Wsfs Financial Corp Q3 FY2025 Earnings Call

Ladies and gentlemen, thank you for being here. My name is Colby, and I will be your conference operator today. I would like to welcome you to the WSFS Financial Corporation Third Quarter Earnings Call. I will now turn the call over to your host today, Mr. David Burg, Chief Financial Officer. You may begin, sir.

Great. Thank you very much, and good afternoon, everyone, and thank you for joining our third 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 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 the 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 SEC. All comments made during today's call are subject to the safe harbor statement. I will now turn to our financial results. During the third quarter, WSFS continued to demonstrate the strength of our franchise and diverse business model. The company delivered a core EPS of $1.40, core return on assets of 1.48% and core return on tangible common equity of 18.7%, which are all up versus the second quarter. On a year-over-year basis, core net income increased 21%, core PPNR grew 6% and core earnings per share increased 30%. In addition, our tangible book value per share increased by 12%. Net interest margin expanded 2 basis points to 3.91% quarter-over-quarter. This reflects a reduction in total funding cost of 2 basis points with a deposit beta of 37%. Given the September rate cut, our exit beta for September is 43%, which reflects the repricing actions taken after the rate cut. Net interest margin for the quarter benefited from an interest recovery from a previously nonperforming loan, which added about 4 basis points. Core fee revenue was flat quarter-over-quarter as our results were impacted by 2 previously announced strategic exits in Wealth and Trust as well as the Spring EQ earn-out from last quarter. Excluding these items, core fee revenue grew 5% quarter-over-quarter, primarily driven by Capital Markets and Cash Connect. Our Wealth and Trust business continues to perform very well and grew 13% year-over-year. Total client deposits increased 1% linked quarter, driven by commercial business. On a year-over-year basis, client deposits grew 5%, driven by growth across consumer, commercial, wealth and trust. Importantly, noninterest deposits grew 12% year-over-year and continue to represent over 30% of our total client deposits. Loans were down 1% linked quarter, driven by the previously announced sale of the Upstart loan portfolio and continued runoff in our Spring EQ portfolio. Excluding these items, loans were generally flat this quarter, but we saw solid momentum in several areas. Our residential mortgage and WSFS originated consumer loan portfolios both delivered strong growth with linked quarter increases of 5% and 3%, respectively. These results reflect the momentum of our home lending business as well as the learnings obtained from our partnership with Spring EQ. In commercial, new fundings this quarter were offset by lower line utilization and the payoff of problem loans, which supported improvements in our asset quality. Importantly, our commercial pipeline remains strong across both C&I and commercial real estate, increasing to approximately $300 million. We saw a meaningful improvement across our asset quality metrics during the quarter. Total net credit costs were $8.4 million this quarter, down $5.9 million compared to the prior quarter. Net charge-offs were 30 basis points for the quarter and 21 basis points when excluding NewLane. Importantly, we saw a decline in problem assets, delinquencies and nonperforming assets this quarter. NPAs declined by over 30% to 35 basis points, driven by 2 large payoffs with no additional losses, while delinquencies declined by 34%. In each of these areas, we are now at or below the lowest level in the past year. During the third quarter, WSFS returned $56.3 million of capital including buybacks of $46.8 million or 1.5% of our outstanding shares. Year-to-date, we have repurchased 5.8% of our outstanding shares. Despite these higher levels of repurchase, our capital position remains very strong with a CET1 of 14.39%, well in excess of our medium-term operating target of 12%. We intend to maintain an elevated level of buybacks in line with our previously communicated glide path towards our capital target of 12%. While retaining discretion to adjust the pace of these buybacks based on the macro environment, our business performance and potential investment opportunities. These results position us well to meet our previously announced full year outlook, even with an additional October rate cut, which was not previously included in our assumptions. While the timing of future rate cuts remains uncertain, it's important to note that the impact of additional rate cuts on our financial results will not be linear as we continue to manage our margins through deposit repricing, our hedge program, and securities portfolio strategy. As we have done in the past, we will provide a full year 2026 outlook in January with the release of our fourth quarter 2025 financial results. We remain excited about the future and committed to continuing to deliver high performance. Thank you, and we'll now open the line for questions.

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

I wanted to start kind of with the bigger picture question, David, and you kind of touched on it towards the end of your prepared remarks. But that medium-term target on CET1 is challenging to hit, given just how much money you guys make. So it would be helpful to get a sense just kind of big picture in your mind, what's your base case scenario to achieving that target? And sort of what does that assume for organic growth rates over the next couple of years, acquisitive growth, be it depositories or fee verticals? And then you mentioned potentially flexing the buyback at a more accelerated clip. Just your base case to get there would be helpful to start.

Yes, absolutely, Russell. Look, as you've seen this year, we are buying back shares at a pace significantly faster than in the past couple of years. We are repurchasing about 100% of our net income. Given the dynamics of our balance sheet, such as the sale of the Upstart portfolio and the runoff in some partnership portfolios, our risk-weighted assets have not increased. As a result, despite these buybacks, our capital levels remain very high and have actually increased since the beginning of the year. This is the situation we are in. Regarding the profitability levels you mentioned, we generate a lot of capital. Looking ahead, even with a strong growth rate on our balance sheet, we still have plenty of resources to execute buybacks at or above 100% of our net income for a few years, around 2 to 3 years. This is our strategic intention. Depending on developments with the balance sheet, we might accelerate that course. I can certainly see us increasing our buybacks beyond our net income. As you noted, we continually evaluate various investment opportunities. Our first priority is always to invest capital in the business where there are fruitful opportunities. After that, we would focus on returning capital.

Okay. Got it. And then just the second question for me. So asset quality resolution and trends were really constructive this quarter. You guys have a healthy reserve and we just talked about the healthy CET1 for that matter. So I guess how are you thinking about reserve levels here amid what is still a somewhat volatile macro? And then could you share particular sectors of your loan portfolio where you continue to keep a closer incremental eye?

Yes, regarding asset quality, we have seen positive momentum and progress in our numbers. I want to emphasize that our approach starts with disciplined originations, ensuring that we maintain recourse for most of our lending to support strong underwriting practices. Additionally, we proactively engage with clients in case of any unforeseen challenges. We have a comprehensive forward-looking pipeline and we stress-test our portfolio for higher rates, addressing potential issues early on with our clients. While the commercial sector may have some inconsistencies, we feel confident about our portfolio and are focused on resolving and managing any remaining non-performing assets. The consumer asset quality remains robust, especially in our home lending and Spring portfolio, which gives us confidence in continued progress. In terms of reserves, the macro data suggests we could release some reserves, but we’ve chosen to maintain a conservative approach due to potential volatility in the macroeconomic environment, including shifts in rates, inflation concerns, and labor market weaknesses. This conservative stance is a response to the current uncertainties. Let me know if there’s anything more specific you’d like to discuss.

Your next question comes from the line of Kelly Motta from KBW.

Your next question comes from the line of Christopher Marinac from Janney Montgomery Scott.

I wanted to dig in further to the Wealth and Trust business lines and just understand a little bit more about the future growth in terms of new accounts being opened versus just doing more business with existing accounts. I know you called a little bit of that out on the Bryn Mawr Trust, but I wanted to do more on the other pieces.

Sure. Chris, thanks for the question. So as you know, our wealth business is a pretty diverse business. And there are really 3 business lines within that business. There's the institutional services, there's the Bryn Mawr Trust of Delaware and then the private wealth management. And also about 60% of the revenue in that business is really not AUM-based revenue, not tied to AUM, but really tied to new accounts and tied to transaction activity. And so we've seen the places where we've seen a lot of new activity growth, new clients, new accounts have been both on the institutional services side and the BMT of Delaware side. When you look at year-over-year, institutional services are up about 30% this quarter, and BMT of Delaware is up about 20% this quarter. And so we're seeing growth in new accounts and transactions with existing clients. We're seeing a lot of activity there.

Chris, this is Art. I would tell you on a few things. I mean, the institutional services team just came back from the ABS East conference in Miami this week, and they're excited. I mean, our reputation and our quality of service is really being recognized in the marketplace. There's been comments about deterioration in service with some other trustees. And so we are continuing to see a very robust pipeline with new clients and actually becoming the preferred provider for many clients. On the BMT of Delaware side, a similar thing. We've seen a recent bank acquisition that one of the subsidiaries was a Delaware Trust, and we're seeing clients starting to leave that and coming to us. We're seeing opportunities on the international side of that business. So that team is really continuing to look to grow its business. And then on the private wealth management side, we've kind of got past the Commonwealth divestiture, if you will. And the last 2 months have been net client cash flow positive, and we're starting to see very good referrals from commercial. We're also really honing in on COIs and really trying to focus on getting more business from some of our COIs. So I think all in all, we have a really positive outlook going into 2026 with our Wealth and Trust businesses.

Great. And I guess, just to extend one more thought. You have operating leverage on all ends of the company, but is the operating leverage greater in the wealth space where you can create more earnings from that versus the bank operation?

Yes, one of the aspects that highlights the diversity of our business model is our profit margins in the wealth business, which I believe are higher than the typical margins seen in other wealth businesses. This is really tied to our business model. We certainly have significant operating leverage and ample opportunities for scale, especially in the institutional services segment in BMT of Delaware. I definitely support that viewpoint.

And I think you can see it in our deposit base that comes out of the trust business because that's large deposits. They're not using our branch network. They're not using ATMs. It's a very scalable business for us.

Your next question comes from the line of Janet Lee from TD Bank.

Regarding the Cash Connect business, if interest rates were to decrease, I would anticipate a reduction in revenue, but I believe that the funding side could balance that out. In terms of the net interest income benefits from Cash Connect, how do you forecast the potential financial advantages of Cash Connect growing? Or is it expected to be more limited?

Yes, Janet, I'm happy to address that. Regarding Cash Connect, your description is spot on. The revenue generated from Cash Connect is linked to interest rates. As interest rates decrease, we anticipate a decline in our fee revenue from Cash Connect, but this will be more than counterbalanced by a drop in expenses. Therefore, from a profitability standpoint, we actually benefit from lower rates. You can estimate that for every 25 basis points decrease, there's approximately a $300,000 pre-tax profitability advantage. We've noticed this trend with recent rate cuts. The September cut isn't reflected in the numbers yet, but potential cuts coming up in December will also impact the beginning of next year. That's one aspect of Cash Connect that we’re focusing on to enhance profitability. Additionally, when we examine our segment reporting for Cash Connect, we aim to improve profit margins in that business overall. This isn't solely influenced by interest rates, but also by the pricing leverage we believe we have in the market, thanks to our market share, as well as efficiency improvements on the expense side. We have several levers to pull here, and the results so far have been positive. Year-over-year, profit margins in that segment increased from just under 6% to over 10%. It’s worth noting that last quarter included an insurance recovery, which inflated margins a bit, but when adjusted for that, last quarter's margin was around 8%. So, we've progressed from roughly 6% to 8% to 10%, following the trajectory we aimed for, indicating that we are effectively executing on that strategy.

And Janet, just as a reminder, the way we account for the bailment business, the benefit that David is talking about won't necessarily flow through NII. It's a combination of fee income and noninterest expense.

And just to clarify, you are maintaining your low single-digit guidance, which includes the low single-digit commercial loan growth for the year. Does this also account for the problem loan payoff experienced in the quarter? Additionally, can you provide insights on the size or pace of the payoffs from the consumer partnership going forward? Should we expect it to slow down from the current level of around $140 million? How should I consider the overall impact of the payments and the trend in that regard?

Yes, let me address the consumer side first and then return to the commercial question. This quarter, we experienced two significant events within the consumer sector that need to be distinguished. First, we finalized the sale of the Upstart portfolio, which removed about $85 million from our balance sheet at the start of the quarter. This portfolio was nonstrategic and had already been in decline, accompanied by some increased net charge-offs. We decided to strategically exit this portfolio and seized the opportunity to release some reserves based on this transaction. Now, concerning the remaining decline, it is primarily related to the Spring EQ portfolio, which saw a reduction of about $50 million this quarter. We anticipate this decline to continue at a pace of about $15 million to $17 million per month. However, we have been making significant progress in our Home Lending business, which includes our mortgage operations and WSFS-originated consumer loans primarily consisting of HELOCs, lines of credit, and installment loans. We have achieved annualized double-digit growth in this segment for several quarters, effectively offsetting the runoff from Spring EQ. We're optimistic that this growth will persist, supported by our unique origination capabilities in the mortgage sector and the expansion of our origination team. As for the commercial side, this quarter was notably affected by a few factors. The payoff of problematic loans is a positive trend that contributes to our improvement in asset quality. We also observed a decrease in line utilization this quarter, which tends to fluctuate and can be influenced by economic uncertainties. Generally, this reflects business activity levels. On a broader note, we feel optimistic about our pipeline, including Commercial and Industrial (C&I) loans. We are focused on ensuring that our originations are both profitable and beneficial, especially in a competitive C&I landscape. We are not competing on the lowest price point and are being cautious with our underwriting practices. That said, our pipeline currently stands at about $300 million, higher than we've seen in several quarters, indicating strong potential. Furthermore, we continue to attract talent, which bolsters our confidence. Recently, we appointed a new Market President for Philadelphia, who previously held a similar role at a major regional bank. Attracting talent like this underscores the confidence that others have in our franchise as well. While predicting quarter-over-quarter performance can be challenging, we remain optimistic about growing that business and continuing our focus on C&I as a foundational element of our strategy.

Your next question comes from the line of Kelly Motta from KBW.

Sorry about the technical difficulties. You mentioned the recruitment of the Philadelphia Market President, and it's clear that organic growth is a focus. Are there other areas where you're looking to add talent that could enhance your product line, wealth management, or the core banking operations, or in regions that present attractive growth opportunities where you could expand your team?

Yes, the answer is yes. As I mentioned, we are adding more relationship managers to the commercial team, which remains a key area for us to grow. The wealth business has also been a continuing focus, and we have successfully integrated several teams over the past 12 to 18 months, which is proving beneficial. We are actively seeking talent through both lift-outs and potential RA acquisitions, and we regularly assess our talent across our operational areas. We believe there is significant opportunity available. Art previously highlighted the importance of referrals, which we see as a major area for potential across our business segments, including wealth, commercial, small business, and home lending. There is a substantial amount of untapped potential in these areas.

Got it. That's helpful. And then maybe turning back to the margin. I apologize if I missed this, but you guys have done a really great job managing the margin, keeping an overall relatively high level of margin and neutralizing some asset sensitivity. You get a couple of cuts here again this quarter. Do you think you have enough flex in the deposit base to absorb some of that? Or could there be some near-term pressure in that margin ahead?

Yes, Kelly, I'd be glad to discuss that. To provide you with a brief answer and a more detailed one, our net interest margin does show sensitivity, which I've estimated at around 3 basis points for each 25 basis point rate cut. This means that in terms of our net interest margin for this quarter, we were at 3.91%. If we adjust for an interest recovery, we trend towards the high 3.80% range. With a few expected rate cuts in the fourth quarter, we might drop to approximately 3.80%. On a longer-term basis, we have various strategies to counteract this sensitivity after the initial effect. Looking back over the last year, we've seen 125 basis points of rate cuts, yet our margins have increased by more than 10 basis points year-over-year. This sensitivity of about 3 basis points per cut is projected to decrease to 1 or 2 basis points as we implement these strategies. One such strategy is the deposit repricing you've mentioned. The beta at the end of the last quarter was around 43%. We expect to maintain a similar beta for upcoming cuts. Additionally, we have a hedging program with floor options that help neutralize some of the asset sensitivity. Currently, we have around $850 million of these in the money, and with the next rate cut, an additional $250 million would enter that status. If there are three more cuts, the entire $1.5 billion program would be in the money, effectively neutralizing this amount of variable rate loans and making them function more like fixed rates. We plan to continue using this hedging program through 2026, ensuring the effective deployment of that $1.5 billion. Another strategy involves growing new deposits, which allows us to reinvest in a favorable yield curve. This process does take time, but it significantly supports our net interest margin. Lastly, I want to mention our securities portfolio, which yields below 2.5%. We have about $500 million of cash flow annually from this portfolio that we can reinvest into loans or other securities. This rollover is expected to generate an annual yield increase of 4 to 5 basis points. Together, these strategies enable us to mitigate the impact of rate cuts more effectively than simple calculations might indicate, and we will continue to utilize these tools.

Great. I really appreciate all the color on that. That's really helpful and it will be helpful to go back to just one point of tying up loose ends of clarification. Just can you remind me how much floating rate loans you have and maybe index deposits just to help manage our margin with that component?

Yes. Our floating rate loans are just over 50%, and our loan beta is around 50%. However, when we factor in the hedges, the loan beta reduces to just above 40%. This is how we aim to balance the portfolio, considering our deposit beta falls within a similar range. On the deposit side, we have a CD book with most of the time maturities around 6 months and a bit extending to 11 months, which matures on its regular schedule. The other deposits primarily consist of non-indexed accounts, and we have about $700 million to $800 million in indexed deposits.

And with no further questions in queue, I would like to turn the conference back over to David Burg.

Okay. Thank you very much, everyone, for joining the call today. If you have any specific follow-up questions, please feel free to reach out to Investor Relations or me. Have a great day.

This concludes today's conference call. You may now disconnect.