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spk01: Welcome to the WSFS Financial Corporation fourth quarter 2022 earnings call. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star followed by the number one on your telephone keypad. I'd now like to turn the call over to your host for today, Mr. Dominic Canuso, Chief Financial Officer. Sir, you may begin.
spk05: Thank you, Angela. 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, Steve Clark, Chief Commercial Banking Officer, and Shari Krasinski, Chief Consumer Banking Officer. Before I begin with the remarks on 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 Forms 10-Q. as well as other documents we periodically file with the Securities and Exchange Commissions. All comments made during today's call are subject to the Safe Harbor Statement. I will now pass the call over to Roger. Thanks, Dominic.
spk06: Consistent with our recent practice on the fourth quarter earnings call, our remarks today will be divided into two sections. I will provide brief commentary on the fourth quarter and full year 2022 results and then turn it over to Dominic for our 2023 outlook. After our prepared remarks, we will open it up for Q&A with the team. 2022 was an important year for WSFIS. Since the closing of our combination with Bryn Mawr Trust last January, we built momentum and our financial performance improved each quarter, culminating with a strong fourth quarter. This past quarter's results were highlighted by our core net interest margin of 4.49%, which expanded 50 basis points for 13% higher than the third quarter. Loan growth was solid, and we continued to exhibit the value of our diversified fee income. The trend of absorption into the economy of the excess liquidity built up during 2020 and 2021 was evidenced by the decline in deposits. Excluding lower institutional trust deposits due to reduced capital markets activity and normal seasonal runoff of municipal deposits, total customer deposits declined approximately 2% linked quarter or 6% annualized. Credit costs were modestly higher due to loan growth and the economic forecast, and all credit metrics remain at favorable levels. Expenses remain well managed and reflect the continued impact of higher rates on Cash Connect funding expenses that are offset in our fee revenue. In summary, our operating performance improved significantly from the third quarter with core EPS, core ROA, and core PPNR increasing 12%, 13%, and 14% respectively. Although we expect economic growth to be muted in the near term, we enter 2023 with the BMT bank integration activity successfully completed and positioned very well to optimize the significant franchise investments over the past several years. Dominic?
spk05: Thanks, Roger. On slide four of the earnings release supplement presentation, which is available in the investor relations section of our company website, We lay out our expectations and outlook for 2023, which I will walk through now. Our assumptions are based on a relatively flat yield environment with Fed funds ending the year at 4.75% and flat GDP growth with mild recessionary growth rates in the second half of the year. Net loan growth is expected to be in the mid single digits with growth across all of our lending portfolios. Consistent with our current loan mix, C&I lending is expected to be a meaningful contributor to overall growth along with our continued success from our new lane leasing business, both driving the mid to high single-digit growth in our total commercial portfolio. While remaining excess liquidity could result in some elevated payoffs, portfolio pipelines and our competitive market position provide for anticipated continued growth. We expect the consumer loan portfolio growth to moderate in 2023 relative to 2022 in consideration of the overall economic outlook. Deposits are expected to remain relatively flat by year end. While we have benefited meaningfully from our customers' outsized excess liquidity demonstrated by our lower than pure average loan to deposit ratio, including the current quarter 73%, We anticipate this to normalize throughout 2023. Of course, our expectations are subject to somewhat unpredictable nature of the current macro liquidity environment. With that said, we have a well diversified and loyal customer base across all of our primary businesses, and we will be competitive and prudent in our deposit pricing to retain our existing customers where appropriate and to grow new customers. This is consistent with our performance to date as demonstrated by our through-the-cycle beta of 15%, which we expect to increase to approximately 35% by the end of the year. As we have discussed over the past two years, our strategy has been to deploy excess liquidity into our investment portfolio, which historically was in our target range of 16% to 18% of total assets and has grown to be in the high 20%. This has provided optionality given the unpredictable nature of the environment and has served us well, generating over $40 million of pre-tax income in 2022. With the normalization of excess liquidity, we will let the investment portfolio cash flow back down to our target level to fund loan growth. The portfolio currently cash flows at a run rate of approximately $500 to $600 million per year. Full year net interest margin is expected to be in the 4.35% to 4.45% range. We are assuming two 25 basis point increases in short-term rates early in the year, followed by one 25 basis point decrease late in the year. We will continue to benefit from our predominantly variable loan portfolio and the asset mix shift from our investment portfolio to loans. These will be offset by the previously mentioned deposit betas and a return to a modest level of wholesale borrowings. Core fee revenue growth is expected in the mid to high single digits, driven by CashConnect's variable rate fee pricing and franchise growth, and also supported by modest growth in mortgage banking and capital markets. our fee income is expected to continue its resiliency through these economic and interest rate environments, generating a core fee revenue ratio in the mid to high 20%. Provision costs are expected to be between 40 to 50 basis points of average loans for the year primarily driven by loan growth and the forecasted economic environment. This is supported by the beginning of the year with strong current and leading portfolio credit metrics and an ACL coverage ratio of 1.17%. Our core efficiency ratio is expected to be in the mid-50s as we continue to invest prudently into the growth of the overall franchise, particularly in talent and benefits and our technology stack to enable internal efficiencies and scale and to continue to enhance our customer experiences across our delivery channels. 2023 full-year core ROA outlook is around 1.50%, with a robust PPNR as a percentage of assets of around 2.3%, which reflects the strength of our business model, including our broad lending products and the highly diversified and resilient fee revenue base. 2023 continues the momentum from 2022, and we are excited about the strong growth potential from our unique strategic market position in both our regional and national franchises. We will now open the line to answer any questions you may have.
spk01: At this time, I would like to remind everyone If you would like to ask a question, please press star one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster.
spk00: Your first question comes from the line of Frank Chiraldi with Piper Sandler.
spk01: Your line is open.
spk08: Hi, guys. Good afternoon. Hey, Frank. Hey, Frank. Dominic, on the mid-single-digit or the guide in general, the mid-single-digit loan growth and then utilizing the cash flow from the securities book, it seems to me they're pretty much, I don't know, perfectly offsetting. So you also mentioned, I think, some modest level of borrowing. So I just wanted to make sure just in terms of modeling, I'm kind of thinking about it correctly.
spk05: Yeah, I think you summarized the calculus of how they come together the question will be the phasing throughout the year. So we do expect, you know, while the cash flowing of the investment portfolio is between $40 to $50 million a month, the phasing of the loan growth might result in a different pace of that. And we are anticipated to fund that depending on the excess liquidity runoff with wholesale borrowings.
spk04: Okay.
spk08: And then in the past, when you guys have talked about loan growth, you've excluded resi runoff. I don't know if maybe that's just sort of almost complete now, so it just doesn't move the needle, or what's the thinking there?
spk05: Yeah, as you may recall, since beneficial and through BMT, we've had some runoff portfolios, including the acquired residential portfolio. For the most part, they have run their course, and the remaining acquired residential portfolio is nominal relative to attrition rate to impact the entire story. Plus, in select places and working with some of our customers, we are retaining some ARM mortgages that will supplement that portfolio. So we're now at a point where we'll be speaking to total loan growth from here on out.
spk08: Okay, great. And then just lastly, you talked about the efficiencies and mid-50s on the higher revenue guide was a little surprising to me, but you mentioned the further investment into the franchise. Just wondering if that's, I guess, first, is that sort of a reasonable place to expect WISFIS to operate in the longer term? And then also, does that assume any cost saved in the wealth management business in 2023 following the merger, or is that something that's farther out?
spk05: Sure. So I'll parse those out. We would expect mid-50s to be a sustainable level of efficiency ratio, particularly for two reasons. Our high touch customer service levels across our banking franchise and our outsized fee income ratio. And as we know, both in Wealth and Cash Connect, there's a higher than bank average efficiency ratio in those businesses. And we continue to invest across all those opportunities. I do think our step off point was particularly low from 2022 because of the higher vacancy factor from the labor markets. And then lastly, on the synergies, we have achieved all the BMT cost synergies that we anticipated. Almost all of them were from the bank side. There were some from the wealth side, but they've all been included in our run rates. The business does continue to look for operational opportunities. but no restructuring benefits.
spk04: Okay. All right. Thank you. Thanks, Frank.
spk01: Your next question comes from the line of Betty Strickland with Janie Montgomery Scott. Your line is open.
spk02: Hey, good afternoon. Good afternoon, Betty. I was just curious with respect to loan guidance. Should we expect loan growth to be more heavily weighted towards the earlier part of the year assuming an economic slowdown later in the year, or do you think it'll be fairly consistent?
spk07: Fetty, this is Steve Clark speaking. I think our pipeline has been pretty consistent, the 90-day weighted average for the past several quarters of just under $300 million. So that's our expectation going forward. No real front-loading. We're hoping that We'll continue to have a fairly robust pipeline and generate loan growth through the whole year.
spk02: Got it. And then switch to deposit costs. You guys had a lot of success this quarter holding down deposit costs. Can you talk a little bit more about your deposit strategy for the year and how your different business lines like Wealth play into that?
spk05: Sure. Yeah, I would say first setting the landscape for the greater Philadelphia market, you know, it's predominantly driven by the larger banks that aren't rushing to change their rates. We do see some competition from smaller banks who have higher loan to deposit ratios. But across the board, we have a very consistent and loyal customer base. And we provide a full suite of products and services. from variable rate deposits all the way to higher priced CDs. And so we continue to work with our customers to leverage the right product for the interest rate expected and for their needs. And we expect to be competitive to retain our existing customers and to be able to grow new customers in this market throughout the year. We continue to benefit from a well-diversified deposit base with more than 50% of our deposits coming outside of our consumer and branch network, with $2 billion coming from trust and wealth. And we do expect both from the wealth side being able to grow deposits, particularly in this environment where there's a heightened focus on wealth management. And over the long term, while there may be some quarter-to-quarter variation in the trust deposits, we do see opportunity to continue to take market share and grow those over the long run. But those are all included in our deposit outlook for the year.
spk02: Got it. Thanks, Dominic. That's helpful. And just one more follow-up, just following up on an earlier question. Given the cash flow of the investment portfolio we've already discussed and the excess liquidity runoff, it sounds like we might continue to see a limited amount of earning asset decline in the next couple of quarters. Is that a fair assessment?
spk05: It really will be a function of the trend of the liquidity environment, but we would expect our total assets and interest earning assets to be relatively stable throughout the year.
spk00: Understood. Thanks for taking my questions. Thanks, Teddy.
spk01: Your next question comes from the line of Michael Perito with KBW. Your line is open.
spk03: Hey, guys. Good afternoon. How are you?
spk08: All right, Michael.
spk03: Good. Thanks for taking my questions. Just a couple – first, though, just a point of clarification. Dominic, on the 2023 guide, Steve kind of addressed the loan growth, but where else does the mild recession assumption show? I mean, obviously – in the 40 to 50 basis points provisioning, I'd imagine. But does it impact anything else, like in terms of NIM or efficiency that we should just be aware of if the macro kind of shifts more favorable?
spk05: Yeah, I think some of that will show up in our fee income, particularly mortgage banking and the wealth side of our wealth and trust business on the AUM side. So they could have upside relative to our outlook if the economic forecast becomes more rosy.
spk03: Okay. That makes sense. And then, Roger, big picture question. You know, I mean, if I think back over the last handful of years, while the economic environment's uncertain, this feels like one of the cleaner guides we've had. There's no runoff. There's no accretable yield at the margin, or at least much smaller. And so I'm kind of looking at these return targeted metrics, the 150 ROA, the 230 PPR ROA. Are these the right metrics for you guys for the time being for us to be thinking of? And is the focus kind of for you guys to try and grow the franchise on a net basis while maintaining these metrics? Is that kind of the right way to think about kind of strategically where you guys are at at this point, or would you frame it differently?
spk06: No, I think that's a good characterization of where we're at. I think it's representative of the fact that there has been a lot of noise in the numbers the last couple of years because of the beneficial and Bryn Mawr deal. That's all behind us now. Obviously, we're seeing the benefits of the rate environment. And as you know, Mike, the way we manage the company is to be a top quintile performer in our peer group measured by ROA. And we think we're there now. And our goal would be to grow from here.
spk03: Perfect. And then just last for me, and I'll step back, because on the buybacks, you still have some authorization here. You've been active. I guess the question is, how do you balance? It sounds like your base case is for the miles recession in the back half of the year. Capital should build throughout the year, but still probably not as high as you guys are used to it being. So how do you balance that with the ongoing appetite for buybacks over the course of the year?
spk05: Sure, Michael. This is Dominic. As you mentioned, we do have 9% share authorization. We were very heavy participants in share repurchases throughout 2022, particularly in the first three quarters as we caught up to some share repurchases that we pended during the waiting period for the BMT acquisition. As we've said, our historical practice with regard to capital is a waterfall approach where we evaluate the overall economic environment and protect the balance sheet with our capital, then we look at organic growth. And then to the extent we have additional capital that is not needed relative to those first two tiers, we would then redeploy it. Now, we do anticipate routine share repurchases regardless of price. And we would expect between that and our dividend, we would return about 35% of our core net income, you know, through the cycle and on average throughout the year. Incremental to that would be dependent upon that waterfall of capital demand need followed by our IRR model looking at our share repurchase plan. And we will take that on a quarter-by-quarter basis as we evaluate the overall economy.
spk03: Got it. Very helpful. Thank you both for taking my questions. I appreciate it. Thank you.
spk01: Your next question comes from the line of Manuel Navas with DA Davidson. Your line is open.
spk04: Hey, guys. Good afternoon. Emmanuel. The deposit data that you have projected out, have you already started to increase some deposit costs, or you just kind of have that out there to anticipate some future deposit cost increases?
spk05: Sure. You know, in our materials, you'll see a chart on our NIMS slide in the supplement that demonstrates the last few quarters deposit betas and deposit pricing, and they have continued to tick up and, in fact, at accelerated rates. So we have seen through the cycle deposit betas of 15% by year end. So we have been judiciously moving pricing, particularly on our CDs and the shorter-term CDs, attract and retain deposits given the anticipated rise and potential stabilization of the interest rate environment. And we expect through some rack rate movements, product shifting and exception pricing to deliver that deposit data in the mid 30s by the end of this year.
spk04: Do you have a spot rate for the end of the year?
spk05: We have not disclosed that, but we do think relative to where we are today, I think the deposit data would provide that detail for you.
spk04: Okay. What type of offers are you putting out there, and what kind of – have you already seen some pretty nice success rate for attracting deposits?
spk05: Yeah, I think one of our leading products right now is a $1,200 11 to 12 month CD at 4% to retain the short term. And while we assess kind of the kind of expectations from customers looking for that higher rate and that will give us time to evaluate the broader market trends, that's been very competitive. And then we have some other variable rate products that customers are shifting to. And then to the extent they are looking for something more than that, we are working and the consumer and commercial teams are working with wealth to look at other products, including treasuries, to bring the value in the near term, but retain the customer.
spk04: That's helpful. One small question on the loan loss reserve. The consumer loan growth in the consumer partnership was really strong. What type of reserve does a spring EQ product kind of require? That one specifically. I know you had the whole thing laid out in the back of 4.4%, but just that product itself.
spk05: Yeah, it's a secure product and kind of cash flows pretty quickly and the losses have been relatively low. So it's in the low to mid single digit range and captured in the consumer line item that we provide on the loan loss reserve slide.
spk04: That's helpful. Thank you so much. Thank you, Manuel.
spk01: If you would like to ask a question, please press star 1 on your telephone keypad.
spk00: Thank you.
spk01: And with no further questions in the queue, I would like to turn the conference back over to Mr. Canuso.
spk05: Thank you all for joining the call today. If you have any specific questions following this meeting, feel free to reach out to me directly. Also, Roger and I will be attending conferences and investor meetings throughout the quarter and we look forward to meeting with many of you then. Have a good day.
spk01: This concludes today's conference. You may now disconnect.
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