Q3 2023 WSFS Financial Corp Earnings Call
Hello, and thank you for standing by my name is Regina and I will be your conference operator today at this time I would like to welcome everyone to the Ws that Best Financial Corporation third quarter 2023 earnings Conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question.
<unk> and answer session, if you'd like to ask a question. During this time simply press Star then the number one on your telephone keypad to withdraw your question Press Star One again I'd now like to turn the conference over to your host for today, Mr. Art Bacci, Chief Wealth Officer interim Chief Financial Officer, Sir you may begin.
Thank you Regina.
Good afternoon, and thank you again for joining our third quarter 2023 earnings call 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.
With me on this call are Rodger Levenson, Chairman President and CEO .
And Steve Clark, Chief commercial banking officer.
Before I turn over the call to Roger for his 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 operations 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 may periodically filed with the Securities and Exchange Commission all comments made during today's call are subject to the Safe Harbor statement I will now turn the call over to Roger.
Thank you art and everyone else for joining us on the call today.
With this performance very well in the third quarter as we continued to demonstrate the strength and diversity of our business model.
Core EPS of $1 23.
And core ROA of 146% represented growth from the second quarter of 6% and 4% respectively.
Our performance was driven by loan growth across all of our commercial and consumer segments.
Posits were essentially flat when compared to the second quarter, excluding the anticipated run off of short term transaction related deposits in our corporate trust business.
The net interest margin remained very solid at 4.08%, reflecting the impact of the fed hike in short term rates in July expected increase in deposit betas and very modest deposit attrition.
Through the cycle interest bearing deposit beta has ended the quarter at 39% as the pace the pace of growth continued to moderate.
NIM was favorably impacted by about five basis points due to higher purchase loan accretion and maturity event reverse mortgages.
Core fee revenue grew 9% linked quarter and was a record quarterly high growth came from each of our major business lines, including wealth and trust cash connect mortgage banking capital markets and the core banking business.
The core fee revenue ratio increased to 20 866.
Zero percent.
With the slowing economy and corresponding credit normalization, we did see a negative uptick in our asset quality metrics. Most of this variance was driven by two unrelated C&I credits that moved to nonperforming status due to operating challenges specific to those businesses.
Problem asset migration reflected downgrades in the commercial sectors, including office.
Regina: Hello, and thank you for standing by. My name is Regina, and I will be a conference operator today. At this time, I would like to welcome everyone to the WSFS Financial Corporation 3rd quarter 2023 earnings conference call.
Inclusive of these downgrades the office loan portfolio has 6% problem loans zero delinquency and less than $1 million in npa's.
Regina: All lines have been placed on mute to prevent any background noise. After the speakers remark, there will be a question and answer session. If you'd like to ask a question during this time, simply press star then the number one on your telephone keypad. To withdraw your question, press star one again.
Total classified loans to tier one capital plus ACO stood at 16 point, 11% or just under 3% of total loans.
Credit losses were relatively flat to Q2 at 45 basis points or 19 basis points, excluding newly leasing an upstart portfolios.
Arthur Bacci: I'd now like to turn the conference over to your host for today, Mr. Art Bacci, Chief Walt Officer, Interim Chief Financial Officer. Start you may begin. Thank you, Regina.
Our balance sheet remained strong, including significant liquidity capacity and regulatory capital levels that continue to exceed well capitalized.
Arthur Bacci: Good afternoon and thank you again for joining our 3rd quarter 2023 earnings call. 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. With me on this call, our Roger Levinson, Chairman, President and CEO, and Steve Clark, Chief Commercial Banking Officer.
On slide 14 of the earnings release supplement we have provided an update to our mid year 2023 outlook, incorporating Q3 results and commentary on Q4 ranges on NIM PNR and ROA percentages.
Overall, we remain on track to achieve the full year outlook, which assumes no additional short term rate hikes and modest GDP growth in Q4.
Arthur Bacci: Before I turn over the call to Roger for his remarks on the quarter, I would like to read our safe harbor statement. Our discussion today will include information about our management's view of our future operations, plans and prospects to constitute forward looking statements. Actual results may differ materially from historical results or those indicated by these four looking statements due to risk and uncertainties, including but not limited to the risk factors included in our annual report on form 10k. And our most recent quarterly reports on form 10Q, as well as other documents we make periodically follow with the Securities and Exchange Commission.
Consistent with our historical practice, we will provide a 2024 outlook when we announced Q4 earnings in late January .
Thank you and I will now turn it back to art to facilitate the Q&A.
Okay.
We will now open the line to answer any questions you may have.
At this time I would like to remind everyone in order to ask a question simply press star followed by the number one on your telephone keypad. Our first question will come from the line of Frank Schiraldi with Piper Sandler. Please go ahead.
Arthur Bacci: All comments made during today's call are subject to this safe harbor statement.
Rodger Levenson: I will now turn the call over to Roger. Thank you, Art, and everyone else for joining us on the call today. With this performed very well in the third quarter, as we continue to demonstrate the strength and diversity of our business model, core EPS of $1.23 and core ROA of 1.46% represented growth from the second quarter of 6% and 4% respectively. Our performance was driven by loan growth, of course, all our commercial and consumer segments.
Hi, guys.
Right.
I wanted to ask about.
Loan growth here I mean.
Obviously quite strong in the quarter you reiterated your guide overall for 2023.
But as we start to think about you guys have.
So Germany, given your low loan to deposit ratio.
But also we're seeing maybe a tougher credit environment. So how do you think about.
The opportunity versus a potential risk here.
Do you think we start to see some moderation in this loan growth.
Rodger Levenson: The positives were essentially flat when compared to the second quarter, excluding the anticipated runoff of short-term transaction-related deposits in our corporate trust business. The net interest margin remained very solid at 4.08% reflecting the impact of the Fed hike in short-term rates in July, expected increase in deposit betas and very modest deposit attrition. Through the cycle, interest bearing deposit betas ended the quarter at 39% as the pace of growth continued to moderate.
Going forward here or what are your thoughts in general.
So Frank this is Steve Clark speaking, so I think the way we look at the loan growth is really about opportunity and.
In the current macro environment environment and the current region, we serve so on CRE.
Continue to be very very selective we have focused on multifamily and residential.
Particularly at the at the Beach and shore markets, but the real opportunity for us is C&I.
That pipeline.
Rodger Levenson: NIM was favorably impacted by about five basis points due to hired purchase loan accretion and maturity events in a few reverse mortgages. Core fee revenue grew 9% link quarter and was a record quarterly high. Growth came from each of our major business lines, including wealth and trust, cash connect, mortgage banking, capital markets, and the core banking business. The core fee revenue ratio increased to 28.60%, consistent with the slowing economy and corresponding credit normalization, we did see a negative uptick in our asset quality metrics.
As relatively strong as a result of some of our competitors being distracted and some of the service issues companies are experiencing from their incumbent banks, so that creates opportunity for us so.
We're very active in C&I, calling and prospecting.
Selective in CRE.
But do you have a tailwind of fundings coming from commitments that were extended last year and were underwritten in a higher rate environment and very sensitized to the to the rate environment. So.
<unk>.
That's kind of my perspective.
Rodger Levenson: Most of this variance was driven by two unrelated C&I credits that moved to non-performing status due to operating challenges specific to those businesses. Problem asset migration reflected down grades in the commercial sectors, including office. Inclusive of these down grades, the office loan portfolio has 6% problem loans, zero delinquency, and less than $1 million in NPAs. Total classified loans to Tier 1 capital plus ACL stood at 16.11% or just under 3% of total loans.
Okay, Alright, I appreciate it.
Just on credit I think the coverage ratio.
Reserve coverage ratios.
Linked quarter.
Just given some of the downgrades on the Palm asset side could you just maybe speak to that a bit in.
Was this sort of.
The expectation was this credit migration kind of baked into the reserve already or just your general thoughts on on reserving.
And the credit migration.
Particularly on the problem asset side.
Hi, Frank this is art.
Rodger Levenson: Credit losses were relatively flat to Q2 at 45 basis points or 19 basis points, excluding new lane leasing and upstort portfolios. Our balance sheet remains strong including significant liquidity capacity and regulatory capital levels that continue exceed well capitalized. On slide 14 of the earnings release supplement, we have provided an update to our mid-year 2023 outlook, incorporating Q3 results, and commentary on Q4 ranges on NIM, PPRR, and ROA percentages. Overall, we remain on track to achieve the four-year outlook, which assumes no additional short-term rate heights and modest GDP growth in Q4.
<unk> was flat at $1 28 number a good portion of that was because of just loan growth.
So that was less impacted by any migration issues. You mean that this is something we will continue to evaluate throughout the quarter as we look at the economic outlook and the trends, we're seeing but at this point, we feel pretty comfortable with the coverage ratio where it is.
And Frank This is Steve I would only add that the credit migration you referenced as those assumptions are baked into the current ACL from both a qualitative and quantitative perspective.
Thanks.
Okay, and then if I could just sneak in one last one on the.
Deposits.
You guys mentioned the trust deposits that flowed back out the transaction will soften.
I guess that was the driver of the noninterest bearing bearing balances being down.
Rodger Levenson: Consistent with our historical practice, we will provide a 2024 outlook when we announce Q4 earnings in late January.
Linked quarter.
Just any thoughts on what Youre seeing more generally there do you expect kind of a continued slow bleed in noninterest bearing balances in this kind of higher for longer rate environment.
Arthur Bacci: Thank you, and I will now turn it back to Art to facilitate the Q&A. We will now open the line to answer any questions you may have. At this time, I'd like to remind everyone in order to ask a question, simply press star, followed by the number one on your telephone keypad.
Thank you Frank I'll take that.
When you look pre COVID-19 are noninterest bearing to total deposits was around 727, 28%. We're at about 31 now so we're still above where we were pre COVID-19 there may be a little bit more.
Frank Schiraldi: Our first question will come from the line of Frank Scheroldy with Piper Sandler. Please go ahead. Hi, guys. Hi, Frank.
Lead to go there, but I think we're kind of towards the bottom of it.
Frank Schiraldi: I want to ask about the long growth here. Obviously, quite strong in the quarter. You reiterated your guide overall for 2023. But as you sort of think about, you guys have a fraternity given your low-loan deposit ratio, but also we're seeing maybe a top-of-credit environment. So how do you think about the opportunity versus the potential risk here? Do you think we start to see some moderation in this long growth going forward here? What are your thoughts in general?
Yeah on the trust deposits Theres, an element of it there's really two components of our trust deposits. One is kind of a I'd call. It right now 700 $800 million base, it's just recurring cash flow coming in from loan payments that we pass on to.
Investors and then Theres a component where there may be certain types of trust that are pre funded with cash and we hold for a period of time, that's the lumpy component of it and so that's really a function of how the securitization market is going we do have a pipeline that we're looking at that potentially has some more noninterest bearing deposits in Q4.
Stephen Clark: Frank, this is a Steve Clark speaking. So I think the way we look at the long growth is really about opportunity in the current macro-environment and the current region we serve. So on CRE, we continue to be very, very selective. We have focused on multifamily and residential, particularly at the beach and shore markets. But the real opportunity for us is C&I. That pipeline is relatively strong. It's the result of some of our competitors being distracted and some of the service issues companies are experiencing from their incumbent banks.
But it's really driven by the capital markets and the securitization activity in the type of deals that are being done in the market.
Stephen Clark: So that creates opportunity for us. So we're very active in C&I, calling and prospecting, very selective in CRE. But do have a tailwind of funding coming from commitments that were extended last year and were underwritten in a higher rate environment and very sensitized to the rate environment. So I think that's kind of my perspective.
Yes, Frank this is rodger, yes, the only thing I would add too is just on.
Building on Steve's comments about the commercial loan business.
Frank Schiraldi: Okay, all right, I appreciate it.
C&I being the largest segment deposits come with those relationships and with the overall focus more broadly on relationships. In addition to wealth.
We have.
Strong focus on full relationships in the commercial space.
Which should give us some ability to offset as I said some of the lingering.
Absorption of the excess liquidity in the consumer book.
Alright, okay. Thanks for all the color.
Thank you.
Your next question will come from the line of Russell Gunther with Stephens. Please go ahead.
Hey, Good afternoon, guys Hi, Roger also just.
Just a quick follow up on the loan growth question earlier.
I appreciate your comments there obviously, a good environment for you guys to continue to take share from competitors given your positioning.
The environment for taking commercial lending talent isn't that still remain an opportunity in any wins in the quarter.
Frank Schiraldi: Then, just on credit, I think the coverage ratio, reserve coverage ratio was, was flat in quarter, just given some of the downgrades on the problem that's outside, could you just maybe speak to that a bit and, you know, was this sort of, expectate, was this credit migration kind of baked into the reserve already or just your, your general thoughts on, on, on reserving and, and the, and the credit migration, you know, particularly on the problem that's outside. Hi, Frank, this is our, yeah, the, the ACL was flat at 128, remember, a good portion of that was because of just long growth.
Okay.
So Russell Steve Clark, So yes, it remains an opportunity no there were no wins in the quarter, but we have active outreach and were receiving inbound calls from relationship managers in the market who are interested in.
Joining the <unk> team so we have active dialogue.
And we believe there will be some talent coming our way in future periods, but nothing to report in the third quarter.
I would just say Ross thank you.
With our competitive positioning where the natural landing spot for talented relationship managers, particularly from larger banks and you've seen that as the relationship manager group has expanded over the last several years under Steve's leadership.
Frank Schiraldi: So that was less impacted by any migration issues. I mean, that this is something we will continue to evaluate throughout the quarters. We look at the economic outlook and the trends we're seeing, but at this point we feel pretty comfortable with the coverage ratio where it is.
The point, though is very high to join US at this point obviously.
We want people, who can move business.
Stephen Clark: And Frank, this is Steve. I would only add that the credit migration you referenced is, those assumptions are baked into the current ACL from both a qualitative and quantitative perspective. Thanks.
With them joining us and are also culturally consistent and have the same kind of philosophy around relationship banking. So we get a lot of inbound calls, but the bar for us is definitely higher.
Frank Schiraldi: Okay, and then, if I could just sneak in one last one on the deposits, you guys mentioned the, the trust deposits that flowed back out, the transactual stuff. And I guess that was a driver of the, the nonintersparing bearing balances being down, link quarter.
In terms of the quality of people that we would bring over Russell Steve. This is Steve Clark again, I need to correct myself I had my quarters confused so we actually did add too.
RM talent in the quarter.
One in the Philadelphia market long tenured relationship manager came to us from a large national bank. So he is housed in Philadelphia, and then a healthcare RM.
Arthur Bacci: Just any thoughts on what you're seeing more generally there, do you expect kind of a continued flow, believe, and nonintersparing balances in this kind of higher, for longer rate environment? Thank you, Frank.
Long experienced RM in the market joined our health care vertical so those two RMS did occur in the third quarter.
Arthur Bacci: This is, this is our, I'll take that. You know, when you look free COVID, our nonintersparing total deposits is around 727, 28%. We're at about 31 now.
Okay, Great guys I appreciate all the color on that and then just quickly switching gears.
Arthur Bacci: So we're still above where we were pre-COVID. There may be a little bit more lead to go there, but I think we're kind of towards the bottom of it. I, you know, on the trust deposits, there's an element of it that there's really two components of our trust deposits. One is kind of a, I'd call it right now 700, 800 million dollar base. It's just recurring cash flow coming in from loan payments that we pass on to investors.
From a margin perspective cash balances came down quite a bit this quarter.
Mind us kind of where they stand today relative to maybe a base do you like to remain at but maybe relative to total assets.
Arthur Bacci: And then there's a component where there may be certain types of trusts that are pre-funded with cash and we hold for a period of time. That's the lumpy component of it. And so that's really a function of how the securitization market is going. We, we do have a pipeline that we're looking at that potentially has some more nonintersparing deposits in Q4, but it's really driven by the capital markets and the securitization activity and the type of deals that are being done in the market.
Yeah.
Yes, I would say.
Russell the balances are within the range of kind of what our long term goals I remember it fluctuates a little bit depending upon what's going on with cash connect and the on balance sheet off balance sheet business and an overall liquidity planning and.
We're right now we're in within our liquidity goals. So it should stay in and around this range.
Okay. That's helpful. Roger Thank you.
And then I know, we'll get a full year outlook.
And in a few months, but as we think about your updated margin range for the fourth quarter just bigger picture. How are you guys thinking about where that can ultimately drop even just from a timing perspective, we've seen competitors. This quarter talking about drops in <unk>. How are you guys generally thinking about the timing there.
Rodger Levenson: Yeah, Frank, this is Roger. I think I would add to it just building on Steve's comments about the commercial loan business. You know, with C&I being the largest segment, you know, that deposits come with those relationships. And with the overall focus more broadly on relationships. In addition to wealth, you know, we have, you know, strong focus on full relationships in the commercial space, which should give us some ability to offset, as Art said, some of the lingering, you know, absorption of the excess of liquidity in the... Consumer Book. Right. Okay. Thanks for all the color.
Frank Schiraldi: Thank you.
Yes Russell.
We're kind of.
Assuming rates stay where they're at we're thinking somewhere second quarter next year, we start to see.
But bottoming of the margin.
Theres still some opportunity with to us to increase our betas are lightly we have some budget left in our beta where we do see some competitors increasing rates.
Russell Gunther: You're next question. We'll come from the line of Russell Gunther. What's Stephen's?
We certainly want to protect our relationships and as Steve said in a lot of our new business comes with it.
Russell Gunther: Please go ahead. Hey, good afternoon, guys. Hi, Russell. Hey, just a quick follow up on the loan growth question earlier. Appreciate your comments there. Obviously a good environment for you guys to continue to take share from competitors given your positioning. How's the environment for taking commercial lending talent? Is that still remain an opportunity in any wins in the quarter? So Russell, Steve Clark, so yes, it remains an opportunity. No, there were no wins in the quarter, but we have active outreach and we're receiving inbound calls from relationship managers in the market who are interested in joining the WSFS team.
Deposit relationships, but I think in the second quarter, we would start to see a bottomley bottoming of the NIM.
Great.
And last one for me. Thank you guys on the net charge off outlook again bigger picture.
<unk>.
Core kind of 19 basis points ex New lane, an upstart just have a general sense for your expectation for consumer charge off trends in the near term.
And the consumer charge off trends have been pretty much within our expectations.
The last two quarters, they've been consistent so I think we're kind of normalizing at a pretty steady rate for the and those being mostly the upstart portfolio and the new land portfolios and even though that's more of a leasing small business, but there does seem to have kind of leveled out at this level.
Russell Gunther: So we have active dialogue, and we believe there will be some talent coming our way in future periods, but nothing to report in the third quarter. I just say, Russell, thank you. You know, with our competitive positioning, we're the natural landing spot for talented relationship managers, particularly from larger banks. And you've seen that as the relationship manager. Groups has expanded over the last several years under Steve's leadership. The board though is very high to join us, you know, at this point.
Okay. Thanks, guys for taking all my questions Thats It for me.
Thank you.
Your next question will come from the line of Betty strict Glyn with Janney Montgomery Scott. Please go ahead.
Hey, good afternoon guys.
Afternoon.
Okay.
Update us on expectations for earning and total asset growth as you allow the investment portfolio to run off I think in the slides. It says you are targeting 18% from 24% today and then along those same lines should we should we see the balance sheet relatively flat or maybe even shrink from here in the near term just trying to get a sense for where total ad.
Russell Gunther: Obviously, we want people who can move business with them joining us and are also culturally consistent and have the same kind of philosophy around, you know, relationship banking. So we get a lot of inbound calls, but the board for us, you know, is definitely, you know, higher in terms of the quality of people that we would bring over.
Let's go.
Okay.
Yeah.
I think we would see total assets pretty much remain flat I think our mortgage backed securities portfolio.
Russell Gunther: Again, Russell, Steve, this is Steve Clark again. I need to correct myself. I have my quarters confused. So we actually did add to RM talent in the quarter, one in the Philadelphia market, a long tenured relationship manager came to us from a large national bank. So he's housed in Philadelphia. And then a healthcare RM, a long experience RM in the market joined our healthcare vertical. So those two RMs did occur in the third quarter. Okay, great guys. I appreciate all the color on that.
Ben.
Elevated because we had the excess liquidity over the last few years, and we're allowing that to run down to more traditional levels around 20% or so and that's going to take a few years, but we're seeing as we said in the supplement about $1 billion of runoff in that portfolio over the next two years.
Kind of look at that as a $1 billion of runoff that can be redeployed into our loan portfolio and a nice pickup in yields on that transition and mix shift.
That makes sense.
Russell Gunther: And then just quickly switching gears from a margin perspective, cash balances came down quite a bit this quarter. They just remind us kind of where they stand today relative to maybe a base you like to remain at, but maybe relative to total after. Yeah, I would say Russell, that balances are within the range of kind of what our long-term schools are. Remember, it fluctuates a little bit depending upon what's going on with cash connect and the one balance sheet or balance sheet business and then overall liquidity planning. And we're right now, we're within our liquidity goals. So it should stay in and around this range. Okay, that's helpful.
Just one more from me I mean could we see overall fee income come down some in the fourth quarter, just given the guidance of mid single digits for the year.
Russell Gunther: Roger, thank you.
And if so is that driven by any business line in particular.
I would tell you that the fee income has a little bit of noise at times, just because of the income we generate from some boldly and derivative cost.
The core components of it wealth cash connect and the core banking fees continue to have gone up.
At the range, we have projected we did have a strong quarter in our capital markets area, which helped drive up this quarters.
Fee revenue. So that's why you see the 9% I wouldn't expect it to continue to grow at 9% I think back to a normal.
Russell Gunther: And then I know we'll get a full year outlook in a few months. But as we think about your updated margin range for the fourth quarter, just bigger picture.
Expectations of mid single digit would be more appropriate.
Okay.
Russell Gunther: How are you guys thinking about where that can ultimately drop even just from a timing perspective? We've seen competitors this quarter talk about drop and three to report to you. How are you guys generally thinking about the timing? There.
Got it that's helpful. Thanks for taking my questions.
Thank you.
Your next question will come from the line of Manuel Novice with D. A Davidson. Please go ahead.
Hey, just a couple of backup to the loan growth expectations.
Rodger Levenson: Yeah, Russell, we're, you know, we're kind of assuming rates they were there at, we're thinking somewhere, you know, second quarter. Next year, we start to see a bottoming of the margin. There's still some opportunity with to us to increase our beta.
So I understand the selectivity in some in some portions of the book and the opportunity in others.
How do you include the expectations for a bit of that recession at the end of the end of the year in your growth projections.
Yeah.
So I would just generally say as we as we mentioned Manuel most of our growth is coming from taking market share.
Rodger Levenson: And as lightly we have some budget left in our beta, we, where we do see some competitors increasing rates and we certainly want to protect our relationships. And as Steve said, you know, a lot of our new business comes with the deposit relationships. But I think in the second quarter, we start to see a bottom link bottoming of the name. Great.
And so and.
Even if there was.
<unk>.
Contraction from the run rate on GDP growth, which is obviously, what we would expect we don't believe that would have in the near term and immediate impact.
The loan growth longer term it would depend on the path of the economy, but most of where we're seeing our growth is from taking market share and to a lesser degree <unk>.
Russell Gunther: And last one for me. Thank you guys on the net charge off outlook. Again, bigger picture. You mentioned poor kind of 19 basis points, X new lane and upstart. Just have a general sense for your expectation for consumer charge off trends in the near term. You know, the consumer charge off trends have been pretty much within our expectations. The last two quarters, they've been consistent. So I think we're kind of normalizing at a pretty steady rate for the.
Spanning existing relationships.
Okay.
Talking about our pipeline of construction I know there was some nice construction gains in the quarter can you just kind of talk about that a bit just what trends youre seeing there.
So Emmanuel Steve Clark, So looking back over the past year. So into early 2022, when we approve construction financing for the.
Russell Gunther: And those being mostly the upstart portfolio and the new lane portfolio is even though that's more of a leasing small business, but they seem to have kind of leveled out at this level. Okay, thanks guys for taking all my questions.
Multifamily or for residential subdivision.
Equity from the borrower goes in first and again, we're underwriting in the range of 65% to 75% loan to cost. So that equity is significant goes in first and now those unfunded commitments that we settled on closed on last year our funding this year. So.
Russell Gunther: That's it for me.
Betty Strickland: Thank you.
Betty Strickland: Your next question will come from the line of Betty Strickland with Janima Gumree Scott. Please go ahead. Hey, good afternoon, guys. We have soon updated some expectations for earning and total asset growth as you allow the investment for a little runoff. I think in the slides, it says you're targeting 18% from 24%. And then along those same lines, you know, should we should we see the balance sheet relatively flat or maybe even drink from your near term, just trying to get a sense for where total assets could go.
That is a tailwind in our loan growth.
And again.
Those those loans were underwritten.
In a higher rate environment and are sensitized to we'd even higher rate environment to make sure the appropriate coverage would be there at completion of the multifamily project or.
Interest reserve on a residential lot subdivision project.
Betty Strickland: I think we would see total assets pretty much for main flat. I think our mortgage backed securities portfolio, you know, had been elevated because we had the excess liquidity over the last few years. And we're allowing that to run down to more traditional levels around 20% or so. And that's going to take a few years, but you know, we're seeing as we send the supplement about a billion dollars of runoff in that portfolio over the next two years to kind of look at that as a billion dollars of runoff that can be redeployed into our loan portfolio and a nice pickup in yields on that transition and mixed shift. That makes sense.
Okay.
I am sure that tailwind is captured in the guidance is can you quantify it.
The benefit to 2024 from some of that.
Yes, I can't quantify it at this point.
Okay.
Okay.
Our ship questions I understand we'll get an update next quarter.
Thinking about that NIM bottom in the second quarter of 'twenty four.
Is the expectation there that you'll see stability in the NIM or could even start to rise and this is assuming.
No more hikes and kind of a flat fed funds environment.
Betty Strickland: And just one more for me, I mean, can we see overall fee income come down some of the fourth quarter, just given the guidance to mid single digits for the year. And as soon as that driven by the business line in particular.
Yes.
Thank you.
It would stabilize and we'd see some leveling for a period of time, but again as the portfolio mix changes from the MBS over to the loan.
Betty Strickland: I would tell you that the fee income has a little bit of noise at times just because of the income we generate from some bully and derivative cost. The core components of it wealth cash connect and the core banking fees continue to have gone up at the range we've projected, we did have a strong quarter in our capital markets area which helped drive up this quarters. Fee Revenue, so that's why you see the 9%, I wouldn't expect it to continue to grow at 9%, I think back to our normal expectations of mid-single digit would be more appropriate. Got it, that's helpful.
We'd be picking up $450 to 500 basis points on that mix shifts so that would start to bring the.
The yields up.
For some period of time, obviously, it's not going to be immediate but yes, assuming all else equal I would say second half of the year, we'd start to see some lift in the NIM.
Betty Strickland: Thanks for taking my question.
Alright.
Kind of building on that.
Are we getting close to the peak of the loan yields or could that still makes a little bit higher I guess, just looking at loan yields alone at around $6 80.
Betty Strickland: Thank you.
What are kind of thoughts on that progression.
If rates stay the same stay flat from here.
And at this point, we have some originations that are coming in over 690 into that low sevens. So I think it really depends on the mix of loans, we're bringing in but the pricing.
Manuel Navas: Your next question will come from the line of Manuel Navas with DA Davidson. Please go ahead. Okay, I just are going back up to the long growth expectations. I understand the selectivity in some portions of the book and the opportunity and others.
It's probably assuming no change in rates and I'll look at Steve I think we're pretty much we're comfortable with our pricing on the loan side is.
Yes, so I would not expect a significant increase in yield unless the fed raises interest rates our books, 55% variable. So we would benefit from a fed increase but.
Rodger Levenson: How do you include the expectations for a bit of that recession at the end of the year in your growth projections? I would just generally say, as we mentioned, Manuel, most of our growth is coming from taking market share. And so even if there was a contraction from the run rate on GDP growth, which is obviously what we would expect, we don't believe that would have in the near term an immediate impact on the longer term, it would depend on the path of the economy. But most of where we're seeing our growth is from taking market share and to a lesser degree, expanding existing relationships.
I would not predict higher yields significantly higher yields going forward absent that.
Okay, and you're still going to benefit from the securities yields of $2 30 going to loan yields over time.
Correct correct.
Yes.
You made a comment about that.
Some room on deposit beta.
Versus kind of your target. It seems like you are kind of outperforming in recent quarters.
How are you thinking about using some of that leftover higher beta target to kind of maybe protect your deposit flows.
Steve Clark: And you talked about a pipeline of construction and there was some nice construction gains in the quarter. Can you just kind of talk about that a bit, just what trends you're seeing there?
Talk about that strategically.
Ill leave it there.
No.
We are Alco committee that looks at what the competitive pricing is and we talk about it every month, we do see some competitors that have some higher rates and again to protect relationships, we will do exception pricing.
Steve Clark: So, Manuel Steve Clark, so looking back over the past year, so into early 2022, when we approve construction, financing for multi-family or for residential subdivision, equity from the borrower goes in first. And again, we're underwriting in the range of a 65 to 75% loan to cost. So that equity is significant, goes in first. And now those unfunded commitments that we settled on, closed on last year, are funding this year. So that is a tailwind in our loan growth.
Where it's necessary and that's really left up to the line of business leaders to determine that exception pricing. So we do believe we have the ability to where necessary increase some rates to manage that relationship we're not doing it across the board to just go raise deposits, we're not in the position of needing to get additional.
Steve Clark: And again, those loans were underwritten in a higher rate environment and a census highs till we need even higher rate environment to make sure the appropriate coverage would be there at completion of the multi-family project or interest reserve on a residential lots of division project.
<unk> liquidity, but certainly we've acquired some very strong relationships and those we want to protect.
Thank you very much for the comments.
Thank you and with no further questions in queue I'd like to turn the conference back over to Mr. Bacci.
Thank you.
Again for joining the call today, if you have any specific follow up questions. Please feel free to reach out to me directly also Roger and I will be attending conferences and investor meetings throughout the quarter and we look forward to meeting with many of you have a good day.
Manuel Navas: I'm sure that tailwind has captured in the guidance is, can you quantify the benefit to 2024 from some of that? Yeah, I can't quantify at this point.
That will conclude today's meeting we thank you all for joining you may now disconnect.
Okay.
Okay.
Rodger Levenson: I'll shift questions. I understand we'll get an update next quarter. Think about that men bottom in the second quarter of 24. Is the expectation there that you'll see stability in the name, or could even start to rise, and this is assuming no more hikes and kind of flat said funds environment. Yeah, I think it would stabilize and would see some leveling for a period of time, but again, is the portfolio mix changes from the MBS over to the loan.
Rodger Levenson: You know, we'd be picking up 450 to 500 basis points on that mix shift, so that would start to bring the yields up over some period of time. Obviously, it's not going to be immediate, but yeah, assuming all else equal, I would say, second half of the year, we'd start to see some lift in the M. Kind of building on that, are we getting close to the peak of the loan yields, or we could that still mix a little bit higher and just look at loan yields alone at around 680, what are kind of thoughts of that progression?
Rodger Levenson: If rates stay the same, stay flat from here. You know, at this point, we have some origination that are coming in over 690 into the low 7s, but they could really depend on the mix of loans we're bringing in, but the pricing which is probably assuming no change in rates. Now, look at Steve, I think we're pretty much comfortable where our pricing on the loan side is. Yes, so I would not expect a significant increase in yield unless the Fed raises interest rate.
Rodger Levenson: Our books, 55% variable, so we would benefit from a Fed increase, but I would not predict, you know, higher yields, significantly higher yields going forward, after that. Okay, so you're still going to benefit from the securities yield, the 230 going to the loan yields over time. Correct. You made a comment about the some room on deposit beta versus kind of your target. You think it's like you're kind of outperforming in the recent quarters.
Rodger Levenson: How are you thinking about using some of that leftover higher beta target to kind of maybe protect your deposit flows? Just talk about that strategically and I'll leave it there. No, we, you know, we, our Outgo Committee looks at what the competitive pricing is and we talk about it every month. We do see some competitors have some higher rates. And again, to protect relationships, we will do exception pricing where it's necessary and that's really left up to the line of business leaders to determine that exception pricing.
Rodger Levenson: So we do believe we have the ability to where necessary increase some rates to manage a relationship. We're not doing it across the board to just go raise deposits, we're not in the position of needing to get additional liquidity, but certainly we've acquired some very strong relationships and those we want to protect.
Rodger Levenson: Thank you very much for the comment. Thank you.
Arthur Bacci: And with no further questions, thank you.
Arthur Bacci: I'd like to turn the conference back over to Mr. Baji. Thank you again for joining the call today. If you have any specific follow-up questions, please feel free to reach out to me directly. Also, Roger and I will be attending conferences and investor meetings throughout the quarter and we look forward to meeting with many of you. Have a good day.
Arthur Bacci: That will conclude today's meeting. We thank you all for joining. You may now disconnect.