WSFS Financial Corp (WSFS) 2010 Q3 法說會逐字稿

Good morning, ladies and gentlemen. My name is Andrea. I will be your conference call operator today.

At this time, I would like to welcome everyone to the Bryn Mawr Bank Corporation's quarterly conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. (Operator Instructions)

As a reminder, this conference is being recorded. 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, Andrea, and thanks, everyone, for joining us today. I hope you had a chance to review last night's press release. If you've 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 Bank Corporation, has some comments on the quarter and our strategic initiatives. After that, we will take your questions.

The archives of this conference call will be available at the Bryn Mawr Bank Corp.'s website or by calling 877-344-7529 and the replay code is 444122. A replay will be available approximately two 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 may, will, would, could, should, likely, possibly, probably, potentially, predict, contemplate, continue, believe, expect, anticipate, intend, plan, target, estimate, or words or phrases 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.

All forward-looking statements discussed during the call are based on management's current beliefs and assumptions and speak only as of the date and the time they are made. The Corporation does not undertake to update forward-looking statements. Thank you, and now I would like to turn the call over to Ted.

Thanks, Duncan, and thank you, everyone, for joining us today. After the close of the market yesterday, we released our third-quarter 2010 operating results and I hope you have all had a chance to review our release.

We reported a third-quarter diluted loss per share of $0.08 and a net loss of $1 million. This includes approximately $4.3 million of pretax merger expenses related to the acquisition of First Keystone Financial and a provision for loan and lease losses of $4.2 million. For the same period last year, the Corporation reported diluted earnings per share of $0.30 and net income of $2.6 million.

This quarter marked a very significant accomplishment for the Corporation beginning with the closing of the First Keystone Financial acquisition, conversion of their customer accounts to a common computer system, changing all building signage and merchandising signing and related collateral to Bryn Mawr Trust. We are now identified under a single brand and we are positioned for growth particularly in our new markets.

The combination of the two banks has gone extremely well and our entire team deserves a lot of credit for their thoughtful planning to make this a very smooth customer transition. We're very proud of the team's efforts.

I would like to now review our financial performance for the quarter. Due to the success of new initiatives along with improvements in financial markets, wealth management division assets under management, administration, supervision and brokerage were $3.3 billion at September 30, 2010; up approximately 14% from the fourth quarter of 2009 and up approximately 21% from September 30, 2009.

Revenue from the wealth management division fell slightly from the second quarter due to the timing of fee recognition on estates and tax preparation revenue. Revenue for the third quarter of 2010 was $3.7 million, down 5% from the second quarter of 2010 revenue of $3.9 million, but increased almost 7% from third-quarter 2009 revenue of $3.5 million. We are actively pursuing many new leads and opportunities, especially those created by the recent announcement of the sale of Wilmington Trust.

As you undoubtedly noticed, deposit loan and lease balances increased substantially from the second quarter as a result of the merger of First Keystone into Bryn Mawr Trust. Deposit levels increased $322 million or 34% from December 31, 2009, to $1.3 billion as of September 30, 2010, primarily the result of the FKF merger. The cost of interest-bearing deposits declined 13 basis points from the second quarter, partly the result of the repricing of Keystone core transaction accounts.

We are seeing almost no attrition of clients from the First Keystone side, which is a true indication of what a great job our Bryn Mawr Trust/First Keystone team did with the acquisition and conversion. At September 30, 2010, portfolio loan and lease balances totaled $1.2 billion, an increase of $291 million or 33% compared to $885 million at December 31, 2009. Once again, primarily due to the merger.

As a result of management's decision to reduce the lease portfolio, it has declined $10 million or 21% from December 31, 2009, to $37.6 million. The performance of the lease portfolio has shown steady and significant improvement with the delinquency rate declining 122 basis points to 1.65% as of September 30, 2010.

The tax equivalent net interest margin was 3.66% for the third quarter of 2010, down 14 basis points from the second quarter of 2010, primarily due to the declining market interest rates and the addition of lower yielding interest earning assets from the Keystone merger. Consumers continue to be motivated to refinance residential mortgages due to the historic low rate environment.

Net revenue from the sale of residential mortgage loans for the quarter ended September 30, 2010, was $1.2 million compared to $760,000 from the quarter ended September 30, 2009. At September 30, 2010, the allowance for loan and lease losses was $10.3 million which was 88 bps of the loan portfolio compared to $10.4 million or 1.18% at December 31, 2009.

The decrease in the allowance as a percentage of loans and leases is primarily due to the acquisition of the Keystone loan portfolio, which is recorded at its fair value without its previously recorded allowance for loan and lease losses. Approximately $3.7 million of the $4.2 million provision for loan and lease losses in the third quarter of 2010 is related to two commercial relationships that were included in non-performing assets in prior periods. Non-performing loans and leases were 92 basis points of total portfolio loans and leases at September 30, 2010.

In mid-September, following the first Keystone conversion activities, we initiated a multimedia advertising campaign in the Philadelphia area promoting our four core competencies -- wealth management, retail banking, business banking and mortgage banking. The goal of this campaign is to increase brand awareness, particularly in our new markets, and to increase sales throughout the organization. Preliminary feedback on this campaign has been very positive.

We are looking forward to a solid fourth quarter and a strong 2011 as most of the Keystone merger-related expenses are behind us. In summary, Bryn Mawr Trust is fundamentally sound, profitable on a year-to-date basis and has the flexibility and agility to respond to the opportunities afforded by a strong capital base, asset quality and liquidity. Lastly, we continue to remain well capitalized at both the bank and the corporate level.

Before closing, I'm pleased to announce that the Corporation's Board of Directors declared a quarterly dividend of $0.14 per share payable on December 1, 2010, to shareholders of record as of November 18, 2010. This is our 71st consecutive quarterly dividend.

With that, we will open the lines for any questions. Operator, would you please compile the Q&A roster?

(Operator Instructions) Collyn Gilbert, Stifel Nicolaus.

Just a few questions. Could you walk through a little bit more on the two commercial loans? I know you said they were already in non-performing, but just refresh our memory as to what the specific components of those loans were?

Sure, we definitely will. Those of course are important items here. With us today is not only Duncan Smith, our Chief Financial Officer, but Joe Keefer, our Chief Lending Officer. So, Joe, let me turn that question over to you.

Yes, we have two commercial relationships that we have been tracking for some time and have been on our non-performing. One of them was related to the construction industry; it was not a builder but sold into that industry. We thought that the business was going to be able to continue and we were valuing our collateral based on that assumption that their business was picking up and things were getting better.

As it turned out, that did not happen. The business owner did not meet the projections, so we had to go in and revalue our collateral position as if it was not a going concern.

So, we were very, very aggressive and conservative in our approach to that credit and essentially all that we have left is debt that's related to real estate where we have recent appraisals and we discounted or reserved against those loan balances at a discount to those appraisals. The other credit I think we're carrying around a $700,000 level. It's really what I would call something that's in litigation for us to get any kind of recovery.

And based on what the lawyers are telling us, our chance to get our hearing, unfortunately, because of the court system, is going to be delayed by another 12 months. So we thought it was appropriate to write that down further.

That's helpful.

But before the Keystone -- this is Ted Peters. Before the Keystone merger, we had about 12 or 13 loans on our watchlist which we reviewed, obviously, weekly and monthly with the Board. Of those, all of them except two stabilized and actually improved and we feel comfortable with. Two of them, quite frankly, tanked on us pretty badly and those have been really charged down, we think, very aggressively.

Now that said, you have to remember when First Keystone joined us we did put a loan mark on all their loan assets that joined us. So even though there are a number of problem loans in their portfolio, which we knew going in -- that's one of the reasons they were looking to join somebody -- we feel those have been marked down conservatively.

That's helpful. And back to the -- that was kind of my question, Ted, on the watchlist and, Joe, to your comment thinking that the business was improving and then it didn't. So is your general outlook -- do you get a sense that conditions are improving?

I think it's a little interesting, obviously, to have seen what happened with Wilmington Trust and that there were some more other more Philadelphia-based banks that have had more significantly deteriorating credit this quarter that I think maybe surprised some folks. So what are you guys seeing?

And maybe, Ted, that was -- you spoke to that, indicating that all but two have improved on your watchlist. But in general, maybe either speak from specific geographies in terms of exposure maybe to Southern Delaware or just in your markets overall how you feel about credit.

I mean, the Mid-Atlantic and particularly the Philadelphia area certainly didn't see the highs and the lows of other areas. Fortunately we're not Atlanta or Phoenix or Southern California or some areas like that.

That said, things are still very slow here. The absorption rate among builders who have homes built out there is very slow. We are in a recovery, we know that; it's going to be a very slow recovery.

Our feeling is it's going to be a minimum of three years until we're back to any kind of normalcy, however we want to define normalcy or the new normalcy. And that could be as much as five years.

We were fortunate in that we didn't have a very large construction portfolio exposure. We had at one point about $78 million, I think, in construction loans and that now has been worked down to what, Joe, about 35?

It's about 30 -- we worked it down from a high of $70 million in the fourth quarter of 2006 to about $40 million.

It's about $40 million. And that was just not us working it down, but it was also our builders who were pretty good -- we have a small stable of builders just basically stopped building and they pulled back their horns as well.

So we were fortunate that we didn't have a lot of exposure and that our exposure was primarily sort of in this Route 30, what we call the Main Line area. We do not have any construction exposure down in Delaware. Obviously that's where Wilmington Trust got hurt, having lots of large planned community developments down there. So we don't have any exposure down there.

That's helpful. Then just one more big picture question and then just two sort of maintenance questions. Can you just talk a little bit -- I mean, you guys have seen tremendous growth on the wealth management side and obviously you have pointed to the destruction of Wilmington Trust as perhaps an opportunity.

Have you seen -- of some of the asset growth that you've seen to date, some of that come from Wilmington Trust? And then maybe also speak to if there's certain specific initiatives you may have in terms of tackling those potential customers.

Well, first of all, we opened up a trust company in Delaware about two years ago, Bryn Mawr Trust Company of Delaware. This was, of course, before Wilmington Trust got into trouble and it primarily was doing sort of directed trustee business, administrative trustee business. And that has grown to about $500 million. So that's -- a lot of our growth has been there.

In addition, we started an institutional escrow business; hired a gentleman from Bank of America and that's off to a good start for us. And then a third thing is we started a company called BMT Asset Management, which is basically a brokerage operation to enhance our existing brokerage operation, where we hired a number of stockbrokers from UBS to come in and to work under our umbrella.

And then lastly, of course, as you know, in July 2008 we purchased Lau Associates in Wilmington, Delaware, which has about $500 million of -- a little more than $500 million of assets under management. They are an RIA.

Yes, we have a plan internally to actively solicit more business down in the Delaware area. We have already seen more deal flow there; really on the wealth side, not so much on the lending side. So, yes, we have developed a plan and have a plan to try to do some business with some of Wilmington's clients.

It's a shame, we, quite frankly, sort of -- I don't want to say off the record -- but I mean, we're very sorry to see what has happened to Wilmington Trust just as we were very sorry to see what has happened to First National Bank of Chester County. It's a shame to see banks that have been around 150 years or so sort of get themselves into trouble and basically go out of business.

Yes, okay. One final question. Duncan, to you, can you just give a rough idea of what you think a good run rate would be on expenses?

Okay, it's a good question. When you speak of expenses, are you talking about --?

Non-interest expense, yes, backing out. Just trying to reconcile First Keystone and then assumed cost savings going forward, obviously.

Yes, well obviously, the merger-related expenses would come out. There will be some trailer of that into the fourth quarter, but they'll obviously be line itemed like they are right now. You'll see those come through.

But we have got most of those out. And then we took out a lot of the expenses. We did run say for, let's call it two months, we had double operating expenses on running the Keystone system and our system. So there will be some operating costs there that will come out.

There are some salaries and wages of employees who were working through -- have worked-through dates through September, October, a couple go through December. But I think we're still working through those numbers.

But you could say there's probably about say $300,000 in salaries and wages and maybe another $200,000 in other expenses throughout the different operating buckets. So you could probably say $500,000 is a very rough estimate of what might come out of those numbers.

Also included in our -- we won't know until we see everything go through because some of the employees, what's happened, they have filled open spaces. We have open positions and some of them have jumped into the open spots and it's all working out quite well.

But included in our expenses for this quarter are two items. Obviously you see the impairment of the OREO expense and that was a property we took back. And based on a recent appraisal we wrote that property down.

So we believe that is at its fair value now and we think we should be able to move that property relatively quickly. So that's one item in there.

Also in other non-operating expenses is -- you'll see -- and a lot of this detail will come out in the 10-Q which comes out later today. There's a section of other operating expenses and there's detail on that. There's about, say, $300,000 relating to a contract termination unrelated to the merger. So that gives you a little bit of an idea.

On the other hand, if you look at on the non-interest income side, the gain on the sale of residential mortgages, we're running at quite a robust rate right now. We would love to say that's going to continue, but we won't know until you get through the quarter. That's running at a pretty nice rate right now.

That's very helpful, I'll hop out. Thanks, guys.

David Darst, Guggenheim Securities.

Ted, could you comment on the 30- to 89-day increase? Is that related to the acquisition?

You're talking about on delinquencies?

Correct.

I'm going to turn that over to Joe and we will take a look at it.

Most of that is related to First Keystone. Their delinquency rate was in excess of 2%.

However, we had one large residential mortgage loan that has never been delinquent. And in fact, they had the money at the bank and could have made their payment; we just didn't have the authority to charge the account.

So if you back that out, actually our delinquency on the 30 days is even where it was in June. So we just had a little blip with one of our large jumbo residential loans.

Okay, got it. And then on the margin, Duncan, it looks like you got $30 million more of liquidity at 25 basis points. Do you have any plans to invest that or do you think you'll be able to move that into loans?

Well, ideally we would love to move it into loans; that would be first choice. And we will play that as it goes.

But there is -- we have Home Loan Bank borrowings coming up maturity. So if the loan demand isn't there, it will probably get used to reduce the Federal Home Loan Bank borrowings which are probably around 75 basis points, because they've been marked -- through the merger accounting they have been marked to market and that's about 75 bps versus as you said 25 bps on the asset side. So that would actually be a pickup.

Now if we can lend it obviously that would be a much bigger margin increase. But these things are coming due. There's another one -- there's a couple that have come due in October since these numbers have come out.

What is the volume of the ones that matured in October?

I think it was $20 million that came due in October.

And those were their borrowings that were already marked to market?

Yes, yes. In the 10-Q when that comes out, there will be a little more information about that including what is coming due in the next year. We've got probably another $20 million in November.

So should we expect the balance sheet to more than likely shrink by those amounts over the next couple of quarters?

This is Ted Peters. We're talking about that right now, whether we want to just sort of let the Federal Home Loan Bank borrowings run off and then run the balance sheet down $100 million. We're sort of discussing that.

Loan demand is picking up somewhat. We did make a strategic decision a few months ago, which I think is a good one, to hold another $30 million of residential mortgage loans.

As you know, we are generating a lot of residential mortgage loans. We saw almost all of the Fannie. However, we've decided to hold about $30 million of those regular mortgages and some jumbos so that's adding some loans to the balance sheet.

In addition, we did pick up a couple lenders. We saw some opportunities out there from some lenders who were with some banks that had been struggling a little bit. National Penn, we hired a couple of letters from National Penn in particular and we have seen some nice business moving over from those other banks.

We think it may be a little too early, but we loan demand -- we're starting to see a strengthening of loan demand with actually decent deals. We saw loan demand before but they were basically kind of not good situations that other banks were trying to exit from. But we're starting to see some -- it seems it's not -- it's hard to see a real trend but we have seen a pickup in loan demand, I would say, in the last 2.5 months.

Duncan, the capital ratios were a little bit better than expected for tangible equity. It looked like there was an adjustment to the beginning -- ending balance at June 30 for common equity. Did that -- was there something that you restated or maybe you restated in the June 30 Q and I didn't see it?

I think you may be right there. There was -- I think you may have been looking at maybe the shareholder presentation from June, but now the ratios as we have them in the press release here are the good numbers.

At how about (multiple speakers) how about the tax rate? Could you just comment on what your expected tax rate would be for the fourth quarter of next year?

Fourth quarter of 2010 or fourth quarter of --?

Yes.

Because you said next year.

Well, both.

Obviously the tax rate in the third quarter is a negative obviously so it's a tax benefit and it has got -- it's at 40% there. But part of the increase or part of the change is due to tax exempt securities picked up by Keystone and also some BOLI. They have significant BOLI holdings.

So that impacted the rate. And then you also have the effect, the other way of merger expenses and the fact that we are under $10 million annualized at the third quarter.

So I would say going forward, we will see that tax rate -- I think it's a 34% year to date. It will probably drop a little bit on a year-to-date basis because of the tax exempt and the fourth quarter will be less merger-related expenses. So it should drop a little bit because of the tax exempt income, but I would say for next year you would see it come back up maybe 34%, 34.5%.

As you probably know, David, some of the merger-related expenses are not tax-deductible which is -- I'm not sure why, but they weren't. So that affected it as well.

So if you look at the cumulative rate through nine months, what is it, 34%? It's 34.2% -- let me just get that. It's 34.2% through nine months so when we go into the fourth the year-to-date rate should drop a little bit because of the tax exempts.

Okay, thank you.

Jason O'Donnell, Boenning Scattergood.

Thanks for the color on the two commercial credits. I'm wondering if there are any other larger commercial credits that have deteriorated recently.

Joe, why don't you answer that one?

No, I think we are -- on the BMT legacy portfolio, I think we feel pretty good that the portfolio will continue to perform the way it has in the past. So we actually think -- what our sense of the economic situation here is things have stabilized.

People are a little bit more comfortable that we are at the bottom and they corrected their expenses, they corrected their balance sheet. So from here on out they can kind of continue along.

With the First Keystone portfolio there are a couple of credits we are watching, but by and large, we have been through about three months of reassessing that portfolio. I'm feeling better about it than perhaps I did prior to the merger.

Okay, great. And then just in terms of the criticized or classified assets loan portfolio, I'm just wondering what the trend has been in the loan portfolio over the past few quarters.

Well it's -- I'm going to try not to mix and match. If you look at the BMT legacy portfolio, the criticized and classified list has come way down because, as Ted has stated, most of the credits performed and improved.

However, we've taken some serious charge-off on the ones that have nipped at us so that's improved but only because we took charge-offs. So we don't like that but I think we are done with it on those two credits.

The FKB portfolio, we are re-rating that entire portfolio this month and into the fourth quarter. And by and large, under the eye of getting new information, meeting with the customers, we potentially see more of those credits being upgraded. But there is a couple we are watching.

The beauty of it all though, as you know, is we are able to put a pretty good mark on it so if they do deteriorate we are protected. And what you would see is something bleed into non-performing or REO where we already have the loss if you will. The loss is in the mark.

Okay, great. And then I was just wondering can you just give us some high-level color on the composition of the reserves? Specifically I'm interested in kind of how much is currently unallocated versus reserves for specific problem loans.

Jason, that's something we generally don't talk about as far as unallocated. But I can just tell you in general, there is not a -- we have a very detailed formula that we go -- process that we go through that allocates pieces of the reserve to different buckets of -- different types of loans by category -- commercial construction, commercial loan, commercial and industrial -- and there's really a nominal amount of unallocated loans or unallocated reserve.

So, that's not something that -- so the number is not meaningful. So to really answer your question, there really isn't any unallocated of any significance out there. It's just -- it's all allocated by percentages, formulas to different types of loan allocations and we review that every quarter.

Great, that's helpful. And then finally, I just was wondering were there any interest income reversals impacting net interest income this quarter?

Could you restate that question please?

Were there any interest income reversals that were impacting net interest income this quarter?

You mean like non-performing loans? You mean like non-accrual loans?

Yes.

(multiple speakers) What is in interest income -- and when the 10-Q comes out there will be a schedule that talks about the -- how can I say this? The merger adjustments that run through in the P&L, and we have given you a detailed schedule in the 10-Q that shows the impact on interest income, interest expense and non-interest income and expense of all the merger-related accretable or amortizeable items that run through.

Just keep in mind, say for example Federal Home Loan Bank, there's quite a large credit that goes through the third quarter as a reduction of interest expense. But that really brings their borrowings say -- if they were 5%, brings them down to market of 0.75%.

So while that credit is large, it is there to bring them to market and now they're on our balance sheet or running through our income statement at market rates. So when they mature, that credit goes away but then you can either reborrow or pay that off and you'll be at market rate. So it's there for the duration of the liability.

So you are not expecting -- in terms of the impact of purchase accounting adjustments, you're not expecting a material sort of shift in the margin over the next several quarters as a result?

No, not a material -- basically those purchase accounting adjustments marked their loans and their deposits and their borrowings to market. So they are now at -- with those purchase accounting adjustments, they're at market.

And then when they mature -- like say, for example, a CD. If they had a CD that was priced high, so where there was a slight premium we put on the books for CDs, when those CDs mature -- let's say they were 2% and the market is 1% -- we can then reprice them at 1% when they mature and basically they are in at that effective 1% rate right now.

That's why the margin went from 3.8% to 3.66%. So it really was partly due to the pressure of the interest rate environment as opposed to primarily being attributed to the Keystone merger because everything was marked to market.

And on the -- Alison Gers, who is in charge of all of our wealth, our branch banking and things, reduced the First Keystone interest expense ratio rates prior to the merger and brought them down more in line with our numbers as we got closer to the merger. And they're basically in line now. And as Ted said, there was no -- we've seen no noticeable attrition at all on the deposit side.

Let me speak maybe just for a second, if it's alright, Jason, about the Keystone merger. As I mentioned in my prepared remarks, it has gone very, very well and we've seen, literally, almost no attrition.

We think we could really grow their business and their market because we're going to be putting in a lot of cross-sell and referral programs. We've been very good at our branch sales and so forth.

So we really see -- most of their branches, we picked up eight full-service branches. We really see almost all those branches starting to grow and really not by pricing mechanisms but by better sales efforts and marketing and so forth. So we see a real opportunity there.

Great, thank you.

(Operator Instructions) Gentlemen, we're showing no further questions at this time. Do you have any closing remarks today?

Yes, this is Ted Peters and once again, I would like to thank everybody for joining us today. If you do have any questions, feel free to give myself or Joe Keefer or Duncan Smith a call and have a great day. Thank you.

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