WSFS

WSFS Financial Corp. 10-Q Summary (Period Ended June 30, 2010)

Business Context and Reporting Period

WSFS Financial Corporation is a thrift holding company headquartered in Wilmington, Delaware, operating primarily through its subsidiary, Wilmington Savings Fund Society, FSB. The company serves the mid-Atlantic region with 40 banking offices. This report covers the quarterly and six-month periods ended June 30, 2010. On June 24, 2010, the company entered into an agreement to acquire Christiana Bank & Trust Company for $34.5 million, expected to close in the fourth quarter of 2010.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability Turnaround: The company returned to profitability, recording net income of $3.3 million for the quarter, compared to a net loss of $2.3 million in the same period in 2009. For the six months, net income was $3.8 million versus $0.6 million in 2009.
• Net Interest Margin Expansion: Net interest margin improved significantly to 3.66% for the quarter (up 35 basis points from 2009) and 3.62% for the six months (up 44 basis points). This was driven by declining funding costs and a favorable shift toward lower-cost non-maturity deposits.
• Expense Management: Noninterest expenses decreased $3.2 million quarter-over-quarter compared to 2009, largely due to the absence of $5.7 million in non-routine charges recorded in Q2 2009 (related to the wind-down of 1st Reverse and fraud charges).
• Asset Quality: Nonperforming assets increased slightly to $85.8 million (2.26% of total assets) from $82.2 million at year-end 2009. However, nonperforming construction loans decreased by $13.6 million due to proactive asset dispositions.
• Loan Portfolio: Total loans decreased $19.2 million from December 31, 2009, primarily due to a reduction in residential mortgage loans and construction loans, offset by growth in commercial loans.

Outlook, Risks, and Unusual Items

• Unusual Items: In Q1 2010, the company recorded a $4.5 million non-routine charge related to an embezzlement incident involving an armored car vendor. As of July 23, 2010, management expects a full recovery of these funds in Q3 2010.
• Acquisition: The proposed acquisition of Christiana Bank & Trust is subject to regulatory approval. Risks include integration challenges, potential loss of customers, and failure to realize anticipated cost savings.
• Regulatory Environment: The Dodd-Frank Act, signed into law in July 2010, introduces significant regulatory changes, including the elimination of the Office of Thrift Supervision (OTS) and potential increases in compliance costs and capital requirements.
• Interest Rate Risk: The company maintains a positive interest-sensitive gap. Management monitors exposure to interest rate fluctuations, noting that rising rates could benefit net interest income given the current asset/liability mix.
• Asset Quality Risks: Continued economic recession and unemployment may lead to further loan migrations to higher risk ratings and increased provisions for loan losses.

Investor Verification Checklist

• Recovery of Fraud Losses: Verify the actual receipt of the $4.5 million recovery from the armored car vendor incident in Q3 2010.
• Acquisition Closing: Monitor the status of regulatory approvals for the Christiana Bank & Trust acquisition and any associated integration costs.
• Nonperforming Asset Trends: Track the ratio of nonperforming assets to total assets and the specific allowance coverage for construction and commercial real estate loans.
• Net Interest Margin Sustainability: Assess whether the improved net interest margin can be sustained as the low-interest-rate environment evolves.
• Regulatory Capital: Confirm continued compliance with "well-capitalized" status under OTS and future Federal Reserve/OCC standards post-Dodd-Frank.