Q4 2023 WSFS Financial Corp Earnings Call

Participants

Steve Clark; Executive Vice President, Chief Commercial Banking Officer; WSFS Financial Corp

Presentation

Operator

Hello, and welcome to the WSFS Financial Corporation fourth quarter 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 during this time, simply press star one. 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.

Thank you. Good afternoon, and thank you again for joining our fourth 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 website.
With me on this call are Rodger Levenson Chairman, President and CEO, Steve Clark, Chief Commercial Banking Officer, and Sherry presents ski 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. 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, and I will now turn the call over to Roger.

Thank you, Art, and everyone else for joining us on the call today. With this performed very well in the fourth quarter as we continued 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% and a core return on assets of 1.38%. Each of these metrics, a scheme exceeded 2022 levels.
Highlights for the quarter and full year included customer deposit growth of 3% linked quarter or 13% annualized growth occurred across our Wealth and Trust, commercial and consumer businesses. Deposit mix remained 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% for the quarter, with interest bearing deposit beta at 44%. 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 30.4% in the fourth quarter. The core efficiency ratio was 54.5% for the quarter, which included several favorable onetime adjustments of approximately $4 million for estimated incentive and employee benefit accruals. Excluding these adjustments, the core efficiency ratio would have been 56.2%. Asset quality remained stable. Net charge-offs and problem loans were essentially flat to Q2 three and NPAs ticked up eight basis points. The balance sheet remains strong, with ACL coverage of 1.35% 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 entered 2024 with strong momentum and look forward to continuing to execute execute on our 2022-2024 strategic plan.
I will now turn it back to Art for commentary on our 2024 outlook and to facilitate Q&A.

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 there is a different approach from our prior periods, whereby we tied our interest rate outlook to the forward curve. 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 three interest rate cuts totaling 75 basis points all in the second half of 2020 for the impact potentially reduces our net interest margin by approximately 15 basis points in 2020.
For further information on our interest rate sensitivity is provided on Slide 10 of the supplement with Visa's diverse business model provides management with multiple strategies to achieve our previously communicated goal of top quartile performance. Our favorable market position a loan 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 one-third of our total revenue. Our fee-based businesses continue to be increasingly integrated with our overall business model and all has significant growth opportunities because of joint relationships with our commercial and consumer customers, industry consolidation and potential nonbank M&A activity. I will also point out that gradual declining interest rates potentially enhanced our financial results and capital positions from better equity and fixed income market performance, increased mortgage and asset securitization transactions and higher market valuations of our investment portfolio and tangible book value. As demonstrated during the fourth quarter, net charge-offs are expected to be between 50 and 60 basis points of average loans for the year, primarily driven by upstart and new line as well as continued normalization of credit trends.
Our over our overall our portfolio credit metrics were stable this quarter and our ACL coverage ratio is 1.35% of total loans and leases. Excluding the held to maturity securities and including acquisition credit marks. The ACL ratio stands at 1.64% of loans and leases. Further information on our ACL ratio is included on Slide 13 of the supplement. And 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. Thank you, and we will now open the line for questions.

Question and Answer Session

Operator

Thank you. If you have a question, please press star one on your telephone keypad. For our first question comes from the line of Michael Perito of KBW. Your line is open.

Hey, guys, good afternoon. Happy New Year and thanks for taking my questions. Happy to do it up. You obviously have a lot of great extra color around margin and rates in the deck. So appreciate that. Just to maybe put some guardrails around it. And um, so I guess first, just looking at Slide 10 here, the $225 million cut the $9.6 million NII impact. So I mean, I guess if we're just thinking kind of pure name, here's why I'm kind of sanity check my math is it would seem like every cut all else equal static balance sheet kind of moves the three, 83, 90 range down five bps. So like three, 75 to 3.5 and so forth is would you guys generally agree directionally with that are on and that's it. And that is incorporating the benefit of the off balance sheet hedging strategy. Is that all kind of correctors or anything that would you would change?

Mike, I think that's directionally correct. And I would just reiterate that's a 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 2020 for Krak.

Yes, I'll address that.

The three 83.

I mean, does that the additional hedges, the $250 million that were approved for additional floors, would that potentially neutralize that range somewhat? Or is that kind of baked into that as well.

Would you say that that's baked into that because any hedges we put in would be you would have to result in significantly lower rates today?
The seven 50 we've done is at about a 4%, so for rate. So clearly there have to be a material drop in the in the so for the hedges to kick and Got it.

That's great.

Thank you.

And then switching over to the fee side, obviously a very strong quarter on a couple of comments in the deck. I drew my attention I'd just love it like a layer deeper on them with substantial growth opportunity on the wealth side.
And then a comment about Cash Connect and pure consolidation. Any obviously, you guys have double digit growth expectations for fees and '24, 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?

Sure. So this is Art again, Mike and one of the things that happened in the fourth quarter, late third quarter fourth quarter as 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 continue to see inflows through the first 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 and on the well side, I mean, a combination of our businesses, we are seeing very strong pipelines are going into 2020 for institutional trust businesses got a nice pipeline, including almost $100 million 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 businesses as well.

That's helpful. Thanks. And just two more quick ones, if I could. It seems like the consumer unsecured consumer charge-offs were 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. Ray, like, for example, to discover who just 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 the unconcerned unsecured consumer credit environment, particularly as it relates to your portfolio as we think about 24?

Yes. I mean, I think maybe this is already again, if you strip out upstart and we've seen the same thing, the charge-offs have been really benign and stable on the unsecured upstart been the one area where we've seen and 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, 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.

Got it. And then just just lastly on obviously, the the guide is very helpful in laying out how you guys are thinking about the year, you know, the one thing that was kind of absent is just any incremental commentary around buybacks and just some 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?

Hey, Mike, 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 to only put in there, the on the routine buybacks that we used to supplement the dividend, we continue to periodically evaluate and potentially on higher buyback levels. But as you know, that's dependent upon the forward look of the economy as well as assessment of our on 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 and as those factors play out, but nothing different from our ongoing philosophy.

Sorry, that listen, thanks, guys. I appreciate it and have a great weekend and talk soon.

Operator

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

Hey, good afternoon, everyone. Just wanted to start back on the sensitivity analysis for a second. Could there be some level of upside there, just given the fact that that assumes a static balance sheet and you're clearly going to grow loans and kind of within your guide. I'm 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?

Sure, Freddy. And I do think there is some upside on the position we have today has been consistent our asset sensitivity over a long period of time but it certainly has benefited us when rates have gone up and even through multiple rate cycles, we've consistently put out a top quintile on net interest margin, the opportunities because we have a lot of levers to pull kind of exist in a couple of areas. One, some of our betas, if rates were to start decline could be better than we anticipate but right now we're 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 in 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.
Understood.

That makes a lot of sense. And I guess along the same lines, can you remind us of where you feel like DDAs could end up over the next couple of quarters, and 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 noninterest-bearing deposits over time?

Yes, I think we've got a third of the 30% rate targets probably kind of reflective of 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 we that's kind of the pre-pandemic levels. So we feel pretty comfortable at a 30 is a good area. And again, if if rates decline and market securitization activity picks up, that could increase actually. So 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 and more earlier versus later in the year? And any any detail you can give on either technology initiatives or hiring or anything along those lines?

What's driving some of that Phase I studies, 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 we've 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, and we could see more opportunity there if we think it's additive to us too, to hire folks and as well as something like the small ROI 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.

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

That said, that's an accurate assessment.

Thanks so much. I'll get back in the queue.

Operator

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

Hey, good afternoon, guys at Argo. Appreciate all that marginally, Rogério.

I appreciate the discussion around the NIM. App maybe and particularly sensitizing to the three cut.

So in that scenario, what are you guys assuming your deposit beta does on the way down?

It sounds like some broader comments you made being conservative there, but I'm curious what's baked into that three cuts sensitivity?
So obviously, if the if rates start to go down, we would recalibrate our beta. We kind of initially think early on the beta would be fairly low. Again, we because of the competitive environment, we do have opportunities. We have product money market cap products that are tied to an index of the index declines. Obviously our rates will go down. We've done some exception pricing primarily with sort of public money and commercial money that could be repriced down. 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 can lower our rates, but that's our assumption is the competitive market will require us to continue to provide some premium on deposits to protect our franchise.

Okay. I appreciate that.

Art. And then if you could just as a follow-up, remind us the amount of index deposits you have the amount of index deposits. Is that what is said, Russell, on 50 if you have, you may ask your factory.
No problem tirelessly in the money.
Now to let us get back to your host, Russell, and I appreciate that. No problem.

And then just last one for me, guys.

The '24 outlook, again, with the stable rate and any risk to the fee guide, if you were to sensitize the three cuts, it sounds like Cash Connect is really a market share gain opportunity, but just thinking through that double digit target in the three cut scenario as well, how do you see that playing out I think potentially three rate cuts certainly would increase the value of fixed income AUM and potentially have an upside in the market, which would increase our AUM. And we're building in like a three for 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 and enhance the securitization market and lead to further corporate debt refinancings, which would benefit our institutional trust business.
Okay. That's very helpful.

Thank you, guys, for taking my questions.

Operator

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

As Frank just on the Cash Connect business, trying to get a sense some given the pickup in business here in the fourth quarter and potentially into a into the current year come out. Obviously, the double digit growth year over year has got a pretty good starting jumping off point but and when I think about just growth off of 4Q levels, I mean is there enough low hanging fruit where you could see some double digit growth off of 4Q levels in 2024. How are you thinking about growth from here, I guess for Cash Connect?
I think given the and 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 loads that was low double digit growth from the fourth quarter.
Okay.

I think plan and the thing is frankly, the Cash Connect, it's Roger come 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 Okay.

Yes, I was going to ask about returns in that business. The ROA liquid kind of pretty good boost. I don't know if that's sustainable.

And if you can can see further Harney borrow a pickup in 2024 where that business could again be accretive to the bottom line ROI?

Yes.

And as you know, we fund 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 as we went through a period of significant investment in some product and some technology and the maturation of that combined with this opportunity in the traditional banking business and we're getting some scale and some pricing power and we think and has every opportunity for us to have it continue to be accretive to overall corporate or away in the near term.

I think we pretty much saw a bottoming of the ROA in the first quarter this year between the first and fourth quarter, they are always increased 250%. So with additional volume being added in the first half of next year, you would expect that ROA to continue to move up.
Okay, great.

And then them, Art, just on the I know you had some linked quarter, the growth noted in obviously a lot of that was market driven, but just wondering if you have and that flows you've seen in AUM from a from a customer standpoint over the last couple of quarters?

Yes. We saw a little bit more outflow in the fourth quarter. So we're pretty much breakeven through the first three quarters of which was a big improvement from prior years because we were still integrating Braemar trusts and there was a lot of client change and some adviser departures. So we saw fourth quarter a little bit more departure than some of that just tied to spend where we're seeing some customers using up more assets in order to just maintain a lifestyle, given the higher inflation rate and higher rates whereby they're buying houses and instead of financing them paying all cash.
Okay. And then just lastly, sorry if I missed it, but the uptick in NPAs obviously off a pretty low base, but what was what drove that primarily.

Steve Clark

And Frank, this is Steve Clark speaking. That was really the two specific loans, one in the multifamily sector. This particular multi-family 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 multi-family. The other was in art legacy health care book of the ElderCare up, frankly, facility just did not recover from COVID. So on they were the two specific loans, one in multifamily, one in legacy elder care.

Okay. And then are either those additions or other those additions still current or these are 90 days past due and PA's?

Steve Clark

They're both NPAs.

Okay. All right. I appreciate it. Thank you. Thanks for the color.

Operator

Your next question comes from the line of manual NOVeA with DA Davidson. Your line is open.

Hey, good afternoon. Does the 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 would all be additive credit amendment versus or any M&A would be additive?

We have not baked anything into our guidance for M&A and what's your appetite on the fee side?
We continue to look at opportunities, namely across our fee businesses. And then 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, nothing definitive right now.

And then there was a little bit of elevated paydown activity in commercial. Do you have any view on how that continues? And and can you just talk about loan growth across the year?

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&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 CNI both in the commercial bank and our small business bank and elevated payoffs in that C&I segment in the fourth quarter really revolve around three transactions that totaled almost $80 million in the hospitality space. Two of our sponsors sold their assets and the third refinanced. And that resulted in some unplanned significant reductions in C&I. The rest of that reduction was line activity at year end with companies clearing out their line of credit balances in preparation for year-end.

Thank you. Appreciate that.

Operator

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

Hey, thanks. Just sorry, I had one quick follow-up. Tom, just wanted to ask about the growth of the balance sheet and earning assets relative to loans. I think it's been and 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 say stay overall relatively flat? Or does that start to grow a bit with some loan growth?

I'm afraid this is our I would say that the balance sheet would probably remain flat, generally flat. Remember, we have $500 million 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 loan loans would have to really grow significantly in order for us to start to grow the balance sheet.
Got it.

Thanks But thank you.

Operator

And with no further questions in queue. I would like to turn the conference back over to Art Bacci.

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 next, your line.