WSFS Financial Corporation 3rd Quarter Earnings Call - WSFS FINANCIAL CORP

Financial Performance:

• Core EPS reached $1.75; core ROA was 1.58% and core return on tangible common equity was 20.7%.
• Core PPNR grew 15% and core net income rose 14% year-over-year, driving core ETS growth of 25%.
• Net interest margin (NIM) expanded 1 basis point to 3.88% due to loan growth and investment yields, partially offset by a 4 basis point increase in deposit costs.
• Core fee revenue increased 3% year-over-year (declined 1% quarter-over-quarter), with Wealth & Trust driving growth up 30% to represent ~60% of total fee revenue.
• Gross loans grew 1% quarter-over-quarter (5% annualized); excluding specific runoff, growth was 2% QoQ and 7% YoY.
• Average core deposits increased 10% YoY; non-interest-bearing deposits grew 20% YoY and now constitute 35% of total average deposits.
• Core non-interest expenses decreased 3% QoQ, lowering the efficiency ratio to 56.1%.
• Asset quality remained stable with net recoveries for the second time in the year; YTD net charge-offs were 3 basis points of average gross loans.
• Problem assets increased $57.5 million (12% QoQ) due to multifamily, construction, and CNI downgrades but remain down 16% YoY.
• Capital return: $70 million returned to shareholders ($60M in buybacks); 5.6% of shares repurchased YTD; return rate reduced to ~80% of net income for the quarter.

Guidance and Future Outlook:

• Expected cumulative interest-bearing deposit beta to exit 2026 at 35% following the September hike, with normalized beta projected at 45–50% through the rate increase cycle.
• Loan growth guidance remains consistent with mid-single digits; CNI growth is expected to continue at a normal pace (5% QoQ, 9% YoY) despite moderated funding levels.
• Residential mortgage and home equity growth is anticipated to slow due to rates above 7%, though the pipeline remains supported.
• Securities portfolio reinvestment strategy continues to leverage higher yields; portfolio size targeted to remain in the low 20s percent of assets.
• Long-term TCE ratio target remains 12%; pace of buybacks may be adjusted quarterly based on interest rate volatility and AOCI runoff.
• Management expects credit quality to come in better than prior net charge-off guidance due to stable recovery trends.

Business Segments and Product Lines:

• Wealth & Trust: Delivered double-digit growth for eight consecutive quarters; Corporate Trust and Global Capital Markets grew 45% and 48% YoY, while private wealth grew 14% driven by AUM.
• Institutional Services: Demonstrated strong market share gains; deal activity increased 4% QoQ, and fee revenue grew 5% QoQ.
• Cash Connect: Achieved a 15% profit margin; revenue is sensitive to rate cuts (lower volumes) but benefits from rate hikes (~$2.7M fee increase per 25bps hike).
• Commercial: CNI funding normalized from elevated H1 levels; CRE project viability is being monitored as debt service coverage becomes tighter.
• Consumer: Home lending remained resilient with 24% YoY growth in residential mortgage and home equity loans.

Market and Competitive Landscape:

• Deposit pricing pressure remains elevated; management expects deposit competition to persist, potentially pressuring NIM expansion.
• WSFS is gaining market share in Institutional Services, particularly in securitization and capital markets, driven by a differentiated origination strategy.
• The Wealth & Trust business benefits from non-AUM drivers, including tax policy changes favoring Delaware trusts and sustained capital market activity.
• Competition in CNI is intensifying, requiring defensive pricing strategies to retain existing clients.
• Market trends indicate a shift in deposit flows, with transactional deposits moving seasonally, though average balances provide a more accurate activity metric.

Risks and Challenges:

• Deposit Beta Risk: Potential for deposit betas to drift higher over time (45–50%) as market competition intensifies.
• Credit Risk: Specific reserve of $8 million recorded for a student housing-related loan; multifamily, construction, and CNI sectors flagged for monitoring.
• Interest Rate Sensitivity: While asset-sensitive, NIM expansion is capped by deposit pricing pressures; a 25bps rate hike is estimated to yield 2–3bps NIM increase.
• Loan Origination Demand: Higher mortgage rates (>7%) are expected to dampen residential origination volumes.
• One-off Events: Specific credit events (e.g., student housing) can temporarily impact problem asset levels and reserves.

Management Commentary and Tone:

• Management expressed confidence in the franchise's resilience, highlighting consistent Wealth & Trust growth across multiple rate environments.
• Tone was cautious yet optimistic regarding NIM expansion, acknowledging the trade-off between market share defense and margin compression.
• Confidence in the sustainability of double-digit Wealth & Trust growth was maintained, attributed to diverse revenue drivers (transactional vs. AUM).
• Management emphasized expense discipline while continuing to invest in the franchise to support long-term efficiency ratio improvements.
• Capital allocation remains a priority, with a clear commitment to returning capital while maintaining a robust balance sheet.

Analyst Questions and Answers:

• Loan Growth & Rates: Confirmed CNI momentum is normalized; residential growth will likely slow due to high rates but remains competitive.
• Deposit Beta: Clarified that while 35% is the exit target for the current cycle, the normalized beta is expected to settle higher (45–50%) in a rising rate environment.
• Cash Connect: Confirmed profitability impact of rate hikes is manageable (~$2.5M expense vs. fee increase per 25bps).
• Deposit Mix: High non-interest-bearing growth (20% YoY) is not expected to be sustainable; long-term target is mid-single digit growth for both deposits and non-interest-bearing mix.
• Securities Portfolio: Reinvesting proceeds at higher yields is accretive to NIM; portfolio size capped at low 20% of assets to avoid over-extension.
• Capital Targets: TCE target of 12% remains; buyback pace adjusted slightly to manage volatility risks.
• Credit Quality: No material new stress identified in 24-month CRE run-off analysis; current NPA is an isolated incident.

Other Key Points:

• The company exited the prior rate cut cycle with a cumulative deposit beta of 41% and saw an 18% beta during the September rate hike.
• Fee revenue growth in Wealth & Trust is broad-based across Corporate Trust, Global Capital Markets, Bryn Mawr Trust, and Private Wealth.
• Efficiency ratio improvement to 56.1% was supported by favorable non-recurring items (medical expenses) and revenue growth.
• NIM sensitivity analysis suggests a 2–3 basis point increase for every 25 basis point rate hike, contingent on deposit beta behavior.
• The Wealth & Trust segment is 70% non-AUM based (transactional) and 30% AUM based, providing insulation from market volatility.