WSFS Financial - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 delivered a clean beat: core EPS $1.13 vs S&P Global consensus $1.04* and revenue $238.8mm vs $235.2mm*, driven by 8bps NIM expansion to 3.88% and disciplined deposit repricing, with core PPNR up 11% QoQ to $104.6mm.
• Wealth & Trust maintained strong momentum (+19% YoY fee revenue), offsetting softer Cash Connect volumes; efficiency improved to ~59% from ~64% in Q4 as seasonal and one-time costs rolled off.
• Credit costs rose on a single legacy office-related C&I charge-off ($15.9mm), taking NCOs to 0.76% annualized; excluding this, NCOs would have been 0.27%, with Upstart and NewLane losses continuing to decline.
• Capital deployment accelerates: $53.8mm buybacks (1.03mm shares at $52.37), dividend raised 13% to $0.17, and authorization expanded to repurchase ~14% of outstanding shares; medium-term CET1 target set to ~12% (from 14.10% current), implying ongoing buyback capacity subject to macro.
• Near-term stock catalysts: continued deposit cost declines, hedging floors limiting NIM compression on further rate cuts, Wealth & Trust share gains, and buyback pace tied to CET1 glide path and macro clarity.

What Went Well and What Went Wrong

What Went Well

• NIM expanded 8bps QoQ to 3.88% as total deposit costs fell 12bps and $70mm sub-debt was redeemed, lifting core PPNR to $104.6mm and efficiency to ~59%.
• Wealth & Trust fee revenue grew 19% YoY (Institutional Services and BMT of DE strength), with pre-tax income of $29.4mm; AUM/AUA held at ~$89.6bn.
• Management emphasizing shareholder returns and confidence: “Board approved 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…”.

What Went Wrong

• Net charge-offs increased to 0.76% annualized on a single office-related C&I charge-off ($15.9mm), elevating total net credit costs to $17.6mm; problem assets ticked up and delinquencies rose to 1.13% of gross loans.
• Cash Connect volumes softened (serviced non-bank ATMs/smart safes down ~17% YoY to 38,214) and net revenue dipped to $21.5mm, though margins improved with pricing and lower cost of funds.
• Loans were essentially flat QoQ (gross down $78mm) as clients paused expansion amid macro and policy uncertainty; CRE multi-family downgrades increased problem assets but remained current and well-collateralized.

Transcript

Operator (participant)

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 speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star one again. Thank you. I'd now like to turn the call over to David Burg, Chief Financial Officer. Sir, you may begin.

David Burg (CFO)

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 of 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 an 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. WSFS had a solid start to 2024, 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 PP&R 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 eight 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 action, as well as the redemption of $70 million in higher-priced sub-debt. On a year-over-year basis, our net interest margin expanded by 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 4Q levels and were also impacted by some one-timers in this quarter. Gross loans were down less than 1% late quarter. Commercial loans were generally flat late 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 if we continue to be actively engaged with our clients as they navigate the current environment. Client deposits declined 1% late 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 continue to be strong and were up 6% year-over-year. Our loan-to-deposit ratio remained at 77% and continues to provide ample balance sheet flexibility and capacity to fund future growth. Our total net credit costs were $17.6 million, an increase of $8.9 million from the previous quarter, and our net charge-offs were at $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 do not 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 nine 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 two-year results. We remain committed to delivering high performance and will now open the line for any questions.

Operator (participant)

Thank you. We will now begin the question-and-answer session. If you have dialed in and would like to ask a question, simply press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. Your first question comes from the line of Russell Gunther with Stephens. Please go ahead.

Russell Gunther (Managing Director and Senior Research Analyst)

Hey, good afternoon, guys.

David Burg (CFO)

Hey, Russell.

Rodger Levenson (Chairman, President and CEO)

Hey, Russell.

Russell Gunther (Managing Director and Senior Research Analyst)

Hey, Rodger. Hey, David. Hey, you guys may have just addressed this, but I know you don't typically give the updated guidance till mid-year. It sounds like that's still the plan. I was surprised, though, with the lack of the guidance slide still in the deck. As we wait for an update, is there anything to read into any decrease in visibility on the PP&R credit quality front as to why that may not have been in the deck this quarter?

David Burg (CFO)

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

Russell Gunther (Managing Director and Senior Research Analyst)

Okay. I appreciate you taking that question. 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 35-45 basis point guide from the end of the year. Does that set you up to reiterate that kind of expectation? Is 35-45 still the right way to think about it? Obviously, a lot of increased volatility since that was given. How should we think about the puts and takes there from a charge-off perspective?

David Burg (CFO)

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

Russell Gunther (Managing Director and Senior Research Analyst)

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

David Burg (CFO)

Yeah. Yeah, absolutely happy to. Yeah, there are a few puts and takes, as you said. Cash Connect, we did have the $1.9 million quarter-over-quarter variance, as you mentioned. Also, volumes are a bit down this quarter. And because of interest rates, as you know, the top line in Cash Connect comes down. As you know, when you look at Cash Connect, the expenses are very closely correlated to the revenue. 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. I would say, other than that, we did have kind of a one-time item related to incentive accruals this quarter for about $4 million. That just corresponds to our annual—the first quarter, we go through our annual review process and true up our incentive accruals.

We did have a reversal of $4 million there. Like you said, fourth quarter was seasonally higher with some legal expenses and typical kind of year-end things. 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. The run rate is kind of in between the fourth quarter and this quarter. We were about $152 million this quarter. Again, there is probably $4 million of a one-timer and $4 million of timing items. The run rate is that $160 million range between the two quarters.

Russell Gunther (Managing Director and Senior Research Analyst)

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

David Burg (CFO)

Yeah. Thanks, Russell.

Operator (participant)

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

Frank Schiraldi (Managing Director)

Hi, guys. Good afternoon.

David Burg (CFO)

Hi, Frank.

Frank Schiraldi (Managing Director)

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

Rodger Levenson (Chairman, President and CEO)

Yeah, Frank, I would tell you, as I'm out and about with our customers, and as David mentioned in his remarks, we're seeing customers performing well or kind of hanging in there, but very cautious around expansion or change because of the volatility and kind of unevenness that's been in the markets. We've had a number of situations where we had approved deals for business expansion or adding a building or things like that. The customer just called us and said, "I'm just going to sit tight for at least 60-90 days till I get a better visibility." That's been the tone of the conversations I've had with a lot of our borrowers. As David said, the pipeline remains at consistent levels. We're seeing opportunities take market share.

Whenever you go through a period of disruption, like we've seen over the last couple of months, changing banks or adding to existing facilities, that kind of stuff gets impacted. Hopefully, as some of the near-term outlook gets a little bit clearer, some of that volatility will be reduced, and that should hopefully accrue to our benefit and our customers' benefit.

Frank Schiraldi (Managing Director)

Great. Okay. Appreciate it, Rodger. In terms of either problem loans or increased delinquencies, which I think came on the C&I side, any sort of common thread there or commentary around that link quarter?

David Burg (CFO)

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

Frank Schiraldi (Managing Director)

Got it. Recognizing that rate moves are going to impact the Cash Connect business on both revenues and expenses, if we get some more rate cuts in the back half of the year, should that really have an impact on overall returns of Cash Connect? What are you thinking in terms of ROA here as we progress through the year on that business specifically?

David Burg (CFO)

Yeah. Yeah. On Cash Connect, as you referred to, obviously, our focus has been on driving the profitability and the ROA of that business. Primarily, we're focused on looking at the profitability. As you can see, the profitability came in a bit above 7%, which is an improvement year-over-year and quarter-over-quarter when you normalize for that one-time client event. It is moving in the right direction, but there's more work to do, and we continue to want to drive it higher. With respect to interest rates, interest rates are going to impact the top line of Cash Connect with an offsetting benefit on expenses. It does actually improve profitability. You can think of it, about $400,000 per rate cut on an annualized basis is kind of the profitability improvement from rates.

When you think about the overall profitability equation of Cash Connect, there are a few things that are going on. One is rates, which is accretive. Volumes have been—this is a seasonally low volume quarter, and volumes have been a bit softer in general. Volumes have been a bit of a headwind. To offset that, we're trying to implement some pricing increase. We actually implemented a pricing increase this quarter, which leverages some of the scale that we have in the market, which fell to the bottom line. I think some of those efforts are beginning to bear fruit to offset some of the headwinds that we're seeing with the goal of continuing to drive the profit margin.

I do expect that profit margin to continue to go up with, again, maybe have some volatility quarter to quarter, but continue to go up. I do expect that ROA to be accretive to us.

Frank Schiraldi (Managing Director)

Very helpful. Thank you.

Russell Gunther (Managing Director and Senior Research Analyst)

Thank you.

Operator (participant)

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

Manuel Navas (Senior Research Analyst and Managing Director)

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

David Burg (CFO)

Yeah. Hey, Manuel. Good afternoon. On deposit betas, we had a goal of getting to 40%. Our guide was to get to 40% by the end of year-end. We've exceeded the pace that we initially set out for ourselves because we basically got to 38% this quarter. 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. I think we're going to continue to push higher to get some additional upside. 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 is there are a number of tools that we use to manage NIM. Deposit beta is obviously the big one, but there are other tools.

For example, we've really done some optimization around our wholesale funding. In the last two quarters, we paid off a facility in the fourth quarter. We paid off sub-debt facility in the first quarter. We have also reduced our wholesale funding, and we did that through cash, through our deposit generation. That's number one. Number two is the hedging program that we have. Just as a reminder, we have $1.5 billion of floor options, notional, $1.5 billion. Where we sit right now, about $500 million are in the money. With every successive rate cut, more and more become in the money. With another rate cut, another $350 million hit the strike price. The second rate cut, 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. Every rate cut, the impact to our NIM of every rate cut is going to be lower as we go through the cycle. I think we do use all of those tools to mitigate net interest margin kind of compression. I feel good about our ability to continue to do that.

Manuel Navas (Senior Research Analyst and Managing Director)

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.

David Burg (CFO)

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 fours, we're still picking up a meaningful amount of upside there. I think that higher end staying longer provides another lever. You're absolutely right.

Rodger Levenson (Chairman, President and CEO)

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

Manuel Navas (Senior Research Analyst and Managing Director)

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

David Burg (CFO)

Yeah. Yeah. Yeah. No, gotcha. Let me try to address both of those. In terms of the timeframe 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. 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. 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 do not 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. We are going to weigh all of the factors that we talked about. If everything holds steady, I think we have an opportunity to do more and continue to lean in.

Manuel Navas (Senior Research Analyst and Managing Director)

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 making you feel less likely to slow versus where you were in the first quarter? Kind of just where do you feel with the macro environment currently?

David Burg (CFO)

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

Manuel Navas (Senior Research Analyst and Managing Director)

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

David Burg (CFO)

Yeah. Yeah. Good question. On the AOCI, it is a secondary metric. We look at our TCE ratio, our 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. As that portfolio, as our overall securities portfolio has come down over the years, and as you know, that AOCI has been getting just the—it throws off about $500 million of cash flow a year. The AOCI gets smaller kind of at the same percentage, 8%-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 is something we always look at as well.

Manuel Navas (Senior Research Analyst and Managing Director)

Thank you. I appreciate the commentary.

David Burg (CFO)

Thanks, Manuel.

Operator (participant)

If you would like to ask a question, please press star one on your telephone keypad. Your next question comes from the line of Kelly Motta with KBW. Please go ahead.

Kelly Motta (Managing Director and Equity Research)

Hi. Good afternoon. Thanks for the question.

David Burg (CFO)

Hi, Kelly.

Kelly Motta (Managing Director and Equity Research)

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

Rodger Levenson (Chairman, President and CEO)

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

Kelly Motta (Managing Director and Equity Research)

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

Rodger Levenson (Chairman, President and CEO)

Kelly, you know our loan book. It's primarily C&I businesses and real estate developers called up to $100 million-$150 million in annual revenue or projects, things like that. These are entrepreneurs. I would tell you, over many, many years, when there's certainty, even if the certainty isn't all good news, at least if it's not good news, they know how to factor that into their business, and they will continue to move ahead. The challenge that borrowers are expressing to us now is they don't know how to factor it into their business because the numbers keep changing, particularly on the tariffs. It's very hard then to make business decisions. People are, like I said, I think generally our customers are doing fine. They're just in a holding pattern until there's a little bit more certainty.

I think we'll start to see some movement going forward. I would reiterate that certainty does not mean that everything has to be great. Just tell them what the rules of the road are, and entrepreneurs have a very strong capability to adjust accordingly.

Operator (participant)

Great. Thanks for the call. I'll step back. Thank you. If we have no further questions in queue, I would like to turn the conference back over to you, David.

David Burg (CFO)

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.

Operator (participant)

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