WSFS Financial Corp (WSFS) 2010 Q4 法說會逐字稿

Welcome to the WSFS Financial Corporation fourth quarter 2010 earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions)This conference call is being recorded. I would now like to introduce your host for today's conference, Steve Fowle, Executive Vice President and Chief Financial Officer. You may begin.

Thank you [Givonne] and thank you to everyone participating on the call. I would like to introduce the people here with me that will be participating on the call. Mark Turner, President and CEO of WSFS, Rodger Levenson, Director of Commercial Banking, Rick Wright, Director of Marketing and Retail Banking, and myself. 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 maybe beyond the Company's control are subject to risks and uncertainties and other factors which could cause actual results to differ materially from those 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, 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 there with, changes resulting from our participation in CPP including additional conditions that may be imposed in the future on participating companies, cost and expenses that may be occurred and benefits achieved from acquisitions 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.

Thanks Steve. Thanks all for your time and attention. In 2010, we earned $14.1 million, or $1.46 a share, including $2.1 million, or $0.16 a share in the fourth quarter. The fourth quarter's results included the impact of the CB&T acquisition integration. The rest of the earnings release was full in detail and hopefully was also clear to you. Therefore, I would like to use my ten minutes of introductory comments on management's overview of 2010, and more importantly how that relates to prospects for 2011 and after. 2010 was important year for WSFS. In 2010, we rebounded from the deep recession to profitability, we expect that rebounding to continue and to strengthen, even as the path maybe uneven in the short-term due to choppy economy and our longer term investments. In 2010, we significantly reduced the risk in on balance sheet. Non-performing assets were contained within our range and are still down from their peak in late 2009.

More importantly for the future, delinquencies and total problem loans, both early indicators of future credit quality and costs, showed marked improvements from earlier in the cycle. Problem loans, for example, are down 20% from their peak, and residential construction loans are now less than 3% of total loans and have been well scrutinized and reserved for properly. The loan loss provision was also down modestly from $48 million in 2009 to $42 million in 2010, consistent with our previous guidance and a shown improvement in each of the last five quarters. Our previous guidance on the 2010 provision which proved accurate was based on thorough re-underwriting and stress testing of our portfolios in late 2009 and then continual reevaluation. Through 2010, we increased that vigilance in understanding our portfolio and taking appropriate action.

Now, with apparently better economic background, residential construction loans addressed at a low level and early stage quality indicators improving, we feel comfortable saying but with all necessary caveats that credit quality will likely meaningfully improve in 2011. As a result, we are projecting about $30 million in provision in 2011, plus or minus $2 million. That number also assumes significant loan growth as well. I'll discuss more later. We are also hopeful that if the economy improves modestly, the provision will be better than that. As a parenthetical, we would point out that while provision costs may be going down as is the industry cost to resolve problem situations and people professional fees, foreclosure costs, et cetera, will remain elevated through 2011.

In 2010, our investment portfolio also proved to be of very high quality, which we were confident in from our frequent independent stress tests as discussed in our previous presentations. As a result, in 2010, we were able to earn good rates of return on the portfolio and also exit through run off and sale almost all of our downgraded securities and at a net realized gain for the year. The remaining portfolio is overwhelmingly AAA rated and very short duration, at an estimated 2.1 years and currently has unrealized positive mark-to-market showing it too is of high quality and slightly above mark rates. This bodes well for future good returns on less risk from our investments and healthy cash flows to support expected organic loan growth in 2011.

In 2010, we also strengthened our balance sheet by continuing to build our cushions. The allowance for loan losses increased $7 million, or 13%, despite significant charge-offs to resolve or identify problem situations. Tangible common capital has also increased by $46 million or 20% to help support our growth plans. We believe our loan loss reserve at 2.3% of loans and tangible common equity at 7.2% of tangible assets are very sufficient for our potential losses, the inherent risk in our business model and our planned growth. We, of course, monitor these frequently.

In summary, in 2010 we took significant actions so that entering 2011 we have an even stronger, less volatile, more cushioned balance sheet. The local economy, albeit in low gear, has shown signs of stabilization to moderate improvement. Delaware unemployment peaked in March 2010 at 9.3% and closed the year at 8.5%. House prices moderated with a median sales price decline of only 2.1% from 2009 values. Combined, these all provide stronger foundation for much better growth and results in 2011. That's a good segue to talk about growth for both 2010, and for what we see in the future. In 2010, we grew and transformed franchise both organically and through strategic moves. We continued to add offices in key locations, recruit seasoned local bankers in Delaware and southeastern Pennsylvania and add to our market share in Delaware through their Christiana Bank & Trust acquisition.

The areas we targeted is important to our franchise value grew strongly. In 2010, commercial and industrial loans grew $119 million or 11% and customer funding grew $363 million or 16%. Our loans to customer funding is now 98%, much improved from a high of 141%, before this cycle began. Our net interest margin also improved 32 basis points year-over-year. Customers have been drawn to our strength, local responsiveness and brands of stellar service and they've also shown a willingness to pay for this extra strength and service. This cycle has been valuable to help both prove our business model and enhance our long-term franchise value.

In 2010, we also greatly enhanced our business model with the which Christiana Trust platform. This was very strategic for us. Along with already strong retail and commercial banking, we now have equally strong fiduciary revenue capabilities with a local and national reputation. To put that in perspective, WSFS is in the top 200 largest banks in the country, while Christiana Trust is a top 100 provider of trust and wealth management services. The conversion and initial integration of Christiana went smoothly, synergies and costs are on track. The management team is here and we're working very well with them as they grow that business. In December 2010, their first month with us, Christiana Trust had one of the best months in their history for closed business. This quarter and going forward, to show the importance of this business line for us, we've broken out all fiduciary and investment management revenue as a separate line item on our financial statements. We look forward to a growing and providing even healthier and more diversified level of fee income for us.

Most importantly, as we enter 2011, we are positioned to soon be by far the largest, oldest full service independent bank and trust Company headquartered in Delaware, a state which prides itself on doing business locally. For 2011, we believe the combination of our market, our position in the market, our enhanced business platform, our reputation for service, and the significant current market disruptions will all combine to be powerful sources of our growth. To highlight that window of opportunity, in late 2010 and 2011, in our markets, there are at least five meaningful bank changes, most from familiar names to unfamiliar names to customers. A couple of these changes are, as you know, very significant in terms of local market share.

By serving well, we plan to get more than our fair share of disenfranchised associates and customers and grow profitably. Of course, we have to execute on the opportunities. We are intently focused on doing so and have the strategy, resources and people to do it. An independent survey ranks us as the top workplace in Delaware for the last two years, and another independent survey again ranks our customer engagement, which is a much stronger and stickier concept in satisfaction or loyalty, as world class. Associate engagement, service and customer engagement are the heart of our business model and are why we have been able to grow as we have during a very difficult time and it will also be the strong foundation for our future growth. Thank you, at this time we will take questions.

(Operator Instructions)Our first question is from Mike Sarcone with Sandler O'Neill.

First question, you said the $30 million provision for 2011 assumes significant loan growth. Can you quantify what significant loan growth means?

We generally, in that area, Mike, don't provide specific guidance but I would say with the opportunities in front of us, the growth is north of 10% into the low teens.

Great. Then the reserve now stands at 2.3% of loans, I know you said that, that's sufficient for any losses you may be estimating. Can you give us guidance on how low you may be willing to let the reserve go?

Sure. I will have Rodger Levenson answer that question.

Hi, Mike. As mentioned in our previous guidance, net charge-offs exceed provision during the quarter by $4 million, as we recognize losses as part of our continuing efforts to resolve problem situations. As you know, charge-offs are a lagging indicator of credit quality and so given the decline in our leading indicators, like problem assets, we would expect this general type of charge-off trend of exceeding provision to continue through 2011. While individual quarters maybe lumpy, our forecast for 2011 for charge-offs is similar to the $35 million of charge-offs in 2010. Combine that with a provision of about $30 million, depending upon that pace of loan growth that Mark had just referred to, our [ALLL] to total loans would be modestly below 2% by the end of 2011.

Okay. Then one more question for Rodger, you guys had pretty solid growth in commercial loan balances ex the construction. Can you just give us some color on what the pipeline looks like currently?

Sure. Our pipeline is at the highest level it's been in several years. Our 90 day forward weighted average has now grown to over $140 million. We are seeing some pricing pressure in particular at the top end of our target market for large high quality credits; however, we are still seeing a very high volume of opportunities within our core C&I, and selected CRE transactions. And obviously we are also really beginning to see the significant traction from the eight new relationship managers that were hired in 2010.

Okay. Thanks, guys.

Andrew Stapp with B. Riley and Company.

The decline in construction development loans was pretty significant as was the increase in CRE, was there much in the way of construction or development loans rolling over in to commercial mortgages?

There was a bit of that, Andy. Actually of the $43 million decline, about $24 million of that was a reclassification from construction in to other categories. $22 million of those actually was C&I, as you know, in our construction bucket, we carry owner-occupied construction and we had several large projects which [were] being completed and are now converting in to amortizing mortgages, so that's the part of the growth in the C&I line. There was really only a very small piece that went up in to CRE.

Okay. Do you expect any more cost saves from your efficiency program in 2011?

Hi Andy, this is Steve. We do expect some of our cost savings to roll on during 2011, but most, probably 90% is probably in our numbers.

What would the remaining 10% be?

It would be about $100,000.

Okay.

A quarter, yes. $100,000 a quarter Andy. Thank you Mark

Yes, okay. And the -- your sale of securities, what was the timing of the sales?

A lot of that was to take advantage of the significant improvement in the markets that occurred, as you know, at the end of the third quarter in to the beginning of the fourth quarter then some again in the beginning of December.

Okay. Just trying to get, I mean, the yield on securities, is that a good run rate going in to Q1?

Andy, this is Steve. I'd expect downward pressure on that still due to those sales towards the end of the year. We also know, as you may remember, had some positive benefit from earlier in the quarter from some repricing of Federal Home Loan Bank advances. We also know that the CBT acquisition is going to be helpful to our margin. So if you are looking at margin going forward, I would expect to this quarter to be flat maybe some potential upside but marginal.

Do you have the December margin?

December is usually the month, Andy, that's impacted by things going in to non-accrual so it's not really indicative of things going forward but the whole quarter's margin was pretty flat at around 3.63% if you were to normalize that. That's why Steve and we are saying should be pretty flat with maybe a little bit of upside bias as we get more repricing of Home Loan Bank advances and CDs and such.

Okay. I will hop back in to the queue.

Thank you.

Matt Schultheis with Beoenning & Scattergood.

Couple of quick questions for you, one with regard to the expected loan growth. Do you see yourself funding that more with further securities run-off or are you going to try to fund this with the liability side of balance sheet or is it going to have to be a combination of both and to what degree?

I will take the first shot at that and ask Rick to augment it with anything. But we also -- besides double digit loan growth, we also expect double digit deposit growth next year. It should be fairly self-funded fund, or organically funded, I should say.

So you are not just going to switch your mix on the asset side then --

No, I would say if we do get -- one of the things we like about our securities portfolio is it is high quality and very short duration and throws off about $20 million a month right now in cash flow so it allows us if we get loan growth above trend or loan growth above deposit rates to be able to do that. So it's very flexible for us.

Matt, this is Steve. That growth in loans itself should improve and deposits themselves should improve the mix just by that growing all else holding equal.

Sure. Understand. Also you are sitting here with some TARP and was wondering what your thought process is with regard to retain that whether obviously, it seems like if you are growing to grow this much you probably want as much as capital cushion as possible but there is a Small Business Lending facility that's out there now for you guys to consider and just what your thought process is overall in that area?

It's a great question. We were following the small business, the Small Business Lending Fund prospects as early as mid-last year when the topic came up. Then we were quite positively surprised when just before the holidays the details were announced. We think it's an extremely attractive program for somebody in our position. We are currently taking a close look at the Small Business Lending Fund as a potentially very good alternative to repay CPP. On its surface, it appears to be much cheaper Tier 1 capital, as you know, depending on how much small business lending you do and as they define small business lending, that's in a sweet spot of where we have grown or looking to grow. You can reduce your rate.

We look at possibly an initial rate of 3% if we were to get in to that program and potentially down, better from that. It's also more flexible and less burdensome and I think overall the incentives are very consistent with our strategic plan and our desire to continue to be a lender to our community during a period of time when other people are on the sidelines and overall, it appears to have a seamless path to exit. We are taking a close look at that program, obviously, you don't know until all the documents are out, but we decided not to pursue that. We would continue down a path of wanting to exit CPP as quickly as possible.

Have you had conversations with your regulators regarding, A, two things here. The small business lending facility and also have you actually had any conversations with regulators about the switch from an OTS-regulated institution to wherever you are going to go next?

Well, as you know, unless we decide to make a different change as an OTS institution, late July, we will be regulated by the OCC. So the OTS and the OCC have had outreach programs, just get to know you situations and also instructive in terms of what the transition process will look like going forward and we participated as a lot of [thrifts] have in those situations. Absent us making a different change, we would expect to be a OCC-regulated institution by the end of next year.

Have you given thought to becoming a state charter?

I would say during the next -- during the period between now and July, we will be also actively taking a look at our other alternatives, one of which would include or the one of the other obvious one is becoming a state chartered institution.

Okay, thank you.

You're welcome.

Steve Moss with Janney Montgomery Scott.

All my questions have been answered, guys.

Thanks, Steve.

Zack Bowen with CL King.

With regard to the wealth management side of the business, you mentioned about the number of closures in the Christiana side being the highest in December, how much of that is attributable to the dislocation of Wilmington Trust customers? What was your market share going in to this with the Christiana and where do things stand now?What's the outlook?

Very little of that was attributable to Wilmington Trust customers, number one, that their pipeline in the business takes some time to close. And their business model, while it includes some local business, is mostly Delaware Trust business directed at a more national marketplace but we are ramping up the efforts, as you might imagine, to move as much local business as possible so we would hope that would be a source of growth in the future.

Austin Root with North Oak Capital.

Good afternoon. I wanted to talk a little bit about non-interest expense, particularly employee related. Is there a -- I assume that most of the increase is related to the new bankers that have been hired in the new markets. Is there a time at which you think will normalize with or be compensated by loan growth or are we looking at a raised efficiency ratio?

In terms of the growth quarter to quarter, I think about 50% of that could be characterized in the salaries line item, could be characterized as timing related. An example of that -- actuarial studies that we get in the fourth quarter where the accrual is made in the fourth quarter, about 50% of that has to do with timing, about 25% has to do with CB&T itself, and the other 25% just generally related to growth. I would expect as we go through 2011 with our plans for continued growth and continued branch openings, that we aren't at a run rate now but we'll continue to add expenses and the -- Rodger's made the point before that the commercial lenders that we pulled on are having success and are adding loans. They have a quick -- relatively quicker run rate to self funding themselves. But we do also anticipate additional hires in that category as well.

Great. Was very happy to hear about the low provisioning combined with significant loan growth. Can you talk a little bit about real estate-related costs? I think it sounded like, you said they will remain elevated. Any finer point on that?

Rodger, correct me if I'm wrong, or augment this. Last year, we had about $5 million in what we would classify as other credit related costs so costs to dispose, legal, OREO, foreclosure and we expect about that same amount in 2011.

Okay. The whole line, the line item workout in REO was $6.5 million. You're saying of that, $5 million was non-normal?

No, $5 million is what we have is the normal part of that expense.

I guess, I mean, it says the phrasing was remaining elevated I guess I meant.

Yes. Just to maybe clarify, our forecast for 2011 is that, that line item would be somewhere around $5 million.

Got it. Okay, thanks very much.

Andrew Stapp with B. Riley and Company.

Do you happen to have the year-end balances for goodwill and core deposit intangible?

Andy, this is Steve. I don't have those numbers with me. We added approximately $16 million of goodwill. The final breakdown of the portion that has to do with core deposit intangible and the value of the relationships with the trust business hasn't been finalized but that will be a portion of that goodwill.

We will have the December soon.

Okay. What are you looking for in terms of effective tax rate in 2011?

Expected effective tax rate will be about 36%.

Okay. What is your monthly or quarterly, annual, whatever, run rate for interchange fees?

We don't have that off the top of our head, Andy; we'll have to get back to you on that. Interchange is something we are obviously watching closely. There is a proposal out there now, as you know. The industry is pushing back significantly on that through lawsuits and lobbying efforts and banks like us under $10 million are technically excluded but we know that market forces may take care of some of that. So we are watching that closely.

Okay. Lastly, are you still comfortable with your Christiana Bank & Trust cost saves estimates and over what time frame do you expect to achieve those costs

Yes. We are tracking very closely to our original estimates, including the time phasing of those. I think the original estimate was $3.3 million. We are tracking at about $3.2 million at this point. But some part of that is supposed to come in '11 and a little bit in '12 as well.

I have that answer, this is Rick Wright. I have the answer about the interchange, in 2010 we had about $8 million in interchange income.

On the Christiana cost, can you refresh my memory as to when those how they are spread out?

Of the over $2 million is in -- to be garnered almost immediately through the first couple of quarters then the other $1 million would be through the latter half of '11 and early part of '12.

Okay. All right, thank you.

Nancy Frohna with 1492 Capital Management.

Okay, very good. Just wanted to get a little bit of clarification on the Reg E impact. I think it looks like it came in better than what you were expecting or projecting back in the third quarter. I looked back at my notes and it was looking like potentially $600,000 worth of a negative impact but to be offset by expense reductions and looking through the details here in the numbers I'm not sure how that came out ultimately versus your expectations from last quarter?

Yes. Rick?

Yes, since Reg E was implemented in August, we have been seeing about a $200,000 per month reduction in net overdraft revenues. We expect that recent run rate to continue through 2011 somewhat offset by some new account growth that we talked about.

Okay. Then what about potential other sources of revenue to offset that? Is there something that's happened different on that from that perspective? Revenue enhancements or offsets?

We have several that we are looking at and probably, like everyone, are relooking at our entire checking account line-up and what we are going to charge for what and minimum balances and so on and so forth. But until we see clarity on the Durbin Amendment and a little bit more on what others are doing, we are not ready to answer that.

Okay. Fair enough. One last question about cash at the Holdco level. Where does that stand?

$20 million.

$20 million. Very good, thank you very much.

Thank you. (Operator Instructions)I'm showing no further questions in the queue, sir.

All right. Thank you very much. Appreciate everybody's, again, time and attention. We will be on the road in March and then possibly again in May and in June. So we look forward to seeing some of you then. Have a great weekend.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all disconnect. Everyone have a great day.