WSFS Financial Corporation
Q3 2014 Earnings Call Transcript

Published: 31 Oct 2014

[Operator:]

Good day, ladies and gentlemen. Thank you for standing by. And welcome to the WSFS Financial Corporation Third Quarter 2014 Earnings 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 call is being recorded. I’d now like to turn the conference to our host, Mr. Stephen Fowle, Chief Financial Officer. Sir, you may begin.

[Stephen Fowle:]

Thank you, Eric. And thank you all for taking the time to participate on this call with us. With me today on the call, Mark Turner, our 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 risk 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. With that statement having been read, I will turn the call over to Mark Turner.

[Mark Turner:]

Thanks, Steve, and thanks everyone on the call for your time and attention. We just reported net income of $11.4 million or $1.23 per share in the third quarter 2014. Excluding securities gains and excluding notable expenses for expected merger costs and ongoing litigation costs, and a small amount for fraud-related costs, which was largely from breaches occurring at local and national retailers, net income would have been $13.8 million or $1.48 per share. As our company has grown and diversified substantially over recent years, there can be a meaningful amount of seasonality in our results, especially our fee-based businesses. So the most comparable quarter would be the same quarter last year. Last year we reported a $1.54 in earnings per share in this quarter, which included securities gains and one-time gain on the consolidation of a reverse mortgage securitization. Excluding these items, EPS would have been a $1.26 per share this quarter last year. So factoring in our most renewal in each quarter, we continue to show a strong double-digit growth trend in both sustainable earnings per share and return on assets. I will speak more to our return on assets trend and our strategic plan targets later. Other highlights for this quarter and some forward-looking expectations include, we successfully closed the FNB Wyoming merger transaction on September 5th, adding many new good customers and a couple hundred million in valuable loans and deposits on day one. The transaction had a de minimis impact on tangible book value per share. And we continue to expect strong earnings per share accretion given the price pay and the synergies available to us in this end market deal. We increase core revenues after factoring out securities gains and one times gains at a 10% rate year-over-year. This was on the back of net interest income that grew 10% and a margin that grew by 12 basis points over this time last year. And even without one-time fee accretions, margin dollars and margin percentage grew solidly. Revenue growth also came on the strength of core fee income that rose 9% over last year. Our cash connect ATM division, wealth division and our Array and Arrow mortgage and title units continue to perform very nicely and provide strong return for us despite ongoing investments to support the robust sales growth on the upfront cost, with the introduction of new products and services. We organically increased deposits 3% in this quarter. That excludes the core deposits and most of this growth was in core or non-CD deposits, including typical, seasonal municipal fundings. And while loan balances erupt from the acquisition, organic loan growth was a challenge for us this quarter. This was a result of a large payoff on a continuing relationship mentioned on this call last quarter, some large payoffs and paydown of problem loans which of course is a good thing and a seasonally slow summer loan origination period. Our commercial loan pipeline did not start building again strongly until after Labor Day. I'm pleased to let you know that the loan pipeline is now back to previous high levels at over $125 million in expected closings in the next 90 days. We therefore believe we will return to achieving our long-term expectations having mid-to-high single-digit annual organic loan growth. And credit quality continues to improve with non-performing assets and classified asset down. Non-performing assets now represent less than 1% of assets, a level not seen since before the financial crisis in 2008. Moreover about one third of the items included is NPAs are loans which are regularly paying and are accruing and classifies TDRs. Delinquency was up as a result of one relationship that is in highly seasonal business that has shown the same delinquency pattern in the past and is well secured. Absent that one relationship which of course we're managing closely, delinquencies improved as well. Reflecting our better credit quality, total credit costs, which include provision, OREO and workout costs were less than $1 million this quarter. We would expect total credit costs to be in the $2 million range next quarter, but as we witnessed this year in a positive way, credit costs can be uneven from quarter four. As mentioned merger, integration, litigation and cost from retailers were heavy in the quarter. We expect these costs will be much later in the fourth quarter and beyond. Finally, our earnings and capital continue to grow and to flexibly manage our capital, improve our return on equity and return even more value to owners, in mid-September we announced a 25% increase to our cash dividend and a 5% share repurchase authorization. The share repurchase authorization is full and open and we come out of our traditional earnings blackout period in a few days. I will end my comments with the following four context of recent history this quarter and our near-term return prospects as we see them today. As many of you know and as we publish quarterly in our investor presentations, in 2012 and coming out of the hardest part of the cycle and a period of intense investment in our franchise we established a three-year strategic plan. This included our goals and a path to sustainably high performing status which we defined as the type of business we do and the risk we take achieving at least a 1.20 ROA exiting 2015. Beginning that plan we reported 91 basis points in ROA in the first quarter of 2013, but we more normalized that to 70 basis points once we took out securities gains and adjusted credit costs higher to our longer-term expectations. Last quarter halfway into the plan, we reported an ROA of 1.12%, but similarly normalize that to a more sustainable ROA of 1.03%. This quarter we reported an ROA of 99 basis points, but after normalizing credit costs to our expected long-term rate and backing a large notable cost, we believe our more sustainable ROA this quarter to be 1.07%. So seven quarters into our 12 quarter plan, at 1.07% we are slightly ahead of plan for our goal. We expect the fourth quarter show some boost to this normalized ROA metric as we get a full quarter’s benefit from the recently closed merger and the fourth quarter is typically seasonally stronger. We understand the last basis points are the hardest to achieve in any goal. However, we have good momentum in pipelines in our businesses and with local economy strengthening a bit, our prominent position in our markets and our award-winning associates and service. We're very focused on achieving our strategic plan and goals. Thank you. And at this time, we would be happy to take your questions.

[Operator:]

(Operator Instructions) And our first question comes from Catherine Mealor from KBW. Please go ahead.

[Catherine Mealor:]

Good afternoon, everyone.

[Mark Turner:]

Hi, Catherine.

[Catherine Mealor:]

Wondering if you could talk about the margin first. If we back out the four bps of impact on the prepayment fees you mentioned in our press release, which came out to 369 level. And so from there, how should we think about the margin? Do you still believe there is an upward bias to the margin with your balance sheet niche strategy?

[Steve Fowle:]

Yeah. Thanks Catherine and this is Steve. You are right. In terms of how you are looking at the margin and a more normalized number being in the high 360s. Over the past quarter, we continued to position our balance sheet to become more asset sensitive. And I believe that may cause our upward momentum in margin. So that as we move through the end of the year, you will probably see our margin holdings steady at about where it is. And longer term, we will be giving some more guidance. But again, we will be continuing our focus on strengthening our balance sheet towards better yielding assets and more stable core funding. I do want to say though that I do expect increased margin volatility, due to both our reverse mortgage assets and the acquired loan portfolio.

[Catherine Mealor:]

Okay. And remind us any plans for further reductions in borrowings moving forward?

[Steve Fowle:]

So, Catherine, could you say that again? There was a little stag at the beginning of your question.

[Catherine Mealor:]

Just hoping if you can remind us of any plans for further reductions in borrowings? Looks like you -- those FHLB came down this quarter.

[Mark Turner:]

No. I think that was a result of just normal business volatility on closing of the acquisition, the seasonal municipal funding coming in. So there's no plan for reduction in additional borrowings.

[Catherine Mealor:]

Okay. And then one last question on cost savings regarding the FNB Wyoming deal. Can you remind us on the timing of how you plan for these cost savings to come through earnings over the next couple of quarters?

[Mark Turner:]

Yeah. I’d anticipate most of the cost savings we are getting pretty much right out of the gate. We closed branches, as we actually did the acquisition and very quickly right size the balance sheets and took lower yielding more liquid securities that were necessary on our balance sheet out. And the associate changes went along with that. So, I’ll expect most of those savings will be right out of the gate now. I’d say that with an asterisk because of course, we do have transaction-related expenses, we quantified those. For this quarter, we’d expect next quarter to still have transaction-related expenses running probably at about half of the level we saw this quarter.

[Catherine Mealor:]

Okay. Perfect. Thank you very much.

[Mark Turner:]

Thank you.

[Operator:]

Our next question comes from Jason O’Donnell of Merion Capital Group. Please go ahead.

[Jason O’Donnell:]

Good afternoon.

[Mark Turner:]

Good afternoon, Jason.

[Jason O’Donnell:]

With respect to your loan growth guidance, are you calling from mid-to-high single digit organic loan growth for the fourth quarter or is that for the full year of 2014?

[Rodger Levenson:]

Hi, Jason. It’s Rodger. That would be for the full year. Excuse me -- I’m sorry, for the fourth quarter annualized excluding the impact of FNBW. Sorry about that.

[Jason O’Donnell:]

No problem. So annualized fourth quarter growth organic. And then on the -- with respect to just kind of digging into the margin, the cost is little bit more. In terms of the average of loan yield, can you just tell us what the outlook there is for the average loan yield and excluding the impact of prepayment, kind of lease and number of days? Have you all seen greater pressure on the new loan pricing in recent years where pricing pressure remained unchanged?

[Steve Fowle:]

Jason, this is Steve. I will talk a little bit about big picture, what we are seeing and turn it over to Roger to talk about the competition and what we’re seeing there. Obviously, we disclosed some fee income we took through the margin this quarter and we do see some noise from quarter-to-quarter. When I look at the three peers we reported, our loans yields were normalized for some of those big volatility items, was pretty steady trending slide upward, downward only very slightly. And as we look at loans, the larger loans we put on the portfolio and the once that paid down and paid off during the quarter. They came in at about the same yield as what was paid down and paid off. So we’ve approached equilibrium on loan yield pricing. So, I’d expect that to be stable as we move forward x obviously the fee volatility.

[Jason O’Donnell:]

Mark, okay, great.

[Rodger Levenson:]

Yeah. This is Rodger, just to add to that. So I would expect, we are still seeing intense pressure from a pricing standpoint for commercial loans, fixed rate loans generally now five and seven years in and around 4% and variable rates can be below that. So we may see a commercial loan yields drift down just a little bit but as Steve said for the most part, what’s running off, we’re replacing it pretty close to those wells.

[Mark Turner:]

And so, what I’d add to that is I think where the competition is affecting us most is in volumes. So we would probably have stronger loan growth given our market opportunities than we are showing now. We’re not for the intense pricing pressure. Some of which we’re just willing to let those deals go as they don’t make long-term sense for us. So giving a little build up on volume to maintain the margin but still able to get as we said high -- high single digit loan growth, the absent little bit of volatility from quarter to quarter.

[Jason O’Donnell:]

Great. Makes sense. Thanks a lot guys.

[Mark Turner:]

Thank you.

[Operator:]

(Operator Instruction) And our next question comes from Frank Schiraldi from Sandler O’Neill. Please go ahead.

[Frank Schiraldi:]

Hi guys. Just - first, Mark I think you might have sort of answered this already in your -- at the end of your prepared remarks but you talked about the pipeline refilling. How much of that is a function of improving demand in the footprints or is it mostly continue to be a zero sum game where you’ve taken from other banks?

[Mark Turner:]

So I’ll let Rodger answer that question.

[Rodger Levenson:]

Yeah. I would say that majority of it, Frank, continues to be taking market share. We are seeing selected investments by existing customers but the majority of that pipeline is taking market share.

[Frank Schiraldi:]

Okay. And then just now that FNB is closed. If you could just talk about your appetite for further deals, is there plenty of opportunities or we’ve gone a bit forth here, it seems like there has been an uptick in pricing of deals more recently?

[Mark Turner:]

Yes. So I will say that there continues to be a lot of market activity and a number of either calls we get from other institutions or from investment bankers have certainly been one the increase. But actually I’ll put that -- put this to context as to how we approach these type of opportunities. So in the last seven years, we’ve done four small but meaningful and quickly accretive and high IRR end market acquisitions. We have looked at lot of things but turned down many, including me because they didn’t fit with our strategy. Many of that didn’t fit with our pricing discipline and some that frankly were just put in too hard column. So I would say, given our strategic and fiscal discipline as well as our desire not to be distracted from our significant organic growth curve that we’re on. We likely you'll see us being infrequent participants in M&A situation. But when we do I think that will be very compelling. And our focus has been and will continue to be primarily on negotiated situations versus participating in broad auction processes where frankly, you spend a lot of time and we find out we don't wind up winning. Because -- so there's always somebody in there that has a stronger currency than you or more synergy opportunities or just a bigger strategic appetite for growth that will bid it up to a point where it just doesn’t make sense for us. So infrequent but good participant as how I categorize our approach just given our discipline.

[Frank Schiraldi:]

Okay. In terms of geography there, would the focus be on the Southeastern Pennsylvania in terms of looking at potential deals to build out that part of the franchise?

[Mark Turner:]

So we always look certainly within our -- anything within our footprint or nearby adjacent footprint where we’re already doing commercial business, already our brand extends just because of a natural traffic patterns. And Southeastern Pennsylvania would be -- characterizes being strongly in that camp. Our brand is already up there. We have eight locations. It travels well up there and we’re already doing business, significant business on the commercial side up there as well and Array and Arrow and the wealth business that we’re doing up there. So that would be a natural extension for us. And one where we believe our brand and business model would play well. There is also a number of smaller banks up there, more so than what’s left in Delaware or Northeastern Maryland, which might be the other two places where both in and currently looking. So I think, just as a function of supply and demand as well as what fits with us, that would be where we’re looking on a more interested basis than other places.

[Frank Schiraldi:]

I appreciate the color. Thanks.

[Mark Turner:]

Thank you.

[Operator:]

And I’m showing no further questions at this time. ]

[Mark Turner:]

Okay. Well again, thank you everybody. We appreciate your time and attention. We, as normal, will -- after these calls will be on the road quite a bit. In fact, I think, next two weeks we’ll be on the road three times. So we look forward to catching up with many of you there and continuing to talk about our good story. Have a great weekend.

[Operator:]

Ladies and gentlemen, that does conclude today’s conference. Thank you for your attendance. You may now disconnect. Everyone have a great day.