WSFS

WSFS Financial Corp. 10-Q Summary: Period Ended September 30, 2003

Business Context and Reporting Period

WSFS Financial Corporation is a Delaware-based thrift holding company with primary operations in the Mid-Atlantic region. This report covers the quarterly period ended September 30, 2003, and the nine-month period ended on that date. The company focuses on core community banking, having recently divested its sub-prime mortgage banking subsidiary (Wilmington Finance, Inc.) and its internet banking subsidiary (CustomerOne Financial Network, Inc.), which are reported as discontinued operations or businesses held-for-sale.

Key Financial Metrics

Cash Flow: Net cash used for operating activities was $6.1 million for the nine months ended September 30, 2003. Net cash used for investing activities was $526.6 million, driven primarily by purchases of mortgage-backed securities. Net cash provided by financing activities was $421.3 million, largely due to Federal Home Loan Bank borrowings.

Capital: The Bank is "well-capitalized" under OTS regulations, with a Total Capital ratio of 17.95% and a Tier 1 Capital ratio of 17.09%.

Material Changes vs. Prior Period

• Net Income Volatility: While Q3 2003 net income ($5.3M) was lower than Q3 2002 ($9.5M), the nine-month 2003 net income ($56.4M) significantly exceeded the prior year ($26.8M). This surge is primarily due to a $41.4 million after-tax gain on the sale of Wilmington Finance, Inc. (WF) in Q1 2003.
• Discontinued Operations: Q3 2002 included significant income from discontinued operations and businesses held-for-sale ($4.3M from operations and $0.7M gain on sale). These segments were sold or wound down in late 2002 and early 2003, resulting in no comparable activity in Q3 2003.
• Net Interest Margin Compression: The net interest margin declined from 4.57% in Q3 2002 to 2.96% in Q3 2003. This was driven by the sale of high-yield reverse mortgages in late 2002, a low interest rate environment, and the purchase of lower-yielding mortgage-backed securities (MBS).
• Asset Growth: Total assets increased by $401 million to $2.1 billion, fueled by a $369 million increase in MBS and an $182 million increase in loans, offset by the removal of assets from businesses held-for-sale.

Outlook, Risks, and Management Commentary

• Outlook: Management expects MBS yields to improve in Q4 2003 (estimated 2.50% to 2.90%) as prepayment speeds slow due to rising mortgage rates. Expenses are expected to increase modestly due to the opening of 3-4 new branches by the end of 2004.
• Legal Contingency: An arbitration demand filed by American Homestead Mortgage Corp. (AHMC) seeks approximately $8.0 million related to a 1994 reverse mortgage purchase agreement. WSFS believes the claim is without merit and expects liability to be less than $2.0 million, for which it has accrued.
• Indemnifications: The company faces potential indemnification liabilities from the sales of C1FN/Everbank and WF. Management believes the likelihood of material payments is remote, and no additional provisions have been made beyond amounts already recognized.
• Asset Quality: Nonperforming assets decreased to $6.9 million (0.33% of total assets). The allowance for loan losses covers nonperforming assets at 321%.

Investor Verification Checklist

• Gain on Sale Sustainability: Verify the impact of the $41.4 million one-time gain on WF on the nine-month earnings; core continuing operations income was $15.0 million.
• Reverse Mortgage Arbitration: Monitor the December 2003 arbitration hearing with AHMC regarding the $8.0 million claim.
• MBS Yield Recovery: Track Q4 2003 MBS yields to confirm management's forecast of 2.50%–2.90% as prepayment speeds normalize.
• Escrow Collections: Confirm the receipt of remaining escrow payments from the C1FN and WF sales expected in Q4 2003.
• Capital Deployment: Assess the return on the $369 million increase in mortgage-backed securities given the compressed yield environment.