Q3 2019 Earnings Call

Ladies and gentlemen, today's conference is scheduled to begin showing leased continue to standby. Thank you for your patience.

Ladies and gentlemen, thank you for standing by and welcome to the WSFS Financial Corp, third quarter 2019 earnings Conference call.

At this time all participants on in listen only mode.

After the speakers presentation, there will be a question and answer session.

Asked the question during this session Wendy you would need to press Star then one on your telephone.

Please be advised that today's conference is being recorded.

You should require any further assistance. Please press star then zero.

I would now like to hand, the conference over to your speaker for today.

Any kind of self Chief financial Officer, Sir you may begin.

Thank you to Wanda and thanks to all of you for taking the time to participate on our call today.

With me on this call our Rodger Levenson, President and CEO part BACE, Chief Wealth Officer, Steve Clark, Chief Commercial banking Officer, and Rick Wright, Chief retail banks in Australia.

For Roger begins with his remarks, I would like to read our safe Harbor statement.

Our discussion today will include information about or management's view of our future expectations plans and prospects that constitute forward looking statements.

Actual results may differ materially from historical results are those indicated by these forward looking statements due to risks and uncertainties.

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 filed with the Securities and Exchange Commission.

Comments made during today's call are subject to the safe Harbor statement without Red I'll turn the discussion over to Rodger Levenson.

Thank you Dominic and thanks again, everyone for joining us on the call today.

In the second full quarter since the closing of the beneficial acquisition with fish reported solid operating results with core net income of $52 million and core earnings per share of 98 cents, both increasing approximately 10% when compared to the second quarter of this year.

These results drove a core return on assets of 1.66% and a core return on average tangible common equity of 16.93%.

Dominic will be providing additional commentary on our results in a few moments similar to the last two quarters, we're providing an earnings release supplement posted on our website. The supplement includes additional details on our financial performance as year over year comparisons are impacted by the timing of the beneficial acquisition.

During the third quarter, we completed the last major milestone of the beneficial integration with a very successful brand and systems conversion over the weekend of August 20, fours and 25th.

This was a very large and complex projects, including the closing of 20 retail office locations combined with the ship the sale of five retail offices to the bank of Princeton in May we have now reduced our retail footprint by 25 locations. The remaining five retail location closures of our original branch.

Optimization plan will occur by the end of 2020.

We are pleased with our progress will beneficial and the entire with his team it seems to as he asked extend very well position to deliver on the promise in opportunity from being the largest locally headquartered back in the greater Philadelphia and Delaware regions I will now turn it over to Dominic to provide details when our financial results.

Thanks Roger.

Good afternoon, everyone.

We're very pleased with the financial performance of the quarter on both a GAAP and core basis, especially so given the intense focus to the team on executing a successful brand and technology conversion.

I will first comment on the reported GAAP earnings in the quarter, then provide additional context to the poor results Roger mentioned earlier.

Our GAAP results of 1.72% or away and one dollar and two cents earnings per share includes $18.9 million, a pretax net restructuring and corporate development costs.

Oh associated with the beneficial transaction and conversion.

These costs and cost the date for the transaction are consistent with our original expectations.

More than offsetting this in the quarter isn't unrealized gain on our visa class B share investment.

$21.3 million pretax, bringing our life to date realized and unrealized gain to $50.1 million.

These items are outlined in our gas to core earnings reconciliation included in both our earnings release and on page four of the supplemental slides.

Also included in our supplement on page five is detail on our loan and deposit growth for the quarter clarifying both headline growth rates and growth after adjusting to normalize for attrition in the runoff portfolios.

While total total gross loans declined $69 million in the quarter when excluding the $101 million of attrition in the runoff portfolios loans grew 32 million work, 2% annualized resulting from 27 million in consumer loans and 12 million in Cnine.

This loan growth is consistent with our updated full year expectations outlined in the second quarter call.

Total customer deposits increased $19 million for the quarter, which included expected attrition related to the recent branch consolidations and cyclicality in customer funding with both more than offset by growth in low and no Pos public funding and trust deposits.

Net interest margin for the quarter was a very healthy 4.38% led by our strong relationship based CNR loan yields and the stability of our almost 40% of total customer deposits been no and low cost products.

NIM was lower six basis points in the quarter quarter due to the 2 billion dollar short term noninterest bearing trust deposits that was held at the bank for 15 days.

I'll dilutive to NIM, It contributed 1.7 million and net interest income.

The interest rate environment, specifically, a 50 basis point decrease and crime and why born in the quarter reduce net interest margin by 10 basis points, which is consistent with performance expected door declining rate environment.

Additional information on net interest margin is in the supplement on slide seven.

Credit quality metrics remained strong and maintain at the positive low end of historical trends and consistent with second quarter ratios.

Total credit costs of $5 million were 22 basis points on loans improved significantly from the second quarter and it's in line with our long term trend.

Core fee income ratio for the quarter was 25.3% as result of $41 million in fees diversified across her over 16, various products and businesses from our three reporting segments banking wealth and cash connect.

It is worth noting that are well diversified fee income base adds stability and consistency to revenue and earnings in a declining rate environment.

Our core efficiency ratio of 55.9% was relatively consistent with second quarter results from continued cost management discipline and delivering on the acquisition cost synergies of achieving 50% cost savings in 2019, which increases the 90% in 2020 as we get the full year.

Benefit other cost saves from the integration and conversion, which increases to 100% by 2021.

Lastly, in the quarter, we returned $47 million in capital to our shareholders through our quarterly dividend of 12 cents per share.

And $40.6 million were 959000 in share repurchases.

This leaves just over 1.9 million in shares remaining under our current authorization and we will continue to be active buyers at an even above current market prices.

I would like to pass it over to Roger for some final comments.

Before we turn to Q1 day I wanted to share some early perspective headed into 2020.

Consistent with the entire industry. Our 2020 planning process is being impacted by the recent significant shift in interest rates.

When we initially modeled 2020 as part of our strategic plan, we envision we envisioned a stable economy and rate environment with one fed funds increased each in 2019 and 2020, along with a relatively normal sheet yield curve.

As a result of the two fed rate cuts already this year, along with one more costs expected next week, we're facing a fairly strong headwind in our net interest margin.

However, we are fortunate to be in a position to offset those headwinds in whole or in part with the tailwinds of higher cost and revenue synergies from beneficial.

We are currently assessing these dynamics as part of the 2020 planning process and will provide an update upon the completion of the plan as has been our regular practice in January .

And now we'll be happy to take your questions.

Ladies and gentlemen, as a reminder to asked a question do we need to press Star then one on your telephone.

Withdraw your question please press the pound.

Again, it's fair to ask the question.

Please stand back when we compared to Q.

My first question comes from the line of French.

Sandler O'neill.

<unk>.

Hi, guys Frank.

Just a.

Just a couple of questions I wonder if I could start on the margin if I look at the slide deck on page seven the Fourq uniting margin. The range you give a is for 10 to 420.

Does that include is that inclusive of a a rate decrease in October .

[noise] did.

Does not which is why we added the bullet in a far right column of slide seven on the supplement just clarifying that an additional said rate decrease in October and the impact from the large short term deposit will yeah.

I would reduce full year from for 34 families plank with U.S. and specifically for the fourth quarter here for the fourth quarter does include yes. The caught it does yes. Thank you.

Okay. So that for tend to 420 does include the cut or no.

Oh, Okay, I apologize for that I was starting with the full year for tend to 420 range does include it to understand the dynamics between the third and fourth quarter, but the full year 2019 outlook was maintained at the second quarter outlook provided a just for consistency purposes.

Okay, and then so I'm thinking about you know what do you guys give for the full year.

And the linked quarter compression, excluding the beneficial accretion of you know it looks like 80 basis points.

And I'm thinking about the.

The impact of the large deposit in the quarter as well and it seems like.

Interest rates. The you know let me now is there anything else sort of baked into this but the interest rate.

Reduction would seem to impact the margin by.

Double digits linked quarter is that fair and then if that's the case just kind of wondering if you guys can give your thoughts on you know given 25 basis point decrease in fed funds, how that would impact the margin on sort of a normalized basis.

Sure obviously with the timing of interest rate cuts, it's not always a straightforward answer what I would say is the fourth quarter impact because these are averages for the full quarter incorporates the full quarter impacted the most recent rate cut.

A full quarter impact of an additional rate cut and a full quarter impact of the conversion alignment of our products, So which accentuates what would otherwise look to be a more sensitive interest rate sensitivity for net interest margin.

Okay. So in that case is impossible to.

On a normalized basis, just what it was a 25 basis point caught sort of doesn't you know.

In terms of NIM compression.

Sure.

Yeah, all else equal and presuming a historical deposit beta if you will a full year impact of about 25 basis point rate cut would it be about $2 million.

Thanks, and then.

Then finally, just on cost saves certainly where the efficiency ratio is.

You know you guys are ahead of schedule, obviously the revenue picture plays into that so just kind of curious if you could and I think you kind of alluded to a dumb Nic are you still kind of on trend for the 50% and the 90%.

Cost saves has that picture check or is that picture changed at all and then if you can give any detail on on.

You know the tech spend.

That was just talking about as part of the deal.

Sure. So first I would say, yes, we continue to see a clear line of sight of delivering the 50% cost saves in 2019 and with the Annualization of the run rate benefit of the post conversion cost saves. We also see a clear line of sight of the 90%.

In 2020 growing to 100%, obviously, a lot of that resulting from the annualization of reduced.

Branch count facility and some TV count.

Yes, Frank this is Roger is you'll recall when we announced the deal we said 50% of that cost saves related to the branch optimization plan or roughly between six and $7 million a year would go into the tech spend so we had been working on that project work diligently alongside this.

Integration process, one of the things that we will update as part of that 2020 plan is likely acceleration of that plan just because you know our observation over the past 18 months. Since we initially you know develop that plan is things are moving faster we want to move.

Pasture, along that original road map I think our first year of working with our consultant and just our own internal assessment.

Indicates that we need to continue to accelerate that process, but we'll have more specificity in early January as we pull that together with all the other pieces of the plant.

Okay. Okay, great. Thank you.

Thank you.

Next question comes from a lot of Michael Marino with KBW.

Okay.

Hi, Roger Dominic and good afternoon, rather.

<unk>.

I wanted to ask a follow up on the cost side you know as we look at that you kind of core 90, just under 91 million dollar the third quarter I think does the conversion at least one of the press release don't happen fairly late in August . So I mean, it can you provide any near term insight about kind of where does the to the cost.

<unk> expense number for the fourth quarter will shake out in a range because it's Mike My guess is that 91 million or just under 91 million still incorporated some elevated cost that that likely won't be what wasn't in the back two months of of the quarter.

That's right. So it's fair question, while I can't give an explicit guidance on the fourth quarter costs. What I can say is as we've discussed between the branch consolidation the technology conversion and reduced hefty count you would expect a full quarters benefit of those saves which would reduce from.

That third quarter core costs by a couple of million dollars offset by a normal business growth and invest me investing in revenue generating efforts.

Got it okay. That's helpful. Thank you dominant and then on a on the D kind of the overall revenue side of Oh Beneficially, obviously, there's been some press releases out on some hires that you guys have made and I think you made some comments in the did the earnings release about some of the progress you're making there, but just as we kinda to go.

Got it from an analysis standpoint, no what should we be looking for you know to kind of see how successful. Some of these hires are being and what are your initial expectations for some of these additions you guys are making from there on the revenue producing side in Philadelphia market.

Yeah, So I'll jump in here, Michael So we're very pleased not only with the progress from some of the hires but the overall list.

From a team that we've gotten this particularly is now we're past conversion and that last major milestone of integration part of what Dominic It was alluding to was the investment that we've made in some of the business cases, particularly in those product areas that beneficial didn't offer and we needed to.

Staff up.

To support the revenue growth next year, we're in the middle of that I think were way down the road in certain areas others, we still have a little hiring to do and that will all be reflected when you see the 2020 plan and Ah. That's the plan I was referring to you know kind of we're in the middle of pulling all those pieces together.

Got it and then just lastly, if I could on capital you know I mean, you guys.

It out.

$47 million in the quarter.

Made 54 and still saw capital levels Bill. So yeah, I guess kind of a multipart question here, but I guess to try and ask it's essentially I. Just one is the I'd point out where you where your profitability in capital levels likely wouldn't you just it makes sense to maybe establish a bit more of a competitive dividend policy to help kind of.

Take off some of the upward pressure on on your already excess capital ratios and too.

No I I would think that the overall risk of your balance sheet is lower post beneficial than pre but obviously, you're carrying three 400 basis points more capital and I guess, you know as you guys viewed internally <unk>, how much of Oh, Oh area of focus is that are you guys fairly content to just kind of run near term with that level capital.

It's kind of limited options are you disposal or or or can we expect you guys to try to be as aggressive as possible within reason to Tim to limit any further capital appreciation given the lack of overall balance sheet growth.

Sure. Thanks, Mike clearly a couple points Airwatch I'll.

I'm trying to discern.

First regarding your question on the dividend policy, we have a longstanding disciplined capital pack practice of returning a minimum 25% of our annual earnings through split evenly between that low and consistent dividend and a minimum level share buybacks and.

Anything incremental to that would be evaluated based on.

The share price and our IR model determining incremental share buybacks.

We have evaluated that and we reevaluate that every year and we believe the balance of the dividend and the share buyback is optimal for our capital structure, our investor base and our overall capital strategy, which blends to your second question of the risk of the balance sheet being lower primarily because of the strong capital position.

First off when we look at capital levels above kind of our target of what we've historically said between seven and 8% of TC ratio, we would look to a first reinvested in the business.

Second, let's look for inorganic opportunities and obviously put beneficial we're focused very much on acquisition and the integration and the opportunities that brings but we would look for other opportunities in appropriate fee income businesses that would align with our offering today and then lastly return that capital too.

Shareholders through share buybacks.

Continue continuing with the strong capital position, we're in and the remaining authorization. We would we have available to US we would continue repurchasing shares consistent with what you've seen in the third quarter and reevaluate that as part of our 2020 planning process.

Got it and that's a that's helpful. And then just lastly, I'll jump back just a any especially with the beneficial deal I know, there's quite a few moving pieces here, but are you guys prepared or or in the process of providing any thoughts around cecil adoption at this point or not quite yet.

Yeah. So clearly it's a area of focus in the third quarter as we start heading into words the ended the year and the cut over to see so on January 1st 2020, our team has been very active on Cecil.

From a project perspective, ensuring we have the right technology clean data and a strong governance structure, we have been working on our side by side modeling over the last three to six months ensuring.

We have the right transparency and assumptions around our methodology on our economic expectations and qualitative adjustment factors. We continue the model those and validate those.

As part of the third quarter, we will not be disclosing a.

A range as we continually annualize those impacts, but we will be fully prepared for the cutover on January 1st wanted to point.

Like on that I think like yeah, Mike sorry.

I as you know part of the complexity for US is almost half of our loan book now isn't acquired loan.

Very differently undersea showing it so we just think it's prudent as we do this parallel model to incorporate all of the various scenarios and assumptions that we need in several integrations to make sure that when we do the crossover.

You know that you have a good handle on that and that's just part of the process of validation that we're going so.

Helpful. Thank you guys for taking my questions I appreciate it.

Thanks, Mike.

Thank you.

I am onto ladies and gentleman asked the question that star one.

Our next question comes from a lot of Russell Gunther with D.A. Davidson Your line is open.

Hey, good afternoon, guys I rather hold.

I wanted to circle back to the to the growth conversation a bit and and just get your first you're on a high level thoughts on on see an ice yari. Appreciate all the color on on the runoff portfolios, but maybe give us a sense of what the opportunity. There is a from a gross loan perspective some of that.

Drivers there are.

Perhaps you could comment on on pipelines and really trying to get a sense for when we might see a return to to net loan growth.

Hey, Russell this is Steve Clark So regarding pipeline pipeline is relatively strong I remind you day weighted average is.

About 195 million as we sit.

About two thirds of that is in Pennsylvania, and another say about three quarters of that isn't cnine. So we're optimistic that will continue the trend of increasing seeing higher as a percent of total and that'll be helped a little bit by the CR rate participation portfolio.

Continues to run all.

So all in all.

Pretty optimistic about a growth across that.

Okay got it and then are you guys.

Contemplating any any additional commercial lender hires.

Within any particular markets, where perhaps Philadelphia.

Seeing any opportunities to do so.

Yes, so I would say, yes, we certainly have continuing interest.

Over the last year, we've added three relationship managers through our Pennsylvania and legacy team and then we've added a one new RM and one very experienced portfolio manager to the beneficial.

We're in active conversations.

We continue to entertain opportunities to add talent and we think with our presence now in Philadelphia.

We should continue to have those opportunities.

Okay got it. Thank you and then you know from a big picture perspective is there appointed in which you guys are are comfortable that you'll be able to outpace the kind of ring fenced runoff portfolios and start to think about or be able to put up a.

No you're going to low single digit organic number going forward.

So I'll I'll jump in on that Russell I think you can see from that the slide we think that we've worked our way through the significant.

Amount of that leverage loan portfolio. That's all cnine, that's really down to two relationships I think you see the trajectory on the consumer books, a particularly Reggie mortgage and student loans and I'd say you know the auto as you can see is coming to an end in terms of a material at that standpoint as well.

That the one factor that is a little bit dependent upon the economy, an interest rate cycle, where those she already participations, but we clearly see that that's the pace of the attrition slowing moderating to a more what I would call kind of normal run rate versus what we are really.

Finally for it and I think most of that this year is a combination of.

She joins in our part to exit some portfolios they didn't fit and the interest rate.

Alignment, which accelerated some refinances. So I would say you know and you will see this in 2020 in terms of our plan you know, we certainly see that moderating and then I I've returning to the growth rates that we've enjoyed you know historically versus our peers.

Got it Okay got it will say look thank you both for your thoughts on that and just briefly switching gears.

You know very loud and clear about waiting on C., so disclosure, but any just broad stroke comments on you know the credit quality outlook anything you know within your footprints or asset classes. So that's up a concern.

Where we would see you know kind of quicker pace to normalize in credit costs. It just appreciate your general thoughts.

Yeah, Russell, Steve Clark again, so no. We're currently underlying credit trends are very stable as Dominic mentioned, we're we're kind of back to the historical low end of the range in terms of credit costs and you know sitting here today.

Comfortable with where.

Where we are.

Very good alright, thanks, all for taking my questions.

Thanks Ross.

Thank you.

Question comes from the line of Joe Gladue without Securities. Your line is open.

Hi, good afternoon.

Joe.

Yeah, Yeah I just have one question I just looking at the.

Loan yields, particularly on that.

Commercial real estate portfolio looks like yields were down over 100 basis points from second quarter to third quarter just.

Just wondering if you could jumei global color on.

What was driving that.

Rapid decline.

Sure. Thanks, Joe.

If you're referring to the schedule that's in the earnings release the yields on all of the loan categories includes purchase accounting accretion and the significant step down in that portfolio from the second quarter third quarter, primarily driven to the volatility in the purchase accounting accretion.

There was a significant shift in the in the third quarter more of the accretion came from CRT, where I'm sorry in the second quarter was mostly CRT and the third quarter. It was mostly C and I see you will see kind of an offsetting step up and the sienna yields within the earnings release material.

Okay.

Might be BARDA. Thank you that was it.

Thank you Joe.

Thank you.

I'll now turn the call over to Rodger Levenson for closing remarks.

Thank you and thanks again for everybody participating on the call today, Dominic when I look forward to seeing many of you. When we go back on the road in November and December and as always we are happy to address any other questions. You may have in the interim please don't hesitate to contact us.

Thanks, again for joining us and have a good day.

Ladies and gentlemen, this concludes todays conference. Thank you for your participating you may now disconnect I just want to upgrade.