Q1 2021 WSFS Financial Corp Earnings Call

Thank you for standing by and welcome to W. S. F. S Financial Corporation first quarter 2021 earnings call. At this time, all participants are no smoke.

After the Speakers' presentation there'll be a question and answer session to ask a question. During this session and the need to press Star then one and your telephone please be advised that today's call is being recorded.

And if you've acquired additional assistance you May Press Star, then zero attrition operator and.

And now like to turn the call over to your host for today, Mr. Dominic Caruso, Chief Financial Officer, Sir you may begin.

Thank you Michelle and thanks to all of you for taking the time to participate on our call today.

With me on this call are Rodger Levenson, Chairman, President and CEO Art Bacci, Chief Wealth Officer, Steve Clark, Chief Commercial banking Officer, and Rick Wright, Chief retail banking officer.

Before I begin with remarks on the quarter I would like to read our safe Harbor statement our.

Our discussion today will include information about our managements 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 risk factors included in our annual report on form 10-K.

And our most recent quarterly reports on form 10-Q, as well and other documents, we periodically file with the Securities and Exchange Commission.

All comments made today.

Our subject to the Safe Harbor statement.

Yeah.

Good afternoon, everyone and thank you for joining us on the call.

Our earnings release, and Investor presentation, which we will refer to today can be found in the Investor Relations section of our company's website.

We are very pleased with both the operating and financial results and the quarter and our ability to continue to serve our customers and this environment.

Especially during our due diligence announcement and ramp up of our conversion and integration efforts for the pending combination with Bryn Mawr Trust.

The transient transaction is anticipated to close and early fourth quarter of this year with anticipated bank conversion and early first quarter 2022.

Wish this had a strong first quarter of 2021, demonstrating the strength and diversity of our franchise and the stability of our performance a full year into the pandemic.

We are beginning to see positive signs from the economic recovery and reopening of our local economies, particularly in the positivity of our customers and clients sediment and demonstrated and our credit quality metrics.

Highlighted on slide four of our Investor presentation first quarter reported net income is $65 $1 million, a $1.36 earnings per share and a $1.39 earnings per share and a core basis, which excludes corporate development costs related to Bryn Mawr Trust transaction.

Return on assets and the quarter was 185% and one eight and 9% on a core basis.

Similar to the industry as a whole customer liquidity continues to increase from PPP funding stimulus checks and continued conservatism and spending through the first quarter.

Detailed on slide five customer deposits increased $580 million and the quarter or 5%.

And is up $2 $8 billion or 30% year over year.

With this excess liquidity over the past 12 months, we have paid off around $440 million of wholesale funding increased our investment portfolio by approximately $900 million and have $1 5 billion of additional cash that we will continue to optimize within our overall balance sheet strategy and risk tolerance.

This excess liquidity is resulting in approximately 39 basis point reduction to net interest margin and 19 basis point reduction to our away.

Consistent with the impact of excess liquidity and the market net loans decreased $84 million or 1% when excluding both PPP forgiveness in the quarter and runoff portfolio performance.

Paul revolving lines of credit exposures have held relatively constant over the past year line utilization has decreased from over 45% to just under 36% since the first quarter of 2020.

And these trends along with the continued portfolio churn or headwinds against our original outlook of mid single digit loan growth and May continue and the near term.

A couple of additional points to note on our portfolio.

We have almost completed the runoff of the non relationship commercial loans acquired in the beneficial transaction with now only $55 million of CRE participations remaining.

The remaining runoff portfolio as primary primarily and the residential held for investment portfolio and their current attrition rates could meaningfully run off by the end of 2020 free.

In addition, and the corner, we supported almost $300 million of PPP, two originations for our customers and non customers, which are not on our books and resulted in $2 $2 million of fee income and the period and demonstrates our continued ability to serve our customers through this pandemic with a toe.

It'll have almost one $3 billion and PPP loans generated in the past year.

Net interest margin and the quarter illustrated on slide six is 359%, including a 12 basis point benefit from P. P. P.

37 basis points of CLA.

And offset by 39 basis points of negative impact from the excess liquidity levels previously mentioned.

While loan yields have decreased nine basis points, and the quarter, resulting from poor portfolio churn reductions and customer deposits.

Cost offset much of that impact.

Customer deposit costs are now at the same level as the low point after the great recession in 2000, 22015, which we were able to achieve and just one year's time after the economic slowdown started.

Further details are on slide 25.

Seen on slide seven core fee revenue again demonstrated the strength of our diverse products and services and franchise value, particularly in this lower interest rate environment.

Core fee fee revenue percentage was just over 29% and the quarter.

Core fees grew 20% or $8 million year over year, driven by continued strength and mortgage banking and robust growth and wealth fees, driven by 17% growth and both <unk> and AUM.

We continue to be disciplined and our expense management with focused investments and franchise growth our delivery transformation initiative and and our controls environment.

The core efficiency ratio and the quarter was 57, 9%.

The strengthening macro economic trends and continued reopening of our local markets are seen directly and our credit quality metrics with all leading and credit quality indicators, improving and the quarter.

This combined with continued low credit cost resulted in an ACL at quarter end of approximately $205 million and and ACL coverage ratio of 2.51% excluding PPP.

This is versus $229 million and a coverage ratio of 273% at year end.

The $24 million lower ACL included a negative provision in the quarter of $22 million.

Excluding this release core ROA and the quarter is 146%.

Additional details on ACL is on slide eight.

Assuming continued improvement and the economy and no material portfolio changes, we would continue to provide for loan growth offset by reserve releases aligned with the economic forecast.

Capital levels continue to be robust, while generating return on tangible common equity of 22, 4%.

The board of directors approved a quarterly cash dividend of <unk> 13 per share of common stock and 8% increase from our cash dividend paid in one.

Q2 thousand 21.

During the quarter, we repurchased 267000 shares at an average price of $44.97.

Totaling $12 million and capital return.

We do not anticipate further share repurchases until the close of the Bryn Mawr transaction.

In summary, it was a positive start to the year for with us.

Although we are optimistic about both our near term and long term prospects our performance for the remainder of 2021 will be directly influenced by the path and pace of the economic recovery and related health situations, and the excess liquidity and new markets and impacts on both loan demand and deposit growth.

Thank you and we will be happy to take your questions.

As a reminder to ask a question. Please press Star then one.

And if your question has and answered and you'd like to lose yourself and the Q press the pound key.

Our first question comes from Michael Perito with K B W. Your line is open.

Hey, guys good afternoon.

And Michael Mike.

Dominic I wanted to just stick on your last comment there and I realize it's a bit challenging but on the liquidity side right I mean I guess.

We will have to obviously make some assumptions about when that flows out over the course of the year, but I guess could you maybe give us a little bit more color on how you're thinking about deployment assuming that the cash you know maybe sticks around for a couple of quarters here. I mean is there a point, where you start putting it to work and the investment book I mean, obviously loan growth is a little uncertain right now and even expand.

And the docs, you're willing to provide there on the sides of the balance sheet and liquidity appetite.

Sure. It's a great question and we do anticipate for the excess liquidity to be around at least for a couple of quarters and I mentioned in my comments that the AUM.

Over the last few quarters, we've leveraged that excess liquidity to pay off wholesale funding and have increased our investment portfolio significantly we will continue to evaluate and put that those dollars to us and while it is a drag to net interest margin the opportunity from the incremental volume.

Could generate some NII and offset any lagging growth and the total portfolio.

So it sounds like it's not unreasonable to think that you know look at the period and balance sheet. The cash balances were even higher than the average balance sheet, which suggests I mean.

Assuming that that liquidity stays and it's not unreasonable to assume that that you guys will continue.

Continue to build the bond book here, just given your loan growth commentary that.

And that that you mentioned in your prepared remarks.

That is a good assumption.

And then on the.

And the fee side.

I was wondering obviously some good momentum on a couple of business lines here I was curious if you could maybe give an update on the cash connect outlook for the balance of the year, but also on the mortgage side.

I I, it's always been kind of a tight real estate market and in your neck of the woods and if theres still one off refi momentum here for that and remain elevated or or any other thoughts there would be helpful.

Sure. Good question. So we did see a decrease quarter over quarter and the fees from cash connect even though both units served and total dollars managed increase and that was primarily because of the seasonality slowdown in the first quarter, and particularly harsh weather months and January and February across much of the country.

<unk>.

But we do anticipate that the topline growth will continue based on unit served and dollar served and the mid to high single digits.

On the mortgage side, what we've seen and the first quarters.

Refi mix is still at 70% and still leading the volume we do anticipate at some point in time as the interest rates remain low that those that could have refinance would have but we haven't necessarily seen a significant slowdown as of yet.

Got it and then just some last question for me.

And just apologize if I missed it in the prepared remarks or in the deck somewhere but I was just looking for the quarter to date or the end of quarter.

Modification or total deferral number I was wondering if you have out and and and maybe just to parlay that into a quick comment about you know.

The directional here I mean, you guys kind of stood by your provision costs, but obviously with the deferrals coming down from assuming they did and and the economy kind of slowly chugging along here month by month I mean, it seems like that might be a little conservative I was wondering if you had any updated thoughts.

Yeah.

Hey, Mike This is Steve Clark regarding the deferral question.

Just about 1% of our total book remains in some form of modification.

For the commercial book that represents $79 million and and all of that they they are all paying interest.

So the deferrals and we've seen no uptick.

It's very it's been very flat over the last two quarters and then.

Pretty good about where we stand related to that.

Got it alright, guys. Thank you I appreciate it.

Thanks, Mike.

Again to ask a question. Please press Star then one.

Our next question comes from Brody Preston with Stephens Bank. Your line is open.

Hey, good morning, everyone.

Hello, Brody Hey, Brody.

First of all I want to say thanks <unk>. Thanks for the earnings deck and you guys think you guys have revamped and over the last couple of quarters and there's a lot of great detail and there. So it was nice to come through that last night when you dropped it.

But I did want to start.

Start by asking.

And I and I might've missed it.

Do you have and average balance for your for the PPP loans for the quarter.

We do and we have shared in our materials I think it's slide seven that's right.

Six.

Slide five and I apologize and on there you'll see that PPP loans ended at $5 27.

And so it would be.

And low sixes 600 for the quarter.

Oh, okay. Okay. So just a simple average kind of gets you there.

Yes, okay.

Alright, and then it was good to see the fee income you know I think it's the first the first quarter since the beneficial deal you guys are back above <unk>.

And 30% non.

And with some of the headwinds on on cash connect that you saw but just as we think about mortgage kind of trending lower.

You know I think you had loved us and you'd love to have that mix kind of stay above 30%.

Read into.

Sudbury and Mark deal and so I guess, what levers do we have to Paul so to keep that percentage above 30.

And the short term.

Sure, Yes, I think it's an important context and note that that it's 30% in this interest rate environment of course, and we'd love to be able to maintain at that level and in a rising rate environment and would look to do that and while there may be a slowdown in mortgage we continue to see opportunities in both cash connect and well.

Growth to offset that and obviously with the pending combination with Bryn mawr that would enhance the percentage as well.

Okay got it and then just wanted to circle back on the on the growth commentary so.

I understand there is headwinds, but you did you did kind of stick to the mid single digit guide ex PPP and the run off portfolios and so now that now that the runoff portfolios at least and the commercial side are down.

It was $55 million or so is what you called out and the deck.

And it is is the growth to get to that guidance more back half loaded and what are the categories that you expect to drive that growth from here.

Yeah Brady this is Steve Clark again, so so yes, we do remain comfortable and our.

Expectations for the full year in terms of mid single digit so.

From our view kind of back half second half of the year.

A couple of reasons for that.

As we sit here today our pipeline.

Is as large as it's been since the fourth quarter of 2019 so.

Feeling.

Optimistic there.

We continue to.

We're pretty selective in that space and remain very disciplined.

Regarding pricing and structure, but nonetheless, we have.

CRE opportunities and then lastly, the C&I RMS that we added last October November.

To the team very pleased with the traction they're getting and expect them to continue to produce as we go through of the second half of the year.

As it relates to the C&I growth I would just add certainly dependent on the economy continuing to open up and really dependent on our customers are sitting on so much liquidity, it's dependent on that being used and.

And then as it relates to companies changing banks.

And where do they stand and their PPP forgiveness process, because that is a bit of a headwind.

But generally again for the full year.

Feel mid single digit is attainable.

Okay, and what are the origination yields on new production averaging Steve.

So new production for the quarter and this is.

All loans over $250000.

<unk> was $3 six 7% so that really.

Paris favorably to the fourth quarter, which was $3 two 8%. So we had stated in the past we're kind of shooting for that mid threes.

And.

The first quarter, we were pleased with that in terms of.

The weighted average yield on new fundings.

Great. Thank you for that and Dominic this one's for you and use the $17 5 million and.

And net expected investment for this year and tied to delivery transformation and I just wanted to ask how much of that was accomplished and the first quarter.

Yeah. So.

Yes, I would say I think it's about $3 million or so it will definitely ramp up as some of that is capex investment and wood.

Hey come into and the expense line to depreciation depreciation once those projects go live but overall the $17 $5 million is consistent with what we laid out at the beginning of the year versus our expectation and consistent with the overall strategy. We've discussed over the last few years.

Got it and then I do have a question on SBA just with the relationship managers from 19, it's wanting you added a couple and I.

And the P. P P experiences kind of bolster and everybody's feelings about maybe being able to take advantage of SBA and so do you.

Dissipate, maybe building out this platform and being more I guess more involved in southern New England, and Bangalore going forward just given the just given the fee income opportunities.

Brady This is Steve again, so you know the SBA team has really.

Really gelled over the last year. So we did add three new associates in that space.

Two kind of in market and one kind of a national franchise, and we're seeing opportunity coming out of our business banking book on the commercial side. In addition to the SBA RMS that are focused in that space.

Companies that have struggled over the past year or certainly are candidates for SBA seven a refinancing and.

And if we're if we're effective and that we have the gain on sale possibility. So.

SBA for the bank.

As a growth segment and.

Rent rate may have additional comments there, but that's that's our view.

Awesome. Thank you for taking my questions and I'll step back in the queue.

Thank you and with no further questions in queue I would like to turn the conference back over to Mr. Caruso.

Thank you all for participating today.

Roger and I will be attending Investor conference and events during the second quarter and look forward to meeting with many of you then have a good day.

Well, ladies and gentlemen, this does conclude the conference you may now disconnect everyone have a great day.

And Tom.

And.

And.

And.

And then.

And.

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And last year.

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