WSFS Financial Corporation (WSFS) Q1 2015 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. My name is Laura. I will be your conference call operator today. At this time, I would like to welcome everyone to the Bryn Mawr Bank Corporation’s Quarterly Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period. [Operator Instructions] Thank you. Please note this event is being recorded. It is now my pleasure to turn the floor over to your host, Duncan Smith, Chief Financial Officer. Sir, you may begin your conference.

Thank you, Laura and thanks for joining us everybody today. I hope you had a chance to review our most recent press release. If you have not received the press release, it is available on our website at bmtc.com. Frank Leto, President and CEO of Bryn Mawr Bank Corp. has some comments on the quarter and our strategic initiatives. After that, we will take your questions. The archives of this call will be available at Bryn Mawr Bank Corp.’s website or by calling 877-344-7529 referring to conference number 10062202. A replay will be available approximately two hours after the call. Before we begin, please be advised that during the course of this conference call, management may make forward-looking statements, which are not historical facts. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include but are not limited to the words may, will, would, could, should, likely, possibly, probably, potentially, predict, contemplate, continue, believe, expect, anticipate, outlook, project, forecast, are optimistic, are looking, intend, plan, target, estimate, or words or phrases of similar meaning. Forward-looking statements by their nature are subject to risks and uncertainties. A number of factors, many of which are beyond the Corporation’s control, could cause actual conditions, events, or results to differ significantly from those described in these forward-looking statements. All forward-looking statements discussed during this call are based on management’s current beliefs and assumptions and speak only as of the date and time they are made. The Corporation does not undertake to update forward-looking statements. For a complete discussion of the assumptions, risks, and uncertainties related to our business, you are encouraged to review our filings with the SEC located on the website. Thanks. And I’ll turn the call over to Frank.

Thanks Duncan, and I'd like to thank you all for joining our conference call today. I hope you had a chance to review our first quarter earnings press release which was issued yesterday. We're pleased with our strong results and we [ph] begin to recognize the scale added by the Continental merger as well as the contribution of our growing insurance division and our strategic initiatives. The merger with Continental was completed on January 01, and brought approximately $427 million in loans and $482 million in deposits in addition to nine new full-service branches. Our staff and management have been hard at work integrating the two institutions and we remain confident that the former clients of Continental will experience a seamless transition to the Bryn Mawr Trust network which is expected to occur during the fourth quarter of this year. Having completed eight mergers and acquisitions in recent years, we have built a team of highly skilled individuals who are devoted to integrating the operations of the companies we acquire. The same team is also heavily involved in the due diligence process as new opportunities arise. In addition to the Continental merger, the acquisition of Powers Craft Parker and Beard which closed in October of last year is fully integrated and is producing positive effects on our bottom line. To further bolster our insurance division on April 01 of this year we acquired the Robert J. McAllister Agency, another full-service insurance and advisory firm providing insurance and risk management solutions to individuals and businesses in the Philadelphia area. The combination of Powers Craft and McAllister will open our insurance division to several new markets and it continues to increase its scale, making it eligible for more favorable pricing from insurance carriers. Lastly, our mortgage banking initiative which began to ramp up in 2014 is now in full swing with six new mortgage loan originators working tirelessly to take advantage of our expanded footprint and to increase this important source of non-interest income. We recognize that while organic growth is an important part of our overall growth strategy, the identification and development of these diversified revenue streams is equally important, especially as we continue to be saddled with tightening interest margins. And now on to the numbers. We reported net income of $7.5 million and diluted earnings per share of $0.42 for the first quarter of '15 as compared to net income of $6.7 million and diluted earnings per share of $0.49 for the same period in 2014. It is important to point out the net income for the first quarter of 2015 includes the pretax due diligence and merger-related expenses of $2.5 million as compared to $264,000 for the same period last year. On a non-GAAP basis, net income excluding tax-effected due diligence and merger-related expenses was $9.1 million or $0.51 per diluted share for the first quarter of '15 as compared to $6.9 million or $0.50 per diluted share for the same period last year. We believe these non-GAAP measures are important in evaluating the Corporation's performance and a reconciliation of these measures is included in the schedules accompanying our press release. Some significant factors contributing to the results in the first quarter of 2015 included an increase in net interest income of $6.1 million or $32.4% to $24.8 million as compared to $18.7 million for the same period in 2014. Average portfolio loans for the first quarter in '15 increased by $530 million as compared to the first quarter of 2014. And this increase was primarily related to $426.6 million of loans acquired from Continental. Average interest bearing deposits also increased $502 million between the first quarter of 2015 and the first quarter of 2014 largely from the Continental acquisition. The tax equivalent net interest margin of 3.79% for the first quarter of 2015 decreased by 23 basis points from the 4.02% in the same period in 2014 and 5 basis points from the fourth quarter of 2014. The decreases in tax equivalent net interest margin were driven not only by the addition of the Continental loan portfolio whose interest yields were quoted at [ph] market rates as of the date of the acquisition, but also by an increase in average cash on deposit with correspondent banks. For the three months ending March 31, average interest earning deposits with other banks totaled $206.7 million as compared to $115 million and $67.8 million for the fourth quarter of 2014 and the first quarter of 2014 respectively. The average yield earned on these deposits which are primarily at the Federal Reserve was 25 basis points. This increase in deposits with other banks resulted from the influx of cash from customer deposits during the first quarter of 2015. The provision for loan and lease losses decreased by $181,000 for the first quarter of 2015 as compared to the same period last year. The Corporation recorded a provision for loan lease losses of $569,000 for the three months ending March 31, as compared to a provision of $750,000 for the same period in 2014. On a linked quarter basis, the provision increased $885,000 for the first quarter of 2015 from $316,000 release from allowance recorded in the fourth quarter of 2014. Non-interest income increased $3.6 million for the three months ending March 31 as compared to the same period in 2014. Contributing to the increase was $916,000 increase in insurance revenues directly related to the Powers Craft acquisition. The acquisition of Robert J. McAllister Agency in April is expected to add an additional $500,000 annually from its growing source of non-interest income. Net gain on the sale of residential mortgage loans increased $484,000 in the first quarter of 2015 as compared to last year as the mortgage banking initiative begins to produce the anticipated results. Residential mortgage loans originated for resale during the first quarter of this year totaled $27.2 million representing 194.6% increase from last year. On a linked quarter basis, net gain from sale of residential loans for the first quarter of 2015 increased $337,000 with loans originated for resale increasing by 88% as compared to the fourth quarter. Net gain on sale of available for sale investment securities totaled $810,000 for the three months ending March 31 as compared to a net loss of $4000 for the same period last year. In an effort to shorten the duration of the investment portfolio, certain long-term investments acquired from Continental were sold responding [ph] in market interest rates that occurred beginning of 2015 to increase the market value of the Corporation's available for sale portfolio. Revenue for Wealth Management services remained strong increasing $192,000 to $9.1 million for the first quarter of 2015 as compared to the same period last year. Other operating income increased by $847,000 for the first quarter of 2015 as compared to the same period last year [ph]. This increase was partially attributed to a $448,000 special dividend received from the Federal Home Loan Bank of Pittsburgh in addition to increases in debit card fees in connection with volume increases from the Continental merger. Non-interest expense for the three months ended March 31 increased by $8.5 million as compared with the same period in 2014. Largely contributing to the increase in non-interest expense were increases in salaries and wages, employee benefits, occupancy and bank premises, and furniture, fixture and equipment expense all of which were directly related to the continental staff and facilities. Due diligence in merger related expenses are $12.5 million for the first quarter $2.2 million increase from 2014. These expenses included investment banking fees, professional fees, redundant staffing and systems expenses related to the integration of the Continental infrastructure. Included in other operating expense for 2015 was $177,000 of debt prepayment penalties, associated with the early prepayment $19.6 million of FHLB advances assumed from Continental as well as $343,000 paid to terminate two interest rate swap positions assumed in the Continental merger. Total portfolio loans and leases of $2.9 billion as of March 31 increased $436 million from December 31, primarily related to loan acquired from Continental. The growth in loan volume was anticipated based on below average loan pipeline that existed as of December 31, 2014. Furthermore the addition of staff and operations from Continental and the integration of the two credit cultures through that we experienced expected delays and distractions as the two institutions come together as a combined force. While some of our competitors maybe presorting stronger loan growth we are cognizant of the fact that there is quite a bit of irrational pricing and structuring going on in the marketplace. With extremely low rates and favorable accommodates being offered as loss leaders in order to procure additional business. One of our hallmarks has always been our excellent credit quality and we have no intention of allowing it to deteriorate in order to buy business. It was this unwillingness to lower our guard in the past that enable us to whether the recent financial crisis that negatively impacted many of our competitors. That being said, our lending pipeline has improved significantly as of March 31, and we anticipate better growth for the remainder of the year. In addition with the mortgage lending initiative producing excellent results, we have the ability to hold a larger percentage of new originated loans in our portfolio. Nonperforming loans and leases as of March 31 were $9.1 million, or 44 basis points of total portfolio loans and leases as compared to $10.1 million or 61 basis points as of December 31, 2014. For the three months ending March 31, net loan and lease charge-offs were $859,000 as compared to $495,000 for the same period in '14. Total assets as of March 31 were $2.94 billion, an increase of $696.7 million from December 31. Deposits of $2.24 billion as of March 31 increased $553 million from December 31. This increase was partially related to deposits initially assumed in the Continental merger in addition to organic increases of $71.7 million during the first quarter of 2015. As of March 31, the capital ratios for the Bank and Corporation indicate levels well above regulatory minimum to be considered well capitalized. The tangible equity ratios for both the Bank and the Corporation as of March 31 have increased from their December 31 levels primarily as a result of the equity issued in the Continental merger, which totaled $123.7 million. The effect of this issuance of equity was partially offset by $65.6 million in goodwill and intangible assets also recorded in connection with the merger. In closing, I'd like to take this opportunity to announce the launch of our new marketing campaign and rebranding of the Bank, which was unveiled at our Annual Meeting yesterday. We wanted to take a fresh look at The Bryn Mawr Trust brand, which we feel is one of the strongest in community banking and create a singular credible brand position that has the capabilities of encompassing all of our business lines. Bryn Mawr Trust understands that each client is different with very different and special financial needs deserving an institution with experienced singular focus on achieving those goals. Therefore, as of today the Bryn Mawr Trust Company will be known simply as Bryn Mawr Trust or BMT. Over the coming months we'll begin the process of rolling out the new brand with a new website, signage, brochures and the like and we're very excited about the new look. For the past 88 consecutive quarters we paid dividends to our shareholders and we are very proud of this record and feel fortunate to have the continued loyalty and support of our shareholders. Therefore, I am pleased to announce that on April 30, 2015 the Board of Directors of the Corporation declared a quarterly dividend of $0.19 per share payable on June 1, 2015 to shareholders of record as of May 12, 2015. In summary, we believe our business model is sound with an improving economy locally and nationally and we're in an excellent position to take advantage of opportunities for continued profitable growth and strong performance. We continually evaluate acquisition opportunities as they arise with a focus on quality, compatibility and strategic value and believe we are poised for continued profitability and growth. And with that, we'll open the lines to questions.

Thank you. At this time we will begin the question and answer session. [Operator Instructions] And our first question will come from Chris McGratty of KBW.

Hey, good morning everybody.

Good morning.

Good morning, Chris.

Okay, Duncan, maybe start with you, a lot going on with the balance sheet and your cash position was up substantially so from securities, can you help us on the kind of your earning asset levels from here, are we done with kind of the right sizing of the combined institution, should we see the securities book kind of hold where it is or is there anything left to be done?

Good question. As we mentioned, as Frank mentioned in his opening remarks there, we did shrink the opening balance sheet from day one of the acquisition by about $115 million that was short-term borrowings came out and then accordingly cash and securities. So right now cash is a little bit higher than we would like to carry, partly we do every year experience a seasonal influx of cash during the first quarter and a lot of that runs out right way at the end of the - around about April '15. So it is going off to Washington. So, we are going to see the cash levels lower. We're probably going to continue to restructure the investment portfolio a little bit, but the levels should remain about where they are in investment portfolio. It's probably the cash and hopefully we'll be deploying that in the loans or put it out in new investments.

Okay, that's helpful.

Okay.

And the kind of the followup to that is, if your core margin if you kind of back out the accretion you guys are starting to back disclose, that obviously was impacted by cash. So the question is, is the – how should we be thinking about the near-term margin given the restructuring? My guess is you'll get some relief from the activity that you talked about from either better loan growth and security deployments, so should we see a sequential improvement in the margin or is there competitive pressures that will offset that?

Yes, I think it's probably flat due to Duncan said pricing in the market of new loan books. I hope nobody pays off and we stay exactly where we are and but it is a lot of the irrational pricing out there and some very, very low rates and so that pressure will be there. The margin or the accretive yield obviously is going to be higher than it has all last year, but it is tempered or it's characterized by – it's done on a loan level. So depending on the speed of the loan payoffs and/or how long they stay with us then that will mitigate a little bit, but it's certainly going to be an elevated level for quite some time.

Got it, okay. And last question I have for you is, I think you talked about last quarter this year not a ton of the cost days [ph] will come in, but next year is kind of where you get the guts of them to kind of come in to the bottom line, kind of adjusting for the noise in the first quarter, how should we think about the near-term expense run rate of the company?

Well, it's $27.5 million for the first quarter, the reported number. You obviously see that about $2.5 million is merger cost and in that merger costs we do have what we consider redundant systems, redundant staffing and people who are scheduled to exit at some point in the future. So that number is in the merger cost number, but things like intangible pieces like focus the cost you can't really quantify that number. So that's not in that number. So, but we do expect once we get and working on several on several IT initiatives right now to get us through the conversion and then sure we will see efforts and spend a little bit more on growth then integrating this merger. So we should see that starting in the first quarter of next year we'll get the full effect. Additionally, there were prepayment penalties and swap payment fees about $0.50 million. So you take another $0.50 million out there. So the run rate is probably around 24 to 24.5 for expenses.

Okay.

That helps?

That's very helpful. Thanks a lot.

Thanks.

And our next question will come from Matt Schultheis of Boenning.

Excuse me, good morning.

Good morning Matt.

Good morning Matt.

Really quickly, can you shed a little bit of light onto what you expect the impact of McAllister to be from a financial impact?

Well Matt, it's Frank. I think I said in my opening remarks, McAllister should generate about an additional $0.50 million in insurance revenues. I think that thing that's hard to quantify right now is the pricing break we are going to get given the larger amount of volume that we're going to put through a couple of the insurers. There were some crossover with some of the insurers that both Powers Craft and McAllister and we're going to get a better commission structure with the larger volume going through. We just haven’t been able to quantify it yet, probably have a better idea at the end of this first quarter.

Okay, and then your capital ratios are still very strong and, I was just trying to get a sense of your appetite for acquisitions, are you going to focus more on the fee side, more on the bank side or sort of agnostic depending on availability?

Well, that word agnostic has gotten everybody in the room smiling because that's pretty much the way we look at acquisitions. I think we are focusing on both to be honest with you, I mean we want to continue to build up the non-interest income side of this business. I mean you know, it's a personal goal we set up, so more even with the interest income side, so, but you got to take the opportunities as they come and I think the M&A market in the bank space is certainly heating up, at least that's what we're seeing. So, I think we are going to take advantage of opportunities as they arise whether they be wealth insurance or bank.

Well, Matt, with respect to capital, we stated before our TCE kind of goal that we would like to ideally be at is round that 8% number. So we're a little bit on the high side, but that's fine for now, but we do recognize as you said that the capital ratios are good and that kind of 8% is our managed target for TCE.

Okay, alright. Thank you very much.

Thanks Matt.

[Operator Instructions] And showing no further questions, I would like to turn the call back over to management for any closing remarks.

Well, thanks again everybody for tuning in and we look forward to a great second quarter. Thanks.