WSFS Financial : 4Q 2021 Earnings Call Transcript

WSFS Financial Corporation [WSFS]

4Q 2021 Earnings Conference Call

Tuesday, January 25, 2022, 1:00 PM ET

Company Participants:

Rodger Levenson; Chairman, President and Chief Executive Officer

Dominic Canuso; Executive Vice President, Chief Financial Officer

Art Bacci; Executive Vice President, Chief Wealth Officer

Steve Clark; Executive Vice President, Chief Commercial Banking Officer

Rick Wright; Executive Vice President, Chief Retail Banking Officer

Analysts:

Michael Perito; Keefe, Bruyette & Woods

Erik Zwick; Boenning & Scattergood

Brody Preston; Stephens, Inc.

Russell Gunther; D.A. Davidson & Co.

David Bishop; Seaport Research Partners

Frank Schiraldi; Piper Sandler & Co.

Presentation:

Operator: Ladies and gentlemen, thank you for standing by, and welcome to WSFS Financial Corporation Fourth Quarter 2021 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to turn the conference over to your speaker for today, Dominic Canuso, Chief Financial Officer. You may begin.

Dominic Canuso: Thank you, Towanda. 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 our 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 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 call are subject to the Safe Harbor Statement. With that read, I will pass the call over to Rodger Levenson.

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.

1

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 continue 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.

Dominic Canuso: 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-formayear-end 2021 estimates presented on Slide 5.

Net loan growth is expected to be in the mid-to-high single digits, excluding runoff 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 costs. 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.

2

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 3 assumed interest rate increases of 25 basis points each. Our NIM outlook assumes 7 to 11 basis point benefit of purchase accounting accretion and the 35 to 45 basis points of 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-highsingle-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-30's.

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 a 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 the 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.

Questions & Answers:

Operator: [Operator Instructions] Our first question comes from the line of Erik Zwick with Boenning and Scattergood.

Erik Zwick: Wondering if I could first start with just 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 with that transaction 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 this cycle will be similar to what you're using in the model?

Dominic Canuso: Sure. Thanks, Erik. So we are asset sensitive as laid out on our Slide 35 of our Investor Presentation. However, I'd caveat that, that is the legacy WSFS at year-end 12/31.

Currently, our variable book 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.

3

The deposit ratio -- sorry, assumed is close to 0, given the extremely low interest rates and our experience that there's typically a 6- to 12-month lag in deposit betas after the first interest rate increase.

Erik Zwick: That's great. And then turning towards the expectations for loan growth in the year, within that slide, you mentioned some confidence in -- or mentioned reduction in loan payoff levels throughout the year.

Just curious about your confidence in that occurring? Are you already seeing paydown slowdown with some of the increases in rates we've seen at this point?

Steve Clark: 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.

Erik Zwick: Got it. And last one for me, just sticking to the loans. Within the '22 outlook, you talked about the mid-to-highsingle-digit growth, excluding the residential mortgage portfolio. So just curious, are you guys aiming to keep the residential mortgage portfolio flat? Or do you think it will decline throughout the year? Or what are your expectations with regard there?

Dominic Canuso: Sure. This is Dominic again. We would expect that to run off, commensurate with the interest rate environment and the refinance conditions. So what is it expected to run off with a headwind of about 1% and 1.5% impact to our net growth rate.

Erik are you still there? Towanda, maybe he got disconnected, if we could continue with additional questions.

Rodger Levenson: This is Rodger Levenson for those of you still -- if you're on the call, we're just trying to connect with the operator, not sure what happened. We will be connecting shortly.

Operator: Our next question comes from Frank Schiraldi from Piper Sandler.

Frank Schiraldi: Just curious on the -- what the modeling implies for or assumes for securities purchases, increases in the securities book in 2022?

Dominic Canuso: Sure, Frank. This is Dominic. The recent interest rate that we've been acquiring is in the high 170s, and we're anticipating 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 at a higher interest rate environment. So where we landed the year at about 170 yield on that portfolio, we do anticipate to continue for the foreseeable future.

Frank Schiraldi: Okay. And in terms of size of the securities book over the year?

Dominic Canuso: 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-economic liquidity environment.

4

Frank Schiraldi: 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 market sell-off and then how do we think about that factoring into growth, especially now that you have more of an actively managed portfolio?

Art Bacci: Frank, this is Art Bacci. Thanks for the question. Let me -- just stepping back a second. I mean I'm still expecting more higher 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-based 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. So we serve as assignment agent for some high-yield deals, and there was a lot of trading in those positions in the fourth quarter.

And if you look at the volatility, third quarter of this 2021, we saw a 50% increase in assignment fees1. That declined by about 25% in Q3, and we saw a 40% increase in Q4. So it's very volatile. So when you kind of strip out that transaction activity, we're still looking at high single-digit growth in our core Wealth business.

Frank Schiraldi: Okay. And does that look at what happened in January in the markets? I just don't know how impactful market moves are to the -- at least the actively managed portfolio?

Art Bacci: We really bill in arrears. So our fourth quarter AUM was up about -- combined BMT and WSFS is about 5%. So that would indicate to me about a 5% revenue growth, all else being equal. Going into 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 first -- 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.

Frank Schiraldi: Sure. Okay. And then just lastly, if I could, in terms of the double-digit Consumer growth, how much does Upstart play into that? And is it the majority of growth? And what sort of yields -- average yields are you getting there?

Rick Wright: 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 Spring EQ and Upstart together will account for a significant amount of that growth where -- we're doing a lot of production in the other areas, but the runoff, the paydowns, 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 Schiraldi: Got you.

Dominic Canuso: And Frank, just to clarify, that's the bottom line NIM, the gross yield on those products are 12% to 13%.

Frank Schiraldi: I'm sorry. So the loan yields 12% to 13%?

Dominic Canuso: Correct.

Frank Schiraldi: Upstart as opposed to, obviously, that's not Spring EQ, that's Upstart yields.

Rick Wright: Correct.

1Correction: second quarter of 2021, we saw a 45% increase in assignment fees

5