WSFS Financial's (WSFS) CEO Mark Turner On Q2 2014 Results - Earnings Call Transcript

| About: WSFS Financial (WSFS)

WSFS Financial Corporation (NASDAQ:WSFS)

Q2 2014 Results Earnings Conference Call

July 25, 2014, 5:00 p.m. ET

Executives

Mark Turner - President and Chief Executive Officer

Steve Fowle - Chief Financial Officer

Rodger Levenson - Chief Commercial Banking Officer

Paul Geraghty - Chief Wealth Officer

Rick Wright - Chief Retail Banking Officer

Analysts

Frank Schiraldi - Sandler O’Neill

Jason O’Donnell - Marion Capital

Operator

Good day, ladies and gentlemen, and welcome to the WSFS Financial Corporation second quarter 2014 earnings call. [Operator instructions.] I would like to introduce your host for today’s conference, Steve Fowle, Chief Financial Officer. Sir, you may begin.

Steve Fowle

Thank you, operator, and thanks to all of you for taking the time to participate on our call today. With me is Mark Turner, our President and CEO; Paul Geraghty, Chief Wealth Officer; Rodger Levenson, 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 recently quarterly reports on Form 10-Q, as well as other documents we periodically file with the Securities and Exchange Commission.

Having read that, I’ll turn the call over to Mark Turner for his comments .

Mark Turner

Thanks, Steve, and thanks to everyone on the call for your time and attention. WSFS reported a very good quarter. Coming off the season and weather slowed first quarter, our quarter results, as expected, rebounded strongly.

Our highlights included earnings per share reached $1.39 or 20% greater than the more comparable same quarter last year. Quarter return on assets reached a cycle high of over 1.1%, and return on tangible common equity was a healthy 13.5%.

Loan growth continued our mid to high single-digit trend, with year over year growth at 8% and quarterly annualized growth at 7%. Core deposits continued to grow nicely, up 6% over this time last year and 4% annualized in the quarter, with particularly strong growth in valuable non-interest-bearing deposits.

Total core revenue, that is excluding securities gains, grew 8% over the comparable quarter last year and 5.6% unannualized from the first quarter, propelled by both strong growth in net interest income, in both dollars and margin percentage, and growth in fee income.

And not only did growth in revenues obviously exceed growth in expenses, but also the pace of growth in revenues exceeded that of expenses, despite a small amount of corporate development costs for our impending closing of the FNB Wyoming Delaware transaction, and litigation costs related to a bankruptcy trustee claim, challenging our repayment on a $5 million loan dating back to 2009.

Without these last two items, normalized operating leverage increased significantly. Also helping the results in the quarter were solid improvements in credit quality and credit costs. Nonperforming assets, delinquencies, and the classified loan ratio were all better to much better in the quarter. This led to chargeoffs which, for the first time since before the 2008 financial crisis, were in a net recovery position for the period.

As a result of the improved indicators and credit quality, and especially zero net chargeoffs, we were able to post a very small provision for loan losses in the quarter, while at the same time we increased our allowance for loan losses slightly on a dollar basis to accommodate for our new loan growth.

We are especially pleased that our very good performance this quarter came as a result of across the board franchise growth in loans, deposits, fee income, and margin, and was punctuated by solid credit quality and prudent provisioning as evidenced by no net chargeoffs and no reserve release.

Furthermore, our banking, wealth, and cash connect ATM segments all continued to garner new and experienced associates and post healthy customer gains and revenue increases, which bodes well for future performance.

Our results demonstrate our solid position in our market, our well-respected brand and differentiated strategy, our ongoing returns on effective investments made over the past cycle, which we continue to optimize and selectively add to. In that regard, our late 2013 addition of Array and Arrow Financial has performed extremely well, and we are looking forward to our upcoming third quarter 2014 partnership with FNB Wyoming performing as well.

Thank you again, and with that, we will take your questions.

Question-and-Answer Session

Operator

[Operator instructions.] And our first question comes from the line of Frank Schiraldi.

Frank Schiraldi - Sandler O’Neill

Given we’ve got another quarter reported here, and just wondered if you could comment maybe on your previously disclosed goal of reaching 1.2 to 1.3 ROA by the end of, specifically by Q4 2015? If you could just comment on your confidence in that goal?

Mark Turner

On our website soon, in preparation for a conference we’re attending next week, we’ll give the normal quarterly update on that in terms of what’s possible and what we’ve achieved, and where we’re going with that. But in summary, we started at 70 basis points, six quarters ago now. We’re now six quarters into it, and we just reported about 1.1%. If you normalize that for credit cost, it’s probably a little over 1% ROA. So we believe we are on track, if not a little bit ahead of, on a normalized basis, our path to 1.2 to 1.3 as we exit 2015.

Just to reiterate for people, 1.2 would be what we believe we can get to, if the economy kind of stays the same, it will take improvement in the economy and an improvement in the yield curve for us to get to 1.3.

Frank Schiraldi - Sandler O’Neill

You mentioned normalized credit costs. Should we still assume, I think it was $3 million to $3.5 million a quarter? Is that the expectation of normalized credit costs going forward?

Rodger Levenson

Based upon the improvement in the metrics that we outlined in the release, really across the board from an asset quality standpoint, we’re estimating for the next two quarters each, total credit costs to be in the range of $2 million. And I would remind you each quarter that that includes provision, OREO expenses, loan workout, etc.

Mark Turner

But obviously, as we saw the first two quarters, it can be uneven.

Steve Fowle

That’s lower than we expect our real long term run rate to be. So when you look at the chart, we’re going to be posting, that Mark referenced, that’s actually assuming higher credit costs than Roger is planning on for these next two quarters looking at our long term goal.

Frank Schiraldi - Sandler O’Neill

And then I just wondered if you could remind us when FNB comes onto the books, and the expected accretion associated with that company.

Mark Turner

We have the closing of the transaction scheduled for September 5. So we’re moving forward with that in plan. You may remember we talked about a one-time transaction cost that we’d be incurring. We have some of that behind us, and we’ve been disclosing overall corporate development costs quarterly. But we think we have about $3.5 million of costs that will impact our financial results. A large portion of that will be taken over the next couple of quarters.

And excluding those costs, we disclosed that we expect more than 3% earnings per share accretion from the transaction and increasing as we move forward through time.

Frank Schiraldi - Sandler O’Neill

So more than 3%, would that be an initial accretion, or would that be sort of maybe first 12 months? I’m just trying to recall what your disclosure was.

Mark Turner

That’s first year out of the gate.

Frank Schiraldi - Sandler O’Neill

And then just a quickie on the litigation costs. You mentioned in the release that they’ll continue at an elevated level in the third quarter, and then all else being equal, is that expected to fall back off for 4Q?

Mark Turner

That really depends. We’re right now at a very labor intensive period and we will be emerging from that as we go through the third quarter. What happens going forward really depends on the course that the case takes, and decisions we’ll be getting along the way. So can’t give a lot more visibility because of this uncertainty around the course this case is going to be taking in the future.

Frank Schiraldi - Sandler O’Neill

And this litigation cost, does this involve a reserve being taken? Or is this something that’s being paid out as we progress through the year? How should I think about that?

Mark Turner

The costs in the second quarter were for attorneys and professional fees, and any reserve we have on the books would be disclosed in our Q or SEC filings.

Operator

And our next question comes from the line of Jason O’Donnell from Marion Capital.

Jason O’Donnell - Marion Capital

My first question relates to the funding strategy going forward, and you all I think put up high single-digit earning asset growth in the second quarter annualized, which is nice to see. We’re not seeing a lot of that out there. But could you talk a little bit about the strategy going forward on the funding side, and whether you would be willing to continue to borrow more meaningfully in the event loan growth accelerates over the next few quarters or whether it would be kind of come squarely from core deposits, or you tap the securities portfolio. How do you think about the funding mix as we look over the next two or three quarters.

Mark Turner

I think the answer is, it’s from a bunch of things, and we would evaluate that as we move through time. So first and foremost, the acquisition will help in that FNB Wyoming has more deposits than loans, so that will help funding right there. And then we have said especially where we are in the cycle, and with interest rates at this point, we’d be willing to let the securities portfolio run down to fund loan growth, and that will obviously help margin.

And then other than that, we can, as we see is appropriate in our marketplace, we can obviously dial up the deposits or dial back the deposit taking that we get. And then the last kind of lever we’ll fall back on would be funding through home loan bank or other noncore sources. And we have over a billion dollars’ worth of availability from those sources. So we have plenty of options and liquidity, and we would tap those in a combination that obviously we saw best for both profitability, liquidity, and interest rate risk.

Jason O’Donnell - Marion Capital

And then my second question, related to the margin, it looks like the margin was up a couple of basis points this quarter, just excluding the impact of the days and the reverse mortgage income incrementally. What’s the outlook for the back half of the year, and specifically, if you can give us any color around deposit rates, and where you see deposit costs heading in the current environment.

Steve Fowle

From a margin standpoint, we’re expecting flat to slightly improving margin, very consistent with what we’ve talked about in the past, and for this coming quarter, and throughout the year. So continue to see slight positive momentum really around our loan growth, repositioning of our balance sheet, and pricing discipline we’ve maintained through the cycle.

Rick Wright

In the current environment, we’re not seeing anything different from the last several quarters. There’s obviously a lot of competition out there, but I haven’t seen any trend toward accelerated competition or accelerated rates. So I wouldn’t expect to see those in the next couple of quarters.

Operator

And I’m showing that there are no further questions at this time. I’d like to turn the call over to Mark Turner for closing remarks.

Mark Turner

So there was one question that we were expecting to get, and we did not get, so we’ll end the call with maybe an additional commentary on loan growth in the third quarter, and through the rest of the year, before we go to concluding comments. Rodger?

Rodger Levenson

So I just wanted to reaffirm our previous guidance, that we expect over the long term and for this full year of mid to high single digit loan growth. We do have one large relationship that we’ve been expecting and expect there will be a payoff on this quarter. We’re not leaving the relationship. They’re taking out some of the real estate related to the relationship into the permanent markets. As you know, there’s some very attractive terms in those markets. So that may dampen the growth rate a little bit in the third quarter, but we expect to achieve the prior full year guidance.

Mark Turner

Thank you, Rodger. And thanks to everyone again on the call. We look forward to seeing as many of you as possible at our New York City investor relations conference next week. So have a good weekend, everybody. Take care.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

About this article:

Expand
Tagged: , Regional - Mid-Atlantic Banks,
Error in this transcript? Let us know.
Contact us to add your company to our coverage or use transcripts in your business.
Learn more about Seeking Alpha transcripts here.