XNAS:WSFS WSFS Financial Corp Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number 0-16668

 

 

WSFS FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   22-2866913

(State or other jurisdiction of

Incorporation or organization)

 

(I.R.S. Employer

Identification Number)

500 Delaware Avenue, Wilmington, Delaware   19801
(Address of principal executive offices)   (Zip Code)

(302) 792-6000

Registrant’s telephone number, including area code:

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files),    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of May 4, 2012:

 

Common Stock, par value $.01 per share   8,705,389
(Title of Class)   (Shares Outstanding)

 

 

 


Table of Contents

WSFS FINANCIAL CORPORATION

FORM 10-Q

INDEX

 

        Page   
PART I. Financial Information   

Item 1.

  

Financial Statements (Unaudited)

  
  

Consolidated Statements of Operations for the Three Months Ended March 31, 2012 and 2011

     3   
  

Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2012 and 2011

     4   
  

Consolidated Statements of Condition as of March 31, 2012 and December 31, 2011

     5   
  

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011

     6   
  

Notes to the Consolidated Financial Statements for the Three Months Ended March 31, 2012 and 2011

     7   

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     32   

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     44   

Item 4.

  

Controls and Procedures

     44   
PART II. Other Information   

Item 1.

  

Legal Proceedings

     44   

Item 1A.

  

Risk Factors

     44   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     45   

Item 3.

  

Defaults upon Senior Securities

     45   

Item 4.

  

Mine Safety Disclosures

     45   

Item 5.

  

Other Information

     45   

Item 6.

  

Exhibits

     45   

Signatures

     46   

Exhibit 31.1

  

Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

  

Exhibit 31.2

  

Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

  

Exhibit 32

  

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

  

Exhibit 101.INS

  

Instance Document

  

Exhibit 101.SCH

  

Schema Document

  

Exhibit 101.CAL

  

Calculation Linkbase Document

  

Exhibit 101.LAB

  

Labels Linkbase Document

  

Exhibit 101.PRE

  

Presentation Linkbase Document

  

 

2


Table of Contents

WSFS FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

 

     Three Months Ended March 31,  
     2012      2011  
     (Unaudited)  
     (In Thousands, Except Per Share Data)  

Interest income:

     

Interest and fees on loans

   $ 33,395       $ 31,956   

Interest on mortgage-backed securities

     5,718         7,026   

Interest and dividends on investment securities

     101         170   

Other interest income

     9         —     
  

 

 

    

 

 

 
     39,223         39,152   
  

 

 

    

 

 

 

Interest expense:

     

Interest on deposits

     4,015         5,223   

Interest on Federal Home Loan Bank advances

     1,937         2,727   

Interest on trust preferred borrowings

     375         336   

Interest on other borrowings

     366         612   
  

 

 

    

 

 

 
     6,693         8,898   
  

 

 

    

 

 

 

Net interest income

     32,530         30,254   

Provision for loan losses

     8,245         5,908   
  

 

 

    

 

 

 

Net interest income after provision for loan losses

     24,285         24,346   
  

 

 

    

 

 

 

Noninterest income:

     

Credit/debit card and ATM income

     5,422         4,740   

Deposit service charges

     4,014         3,564   

Fiduciary & investment management income

     3,031         2,827   

Security gains, net

     2,036         415   

Loan fee income

     610         685   

Mortgage banking activities, net

     516         547   

Bank owned life insurance income

     185         179   

Other income

     944         682   
  

 

 

    

 

 

 
     16,758         13,639   
  

 

 

    

 

 

 

Noninterest expenses:

     

Salaries, benefits and other compensation

     16,235         14,816   

Occupancy expense

     3,048         2,838   

Equipment expense

     1,667         1,614   

FDIC expenses

     1,437         1,764   

Data processing and operations expenses

     1,322         1,417   

Professional fees

     1,164         1,123   

Loan workout and OREO expenses

     836         2,483   

Marketing expense

     779         951   

Acquisition integration costs

     —           334   

Other operating expense

     4,501         4,047   
  

 

 

    

 

 

 
     30,989         31,387   
  

 

 

    

 

 

 

Income before taxes

     10,054         6,598   

Income tax provision

     3,610         2,392   
  

 

 

    

 

 

 

Net income

     6,444         4,206   

Dividends on preferred stock and accretion of discount

     692         692   
  

 

 

    

 

 

 

Net income allocable to common stockholders

   $ 5,752       $ 3,514   
  

 

 

    

 

 

 

Earnings per share:

     

Basic

   $ 0.66       $ 0.41   

Diluted

   $ 0.66       $ 0.40   

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

3


Table of Contents

WSFS FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

     Three months ended
March 31,
 
     2012     2011  
     (Unaudited)  
     (In Thousands)  

Net Income

   $ 6,444     $ 4,206  

Other comprehensive income (loss):

    

Unrealized gains on securities available for sale

     540       142  

Tax expense

     (224     (54
  

 

 

   

 

 

 

Net of tax amount

     316       88  

Reclassification adjustment for gains included in net income

     (2,036     (415

Tax expense

     774       157  
  

 

 

   

 

 

 

Net of tax amount

     (1,262     (258

Total other comprehensive loss

     (946     (170
  

 

 

   

 

 

 

Total comprehensive income

   $ 5,498     $ 4,036  
  

 

 

   

 

 

 

 

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Table of Contents

WSFS FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CONDITION

 

     Mar 31,
2012
    Dec 31,
2011
 
     (Unaudited)  
     (In Thousands, Except Per Share Data)  

Assets

    

Cash and due from banks

   $ 67,517     $ 70,889  

Cash in non-owned ATMs

     391,939       397,119  

Interest-bearing deposits in other banks

     239       9  
  

 

 

   

 

 

 

Total cash and cash equivalents

     459,695       468,017  

Investment securities, available-for-sale

     890,865       859,362  

Investment securities, trading

     12,465       12,432  

Loans held-for-sale

     8,173       10,185  

Loans, net of allowance for loan losses of $55,798 at March 31, 2012 and $53,080 at December 31, 2011

     2,723,863       2,702,589  

Bank owned life insurance

     63,577       63,392  

Stock in Federal Home Loan Bank of Pittsburgh, at cost

     33,968       35,756  

Assets acquired through foreclosure

     6,708       11,695  

Premises and equipment

     36,637       35,964  

Goodwill

     28,146       28,146  

Intangible assets

     5,932       6,139  

Accrued Interest receivable

     11,582       11,743  

Other assets

     45,543       43,588  
  

 

 

   

 

 

 

Total assets

   $ 4,327,154     $ 4,289,008  
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Liabilities:

    

Deposits:

    

Noninterest-bearing demand

   $ 542,176     $ 525,444  

Interest-bearing demand

     416,550       389,495  

Money market

     775,729       805,570  

Savings

     400,310       368,390  

Time

     395,768       412,027  

Jumbo certificates of deposit – customer

     361,871       346,568  
  

 

 

   

 

 

 

Total customer deposits

     2,892,404       2,847,494  

Brokered deposits

     297,104       287,810  
  

 

 

   

 

 

 

Total deposits

     3,189,508       3,135,304  

Federal funds purchased and securities sold under agreements to repurchase

     75,000       50,000  

Federal Home Loan Bank advances

     527,973       538,682  

Trust preferred borrowings

     67,011       67,011  

Other borrowed funds

     33,113       67,927  

Accrued interest payable

     3,817       1,910  

Other liabilities

     34,194       36,041  
  

 

 

   

 

 

 

Total liabilities

     3,930,616       3,896,875  
  

 

 

   

 

 

 

Stockholders’ Equity:

    

Serial preferred stock $.01 par value, 7,500,000 shares authorized; issued 52,625 at March 31, 2012 and December 31, 2011

     1       1  

Common stock $.01 par value, 20,000,000 shares authorized; issued 18,285,720 at March 31, 2012 and 18,258,714 at December 31, 2011

     183       182  

Capital in excess of par value

     220,800       220,163  

Accumulated other comprehensive income

     10,256       11,202  

Retained earnings

     413,578       408,865  

Treasury stock at cost, 9,580,569 shares at March 31, 2012 and December 31, 2011

     (248,280     (248,280
  

 

 

   

 

 

 

Total stockholders’ equity

     396,538       392,133  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 4,327,154     $ 4,289,008  
  

 

 

   

 

 

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

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Table of Contents

WSFS FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Three months ended
March 31,
 
     2012     2011  
     (Unaudited)  
     (In Thousands)  

Operating activities:

    

Net Income

   $ 6,444     $ 4,206  

Adjustments to reconcile net income to net cash provided by operating activities:

    

Provision for loan losses

     8,245       5,908  

Depreciation, accretion and amortization

     3,988       2,349  

Decrease in accrued interest receivable

     161       284  

(Increase) decrease in other assets

     (1,401     2,201  

Origination of loans held-for-sale

     (30,406     (27,761

Proceeds from sales of loans held-for-sale

     33,205       40,817  

Gain on mortgage banking activities, net

     (516     (547

Security gains, net

     (2,036     (415

Stock-based compensation expense

     608       306  

Excess tax benefits from share-based payment arrangements

     (7     (55

Increase in accrued interest payable

     1,907       1,979  

Decrease in other liabilities

     (1,827     (2,513

Loss on sale of assets acquired through foreclosure and valuation adjustments, net

     595       2,100  

Increase in value of bank-owned life insurance

     (185     (179

(Increase) decrease in capitalized interest, net

     (165     44  
  

 

 

   

 

 

 

Net cash provided by operating activities

   $ 18,610     $ 28,724  
  

 

 

   

 

 

 

Investing activities:

    

Maturities of investment securities

     4,524       7,557  

Sale of investment securities available for sale

     84,808       46,116  

Purchase of investment securities available-for-sale

     (162,404     (72,789

Repayments of investment securities available-for-sale

     40,376       49,817  

Disbursements for reverse mortgages

     (17     (43

Net increase in loans

     (33,311     (38,481

Net decrease in stock of Federal Home Loan Bank of Pittsburgh

     1,788       1,877  

Sales of assets acquired through foreclosure, net

     7,310       2,253  

Investment in premises and equipment, net

     (1,933     (1,884
  

 

 

   

 

 

 

Net cash used for investing activities

   $ (58,859   $ (5,577
  

 

 

   

 

 

 

Financing activities:

    

Net increase in demand and saving deposits

     41,052       76,688  

Net decrease in time deposits

     (956     (5,567

Net increase (decrease) in brokered deposits

     9,244       (84,764

Receipts from FHLB advances

     4,349,754       4,500,000  

Repayments of FHLB advances

     (4,360,463     (4,500,000

Receipts from federal funds purchased and securities sold under agreement to repurchase

     3,765,000       5,577,871  

Repayments of federal funds purchased and securities sold under agreement to repurchase

     (3,740,000     (5,568,665

Repayment of unsecured debt

     (30,000     —     

Dividends paid

     (1,700     (1,686

Issuance of common stock and exercise of common stock options

     (11     435  

Excess tax benefits from share-based payment arrangements

     7       55  
  

 

 

   

 

 

 

Net cash provided by (used for) financing activities

   $ 31,927     $ (5,633
  

 

 

   

 

 

 

(Decrease) increase cash and cash equivalents

     (8,322     17,514  

Cash and cash equivalents at beginning of period

     468,017       376,759  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 459,695     $ 394,273  
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Flow Information:

    

Cash paid for interest during the period

   $ 4,786     $ 6,920  

Cash paid for income taxes, net

     4,221       214  

Loans transferred to assets acquired through foreclosure

     2,918       3,641  

Net change in other comprehensive income

     (946     (170

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

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Table of Contents

WSFS FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2012

(UNAUDITED)

1. BASIS OF PRESENTATION

Our Consolidated Financial Statements include the accounts of WSFS Financial Corporation (“the Company”, “our Company”, “we”, “our” or “us”), Wilmington Savings Fund Society, FSB (“WSFS Bank” or the “Bank”) and Montchanin Capital Management, Inc. (“Montchanin”). We also have one unconsolidated affiliate, WSFS Capital Trust III (“the Trust”). WSFS Bank has two wholly owned subsidiaries, WSFS Investment Group, Inc. (“WIG”) and Monarch Entity Services LLC (“Monarch”) and Montchanin has one wholly owned subsidiary, Cypress Capital Management, LLC (“Cypress”).

Founded in 1832, we are the seventh oldest bank and trust company in the United States continuously operating under the same name. We provide residential and commercial real estate, commercial and consumer lending services, as well as retail deposit and cash management services. In addition, we offer a variety of wealth management and trust services to personal and corporate customers through our Trust and Wealth Management division. Lending activities are funded primarily with customer deposits and borrowings. The Federal Deposit Insurance Corporation (“FDIC”) insures our customers’ deposits to their legal maximums. We serve our customers primarily from our 49 offices located in Delaware (39), Pennsylvania (8), Virginia (1) and Nevada (1) and through our website at www.wsfsbank.com.

Amounts subject to significant estimates are items such as the allowance for loan losses and reserves for lending related commitments, goodwill, intangible assets, post-retirement benefit obligations, the fair value of financial instruments and other-than-temporary impairments. Among other effects, changes to such estimates could result in future reserves for impairments of investment securities, goodwill and intangible assets and increases of allowances for loan losses and lending related commitments as well as increased post-retirement benefits expense.

Our accounting and reporting policies conform with U.S. generally accepted accounting principles and prevailing practices within the banking industry for interim financial information and Rule 10-01 of the Securities and Exchange Commission (“SEC”) Regulation S-X. Rule 10-01 of Regulation S-X does not require us to include all information and notes for complete financial statements and prevailing practices within the banking industry. Operating results for the three month period ended March 31, 2012 are not necessarily indicative of the results that may be expected for any future quarters or for the year ending December 31, 2012. For further information, refer to the consolidated financial statements and the accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the SEC.

Whenever necessary, reclassifications have been made to prior period Consolidated Financial Statements to conform to the current period’s presentation. All significant intercompany transactions were eliminated in consolidation.

 

7


Table of Contents

Accounting for Stock-Based Compensation

Stock-based compensation is accounted for in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 718, Stock Compensation. After shareholder approval in 2005, the 1997 Stock Option Plan (“1997 Plan”) was replaced by the 2005 Incentive Plan (“2005 Plan”). No future awards may be granted under the 1997 Plan. The 2005 Plan will terminate on the tenth anniversary of its effective date, after which no awards may be granted. We have stock options outstanding under both plans (collectively, “Stock Incentive Plans”). The number of shares reserved for issuance under the 2005 Plan is 1,197,000. At March 31, 2012, there were 194,579 shares available for future grants under the 2005 Plan.

The Stock Incentive Plans provide for the granting of incentive stock options as defined in Section 422 of the Internal Revenue Code as well as non-incentive stock options (collectively, “Stock Options”). Additionally, the 2005 Plan provides for the granting of stock appreciation rights, performance awards, restricted stock and restricted stock unit awards, deferred stock units, dividend equivalents, other stock-based awards and cash awards. All Stock Options are to be granted at not less than the market price of our Company’s common stock on the date of the grant. All Stock Options granted during 2012 and 2011 vest in 25% per annum increments, start to become exercisable one year from the grant date and expire five years from the grant date. Generally, all awards become immediately exercisable in the event of a change in control, as defined within the Stock Incentive Plans. In addition, the Black-Scholes option-pricing model is used to determine the grant date fair value of stock options.

Stock Options

The following table provides information about our stock options outstanding for the three months ended March 31, 2012 and 2011:

 

     March 31, 2012      March 31, 2011  
     Shares     Weighted-
Average
Exercise
Price
     Shares     Weighted-
Average
Exercise
Price
 

Stock Options:

         

Outstanding at beginning of period

     416,886     $ 43.52        566,323     $ 42.84  

Granted (1)

     32,830       40.89        50,723       44.91  

Exercised

     (1,815     24.94        (7,161     22.34  

Forfeited

     —          —           (14,348     46.13  
  

 

 

      

 

 

   

Outstanding at end of period

     447,901       43.41        595,537       43.18  

Exercisable at end of period

     337,764     $ 45.00        454,294     $ 44.28  

Weighted-average fair value of awards granted

   $ 12.38        $ 14.29    

 

(1) Options granted in the first quarter of 2012 are less than the first quarter of 2011 due to additional 2012 awards being granted in the second quarter of 2012.

The following table provides vesting information about our stock options outstanding for the three months ended March 31, 2012 and 2011:

 

     March 31, 2012        March 31, 2011  
     Shares     Weighted-
Average
Exercise
Price
       Shares     Weighted-
Average
Exercise
Price
 

Stock Options:

           

Unvested at beginning of period

     112,258     $ 36.08          123,486     $ 45.04  

Granted

     32,830       40.89          50,723       44.91  

Vested

     (34,951     32.89          (24,977     26.96  

Forfeited

     —          —             (7,989     39.70  
  

 

 

        

 

 

   

Unvested at end of period

     110,137     $ 38.53            141,243     $ 39.66  

 

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Table of Contents

The total amount of compensation cost to be recognized relating to non-vested stock options as of March 31, 2012 was $781,000. The weighted-average period over which it is expected to be recognized is 2.5 years. We issue new shares upon the exercise of options.

Restricted Stock

We issued 24,442 restricted stock units and awards during the first quarter of 2012 compared to 39,383 during the first quarter of 2011. These awards vest over a four year period. These stock awards were made to certain executive officers. The total amount of compensation cost to be recognized relating to non-vested restricted stock as of March 31, 2012, was $1.8 million. The weighted-average period over which it is expected to be recognized is 2.2 years.

Performance Stock Awards

The Board approved a plan in which Marvin N. Schoenhals, Chairman of the Board, was granted 22,250 shares of restricted stock effective January 3, 2011, with a five-year performance vesting schedule starting at the end of the second year. These shares are subject to vesting in whole or in part based on whether Mr. Schoenhals plays a meaningful role in establishing new business relationships that, over a two year period of time achieve at least a 50% return on the investment of restricted stock cost.

For the three months ended March 31, 2012, the effect of stock-based compensation, including stock options, restricted stock, and performance stock, on salaries, benefits and other compensation was $711,000 pre-tax ($545,000 after tax) or $0.06 per share. This compares to $525,000 pre-tax ($437,000 after tax) or $0.05 per share during the three months ended March 31, 2011. The increase was mainly due to additional expense related to the performance stock awards.

2. EARNINGS PER SHARE

The following table shows the computation of basic and diluted earnings per share:

 

     For the three  months
ended
March 31,
 
     2012      2011  
    

(In Thousands, Except

Per Share Data)

 

Numerator:

     

Net income allocable to common stockholders

   $ 5,752      $ 3,514  
  

 

 

    

 

 

 

Denominator:

     

Denominator for basic earnings per share – weighted average shares

     8,687        8,576  

Effect of dilutive employee stock options and warrants

     73        154  
  

 

 

    

 

 

 

Denominator for diluted earnings per share – adjusted weighted average shares and assumed exercise

     8,760        8,730  
  

 

 

    

 

 

 

Earnings per share:

     

Basic:

     

Net income allocable to common shareholders

   $ 0.66      $ 0.41  
  

 

 

    

 

 

 

Diluted:

     

Net income allocable to common shareholders

   $ 0.66      $ 0.40  
  

 

 

    

 

 

 

Outstanding common stock equivalents having no dilutive effect

     480        304  

 

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Table of Contents

3. INVESTMENT SECURITIES

The following tables detail the amortized cost and the estimated fair value of the Company’s investment securities held-to-maturity and securities available-for-sale (which include reverse mortgages):

 

     Amortized
Cost
    Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 
     (In Thousands)  

Available-for-sale securities:

         

March 31, 2012:

         

Reverse mortgages

   $ (630   $ —         $ —        $ (630

U.S. Government and government sponsored enterprises (“GSE”)

     44,791       249        (29     45,011  

State and political subdivisions

     3,635       39        (1     3,673  

Collateralized Mortgage Obligation (“CMO”) (1)

     312,212       6,142        (2,261     316,093  

Federal National Mortgage Association (“FNMA”)

     363,949       8,905        (361     372,493  

Federal Home Loan Mortgage Corporation (“FHLMC”)

     92,485       1,711        (80     94,116  

Government National Mortgage Association (“GNMA”)

     57,141       3,047        (79     60,109  
  

 

 

   

 

 

    

 

 

   

 

 

 
   $ 873,583     $ 20,093      $ (2,811   $ 890,865  
  

 

 

   

 

 

    

 

 

   

 

 

 

December 31, 2011:

         

Reverse mortgages

   $ (646   $ —         $ —        $ (646

GSE

     38,776       262        (13     39,025  

State and political subdivisions

     4,159       39        (8     4,190  

CMO (1)

     323,980       6,933        (2,527     328,386  

FNMA

     320,019       9,379        (44     329,354  

FHLMC

     93,305       1,781        —          95,086  

GNMA

     60,991       3,033        (57     63,967  
  

 

 

   

 

 

    

 

 

   

 

 

 
   $ 840,584     $ 21,427      $ (2,649   $ 859,362  
  

 

 

   

 

 

    

 

 

   

 

 

 

Trading securities

         

March 31, 2012:

         

CMO

   $ 12,465     $ —         $ —        $ 12,465  
  

 

 

   

 

 

    

 

 

   

 

 

 

December 31, 2011:

         

CMO

   $ 12,432     $ —         $ —        $ 12,432  
  

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) Includes agency CMO and SASCO 2002 RM-1 Class O securities classified as available-for-sale

 

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The scheduled maturities of investment securities available-for-sale at March 31, 2012 and December 31, 2011 were as follows:

 

     Available-for-Sale  
     Amortized
Cost
     Fair
Value
 
     (In Thousands)  

March 31, 2012

     

Within one year (1)

   $ 3,765      $ 3,795  

After one year but within five years

     42,274        42,503  

After five years but within ten years

     157,852        162,992  

After ten years

     669,692        681,575  
  

 

 

    

 

 

 
   $ 873,583      $ 890,865  
  

 

 

    

 

 

 

December 31, 2011

     

Within one year (1)

   $ 7,916      $ 7,966  

After one year but within five years

     32,225        32,465  

After five years but within ten years

     129,597        135,649  

After ten years

     670,846        683,282  
  

 

 

    

 

 

 
   $ 840,584      $ 859,362  
  

 

 

    

 

 

 

 

(1) Reverse mortgages do not have contractual maturities. We have included reverse mortgages in maturities within one year.

The portfolio of available-for-sale mortgage-backed securities includes 236 securities with an amortized cost of $825.8 million comprised of $513.6 million of GSE and $312.2 million of non-GSE securities. All securities were AAA-rated at the time of purchase; only one security with an amortized cost of $10.0 million was rated below AAA at March 31, 2012. All securities were re-evaluated for OTTI at March 31, 2012. The result of this evaluation showed no other-than-temporary impairment for the first quarter of 2012. The weighted average duration of the mortgage-backed securities was 3.3 years at March 31, 2012.

At March 31, 2012, investment securities with market values aggregating $397.3 million were pledged as collateral for retail customer repurchase agreements, municipal deposits, and other obligations. From time to time, investment securities are also pledged as collateral for FHLB borrowings. There were no FHLB pledged investment securities at March 31, 2012.

During the first three months of 2012, we sold $84.8 million of investment securities categorized as available-for-sale for net gains of $2.0 million. In the first quarter of 2011, proceeds from the sale of investment securities available-for-sale were $46.1 million and resulted in net gains of $415,000. These sales were the result of ongoing portfolio management aimed at minimizing credit risk and decreasing prepayment/premium risk due to faster prepayments caused by declining mortgage interest rates in this historically-low rate environment. The cost basis of all mortgage-backed securities sales are based on the specific identification method.

MBS have expected maturities that differ from their contractual maturities. These differences arise because borrowers may have the right to call or prepay obligations with or without a prepayment penalty.

At March 31, 2012, we owned investment securities totaling $205.4 million in which the amortized cost basis exceeded fair value. Total unrealized losses on those securities were $2.8 million at March 31, 2012. The temporary impairment is the result of changes in market interest rates subsequent to the purchase of the securities. Securities with a fair value of $24.8 million have been impaired for 12 months or longer. We have determined that these securities are not other than temporarily impaired. Our investment portfolio is reviewed each quarter for indications of impairment. This review includes analyzing the length of time and the extent to which the fair value has been lower than the cost, the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer and our intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in the market. We evaluate our intent and ability to hold debt securities based upon our investment strategy for the particular type of security and our cash flow needs, liquidity position, capital adequacy and interest rate risk position. In addition, we do not have the intent to sell, nor is it more likely-than-not we will be required to sell these securities before we are able to recover the amortized cost basis.

 

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The table below shows our investment securities’ gross unrealized losses and fair value by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2012.

 

     Less than 12 months      12 months or longer      Total  
     Fair
Value
     Unrealized
Loss
     Fair
Value
     Unrealized
Loss
     Fair
Value
     Unrealized
Loss
 
     (In Thousands)  

Available-for-sale

                 

U.S Government and GSE

   $ 12,051      $ 29      $ —         $ —         $ 12,051      $ 29  

State and political subdivisions

     —           —           135        1        135        1  

CMO

     92,728        1,468        24,665        793        117,393        2,261  

FNMA

     59,304        361        —           —           59,304        361  

FHLMC

     11,206        80        —              11,206        80  

GNMA

     5,316        79        —           —           5,316        79  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired investments

   $ 180,605       $ 2,017       $ 24,800      $ 794      $ 205,405      $ 2,811  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The table below shows our investment securities’ gross unrealized losses and fair value by investment category and length of time that individual securities were in a continuous unrealized loss position at December 31, 2011.

 

     Less than 12 months      12 months or longer      Total  
     Fair
Value
     Unrealized
Loss
     Fair
Value
     Unrealized
Loss
     Fair
Value
     Unrealized
Loss
 
     (In Thousands)  

Available-for-sale

                 

U.S Government and GSE

   $ 5,047      $ 13      $ —         $ —         $ 5,047      $ 13  

State and political subdivisions

     —           —           440        8        440        8  

CMO

     78,955        2,194        9,933        333        88,888        2,527  

FNMA

     6,959        44        —           —           6,959        44  

FHLMC

     —           —           —           —           —           —     

GNMA

     5,420        57        —           —           5,420        57  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired investments

   $   96,381       $ 2,308      $ 10,373      $ 341      $ 106,754      $ 2,649  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

We own $12.5 million par value of SASCO RM-1 2002 class B securities which are classified as trading, of which, $1.4 million is interest paid in kind. We expect to recover all principal and interest due to seasoning and excess collateral. Based on FASB ASC 320, Investments – Debt and Equity Securities (“ASC 320”) (formerly SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities) when these securities were acquired they were classified as trading because it was our intent to sell them in the near term. We use the guidance under ASC 320 to provide a reasonable estimate of fair value. We estimated the value of these securities based on the pricing of BBB+ securities that have an active market through a technique which estimates the fair value of this asset using the income approach as of March 31, 2012.

During 2011, we purchased 100% of SASCO 2002-RM1 Class O certificates for $2.5 million. The transaction closed on July 15, 2011. As of March 31, 2012, the market value of the SASCO 2002-RM1 O securities was determined in accordance with FASB ASC 820-10 (ASC 820), to be $3.5 million. These securities have been included in CMO since their purchase.

4. ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY INFORMATION

Allowance for Loan Losses

We maintain allowances for loan losses and charge losses to these allowances when such losses are identified. The determination of the allowance for loan losses requires significant judgment reflecting our best estimate of probable loan losses related to specifically identified loans as well as probable loan losses in the remaining loan portfolio. Our evaluation is based upon a continuing review of these portfolios.

 

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Table of Contents

We established our loan loss allowance in accordance with guidance provided in the Securities and Exchange Commission’s Staff Accounting Bulletin 102 (“SAB 102”). Its methodology for assessing the appropriateness of the allowance consists of several key elements which include: specific allowances for identified problem loans; formula allowances for commercial and commercial real estate loans; and allowances for pooled homogeneous loans.

Specific reserves are established for certain impaired loans in cases where we have identified significant conditions or circumstances related to a specific credit that indicate the probability that a loss has been incurred.

The formula allowances for commercial, commercial real estate and construction loans are calculated by applying estimates of default and loss severity to outstanding loans based on the risk grade of loans. Default rates are determined through a past twelve quarter migration analysis. Loss severity is based on a three year historical analysis. As a result, changes in risk grades affect the amount of the formula allowance.

Pooled loans are usually smaller, not-individually-graded and homogeneous in nature, such as consumer installment loans and residential mortgages. Loan loss allowances for pooled loans are first based on a five-year net charge-off history. The average loss allowance per homogeneous pool is based on the product of average annual historical loss rate and the homogeneous pool balances. These separate risk pools are then assigned a reserve for losses based upon this historical loss information.

Qualitative and environmental adjustment factors are taken into consideration when determining the above described reserve estimates. These adjustment factors are based upon our evaluation of various current conditions, including those listed below.

 

 

General economic and business conditions affecting the Bank’s key lending areas,

 

 

Credit quality trends,

 

 

Recent loss experience in particular segments of the portfolio,

 

 

Collateral values and loan-to-value ratios,

 

 

Loan volumes and concentrations, including changes in mix,

 

 

Seasoning of the loan portfolio,

 

 

Specific industry conditions within portfolio segments,

 

 

Bank regulatory examination results, and

 

 

Other factors, including changes in quality of the loan origination, servicing and risk management processes.

Our loan officers and risk managers meet at least quarterly to discuss and review these conditions and risks associated with individual problem loans. In addition, various regulatory agencies and loan review consultants periodically review our loan ratings and allowance for loan losses.

During the first quarter of 2012, we made certain improvements to the method in which we determine the allowance for loan loss. These improvements include:

 

 

Used a three year loss migration analysis to determine the probability of default,

 

 

Segregated the commercial loan segment to more specifically analyze the risks associated with business, owner-occupied CRE, investor CRE and construction loan portfolios,

 

 

Improved the data used to determine qualitative adjustment factors,

 

 

Established a portion of the allowance for loan losses related to model and complexity risk,

 

 

Established a reserve for unfunded commitments (reflected in other liabilities on the Consolidated Statements of Condition), and

 

 

Revised our loan risk rating system based on recommendations from industry experts.

The above changes to the calculation of the allowance for loan losses did not have a material impact on the allowance for loan loss at March 31, 2012 or the amount of provision for loan losses recorded during the period.

 

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Table of Contents

The following table provides the activity of the allowance for loan losses and loan balances for the three months ended March 31, 2012:

 

     Commercial     Owner
Occupied
Commercial
    Commercial
Mortgages
    Construction     Residential     Consumer     Complexity
Risk (1)
     Total  
     (In Thousands)  

Three months ended March 31, 2012

                 

Allowance for loan losses

                 

Beginning balance

   $ 15,067      $ 9,235      $ 7,556      $ 4,074      $ 6,544      $ 10,604      $ —         $ 53,080   

Charge-offs

     (2,331     (502     (190     (1,506     (324     (1,229     —           (6,082

Recoveries

     53       6       313       28       25       130       —           555  

Provision

     (1,164     (1,734     2,851       6,321       155       748       1,068        8,245  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 11,625      $ 7,005      $ 10,530      $ 8,917      $ 6,400      $ 10,253      $ 1,068       $ 55,798   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Period-end allowance allocated to:

                 

Loans individually evaluated for impairment

   $ 1,615      $ 2,191      $ 1,156      $ 2,750      $ 869      $ 96      $ —         $ 8,677   

Loans collectively evaluated for impairment

     10,010       4,814       9,374       6,167       5,531       10,157       1,068        47,121  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 11,625      $ 7,005      $ 10,530      $ 8,917      $ 6,400      $ 10,253      $ 1,068       $ 55,798   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Period-end loan balances evaluated for:

                 

Loans individually evaluated for impairment

   $ 6,526      $ 21,760      $ 11,625      $ 24,246      $ 15,723      $ 2,912      $ —         $ 82,792 (2) 

Loans collectively evaluated for impairment

     792,293     $ 665,180        605,601       99,937       251,310       282,548       —           2,696,869  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 798,819      $ 686,940      $ 617,226      $ 124,183      $ 267,033      $ 285,460      $ —         $ 2,779,661   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

(1) Represents the portion of the allowance for loan losses established to account for the inherent complexity and uncertainty of estimates.
(2) The difference between this amount and nonaccruing loans at March 31, 2012, represents accruing troubled debt restructured loans.

 

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Table of Contents

Non-Accrual and Past Due Loans

The following tables show our nonaccrual and past due loans at the dates indicated:

 

Still Accruing Still Accruing Still Accruing Still Accruing Still Accruing Still Accruing Still Accruing

March 31, 2012

(In Thousands)

   30–59 Days
Past Due and
Still Accruing
    60–89 Days
Past Due and
Still Accruing
    Greater Than
90 Days

Past Due and
Still Accruing
    Total Past
Due

And Still
Accruing
    Accruing
Current
Balances
    Nonaccrual
Loans
    Total
Loans
 

Commercial

   $ 14,209      $ 65      $ 614      $ 14,888      $ 777,405      $ 6,526      $ 798,819   

Owner-occupied commercial

     638        164        —          802        664,378        21,760        686,940   

Commercial mortgages

     —          —          240       240       605,361       11,625       617,226  

Construction

     850       —          —          850       99,087       24,246       124,183  

Residential

     5,830       655       111       6,596       251,850       8,587       267,033  

Consumer

     1,993       597       —          2,590       281,549       1,321       285,460  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 23,520      $ 1,481      $ 965      $ 25,966      $ 2,679,630      $ 74,065      $ 2,779,661   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of Total Loans

     0.85     0.05     0.03     0.93     96.40     2.67     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Still Accruing Still Accruing Still Accruing Still Accruing Still Accruing Still Accruing Still Accruing

December 31, 2011

(In Thousands)

   30–59 Days
Past Due and
Still Accruing
    60–89 Days
Past Due  and
Still Accruing
    Greater Than
90 Days
Past Due and
Still Accruing
    Total Past
Due

And Still
Accruing
    Accruing
Current
Balances
    Nonaccrual
Loans
    Total
Loans
 

Commercial

   $ 1,087      $ 63      $ 78      $ 1,228      $ 1,435,876      $ 23,080      $ 1,460,184   

Commercial mortgages

     479       243       —          722       605,764       15,814       622,300  

Construction

     3,727       —          —          3,727       80,074       22,124       105,925  

Residential

     5,501       1,238       887       7,626       258,820       9,057       275,503  

Consumer

     2,783       709       —          3,492       287,247       1,018       291,757  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 13,577      $ 2,253      $ 965      $ 16,795      $ 2,667,781      $ 71,093      $ 2,755,669   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of Total Loans

     0.49     0.08     0.04     0.61     96.81     2.58     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Impaired Loans

The following tables provide an analysis of our impaired loans at March 31, 2012 and December 31, 2011:

 

March 31, 2012

(In Thousands)

   Ending
Loan
Balances
     Loans with
No Specific
Reserve (1)
     Loans with
Specific
Reserve
     Related
Specific
Reserve
     Contractual
Principal
Balances
     Average
Loan
Balances
 

Commercial

   $ 6,526       $ 4,291       $ 2,235       $ 1,615       $ 8,581       $ 9,013   

Owner-occupied commercial

     21,760         14,071         7,689         2,191         23,736         14,705   

Commercial mortgages

     11,625        5,857        5,768        1,156        15,871         16,479   

Construction

     24,246        13,395        10,851        2,750        40,080         26,120   

Residential

     15,723        9,176        6,547        869        18,302        17,159   

Consumer

     2,912        1,674        1,238        96        3,343        3,477   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 82,792       $ 48,464       $ 34,328       $ 8,677       $ 109,913       $ 104,361   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

December 31, 2011

(In Thousands)

   Ending
Loan
Balances
     Loans with
No Specific
Reserve (1)
     Loans with
Specific
Reserve
     Related
Specific
Reserve
     Contractual
Principal
Balances
     Average
Loan
Balances
 

Commercial

   $ 23,193       $ 19,353       $ 3,840       $ 2,630       $ 26,815       $ 22,396   

Commercial mortgages

     15,814        13,602        2,212        295        21,278        16,237  

Construction

     22,124        14,166        7,958        723        34,862        27,323  

Residential

     16,227        9,649        6,578        964        19,312        17,480  

Consumer

     2,621        1,336        1,285        101        2,788        3,916  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 79,979       $ 58,106       $ 21,873       $ 4,713       $ 105,055       $ 87,352   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Reflects loan balances at their remaining book balance.

Interest income of $93,000 was recognized on impaired loans during the three months ended March 31, 2012.

Credit Quality Indicators

Below is a description of each of our risk ratings for all commercial loans:

Pass. These borrowers presently show no current or potential problems and their loans are considered fully collectible.

Special Mention. Borrowers have potential weaknesses that deserve management’s close attention. Borrowers in this category may be experiencing adverse operating trends, e.g.; declining revenues or margins, high leverage, tight liquidity, or increasing inventory without increasing sales. These adverse trends can have a potential negative effect on the borrower’s repayment capacity. These assets are not adversely classified and do not expose the Bank to significant risk that would warrant a more severe rating. Borrowers in this category may also be experiencing significant management problems, pending litigation, or other structural credit weaknesses.

Substandard. Borrowers have well-defined weaknesses that require extensive oversight by management. Borrowers in this category may exhibit one or more of the following: inadequate debt service coverage, unprofitable operations, insufficient liquidity, high leverage, and weak or inadequate capitalization. Relationships in this category are not adequately protected by the sound financial net worth and paying capacity of the obligor or the collateral pledged on the loan, if any. The distinct possibility exists that the Bank will sustain some loss if the deficiencies are not corrected.

Doubtful. Borrowers have well-defined weaknesses inherent in the Substandard category with the added characteristic that the possibility of loss is extremely high. Current circumstances in the credit relationship make collection or liquidation in full highly questionable. A doubtful asset has some pending event that may strengthen the asset that defers the loss classification. Such impending events include: perfecting liens on additional collateral, obtaining collateral valuations, an acquisition or liquidation preceding, proposed merger, or refinancing plan.

Loss. Borrowers are uncollectible or of such negligible value that continuance as a bankable asset is not supportable. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical to defer writing off this asset even though partial recovery may be recognized sometime in the future.

Residential and Consumer Loans

The residential and consumer loan portfolios are monitored on an ongoing basis using delinquency information and loan type as credit quality indicators. These credit quality indicators are assessed in the aggregate in these relatively homogeneous portfolios. Loans that are greater than 90 days past due are generally considered nonperforming and placed in nonaccrual status.

 

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Table of Contents

The following tables provide an analysis of problem loans as of March 31, 2012 and December 31, 2011:

Commercial credit exposure credit risk profile by internally assigned risk rating (in thousands):

 

     Commercial(1)      Owner-Occupied
Commercial(1)
     Commercial Mortgages      Construction      Total Commercial  
     Mar 31,
2012
     Dec. 31,
2011
     Mar 31,
2012
     Dec. 31,
2011
     Mar 31,
2012
     Dec. 31,
2011
     Mar 31,
2012
     Dec. 31,
2011
     March 31, 2012     December 31, 2011  
                             Amount      Percent     Amount      Percent  

Risk Rating:

                                  

Special mention

   $ 20,328       $ 85,848       $ 5,446       $ —         $ 33,524       $ 50,044       $ 2,963       $ 9,747       $ 62,261         $ 145,639      

Substandard:

                                  

Accrual

     102,211        107,896        79,906        —           26,345        13,664        19,453        19,039        227,915           140,599     

Nonaccrual

     6,526        23,193        21,760        —           11,625        15,814        24,246        22,124        64,157           61,131     
  

 

 

    

 

 

    

 

 

       

 

 

    

 

 

    

 

 

    

 

 

    

 

 

      

 

 

    

Total Special Mention and Substandard

     129,065        216,937        107,112        —           71,494        79,522        46,662        50,910        354,333         16     347,369        16

Pass

     669,754        1,242,519        579,828        —           545,732        543,277        77,521        55,244        1,872,835        84       1,841,040        84  
  

 

 

    

 

 

    

 

 

       

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total Commercial Loans

   $ 798,819       $ 1,459,456       $ 686,940       $ —         $ 617,226       $ 622,799       $ 124,183       $ 106,154       $ 2,227,168         100   $ 2,188,409         100
  

 

 

    

 

 

    

 

 

       

 

 

    

 

 

    

 

 

    

 

 

    

 

 

      

 

 

    

Consumer credit exposure credit risk profile based on payment activity (in thousands):

 

     Residential      Consumer      Total Residential and Consumer  
     Mar 31, 2012     Dec. 31,
2011
     Mar 31, 2012     Dec. 31,
2011
     March 31, 2012     December 31, 2011  
               Amount      Percent     Amount      Percent  

Nonperforming

   $ 15,723 (2)    $ 16,227       $ 2,912 (2)    $ 2,621       $ 18,635         3   $ 18,848         3

Performing

     251,310       259,276        282,548       289,136        533,858        97       548,412        97  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 267,033      $ 275,503       $ 285,460      $ 291,757       $ 552,493         100   $ 567,260         100
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

      

 

 

    

 

(1) Prior to 2012, owner-occupied commercial loans were included in commercial loan balances.
(2) Includes $8.7 million of troubled debt restructured mortgages and home equity installment loans performing in accordance with modified terms and are accruing interest.

 

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Troubled Debt Restructurings (TDRs)

Effective July 1, 2011, we adopted the provisions of Accounting Standards Update No. 2011-02, A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring. In doing so, we reassessed all loan modifications occurring since January 1, 2011 for identification as TDRs, resulting in no newly identified TDRs.

The book balance of TDRs at March 31, 2012 and December 31, 2011 was $32.0 million and $27.7 million, respectively. The balances at March 31, 2012 include approximately $23.1 million of TDRs in nonaccrual status and $8.9 million of TDRs in accrual status compared to $18.8 million of TDRs in nonaccrual status and $8.9 million of TDRs in accrual status at December 31, 2011. Approximately $1.4 million and $1.2 million in specific reserves have been established for these loans as of March 31, 2012 and December 31, 2011, respectively.

During the three months ending March 31, 2012, the terms of 13 loans were modified in troubled debt restructurings, of which 11 were related to commercial loans that were already placed on nonaccrual. Nonaccruing restructured loans remain in nonaccrual status until there has been a period of sustained repayment performance for a reasonable period, usually six months. The remaining two loans represented residential loans. Our concessions on restructured loans consisted mainly of forbearance agreements, reduction in interest rates or extensions of maturities. Principal balances are generally not forgiven by us when a loan is modified as a TDR.

The following table presents loans identified as TDRs during the three months ended March 31, 2012:

 

(In Thousands)

   Three
Months
Ended
March 31,
2012
 

Commercial

   $ 9,276   

Construction

     378  

Residential

     451  
  

 

 

 

Total

   $ 10,105   
  

 

 

 

The troubled debt restructurings described above increased the allowance for loan losses by $38,000 through allocation of a specific reserve, and resulted in charge offs of $759,000 during the three months ending March 30, 2012, most of which had been previously identified and reserved for in prior periods.

There were no TDRs which defaulted (defined as past due 90 days) during the three months ended March 31, 2012 that were restructured within the last twelve months prior to December 31, 2011.

 

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Table of Contents

5. TAXES ON INCOME

We account for income taxes in accordance with FASB ASC 740, Income Taxes (“ASC 740”) (Formerly SFAS No. 109, Accounting for Income Taxes and FASB Interpretation No. 48, Accounting for Uncertainty In Income Taxes, an Interpretation of FASB Statement 109). ASC 740 requires the recording of deferred income taxes that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. We exercise significant judgment in the evaluation of the amount and timing of the recognition of the resulting tax assets and liabilities. The judgments and estimates required for the evaluation are updated based upon changes in business factors and the tax laws. If actual results differ from the assumptions and other considerations used in estimating the amount and timing of tax recognized, there can be no assurance that additional expenses will not be required in future periods. No valuation allowance has been recorded on our deferred tax assets due to our history of prior earnings along with our expectations of future income. ASC 740 prescribes a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. We recognize, when applicable, interest and penalties related to unrecognized tax benefits in the provision for income taxes in the financial statements. Assessment of uncertain tax positions under ASC 740 requires careful consideration of the technical merits of a position based on our analysis of tax regulations and interpretations.

The total amount of unrecognized tax benefits as of March 31, 2012 and December 31, 2011 were both $88,000, all of which would affect our March 31, 2012 effective tax rate if recognized. As of March 31, 2012 and December 31, 2011, the total amount of accrued interest included in such unrecognized tax benefits were both $15,000. Penalties of $6,000 are included in such unrecognized tax benefits. We record interest and penalties on potential income tax deficiencies as income tax expense. Our Federal and state tax returns for the 2008 through 2011 tax years are subject to examination as of March 31, 2012. There are currently no income tax audits in process.

6. SEGMENT INFORMATION

Under the definition of FASB ASC 280, Segment Reporting (“ASC 280”) (Formerly SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information) we discuss our business in three segments. There is one segment for each of WSFS Bank, Cash Connect, (the ATM division of WSFS Bank), and Trust and Wealth Management. Trust and Wealth Management is comprised of Montchanin, Christiana Trust, Private Banking and WSFS Investment Group, Inc. in a single reportable segment because each has similar economic characteristics, products, customers and distribution methods. As required by ASC 280, all prior years’ information has been updated to reflect this presentation.

The WSFS Bank segment provides financial products to commercial and retail customers through its 49 offices located in Delaware (39), Pennsylvania (8) and Virginia (1) and Nevada (1). Retail and Commercial Banking, Commercial Real Estate Lending and other banking business units are operating departments of WSFS. These departments share the same regulator, the same market, many of the same customers and provide similar products and services through the general infrastructure of the Bank. Because of these and other reasons, these departments are not considered discrete segments and are appropriately aggregated within the WSFS Bank segment in accordance with ASC 280.

Cash Connect provides turnkey ATM services through strategic partnerships with several of the largest networks, manufacturers and service providers in the ATM industry. The balance sheet category “Cash in non-owned ATMs” includes cash from which fee income is earned through bailment arrangements with customers of Cash Connect.

The Trust and Wealth Management segment is comprised of Christiana Trust, Montchanin, Private Banking and WSFS Investment Group, Inc. Christiana Trust was acquired in December 2010 and WSFS’ Trust business was consolidated into Christiana Trust. Christiana Trust provides investment, fiduciary, agency and commercial domicile services from locations in Delaware and Nevada. These services are provided to individuals and families as well as corporations and institutions. Montchanin has one consolidated wholly owned subsidiary, Cypress Capital Management, LLC (Cypress). Cypress is a Wilmington-based investment advisory firm serving high net-worth individuals and institutions. WSFS Investment Group, Inc. markets various third-party insurance products and securities and Private Banking which specializes in meeting the needs of professionals and their practices, including deposit services and credit needs of existing and start-up practices.

 

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Table of Contents

An operating segment is a component of an enterprise that engages in business activities from which it may earn revenues and incur expenses, whose operating results are regularly reviewed by the enterprise’s chief operating decision makers to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. We evaluate performance based on pretax ordinary income relative to resources used, and allocate resources based on these results. The accounting policies applicable to our segments are those that apply to our preparation of the accompanying Consolidated Financial Statements. Segment information for the three months ended March 31, 2012 and 2011 follows:

 

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Table of Contents

For the three months ended March 31, 2012

 

     WSFS Bank      Cash
Connect
     Trust &
Wealth
Management
    Total  
     (In Thousands)  

External customer revenues:

          

Interest income

   $ 37,036      $ —         $ 2,187     $ 39,223  

Noninterest income

     9,528        4,074        3,156       16,758  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total external customer revenues

     46,564        4,074        5,343       55,981  
  

 

 

    

 

 

    

 

 

   

 

 

 

Inter-segment revenues:

          

Interest income

     960        —           1,227       2,187  

Noninterest income

     2,061        173        —          2,234  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total inter-segment revenues

     3,021        173        1,227       4,421  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total revenue

     49,585        4,247        6,570       60,402  
  

 

 

    

 

 

    

 

 

   

 

 

 

External customer expenses:

          

Interest expense

     6,475        —           218       6,693  

Noninterest expenses

     26,338        1,972        2,679       30,989  

Provision for loan loss

     8,296        —           (51     8,245  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total external customer expenses

     41,109        1,972        2,846       45,927  
  

 

 

    

 

 

    

 

 

   

 

 

 

Inter-segment expenses

          

Interest expense

     1,227        334        626       2,187  

Noninterest expenses

     173        525        1,536       2,234  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total inter-segment expenses

     1,400        859        2,162       4,421  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total expenses

     42,509        2,831        5,008       50,348  
  

 

 

    

 

 

    

 

 

   

 

 

 

Income before taxes

   $ 7,076      $ 1,416      $ 1,562     $ 10,054  

Provision for income taxes

             3,610  
          

 

 

 

Consolidated net income

           $ 6,444  
          

 

 

 

Capital expenditures

   $ 1,713      $ 156      $ 64     $ 1,933  
  

 

 

    

 

 

    

 

 

   

 

 

 

As of March 31, 2012

          

Cash and cash equivalents

   $ 51,520      $ 405,053      $ 3,122     $ 459,695  

Other segment assets

     3,667,601        2,530        197,328       3,867,459  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total segment assets

   $ 3,719,121      $ 407,583      $ 200,450     $ 4,327,154  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

For the three months ended March 31, 2011

 

     WSFS Bank      Cash Connect      Trust & Wealth
Management
     Total  
     (In Thousands)  

External customer revenues:

           

Interest income

   $ 36,787      $ —         $ 2,365      $ 39,152  

Noninterest income

     7,318        3,416        2,905        13,639  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total external customer revenues

     44,105        3,416        5,270        52,791  
  

 

 

    

 

 

    

 

 

    

 

 

 

Inter-segment revenues:

           

Interest income

     830        —           1,651        2,481  

Noninterest income

     1,842        161        —           2,003  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total inter-segment revenues

     2,672        161        1,651        4,484  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

     46,777        3,577        6,921        57,275  
  

 

 

    

 

 

    

 

 

    

 

 

 

External customer expenses:

           

Interest expense

     8,550        —           348        8,898  

Noninterest expenses

     27,371        1,765        2,251        31,387  

Provision for loan loss

     5,153        —           755        5,908  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total external customer expenses

     41,074        1,765        3,354        46,193  
  

 

 

    

 

 

    

 

 

    

 

 

 

Inter-segment expenses

           

Interest expense

     1,651        271        559        2,481  

Noninterest expenses

     161        451        1,391        2,003  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total inter-segment expenses

     1,812        722        1,950        4,484  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total expenses

     42,886        2,487        5,304        50,677  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) before taxes

   $ 3,891      $ 1,090      $ 1,617      $ 6,598  

Provision for income taxes

              2,392  
           

 

 

 

Consolidated net income

            $ 4,206  
           

 

 

 

Capital expenditures

   $ 1,840      $ 44      $ —         $ 1,884  
  

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2011

           

Cash and cash equivalents

   $ 48,107      $ 416,949      $ 2,961      $ 468,017  

Other segment assets

     3,618,744        2,155        200,092        3,820,991  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total segment assets

   $ 3,666,851      $ 419,104      $ 203,053      $ 4,289,008  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

7. FAIR VALUE DISCLOSURES OF FINANCIAL ASSETS

FAIR VALUE OF FINANCIAL ASSETS

ASC 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820-10 establishes a fair value hierarchy that prioritizes the use of inputs used in valuation methodologies into the following three levels:

Level 1: Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.

Level 2: Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; inputs to the valuation methodology include quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs to the valuation methodology that are derived principally from or can be corroborated by observable market data by correlation or other means.

Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

The table below presents the balances of assets measured at fair value as of March 31, 2012 (there are no material liabilities measured at fair value):

 

Description

   Quoted
Prices in
Active
Markets for
Identical
Asset

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
    Total
Fair Value
 
     (in Thousands)  

Assets Measured at Fair Value on a Recurring Basis

          

Available-for-sale securities:

          

Collateralized mortgage obligations

   $ —         $ 312,593      $ 3,500     $ 316,093  

FNMA

     —           372,493        —          372,493  

FHLMC

     —           94,116        —          94,116  

GNMA

     —           60,109        —          60,109  

U.S. Government and GSE

     —           45,011        —          45,011  

State and political subdivisions

     —           3,673        —          3,673  

Reverse mortgages

     —           —           (630     (630

Trading Securities

     —           —           12,465       12,465  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total assets measured at fair value on a recurring basis

   $ —         $ 887,995      $ 15,335     $ 903,330  

Assets Measured at Fair Value on a Nonrecurring Basis

          

Other real estate owned

   $ —         $ —         $ 6,708     $ 6,708  

Impaired Loans (collateral dependent)

     —           —           72,294       72,294  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total assets measured at fair value on a nonrecurring basis

   $ —         $ —         $ 79,002     $ 79,002  

 

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Table of Contents

The table below presents the balances of assets measured at fair value as of December 31, 2011 (there are no material liabilities measured at fair value):

 

Description

   Quoted
Prices in
Active
Markets for
Identical
Asset

(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
    Total
Fair Value
 
     (in Thousands)  

Assets Measured at Fair Value on a Recurring Basis

          

Available-for-sale securities:

          

Collateralized mortgage obligations

   $ —         $ 324,450      $ 3,936     $ 328,386  

FNMA

     —           329,354        —          329,354  

FHLMC

     —           95,086        —          95,086  

GNMA

     —           63,967        —          63,967  

U.S. Government and GSE

     —           39,025        —          39,025  

State and political subdivisions

     —           4,190        —          4,190  

Reverse mortgages

     —           —           (646     (646

Trading Securities

     —           —           12,432       12,432  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total assets measured at fair value on a recurring basis

   $ —         $ 856,072      $ 15,722     $ 871,794  

Assets Measured at Fair Value on a Nonrecurring Basis

          

Other real estate owned

   $ —         $ 11,695      $ —        $ 11,695  

Impaired Loans (collateral dependent)

     —           74,562        —          74,562  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total assets measured at fair value on a nonrecurring basis

   $ —         $ 86,257      $ —        $ 86,257  

Fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models or obtained from third parties that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include unobservable parameters. Our valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While we believe our valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

Available- for-sale securities. As of March 31, 2012, securities classified as available for sale are reported at fair value using both Level 2 and Level 3 inputs. Included in the Level 2 total are approximately $45.0 million in Federal Agency debentures, $758.4 million in Federal Agency MBS, $80.9 million of Private Label MBS, and $3.7 million in municipal bonds. Agency and MBS securities are predominately AAA-rated. We believe that this Level 2 designation is appropriate for these securities under ASC 820-10 as, with almost all fixed income securities, none are exchange traded, and all are priced by correlation to observed market data. For these securities we obtain fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, U.S. government and agency yield curves, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the security’s terms and conditions, among other factors. Included in the Level 3 total is a small equity traunche of a reverse mortgage security purchased on July 15, 2011. This security is Level 3 because there is no active market for this security and no observable inputs that reflect quoted prices for identical assets in active markets (Level 1) or inputs other than quoted prices that are observable for the asset through corroboration with observable market data (Level 2). In order to establish the fair value for a Level 3 asset a “mark-to-model” has been developed using the income approach described in ASC 820-10-35-32 and is similar to the methodology used to value our trading securities described below.

 

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Table of Contents

Trading securities. The amount included in the trading securities category represents the fair value of a BBB-rated traunche of a reverse mortgage security. There has never been an active market for these securities. As such, we classify these trading securities as Level 3 under ASC 820-10. As prescribed by ASC 820-10 management used various observable and unobservable inputs to develop a range of likely fair value prices where this security would be exchanged in an orderly transaction between market participants at the measurement date. The unobservable inputs reflect management’s assumptions about the estimates that market participants would use in pricing this asset. Included in these inputs were the median of a selection of other BBB-rated securities as well as quoted market prices from higher rated tranches of this asset class. As a result, the value assigned to this security is determined primarily through a discounted cash flow analysis. All of these assumptions require a significant degree of management judgment. The key inputs consist of prepayments, house price appreciation and interest rates. Management has completed a sensitivity analysis at March 31, 2012, which showed any increase or decrease in these inputs would not have a significant impact on the fair value of these assets.

Reverse Mortgages. The amount of our investment in reverse mortgages represents the estimated value of future cash flows of the reverse mortgages at a rate deemed appropriate for these mortgages, based on the market rate for similar collateral. The projected cash flows depend on assumptions about life expectancy of the mortgagor and the future changes in collateral values. Due to the significant amount of management judgment and the unobservable input calculations, these reverse mortgages have been classified as Level 3.

The changes in Level 3 assets measured at fair value on a recurring basis are summarized as follows:

 

     Trading
Securities
     Reverse
Mortgages
    Available-
for-sale
Securities
    Total  
(In Thousands)                          

Balance at December 31, 2010

   $ 12,432      $ (686   $ —        $ 11,746  

Total net income (losses) for the period included in net income

     —           (137     265       128  

Purchases, sales, issuances, and settlements, net

     —           177       2,755       2,932  

Mark-to-market adjustment

     —           —          916       916   
  

 

 

    

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

   $ 12,432      $ (646     3,936     $ 15,722  

Total net income (losses) for the period included in net income

     33        (29     —          4  

Purchases, sales, issuances, and settlements, net

     —           45       —          45  

Mark-to-market adjustment

     —           —          (436     (436
  

 

 

    

 

 

   

 

 

   

 

 

 

Balance at March 31, 2012

   $ 12,465      $ (630   $ 3,500     $ 15,335  
  

 

 

    

 

 

   

 

 

   

 

 

 

Other real estate owned. Other real estate owned consists of loan collateral which has been repossessed through foreclosure or other measures. Initially, foreclosed assets are recorded as held for sale at the lower of the loan balance or fair value of the collateral less estimated selling costs. Subsequent to foreclosure, valuations are updated periodically and the assets may be marked down further, reflecting a new cost basis. The fair value of our real estate owned was estimated using Level 3 inputs based on appraisals obtained from third parties.

Impaired loans. We evaluate and value impaired loans at the time the loan is identified as impaired, and the fair values of such loans are estimated using Level 3 inputs in the fair value hierarchy. Each loan’s collateral has a unique appraisal and management’s discount of the value is based on the factors unique to each impaired loan. The significant unobservable input in determining the fair value is management’s subjective discount on appraisals of the collateral securing the loan, which range from 10% - 50%. Collateral may consist of real estate and/or business assets including equipment, inventory and/or accounts receivable and the value of these assets is determined based on the appraisals by qualified licensed appraisers hired by us. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, estimated costs to sell, and/or management’s expertise and knowledge of the client and the client’s business.

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a gross amount of $82.9 million and $80.0 million at March 31, 2012 and December 31, 2011, respectively. The valuation allowance on impaired loans was $8.7 million as of March 31, 2012 and $4.7 million as of December 31, 2011.

 

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In light of the continuing slow-down in the real estate market, management is required to utilize a more significant level of unobservable inputs and, as such, we have reclassified the hierarchical levels of both Other Real Estate Owned and Impaired Loans to Level 3 as of March 31, 2012.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The reported fair values of financial instruments are based on a variety of factors. In certain cases, fair values represent quoted market prices for identical or comparable instruments. In other cases, fair values have been estimated based on assumptions regarding the amount and timing of estimated future cash flows that are discounted to reflect current market rates and varying degrees of risk. Accordingly, the fair values may not represent actual values of the financial instruments that could have been realized as of period-end or that will be realized in the future.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

Cash and Short-Term Investments: For cash and short-term investments, including due from banks, federal funds sold, securities purchased under agreements to resell and interest-bearing deposits with other banks, the carrying amount is a reasonable estimate of fair value.

Loans: Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type: commercial, commercial mortgages, construction, residential mortgages and consumer. For loans that reprice frequently, the book value approximates fair value. The fair values of other types of loans are estimated by discounting expected cash flows using the current rates at which similar loans would be made to borrowers with comparable credit ratings and for similar remaining maturities. The fair value of nonperforming loans is based on recent external appraisals of the underlying collateral. Estimated cash flows, discounted using a rate commensurate with current rates and the risk associated with the estimated cash flows, are utilized if appraisals are not available. This technique does not contemplate an exit price.

Bank-Owned Life Insurance: The estimated fair value approximates the carrying value for this investment.

Stock in the Federal Home Loan Bank of Pittsburgh: The fair value of FHLB stock is assumed to be essentially equal to its cost. We carry FHLB stock at cost, or par value, and evaluate FHLB stock for impairment based on the ultimate recoverability of par value rather than by recognizing temporary declines in value. As part of the impairment assessment of FHLB stock, management considers, among other things, (i) the significance and length of time of any declines in net assets of the FHLB compared to its capital stock, (ii) commitments by the FHLB to make payments required by law or regulations and the level of such payments in relation to its operating performance, (iii) the impact of legislative and regulatory changes on FHLB, the FHLB has access to the U.S. Government-Sponsored Enterprise Credit Facility, a secured lending facility that serves as a liquidity backstop, substantially reducing the likelihood that the FHLB would need to sell securities to raise liquidity and, thereby, cause the realization of large economic losses. On August 8, 2011, Standard & Poors (“S&P”) downgraded the FHLB from AAA to AA+, similar to their downgrade of the U.S. sovereign rating. The reduction in the FHLB credit rating was due to the belief, by S&P, that the FHLB system is certain to receive U.S. government support, if necessary, resulting from the important role the FHLB system plays as primary liquidity providers to U.S. mortgage and housing-market participants. Despite the downgrade, the FHLB continues to have a very high degree of government support and was in compliance with all regulatory capital requirements as of March 31, 2012. As a result, we have determined there was no other-than-temporary impairment related to our FHLB stock investment as of March 31, 2012.

Demand Deposits, Savings Deposits and Time Deposits: The fair value of demand deposits and savings deposits is determined by projecting future cash flows using an estimated economic life based on account characteristics. The resulting cash flow is discounted using rates available on alternative funding sources. The fair value of time deposits is estimated using the rate and maturity characteristics of the deposits to estimate their cash flow. The cash flow is discounted at rates for similar term wholesale funding.

 

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Borrowed Funds: Rates currently available to us for debt with similar terms and remaining maturities are used to estimate fair value of existing debt.

Off-Balance Sheet Instruments: The fair value of off-balance sheet instruments, including commitments to extend credit and standby letters of credit, is estimated using the fees currently charged to enter into similar agreements with comparable remaining terms and reflects the present creditworthiness of the counterparties.

The book value and estimated fair value of our financial instruments are as follows:

 

     Fair Value    March 31, 2012      December 31, 2011  
     Measurement    Book Value      Fair Value      Book Value      Fair Value  
(In Thousands)                                 

Financial assets:

              

Cash and cash equivalents

   Level 1    $ 459,456      $ 459,456      $ 468,017      $ 468,017  

Investment securities

   See previous table      903,330        903,330        871,794        871,794  

Loans held for sale

   Level 3      8,173        8,173        10,185        10,185  

Loans, net

   Level 3      2,723,863        2,744,491        2,702,589        2,721,804  

Stock in Federal Home Loan Bank of Pittsburgh

   Level 2      33,968        33,968        35,756        35,756  

Accrued interest receivable

   Level 2      11,582        11,582        11,743        11,743  

Financial liabilities:

              

Deposits

   Level 2      3,189,508        3,090,097        3,135,304        3,087,464  

Borrowed funds

   Level 2      703,097        709,554        723,620        731,522  

Standby letters of credit

   Level 3      297        297        322        322  

Accrued interest payable

   Level 2      3,817        3,817        1,910        1,910  

The estimated fair value of our off-balance sheet financial instruments is as follows:

 

     March 31,
2012
     December 31,
2011
 
(In Thousands)              

Off-balance sheet instruments:

     

Commitments to extend credit

   $ 4,414      $ 4,445  

8. INDEMNIFICATIONS AND GUARANTEES

Secondary Market Loan Sales. We generally do not sell loans with recourse except to the extent arising from standard loan sale contract provisions covering violations of representations and warranties and, under certain circumstances first payment defaults by borrowers. These are customary repurchase provisions in the secondary market for conforming mortgage loan sales. These indemnifications may include our repurchase of the loans. Repurchases and losses are rare, and no provision is made for the losses at the time of sale. During the first quarter of 2012, we had no repurchases under these indemnifications.

We typically sell fixed-rate, conforming first mortgage loans (including reverse mortgages) in the secondary market as part of our ongoing asset/liability management program. Loans held-for-sale are carried at the lower of cost or market of the aggregate or in some cases individual loans. Gains and losses on sales of loans are recognized at the time of the sale.

 

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Swap Guarantees. We entered into agreements with three unrelated financial institutions whereby those financial institutions entered into interest rate derivative contracts (interest rate swap transactions) with customers referred to them by us. By the terms of the agreements, those financial institutions have recourse to us for any exposure created under each swap transaction in the event the customer defaults on the swap agreement and the agreement is in a paying position to the third-party financial institution. This is a customary arrangement that allows smaller financial institutions like us to provide access to interest rate swap transactions for our customers without creating the swap ourselves.

At March 31, 2012 there were 81 variable-rate swap transactions between the third party financial institutions and our customers, compared to 79 at December 31, 2011. The initial notional amount aggregated approximately $319.8 million at March 31, 2012 compared with $318.1 million at December 31, 2011. At March 31, 2012 maturities ranged from approximately 4 months to 13 years. The aggregate market value of these swaps to the customers was a liability of $30.7 million at March 31, 2012 and $32.8 million at December 31, 2011.

9. ASSOCIATE (EMPLOYEE) BENEFIT PLANS

Postretirement Benefits

We share certain costs of providing health and life insurance benefits to retired Associates (and their eligible dependents). Substantially all Associates may become eligible for these benefits if they reach normal retirement age while working for us.

We account for our obligations under the provisions of FASB ASC 715, Compensation – Retirement Benefits (“ASC 715”) (Formerly SFAS No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions). ASC 715 requires that the costs of these benefits be recognized over an Associate’s active working career. Disclosures are in accordance with ASC 715.

The following disclosures of the net periodic benefit cost components of postretirement benefits were measured at January 1, 2012 and 2011:

 

     Three months ended
March 31,
 
     2012      2011  
(In Thousands)              

Service cost

   $ 72      $ 52  

Interest cost

     44        42  

Amortization of transition obligation

     15        15  

Net loss recognition

     17        8  
  

 

 

    

 

 

 

Net periodic benefit cost

   $ 148      $ 117  
  

 

 

    

 

 

 

10. STOCK AND COMMON STOCK WARRANTS

In August 2010, we completed an underwritten public offering of 1,370,000 shares of common stock. The offering priced at $36.50 per share, a slight premium to the prior day’s closing price, and raised $47.1 million net of $2.9 million of costs.

On September 24, 2009 we completed a private placement of stock to Peninsula Investment Partners, L.P. (Peninsula), pursuant to which we issued and sold 862,069 shares of common stock for a total purchase price of $25.0 million, and a 10-year warrant to purchase 129,310 shares of common stock at an exercise price of $29.00 per share. The warrant is immediately exercisable. During 2011 all shares were distributed on a pro-rata basis to the fund holders of Peninsula with the warrants being transferred to Peninsula’s managing partner.

Total proceeds of $25.0 million were allocated, based on the relative fair value of common stock and common stock warrants, to common stock for $23.5 million and common stock warrants for $1.5 million on September 24, 2009.

 

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On January 23, 2009, we entered into a purchase agreement with the U.S. Treasury pursuant to which we issued and sold 52,625 shares of our fixed-rate cumulative perpetual preferred stock for a total purchase price of $52.6 million, and a 10-year warrant to purchase 175,105 shares of common stock at an exercise price of $45.08 per share. On March 28, 2012, the U.S. Department of the Treasury held a public auction where it sold all 52,625 shares, which represented the Treasury’s entire preferred stock holding in WSFS. Under the terms of the agreement, WSFS will continue to pay a five percent dividend annually for each of the first five years of the investment and a nine percent dividend thereafter until the shares are redeemed. The cumulative dividend for the preferred stock is accrued for and payable on February 15, May 15, August 15 and November 15 of each year. We have declared and paid $658,000 preferred stock dividends during the three months ended March 31, 2012.

Total proceeds of $52.6 million were allocated, based on the relative fair value of the preferred stock and common stock warrants, to preferred stock for $51.9 million and common stock warrants for $693,000 respectively, on January 23, 2009. The preferred stock discount is being accreted, on an effective yield method, to preferred stock over five years. We have accreted $35,000 during the three months ended March 31, 2012, relating to the discount on preferred stock.

The preferred stock is nonvoting, except for class voting rights on certain matters that could adversely affect the shares. They may be redeemed by us for the liquidation preference ($1,000 per share), plus accrued but unpaid dividends. The warrant is exercisable immediately and subject to certain anti-dilution and other adjustments.

11. GOODWILL AND INTANGIBLES

In accordance with FASB ASC 805, Business Combinations, and FASB ASC 350, Intangibles – Goodwill and Other, all assets and liabilities acquired in purchase acquisitions, including goodwill, indefinite-lived intangibles and other intangibles are recorded at fair value. We consider our accounting policies related to goodwill and other intangible assets to be critical because the assumptions and judgment used in determining the fair value of assets and liabilities acquired in past acquisitions are subjective and complex. As a result, changes in these assumptions and judgment could have a significant impact on our financial condition or results of operations.

The fair value of acquired assets and liabilities, including the resulting goodwill, was based either on quoted market prices or provided by other third-party sources, when available. When third-party information was not available we made good-faith estimates primarily through the use of internal cash flow modeling techniques. The assumptions used in the cash flow modeling are subjective and susceptible to significant changes.

Goodwill and other intangible assets with indefinite useful lives are tested for impairment at least annually and charged to results of operations in periods in which the recorded value is more than the estimated fair value. Intangible assets that have finite useful lives will continue to be amortized over their useful lives and are periodically evaluated for impairment. Goodwill totaled $28.1 million at both March 31, 2012 and December 31, 2011. The majority of this goodwill, or $23.0 million, is in the WSFS Bank reporting unit and is the result of a branch acquisition in 2008 and the acquisition of CB&T during 2010. The remaining $5.1 million is in the Trust and Wealth Management reporting unit and is mainly the result of the acquisition of CB&T.

Goodwill is tested for impairment using a two-step process that begins with an estimation of fair value. The first step compares the estimated fair value of our reporting units with their carrying amounts, including goodwill. If the estimated fair value exceeds its carrying amount, goodwill is not considered impaired. However, if the carrying amount exceeds its estimated fair value, a second step is performed comparing the implied fair value to the carrying amount of goodwill. An impairment loss would be recorded to the extent that the carrying amount of goodwill exceeds its implied fair value.

Fair value may be determined using market prices, comparison to similar assets, market multiples, discounted cash flow analyses and other variables. Estimated cash flows extend five years into the future and, by their nature, are difficult to estimate over such an extended period of time. Factors that may significantly affect estimates include, but are not limited to, balance sheet growth assumptions, credit losses in our investment and loan portfolios, competitive pressures in our market area, changes in customer base and customer product preferences, changes in revenue growth trends, cost structure, changes in discount rates, conditions in the banking sector and general economic variables.

As of December 31, 2011, we completed the Step One test of the analysis to determine potential goodwill impairment of the WSFS Bank and Trust and Wealth Management reporting units. The valuation incorporated a market-based analysis and indicated the fair values of our WSFS Bank and Trust and Wealth Management reporting units were above their carrying amounts. Therefore, in accordance with FASB ASC 350-20-35-6, the Step Two analysis was not required.

 

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FASB ASC 350, also requires that an acquired intangible asset be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the asset can be sold, transferred, licensed, rented or exchanged, regardless of the acquirer’s intent to do so.

The following table summarizes other intangible assets:

 

     Gross
Intangible
Assets
     Accumulated
Amortization
    Net
Intangible
Assets
 
     (In Thousands)  

March 31, 2012

       

Core deposits

   $ 4,370      $ (1,549   $ 2,821  

Other

     4,870        (1,759     3,111  
  

 

 

    

 

 

   

 

 

 

Total other intangible assets

   $ 9,240      $ (3,308   $ 5,932  
  

 

 

    

 

 

   

 

 

 

December 31, 2011

       

Core deposits

   $ 4,370      $ (1,393   $ 2,977  

Other

     4,865        (1,703     3,162  
  

 

 

    

 

 

   

 

 

 

Total other intangible assets

   $ 9,235      $ (3,096   $ 6,139  
  

 

 

    

 

 

   

 

 

 

Core deposits are amortized over their expected lives using the present value of the benefit of the core deposits and straight-line methods of amortization. During the three months ended March 31, 2012, we recognized amortization expense on other intangible assets of $212,000.

The following presents the estimated amortization expense of intangibles:

 

(In Thousands)    Amortization
of Intangibles
 

Remaining in 2012

   $ 885  

2013

     916  

2014

     758  

2015

     711  

2016

     465  

Thereafter

     2,197  
  

 

 

 

Total

   $ 5,932  
  

 

 

 

For the three months ended March 31, 2012, we determined there were no events that would trigger impairment testing of goodwill and other intangible assets. Changing economic conditions that may adversely affect our performance and stock price could result in impairment, which could adversely affect earnings in the future.

12. LEGAL PROCEEDINGS

We were served with a complaint filed in U.S. Bankruptcy Court by a bankruptcy trustee relating to a former WSFS Bank customer. The complaint challenges the Bank’s actions in exercising its rights concerning an outstanding loan and also seeks to avoid and recover the pre-bankruptcy repayment of that loan. Management of the Bank believes it acted appropriately and is vigorously defending itself against the complaint. No litigation reserve has been recorded as it is not yet possible to establish the probability of, or reasonably estimate, a potential loss. Our insurance carrier has determined our future litigation defense costs are covered by an insurance policy we have for such matters.

 

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On November 18, 2011, a purported class action was filed in the Delaware Superior Court for New Castle County. The Complaint challenges WSFS Bank’s practices relating to its assessment and collection of overdraft fees on checking accounts. Damages are sought for the statute of limitations period applicable to the claims made in the suit, and include restitution of overdraft fees paid to WSFS Bank, actual damages allegedly sustained by customers, punitive damages, and attorney’s fees. This case is nearly identical to numerous other lawsuits that have been brought by a small handful of class action litigators. We have discovered more than 120 other overdraft suits that have been brought against U.S. banks. No litigation reserve has been recorded as it is not yet possible to establish the probability of, or reasonably estimate, a potential loss. We strongly believe that our overdraft practices are fair to our customers and comply fully with all applicable laws and regulations. We believe this suit is without merit and intend to vigorously defend the pending action.

There are no other significant pending legal proceedings involving us other than those arising out of routine operations. Management does not anticipate that the ultimate liability, if any, arising out of such other proceedings will have a material effect on the Consolidated Financial Statements.

13. SUBSEQUENT EVENTS

In April, 2012, we began a process to sell in bulk sale transactions approximately $52 million in unpaid principal balance, as of March 31, 2012, of criticized and nonperforming loans. Preliminary bids are due by June 7, 2012 and, assuming receipt of an acceptable bid, we anticipate that the closing of such a sale will be completed on or around June 30, 2012. We are not bound to complete these sales, and may choose to reject any and all bids based upon the terms of the bids received. Overall, bids are expected to reflect discounts from current asset carrying values and these discounts may be significant. The loans anticipated to be sold were reclassified as loans held for sale in April 2012.

Concurrently with the proposed bulk sale, we anticipate selling approximately $300 million in mortgage-backed securities at a gain and reinvesting the proceeds in similar securities but with a shorter duration reducing the prepayment and interest-rate risk in the overall portfolio. We expect the gain from the securities sales may offset all, or a large part of the loss to be included in the bulk sale transactions. While future earnings may be negatively impacted by the decreased securities yield, we expect that the impact on 2012 earnings will be offset by an improvement in total credit costs from the bulk sales.

 

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ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

WSFS Financial Corporation is parent to Wilmington Savings Fund Society, FSB (“WSFS Bank” or the “Bank”), the seventh oldest bank and trust in the United States continuously operating under the same name. A permanent fixture in the community, WSFS has been in operation for more than 180 years. In addition to its focus on stellar customer service, the Bank has continued to fuel growth and remain a leader in our community. We are a relationship-focused, locally-managed, community banking institution that has grown to become the largest thrift holding company in the State of Delaware, one of the top commercial lenders in the state, the third largest bank in terms of Delaware deposits and one of the top trust companies in the country. We state our mission simply: We Stand for Service and Strengthening Our Communities.

Our core banking business is commercial lending funded by customer-generated deposits. We have built a $2.1 billion commercial loan portfolio by recruiting the best seasoned commercial lenders in our markets and offering a high level of service and flexibility typically associated with a community bank. We fund this business primarily with deposits generated through commercial relationships and retail deposits. We service our customers primarily from our 49 offices located in Delaware (39), Pennsylvania (8), Virginia (1) and Nevada (1). We also offer a broad variety of consumer loan products, retail securities and insurance brokerage through our retail branches.

We have two consolidated subsidiaries, WSFS Bank and Montchanin Capital Management, Inc. (“Montchanin”) and one unconsolidated affiliate, WSFS Capital Trust III (“the Trust”).

WSFS Bank has two wholly owned subsidiaries, WSFS Investment Group, Inc. and Monarch Entity Services, LLC (“Monarch”). WSFS Investment Group, Inc., markets various third-party investment and insurance products, such as single-premium annuities, whole life policies and securities primarily through the Bank’s retail banking system and directly to the public. Monarch provides commercial domicile services which include employees, directors, sublease of office facilities and registered agent services in Delaware and Nevada.

Our Cash Connect division is a premier provider of ATM Vault Cash and related services in the United States. Cash Connect manages nearly $448 million in vault cash in more than 12,000 ATMs nationwide and also provides online reporting and ATM cash management, predictive cash ordering, armored carrier management, ATM processing and equipment sales. Cash Connect also operates over 400 ATMs for WSFS Bank, which has, by far, the largest branded ATM network in Delaware.

We offer trust and wealth management services through Christiana Trust, Cypress Capital Management, LLC (Cypress), WSFS Investment Group brokerage and our Private Banking group. The Christiana Trust division provides investment, fiduciary, agency and commercial domicile services from locations in Delaware and Nevada and has over $11 billion in assets under administration. These services are provided to individuals and families as well as corporations and institutions. The Christiana Trust division of WSFS Bank provides these services to customers locally, nationally and internationally making use of the advantages of its branch facilities in Delaware and Nevada. Cypress is an investment advisory firm that manages more than $500 million of portfolios for individuals, trusts, retirement plans and endowments. WSFS Investment Group, Inc. markets various third-party insurance products and securities through the Bank’s retail banking system.

Until July 21, 2011, WSFS Financial Corporation and WSFS Bank were regulated by the Office of Thrift Supervision. As of July 21, 2011, WSFS Financial Corporation’s primary federal regulator became the Federal Reserve and WSFS Bank’s primary federal regulator became the Office of the Comptroller of the Currency. While we do not anticipate the change in primary regulators will have a material impact on our operations, there can be no assurance that the interpretation by these agencies of the regulations governing our business will not be different than that of the Office of Thrift Supervision which may affect the manner in which we conduct our business in the future.

 

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FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, and exhibits thereto, contains estimates, predictions, opinions, projections and other statements that may be interpreted as “forward-looking statements” as that phrase is defined in the Private Securities Litigation Reform Act of 1995. Such statements include, without limitation, references to our financial goals, management’s plans and objectives for future operations, financial and business trends, business prospects, and management’s outlook or expectations for earnings, revenues, expenses, capital levels, liquidity levels, asset quality or other future financial or business performance, strategies or expectations. Such forward-looking statements are based on various assumptions (some of which may be beyond the Company’s control) and are subject to risks and uncertainties (which change over time) and other factors which could cause actual results to differ materially from those currently anticipated. Such risks and uncertainties include, but are not limited to, the results of the Company’s proposed bulk sale and investment securities transactions; those related to the economic environment, particularly in the market areas in which the Company operates; the volatility of the financial and securities markets, including changes with respect to the market value of financial assets; changes in market interest rates, changes in government regulation affecting financial institutions, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules being issued in accordance with this statute and potential expenses associated therewith; and the costs associated with resolving any problem loans and other risks and uncertainties, discussed in documents filed by WSFS Financial Corporation with the Securities and Exchange Commission from time to time. Forward looking statements are as of the date they are made, and the Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company.

CRITICAL ACCOUNTING POLICIES

The discussion and analysis of the financial condition and results of operations are based on the Consolidated Financial Statements, which are prepared in conformity with U.S. generally accepted accounting principles. The preparation of these Consolidated Financial Statements requires us to make estimates and assumptions affecting the reported amounts of assets, liabilities, revenue and expenses. We regularly evaluate these estimates and assumptions including those related to the allowance for loan losses, deferred taxes, fair value measurements, goodwill and other intangible assets. We base our estimates on historical experience and various other factors and assumptions that are believed to be reasonable under the circumstances. These form the basis for making judgments on the carrying value of assets and liabilities that are not readily apparent from other sources. Although our current estimates contemplate current economic conditions and how we expect them to change in the future, for the remainder of 2012, it is reasonably possible that actual conditions may be worse than anticipated in those estimates, which could materially affect our results of operations and financial condition. Actual results may differ from these estimates under different assumptions or conditions.

The following are critical accounting policies that involve more significant judgments and estimates. See further discussion of these critical accounting policies in the 2011 Annual Report on Form 10-K.

Allowance for Loan Losses

We maintain allowances for loan losses and charge losses to these allowances when realized. We consider the determination of the allowance for loan losses to be critical because it requires significant judgment reflecting our best estimate of impairment related to specifically evaluated impaired loans as well as the inherent risk of loss for those in the remaining loan portfolio. Our evaluation is based upon a continuing review of the portfolio, with consideration given to evaluations resulting from examinations performed by regulatory authorities.

Deferred Taxes

We account for income taxes in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740, Income Taxes (“ASC 740”), which requires the recording of deferred income taxes that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. We consider our accounting policies on deferred taxes to be critical because we regularly assess the need for valuation allowances on deferred income tax assets that may result from, among other things, limitations imposed by Internal Revenue Code and uncertainties, including the timing of settlement and realization of these differences. No valuation allowance is required as of March 31, 2012.

 

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Fair Value Measurements

We adopted FASB ASC 820-10 Fair Value Measurements and Disclosures (“ASC 820”), which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. We consider our accounting policies related to fair value measurements to be critical because they are important to the portrayal of our financial condition and results, and they require our subjective and complex judgment as a result of the need to make estimates about the effects of matters that are inherently uncertain. See Note 7, Fair Value of Financial Assets to our Consolidated Financial Statements.

Goodwill and Other Intangible Assets

In accordance with FASB ASC 805, Business Combinations, and FASB ASC 350, Intangibles – Goodwill and Other, all assets and liabilities acquired in purchase acquisitions, including goodwill, indefinite-lived intangibles and other intangibles are recorded at fair value. We consider our accounting policies related to goodwill and other intangible assets to be critical because the assumptions or judgment used in determining the fair value of assets and liabilities acquired in past acquisitions are subjective and complex. As a result, changes in these assumptions or judgment could have a significant impact on our financial condition or results of operations.

For additional information regarding our goodwill and other intangible assets, see Note 11 to the Consolidated Financial Statements.

FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY

Financial Condition

Our total assets increased $38.1 million or 1% to $4.3 billion as of March 31, 2012. Included in this increase was a $21.3 million, or 1% increase in net loans, and a $31.5 million, or 4%, increase in investment securities. The increase in loans was mainly in commercial and industrial (C&I) loans which grew $25.6 million, or 2% during the first quarter of 2012. This growth occurred despite typically slower seasonal loan growth during the first quarter and was partially offset by a decrease in residential and consumer loans, generally reflecting a continuing purposeful change in the mix of our loan portfolios. In addition, and partially offsetting these increases, cash and cash equivalents decreased $8.3 million or 2% during the quarter.

Total liabilities increased $33.7 million during the quarter to $3.9 billion as of March 31, 2012. This increase was primarily the result of increased deposits of $54.2 million, or 2%, and an increase of $25.0 million in federal funds purchased and securities sold under agreements to repurchase. Partially offsetting these increases was a $34.8 million decrease in other borrowed funds, which includes customer sweep accounts.

Capital Resources

Stockholders’ equity increased $4.4 million between December 31, 2011 and March 31, 2012. This increase was mainly due to net income of $6.4 million. Partially offsetting this increase was a decrease of $1.0 million in the value of our available-for-sale securities portfolio combined with the payment of common and preferred dividends of $1.7 million during the three months ended March 31, 2012.

Book value per common share was $45.55 at March 31, 2012 an increase of $0.36 from $45.19 reported at December 31, 2011. Tangible common book value per common share (a non-GAAP measurement) was $35.62 at March 31, 2012, an increase of $0.42, or 1% from $35.20 reported at December 31, 2011.

 

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Below is a table comparing the Bank’s consolidated capital position to the minimum regulatory requirements as of March 31, 2012:

 

     Consolidated
Bank Capital
    For Capital
Adequacy Purposes
    To be Well-Capitalized
Under  Prompt Corrective
Action Provisions
 
(dollars in thousands)    Amount      % of
Assets
    Amount      % of
Assets
    Amount      % of
Assets
 

Total Capital (to Risk-Weighted Assets)

   $ 441,162         13.57   $ 260,144         8.00   $ 325,180         10.00

Core Capital (to Adjusted Total Assets)

     400,317        9.34       171,497        4.00       214,371        5.00   

Tangible Capital (to Tangible Assets)

     400,317        9.34       64,311        1.50       N/A         N/A   

Tier 1 Capital (to Risk-Weighted Assets)

     400,317        12.31       130,072        4.00       195,108        6.00   

Under guidelines issued by banking regulators, savings institutions such as the Bank must maintain “tangible” capital equal to 1.5% of adjusted total assets, “core” capital equal to 4.0% of adjusted total assets, “Tier 1” capital equal to 4.0% of risk weighted assets and “total” or “risk-based” capital (a combination of core and “supplementary” capital) equal to 8.0% of risk-weighted assets. Failure to meet minimum capital requirements can initiate certain mandatory actions and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our bank’s financial statements.

At March 31, 2012, the Bank was in compliance with regulatory capital requirements and was considered a “well-capitalized” institution. The Bank’s core capital ratio of 9.34%, Tier 1 capital ratio of 12.31% and total risk based capital ratio of 13.57%, all remain substantially in excess of “well-capitalized” regulatory benchmarks, the highest regulatory capital rating. In addition, and not included in Bank capital, the holding company held $12.0 million in cash to support dividends, acquisitions, strategic growth plans.

Recently Issued Guidance on Federal Debt

On August 5, 2011, Standard and Poor’s rating agency lowered the long-term rating of the U.S. government and federal agencies from AAA to AA+. In a joint press release issued by the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration and the Office of the Comptroller of the Currency, the following guidance was provided related to the downgrade: for risk-based capital purposes, the risk weights for U.S. Treasury securities and other securities issued or guaranteed by the U.S. government, government agencies and government-sponsored entities will not change. In addition, the treatment of U.S. Treasury securities and other securities issued or guaranteed by the U.S. government, government agencies and government-sponsored entities will be unaffected.

Liquidity

We manage our liquidity risk and funding needs through our Treasury function and our Asset/Liability Committee. We have a policy that separately addresses liquidity, and management monitors our adherence to policy limits. Also, liquidity risk management is a primary area of examination by the banking regulators.

As a financial institution, the Bank has ready access to several sources to fund growth and meet its liquidity needs. Among these are: net income, retail deposit programs, loan repayments, borrowing from the FHLB, repurchase agreements, access to the Fed Discount Window, and access to the brokered deposit market as well as other wholesale funding avenues. In addition, we have a large portfolio of high-quality, liquid investments, primarily short-duration mortgage-backed securities and government sponsored enterprises (“GSE”) notes that provide a near-continuous source of cash flow to meet current cash needs, or can be sold to meet larger discrete needs for cash. Management believes these sources are sufficient to maintain required and prudent levels of liquidity.

During the three months ended March 31, 2012, cash and cash equivalents decreased $8.3 million to $459.7 million. This decrease was primarily a result of the following: cash usages for a $33.3 million increase in net loans; $32.7 million purchases (net of sales and maturities) of available for sale securities; $30.0 million repayment of unsecured bank debt, and a

 

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$10.7 million decrease in federal home loan bank advances. Offsetting these decreases in cash were: $40.1 million in cash provided through increases in demand, savings, and time deposits, $25.0 million increase in proceeds in federal funds purchased and securities sold under repurchase agreements; $18.6 million provided by funds related to operations and $7.3 million from the sales of assets acquired through foreclosure.

NONPERFORMING ASSETS

The following table shows our nonperforming assets and past due loans at the dates indicated. Nonperforming assets include nonaccruing loans, nonperforming real estate, assets acquired through foreclosure and restructured mortgage and home equity consumer debt. Nonaccruing loans are those on which the accrual of interest has ceased. Loans are placed on nonaccrual status immediately if, in the opinion of management, collection is doubtful, or when principal or interest is past due 90 days or more and the value of the collateral is insufficient to cover principal and interest. Interest accrued but not collected at the date a loan is placed on nonaccrual status is reversed and charged against interest income. In addition, the amortization of net deferred loan fees is suspended when a loan is placed on nonaccrual status. Subsequent cash receipts are applied either to the outstanding principal balance or recorded as interest income, depending on management’s assessment of the ultimate collectability of principal and interest. Past due loans are loans contractually past due 90 days or more as to principal or interest payments but which remain on accrual status because they are considered well secured and in the process of collection.

 

     March 31,
2012
    December 31,
2011
 
     (In Thousands)  

Nonaccruing loans:

    

Commercial

   $ 6,526     $ 23,080  

Owner-occupied commercial (3)

     21,760        —     

Consumer

     1,321       1,018  

Commercial mortgage

     11,625       15,814  

Residential mortgage

     8,587       9,057  

Construction

     24,246       22,124  
  

 

 

   

 

 

 

Total nonaccruing loans

     74,065       71,093  

Assets acquired through foreclosure

     6,708       11,695  

Troubled debt restructuring (accruing)

     8,837       8,887  
  

 

 

   

 

 

 

Total nonperforming assets

   $ 89,610     $ 91,675  
  

 

 

   

 

 

 

Past due loans (1):

    

Residential Mortgages

     111       887  

Commercial and commercial mortgages

     854       78  
  

 

 

   

 

 

 

Total past due loans

   $ 965     $ 965  
  

 

 

   

 

 

 

Ratios:

    

Allowance for loan losses to total loans (2)

     2.01     1.92

Nonperforming assets to total assets

     2.07     2.14

Nonaccruing loans to total loans (2)

     2.66     2.58

Loan loss allowance to nonaccruing loans

     75.34     74.66

Loan loss allowance to total nonperforming assets

     62.27     57.90

 

(1)

Past due loans are accruing loans which are contractually past due 90 days or more as to principal or interest. These loans are well secured and in the process of collection.

(2)

Total loans exclude loans held for sale.

(3) 

Prior to 2012, owner-occupied loans were included in commercial loans.

 

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Nonperforming assets decreased $2.1 million between December 31, 2011 and March 31, 2012. As a result, non-performing assets as a percentage of total assets decreased from 2.14% at December 31, 2011 to 2.07% at March 31, 2012. This decrease was mainly due to a $5.0 million decrease in Other Real Estate Owned (“OREO”) assets, mainly due to the sale of OREO properties, including one large residential development for $3.3 million and a bulk sale of smaller residential properties totaling $2.6 million. These decreases were partially offset by the downgrade of two new relationships during the first quarter of 2012 to nonaccrual status.

The following table summarizes the changes in nonperforming assets during the period indicated:

 

     For the three
months  ended
March 31, 2012
    For the year
ended
December  31, 2011
 
     (In Thousands)  

Beginning balance

   $ 91,675     $ 92,898  

Additions

     18,377       89,842  

Collections

     (13,605     (40,695

Transfers to accrual

     (269     (8,474

Charge-offs / write-downs, net

     (6,568     (41,896
  

 

 

   

 

 

 

Ending balance

   $ 89,610     $ 91,675  
  

 

 

   

 

 

 

The timely identification of problem loans is a key element in our strategy to manage our loan portfolio. Timely identification enables us to take appropriate action and, accordingly, minimize losses. An asset review system established to monitor the asset quality of our loans and investments in real estate portfolios facilitates the identification of problem assets. In general, this system utilizes guidelines established by federal regulation.

INTEREST SENSITIVITY

The matching of maturities or repricing periods of interest rate-sensitive assets and liabilities to promote a favorable interest rate spread and mitigate exposure to fluctuations in interest rates is our primary tool for achieving our asset/liability management strategies. We regularly review our interest-rate sensitivity and adjust the sensitivity within acceptable tolerance ranges established by the Board of Directors. At March 31, 2012, interest-earning liabilities exceeded interest-bearing assets that mature or reprice within one year (interest-sensitive gap) by $1.7 million. Our interest-sensitive assets as a percentage of interest-sensitive liabilities within the one-year window decreased from 102.84% at December 31, 2011, to 99.93% at March 31, 2012. Likewise, the one-year interest-sensitive gap as a percentage of total assets changed to -0.04% at March 31, 2012 from 1.54% at December 31, 2011. The change in sensitivity since December 31, 2011 reflects the current interest rate environment and our continuing effort to effectively manage interest rate risk.

 

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Market risk is the risk of loss from adverse changes in market prices and rates. Our market risk arises primarily from interest rate risk inherent in our lending, investing, and funding activities. To that end, we actively monitor and manage our interest rate risk exposure. One measure, required to be performed by federal regulation, measures the impact of an immediate change in interest rates in 100 basis point increments on the net portfolio value ratio. The net portfolio value ratio is defined as the net present value of the estimated cash flows from assets and liabilities as a percentage of net present value of cash flows from total assets (or the net present value of equity). The table below shows the estimated impact of immediate changes in interest rates on our net interest margin and net portfolio value ratio at the specified levels at March 31, 2012 and December 31, 2011:

 

     March 31, 2012     December 31, 2011  
% Change in
Interest Rate
(Basis Points)
   % Change in
Net Interest
Margin (1)
    Economic
Value of
Equity (2)
    % Change in
Net Interest
Margin (1)
    Economic
Value of
Equity (2)
 
+300      5     12.02     6     11.17
+200      1     11.95     3     11.30
+100      -3     11.84     -2     11.21
-      0     11.74     0     10.97
-100      2     11.15     -8     10.19
-200 (3)      NMF        NMF        NMF        NMF   
-300 (3)      NMF        NMF        NMF        NMF   

 

(1) The percentage difference between net interest margin in a stable interest rate environment and net interest margin as projected under the various rate change environments.
(2) The economic value of equity ratio of the Company in a stable interest rate environment and the economic value of equity ratio as projected under the various rate change environments.
(3) Sensitivity indicated by a decrease of 200 or 300 basis points is not deemed meaningful at March 31, 2012 given the low absolute level of interest rates at that time.

We also engage in other business activities that are sensitive to changes in interest rates. For example, mortgage banking revenues and expenses can fluctuate with changing interest rates. These fluctuations are difficult to model and estimate.

COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2012

Results of Operations

We recorded net income of $6.4 million for the quarter ended March 31, 2012, a 53% increase over net income of $4.2 million for the quarter ended March 31, 2011. Income allocable to common stockholders’ (after preferred stock dividends) was $5.8 million, or $0.66 per diluted common share (a 65% increase in diluted EPS), for the quarter ended March 31, 2012, compared to income allocable to common shareholders’ of $3.5 million, or $0.40 per diluted common share, for the quarter ended March 31, 2011. Earnings for the first quarter of 2012 reflected strong revenue growth, while expenses decreased slightly during the same period. The improvement in earnings included an increase of $3.1 million in noninterest income and an increase of $2.3 million in net interest income. The increase in noninterest income was due in part to an increase in securities gains and credit/debit card and ATM fees during first quarter of 2012. These increases were partially offset by an increase in the provision for loan losses of $2.3 million. Noninterest expenses decreased slightly year-over-year, as increases from the later stages of our heavy investment phase, were offset by lower loan workout and OREO expenses in the first quarter of 2012.

 

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Net Interest Income

The following tables provide information concerning the balances, yields and rates on interest-earning assets and interest-bearing liabilities during the periods indicated.

 

     Three Months Ended March 31,  
     2012     2011  
     Average
Balance
    Interest      Yield/
Rate (1)
    Average
Balance
    Interest      Yield/
Rate (1)
 
(Dollars In Thousands)                                       
Assets:               

Interest-earning assets:

              

Loans (2) (3):

              

Commercial real estate loans

   $ 739,158     $ 8,931        4.83   $ 755,256     $ 8,860        4.69

Residential real estate loans

     279,480       3,199        4.58       314,677       3,862        4.91  

Commercial loans

     1,468,048       17,775        4.88       1,253,433       15,381        4.99  

Consumer loans

     289,230       3,490        4.85       307,873       3,853        5.08  
  

 

 

   

 

 

      

 

 

   

 

 

    

Total loans

     2,775,916       33,395        4.86       2,631,239       31,956        4.90  

Mortgage-backed securities (4)

     826,088       5,718        2.77       711,852       7,026        3.95  

Investment securities (4) (5)

     47,276       101        0.96       47,806       170        1.42  

Other interest-earning assets

     35,290       9        0.10       37,596       —           —     
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-earning assets