WSFS

WSFS Financial Corp. Q1 2009 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2009. WSFS Financial Corporation is a thrift holding company headquartered in Wilmington, Delaware, operating primarily through its subsidiary, Wilmington Savings Fund Society, FSB. The company serves the mid-Atlantic region with residential and commercial lending, retail deposits, and wealth management services. As of May 1, 2009, there were 6,190,987 shares of common stock outstanding.

Key Financial Metrics

Liquidity and Capital: The company raised $52.6 million in January 2009 through the sale of preferred stock to the U.S. Treasury under the Capital Purchase Program (CPP). The bank remains "well-capitalized" under regulatory standards, with a Tier 1 capital ratio of 10.19%.

Material Changes vs. Prior Period

• Profitability Decline: Net income dropped 59% year-over-year, primarily driven by a $5.26 million increase in the provision for loan losses and higher noninterest expenses.
• Asset Quality Deterioration: Nonperforming assets increased by $20.0 million (56%) to $55.8 million. This was driven by a $10.9 million increase in nonaccruing loans, largely due to four residential construction loans, and a $3.6 million increase in assets acquired through foreclosure.
• Expense Growth: Noninterest expenses rose 16% to $24.4 million. Increases were attributed to higher FDIC insurance premiums, write-downs of foreclosed assets ($466,000), and expenses related to the 1st Reverse acquisition.
• Deposit Growth: Total deposits increased by $135.8 million (6%) compared to the prior quarter, with significant growth in customer deposits and brokered certificates of deposit.
• Investment Portfolio: Mortgage-backed securities increased by $98.3 million, while cash and cash equivalents decreased by $46.7 million.

Outlook, Risks, and Unusual Items

• Subsequent Event (Fraud Risk): In April 2009, the company discovered suspicious wire transfer activity affecting two customer accounts. An investigation is ongoing. If no recoveries or insurance coverage is obtained, the company estimates a potential expense of approximately $1.3 million.
• Regulatory Environment: The company is subject to executive compensation restrictions under the CPP and the American Recovery and Reinvestment Act (ARRA). Additionally, a proposed FDIC emergency special assessment of 20 basis points could significantly impact 2009 results.
• Market Risk: The company maintains a positive interest-sensitive gap of $129.2 million. Management notes that the low absolute levels of interest rates make sensitivity to rate decreases less meaningful.
• Impairment: The company holds $296.0 million in mortgage-backed securities with unrealized losses of $20.9 million. Management has determined these are temporary impairments due to market liquidity and interest rate changes, not credit quality issues.

Investor Verification Checklist

• Loan Loss Provision Adequacy: Verify if the $7.65 million provision is sufficient given the 56% spike in nonperforming assets and the specific concentration in residential construction loans.
• Wire Transfer Fraud Impact: Monitor the outcome of the April 2009 investigation to confirm if the estimated $1.3 million loss will be realized or covered by insurance.
• FDIC Assessment Impact: Assess the potential financial impact of the proposed 20 basis point emergency special assessment on future liquidity and earnings.
• Preferred Stock Dividends: Confirm the impact of the 5% (rising to 9%) dividend obligation on the U.S. Treasury preferred stock on future earnings available to common shareholders.
• Asset Quality Trends: Track the ratio of nonperforming assets to total assets (currently 1.57%) to ensure it does not continue to rise in subsequent quarters.