Q4 2023 WSFS Financial Corp Earnings Call
Hello, and welcome to the W. S. S. S 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 now.
I'd 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.
Art Bacci: 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.
Art Bacci: With me on this call are Rodger Levenson, Chairman, President and CEO, Steve Clark, Chief Commercial banking officer, and Sherri presented ski Chief consumer banking officer.
Art Bacci: 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 managements view of our future expectations plans and prospects that constitute forward looking statements.
Art Bacci: 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 docs.
Art Bacci: Humans, 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.
Thank you art and everyone else for joining us on the call today.
Roger: 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.
Roger: Core return on tangible common equity of 20, 248% and a core return on assets of 138%.
Roger: Each of these metrics exceeded 2022 levels.
Roger: Highlights for the quarter and full year included customer deposit growth of 3% linked quarter or 13% annualized.
Roger: Growth occurred across our wealth and trust commercial and consumer businesses.
Roger: Positive mix remains strong with 31% of average deposits in noninterest demand accounts.
Roger: Loan growth of 1% linked quarter or 3% annualized.
Roger: Full year customer deposit and loan growth of 2% and 7%, respectively with a year end loan to deposit ratio of 77%.
Roger: Yeah.
Roger: Core net interest margin of 399% for the quarter with interest bearing deposit beta at 44%.
Roger: Core fee revenue growth of 6% linked quarter growth was driven by wealth and trust cash connect and capital markets businesses.
Roger: Full year core fee revenue growth of 10% and core fee revenue ratio of 34% in the fourth quarter.
Unnamed Host: Hello, and welcome to the WSFS Financial Corporation Fourth Quarter Earnings Call. All lines have been placed on mute to prevent any background noise.
Roger: 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.
Unnamed Host: After the speaker's 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.
Roger: Excluding these adjustments the core efficiency ratio would have been 56, 2%.
Art Bacci: Thank you. Good afternoon, and thank you again for joining us for 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 Krasinski, Chief Consumer Banking Officer. Before I turn the call over to Rodger 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. However, actual results may differ materially from historical results due to risk 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.
Roger: Asset quality remained stable net charge offs and problem loans were essentially flat to Q3, and npa's ticked up eight basis points.
Roger: The balance sheet remains strong with ACL coverage of 135% and all capital ratios significantly above well capitalized levels.
Roger: In summary, our franchise growth was facilitated by the continued optimization of our investments and highly unique competitive market position.
Roger: We entered 2024 with strong momentum and look forward to continuing to execute execute on our 2022 to 2024 strategic plan.
Roger: I will now turn it back to art for commentary on our 2020 for outlook and to facilitate Q&A.
Art Bacci: Thank you Roger.
Art Bacci: I will now cover our outlook for 2024.
Art Bacci: Looking forward to 2024, we expect a full year core return on assets of around 120%.
Art Bacci: 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.
I will now turn the call over to Rodger. Thank you, Art, and everyone else for joining us on the call today. WISFIS performed very well in the fourth quarter as we continue to demonstrate the strength and diversity of our business model. These results cap 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.
Art Bacci: 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.
Art Bacci: We have also assessed our outlook, assuming three interest rate cuts totaling 75 basis points.
Art Bacci: All in the second half of 'twenty 'twenty four.
Art Bacci: 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.
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 business. Deposit mix remains strong, with 31% of average deposits in non-interest demand again.
Art Bacci: With business diverse business model provides management with multiple strategies to achieve our previously communicated goal of top quartile performance.
Art Bacci: Our favorable market position, a loan to deposit ratio of 77% and consistent cash flows from our securities portfolio enabled us to Opportunistically fund relationship based loans in our markets.
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%. Coordinate 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 & 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%.
Art Bacci: Our multiple sources of core deposits provide us with favorable deposit cost and funding mix further contributing to our top tiered net interest margin.
Art Bacci: The 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.
Art Bacci: <unk>.
Art Bacci: 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 that.
Art Bacci: Administrative during the fourth quarter.
Art Bacci: Net charge offs are expected to be between 50, and 60 basis points of average loans for the year, primarily driven by upstart in Ukraine as well as continued normalization of credit trends.
As the quality remained stable, net charge-offs and problem loans were essentially flat to Q3, 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 a 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. Thank you, Rodger.
Art Bacci: Our over our overall our portfolio credit metrics were stable this quarter and our ACL coverage ratio is 135% of total loans and leases excluding.
Art Bacci: Excluding the held to maturity securities and including acquisition credit marks the ACL ratio stands at 164% of loans and leases further information on our ACL ratio is included on slide 13 of the supplement.
Art Bacci: Finally, our strong capital position and earnings enabled 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 Change: Thank you and we will now open the line for questions.
Art Bacci: And we'll 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. However, our analysis demonstrates the forward curve has been a poor indicator of actual interest rate changes.
Speaker Change: Thank you if you have a question. Please press star one on your telephone keypad.
Speaker Change: Your first question comes from the line.
Speaker Change: Michael Perito of <unk> Your line is open.
Speaker Change: Yes.
Michael Perito: Hey, guys. Good afternoon happy new year, Thanks for taking my questions.
Speaker Change: Happy to do it.
Michael Perito: Yes, 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.
Art Bacci: 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.
Michael Perito: So I guess first just looking at slide 10 here.
Michael Perito: 25 caught the $9 6 million 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 a static balance sheet kind of moves to $383 90 range down five bps. So like 375 to 385 and so forth would you guys generally agree directionally with.
Michael Perito: That or.
Michael Perito: And that's and that is incorporating the benefit of the off balance sheet hedging strategy does that all kind of correct or is there anything that would you would change.
Art Bacci: WISFIS'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 market. 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.
Michael Perito: Mike I think Thats Directionally correct.
Michael Perito: To reiterate that's a annualized number so if rates are.
Michael Perito: Growing too.
Michael Perito: <unk> reduced in the second half of the year, we clearly wouldn't feel that full impact in 2024 correct.
Speaker Change: Correct, yes, okay and does that.
Speaker Change: The 383, I mean does that.
Speaker Change: The additional hedges to $250 million that it is approved for additional floors wood.
Speaker Change: That potentially neutralize that range somewhat or is that kind of baked into that as well would you say.
Speaker Change: Yes.
Speaker Change: Into that because any hedges, we put in would be.
Art Bacci: 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 gradually declining interest rates potentially enhance our financial results in capital positions, rather than better equity and fixed income market performance, increase 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 lane loans, as well as continued normalization of credit trends. Overall, our portfolio credit metrics were stable this quarter, and our ACL coverage ratio was 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.
Speaker Change: Have resulted in significantly lower rates today. The 750, we've done is at about a 4%. So for rate. So clearly there has to be a material drop in and so for the hedges to kick in.
Speaker Change: Got it.
Speaker Change: That's great. Thank you.
Speaker Change: And then switching over to the fee side, obviously, a very strong quarter.
A couple of comments on the deck drove my attention I would just love with like a layer deeper on them with substantial growth opportunity on the wealth side, and then I'll comment about cash connect and peer 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 a driver.
Speaker Change: And that assumption.
Speaker Change: Sure.
Speaker Change: So this is already good Mike.
Speaker Change: 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.
Speaker Change: 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, and our pipeline from that.
Speaker Change: Situation, which is giving us a high degree of confidence at cash connect we will continue to have some double digit growth into 2024 over 2023, and then on the on the wealth side I mean, a combination of our businesses are seeing very strong pipelines.
Art Bacci: 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. Thank you. If you have a question, please press star 1 on your telephone keypad.
Going into 2020 for institutional Trust business has got a nice pipeline, including almost $100 million of potential deposits that we're looking at an 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.
Michael Perito: Your first question comes from the line of Michael Perito of KBW. Your line is open. Hey guys, good afternoon, happy new year. Thanks for taking my questions. I'm happy to do it.
Speaker Change: <unk>.
Speaker Change: Great opportunity to continue to grow.
Speaker Change: AUM businesses as well.
Speaker Change: That's helpful. Thanks.
Speaker Change: 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 data points have been so mix right. Like for example to discover who got a prime unsecured book saw an uptick in charge offs and delinquencies others have been more stable.
Michael Perito: Yeah, 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.
Michael Perito: 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 want to kind of sanity check my math, it would seem like every cut, all else equals static balance. She kind of moves the 380, 390 range down five bips. So like 375 to 385 and so forth.
Speaker Change: We'll get a few more data points next week, but any updated thoughts around the unconcern unsecured consumer credit environment, particularly as it relates to your portfolio as we think about 'twenty four.
Speaker Change: This is Arne again, if you if you strip out upstart we've seen the same thing that 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 and that we believe was tied to some of the earlier cohorts that we booked and that is working its way.
Michael Perito: Would you guys generally agree directionally with that? And that is incorporating the benefit of the off-balance sheet hedging strategy. Is that all kind of correct? Or is there anything that you would change?
Michael Perito: Mike, I think that's directionally correct, and I'll 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. Correct. Yes. Okay. And is that... The 383, I mean, does that...
Speaker Change: Through the system and we would hope that in the first second quarter that would start to decline. We are also we're not really materially adding to the upstart portfolio. We hit our concentration limits on unsecured and so that is basically just replacing some runoff for this at this point in time and we will continue.
Michael Perito: The additional hedges, the $250 million that it says was approved for additional floors, would that potentially neutralize that range somewhat? Or is that kind of baked into that as well, would you say? Now that's baked into that because any hedges we would put in would have to result in significantly lower rates. Today, the 750 we've done is at about a 4% SOFR rate, so clearly there would have to be a material drop in the SOFR for the hedges. Got it. That's great. Thank you.
Speaker Change: To evaluate the charge off experience, which could lead us to making other decisions.
Speaker Change: Okay.
Speaker Change: Got it and then just just lastly.
Speaker Change: 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.
Speaker Change: 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.
Michael Perito: And then switching over to the fee side, obviously, a very strong quarter. You know, a couple of comments in the deck draw my attention. I just love it, like a layer deeper on them.
Speaker Change: Going forward.
Speaker Change: Hey, Michael It's Roger Nothing has 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.
Art Bacci: You know, it's a substantial growth opportunity on the wealth side. And then a comment about Cash Connect and peer consolidation. You know, and 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? Sure. So this is Art again, Mike.
Roger: Our routine buybacks that we use to supplement the dividend we continue to periodically evaluate.
Roger: Essentially higher buyback levels, but as you know thats dependent upon the forward look on the economy as well as assessment of our balance sheet and where the share prices because we have a model.
Art Bacci: And, you know, one of the things that happened in the fourth quarter, late third quarter, fourth quarter: 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 in 2024 over 2023. And then on the well side, I mean, a combination of our businesses is seeing very strong pipelines going into 2020 for our institutional trust businesses. We have a nice pipeline, including almost 100 million 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. That's helpful, Art. Thanks. Just two more quick ones, if I could.
Roger: Target is at least 16% IRR. So we will continue to evaluate that.
Roger: As those factors play out, but nothing different from our ongoing philosophy.
Yes.
Speaker Change: Very good listen thanks, guys I appreciate it have a great weekend talk soon.
Speaker Change: Sure.
Speaker Change: Yeah.
Your next question comes from the line of studies.
Speaker Change: <unk> Strickland with Janney Montgomery Scott Your line is open.
Hey, good afternoon, everyone.
Strickland: Just wanted to start back on the sensitivity analysis for a second.
Strickland: Could there be some level of upside there just given the fact that that assumes a static balance sheet and youre clearly going to grow loans.
Speaker Change: Kind of within your guide just trying to think through.
Speaker Change: And a little more detail about what happens with the margin if we as analysts do assume some level of rate cuts.
Speaker Change: Sure Friday.
Speaker Change: Do think there is some upside.
Speaker Change: 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.
Speaker Change: Net interest margin.
Art Bacci: It seems like the unsecured consumer charge-offs were pretty stable and remain in the range I think you guys have communicated. Just any broader commentary? 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? I mean, I think if you, this is Art again, if you strip out Upstart, we've seen the same thing, that charge-offs have been really benign and stable on unsecured.
Speaker Change: The opportunities because we have a lot of levers to pull kind of exist in a couple of areas one.
Speaker Change: Some of our beta is.
Speaker Change: If rates were to start decline could be better than we anticipate but right now we are.
Speaker Change: 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.
Speaker Change: We would and we will we have the ability to.
Speaker Change: Basically defend our market position and go after those.
Speaker Change: Those competitors secondly, I think that the.
Speaker Change: Declining rate environment could very will trigger increase mortgage and other type of asset backed securitization 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 noninterest bearing deposits. So those are.
Art Bacci: Upstart has been the one area where we've seen some 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 or second quarter that will start to decline. We also, you know, are not really materially adding to the Upstart portfolio. We've hit our concentration limits on unsecured loans, and so that is basically just replacing some runoff for this at this point in time, and we will continue to evaluate the charge-off experience, which could lead us to making other decisions.
Speaker Change: Just a couple of levers that could really worked to our benefit as 2024 progresses.
Speaker Change: Understood that makes a lot of sense.
Speaker Change: And I guess, along those same lines can you remind us of where you feel like Dth could end up over the next couple of quarters I think.
Speaker Change: Peg them at about 31% of average deposits today does that glide down into the <unk>.
Speaker Change: Hi, <unk>.
Speaker Change: What are your assumptions on the level of noninterest bearing deposits overtime.
Yes.
Speaker Change: I think we've got a 30% to 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.
And then, just lastly, you know, obviously, 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 was just any incremental commentary around buybacks and, you know, 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 Michael, it's Rodger.
Speaker Change: It has been about 30% that's kind of the pre pandemic levels. So we feel pretty comfortable at a 30 is a good area and again.
Speaker Change: If rates decline in market securitization activity picks up that could increase actually so.
Speaker Change: Got it and then just one last question for me on expenses I know you guys mentioned continued investment in the franchise.
Speaker Change: Are there any initiatives in particular.
Speaker Change: That could move expenses up.
More earlier versus later in the year.
Speaker Change: Any detail you can give on any either technology initiatives or hiring or anything along those lines, what's driving some of those expenses.
Michael Perito: 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 place 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 our 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. Very good Listen, thanks guys. I appreciate it. Have a great weekend!
Speaker Change: Our phase <unk> study. This is Roger I don't think Theres anything one big thing of note, we're continuing to invest in the franchise. So yes, we have.
Roger: 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.
Roger: And we could see more opportunity there if we think it's additive to us due to hire folks.
Roger: As well as something like the small RIAA investment that we made.
Roger: <unk> 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.
Your next question comes from the line of Fetty Strickland with Janie Montgomery Scott. Your line is open. Hey, good afternoon, everyone.
Roger: Invest as others retrench and Thats really it's reflected broad based across.
Art Bacci: Just wanted to start back on the sensitivity analysis for a second. You know, 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 slow? Within your guide, just trying to think through in a little more detail about what happens with the margin if we as analysts do assume some level of rate cuts. Sure, Freddie, and I do think there is some upside. The position we have today has been consistent; our asset sensitivity over a long period of time. It certainly has benefited us when rates have gone up. And even through multiple rate cycles, we've consistently put out a top quintile.
Roger: All of the NIH categories.
Understood. So supported more of long term growth rather than any particular initiatives for new product line or anything like that.
That said <unk>.
Speaker Change: An accurate assessment.
Speaker Change: Got it thanks, so much I'll step back in the queue.
Speaker Change: Your next question comes from the line of Russell Gunther with Stephens. Your line is open.
Russell E. T. Gunther: Hey, good afternoon guys.
Russell E. T. Gunther: Alright, I appreciate all the the margin Hey, Roger I appreciate the discussion around the NIM.
Russell E. T. Gunther: Maybe particularly sensitizing to the tune of three cut so in that scenario.
Russell E. T. Gunther: What are you guys assume your deposit data does on the way down it sounds like some broader comments you made being conservative there but.
Art Bacci: The opportunities, because we have a lot of levers to pull, kind of exist in a couple of areas. One, you know, some of our betas could be better than we anticipate, but right now, our view is that there are 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 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 increased mortgage and other 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 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.
Russell E. T. Gunther: Curious, what's baked into that three cut sensitivity.
Roger: Well, obviously if rates start to go down we would recalibrate our beta.
Roger: 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.
Roger: 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 some public money in commercial money that could be re price 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 <unk>.
Roger: Slower decline 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 to protect our franchise.
Speaker Change: Okay I appreciate that.
Speaker Change: And then if you could just as a follow up remind us the amount of index deposits you have.
Art Bacci: And I guess along those same lines, can you remind us of where you feel like DDAs could end up over the next couple quarters? I think I pegged them at about 31% of average deposits today. Does that glide down into the, you know, high 20s?
The amount of index deposits as Archie said Russell.
Speaker Change: If you have it.
Speaker Change: And we managed to get back to.
Speaker Change: Great.
Speaker Change: No problems early in the money.
Yeah.
Speaker Change: Let us get back to you Ross.
Ross: I appreciate that no.
Ross: No problem and then just last one for me guys. The 24 outlook again with the stable rates.
Or, you know, what are your assumptions on the level of non-interest-bearing deposits over time? I think we've got the 30 percent 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 that's kind of the pre-pandemic level, so we feel pretty comfortable that a 30 is a good area. If rates decline and market securitization activity picks up, that could actually increase. And then just one last question for me on expenses. I know your guide mentions continued investment in the franchise, but 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? Fetty, this is Roger.
Ross: Any risk to the fee guide.
Ross: If you were to sensitize to three cuts I mean, it sounds like the cash connect is really a market share gain opportunity.
Ross: Just thinking through that double digit target.
Ross: In the three cuts scenario as well how do you see that play out.
Ross: 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 3% market based AUM growth so that could potentially increase if the markets were to go up and as I mentioned previously.
Ross: <unk>.
Ross: Some rate decreases could enhance the securitization market and lead to further corporate debt refinancings, which would benefit our institutional trust business.
Speaker Change: Okay. That's very helpful. Thank you guys for taking my question.
Yeah.
Speaker Change: Your next question comes from the line of Frank Schiraldi with Piper Sandler Your line is open.
Frank Joseph Schiraldi: Hi, guys.
Frank Joseph Schiraldi: Frank Frank.
Frank Joseph Schiraldi: Just on the.
Frank Joseph Schiraldi: Cash connect business trying to get a sense.
I don't think there's anything, you know, one big thing of note. We're continuing to invest in the franchise. So yes, we have, you know, a fair number of technology investments that will continue, which has been the process that we've been going on for several years. And we're looking to hire.
Frank Joseph Schiraldi: Given the pickup in business here in the fourth quarter and potentially into.
Frank Joseph Schiraldi: Into the current year.
Is it.
Obviously, the double digit growth year over year, it's got a pretty good start jumping off point, but.
Frank Joseph Schiraldi: When I think about just growth off of <unk> levels. I mean is there enough low hanging fruit, where you could see.
Frank Joseph Schiraldi: Double digit growth off of <unk> levels in 2024, how are you thinking about growth from here I guess for cash connect.
And we have some businesses, you know, that already have plans for hiring, most of that tied to, you know, potential revenue. And, you know, we could see more opportunity there if we think it's additive to us to hire folks, you know, as well as something like, you know, the small RIA investment that we made. So a combination of those things, we're looking to invest in and grow the business. We think this is a time to gain market share and to invest as others retrench. And that's really, it's reflected broadly across all of the NIH.
I think given the the volume that's in the pipeline from the.
Frank Joseph Schiraldi: Providers of ATM services that are moving from that other competitor with potential for some loads low double digit growth from the fourth quarter.
Frank Joseph Schiraldi: Okay.
Frank Joseph Schiraldi: This thing is frankly, the cash connect it's Roger.
Frank Joseph Schiraldi: With some of this consolidation also come some pricing power for us, which could be a tailwind as we pick up some business.
Frank Joseph Schiraldi: Well.
Speaker Change: Okay, Yeah, I was going to ask about returns in that business. The ROA looks like kind of a pretty good boost I don't know if thats sustainable.
Understandable. So supportive of more long-term growth rather than, you know, any particular initiative or new product line or anything like that. That's accurate. Got it. Thanks so much.
Speaker Change: If you even can see further on.
Speaker Change: Hey.
Russell E. T. Gunther: I'll step back in the queue. Your next question comes from the line of Russell Gunther with Stevens. Your line is open. Hey, good afternoon, guys. I appreciate all the margin. Hey, Rodger.
Speaker Change: ROE a pick up in 2020 for where that business can again be accretive.
Speaker Change: <unk>.
Speaker Change: The bottom line on ROI.
Speaker Change: As you know we've.
I appreciate the discussion around the NIM, maybe, and particularly sensitizing to the three-cut. So in that scenario, what do you guys assume your deposit data 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-cut sensitivity.
Speaker Change: And you hit on it historically over time cash connect has been accretive to the overall Roe.
Speaker Change: Getting back to those levels.
Speaker Change: We went through a period of significant investment in some product and some technology and kind of the maturation of that combined with this opportunity in a traditional bailment business.
Speaker Change: We're getting some scale and some pricing power and we think.
Art Bacci: Well, obviously, if rates start to go down, we would recalibrate our beta. We kind of initially think early on that the beta would be fairly low, again, because of the competitive environment. We do have opportunities.
Speaker Change: Yes.
Speaker Change: Every opportunity for us to have it continue to be accretive to overall corporate ROA in the near term.
Speaker Change: I think we pretty much saw a bottoming of the ROA in the first quarter of this year.
Art Bacci: You know, we have products, 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. But on the consumer side, there continues to be a fair amount of competition in the market.
Speaker Change: During the first and fourth quarter ROA has increased 250% so.
Speaker Change: With additional volume being added in the first half of next year, we would expect <unk> to continue to move up.
Speaker Change: Okay, Great and then.
Speaker Change: Alright, just on the <unk>.
Speaker Change: Linked quarter the growth.
Art Bacci: 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, the competitive market will require us to continue to provide some premium on deposits to protect our franchise. Okay, I appreciate that, Art.
Noted, obviously a lot of that was market driven but just wondering if you have.
Speaker Change: Net flows you've seen in <unk>.
Speaker Change: From.
Speaker Change: A customer standpoint.
Speaker Change: Over the last couple of quarters.
Art Bacci: 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 you said, Russell? If you have it.
Speaker Change: Yes.
Speaker Change: We saw a little bit more outflow in the fourth quarter. So we were pretty much breakeven through the first three quarters of which was a big improvement from prior years, because we were still integrating Bryn Mawr Trust and there was a lot of climate change and some advisor departures. So we saw fourth quarter a little bit.
Unnamed Host: Yeah, we may have to get back to it. No problem. I earned the money.
Speaker Change: More departure that some of that is tied to spend where we're seeing them come.
Unnamed Host: Let us get back to you, Russell, on that. I appreciate that. No problem. And then just last one for me, guys, the 24-hour outlook again with the stable rate. Any risk to the fee guide if you were to sensitize to three cuts?
Speaker Change: Customers using up more assets in order to just maintain lifestyle, given the higher inflation rate and higher rates, whereby they are buying houses and instead of financing and paying all cash.
Speaker Change: Okay.
Art Bacci: I mean, 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. 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 refinances, which would benefit our institutional trust. Okay, that's very helpful.
Speaker Change: And then just lastly, sorry, if I missed it but the uptick in NPA is obviously off a pretty low base, but what was what drove that primarily.
Speaker Change: Hey, Frank This is Steve Clark speaking, if that was really due to specific loans one.
Steve Clark: In the multifamily sector.
Steve Clark: Yes.
Steve Clark: This particular multifamily was master leased to our co living operator, who declared bankruptcy. So that sponsor is working to reposition that property into a more of a traditional multifamily the other was.
Steve Clark: Our legacy healthcare book.
Steve Clark: Elder care.
Steve Clark: Frankly facility did not recover from Covid. So they were the two specific loans one in multifamily one in legacy elder care.
Russell E. T. Gunther: Thank you guys for taking my questions. Your next question comes from the line of Frank Schiraldi with Piper Sandler. Your line is open. Bye, guys.
Steve Clark: Okay, and then are either of those additions are either of those additions still current or these are 90 days past due and NPS.
Frank Joseph Schiraldi: Just on Cash Connect Business, trying to get a sense, given the pickup in business here in the fourth quarter and potentially into the current year, is it, you know, obviously double-digit growth year over year, it's got a pretty good starting, jumping off point, but when I think about just growth off of four Q levels, I mean, is there enough low-hanging fruit where you could see double-digit growth off of four Q levels in 2024? How are you thinking about growth from here, I guess, for Cash Connect? I think given the volume that's in the pipeline from providers of ATM services that are moving from that other competitor, there's potential for some low double-digit growth in the fourth quarter. Okay.
Steve Clark: No. They are both npa's, okay alright.
Speaker Change: Appreciate it thank you.
Speaker Change: Thanks, Brian.
Speaker Change: Your next question comes from the line of Manuel Nava with D. A Davidson your line is open.
Manuel Nava: Hey, good afternoon.
Manuel Nava: The fee income.
Manuel Nava: Include any acquisitions and would any I think you have some interest there and with any with any acquisitions.
On the fee side be it all be added correct.
Manuel Nava: Yes, I mean this is art any M&A would be additive we have not baked anything into our guidance for M&A.
Manuel Nava: And what's your appetite on the fee side.
Manuel Nava: We continue to look at opportunities, namely across our fee businesses and.
Art Bacci: I think the other thing is that, Frank, with the cash connects, Roger, you know, with some of this consolidation, there also comes some pricing power for us, which could be a tailwind as we pick up, you know, some business, as well. Okay, yeah, I was gonna ask about returns in that business. The ROA looked like it got a pretty good boost, but I don't know if that's sustainable.
Manuel Nava: We did do the transaction in 2023, and we have a couple of other things we're looking at but.
Manuel Nava: We're just looking at it and nothing nothing definitive right now.
Speaker Change: Okay and.
Speaker Change: There was a little bit of elevated pay down activity in commercial.
Do you have any.
Speaker Change: View on how that continues.
Speaker Change: And can you just talk about loan growth across the year.
Speaker Change: Emmanuel Steve Clark again, so last year year over year, we grew loans across all segments about 7%.
Speaker Change: 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.
And if you even can see further ROA pickup in 2024, where that business could again be accretive to the bottom line ROI. Yeah, as you know, we've, and you hit on it, you know, historically, over time, Cash Connect has been accretive to the overall, you know, ROA, and we're getting back to those levels. You know, we went through a period of significant investment in some product and some technology and kind of 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, you know, every opportunity for us to have it continue to be, you know, a creative, overall corporate ROI. We pretty much saw a bottoming of the ROA in the first quarter this year. Between the first and fourth quarter, the ROA has increased 250. So.
Speaker Change: <unk> certainly is still C&I, both in the commercial bank and our small business bank.
Speaker Change: Elevated payoffs in C&I segment in the fourth quarter really revolve around three transactions.
Speaker Change: Totaled almost $80 million in the hospitality space two of our sponsors sold their assets in the third refinanced and that resulted in some unplanned significant.
Reductions in C&I, the rest of the reduction was align activity at year end with companies clearing out their line of credit balances and preparation for year end.
Speaker Change: Yeah.
Speaker Change: Thank you I appreciate that.
Art Bacci: With additional volume being added in the first half of next year, we would expect NROA to continue to move up. Okay, great. And then
Speaker Change: Yes.
Speaker Change: Your next question is a follow up from Savi <unk> with Janney Montgomery Scott Your line is open.
Art Bacci: Art, just on the AUM link quarter, the growth noted, you know, 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. Yeah, we saw a little bit more outflow in the fourth quarter, so we were pretty much break-even through the first three quarters, which was a big improvement from prior years because, you know, we were still integrating Bremar Trust and there was a lot of client change. So we saw a little bit more departure in the fourth quarter, and some of that just tied to spend, customers using up more assets in order to just maintain their lifestyle given the higher inflation rate and higher rates whereby they're buying houses instead of financing them, and paying off, OK. And then just lastly, sorry if I missed it, but the uptick in NPAs is obviously off a pretty low base, but what drove that primarily? Frank, this is Steve Clark speaking.
Savi: Hey, Thanks, just sorry, I had one quick follow up just wanted to ask about the growth of the balance sheet and earning assets relative to loans I think it's been.
Savi: If my math is right, it's been relatively low even down a little bit the last couple of quarters.
Savi: Should we see the balance sheet, continuing to say state overall relatively flat or does that start to grow a bit.
Savi: What's on our loan growth.
Savi: Yeah.
Savi: Brady. This is our I would say that the balance sheet would probably remain.
Speaker Change: Flat generally flat remember, we have $500 million a year roughly of cash flow coming off the <unk>.
Speaker Change: Mortgage backed securities and investment portfolio, which would fund about a three 5% growth in the loan portfolio stood alone loans would have to really grow significantly in order for us to start to grow the balance sheet.
Got it thanks art.
Speaker Change: That's it for me.
Speaker Change: Thank you and with no further questions in queue I would like to turn the conference back over to art Bacci.
Art Bacci: And 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.
Steve Clark: That was really two specific loans, one 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 health care book; the eldercare facility just did not recover from COVID.
Art Bacci: 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.
Speaker Change: This concludes today's conference call. We thank you for joining you may now disconnect your lines.
Speaker Change: Okay.
Steve Clark: So they were the two specific loans, one in multifamily, and one in legacy eldercare. Okay, and then are either of those loans still current, or are these, you know, 90 days past due and NPAs? No, they're both NPAs.
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: Okay.
Steve Clark: Okay. All right. I appreciate it. Thank you. Thanks, Frank. Your next question comes from the line of Manuel Navas with D. A. Davidson. Your line is open. Hey, good afternoon.
Art Bacci: 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 the fee side be, it'd all be added, correct? Yeah, this is Art.
Art Bacci: Any M&A would be additive. We have not baked in anything into our guidance for M&A, and What's Your Appetite on the Seaside? We continue to look at opportunities, namely across our fee businesses, and, you know, we did the transaction in 2023, and we have a couple of other things we're looking at, but, you know. We're just looking at it; nothing definitive right now. Okay, and there was a little bit of elevated pay down activity and commercial activity. Do you have any view on how that continues? And can you just talk about loan growth across the year? Emmanuel, Steve Clark again.
Steve Clark: So last year, year over year, we grew loans, you know, across all segments by about 7%. We believe mid single-digit growth for 2024 is attainable, again, across all segments, CNI, CRE, consumer with our Spring EQ partnership, and residential mortgage as we made a strategic decision to hold more on balance. Focus certainly is still C&I, both in the commercial bank and our small business. 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 savings. Reductions in C&I.
Steve Clark: The rest of the reduction was line activity at year end, with companies clearing out their lines of credit balances in preparation for year end. Thank you. I appreciate that. Your next question is a follow-up from Betty Strickland with Jamie Montgomery Scott. Your line is open.
Hey, thanks, just sorry; I had one quick follow-up. Just wanted to ask about the growth of the balance sheet in earning assets relative to loans. I think it's been, if my math is right, relatively low to even down a little bit in the last couple quarters.
Art Bacci: 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 loans? I would say the balance sheet would probably remain the same, flat, generally flat. Remember, we have about $500 million a year, roughly, of cash flow coming off mortgage-backed securities and the 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.
Art Bacci: Got it. Thanks, Art, but Thank you, and with no further questions in queue, I would like to turn the conference back over to our. 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, Rodger 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. This concludes today's conference call. We thank you for joining us.