WSFS Financial Corporation (NASDAQ:WSFS) Q1 2024 Earnings Call Transcript

WSFS Financial Corporation (NASDAQ:WSFS) Q1 2024 Earnings Call Transcript April 26, 2024

WSFS Financial Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for standing by, and welcome to the WSFS Financial Corporation First Quarter Earnings Conference 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. [Operator Instructions] Thank you. I’d now like to turn the call over to your host for today, Mr. Art Bacci, Chief Wealth Officer, Interim Chief Financial Officer. Sir, you may begin.

Art Bacci: Thank you, Rob. Good afternoon, and thank you for joining our first 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. With me on this call today are Rodger Levenson, Chairman, President and Chief Executive Officer; Steve Clark, Chief Commercial Banking Officer; and Shari Kruzinski, Chief Consumer Banking Officer. Before I turn the call over to Rodger for his remarks on the quarter, I would like to read our safe harbor statement. Our discussion today will include information about our management’s 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 the 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 may 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 the call over to Rodger.

Rodger Levenson: Thank you, Art, and everyone else for joining us on the call today. WSFS had a good start to 2024, continuing to demonstrate the strength of our franchise and diverse business model. Our first quarter results included a core earnings per share of $1.11, core return on tangible common equity of 19.2% and a core return on assets of 1.31%. Our results continue to reflect the benefits of the investments we are making in our company and our unique competitive market position. Highlights for the quarter included gross loan growth of 2% linked quarter or 7% annualized. This growth was spread across our commercial mortgage, consumer, and C&I books. Quarter-end customer deposits were up 3% linked quarter after excluding expected trust activity and a short-term commercial deposit withdrawal.

Average deposit balances increased 4.9% annualized linked quarter. Deposits remain well-diversified across our commercial, consumer, wealth, and trust businesses, with 30% of average deposits in noninterest-bearing demand accounts. The core net interest margin was 3.84% for the quarter, with interest-bearing deposit beta of 47%. While our average cost of funds increased 17 basis points during the quarter, the increase mostly occurred early in the quarter and the rate of increase in cost of funds declined meaningfully in March. Excluding the income from our equity position in Spring EQ of $3.5 million in the fourth quarter of 2023, core fee revenue increased 2.7% linked quarter. As a reminder, Spring EQ was acquired effective year-end 2023 and we will therefore no longer recognize income from this investment.

Our core fee revenue ratio was 30.3% in the first quarter. The core efficiency ratio stood at 58.6% for the quarter. Noninterest expenses in both the fourth quarter of 2023 and the first quarter of this year included a number of non-recurring adjustments. Normalizing for these items, expenses increased $7.2 million or 5% linked quarter with Cash Connect external funding costs representing $5.2 million of the increase. Cash Connect added 4,336 serviced non-bank ATMs during the quarter due to the previously discussed exit of a large industry participant. We anticipate opportunities for additional unit growth during the second quarter. Expenses were higher in the quarter due to one-time onboarding costs and increased use of external funding. Asset quality remains stable.

Problem loans and delinquencies were flat at 4.41% and 81 basis points of gross loans, respectively. NPAs declined to 33 basis points of total assets, primarily due to the resolution of two non-performing C&I credits. Net charge-offs decreased to 27 basis points of average gross loans, including a net recovery, excluding the upstart and leasing portfolios. The ACL coverage was 1.48% as we continued to build reserves for potential future credit losses. In summary, we remain well-positioned to deliver top-quintile financial performance in 2024. We are tracking well to the full year outlook communicated in January. Thank you. I will now have Art facilitate Q&A.

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Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of Russell Gunther from Stephens. Your line is open.

Russell Gunther: Hey, good afternoon, guys.

Rodger Levenson: Hey, Russell.

Art Bacci: Good afternoon.

Russell Gunther: I wanted to circle up on Cash Connect, and I appreciate some of the puts and takes you just discussed, Rodger. But can you guys share where the market share is mostly coming from, who the competitor is that left the space, how you kind of quantify for us what the market share gain opportunity can be? And then, you touched on this just a bit a moment ago, but how we should think about the modeling dynamics around related expenses?

Art Bacci: Yeah, Russell, this is Art. I think we’ve communicated previously that the participant that exited was U.S. Bancorp in the fourth quarter of last year. In aggregate, we’ve added somewhere close to 12,000 units between the first quarter and fourth quarter of last year. That’s probably, I’d say, three-quarters to 80% of what we think we will onboard. We’ve got a few more cash purchases in the process here in Q2. I think when you kind of look at some of the expenses and the lower profitability, I’d say, in the first quarter was just because of some of the transition that had to go on. And we sat on some additional non-earning cash in the vaults, as well as the fact that in order to make the transition smoother, rather than optimize where we source cash, we wound up just using our external funding source exclusively, so that the carriers were — there was no confusion of where the carriers would go to get cash.

As we move along here with these cash purchases, we’ll start to kind of optimize the usage of cash, which involves looking at distances between various vaults and the ATMs, so that, that will kind of bring us back down into more normalized mix of funding between WSFS and our external funding sources.

Rodger Levenson: Yeah, Russell, I would just add to that, as we’ve said historically, if you think about the profitability of the business, it should be accretive to the overall bank over time. And so, we feel like, as we move through this transition, we should return to those levels of profitability over the course of this year.

Russell Gunther: Okay, guys, thank you. That’s very helpful. And then, if I could just switch gears a bit with regard to WSFS getting out of the customer originations being on pause with Upstart, expectations for that portfolio to start to decline. Can you just talk a bit about the strategic shift there? And then, what, if any, impact you would expect this to have on your net charge-off guidance over time?

Art Bacci: Russell, this is Art. We really think that we’re well reserved for the losses that we will incur in the portfolio. And without further originations of any meaningful amounts, clearly, the provision under the CECL methodology will decline. But we do think we have a good handle on the charge-offs and that they will — we’ll probably see another couple of quarters of level charge-offs declining as the portfolio continues to shrink.

Rodger Levenson: Yeah, Russell, just as a reminder, on the first part of your question, the strategy, that was — the Upstart partnership was a strategy that was really driven by two dynamics. One, it did plug a gap in our consumer credit product offering, and it also was an opportunity for us to experiment somewhat with digitally originated customers to see if we could cross-sell into those. So, the combination, I would say, of getting to the size that we wanted to get to, seeing the credit performance, and candidly, it did not give us the kinds of returns on the cross-sell that we saw — that we expected, and that’s really the reason for the pause. I will just clarify that we still have the channel available to our customers, but we expect fairly modest originations. And overall, with the size of that portfolio and the total loan book, obviously does not have a material impact on our earnings.

Russell Gunther: Okay. Great. Rodger, thank you for that. And then just last one for me and I’ll step back. Again switching gears, could you guys just talk a bit about your M&A appetite here on the depository side, overall level of discussions or activity, and then an ideal profile of any potential partner?

Rodger Levenson: Yeah. So, Russell, really, that has not changed for us. As we’ve talked about for the last couple of years, after the significant investments we made with the Beneficial and Bryn Mawr franchises, we feel we’re very uniquely positioned in a great market for significant organic growth over time and extended time. And so we’re really not focusing on or contemplating any traditional bank M&A that would revolve around additional deposits. In addition, though, I would say, we continue to invest in the business, and we are seeing opportunities in both the wealth and the commercial areas to add talent as well as what you see happening in Cash Connect. So, we will continue to invest in the business if we see the opportunity for returns consistent with our business model. But traditional bank M&A, at this point is not in our line of sight.

Russell Gunther: Okay. Thank you, guys. I’ll step back. I appreciate you taking my question.

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

Rodger Levenson: Good afternoon, Frank.

Frank Schiraldi: Hey, good afternoon, guys. Just wanted to start with wealth management and commentary around the adjustment in deferred revenue driving a part of the decline. And just curious if you could talk through that in terms of, is this quarter a better run rate? Does that come back out? Or how to think about run rate here with that commentary around deferred revenue?