WSFS Financial Corp (WSFS) 2009 Q3 法說會逐字稿

Good afternoon and welcome to the WSFS third-quarter 2009 earnings release conference call. (Operator Instructions). Please note this event is being recorded. I would now like to turn the conference over to Mr. Steve Fowle.

Thank you to everyone participating on this call. With me at WSFS I have Mark Turner, President and CEO of the Company; Rodger Levenson, Head of Commercial Lending; Rick Wright, Head of Retail, and I am Steve Fowle, CFO for the Company.

Before Mark begins with his opening remarks, I would like to read our Safe Harbor statement. The following discussion may contain statements which are not historical facts and are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements, which are based on various assumptions, some of which may be beyond the Company's control, are subject to risks and uncertainties 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, volatility of the financial and securities markets, including changes with respect to the market value of our financial assets, changes in government laws and regulations affecting financial institutions, including 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 cost 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.

The Corporation does not undertake to update any forward-looking statements, whether written or oral, that maybe made from time to time by or on behalf of the Corporation.

With that, I will turn the discussion over to Mark Turner.

Thank you all for your time and interest. I have about 10 minutes of comments before opening the call to take questions.

What we hope to convey in this call is that we are strengthening and growing WSFS by improving the fundamentals of our franchise during a lingering recession that continues to negatively impact our customers and our credit metrics.

Last night, as you know, we reported breakeven net income for the third quarter. After including preferred dividends this translated to a loss per share of $0.10. This brings earnings for the year to a small profit of $625,000, and a loss for the year of $0.20 per share after these preferred dividends.

Credit challenges obviously continue. This quarter we recorded a provision for loan losses of $15.5 million, up from $12 million last quarter. The provision is primarily a result of continued weakness in our construction and land development portfolio, and also general risk migration across our loan portfolios. The sizes of the provision this quarter was also impacted by an extensive review of our commercial portfolio that we undertook this summer. And what we see is approximately the anniversary of this recession meaningfully hitting our region.

This extensive review looked at every loan commitment greater than $1 million, regardless of risk rating, and represented 74% of our total commercial loan portfolio. The review considered business and project cash flows, and appropriately conservative real estate values, while minimizing the role of guarantor support in our rating and our estimated loss conclusions. This review alone resulted in additional $4 million in provision during the third quarter.

Net charge-offs, however, improved this quarter to $4.5 million, or 71 basis point of average loans, from $6.2 million or 97 basis points in the second quarter. With our appropriate and prudent provision covering several times our charge-offs, our coverage ratio improved from 1.63% to 2.05% in allowance for loan losses to total loans.

Also, the rate of additions in nonperforming assets slowed to an increase of $13.3 million in the third quarter from $24.1 million in additions last quarter, and $20 million in the first quarter of 2009.

We continue to make progress on shrinking our residential construction and land development loans, which have been our most problematic portfolio. During the quarter we decreased the size of this portfolio by $11.4 million. Importantly, that was mostly through pay downs, with some reductions through charge-offs and transfers to other real estate owned. Residential construction and land development loans at $123 million now represent less than 5% of total loans.

We do expect that credit costs will continue to impact our earnings, as our customers are increasingly challenged by this prolonged recession. Last quarter we provided guidance for the full year 2009 provision for loan losses with a top of the range of $46 million. We have updated that analysis and now estimate that we will be at or just slightly above the top of that range.

However, the provision is subject to factors that could significantly impact the magnitude, such as a pickup or a decline in the economy or a change in our asset disposition strategy. We expect our provision to continue to be lumpy as the economic environment is still dynamic.

Also, our investment portfolio continues to perform very well. The market value of our $573 million portfolio increased $10.9 million during the quarter. Result of stress tests on our downgraded bonds improved from last quarter's levels, despite additional downgrades. As a result, we have taken no other temporary impairment on our securities portfolio, a reflection of its quality, our prepurchase due diligence and our active portfolio management.

Regarding capital, during the quarter we significantly built capital levels to allow us to both take advantage of growth opportunities and to provide additional support against the threat of continued economic deterioration. In addition to the marked improvement in our securities portfolio mentioned earlier, our capital growth also reflects our private placement of $20 million in common stock to Peninsula Investment Partners L.P.

Our tangible common equity ratio increased meaningfully from 5.75% at June 30 to 6.65% at September 30. And are tangible common book value also grew $0.26 to $33.45 per share.

Tier 1 capital now stands at 11.13%, approaching double the well-capitalized regulatory level of 6%.

We are seeing opportunities, and continue to grow our commercial lending business. Our commercial portfolio increased $34.4 million or 7% annualized over June 30 levels, and $246 million or 15% over year ago levels. These growth figures are more impressive when you consider this growth occurred despite the desired decreases in our construction and land development portfolio.

Most importantly, we have been extremely successful in increasing our marketshare in C&I landing, and have been able to win full relationships, that is relationships including deposits and fee-based services of healthy customers in our markets.

Most impressively, deposit growth in dollars and in marketshare terms continued at very strong rates, increasing $83 million or 17% annualized from last quarter and $530 million or 35% over this time last year, with a marked shift towards core and lower costing deposits.

Our loan to deposit ratio, excluding brokered CDs, has decreased from 139% last year to 117% currently. One strategic goal of ours is to bring this ratio to 100% over the next few years.

While our deposit growth has benefited certainly from economic and market factors that have helped the banking industry in general, we have positioned our business to take much more than our fair share of this market growth. In fact, FDIC data that was recently released and reflected June 2009 deposit balances, shows that while customer deposits, that is deposits excluding brokered CDs, at our market large market competitors grew by 11% to 15% year-over-year. WSFS grew deposits 32% over that same period of time, and grew by 25%, if you exclude our small branch acquisition last year.

Our success in building our core business, commercial loans funded by customer deposits, has also helped in our efforts to grow our margin. Our margin improved to 3.35%, up from 3.31% last quarter and 3.05% in the first quarter this year. As result of our reliable service oriented brand we have been able to increase marketshare and improve margin and fee income at the same time.

Regarding fee income, it is also up significantly over prior periods. While the comparison has improved by well-timed gains on sales of investment and loans this quarter, increases are relatively strong even without these gains and reflect a core franchise growth.

Our results also reflects the efforts we have in controlling our expenses, as we continue to grow our banking franchise. We are well underway in executing our Creative Opportunities for Revenues and Expenses, what we call our CORE Program, with a goal of reducing expenses by nearly 6% at the bank, or approximately $5.8 million annually.

Some results of that program are already evident in our third quarter '09 expense -- expenses. While there was a considerable amount of noise last quarter, that is the second quarter of 2009, results in normalized expenses were that they were essentially flat from this quarter to last quarter, despite a full period impact of three new branches and significant growth in our commercial lending and overall deposits.

To sum up our performance for the quarter, we achieved prudent and appropriate loan loss reserves build. Importantly, we grew pretax, pre-provision net revenues by 28% to $15.3 million this quarter from $11.9 million in the third quarter of 2008. And showed breakeven net income in this quarter.

Improvements are a direct result of steps we have taken during this time of economic turbulence to grow our business, improve our margins and efficiency, and otherwise take advantage of opportunities in this environment. We are building our Company to be a high performer for the long-term.

Thank you for your attention. At this time we will take questions.

(Operator Instructions). Andy Stapp, B. Riley & Co.

As you look into your crystal ball, are you gaining any clarity as to when you think NPAs might peak?

I can give you an answer to that question that will hopefully be helpful, but maybe not a complete answer. It is tough to look out several quarters. We did do an updated analysis of our portfolios and looking at what we thought might happen to NPAs next quarter. As you know, any analysis like that is fraught with uncertainty and all appropriate caveats, because one or two large credits swinging one way or the other, positively or negatively, could impact it. And obviously, we don't know what is going to happen in the economy.

But we did project a range. And if the midpoint of that range were to happen, the assumption is that an economy that remains relatively about the same as it is now would result in a midpoint in that range. NPAs next quarter would go up by about the same amount as they did this quarter on a dollar basis. Beyond that, I think there is just too much economic uncertainty to say.

Okay, I understood. When do you anticipate the completion of their cost reduction program?

I will let Steve handle that one.

A little bit in two answers. The first answer is that we are -- the first phase is that we get committed to implementation dates surrounded by the time our budget is completed this year, so that money is actually committed to -- and committed to timing wise.

My expectation, while we have gotten about one-quarter of it implemented to date, which means that the benefit will be seen going forward, I would anticipate we would get up to about 75% of that actually implemented and run rate in the second half of next year. And almost all the rest of that by the end of next year, so the run rate will be seen in 2011.

Do you happen to have 30 day to 90 day delinquencies?

We are ready for you this time. Roger has that information.

Just let me give you some color for the whole Company. The 30 to 89 day category increased by 10 basis points, from 90 basis points to 100 basis points. Our commercial business actually declined by 2 basis points, and our consumer businesses went up 49 basis points, primarily driven by the residential mortgage portfolio.

I have some other questions, but I will get back in the queue and let other people have some time.

Avi Barak, Sandler O'Neill.

A few quick questions for you. The first one is a follow-up on Andy's. As far as identification of potential problem credit, is it your sense that there is a clear migration going on from the identification process more towards the charge-off and work-out OREO, or is it your sense that we are still in the identification process?

It is Roger. I would say for the most part in our construction portfolio we are well past the identification process. C&I is probably a little bit earlier back in the process than that. We are just starting to see the impact of the prolonged economic downturn on a number of our C&I customers.

Especially small business customers, who may not have as many resources to weather a prolonged economic downturn. Our small business portfolio is only about $130 million of our total loans.

Secondly, with respect to the capital raise, and I guess improvement in spreads your TCE improved pretty meaningfully to the 6.7%. Is that where you guys want it or would you be looking at or considering a traditional capital raise at this point in time?

We are not considering a traditional capital raise at this time. We are comfortable with that. And what we are seeing at this point in terms of managing credit risk and the strength of our pre-provision net revenue to be able to help us to manage losses coming from the loan portfolio.

Then lastly, has your thought process changed at all with regard to repayment of TARP since last quarter, which I believe was will -- we will pay it when prudent.

No, it is the same. And we define prudent as when do we see probably a couple quarters of economic stabilization nationally and locally, and a couple quarters in stabilization, and even improvements, in our own credit metrics and earnings performance.

Sandy Osborne, KBW.

I guess can you just give us some color on the commercial real estate loans you booked recently, what geography, size and loan to value?

It is Roger. We did book two fairly significant commercial real estate loans in the past quarter, both in our -- consistent with what we have talked about before -- both in our geographic footprint. Both happen to be retail properties. One was down in Sussex County and one was up in the Philadelphia market. Very strong credit metrics. Both have very strong sponsors. And we have got very, very healthy pricing in both cases. Those were the two significant adds to that portfolio.

And you are still pretty optimistic about the pipeline?

The pipeline is -- it kind of comes and goes. There's definitely opportunities out there, particularly as we see things that are not finding a home in the capital markets. But there is certainly every indication there is going to continue to be those opportunities. We are obviously being selective on which ones we are pursuing.

What drove the link-quarter ramp up in past due loans? Is there anything specially lumpy in there?

In our delinquency statistics?

The 90 days and accruing.

I am sorry. There is one particular loan in that 90 days and accruing. It is a $3.7 million owner-occupied mortgage for a customer that we have in the state that we are in the process of modifying that mortgage. It happens to have a partial USDA guarantee that we are working through their consent, and we would expect that to get resolved this quarter.

I think that's all I had. Thanks.

(Operator Instructions). Andy Stapp, B. Riley & Co.

Just wondering if you could talk about opportunities for further net interest margin expansion.

This is Steve. We reported 3.35% margin last quarter. The September month was 3.37%. So we would expect some improvement from quarter to quarter because of that trend, and potentially little bit of above that level.

This does conclude our question-and-answer session. I would like to turn the conference back over to Mark Turner for any closing remarks.

Well, thank you all for your time and attention today. As you know, and as many of you have, feel free to call Steve if you have any questions. And he will make sure that if he can't answer the question, that we assemble the right people to answer the questions.

I would also like to let you know that we will be presenting at a conference on November 12, I believe. We will put a press release out on that, and obviously a book on our website, and that will be webcast live. So there will be more information that we will share at that time. And we look forward to seeing you all in the near future. Thank you.

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