WSFS

WSFS Financial Corp. 10-Q Summary: Period Ended September 30, 2008

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for WSFS Financial Corporation, a Delaware corporation and parent to Wilmington Savings Fund Society, FSB. The report covers the three and nine months ended September 30, 2008. WSFS operates as a community banking institution with 34 retail branches in Delaware, Southeastern Pennsylvania, and Northern Virginia. Its business segments include WSFS Bank (commercial and retail lending), Cash Connect (ATM services), and "All Others" (wealth management and investment advisory).

Key Financial Metrics

Material Changes vs. Prior Period

• Earnings Decline: Net income for the third quarter of 2008 decreased 23% to $5.51 million from $7.14 million in the same period in 2007. For the nine-month period, net income fell 12% to $19.46 million from $22.15 million.
• Provision Increase: The provision for loan losses surged to $3.50 million in Q3 2008 from $1.00 million in Q3 2007, driven by deteriorating economic conditions and credit quality concerns in the residential real estate market.
• Net Interest Income Growth: Despite lower yields, net interest income increased 16% in Q3 and 9% for the nine-month period, aided by a liability-sensitive balance sheet and active deposit pricing management.
• Nonperforming Assets: Total nonperforming assets increased to $36.58 million (1.12% of total assets) from $31.81 million at year-end 2007. This included a significant rise in construction loans on nonaccrual status.
• Expense Growth: Noninterest expenses rose 8% in Q3 and 9% for the nine-month period, largely due to growth initiatives, increased FDIC assessments, and legal fees related to workout loans.

Guidance, Outlook, and Risks

• Visa Litigation: The company recorded a $245,000 non-cash charge ($151,000 after-tax) in Q3 related to a Visa litigation settlement disclosed after the initial earnings release.
• Regulatory Capital: The Bank remains "well-capitalized" under OTS regulations, exceeding all minimum requirements for total, core, tangible, and Tier 1 capital.
• Liquidity: Cash and cash equivalents decreased $46.1 million during the nine-month period due to net loan growth and reduced FHLB borrowings. The company maintains $200.5 million in remaining FHLB funding capacity.
• Acquisitions: Subsequent to the reporting period (October 27, 2008), WSFS acquired six branches of Sun National Bank, adding approximately $96 million in deposits.
• TARP and EESA: Management is evaluating the Troubled Asset Relief Program (TARP) and the Emergency Economic Stabilization Act (EESA) but does not currently believe it has significant exposure to troubled assets warranting participation. The company is also reviewing options regarding the FDIC's Temporary Liquidity Guarantee Program.
• Interest Rate Risk: The company has a liability-sensitive gap of $27.6 million within the one-year window. Management actively monitors interest rate sensitivity to mitigate exposure.

Investor Verification Checklist

• Asset Quality: Verify the trend in nonaccruing construction loans, which increased significantly to $19.7 million, and the adequacy of the allowance for loan losses (1.20% of total loans).
• Deposit Mix: Review the reliance on brokered deposits, which increased to $338.5 million, and the associated funding costs.
• Noninterest Income: Assess the sustainability of noninterest income given the decline in ATM bailment fees and the one-time nature of the Visa gain in the prior year.
• Regulatory Compliance: Confirm the impact of new executive compensation restrictions under TARP/CPP if the company elects to participate.
• Subsequent Events: Evaluate the integration risks and deposit retention of the recently acquired Sun National Bank branches.