Q1 2023 WSFS Financial Corporation Earnings Call
It'll be U S. S Financial Corporation first quarter 2023 earnings 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 at that time simply press star followed by the number one on your telephone keypad.
I'd now like to turn the call over to your host for today, Mr. Dominic Caruso, Chief Financial Officer, Sir you may begin.
Thank you, Brian and thanks to all of you for taking the time to participate on our call today.
With me on this call are Rodger Levenson, Chairman, President and CEO Art Bacci, Chief wealth Officer.
Steve Clark, Chief commercial banking officer, and Sherry Krzyzanowski, Chief Consumer banking officer.
Before I begin with remarks on the quarter I would like to read our safe Harbor statement.
Our discussion today will include information about our managements 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 these 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, and our most recent quarterly reports on Form 10-Q, as well as other documents we periodically file.
<unk> with the Securities and Exchange Commission.
All comments made during today's call are subject to the safe Harbor statement.
Good afternoon, and thank you again for joining our first quarter 2023 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's website.
The strength of the with this franchise with demonstrated in this unique quarter.
As a result of our relationship based banking model concentration risk management and diversified fee revenues.
First quarter core <unk> percent was 229% and core ROA was 127%.
Given the significant noise and disruption throughout the industry during the quarter I will first share details and perspectives on the strength and composition of our customer deposit base liquidity capacity and capital position.
Followed by additional details on our financial performance in the quarter.
Okay.
Shown on slide four our customer deposit franchise is very diversified with significant deposits from our consumer branch network commercial small business trust and wealth lines of business with our bank average balance per account of $33000.
We also have granular concentrations with no more than 5% of deposits sourced from any one industry.
73% of our deposits are insured and protected with 64% FDIC insured and another 9% collateralized or otherwise protected.
Noninterest bearing demand deposits comprised 33% of customer deposits with no and low interest demand, making up 53%.
From year end 2022 through March 8th deposits were flat and declined 1% in the full quarter.
Presented on slide eight at quarter end, we utilized $1 1 billion of wholesale funding, which is only 6% of total balance sheet funding and 13% of totally readily available funding.
Leaving seven $9 billion of readily available and secured borrowing capacity.
This capacity equates to 50% of customer deposits and almost double uninsured and unprotected deposits.
Okay.
Capital levels remain well above well capitalized.
Illustrated on slide 12, we provide details of our investment portfolio and capital levels.
When reducing capital by the effective OCI, which includes the full impact of the HTM portfolio.
All regulatory bank ratios remain above well capitalized.
Detailed on slide five gross loans grew $230 million in the quarter with $155 million from commercial and $68 million from our spring EQ consumer partnership.
Our consumer loan growth moderated in the quarter as the upstart portfolio was flat at $237 million or 2% of total gross loans.
Our commercial loan composition is highly diversified in both C&I and owner occupied portfolio and the CRE investor and construction portfolio as seen on page six.
The first quarter net interest margin was 425% with loan yields increasing 44 basis points to 264, 2%.
As more than 50% of total loans are variable.
The interest bearing deposit beta increased to 28%, resulting in total deposit cost of 80 basis points in the quarter with no and low interest demand deposit cost of 23 basis points.
With over 25 discrete fee lines of business businesses, our products core fee revenue was $63 $7 million with 5% growth versus the first quarter of 2022 with.
With our core fee revenue ratio of 25, 8%.
Wealth management contributed just under 50% of total core fees.
Excluding fee income from BMT insurance advisors, which was sold in <unk> of 2022, the year over year fee growth was 7%.
The core efficiency ratio in the quarter was 53, 9% demonstrating continued discipline in cost management.
Expenses in the quarter included a $2 $3 million benefit for a couple of non reoccurring items in salary and benefits.
When excluding these items the efficiency ratio would be approximately 55%.
Yeah.
Overall asset quality remained relatively stable as shown on slides 10 and 11.
Problem assets continued to post Covid positive trends in NPA has remained stable and at historical lows.
Delinquencies increased 32 basis points to 83 basis points of gross loans.
Primarily due to two C&I long term problem loan relationships with one of these relationship still accruing.
Although these relationship pertained to long term care facilities or.
Our overall long term care portfolio is approximately $130 million in total outstandings or 1% of gross loans.
In the quarter net charge offs increased to 40 basis points of average gross loans driven by slightly higher commercial portfolio charge offs.
Normal maturation of both newly in leasing and the upstart portfolio, along with lower recoveries in the quarter.
Provision in the quarter was $29 million.
Which include includes a $17 $3 million increase in the ACL.
Due to economic forecast and uncertainty along with new loan originations and other credit trends in the portfolio.
The ACL coverage ratio increased 11 basis points to 128%.
And as 150% when including estimated remaining credit marks on the acquired portfolio.
Clearly there are rapidly changing dynamics in our industry impacting the financial results and this uncertainty is expected to continue.
As we typically do each year, we will provide an update to our full year outlook. When we report our second quarter earnings.
In summary.
Overall, we had a solid performance in the quarter.
With a strong ending balance sheet.
And while uncertainty remains in the macroeconomic outlook and near term market conditions with.
<unk> is well positioned to continue to focus and execute on our strategic plan objectives and to serve our current customers and communities.
We will now open the lines to answer any questions you may have.
At this time, if you'd like to ask a question press star followed by the number one on your telephone keypad. If you would like to withdraw your question again press Star one.
Your first question is from the line of Frank Schiraldi with Piper Sandler Your line is open.
Hi, guys.
Just wondering if you could domenic talk a little bit about.
And.
Recognizing that you we'll update guidance next quarter, but any sort of color you can give on thoughts.
Sure.
Thoughts on deposit betas, just given what we saw in the industry late in the quarter and what you guys saw a mix shift in the quarter.
Sure. Thanks Frank.
Clearly deposit betas had stepped up in the quarter to 28% that's slightly higher than the run rate expected at the earlier stages of the year our outlook at the beginning of the year suggested that deposit betas would end 2023 in the high Thirty's.
Given the disruption and the higher rate environment, it's possible that those deposit betas and in the mid to high Forty's, but it's still clearly early in the year.
Okay.
Okay, and Thats interest bearing deposit beta correct.
That is correct okay.
And then Joe.
Just if you can share with us.
I know you've given the trust business, there's some nuances too.
Your deposit base.
I'm wondering if you could maybe talk a little bit about the noninterest bearing portion of the deposit base.
And where you see.
Don't know if you can talk to.
What <unk> seen early here in the second quarter.
But just curious what your thoughts are on.
Maybe.
Continuing to outflows, there where you could see maybe these levels stabilizing.
Percentage of total deposits.
Sure Frank So I would say, we continue to see opportunity overall to grow the trust deposit business, but it is.
<unk> by flows and capital markets and given the disruption in the rate environment and the liquidity environment those have slowed.
Much of that is noninterest bearing however, some are and we would expect to continue to be competitive and look for opportunities to grow.
But similar to the market conditions in the near term it may be a little bit difficult to predict the pace of new deals coming to market in the deposits from that business, but overall, we believe we are well positioned to grow our market share and increased deposits overtime.
And then and then just lastly, if I could just given some of the uncertainty you spoke to in the industry at large.
What are your any any updated thoughts on putting.
Capital to work through organic growth and how you.
How that sort of stacks up against.
Further buybacks here in the near term.
Sure as we've said in the past when we think about our capital return philosophy. We first look through the lens of the economic and credit environment, then look to fund organic growth and inorganic growth and then to the extent there is excess capacity, we would return that to shareholders.
Given the environment. We're in we continue to evaluate that macroeconomic and credit environment and will typically as we do take a quarter to quarter basis for those share repurchases.
It continues to be opportunity for organic loan growth as seen in the quarter and we will continue to serve our customers retain our customers and grow where we feel appropriate but we believe we have the capacity to do that.
Okay.
Okay, Alright, great. Thank you.
Thanks Frank.
Your next question is from the line of <unk> Strickland with Janney. Your line is open.
Hey, good afternoon.
Anthony.
Thanks for the detail on the deck on liquidity.
I understand it correctly, you have $4 2 billion of capacity at <unk> based on currently pledged securities and then that $2 1 billion is unpledged flexible. So there's $6 3 billion total capacity that they told me is that right.
That's right. That's the distinction we have made to differentiate between what's readily available and what we could do over time to increase our capacity if needed.
Got it.
And given that do you expect that you will continue to utilize wholesale funding just be a broker.
FH youll be borrowings on the balance sheet.
That's the trajectory higher.
From here.
Of that.
Clearly that will be driven by net loan growth and we do expect the investment portfolio to continue to cash flow at $50 million a month, so that will fund some.
Some of the loan growth, but to the extent loan growth is greater than that and depending on deposit trends, we would utilize wholesale funding and typically we would be opportunistic across the various sources based on rate.
What we focus on more recently was.
Broker Cds given the advantage we have on the rate side, there, but we would leverage all lending sources as appropriate.
Got it and then just one last one for me just trying to interpret.
Where we see provision going from here and I understand you guys will provide updated guidance next quarter, but yes, I understand the economic factors change this quarter, but does that mean provision continues to be around this $30 million a quarter number all else equal or has that changed now factored in and we see provision potentially normalize.
Back to something around fourth quarter number.
Yes, so it's a good question I think as you know.
The ACL model incorporates forecast itself I think it has captured the current level of economic uncertainty and forecast, but that could change by the quarter. It will primarily be driven by the net loan growth and mix in the portfolio. This quarter was relatively outsized as we stepped up from a one.
One 7% ACL coverage to the 128, we feel good that that represents the risk identified in the forecast that we're using.
From here on out, it's really going to be driven on that economic forecast and the net loan growth.
Got it that makes sense to me thanks for taking my question.
Thanks Penni.
Your next question is from the line of Tim Switzer with K B W. Your line is open.
Alright. Thank you for taking my question I'm on for Mike Perito.
Hi, Tim.
I had a quick follow up on kind of the credit talks there.
It seemed like a lot of the charge offs. This quarter was driven by your consumer portfolio such as upstart can you talk about the expected impact of that normalization continues like where net charge offs could drift from here at least the impacts from.
Those select consumer portfolios.
Sure. The first thing I would clarify though is they still continue to be relatively small in the charge off Paul.
But because they are maturing portfolios.
They had stepped up over the last few quarters, we would expect upstart and new lane leasing from here to be relatively stable.
And then really driven by.
The larger portfolios.
Okay were you, saying you expect the charge offs to be stable or the size of those portfolios.
The size of the portfolios.
Okay, Alright, that's understood and.
On the Securities portfolio have you guys seen any opportunities to maybe reposition it a little bit or sell some parts. When you get some rate volatility maybe it gives you an opportunity to sell and redeploy into itself.
There is something like that.
Sure Great question and as a reminder, we continue to evaluate that portfolio and in the second quarter of 2022, we did reposition about $1 billion from <unk> to HTM. We continue to monitor at this point in time, it would be NPV negative and given our <unk>.
To fight in the forecast that we're using.
From here on out, it's really going to be driven on that economic forecast and the net loan growth.
Got it that makes sense to me thanks for taking my questions.
Thanks Penni.
Your next question is from the line of Tim Switzer with <unk>. Your line is open.
Liquidity position and capital positions were comfortable with the investment portfolio cash flowing at this point in time.
Alright. Thank you for taking my question I'm on for Mike Perito.
Okay. That's all for me thank you.
Hi, Tim.
Thank you Tim.
I had a quick follow up on kind of the credit talks there.
Your next question is from the line of Russell Gunther with Stephens. Your line is open.
It seemed like a lot of the charge offs. This quarter was driven by your consumer portfolios such as upstart.
Hey, good afternoon guys.
Wanted to ask on <unk>.
On the loan growth outlook and appetite, whether yours has changed at all.
Can you talk about the expected impact of that normalization continues like where net charge offs could drift from here at least the impact from those.
And if youre seeing any opportunity from a commercial lender lift out perspective as perhaps.
Those select consumer portfolios.
Sure. The first thing I would clarify though is they still continue to be relatively small in the charge off Paul.
Some peers with dialed back expectations.
Struggle a bit.
Hey, Russell this is Steve Clark speaking, so I would say broadly we remain open for business.
But because they are maturing portfolios.
They had stepped up over the last few quarters, we would expect upstart and new lane leasing from here to be relatively stable.
And we certainly continue to entertain both C&I and CRE opportunities.
I would say the focus is on supporting our customer base and certainly the bar is higher in the CRE space.
And then really driven by.
The larger portfolios.
Okay were you, saying you expect charge offs to be stable or the size of those portfolios.
But we believe.
Staying relationship focused.
The size of the portfolios.
When there is an opportunity it has to be a meaningful new relationship coming to us and.
Oh, Okay, alright, that's understood and.
On the Securities portfolio have you guys seen any opportunities to maybe reposition it a little bit or sell some parts. When you get some rate volatility maybe gives you an opportunity to sell and redeploy into something.
And we will entertain that.
In terms of talking to other potential relationship managers in the market.
There is certainly is disruption.
Have ongoing dialogue with <unk>.
Something like that.
Sure Great question and as a reminder, we continue to evaluate that portfolio and in the second quarter of 2022, we did reposition about $1 billion from <unk> to HTM. We continue to monitor at this point in time that would be NPV negative and given our <unk>.
Candidates across the footprint and we will just have to see where that leads.
Nothing definitive at this point in time.
Okay, Great I appreciate that.
Then.
Dominic are you guys contemplating any steps to kind of lock in asset sensitivity as we think about the potential for rates to go the other way maybe.
Liquidity position and capital positions were comfortable with the investment portfolio of cash flowing at this point in time.
Is it really at the beginning of the beginning of next year.
Yes, absolutely we continue to evaluate our interest rate risk profile, particularly the asset sensitivity and the potential for down rate environment, although that.
Okay. That's all for me thank you.
Thank you Tim.
Your next question is from the line of Russell Gunther with Stephens. Your line is open.
That may be a little longer than expected and we have taken some positions.
Hey, good afternoon guys.
Wanted to ask on <unk>.
On the loan growth outlook and appetite, whether yours has changed at all.
Some floors in place.
<unk> really managing more from an interest rate risk profile perspective, then significant changes in the overall asset sensitivity of the balance sheet.
And if youre seeing any opportunity from a commercial lender lift out perspective as perhaps.
Okay.
Some peers with dialed back expectations.
Got it.
Struggle a bit.
Helpful and then.
Just the last one for me I appreciate the thoughts around where interest bearing deposit betas may okay.
Hey, Russell this is Steve Clark speaking, so I would say broadly we remain open for business.
Up.
Are you guys able to share kind of what the March margin was and kind of where the cost of deposits exited the quarter.
And we certainly continue to entertain both C&I and CRE opportunities.
I would say the focus is on supporting our customer base and certainly the bar is higher in the CRE space.
Sure I can share.
In the materials show, an 80 basis point cost of deposits that ended.
March just under 1%.
But we believe.
Staying relationship focused.
Okay.
Okay great.
When there is an opportunity it has to be a meaningful new relationship coming to us and.
Right. That's it for me guys. Thanks very much.
Thanks Joseph.
And we will entertain that.
Your next question comes from the line of Emmanuel Novice with D. A Davidson your line is open.
In terms of talking to other potential relationship managers in the market.
Okay.
There certainly is disruption.
Hey, good afternoon.
Have ongoing dialogue with.
Hi management.
Yeah.
Candidates across the footprint and we will just have to see where that leads.
What should we expect out of.
Kind.
Medium term loss rates in the in the new land portfolio or the upstart portfolio.
Nothing definitive at this point in time.
Okay, Great I appreciate that.
Sure Yes.
And then.
Dominic are you guys contemplating any steps to kind of lock in asset sensitivity as we think about the potential for rates to go the other way.
Underwritten the upstart portfolio to the mid six levels and have reserved for those levels. They are just starting to approach the modeled levels as the portfolio matures.
As always the beginning beginning of next year.
Yes, absolutely we continue to evaluate our interest rate risk profile, particularly the asset sensitivity and the potential for a down rate environment, although that that may be a little longer than expected and we have taken some positions.
Similarly on the leasing portfolio, it's going to be.
Around 1%, if not just under and again as that total book matures.
It's getting too we would see those levels stabilized.
You were getting on the leases about 9% yields last quarter is there an update to that number this quarter.
Put some floors in place.
<unk> really managing more from an interest rate risk profile perspective, then significant changes in the overall asset sensitivity of the balance sheet.
Yes.
Believe slightly over 10% at this point.
On new leases.
Okay.
Got it.
On new business Okay.
Helpful and then.
And roughly what's the upstart.
Just the last one for me I appreciate the thoughts around where interest bearing deposit betas may.
Currently <unk>.
Currently it's about 16%.
Up.
Okay.
Are you guys able to share kind of what the March margin was and kind of where the cost of deposits exited the quarter.
I appreciate that.
Most of my other questions have been answered thanks.
Sure I can share.
Great. Thank Manuel.
In the materials show, an 80 basis point cost of deposits that ended.
Yes.
And with no further questions in the queue I would like to turn the conference back over to Mr. Caruso.
March just under 1%.
Yeah.
Thank you for joining the call today, if you have any specific follow up questions feel free to reach out to me directly.
Okay great.
That's it for me guys. Thanks very much.
Thanks Ross.
Also Roger and I will be attending conferences and investor meetings throughout the quarter and we look forward to meeting with many of you then have a good day.
Your next question comes from the line of Emmanuel Novice with D. A Davidson your line is open.
Okay.
Ladies and gentlemen, thank you for participating this concludes today's conference call you may now.
Hey, good afternoon.
And then.
What should we expect out of.
Kind of medium term loss rates in the in the new land portfolio or the upstart portfolio.
Sure Yes.
Underwritten the upstart portfolio to the mid six levels and have reserved for those levels.
They are just starting to approach the modeled levels as the portfolio matures.
Similarly on the leasing portfolio, it's going to be.
Around 1% if not just under and again is that total book matures as it's getting too we would see those levels stabilized.
Yeah.
You were getting on the leases about 9% yields last quarter is there an update to that number this quarter.
Yes, it's I.
I believe slightly over 10% at this point.
On the new leases.
Yes on new business Okay.
And roughly what's the upstart yields currently.
Currently it's about 16%.
Okay.
Yeah.
I appreciate that.
Most of my other questions have been answered thanks.
Great. Thank Manuel.
Yes.
And with no further questions in the queue I would now like to turn the conference back over to Mr. Caruso.
Thank you for joining the call today, if you have any specific follow up questions feel free to reach out to me directly.
Also Roger and I will be attending conferences and investor meetings throughout the quarter and we look forward to meeting with many of you then.
Have a good day.
Ladies and gentlemen, thank you for participating. This concludes today's conference call you may now disconnect.
Yeah.
Yeah.