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Good day, ladies and gentlemen. And welcome to the WSFS Financial Corporation Fourth Quarter 2017 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 be -- will follow at that time. [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; Roger Levinson, Chief Operating Officer; Paul Geraghty, Chief Wealth 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 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.
Thanks, Dominic, and thank you to everyone for joining us on our call today. We are pleased to announce that are fundamental performance in the fourth quarter was strong and kept the very solid year for WSFS.
As previously disclosed, our reported results for both the quarter and full year include the impact of four significant non-recurring items which occurred just prior to the year-end, primarily related to the tax law change signed on December 24th. Details on each of these items were provided in our 8-K 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 on 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 mixed, and the plan redemption of our $55 million senior notes late in the third quarter, partially offset by lower purchased 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 CashConnect 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 the 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 cost 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 costs 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 remain stable and at very favorable level.
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 our 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, a net interest margin in the 3.90%, 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 CashConnect businesses.
Fourth, total credit costs of approximately 20 basis points on average assets were $13 million to $15 million for the year. Again, we would caution that as we’ve 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%. And finally, 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 optimize our recent acquisitions and continue to execute on our three-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.
Thank you. [Operator Instructions] Our first question comes from the line of Austin Nicholas from Stephens. Sir, your line is now open.
Hey, guys. Good morning.
Hi, Austin.
Maybe just touching on the CashConnect side of the business, it looks like, revenue was up, but maybe net revenue was down a little bit quarter-over-quarter, if I am reading that right. Was that driven by the funding side of the business, and then, how do we -- how should we think about gross net that business going out into ‘18, is it still that kind of low double-digit revenue growth?
Sure, Austin. This is Dominic. I would say we have seen topline 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 safe has reduce growth in the bottomline as we transition through 2017. We continue to see prospects in that business or topline fee revenue growth to be the low-double digit and we do expect bottomline growth to be in the mid-single digits.
Understood. Thanks. 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?
Yeah. 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 or 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 will come in as we said that mid-to-high single-digit for the full year.
Okay. Thanks. And then maybe just one last one on your outlook for M&A, is -- with the Penn Liberty now integrated. What are -- I guess what are the opportunities there, may be 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 this be?
Hey, Austin. It’s Roger. As you recall, we took 2017 is 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 would like to supplement the Wealth business if we could, again with some expansions of our product offering or deepening of our existing product offering or continuing with our pattern, what I will call small and easily integratable acquisition. So think about those in total deal consideration size of $5 million to $20 million 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 built in Southeastern Pennsylvania, we very much would like to do that and we continue to evaluate those opportunities as they come about.
Understood. Thanks, Roger. I think that’s all the questions I have so I will hop off.
Our next question comes from the line of Catherine Mealor from KBW. Your line is now open.
Thanks. Good afternoon.
Hi, Catherine.
Good afternoon.
One quick question on the margin, it looks like you are 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 are thinking of the margin from here, what’s really, I guess, my question is two 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 yield, it feels like if we are in rising rate environment we should see a pick up 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 a 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 these two dynamics? Thank you.
Sure, Catherine. This is Dominic. So I will walk through that a little bit. So in the fourth quarter we were -- the margin was slightly elevated with some one-time payoff benefits that we experience through call back 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 Roger mentioned, we do anticipate in our plan and assumptions one rate increase in June.
Historically, we have experienced over long-term a 50% beta through the rising rate cycle we are 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 call back some of the benefits that we would see on the yield side. As Roger mentioned though, we could achieve the high end of the range of 3.90% depending on not only the number of rate increases, but that 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 mid next year that we are 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 advantage municipal bond yields and other items that are reduced year-over-year due to the tax legislation. I will pass it over to Steve to talk about yields.
Yeah. 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 2016, our average yield was 3.96%. So obviously benefiting from the increases in short-term rates over the past year and we would expect that trend to continue.
Yeah. This is Mark, Catherine. I will 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 at 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 are -- if we project too much in revenues that allows too much cost in the business and the cost come and the revenue may not.
So we were very conservative in our estimation about two 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 two or three, given how asset sensitive we are that will -- that -- 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 policy in 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 hope we get towards the higher end of the 3.90%s, which would be an increase over last year’s full year 3.95%.
Those are all very helpful color. Thank you, everyday. And maybe one other follow-up on Capital Management, any thoughts on any change to your strategy now with a lower to corporate tax rate and your ability to generate capital to faster pace over the next couple of years?
Yeah. 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 profits that more capital would be returned either through our consistent and regular dividend that is now $0.09 per share or our share 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. Your line is now open.
Good afternoon, guys.
Hi, Russell.
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?
Yeah. 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.
Okay.
It does, as Roger pointed out, start lower because of the seasonality in the first quarter and build during the year. So just to put it in perspective last year, this is Mark, I am sorry. Last year we achieved full year 1.21% core and sustainable, so that would translate to the 1.50% we are expecting next year, which is a result of two things, increasing momentum in performance, as you saw, we exited the year to 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. I 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 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 management we’ve hired over the past several years and production that they hopefully can achieve. We look at the successful integration of the team, teams from the prior Alliance Bank into 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.
Yeah. So I would just add to that, Russell, if you look at that pipeline, Steve had mentioned before of our overall commercial pipeline, about 40% of that represent 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 topline within the CashConnect business?
Sure. We can see -- we continue to see and I apologies, this is Dominic again. We continue to see consolidation within the industries and the client that we serve grow in market share and as such in the bailment business. In addition, we see the opportunity to sell other services, including a full product of logistic services, which is repackage armored car services, insurance, reconciliation and cash optimization fee services.
And lastly, as we have established ourselves as a strong presence in the cash logistic business, with the proliferation of smart safe across the country we see a good opportunity to be positioned to take advantage of that market. This market is expected to grow about 15% next year given our growth and of about 1600 smart safes. Since our inception of that program we expect that count to double throughout 2018.
So through our traditional bailment additional logistic services and the expansion of the smart safe business we see the opportunities continue to grow, Steve, of revenue in that business in the low-to-mid double digits.
Got it. Very helpful. Thanks, Dominic. Thank you, guys. That’s all I have.
Thank you.
Our next question comes from the line of Joe Gladue from Merion Capital Group. Your line is now open.
Hi. Good afternoon.
Hi, Joe.
Hi, Joe.
I guess, I will follow-up that last question with the, I guess, question on the growth in fees on the other business, the Wealth Management. And just wondering to 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 Roger. The assumptions that we outline did not include any impact from the change in the tax legislation on any of our revenue metrics, as I talk about. I think it’s still to be determined how that will play out, of course all of our businesses and I would put Wealth in there. But achieving the low double-digit outlook that we provided isn’t -- was not driven in any way by the change in the tax law.
All right. I think my other questions have been asked. Thanks.
[Operator Instructions] Our next question comes from the line of Frank Schiraldi from Sandler O’Neill. Your line is now open.
Good afternoon. Just a couple of questions left for me. On, Roger, I think, you mentioned, credit costs 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 build at this point in the cycle or does this reflect normalized expectations of loss. Just wondering, I guess, how you guys are thinking about a credit at this point?
Yeah. Thanks for the question Frank. So if you look at total credit costs this past year, we were just under 20 basis points on average assets for total credit costs 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 changing view in credit.
So it really is 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 now we saw this past year.
Okay. And then, just one on the NIM, I am not sure if you guys have, I don’t recall you -- if you talked about this in the past. But in terms of as we think about just a 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 that’s 125 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 that beta we could be favorable or unfavorable to that metric.
Okay. Got you. All right. That’s all I have. Thanks.
Frank, thanks.
Thank you.
And I am showing no further questions. I would now like to turn the call back to Roger Levinson, Chief Operating Officer for any further remarks.
Thanks and thank you again for 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.