WSFS Financial - Q3 2024

Transcript

Operator (participant)

Thank you. I'd now like to turn the call over to Rodger Levenson, Chairman, President, and Chief Executive Officer. Sir, you may begin.

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 Financial Corporation in mid-August following a 17-year career at Citigroup. During his short tenure with WSFS Financial Corporation, 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 (EVP and CFO)

Thank you, Rodger, and thank you everyone for joining our Q3 twenty twenty-four 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 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 to our financial results. WSFS continued to demonstrate the strength of our franchise and diverse business model during the Q3. 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 thirtieth, 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 Q3 of 2023. The Q3 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 the successful completion of a 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 Q3 of 2023, 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 Q3. 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 Q4. We're currently evaluating 2025 volumes with the company.

Core non-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 seven basis points from 2Q24. 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 our previous outlook that did not include any rate cuts. In addition, we updated our estimate for 4Q NIM to be 3.70-3.75%. 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 1.20-1.25%.

This change is consistent with the sensitivity that we provided previously, that each twenty-five basis points reduction in the Fed funds rate would reduce ROA by approximately three 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 twenty twenty-five in January with the release of our Q4 twenty twenty-four financial results. In summary, despite the economic uncertainty, WSFS continues to grow and deliver strong results in the Q3.

We remain well positioned to execute on our strategy and produce 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 (participant)

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. Your first question comes from the line of Russell Gunther from Stephens. Your line is open.

Russell Gunther (Managing Director and equity research analyst)

Hey, good afternoon, guys.

David Burg (EVP and CFO)

Hey, Russell.

Operator (participant)

Hi, Russell.

Russell Gunther (Managing Director and equity research analyst)

I appreciate the update to margin expectations, and understandable we'll 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 points hike impact to the NIM, would be?

David Burg (EVP and CFO)

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 seven basis points, and when you think about that seven 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 two basis points. We had a little tick-up in non-accruals, which was two basis points, and then higher deposit costs was three 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.

As you know, the program was initially the strategy was for $1.5 billion. We completed the whole program this quarter. 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. They basically strike at different levels. They kick in at different levels, but the first ones start to kick in around 4.75%. 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 continue to go through the cycle, if we have additional cuts, that'll mitigate some of the sensitivity that we provided.

You know, we provided our previous guidance, as you know, was about five basis points of NIM for twenty-five basis points of rate cut, and these hedges will mitigate that effect somewhat.

Russell Gunther (Managing Director and equity research 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 Q4 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 2025, you know, a lot of market share and unique market share gains occurred in 2024. What's a decent type of growth rate for that fee revenue item?

David Burg (EVP and CFO)

Yeah. So, with respect to that line item and, you know, 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 twenty twenty-five and the impact of interest rates on 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 (Managing Director and equity research analyst)

Okay. 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 (EVP and CFO)

... Yeah, 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 earn-outs 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 earn-out of about $2 million. The future earn-outs then potentially maybe one next year, but it'll depend on the volume of originations for that year, and that is something that is under discussion now. You know, as we mentioned in the Q4, 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.

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

Russell Gunther (Managing Director and equity research analyst)

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

David Burg (EVP and CFO)

Thank you.

Operator (participant)

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

Kathleen Ashley (VP and Equity Research Analyst)

Hi, good afternoon. This is Kate, on for Kelly.

David Burg (EVP and CFO)

Hi, Kate.

Kathleen Ashley (VP and Equity Research Analyst)

So going back to the guide, so appreciate that the charge-offs are lower than what was previously expected, but also mentioned some lumpiness from the commercial charge-offs. So, with that move to NPA, like, how should we be thinking about potential related NCOs off that?

David Burg (EVP and CFO)

Yeah, Kate, I think that... I think 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- and 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 our 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 Q1, and we knew that these were going to be uneven, and so now you're seeing some of that pipeline coming through the process.

Kathleen Ashley (VP and Equity Research Analyst)

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

David Burg (EVP and CFO)

Thank you.

Operator (participant)

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

Sharon Ji (Analyst)

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

David Burg (EVP and CFO)

Yeah. 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 had an eleven-month CD product, which was our main product. We reduced pricing on that, and then we've also shortened the tenor on that from eleven 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, you know, that portfolio.

On the way down, as you said, our all-in 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. But, you know, 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 Q4. 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 in rapid succession, you know, 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 really not trying to manage for one quarter, but we're trying to manage for strategic market share gains, and that's, you know, how we'll behave and strategize about this.

Sharon Ji (Analyst)

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

Stephen Clark (Chief Commercial Banking Officer)

Yeah, 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're-

... 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.

Sharon Ji (Analyst)

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

Operator (participant)

Again, if you would like to ask a question, please press star one on your telephone keypad. Your next question comes from the line of Frank Schiraldi from Piper Sandler. Your line is open.

Frank Schiraldi (Managing Director and Senior Research Analyst)

Hey, guys.

David Burg (EVP and CFO)

Frank.

Frank Schiraldi (Managing Director and Senior Research Analyst)

Just wanted to go back to credit for a second. You know, I totally get when I look at NPAs, delinquencies, net charge-offs, 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 (EVP and CFO)

Yeah. Frank, I think, I think what I would say in terms of problem assets is that, we have, you know, 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, and I think we try to take a very rigorous approach of looking at cash flows, looking at the environment, and continuously, you know, updating our valuations. So I think I would say this is, I think, an indication more of a process rigor rather than, you know, rather than a bad omen in the portfolio.

And you know, to give you an example, I mean, there 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, you know, it's you know, we think that even based on updated valuations, we're at 50%-60% of the value. So I think that's just an example of something that's there, but I think, again, more an indication of a process.

Rodger Levenson (Chairman, President, and CEO)

Yeah. Frank, I just maybe just put a little more numbers around it. If you really look at the growth in the criticized loans, the problem loan category, it. There's three credits made up almost 70% of it. It was one larger relationship, which David referred to, where there's our projects are very solid, but there's some stress in his 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 in 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 (Managing Director and Senior Research Analyst)

Okay. Thanks for that color. And then, just in terms of, I don't know if you want to put too fine a point on it. I know in the past you talked about the five basis points and NIM compression for a given twenty-five basis point rate cut. Obviously, there's some mitigation here with this hedging program. You know, I don't know if you wanted 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 going to 2025 to do.

David Burg (EVP and CFO)

Yeah, Frank, I think we'll do that in 2025. But again, I think the important thing is the non-linearity of it. And, you know, 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. You know, 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, you know, a large pickup as rates come down there. So, you know, I think there are a few puts and takes there and really dependent on the trajectory of rates, and that's why, you know, 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, you know, I think that five basis points was more for the first few cuts rather than something that you can extrapolate, you know, to the whole cycle.

Frank Schiraldi (Managing Director and Senior Research Analyst)

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

Rodger Levenson (Chairman, President, and CEO)

Hey, Frank, it's Rodger. I think you really hit on all the, you know, the important points. You know, 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's 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, you know, 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 to pick up 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, you know, 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.

You know, we'll see what comes, you know, along, but our focus continues to be primarily on organic growth from a bank standpoint.

Frank Schiraldi (Managing Director and Senior Research Analyst)

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

Rodger Levenson (Chairman, President, and CEO)

Thank you.

David Burg (EVP and CFO)

Thank you, Frank.

Operator (participant)

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

David Burg (EVP and 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 (participant)

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