WSFS Financial Corporation
Q4 2015 Earnings Call Transcript

Published: 29 Jan 2016

[Operator:]

Good day, ladies and gentlemen and welcome to the WSFS Financial Corporation Fourth Quarter and Full-Year 2015 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 call is being recorded. I'd now like to introduce your host for today’s conference Mr. Rodger Levenson, Chief Financial Officer. You may begin, sir.

[Rodger Levenson:]

Thank you, Ronya and thanks to all of you for taking the time to participate on 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 on 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.

[Mark Turner:]

Thanks Rodger, and thanks to all of you on the call for your time and attention. My comments today will be probably a few minutes longer than usual, one because we had a lot of stuff going in the quarter, a lot of good stuff and two, because we just completed a year, completed our budgets and starting a New Year so it's that time where we can give better guidance on what our expectations are for the full-year 2016. So in the fourth quarter of 2015 we reported earnings per share of $0.46 and a return on assets of 1.03% on a GAAP basis. However, after adjusting for corporate development costs related to our one closed and one pending acquisition and a small net loss on the sale of securities and funding we calculate core EPS for the quarter of $0.59 and associated ROA of 1.31%. As we do every quarter we look closely at our results and make adjustments for discrete sizable items that while and part of doing business we believe are not routine in order to derive our core sustainable ROA. This quarter as expected we had a number of these items primarily from merger related costs and accretion that when they are adjusted indicate a core sustainable ROA of a very healthy 1.24% and an associated earnings per share of $0.55. These results exceeded our three year strategic plan goal of achieving a 1.2% core sustainable ROA by this quarter. As you may recall, we have labeled this our path to high-performing goal and we updated you every quarter on our progress in our investor presentations. In this quarter earnings release we also provided a summary of how we got from the GAAP reported ROA to our estimated core sustainable ROA. And we summarized how we progressed from approximately 78 basis points in core sustainable ROA 12 quarters ago to the 124 basis points of ROA we estimate now. If you haven’t done so, I’d encourage you to read that special section of the release. This quarter also accelerated our trend to strong fundamental performance. As mentioned in the past, our model because of its heavier mix of fee-based businesses shows more seasonality than is traditional. So it is more helpful to compare results from the fourth quarter of this year to the same quarter last year. I’ll also point out any particular trends in linked quarter growth that maybe impacting coming quarters. Furthermore, I will provide our current outlook for some key operating metrics in 2016. As always, these outlooks can change positively or negatively for many reasons, both in and out of our control. Highlights for the quarter and associated outlooks for the future include the following major items. Core net revenue increased $12.3 million or 21% over the same quarter last year from double-digit gains in both net interest income and fee income. Net interest income was up 25% from both robust acquisition and organic growth. Total fee income was up 13% primarily from organic gains in both our Wealth segment, which saw 17% fee increase and our Cash Connect segment, which saw 14% fee increase over the same quarter last year. For 2016, we expect a total organic fee income growth will be in the low-teen percentages as well. While core net revenue increased $12.3 million or 21%, total core expenses increased only $3.7 million or 10%. This was a result of our achieving broader economies of scale through growth, our earlier investments maturing, increasing the contribution margin from certain business lines and prudently managing other expenses at the margin. These revenue and cost dynamics led to an increase in operating leverage of 11 percentage points in the last year alone. Given we are a growing institution, we managed more of our efficiency ratio than to strict expense - and are pleased we have also exceeded our strategic plan goal of getting to a core efficiency ratio of about 60%, which we believe is a healthy level given our mix of fee-based businesses and our high service business model. For the full-year 2016, we expect that we would be around that 60% efficiency percentage as well with potential for improvement as we continue to grow and once the synergies from the pending acquisition of Penn Liberty are achieved. Our net interest margin increased to a reported 4.14% would include a lot of merger related accretion and other large additions. The internal analysis we shared in our release normalized that margin to an estimated 3.83%, a nice increase over both reported and normalized margin from last quarter and this quarter last year. More importantly, we now expect given our hardened improvement in the mix of assets and funding and are well-managed asset sensitive position that our margin will be in the mid to high 380s well into 2016. But as we saw this quarter can fluctuate based on normal merger accretion, reverse mortgage yields and accreted fees from normal loan payoffs. On top of the $291 million of loans added from the Alliance acquisition that closed in October 2015, we organically grew loans another $122 million in the quarter or 15% on an annualized basis. Our loan growth for all of 2015 was $586 million or 18%. That growth came from all major lending categories and was very balanced almost exactly evenly split with nine percentage points of growth coming from acquisition and 9% points of growth coming organically. That’s a welcome dual accomplishment, we can grow prudently and robustly, but both methods would and one method does not impede our success in the other. In 2016, we again expect we will grow loans organically by high single-digit percentages on average. The quarterly results can and have varied as part of the nature of the business. In fact some of the outsized 15% annualized growth we showed in the fourth quarter of 2015 was unexpected and came because of $40 million of loans we believe would pay off and go into the permanent market by year-end will not do so until early 2016. On top of that high single-digit organic growth loan expectation for 2016, we also expect approximately $500 million in loans will come over from the plan combination with Penn Liberty Bank in early August 2016. We also maintained a healthy loan-to-deposit ratio of 99% at yearend by growing customer funding $441 million in the quarter. $339 million of that came from the Alliance acquisition and another $102 million or 12% annualized came from good organic growth and the organic growth came mostly in core relationship deposit accounts. In 2016, we anticipate organic deposit growth percentage will be in the mid-to-high single digits and another approximately $600 million in deposits will come over upon the combination with Penn Liberty Bank in August 2016. Credit quality continued to be good, nonperforming assets declined on both the percentage and a dollar basis. The classified loans to Tier 1 capital plus ALLL ratio stayed essentially flat and the small increase was both expected and was entirely from acquired loans. Charge-offs were low $1.1 million or 12 basis points annualizing the quarter. Delinquencies did increase however, the majority of the increase was due to one highly seasonal business that is showing this payment pattern in the past and that delinquency was cured in early January. The remainder of the delinquency increase came from two relationships that are already been categorized as MPAs and therefore have already been written down to expected net recoverable value. As a result, we are comfortable that the increase in delinquencies is not indicative of a broader trend. Total credit costs for the quarter that is including provision, OREO cost workout and related costs were $2.5 million and for 2015 came in at $9.0 million right in line with the $2 million to $2.5 million per quarter on average we have been estimating. For 2016, we expect organic credit costs will be just a bit higher than the 2015 total due to growth, but as we have seen credit costs can vary from quarter-to-quarter again as part of the nature of the business. As a reminder, our first quarter is usually our weakest; revenues are temporarily hampered by fewer days, seasonal slowness and fee-based businesses and generally lower economic activity which can be further impacted by occasional harsh weather in the Northeast. Furthermore expenses are seasonally elevated by the impact from the change in benefit plan years including higher paid time loss accruals and 401(k) matching costs and employer-paid taxes until caps are met as well as higher expenses like snow removal. All that detail aside, we are very pleased not only to exceed our three-year strategic plan ROA goal, but also we are grateful for the intense work, good management and steadfast governance went in over many years to achieving this milepost in our performance. Given the strength and momentum of our business model and of our brand, the organic market opportunities ahead the pending combination with Penn Liberty Bank and our terrific team of associates, we look forward to a successful 2016. Thank you. And at this time, we would be happy to take your questions.

[Operator:]

Thank you. [Operator Instructions] And our first question comes from the line of Frank Schiraldi from Sandler O'Neill. Your line is now open.

[Frank Schiraldi:]

Hi gentlemen.

[Mark Turner:]

Hi Frank.

[Frank Schiraldi:]

Just a couple questions. First, on the margin, I wonder is the best way to think about the NIM going forward, Mark, you gave the high-3.80%s level. And then would it be reasonable just to add the eight basis points of normal accretion from Alliance to that number to think about what a decent reported NIM might look like, at least in the first half of the year?

[Mark Turner:]

So Frank that number that I gave above mid-to-high 380s would include normal accretion from acquisitions. And why would say on top of that though what might also happen or the normal or the routine variations we have in reverse mortgage income, but also any accretion we might have from payoffs, which happened from time-to-time. We happen to have an outsized amount in this quarter but those type of things can still happen. So the core number mid-to-high 380s which would include normal accretion, a normal amount of accretion from loan payoffs and normal versus mortgage activity, but it could vary around that mid-to-high 380s depending on the level of that stuff.

[Frank Schiraldi:]

Okay, great and then, Mark, I think you said, guided to low teen growth organically for fee income next year. If that's the case, I'm just wondering how impactful is the weaker equity markets in the first quarter on your wealth management revenues?

[Paul Geraghty:]

Hi, Frank. Paul Geraghty here.

[Frank Schiraldi:]

Hi, Paul.

[Paul Geraghty:]

I think obviously, if the markets don't improve, we’ll have some minor revenue impact on that. But our fee-based, or our market-based fees on AUM is really in Cypress and only represents about 14% of our overall wealth revenue most of our revenues derived from the transactional fiduciary services business at Christiana, which is not AUM dependent. So clearly we have a little bit of a budgeted revenue shortfall to make up in other places if the market continues to be so volatile. But I don't see it as a major issue in achieving our plans next year in terms of revenue and profitability.

[Frank Schiraldi:]

Okay. Great, thank you.

[Mark Turner:]

Thank you.

[Operator:]

And our next question comes from the line of Catherine Mueller from KBW. Your line is now open.

[Catherine Mueller:]

Thanks. Good afternoon.

[Mark Turner:]

Hi, Catherine.

[Catherine Mueller:]

One more on the margin and the balance sheet. How should we think about the size of the securities portfolio? That's been trending down the past couple quarters. Do you expect to continue that trend or has that kind of flat lined from here, ex acquisitions?

[Mark Turner:]

Yes, so flat to slightly down is what you should look at. We have kind of an internal framework that we use. When the yield curve and our capital is giving us opportunities to add leverage, we might have our securities portfolio grow to as much as 20% of our total balance sheet. And when either capital is constrained or in this case because the yield curve is not robust, we would let that number drift to the mid-to-lower teens. But we’re kind of comfortable more or less where it is right now maybe declining a little bit and have loans grow into capital as opposed to investments, which has in the past, and I think will continue to help our overall margin percentage.

[Catherine Mueller:]

Okay, great. And then one follow-up. It's just on the expenses. Can you find just the timing on the Alliance cost savings, how much we saw this quarter and if there's any more to go into the next quarter?

[Rodger Levenson:]

Hey, Catherine its Rodger.

[Catherine Mueller:]

Hey, Rodger.

[Rodger Levenson:]

How you doing? So just to remind everybody on the call we announced and anticipated that we get approximately 40% cost savings out of the Alliance expense base and I would tell you that we've achieved the vast majority of that. There's a little bit of a tail on some professional fees and some other things but most of those expenses we’ve accounted for those in the first full quarter of the combination.

[Catherine Mueller:]

Okay - is a good run rate to grow from?

[Rodger Levenson:]

So what I would add to that, I’m sorry, go ahead.

[Catherine Mueller:]

I look at as $41 million is a good run rate to grow from into 2016?

[Rodger Levenson:]

So that’s where I was going to go. So there was a question earlier about how much of the margin might be in the - what the normalized margin might be going forward and then we talked about that mid to high 380s with some potential upside based on volatility and normal accretion and reverse mortgages et cetera. On the expense side we had a higher level of expenses in the quarter from a few things; one, marketing costs and that’s for the whole year as we've expanded number of products and expanded into new geographies we could see that potentially decline. Otherwise compensation costs were much higher than in a normal quarter because of the true up at year end based on our performance. Our performance being so good, compensation cost isn't necessarily linear with the performance, but increases as we get the higher levels. And then we also had over a $1 million in the quarter of professional legal and dispute related costs for some legacy trust accounts, which is a normal part of the business, but happen to be very heavy in this quarter. So there's some potential on the expense side for that to go down as well.

[Catherine Mueller:]

All right. That's great. Thanks so much. Congrats on a good quarter.

[Rodger Levenson:]

Thank you very much.

[Operator:]

And our next question comes from the line of Matt Schultheis from Boenning & Scattergood. Go ahead sir.

[Matt Schultheis:]

Good afternoon. How are you?

[Mark Turner:]

Good, Matt. How are you?

[Matt Schultheis:]

I'm doing well, thanks. Really quickly, and I apologize if you already covered this. Can you remind us what the difference is between the collateral value and the book value or what's on your books for the reverse mortgages that you brought back into the balance sheet a couple years ago?

[Mark Turner:]

Yes, so thank you. They’re on our books at right around $25 million I am using round numbers and the lower of the P&I that showed us where the collateral value, which is the right way to look at it as $47 million, so that's $22 million in income that could come into income over the remaining life of the portfolio.

[Matt Schultheis:]

Which should, in theory, be getting a little bit shorter every day?

[Mark Turner:]

Yes. As the time it’s unbeaten and untied as far as I know. And the average age of people and remaining participants in that portfolio I think is approaching 95 years old.

[Matt Schultheis:]

Okay. Well, thank you very much.

[Mark Turner:]

All right. Thank you.

[Operator:]

And our next question comes from the line of Joe Gladue from Merion Capital. Your line is now open.

[Joseph Gladue:]

Hi, good afternoon.

[Mark Turner:]

Good afternoon Joe.

[Joseph Gladue:]

On the cash connect I guess the press release mentioned that you'd gotten some new customers in the account. Just wondering, did we see the full impact of that in the fourth quarter or did that come in late? Just wondering what additional improvement we might have seen from that end.

[Rodger Levenson:]

Joe, its Rodger. We got the majority of the impact in this quarter, it was one large customer that they acquired they’ve been working on for a long time. That’s very prominent in the casino industry and that's why it is such a significant amount of cash, but the majority of that occurred in the quarter.

[Joseph Gladue:]

Okay. Fair enough. And I guess…

[Mark Turner:]

The upside there and Cash Connect would be the increasing penetration of their total cash management services into their pure bulk cash customers as well as the new products they are rolling out, most prominently the deposit safe product that has rolled out this year, which is gaining some traction and we talked about in the press release.

[Joseph Gladue:]

Okay. All right. And on the other question I had was, I guess, relating to provisioning in reserve levels. Now obviously, with the asset quality's getting better and reserves have been increasing as a percentage of non-performers, but I guess you could stand below 1% as a percentage of total loans now. I'm just wondering how we should be looking at your provisioning going forward in relation to that declining reserves to total loans?

[Rodger Levenson:]

Yes. Joe, its Rodger. So the first thing I would point out is that ratio that you referred to is impacted by the acquired loans actually if you exclude the acquired loans that ratio would be 111 for us, but all that being said if you look at the leading indicators of asset quality which is for us the best barometer of how to forecast provision both delinquency and problem loans and when I say delinquency I'm excluding that one large situation would subsequently was cheered after the first of the year. There it remain a historically low levels. So we feel confident in the guidance that we've been giving for a little while now between $2 million and $2.5 million for all credit costs so that would be ALLL plus workout costs, OREO et cetera as a quarterly run rate for where we are at one provision obviously caveat it significantly by, economy will be lumpy as Mark said from quarter-to-quarter, but that's our best estimate sitting here today.

[Joseph Gladue:]

Okay. All right. That’s it from me. Thank you.

[Rodger Levenson:]

Thank you.

[Operator:]

[Operator Instructions] And I'm not showing any further questions. I would now like to turn the call back to Mr. Mark Turner for any further remarks.

[Mark Turner:]

Thank you again everyone. We appreciate your time and attention. We will be on the road in an investor conference in early February and look forward to seeing many of you there. Have a great weekend.

[Operator:]

Ladies and gentleman, thank you for participating in today’s conference. This concludes the program. You may now all disconnect. Everyone have a great day.