WSFS

WSFS Financial Corp. 10-Q Summary: Period Ended June 30, 2011

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for WSFS Financial Corporation, a Delaware-based thrift holding company and parent to Wilmington Savings Fund Society, FSB. The report covers the three and six months ended June 30, 2011. The company operates 47 offices primarily in Delaware, Pennsylvania, Virginia, and Nevada, offering commercial and consumer lending, retail deposits, and wealth management services through its Christiana Trust division. As of July 21, 2011, the company's primary federal regulator transitioned from the Office of Thrift Supervision to the Federal Reserve (holding company) and the Office of the Comptroller of the Currency (bank).

Key Financial Metrics

Material Changes vs. Prior Period

• Earnings Growth: Net income for the six months ended June 30, 2011, increased 155% to $9.73 million compared to $3.82 million in the same period of 2010. Diluted EPS rose from $0.34 to $0.96.
• Revenue Drivers: Noninterest income increased significantly, driven by a $3.7 million increase in fiduciary and investment management income (due to the December 2010 acquisition of Christiana Bank & Trust) and $1.2 million in unanticipated, non-taxable Bank-Owned Life Insurance (BOLI) income.
• Expense Management: The provision for loan losses decreased by 34% ($7.5 million) year-over-year for the six-month period, reflecting improved credit quality and fewer problem loans. However, noninterest expenses increased by $4.7 million due to franchise growth, new branch openings, and $780,000 in acquisition integration costs.
• Asset Quality: Nonperforming assets increased to $100.6 million (2.42% of total assets) from $92.9 million (2.35%) at year-end 2010, primarily due to a $10.1 million increase in nonperforming commercial mortgages.
• Liquidity: Cash and cash equivalents increased by $114.4 million to $491.2 million, supported by growth in the Cash Connect division and increased FHLB advances.

Guidance, Outlook, and Risks

Management Commentary: Management attributes the earnings improvement to loan growth, the integration of the Christiana Trust division, and a reduction in loan loss provisions. The company continues to focus on commercial lending and franchise growth, having opened five new branches and relocated four others in the first half of 2011.

Regulatory Changes: The company notes the impact of the Dodd-Frank Act, including changes to deposit insurance assessments and the phase-out of the Office of Thrift Supervision. The company is also subject to new debit card interchange fee rules effective October 1, 2011.

Risks and Contingencies:

• Legal Proceedings: A complaint was filed on July 18, 2011, in U.S. Bankruptcy Court by a trustee relating to a former customer. Management believes it acted appropriately but has not yet estimated a potential loss.
• Interest Rate Risk: The company maintains a positive interest-sensitive gap. A 100 basis point increase in rates is projected to decrease net interest margin by 3%, while a 100 basis point decrease has a negligible impact.
• Asset Quality: While the provision for loan losses has decreased, the sluggish economy continues to pressure collateral values, and retail loan charge-offs remain elevated.

Investor Verification Checklist

• Acquisition Integration: Verify the ongoing impact of the Christiana Bank & Trust acquisition on fiduciary income and integration costs.
• Nonperforming Assets: Monitor the trend in nonperforming commercial mortgages, which drove the increase in total nonperforming assets.
• Regulatory Transition: Assess the operational and compliance impact of the transition from the Office of Thrift Supervision to the OCC and Federal Reserve.
• Legal Exposure: Track the status of the July 2011 bankruptcy court complaint to determine potential financial impact.
• Interest Rate Sensitivity: Review the company's asset/liability management strategy given the low interest rate environment and the projected impact of rate changes on net interest margin.