Q1 2024 WSFS Financial Corp Earnings Call

Participants

Arthur Bacci; Executive Vice President, Chief Wealth Officer and Chief Financial Officer; WSFS Financial Corp

Rodger Levenson; Chairman of the Corporate Development Committee, Chief Executive Officer, Member of the Executive Management Team, President; WSFS Financial Corp

Shari Kruzinski; Chief Customer Officer, Executive Vice President; WSFS Financial Corp

Russell Gunther; Analyst; Stephens Inc.

Frank Schiraldi; Analyst; Piper Sandler

Feddie Strickland; Analyst; Janney Montgomery Scott LLC

Manuel Navas; Analyst; D.A. Davidson & Company

Kelly Motta; Analyst; Keefe, Bruyette & Woods North America

Presentation

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 session. If you would like to ask a question during this time, simply press star, followed by the number one on your telephone keypad. If you would like to withdraw your question again, press the star one. 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. Sir, you may begin.

Arthur Bacci

Thank you, Ron. Good afternoon and thank you for joining our first quarter 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 Rodger Levenson, Chairman, President and Chief Executive Officer, Steve Clark, Chief Commercial Banking Officer, and Sherry present, SKI 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. 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 Form 10 K, 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.

Rodger Levenson

Thank you, Art and everyone else for joining us on the call today, which has had a good start to 2020 for 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. This growth was spread across our commercial mortgage consumer and C&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. The core net interest margin was 3.84% for the quarter with interest-bearing deposit beta of 47%, 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 $3.5 million in the fourth quarter 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 first quarter. The core efficiency ratio stood at 58.6% for the quarter. Non-interest expenses in both the fourth quarter of 2023 and the first quarter of this year included a number of nonrecurring adjustments. Normalizing for these items, expenses increased 47.2 million or 5% linked quarter with Cash Connect external funding costs representing $5.2 million of the increase. Cash Connect added 4,336 service 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 second quarter. Expenses were higher in the quarter due to one-time employee onboarding costs and increased use of external funding. Asset quality remained stable. Problem loans and delinquent lease delinquencies were flat at 4.41%, and 81 basis points of gross loans, respectively. Npas declined to 33 basis points of total assets, primarily due to the resolution of two nonperforming C&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.
In summary, we remain well positioned to deliver top Quintiles financial performance performance in 2024. We are tracking well to the full year outlook communicated in January.

Question and Answer Session

Operator

Thank you, and we'll now have or facilitate Q&A at this time, I would like to remind everyone in order to ask a question, press star, then the number one on your telephone keypad. Your first question comes from the line of Russell Gunther from Stephens. Your line is open.

Russell Gunther

Thank you. Good afternoon, guys, a restaurant afternoon. I wanted to circle off on Cash Connect, and 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 that unless the space how you kind of quantify for us, what the market share gain opportunity can be? And then you touched on this just a bit a moment ago, but how we should think about the modeling dynamics around related expense?

Arthur Bacci

Yes, Russell, this is our I think we've communicated previously that the participant that exited was U.S. Bancorp in the fourth quarter of last year. In aggregate, we've added somewhere close to 12,000 units between the first quarter and fourth quarter of last year. It's probably, I'd say three-quarters to 80% of what we think we will onboard. We've got a few more cash purchases in the process here in Q2. I think when you kind of look at some of the expenses and the lower profitability, I'd say in the first quarter was just because of some of the transition I have to go on and we sat on some additional non-earning cash in the vault as well as the fact that in order to make DM 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 will start to kind of optimize the usage of cash, which involves looking at distances between various vaults in the ATMs. And so that will kind of bring us back down into more normalized mix of funding between WSFS in our external funding sources.

Rodger Levenson

Yes, Russell, I would just add to that, as we've said historically, as 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. And over the course of this year.

Russell Gunther

Okay, guys. Thank you. That's very helpful.
And then if I could just switch gears a bit and with regard to the with is getting out of a customer originations being on pause with upstart expectations for that portfolio to start to decline. Can you just talk a bit about the strategic shift there? And then what, if any impact you would expect this to have on your net charge-off guidance over time?

Arthur Bacci

Russell, this is Art. And we really think that we're well reserved for the losses that we will incur in the portfolio and without further originations and any meaningful amounts, clearly, a 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 from yet.

Rodger Levenson

Russell, just as a reminder, on the first part of your question, the strategy that was at the UPS to our partnership, it was a strategy that was really driven by two Jenna two dynamics. One, it did plug a gap in our consumer credit product offering. And it also was an opportunity for us to experiment somewhat with a digitally originated customers to see if we could then cross-sell into those So the combination, I would say, of getting to that size that we wanted to get to seeing the credit performance and candidly did not give us the kinds of returns on the cross-sell that we saw that we expected, 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 and the total loan book, obviously does not have a material impact on our earnings.

Russell Gunther

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

Rodger Levenson

Yes. So Russell and really that has not changed for us as we've talked about for the last couple of years after the 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 until we're really not focusing on or contemplating any traditional bank M&A that would revolve around additional deposit 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 so we will continue to invest in the business and if we see the opportunities for returns consistent with our business model. But traditional bank M&A at this point is not in our line of sight pullbacks.

Russell Gunther

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

Operator

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

Frank Schiraldi

Good afternoon, guys. Just wanted to start with our wealth management and commentary around the adjustment in deferred revenue are driving a part of the decline, and I'm just curious if you could talk through that in terms of is this quarter a better run rate, does that come back out or how to think about a run rate here with that, what kind of commentary around deferred revenue, Russell, this is or that was there was really a one-time item.

Arthur Bacci

We had moved some accounts to a different billing platform and in doing so realize that we had about 1.3 overstated of deferred revenue. So that was the impact of this quarter's revenue was the 1.3 that's really a one-time item. In addition to that, there's just some seasonality, both in the AM Trust Company of Delaware activity and in the institutional trust businesses, there's usually a rush, again, trust and securitizations done at year end. So that when you compare it to linked quarter is definitely going to be down somewhat. But if you compare like our institutional trust business to a year ago quarter were 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.

Frank Schiraldi

Okay. So that $1.3 million, and it is a hit to revenues this quarter and we'll come back out here.

Arthur Bacci

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

Frank Schiraldi

Okay. And then just a wondering if you could give a little more detail a little more color on then, 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 on just looked like there were some maybe excess liquidity in the quarter that helped drive them lower on and I don't know if that's in part an arbitrage opportunity and just wondering how that kind of fits in with your name outlook and a kind of color in some in many viable report from us on 1Q?

Arthur Bacci

You Frank, the NIM. really was the first thing that really impacted most suggest 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 two 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 RNAM. in the second quarter. And the other contributing factor, little to some degree was the And 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 nine basis point decline on the mortgage back and securities. But so short short answer is we continue to believe very confidently that second quarter will see the low point and that the minimum 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 back, but call it cash flow into either loans or even if we put into Fed funds, it will be a 300 basis point pickup in the yield there.

Frank Schiraldi

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

Arthur Bacci

They recorded the the deposit costs only increased two basis points at March relative to February.
Yes. So like I said, that 17 was mostly 17 basis point increase in cost of funds was the change in reserves for the first half.

Frank Schiraldi

Okay, great.

Operator

Thank you. Welcome. Your next question comes from the line of Feddie Strickland from Janney. Your line is open.

Feddie Strickland

Thanks, very good afternoon, everybody. Just wanted to ask how much repricing opportunity do you see on fixed rate loans in the near term that could potentially move 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 as I said either Steve Clark here.

Arthur Bacci

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, the yield should still be in that 7%, low 7% range going forward.

Feddie Strickland

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 have a little bit of extra liquidity there. Can you talk through what drove some of that in? Can you do what we might see next quarter in terms of asset growth, if this is our I think really when you look at the earning asset growth, there's probably about three or $400 million there of excess liquidity above the prior quarter.

Arthur Bacci

And that's because in the first quarter, we did take down about $800 million 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. And going forward, I'd still say that's probably flat generally because this quarter, I think usually in the second quarter, 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.

Feddie Strickland

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 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. Is that pretty much the Delta and between what we saw in the first quarter and what we potentially see in future quarters versus the guidance?

Rodger Levenson

Yes. So I think I'll just jump in here. So as Art mentioned, we think for both new main and for upstart, we see the level of charge-offs on having plateaued, and we'll start and drift down here just a little bit, especially with the upstart portfolio as it probably takes a little bit more quickly. I think there the delta really for us, one charge-offs will be what have a on commercial portfolio performance. And we obviously were pleased with the net recovery this quarter and but we're still coming off of historically low levels and credit in the C&I book tends to be a little bit lumpy. So you can see a spike or two depending upon one or two credits and the size of those credits and it shows kind of averaging all of what we have seen as historical charge-off rate that got us to that range that we provided in the outlook. And we continue to them we assume that some of that will occur during the remainder of the year.

Feddie Strickland

Understood. Thanks for the color there, Roger. And not that's it for me. I'll step back in the queue. Thanks for taking my questions.

Operator

Thank you. Your next question comes from the line of manual Navis from D.A. Davidson, your line.

Manuel Navas

A great start to the year in terms of loan growth from any one of our pipelines and are they impacted at all with rates staying high and any issue with demand on from rates?

Arthur Bacci

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 million. 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 a interest rate environment on the C&I side has not impacted our pipeline. 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.

Manuel Navas

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

Arthur Bacci

And one of those is our metric 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 pre-funding trust that's going to go out and acquire assets for mortgages for the Trust. And in that we can't really forecast is easily. That's really up to securitization markets and different clients type of deals. They bring us, but the teams actively, again, they've got a very active pipeline and there could be some nice opportunities here, if not in the second quarter, certainly the second half of the year.

Manuel Navas

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

Arthur Bacci

I'll turn it over to Sherry, but I'd say we're still tracking. We have a beta was about 47 non-interest bearing. We said 50, we kind of think we'll be close to that. But the pressure seems to have declined in terms of having to really use excess budget. If you will to defend our deposit pricing and share, we can talk more about what you're seeing in the market.

Shari Kruzinski

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 I'm really pleased and feeling very comfortable. In fact, our CD retention rates are actually running a lot higher than we had expected on really proactive management on the exception pricing front as well that's really helpful. And just my last question shift to on the buyback and capital return, just kind of gone above the 35% threshold and any just any updated comments on that now we continue to stick to the 35% long term.

Arthur Bacci

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

Rodger Levenson

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

Operator

Thank you very much to our next question comes from the line of Kelly Motta from KBW. Your line is open.

Kelly Motta

Hi. Thank you so much for the question. On most of mine have been asked and answered, but maybe looking at slide 10, it says you've continually been reviewing on all $2.5 billion plus loans maturing in the next 24 months? And just given the investor focus on CRE and office, if you could provide, you know what, what your findings have been any conversations with borrowing borrowers whose loans are coming due or up for repricing and how you are managing them with those banks?

Arthur Bacci

Kelly, Steve Clark again. So yes, as we've noted, we've had for several quarters now and ongoing project, our protocol to look two 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 been quite successful in working with our customers for loans that have matured during the first quarter 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 on as it relates to their maturities on 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 and a loan-by-loan basis versus a broad concern.

Kelly Motta

Yes. Got it. Thank you so much.

Operator

Thank you. And with no further questions, in queue. I would like to turn the conference back over to Mr. Bacci.

Arthur Bacci

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 Brazil. 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 great day.

Operator

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