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Edited Transcript of WSFS earnings conference call or presentation 22-Jan-20 6:00pm GMT

Q4 2019 WSFS Financial Corp Earnings Call

Wilmington Jan 28, 2020 (Thomson StreetEvents) -- Edited Transcript of WSFS Financial Corp earnings conference call or presentation Wednesday, January 22, 2020 at 6:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dominic C. Canuso

WSFS Financial Corporation - Executive VP & CFO

* Lisa M. Brubaker

WSFS Financial Corporation - Executive VP & CTO

* Rodger Levenson

WSFS Financial Corporation - Chairman, President & CEO

* Stephen P. Clark

WSFS Financial Corporation - Chief Commercial Banking Officer & Executive VP

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Conference Call Participants

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* Broderick Dyer Preston

Stephens Inc., Research Division - VP & Analyst

* Erik Edward Zwick

Boenning and Scattergood, Inc., Research Division - Director and Analyst of Northeast Banks

* Frank Joseph Schiraldi

Piper Sandler & Co., Research Division - MD & Senior Research Analyst

* Michael Perito

Keefe, Bruyette, & Woods, Inc., Research Division - Analyst

* Russell Elliott Teasdale Gunther

D.A. Davidson & Co., Research Division - VP & Senior Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the WSFS Financial Corporation Fourth Quarter 2019 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference call is being recorded. (Operator Instructions)

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

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Dominic C. Canuso, WSFS Financial Corporation - Executive VP & CFO [2]

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Thank you, Valerie, and thanks to all of you for taking the time to participate on our call today. With me on this call are Rodger Levenson, Chairman, President and CEO; Art Bacci, Chief Wealth Officer; Steve Clark, Chief Commercial Banking Officer; Rick Wright, Chief Retail Banking Officer; and Lisa Brubaker, Chief Technology 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 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. All comments made during today's call are subject to the safe harbor statement.

With that read, I'll turn the discussion over to Rodger Levenson.

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Rodger Levenson, WSFS Financial Corporation - Chairman, President & CEO [3]

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Thanks, Dominic, and thank you to everyone for joining us on the call. Consistent with our historical practice, our comments today will be a little longer than usual as they include our outlook for 2020. For your reference, we have also provided additional information on the fourth quarter, full year 2019 and 2020 outlook in the earnings supplement posted on our website. I will briefly touch on Q4 and full year 2019 results and then turn the call over to Dominic to walk through the details of the 2020 outlook. As always, upon the conclusion of our prepared remarks, our team will be happy to answer any questions that you may have.

We are very pleased to report that Q4 2019 was another strong quarter for WSFS with core earnings per share of $0.96 and core ROA of 1.63%. Our results in the quarter were driven by solid revenue generation in both our spread and fee businesses, combined with disciplined noninterest expense management. Highlights also included a 40% reduction in our nonperforming loans, resulting from the positive resolution of our largest NPL. This performance in the fourth quarter contributed to full year 2019 results of a core earnings per share of $3.74 and a core ROA of 1.61%. As outlined in Pages 10 and 11 of the earnings supplement, our results for the year exceeded our original expectations and reflected strong operating performance, combined with the successful integration of Beneficial.

One of our key strategic objectives related to Beneficial is the repositioning of the loan portfolio mix. Specifically, we identified approximately $1.6 billion of non-relationship lower-yielding portfolios, including approximately $1.1 billion of residential mortgages that we plan to runoff and replace with higher-yielding and relationship-driven C&I loans.

The declining interest rate environment in the second half of the year accelerated this planned runoff and was reflected in our 2019 loan growth. It also contributed to our full year net interest margin of 4.44%, which included 45 basis points of Beneficial related purchase loan accretion. While the timing of the loan attrition and accretion was different than anticipated, it is consistent with our strategic plan.

Total deposits grew 2% for the year when excluding the impact of the sale of 5 New Jersey branches to The Bank of Princeton. This included a 4% increase in core deposits and minimal post-conversion deposit attrition. Organic core fee income growth of 5% for the year was led by strong mortgage banking and wealth management revenue, offset by a modest decline in our traditional banking fees. Our core efficiency ratio of 56.2% reflected achieving higher than modeled cost savings from Beneficial ongoing expense management and higher revenue. Credit costs were modestly over our original expectations at $29.2 million or 35 basis points of loans. This was directly attributable to 2 specific episodic loan impairments in the second quarter, which accounted for over 75% of our net charge-offs of the year.

Finally, as a result of our strong capital position and current share price, we were able to repurchase just over 2.1 million shares of WSFS stock at an average price of $42.83 during the course of the year. Having completed the integration of Beneficial and achieving or exceeding our plans for 2019, we move into 2020 uniquely positioned as the only locally headquartered bank in the greater Philadelphia and Delaware region with the size, scale and product offering combined with WSFS stellar service to compete with our big bank competitors in this market. We look forward to executing the second year of our strategic plan.

I will now hand it over to Dominic to provide additional information on our 2020 outlook.

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Dominic C. Canuso, WSFS Financial Corporation - Executive VP & CFO [4]

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Thanks, Rodger. Good afternoon, everyone, and Happy New Year. We are excited to turn the page to the second year of our 3-year strategic plan, which is focused on transformation and delivering on the opportunities in the greater Philadelphia and Delaware marketplace, resulting from the successful close, conversion and integration of beneficial. Our 2020 outlook that we will walk through today, and outlined in the supplemental materials posted on our website, is based on performance expectations consistent with our original beneficial acquisition pro forma and our 3-year strategic plan as we continue to see opportunities consistent with or better than original expectations. These performance expectations build on our strong 2019 financial and operating results and incorporate the opportunities we see in our pipeline, existing relationship opportunities and revenue synergy business cases.

Highlights for our outlook include the following. Loan growth is expected in the low to mid-single-digit percentage points, driven by mid- to high single-digit organic growth, offset by purposeful runoff of nonstrategic, non-relationship portfolio. Deposits are expected to grow in the mid-single digits, including mid- to high single-digit core deposit growth, offset somewhat with modest post-conversion and branch consolidation attrition and purposeful runoff of higher cost CD. A net interest margin in the range of 4.10% to 4.15%. This includes 125 basis point Fed rate decrease midyear, 30 basis points of modeled Beneficial accretion and 5 to 10 basis points of incremental Beneficial accretion based on the pace of attrition in the runoff portfolios given the current rate environment.

Core fee income is assumed to grow in the low single digits. This lower than historical growth rate is impacted by 3 key factors: one, Durbin's effect on debit interchange rates beginning in July 2020, which alone reduces the fee growth by 4 percentage points; two, the full year impact of conversion-related product mapping that occurred late in the third quarter of 2019; and three, the interest rate environment impact on Cash Connect bailment fees, which is fully offset by lower funding costs. Excluding these near-term headwinds, fee income would have grown in the high single digits driven by double-digit growth in both wealth and mortgage businesses.

Core efficiency ratio is expected to be approximately 59%. This includes fully achieving the 90% of integration cost savings consistent with the original year 2 projection in the Beneficial deal model. It also includes the first full year of our delivery transformation investment. When normalizing for the interest rate environment versus our original strategic plan, the efficiency ratio would be approximately 55%.

Credit costs are forecasted to be approximately 26 basis points of loans or $20 million to $24 million on a full year basis after the adoption of CECL. That amount is the amount that runs through the P&L in 2020 after the day 1 increase in ACL, which is taken directly through the balance sheet. Our current estimate of the day 1 impact from our CECL adoption is approximately a $30 million to $40 million increase in reserves from our 2019 year-end position, resulting in an ACL coverage ratio between 90 and 100 basis points of loans. Addressed in the supplemental materials on Slide 8, this increase is primarily driven by the mix of our organic and acquired portfolios plus our asset class mix, driven by historical loss experiences and weighted average life of each portfolio.

We continue to finalize and validate our assumptions and model outputs and will provide additional information in our upcoming 10-K filings. The outlook includes a core effective tax rate of approximately 24%, consistent with our strategic plan, which is a slight increase in 2019 due to lower expected stock-based compensation activity.

Consistent with our strategic plan theme of transformation, we are excited to enter our first full year of delivery transformation and to meaningfully progress our efforts in melding our physical and digital delivery channels, consistent with our brand and mission. In 2019, working with our strategic partner, we focused on refining the Delivery Transformation program, resulting in our commitment to increase our initial incremental investment and to accelerate our time line from 5 years to 3 years. This increase and acceleration is based on a continued rapid evolution of technology in our banking industry, along with the opportunity to more quickly enhance our customer experience and accelerate operational efficiencies and ROI. We have provided additional context in the supplemental materials on Slide 6 and 7, including a list of specific initiatives across 3 major areas of customer acquisition, customer experience and IT infrastructure.

Finally, some comments on capital management. It is our long-standing practice to return at least 25% of annual net income to shareholders through a combination of our purposely low dividend and routine share buybacks regardless of price. When we are in a position of excess capital, and our share price is such that buying incremental shares as an IRR of over 18%, we will engage in incremental buyback. Given our strong excess capital position and our current share price, consistent with both the third and fourth quarter of 2019, we intend to be aggressive buyers of our stock in the foreseeable future, even at levels moderately above the current market price. Overall, we expect to achieve a full year core ROA of approximately 1.44% and achieve our strategic plan objectives in 2020. When excluding the significantly lower interest rate environment versus expectations 18 months ago, specifically, base rates that are 150 basis points lower, our outlook performance is slightly favorable to our original strategic plan estimates. As always, we are focused on and expect to deliver sustainable high-performance, defined as top quintile ROA in our peer group.

Thank you for joining us on this call today. We will now open up the line, and our team is happy to answer any questions you may have. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Frank Schiraldi of Piper Sandler.

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Frank Joseph Schiraldi, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [2]

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Just to start with Dominic, I might have missed it. I'm not sure if you gave it. You talked about accelerating the tech spend to 3 years versus the 5. But did you give a total dollar amount over those 3 years?

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Dominic C. Canuso, WSFS Financial Corporation - Executive VP & CFO [3]

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I did not, and good question. So historically, in our previous conversations, we've discussed an incremental investment of $32.5 million. As we've talked about increasing in this investment, as you'll see in our material, we lay out the gross investment in 2020 of just over $15 million. We would expect to invest at that pace over the next few years. But as with anything over a 3-year plan, we will continue to evaluate.

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Frank Joseph Schiraldi, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [4]

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Got you. And I mean, I guess, is it reasonable to think about net expenses being the same level as well per year?

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Dominic C. Canuso, WSFS Financial Corporation - Executive VP & CFO [5]

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On a net -- those would actually increase as part -- portions of each year spends in CapEx. And as they begin to amortize, the net cost would increase. But then the cost would be offset by cumulative gains in revenues associated with the benefits of the investment, along with operational efficiencies and other back-office expenses.

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Frank Joseph Schiraldi, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [6]

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Got you. Okay. And then the 1.44% ROA that you cite for 2020, does that include buyback activity?

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Dominic C. Canuso, WSFS Financial Corporation - Executive VP & CFO [7]

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It does. It will include buyback activity consistent with recent share repurchases.

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Frank Joseph Schiraldi, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [8]

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Okay. But correct me if I'm wrong, the original guidance didn't have significantly high -- I mean, I think it had your standard return of, whatever it is, 25% in terms of buyback activity baked in, if I think about the 1.61% you guys have given originally.

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Dominic C. Canuso, WSFS Financial Corporation - Executive VP & CFO [9]

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Correct. It would have been closer to our minimum level of capital returns.

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Frank Joseph Schiraldi, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [10]

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Okay. Now -- and then as we think about buybacks, you certainly -- you talked about the IRR being attractive and you guys, even after CECL, have plenty of excess capital. Should we think about incremental buyback as being up to returns of 100% of earnings? Or should we think of capital return in the near term could be -- could exceed any earnings?

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Rodger Levenson, WSFS Financial Corporation - Chairman, President & CEO [11]

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So Frank, this is Rodger. I think the way I would look at it is, certainly, we intend to continue around the pace that you've seen in the second -- excuse me, the third and fourth quarter this year, and we're clearly generating enough capital to support that. But as always, we will evaluate that with other uses of the capital, the current economic environment, credit environment, et cetera. So I think it's a fair statement to say that we're certainly generating enough capital to support the current pace. And then depending upon those factors and where our share prices and other things, we could increase that amount.

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Frank Joseph Schiraldi, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [12]

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Okay. And -- so you have, I guess, $1 million -- 1 million shares left, I would imagine. Now the Fed has changed its rules, there's no issue to reauthorizing it at some point this year.

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Rodger Levenson, WSFS Financial Corporation - Chairman, President & CEO [13]

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Yes. So our normal cycle, Frank, is we do our capital planning with our Board in the first quarter. Where we address all capital issues as part of that process, we'll evaluate a new share repurchase authorization and would expect to move forward on that as we go through that cycle.

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Frank Joseph Schiraldi, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [14]

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Okay. And then just finally, on the purchase accounting accretion, if you could just remind us, I think it's a small number, but if there's any purchase accounting accretion in the margin excluding the Beneficial deal. And then just the timing of that purchase accounting accretion, is it -- I know you talked about the numbers for 2020, you layout in your slide deck. Is that pretty -- spread pretty evenly throughout the year? Or does that start to ramp down at some point?

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Rodger Levenson, WSFS Financial Corporation - Chairman, President & CEO [15]

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Sure. So to your first question, there is about 2 to 3 basis points of legacy acquisitions, purchasing accounting accretion before Beneficial. And then to your question regarding the 30 to 40 basis points of purchased loan accretion from Beneficial in 2020, it would likely pace down throughout the year and average that amount. (inaudible) contingent upon kind of payoffs from a quarter-to-quarter basis.

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Frank Joseph Schiraldi, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [16]

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Right. I mean, I guess, the incremental accretion is going to be more volatile. But if we think about the model, is it a pretty shallow slope in terms of quarter-over-quarter how much would roll off?

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Rodger Levenson, WSFS Financial Corporation - Chairman, President & CEO [17]

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It is a shallow slope in 2020.

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Operator [18]

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Our next question comes from Michael Perito of KBW.

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Michael Perito, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [19]

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I wanted to just clarify. So I mean, did I hear you guys, right? Just on the share repurchase topic. So the expectation, at least for the next couple of quarters, obviously, anything beyond that, it's a little difficult to comment on for the next couple of quarters is to kind of stay at the pace that you were at in the fourth quarter, and then to kind of just constantly evaluate it moving forward what the pressures capital is?

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Dominic C. Canuso, WSFS Financial Corporation - Executive VP & CFO [20]

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Yes, that's correct.

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Michael Perito, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [21]

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Okay. And I was wondering if you guys could expand a little bit more. I appreciate all the information on both the outlook and kind of the delivery transformation that you guys put in the earnings supplement. But I was wondering if you could maybe expand a little bit more on the decision-making process around accelerating some of those expenses, face value, it seems -- the timing seems a little interesting, just given the rate environment is more challenging to kind of ratchet up the expenses. But I'm sure there's reason for that. I was wondering if you could just kind of expand on that dynamic a little bit for us.

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Dominic C. Canuso, WSFS Financial Corporation - Executive VP & CFO [22]

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Yes, sure. First, I would say, and at least we'll cover most of the questions. But as is our historical practice when we make incremental investments, we look for the longer-term opportunity. And along with this in Delivery Transformation, we see the opportunity to accelerate not only the investment, but the delivery of the opportunities and benefits from that investment.

I'll pass it over to Lisa to talk about the framework of decision-making.

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Lisa M. Brubaker, WSFS Financial Corporation - Executive VP & CTO [23]

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Sure. Thanks, Dominic, and hello, Michael. So just to kind of underscore what Dominic has said, as we look across the landscape, and I think everybody is seeing that the pace of technology is moving very quickly, and we want to be in a position, obviously, that we can continue to respond and innovate and provide what our customers are looking for. And so as we were looking at the time line for delivering across all of the projects in our road map, it makes sense to us to be able to tackle that now so we can pull the benefits forward and be able to deliver on those 3 areas that we talked about in supplemental materials, particularly around customer acquisition and experience. So the thought process is really, organizationally, we felt the time was right. We have our expanded market now. We've got customers to serve and others to attract, and we're ready to execute, and that was really behind the decision.

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Rodger Levenson, WSFS Financial Corporation - Chairman, President & CEO [24]

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Hey, Michael, this is Rodger. I do want to make a point clear though. Our decision to accelerate the investment was exactly as Lisa and Dominic described. It was not influenced at all about the current interest rate environment or 2020 outlook. I think when we originally came up with that assessment in the summer of '18, as you know, the world was a very different place, and we did not have anywhere near the amount of knowledge about the beneficial customer base or the broader market that we operate in now. And working with our partner, we made the decision to accelerate it along the lines of what Lisa just referred to as opposed to an assessment of the more macro financial environment.

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Michael Perito, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [25]

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Got it. And I think I remember when you guys first laid out the plan, the comment was that this wasn't a catch-up. This was to keep you kind of at the forefront from a technology perspective relative to your competitors. Is it fair to say that, that's -- is that still the case, but has maybe some of your competitors accelerate more rapidly than you thought with kind of making you pull forward? Or has that dynamic changed at all? Or any other thoughts on that aspect of it?

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Rodger Levenson, WSFS Financial Corporation - Chairman, President & CEO [26]

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No, I don't -- the dynamic hasn't changed at all. I just would refer back to what I just said, the world has changed dramatically in the last 18 months. And this acceleration is required to make sure that we're keeping up with the changes that we're seeing from competition in an external environment.

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Michael Perito, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [27]

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Got it. Okay. Thank you for giving me some thoughts on that. And then just lastly, I wanted to just ask on loan growth. I mean, it sounds like you guys are a little bit more optimistic about turning positive growth in 2020. I guess, is that a fair takeaway from your prepared remarks? And if so, I mean, does the growth that you've laid out in your 2020 outlook, is that balanced? Or do you think out of the gates here in the early part of the year that the runoff could still be more material to kind of a net growth with a stronger back half of the year? Just any initial thoughts as you see the pipeline and the runoff and how that could play out?

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Stephen P. Clark, WSFS Financial Corporation - Chief Commercial Banking Officer & Executive VP [28]

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Michael, this is Steve Clark. We do think for the full year low to mid-single-digit loan growth, and that is including the identified runoff portfolios. But absent those, we are looking at mid- to single-digit growth, excluding those portfolios, mid- to high single-digit growth. And we think that will be driven in our plan by C&I, and leasing from our new leasing company that we acquired with Beneficial and a little bit of consumer on the Spring EQ and student lending front.

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Michael Perito, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [29]

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All right. Maybe just asking the question a little differently. As you look at just the runoff, which you guys have planned, is there any material difference between kind of runoff per quarter next year? Not looking for the growth number per quarter, but just to try and get a sense of -- in the first half of the year, net growth might be a little slower than the back half because the runoff slows down as the year progresses or anything of that nature?

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Stephen P. Clark, WSFS Financial Corporation - Chief Commercial Banking Officer & Executive VP [30]

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Yes. So we did not model the year that way. We kind of modeled that consistently -- consistent runoff through the year. But it certainly could be lumpy quarter-to-quarter depending on what happened.

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Operator [31]

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Our next question comes from Erik Zwick of Boenning.

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Erik Edward Zwick, Boenning and Scattergood, Inc., Research Division - Director and Analyst of Northeast Banks [32]

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Maybe if I can start with the net interest margin, and looking at Slide 11 for 2020, the net interest margin, excluding the Beneficial accretion, the target of 3.75%. Can you just maybe give me a little color in terms of where that kind of starts the year and how you expect it to trend throughout the year to kind of reach that 3.75% average?

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Dominic C. Canuso, WSFS Financial Corporation - Executive VP & CFO [33]

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Sure. And just for everybody's reference, as we're speaking to Page 11 in the supplemental material. So in the bullet point below, you'll see that the fourth quarter for net interest margin was a 3.88%, that included some outsized kind of payoff amounts and some income from purchase -- from the NPL. So when you normalize that, it would be in the low 3.80s. And then as the year plays out, as it takes some time for the deposit betas to catch up and then playing out the rate environment with assumed cuts in the middle of the year, it would phase down throughout the year.

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Erik Edward Zwick, Boenning and Scattergood, Inc., Research Division - Director and Analyst of Northeast Banks [34]

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And so kind of it trends down throughout the year. And do you see stabilization at some point in that? Or does it continue to trend down towards even through the fourth quarter?

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Dominic C. Canuso, WSFS Financial Corporation - Executive VP & CFO [35]

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No, we would see stabilization after the rate cut and then stabilization to upside as the portfolio remixes towards the C&I relationship higher yielding loan.

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Erik Edward Zwick, Boenning and Scattergood, Inc., Research Division - Director and Analyst of Northeast Banks [36]

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Great. And then switching to the noninterest income. In terms of the impact from Durbin, once it's effective in July, can you remind me of the dollar impact of your interchange revenue that'll be impacted?

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Dominic C. Canuso, WSFS Financial Corporation - Executive VP & CFO [37]

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Yes. So historically when we communicated the impact, we have said on a full year basis, going over $10 billion would be about $11 million net impact to the bottom line, including about $0.5 million of costs and about $10.5 million of lower interchange. We're seeing a number about 25% higher than that as we see the mix of our debit interchange coming more from Signature, which will take a larger kind of negative hit when Durbin takes effect.

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Erik Edward Zwick, Boenning and Scattergood, Inc., Research Division - Director and Analyst of Northeast Banks [38]

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Okay. That's just kind of some quick numbers. Somewhere around that maybe $4.5 million net impact per quarter starting in 3Q? By far kind of 25% to the original $11 million estimate?

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Dominic C. Canuso, WSFS Financial Corporation - Executive VP & CFO [39]

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Yes. So it would be a little lower than that, I would say, around $3 million to $4 million.

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Erik Edward Zwick, Boenning and Scattergood, Inc., Research Division - Director and Analyst of Northeast Banks [40]

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Okay, great. And then in terms of the credit cost outlook for 2020, that $20 million to $24 million, are you able to break that down in terms of what you expect in terms of provision versus loan workout costs and any other expenses?

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Rodger Levenson, WSFS Financial Corporation - Chairman, President & CEO [41]

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Yes. So this is Rodger. The -- almost the entire amount is provision. I think the numbers break out -- let me just flip to the page, and I give it to you here. Sorry. I think its provision is right around $17 million or so -- $17 million to $20 million with a delta being the -- on total credit costs.

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Erik Edward Zwick, Boenning and Scattergood, Inc., Research Division - Director and Analyst of Northeast Banks [42]

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Great. I appreciate that. And then just one last one from me. In terms of the branch in Hockessin that experienced the fire, do you have an estimate for when that branch location might open again?

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Rodger Levenson, WSFS Financial Corporation - Chairman, President & CEO [43]

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We don't. That's something that we're currently analyzing, it's probable -- probably we'll have more information later in the month.

The one thing I would add is there is significant structural damage, and if we decide to go further with that, and we're talking about at least 9 months.

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Operator [44]

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

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Russell Elliott Teasdale Gunther, D.A. Davidson & Co., Research Division - VP & Senior Research Analyst [45]

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So a question regarding, Rodger, your comments about evaluating other uses of capital once we get through the next couple of quarters with buybacks. I believe the current 3-year plan was internally focused, and that M&A was not something that you would consider. Is that correct? And is that still the case?

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Rodger Levenson, WSFS Financial Corporation - Chairman, President & CEO [46]

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Yes. So we believe strongly that we have a very unique organic growth opportunity with our positioning in this much bigger market, and that's really the focus and how the 3-year strategic plan was contemplated as it relates to traditional bank M&A. We have said that we would consider some smaller M&A in our fee-based businesses, particularly the wealth management space. But I think from an overall capital management perspective, that's the way you should be thinking about us.

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Russell Elliott Teasdale Gunther, D.A. Davidson & Co., Research Division - VP & Senior Research Analyst [47]

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Got it. Okay. And then along those lines, Rodger, if you could just remind us of sort of the capital threshold, be it TCE in terms of what you would consider your internal target, so helping us get a sense for what is also excess?

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Rodger Levenson, WSFS Financial Corporation - Chairman, President & CEO [48]

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So our optimal TCE ratio over the cycle would be somewhere between 7% and 8%. And as we've talked about, that's been stress tested multiple times, including our own experience going through a deep recession. We're clearly significantly higher than that, more than we thought we would be because we landed with better capital after the closing of Beneficial. So I think that provides us a lot of flexibility, whether it's to use it in buybacks or other deployment of capital as we see fit or if the things were to change in the economy that we would have a buffer there as well. So we just look at it at this point as it gives us significant optionality.

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Russell Elliott Teasdale Gunther, D.A. Davidson & Co., Research Division - VP & Senior Research Analyst [49]

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Right. Yes -- no, very clear there. And so I guess, then in terms of timing to work that capital ratio back down to your optimal levels with a depository deal kind of off the table near term. Getting back to that original question of paying out over 100% of earnings, why would we not see that in the back half of this year?

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Rodger Levenson, WSFS Financial Corporation - Chairman, President & CEO [50]

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Yes. Well, obviously, I think it's dependent upon share price, and it's dependent upon other factors as we see either opportunities to invest in the business organically or invest in some fee-based acquisitions or other things. My comment on the pace of the buybacks is, I would expect the current pace to continue, but that we certainly will evaluate based upon all those factors and increase in that buyback activity. And that would all be factored into our regular capital planning, which, as I said, we go through in the first quarter of each year.

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Russell Elliott Teasdale Gunther, D.A. Davidson & Co., Research Division - VP & Senior Research Analyst [51]

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Okay, great. And then switching gears to the margin, the 4.10% to 4.15% for this year that contemplates a June cut, could you quantify what that cut would mean within that range from a basis point perspective, please?

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Dominic C. Canuso, WSFS Financial Corporation - Executive VP & CFO [52]

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Yes, sure. So given the timing of it and the presumed data that we've seen more -- in the more recent rising rate environment about -- of about 25%, we would expect that impact to be relatively small, about $2 million or a couple of basis points.

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Russell Elliott Teasdale Gunther, D.A. Davidson & Co., Research Division - VP & Senior Research Analyst [53]

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Okay, got it. And then just circling back to the expense conversation, particularly the discussion around the accelerated expenses, could you quantify what, if anything, that impacted or impacts your 2020 efficiency guide, the decision to do that?

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Dominic C. Canuso, WSFS Financial Corporation - Executive VP & CFO [54]

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Sure. It does somewhat by a percentage point or so, but it is included in the outlook that we've provided, and we would expect when you normalize our fourth quarter cost that you'd see some modest growth throughout the year, primarily driven from growth and investment in the business and delivery trend rate.

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Russell Elliott Teasdale Gunther, D.A. Davidson & Co., Research Division - VP & Senior Research Analyst [55]

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Okay. And then to follow that, I mean, we -- with that 59% cut, could you help us with what you would consider to be kind of a core growth rate for the company from there from a percentage basis? Or to even potentially simplify it further given all of the moving pieces for an absolute dollar expense base for 2020 and '21.

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Dominic C. Canuso, WSFS Financial Corporation - Executive VP & CFO [56]

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Yes, so we typically don't provide that level of detail. What I would say is, if you think about kind of the assumptions underlying the 2020 outlook around underlying loan and deposit growth, the expectation that our fee income would outpace that growth and our ability to scale the business, I think it would be fair to expect 10%-plus growth thereafter on a bottom line basis. But again, that's just slags of those performance metrics drawn out. We typically don't provide detail at that level.

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Operator [57]

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(Operator Instructions) We have a question from Brodie Preston of Stephens Inc.

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Broderick Dyer Preston, Stephens Inc., Research Division - VP & Analyst [58]

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So I just wanted to -- just real quick, just sticking with the Delivery Transformation, just reading the headline on that slide. So it's $15 million of CapEx this year, right, Dominic? And it's $9.7 million of expenses being added to the run rate this year and then it's $8.2 million of revenue synergies. Is that correct?

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Dominic C. Canuso, WSFS Financial Corporation - Executive VP & CFO [59]

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So let me clarify. It's a gross investment of $15.2 million, which includes about $6 million of CapEx. And then when you begin to amortize that, you would have a net expense of $9.7 million. That is offset by $1.5 million of revenue lift. So the $8.2 million is the net expense offset by the revenue.

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Broderick Dyer Preston, Stephens Inc., Research Division - VP & Analyst [60]

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Okay, okay. So it's -- just in terms of like, for our model, the $1.5 million gets added to revenue, to fee income and then $9.7 million gets added to expenses for the run rate for 2020, and then $6 million is depreciated or amortized over like a 5-year basis or something like that?

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Dominic C. Canuso, WSFS Financial Corporation - Executive VP & CFO [61]

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That is correct. So a couple of finer points on that. The depreciation would be between 3 and 5 years, depending on the project, and the $1.5 million is spread between our fee income and our margin as we leverage increased pipelines, generating more deposit and loan growth as well.

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Broderick Dyer Preston, Stephens Inc., Research Division - VP & Analyst [62]

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Okay. All right, thank you very much for the clarification. I appreciate that.

One ticky-tack one on the margin for me. So it's 2 to 3 bps of accretion ex Beneficial and it looked like it was 47 basis points all in from Beneficial. So it's about 49 to 50 basis points of accretion all in. Is that correct?

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Dominic C. Canuso, WSFS Financial Corporation - Executive VP & CFO [63]

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I'm sorry, which period are you speaking to?

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Broderick Dyer Preston, Stephens Inc., Research Division - VP & Analyst [64]

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For 4Q. Sorry about that.

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Dominic C. Canuso, WSFS Financial Corporation - Executive VP & CFO [65]

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So -- and if you could repeat those numbers, by the way?

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Broderick Dyer Preston, Stephens Inc., Research Division - VP & Analyst [66]

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Yes. So it's -- you said it was 2 to 3 bps ex Beneficial of accretion in the fourth quarter. And then it looked like it was about 47 basis points of accretion from Beneficial in the quarter?

So all in, like 49 to 50?

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Dominic C. Canuso, WSFS Financial Corporation - Executive VP & CFO [67]

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That is correct.

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Broderick Dyer Preston, Stephens Inc., Research Division - VP & Analyst [68]

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Okay, great. And then the ROA guidance of the 1.44%. Does that include any other fee income or revenue synergies beyond what you outlined on that Delivery Transformation slide?

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Dominic C. Canuso, WSFS Financial Corporation - Executive VP & CFO [69]

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It does. In fact, it incorporates the Beneficial business cases that we've been speaking to for the last 1.5 years, which is the investment in the fee income opportunities that we saw that we have in our legacy footprint that we can leverage across our larger customer base and larger geographic footprint, specifically mortgage fee income, our credit card, SBA and Wealth.

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Broderick Dyer Preston, Stephens Inc., Research Division - VP & Analyst [70]

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Okay. And if I remember correctly, that was about 6 basis points additive to the ROA in the original plan. Is that correct?

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Dominic C. Canuso, WSFS Financial Corporation - Executive VP & CFO [71]

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That is correct.

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Broderick Dyer Preston, Stephens Inc., Research Division - VP & Analyst [72]

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Okay. Great. The C&I recovery that you had this quarter, the $1.3 million, was that tied at all to the health care loan or the refinery loan charged off in 2Q?

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Rodger Levenson, WSFS Financial Corporation - Chairman, President & CEO [73]

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No, Brodie, that was a much older legacy different unrelated credit.

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Broderick Dyer Preston, Stephens Inc., Research Division - VP & Analyst [74]

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Okay. I guess, there was a headline that the refinery sold for the top bid. So I guess I'm just trying to drill down in terms of a potential recovery moving forward tied to that refinery loan. So if you have any color there, that would be appreciated.

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Rodger Levenson, WSFS Financial Corporation - Chairman, President & CEO [75]

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So obviously, we're part of that bankruptcy process. We're closely watching that process and evaluating our options. But there's -- beyond that, there's really nothing to report at this point.

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Broderick Dyer Preston, Stephens Inc., Research Division - VP & Analyst [76]

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Okay. All right. And the NPL that moved off the books this quarter. That was the $20 million sort of local health care facility that you guys also spoke about on the Q2 call?

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Rodger Levenson, WSFS Financial Corporation - Chairman, President & CEO [77]

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That's correct.

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Broderick Dyer Preston, Stephens Inc., Research Division - VP & Analyst [78]

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Okay, great. And then just talking more the -- so NewLane, I know it's a small portion of the book right now, but it continues to grow at a pretty healthy clip. So I was just wondering if you could give us a sense as to what the average ticket size is there and what the typical customer looks like and the duration and yield on those lines?

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Rodger Levenson, WSFS Financial Corporation - Chairman, President & CEO [79]

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So I'll just give you the broad overview, Brodie. It's a national small ticket. So think kind of $10,000 to $20,000 vendor-driven leasing business that is sourced primarily through direct channels and broker relationships. So it's all across the country, small ticket vendor-driven leasing. And it's performing very, very well and according to plan. We're very, very pleased with that. We see lots of opportunity there. This is a little bit behind our original plan, but it's really starting to hit an inflection point and take off. And we see really nice synergy with our commercial business in our C&I and small business teams as well. Dominic can give you a little bit of color on yields in that business. It's obviously a significantly higher than our normal commercial book.

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Dominic C. Canuso, WSFS Financial Corporation - Executive VP & CFO [80]

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Yes. And so just to supplement. While the loans are generally typically average what Rodger had mentioned, they can range from anything on the $5,000 level on the low side to significantly higher, depending on the customer, the quality and the product, et cetera. We are generating yields in the high single digits to the mid-teens, depending on the credit risk on product in general terms. But these are typically 3- to 5-year duration contracts.

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Broderick Dyer Preston, Stephens Inc., Research Division - VP & Analyst [81]

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Okay, great. I appreciate that color. And then one last one. The CD book, the higher cost CD book that you have pegged for runoff, just across customer time deposits and brokered time deposits, you grew by 2% -- 2% to 2.5% this quarter. So I just wanted to get a sense for what the amount is that you pegged for runoff for that higher cost CD book, sort of what the average cost is there and whether or not it would be evenly runoff or if it would be front-loaded in the beginning of 2020?

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Dominic C. Canuso, WSFS Financial Corporation - Executive VP & CFO [82]

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Yes. I would say it's relatively even from quarter-to-quarter, but if you think about 1 year, 1.5 years ago, we were generating 18-month durations. So longer terms, higher yielding and some of those rates churn will be reducing those back to more rack rates and that will create some attrition. We don't typically disclose that level of detail, but nonetheless, it would runoff in an amount that would reduce our growth rate by 1% or 2%.

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Operator [83]

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And with no further questions in queue, I'd like to turn the call back over to Mr. Rodger Levenson. Sir?

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Rodger Levenson, WSFS Financial Corporation - Chairman, President & CEO [84]

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Thank you, and thanks again for every participant on the call today. Dominic and I look forward to seeing many of you when we go back out on the road in the coming weeks. We are also happy to address any other questions that you may have prior to then. Thanks again, and have a good day.

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Operator [85]

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Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you for participating. You may all disconnect.