WSFS Discusses Reverse Mortgage Acquisition On Earnings Call

image Seeking Alpha posted a transcript from WSFS Financial Corporation’s Q4 earnings call where the company discussed its acquisition of 1st Reverse Financial.  The company acquired a majority stake in the company in April of 2008 for about $3.4 million.

The call includes questions from KBW and Kennedy Capital and covers why WSFS bought 1st Reverse and some of the adjustments that have been made over the past year. Mark Turner, WSFS’s CEO and Steve Fowle, WSFS’s CFO answer the majority of the questions.  Below is a copy of the discussions related to reverse mortgages.

 Mark Turner

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On another topic, as you know, we purchased a majority stake in First Reverse in April for about $3.4 million total investment. First Reverse is a startup platform for originating and selling reverse mortgages, a product that we like, originate locally from our retail network and with which we have 15 years of experience. While First Reverse continues to improve in originations and pipeline, it is not yet showing a profit. The correspondent and secondary reverse mortgage environment has not been hospitable over the last nine months, and we continue to work very closely with management of the joint venture to make appropriate adjustments to their business model and to reduce expenses to get to lower breakeven levels of loan originations.

Sandra Osborne – KBW

I was wondering if you could just give us an update or any more thoughts on your First Reverse stake, specifically just about that, the outlook for reverse mortgages in general?

Also what are your expectations from the investment? I think that you had originally said you expected about a year or so startup losses. I’m just curious if that’s been pushed out any with the restructuring?

Mark Turner

When we purchased that majority stake in that startup business back in April, the business model that existed at the time in a much better environment had breakeven origination volumes at about 250 loans per month. And then over the course of the summer there was a change in law which originated one of their channels, their broker originated channels of how they originate loans. And then the secondary market for jumbo product, which they also had part of their business model went away, and then generally with declining equity values there’s, there are less reverse mortgage equity recaps by seniors. So it was clear by the end of the summer into early fall that the business, that business model was not going to get to breakeven in the near term.

So we worked with management very closely to adjust the business model, that it’s much more retail oriented on a commission base with a high variable cost structure, and reduced quite a bit of the fixed expenses so that their breakeven origination volumes at this point are about 100 loans per month. They’re originating about 50 loans per month right now, but with a pipeline that is building. The last pipeline I saw had about 180 loans in it. It’s our hope and expectation that it would take a couple months to get to a 100 loans, that would be put them at about the year level in terms of since when we purchased them. But it’s by far, a far gone conclusion that they will reach 100 loans per month in the next two months, but that’s what we’re working towards.

Sandra Osborne – KBW

What about just the outlook in general for the business for reverse mortgages?

Mark Turner

Yes, the long-term outlook is very good. Reverse mortgages with the senior population growing, savings rates having declined over the last generation and higher costs to live, it’s clear that the reverse mortgage product will be a product that seniors have to tap to live in their homes comfortably in retirement, and that’s something that a lot of seniors want to do. Overall the reverse mortgage market has grown quite substantially over the last 10 years. So we are a long-term believer in the product. As I mentioned we originate it locally from our branches in addition to that First Reverse investment. We are just working like heck in the current environment to get that business unit up to breakeven origination volumes, since they had to essentially retool their entire business model since we purchased them.

Brian Hagler – Kennedy Capital

Lastly, you talked about adjusting your underwriting and your expenses to the current environment. Can you just kind of talk about what maybe, what kind of run rate of expenses you guys may hope to achieve, or if you’re just hoping to kind of keep them flat with this quarter?

Mark Turner

In the core bank we’re trying to keep them flat. That’s what we’re planning for next year and that’s what we’ve put into the budget, but to the extent we have growth initiatives like First Reverse, you’re going to see growth there, but excluding those, our goal is to keep expenses flat, and that is what’s been directed in the budget process.

Steve Fowle

Yes, let me caveat that a little bit. As you remember, we did pick-up branches in the fourth quarter, which will impact the base rate for expenses going forward. We do have some negative impact from increased FDIC insurance premiums which hit us. I think probably a good way to look at it is excluding 1st Reverse that probably getting about 1% additional expense growth year to year.

WSFS Financial Corporation Q4 2008 Earnings Call Transcript

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  • The break even number for an expense control driven DE lender is generally well under 50 loans a month, not 250 loans a month. Using Mr. Turner’s comments as a guide, there would only be about seven profitable lenders in the niche. We all know that is not the case. So where has the money gone?

    Curious report.

    If the pipeline growth is former Nutter clients, you have to wonder about the future QC issues…….

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