WSFS Financial Corporation (WSFS) Earnings Call Transcript & Summary

Thank you for standing by. Welcome to the WSFS Financial Corporation First Quarter 2025 Earnings Call. [Operator Instructions] I'd now like to turn the call over to David Burg, Chief Financial Officer. Sir, you may begin.

Okay. Thank you very much, operator. Good afternoon, everyone, and thank you for joining our first quarter 2025 earnings call. 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. With me on this call is Rodger Levenson, our Chairman, President and CEO. Prior to reviewing our financial results, 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. I will now turn to our financial results. WSFS had a solid start to 2025, continuing to demonstrate the strength of our franchise and diverse business model. Our first quarter results included a core earnings per share of $1.13, core ROA of 1.29%, core PPNR of $104.6 million, and core return on tangible common equity of 16.97%. All of these metrics represented improvements from the prior quarter. Core net interest margin expanded 8 basis points to 3.88%. This reflects a reduction in total funding cost of 15 basis points to 1.77%. Our funding costs benefited from a 12 basis points reduction in total deposit costs from our repricing actions as well as the redemption of $70 million in higher-priced sub debt. On a year-over-year basis, our net interest margin expanded by 4 basis points despite absorbing 100 basis points of interest rate cuts. Our total deposit cost was 1.71% with an interest-bearing deposit beta of 38%. Core fee revenue grew 6% year-over-year, powered by Wealth and Trust, which grew 19%. Institutional Services and the Bryn Mawr Trust Company of Delaware both delivered very strong year-over-year growth by driving higher deal flow. As a reminder, Institutional Services provides trustee and agent services on securitization, debt issuance and corporate bankruptcy transaction, and the business continues to win market share in these areas. While Cash Connect fees declined quarter-over-quarter due to seasonally lower volumes and the impact of lower interest rates, the business delivered higher profit margins through expense and pricing offsets. The core efficiency ratio was 59% this quarter as expenses declined by 9% quarter-over-quarter from seasonally high 4Q levels and were also impacted by some one-timers in this quarter. Gross loans were down less than 1% linked quarter. Commercial loans were generally flat linked quarter and originations were more muted as clients postponed investments due to the uncertainty in the macroeconomic environment. Our pipeline is at the same level as the past several quarters, and we continue to be actively engaged with our clients as they navigate the current environment. Client deposits declined 1% linked quarter, primarily due to seasonality and expected outflows in trust. Client deposits are up 4% year-over-year, driven by broad-based growth across business lines. Noninterest-bearing deposits continue to be strong and were up 6% year-over-year. Our loan-to-deposit ratio remained at 77% and continues to provide ample balance sheet flexibility and capacity to fund future growth. Our total net credit costs were $17.6 million, an increase of $8.9 million from the previous quarter, and our net charge-offs were $24.6 million. The increase in credit costs and charge-offs was driven by a $15.9 million charge-off of a previously identified nonperforming office-related C&I loan. This loan was acquired as part of the Bryn Mawr Trust acquisition, and we don't have similar loans in our portfolio. Excluding this loan, we recorded net charge-offs of 27 basis points and 19 basis points without Upstart, which continued to show a decline in losses. Our ACL coverage ratio ended the quarter at 1.43%, which included a small upward adjustment to reflect the recent macro volatility. We continue to monitor the overall environment and we'll make adjustments as needed going forward. Our capital ratios remain strong and significantly above well-capitalized regulatory targets with a CET1 of 14.1% and a TCE of 8.63%. During the first quarter, WSFS returned $62.6 million of capital, including $53.8 million in buybacks and $8.8 million in dividends. Our buybacks for the first quarter are over 55% of the total buyback amount completed in 2024. Additionally, we announced a 13% increase in the quarterly dividend to $0.17 per share, along with an additional share repurchase authorization of 10% of our outstanding shares as of quarter end. This brings our total authorization to 14% of our outstanding shares as of the end of the quarter. As part of our annual capital plan process and as seen on Slide 9 of the earnings supplement, we made an update to our capital philosophy where we will be targeting a CET1 ratio of 12% in the medium term. We will execute a gradual multiyear glide path to this target and retain discretion to adjust the pace of buybacks based on the macroeconomic environment, our business performance as well as potential investment opportunities. Overall, we're pleased with these results to start the year in a difficult macro environment. As part of our normal process, we will provide an updated full year outlook when we present our 2Q results. We remain committed to delivering high performance, and we'll now open the line for any questions.

[Operator Instructions] Your first question comes from the line of Russell Gunther with Stephens.

You guys may have just addressed this, but I know you don't typically give the updated guide until midyear. It sounds like that's still the plan. I was surprised, though, with the lack of the guidance slide still in the deck. So as we wait for an update, is there anything to read into any decrease in visibility on the PPNR credit quality front as to why that may not have been in the deck this quarter?

No, Russell, nothing to read into that. Typically, as our usual pattern, we will update the guidance after the second quarter. We don't like to give guidance every quarter or update the guidance because obviously, it's early in the year. And also you can see how volatile the environment is. So I think it's probably more meaningful to give that update after the second quarter, and that's what we'll do. So nothing to read into from that.

Okay. I appreciate you taking that. And then maybe on the net charge-off front. And again, I'm not sure what you can say as we await the mid-quarter update or midyear update. But obviously, the one isolated or idiosyncratic credit this quarter pushed you outside of that 35 to 45 basis point guide from the end of the year. Does that set you up to reiterate that kind of expectation? Is 35% to 45% still the right way to think about it? Obviously, a lot of increased volatility since that was given. But how should we think about the puts and takes there from a charge-off perspective?

Yes, Russell, I would say, again, that loan, as you alluded to, previously identified, obviously, a one-off item. As I mentioned in the earlier remarks, it was an acquired loan, and we don't have another one like that in the portfolio. If you exclude that, we're about 27 basis points of net charge-offs. So if you exclude that onetime loan, some of the other -- all the other portfolios are behaving in line with expectation. Some of the places where we've had elevated charge-offs before in terms of Upstart, NewLane, those continue to decline quarter-over-quarter and are both below $3 million this quarter. So I think that continues to be a positive story. So I would say other than that, there's really nothing that we're seeing that would cause concern. And I think the portfolio is behaving generally as expected.

Okay. And then just last one for me, if I could, please, on the expense line. Could you give us a sense for how 1Q kind of shapes up relative to the run rate going forward? I know there was some seasonality in Cash Connect. Maybe you could address the -- what I think was a $1.9 million nonrecurring Cash Connect item as well. Just how you, again, fold all that together and what we should think about expenses in the coming quarter.

Yes. Yes, absolutely, happy to. Yes, there are a few puts and takes, as you said. Cash Connect, we did have the $1.9 million quarter-over-quarter variance, as you mentioned. Also, volumes are a bit down this quarter and because of interest rates, as you know, the top line in Cash Connect comes down. So as you know, when you look at Cash Connect, the expenses are very closely correlated to the revenue. So when you look at quarter-over-quarter, we had about a $5 million decline due to Cash Connect, including that $1 million onetime item that you mentioned. I would say other than that, we did have kind of a onetime item related to incentive accruals this quarter for about $4 million. That just corresponds to our annual -- in the first quarter, we go through our annual review process and true up our incentive accruals. So we did have a reversal of $4 million there. And like you said, fourth quarter was seasonally higher with some legal expenses and typical kind of year-end things. So in terms of run rate, I would say this quarter was lower than a run rate quarter. I would say probably $4 million one-timer and maybe $4 million else of timing items. So the run rate is kind of in between the fourth quarter and this quarter. We're about $152 million this quarter. Again, there's probably $4 million of a one-timer and $4 million of timing items. So the run rate is in that $160 million range between the 2 quarters.

And your next question comes from the line of Frank Schiraldi with Piper Sandler.

Just on the -- and recognizing that you're not updating guide until July, just in terms of broad thoughts here on commercial growth, at least in the near term, I guess, over the next coming months, just given the macro uncertainty and what we saw in the first quarter.

Yes, Frank, I would tell you, as I'm out and about with our customers, and as David mentioned in his remarks, we're seeing customers performing well or kind of hanging in there, but very cautious around expansion or change because of the volatility and kind of unevenness that's been in the markets. So we've had a number of situations where we had approved deals and for business expansion or adding a building or things like that. And the customer just called us and said, I'm just going to sit tight for at least 60, 90 days until I get a better visibility. And that's been the tone of the conversations I've had with a lot of our borrowers. So as David said, the pipeline remains at consistent levels. We're seeing opportunities to take market share. But whenever you go through a period of disruption like we've seen over the last couple of months, changing banks or adding to existing facilities, that kind of stuff gets impacted. Hopefully, as some of the near-term outlook gets a little bit clearer, some of that volatility will be reduced, and that should hopefully accrue to our benefit and our customers' benefit.

Great. Okay. Appreciate it, Rodger. And then just in terms of either problem loans or increased delinquencies, which I think came on the C&I side. Any sort of common threads there or commentary around that linked quarter?

No. Frank, I would just say, like you mentioned, in the fourth quarter, both of those metrics came down, came up a bit in the first quarter, similar to the levels that we saw in the third quarter. So there's some ins and outs there. But as we look at that delinquency increase, there are no large loan increases there. The largest one was $5 million. So it's pretty -- and there's not kind of a pattern of a particular vertical or sector. So I would say no kind of red flags go up from looking at that. And obviously, we continue to manage that closely, continue to be very, very closely engaged with our clients in those situations.

Got it. And then recognizing that rate moves can -- are going to impact the Cash Connect business on both revenues and expenses. If we get some more rate cuts in the back half of the year, should that really have an impact on overall returns at Cash Connect? And kind of what are you thinking in terms of ROA here as we progress through the year on that business specifically?

Yes. Yes. So on Cash Connect, as you referred to, obviously, our focus has been on driving the profitability and the ROA of that business. Primarily, we're focused on looking at the profitability. And as you can see, the profitability came in a bit above 7%, which is an improvement year-over-year and quarter-over-quarter when you normalize for that onetime client event. So it is moving in the right direction, but there's more work to do, and we continue to want to drive it higher. With respect to interest rates, interest rates are going to impact the top line of Cash Connect with an offsetting benefit on expenses. So it does actually improve profitability. And you can think of it about $400,000 per rate cut on an annualized basis is kind of the profitability improvement from rates. So when you think about the overall profitability equation of Cash Connect, there are a few things that are going on. One is rates, which is accretive. Volumes have been -- this is a seasonally low volume quarter and volumes have been a bit softer in general. So volumes have been a bit of a headwind, but to offset that, we're trying to implement some pricing increase. We actually implemented a pricing increase this quarter, which leverages some of the scale that we have in the market, which fell to the bottom line. And so I think some of those efforts are beginning to bear fruit to offset some of the headwinds that we're seeing with the goal of continuing to drive the profit margin. So I do expect that business -- I do expect that profit margin to continue to go up with, again, maybe have some volatility quarter-to-quarter, but to continue to go up. And I do expect that ROA to be accretive to us.

Your next question comes from the line of Manuel Navas with D.A. Davidson.

Given your strength in deposit betas, are there any updates to deposit beta expectations from here? And just kind of how does that impact your kind of near-term NIM expectations?

Yes. Manuel, so on deposit betas, we had a goal of getting to 40%. Our guide was to get to 40% by the end of year-end, and we've exceeded the pace that we initially set out for ourselves because we basically got to 38% this quarter. So essentially, we're there. We're going to continue to push higher. I think we've squeezed a lot of the juice out of that and have done a good job in repricing, but I think we're going to continue to push higher to get some additional upside. But I would say that with your broader question on net interest margin management, there are a few things that I wanted to point out, which is there are a number of tools that we use to manage NIM. And deposit beta is obviously the big one, but there are other tools. And for example, we've really done some optimization around our wholesale funding in the last 2 quarters. We paid off a facility in the fourth quarter. We paid off sub debt facility in the first quarter. So we've also reduced our wholesale funding, and we did that through cash through our deposit generation. That's number one. Number two is the hedging program that we have. And just as a reminder, we have $1.5 billion of floor options, notional $1.5 billion, where we sit right now, about $500 million are in the money. And with every successive rate cut, more and more become in the money. So with another rate cut, another $350 million hit the strike price, the second rate cut, another $250 million. And if we're in a scenario where we have 3 or 4 rate cuts, basically all of that $1.5 billion will be in the money. So every rate cut, the impact to our NIM of every rate cut is going to be lower as we go through the cycle. And so I think we are -- we do use all of those tools to mitigate net interest margin kind of compression, and I feel good about our ability to continue to do that.

And at the same time, you're having flows that could go from securities in many quarters to loan growth and pick up there as well.

Exactly. Exactly. Our securities portfolio continues. The yield is 2.37% this quarter. Whether we invest -- if we invest in loans at over 6%, even if we invest in other securities at high 4s, we're still picking up a meaningful amount of upside there. So I think that higher end staying longer provides another lever. You're absolutely right.

Yes. And I would just add, Manuel, as David said, I think we have opportunity on that deposit beta. We obviously got to our goal quicker than we thought, but we continue to take actions to drive that higher while maintaining deposit levels. So I think there's some opportunity there, although it's clearly not as significant as what happened in the back half of last year.

That's really helpful. Just to shift topic a little bit. Can we talk about the medium-term time frame on the 12% CET1 target? Is that kind of something you've been contemplating with your last 3-year plan? And how does that kind of compare with -- I think you kind of talked about a 50% total capital payout this year. Is that still the right level? There's a couple of questions there, but just thinking about the time frame and then about the 50% this year in terms of buyback preference.

Yes. Yes. No, got you. Let me try to address both of those. So in terms of the time frame for medium term, I would think about it as a 2- to 3-year glide path. It's hard to be specific because it depends on the macro environment. Obviously, we want to be careful if there's deterioration, also our business performance and any future investments. So we want to retain discretion, but think of it as a 2- to 3-year glide path. And the way this developed is at every point in the year at this time, in the first quarter, we go through a capital planning process, where based on the Fed scenarios, we stress our balance sheet, we stress our capital and we evaluate our capital position. As you know, we've built some capital over the last few years. I think we feel good about our ability to perform under those stresses, and we wanted to provide some clarity around what that medium-term target can be. So we -- in the first quarter, we obviously leaned into the buybacks because we thought it was a great opportunity, and we returned about 95% of earnings in the first quarter. I don't want to give specific guidance for the rest of the year. But I think the intention of sharing that framework and the path of travel is that we clearly have the ability and want to lean into the buybacks and so we're going to weigh all of the factors that we talked about. But if everything holds steady, I think we have an opportunity to do more and continue to lean in.

Citing the macro environment as something you're considering, where does that fit in terms of your desire to hit the pedal on buybacks? Is right now the macro environment make you feel less likely to slow versus where you were in the first quarter? Kind of just how -- where do you feel with the macro environment currently?

Yes. I think, again, like you said, we leaned in, in the first quarter. I think we have -- we're very well capitalized at a 14% CET1 -- and we feel -- we don't see anything at this point that would make us change our view, but we said macro environment because, of course, we have to watch for further deterioration, but nothing specifically that we're seeing.

How does AOCI impact any of your thought process here? Obviously, you didn't even use it in the determination of this, but there's been swings of it either way. Just kind of initial thoughts on that.

Yes. Yes. Good question. On the AOCI, it is a secondary metric. We look at our TCE ratio, tangible common equity ratio, which includes the AOCI. And even though the primary metric we're targeting is the CET1, the TCE is a secondary metric that we also look at. And so obviously, we take those swings into account. But as that portfolio -- as our overall securities portfolio has come down over the years, and as you know, that AOCI has been getting just the -- it throws off about $500 million of cash flow a year, the AOCI gets smaller kind of in the same percentage, 8% to 10% a year. So as that becomes a smaller factor, we think that TCE is going to be kind of less of an important driver relative to CET1, but it's something we always look at as well.

And your next question comes from the line of Kelly Motta with KBW.

I guess turning to just the loan side of things and the increased uncertainty. Just wondering if you've done any -- understanding it's early a preliminary analysis on the portfolio that could be impacted by the new tariff policies? And if you're making just in light of increased uncertainty, any changes to your underwriting or getting more -- incrementally more cautious on any areas? Interested to hear your thoughts.

Yes. Thanks, Kelly. It's Rodger. So we have looked at the C&I book, in particular, potential exposure to both the impact of the federal government contraction, the DOGE projects and separately, the tariffs, we looked at all those larger relationships. At this point, we haven't done anything yet because candidly, everything seems to change so frequently. It would be hard to change our underwriting criteria based on information that hasn't even really been implemented yet. But we know the populations. We're watching it. We're in close contact with those clients, but nothing at this point to report in terms of any impact from a credit or a credit underwriting standards.

Got it. That's super helpful. And then just from a net growth perspective, I understand that 1Q is kind of challenging across the board, a lot of unknowns, and you spoke of clients just hitting the pause on projects. What do you think needs to occur in order to kind of spur some net growth again? Is it some greater certainty on some of these policy things, just trying to piece together kind of the thought process of where we could see some net growth picking up and what would have to occur in order to see that?

So Kelly, you know our loan book. It's primarily C&I businesses and real estate developers call it up to $100 million, $150 million in annual revenue or projects, things like that. And so these are entrepreneurs. And I would tell you, over many, many years, when there's certainty, even if the certainty isn't all good news, at least if it's not good news, they know how to factor that into their business, and they will continue to move ahead. The challenge that borrowers are expressing to us now is they don't know how to factor it into their business because the numbers keep changing, particularly on the tariffs, and it's very hard then to make business decisions. So people are, like I said, I think generally, our customers are doing fine. They're just in a holding pattern until there's a little bit more certainty and then I think we'll start to see some movement going forward. And I just -- I would reiterate that certainty does not have -- does not mean that everything has to be great, but just tell them what the rules of the road are and entrepreneurs have a very strong capability to adjust accordingly.

And with no further questions in queue, I'd like to turn the conference back over to you, David.

Okay. Thank you very much, everyone. If you have any specific follow-up questions, feel free to reach out to Andrew or me. Rodger, Arthur and I will be attending investor meetings throughout the quarter, and we look forward to meeting with many of you. Have a great day.

Thank you. And ladies and gentlemen, this concludes today's conference call. You may now disconnect.