Wsfs Financial Corp Q4 FY2021 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to WSFS Financial Corporation Fourth Quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Operator Instructions. I would now like to turn the conference over to your speaker for today, Dominic Canuso, Chief Financial Officer. You may begin.

Thank you, Wanda, 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 we begin with remarks, I would like to read 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. 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. With that read, I will pass the call over to Rodger Levenson.

Thanks Dominic. Considering the unique nature of the timing of the Bryn Mawr Trust close on January 1, I will provide a few summary thoughts on 2021. After my remarks, Dominic will be providing a detailed overview of the 2022 outlook, which includes the full-year of the combined companies. 2021 was a strategically important year for WSFS. Our financial results were very strong with full-year core earnings per share of $5.63 and a core ROA of 1.80%. In conjunction with the improving economy, we experienced a release of approximately $117 million of the credit loss reserves from the COVID-related build in 2020. Excluding the impact of the reserve release, the full-year core PPNR was $236 million or 1.58% of average assets. As detailed in the earnings release and investor presentation, the primary drivers between reported and core results were corporate development and restructuring expenses related to BMT and the impact of the litigation settlement recovery, which occurred at the end of the year. In addition to our financial performance, WSFS exited 2021 with very positive momentum driven in large part by our prior franchise investments. First, while loan growth continues to be impacted by significant excess customer liquidity, commercial loan fundings and pipeline continued to grow in the fourth quarter, exceeding pre-COVID levels. The Upstart consumer loan partnership has performed above our original plans and NewLane leasing had its strongest quarter in its early history. Second, deposit growth continued in the fourth quarter, mostly from our corporate trust business in Wealth Management, almost all of which is non-interest bearing. It is important to note that 54% of our customer deposits are from commercial, small business, and wealth segments. Overall, our balance sheet remains asset sensitive and combined with our liquidity, we are very well positioned for rising rates and our ability to fund future loan growth. Next, both Wealth Management and Cash Connect ended the year strong, continuing to underscore the strength and diversity of our fee-based businesses. Also, consistent with the reserve release in the quarter, credit metrics continue to improve with significant reductions in problem loans, non-performing assets, and net charge-offs. Overall, these metrics are at or near where the portfolio stood at the end of 2019, prior to COVID. Finally, and importantly, we closed BMT right after the end of the year. As we said at the announcement, this combination significantly strengthens our business model, builds on prior franchise investments, and enhances our unique competitive positioning as the largest locally headquartered bank and wealth management franchise in the Greater Philadelphia and Delaware region. I will now turn it back to Dominic for the 2022 outlook.

Thanks, Rodger. We head into 2022 with significant opportunities as a combined organization with over $20 billion in assets and $58 billion of AUA and AUM. We anticipate our performance to improve throughout the year as we capitalize on our unique presence in our markets, execute on revenue synergies, and achieve cost synergies from our combination with Bryn Mawr Trust. On Slides 5 and 6 of the Investor presentation, which is available in the Investor Relations section of our website, we lay out our expectations and outlook for 2022, which I will walk through now. The growth rates in our outlook are based off the combined pro forma year-end 2021 estimates presented on Slide 5. Net loan growth is expected to be in the mid-to-high single digits, excluding run-off in our acquired residential mortgage portfolios. With the combined 102 lenders, across C&I, CRE, small business and private banking, commercial loan growth is targeted in the mid-single digits. This is supplemented by double-digit growth rates in NewLane, our small ticket leasing business; and our consumer partnership portfolio, which includes the recent successful launch of our Upstart lending product. These growth rates assume a reduction in commercial loan payoffs, resulting from the excess liquidity given the anticipated rising rate environment. Deposits are expected to remain relatively flat throughout the year. Our elevated and robust deposit levels, supported by our relationship-based strategy, are generated from across all our primary lines of business, while providing historically low funding cost. Our expectations are subject to the somewhat unpredictable nature of the current macro excess liquidity environment, which we assume continues at elevated levels through 2022. Consistent with our strategy over the past two years, we continue to deploy our significant excess liquidity methodically into our investment portfolio, generating yield and earnings, while maintaining a shorter duration and providing ample liquidity for future net loan growth or reinvestment at higher interest rates if the excess liquidity environment persists. Full-year net interest margin is anticipated in the 3.15% to 3.20% range, with margin expansion throughout the year, supported by loan growth and three assumed interest rate increases of 25 basis points each. Our NIM outlook assumes a 7 basis point to 11 basis point benefit of purchase accounting accretion and a 35 basis point to 45 basis point negative impact from excess liquidity. Fee revenue growth is expected in the mid-single-digits, including a reduction in deposit overdraft fees, the impact of Durbin on Bryn Mawr’s legacy interchange income, and the loss of PPP fee income in 2021. Excluding these impacts, fee revenue is expected to grow mid-to-high single digits, driven by double-digit growth in Cash Connect, mid-to-high single digit growth in trust and wealth, and meaningful growth from synergies from BMT’s capital markets platform, particularly in a rising rate environment. This results in a core fee income ratio in the low to mid-30s. Provision costs are expected to be between $15 million and $25 million, excluding the initial ACL impact attributable to BMT. Provision costs are driven by assumed net loan growth, continued strong portfolio credit metrics and the stable economic outlook. An efficiency ratio in the low 60s is driven by the assumptions previously mentioned, our continued investment in talent, and our delivery transformation initiative, along with the phasing of the BMT cost synergies beginning with the bank conversion in late 1Q. We are on track to meet or exceed 65% of the target annual cost savings identified with BMT with 100% of the targeted cost savings achieved by early 2023. As cost synergies are realized, the 4Q efficiency ratio is expected to be in the high-50s. And consistent with 2021, our tax rate is expected to be around 24%. Based on anticipated performance and driven by our momentum and strategic opportunities previously mentioned, ROA for the year would be around 1.10%, with performance improvement expected throughout the year, and a 4Q ROA around 1.20%. We will now open the line to answer any questions you may have.

Thank you. Operator Instructions. Our first question comes from the line of Erik Zwick with Boenning & Scattergood. Your line is open.

Thanks. Good afternoon, everyone. Wondered if I could first start with the interest rate sensitivity: you mentioned obviously within your assumptions for the year you're assuming three fed funds rate increases throughout the year. Just curious how your asset sensitivity may have changed with Bryn Mawr now that transaction is closed, and additionally, what are you assuming as far as deposit beta assumptions in that model, and just kind of curious if you think the real-world betas in the cycle will be similar to what you're using in the model?

Sure. Thanks, Erik. So, we are asset sensitive, as laid out on Slide 35 of our investor presentation. However, I'd caveat that that is the legacy WSFS at year-end 12/31. Currently, our variable bucket is about 52% of total loans. With the close of BMT, we anticipate that to be in the high-50s, so we would increase in asset sensitivity. The three rate increases assumed this year have approximately a 6 basis point impact on NIM with an exit impact of about 12 basis points. The deposit beta assumed is close to 0 given the extremely low interest rates and our experience that there's typically a 6 month to 12 month lag in deposit betas after the first interest rate increase.

That's great, thanks. And then turning towards the expectations for loan growth in the year within that slide, you mentioned some confidence and mentioned reduction in loan payoff levels throughout the year. Just curious about your confidence in that occurring — are you already seeing payoff slowdown with some of the increases in rates you've seen at this point?

Erik, this is Steve Clark. So, this is our view that we believe with a rising rate environment, some of the payoffs we've experienced this past year and this past quarter will be behind us. Many of our CRE borrowers have found the permanent market and have locked in rates with the threat of increasing rates. So, our forecast is less payoff activity during 2022 than prior years.

Got it. Thanks for the clarification there. And last one for me, just sticking to the loans, within the 2022 outlook you talk about mid-to-high single-digit growth, excluding the residential mortgage portfolio. So, are you aiming to keep the residential mortgage portfolio flat, or do you think it will decline throughout the year? What are your expectations with regard there?

Sure. We would expect that to run off commensurate with the interest rate environment and the refinance conditions. So, it is expected to run off with a headwind of about a 1% to 1.5% impact to our net growth rate. Sorry, Erik, are you still there? Wanda, maybe he got disconnected. If we could continue with additional questions.

This is Rodger Levenson, and for those of you still on the call, we're just trying to connect with the operator. Not sure what happened. We'll be connecting shortly. Technical difficulty.

And our next question comes from Frank Schiraldi from Piper Sandler. Your line is now open.

Just curious on what the modeling implies for — assumes for securities purchases, increases to the securities book in 2022? And in terms of size, does it grow over the year?

Sure, Frank. The recent investments that we've been acquiring are in the high 170s and we would anticipate that to increase with the expansion of the 5 and 10 year. However, the runoff legacy investments could be comparable to that rate as they were purchased in a higher interest rate environment. So, where we landed for the year is about a 170 basis point yield on that portfolio, and we do anticipate to continue that for the foreseeable future. In terms of size, yes, we would expect it to grow about 5% from where we ended the year. So, a couple of hundred million more as we complete our current round of excess liquidity deployment. Any remaining incremental purchases would be a function of the macro liquidity environment.

Got you. And then in terms of the guide on the wealth management side, I think it's mid-to-high single digits — does that factor in the recent equity markets sell-off and how do we think about that factoring into growth, especially now that you have more of an actively managed portfolio?

Hey Frank, thanks for the question. Let me just step back a second. I'm still expecting more high single-digit growth in our core business, but if you look at our wealth business, we really have three sources of fee income. One is driven by our account base fees that tends to come from our corporate trust area and some of our directed trust. We have AUM-based fees and then we have transaction-based fees. We serve as assignment agent for some high yield deals and there was a lot of trading in those positions in the fourth quarter. If you look at the volatility, in the third quarter of 2021 we saw a 50% increase in assignment fees that declined by about 25% in Q3, and we saw a 40% increase in Q4. So, it's very volatile. When you strip out that transaction activity, we're still looking at high-single-digit growth in our core wealth business.

Okay. And does that take into account what happened in January in the markets? I just don't know how impactful market moves are to the actively managed portfolio.

We really did see our fourth quarter AUM, a combined BMT and WSFS, up about 5%, so that would indicate about a 5% revenue growth, all else being equal, going to Q1. We have modeled an assumption that the markets, our portfolios, would be up probably 4% to 6% this year. The volatility you're seeing right now, we saw it in the fourth quarter of 2018, we saw it in the first half of 2020; that's to be expected, but that doesn't mean the market for the full-year will be negative and we still expect positive returns this year.

Sure, okay. And then just lastly, in terms of the double-digit consumer growth, how much does Upstart play into that and is it the majority of growth? What sort of yields, average yields are you getting out there?

This is Rick Wright. On the Upstart side, I'd say we're just starting to grow that. Although it's been a fairly substantial front-end effort on that, I would say that Upstart and Spring EQ together will account for a significant amount of that growth. We're doing a lot of production in the other areas, but the runoff, the pay downs, the use of the credit lines are still headwinds. So, the basic answer is Upstart and Spring will be a lot of it. The yield is in the mid-7 on Upstart.

Frank, just to clarify, that's a bottom-line NIM. The gross yield on those products is 12% to 13%.

I'm sorry. So, the loan yield is 12% to 13%?

Correct.

Thank you. Our next question comes from the line of Michael Perito with KBW. Your line is open, sir.

Hello. Can you guys hear me? Sorry. Thanks for taking my questions. I had a couple places I want to touch on. Number one, on the Bryn Mawr side, Rodger, I was curious if you could provide some updated commentary around key employee and customer retention with the transaction now closed, and just generally speaking, also on top of that, what the hiring pipeline in that Greater Philadelphia market looks like, which is something I think you guys have some nice momentum on leading into that transaction?

Yes, thanks for the question Mike. On the customer side, things are going really well. We really haven't seen any attrition to any degree at all on the consumer, commercial, and wealth businesses. There have been a few folks on the wealth and commercial side that have left; I'd say that's all relationship managers and customer-facing folks. It's all very manageable and to be expected when you go through a combination like this and a number of the positions have already been backfilled. Looking out in terms of future adds, particularly on commercial RMs, I think we'll see an uptick as we cycle into the hiring season, particularly as you get past bonus time and those conversations will heat up again. They've been happening informally up to now. As we said when we made the announcement, I think Bryn Mawr only makes us a more attractive landing spot, particularly for somebody who's at a larger bank and isn't happy for whatever reason. So, we'll continue to look to invest in bringing talent over to the extent that we think it can be additive to what we already have.

Great, thank you. And then, a two-part question: I was looking at Slide 17 about some of the strategic partnerships. With Bryn Mawr now in the fold, how do you see the mix of business unfolding? I think after the Beneficial deal there were some conversations around remixing the loan book back closer to where legacy WSFS was, and Beneficial took down your fee contribution as well. Bryn Mawr not so much. Just curious to get a broader outlook in terms of how you see the mix of business developing over the next handful of years. And secondarily, on the strategic partnerships slide, is that set for the near term or is there more in the pipeline? Would love some color there.

So, I'll start and then anyone else from the team can jump in. Just starting with the last piece and circling back: partnerships have been an important part of our business model for a long time. Our company has a long history of connecting with entrepreneurial folks if it can be additive to serving our customers and what you see on that chart are the recent results of that, and I think that will continue to play out. There's really nothing imminent on that front, although a number of those things are still in very early stages; for example, cred.ai is just starting to launch their platform. That will continue to be a big part of our business, particularly on the consumer side. Partnerships like Upstart will continue to be a significant part of how we serve our customers. In terms of the overall business mix, wealth becomes a much bigger part of our business to almost 50% of our fee-based revenue going forward. We still think there's a tremendous opportunity in the commercial space with the growth opportunity we have there, and the consumer bank with a lift from partnerships will continue to be an important part of the business model as well. So, I don't think it's a dramatic shift in our business mix, but I clearly see wealth and commercial being the primary growth vehicles.

That's helpful, Rodger. Is there any material loss so far related to them being approved for a bank charter on the fee deposit side?

No. We're totally out of that relationship. We actually sold our equity stake earlier in 2021. So, there's no financial impact to that partnership at this point.

Got it. Thanks. And then just lastly for me on the buyback: curious if you can give us a comment on where the pro forma capital ratios shook out when you closed relative to what you expected, and any general thoughts. You said in the release you'd plan to resume buybacks — any additional color there would be great.

Sure. We have not fully closed the books on Day 1 and will provide significant information with regard to the first quarter close and Day 1 marks, but at this point in time the pro forma capital is meaningfully favorable to the transaction announcement information along with our regulatory applications. So, we continue to be in a highly excess capital position. As we stated in the materials, we do anticipate with the closure of the BMT transaction to resume share repurchases. As we've stated before, our capital philosophy is to return a minimum 25% of annual core earnings relatively equally between our dividend and share repurchases, and then incremental share repurchases depending on the stock price and the IRR that we would achieve through those share repurchases. I would note that we did pause early last year with the announcement of BMT, so we have both the 2021 and 2022 routine share repurchases ahead of us, which is around $60 million regardless of price, and incremental to that would be dependent on the stock price.

Got it. That is very helpful. Thank you.

Thank you. Our next question comes from the line of Russell Gunther with D.A. Davidson. Your line is open.

Hey, good afternoon guys. Just a quick follow-up on the recruitment line of questioning earlier: the RM adds that are seasonally starting to happen, are those targeted at all in footprint or are there adjacent or new markets you would consider employing that strategy in as well?

Hey Russell, it's Rodger. So, it's really primarily in footprint. We would consider adjacent geographies, but the primary focus is really on the market opportunity in our geographic region, which as you know is very large from both the geography and business count standpoint.

Understood. Thank you, Rodger. And then back to the guide on fees: you mentioned a reduction in overdraft fees. Could you provide any additional color on what's planned there and potential revenue at risk?

Yeah, this is Rick Wright. Over the last several years we've made incremental decisions to make overdraft policies a little more customer friendly. At this point, the amount of overdraft revenue is not really significant for us; I would say it's roughly a million dollars in further reduction with this latest move. We'll continue to look at it, but it's really immaterial to our fee revenue.

Very helpful. And then on the expense side: the guidance talks about continued delivery transformation investments. Could you give an update on where that stands and any color on how that impacts the expense base for 2022 and beyond?

Sure, Russell. We provide information on our delivery transformation on Slide 18, and we communicated a $13.3 million net investment in 2021 along with a slight step-up into 2022, primarily from timing of some initiatives. We continue to focus on our holistic approach to serving our customer, an omni-channel experience, and technology stacks that provide flexibility outside of our core systems to bring in new partnerships, but also to create operational efficiencies in the back office and across the organization from our lenders to our data analytics. Next year we'll be focused on rolling out our sales force CRM platform to ensure a one-witnessed approach to all the products and services we offer, and we're also launching next-gen sales and service which includes an improved online account opening experience — currently our most recent launch customer can open up a deposit account in as little as two minutes, which is a significant reduction in prior processes, and we'll continue to roll out those capabilities and enhancements throughout the year.

That's really helpful Dominic. Is the bulk of that investment then behind you after this year, or is this $13 million to $15 million over the past couple of years something we should think about going forward in terms of what you have planned?

So, I think it's hard to predict. There's a certain amount of this that's going to be ongoing, but to forecast out beyond the current year is something we're going to have to see based on our assessment of what we need for our customers and the current landscape. I would say we're talking about these levels, but any one particular year is kind of hard to forecast at this point. I do think we're at an inflection point on this whole project. We've been at it for over three years. We've made a tremendous amount of investments in talent and process. As Dominic mentioned, more of that is showing in some of our customer facing applications that we're working on this year and I think that will continue to be the focus. When we started that project to where we are today, we're a very different company, particularly in the size of the wealth business and the expansion in some of our partnerships. We'll continue to evaluate how that drives where we want to invest those dollars moving forward.

Understood. I appreciate it, guys. That's for me.

Thank you. Our next question comes from the line of David Bishop with Seaport Research Partners. Your line is open.

Good afternoon. Most of my questions have been asked and answered, but maybe Dominic could remind us close to those with more transaction and balance sheet restructurings, security repositioning or calls for pay down of borrowings or cash and your view of excess liquidity exiting the year? Thanks.

Sure. I'll start with our directional loan-to-deposit: we ended the year with a loan-to-deposit ratio of 60% because of the excess liquidity and really strong customer deposits across all of our business. We believe that was significantly low. BMT did bring a loan-to-deposit ratio more in the 80s. So, combining those lessens that excess liquidity impact overall on the balance sheet and on our net interest margin, given the outlook we provided. We are restructuring the acquired investment portfolio to be commensurate with our strategy. Much of that was actually executed in the fourth quarter in anticipation of the close on Day 1, so the ending balance sheet is relatively consistent with where it'll land. Throughout 2022, we will evaluate primarily trust preferreds and some subordinated debt that are higher interest rates that we would likely call, and we communicated at the time of the combination that there would be some of that activity that would continue to support an improved margin that is included in our NIM outlook.

Okay, great. And I apologize if I missed this in the slide deck, but C&I line utilization, do you have an update this quarter versus last and is that helpful now?

David, Steve Clark again. In the fourth quarter we saw an uptick in commercial line of credit utilization — it picked up from 33% to 35.8% in the fourth quarter from the third quarter. That meant about $55 million in balances. We're hopeful as the liquidity runs off that utilization rate will continue to trend back to our historical norms, which had been in the low-40s to mid-40s as a percent.

Great, thank you.

Thank you. Our next question comes from the line of Brody Preston with Stephens Inc. Your line is open.

Hi, good afternoon everyone. I've got a handful of questions. I'll try to get through them quickly. On the buyback front: I know the commitment is to return at least 25% of capital every year, but if I look back to 2019 you bought back about 7% of shares throughout the year when the stock was trading at a similar level to where it is now. You're in a more favorable liquidity and capital position today than you were back then. Would you be open to taking a similar approach as you did in 2019 now that Bryn Mawr is closed?

This is Rodger. Just to remind you, Brody, we've been very disciplined on non-routine buybacks with a model that targets an 18% IRR, and the calculation of that IRR is driven by the increase in EPS, the EPS accretion offset by tangible book value dilution and obviously stock price. 2019 was favorable in terms of where our share price was and that's why we moved quickly on the buybacks in that quarter. I think we're at levels at this point with the share price that are getting close to attractive, but we're still at this point fairly fully valued. We'll monitor and if the market moves to a level that makes that IRR favorable at 18% or better, we will be aggressive. We intend to remain disciplined and not change the inputs to that model to justify repurchases.

Understood. Maybe on the loan portfolio: you noted $908 million of variable loans are at floors. How many hikes would it take for that $908 million to reprice off those floors?

Hey Brody, it's about two to three rate increases on average because of the blended rate involved with the book. So, the three rate increases we have assumed will start to benefit toward the latter half of the year.

Got it. I noticed you included good market share color in the ABS market. How does that business generate fees — is it more transactional in nature? And is that where you first started the relationship with Upstart?

Brody, the corporate trust business really has no relationship to Upstart. The corporate trust business has two components. What we call our global capital markets deals more with stressed debt, administrative agent roles — that's where we get more of the transaction fees. Our core corporate trust serving as trustee for securitizations, namely RMBS and consumer loans, tends to be a per-account fee that we earn every year and that's been the growth of the business as the industry has grown with refinancings and home purchases. We brought in a new business development person last year who's introduced new relationships to us. We're pretty disciplined on margins there — margins are about 50% if not better in some cases. It's a very attractive business and rapid growth. Even if securitization markets slow, we think we can offset some of that with market share gains; we still have room to grow before catching up to number three.

Got it. On the Upstart relationship: what does the credit box look like? There are other partner banks in securitization — some go down to 300 FICO whereas others stay mid-FICO. Is your credit box closer to the mid-FICO given the yields you mentioned?

Yes. Part of the reason we selected Upstart was to overlay our underwriting strategy, our geography and our volume levers. The quality and underwriting scores on these customers are commensurate with what we would do ourselves using their proprietary underwriting models. So far to date, the average FICO we've been generating is about 700 plus or minus; we do go a little below that but primarily north of near-prime.

I'll add that we picked them because they have a track record of performing better across different FICOs and while we're focused on those bands Dominic mentioned, we expect to do better than the market on that. It's all in footprint. Those customers are put into our automated marketing platform and we're marketing to them, so we see this as a real opportunity for us.

Got it. On the student loan run-off: when the moratorium ends in May, would you expect the $109 million in student loans from Beneficial to refinance or run off at a faster pace going forward?

It's hard to tell, Brody, but for a long time that portfolio for Beneficial has traded at normal amortization. We don't see that changing dramatically and certainly nothing to the magnitude that would move the needle on our loan portfolio.

Got it. For Bryn Mawr loans, have you gone through a similar runoff analysis? Can you ring fence the size of the runoff portfolio from BMT added?

At a high level, it's really only the residential mortgage portfolio that will runoff from Bryn Mawr. Their commercial book was very different from Beneficial and as outlined in the materials, we've essentially completed the runoff of those Beneficial runoff portfolios down to a very small level. So, it's really just the student and the residential mortgage. The residential mortgage that comes over with Bryn Mawr will be part of that portfolio and attrition will be very dependent upon the rate environment and refinance activity, balanced by new home sales and related factors.

Got it. Last one: core loan yields ex-PPP and PAA ticked higher this quarter — was there anything specific that drove that?

No, it was driven by a combination of continued deployment of excess liquidity, some loan growth, however that was supported by some loan payoff fees, and then a slight tick down in our cost of funds. So it was split across those three drivers.

Great. Thank you very much for taking my questions everyone. I appreciate it.

All right, Brody. Thank you.

Operator Instructions. I'm showing no further questions in the queue. I would now like to turn the call back over to Rodger Levenson for closing remarks.

Actually, I think Dominic is going to take it away. Thanks, Dominic.

Sure. Thank you everyone for joining the call today. Rodger and I will be attending conferences and investor meetings throughout the quarter. We look forward to meeting with many of you then. If you have any questions, don't hesitate to reach out. Thanks for joining. Have a good day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.