WSFS Financial Q1 2024 Earnings Call Transcript

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April 26, 2024

There are 10 speakers on the call.

Operator

Thank you for standing by, and welcome to the WSFS Financial Corporation First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer Thank you. I'd now like to turn the call over to your host for today, Mr. Art Bacci, Chief Wealth Officer, Interim Chief Financial Officer.

Operator

Sir, you may begin.

Speaker 1

Thank you, Rob. Good afternoon and thank you for joining our Q1 2024 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 today are Roger Levinson, Chairman, President and Chief Executive Officer Steve Clark, Chief Commercial Banking Officer and Sherry Krasinski, Chief Consumer Banking Officer. Before I turn the call over to Roger for his remarks on the quarter, I would like to read our Safe Harbor statement.

Speaker 1

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 the forward looking statements due to risks and uncertainties, including, but not limited to, the risk factors included in our annual report on the Form 10 ks and our most recent quarterly reports on Form 10 Q as well as other documents we may periodically file 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.

Speaker 2

Thank you, Art, and everyone else for joining us on the call today. Wixbus had a good start to 2024 continuing to demonstrate the strength of our franchise and diverse business model. Our first quarter results included a core earnings per share of $1.11 core return on tangible common equity of 19.2% and a core return on assets of 1.31%. Our results continue to reflect the benefits of the investments we are making in our company and our unique competitive market position. Highlights for the quarter included gross loan growth of 2% linked quarter or 7% annualized.

Speaker 2

This growth was spread across our commercial mortgage, consumer and C and I books. Quarter end customer deposits were up 3% linked quarter after excluding expected trust activity and a short term commercial deposit withdrawal. Average deposit balances increased 4.9% annualized linked quarter. Deposits remain well diversified across our commercial, consumer, wealth and trust businesses with 30% of average deposits in non interest bearing demand accounts. The core net interest margin was 3.84% for the quarter with interest bearing deposit beta of 47%.

Speaker 2

While our average cost of funds increased 17 basis points during the quarter, the increase mostly occurred early in the quarter and the rate of increase in cost of funds declined meaningfully in March. Excluding the income from our equity position in Spring EQ of $3,500,000 in the Q4 of 2023, core fee revenue increased 2.7% linked quarter. As a reminder, Spring EQ was acquired effective year end 2023 and we will therefore no longer recognize income from this investment. Our core fee revenue ratio was 30.3% in the Q1. The core efficiency ratio stood at 58.6 percent for the quarter.

Speaker 2

Non interest expenses in both the Q4 of 2023 and the Q1 of this year included a number of non recurring adjustments. Normalizing for these items, expenses increased $7,200,000 or 5% linked quarter with cash connect external funding costs representing $5,200,000 of the increase. Cash Connect added 4,336 serviced non bank ATMs during the quarter due to the previously discussed exit of a large industry participant. We anticipate opportunities for additional unit growth during the Q2. Expenses were higher in the quarter due to one time onboarding costs and increased use of external funding.

Speaker 2

Asset quality remained stable. Problem loans and delinquencies were flat at 4.41 percent and 81 basis points of gross loans respectively. NPAs declined to 33 basis points of total assets primarily due to the resolution of 2 non performing C and I credits. Net charge offs decreased to 27 basis points of average gross loans, including a net recovery excluding the upstart and leasing portfolios. The ACL coverage was 1.48% as we continued to build reserves for potential future credit losses.

Speaker 2

In summary, we remain well positioned to deliver top quintile financial performance in 2024. We are tracking well to the full year outlook communicated in January. Thank you. I will now have Art facilitate Q and A.

Operator

Your first question comes from the line of Russell Gunther from Stephens. Your line is open.

Speaker 3

Hey, good afternoon, guys.

Speaker 2

Hey, Russell. Good afternoon.

Speaker 3

I wanted to circle up on Cash Connect. I appreciate some of the puts and takes you just discussed, Roger. But can you guys share where the market share is mostly coming from? Who the competitor is left the space, how you kind of quantify for us what the market share gain opportunity can be. I then you touched on this just a bit a moment ago, but how we should think about the modeling dynamics around related expenses?

Speaker 1

Yes, Russell, this is Art. I think we've communicated previously that the participant that exited was U. S. Bancorp in the Q4 of last year and in aggregate we've added somewhere close to 12,000 units between the Q1 and Q4 of last year. That's probably I'd say 3 quarters to 80% of what we think we will onboard.

Speaker 1

We've got a few more cash purchases in the process here in the the lower profitability, I'd say in the Q1 was just because of some of the transition that had to go on and we sat on some additional non earning cash in the vaults as well as the fact that in order to make the transition smoother rather than optimize where we source cash. We wound up just using our external funding source exclusively so that the carriers were there was no confusion of where the carriers would go to get cash. As we move along here with these cash purchases, we'll start to kind of optimize the usage of cash, which involves looking at distances between various vaults

Speaker 4

in the ATMs. And so that will kind

Speaker 1

of bring us back down into more normalized mix of funding between WSFS and our external funding sources.

Speaker 2

Yes. Russell, I would just add to that. As we've said historically, if you think about the profitability of the business, it should be accretive to the overall bank over time. And so we feel like as we move through this transition, we should return to those levels of profitability over the course of this year.

Speaker 3

Okay, guys. Thank you. That's very helpful. And then if I could just switch gears a bit. With regard to WSFS getting out of the customer originations being on pause with Upstart expectations for that portfolio to start to decline.

Speaker 3

Can you just talk a bit about the strategic shift there? And then what, if any, impact you would expect us to have on your net charge off guidance over time?

Speaker 1

Russell, this is Art. We really think that we're well reserved for the losses that we will incur in the portfolio and without further originations of any meaningful amounts, clearly the provision under the CECL methodology will decline. But we do think we have a good handle on the charge offs and that they will we'll probably see another couple of quarters of level charge offs with declining as the portfolio continues to shrink.

Speaker 2

Yes. Russell, just as a reminder on the first part of your question, the strategy, that was the UpStar partnership was a strategy that was really driven by 2 dynamics. 1, it did plug a gap in our consumer credit product offering. And it also was an opportunity for us to experiment somewhat with digitally originated customers to see if we could cross sell into those. So the combination, I would say, of getting to the size that we wanted to get to, seeing the credit performance and candidly did not give us the kinds of returns on cross sell that we saw that we expected.

Speaker 2

And that's really the reason for the pause. I will just clarify that we still have the channel available to our customers, but we expect fairly modest originations. And overall with the size of that portfolio in the total loan book, obviously does not have a material impact on our earnings.

Speaker 5

Okay, Great. Roger, Art, thank

Speaker 3

you for that. And then just last one for me and I'll step back. Again, switching gears, could you guys just talk a bit about your M and A appetite here on the depository side, overall level of discussions or activity and then an ideal profile of any potential partner?

Speaker 2

Yes. So Russell, really that has not changed for us. As we've talked about for the last couple of years, after the significant investments we made with the Beneficial and Bryn Mawr franchises, We feel we're very uniquely positioned in a great market for significant organic growth over time and extended time. And so we're really not focusing on or contemplating any traditional bank M and A that would revolve around additional deposits. In addition though, I would say, we continue to invest in the business and we are seeing opportunities in both the wealth and the commercial areas to add talent as well as what you see happening in Cash Connect.

Speaker 2

So we will continue to invest in the business if we see the opportunities for returns consistent with our business model. But traditional bank M and A at this point is not in our line of sight.

Speaker 3

Okay. Thank you, guys. I'll step back. I appreciate you taking my question.

Operator

Your next question comes from the line of Frank Schiraldi from Piper Sandler. Your line is open.

Speaker 6

Good afternoon, Frank. Hey, good afternoon, guys. Just wanted to start with Wealth Management and commentary around the adjustment in deferred revenue driving a part of the decline. And just curious if you could talk through that in terms of is this quarter a better run rate? Does that come back out?

Speaker 6

Or how to think about run rate here with that commentary around deferred revenue?

Speaker 1

Yes. Russell, this is Art. That was really a one time item. We had moved some accounts to a different billing platform and in doing so realized that we had about $1,300,000 overstated of deferred revenue. So that was the impact of this quarter's revenue was the $1,300,000 that's really a one time item.

Speaker 1

In addition to that, there's just some seasonality both in the Trust Company of Delaware activity and in the institutional trust businesses. There's usually a rush to get trust and securitizations done at year end. So that when you compare it to linked quarters, it's definitely going to be down somewhat. But if you compare like our institutional trust business to a year ago quarter, we're actually up year over year. So I think the pipeline is still very robust and we continue to still feel comfortable in the outlook we provided in terms of the growth of our fee businesses.

Speaker 6

Okay. So that $1,300,000 is a hit to revenues this quarter and will come back out?

Speaker 1

Yes. So we'll earn it back because it was deferred revenue.

Speaker 6

Right. Okay. And then just wonder if you could give a little more detail or a little more color on NIM. Obviously, you have the guidance out there from the beginning of the year and you've mentioned you guys are kind of on track there. Just look like there was some maybe excess liquidity in the quarter that helped drive NIM lower.

Speaker 6

And I don't know if that's in part an arbitrage opportunity. And just wondering how that kind of fits in with your NIM outlook and any kind of color in NIM moving forward from 1Q?

Speaker 1

Frank, the NIM really was, I'd say the first thing that really impacted most was just an increase in cost of deposits and funding. It went up 17 bps. And just to give you some color, in March, cost of funds only increased 2 basis points. So as Roger mentioned in his opening comments, most of that increase was early in the quarter and it was because of the lag in repricing deposits. We still see kind of a plateauing of our NIM in the second quarter.

Speaker 1

The other contributing factor little to some degree was the ironically as the AOCI or the mark on the investment securities portfolio declined, the yield actually goes down because you have a higher balance. So that was another roughly 9 basis point decline on the mortgage backed securities. But so short answer is we continue to believe very confidently that second quarter will see the lower point and that the NIM starts to kind of accrete back up in the second half of the year, namely because of the pay down in the mortgage backed securities portfolio and redeploying that cash flow into either loan. Okay. And

Speaker 6

Okay. And I'm sorry, just to clarify, Art, you said down I think you said deposit costs were down 2 basis points in March?

Speaker 1

The deposit costs only increased 2 basis points in March relative to February. Yes. So like I said that 17 was mostly 17 basis point increase in cost of funds for the first half.

Speaker 6

Okay, great. Thank you.

Speaker 3

Welcome.

Operator

Your next question comes from the line of Freddie Strickland from Janney. Your line is open.

Speaker 1

Thanks, Freddie.

Speaker 7

Hey, good afternoon, everybody. Just wanted to ask, how much repricing

Speaker 8

Just wanted to ask, how much repricing opportunity do you see on fixed rate loans

Speaker 7

in the near term that could potentially be with the needle on loan yield? Or do you think yield stays kind of where it is at this point, just given the floating portion of the portfolio?

Speaker 4

Hey, Fady, Steve Clark here. Really, there's no significant repricing opportunity in our fixed rate commercial loan book. I think yield will be fairly consistent throughout the rest of the year unless the Fed increases rates given our variable rate loan book. So all things being equal, yield should still be in that 7% low 7% range going forward.

Speaker 7

Got it. That's helpful. And then just wanted to switch back to I was surprised at the level of asset growth this quarter and earning assets. I know you talked about having a little bit of extra liquidity there. Can you talk through what drove some of that and what we might see next quarter in terms of asset growth?

Speaker 4

Yes, Feddy, this is Art. I think really when

Speaker 1

you look at the earning asset growth, there was probably a $300,000,000 or $400,000,000 there of excess liquidity above the prior quarter and that's because in the Q1, we did take down about $800,000,000 of bank term funding refinance some we had and we actually took advantage of the lower rate and the fact that we could borrow at face value of the securities. Going forward, I'd still say that's probably flat generally to this quarter. I think usually in the Q2 we'll see some more significant cash flows coming in and out because of tax payments. So the tax receipts and the tax payments going out will elevate some of the keep that cash a little bit more elevated for the quarter.

Speaker 7

Thanks, Art. That's helpful. And then just one last question going back to charge offs. I know the guidance is 50 to 60 basis points this year and you came in well below that. Is the variance versus guidance just effectively driven by what you're expecting or what we should expect from the consumer book over time to be laying an upstart?

Speaker 7

Is that pretty much the delta between what we saw in the Q1 and what we see in future quarters versus the guidance?

Speaker 2

Yes. So, Teddy, I'll just jump in here. So as Art mentioned, we think for both New Lane and for Upstart, we see the level of charge offs having plateaued and will start to drift down here just a little bit, especially with the Upstart portfolio as it probably attracts a little bit more quickly. I think the delta really for us on charge offs will be what how the commercial portfolio performance. Obviously, we're pleased with the net recovery this quarter, but we're still coming off of historically low levels and credit in the C and I book tends to be a little bit lumpy.

Speaker 2

So you can see a spike or 2 depending upon 1 2 credits and the size of those credits. And it's those kind of averaging all of what we have seen as historical charge off rates that got us to that range that we provided in the outlook. And we continue to assume that some of that will occur during the remainder of the

Speaker 7

year. Understood. Thanks for the color there, Roger. And that's it for me. I'll step back in the queue.

Speaker 7

Thanks for taking my questions.

Speaker 1

Thank you.

Operator

Your next question comes from the line of Manuel Nieves from D. A. Davidson. Your line.

Speaker 5

Hey, great start to the year in terms

Speaker 4

of loan growth.

Speaker 5

Any how are pipelines and are they impacted at all with rates staying high? Any issue with demand from rates?

Speaker 4

Emmanuel, Steve Clark again. Pipeline in the Commercial Bank and the Small Business Group remain fairly strong. So our 90 day weighted average is just a little over $300,000,000 So activity and opportunities continue to present themselves. I think a significant portion of that is from the disruption that's occurring at some of the bigger players in our market and that is generating opportunity as Roger said earlier for both customer acquisition and talent acquisition. So interest rate environment on the C and I side has not impacted our pipeline.

Speaker 4

And certainly on the CRE side, we remain very, very selective in terms of new customer acquisition, new sponsor acquisition and continue to focus on supporting our existing customer base.

Speaker 5

That's great. In terms of shifting over to deposits a bit, any early take on movements in trust deposits and other flows that you're looking out for?

Speaker 1

Well, this is Art. I think things right now are pretty steady. We continue to have a very strong pipeline in securitization deals. Remember some of those deposits as I mentioned in the past are really cash prefunding trust that's going to go out and acquire assets for mortgages for the trust and that we can't really forecast as easily. That's really up to securitization markets and different clients type of deals they bring us.

Speaker 1

But the teams actively got a they've got a very active pipeline and there could be some nice opportunities here if not in the second quarter certainly in the second half of the year.

Speaker 5

In the past, you've talked about having a little bit of a budget in your deposit beta assumptions to defend deposits more. How has that progressed? And what are your updated thoughts on that ability to defend your deposits even more if necessary?

Speaker 1

Yes. I'll turn it over to Sherry, but I'll tell you, we're still tracking. We have a beta was about 47 on interest bearing. We said 50. We kind of think we'll be close to that.

Speaker 1

But the pressure seems to have declined in terms of having to really use excess budget, if you will, to defend our deposit price. And Sherri can talk more about what she's seeing in the market.

Speaker 8

Sure. I would say that, as Art mentioned, the competitive pressure although it still exists, it's subsided somewhat. And we are still seeing customers interested in certificates of deposit, the money market. We've been successful attracting new customers to those products, but really pleased and feeling very comfortable. In fact, our CD retention rates are actually running a lot higher than we had expected, really proactive management on the exception pricing front as well.

Speaker 5

That's really helpful. Can I just my last question shift to the buyback and capital return, you've kind of gone above the 35% threshold? Just any updated comments on that?

Speaker 1

No. We continue to stick to the 35% long term. We had some makeup to do from Q4 where we were a little bit under 35%. We made up for it in Q1, but no, generally we're going to stick to the 35% for the year. So there may be some timing differences between quarters, but no real change.

Speaker 2

It's an ongoing that obviously articulated it well, but it is an ongoing evaluation, Manuel. And so as we go through our capital stress testing and we see opportunities to go above that, what we call the routine buybacks, We will evaluate that. It's just not in our current near term thinking.

Speaker 5

I appreciate that. Thank you very much.

Operator

Your next question comes from the line of Kelly Motta from KBW. Your line is open.

Speaker 9

Hi. Thank you so much for the question. Most of mine have been asked and answered. But maybe looking at Slide 10, it says you've continually been reviewing all $2,500,000 plus loans maturing in the next 24 months. Just given the investor focus on CRE and office, if you could provide what your findings have been?

Speaker 9

Any conversations with borrowers whose loans are coming due or up for repricing and how you are managing with those? Thanks.

Speaker 4

Kelly, Steve Clark again. So yes, as we've noted, we've had for several quarters now an ongoing project or protocol to look 2 years out and roll quarters forward as the year progresses at all loans that are scheduled to mature during this time period. And we just want to be proactive and get in front of our customers well in advance of any maturity dates. And so far, we've been quite successful in working with our customers for loans that have matured during the Q1 of this year and the end of last year with really minor challenges. So that will be ongoing each quarter and we'll continue to work with all of our customers as it relates to their maturities.

Speaker 4

There could be and likely will be some discussions with certain borrowers with certain loans as we move forward, But we really view it as really episodic in a loan by loan basis versus a broad concern.

Speaker 9

Got it. Thank you so much.

Operator

Thank you. And with no further Thank you. And with no further questions in queue, I would like to turn

Speaker 3

the conference back

Speaker 1

over to Mr. Bocci. Thank you for joining the call today. If you have any specific follow-up questions, please feel free to reach out to me directly or Andrew Bazell. Roger and I will be attending conferences and investor meetings throughout the quarter and we look forward to meeting with many of you.

Speaker 1

Have a great day.

Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.

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