WSFS Financial Corp (WSFS) 2010 Q1 法說會逐字稿

Hello and welcome to the WSFS Financial Corporation first quarter 2010 earnings 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) Please note this conference is being recorded. A rebroadcast of this conference call will be available one hour after completion of this call until 12:00 AM Eastern on May 11, 2010, by calling 877-344-7529 and using conference ID 439600. Now, I would like to turn the conference over to Mr. Stephen Fowle.

Thank you, Lanita, and thank you to the participants on this call. Participating on the call will be Mark Turner, CEO of WSFS Financial Corporation, Rodger Levenson, Head of Commercial Division, and I'm Steve Fowle, the CFO. Before we get started though I would like to read our Safe Harbor language. The following discussion may contain statements which are historical facts in our 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 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; 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. I'll turn the call to Mark Turner.

Thank you, Steve, and thank you all for your time and interest. I have about ten minutes of comments before opening the call to take questions. Last night we reported net income of $514,000 for the first quarter of 2010. After subtracting preferred dividends, this resulted in a $0.03 per share loss. These results included a non-routine charge which we took at Cash Connect, our ATM services division, which we had announced earlier in the quarter. I will provide more details on this charge a bit later on the call. Adjusting for this charge, earnings would have been $3.6 million or $0.41 per share for the quarter. I would also like to point out, as we detailed in the earnings release, that we benefited about $0.13 a share in this quarter and a similar dollar amount in the same quarter of 2009 from a tax item, which we do not expect going forward. Our core franchise earnings continue to show strong improvement. Adjusted pretax, preprovision revenues increased to $15.3 million, up $4.7 million or 45% from the first quarter of 2009.

Again this quarter, we were successful in growing our customer deposit base. Deposits grew at a 12% annualized rate and are up $363 million or 20% from last year's levels. And commercial loans grew this quarter as well, despite a planned and significant reduction in construction loan balances, as we continue to attract new business banking customer relationships. Our overall franchise growth reflects a significant market share gain -- excuse me, our overall franchise growth reflects significant market share gains. During the quarter, we re-opened our renovated Prices Corner Branch and broke ground on a new branch in Glen Mills, Pennsylvania. We recruited seasoned local bankers and relationship managers. Our market share growth is also a result of our strategy of engaged associates delivering stellar service to create customer advocates, which has demonstrated its value in many ways during this downturn.

We again reported success in growing our net interest income and margin. We increased our margin to 3.57%, up 9 basis points from last quarter and up a very robust 52 basis points from year-ago levels. Net interest income grew $5.4 million or 23% from the first quarter of last year. And in March of 2010, net interest income passed the $10 million mark. We are also continuing to see success in our core expense management program. Reported expenses, adjusted for niche business results including the Cash Connect non-routine charge, decreased $1.6 million from last quarter and we still have a number of significant core program initiatives that have not yet begun to impact our bottom-line, but we confidently expect they will as we progress through the year. While credit costs continue to adversely affect the bottom-line, a number of key credit statistics continue to show improvement or stabilization.

Nonperforming assets decreased slightly to $82.1 million from $82.2 million last quarter, and the ratio of nonperforming assets to total assets decreased 4 basis points to 2.15%. Loans 90 days past due and still accruing also improved from $1.4 million to $0.7 million, and ORE write-downs also improved. Importantly, construction and land development loans further declined $30.5 million, or 16% in the quarter, and also declined $62.8 million, or 28% from last year. CLD loans now represent only 6.5% of total gross loans, with 4 percentage points of that in residential CLD loans. These improvements reflect efforts to aggressively implement our plan to meaningfully reduce our level of problem loans. To achieve this plan, we've added significant additional resources and talent to our problem asset management efforts, including the hiring of senior asset workout specialists. As you know, delinquencies did increase modestly during the quarter.

Total loan delinquencies increased to 2.80% from 2.20% in the fourth quarter of 20 -- in the fourth quarter of 2009. Total commercial portfolio delinquencies increased 65 basis points to 2.44% and our consumer portfolio delinquencies increased 51 basis points to 3.88%. It's worth noting, however, that over half of the total delinquencies increase and well over half of the commercial delinquency increase is due to one residential construction loan that we had already moved to nonperforming status in the second quarter of last year. And for some additional perspective, the remaining basis point increase in our total loan portfolio delinquency in the quarter amounts to only $7.2 million. Early stage delinquencies increased 0.85% to -- excuse me -- early stage delinquencies increased from 85 basis points to 1.65%, with 40% of that increase coming from the aforementioned loan that was already moved to nonaccrual status last year.

During the quarter, we provided $11.4 million for loan losses, down from $12.7 million provision last quarter and in excess of the $7.8 million in quarterly net charge-offs. Because of the modest increase in delinquencies, we continue to build our allowance to total gross loans, which is now at 2.27%, up 15 basis points from last quarter. While this quarter included many positive credit quality comparisons, we believe that credit challenges will continue to affect our customers and therefore us. We still expect that our full year 2010 provision will be modestly below the 2009 level of $48 million. Our first quarter results were consistent with that view, but we continue to expect uneven provisioning, charge-offs and problem loan changes until we have more consistent strength in the economy. And because of general economic uncertainty, we are also maintaining capital at strong levels.

Most key capital ratios improved modestly during the quarter. Our Tier 1 capital ratio increased 5 basis points to 11.07%. Total risk-based capital increased 9 basis points to 12.33%. And tangible common equity increased 2 basis points to 6.33%. All regulatory capital ratios remain substantially in excess of well capitalized levels. Additionally, the parent Company holds $30 million in funds, mostly from our third quarter 2009 common capital raise, which provides for additional strength and flexibility. And finally, during the first quarter, our tangible common book value per share increased $0.60 to $33.87. As I mentioned earlier, and as we disclosed on February 19th, in February our Cash Connect division learned that an armored car carrier that served as a vendor for several of Cash Connect's customers engaged in embezzlement. As a result, during the quarter we recorded a $4.5 million pretax charge for funds that are not immediately available to Cash Connect. But we are well down the path to recovery.

As additional color, Cash Connect has been involved in similar situations with the largest of which was in 2001. In these other instance, we've had full recovery of misappropriate funds because Cash Connect had several avenues of recovery established in our ATM operations. Since that incident, Cash Connect applied additional layers of protection for such situations. Recovery may be available from a number of sources, including from liquidation of the vendor's assets, currently the courier and related companies are in receivership, as well as recovery from Cash Connect customers and through layers of insurance. However, we believe it is appropriate and prudent to take the charge now and record recovery when it occurs. In closing, we continue to make significant progress in the measures we have identified as key to building our franchise value.

This progress includes prudent commercial loan growth, strong deposit growth, and an improved margin, while maintaining our focus on continued expense control. We also saw a second consecutive quarter of improvement in many of our credit quality statistics. A modest deterioration in delinquency statistics highlights the challenges still present in our economy. However, we will continue to build on and improve on an already strong and growing franchise. With that, I thank you for your attention and we'll take any questions now.

(Operator Instructions) Our first question is from Andy Stapp of B Riley. Please go ahead.

Good afternoon.

Good afternoon, Andy.

In your cost reduction program, how much savings do you have left? And could you provide some color on the timing of the realization of the savings?

Sure. I'll have Steve answer that question.

Yes, thanks. To date we have about half of the initial $5.8 million target implemented and some of that coming in just this last quarter. We would anticipate that before the end of the year we would have the remaining half implemented. Good chunk of that expected this coming quarter and we've identified opportunities that could take us over that $5.8 million.

And that $5.8 million is an annualized run rate, Andy.

Right, right, okay. Could you provide some detail on the composition of net charge-offs, how much was construction and development related, C&I, CRE, that type thing?

Yes, absolutely. Rodger, do you want to handle that?

Yes. Andy, of the charge-offs, about two-thirds of it was commercial, which would include construction, and about one third was in our consumer businesses.

Okay and of that two-thirds, do you know how much was construction and development related?

Yes, about -- of that number, about half of it was construction. The other half was in the C&I businesses.

Okay. And how does classified assets compare link quarter?

We -- Andy, in the past, we have not provided information on classified assets and problem loans just because that number's very judgmental and can be, can differ a lot in judgment from one company to another. But overall, I think our trends in nonperforming assets would give you a good indication.

Okay. All right, thank you. I'll get back into the queue.

The next question is from Avi Barak of Sandler O'Neill. Please go ahead.

Good afternoon, guys.

Good afternoon, Avi.

A few questions for you. Firstly, was hoping you could let us know where you are as far as progress in getting customers that use overdraft protection to opt into the program now with the rule change just around the corner.

Avi, I can't give you a lot of detail on that right now unless Steve knows more about it than I do. We have in terms of quantitative information. Qualitatively we have a plan in place and have mailings out to customers and have gotten responses back and have several stages of that plan, early mailings, mailings around the July and August regulatory dates, and then we have plans for what happens after that as well. But that's something I think we'll be able to give you better information on in a couple months and it's probably something we will update on as we attend conferences in May and June.

I do know, Avi, we are prioritizing the people that we contact, really hitting up higher priority users first. It's early in the process, still what we're getting back is about half and half people opting in and opting out.

Okay, fair enough. On an unrelated issue, now that we're in the later stages of earnings season, we've heard a lot of conference calls this quarter in which management teams have noted sort of a general decline in loan demand. That said, you guys are sort of in a market that there's been a lot of disruption, et cetera. Are you feeling that same lack of demand or are you seeing it offset by continued market share gains from customers who are maybe pushed out the door from the larger banks?

Let me start on that and then I'll have Rodger add some detail. As, Avi, you know, but others on the call may not, our marketplace is many large, mostly out-of-state organizations, many of whom are quite distracted now by significant either merger, reorganization, leadership change, or asset quality issues and we are the only sizable alternative in Delaware for both employees and customers who may be disenfranchised and looking for another bank to fulfill their needs. That has led us over the last couple of quarters to recruit a lot of seasoned bankers, including a couple seasoned relationship managers in last quarter and we are starting to see -- have seen and are starting to, on an increasing basis, to see the benefits of that as we're coming out of the first quarter, which it typically is a slow quarter. Now, that's -- those are qualitative comments and I'll ask Rodger to maybe add a little quantitative value to that.

Yes, thanks, Mark. Avi, loan demand was somewhat sluggish in the quarter. I think that's somewhat reflective of the local economy and, to a lesser degree, some of the challenges we had with the weather. However, I would tell you that our pipeline is building significantly as a result not only of our relationship managers, or existing relationship managers, but several of the new relationship managers that we recruited. And our forward-looking pipeline is as strong as it's been in more than several quarters. And so we are expecting in upcoming quarters to see loan growth that would closely track what we had projected for the full year, which on an annualized basis, would be in the high single-digits.

Perfect. Thank you very much. Lastly, Mark, just best guess or gut feel for timing of recapturing the $4.5 million from the armored car situation?

Highly, very highly probable it will be before the end of the year. Good chance it will be in the second quarter.

Thank you.

Our next question is with Steve Moss of Janney Montgomery Scott. Please go ahead.

Good afternoon, guys.

Good afternoon.

I wanted to ask with regard to the investment securities purchases here, what are your thoughts in terms of additional purchases and what will the impact be to the margin?

When investment purchases, we saw an opportunity late last year into the very beginning parts of the first quarter of this year to take advantage of some market dislocation and get some very high quality triple-A, short duration, by that I mean about 2.5 year duration, mortgage backed securities at a very good yield, about a 6.4% yield, which we stress tested ourselves and we're very comfortable with. And that fit quite nicely with the fact that we saw loan demand actually slowing around that time and the loan, our construction loan book running off and we have a strategy to actually sell first mortgage loans. So it was -- we put on about $200 million, a little over $200 million as a replacement strategy on the balance sheet for the run-off we were seeing and planning for in the loan book. Where we are now is, as you heard Rodger say, we expect that loan demand will pick up for the rest of the year and we -- that opportunity in the mortgage backed market to pick up very high quality mortgage-backs at a good yield is no longer there. The yields are much lower now. So we would expect going forward for the rest of the year, the balance sheet growth to be -- see a mortgage-backs likely run off and loans build.

Okay and I guess we should expect some further net interest margin expansion here for -- into Q2 and so forth?

Steve will handle that.

Yes, as you know, we reported 357 for the first quarter. March results were slightly stronger than the average, and March was about 3.6%, and the margin for that month was, margin dollars were $10 million. But we anticipate that deposit rates have less room to move and moving the needle on margin's going to be more difficult going forward. So I would expect some improvement over this next quarter, but modest.

Okay. Thank you very much.

Thank you.

The next question is with Matt Schultheis, sorry if I mispronounce the name, of Boenning and Scattergood. Please go ahead.

Good afternoon.

Hi, Matt.

Quick question for you and I may have missed this. But with regard to the cost initiatives, do you have any severance charges or is this primarily through attrition?

Most of it is actually related to renegotiating contracts with vendors. So would not have severance-related charges. And most of the contracts would not involve any buyouts of existing contracts. There are a few headcount displacements, but they are through, primarily through natural attrition.

Okay. And lastly, some of your competitors and some other companies that I don't think you compete that directly with on the Delmarva peninsula have been bemoaning the lack of activity, particularly with regard to construction, not seeing new projects coming online, et cetera, et cetera. And just wanted to get your general sense of overall economic activity in Delaware, particularly with regard to the southern end of the state.

Yes, let me respond to that first and then ask Rodger, since he's closer to the round on that that also add some comments. The Delaware economy, like a lot of the surrounding region, and by that I mean the closely surrounding region, southeastern Pennsylvania, northeastern Maryland, Delaware down into the Delmarva peninsula, it's exhibiting kind of last in, last out traits, to use somebody else's coined term, in terms of the recession. And that is while the recession has hit us softer, it seems to have hit us a bit later and therefore we expect will be not only a bit later in, but a bit later out. Unemployment in the state is about 9.2%, which is double what it was at its low point, but slightly better than national average of 9.7%. Housing prices on average are down about 5% from this time last year, which is about the same as national averages, but as we all know with housing markets, there's not one, there's many and price changes vary widely depending on price point and the project. We are, however, starting to see some increased activity in housing and I point to some statistics in January, which were the latest that I saw, that housing activity in January of this year was up in Delaware significantly over January of the prior year. And just anecdotally, two of our larger residential construction projects, which are currently in nonaccrual status, the developers in those projects are close to signing contracts with national builders for the takedown of a meaningful number of lots, so we are starting to see some activity. Rodger, do you have anything else you want to add to that?

The only thing, just to be specific about where we're at with residential construction in Sussex County. Of our approximately $100 million of residential CLD, $36 million, or 36%, is in Sussex County, but as we've talked about before, that's spread over 22 different projects and I would tell you that of those 22 projects, there's only three that are on a nonaccrual status. So that would obviously indicate that the other ones, while might be a little bit slower, are still performing reasonably well.

Okay. Yes, that's it for me, thanks.

Thank you.

Our next question is with Brian Rohman of Robeco, please go ahead.

Yes, hi. All of my questions have been answered. Thank you.

Thanks, Brian.

Our next question, then, is from Andy Stapp of B Riley.

How much do you have remaining in your professional fees for the consultant study with the -- with regard to the efficiency program?

With the core program, we recorded $1.2 million in expenses in the fourth quarter of last year, about $0.5 million in the first quarter of this year, and Steve, what's your estimate of what's remaining?

I would say overall, expectation is it will be about $2 million or a little over $2 million. And that is expensed as they do the work that earns it. So the expense happens before the benefits are seen.

So just to clarify, a little -- $2 million to a little over $2 million, about a $1.5 million -- $1.7 million has already been recognized, is that right, Steve?

That's right.

Okay. And your tangible book's value per share was up, I forget how much, about $0.30 or something. Is that related to valuation advances in your private label mortgage-backs?

Correct. Our bottom-line was essentially flat, so any increases would have come through other comprehensive income, which would have been the unrealized gains in the mortgage-back portfolio.

But is it the private label--

It's across the board, but it includes private label.

Okay, all right. Thanks.

And, gentlemen, I'm showing no other questions in the queue at this time.

All right. Well, thank you very much, everybody, again, for your time and attention and your interest. As you know, if you have questions, Steve and myself are available to answer those questions or get you to the right person to be able to help you. We will be on the road in May and June at a couple conferences, so we look forward to seeing you there and we will post whatever materials we will be speaking to on our website in advance of that and look forward to updating you on our progress. Thank you.

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