WSFS Financial Corporation
Q1 2010 Earnings Call Transcript

Published: 30 Apr 2010

[Operator:]

Hello and welcome to WSFS Financial Corporation first quarter 2010 earnings call. All participants will be in a 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. A rebroadcast of this conference call will be available one hour after completion of this call until 12

[Stephen Fowle:]

Thank you, Linea, and thank you to all the participants on this call. Participating on the call will be Mark Turner, CEO of WSFS Financial Corporation; Rodger Levenson, Head of Commercial Division; and I am Steve Fowle, the CFO. Before we get started though, I’d like to read our Safe Harbor language. The following discussions may contain statements, which aren’t historical facts and are forward-looking statements as the 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 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 laws and regulations affecting financial institutions, including 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; 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’ll turn the call to Mark Turner.

[Mark Turner:]

Thank you, Steve, and thank you all for your time and interest. I have about 10 minutes of comments before opening the call to take questions. Last night, we reported net income of $514,000 for the first quarter of 2010. After subtracting preferred dividends, this resulted in a $0.03 per share loss. These results included a non-routine charge, which we took at Cash Connect, our ATM services division, which we had announced earlier in the quarter. I will provide more details in this charge a bit later on the call. Adjusting for this charge, earnings would have been $3.6 million or $0.41 per share for the quarter. I’d also like to point out, as we detailed in the earnings release, that we benefited about $0.13 a share in this quarter and a similar dollar amount in the same quarter of 2009 from a tax item, which we do not expect going forward. Our core franchise earnings continue to see strong improvement. Adjusted pretax pre-provision revenues increased to $15.3 million, up $4.7 million or 45% from the first quarter of 2009. Again this quarter, we were successful in growing our customer deposit base. Deposits grew at a 12% annualized rate and are up $363 million or 20% from last year’s levels. And commercial loans grew this quarter as well despite a plan with significant reduction and construction loan balances, as we continue to attract new business banking customer relationships. Our overall franchise growth reflects a significant market share gain -- excuse me. Our overall franchise growth reflects significant market share gains. During the quarter, we reopened our renovated Prices Corner branch and broke ground in a new branch in Glen Mills, Pennsylvania. We recruited seasonal local bankers and relationship managers. Our market share growth is also a result of our strategy of engaged associates delivering stellar services to create customer advocates, which has demonstrated its value in many ways during this downturn. We again reported success in growing our net interest income and margins. We increased our margin to 3.57%, up 9 basis points from last quarter and up a very robust 52 basis points from year-ago levels. Net interest income grew $5.4 million or 23% from the first quarter of last year. And in March of 2010, net interest income passed the $10 million mark. We are also continuing to see success in our core expense management program. Reported expenses, adjusted for niche business results, including the Cash Connect non-routine charge, decreased $1.6 million from last quarter. And we still have a number of significant core program initiatives that have not yet begun to impact our bottom line, but we confidently expect they will, as we progress through the year. While credit costs continue to adversely affect the bottom line, a number of key credit statistics continued to show improvement or stabilization. Non-performing assets decreased slightly to $82.1 million from $82.2 million last quarter, and the ratio of non-performing assets to total assets decreased 4 basis points to 2.15%. Loans 90 days past due and still accruing also improved from $1.4 million to $0.7 million. And ORE [ph] write-downs also improved. Importantly, construction and land development loans further declined $30.5 million or 16% in the quarter and also declined $62.8 million or 28% from last year. CLD loans now represent only 6.5% of total gross loans, with 4 percentage points of that in residential CLD loans. These improvements reflect efforts to aggressively implement our plan to meaningfully reduce our level of problem loans. To achieve this plan, we have added significant additional resources and talent to our problem asset and management efforts, including the hiring of senior asset workout specialists. As you know, delinquencies did increase modestly during the quarter. Total loan delinquencies increased 2.80% from 2.20% in the fourth quarter of 2009. Total commercial portfolio delinquencies increased 65 basis points to 2.44%, and our consumer portfolio delinquencies increased 51 basis points to 3.88%. It’s worth noting, however, that over half of the total delinquencies increase and well over half of the commercial delinquency increase is due to one residential construction loan that we have already moved to non-performing status in the second quarter of last year. And with some additional perspective, the remaining basis point increase in our total loan portfolio delinquency in the quarter amounts to only $7.2 million. Early stage delinquencies increased 0.85% to -- excuse me. Early stage delinquencies increased from 85 basis points to 1.65%, with 40% of that increase coming from the aforementioned loan that was already moved to non-accrual status last year. During the quarter, we’ve provided $11.4 million for loan losses, down from $12.7 million provision last quarter and in excess of the $7.8 million in quarterly net charge-offs. Because of the modest increase in delinquencies, we continued to build our allowance to total gross loans, which is now at 2.27%, up 15 basis points from last quarter. While this quarter included many positive credit quality comparisons, we believe that credit challenges will continue to affect our customers and therefore us. We still expect that our full year 2010 provision will be modestly below the 2009 level of $48 million. Our first quarter results were consistent with that view, but we continue to expect uneven provisioning, charge-offs, and problem loan changes until we have more consistent strength in the economy. And because of general economic uncertainty, we are also maintaining capital at strong levels. Most key capital ratios improved modestly during the quarter. Our Tier 1 capital ratio increased 5 basis points to 11.07%. Total risk-based capital increased 9 basis points to 12.33%. And tangible common equity increased 2 basis points to 6.33%. All regulatory capital ratios remained substantially in excess of well capitalized levels. Additionally, the parent company holds $30 million in funds, mostly from our third quarter 2009 common capital raise, which provides for additional strength and flexibility. And finally, during the first quarter, our tangible common book value per share increased $0.60 to $33.87. As I mentioned earlier and as we disclosed on February 19, in February, our Cash Connect division learned that an armored car carrier that served as a vendor for several of Cash Connect’s customers engaged in embezzlement. As a result, during the quarter, we recorded a $4.5 million pretax charge for funds that are not immediately available to Cash Connect, but we are well down the path of recovery. As additional color, Cash Connect has been involved in similar situations, the largest of which was in 2001. In these other instances, we’ve had full recovery of misappropriated funds because Cash Connect had several avenues of recovery established in our ATM operations. Since that incident, Cash Connect applied additional layers of protection for such situations. Recovery may be available from a number of sources, including from liquidation of the vendors’ assets, currently the carrier and related companies are in receivership, as well as recovery from Cash Connect customers and to the layers of insurance. However, we believe it is appropriate and prudent to take the charge now and record recovery when it occurs. In closing, we continue to make significant progress in the measures we have identified as key to building our franchise value. This progress includes prudent commercial loan growth, strong deposit growth, and an improved margin, while maintaining our focus on continued expense control. We also saw a second consecutive quarter of improvement in many of our credit quality statistics. A modest deterioration in delinquency statistics highlights the challenges still present in our economy. However, we will continue to build on and improve on an already strong and growing franchise. With that, I thank you for your attention. And we’ll take any questions now.

[Operator:]

(Operator instructions) Our first question is from Andy Stapp of B. Riley. Please go ahead.

[Andy Stapp:]

Good afternoon.

[Mark Turner:]

Good afternoon, Andy.

[Andy Stapp:]

In your cost reduction program, how much savings do you have left? And could you provide some color on the timing of the realization of the savings?

[Mark Turner:]

Sure. I’ll have Steve answer that question.

[Stephen Fowle:]

Well, thanks. To date, we have about half of the initial $5.8 million target implemented and some of that coming in just this last quarter. We would anticipate that before the end of the year, we have the remaining half implemented. A good chunk of that is expected this coming quarter, and we have identified opportunities that could take us over that $5.8 million.

[Mark Turner:]

And that $5.8 million is an annualized run rate, Andy.

[Andy Stapp:]

Right, right. Okay. Could you provide some detail on the composition of net charge-offs, how much was construction development related, C&I, CRE, that type thing?

[Mark Turner:]

Yes, absolutely. Rodger, do you want to handle that?

[Rodger Levenson:]

Yes. Andy, of the charge-offs, about two-thirds of it was commercial, which would include construction and about one-third was in our consumer businesses.

[Andy Stapp:]

Okay. And of that two-thirds, how much was construction involvement related?

[Rodger Levenson:]

Yes. Of that number, about half of it was construction, the other half was in the C&I businesses.

[Andy Stapp:]

Okay. And how does classified assets compare linked quarter?

[Rodger Levenson:]

Andy, in the past, we have not provided information on classified assets and problem loans just because that number is very judgmental. And it can differ a lot the judgment from company to another. But overall, I think our trends in non-performing assets would give you a good indication.

[Andy Stapp:]

Okay. All right, thank you. I’ll get back into the queue.

[Operator:]

Your next question is from Avi Barak of Sandler O'Neill. Please go ahead.

[Avi Barak:]

Good afternoon, guys.

[Mark Turner:]

Good afternoon, Avi.

[Avi Barak:]

A few questions for you. Firstly, I was hoping you could let us know where you are as far as progress and getting customers that use overdraft protection to opt into the program now that the road changed just around the corner.

[Mark Turner:]

Avi, I can’t give you a lot of detail on that right now unless Steve knows more about it than I do. We have -- in terms of quantitative information, qualitatively, we have a plan in place and have mailings out to customers and have gotten responses back and have several stages of that plan, early mailings, mailings around the July and August regulatory dates, and then we have plans for what happens after that as well. But that’s something I think we’ll be able to give you a better information on in a couple months since probably something we will update on as we attend conferences in May and June.

[Stephen Fowle:]

As you know, Avi, we are prioritizing the people that we contact, really heading up higher priority users first, but certainly in the process still. What we are getting back is about half-and-half people opting in and opting out.

[Avi Barak:]

Okay. Fair enough. On an unrelated issue, now that we are in the later stages of earnings season, we’ve heard a lot of conference calls this quarter on which management teams have noted sort of a general decline in volume demand. That said, you guys are sort of in a market that there has been a lot of disruption etc. Are you feeling that same lack of demand or are you seeing it offset by continued market share gains from customers who are maybe pushed out the door from the larger banks?

[Mark Turner:]

Let me start on that and then I’ll have Rodger add some detail. As, Avi, you know, but others in the call may not, our marketplace is many large, mostly have state organizations, many of whom are quite distracted now by significant merger reorganization leadership change, your asset quality issues, and we are the only sizable alternative in Delaware for both employees and customers who may be existing franchise and looking for another bank to fulfill their needs. That has led us over the last couple quarters to recruit a lot of season bankers, including a couple season relationship managers in the last quarter. And we are starting to see -- have seen and are starting to, on an increasing basis, to see the benefits of that as we are coming out of the first quarter, which typically is a slow quarter. Those are qualitative comments. And I’ll ask Rodger to maybe add a little quantitative value to that.

[Rodger Levenson:]

Yes. Thanks, Mark. Avi, loan demand was somewhat sluggish in the quarter as that’s somewhat reflective of the local economy and to a lesser degree, some of the challenges we had with the weather. However, I would tell you that our pipeline is building significantly as a result not only of our relationship managers -- existing relationship managers, but several of the new relationship managers that we recruited. And our forward-looking pipeline is as strong as it has been in more than several quarters. And so we are expecting in upcoming quarters to see loan growth that would closely track what we had projected for the full year, which on an annualized basis would be in the high-single digits.

[Avi Barak:]

Perfect. Thank you very much. Lastly, Mark, just best guess or gut feel for timing of recapturing the $4.5 million from the armored car situation?

[Mark Turner:]

Highly -- very highly probable it would be before the end of the year. Good chance it will be in the second quarter.

[Avi Barak:]

Thank you.

[Operator:]

Our next question is with Steve Moss of Janney Montgomery Scott. Please go ahead.

[Steve Moss:]

Good afternoon, guys.

[Mark Turner:]

Good afternoon.

[Steve Moss:]

I wanted to ask with regard to the investment securities purchases here. What are your thoughts in terms of additional purchases? And what will the impact be to the margin?

[Mark Turner:]

On investment purchases, we saw an opportunity late last year until the very beginning parts of the first quarter of this year to take advantage of some market dislocation and get some very high quality, AAA, short duration -- but I don’t mean about 2.5-year duration – mortgage-backed securities at a very good yield at about 6.4% yield, which we stress tested ourselves and we are very comfortable with. And that fit quite nicely with the fact that we saw loan demand actually slowing around that time and our construction loan book running off and we have a strategy to actually sell first mortgage loans. So it was -- we've put on about $200 million, a little over $200 million as a replacement strategy on the balance sheet for the run-off that we are seeing and planning for in the loan book. Where we are now is, as you heard Rodger say, we expect that loan demand will pick up for the rest of the year, and that opportunity in the mortgage-backed market to pick up very high quality mortgage backs at a good yield is no longer there. The yields are much lower now. So we would expect going forward for the rest of the year the balance sheet growth to see a mortgage-back slightly run off and loans build.

[Steve Moss:]

Okay. And I guess we should expect some further net interest margin expansion here into Q2 and so forth?

[Mark Turner:]

Steve will handle that.

[Stephen Fowle:]

As you know, we reported 3.57% for the first quarter. March results were slightly stronger than the average, and March was about 3.6%. And the margin for that month was -- margin dollars were $10 million. But we anticipate the deposit rates have less room to move, and moving the needle on margin is going to be more difficult going forward. So I would expect some improvement over this next quarter, but modest.

[Steve Moss:]

Okay. Thank you very much.

[Mark Turner:]

Thank you.

[Operator:]

The last question is with Matt Schultheis, sorry if mispronounced the name, of Boenning & Scattergood. Please go ahead.

[Matt Schultheis:]

Hi, good afternoon.

[Mark Turner:]

Hi, Matt.

[Matt Schultheis:]

Quick question for you. I may have missed this. But with regard to the cost initiatives, do you have any severance charges or is this primarily for attrition?

[Mark Turner:]

Most of it is actually related to renegotiating contracts with vendors. So we do not have severance related charges. And most of the contracts would not involve any buyouts of existing contracts. There are a few headcount displacements, but they are primarily through natural attrition.

[Matt Schultheis:]

Okay. And lastly, some of your competitors and some other companies that I don’t think you can beat that directly with -- on the Delmarva Peninsula have been moaning the lack of activity, particularly with regard to construction, not seeing new projects coming online et cetera, et cetera. And just wanted to get your general sense of overall economic thank you in Delaware, particularly with regard to the southern end of the state.

[Mark Turner:]

Let me respond to that first and then ask Rodger since he sees closer to the round and that also add some comments. The Delaware economy, like a lot of the surrounding region, and by that I mean the closely surrounding regions, Southeastern Pennsylvania, Northeastern Maryland, Delaware, down into the Delmarva peninsula. It’s exhibiting kind of last-in last-out trades to use somebody else’s point turn in terms of the recession. And that is, while the recession has hit us softer, it seems to have hit us a bit later and therefore we expect will be not only a bit later in, but a bit later out. Unemployment in the state is about 9.2%, which is double of what it was at its low point, but slightly better than national average of 9.7%. Housing prices, on average, are down about 5% from this time last year, which is about the same as national averages, but as we also know, with housing markets, there is not one. There is many, and price changes very widely depending on price point and the projects. We are, however, starting to see some increased activity in housing. And I’ll point to some statistics in January, which relate us that I saw that housing activity in January of this year was up in Delaware significantly over January of the prior year. And just anecdotally, two of our larger residential construction projects, which were currently in non-accrual status, the developers in those projects are close to signing contracts with national builders for the take-down of a meaningful number of lots. So we are starting to see some activity. Rodger, do you have anything you want to handle that?

[Rodger Levenson:]

The only thing, just to be specific, about where we are at with residential construction in Sussex County, of our approximately $100 million of residential CLD, $36 million or 36% is in Sussex County. But as we have talked about before, that spread over 22 different projects. And I would tell you that of those 22 projects, only three of that are in non-accrual status. So that would obviously indicate that the other ones might be a little bit slower, are still performing reasonably well.

[Matt Schultheis:]

Okay. Yes, that’s it for me. Thanks.

[Rodger Levenson:]

Thank you.

[Operator:]

Our next question is with Brian Roman of Robeco. Please go ahead.

[Brian Roman:]

Yes, hi. All of my questions have been answered. Thank you.

[Mark Turner:]

Thanks, Brian.

[Operator:]

Next question then is from Andy Stapp of B. Riley.

[Andy Stapp:]

How much do you have remaining in your professional fees for the consultant study with regard to the efficiency program?

[Mark Turner:]

With the core program, we reported $1.2 million in expense in the fourth quarter of last year, about $0.5 million in the first quarter of this year. And Steve, what’s your estimate was remaining?

[Stephen Fowle:]

I’d say overall, expectation is it will be about $2 million or a little over $2 million. And that is expensed as they do the work that earns it. So the expense happens before the benefits are seen.

[Andy Stapp:]

So just clarify, a little -- $2 million to a little over $2 million, about $1.7 million has already been recognized. Is that right, Steve?

[Stephen Fowle:]

That’s right.

[Andy Stapp:]

Okay. And your tangible books value per share was == I forget how much, about $0.30 or something. Is that related to valuation events as in your private label mortgage-backs?

[Mark Turner:]

Correct. Our bottom line was essentially flat. So any increases would have come through other comprehensive income, which would have been the unrealized gains in the mortgage-backed portfolio.

[Andy Stapp:]

But is it the private label --?

[Mark Turner:]

It’s across the board, but it includes private label.

[Andy Stapp:]

Okay. All right. Thanks.

[Operator:]

And gentlemen, I’m showing no other questions in the queue at this time.

[Mark Turner:]

All right. Well, thank you very much, everybody, again for your time and attention and your interests. As you know, if you have questions, Steve and myself are available to answer those questions or get you to the right person to be able to help you. We will be on the road in May and June at a couple conferences. So we look forward to seeing you there, and we will post whatever materials we were speaking to on our website in advance of that and look forward to updating you on our progress. Thank you.

[Operator:]

Well, the conference is now concluded. Thank you for attending today’s presentation. You may now disconnect your lines.