Catherine Mealor - KBW Frank Schiraldi - Sandler O'Neill Russell Gunther - D.A. Davidson

Good day, ladies and gentlemen, and welcome to the WSFS Financial Corporation Second 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 follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I’d like to introduce your host for today conference Dominic Canuso, Chief Financial Officer. Sir, you may begin.

Thank you, Glenda, 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; Roger Levinson, 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 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 Mark Turner.

Thanks Dominic and thanks to everyone on the call for your time and attention. We're pleased to report another very solid quarter of earnings with net income of $20.6 million and earnings per share of $0.64. Excluding a small net amount of securities gains and merger related costs, core earnings per share were $0.63, core return on assets was 1.22% and core return on tangible common equity was just a hair under 16%, all very strong results. In addition, core net revenues grew by $13.9 million or 19% from the same quarter last year, including a robust 17% growth in net interest income and a very robust 24% growth in fee income, both coming from a combination of healthy organic growth and our late 2016 successful acquisition growth. The net interest margin improved nicely by 3 basis points in both the quarter and over last year to 3.93%, despite a decline in normally volatile acquisition related accretion and reverse mortgage interest income. We see several basis points of further upside in the margin in the second half of the year given the mid-June Fed funds rate increase, our significant core funding composition, which represents 88% of total customer deposits as well as the planned pay-off of $55 million in higher cost senior debt on September 1. Importantly, core fee income grew nicely across almost all business units resulting in that previously mentioned total growth of 24% over this time last year. And more importantly that included more than half or 13 percentage points coming from organic growth. Fee income now also represents a robust 36.5% of total revenue and it's very well diversified among traditional banking, mortgage banking, wealth management and cash connect services. Core expense growth of $8.2 million over that same time was far less than core revenue…

[Operator Instructions] And our first question comes from the line of Catherine Mealor from KBW. Your line is now open.

First on the fees, I mean really strong growth in fee income this quarter. Is there anything that you saw in the growth that - temporary or one-time that may normalize as we get into the back half of the year or do you feel like this higher level of fee income is a good run rate to grow from for the rest of the year?

Each of our business is, the four that generate fee income, traditional banking, mortgage banking, wealth and cash connect ATM services have some seasonality in them and each of the seasonality differs a little bit. So for example in the second quarter, we benefit in wealthy by some tax preparation services and things like bankruptcy cases and the income wearing off them can come and go depending on the bankruptcy cases. Having said that, all of them are continuing to grow on a nice fundamental growth trend. So I would expect some seasonality around this base, but continued strong growth year over year.

And are you still targeting the 20% year-over-year growth for fees?

For this year in total, yes. Obviously that is benefited by the fact that we added two small acquisitions in powder middle and west capital late at the end of last year. So when we look to ’18 growth over ’17 that number will obviously change and will depend on the dynamics of that time.

And then, one follow-up on the margin. Can you talk a little bit about what you've seen in your portfolio since now you've got with this prime in line with Wall Street Journal prime and you got the June hike on top of that. And so what you're seeing in terms of repricing on your loan book, so far this quarter, and as we move into next quarter as we get a full impact of the June hike. Thanks.

Sure Catherine, this is Dominic. As you mentioned, with the March rate increase, WSFS prime was aligned with Wall Street prime. We have continued to see positive benefit as we've mentioned in previous quarters from the asset sensitive position we have in our balance sheet and the high variable rate mix on our loans. Compared to year over year, we've seen about 5 basis points improvement from a positive rate environment. With the most recent rate increase in June, we expect that to continue at a higher pace and expect that improvement to continue especially in the third quarter and beyond.

And any impact that you’re seeing from the flatter curve that’s taken a little bit of that benefit out or is it – the short end is really what's driving your higher margin.

Yeah. The short end is really what most of our assets are priced off of the loan book, the longer, and obviously affects some of our securities. But it’s a much smaller part of the book and a lot slower to reprice. Steve, did you want to comment on competitive environment and loans?

Only to add, this is Steve Clark, Chief Commercial Banking Officer. Only to add that it remains very, very competitive, but to reinforce Dominic's comments, looking back over the last year, on our yield, the yield in the commercial book for the full year last year was 4.19%. First quarter, this year, 4.34%. Second quarter this year, 4.52%. So we see continued benefit from the short-term rate environment going on. For new loans booked, correct.

They are the average rate on new loans book that you just gave?

That is correct.

Thank you. And our next question comes from the line of Frank Schiraldi from Sandler O'Neill.

Just a follow-up on the NIM. I’m sorry, did you guys talk about a specific guidance for NIM expectations in the back half of the year, given the June hike and the debt payoff?

We did and Dominic can correct me if I'm wrong or augment this, but high-390s

That's correct. And that would -- that assumption includes no additional rate increases for the second half of the year and includes the continued benefit of the most recent June rate hike and the pay down of the older hired cost senior debt.

And the senior debt comes in September you said?

September 1st is the planned payoff of that and that would be 55 million and 6.25% debt coming off the books. We have about $700,000 non-cash write-off of old debt costs to take at that time.

And then I’m just trying to think through the 1.3% ROA. I believe you had, correct me if I’m wrong, but you did not have the June hike in your assumptions for that guidance. So just wondering what that might mean for hitting that target and if you might perhaps expect to hit that a little bit earlier that the 4Q.

Yes. So you listen very closely, because I did adjust my wording slightly from prior to say that we would hope to get to 1.30% core and sustain it by no later than the fourth quarter of 2018. So on the current path, obviously nothing significant happening that we don’t expect we would hope to get there a little bit earlier than that.

Okay. And then finally just on Cash Connect, I wondered if you could just remind us or if anything's changed in terms of expected growth trajectory there year-over-year

Sure. So, we had been traveling at about 15% revenue growth compounded for the last five years as you saw and we caught out in the first quarter. First quarter slowed down quite a bit. We had some, besides normal seasonality, we had some large customers that were consolidated up and we lost some business out of that and there's been some margin pressure just due to consolidation of our customers and there are bigger customers demanding better pricing. But offsetting that, we’ve had growth in managed services. So related to the cash we put in the ATMs as well as the smart save, so we saw a nice rebound in the second quarter, where growth year-over-year expanded from that 5% to 9% and we're hoping -- our goal is to get that again up into double digit growth by the end of the year.

Thank you. And our next question comes from the line of Russell Gunther from D.A. Davidson.

Maybe just a quick follow-up on the fee income guidance and commentary. That other income line has kind of steadily marched higher over the past few quarters. Could you just remind us what's in there and what's driving that and what the outlook might be there?

And so a big component of that is the managed services fee income from Cash Connect. So that's where that shows up, but Dominic has some other details in front of him.

Yeah. So that's correct and we do expect since that's associated with the fee income in the Cash Connect business, that would continue to grow in that high single digits or low double digits for the remainder of year, contributing to delivering the overall fee growth for 20% for the full year basis.

And then your commentary as to expectations for the efficiency ratio for the back half of this year, if you just give us a sense for where you expect to see, if you do expect to see just the absolute expense level kind of come down to help hit that or is this more revenue driven?

Yes. So I think it’s operating leverage driven if you will. So that maybe just to set some context here, our path for delivering a full-year 60% starts out with kind of in the 62% in the first quarter and then trending down to the 58 plus percent range by the fourth quarter, averaging over the course of the year, ex any big one timers one way or the other, 60%. So that's the kind of the natural path based on seasonality and growth of the business. So obviously, we're tracking that path for the first two quarters of the year and with what we see, we expect to track for the second two quarters of the year. And I'm sorry, what was the question.

No. You hit it. I was just trying to get a sense for whether there's anything within the P&L that may experience some more meaningful step down in the expense line items or is it more revenue driven?

Since we're growing strongly, it is more operating leverage driven so. So just to point one thing out, if you looked at our growth in revenue and our growth in expenses year-over-year, so the efficiency ratio on the growth, that was under 59%, which obviously helps the overall efficiency ratio. If you take out some of those legal expenses, that actually would have been kind of under 55%. So as we are growing the efficiency ratio on that growth is improving into the mid-50s, helping to drive the overall efficiency ratio down to under 60.

And then you guys’ asset quality has been great, really, really solid quarter there, first half of the year kind of tracking below the low end of that kind of 12 million to 14 million all-in credit cost. Is that still a good guidepost or based on your kind of forward look on asset quality, you think you could help perform there?

This is Steve again. We think that original guidance of 12 million to 14 million for the full year, 3 million to 3.5 million per quarter is still kind of a good guide. Credit cost can be uneven and we just feel that this guidance, this range is still appropriate for the full year.

Since we have seen past years, we typically have three quarters that are kind of under guidance and one quarter that’s well over guidance for the whole year coming in about as guidance. So I would, it’s just the nature of credit and I wouldn't be surprised if those type of things happen in the future.

Sure. And then last question for me, you mentioned the commercial paydowns in the quarter expected, but were a bit pronounced. Just give us a little bit of color about what transpired there and what your expectations were for payoffs might be?

Yes. So, Steve again. In the quarter, we really had some strong production in the commercial bank. We did have some headwinds, about $32 million of unanticipated payoffs in the C&I book and that was through the company's sales and refinance of some owner occupied real estate. On the CRE side, same story, about 50 million of unanticipated pay offs plus some anticipated, we had some construction loans move into the permanent market and that was planned. So 82 million in total of payoffs that came at us, still grew a little bit incrementally. And as we said earlier, the first half of the year growth in commercial about 5.5% year-to-date annualized, we’re feeling pretty good. Our pipeline is strong, remains strong, 90-day weighted average of over $150 million and we feel that mid to high single digit growth for the full year is still forecasted.

[Operator Instructions] And our next question comes from the line of Matt Schultheis from Boenning. I apologize. I'm showing no further questions over the phone lines. I’d like to turn the call back over to Mark Turner, Chief Executive Officer, for closing remarks.

Okay. Well, thank you. Roger, Dominic and I will be on the road a bit in the coming months and we look forward to catching up with as many of you as possible then and dialoguing further. Have a great weekend.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone, have a great day.