Earnings Call Transcript - WSFS Q3 2024

Operator, Operator

Thank you for joining us for the WSFS Financial Corporation Third Quarter Earnings Call. All lines are muted to minimize background noise. We will have a question-and-answer session following the speakers' remarks. Now, I would like to hand the call over to Rodger Levenson, Chairman, President, and Chief Executive Officer. Please go ahead.

Rodger Levenson, Chairman, President, and CEO

Thank you, Ron, and thanks to everyone for joining us on the call today. Before we get started, I wanted to officially introduce the newest member of our executive leadership team, Executive Vice President and CFO, David Burg. As many of you know, David joined WSFS in mid-August following a 17-year career at Citigroup. During his short tenure with WSFS, he has demonstrated the leadership and skills to accelerate our growth and deliver shareholder value. We're thrilled to have him on the team. David?

David Burg, CFO

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 continues 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-priced 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, Operator

Thank you. We will now begin the question-and-answer session. Your first question comes from Russell Gunther from Stephens. Your line is open.

Russell Gunther, Analyst

Hey, good afternoon, guys.

Rodger Levenson, Chairman, President, and CEO

Hey, Russell.

David Burg, CFO

Hi, Russell.

Russell Gunther, Analyst

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, CFO

Of course, Russell. I’d be happy to provide that information. First, I want to take a moment to discuss our net interest margin compared to the previous quarter. We experienced a decline of 7 basis points. This decrease can be attributed to several factors: around 2 basis points from the update of our investment portfolio, a slight increase in non-accruals which accounted for 2 basis points, and higher deposit costs that contributed 3 basis points. It’s worth noting that the rise in deposit costs is starting to moderate. Regarding the hedge program you mentioned, we completed $1.2 billion last quarter; initially, we aimed for $1.5 billion but wrapped up the entire program this quarter. We now have approximately $1.5 billion in place, consisting of floor options that span six-month forwards with a 30-month term, striking at various levels, with the first triggers starting around 4.75%. The hedge program serves as a counterbalance to the asset sensitivity we face. As we move forward through this cycle and if further rate cuts occur, these hedges will help lessen the sensitivity we have highlighted. Previously, we indicated an expectation of about 5 basis points of net interest margin impact for a 25 basis point rate cut, and these hedges will provide some mitigation of that effect.

Russell Gunther, Analyst

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, CFO

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, Analyst

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, CFO

Yes, regarding Spring EQ, due to the previously announced sale, we had several provisions in the contract that included earnouts based on reaching certain origination volumes. Since we met our volume targets for this year, we earned about $2 million from that earnout. Future earnouts may occur, potentially one next year, but that will depend on the origination volume for that year, which is currently being discussed. As stated in the fourth quarter, we do not expect new originations. Following the sale, Spring EQ is reassessing its strategy and funding profile, and we are in talks with them about plans for 2025. We aim to provide an update on this in the January outlook.

Russell Gunther, Analyst

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

David Burg, CFO

Thank you.

Operator, Operator

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

Kate Ashley, Analyst

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, CFO

Yes, Kate, even though we noted an increase in some of our credit metrics, it's important to understand that the impact for this quarter was primarily due to a few problematic loans within certain relationships. These relationships were not unexpected; we have been closely monitoring them as they are part of our problem assets. We are actively working with the sponsors to find a path to resolution. Therefore, the effects we are seeing are part of the natural progression of these credits. The net charge-offs this quarter were mainly due to two commercial and industrial loans. One was for a suburban hotel property in suburban Philadelphia, and the other was another C&I loan within our footprint. This contributed to the increase in charge-off levels, which is why we feel confident in adjusting our full-year guidance to the lower end of the range. Again, we anticipated these developments and they do not come as a surprise to us. As you know, the first half of the year saw relatively low commercial charge-offs, and we even had a net release in the first quarter. We were aware that these figures would be uneven, and now we are witnessing some of that pipeline materializing in the process.

Kate Ashley, Analyst

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

David Burg, CFO

Thank you.

Operator, Operator

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

Sharanjit Cheema, Analyst

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, CFO

Yes, in response to your second question, we've taken proactive steps. Prior to the rate cut, we already decreased our CD pricing. Our main product was an 11-month CD, which we adjusted in pricing and shortened to six months. We have around $700 million in indexed CDs that will reprice automatically and about $4.5 billion in high yield or money market CDs at higher price points, and we've started making adjustments on those. We're working with our clients to manage that portfolio. Currently, our interest-bearing beta is 51, and the all-in rate is in the mid-30s. There will be a lag in deposit costs as we move down, but we plan to be proactive. For the upcoming 50 basis points of cuts, I expect our near-term beta to be in the high-teens or 20% for the fourth quarter. The beta for 2025 will depend on how quickly additional rate cuts occur. If there's a pause, that's one scenario, whereas multiple rapid cuts offer a different opportunity for us to be more aggressive. Additionally, we are experiencing some disruption in the market due to competitor dynamics, which presents an opportunity for us to gain market share and acquire clients. Our focus is not on managing for just one quarter but instead on strategically gaining market share to guide our actions and strategies.

Sharanjit Cheema, Analyst

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

Steve Clark, Chief Commercial Banking Officer

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, Analyst

Great. Thank you. I'll step back now.

Operator, Operator

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

Frank Schiraldi, Analyst

Hi, guys.

Rodger Levenson, Chairman, President, and CEO

Frank. Hi, Frank.

Frank Schiraldi, Analyst

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, CFO

Yes, Frank, regarding problem assets, we have a thorough process in place where we assess our portfolio by looking two years ahead. We examine all maturities and underlying cash flows, evaluating the entire portfolio robustly. Our approach involves closely monitoring cash flows and the economic environment, while continuously updating our valuations. I believe this reflects our rigorous process rather than being a negative sign for the portfolio. For instance, one of the increases this quarter was due to a relationship facing specific short-term challenges. When we evaluate the collateral, we find that based on updated valuations, we are at 50% to 60% of the value. This highlights our ongoing educational efforts.

Rodger Levenson, Chairman, President, and CEO

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 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 loans.

Frank Schiraldi, Analyst

Thank you for that insight. Regarding the earlier discussion about the 5 basis points of net interest margin compression for a 25 basis point rate cut, it's clear there are some mitigating factors with the hedging program. I'm curious if you could provide an estimate adjusted for the hedges on what the future impact might look like, or if that’s something we'll look at closer to 2025.

David Burg, CFO

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, Analyst

Okay. Lastly, I wanted to inquire about your capital regarding profitability and growth strategy. Considering your focus on organic growth and the recent significant deals you've completed, I’m curious if you have any updated insights on the potential for further bank mergers and acquisitions based on the current environment.

Rodger Levenson, Chairman, President, and CEO

Hey Frank, it's Rodger. I think you really touched on all the key points. We're making significant progress on optimizing our two major investments. When looking back at last year and the first three quarters of this year, we have consistently seen growth in loans, deposits, fee income, and market share. While we started from a low base, we believe there is still plenty of opportunity ahead. As David mentioned, especially considering the disruptions affecting some of the larger players in our market, we are also heavily investing in talent, which is partly reflected in the NIE. About two-thirds of our year-over-year staffing increases have been in business-generating areas. We're identifying opportunities, especially in attracting talent from other organizations, so we are investing significantly in the business. We remain vigilant for any opportunistic chances that could enhance our efforts, but I want to emphasize that any such opportunities would need to meet a very high standard, as they must support our ability to continue focusing on organic growth. We're dedicated to this strategy, and we will see what opportunities arise, but our main priority remains on organic growth from a banking perspective.

Frank Schiraldi, Analyst

Great. Okay. I appreciate all the color. Thanks, guys.

Rodger Levenson, Chairman, President, and CEO

Thank you.

David Burg, CFO

Thank you, Frank.

Operator, Operator

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

David Burg, CFO

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, Operator

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