WSFS

WSFS Financial Corp. Q1 2011 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2011. WSFS Financial Corporation is the parent company of Wilmington Savings Fund Society, FSB (WSFS Bank), a community banking institution operating 44 offices primarily in Delaware, Pennsylvania, Virginia, and Nevada. The company operates three reportable segments: WSFS Bank, Cash Connect (ATM services), and Trust & Wealth Management (including Christiana Trust, acquired in late 2010).

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability Surge: Net income increased significantly from $0.5 million in Q1 2010 to $4.2 million in Q1 2011. This turnaround was driven by a $5.5 million reduction in the provision for loan losses and a $2.5 million increase in noninterest income.
• Asset Quality Improvement: The provision for loan losses dropped from $11.4 million to $5.9 million, reflecting fewer problem loans and improved risk migration. However, nonperforming assets increased slightly to $101.8 million (2.58% of total assets) from $92.9 million.
• Revenue Growth: Noninterest income rose 22% year-over-year, primarily due to $1.8 million in fiduciary income from the Christiana Trust acquisition and growth in the Cash Connect division.
• Expense Management: Noninterest expenses increased $1.8 million to $31.4 million. This increase is largely attributable to the first full quarter of Christiana Trust integration costs ($334,000) and growth-related expenses (new branches, staff). Notably, Q1 2010 included a $4.5 million non-routine charge for an armored carrier fraud loss which is absent in the current period.
• Funding Mix: Brokered deposits decreased by $84.8 million, while customer deposits increased by $94.3 million, improving the funding mix by reducing reliance on wholesale funding.

Outlook, Risks, and Management Commentary

• Capital Position: The Bank remains "well-capitalized" under regulatory standards, with a Tier 1 capital ratio of 12.44% and a total risk-based capital ratio of 13.69%.
• Acquisition Integration: Management continues to integrate Christiana Bank & Trust, which has contributed to revenue growth but also added to operating expenses.
• Regulatory Environment: The filing highlights the impact of the Dodd-Frank Act, including the phase-out of the Office of Thrift Supervision (OTS) and the transition to the Office of the Comptroller of the Currency (OCC) as the primary regulator. New FDIC assessment rules based on average assets rather than deposits are expected to take effect in Q2 2011.
• Interest Rate Risk: The company maintains a positive interest-sensitive gap of $233.3 million. Management notes that while the net interest margin decreased slightly by one basis point, the portfolio is well-positioned for rising rates.
• Forward-Looking Risks: Risks include the potential for actual economic conditions to be worse than estimated, which could impact loan loss provisions and asset valuations. There is also uncertainty regarding the full realization of synergies from the Christiana Trust acquisition.

Investor Verification Checklist

• Nonperforming Asset Trends: Verify the trajectory of nonperforming assets, which rose to 2.58% of total assets, and monitor the specific impact of the three land loans placed on nonaccrual status.
• Provision Sustainability: Assess whether the reduced provision for loan losses ($5.9M) is sustainable given the lingering economic conditions and the specific concentration of construction and commercial real estate loans.
• Christiana Trust Synergies: Monitor the integration progress of Christiana Trust to ensure projected revenue synergies are realized against the increased operating costs.
• Regulatory Capital Impact: Review the impact of the new FDIC assessment methodology (effective Q2 2011) on future liquidity and expense ratios.
• Brokered Deposit Reduction: Confirm the stability of the funding mix as the company successfully reduced brokered deposits by 34% in the quarter.