WSFS Financial Corporation (WSFS) Q1 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the WSFS Financial Corporation First Quarter 2014 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today’s conference, Steve Fowle, Chief Financial Officer. Please go ahead, sir.

Thank you, Danielle, and thanks to all of you for taking the time to participate on this call. With me from WSFS are Mark Turner, President and CEO; Paul Geraghty, our Chief Wealth Officer; Rodger Levenson, Chief Commercial Banking Officer; and Rick Wright, our 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 can 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 recent quarterly reports on Form 10-Q, as well as other documents we will periodically file with the Securities and Exchange Commission. Now with that said, I will turn the call over to Mark Turner.

Thanks, Steve, and thanks to everyone on the call for your time and attention. WSFS reported $16.9 million in net income and $1.85 per share in earnings in the first quarter. Excluding notable items identified in the release, the largest of which was a $6.7 million or $0.73 per share tax benefit from the legal call of our reverse mortgage trust more normal earnings were $1.10 per share in the quarter. As indicated in last quarter’s call and this quarter’s release, the first quarter is by far the most seasonably slow quarter and this year that was exacerbated by the long and harsh winter in the Mid-Atlantic States. Despite those dynamics we continued the fundamental growth and momentum of our business. Highlights include, core total revenues, net interest income, and core fee income, that is excluding securities gains, all increased a healthy 8% from the same quarter 2013 with that strength coming from every major business line. Continuing that momentum this quarter’s total loans grew by 5% annualized propelled by commercial loans, our most profitable loan segment, which grew 9% on an annualized basis. And core customer funding excluding the expected run-off and temporary trust account activity increased 5% on an annualized basis in the quarter. Core funding now represents a robust 84% of our total customer funding. Our core earnings per share of $1.10, again that’s excluding the notable items, was 22% greater than the same quarter last year. And our return on assets of 90% basis points was 9 basis points or 11% greater than the same quarter last year as well. Lastly tangible common equity and tangible common book value per share both increased more than 7% in this quarter alone coming from net income and an improvement in the value of our investment securities. There are a few items that warrant some additional discussion and analysis to help in understanding our broader business and balance sheet dynamics. First, the calculated margin declined by 11 basis points in the quarter. We estimate 7 basis points of that was due to lower number of days this quarter, generating less income and our simple margin calculation method in which each quarter regardless of the number of days gets the same one quarter annualization factor. A further 2 basis points of the margin decline came from our reverse mortgage income which as you know can be volatile, and the last 2 basis points came from the impact of heavy competition on loan yields. Switching to credit quality, NPAs total assets at 1.22% and total credit cost at 3.1 million were at good overall levels. While total credit costs were in line with guidance of 3 million to 3.5 million per quarter for 2014, they were moderately elevated from last quarter primarily driven by 2 medium sized relationships that went delinquent and were put on nonaccrual status. As we’ve indicated while credit quality and credit cost continued to trend down to pre-grade recession levels they can in any quarter be uneven. Finally as mentioned earlier the first quarter of the year winter months in general and the harsher weather this year specifically are impactful in a compounding way due to, the lower number of days turned revenue, less activity occurring in the economy affecting our particularly transaction-heavy fee-based businesses, higher compensation and related costs that typically come with the start of a New Year and higher expenses from things like snow removal and utility costs. We estimate in this quarter as compared to the fourth quarter of 2013 that net interest income was reduced by $650,000 for the 2 fewer days. Compensation and related costs increased approximately $800,000 dollars from employment taxes and 401(k) matching costs that cap out over the course of the year and the harsh winter increased our expenses by approximately $400,000. The impact on fee income is much harder to isolate but based on our history typically core fee income in the first quarter is 5% to 7% lower than the fourth quarter. Right now that equates to about $1.0 million to $1.4 million, and we expect would be at the high-end of that range if it is a rougher winter. We also expect most of these first quarter impacts will receipt as 2014 progresses and with our continued good growth and the local economy showing increasing signs of strength, we look forward to a very good 2014. Thank you. And at this point, we’d be happy to take your questions.

[Operator Instructions] And our first question comes from Catherine Mealor from KBW.

I wanted to see, you mentioned in the release and in your remarks how you’re seeing a decline in your loan yield from increased competition. Can you give us a little bit of color behind generally where you’re seeing loans coming off and then coming on your portfolio right now?

Cathy, excuse me, it’s Rodger Levenson speaking. In terms of where we’re seeing loans coming on, if you look at this past quarter average loan yields for loans greater than $500,000 which is really the majority of our commercial business we came in at 4.3 on a weighted average basis the yield. So that’s right in line with what our overall yield has been and I think this stands up very favorably compared to our peers. Obviously our run-offs is a little bit north of that, in terms of the higher yielding loans that are running off, but that gap has been steadily declining and we’re getting close to the point of equilibrium. In terms of the competition it’s very intense, it's coming I think from across all sectors. One particular point I would highlight is one very large regional player in our market has been out with a heavy promo on up to $3 million owner occupied commercial mortgage a 5-year term, 20-year amortization at 369 which is very aggressive and obviously compares differently to the business that we’ve been booking and has impacted our pricing decisions somewhat. So right now, I’d call the pricing pressure intense.

Got it. And so then how are you thinking about your NIM margin going forward? Do you still feel like there is a little bit of an upward bias towards your core margin?

Yes. Catherine, if you think about it, as we move into next quarter it’s a longer quarter so that in itself will help with both the net interest income dollars and the margin calculations. But we don’t pick up as many days as we lost going from Q4 to Q1. But additionally if you think about what Rodger said about the commercial loan yields, there is still pressure but the pressure should decrease as we’re reaching kind of an -- approaching an equilibrium to what our current portfolio yield is. So I think the trends in terms of the downward pressure there should slow somewhat. But at the same time we’re expecting offsetting that to be continued growth in our businesses and as a result of that continued improvement in balance sheet mix that should help us out. So I’d anticipate upward trends from some more quantitative factors in Q1 and then some additional opportunity to pick up incremental increases in margin beyond that.

And our next question comes from Jason O’Donnell from Merion Capital Group. Jason O’Donnell: Rodger, just given your commentary on the loan yield potentially stabilizing soon and Steve I think you just shared with us some thoughts around the margin potentially increasing. Is that something that is likely to be material or are you envisioning sort of a maybe just a few basis points of expansion as we look out over the next couple of quarters?

I’d anticipate gradually and slower few basis points as oppose to larger chunks. But again the days of the month itself will help this coming quarter. Sorry end of [ph] the quarter. Jason O’Donnell: Yes. And then I guess just in terms of the outcome with respect to loan growth this quarter was obviously pretty favorable just given the winter. How would you all characterize the loan pipeline at this point relative to where it was maybe last year at this time, is it stronger, weaker somewhere in the same range?

Jason, it’s Rodger again. Our pipeline, compared to this time last year, is a little weaker. I really attribute that very much to the pricing competition not there is an overall opportunities out there but we really only put things into that 90 day weighted average that we think have the likelihood of closing. So we’re a bit below where we were at this time last year and where we track actually during most of the first quarter. So while I think we will -- we're still on-track for mid to high single-digit loan growth for the year, this upcoming quarter could be a bit below that. Jason O’Donnell: Okay, understood. And then on the switching gears a little bit on the noninterest income side just thinking about the trajectory there at least the core noninterest income can you give us some color around your near-term expectation for the credit, debit card and ATM line do you expect that to bounce back a little bit into the second quarter I know there are some moving parts in there given the impact of Cash Connect?

It’s a little hard to read because we’re still trying to settle [ph] a little bit about the, what’s the impact of the winter versus the seasonal but we clearly expect an improvement versus the first quarter and an improvement in the second quarter relative to 2013’s second quarter. Jason O’Donnell: Okay, great. And then last one and I’ll hop out. On the mortgage banking side, do you expect to see a rebound there in the second quarter based on the pipeline you have currently or is this a good run rate all else equal in terms of rates?

This is Rick Wright again I’ve answered the last question I forgot to identify myself, we do expect some improvement looking at the pipeline over the last 30 days or so it’s improved quite a bit at this point we would say that we’re expecting something in the 900,000 to a 1 million range so it would be an improvement. The last couple of weeks would push me a little towards the top-end of that but we’ll have to see how that goes. And I would say that we have turned to significant purchase money on the loan side as opposed to refis that’s running about 50% to 60% so that’s sort of good news for us.

And we’re bucking the trend a little bit of the market out there because of our purchase of Array Financial late last year which is a very good operation and primarily their business has been built one center of influence and purchase money market business so we’re rebounding stronger in that and I think most that we’re more depending on just refi business.

And our next question comes from Matt Schultheis from Boenning.

A couple of quick questions and I am sorry if I missed this in my read of your press release. Were there any interest accrual reversals tied to the 2 larger loans that you put on to nonaccrual and if so how much were they?

Yes. Matt, it’s Rodger again. There was accruals it was a modest amount though I don’t have the exact basis point piece but it was a modest piece.

Yes, just to hang on to that a little bit Matt is that if you look at the quarter-to-quarter change in net interest margin in addition to the days of the quarter if you look at the loan yields particularly commercial we did have a couple of 100,000 of accounting adjustments in that quarter related to prepayments. So if you’re trying to rationalize the difference quarter-to-quarter it’s less to due to things that impacted us negatively this quarter and more to things that impacted us positively last quarter.

Okay. And can you add any color as to the nature of the loans that were moved into nonaccrual the 2 larger loans of 7 million and change?

Matt, it’s Rodger again these are 2 commercial real estate related loans one is in Cecil County Maryland, the other one is in Delaware County, Pennsylvania. Projects that are income producing projects that suffered some vacancy and where the sponsor had some pressure in their overall global cash flow which caused them to go delinquent and subsequently nonaccrual.

Same sponsor?

No, 2 different sponsors, totally unrelated.

[Operator Instructions] And our next question comes from Frank Schiraldi from Sandler O'Neill.

Just most of my questions have been asked already actually but I guess I’ll just ask one more on the margin if I could. Steve I think you mentioned on the last call that expected the NIM to improve slightly from 4Q levels I took that to mean for the full year 2014 so if that’s the case is that still looking like a possibility here or does that reset downwards somewhat given competition?

Yes, given the competition and also the dynamics about interest rate I am anticipating that we do improve through the year and my comment last time was about the overall year not quarter-to-quarter. But I’d expect as we recover the year that we go out the last quarter kind of similar to where we went out last year’s last quarter, assuming we can continue to make the kind of growth in our balance sheet that we’re expecting to make.

And I am not showing any further questions, I would now like to turn the call back to Mark Turner for any further remarks.

Okay. Thanks again everyone for your time and attention. We will be on the road a couple of times in the second quarter and we look forward to seeing as many of you as possible then. Have a great weekend.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. Everyone have a great day.