WSFS Financial Corporation
Q4 2010 Earnings Call Transcript

Published: 4 Feb 2011

[Operator:]

Good day, ladies and gentlemen and welcome to the WSFS Financial Corporation’s fourth quarter 2010 earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) And as a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference Steve Fowle, Executive Vice President and Chief Financial Officer. You may begin.

[Steve Fowle:]

Thank you Jerome (ph) and thank you to everyone participating on the call. I would like to introduce the people here with me they will be participating on the call. Mark Turner, President and CEO of WSFS; Rodger Levenson, Director of Commercial Banking; Rick Wright, Director of Marketing and Retail Banking and myself. Before Mark begins with his opening remarks, I’d 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 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 CPP including additional conditions that may be imposed in the future on participating companies; costs and expense that may be incurred in benefits achieved from acquisitions and the cost associated with resolving any problem loans in 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. With that, I will turn the discussion over to Mark Turner, WSFS President and Chief Executive Officer.

[Mark Turner:]

Thank you, Steve. And thanks to all for your time and attention. In 2010, we earned $14.1 million or $1.46 a share including 2.1 million or $0.16 in the fourth quarter. The fourth quarter’s results included the impact of the CB&T acquisition integration. The rest of the earnings release was full in detail and hopefully was also clear to you. Therefore, I’d like to use my 10 minutes of introductory comments on management’s overview of 2010 and more importantly, how that relates to prospects for 2011 and after. 2010 was an important year for WSFS. In 2010, we rebounded from the depreciationed (ph) profitability. We expect that rebounding to continue and to strengthen even if the path maybe uneven in the short-term due to the choppy economy and our longer-term investments. In 2010 we significantly reduced risk in our balance sheet. Non-performing assets were contained within a narrow range and are still down from their peak in late 2009. And more importantly for the future, delinquencies and total problem loans, both early indicators of future credit quality and costs should mark improvements from earlier in the cycle. Problem loans for example, are down 20% from their peak. And residential construction loans are now less than 3% of total loans and have been well scrutinized in reserve properly. The loan loss provision was also down modestly from 48 million in 2009 to 42 million in 2010, consistent with our previous guidance and is showing improvement in each of the last five quarters. Our previous guidance on the 2010 provision, which proved accurate, was based on thorough re-underwriting and stress testing of our portfolios in late 2009 and then continual reevaluation. Through 2010 we increased that vigilance in understanding our portfolio and taking appropriate action. Now, with apparently better economic background, residential construction loans addressed in at a low level and early stage quality indicators improving, we feel comfortable saying but with all necessary caveats, a credit quality will likely, meaningfully improve in 2011. As a result, we are projecting about $30 million in provision in 2011 plus or minus a couple of million. That number also assumes significant loan growth as well, discussed more latter. We are also hopeful that if the economy improves modestly, the provision will be better than that. As a parenthetical, we would point out that while provision cost maybe going down, as an industry cost resolved problem situations in people, professional fees, foreclosure costs et cetera will remain elevated through 2011. In 2010, our investment portfolio also proved to be a very high quality, which we were confident in from our frequent independent stress tests as discussed in our previous presentations. As a result, in 2010, we were able to earn good rates of return on the portfolio and also exit through run-off and sale almost all of our downgraded securities and any net realized gain for the year. The remained portfolio was overwhelmingly AAA rated in very short duration at an estimated 2.1 years. And currently has an unrealized positive mark-to-market, showing it too as of high quality and slightly above market rates. This builds well for future good returns on less risk from our investments and healthy cash flows to support expected organic loan growth in 2011. In 2010, we also strengthened our balance sheet by continuing to build our cushions. The allowance for loan losses increased 7 million or 13% despite significant charge-offs to resolve identified problem situations. Tangible common capital was also increased by 46 million or 20% to help support our growth plans. We believe our loan loss reserve at 2.3% loans and tangible common equity at 7.2% of tangible assets are very sufficient for our potential losses, the inherent risk in our business model and our planned growth. We of course monitor these frequently. In summary, in 2010 we took significant actions so that entering 2011 we have an even stronger, less volatile, more cushioned balance sheet. The local economy, albeit in low gear, has shown signs of stabilization to mild improvement. Delaware employment peak in March 2010 at 9.3% and closed the year at 8.5%. And house price is moderated with a medium sales price decline of only 2.1% from 2009 guidance. Combined, these all provides stronger foundation for much better growth in results in 2011. That’s a good safe way to talk about growth for both 2010 and for what we see in the future. In 2010, we grew and transformed our franchise both organically and for strategic moves. We continued to add offices in key locations, recruit seasonal local bankers in Delaware and South Eastern Pennsylvania, and add to our market share in Delaware to the Christiana Bank & Trust acquisition. The areas we target is important to our franchise value grew strongly. In 2010, commercial industrial loans grew 119 million or 11%. And customer funding grew 363 million or 16%. Our loans to customer funding is now 98%, much improved from a high of 141% before this cycle began. Our net interest margin also improved 32 basis points year-over-year. Customers have been drawn to our strength, local responsiveness and brand of stellar service, and have also showing willingness to pay for this extra strength in service. This cycle has been valuable to help both prove our business momentum and enhance our long-term franchise value. In 2010, we also greatly enhanced our business model with the acquisition of the Christiana Trust platform. This was very strategic for us. Along with already strong retail and commercial banking, we now have equally strong fiduciary revenue capabilities with a local and national reputation. Put that in perspective, WSFS is in the top 200 largest banks in the country, while Christiana Trust is a top 100 provider of trust and wealth management services. The conversion in the initial integration of Christiana went smoothly. Synergies and costs were on track. The management team is here. And we are working very well with them as they grow that business. In December 2010, their first month with us, Christiana Trust had one of the best months in their history for a closed business. This quarter and going forward to show the importance of this business line for us, we’ve broken out all fiduciary and investment management revenue as a separate line item in our financial statements. We look forward to a growing and providing an even healthier and more diversified level of fee income for us. Most importantly, as we enter 2011, we are positioned to soon be, by far the largest, oldest, post service, independent bank and trust company headquartered in Delaware. A state which prides itself on doing business locally. For 2011, we believe the combination of our market, our position in the market, our enhanced business platform, our reputation for service and the significant current market disruptions will all combine to be powerful sources of our growth. To highlight that window of opportunity, in late 2010 and 2011, in our markets there are at least 5 meaningful bank changes, most from familiar names to unfamiliar names to customers. A couple of these changes are, as you know, very significant in terms of local market share. By serving well, we plan to get more than our first share of decent franchise, associates and customers and grow profitably. Of course, we have to execute on the opportunities, we are intently focused on doing so, and have the strategy, resources and people to do it. An independent survey ranks us as the top workplace in Delaware for the last two years. And another independent survey again ranks our customer engagement which is a much stronger and stickier concept in satisfaction or loyalty as world class. Associate engagement, service and customer engagement are the heart of our business model and are why we have been able to grow as we have during a very difficult time and they’ll also be the strong foundation for our future growth. Thank you. And at this time we will take questions.

[Operator:]

Thank you. (Operator Instructions) And our first question comes from Mike Sarcone with Sandler O’Neill.

[Michael Sarcone:]

Good afternoon, Guys.

[Mark Turner:]

Good afternoon, Mike.

[Michael Sarcone:]

So first question, you had said that the $30 million provision for 2011 assumed significant loan growth. Can you quantify what significant loan growth means?

[Mark Turner:]

We generally in that area, Mike, don’t provide specific guidance, but I would say with the opportunities in front of us the growth is north of 10% into the low teens

[Michael Sarcone:]

Okay, great. And then, the reserve now stands at a 2.3% of loans. I know you said that – that’s sufficient for any loss that you maybe estimating. Can you give us any guidance on how low you may be running through at reserve bill?

[Mark Turner:]

Sure. I’ll have Rodger Levenson to answer that question.

[Rodger Levenson:]

Hi Mike. As mentioned in our previous guidance net charge-offs exceeded provision during the quarter by $4 million as we recognized losses as part of our continuing efforts to resolve problem situations. As you know charge-offs are a lagging indicator of credit quality. And so given the decline in our leading indicators like problem assets, we would expect this general type of charge-off trend of exceeding provision to continue through 2011. While, individual quarters maybe lumpy, our forecast for 2011 for charge-offs is similar to the $35 million of charge-offs in 2010. Combine that with a provision of about 30 million depending upon that pace of loan growth that Mark had just referred to, are attributable to total loans would be modestly below 2% by the end of 2011.

[Michael Sarcone:]

Okay. And then, one more question for Rodger. You guys had pretty solid growth in your commercial loan balances, extra construction. Can you just give us some color on what the pipeline looks like currently?

[Rodger Levenson:]

Sure. Our pipeline is at the highest level it’s been in several years. Our 90 day forward weighted average has now grown to over $140 million. We are seeing some pressure, pricing pressure in particular at the top end of our target market for large high quality credits. However, we are still seeing a very high volume of opportunities within our core C&I and selected CRE transactions. And obviously we are also really beginning to see the significant traction from the eight new relationships managers that were hired in 2010.

[Michael Sarcone:]

Okay. Thanks Guys.

[Rodger Levenson:]

Thank you.

[Operator:]

Our next question comes from Andy Stapp with B. Riley & Company.

[Andy Stapp:]

Good afternoon.

[Mark Turner:]

Good afternoon, Andy.

[Andy Stapp:]

The decline in construction to development loans was pretty significant as well as the increase in CRE, was there much in the way of construction and development loans rolling over into commercial mortgages?

[Mark Turner:]

There was a bit of that. Andy, actually of the $43 million decline, about 24 million of that was a reclassification from construction into other categories, 22 of those actually was C&I. As you know, in our construction bucket we carry owner-occupied construction and we had several large projects which we had been completed and are now converting into amortizing mortgages. And so, that’s part of the growth that you see in the C&I line. There was really only a very small piece that went up into CRE.

[Andy Stapp:]

Okay. And do you expect any more cost saves from your efficiency program in 2011?

[Steve Fowle:]

Yeah hi Andy, this is Steve. We do expect some of our cost savings to roll on during 2011, but most probably 90% lower in our numbers.

[Andy Stapp:]

Okay. So what will the remaining 10% be?

[Steve Fowle:]

It would be about 100,000.

[Andy Stapp:]

Okay, that’s okay, quarter yeah?

[Mark Turner:]

100,000 at quarter end.

[Steve Fowle:]

Thank you Mark.

[Andy Stapp:]

Yeah, okay. And do your sell the securities, what was the timing of the sales?

[Mark Turner:]

Yeah, a lot of that was – take advantage of the significant improvement in the market that occurred, as you know at the end of the third quarter and to the beginning at the fourth quarter and then some again in the beginning of December.

[Andy Stapp:]

Okay. Just trying to get, I mean the yield on securities, is that a good run rate going into Q1?

[Steve Fowle:]

Hi Andy, this is Steve, I would expect some downward pressure on that still due to those sales towards the end of the year. We also know, as you may remember had some positive benefits from earlier in the quarter from re-pricing of Federal Home Loan Bank Advances. We also know that CB&T acquisition is going to be helpful to our margin. So, if you’re looking at margin going forward, I’d expect this quarter to be flat maybe some potential upside but a bit marginal.

[Andy Stapp:]

Do you have the December margin?

[Mark Turner:]

December usually the month Andy, that’s impacted by things going into non accruals so it’s not really indicative of things going forward. But the whole quarter’s margin was pretty flat or around 363, if you were to normalize that. So, that’s why I think Steve has and we are saying that should be pretty flat with maybe a little bit of upside buyers as we get some more re-pricing them from Home Loan Bank Advances and CDs and such.

[Andy Stapp:]

Okay. I’ll hop back into the queue.

[Mark Turner:]

Thank you.

[Operator:]

Our next question comes from Matt Schultheis with Boenning & Scattergood

[Matt Schultheis:]

Good afternoon, gentleman.

[Mark Turner:]

Good afternoon, Matt.

[Matt Schultheis:]

Couple of quick questions for you, one with regard to the expected loan growth, do you see yourself funding that more with further securities run off or you’re going to try to fund this with what the liability side of balance sheet or is it going to have be a combination of both and to what degree?

[Mark Turner:]

I’ll take the first shot at that and ask Rick to augment it anything. But are also besides double digit loan growth, we also expect double digit deposit growth next year so it should be fairly self-funded or organically funded, I should say.

[Matt Schultheis:]

Okay. So you had just kind of switch your mix on your asset side from the self-funded?

[Mark Turner:]

No, I would say that if we do get, one of the things we like about our securities portfolio, it is a high quality and braced with duration and close offs about 20 million a month right now in cash flow. So it allows us if we do get loan growth above trend or loan growth above deposit rate to be able to do that. But so it’s very flexible for us.

[Steve Fowle:]

And Matt, this is Steve. That growth in loans itself should improve and deposits themselves should improve the mix, just by that growing all those holding equal.

[Matt Schultheis:]

Sure, I understand. Also you’re still fitting here with some thought and I was wondering what your thought process is with regard to repaying that whether obviously it seems like if you’re going to grow the selection process, (inaudible) capital cushion is possible, but they is the small business lending facilitators out for now for you guys to consider in this, what is your thought process is overall in that area?

[Mark Turner:]

Yeah, it’s a great question. And we were following the small business lending fund prospects as early as mid-last year when the topic came up and then we’re quite positively surprised when just before the holidays, the details were announced. And we think it’s an extremely attractive program for somebody in our position. So we are currently taking a close look at the small business lending fund as a potentially very good alternative to repay CPT on its surface. It appears to be much cheaper tier 1 capital as you know, depending on how much small business lending you do and as they define small business lending. And it’s in sweet spot where we have grown or looking to grow, you can reduce your rate. We will look at possibly in initial rate of 3% if we were to get into that program and potentially down and better from that. It’s also more flexible and less burdensome. And I think overall the incentives are very consistent with our strategic plan and our desire to continue to be a lender in our community during the period of time when other people are on the sidelines. And overall it appears to have a much more seamless path to exit. So we’re taking a very close look at that program. Obviously you don’t know until all the documents are out. But if we decided not to pursue that, we would continue down the path of one into exit CPT as quickly as possible.

[Matt Schultheis:]

Have you had conversations with your regulators regarding, regarding two things, the small business lending facility and also, have you actually had any conversations with regulators without the switch from OTS regulated institution to wherever you’re going to go next?

[Mark Turner:]

Well, as you know, unless we decide to make a different change as an OTS institution from late July, we will be regulated by the OCC. So the OTS and the OCC have had outreach programs just get to know you situations and also instructive in terms of what the transition process will look like going forward. And we participated as a lot of tricks have in those situations. So asking us making a different change we would expect to be an OCC regulated institution by the end of next year.

[Matt Schultheis:]

(Inaudible) the state charter?

[Mark Turner:]

I will say that during the next – during the period between now and July we will be also actively taking a look at our other alternatives, one of which would include, likely the one other obvious one that’s becoming a state charter institution.

[Matt Schultheis:]

Okay. Thank you.

[Mark Turner:]

You’re welcome.

[Operator:]

Our next question comes from the line of Steve Moss with Janney Montgomery Scott.

[Steve Moss:]

Actually all my questions have been answered guys.

[Mark Turner:]

All right. Thanks, Steve.

[Operator:]

And our next question comes from Zack Bowen with CL King.

[Zack Bowen:]

Regard to the wealth management side of the business. You mentioned about the number of closures in the Christiana side being the highest in December.

[Mark Turner:]

Right.

[Zack Bowen:]

How much of that is attributable to the dislocation of Wilmington Trust customers and was your market share going into this with the Christiana and where do things stand now and what’s the outlook?

[Mark Turner:]

Very little of that was attributable to Wilmington Trust customers, number one, that their pipeline on that business take some time to close and their business model well it includes some local business is mostly Delaware Trust business directed in more national marketplace. But we are ramping up the efforts as you might imagine to move as much local business as possible so we would hope that would be a source of growths in the future.

[Operator:]

Our next question comes from Austin Reeve with North Oak Capital.

[Austin Reeve:]

Hi, good afternoon. I want to just talk a little bit about not-interest expense and particularly employee related. Is there a – I assume that most of the increase is related to the new bankers that have been hired in the new markets, is there a time that which you think that that will normalize with or be compensated by loan growth or are we kind of looking at a raised efficiency ratio?

[Steve Fowle:]

Yeah, in terms of the growth quarter-to-quarter, I think about half of that could be characterized in the salaries line item; it could be characterized as timing related. As an example of that, actuarial studies that we get in the fourth quarter, where the accrual is made it in the fourth quarter. So about half of that has to do with timing, about a quarter has to do with CB&T itself. And the other quarter it just generally related to growth. I would expect as we go through 2011 with our plans for continued growth and continued branch openings that we aren’t at a run rate now but we will continue to add expenses. And we – Rodger’s made the point before that the commercial lenders that we pulled on are having success and are adding loans. They have a quick – relatively quicker run rate to self-funding themselves, but we do it also and anticipate additional hires in that category as well.

[Austin Reeve:]

Okay. Great. And we’re very happy to hear about the low provisioning combined with significant loan growth. Can you talk a little more about the real estate related costs? I think it sounded like you said they will remain elevated, any finer point that?

[Mark Turner:]

Yeah, I think Rodger, correct me if I’m wrong or augment this. Last year we had about $5 million and what we would classify as other credit related costs, so cost to dispose, legal OREO, foreclosure and we expect about that same amount in 2011.

[Rodger Levenson:]

Yeah. Correct.

[Austin Reeve:]

Yeah, the whole line, the line item loan workout in OREO was 6.5 million but you’re saying of that kind of 5 million was not normal?

[Rodger Levenson:]

No. I’d say the 5 million is what we have is the normal part of that expense.

[Austin Reeve:]

Okay. Normal. Well, I guess I mean it says that the phrasing was remaining elevated, I guess I meant that.

[Steve Fowle:]

Yeah.

[Rodger Levenson:]

Yeah, I think, like, just maybe clarify it. Our forecast for 2011 is that, that line item would be somewhere around $5 million.

[Austin Reeve:]

Got it. Okay. Thanks very much.

[Operator:]

Our next question comes from Andy Stapp with B. Riley & Company.

[Andy Stapp:]

You have been (inaudible) the year-end balances for goodwill and core deposit intangible?

[Steve Fowle:]

Andy, this is Steve. I don’t have those numbers with me, we added approximately 16 million of goodwill, the trial breakdown as the portion that has to do with core deposit intangible and the value or the relationships with the trust business, it hasn’t been finalized, but that will be a portion of that goodwill.

[Andy Stapp:]

Okay.

[Steve Fowle:]

We’ll have those numbers in front.

[Andy Stapp:]

Okay. And well, what are you looking for in terms of the effective tax rate in 2011?

[Steve Fowle:]

Expected effective cash rate will be about 36%.

[Andy Stapp:]

Okay. And what is your monthly or quarterly, annual, whatever run rate for interchange fees?

[Steve Fowle:]

We don’t have that off the top of our hand Andy, we’ll have to get back to you on that.

[Andy Stapp:]

Okay.

[Steve Fowle:]

Interchange is something we are obviously watching closely. But there is a proposal out here now as you know industry is pushing back significantly on that.

[Andy Stapp:]

Right.

[Steve Fowle:]

Through lawsuits and lobbying efforts and banks like us understand meaning (ph) or it’s technically excluded, but we know that market forces may take care of some of that. So we are watching that closely.

[Andy Stapp:]

Okay. And lastly, are you still comfortable with your Christiana Bank & Trust costs saves estimates and probably what timeframe do you expect to achieve those milestones?

[Steve Fowle:]

Yes, we are tracking very closely to our original estimates including the time phasing of those. I think the original estimate was about 3.3 million. We are tracking at about 3.2 million at this point. But some part of that is supposed to come in ‘11 and a little bit in ‘12 as well.

[Andy Stapp:]

Okay.

[Rick Wright:]

I have that answer, this is Rick Wright. I have the answer about the interchange we – in 2010 we had about 8 million in interchange income.

[Andy Stapp:]

Okay. And on the Christiana cost saves, can you refresh my memory as to when those – how that is spread out?

[Rick Wright:]

Yeah – over $2 million is in the – to be guarded almost immediately through the first couple quarters and then the other $1 million would be through the latter half of ‘11 and the early part of ‘12.

[Andy Stapp:]

Okay. Alright, thank you.

[Operator:]

Our next question comes from Nancy Frohna with 1492 Capital Management.

[Nancy Frohna:]

Good afternoon.

[Rick Wright:]

Good afternoon.

[Nancy Frohna:]

Can you hear me okay?

[Rick Wright:]

Yes.

[Nancy Frohna:]

Okay, very good. Just wanted to get a little bit of clarification on the Reg E impact, I think it looks like it came in better than what you were expecting or projecting back in the third quarter. I looked back at my notes and it was looking like potentially 600,000 worth of sort of a negative impact. But to be offset by expense reductions and kind of looking through the details here in the numbers, I’m not sure how that kind of came out ultimately versus your expectations from last quarter?

[Steve Fowle:]

Yeah. Rick, can you?

[Rick Wright:]

Yes, since Reg E was in formatted in august we have been seeing about a $200,000 per month reduction in net overdraft revenues. And we expect that recent run rate to continue through 2011 somewhat offset by some new account growth that we talked about.

[Nancy Frohna:]

Okay, and then what about potential other sources of revenue to offset that? Is there something that’s happened sort of different on that from that perspective? Revenue enhancements or offsets?

[Rick Wright:]

We have several that we are looking at and probably like everyone are re-looking at our entire checking account lineup and what we are going to charge, for what in minimum balances and so and so forth. But until we see some clarity on the Durbin Amendment and a little bit more on what others are doing we are not really ready to answer that.

[Nancy Frohna:]

Okay, fair enough. And then one last question about cash at the hold-co level?

[Rick Wright:]

Okay.

[Nancy Frohna:]

What does that stand, to do – ?

[Rick Wright:]

20 million.

[Nancy Frohna:]

20 million? Okay. Very good. All right. Thank you very much.

[Rick Wright:]

Thank you.

[Operator:]

(Operator Instructions). And I’m showing no further questions in the queue sir.

[Rick Wright:]

All right. Well, thank you very much. I appreciate everybody’s again time and attention. We will be on the road in March and then possibly again in May and in June. So we look forward to seeing some of you then. Have a great weekend.

[Operator:]

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program you may all disconnect. Everyone have a great day.