WSFS Financial Corporation
Q3 2012 Earnings Call Transcript

Published: 31 Oct 2012

[Operator:]

Good day, ladies and gentlemen, and thank you for standing by. And welcome to the WSFS Financial Corporation’s 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 follow at that time. (Operator Instructions) As a reminder, today's conference maybe recorded. Now its my pleasure to turn the floor over to Steve Fowle, Chief Financial Officer. Sir, the floor is yours.

[Steve Fowle:]

Thank you, Huey and thank you to all of you for taking the time to participate on this call. Participating on the call here with us are, Mark Turner, President and CEO; Paul Geraghty, Chief Wealth Officer; Rodger Levenson, Chief Commercial Banking Officer; Rick Wright, Chief Retail Banking Officer and myself. Before Mark begins with 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 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 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 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 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’ll turn the call over to Mark Turner for his opening comments.

[Mark Turner:]

Thanks Steve and thanks everyone for your time and attention. We are pleased to have reported net income of $10 million and earnings of $1.06 per share in the third quarter of 2012. This earnings per share performed with a 51% improvement over the same quarter last year. Return on assets for the quarter was 95 basis points and was our best reported performance since late 2007 before the great recession and financial crisis fully hit. As usual, the quarter included some notable items. The company continued our prudent management of prepayment and extension risk in our investment portfolio. We are monetizing some of premiums before they quickly prepay at par in this low rate environment. These gains resulted in $0.17 in earnings per share in the quarter and while not fundamental earnings power, we note that the last five quarters included substantial gains from similar portfolio risk management. The company also realized almost $1 million in non-taxable bank-owned life insurance gains, improving fee income, reducing our effective tax rate and resulting in an improvement of $0.11 in earnings per share in the quarter. Offsetting these by small amounts was our adoption of recently issued regulatory guidance when the treatment of consumer loans have been discharged in Chapter 7 bankruptcy. This led half adjustments in incremental non-performing assets, charge-offs and provision and reduced earnings per share by $0.05 in the quarter. We note that the vast majority of these loans are paying and have been paying for many months after bankruptcy and therefore we expect the recovery of most of these losses overtime. In the industry and our challenges from the still slowly recovering economy include loan growth and net interest margin pressure. Our loans were flat in the quarter, but growth was masked by both the intentional sale of low rate mortgage loans in this historic interest rate environment and also the intentional disposition of problem assets. The spillover from the successful execution of our second quarter’s asset strategy program. Absent these last problem loan dispositions, loans would have grown 3% annualized in the quarter, from market share gains, as incremental borrowings from existing customers is tepid, because of the economy and pre-election uncertainty. Note that our pipeline of new commercial loans is again relative strong. Our probability weighted average expected to close in the fourth quarter is $100 million in new commercial loans and therefore we expect loan growth in the fourth quarter to be at the low single-digits annualized pace also; Roger will have more to say about this in our question-and-answer period. Our net interest margin and net interest income declined in the quarter, primarily as a result of corporate initiatives; that is, we estimate about eight basis points of our 12 basis point margin decline came from the disposition of higher yielding securities and loans in our asset strategies program coupled with the senior debt rates this quarter support balance sheet and eventual redemption of our preferred shares. Each of these initiatives has had or will have substantial positive bottomline effects despite their negative margin impacts. We estimate the remaining four basis points to 12 basis point decline came from normal repricing of securities and loans in this low rate and competitive environment. We expect some continued margin pressure in coming quarters as a result of these dynamics. Beyond those notable items and challenges highlights in the quarter were many and fundamental results were driven by vastly improved credit, fee income growth and expense management. Despite the minor Chapter 7 catch up adjustments, credit metrics and credit cost improved across the board. Among other gains from the second quarter non-performing assets were down 8% to $57.1 million and are a cycle low of 1.34% of assets. The classified asset ratio was down 530 basis points, 43.4% of Tier I equity plus our allowance for loan losses and total credit costs which include provision, OREO charges and workout costs decreased 68% to $5.9 million. These improvements were the result of the successfully concluded asset strategies program discussed extensively in the second quarter and continued improving portfolio dynamics. In addition, our allowance for loan losses improved of 114% of non-performing assets. Fee income normalized to exclude the notable items improved 16% annualized from the second quarter and reflects higher mortgage banking income and growth in our number of customers over recent quarters. We have experienced fundamental growth in all business lines, retail, commercial, Cash Connect and especially our wealth division. This organic growth has been validated by recently published FDIC deposit market share results, showing we well outpaced traditional market share growth and solidified our number three market share position in our primary market Delaware. Lastly, our quick efficiency plan started and discuss last quarter continues to roll out and show strong results with expenses down this quarter over the last quarter by 3% or 10% annualized and expenses were flat from this quarter last year, despite heavy investment in our franchise over that time. We expect added benefits from this initiative in the next two quarters. In conclusion, we are pleased with our results this quarter and realize the industry and we have challenges to manage through. However, we believe we have the best brand, team and momentum in our marketplace to produce market share gains and improve fundamental performance. Thank you. And at this time, we will take your questions.

[Operator:]

Thank you. (Operator Instructions) Our first question in queue comes from the line of Catherine Mealor with KBW.

[Catherine Mealor:]

Maybe as a quick follow-up on the loan growth, I know you talked a little bit about it in your comments, but can you talk a little bit about the slowdown that we saw this quarter from the $22 million that you sold. What is it, do you really think its just the demand that's slowing pre-election, do you feel like once we get through November you’ll start to see more of a pick up inland demand going into the fourth quarter and can you talk about little bit about the pricing too. Is it a part of slow down in loans that you are being more conservative on your pricing, how competitive is the pricing in your market, thanks so much.

[Steve Fowle:]

How about Rod you take that and then I will add any comment if necessary.

[Mark Turner:]

I know this has been talked a lot about, but I would tell you it is very real, this phenomenon of uncertainty from our borrowers, I would say particularly over the last two quarters but it really intensified this quarter around the uncertainty post election and how that translates into borrowing and capital needs. The primary uncertainty obviously is around taxes and healthcare costs which meant most of our customers are small business customers as defined broadly and obviously that impacts them significantly. So that has been a real phenomenon and has translated into a fair bit of pay down on lines and also not accessing new capital for investment decisions. So that's definitely a factor we believe and there's also the factor of competition particularly price competition, I guess where the competition is the most acute for us right now and where we have past going some opportunities and then the pricing that too aggressive it is. We are seeing a number of situations where banks in our market particularly the larger banks are offering long term fixed rates, well beyond 10 years, 15-20 and even in some cases longer than that at rates that we obviously feel are too aggressive for us to meet our return thresholds. So those two factors really have combined to impact the loan growth. All that being said, I would just reiterate that we continue to see and have acquired lots of great market share and this environment. It is being impacted by some of these other factors and we feel that trend is going to continue in the fourth quarter.

[Catherine Mealor:]

And on the…

[Steve Fowle:]

What I would add to that is in our loan committee and executive committee as they meet frequently, we are seeing good new credits, house credits from our larger rivals coming in and we are winning a great deal of them. However that has been offset by current borrowers paying down, competition from the big banks at the larger middle market segment, our purposeful shedding of problem at says to improve credit profile and credit costs which obviously showed up this quarter and not retaining some of the very low rates, fixed rates mortgages that are coming on at this point. All in all though I think when the economy picks up, we will be very pleased with the composition of our market share and our loan portfolio.

[Catherine Mealor:]

That's really helpful. Thanks. And maybe just one follow-on. Mark you mentioned you had about $100 million new commercial loans in the pipeline through the fourth quarter, at about what average rate do you feel like those loans are being put on your balance sheet.

[Rodger Levenson:]

This is Rodger again and this would be a broad generalized statement, but I would say, as you recall, most of our commercial loan books, 75% of it is floating rate, off of (inaudible) prime, which currently is at 4%. So I would say that most of the business that we're book is a bit above that rate.

[Operator:]

Thank you, Madam. Our next question comes from the line of Frank Schiraldi with Sandler O'Neill. Please go ahead. Your line is open.

[Frank Schiraldi:]

Just a couple of modeling questions first actually. Steve, I know you guys had spoken on same quarter call about potential credit cost going forward and you noted that OREO and work out cost you expect, now you said you expect that to be lumpy but you gave guidance for the 500 to a $1 million a quarter. I am just wondering if that’s a good expectation at this point for 4Q?

[Steve Fowle:]

Yeah. This is Steve. You were expecting that that would probably be a good number. We had one particularly large credit that we took some extra charge and that was OREO this past quarter that made the number little higher than we expected and again that has to with the lumpiness we talked about.

[Frank Schiraldi:]

Okay, and I am assuming there be no change as well to the expectations you gave on provisioning?

[Steve Fowle:]

That’s right. And I think the provisioning number would have been right in our range had it not been for the catch-up adjustments on the chapter 7 regulatory guidance.

[Frank Schiraldi:]

Okay, I thought it was within your range. And then the expense saved and again in the second quarter, you had given sort of expectations of timing and I believe you had said perhaps 1 million will flow through in the fourth quarter or a third quarter and another 2 million in the fourth quarter. Wondering if you could talk a little about one if that timing still holds true in terms of those numbers and secondly just where the cost saves are coming out of the particularly in the fourth quarter?

[Steve Fowle:]

Yeah, we talked last quarter about in fact we identified a little over 4 million in pretax benefits from the program. By the end of the second quarter that’s annual run rate, by the end of the third quarter we had about half of that already realized, already implemented. We would expect the remaining about 2 million to be split evenly between next quarter and in the beginning of 2013 in terms of implementation dates. As I look to where they are I would say about half of that has to do with the salaries and benefits line items and the rest is spread through data processing professional fees other operating expenses ever.

[Frank Schiraldi:]

Okay, great. And then just lastly wanted to ask question on credit, look like if you exclude the asset dispositions in the quarter there were some inflows into non-accrual I wondered if you could just talk about the level of inflow seen in this quarter versus 2Q and may be sort where those are coming and then size of those loans or relationship?

[Rodger Levenson:]

Yes Frank this is Rodger and as I saw in your note. NPLs for the quarter went down 2.6 million obviously that incorporates also the 4.7 that we have talked about of the loans went to NPA as a result of the adoption of the Chapter 7 guidance. So the decrease would have been around 7 million for the quarter and that was really comprised of inflows of about 10 offset by dispositions, pay-off, collections things of that need of about 17 and I would highlight on that inflow number that's a gross inflow number. So the net inflow would have been lower when you offset some of the other things I just talked about, and there was not one individual loan more than $1.5 million. So it was primarily small and consumer’s stuff that is going on that I would say is very consistent with where we are at in the pass of the economy.

[Frank Schiraldi:]

Okay, so not necessarily much lower or higher and then I guess if I take a look but what you saw in 2Q in terms of grows inflows?

[Rodger Levenson:]

I’d say, its very similar or declining to what the pattern has been. I would also just point out just for a point of clarification. Of the $22 million of dispositions that we had in the quarter, about 12 of that was related to a payoff of a loan that was not in the non performing category, it was a performing loan that we were repaid at par and that was included in our problem loans statistics. So I just wanted to make sure that was a clear.

[Mark Turner:]

The other thing I’d augment that by, is generally the fourth quarter tends to be fundamentally the slowest quarter of inflows in terms of problems just because the nature of our customers being smaller and medium sized private company they get their financial statements sent to us in the second and third quarter. So that’s when things tend to be more identified and fall into those buckets. Obviously we keep tab on those customers around the bubble more closely than that.

[Operator:]

Thank you, sir. Our next question in queue is Matt Schultheis from Boenning & Scattergood. Please go ahead.

[Matt Schultheis:]

Really quick question, I am not sure you really have an answer for it yet, but I was wondering if you can try to quantify the impact of Hurricane Sandy with regard to clean up costs for the fourth quarter, any impact that may have on borrowing credit metric, borrowers credit metric standpoint that something you may have lost a key facility or something of that nature and lastly with long-term implications maybe for loan growth as (inaudible) rebuilt.

[Steve Fowle:]

Yeah, Delaware was as the Governor said was very fortunate, we were spared the worst of the Hurricane. Had it hit landfall 50 to 75 miles south you would see pictures probably in Delaware like the ones you are seeing in New Jersey and New York. But because it went 50 to 75 miles north and we were kind of in the southwest corner, rains were less and winds were less and it moved through much quicker than expected. So while there are many, you all know the numbers of many millions of people still left without power. They are only about as of this morning 2,400 homes without power in Delaware. So we saw rain and wind and there are some down limbs and some street flooding in the lower part of the state but there were no houses taken off their foundations and no big floods in houses to speak of. So we were very fortunate, our whole branch network was back up and running by 12 o'clock yesterday and I think our situation was very similar and we run the state from bottom to top, our situation was similar to many other businesses in the state and so we don't expect and the same holds for nearby South Eastern Pennsylvania where we have our other branches and our other business customers and northeast Maryland would be the same as well. So we don't expect much of a credit or financial impact to recovery impact from the Hurricane both the depths of it and the need to recover as you would be seeing in central New Jersey and New York.

[Operator:]

Our next question in queue comes from (inaudible) with Janney Montgomery. Please go ahead. Your line is open.

[Unidentified Analyst:]

I was just wondering if you could give us some guidance about the interest margin going forward. Do you see the margin to stay on the level we see now or do you see further compression and also I know you mentioned the provision already but just to be clear do you expect the provision to stay around levels that you see now?

[Steve Fowle:]

In terms of the margin first Mark talked about the dynamics that hit the margin in his opening remarks and in terms of going forward, I would expect to see continued margin pressure in the fourth quarter, the largest impact should be from our senior debt which was issued later than midway through the third quarter, that had a four basis points negative impact in the third quarter. So I would expect a similar to slightly larger impact in the fourth quarter. We are actively managing through the tough margin environment and we have a task force working to implement margin initiatives. We will also see some benefit from about $55 million in promotional CDs with the rate above 4.5% that matured late in the third quarter through middle of this fourth quarter and $40 million advances with average rates in the mid (inaudible) that mature early next year. So you know, while there will be some continued impact from the debt offering, we're taking steps we can to mitigate a step the environmental pressures as we are able to.

[Mark Turner:]

With respect to the provision, Roger do you want to chip in on that?

[Rodger Levenson:]

Yeah, our guidance is the same. We would expect to range between $3 million and $4 million, consistent with what you saw this quarter especially as Mark said, net the impact of the adoption of the guidance when chapter seven bankruptcies.

[Mark Turner:]

And just to reiterate again, reaffirm the guidance, when total credit cost, so that’s provision OREO and work out in a range of $4.5 million to $5 million and this quarter it was $5.9 million, $900,000 higher than the high end. Almost $700,000 of that came from the chapter seven bankruptcy guidance adoption and the rest was from that one OREO write-down.

[Operator:]

Thank you. (Operator Instructions) Our next question in queue comes from Jason O'Donnell with Merion Research. Please go ahead. Your line is open.

[Jason O'Donnell:]

My first question is a bit of a housekeeping item. I am just wondering how much of your loan work out and OREO expense line as a function of OREO expense and of that expense figure, are there any evaluation adjustments in there that are impacting the trend?

[Rodger Levenson:]

Of that $2.1 million of expense that we had in the quarter in that overall category, right around a $1.4 million, little over a $1.4 million is related to OREO write-downs. The remainder would be all their costs involved in collection. And as Mark and Steve both said, the vast majority of that was related to one specific situation.

[Jason O'Donnell:]

And then can you just give us your thoughts regarding the reserve at this point, I am wondering where you think the reserves-to-loans ratio might settle out over the next several quarters just given the improvement and credit quality you are seeing?

[Rodger Levenson:]

Yeah, we are to 169 now, we have said the credit cure continues as we expect or as everybody expects and the economy path continues as everybody expects given our the risk profile the business we do, settling outs in the new normal at about 150 that’s a gross broad estimate but that’s what we think at this point, again it will be a lot of that will be dictated by the path of the economy.

[Jason O'Donnell:]

And then my final question is on the fee income side, it looks like mortgage banking revenues doubled this quarter, can you just give us an update on the gain on sale margins you are seeing and whether you think third quarter revenues are sustainable heading into the fourth quarter?

[Rick Wright:]

Organic sale continues to be strong and one of things that’s happening now it’s because of the all the activity it’s taking about 75 days to fund book loan. So we actually have a pretty clear look at the next 75 days and are comfortable that we are going to be at even a higher level for the fourth quarter our gains. The margin I don’t know of the top of my head. I know it’s been consistent.

[Operator:]

Thank you, sir and there appears to be no additional question is in the queue. I would like to turn the program back over to Mr. Mark Turner for any additional or closing remarks.

[Mark Turner:]

Okay, thank you very much and thanks again everybody for listening in and your questions. Again, we are pleased to be reporting strong numbers. We continue to see market share gains; we hope that some of the growths that we see will overshadow some other run-off we see in quarters going forward. And we look forward to catching up with people, we note will be at a conference soon in a couple of weeks or so and look forward to seeing many of you there. Other than that, our thoughts are obviously with those that were more affected than we were from the Hurricane and we will continue to support them in anyways we can. Take care, everybody.

[Operator:]

Thank you, sir. Ladies and gentlemen, again this does conclude today's program. Thank you for your participation and have a wonderful day. Attendees, you may disconnect at this time.