WSFS Financial Corporation (NASDAQ:WSFS) Q4 2023 Earnings Call Transcript

WSFS Financial Corporation (NASDAQ:WSFS) Q4 2023 Earnings Call Transcript January 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: 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. [Operator Instructions] 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.

Art Bacci: 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 Shari Kruzinski, 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. I will now turn the call over to Roger.

Rodger Levenson: Thank you, Art, and everyone else, for joining us on the call today. WSFS 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 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 the 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 one-time 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 Q3, and NPAs ticked up 8 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 enter 2024 with strong momentum and look forward to continuing to execute on our 2022 to 2024 strategic plan. I will now turn it back to Art for commentary on our 2024 outlook and to facilitate Q&A.

Art Bacci: Thank you, Rodger. 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. Our analysis demonstrates the forward curve has been a [poor] (ph) 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 2024.

The impact potentially reduces our net interest margin by approximately 15 basis points in 2024. Further information on our interest rate sensitivity is provided on Slide 10 of the supplement. WSFS’ 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 cost 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 have significant growth opportunities, because of joint relationships with our commercial and consumer customers, industry consolidation, and potential non-bank M&A activity.

I will also point out that gradual declining interest rates potentially enhance our 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 and tangible book value as demonstrated during the fourth quarter. Net charge-offs are expected to be between 50 basis points and 60 basis points of average loans for the year, primarily driven by Upstart and NewLane, 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% 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. 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.

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Q&A Session

Operator: Thank you. [Operator Instructions] Your first question comes from the line of Michael Perito of KBW. Your line is open.

Michael Perito: Hey guys, good afternoon. Happy New Year. Thanks for taking my questions.

Rodger Levenson: Happy to do it.

Michael Perito: Obviously, a lot of great extra color around margin and rates in the deck. So, I appreciate that. Just to maybe put some guardrails around it. So I guess first, just looking at Slide 10 here, the ’25 cut, the $9.6 million NII impact, so I mean, I guess if we’re just thinking kind of pure NIM here, just what kind of sanity check my math, it would seem like every cut, all else equal a 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 is. Would you guys generally agree directionally 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?

Art Bacci: 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.

Michael Perito: Correct. Yes. Okay. And is that the 3.80% — I mean does that — the additional hedges, the $250 million, 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?

Art Bacci: 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 million we’ve done is at about 4% SOFR rate. So, clearly, there have to be a material drop in the SOFR for the hedges to kick in.

Michael Perito: 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. I just love it like a layer deeper on them. With substantial growth opportunity on the Wealth side and then a comment about the Cash Connect and peer consolidation, any — obviously, you guys have double-digit growth expectations for fees in ’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?

Art Bacci: Sure. So, this is Art again, Mike. One of the things that happened in the fourth quarter — late third quarter, fourth quarter 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 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 Wealth side, I mean, the combination of our businesses are seeing very strong pipelines going into 2024. 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 business as well.

Michael Perito: That’s helpful, Art. Thanks. 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? The data points have been so mixed, right? 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 the unsecured consumer credit environment, particularly as it relates to your portfolio as we think about ’24?

Art Bacci: Yeah, I mean, I think — this is Art 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 higher levels of charge-offs in that. We believe it 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 run-off at this point of time, and we will continue to evaluate the charge-off experience, which could lead us to making other decisions.

Michael Perito: 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.

Rodger Levenson: Hey, Mike, it’s Rodger. 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 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.