WSFS Financial Corporation (NASDAQ:WSFS)
Q2 2016 Earnings Conference Call
July 29, 2016, 1:00 PM ET
Dominic Canuso - Executive Vice President and Chief Financial Officer
Mark Turner - President and Chief Executive Officer
Rodger Levenson - Chief Corporate Development Officer
Paul Geraghty - Executive Vice President and Chief Wealth Officer
Stephen Clark - Senior Vice President and Chief Commercial Banking Officer
Richard Wright - Executive Vice President and Chief Retail Banking Officer
Catherine Mueller - Keefe, Bruyette & Woods, Inc
Joseph Gladue - Merion Capital Group
Good day, ladies and gentlemen and welcome to the WSFS Financial Corporation Second 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 conference call is being recorded.
I'd now like to turn the call over to your host for today Mr. Dominic Canuso, Chief Financial Officer. Sir, you may begin.
Thank you, Danielle 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; Rodger Levenson, Chief Corporate Development Officer; 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.
Thank you, Dominic and thank you to everyone on the call for your time and attention. I'm going to provide a few overview comments on our second quarter results and highlights. And then hand it over to Rodger to walk through additional details.
We are pleased to have announced a very solid quarter with earnings per share of $0.58 on both reported and a core basis. This is a 35% increase over the reported earnings per share in the second quarter of 2015 and a 32% increase over the core earnings per share for that same quarter a year ago.
Core revenue that is excluding securities gains grew a robust 16% and reflected positive results across all of our business lines including the benefits of good organic growth and our successful recent acquisitions. Bottom line results translated into a very solid return on assets of 1.23% for the quarter on both the reported and core basis.
As total credit cost remain historically low, we estimate our core sustainable ROA at 1.14% for this quarter. This result our seasonality and momentum all in line with our expectation to exit the year with a 1.25% core and sustainable return on assets. And that does not include the expected positive impact from our pending combination with Penn Liberty Bank.
During the quarter we were also very pleased to have received an A minus rating from the Kroll Bond Rating Agency for WSFS Financial Corporation and a correspondent A rating for WSFS Bank. Our strong rating facilitated us raising $100 million of holding company senior unsecured notes with a 10-year term and a fixed coupon of 4.5% for the first five years.
As indicated the proceeds of this offering are expected to be used to prefund the September 2017 call on our current $55 million of senior holding company notes, which have a much higher coupon of 6.25% and are also expected to provide capital to invest in small fee-based acquisitions, stock buybacks and other general corporate purposes.
Finally, we are very much on track for the closing and conversion of the Penn Liberty combination in the second week of August. Our collective integration teams have been working hard for a number of months and we are excited about further strengthening our franchise and leadership in Southeastern Pennsylvania. As with the last two Community Bank transactions 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.
With that general overview, I will turn it over to Rodger for more detail and of course I will participate in the Q&A section after his remarks. Thank you.
Thanks Mark. As Mark outlined our performance during this past quarter similar to last quarter was driven by core revenue growth which came in at a strong 16% compared to the second quarter of 2015. Once again this growth was driven by both net interest income which grew 19% from both acquisition and organic growth and fee income which increased 11% almost entirely from organic growth.
The net interest margin came in at the top end of our range of expectations for 2016 at 3.90% an increase of 19 basis points from the same period last year. This expansion was a result of our recent acquisitions and continued disciplined loan and deposit pricing. Although this quarter's interest expense only saw a modest impact from our recent debt issuance. We anticipate starting in the third quarter approximately a net 8 basis point impact on the NIM from the new debt issued in June.
Combined with the current rate curve expectations of no further increases in short-term interest rates for the remainder of 2016 our modeling now forecast a NIM range of 3.80% to 3.85% through the end of the year. Our core fee income growth of 11% versus the second quarter of 2015 was driven by performance across all of our fee generating business lines.
Our core fee-based income to total revenue stood at a very strong 34% and while this figure will be modestly impacted by the Penn Liberty acquisition we still have the goal of increasing this ratio to 40% by the end of our 2016 to 2018 strategic plan. Our core expenses which exclude M&A costs grew $5.5 million in the quarter were 15% in support of both acquisition and organic growth.
Adjusting our expenses for the litigation settlement disclosed in the notable items, the growth in expenses was $4.6 million or 12%. When compared with our 16% core revenue growth, this provided 4 points of positive core operating leverage over the same quarter last year and an adjusted core efficiency ratio of 59.5%.
Total loan growth was 4% annualized in the quarter. Highlights for the quarter were 13% annualized increase in C&I loans and 17% annualized growth in consumer loans which were somewhat offset by expected construction loan payoffs and continued reduction of residential mortgage loans total on the balance sheet.
Our loan pipeline remains solid going into the third quarter and we expect overall organic loan growth that is excluding the impact of Penn Liberty to be in the low-to-mid single-digits for the second half of 2016. Our reported deposit growth was impacted by a $30 million decline in money market accounts related to an expected seasonal decline in municipal and school district deposits and the planned runoff of $20 million of higher cost CDs.
Relationship oriented checking accounts grew 5% annualized during the quarter. We anticipate the total organic core deposits will grow in the mid-to-high single-digits for the remainder of 2016. Asset quality trends remain favorable during the quarter. NPAs declined by $6.1 million and now stand at 54 basis points of total assets. Total delinquencies which includes non-performing delinquencies were 64 basis points.
Our loan loss provision of $1.3 million cover charge-offs of $1.1 million and provided for long growth. Although, we remain pleased with our current asset quality, credit cost can be lumpy as was demonstrated in 2015 and we still believe that our longer-term guidance of $2 million to $2.5 million in average quarterly total credit cost is appropriate. In summary, we had a very good second quarter and first half of 2016 and remain focused on improving our performance for the remainder of the year.
Thanks again for your time and attention and we will now be happy to answer any questions.
Thank you. [Operator Instructions] And our first question comes from Catherine Mueller from KBW. Your line is open.
Thanks. Good afternoon, everyone.
Good afternoon, Catherine.
Wanted to start maybe first with the loan growth in thinking about you've had really great loan growth on the C&I front, but that's obviously been offset a little bit by some construction payoffs. As you think into the back part of the year, are there any large construction payoffs that you see on the horizon? Or do you think that is going to be less of an offset moving forward?
Yes, Catherine. This is Steve Clark. In the second quarter, we did have approximately $50 million of construction loans or CRE loans, payoff or go to the permanent market. In the third quarter, we see two lumpy payoffs totaling $35 million both of those coming out of the construction portfolio into the permanent market.
And then Catherine that’s factored in our expectations for back half of the year growth in the low-to-mid single digits for total loans. We still expect good growth in the C&I and the consumer segments, but offset by runoff and construction and continued runoff in residential mortgages.
Got it. Okay and then at what point do think that Penn Liberty add could accelerate that low-to-mid single-digit growth rate a little bit higher? I know it's hard for that happen in the first quarter that you seal the deal, but is that you think that's a possibility as we move into 2017?
Yes. We're very optimistic and positive with Penn Liberty joining us. With the amount of disruption in Southeastern Pennsylvania through various acquisitions, we think the timing is perfect for WSFS and Penn Liberty to join forces and we believe their team joining ours will be accretive to our efforts.
And we have been making joint calls with them for some time now to get to know their customers and their marketplace better. And I would expect Catherine, this is Mark Turner, I would expect by late in the year, early next year absent the typical seasonality you see through the holiday and the winter months, we should start to see it pick up from combining with them.
Okay, great. And then maybe my second question is on the fees. And we've talked about this a lot over the years, but you've got this goal to get to 40% over your strategic planning session. How much of that 40% growth or growth to 40% do think in happen organically versus the need to do another fee-based acquisition? And can you talk a little bit about have conversations picked up or what is your outlook for the likelihood of a fee-based acquisition in the next 12 months?
So Catherine, this is Rodger. The majority of the growth we believe can come from continued double-digit - low double-digit growth from our existing fee-based businesses, but there's no question for us to get to that 40% that we will have to do several of the smaller fee-based acquisitions that we've talked about.
So when we talk about smaller I would say transaction sizes in the range of $5 million to maybe up to $20 million in deal size and would be either complimentary to our existing product offering or potentially an entree into a new fee-based area. We are initially focused on adding to our existing fee-based businesses with wealth management, a particular area of interest and we're working at that goal I'd say very diligently to get some opportunities to the finish line hopefully in the near future.
Okay. Great. Great quarter guys. Thanks.
Thank you, Catherine.
Thank you. And our next question comes from Joe Gladue from Merion Capital. Your line is open.
Just I guess first off like to touch a little bit more on the net interest margin. Just wondering I guess there’s been some variability in recent quarters from early payoffs and accretion and stuff. Wondering if that was very significant in the second quarter or any more so than it was in the first?
So yes, we did have a very strong net interest margin quarter at the high end of the range and that did include about 4 basis points of accretion over and above our expectations and that was slightly higher than the first quarter. In our outlook, we do not expect that elevated level of accretion to continue, but as you know it maybe lumpy from quarter-to-quarter. On a full-year range basis, we expect our net interest margin to be in the range of 383 to 387 for the remaining quarters to be in the range of 380 to 385 including the 8 basis point impact of the senior debt raise that we spoke about earlier.
All right. And you've built up a little bit of liquidity over the last few quarters. I imagine some of that is going to - will be absorbed by acquisition is that - any reason to believe differently?
So I don't know exactly what you're referring to, some of that is probably likely from cash connect and it's cash in - it's actually earning cash, it's cash in non-owned ATMs that may show up on some of the screens you're looking at like liquidity, but it is actually basic business cash connect and earning fee income. There are also might be some of that are coming from average balances off of the debt raised before we get a chance to pay off some short-term borrowings with that. But we don't have from our perspective any unanticipated spikes in liquidity this past quarter.
Okay. And I guess on the topic of cash connect that had some good revenue growth over the last few quarters I guess again 12% growth this quarter if I remember that correctly. Is that going to slow down at any point or can you see that with some of the new product, is that a sustainable level of growth for a little while?
Joe, it’s Rodger. We believe so they've actually seen some nice increase in their traditional bailment business as they've been able to take some market share on that side of the business and then the continued growth of their new product and additional services we think combined will continue the growth rates at the trend that they've been showing recently.
Right. I believe that's all I have. Thank you.
All right. Thank you, Joe.
Thank you. [Operator Instructions] Thank you. And with no further questions in queue. I would like to turn the conference back over to Mr. Mark Turner.
Actually, this is Rodger Levenson again; thank you again for everybody for dialing in today. Mark, Dominic and I will be attending an Investor Conference in New York next week and we hope to see many of you there if not later on down the road. Thank you.
Have a great weekend everybody.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.
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