WSFS Financial Corporation
Q3 2015 Earnings Call Transcript

Published: 30 Oct 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the WSFS Financial Corporation's Third Quarter 2015 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct question-and-answer sessions, and instructions will follow at that time. [Operator Instructions] As a reminder, today's conference is being recorded. I'd now like to introduce your host for today Mr. Rodger Levenson, Chief Financial Officer. Sir, you may begin.

[Rodger Levenson:]

Thank you, Liz and thanks to all of you for taking the time to participate in our call today. With me on this call are Mark Turner, President and CEO; Paul Geraghty, Chief Wealth Officer; Steve Clark, 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 recent quarterly reports on Form 10-Q, as well as other documents we periodically file with the Securities and Exchange Commission. With that read, I’ll turn the discussion over to Mark Turner, our President and CEO.

[Mark Turner:]

Thanks Roger, and thanks everyone on the call for your time and attention. We are pleased to have reported net income of $14.4 million and earnings-per-share of $0.51 for the third quarter of 2015. Return on assets was a very healthy 1.14% and return on tangible common equity was a strong 13.3%. Excluding the non-core items of securities gains and corporate development expenses, earnings were an even stronger $0.53 per share in the quarter, and in our routine quarterly analysis provided in our investor deck after normalizing for the non-core items mentioned and increasing our expenses for a more normal amount of credit costs, we internally peg our core sustainable ROA at 1.16% for the third quarter 2015. All significant areas of the bank showed strength this quarter in the year-over-year comparisons. Net interest income increased 12% over the same quarter last year and 5% non-annualized over the second quarter 2015, on growth and an improved mix of loans, investments and deposits. Net interest income was also enhanced by improved performance from purchased loans and reverse mortgages. We've noted yield on these assets can be uneven from quarter to quarter. The margin for the quarter was a solid 3.79%, that's 8 basis points and 9 basis points better than last quarter and this quarter last year, on the strength of that improved balance sheet mix and those enhanced yields. Credit quality continued its long-term positive trends. Charge-offs were elevated primarily as a result of charging off the reserve on the one large commercial loan we both discussed and provided for last quarter. Otherwise, nonperforming assets, nonperforming loans, criticized loans and classified loans all improved and delinquencies including nonperforming delinquencies were relatively flat at a low 53 basis points of loans. Because of our mix of businesses, fee income can be more seasonal than of peer banks. So the year-over-year comparisons for fee income and therefore total revenue are more meaningful. Fee income was up 7% this quarter year-over-year primarily on the significant improvement in fiduciary income, which was up 24%. As a result of the 12% increase in net interest income and the 7% increase in fee income, when combined total core revenue was up 10% this quarter over the same quarter last year. As importantly, core expenses were up only 4%, resulting in 6 percentage points of positive operating leverage, as many of our investments over the past cycle are maturing and we have achieved broader economies of scale. As a result, our reported efficiency ratio improved to just over 61%, and to just under 60% excluding the non-core items mentioned earlier. Combining the healthy revenue growth and efficiency improvements our core pre-tax, pre-provision net revenue improved $4.3 million or 21% in this quarter from the same quarter last year. That's an over $17 million improvement on an annualized basis. Deposits were up a healthy 2% in the quarter, non-annualized on an increase of municipal and school district deposits, which typically come in this time of the year and gradually flow out over the course of the next 12 months. Loan growth in the third quarter was modest and only 2% annualized and was muted by a very strong second quarter of growth, a highly competitive pricing environment, construction loans naturally moving to the permanent market and reduced balances and mortgages held for sale from good mortgage banking activity. Our business pipeline line of loans continues to be strong and we still expect mid to high single digit loan growth for the full year 2015. Our margin, even without the enhancement this quarter we mentioned, is showing good resilience because of the continued improvement in balance sheet mix. In addition, our fee income businesses continued to show nice pipelines and to gain strength. On other growth fronts, we closed the acquisition of nearby Alliance Bank in South-eastern Pennsylvania in early October, which excluding one-time costs we expect will be immediately accretive. With closing converted seamlessly, all in the same weekend and we are tightly on track for expectations of customer and balance retention, one-time costs, synergies, accretion and returns from this bolt on opportunity. These positives, combined with a strong positive operating leverage we have shown recently, augur well for [indiscernible] coming very close to if not slightly exceeding our three-year strategic plan goal of achieving a core sustainable 1.20% ROA next quarter. We do expect next quarter will be noisy as many one-time costs related to the October acquisition of alliance bank will be recognized. As usual, we will call these out and call out other non-core items, whether positive or negative for your evaluation of our performance. During the third quarter, we also continued our string of being named in an independent survey of thousands of local employees a highly ranked top workplace in our primary market. This is the 10th year in a row we've been ranked among the top five workplaces in Delaware and in a separate independent survey, we also achieved a five-year unbroken string of being named the number one bank in the state from the customer's perspective. These recognitions are leading indicators of our success, and combined with our growing financial returns, which are lagging indicators of success, all of these are evidence that our strategy of engaged associates delivering stellar service, growing customer advocates and value for our earners is being executed well and is working well. Finally, as a result of our strong capital earnings and prospects, we're also pleased to have announced that this quarter, we completed our 5% share repurchase plan initiated just last October and the Board at its meeting yesterday approved a new 5% share repurchase plan and a 20% increase in our cash dividend. Thank you for your attention. At this time, we'd be happy to take your questions.

[Operator:]

[Operator Instructions] Our first question comes from Frank Schiraldi with Sandler O'Neill. Your line is open. Please go ahead.

[Frank Schiraldi:]

Just wanted to ask about the NIM expansion linked quarter, I mean, it seemed like that it was a fairly stable NIM and then you had a couple of maybe more one-offs that increased the NIM sequentially, so should we see those increases as one-offs and that are likely to come back out of the NIM next quarter?

[Rodger Levenson:]

Frank, it's Rodger. Yes, I think that's an accurate characterization. Those things will happen from time to time with those purchased portfolios and reverse mortgage, but they're certainly not sustainable or predictable and as we think about our core margin, for the fourth quarter, we anticipate it remaining relatively flat at right around 3.70.

[Frank Schiraldi:]

Okay, and just thinking about the reverse mortgage portfolio. I mean, is there any sort of thing such as a normalized yield in that portfolio or is it just [indiscernible] depending on cash flows there?

[Rodger Levenson:]

Yeah, so, if you looked at our data probably over the last three or four quarters prior to this when our yield was fairly steady at about 17% on a portfolio, that's declining. So, this is a portfolio of purchased loans that is slowly running off over time. So, it does depend on cash flows and on the net present value calculation to determine the yield for the quarter. I'd say that there is some -- as that portfolio has matured, there is some stability in it and in fact, most -- and we hope most of the volatility would be to the upside, for a couple of reasons on the yield. One is, we tend to be conservative in our assumptions of what will happen in that portfolio, and assumptions drive the net present value calculation. The big assumptions there are, one, it'll be maturity events and that's when somebody either dies or moves out of the home. Those things are relatively predictable, but we still try and be conservative about those using actuarial tables. The second is, what's the value of the collateral -- the home when there is a maturity event and you have to sell it and recoup your loan balance and any equity share you might have in the upside. Fortunately for us, most of the collateral in this portfolio of repurchased are in good places, Northern California, around San Francisco, San Jose, Silicon Valley and Southern California, around San Diego and Los Angeles and those markets have been very strong and have outperformed our model assumptions about price appreciation. Hopefully, that's helpful color.

[Frank Schiraldi:]

Thank you. Then finally, just in terms of the loan growth, I know you reiterated your guidance, so that guidance is for full year 2015, if I'm not mistaken, as you just kind of look out at the pipeline and think about growth going forward, is that just a fair assessment of normalized growth at this point maybe adjusted for any seasonality, just that mid to high single-digit annual growth?

[Stephen Clark:]

Yeah Frank. This is Steve Clark. We would agree with that. We have a very strong pipeline, 90 day weighted average of about $148 million. We feel fairly comfortable of that mid-to high single-digit growth for the full year. There are some headwinds, a couple of large construction loans will go to the permanent market in the fourth quarter also, and as you know, competition is significant, but we are comfortable.

[Frank Schiraldi:]

Great. Okay, thank you.

[Operator:]

Our next question comes from the line of Catherine Mealor with KBW. Your line is now open.

[Catherine Mealor:]

Mark, in your 1.2 ROA goal, how should we think about what's an appropriate assumption for total credit cost?

[Mark Turner:]

So, Rodger is more schooled on this. So, I'll have Rodger answer it if you don't mind?

[Catherine Mealor:]

Yeah, of course.

[Rodger Levenson:]

Yeah, so in the 1.20 modelling that we've done, what we have been using as sort of a normalized credit cost is going back and looking at the previous 11 quarter average, and then normalizing either up to that, like this quarter, where we're a little bit below it or down to it, like we were last quarter when we had the elevated provision because of the one loan and that number is just a little bit over $2.2 million, which is right in the middle of our long-term guidance of credit costs of between $2 million and $2.5 million for the year per quarter.

[Catherine Mealor:]

Got it. Okay, all right. That's all. Then, in terms of fees, any color you can give on your outlook for mortgage?

[Mark Turner:]

Yeah, this next quarter, we're looking at somewhere in the $1.4 million to $1.5 million range. We were down a little bit this quarter, due to slightly slower seasonal volumes and we had some delays in delivering loans in July that sort of backed us up a bit, but our pipeline's strong. We've got $67 million in the pipeline. So, we think the $1.4 million, $1.5 million next quarter is a good number.

[Catherine Mealor:]

Okay. All right, thanks and then maybe one on expenses. Can you help us frame the ALLB cost savings and if you've already had a conversion, how quickly are you going to get these cost savings in the run rate next quarter?

[Mark Turner:]

Yeah, so when we announced the deal, we said that we expect to achieve 40% cost savings, 35% in the first full year of the transaction, so we would expect to start seeing those impact us in the fourth quarter.

[Rodger Levenson:]

The only thing I'd add to that, it was a pretty quick, clean conversion, so most of that 35% of the total 40% cost save should come in almost right away. We do have some retention of some staff through the end of the year to take care of obviously issues that we'll need people to hang around a little bit for, but most of those cost savings should hit us in the fourth quarter.

[Catherine Mealor:]

And maybe be on a full run rate by first quarter or still --?

[Mark Turner:]

I'd say for all practical purposes, on a full run rate by first quarter. There might be a percent or two of that 40% still left, but most of it will be in there.

[Catherine Mealor:]

Okay. Great. Thank you, very much.

[Operator:]

Our next question comes from the line of Matt Schultheis with Boenning. Your line is now open.

[Matthew Schultheis:]

I was just wondering if you can give us a very brief state of the state as far as how you feel the general economic conditions are doing in your markets, relative to the nation as a whole, loan demand building, whatever you think is pertinent.

[Mark Turner:]

Yeah, so I'll start in a macro level and then I'll ask Rodger and Steve and others to jump in on a maybe more micro level from a customer demand perspective. So, the Delaware economy and South-eastern Pennsylvania markets, we operate in continue to do fairly well. They pretty much match national averages and trend lines on many important metrics like employment and housing activity and housing price growth. So, I would characterize the local economy as not robust, but stable and slowly gathering strength. Kind of in a base headline issue in the state over the last month or so. There's some uncertainty about whether Chemours, a DuPont spin-off will need to layoff some folks and [indiscernible] causing some job loss and obviously we're all aware of the ongoing drama at DuPont and the pressures that they might feel to make cost cuts resulting in layoffs and make other strategic changes. So, those are looming concerns that haven't hit the market yet. On the positive front, I think offsetting those, completely if not more than completely, JPMorgan Chase just announced that over the next few years they'll be adding 1,800 jobs to the state and not the lower wage jobs like in the call center, but mid and higher level jobs, technology jobs, analyst, data jobs, announced, an average $65,000 a year average kind of salary. So, we continue to see those kind of positives happening in the state, especially in the financial sector, which the state is known for. So, those are kind of macro points and I'll throw it over to Steve or Rodger to talk about within our customer base what they're seeing.

[Stephen Clark:]

I would suggest Matt that our customer base, it's okay. Looking back, this quarter and past quarters, about 70% of our commercial lending growth has come from existing clients and about 30% has come from new relationships and the bulk of that is really market share increases for us. So, generally, I agree with what Mark said, comes okay, and our customers seem to be doing okay, but certainly not robust.

[Matthew Schultheis:]

Okay. That was actually the only question I had. Thank you.

[Operator:]

[Operator Instructions] Our next question comes from the line of Joe Gladue with Merion Capital Group. Your line is now open.

[Joe Gladue:]

Let me sort of piggyback on the last question a little bit, just sort of, I guess, somewhat macro economically, just in regards to the interest rate environment and the I guess, continued uncertainty as to whether the Fed will raise at least the sort of extended period of low interest rates, are you -- is any of that causing you to change your positioning at all or how are you approaching that?

[Mark Turner:]

So, I'll answer and I think Rodger can provide some detail. So, at this point, we entered the year being asset sensitive with the exception of the 100 -- 75 basis points of rate rise, because we have [indiscernible] prime on $700 million of our loans that was above Wall Street Journal prime which we didn't expect would increase as the Fed might raise rates. As the year has progressed, we've gotten even more asset sensitive. So at this point, even over the first 7,500 basis points, we're not negatively affected than we to the point we're up 100 basis points we'd see our margin increasing 3%, 200 basis points 7% and 300 basis points, about 10%.

[Rodger Levenson:]

Yeah, actually it's 200, it's 3%. First 100 is flat for us.

[Mark Turner:]

Thank you. So, after the first 100 flat, we go up pretty significantly from there and that's only got more -- we've only gotten more asset sensitive as the year's going on, as we've been adding variable rate loans and adding core deposits. So, one of the things that we've taken a look at in conjunction with the Alliance acquisition is they brought a significant amount of liquidity to us, a higher -- excuse me, a lower loan to deposit ratio and a lot of cash and we used some of that cash to pay off some duration and federal home loan bank advances in October, which will cost us a little bit upfront on prepayment penalties, kind of merger related repositioning the whole balance sheet for the acquisition type cost, but going forward, should add a couple of basis points in margin and a couple of basis points in ROA just from that slight repositioning of about $100 million in taking duration off our books in federal home loan bank advances, but overall, I'd say we're very well positioned for a rise in rates and certainly would look forward to that. The other thing I'd say is this is obviously, all based on model data based on betas and assumptions that we've experienced in the past. We would hope to do better than the model in a rising rate environment, because the data is all kind of 10 years old, the last time rates went up, and we were a much different institution back then. We have a much better position in the marketplace, bigger position, better brand and we think we are a price leader in the market now as opposed to 10 years ago, when we were more of a typical community bank price follower.

[Joe Gladue:]

Thank you. That's helpful. I just had one other I guess numbers question, on your expense side, there was a fairly significant reduction in the, I guess, other noninterest expenses category, just wondering what that was and if that reduction is something that was more onetime or continuing.

[Rodger Levenson:]

Yeah Joe. It's Rodger. It's really not one particular thing. There are several areas where we had some expense reimbursements, we had cash connect, go through with insurance deductible in the second quarter, so, insurance started kicking in for them a little bit in the third quarter effecting losses, but not any one big thing that's driving that number.

[Joe Gladue:]

Okay, is some of that more recurring reduction or again sort of more one-time items?

[Rodger Levenson:]

Yeah. So, the way I would answer that Joe is, I would continue to think about it in the terms of our efficiency ratio and we're in those low 60s, it's where we expect to stay and as we've talked about in the past, we think that's appropriate for our business model. So, I think you should expect us to continue to be in that kind of low 60s range.

[Joe Gladue:]

All right. Fair enough. Thank you. That's it for me.

[Operator:]

Thank you. And with no further questions in queue, I'd like to turn the conference back over to Mr. Mark Turner.

[Mark Turner:]

All right, Liz and, thanks everybody again. We very much appreciate your time and attention. We're pleased to have reported the results we reported. Look forward to speaking with you this time next quarter and Rodger and I will be on the road over the next couple of weeks appearing at a couple of investor conferences and we look forward to catching up with many of you there. Have a great weekend.

[Operator:]

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