Fair Value Disclosures of Financial Assets and Liabilities

3 Months Ended

Mar. 31, 2015

Fair Value Disclosures [Abstract]

Fair Value Disclosures of Financial Assets and Liabilities

11. FAIR VALUE DISCLOSURES OF FINANCIAL ASSETS AND LIABILITIES

FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES

ASC 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820-10 establishes a fair value hierarchy that prioritizes the use of inputs used in valuation methodologies into the following three levels:

Level 1: Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.

Level 2: Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; inputs to the valuation methodology include quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs to the valuation methodology that are derived principally from or can be corroborated by observable market data by correlation or other means.

Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy as of March 31, 2015, is set forth in the following table:

	Quoted Prices in Active Markets for Identical Asset		Significant Other Observable Inputs		Significant Unobservable Inputs		Total Fair
(In Thousands)
Description	(Level 1)		(Level 2)		(Level 3)		Value
Assets measured at fair value on a recurring basis
Collateralized mortgage obligations	$	—	$	221,021	$	—	$	221,021
FNMA		—		304,127		—		304,127
FHLMC		—		151,014		—		151,014
GNMA		—		75,266		—		75,266
U.S. Government and agencies		—		35,069		—		35,069
Total assets measured at fair value on a recurring basis	$	—	$	786,497	$	—	$	786,497
Assets measured at fair value on a nonrecurring basis
Other real estate owned	$	—	$	—	$	6,088	$	6,088
Loans held-for-sale		—		46,892		—		46,892
Impaired loans (collateral dependent)		—		—		38,795		38,795
Total assets measured at fair value on a nonrecurring basis	$	—	$	46,892	$	44,883	$	91,775

There were no material liabilities measured at fair value as of March 31, 2015.

The table below presents the balances of assets measured at fair value as of December 31, 2014:

	Quoted Prices in Active Markets for Identical Asset		Significant Other Observable Inputs		Significant Unobservable Inputs		Total
(In Thousands)
Description	(Level 1)		(Level 2)		(Level 3)		Fair Value
Assets measured at fair value on a recurring basis
Available-for-sale securities:
Collateralized mortgage obligations	$	—	$	192,932	$	—	$	192,932
FNMA		—		292,553		—		292,553
FHLMC		—		146,882		—		146,882
GNMA		—		77,797		—		77,797
U.S. Government and agencies				29,960		—		29,960
Total assets measured at fair value on a recurring basis	$	—	$	740,124	$	—	$	740,124
Assets measured at fair value on a nonrecurring basis Other real estate owned	$	—	$	—	$	5,734	$	5,734
Loans held-for sale		—		28,508		—		28,508
Impaired loans		—		—		41,334		41,334
Total assets measured at fair value on a nonrecurring basis	$		$	28,508	$	47,068	$	75,576

There were no material liabilities measured at fair value as of December 31, 2014.

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 March 31, 2015, securities classified as available-for-sale are reported at fair value using Level 2 inputs. Included in the Level 2 total are approximately $35.1 million in Federal Agency debentures, and $751.4 million in Federal Agency MBS. We believe that this Level 2 designation is appropriate for these securities under ASC 820-10 as, with almost all fixed income securities, none are exchange traded, and all are priced by correlation to observed 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.

Other real estate owned

Other real estate owned consists of loan collateral which has been repossessed through foreclosure or other measures. Initially, foreclosed assets are recorded at the lower of the loan balance or fair value of the collateral less estimated selling costs. Subsequent to foreclosure, valuations are updated periodically and the assets may be marked down further, reflecting a new cost basis. The fair value of our real estate owned was estimated using Level 3 inputs based on appraisals obtained from third parties.

Loans held-for-sale

During 2014 we elected to record loans held-for-sale at their fair value. As of March 31, 2015 and December 31, 2014 the fair value of our loans held-for-sale is based upon estimates using level 2 inputs. These inputs are based upon pricing information obtained from secondary markets and brokers.

Impaired loans

We evaluate and value impaired loans at the time the loan is identified as impaired, and the fair values of such loans are estimated using Level 3 inputs in the fair value hierarchy. Each loan’s collateral has a unique appraisal and management’s discount of the value is based on the factors unique to each impaired loan. The significant unobservable input in determining the fair value is management’s subjective discount on appraisals of the collateral securing the loan, which range from 10% - 50%. Collateral may consist of real estate and/or business assets including equipment, inventory and/or accounts receivable and the value of these assets is determined based on the appraisals by qualified licensed appraisers hired by us. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, estimated costs to sell, and/or management’s expertise and knowledge of the client and the client’s business.

Impaired loans, which are measured for impairment by either calculating the expected future cash flows discounted at the loan’s effective interest rate or determining the fair value of the collateral for collateral dependent loans has a gross amount of $42.8 million and $46.7 million at March 31, 2015 and December 31, 2014, respectively. The valuation allowance on impaired loans was $4.8 million as of March 31, 2015 and $5.3 million as of December 31, 2014.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The reported fair values of financial instruments are based on a variety of factors. In certain cases, fair values represent quoted market prices for identical or comparable instruments. In other cases, fair values have been estimated based on assumptions regarding the amount and timing of estimated future cash flows that are discounted to reflect current market rates and varying degrees of risk. Accordingly, the fair values may not represent actual values of the financial instruments that could have been realized as of period-end or that will be realized in the future.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

Cash and cash equivalents

For cash and short-term investment securities, including due from banks, federal funds sold or purchased under agreements to resell and interest-bearing deposits with other banks, the carrying amount is a reasonable estimate of fair value.

Investment securities

Fair value is estimated using quoted prices for similar securities, which we obtain from a third party vendor. We utilize one of the largest providers of securities pricing to the industry and management periodically assesses the inputs used by this vendor to price the various types of securities owned by us to validate the vendor’s methodology. The fair value of our investment in reverse mortgages is based on the net present value of estimated cash flows, which have been updated to reflect recent external appraisals of the underlying collateral. For additional discussion of our internally developed models, see “Fair Value of Financial Assets” in this note.

Loans held-for sale

Loans held-for- sale are carried at their fair value.

Loans

Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type: commercial, commercial mortgages, construction, residential mortgages and consumer. For loans that reprice frequently, the book value approximates fair value. The fair values of other types of loans are estimated by discounting expected cash flows using the current rates at which similar loans would be made to borrowers with comparable credit ratings and for similar remaining maturities. The fair value of nonperforming loans is based on recent external appraisals of the underlying collateral. Estimated cash flows, discounted using a rate commensurate with current rates and the risk associated with the estimated cash flows, are utilized if appraisals are not available. This technique does not contemplate an exit price.

Reverse mortgage loans

For additional information on these reverse mortgage related assets, see Note 7, Reverse Mortgage Related Assets, to the unaudited Consolidated Financial Statements.

Stock in the Federal Home Loan Bank (FHLB) of Pittsburgh

The fair value of FHLB stock is assumed to be equal to its cost basis, since the stock is non-marketable but redeemable at its par value.

Other assets

WSFS holds 50,833 shares of Visa Class B stock. Following resolution of Visa’s covered litigation, shares of Visa’s Class B stock will be converted to Visa Class A shares (the current conversion rate is 1.6483 shares of Class A stock for each share of Class B stock). As our ownership is related to our prior participation in Visa’s network, while Visa operated as a cooperative, this ownership is recorded on our books with zero basis.

While only current owners of Class B shares are allowed to purchase other Class B shares, there have been several transactions between Class B shareholders. Based on these transactions we estimate the value of our Class B shares to be $4.8 million as of March 31, 2015.

Demand deposits, savings, deposits and time deposit

The fair value deposits with no stated maturity, such as noninterest-bearing demand deposits, money market and interest-bearing demand deposits, is assumed to be equal to the amount payable on demand. The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using rates currently offered for deposits with comparable remaining maturities.

Borrowed funds

Rates currently available to us for debt with similar terms and remaining maturities are used to estimate fair value of existing debt.

Off-balance sheet instruments

The fair value of off-balance sheet instruments, including commitments to extend credit and standby letters of credit, approximates the recorded net deferred fee amounts, which are not significant. Because commitments to extend credit and letters of credit are generally not assignable by either us or the borrower, they only have value to us and the borrower.

The book value and estimated fair value of our financial instruments are as follows:

(In Thousands)	Fair Value	March 31, 2015				December 31, 2014
	Measurement	Book Value		Fair Value		Book Value		Fair Value
Financial assets:
Cash and cash equivalents	Level 1	$	505,638		505,638	$	508,039	$	509,039
Investment securities available-for-sale	See previous table		786,497		786,497		740,124		740,124
Investment securities held-to-maturity	See previous table		122,887		122,772		126,168		126,171
Loans, held-for-sale	See previous table		46,892		46,892		28,508		28,508
Loans, net	Level 2		3,189,138		3,159,907		3,156,652		3,121,855
Reverse mortgage loans	Level 3		27,035		27,035		29,298		29,298
Stock in FHLB of Pittsburgh	Level 2		27,655		27,655		23,278		23,278
Accrued interest receivable	Level 2		12,004		12,004		11,782		11,782
Other assets	Level 3		—		4,837		—		4,837
Financial liabilities:
Deposits	Level 2		3,522,278		3,345,564		3,649,235		3,461,218
Borrowed funds	Level 2		874,557		877,815		667,775		672,850
Standby letters of credit	Level 3		160		160		151		151
Accrued interest payable	Level 2		1,621		1,621		1,004		1,004

At March 31, 2015 and December 31, 2014 we had no commitments to extend credit measured at fair value.