WSFS Financial Corp (WSFS) 2009 Q1 法說會逐字稿

Good morning, ladies and gentlemen. My name is BJ; I will be your conference operator today. At this time I would like to welcome everyone to the Bryn Mawr Bank Corporation's first-quarter 2009 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker remarks there will be a question-and-answer period. (Operator Instructions). Thank you. It is now my pleasure to turn the floor over to your host, Duncan Smith, Chief Financial Officer. Sir, you may begin your conference.

Thank you, BJ, and thanks, everyone, for joining us today. I hope you had a chance to review last night's press release. If you have not received our press release, it is available on our website at BMTC.com or by calling 610-581-4925. Ted Peters, Chairman and CEO of the Bryn Mawr Trust Company, has some comments on the quarter, our strategic initiatives and a view of the competitive landscape. After that we'll take your questions.

The archives of this conference call will be available at Bryn Mawr Bank Corporation's website or by calling 877-344-7529 and the replay pass code is 429460. A replay will be available approximately 2 hours after this 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 can be identified by the fact that they do not relate strictly to historical or current facts; they often include the words believe, expect, anticipate, intend, plan, target, estimate or words of similar meaning.

Forward-looking statements by their nature are subject to risks and uncertainties. A number of factors, many of which are beyond the Corporation's control, could cause actual conditions, events or results to differ significantly from those described in the forward-looking statements. Forward-looking statements speak only as of the date they are made. The Corporation does not intend to update forward-looking statements. Thank you now and I'd like to turn the call over to Ted.

Thanks, Duncan, and thank you, everyone, for joining us today. I should note but also with us today is Joe Keefer, Executive Vice President and Chief Lending Officer of the Corporation.

Yesterday afternoon we issued our earnings release for the first quarter of 2009. We reported strong earnings for the first quarter with net income of $2.6 million or diluted earnings per share of $0.31 compared to the fourth-quarter 2008 results of $1 million [earned] -- net income or $0.12 diluted earnings per share. The Corporation's diluted earnings per share increased $0.19 or 160% over the fourth quarter of 2008.

Our strong first-quarter performance is gratifying and supports our belief and confidence that we are well positioned for continued growth and profitability. We continue to be well-capitalized and we exceed regulatory requirements for a well-capitalized organization.

As many of you may have read, we enhanced our capital position raising an additional $10 million in capital on April 20, 2009, just last week. We raised $2.5 million through the sale of unregistered equity securities in a private placement to an accredited investor. Additionally, we raised $7.5 million in subordinated debt which is intended to qualify as Tier 2 capital.

This capital infusion strengthens our already strong capital position and gives us greater resources to take advantage of strategic opportunities to invest and expand the corporation and for other corporate purposes. This new capital was raised without any government systems.

While it is not part of our financial review, I would like to briefly mention a significant milestone for the Corporation. On March 25, 2009 we celebrated the 120th anniversary of Bryn Mawr Trust. We take great pride in achieving this milestone and we are proud to be a strong, stable and secure institution, especially in these very difficult times.

Now I would like to review some of our more significant events for the quarter. Core deposit growth was particularly strong as money market and savings accounts grew $29.3 million and $29.5 million respectively. We opened many new relationships during the quarter and many of our existing customers made additional deposits to their money market and savings accounts. New customer relationships are growing and we are expanding existing deposit relationships as a result of our strong cross selling and customers seeking to affiliate with a strong financial institution.

Since core deposit growth was so robust we intentionally reduced our reliance on wholesale funding by allowing $30 million in wholesale CDs to mature. Our new Westchester regional banking center is off to a strong start, generating deposits of $8.8 million in just three months of operation. This new key location is part of our strategy to grow retail business and wealth relationships in Chester County.

Retail and small business checking account openings were substantial across our entire branch network as a result of strong sales efforts and effective marketing campaigns during the quarter. We continue to offer an attractive and extremely competitive line of deposit and cash management products and services and we are positioned for and expect continued growth.

A residential mortgage refinancing frenzy developed during the first quarter as result of the near record low mortgage rates. Mortgage originations during the first quarter were $96.5 million, an increase of $70.7 million or 274% compared to the fourth quarter of 2008. The majority of these loans are being sold to Fannie Mae and we are retaining the servicing. This activity resulted in a gain on the sale of mortgage loans of $1.8 million or an increase of $1.5 million over the same period last year.

Home equity lines and loans and commercial mortgages increased a total of $17 million. However, this growth was offset by planned decreases in construction loans of $15 million, residential mortgages of $8 million and leases of $1.5 million. The decline in construction loans was the result of loan payoffs, some completed projects converting to permanent mortgages and a slowdown in new construction projects by our residential home builders. The decline in our lease portfolio was a function of management's intention to limit growth of this portfolio.

As mentioned in previous quarterly earnings calls, we implemented tighter underwriting standards for leasing over the past 15 months and we continue to evaluate the degree of our participation in the leasing market. The net impact of these offsetting volumes was a slight decrease in total portfolio loans and leases of less than 1% from December 31, 2008. Compared to the first quarter of 2008 total portfolio loans and leases are up $76.7 million or 9.4%.

We booked a provision for loan and lease losses of $1.6 million in the first quarter; this was a decrease of $1.3 million from the fourth quarter of 2008 provision of $2.9 million. We anticipate leasing charge-offs and the provision related to the leasing portfolio to improve in the second half of 2009.

Overall the allowance for loan and lease losses at March 31, 2009 stands at $10.1 million or 1.13% of portfolio loans and leases compared to $10.3 million or 1.15% at December 31. Our nonperforming assets declined from $5.8 million at December 31 to $5.3 million as of March 31, primarily due to one loan relationship that is once again performing according to terms. Overall, nonperforming assets represented 45 basis points of total assets at March 31 compared to 50 basis points at December 31.

The net interest margin remained stable from the prior quarter with a slight decrease of only 1 basis point from December 31 to 3.62%. Market conditions continue to make it difficult to earn attractive yields on our investments and loan pricing on good credits remains competitive. To help improve our margin we added additional overnight investment options for our excess cash balances which satisfied our requirements for liquidity, safety and reasonable risk.

The overall yield on our investment portfolio declined 22 basis points to 4.58% and 21 basis points on our loans and leases to 5.85%, resulting in an overall decline of 26 basis points on our total interest earning assets for a yield of 5.37%. However, we were able to stabilize the margin by aggressively repricing our interest-bearing deposit portfolio and replacing maturing wholesale funds with lower rate wholesale funds and core deposits.

The quality of our investment portfolio remains excellent and there are no impairment issues as of March 31. In the first quarter we grew our portfolio of relatively low-cost deposits through effective marketing in our trade area. Aggregate average quarterly balances of interest-bearing checking, money market and savings account balances rose to $368.9 million in the first quarter of 2009 from $334.9 million in the fourth quarter of 2008.

First-quarter 2009 average non interest bearing balances increased 11.1% to $160.3 million from $143.8 million in the fourth quarter. In addition, we reduced our use of wholesale deposits in the first quarter by $20.3 million from the previous quarter, and our use of other borrowed funds decreased $1.9 million in the first quarter.

Overall our cost of interest-bearing funds during the quarter decreased 27 basis points. We are exercising discipline in our deposit pricing despite evidence that some larger troubled institutions that operate in our markets continue to chase deposits with irrational pricing. This aggressive discipline allowed us to hold our net interest margin flat from the fourth quarter 2008.

For the first quarter we saw a significant increase in non-interest income of $2.2 million compared to the prior quarter and a $1.9 million increase compared to the quarter a year ago. This increase was attributed to the gain on sale of residential mortgage loans of $1.9 million in the first quarter of 2009 due to the aforementioned refinancing activity driven by the low mortgage rate environment.

The majority of loans sold during the first quarter were sold to Fannie Mae in which we retained servicing. However, please keep in mind that we see a corresponding increase in operating expenses as a result of the sharp increase in mortgage originations.

Gains on the sale of securities was $472,000 in the first quarter 2009 compared to $222,000 in the first quarter of 2008. There were no securities sold during the fourth quarter of 2008. Service charges on deposits for the first quarter 2009 increased $463,000, up $71,000 or 18.1% from the first quarter 2008. This growth was primarily due to new account growth, better monitoring and lower earnings credit rates. Compared to the fourth quarter of 2008 service charges on deposits increased 1.8% due to strong account openings.

Wealth revenues continue to be impacted by the unfavorable stock market. Total wealth revenue of $3.5 million in the first quarter of 2009 increased $192,000 or 5.8% from the first quarter of 2008. However, Lau Associates, which was acquired in the third quarter of 2008, accounted for all of this increase. Revenues from existing wealth services decreased $665,000 or 20.1% primarily due to the decline in the market value of wealth assets. Compared to the fourth quarter 2008 wealth revenues declined 5.1% or $191,000.

We expect that our new subsidiary, the Bryn Mawr Trust Company of Delaware, will strengthen our wealth management business and there is a strong pipeline of new business that we expect to close. This new subsidiary will allow our clients to reap the benefits of the Delaware advantage which describes the range of legal advantages that facilitate trusts for the state planning strategies that are ideally suited for wealthy individuals, families and business owners.

Non-interest expense for the first quarter 2009 was $11.5 million, up 9.8% or $1 million from the fourth quarter. There are a number of categories driving this increase and a significant portion is directly related to the increase in mortgage origination volume. Salaries and wages increased $877,000 or 19.1%. However, excluding Lau Associates and variable compensation related to mortgage originations, salaries were essentially flat with the first quarter 2008.

Employee benefit expense of $1.6 million is up $250,000 or 18.8% from the first quarter 2008 as a result of increased pension and discretionary 401(k) contribution expenses. The increase in pension expenses is related to the decline in the asset values of the plan during 2008. Compared to the fourth quarter of 2008 employee benefits increased $670,000 or 73.5% due to pension expenses and the discretionary match which was implemented in the second quarter of 2008.

Occupancy expense increased $177,000 compared to the first quarter of 2008 due to the addition of new facilities including Westchester and the Wayne branch renovation. As a result of an FDIC base rate premium increase of 130%, participation in the program to provide higher coverage on non-interest-bearing demand deposits over $250,000 and a nonrecurring credit applied in the first quarter of 2008, FDIC expense increased $230,000 or 254% compared to the first quarter of 2008.

We are projecting a year-to-year increase in FDIC premiums of approximately $900,000 and this excludes an anticipated third-quarter 2009 10 basis point special assessment which will be used to recapitalize the FDIC fund.

Market value adjustments on our mortgage servicing and rights portfolio and negatively impact pretax income by $204,000. The adjustment on this portfolio is the result of declining values on older higher rate mortgages due to the current low rate environment. Other operating expenses of $1.5 million were up $359,000 or 30.9%. Again, a significant portion of this non-interest expense increase was related to variable mortgage processing expenses for such things as appraisal fees and credit reports.

As previously stated, the capital ratios for the Bank and Corporation remain well-capitalized by regulatory standards. As of March 31 the Bank and Corporation had Tier 1 capital to risk-based weighted asset ratios of 8.56% and 8.91% respectively. The addition of $7.1 million of subordinated debt at the Bank and $2.5 million of common stock at the Corporation enhanced the Corporation's Tier 2 capital by approximately $10 million.

We remain focused on maintaining the appropriate level of capital to support asset growth, acquisitions and to remain in the well-capitalized category. In addition, we remain focused on asset quality and liquidity.

Finally, I would like to mention some key objectives, strategies and tactics that we will continue to focus on throughout 2009. First, to protect the net interest margin by holding a line on loan rate adjustments and adhering to a strict discipline on our deposit and loan product pricing.

Second, strong asset quality, by maintaining strict underwriting standards and appropriately managing our risk.

Third, capital and liquidity, by remaining a strong well capitalized institution and closely monitoring and executing appropriate strategies to enhance our liquidity and capital positions.

Four, by controlling expenses. We hope to maintain a tight control on expenses and an internal task force is now reviewing our non-interest expenses to see where we can further eliminate or reduce overhead.

Five, to improve revenues. We have recently retained a consulting firm that specializes in revenue enhancement to help us to identify additional ways to improve our revenue.

And six, new market opportunities. We want to capitalize on our new market opportunities in the State of Delaware and in Chester County with our new Westchester branch.

In summary, Bryn Mawr is fundamentally sound, profitable and has the flexibility and agility to respond to the opportunities afforded by its strong capital base, asset quality and liquidity. We have a strategy in place that will create significant value over time. We are proud that our disciplined approach to the market, regardless of conditions, has enabled us to remain secure throughout.

The weak economy and prolonged disruption of the financial markets will remain a challenge. However, the Bryn Mawr Trust Company for over 120 years, through numerous periods of economic prosperity and diversity, has succeeded by providing outstanding banking and wealth management services.

Before closing I am pleased to announce that the Corporation's Board of Directors declared a quarterly dividend of $0.14 per share payable June 1, 2009 to shareholders of record as of May 7. This is our 66th consecutive quarterly dividend. With that we will open the lines for questions. Operator, would you please compile the Q&A roster?

(Operator Instructions). Jason O'Donnell, Boenning & Scattergood.

Good morning. Congratulations on a nice quarter. Just a couple of questions on the balance sheet. You talked a bit about the moderation in loan growth you're seeing driven by really run-off in the construction bucket. Can you just give us a little more color on the commercial pipeline, your expectations for near-term growth?

Thank you. I think we'll have Joe Keefer, our Chief Lending Officer, answer that.

Hi, Jason. Historically the first quarter is always a little slow in our loan growth if you go back over a number of years. The reason for that is a lot of companies make decisions on changing their banking relationships in the second and third quarter when lines are being renewed. So we would expect some increase in our loan portfolio in the second and third quarter. Our plan for 2009 is to grow our average assets by 9%, which is off of prior periods but still I feel robust in these economic times.

Okay. In terms of just thinking about some of the excess liquidity that you have that you picked up during the quarter, should we expect any of that to get deployed into investment securities or to be used to pay down some of your borrowings going forward?

Jason, this is Duncan. We are looking at both of those options might now and part of it is to coordinate with Joe and the lenders to see what they've got coming, so obviously we'd like to put it out in loans as first choice and then second choice will be, as you said, looking at paying down some debt and/or putting in the investment portfolio.

If it goes to the investment portfolio it's probably going to stay short and we have been doing a good bit of work on trying to get some additional yield on overnight cash. But you're right, with the BOLI money that came in and the debt and equity money that came in and deposit growth, as you saw during the first quarter, was outstanding. So we are sitting on a big pile of cash and we have to evaluate what's the best usage of that. So we're in the process.

Also in addition to that, Jason, we're not out of the woods here with this economy and with some of these banking issues. So we want to remain very liquid. And so part of our strategy is to err on the side of having a little too much liquidity.

Okay, great. So in terms of the margin it sounds like based on your comments that you feel like you've got that under control from a stability standpoint in the near-term. But I'm wondering, do you see any opportunity for expansion there in the back half of the year as you migrate some of these funds into albeit slightly higher yields?

Yes, we do. We think our margin will gradually increase throughout the year. We are holding a line on our loan pricing, for instance. We've dropped prime to 399, we did not drop all the way down and we don't have any plans to drop it. We're holding the line on floors on a lot of our HELOCs and things like that. And as a lot of our deposit CDs mature and some wholesale funding matures we can write them at lower rates. So we expect a gradual increase in our margin throughout the year.

Okay, great. And then in terms of just going back to the mortgage refinance activity you're seeing, I'm just wondering -- in terms of -- obviously we're seeing a lot of that flow-through on the gain on sale of loans. I'm wondering -- you guys own a title company, you have some title income. Is that in the other operating income, where does that show up at?

I believe that's in other operating income and that was about $150,000 for the quarter.

$150,000, okay.

But we certainly did see a nice pop in that. And that's a joint venture, so I believe our ownership is around 50% of that activity.

Okay. So really the combination of the gains that we're seeing in addition to the title fees, so total revenue is somewhere around $2 million?

Yes.

Related to mortgage refinance?

Yes.

And you're saying that the expenses are about 40% of that revenue number?

Yes.

Okay.

They're the incremental or the marginal expenses. There are certain fixed mortgage costs out there with some salary people, but for every incremental dollar we're getting in we're probably paying all-in about $0.40 out.

Okay. And in terms of the activity, the level of activity you're seeing, has that slowed in the second quarter? And can you -- or has it remained pretty robust?

Joe Keefer again. It remains pretty robust. They're there a lot of hours cranking out the loans. So I would anticipate that the second quarter could mirror the first quarter. As long as rates stay below 5% that seems to be the magic number.

Okay, great. And then also on the FDIC expense, I know we've talked about this before, but if you could just refresh my memory on the -- in the second quarter are you experiencing -- are you going to get another pickup in the regular rate ex the special assessment that's coming down the pike? Or is the 12 basis points or whatever the number that you experienced in the first quarter, is that sort of over with?

April 1 they changed the rates to a completely different formula and it's rather complex. But looking through that formula I think we're about 12.5 basis points for the first quarter. I don't expect it to go more than another -- up to no more than 13.5. But it is a formula base based on about 20 different factors. They actually put out a spreadsheet to give to you to calculate what your rate is going to be. So a slight increase in the rate maybe, maybe from 12.5 to 13.5, but that should stick from there in other than the special assessment.

Okay, great. And then in terms of the pension costs are obviously driving some of the increase we're seeing in the operating expense base. I'm just wondering, is the rate of -- the current expense for the first quarter, is that a reasonable rate going forward or should we see pension costs and other items outside of the FDIC issue drive some of those compensation and pension cost-related expenses higher in the second quarter?

The pension costs that are in there for the first quarter are basically annualized numbers cut by four. We expect that because you basically do pension accounting once a year and you do the estimate for the year. So we expect what's in the first quarter will continue through the year.

Okay. And then finally just on the credit quality. The lease charge-offs declined slightly in the first quarter versus the fourth quarter. It's just nice to see; I'm just wondering, do you think those losses peaked at year end or is the first quarter result something of an anomaly?

We think that as we go out throughout the year the leasing charge-offs will decrease. Our plan is every quarter that they would come down. Now some of that is dictated by the economy and there's one particular segment within the portfolio that we're watching closely. But sitting where we are today we expect the leasing charge-off will decrease throughout the year. As you know, we converted to a 100% A strategy throughout 2008 and the new leases that we put on are performing pretty well. We're just dealing with some problems generated in 2006 and 2007.

I should note, Jason, that our charge-offs for the first quarter were less than we projected.

Right they were expected -- better than expected.

Yes.

Right.

Okay, great. Thanks very much, gentlemen.

David Darst, FTN Equity.

Good morning. Ted, are there any areas of the loan portfolio that you're seeing better demand? And where would you like to see growth within the portfolio and what are some of the categories you're deemphasizing?

Well, we want to continue to see growth certainly in our C&I portfolio. As we mentioned, we had purposefully deemphasized certain areas like construction loans and obviously in the leasing area. We've seen pretty strong growth on the consumer side, which is kind of surprising because a lot of banks aren't seeing that, but in our HELOC portfolio and other areas.

Generally the flatness in our loan growth, this is actually the first time in my eight years here I think we've decreased quarter-to-quarter in loan outstandings. It's really partially, certainly partially planned. And as Joe mentioned, it's always a little slower in the first quarter. I think everybody is being a little more careful out here, but we're actively in the market lending money to qualified people. Joe, do you want to add anything to that?

No. A lot of the new credits we added in the first quarter were non-borrowing, which is always good. We're seeing some opportunities with some real strong nonprofits that actually don't borrow money. It helps us on the deposit side.

Okay, but has demand changed?

I think demand is definitely down from when the economy was more robust. There's no doubt about that.

Okay. So it's basically a market share movement that you're getting?

Yes, it's definitely coming from other banks. We're seeing more opportunities from some of our larger brethren that are having some problems right now.

Okay. What's the rate on the subdebt that you just issued or the trust preferred?

It is 90-day LIBOR plus 5.75, so it's around 7.

Okay. And then what are your current CD rates?

Our strategy on CDs is to price sort of in the middle of the market. Occasionally we have some specials, whatever. But we're not relying on retail CDs to really fund us or whatever. Your CD customer, as you know, is usually not your loyal customer who's got five other accounts with you or so forth, it's a price driven thing. In general we've been dropping our liability pricing, our deposit pricing across the board including the CD area. So I would not say that -- I would say that none of our CDs are really what I would call any kind of hot money or special money at all.

I mean our average rate for the first quarter on time deposits of $207 million was 303, but we know there's a big bucket coming to mid year this year that will reprice at much lower rates.

Okay. What rate do you think it will reprice to?

I can't say on that, I would be guessing, I'd have to check with our marketing folks. They're watching what everybody else is doing and we're certainly not the leader in the price. But we're not at the way bottom, we want to retain it at -- is kind of a guessing game there. What works?

One of our executive vice presidents, Alison Gers, is our deposit Czar, we call her, head of all deposits. She works closely with finance and with our marketing group. So I think we've done a really good job as we're dropping our liability pricing of retaining our deposits, especially those that maybe are a little bit more price sensitive such as money market and CDs.

Okay, thanks.

(Operator Instructions). We show no further questions at this time. I'd like to turn the conference back over to the hosts for any closing remarks.

No closing remarks. I'd just like to thank everybody for calling in today. We have a great good turnout from the list which we just printed out. So we look forward to talking to you at the end of the second quarter. Thank you very much.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.