WSFS Financial Corporation
Q1 2009 Earnings Call Transcript

Published: 27 May 2009

[Operator:]

Welcome to the WSFS first quarter 2009 earnings release conference call. (Operator Instructions) At this time I would like to turn the conference call over to Mr. Steve Fowle.

[Steve Fowle:]

Thank you to everyone participating on this call. Before Mark begins with his opening remarks, I'd like to read our Safe Harbor Statement. The following discussion may contain statements which are not historical facts and are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements, which are based on various assumptions, some of which may be beyond the company's control, are subject to risks and uncertainties and other factors which could cause actual results to differ materially from those currently anticipated. Such risks and uncertainties include but are not limited to those related to the economic environment, particularly in the market areas in which the company operates, the volatility of the financial and securities markets, including changes with respect to the market value of our financial assets, changes in government regulations affecting financial institutions and potential expenses associated therewith, changes resulting from our participation in the CPP, including additional conditions that may be imposed in the future on participating companies, and the costs associated with resolving any problem loans and other risks and uncertainties discussed in documents filed by WSFS Financial Corporation with the Securities and Exchange Commission from time to time. The corporation does not undertake to update any forward-looking statements, whether written or oral, that may be made from time to time by or on behalf of the corporation. With that, I'll turn the discussion over to Mark Turner, WSFS President and Chief Executive Officer.

[Mark Turner:]

Thank you all for your time and interest. I have about 10 minutes of opening comments before Q&A. First, a couple minutes on trends affecting us. As you know, in the fourth quarter of 2008, a number of items negatively impacted our earnings. And while the full year 2008 was profitable, these items led to our first quarterly loss in many years. In the first quarter of 2009, many of these items continued but lessened leading to a modestly profitable quarter. Some of these trends include our provision for loan loss at $7.7 million was much less than the $14.7 million last quarter. Also our adjustments to real estate owned improved from $700,000 to $466,000. Net charge-offs at $3.2 million improved from $11.9 million in the fourth quarter of 2008. We recorded a charge of $301,000 in the first quarter against our legacy reverse mortgage portfolio down from a $1 million charge in the fourth quarter. And we recorded $124,000 mark-to-market on our triple-B rated reverse mortgage-backed security in the first quarter of 2009, which was a significant improvement from the $1.4 million we recorded during the fourth quarter of 2008. The face value of this security is about $12.4 million but has been written down to book value of $10.7 million now. We continue to expect full payment on this security because of it's significant over collateralization, and we updated our understanding of this over collateralization with AVMs and BPO appraisals of all the underlying houses at the end of 2008. And finally, First Reverse our small startup reverse mortgage banking unit reported a pre-tax loss of $586,000 in the first quarter, an improvement from $832,000 reported in the fourth quarter of 2008. I'd like to spend a minute updating you also on some other items impacting our results. As we previewed on our last call, our results for the quarter were also negatively impacted by a number of items all a result directly or indirectly of the weakness in the economy. First, we recorded a decrease in bank-owned life insurance income due to weakness in the investments underlying the insurance. We expect first quarter results to be a reasonable proxy for the remaining quarters of the year for bullying income. We also recorded no federal home loan bank stock dividends. We anticipate no dividends for the remainder of the year. Finally, we recorded a significant increase in our FDIC insurance assessment to $1.5 million for the first quarter of 2009 compared to $330,000 in the fourth quarter of 2008. This large amount was due to increased assessment rates, our deposit growth, and a catch-up adjustment. Not withstanding any one-time assessments that may be leveled b y the FDIC, we expect the total FDIC insurance charge for the full year 2009 to be about $5 million. Now a couple minutes on credit quality specifics. Overall economic weakness and credit quality specifically continues to weigh on earnings. The vast majority of our large portfolios of loans are holding up relatively well. Residential construction lending at 5.4% of our loans or $136 million continues to be the sore spot. Non-performing assets increased to $55.8 million in the first quarter of 2009. The increase reflected three things. One, a $10.9 million increase in non-performing loans. This net increase reflects continuing weakness in our residential CLD portfolio and was due overwhelmingly to four loans. Two, a $5.5 million increase in trouble debt restructurings reflecting 24 residential mortgage and home equity loans. These TDRs are a result of our efforts to work with homeowners to keep them in their homes while protecting our returns in the current cycle. The vas majority of these modified loans are paying. And three, a $3.6 million increase in assets acquired through foreclosure predominantly due to one large residential CLD property. We continue to provide appropriately and grew our allowance ratio to 1.41% this quarter from 1.26% of total gross loans last quarter. Now, a couple minutes on the provision for loan losses. On our earnings call last quarter, we indicated our charge-offs and provision for 2009 would be similar to the full year 2008 numbers of $16 million in charge-offs and $23 million in provision as we saw the recession continuing. We cautioned that this was a dynamic environment and, therefore, projecting losses and their timing in any quarter would be difficult. Our first quarter results bore that out. Charge-offs at $3.2 million were actually less than we expected, but to provision at $7.7 million was about $2 million greater than we expected as loans migrated down the risk grades. We are also seeing some signs of general stabilization. Commercial and industrial loans and commercial real estate loans have held up well to date, and consumer and first mortgage loan losses have stabilized at relatively low levels. But job losses and residential property values have worsened so new home sales and, therefore, residential CLD loans continue to be the big issue for us and other banks. We are better positioned than many as residential CLD loans are only 5.4% of our total loans, but a large percentage are moving on to our watch list as sales activity for all but first time buyers of modestly priced homes have slowed dramatically. Annualizing our $7.7 million in provision for the first quarter would arrive at a full year provision of just under $31 million. We dedicate significant resources ever quarter at a very granular loan-by-loan level to assessing problem loans, migration in our portfolios and expected losses. Given the continued economic weakness, I think it's now prudent to assume the provision of the full year 2009 will be closer to our first quarter run rate better than last years rate. By way of information only, the four analysts that cover us had estimates for a full year 2009 provision of between $26 million and $33 million, but we, again, caution it's a very dynamic environment and projecting losses and timing of losses at any quarter continues to be difficult. Importantly, all else remaining more or less the same, we will be profitable in 2009 at any of those levels of provisioning and profitable at even much higher levels of provisioning. The balance of my comments will speak about relatively good news, and there is much good news to report. Our market clearly sees us as a bank of choice for service and is a result during a time when others are in retreat we are taking good market share. Retail deposits grew $139 million from December for an annualized growth rate of 33%. Most of this growth was in core deposit accounts. Loans also grew $60 million from December as our commercial and industrial portfolio grew $71.5 million. In many cases this growth is with customers we have been courting for years who have become disenfranchised by other lenders. We are seeing many opportunities and with much better structure and pricing than in recent years and we've had to pick and choose which relationships get our balance sheet space. Another bright spot due to strong growth and a stable net interest margin, we have improved our net interest income significantly increasing $1.3 million from the fourth quarter of 2008 and $2.9 million from the first quarter of 2008. We do continue to benefit also from balance sheet management. Our loan portfolio remains diversified. We continue to tightly observe portfolio, borrower and geography limitations we put on CLD portfolio starting back in 2005. Our portfolio of construction loans is steady to shrinking. And we continue to maintain diversification in C&I and CRE lending. As mentioned earlier, a number of indicators are stable or improving. Commercial mortgage and C&I delinquency rates typically seen as a leaning indicator for these loans are stable. The C&I delinquency up slightly to 40 basis points at the end of the first quarter from 32 basis points at the end of 2008, and CRE delinquency holding at 86 basis points from 84 basis points delinquency at the end of 2008. However, we do continue to monitor these portfolios closely and these portfolios have shown some migration to lower risk rating. Also, delinquency statistics in mortgage and real estate secure consumer loans continue to compare favorably to national levels. As mentioned, our losses here have stabilized at relatively low levels, $744,000 in the first quarter for all mortgage and all consumer loans, or all first mortgage and all consumer loans, or 42 basis points annualized. And we continue to minimize credit risk in our investment portfolio. For those new to us, we have no Freddie or Fannie preferred, trust preferred subprime-backed securities, or bank and thrift equity securities. Our portfolio improved in price over the last quarter as the mortgage-backed securities market improved, and we also executed the successful sale of $21 million of securities to offset our robust loan growth, including $7 million in non-agency mortgage-backed securities all at a gain, one reflection of the quality of our portfolio. Another reflection of the quality of our securities portfolio, to date 12 of our 81 private label mortgage-backed securities have been downgraded below triple-A minus. Two independent stress tests of all 12 downgraded bonds have led us to conclude that there is no other than temporary impairment on these bonds, as collection of all principle and interest is probable. For some additional detail, these 12 bonds have a face value of $61.8 million. Even in the most severe shock that the experts provided us, which starts with December 31, 2008 home price values and includes a 17% decrease in home prices this year and another 5% decrease next year, the credit losses on these 12 downgraded bonds would be only $325,000 out of $61.8 million in face, or only 54 basis points of losses in a severe shock scenario. In summary, we've rebounded from our fourth quarter loss to a modest profit. We remain affected by the same issues and trends that impacted us then but to a much lesser degree. Most importantly, we continue to take good market share, most notably in deposits and getting full relationships from our commercial customers, both strategically important to us. Thank you, and at this time we'll take questions.

[Operator:]

(Operator Instructions) Our first question comes from Avi Barak – Sandler O'Neil.

[Avi Barak:]

A few questions for you, firstly, the $11 – the $9 million, excuse me that went into non-performing loans that you mentioned it's basically four loans to a developer. Is it all the same developer, the four loans, or is it four different developers?

[Mark Turner:]

Avi, I'm going to have Rodger Levenson, who is head of our Commercial Division and heads our Chief Credit Officer function as well, answer that question.

[Rodger Levenson:]

Avi, these are four separate unrelated loans in different geographies to different borrowers.

[Avi Barak:]

Okay, thank you. Secondly, the modified loans in the consumer portfolio, I guess it was about $5 million or $6 million. If those continue to pay, will they eventually come off the non-performing balance or will they stay in non-performing for the life of the loan?

[Rodger Levenson:]

Now, based upon our understanding currently, as long as there's performance over a demonstrated period of time, we would expect that they would be reclassified out of TDRs.

[Avi Barak:]

Is that two quarters or?

[Rodger Levenson:]

Six months

[Avi Barak:]

Six months, okay, thanks. Thirdly, the OREO, I'm just wondering what kind of, is that just raw land, or is it half raw land half unfinished homes, or how should we think about that?

[Rodger Levenson:]

Avi, the single largest component of that was one of the projects we identified in the fourth quarter as taking a large write-down on and it's a partially completed condominium project in Philadelphia, which we've now taken control of.

[Avi Barak:]

And then, lastly, as the dynamics and the political environment of TARP continues to change and morph, I'm just wondering your thoughts on paying that back or holding onto it for the first year, etc. and where we stand in that regard.

[Mark Turner:]

Avi, we're going to be evaluating that literally over the next several weeks. We believe, obviously, there's some negatives to holding TARP, as has been well discussed in the press, and we've seen those as well, but also there continue to be some positives, including supporting our balance sheet in a difficult time and also supporting growth that we're experiencing. So it may have run its course for us and served its purpose, but we'll be making that decision over the next several weeks.

[Operator:]

Our next question comes from Andy Stapp – B. Riley & Company.

[Andy Stapp:]

Just following up on the TARP question, if you did decide to redeem it, would you do any type of capital raise?

[Mark Turner:]

Andy, that would be a part of the overall evaluation so I can't answer that at this time.

[Andy Stapp:]

Okay.

[Mark Turner:]

We have, Andy, purchased mortgage-backed securities, liquid mortgage-backed securities over the last couple of quarters in anticipation and response to having raised it, so there is balance sheet room that we could potentially unwind if we were to pay that back.

[Andy Stapp:]

Okay. And do you still anticipate First Reverse to turn a profit in the second quarter?

[Mark Turner:]

Andy, our primary goal now with First Reverse management is to continue to hone the model and cut costs to get them to a breakeven level as soon as possible. At the same time we're also working with First Reverse management on our strategic alternatives for that business, which could include partnering, a sale of part or all the business, or an orderly wind down if we cannot get sufficient traction. It's been a difficult market for a startup involved in mortgages as home values have come down. I'll say, though, we still strongly believe in the reverse mortgage product as a great way for seniors and baby boomers to live comfortably in their homes in retirement. We believe the product has a bright future because of the demographics, and we continue to have great success originating them from our local retail branch network.

[Andy Stapp:]

Okay. And with regard to your nice deposit growth, was that driven, was that just driven all by gaining market share, or did you also do a promotional campaign?

[Mark Turner:]

Actually, our head of retail is here, Rick Wright, who wasn't introduced, so I'll ask Rick to add some comments on that.

[Rick Wright:]

We did have one promotion to the tune of about $10 million was all it was on the CD side, but we're finding just that continued flow of core deposits, particularly interest checking products that are coming to us with no particular promotional rate or offer.

[Andy Stapp:]

Okay, great. And in your earnings release it mentioned a risk grade migration in your commercial portfolio. Is that talking about C&I specifically or just all commercial categories?

[Rodger Levenson:]

Andy, it's Rodger again. It's all categories, although it's primarily residential CLD, residential construction.

[Operator:]

Our next question comes from Stephen Moss – Janney Montgomery Scott.

[Stephen Moss:]

Most of my questions have been answered. Just a little bit on the loan growth side, it was good for the quarter and what are your expectations going forward?

[Rodger Levenson:]

This is Rodger again. As we mentioned in the fourth quarter, we see the current environment presenting us with lots of very good opportunities to get full relationship banking at good structure and very well priced, and so our pipeline continues to be robust, and we feel very optimistic about it going forward.

[Stephen Moss:]

Okay, good. And then with regard to the margin, what should we be expecting going forward with the securities coming on?

[Steve Fowle:]

Yes, the margin was beginning to recover at the end of this past quarter, so the margin rates were going up as we exited the first quarter. So I expect the margin to be just slightly above kind of the normalized rate for the first quarter.

[Operator:]

Our next question comes from [Ronald Smith].

[[Ronald Smith]:]

Yes, I'm a retired officer of the bank and I also own several thousand shares. I'm just going to ask a forward-looking question. Assuming that the loan loss debacle will eventually go away and you'll return to a more normal provision, such as the provisions that you were making in 2007. Is it reasonable to assume that the balance sheet growth and the net interest margin that's just slightly over three will get you back to an earnings per share of approximately $1 a quarter, without regard for when that might happen? I'm not asking you to say when, but it looks to me like that's achievable.

[Steve Fowle:]

Well, thanks for listening, Ron, and thanks for your service to the company in the past. With all those caveats that you put on it, certainly if the loan loss provisioning got back to the levels that they were a couple of years ago, it's easy to assume that, given all the growth that we've had, that we could get back to the quarterly earnings that we had last year, which were over $1 a share. But I just mention that the if and then when of when the provisioning and loan losses will get back to levels of a couple of years ago is still very uncertain.

[[Ronald Smith]:]

I understand that. I'm a forward-looking guy, though, and I'm a patient guy too. Thanks for your answer.

[Operator:]

(Operator Instructions) And, ladies and gentlemen, at this time I'm showing no additional questions.

[Mark Turner:]

Well, we'd like to thank you all for your time and interest and your questions, and Steve's and my numbers are well published. If you have calls, please feel free to call at any time and we look forward to getting on the road soon and talking more about WSFS.

[Operator:]

That concludes today's teleconference.