Earnings Call: Q2 2021

Jul 23, 2021

Ladies and gentlemen, thank you for standing by, and welcome to WSFS Financial Corporation Second 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. Please be advised that today's conference is being recorded. I would now like to turn the call over to your host for today, Mr. Dominic Canuso, Chief Financial Officer. Sir, you may begin. Thank you, Olivia. With me on this call are Roger Levinson, Chairman, President and CEO Art Bacci, Chief Wealth Officer Steve Clark, 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 statements. 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 ks 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 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 Web We continue to see positive signs of recovery and reopening of local economies across our region, which is demonstrated in our customers and clients' sentiments, consumer spending trends, loan growth and credit quality metrics. Wixbus had another strong quarter rounding out a robust first half of twenty twenty one, demonstrating the strength and diversity of the franchise and the stability of performance through various economic and rate environments. Highlighted on Slide 4 of our investor presentation, 2nd quarter reported net income is $95,700,000 a $2.01 earnings per share and a 2.60 ROA. Reported and core performance were comparable this quarter as a large one 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 525. 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 $300,000,000 in total loans. Customer deposits grew $445,000,000 or 15% annualized in the quarter, primarily from trust relationships and commercial customers. Versus prior year, customer deposits have increased $1,900,000,000 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 3.23 percent, which includes 24 basis points of purchase accounting accretion and 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. 2nd quarter fee revenue again demonstrated the strength and diversity of our fee products and services and franchise value, especially in this lower interest rate environment. Core fee revenue was a healthy 30% of revenue when excluding PPP and supported by 7% year over year core fee growth. When excluding the impacts from the Durbin amendment, year over year core fees grew 16%, driven by 41% increase in wealth management fees, supported by a record $26,700,000,000 of AUA and AUM, along with a 24% increase with from Cash Connect. This was offset by reduced mortgage banking fees from the recent slowdown in refi volume and housing market supply shortages. The core efficiency ratio increased to 60.7%, 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 Q2 of 2020, at the onset of COVID, we were very proactive in evaluating the portfolios believed to be most vulnerable to the emerging economic stress. As a result of this process, 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, ACL at quarter end was $132,400,000 with an ACL coverage ratio of 1.63% excluding PPP and 1.93% when including the remaining credit mark on acquired portfolios. The ACL now stands $100,000,000 or 1.11 percentage points less than the peak in the Q3 of 2020, as all credit metrics continue to improve and trend toward pre COVID 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 9.13% and the bank CET1 ratio improved 101 basis points to 14.21 percent. The Board of Directors approved a quarterly cash dividend of $0.13 per share of common stock and no shares were purchased in the quarter as we have paused repurchases until the close of the BMC 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 PPNR as a percentage of assets in the range of 1.5% 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 10, both Wistus and Bryn Mawr stockholders approved the merger of Bryn Mawr into Wistus and 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 Wistus are actively working together designing and implementing our conversion and integration plans as the transaction is anticipated to close early Q4 of the year, pending receipt of the remaining required regulatory approvals. The bank conversion, including bank branding and branch consolidation, is planned for early Q1 2022. Thank you, and we will be happy to take your questions. And our first question coming from the line of Michael Perito with KBW. Your line is open. Hey, good afternoon, guys. Thanks for taking my question. Hey, Mike. I wanted to start on the growth piece of it. It seems like you're obviously really strong C and I franchise in your core markets. But it seems like other areas like some of your consumer partnerships and New Lane and some of the equipment financing are seeing better growth. And I guess as part of that's because of having a little bit more geographic diversification. I was just curious if you could maybe update us on how you kind of view that element of your loan portfolio today? 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 loan. 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 the loan growth you're seeing here. On the consumer side, we do have various partnerships and avenues generating the appropriate products and services for our customers, including partnerships with Spring EQ, which is secondary market mobile based lending. We have LendKey generating student lending. And we're just launching a new product in the Q3 here, which is unsecured lending with Upstart, which we anticipate to add to the loan growth in the second half of the year. Yes. And if I could just add on that, Mike, just some historical context, obviously, this is Roger. Obviously, we're a regionally focused commercial driven C and I bank. And so I would think that we've always liked 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, I would expect that the majority of our growth over time will come from local based lending with C and I being the leading category for us 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 around full relationships. Got it. Very helpful. Just 2 more I wanted to hit on real quick. Both yourselves and BMT had really strong quarters growing, the wealth management AUM and revenues. Obviously, I think when you guys announced the deal, that was a pretty important element of the pro form a franchise. And I'm just curious if you have any I know you have the broader fee 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 happens? So this is Roger again. I'll start and I'll let Art give you a little bit more specificity. I would just tell you that everything that we thought coming into the discussions through 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 BMT has 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 common need combined excuse me, combined wealth businesses and we see as much if not more potential than when we did the original model. And I'll throw it over to Art for any kind of specific color. Yes. Thanks, Roger. Mike, this is Art. And yes, I'd add maybe three points to that. One is, as Jen and I have worked through the integration and getting to know each other and we look at each other's strategic plan, we lack a little bit in that it's almost like we were looking over 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 the potential that's coming out of this and they're all very excited. So that leads us to believe that this is going to be a great combination. Secondly, Rick, Steve and I have been working over the last couple of years to really make sure the retail commercial wealth businesses are going to market on a more holistic basis. And we're seeing a lot of good interaction between our ends, our advisors. And so we have, 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 the business. And then thirdly, our Corporate Trust business is really hitting on all cylinders and 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 kick it to someone else. Roger, this is probably a quick answer. I just want to confirm. I mean, is it fair for us to assume that once the Bryn Mawr trust deal closes that your approach to capital deployment will probably mirror what you guys did leading into the announcement as it regards to share repurchase appetite and kind of the steady dividend payout? Yes. There will be no change to our long term capital philosophy and strategy. Obviously, it just paused because of the comment where we're at in the combination. Appreciate it. Thank you, guys. Thank you, Mike. Our next question coming from the line of Eric Wieck with Boenning and Scattergood. Your line is open. Good afternoon, everyone. Are you able to hear me? Yes. Hey, Eric. Hey. I wanted to first start with thinking about the outlook 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? Yes. Eric, Steve Clark. The pipeline is fairly consistent with what it has been over the past quarter or so. So our 90 day weighted average pipeline for commercial is around $235,000,000 that remains strong and as high as it's been since the Q4 of 2019. So despite the headwinds, we are getting opportunities across our C and I and CRE businesses and feel good about it. Regarding yields, new loans booked greater than $250,000 for the Q2. The weighted average yield was 3.52. So we target that mid-3s, feel good about that. That compares to 3.67% in the Q1, but fairly consistent. Yes. This is Roger, if I could just add to that. Our fundings our commercial loan fundings were up in the second quarter, just I think a little bit under $450,000,000 It's just a challenge right now, candidly, to stay in front of the payoffs for all the reasons that we've talked about. So we feel good about the momentum. It's just the churn has been a little greater than we had anticipated. And that's really what you see reflected in the outlook for the second half of the year. That's good color. I appreciate it guys. Switching gears to credit, if I look back to the press release from Q2 of last year, the hotel portfolio had 247,000,000 dollars of loans that received, I think, risk rating downgrades. And in this quarter, 2Q 2021, press release indicated that total problem assets declined by about $100,000,000 or so mainly due to the hotel portfolio. So just curious, as you look at it today, kind of what is the percentage of that those original loans that were downgraded that have yet to be upgraded? And what are you seeing within those? Any commonalities from geography or hotel type or occupancy? Or what are you still kind of watching and maybe give you some concern today? Yes. So Steve again, so last year of our hotel book, which was about $540,000,000 we did downgrade and criticize a little over 50% of that book. So we thought that was the correct action at that time. And as you've 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 39%. So all of those borrowers are paying all but $44,000,000 are paying their original contractual payments. The remaining $44,000,000 which represents 4 or 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 Q2 of last year. Occupancy continue to kind of trend upward. About a third of our book is leisure. So at the Jersey Shore or Delaware Beaches, you cannot get a room this time of year with those locations. So very, very, very strong. Very strong occupancy at the leisure hotel. The business travel is coming back. Occupancies have continued to increase. I don't have specifics, but I can share anecdotally one 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 one example of just the positive trend we're seeing kind of across that entire portfolio. Thanks, Steve. And just last one 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 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 it 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-60s. And so it's really partnering with them, speaking to them, understanding their demands. I think it will trend probably consistently with the overall growth in the economy, GDP and the impact it's having on prices and spending overall. We do anticipate with the continued growth and there's even more stimulus that could be on its way that we're really focused on utilizing it appropriately. We've paid off $100,000,000 of our senior debt in the past quarter. We've paid off $500,000,000 of wholesale funding over the last year and we've doubled our investment portfolio and staying within our kind of risk tolerance and liquidity expectations. And we'll 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 runoff. Thanks for taking my questions today. Thank you. Our next question coming from the line of Brody Preston with Stephens. Your line is open. Hey, good afternoon, everyone. Hi, Brody. Hey, I had a question for you just regarding the runoff portfolio. So I'll speak for myself and say that it's a little challenging to model the runoff portfolio on a quarter to quarter basis, particularly the residential side. And so I know you got Bryn Mawr coming up in the beginning of Q4 here. But has there been any thought to given to potentially selling the residential runoff portfolio and I guess maybe cleaning things up on the loan side just a little bit faster 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 hole. I'm just trying to think about the puts and the takes of pursuing a strategy like that? Yes, appreciate that. And I'll address the resi mortgage specifically. I think as you know, Brody, these runoff portfolios all 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 there's a very small student loan portfolio left. And we don't see any addition to the commercial runoff portfolios from BMT. So what will be left is the residential mortgage book. And this strategy for us predated beneficial. Obviously, we evaluate lots of different things. But most of these mortgages are either relationships today or potential for relationships because of where they're a significant portion are 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 over from BMT is really just a normal amortization of letting it trade off. And we would expect that since we've kind of gone through this period where the rates drop 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 of a normal sort of portfolio mortgage duration attrition rate. And again, we want to focus on seeing if we can grow those relationships. So I wouldn't expect in the near term a wholesale transaction as it relates to our resi mortgage portfolio. Got it. Thank you for that. Maybe just to I guess maybe just as a follow-up to that. I'm assuming that the residential mortgages that you pegged as runoff are kind of single relationship. 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 most 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. So the large percentage of the resi mortgages that came over from Beneficial were, I would call, sort of single service relationships. So they were originated primarily through broker and builder arrangements and they were 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 have 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 we operate as you know and originate and sell model. So in many cases, these loans that are sitting here that are trading off are already part of significant relationships, including referrals that come out of our private bank, our commercial group, as well as the broader retail network. Significant liquidity growth despite the significant securities build you have. And so just with the buybacks being in suspension for another quarter and the loan growth guidance coming down a little bit, are you expecting for that liquidity to just kind of hang around? Are there any sort of near term deployment opportunities from here that we should be thinking about? Sure. As I just mentioned, we have optimized a significant amount of the excess liquidity over the last year, including the June payoff of the $100,000,000 senior debt and the doubling of 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 VMT 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 acceptable investments, the 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 one of the slides that stood out to me in the deck was the digital slide. And given the sustained shift you all have seen in the digital channels for customer interaction, Just 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 as an additional sort of customer acquisition tool? Or do you think it's becoming more of an alternative to physical locations at this point? This is Rick. I think what we're seeing is there's obviously a more rapid adoption of the digital products and services that we have, 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 that's what we're doing in our delivery transformation effort and we hope to see more of that hit the market over the next year. All right, great. And then last one for me. I'm sorry if I missed it in the deck, Dominic, but could you remind us what percent of the loan portfolio is floating rate? And then if there are any floors in place, what percent of the loan portfolio is at or below floor levels? Sure. We're running about fifty-fifty between variable and fixed. And that would we would look to continue to increase the variable portion of that portfolio as we talked about with the runoff of the resi mortgage portfolio and continue to grow the relationship based C and I lending. And, Brady, this is Steve. About a third of that variable rate book have floors in the note and all of our new originations over the past year and a half have floors either 0% 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 floor levels? So I think we have to get back to you with an exact answer. My guess is a couple of 100,000,000 at most. Okay. All right. Thank you very much, everyone. I appreciate you taking my questions. Thank you. Your next question coming from the line of Russell Gunther with D. A. Davidson. Your line is open. Hey, this is Manuel Mavas on for Russell. Hello. Hey. Just wanted to check-in on this with the efficiency ratio target of low-60s, 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 expenses in this environment and monitor the 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 step up in the run rate of absolute dollar cost from the Q2 into the second half of the year, but would look 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. Okay. Thank you very much. Thank you. And I see no further questions in the queue. I would like to turn the conference back over to Mr. Caruso. Thank you for participating on the call today. Roger and I will be attending investor conferences and events throughout the Q3 and we look forward to meeting with many of you then. Enjoy the summer. Thank you. Thanks everybody. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.