WSFS Financial Corp (WSFS) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the WSFS Financial Corporation's fourth-quarter and full-year 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded.

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

Thank you, Charlotte, and thanks to all of you for taking the time to participate on our call today. With me on this call are Mark Turner, President and CEO; Rodger Levenson, Chief Corporate Development Officer; Paul Geraghty, Chief Wealth Officer; Steve Clark, Chief Commercial Banking Officer; and Rick Wright, Chief Retail Banking Officer.

Before Mark begins with his remarks, I would like to read our Safe Harbor statement. Our discussions today will include information about our management's view of 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 Mark Turner.

Thanks, Dominic, and thanks to everyone for your time and attention. WSFS reported net income for the quarter of $18.1 million and earnings per share of $0.56. This capped a year where we reported net income of $64.1 million, or $2.06 per share. Excluding years in the early 2000s where we had big gains on sales of businesses and portfolios, both of these results were record operating earnings for the Company.

Earnings would have been even stronger, but were unfortunately marred right as we ended the year by a $3.5 million pretax loss, or $0.07 per share, on an unsecured private banking lending relationship. We lent money originally to the borrower in 2014 based on their substantial financial wherewithal and ability to pay at that time and in connection with a business development initiative.

The initiative has brought meaningful client relationships to WSFS since then, which are still with us today and we expect to be with us into the future. But unfortunately, given a precipitous deterioration in the borrower's personal financial situation, we had to charge off and provide for the expected loss this quarter. We have no other facilities like this one.

Also as detailed in the release, otherwise our total portfolio of unsecured personal loans is very small, very granular; and I will add, is also performing quite well with no non-performing loans and only 40 basis points of delinquency. In summary, while unexpected and unfortunate, we are very confident this is a unique situation for us. This loss did take the shine of an otherwise very impressive quarter and year.

Highlights for the quarter included, first, core net revenues grew 14% over the same quarter last year, including an 11% increase in core net interest income and a 20% increase in core fee income, with particular strength in the Wealth division. The reported net interest margin for the quarter was a robust 3.9%, and fee income is well diversified and represents a strong 34% of total revenue.

Next, core non-interest expenses grew 14% to support our growing franchise, resulting in a core efficiency ratio of a healthy 58%. Further, loans grew at an annualized rate of 6% in the quarter and core deposits, excluding the expected seasonal decline in public funds, grew at a 7% rate and represent a robust 87% of our total customer funding, which is especially valuable in a rising rate environment. And finally, even with the private banking loan situation, most asset quality statistics, especially non-performers, delinquencies and classified assets, were stable to improved and continue at favorable low levels.

Switching gears. During 2016 we both fully integrated the Alliance organization and closed and integrated the Penn Liberty organization into our Pennsylvania market banking franchise, bringing our total number of locations in Pennsylvania to 29 offices. We also signed, closed and integrated the Powdermill Financial and West Capital Management businesses into our Wealth unit.

These combinations came with the expected corporate development cost in 2016 of $8.5 million, or $0.19 a share, but those essential costs are predominantly behind us now. Most importantly, these additions are all strategic and accretive, and will help power our results in 2017 and thereafter.

Speaking of 2017, we completed our 2017 financial plan, the highlights of which include our expectations of, one, loans and deposits each growing in the mid- to high single digits. Two, a net interest margin averaging in the 3.9%s. This assumes only one 25 basis points increase in the Fed fund rate in 2017, includes the accretion from recent acquisitions and the benefit of the planned payoff of our higher costing senior debt in the third quarter of 2017. Three, fee income from strong organic growth and recent acquisitions increasing around 20%.

Four, total credit costs; that is, including provision, REO, workout and related costs of $12 million to $14 million in the year. This is up from past guidance due almost exclusively to the strong organic and acquisition growth in loans in the past couple years. We again caution that, as we saw in 2016, credit costs can be uneven. Five, an efficiency ratio of around 60%. And six, an effective tax rate of near 35%.

It's important to note our 2017 plan was put together mostly before the recent election results. And like others, as a result of potential changes we see positive upside in several of our long-term profitability dynamics. In particular, in our net interest income, efficiency, and tax rates.

Those would likely be partially offset by a decline in mortgage banking revenue in the short term as a result of rising rates. But all of those dynamics are largely dependent on the impact from both the magnitude and the timing of any concrete changes coming from Washington. Also as we have done in the of past, I remind you that the first quarter of any year tends to be our weakest because of seasonality that negatively affects both revenues and expenses.

In summary, even including the credit knock at the end of the year, 2016 was a record and catalytic year for us. We believe we are well positioned for 2017 and beyond to deliver on our strategic planned goal of meeting or exceeding a 1.3% core and sustainable return on assets by the fourth quarter of 2018, and that number is based on pre-election dynamics. On top of that, we look forward to the next couple of years with a view that, both on things we can influence and on external factors, there appear to be more tailwinds than headwinds on the horizon.

Thank you. At this time we are happy to take your questions.

(Operator Instructions)

Our first question comes from the line of Catherine Mealor from KBW. Your line is now open.

Thanks. Good afternoon everyone.

Good afternoon.

Mark, you mentioned the 1.3% ROA for fourth quarter 2018, and I remember -- I believe you had a 1.25% ROA goal for the fourth quarter of this year, which with the higher provision you didn't hit. But I feel like if you normalize that provision out towards this $3 million to $3.5 million guidance that you gave for next year, you're right at about that 1.20%, 1.25% ROA level. So is it fair to say that's a level that you think is achievable for 2017 and then the lift in 2018 will come from more fee-based acquisitions and the benefit from higher rates?

Yes, I think that's fair. In fact, I think your calculations are spot-on for how we look at core and sustainable through -- as we completed 2016. We actually had our internal number pegged at right around 1.20%, and the miss would have been just the decline that was unexpected in mortgage banking revenue, predominantly that, which obviously was because of rates which will have positive impacts on other of our profitability dynamics, specifically net interest income going forward.

Yes, and as we look into 2017, we would expect a full year of around 1.25%, which usually, as you know, starts lower than that because of first-quarter seasonality and ends much stronger than that. And I think if we achieve that, that positions us really, really well for 2018, given just the growth in the franchise, the improved efficiencies, the improvements -- continued improvement in margin and our goal, which you saw us act on to continue to put resources into growing our fee income.

And then what on the margin, so your guidance is to for it stay in the 3.90%s. Can you talk a little bit about how you think about your margin in a rising rate environment and the dynamics that with this prime will play for the next couple of rate hikes?

It feels like you're more guiding for a more stable, maybe even kind of lower margin in this first part of the year and then once you get the benefit from the repayment of the debt in the back half of the year, that's when it'll pop and round out at 3.9%. Is that a fair assessment on the margin?

I think you know us and our dynamics pretty well, Catherine. I think you've got it pretty much spot-on, which is through the first -- the next 50 basis points we're pretty much neutral. That's on a model basis.

We actually believe internally that we outperform that model, just because of the change in our profile in our marketplace to being a brand and a market leader, as well as just the strength of our relationships over the last cycle. But once we get past that 50 basis points, the impact starts to be very positive and on a pretty steep slope from there. Dominic, I don't know if you have anything you'd like to add to that?

No, I think that captures it. Just to clarify, we do have one assumption of a 25 basis point increase, which is in the second half of the year in the 2017 guidance Mark spoke of. Anything in additional to that would play out with the dynamics defined, in the 50 basis point, 100 basis point increasing the margins.

That makes sense. One more thing on credit. Is there any -- I know this is probably just one-off, and so is there any other commentary you can give on the rest of your portfolio? I mean, trends and maybe classifieds that would gives us comfort that there isn't another kind of credit issue lurking next year that you know of?

I think having two credit issues two quarters in a row there's a worry that credit costs may come in higher than that $12 million to $14 million range. And so any kind of comfort with what you're seeing in your markets or trends in other metrics I think would be helpful to give us some comfort there. Thanks.

Yes, so obviously we had an item last quarter, about a $4 million from a C&I loan that we took charge-off and provision on, and this quarter $3.5 million. When you have two in a row, obviously nobody feels good about calling anything one-off, but really two completely different situations.

One was a legacy large C&I loan from the financial crisis days that we stayed with the borrower through many years and worked with them on, and were deliberate in watching it. It showed up in our problem loan statistics frequently and periodically in delinquencies. And we just got to the point where in our judgment we said, even though we've worked with them for seven, eight years, the risk of having a bigger loss in the future was greater than responding to a refinancing opportunity that they had to take us out of the credit. So that was very long and well watched and deliberate.

This quarter was a consumer loan situation, and like consumer loan situations sometimes happen, they're unexpected because you don't have the same view into what's happening into somebody's personal situation as you do with a commercial borrower where you're meeting with them frequently and getting frequent information.

We do feel very comfortable in this situation that we have no other relationships or arrangements like that. And our consumer unsecured portfolio is very, very clean, as I mentioned. No non-performers, no troubled debt restructurings, and only $100,000 on a $28 million portfolio of delinquencies.

With respect to commercial, and even the rest of our portfolio, we have non-performers or very low delinquencies, are very low and actually improved this quarter and classified assets continued to be very low and stable, and actually improved this quarter. So there's nothing we can see, either in our data or in our marketplace or anecdotes, that suggests that there's anything out there that we would be surprised by again.

I offer you that, but as we also offer that credit, as we said, can be uneven and clearly it showed itself to be that at the end of this year. But I would say even in a normal distribution of credit you're going to have occasions where you have back-to-back things like this.

Completely fair. Thank you for the commentary.

You're welcome. Thank you for the questions.

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

Good afternoon.

Good afternoon, Joe.

I'd like to, I guess, just one other question on the net interest margin and such. It seems that your balance sheet's getting a little bit more liability sensitive in the last couple of quarters. Is that tied in with the third-quarter debt maturity and the senior debt -- senior notes that are going to be used to repay them?

Thanks for the question. This is Dominic. That's exactly the case.

With the expected call of the senior debt in the 2017 time period, so in the next 12 months, the repricing of that has driven the sensitivity down somewhat. But we continue to be asset sensitive and well positioned for the expected rising rate environment going forward.

Okay. I just wanted to clarify that. And I guess on your stock repurchase program, just wonder how you're feeling about going on with that, now with the increased valuations we've gotten over the last couple of months?

Yes, just want to reiterate what our philosophy and practice has been and continues to be. We pay very low as a percentage of earnings cash dividend. So is in the order of 10% to 15% by policy, and we're in that range now.

Beyond that we do buybacks for the flexibility that buybacks offer us over having a fixed cash dividend, and we really break that into two pieces. There's a portion of buybacks up to about 15% of earnings that we will do, almost regardless of price. It really just is a substitute for having a very, very low dividend. So look for us in most years, absent something unusual happening, to have at a minimum a cash dividend and a small buyback program that would approach 25% of earnings.

Anything over 25% is subject to -- are in buybacks, and are subject to a model that really calculates the expected internal rate of return on those buybacks where we look at the cash out, if you will, or the outflow as tangible book value dilution for buying shares. And then compare that against the inflows of the expected EPS accretion for buying back shares, and we look for a minimum rate of return on that outflow and inflow dynamic of 18% IRR.

Okay.

Having given you that context, we continue to buy back shares, as you saw modestly in the last quarter. And even continue to buy them back today as a substitute for a very low cash dividend.

All right. Thank you.

You're welcome.

Thank you. Our next question comes from the line of Austin Nicholas from Stephens. Your line is now open.

Hey, guys. Good morning.

Good morning, Austin.

Maybe just a quick question on the Cash Connect business. Just looking out over the next year to two years, it's my understanding that there's some rate floors in that business that maybe aren't blown past through until maybe the end of this year. And then maybe, can you talk about how the dynamics between the call it asset sensitivity in that business, and then what you're seeing just on a kind of organic growth within that business?

Thank you, Austin. This is Dominic. Just to parse out your questions.

First is just the impact from some of the floors. And you are correct, because of some of our customers' price to [listus] prime, there is about a 25 basis point differential between Wall Street and listus prime that we expect in the near term to create some compression in the margins for that business.

Long term we do see consolidation continuing to occur, and what that's doing is really reducing the amount of players in the space. That can be a risk and an opportunity, as we may lose some customers over time but the customers that we service are also expected to grow in volume and size as part of that business and consolidation rates are expected to come down somewhat. But our strategy continues to be focused on a more diversified revenue stream beyond just bailment across what we call TCM, or full cash management services, across logistics, reconciliation and forecasting tools.

In addition, that business continues to innovate, more recently focused on the smart safe business, where we expect to see really strong growth in the product expansion and penetration into existing customers and future customers that we continue to support low double-digit growth in that fee business.

Okay. All right. Well, thanks, Dominic. And then maybe just on the corporate development costs for next year. Should we see some remaining corporate development costs from the acquisitions in 2016?

Hey, Austin. It's Rodger Levenson. The significant amount of those costs have been incurred this year. There's a small trailing tail to those costs from the previous transactions of anywhere between $0.01 and $0.02 per share throughout 2017. Other costs will come obviously through kind of normal corporate development activities and would be deal specific.

Got you. Okay. All right. Well, I appreciate the time, guys. That's it from me.

All right. Thank you, Austin.

Thank you.

(Operator Instructions)

Our next question comes from the line of Frank Schiraldi from Sandler O'Neill. Your line is now open.

Hey, guys. Good afternoon.

Good afternoon, Frank.

A couple questions on -- a couple follow-ups, really. I just wanted to make sure I heard you right, Mark, on the interest rate positioning. So pretty neutral through the first 50 basis points. That's inclusive of the 25 we got in December?

Yes, that's inclusive of the 25 we got in December. Next 50 basis points pretty neutral on a model basis, again with the expectation I think we have a substantial opportunity to outperform the model.

Okay. Then I just wonder if you could share what average beta you guys use for the deposit base? And I'm assuming so far you've basically been able to hold pricing here.

I think it's probably very consistent with what you're seeing from others. And again, this is the model beta and a lot of these betas are based on the last time rates rose, which were 10 years ago.

And again, I'd just say that we're a much, much different organization than we were 10 years ago in our brand and our market competitiveness. But it's on average 50 basis points of beta, and that's spread out anywhere from 20 basis points on the core checking stuff up to 80 basis points on the savings and money market stuff.

I'm sorry. So 80 basis points of 100?

So 50 on average, but that 50 on average could be -- includes assumptions about 20 basis points on checking accounts and up to 80 basis points on products that are less core, like savings and money market. But on average 50 basis points.

And to your last question, yes, we really haven't seen any need at this point to raise rates or any pressure coming from the customer base or competition to raise interest rates. And our expectation is we probably wouldn't see that through the next 25 to 50 basis points.

And then on -- just on M&A, I wondered what your appetite was go forward for -- or if you see anything on the horizon in terms of additional wealth management deals that might move the needle here?

Hey, Frank. It's Rodger. So I would say generally with the guidance that we've given before, we're very focused on optimizing the recent investments, and clearly in the wealth space with the acquisitions of Powdermill and West Capital Management in the back half of the year, we're very focused on optimizing and integrating those. We really feel that significantly enhanced our platform.

That being said, we continue to look for other, what I will call, kind of tuck-in acquisitions to that business. Again, along the same lines that we've talked about in terms of relatively small, minimal integration risk, and something that we can pull in quickly and move on from.

So we keep our eyes open for those. But I would put it in the context of we are focused right now on integrating those most recent two.

Okay, got you. Thank you.

Thank you.

Thank you. At this time I'm not showing any further questions. I would like to turn the call back over to Mark Turner for closing remarks.

All right. Thank you, Charlotte, I appreciate that. And thank you everybody on the call again for your time and attention.

Rodger, Dominic and I will be on the road in investor conferences actually several times, I think actually up to five times over the next couple months. It seems to be a busy season. And we look forward to seeing many of you then. Have a great weekend.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone have a great day.