WSFS Financial Corporation
Q3 2011 Earnings Call Transcript

Published: 28 Oct 2011

[Operator:]

Good day, ladies and gentlemen, and welcome to the WSFS Financial Corporation Third 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 be given at that time. (Operator instructions) As a reminder, today's conference call is being recorded. I would now like to introduce the speakers, Mark Turner, President and CEO; Steve Fowle, Chief Financial Officer; Rodger Levenson, Director of Commercial Banking; and Rick Wright, Director of Marketing and Retail Banking. I would now like to introduce your host for today's conference, Mr. Steve Fowle, Chief Financial Officer. Sir, you may begin.

[Steve Fowle:]

Thank you, Davon [ph], and thanks to all of you for taking the time to participate in this call. Before Mark begins his comments, I would like to read our Safe Harbor statement. This report contains estimates, predictions, opinions, projections and other statements that may be interpreted as forward-looking statements as that phrase is defined in the Private Securities Litigation Reform Act of 1995. Such statements include, without limitation, references to our financial goals, management's plans and objectives for future operations, financial and business trends, business prospects, and our outlook or 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 over time, 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 regulation affecting financial institutions, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules being issued in accordance with this statute 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 documents filed by WSFS Financial Corporation with the Securities and Exchange Commission from time to time. Forward-looking statements speak only as of the date they are made, and the Company 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 Company. With 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 net income of $6.8 million or $0.70 of earnings per share. Excluding notable items mentioned in the release, which were a net positive in each of the three quarters presented, results in the third quarter were $0.59 earnings per share, a marked improvement over similarly adjusted results of $0.41 per share last quarter and $0.40 per share in the same quarter last year. Driving the improvement in our results during the quarter and highlights for the quarter were both strong revenue growth which was up 16% annualized over the second quarter of 2011 and 10% over the third quarter of 2010, and many stable to modestly improved credit metrics leading to improved total credit costs. Our revenue growth was driven by both improvements in net interest margin, which increased 2 basis points and $1 million or 13% annualized and improvements in fee income, which increased $900,000 or 22% annualized over the second quarter of 2011. Our ability to improve margin in a difficult environment was the result of strong C&I loan growth at a 20% annualized improvement over last quarter, coming primarily from market share gains, fundamental deposit growth despite the expected outflow on two accounts, and prudent management of funding costs. While funding costs will be increasingly challenging – reducing funding costs will be increasingly challenging, given our trends we expect that we will be able to hold our net interest margin percentage at about the same level for the balance of the year, plus or minus a few basis points. Fee income was also up 20% annualized over last quarter after excluding notable items like securities gains in each quarter and was driven by franchise growth in many areas of the Bank. While revenue growth was certainly a highlight, the continued improvement in many credit metrics and credit costs also contributed to bottom line results. Non-accrual loans declined over $10 million or 12%, total non-performing assets declined $4 million or 4%, and total delinquencies improved slightly. More qualitatively, loans disposed of during the quarter were generally adequately reserved for and loan migration was in loans that were also generally well secured. As a result, our provision declined $2 million from last quarter to $6.6 million this quarter, and total credit costs declined a similar amount to $8.4 million in the third quarter of 2011. Total credit costs, which include provision, loan workout, and OREO expenses, through the first three quarters of 2011 were $27 million. That result and our updated forecast has us tracking to our previous guidance of $35 million, plus or minus $2 million for the full year. Our charge-offs for the first three quarters were $28.2 million, and for the full year, may be a bit above our earlier guidance of $35 million. As we indicated at the outset of the year and since, for 2011 we expect charge-offs to match or come close to total credit costs. As we have also said, these numbers by their nature can be lumpy in any quarter. We are on that path. Our prior forecast had indicated that non-performing assets would be around flat at the end of the third quarter from the second quarter and then have a modest decline in the fourth quarter. We were able to accelerate a number of forecasted fourth quarter dispositions into the third quarter, which contributed to the 4% decline in non-performing assets. Incorporating this information into our updated forecast will indicate non-performing assets in the fourth quarter would remain close to current levels and therefore, consistent with our earlier full year guidance. Similar to credit costs, the NPA trend line can be impacted in any individual quarter by the timing of inflows and dispositions, and this forecast also does not include any significant changes in our disposition strategy or the general economy. In summary, overall credit costs remain in a stable and very manageable range for us and the year in terms of credit costs, charge-offs, and NPA is playing out pretty much as we had anticipated in prior guidance. As we drive towards what we hope will be the best year for us in the last few years of a difficult downturn, our business strategy, our investments in our franchise, and our current focus on taking market share are paying off. Our success is demonstrated in our earnings growth, our continued robust C&I loan growth, our moving up to a solid third place in traditional bank deposit market share in Delaware, our improving asset and funding mix allowing us to expand our net interest margin and net interest income in a difficult rate environment, and our robust growth in fee income, now fully 34% of revenue, much of that driven by our enhanced trust and wealth management services, including our successful integration of Christiana Trust. It is still a difficult environment out there. However, WSFS associates look forward to meeting the challenges and serving our customers, communities, and our owners. Thank you. And we will take questions at this time.

[Operator:]

Thank you. (Operator instructions) Our first question comes from Michael Sarcone of Sandler O'Neill.

[Michael Sarcone:]

Hi, good afternoon, guys.

[Mark Turner:]

Hi, Michael.

[Michael Sarcone:]

So, you had said that the NPAs have decreased this quarter because you kind of fast-tracked some of the dispositions. Can we take that to mean that we can – you don't foresee future reserve releases given that you expect NPAs to hold steady this quarter?

[Rodger Levenson:]

Mike, it's Rodger Levenson. As Mark said, we think the NPAs will stay about the same levels. It's hard to predict exactly how the charge-off provision dynamic will work out quarter to quarter, but as we said, I think the overall year is playing out pretty much the way we said. So I think that would indicate we are on a similar path that we've been reporting the last few quarters. It maybe lumpy, which is kind of what happened this quarter; we had one significant charge-off that we had primarily reserved for that drove the numbers that happened literally at the end of the quarter. But it's hard to predict exactly how that's going to play out. I wouldn't expect any significant change from the pattern that we've had over the course of the year.

[Michael Sarcone:]

Okay. And since I have you, on the commercial pipeline, can you tell us what that looks like?

[Rodger Levenson:]

Yes, it continues to be strong. It's held – our 90-day weighted average has held consistent throughout the year. I think the fourth quarter will look very similar to the prior quarters, strong C&I growth and a leveling off of construction and commercial real estate loans sort of staying around flat.

[Michael Sarcone:]

Okay, thanks. And this question is probably for Mark. Can you update us on your thoughts on repayment of TARP?

[Mark Turner:]

Yes. Sure, Michael. We believe based on our risk profile, capital, our improving earnings trends and the internal stress tests that we've done that we have enough capital to repay TARP without a capital raise and that's certainly our desire. To anyone that's new to us, WSFS raised $75 million in common capital after our takedown of $53 million in CPP. But CPP is still an expensive regulatory capital and given the continued uncertainty around the path of the economy, the likely most prudent path for us is to repay in tranches as we generate more capital internally and get a better feel for the direction of the economy. And we expect to begin discussions of that with the OCC in the near term.

[Michael Sarcone:]

Okay, great. Thank you.

[Operator:]

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

[Andy Stapp:]

Good afternoon.

[Mark Turner:]

Good afternoon, Andy.

[Andy Stapp:]

What's a good rate for the effective tax rate going forward?

[Steve Fowle:]

Andy, that's still about 36% rate. We've had some ins and outs this year in terms of tax reserves and some benefits from bank-owned life insurance last quarter that's hidden that rate a little bit, but 36% is a good rate to use going forward.

[Andy Stapp:]

Okay. And how much do you have in CDs and borrowings that are scheduled to reprice over the – in coming quarters and what's the roll-off rate?

[Steve Fowle:]

Yes, in the coming quarter, our CDs don't have any insight in terms of any significant lumpiness. I think they are spread pretty well. In terms of borrowings, nothing – we had some longer-term borrowings mature this past quarter. This coming quarter, don't see a lot, but there is a decent amount, $30 million or $50 million worth in the first quarter of next year.

[Mark Turner:]

Longer-term stuff rolling off at higher rates.

[Andy Stapp:]

And do you know what the rate of that is?

[Mark Turner:]

Andy, I'm going a little bit by memory here, but I remember it being in the 3%, 3.5% range. If it's significantly different than that, we'll let people know.

[Andy Stapp:]

Okay. And what is the cash flow from your securities portfolio?

[Steve Fowle:]

We are running cash flows of $12 million to $15 million a month, Andy.

[Andy Stapp:]

Okay. And what type yields are you getting on new securities?

[Steve Fowle:]

It has – it's been moving with rates. Obviously, it's been lower than we anticipated coming into the year because of the low rate environment. Just having glanced at the purchases that we did over the last quarter, it probably averaged in the low 3s.

[Andy Stapp:]

Okay. All right, thank you.

[Mark Turner:]

Thank you, Andy.

[Operator:]

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

[Matthew Clark:]

Hi guys, good afternoon.

[Mark Turner:]

Good afternoon, Matt.

[Matthew Clark:]

On the commercial deposit front, have you guys started to pay interest on your business deposits? And I'm sure the impact has obviously been very limited given that rates were so low, but just trying to get a sense for whether or not you have any desire to maybe pay up a little bit to capture some share or how you think about defending that share when rates do go up.

[Rodger Levenson:]

It's Roger again. We have not embarked down that road yet. We're kind of taking a little bit of a wait-and-see approach on that. As you know, the vast majority of our commercial deposits are tied to commercial lending relationships where we have a total relationship. And so, I don't see us changing materially from what our approach has been; they really kind of tag along with the rest of the relationship.

[Matthew Clark:]

Okay. Thanks, guys.

[Rodger Levenson:]

Thank you.

[Operator:]

Thank you. (Operator instructions) Our next question comes from Ronald Smith of WSFS.

[Ronald Smith:]

Good afternoon.

[Mark Turner:]

Hi, Ron. How are you doing?

[Ronald Smith:]

I'm doing well. Thank you. We are shareholders in the Bank, we are retired. I've been retired now for over 20 years and we still own shares of the stock and I congratulate you guys on a much improved quarter.

[Mark Turner:]

Thank you, Ron.

[Ronald Smith:]

One of the most stimulating discussions that I can remember from my time at the Bank were the weekly meetings of the asset/liability management committee and that's where my question comes from today. Looking at your annual report from last year, it looks as if retail time deposits were in the area of 25% of total liabilities. And you were – and you are positively GAAP-ed. So I suppose that just as we found back in the '80s that with a positive GAAP when interest rates started to go up, we were kind of happy because our assets repriced immediately, because we had significant numbers of loans that were prime rate related and our liability costs went up only very gradually. I assume that's going to be the case for you guys because of your – the GAAP position that was shown in your annual report.

[Mark Turner:]

Yes, Ron, thanks for the question and a very memorable name around here. Thanks for your service. We still have stimulating discussions at ALCO, probably even more stimulating in the current environment and all that goes on from a day-to-day and week-to-week basis. To your question, we are positively GAAP-ed, slightly positively GAAP-ed and so, we would welcome a rise in rates for a number of reasons. One was because it would help our margin long term and two, hopefully that would be a sign that the economy is improving and that would have other positive impacts. I would point out though, as we've said in the past, a number of our loans have floor rates in them or de facto floor rates in them because WSFS did not lower its prime rate consistent with Wall Street Journal prime back, gosh, at the end of '09 I guess it is now when prime went down again. So the first 75 basis points of increase for us, you probably wouldn't see a whole lot of improvement in our margin, maybe even a little bit of a slight decrease. But after that, it would go up.

[Ronald Smith:]

The other related issue is the issue of attracting two to five-year CD money and it would appear to me that the interest rate cycle has bottomed and we are on our way back up. How fast it goes up is anybody's guess and that's very dangerous to try to predict. But when we thought we were in the part of the cycle where rates were going to rise, we began to be pricing our two to five-year CD product a little more aggressively in order to try to attract two to five-year money, again because we thought that with general rates rising, locking in the two to five-year liability costs would help us.

[Mark Turner:]

Yes, interesting. We think one of our advantages is a sophisticated, yet – organization that is smaller and much more nimble has the ability to get around the table and talk to people on the field and quickly get a sense for what customer preferences are and what we can do quickly, and make changes quickly to do some of those things to get in front of the curve. And so, we do try and do that, but we are also careful not to try and out-guess the market too much, because that can – as you pointed out, can be dangerous.

[Ronald Smith:]

I agree, I agree with you. Well, thanks for taking the time to share with me. I appreciate it very much. Bye-bye.

[Mark Turner:]

Thank you, Ron. Thanks for calling.

[Ronald Smith:]

Right. You're welcome.

[Operator:]

Thank you. We have a follow-up question from Michael Sarcone.

[Michael Sarcone:]

Hi, guys. Just two follow-ups for me. First, can you give us any sense of timing on when the construction and resi mortgage loan runoff will be less of a drag on total net loan growth?

[Rodger Levenson:]

Yes, this is Rodger. I'll speak on the construction. I'll let Rick talk about resi mortgage. I think we are pretty close to the bottom. Our resi mortgage number now is down to $45 million. I think that might trail down a little bit, but we are seeing some nice commercial construction opportunities which will more than cover any further decline there. So, it may go down a little bit more as we kind of work through sort of the final end of some of the credit issues we have, but I think we are pretty close to the bottom of the construction bucket.

[Rick Wright:]

This is Rick. On the mortgage side, we've – I guess it's been for at least two to three years now, have pretty much been selling everything that we originate. So I would suspect that that trend will continue about like it is unless and until we make a decision that we decide to hold on to some of that. So in the next several quarters, I'd expect it to look about the same.

[Michael Sarcone:]

And I think that was in terms of trends?

[Rick Wright:]

In terms of trend, yes.

[Michael Sarcone:]

Great. And last question. Do you guys have any updated guidance on loan growth?

[Rodger Levenson:]

Only what I mentioned previously. I would expect that our C&I businesses, they've been trending anywhere around the mid-teens, so this quarter obviously was 20% annualized. Our full year forecast on that is right around mid-teens. I think overall, our loan growth for the year will be in that same guidance that we've given previously which would be mid-single digits for the entire Bank.

[Michael Sarcone:]

Okay.

[Rodger Levenson:]

Mid-to-low single-digits, excuse me.

[Operator:]

Thank you. I'm showing no further questions at this time. I'd like to turn the call back to Mr. Turner for closing remarks.

[Mark Turner:]

Well, thanks, everybody. We appreciate again your time and attention and your interest in WSFS. We are pleased with the quarter obviously, but never satisfied. As Steve said, there is still a lot more work to do, but we are excited that our investments that we've been making over the last couple of years are up the ramp-up curve and starting to pay off, and excited also about our continuing ability to manage credit in what for us is a – we believe a stable, manageable range and work things down from here. So thank you and have a good weekend.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all now disconnect. Thank you and have a nice day.