WSFS Financial Corp (WSFS) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the WSFS Financial Corporation Fourth Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

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

Thank you, Brian, 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; Rodger Levenson, Chief Operating Officer; Paul Geraghty, Chief Wealth Officer; Steve Clark, Chief Commercial Banking Officer; and Rick Wright, Chief Retail Banking Officer.

Before Rodger begins with his remarks, I would like to read our safe harbor statement. 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 factors included in our annual report on Form 10-K and our most recent quarterly report 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 Rodger Levenson.

Thanks, Dominic, and thank you to everyone for joining us on our call today.

We are pleased to announce that our fundamental performance in the fourth quarter was strong and capped a very solid year for WSFS.

As previously disclosed, our reported results for both the Quarter and Full Year include the impact of four significant nonrecurring items which occurred just prior to year-end, primarily related to the tax law change signed on December 24. Details on each of these items were provided in our 8K filed on January 4, 2018. My comments during this presentation will focus on our performance excluding these items, as well as our normal practice of excluding Corporate Development Expenses and Securities Gains, which were both nominal this quarter. We will be happy to address specific questions on any of these items during the Q&A section of this call.

Highlights for the fourth quarter and full year 2017 included:

First, Core Net Revenue Growth of 11% compared to the fourth quarter of 2016, driven by 9% growth in Net Interest Income and 16% growth in Fee Income.

Second, loan growth in the quarter of 10% annualized, led by 9% annualized growth in C&I loans, which is our largest loan portfolio and solid growth in our Consumer loans as a result of our strategic partnership with Spring EQ, a locally-based digital home equity lender.

Third, Deposit growth was also very strong with total customer deposits growing 12% annualized. Total core deposits grew 6% annualized and remain at a very strong 87% of total customer deposits.

Fourth, On a full year basis, total loans and customer deposits grew at healthy levels of 7% and 9%, respectively. This was consistent with our expectations and continues to demonstrate our ability to gain market share organically and fund our loan growth via customer-generated deposits.

Fifth, The reported Net Interest Margin for the quarter was 4%. This represented a very healthy increase of 10 basis points compared to the fourth quarter of 2016. Primary drivers of this improvement were the higher short term rate environment, balance sheet growth and mix and the planned redemption of our $55 million senior notes late in the third quarter, partially offset by lower purchase loan accretion. Our full year margin came in at 3.95% which was an increase of 7 basis points from the prior full year and also in line with our expectations.

Sixth, Core fee income grew 16% when compared to the fourth quarter of 2016, driven by continued success across our Wealth and Cash Connect businesses. For the full year, core fee income growth of 19% was divided into 12 percentage points from organic growth and 7 percentage points from our recent acquisitions.

Seventh, Expenses were well managed with a Core Efficiency Ratio of 57% in the quarter. Consistent with the typical seasonality of our business, our Core Efficiency Ratio improved throughout the year, and our full year ratio landed almost exactly at 60% as expected.

Eighth, Total Credit Costs, which include Provision Loan Workout, REO and other related costs were $4.1 million for the quarter. The primary drivers of Provision were a $2.8 million charge-off on a commercial real estate loan and the reserves allocated to a $7.5 million C&I relationship which was moved to non-accrual status during the quarter. This local technology consulting business continues to be current on its payments and is supported by strong ownership that is very familiar to the Bank.

As we have previously stated, total credit costs can be uneven from quarter to quarter. That played out again this past year. However, our total credit cost for all of 2017 were $12.6 million, which was just below the midpoint of our full year range of expectations of $12 million to $14 million and right around 20 basis points on average assets for the year.

Overall, our credit quality metrics remained stable and at very favorable levels.

Finally and significantly, as a result of our performance, we achieved a core ROA for the quarter of 1.31% and a full year Core ROA of 1.21%. We are pleased to report that we achieved our strategic plan goal of a Core and Sustainable ROA of 1.30% by the fourth quarter of 2018, a full year ahead of schedule.

I would like to turn now to our 2018 Financial Plan. Our Plan was finalized in mid-December prior to the passage of the new tax law. Although we have updated our effective tax rate to reflect the new corporate tax rate, we have not made any other changes to our underlying business assumptions to reflect a potential lift in the economy from the tax reform. Highlights of the plan include: First, Continuing Loan and Deposit growth in the mid-to-high single digits;

Second, net interest margin in the 3.90s. This conservatively assumes one additional 25 basis point increase in the Fed Funds rate in June. The impact of any additional rate hikes and the magnitude and lag of rising deposit betas will likely determine our ability to get to the upper end of this range for the full year.

Third, Well diversified fee income growth in the low double digits driven by continued good organic growth in our Wealth and Cash Connect businesses.

Fourth, Total credit cost of approximately 20 basis points on average assets or $13 million to $15 million for the year. Again, we would caution that as we have seen in the past two years, these costs can be uneven from quarter to quarter.

Fifth, A full year efficiency ratio of just under 60%.

Finally, a full year effective tax rate of approximately 23%. This tax rate may fluctuate quarter-to-quarter due to equity exercise activity.

As a reminder, our first quarter tends to be our weakest because of the seasonality that negatively impacts both revenues and expenses. We would therefore expect our Core and Sustainable ROA to build throughout the year with the potential to produce a full year Core and Sustainable ROA of around 1.50%.

In summary, 2017 was a very solid year for WSFS. We optimized our recent acquisitions and continued to execute on our 3 Year Strategic Plan. As a result, we delivered on the key operating metrics in both our Strategic and Annual Plans and achieved our Core and Sustainable ROA objective a full year earlier than planned. We enter 2018 with increased momentum, and we are also hopeful that the recent changes in the tax laws will facilitate additional growth in the economy, which will be better for our customers, communities, and in turn better for WSFS.

At this time, we will be happy to take your questions.

(Operator Instructions) Our first question comes from the line of Austin Nicholas from Stephens.

Hey guys, good morning. Maybe just touching on the Cash Connect side of the business. It looked like revenue was up but maybe net revenue was down a little bit quarter-over-quarter, if I'm reading that right. Was that driven by the funding side of the business? And then how do we -- how should we think about growth in that business going out into 2018? Is it still that kind of low double-digit revenue growth?

Sure, Austin, this is Dominic. I would say we have seen top line growth in that business continue to grow in the low double digits. With the rate environment and the rising rates, that has reduced our net fee growth to the mid-single digits, and our investment in the growth of that business and smart safes has reduced growth in the bottom line as we transitioned through 2017. We continue to see prospects in that business for top line fee revenue growth to be the low double digits, and we do expect bottom line growth to be in the mid-single digits.

Understood, thanks Dominic. And then maybe looking out over the next few quarters, what should we be looking at in terms of maybe on a quarterly basis on loan growth? Should we expect the first quarter to be kind of seasonally weak and then pick up and to get to that, call it, mid-to-high single-digit loan growth on a full year basis?

Yes. Austin, this is Steve Clark. So for the full year, we are forecasting mid-to-high single-digit commercial loan growth. And the pipeline, while it's a little bit lower than past quarters, it's around $100 million, our 90-day weighted average. It kind of represents the success we had ending the year, so we're pretty confident. 65% of that pipeline represents C&I opportunities, and we think we'll come in, as we said, in that mid-to-high single digit for the full year.

Thanks and then maybe just one last one on your outlook for M&A. With Penn Liberty now integrated, what are -- I guess, what are the opportunities there maybe on the fee income side in the Wealth Management business? And then, I guess, beyond that, what are you looking -- what are you seeing in the market in terms of M&A opportunities and where might those be?

Austin, it's Rodger. As you recall, we took 2017 as the year to optimize the recent acquisitions that we accomplished, and we think we are significantly behind that accomplishment. So really, our goal now going forward is to continue on our strategic plan. And so on the fee-based side, we'd like to supplement the Wealth business, if we could, again, with some expansions of our product offering or deepening of our existing product offering while continuing with our pattern of what I would call small and easily integratable acquisitions. So think about those in total deal consideration size of $5 million to $20 million and similar to the two acquisitions we had several years ago. On the bank side, from a traditional M&A standpoint, if we had the opportunity to augment the franchise that we've built in Southeastern Pennsylvania, we very much would like to do that, and we continue to evaluate those opportunities as they come about.

Thanks Rodger that is all the questions I have, I'll hop off.

Our next question comes from the line of Catherine Mealor from KBW.

Thanks, good afternoon one question on the margin. It looks like you're giving us a little bit of guidance for margin compression this year just off of the higher fourth quarter base, just a little bit, not a lot. But as we think about the margin from here, what's really -- I guess my question is 2 parts. So what's really driving that compression? Is it mostly just coming from higher deposit betas? Or what is your -- and then also, what is your outlook for loan yields? It feels like if we're in a rising rate environment, we should see a pickup in the increase in loan yields, which I thought might be enough to offset your higher deposit betas. But it feels like -- with your guidance, it feels like the deposit betas are going to be high enough to really offset that improvement we should see on the asset side. How should we kind of think about those 2 dynamics?

Sure, Catherine. This is Dominic. So I'll walk through that a little bit. So in the fourth quarter, we were -- the margin was slightly elevated with some onetime payoff benefit that we experienced through clawback of fees in the quarter. So -- but stepping off of fourth quarter into next year, we continue to be asset-sensitive. We continue to be well positioned to take advantage of rising rates that we expect. And as Rodger mentioned, we do anticipate in our plan and assumptions one rate increase in June. Historically, we have experienced, over the long term, about a 50% beta. Through the rising rate cycle we're in the midst of, we've experienced in the low double digits, so 10% to 15%. But we do expect that to increase towards the 50%, and that would clawback some of the benefit that we would see on the yield side. As Rodger mentioned though, we could achieve the high end of the range, 390s, depending on not only the number of rate increases but the performance of that beta going forward. We do see some headwinds with the runoff of PCI, and that, along with the continued runoff of the reverse mortgage portfolio, provides for about 8 basis points of reduced NIM next year that we're covering through the rising rate environment and continued strong balance sheet. So -- and lastly, there's about 2 basis points of tax impact on the tax-advantaged municipal bond yields and other items that are reduced year-over-year due to the tax legislation. I'll pass it over to Steve to talk about yields.

Yes. So Catherine, it's kind of interesting, the fourth quarter of 2017 for commercial loans greater than $250,000, our average yield was about 4.61%. And if you look back a year ago, fourth quarter of 2016, our average yield was 3.96% so obviously benefiting from the increases in short-term rate over the past year, and we would expect that trend to continue.

This is Mark, Catherine. I would just add to that from a more global perspective, as I look back over our planning -- or annual plans for the last several years, I think we've been very, very successful in setting goals on major line items and hitting them. And the one that we have consistently come up short on, on our annual plan is the net interest margin percentage. So my guidance to the team this year was let's be conservative because we all know if we're -- if we project too much in revenues, that allows too much costs in the business, and the costs come and the revenue may not. So we were very conservative in our estimation about 2 things in the plan that I think is showing up in your comment. One is we only anticipated one rate increase next year, in June. As you know, economists and the Fed are forecasting more like 2 or 3. Given how asset-sensitive we are, that will -- if that comes to pass, that could help us, and of course, that would be a good thing. And then secondly, betas. We have a tremendous deposit-generating franchise at this point in our history. We have a 96% loan-to-deposit ratio. We have a really high-quality liquid investment portfolio that we can use to fund loan growth. And we also announced we are turning in our BOLI policies and generating $100 million in cash that way. So I don't expect, given our brand and the positioning I just mentioned, that we will be overly aggressive with respect to deposit rates. So I am hoping that we can continue to lag on deposit betas. And if we can do that and we get rate increases, I would -- hopefully, we get towards the higher end of the 390s, which would be an increase over last year's full year of 3.95%.

That's all very helpful color. Thank you everybody, and then maybe one other follow-up on capital management. Any thoughts on any change to your strategy now with the lower corporate tax rate and your ability to generate capital at a faster pace over the next couple of years?

Yes. So annually, this is Dominic, we evaluate our capital policies and we will, in 2018, continue to evaluate the capital generation of the business and our return of capital. We would expect that with the lower rate of -- tax rate and the higher expected profit, that more capital would be returned, either through our consistent and regular dividend that is now $0.09 per share or our share buy back -- share buyback program. But again, we will evaluate through 2018 as we monitor performance.

Great thank you so much.

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

Good afternoon guys, just a couple of clarifying questions, please. On the 1.30% ROA, so if I understood you correctly, the fourth quarter result is something that you guys believe can sustain and then build throughout the year. With the ability to hit the 1.5% as an exit, that incorporates the tax reform. Is that correct?

Yes. So let me be clear. We said that we think we have the opportunity, if we achieve all of the goals that I outlined and the metrics that I outlined, to achieve a full year ROA of 1.50%, if all those things were to happen. But that does incorporate the change in the tax law. That's correct.

It does, as Rodger pointed out, start lower because of seasonality in the first quarter and build during the year. So just to put it in perspective last year -- this is Mark, I'm sorry. Last year, we achieved full year 1.21% core and sustainable. So that would translate to the 1.50% we're expecting next year, which is a result of two things: increasing momentum in performance. As you saw, we exited the year at 1.31%; coupled with the tax rate change.

I appreciate that. And then let me just ask another follow-up in terms of your growth outlook. Appreciate the guidance in terms of magnitude, but could you just give us some thoughts -- your thoughts around where you would expect that growth to come from, from both a loan product and perhaps even geographic perspective?

Yes. So this is Steve again. I think, certainly, looking at our commercial portfolio, as I mentioned, we see it coming from both C&I and CRE opportunities, and we see it coming in Southeastern Pennsylvania. We look at the relationship managers we've hired over the past several years and production that they hopefully can achieve. We look at the successful integration of the teams from the prior Alliance Bank and Penn Liberty Bank, and we see continued disruption in Southeastern Pennsylvania. So we think with all those things and our meaningful presence up there now, with 28 locations and executive leadership in the market, local decision-making, we just see an opportunity -- a very nice opportunity for us in Southeastern Pennsylvania.

Yes. So I would just add to that, Russell. If you look at that pipeline that Steve had mentioned before of our overall commercial pipeline, about 40% of that represents opportunities in Southeastern Pennsylvania.

Correct.

Got it, okay. Very helpful. Thank you guys, last one for me. Just give me some color, please, if you could around your expectation about what's going to drive, I think you said, low double-digit top line within the Cash Connect business.

Sure. We continue to see -- and apologize, this is Dominic again. We continue to see consolidation within the industry, and the clients that we serve grow in market share. And as such, in the bailment business, we see opportunity to continue to grow that key portion of the business. In addition, we see the opportunity to sell other services, including a full product of logistics services, which is repackaged armored car services, insurance, reconciliation and cash optimization fee services. And lastly, as we have established ourselves as a strong presence in the cash logistics business, with the proliferation of smart safes across the country, we see a good opportunity to be positioned to take advantage of that market. The smart safe market is expected to grow about 15% next year. Given our growth of about 1,600 smart safes since our inception of that program, we expect that count to double throughout 2018. So through our traditional bailment, additional logistics services and the expansion of the smart safe business, we see the opportunity to continue to grow fee revenue in that business in the low to mid-double digits.

Very helpful Dominic. Thank you guys.

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

I guess I'll follow up that last question with, I guess, question on the growth on fees on the other business, the Wealth Management. And just wondering, do your estimates there incorporate any benefits from the reduced tax rates on small businesses and individuals in terms of increased Assets Under Management? Or -- and if not, I guess, what are your thoughts on what that can do for the asset management business?

So Joe, this is Rodger. The assumptions that we outlined did not include any impact from the change in the tax legislation on any of our revenue metrics, as I talked about. I think it's still to be determined how that will play out across all of our businesses, and I would put Wealth in there. But achieving the low double-digit outlook that we provided is -- is not driven in any way by the change in the tax law.

Thanks guys, I think my other questions have been answered.

(Operator Instructions) Our next question comes from the line of Frank Schiraldi from Sandler O'Neill.

Just a couple of questions left for me. Rodger, I think you mentioned credit cost of $13 million to $15 million for the year, which is up slightly from where you were last year. And just wondering, does that translate into some modest reserve builds at this point in the cycle? Does it just reflect normalized expectations of loss? Just wondering, I guess, how you guys are thinking about credit at this point.

Yes. Thanks for the question, Frank. So if you look at total credit cost this past year, we were just under 20 basis points on average assets for total credit cost, and that $13 million to $15 million range for next year also anticipates coming in around 20 basis points on average assets. So the growth in the number is just coming really from the growth in the business as opposed to any underlying fundamental or change in view in credit. So really, it's nothing that we see there. I think, generally, our view is, even though it's been an extended cycle, that provisioning will cover our charge-offs and loan growth going forward approximately, and that's very consistent with what we saw this past year.

Okay. And then just one on the NIM. Not sure if you guys have -- I don't recall if you talked about this in the past, but in terms of as we think about just another 25 basis point rate hike, if it finds it way into the market this quarter -- this year, how much that would, in your estimate, boost the NIM, all else equal.

Sure. This is Dominic. If -- on a full year basis, one 25 basis point rate increase, with our historically modeled 50% beta, we would see about a $1.3 million lift to NII. But again, that's on a full year basis with the 50% beta. So depending on, obviously, timing and the size of that beta, we could -- it could be favorable or unfavorable to that metric.

Ok gotcha, that's all I have thanks.

And I am showing no further questions. I would now like to turn the call back to Rodger Levenson, Chief Operating Officer, for any further remarks.

Thanks, and thank you again everybody for your time and attention. Mark, Dominic and I will be on the road at investor conferences over the next couple of months and we look forward to seeing many of you then. Have a good day.

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