WSFS Financial Corporation
Q2 2011 Earnings Call Transcript

Published: 29 Jul 2011

[Operator:]

Good day, ladies and gentlemen, and welcome to WSFS Financial Corporation Second Quarter Earnings Conference Call. At this time, all lines are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to introduce Mr. Steve Fowle, Chief Financial Officer. You may begin.

[Stephen Fowle:]

Thank you, Mary. And thank all of you for taking the time to participate on this call. Participating with me on this call is Mark Turner, President and CEO at WSFS; Rodger Levenson, Head of Commercial Lending; and Rick Wright, Head of Retail and Marketing for the organization. Before Mark begins his opening remarks, I would like to read our Safe Harbor statements. This call will contain estimates predictions, opinions, projections, and other statements that may be interpreted as forward-looking statements as that phrases defined in the Private Securities Litigation Reform Act of 1995. Such statements include without limitation, references to our financial goals, management plans and objectives for future operations, financial and business trends, business prospects, and our outlook and expectations for earnings revenues, expenses, capital levels, liquidity levels, asset quality, or other future financial or business performance strategies or expectations. Such forward-looking statements are based on various assumptions, some of which may be beyond the company’s control and are subject to risks and uncertainties which change overtime 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 market interest rates, changes in government regulations affecting financial institutions, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and the roles has being issued in accordance with this sachet and 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; and the costs associated with resolving any problem loans and other risks and uncertainties discussed in the documents filed by WSFS Financial Corporation with the Securities and Exchange Commission from time-to-time. Forward-looking statements, speak only as of date they are made and the Company 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 company. All that said, I will turn the call over to Mark Turner for his opening comments.

[Mark Turner:]

Thanks, Steve. And thank you all for your time and attention. We are pleased to report second-quarter earnings of $0.55 per share. This exceeds results for our last quarter of $0.40 per share and also beat results for this quarter last year of $0.36 per share by 53%. There were a few non-routine items identified in a written release that netted us a positive $0.14 per share. Core results were good and were driven by strong growth in the fundamental areas including C&I loans, core deposits, margins and fee income. And also in the control expenses taken in the context of our growing franchise. These all over came a somewhat higher provision expense which covered charge offs resulting in no earnings boost from so-called reserve releases. The higher provision which driven primarily by declining collateral values on a few problem loans mostly residential construction loans and a higher level of retail loans charge-offs both due to the protracted sluggish economy. As a reminder, we said in the past the total credit cost, which include provision REO write-downs letter of credit reserves et cetera would be uneven at this point in the cycle especially on a quarterly basis, but that are best estimate is that they would be $35 million plus or minus couple of million for the full year 2011. Total credit costs for the first six months totaled $18.6 million in line with that full-year expectation. This fact in our latest analysis of our loan book and the local economy affirm that earlier full year estimate absent a meaningful deterioration in the economy from here. We would note that like recent national statistics the local economy has shown a more sluggish recovery than expected even six or nine months ago. Delaware our primary market has an unemployment rate of 8% and that is meaningfully better than the national average of 9.2%, but it’s still historically high and it’s improving suddenly. Housing activity and housing price changes at the law like national average which is to say there are down from last year and down for where we and others expected them to be at this point in a recovery. Despite all that, we were pleased to show improvements in most all major asset quality statistics both leading and lagging indicators. These include declines in total problem loans, delinquencies, non-performing assets and charge-offs. These improvements are the result of although a sluggish and still slightly improving local economy or well underwritten loan book and diligent loan by loan credit management starting early in the cycle. We note again that our biggest pain point over this cycle residential construction loans are now only 2% of total loans and I think closely and continually examined over the last three years now. Further based on our latest analysis and consistent with previous guidance, we expect non-performing assets in the third quarter to stay about the same level they are at now plus or minus a little. But would decline modestly by the end of the year which frequently evaluate every problem loan and make the decision, in each case, we believe is thus for realizing optimal value. In some cases this involves aggressive disposition. And others working with the borrower when they exhibit both cooperation and operating and financial capacity. We believe our asset quality overall any individual statistics can best be characterized as in a very manageable range for us and the one in improving trend, but again as a consequence of the economy and individual situations may exhibit some lumpiness in the overall downward trend. In summary, all (inaudible) included we expect credit quality and credit cost to be modestly better in the second half of the year than they were in the first half. Switching years most notably in the quarter with a double-digit growth in commercial and industrial loans, mostly some market share gains given the disruption we’ve mentioned in the past. We expect this level of growth to continue through year end as our C&I pipeline is strong. However, this growth is muted by our continued intentional run-off in construction and residential mortgage loans and more recently from aggressive pricing from larger competitors or high quality existing and perspective commercial real-estate loans. We still expect commercial and industrial loans to grow at a mid-teen rate this year but overall loan growth we expect will be closer to the mid to high single digit range. Also noteworthy deposit growth especially core deposits was again strong although we do expect continue growth to be uneven as a result of higher level of municipal school district commercial and trust related deposits we now have which can naturally have big inflows and outflows in any quarter. As a result of the C&I loan growth core deposit growth and investment portfolio management where we slightly lengthened our duration or still maintaining asset sensitivity, margin growth was nicely positive on both a dollar and a percentage basis. In the near term we expect the margin percentage to have a couple more basis points room to grow as balance sheet management strategies and funding rakings are diminishing. And despite the industry challenges to make up loss revenues from regulatory changes fee income growth that WSFS was also strong. Even without the positive non-routine items we mentioned in the release. Deposit fee income and AT income rebounded and fiduciary revenues were strong especially from Christiana Trust which has been fully and successfully integrated at this point. As a couple of data points fiduciary revenues of the integrated Christiana Trust for the first six months of 2011 have exceeded our expectations when we did the deal and are up 18% over pro forma integrated results for this same time last year. As mentioned, expenses were also nicely controlled as a result of our completed core efficiency program, acquisition synergies and FDIC expense reductions. This is especially noteworthy given a significant organic and acquisition franchise growth we’ve undertaken in the last year including five new branches, four relocated branches, 11 new commercial relationship managers and related credit administration and support staff and a strategic acquisition of Christiana Bank & Trust. Finally since our last earnings call we become by far the largest, oldest full service bank and trust company, head quartered on our primary market of Delaware. That alone is meaningful, but along with being named a perennial top work place and have earned a world class designation for service from the Gelb Organization. These all combined create a significant market advantage for us. And as larger and smaller competitors are distracted, we continue to aggressively and prudently attract talent, fill a service void and take good market share as we pursue this once every 100 year opportunity for us. Thank you again and at this point we will take your questions. Question-and-Answer-Session

[Operator:]

(Operator Instructions) Our first question comes from Michael Sarcone from Sandler O’Neill.

[Michael Sarcone:]

Hey, good afternoon guys.

[Mark Turner:]

Good afternoon Michael. First question, you said the commercial loan pipeline was still pretty strong. Can you just give us a little more color on the pipeline?

[Stephen Fowle:]

Sure, I have Roger tackle that question, Roger?

[Rodger Levenson:]

Yeah, Michael I would tell you that our pipeline has been pretty consistent. We have been in a range of 90-day weighted average for pipeline anywhere from about 100 to 120 million throughout the course of the year. Obviously, some runoff and some other things that has been going on with our portfolio in terms of some seasonal pay downs has been impacting that but our funding have been tracking fairly close to those numbers.

[Michael Sarcone:]

Okay. And then on the commercial loan pricing, you said you have seen some competition, can you elaborate on that?

[Rodger Levenson:]

Yeah, as Mark said. It has been primarily for what I will call high quality stabilized commercial real-estate properties. And we have seen rates for some customers that are going either to the banks or is into the – back into the public markets below 4%, 4 or 5 in seven-year money.

[Michael Sarcone:]

Okay. And then just an unrelated question. Can you give us any updates on your thoughts on your TARP and the SBLF program?

[Rodger Levenson:]

Yeah, happy to. Michael, at this point, plan A for us and we think the best option for us were repayment of TARP is the small business lending fund for reasons we’ve stated in the past. I think others have which or because of our opportunity to grow business loans, we can reduce our coupon, obviously gets rid of any unwanted restrictions and also provides us additional capital risk support of the opportunity we have in the local marketplace. We like a lot of other institutions have applied. I think there have been 870 applications as far as I know; the treasury has only announced 23 fundings. So, there is a lot more to be done in the next two months, because I believe the statutory requirement is that all the funds be distributed by the end of September, so we are waiting to hear like others and I believe any announcements will be done frankly by the treasury, so we will forward hearing. We don’t think there is any reason why we wouldn’t be approved, but obviously that’s out of our hands at this point. If for some reason that did not come to pass, we’ve done a lot of internal analysis based on our earnings trends or asset quality trends or capital and stress test we’ve done one capital across the board. We believe we have the (inaudible) to repay TARP out of existing capital and future earnings. And obviously that’s our internal analysis we have not had those discussions with regulators because plan A still a small business lending fund.

[Michael Sarcone:]

All right. Okay. And so is there like a working dialogue with the treasury on the active application or is it more you submitted and just wait to hear back?

[Mark Turner:]

They give you a phone number you can call and then e-mail you can send e-mails to but there really is very little dialogue that you can get, so that’s kind of a don’t call us we will call you.

[Rodger Levenson:]

Okay, all right. Thanks guys.

[Mark Turner:]

Thank you.

[Operator:]

Thank you. Our next question comes from Matthew Clark from KBW.

[Matthew Clark:]

Hey good morning guys.

[Mark Turner:]

Good morning.

[Matthew Clark:]

On the – in the (inaudible) but I’m just curious whether or not there was any lumpiness in a way of fees in there or whether or not you are actually able to book new loans at higher rates?

[Mark Turner:]

Rodger?

[Stephen Fowle:]

I can address that Mark. This is Steve. There is a little of doubt, some of it had to do with just some simple accounting entries and some of them had to do with the fact that we’re getting some shorter contractual yields on loans.

[Matthew Clark:]

Okay, great. And then in the pipeline, I’d say the new business that you are seeing from all the disruption around you, there is some mention I think in the release in terms of the deposit side that there could be some – you are getting – you’re winning larger deals and larger balances and deposits as well. I’m just curious as to if you could remind us what your in-house limit is whether or not you’re – and then maybe how large some of these wins are for you both on the loan and deposit side?

[Rodger Levenson:]

Well, I will start. This is Rodger. I’ll start on the loan side, we have an in-house house limit of $25 million and we have individual projects and borrower limits below that. So usually the relationship that aggregate near the half limit or relationships that have several projects or separate different entities that have distinct cash flows that we aggregate because of common ownership and there is just a handful of relationships that are over that amount today. Really the business that we are doing is our traditional bread and butter business and that’s been true for the first half of the year. So I would say anywhere from a couple of million dollars of credit up to 15 or so millions of credit is where we are seeing the most activity.

[Mark Turner:]

And on the deposit side, as a consequence, it’s going to be Delaware banks now and our expansion in southeastern Pennsylvania and some of the town we picked up in the cash management area. We have and also the Christiana Bank & Trust acquisition. We pick up larger individual deposits from municipalities, school districts, institutions, commercial depositors and that can be $10 million, $20 million, up to $30 million. So we detailed that now in our Qs about our concentrations that we have and just want point out the people that we now do have those larger businesses and institutions deposit with us that shows some seasonality. Now school districts are example, obviously, real estate tax is coming in at certain point and they use it over the course of the year. So those will be the type of things you should be aware of. In terms of limitations on those we don’t have any set limitations but we are very focused on funding diversification, we have some soft limit on areas like public funding and that we’ll take.

[Matthew Clark:]

Got it. Thanks guys.

[Mark Turner:]

Thank you.

[Operator:]

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

[Andy Stapp:]

Hi guys.

[Mark Turner:]

Hi Andy.

[Andy Stapp:]

If you get the exact dollar amount you previously talked about with it regards to the small business lending fund and I think it is around $75 million, is that what you’re still looking to do?

[Mark Turner:]

Correct, that was the application amount.

[Andy Stapp:]

Okay. And just curious why you decided to extend the duration of your securities portfolio?

[Mark Turner:]

I’ll start and then Steve will augment to the extent he feels necessary. Andy we as a consequence of some things we did in just the organic business we were doing we got very asset sensitive above our comfort limits. That is we had extended a couple of years ago some liabilities out on the curve – four and five years, we’ve done some CD five year promotional CD – CD promotions and I just as a natural consequence of our business, lot of the loans we’re bringing on in the commercial land and their floating rates so they’re reprising obviously currently and so we had gotten very asset sensitive and found that we were above our comfort levels especially in light of all the talk recently about rates being low for an extended period of time and we were kind of leaving some money on the table and also exposing our self-there, so we took the opportunity to shorten some liabilities and in our investment portfolio is slightly lengthen some of our investments to get a still to be asset sensitive but not as asset sensitive and also pick up some new yield at the same time.

[Stephen Fowle:]

And Mark mentioned that we hit our comfort level, will that including hitting a board prescribed range that we maintain – try to maintain our asset sensitivity within?

[Andy Stapp:]

Okay. And with the offices that you – first of all how well your new office fairing and would it be logical to assume that the positive growth should pick up in the back end of the year, if you could just provide some color or your thoughts on deposit growth?

[Richard Wright:]

Hi. This is Rick Wright. All those branches that we have which amount to five of them counting the one we moved are doing well. We still have a plan to do at least one. It’s not as many as three towards the end of the year in the Delaware market. And I would suspect that we’re going to continue to have some pretty good organic growth from those. Just one other item to point out, while the deposit growth had some volatility and it’s because of some of these larger kinds of accounts that have been mentioned, we’ve continue to have very, very strong household growth. And we had sort of record household growth in the first quarter and the second quarter was even stronger. So, I think that these new branches will just accelerate that.

[Andy Stapp:]

Okay. Thank you. I’ll hop back into the queue.

[Richard Wright:]

Thanks, Andy.

[Operator:]

Thank you. (Operator Instructions). Our next question comes from Steve Moss from Janney Montgomery Scott.

[Steve Moss:]

Good afternoon guys.

[Mark Turner:]

Good afternoon Steve.

[Steve Moss:]

I just wanted to get a feel for your appetite of hiring additional lenders after I know it’s pretty aggressive towards the fourth quarter and beginning of this year. Are you going to continue hiring lenders later this year as you grow loan balances and what’s your thinking there?

[Mark Turner:]

I’ll let Rodger tackle that. Rodger?

[Rodger Levenson:]

Hey, Steve, it’s Rodger Levenson. As we’ve talked about in the past we have a plan to add additional talent and we have the names of the folks in our market that we’re aware of that would be additive to our efforts, we have brought over a number of those folks already. There is still is a handful of people both in Delaware and Southeastern PA. They have done – we would very much like to see us join our team. We continue to have conversations with them, timing, and when they may or may not come, it’s hard to predict. But I would say there is a small group of folks that yes absolutely we would look to hire if they became available.

[Steve Moss:]

Okay, thank you very much.

[Rodger Levenson:]

Thank you.

[Operator:]

Thank you. (Operator Instructions). We do have a follow-up question from Andy Stapp from B. Riley Company.

[Andy Stapp:]

Are you still looking for effective tax rate this year at 36%?

[Rodger Levenson:]

Yeah, I expect that still an appropriate tax rate (inaudible).

[Andy Stapp:]

Okay, great guys.

[Rodger Levenson:]

Absolutely we can drop. Andy just augment that’s for the rest of the year, obviously that would be lowered a little bit by the nontaxable income we got in the second quarter.

[Andy Stapp:]

Got you. Okay. Thanks.

[Rodger Levenson:]

Thanks Andy.

[Operator:]

Thank you. As there are no further questions, I would now like to turn the conference back over to the speaker.

[Mark Turner:]

Okay. Thank you. We appreciate again everybody’s time and attention and your confidence in us. We will be on the road next week in New York at an investor conference where Steve, Rodger, and I will make a presentation and be available for one-on-one meeting and that conference will more broadly discuss the banks progress and our strategies and results for the second quarter. That will be webcast and information; materials and that will be available on our website prior to that. Thank you and have a great weekend.

[Operator:]

Ladies and gentlemen, this concludes today’s conference. You may now disconnect and have a wonderful day.