Q1 2022 WSFS Financial Corp Earnings Call

Yeah.

Thank you for standing by and welcome to the W. S. S. S Financial Corporation first quarter 2022 earnings conference call.

At this time all participants are in a listen only mode.

After the speaker presentation, there will be a question and answer session to ask a question. During the session you will need to press star one on your telephone please.

Please be advised that today's call is being recorded.

If you require any further assistance. Please press star zero I would now like to hand, the call over to your host for today, Dominic Caruso Chief Financial Officer. Please go ahead.

Thank you Latif.

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 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 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 car call are subject to the safe Harbor statement.

Okay.

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

Yeah.

We achieved significant and exciting milestones in the first quarter of the year.

After the close of our combination with Bryn Mawr Trust on January one.

We successfully completed the bank technology branding and branch conversions over the weekend of March 18th.

We converted over 40000 customer households, consolidated 34 branches and began recognizing cost synergies from the transaction.

We are slightly ahead of schedule to achieve or exceed the 65% of the identified annual transaction related cost savings in 2022.

We also announced new branding supporting Bryn Mawr Trust as the prominent wealth management brand.

The wealth technology integration is expected to occur throughout 2022 and into early 2023.

In addition, we closed out our three year strategic plan that included the combination with beneficial and our delivery transformation initiative.

Both of which successfully positioned us for a combination with Bryn Mawr and the continued opportunities we see across a diversified business model.

We are now rolling out our next three year strategic plan, which I will speak to in a few moments.

While our reported results in the quarters included significant impacts from onetime items, resulting from the closing of the Bryn Mawr transaction, we had strong underlying core financial results.

Reported net income was $3 8 million or seven basis points of ROA and <unk> EPS.

This included 51 $6 million of pretax corporate development and restructuring charges associated with the transaction.

676 basis points of ROA, and <unk> 60 of EPS.

And when also including the initial Bryn Mawr ACL provision of $23 5 million, our ROA was 117%.

Well our performance metrics are noisy this quarter due to the combination with Bryn Mawr.

Our performance demonstrates the strength of the franchise and the momentum to deliver improved returns throughout the year.

Our loan to deposit ratio of 64%.

Low customer funding cost of seven basis points stable yields and an asset sensitive balance sheet, all position us well for the rising rate environment.

We anticipate NIM expansion of 50 basis points by the fourth quarter of 2022, assuming a total of 725 basis point increase in fed funds throughout the year.

As illustrated on slide six of the earnings supplement this is 30 basis points favorable to our original <unk> NIM outlook due to the anticipation of four additional rate increases and earlier phasing of the increases throughout the year.

As NIM expands and we continued to achieve cost synergies throughout the year, we anticipate our core ROA to improve approximately 20% to 25 basis points by <unk> in the range of 1352, 145%.

On slide 12 of the supplement our ACL coverage ratio of 119% is consistent with prior quarter.

The $136 $3 million of total ACL includes approximately $50 million of ACL from Bryn Mawr, including $23 $5 million of initial BMT ACL provision for non PCI loans.

And $26 $1 million initial ACL for PCI loans.

When excluding the initial BMT ACL provision.

There would have been a provision release of $4 $5 million in the quarter due to the continued improvement in credit trends in the portfolio.

The cover coverage ratio is 153% when including estimated remaining credit marks on acquired loan portfolios.

We returned approximately $56 million of capital to shareholders in the quarter, including $8 5 million of common stock dividends and $47 6 million and share repurchases, which included routine share repurchases from 2021 that were paused in anticipation of the combination.

And incremental repurchases.

Our regulatory capital ratios are substantially in excess of well capitalized and significantly favorable to our capital position and anticipated post close at the time of the BMT combination announcement.

With CET, one and tier one capital of $13, 93% and total capital of 14, 89%.

Yeah.

Tangible common equity ended the quarter at seven 7%.

This is a 167 basis points lower than prior quarter, resulting from the changes in OA, a OCI from the rising rate environment.

Impact on the SaaS portion of our investment portfolio, plus the anticipated onetime costs associated with the Bryn Mawr transaction.

The total current LCI impact on TCE is a negative 155 basis points.

Similarly, as illustrated on slide six of the supplement or.

Our tangible book value per share decreased $6 25 in the quarter, resulting from the same two events with approximately two thirds of the reduction from OCI and one third from BMT onetime transaction impacts.

The total estimated BMT transactions dilution is favorable to the transaction model expectations at the time of the deal announcement.

Regarding the impact of OCI. It is important to note that given our strong diversified customer deposit growth over the last few years and the consistent loan to deposit ratio in the low sixty's.

Along with our strong capital position, we made the purposeful and strategic decision to deploy our excess liquidity into our investment portfolio.

The strategy was to maximize earnings maintain duration of cash flows from the deployment minimize risk and to provide optionality.

This optionality was to provide flexibility in the event customer deposits ran off.

Or to redeploy cash flows into net organic loan growth.

Or to reinvest in cash flows back into securities.

We continue to believe this is the best option for us.

Regardless of categorization, we do intend to hold these assets to maturity and expect a OCI loss position to amortize off over the duration of the investment and back into tangible equity.

Lastly, as illustrated on slide seven in the supplement we are sharing the financial targets supported by our three year strategic plan for 2022 through 2024, which focuses on optimizing our investments made over the last few years, including our combinations with beneficial and Bryn Mawr.

And our delivery transformation initiative.

We believe we are strongly positioned for above market growth in the large as the largest locally headquartered community bank in our market and differentiated from the other large market share banks that are all nationals or superregionals.

Loan growth will be supplemented by continued strength of our diversified fee revenue businesses in particular, our national franchises in wealth and cash connect.

When combined with our asset sensitive balance sheet and diversified low cost deposits.

Our ROA is expected to improve during the strategic plan period.

In our planning we have considered the macroeconomic volatility and recognize that there will likely be variability in our performance due to these external factors.

We've captured the anticipated volatility in our range of ROA between 153% and 170% by the end of the planning period.

Most importantly is that we continue to hold as our primary financial objective to deliver sustainable high performing results as defined by our ROA in the top quintile of our peer group, which we believe our plan delivers.

We will now open up the line to answer any questions you may have.

Thank you to ask a question. Please press star one on your Touchtone telephone again Thats Star one on your Touchtone telephone to ask a question to withdraw your question press the pound key please standby, while we compile the Q&A roster.

Our first question comes from the line of Frank Schiraldi of Piper Sandler Your question. Please.

Yes.

Frank.

I wonder if.

I guess you are not.

<unk> guide.

Loan growth at this time, but is there any color you can provide on.

Commercial.

In terms of you know you've got a strong pipeline paydowns have remained elevated.

But have you seen that slow now that rates have moved higher and then any additional color just on that side of things.

Yeah, Hey, Frank Steve Clark here.

So yeah, so commercial loan balances quarter over quarter were flat.

But activity was very strong.

Commercial loan funding last quarter of over 500 million on top of $490 million in the prior quarter. So.

Headwinds remain in the C&I space through excess liquidity.

And there certainly has been historical refinance activity in CRE, we do believe rising interest rates should lessen.

Some of the refinance activity going forward.

On top of that our pipeline as you mentioned is very strong the.

Our commercial 90 day weighted average is $330 million on top of that is our small business pipeline of $30 million.

And lastly, we have.

Unfunded non revolving commitments of a little over $400 million. So these are loans that have closed over the past year, but have not yet started to fund and we would expect those to start funding in future periods. So we feel really good about where we are the significant activity.

Very strong pipeline and.

Prospects remain very very favorable we are forecasting kind of that mid to high single digit at the bank level. So that includes activity coming out of our.

New lending finance business, the leasing business and the strategic partnerships, we have on the consumer side, which have been doing very very well.

Okay, Alright, Thanks, Steve and then I guess, just following up on the consumer side.

Is the growth.

A split in the quarter or is it mostly the upstart relationship not sure how much detail you can give there but you.

Certainly on pace for that double digit growth on that side of things just wondering if youre still comfortable.

With that.

Sort of a growth level.

Just Kevin.

Maybe macro factors.

That's driving any change to your thinking on that side of things.

Yes.

We're continuing to do.

Somewhere in the neighborhood of 20 plus million a month.

We are obviously monitoring this portfolio closely because it is new to us the delinquencies are still within our planning range. The loans are generally in our footprint. We are able to move on a dime in the ability to control either underwriting pricing or geography and 80.

5% of those loans are prime and Super Prime.

With an average FICO of 695, so at the moment, we are comfortable proceeding as we are.

Okay.

And if I could just sneak one more in.

On a quick one on NIM guide.

From the initial guide last quarter assumed a drag from excess liquidity of 35 to 45 basis points.

Youre right that I guess, the high end of that in the first quarter is there any adjustment.

You made to that for the updated guide you provide in the slide deck.

Hey, Frank we have not updated our guidance for that and as we communicated at the original outlook last quarter as we anticipated the excess liquidity drag to continue to shrink throughout the year.

Got you okay. Thanks, Tommy Thanks, guys.

Thank you.

Thank you. Our next question comes from Michael Perito of K B W. Please go ahead.

Hey, guys good afternoon.

Hey, Mike.

I wanted to spend a minute on the comments that you made dominic around the liquidity position I guess and I apologize if I missed this I was trying to follow but I guess the question is is just.

You guys purchased continue to grow the securities portfolio, but does that potentially continue going forward or do you think that that has kind of capped out here.

And as we look forward, it's more likely that any excess cash like let's say deposit outpaces your projections or anything like that we'll just be held in it more shorter term flexible cash equivalents, so or do you think there could be a situation where the bond book growth further from the Q1 levels.

Yes. Good question for the most part we've achieved the target balance sheet. We're looking for however, there is likely some additional expansion from the first quarter levels in the MBS portfolio.

But not meaningful relative to the amount we've grown in the last few years.

And what's the.

And then once again sorry.

You said this but just the updated kind of blended duration of the investment portfolio. After the purchases in the first quarter.

Yeah, it's still around five years, which is the duration, we look to manage to within the portfolio.

Got it.

And then just secondly, kind of a quick too.

Two part question here, just one you guys updated the roadway.

Q4 exit run rate for the year with the new NIM Guide.

Obviously, it's you can kind of back into it but just say is it safe to say that.

The efficiency ratio likely would come in lower as well or do you think that that.

If the fed has to raise rates back dramatically in response to kind of stubborn inflation theres a chance that the expenses are guided to when that scenario could drift.

Well, partly offsetting some of that benefit.

Yeah, I think you summarized the macroeconomics.

Tax accurately.

All else equal, obviously, a higher NIM.

Leading to higher NII would reduce.

The efficiency ratio.

But to your point in this environment the higher interest rate environment is to stem inflation and the impacts of inflation are still playing out.

So we continue to expect improved efficiency ratio.

And we expect the cost takeout that we were the synergies from BMT to continue throughout the year.

Great and sorry.

One last one just curious the three year strategic plan.

The thoughts around M&A.

Changed or altered at all just kind of strategically now with with Bryn Mawr under your belt, and obviously a lot of space between you and $10 billion in and two fairly large deals in the last few years just wondering if there is any different.

Hi, good indication or thoughts around M&A that are worth refreshing at this point. Thank you.

Hey, Mike its Rodger levenson.

<unk> of our strategic three year strategic plan is focused optimize and integrate.

And really it is very much focused on organic growth. So nothing significant is built into that plan as it relates to M&A, particularly on the bank side that being said, we're always going to invest in the franchise, but the plan is achievable without any significant investment build.

Into the model.

Cool Thank you guys.

Thanks, Mike.

Thank you again to ask a question. Please press star one on your touch tone telephone again Thats star one on your Touchtone telephone to ask a question.

Our next question comes from the line of Russell Gunther of D. A Davidson your question. Please.

Hi, good afternoon guys.

Hey, Russell.

I appreciate the update on the margin expectations and assumptions there could you give us a sense.

Update us in terms of how youre thinking about deposit betas.

Just the backdrop of that 7% rate hikes in 'twenty, two how that might progress.

Sure.

I'll start with the historical deposit betas had been in the 50% range. The most recent rising rate cycle in 17, and 18 was in the mid twenties.

We would expect to be closer to the more recent rate environment, typically though deposit betas have lagged about six to nine months from when interest rates start to rise that would likely mean that very low deposit betas would begin in 2022 and would more likely play out in the next year.

But I think at the end of the day the inflationary environment. In this cycle is different so that may play out differently in deposit betas, although it's important to note that 14% of our deposit base is in trust and wealth at no interest rates and believe we believe that will help stabilize the deposit beta in.

In a rising rate environment.

Okay got it very helpful.

And then.

The 2022 outlet slide again.

Left unchanged, we've had some discussions around that.

Longer term plan and where profitability metrics are going.

I guess is there any color.

Color you could share in terms of your expectations for total fee revenue contribution I know had been in the 30% range previously.

Does the NII.

Outlet take that lower or is there any refreshed outlook in terms of the pro forma franchise, particularly on the wealth side.

Sure I'll start with absolute growth in our outlook, we communicated that we expected mid single digit growth. This year and fees. We continue to expect that and that included some durbin impacts from BMT in the loss of PPP loans, but as we think through the strategic planning horizon, we would expect.

Fees to grow in the high single digits double digit range and that would continue.

We looked for fee.

<unk> income.

Ratio around 30 or better, but obviously that is directly impacted by the interest rate environment. So depending on the number of rate increases that could be in the high twenty's to low thirties, but most importantly that we continue to see it growing.

In the high single digits to low double digits over the next few years.

That's very helpful. Dominic Thank you for that.

Then just last one for me on capital.

Heard you on the on the M&A side of things and your commentary about expectations for that to continue to build.

How should we think about buybacks going forward relative to <unk>.

Yes, I think most importantly that we continue to hold that our historical practice and philosophy about capital return will continue.

In this environment it has proven.

A good Max.

Maximize our shareholder returns and we will continue to evaluate our total capital position clearly in this environment, we will evaluate that first and ensure that we have the right amount of regulatory and tangible equity and then we will return at least 25% of our core.

Net income split equally between dividend and routine share repurchases, regardless of price and then anything incremental to that will be a function of those capital positions loan growth opportunity and ultimately our share price ensuring that any incremental.

Share repurchases would deliver an IRR greater than 18%.

Understood. Okay. Thank you for taking my question.

Thanks Ross.

And with no further questions in queue I'd like to turn the call back over to Mr. <unk> Sir.

Thank you for joining the call today, 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 great day.

This concludes today's conference call. Thank you for participating you may now disconnect.

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Good morning, everyone.

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