Q2 2023 WSFS Financial Corporation Earnings Call
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Yeah.
Ladies and gentlemen, thank you for standing by walking to the Wilmington Savings Fund Society.
<unk> Financial Corporation second quarter earnings call I'd now like to turn the call over to your host for today, Mr. Dominic <unk> Chief Financial Officer, Sir you may begin.
Thank you Mani 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.
Steve Clark, Chief commercial banking officer, and Sharon Brzezinski, 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 with the Securities and Exchange Commission.
All comments made during today's call are subject to the safe Harbor statement.
Okay.
Good afternoon, and thank you again for joining our second 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.
Yeah.
We are pleased with the solid performance in the second quarter across all our businesses demonstrated by growth in loans deposits and fee revenue.
Combined with strong NIM capital and liquidity levels and.
And stable credit performance, we remain well positioned to compete in the current economic environment.
After sharing some details on the quarter I will provide an update to our full year outlook as we typically do with our second quarter earnings release.
Second quarter results included core EPS of $1 16 per share, which is a <unk>, 14% increase over prior quarter and year over year.
Core ROA of 141%, which is up 14 basis points over prior quarter and year over year.
And core <unk> as a percentage of assets, which declined slightly to two 2%.
In the quarter loans grew $197 million or nearly six 5% annualized.
C&I led almost half of the volume growth followed by CRE as construction loans converted to commercial mortgages.
On an annualized basis consumer partnership spring EQ continued moderated growth at 27%.
Residential mortgage grew 23% from our competitive arm products.
And new land leasing grew 9%.
Deposits grew $380 million or 10% annualized primarily from our wealth and capital markets Trust businesses.
While trust deposits can sometimes be short term in nature. They are typically no or low cost deposits and demonstrates the diversity of the overall deposit franchise.
Noninterest bearing deposit mix was 34% and the loan to deposit ratio held flat from prior quarter at 75%.
Yeah.
Net interest margin was $4, one 1% with loan yields of $6, 79% and total deposit costs of $1 one 6%.
Interest bearing deposit betas ended the quarter at 35% through the cycle.
While up 7% percentage points in the quarter the pace of beta slowed after increasing 13 percentage points in the first quarter.
Core fee revenue was up 6% or $3 $7 million over prior quarter.
And up 4% year over year, when normalizing for the sale of BMT insurance advisors that occurred at the end of <unk> 2022.
Growth in the quarter was from cash connect well.
Core banking fees.
The core fee revenue ratio increased to 27%, even as our NIM held about 4%.
The core efficiency ratio was 55, 5%.
When excluding growth in cash connect funding cost, which is more than offset in fee revenue.
Normalizing in the first quarter NIH for one timers that were discussed last quarter.
Costs were higher 2%, primarily driven by merit increases that occurred late in the first quarter along with some continued investment in technology enhancements.
Asset quality remains relatively stable in the quarter.
Problem assets increased slightly and remain at levels consistent with the average over the last year.
Delinquencies improved to 59 basis points and non performing assets held flat at historically low levels of 16 basis points.
Net charge offs increased slightly to $13 million.
Recent net charge off levels are attributable to growth in the new lane leasing portfolio and the maturation of upstart vintages.
Losses from these portfolios are expected to stabilize at these levels are.
Consistent with our underwriting and profitability expectations and have been provided for.
As such and consistent with the stable leading credit indicators across the other portfolios.
The ACL increased slightly by $2 $7 million.
The ACL coverage ratio remained flat at $1 two 8%.
And four 9% when including the estimated remaining credit marks on the acquired loan portfolio.
Okay.
Access to liquidity remains significant and.
And capital levels remain well above well capitalized.
When reducing capital levels by the effective OCI, which includes the full impact of the HTM portfolio.
All regulatory bank ratios remain well capitalized.
We have updated our full year outlook for our key metrics, which can be found on slide 13 of our supplement.
Our outlook reflects $1 25 basis point rate increase in July .
Followed by flat rates for the remainder of the year.
And a mild recession to begin in the second half of the year.
Our full year core <unk> is expected near $2 one zero percent.
With our full year core ROA around 125%.
Overall, our performance in the quarter demonstrated the resiliency and potential of our fee revenue businesses.
The benefits of our diversified deposit base.
And the strength of the balance sheet.
We are well positioned to continue to execute on our strategic plan.
And serve our markets as the largest locally headquartered community Bank and Trust company in the greater Philadelphia and Delaware region.
We will now open the lines to answer any questions you may have.
Yes.
Yes.
The floor is now open for your questions to ask a question at this time. Please press star one on your telephone keypad, if any point you'd like to withdraw from the queue. Please press star one again, we'll now take a moment to compile a roster.
Our first question comes from the line of Frank Schiraldi from Piper Sandler. Please go ahead.
Good afternoon.
Alright.
I wonder if.
Thank you mentioned that the noninterest bearing.
30, Pakistan all deposits.
And I think you noted that the trust.
Les than deposits.
Can sometimes be short term in nature.
Curious if you can talk a little bit about trends youre seeing or expecting there.
Maybe a little bit longer term on a quarter on the noninterest bearing side do you still see in.
In general our mix shift.
Out of noninterest bearing or that you know essentially offset by.
The trust business noninterest bearing.
S business.
Sure. Thanks, Frank overall I'll speak to trust first is that they continue to see opportunities in that business to raise short term deposits at low or no interest rates, but as we mentioned they can be short term in nature, so quarter to quarter. They may fluctuate in and would show up in in the noninterest bearing for the loan.
Interest bearing DDA accounts overall as a portfolio, we would expect the noninterest bearing to continued to climb as excess liquidity is consumed by our customers and customers continue to optimize.
Our deposit products and we believe we're well positioned to retain those deposits, but maybe through a money market account or a short term CD or potentially even move to AUM, if theyre looking for fed products.
Okay. So you do expect that 34%.
Shrimp by some some margin.
In coming quarters.
That is correct.
Okay.
And then if you could just talk about you mentioned the in.
In the Middle East you talked about.
Charge offs side.
C&I credits that had.
Our private events during the quarter, but one.
One of the people.
Any color there.
What.
That component was in terms of the.
Overall charge offs.
Yes, Frank this is Steve Clark speaking regarding the two commercial charge offs one was.
Our classified asset that had been classified for over a year.
Contractor in the HVAC space went through a bankruptcy sale that generated less than expected proceeds hence the charge offs.
<unk> was a fulfillment.
Company, providing automation equipment for warehouse distributions.
That client customer had.
A dispute with their largest customer over a change order, which resulted in severe cash flow difficulties. So two really unrelated occurrences and really I would view as unique circumstances.
Yeah.
Okay is that more of a driver of just trying to get in terms of size.
But more of a leasing.
The upstart portfolio, just maturing those losses coming through.
Driving the net charge off level is that more of a driver.
Two C&I credits in the quarter.
It's both as you mentioned and as we've referred to in our materials. There were these unique one one off.
Charge offs, but the maturation of new Lane and.
An upstart have driven net charge offs to these levels as we noted that 62% of the net charge offs are coming from newly in an upstart and are performing within the range of expectations that but because of the maturation in the vintages they've been growing over the last four quarters, and we expect them to stabilize around.
These levels going forward.
Okay.
Great and then just one last one if I could on the.
On the wealth side I believe you talked about working on that.
Hi.
The market drove the.
The increase this quarter can you just talk about.
Putting the market, leaving the market aside what in that customer flows look like in that business.
Hey, Frank This is art bacci, we've actually seen really three straight quarters of record inflows in AUM and I think that's attributed to the increased referrals going on between the commercial consumer and wealth businesses. It was as we have seen continue to see some outflows as you can imagine.
Just because spend rates with higher inflation people.
Asking for distributions.
Idiosyncratic events like this where distributions are made from trust.
So it's a slight.
Okay.
Slate.
<unk> core positive flow, but I'm really.
Positively looking at the future because the flows coming in it's just been growing pretty steadily over the last three quarters and we continue to see more in the pipeline going forward.
Okay and then.
If the market's up.
And <unk> when we see more of that flow through revenues and then <unk> all else equal.
Hello to look at it.
Yes, Q2 will drive Q3, but increasingly our billing with the <unk> acquisition is a little bit more complex, we have some that bill monthly some quarterly.
But but generally because we bill in advance we should expect the third quarter Duluth positive for us.
Okay, great. Thank you.
Thanks Frank.
Yes.
Our next question comes from the line of Michael Perito from <unk>. Please go ahead.
Hey, good afternoon, guys. Thanks for taking my questions.
Hey, Michael.
I just wanted to follow up on Frank's question quickly Dominic you mentioned, the 62% or so of the net charge offs came from newly in an upstart do you have the actual like charge off rate and in both of those portfolios that you expect to kind of stabilize moving forward.
Yes, we would expect upstart to be in around 6% on an annualized basis and new land to be around 2%.
Okay.
And when you say stabilize going forward I mean, how does that cause in the guidance Slide you guys mentioned, you assume a mild recession and in the back half of the year. Just does that is that elevated I guess to what would be you would expect to see in a non recessionary environment from a charge off perspective or is it not really material enough in either.
To read into it that much.
No well, it's impacting our ACL as in the first quarter, when we spoke to updating the economic forecast and the ACL model, but.
They are all performing relatively in the range of what we've underwritten. So most of the ACL increases forecast based on outperformance based at this point in time.
Okay.
Maybe transitioning from that line of questioning is as you think about kind of those loss rates normalized loss rates in those portfolios. The environment that you guys are assuming over the next six months to kind of the distance you've now put between the Bryn Mawr acquisition, you know could you maybe give us an update on how we should think about the mix of your loan portfolio has a target mix of your loan portfolio.
So going forward I remember years ago. After beneficial you guys were I had mentioned that.
You were still targeting to try to get that C&I backup to 50%, obviously consumers grown a lot. Since then there's been another deal what's changed can you maybe just give us some updated thoughts about how you think that mix should ideally look over the next handful of quarters. If you guys are kind of hitting your targets.
Yeah, Hey, Mike It's Roger.
I would say that as we've talked about in the past.
And longer term, we would like the mix to be 80% commercial 20% consumer and within that commercial bucket clearly C&I being a driver so little bit different than where we were several years ago because of the acquisitions were a little heavier on CRE, but what you should.
<unk> going forward and we were pleased with what we saw this quarter is they'll definitely be growth in the CRE portfolio, but we would expect more growth to come from the C&I book.
Yes.
Got it that makes sense Roger Thanks, and then just lastly for me and then I'll step back just.
The guidance update was helpful, particularly some of the exit run rates and I don't want to put the cart in front of the horse, but just as we as we think ahead I mean is it fair to think of those exit run rates is something that on the ROA of the P. P. NR rois something that overtime you guys you would hope at a more normalized positive environment. There there would be kind of upside to us.
Realize it's challenging to kind of put timing parameters around that now, but just kind of structurally as you think about your name and your profitability targets longer term is that a fair way to kind of think about those exit run rates are or would you say that differently.
No I think the way you described it is a fair assumption I would say.
Clearly interest rate environment dependent and that there would likely be some continued deposit beta lag into next year.
Into the early first quarter, but from then we would expect.
NIM expansion portfolio expansion to improve both margins and ROA from there. So I think the <unk> exit range is probably a decent indicator, but obviously dependent on a lot to play out economically in the second half of this year, yes, I would just add to that with the economic uncertainty going forward.
Credit as we've always said can be lumpy.
<unk> will play out over the next couple of years, and so all things being equal.
That's where we're at in terms of that Dominic described it credit may be a little bit of a wildcard depending upon the path of the economy going forward.
Got it.
Thank you guys, it's very helpful.
Thanks, Mike.
Our next question comes from the line of Betsy strict Glynn from Janney Montgomery Scott. Please go ahead.
Okay.
Thanks, Good afternoon everybody.
Just wanted to follow up on that last question. It sounds like if the fed were to do another 25 basis point hike. This week.
We potentially have another one in September and then stop.
Maybe it would be reasonable to expect the margin that's still potentially come off in 2024 over the course of the year.
If we assume fed funds remain flat is that right.
Yes, I don't want to get into specifics into 2024, but we.
With one we've assumed one rate increase tomorrow.
And there are in the rate forecast like I said, it really will come down.
<unk> liquidity trends.
Deposit betas.
And once those settle that we do have tailwind and the mix shift of our portfolio as we liquidate the investment portfolio and it migrates into loans.
And that should add some tailwind to expand margin from there again it of timing dependent on the economy.
Yeah.
Understood that makes sense.
Along that same line of questioning just wanted to touch on slide 12, I. Appreciate you putting out of it that we talk about the $1 billion in securities cash flow over the next 24 months.
Just trying to think about how that's going to flow through I mean should we think about that as roughly 125 million a quarter or is that run off more front end or backend loaded.
Trying to get a sense of where that can go particularly in the next couple of quarters as it relates to both increase the yield.
NCI can attack.
Sure that represents the cash flow from the investment portfolio, which to some extent into interest rate driven on prepaid speeds et cetera, but I think it's a fair assumption to assume it's relatively straight lined over the 24 month period and wood.
Mix shift from the two 3% yield to loan yields in the upper sixes, if not 7% depending on the rate environment.
Yeah.
Got it.
One last one for me should.
Should we see share repurchases continue in future quarters, just given where capital is and the size of the authorization or do you think you'll pause on that for now.
Yes, we discuss regularly we take it quarter by quarter view, where we evaluate our total capital position economic stress credit stress in the environment.
Anticipated growth in the portfolio and we believe based on where we are today that we would likely see in the third quarter share repurchases and capital return commensurate with.
The levels, we had in the first and second quarter, but we take a quarter to quarter view and we can provide another outlook on the next call.
Sounds good thanks, Tom.
Ill step back in the queue.
Thanks.
Yeah.
Our next question comes from the line of manual Nevadas from D. A Davidson. Please go ahead.
Okay.
Hey, good afternoon, just following up on those exits.
Returns those exit return ranges.
Yeah.
They include a mild recession.
If the recession was pushed back even further would you be above those ranges or or at the high end of the range.
Yeah.
Yes, it's fair.
Your question I think the mild recession suggests that there is very limited impact to our outlook other than what we've already incorporated into the ACL.
I think the mild recession is captured within the ranges that we're given.
And then to the extent a recession is.
It doesn't show up maybe it's at the high end.
But of course, it would be dependent upon the type of recession, we have which is yet to be determined.
Shifting to.
Do you have an update on deposit betas.
Kind of what's in the assumptions for the NIM.
Yeah sure. So just to clarify through the cycle today in June we had a 35% deposit betas, we talked about this in the first quarter call that we.
At our year end deposit betas to be around 45% I think that holds in this outlook.
We have seen them slow down a bit.
But given the fast increases will have to play that out, but we do have some capacity for deposit betas to increase the second half of the year within the NIM forecast.
Do you have kind of a.
Our jumping off point for third quarter deposit costs, while I think June NIM.
Kind of help with that.
Modeling.
Yeah sure so our second quarter interest.
Customer funding cost was $1 75 for a total customer funding at 116 that was the June average and Thats in the material are step off in the month of June was $1 84.
And for interest bearing and then $1 23 for total customer funding.
And that represents a 35% deposit beta.
Okay.
Okay I appreciate that.
Thank you I'll step back into the queue. Thanks.
Thank you Daniel Thank you.
Our next question comes from Russell Gunther from Stephens. Please go ahead.
Good afternoon, guys I just had a follow up on hey, Dominic on the on the loan growth discussion.
We're just how you'd characterize the updated guide is that.
Mid to upper so the upper single digit reflective of the strength and resolved in the first half of the year kind of in that range and you'll see the back half moderating or do you think we can kind of continue at this clip.
How would you frame that.
Hey, Russell Steve Clark.
The updated guidance mid to high I think really reflects a couple of things that reflects yes, our performance in the first quarter and first half of the year, our pipeline, which really has rebounded from the end of the first quarter, where we had some significant production and our pipeline reduced to.
Down to kind of the low $200 million. That's a 90 day weighted average pipeline, it's back up to $300 million at the end of the second quarter. So.
Devin.
Significant activity and I really think our outlook reflects our position kind of in the greater Philadelphia market.
As I mentioned the largest locally.
Managed independent bank and.
Our our focus is on this market and our larger bank competitors are focused across the country.
So.
We're taking care of customers and we're taking advantage of opportunities that are presented to us in the current macro environment.
I appreciate that.
A follow up in terms of those opportunities are you guys seeing the ability to recruit.
<unk> lending talent.
From some of your competitors given.
The position we're in.
That a driver.
<unk>.
Growth going forward or how would you characterize.
The opportunities up there.
So yes, we are.
Attracting talent from some of our local competitors.
Those additions.
Production.
<unk> from them arent baked into our outlook. So that's an upside.
So here in the third quarter, we expect to.
Announce an onboard several new adds to the team and we continue to entertain discussions and.
We're frankly very selective in who we add to the team, it's a pretty high bar.
To join the the commercial banking team at WSI FES.
Understood. Okay. I appreciate that and then the other is just a follow up on the capital return discussion I appreciate the quarter by quarter look and some comments on where the <unk> buyback could look.
You're kind of right around that 35% total payout that you guys tend to think about are there a bogey that we should think about those dominant going forward that would you.
You would want to see materialize.
Before kind of increasing beyond.
Youre more normal targeted payout.
Sure I think first would be.
To the extent there is a recession and the severity of it followed by the impact on credit performance that would be the biggest bogie in the meantime, we are well capitalized we're positioned well to compete as I mentioned.
We're positioned to be able to return.
Targeted level of of capital on a quarterly basis from there, we'll reassess as we always do.
Okay.
Great Alright, guys Thats. It for me thanks for taking my questions.
Thanks Ross.
Okay.
Hmm.
Thank you and with no further questions in queue I would now like to turn the conference back over to Mr. Can do so.
Thank you for joining the call today.
Do 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.
Yes.
Thank you ladies and gentlemen, this does conclude today's call. Thank you for your participation you may now disconnect.
Yeah.