WSFS

WSFS Financial Corp. 10-Q Summary: Period Ended June 30, 2009

Business Context and Reporting Period

WSFS Financial Corporation, a Delaware-based thrift holding company, reported results for the quarterly and six-month periods ended June 30, 2009. The Company operates primarily through its subsidiary, Wilmington Savings Fund Society, FSB, serving the mid-Atlantic region with commercial and retail banking services. The reporting period reflects the ongoing impact of the 2008-2009 financial crisis, characterized by deteriorating asset quality and increased regulatory assessments.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability Reversal: The Company reported a net loss of $2.32 million for the quarter, a significant decline from net income of $6.70 million in the same quarter of 2008. For the six-month period, net income dropped to $0.62 million from $13.95 million in 2008.
• Provision for Loan Losses: The provision increased sharply to $12.0 million for the quarter (from $2.4 million in 2008) and $19.7 million for the six months (from $4.8 million in 2008). This was driven by risk grade migration, collateral depreciation, and charge-offs in the commercial and construction portfolios.
• Nonperforming Assets (NPA): NPAs more than doubled to $79.9 million (2.23% of total assets) from $35.8 million (1.04% of total assets) at year-end 2008. This increase was primarily due to six construction projects totaling $35.1 million.
• Noninterest Expenses: Expenses rose $9.8 million for the quarter to $31.0 million, driven by non-routine charges including a $1.6 million wind-down of the 1st Reverse subsidiary, a $1.7 million FDIC special assessment, and $1.5 million in fraud-related expenses.
• Net Interest Margin (NIM): NIM improved to 3.31% for the quarter (from 3.20% in 2008) and 3.18% for the six months (from 3.10% in 2008), aided by lower funding costs and improved deposit mix.

Guidance, Outlook, and Risks

• Capital Position: The Company remains "well-capitalized" under regulatory standards. Stockholders' equity increased by $55.3 million year-to-date, largely due to a $52.6 million sale of preferred stock to the U.S. Treasury under the Capital Purchase Program (CPP).
• Subsequent Event: In July 2009, the Company entered an agreement to sell $25 million of common stock and warrants to Peninsula Investment Partners, L.P., which would increase their ownership to approximately 20.87%.
• Risks and Contingencies:
  • Asset Quality: Continued weakness in the residential construction and land development sectors poses a risk to future earnings and capital.
  • Regulatory Assessments: The FDIC special assessment of 5 basis points was levied in June 2009, with potential for additional assessments in subsequent quarters.
  • Legal/Operational: The Company incurred costs related to fraudulent wire transfers and the wind-down of its reverse mortgage subsidiary, 1st Reverse Financial Services, LLC.
• Management Commentary: Management emphasized active management of deposit pricing and funding mix to maintain margins. They noted that while the provision for loan losses is elevated, it reflects a proactive approach to asset quality deterioration.

Investor Verification Checklist

• Asset Quality Trends: Verify the trajectory of nonperforming assets, specifically the $35.1 million in construction loans, and the adequacy of the allowance for loan losses (currently 1.63% of total loans).
• Non-Routine Charges: Confirm the final impact of the 1st Reverse wind-down and the specific details of the $1.5 million fraud-related expense.
• Capital Adequacy: Monitor the impact of the CPP preferred stock dividends (5% initially, rising to 9%) on future earnings available to common shareholders.
• FDIC Assessments: Track potential additional FDIC special assessments that could impact liquidity and profitability in the second half of 2009.
• Subsequent Stock Sale: Assess the implications of the Peninsula Investment Partners transaction on corporate governance and future capital strategy.