WSFS Financial Corp

NASDAQ:WSFS

Earnings Call Transcript 2018-Q1

[Operator]

Good day, ladies and gentlemen. And welcome to the WSFS Financial Corporation First Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to turn the call over to your host today, Mr. Dominic Canuso, Chief Financial Officer. Sir, you may begin.

[Dominic Canuso, CFO]

Thank you, Amanda, and thanks to all of you for taking the time to participate on our call today. With me on this call are Mark Turner, Chairman, President and CEO; Roger Levinson, Chief Operating Officer; Steve Clark, Chief Commercial Banking Officer; and Rick Wright, Chief Retail Banking Officer.

Before Roger begins with his remarks, I would like to read our Safe Harbor statements. Our discussion today will include information about our management’s view of our future expectations, plans and prospects that 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 periodically file with the Securities and Exchange Commission.

With that read, I’ll turn the discussion over to Roger Levinson.

[Roger Levinson, COO]

Thanks, Dominic, and thank you all for your time and attention today. We are pleased to report earnings of $37.4 million or $1.16 per share for the first quarter of 2018. Excluding the impact of the 1.7 million insurance recovery and the 15.3 million valuation increase of our Visa Class B shares core earnings per share was $0.76 which is a 29% increase over earnings per share in the second quarter last year. These core results represent a core ROA of 1.43% and a core return on tangible common equity of 18.81%.

Our strong operating performance was driven by the combination of an 11% increase in core net revenue and an 8% increase in core noninterest expense compared to the same period in the prior year. This resulted in 3 percentage points of positive operating leverage. These results were achieved despite occurring and what has historically been our slowest quarter due to fewer days and heightened seasonality impacting both lower revenues and higher expenses.

Core net interest income grew by 9% when compared to the first quarter of 2017. A significant driver of this growth was our net interest margin of 4.01% with [technical difficulty] basis points higher than the first quarter of 2017. As detailed in the release, this growth was a result of the higher short-term rate environment, balance sheet growth and the redemption of our $55 million senior notes in the third quarter of 2017.

Net loans increased 3%, on an annualized basis, excluding the continued expected runoff of our residential mortgage portfolio. Commercial loan growth of 2% annualized was impacted by payoffs in our commercial real estate and C&I portfolios as well as overall lower originations which were primarily related to the ongoing higher competitive pricing environment.

Total customer fundings declined 1% on an annualized basis excluding the anticipated seasonal [indiscernible] of public funding dollars. This decline reflected seasonal trends, as well as the impact of promotional deposit pricing, which we have seen in our market.

Loan and deposit growth was below our [full year rate] expectations. However, we believe that our current strong margin, combined with the full impact of the recently completed rate increase of 25 basis points by the fed on March 21 and potential additional increases provides flexibility and optionality to respond to competition for both loans and deposits consistent with our mid to high single-digit growth rate expectations for the full year. Core noninterest or fee income grew a very healthy 16% in the quarter when compared to the first quarter of 2017. This performance was driven by increased revenue across each of our major fee-based businesses, reflecting solid organic growth.

Core noninterest expense growth of 8% was in line with our expectations and included a one-time expense of $900,000 related to the surrender of our bowling [ph] policy which will be more than offset with the income related to the reinvestment of these funds over the next few quarters. Our core efficiency ratio of 61.1% puts us on track to achieve a full year core efficiency ratio of under 60%.

Credit remains stable with all key metrics showing either a slight improvement remaining essentially flat compared to the fourth quarter of 2017. Total credit cost for the quarter were $4.1 million. We still expect full year total credit cost to be in the range of $13 million to $15 million, but as we have discussed previously with some level on our unevenness quarter to quarter.

During the quarter, we made the decision to update the calendar of our annual capital management planning process moving from the third quarter of each year to the March April timeframe. This will align with the completion of our annual planning cycle and within early outlook on actual full year performance. Our capital return policy has not changed. We target an annual cash dividend of 10% to 15% of earnings with another 10% to 15% of earnings through stock buybacks regardless of price with a combined target of at least 25% of earnings returned to our owners annually.

Consistent with these targets and in conjunction with our updated planning calendar we announced a 22% increase in the quarterly dividend to $0.11 per share reflecting both our core operating performance and the impact of the tax law change at the end of 2017. This higher dividend would put us right around the midpoint of our 10% to 15% of earnings target based on our 2018 plan. This the second increase in the past three quarters and represent a combined 57% increase in the dividend over that period of time.

In conclusion, the first quarter was a very solid start to the year. Our strong revenue growth demonstrated the strength and diversity of our franchise. Expenses were well managed, especially during the quarter where they are typically elevated due to seasonality. Going forward we believe that our market position and brand will allow us to address the impact of the ongoing competitive rate environment in a manner that will grow long term franchise value. Considering all of these dynamics, we remain on track to achieve a full year ROA of 1.50%.

Thank you. At this time, the team will be glad to take your questions.

[Operator]

[Operator Instructions]. Our first question comes from the line of Frank Schiraldi of Sandler O’Neill. Your line is open.

[Frank Schiraldi, Sandler O’Neill]

Just a couple of questions if I could. First, I just wanted to ask on the NIM. I believe you guys it was in the 390s, you are starting off the year pretty strong. Is that looking quite conservative here or would you say given the false start to loan growth you be getting that pricing flexibility to get to those goals and [indiscernible] still be, I’m just wondering if you could remind us what's behind that guidance in terms of rate hikes? And how you feel about it?

[Dominic Canuso, CFO]

This is Dominic, so first off, we did have a stronger-than-expected first-quarter in net interest margin. There were a couple of factors contributing to that, one of those were a couple or I’ll say non-core items, specifically the restructuring of the bowling which will add a couple basis points to the run rate as we surrendered that and reinvest portions of that into higher yielding agency MDF investments. We also reevaluate [ph] the reverse mortgage portfolio, which will add a couple basis points on a full-year basis and then the higher [indiscernible] dividend that was announced in the first quarter. So, it added 5 basis points not only to the quarter to the run rate for the year, but in addition to that we've been able to maintain our beta to the low end of historical averages as we discussed before. Our beta historically has been about 15%. Our beta through this rising rate environment for the last six increases is trending around 15%. And that is outpacing our expectations. In addition, the LIBOR curve has accelerated relative to the fed funds rate, so we also are seeing higher yields on our loan book. So, all those contributed to a very strong quarter, but all are expected to continue. We do have the expectation of one rate increase in our projections, which is in June, and while there is potential for more than that. We would combine tailwinds to allow us to focus on the balance of net interest margin and growth rates as Roger mentioned. So, for the second quarter and the full year, we do expect net interest margin to be consistent with the first quarter.

[Frank Schiraldi, Sandler O’Neill]

My other question was on fee income, was on the CashConnect business and revenues were up bottom line earnings did not grow and I guess you are seeing a greater expenses as short-term rates move higher. Just wondering if that -- you can talk a little bit about the ROAMF business I know it has in the past been higher I think in the 2% range. And just wondering where that ROA is trending to and still if you're still confident that being accretive to the overall blended ROI.

[Dominic Canuso, CFO]

This is Dominic again. So just to restate the performance in the quarter there was high double-digit growth for fee income that resulted in about 12% net revenue growth that ended up with a core income of relatively flat. Historically this business was 120-130 marginal ROA and with pricing pressures in the market due to the consolidation within the industry that pushed that ROA closer to one. For the last year with rising rates that has compressed our margin in the business. What we are actively doing is optimizing the balance sheet, between our on-balance sheet and off-balance sheet funding to shift more to off-balance sheet, which would improve our ROA, but as we've done that it has compressed bottom line growth. We do expect that to continue somewhat throughout 2018. But once we're done that restructuring the ROA would be back to its historical averages.

In addition, as we invest in the smart space-based business and other logistics fee income products we expect the revenue to stay on track in that double-digit range. And once we do that, we expect that growth to more drive additional net income.

[Roger Levinson, COO]

This is what as you said add some historical context the ROAs that Dominic made reference to historical ROAs of that business, was kind of blend that 130 to 150 were pre-the tax change. So that would equalize greater than 150 ROA. And it's our goal to have all of our business units being at that 150 or higher range. And the CashConnect business right now is in a bit of a transformation with both what's going on in their marketplace, and customers and technology in interest rates but they are actively working the plan and over time they have been a great business for us, a great source of revenue diversification. And we certainly would expect them to get back to that level.

[Operator]

Our next question comes from the line of Joe Gladue of Merion Capital Group. Your line is open.

[Joe Gladue, Merion Capital Group]

Just wanted to talk about the loan pipeline and loan growth size. Can you still -- are your expectations still the same for full year growth and I’m wondering if you could touch on where the loans are growing what loan categories are driving growth?

[Steve Clark, Chief Commercial Banking Officer]

This is Steve Clark speaking. So, it was Roger indicated, we still believe mid to high single-digit loan growth remains forecasted for the year and a combination of factors, our pipeline that remains fairly strong, 90-day weighted average of 102 million plus or minus. Now there is still continued disruption in our southeastern condominium market. So clearly, there's opportunity there. We have a significant amount of construction loan that have closed but have not yet funded. So, there was commitment for fund as we go through the next two quarters. And then lastly, we experienced some line of credit paydown in the C&I book in the first quarter. We believe they are temporary and we should see real advances on those lines as we go through this plan. So, kind of four factors combining to the lead us to continue to forecast that mid-to high single-digit growth.

[Mark Turner, CEO]

This is Mark, on top of that as was mentioned earlier and alluded to the margin where the company is much stronger than we expected starting the year and typically the first quarter is a weaker quarter in the margins so we do have some flexibility there to provide for growth when both deposits and loans to react in a competitive price environment but still show a margin with a forward handle.

[Joe Gladue, Merion Capital Group]

Just like to ask about the M&A appetite particularly I guess in with the wealth management side.

[Dominic Canuso, CFO]

Joe as we talked about for a while last year was a year of optimization and leveraging the prior investments that we had made both on a traditional bank side and on the wealth side, so we’re back in what I would generally characterize as looking through opportunities in both spaces on a traditional bank side, our focus continues to remain in southeastern Pennsylvania where we have built a really nice present but we think there is significant opportunity for more growth there and then in a fee-based businesses as particularly in the wealth [ph] space if there was opportunities to expand our product offering or different scale into some of our existing businesses, we would look to continue the pattern of several years ago, relatively smaller fee base deals that we could integrate relatively smoothly and not disrupt the momentum that we have in that business.

[Operator]

Thank you. Our next question come from the line of Catherine Mealor of KBW. Your line is now open.

[Catherine Mealor, KBW]

On expenses can your thoughts on target efficiency ratio and your outlook for growth this year.

[Dominic Canuso, CFO]

Sure, as we provided our expectations for the year it continued improve operating leverage and an efficiency ratio that under 60% as you see in the results for the first quarter, we delivered stronger efficiency ratio this year than the first quarter of last year. We do expect that to help deliver the full year efficiency ratio of below 60 as result all we said at the beginning year due to seasonality it starts higher than 60, and then trends below into the high 50s and we feel confident in delivering on that expectation.

[Catherine Mealor, KBW]

Okay great and then update us on the tax rate for this year, and this quarter came in a little bit lower than expected.

[Dominic Canuso, CFO]

Sure, as you may have seen in prior first quarter's tax rate is affected by a benefit in stock option execution that reduces our effective tax rate by about 100 to 150 basis points, we do expect our effective tax rate to be in the 23.5% to 24% plus or minus any benefit or illusion from the tax rate for the full ASU on stock comp, for the full year we do expect it to be around 23%.

[Catherine Mealor, KBW]

That’s helpful thank you. And then lastly just on credit any kind of trends that you are seeing in classified and anything in particular that you are looking out for right in your market. Thanks.

[Dominic Canuso, CFO]

No Catherine as I said in my comments we feel good. We see credit remains in a stable positive bottom of the cycle and both -- the leading indicators of delinquency and problem loans were essentially flat this quarter versus last quarter and historical very low levels.

[Operator]

Our next question comes from the line of Russell Gunther of D.A. Davidson. Your line is open.

[Russell Gunther, D.A. Davidson]

I’d like to follow-up on Joe's question earlier on M&A within the wealth space you guys commented, one of the things you look forward to be able to expand your product offering. I just wanted to get some colors to what should be looking further.

[Dominic Canuso, CFO]

There is nothing particular that we have targeted but as we found with our acquisition of Powdermill there could be some niche areas in the wealth space that we could find opportunities to I’d say [bolt on] to our existing platform. We feel very good that we have a full suite of wealth management products, but there could be unique sort of [boutique] businesses that are highly focused in one area that could be the kind of opportunity that we would look at.

[Mark Turner, CEO]

This is Mark. The only thing I’d add is in our assets under management there are some segments to the marketplace that we don't offer or don't have a robust offering. And so, getting more scale and assets under management and more products that would resonate with the different classes of investors would be a priority for us as well.

[Russell Gunther, D.A. Davidson]

And then last one for me, I thought I read during the quarter you guys entered into a relationship with Sophia [ph]. Just wondering if you could give us some color on that and how that might manifest in your balance sheet or P&L, if at all?

[Rick Wright]

This is Rick Wright. We are enabling them to offer a checking like product and a debit card that would be on their book, not ours and that is probably something we'll see this quarter. They're asking it sort of the friends and family kind of thing right now, but it wouldn’t affect our balance sheet, it will just be for us will be reimbursement of expenses and some fee income.

[Dominic Canuso, CFO]

So, Russell just remember from a historical context. It is really a continuation of our partnership with a local company here. And banks that was acquired by Sophia and we've been able to develop a nice relationship with them and extend that partnership. Although it has a different content, as Rick described. And the impact that we would expect to see this year because of the rollout of the product would be nominal on our P&L.

[Operator]

Our next question is from the line of Austin Nicholas of Stephens. Your line is open.

[Austin Nicholas, Stephens]

Most of my questions have been answered but maybe just we are wealth management and fee income outlook I think the prior guidance was low double-digit range of growth for '18. Is that still what you're looking for I guess from with one quarter behind you?

[Dominic Canuso, CFO]

That’s overall for all of our fee businesses. The first quarter was particularly strong in our wealth business, particularly the Christiana Trust business. A lot of that was higher to capital markets activity, bankruptcy that business can tend to fluctuate a little bit and then combine some of the dynamic and Cash Connect that Mark alluded to, and just what I call, normal cycle of our other fee businesses would expect our current expectation is still that low double-digit full year growth expectation.

[Austin Nicholas, Stephens]

And then maybe just on tax reform, any early positives or negatives you’re seeing tangibly or hearing from both [indiscernible] climate clients or within your wealth management business.

[Mark Turner, CEO]

This is Mark Turner, no, I think the short answer to that is no, we haven't. It's early yet. And we haven't seen any tangible impact people continue to talk but nothing is really showing up at the door yet, and so that's where you are. I think we like everybody else are hopeful that over the course of the -- as people get through their planning of what it really means to them and get about executing those plans that’s increasingly over the course of the year, we will show those opportunities and lending and wealth management.

[Operator]

Thank you. Our next question is from the line of Matt [indiscernible]. Your line is now open.

[Unidentified Analyst]

Good afternoon, I was just wondering if you are feeling any internal drive or external pressure to move more into the city of Philadelphia from the suburbs?

[Dominic Canuso, CFO]

So, it’s a great question Matt, in fact one we were just discussing in our weekly staff meeting this morning. So, the answer to that question is yes, a little bit. So, we have a significant presence in the western suburbs, which are traditionally -- we are a small urban, a great small urban suburban bank and we have that covered pretty well, but we are looking for more presence in the western suburbs which are demographically rich and growing, but the fact is, if you're in the western suburbs there are suburbs of Philadelphia. So, it makes sense to have some presence in Philadelphia on just to reiterate, we already do have fairly significant commercial presence and wealth presence in Philadelphia. So we have done several $100 million worth of construction and commercial real estate lending in Philadelphia through our experienced team there that’s been in that marketplace for a long time that we picked up through acquisitions of other institutions and then continue to do that business and capital management is right there in the heart of the business district that at 18th and market but we have strongly consider and probably within the next year or so will be putting out a shingle.

In the business district of Philadelphia, it acts as a loan production office a place for customer, are you know, customer relationship building and brand recognition right in central business district and then Gail [ph], see where it goes from there. We are in no hurry to build a big presence, the big retail presence in Philadelphia, it's extremely competitive market and with the different political and PR dynamic.

[Operator]

[Operator Instructions] The next question is from the line of John Anderson of Peoples Security Bank. Your line is open.

[John Anderson, Peoples Security Bank]

My question centers around the valuation of your class visa class B shares and just the methodology that you put in place to generate that valuation as we are trying to get our hands around that. And it's hard for us to try to identify some transactions out there in the market.

[Dominic Canuso, CFO]

Good question. John, thanks for joining the call. This is Dominic Canuso. So as our release stated this investment was historically held at cost due to the reason that it was an illiquid market with very low number of transactions or even transparency into those transactions. Obviously, this ASU required a fair market value approach in using your traditional fair market value methadone alternative method. Because we have participated in this market in the last few years and just had some background with the IPO of Visa in 2008, we received about 50,000 shares over the last few years as we look into this market and identified a dislocation in pricing.

We found ourselves with the opportunity to acquire an additional 310,000 visa class B shares. And that participation in that market has created a network and where we have some visibility and observations of transactions and it is that visibility that required us to revalue these assets, and roughly $15.3 million gain for the quarter. Based on the ASU it is the trigger to write the asset up or down and it's based on the individual's institutions observation and that’s what caused or triggered the event for us because we are in the market, we have observed these private transactions. There are some public out there, but we guess that with this ASU taking effect in the first quarter that we would anticipate others who have these shares that will wipe the asset up or down depending on their valuation to create a market price that will see through earnings releases and quarterly filings.

[Mark Turner, CEO]

This is Mark, if I could add a little bit more to that, at the risk of my CFO sneering at me. But this is publicly available information, the FDIC conducted auctions last year which were publicized and those are subject to FOIA requests. So, anybody interested could with the timeline get access to that information. And it was an institution in Florida and the fourth quarter that if you Google this topic, you could find out what was in their release.

[Operator]

Thank you. There are no further questions in queue. I’d now like to turn the call back over to Mr. Roger Levinson.

[Roger Levinson, COO]

Thank you again for your time and attention. Mark, Dominic and I will be on the road a few times in the second quarter and look forward to seeing many of you. Have a good day. Thank you.

[Operator]

Ladies and gentleman thank you for your participation in today’s conference, this does conclude the program. You may now disconnect. Everyone have a great day.