WSFS Financial Corporation (WSFS) Q1 2016 Earnings Report, Transcript and Summary

Good morning, and welcome to the Bryn Mawr Bank Corporation First Quarter 2016 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Mike Harrington, Executive Vice President and Chief Financial Officer. Please go ahead.

Thank you, Andrew and thanks everyone for joining us today. I hope you had a chance to review our most recent earnings release. If you have not received our press release, it is available on our website at 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; and Gary Madeira, our Head of Wealth Management. 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 10083628. A replay will be available approximately one hour after this call concludes and will be accessible until 9:00 a.m. Eastern Time on Friday, May 13, 2016. 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, Mike and I would like to thank all of you for joining our conference call today. We started 2016 on a very sound footing, reporting net income of $8.3 million and diluted earnings per share of $0.49. Many of the investments made in 2015 along with the implementation of our strategic plan are beginning to impact our performance. Net income for the first quarter of 2016 is a $14.6 million increase from the fourth quarter of 2015. However, as you know, the fourth quarter of 2015 was primarily impacted by the loss on the settlement of our corporate pension plan, which resulted in a $17.4 million pretax charge for the quarter. Our core net income for the fourth quarter of 2016, which was also $8.3 million, increased by $778,000 or 10.4% from the $7.5 million core net income recorded in the fourth quarter of ’15. Core net income excludes certain income and expense items that are not frequently recurring and enables management to more comparably evaluate changes in the Corporation’s operations. These items include the settlement of our corporate pension plan, due diligence, merger-related and merger integration costs, severance expense, branch lease termination expense, debt and swap prepayment penalties, and impairment of intangible assets, as well as the gain on sale of available for sale investment securities. During the first quarter of 2016 we experienced very strong loan growth with portfolio loans increasing by $109.9 million. On an annualized basis, this marked a 19.4% increase. The majority of the loan growth occurred in our commercial mortgage and construction loan segments of the portfolio. The tax-equivalent net interest margin improved by 10 basis points for the first quarter of 2016 from the fourth quarter of 2015. Excluding the effect of fair value mark accretion, we still saw a 7 basis point increase with the linked quarter. The solid loan growth during the quarter, which enabled the deployment of cash balances to earn significantly higher yields as loan balances, accounted for this margin expansion. On the non-interest income front, our mortgage banking initiative is in full swing. The mortgage team recently completed the implementation of a new fully integrated loan origination system, which will streamline the entire process from application through origination. The system is expected to shorten the approval process, expedite delivery of loans to investors and increase capacity and efficiency within the mortgage group. Wealth assets increased by nearly 11% during the first quarter of 2016, but did not produce the comparable increase in revenue from wealth management services. The reason for this disparity continues to be market volatility and the change in the composition of our wealth portfolio as a significant portion of the increase in wealth assets during the first quarter was from assets held in fixed fee accounts, which provide lower yields but also serve to insulate the Corporation from the volatility associated with the market movement. Non-interest expense during the first quarter returned to a more normalized level as much of the noise during 2015 related to the Continental merger and other strategic initiates has been eliminated. The provision for loan and lease losses for the first quarter of 2016 decreased by $367,000 from the fourth quarter, although net charge-offs between the periods decreased by $1.4 million. The increase in the provision relative to charge-offs was driven by the significant increase in loan balances. The incurred loss model on which the allowance for loan losses is based determines the level of the allowance for each portfolio loan segment, and is driven by qualitative and quantitative factors applied to these loan balances. For the past 92 consecutive quarters, we paid dividends to our shareholders. We feel 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 April 28, 2016 the Board of Directors of the Corporation declared a quarterly dividend of $0.20 per share payable on June 1, 2016 to shareholders of record as of May 10, 2016. In summary, we believe our business model is sound and with the investments made in 2015 put us 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 and increasing regulatory and compliance burdens, we strive to identify new ways to diversify and expand our non-interest revenue streams. We continually evaluate acquisition as well as organic expansion opportunities as they arise with a focus on quality and compatibility. We believe we are poised for continued profitability and growth. With that we will open the lines to any questions.

[Operator Instructions] The first question comes from Casey Orr of Sandler O'Neill. Please go ahead.

Good morning.

Good morning.

Hi Casey.

Great quarter. First, if you could dive more into the loan growth you saw, how much of that would do attribute to the new lenders you brought on versus activity picking up in your markets, and in what markets specifically are you seeing strength?

Hi, Casey, it is Joe Keefer. A lot of the – some of the loan growth was really a mix. And yes, we have the new office out in Hershey that certainly contributed to loan growth, and we were very pleased by that. In addition, as you know, we bought a bank in Delaware and our lending team down there has expanded and they also contributed to the growth. But I got to tell you even in our own market, the legacy Bryn Mawr lenders had a very, very strong quarter. We went in with a nice pipeline and we also were able to win on new deals and close them within the same quarter. So we had it kicking on all cylinders.

Casey, this is Frank, I think the other thing that we are seeing is that there has been, so much disruption in the marketplace between central Pennsylvania to where we are. The eastern part of the state has given us a lot of opportunity, not only obviously on the lender front, but customers that feel displaced or dissatisfied. So I mean that is also a part of what we are seeing and is driving some of the growth.

Okay, great. And probably another question for Joe would be, what would you say your outlook then is for loan growth for the year given the 19% you put on just in the first quarter?

Well, I think if you look at our history we have always been good, strong loan generators, and I will make a point that these aren’t just transactions, they are relationships. So if I look at it now I think that our pipeline is consistent with where it has been in the past.

Okay, great. And then also can you talk to us more about what drove the loan yields up this quarter, and what your outlook is for the margin from here given I guess the backdrop that you don't have much more room to remix out of cash balances?

Casey, this is Mike Harrington. So, the loan – I think the yield change really in the quarter was related to some purchase accounting, which we alluded to in the press release that had a large loan payoff and there was some accretion related to that. The margin expansion again was just that reallocation that you just mentioned from cash to loans and that helped push the margin up by 10 basis points. And on a go forward basis, don't have a prediction for the margins going, but we are certainly focused on funding that with deposits and keeping that loan to deposit ratio around 100%. So as it continues to grow we will look for ways to continue to match-fund that with deposit growth.

Okay, great. Very helpful. I'll let someone else jump on.

Thanks Casey.

[Operator Instructions] The next question comes from Michael Perito of KBW. Please go ahead.

Hi, good morning.

Hi Mike.

A couple of high level questions frankly, just one, as you mentioned the expense in the quarter was pretty clean, just a hair over $25 million, as you kind of look back to everything you accomplished last year, and then kind of what you have the opportunities in front of you with maybe some of the disruption and the high levels of growth, how are you kind of thinking about what a more normalized expense growth rate for your company is, over the next year or so?

I mean, hard to tell what we may do as a result of the disruption. I mean obviously we are always going to look at opportunities, and I am not going to just focus on keeping those expenses where they are for if there is a good long-term opportunity. And I think, you know, we probably should have done a better job in the fourth quarter of telegraphing that to all of you because I think there is maybe some confusion. But we added a significant number of people in the fourth quarter that were not planned, but there were certainly opportunities as a result of this disruption. They take a little while to obviously start to become – to where they cover themselves, but we are going to see that benefit hopefully as we go forward and I would say about the same with the disruption. We are going to keep looking at opportunities. If they make sense and they are in the best long-term interest of the corporation, we will do it.

Okay, and then maybe piggy-backing on that question, in your prepared remarks you made a comment about still considering both organic and inorganic methods of growth, I mean with the healthy pipeline I guess how are your priorities stacked, has it the last year or so changed anything in your minds, I mean is there more of a focus internally on kind of the organic growth opportunities, which seem plentiful or is M&A still very much, something you guys are actively looking into?

Well, I mean I think – again we talked about this when we talked about our strategic plan, which is really heavily organically focused, and the idea was to supplement it with strategic acquisitions that made sense. And, I mean we have certainly looked at the lot of opportunities, nothing strategically fit – what made sense for us. That is not to say we wouldn't do it. It is just the right opportunity hasn't come along. I mean I don't think we can sit around and wait for another acquisition, and that really was a large part of what we did last year, which is someday this acquisition game is going to dry up and if you don't focus for the long-term on the organic basis, you are going to be sort of sitting out there not having a lot to do, and that really was our game last year; to focus on the organic growth for the long-term. So we are still – that is still what we are looking at today.

Okay, good. Thank you. I appreciate it.

And we have a question from [Indiscernible]. Please go ahead.

Thanks. Good morning and thanks for taking my question. Regarding your wealth management business, I realize you are going through this change where you are growing as such with lower, but less volatile yields, and that holds back or actually retards – it goes backwards the amount of income from that segment, but can you tell us how long it will be before that change normalizes in the composition of the wealth management assets, so that it is a steady state and just the growth itself will grow that segment’s income?

So this Frank, I'm going to turn it over to Gary in a minute, but I mean, if you could tell us when the markets are normalized, I think we can tell you when things will go back to normal. Again we are focused on trying to just continually add assets, add good accounts so that when the markets do turn around, then we will start to see the benefits of it, but Gary maybe will comment a little bit more.

Yes, this is Gary. A couple of things, first, the fixed fee business that is how we term it, is largely trust only business, and we have a pretty good record of turning a portion of that business over to full assets under management. So that we hope is something to look ahead and benefit from. I think the other thing with respect to the quarter was that, the first two months of the quarter were just dreadful in the market as everyone knows. March was a far better quarter and probably has a little bit of a lag there, when as the business drops in and a little bit of a lag between that time and when we enjoy the benefit of the revenue from that. So, we did see a little bit of a turnaround in the first quarter but it is really tough to fight the market.

I think I got it. Just one more question, regarding your loan growth, you talked about – you mentioned you had a good pipeline at the beginning of the quarter, which aided the loan growth, can you describe your pipeline for loan opportunities at the end of the quarter, is it as good as, better than, worse than what you had at December 31?

I think our pipeline is consistent with how we generated loan growth in prior quarters. So if you look back at how – we always look at as I said the case is, we have always been very good loan generators, and I will make the point, we are developing relationships here as well. So, when I look at that I think that, we will be consistent, and the pipeline is consistent with that growth. The other thing I wanted to say when I talk about legacy Bryn Mawr lenders I am including Continental Bank as well, and they have contributed to our growth too. So I wanted to clarify that point. I think it is important.

Understood.

The other thing is everything in our pipeline doesn't close.

Right.

But I really would point you to our past growth.

Okay. Actually I do have one more question regarding deposit growth, I think in the press release you referenced a good portion of the growth this quarter was on the wholesale side, can you describe the competition for deposits in your market just incrementally at this point, is it more aggressive or less aggressive on the pricing front today, or just with any kind of concession you would make for deposit gathering than it was last quarter?

This is Mike Harrington. I'm not sure enough good feel for it from last quarter-to-quarter, but I think it is a pretty aggressive marketplace out there for funds at the margin, and that is across the board, big banks, small banks. So there is definitely some demand out there for deposits from the depository institutions, and we are going to need to compete for that. So what we did this quarter is from my understanding of historic patterns it is a quarter where we have some seasonal outflow. So we did what most companies do, which is refinance that in the short-term with other sources of funding, and we would expect that to potentially bounce back in the future, but on a longer-term basis we are out there with different programs, and try to make sure that we are gathering deposits at the pace we are growing our portfolio.

Got it. Okay, thanks for answering my questions.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Frank Leto, President and CEO, for any closing remarks.

Thank you all for joining the call, and thank you. We will be talking to you hopefully in the future.