WSFS Financial Corporation (WSFS) Q2 2016 Earnings Report, Transcript and Summary

Good morning, and welcome to the Bryn Mawr Bank Corporation Second Quarter 2016 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mike Harrington. Mr. Harrington, please go ahead.

Thank you, Keith 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 10089216. 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, August 05, 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 to 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 you all for joining our conference call today. I hope you had a chance to review our second quarter earnings release which was issued yesterday after the markets closed. As you can see we continue to perform well reporting net income of $8.9 million and diluted earnings per share of $0.52. As we move into the second half of the year it's become evident that the results we expected from the investments made in 2015, which included numerous technology enhancements, the additions of new teams and talent, and the maturing of some of our strategic initiatives have begun to bear fruit. Net income for the second quarter of 2016 increased by $646,000 from the first quarter. Driving this increase was a 2.8% increase in net interest income quarter-over-quarter. Much of the outstanding loan growth we experienced in the first quarter of this year, coupled with the solid loan growth during the second quarter helped to offset the decline in the loan yields. In addition to the increase in net interest income, our provision for loan and lease losses decreased by $965,000 for the second quarter of 2016, as compared to the first quarter. The credit quality of our loan portfolio continues to be excellent with net charge-offs during the quarter of only $254,000, one of the lowest levels in our recent history. In addition to the low net charge-offs for the quarter, certain qualitative factors in loan portfolio including delinquency and non-accrual levels also improved which resulted in a lower requirement for allowance for loan losses. The tax-equivalent net interest margin for the second quarter decreased by 6 basis points largely as a result of decline in loan yields with the tax equivalent yield on loans and leases decreasing by 4 basis points from the first quarter. At the same time we experienced increases in funding cost with deposit rates increasing 7 basis points, as strong loan growth required additional funding much of which came by way of retail certificates to deposit. On the non-interest income front we saw increases in gain on sale of loans, as well as an increase in fees for wealth management services, and mortgage department is currently taking advantage of the low interest rate environment as many home owners seek to refinance current loans to lower rates. Fees for wealth management services increased by almost $600,000 quarter-over-quarter largely as a result of rebound in market prices during the quarter, which affected our wealth accounts whose fees are tied to market values. In addition new account activity and fees collected for tax services contributed to the increase. As you will note in the release, the growth in wealth assets during the first two quarters of 2016 which totaled $1.27 billion or 15.2% do not result in a similar increase in fees or wealth management services which grew was slightly less than 5%. These results are due to a number of factors, first a substantial portion of the growth and wealth assets was in accounts which are charged fixed fees typically due to services offered and they charge a lower fee per dollar of assets. Additionally, the growth in market value based accounts was somewhat muted by the normal attrition of funds from these accounts primarily through beneficiary spending which offset our strong new business development and customer retention efforts. Non-interest expense for the second quarter of 2016 increased by $1.2 million from the first quarter. Nearly half of this increase was related to a nearly $600,000 impairment of mortgage servicing rights during the quarter. This impairment was the result of increased expectations for the continuation of the low interest rate environment partially driven by international events which caused interest rates to fall at the end of the quarter. In addition to the MSR impairment we saw $450,000 increase in salary and wage expense primarily related to the incentive accruals associated with our business activity during the quarter. For the past 93 consecutive quarters we paid dividends to our shareholders and we are very proud of this record and feel very fortunate to have the continued loyalty and support of our shareholders. Therefore I am pleased to announce that on July 21, 2016 the Board of Directors of the Corporation elected to increase the quarterly dividend by 5% and declared a quarterly dividend of $0.21 per share payable on September 1, 2016 to shareholders of record as of August 2, 2016. In summary, I am thrilled with the progress we have made year-to-date and I am equally optimistic about our future despite the challenges associated with the modestly growing economy, the low interest rate environment and the increasing regulatory and compliance expectations. As an industry we all face these challenges however I believe our business model, the Bryn Mawr trust model with its emphasis on diversified revenue sources coupled with our first class team and markets that are hungry for a locally based alternative place Bryn Mawr trust in an excellent position to win business and continue our strong growth and performance. Finally after speaking to many of you over the last few months, we have decided to discontinue our practice of conducting these conference calls. We will continue to be actively engaged in our investor outreach and as always we will be available to answer questions through our investor relations department which is listed on our website. With that we will open the lines for any questions.

[Operator Instructions] And the first question comes from Michael Perito with KBW.

Hi, good morning. A few questions, I guess, maybe starting on the deposit growth and kind of the - as the comment on increase in CDs, so obviously you guys remain pretty confident with the market backdrop on the asset generation side. I guess how are you guys thinking, I mean - going forward as we move into the back half of the year, is there going to be more build up in entire deposits or there are other initiatives you guys are looking at trying to fund this loan growth as it continues to come from the market structure?

Michael, this is Mike Harrington. I think there is a combination of strategies that are in place. One of the good news, typically in the third quarter at least thinking now, to the quarter end now, we do get some seasonal inputs just because of the business activity of our customers. And then we have a couple of other initiatives underway to fund the growth that it can't get into, but there would be more quarter like money market and TDA type of deposits. And then at the margin if we need funding in order to just kind of manage our position from a loan to deposit ratio, we go out in the marketplace and raise CDs and that's what we saw this quarter where we were doing a couple of promotional things and the increase you saw in the quarter is a function of us bringing in those dollars.

Okay. And then I guess as it translates to the kind of the core margin expectations, obviously in the first quarter you guys benefitted from some excess liquidity deployment, kind of back where you started in the fourth quarter now at 364. Any comments you guys can provide on kind of the near term outlook as you see kind of your asset generation and your funding as you just talked about?

We try to stay away from making forward looking statements or predictions around what we expect, but the dynamics in the marketplace are like asset generation side of the business we’ll continue to perform well. And - but we're going to need to do different things to fund that in order to manage our liquidity position the way we broadcast previously, which is in that, we're – our risk tolerance in between 105% is sort of where we want to keep that number below there. So depending on the asset growth we get, we’ll have to be on the market raising funds and we're going to – we’re obviously going to try to do that at the lowest cost possible. But when there is alternatives aren't available, or they are not enough to fund the growth and we'll go out in the marketplace and raise CDs and that's what we saw happen this quarter.

And then - thanks Mike. And then maybe just one follow-up on the CDs, can you just give us any color on the rate and duration of the stuff that you had?

Well I think generally speaking, it's probably about a year or little bit more than that. And the rate in the marketplace at the margin if you want to really bring in money's north of 1%, so maybe 1% to 1.10%.

Okay, great. Thanks.

Thank you. And the next question comes from David Bishop with FIG Partners.

Good morning, gentlemen. Really coming off a very strong first quarter pressure on the commercial real estate front, you're back down a little bit from there, but just curious enter quarter there's been any sort of change in your appetite for commercial real estate just in the context of the ongoing regulatory dialogue?

Not really, Dave, this is Frank. I mean we - this is obviously a question that we get often ever since this December statement by the OCC and the Fed. Given our mix of loans, our capital and some payoffs that we've had, we've been able to manage to sort of the risk appetite that the board set and that we're comfortable with and we're actually well below where we - where that appetite is said. And I think we’re very comfortable on the continued generation of these loans at this point in time. We monitor it constantly and we did it well before December 15. We've been doing this for years and I think that’s why we have a comfort level in our loan portfolio and knowing what’s in it and the way that we analyze it and cut it apart. So it’s a long-winded answer but I think we’re comfortable with where we are.

Any changes in terms of the pricing dynamics within the market, have you seen any sort of improvement, on sort of a risk adjusted pricing basis given through the regulatory browbeating that’s been occurring.

This is Joe Keefer. When rates dropped a little bit there, the credit spreads didn’t – didn’t drop as much. But what we're seeing it actually widened but what we’re actually seeing is because we’re in a low rate environment, some of our large -it’s more of a mix where they want to go longer and therefore they do a swap and it goes on our books at a floating rate. So that's impacted the yield a little bit. It’s been more of that than anything else.

Got it. And that maybe turning the prism a bit, just in terms of the wealth management. Frank, at this point that there is - you’ve seen the growth in the assets but the fees I guess are down a little bit year-over-year. Are you happy with the profitability the units generating as it stands now, I mean are there other sort of touch points or revenue streams that are maybe offsetting the visible wealth management fees that we see in the income statement that we’re just not seeing elsewhere, just curious how you’re thinking about that segment, right now.

No, I mean look, it’s - for us it's a very profitable segment. This is I think what distinguishes Bryn Mawr from just about every one of our peers. We're never happy if revenues aren't where everybody expects them to be, want to be higher than they are, I mean that's the goal. I don’t see - we’re always exploring new opportunities especially on the non-interest income front. But I think we’ve just had some headwinds these last say six to nine months with the market. And these cycles happen but that’s also why we like to diversify the revenue, as it precisely what our goal is and so why we brought the insurance in for example, to give us a little anchor to windward if we need it. So overall I think we’re very pleased. I mean, we constantly focus on new account growth just like we’re focused on the bank side on new asset growth and I think Gary’s team has done a pretty good job of it in a very competitive marketplace.

Got it. Thank you.

Thank you. And the next question comes from Matt Schultheis with Boenning.

Hi, good morning. Really quickly what’s your outlook for accretable yield for the remainder of the year and maybe into 2017?

Matt, it’s Mike. The only thing I could say it’s just look it’s been tending out and you’ll have to come up with your own estimate for that. It’s really unpredictable for us because of the dynamics of the prepayments when they occur. So whether or not they are going decrease or speed up, I really couldn’t even give you a forecast for that if I wanted to.

Advance notice on that so.

There is pretty good trend data out there so I would just try to use that to figure out what’s going to happen in the next couple of quarters.

Okay. And with regard to loan demand how much of this is market share gain versus actual sort of jump ball customers looking to expand their businesses or their investments and is there a variation across your footprint with that.

Hi Matt, it's Joe Keefer. That’s a good question. I think - I don’t have exact data on this, so I could just give you trends and for most of the account growth have been new relationships and taking market share from other banks. We do have some customers that are growing and that’s helping us but I would say a majority of it is market share driven.

And Matt just to add a little color to that question, I think if you look all the growth in for example Central Pennsylvania for us is new growth and we’ve only been out there -it’s been close to a year now at this point so it is all new growth and it’s been much better than we anticipated. And Delaware is very similar, I mean Delaware we started that at a very small level and you can just take a look at the numbers I mean that’s grown substantially and that’s generally new relationships. And then I think with the legacy business which we look at includes all the other acquisition Continental, First Keystone and of course our legacy Bryn Mawr business just again anecdotally we don’t have the numbers per se but there are - we can tell you coming through a loan committee lots of new names and lots of new relationships that we’re not used to seeing in the past. So I think it’s just a lot of hard work by Joe’s team to generate some new assets for the bank. That being said, we still have clients that are expanding but we get to - I think Joe's right in saying I think it’s primarily new relationships to the bank.

Okay, thank you.

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

Thanks everybody again for joining the call and going forward like we said we’ll be available for questions and I am sure we’ll see a lot of you in the next couple of months at some of these investor meetings. Thanks.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.