Q2 2021 WSFS Financial Corp Earnings Call
Ladies and gentlemen, thank you for standing by and welcome double U S. F S financial Corporation's second quarter 'twenty 'twenty 1 earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question for this session you will need to press. The Star then the 1 key on you touched on.
Telephone please.
Please be advised for today's conference is being recorded.
If you recall our assistance. Please press Star then zero.
I would now like to turn the call over to your host for today, Mr. Dominique Ansel Chief Financial Officer, Sir you may begin.
Thank you Olivia.
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 begin with remarks on the quarter I would like to read 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.
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 indicated 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.
Good afternoon, everyone and thank you for joining us on the call today.
Our our earnings release, and Investor presentation, which we will refer to on today's call can be found in the Investor Relations section of our company's website.
We continue to see positive signs of recovery and reopening of local economies across our region, which is demonstrated in our customers and clients sediments.
<unk> spending trends loan growth and credit quality metrics.
Which just had another strong quarter rounding out a robust first half of 2021.
Demonstrating the strength and diversity of the franchise and the stability of our performance through various economic and rate environments.
Highlighted on slide 4 of our Investor presentation second quarter reported net income is $95.7 million.
$2 and 1 penny earnings per share and a 260 R O a.
Reported and core performance, where comparable this quarter as a large 1 time gain was offset by a few non core expenses as laid out in the earnings materials.
The significant excess liquidity environment continues to have an impact on the balance sheet as seen on slides 5 and 'twenty 5.
Loans grew 2% annualized versus prior quarter, when excluding PPP and purposeful runoff portfolios.
Growth was primarily in commercial lending from higher new loan originations and line utilization.
And from our new Lane leasing business.
Loans at New Lane are up 37% year over year and are just under $300 million in total loans.
Customer deposits grew $445 million or 15% annualized in the quarter, primarily from trust relationships and commercial customers versus.
Versus prior year customer customer deposits have increased $1.9 billion or 17%.
Total customer deposit costs are at historic lows of 11 basis points as low and no cost checking and savings accounts represent 70% of customer deposits with a weighted average cost of only 3 basis points.
Net interest margin in the quarter.
Detailed on slide 6 is 3.3%, which includes 24 basis points of purchase accounting accretion an 8 basis points of PPP income both more than offset by 50 basis points of negative impact from excess liquidity.
Pressure from excess liquidity is expected to persist throughout 2021 and into 2022, particularly given our broad based strong customer deposit relationships across commercial small business consumer and trust and wealth.
Second quarter fee revenue again demonstrated the strength and diversity of our feed products and services and franchise value, especially in this lower interest rate environment.
Core fee revenue was a healthy 30% of revenue when including everyone, excluding PPP and supported by 7% year over year core fee growth.
When excluding the impacts from the Durbin amendment year over year core fee grew.
Core fees grew 16% driven by a 41% increase in wealth management fees supported by a record $26.7 billion of value.
And AUM.
Along with a 24% increase with cash from cash connect.
This was offset by reduced mortgage banking fees from the recent slowdown in refi volume and housing markets supply shortages.
The core efficiency ratio increased to 67% res.
Resulting from lower PPP, lower purchase accounting accretion and lower mortgage banking revenue all in line with our expectations for the year.
We continue to be disciplined in our expense management with investments focused in franchise growth and delivery transformation.
Regarding our ACL and provision.
In the second quarter of 2020 at the onset of Covid, we were very proactive in evaluating the portfolio's believed to be most vulnerable to the emerging economic stress.
As a result of this processed ACL reserves built with the anticipation of potential losses in these portfolios.
Fortunately due to the impact of PPP additional government stimulus loan modifications and the strength of our borrowers these portfolios performed much better than expected.
Combined with the improving economic environment. These factors led to a meaningful reduction in problem loans and the reserve release this quarter.
Shown on slide 8.
At quarter end was $132.4 million with an ACL coverage ratio of 1.63% excluding PPP.
And 193% when including the remaining credit Mark on acquired portfolios.
The ACL now stands $100 million or 111 percentage points less than the peak in the third quarter of 2020, as all credit metrics continue to improve and trend toward pre COVID-19 lows with continued low loss content across the portfolio.
Potential modest reserve releases in the second half of the year will be dependent upon continued improvement in the credit performance in the portfolio and economic outlook and offset by loan growth.
We continue to generate significant capital through earnings and have a strong capital position heading into the anticipated combination with BMT.
As TCE increased 55 basis points in the quarter to 913% and the bank CET 1 ratio improved to 101 basis points to 14.2 1%.
The board of directors approved a quarterly cash dividend of <unk> 13 per share of common stock and no shares were purchased in the quarter as we have paused repurchases until the close of the BMT transaction.
Our original outlook for 2021 on slide 10 anticipated a gradual and uneven economic recovery, which has played out in the first half of the year and we are pleased with the continued strong operational and financial performance delivered in this environment.
The gradual and uneven pace of recovery continues to be our expectation for the remainder of 2021.
And while excess liquidity may impact loan growth in the short term through our diversified business model and disciplined expense management, we anticipate our full year results to be consistent with our original 2021 plan for <unk> as a percentage of assets in the range of 1.5 per cent to 1.6%.
We are optimistic and excited about our future prospects, given our unique competitive and strategic position in our markets the strength of our national fee based businesses, along with the upcoming combination with BMT.
Regarding BMT on June 10th both whispers and Bryn Mawr stockholders approved the merger of Bryn Mawr Intuit. This at a special meeting of stockholders for each company.
We are also excited to share that this week, we received OCC approval for the combination.
Our highly engaged teams at Bryn Mawr, and whiskers are actively working together designing and implementing our conversion and integration plans as the Transat transaction is anticipated to close early fourth quarter of the year.
Pending receipt of the remaining required regulatory approvals.
The bank conversion, including bank branding and branch consolidation is planned for early first quarter 2022.
Thank you and we will be happy to take your questions.
Ladies and gentlemen to ask a question at this time. Please press the star agenda, 1 key on your Touchtone telephone to withdraw your question Quest the pound key.
Standby, while we compile the Q&A last time.
And our first question coming from the line of Michael Perito with <unk>. Your line is open.
Yes.
Hey, good afternoon, guys. Thanks for taking my questions.
Hey, Mike.
I wanted to start on the growth piece of it it seems like.
Obviously really strong C&I franchise in your core markets, but it seems like.
Other areas like like some of your consumer partnerships and new lean and some of the equipment financing or are seeing better growth I guess as part of that because of having a little bit more geographic diversification and I was just curious if you could maybe.
Update us on.
How are you kind of view that element of your loan portfolio today, and and and and do you kind of see yourself exploring more of those opportunities in the future to try and enhance growth outside of the Metro Philadelphia Wilmington area.
Sure Good question and a lot there, but I'll start off we do see strength in the commercial loans, obviously as we've mentioned excess liquidity continues to play into the loan demand in our markets.
And particularly we continue to be disciplined in our pricing and terms.
Which results in a loan growth youre seeing here on the consumer side, we do have various partnerships and avenues generating.
The appropriate products and services for our customers and crude including <unk>.
Partnership with the spring EQ, which is secondary market mobile based lending.
We have learned key generating.
Student lending and we're just launching a new product in the third quarter here, which is unsecured lending with upstart, which we anticipate to add to the loan growth in the second half of the year.
Yeah, and if I could just add on that Mike just some historical context, obviously its rodger.
Obviously.
Our regionally focused commercial driven C&I bank and so I would think that we always like to have some diversity in our loan book, we've kind of targeted that we'd like to have at least 20% of our loans consumer loans that may go a little below or a little above depending upon where things are at but.
With our investments that we've made in the franchise here locally.
Would expect that the majority of our growth.
Over time, we will come from local base lending with C&I being the leading category for us in net in the commercial area. Obviously, that's a little bit challenged right now because of as Dominic said, the unevenness of the recovery and overall.
Conservatism by a lot of our borrowers, but I think we've demonstrated over time the value of those relationships and I think it's important to point out that many of those relationships are the drivers of some of the deposit growth that we've seen which I think again just solidifies the premise of the strategy of ramp.
Full relationships.
Got it very helpful.
Just 2 more I wanted to hit on real quick both yourselves and DMT had really strong.
Quarters growing the wealth management AUM and revenues.
Obviously, I think when you guys announced the deal that was that was a pretty important element of the pro forma franchise and I'm. Just curious if you have any.
I know you have the broader the income guide, but I was just curious if you have any more general outlook comments about combining the 2 wealth platforms and the type of growth that you think you could achieve once that happened.
So this is rodger again, I'll start and I'll, let mark give you a little bit more specificity I would just tell you that everything that we thought coming into the discussions do our due diligence and since then about the wealth opportunity has been confirmed.
We think there's just significant opportunity with our combined franchise the integration process is going very well.
The teams have come together.
The leadership under art and Jen Fox from BB&T.
It really started to put together a very significant integration plan and it's being very well received by our customers and in the marketplace.
So.
I think everybody recognizes the value of the combination combined excuse me combined wealth businesses and we see it.
As much if not more potential.
Then when we did the original modeling I'll throw it over to art for any kind of specific color. Thanks, Roger Mike. This is art and yeah, I'd add maybe 3 points to that 1 as you know as Jen and I have worked through the integration and getting to know each other and we look at each other strategic plan.
We laugh a little bit in that it's almost like we were looking over each on each other's shoulders. As we were preparing our plans independently and so we're finding the businesses are very complementary.
And the teams are realizing that and seeing that potential, but it's coming out of this and they're all very excited.
Leads us to believe that this is going to be a great combination secondly.
Rick Stephen I had been working over the last couple of years to really make sure. The retail commercial wealth businesses are going to market on a whole on a more holistic basis and we're seeing a lot of good interaction between our ends our advisors and so we as you know.
In some cases commercial relationships, where the owners are selling the business and we're getting good referrals. So while we may not get the loan growth. We're certainly getting the fee benefit from that we're seeing the same thing on the retail side with all the excess liquidity and people looking for other places to invest for the business and then thirdly, our corporate trust business is really hitting on all cylinders.
Lenders I mean, partly due to just the market securitization activity is very high secondly, our team with the addition of a new business development officer has made inroads into new relationships.
So that's really helping and we see a pipeline that continues to be very robust on that front.
Helpful color. Thanks, and then just lastly for me and then I'll I'll kick it to someone else.
Roger I, just probably a quick answer I just want to confirm I mean is it fair to for us to assume that once the Bryn Mawr Trust deal closes that your approach to capital deployment, what will probably mirror, what you guys did leading into the announcement as it regards to.
Share repurchase appetite in and kind of the steady dividend payout.
Yes, there will be no change to our long term capital philosophy and strategy, obviously, it just pause because of the comment where we're at in the combination.
I appreciate it thank you guys.
Thank you Mike.
And our next question coming from the line of.
Eric Zwick with Boenning and Scattergood. Your line is now open.
Okay.
Good afternoon, everyone are you able to hear me.
Yes, Hey, Eric.
Hey.
Wanted to first start with.
Thinking about the outlook for for loan growth.
Going forward curious if you could provide an update on just where the pipeline stands today relative to maybe 3 months ago and also kind of how the average yield is trending at this point.
Yeah, Eric Steve Clark.
The pipeline is fairly consistent with what it has been over the past.
Or so so our 90 day weighted average pipeline for commercial is around $235 million.
<unk> remains strong and as high as it's been since the fourth quarter.
Of 2019.
So.
Despite the headwinds we are getting opportunities.
Across our C&I and CRE businesses and feel good about it regarding yields.
New loans booked greater than $250000 for the second quarter.
The weighted average yield was 352.
We target that mid threes feel good about that that compares to $3.67 in the first quarter.
Fairly consistent.
This is Roger if I could just add to that and our fundings are commercial loan fundings were up in the.
Second quarter, there is still I think a little bit under $450 million. It's just a challenge right now candidly to stay stay in front of the pay offs for all the reasons that we've talked about so we feel good about the momentum.
The churn has been a little greater than we had anticipated and thats really what you see reflected in the outlook for the second half of the year.
That's good color I appreciate it guys switch.
Switching gears to credit if I look back to the press release from second quarter of last year.
Hotel portfolio had $247 million excuse me of loans that received I think risk rating downgrades and.
And this quarter to 21 press release indicated that total problem assets declined by about $100 million or sales, mainly due to the hotel portfolio. So just curious as you look at it today kind of what is the percentage of those original loans that were downgraded that have yet to be upgraded and you know what are you seeing but within knows any commonality is from geography or a hotel type.
For occupancy.
What are you still kind of watching and maybe it gives you some concern today.
Yes, so Steve again, so last year of our hotel book, which was about $540 million, we did downgrade and criticize a little over 50% of that book.
So we felt that was the correct action at that time and as you have read.
We've seen improvement there and we have upgraded some of that exposure here in the second quarter. So the percent of criticized assets in the hotel book.
Has been reduced down to <unk>.
39%.
So all of those borrowers are paying are all but 44 million are paying their original contractual payments.
The remaining 44 million, which represents.
For a 5.
Properties are paying interest only.
So the book really has held up.
And rebounded from where we thought we were back in the kind of the second quarter of last year.
Occupancies continue to.
To kind of trend upward.
About a third of our book is leisure.
At the Jersey shore or Delaware beaches.
You cannot get a room at this time of year.
As the location, so very very very strong.
Occupancy at the leisure.
Hotel for the business travel is coming back Occupancies have continued to increase I don't have specifics.
But I can share anecdotally 1 borrower that we spoke to just this week has 15 properties all business.
Focused and his current occupancies are approaching 70%. So anecdotally. That's 1 example of it.
Just the positive trend were seeing kind of across that entire portfolio.
Thanks, Steve and just last 1 for me and then I'll jump off Dominic in your prepared comments you mentioned that you expect the excess liquidity.
And the drag on the margin to persist into 2022 as you look at all of the.
Deposits that have come in from from the stimulus efforts across both your commercial and consumer customers. How do you guys try and look at it and figure out what might be kind of sticky and then ultimately be long term core deposits and what might flow out the door at some point and leaves relieve some of the pressure on the margin.
Sure. It's a great question I think a big first.
First stems from the fact that.
We focus on relationship based banking and I would just add to your list the trust and wealth deposits continue to grow as well and really leads to our outsized and lower loan to deposit ratio in the mid Sixty's and and so it's really partnering with them speaking to them understanding their demands.
I think it will trend probably consistent with the overall growth in the economy GDP and the impact.
It is having on.
On prices and spending overall.
We do anticipate with the continued growth and theres, even more stimulus that's that could be on its way that we're really focused on.
Utilizing it appropriately we paid off for $100 million of our senior debt in the past quarter, we've paid off $1 billion of wholesale funding over the last year, and we've doubled our investment portfolio and staying within our risk tolerance and liquidity expectations and and we will look to do that.
Incrementally over the next quarter and then really once we close on BMT optimize the combined balance sheet with the ability to flex back down if we see the excess liquidity run off.
Thanks for taking my questions today.
Thank you.
Yeah.
Ladies and gentlemen, as a reminder to ask a question you Wayne Kapusta Star then the 1 key on your Touchtone telephone.
Our next question coming from the line of Brody Preston with Stephens. Your line is open.
Hey, good afternoon, everyone.
Jody.
Hey, a question for you just regarding the the runoff portfolio, so I'll speak for myself.
Say that it's a little challenging to model the runoff portfolio on a quarter to quarter basis.
Particularly the residential side.
So I know you've got Bryn Mawr coming up.
At the beginning of the fourth quarter here.
But has there been any thought to given to.
Potentially selling the residential run off portfolio and I guess, maybe cleaning things up on the loan side, just a little bit faster than than letting it just run off so that way you can kind of maybe reset and at that point with the deal closing maybe you could use some of that capital to buy back a bigger.
Slug of shares to plug the earnings hold I'm, just trying to think about you know.
The the.
Puts and the takes of pursuing a strategy like that.
Yeah, I appreciate that and I'll address the resi mortgage specifically I think as you know Brody. This these run off portfolio is all really.
Really originate with the exception of residential mortgage from the beneficial transaction and we thought initially it would take about 4 years for that stuff to a trade off it's happened sooner.
Right around 3 years by the time at the end of this year, primarily because of the rate environment and really when you look at it the commercial portfolios will have run off by the end of the year and Theres, a very small student loan portfolio less and we don't see any addition to the commercial runoff portfolio has shrunk from BMT, So what will be.
Left is the residential mortgage book.
This strategy for us predated beneficial and I obviously.
We evaluate lots of different things, but you know most of these mortgages are either relationships today or potential for relationships because of where they were a significant.
Portion of our originated through.
Our retail network or our mortgage loan officers, who operate within this region and so we want to use the opportunity to see if we can enhance those relationships.
Over time, and really the quote unquote run off going forward, including what will come out from BMT is really just the normal amortization of.
Of letting it a trade off and we would expect that since we've kind of going through this period, where the rates dropped significantly.
We wouldn't expect to see as much refi activity, although there will be some so I think that will flatten out and be a more and more sort of portfolio mortgage duration attrition rate and again, we want to focus.
If we can grow those relationships so I wouldn't expect in the near term our wholesale.
Transaction as it relates to resi mortgage portfolio.
Got it thank you for that and maybe just to.
Maybe just as a follow up to that.
I'm, assuming that the residential mortgages that you've pegged as runoff for kind of a single relationship they've just got their mortgage with you. So I guess what products are you trying to cross sell them into and I guess, what have you been more successful with so far in terms of customers that might have been designated as a runoff loan originally and you've converted them maybe to a more full relationship.
Yes.
The large percentage of the mortgage the resi mortgages that came over from beneficial where I would call sort of single service.
Relationships so they were.
Originated primarily through broker and builder arrangements and they would never actively engaged with.
We've undertaken an effort to.
Make those fuller relationships, we've had a team of people who have been in contact with these customers to not only hopefully capture a refinance opportunity, but also traditional banking products.
Because they're located here. These are all located here.
In our geographic footprint and then the remainder of it is you know we operate as you know an originate and sell model. So in many cases. These loans that are sitting here that are a trading off are already part of significant relationships, including referrals that come out of our our private bank or <unk>.
Commercial group as well as the broader.
Retail network.
Got it thank you for that color Roger I appreciate it.
I guess just maybe.
Switching gears Dominic.
There's another another quarter of significant liquidity growth despite the.
<unk> Securities build you have and so just with the with the buybacks being in suspension for another quarter in the loan growth guidance coming down a little bit.
Are you expecting for that liquidity to just kind of hanging around are there any sort of near term deployment opportunities from here that we should be thinking about.
Sure.
Just mentioned, we have optimized the significant amount of the excess liquidity over the last year, including the June payoff of the $100 million senior debt and debt doubling up the investment portfolio over the last year, we would look to continue to do that and we're doing it with an eye towards the BMT transaction and the post.
Combination balance sheet optimization. So we do see the opportunity to continue to increase the size of the investment portfolio.
That works within our framework of except for investments are low risk moderate yield and providing the cash flow liquidity that we expect from the portfolio. So you'd likely see that continue to increase in the second half of the year.
Got it and then 1 of the slides that stood out to me in the deck was the digital the digital slide and given.
Given the sustained shift you all have seen in the digital channels for customer interaction.
Wanted to get an update on how your view may have been shaped over the last year or so on the branch network do you see the digital channel is as an additional source of customer acquisition tool or do you think it's becoming more of an alternative to physical locations at this point.
Okay. This is Rick.
I think what we're seeing is there is obviously at a more rapid adoption of the digital products and services that we have but.
But we're never going to be a digital first company.
We think the relationships are important and we're going to do everything to try to humanize the digital touch and Thats what were doing in our <unk>.
Delivery transformation effort and we hope to see more of that hit hit the market over the next year.
Alright, Great and then last 1 for me I am sorry, if I missed it in the deck, Dominic but could you remind us what percent of the loan portfolio.
As floating rate and and then if there are any floors in place what percent of the loan portfolio was at or below floor levels.
Sure, we're running about 50.50 between variable and fixed.
And that would we would look to continue to increase the variable portion of that portfolio as we talked about what the run off of.
Rajeev mortgage portfolio and continue to grow that relationship.
C&I lending.
Brian This is Stephen about a third of that variable variable rate book have floors.
In the note and.
All of our new originations over the past year and a half have floors.
Either zero percent LIBOR floors or.
A floor of 3% when we can get it.
Got it and Steve do you happen to know what of that third do you happen to know what percent of that is currently at or below a floor levels.
So.
I think we have to get back to you with an exact answer my guesses.
Couple of hundred million dollars at most.
Okay.
Alright. Thank you very much everyone. I appreciate you taking my questions.
Thank you.
And our next question coming from the line of Russell Gunther with D. A Davidson your line is open.
Hey, This is Manuel now have us on for Russell.
Hello.
Hey.
Just wanted to check in on.
This.
With the efficiency ratio target of low <unk> do you have a kind of a.
What expense run rate should we expect to help achieve that.
Sure, Yes, so we do anticipate as I've mentioned.
To continue our expense discipline in this environment and monitor.
Growth rate of the portfolio, but we will continue to invest in our delivery transformation efforts as we've laid out in our materials and in franchise growth, particularly in wealth and cash connect and so we would continue to see some <unk>.
Step up in the run rate of absolute dollar cost from the second quarter into the second half of the year, but would look to.
To maintain positive operating leverage and ensure that revenues are growing faster than the expense growth rate.
Thank you.
You got all the rest of my questions. Thank you very much.
Thank you very much.
Thank you and I see no further questions in queue I would like to turn the conference back over to Mr. Cunningham.
Thank you for participating on our call today, Rodger and I will be attending investor conferences and events throughout the third quarter and we look forward to meeting with many of you then enjoy the summer. Thank you. Thank.
Thank you for everybody.
Ladies and gentlemen that does conclude our conference for today. Thank you for your participation you may now disconnect.
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Energy loans.
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Yes.
Yeah.
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On the volume.
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Yes.
No.
John.
Moving on.
Tom.
Perfect.
Gross margin.
John.
Tom.
Yes.
Thanks, Paul.
Okay.
On the dividend income.
Yes.
Paul.
Yes.
<unk> net.
John.
Sure.
Net income.
Okay.
John.
John.
Tom.
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Yes.
Net.
Thanks for those.
Revenue per unit.
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John.
Moving on.
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Paul.
Yes.
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Yes.
Non-GAAP.
Loan growth for volume.
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