XNAS:WSFS WSFS Financial Corp Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

XNAS:WSFS (WSFS Financial Corp): Fair Value Estimate
Premium
XNAS:WSFS (WSFS Financial Corp): Consider Buying
Premium
XNAS:WSFS (WSFS Financial Corp): Consider Selling
Premium
XNAS:WSFS (WSFS Financial Corp): Fair Value Uncertainty
Premium
XNAS:WSFS (WSFS Financial Corp): Economic Moat
Premium
XNAS:WSFS (WSFS Financial Corp): Stewardship
Premium
 
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 June 30, 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)

WSFS Bank Center

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 August 3, 2012:

 

Common Stock, par value $.01 per share

 

8,705,604

(Title of Class)   (Shares Outstanding)

 

 

 


Table of Contents

WSFS FINANCIAL CORPORATION

FORM 10-Q

INDEX

 

PART I. Financial Information

 

          Page  
Item 1.    Financial Statements (Unaudited)   
   Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2012 and 2011      1   
   Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2012 and 2011      2   
   Consolidated Statements of Condition as of June 30, 2012 and December 31, 2011      3   
   Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011      4   
   Notes to the Consolidated Financial Statements for the Three and Six Months Ended June 30, 2012 and 2011      5   
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      32   
Item 3.    Quantitative and Qualitative Disclosures About Market Risk      46   
Item 4.    Controls and Procedures      46   

PART II. Other Information

  
Item 1.    Legal Proceedings      46   
Item 1A.    Risk Factors      46   
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds      46   
Item 3.    Defaults upon Senior Securities      47   
Item 4.    Mine Safety Disclosures      47   
Item 5.    Other Information      47   
Item 6.    Exhibits      47   

Signatures

     48   
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   
Exhibit 101.DEF    Definition Linkbase Document   


Table of Contents

WSFS FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2012      2011      2012      2011  
    

(Unaudited)

(In Thousands, Except Per Share Data)

 

Interest income:

           

Interest and fees on loans

   $ 32,787      $ 32,803      $ 66,182      $ 64,759  

Interest on mortgage-backed securities

     4,891        6,884        10,609        13,910  

Interest and dividends on investment securities

     76         127        177        297  

Other interest income

     9        —           18        —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     37,763        39,814        76,986        78,966  
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest expense:

           

Interest on deposits

     3,400        5,034        7,415        10,257  

Interest on Federal Home Loan Bank advances

     1,645         2,655        3,582        5,382  

Interest on trust preferred borrowings

     370         339        745        675  

Interest on other borrowings

     270        599        636        1,211  
  

 

 

    

 

 

    

 

 

    

 

 

 
     5,685        8,627        12,378        17,525  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     32,078        31,187        64,608        61,441  

Provision for loan losses

     16,383        8,582        24,628        14,490  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     15,695        22,605        39,980        46,951  
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest income:

           

Security gains, net

     13,310        603        15,346        1,018  

Credit/debit card and ATM income

     5,871        5,286        11,293        10,026  

Deposit service charges

     4,299        4,026        8,313        7,590  

Fiduciary & investment management income

     3,427        3,068        6,458         5,895  

Loan fee income

     487        576        1,097        1,261  

Mortgage banking activities, net

     452        231        968        778  

Bank owned life insurance income

     136        1,419        321        1,598  

Other income

     1,010        820        1,954        1,502  
  

 

 

    

 

 

    

 

 

    

 

 

 
     28,992        16,029        45,750        29,668  
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest expenses:

           

Salaries, benefits and other compensation

     16,663        14,413        32,898        29,229  

Occupancy expense

     3,414        2,935        6,462        5,773  

Equipment expense

     2,035        1,915        3,702        3,529  

Loan workout and OREO expenses

     1,951        1,642        2,787        4,125  

Data processing and operations expenses

     1,466        1,284        2,788        2,701  

FDIC expenses

     1,441        1,278        2,878        3,042  

Professional Fees

     1,082        1,584        2,246        2,707  

Marketing Expense

     818        898        1,597        1,849  

Acquisition integration costs

     —           446        —           780  

Other operating expense

     4,147        4,257        8,648        8,304  
  

 

 

    

 

 

    

 

 

    

 

 

 
     33,017        30,652        64,006        62,039  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before taxes

     11,670        7,982        21,724        14,580  

Income tax provision

     4,340        2,459        7,950        4,851  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

     7,330        5,523        13,774        9,729  

Dividends on preferred stock and accretion of discount

     692        693        1,384        1,385  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income allocable to common stockholders

   $ 6,638      $ 4,830      $ 12,390      $ 8,344  
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per share:

           

Basic

   $ 0.76      $ 0.56      $ 1.42      $ 0.97  

Diluted

   $ 0.76      $ 0.55      $ 1.41      $ 0.96  

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

 

1


Table of Contents

WSFS FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2012     2011     2012     2011  
    

(Unaudited)

(In Thousands)

   

(Unaudited)

(In Thousands)

 

Net Income

   $ 7,330     $ 5,523     $ 13,774     $ 9,729  

Other comprehensive income (loss):

        

Unrealized gains on securities available for sale

     11,724        1,631        12,264        1,771   

Tax expense

     (4,433     (620     (4,656 )     (673
  

 

 

   

 

 

   

 

 

   

 

 

 

Net of tax amount

     7,291        1,011        7,608        1,098   

Reclassification adjustment for gains included in net income

     (13,310     (603     (15,346     (1,018

Tax expense

     5,058       229       5,831       387  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net of tax amount

     (8,252     (374 )      (9,515     (631 ) 

Total other comprehensive (loss) income

     (961     637       (1,907     467  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 6,369     $ 6,160     $ 11,867     $ 10,196  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

2


Table of Contents

WSFS FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CONDITION

 

     June 30,
2012
    Dec 31,
2011
 
     (Unaudited)  
     (In Thousands, Except Per Share Data)  

Assets

    

Cash and due from banks

   $ 85,069     $ 70,889  

Cash in non-owned ATMs

     382,139       397,119  

Interest-bearing deposits in other banks

     43       9  
  

 

 

   

 

 

 

Total cash and cash equivalents

     467,251       468,017  

Investment securities, available-for-sale

     807,253       859,362  

Investment securities, trading

     12,465       12,432  

Loans held-for-sale

     19,552       10,185  

Loans, net of allowance for loan losses of $46,429 at June 30, 2012 and $53,080 at December 31, 2011

     2,657,513       2,702,589  

Bank owned life insurance

     63,713       63,392  

Stock in Federal Home Loan Bank of Pittsburgh, at cost

     33,364       35,756  

Assets acquired through foreclosure

     9,246       11,695  

Premises and equipment

     36,841       35,964  

Goodwill

     28,146       28,146  

Intangible assets

     5,646       6,139  

Accrued Interest receivable

     10,098       11,743  

Other assets

     41,286        43,588  
  

 

 

   

 

 

 

Total assets

   $ 4,192,374      $ 4,289,008  
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Liabilities:

    

Deposits:

    

Noninterest-bearing demand

   $ 620,062     $ 525,444  

Interest-bearing demand

     429,466       389,495  

Money market

     712,669       805,570  

Savings

     394,254       368,390  

Time

     379,997       412,027  

Jumbo certificates of deposit – customer

     341,709       346,568  
  

 

 

   

 

 

 

Total customer deposits

     2,878,157       2,847,494  

Brokered deposits

     286,212       287,810  
  

 

 

   

 

 

 

Total deposits

     3,164,369       3,135,304  

Federal funds purchased and securities sold under agreements to repurchase

     100,000       50,000  

Federal Home Loan Bank advances

     392,932       538,682  

Trust preferred borrowings

     67,011       67,011  

Other borrowed funds

     28,781       67,927  

Accrued interest payable

     5,184       1,910  

Other liabilities

     32,152        36,041  
  

 

 

   

 

 

 

Total liabilities

     3,790,429        3,896,875  
  

 

 

   

 

 

 

Stockholders’ Equity:

    

Serial preferred stock $.01 par value, 7,500,000 shares authorized; issued 52,625 at June 30, 2012 and December 31, 2011

   $ 1     $ 1  

Common stock $.01 par value, 20,000,000 shares authorized; issued 18,287,752 at June 30, 2012 and 18,258,714 at December 31, 2011

     183       182  

Capital in excess of par value

     221,576       220,163  

Accumulated other comprehensive income

     9,295       11,202  

Retained earnings

     419,170       408,865  

Treasury stock at cost, 9,580,569 shares at June 30, 2012 and December 31, 2011

     (248,280     (248,280
  

 

 

   

 

 

 

Total stockholders’ equity

     401,945       392,133  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 4,192,374      $ 4,289,008  
  

 

 

   

 

 

 

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

 

3


Table of Contents

WSFS FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Six Months Ended
June 30,
 
     2012     2011  
     (Unaudited)  
     (In Thousands)  

Operating activities:

    

Net Income

   $ 13,774      $ 9,729   

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

    

Provision for loan losses

     24,628        14,490   

Depreciation, accretion and amortization

     7,811        4,995   

Decrease in accrued interest receivable

     1,645        496   

Decrease in other assets

     3,480        4,162   

Origination of loans held-for-sale

     (69,557     (47,393

Proceeds from sales of loans held-for-sale

     65,837        59,329   

Loss on loan disposition

     14,176        —     

Gain on mortgage banking activities, net

     (968     (778

Security gains, net

     (15,346     (1,018

Stock-based compensation expense

     1,478        441   

Excess tax benefits from share-based payment arrangements

     (10     (75

Increase in accrued interest payable

     3,274        4,140   

Decrease in other liabilities

     (3,861     (2,182

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

     1,596        1,765   

Increase in value of bank-owned life insurance

     (321     (1,598

(Increase) decrease in capitalized interest, net

     (295     71   
  

 

 

   

 

 

 

Net cash provided by operating activities

   $ 47,341      $ 46,574   
  

 

 

   

 

 

 

Investing activities:

    

Maturities of investment securities

     4,524        11,552   

Sale of investment securities available for sale

     504,203        123,125   

Purchase of investment securities available-for-sale

     (521,138     (265,874

Repayments of investment securities available-for-sale

     73,353        89,879   

Disbursements for reverse mortgages

     (14     (351

Proceeds from loan disposition

     26,377        —     

Net increase in loans

     (34,364     (80,350

Net decrease in stock of Federal Home Loan Bank of Pittsburgh

     2,392        1,855   

Sales of assets acquired through foreclosure, net

     10,134        7,303   

Investment in premises and equipment, net

     (4,101     (4,886
  

 

 

   

 

 

 

Net cash provided by (used for) investing activities

   $ 61,366      $ (117,747
  

 

 

   

 

 

 

Financing activities:

    

Net increase in demand and saving deposits

     58,408        155,070   

Net decrease in time deposits

     (36,889     (29,834

Net decrease in brokered deposits

     (1,709     (82,321

Receipts from FHLB advances

     18,325,738        7,907,471   

Repayments of FHLB advances

     (18,471,488     (7,762,343

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

     9,410,000        8,525,000   

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

     (9,360,000     (8,525,000

Repayment of unsecured debt

     (30,000     —     

Dividends paid

     (3,407     (3,376

Issuance of common stock and exercise of common stock options

     (136     838   

Excess tax benefits from share-based payment arrangements

     10        75   
  

 

 

   

 

 

 

Net cash (used for) provided by financing activities

   $ (109,473   $ 185,580   
  

 

 

   

 

 

 

(Decrease) increase in cash and cash equivalents

     (766     114,407   

Cash and cash equivalents at beginning of period

     468,017        376,759   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 467,251      $ 491,166   
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Flow Information:

    

Cash paid for interest during the period

   $ 9,104      $ 13,385   

Cash paid for income taxes, net

     8,202        317   

Loans transferred to assets acquired through foreclosure

     8,605        5,187   

Other comprehensive (loss) income

     (1,907     467   

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

 

4


Table of Contents

WSFS FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 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 fully-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, the Bank is one of the ten oldest banks continuously operating under the same name in the United States. 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 52 offices located in Delaware (42), 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 and six month periods ended June 30, 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.

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 June 30, 2012, there were 141,177 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

 

5


Table of Contents

are to be granted at not less than the market price of our Corporation’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 June 30, 2012 and 2011:

 

     June 30, 2012      June 30, 2011  
     Shares     Weighted-
Average
Exercise
Price
     Shares     Weighted-
Average
Exercise
Price
 

Stock Options:

         

Outstanding at beginning of period

     447,901     $ 43.41        595,537     $ 43.18  

Granted

     55,477       38.93        3,000       42.86  

Exercised

     (2,059     27.49        (6,464     33.04  

Forfeited

     (2,075     69.00        (27,632     45.12  
  

 

 

      

 

 

   

Outstanding at end of period

     499,244       42.87        564,441       43.21  

Exercisable at end of period

     334,430     $ 44.93        428,226     $ 44.39  

Weighted-average fair value of awards granted

   $ 12.57        $ 13.92    

 

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

The following table provides vesting information about our stock options outstanding for the three months ended June 30, 2012 and 2011:

 

     June 30, 2012      June 30, 2011  
     Shares     Weighted-
Average
Exercise
Price
     Shares     Weighted-
Average
Exercise
Price
 

Stock Options:

            

Unvested at beginning of period

     110,137     $ 38.53           141,243     $ 39.66  

Granted

     55,477       38.93           3,000       42.86  

Vested

     (800     35.12           (3,351     45.54  

Forfeited

     —          —              (4,677     42.82  
  

 

 

      

 

  

 

 

   

Unvested at end of period

     164,814     $ 38.68           136,215     $ 39.52  

 

6


Table of Contents

Stock Options

The following table provides information about our stock options outstanding for the six months ended June 30, 2012 and 2011:

 

     June 30, 2012      June 30, 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)

     88,307       39.66        53,723       44.90  

Exercised

     (3,874     26.29        (13,625     27.42  

Forfeited

     (2,075     69.00        (41,980     45.47  
  

 

 

      

 

 

   

Outstanding at end of period

     499,244       42.87        564,441       43.21  

Exercisable at end of period

     334,430     $ 44.93        428,226     $ 44.39  

Weighted-average fair value of awards granted

   $ 12.50        $ 14.30    

The following table provides information about our stock options outstanding for the six months ended June 30, 2012 and 2011:

 

     June 30, 2012      June 30, 2011  
     Shares     Weighted-
Average
Exercise
Price
     Shares     Weighted-
Average
Exercise
Price
 

Stock Options:

         

Unvested at beginning of period

     112,258     $ 36.08        123,486     $ 34.94  

Granted

     88,307       39.66        53,723       44.90  

Vested

     (35,751     32.94        (28,328     29.16  

Forfeited

     —          —           (12,666     40.85  
  

 

 

      

 

 

   

Unvested at end of period

     164,814     $ 38.68        136,215     $ 39.52  

The total amount of compensation cost to be recognized relating to non-vested stock options as of June 30, 2012 was $1.2 million. The weighted-average period over which it is expected to be recognized is 2.9 years. We issue new shares upon the exercise of options.

Restricted Stock

We did not issue any restricted stock units or awards during the second quarter of 2012. We issued 24,442 restricted stock units and awards during the first six months of 2012 compared to 39,422 during the first six months 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 June 30, 2012, was $1.5 million. The weighted-average period over which it is expected to be recognized is 2.0 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.

 

7


Table of Contents

For the three months ended June 30, 2012, the effect of stock-based compensation, including stock options, restricted stock, stock awards, and performance stock, on salaries, benefits and other compensation was $767,000 pre-tax ($537,000 after tax) or $0.06 per share. This compares to $335,000 pre-tax ($251,000 after tax) or $0.03 per share during the three months ended June 30, 2011. The increase was mainly due to the timing of stock option awards granted in 2012 as well as additional expense in 2012 related to Performance Stock Awards. There was no expense for Performance Stock Awards recorded during 2011.

For the six months ended June 30, 2012, the effect of stock-based compensation, including stock options, restricted stock, stock awards, and performance stock, on salaries, benefits and other compensation was $1.5 million pre-tax ($1.1 million after tax) or $0.12 per share. This compares to $860,000 pre-tax ($688,000 after tax) or $0.08 per share during the three months ended June 30, 2011. Similar to the quarterly discussion, the increase was mainly due to the timing and amount of stock option awards granted in 2012 and the expense related to 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

June 30,
     For the six months
ended

June 30,
 
     2012      2011      2012      2011  
     (In Thousands, Except Per Share Data)  

Numerator:

           

Net income allocable to common stockholders

   $ 6,638      $ 4,830      $ 12,390      $ 8,344  
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator:

           

Denominator for basic earnings per share—weighted average shares

     8,706        8,599        8,696        8,588  

Effect of dilutive employee stock options and warrants

     72        128        75        139  
  

 

 

    

 

 

    

 

 

    

 

 

 

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

     8,778        8,727        8,771        8,727  
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per share:

           

Basic:

           

Net income allocable to common shareholders

   $ 0.76      $ 0.56      $ 1.42      $ 0.97  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted:

           

Net income allocable to common shareholders

   $ 0.76      $ 0.55      $ 1.41      $ 0.96  
  

 

 

    

 

 

    

 

 

    

 

 

 

Outstanding common stock equivalents having no dilutive effect

     536        545        536        487  

 

8


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:

         

June 30, 2012:

         

Reverse mortgages

   $ (632   $ —         $ —        $ (632

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

     47,766       260        (7     48,019  

State and political subdivisions

     3,635       36        (1     3,670  

Collateralized Mortgage Obligation (“CMO”) (1)

     240,739       5,115        (163     245,691  

Federal National Mortgage Association (“FNMA”) Mortgage-Backed Securities (“MBS”)

     369,770       5,928        (141     375,557  

Federal Home Loan Mortgage Corporation (“FHLMC”) MBS

     76,300       1,553        (10     77,843  

Government National Mortgage Association (“GNMA”) MBS

     53,979       3,126        —          57,105  
  

 

 

   

 

 

    

 

 

   

 

 

 
   $ 791,557     $ 16,018      $ (322   $ 807,253  
  

 

 

   

 

 

    

 

 

   

 

 

 

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

         

June 30, 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

 

9


Table of Contents

The scheduled maturities of investment securities available-for-sale at June 30, 2012 and December 31, 2011 were as follows:

 

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

June 30, 2012

     

Within one year (1)

   $ 6,766      $ 6,818  

After one year but within five years

     42,303        42,542  

After five years but within ten years

     168,803        172,129  

After ten years

     573,685        585,764  
  

 

 

    

 

 

 
   $ 791,557      $ 807,253  
  

 

 

    

 

 

 

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 (“MBS”) includes 151 securities with an amortized cost of $740.8 million comprised of all GSE securities. All securities were AAA-rated at the time of purchase. All securities were re-evaluated for OTTI at June 30, 2012. The result of this evaluation showed no OTTI for the second quarter of 2012. The weighted average duration of the mortgage-backed securities was 4.5 years at June 30, 2012.

At June 30, 2012, investment securities with market values aggregating $364.0 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 June 30, 2012.

In conjunction with the asset disposition strategies discussed in the Company’s Current Report on Form 8-K filed on May 10, 2012 (“the Asset Strategies”), during the first six months of 2012, we sold $504.2 million of investment securities categorized as available-for-sale for net gains of $15.4 million. In the first six months of 2011, proceeds from the sale of investment securities available-for-sale were $123.0 million and resulted in net gains of $1.0 million. 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 investment 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 June 30, 2012, we owned investment securities totaling $107.9 million in which the amortized cost basis exceeded fair value. Total unrealized losses on those securities were $322,000 at June 30, 2012. The temporary impairment is the result of changes in market interest rates subsequent to the purchase of the securities. 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.

 

10


Table of Contents

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 June 30, 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 agencies

   $ 5,047      $ 7      $ —         $ —         $ 5,047      $ 7  

State and political subdivisions

     —           —           135        1        135        1  

CMO

     31,871        163        —           —           31,871        163  

FNMA

     65,682        141        —           —           65,682        141  

FHLMC

     5,172        10        —           —           5,172        10  

GNMA

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired investments

   $ 107,772      $ 321      $ 135      $ 1      $ 107,907      $ 322  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 agencies

   $ 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, $1.5 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”) 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 June 30, 2012.

During 2011, we purchased 100% of SASCO 2002-RM1 Class O certificates for $2.5 million. As of June 30, 2012, the market value of the SASCO 2002-RM1 O securities was determined in accordance with FASB ASC 820-10, Fair Value Measurement (“ASC 820”), to be $4.3 million. These securities have been included in our CMO portfolio since their purchase.

 

11


Table of Contents

4. ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY INFORMATION

Allowance for Loan Losses

We maintain an allowance for loan losses and charge losses to this allowance when such losses are realized. The determination of the allowance for loan losses requires significant judgment reflecting our best estimate of impairment 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.

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 homogenous 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 homogenous 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 homogenous 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 above 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

 

 

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

 

12


Table of Contents

The following table provides the activity of the allowance for loan losses and loan balances for the three and six months ended June 30, 2012:

 

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

Three months ended June 30, 2012

                

Allowance for loan losses

                

Beginning balance

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

Charge-offs

     (7,704     (2,186     (4,701     (8,498     (2,315     (1,692     —          (27,096

Recoveries

     797       —          51       300       33       163       —          1,344  

Provision

     5,173       (728     3,738       4,588       2,147       1,617       (152     16,383  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 9,891      $ 4,091      $ 9,618      $ 5,307      $ 6,265      $ 10,341      $ 916      $ 46,429   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Six months ended June 30, 2012

                

Allowance for loan losses

                

Beginning balance

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

Charge-offs

     (10,035     (2,688     (4,891     (10,004     (2,639     (2,921     —          (33,178

Recoveries

     850       6       364       328       58       293       —          1,899  

Provision

     4,009       (2,462     6,589       10,909       2,302       2,365       916       24,628  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 9,891      $ 4,091      $ 9,618      $ 5,307      $ 6,265      $ 10,341      $ 916      $ 46,429   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Period-end allowance allocated to:

                

Loans individually evaluated for impairment

   $ 629      $ 10      $ 309      $ 139      $ 882      $ 45      $ —        $ 2,014   

Loans collectively evaluated for impairment

     9,262       4,081       9,309       5,168       5,383       10,296       916       44,415  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 9,891      $ 4,091      $ 9,618      $ 5,307      $ 6,265      $ 10,341      $ 916      $ 46,429   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Period-end loan balances evaluated for:

                

Loans individually evaluated for impairment

   $ 4,020      $ 17,980      $ 5,219      $ 5,656      $ 16,083      $ 4,014      $ —        $ 52,972 (2) 

Loans collectively evaluated for impairment

     807,981      $ 619,004        613,648       90,520       239,515       280,302       —          2,650,970   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 812,001      $ 636,984      $ 618,867      $ 96,176      $ 255,598      $ 284,316      $ —        $ 2,703,942   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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 June 30, 2012, represents accruing troubled debt restructured loans.

The following table provides the activity of the allowance for loan losses and loan balances for the three and six months ended June 30, 2011:

 

     Commercial     Commercial
Mortgages
    Construction     Residential     Consumer     Total  
     (In Thousands)  

Three months ended June 30, 2011

            

Allowance for loan losses

            

Beginning balance

   $ 24,536      $ 11,866      $ 6,658      $ 3,763      $ 9,177      $ 56,000   

Charge-offs

     (2,847     (1,060     (1,846     (899     (2,468     (9,120

Recoveries

     210        279       115        7       175        786   

Provision

     3,337        1,245       904        836       2,260        8,582   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 25,236      $ 12,330      $ 5,831      $ 3,707      $ 9,144      $ 56,248   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Six months ended June 30, 2011

            

Allowance for loan losses

            

Beginning balance

   $ 26,480      $ 10,564      $ 10,019      $ 4,028      $ 9,248      $ 60,339   

Charge-offs

     (6,210     (1,307     (7,072     (1,306     (4,224     (20,119

Recoveries

     338        287       506        91       316        1,538   

Provision

     4,628        2,786       2,378        894       3,804        14,490   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 25,236      $ 12,330      $ 5,831      $ 3,707      $ 9,144      $ 56,248   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Period-end allowance allocated to:

            

Loans individually evaluated for impairment

   $ 2,304      $ 4,349      $ 1,411      $ 825      $ 112      $ 9,001   

Loans collectively evaluated for impairment

     22,932        7,981       4,420        2,882       9,032        47,247   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 25,236      $ 12,330      $ 5,831      $ 3,707      $ 9,144      $ 56,248   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Period-end loan balances evaluated for:

            

Loans individually evaluated for impairment

   $ 22,736      $ 20,177      $ 31,586      $ 17,567      $ 3,128      $ 95,194 (1) 

Loans collectively evaluated for impairment

     1,308,304        602,374       96,932        276,003       298,281        2,581,894   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 1,331,040      $ 622,551      $ 128,518      $ 293,570      $ 301,409      $ 2,677,088   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) The difference between this amount and nonaccruing loans at June 30, 2011, represents accruing troubled debt restructured loans.

 

13


Table of Contents

Non-Accrual and Past Due Loans

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

 

June 30, 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

   $ 363      $ —        $ 7      $ 370      $ 807,611      $ 4,020      $ 812,001   

Owner occupied commercial (1)

     —          —          —          —          619,004        17,980        636,984   

Commercial mortgages

     —          —          —          —          613,648       5,219       618,867  

Construction

     —          —          182       182       90,338       5,656       96,176  

Residential

     4,562       1,092       547       6,201       241,913       7,484       255,598  

Consumer

     1,212       177       94       1,483       280,634       2,199       284,316  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 6,137      $ 1,269      $ 830      $ 8,236      $ 2,653,148      $ 42,558      $ 2,703,942   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of Total Loans

     0.22      0.05      0.03      0.30      98.12      1.58      100 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Prior to 2012 owner occupied loans were included in commercial loan balances.

Impaired Loans

The following tables provide an analysis of our impaired loans at June 30, 2012 and December 31, 2011:

 

June 30, 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

   $ 4,020      $ 3,277       $ 743       $ 629          $ 5,571       $ 9,393   

Owner-Occupied Commercial (2)

     17,980        17,935        45        10           22,681         15,325   

Commercial mortgages

     5,219        4,268        951        309           6,900         19,437   

Construction

     5,656        3,583        2,073        139           14,546         39,054   

Residential

     16,083        8,826        7,257        882           17,699        19,255   

Consumer

     4,014        2,490        1,524        45           4,249        3,631   
  

 

 

    

 

 

    

 

 

    

 

 

       

 

 

    

 

 

 

Total

   $ 52,972       $ 40,379       $ 12,593       $ 2,014          $ 71,646       $ 106,095   
  

 

 

    

 

 

    

 

 

    

 

 

       

 

 

    

 

 

 

 

14


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.
(2) Prior to 2012 owner occupied commercial loans were included in commercial loan balances.

Interest income of $235,000 and $328,000 was recognized on impaired loans during the three and six months ended June 30, 2012, respectively.

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 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.

 

15


Table of Contents

The following tables provide an analysis of problem loans as of June 30, 2012 and December 31, 2011:

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

 

     Commercial      Owner-Occupied
Commercial (1)
     Commercial Mortgages      Construction      Total Commercial  
     Jun 30,
2012
     Dec. 31,
2011
     Jun 30,
2012
     Dec. 31,
2011
     Jun 30,
2012
     Dec. 31,
2011
     Jun 30,
2012
     Dec. 31,
2011
     June 30, 2012     December 31, 2011  
                             Amount      Percent     Amount      Percent  

Risk Rating:

                                  

Special mention

   $ 18,236       $ 85,848       $ 21,243         —         $ 31,649       $ 50,044       $ 2,209       $ 9,747       $ 73,337         $ 145,639      

Substandard:

                                  

Accrual

     83,886        107,896        56,695        —           16,826        13,664        11,239        19,039        168,646          140,599     

Nonaccrual

     3,277        23,193        17,935        —           4,268        15,814        3,583        22,124        29,063          61,131     

Doubtful/Nonaccrual

     743         —           45         —           951         —           2,073         —           3,812           —        
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

      

 

 

    

Total Special Mention and Substandard

     106,142        216,937        95,918        —           53,694        79,522        19,104        50,910        274,858        13      347,369        16 

Pass

     705,859        1,242,519        541,066        —           565,173        543,277        77,072        55,244        1,889,170        87       1,841,040        84  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total Commercial Loans

   $ 812,001       $ 1,459,456       $ 636,984         —         $ 618,867       $ 622,799       $ 96,176       $ 106,154       $ 2,164,028         100    $ 2,188,409         100 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

      

 

 

    

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

 

     Residential      Consumer      Total Residential and Consumer  
     Jun 30, 2012     Dec.31,
2011
     Jun 30, 2012     Dec.31,
2011
     June 30, 2012     December 31, 2011  
               Amount      Percent     Amount      Percent  

Nonperforming

   $ 16,083 (1)    $ 16,227       $ 4,014 (1)    $ 2,621       $ 20,097           $ 18,848        

Performing

     239,515       259,276        280,302       289,136        519,817        96       548,412        97  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 255,598      $ 275,503       $ 284,316      $ 291,757       $ 539,914         100    $ 567,260         100 
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

      

 

 

    

 

(1) Prior to 2012, owner occupied commercial loans were included in commercial loan balances.
(2) Includes $10.4 million at June 30, 2012 and $8.9 million at December 31, 2011 of troubled debt restructured mortgages and home equity installment loans performing in accordance with modified terms and are accruing interest

 

16


Table of Contents

Troubled Debt Restructurings (TDR)

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 June 30, 2012 and December 31, 2011 was $17.9 million and $27.7 million, respectively. The balances at June 30, 2012 include approximately $7.4 million of TDRs in nonaccrual status and $10.5 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 $927,000 and $1.3 million in specific reserves have been established for these loans as of June 30, 2012 and December 31, 2011, respectively.

During the six months ending June 30, 2012, the terms of nine loans were modified in troubled debt restructurings, of which two 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 seven 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 and six months ended June 30, 2012:

 

(In Thousands)

   Three
Months
Ended
June 30,
2012
     Six
Months
Ended
June 30,
2012
 

Commercial

   $ —         $ 9,276   

Construction

     —          378  

Residential

     827        1,278  
  

 

 

    

 

 

 

Total

   $ 827       $ 10,932   
  

 

 

    

 

 

 

The troubled debt restructurings described above increased the allowance for loan losses by $130,000 through allocation of a specific reserve, and resulted in charge offs of $5.3 million during the six months ending June 30, 2012.

There were no TDRs which defaulted (defined as past due 90 days) during the three and six months ended June 30, 2012 that were restructured within the last twelve months prior to December 31, 2011.

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.

 

17


Table of Contents

The total amount of unrecognized tax benefits as of June 30, 2012 and December 31, 2011 were $3,000 and $88,000, respectively, all of which would affect our June 30, 2012 effective tax rate if recognized. As of June 30, 2012 and December 31, 2011, the total amount of accrued interest included in such unrecognized tax benefits were $3,000 and $15,000, respectively. Penalties of $6,000 were included in such unrecognized tax benefits at December 31, 2011, but none are included at June 30, 2012. 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 June 30, 2012. We were recently notified of the IRS intention to audit our 2010 tax return. There are currently no other 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, Monarch Entity Services LLC, 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 52 offices located in Delaware (42), 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, Monarch Entity Services LLC, Montchanin, Private Banking and WSFS Investment Group, Inc. Christiana Trust was acquired in December 2010 and WSFS’ Trust and Wealth Management business was consolidated into Christiana Trust. Christiana Trust provides investment, fiduciary, and agency services from locations in Delaware and Nevada. These services are provided to individuals and families as well as corporations and institutions. Monarch Entity Services LLC provides commercial domicile services from locations in Delaware and Nevada. 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 specializes in meeting the needs of professionals and their practices, including deposit services and credit needs of existing and start-up practices.

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 and six months ended June 30, 2012 and 2011 follows:

 

18


Table of Contents

For the three months ended June 30, 2012

 

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

External customer revenues:

           

Interest income

   $ 35,688      $ —         $ 2,075      $ 37,763  

Noninterest income

     20,969        4,473        3,550        28,992  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total external customer revenues

     56,657        4,473        5,625        66,755  
  

 

 

    

 

 

    

 

 

    

 

 

 

Inter-segment revenues:

           

Interest income

     1,048        —           1,479        2,527  

Noninterest income

     2,178        248        —           2,426  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total inter-segment revenues

     3,226        248        1,479        4,953  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

     59,883        4,721        7,104        71,708  
  

 

 

    

 

 

    

 

 

    

 

 

 

External customer expenses:

           

Interest expense

     5,478        —           207        5,685  

Noninterest expenses

     27,583        2,543        2,891        33,017  

Provision for loan loss

     15,494        —           889        16,383  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total external customer expenses

     48,555        2,543        3,987        55,085  
  

 

 

    

 

 

    

 

 

    

 

 

 

Inter-segment expenses

           

Interest expense

     1,479        336        712        2,527  

Noninterest expenses

     248        601        1,577        2,426  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total inter-segment expenses

     1,727        937        2,289        4,953  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total expenses

     50,282        3,480        6,276        60,038  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before taxes

   $ 9,601      $ 1,241      $ 828      $ 11,670  

Provision for income taxes

              4,340  
           

 

 

 

Consolidated net income

            $ 7,330  
           

 

 

 

Capital expenditures

   $ 2,208       $ —        $ 3      $ 2,211   
  

 

 

    

 

 

    

 

 

    

 

 

 

As of June 30, 2012

           

Cash and cash equivalents

   $ 62,314      $ 401,316      $ 3,621      $ 467,251  

Other segment assets

     3,534,103         2,125        188,895        3,725,123  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total segment assets

   $ 3,596,417       $ 403,441      $ 192,516      $ 4,192,374  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

19


Table of Contents

For the three months ended June 30, 2011

 

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

External customer revenues:

           

Interest income

   $ 37,469      $ —         $ 2,345      $ 39,814  

Noninterest income

     9,003        3,833        3,193        16,029  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total external customer revenues

     46,472        3,833        5,538        55,843  
  

 

 

    

 

 

    

 

 

    

 

 

 

Inter-segment revenues:

           

Interest income

     1,098        —           1,113        2,211  

Noninterest income

     1,627        161        —           1,788  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total inter-segment revenues

     2,725        161        1,113        3,999  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

     49,197        3,994        6,651        59,842  
  

 

 

    

 

 

    

 

 

    

 

 

 

External customer expenses:

           

Interest expense

     8,284        —           343        8,627  

Noninterest expenses

     25,612        1,872        3,168        30,652  

Provision for loan loss

     8,279        —           303        8,582  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total external customer expenses

     42,175        1,872        3,814        47,861  
  

 

 

    

 

 

    

 

 

    

 

 

 

Inter-segment expenses

           

Interest expense

     1,113        293        805        2,211  

Noninterest expenses

     161        353        1,274        1,788  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total inter-segment expenses

     1,274        646        2,079        3,999  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total expenses

     43,449        2,518        5,893        51,860  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) before taxes

   $ 5,748      $ 1,476      $ 758      $ 7,982  

Provision for income taxes

              2,459  
           

 

 

 

Consolidated net income

        .          $ 5,523  
           

 

 

 

Capital expenditures

   $ 2,561       $ 133       $ 299      $ 2,993   
  

 

 

    

 

 

    

 

 

    

 

 

 

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  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

20


Table of Contents

For the six months ended June 30, 2012

 

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

External customer revenues:

           

Interest income

   $ 72,724      $ —         $ 4,262      $ 76,986  

Noninterest income

     30,498        8,546        6,706        45,750  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total external customer revenues

     103,222        8,546        10,968        122,736  
  

 

 

    

 

 

    

 

 

    

 

 

 

Inter-segment revenues:

           

Interest income

     2,156        —           2,986        5,142  

Noninterest income

     4,247        421        —           4,668  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total inter-segment revenues

     6,403        421        2,986        9,810  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

     109,625        8,967        13,954        132,546  
  

 

 

    

 

 

    

 

 

    

 

 

 

External customer expenses:

           

Interest expense

     11,953        —           425        12,378  

Noninterest expenses

     53,967        4,515        5,524        64,006  

Provision for loan loss

     23,790        —           838        24,628  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total external customer expenses

     89,710        4,515        6,787        101,012  
  

 

 

    

 

 

    

 

 

    

 

 

 

Inter-segment expenses

           

Interest expense

     2,986        670        1,486        5,142  

Noninterest expenses

     421        1,126        3,121        4,668  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total inter-segment expenses

     3,407        1,796        4,607        9,810  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total expenses

     93,117        6,311        11,394        110,822  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) before taxes

   $ 16,508      $ 2,656      $ 2,560      $ 21,724  

Provision for income taxes

              7,950  
           

 

 

 

Consolidated net income

            $ 13,774  
           

 

 

 

Capital expenditures

   $ 4,114       $ 10      $ 20      $ 4,144   
  

 

 

    

 

 

    

 

 

    

 

 

 

As of June 30, 2012

           

Cash and cash equivalents

   $ 62,314      $ 401,316      $ 3,621      $ 467,251  

Other segment assets

     3,534,103         2,125        188,895        3,725,123  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total segment assets

   $ 3,596,417       $ 403,441      $ 192,516      $ 4,192,374  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

21


Table of Contents

For the six months ended June 30, 2011

 

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

External customer revenues:

           

Interest income

   $ 74,256      $ —         $ 4,710      $ 78,966  

Noninterest income

     16,288        7,249        6,131        29,668  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total external customer revenues

     90,544        7,249        10,841        108,634  
  

 

 

    

 

 

    

 

 

    

 

 

 

Inter-segment revenues:

           

Interest income

     2,208        —           2,407        4,615  

Noninterest income

     3,427        322        —           3,749  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total inter-segment revenues

     5,635        322        2,407        8,364  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

     96,179        7,571        13,248        116,998  
  

 

 

    

 

 

    

 

 

    

 

 

 

External customer expenses:

           

Interest expense

     16,834        —           691        17,525  

Noninterest expenses

     52,651        3,637        5,751        62,039  

Provision for loan loss

     13,734        —           756        14,490  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total external customer expenses

     83,219        3,637        7,198        94,054  
  

 

 

    

 

 

    

 

 

    

 

 

 

Inter-segment expenses

           

Interest expense

     2,407        564        1,644        4,615  

Noninterest expenses

     322        804        2,623        3,749  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total inter-segment expenses

     2,729        1,368        4,267        8,364  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total expenses

     85,948        5,005        11,465        102,418  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) before taxes

   $ 10,231      $ 2,566      $ 1,783      $ 14,580  

Provision for income taxes

              4,851  
           

 

 

 

Consolidated net income

            $ 9,729  
           

 

 

 

Capital expenditures

   $ 4,394       $ 177      $ 306      $ 4,877  
  

 

 

    

 

 

    

 

 

    

 

 

 

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  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

22


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 June 30, 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

   $ —         $ 241,346      $ 4,345     $ 245,691  

FNMA

     —           375,557        —          375,557  

FHLMC

     —           77,843        —          77,843  

GNMA

     —           57,105        —          57,105  

U.S. Government and agencies

     —           48,019        —          48,019  

State and political subdivisions

     —