Earnings Call Transcript - WSFS Q4 2025

Operator, Operator

Good day, and welcome to the WSFS Financial Corporation Fourth Quarter 2025 Earnings Call. As a reminder, this conference call is being recorded. I'd now like to turn the call over to your host for today, Mr. David Burg, Chief Financial Officer. Sir, you may begin.

David Burg, CFO

Great. Thank you very much, and good afternoon, everyone, and thank you for joining our fourth 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 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 the 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. Our businesses continued to perform very well in the quarter, providing strong momentum moving into 2026. For the fourth quarter, WSFS delivered a core earnings per share of $1.43, a core ROA of 1.42% and core return on tangible common equity of 18%, which are all up meaningfully on a year-over-year basis. These results closed out a successful 2025 that included a full year core EPS of $5.21, core ROA of 1.39% and core return on tangible common equity of 18%. Our 4Q core EPS is up 29% over the prior year, and our 2025 full year EPS increased 19% over the prior year. These core results for the fourth quarter exclude several non-core items, which resulted in a $5 million impact to net income as well as the $0.09 impact to EPS in the quarter. These items are outlined on Page 5 of the supplement. Net interest margin was 3.83% for the quarter, down 8 basis points linked quarter, driven by the rate cuts and a one-time interest recovery last quarter, which accounted for 4 basis points of the decline. Importantly, our NIM is up 3 basis points year-over-year while absorbing 75 basis points of interest rate cuts since the fourth quarter of 2024. We continue to successfully reprice our deposits, and our exit deposit beta for December was 43%. Core fee revenue increased 2% linked quarter and 8% year-over-year driven by double-digit growth in Wealth & Trust, capital markets and home lending. Our Wealth & Trust business continues to perform very well and grew 13% year-over-year with 29% growth in WSFS Institutional Services and 24% growth in BMT of Delaware. For the full year 2025, WSFS Institutional Services was the fourth most active U.S. asset-backed and mortgage-backed securities trustee with nearly 12% market share, moving up 2 spots in the rankings relative to 2024. Total gross loans grew 2% linked quarter or 9% annualized, driven by broad-based growth across our businesses. In commercial, growth was led by C&I, which delivered growth of 4% linked quarter or 15% annualized. And overall, we saw the largest quarterly fundings in over 2 years. Our residential mortgage and WSFS originated consumer loans continued to build on a strong momentum and grew 5% linked quarter. Total client deposits increased 2% linked quarter or 10% annualized, with growth across trust, private banking and consumer. Importantly, our noninterest-bearing deposits grew 6% linked quarter and now represent 32% of our total client deposits. Turning to asset quality, we saw a meaningful improvement across our problem assets due to favorable net migration and payoffs and ended the year at the lowest level in over 2 years. Nonperforming assets were essentially flat compared to the prior quarter and ended the year down approximately 40% compared to year-end '24. Delinquencies increased 46 basis points linked quarter due to several previously identified non-performing and problem assets moving to delinquent status in the quarter; 14 basis points of this increase was driven by non-performing loans. The remainder is primarily comprised of 2 office loans and 1 multifamily condo loan in our footprint. One of the office loans was already resolved in January, while the other is a medical office expected to be sold in the first half of '26, which would result in a full repayment of our loan. We continue to work with the borrower on the remaining loan and believe we're well secured. Net charge-offs increased 16 basis points to 46 basis points of average loans, primarily due to the partial charge-off of a nonperforming land development loan. Net charge-offs were 40 basis points for the year, excluding Upstart, which is on the midpoint of our prior outlook. During the fourth quarter, WSFS returned $119 million of capital including buybacks of $109 million or 3.7% of our outstanding shares. This took our total buybacks for the year to $288 million, representing over 9% of our outstanding shares. On Slide 15 of the supplement, we provided our 2026 outlook, which assumes a continued stable economy and three 25 basis point rate cuts throughout the year in March, July and December. Overall, we expect to deliver another year of high performance and growth with a full year core ROA of approximately 1.40% and double-digit growth in core EPS. As a reminder, 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 buybacks based on the macro environment, business performance and potential investment opportunities. We expect mid-single-digit loan growth overall with low single-digit growth in our consumer portfolio, where we expect continued momentum in residential mortgage and other real estate secured consumer loans, partially offset by the continued runoff of our Spring EQ partnership portfolio. Building on a strong momentum in deposits in 2025, we expect continued broad-based deposit growth across our businesses in '26. Our outlook calls for deposit growth in the mid-single digits from 4Q levels. Our outlook for NIM is approximately 3.80% for the year, which incorporates the impact of the 3 additional interest rate cuts I mentioned. We continue to focus on deposit repricing opportunities while growing our portfolio and expect to maintain an interest-bearing deposit beta of low to mid-40s throughout the year. While the path and 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 several levers, including deposit repricing actions, our hedge program and the securities portfolio strategy. We continue to see momentum and growth opportunities in our fee businesses, which contribute approximately 1/3 of our total revenue. Our overall fee revenue will grow mid-single digits, excluding Cash Connect. Wealth & Trust is expected to continue the strong momentum and again grow double digits in 2026. Cash Connect revenue is expected to decline due to interest rates but will be more than offset in expenses. Our focus in Cash Connect continues to be on driving the profit margin which has increased meaningfully in 2025. Our outlook for net charge-offs is 35 to 45 basis points of average loans for the year, consistent with our 2025 results. While we have seen strong improvement in problem loans and nonperforming assets, commercial loan losses may remain uneven. Our outlook calls for an efficiency ratio in the high 50s for the year. We plan to maintain strong expense discipline, but we'll continue to leverage opportunities to invest in the franchise, which, coupled with normal seasonality, may result in some variances quarter-to-quarter. We're excited about the future and remain committed to delivering high performance. Thank you, and we will now open the line for questions.

Operator, Operator

Our first question comes from Manuel Navas from Piper Sandler.

Manuel Navas, Analyst

On the loan growth, can you talk a little bit about the better commercial trends? And kind of what are you seeing out there in terms of sentiment? There's some better line utilization, the footings were up. Just kind of talk about what you're seeing in commercial that's driving this kind of strong originations and a good outlook.

David Burg, CFO

Yes, good afternoon. I'll start by discussing the commercial sector. In the first half of last year, the economy faced significant uncertainty due to pending tax legislation, tariffs, and other legislative matters. As Rodger has noted in earlier calls, small business owners and entrepreneurs were hesitant to make decisions amid this uncertainty, resulting in delays. However, as the year progressed, we maintained discussions with clients, and by the third quarter, our pipeline grew to over $300 million. In the fourth quarter, as some of these uncertainties were resolved, particularly with the passage of the tax bill and clearer legislative direction, we observed strong originations and fundings, along with continued positive momentum. While we may not experience this level of growth every quarter, we are optimistic about the momentum moving forward.

Manuel Navas, Analyst

I appreciate that. Can I switch over to capital return for a moment.

David Burg, CFO

Sure.

Manuel Navas, Analyst

This was a really strong quarter in terms of buybacks. What are kind of your parameters there? Is it just that CET1 ratio? This quarter also had return on AOCI, a little bit lower pricing, tangible book value per share growth you hit the 110% total payout. Like what should be the guidepost beyond CET1 going forward?

David Burg, CFO

I think, Manuel, we look at all of those factors, I would say, primarily CET1 and TCE, which does incorporate that AOCI volatility. And of course, if we see our price dip, we take advantage of those opportunities. But generally, our approach is, as you know, the majority of our capital philosophy, our capital return philosophy is through buybacks. Our dividend is kind of in the mid-teens. So about 85% of our capital returns is through buybacks. And we are continuing on this kind of multiyear glide path to get to the capital to our capital target. And so I think we have the capacity and you can kind of think about it as returning roughly 100% of net income a year. But I think importantly, we will talk about up and down depending on what we see. If there are investment opportunities, we want to take advantage of those. And similarly, if there's some kind of stress in the economy or the market, we may slow that down. So I think that's kind of the glide path, but all of the factors you mentioned are things we take into account.

Operator, Operator

Our next question comes from Russell Gunther from Stephens.

Russell Elliott Gunther, Analyst

I wanted to start on Cash Connect, if we could. So 3 cuts baked into the outlook. I know 4Q tend to see some seasonally lower ATM volume. But as you look at the year ahead, what type of revenue hit are you guys anticipating here? And then within that, if you could talk to just overall margin expectations, you mentioned the improvement, I think from what was a high single-digit margin to a low double-digit one now. So just helpful to get the puts and takes positive and negative over the course of '26 in terms of profitability improvement here.

David Burg, CFO

Yes, sure, sure, Russell. So yes, when you look at Cash Connect, as you mentioned, the interest rates do have an impact on the pricing, on the top line, but that's more than offsetting the expenses. So we do have a margin benefit there. I think the way to think about it is roughly about $2.5 million annual impact per 25 basis point rate cut is kind of roughly what you should think about on the topline. And so the impact of the rate cuts, like you said, about 3 rate cuts for the year, that's really kind of the way to think about the impact on the topline for Cash Connect. But you mentioned the margin. That's really been the story that we've been focused on because some of that macro pricing. But not only are the interest rates accretive to margin, but we've also been taking a number of other actions to continue to drive margin. And those are: number one, pricing. We've leveraged some of the scale that we have in the market to increase pricing across our products, and that's been a meaningful benefit. Number two, we've had a couple of things that we're doing around expenses, and that includes both optimizing kind of in-transit cash as well as just efficient management of expenses in the business. And the third thing that we're doing is we're taking a look at the client portfolio across that business and thinking about and there's a page in the supplement, which shows the mix of that business between Smart Safes and bailment and you can see that Smart Safes have increased year-over-year from about 25% of total volume to about 33% of total units, rather. And the Smart Safes generally come with higher margin and higher kind of value-add products. And so as we continue to grow that business, which we think is kind of a growth vector within that business, that should also be accretive to our margins, and that's part of our strategy. So it's a combination of not just rates, but all of those actions that have allowed us to drive the margin. And the goal is that we continue to drive that into the mid-single digits and hopefully higher.

Russell Elliott Gunther, Analyst

That's very helpful, David. Now, regarding expenses, it's great to see the high deficiency. Besides the lower results from Cash Connect that we discussed, are there any areas where we can make outright reductions to support a lower run rate for the year? I'm trying to consider what a reasonable core noninterest expense growth rate is for WSFS.

David Burg, CFO

Yes, Russell, I would like to mention a couple of things. Our efficiency for this year was 59%. We indicated a target in the high 50s, and we aim to stay in that range or slightly improve next year. We prefer not to provide a specific number because, as you know, we want to capitalize on opportunities and invest in our franchise. If opportunities arise involving talent additions or technology, we want to seize those. Therefore, fluctuations may occur from quarter to quarter. To give you a better idea of our expense management, we are implementing various productivity actions. For instance, we've been optimizing our real estate portfolio, which has been beneficial and will continue to be. We are actively leveraging those opportunities. Additionally, we have divested several products or businesses that do not align with our strategy, including Upstart, Powder Mill, and the exit from the joint venture with Commonwealth, all of which help reduce expenses related to non-core aspects of our operations. Lastly, we are maintaining strong discipline regarding our headcount and overall expenses, particularly in shared functions. All these factors give us confidence, and importantly, we want to keep investing in the business if the right opportunities arise.

Russell Elliott Gunther, Analyst

I hear you. I appreciate it. And then just last one for me. Curious as to the anticipated mix of deposit growth. So you guys are basically looking to match fund loan growth. Just wondering any willingness to flex with the below-peer loan-to-deposit ratio around 76%, right? Just maybe fewer market rate deposits. And then I guess an adjacent question really would be just expectations around the overall size of the balance sheet, if you can touch on the investment portfolio and cash balances, how they could trend over the course of the year?

David Burg, CFO

Certainly. First, regarding deposits, we are mindful of the trade-offs involved. Throughout the year, we've been gradually reducing our CD book, largely driven by price considerations. This isn't a deliberate reduction, but rather a result of our aggressive pricing strategy, supported by strong deposit growth in other areas, especially for clients with solely CD relationships. We will continue to explore pricing opportunities while also focusing on increasing our core clients and relationships. As for our securities portfolio, we've been reducing it somewhat over the last couple of years from higher levels and have now brought it down to around 21%. Our goal is to maintain it at this level moving forward. Any securities that come off the portfolio will be reinvested in similar types of securities, such as agencies and MBS, without taking on significant credit risk.

Operator, Operator

Our next question comes from Kelly Motta from KBW.

Kelly Motta, Analyst

Over the past year, you have exited a couple of businesses where the risk-adjusted returns were not favorable. It seems that, based on your guidance and outlook, these challenges are starting to lessen. As you strategically assess your diversified businesses, are there any areas you are still evaluating that you could share, particularly regarding the profitability thresholds you consider for niche businesses and the deposit and loan sectors you operate in?

David Burg, CFO

Yes. I'll begin, and I'm sure Rodger will add his thoughts as well. Kelly, we have an initiative we call relook, where we examine various aspects of our business to assess their strategic fit moving forward. This is an ongoing process for us. As you mentioned, we've successfully divested some areas. While I can't provide specific details about upcoming changes, I can say that this evaluation is an integral part of our strategic plan and ongoing strategy.

Rodger Levenson, CEO

Yes, Kelly, it's Rodger. I would just add to what David said that if you look at the actions we took in '25, those were decisions made when WSFS looked very different than we do today. Since they were low scale, low profitability partnerships or businesses, we thought it made sense to move on from those for the reasons David mentioned. There isn’t a large group of followers in that regard, but as David pointed out, there are opportunities to reassess many aspects of our operations based on the company's evolution. I think this year has been important for building that capability. We've always been disciplined in assessing profitability by business line and shared service area. I believe this exercise will help us maintain that discipline going forward. When you experience rapid growth, as we did four or five years ago, you eventually reach a point where you assess whether you're achieving the higher growth needed to free up capital and resources for further investment in promising areas, while reallocating assets where growth is lacking. This process is a crucial part of our strategic plan and will continue to be so in the future.

Kelly Motta, Analyst

Got it. That's helpful. Maybe a question on M&A, if I could. It's been several years now since the last deal. I know you've been internally focused and clearly, you've had a nice glide path with what you're doing organically, but just as we get another year out entering 2026. I'm wondering if you have any updated thoughts here given the integration and work you've done so far?

Rodger Levenson, CEO

Yes. This is Rodger again. I'm sure you're referring to bank M&A, which I'll address in a second. But as David said a couple of times, we're continuing to invest very heavily in the business, whether it's the fee businesses or the banking business, and that could come through one-off lift apps or talent or small firms or it could come to something larger. As it relates to traditional banking we've been clear over the last year or so that if something came along that would strengthen our position, our very strong position in the greater Philly Delaware region, we would absolutely consider that. And I think we have demonstrated now our ability to execute on those very well. But we also feel good about the organic growth. And so we can continue to achieve our objectives as we outlined for '26 by focusing on the organic opportunity, and then we'll supplement those with inorganic opportunities should they come along.

Operator, Operator

Our next question comes from Christopher Marinac from Janney Montgomery Scott.

Christopher Marinac, Analyst

I wanted to look at sort of risk-adjusted returns in the loan portfolio, and particularly as Upstart is now behind you. Do you see those getting stronger? Or does the rate environment sort of limit what you can get on a risk-adjusted return?

David Burg, CFO

Chris, it's David. When we evaluate our loan pricing and risk-adjusted returns, it stems from the different businesses we operate. In our consumer segment, we've divested Upstart, and our portfolio is now primarily secured by real estate. Our goal is to concentrate on areas where we possess a competitive advantage and can originate better than others in the market, particularly with our home lending products. This focus impacts both our risk-adjusted returns and our capacity for sustainable growth at advantageous price points. Hence, our growth strategy will lean towards residential products, including home equity lines and installment loans, which feature a different loss profile compared to unsecured portfolios. On the commercial side, our main offering remains the C&I relationship product, which continues to experience growth. While we may not be the lowest priced in the market, we emphasize our relationship management, diverse product offerings, superior customer service, and personalized attention as our competitive edge. Therefore, while C&I is our primary product, commercial real estate will also be a key focus for growth with the right sponsors who are well-regarded within our operational areas.

Rodger Levenson, CEO

Chris, this is Rodger. Obviously, 100% agree with what David. The other component which you'll hear us continue to talk about more is getting more out of our client relationships, particularly C&I, but across the platform by referrals throughout our franchise, especially on the wealth side. So I think it's taking that total relationship view and allocating that to various products is where we see an opportunity to get a little bit more overall profitability through the franchise just because of the strength of the relationship. I think we've done a good job on that front, but we also feel like we're just getting started, particularly on those referrals into wealth and vice versa.

Christopher Marinac, Analyst

Great. I appreciate it. And then, David, just a quick question on taxes. Is that sort of 24%, 25% range still a good number to think about going forward?

David Burg, CFO

Yes, yes, that's a good number. Yes, the tax bill really didn't have a material impact on our business, maybe a little bit of a negative impact because some deductions are no longer allowed charitable deductions, for example, up to a certain point. So a small impact, but generally, that's the right range.

Operator, Operator

Our next question comes from Janet Lee from TD Cowen.

Sun Young Lee, Analyst

I want to understand the factors driving your significant growth in noninterest-bearing deposits this quarter. I believe much of this is linked to the momentum in your wealth and trust segments. Additionally, the revenue from wealth and trust fees is also experiencing double-digit growth. I would like to know if this is due to an expanding institutional trust market or if you're gaining market share. I'm interested in the competitive landscape and whether the $340 million increase in noninterest-bearing deposits this quarter is expected to normalize in the upcoming quarter.

David Burg, CFO

Thank you for your question, Janet. We generally expect our noninterest deposit growth to align with our interest-bearing deposit growth. Our goal is to maintain and ideally increase that noninterest-bearing ratio. The 6% quarter-over-quarter growth we experienced this quarter is likely not something we can replicate consistently every quarter. However, we aim to keep growing at least in line with our total deposits. Importantly, the growth we've seen this quarter is primarily from two areas: trust and private banking. It's worth noting that the composition of our noninterest-bearing deposits is quite diverse, with around 40% coming from consumer accounts, about 35% from trust and private banking, and around 25% from commercial. Every segment is making a significant contribution to the noninterest-bearing balance, driven by relationship growth and the expansion of relationship accounts. So, while trust, particularly in private banking, has been a major growth engine this quarter, the overall contribution is broad across our business.

Sun Young Lee, Analyst

Got it. In terms of credit problem assets, non-performing assets decreased from the previous quarter, while new charge-offs rose slightly. Considering the favorable shift in those problem assets, which I believe you mentioned is at its lowest level in over two years, how should we view this in relation to your expectations for where your new charge-offs might settle compared to the guidance of 35 to 45 basis points?

David Burg, CFO

Yes, you're correct regarding our problem assets. We have seen a migration leading to a decrease of approximately $95 million. This drop is attributed to a combination of migration, payoffs, and paydowns. For our net charge-off guidance, if we exclude Upstart, we are looking at 40 basis points this year, and we expect to maintain a similar position next year. The commercial sector will likely remain uneven; that's an important takeaway. You might notice some fluctuations, and some nonperforming assets could potentially be written off. However, we remain confident about our portfolio. One aspect that sets us apart in our commercial real estate portfolio is the high level of recourse. In fact, we have 80% recourse in our office portfolio and 86% in our multifamily portfolio. This, along with strong collateral, reassures us about these portfolios, even though they will continue to show variability. On the consumer side, after divesting our Upstart portfolio, most of what's left is secured by real estate, which has kept our net charge-off rates low and continues to perform well.

Operator, Operator

Our last question comes from Manuel Navas from Piper Sandler.

Manuel Navas, Analyst

Hopping on to try to clarify something. Is the double-digit EPS growth on core or reported EPS?

David Burg, CFO

It's focused on core compared to core, Manuel.

Manuel Navas, Analyst

Okay. Great. A quick question on the NIM with that guide has there been any shifts in your hedging profile? Any other kind of wildcards in the NIM outlook?

David Burg, CFO

No, there are no wild cards. Our NIM outlook is for 3.80%. We finished the quarter at 3.83%. Our exit rate for December was also 3.83%. We are managing the anticipated interest rate cuts for next year in three ways. Deposit pricing is the main method, along with our hedging program in the securities portfolio. To update on the hedging program, we currently have about $1.3 billion of hedges that are in the money. If there’s another rate cut, that amount would rise to $1.5 billion. This is an important tool for mitigating the impact of future rate cuts. Regarding the securities portfolio, we are reinvesting funds to keep it flat, which is yielding about 2.35% to 2.4%. We are reinvesting that at around 4.3% to 4.4%, resulting in a roughly 200 basis point uplift that offsets some of the interest rate impact. Overall, this is why the anticipated impact for next year is somewhat less than what sensitivity analysis would suggest. These are the strategies we continue to manage.

Manuel Navas, Analyst

You mentioned strong deposit growth with this outlook. You touched on it a bit in the trust business, but where do you see all the growth in your other businesses? What opportunities do you see for deposit growth?

David Burg, CFO

Our outlook is focused on achieving continued mid-single-digit growth in deposits. In institutional services, we've been steadily increasing our market share and expect this trend to continue, making it a key growth driver. Rodger highlighted the referrals we’re cultivating within our commercial and wealth segments, presenting significant untapped opportunities that should also contribute to deposit growth. Additionally, expanding our Commercial and Industrial portfolio is vital for our deposit strategy. When we consider all these factors, including the significance of small businesses in our deposit growth, we are optimistic about our business mix and the contributions from each segment.

Operator, Operator

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

David Burg, CFO

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

Operator, Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.