Q3 2020 WSFS Financial Corp Earnings Call

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Gentlemen, thank you for standing by and welcome to the W have stuff that's financial Corporation third quarter 2020 earnings call.

At this time all participants are in a listen only mode.

Speakers presentation, there will be a question and answer session.

A question during the session Press Star one on your telephone if your clarity further assistance. Please press Star then zero.

Oh, excuse Roasteries conference call Mr., Dominic Caruso, Chief Financial Officer, Sir you may begin.

Thank you Kevin.

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.

Our BACE Chief wealth officer.

Steve Clark, Chief commercial banking officer, and Rick Wright, Chief retail banking officer.

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

Our discussion today will include information about our managements 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 the 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 period.

Radically filed with the Securities and Exchange Commission.

Comments made during today's call are subject to the safe Harbor statement.

With that read I will turn the discussion over to Roger left.

Thanks, Dominic and thanks, everyone for joining us on the call.

Which had a very solid third quarter reporting earnings per share of a dollar and a penny return on assets of 1.49% and return on tangible common equity of 16.61%.

As detailed in the release and earnings supplement posted on the Investor Relations section of our company website. This performance was a direct result of our diversified business model and the incredible dedication of our over 1800 highly engaged associates, who have responded admirably to the challenges.

The pandemic and related economic recovery.

Core pre provision net revenue of $68 million represented a 7% increase over the prior quarter and translated into a very healthy 1.98% of assets.

A highlight was our core fee income, which grew 13% on a linked quarter basis, driven by strong performance in our mortgage and wealth businesses. This.

This fee income growth occurred even with the impact of Durbin, which became effective on July 1st.

As outlined in a supplement on slide six our fee income is very well diversified and provide earnings stability and capacity through interest rate cycles.

Loan and deposit growth reflected the current economic environment the pie.

Deposit growth was of particular note, even when excluding regular seasonal municipal deposit levels.

Our net interest margin of 3.66% contracted 27 basis points in the quarter, primarily as a result of excess liquidity like excess liquidity related to these high levels of customer deposits and lower purchase loan accretion.

Core expenses were flat on both the linked quarter and year over year basis, the core efficiency ratio was 57.1% why.

While we remain focused on disciplined expense management, we continue to make significant investments in our franchise, including our delivery transformation and talent acquisition throughout the organization.

Overall credit trains credit trends remained stable loan modifications declined significantly during the quarter and currently stands at 3% of overall loans.

Delinquencies non performers and charge offs remain at low levels.

As a result of the completion of our targeted portfolio reviews started in the second quarter total problem assets, which include all criticized classified and nonperforming loans increased to 49% of tier one capital plus Hcl.

Just over half of the problem loans are in the hotel retail retail real estate and foodservice portfolios, which have seen the biggest impact of the pandemic.

Hcl coverage of 2.74%, excluding PPP was flat to the second quarter and stay.

And stands at 3.22% when including the remaining credit Mark Warner acquired portfolios.

The provision in the quarter, reflecting relatively consistent economic forecasts first prior quarter expectations and overall stable portfolio performance.

The risk rating migration in the quarter was primarily incorporated into our second quarter provisioning.

Future loss content will be dependent upon the path of the economic recovery and potential additional stimulus.

Despite a very strong capital position, we prudently suspended share repurchases in the second quarter due to the significant uncertainty at the onset of the pandemic with.

With improved visibility into the near term operating environment solid operating performance and significant capital and Hcl levels. The board approved the resumption of share repurchases in the fourth quarter.

At current trading ranges the IR on share repurchases is very compelling and there and we therefore intend to be aggressive buyers of our stock.

Looking ahead in the fourth quarter, we see a modest decline in core pre provision net revenue based upon anticipated lower purchase loan accretion a seasonal decline in mortgage revenue and continued franchise investment.

This outlook envisions a continuation of the current economic recovery and 20% of P.P.P. loan forgiveness.

As has been our recent practice, we will provide our outlook on 2020, when we announce our fourth quarter results in January.

In conclusion, while the macro longer term outlook will be determined by the length and path of the economic recovery.

Entire company remains focused and energized on realizing the growth opportunity in front of us as the largest locally headquartered bank in Philadelphia, and Delaware Valley region.

Thank you.

I will now turn it over to Tom and to facilitate QNX.

Thanks Roger.

Even if you can open the line for questions.

Ladies and gentlemen, if you have a question or comment at this time. Please press Star then the one key on your first phone telephone. If your question has been answered you wish to move yourself from the queue. Please press the pound cheap.

Our first question comes from fresher only with Piper similar.

Good afternoon.

Hi, Frank.

Hi, Tom Roderick just want to follow up on your comments on the buyback in are you starting to use the word aggressive and you know if I look at your presentation, you guys talk about close to 500 million and access capital.

Tom that you have on the books are you going to generate over the next five quarters and I guess, you know acquisition seem kinda unlikely I would imagine that growth is difficult just given the run down and.

And the poor in the beneficial portfolio. So is that is buybacks at this point the primary use of capital and you know 500 million in excess capital I guess would be even greater than that 15% buyback that you have outstanding here.

Yeah, So Frank just maybe a little bit at a high level context, I think certainly right now buybacks is one of the primary uses of capital.

We feel as we said in the second quarter in a very well reserved for the for the economic environment.

Environment and the potential losses that could occur with that so we don't see that certainly based on everything that's going on now but I do think there is continued uncertainty out there about the path of the recovery.

And so as you know optionality on that front as well as Optionality for opportunities. You know it is also part of the thought process on that you know the capital deployment clearly, we just approved a 15% when we put the share the share repurchase suspension in place in the second quarter.

That gives us a fair bit of headroom here you know over the next several quarters, but it will be a continual <unk>.

Process of evaluating all those factors in terms of you know other opportunities that might present themselves.

And then just a follow up if I could on the the migration into problem assets in the quarter.

I know you know if you look at the presentation, certainly you breakout pieces like restaurant and retail and then go back to last quarter, I guess and then pull out.

Whereas the migration ones this quarter specifically in most categories. You know I think the hotels stuff has already been completed a if I recall into Q. So just wondering if you could maybe talk about what the greatest driver within those portfolios and then maybe the you know if there was a driver outside of those portfolios of the mine.

Operation in the quarter.

Sure. Thanks, Frank Steve do you want to talk about the process that we.

<unk> third quarter, where that left the metrics show.

Sure be happy to Hello, Frank So yeah. The third quarter was really a continuation of what we had started in the second quarter and Frac you're correct. We did complete our risk rating review of a 100% of the hotel bulk in the second quarter and we were about halfway through the risk rating review for the other high risk.

Kinda categories. So here, we have completed about 50% of the review NCR retail almost 40% of the review on retail trade and about 50% of the restaurant and again as a reminder, these were categories, we had coated red and yellow so.

So that that the review was completed and fall in the third quarter and the migration really was was consistent with our expectation by the migration predominantly about half of about 100 million was the already.

In those high risk categories, and the balance was really spread across all different categories of CNL eyes owner occupied with real no significant concentration in those categories.

Okay got you and then there's the review of those targeted categories is complete as is there further.

And I guess, there's always you know you're always looking at the loan book, but is there still a piece of that review to be completed and then does the provisioning that you took in the second quarter already incorporate additional risk rating migration that we could see.

For Q in future periods, yes, Paulette, let Dominic.

To answer the second part of your question, but the first part of your question. Yes, we have completed a 100% of the review of the Red and yellow coded borrowers and industries. So that represents a tick over $3 billion of our commercial book. So that review is done now as you recall, we do have just bought.

Normal process.

We set quarterly with all of our our Ams and credit teams and review every RM portfolio on a quarterly basis, so something they fall out of those quarterly reviews positively or negatively but in terms of the targeted review, we have 100% complete at that.

Yeah, and just to build on that I think you know as we discussed in the after the second quarter, both the process in which Steve and the credit team took with regard to loan reviews and with our Cecil.

PCL build we took a very conservative view with the objective under this seasonal model to capture as much of the credit and economic impacts in the future onto the balance sheet at the end of the second quarter. We had as Steve said knew where we were at the end of that quarter with regard to.

The targeted processes and we took that into consideration through qualitative adjustment factors such that with the review completed and the the migration that occurred there resulted in no meaningful change in our Hcl coverage ratios.

Okay all right. Thank you.

Thanks Frank.

Our next question comes from Michael for either with KBW.

Hey, good afternoon, guys. Thanks for taking my question, Hey, Mike Mike.

I want to start on the fee income side, obviously, a really strong quarter investment management mortgage verticals here, but but curious if you could maybe try and just conceptually break out a little bit how much of this was kind of.

Whole blood related you know how much of this was some of the hiring an effort. She does that make you to grow out the feed products and Philadelphia and building on that what's kind of the outlook for fee growth as we kind of get towards 2021 at this point given some of the strong trends you're seeing today.

Sure Mike This is domenick I'll start with that.

You see on slide six our Investor relations material, we did see a nice step up in the third quarter across really many of our fee categories. And then this in particular offset the onset of the Durbin Amendment, which clearly has an impact to our banking fees and we are pleased with the overall growth.

From that perspective, I think you clearly see in mortgage.

I think thats an industry wide event I think two things are happening one the lower interest rate environment driving significant volumes and then the attractiveness in the secondary market for these assets are driving the pipeline valuation a little bit higher.

I think with rates staying lower this could continue.

We do see that third quarter is definitely a high Mark 60, and we would expect in the fourth quarter and see typical seasonality of lower volumes to result.

I think cash connect we definitely saw some nice step up but this was a little bit of a catch up in volumes associated with coming out and re opening some of the economies nationwide as that business serves no really all 50 States and then wealth and trust a combination of both.

Improved Oh, hey.

Hey, Hey, you.

Equity markets, but also a good amount of continued volume on in the trust business. So yes, we do see the fourth quarter being lower a bit given the outsized outperformance in mortgage and a little bit in cash connect.

I think the long term prospects and while we will provide more.

Information regarding 2021, specifically with our fourth quarter results.

Thank you Larry we continue to see the opportunity to grow both our local and national businesses at a high single digits low double digits for the foreseeable future. We've talked about since we the combination with beneficial the opportunity to invest in a lot of these fee based area.

To further penetrate into the newer markets with the greater Philadelphia region and.

And we see that opportunity to continue to be there.

And in fact is providing some of the benefits were seeing particularly in the mortgage business.

Okay. Thank you look for before launch just to clarify on the investment management side was.

Yeah, I know it can move from quarter to quarter, but was there anything particular really elevated in there that were mindful of is kind of go up forecast forward here.

Our did you want to talk about that.

Michael could you repeat your question you came in a little blurry for me I'm sure.

I'm sorry, I was just curious do you to 30.3 million investment management to share revenue and EPS was there.

Sure I know what could can change from quarter to quarter, but was there anything, particularly elevated did not figure that we should be mindful of that as we roll off forecast forward.

You know why but really it was spread across all of our businesses had a strong third quarter you know the.

The institutional trust and.

Business benefited from some bankruptcy were the increases obviously.

We expect that to kind of continue to grow into next year it might slow down in the fourth quarter just seasonally.

The corporate trust business issuance mortgage backed securities remain very strong.

Kind of predict a pretty good fourth quarter in terms of personal trust and then the advisory business is so good you and growth and we ended the third quarter with you HM two.

2% and we usually bill in arrears. So I would expect the income in the fourth quarter is generally assuming all else equal would be in line with the loan growth that we saw at the end of the third quarter.

Great helpful. Thanks, and then just switching to the expense side of equation. I mean, obviously you guys continue to make investments as you alluded to Roger but you know I think digital delivery transformation advances you know it would seem to me that there might be opportunities elsewhere to kind of gain efficiencies and reduce cost and I'm just I think you guys.

Alluded to something of that nature on the second quarter earnings call. Just curious how you know how that process is going and how far along you guys are kind of reviewing your cost structure.

As we approach year end here.

Sure Mike I'll take that I think it's important.

To remind everyone that the journey, we've been on since the combination with beneficial over the last year and a half as as part of that acquisition. We made two specific efforts with regard to a cost center.

Cost synergies, one and branch consolidation.

We took a big step with our branch footprint with the combination, where we closed 25% of our branches or or 30 branches and.

To clarify about a third of that was actually your typical proximity based branch closures, where you look at you know a couple.

Coverage within three miles and and.

Merge those branch locations, but the other 20 branches that we closed or about 18% of the remaining branches were retooling efficiencies. So we took that opportunity to to get ahead of what we saw is the continued trend and lower transaction count and our ability to serve our cost to customers through that remain.

Mining footprint and NR to digital platforms. So.

So for US we were a bit ahead of the curve for coal bed and we feel comfortable with where we are however, we continue to evaluate that as.

Digital adoption continues.

You know as part of that not only it wasn't that the real estate cost but.

Lower TV count associated with those.

Those lower branches.

We are evaluating our non retail office footprint.

Including our wheel and <unk> real estate cost, Oh, Peos and training centers and are evaluating what.

Post cobot environment would look like and to the extent, we have opportunities within that footprint.

But we feel like the cost base. We have today is very appropriate for us to deliver the high touch customer service, we do we do with our high fee income and our.

Relationship based lending model.

57% efficient see ratio, we feel is really compelling given the low interest rate environment. We are at and we're very focused on now executing on the investments, particularly in delivery transformation and the continued GE opportunities that we see ahead of us.

Helpful. Thank you for taking my questions guys.

Thanks, Mike.

Our next question comes from Brody Preston with Stephens, Inc.

Hi, good afternoon, everyone.

Hey, Brodie Brody.

Hey, So I just wanted to circle back on on the buyback Roger I. Just wanted to confirm is there were there any are there any conversations I guess, maybe or I guess approvals that need to be add from the fed or any regulators before you could this resumed repurchasing.

So we consult with our regulators on any significant actions that we're taking whether its capital related or other things. So that's part of the normal process for us and so we were in conversation.

Dan and obviously, it's conversations went well and were moving.

We're moving forward.

Okay. Okay. Thank you for that so I guess, you know I guess, just tying that to the capital slide that you all put it in there you know as you noted and then Frank mentioned earlier really strong excess capital position, but the I guess the Hcl scenario that you that you have outlined in their 30 basis points.

As of the second quarter, yet I think there's a $10.2 billion in risk weighted assets. So that implies 30 to 35 million I guess in in losses in a severe adverse scenario, which is I mean, you guys make you know two times that and quarterly PPNR in any given quarter. So is there any reason for us to assume that you.

Would not be aggressive on the buyback.

In the fourth quarter and beyond that.

So I'll start now huh Dominick please chime in so at you in the near term, there's nothing that we could see that would provide.

Prevent us from being aggressive one of the as I should have said this is part of that initial response to Frank but one of the things and the reasons that we like buybacks as a way of returning capital to our shareholders is a optionality. It gives us the option at any time to respond to opportunities.

Challenges and read divert that capital you know to address.

Situation.

I think Frank said, it well nothing on that front is obvious right now so buybacks is where we're headed but it's always subject to change based on circumstances and things that could play out in the future sitting here today, there's nothing in the near term that would scare us away from you know.

You know being aggressive on buybacks, just obviously give the caveat you know a lot of this is very dependent upon the external macro environment and how that how that all plays out but sitting here today, we feel very confident in being.

Being aggressive in the near term.

Okay.

Just circling back to the trust business real quick I wanted to ask does is there any I guess.

Attacks arm within that that helps people with their taxes at all and if so could that become a tailwind if we get another change in the tax code under a potential biden presidency.

Our selectica sure I'll take that.

Brady, we definitely see that opportunity generally the fourth quarter for us.

It is one of our more active quarters on the personal trust side and we are already seeing in September and October an elevated level of volume with people setting up marital trust.

In anticipation of higher tax rates going forward. So that's an element.

Of our planning.

Okay, great. Thank you for that and then Dominic on cash connect I think last quarter, we talked about bottoming on net revenue with the rates going to zero and then moving higher from there was growth which was good to see this quarter. So just wanted to get a sense for how the growth outlook for new ATM and smart city.

This looks and also wanted to ask if there was any potential for.

You know gaining wallet share with existing clients in the cash connect business.

Sure Great question, what I'd say is we to reiterate what we saw this year in this unique environment was the resiliency of both cash and our economy, along with cash connects ability to serve through various cycles and we definitely saw the rebound play out in the third.

Quarter, not only bringing more units back on line, but supporting our ISO customers and Phil.

Filling their ATM and then re engaging on the smart CE program, we absolutely see the same growth trajectory in the future as we've seen in the recent past in fact this year alone. During this current environment, we see the opportunity to grow our units served a of around 7%, which is which is.

A nice growth rate considering you know we serve a lot of retail and location based.

Services Oh, we also do look to deepen our relationship with our existing I, so customers just with a volley.

With the volume of cash, but with increased services as you know we provide our armored carrier.

Services, along with insurance reconciliation and optimization, so non asset based fee services that continues to improve our performance margins and on our way and we will continue to look for that further penetration within those customers and diversify as well.

Okay. Thank you very much for that and then last one for me was I just wanted to get a sense for how much was left in a deposit and borrowing related accretable yield.

The accretable yield on the deposits.

Yeah, just from interest there just loan accretion in general.

Yeah, just just wanted to get a sense of the total accretable yield if there was any still left from the.

Beneficial related Cds and borrowings.

Yeah I'd have to follow up with you on the specific amount you know most of them were short tenure at accretion so.

So we can follow up offline with that but we continue to have a purchased loan.

Accretion portfolio, just under $90 million or both on the yield and credit side.

Which creates that elongated tail to the purchase loan accretion impact to our net interest margin.

Okay, that's fair enough, but it sounds like its mostly related to the loan portfolio at this point and sorry, just for calculating a core loan yield it would be safe to back the majority out of there.

Out of there.

That's correct.

All right. Thank you very much Dominic I appreciate the time everyone.

Sure. Thank you.

Again, ladies and gentlemen, if you have a question or a comment at this time. Please press Star then one key on your Touchtone telephone.

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

Hey, good afternoon guys.

Hey, Russell Russell.

Just a quick follow up on the expense line of conversation.

I believe in the comments around the PPNR guide for next quarter, you mentioned continued franchise investment.

Been running just shy of kind of 91 million on a core expense basis for the last couple of quarters.

Get your thoughts on the sustainability of that and where that is likely to head in the fourth quarter and then down because a follow up you mentioned a 57% efficiency is as a good place to be in zero rate environment.

Can you talk about your ability to improve upon that.

As we as we look into 2021 or at least commit to kind of holding that where it is.

[laughter].

Sure So first on the.

Noninterest expense.

We have been in the low ninetys close to $90 million for the last few quarters, we do expect that to increase and that's part of the step down from the third quarter fourth quarter core PPNR X PPP.

That increase in cost base is primarily the continued investment in delivery transformation and supporting the growth in our fee businesses. So it may.

So it may step up a couple of percentage points in the fourth quarter and then as we mentioned earlier with regard to 2021 will provide a more.

Comprehensive discussion on our outlook once we complete our plan for next year clearly, there's a lot in play with regard to the economic environment and banking environment, but most importantly, we continue to see the opportunity ahead of us as Roger mentioned as the largest local headquartered bank and the greater Philadelphia region.

And the state of Delaware and we.

We see the opportunities from those business cases that we've been talking about for the last few years to be there and we'll continue to make those investments.

Got it okay I appreciate the near term thoughts I guess.

With the ability to kind of harvest the the franchise investment that's already been made.

On the top line do you think you can again at least is committed to holding that 57% efficiency ratio if not improve upon.

Yes, I think typically as we've said before we do focus on efficiency ratio. We're pleased with the results for the third quarter and when we do look forward.

Forward in our investment base, we look for positive operating leverage however, what I will say is we also have demonstrated our ability to accelerate investments when we see opportunities, particularly when there is disruption.

In the economy or in our markets and that could affect the near term shape of that but it would all be revenue generating investments that may just have a somewhat periodic lag. So we're evaluating all those opportunities. So as I mentioned is a bit early to commit to kinda that near term expectation, but I think you can see in there too.

Track record than our historical expense management discipline that we do typically manage to positive operating leverage except when we see those opportunity for accelerated growth investment.

Understood. Okay. Thanks for the follow up and then just switching gears on the.

Organic growth outlook.

We are able to to show a little bit of positive.

Momentum on the on the core portfolio I guess I Wonder if you could just address where you'd expect to see an.

To see an ita.

Picked back up or if that's to remain a headwind going forward and and then.

And then beyond that the remainder of the core portfolio, if there is opportunity to sustain.

Positive growth in the near term.

Sure Steve do you want to take that.

Sure Domenick, yes regarding you know commercial growth opportunity.

We still see almost weekly opportunity NCR is more.

Multifamily residential land and and and.

And and land development residential construction.

And a little bit of kind of neighborhood retail.

Looking at all of that through a pretty pretty caught the cobot lens. The CNL I saw it still is.

It is I would say headwind and you know not a lot of investment going on by our borrowers so any opportunity it's really.

Market share opportunities.

But we are.

We are seeing instances where.

Pp loans, which have not yet been forgiven are are precluding companies from transferring bags. So.

I think see an eye in the.

In the short term will still be a very.

Very very muted in terms of growth.

Okay, great. Thanks for taking my questions guys.

Thank you Russell.

Thank you and with no further questions in the queue I'd like to turn the conference back over to Rodger Levenson.

Thank you again, everybody we will be attending a couple of investor conferences in the coming weeks and look forward to seeing many of you soon as always if there's any follow up questions. Please feel free to contact any of us directly I have a nice weekend and thank you again for your interest in which this.

Ladies and gentlemen, this will conclude todays presentation. You may now disconnect and have a wonderful day.

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