10-Q 1 f10q_093011-0312.htm FORM 10-Q 9-30-11 WSFS FINANCIAL CORPORATION f10q_093011-0312.htm
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
September 30, 2011
     
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
 
(I.R.S. Employer
Incorporation or organization)
 
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),
 __X__ Yes_____ 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 [  ] Smaller reporting company [   ]
(Do not check if 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 November 2, 2011:
 
Common Stock, par value $.01 per share
 
8,612,876
(Title of Class)
 
(Shares Outstanding)
 
 

 

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 Nine
           
   
Months Ended September 30, 2011 and 2010
 
4
       
                 
   
Consolidated Statements of Condition as of  September 30, 2011 and December 31, 2010
 
5
       
                 
   
Consolidated Statements of Cash Flows for the Nine  Months
           
   
Ended September 30, 2011 and 2010
 
6
       
                 
   
Notes to the Consolidated Financial Statements for the Nine
           
   
Months Ended September 30, 2011 and  2010
 
7
       
                 
Item 2.
 
Management’s Discussion and Analysis of Financial Condition
 
32
       
   
and Results of Operations
           
                 
Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
 
46
       
                 
Item 4.
 
Controls and Procedures
 
46
       
                 
                 
PART II. Other Information
   
         
Item 1.
 
Legal Proceedings
 
47
       
                 
Item 1A.
 
Risk Factors
 
47
       
                 
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
47
       
                 
Item 3.
 
Defaults upon Senior Securities
 
47
       
                 
Item 4.
 
[Reserved]
 
47
       
                 
Item 5.
 
Other Information
 
47
       
                 
 
 
2

 
 
                 
                 
Item 6.
 
Exhibits
 
48
       
                 
Signatures
     
49
       
                 
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             
                                                                                          
   
                                             
                                             
   

 
3

 

CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
 
 
   
 
   
 
   
 
 
 
 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
 
 
2011
   
2010
   
2011
   
2010
 
 
 
(Unaudited)
 
 
 
(In Thousands, Except Per Share Data)
 
Interest income:
 
 
   
 
   
 
   
 
 
Interest and fees on loans
  $ 32,940     $ 31,664     $ 97,699     $ 94,497  
Interest on mortgage-backed securities
    7,052       8,699       20,962       27,370  
 Interest and dividends on investment securities
    99       216       396       718  
Other interest income
    -       -       -       6  
 
    40,091       40,579       119,057       122,591  
Interest expense:
                               
Interest on deposits
    4,619       5,590       14,876       17,655  
 Interest on Federal Home Loan Bank advances
    2,484       3,818       7,866       11,812  
 Interest on trust preferred borrowings
    340       370       1,015       1,047  
Interest on other borrowings
    468       624       1,679       1,859  
 
    7,911       10,402       25,436       32,373  
Net interest income
    32,180       30,177       93,621       90,218  
Provision for loan losses
    6,558       9,976       21,048       31,980  
Net interest income after provision for loan losses
    25,622       20,201       72,573       58,238  
 
                               
Noninterest income:
                               
Credit/debit card and ATM income
    5,523       4,984       15,549       14,171  
Deposit service charges
    4,385       4,153       11,975       12,381  
Fiduciary & investment management income
    2,982       1,016       8,877       3,169  
Security gains, net
    1,935       1,756       2,953       2,024  
Loan fee income
    610       626       1,871       2,015  
Mortgage banking activities, net
    257       646       1,035       1,145  
Bank owned life insurance income
    197       181       1,795       596  
Other income
    1,035       1,063       2,537       2,501  
 
    16,924       14,425       46,592       38,002  
Noninterest expenses:
                               
Salaries, benefits and other compensation
    15,337       12,237       44,566       36,334  
Occupancy expense
    3,171       2,402       8,944       7,235  
Loan workout and OREO expenses
    1,864       908       5,989       4,877  
Equipment expense
    1,666       1,648       5,195       4,762  
Marketing Expense
    1,597       703       3,446       2,312  
FDIC expenses
    1,436       1,829       4,478       5,234  
Data processing and operations expenses
    1,325       1,096       4,026       3,541  
Professional Fees
    1,267       1,609       3,974       3,899  
Acquisition integration costs
    -       143       780       311  
Non-routine ATM loss
    -       (4,491 )     -       -  
Other operating expense
    4,749       4,008       13,053       10,959  
 
    32,412       22,092       94,451       79,464  
 
                               
Income before taxes
    10,134       12,534       24,714       16,776  
Income tax provision
    3,348       4,312       8,199       4,739  
Net income
    6,786       8,222       16,515       12,037  
Dividends on preferred stock and accretion of discount
    692       692       2,077       2,076  
Net income allocable to common stockholders
  $ 6,094     $ 7,530     $ 14,438     $ 9,961  
 
                               
Earnings per share:
                               
Basic
  $ 0.71       0.95     $ 1.68     $ 1.35  
Diluted
  $ 0.70       0.94     $ 1.66     $ 1.33  
 
                               
The accompanying notes are an integral part of these Consolidated Financial Statements.
 

 
4

 

WSFS FINANCIAL CORPORATION
 
CONSOLIDATED STATEMENT OF CONDITION
 
 
 
 
   
 
 
 
 
Sept 30,
   
Dec 31,
 
 
 
2011
   
2010
 
 
 
(Unaudited)
 
 
 
(In Thousands, Except Per Share Data)
 
Assets
 
 
   
 
 
Cash and due from banks
  $ 80,021     $ 49,932  
Cash in non-owned ATMs
    383,358       326,573  
Interest-bearing deposits in other banks
    174       254  
  Total cash and cash equivalents
    463,553       376,759  
Investment securities, held-to-maturity
    219       219  
Investment securities, available-for-sale including reverse mortgages
    47,873       52,232  
Mortgage-backed securities, available-for-sale
    772,508       700,926  
Mortgages-backed securities, trading
    12,432       12,432  
Loans held-for-sale
    7,776       14,522  
Loans, net of allowance for loan losses of $53,188 at September 30, 2011
               
and $60,339 at December 31, 2010
    2,642,229       2,561,368  
Accrued Interest receivable
    11,326       11,765  
Bank owned life insurance
    63,153       64,243  
Stock in Federal Home Loan Bank of Pittsburgh, at cost
    37,638       37,536  
Assets acquired through foreclosure
    11,880       9,024  
Premises and equipment
    35,686       31,870  
Goodwill
    28,146       26,745  
Intangible assets
    6,404       7,307  
Other assets
    47,917       46,570  
 
               
Total assets
  $ 4,188,740     $ 3,953,518  
 
               
Liabilities and Stockholders’ Equity
               
 
               
Liabilities:
               
Deposits:
               
Noninterest-bearing demand
  $ 492,685     $ 468,098  
Interest-bearing demand
    358,322       312,546  
Money market
    737,706       743,808  
Savings
    375,528       255,340  
Time
    442,960       484,864  
Jumbo certificates of deposit – customer
    324,041       297,112  
  Total customer deposits
    2,731,242       2,561,768  
Brokered deposits
    220,811       249,006  
  Total deposits
    2,952,053       2,810,774  
 
               
Federal funds purchased and securities sold under agreements to repurchase
    100,000       100,000  
Federal Home Loan Bank advances
    568,776       488,959  
Trust preferred borrowings
    67,011       67,011  
Other borrowed funds
    69,283       91,636  
Accrued interest payable
    8,533       3,317  
Other liabilities
    35,876       23,999  
Total liabilities
    3,801,532       3,585,696  
 
               
 
               
Stockholders’ Equity:
               
Serial preferred stock $.01 par value, 7,500,000 shares authorized; issued 56,625 at
               
September 30, 2011 and December 31, 2010
    1       1  
Common stock $.01 par value, 20,000,000 shares authorized; issued
               
18,191,845 at September 30, 2011 and 18,105,788 at December 31, 2010
    182       180  
Capital in excess of par value
    218,546       216,316  
Accumulated other comprehensive income
    12,329       6,524  
Retained earnings
    404,430       393,081  
Treasury stock at cost, 9,580,569 shares at September 30, 2011 and December 31, 2010
    (248,280 )     (248,280 )
Total stockholders’ equity
    387,208       367,822  
Total liabilities and stockholders’ equity
  $ 4,188,740     $ 3,953,518  
 
               
The accompanying notes are an integral part of these Consolidated Financial Statements.
 

 
5

 

WSFS FINANCIAL CORPORATION
 
CONSOLIDATED STATEMENT OF CASH FLOWS
 
 
 
 
   
 
 
 
 
Nine Months Ended
 
 
September 30,
 
 
 
2011
   
2010
 
 
 
(Unaudited)
 
 
 
(In Thousands)
 
Operating activities:
 
 
   
 
 
Net Income
  $ 16,515     $ 12,037  
Adjustments to reconcile net income to net cash provided by operating activities:
               
  Provision for loan losses
    21,048       31,980  
  Depreciation, accretion and amortization
    7,991       4,725  
  Decrease in accrued interest receivable
    439       682  
  Increase in other assets
    (5,070 )     (7,947 )
  Origination of loans held-for-sale
    (69,659 )     (102,598 )
  Proceeds from sales of loans held-for-sale
    77,844       99,102  
  Gain on mortgage banking activity
    (1,035 )     (1,145 )
  Gain on mark to market adjustment on trading securities
    -       (249 )
  Gain on sale of securities, net
    (2,953 )     (1,775 )
  Stock-based compensation expense
    1,216       773  
  Excess tax benefits from share-based payment arrangements
    (587 )     (323 )
  Increase in accrued interest payable
    5,216       6,245  
  Increase in other liabilities
    11,884       10,589  
  Loss on sale of assets acquired through foreclosure and valuation adjustments, net
    2,447       3,577  
  Increase in value of bank-owned life insurance
    (1,795 )     (596 )
  Decrease in capitalized interest, net
    1       144  
Net cash provided by operating activities
  $ 63,502     $ 55,221  
 
               
Investing activities:
               
Maturities of investment securities
    11,727       3,540  
Sale of investment securities available for sale
    6,050       -  
Purchase of investments available-for-sale
    (13,159 )     (7,081 )
Sales of mortgage-backed securities available-for  sale
    210,211       92,493  
Repayments of mortgage-backed securities available-for-sale
    130,184       142,612  
Purchases of mortgage-backed securities available-for-sale
    (402,118 )     (264,464 )
Disbursements for reverse mortgages
    (396 )     (145 )
Net increase in loans
    (118,138 )     (27,143 )
Payment of bank-owned life insurance
    2,885       -  
Net decrease in stock of Federal Home Loan Bank of Pittsburgh
    (102 )     -  
Sales of assets acquired through foreclosure, net
    9,088       6,324  
Investment in premises and equipment, net
    (8,067 )     (3,621 )
Net cash used for investing activities
  $ (171,835 )   $ (57,485 )
 
               
Financing activities:
               
Net increase in demand and saving deposits
    162,096       192,696  
Net (decrease) increase in time deposits
    (14,975 )     42,731  
Net decrease in brokered deposits
    (28,245 )     (95,901 )
Receipts from federal funds purchased and securities sold under agreement to repurchase
    3,103,525       13,795,000  
Repayments of federal funds purchased and securities sold under agreement to repurchase
    (3,103,525 )     (13,795,000 )
Receipts from FHLB advances
    9,846,709       19,767,639  
Repayments of FHLB advances
    (9,766,892 )     (19,935,582 )
Dividends paid
    (5,067 )     (4,527 )
Issuance of common stock and exercise of common stock options
    914       47,931  
Excess tax benefits from share-based payment arrangements
    587       323  
Net cash provided by financing activities
  $ 195,127     $ 15,310  
 
               
Increase cash and cash equivalents
    86,794       13,046  
Cash and cash equivalents at beginning of period
    376,759       321,749  
Cash and cash equivalents at end of period
  $ 463,553     $ 334,795  
 
               
Supplemental Disclosure of Cash Flow Information:
               
Cash paid for interest during the period
  $ 20,220     $ 47,148  
Cash paid for income taxes, net
    336       7,485  
Loans transferred to assets acquired through foreclosure
    14,391       6,101  
Net change in other comprehensive income
    5,805       11,687  
Settlement of pending sale of premises and equipment
    -       6,515  
 
               
The accompanying notes are an integral part of these Consolidated Financial Statements.
 

 
6

 

WSFS FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(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 Christiana Trust 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 48 offices located in Delaware (38), 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 nine month periods ended September 30, 2011 are not necessarily indicative of the results that may be expected for any future quarters or for the year ending December 31, 2011. 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, 2010, 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

 
2. EARNINGS PER SHARE

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

    For the three months ended     For the nine months ended  
    September 30,     September 30,  
    2011      2010      2011       2010  
    (In thousands, Except Per Share Data)   
Numerator:
 
 
   
 
   
 
   
 
 
Net  income allocable to common stockholders
  $ 6,094     $ 7,530     $ 14,438     $ 9,961  
 
                               
Denominator:
                             
Denominator for basic earnings per share - weighted average shares
    8,605       7,907       8,594       7,369  
Effect of dilutive employee stock options and warrants
    96       124       124       125  
  Denominator for diluted earnings per share – adjusted weighted 
   average shares and assumed exercise
    8,701       8,031       8,718       7,494  
 
 
                               
Earnings per share:
                               
Basic:
                               
  Net income allocable to common shareholders
  $ 0.71     $ 0.95     $ 1.68     $ 1.35  
Diluted:
                               
  Net income allocable to common shareholders
  $ 0.70     $ 0.94     $ 1.66     $ 1.33  
 
                               
Outstanding common stock equivalents having no dilutive effect
    537       603       538       604  



 
8

 

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):
 
 
 
   
Gross
   
Gross
   
 
 
 
 
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
 
 
Cost
   
Gains
   
Losses
   
Value
 
 
 
(In Thousands)
 
Available-for-sale securities:
 
 
   
 
   
 
   
 
 
September 30, 2011:
 
 
   
 
   
 
   
 
 
Reverse mortgages
  $ (418 )   $     $     $ (418 )
U.S. Government and government
                               
  sponsored enterprises ("GSE")
    43,796       320       (21 )     44,095  
State and political subdivisions
    4,159       39       (2 )     4,196  
 
  $ 47,537     $ 359     $ (23 )   $ 47,873  
December 31, 2010:
                               
Reverse mortgages
  $ (686 )   $     $     $ (686 )
GSE
    49,691       441       (129 )     50,003  
State and political subdivisions
    2,879       38       (2 )     2,915  
 
  $ 51,884     $ 479     $ (131 )   $ 52,232  
Held-to-maturity:
                               
September 30, 2011:
                               
State and political subdivisions
  $ 219     $ 1     $     $ 220  
 
  $ 219     $ 1     $     $ 220  
December 31, 2010:
                               
State and political subdivisions
  $ 219     $     $ (23 )   $ 196  
 
  $ 219     $     $ (23 )   $ 196  

Securities with market values aggregating $44.0 million at September 30, 2011 were specifically pledged for certain letters of credit and municipal deposits which require collateral.

The scheduled maturities of investment securities held-to-maturity and securities available-for-sale at September 30, 2011 and December 31, 2010 were as follows:
 
 
Held-to-Maturity
 
Available-for-Sale
 
 
Amortized
 
Fair
 
Amortized
 
Fair
 
 
Cost
 
Value
 
Cost
 
Value
 
 
(In Thousands)
 
September 30, 2011
 
 
 
 
 
 
 
 
Within one year (1)
  $     $     $ 10,139     $ 10,204  
After one year but within five years
                35,084       35,357  
After five years but within ten years
                2,000       2,000  
After ten years
    219       220       314       312  
 
  $ 219     $ 220     $ 47,537     $ 47,873  
December 31, 2010
                               
Within one year (1)
  $     $     $ 10,549     $ 10,617  
After one year but within five years
                41,006       41,286  
After five years but within ten years
                       
After ten years
    219       196       329       329  
 
  $ 219     $ 196     $ 51,884     $ 52,232  
 
                               
(1) Reverse mortgages do not have contractual maturities. We have included reverse mortgages in maturities within one year.
 


 
9

 

We sold a $6.1 million investment security classified as available-for-sale during the first nine months of 2011 resulting in a gain on sale of $110,000.  There were no sales of investment securities classified as available-for-sale during the first nine months of 2010 and, as a result, there were no net gains or losses realized during the 2010 period.  The cost basis for investment security sales was based on the specific identification method.  Investment securities totaling $500,000 and $720,000 were called by their issuers during the nine months ended September 30, 2011 and 2010, respectively.

At September 30, 2011, we owned investment securities totaling $4.5 million where the amortized cost basis exceeded the fair value. Total unrealized losses on those securities were $23,000 at September 30, 2011. This temporary impairment is the result of changes in market interest rates subsequent to the purchase of the securities. Securities with fair values of $135,000 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 the 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.
 
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 September 30, 2011.
 
 
 
Less than 12 months
   
12 months or longer
   
Total
 
 
 
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
 
 
Value
   
Loss
   
Value
   
Loss
   
Value
   
Loss
 
 
 
(In Thousands)
 
Held-to-maturity
 
 
   
 
   
 
   
 
   
 
   
 
 
State and political subdivisions
  $     $     $     $     $     $  
 
                                               
Available-for-sale
                                               
State and political subdivisions
    312       1       135       1       447       2  
U.S Government and agencies
    4,046       21                   4,046       21  
 
                                               
Total temporarily impaired investments
  $ 4,358     $ 22     $ 135     $ 1     $ 4,493     $ 23  

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, 2010.
 
 
 
Less than 12 months
   
12 months or longer
   
Total
 
 
 
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
 
 
Value
   
Loss
   
Value
   
Loss
   
Value
   
Loss
 
 
 
(In Thousands)
 
Held-to-maturity
 
 
   
 
   
 
   
 
   
 
   
 
 
State and political subdivisions
  $     $     $ 102     $ 23     $ 102     $ 23  
 
                                               
Available-for-sale
                                               
State and political subdivisions
    502       2                   502       2  
U.S Government and agencies
    12,994       129                   12,994       129  
 
                                               
Total temporarily impaired investments
  $ 13,496     $ 131     $ 102     $ 23     $ 13,598     $ 154  

 
10

 

4. MORTGAGE-BACKED SECURITIES

The following tables detail the amortized cost and the estimated fair value of the Company’s mortgage-backed securities:
 
 
 
   
Gross
   
Gross
   
 
 
 
 
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
 
 
Cost
   
Gains
   
Losses
   
Value
 
 
 
(In Thousands)
 
Available-for-sale securities:
 
 
   
 
   
 
   
 
 
 
 
 
   
 
   
 
   
 
 
September 30, 2011:
 
 
   
 
   
 
   
 
 
Collateralized mortgage obligations (“CMO”) (1)
  $ 327,313     $ 8,270     $ (1,536 )   $ 334,047  
Federal National Mortgage Association (“FNMA”)
    294,022       8,917       (53 )     302,886  
Federal Home Loan Mortgage Corporation (“FHLMC”)
    72,256       2,019       (20 )     74,255  
Government National Mortgage Association (“GNMA”)
    58,649       2,671       -       61,320  
 
  $ 752,240     $ 21,877     $ (1,609 )   $ 772,508  
December 31, 2010:
                               
CMO (1)
  $ 490,946     $ 9,687     $ (599 )   $ 500,034  
FNMA
    89,226       1,253       (431 )     90,048  
FHLMC
    43,970       743       (273 )     44,440  
GNMA
    65,849       1,229       (674 )     66,404  
 
  $ 689,991     $ 12,912     $ (1,977 )   $ 700,926  
Trading securities:
                               
September 30, 2011:
                               
CMO
  $ 12,432     $     $     $ 12,432  
December 31, 2010:
                               
CMO
  $ 12,432     $     $     $ 12,432  
 
                               
(1) Includes Agency CMOs classified as available-for-sale and SASCO RM-1 2002 Class O securities classified as available-for-sale.
 

The portfolio of available-for-sale mortgage-backed securities is comprised of 183 securities with an amortized cost of $752.2 million of both GSE ($569.0 million) and non-GSE ($183.2 million) securities.  All securities were AAA-rated at time of purchase; only two securities with an aggregate value of $10.8 million are now rated below AAA.  Downgraded securities were re-evaluated at September 30, 2011.  The result of this evaluation shows no other-than-temporary impairment for the nine months ended September 30, 2011.  The weighted average duration of the mortgage-backed securities was 2.7 years at September 30, 2011.

At September 30, 2011, mortgage-backed securities with market values aggregating $368.5 million were pledged as collateral for retail customer repurchase agreements, municipal deposits and other obligations. From time to time, mortgage-backed securities are also pledged as collateral for Federal Home Loan Bank (FHLB) borrowings. The fair value of these FHLB-pledged mortgage-backed securities was $17.4 million at September 30, 2011.

During the first nine months of 2011, we sold available-for-sale mortgage-backed securities of $210.0 million with net gains of $2.8 million. The cost basis of all mortgage-backed securities sales is based on the specific identification method. There were sales of available-for-sale mortgage-backed securities of $92.5 million with net securities gains of $1.8 million during the first nine months of 2010.

 
11

 
 
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 September 30, 2011, we owned mortgage-backed securities totaling $80.9 million where the amortized cost basis exceeded fair value.  Total unrealized losses on these securities were $1.6 million at September 30, 2011.  This temporary impairment is the result of changes in market interest rates in the mortgage-backed securities market.  There were no securities impaired for 12 months or longer.  We have determined that these securities were not other-than-temporarily impaired at September 30, 2011.  Quarterly, we evaluate the current characteristics of each of our mortgage-backed securities such as delinquency and foreclosure levels, credit enhancement, projected losses and coverage.  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. 
 
The table below shows our mortgage-backed securities’ gross unrealized losses, fair value by investment category and length of time individual securities have been in continuous unrealized loss position at September 30, 2011.
 
 
Less than 12 months
 
12 months or longer
 
Total
 
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
 
Value
 
Loss
 
Value
 
Loss
 
Value
 
Loss
 
 
(In Thousands)
 
Available-for-sale
 
 
   
 
   
 
   
 
   
 
   
 
 
CMO
  $ 64,739     $ 1,536     $     $     $ 64,739     $ 1,536  
FNMA
    10,488       53                   10,488       53  
FHLMC
    5,674       20                   5,674       20  
GNMA
                                   
 
                                               
Total temporarily impaired MBS
  $ 80,901     $ 1,609     $     $     $ 80,901     $ 1,609  

The table below shows our mortgage-backed 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, 2010.
 
 
Less than 12 months
 
12 months or longer
 
Total
 
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
 
Value
 
Loss
 
Value
 
Loss
 
Value
 
Loss
 
 
(In Thousands)
 
Available-for-sale
 
 
   
 
   
 
   
 
   
 
   
 
 
CMO
  $ 58,821     $ 534     $ 1,171     $ 65     $ 59,992     $ 599  
FNMA
    45,129       431                   45,129       431  
FHLMC
    14,981       273                   14,981       273  
GNMA
    23,831       674                   23,831       674  
Total temporarily impaired MBS
  $ 142,762     $ 1,912     $ 1,171     $ 65     $ 143,933     $ 1,977  

We own $12.4 million par value of SASCO RM-1 2002 class B securities which are classified as trading, of which, $1.4 million is accrued 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 used the guidance under ASC 320 to provide a reasonable estimate of fair value in 2010. 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 September 30, 2011.

 
12

 

5. 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.

The following table provides the activity of the allowance for loan losses and loan balances for the three and nine months ended September 30, 2011:
 
 
 
Commercial
   
Commercial
Mortgages
   
Construction
   
Residential
   
Consumer
   
Total
 
 
 
(In Thousands)
 
Three months ended September 30, 2011
   
 
   
 
   
 
   
 
 
Allowance for loan losses
   
 
   
 
   
 
   
 
 
Beginning balance
  $ 25,236     $ 12,330     $ 5,831     $ 3,707     $ 9,144     $ 56,248  
   Charge-offs
    (1,431 )     (5,302 )     (1,107 )     (877 )     (1,248 )     (9,965 )
   Recoveries
    71       94       51       25       106       347  
   Provision
    1,645       302       926       427       3,258       6,558  
Ending balance
  $ 25,521     $ 7,424     $ 5,701     $ 3,282     $ 11,260     $ 53,188  
 
                                               
Nine months ended September 30, 2011
                                 
Allowance for loan losses
                                 
Beginning balance
  $ 26,480     $ 10,564     $ 10,019     $ 4,028     $ 9,248     $ 60,339  
   Charge-offs
    (7,641 )     (6,609 )     (8,179 )     (2,183 )     (5,472 )     (30,084 )
   Recoveries
    409       381       557       116       422       1,885  
   Provision
    6,273       3,088       3,304       1,321       7,062       21,048  
Ending balance
  $ 25,521     $ 7,424     $ 5,701     $ 3,282     $ 11,260     $ 53,188  
 
                                               
Period-end allowance allocated to:
                                 
   Specific reserves(1)
  $ 1,810     $ 1,604     $ 3,005     $ 808     $ 120     $ 7,347  
   General reserves(2)
    23,711       5,820       2,696       2,474       11,140       45,841  
Ending balance
  $ 25,521     $ 7,424     $ 5,701     $ 3,282     $ 11,260     $ 53,188  
 
                                               
Period-end loan balances evaluated for:
                                 
   Specific reserves(1)
  $ 21,270     $ 20,306     $ 21,701     $ 17,666     $ 3,176     $ 84,119  (3)
   General reserves(2)
    1,376,272       583,564       89,803       267,668       293,991       2,611,298  
Ending balance
  $ 1,397,542     $ 603,870     $ 111,504     $ 285,334     $ 297,167     $ 2,695,417  
 
                                               
(1) Specific reserves represent loans individually evaluated for impairment
 
(2) General reserves represent loans collectively evaluated for impairment
 
(3) The difference between this amount and nonaccruing loans at September 30, 2011, represents accruing troubled debt restructured loans.
 
 
 
13

 


Non-Accrual and Past Due Loans

The following tables show our nonaccrual and past due loans at the dates indicated:
 
 
 
30–59 Days
   
60–89 Days
   
Greater Than
90 Days
   
Total Past
Due
   
Accruing
   
 
   
 
 
September 30, 2011
 
Past Due and
   
Past Due and
   
Past Due and
   
And Still
   
Current
   
Nonaccrual
   
Total
 
(In Thousands)
 
Still Accruing
   
Still Accruing
   
Still Accruing
   
Accruing
   
Balances
   
Loans
   
Loans
 
 
 
 
   
 
   
 
   
 
   
 
   
 
   
 
 
Commercial
  $ 1,774     $ 507     $ 894     $ 3,175     $ 1,372,997     $ 21,370     $ 1,397,542  
Commercial
                                                       
     mortgages
    967       -       73       1,040       581,955       20,875       603,870  
Construction
    359       -       -       359       89,444       21,701       111,504  
Residential
    4,332       2,483       562       7,377       267,386       10,571       285,334  
Consumer
    1,342       395       -       1,737       293,868       1,562       297,167  
 
                                                       
Total
  $ 8,774     $ 3,385     $ 1,529     $ 13,688     $ 2,605,650     $ 76,079     $ 2,695,417  
% of Total Loans
    0.32 %     0.13 %     0.06 %     0.51 %     96.67 %     2.82 %     100 %
 
                                                       
 
 
30–59 Days
   
60–89 Days
   
Greater Than
90 Days
   
Total Past
Due
   
Accruing