WSFS Financial Corp (WSFS) 2016 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to WSFS Financial Corporation first-quarter 2016 earnings conference call. At this time, all participants are in listen-only mode. Later we will conduct a question and answer session, and instructions will follow at that time. If anyone should require operator assistance, please press star then zero on your touchtone telephone.

As a reminder this conference is call is being recorded.

I now would like to turn the conference over to your host for today Mr. Rodger Levenson, Chief Financial Officer. Sir, you may begin.

Thank you Kieren 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 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 10K, and on the most recent quarterly reports on form 10-Q, as well as other documents we periodically file with the Securities and Exchange Commission.

And now I'd like to turn the discussion over to Mark Turner

Thanks Rodger, and thank you everyone on the call for your time and attention.

We're pleased to have reported $0.52 earnings-per-share in the quarter and that translates to $0.53 after a small net adjustment to exclude the minor notable items in the quarter of merger and acquisition costs and securities gains. This $0.53 was a 20% increase from the $0.44 reported in the first quarter last year, calculated on a similar basis. We believe it was a solid clean quarter all around, highlighted by continued strong year-over-year revenue growth, and further improvements in operating leverage.

Our first-quarter is typically our slowest as revenues are dampened by fewer days, winter weather and some natural seasonality in our businesses, and expenses are accentuated by higher paid time off or accruals, increased payroll tax and benefit cost [until capture med], and higher snow removal and heat costs. Despite all that, we recorded an adjusted return on assets of 1.4% in this quarter. That's 10 basis points higher than the core ROA in the same quarter last year.

Further, the 1.14% ROA in our slowest quarter is about even with the core ROA for all of 2015. So our momentum from last year continued into 2016. We expect to exit this year with a core sustainable return on assets of over 1.25% in the fourth quarter. And that excludes any benefits from the pending Penn liberty combination.

Revenue growth was a major highlight in the quarter, with total core net revenue, that is revenue excluding all securities gains and the one-time federal home loan bank dividend from last year, increasing $9.5 million, or 16% from the first quarter of 2015. This came from net interest income, which increased a strong 19% from both acquisition and organic growth, and fee income which increased a healthy 10%, almost exclusively from organic growth.

The net interest margin performed solidly within our range of expectations coming in at a robust 3.87%. Fee income showed some variance as lower growth and fiduciary fees were offset by strength in Cash Connect ATM-related revenue, mortgage banking fees, deposit fees, and gains on the sale of small business administration loans, which is a growing strategy and the source for us.

So despite the slower quarter in wealth we still produce double-digit growth overall in fee revenue this quarter. This dynamic highlights one of the strength of our business, a full third of our income comes from fee-based revenue, and it comes from various independent sources, so our revenue stream is robust, diverse, and also more resilient through cycles. For these reasons, by the end of our new three-year strategic plan, one goal of ours is to grow our fee-based income to 40% of total revenue.

Our core expenses grew $4.3 million in the quarter, or 11%, to support a robust acquisition and organic growth. Given our good growth trajectory, we are also focused on producing efficiency and operating leverage. And at 16%, our core revenue grew much more than the 11% growth in our core expenses, producing an improved efficiency ratio and five full points of positive core operating leverage over the same quarter last year.

Total loan growth was 2% annualized in the quarter. This included 8% growth in commercial and industrial, and commercial real estate loans. Offset partly by some expected construction loans paying off normally and moving into the permanent markets, as well as a reduction in the residential mortgages, loans held on our balance sheet as we execute our mortgage banking strategy.

Like credit costs, loan growth can be uneven. Last quarter we had an outsized amount of organic loan growth of about 15% annualized, as more loans than expected closed, and fewer than expected paid off in the fourth quarter of 2015. That dynamic affected net loan growth this quarter. However, our loan prospects are good, and like 2015, we still expect overall loan growth to be in the mid to high single digits for all of 2016.

Likewise core deposits grew at 4% annualized; however total deposit growth was muted by continued purposeful runoff of higher cost CDs, as we closely managed our liquidity and net interest margin. In 2016 we plan to grow deposits effectively in line with loan growth.

While growing our topline strongly, the company continues to generate even stronger bottom line returns. And as such, we help manage our growing capital base, and return value to shareholders by repurchasing 302,000 shares for a full 1% of our shares in the quarter and an average price of $29.75 per share.

And finally as previously announced in early April, we received all necessary approvals to close in the pending Penn Liberty acquisition. Our teams are now in the very active integration mode and we expect the transaction to be completed and converted in the second week of August 2016.

As with the last two Community Bank transactions, which we successfully completed in 2014 and 2015, we expect this combination to be immediately accretive to earnings-per-share and return on assets, excluding merger-related costs. We also look forward to serving more of the Southeastern Pennsylvania markets, where there are fewer and fewer local fully-capable banks like WSFS to take care of an increasing number of dislocated banking customers, employees, and communities there.

Thank you again for your time and attention, and at this time we will take your questions.

Thank you.

(Operator Instructions)

And our first question comes from Joe Gladue from Merion Capital Group. Your line is open.

Good afternoon

Good afternoon Joe

A couple of things, just on the loan growth, I guess in fourth quarter you had roughly $40 million of loans that you'd expected to pay off and that continued on through the end of the year. Have all of those paid off now?

Joe this is Steve Clark. We did anticipate a little over $40 million of three large construction loans being paid off. One of the three did get paid off in the first quarter, the other two we expect to be paid off during the second quarter.

Okay, you have rough -- what of that $40 million is left with those two?

Approximately $23 million of those few remaining loans.

Okay. And on the balance sheet growth overall, you had enough deposit growth to fund the growth in loans during the quarter, but then there was some additional Federal Home Loan Bank advances taken out and that went into -- looked like it went into securities. Just wondering what's the thinking there with the low interest rate environment. Is it just building up liquidity and anticipation of loan growth, or just wondering what the dynamics there are.

Yes, no. So I think the amounts you're talking about are very small and are probably more likely due to the growth in the Cash Connect business than they are to growth in the securities book. We have been keeping our securities book actually about the same level of 17% of total assets. In fact, it may go up or down a little bit in any quarter, but it's been on a slow decline, as frankly don't get the reward for -- for that trade that you used to given the shape of the yield curve. So, I think what you're seeing is more related to growth in real business and the Cash Connect side that's being funded by wholesale deposits.

Okay. And lastly just touch base on that interest margin. Last quarter you broke out all of the impacts of some of the non-core items like the purchase accounting accretion and payoffs and how that affected the net interest margin. Was there much of that, can you quantify how much of that occurred in the first quarter?

Yes. Hey Joe it's Rodger. So as we said in the investor presentation from the fourth quarter, we had estimated that the accretion that would flow-through from the alliance portfolio would be in a range of 2-6 basis points that would run through the margin and in this quarter it was six basis points.

Okay. All right. That's it thank you.

And we expect that 2-6 basis points to continue through the rest of the year, so that our earlier guidance of margin for the full year being in the high 380s range, the 385-389, obviously is what happened in the first quarter, and we would expect that, absent significance swings in one or another to be the case for the rest of the year.

Okay thank you.

Thank you.

Thank you, and our next question comes from Catherine Mealor at KBW. Your line is open.

Good afternoon

Good afternoon Catherine

You laid out some nice strategic goals going to the next couple of years, and just want to think about a couple of assumptions behind those goals, and maybe first is how are you are thinking of normalized credit cost as you go to the next couple of years at a really low quarter this quarter, and I know that's bounced around a little bit. And then also how are you incorporating potential rate hikes in that forecast, as well.

So I'll start with the credit cost and I'll touch on the rate hikes, and I'm sure Mark will add some color. So as we have said for this year, Catherine, we would anticipate total credit cost provision, plus non-provisian workout OREO et cetera, of $2 million to $2.5 million per quarter for a total of between $8 million and $10 million for the year. And I would expect that the growth of that, again short of any major changes in the economy, if we continue on this current economic environment and pattern, that the growth in that would mirror the growth in loans.

And what we're looking at as a percentage of loans or assets. If things were to change, we would obviously adjust accordingly based on the economic factors. But our forecasting is done based upon where we are at today and this economy continuing. And I would say generally, the same for the second piece of your question.

And let me add some color to that in terms of both history and what we're thinking about going forward in our strategic plan.

So if you did a calculation of core sustainable for the first quarter, it would've taken that, the 113 we reported down to 110 just normalizing for credit cost, the numbers that Roger referred to. So if we did a look back over the last four years of how much our ROA, our core sustainable ROA declined from a seasonally strong fourth quarter to first-quarter and then with the bounce back was from first-quarter to second-quarter, which is again, seasonally stronger.

So, on average over the last four years, data when we started on our current disciplined strategic growth path, from the fourth quarter to the first quarter, the average decline in core sustainable ROA was nine basis points. And the average bounce back in the second quarter, from first quarter to the second quarter over the last three years that we were in the plan was 14 basis points.

So, an indication that the first-quarter is our seasonally slowest, and we do see a decline and a nice bounce back. I wouldn't expect that bounce back this year to be that same average, because the trajectory we were on for the last three years was really much steeper than the trajectory we're on now in our ROA, but certainly would expect the bounce back.

The other thing I'd refer you and others to, there's a page in our strategic -- excuse me, in our investor presentation where we talk about major line items, what our expectations are for the year, and to reiterate those to get to that 125 bps by the fourth-quarter, there's assumptions of mid to high single-digit loan and deposit growth, credit total credit cost as Roger mentioned, on average $2 million to $2.5 million per quarter, fee income growing in the low teens rates, with the primary drivers of that being wealth, Cash Connect, mortgage, and also our ability to penetrate the recent acquisitions we've done with more fee-based products and an efficiency ratio of around 60%.

And again I say that the 125 bps does not anticipate or does not include -- we certainly do anticipate any expected benefits in ROA and EPS from the Penn Liberty acquisition in the third quarter. And lastly to get from the 125 bps to the 130 bps by the end of three years strategic plan, that will take obviously continued growth in those trends, especially deeper penetration into what we think is a very fertile market for us in Southeastern Pennsylvania, as well as growing our fee-based income from what it is now in the low 30s to 40%.

That's really helpful and so you don't need higher rates necessarily to get that 130 level?

No, so this year in our budget we had -- we factored in two rate increases. The one that already occurred in December, so obviously that's baked in, and we got some minor benefit from that, because we are slightly asset sensitive for the first 75 basis points in rate rise, and we factored in only one other rate increase in June. As again since we are only slightly asset sensitive at this point, if it occurs it will be a slight help to us. If it doesn't occur it's not going to affect us. It's something we can easily make up in other ways.

Got it. And then are there any balance sheet mix change strategies as part of these financial goals to bring up the loan to deposit ratio, or changing securities or borrowings to different percentages of funding or average earning assets

I'd say we've made a lot of balance sheet changes over the last several years out optimize our balance sheet, and I'd say the one significant one that is out there for us is growing consumer loans. We have a great brand reputation and distribution network in our markets, and we have the balance sheet capacity for it, so we've got to do a better job of getting into our customer's, into our customer's wallets through consumer lending.

Great, okay, thank you very much that's all I have got.

Thank you

Once again, ladies and gentlemen, if you have a question at this time, please press star and then the number one key. I'm showing no further questions, I would like to now turn the call back over to Mr. Mark Turner for any further remarks

All right, thank you Kieren. I appreciate it again. Thank you everybody on the call for your time and attention.

We are very pleased to have reported a continuation of our solid trends last year and a really strong start to this year. I look forward to good things to come. Have a great weekend everybody

Ladies and gentlemen thank you for participating in today's conference. This concludes today's program, you may all disconnect. Everyone have a great day.