WSFS (WSFS) Q3 2024 Earnings Call Transcript

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Date

Friday, October 25, 2024 at 1 p.m. ET

Call participants

• Chairman, President, and CEO — Rodger Levenson
• Chief Financial Officer — David Burg
• Chief Operating Officer — Art Bacci
• Chief Commercial Banking Officer — Steve Clark
• Chief Consumer Banking Officer — Shari Kruzinski

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Takeaways

• Core EPS -- $1.08 per share, as directly reported for the quarter.
• Core ROA -- 1.22%, reflecting the company's return on average assets this period.
• Core Return on Tangible Common Equity -- 16.96% for the quarter.
• Loan Growth -- 5% annualized, characterized as broad-based.
• Deposit Growth -- 3% annualized, with deposits remaining well diversified.
• Loan-to-Deposit Ratio -- 80% as of September 30, enabling substantial balance sheet flexibility.
• Core Fee Revenue -- $90.1 million, up 5% linked quarter and up 23% year over year.
• Wealth Management Fee Revenue -- Declined 3% linked quarter, increased 12% year over year; institutional services growth offset by seasonally lower fees in private wealth and Bryn Mawr Trust Company of Delaware.
• Cash Connect Revenue -- Increased 3% linked quarter and 50% year over year, attributed to greater market share and bailment revenues.
• Cash Connect ROA -- 1.29% for the quarter, reflecting performance of this segment.
• Core Banking Fee Revenue -- Up 25% over the prior quarter, due to Spring EQ earn-out payment and bank-owned life insurance revenue.
• Spring EQ Origination Goal -- Achieved for 2024, with no new originations expected in the fourth quarter; 2025 volumes under review.
• Core Net Interest Expense -- $163.7 million, up 5% linked quarter, driven by higher reserves for unfunded commitments, increased loan workout costs, and staffing expenses.
• Net Interest Income -- Grew 2% linked quarter.
• Net Interest Margin (NIM) -- 3.78%, down 7 basis points sequentially, primarily due to higher-priced deposits and investment portfolio market value changes.
• Total Net Credit Costs -- $20.1 million, showing a modest increase compared to the prior quarter, with a decrease in the provision for credit losses offset by higher reserves and workout costs.
• Non-Performing Assets -- Increased 12 basis points quarter over quarter to 44 basis points, mainly from two unrelated problem loans.
• Net Charge-Offs -- Rose by 14 basis points linked quarter to 58 basis points, largely driven by a write-down from a specific non-performing loan.
• Total Stockholders' Equity -- Increased 8% linked quarter, driven by higher valuations in available-for-sale securities and earnings.
• Book Value Per Share -- Rose 8% linked quarter to $45.37.
• Tangible Book Value Per Share -- Rose 13% linked quarter to $28.56.
• Full-Year NIM Outlook -- Management now expects approximately 3.80%, the lower end of the previous guidance range, reflecting the September rate cut.
• Fourth Quarter NIM Guidance -- Estimated at 3.70%-3.75%.
• Net Charge-Off Outlook -- Reduced to approximately 50 basis points, the low end of the previous guidance range.
• ROA Outlook -- Updated to 1.20%-1.25%, consistent with prior sensitivity disclosures regarding rate changes.
• Interest Rate Hedge Program -- $1.5 billion of floor options in place, with triggers starting at 4.75%, designed to mitigate asset sensitivity in a declining rate environment.
• Commercial Loan Pipeline -- 90-day weighted average pipeline reported at about $230 million, considered consistent with past quarters.
• Deposit Pricing Actions -- Proactively lowered CD rates ahead of September rate cut; shortened primary CD product tenor; $700 million of indexed CDs set to reprice automatically; actions underway on additional $4.5 billion in high-yield or money market CDs.

Summary

WSFS Financial Corporation (NASDAQ:WSFS) reported significant increases in both core fee revenue and equity, reflecting ongoing market share gains and effective portfolio mitigation strategies. Management cited the successful completion of its trust accounting system conversion and stated that further strategic updates, particularly on Spring EQ and 2025 projections, will be provided with the next quarterly report. Adjustments to net interest margin and charge-off forecasts reflect the September rate cut and evolving interest rate expectations.

• Burg explained that the impact on net interest margin from future rate cuts "will not be linear and will be affected by the pace of future rate cuts, deposit pricing, the impact of our hedge program and the behavior of our securities portfolio."
• Levenson stated that continued investment in business-generating talent is supported by "opportunities that we've talked about from the pickup talent from other organizations," indicating an emphasis on organic growth.
• Management stated that "three credits made up almost 70%" of the increase in criticized and problem loan categories, signifying concentration of new credit stress but ongoing monitoring rather than surprise deterioration.
• The company announced full-year 2024 origination targets for Spring EQ have been reached, and "do not expect new originations in the fourth quarter," with future volume under review.

Industry glossary

• Bailment Revenues: Income earned from providing physical cash to ATMs owned or operated by third parties, with the bank retaining ownership of the cash.
• Floor Options: Derivative contracts that provide a minimum interest rate on a specified notional amount, hedging against falling interest rates.
• MBS Portfolio: Mortgage-backed securities portfolio held as part of investment assets, often providing principal repayments and reinvestment opportunities in changing rate environments.

Full Conference Call Transcript

David Burg: Thank you, Rodger, and thank you, everyone, for joining our third 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. In addition to Rodger Levenson, our Chairman, President, and CEO, I'm joined by Art Bacci, Chief Operating Officer; Steve Clark, Chief Commercial Banking Officer; and Shari Kruzinski, Chief Consumer Banking Officer. Prior to reviewing our financial results, I would like to read our Safe Harbor Statement. Our discussion today will include information about management's view or 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 an annual report on Form 10-K, our most recent quarterly reports on Form 10-Q, as well as other documents we 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 to our financial results. WSFS continue to demonstrate the strength of our franchise and diverse business model during the third quarter. Results included a core EPS of $1.08 per share, core ROA of 1.22%, and core return on tangible common equity of 16.96%.

Loans and deposits increased 5% and 3% respectively on an annualized basis. Growth in loans was broad-based and our deposits remained well diversified. Our loan to deposit ratio was 80% on September 30, providing ample balance sheet flexibility and capacity to fund future growth. Core fee revenue of $90.1 million was up 5% linked quarter and 23% year-over-year. Wealth management fee revenue declined 3% linked quarter, but increased 12% over the third quarter of ‘23. The third quarter was driven by strong results in institutional services offset by seasonally lower fees in private wealth and the Bryn Mawr Trust Company of Delaware.

Notably, this quarter also marks a successful completion of our trust accounting system conversion, as well as the rollout of upgraded client account portal in accordance with our Bryn Mawr Trust integration plan, which positions us well for future growth. Cash Connect increased 3% linked quarter and 50% over the third quarter of ‘23, driven by increased bailment revenues as we captured market share over the past year. This, combined with the continued optimization of its units and funding mix, drove an ROA of 1.29% in the third quarter. Core Banking increased 25% over the prior quarter, primarily due to an annual earn-out payment from the previously announced sale of Spring EQ and an increase in bank-owned life insurance revenue.

As noted in our earnings release, we have achieved our 2024 origination goal with Spring EQ and do not expect new originations in the fourth quarter. We're currently evaluating 2025 volumes with the company. Core net interest expense of $163.7 million was up 5% linked quarter, driven by unfunded loan commitment reserves, higher loan workout costs, and compensation related expenses to support future franchise growth. Net interest income grew 2% linked quarter and the net interest margin was 3.78% down 7 basis points from 2Q ‘24.

Our net interest margin was impacted by growth in higher price deposits as we took advantage of market opportunities to grow share, as well as the impact of market value increases in our available for sale investment portfolio. Total net credit costs of $20.1 million increased modestly, compared to the prior quarter with a decrease in the provision for credit losses offset by an increase in reserves for unfunded commitments and loan workout costs. Non-performing assets increased 12 basis points quarter-over-quarter to 44 basis points, primarily driven by the migration of two previously identified and unrelated problem loans.

Net charge-offs increased 14 basis points quarter-over-quarter to 58 basis points, primarily driven by the write-down of one of the previously mentioned non-performing loans. And year-to-date charge-off levels are in line with our expectations. Total stockholders' equity increased 8% linked quarter, driven by market value increases in available-for-sale investment securities and quarterly earnings. As a result, our book value per share increased 8% linked quarter to $45.37, and our tangible book value per share increased 13% linked quarter to $28.56. On the last page of the supplement, we provided an update to a full-year outlook to reflect the 50 basis points rate cut that occurred in September.

As a reminder, our previous mid-year outlook did not reflect any rate cuts for 2024. Our outlook for loans, deposits, fee revenue growth, and efficiency ratio remains unchanged from the prior outlook. We updated our outlook for net interest margin and now expect our full-year NIM to be approximately 3.80%, which is at the lower end of the range from a previous outlook that did not include any rate cuts. In addition, we updated our estimate for 4Q NIM to be 3.70% to 3.75%. With respect to net charge-offs, we have reduced the outlook for the year to approximately 50 basis points, which corresponds to the low-end of our previous range.

And lastly, we updated our outlook for ROA to a range of 1.20% to 1.25%. This change is consistent with the sensitivity that we provided previously that each 25 basis points reduction in the Fed funds rate would reduce ROA by approximately 3 basis points on an annualized basis. While the path of future rates remains uncertain, it's important to note that the impacts of additional rate cuts on our financial results will not be linear and will be affected by the pace of future rate cuts, deposit pricing, the impact of our hedge program and the behavior of our securities portfolio.

As we have done in the past, we will provide a full-year outlook for 2025 in January with the release of our fourth quarter 2024 financial results. In summary, despite the economic uncertainty, WSFS continues to grow and deliver strong results in the third quarter. We remain well positioned to execute on our strategy and predict top-tier performance for the full-year. Equally important, our liquidity and capital position provides a cushion to absorb any unexpected challenges that we might face. Thank you. And we will now open the line for questions.

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from a line of Russell Gunther from Stephens. Your line is open.

Russell Gunther: Hey, good afternoon, guys.

Rodger Levenson: Hey, Russell.

David Burg: Hi, Russell.

Russell Gunther: I appreciate the update to margin expectations and understandable will hold off on 2025. But if we could take a stab at thinking through, you know, the hedge program, as well as just what you would expect per 25 basis point hike impact to the NIM would be?

David Burg: Sure, sure Russell. Happy to do that. And Russell, before doing that, I just want to back up a little bit and talk about our NIM versus the prior quarter. As you know, we had a reduction of 7 basis points. And when you think about that 7 basis points, you can kind of break it down in a few different categories. One, was due to the write-up of our investment portfolio, so just purely math about 2 basis points. We had a little tick up in non-accruals, which was 2 basis points, and then higher deposit costs was 3 basis points. And obviously that higher deposit cost is moderating. The rate of that increase is moderating.

So when you think about the hedge program that you mentioned, we had $1.2 billion completed last quarter. We -- as you know, the program was initially, the strategy was for $1.5 billion. We completed the whole program this quarter. So we now have about $1.5 billion completed. And those are floor options. And they're basically six months forwards with a 30-month term. And they basically strike at different levels. They kick in at different levels. But the first ones start to kick in around 4.75%. So I think the way to think about the hedge program is, obviously, that it's a mitigant to the asset sensitivity that we have.

And so as we go, continue to go through the cycle, if we have additional cuts, that'll mitigate some of the sensitivity that we provided. We provided our previous guidance, as you know, was about 5 basis points of NIM for 25 basis points of rate cut, and these hedges will mitigate that effect somewhat.

Russell Gunther: Okay, that's very helpful. Thank you for the answer. And then switching gears to the fee side, another really strong quarter out of that credit debit ATM revenue fee item. As you guys look ahead to the fourth quarter and the potential for additional Fed cuts, how do you see that line item trending linked quarter? And then as we maybe broad stroke take a step to thinking about ‘25, a lot of market share and unique market share gains occurred in ’24? What's a decent type of growth rate for that fee revenue item?

David Burg: Yes. So with respect to that, line item in particularly Cash Connect, as you said, there were significant market share gains this year. The focus of that business is to now optimize that network and really drive some efficiency in that network. Some of the decline that we saw in the pre-tax margin this quarter was related to idle cash. So cash that was non-earning. And so we really need to optimize that network to make sure that we drive the profitability into that business. In terms of 2025 and the impact of interest rates in that business, from a top line perspective, remember that business does charge based on the cash that is out in the ATMs.

So we will see a decline in top line revenue, but we will see an equal decline or more decline in expenses. So when you think about our profitability, we should have higher profitability expansion in the down cycle for that business even though the top line will see declines just based on interest rates coming down.

Russell Gunther: Okay, I got it. Super helpful. And then just last one for me, guys, would be the impact of Spring EQ revenue on the fee income this quarter?

David Burg: Yes, so with Spring EQ, this was -- as a result of the previously announced sale, we had a number of provisions in the contract where we had earnouts depending on achieving certain origination volumes. Since we were able to achieve our volume for this year, we basically, as a result, that resulted in that earnout of about $2 million. The future earnouts, potentially maybe one next year, but it will depend on the volume of originations for that year. And that is something that is under discussion now. As we mentioned in the fourth quarter, we don't anticipate new originations. And as a result of the sale, Spring EQ is evaluating its strategy going forward and its funding profile.

And as a result, we're discussing with them how 2025 is going to look. And we hope to provide an update on that in the January outlook.

Russell Gunther: Understood. Okay, great. Well, thanks guys for taking all of my questions. Very helpful.

David Burg: Thank you.

Operator: Your next question comes from the line of Kate Ashley from KBW. Your line is open.

Kate Ashley: Hi, good afternoon. This is Kate on for Kelly. So, going back to the guide, so appreciate that the charge-offs are lower than what was previously expected, but also mentions lumpiness from the commercial charge-off. So, with that moved to NPA, like how should we be thinking about potential related NPAs off that?

David Burg: Yes, Kate, I think that the way to think about, even though we had a tick up in some of our credit metrics, I think what's important to appreciate is that the impacts for this quarter were really driven by several problem loans across a few relationships. And these relationships were not a surprise to us, but ones that we have been monitoring. They have been in our problem assets, and ones that we're working on constructively with the sponsors towards a path to resolution. And so these are not necessarily surprises, but these are the impacts of some of those credits working their way through the cycle.

And that's why -- so basically the net charge-offs this quarter were really driven by two C&I loans on the commercial side. One was a suburban hotel property in suburban Philadelphia, and another C&I credit in her footprint. And that was really kind of the uptick on the charge-off level. And that's why we feel comfortable reducing our guide for the full-year to the low-end of the range. Again, because these were expected. We saw these coming, and I think they don't present surprises to us. So as you know, the first-half of the year, in terms of commercial charge-offs, was pretty low.

We actually had a net release in the first quarter, and we knew that these were going to be uneven, and so now you're seeing some of that pipeline coming through the process.

Kate Ashley: Great. Thank you. That's it from me. I'll step back.

David Burg: Thank you.

Operator: Our next question comes from the line of Manuel Navas from D.A. Davidson. Your line is open.

Sharanjit Cheema: Hello, this is Sharanjit Cheema on for Manuel. And I was wondering what deposit data are expected on the way down and there were approximately 36% of the way up? And what have you done so far since September in terms of rate cuts?

David Burg: Yes, so on your second question first, we've been pretty proactive about this. We -- even a little bit ahead of the rate cut, we reduced our CD pricing. And we brought in our -- we had an 11-month CD product, which was our main product. We reduced pricing on that. And then we've also shortened the tenor on that from 11 months to six months. We have a number of CDs, about $700 million that are indexed, that would reprice automatically. And then we have about $4.5 billion that are high yield or money market CDs at the higher price points. And we've started taking actions on all of those.

And so we're working with each of those clients, and we're moving that portfolio. On the way down, as you said, our interest-bearing beta was 51, our all-in was in the mid-30s, as you mentioned. And clearly, looking at the deposit costs that we have, there will be a lag on the way down. And -- but we plan to be very proactive about this. I think our beta in the near-term for these 50 basis points of cuts will be somewhere in the high-teens or 20% for the fourth quarter. But the future beta for ‘25 will be highly dependent on the future on how quickly those other rate cuts come and if they come.

So if we have a pause, that's one scenario. If we have a number of other rate cuts and rapid succession, that's a very different scenario and allows us to be more aggressive. But I would say the other thing that I wanted to point out is that we do have some disruption in our market from competitor dynamics. And we see the opportunity to pick up share and pick up clients. And so that's also something that we want to do with respect to our deposits.

So, you know, we're not -- we're really not trying to manage for one quarter, but we're trying to manage for strategic market share gains and that's how we'll behave and strategize about this.

Sharanjit Cheema: Great, thank you. And then for my last question, how are your commercial loan pipelines working right now?

Steve Clark: Yes, this is Steve Clark. The commercial pipeline is consistent with past quarters. So our 90-day weighted average is running at about $230 million. And that's what we expect in the near-term in terms of closings. On top of that, we have commercial businesses in our small business unit, our SBA unit, and our private banking teams. That would be in addition to that. But generally, we are pleased with our pipeline and it remains consistent, which is good news as we have shown pretty decent mid-single-digit growth throughout the year.

Sharanjit Cheema: Great. Thank you. I'll step back now.

Operator: [Operator Instructions] Your next question comes from the line of Frank Schiraldi from Piper Sandler. Your line is open.

Frank Schiraldi: Hi, guys.

Rodger Levenson: Frank. Hi, Frank.

Frank Schiraldi: Just wanted to go back to credit for a second. I totally get when I look at NPAs, delinquencies, net charge-off, linked quarter, that is really just driven by a couple of credits. However, you mentioned that those, I think the credits were already in the problem asset base. And I'm just trying to get a sense for what the main driver is in terms of the growth in problem assets linked quarter?

David Burg: Yes, Frank, I think what I would say in terms of problem assets is that we have, I think as we mentioned before, we have a pretty robust process where we look forward two years. We look at all of our maturities. We look at the underlying cash flows. And we really evaluate the entire portfolio. And I think we try to take a very rigorous approach looking at cash flows, looking at the environment, continuously updating our valuations. So I think, I would say this is -- I think, an indication more of a process rigor rather than the bad omen in the portfolio.

And, you know, to give you an example, I mean, there are, one of the increases this quarter was driven by a relationship where there are some specific short-term challenges, but when we look at the collateral, it's -- you know, we think that even based on updated valuations, we're at 50% to 60% of the value. So I think that's just an example of something that's there, but I think, again, more in the educational process.

Rodger Levenson: Yes, Frank, maybe just put a little more numbers around it. If you really look at the growth in the criticized loans and the problem loan category, there's three credits made up almost 70% of it. It was one larger relationship with David referred to, where there is -- our projects are very solid, but there's some stress in the sponsor's global cash flow that we're working through collaboratively and another project that we have, long-time customer, where there's some slowness and some leasing up of a completed construction project. That's really the driver of that pop that you see in the problem ones.

Frank Schiraldi: Thanks for that color. And then just in terms of -- I don't know if you want to put a two-finer point on it. I know in the past you talked about the 5 basis points in NIM compression for a given 25 basis point rate cut, obviously. There's some mitigation here with this hedging program. You know, I don't know if you were wanting to put a number around adjusted for the hedges, you know, what that could potentially look like going forward, or if that's something you're -- 2025 to do?

David Burg: Yes, Frank, I think we'll do that in 2025. But again, I think the important thing is the non-linearity of it. And our hedges start at 4.75%. And the lower we go, the more of an impact that is, that's number one. So I think we want to see a little bit how the cuts play out. Number two, obviously, the point I mentioned about pricing and our ability to be more aggressive depending on how many cuts come.

And number three is also with respect to our securities portfolio, that's an important mitigant to the asset sensitivity on the downside, because as you know that portfolio kicks off about $500 million of cash a year that we redeploy at about 4.5% higher. And so depending on how far rates go, you may have accelerated paydowns because that's mostly an MBS portfolio. So you also may have accelerated paydowns, and we have a large pickup as rates come down there. So I think there are a few puts and takes there, and really dependent on the trajectory of rates.

And that's why I think it makes sense for us to give that outlook next year as we see a little bit more about how things play out. So I think that 5 basis points was more for the first few cuts rather than something that you can extrapolate to the whole cycle.

Frank Schiraldi: Okay. And then just lastly, just wanted to ask about capital in terms of your profitability and growth trajectory, understanding the priorities, organic growth, and you know, you've done two larger size deals, still not too far in the rear view mirror. Just wondering if there's any updated thoughts around the potential of what you guys are -- as you look in the environment today of further bank M&A?

Rodger Levenson: Hey Frank, it's Rodger. I think you really hit on all the important points. We're seeing great progress on the optimization of the two big investments. If you look through last year and the first three quarters of this year, pretty consistently growing loans, deposits, fee income, and taking market share. But as you know, we were starting from a very low bottom, so we think there is a -- in terms of our position in the market more broadly. So we think there's still a lot of runway there to go. And as David said, particularly when you see some of the distractions that are going on in some of the larger players in our market.

In addition to that, we continue to heavily invest in talent. That's somewhat reflected in the NIE. And if you look at the year-over-year adds to staff that we've had across the organization, about two-thirds of those are in business-generating lines of business. Again, we're seeing opportunities that we've talked about from the pickup talent from other organizations. So we are investing very heavily in the business. We always keep an eye out for, you know, things that would be opportunistic, that we could help support those activities.

But I would reiterate that the bar for that for us would be very, very high because it would have to be considered in light of how that would impact our ability to continue to execute on the organic opportunity. So we're running hard at it. We'll see what comes along, but our focus continues to be primarily on organic growth from a bank standpoint.

Frank Schiraldi: Great. Okay. I appreciate all the color. Thanks, guys.

Rodger Levenson: Thank you.

David Burg: Thank you, Frank.

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

David Burg: Okay. Thank you very much. And thank you all for joining the call today. If you have any specific follow-up questions please feel free to reach out to Andrew or me. Rodger, Art and I will be attending conferences and investor meetings throughout the quarter and we look forward to meeting with many of you during the quarter. Have a great day.

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

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