WSFS Financial Corporation (WSFS) Q3 2015 Earnings Report, Transcript and Summary

Good morning, and welcome to the Bryn Mawr Bank Corporation Third Quarter 2015 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] I would now like to turn the conference over to David Takats. Please go ahead, sir.

Thank you, Keith and thanks everyone for joining us today. I hope you had a chance to review our most recent press release. If you have not received our press release, it is available on our website at www.bmtc.com or by calling 610-581-4925. Also on the call with us today are Frank Leto, President and CEO; Joe Keefer, our Chief Lending Officer; Harry Madeira, Head of Wealth Management; and Mike Harrington, our new Chief Financial Officer. The archives of this conference call will be available at the Bryn Mawr Bank Corporation website or by calling 877-344-7529, referring to conference number 10072507. A replay will be available approximately 1 hour after this call concludes and will be accessible until 9:00 a.m. Eastern Time on Friday, November 6, 2015. 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. Please refer to the disclaimer labeled forward-looking statements and safe harbor in our earnings release for more information regarding what constitutes a forward-looking statement. 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 more complete discussion of the assumptions, risks and uncertainties related to our business, you are encouraged to review our filings with the Securities and Exchange Commission located on our website. I would now like to turn the call over to Frank.

Thanks, David and I would like to thank everybody for joining the conference call today. I would also like to take this opportunity to welcome Mike Harrington, who is on today’s call. I hope you had a chance to review our third quarter earnings release, which was issued yesterday after the market close. Net income for the quarter totaled $7.5 million, which was an increase of $1 million from the third quarter last year. If we exclude merger costs and security gains, core earnings have increased by $1.1 million from last year. As we saw in the second quarter of this year, loan growth continues to be excellent. Net portfolio loans grew by $75.5 million, or 3.5% during the quarter, with commercial mortgages, C&I loans, and residential mortgages leading the way. It should be noted that the net growth in portfolio loans excludes $37.3 million of pay-downs of acquired loans, bringing the actual growth in the quarter in originated loans to $112.8 million. This loan growth or this growth in the loan portfolio was challenging as our lending teams are constantly faced with fierce competition for market share, with other banks sometimes offering low rates and [covenant] like loan terms. Our lenders pride themselves on their talent for winning bids based on relationships and the ability to offer efficient, origination timelines tailored to fit their customers’ needs. These factors have been a driving force in developing new relationships with borrowers, who are also new to Bryn Mawr. Our credit quality continues to be excellent with non-performing loans as of September 30, 2015, comprising 55 basis points of total portfolio loans, down from 61 basis points at the end of 2014. We did experience an uptick in non-accruals during the quarter, mainly related to a $1.9 million C&I loan, which was classified as impaired. However, we are working closely with the borrower and optimistic that this will be resolved before year-end. On the non-interest income front, our wealth and insurance divisions continue to provide a reliable source of fee income, which as you all know is vital during this extended period of tightening interest margins. And while the downtown in the stock market during the third quarter had an impact on our wealth management services, our wealth officers are continuing to identify new opportunities for growth. With respect to one of our strategic initiatives for 2015, the recent additions of two top loan officers in our Hershey wealth location has created synergies between the wealth and lending businesses as the lenders develop relationships with existing wealth clients, as well as to introduce their books of known customers to the wealth business. While the new lenders have only been with us for slightly over a quarter, they have already booked loans and have developed a strong pipeline. We believe that this is a significant opportunity for Bryn Mawr Trust given their disruption in the central Pennsylvania market following several recent merger announcements. Our recent insurance acquisitions operating together under the Powers Craft Parker & Beard name continue to produce consistent levels of insurance revenues. With year-to-date revenues topping $2.9 million, a nearly 8-fold increase from the same period in 2014. In addition to these non-interest revenue strategies the corporation is constantly on the lookout for new opportunities as they arise. We frequently evaluate various lift out strategies in the lending arena, most recently successfully adding a team of seasoned lenders to form a subsidiary of the bank, which was specialized in nontraditional commercial real estate loans to small businesses to small businesses throughout the country. The operations began on October 1, and as we are optimistic that although this new venture will require some time to ramp up its originations, it will have a positive impact on our bottom line. They too have already begun to develop a nice pipeline of opportunities. In regards to capital planning as you all know, we completed a very successful sub debt offering in August raising $30 million of 4.75% fixed-to-floating rate notes. The rate we achieved was one of the lowest at the time and reflects the market’s confidence in the corporation. The sub debt will serve to augment the corporation’s tier two capital, which will be impacted later this year by the termination of our corporation pension plan. In August, we also announced the share repurchase program, in which we indicated our intention to repurchase up to 1.2 million shares of BMT stock, with a goal of increasing shareholder value and earnings per share. As of September 30, 2015 the corporation repurchased 554,500 shares under the program. As I mentioned last quarter, a number of recent improvements to our back-office and front office systems will not only put us on the leading edge of banking technologies, it will also begin to improve efficiencies and will enable us to scale for future growth. These improvements, however, come at a cost, as the new systems are placed into service and their costs are being amortized. With regards to the continental systems conversion, which is slated to be completed this weekend, redundant system costs, as well as staffing will be eliminated as all of our branches will operate under the Bryn Mawr Trust banner. It will certainly be a busy weekend for many members of our talented staff, and once we have crossed this hurdle, we expect to realize further cost savings related to the combined institutions. For the past 90 consecutive quarters we paid dividends to our shareholders. We are very proud of this record and feel fortunate to have the continued loyalty and support of the shareholders. Therefore I am pleased to announce that on October 22, 2015 the board of directors of the corporation declared a quarterly dividend of $0.20 per share payable on December 1, 2015 to shareholders of record as of November 3, 2015. In summary, we believe our business model is sound and that we are in an excellent position to take advantage of opportunities for continued profitable growth and strong performance. As we along with other community banks continue to be squeezed by tightening interest margins we strive to identify new ways to diversify and expand our non-interest revenue streams. We continually evaluate acquisition opportunities as they arise with focus on quality and compatibility and we believe we are poised for continued profitability and growth. So with that, we will open the lines to questions.

Thank you. [Operator Instructions] And the first question comes from Chris McGratty with KBW.

Hi, good morning everyone.

Good morning, Chris.

Good morning, Chris.

Hi Mike. Good to talk to you. I wanted to get a little more detail on the loan growth opportunity. Obviously the quarter was big. Can you frame the pay downs in context of prior quarters of $37 million, is that – how unusual is that lower pay down?

I don’t know what the number were early payouts or whether just normal maturities.

Well, I think with the acquired loans with Continental Bank what we experienced in the first – this is Joe Keefer Chris, in the first six months was a fairly high level of prepayments that weren’t caused by losing the customer. The customer decided to either sell their business or sell real estate that they own where we had a commercial mortgage on. So that was at a fairly high level. That was somewhere around $20 million to $25 million. The other runoff that happens is normal through scheduled debt reductions, but with respect to the Continental, relationship managers and their performance there, their pipelines have really picked up from the beginning of the year, which is to be expected, when you go through a merger like that. It takes a little while to get ramped up, but I am very pleased with where they are now.

That is helpful. I guess what I am after is 75 million that you put on this quarter roughly, I guess I'm trying to see what the run rate might be into the end of the year and into ’16 especially, maybe if you could add some color on the lift outs that have occurred?

I will talk about the bank’s loan portfolio and we had two very, very strong quarters, I think approaching 3.5% each quarter. And the lenders did a very good job building the pipeline, closing the loans, and when I look at the pipeline today it is down a little bit, which is to be expected with all that growth. But it is still at a level that when I look at prior quarters is very, very acceptable. So I am thinking in the fourth quarter it is going to be pretty good, double-digit, don't really know. That would be difficult, but I think will come for the year 2015 show a nice loan growth for the whole year. I am sorry. On the lift outs, that is relatively new. I mean that just started October 1. And the business model it is a lot like – the financial models are a lot like our leasing company, where we can create a specialty niche business, and if we apply 8% capital against their portfolio, we will achieve return on equity that is much more than we can get in the traditional bank. But it is just up and running. So we don't really see much contribution from them with respect to earnings accretions until the latter part of next year.

Chris, I am Frank. Just to give you a little bit more color too, one of our strategic initiatives we started at the beginning of the year was to build out Hershey into more of a full service branch as we had the wealth management out there. So, Joe and Garry worked pretty much in the first part of the year on getting it set up. We have been able to bring over two very strong people and that was what I was alluding to in the opening remarks is that they have already closed, I think a pretty significant amount for the year – for little over a quarter they have been here and looking at their particular individual pipelines it is strong going into the rest of the year, and hopefully into the beginning part of next year. We are seeing a lot of opportunities with all that displacement out there to maybe pick up some very strong teams, and we are continually evaluating that. I think our brand is starting to resound well in central Pennsylvania and that is why we see the teams contacting us.

Is the dislocation Mike obviously coming from Susquehanna and with National Penn being acquired as well, is there a more [core press] on talent and kind of recruiting over the next 6 months for just this location?

Well, I mean, we are definitely looking at every opportunity that comes along. I mean it is – and it is not just those two banks. I mean you have got Metro out there, you have got Integrity, you have got – I mean that is a number of things that went on in central Pennsylvania, and some of that spills over certainly to the eastern part of the states. So we will just keep looking. I mean I think there is – we will see, we will see. We hope there will be good opportunity.

Okay. Just if I can ask one more on credit, the provision on the credit relative to the size of the credit seemed fairly sizable, can you maybe elaborate on what happened in the resolution process should we be thinking about additional provisions being required in the fourth quarter?

Well, the biggest piece of the provision this quarter was related to that C&I loan that became impaired during the quarter. We put half a million dollar specific reserve on that. If you back that out of the 1.2 million based on our originated loan growth of $113 million, you are looking at about 61 basis points of provision on the new growth. So it is really not anything alarming at this point.

Then you think that the 0.5 million suffices to any loss content that might be in that relationship?

Chris, I think you will just see Bryn Mawr perform from a credit quality basis the way we have always performed in the way I am looking at the portfolio. So we go quarter-to-quarter, we make an assessment of the loan quality and that is what we will do going forward.

All right. Thank you.

Thank you. [Operator Instructions] And we have a question from Casey Orr with Sandler O'neill.

Hi, good morning.

Good morning.

Good morning Casey.

I am wondering with respect to the share buybacks, can you tell us what the average price was that you bought the shares back at, and then going forward should we expect you to continue to buy back shares in that price or that level of shares over that be largely dependent on your stock price, which has come back up since the third quarter? Thanks.

Hi, this is Lori Buchanan, the General Counsel here at Bryn Mawr. We can't give you specifics in terms of the buyback, but the shares were bought back in connection with a 10b-18 offering. So, all within the price ranges that are [Indiscernible].

Okay, great. Thanks, and I am wondering if you can touch more on the expense saves you expect to get from the systems conversion that is happening this weekend? Thanks.

Well, I mean, a couple of things Casey. We are starting to see two branches that we closed, we are starting to see those come through for the rest of the year. Going into – we are going to have these expenses through the end of the year to a large extent. So actually give me one second Casey. Total – so total expected cost savings coming out of Continental was little under 40%. So we will get rid of the redundant systems by – really by the end of December we are going to get rid of the redundant staffing by the end of December. All that should shake out as we have been saying all along for the rest of the year beginning in the first quarter; you will start to see that new run rate.

Great. That is helpful. Thanks.

Thank you. And as there are no more questions at the present time, I would like to turn the call back over to management for any closing comments.

Well, thank you again for joining the call and we will be looking forward to giving you the year-end results in January. Thanks.