Wsfs Financial Corp Q4 FY2024 Earnings Call

Thank you for waiting. My name is Janine, and I will be your conference operator for today. I would like to welcome everyone to the WSFS Financial Corporation Fourth Quarter Earnings Call. Now, I will turn the call over to David Burg, Chief Financial Officer. Sir, you may begin.

Great. Thank you, Janine, and good afternoon, everyone, and thank you for joining our fourth 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 website. With me on this call are Rodger Levenson, Chairman, President and CEO; and Arthur Bacci, Chief Operating Officer. Prior to reviewing our financial results, I would like to read our safe harbor statement. Our discussion today will include information about 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 to our financial results. Our businesses continued to perform very well in the quarter, providing us with strong momentum moving into 2025. 4Q results included a core earnings per share of $1.11, core return on assets of 1.24%, and core return on tangible common equity of 16.55%. These results capped a successful 2024 with full year core earnings per share of $4.39, core return on assets of 1.26% and core return on tangible common equity of 17.83%. Our results for the quarter included the termination of a relationship with a long-standing Cash Connect client as a result of adverse events in the client's overall business portfolio. This termination resulted in a negative $4.7 million pre-tax impact to our financials, with a $2.8 million impact to core fee revenue and a $1.9 million impact to core noninterest expense. This event is an isolated incident that does not have a broader bearing on the Cash Connect business. The team acted proactively to protect our interests, and we will be working to recover this loss through insurance and other avenues where appropriate. Despite the Cash Connect event, WSFS delivered year-over-year core fee revenue growth of 7% in 4Q, powered by the Wealth & Trust business, which delivered a record fee quarter of $40 million on double-digit growth. For the full year 2024, the company achieved core fee growth of 19% relative to the prior year. Core net interest margin was 3.80% for the quarter, up 2 basis points linked quarter despite the interest rate cuts that we experienced in 4Q 2024. We actively managed our deposit repricing and achieved an interest-bearing deposit beta of 26% for the quarter, with an exit beta as of the end of December of 35%. Customer deposits grew 4% linked quarter driven by broad-based growth across the Wealth & Trust, Consumer, and Commercial business lines. Noninterest-bearing deposits grew 6% linked quarter and comprised 31% of average deposits in 4Q. Loans declined 1% linked quarter, driven by higher seasonal payoffs and business sales. On a year-over-year basis, loans grew 3%, with mid-single-digit growth in C&I and commercial mortgage. We continue to have a strong originations pipeline while our business sales present important opportunities for our Wealth business to expand client relationships. We finished the year with a loyalty deposit ratio of 77%, providing ample balance sheet flexibility and capacity to fund future growth. Our total net credit costs of $8.7 million decreased by $11.4 million from the prior quarter. This decrease reflects improvements in early-stage metrics of problem asset and delinquencies, as well as lower net charge-offs. Excluding our Upstart portfolio, which is in run-off, we recorded net charge-offs of 20 basis points for the quarter and 27 basis points for the year. Nonperforming assets increased quarter-over-quarter due to the migration of one relationship with two loans, but we believe these loans are well collateralized based on current valuations. Our ACL coverage at the end of the year remains at 1.48%. On the last page of the supplement, we provided our outlook for 2025 which assumes one 25 basis point rate cut in June. Overall, we expect to deliver another year of high performance and growth with a full year core return on assets of approximately 1.25%. We expect mid-single-digit loan growth in our Commercial portfolio and flat growth in our Consumer portfolio. Our Consumer portfolio will be impacted by the runoff of our Upstart and Spring EQ partnership portfolios which will be offset by WSFS originated loan growth. We expect continued broad-based deposit growth across our businesses in 2025, building on our recent momentum. Our outlook is for deposit growth in the low-single-digits from our very strong levels in 4Q. Our outlook for net interest margin is approximately 3.80% for the year, consistent with the level in 4Q, and this incorporates an additional interest rate cut in June. We will continue to focus on deposit repricing opportunities, and expect to finish the year with an interest-bearing deposit beta of approximately 40%. We continue to see strong momentum and growth opportunities in our fee businesses, which contribute almost a third of our total revenue. We expect our Wealth & Trust business to grow double digits as we capitalize on talent additions and technology investments made in 2024. Our overall fee revenue will grow mid-single-digits as Cash Connect revenues are expected to decline as a result of the interest rate reductions. As a reminder, this revenue decline is more than offset in Cash Connect's funding costs resulting in a higher profit margin for the business in 2025. Net charge-offs are expected to be between 35 basis points to 45 basis points of average loans for the year as the industry continues to see the normalization of credit. Our Commercial portfolio continues to perform well, but losses may remain uneven in 2025. We expect net charge-offs associated with Upstart to continue to decline as the portfolio runs off. And lastly, we will continue to leverage opportunities to invest in the franchise while prudently managing our expense base. While we may have fluctuations in our efficiency ratio quarter-to-quarter, our outlook for the full year is for an efficiency ratio of 60%. We're excited about the future and remain very committed to delivering high performance. Thank you, and we will now open the line for questions.

Our first question is from Russell Gunther from Stephens. Please go ahead.

Hey, good afternoon, guys.

Hey, Russell.

Hey, Russell.

I wanted to begin by discussing the expense outlook. I appreciate the efficiency guide for the year. Could you share your thoughts on how you are considering dollar expenses for the fourth quarter? While I understand there are fluctuations from quarter to quarter, what is included in the top-line guidance provided earlier? Additionally, as a follow-up, what margin of ARR are you assuming in the efficiency guide? I think in the past year, we were perhaps 90 basis points above the range you mentioned.

Thank you, Russell. I want to discuss our fourth quarter a little. As you mentioned, it was somewhat turbulent. We had the one-time Cash Connect impact of $1.9 million, and looking at the year-over-year comparison, we also saw increases related to interest rate hikes, which are reflected in our revenue. These are merely variable expenses that affect our expense line according to rates, balanced out by revenue. When adjusting for those factors, our yearly expenses increased by about 50%. A significant portion of that rise was in salaries and benefits, driven mainly by two things. First, at the end of the year in the fourth quarter, we adjust our incentive compensation to match our actual performance for the year. Secondly, we're investing in our business by increasing headcount. We added around 80 full-time employees year-over-year, with approximately two-thirds of those going into three key areas: wealth, commercial, and technology. These are the sectors where we continue to invest. Our fee growth, especially on the Wealth side, with the double-digit growth we're anticipating this year or next, reflects these investments. We're fortunate to be a preferred platform for many, as evidenced by two advisory teams that recently joined us from competitors. We're seeing substantial interest on both the Commercial and Wealth sides for people wanting to join our team. That provides some context for the quarter. Regarding our guidance, the efficiency ratio can fluctuate from quarter to quarter and can also be affected by revenue-related rate changes. We aim for a goal this year, but we might see variations quarter-over-quarter as we work to manage it. Our goal is to keep efficiency generally stable, which suggests parallel growth in revenue and expenses. That's our guiding principle. We plan to keep investing and remain opportunistic as we believe it’s the right long-term strategy, while diligently managing our expenses.

Appreciate it, David. Thanks for the color there. And then, as it relates to Cash Connect, can you talk about any potential levers you guys have yet to pull that could improve overall profitability in general sort of agnostic of what short rates do?

Yes, definitely. As you mentioned, interest rates will have an effect on the business, but it's important to note that as interest rates have fallen, this should benefit our profit margins. Even though there may be some impact on revenue and fees, we expect that to be more than offset by controlling expenses. We're also focused on increasing the profit margin of the business through various strategies. This includes growth, optimizing our cash logistics to reduce noninterest-earning cash, and importantly, pricing. After consolidating market share from our USB client acquisitions, we believe we have an opportunity to leverage pricing, which we plan to implement. Our goal is to elevate the profit margin next year compared to this year.

Got it. Okay. Helpful. Thank you. And then just one last one from me, guys, in terms of how we should think about the overall size of the securities portfolio by the end of the year if you're still kind of targeting roughly 20% of average assets ultimately and maybe when we might get there?

Currently, the securities portfolio represents about 22% of our assets, and we are aiming for around the 20% mark, potentially a bit lower. The portfolio's value is approximately $4.5 billion, generating about $500 million in cash annually from principal and interest. Most of this cash will be reinvested to support business growth, although we may also allocate a portion back into the securities portfolio. Overall, we expect the percentage to decrease, even with some additions to the securities portfolio.

Okay. Thanks very much for taking my questions.

Thank you. Thanks, Russell.

Thank you. Our next question comes from the line of Frank Schiraldi from Piper Sandler. Please go ahead.

I am curious about your current capital levels on a regulatory basis and how you anticipate those may trend in the short-term or medium-term. I know you've been buying back stock, which gives you more flexibility, but I'm also interested in your thoughts on potential other uses of capital and your current interest in additional M&A. Thank you.

I'll begin with our approach to capital before handing it over to Rodger to discuss M&A. Regarding capital, our strategy involves returning about 35% of our net income annually, which breaks down to approximately 15% for dividends and the remainder for buybacks. Last year, we exceeded that target, reaching around 50%—with about 35% allocated to buybacks and 15% to dividends. Our evaluation process considers the opportunities for deploying capital within the business against our stock's trading value, ensuring we find a balance between buybacks and other investments. As we did this year, we anticipate following the same approach next year, actively reassessing this balance. Additionally, we've maintained slightly higher capital levels over the past couple of years due to market volatility, including credit and interest rate fluctuations. We believe it remains wise to retain that extra capital for now. We are closely examining buybacks and remain disciplined in our management, aiming to return as much capital as possible.

Yeah, Frank, it's Rodger. I would just add, as it relates to our appetite for M&A, we just completed our next strategic plan, '25, '26, '27 strategic plan. And the focus is really continuing to optimize this very unique market position that we have across all of our businesses and to really optimize that investment. That being said, as David outlined, we continue to invest in the franchise, and we would look to invest in both the fee businesses and the banking side if it was something that could be accretive to those activities. I will say that like any investment that we make, the bar is pretty high because any decision to deploy capital in those kinds of investments is a decision to not deploy it in the ordinary course of business. So, we're open to looking at that, but we feel very confident that we can continue to achieve the kind of results that we have provided and what we've outlined in the outlook without having to do anything of any significant magnitude, but always open to opportunities that would strengthen the franchise.

Okay, great. I have a couple of quick questions related to modeling. The deposit growth was really strong this quarter, but large customer inflows can sometimes be temporary. Are you anticipating any withdrawals in the first quarter, or do you think this is a solid run rate moving forward?

I believe you're correct, Frank. I think we will see some of that. When we examine our growth this quarter, both compared to the previous quarter and on a year-over-year basis, it’s significant, even after accounting for seasonality. For example, if we review last year's performance, we had a strong fourth quarter, with about half of that growth carrying into the first quarter, which we then built upon. Therefore, I expect a similar trend this year, which may explain the modest growth in deposits following the peak in the fourth quarter. However, it's crucial to note that when we look at our average balances year-over-year, which smooths out these fluctuations, we have still achieved a 6% increase overall when compared year over year. More importantly, our noninterest-bearing deposits have grown by 7%. This growth occurred across all our business segments: Consumer, Commercial, and Wealth & Trust. This reflects our essential fee relationships and core operating business with clients. Overall, the deposit situation is robust. While there is some seasonality, regardless of how you assess it, we are experiencing solid growth quarter over quarter and year over year.

Okay, that's great. Just quickly, regarding the Cash Connect business, I believe one partnership was terminated. The figures you're providing seem to be one-time impacts. Am I missing something? Is there a number you can share, or is the quarterly impact from losing this customer not significant?

Yeah. I would say, Frank, there are a few moving pieces there when you think about Cash Connect for 2025. One is, this client; two is, the interest rate impact; and three, are the levers that I previously discussed around pricing optimization and growth in the business. And so, when you net all of those things, we expect the top-line revenue to be down somewhat, but that's more than offset in expenses. And so, when you net all of those things, including the absence of this client, we still expect a profit margin to increase from the mid-single digits to kind of the high-single digits next year. So that's really how we look at the business, and that's how we're driving the business.

Okay. All right. Just in terms of the specific fee from the absence of this one customer is just something you guys aren't disclosing or is it just not meaningful or both?

I can't provide specific details about client revenue. However, I would emphasize the profit margin and our performance rating for this quarter.

Okay. All right, great. Thank you.

Thank you very much.

Thank you. Our next question comes from the line of Kelly Motta from KBW. Please go ahead.

Hi, thanks for the question. Maybe just one more quick question on this Cash Connect business. Just from a high level, it sounds like what happened with this client is somewhat idiosyncratic. What are the risks of this business? Is it mostly just mismanagement or potential fraud risk or theft? I'm just trying to understand what the risks are here beyond moves in interest rates. Maybe I'll start with that.

Yeah. So, just to circle back to the particular situation, Kelly, as outlined in the materials, the business owner had financial stress and related enterprises that we felt elevated the risk profile of our relationship, and that's what led to the termination of that relationship. More broadly, I think the risk as you think about the business here, is we're managing and keeping track of large amounts of cash throughout the system and making sure that we have all the proper controls in place to manage and track that, which is obviously a lot of systems that have been built up over the 25 years or so that we've been in business. And I would say, as a general statement, all of those controls worked in this particular situation to our satisfaction. There are some loose ends that we're still working on that are reflected in those charges, and we have some avenue to pursue on that, but that's the biggest risk in this business. And I would say, as a general statement, I think the way we mitigate those risks and manage them were demonstrated very well in the ultimate outcome of that situation.

Understood. That information is really valuable. I appreciate the insights on the investments you've made, the talent you've brought on board, and how you're handling expenses in relation to revenue growth. As we look to the future, I'm curious about managing expenses. Is there still room for additional efficiencies? If revenue comes in lower than expected or faces challenges, could there be areas where you might achieve more savings? Or would the primary adjustment be in your hiring strategies?

It's a combination. One factor driving our expenses this quarter was the true-up in our incentive accrual for the fourth quarter, which directly reflects the company's performance. This aspect is clearly variable and tied to our return on equity. Additionally, as we invest in headcount, particularly with advisers and relationship managers, expenses begin immediately, but revenue typically doesn't start to materialize significantly until the second year due to contractual limitations. This creates a timing gap between expenses and revenue. However, we remain optimistic about maintaining our double-digit growth trajectory, supported by these investments. Lastly, we've made significant technology investments this year, including an upgrade to our trust accounting system, which is a key part of our integration from previous acquisitions. This affected our expenses as well. Overall, we believe we have various levers to manage effectively, and we consistently evaluate our strategies.

Yeah, Kelly, it's Rodger. To provide some historical context, our efficiency ratio has generally been higher than that of some peers. We have periodically dipped into the 50s and have typically maintained around 60% as a sustainable level. This is largely due to our involvement in service-driven industries and fee-based businesses, which tend to have higher expenses. Thus, we aim for an efficiency ratio around 60%. We are always exploring ways to enhance our efficiency. In this quarter, we transitioned some owned real estate to held for sale, looking to capitalize on market opportunities for potential cost savings. However, it’s important to note that we don't expect to fall below our historical efficiency levels since our business mix and service model suggest a naturally higher efficiency ratio.

Understood. That's super helpful context. Maybe last question from me. This is the second quarter where you had an uptick in NPAs this quarter. I believe the presentation calls out land and multifamily construction. Can you provide us some color on the migration that occurred this quarter and your process of work out of some of these larger migrations over the back half of last year?

Yeah. So, I would say that really, there was only one credit of any size that moved to NPA, and it was that relationship. So, two loans right around $20 million each as we outlined in the materials, a land loan, industrial land loan in Central Jersey area and then another multifamily construction loan more in North Jersey. To a large sponsor that has run into some challenges in his global cash flow, we feel, as David said, we're very well secured, and we're working through that. Similarly, I would say, the other situations that we've had that migrated over the course of last year into NPA, I think we continue to work on those in a very constructive way. As we've talked about with our borrowers, we hope to see some resolution in the near future. And obviously, all of that was incorporated into where we've landed on the ACL going forward.

Kelly, I would just add that a vast majority of our loans are with recourse as well. We actively manage that with different tools, which is why we don't necessarily see the NPAs turning into losses.

Awesome. Thank you so much.

Thank you.

Our last question comes from Manuel Navas from DA Davidson. Please go ahead.

Hey, good afternoon.

Hey, Manuel.

Could you go into a little bit more detail on the loan growth outlook and the mix for it, discuss pipelines and kind of what keeps consumer flat, what parts are going to make up for the Upstart runoff? Let's start with that.

Sure. When considering the outlook for loan growth, it's important to differentiate between the Consumer and Commercial sectors. In the Consumer area, we have two portfolios that will be declining. One is UpStart, which stood at around $140 million at the year’s end, and it decreases by about $25 million each quarter. By the end of the year, this portfolio will be quite minimal. The other declining portfolio is $1 billion, associated with the Spring EQ portfolio. The runoff from this portfolio is somewhat influenced by interest rates and prepayments, but typically, it decreases by approximately $10 million to $15 million monthly. This quarter, we saw about $44 million in runoff from that portfolio. These represent the downward trends. On the other hand, we have made significant strides in growing our WSFS originated loans, including residential mortgage loans, which experienced strong growth this quarter, along with other consumer portfolios, particularly HELOCs, which also saw growth. We believe that increased activity in mortgages and the growth in our smaller real estate portfolios will largely balance out the declines and keep consumer lending stable. As for the Commercial side, we experienced larger payoffs this quarter, typical for the fourth quarter, heightened by some business sales that constituted about 25% of the payoffs. However, our origination pipeline remains robust, and we are optimistic about it. We expect Commercial to continue achieving mid-single-digit growth. Overall, when we combine these factors, we anticipate a growth rate of about 3.5% to 4% between the two sectors.

I appreciate that color. Does the resi mortgage origination or the HELOC origination, is that add households? Is it like kind of deeper relationships with folks you already have on the Wealth Management side? That was part of the thought process with Upstart and Spring EQ that you could add households. And I'm just wondering if you're finding new ways to do that. Just any color on some of that would be helpful.

I believe that in residential mortgages, it's a mix of factors. We have the capability to originate these loans ourselves, and we focus on building relationships. This can help us attract new clients, whom we then encourage to open deposit accounts. Additionally, it's a vital source for cross-selling opportunities from our Wealth business, benefiting both sides. Therefore, it's a way to bring in new clients and also expand our relationships with clients who come through other channels, such as Wealth.

Manuel, I'd also remind you, this is Art, we have originated both mortgage loans for clients or prospects as well as non-clients, and we have the flexibility for the non-client relationships to be able to sell those loans into the secondary market and book a gain. So, it's a combination of sales and then where those relationships are there, we'd rather keep it on the books rather than expose that client to a competitor.

I appreciate that. With that kind of blended overall loan growth rate of 3.5% to 4%, a lot of that's covered with securities cash flows that could potentially leave you with a lot more capital build. You talked about having a similar level of buyback activity to last year. Could it meaningfully increase?

Yeah. I think, Manuel, we kind of touched on this before. Yes, we can fund the loan growth with the securities, there may be some excess, and we're certainly generating capital, and that will all be included in our ongoing analysis of the capital return philosophy that we've talked about a fair bit.

In this quarter, we paid off our BTFP facility entirely in cash due to the liquidity we generated in the business. This has positively impacted our net interest margin. We are considering all available options to deploy liquidity, and as Rodger mentioned, we will definitely continue to assess buybacks.

Are there any additional insights regarding the strategic plan and the new three-year plan? It seems clear that it relates to the near-term outlook for this year, but can you elaborate on the focus of that three-year strategic plan?

I think the plan aligns with our previous processes, which occur every three years, involving collaboration between management and the Board. It's very much in line with what we've previously discussed. Our aim is to further optimize the investments we've made in our franchise and to enhance those areas across all our business lines. As mentioned, we hold a distinctive position in a highly favorable market, where larger institutions view this market as only a small segment of their operations, whereas it represents our core. We see growth opportunities to capture more market share and increase our wallet share with customers through our ongoing investments. This is the primary focus of our plan, reinforcing our long-term objective of achieving sustainable, high performance as demonstrated in recent years. We plan to invest in these areas, similar to our approach in 2024, which included adding talent. We are also open to making larger investments but will be selective, as we want the organization to prioritize optimizing our unique opportunities ahead of us.

I appreciate the commentary. Thank you.

Okay. Thank you, everyone, for joining today's call. If you have any specific questions, please feel free to reach out to Andrew or me. Rodger, Art, and I will be attending conferences and investor meetings throughout the quarter, and we look forward to meeting with many of you. Have a great day. Thank you.

That concludes our conference call for today. You may now disconnect.