WSFS Financial Corporation (NASDAQ:WSFS)
Q1 2016 Earnings Conference Call
April 29, 2016, 13:00 ET
Rodger Levenson - EVP & CFO
Mark Turner - President & CEO
Paul Geraghty - EVP & Chief Wealth Officer
Stephen Clark - SVP & Chief Commercial Banking Officer
Richard Wright - EVP & Chief Retail Banking Officer
Joseph Gladue - Merion Capital Group.
Catherine Mueller - Keefe, Bruyette & Woods, Inc.
Good day, ladies and gentlemen and welcome to the WSFS Financial Corporation First Quarter 2016 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.
Thank you, Keiran 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.
And now I would like to turn the discussion over to Mark Turner.
Thanks Roger and thank you everyone on the call for your time and attention. We are pleased to have reported $0.52 of earnings per share in the quarter. And that's translates to $0.53 in a small adjustment to include the minor items in the quarter or M&A costs and security scans.
This $0.53 is a 20% increase from the $0.34 reported in the first quarter last year calculated on a similar basis. We believe what was a solid clean quarter all around highlight 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 pay time offer, increased payroll tax and benefit costs until capture med and higher snow removal cost.
Despite all that we recorded an adjusted of internal assets of 1.14% in this quarter. That's 10 basis points higher in 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 from all of 2015 so our momentum from last year continued into 2016.
We expect to exit this year with a core sustainable return on asset 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 last year increasing $9.5 million or 16% from 2015. This came from net interest income which increased to strong 19% from both acquisition and organic growth. And fee income which increased to healthy 10% almost exclusively from organic growth.
The net interest margin performed within our range of expectations coming in a robust 3.87%. Fee income showed some variance as lower income in fiduciary fees were offset by strength in cash connect ATM related revenue, banking fees, deposit fees and gains on the sale of the small business administration loans which is a growing strategy and free source for us. So despite a slower quarter in wealth we still produced double digit growth overall on fee revenue this quarter.
This dynamic highlights one of the strengths 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 quarter expenses grew 4.3% in the quarter or 11% to support our robust acquisition organic growth. Given our good growth trajectory we are focused on producing efficiency in operating leverage. And at 16% our core revenues grew much more than 11% growth in our core expenses producing an improved efficiency ratio and 5 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 all set partly by some expected construction loans paying off normally and moving into the permanent markets as well as the reduction in residential mortgages, loans, held owner balance sheet as we execute our mortgage banking strategy.
Like credit cards, loan growth can be uneven. Last quarter we had an outsize amount of organic loan growth, 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 expect overall loan growth to be in mid to single high digits for all of 2016. Likewise core deposits grew at 4% annualized. However, total deposit growth was muted by continued purposeful run-off of higher cost CDs as we closely manage our liquidity and net margin.
In 2016 we plan to divert deposits to effective on line with loan growth. While growing our top line strongly the company continues to generate even stronger bottom line returns and as such we help our growing capital base and return value to shareholders by repurchasing 300 in 2000 of shares or a full 1% of shares in the quarter and an average price of $0.29 and $0.75 per share. Finally, as previously announced in early April we received all necessary approvals to close a pending Penn Liberty acquisition.
Our teams are now on the very active integration mode and we expect the transaction to be completed and converted in the second week or August 2016. As with the last two community backed transactions which we successfully completed in 2014 and 2015 we expect this combination to be immediately accretive to earnings per share and assets excluding merger related costs.
We also look forward to serving more of the South East Pennsylvania markets where there are a fewer and fewer local fully capable banks like WSFS to take care of a number of 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] Our first question comes from the line Joseph Gladue from Merion Capital Group, your line is open.
Good afternoon, just on the loan growth and the fourth quarter you had the $40 million of loan you were expected to pay off and continue on through the end of the year. Are all those paid off now?
Joe this is Steve, we did anticipate a little over $40 million of three large construction loans being paid off. One of three did get paid off in the first quarter. The other two we expect to be paid off during the second quarter.
Do you have rough guess of what of $40 million is left with those two?
Approximately $23 million of those two remaining loans.
And on the balance sheet growth overall you had enough deposit growth to fund the growth in loans during the quarter, but then I guess there were some additional bank advances taken out, looks like it went into securities, just what's the thinking there with the low interest rates environment building up liquidity and of growth and what dynamics there are?
Yes, I think the amounts you are talking about is small and probably more likely due to the growth in the cash connect business than they are in the growth in the securities book. We have been securities book of about the same level of 17% of total assets, they go up or down a little bit and any quarter but it's something of a slow decline as frankly you don't get the reward for that rate given you used to so I think what you are saying is more related to growth in real business in the cash side which has been funded by wholesale deposits.
Okay. And lastly, touch base on the interest margin, last quarter you broke out all of the impacts of non-core items like purchase account and accretion, payoffs and how they affect the interest margin. Could you quantify how much of that occurred in the first quarter?
Yes, hi Joe, it's Roger so as we say in the investor presentation from the fourth quarter, we had estimated that the accretion that would flow through the alliance portfolio would be in a range of 2 to 6 basis points that would run through the margin and in this quarter it was 6 basis points.
And we expect that three to six basis points to continue through the rest of the year so there are earlier guidance of margin for the full year being in the high 380s range, the 385 to 389. Obviously it's what happened in the first quarter so expect that absence and significant swings in one item or the other to be the case for the rest of the year.
Okay. Thank you.
Our next question comes from Catherine Mueller at KBW your line is open.
Hey good afternoon. You laid out some strategic goals going off into the next couple of years so just wanted to ask about assumptions behind this goal and first is how are you thinking of normalized credit cards as you go through the next couple of years, had a really low quarter this quarter and then also how are you incorporating potential rate hikes in net forecast as well?
So I will start with the credit costs and I will touch on the rate hikes and I am sure Mark will add some color. As we have said for this year Catherine we would anticipate total credit cost provision plus non-provision work out etcetera of $2.5 million per quarter. It's total of between $8 million and $10 million for the year. And I would expect that the growth of that against 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 most.
And if we are looking 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 one based upon where we are at today in this economy continuing and I would say generally the same for your second piece of your question.
Let me add some color to that in terms of both history and what we are thinking about going forward in our strategic plan. So if you did a calculation of course sustainable for the first quarter would have taken at $113 million and reported down to $110 million just normalizing for credit costs the numbers that Roger referred to.
So if we looked back over the last 4 years how much our course sustainable ROA declined from a seasonally strong fourth quarter to first quarter and then 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 ROA of course sustainable ROA was 9 basis points and the average bounce back in the second quarter from the last three years was 14 basis points so an indication to the first quarter is our seasonally slowest and we do see decline in a nice bounce back. I wouldn't expect that bounce back this year to be that same average because the trajectory we are on to the last three years is clearly much steeper than the trajectory we are on now in our ROA but certainly would expect to bounce back.
The other thing I would refer you and others too is a page in our investor presentation where we talk about major line items what our expectations are for the year and just to reiterate those to get to that $125 million by the fourth quarter there are assumptions of mid-high single digit loan in deposit growth. Total credit cost as Roger mentioned on an average is $2 million to $2.5 million per quarter.
The income growing in the low teens rates with the primary driver of that being wealth, cash connect, mortgage and also our ability to penetrate the recent acquisitions we have done with more fee based products and an efficiency ratio of around 60% and again I would say the $125 million does not include any expected benefits in ROA or EPS from the Penn Liberty acquisition in the third quarter.
And lastly to get to the $125 million to the $130 million in the three year strategic plan, that will take continued growth in those trends especially deeper penetration and to what we think as a very fertile markets for us in South Eastern Pennsylvania as well as growing our fee based income from what it is now in the low thirties to 40%.
That's very helpful, so you don't need higher rates necessarily to get to that $130 million level?
No, so this year in our budget we factored in two rate increases, one that already occurred in December, obviously that's faked in, we got some minor benefits from that because we are slightly asset sensitive for the first 75 basis points in the rate rise and we factored in only one other rate increase in June and 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 as we can easily make up in other ways.
Got it. And are there any balance sheet mix change strategy, part of financial goal, bringing up to deposit ratio or changing securities or borrowing to a different percentage of funding or other assets?
I would say we have made a lot of balance sheet changes over the last several years to help optimize the balance sheet and I would say the one significant one is growing consumer loans. We have a great brand reputation and distribution network in our markets and we have a balance sheet capacity for it and we have to do a better job of getting into customers wallets through consumer lending.
Great okay. Thank you very much.
And I am showing no further questions. I would now turn the call back to Mr. Mark Turner for any further remarks.
Alright, thank you Kieran, appreciate it. Thank you everybody on the call for your time and attention. We are very pleased to have reported a continuation of our solid transaction and a really strong start to June and look forward to good things to come. Have a great weekend everybody.
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.
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