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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 are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session [Operator Instructions].
I would now like to hand the conference over to your speaker for today, Dominic Canuso, Chief Financial Officer. Sir, you may begin.
Thank you, Towanda, and thanks to all of you for taking the time to participate on our call today. With me on this call are Rodger Levenson, President and CEO; Art Bacci, Chief Wealth Officer; Steve Clark, Chief Commercial Banking Officer; and Rick Wright, Chief Retail Banking Officer. Before Rodger begins with his remarks, I would like to read our Safe Harbor statement. Our discussion today will include information about our management's view of our future expectations, plans, and prospects that constitute forward-looking statements. Actual results may differ materially from historical results or those indicated by these forward-looking statements due to risks and uncertainties, including but not limited to, the risk factors included in our Annual Report on Form 10-K and our most recent quarterly reports on Form 10-Q as well as other documents we periodically file with the Securities and Exchange Commission. All comments made during today's call are subject to the Safe Harbor statement. With that read, I'll turn the discussion over to Rodger Levenson.
Thank you, Dominic, and thanks again to everyone for joining us on the call today. In the second full quarter since the closing of the Beneficial acquisition, WSFS reported solid operating results with core net income of $52 million and core earnings per share of $0.98, 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 have provided 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 the very successful brand and systems conversion over the weekend of August 24th and 25th.
This was a very large and complex project, including the closing of 20 retail office locations. Combined with 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 on Beneficial and the entire WSFS team is enthusiastic and very well positioned to deliver on the promise and opportunity from being the largest locally-headquartered bank in the Greater Philadelphia and Delaware regions. I will now turn it over to Dominic to provide details on our financial results.
Thanks, Rodger. Good afternoon, everyone. We are very pleased with the financial performance of the quarter on both the GAAP and core basis, especially so, given the intense focus of 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 core results Rodger mentioned earlier. Our GAAP results of 1.72% ROA and $1.02 earnings per share includes $18.9 million of pre-tax net restructuring and corporate development costs, all associated with the Beneficial transaction and conversion. These costs and cost-to-date for the transaction are consistent with our original expectations. More than offsetting this in the quarter is an unrealized gain on our Visa Class B share investments of $21.3 million pre-tax bringing our life-to-date realized and unrealized gain to $50.1 million.
These items are outlined in our GAAP to core earnings reconciliation included in both our earnings release and on Page 4 of the supplemental slide. Also included in our supplement on Page 5 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 run-off portfolios. While total gross loans declined $69 million in the quarter, when excluding the $101 million of attrition in the run-off portfolios, loans grew $32 million or 2% annualized resulting from $27 million in consumer loans and $12 million in C&I. 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 cost public funding and trust deposits.
Net interest margin for the quarter was a very healthy 4.38% led by our strong relationship based C&I loan yields and the stability of our almost 48% of total customer deposits in no-and low-cost products. NIM was lower 6 basis points in the quarter due to the $2 billion short-term non-interest bearing trust deposit that was held at the bank for 15 days. While dilutive to NIM, it contributed $1.7 million in net interest income. The interest rate environment, specifically a 50 basis point decrease in prime and LIBOR in the quarter reduced net interest margin by 10 basis points, which is consistent with performance expected during a declining rate environment. Additional information on net interest margin is in the supplement on Slide 7. Credit quality metrics remain strong and maintain at the positive low end of historical trends and consistent with second quarter ratio.
Total credit cost of $5 million or 22 basis points on loans, improved significantly from the second quarter and is in line with our long-term trend. Core fee income ratio for the quarter was 25.3% as a result of $41 million in fees, diversified across our over 16 various products and businesses from our three reporting segments; Banking, Wealth and Cash Connect. It is worth noting that our 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 to 90% in 2020 as we get the full-year benefit of the 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 $0.12 per share and $40.6 million or 959,000 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 and even above current market prices. I would like to pass it over to Rodger for some final comments.
Before we turn to Q&A, 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 envisioned a stable economy and rate environment with one fed funds increase each in 2019 and 2020 along with a relatively normal shape yield curve.
As a result of the two fed rate cuts already this year along with one more cut 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 we'll provide update upon the completion of the plan as has been our regular practice in January.
Thanks and now we will be happy to take your questions.
[Operator Instructions] Our first question comes from the line of Frank Schiraldi with Sandler O'Neill. Your line is open.
Hey, guys.
Hey, Frank.
Just had a couple of questions. I wonder if I could start on the margin. If I look at the slide deck on Page 7, the 4Q '19 margin, the range you give is 4.10% to 4.20%. Does that include -- is that inclusive of a rate decrease in October?
It does not, which is why we added the bullet in the far right column of Slide 7 on the supplement, just clarifying that an additional fed rate decrease in October and the impact from the large short-term deposit would reduce full year from 4.30% to 4.40%.
I think Frank was asking specifically for the fourth quarter?
Yes
So the fourth quarter does include the cut.
Yes, it does.
Yes, thank you.
Okay. So the 4.10% to 4.20% does include the cut or no?
It does. I does, I apologize for that. I was starting with the full year. 4.10% to 4.20% 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, just for consistency purposes.
Okay. And then -- so, I'm thinking about what you guys gave for the full year and the linked-quarter compression, excluding the beneficial accretion of, you know looks like 8 basis points. And I'm thinking about the impact of the large deposit in the quarter as well and it seems like interest rates, let me know, 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 -- given 25 basis point decrease in fed funds, how that would impact the margin on sort of a normalized basis?
Sure. And 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 impact of 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 product. So which accentuates what otherwise look to be a more sensitive interest rate sensitivity for net interest margin.
Okay. So, in that case, is it possible to -- on a normalized basis, just what a 25 basis point cut sort of does in terms of NIM compression all else aside?
Yeah. All else equal, and presuming a historical deposit beta, if you will, a full year impact of a 25 basis point rate cut would be about $2 million.
Thanks. And then, finally just on cost saves, certainly where the efficiency ratio is, 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 it Dominic. Are you still kind of on-trend for the 50% and the 90% cost saves? Has that picture -- or is that picture changed at all? And then if you can give any detail on the tech-spend that was talked 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 FTE count.
Yeah. And Frank, this is Rodger. As you'll recall, when we announced the deal, we said 50% of the cost saves related to the branch optimization plan or roughly between $6 and $7 million a year would go into the tech spend? So we have been working on that project very diligently alongside this integration process.
I think one of the things that we will update as part of the 2020 plan is likely an acceleration of that plan, just because our observation over the past 18 months since we initially developed that plan is things are moving faster, we want to move faster along that original roadmap. 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 plan.
Thank you. Our next question comes from the line of Michael Perito with KBW. Your line is open.
Hi, Rodger and Dominic good morning -- good afternoon. Rather. I wanted to ask a follow-up on the cost side. You know as we look at that new kind of core 90 -- just under $91 million in the third quarter, I think the conversion at least according to the press release still happen fairly late in August. So I mean can you provide any near-term insight about kind of where the cost save expense number for the fourth quarter will shake out in a range because it's -- my guess is that $91 million or just under $91 million still incorporates some elevated cost that likely won't be -- wasn't in the back two months of the quarter.
That's right. So it's a fair question. Well I can't give an explicit guidance on the fourth quarter cost. What I can say is, as we've discussed between the branch consolidation, the technology conversion, and reduced FTE count, you would expect a full quarter's benefit of those sales, which would reduce from that third quarter core cost by a couple of million dollars, offset by normal business growth and investment -- investing in revenue generating efforts.
Got it. Okay, that's helpful. Thank you, Dominic. And then on the kind of the overall revenue side of Beneficial, obviously there has been some press releases out on some hires that you guys have made, and I think you made some comments in the earnings release about some of the progress you're making there. But as we kind of think about it from an analysis standpoint, should we be looking for 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 the -- on the revenue producing side in the 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 lift from the team that we've gotten and particularly as now we're past conversion and that last major milestone of integration, part of what Dominic 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 we're 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 that's the plan I was referring to, kind of, we're in the middle of pulling all those pieces together.
Got it. And then just lastly if I could on capital, I mean you guys paid out $47 million in the quarter, made $54 million and still saw capital levels build. So I guess it's kind of a multi-part question here, but I guess to try and ask it succinctly. I guess one, is it at a point now where your profitability and capital levels likely would need to -- 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 your already excess capital ratios?
And two, I would think that the overall risk of your balance sheet is lower post Beneficial than pre. But obviously you're carrying 300 basis points, 400 basis points more capital. And I guess as you guys view it internally, how much of an area of focus is that? Are you guys fairly content to just kind of run near-term with that level of capital with kind of limited options at your disposal or can we expect you guys to try to be as aggressive as possible within reason to limit any further capital appreciation, given the lack of overall balance sheet growth?
Sure. Thanks Mike. Clearly a couple of points there, which I'll try to discern. First, regarding your question on the dividend policy, we have a long-standing disciplined capital practice of returning a minimum 25% of our annual earnings through -- split evenly between that low and consistent dividend and minimum level of share buybacks anything incremental to that would be evaluated based on the share price and our IRM model determining incremental share buybacks. We have evaluated that and we re-evaluate 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 7% and 8% of TCE ratio, we would look to first reinvest it in the business. Second, look for inorganic opportunities and obviously put Beneficial, and we're focused very much on that 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 to shareholders through share buybacks. 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 re-evaluate that as part of our 2020 planning process.
Got it, that's helpful. And then just lastly, I'll jump back, just any -- especially the Beneficial deal, I know there is quite a few moving pieces here, but are you guys prepared or in the process of providing any thoughts around CECL adoption at this point or not quite yet?
Yeah. So clearly, it's an area of focus in the third quarter as we start heading in toward the end of the year and cut over to CECL on January 1st, 2020. Our team has been very active on CECL 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 to model those and validate those. As part of the third quarter, we will not be disclosing a range as we continually annualize those impacts, but we will be fully prepared for the cutover on January 1st, 2020.
Thanks. Sorry go ahead.
I could just add. Yeah Mike, this is Rodger and I'll just add. As you know, part of the complexity for us is almost half of our loan book now is in acquired loan book which is [indiscernible] very differently under CECL and so we just think it's prudent as we do this parallel modeling to incorporate all of the various scenarios and assumptions that we need and several iterations to make sure that when we do the cross over that we have a good handle on that and that's just part of the process of validation that we're going through.
Helpful. Thank you guys for taking my questions. I appreciate it.
Thanks Mike.
Thank you. [Operator Instructions] Our next question comes from the line of Russell Gunther with D.A. Davidson. Your line is open.
Hey, good afternoon guys.
Hi, Russell.
I wanted to circle back to the growth conversation a bit and just get your, first your kind of high level thoughts on C&I CRE. I appreciate all the color on the run-off portfolios, but maybe give us a sense of what the opportunity there is from a gross loan perspective with some of the drivers there are. Perhaps you could comment on pipelines and really trying to get a sense for when we might see a return to net loan growth?
Hey, Russell. This is Steve Clark. So regarding pipeline. Pipeline is relatively strong. Our 90-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 is in C&I. So we're optimistic that we'll continue the trend of increasing C&I as a percent of total and that will be helped a little bit by the CRE participation portfolio that continues to run off. So all in all, I'm pretty optimistic about our growth prospects.
Okay, got it. And then, are you guys contemplating any additional commercial lender hires within any particular markets, perhaps Philadelphia or 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 to our Pennsylvania-based legacy team and then we added one new RM and one very experienced portfolio manager to the Beneficial team. We are in active conversations and 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, from a big picture perspective, is there a point in which you guys are comfortable that you'll be able to outpace the kind of ring fence to run-off portfolios and start to think about or be able to put up a -- even a low-single-digit organic number going forward?
So, I'll jump in on that, Russell. I think as you can see from that -- the slide, we think we've worked our way through the significant amount of that leverage loan portfolio. That's all C&I. That's really down to two relationships. I think you see the trajectory on the consumer books, particularly resi mortgage and student loans. And I'd say the auto, as you can see, is coming to an end in terms of a material standpoint as well.
The one factor that is a little bit dependent upon the economy and interest rate cycle are those CRE participations. But we clearly see the pace of the attrition slowing, moderating to a more what I would call kind of normal run rate versus what we originally thought. And I think most of that this year is a combination of decisions on our part to exit some portfolios that didn't fit and the interest rate environment, which accelerated some refinances. So I would say, and you will see this in 2020 in terms of our plan, we certainly see that moderating, and then us returning to the growth rates that we've enjoyed historically versus our peers.
Got it. Okay, guys -- Well -- look, thank you both for your thoughts on that. And just briefly switching gears, I hear you loud and clear about waiting on CECL disclosure, but any just broad stroke comments on the credit quality outlook, anything within your footprints or asset class that's of a concern, where we would see a kind of quicker pace to normalizing credit cost. Just appreciate your general thoughts.
Yeah, Russell, Steve Clark, again. So no, currently underlying credit trends are very stable. As Dominic mentioned, we're kind of back to the historical low end of the range in terms of credit costs and sitting here today, we feel comfortable with where we are.
Very good. All right, thanks all for taking my questions.
Thanks, Russell.
Thank you. Our next question comes from the line of Joe Gladue with Alden Securities. Your line is open.
Hi, good afternoon.
Hey, Joe
Yeah. I just had one question. Just looking at the loan yields, particularly on the -- I guess commercial real estate portfolio, looks like yields were down over 100 basis points from second quarter to third quarter. And just -- just wondering if you could give us a little 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 yield on all of our loan categories includes purchase accounting accretion and the significant step down in that portfolio from the second quarter to third quarter is primarily driven to the volatility in the purchase accounting accretion. There is a significant shift in the third quarter. More of the accretion came from CRE where -- I'm sorry in the second quarter was mostly CRE and the third quarter, it was mostly C&I. So you'll see kind of an offsetting step up in the C&I yield within the earnings release material.
Okay. I thought that might be part of it. Thank you. That was it.
Thank you, Joe.
Operator
Thank you. I will now turn the call over to Rodger Levenson for closing remarks.
Thank you. And thanks, again, for everybody participating on the call today. Dominic and 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 today's conference. Thank you for participating, you may now disconnect.