Q3 2022 WSFS Financial Corp Earnings Call
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Good day and thank you for standing by welcome to the W. S. S. S Financial Corporation third quarter earnings call. At this time, all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
Ask a question during this session you will need to press star one on your telephone.
Please be advised that today's conference is being recorded.
I would now like to hand, the conference over to your host today, Mr. Dominic Caruso, Chief Financial Officer, Sir you may begin.
Thank you Michelle.
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.
Steve Clark, Chief commercial banking officer, and Rick Wright, Chief retail banking officer.
Before I begin with remarks on the quarter 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.
In 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.
Okay.
Our earnings release and earnings release supplement, which we will refer to on today's call can be found in the Investor Relations section of our company website.
Our third quarter results demonstrated the momentum and diversity of the franchise.
Strong balance sheet positioning and the opportunities from our U unique competitive position in our markets.
We remain on track to deliver our full year core ROA of between one three and 140%.
With a <unk> ROA between 160 and 1.70%.
Reported ROA in the third quarter of $1, four 4% and EPS of $1 16 include.
Included $2 $6 million of corporate development, and restructuring costs, and a $2.3 million non reoccurring valuation adjustment on visa class B structured sale derivative, which was established in Q2 2020.
As summarized on slide three of the supplement excluding these items. Our core results included an ROA of 152% or 25 basis points favorable to Q.
EPS of $1 23, or 'twenty, one favorable to <unk>.
And in our O T C of 24 <unk>, 1%.
Illustrated on slide five.
<unk> growth when excluding the acquired H F. I read your mortgage portfolio was 9% annualized in the quarter and was broad based with 40% annualized growth in both construction and consumer loans.
17, 17% annualized growth in commercial leases.
The 90 day weighted average commercial pipeline ended the quarter at approximately $300 million, which was down approximately from $350 million from two Q.
Due to pipeline closings at the end of the quarter with the expectation that the pipeline will rebuild in <unk>.
<unk>.
Deposits decreased 3% or 13% annualized in the quarter with 40% or over 220 million coming from transactional trust deposits driven by timing of customer trust transactions and not tied to the broader market deposit trends.
To provide some context. These trust deposits grew almost 60% year over year from our services as paying agent and custodian on various types of capital market trusts.
These deposits are transactional in nature and can vary period to period. However over the long term, we continue to see opportunities to grow our market share and ultimately deposit levels.
Excluding these trust accounts deposits decreased 2% or 8% annualized resulting from customer liquidity run off across small and large balance customers in retail and small business demonstrating the broader macroeconomic impact on liquidity as we are not seeing increased <unk>.
Customer account attrition.
Additionally, in the quarter municipal and public funded accounts increased $182 million.
Our strong deposit diversity continues with 55% coming from commercial wealth and trust and small business and 58% from low and noninterest bearing accounts.
Our loan to deposit ratio now stands at 70% as we continue to be well positioned to fund continued organic loan growth.
Net interest margin detailed on slide seven increased 59 basis points to 399% and up almost 100 basis points since one Q.
Driven by the higher interest rate environment, and our asset sensitive balance sheet position.
Loan yields increased 70 to 72 basis points as our fixed variable mix hold steady around 45 55.
With 50% of the book tied to the short end of the curve.
Total deposit costs increased seven basis points to 15 basis points as the cycle to date interest bearing deposit beta it reached 7%.
As we mentioned on prior calls, we expect deposit betas to increase to 10% to 15% by year end and potentially reaching 25% to 30% by the end of the cycle.
At quarter end, we were not utilizing short term wholesale funding with total wholesale funding capacity available of $5 billion.
Our core fee revenue was 26, 8% in the quarter down from 30.0% in <unk>.
Primarily driven by the 15% growth in NII quarter over quarter.
Core fees, while down $1 1 million quarter over quarter demonstrated the benefits of our diversification of revenue, particularly in this environment with lower fees in wealth capital markets and mortgage almost fully offset by increases in cash connect and other fees.
Current and leading credit metrics continued to post pandemic positive and stable trends with net charge offs in the quarter of $3 2 million or 11 basis points of average gross loans.
Detailed on slide nine the ACL increased $4 $2 million with provision in the quarter of $7 5 million.
The ACL coverage ratio stands at $1, one, 4% or one basis point higher than <unk>, and when including estimated remaining credit marks on acquired loan portfolio.
Average ratio is 140%.
The core efficiency ratio decreased to 53, 8% from 56, 2% in <unk> driven by the growth in NII and stable fees offset by core noninterest expense increases of $6 6 million.
Primarily driven by $2 $6 million and higher performance based incentive.
$1 6 million and other one time personnel cost.
$1 5 million from higher funding costs for cash connect.
One 2 million higher loan workout and other credit cost.
Excluding these items all other costs were relatively flat quarter over quarter.
Capital ratios remained strong and well above well capitalized and internal target levels with CET, one and tier one capital of 12, 38%.
And total risk based capital at the bank of $13 three 4%.
Consistent with the first half of the year, we returned $95 million of capital to shareholders, including $9 $5 million in common stock dividend and $81 million in share repurchases or one 7 million shares or 3% of outstanding shares.
Year to date, we have returned 109% of adjusted net income to shareholders.
As depicted on slide 10, TCE ratio ended at $5 seven 3%.
Excluding OCI TCE ratio would be nine 5%.
While we continue to monitor the sensitivity of OCI to the forward curve as I mentioned earlier, we continue to have strong liquidity levels with our full wholesale borrowing capacity available protecting our investment portfolio as a liquidity source.
Over 40% of the decline in TCE quarter over quarter was attributable to the capital returned to shareholders as I previously mentioned.
We continue to evaluate.
Both our <unk> and HTM investment portfolio mix.
Along with balance sheet hedging strategies to best position us for the anticipated interest rate volatility.
In the next few years.
I also wanted to point out that in our current version of our earnings release on page 18, there is a geography are between MBS and investment securities.
The $1 $1 million of MBS that was moved to HTM was incorrectly included in our investment securities.
This will be corrected and we will repost the earnings release shortly.
All totals on the page are correct.
In summary, the growth and overall performance in the quarter demonstrated the continued opportunity, resulting from our unique competitive position as the largest locally headquartered community bank and wealth franchise in our region, the diversity of our loan and product fees.
Long with the returns from our strategic investments made over the past few years.
We will now open the line to answer any questions you may have.
Sure.
As a reminder to ask a question you will need to press star one on your telephone.
Please standby, while we compile the Q&A roster.
Yeah.
The first question comes from Frank Schiraldi with Piper Sandler Your line is now open.
Hey, guys.
Just wondering if you could talk about the.
The adjustments to guide as far as.
The expectation we updated expectation on.
Fee income growth.
Is that market related or just any more color you could provide there. Thanks.
Sure Frank Yes in our outlook.
Update we did note that fee growth for the year would be lower than we had established.
In the second quarter. This is all market driven as you would expect in a higher interest rate environment impacting capital market swap volume mortgage volume and the equity markets impacting AUR.
Okay, and then on the subject of <unk> terms of the contraction. This quarter. Obviously, you just noted market related.
If you pull out.
The <unk>.
Impact from the market just curious if you can talk.
At all about any.
The inflows outflows in terms of business there.
Hey, Frank this is art.
Most of the decline was really market driven.
Had a small net client cash flow number for the quarter, but it was much smaller than what we saw the prior quarter when we had.
Significant outflow just due to seasonality with tax payments.
But this quarter really from a net client cash flow was I'd say almost flat and it was really the decline in AUM was market driven.
Okay. Thanks, all right and then.
Just on the consumer growth.
Can you break that down at all in terms of I know in the release you talked about.
Home equity and.
The upstart relationship.
Contributing to growth linked quarter could you just talk a little bit about what the growth was on the unsecured side and then just remind us of.
And what your.
Thresholds or internal ceilings are on that business.
In terms of size.
Yes. This is Rick I'll take the the growth we did about $34 million increase on the upstart product, we did another $90 million on the spring product.
Do you want to take the others, yes, sure. So for unsecured lending book, which is primarily upstart in credit cards, we have an internal limit of 20% of capital plus ACL and we're approaching that so at this point in time, what you would expect through the fourth quarter and for the foreseeable future is that the upstart.
<unk> staying relatively consistent with the levels it's at today.
Great I appreciate it and then if I could sneak in one last one just on the.
A significant buyback activity in the quarter.
Can you talk a little bit about your appetite for further buybacks with the stock where it is currently.
And how.
If at all the OCI marks in.
Contraction in tangible book value plays into that thinking.
Sure Good question Frank.
Our overall capital return philosophy, as we've articulated over the years and over the last few quarters has not changed and which we always evaluate our capital ratios, particularly our regulatory capital and view opportunities to deploy our excess capital and liquidity.
First by protecting the balance sheet.
Looking at our in our or our organic growth opportunities and then inorganic and as <unk> seen over the years coming out of the beneficial transaction, where we were sitting on significant capital. We returned significant amounts to shareholder then paused during the COVID-19 environment than re engaged meaningfully.
And then paused again with BMT I think that demonstrates.
What we do is take a quarterly view and ensure that each quarter, we're evaluating that kind of waterfall of risk and opportunity and as over the last few quarters, leading up to the current environment. We were we felt our capital ratios were strong.
Obviously with the economic environment and the lack of certainty in the forecast we will take that into consideration in the fourth quarter with regard to OCI, we keep a close eye on it as I mentioned.
In my script that we continue to have significant capacity and liquidity either through our loan to deposit ratio or our wholesale funding in which we do not foresee the need to leverage our investment portfolio for liquidity other than the natural run off that will occur.
Is it cash flows and so therefore, while the OCI impact is meaningful.
We take that funding availability into consideration when we think about our total capital ratios and focus on the regulatory capital both at the company and the bank levels.
Okay, great. Thank you for all the color.
Please rank.
Please standby for our next question.
Okay.
Our next question comes from Manuel No boss with D. A Davidson your line is now open.
Our next question Emmanuel Mac Grill.
Okay.
Oh, Hey, good afternoon, sorry about that.
Could you add any more color on what youre, describing it in the prepared remarks about.
Options for the securities portfolio.
Okay.
Sure I think you're speaking to the categorization between available for sale and held to maturity.
Is that correct yes.
Yes, yes.
As we've discussed over the last two years, we've significantly increased our investment portfolio to put to deploy excess liquidity. Therefore, having a significant amount invested in the last two years over the lower interest rate environment, we continue to evaluate the right categorization and in the second quarter.
This year.
Reallocated $1 1 million of it to HTM as that portfolio is the most <unk>.
Rate sensitive.
Two future impacts we continue to look at tranches throughout the portfolio.
We will continue to monitor going forward, but nothing was moved in the third quarter.
That's helpful as well.
Remind me, what's the current like a run off.
From that from the portfolios.
Yeah.
Portfolios cash flowing about $50 million a month.
Which was part of the Optionality of why we determined the investment portfolio was the best option for deployment of the excess liquidity because of the cash flowing and the opportunity to either fund any excess liquidity runoff.
Loan growth or reinvest it at a higher rate environment.
Okay. That's helpful.
Hi.
You've had really strong.
Deposit.
Cost performance so far.
Are you seeing any kind of competition pick up.
Since the close of the quarter.
Just kind of any any color there I mean, I think that your deposit beta trajectory is still pretty low.
Yes. This is Rick again, I think what we're seeing on deposits and it seems to be an industry trend is that the higher balanced customer is finding some alternatives for instance, treasuries, where theres a pretty big Delta.
Between that and what banks are offering.
And we see the the lower balanced customer.
Going through some of that money they got during the Covid relief.
And Thats a trend it's pretty much across the board, but we are not seeing significant competition from banks and.
And money, we're not seeing money going out even to the internet.
At this point and Manuel this is Dominic just add color to that where appropriate when we're working with our customers. If they are looking for redeployment of their deposits into wealth assets. We are working with private banking and the wealth group to maintain those funds just in a different form whether it's AUM or in treasuries.
Or something like that and then the backdrop of this is our well diversified deposit base across all of our relationship lending and that tends to result in a lower beta through cycles, we expect the beta to increase as I mentioned in my script.
But we see we're in a strong position to manage through that and both maintain lower funding costs and deposit levels.
Okay. Thank you I'll step back into the queue. Thank you I appreciate the comments.
Okay. Thank you.
As a reminder, please press star one one on your telephone to ask a question.
And with no further questions in the queue I would like to turn the conference back over to Mr. <unk>.
Thank you for joining the call today.
Roger and I, along with art Bacci, Chief wealth officer, we'll be attending conferences and investor meetings throughout the quarter and we look forward to meeting with many of you then have a good day.
This concludes today's conference call. Thank you for participating you may now disconnect.
The conference will begin shortly.
Raise your hand during Q&A, you can dial star one one.
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