10-Q 1 d603718d10q.htm FORM 10-Q Form 10-Q
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 September 30, 2013

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 November 1, 2013

 

Common Stock, par value $.01 per share    8,850,368
(Title of Class)    (Shares Outstanding)

 

 

 


Table of Contents

WSFS FINANCIAL CORPORATION

FORM 10-Q

INDEX

 

          Page  
   PART I. Financial Information   

Item 1.

   Financial Statements (Unaudited)   
   Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2013 and 2012      3   
   Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2013 and 2012      4   
   Consolidated Statements of Condition as of September 30, 2013 and December 31, 2012      5   
   Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012      6   
   Notes to the Consolidated Financial Statements for the Three and Nine Months Ended September 30, 2013 and 2012      7   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      37   

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      50   

Item 4.

   Controls and Procedures      50   
  

PART II. Other Information

  

Item 1.

   Legal Proceedings      50   

Item 1A.

   Risk Factors      50   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      51   

Item 3.

   Defaults upon Senior Securities      51   

Item 4.

   Mine Safety Disclosure      51   

Item 5.

   Other Information      51   

Item 6.

   Exhibits      51   

Signatures

        52   

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   

 

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Table of Contents

WSFS FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2013      2012      2013      2012  
    

(Unaudited)

(In Thousands, Except Per Share Data)

 

Interest income:

           

Interest and fees on loans

   $ 32,708      $ 32,003      $ 96,268      $ 98,185  

Interest on mortgage-backed securities

     3,527        4,344        10,726        14,953  

Interest on reverse mortgages

     248        35        462        (41

Interest and dividends on investment securities

     546        123        999        376  

Other interest income

     87        9        134        27  
  

 

 

    

 

 

    

 

 

    

 

 

 
     37,116        36,514        108,589        113,500  
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest expense:

           

Interest on deposits

     1,673        3,237        5,513        10,652  

Interest on Federal Home Loan Bank advances

     482        1,403        1,376        4,985  

Interest on federal funds purchased and securities sold under agreements to repurchase

     244        253        738        765  

Interest on trust preferred borrowings

     339        369        1,005        1,114  

Interest on senior debt

     943        353        2,830        353  

Interest on other borrowings

     29        6        85        130  
  

 

 

    

 

 

    

 

 

    

 

 

 
     3,710        5,621        11,547        17,999  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     33,406        30,893        97,042        95,501  

Provision for loan losses

     1,969        3,751        5,880        28,379  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     31,437        27,142        91,162        67,122  
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest income:

           

Credit/debit card and ATM income

     6,374        5,738        18,231        17,031  

Deposit service charges

     4,407        4,360        12,637        12,673  

Investment management and fiduciary revenue

     3,836        3,258        11,623        9,716  

Reverse mortgage consolidation gain

     3,801        —          3,801        —    

Mortgage banking activities, net

     907        914        2,837        1,882  

Loan fee income

     419        706        1,401        1,803  

Security gains, net

     306        2,451        2,856        17,797  

Bank owned life insurance income

     74        1,126        162        1,447  

Other income

     2,618        1,195        6,807        3,149  
  

 

 

    

 

 

    

 

 

    

 

 

 
     22,742        19,748        60,355        65,498  
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest expenses:

           

Salaries, benefits and other compensation

     17,648        16,942        53,086        49,840  

Occupancy expense

     3,385        3,235        10,169        9,697  

Equipment expense

     2,044        1,701        5,990        5,403  

Data processing and operations expenses

     1,548        1,402        4,291        4,190  

FDIC expenses

     959        1,384        3,067        4,262  

Professional fees

     866        671        2,712        2,917  

Marketing expense

     643        379        1,768        1,976  

Loan workout and OREO expenses

     492        2,115        1,432        4,902  

Other operating expense

     5,224        4,324        15,816        12,972  
  

 

 

    

 

 

    

 

 

    

 

 

 
     32,809        32,153        98,331        96,159  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before taxes

     21,370        14,737        53,186        36,461  

Income tax provision

     7,210        4,758        18,378        12,708  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

     14,160        9,979        34,808        23,753  

Dividends on preferred stock and accretion of discount

     332        693        1,633        2,077  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income allocable to common stockholders

   $ 13,828      $ 9,286      $ 33,175      $ 21,676  
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per share:

           

Basic

   $ 1.57      $ 1.07      $ 3.77      $ 2.49  

Diluted

   $ 1.54      $ 1.06      $ 3.72      $ 2.47  

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

 

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Table of Contents

WSFS FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2013     2012     2013     2012  
     (Unaudited)
(In Thousands)
    (Unaudited)
(In Thousands)
 

Net Income

   $ 14,160     $ 9,979     $ 34,808     $ 23,753  

Other comprehensive (loss) income:

        

Unrealized (losses) gains on securities available-for-sale

     (4,901     15,341       (43,781     27,605  

Tax benefit (expense)

     1,795       (5,783     16,532       (10,440
  

 

 

   

 

 

   

 

 

   

 

 

 

Net of tax amount

     (3,106     9,558       (27,249     17,165  

Reclassification adjustment for gains included in net income

     (306     (2,451     (2,856     (17,797

Tax expense

     116       931       1,085       6,763  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net of tax amount

     (190     (1,520     (1,771     (11,034

Total other comprehensive (loss) income

     (3,296     8,038       (29,020     6,131  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 10,864     $ 18,017     $ 5,788     $ 29,884  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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WSFS FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CONDITION

 

     September 30,
2013
    December 31,
2012
 
    

(Unaudited)

(In Thousands, Except Per Share Data)

 

Assets

  

 

Cash and due from banks

   $ 96,021     $ 93,629  

Cash in non-owned ATMs

     406,227       406,627  

Interest-bearing deposits in other banks

     197       631  
  

 

 

   

 

 

 

Total cash and cash equivalents

     502,445       500,887  

Investment securities, available-for-sale

     806,926       907,955  

Investment securities, trading

     —         12,590  

Loans held-for-sale

     12,608       12,758  

Loans, net of allowance for loan losses of $41,431 at September 30, 2013 and $43,922 at December 31, 2012

     2,829,992       2,723,916  

Reverse mortgage loans

     40,095       (457

Bank-owned life insurance

     63,077       62,915  

Stock in Federal Home Loan Bank of Pittsburgh, at cost

     33,876       31,165  

Assets acquired through foreclosure

     7,163       4,622  

Accrued interest receivable

     9,833       9,652  

Premises and equipment

     36,001       38,257  

Goodwill

     32,395       28,146  

Intangible assets

     7,146       5,174  

Other assets

     61,099       37,568  
  

 

 

   

 

 

 

Total assets

   $ 4,442,656     $ 4,375,148  
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Liabilities:

    

Deposits:

    

Noninterest-bearing demand

   $ 609,115     $ 631,026  

Interest-bearing demand

     669,173       538,195  

Money market

     780,753       933,901  

Savings

     378,397       389,977  

Time

     256,397       316,986  

Jumbo certificates of deposit – customer

     251,764       294,237  
  

 

 

   

 

 

 

Total customer deposits

     2,945,599       3,104,322  

Brokered deposits

     175,599       170,641  
  

 

 

   

 

 

 

Total deposits

     3,121,198       3,274,963  

Federal funds purchased and securities sold under agreements to repurchase

     114,000       110,000  

Federal Home Loan Bank advances

     600,435       376,310  

Trust preferred borrowings

     67,011       67,011  

Senior debt

     55,000       55,000  

Other borrowed funds

     38,169       28,945  

Bonds payable

     26,340        —    

Accrued interest payable

     3,254       1,099  

Other liabilities

     43,298        40,766  
  

 

 

   

 

 

 

Total liabilities

     4,068,705       3,954,094  
  

 

 

   

 

 

 

Stockholders’ Equity:

    

Serial preferred stock $0.01 par value, 7,500,000 shares authorized; issued 0 at September 30, 2013 and 52,625 issued at December 31, 2012

   $ —       $ 1  

Common stock $0.01 par value, 20,000,000 shares authorized; issued 18,425,025 at September 30, 2013 and 18,354,055 at December 31, 2012

     184       184  

Capital in excess of par value

     175,176       222,978  

Accumulated other comprehensive (loss) / income

     (16,077     12,943  

Retained earnings

     462,948       433,228  

Treasury stock at cost, 9,580,569 shares at September 30, 2013 and December 31, 2012

     (248,280     (248,280
  

 

 

   

 

 

 

Total stockholders’ equity

     373,951       421,054  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 4,442,656     $ 4,375,148  
  

 

 

   

 

 

 

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

 

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Table of Contents

WSFS FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Nine months ended
September 30,
 
     2013     2012  
    

(Unaudited)

(In Thousands)

 

Operating activities:

  

 

Net Income

   $ 34,808     $ 23,753  

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

    

Provision for loan losses

     5,880       28,379  

Depreciation of premises and equipment

     4,329       3,803  

Amortization, net

     8,575       8,123  

(Increase) decrease in accrued interest receivable

     (181     1,451  

(Decrease) increase in other assets

     (6,126 )     8,726  

Origination of loans held-for-sale

     (178,819     (137,298

Proceeds from sales of loans held-for-sale

     191,831       142,535  

Gain on mortgage banking activities, net

     (2,837     (1,882

Gain on mark-to-market adjustment on trading securities

     125       —     

Security gains, net

     (2,981     (17,797

Reverse mortgage consolidation gain

     (3,801     —    

Stock-based compensation expense

     2,294       1,600  

Excess tax benefits from share-based payment arrangements

     (266     (99

Increase in accrued interest payable

     2,155       4,425  

Decrease in other liabilities

     (9,488     (3,432

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

     203       2,891  

Increase in value of bank-owned life insurance

     (162     (1,447

Decrease in capitalized interest, net

     (802     (478
  

 

 

   

 

 

 

Net cash provided by operating activities

   $ 44,737     $ 63,253  
  

 

 

   

 

 

 

Investing activities:

    

Maturities of investment securities

     510       5,039  

Sale of investment securities available for sale

     239,383       616,254  

Purchase of investment securities available-for-sale

     (255,277     (751,363

Repayments of investment securities available-for-sale

     64,369       101,729  

Disbursements for reverse mortgages

     (40     (94

Proceeds from loan disposition

     —         31,307  

Net increase in loans

     (121,589     (38,190

Cash received in consolidation of reverse mortgage securitization trust

     5,833        —    

Payment of bank-owned life insurance

     —         2,021  

Acquisition of Array/Arrow, net of cash acquired

     (4,189     —    

Net (increase) decrease in stock of Federal Home Loan Bank of Pittsburgh

     (2,711     5,585  

Sales of assets acquired through foreclosure, net

     4,682       11,789  

Investment in premises and equipment, net

     (1,948     (5,747
  

 

 

   

 

 

 

Net cash (used for) provided by investing activities

   $ (70,977   $ (21,670
  

 

 

   

 

 

 

Financing activities:

    

Net (decrease) increase in demand and saving deposits

     (46,072     101,059  

Decrease in time deposits

     (103,062     (58,991

Increase (decrease) in brokered deposits

     4,958       (25,717

Receipts from FHLB advances

     29,071,254       27,299,083  

Repayments of FHLB advances

     (28,847,129     (27,444,895

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

     15,682,425       14,135,000  

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

     (15,678,425     (14,085,000

Repayment of unsecured debt

     —         (30,000

Issuance of Senior Debt

     —         52,691  

Dividends paid

     (6,017     (5,115

Issuance of common stock and exercise of common stock options

     2,223       1,086  

Repurchase of common stock warrants

     —         (1,800

Redemption of preferred stock

     (52,623     —    

Excess tax benefits from share-based payment arrangements

     266       99  
  

 

 

   

 

 

 

Net cash provided by (used for) financing activities

   $ 27,798     $ (62,500
  

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     1,558       (20,917

Cash and cash equivalents at beginning of period

     500,887       468,017  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 502,445     $ 447,100  
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Flow Information:

    

Cash paid for interest during the period

   $ 9,392     $ 13,574  

Cash paid for income taxes, net

     15,822       8,379  

Loans transferred to assets acquired through foreclosure

     7,427       9,290  

Net change in other comprehensive income

     (29,021     6,131  

Fair value of assets acquired

     12,817       —    

Fair value of liabilities assumed

     10,127       —    

Fair value of assets consolidated

     41,397        —     

Fair value of liabilities consolidated

     26,339     

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

 

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Table of Contents

WSFS FINANCIAL CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013

(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”). In addition to the subsidiaries listed above, we also have one consolidated variable interest entity, SASCO 2002-RM1 (“SASCO”), which is a reverse mortgage securitization trust.

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 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 51 offices located in Delaware (41), Pennsylvania (8), Virginia (1) and Nevada (1) and through our website at www.wsfsbank.com. Information on our website is not incorporated by reference into this quarterly report.

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, investment in reverse mortgage, income taxes and other-than-temporary impairments (“OTTI”). Among other effects, changes to such estimates could result in future impairments of investment securities, goodwill and intangible assets and establishment 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, 2013 are not necessarily indicative of the results that may be expected for any future quarters or for the year ending December 31, 2013. 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, 2012 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.

 

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2. EARNINGS PER SHARE

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

 

     For the three months ended
September 30,
     For the nine months ended
September 30,
 
     2013      2012      2013      2012  
     (In Thousands, Except Per Share Data)  

Numerator:

           

Net income allocable to common stockholders

   $ 13,828      $ 9,286      $ 33,175      $ 21,676  
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator:

           

Denominator for basic earnings per share—weighted average shares

     8,828        8,712        8,804        8,702  

Effect of dilutive employee stock options and warrants

     148        83        106        77  
  

 

 

    

 

 

    

 

 

    

 

 

 

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

     8,976        8,795        8,910        8,779  
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per share:

           

Basic:

           

Net income allocable to common stockholders

   $ 1.57      $ 1.07      $ 3.77      $ 2.49  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted:

           

Net income allocable to common stockholders

   $ 1.54      $ 1.06      $ 3.72      $ 2.47  
  

 

 

    

 

 

    

 

 

    

 

 

 

Outstanding common stock equivalents having no dilutive effect

     402        338        557        361  

 

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3. INVESTMENT SECURITIES

The following tables detail the amortized cost and the estimated fair value of our investment securities available-for-sale and trading securities:

 

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

Available-for-sale securities:

          

September 30, 2013:

          

State and political subdivisions

   $ 87,987      $ 224      $ (4,879   $ 83,332  

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

     41,670        131        (3     41,798  

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

     379,721        518        (11,990     368,249  

Collateralized Mortgage Obligation (“CMO”) (1)

     112,887        169        (4,585     108,471  

Federal Home Loan Mortgage Corporation (“FHLMC”) MBS

     109,482        38        (3,397     106,123  

Government National Mortgage Association (“GNMA”) MBS

     100,349        1,134        (2,530     98,953  
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 832,096      $ 2,214      $ (27,384   $ 806,926  
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2012

          

State and political subdivisions

     3,120        89        —         3,209  

GSE

     46,726        266        (2     46,990  

FNMA

     396,910        9,588        (243     406,255  

CMO (1)

     251,848        7,849        (301     259,396  

FHLMC

     58,596        1,171        (117     59,650  

GNMA

     129,288        3,221        (54     132,455  
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 886,488      $ 22,184      $ (717   $ 907,955  
  

 

 

    

 

 

    

 

 

   

 

 

 

Trading securities

          

September 30, 2013:

          

CMO

   $ —         $ —         $ —        $ —     
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2012

          

CMO

   $ 12,590      $ —        $ —       $ 12,590  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) Includes agency CMO securities classified as available-for-sale

 

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Table of Contents

The scheduled maturities of investment securities available-for-sale at September 30, 2013 and December 31, 2012 were as follows:

 

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

September 30, 2013

     

Within one year

   $ 22,860      $ 22,932  

After one year but within five years

     32,661        32,465  

After five years but within ten years

     312,070        298,900  

After ten years

     464,505        452,629  
  

 

 

    

 

 

 
   $ 832,096      $ 806,926  
  

 

 

    

 

 

 

December 31, 2012

     

Within one year

   $ 19,001      $ 19,115  

After one year but within five years

     28,855        29,034  

After five years but within ten years

     321,103        329,580  

After ten years

     517,529        530,226  
  

 

 

    

 

 

 
   $ 886,488      $ 907,955  
  

 

 

    

 

 

 

The portfolio of available-for-sale “MBS” includes 134 securities all of which are GSE securities with an amortized cost of $702.4 million. All securities were AAA-rated at the time of purchase. All securities were re-evaluated for OTTI at September 30, 2013. The result of this evaluation showed no OTTI for the third quarter of 2013. The weighted average duration of MBS was 5.8 years at September 30, 2013.

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, 2013, investment securities with market values aggregating $513.0 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 September 30, 2013.

During the first nine months of 2013, we sold $239.9 million of investment securities categorized as available-for-sale for net gains of $3.0 million. In the first nine months of 2012, proceeds from the sale of investment securities available-for-sale were $616.3 million and resulted in net gains of $17.7 million. The cost basis of all investment securities sales is based on the specific identification method.

As of September 30, 2013, our investment securities portfolio had remaining unamortized premiums of $25.1 million and $90,000 of unaccreted discounts.

At September 30, 2013, we owned investment securities totaling $678.9 million in which the amortized cost basis exceeded fair value. Total unrealized losses on those securities were $27.4 million at September 30, 2013. 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 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.

During the first nine months of 2013, we purchased $77.7 million of municipal bonds. The purpose was to improve return, diversify our investment portfolio and reduce our effective tax rate.

 

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Table of Contents

For these investment securities with unrealized losses, the table below shows our gross unrealized losses and fair value by investment category and length of time that individual securities were in a continuous unrealized loss position at September 30, 2013.

 

     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

                 

State and political subdivisions

   $ 59,470      $ 4,879      $ —        $ —        $ 59,470      $ 4,879  

U.S Government and agencies

     —          —          2,003        3        2,003        3  

FNMA

     331,949        11,840        4,060        150        336,009        11,990  

CMO

     99,464        4,584        1,339        1        100,803        4,585  

FHLMC

     105,539        3,397        —          —          105,539        3,397  

GNMA

     75,096        2,530        —          —          75,096        2,530  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired investments

   $ 671,518      $ 27,230      $ 7,402      $ 154      $ 678,920      $ 27,384  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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, 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

                 

State and political subdivisions

   $ —         $ —         $ —         $ —         $ —         $ —     

U.S Government and agencies

     2,008        2        —           —           2,008        2  

FNMA

     43,696        243        —           —           43,696        243  

CMO

     40,358        268        1,364        33        41,722        301  

FHLMC

     13,884        117        —           —           13,884        117  

GNMA

     10,029        54        —           —           10,029        54  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired investments

   $ 109,975      $ 684      $ 1,364      $ 33      $ 111,339      $ 717  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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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. We established our allowance for loan losses in accordance with guidance provided in the SEC’s Staff Accounting Bulletin 102 (“SAB 102”). The determination of the allowance for loan losses requires significant judgment reflecting our best estimate of impairment related to specifically identified impaired 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 are included in our allowance for loan losses:

 

   

Specific reserves for impaired loans

 

   

Allowances for pools of homogenous loans based on historical loss experience

 

   

Adjustments for qualitative and environmental factors

 

   

Allowance for model estimation and complexity risk

Specific reserves are established for impaired loans where we have identified significant conditions or circumstances related to specific credits that indicate losses are probable. Unless loans are well-secured and collection is imminent, all loans that are 90 days past due are deemed impaired. Reserves for impaired loans are generally charged-off within 90 days of impairment recognition. Estimated losses are based on collateral values, estimates of future cash flows, or market valuations.

Allowances for pooled homogeneous loans, that are not deemed impaired, are based on historical loss experience. Estimated losses for pooled portfolios are determined differently for commercial loan pools and retail loan pools. Commercial loans are pooled into the following segments: Business Loans (Commercial and Industrial Loans), Commercial Real Estate – Owner-Occupied, Commercial Real Estate – Investor, and Construction Loans. Each pool is further segmented by internally assessed risk ratings. Loan losses for commercial loans are estimated by determining the probability of default and expected loss severity upon default. Probability of default is calculated based on the historical rate of migration to impaired status during the last fourteen quarters. This was an increase of one quarter over the previous period’s analysis. This adjustment provides a more representative period and accurate estimation of the allowance at the current point in this credit cycle. Loss severity is calculated as the actual loan losses (net of recoveries) on impaired loans in the respective pool during the same time frame. Retail loans are pooled into the following segments: residential mortgage loans, home equity secured loans, and all other consumer loans. Pooled reserves for retail loans are calculated based solely on the previous three year average loss rate.

Qualitative and environmental adjustment factors are taken into consideration when determining the above reserve estimates or core reserves. These adjustment factors are based upon our evaluation of various current internal and external conditions including:

 

   

Assessment of current underwriting policies, staff, and portfolio mix

 

   

Internal trends of delinquency, nonaccrual and criticized loans by segment

 

   

Assessment of risk rating accuracy, control and regulatory assessments/environment

 

   

General economic conditions — locally and nationally

 

   

Market trends impacting collateral values

 

   

Competitive environment as it could impact loan structure and underwriting

The above factors are based on their relative standing compared to the period which historic losses are used in core reserve estimates and current directional trends. Each individual qualitative and environmental factor in our model can add or subtract to core reserves.

The final component of our allowance for loan losses is a reserve for model estimation and complexity risk. The calculation of reserves is generally quantitative; however, qualitative estimates of valuations and risk assessment are necessary. We increased our calculated reserves by 2% to account for model estimation and complexity risk as of September 30, 2013 and December 31, 2012.

Our loan officers and risk managers meet at least quarterly to discuss and review the 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.

 

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Table of Contents

The following tables provide the activity of our allowance for loan losses and loan balances for three and nine months ended September 30, 2013 and 2012:

 

     Commercial     Owner -
Occupied

Commercial
    Commercial
Mortgages
    Construction     Residential     Consumer     Complexity
Risk (1)
    Total  
     (in thousands)  

Three months ended September 30, 2013

                

Allowance for loan losses

                

Beginning balance

   $ 12,967      $ 8,049      $ 6,345      $ 3,952      $ 3,230      $ 6,137      $ 814      $ 41,494   

Charge-offs

     (1,172     (31     (103     (4     (290     (1,343     —         (2,943

Recoveries

     273       55       333       21       10       219       —         911  

Provision (credit)

     594       (23     345       (380     364       1,071       (2     1,969  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 12,662      $ 8,050      $ 6,920      $ 3,589      $ 3,314      $ 6,084      $ 812      $ 41,431   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nine months ended September 30, 2013

                

Allowance for loan losses

                

Beginning balance

   $ 13,663      $ 6,108      $ 8,079      $ 6,456      $ 3,124      $ 5,631      $ 861      $ 43,922   

Charge-offs

     (2,311     (68     (1,824     (1,344     (985     (4,153     —       $ (10,685

Recoveries

     900       100       442       106       51       715       —       $ 2,314   

Provision (credit)

     410       1,910       223       (1,629     1,124       3,891       (49   $ 5,880   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 12,662      $ 8,050      $ 6,920      $ 3,589      $ 3,314      $ 6,084      $ 812      $ 41,431   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Period-end allowance allocated to:

                

Loans individually evaluated for impairment

   $ 2,004      $ 945      $ 1,995      $ —        $ 995      $ 12      $ —        $ 5,951   

Loans collectively evaluated for impairment

     10,658       7,105       4,925       3,589       2,319       6,072       812       35,480  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 12,662      $ 8,050      $ 6,920      $ 3,589      $ 3,314      $ 6,084      $ 812      $ 41,431   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Period-end loan balances evaluated for:

                

Loans individually evaluated for impairment

   $ 5,833      $ 12,568      $ 8,894      $ 274      $ 17,360      $ 4,400      $ —        $ 49,329 (2) 

Loans collectively evaluated for impairment

     748,106       777,297       704,895       102,347       211,595       283,645       —       $ 2,827,885   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 753,939      $ 789,865      $ 713,789      $ 102,621      $ 228,955      $ 288,045      $ —        $ 2,877,214   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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 September 30, 2013 represents accruing troubled debt restructured loans.

 

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Table of Contents

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

 

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

Three months ended September 30, 2012

                

Allowance for loan losses

                

Beginning balance

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

Charge-offs

     (1,281     (926     (709     (676     (705     (2,573     —         (6,870

Recoveries

     455       184       18       1,314       113       204       —         2,288  

Provision

     (127     (4     (2,281     (810     2,690       4,300       (17     3,751  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 8,938      $ 3,345      $ 6,646      $ 5,135      $ 8,363      $ 12,272      $ 899      $ 45,598   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nine months ended September 30, 2012

                

Allowance for loan losses

                

Beginning balance

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

Charge-offs

     (11,316     (3,614     (5,600     (10,680     (3,344     (5,494     —         (40,048

Recoveries

     1,305       190       382       1,642       171       497       —         4,187  

Provision

     3,882       (2,466     4,308       10,099       4,992       6,665       899       28,379  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 8,938      $ 3,345      $ 6,646      $ 5,135      $ 8,363      $ 12,272      $ 899      $ 45,598   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Period-end allowance allocated to:

                

Loans individually evaluated for impairment

   $ 1,244      $ 222      $ 90      $ 94      $ 1,199      $ 24      $ —        $ 2,873   

Loans collectively evaluated for impairment

     7,694       3,123       6,556       5,041       7,164       12,248       899       42,725  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 8,938      $ 3,345      $ 6,646      $ 5,135      $ 8,363      $ 12,272      $ 899      $ 45,598   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Period-end loan balances evaluated for:

                

Loans individually evaluated for impairment

   $ 3,579      $ 13,324      $ 5,875      $ 2,620      $ 18,072      $ 6,694      $ —        $ 50,164 (2) 

Loans collectively evaluated for impairment

     694,626       737,670       598,681       111,557       232,270       276,791       —         2,651,595  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 698,205      $ 750,994      $ 604,556      $ 114,177      $ 250,342      $ 283,485      $ —        $ 2,701,759   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

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Table of Contents

Nonaccrual and Past Due Loans

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

 

September 30, 2013

(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

   $  13,212      $ —        $ —        $  13,212      $ 735,077      $ 5,650      $ 753,939   

Owner-Occupied commercial

     6,474       —         —         6,474       770,823       12,568       789,865  

Commercial mortgages

     22       —         —         22       705,077       8,690       713,789  

Construction

     —         —         —         —         102,347       274       102,621  

Residential

     3,672       1,073       658       5,403       215,113       8,439       228,955  

Consumer

     1,138       468       —         1,606       283,890       2,549       288,045  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 24,518      $ 1,541      $ 658      $ 26,717      $ 2,812,327      $ 38,170      $ 2,877,214   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of Total Loans

     0.85     0.06     0.02     0.93     97.74     1.33     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2012

(In Thousands)

   30–59 Days
Past Due and
Still Accruing
    60–89 Days
Past Due and
Still Accruing
    Greater Than
90 Days
Past Due and
Still Accruing
    Total Past
Due
And Still
Accruing
    Accruing
Current
Balances
    Nonaccrual
Loans
    Total
Loans
 

Commercial

   $ 1,214      $ —        $ —        $ 1,214      $ 698,416      $ 4,861      $ 704,491   

Owner-Occupied commercial

     1,264       —         —         1,264       755,316       14,001       770,581  

Commercial mortgages

     —         —         —         —         618,731       12,634       631,365  

Construction

     269       70       —         339       131,489       1,547       133,375  

Residential

     5,383       606       786       6,775       226,863       9,989       243,627  

Consumer

     971       526       —         1,497       282,776       4,728       289,001  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 9,101      $ 1,202      $ 786      $ 11,089      $ 2,713,591      $ 47,760      $ 2,772,440   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of Total Loans

     0.33     0.04     0.03     0.40     97.88     1.72     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Impaired Loans

The following tables provide an analysis of our impaired loans at September 30, 2013 and December 31, 2012:

 

September 30, 2013

(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

   $ 5,833       $ 2,288       $ 3,545       $ 2,004       $ 13,728       $ 5,062   

Owner-Occupied commercial

     12,568        5,723        6,845        945        14,911        13,167  

Commercial mortgages

     8,894        2,896        5,998        1,995        19,494        9,887  

Construction

     274        274        —           —           16,012        1,261  

Residential

     17,360        9,680        7,680        995        19,726        18,091  

Consumer

     4,400        4,272        128        12        5,091        5,712  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $  49,329       $  25,133       $  24,196       $  5,951       $  88,962       $  53,180   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2012

(In Thousands)

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

Commercial

   $ 4,861       $ 1,598       $ 3,263       $ 2,100       $ 12,060       $ 4,993   

Owner-Occupied commercial

     14,001        13,827        174        1        18,658        16,856  

Commercial mortgages

     12,634        5,422        7,212        1,887        22,192        10,233  

Construction

     1,547        1,172        375        28        17,711        11,239  

Residential

     18,483        11,053        7,430        919        20,771        16,917  

Consumer

     6,329        5,635        694        16        7,265        4,514  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 57,855       $ 38,707       $ 19,148       $ 4,951       $ 98,657       $ 64,752   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

Interest income of $234,000 and $706,000 was recognized on impaired loans during the three and nine months ended September 30, 2013, respectively.

 

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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, for example, 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.

 

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The following tables provide an analysis of problem loans, by credit risk profile using internally assigned risk ratings, as of September 30, 2013 and December 31, 2012

 

      Owner-Occupied     Commercial           Total  
    Commercial     Commercial     Mortgages     Construction     Commercial  
      September 30,     December 31,  
    Sept. 30     Dec. 31     Sept. 30     Dec. 31     Sept. 30     Dec. 31     Sept. 30     Dec. 31     2013     2012  
  2013     2012     2013     2012     2013     2012     2013     2012     Amount     %     Amount     %  

Risk Rating:

                       

Special mention

  $ 17,148      $ 14,611      $ 15,433      $ 27,398      $ 9,239      $ 29,267      $ 1,567      $ 2,453      $ 43,387        $ 73,729     

Substandard:

                       

Accrual

    58,944       63,074       38,792       44,899       6,156       6,222       2,907       5,755       106,930         119,950    

Nonaccrual

    2,105       1,598       5,723       13,827       2,896       5,422       274       1,172       10,902         22,019    

Doubtful / Nonaccrual

    3,545       3,263       6,845       174       5,998       7,212       —         375       16,280         11,024    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Total Special

                       

Mention, Substandard and Doubtful

    81,742       82,546       66,793       86,298       24,289       48,123       4,748       9,755       177,499       8     226,722       10

Pass

    672,197       621,945       723,072       684,283       689,500       583,242       97,873       123,620       2,182,715       92     2,013,090       90  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Commercial Loans

  $ 753,939      $ 704,491      $ 789,865      $ 770,581      $ 713,789      $ 631,365      $ 102,621      $ 133,375      $ 2,360,214        100   $ 2,239,812        100
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

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

 

     Residential      Consumer      Total Residential and Consumer  
     Sept. 30      Dec. 31      Sept. 30      Dec. 31      September 30, 2013     December 31, 2012  
     2013      2012      2013      2012      Amount      Percent     Amount      Percent  

Nonperforming (1)

   $ 17,360       $ 18,483       $ 4,401       $ 6,329       $ 21,761         4   $ 24,812         5

Performing

     211,595        225,144        283,644        282,672        495,239        96     507,816        95  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 228,955       $ 243,627       $ 288,045       $ 289,001       $ 517,000         100   $ 532,628         100
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

      

 

 

    

 

(1) Includes $10.8 million as of September 30, 2013 and 10.1 million as of December 31, 2012 of troubled debt restructured mortgages and home equity installment loans that are performing in accordance with modified terms and are accruing interest.

 

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Table of Contents

Troubled Debt Restructurings (TDR)

The balance of TDRs at September 30, 2013 and December 31, 2012 was $26.6 million and $22.0 million, respectively. The balance at September 30, 2013 included approximately $15.5 million in nonaccrual status and $11.1 million in accrual status compared to $11.9 million in nonaccrual status and $10.1 million in accrual status at December 31, 2012. Approximately $1.0 million and $936,000 in related reserves have been established for these loans at September 30, 2013 and December 31, 2012, respectively.

During the nine months ended September 30, 2013, the terms of 21 loans were modified in TDRs, 5 of which were commercial loans that had already been placed on nonaccrual. The remaining loans represented residential and consumer 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. Nonaccruing restructured loans remain in nonaccrual status until there has been a period of sustained repayment performance, typically six months.

The following table presents loans identified as TDRs during the three and nine months ended September 30, 2013 and 2012:

 

     Three      Three      Nine      Nine  
     Months Ended      Months Ended      Months Ended      Months Ended  
     September 30,      September 30,      September 30,      September 30,  

(In Thousands)

   2013      2012      2013      2012  

Commercial

   $ 6,800       $ 710       $ 6,824       $ 9,986   

Commercial mortgages

     108        —          1,169        —    

Construction

     —          —          —          378  

Residential

     207        2,779        806        4,170  

Consumer

     256        2,165        973        2,312  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,371       $ 5,654       $ 9,772       $ 16,846   
  

 

 

    

 

 

    

 

 

    

 

 

 

The TDRs described in the table above increased our allowance for loan losses by $37,000 through allocation of a related reserve, and resulted in charge-offs of $363,000 during the nine months ended September 30, 2013, compared to increased reserves of $357,000 and charge-offs of $8.1 million for the same period of 2012.

There was one residential TDR in the amount of $130,000 which defaulted (defined as past due 90 days) during the three and nine months ended September 30, 2013, that was restructured within the last twelve months prior to September 30, 2013.

 

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Table of Contents

5. REVERSE MORTGAGE LOANS AND RELATED ASSETS AND LIABILITIES

Reverse mortgage loans are contracts in which a homeowner borrows against the equity in his/her home and receives cash in one lump sum payment, a line of credit, fixed monthly payments for either a specific term or for as long as the homeowner lives in the home, or a combination of these options. Since reverse mortgages are nonrecourse obligations, the loan repayments are generally limited to the sale proceeds of the borrower’s residence and the mortgage balance consists of cash advanced, interest compounded over the life of the loan and some may include a premium which represents a portion of the shared appreciation in the home’s value, if any, or a percentage of the value of the residence.

In 1993, we acquired a pool of reverse mortgages from the FDIC and another lender. In 1994, we purchased Providential Home Income Plan, Inc., a California-based reverse mortgage lender. In November 2002, substantially the entire WSFS reverse mortgage portfolio was sold. In addition to cash payment for the loans, we received $10 million in BBB rated mortgage-backed securities (Class B) which we classified as trading and an option to acquire up to 49.9% of the Class “O” certificates issued in connection with mortgage-backed securities by SASCO 2002 RM-1 (“SASCO”). These mortgage-backed securities were part of a larger issuance of securities backed, in part, by the sold reverse mortgages. Subsequently we negotiated to purchase 100% of the SASCO Class “O” certificates for $2.5 million. This transaction closed in July, 2011.

During the third quarter of 2013, we obtained the right to execute a clean-up call on the underlying collateral. This event triggered us to consolidate the assets and liabilities of the securitization trust, SASCO on our balance sheet in accordance with ASC 810, Consolidation. As a result, we consolidated $40.5 million of reverse mortgage loans, $5.8 million of cash, $885,000 of MBS and $38.8 million of debt all at fair value. Our existing investment in reverse mortgages was combined with the consolidated reverse mortgage loans for a total of $40.1 million at September 30, 2013. The average loan-to-value for these loans is approximately 45%, the average age of the borrowers is 92 years old and there is, in the view of management, significant overcollateralization in the portfolio.

The value of the reverse mortgages is calculated by a third party model that uses the income approach as described in ASC 820-10-35-32. The model is a present value cash flow model, consistent with ASC 820-10-55-5 which describes the components of a present value measurement. The model incorporates the projected cash flows of the notes (including payouts and collections) and then discounts these cash flows using a rate that is commensurate with the risk adjusted rate. The inputs to the model reflect our expectations of what other market participants would use in pricing this asset in a current transaction and therefore is consistent with ASC 820 that requires an exit price methodology for determining fair value.

To value these securities as of September 30, 2013 we used a proprietary model and actual cash flow information to estimate future cash flows. There are three main drivers of cash flows: 1) Prepayments; 2) House Price Appreciation (HPA) forecasts and 3) Interest Rates.

 

  1) Prepayments – “one year look-back” comparing the actual cash flows to the forecasted cash flows based on the assumptions used. The base case prepayment represents the average payoff rates for proprietary reverse mortgages by borrower age, using approximately ten years of historical data. We have used 50% of the base case forecasted cash flows to reflect recent prepayment activity.

 

  2) House Price Appreciation – Consistent with other reverse mortgage analyses from various market sources, we forecast a 2% decline in housing prices in the next year and a 2% recovery in the following year. We believe this forecast continues to be appropriate given the nature of reverse mortgage collateral and historical under-performance to the broad housing market.

 

  3) Interest Rates –As of September 30, 2013 the forward rates on one month LIBOR are consistent with the assumptions used for future interest rates (one month LIBOR ramping up to 3% over ten years).

The net present value of the projected cash flow depends on the discount rate used. We use a discount rate of 18.7% in valuing expected net cash flows. If the discount rate was decreased by 1%, the net present value would increase by $890,000. If the discount rate was increased by 1%, the net present value would decrease by $850,000.

The fair values listed above are estimates that are subject to adjustments. However, while they are not expected to be materially different than those shown, any material adjustments to the estimates will be reflected, retroactively, as of the date of the transaction.

6. 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.

 

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Table of Contents

As a result of the consolidation for accounting purposes of the SASCO reverse mortgage securitization trust during the third quarter of 2013, a deferred tax asset (“DTA”) of approximately $6.7 million was recorded. However, because SASCO is not consolidated for income tax purposes, a full valuation allowance was also recorded on this DTA due to the uncertainty of its realization, as realization is dependent on future taxable income, which is anticipated upon consolidation for income tax purposes. We are taking steps to unwind the SASCO tax structure which will permit tax consolidation, at which point the uncertainty surrounding the realization of the DTA will be eliminated. Accordingly, if and when we complete this restructuring, we expect to remove the $6.7 million valuation allowance which will result in an income tax benefit through earnings.

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.

There were no unrecognized tax benefits as of December 31, 2012. We record interest and penalties on potential income tax deficiencies as income tax expense. Our federal and state tax returns for the 2009 through 2012 tax years are subject to examination as of September 30, 2013. During the current quarter, the audit of our 2010 federal tax return was completed by the Internal Revenue Service. We recorded a $200,000 tax benefit as a result of settling this audit. No state income tax return examinations are currently in process.

7. SEGMENT INFORMATION

In accordance with 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.

The WSFS Bank segment provides financial products to commercial and retail customers through its 51 offices located in Delaware (41), 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 Wealth Management division provides a broad array of fiduciary, investment management, credit and deposit products to clients through four businesses. WSFS Investment Group, Inc. provides insurance and brokerage products primarily to our retail banking clients. Cypress Capital Management, LLC is a registered investment advisor with over $609 million in assets under management. Cypress’ primary market segment is high net worth individuals, offering a ‘balanced’ investment style focused on preservation of capital and current income. Christiana Trust, with $8.1 billion in assets under administration, provides fiduciary and investment services to personal trust clients, and trustee, agency, custodial and commercial domicile services to corporate and institutional clients. WSFS Private Banking serves high net worth clients by delivering credit and deposit products and partnering with Cypress, Christiana and WSFS Investment Group to deliver investment management and fiduciary products and services.

 

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Table of Contents

An operating segment is a component of an enterprise that engages in business activities from which it may earn revenues and incur expenses, whose operating results are regularly reviewed by the enterprise’s chief operating decision makers to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. We evaluate performance based on pretax ordinary income relative to resources used, and allocate resources based on these results. The accounting policies applicable to our segments are those that apply to our preparation of the accompanying Consolidated Financial Statements. Segment information for the three and nine months ended September 30, 2013 and 2012 follows:

For the three months ended September 30, 2013

 

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

External customer revenues:

          

Interest income

   $ 35,171      $ —        $ 1,945     $ 37,116  

Noninterest income

     12,449        6,360        3,933       22,742  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total external customer revenues

     47,620        6,360        5,878       59,858  
  

 

 

    

 

 

    

 

 

   

 

 

 

Inter-segment revenues:

          

Interest income

     906        —          1,477       2,383  

Noninterest income

     1,689        222        28       1,939  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total inter-segment revenues

     2,595        222        1,505       4,322  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total revenue

     50,215        6,582        7,383       64,180  
  

 

 

    

 

 

    

 

 

   

 

 

 

External customer expenses:

          

Interest expense

     3,587        —          123       3,710  

Noninterest expenses

     26,510        3,470        2,829       32,809  

Provision for loan loss

     2,263        —          (294     1,969  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total external customer expenses

     32,360        3,470        2,658       38,488  
  

 

 

    

 

 

    

 

 

   

 

 

 

Inter-segment expenses

          

Interest expense

     1,477        400        506       2,383  

Noninterest expenses

     250        561        1,128       1,939  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total inter-segment expenses

     1,727        961        1,634       4,322  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total expenses

     34,087        4,431        4,292       42,810  
  

 

 

    

 

 

    

 

 

   

 

 

 

Income before taxes

   $ 16,128      $ 2,151      $ 3,091     $ 21,370  

Provision for income taxes

             7,210  
          

 

 

 

Consolidated net income

           $ 14,160  
          

 

 

 

Capital expenditures

   $ 460      $ 131      $ —       $ 591  
  

 

 

    

 

 

    

 

 

   

 

 

 

As of September 30, 2013

          

Statement of Condition

          

Cash and cash equivalents

   $ 76,785      $ 422,544      $ 3,116     $ 502,445  

Other segment assets

     3,756,277        1,995        181,939       3,940,211  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total segment assets

   $ 3,833,062      $ 424,539      $ 185,055     $ 4,442,656  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

For the three months ended September 30, 2012

 

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

External customer revenues:

           

Interest income

   $ 34,475      $ —        $ 2,039      $ 36,514  

Noninterest income

     11,686        4,707        3,355        19,748  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total external customer revenues

     46,161        4,707        5,394        56,262  
  

 

 

    

 

 

    

 

 

    

 

 

 

Inter-segment revenues:

           

Interest income

     944        —          1,358        2,302  

Noninterest income

     2,122        148        24        2,294  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total inter-segment revenues

     3,066        148        1,382        4,596  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

     49,227        4,855        6,776        60,858  
  

 

 

    

 

 

    

 

 

    

 

 

 

External customer expenses:

           

Interest expense

     5,377        —          244        5,621  

Noninterest expenses

     27,300        2,113        2,740        32,153  

Provision for loan loss

     2,997        —          754        3,751  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total external customer expenses

     35,674        2,113        3,738        41,525  
  

 

 

    

 

 

    

 

 

    

 

 

 

Inter-segment expenses

           

Interest expense

     1,358        338        606        2,302  

Noninterest expenses

     172        586        1,536        2,294  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total inter-segment expenses

     1,530        924        2,142        4,596  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total expenses

     37,204        3,037        5,880        46,121  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) before taxes

   $ 12,023      $ 1,818      $ 896      $ 14,737  

Provision for income taxes

              4,758  
           

 

 

 

Consolidated net income

            $ 9,979  
           

 

 

 

Capital expenditures

   $ 1,289      $ 311      $ 3      $ 1,603  
  

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2012

           

Statement of Condition

           

Cash and cash equivalents

   $ 68,419      $ 430,382      $ 2,086      $ 500,887  

Other segment assets

     3,683,073        1,605        189,583        3,874,261  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total segment assets

   $ 3,751,492      $ 431,987      $ 191,669      $ 4,375,148  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

For the nine months ended September 30, 2013

 

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

External customer revenues:

          

Interest income

   $ 102,732      $ —        $ 5,857     $ 108,589  

Noninterest income

     31,009        17,412        11,934       60,355  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total external customer revenues

     133,741        17,412        17,791       168,944  
  

 

 

    

 

 

    

 

 

   

 

 

 

Inter-segment revenues:

          

Interest income

     2,723        —          4,276       6,999  

Noninterest income

     5,040        645        82       5,767  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total inter-segment revenues

     7,763        645        4,358       12,766  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total revenue

     141,504        18,057        22,149       181,710  
  

 

 

    

 

 

    

 

 

   

 

 

 

External customer expenses:

          

Interest expense

     11,120        —          427       11,547  

Noninterest expenses

     79,671        9,629        9,031       98,331  

Provision for loan loss

     6,044        —          (164     5,880  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total external customer expenses

     96,835        9,629        9,294       115,758  
  

 

 

    

 

 

    

 

 

   

 

 

 

Inter-segment expenses

          

Interest expense

     4,276        1,176        1,547       6,999  

Noninterest expenses

     727        1,649        3,391       5,767  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total inter-segment expenses

     5,003        2,825        4,938       12,766  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total expenses

     101,838        12,454        14,232       128,524  
  

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) before taxes

   $ 39,666      $ 5,603      $ 7,917     $ 53,186  

Provision for income taxes

             18,378  
          

 

 

 

Consolidated net income

           $ 34,808  
          

 

 

 

Capital expenditures

   $ 1,505      $ 591      $ —       $ 2,096  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

For the nine months ended September 30, 2012

 

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

External customer revenues:

           

Interest income

   $ 107,199      $ —        $ 6,301      $ 113,500  

Noninterest income

     42,238        13,254        10,006        65,498  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total external customer revenues

     149,437        13,254        16,307        178,998  
  

 

 

    

 

 

    

 

 

    

 

 

 

Inter-segment revenues:

           

Interest income

     3,099        —          4,344        7,443  

Noninterest income

     6,368        568        79        7,015  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total inter-segment revenues

     9,467        568        4,423        14,458  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

     158,904        13,822        20,730        193,456  
  

 

 

    

 

 

    

 

 

    

 

 

 

External customer expenses:

           

Interest expense

     17,330        —          669        17,999  

Noninterest expenses

     81,267        6,628        8,264        96,159  

Provision for loan loss

     26,786        —          1,593        28,379  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total external customer expenses

     125,383        6,628        10,526        142,537  
  

 

 

    

 

 

    

 

 

    

 

 

 

Inter-segment expenses

           

Interest expense

     4,344        1,008        2,091        7,443  

Noninterest expenses

     647        1,711        4,657        7,015  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total inter-segment expenses

     4,991        2,719        6,748        14,458  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total expenses

     130,374        9,347        17,274        156,995  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) before taxes

   $ 28,530      $ 4,475      $ 3,456      $ 36,461  

Provision for income taxes

              12,708  
           

 

 

 

Consolidated net income

            $ 23,753  
           

 

 

 

Capital expenditures

   $ 5,406      $ 321      $ 20      $ 5,747  
  

 

 

    

 

 

    

 

 

    

 

 

 

8. FAIR VALUE DISCLOSURES OF FINANCIAL ASSETS AND LIABILITIES

FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES

ASC 820-10, Fair Value Measurements and Disclosure, 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.

 

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Table of Contents

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 September 30, 2013 (there were no material liabilities measured at fair value):

 

     Quoted
Prices in
Active
Markets for
Identical
Asset
     Significant
Other
Observable
Inputs
     Significant
Unobservable
Inputs
     Total  

Description

   (Level 1)      (Level 2)      (Level 3)      Fair Value  
     (in Thousands)  

Assets Measured at Fair Value on a Recurring Basis

           

Available-for-sale securities:

           

Collateralized mortgage obligations

   $ —         $ 108,470      $ —         $ 108,470  

FNMA

     —           368,249        —           368,249  

FHLMC

     —           106,123        —           106,123  

GNMA

     —           98,954        —           98,954  

U.S. Government and agencies

     —           41,798        —           41,798  

State and political subdivisions

     —           83,332        —           83,332  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets measured at fair value on a recurring basis

   $ —         $ 806,926      $ —         $ 806,926  

Liabilities Measured at Fair Value on a nonrecurring Basis

           

Bonds payable

   $ —         $ 26,340       $ —         $ 26,340   

Assets Measured at Fair Value on a Nonrecurring Basis

           

Other real estate owned

   $ —         $ —         $ 7,163      $ 7,163  

Reverse mortgage loans

     —           —           40,095        40,095  

Impaired loans (collateral dependent)

     —           —           43,379        43,379  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets measured at fair value on a nonrecurring basis

   $ —         $ —         $ 90,637      $ 90,637   

 

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Table of Contents

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

 

     Quoted
Prices in
Active
Markets for
Identical
Asset
     Significant
Other
Observable
Inputs
     Significant
Unobservable
Inputs
    Total  

Description

   (Level 1)      (Level 2)      (Level 3)     Fair Value  
     (in Thousands)  

Assets Measured at Fair Value on a Recurring Basis

          

Available-for-sale securities:

          

Collateralized mortgage obligations

   $ —         $ 252,300      $ 7,096     $ 259,396  

FNMA

     —           406,255        —          406,255  

FHLMC

     —           59,650        —          59,650  

GNMA

     —           132,455        —          132,455  

U.S. Government and agencies

     —           46,990        —          46,990  

State and political subdivisions

     —           3,209        —          3,209  

Reverse mortgage loans

     —           —           (457     (457

Trading Securities

     —           —           12,590       12,590  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total assets measured at fair value on a recurring basis

   $ —         $ 900,859      $ 19,229     $ 920,088  

Assets Measured at Fair Value on a Nonrecurring Basis

          

Other real estate owned

   $ —         $ —         $ 4,622     $ 4,622  

Impaired loans

     —           —           52,904       52,904  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total assets measured at fair value on a nonrecurring basis

   $ —         $ —         $ 57,526     $ 57,526  

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

Available-for-sale securities. As of September 30, 2013, securities classified as available-for-sale were reported at fair value using both Level 2 and Level 3 inputs. Included in the Level 2 total were approximately $41.8 million in Federal Agency debentures, $681.8 million in Federal Agency MBS, and $83.3 million in municipal bonds. Agency and MBS securities were predominately AAA-rated. We believe that this Level 2 designation is appropriate for these securities under FASB ASC 820-10 as, with almost all fixed income securities, none are exchange traded, and all are priced by correlation to observable market data. For these securities we obtain fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, U.S. government and agency yield curves, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the security’s terms and conditions, among other factors. Included in the Level 3 total at December 31, 2012, was a small equity tranche of a reverse mortgage security purchased on July 15, 2011. This security was Level 3 because there was no active market for this security and no observable inputs that reflected quoted prices for identical assets in active markets (Level 1) or inputs other than quoted prices that were observable for the asset through corroboration with observable market data (Level 2). In order to establish the fair value for a Level 3 asset a “mark-to-model” was developed using the income approach described in FASB ASC 820-10-35-32 and was similar to the methodology used to value our trading securities described below. As of September 30, 2013, we consolidated the assets and liabilities of the securitization trust which resulted in these securities are being eliminated in consolidation. For additional information regarding these transactions, see Note 5, Reverse Mortgages and Related Assets and the discussion of reverse mortgages in this section.

 

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Table of Contents

Trading securities. The amount included in the trading securities category at December 31, 2012 represented the fair value of a BBB-rated tranche of a reverse mortgage security. There was never an active market for these securities. As such, we classified these trading securities as Level 3 under FASB ASC 820-10. As prescribed by FASB ASC 820-10 management used various observable and unobservable inputs to develop a range of likely fair value prices where this security would be exchanged in an orderly transaction between market participants at the measurement date. The unobservable inputs reflected management’s assumptions about the assumptions that market participants would use in pricing this asset. Included in these inputs were the median of a selection of other BBB-rated securities as well as quoted market prices from higher rated tranches of this asset class. The unobservable inputs consisted of prepayments, house price appreciation and interest rates. Management completed a sensitivity analysis at December 31, 2012 which showed any increase or decrease in these inputs would not have had a significant impact on the fair value of these assets. As a result, the value assigned to this security was determined primarily through a discounted cash flow analysis. All of these assumptions required a significant degree of management judgment. As of September 30, 2013, we consolidated the assets and liabilities of the securitization trust which resulted in these securities being completely eliminated in consolidation. For additional information regarding these transactions, see Note 5, Reverse Mortgages and Related Assets and the discussion of reverse mortgages in this section.

Reverse Mortgages. Reverse mortgage loans are valued using a present value cash flow model that incorporates the projected cash flows of the notes (including payouts and collections) and then discounts these cash flows using a rate that is commensurate with the risk adjusted rate. The inputs to the model reflect our expectations of what other market participants would use in pricing these assets in a current transaction. Due to the significant amount of management judgment and the unobservable input calculations, these reverse mortgages have been classified as Level 3. For additional information regarding these transactions, see Note 5, Reverse Mortgages and Related Assets and the discussion of reverse mortgages in this section.

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

 

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

Balance at December 31, 2011

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

Total net income for the period included in net income

     33       12       —          45  

Purchases, sales, issuances, and settlements, net

     —          177       —          177  

Mark-to-market adjustment

     125       —          3,160       3,285  
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2012

   $ 12,590     $ (457   $ 7,096     $ 19,229  

Mark-to-market adjustment

     (125     —          —          (125

Reverse mortgage securitization trust consolidation

     (12,465     457        (7,096     (19,104
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2013

   $ —        $ —        $ —        $ —