WSFS Financial Corp (WSFS) 2008 Q2 法說會逐字稿

Good afternoon. My name is Tia and I will be your conference operator today. At this time, I would like to welcome everyone to the Bryn Mawr Bank Corporation second-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS). It is now my pleasure to turn the floor over to your host, Duncan Smith. Sir, you may begin your conference.

Thank you, Tia, and thanks, everyone, for joining us today. If you've not received our press release that was issued at 4 p.m. today and is available on our website at www.BMTC.com or by calling 610-228-2140. Ted Peters, Chairman and CEO of the Bryn Mawr Trust Company, will makes some introductory comments on the quarter, our strategic initiatives and our view of the competitive landscape. After that, we'll take your questions.

The archive of this conference call will be available online at the Bryn Mawr Bancorp website or by calling 800-642-1687 and entering conference pin number 53962580. A replay will be available approximately 2 hours after the call concludes.

Before we begin, please be advised that during the course of this conference call management may make forward-looking statements which are not historical facts. Forward-looking statements may be identified by the use of the words such as believe, expect, anticipate, intend, plan, estimate, could, may, likely, probably or possibly. These statements include, but are not limited to, statements regarding plans, objectives and expectations with regards to future operations and statements regarding future performance.

Such statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond the control of the Bryn Mawr Bank Corporation and its management and could cause actual results to differ materially from those expressed and/or implied by the forward-looking statement and information in this statement.

Factors that may affect future performance as discussed in this document filed by the Bryn Mawr Bank Corporation with the SEC from time to time include the Company's annual report on Form 10-K for the year ended December 31, 2007. Bryn Mawr Bancorp undertakes no obligations to update these forward-looking statements to reflect events or circumstances that occur after the date that such statements were made. Thanks and now I'd like to turn the call over to Ted.

Thank you everyone for joining us today. We are pleased to report strong second-quarter results with earnings of $0.37 per diluted share, up from both a year ago and the first quarter. Results in the second quarter were driven primarily by a 15% increase in our loan and lease portfolio as well as some long-awaited stabilization in our net interest margin.

Bryn Mawr's strong banking and wealth management franchise and disciplined credit quality management has enabled us to focus on building our business at a time when many other financial institutions, both large and small, are struggling for survival. The Board of Directors has expressed their continued confidence in the soundness and security of your bank by authorizing a 7.7% increase in the quarterly dividend from $0.13 per share to $0.14 per share.

For the second quarter of 2008, we reported diluted earnings per share of $0.37 compared to $0.36 per share for the second quarter of 2007. Net income for the current quarter was $3.2 million compared to $3.1 million in 2007. For the quarter the annualized return on equity was 13.65% compared to 14.66% last year; return on assets was 1.4% in the quarter compared to 1.49% last year.

With our loan and lease portfolio up over 15%, we have clearly not lost any of our momentum. Leasing continues to be our fastest growing new business initiative. High-yielding leases were added to our asset mix to help diversify and sustain yields on our overall portfolio during a period where yields have been under pressure.

In the second quarter, lease yields averaged just under 11% and made a positive contribution to the net interest margin and net interest income. At June 30th, the leasing portfolio had grown to $54.1 million from $28.9 million a year ago and now represents 6.3% of our total loan and leases portfolio.

We originate leases through a network of national brokers, all who are approved. Only four brokers of our 50 brokers represent greater than 5% of total originations with the largest less than 7%. This broad network has created a portfolio that enjoys diversity in equipment, industry and geography. Healthcare-related equipment represents the largest proportion of the portfolio at 18%.

Customer concentration by state mirrors population concentration with California representing 14%, New York State 8% and Texas, New Jersey, Pennsylvania and Florida each representing about 7%. Given changing economic conditions in the third quarter of 2007, we began modifying our underwriting standards on and lease originations, eliminating unprofitable sources of business and concentrating new originations in the best credit categories.

Other than leasing, general loan production was up once again across the portfolio. Compared to a year ago, commercial and industrial loans are up 20% and commercial mortgages are up over 8%. The growth largely came from existing customers and prospects in our immediate trade area.

The fastest growing loan product on the personal loan side is our home equity line of credit product which was up 25%. This growth occurred with retail customers within our footprint which serves an affluent area that has not been subject to wide real estate price swings. Residential mortgage balances were also up very nicely at 9%.

Though competition for good credits remains quite brisk, we are maintaining pricing discipline to help sustain the overall portfolio yield. Credit quality in the aggregate remains very good; charge-offs for this quarter fell to 23 basis points from 31 basis points in the first quarter. However, the provision for loan and lease losses was 781,000 in the quarter, primarily in recognition of the change in the complexion of our portfolio.

Our conventional loan portfolio has been performing consistent with our long-term record of strong credit quality as we have individually underwritten all of our loans. We are not burdened with subprime or other risky loans that now plague many lenders. We are working very hard to maintain high credit quality across the entire portfolio and are already well reserved with an allowance for loan and lease losses that exceeds 500% of nonperforming loans and leases.

On the non-interest income side, wealth management revenues continue to reflect a weak stock market and the loss of the Community Bank's portfolio business. Community Banks, as you may remember, was purchased recently by Susquehanna Bancshares. Wealth management revenues for the second quarter of 2008 were flat with the first quarter of 2007 -- excuse me, were flat with the first quarter of this year, 2008, and down 4% compared to the second quarter of last year.

Consistent with our strategy to grow both organically as well as through acquisition, on July 15th, we closed the acquisition of Lau Associates -- and Lau is spelled L-A-U, Lau Associates -- a Wilmington, Delaware based financial planning and money management firm with approximately $603 million of assets under management and $156 million of assets under supervision.

Lau Associates is the premier provider of multi-family office services in the mid-Atlantic region. We are excited and honored that they have chosen to affiliate themselves with the Bryn Mawr Trust Company. Lau Associates will operate as a separate entity under the continued leadership of Judy Lau, their dynamic founder.

With this acquisition our total assets under management and administration will increase to approximately $3 billion, maintaining Bryn Mawr as one of the largest wealth managers in the region. This will be an all cash transaction and is anticipated to be immediately accretive to earnings. We remain open to grow through additional acquisitions.

Also in our wealth management business, the Bryn Mawr Trust Company of Delaware charter was recently approved and we expedite Bryn Mawr Trust of Delaware to open later this quarter. A Delaware Trust charter provides a number of advantages in competing for both individual and institutional trust business, which we expect to lead to growth in trust assets managed and administered.

In retail banking the Westchester regional banking office, which is being constructed right now, should be completed by the middle of the fourth quarter. We also recently completed a full remodeling of our Wayne branch. A more significant presence in both of these affluent communities should improve our deposit gathering and loan growth opportunities.

In addition to maintaining pricing discipline with our loan products, we initiated some balance sheet management strategies including increasing our investment portfolio to primarily improve liquidity and to capitalize on interest rate spreads. Our investment securities portfolio is now $112 million and our proportion of investment securities, relative to the entire balance sheet, is moving in the direction of similar financial institutions.

In the second quarter checking, money market and saving deposit accounts continued to grow. We also saw an increase in average non-interest-bearing deposits. Also in the second quarter the cost of wholesale deposits and borrowing has fallen as higher priced obligations matured and were repriced at lower rates.

On the cost side, the year-over-year growth in operating expenses was around 3% this quarter despite the faster rate increase in salaries and wages needed to support our new growth initiatives. Our capital ratios are strong and we remain well-capitalized according to all federal and state regulatory guidelines.

Some of the key ratios that are indicators of our financial strength include -- first, our allowance for loan and lease losses at 509% of our nonperforming loans and leases; two, the proportion of our total loan portfolio comprised of nonperforming loans and leases is only 20 basis points; three, the overall allowance for loan and lease losses is $8.7 million or 1.02% of total portfolio loans and leases.

To summarize, we have demonstrated the ability to generate attractive asset growth across the board -- across a broad cross selection of loan and lease categories while maintaining our high credit standards and making underwriting modifications where economic conditions warrant. We are making progress to stabilize our net interest margin.

Through the acquisition of Lau Associates and the opening of a Delaware Trust Company we are adding over $600 million of assets under management and over $150 million of assets under supervision, broadening the breadth of our product offerings and improving scale in our wealth management business. We are also growing our retail banking presence.

We are not immune from macroeconomic forces that may slow asset growth or play havoc with interest rates and we are ever mindful of how we can best position your bank for changes in the external environment. But at the same time, we are confident in the outstanding franchise we have established in our market and the solid financial position from which we operate.

We believe that Bryn Mawr Trust and Bryn Mawr Bancorp are well positioned to continue to provide shareholders attractive returns on the capital with which we have been entrusted. With that we will open the lines for any questions. Operator, would you please compile the Q&A roster?

(OPERATOR INSTRUCTIONS). Jason O'Donnell, Boenning & Scattergood.

Good afternoon or good evening. How are you? Listen, congratulations on the good quarter. I just have a couple of questions, and forgive me if I hop around a little bit. But just on the recent acquisition of J&J Holdings and the Lau subsidiaries, can you just tell me roughly how much of a contribution you expect to trust revenue on a quarterly basis and also -- if you have it? And also, sort of how much -- give me a sense of how much you expect in an increase in the way of operating expenses as a result of that acquisition?

I'll have Duncan handle that.

Jason, I can give you some of that information. We're expecting about $4 million in annual revenue. So about $1 million a quarter there. And then margins on that are going to be anywhere from 30% to 40%.

Okay, great.

That's before any of the deal amortization type costs that we're still working through.

Okay. Also, on the margin I noticed obviously that bottomed out this quarter or hopefully at least it flattened. And I'm just wondering what your thoughts are given your current level of growth and kind of what's your expectation here in the third quarter assuming that we don't see any rate increases over the near term?

We were very happy with our margin in the second quarter. It was 397; it was exactly the same as the first quarter, so we basically stabilized. As you know, our margin had been dropping pretty consistently for the last year or so. This is in fact -- this really is despite the fact that we're growing the bank and funding some of that growth through more expensive wholesale money. So we feel confident that we can maintain that margin. We are repricing some of our wholesale funding right now. So we think we will stay in that range of 397, it could be a little bit lower, it could be a little bit higher, but we think we'll be in that range.

Okay, great. That's helpful. On the home equity portfolio, it looked like you had this quarter, if I recall previously, the bulk of the loan growth was coming from commercial real estate or commercial CNI or some combination as well as you had some increases in equipment lease portfolio as well. There's sort of more diversification in growth this quarter. On the home-equity side though, can you just give me a break out, if you have it, between the loans and the lines and where you're seeing the bulk of the increase?

Well, we're seeing the bulk of the increase in lines of credit, what we call HELOCs, home equity lines of credit. But we're seeing a pretty good general activity on the consumer borrowing side across the board. What we've really seen in the last really month or so is really what I would call flight to quality.

We have a number of people who are coming to Bryn Mawr Trust because we are perceived as a very strong institution and they're bringing their deposits and they're bringing some of their lending business with us too. So we were very pleasantly surprised by that increase in home equity line of credit business and hopefully it will continue.

Okay. And then lastly, with respect to credit quality, can you just give me some color on -- if you don't mind, on the composition of net charge-offs and how much of that is from the equipment lease portfolio roughly? And also, what types of loans are you seeing that are moving into nonperforming in the second quarter?

Jason, I can give you some of that. Almost all of those charge-offs for the quarter are in the leasing portfolio. The charge-offs in the banking portfolio or non-leasing portfolio are almost nil, just a nominal amount there.

Okay.

So we do expect that similar type numbers in the leasing portfolio probably for the next two quarters -- and as the changes we made the end of '07 work through the portfolio and it continues to mature.

Okay. And then on the nonperforming asset side, you had an increase this quarter, correct? It wasn't -- the total number was still fairly small but --?

I can give you -- approximately $1 million of that is residential mortgages or first -- probably first lien type residential mortgages; $600,000 is leasing related and then there's some assorted other pieces, one or two big pieces.

When you're kind of low, anytime you get a little bit of -- little stuff comes in it makes the number jump, look a little higher than maybe it really is. At the end of the year we were at 25 bps, and then at the end of the first quarter we got down to what -- 9, 10 or 12 and now we're back up to 20. So we think it's a very reasonable number and we're very happy with where we are on it. But once again, hopefully it could drop down next quarter, it could go up a little bit, but we feel comfortable with the credit quality.

And that leasing number is 17 different leases and on the residential it's about 12 different mortgages. So it's not concentrated on any one piece, they're all smaller pieces.

Okay, great. Thank you very much.

David Darst, FTN Midwest.

Good afternoon. You indicated in your fee income that you're seeing some -- or getting some income from people turning in the leases?

You mean people --?

Yes, I guess early termination of the lease.

Well, when people terminate leases early and pay them off we make money on it because they have to make all the payments for the remaining term. I know that's something where we make money on, but I wasn't really aware that was anything (multiple speakers).

It wasn't a big number in the -- I don't have that right in front of me. I'll see if I can work that up. But it was a noticeable increase in this quarter compared to other quarters.

Is it something related to higher fuel costs and the people are no longer wanting to use the equipment or it's not economical for them to use the equipment?

I think our equipment is -- I don't think it's concentrated in moving vehicles, so it's all different kinds. But so that's a good question. I don't think we're able to answer that right now.

Okay. And how much is transportation or construction related?

Well, we did -- in Ted's prepared remarks, did have some data specifically for you in there, but I don't have that in front of me.

Yes, I think you just had the geographical data, right?

I think what we said in there is that medical has 18% and there was no one other significant industry in there. That was the biggest one that we noted.

Okay. And so you feel like this level of charge-offs will continue $800,000 or $900,000 for the next couple quarters?

Yes, but hopefully not that -- I don't think they're that high.

Okay. Because you made some changes, right, that you thought would kind of bring the level down. Have those not really worked through yet?

Yes, that's exactly right. In the latter part of 2007 we changed the credit standards a little bit; we raised the FICO score; we had a broker or two we stopped doing business with; we try to concentrate more in medical equipment and telecommunications equipment; got away from some other things.

So it takes a while for it to work through, but we feel that there was a big improvement in the second quarter over the first quarter and we think the third quarter, while there's still going to be charge-offs, will be hopefully around or an improvement from the second quarter. So we feel comfortable where we are. Clearly we are watching this very, very closely.

Okay. And how's your commercial pipeline?

The commercial pipeline is good. We're seeing a lot of loan requests out there quite frankly from clients who are involved with one or two of the larger banks, national banks who have experienced a little bit of problem and some bad publicity. So we're seeing some loan requests from those types of client and also we're seeing some deposit inflows from them as well.

So we're very, very good commercial lenders, we're very good business lenders and we have a good reputation for that in the Philadelphia area. And so our pipeline has remained really steady in that area since really I've been here seven or eight years.

Okay, that sounds good. So we would assume that this flight to quality trend that you referenced will continue and probably I would say accelerate in July given the turmoil with the larger banks?

We think so, yes. I don't want to name names, but there's one large bank in our area that's had a lot of bad publicity nationally on their credit quality some other things and that's where we're really seeing a number of these loan requests. On the other hand, when anybody comes from another bank, why are you leaving? We look at it pretty closely. But competition is brisk out there too. We're in a market that's very heavily banked and a lot of very good banks in this market who we compete against.

Okay, thanks.

Thanks, David.

Jerry Heffernan, Lord Abbett.

I'd like to -- this is more of a trying to get into management's head question here. The loan and lease portfolio growth of 15% is -- well, it's very large; it's a very impressive number. I would like to approach this from the standpoint of questioning it. Is this the time that you want to be growing that that quickly?

And perhaps another way to look at it is since a lot of this growth needs to be funded with wholesale funding, an expensive form of funding, would it be better to be pricing up your offerings and accepting a lower growth rate with a higher yield given the fact that the funding mechanism is a wholesale funding? How do you work that balance?

You must have been sitting in some of our management meetings or something. That's exactly what we've tried to do and really have done. We are growing the leasing portfolio at a much slower rate than we were six or eight months ago. And while we didn't raise rates we maintained it. While a lot of the leasing industry has been dropping rates we've maintained our rate up around that 11%. So by keeping our rates up a little bit and being a little bit more selective we have slowed our growth down.

What happens in the leasing business since the average lease is 42 months you get a lot of runoff. So right now we're booking about $2.7 million in leases a month and we're running off about $1.7 million. So our net increase in our leasing portfolio is approximately $1 million a month net and that's much less than it was say the previous year or so. So we've actually done what you kind of suggested. We've maintained our margins, and actually increased our margins in that business and we've improved our credit quality too.

Okay. Well what about the non-leasing portfolio? What about just the loan growth -- the loan portfolio and the HELOCs and things of that sort?

Well, a couple of things. One, loan demand is strong. Our low growth last year was almost 18%, the previous year it was almost 15%, that's across the board for the whole institution. And we talk a lot about maintaining excellent quality, that's always first. And so we talk about should we also then be increasing our rates and our commercial loan rates and slowing that growth?

One of the things, it's a very competitive market here, the competition is brisk. You hate to walk away from business, but it's not only the loan business, you get all the deposit business, then you get the 401(k) from the Company, you get the personal accounts of the owners their employees. We have a program where we do special things for employees of client of ours.

So we really develop with our lending clients, business clients especially a very holistic kind of relationship. So to walk away from a deal for an eighth of a point or a quarter of a point sometimes makes sense and sometimes it doesn't make sense.

The strong growth in loans has put some stress on our balance sheet. I think you know that and by looking at the numbers. And so we are probably going to be modeling next year a little bit slower low growth both because the lease portfolio will grow a little slower and perhaps what you're saying, maybe being a little less competitive on some pricing. But we'll see how that goes.

I mean, I imagine the discussion with the customer has got to go along the lines of -- you get what you pay for, we're going to be giving you a much higher service level, this is a much better banking experience, look what's going on with the other banks in our area. But I mean, you guys seem to be doing a great job here, very happy with everything. But when I see wholesale funding at 35% when it was at 27% last month, that rubber band is starting to be stretched pretty thin there.

Yes, I would agree. Quite frankly, we have a number of deals recently -- sort of anecdotal, where we were a quarter of a point to three-eighths of a point over our competition and we got the business or we kept the business if it was an existing client. So you're right, there is a value out there on preferred service and sort of the quality institution we are. Whether that is worth an eighth of a point or a quarter, or three-eighths of a point, it depends upon the client and the deal and the size of the deal quite frankly.

The smaller the transaction -- a $300,000 loan doesn't have as much price sensitivity as a $3 million loan obviously. But we are watching and we spend a lot of time on our funding. I think the liability side of the balance sheet, as we all know, is the most difficult part of banking right now and the use of wholesale funding and core deposits and other things. So it's something, Jerry, we're spending a lot of time and attention on and we realize that we are as -- to use your metaphor, we're stretching the rubber band a little bit.

Okay. If I could switch topics and go to the loan loss reserves. 1.02% reserve level which is down from a 1.16% a year ago. I find it interesting/peculiar that we would have the loan loss reserve going to a lower level given the overall banking backdrop of which we're currently working.

All my discussions with other bank CEOs right now is that, yes, while they have been pressed over the last several years to justify their loan loss reserves, that all meetings with the regulators right now are indicative of an overall theme of, you know what, we should have a better margin of safety, we should have a -- we're looking towards higher loan loss reserves.

This is Duncan, I'll just comment on that. The reserve for loan-loss process, as you know, is a very I guess difficult, subjective, technical process that you have different forces pulling different ways, you have the SEC, you have the examiners and regulators. And so we've spent a lot of time on the allowance for loan losses.

Although we have one allowance for the entire balance sheet, you can really break it into two parts. We've got the leasing portfolio and we have about 1.75% set up for the leasing portfolio. And we've talked already on the call about the leasing charge-offs. And then you have the distinct nonleasing portfolio that at this time, based on all indicators and all metrics, is performing very well.

So while maybe we would love to at times put away dollars for rainy days, things like that, we have a process, we go through the process and this is -- based on the credit quality and the performance of our loans this is what makes sense and -- we do understand the issue and we're prepared to talk about it. But the credit quality has held up quite well so far and until something changes we're going to go along with this piece.

Can I add one thing to that, Jerry? On the leasing portfolio we have a formula. It hits 120 days it's gone whether we think it's collectible or not collectible or whatever. So because of that, we're basically regularly replenishing that leasing loan loss provision.

That makes sense to me, but when you are talking about HELOCs and other related lending activities that are widely known to be suffering default pressure, it just seems to me to say, look, even know our current experience -- and I'm certainly not talking anything about rainy day because that is not appropriate. But if you look about you and everybody is catching the cold, assuming that you may get a sniffle at some point is not stowing away for a rainy day. I mean, that is just being diligent.

Well, we are very fortunate -- let's bring up and talk about the residential real estate loans that we have to residential mortgages we hold in the books, or our HELOCs or our home equity loans or whatever. We are in a very nice market here. It is an affluent market. The Philadelphia area and especially the Philadelphia suburbs, we do not see the highs and we don't see the lows. So we are not like Florida or California or places like that.

So home prices in this area have just basically flattened out, and they're not going up very much, but they're certainly not going down. We haven't seen the depreciation you have been seeing in certain areas. So we have not noticed -- if you look at our delinquencies in those areas, residential real estate, home equity lines of credit, home equity loans, we don't see any indication of problems in that area.

Those delinquency figures and everything are probably about the same they are now as they were last year and they were five years ago. They are very low.

I think the last time we spoke, we talked about as far as residential construction that there were, if my memory serves me correctly, 10 to 12 builders local that you have dealt with and dealt with for a long time. They were never out more than four or six houses at any one time.

Can you just review that book? Are you still working with all of them? Have you pared back on that? Have any of them decided to slow down their business? Anything there that we should be concerned about?

It is really the same basic book of builders. These are people who have been in business -- sometimes they inherited the business from their parents, and they have been in business 40, 50 years. And interestingly enough, they anticipated a slowdown long before most people did. So a lot of them got out of building larger $2 million to $5 million homes, and they sort of downsized into building clustered housing, age-targeted communities more in the $600,000 to $1 million range that have worked well for them.

Some of the larger projects we were in basically sold down, so we are very comfortable where we are. The absorption rates on the more expensive houses, you are correct, are much slower than anybody anticipated, but we feel very comfortable where we are.

Our total site construction loans -- these are residential site development loans, which are really where the risk is in a portfolio -- that is only around $45 million, and that is on a loan portfolio of, what, $850 million. So it is really a relatively manageable part of it.

But there is a fair amount of risk there, you are right, but where we are right now we feel very comfortable with it. We are not taking on new builders. We have actually budgeted this year a decrease in those outstandings, and that is what is happening right now. So that is where we are.

Thank you very much for taking my questions. I'll let someone else take the mic here.

(OPERATOR INSTRUCTIONS). There appears to be no questions at this time. I would now like to turn the floor back over to your host for any closing comments.

This is Ted Peters, and once again, Duncan and I would like to thank you for tuning in. We appreciate you following the institution, either the shareholders and analysts. And if you do have any questions or comments, feel free to give us a call. Thank you very much.

This concludes today's Bryn Mawr conference call. You may now disconnect.