WSFS Financial Corporation
Q1 2011 Earnings Call Transcript

Published: 29 Apr 2011

[Operator:]

Good day, ladies and gentlemen, and welcome to the WSFS Financial Corp. First Quarter 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) As a reminder, this conference is being recorded. I’d now like to introduce our speakers for today’s call; Mr. Mark Turner, President and CEO; Stephen A. Fowle, Chief Financial Officer; Rodger Levenson, Director of Commercial Banking; and Richard Wright, Director of Marketing and Retail Banking. And I’d now like to hand the call over to Stephen Fowle. You may begin.

[Stephen A. Fowle:]

Thank you, Mini, and thank you to everyone participating on this call. 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 in our forward-looking statements as that is term defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements which are based on various assumptions some of which maybe 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 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 expenses that may be incurred and benefits achieved from acquisitions, and the costs associated with resolving 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 statement, whether written or oral, that may be made from time to time by or on behalf of the Corporation. With that, I’ll turn the discussion over to Mark Turner, WSFS’ President and Chief Executive Officer.

[Mark A. Turner:]

Thank you, Steve, and thank you all for your time and attention. In the first quarter of 2011, WSFS earned $4.2 million or $0.40 a share, which was a significant improvement over last quarter and the same quarter of last year. The results include the first full quarter with Christiana Trust and details of the quarter results are presented in full in our press release. Therefore, I’d like to take about 10 minutes to provide some additional insight into WSFS markets, our plans for our franchise and some expectations we have. The Delaware economy continues its slow recovery, unemployment at 8.4% in March is inching down and economic activity feels like it has improved slightly albeit still at low levels. Residential real estate values appear to be nearing a bottom, but activity is still like lacklustre and March average sales prices were down about 6% year-over-year. Like many, we believe that the mid-Atlantic region was later coming into the recession and probably it lags on the way out. On the flip side of that same point, however, as the downturn is well into its third year, disruption in our banking market is at its high. For many months, by far the dominant player in our Delaware market has been working through issues and now the integration of its merger with an out of state buyer, it has been the largest player for 100 years and has twice the market share as the nearest competitor. Also in contiguous Chester County, Pennsylvania, the largest independent bank recently was purchased by an out of market institution. In general, M&A activity and credit issues have significantly sidelined the appeal of these and other local bank competitors. We see this as a once-every-100-year opportunity in the local banking market. We feel we’re positioned extremely well to capitalize in the disruption we see, particularly because of our long local history and our reputation for superior service. In addition, our credit profile is manageable. That is, while headline statistics are mixed, taken as a whole, our asset quality is relatively good and improving. On that credit quality front, the first quarter of 2011 continued our trend of improving provision expense and overall credit cost. Total credit costs including provision, letter of credit contingencies and loan workout and OREO cost declined $3.1 million from last quarters $11.5 million to $8.4 million this quarter. This was a result of net positive trends in credit migration as many customers have successfully adjusted to the new economic reality. As a result, leading credit quality indicators like total problem loans decreased an additional 6% this quarter are coming down steadily and are down 24% from their peak. Total problem loans now stand at less than 10% of our loan portfolio. Based on a detailed analysis, we expect total problem loans to continue a steady decline through 2011. Further, delinquencies and we measured delinquencies to include delinquent non-performing loans increased slightly but remaining very manageable 2.8% of total loans. Delinquencies have been in a tight range of between 2.4% to 2.8% the last five quarters. At the other end, we’ve indicated a lagging credit quality metrics like non-performing assets and charge-offs would be lumpy we saw this quarter. Net charge-offs improved this quarter from last and we’re encourage that we’ve begun to see a couple of positive marks, as we disposed of OREO and non-performing loans, but I caution it is only a couple. Non-performing assets increased just under 10% but are still a manageable 2.6% of total assets. A few larger previously identified problem loans migrating to non-performing status exceeded the timing of our disposition efforts. Disposition activity can be slower in the winter and we expect it to pick up in the spring and summer months. A large portion of the new non-performers has come from our residential construction portfolio. The sponsor’s ability to carry projects continues to be impacted by the extended housing market. Fortunately, we’ve managed residential construction loans down to only 2% of total loans and 38% of that 2% are already in non-performing assets and there are no residential construction loans left, performing or non-performing greater than $5 million. To some expectations, forecasting NPA is challenging, as many factors including negotiations with borrowers, dispositions and economic trends can affect both the ultimate outcome and the timing of these situations. Nonetheless, based on a detailed probability weighted analysis of our current problem pipeline and disposition activity, we estimate that total non-performing assets will stabilize at around current levels for the next two quarters and trend down after that. But it’s worth repeating that this lagging metric can be billable. Further, last quarter, we provided guidance that our 2011 provision would be $30 million plus or minus a couple a million. And then other credit costs primarily workout and OREO write-downs would be about $5 million for the year. So the total credit costs in 2011 would be $35 million plus or minus. As mentioned in the first quarter total credit costs were $8.4 million. Annualize that comes to just under the full year expectation of $35 million. The provision of $5.9 million was lower than we expected because of the net positive loan risk migration and an overall decline in problem loans. The other credit costs primarily OREO write-downs of $2.5 million were higher than we expected because of markdowns on more distressed non-performing assets. In summary, on credit, despite of mix headline statistics, our thoughts on our overall credit quality haven’t changed from last quarter. That is it peaked in late 2009 or early 2010 and the trend is improving from there. Therefore we still expect full-year 2011 credit cost to be about $35 million plus or minus, but individual quarters would be lumpy as well the split between provision and write-downs. Switching gears, while we will not take our eye off managing our loan portfolio, our strength in our brand has placed us in a unique position to be on the offensive in pursuing the every 100-year opportunity. So we have continued to do just that. As you know the close on the acquisition on Christiana Bank & Trust in December 2010, the acquisition gave us a more significant presence in the attractive Greenville, Delaware banking market. More strategically the acquisition bolstered our trust in wealth management offering and diversified our revenue base. We are pleased to report that Christiana Trust revenues have exceeded our expectations and have continued to grow through the integration. And we continue to be on track for cost savings and one-time costs we have communicated when we announced the merger. We also continue to grow our growth efforts in Delaware and Southeastern Pennsylvania. Over the past year we have hired 10 seasoned commercial loan officers from our competitors. That is a 40% in our commercial lenders from 25 to 35. We also relocated, renovated or opened seven branches in the last year and several more are expected in 2011. We are actively promoting the Switch-to-WSFS campaign with increased advertising, switch Saturday hours, targeted promotions like our anniversary savings promotion and our service guarantee and an active referral program which involves all WSFS associates. We will soon be the oldest and largest, locally managed, full service bank in Delaware further differentiated by our world-class levels of service and we are taking advantage of that position. Our investment and our growth efforts continue to pay dividends. This quarter customer funding were $71 million or 11% annualized growth rate over the last quarter. Core account growth across all categories was partially offset by seasonal, municipal, and school district flows and money market accounts. And commercial and industrial lending accelerated increasing $49 million, a 16% annual growth rate. And that growth came despite a usually slow winter season. Loan closings accelerated in March and our pipeline remained strong. We are optimistic about the coming months’ growth. Growth in our franchise helped us to continue to grow revenues. Total revenues increased from prior quarter and from year ago levels. Despite the impact of Reg E changes on overdraft income year-over-year revenue increased to strong 80% and fee income exceeded 30% of revenues, demonstrating our increasingly strong and diversified revenue sources. The cost of remaining investments, mentioned earlier, however come before the full benefits and we saw that in this quarter’s results. While reporting earnings growth, our expenses increased and due to the impact of revenue growth. Expense increases include the first full quarter of the impact of Christiana Trust as well as the cost of new and relocated branches and a hiring of seasoned lenders and support staff in our markets. We anticipate future investment in branches, lenders and increasing marketing costs as we move to take market share in Delaware and South Eastern Pennsylvania. Given our marketplace dynamics, again this is literally in every 100-year opportunity is an opportune time to invest for the future. Our financial results for 2011 will likely follow an uneven path because the ramp rate on our market opportunity investments and a still sluggish economy. However, in total, we believe 2011 will be very successful in terms of building long-term franchise and shareholder value. Thank you for your attention. At this time we’ll take your questions.

[Operator:]

Thank you. (Operator Instructions) Our first question comes from Michael Sarcone of Sandler O’Neill. Your line is open.

[Michael Sarcone:]

Hey good afternoon, guys.

[Stephen A. Fowle:]

Good afternoon, Mike.

[Michael Sarcone:]

My first question was just on the main compression. Do you expect that lower MBS yields will continue to weigh on the margin?

[Stephen A. Fowle:]

Yeah, this is Steve. Mortgage-backs have come down; we expect a decrease in those yields to decelerate. We’re now reinvesting still little bit low those rates, but the cash flows aren’t coming at as quickly and the amount we’re investing below is nowhere near as much as it was below in the past. So, I’d expect a little bit further downward pressure and stabilization.

[Michael Sarcone:]

Okay. And then on the operating expenses, is the $31 million, a good run rate for the near term?

[Stephen A. Fowle:]

I expect there will still be some additional investment particularly in marketing dollars through the course of this year, increased from levels we saw in the first quarter. But overall I’d expect that our efficiency ratio was going to trend down from this quarter and finish the year in the low 60s.

[Michael Sarcone:]

Okay, and on the capital priorities as it relates to TARP. Can you comment on that?

[Mark A. Turner:]

Yes, I will comment on that Mike, this is Mark Turner again. Despite some recent political positioning, we continue to think that’s small business-lending fund is a very attractive capital for us. Assuming that program goes through as it currently is written, it would reduce restrictions on us and we enter at a lower cost than we’re currently saying for TARP and provide further incentives to reduce that cost. And those incentives actually align with the growth that we’re seeing and the growth opportunities that we have, and that is lending to small and medium size businesses. And that’s happening in our market because of the market share opportunities. We haven’t seen all the details, we’re fine print, so we can’t say definitively whether we participate but we continue to wait for that program to be rolled out by treasury.

[Michael Sarcone:]

Okay, great. Thanks guys.

[Mark A. Turner:]

Thank you.

[Operator:]

Thank you. Our next question comes from Andy Stapp of B. Riley & Company. Your line is open.

[Andrew Stapp:]

Hi, guys.

[Mark A. Turner:]

Hi, Andy.

[Andrew Stapp:]

Your growth in average loans are strong as 3.5%, but on an end-of-period basis they’re relatively flat. Could you talk about this? Do you still think, are you still looking for double-digit loan growth for the year?

[Mark A. Turner:]

I’ll have Rodger answer that Andy.

[Andrew Stapp:]

Okay.

[Rodger Levenson:]

Hi, Andy. Yes, we still believe that double digit overall loan growth is where we’re going to end up the year. I would say that some of that will be impacted by things as we continue to work down the construction portfolio, but based on our current run rate we think that that is achievable.

[Mark A. Turner:]

And Andy, some additional color to that, the first quarter of the year is traditionally slower and also given the campaign that we’re involved in, which is a market share taking campaign and the situation that’s unfolding, we would expect the momentum to continue to build over the course of the year.

[Andrew Stapp:]

Okay. And could you talk about your pipeline for hiring new talent?

[Rodger Levenson:]

It’s Rodger again. We did hire two new relationship managers this quarter and we’re obviously still talking to other people, but I’m also pleased to say that we’ve added significant other talent to our team as well. Two people on our cash management area, two people on our small business origination area. So we see lots of opportunities to add talent and we continue to be open to adding others as they become available.

[Andrew Stapp:]

Okay. And what are you expecting in terms of the FDIC assessment this quarter?

[Stephen A. Fowle:]

Andy, I don’t have any reason to see that coming down, we are growing deposits aggressively, and other changes that are going to be working their way through with the way the FDIC is charging and we will be impacted on that as and when that happens.

[Andrew Stapp:]

Okay. I’ll hop back into the queue.

[Stephen A. Fowle:]

All right. Thanks.

[Andrew Stapp:]

Thank you.

[Operator:]

Our next question is from Steve Moss of Janney Montgomery. Your line is open.

[Steve Moss:]

Good afternoon, guys. I wanted to touch base on the, following up on deposits here, good interest bearing growth this quarter, just wondering is that more consumer or commercial driven?

[Richard M. Wright:]

This is Ric Wright. I would say that’s pretty much across the board. One thing I would say is that the $71 million in growth that we’re reporting is a little bit misleading in the sense that if you account for some of the seasonal fluctuations and one-time draws, our growth was really about $180 million, of which about half of that was this savings function that we talked about in the other half was core business growth. So it was a very strong quarter across the board on deposit growth.

[Steve Moss:]

Okay. And then Rodger with regard to the loan pipeline and the activities you are seeing, where are you getting your most C&I growth, from what industries, I should say.

[Rodger Levenson:]

It’s not any specific industry, Steve, it’s across all of our C&I businesses. A fair amount in the service industry, some contract, road infrastructure, those kinds of things, but it’s a pretty broad distribution. No specific constitution.

[Steve Moss:]

Okay. Pretty much all of my questions have been answered. Thanks guys.

[Mark A. Turner:]

Thank you.

[Operator:]

Thank you. (Operator Instructions) We have a follow-up question from Andy Stapp of B. Riley & Company. Your line is open.

[Andrew Stapp:]

Yes. What’s a good run rate for the effective tax rate going forward?

[Stephen A. Fowle:]

Yeah this is Steve Fowle again, we’ve traditionally been about 36% and I’d expect that for this year as well.

[Andrew Stapp:]

Okay. And you have the interest reversals in Q1 and Q4.

[Stephen A. Fowle:]

For non-accruals?

[Andrew Stapp:]

Yes.

[Stephen A. Fowle:]

We don’t have those at our fingertips today Andy, so...

[Andrew Stapp:]

Much fair to say they are higher in Q1.

[Stephen A. Fowle:]

Yes, slightly higher in Q1. Not significantly higher, slightly higher.

[Andrew Stapp:]

Okay. What’s your outlook for deposit growth for the year?

[Mark A. Turner:]

Yes let me, on that last question just clear up something was potentially unclear earlier. When Steve commented on the securities, the year-end securities being stable to slightly down that was not meant to imply the same thing what happened to margin. We actually expect margin to bounce back into the low three sixes next quarter, primarily because of our ability to manage down funding costs, both wholesale and retail funding cost. And hopefully that will make that point clear, and I’m sorry Andy, could you ask that question again.

[Andrew Stapp:]

Yes. Just wanted some color on the outlook for deposit growth for the year.

[Mark A. Turner:]

Okay, Rick.

[Richard M. Wright:]

Yes. This is Rick again. I would say that it’s going to be strong. To put a specific number on it would be tough, but I would tell you that we just added two new branches, one was a big remodel and another brand new branch. We have three new branches coming up in the next 45 days. And we have another one or two later on this year. So between that all the efforts we have in Pennsylvania and Delaware we’re expecting it to be strong in rest of the year.

[Andrew Stapp:]

Okay.

[Mark A. Turner:]

Andy, on your question about the non-accruals, I don’t have that split up myself, but non-accruals in similar accounting adjustments to margin impacted the first quarter by about 245,000, in the fourth quarter by about 130,000.

[Andrew Stapp:]

Okay and how did the CB&T’s revenue compared to Q4, and on a four-quarter basis?

[Mark A. Turner:]

It was stronger. Actually I’m going to take that back. December was a particularly strong month for Christiana. It’s just the nature of their business. A lot of business gets done in December. So it’s really not a fair comparison. I will say that overall to register your question their pipeline is strong and increasing. April tends to be a strong month too because of the tax [part].

[Andrew Stapp:]

Okay. And is your Q1 professional fees a good run rate? I know you had some noise last year with your efficiency study.

[Stephen A. Fowle:]

Yes, I do expect that it’s going to be as any. Again that tends to be lumpy depending on when we do projects and when we have needs, particularly in the technology side to bring in people to implement projects. But I think that’s a good rate as any.

[Andrew Stapp:]

Okay. All right. Thanks.

[Mark A. Turner:]

Thank you.

[Operator:]

Thank you. (Operator Instructions) We’ll have a follow-up question from Michael Sarcone of Sandler O’Neill. Your line is open.

[Michael Sarcone:]

Hi, guys. This question is for Rick. Rick, can you give us your outlook for mortgage banking and loan fee income?

[Richard M. Wright:]

Overall?

[Michael Sarcone:]

Overall.

[Richard M. Wright:]

On the mortgage banking side, it’s been very strong with their seller pipeline on that side, but it is clearly slowing a bit in terms of the refinancing activity. So, I mean, my best estimate is that’s going to spread up level out at this point. In general, on fee income, we talked about Reg E before. We’re still running at about the same level, about a $200,000 a month difference versus pre-Reg E. However, a lot of our other service charges are offsetting that at this point, some of the other service charges on deposits. We’ve also put in place a couple of increased or new charges that are taking place either in May or in June that we expect to offset much of the rest. We are still looking at the restructure of the product line, which will probably have a significant impact, but that probably won’t happen until late summer or early fall at this point.

[Mark A. Turner:]

We continue to see benefit too just by the growth in the number of customers from the market share gains.

[Michael Sarcone:]

Okay. Thank you.

[Mark A. Turner:]

You’re welcome.

[Operator:]

Thank you. Our next question comes from [Melanie Lynskey] of Sandler O’Neill. Your line is open.

[Unidentified Analyst:]

Hi, good afternoon. You mentioned the SBLF as an option to replace TARP. Can you just talk about whether or not you would be interested in more capital than the TARP that’s currently outstanding? And based on the current level what’s your expected dividend rate would be under the SBLF?

[Stephen A. Fowle:]

Yeah, the expected dividend rates given the calculation that we've done internally would be about 3% with an opportunity to go down from there. With respect to the amounts we currently have $53 million in TARP outstanding. We've been thinking about an amount of about $75 million and that would be still under 3% of risk rated assets. But given the cheapness of that capital and given the opportunities we have to put it to use were exactly the reasons that the program is out there. We have planned a small, medium-sized businesses we think it is the right economic trade.

[Unidentified Analyst:]

Understood, thank you very much.

[Mark A. Turner:]

Thank you.

[Operator:]

Thank you, I'm showing no further questions in the queue at this time.

[Mark A. Turner:]

Okay, well. Thank you, all very much we appreciate again your time and attention as always we are available for follow-up questions. And we expect to be on the road couple of times between now and next quarter when we talk to you again. So hopefully able to see you then, have a good weekend.

[Operator:]

Thank you, ladies and gentlemen this concludes the conference for today. You may all disconnect. Have a wonderful day.