WSFS Financial Corporation
Q2 2013 Earnings Call Transcript

Published: 26 Jul 2013

[Operator:]

Good day, ladies and gentlemen, and welcome to the WSFS Financial Corporation’s Second 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 be given at that time. (Operator Instructions) As a reminder, today’s program is being recorded. I would now like to introduce your host for today’s program Mr. Steve Fowle, Chief Financial Officer. Please go ahead.

[Steve Fowle:]

Thank you, Jonathan and thanks to all of you for taking the time to participate on this call. With me today participating are Mark Turner, President and CEO; Paul Geraghty, Chief Wealth Officer; Rodger Levenson, Chief Commercial Banking Officer; and Rick Wright, Chief Retail Banking Officer. 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 expectations, 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 recent Quarterly Reports on Form 10-Q as well as other documents we periodically file with the Securities and Exchange Commission. With that statement right now I am going to turn the presentation over to Mark Turner.

[Mark Turner:]

Thanks, Steve, and thanks to everyone for being on the call. We are pleased to report earnings in the second quarter of 2013 of $10.9 million or $1.16 a share. Earnings per share for the quarter and for the year-to-date improved over 50% from the same periods last year and this quarter’s earnings per share represent the best for the company since the first quarter of 2008. Further, return on assets reached an important benchmark of 1.0% and return on tangible common equity reached a healthy 12.2%. Improvements were achieved almost across the board in all business segments and major line items. Total credit cost including provision workout and other credit costs were $2.4 million, essentially flat with last quarter and meaningfully lower than our previous expectations driven by a broad improvement in credit quality. Charge-offs, non-performing assets, non-performing loans, delinquencies, classified and criticized assets all improved. This is the second quarter in a row where total credit costs have come in well below our previous expectations. Moreover, the second quarter is important quarter because annual and attested financial statements come in from many of our commercial clients which give us an objective view on a condition and prospect of our customers. Because of the borrower factors and a slowly but steadily improving global economy where credit cost not only beyond even, we expect total credit loss in the second half of 2013 to come in below our previous guidance and to remain around the level seen in the first half of 2013. More importantly, total core revenue which excludes securities gains and any impact from accounting changes was up 20% on an annualized basis over the first quarter 2013. This too came in almost all business segments and major line items. We expected a seasonal balance from the slower first quarter because of the fewer number of days and generally speaking slower spending in commerce associated with the mid-winter months of the first quarter. However, even factoring for seasonality, our business segment showed good fundamental year-over-year growth this quarter including core fee income which grew 12% year-over-year and now represents a robust 37% of total revenue, providing good strength and diversity to our revenue engine. Now, I would like to dive down a bit and give a view into each of our major business segments. In our primary business of community banking, net interest income was up 6% annualized during the first quarter of 2013, driven by a four basis point greater net interest margin percentage and healthy loan growth. The net interest margin and net interest income were positively affected by earning asset growth and improved mix of earnings assets, pricing discussions in the deposit base especially time deposits and the balance sheet repositioning we undertook in late 2012 into early 2013. Based on trends leaving the quarter and other visible data, we expect our margin percentage for the next couple of quarters to be flat to up a couple of basis points. And while overall deposits balances were down reflecting occasional volatility in trust and commercial accounts as well as letting higher cost time deposits runoffs, core deposits now represent 81% of total deposits and demand deposits are half of core deposits. As a result, deposit service charges were up for the first quarter because of this growth and the seasonable balance. Importantly, loan balances were up 8% annualized reflecting a strong 10% annualized growth in commercial lending primarily commercial real estate coming from good market share gains. Including the slower first quarter, we still expect mid-single digit total loan growth for the full year 2013, led again by commercial loans. In Cash Connect or ATM servicing division, core net revenues were up significantly, reflecting seasonal activity, new customers and new product offerings to existing customers. Backing up the recent accounting change to Cash Connect we’ve discussed in the past, which inflates both revenues and expenses by a like amount, real net revenues were up 10% over the second quarter 2012. The Wealth Management segment continues to show excellent growth as produciary revenues were up 36% annualized from the first quarter and 18% from prior year levels. Again, reflecting a seasonal bump as well as fundamental growth in this business in both personal and corporate trust accounts. On top of the strong revenue growth, expense were managed prudently and ex to Cash Connect accounting change were fundamentally flat over this quarter of last year, as we continue to benefit from improved credit costs, lower regulatory related costs, as we optimize the strategic investments made over this last cycle as we promised. Now taking a backup to the whole company view, as a result of the significant revenue growth and the low expense growth, operating leverage accelerated in the quarter. Pre-provision net revenue, excluding securities gains, was up 49% annualized from the first quarter of 2013 and up 19% from this time last year. Again, demonstrating both the seasonality bump and the fundamental momentum achieved over the past year. These strong results reflect our execution on continuing market opportunities, investments made over the cycle, and most importantly, our differentiating brand and business model. Our business model stresses being a great place to work involved in the community, developing engaged associates, providing stellar service to our customers and growing customers (advocates). All of which have won numerous awards in recent years. These are important because they are the leading indicators of our success. And as expected, they are also showing up in our financial performance. Because the local economy is showing improvement, and because our leading indicators are good and reflect years of foundation, hard work and discipline, we believe we are poised for continued growth in the second half of 2013. Finally, another indicator of our very good position, we are also pleased to report that we received a regulatory okay to retire our former TARP preferred securities and to retire them from available cash on hand. We repurchased 20 million as essentially par late in the second quarter in the open market, and expect to redeem the remaining 32.6 million at par by the end of August, using our cash at the holding company. On a pro-forma basis, redemption of this excess capital will improve earnings per share by about $0.30 per year, which will kick-in in full in the fourth quarter 2013. Thank you. And at this time, we’d be happy to take questions.

[Operator:]

(Operator Instructions). Our first question comes from the line of Frank Schiraldi from Sandler O’Neill. Your question please?

[Frank Schiraldi:]

You talked about in the past the potential for replacing TARP with some lower cost preferred just because of the, some of the growth opportunities you’re seeing. Is that something that you’ve talked about, started upon, is that something we might see when you redeem the remainder of the TARP?

[Stephen Fowle:]

Thanks Frank, good question. We did a deep evaluation of that literally in the last month to six weeks and came to the conclusion that, that kind of swapping of TARP for something else was impractical just based on the legalities and technicalities of doing that. And also looking at frankly the coupons that might be available to us that the rate wouldn’t be, and the cost and factoring the cost of doing that but the coupon wouldn’t be a whole lot different than the 9% that this TARP would ratchet up to come February of next year. So at the end of the day, that was too costly for us as capital and just kind of un-wielding and impractical to do. So we shelved that idea in favor of redeeming this capital, which we believe is excess. That would, if we were to do something like that, that would have been frankly just overly dry-powder and not for any specific purpose in the near term.

[Frank Schiraldi:]

Got you, okay. And then I just wanted to, sort of a general question on deposit service charges, they’re fairly strong in the quarter. And seasonally they are little weaker in 1Q. I’m just wondering if we might expect a bit of weakness going forward if customers what I’ve been hearing just more generally customers changing the way they are doing things and trying to minimize fees. Could you just maybe just talk a little bit about that Mark?

[Mark Turner:]

Yeah actually Rick Wright is right here, Rick is head of our Retail Banking division, so I will let Rick speak. Rick?

[Rick Wright:]

Yes, in the second quarter we were actually down about 82,000 versus last year based on some of the customer behavior that we have seen primarily foreign ATM withdrawals and decline in our non-customer check cashing fees. But we actually anticipate service charges growing, we introduced a new product line earlier in the year and we have yet to convert our grandfather products over that product line, and that product line will enhance balances and fee income going forward. And we expect that to occur late in the third quarter. So we'll get a little bit of lift in the third quarter and a lot more lift in the fourth quarter.

[Frank Schiraldi:]

And then just finally just wondered if you could remind us on your thoughts Mark on M&A opportunities versus organic opportunity, obviously the ladder seems to continue to be very strong here.

[Mark Turner:]

We have plenty of organic growth opportunities and are continuing to focus primarily on that, however we're as we mentioned in the past and would be open for small acquisition opportunities that were in market, contiguous, low risk, well priced and structured and immediately accretive, obviously that sounds like motherhood and apple pie. But given what we're seeing in marketplace and the chatter and what we've seen elsewhere, and conversation some direct, some indirect, we believe some of those opportunities will present themselves over the next couple of years, but I can't handicap whether any of those will come to fruition.

[Frank Schiraldi:]

When you say small, what sort of I guess size of your asset base do you mean when you say small?

[Mark Turner:]

Few 100 million.

[Operator:]

(Operator Instructions). Our next question comes from the line of Jason O’Donnell with Merion Capital Group. Your question please?

[Jason O’Donnell:]

Fee income was obviously a real source of strength this quarter with respect to the 700,000 linked to quarter increase and other income. What was the driver there? And are there any non-recurring items in that line item we should be thinking about?

[Stephen Fowle:]

Again Mark talked a little earlier about seasonality and seasonality absolutely plays into the fee income line item. First quarter being the weakest quarter for us and second quarter and third quarter typically being about on par with each other and strongest of the two quarters. That said really across all of our business lines we did have strong growth in fee income weather it's the banking segment with the strong improvement in mortgage banking or our Cash Connect division which is our ATM division or our wealth business. Cash Connect itself saw a number of wins this quarter, Mark talked about growth in that business that added a fee income, and next quarter should be a little quieter in terms of growth. But we continue to expect high single digit growth in that business longer term. And let me Paul and Rick both to comment specifically on their businesses. Paul?

[Paul Geraghty:]

We've seen real strength in the personal trust area coming off the business that we booked right at the end of the year and recognized the revenue from that throughout the year. And the real estate improvement through our capital market activity has really been a source of strength in the second quarter of this year on the institutional trust side. And the rebound in market values with respect to our investment management area has also propelled our growth. So we feel good about the quarter and we feel good about their continuing trend through the end of the year.

[Rick Wright:]

With regard to mortgage banking, we had a big quarter. The big quarter was due to some of the incoming volume that we had, but we did push through some of the business that was sort of backlogging some of our investors. And while we see that refi's are clearly slowing, we would expect to see some of the purchase activity increase; the percentages is gaining significantly for us and if we were trying to handicap the coming quarters, we probably say it would be down to 700,000 to 900,000 in the quarter.

[Stephen Fowle:]

And just to follow up, this is Stephen Fowle again. Specifically with regard which may have been part of your question the other income line item the fee income that was up strongly, part of that had to do with the accounting change, but a lot of that had to with the accounting change, but a lot of that had to do with general Cash Connect business like insurance revenue and career income. And we also had some benefits really in a couple other smaller line items reflecting part of that growth.

[Jason O’Donnell:]

And then just one follow up, looks like on the loan loss provision expense line came in below what we're projecting due to some additional reserve release activity. How should we be thinking about the reserves, the loans ratio trend for next few quarters?

[Rodger Levenson:]

This is Rodger, generally I would say in line with the comments that Mark made we expect the second half to look similar to the first half so I would expect that charge offs would be somewhere close to provision for the back half of the year and that ratio should stay pretty close to the range that it's at right now.

[Operator:]

Our next question comes from the line of David Peppard from Janney, your question please.

[David Peppard:]

I just wanted to speak a little bit towards the loan yields, they are yet loan growth in quarter and the yields higher particularly in the CRE bucket, could you speak a little bit about how that happens and also make it comfortable with the risk profile, the CRE loans that you got this quarter.

[Rodger Levenson:]

Hi David, it's Rodger; I'll speak to the activity in the quarter and let Steve touch base, just a little color on why there was some impact on the yield that took it up a basis point or two. So we did have a very nice quarter in commercial real estate space, it was a wide variety of projects, it was our footprint, I would tell you that these projects have a very strong credit profile and in fact the new business that we're booking has anywhere from I'd call it a low to a mid-four kind of coupon on it for the fixed rate stuff and we're not going at expect in very limited circumstances beyond a seven year term and getting comparable spreads and when we do floating rates and have our customers into an interest rate swap. Because of the interest rate environment and a lot of liquidity out there the real estate space is seeing some assets change hands, re-price, maturing loans in other institutions and it's giving us some very nice opportunities. And terms of some accounting behind the loan yields, if you look at the comparison to the first quarter, normalizing some accounting adjustments, the yield would have been essentially flat quarter to quarter, we talked last quarter about having depressed loan yields due to acquisition, discount accretion, expectations, actually turning out lower than we expected, we got some of that back this quarter, we also had a couple of basis points in the improvement that was related to prepayment penalties that were taken into income, as we collected prepayment penalties during the quarter.

[David Peppard:]

So what will be your expectations for loan yields over the next couple of quarters then overall?

[Rodger Levenson:]

Right so we had some stability this quarter, the general trend for us in the industry has been down, it's been down very gradually for us because most of our loans our adjustable rate loans so we're taking less pressure on loan yields than I think the typical industry player would be, and Dave all of those would have been factored into my earlier comment that based on where we exited the quarter and what we see we expect the margin to be flat, perhaps up a couple basis points in the back half of the year.

[Operator:]

Thank you, this does conclude the question and answer session of today's program, I'd like to hand the program back to Mark Turner for any further remarks.

[Mark Turner:]

Yes thanks again all for your time, attention and questions, we hope to see many of you in New York next week when we present an investor conference there. We do have an updated investor presentation deck and that will be posted on Monday to our website and I think there will be some helpful information in there as well so encourage you all to take a look at that. Have a great weekend.

[Operator:]

Thank you ladies and gentlemen for your participation in today's conference this does conclude the program, you may now disconnect, good day.