WSFS Financial Corporation
Q4 2011 Earnings Call Transcript

Published: 27 Jan 2012

[Operator:]

Good day, ladies and gentlemen, and welcome to the WSFS Financial Corporation Fourth Quarter 2011 Earnings 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 call is being recorded. I would now like to introduce your host for today’s conference, Stephen Fowle, Chief Financial Officer.

[Stephen A. Fowle:]

Thank you, Juan, thank you all for taking the time to participate on this call. With me today is Mark Turner, President and CEO; Rodger Levenson, Director of Commercial Banking; Rick Wright, Director of Retail Banking; and Paul Geraghty, Chief Wealth Officer. Before I turn the call over to Mark for his opening remarks, 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 stature, 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. Now with that read, I will turn the call over to Mark Turner for our opening comments.

[Mark A. Turner:]

Thanks, Steve. Thanks everyone for your time and attention. I have about 10 minutes of opening comments, and then we’ll take all questions. We’re pleased to report earnings in the fourth quarter, up $6.8 million, or $0.63 per share. This capped the year with net income increase 61% to $22.7 million, and earnings per share increased 56% to $2.28 per share. After an essentially break-even year in 2009, the bank has shown nice increases in profitability in each of the last two years. And there is much more room to improve. Earnings in 2010 and 2011 could have been even greater, but we chose to strategically focus on franchise investments and a once in a lifetime period of market disruption. Among other things in the last two years, we have grown our commercial lenders 40%, added, relocated or renovated over 40 % of our branch network, significantly grown our Cash Connect ATM services business and Cypress Capital, our registered investment advisory business, and completed the successful integration of Christiana Bank & Trust adding great leadership platform and brand in trust services. Those investments are bearing significant fruit. To that point, total customer funding was again up strongly in 2011, growing 10% and propelling us into a solid number three market share position in our primary market of Delaware. Moreover, core deposits were up 17% from prior year levels. Total loans were up 5% for the year, but more importantly our most profitable segment, C&I loans are loans to operating businesses, where we almost always get full relationships were up 18% in the year. This continues to improve our portfolio mix and risk profile as stress construction loans and lower margin residential mortgages have played lesser role in our balance sheet and earnings stream. Fee income excluding securities gains and losses was up 15% this year from the shear growth in our number of customers and from new fiduciary services. Fee income now solidly represents about a third of total revenues. As a result of all this total revenues increased nearly $19 million in 2011 or 11%, well above peer averages. Furthermore, in 2011, deposits, core deposits, loans and C&I loans all showed their best period of growth in the fourth quarter with much of that loan growth coming late in the fourth quarter. And Christiana Trust has the best year in its history with revenues up 15% in 2011. This all bodes well for 2012. Based on our investments, recent trends and pipeline, absent unusual shocks, we expect 2012 will show mid-to-high single digit growth in loans and deposits, and slightly better than that in normal fee income growth. Importantly, our net interest margin percentages held steady even in a tougher rate environment as we have been able to mitigate flowing asset yields on securities with a combination of growth and improving mix of loans and reductions in funding costs. Much of this is owed to our prominent position in our primary market, where after years of investment and focus; we now have a full state presence, best-in-class service and a well-known, well-branded profile to compete strongly against out of region banks for our desired customer at better pricing. We expect our margin percentage to remain about and its current rate in the first quarter of 2012 reflecting these same trends, and net interest income to improve with the growth in earning assets. Expense increases in the year and quarter were consistent with our substantial franchise growth and continuing vigilant credit management in a still slow economic environment. As indicated in the release, in the fourth quarter expense increases were primarily due to cost from an OREO bulk sale and cost to ready other problem assets under agreement of sale for their disposition in early 2012, which sets us up nicely with some cost behind us and some amendment in the pipeline for asset disposition. Part of the increase in expenses also came from professional fees to assist in our transition to a new regulatory framework. On this last point, we proactively engaged an experienced firm to help us adjust our internal risk rating framework to the heightened standards of the OCC and Federal Reserve and what we refer to as our risk recalibration project. In this project, we do a much greater line between our Pass loan grades and our Criticized loan grades. We eliminated our last Pass grade, which was a management involvement risk grade, which we called "pass/watch" and we re-rated 100% of those loans under tighter definitions and assumptions. About 60% of these watch loans, we’re upgraded on new rating system and about 40% were downgraded. While these watch loans had full attention of management, this project resulted in a $67 million increase in Criticized and classified loans and that added about $2.1.million in loan loss provision in the quarter as a result of running these changes to our loan-loss model. Both the professional fees and the added loan loss provision totalling about $2.5 million pre-tax in the quarter were costly but we believe were money well spent and position us better in 2012. In many other areas asset quality showed mild to marked improvement. Total credit costs in 2011 including provision, OREO and other workout costs were down 24% from last year, and in the year totaled $37 million. That is inline with guidance given throughout 2011 that these combined cost would be about $35 million plus or minus. Nonperforming assets improved 5% to $92 million in the quarter, a little better than we expected and that’s on top of $4 million or 4% improvement in the third quarter. NPAs are now 2.14% of total assets. Delinquency percentage continue to be relatively low and stable and charge-offs declined 26% in the quarter to $7.1 million and we’re also down 49% from this quarter of last year. All of that combined including the additional $2.1 million from the risk recalibration project led to a provision in the quarter of $6.9 million, a small increase from the $6.6 million last quarter, which as the margin was primary driven by the new loan growth, which was strong. Absent unexpected shocks or changes in strategy, we expect to continue our 2010 trend in improvement and total credit costs, our 2011 trend and improvement and total credit costs into 2012 and our recent trends in NPAs into 2012 as well. But caution again, any progress can be uneven. None of the progress we’ve seen in 2011 in growth, in profitability and in asset quality will be possible without our award wining associates and customer engagement and we were again honored to be named the Top Workplace and the Top Bank in Delaware by independent surveys. As mentioned above and in the release 2010 and 2011, reuse of both increasing profitability and very purposeful franchise investment and growth. As we begin 2012, we are now entering the optimization stage of those investments. We still expect strong above peer growth from that focus, but with far fewer and new investments coming online to impact expenses and efficiencies, we expect greater operating leverage and profitability and continued improvement in asset quality. Thank you. And we’ll take questions at this time.

[Operator:]

Thank you. (Operator Instructions) And first up, we have Michael Sarcone with Sandler O'Neill.

[Michael Sarcone:]

Good afternoon, guys.

[Stephen A. Fowle:]

Good afternoon, Michael.

[Michael Sarcone:]

First question, I know you said continued reduction in credit costs. Is there anyway you guys can provide some quantitative guidance on total credit costs for the year?

[Rodger Levenson:]

Yeah, Mike, it’s Rodger Levenson. Our forecast for 2012 is that we anticipate total credit costs to be approximately $30 million, give or take and that would be broken out roughly $22 million provision and $8 million on workout and other OREO costs. The decline obviously is result of the reduction in our construction portfolio and we’re actually forecasting credit cost to be flat in our C&I businesses and a little bit better in the consumer portfolios. Obviously, this is predicated on an economy that’s showing modest growth and elevated unemployment to continue, and it doesn't obviously also include the impact of any potential accelerated disposition strategies, which as you know we've evaluated from time-to-time.

[Michael Sarcone:]

Okay, thanks. And just on the risk recalibration. Do you expect any further amplifications in either, classification changes or hit to the provisions going forward or do you feel like you’ve taken them all in 4Q?

[Stephen A. Fowle:]

We believe we’ve taken them in 4Q.

[Rodger Levenson:]

And I’d just add to that, that the loans that were downgraded were granular, wasn’t a couple of big loans, it was a lot of small loans. It really had no common themes; they were across several portfolios except the common theme was that they showed some cash flow weakness and relied on some collateral and guarantor support for ultimate repayment. And many are already in stages of repair and with a couple of more positive quarters behind them, we’d expect a large percentage could actually be upgraded in 2012. That rating class the pass/watch was something that we used for many years to manage credits on the bubble and had standing in the old regulatory framework, but our consultants advice us that we were much better off drawing much wider line between pass and criticized loans and we agreed.

[Michael Sarcone:]

Okay, thanks. And last one from me. Is it possible to quantify the amount of the bulk OREO sale completed in the quarter?

[Stephen A. Fowle:]

Sure. Just to give you a little bit of detail, Mike, it was 18 individual residential properties that had a net book value at the time of disposition of $2.4 million and we sold them for a 1 – just over 1.7.

[Michael Sarcone:]

Okay. Thanks, guys.

[Stephen A. Fowle:]

Thank you.

[Operator:]

All right, our next question comes from Matthew Clark with KBW.

[Matthew Clark:]

Hi, good afternoon, guys.

[Stephen A. Fowle:]

Good afternoon, Matt.

[Matthew Clark:]

Hi. Could you just remind us about the sensitivity of your loan portfolio to rates, now if the FED on hold through potentially late 2014 now, I’m just trying to get a sense of – if you could just remind us what percent of your loan book is floating in the index sort of Type 2, I’m just trying to get a sensitivity as to, how much if any more yield conversion we could see?

[Stephen A. Fowle:]

Yeah, to your specific question, our calculation of floating versus fixed rate loans is about across-the-board and including loans that are hybrid and the nature of their repricing. It’s about 75% to 76% of our loans are floating rate, and above 25% are fixed. Obviously, the Fed’s announcement the other day that rates will be low for a long time, I think at some point, we’ll catch up to banks. We think we’re relatively well positioned than we think we’re well positioned for the following reasons. One, over the last year we significantly reduced our asset sensitivity. So, now we’re only slightly asset sensitive. We still believe we have more room to improve on deposit costs and on wholesale funding costs. We have over $100 million of advances that are repricing in the next six months at an average rate of about 3.1% on those advances. We have obviously growth in loans, and an improving mix as I talked about in the call, and in my comments of our earning assets. And beyond that for a bank of our size, and certainly a bank of our history we have very strong profile in fee income, about a third of our total revenues comes from fee income.

[Matthew Clark:]

But those loans, I guess, can you give us a sense for what they’re tied to, is it something that adjust monthly or whether or not those, and whether or not you’re, are you dealing with borrowers that come back and say, I want 3.5%, and whether or not that can happen or not?

[Rodger Levenson:]

Yeah. Matt, it’s Rodger Levenson again. The significant majority of our floating rate commercial loans are tied to WSFS Prime not Wall Street Journal Prime. You may recall, several years ago when the Fed went down, Fed funds went down, and Wall Street Journal Prime went down at 3.25%. We did not, we kept it at 4%, that’s generally has not had a significant impact from a customer push back standpoint. And we continue to get pricing based on that even to today at that level or some margin above that. That’s the vast majority of what we’re doing, particularly in the C&I world.

[Matthew Clark:]

Okay, great. And then finally, on the regulatory consultant. Can you give us a sense for whether or not you believe there, obviously you’re not alone going through this transition, but just trying to get a sense for whether or not there is any additional expense that might be associated with enhancing processes, procedures, infrastructure to deal with the OCC going forward, whether or not you believe that there could be some or not?

[Rodger Levenson:]

I’ll answer that question generally. We put a ton of work in prior to the changing and regulators to add people, positions and obviously its related not only the regulatory change but the economic environment as well as Dodd-Frank and new systems. So, going into it we believe we’re very well prepared. We believe engaging this consultants and the work we did with them was, I don’t want to say icing on the cake but certainly the tail end of it, we will expect probably use them a little bit more into the first quarter of this year. But not nearly as much as we did at the latter part of last year and, we have a few changes to make here and there. Yes, but I think the resources that we’ve already put on board can accommodate them nicely. Steve, you got any?

[Stephen A. Fowle:]

No, no, I’d agree. Most of the work was done in the fourth quarter.

[Matthew Clark:]

Great. Thanks guys.

[Operator:]

Our next question comes from David Peppard with Janney Montgomery Scott.

[David Peppard:]

Hello gentlemen.

[Stephen A. Fowle:]

Hello David.

[David Peppard:]

I just wanted to follow-up on your earlier comments regarding loan growth. Could you maybe talk about what’s in the commercial pipeline now and also when we’ll see less of a drag on the run-off from residential mortgage and construction loans?

[Rodger Levenson:]

Yeah. Hi, David. It’s Roger. Our plight, as Mark said, we had a really good last few weeks of December. And close to several very significant transactions for us. So, our pipeline is a bit lower than it has been that 90 day weighted average is around $100 million. Right now, it’s a little bit when we were carrying it most of last year. But as we’ve said before and as Mark said in his comments, we really expect that to be the driver of our growth this year. We think that it will be, maybe at a little bit lower level than last year because of the economy and some competitive pressures, but it will be the driver and we really think we’ve hit the bottom on the runoff of the construction portfolio. We’re trying to see some small but nice opportunities. We want to do some commercial construction. So, we’re forecasting a little bit of growth there and we’re essentially forecasting that our consumer businesses will be flat this year. That’s versus a runoff of almost $60 million last year. So, you put all those things together and that’s the high single-digit forecast that Mark referenced.

[David Peppard:]

Okay. And on the deposit capture side, I know last quarter you said you hadn’t but have you starting paying interest on your business deposits or is there anything you’re entertaining in order capture more market share?

[Stephen A. Fowle:]

We haven’t done that yet. We’re kind of waiting and watching to see what others might do, we don’t think it’s critical for the majority of the business that we do, because most of our business deposits are tied to these C&I relationships that we’re bringing over.

[David Peppard:]

Okay.

[Stephen A. Fowle:]

And we haven’t seen pressure in the marketplace on that either, David.

[David Peppard:]

Okay. But it is something you would entertain to defend you share or grow your share if need be?

[Rodger Levenson:]

Sure. If need be, we absolutely.

[David Peppard:]

And my last question I guess for you guys is an update on TARP repayment plans?

[Stephen A. Fowle:]

Yeah, we have recently begun very – I don’t want to stress very, very preliminary discussions with our regulators on this. So given the very, very preliminary nature of that, and at this point we’re discussing this process and expectations, there really isn't much to report on that, we’ll keep you updated as there’s more meaningful report. The only thing I’ll say is, just to reiterate that our goal was to do it without impacting common shareholders. And to do it in a prudent way, and that suggests that doing it in tranches over time, hopefully before the reset date, which for us is the first quarter of 2014 would hit. And so, that’s where we are at this point. As I said, we will keep you updated as there’s meaningful developments in the time and form obviously that’s fair.

[David Peppard:]

Did the regulators appear to be responsive to a non-dilutive strategy?

[Stephen A. Fowle:]

The discussions are too early to really give anything meaningful on that.

[David Peppard:]

Okay, thank you.

[Operator:]

(Operator Instructions) And next on line we have Ross Haberman with Haberman Management.

[Ross Haberman:]

Gentlemen, how are you? Just one follow-up regarding the prior call, a question did you guys hold a fairly large securities portfolio. Would one option be selling some of the securities in order to pay down the TARP?

[Stephen A. Fowle:]

As you know, it's not just a cash availability issue. The criteria get at capital levels after you would pay it down, as well as asset quality trends and earnings trends and things like those. All of which, we believe, we've made substantial progress on and the trends are heading in the right direction. And also, it would depend on being able to show stress test that no wonder increased the economics stress and still be well capitalized even after repayment. And again, we’ve done those internal analysis on all those trends, and we believe we’re in a good position, but the economy is uncertain and we’re in a new regulatory framework. So we have some work to do to plough that field.

[Ross Haberman:]

And just one other technical question. Are you at this point allowed to pay dividend money, up from the bank to the holding company?

[Stephen A. Fowle:]

We have no prohibition against that. Obviously, that would need to go through our primary regulator.

[Ross Haberman:]

Okay, all right. Thank you guys. Best of luck.

[Stephen A. Fowle:]

Thank you.

[Operator:]

And our next question is a follow-up with Michael Sarcone with Sandler O'Neill.

[Michael Sarcone:]

Hey guys, looking at the loan portfolio yield it’s held in pretty well over the quarter, and was down around 3 bps. Looks like the most compression on the loan yields came from both [really] mortgage side and the commercial side. On that, the commercial loans, is that just basically pricing pressure from increased competition or can you speak to that?

[Stephen A. Fowle:]

No, it’s just predominantly having to deal with the portion of that portfolio that is fixed rate, so as those loans are gradually maturing over time and either renewing or paying down that’s causing that fixed rate portion to decrease.

[Michael Sarcone:]

Okay. And on the continued deposit cost reduction, do you expect that to primarily come just from CDs?

[Rodger Levenson:]

I would say it’s still as possible to get it across-the-broad. At the present time, we’re pricing, our street pricing is basically the same as our large competitors in the marketplace, but we do have some legacy product out there both in the CD side and in the money market side that we have similar amount.

[Michael Sarcone:]

Okay. Thank you.

[Rodger Levenson:]

Thank you.

[Operator:]

At this time, I’d like to turn it to our speakers for our any closing remark.

[Mark A. Turner:]

Thank everybody again for your time and attention today. As always, we appreciate your interest in us and your faith in us. And we’re available for calls obliviously and at the appropriate way and hope to see you as we get out and about over the next couple of months. Everybody have a good weekend.

[Operator:]

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