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EX-32 - EXHIBIT 32 - WSFS FINANCIAL CORPex_32.htm
EX-31.1 - EXHIBIT 31.1 - WSFS FINANCIAL CORPex_31-1.htm
EX-31.2 - EXHIBIT 31.2 - WSFS FINANCIAL CORPex_31-2.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
March 31, 2011
     
OR
     
o  
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 o
 
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_____ 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 o Accelerated filer x
Non-accelerated filer o Smaller reporting company o
(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 o No x
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of May 3, 2011:
 
Common Stock, par value $.01 per share
 
8,596,821
(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 Months
   
   
Ended March 31, 2011 and 2010
 
3
         
   
Consolidated Statements of Condition as of  March 31, 2011
   
   
and December 31, 2010
 
4
         
   
Consolidated Statements of Cash Flows for the Three  Months Ended
   
   
March 31, 2011 and 2010
 
5
         
   
Notes to the Consolidated Financial Statements for the Three
   
   
Months Ended March 31, 2011 and  2010
 
6
         
Item 2.
 
Management’s Discussion and Analysis of Financial Condition
 
28
   
and Results of Operations
   
         
Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
 
40
         
Item 4.
 
Controls and Procedures
 
40
         
         
PART II. Other Information
         
Item 1.
 
Legal Proceedings
 
40
         
Item 1A.
 
Risk Factors
 
40
         
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
40
         
Item 3.
 
Defaults upon Senior Securities
 
40
         
Item 4.
 
[Reserved]
 
40
         
Item 5.
 
Other Information
 
40
         
Item 6.
 
Exhibits
 
40
         
Signatures
     
41
         
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
   

 
2

 

WSFS FINANCIAL CORPORATION
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
 
 
   
 
 
 
 
Three months ended March 31,
 
 
 
2011
   
2010
 
 
 
(Unaudited)
 
 
 
(In Thousands)
 
Interest income:
 
 
   
 
 
Interest and fees on loans
  $ 31,956     $ 31,223  
Interest on mortgage-backed securities
    7,026       9,032  
Interest and dividends on investment securities
    170       303  
 
    39,152       40,558  
Interest expense:
               
Interest on deposits
    5,223       6,294  
Interest on Federal Home Loan Bank advances
    2,727       3,977  
Interest on trust preferred borrowings
    336       329  
Interest on other borrowings
    612       615  
 
    8,898       11,215  
 
               
Net interest income
    30,254       29,343  
Provision for loan losses
    5,908       11,410  
Net interest income after provision for loan losses
    24,346       17,933  
 
               
Noninterest income:
               
Credit/debit card and ATM income
    4,740       4,370  
Deposit service charges
    3,564       3,879  
Fiduciary and investment management income
    2,827       1,065  
Loan fee income
    685       680  
Mortgage banking activities, net
    547       252  
Bank owned life insurance income
    179       196  
Security gains, net
    415       -  
Other income
    682       699  
 
    13,639       11,141  
Noninterest expenses:
               
Salaries, benefits and other compensation
    14,816       11,986  
Occupancy expense
    2,838       2,562  
Loan workout and OREO expenses
    2,483       1,097  
FDIC expenses
    1,764       1,643  
Equipment expense
    1,614       1,469  
Data processing and operations expenses
    1,417       1,286  
Professional Fees
    1,123       1,018  
Marketing Expense
    951       704  
Acquisition integration costs
    334       -  
Non-routine ATM loss
    -       4,491  
Other operating expense
    4,047       3,377  
 
    31,387       29,633  
 
               
Income (loss) before taxes
    6,598       (559 )
Income tax provision (benefit)
    2,392       (1,073 )
Net income
    4,206       514  
Dividends on preferred stock and accretion of discount
    692       692  
Net income (loss) allocable to common stockholders
  $ 3,514     $ (178 )
 
               
Earnings (loss) per share:
               
Basic
  $ 0.41     $ (0.03 )
Diluted
  $ 0.40     $ (0.03 )
 
               
The accompanying notes are an integral part of these consolidated Financial Statements.
 

 
3

 

WSFS FINANCIAL CORPORATION
 
CONSOLIDATED STATEMENTS OF CONDITION
 
 
March 31,
   
December 31,
 
 
2011
   
2010
 
 
(Unaudited)
 
 
(In Thousands except for Per Share Data)
 
Assets:
 
 
   
 
 
Cash and due from banks
  $ 65,215     $ 49,932  
Cash in non-owned ATMs
    328,837       326,573  
Federal funds sold
    -       -  
Interest-bearing deposits in other banks
    221       254  
   Total cash and cash equivalents
    394,273       376,759  
Investment securities held-to-maturity
    216       219  
Investment securities available-for-sale including reverse mortgages
    38,378       52,232  
Mortgage-backed securities available-for-sale
    683,619       700,926  
Mortgages-backed securities trading
    12,432       12,432  
Loans held-for-sale
    2,056       14,522  
Loans, net of allowance for loan losses of $56,000 at March 31, 2011
               
  and $60,339 at December 31, 2010
    2,590,071       2,561,368  
Bank owned life insurance
    64,422       64,243  
Stock in Federal Home Loan Bank of Pittsburgh, at cost
    35,659       37,536  
Assets acquired through foreclosure
    8,311       9,024  
Premises and equipment
    32,310       31,870  
Goodwill
    26,777       26,745  
Intangible assets
    7,012       7,307  
Accrued interest receivable and other assets
    56,015       58,335  
 
               
Total assets
  $ 3,951,551     $ 3,953,518  
 
               
Liabilities and Stockholders’ Equity
               
 
               
Liabilities:
               
Deposits:
               
Noninterest-bearing demand
  $ 505,154     $ 468,098  
Interest-bearing demand
    322,749       312,546  
Money market
    684,996       743,808  
Savings
    366,790       255,340  
Time
    471,419       484,864  
Jumbo certificates of deposit – customer
    304,991       297,112  
  Total customer deposits
    2,656,099       2,561,768  
Brokered deposits
    164,267       249,006  
  Total deposits
    2,820,366       2,810,774  
 
               
Federal funds purchased and securities sold under agreements to repurchase
    100,000       100,000  
Federal Home Loan Bank advances
    498,165       488,959  
Trust preferred borrowings
    67,011       67,011  
Other borrowed funds
    68,427       91,636  
Accrued interest payable and other liabilities
    26,665       27,316  
Total liabilities
    3,580,634       3,585,696  
 
               
Stockholders’ Equity:
               
Serial preferred stock $.01 par value, 7,500,000 shares authorized; issued 52,625 at
    1       1  
   March 31,2011 and December 31,2010
               
Common stock $.01 par value, 20,000,000 shares authorized; issued
               
   18,175,313 at March 31,2011 and 18,105,788 at December 31,2010
    182       180  
Capital in excess of par value
    217,089       216,316  
Accumulated other comprehensive income
    6,354       6,524  
Retained earnings
    395,571       393,081  
Treasury stock at cost, 9,580,569 shares at March 31,2011 and December 31,2010
    (248,280 )     (248,280 )
Total stockholders’ equity
    370,917       367,822  
Total liabilities, minority interest and stockholders’ equity
  $ 3,951,551     $ 3,953,518  
 
               
The accompanying notes are an integral part of these Financial Statements.
 

 
4

 

WSFS FINANCIAL CORPORATION
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
 
 
   
 
 
 
 
Three months ended
 
 
March 31,
 
 
 
2011
   
2010
 
 
 
(Unaudited)
 
 
 
(In Thousands)
 
Operating activities:
 
 
   
 
 
Net Income
  $ 4,206     $ 514  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provision for loan losses
    5,908       11,410  
Depreciation, accretion and amortization
    2,349       1,384  
Decrease (increase) in accrued interest receivable and other assets
    2,485       (4,693 )
Non-routine ATM loss
    -       4,491  
Origination of loans held-for-sale
    (27,761 )     (14,814 )
Proceeds from sales of loans held-for-sale
    40,817       18,162  
Gain on mortgage banking activity
    (547 )     (252 )
Gain on sale of investments, net
    (415 )     -  
Stock-based compensation expense, net of tax benefit recognized
    306       204  
Excess tax benefits from share-based payment arrangements
    (55 )     (79 )
Decrease in accrued interest payable and other liabilities
    (534 )     (292 )
Loss on sale of assets acquired through foreclosure and valuation adjustments
    2,100       226  
Increase in value of bank-owned life insurance
    (179 )     (196 )
Decrease (increase) in capitalized interest, net
    44       (13 )
Net cash provided by operating activities
    28,724       16,052  
 
               
Investing activities:
               
Maturities and calls of investment securities
    7,557       500  
Sale of investment securities available for sale
    6,124       -  
Sales of mortgage-backed securities available-for  sale
    39,992       -  
Repayments of mortgage-backed securities available-for-sale
    49,817       46,372  
Purchases of mortgage-backed securities available-for-sale
    (72,789 )     (116,297 )
Disbursements for reverse mortgages
    (43 )     (49 )
Net increase in loans
    (38,481 )     (3,919 )
Net decrease in stock of Federal Home Loan Bank of Pittsburgh
    1,877       -  
Sales of assets acquired through foreclosure, net
    2,253       1,627  
Investment in premises and equipment, net
    (1,884 )     (1,184 )
Net cash used for investing activities
    (5,577 )     (72,950 )
 
               
Financing activities:
               
Net increase in demand and saving deposits
    76,688       69,603  
Net (decrease) increase in time deposits
    (5,567 )     5,355  
Decrease in brokered deposits
    (84,764 )     (18,066 )
Proceeds from federal funds purchased and securities sold under agreement to repurchase
    4,500,000       4,435,000  
Repayments of federal funds purchased and securities sold under agreement to repurchase
    (4,500,000 )     (4,435,000 )
Proceeds of FHLB advances
    5,577,871       6,321,940  
Repayments of FHLB advances
    (5,568,665 )     (6,319,630 )
Dividends paid
    (1,686 )     (1,507 )
Issuance of common stock and exercise of employee stock options
    435       375  
Excess tax benefits from share-based payment arrangements
    55       79  
Net cash (used for) provided by financing activities
    (5,633 )     58,149  
 
               
Increase in cash and cash equivalents
    17,514       1,251  
Cash and cash equivalents at beginning of period
    376,759       321,749  
Cash and cash equivalents at end of period
  $ 394,273     $ 323,000  
 
               
Supplemental Disclosure of Cash Flow Information:
               
Cash paid for interest during the period
  $ 6,920     $ 9,278  
Cash paid for income taxes, net
    214       1,008  
Loans transferred to assets acquired through foreclosure
    3,641       3,616  
Net change in other comprehensive income
    (170 )     5,129  
 
               
The accompanying notes are an integral part of these consolidated Financial Statements.
 
 
 
5

 
WSFS FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THREE MONTHS ENDED MARCH 31, 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”) and its wholly owned subsidiary, Cypress Capital Management, LLC (“Cypress”). We also have three unconsolidated affiliates, WSFS Capital Trust III, WSFS Capital Trust IV, and WSFS Capital Trust V (“the Trusts”). WSFS Bank has two fully-owned subsidiaries, WSFS Investment Group, Inc. (“WIG”) and Monarch Entity Services LLC (“Monarch”). WIG markets various third-party insurance and securities products to Bank customers through the Bank’s retail banking system. Monarch provides commercial domicile services which include employees, directors, sublease of office facilities and registered agent services in Delaware and Nevada.  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 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 44 offices located in Delaware (37), Pennsylvania (5), Virginia (1) and Nevada (1) and through our website at www.wsfsbank.com.

Although our current estimates contemplate current economic conditions and how we expect them to change in the future, for the remainder of 2011, it is reasonably possible that actual conditions may be worse than anticipated in those estimates, which could materially affect our results of operations and financial condition. Amounts subject to significant estimates are items such as the allowance for loan losses and lending related commitments, goodwill, intangible assets, post-retirement obligations, the fair value of financial instruments and other-than-temporary impairments. Among other effects, such changes could result in future 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 expense.

Our accounting and reporting policies conform with U.S. generally accepted accounting principles and prevailing practices within the banking industry for interim financial information and Rule 10-01 of the Securities and Exchange Commission (“SEC”) Regulation S-X.  Rule 10-01 of Regulation S-X does not require us to include all information and notes for complete financial statements and prevailing practices within the banking industry. Operating results for the three month period ended March 31, 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 notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2010, as filed with the SEC.

Accounting for Stock-Based Compensation

Stock-based compensation is accounted for in accordance with FASB ASC 718, Stock Compensation (formerly SFAS No. 123R, Share-Based Payment).  After shareholder approval in 2005, the 1997 Stock Option Plan (“1997 Plan”) was replaced by the 2005 Incentive Plan (“2005 Plan”).  No future awards may be granted under the 1997 Plan, however, we still have options outstanding under the 1997 plan for officers, directors and Associates of the Company and its subsidiaries.  The 2005 Plan will terminate on the tenth anniversary of its effective date, after which no awards may be granted.  We have stock options outstanding under both plans (collectively, “Stock Incentive Plans”).  As of March 31, 2011, the number of shares reserved for issuance under the 2005 Plan is 1,197,000.
 
The Stock Incentive Plans provide for the granting of incentive stock options as defined in Section 422 of the Internal Revenue Code as well as non-incentive stock options (collectively, “stock options”). Additionally, the 2005 Plan provides for the granting of stock appreciation rights, performance awards, restricted stock and restricted stock

 
6

 

unit awards, deferred stock units, dividend equivalents, other stock-based awards and cash awards. All Stock Options are to be granted at not less than the market price of our common stock on the date of the grant. All Stock Options granted during 2011 vest in 25% per annum increments, start to become exercisable one year from the grant date and expire five years from the grant date. Generally, all awards become immediately exercisable in the event of a change in control, as defined within the Stock Incentive Plans. In addition, the Black-Scholes option-pricing model is used to determine the grant date fair value of stock options.  At March 31, 2011, we had 230,540 remaining shares available for issuance under the 2005 Plan.

Stock Options

The following table provides information about our stock options outstanding for the three months ended March 31, 2011:
 
 
March 31, 2011
 
 
 
 
   
Weighted-
 
 
 
 
   
Average
 
 
 
Shares
   
Exercise Price
 
Stock Options:
 
 
   
 
 
Outstanding at beginning of period
    566,323     $ 42.84  
Granted
    50,723       44.91  
Exercised
    (7,161 )     22.34  
Forfeited
    (14,348 )     46.13  
Outstanding at end of period
    595,537       43.18  
 
               
Exercisable at end of period
    454,294     $ 44.28  
 
               
Weighted-average fair value
               
of awards granted
  $ 14.29          

The following table provides information about our unvested stock options outstanding for the three months ended March 31, 2011:
 
March 31, 2011
 
 
 
 
Weighted-
 
 
 
 
Average
 
 
Shares
 
Exercise Price
 
Stock Options:
 
 
   
 
 
Unvested at beginning of period
    123,486     $ 45.04  
Granted
    50,723       44.91  
Vested
    (24,977 )     26.96  
Forfeited
    (7,989 )     39.70  
Unvested at end of period
    141,243     $ 39.66  

The total amount of compensation cost to be recognized relating to non-vested stock options as of March 31, 2011 was $941,000.  The weighted-average period over which they are expected to be recognized is 2.6 years.  We issue new shares upon the exercise of options.

Restricted Stock

We issued 39,383 restricted stock units and awards during the first quarter of 2011.   These awards generally vest over a four year period. For these stock awards made to certain executive officers, there are additional vesting limitations under the Emergency Economic Stabilization Act of 2008 (“EESA”).

 
7

 
Performance Stock Awards

The Board approved a plan in which Marvin N. Schoenhals, Chairman of the Board, was granted 22,250 shares of restricted stock effective January 3, 2011 with a five-year performance vesting schedule starting at the end of the second year.  These awards are based on acquiring new business relationships in which Mr. Schoenhals has played a meaningful role in helping us establish the new business.  These shares are subject to vesting in whole or in part if pre-tax contributions achieved over a two year period result in at least a 50% return on investment of the cost of the restricted stock.

For the three months ended March 31, 2011, the effect of stock-based compensation, including stock options, restricted stock, and performance stock, on salaries, benefits and other compensation was $525,000 pre-tax ($437,000 after tax) or $0.05 per share.

2. EARNINGS PER SHARE

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

 
 
For the three months ended
 
 
 
 
  March 31,  
 
 
2011
   
2010
 
 
 
(In Thousands, Except Per Share Data)
 
Numerator:
 
 
   
 
 
Net income (loss) allocable to common stockholders
  $ 3,514     $ (178 )
 
               
Denominator:
               
Denominator for basic earnings per share - weighted average shares
    8,576       7,084  
Effect of dilutive employee stock options and warrants
    154       -  
Denominator for diluted earnings per share – adjusted weighted
    8,730       7,084  
average shares and assumed exercise
 
               
Earnings per share:
               
Basic:
               
    Net income (loss) allocable to common shareholders
  $ 0.41      $ (0.03 )
Diluted:
               
    Net income (loss) allocable to common shareholders
  $ 0.40      $ (0.03 )
 
               
Outstanding common stock equivalents having no dilutive effect
    304       795  

For the three months ended March 31, 2010, all stock options were excluded from the computation of diluted net loss per common share because the effect would have been antidilutive.
 
 
8

 

3.  INVESTMENT SECURITIES

The following tables detail the amortized cost and the estimated fair value of our investment securities held-to-maturity and securities available-for-sale (which includes reverse mortgages):
 
 
 
 
   
Gross
   
Gross
   
 
 
 
 
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
 
 
Cost
   
Gains
   
Losses
   
Value
 
 
 
(In Thousands)
 
Available-for-sale securities:
 
 
   
 
   
 
   
 
 
 
 
 
   
 
   
 
   
 
 
March 31, 2011:
 
 
   
 
   
 
   
 
 
Reverse mortgages
  $ (685 )   $     $     $ (685 )
U.S. Government and government
    36,657       220       (169 )     36,708  
  sponsored enterprises ("GSE")
                               
State and political subdivisions
    2,329       29       (3 )     2,355  
 
  $ 38,301     $ 249     $ (172 )   $ 38,378  
December 31, 2010:
                               
Reverse mortgages
  $ (686 )   $     $     $ (686 )
U.S. Government and 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:
                               
 
                               
March 31, 2011:
                               
State and political subdivisions
  $ 216     $     $ (22 )   $ 194  
 
                               
December 31, 2010:
                               
State and political subdivisions
  $ 219     $     $ (23 )   $ 196  
 
                               
Securities with book values aggregating $33.6 million at March 31, 2011 were specifically pledged as collateral for the Bank’s Treasury Tax and Loan account with the Federal Reserve Bank, securities sold under agreement to repurchase, and 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 March 31, 2011 and December 31, 2010 were as follows:
 
Held-to-Maturity
 
Available-for Sale
 
 
Amortized
 
Fair
 
Amortized
 
Fair
 
 
Cost
 
Value
 
Cost
 
Value
 
 
(In Thousands)
 
March 31, 2011
 
 
 
 
 
 
 
 
Within one year (1)
  $     $     $ 13,498     $ 13,652  
After one year but within five years
                24,474       24,399  
After five years but within ten years
                       
After ten years
    216       194       329       327  
 
  $ 216     $ 194     $ 38,301     $ 38,378  
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 $6.1 million of investment securities classified as available-for-sale during the first quarter 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 quarter of 2010 and, as a result, there were no net gains or losses realized during the first quarter of 2010. The cost basis for investment security sales was based on the specific identification method.  Investment securities totaling $330,000 and $720,000 were called by their issuers during the first quarter of 2011 and 2010, respectively.

At March 31, 2011, we owned investment securities totaling $17.0 million where the amortized cost basis exceeded the fair value. Total unrealized losses on those securities were $194,000 at March 31, 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 $98,000 have been impaired for 12 months or longer. We have determined that these securities were not other than temporarily impaired as of March 31, 2011 or December 31, 2010.  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 not to sell 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, fair value by investment category and length of time individual securities have been in a continuous unrealized loss position at March 31, 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
$
 
$
 
$
98 
 
$
22 
 
$
98 
 
$
22 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
State and political subdivisions
 
471 
 
 
 
 
 
 
 
 
471 
 
 
U.S Government and GSE
 
16,463 
 
 
169 
 
 
 
 
 
 
16,463 
 
 
169 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total temporarily impaired investments
$
16,934 
 
$
172 
 
$
98 
 
$
22 
 
$
17,032 
 
$
194 
 
The table below shows our investment securities’ gross unrealized losses, 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 GSE
    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 our mortgage-backed securities:

 
 
 
   
Gross
   
Gross
   
 
 
 
 
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
 
 
Cost
   
Gains
   
Losses
   
Value
 
 
 
(In Thousands)
 
Available-for-sale securities:
 
 
   
 
   
 
   
 
 
 
 
 
   
 
   
 
   
 
 
March 31, 2011:
 
 
   
 
   
 
   
 
 
Collateralized mortgage obligations (“CMO”) (1)
  $ 423,923     $ 9,872     $ (751 )   $ 433,044  
Federal National Mortgage Association (“FNMA”)
    130,968       1,129       (650 )     131,447  
Federal Home Loan Mortgage Corporation (“FHLMC”)
    54,683       786       (270 )     55,199  
Government National Mortgage Association (“GNMA”)
    63,112       1,360       (543 )     63,929  
 
  $ 672,686     $ 13,147     $ (2,214 )   $ 683,619  
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:
                               
 
                               
March 31, 2011:
                               
CMO
  $ 12,432     $     $     $ 12,432  
 
                               
December 31, 2010:
                               
CMO
  $ 12,432     $     $     $ 12,432  
 
                               
(1) Includes GSE CMO’s classified as available-for-sale.
 

The portfolio of available-for-sale mortgage-backed securities is comprised of 177 bonds with an amortized cost of $672.7 million of both GSE ($359.3 million) and non-GSE ($313.4 million) bonds.  All bonds were AAA-rated at time of purchase; only one bond with a value of $112,432 is now rated below AAA.  Downgraded bonds were re-evaluated at March 31, 2011.  The result of this evaluation shows no other-than-temporary impairment for the three months ended March 31, 2011.  The weighted average duration of the mortgage-backed securities was 2.5 years at March 31, 2011.

At March 31, 2011, mortgage-backed securities with market values aggregating $353.5 million were pledged as collateral for retail customer repurchase agreements and municipal deposits. From time to time, mortgage-backed securities are also pledged as collateral for Federal Home Loan Bank (FHLB) borrowings and other obligations. The fair value of these FHLB pledged mortgage-backed securities was $51.3 million at March 31, 2011.

During the first three months of 2011, we sold mortgage-backed securities available-for-sale of $40.0 million with net gains of $305,000.  The cost basis of all mortgage-backed securities sales is based on the specific identification method. There were no sales of mortgage-backed securities available for sale during the first three months of 2010.

 
11

 

Mortgage-backed securities have expected maturities that differ from their contractual maturities.  These differences arise because borrowers may have the right to call or prepay obligations with or without a prepayment penalty.
 
At March 31, 2011, we owned mortgage-backed securities totaling $223.4 million where the amortized cost basis exceeded fair value.  Total unrealized losses on these securities were $2.2 million at March 31, 2011.  This temporary impairment is the result of changes in market interest rates and a lack of liquidity 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 March 31, 2011 or December 31, 2010.  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, or 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 that individual securities have been in continuous unrealized loss position at March 31, 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
  $ 96,130     $ 751     $     $     $ 96,130     $ 751  
    FNMA
    80,150       650                   80,150       650  
    FHLMC
    23,785       270                   23,785       270  
    GNMA
    23,353       543                   23,353       543  
 
                                               
Total temporarily impaired MBS
  $ 223,418     $ 2,214     $           $ 223,418     $ 2,214  

The table below shows our mortgage-backed securities’ gross unrealized losses, 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 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 2011 and 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 March 31, 2011.
 
 
12

 
 
5. ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY INFORMATION

Allowance for Loan Losses

We maintain allowances for loan losses and charge losses to these allowances when such losses are 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 months ended March 31, 2011:
 
 
 
   
Commercial
   
 
   
 
   
 
   
 
   
 
 
 
 
Commercial
   
Mortgages
   
Construction
   
Residential
   
Consumer
   
Total
   
 
 
Allowance for loan losses
 
(In thousands)
   
 
 
 
 
 
   
 
   
 
   
 
   
 
   
 
   
 
 
Beginning balance
  $ 26,480     $ 10,564     $ 10,019     $ 4,028     $ 9,248     $ 60,339    
 
 
   Charge-offs
    (3,365 )     (247 )     (5,226 )     (406 )     (1,756 )     (11,000 )  
 
 
   Recoveries
    127       8       391       85       142       753    
 
 
   Provision
    1,294       1,541       1,474       56       1,543       5,908    
 
 
Ending balance
  $ 24,536     $ 11,866     $ 6,658     $ 3,763     $ 9,177     $ 56,000    
 
 
 
                                                 
 
 
Period-end allowance allocated to:
                                                 
 
 
   Specific reserves(1)
  $ 4,169     $ 3,297     $ 1,393     $ 778     $ 121     $ 9,758    
 
 
   General reserves(2)
    20,367       8,569       5,265       2,985       9,056       46,242    
 
 
Ending balance
  $ 24,536     $ 11,866     $ 6,658     $ 3,763     $ 9,177     $ 56,000    
 
 
 
                                                 
 
 
Period-end loan balances evaluated for:
                                                 
 
 
   Specific reserves(1)
  $ 23,252     $ 15,032     $ 30,942     $ 18,501     $ 5,548     $ 93,275  (3)        
   General reserves(2)
    1,263,725       607,209       98,090       284,944       298,828       2,552,796          
Ending balance
  $ 1,286,977     $ 622,241     $ 129,032     $ 303,445     $ 304,376     $ 2,646,071          
 
                                                       
 
         
 
(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 March 31, 2011, represents accruing troubled debt restructured loans of $7.6 million.

 
13

 
Non-Accrual and Past Due Loans

The following tables show our nonaccrual and past due loans at the dates indicated:
 
                                         Greater        
 
 
30–59
   
60–89
   
Greater
   
Total
   
 
   
 
   
than 90
   
 
 
March 31, 2011
 
Days
   
Days
   
than
   
Past
   
 
   
Total
   
Days and
   
Nonaccrual
 
(In Thousands)
 
Past Due
   
Past Due
   
90 Days
   
Due (1)
   
Current
   
Loans
   
Accruing
   
Loans
 
 
 
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 
Commercial
  $ 9,532     $ 2,386     $ 10,230     $ 22,148     $ 1,264,829     $ 1,286,977     $ 424     $ 23,300  
Commercial mortgages
    5,415       5,765       2,348       13,528       608,713       622,241       -       15,229  
Construction
    906       6,064       11,361       18,331       110,701       129,032       -       30,942  
Residential
    5,631       2,960       9,286       17,877       285,568       303,445       576       12,250  
Consumer
    1,353       770       939       3,062       301,314       304,376       -       4,153  
 
                                                               
Total
  $ 22,837     $ 17,945     $ 34,164     $ 74,946     $ 2,571,125     $ 2,646,071     $ 1,000     $ 85,874  
% of Total Loans
    0.86 %     0.68 %     1.29 %     2.83 %     97.17 %     100 %     0.04 %     3.25 %
 
                                                               
                                                 Greater          
 
   30–59        60–89      
Greater
     Total                      
than 90
         
December 31, 2010
 
Days
   
Days
   
than
   
Past
           
Total
   
Days and
   
Nonaccrual
 
(In Thousands)
 
Past Due
   
Past Due
   
90 Days
   
Due (1)
   
Current
   
Loans
   
Accruing
   
Loans
 
Commercial
  $ 3,004     $ 692     $ 8,755     $ 12,451     $ 1,225,595     $ 1,238,046     $ -     $ 21,577  
Commercial mortgages
    6,574       -       2,056       8,630       613,368       621,998       -       9,490  
Construction
    1,685       3,980       14,238       19,903       120,756       140,659       -       30,260  
Residential
    6,913       2,024       9,658       18,595       291,900       310,495       465       11,739  
Consumer
    1,355       261       1,756       3,372       307,137       310,509       -       3,701  
 
                                                               
Total
  $ 19,531     $ 6,957     $ 36,463     $ 62,951     $ 2,558,756     $ 2,621,707     $ 465     $ 76,767  
% of Total Loans
    0.74 %     0.27 %     1.38 %     2.39 %     97.61 %     100 %     0.02 %     2.93 %
 
(1)  Includes nonaccruing and accruing delinquent loan balances.
 
Impaired Loans

The following tables provide an analysis of our impaired loans at March 31, 2011 and December 31, 2010: