WSFS Financial Corp (WSFS) 2009 Q4 法說會逐字稿

Good afternoon and welcome to the WSFS fourth quarter 2009 earnings release conference call. All participants will be in a listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. An operator will give instructions on how to ask your questions at that time. (Operator instructions). This conference is being recorded. A rebroadcast of this conference call will be available one hour after completion of this call until 9 AM Eastern on February 8, 2010, by calling 1-877-344-7529 and using conference ID 437256.

I would like to turn the conference over to Steve Fowle. Please begin, sir.

Thank you and thank you to everyone for participating on this call. Before I start remarks, I'd like to introduce the others that will be participating on the call. They are Mark Turner, President and Chief Executive Officer; Rodger Levenson, head of Commercial Lending; Rick Wright, Head of Retail; and myself, Steve Fowle, Chief Financial Officer.

I'd like to read our Safe Harbor statement. The following discussion may contain statements which are not historical facts and are forward-looking statements as the 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 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 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 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.

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

With that, I'll turn the discussion over to Mark Turner, WSFS President and Chief Executive Officer.

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

Last night we reported breakeven net income for the fourth quarter and full year of 2009. After including preferred dividends, this resulted in a modest loss per share of $0.09 in the fourth quarter and $0.30 loss per share for the full year, or less than 1% of our common tangible book value per share.

This quarter we continued to report significant progress in growing our franchise value as reflected in improvement in many of our core operating statistics. This quarter we are also pleased to report positive results in many of our key credit metrics. I will discuss these first.

Specifically, over the past quarter we reduced non-performing assets by $11 million or 12%. This reduction is due to the positive resolution or paydown of $11.5 million of problem loans combined with $13.4 million in non-performing asset charge-offs and write-downs. These decreases exceeded the $13.9 million in inflows in non-performing assets.

Our progress was made primarily through a reduction of our residential construction and development portfolio, through both the discrete sale of troubled projects or the absorption of completed units and other troubled construction projects. Active management of our residential construction portfolio, both in limits we put on starting in 2005 and in the intense management over the past year, have successfully reduced this portfolio to $110 million, or only 4.3% of our total loans.

Additionally, the roughly $14 million in non-performing asset inflows mentioned earlier showed a different character than in prior quarters, consisting primarily of smaller credits, most well less than $1 million, and many with lower expected loss severities than the larger construction loans which have characterized prior quarters' inflows into non-performing assets. In saying this, I want to be clear that we still do have a few larger construction loans that are on our watch list.

But these non-performing asset improvements were also and supported by improvements in delinquencies, which were often a leading indicator of future problems and losses. As mentioned in the release, at the end of the year total portfolio delinquency improved 59 basis points from the end of September. Our total commercial portfolio delinquency decreased from 2.54% to 1.79%, with early-stage delinquencies decreasing from 0.67% to 0.58%.

Significant improvement in our construction portfolio delinquency more than offset a slight increase in early-stage delinquencies in the C&I and nonconstruction commercial real estate portfolios. In addition, total delinquency in our consumer and mortgage portfolios also declined over the same period, from 3.51% to 3.37% with early-stage delinquencies in those portfolios also decreasing from 1.95% to 1.62%.

Our provision for loan losses during the quarter totaled $12.7 million and was down from both the $15.5 million in the third quarter of 2009 and the $14.7 million in the year-ago period. While the size of our provision decreased from last quarter, the fundamental character of the provision changed as well. Last quarter our provision was driven primarily by negative risk migration in the loan portfolio. This quarter the size of the provision was driven primarily by net charge-offs of previously identified bad loans, and risk migration played a significantly smaller role.

And once again, our provision exceeded net charge-offs in the fourth quarter. As a result, our ratio of allowance for loan losses to total gross loans improved from 2.05% to 2.12% as of the end of December 31. Combined with the reduction in non-performing loans, our ratio of allowance for loan losses to non-accruing loans improved 11 percentage points to 63%.

Net charge-offs did increase this quarter as we move loans through the resolution process and some of the larger construction loans we identified earlier in this cycle. Net charge-offs increased to $11.6 million or 1.2% of average loans annualized from $4.5 million or 0.71% of average loans in the third quarter. This is natural as we provide for losses earlier in the problem loan identification process, when they are probable, then charge the loans off and utilize the provision when the losses are certain or near certain.

These improvements in many credit quality metrics were not by happenstance. We have seen some but not full or clear stabilization in the local economy. But primarily, we have developed and been aggressively working a plan with meaningful targets for reducing our current portfolio of problem loans. To achieve this plan, during the course of 2009, we added significant additional resources and talent to our problem asset management efforts, including reassignment of commercial real estate professionals and the hiring of senior asset workout specialists. Additional senior-level talent was also added just this month.

While managing a problem asset through to resolution is often a long process, we have begun to see some of these efforts paying off.

One quarter is obviously not enough to call these improvements a lasting trend. National unemployment is at 10%, Delaware unemployment is at 9%, housing prices are stressed. And, while new home sales have increased in the last three and six months, they are still below normal, healthy levels. We recognize that economic fundamentals remain tenuous, and we are closely managing other troubled loans in our portfolio. We expect that credit will continue to impact our earnings as customers are challenged by the prolonged economic downturn.

In light of these factors and the continuing uncertainty, we are currently forecasting a full-year 2010 provision for loan losses modestly below 2009 levels. We hope that this will prove conservative and prudent, but it will be greatly dependent on the shape and duration of any economic recovery from here. We plan to update you periodically as 2010 unfolds.

As importantly, as we manage through this credit environment, we continue to focus on growth and improvement in our core franchise during what we see as a window of opportunity. While industry data indicate bank deposits showed strong growth in our market, we brought in far more than our fair share of deposits in 2009. Our success was a result of continued focus on deposit generation across our Company and resulted in $82 million or 16% annualized growth in the fourth quarter and nearly $440 million in new deposits or 26% growth for all of 2009, mostly in core deposit accounts. This growth is a result of well-timed investments in branches and people and affirms our reputation as a reliable local bank and our strategy of engaged associates delivering stellar service to create customer advocates.

2009 was also a year of continued commercial loan growth as we increased our lending market share. For 2009 our commercial loan growth grew $122 million or 7% over 2008. Fourth quarter and full year customer growth was actually a bit stronger than that, as we had about $18 million in loans pay off on the last day of the year from two sizable customers that sold their businesses. And as you may remember, earlier in the year we netted off our balance sheet a $30 million loan because it was collateralized and offset by a WSFS certificate of deposit.

Even with these, our 2009 absolute loan growth level was slower than in recent years, as can be expected in a deep recession. However, our loan growth far exceeded the 7% decrease for 2009 shown by commercial banks in total, as reported by the Federal Reserve, and reflects our continued success in winning quality customers from our competition.

Furthermore, as we grow market share, we improved our margins significantly as a result of improved pricing on loans and thoughtful management of our deposit rates and other funding costs. In the fourth quarter we reported a net interest margin of 3.48%, up a strong 13 basis points from the third quarter of 2009 and up 41 basis points from the fourth quarter of 2008.

Net interest income of $28 million was up $1.8 million from the third quarter and $5.5 million or 24% from the fourth quarter 2008.

And expense management continues to be a focus at WSFS. While our linked-quarter expense comparison shows a $2 million increase in expenses, this comparison includes two large discrete expense items that masked the fundamental progress we were making. The first of these discrete expense items is a $1.2 million accrual for consulting fees related to our core efficiency program. This amount was not yet paid but accrued based on the consultants' progress in their work and represents a fraction of the annual expected benefit once it's fully implemented.

The second item is $1.4 million increase in credit-related costs, mostly in REO write-downs and legal expense for workout loans. This expense is, by nature, very lumpy. Together, these two items totaled $2.6 million and exceed the $2 million increase in non-interest expense linked quarter, as otherwise we continue to closely manage our expenses and improve fundamental efficiency.

As a result of all this, our growth in market share, both loans and deposits, improvement in margin and core fee income and managing expenses, our pre-provision net revenue, a measure of core franchise value, grew $3.7 million or 42% fourth quarter 2009 versus fourth quarter 2008.

Regarding capital, we continue to maintain capital at strong levels. The bank's core capital ratio of 8.67%, Tier 1 capital ratio of 11.02% and total risk-based capital ratio of 12.24% all are substantially in excess of well-capitalized levels. On top of this, the parent company holds $30 million of funds, mostly from our third quarter common equity raise, which provides for additional strength and flexibility. If needed, it can be contributed as capital of the bank to strengthen the balance sheet or provide for growth, or it can be used to help repay our CPP obligations when that is prudent.

The Company's tangible common equity ratio was 6.31% at the end of the fourth quarter. Intangible common book value per share was $33.27, substantially the same as the $33.45 at the end of the third quarter.

In summary, we continue to make significant progress in the measures we have identified as key to building our franchise value during this window of opportunity. This progress includes strong market share growth at increased levels of customer funding, enhanced margin while maintaining our focus on prudent underwriting and continued expense control. This quarter we also reported a bright spot of a quarter of improved asset quality statistics.

We continue to see many challenges in the economy. However, we also recognize that, across the board, we are benefiting from the successes that a dedicated group of associates are having at WSFS.

With that, I thank you for your attention and we'll take questions.

(Operator instructions) Sandra Osborne, KBW.

My first question is on capital. I think last quarter you said you were pretty comfortable with the 6.7 TC ratio, and we saw a decent hit this quarter, thanks in part to the balance sheet growth. Any update on your thoughts about bolstering the ratio and whether or not you'd contemplate a traditional capital raise?

The hit this quarter obviously came primarily from a growth in the balance sheet from investment securities as loan growth was flat. And even the quality of those investment securities, all short-duration, recently rated AAA super senior tranches. In terms of the risk that they provide for that capital, we're very comfortable having taken our capital to 6.3%. And also, since they are very highly liquid, if we needed to create some room for growth elsewhere, we could sell those securities pretty readily to make room for that growth.

So on that basis we don't see the need in the near-term to raise capital, that and, in addition to the fact that, as I mentioned, we have the additional capital at the holding company that we can contribute down to the bank if we saw the need to increase bank capital level ratios.

What about thoughts on repaying TARP? I think you had mentioned before you were going to do it as soon as prudent. And with the relative stability this quarter, is it looking like it could be a near-term event?

No real change in the posture since last quarter. We still define prudent as when we see a couple quarters of clear economic stability, credit quality stability and earnings. And while, as we mentioned, we did have a quarter of improving statistics, there's still a fair bit of uncertainty to the economy out there. So we don't have any change in the posture on that.

All right, and then just a quick question for Rodger, I guess. The $23 million of new commercial relationships, I think, that was referenced in the press release -- I'm curious what type of businesses, and if it's CRE, what type of properties.

It was not CRE. It was our traditional C&I businesses, almost exclusively in Delaware. It was a mixture of different types of businesses and one significant loan to an educational institution where we got the full relationship of that institution.

Avi Barak, Sandler O'Neill.

A few quick questions for you, first on your provision guidance for 2010, that it will hopefully be modestly below 2009 levels. Would that incorporate some kind of reserve releases at some point, or would it still be matching, relatively, charge-offs for provisions?

At this point we're expecting charge-offs for '010 to look something similar to what they were in '09. And so we would expect there would be a little bit of a build in provision, still.

As far as loan to deposit ratio, you've had some success bringing that down. I think it's close to 100% now. Is there an optimal level you'd like to get that to, or it's going to depend on what kind of success you have in deposit growth going forward?

We just completed our three-year strategic plan and one of the goals in that strategic plan was to get to 100% loan to deposit ratio by the end of 2012, which is, you might say -- obviously, we're very close to that goal right now. We have had tremendous success in the last year. We suspect some of that is due to current climate in customer preferences and that deposit growth from here will certainly be much harder than it has been in 2009. We don't expect to see 26% growth going forward.

But, to answer your direct question, for us to get to 100% loan to deposit ratio is, we believe, a good, optimal goal, especially coming from where we came from, which was about, couple of years ago, 140%.

And to clarify a little bit, we're conservative on how we view the deposits on the loan to deposit ratio, where we exclude our brokered CDs. So our loan to deposit ratio currently is just a little bit shy of 114%.

Also to follow up on the previous caller's question on TARP, if hypothetically you were to repay TARP sooner rather than later, I know that the rules are constantly changing with you have to raise dollar for dollar in common equity for what you are repaying in TARP. A, is that the way you would look at the world? Or would you do something, hypothetically, smaller, say $25 million common and then use $25 million from the proceeds you mentioned that are held at the holding company? Maybe just give us a 30,000-foot view on how you'd think about the world in that regard.

Obviously, it's a dynamic equation. If we saw significant opportunities for growth we that were good growth because of market share, because there is, as you know, a fair amount of disruption going on in and around our market place, especially in areas we'd like to grow -- southeastern Pennsylvania, specifically -- we would then look to raise dollar for dollar, but only if we saw good usage for that capital.

If, however, we continued along a normal growth path, then certainly we would consider the $25 million that we raised in the third quarter of last year, as we did when we raised it, as being one of the ways that we'd pay off the $52 million in TARP that we took.

Lastly, Mark, your comment about you would pay back when there's sustained economic growth. I'm assuming, though, one quarter of 5.7% GDP growth is not going to qualify as sustained?

No. When we are looking at the economy, certainly that traditional measure of GDP growth has some bearing. But we are really looking at the local market and job growth and housing stabilization where -- those things as being more important to us than that GDP at a national level.

Andy Stapp, B. Riley & Co.

Just wondering if you have any thoughts as to how close you are getting to getting your construction development issues behind you?

Andy, as Mark said in his comments, we've made significant progress on that front this year. But we also do have, as Mark referenced, several larger projects which we continue to watch very closely. And we'll have to see, as the spring selling season comes about, how those projects perform and, just as importantly, that the sponsors who have been supporting those projects -- how they continue to perform as it relates to their global cash flow.

And, can you talk about opportunities for further net interest margin expansion?

Looking at what happened in December, our end of the year kind of normal margin was higher than we reported for the quarter, very low 350's. So I would expect a couple -- I would expect to hang in a few basis points increase from what we reported this quarter. We have a couple of things going at odds. One is that we are managing deposit pricing lower. But, counteracting that, we're doing some liability extension. And so we see the two of those at odds. So, like I said, we expect to hold where we finished the quarter.

We're slightly liability sensitive at the end of the quarter, so at the beginning of this year we extended about $100 million of short-term liabilities out four years, which, as Steve mentioned, will cost is just a little bit on the margin, but not a whole lot since it was higher-cost funding that had rolled down the curve.

So, [being liability is] sensitive, are you going to take steps over the course of the year to make yourself more neutral, to position yourself for eventual Fed rate hikes?

That $100 million we did was after the end of the year, so that probably pretty much normalized, to put us at a neutral standpoint. We will be looking is the year rolls forward at other opportunities to manage our interest rate risks and look at protecting ourselves on the upside.

Any update on your cost efficiency study, or are you still looking at the same type of cost saves and the timing of the cost saves?

Yes, we are still looking at about the same timing as we talked about last quarter. We have made progress on implementing a number of additional pieces. So we're up over a third of what that number we talked about has been implemented already. And again, we were looking at about 75% of our target of $5.8 million implemented by halfway through the year and, really, to get to 100% of that $5.8 million by the end of the year. And that's when it's implemented.

Brian Hagler, Kennedy Capital.

Wanted to get a little more detail about the non-agency mortgage-backed securities purchased in the quarter. I don't know if you can talk about what kind of discounts you were able to buy them at. It noted that you took advantage of a market opportunity. And then maybe how much that improved the margin this quarter?

The securities or securities that had been repackaged -- they have a significant amount of subordination underneath the piece that we bought, and they were put together over the course of the summer and rated by the rating agencies over the course of this summer, kind of under new rating agency regime. So we have a lot of comfort around the security of those securities. And we put them on with a pretty decent spread, so it did help our margin this quarter. And I actually have [Ron Samuels] here, who manages our portfolio. Any additional commentary?

The average life on the securities we purchased was a little less than three years. The average yield was just a little bit less than 6.5%. They were all resecuritizations of older, non-agency mortgages that were credit enhanced to get AAA rating. They were all super senior first cash flow. About half of the bonds are fixed rate collateral and half are adjustable rate.

Okay, so 6.5% average yield, you said?

Right.

And you should know, as we have always done here, at least over the last generation, we internally stress-test those, as well as looking at the rating agency information that we get using independent models that look at loss coverages and break points and things like that. So these were done, in terms of quality, very consistent with the quality we've shown in our MBS portfolio over this cycle, which has been quite high, as you know with over $600 million in mortgage-backed securities. We only showed $86,000 in OTTI related to those because of the quality of the credit.

And I guess if deposit growth continues to outpace loan growth, would there be -- do you see any other potential opportunities to continue to acquire securities such as this?

Yes, as we mentioned, we have a really good staff when it comes to managing our portfolios who actively look at opportunities and saw an opportunity late last year to pick up securities that were super senior in terms of quality at really good yields, the 6.4% on this $200 million we had purchased. A lot of that opportunity has gone away, but we would still be active in looking for opportunities like that, we just couldn't predict whether they'd be there or not.

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

Just wondering what the impact of non-performing loans were on the net interest margin.

This quarter, our level of non-performing assets causes a drag of about 11 basis points on our margin. So that -- obviously, you wouldn't expect even in a good environment to have no non-performing assets. But were we to go that far, it would add an additional 11 basis points.

And what do you perceive the impact of the Fed's ruling on NSF fees will have on deposit service charges?

This is Rick Wright. I will answer that, at least give you a flavor. But I'd like to couch it a little bit. We are clear on what we think the worst-case scenario is, which is essentially getting no NSF income via cards. We are clearly doing everything we can to make sure that that is not a reality. And we should also understand that only about 15% of our customers, like pretty much any other bank around, actually generate NSF's. And from that there's a segment that's even much smaller than that that generate the majority. And so our plan, like most others, is to communicate to this group strongly and often with multiple touch points so that we can get them to opt in.

We think that most of that group, if they don't opt in initially by August 15, that they will in September and October, based on what happens to them by not doing so. But we're working on that side as well as we have a task force in place that is working on finding other ways that customers are going to be willing to pay for our services, since they aren't going to do it in that way.

We don't know what other regulation is going to come up between now and then. But if I had to give you an absolute worst-case scenario, I'd say we were talking about something in the $3 million range. But we have no plans to make it get to that.

Is that $3 million --

In this year.

This year, so it's a half-year effect?

Yes. Again, that's worst-case if we can't get anybody to opt in or come up with any mitigating sources of fee income.

Got you. And are you seeing any signs that loan demand might pick up in 2010?

There's no question that lending slowed a little bit in the fourth quarter, and Mark detailed some of the things that impacted our overall loan growth. And I would say that, while right now our overall pipeline is running at slightly reduced levels compared to most 2009, we are starting to see some opportunities in what we call our early-stage pipeline as there's more discussions of some economic activity.

So the pipeline feels like it's starting to build again and a good part of that is that some piece of that is tied to potential economic expansion.

Gentlemen, I'm showing no other questions at this time. I'd like to turn the conference back over to Mr. Turner.

Thank you very much. Once again, we appreciate everybody's time and attention, both before the meeting and looking at our release and during the meeting. We will be on conferences and out on the road over the course of the next couple of months, so we hope to run into you there. And if we don't, as always, feel free to call Steve or myself if something comes up. Have a great day and a great weekend.

That does conclude today's conference. You may now disconnect your lines.