WSFS Financial Corporation
Q2 2009 Earnings Call Transcript

Published: 28 Jul 2009

[Operator:]

Good day. Welcome to WSFS Second Quarter 2009 Earnings Conference Call. All participants will be in listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (Operator Instructions). Please note this conference is being recorded. Now I'd like to turn the conference over to Stephen Fowle. Mr. Fowle, the floor is yours, sir.

[Stephen A. Fowle:]

Thank you, Mike, and thank you to everyone participating on the call. Before Mark begins with his opening remarks, I'd like to read our Safe Harbor statements. Following discussion may contain statements which are not historical facts and are forward-looking statements as 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 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 maybe made from time to time by or on behalf of the Corporation. I will now turn the discussion over the Mark Turner, WSFS President and Chief Executive Officer.

[Mark A. Turner:]

Thank you, Steve, and thank you all for your time and interest. I have about 10 minutes of comments before opening the lines to take questions. For the quarter, we recorded a loss of 3.1 million or $0.50 of share. As a result, tangible common book value per share declined by $0.34 or about 1% to $33.19 of share. Our tangible common equity ratio declined slightly to 5.75% of assets. These ratios do not include the pro forma impact of accounting capital raised discussed later. Our results were impacted by a number of non-routine items discussed later and by increase credit costs, which are result of a worsened economy across the region and its impact on our customers and our asset quality. We've responded in a number of ways. First, during the second quarter, we increased our provision for loan losses to 12 million from the first quarter level of 7.7 million reflecting continuing net charge-offs, credit migration in our commercial loan portfolio primarily, the residential, construction and land development portfolio and continued collateral depreciation. Our allowance for loan losses is now 1.63% of loans, an increase from 1.41% at March very 31st. We also recorded 1.3 million in additional write-downs in REO, predominantly related to an updated appraisal on one Philadelphia Condominium Development project. All in all, we improved our loss reserves meaningfully in the quarter. Additionally, during the past quarter, we moved two large development projects in the non-performing status. While thee projects are still paying, the projects show very slow absorption. We believe we have taken an appropriately conservative approach to these credit decisions. We also continue to increase our problem asset management efforts. During the quarter, we hired a Senior Executive with an extensive background in commercial and residential real estate to augment our asset strategies group. His work will focus exclusively on problem loan disposition. On our earnings call last quarter, we indicated that we anticipate our provision for all of 2009 would be similar to the annualized first quarter results, about $32 million. Precaution that this is a dynamic environment and results could likely be lumpy. In the second quarter, our provision is tracking greater than our expectation that we came out first quarter. While we believe some of these variances due to lumpiness, we also recognized there has been credit deterioration across our marketplace. As a result, we have updated our full-year loan loss provision forecast. Our primary assumptions include continued very low housing absorption and very low pricing levels and a continued soft economic environment including higher unemployment. Under these assumptions, we then performed a thorough review of our loan portfolios including, number one, every single residential and commercial construction land development loan, number two, all loans greater than a million dollars rated pass watch or lower in our internal risk rating system, and number three, consumer and various loans based on credit transit portfolio levels. Based on this analysis, we are forecasting a range for our full-year 2009 provision of 36 to $46 million. We recognized we've underestimated expected provisions in past quarters. This is primarily a result of deteriorating economy across our region. With each passing month, we believe we have a better but not perfect understanding of how the economic is affecting our market and customers and have increased the intensity and granularity of our portfolio valuation to arrive at this lease estimate. We've also sort the help of outside experts in valuating potential loan losses. Our expected loss range was supported by an independent investment bank review of expected losses in our portfolios in a pessimistic environment that is an environment, where local unemployment is greater than 9%; unemployment is now at 8.4% in Delaware and housing prices declined another 15%. However, we continue to caution that the current environment is still dynamic and losses and reserves may still be lumpy. Our loss this quarter reflects the difficult economic times in a number of additional ways. Like the rest of the industry, we reported a one-time FDIC Special Assessment to support replacement of the positive insurance bond. For WSFS, special assessment was 1.7 million pretax or $0.17 per share after-tax. We also recorded 1.8 million in tax equivalent charges or $0.17 per share after-tax related to our decision to conduct an orderly wind-down of 1st Reverse. While we continue to be optimistic about future of the reverse mortgage product, we've been disappointed by the impact of that changing regulatory environment that weakening housing markets have had when origination volumes of 1st reverse. Over the past few quarters, we've discussed with you the likelihood of a change in strategic direction for the subsidiary. Following the valuation of a number of strategic alternatives for the company we made a decision to wind-down the operations. 1st Reverse will discontinue taking new reverse mortgage applications after July 31 and begin a wind-down at that time that will last a few months. Additionally, during the quarter, we reported 1.5 million related to fraudulent wire activity affecting accounts of two of our customers impacting earnings per share by $0.15. We also recorded 1 million expenses related to due diligence on an acquisition prospect were we've since terminated the discussions impacting our earnings per share by $0.10. This caused the reflection of WSFS being opportunistic yet careful on the current environment. Despite the increased credit crisis, we reported this quarter on adjusted for these non-routine items WSFS earnings would have been a positive 1.3 million or $0.09 per share. While even with adjustments, our earnings are obviously not satisfactory we showed significant gains in building the fundamentals of our core bank so that we can emerge in the current economic climate a much stronger company. In the past, we've discussed our strategy of Engaged Associates Delivering Stellar Service to Create Customer Advocates, thus building shareholder value. Our success is evident in the significant deposit in commercial loan growth statistics. Deposits grew to an annualized 29% growth rate this past quarter and commercial loans grew at an annualized adjusted 13% growth rate. At the same time, these deposit rates declined and loan yields increase. As a result, we also grew net interest income by more than 10%, an increase on margin of 26 basis points from the first quarter to second quarter of 2009 to active pricing and balance sheet management decisions. We're also pleased to report significant fee income growth. Fee income grew 1.6 million or 14% from the first quarter of 2009 and 1.0 million or 9% from the second quarter of 2008. Our deposit, loan, margin and fee income growth reflect the fundamental strength of our franchise in an adverse economic environment. Of course, we are also managing our expenses more closely and we'll have more to report in coming quarters. Finally, a couple of items from prior presentations that are worth repeating. Our loan portfolio remains diversified. Our portfolio of residential construction loans where we're experiencing the most of our paying at 5.3% of loans have steady to shrinking. And we continue the main diversification in C&I and CRE lending. And delinquency and losses in our mortgage and consumer portfolios remains very manageable. And we continue to show diminished credit risk in our investment portfolio. We have no Freddie or Fannie preferred, Trust Preferred, sub-prime back securities or bank and thrift equity securities. We continue to actively manage our private label mortgage-backed selling 80 million of securities at a 141,000 gain in the quarter. Due to the quality of our investments, we continue to report no other than temporary impairment on any of our securities. Another reflection of the quality of our security portfolio, well, 19 of our 81 private label mortgage-backed securities are in the downgrade below AAA minus. To win the trust assets we also conclude that there is no other temporary impairment on any of these bonds as collection of all principle and interest is probable. Even in the most severe shock scenario the experts provided us, which starts with the March 31, 2009 home price values and includes a 20-plus percent increase in value over the next 24 months, the credit losses on these 19 bonds will only be $231,000 and of $82 million in par value or less than 30 basis points of losses in a severe shock scenario. Now, for a few comments in our announced common equity raise. Today, we signed an agreement with Peninsula Investment Partners to raise 25 million in common equities through sale of 862,000 shares and a 10-year warrant to purchase 129,000 shares of WSFS' common stock. The price for the shares and the straight pressure of the warrant of $129 per share. We welcome this capital addition for a number of reasons. First, while we are currently well capitalized the additional capitals for our ability to pursue opportunities, we continue to see opportunity as a result of the economic environment including the prospects of fundamental gains in share in our market and other strategic opportunities. This additional capital provide additional balance sheet strength and support for payment of CPP funds when the time is right. Additionally, we are enthusiastic about welcoming Peninsula's Managing Partner Ted Weschler back to our Board. Through his funds, Ted, has earned significant amounts of WSFS stock in serving our Board from 1992 to 2007 and was invaluable on building significant shareholder value during that period. At this pricing, and after Peninsula conducting due diligence, we believe this investments represents a board of confidence in WSFS. Pro forma for this capital raise and dividending a CPP funds to the bank our tangible common book value per share would decrease 1.5% from 33.19 at June 30 to $32.68. But our tangible common equity asset ratio will increase meaningfully from 5.75% to 6.45%, about a 12% increase. Also, Tier-I and total risk based capital ratios will also increase about 11 to 12% to above already well capitalized levels. And lastly while we'd benefit from limits and versification requirements we put around our loan portfolios, we nonetheless continue to feel the impact of the economy in our customers and in our credit results. However, shown in our deposit, loan, margin and fee income growth in the second quarter opportunities for our banking business evolved. We believe from our improvements we are realizing and opportunities we are pursuing we'll outlast the current economic environment. Thank you for your patience. And at this time we'll take questions.

[Operator:]

Yes, sir. (Operator Instructions). Our first question comes from the Andy Stapp with B. Riley and Co.

[Andrew Stapp:]

Hi guys.

[Mark Turner:]

Hi Andy.

[Andrew Stapp:]

Could you provide some color on the 6.2 million that you mentioned in your press release that have increased risks in your commercial portfolios. Is it primary commercial loans C&I or are they in a commercial real estate or what? Whatever color you can provide there including the granularity of these loans.

[Rodger Levenson:]

Hey Andy, it's Rodger Levenson. It is a combination of continued stress throughout our construction portfolio and in the C&I portfolio, we're particularly seeing stress at a lower end, small business and a lower end of our business banking franchise.

[Andrew Stapp:]

Okay. And the fraud related wire transfer charge, is that 1.3 million or I know there is some language about $200,000 in expenses. So just trying to confirm if those total charges were 1.3 or 1.5 million?

[Stephen Fowle:]

Andy, this is Steve. 1.3 million was money that was gradually wired out. The 200,000 expenses were related to forensic computer work and legal expenses.

[Andrew Stapp:]

Okay. And would you happen to have your 30 to 89 day delinquencies?

[Rodger Levenson:]

Hi Andy, it's Rodger again. This is for the commercial lending portfolio, our 30 to 59 day delinquency is at 52 basis points at the end of the quarter and our 60 to 89 day is at 17 basis points at the end of the quarter.

[Andrew Stapp:]

And that's just for commercial loans?

[Rodger Levenson:]

That is for the commercial loan portfolio, that's correct.

[Andrew Stapp:]

Do you have it for the total portfolio?

[Rodger Levenson:]

Hold on a second.

[Andrew Stapp:]

Okay.

[Rodger Levenson:]

I will look. Perhaps we'll get back you on the specifics on the consumer portfolios. I don't have it right at my fingertips.

[Andrew Stapp:]

You know where the overall trend was?

[Mark Turner:]

The overall trend in consumer deteriorated a little bit. Andy, this is Mark. I think it was total delinquency in consumer was about little under 2.5% in the second quarter which was up modestly from the first quarter.

[Andrew Stapp:]

And how do you see commercial compared to the first quarter?

[Rodger Levenson:]

It's the similar magnitude. We were just over 2% at the end of the first quarter and the overall commercial delinquencies, we reported, was 2.28 at the end of the second quarter.

[Andrew Stapp:]

Okay. And would happen to have the dollar amount of your watch list at both June 30 and March 31?

[Mark Turner:]

The Delaware amount of the watch list?

[Andrew Stapp:]

Yeah, the total?

[Mark Turner:]

Yeah. Andy, I think we have that number, we just don't have in handy. So if we are going to... we are presenting at a conference tomorrow. The two questions which we couldn't answer we'll catalogue and bring those up at the conference tomorrow.

[Andrew Stapp:]

Okay. And were any cost associated with the capital raise or did you negotiate this internally?

[Mark Turner:]

There were... it was a privately negotiated, there were between legal and some small investment banker fees probably about 200,000 in costs.

[Andrew Stapp:]

Okay. I've some other questions but I'll let other people get on. Thank you.

[Rodger Levenson:]

Okay.

[Mark Turner:]

Thank you, Andy.

[Operator:]

And the next question we have comes from Sandra Osborne from KBW.

[Sandra Osborne:]

Thanks. Good afternoon, guys.

[Stephen Fowle:]

Good afternoon.

[Sandra Osborne:]

I was just wondering can you give me any detail on the incremental construction loan growth; that was only 6 million, would that actual originations or line draw down?

[Mark Turner:]

Yeah, that the incremental there is was draw-downs from the existing projects.

[Unidentified Analyst:]

Okay, so no... you're not starting any new projects, you are not seeing any new projects right now?

[Mark Turner:]

I don't believe there were any new ones, if there was it was very, very small amount.

[Rodger Levenson:]

Yeah. Sandra, this is Rodger. There was a couple of loans we reclassified as construction; there is no new activity in that portfolio.

[Sandra Osborne:]

Okay, thanks. And under the due diligence cost, just curious why the discussions were terminated and what would be attractive to you right now?

[Mark Turner:]

Yeah. Unfortunately but it can't be appropriate for me to comment with any specificity on that. I think suffice is to say that obviously, when we pursue due diligence the prospects that we saw to start were not there, at the end the risks were greater than the opportunities that we saw, generally speaking. And that's, as I mentioned in my earlier comments, I think it's a reflection of we are seeing a lot of opportunity in this market whether they be branches or in our markets or near our market or whole bank situations or niche business opportunities. But we are actively taking a look at but we're being very careful and would continue to be very careful and prudent while we do that.

[Sandra Osborne:]

Alright. And finally, with the new capital infusion, just curious if you could update us on thoughts of other potential, I guess, the timing of that?

[Mark Turner:]

Yeah, we'd like to repay as soon as it's prudent. However, I think that will be as we see signs at the overall economy stabilizing or market stabilizing and more stable asset quality trends across our book and then our region. It's clear from the results, from our results and others results of other players in and nearby our market that the recession is coming in waves and is hitting this part of our region, it's hitting this region in the country right now.

[Sandra Osborne:]

Okay. That's all. Thanks.

[Mark Turner:]

Thank you.

[Operator:]

The next question we have from Steve Moss with Janney Montgomery Scott.

[Steve Moss:]

Good afternoon guys.

[Mark Turner:]

Hi, Steve.

[Steve Moss:]

Just wondering what you see in terms of, you spoke of the stress you see in the economy, but still had commercial and CRE growth for the quarter. What do you see in general for the loans pipeline out there?

[Rodger Levenson:]

This is Rodger again, Steve. Let say it's... there's consistent opportunity out there but as we've mentioned in our conversations in the past, it's primarily from peaking market share from others particularly from some of our larger competitors who are distracted with other issues. So it continues to be at very favorable structure and pricing and overall relationship, but it's not coming from economic growth.

[Steve Moss:]

Okay. Thank you very much.

[Stephen Fowle:]

Thank you.

[Operator:]

The next question we have from Avi Barak of Sandler O'Neill.

[Avi Barak:]

Hi, guys. How are you?

[Mark Turner:]

Good, Avi. How are you?

[Avi Barak:]

Well. First question is aside from the 1.60 million to wind-down 1st Reverse, should we expect future cost associated with that or is that the bulk of it and then how is your own internal reverse mortgage portfolio holding up and why is the difference between the two?

[Mark Turner:]

That is the bulk of it. We do... we accrued for as much as we could on the wind-down decision, but there are some costs bringing the accounting rules that we cannot, we expect over the next few months we'll have a couple of pennies per share of expense running through our earnings statement, but should be nothing significant. Avi, your second question about why the difference. The difference really is in business model and we continue to have very good results locally when we originate reverse mortgages through our retail banking franchise and that's primarily because we obviously already have a significant investment in net retail banking franchise and brand name in our current environment. So it's an additional product we can hook one to the existing retail banking franchise. First reverse was an effort to take reverse mortgages nationally and they did not have the advantage of an existing retail franchise, where other distribution channels. They had to be built and building those during the current market environment proved to be too difficult or... and we could not get the breakeven. So those are the fundamental differences. As I mentioned, we still continue to believe strongly in the products and at a different time expansion of our current franchise in Delaware may make some sense for us.

[Avi Barak:]

Okay. Thanks.

[Mark Turner:]

And just to clarify, we, in both of the situations, we don't hold the loans, we just originate and we resell them in the secondary market.

[Avi Barak:]

Got it. Thank you. And then secondly, an unrelated question. When you are moving loans from the non-performing bucket into the arrear bucket, I know no two loans are exactly the same, but what are, in general, maybe a range on average, what kind of haircuts (ph) are you seeing from the original loan value to when it goes into arrear and then depending on the charge-off for now what are the ultimate haircuts is it 20%, 50% in your range?

[Rodger Levenson:]

Yeah, hi, Avi, it's Rodger. As you know, we move that obviously into arrear those loans. Once we have controlled those projects and it depends upon the length of time that we have to go through that process and so the range could be anywhere from 15 to 30% at this point.

[Avi Barak:]

Okay, perfect. Okay, thank you.

[Mark Turner:]

Thank you.

[Operator:]

The next question we have comes from Mac Zoltes with Benning and Gallagher (ph).

[Unidentified Analyst:]

Hi, good afternoon.

[Mark Turner:]

Hi Mac.

[Unidentified Analyst:]

I have one quick question, a follow up. In the fraud where the $200,000 of expense and about a 100, excuse me, 1.3 was actually wired out, total expense 1.5, I mean did you have to pay payback the customers 1.3?

[Mark Turner:]

That's correct.

[Unidentified Analyst:]

Okay. Thank you very much.

[Mark Turner:]

Thank you.

[Operator:]

And the next question we have comes from Brian Roman with Robeco Investment Management.

[Brian Roman:]

Several questions. Could you just repeat the number you said is your expectation for provision for the year?

[Mark Turner:]

For the total year 2009, 36 to 46 million.

[Brian Roman:]

So, If we call it 40 million we're sort of around the middle, you are talking about another at least doubling what you've done so far.

[Mark Turner:]

That's correct.

[Brian Roman:]

Okay. And is that through the expectation of building that provision above its current coverage of non-performers or just stay in line with its current coverage rate?

[Mark Turner:]

I think the expectation is we had certainly tried and build the provision to get ahead of losses and of non-performers. But that would be a function of when non-performers would hit in the... would be reclassified.

[Brian Roman:]

Okay. Other questions, under notable items, 6.2 million related to increased credit risk within the commercial portfolio. Are those, I am sorry, did you say there was some of those were or were not real estate related?

[Mark Turner:]

Some of them were?

[Brian Roman:]

In construction related?

[Mark Turner:]

That's correct.

[Brian Roman:]

Okay.

[Stephen Fowle:]

That's in the commercial portfolio.

[Brian Roman:]

All right. The 9,53,000 related to due diligence, which you terminated discussion, did you terminate it because you didn't like the potential acquisition prospect or because you felt that given every things going on with the organization now might not be the best time to engage in a transaction?

[Stephen Fowle:]

It was the former.

[Brian Roman:]

Okay. You talked about wire transfer. Mr. Weschler, first of all, who is Peninsula Investment Partners, who are they?

[Mark Turner:]

That's a hedge fund owned and the Principal is Ted Weschler.

[Brian Roman:]

Got it.

[Mark Turner:]

Who started these funds; it's got to be close to 10 years ago now. And Ted, through this fund and through prior funds where he was a Principal, have been involved in owning WSFS for the better part of last generation since the early 1990s.

[Brian Roman:]

Okay. Now you see any loan close to 20%, what's, I mean, what sort of regulatory approval is required to go above 10% and as your prospect that it doesn't happen?

[Mark Turner:]

With prospect... I am sorry, okay. Over 10%, you're required to file what's known as a rebuttal of control agreement where you agree not to do certain things including solicit proxies et cetera, et cetera. And while there is always a prospect given how beneficial private capital is, the banks fees days and given Ted's positive history and long history with the organization, I would expect that prospect that did not happening with this much.

[Brian Roman:]

Okay. Why did he leave the Board?

[Mark Turner:]

Ted left the Board when three years ago, when he sold most of his interest in WSFS at that time. His funds invest primarily and deep value situations and in 2007, when the bank multiples became certainly the highest in a generation that no longer fit, it no longer fit the selection criteria of his fund, so that's why he sold all of that part.

[Brian Roman:]

Good call on his part. Net interest margin, it expanded nicely in the quarter. What's your outlook for margin?

[Mark Turner:]

We saw the margin continuing to improve during the quarter. I'd anticipate we have a slight amount of room on the upside for the margin.

[Brian Roman:]

Okay. Delinquencies in the CLD, construction land development, it's pretty high delinquency rate. Do you expect it to go higher?

[Rodger Levenson:]

Hi Brian, this is Roger again. It's quite possible, as we said, there is a number of projects that we have today that we're monitoring very closely and depending upon future housing sales, those projects could end up going delinquent and that number could get higher.

[Mark Turner:]

Okay. It's stated that that has been built... that prospect has been build into our provision expectations for the year.

[Brian Roman:]

Okay. One last question regarding deposits, non interest-bearing demand deposits grew quite nicely in the quarter. Why did they grow? Is some of that related to the... whose branches did you buy, more bunch of branches?

[Mark Turner:]

Sun branches.

[Stephen Fowle:]

Yeah.

[Mark Turner:]

What, those October of last year and they certainly would have seen a little bit of growth consistent with the growth in the rest of our branches in our franchise in general. I... rates are ahead of retailers so asking to augment these comments. But, may be general, as people are disinvesting in the stock market as their savings were and as they are seeking even and reliable established names like WSFS that have a record of good service, we are seeing not only market share growth that more than our share of market share growth.

[Brian Roman:]

Great thank you for your answers.

[Mark Turner:]

Thank you.

[Operator:]

The next question we have comes from Andy Stapp with B. Riley and Company.

[Andrew Stapp:]

Are you concerned that by growing loans in a difficult environment that you maybe taking on some problems of some of your competitors?

[Rodger Levenson:]

Hey, Andy it's Rodger again. Obviously this environment dictates that the amount of due diligence and underwriting that we go through has increased significantly and your question is probably the first question we ask and ask numerous times to the underwriting process. So, we're going to great lengths to ensure that that's not the case.

[Andrew Stapp:]

Okay. And do you have any feel for when NPAs might peak?

[Rodger Levenson:]

That's hard to forecast. As we've said, it really depends on a number of factors. We certainly would anticipate and we build our forecast around continued fixed low housing and current economic environment remaining at this level and deteriorating slightly through the remainder of the year. So we would expect that NPAs could increase during that period of time. Beyond that, it's really hard to project. I would say that today 27% of our residential construction portfolio already is in a non-accrual status. And so there is a significant amount that's already built into that number.

[Andrew Stapp:]

Okay. Thank you.

[Operator:]

Now Mr. Turner and gentlemen, it appear that we have no further questions at this time.

[Mark Turner:]

Okay. Well, I'd like to thank everybody again for their time and interest and remind everybody that we will be presenting at an investor conference in New York City tomorrow. The information on that conference and the webcast and the dial-in numbers were issued in a press release late last week. If anybody would like that information again, you are free to call Steve Fowle at 302-571-6833. And thank you very much.

[Operator:]

Thank you, gentlemen. Thank you, everyone for attending today's conference. At this time you may disconnect your line. Thank you. (Operator Instructions).