Wsfs Financial Corp Q1 FY2025 Earnings Call

Thank you for standing by. Welcome to the WSFS Financial Corporation First Quarter 2025 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. Thank you. 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 on our management's view of 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 the most recent quarterly reports on Form 10-Q, as well as other documents we periodically filed 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 costs 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 subordinated debt. On a year-over-year basis, our net interest margin expanded by four 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 transactions, 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 Q4 levels and were also impacted by some one-time items 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. Non-interest-bearing deposits continued 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 non-performing 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 will 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 planning 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 multi-year 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 Q2 results. We remain committed to delivering high performance. And we'll now open the line for any questions.

Thank you. We will now begin the question-and-answer session. Your first question comes from Russell Gunther with Stephens. Please go ahead.

Hey, good afternoon, guys.

Hey, Russell.

Hey, Russell.

Hey, Rodger. Hey, David. You may have just addressed this, but I know you don't typically give the updated guidance 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. That's typically our usual pattern; we will update the guidance, you know, after the second quarter. We don't like to give guidance every quarter or update the guidance, because 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 question. And then maybe on the net charge-off front, and again, I'm not sure what you can say as we await a mid-quarter update or mid-year update. But, obviously, the one isolated or idiosyncratic credit this quarter pushed you outside of that 35 to 45 basis point guidance from the end of the year. Does that set you up to reiterate that kind of expectation? Is 35 to 45 basis points 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, is a previously identified, obviously a one-off item. As I mentioned in my 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 one-time loan, 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. 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.

Thank you, David. Finally, could you provide some insight on how Q1 expenses are expected to develop moving forward? I understand there was some seasonality in Cash Connect and a $1.9 million nonrecurring item related to it. Could you clarify how all these factors come together and what we should anticipate for expenses in the upcoming quarter?

Yes, absolutely happy to. Yes, there are a few puts and takes, as you said. Cash Connect, we did have a $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 comes down. So, 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 one-time item that you mentioned. Other than that, we did have a one-time item related to incentive accruals this quarter for about $4 million. That just corresponds to our annual review process, and we true up our incentive accruals. We did have a reversal of $4 million there. And like you said, Q4 was seasonally higher with some legal expenses and typical 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 were 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 that $160 million range between the two quarters.

Okay. That's very helpful. David, thank you very much. I'll step back.

Yeah. Thanks, Russ.

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

Hi, guys. Good afternoon.

Hey, Frank.

Just recognizing that you're not updating guidance until July, I wanted to share some broad thoughts on commercial growth in the near term, particularly over the next few months, considering the macro uncertainty and what we experienced 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 unevenness that's been in the markets. So we've had a number of situations where we've approved deals for business expansion or adding a building, and the customer just called us and said, I'm just going to sit tight for at least sixty, ninety days until I get better visibility. 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 gets impacted. Hopefully, as some of the near-term outlook gets a little clearer, 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 delinquent increased delinquencies, which I think came on the C&I side, any sort of common thread there or commentary around that linked quarter?

No. Frank, I would just say, like you mentioned, in Q4, both of those metrics came down and came up a bit in Q1, similar to the levels that we saw in Q3. So there are 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 isolated, and there's not a pattern of a particular vertical or sector. So I would say no red flags go up from looking at that. And obviously, we continue to manage that closely, and continue to be very closely engaged with our clients in those situations.

Got it. And then, recognizing that rate moves can have an impact on the Cash Connect business both on 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?

At Cash Connect, our main focus has been on enhancing profitability and return on assets. We have seen profitability improve to just over 7%, which is a positive trend compared to last year and the previous quarter when adjusted for a one-time client event. While we are headed in the right direction, we recognize there is still more to accomplish in this area. Regarding interest rates, they will affect Cash Connect’s revenue but will also provide some benefits in terms of expenses, leading to better profitability. Each rate cut is expected to contribute around $400,000 annually to profitability. Overall, several factors impact Cash Connect’s profitability. Increased interest rates are beneficial, but this quarter we are experiencing lower volumes typical for this season, which presents a challenge. To counteract that, we have raised our pricing this quarter, leveraging our market scale to positively impact our bottom line. These strategies are starting to show results, helping us mitigate some of the challenges and aiming to increase our profit margin. I expect the profit margin to rise over time, although it may fluctuate quarterly, and I anticipate that return on equity will also improve.

Very helpful. Thank you.

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

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 near-term NIM expectations?

Yeah. Hey, Manuel. Good afternoon. So on deposit betas, we had a goal of getting to 40%. Our guide was to get to 40% by year-end. 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, Manuel, with your broader question on net interest margin management, there are a few things that I wanted to point out, which are several tools that we use to manage NIM. The positive 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 two quarters. We paid off a facility in Q4. We paid off a subordinated debt facility in Q1. So we've also reduced our wholesale funding, and we did that through cash and 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. 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, and the second rate cut is another $250 million. If we're in a scenario where we have three or four 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. 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 an 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. 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 topics a little bit, can we talk about the medium-term time frame on the 12% CET1 target? Is that something you've been contemplating with your last three-year plan? How does that compare with, I think you kind of talked about a 50% total capital payout this year? Is that still the right level? There are a couple of questions there, but just think about the timeframe and then about the 50% this year in terms of buyback preference.

Yes. 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 two to three-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 two to three-year glide path. 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. 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. 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 feel less likely to slow versus where you were in the first quarter? Where do you feel with the macro environment currently?

Yes, I believe we made significant progress in the first quarter. We are well-capitalized with a 14% CET1 ratio. At this moment, we do not see any factors that would change our perspective, although we are monitoring the macro environment for any potential deterioration. However, we haven't identified anything specific that concerns us. In terms of AOCI, it hasn't influenced our decision-making, but we recognize the fluctuations associated with it. I'd appreciate your initial thoughts on this matter.

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. Even though the primary metric we're targeting is the CET1, the TCE is a secondary metric that we also look at. Obviously, we take those swings into account. But as that portfolio has come down over the years, as you know that AOCI has been getting smaller, and 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. If 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. Thank you. I appreciate the commentary.

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

Hi. Good afternoon. Thanks for the question. I guess, turning to just the loan side of things and the increased uncertainty, just wondering if you've done any 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 becoming more incrementally cautious on any areas. Interested to hear your thoughts. Thank you.

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've 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 credit underwriting standards.

Got it. That's super helpful. And then just from a net growth perspective, I understand that Q1 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 on some greater certainty on some of these policy things? Just trying to piece together the thought process of where we could see some net growth picking up and what would have to occur in order to see that?

Our loan portfolio mainly consists of commercial and industrial businesses and real estate developers with annual revenues or projects ranging from $100 million to $150 million. These are entrepreneurs who, over the years, have been able to navigate uncertainties, even when the news is not entirely positive. They generally know how to incorporate varied information into their business strategies and continue making progress. However, the current challenge for borrowers is the unpredictability of the situation, particularly concerning fluctuating tariffs, which complicates their ability to make informed business decisions. Most of our customers are in a holding pattern, as they await clearer information. It's important to note that certainty does not have to equate to positive news; they just need to understand the parameters within which they are operating, and entrepreneurs typically have the resilience to adapt accordingly.

Great. Thanks for the color. I’ll step back.

Thank you. And with no further questions in queue, I would 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, Art, 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.