WSFS Financial Corporation
Q4 2012 Earnings Call Transcript

Published: 1 Feb 2013

[Operator:]

Good day, ladies and gentlemen, and welcome to the WSFS Financial Corporation’s Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. And later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this call is being recorded. Joining us on the call today is Mark Turner, President and CEO; Stephen Fowle, Chief Financial Officer; Rodger Levenson, Director of Commercial Banking; Richard Wright, Director of Marketing and Retail Banking; and Paul Geraghty, Chief Wealth Officer. I’d now like to turn it over to our host, Steve Fowle.

[Stephen A. Fowle:]

Thank you, Daphne, and thanks to all of you for taking the time to participate on this call. Before Mark begins with his opening remarks, I would like to read our Safe Harbor statement. Our discussion today will include information about our management’s view of our future expectation, plans and prospects that constitute forward-looking statements. Actual results may differ materially from historical results, or those indicated by these forward-looking statements due to risks and uncertainties including but not limited to, the risks factors included in our Annual Report on Form 10-K and our most recently Quarterly Reports on Form 10-Q as well as other documents we periodically file with the Securities and Exchange Commission. I now turn it over to Mark for his comments.

[Mark A. Turner:]

Thanks, Steve, and thanks everyone for your time and attention. We are pleased to have recorded net income in the fourth quarter of $7.6 million and earnings per share of $0.78, which was an increase of 23% over the same quarter in 2011. Further, earnings per share for the full year 2012 were $3.25, an increase of 43% over 2011. Highlights for the quarter included core revenues, that is revenues excluding security sales, over gains, another notable items in each quarter, which were up 10% annualized over the third quarter. This was driven by both increased net interest income and robust growth in fee income. Net interest income improved as total loans increased 9% annualized, which over came a slight two basis point drop in our margin percentage. Core fee income was up 15%, driven by growth in our Wealth business, which had its best quarter in its history, and this was on top of trend and seasonal growth in Cash Connect revenues, and continued strong fees from our Retail and Commercial Banking businesses, primarily from market share gains. For example, in addition to loans being up 9% annualized, core deposits excluding some temporary trust deposits held over year-end increased 28% annualized in the fourth quarter. While this did include some seasonal municipal deposit in close, it also reflects strong fundamental growth in market share. And while we are growing valuable assets, funding in customers during the quarter, we also began implementing a strategy to reduce our less valuable assets and funding, thus improving the margin and ROA going forward and improving capital ratios for future franchise enhancing opportunities. To do this, very late in the fourth quarter, we repaid $125 million in order FHLB advances that were out of step with the funding rate environment. These advances had remaining terms at 11 to 22 months and had a weighted-average cost of 2.63%. The strategy was funded by reducing our mortgage-backed securities portfolio by a similar amount in December and into January 2013. The loss in the extinguish some of the advances – was covered by fourth quarter security sale gains, as we continue to proactively manage risk from MBS prepayments in this historically low rate environment. Credit quality also fundamentally improved as the ratio of classified assets to Tier 1 capital plus our allowance for loan losses dropped to less than 37%. That’s down from over 43% last quarter and a high of over 70% earlier in the cycle. And while delinquencies and NPAs picked up a bit in the quarter, this was due to one credit which we had already classified as a problem loan. Importantly, performing loan delinquencies remained at a very low 40 basis points. Therefore, due to positive overall trends in credit quality, the loan loss provision improved slightly to $3.7 million this quarter. Total credit costs were $6.1 million, which included the write-down of one larger OREO property to facilitative sale in the near-term. Expenses were also well managed. Excluding notable items like the FHLB prepayment costs and a change in accounting at Cash Connect going from net to gross on certain pass-through service fees, expenses were up $711,000, or 2% in the quarter, due to normal fluctuations and things like OREO costs mentioned earlier, professional fees and marketing costs offset by ongoing expense management in other areas. To conclude, we continue to see good market share opportunities. And with our significant credit cleanup in 2012, our recent proactive measures to improve the margin, our growing fee income businesses, prudent expense management and our momentum which were all driven by market leading scores and associate and customer engagement, we believe we’re very well positioned for success in 2013. Thanks again for you time and attention. And at this time, we’ll take questions.

[Operator:]

(Operator Instructions) Our first question comes from Frank Schiraldi with Sandler O’Neill. Your line is open.

[Frank Schiraldi:]

Mark, good afternoon, actually. How are you doing?

[Mark A. Turner:]

Good, Frank, how are you?

[Frank Schiraldi:]

Good, thank you. Couple of questions; first, just wanted to see if you can give a little bit of color on the tremendous deposit growth. I think even when you take out the seasonal growth that you highlighted in the release deposit growth – the core deposit growth was still 7% linked-quarter, or maybe you could just talk a little bit about that and is it attrition you are starting to see come out of some other places in the footprint, and if so, have you seen that ramp up recently, and then what are your thoughts going forward?

[Mark A. Turner:]

Well, we have as mentioned in the release, there is some municipal deposit flow that was up, that’s sort of a seasonal thing in the fourth quarter. However, the lines of business for Commercial and Retail side of the business still have some fairly strong base core growth.

[Stephen A. Fowle:]

And so, Frank, what I would say is, it’s across the Board at both commercial and retail, we continue to take customers in our marketplace. And on the municipal side, we had a strong emphasis in the last couple of years and cash management and we picked up a number of local municipalities within our market area and they have been funding accounts over the course of the last couple of years.

[Frank Schiraldi:]

Okay, great. And then credit, I wondered if, in the past you’ve given some guidance on expected credit cards in future quarters, now I wondered if you are prepared to do that, or how you saw provisioning and credit costs going forward?

[Rodger Levenson:]

Yeah, Frank, it’s Rodger. I would generally say that our expectations were that our asset quality stats will stabilize at around the current levels during 2013 with the potential for some modest improvement depending upon the path of the economy. So when we look at things, we’re expecting total credit costs to improve to approximately $4 million, plus or minus per quarter. That’s the trend line obviously for the year and individual quarters could be lumpy depending upon, circumstances and certainly, it also was highly dependent upon what happens in the economy.

[Frank Schiraldi:]

Okay, great. Okay and then finally just I just wanted to ask a question – as we look out at 2013, your thoughts generally on the margin, I would think, we’re going to – as we’re seeing industrywide continued compression here? I’m just wondering if you believe we can hold the margin near current levels, or what are your thoughts looking forward to this year?

[Stephen A. Fowle:]

Yeah. Hi, this is Steve, Frank. For this coming quarter, we’d anticipate a mid single-digit type lift in our margin, helped by the execution of the advanced prepayment and mortgage-backed securities deleverage that we talked about earlier. And despite margin pressure that’s faced by the industry in general, we see additional upside opportunity for the remainder of the year as our balance sheet mix improves and as other tactics aimed at improving margin gains with traction. Additionally, if you look at our mortgage-backed portfolio, the reinvestment rates are near current portfolio yields. So we expect downward pressure from security should be decreased. So that’s why we see the trends and opportunity that we do. And that does not include any list we would get from repaying the preferred shares, not in the margin…

[Frank Schiraldi:]

Okay, great.

[Mark A. Turner:]

Not in the margin, but in overall bottom line.

[Frank Schiraldi:]

And I guess just as you bring it up Mark, is there any update there on the redemption of those shares?

[Mark A. Turner:]

Yeah, thanks, and I set myself up to that one, didn’t I? We continue to have ongoing dialogue with our regulators. And I’d mention at this point that having been with the OCC for a couple of exams now, couple of four exams, couple of interim exams, I believe we’re very tightly aligned with their expectations. They’re obviously being very deliberate at this point in the cycle. But we would hope and certainly expect that by the reset date in January 14, we have something positive to report there.

[Frank Schiraldi:]

Okay, great. Thank you very much.

[Operator:]

Our next question comes from the line of Catherine Mealor with Keefe Bruyette & Woods. Your line is open.

[Catherine Mealor:]

Good afternoon, everyone.

[Mark A. Turner:]

Good afternoon, Catherine.

[Catherine Mealor:]

On the expense side, I know a few quarters ago you all announced about $4 million in expense savings that you expected to come through over the next couple of quarters. How much of that have we now seen in this quarter’s run rate? And could we maybe see a little bit more coming through in the first half of 2013? Thanks.

[Stephen A. Fowle:]

Yeah, hi, Catherine, it’s Steve.

[Catherine Mealor:]

Hi, Steve.

[Stephen A. Fowle:]

Yeah, hi. In terms of that an issue that we undertook, more than three quarters of it had already been implemented through the end of the year. So there will be very little additional that will be implemented at the beginning of this coming year. So as you look at it, I think you would expect to see most of the impact in the run rate. That said, if you look at the fourth quarter numbers, I remember fourth quarter shows some seasonable increases from the third quarter levels, for expenses in general. Mark referred to these fluctuations in his comments. So as you look at this quarter, in comparison it shows the seasonality. As an example, we saw about $600,000 increase from a typically low third quarter levels in marketing and professional fees. And remember, this quarter we also were impacted by a shift, it’s about a $0.5 million of credit costs into expensed line items. And again, we talked about in the past that those numbers can be uneven both in amount and geography in the income statement.

[Catherine Mealor:]

Okay, that’s very helpful. Thank you.

[Mark A. Turner:]

Thank you.

[Operator:]

(Operator Instruction) Our next question comes from the line of Jason O’Donnell with Merion Capital Group. Your line is open.

[Jason O’Donnell:]

Good afternoon.

[Mark A. Turner:]

Good afternoon, Jason.

[Jason O’Donnell:]

In looking at your average balance sheet for the quarter versus last quarter, it looks like the average yield on the CRE increased 13 basis points. That’s a little surprising to us given, the pricing environment. Do you have any thoughts around kind of what drove the pickup there, and are there any commercial loan prepayment penalties in there that’s [free] house and that are impacting the trend?

[Rodger Levenson:]

Jason, it’s Rodger. There’s a little bit of a lift from that. But there’s also a little bit of lift as we’ve gotten rid of some problem assets in that portfolio. And we have seen some reasonable price due business come on, as we saw there was a little bit of lift in that category during the quarter. So it’s kind of a mixture of a bunch of things.

[Stephen A. Fowle:]

A full of our cards on that Rodger’s point about prepayment, we had a – what had been a previously problem loan that was part of our acquisition that paid off during the quarter. So there was some additional acquisition discount that was brought into our margin in that line item.

[Mark A. Turner:]

The only thing I’d add to that is that, Steve’s comments earlier about margin expectations would have included knowledge of that.

[Jason O’Donnell:]

Okay, great. That makes sense. And then just on the $12 million commercial relationship that migrated to non-accrual this quarter, I’m wondering sort of specifically, how much of the provision expense of $3.7 million here this quarter is tied to that credit?

[Rodger Levenson:]

Yeah, Jason, it’s Rodger, again. So as a rule, we just don’t get into specifics talking about specific credits or their impact on our stats. So I’d prefer just to leave it at that.

[Jason O’Donnell:]

Okay. So putting aside specifics, I guess I’m just sort of wondering, is it a safe assumption that your provision expense run rate would ease kind of near-term assuming that there is no sort of additional large non-recurring sort of commercial relationships that sour during the first quarter?

[Rodger Levenson:]

Yeah, it’s very consistent with what I said to a prior question. We envision our run rate to be approximately $4 million on total credit costs, that’s provision and other credit costs, plus or minus per quarter for 2013.

[Stephen A. Fowle:]

And that would be down from about $6 million this quarter, but obviously lots of moving parts in there.

[Jason O’Donnell:]

Okay, great. And then just one final question and I apologize if I missed this. But what’s the expected impact in the first quarter of the restructuring that was wrapped up in January in terms of realized securities gains in prepayment penalties?

[Mark A. Turner:]

No more prepayment penalties. Probably for the last six quarters or so, we have been managing our securities portfolio very tightly around prepayment risks and given where rates have been, we’ve had lots of – and what the Fed is doing in terms of their balance sheet and buying, there have been lots of embedded gains there. So we would expect in the first quarter to take some gains as well, but certainly down significantly from what we’ve been doing in previous quarters.

[Jason O’Donnell:]

Okay, perfect. Thanks a lot.

[Operator:]

I’m showing no other questions. I’d like to turn it over to Mark Turner for any closing statements.

[Mark A. Turner:]

Again, I’d like to thank everybody for the time and attention. We are very pleased with the results of the quarter and the results of the year and I think just to emphasize, accomplished a lot of great things in 2012, significant credit clean up as well as repositioning the balance sheet for the current rate environment helping stabilize the margin. Cutting expenses and as we’ve seen momentum as we enter 2013 in terms of market share, so we believe we’ve set ourselves up and are well positioned for a successful 2013. Thanks everybody, have a great weekend and look forward to seeing you in the near future.

[Operator:]

Ladies and gentlemen, thus concludes your conference. You all may disconnect and have a good day.