Wsfs Financial Corp Q2 FY2025 Earnings Call

Thank you for standing by. My name is Tina, and I will be your conference operator today. At this time, I would like to welcome everyone to WSFS Financial Corporation Second Quarter Earnings Call. After the speakers' remarks, there will be a question-and-answer session. I'd now like to turn the call over to David Burg, Chief Financial Officer. Sir, you may begin.

Thank you, Tina, and good afternoon, and thank you, everyone, for joining our Second 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 are Rodger Levenson, Chairman, President and CEO; and Art Bacci, Chief Operating Officer. 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. During the second quarter, WSFS has performed well as we continue to demonstrate the strength of our franchise and diverse business model. Results included a core earnings per share of $1.27, core return on assets of 1.3% and core return on tangible common equity of 18.03%. All of these metrics are up versus the first quarter. Core net interest margin expanded 1 basis point to 3.89%. This reflects a reduction in total funding costs of 9 basis points with a deposit beta of 43% for the quarter. These reductions were partially offset by lower loan yields, primarily driven by the announced Upstart sale, which accelerated the disposition of a nonstrategic portfolio that has been in runoff. Core fee revenue grew 9% quarter-over-quarter, driven by broad-based growth across a number of businesses, including wealth, capital markets, and mortgage. Our wealth business grew 17% year-over-year, led by 39% growth in institutional services and 7% in the Bryn Mawr Trust Company of Delaware. Total client deposits increased 1% linked quarter, driven by an increase in trust deposits. On a year-over-year basis, client deposits grew 5%, driven by growth across consumer, commercial, and trust. Importantly, noninterest deposits grew 11% year-over-year and now represent over 30% of our total client deposits. Gross loans were generally flat quarter-over-quarter, but we saw strong momentum in several areas. We saw the highest quarter of commercial fundings in over a year and particularly strong fundings in C&I, where loan balances grew 2% linked quarter. In our consumer business, we had strong growth in residential mortgage, which grew 2% linked quarter and in HELOCs, which grew 8% linked quarter. These results reflect the momentum of our newly combined home lending business as well as the learnings obtained from our partnership with Spring EQ. Total net credit costs were $14.3 million, reflecting lower net charge-offs for the quarter. Net charge-offs were 30 basis points, with approximately half of that coming from the impact of the Upstart sale. Excluding Upstart, total net charge-offs were 14 basis points. Our problem asset levels were stable and NPAs declined to 51 basis points of total assets as a result of payoffs. While delinquencies ticked up in the quarter, the relationship that drove the majority of the increase fully paid off in July. During the second quarter, WSFS returned $87.3 million of capital, including $77.7 million in buybacks which represented 2.7% of our outstanding shares. Year-to-date, we have returned approximately $150 million of capital, resulting in buybacks of 4.4% of our outstanding shares. On the last page of the supplement, we provided our midyear outlook and now assume 225 basis point rate cuts for the remainder of the year, 1 in September and 1 in December. Overall, we're increasing our ROA outlook for the year to approximately 1.30% as we continue to drive high performance and growth. We expect low single-digit growth in our commercial portfolio and flat growth in our consumer portfolio, excluding Upstart. We're generating great momentum in our Home Lending business, and we expect those originations to largely offset the continued runoff in our Spring EQ partnership portfolio. For deposits, our outlook remains the same, and we expect to continue to generate broad-based growth across our business for the year. We're raising our NIM outlook to approximately 3.85%. And this outlook now includes the two additional rate cuts I mentioned earlier. We continue to be focused on deposit repricing opportunities and maintaining our beta through any interest rate cuts. We also continue to see strong momentum and growth opportunities in our fee businesses, which contribute almost 1/3 of our total revenue. Our Wealth & Trust business is performing very well, and the outlook for double-digit fee revenue growth this year remains unchanged. In the second quarter, WSFS completed the sale of its Powdermill business, which provided tax and other administrative services. In addition, we decided to unwind a wealth advisory partnership with Commonwealth Financial Network as a result of Commonwealth's announced sale to LPL Financial. While these transactions will result in some near-term revenue headwinds, they create important strategic opportunities to broaden our product offering and expand our wealth franchise. We expect our overall fee revenue will grow low single digits as Cash Connect revenues are expected to decline primarily as a result of interest rate reductions and lower volume. As a reminder, the interest rate fee revenue decline is more than offset in Cash Connect funding costs, resulting in a higher profit margin. Net charge-offs are expected to be between 35 to 45 basis points of average loans for the year, excluding the full impact of Upstart, which has, at this point, largely been divested. Our commercial portfolio continues to perform well, but losses may remain uneven. Our outlook for efficiency remains unchanged at approximately 60%, and we will continue to leverage opportunities to invest in the franchise while prudently managing our expense base. Lastly, as seen on Slide 9 of the earnings supplement, we will continue to execute buybacks as part of a multiyear glide path to our CET1 capital target of 12%, while retaining discretion to adjust the pace based on the macro environment, business performance, or potential investment opportunities that we see. We are very excited about the future and remain committed to delivering high performance. Thank you, and we'll now open the line for questions.

Your first question comes from the line of Russell Gunther with Stephens.

Maybe could we start on the loan growth discussion. I hear you on kind of what your overall expectations for commercial are for this year. But it was a great C&I quarter. So it would be helpful to just get some big picture takes on what your expectations are for that asset class, how you're thinking about paydowns as a potential headwind continuing going forward? And then just any sentiment shift you could share from your commercial borrowers, whether or not tariffs are still an overhang? Or has the environment improved for them at all, that would be a great place to start.

Sure, Russell. I'll start off by saying that we are focused on growing our loans in a way that adds value. We highly value our commercial and industrial (C&I) relationships and franchise, and we plan to continue emphasizing C&I lending. We've seen solid loan originations in commercial real estate and construction, but we are being selective in those areas, prioritizing high-quality sponsors with whom we have strong relationships. We are not chasing deals based on price alone and intend to maintain our profit margins. Our emphasis will remain on C&I growth, but we also anticipate growth in both the C&I and commercial real estate sectors, with a continued commitment to C&I moving forward.

Hi, Russ, it's Rodger. Good to hear from you. I've been hearing from customers and clients regarding tariffs. There is some uncertainty about how this will unfold and when. However, with time, it seems to be settling a bit after April 2. We've noticed a slight increase in optimism among our borrowers who are now moving forward with some previously delayed projects. I wouldn't call it a significant change yet, as the impact has been minimal so far. Still, it appears to be shifting the outlook for some individuals, although the final outcomes remain uncertain. Overall, the sentiment seems to be moving in a more positive direction.

That's great, everyone. Regarding expenses, I appreciate that the core efficiency ratio guidance remains unchanged for the year. David, it would be helpful to understand your perspective on how the second quarter might shape up as a possible run rate. Can we consider potential revenue-related seasonality or merit increases? I know you mentioned Cash Connect and the potential impact on the bottom line. So, could you provide some insights on the quarter-to-quarter progression?

Sure. Happy to provide that insight, Russell. Looking back at the first quarter, we experienced some one-time benefits and timing-related issues, which accounts for the increase into the second quarter. The figures we’re seeing this quarter represent a solid run rate for future growth. There may be a slight uptick with normal business activities and hiring in the latter half of the year. Overall, the run rate observed this quarter serves as a reliable foundation moving forward.

Okay. Excellent. And then last one for me, guys. You bought back a bunch of stock. You barely put a dent in that CET1. You guys made a ton of money. I know it's a multiyear target. But what piece of it, if any, do you expect either traditional depository M&A or M&A within your fee verticals to play a role in working that lower?

Yes. So I'll take that, Russell. Obviously, we're going at the buybacks hard because of the excess capital, which we walked everybody through last quarter. And we will continue to do that. But as we've always said, our first option for excess capital is to invest in the business. And so if those opportunities come along, whether they're in our fee businesses or the traditional banking business, we will certainly consider those. I think we have a little bit of a leaning on the fee business side, particularly the wealth and trust franchise because we see such great growth potential there. But we're open to it across the entire franchise. I would say on the traditional banking business, we continue to see nice organic growth from this unique position we have in our market. So the bar would be high, but we're open to it if it would be additive and consistent with our strategic plan.

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

I am curious about the potential for an increase in the net interest margin in the latter half of the year, as it seems that the guidance has slightly decreased. I'm wondering about the exit net interest margin and what possible upsides there may be. You've been effective in managing deposit costs, so I wanted to start there.

Sure. Well, you broke up a little bit in the beginning, but I think you were asking about the NIM in the back half of the year, the run rate and where the upside could be, right?

Yes. That is correct. Sorry about that.

Sure. I understand your question about the NIM in the second half of the year and where there might be potential for improvement. In the initial quarters, our net interest margin run rate was approximately 3.88% to 3.89%. We have adjusted our forecast to 3.85%, indicating a slight decrease in NIM for the latter part of the year. This change is primarily due to anticipated interest rate cuts, with one expected in September and another in December. While the December cut won't significantly affect us, the September change will impact us for an entire quarter. Each 25 basis point cut typically leads to a temporary dip in NIM of about 2 to 3 basis points initially. However, we expect this impact to lessen over time as our beta adjusts, ideally reducing the effect to about 1 basis point. The apparent decline in NIM for the second half is largely influenced by the timing of these cuts. Looking ahead to next year, if no further cuts occur, we aim to manage this impact effectively. Additionally, we sold our Upstart portfolio, which has been winding down. For the next few quarters, this sale will also contribute roughly 2 basis points to NIM, a figure that will decrease as the portfolio continues to run off. These two factors will lead to a softer run rate. However, we are striving to manage our deposit pricing effectively and have surpassed our beta target of 40%, reaching 43% this quarter. Although we are experiencing some natural runoff in our CDs, the majority are set for 6 months at a 4% rate, which limits substantial repricing in that area. Nevertheless, we do have some longer-term CDs that will phase out, offering further benefits. Our securities portfolio transitioning into loans or other securities will also contribute about 4 basis points annually. Overall, we still have avenues to improve our pricing performance and offset these impacts.

I appreciate that commentary. Just jumping back for the on the buyback piece, there's been a portion of your buyback and you generally have been price agnostic, but it's substantial this quarter and the first quarter. How much does pricing impact your thought process from here? And how do you think about that pricing? Do you include AOCI recovery in that pricing? And just how has that shifted over time?

Yes, we definitely increased the pace of buybacks in the first half of the year. We took advantage of the lower stock prices in our industry, especially in April, to focus on buybacks. Moving forward, as we see similar price declines, we will continue this approach. However, as Roger mentioned, our main objective is to gradually return capital through buybacks if we don't find investment opportunities for that capital in the business, which remains our first option. We will consider AOCI risks and the current environment, always monitoring our CET1 and TCE to ensure we act prudently with AOCI. Overall, we plan to continue deploying capital through buybacks while maintaining a gradual approach, as we believe this is the right decision, provided there are no better investment opportunities available.

Thank you. I mean, you were able to do this amount of buybacks and your CET1 barely changed.

Yes, that's exactly right. We generate a significant amount of capital, which is crucial for us. Additionally, our risk-weighted assets decreased slightly this quarter, and when our AMCI declines, the associated deferred tax asset impacts our risk-weighted assets, benefiting us with a 250% risk weight. The actual effect on capital also depends on the growth of the balance sheet; as that varies, you will see different impacts on capital accordingly.

And our final question comes from the line of Kelly Motta with KBW.

This is Charlie on for Kelly. In terms of expenses, it seemed like more of a run ratable quarter. Does that kind of still hold true? I know last quarter was a little low. And then you had the Cash Connect recovery. Maybe you could update us on the details of that process and then more broadly, just how you're thinking about expenses going forward?

Sure. Let me start with Cash Connect. In Cash Connect, we had a $1.6 million one-time insurance recovery this quarter. Most of that recovery is related to the client termination from the fourth quarter of last year. It's a positive sign that we were able to achieve that recovery, and typically, we are able to recover most of our losses in that business. This validates the way we have been managing that franchise. This was a one-time benefit in expenses. Other than that, it was a solid quarter for us. The first quarter included timing benefits and had about a $4 million one-time related to our incentive compensation adjustments. This quarter is still strong. We will continue to invest in the business and remain focused on growth, particularly from a technology and talent perspective. We expect continued moderate growth from here, but it's a favorable run rate quarter. As for expenses, we manage the business not just for the short term but for growth. When we see market disruptions or opportunities to acquire talent, especially in wealth and our commercial business, we invest in hiring relationship managers. This can sometimes lead to timing mismatches between expenses and revenue, but we believe it’s the right choice for the franchise, and we will keep pursuing that approach.

That's great. And then in terms of Cash Connect more broadly? I know last quarter, you mentioned some price increases that could drive some better profitability, but offsetting softer volumes and then lower rates are also a factor. Just wondering kind of like net-net, if you're seeing progress and driving profit margins in cash?

Yes, we are. If you exclude the $1.6 million one-time benefit from this quarter, our pretax margin and net income would show a slight increase compared to the previous quarter. Looking at the year, if we adjust for the client termination last year in the fourth quarter, the Cash Connect margin would have been in the mid-single digits, and we expect it to be in the higher single digits this year, above 8%, with a goal to reach the teens. As you mentioned, our focus is on implementing pricing increases, some of which have already taken place, with more expected. We anticipate about a $1 million pretax benefit this year from that. Additionally, interest rates have positively impacted profitability, providing a $300,000 to $400,000 pretax benefit for every rate cut. However, we've faced challenges with some client terminations and volume changes due to industry consolidation. Nonetheless, our goal is to improve profit margins, and we still believe we can achieve growth in market share. It's not a rapidly growing industry, but we see opportunities for growth that we plan to pursue.

Okay. Understood. That's great. And then finally for me, just circling back to the margin outlook. You guys raised it in the back half of the year. Just wondering, kind of looking out further into 2026, if you expect to have some of the same tailwinds with the deposit repricing and the betas there, there's a little more pressure, just your thoughts like looking out further at the margin.

Yes. As you know, we haven't provided guidance for 2026. Our goal is to continue to perform among the top quintile compared to our peers. We aim to improve our return on assets. While we will experience some temporary effects from interest rate cuts, we plan to address those challenges. We anticipate continued growth in our fee businesses, which are beneficial for our return on investment, and our objective is to keep pushing that margin higher.

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

Okay. Great. Thank you very much, everyone. We appreciate your time in joining the call. And if you have any specific follow-up questions. Feel free to reach out to Andrew and me, and have a great day and a weekend.

That concludes today's conference, you may now disconnect.