WSFS Financial Corp. 10-Q Summary: Period Ended September 30, 2009
Business Context and Reporting Period
WSFS Financial Corporation is a thrift holding company headquartered in Wilmington, Delaware, with operations primarily in Delaware, southeastern Pennsylvania, and Virginia. The company operates through its subsidiary, Wilmington Savings Fund Society, FSB. This report covers the quarterly period ended September 30, 2009, and the nine-month period ended on the same date. The company is classified as an accelerated filer.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 |
|---|---|---|
| Net Interest Income | $26.3 million | $76.6 million |
| Provision for Loan Losses | $15.5 million | $35.1 million |
| Net Income | $1,000 | $625,000 |
| Net Loss Allocable to Common Shareholders | $(633,000) | $(1.3 million) |
| Diluted EPS (Common) | $(0.10) | $(0.20) |
| Total Assets | $3.57 billion | $3.57 billion |
| Total Deposits | $2.48 billion | $2.48 billion |
| Stockholders' Equity | $303.0 million | $303.0 million |
| Cash and Cash Equivalents | $289.6 million | $289.6 million |
| Net Interest Margin | 3.35% | 3.23% |
Material Changes vs. Prior Period
- Profitability Decline: The company reported a net loss allocable to common shareholders for both the quarter and the nine-month period, a sharp contrast to the net income of $5.5 million (quarter) and $19.5 million (nine months) in the same periods of 2008. This decline was primarily driven by a significant increase in the provision for loan losses.
- Provision for Loan Losses: The provision surged to $15.5 million in Q3 2009 from $3.5 million in Q3 2008, and $35.1 million for the nine months ended Sep 30, 2009, compared to $8.3 million in 2008. This reflects deteriorating credit quality, particularly in construction and commercial real estate portfolios.
- Nonperforming Assets (NPA): NPAs increased significantly to $93.2 million (2.61% of total assets) from $35.8 million (1.04%) at year-end 2008. Nonaccruing loans rose to $76.1 million, driven largely by nine residential construction projects and four commercial construction projects.
- Net Interest Income Growth: Despite the loss, Net Interest Income increased by $3.0 million in Q3 and $9.9 million for the nine-month period compared to 2008. This was due to improved funding mix (growth in core deposits reducing reliance on wholesale funding) and lower deposit rates.
- Capital Infusion: Stockholders' equity increased by $86.4 million since December 31, 2008, largely due to the sale of $52.6 million in preferred stock to the U.S. Treasury (CPP) and $25.0 million in common stock to Peninsula Investment Partners.
Outlook, Risks, and Unusual Items
- Unusual Items: The nine-month period included $5.7 million in non-routine charges: a $1.6 million charge for the wind-down of the "1st Reverse" subsidiary; a $1.7 million FDIC special assessment; a $1.5 million charge related to fraudulent wire transfers; and $953,000 in acquisition due diligence costs.
- Asset Quality Risks: Management highlighted construction loans as the riskiest segment of the real estate portfolio. The company is aggressively monitoring classified loans due to the weak economic environment and rising unemployment.
- Regulatory Capital: As of September 30, 2009, the Bank was classified as "well-capitalized" under OTS regulations, with a Total Capital ratio of 12.39% and Tier 1 Capital ratio of 11.17%.
- Interest Rate Sensitivity: The company maintained a positive interest-sensitive gap of $35.7 million within one year. Management noted that sensitivity to rate decreases was not deemed meaningful given the low absolute level of interest rates at the time.
- Legal Proceedings: No material legal proceedings were reported as of September 30, 2009.
Investor Verification Checklist
- Allowance Adequacy: Verify the sufficiency of the $52.4 million allowance for loan losses given the rapid increase in nonperforming assets (up 160% YoY) and the specific concentration in construction loans.
- 1st Reverse Wind-down: Confirm the status of the orderly wind-down of the 1st Reverse Financial Services subsidiary and the finality of the $1.6 million write-off.
- Fraudulent Wire Transfer: Review the resolution of the $1.5 million fraudulent wire transfer incident and any potential for further losses or regulatory penalties.
- Preferred Stock Obligations: Assess the impact of the 5% (rising to 9%) dividend requirement on the $52.6 million Treasury preferred stock on future earnings allocable to common shareholders.
- Deposit Mix Sustainability: Evaluate the sustainability of the improved funding mix (shift from wholesale to core deposits) in a competitive rate environment.