WSFS Financial Corp (WSFS) 2009 Q2 法說會逐字稿

Good day and 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 would like to turn the conference over to Stephen Fowle. Mr. Fowle, the floor is yours.

Thank you, and thank you to everyone for participating on the call. Before Mark begins with his opening remarks, I would 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 securities market, including changes with respect to the market value of our financial assets, changes in government regulations affecting financial institutions and potential expenses associated there with. Changes resulting from our participation in the CPP including additional conditions that may we 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. I will now turn the discussion over to Mark Turner, WSFS President and Chief Executive Officer.

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 a share. As a result, tangible common book value per share declined by $0.34, or about 1% to $33.19 a share. Our tangible common equity ratio declined slightly to 5.75% of assets. These ratios do not include the pro forma impact of a common capital raise discussed later.

Our results were impact by a number of non routine items discussed later and by increased credit costs, which are a result of a worsened economy across the region and its impact on our customers and our asset quality. We have 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 and 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 31. 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 into nonperforming status. While these 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. But cautioned that this is a dynamic environment and results would likely be lumpy. In the second quarter, our provision is tracking greater than our expectations as we came out of the first quarter. While we believe some of this variance is due to lumpiness we also recognize there's 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 and land development loan, number two, all loans greater than $1 million rated pass, watch, or lower in our internal risk rating system. Number three, consumer and mortgage loans based on credit trends at the portfolio level. Based on this analysis we are forecasting a range for our full-year 2009 provision of $36 million to $46 million. We recognize we have 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 economy is affecting our market and customers and have increased the intensity and granularity of our portfolio valuation to arrive at this latest estimate. We have also sought the help of outside experts in evaluating potential loan losses.

Our expected loss range was supported by an independent investment banker 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 a difficult economic times and a number of additional ways, like the rest of the industry, we recorded a one-time FDIC special assessment to support replenishment of the deposit insurance fund. For WSFS, special assessment was $1.7 million pre tax or $0.17 per share after tax. We also recorded $1.8 million in tax equivalized 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 the future of the reverse mortgage product we have been disappointed by the impact tha a changing regulatory environment and weakening housing markets have had on origination volumes at 1st Reverse. Over the past two quarters we have discussed with you the likelihood of a change in strategic direction for this subsidiary. Following evaluation of a number of strategic alternatives for the Company we made the 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 recorded $1.5 million related to fraudulent wire activity affecting accounts at two of our customers impacting earnings earnings per share by $0.15. We also recorded $1 million in expenses related to due diligence on an acquisition prospect where we have since terminated discussions impacting earnings per share by $0.10. This last cost is a reflection of WSFS being opportunistic yet careful in the current environment.

Despite the increased credit costs we reported this quarter when adjusted for these non routine items, WSFS earnings would have been a positive $1.3 million orders $0.09 per share. While even with these adjustments earnings are obviously not satisfactory we showed significant gains in building fundamentals of our core bank so that we can emerge from the current economic client a much stronger company.

In the past we've discussed our strategy of engage associates delivering stellar services to create customer advocates, thus building shareholder value. Our success is evident. In the significant deposit and commercial loan growth statistics. Deposits grew at an annualized 29% growth rate this past quarter, and commercial loans grew at an annualized adjusted 13% growth rate at the same time as deposit rates declined and loan yields increased. As a result, we also grew net interest income by more than 10% and increased our margin 26 basis points from the first quarter to second quarter of 2009 through 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 will have more to report in this in coming quarters.

Finally, a couple of items from prior presentations are worth repeating. Our loan portfolio remains diversified. Our portfolio of residential construction loans where we were experiencing the most of our pain at 5.3% of loans is steady to shrinking. We continue to main diversification in C&I and CRE lending. Delinquency and losses in our mortgage and consumer portfolios remain very manageable. And we continue to show de minimus credit risk in our investment portfolio. We have no Freddie or Fannie preferred, trust preferred, subprime backed securities or bank and thrift equity securities. We continue to actively manage our private label mortgage backs selling at $18 million or securities at $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 while 19 of our 81 private label mortgage-backed securities have been downgraded below AAA minus two independent stress tests have led us to conclude that there's no other than temporary impairment on any of these bonds as collection of all principal and interest is probable. Even in the most severe shock scenario the experts provided us, which starts with a March 31, 2009, home price values and includes a 20% plus decrease in values over the next 24 months, the credit losses on these 19 bonds would only be $231,000, out of $82 million in par value, or less than 30 basis points of losses in a severe shock scenario.

Now for a few comments on our announced common equity raised. 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 strike price for the warrant are $29 per share. We welcome this capital addition for a number of reasons.

First, while we are currently well capitalized the additional capital will support 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 will provide additional balance sheet strength and support repayment 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 owned significant amounts of WSFS stock and served on our Board from 1992 to 2007 and was invaluable in building significant shareholder value during that period. At this pricing and after Peninsula conducting due diligence we believe this investment represents a vote of confidence in WSFS.

Pro forma for this capital raise and dividending of 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 to asset ratio would increase meaningfully from 5.75% to 6.45%, about a 12% increase. Also, Tier I and total risk based capital ratios would also increase about 11 to 12% to above already well capitalized levels.

And lastly, while we benefit from limits and diversification requirements we've put around our loan portfolios we nonetheless continue to feel the impact of the economy on our customers and our credit results. However, as shown in our deposit, loan, margin and fee income growth in the second quarter, opportunities for our banking business abound. We believe improvements we are realizing and opportunities we are pursuing will outlast the current economic environment. Thank you for your patience, and at this time we will take questions.

Yes, sir. (Operator Instructions) Our first question comes from Andy Stapp with B. Riley & Company.

Hi, guys.

Hi, Andy.

Could you provide some color on that $6.2 million you mentioned in your press release that have increased risks in your commercial portfolio? Is it primarily commercial loans, C&I, or commercial real estate, or what? Whatever color you could provide there, including the granularity of these loans.

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

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

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

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

Hi, Andy, it's Roger 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.

And that's just for commercial loans?

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

Do you have it for the total portfolio?

Hold on a second.

Okay.

I will look. We'll have to get back to you on the specifics on the consumer portfolio. I don't have it right at my fingertips.

Do you know where the overall trend was?

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

And how does the commercial compare to the first quarter?

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

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

The Delaware amount of the watch list?

If you have the total.

Andy, I think we have that number. We just don't have have it handy. We're presenting at a conference tomorrow. The two questions that you couldn't answer we'll catalog and bring those up at the conference tomorrow.

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

There were -- it was privately negotiated. There were between legal and some small investment bankrupt fees, probably about $200,000 in costs.

And I have some other questions, but I'll let other people get on. Thank you.

Okay.

Thank you, Andy.

Next question we have comes from Sandra Osborne with KBW.

Thanks, good afternoon, guys.

Good afternoon.

I was wondering, can you give me any detail on the incremental construction loan growth? I know it was only $6 million. Curious is that actual originations or line drawdowns?

Yes, the incremental there was drawdowns from existing projects.

Okay. So you're not starting any new projects? Or not seeing any new projects right now?

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

Sandra this is Roger. There were a couple of loans where we classified as construction. There's no new activity in that portfolio.

Thanks. And on the due diligence costs, just curious why the discussions were terminated and what would be attractive to you right now?

Yes. Unfortunately, it would be inappropriate for me to comment with any specificity on that. I think suffice it to say that obviously when we pursued due diligence, the prospects that we saw at the start were not there at the end. The risks were greater than the opportunities that we saw generally speaking. And 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. We are actively taking a look at but we're being very careful and would continue to be very careful and prudent in what we did.

All right. And finally, with the new capital infusion, just curious if you could update us on thoughts about a potential TARP -- I guess the timing of that.

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

All right, that's helpful. Thanks.

Thank you.

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

Good afternoon, guys.

Hi, Steve.

Just wondering what you're seeing in terms of, you spoke to the stresses you're seeing in the economy, but still had had decent commercial and CRE growth for the quarter. What are you seeing in general for the loan pipeline out there?

This is Roger again, Steve. There's consistent opportunity out there, but as we've mentioned in our conversations in the past, it's primarily from taking 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.

Thank you very much.

Thank you.

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

Hey, guys. How are you?

Good, Avi. How are you?

Well, first question is, aside from the $1.6 million to wind down 1st Reverse should we expect future costs associated with that, or is that the bulk of it and then how is your own internal reverse mortgage portfolio holding up and why the difference between the two?

That is the bulk of it. We accrued for as much as we could on the wind-down decision, but there are some costs, according to 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 it should be nothing significant. Avi, to your second question about why the difference, the difference really is in business model. 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 that retail banking franchise and brand-name in our current environment. So it's an additional product we can hook on to the existing retail banking franchise.

1st Reverse was an effort to take reverse mortgages nationally, and they did not have the advantage of an existing retail franchise or other distribution channels. They had to be built and building those during a -- the current market environment proved to be too difficult. And we could not get to break even. So those are the fundamental differences. As I mentioned, we still continue to believe strongly in the product, and at a different time, expansion of our current franchise in Delaware may make some sense for us.

Okay, thanks.

And just to -- just to clarify, we -- in both of these situations, we don't hold the loans. We just originate and immediately sell them into the secondary market.

Got it. Thank you. Then secondly, an unrelated question, when you're moving loans from the nonperforming bucket into the REO bucket, I know no two loans are exactly the same but what are, in general maybe a range or an average -- what kind of haircuts are you seeing from the original loan value to when it goes into or REO and then depending on if it's charged off or not? What are the ultimate haircuts? Is it 20%? 50%? Maybe a range.

Hi, Avi. It's Roger. As you know, we move that obviously into REO, those loans, once we have control of those projects, and it depends upon the length of time that we have to go through that process. So the range could be anywhere from 15 to 30% at this point.

Okay, thank you.

Thank you.

The next question we have comes from Marc Schultheis with Boenning & Scattergood.

I have one quick question to follow up. On this fraud, the $200,000 of expenses and about 1.3 was actually wired out. Total expense, 1.5? Did you have to pay back the customers the 1.3?

That's correct.

Okay. Thank you very much.

Thank you.

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

I have several questions. Could you just repeat the number you said, your expectation for provision for the year?

For the total year, 2009, 36 million to $46 million.

So if we call it $40 million if we sort of go down the middle, you're talking about another at least doubling what you've done so far?

That's correct.

Okay. And is that with the expectation of building the provision, above its current coverage of nonperformers, or just to stay in line with its current coverage rate?

I think the expectation is we'd certainly try and build the provision to get ahead of losses and of nonperformers, but that would be a function of when nonperformers would hit and would be reclassified.

Okay. Another question is under notable items, $6.2 million related to increased credit risk within the commercial portfolio. Are those -- I'm sorry,j did you say some of those were or were not real-estate related?

Some of them were.

In construction related?

That's correct.

Okay.

That's in the commercial portfolio.

All right. $953,000 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 everything that's going on with your organization now might not be the best time to engage in a transaction?

It was the former.

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

That's a hedge fund owned, and the principal is Ted Weschler who started this fund, got to be close to 10 years ago now. And Ted through this fund and through prior funds where he was a principal on have been involved in owning WSFS for the better part of the last generation, since the early 1990s.

Okay. Now, he's going to own close to 20%. I mean, what sort of regulatory approval is required to go above 10%, and is there a prospect that it doesn't happen?

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's always a prospect, given how beneficial private capital is and to banks these days, and given Ted's positive history and long history with the organization, I would expect that that prospect of it not happening would be small.

Sure. Why did he leave the Board?

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

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

Yes, we saw the margin continuing to improve through the quarter. I'd anticipate we have a slight amount of room on the up side for the margin. Delinquencies in the CLD, construct land development, it's a pretty high delinquency rate. Do you expect it to go higher?

It's Roger again. It's quite possible. As we said, there's 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.

That has been -- that prospect has been built into our provision expectations for the year.

Last question. Regarding deposits. Noninterest-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? You bought a bunch of branches.

Sun branches. We bought 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 and our franchise in general. Rick Wright, our head of retail is here, so I will ask him to augment these comments. But I think in general, as people are disinvesting in the stock market as they're saving more and as they are seeking haven and reliable established names, like WSFS that have a record of good service, we're seeing not only market share growth but more than our fair share of market share growth.

Great, thank you for your answers.

Thank you.

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

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

Hey, Andy, it's Roger 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 through the underwriting process. So we're going to great lengths to ensure that that's not the case.

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

That's hard to forecast. As we've said, it really depends on a number of factors. We certainly would anticipate, and we've built our forecast around continued very slow housing and current economic environment, remaining at this level, 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. So there is a significant amount that's already built into that number.

Okay. Thank you.

And Mr. Turner, gentlemen, it appears that we have no further questions at this time.

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, feel free to call Steve Fowle at 302-571-6833. And thank you very much.

Thank you, gentlemen. Thank you, everyone, for attending today's conference. At this time you may disconnect your lines. Thank you.