WSFS Financial Corporation

Ladies and gentlemen, thank you for standing by, and welcome to the WSFS Financial Corporation Second Quarter 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 1 1 on your telephone. I'd now like to turn the call over to your host for today, Mr. Dominic Canuso, Chief Financial Officer. Sir, you may begin.

Thank you, Andrew, and thanks to all of you for taking the time to participate on our call today. With me on this call are Roger Levinson, Chairman, President, and CEO, Art Bacci, Chief Wealth Officer, and Steve Clark, Chief Commercial Banking Officer. Rick Wright, Chief Retail Banking Officer, is unable to join us on the call today. Before I begin with remarks in the quarter, 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. Our earnings release and earnings release supplement, which we will refer to on today's call, can be found in the investor relations section of our company website. We are pleased to announce strong results for our first quarter after the BMT bank, branding, and branch conversion in late March. The quarter demonstrated both the strength of our relationship-based business model and the diversity of our products and services. The quarter also illustrated the continued opportunities that lie ahead given our strategic position as the largest locally headquartered bank and wealth management franchise in our region along with the growth potential of our nationwide businesses. Reported ROA of 1.17% and EPS of 94 cents include a couple of non-reoccurring items in the quarter. We sold approximately $55 million of CNI and CRE loans at par related to a legacy BMT small business real estate lending unit called KCMI. In addition, we sold the BMT Insurance Advisors business to Patriot Growth Insurance, as noted on our press release on July 7th. After completing our strategic plan and aligning it with the BMT combination, these two businesses were the two product lines not considered areas of focus going forward. These sales will not have a material impact to our ongoing financial results. One-time corporate development and restructuring costs in the quarter were $10.3 million pre-tax, or 15 cents per share. Somewhat offsetting this was a $6 million unrealized pre-tax gain on our equity investment in Cred AI, or 7 cents per share. Summarized on slide three of our supplement, when excluding these items, Our core results included net income of $65.4 million, or an ROA of 1.27%, with an EPS of $1.02 and an ROTCE of nearly 20%. These results were driven by consistent and strong performance across all areas of the company, including positive growth in both loans and our diversified fee base. along with achieving the full cost synergy run rate anticipated from the BMT combination. We are executing consistently with our expectations for the year and for our strategic plan. As noted on slide 8, loan growth was 8% annualized when excluding the KCMI sale and the acquired residential mortgage portfolios. This was supported by 5% annualized commercial loan growth when excluding KCMI and supported by 18% annualized growth from new lane leasing. Net new commercial fundings were a record $685 million in the quarter, including line utilization increasing to 39.2%, the highest in two years. The commercial pipeline continues to grow, with 90-day weighted average now over $350 million. Consumer loans grew a robust 41% annualized, driven by continued success of both our Upstart and SpringHQ partnership lending products. Consumer loans are now 13% of total gross loans. Customer deposits decreased 7% annualized, nearly half of which driven by decline in short-term transaction-related trust deposits. We now have just over 1.5 billion in these transaction trust deposits, or approximately 9% of our deposit base, which has grown $652 million over the past year, or 73%. In addition, we moved approximately $59 million of customer deposits into sweep accounts. The loan to deposit ratio stands at 66%, demonstrating the continued strong capacity to fund future net loan growth. During the quarter, we reclassified $1.1 billion, or 19%, of our AFS investment portfolio to HTM, reducing the potential negative impact on TCE from higher middle of the curve rate increases. I'll speak to capital more in a moment. As seen on slide 10, NIM in the second quarter was 3.40%, a 39 basis point increase over 1Q, as loan yields increased 27 basis points from the rising rate environment and churn in the portfolio, while customer deposit costs were relatively flat, increasing only one basis point. In addition, the negative impact from excess liquidity decreased eight basis points to 36 BIPs. Our fee revenue ratio was relatively flat from one Q at 30.0%. As fees grew $5.5 million, or 9% not annualized, driven by growth in Cash Connect and capital market fees of approximately $2 million each, as well as a $1.3 million increase in core banking, which was offset by weaker mortgage banking fees from lower RESI refi volume. Both current and leading credit metrics remain positive and stable, with net charge-offs in the quarter of $2.6 million, Net loan growth and balance sheet mix resulted in an ACL increase of $5.6 million, illustrated on slide 12. The ACL coverage ratio is now 1.13% or 1.42% when included estimated remaining credit marks on the inquired portfolios. When normalizing for the $1.1 billion investment portfolio reclassification, The ACL would have been 1.23% or four bps higher than prior quarter on a comparable basis. Non-interest expense continues to be well managed while at the same time achieving the full run rate impact of the BMT costs synergies early. The core efficiency ratio improved over five percentage points to 56.2%. Consistent with the first quarter, We've returned $56.7 million of capital to shareholders, including $8.4 million of common stock dividend and $48.3 million in share repurchases, or approximately 1.19 million shares. Approximately 85% of core earnings was distributed in the quarter. Also, the Board approved a 15% increase in the quarterly dividend to $0.15 per share, and approved an additional 10 percent share repurchase authorization. Fourteen percent of outstanding shares, or 8.6 million shares, are authorized for repurchase as of the quarter end. Our bank regulatory capital ratios are substantially in excess of well capitalized, with CET1 and Tier 1 capital of 13.6 percent and total risk-based capital of 14.57 percent. TCE decreased to 6.63%, driven by the continued interest rate impact on AOCI. We continue to evaluate and consider both our AFS and HTM investment portfolio mix, along with balance sheet hedging strategies to best position us for the anticipated interest rate volatility in the next few years. Lastly, as we typically do at mid-year, we have updated our outlook assumptions on slide five. As I mentioned at the beginning, we are executing consistent with our plan while we anticipate the second half of the year loan growth rate to be in the mid to high single digits. Given the growth in one queue, our full year growth expectation is now mid single digits or the low end of our original range. Also, given the lower residential refi volume in the markets, combined with the financial market's impact on AUM and the sale of the BMT insurance business, annual fee revenue growth is anticipated in the low single digits. These expectations, combined with the higher interest rate environment and positive performance to date, our full year ROA is now anticipated near 1.35% excluding the initial CECL provision for BMT, with a 4Q ROA around 1.65%. Updated NIM, PPNR% and ROA are illustrated on slide six for both full year and 4Q. In summary, the growth and overall performance in the quarter demonstrates our strategic position in our markets and we look forward to continued opportunities for substantial organic growth ahead. We will now open the line to answer any questions you may have.

Thank you. As a reminder, to ask a question, you will need to press star 11 on your telephone. Please stand by while we compile the Q&A roster. And our first question comes from the line of Frank Chiraldi with Piper Sandler.