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WSFS Financial Corp
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Ladies and gentlemen, thank you for standing by. Welcome to the Wilmington Savings Fund Society Financial Corporation Second Quarter Earnings Call.
I'd now like to turn the call over to your host for today Mr. Dominic Canuso, Chief Financial Officer. Sir, you may begin.
Thank you, Mandeep, 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 Shari Kruzinski, 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 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 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.
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. We're 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 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 14% increase over prior quarter and year-over-year. Core ROA of 1.41%, which is up 14 basis points over prior quarter and year-over-year and core PPNR as a percentage of assets, which declined slightly to 2.2%.
In the quarter, loans grew $197 million or nearly 6.5% 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 NewLane 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 demonstrate the diversity of the overall deposit franchise.
Non-interest bearing deposit mix was 34% and the loan to deposit ratio held flat from prior quarter at 75%.
Net interest margin was 4.11% with loan yields of 6.79% and total deposit cost of 1.16%. 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 2Q 2022. Growth in the quarter was from Cash Connect, wealth and core banking fees. The core fee revenue ratio increased to 27% even as our NIM held above 4%.
The core efficiency ratio was 55.5%. When excluding growth in Cash Connect funding cost, which is more than offset fee revenue and normalizing the first quarter NII 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 lower levels of 16 basis points.
Net charge-offs increased slightly to $13 million. Recent net charge-off levels are attributable to growth in the NewLane 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 1.28% and 4.9% when including the estimated remaining credit marks on the acquired loan portfolio.
Access to liquidity remained significant and capital levels remained well above well capitalized. When reducing capital levels by the effective AOCI, 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 125 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 PPNR is expected near 2.10% with a full-year core ROA around 1.25%.
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 line to answer any questions you may have.
The floor is now open for your questions. [Operator Instructions].
Our first question comes from a line of Frank Schiraldi from Piper Sandler. Please go ahead.
Just on -- I wonder, Dominic, you mentioned the non-interest bearing 34% of total deposits and I think you noted that the trust related deposits can sometimes be short-term in nature. And just curious if you can talk a little bit about trends you're seeing or expecting there maybe a little bit longer-term than a quarter on the non-interest bearing side. Do you still see in general a mix shift at a non-interest bearing or is that potentially offset by the trust business, non-interest bearing deposits and the trust 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 and no interest rates, but as we mentioned, they can be short-term in nature. So quarter-to-quarter they may fluctuate and would show up in the non-interest bearing or the low interest bearing DDA accounts.
Overall as a portfolio, we would expect the non-interest bearing to continue to decline as excess liquidity is consumed by our customers and customers continue to optimize their 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 they're looking for Fed products.
Okay. So you do expect that 34% to shrink that by some margin in incoming quarters?
That is correct.
And then if you could just talk about, you mentioned in the release you talked about on the charge-off side two C&I credits that had credit events during the quarter. Just wondered if you could provide any color there and what that component was in terms of the overall charge-off picture?
Yes. Hey Frank, this is Steve Clark speaking. Regarding the two commercial charge-offs, one was a classified asset that had been classified for over a year. A contractor in the HVAC space went through a bankruptcy sale that generated less than expected proceeds hence the charge-off. The other 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.
Okay. Is that more of the driver of the -- just trying to get in terms of size and is it more the leasing and the Upstart portfolio just maturing and those losses coming through that are driving the net charge-off to that level? Is that more the driver or these two C&I credits in the quarter?
It's both. As you mentioned, and we -- as we referred to in our materials there were these unique one -- one-off charge-offs, but the maturation of NewLane and Upstart have driven net charge-offs to these levels. We -- as we noted that 62% of the net charge-offs are coming from NewLane and Upstart and are performing within the range of expectations that, but because of the maturation and the vintaging, 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 wealth side, I believe you talked about what the AUM being market-driven the increase in AUM this quarter. Can you just talk about any putting the market, leaving the market aside, what net 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 at WSFS. We have seen continue to see some outflows, as you can imagine just because spend rates with higher inflation, people asking for distributions. There's idiosyncratic events like deaths where distributions are made from trust. So it's a slight say core positive flow, but I'm really positively looking at the future because the flows coming in have just been growing pretty steadily over the last three quarters, and we continue to see more in the pipeline going forward.
Okay. And if the markets up in 2Q, then you see more of that flow through revenues and in 3Q all else equal, that, that the way to look at it just --?
Yes. Q2 will drive Q3, but increasingly our billing with the Bryn Mawr acquisition is a little bit more complex. We have some that bill monthly, some quarterly but generally because we bill in advance, we should expect the third quarter to look positive for us.
Our next question comes from the line of Michael Perito from KBW. Please go ahead.
I just wanted to follow-up on Frank's question quickly. Dominic, you mentioned that 62% or so of the net charge-offs came from NewLane and Upstart. Do you have the actual like charge-off rate in both of those portfolios that that you expect to kind of stabilize moving forward?
Yes. We would expect Upstart to be in around 6% on an annualized basis and NewLane to be around 2%.
Okay. And when you say stabilize going forward, I mean, how does that, because in the -- those guidance slide you guys mentioned, you assume a mild recession in the back half of the year. 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 direction 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 in the ACL model. But they're all performing relatively in the range of what we've underwritten. So most of the ACL increases forecast based, not performance based at this point in time.
Okay. And 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. Can you maybe give us an update on how we should think about the mix of your loan portfolio or the target mix of your loan portfolio going forward? I remember years ago after beneficial, you guys were -- had mentioned that you were still targeting to try to get that C&I back up to 50%. Obviously consumer's grown a lot since then. There's been another deal, a lot'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?
Yes. Hey Mike, it's Rodger. I would say that as we've talked about in the past, in longer-term, we would like the mix to be 80% commercial, 20% consumer. And within that commercial bucket, clearly C&I being the driver, it's a little bit different than where we were several years ago because of the acquisitions were a little heavier on CRE, but what you should expect going forward and we were pleased with what we saw this quarter is it'll definitely be growth in the CRE portfolio, but we would expect more growth to come from the C&I book.
Got it. That makes sense, Rodger. 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 think ahead, I mean is it fair to think of those exit run rates as something that on the ROA and the PPNR ROA, something that over time you guys, it would hope in a more normalized deposit environment, there would be kind of upside to, I realize it's challenging to kind of put timing parameters around that now, but just kind of structurally as you think about your NIM and your profitability targets longer-term. Is that a fair way to kind of think about those exit run rates or would you cite it differently?
No. I think the way you've described it is a fair assumption. I would say, it's 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 4Q exit range is probably a decent indicator but obviously depending on a lot that play out economically in the second half of this year.
Yes. I would just add to that that with the economic uncertainty going forward, credit as we've always said can be lumpy and will play out over the next couple of years. And so all things being equal, that's where we're at in terms of how Dominic described it, credit may be a little bit of a wild card depending upon the path of the economy going forward.
Our next question comes from the line of Feddie Strickland from Janney Montgomery Scott. Please go ahead.
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 and we potentially have another one in September and then stop. It would maybe be reasonable to expect the margin to still potentially come up in 2024 over the course of the year if we assume Fed funds are being flat. Is that right?
Yes. So I don't want to get into specifics into 2024, but we -- with one -- we've assumed one rate increase tomorrow in the rate forecast. Like I said, it really will -- would come down to liquidity trends deposit betas. And once those settle though we do have tailwinds in the mix shift of our portfolio as we liquidate the investment portfolio and it migrates into loans. And that should add some tailwinds to expand margin from there. Again, it all timing depended on the economy.
Understood. That makes sense. And along that same line of questioning, just wanted to touch on Slide 12. Appreciate you putting that in the deck. 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? Just trying to get a sense of where that can go particularly in the next couple quarters as it relates to both increased yield and AOCI coming back.
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 would mix shift from a 2.3% yield to loan yields in the upper sixes, if not sevens, depending on the rate environment.
Got it. Just one last one for me. Should we see share repurchases continue in future quarters just given where capital is and the size of the authorization? Can you think you'll pause on that for now?
Yes. As we discuss regularly, we take a quarter by quarter view where we evaluate our total capital position, economic stress, credit stress in the environment and 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, Dominic. Hold on. I'll step back in the queue.
Thanks, Fed.
Our next question comes from the line of Manuel Navas from D.A. Davidson. Please go ahead.
Hey, good afternoon. Just following-up on those exit returns, those exit return ranges, they include a mild recession. Would if the recession was pushed back even further, would you be above those ranges or at the high end of the range?
Yes. It's a fair question. I think the mild recession suggests that there's very limited impact to our outlook other than what we've already incorporated into the ACL. So I think the mild recession is captured within the ranges that we're given. And then to the extent a recession is 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 and kind of what's in the assumption for the NIM?
Yes. 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 expected 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 Fed increases, we'll have to play that out. But we do have some capacity for our deposit betas to increase the second half of the year within the NIM forecast.
Do you have kind of a jumping off point for third quarter deposit costs or like a June NIM to kind of help with that modeling?
Yes. Sure. So our second quarter interest of customer funding cost was a 1.75% for a total customer funding at 1.16%. That was the June average, and that's in the material. Our step off in the month of June was a 1.84% and for interest bearing and then 1.23% for total customer funding, and that represents the 35% deposit beta.
Okay. Okay. I appreciate that. Thank you. I'll step back into the queue.
Thanks, Manuel.
Thank you.
Our next question comes from Russell Gunther from Stephens. Please go ahead.
Hey, good afternoon, guys. I just had a follow-up on the --
Hi.
Hey Dominic. On the loan growth discussion more just how you characterize the updated guide. Is that mid to upper, so the upper single-digit reflective of the strength and results in the first half of the year, kind of in that range and you see the back half moderating, or do you think you can kind of continue at this clip? How would you frame that?
Hey Russell, I'mSteve Clark. So yes, the updated guidance mid to high, I think really reflects a couple things. It 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 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 getting significant activity. And I really think our outlook reflects our position kind of in the Greater Philadelphia market as Dominic mentioned, the largest locally managed independent bank. And 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. And as a follow-up in terms of those opportunities, are you guys seeing the ability to recruit commercial lending talent from some of your competitors given the position you're in? Is that a driver of growth going forward? Or how would you characterize the opportunity set there?
So yes, we are attracting talent from some of the local competitors. Those additions production from them aren't baked into our outlook, so that's an upside. So here in the third quarter, we expect to announce and 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 commercial banking team at WSFS.
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 comments on where the 3Q buyback could look. You're kind of right around that 35% total payout that you guys tend to think about. Are there bogies that we should think about though, Dominic going forward that would -- you would want to see materialize before kind of increasing beyond your 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 bogey. In the meantime, I -- we are well capitalized. We're positioned well to compete as I mentioned. And we're positioned to be able to return our targeted level of capital on a quarterly basis. From there, we'll reassess as we always do.
Thank you. And with no further questions in queue, I would now like to turn the conference back over to Mr. Canuso.
Thank you for joining the call today. If you have any specific follow-up questions, feel free to reach out to me directly. Also, Rodger 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.
Thank you. Ladies and gentlemen, this does conclude today's call. Thank you for your participation. You may now disconnect.