WSFS hotel-loan portfolio, market uncertainty drives 2Q loss
WILMINGTON – WSFS Financial Corp. took an aggressive approach to its COVID-19 battered loan portfolio in its second-quarter 2020 earnings release, reporting a 156.2% increase in problem assets to $568.5 million over the first quarter and a 74% increase in loan-loss provisions to $98.4 million.
That loan-loss provision compares to $12.2 million a year ago.
In total, WSFS reported a quarterly loss of $7 million thanks to the increase in its loan-loss provision, compared with a profit of $10.9 million in the first quarter and $36.2 million for the second quarter of 2019.
Like many sectors, the financial services industry is concerned about the survivability of its customers. While WSFS’s portfolio is centered in the Delaware, Pennsylvania, and New Jersey markets, its national competitors have also set aside money for likely defaults, including JPMorgan Chase & Co. ($8.9 billion); Wells Fargo & Co. ($8.4 billion) and Bank of America ($4 billion).
WSFS, which has about $500 million in loans to hotels, mostly to large chains, said that 70% of its growth in troubled loans during the second quarter came from that part of its portfolio.
The $500 million portfolio does not include recent $150,000-plus Paycheck Protection Program (PPP) loans to hotels, including Hyatt Place Wilmington at the Riverfront and two loans to the Hilton Wilmington/Christiana near Christiana Mall. WSFS also lent 56 Delaware restaurants loans exceeding $150,000, according to recently released SBA data.
“When the pandemic started, occupancy really was in the low- to mid-single digits,” Chief Commercial Banking Officer Steve Clark told participants in its earnings call Friday afternoon before telling them that owner-operators are seeing improved occupancy. “[But] there is significant uncertainty about the future. And while we do expect a decent portion of our hotel book to resume contractual payments, payments alone don’t necessarily dictate risk ratings and there are other potential weaknesses and clearly the economy as described earlier is weak and uncertain.”
Those uncertainties center on travel restrictions within the Tri-State region and opening and closing of restaurants.
WSFS Chief Financial Officer Dominic Canuso said $39 million of the growth in the reserve can be attributed to the economic forecast assumption across the portfolio and $44 million of what he described as the “migration impact from hotels with some additional from the retail and food services industries.”
In response to an analyst question, Clark said the primary metric for moving hotels, restaurants, and retail into the problem-loan bucket is “cash flow and coverage, the ability to cover debt service.”
Canuso said WSFS granted 90-day payment deferrals early in the process when the hospitality industry had just been shut down so they could “get their sea legs underneath them, adjust their businesses, if they could, and then start working with us on a forecast on what the future looks like. What you see in the risk-rating migration in the hotels is Steve and the team sitting down with those customers, getting the updated occupancy, revenue per active rate, average daily rate and then forecasting them out under multiple scenarios.”
WSFS executives told the analysts that the loan-loss also increased as they continue to assess the impact of a new regulatory credit-loss accounting model called Current Expected Credit Losses (CECL) that estimates expected losses over the life of a loan.
WSFS shares have dropped 36.5% since the beginning of the year to $28.45 per share as of the market’s closing July 27.
By Peter Osborne