WSFS Financial Corporation
Q2 2010 Earnings Call Transcript

Published: 27 Jul 2010

[Operator:]

Good day, ladies and gentlemen, and welcome to WSFS Financial Corporation second quarter 2010 earnings release conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session with instructions following at that time. (Operator instructions) As a reminder, this conference is being recorded. Now, your hosts for today’s conference are Mark Turner, President and Chief Executive Officer; Stephen Fowle, EVP and Chief Financial Officer; Rodger Levenson, EVP and Director of Commercial Banking; Richard Wright, EVP and Director of Marketing and Retail Banking. Now, I would like to turn the call over to your host, Stephen Fowle. Please begin sir.

[Stephen Fowle:]

Thank you, Tai Ron, and thank you to everyone participating on this call. Before turning this over to Mark, I would like to read our Safe Harbor statement. The following discussions may contain statements, which are not 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 and 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 CPPT, 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. With that I will turn it over to Mark Turner for the opening comments.

[Mark Turner:]

Thank you Steve. Good morning everyone, and thank you for your time. I have about ten minutes of comments before opening the call to your questions. At WSFS this quarter, we reported net income of $3.3 million and earnings per share of $0.36. After three quarters in a row of essentially breakeven results, this quarter we are pleased to show a breakout to the upside. This was driven by diligent work over many months as demonstrated in the continued stabilization of our overall asset quality metrics allowing positive revenue trends, and our core efficiency initiatives to finally overtake moderating credit costs. Net revenues at $43.1 million in the quarter were up $2.7 million or 7%. This reflected continued growth in our net interest income, which was up $1.4 million or a strong 5% in the quarter, driven by 9 basis points increase in the margin to 3.66%. Also, fee income was up $1.3 million or 12% from the first quarter, driven by growth in accounts and seasonal activity. As a result of this quarter’s earnings and improvement in securities valuations, capital grew nicely to a 6.6% tangible common equity ratio, up 27 basis points, and tangible book value per share was up $1.15 to $35.02 at June 30. Importantly, asset quality metrics taken as a whole showed continued stabilization. Nonperforming assets were up less than $4 million or under 5% to $86 million at June 30 or 2.26% of assets. Delinquencies at $71 million or 2.82% of loans were essentially flat in the first quarter, and a component of that early stage delinquencies declined significantly from $42 million to $25 million, or an improvement from 1.65% to only 0.98% of loans at June 30. Net charge-offs declined significantly to only $5.4 million or 86 basis points annualized from $7.8 million or 124 basis points in the first quarter. This allowed the loan loss provision of $10.6 million to decline $0.8 million or modestly from the first quarter and the provision showed its third consecutive quarterly decline. In summary, we showed continued stabilization in many credit quality metrics and positive earnings in the quarter despite the fact that we continue to provide well in excess of charge-offs reflecting prudent concerns about an uncertain economy, and as a result our allowance for loan losses steadily increased to a healthy 2.48% of total loans from 1.63% this time last year. As mentioned in the past but worth repeating, we ended this recession with less exposure than many others problem areas in loans, investments and other assets, but particularly in construction loans. For over a year now, we have been aggressively adding resources to credit administration, loan review, work out and asset disposition functions demonstrating a capacity over the last few quarters now, slow problem asset inflows, and/or increased problem asset resolutions. As one result of that work, our exposure to construction loans is now less than 8% of total loans. Additionally, a component of total construction loans, residential construction and land development loans or residential CLD, the most painful asset class in this cycle, is now only $91 million or less than 4% of total loans at June 30. And a sub component of that our exposure to residential construction in Sussex County, the County in Delaware believes they have the most supply of new housing products is modest at only $33 million or just a little more than 1% of total loans. This relatively prudent position is a result of good risk management, good governance, and institutional memory from our own early 1990s difficult experience with real estate lending. How did that manifest in our credit practices in this cycle? As many of you recall starting in late 2005, we instituted limits on construction lending in total by type, by county, and for land hold loans, a full year before regulatory guidance was in place. And over a year ago now, we also aggressively scrubbed our commercial lending portfolio, and added credit administration resources in what we internally called our goal one project to proactively address a then rapidly deteriorating environment. Lastly, our loss provision expectation for 2010 incorporated results of a stress test in our commercial real estate portfolio. That prudence continues in our current activity and results. We incurred $1.8 million in additional ORE cost in the second quarter of 2010 to write down assets awaiting disposition to their expected sales values, and we are also affirming our previous guidance that our loan loss provision for the full year 2010 will be modestly less than $48 million we recorded in all of 2009. Through the first six months of 2010, our loan loss provision was $22 million, in line with the full year expectation. In the second quarter, our regulator also completed our scheduled and very thorough annual exam the impact of that would therefore have been reflected in the second quarter results. There were no recommended changes to any loan ratings or loss reserves, which we believe reflects the substantial resources and attention we had dedicated to asset quality over the past year plus. Furthermore, the Delaware economy showed some stabilization. There have been no large lay-off announcements recently and there has been net job growth in the past few months across several industries. And according to the US Bureau of Labor Statistics, there has been a statistically significant improvement in Delaware unemployment rate in the last few months to 8.5% at June 30 down from a high of over 9% earlier this year. The Delaware unemployment rate is now significantly better than the national unemployment rate of 9.5%. Anecdotally, in the last year Delaware has also had several what I call quick turnaround wins. The GM and Chrysler manufacturing plants and the Valero oil refinery, which were all closed in 2009 were repurchased quickly and will be the source of large job growth over in the next couple of years. Fannie Mae, as it reformulated its business model, recently announced it is consolidating its Virginia headquarters into Delaware operations bringing up to 1500 jobs to the Delaware’s financial services industry in the near term. Those are all big wins for a small state. Housing activity while still low has improved. A recent local headline read (inaudible) nationally home sales are up across Delaware, and prices improved in two of the three counties in June of 2010 compared to June of 2009 with a third county’s prices down only 5%. Some of this was of course due to the Federal tax credit and it is too early to tell what the impact of that tax credit going away will be. Turning now to recent trends in our own business development, deposit growth has moderated for us but it is still healthy up 5% on an annualized basis in the second quarter, and while total loans were essentially flat in the second quarter, C&I and CRE loan growth have almost completely offset charge-offs and planned declines in construction loans and consumer mortgage lending. We are also seeing competition heat up a bit or lend into quality middle market companies, a healthy sign for the local economy. July was a very good month for WSFS writing new commercial loan business. Our pipeline is good and we expect it to grow. And in addition to the quality credit administration at (inaudible) we have attracted in the last year to deal with problem loans, since April of 2010, we have added four seasoned commercial lenders from larger local competitors, and we expect to attract more lenders and customers from these competitors as a very high percentage of the market share in and around Delaware is currently held by institutions that are distracted by credit issues, reorganizations or mergers. Finally, ending with two recent announcements, we continue to be very excited about our planned acquisition of Christiana Bank and Trust as it will significantly bolster our trust and wealth management efforts, it will diversify our revenue sources, especially fee revenue and therefore improve franchise value. After transaction and transition cost, we expect the deal to be accretive to earnings per share in 2011, and we expect a closing in the fourth quarter of this year. And lastly as we expected, we are very pleased to have reported yesterday the quick and full recovery on the $4.5 million fraud (inaudible) our ATM division separate in the first quarter of this year. We expect those funds will be received in early August and therefore the recovery to be recorded in the third quarter of 2010. Thank you for your attention, with that we would be happy to take your questions.

[Operator:]

Thank you. (Operator instructions) Our first question is of Andy Stapp of B Riley and Company. Your line is open.

[Andy Stapp:]

Good morning and nice quarter.

[Mark Turner:]

Thanks Andy, I appreciate that.

[Andy Stapp:]

In your last call you talked about opportunities that were reasonably well as far as loan growth in Q2 but loans were only up $6 million on an end of period basis. Is this going to be a Q4 event?

[Mark Turner:]

Rodger Levenson is here Andy, and he is closer to the ground on that, so I will have Rodger answer that question.

[Rodger Levenson:]

Hi Andy, good morning. As Mark said, a number of things that we had anticipated closing in the second quarter led over into July and we have had a very strong month of July. I would say the pipeline behind that has moderated a little bit. There has not been as much economic activity from our existing customer base as we are starting to see some trends of that earlier in the year, but still a great deal of opportunity, as Mark said, in gaining market share from other competitors.

[Andy Stapp:]

And you attribute the moderation to a decline in customers’ sentiment regarding their business prospects with some negative news that we have heard of late?

[Rodger Levenson:]

Yes, I think that is a fair statement, there is a fair amount of uncertainty still out there, which is impacting customers’ vision.

[Andy Stapp:]

Okay.

[Mark Turner:]

I would add to that Andy that our growth trends will be different than the general market sentiment just because of the pick up of using commercial relationship managers that I mentioned that started in the second quarter and we also picked up a couple actually within the last few weeks as well. So the few that we picked up in the earlier part of the second quarter actually came in and started adding business right away. So we see significant opportunity in taking local market share.

[Andy Stapp:]

Sure, I understood. And your neighbor in their call, they talked about sharply deteriorating financial statements and (inaudible) especially in southern Delaware. Are you seeing this?

[Stephen Fowle:]

Yes I will take that Andy. I think clearly 2009 was a rough year for a lot of businesses, operating businesses and real estate companies. So we clearly have seen that as we have gotten in full year financial statements and tax returns. On the appraisal comment, I would agree with the general statement that we have seen a decline in value but I thought it would be helpful to understand our methodology warrants appraisals, particularly residential appraisals because I think it would help provide some context to what we are seeing. We receive a residential construction project. We receive a new appraisal every year. When we get that appraisal, it is internally reviewed by our team and we make appropriate adjustments based on our assessment of the market at a minimum of funds, it would get a 15% discount. Then we have a process that we review those every quarter and as part of that process many times we are doing our own discounted cash flow announces to supplement what was provided in the appraisal and if we think it is appropriate, we take further adjustments. At a minimum, we take a 30% adjustment at the six-month mark as we move through that process. So while we are seeing appraisals come in lower than they were last year, it does not necessarily provide a huge swing from where we had made estimates of the value that we were carrying those projects because we are updating them as I said on a quarterly basis. Generally, I would say over the past year in lower Delaware, we have seen appraisals decline anywhere from 20% to 30% on an annual basis.

[Andy Stapp:]

This is from when to when I am sorry.

[Stephen Fowle:]

A year.

[Andy Stapp:]

Okay.

[Stephen Fowle:]

So it would be anytime from a year prior.

[Andy Stapp:]

Okay. And are they continuing the severity, the loss severity, has that been pretty constant or are appraisal values continuing to erode at the same pace?

[Stephen Fowle:]

It is essentially at the same pace.

[Andy Stapp:]

Okay.

[Stephen Fowle:]

It is very project specific. Every appraisal as you can imagine has many, many assumptions based on residential appraisals, based on absorption, and what may happen in the future and discount rates. But as a general statement that is accurate.

[Andy Stapp:]

Okay. And the third county that you mentioned that had a 5% home price decline, was that Susses County?

[Stephen Fowle:]

For the quarter, yes.

[Andy Stapp:]

Okay. One last question and I will get back in the queue, could you talk about your efficiency program? Is the cost reduction timetable in line with what we discussed last quarter?

[Stephen Fowle:]

Hi Andy, this is Steve. At this point we have got about half of the benefit in our numbers already. I would expect by the end of the year we will have over 90% of those projects, those cost saving projects implemented and in fact towards the end of this past quarter, a significant one was additionally added. And the total there Andy when fully implemented, we expect about $6.8 million in improvement in annual run rate.

[Andy Stapp:]

Okay, thank you.

[Stephen Fowle:]

You are welcome.

[Operator:]

Thank you sir. The next question or comment is from Matt Schultheis of Boenning and Scattergood. Your line is open.

[Matt Schultheis:]

Good morning gentlemen.

[Mark Turner:]

Good morning Matt.

[Stephen Fowle:]

Good morning.

[Matt Schultheis:]

Quick question for you, you probably covered this and I missed it, plans on repaying TARP and/or as needed raising capital.

[Stephen Fowle:]

Yes, when repaying TARP, the only thing I hate to say about that is we are getting closer. We have set kind of benchmarks to ourselves in terms of when we thought it would be prudent to repay above a couple of quarters, couple to a few quarters of local economic stabilization, couple to a few quarters of our own credit metric stabilization, and a couple to a few quarters of our own earnings or internal capital generation, and clearly we have made progress on all three fronts, so I believe we are getting closer. We cannot comment specifically on the definite ways that we might support the Christiana Bank and Trust acquisition only to say that we are fortunate enough to have various possibilities or combination of possibilities including our own earnings and funds we raised last year from private equity placement, shrinking the balance sheet, as you know we have ample high-quality mortgage backed securities, and also the shelf registration statement that we filed late in the second quarter.

[Matt Schultheis:]

I think that is it from me, thank you very much.

[Stephen Fowle:]

Thank you Matt.

[Operator:]

Thank you sir. Our next question or comment is from Steve Moss of Janney Montgomery Scott. Your line is open.

[Steve Moss:]

Good morning guys, nice quarter.

[Mark Turner:]

Good morning Steve, thank you.

[Steve Moss:]

I just have a couple of things to ask. One, any projections with regard to the possible impact on (inaudible) here?

[Stephen Fowle:]

Yes we do. We have done quite a bit of analysis on that. Just to give you some numbers we are making significant progress and have plans for making even more progress. At total – if we have got nobody else, nobody to opt in for overdraft services, we have analyzed it and there were about $6.6 million of revenue at risk on an annual basis. To date through the end of the second quarter, we have got enough people to opt in so that numbers count to $5 million, $5.1 million at risk. We believe based on the aggressive programs we have in place, which include touch points, we are touching customers at all points where we interact with them, and based on those programs and current trends by August 14, which is the date after which you can no longer charge existing customers overdraft fees if they have not affirmably opted in, we will have about $3.7 million at risk and we believe by December 31, through programs after the fact we will have only about $1.9 million at risk. However, we have lot of programs in place to offset even that remaining risk and those programs will include things like reduction in waivers and refunds, as you might expect a big part of our waivers and refunds prior to this affirmative opt in had to do with customers saying that they did not know about the charge and would appreciate having it waived in many cases we did that. Those will be reduced after the affirmative opt in and also new products and services that we are working to implement to replace that fee income. So while we do expect there will be a swoon if you will and fee related to this as I expect will be the case in our industry. We also expect that at 6 to 12 months from now the impact will be minimal.

[Steve Moss:]

Okay and then also with regard to looking at delinquent loans here, seems like there was about $46 million or so in the 90-day [ph] past due bucket, assuming that is largely commercial, I guess any resolution or shall we expect those still to be nonperforming status?

[Stephen Fowle:]

We are in the process of working through each one of those situations as we can imagine as loans reach their maturity date, there is a fair amount of negotiation that goes on between ourselves and the borrowers, Steve. So it is hard to make an accurate prediction of how they are going to trend out. I would just say generally we are hopeful that the majority of those that will be able to get back on to a current status.

[Steve Moss:]

Okay and last question with regard to the margin going forward, now that there is a quarter of margin improvement, where do you all expect that to be going forward?

[Stephen Fowle:]

This is Steve again, during the quarter our margin stayed relatively flat at the level you saw reported for us and our deposit funding cost improvements are more difficult to get as rates remain flat in (inaudible) now. So I would expect the margin to be flat to just marginally improved for the coming quarter.

[Steve Moss:]

Okay, thanks very much guys.

[Stephen Fowle:]

Thank you Steve.

[Operator:]

Thank you and again if you have a question or comment, please press star then one on your touchtone telephone. You have a follow-up question from Andy Stapp of B Riley and Company. Your line is open sir.

[Andy Stapp:]

Deposit growth was not nearly as robust as it has been in recent quarters. Do you expect it to stay at a more moderate level?

[Mark Turner:]

We are going to have Rick comment on this, Andy. If you know, over the last 18 months, we have been fortunate enough to have kind of a torrent of deposit inflows. So to some extent, we expected at some point it would moderate and clearly this quarter it did but Rick will give you some better indication of the dynamics in the marketplace.

[Richard Wright:]

Yes I would say that it is clearly moderated income. We have seen about two months of fairly flat deposit growth, and it is pretty consistent throughout the footprint. We have some new branches, relatively new branches that are out there that are still growing. We expect at this point about a 2% to 2.5% increase in deposits for the rest of the year, which would be a fair amount slower than it has been in the past 18 months as Mark has mentioned.

[Andy Stapp:]

Okay our OREO and loan workout expenses were up I think $1.8 million linked quarter, is this a reasonable run rate or do you expect it to be lumpy, if you could provide some color on this?

[Rodger Levenson:]

Andy, it is Roger, it is very hard to estimate those costs in terms of a run rate, yes a significant portion of that are write downs on OREO projects, and that is highly dependent upon asset values where we are at in the workout process and other things. So, I would expect it to be lumpy.

[Andy Stapp:]

Okay.

[Mark Turner:]

I would just add to that though consistent with Rodger’s earlier comments is what we believe we stay on top of these issues on a very timely basis whether they be taking wax [ph] to appraisals or looking at OREO for its estimated realizable value, we try and stay ahead of the curve.

[Andy Stapp:]

Okay and is the effective tax rate at 31% that you realized this quarter a reasonable run rate?

[Mark Turner:]

Yes, I expect that to be a reasonable run rate, Andy.

[Andy Stapp:]

Okay and how big is your small business portfolio and how much are nonperformers?

[Richard Wright:]

I will take this question Andy. The portfolio for small business for us is about $134 million. I do not have a specific breakout of the nonperformers here, actually I do have, I am sorry I was looking at something else, it is about $2.6 million of that or just under 2% of the portfolio, sorry about that.

[Andy Stapp:]

Okay and how does your watch list compare quarter to quarter?

[Mark Turner:]

We do not provide any detailed information on that. We traditionally have not because it involves a lot of judgment not only within the organization but between organizations, but over the last four quarters, our problem loans have generally trended in line with our nonperforming assets.

[Andy Stapp:]

Okay, all right, thank you.

[Operator:]

Thank you and our next question is from Austin Rooke [ph] of North Oak Capital [ph]. Your line is open.

[Austin Rooke:]

Thank you, good morning.

[Mark Turner:]

Hi, good morning.

[Austin Rooke:]

Can you provide your tier one common ratio?

[Stephen Fowle:]

I cannot off the top of my head but that is certainly a number that we can provide to you Austin soon.

[Austin Rooke:]

Great, I will check out offline. And then just in terms of a related question, I know you talked about TARP repayment getting closer, have you sort of managed your capital, are you having a lot of input from regulators on that matter?

[Stephen Fowle:]

No, we have not had discussions with our regulators on this issue because we have set our own internal prudence marks on this which I mentioned earlier, and we would not be comfortable at this time even approaching our regulators until we pass our own internal hurdles. We have obviously anecdotally heard what is going on with peers and have heard about those discussions, but specifically we have not had in the current environment discussions with our own regulator.

[Austin Rooke:]

Okay, so apart from any TARP, just capital ratios in general, is that a discussion that your regulator is involved with at this point?

[Mark Turner:]

We have not had any specific discussions with them about raising capital related to TARP –

[Austin Rooke:]

I am sorry, or unrelated to TARP.

[Mark Turner:]

Yes that is something that I cannot comment on given the current application we have out there on Christiana Bank and Trust and the shelf registration.

[Austin Rooke:]

Got it, got it, thank you.

[Mark Turner:]

Okay, thank you.

[Operator:]

Thank you. I am showing no further questions or comments at this time. Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program, you may now disconnect and have a wonderful day.