WSFS Financial Q4 2023 Earnings Call Transcript

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January 26, 2024

There are 9 speakers on the call.

Operator

Hello, and welcome to the WSFS Financial Corporation 4th Quarter Earnings All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. I'd now like to turn the call over to your host for today, Mr. Art Bacci, Interim Chief Financial Officer. Sir, you may begin.

Speaker 1

Thank you. Good afternoon and thank you again for joining our Q4 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 website. With me on this call are Roger Levinson, Chairman, President and CEO Steve Clark, Chief Commercial Banking Officer and Sherry Krasinski, Chief Consumer Banking Officer. Before I turn the call over to Roger for his remarks on the quarter, I would like to read out our Safe Harbor statement.

Speaker 1

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 The risk factors included are our annual report on Form 10 ks 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. I will now turn the call over to Roger.

Speaker 2

Thank you, Art, and everyone else for joining us on the call today. Wissfest performed very well in the Q4 as we continue to demonstrate the strength and diversity of our business model. These results capped a successful 2023 with full year core earnings per share of $4.55 Core return on tangible common equity of 22.48 percent and a core return on assets of 1.38%. Each of these metrics exceeded 2022 levels. Highlights for the quarter and full year included Customer deposit growth of 3% linked quarter or 13% annualized.

Speaker 2

Growth occurred across our wealth and trust, Commercial and Consumer Businesses. Deposit mix remains strong with 31% of average deposits in non interest demand accounts. Loan growth of 1% linked quarter or 3% annualized. Full year customer deposit and loan growth of 2% and 7% respectively with a year end loan to deposit ratio of 77%. Core net interest margin of 3.99 percent for the quarter with interest bearing deposit beta at 44%.

Speaker 2

Core fee revenue growth of 6% linked quarter. Growth was driven by Wealth and Trust, Cash Connect and Capital Markets Businesses. Full year core fee revenue growth of 10% and core fee revenue ratio of 30 point 4% in the 4th quarter. The core efficiency ratio was 54.5% for the quarter, which included several favorable one time adjustments of approximately $4,000,000 for estimated incentive and employee benefit accruals. Excluding these adjustments, the core efficiency ratio would have been 56.2%.

Speaker 2

Asset quality remained stable. Net charge offs and problem loans were essentially flat to Q3 and NPAs ticked up 8 basis points. The balance sheet remains strong with ACL coverage of 1.35 percent and all capital ratios significantly above well capitalized levels. In summary, our franchise growth was facilitated by the continued optimization of our investments and highly unique competitive market position. We enter 2024 with strong momentum and look forward to continuing to execute on our 2022 to 2024 strategic plan.

Speaker 2

I will now turn it back to Art for commentary on our 2024 outlook and to facilitate Q and A.

Speaker 1

Thank you, Roger. I will now cover our outlook for 2024. Looking forward to 2024, we expect a full year core return on assets of around 1.20%. Our outlook assumes no interest rate cuts in 2024. This assumption is a different approach from our prior periods whereby we tied our interest rate outlook to the forward curve.

Speaker 1

Our analysis demonstrates the forward curve has been a poor indicator of actual interest rate changes. Additionally, Recent economic data along with comments from the Federal Reserve and European Central Bank officials have combined to temper market expectations for lower interest rates. We have also assessed our outlook assuming 3 interest rate cuts totaling 75 basis points, all in the second half of twenty twenty 4. Further information on our interest rate sensitivity is provided on Slide 10 of the supplement. Wissfizz's diverse business model provides management with multiple strategies to achieve our previously communicated goal of top quartile performance.

Speaker 1

Our favorable market position alone to deposit ratio of 77% and consistent cash flows from our securities portfolio enable us to opportunistically fund relationship based loans in our markets. Our multiple sources of core deposits provide us with favorable deposit costs and funding mix further contributing to our top tier net interest margin. Fee income contributes almost 1 third of our total revenue. Our fee based businesses continue to be increasingly integrated with our overall business model and all have significant growth opportunities because of joint relationships with our commercial and consumer customers, industry consolidation and potential non bank M and A activity. I will also point out that gradual declining interest rates potentially enhance financial results and capital positions than better equity and fixed income market performance, increased mortgage and asset securitization transactions and higher market valuations of our investment portfolio intangible book value as demonstrated during the Q4.

Speaker 1

Net charge offs are expected to be between 50 60 basis points of average loans for the year, primarily driven by start in New Lane as well as continued normalization of credit trends. Overall, our portfolio credit metrics were stable this quarter and our ACL coverage ratio is 1.35 percent of total loans and leases. Excluding the held to maturity securities and including acquisition credit marks, the ACL ratio stands at 1.64 percent of loans and leases. Further information on our ACL ratio is included on Slide 13 of the supplement. Finally, our strong capital position and earnings enable us to absorb unfavorable developments in the economy, to continue to invest in our franchise, capitalize on market opportunities and to take steps to further enhance shareholder returns.

Speaker 1

Thank you. And we will now open the line for questions.

Operator

Thank you. Your first question comes from the line of Michael Perito of KBW. Your line is open.

Speaker 3

Hey, guys. Good afternoon. Happy New Year. Thanks for taking my questions.

Speaker 4

Happy to do it.

Speaker 3

Obviously, a lot of great extra color around margin and rates in the deck. So appreciate that. Just to maybe Put some guardrails around it. So I guess first just looking at Slide 10 here, the 25 cut, the $9,600,000 NII impact. So I mean, I guess if we're just thinking kind of pure NIM here, just want to kind of sanity check my math, it would seem like every cut, All else equal, static balance sheet kind of moves the 3.80, 3.90 range down 5 bps, so like 3.75 to 3.85 and so forth.

Speaker 3

Would you guys generally agree with that or and that is incorporating the benefit of the off balance sheet hedging strategy. Is that all kind of correct or is there anything that would you would change?

Speaker 1

Mike, I think that's directionally correct. And I would just reiterate that's an annualized number. So if rates are Going to get reduced in the second half of the year, we clearly wouldn't feel that full impact in 2024.

Speaker 3

Correct. Yes. Okay. And is that the $380,000,000 to $3,000,000 I mean does that the additional hedges, the $250,000,000 that it says Approved for additional floors, would that potentially neutralize that range somewhat or is that kind of baked into that as well would you say?

Speaker 1

No, that's baked into that because any hedges we would put in would be would have to result in significantly lower rates. Today, the $750,000,000 we've done is at about a 4% SOFR rate. So clearly, there have to be a material drop in the SOFR for the hedges to kick in.

Speaker 3

Got it. That's great. Thank you. And then switching over to the fee side, obviously, a very strong quarter. A couple of comments in the deck, drove my attention.

Speaker 3

I was just loving like a layer deeper on them. With substantial growth opportunity on the wealth side And then a comment about cash connect and peer consolidation. Any obviously, you guys have double digit growth expectations for fees in which is pretty robust, but can you maybe give a few more specifics about where some of those opportunities are coming from and driving that assumption?

Speaker 1

Sure. So this is Art again, Mike. And one of the things that happened in the Q4, late Q3, Q4 is one of the largest players in the Cash Connect business exited the market and we've been able to pick up the clientele and we have continued to see inflows through the 1st and second quarter of 2024 in our pipeline from that situation, which is giving us a high degree of confidence that Cash Connect will continue to have some double digit growth into 2024 over 2023. And then on the well side, I mean a combination of our businesses are seeing very strong pipelines are Going into 2024, institutional trust businesses got a nice pipeline, including almost $100,000,000 of potential deposits that we're looking at. And then Increasingly, our wealth management business being integrated with our normal bank business and the referral activity we're seeing From both commercial and consumer banking is really giving us a great opportunity to continue to grow the AUM business as well.

Speaker 3

That's helpful, Art. Thanks. Just two more quick ones if I could. It seems like the consumer unsecured consumer charge offs We're pretty stable and remain in the range I think you guys have communicated. Just any broader commentary there were the data points have been so mixed, right?

Speaker 3

Like for example, Discover who's got a prime unsecured book saw an uptick in charge offs and delinquencies. Others have been more stable. We'll get a few more data points next week. But any updated thoughts around Unsecured consumer credit environment, particularly as it relates to your portfolio as we think about 24?

Speaker 5

Yes, I mean, I think

Speaker 1

if you this is Art again. If you strip out Upstart, we've seen the same thing. The charge offs have been really benign and stable on the unsecured. Upstart has been the one area where we've seen higher Secured upstart been the one area where we've seen higher levels of charge offs and that we believe was tied to some of the earlier cohorts that we booked and that is working its way through the system and we hope that in the first, second quarter that would start to decline. We've also We're not really materially adding to the Upstart portfolio.

Speaker 1

We've hit our concentration limits on unsecured. And so that is basically just replacing some runoff for this at this point of time and we will continue to evaluate the charge off experience, which could lead us to making other decisions.

Speaker 3

Got it. And then just lastly, obviously, The guide is very helpful in laying out how you guys are thinking about the year. The one thing that was kind of absent is just any incremental commentary around buybacks and just I know your model and your approach to it are pretty consistent all the time, but just any updated color or Board conversations that are happening about the buyback would be helpful just as we think about that moving forward.

Speaker 2

Hey, Michael, it's Roger. Nothing's changed with our capital return philosophy. And it's been our historic practice from a forward looking outlook or for our plan Only put in there the routine buybacks that we use to supplement the dividend. We continue to periodically evaluate Potentially higher buyback levels, but as you know, that's dependent upon the forward look of the economy as well as assessment of our balance sheet and where the share price is because we have a model that targets at least a 16% IRR. So we'll continue to evaluate that as those factors play out, but nothing different from our ongoing philosophy.

Speaker 3

Very good. Listen, thanks guys. I appreciate it. Have a great weekend. Talk soon.

Speaker 6

You too.

Operator

Your next question comes from the line of Freddie Strickland with Janney Montgomery Scott. Your line is open.

Speaker 7

Hey, good afternoon, everyone. Just wanted to start back on the sensitivity analysis for a second. Could there be some level of side there, just given the fact that that assumes a static balance sheet and you're clearly going to grow loans kind of within your guide. Just trying to think through and a little more detail about what happens with the margin if we as analysts do assume some level of rate cuts?

Speaker 1

Sure, Freddie. And I do think there is some upside. The position we have today has been consistent. Our asset Over a long period of time, it certainly has benefited us when rates have gone up and even through multiple rate cycles, we have consistently put out a top quintile net interest margin. The opportunities Because we have a lot of leverage to pull kind of exist in a couple of areas.

Speaker 1

1, some of our betas If rates were to start to decline, could be better than we anticipate. But right now, our view is that there's still a lot of banks out there with high loan to deposit ratios and some liquidity concerns. And so they're keeping rates higher than maybe we would and we will We have the ability to basically defend our market position and go after those competitors. Secondly, I think that the declining rate environment could very well trigger increase mortgage and other type of asset backed securitizations and refinancing of corporate debt, which would give our institutional trust business a nice kick in terms of further deposit growth and a lot of that is tends to be non interest bearing deposits. So those are just a couple of levers that could really work to our benefit as 2024 progresses.

Speaker 7

Understood. That makes a lot of sense. And I guess along those same lines, can you remind us of where you feel like DDAs could end up over the next couple of quarters? I think I peg them at about 31% of average deposits Today, does that glide down into the high 20s? Or what are your assumptions on the level of non interest bearing deposits over time?

Speaker 1

Yes, I think we've got the 30% rate targets probably kind Normalization for us and on average it's been pretty consistent. It might have some volatility from quarter to quarter because of the trust deposits. But when you look at the average, it has been about 30 and that's kind of the pre pandemic level. So we feel pretty comfortable at 30 is a good area. And again, if rates decline and market securitization activity picks up, that could increase actually.

Speaker 7

Got it. And then just one last question for me on expenses. I know your guide mentions continued investment in the franchise. Are there any initiatives in particular that could move expenses up more earlier versus later in the year? And any detail you can give on any either technology initiatives or hiring or anything along those lines, what's driving some of those expenses?

Speaker 2

Fetti, this is Roger. I don't think there's anything one big thing of note. We're continuing to invest in the franchise. So yes, we have A fair number of technology investments that continue, which has been the process that was been going on for several years. And we're looking to hire and we have some businesses that have already have plans for hiring, most of that tied to potential revenue.

Speaker 2

And we could see more opportunity there if we It's additive to us to hire folks, as well as something like the small RIA investment that we made in 2023. So a combination of those things, we're looking to invest and grow the business. We think this is a time to move market share and to invest as others retrench. And that's really it's reflected broad based across all of the NIE categories.

Speaker 7

Understood. So supportive more of long term growth rather than any Particular initiative or new product line or anything like that?

Speaker 2

That's an accurate assessment.

Speaker 3

Got it. Thanks so much. I'll step back in the queue.

Operator

Your next question comes from the line of Russell Gunther with Stephens. Your line is open.

Speaker 4

Hey, good afternoon, guys. Art, I appreciate all the margin. Hey, Roger. I appreciate the discussion around the NIM. Maybe and particularly sensitizing to the 3 cuts.

Speaker 4

So in that scenario, what do you guys assume your deposit data does on the way down. It sounds like from broader comments you made being conservative there, but curious what's baked into that three cut sensitivity?

Speaker 1

Well, obviously if freight start to go down, we would recalibrate our beta. We kind of initially think early on the beta would be fairly low again because of the competitive environment. We do have opportunities. We have product, Money market products that are tied to an index, so if the index declines obviously our rates will go down. We've done some exception pricing primarily with some public money and commercial money that could be repriced down.

Speaker 1

But on the consumer side, There continues to be a fair amount of competition in the market and so we believe that's probably going to be a slower decline. Now If that were to change, clearly we could lower our rates, but that's our assumption is the competitive market will require us to continue to provide some premium on deposits protect our franchise.

Speaker 4

Okay. I appreciate that, Art. And then, if you could, just as a follow-up, remind us The amount of index deposits you have?

Speaker 1

The amount of indexed deposits, is that what you Sid Russell,

Speaker 4

if you have it. No problem. It's really

Speaker 1

in the money market. Let us get back to you, Russell, on that.

Speaker 4

I appreciate that. No problem. And then just last one for me guys, the 2024 outlook again with the stable rates. Any risk to the Fee guide, if you were to sensitize the 3 cuts, I mean, it sounds like the cash connect is really a market share gain opportunity. But just thinking through that double digit target in the 3 cut scenario as well, how do you see that playing out?

Speaker 1

I think potentially 3 rate cuts certainly would increase the value of fixed income AUM and potentially have an upside in the market, which would increase AUM and we're building in like a 3% market based AUM growth. So that could potentially increase if the markets were to go up. As I mentioned previously, some rate decreases could enhance the securitization market and lead to further corporate debt refinancings, which would benefit our institutional trust business.

Speaker 4

Okay. That's very helpful. Thank you guys for taking my question.

Operator

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

Speaker 5

Hi, guys. Hi, Frank.

Speaker 8

Just on the

Speaker 5

Cash Connect business, trying to get a sense Given the pickup in business here in the Q4 and potentially into the current year, Is this obviously a double digit growth year over year, it's got a pretty good starting jumping off point. But when I think about just growth off 4Q levels. I mean, is there enough low hanging fruit where you could see double digit growth off of 4Q levels in 2020 or how are you thinking about growth from here, I guess, for Cash Connect?

Speaker 1

I think given the volume that's in the pipeline from the Providers of ATM services that are moving from that other competitor, there's potential for some That was low double digit growth from the Q4.

Speaker 4

Okay.

Speaker 2

I think the other thing is, Frank with the cash connect, it's Roger. With some of this consolidation also comes some pricing power for us, which could be a tailwind as we pick up some business as well.

Speaker 5

Okay. Yes, I was going to ask about returns in that business. The ROA looks like it got a pretty good boost. I don't know if that's sustainable and if you even can see further RNA ROA pickup In 2024 where that business could again be accretive to the bottom line ROI?

Speaker 2

Yes. As you know, we've and you hit on it. Historically, over time, Cash Connect has been accretive to the overall ROA and We're getting back to those levels. We went through a period of significant investment in some product and some technology and And the maturation of that combined with this opportunity in the traditional bailment business, we're getting some scale and some pricing power and we think There's every opportunity for us to have it continue to be accretive to overall corporate ROA in the near term.

Speaker 1

Yes, Frank. We pretty much saw bottoming of the ROA in the Q1 this year and between the 1st and Q4, the ROA has increased 2 50%. So with additional volume being added in the first half of next year, we would expect that ROA to continue to move up. Okay, great.

Speaker 5

And then Art, just on the AUM linked quarter, the growth noted, Obviously, a lot of that was market driven, but just wondering if you have net flows you've seen in AUM From a customer standpoint over the last couple of quarters?

Speaker 1

Yes. We saw a little bit more outflow in the Q4. So we're pretty much breakeven through the 1st three quarters, which was a big improvement from prior years because we were still integrating Brenmar Trust and there was a lot of client change in some advisor departures. So we saw 4th quarter a little bit more departure and some of that just tied to spend What we're seeing customers using up more assets in order to just maintain lifestyle given the higher inflation rate and higher rates whereby they're buying houses and instead of financing and paying all cash.

Speaker 4

Okay.

Speaker 5

And then just lastly, sorry if I missed it, but the uptick in NPA is obviously off Pretty low base, but what was what drove that primarily?

Speaker 6

Hey, Frank, this is Steve Clark speaking. That was really 2 Specific loans, 1 in the multifamily sector, this particular multifamily was master leased to a co living operator who declared bankruptcy. So that sponsor is working to reposition that property into more of a traditional multifamily. The other was in our legacy healthcare book, The elder care frankly facility just did not recover from COVID. So, they were the 2 specific loans, 1 in multifamily, 1 in legacy elder care.

Speaker 3

Okay.

Speaker 5

And then are either of those additions still current or these are 90 days past due and NPAs?

Speaker 6

They're both NPAs.

Speaker 8

Okay. All

Speaker 5

right. I appreciate it. Thank you.

Speaker 1

Thanks, Frank.

Operator

Your next question comes from the line of Manuel Nieves with D. A. Davidson. Your line is open.

Speaker 8

Hey, good afternoon. Does the fee guidance include any acquisitions And would any I think you have some interest there and would any so would any acquisitions be on fee side be it would all be added, correct?

Speaker 1

Yes, Minu, this is Art. Any M and A would be additive. We have not baked in anything into our guidance for M and A.

Speaker 8

And what's your appetite on the fee side?

Speaker 1

We continue to look at opportunities namely across our fee businesses and we did do the transaction in 2023 and we have a couple of other things we're looking at, but we're just looking at it, nothing definitive right now.

Speaker 8

Okay. And there was a little bit of elevated pay down activity in commercial. Do you have any View on how that continues? And can you just talk about loan growth across the year?

Speaker 6

Emmanuel, Steve Clark again. So last year, year over year, we grew loans across all segments about 7%. We believe mid single digit for 2024 is attainable, again across all segments, C and I, CRE, Consumer with our Spring EQ partnership and residential mortgage as we made a strategic decision to hold more on balance sheet. Focus certainly is still C and I both in the commercial bank and our small business bank. Elevated payoffs in that C and I segment in the 4th quarter really revolve around 3 transactions that totaled almost $80,000,000 In the hospitality space, 2 of our sponsors sold their assets and the 3rd refinanced And that resulted in some unplanned significant reductions in C and I.

Speaker 6

The rest of the reduction was line activity at year end with companies clearing out their line of credit balances in preparation for year end.

Speaker 8

Thank you. I appreciate that.

Operator

Your next question is a follow-up from Freddie Strickland with Jamie Montgomery Scott. Your line is open.

Speaker 3

Hey, thanks. Just sorry, I had one

Speaker 7

quick follow-up. Just wanted to ask about the growth of the balance sheet and earning assets relative to loans. Think it's been, if my math is right, it's been relatively low even down a little bit the last couple of quarters. I mean, should we see the balance sheet continuing to stay overall relatively flat or does that start to grow a bit with some of the loan growth?

Speaker 1

Freddie, this is Art. I would say that the balance sheet would probably remain flat, generally flat. Remember, we have $500,000,000 a year roughly of cash flow coming off the mortgage backed securities and investment portfolio, which would fund about a 3.5% growth in the loan portfolio. So the loans would have to really grow significantly in order for us to start to grow the balance sheet.

Speaker 3

Got it. Thanks Art. That's it for me.

Operator

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

Speaker 1

Thank you for joining the call today. If you have any specific follow-up questions, Please feel free to reach out to Andrew or myself. Also Roger and I will be attending conferences and investor meetings throughout the quarter and we look forward to meeting with many of you. Have a nice weekend.

Operator

This concludes today's conference call. We thank you for joining. You may now disconnect your lines.

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