WSFS Financial Corp (WSFS) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the WSFS Financial Corp. first-quarter 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). As a reminder, this conference is being recorded. I would now like to introduce our speakers for today's call, Mr. Mark Turner, President and CEO, Stephen A. Fowle, Chief Financial Officer, Rodger Levenson, Director of Commercial Banking, and Richard Wright, Director of Marketing and Retail Banking and I'd like to hand the call over to Mr. Stephen Fowle. You may begin.

Thank you, Mimi, and thank you to everyone participating on this call. Before Mark begins with his opening remarks, 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 that term is defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements, which are based on various assumptions, some of which may be beyond the Company's control are subject to risks and uncertainties, and other factors which could cause actual results to differ materially from those currently anticipated.

Such risks and uncertainties include, but are not limited to, those related to the economic environment, particularly in the market areas in which the Company operates, the volatility of the financial and securities markets including changes with respect to 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, costs and expenses that may be incurred and benefits achieved from acquisitions, and the costs associated with resolving 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 will turn the discussion over to Mark Turner, WSFS' President and Chief Executive Officer.

Thank you, Steve. And thank you all for your time and attention. In the first quarter of 2011, WSFS earned $4.2 million or $0.40 a share, which was a significant improvement over last quarter and the same quarter last year. The results include the first full quarter with Christiana Trust and details of the quarter's results are presented in full in our press release. Therefore, I'd like to take about 10 minutes to provide some additional insight into WSFS' markets, our plans for our franchise, and some expectations we have.

The Delaware economy continues a slow recovery. Unemployment at 8.4% in March is inching down, and economic activity feels like it has improved slightly, albeit still at low levels. Residential real estate values appear to be nearing a bottom, but activity is still lackluster, and March average sales prices were down about 6% year-over-year. Like many, we believe that the Mid-Atlantic region was later coming into the recession, and probably lags on the way out.

On the flip side of that same coin, however, as the downturn is well into its third year, disruption in our banking market is at its height. For many months, by far the dominant player in our Delaware market, has been working through issues and now the integration of its merger with an out-of-state buyer. It has been the largest player for 100 years and has twice the market share of the nearest competitor. Also, in contiguous Chester County, Pennsylvania, the largest independent bank recently was purchased by an out-of-market institution. In general, M&A activity and credit issue have significantly sidelined the field of these and other local bank competitors.

We see this as a once every 100-year opportunity in the local banking market. We feel we are positioned extremely well to capitalize on the disruption we see, particularly because of our long local history, and our reputation for superior service. In addition, our credit profile is manageable. That is, while headline statistics are mixed, taken as a whole, our asset quality is relatively good and improving.

On that credit quality front, the first quarter of 2011 continued our trend of improving provision expense and overall credit costs. Total credit costs, including provision, letter of credit contingencies, and loan workout and OREO cost declined $3.1 million from last quarter's $11.5 million to $8.4 million this quarter. This was the result of net positive trends in credit migration, as many customers have successfully adjusted to the new economic reality. As a result, leading credit quality indicators, like total problem loans, decreased an additional 6% this quarter, are coming down steadily, and are down 24% from their peak.

Total problem loans now stand at less than 10% of our loan portfolio. Based on a detailed analysis, we expect total problem loans to continue a steady decline through 2011. Further, delinquencies, and we measure delinquencies to include delinquent non-performing loans, increased slightly but remain a very manageable 2.8% of total loans. Delinquencies have been in a tight range of between 2.4% to 2.8% the last five quarters.

At the other end, we've indicated that lagging credit quality metrics, like non-performing assets and charge-offs, would be lumpy. We saw that this quarter. Net charge-offs improved this quarter from last, and we are encouraged that we've begun to see a couple positive marks as we dispose of OREO and non-performing loans, but I caution it is only a couple. Non-performing assets increased just under 10%, but are still a manageable 2.6% of total assets.

A few larger, previously identified problem loans migrating to non-performing status exceeded the timing of our disposition efforts. Disposition activity can be slower in the winter, and we expect it to pick up in the Spring and Summer months. A large portion of the new non-performers has come from our residential construction portfolio, as the sponsor's ability to carry projects continues to be impacted by the extended soft housing market. Fortunately, we have managed residential construction loans down to only 2% of total loans, and 38% of that 2% are already in non-performing assets, and there are no residential construction loans left, performing or non-performing, greater than $5 million.

To sum expectations. Forecasting NPAs are challenging, as many factors including negotiations with borrowers, dispositions and economic trends can affect both the ultimate outcome and the timing of these situations. Nonetheless, based on a detailed probability-weighted analysis of our current problem pipeline and disposition activity, we estimate that total non-performing assets will stabilize at around current levels for the next two quarters, and trend down after that, but is worth repeating that this lagging metric can be volatile. Further, last quarter we provided guidance that our 2011 provision would be $30 million plus or minus a couple million, and that other credit costs, primarily work-out and OREO writedowns would be about $5 million for the year, so that total credit costs in 2011 would be $35 million plus or minus.

As mentioned in the first quarter, total credit costs were $8.4 million. Annualized, that comes to just under the full-year expectation of $35 million. The provision of $5.9 million was lower than we expected, because of the net positive loan risk migration, and an overall decline in problem loans. The other credit costs, primarily OREO writedowns of $2.5 million, were higher than we expected because of markdowns on more distressed non-performing assets.

In summary on credit, despite mixed headline statistics, our thoughts on our overall credit quality haven't changed from last quarter. That is, it peaked in late 2009 or early 2010 and the trend is improving from there. Therefore, we still expect full-year 2011 credit costs to be about $35 million plus or minus but individual quarters will be lumpy as will the split between provision and writedowns.

Switching gears, while we will not take our eye off managing our loan portfolio, our strength in our brand has placed us in a unique position to be on the offensive in pursuing the every 100-year opportunity, so we've continued to do just that. As you know, we closed on the acquisition of Christiana Bank & Trust in December 2010. The acquisition gave us more significant presence in the attractive Greenville, Delaware banking market, and more strategically, the acquisition bolstered our trust and wealth management offering and diversified our revenue base. We are pleased to report the Christiana Trust revenues exceeded our expectations, and have continued to grow through the integration, and we continue to be on track for cost savings and one-time costs we've communicated when we announced the merger.

We also continued to grow our growth efforts in Delaware and southeastern Pennsylvania. Over the past year, we have hired 10 seasoned commercial loan officers from our competitors. That's a 40% increase in our commercial lenders from 25 to 35. We also relocated, renovated or opened seven branches in the last year, and several more are expected in 2011. We are actively promoting the Switch to WSFS campaign, with increased advertising, Switch Saturday hours, targeted promotions like our anniversary savings promotion and our service guarantee, and an active referral program, which involves all WSFS associates.

We will soon be the oldest and largest locally-managed full service bank in Delaware, further differentiated by our world-class levels of service and we are taking advantage of that position. Our investment and our growth efforts continue to pay dividends. This quarter, customer funding grew $71 million, or at an 11% annualized growth rate over last quarter. Core account growth across all categories was partially offset by seasonal municipal and school district draws in money-market accounts, and commercial and industrial lending accelerated, increasing $49 million, a 16% annual growth rate, and that growth came despite a usually slow winter season. Loan closings accelerated in March, and our pipeline remains strong. We are optimistic about the coming months growth.

Growth in our franchise helped us to continue to grow revenues. Total revenues increased from prior quarter and from year-ago levels. Despite the impact of Reg E changes on overdraft income, year-over-year revenue increased a strong 8%, and fee income exceeded 30% of revenues, demonstrating our increasingly strong and diversified revenue sources. The costs of our many investments mentioned earlier, however, come before the full benefits, and we saw that in this quarter's results. While reporting earnings growth, our expenses increased and muted the impact of revenue growth.

Expense increases include the first full quarter of the impact of Christiana Trust, as well as the cost of new and relocated branches and the hiring of seasoned lenders and support staff in our markets. We anticipate future investment in branches, lenders, and increasing marketing costs as we move to take market share in Delaware and southeastern Pennsylvania. Given our marketplace dynamics, again, this is literally an every 100-year opportunity, it is an opportune time to invest for the future. Our financial results for 2011 will likely follow an uneven path, because of the ramp rate on our market opportunity investments and a still sluggish economy; however in total, we believe 2011 will be very successful in terms of building long-term franchise and shareholder value. Thank you for your attention and at this time, we'll take your questions.

(Operator Instructions). Our first question comes from Michael Sarcone of Sandler O'Neill. Your line is open.

Hi, good afternoon, guys.

Good afternoon, Mike.

My first question was just on the NIM compression. Do you expect that lower MBS yields will continue to weigh on the margin?

Yes. This is Steve. Mortgage-backeds have come down. We expect a decrease in those yields to decelerate. We are now reinvesting still a little bit below those rates but the cash flows aren't coming at us as quickly, and the amount we're investing below it is nowhere near as much as it was below in the past, so I'd expect a little bit further downward pressure and stabilization.

Okay, and then on the operating expenses, is the $31 million a good run rate for the near term?

Well I'd expect there will still be some additional investments, particularly in marketing dollars through the course of this year, increased from levels we saw in the first quarter, but overall, I'd expect that our efficiency ratio is going to trend down from this quarter and finish the year in the low 60s.

Okay, and on capital priorities as it relates to TARP, can you comment on that?

Yes, I'll comment on that, Mike. This is Mark Turner again. Despite some recent political positioning, we continue to think that the small business lending fund is at a very attractive capital for us. Assuming that program goes through as it currently is written, it would reduce restrictions on us and we would enter at a lower cost than we're currently paying for TARP, and provide further incentives to reduce that cost, and those incentives actually align with the growth that we're seeing, and the growth opportunities that we have, and that is lending to small and medium-size businesses and that's happening in our market because of the market share opportunities. We haven't seen all the details or fine print so we can't say definitively whether we would participate but we continue to wait for that program to be rolled out by Treasury.

Okay, great. Thanks guys.

Thank you.

Thank you. Our next question comes from Andrew Stapp of B. Riley & Company. Your line is open.

Hi, guys.

Hi, Andy.

Your growth in average loans was strong as 3.5% but on an end-of-period basis they were relatively flat. Could you talk about this and do you still think, are you still looking for double-digit loan growth for the year?

I'll have Rodger answer that, Andy.

Hi, Andy. Yes, we still believe that double-digit overall loan growth is where we're going to end up the year. I would say that some of that will be impacted by things, as we continue to work down the construction portfolio, but based on our current run rate, we think that is achievable.

And Andy, some additional color to that, the first quarter of the year is traditionally slower, and also given the campaign that we're involved in, which is a market share taking campaign, and the situation that's unfolding, we would expect the momentum to continue to build over the course of the year.

Okay, and could you talk about your pipeline for hiring new talent?

It's Rodger again. We did hire two new managers this quarter and we're still talking to other people but I'm also pleased to say we've added significant other talent to our team as well. Two people are on cash management area, two people in our small business origination area so we see lots of opportunities to add talent and we continue to be open to adding others, as they become available.

Okay, and what are you expecting in terms of the FDIC assessment this quarter?

Yes, Andy, I don't have any reason to see that coming down. We are growing deposits aggressively. I know there are changes that are going to be working their way through with the way the FDIC is charging and we'll be impacted on that as and when that happens.

Okay, I'll hop back into the queue.

All right, thanks.

Thank you.

Our next question comes from Stephen Moss of Janney Montgomery. Your line is open.

Good afternoon, guys.

Hi, Steve.

Wanted to touch base on the following up on deposits here. Good non-interest bearing deposit growth this quarter. Just wondering is that more consumer or commercial driven?

This is Rick Wright. I would say that's pretty much across-the-board. One thing I would say is that the $71 million in growth that we're recording is a little bit misleading, in the sense that if you account for some of the seasonal fluctuations and one-time draws, our growth was really about $180 million, of which about half of that was this savings promotion that we talked about, and the other half was core business growth, so it was a very strong quarter across-the-board on deposit growth.

Okay, and then Rodger, with regard to the loan pipeline and the activities you're seeing, where are you getting your most C&I growth, from what industries, I should say?

It's not any specific industry, Steve. It's across all of our C&I businesses, a fair amount in the service industries, some contracting, road infrastructure, those kinds of things, but it's a pretty broad distribution. No specific concentration.

Okay, pretty much all the rest of my questions have been answered. Thanks guys.

Thank you.

(Operator Instructions). We have a follow-up question from Andy Stapp of B. Riley & Company. Your line is open.

Yes, what's a good run rate for the effective tax rate going forward?

Yes, this is Steve Fowle again. We've traditionally been about 36% and I'd expect that for this year as well.

Okay, and do you have the interest reversals in Q1 and Q4?

For non-accruals?

Yes.

We don't have those at our fingertips, Andy, so--

It's fair to say they're higher in Q1?

Yes, it's slightly higher in Q1. Not significantly higher, but slightly higher.

Okay, and what's your outlook for deposit growth for the year?

Let me, on that last question, just clear up something that was potentially unclear earlier. When Steve commented on the securities, the yield and the securities being stable to slightly down, that was not meant to imply the same thing would happen to margin. We actually expect margin to bounce back into the low [three sixes] next quarter, primarily because of our ability to manage down funding costs, both wholesale and retail funding costs. Hopefully that will make that point clearer, and I'm sorry, Andy, could you ask that question again?

Yes, just wanted some color on the outlook for deposit growth for the year.

Okay. Rick?

Yes, this is Rick again. I would say that it's going to be strong. To put a specific number on it would be tough, but I would tell you that we just added two new branches. One was a big remodel, and another brand new branch. We have three new branches coming up in the next 45 days, and we have another one or two later on this year, so between that, all the efforts we have in Pennsylvania and Delaware, we're expecting it to be strong the rest of the year.

And on your question about the non-accruals I don't have that split out but non-accruals in similar accounting adjustments to margin impacted the first quarter by about $245,000 and the fourth quarter by about $130,000.

Okay, and how did CB&T's revenue compare to Q4 on a full quarter basis?

It was stronger. Actually, I'm going to take that back. December was a particularly strong month for Christiana. It's just the nature of their business. A lot of business gets done in December, so it's really not a fair comparison. I will say that overall to the gist of your question, their pipeline is strong and increasing.

Okay, and last question--

April tends to be a strong month too, because of tax work.

Okay. And is your Q1 professional fees a good run rate? I know you had some noise last year with your efficiency study.

Yes, I'd expect that's as good as any, that again that tends to be lumpy depending on when we do projects, and when we have needs, particularly in the technology side to bring in people to implement projects, but I think that's as good a rate as any.

Okay, all right. Thanks.

Thank you.

Thank you. (Operator Instructions). We have a follow-up question from Michael Sarcone of Sandler O'Neill. Your line is open.

Hi guys. This question is for Rick. Rick, can you give us your outlook for mortgage banking and loan fee income?

Overall?

Overall.

Well on the mortgage banking side, its been very strong where there's still a pipeline on that side, but it is clearly slowing a bit in terms of the refinancing activity, so I mean, my best estimate is that it's going to sort of level out at this point. In general, on fee income, we've talked about Reg E before. We're still running at about the same level, about a $200,000 a month difference versus pre-reg E; however, a lot of our other service charges are offsetting that at this point, some of the other service charges on deposits. We've also put in place a couple of increased or new charges that are taking place either in May or in June that we expect to offset much of the rest. We are still looking at the restructure of the product line which will probably have a significant impact, but that probably won't happen until late Summer or early Fall at this point.

And we continue to see benefit too just by growth in the number of customers from the market share gains.

Okay, thank you.

You're welcome.

Our next question comes from Eileen Lipsky of Sandler O'Neill. Your line is open.

Hi, good afternoon. You mentioned the FBLS as an option to replace TARP. Can you just talk about whether or not you'd be interested in more capital than the TARP that's currently outstanding and based on the current rules what your expected dividend rate would be under the FBLS?

Yes, the expected dividend rate, given the calculation that we've done internally would be about 3% with an opportunity to go down from there. With respect to the amount, we currently have $53 million in TARP outstanding. We've been thinking about an amount of about $75 million and that would be still under 3% of risk weighted assets but given the cheapness of that capital and given the opportunities we have to put it to use, for exactly the reasons that the program is out there, to lend to small and medium size businesses we think it's the right economic trade.

Understood, thank you very much.

Thank you.

Thank you. I'm showing no further questions in the queue at this time.

Okay, well thank you all very much. We appreciate again your time and attention. As always, we are available for follow-up questions and we expect to be on the road a couple times between now and next quarter when we talk to you again, so hopefully we'll see you then. Have a good weekend.

Thank you. Ladies and gentlemen, this concludes the conference for today. You may all disconnect and have a wonderful day.