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EX-32 - EXHIBIT 32 - CERTIFICATION - WSFS FINANCIAL CORPex32.htm
EX-31.2 - EXHIBIT 31.2 - CERTIFICATION - CFO - WSFS FINANCIAL CORPex31-2.htm
EX-31.1 - EXHIBIT 31.1 - CERTIFICATION - CEO - WSFS FINANCIAL CORPex31-1.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
June 30, 2011
     
OR
     
[  ]
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
   
EXCHANGE ACT OF 1934
     
For the transition period from
 
to
 
     
     
Commission File Number  0-16668
     
     
WSFS FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
     
Delaware
 
22-2866913
(State or other jurisdiction of
 
(I.R.S. Employer
Incorporation or organization)
 
Identification Number)
     
500 Delaware Avenue, Wilmington, Delaware
 
19801
(Address of principal executive offices)
 
(Zip Code)
     
(302) 792-6000
Registrant’s telephone number, including area code:
     
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]   No [  ]
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files),   ____ Yes_____ No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer [  ]          Accelerated filer [X]
Non-accelerated filer [  ]            Smaller reporting company [   ]
(Do not check if smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [  ] No [X]
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of August 3, 2011:
 
Common Stock, par value $.01 per share
 
8,604,239
(Title of Class)
 
(Shares Outstanding)

 
 

 

WSFS FINANCIAL CORPORATION

FORM 10-Q

INDEX


PART I. Financial Information

       
Page
 
Item 1.
 
Financial Statements (Unaudited)
     
           
   
Consolidated Statements of Operations for the Three and Six Months
     
   
Ended June 30, 2011 and 2010
 
3
 
           
   
Consolidated Statements of Condition as of  June 30, 2011 and December 31, 2010
 
4
 
           
   
Consolidated Statements of Cash Flows for the Six  Months Ended
     
   
June 30, 2011 and 2010
 
5
 
           
   
Notes to the Consolidated Financial Statements for the Six
     
   
Months Ended June 30, 2011 and  2010
 
6
 
           
Item 2.
 
Management’s Discussion and Analysis of Financial Condition
 
29
 
   
and Results of Operations
     
Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
 
43
 
Item 4.
 
Controls and Procedures
 
43
 
           
           
PART II.  Other Information
   
Item 1.
 
Legal Proceedings
 
43
 
Item 1A.
 
Risk Factors
 
43
 
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
44
 
Item 3.
 
Defaults upon Senior Securities
 
44
 
Item 4.
 
[Reserved]
 
44
 
Item 5.
 
Other Information
 
44
 
Item 6.
 
Exhibits
 
44
 
           
Signatures
     
45
 
           
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

 

CONSOLIDATED STATEMENT OF OPERATIONS
 
 
 
 
   
 
   
 
   
 
 
 
Three Month Ended June 30,
   
Six Months Ended June 30,
 
 
2011
   
2010
   
2011
   
2010
 
 
 
(Unaudited)
 
 
 
(In Thousands, Except Per Share Data)
 
Interest income:
 
 
   
 
   
 
   
 
 
Interest and fees on loans
  $ 32,803     $ 31,610     $ 64,759     $ 62,833  
Interest on mortgage-backed securities
    6,884       9,639       13,910       18,671  
Interest and dividends on investment securities
     127       199       297        502  
Other Interest Income
    -       6       -       6  
 
    39,814       41,454       78,966       82,012  
Interest expense:
                               
Interest on deposits
    5,034       5,771       10,257       12,065  
Interest on Federal Home Loan Bank advances
    2,655       4,017       5,382       7,994  
Interest on trust preferred borrowings
     339        348        675        677  
Interest on other borrowings
    599       620       1,211       1,235  
 
    8,627       10,756       17,525       21,971  
Net interest income
    31,187       30,698       61,441       60,041  
Provision for loan losses
    8,582       10,594       14,490       22,004  
Net interest income after provision for loan losses
    22,605       20,104       46,951       38,037  
 
                               
Noninterest income:
                               
Credit/debit card and ATM income
    5,286       4,817       10,026       9,187  
Deposit service charges
    4,026       4,349       7,590       8,228  
Fiduciary & investment management income
    3,068       1,088       5,895       2,153  
Loan fee income
    576       709       1,261       1,389  
Mortgage banking activities, net
    231       247       778       499  
Bank owned life insurance income
    1,419       219       1,598       415  
Security gains, net
    603       268       1,018       268  
Other income
    820       739       1,502       1,438  
 
    16,029       12,436       29,668       23,577  
Noninterest expenses:
                               
Salaries, benefits and other compensation
    14,413       12,111       29,229       24,097  
Occupancy expense
    2,935       2,271       5,773       4,833  
Equipment expense
    1,915       1,646       3,529       3,114  
Loan workout and OREO expenses
    1,642       2,872       4,125       3,969  
Professional Fees
    1,584       1,440       2,707       2,458  
Data processing and operations expenses      1,284       1,159       2,701       2,445  
FDIC expenses
    1,278       1,762       3,042       3,405  
Marketing Expense
    898       904       1,849       1,609  
Acquisition integration costs
    446       -       780       -  
Non-routine ATM loss
    -       -       -       4,491  
Other operating expense
    4,257       3,574       8,304       6,951  
 
    30,652       27,739       62,039       57,372  
 
                               
Income before taxes
    7,982       4,801       14,580       4,242  
Income tax provision
    2,459       1,500       4,851       427  
Net income
    5,523       3,301       9,729       3,815  
Dividends on preferred stock and accretion of discount
    693       692       1,385       1,384  
Net income allocable to common stockholders
  $ 4,830     $ 2,609     $ 8,344     $ 2,431  
 
                               
Earnings per share:
                               
Basic
  $ 0.56       0.37     $ 0.97     $ 0.34  
Diluted
  $ 0.55       0.36     $ 0.96     $ 0.34  
 
                               
The accompanying notes are an integral part of these consolidated Financial Statements.
 

 
3

 

WSFS FINANCIAL CORPORATION
 
CONSOLIDATED STATEMENT OF CONDITION
 
 
 
June 30,
   
Dec 31,
 
 
 
2011
   
2010
 
 
 
(Unaudited)
 
 
 
(In Thousands, Except Per Share Data)
 
Assets
 
 
   
 
 
Cash and due from banks
  $ 95,682     $ 49,932  
Cash in non-owned ATMs
    395,381       326,573  
Interest-bearing deposits in other banks
    103       254  
Total cash and cash equivalents
    491,166       376,759  
Investment securities held-to-maturity
    217       219  
Investment securities-available-for-sale including reverse mortgages
    38,888       52,232  
Mortgage-backed securities - available-for-sale
    756,169       700,926  
Mortgages-backed securities-trading
    12,432       12,432  
Loans held-for-sale
    3,443       14,522  
Loans, net of allowance for loan losses of $56,248 at June 30, 2011
               
and $60,339 at December 31, 2010
    2,620,840       2,561,368  
Bank owned life insurance
    65,841       64,243  
Stock in Federal Home Loan Bank of Pittsburgh, at cost
    35,681       37,536  
Assets acquired through foreclosure
    5,143       9,024  
Premises and equipment
    33,723       31,870  
Goodwill
    27,828       26,745  
Intangible assets
    6,698       7,307  
Accrued interest receivable and other assets
    53,448       58,335  
 
               
Total assets
  $ 4,151,517     $ 3,953,518  
 
               
Liabilities and Stockholders’ Equity
               
 
               
Liabilities:
               
Deposits:
               
Noninterest-bearing demand
  $ 561,836     $ 468,098  
Interest-bearing demand
    330,844       312,546  
Money market
    689,634       743,808  
Savings
    376,321       255,340  
Time
    452,593       484,864  
Jumbo certificates of deposit – customer
    299,549       297,112  
Total customer deposits
    2,710,777       2,561,768  
Brokered deposits
    166,710       249,006  
Total deposits
    2,877,487       2,810,774  
 
               
Federal funds purchased and securities sold under agreements to repurchase
    100,000       100,000  
Federal Home Loan Bank advances
    634,087       488,959  
Trust preferred borrowings
    67,011       67,011  
Other borrowed funds
    67,863       91,636  
Accrued interest payable and other liabilities
    29,146       27,316  
Total liabilities
    3,775,594       3,585,696  
 
               
Stockholders’ Equity:
               
Serial preferred stock $.01 par value, 7,500,000 shares authorized; issued 56,625 at
               
June 30, 2011 and December 31, 2010
    1       1  
Common stock $.01 par value, 20,000,000 shares authorized; issued
               
18,184,354 at June 30, 2011 and 18,105,788 at December 31, 2010
    182       180  
Capital in excess of par value
    217,662       216,316  
Accumulated other comprehensive income
    6,991       6,524  
Retained earnings
    399,367       393,081  
Treasury stock at cost, 9,580,569 shares at June 30, 2011 and December 31, 2010
    (248,280 )     (248,280 )
Total stockholders’ equity
    375,923       367,822  
Total liabilities and stockholders’ equity
  $ 4,151,517     $ 3,953,518  
 
               
The accompanying notes are an integral part of these consolidated Financial Statements.
 

 
4

 

WSFS FINANCIAL CORPORATION
 
CONSOLIDATED STATEMENT OF CASH FLOWS
 
 
 
Six Months Ended
 
 
June 30,
 
 
 
2011
   
2010
 
 
 
(Unaudited)
 
 
 
(In Thousands)
 
Operating activities:
 
 
   
 
 
Net Income
  $ 9,729     $ 3,815  
Adjustments to reconcile net income to net cash provided by operating activities:
               
    Provision for loan losses
    14,490       22,004  
    Depreciation, accretion and amortization
    4,995       2,973  
    Increase (decrease) in accrued interest receivable and other assets
    4,658       (5,597 )
    Non-routine ATM losses
    -       4,491  
    Origination of loans held-for-sale
    (47,393 )     (54,225 )
    Proceeds from sales of loans held-for-sale
    59,329       52,543  
    Gain on mortgage banking activity
    (778 )     (499 )
    Loss on mark to market adjustment on trading securities
    -       62  
    Gain on sale of securities, net
    (1,018 )     (330 )
    Stock-based compensation expense, net of tax benefit recognized
    441       372  
    Excess tax benefits from share-based payment arrangements
    (75 )     (263 )
    Increase in accrued interest payable and other liabilities
    1,958       4,994  
    Loss on sale of assets acquired through foreclosure and valuation adjustments, net
    1,765       3,563  
    Increase in value of bank-owned life insurance
    (1,598 )     (415 )
    Decrease in capitalized interest, net
    71       76  
                 
Net cash provided by operating activities
  $ 46,574     $ 33,564  
 
               
Investing activities:
               
Maturities of investment securities
    11,552       2,500  
Sale of investment securities available for sale
    6,050       -  
Purchase of investments available-for-sale
    (4,027 )     (2,002 )
Sales of mortgage-backed securities available-for  sale
    117,075       45,979  
Repayments of mortgage-backed securities available-for-sale
    89,879       90,523  
Purchases of mortgage-backed securities available-for-sale
    (261,847 )     (192,700 )
Disbursements for reverse mortgages
    (351 )     (97 )
Net increase in loans
    (80,350 )     (5,872 )
Net decrease in stock of Federal Home Loan Bank of Pittsburgh
    1,855       -  
Sales of assets acquired through foreclosure, net
    7,303       926  
Investment in premises and equipment, net
    (4,886 )     (2,165 )
                 
Net cash used for investing activities
  $ (117,747 )   $ (62,908 )
 
               
Financing activities:
               
Net increase in demand and saving deposits
    155,070       99,346  
Net (decrease) increase in time deposits
    (29,834 )     19,390  
Net decrease in brokered deposits
    (82,321 )     (46,109 )
Receipts from federal funds purchased and securities sold under agreement to repurchase
    8,525,000       9,245,000  
Repayments of federal funds purchased and securities sold under agreement to repurchase
    (8,525,000 )     (9,245,000 )
Receipts from FHLB advances
    7,907,471       15,593,383  
Repayments of FHLB advances
    (7,762,343 )     (15,634,455 )
Dividends paid
    (3,376 )     (3,016 )
Issuance of common stock and exercise of common stock options
    838       920  
Excess tax benefits from share-based payment arrangements
    75       263  
                 
Net cash provided by financing activities
  $ 185,580     $ 29,722  
 
               
Increase cash and cash equivalents
    114,407       378  
Cash and cash equivalents at beginning of period
    376,759       321,749  
Cash and cash equivalents at end of period
  $ 491,166     $ 322,127  
 
               
Supplemental Disclosure of Cash Flow Information:
               
Cash paid for interest during the period
  $ 13,385     $ 17,660  
Cash paid for income taxes, net
    317       4,659  
Loans transferred to assets acquired through foreclosure
    5,187       4,972  
Net change in other comprehensive income
    467       10,840  
 
               
The accompanying notes are an integral part of these consolidated Financial Statements.
 

 
5

 

WSFS FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010
(UNAUDITED)

1. BASIS OF PRESENTATION

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

Founded in 1832, the Bank is one of the ten oldest banks continuously operating under the same name in the United States.  We provide residential and commercial real estate, commercial and consumer lending services, as well as retail deposit and cash management services.  In addition, we offer a variety of wealth management and trust services to personal and corporate customers through our Christiana Trust division.  Lending activities are funded primarily with customer deposits and borrowings.  The Federal Deposit Insurance Corporation (“FDIC”) insures our customers’ deposits to their legal maximums.  We serve our customers primarily from our 47 offices located in Delaware (38), Pennsylvania (7), Virginia (1) and Nevada (1) and through our website at www.wsfsbank.com.

Amounts subject to significant estimates are items such as the allowance for loan losses and 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 and six month periods ended June 30, 2011 are not necessarily indicative of the results that may be expected for any future quarters or for the year ending December 31, 2011. For further information, refer to the consolidated financial statements and the accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2010, as filed with the SEC.

Whenever necessary, reclassifications have been made to the prior periods Consolidated Financial Statements to conform to the current period’s presentation. All significant intercompany transactions were eliminated in consolidation.
 
 
6

 

2. EARNINGS PER SHARE

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

    For the three months ended   For the six months ended   
    June 30,     June 30,  
    2011     2010      2011      2010  
    (In Thousands, Except
Per Share Data)
 
(In Thousands, Except
Per Share Data)
 
Numerator:
 
 
   
 
   
 
   
 
 
Net  income allocable to common stockholders
  $ 4,830     $ 2,609     $ 8,344     $ 2,431  
 
                               
Denominator:
                               
Denominator for basic earnings per share - weighted average shares
    8,599       7,107       8,588       7,096  
Effect of dilutive employee stock options
    128       152       139       125  
    Denominator for diluted earnings per share – adjusted weighted
    average shares and assumed exercise
     8,727       7,259       8,727       7,221  
Earnings per share:
                               
Basic:
                               
Net income allocable to common shareholders
  $ 0.56     $ 0.37     $ 0.97     $ 0.34  
Diluted:
                               
Net income allocable to common shareholders
  $ 0.55     $ 0.36     $ 0.96     $ 0.34  
 
                               
Outstanding common stock equivalents having no dilutive effect
    545       616       487       637  
 
3. INVESTMENT SECURITIES

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

 
7

 


 
 
 
   
Gross
   
Gross
   
 
 
 
 
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
 
 
Cost
   
Gains
   
Losses
   
Value
 
 
 
(In Thousands)
 
Available-for-sale securities:
 
 
   
 
   
 
   
 
 
June 30, 2011:
 
 
   
 
   
 
   
 
 
Reverse mortgages
  $ (406 )   $     $     $ (406 )
U.S. Government and agencies
    36,680       262       (14 )     36,928  
State and political subdivisions
    2,329       39       (2 )     2,366  
 
  $ 38,603     $ 301     $ (16 )   $ 38,888  
December 31, 2010:
                               
Reverse mortgages
  $ (686 )   $     $     $ (686 )
U.S. Government and agencies
    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:
                               
June 30, 2011:
                               
State and political subdivisions
  $ 217     $     $ (19 )   $ 198  
 
  $ 217     $     $ (19 )   $ 198  
 
                               
December 31, 2010:
                               
State and political subdivisions
  $ 219     $     $ (23 )   $ 196  
 
  $ 219     $     $ (23 )   $ 196  

Securities with market values aggregating $36.9 million at June 30, 2011 were specifically pledged as collateral for WSFS’ 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 June 30, 2011 and December 31, 2010 were as follows:
 
 
Held-to-Maturity
 
Available-for-Sale
 
 
Amortized
 
Fair
 
Amortized
 
Fair
 
 
Cost
 
Value
 
Cost
 
Value
 
 
(In Thousands)
 
June 30, 2011
 
 
 
 
 
 
 
 
Within one year (1)
  $     $     $ 9,778     $ 9,878  
After one year but within five years
                28,496       28,681  
After five years but within ten years
                       
After ten years
    217       198       329       329  
 
  $ 217     $ 198     $ 38,603     $ 38,888  
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.
 


 
8

 

       We sold $6.1 million of investment securities classified as available-for-sale during the first six months of 2011 resulting in a gain on sale of $110,000.  There were no sales of investment securities classified as available-for-sale during the first six months of 2010 and, as a result, there were no net gains/losses realized during 2010.  The cost basis for investment security sales was based on the specific identification method.  Investment securities totaling $330,000 and $2.5 million matured or were called by their issuers during the six months ended June 30, 2011 and 2010, respectively.

At June 30, 2011, we owned investment securities totaling $9.6 million where the amortized cost basis exceeded the fair value. Total unrealized losses on those securities were $35,000 at June 30, 2011. This temporary impairment is the result of changes in market interest rates subsequent to the purchase of the securities. Securities with fair values of $245,000 have been impaired for 12 months or longer. We have determined that these securities are not other than temporarily impaired as of June 30, 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 and fair value by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2011.
 
 
 
Less than 12 months
   
12 months or longer
   
Total
 
 
 
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
 
 
Value
   
Loss
   
Value
   
Loss
   
Value
   
Loss
 
 
 
(In Thousands)
 
Held-to-maturity
 
 
   
 
   
 
   
 
   
 
   
 
 
State and political subdivisions
  $     $     $ 101     $ 19     $ 101     $ 19  
 
                                               
Available-for-sale
                                               
State and political subdivisions
    329       1       144       1       473       2  
U.S Government and agencies
    9,028       14                   9,028       14  
 
                                               
Total temporarily impaired investments
  $ 9,357     $ 15     $ 245     $ 20     $ 9,602     $ 35  

The table below shows our investment securities’ gross unrealized losses and fair value by investment category and length of time that individual securities were in a continuous unrealized loss position at December 31, 2010.
 

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

 
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4. MORTGAGE-BACKED SECURITIES

The following tables detail the amortized cost and the estimated fair value of the Company’s mortgage-backed securities:
 
 
 
   
Gross
   
Gross
   
 
 
 
 
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
 
 
Cost
   
Gains
   
Losses
   
Value
 
 
 
(In Thousands)
 
Available-for-sale securities:
 
 
   
 
   
 
   
 
 
 
 
 
   
 
   
 
   
 
 
June 30, 2011:
 
 
   
 
   
 
   
 
 
    Collateralized mortgage obligations (“CMO”) (1)
  $ 361,211     $ 8,148     $ (1,608 )   $ 367,751  
    Federal National Mortgage Association (“FNMA”)
    239,719       2,915       (798 )     241,836  
    Federal Home Loan Mortgage Corporation (“FHLMC”)
    82,224       1,391       (61 )     83,554  
    Government National Mortgage Association (“GNMA”)
    61,264       1,852       (88 )     63,028  
 
  $ 744,418     $ 14,306     $ (2,555 )   $ 756,169  
 
                               
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:
                               
 
                               
June 30, 2011:
                               
    CMO
  $ 12,432     $     $     $ 12,432  
 
                               
December 31, 2010:
                               
    CMO
  $ 12,432     $     $     $ 12,432  
 
                               
(1) Includes Agency CMO’s classified as available-for-sale.
 

The portfolio of available-for-sale mortgage-backed securities is comprised of 191 securities with an amortized cost of $744.4 million of both GSE ($500.3 million) and non-GSE ($244.1 million) securities.  All securities were AAA-rated at time of purchase.  As of June 30, 2011 only one security with a value of $109,000 was rated below AAA.  The downgraded security was re-evaluated at June 30, 2011.  The result of this evaluation shows no other-than-temporary impairment for the six months ended June 30, 2011.  The weighted average duration of the mortgage-backed securities was 3.3 years at June 30, 2011.

At June 30, 2011, mortgage-backed securities with fair values aggregating $331.8 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 $39.0 million at June 30, 2011.

During the first six months of 2011, we sold mortgage-backed securities available-for-sale of $116.9 million

 
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with net gains of $908,000. The cost basis of all mortgage-backed securities sales is based on the specific identification method. There were sales of mortgage-backed securities available-for-sale of $46.0 million with net securities gains of $330,000 during the first six months of 2010.

MBS have expected maturities that differ from their contractual maturities.  These differences arise because borrowers may have the right to call or prepay obligations with or without a prepayment penalty.
 
At June 30, 2011, we owned mortgage-backed securities totaling $170.7 million where the amortized cost basis exceeded fair value.  Total unrealized losses on these securities were $2.6 million at June 30, 2011.  This temporary impairment is the result of changes in market interest rates in the mortgage-backed securities market.  There were no securities impaired for 12 months or longer.  Quarterly, we evaluate the current characteristics of each of our mortgage-backed securities such as delinquency and foreclosure levels, credit enhancement, projected losses and coverage.  In addition, we do not have the intent to sell, nor is it more likely-than-not we will be required to sell these securities before we are able to recover the amortized cost basis.

The table below shows our mortgage-backed securities’ gross unrealized losses, fair value by investment category and length of time individual securities have been in continuous unrealized loss position at June 30, 2011.

 
Less than 12 months
 
12 months or longer
 
Total
 
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
 
Value
 
Loss
 
Value
 
Loss
 
Value
 
Loss
 
 
(In Thousands)
 
Available-for-sale
 
 
   
 
   
 
   
 
   
 
   
 
 
    CMO
  $ 62,428     $ 1,608     $     $     $ 62,428     $ 1,608  
    FNMA
    79,230       798                   79,230       798  
    FHLMC
    9,922       61                   9,922       61  
    GNMA
    19,101       88                   19,101       88  
 
                                               
    Total temporarily impaired MBS
  $ 170,681     $ 2,555     $     $     $ 170,681     $ 2,555  

The table below shows our mortgage-backed securities’ gross unrealized losses and fair value by investment category and length of time that individual securities were in a continuous unrealized loss position at December 31, 2010.
 
 
Less than 12 months
 
12 months or longer
 
Total
 
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
 
Value
 
Loss
 
Value
 
Loss
 
Value
 
Loss
 
 
(In Thousands)
 
Available-for-sale
 
 
   
 
   
 
   
 
   
 
   
 
 
    CMO
  $ 58,821     $ 534     $ 1,171     $ 65     $ 59,992     $ 599  
    FNMA
    45,129       431                   45,129       431  
    FHLMC
    14,981       273                   14,981       273  
    GNMA
    23,831       674                   23,831       674  
 
                                               
    Total temporarily impaired MBS
  $ 142,762     $ 1,912     $ 1,171     $ 65     $ 143,933     $ 1,977  

We own $12.4 million par value of SASCO RM-1 2002 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

 
11

 

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 June 30, 2011.

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 and six months ended June 30, 2011:

 
 
 
   
Commercial
   
 
   
 
   
 
   
 
 
 
 
Commercial
   
Mortgages
   
Construction
   
Residential
   
Consumer
   
Total
 
 
 
(In Thousands)
 
Three months ended June 30, 2011
   
 
   
 
   
 
   
 
 
Allowance for loan losses
   
 
   
 
   
 
   
 
 
Beginning balance
  $ 24,536     $ 11,866     $ 6,658     $ 3,763     $ 9,177     $ 56,000  
   Charge-offs
    (2,847 )     (1,060 )     (1,846 )     (899 )     (2,468 )     (9,120 )
   Recoveries
    210       279       115       7       175       786  
   Provision
    3,337       1,245       904       836       2,260       8,582  
Ending balance
  $ 25,236     $ 12,330     $ 5,831     $ 3,707     $ 9,144     $ 56,248  
 
                                               
Six months ended June 30, 2011
                                 
Allowance for loan losses
                                 
Beginning balance
  $ 26,480     $ 10,564     $ 10,019     $ 4,028     $ 9,248     $ 60,339  
   Charge-offs
    (6,210 )     (1,307 )     (7,072 )     (1,306 )     (4,224 )     (20,119 )
   Recoveries
    338       287       506       91       316       1,538  
   Provision
    4,628       2,786       2,378       894       3,804       14,490  
Ending balance
  $ 25,236     $ 12,330     $ 5,831     $ 3,707     $ 9,144     $ 56,248  
 
                                               
Period-end allowance allocated to:
                                 
   Specific reserves(1)
  $ 2,304     $ 4,349     $ 1,411     $ 825     $ 112     $ 9,001  
   General reserves(2)
    22,932       7,981       4,420       2,882       9,032       47,247  
Ending balance
  $ 25,236     $ 12,330     $ 5,831     $ 3,707     $ 9,144     $ 56,248  
 
                                               
Period-end loan balances evaluated for:
                                 
   Specific reserves(1)
  $ 22,736     $ 20,177     $ 31,586     $ 17,567     $ 3,128     $ 95,194  (3)
   General reserves(2)
    1,308,304       602,374       96,932       276,003       298,281       2,581,894  
Ending balance
  $ 1,331,040     $ 622,551     $ 128,518     $ 293,570     $ 301,409     $ 2,677,088  
 
                                               
(1) 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 June 30, 2011, represents accruing troubled debt restructured loans.
 
 
 

 
12

 
Non-Accrual and Past Due Loans
 
The following tables show our nonaccrual and past due loans at the dates indicated:

 
 
 
   
 
   
Greater
   
 
   
 
   
 
   
Greater than
   
 
 
June 30, 2011
 
30–59 Days
   
60–89 Days
   
than
   
Total Past
   
 
   
Total
   
90 Days and
   
Nonaccrual
 
(In Thousands)
 
Past Due
   
Past Due
   
90 Days
   
Due(1)
   
Current
   
Loans
   
Accruing
   
Loans
 
 
 
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 
Commercial
  $ 946     $ 648     $ 17,332     $ 18,926     $ 1,312,114     $ 1,331,040     $ -     $ 22,803  
Commercial mortgages
    4,433       1,814       3,018       9,265       613,286       622,551       -       20,369  
Construction
    4,548       1,776       13,805       20,129       108,389       128,518       -       31,585  
Residential
    6,501       2,292       8,772       17,565       276,005       293,570       564       10,198  
Consumer
    1,353       397       561       2,311       299,098       301,409       -       1,741  
 
                                                               
Total
  $ 17,781     $ 6,927     $ 43,488     $ 68,196     $ 2,608,892     $ 2,677,088     $ 564     $ 86,696  
% of Total Loans
    0.66 %     0.26 %     1.63 %     2.55 %     97.45 %     100 %     0.02 %     3.24 %