WSFS Reports 2Q 2018 Record Operating Results of 1.65% ROA and EPS of $0.89, an Increase of 39%, Driven by Strong, Balanced, Organic Growth in Net Interest Income, Fee Income, Loans and Deposits

WILMINGTON, Del., July 23, 2018 (GLOBE NEWSWIRE) -- WSFS Financial Corporation (Nasdaq:WSFS), the parent company of WSFS Bank, reported net income of $28.7 million, or $0.89 per diluted common share for 2Q 2018 compared to net income of $20.6 million, or $0.64 per share for 2Q 2017, an earnings per share (EPS) increase of 39%, and $37.4 million, or $1.16 per share for 1Q 2018. 1Q 2018 results included an unrealized investment valuation gain of $15.3 million (pre-tax), or $0.36 per share (after-tax), and a fraud recovery of $1.7 million, or $0.04 per share.

Net revenue (which includes net interest income and noninterest income) was $96.0 million for 2Q 2018, an increase of $10.0 million, or 12%, from 2Q 2017. Net interest income was $61.0 million, an increase of $6.7 million, or 12%, from 2Q 2017; and fee income (noninterest income) was $35.0 million, an increase of $3.3 million, or 10%, from 2Q 2017. Noninterest expenses were $57.8 million in 2Q 2018, an increase of $5.1 million, or 10%, from 2Q 2017. This resulted in an efficiency ratio of 60.0% and 2 percentage points of positive of operating leverage from 2Q 2017.

For 2Q 2018, reported return on assets (ROA) was a very strong 1.65%, a 42 basis point (bps) increase compared to 1.23% for 2Q 2017, and return on average equity was 15.2% in comparison with 11.6% at 2Q 2017.

Highlights for 2Q 2018:

• Core EPS⁽¹⁾ of $0.90 increased $0.27, or 43%, from $0.63 in 2Q 2017.
  
  
• Core ROA⁽¹⁾ was 1.67%, a robust 45 bps increase compared to 1.22% for 2Q 2017.
  
  
• Core return on average tangible common equity (ROTCE)⁽¹⁾ was 20.9% for 2Q 2018, a significant increase compared to 16.0% for 2Q 2017.
  
  
• Core net revenue⁽¹⁾ of $96.0 million increased $10.7 million, or 13% from 2Q 2017, reflecting strong and balanced organic growth, including a $6.7 million, or 12%, increase in core net interest income⁽¹⁾ and a $4.0 million, or 13%, increase in core fee income (noninterest income)⁽¹⁾.
  
  
• The net interest margin increased a meaningful 17 bps to 4.10% from 2Q 2017, primarily as a result of the positive impacts of the higher short-term interest rate environment, pricing discipline, and good balance sheet management, including a planned favorable change in mix of assets and liabilities.
  
  
• Core noninterest expense⁽¹⁾ increased $5.0 million, or 10% from 2Q 2017, with almost half coming from highly variable incentive compensation costs from pay-for-performance plans. WSFS achieved a full 3 percentage points of positive core operating leverage⁽¹⁾, resulting in a core efficiency ratio⁽¹⁾ of 59.6%, a significant improvement compared to 60.9% for 2Q 2017.

Notable items in the quarter:

• WSFS realized no net gains on sales of securities in 2Q 2018, compared to $0.7 million (pre-tax), or approximately $0.01 per share (after-tax) in 2Q 2017.
  
  
• WSFS recorded $0.5 million (pre-tax), or approximately $0.01 per share (after-tax) in 2Q 2018, in corporate development expenses, compared to $0.4 million (pre-tax), or approximately $0.01 per share (after-tax) in 2Q 2017.

⁽¹⁾ As used in this release, core EPS, core return on average assets (ROA), core return on average tangible common equity core net revenue, core net interest income, core fee income (noninterest income), core noninterest expense, core operating leverage and core efficiency ratio are non-GAAP financial measures. For a reconciliation of these measures to their comparable GAAP measures, see "Non-GAAP Reconciliation" at the end of this press release.

CEO outlook and commentary

Mark A. Turner, Chairman, President and CEO, said, “We are pleased to report another very strong quarter, which positions us to meet or exceed the primary goals in our enhanced 2016-2018 Strategic Plan, including a full year 2018 Core and Sustainable ROA of 1.50%. Our superior ROA, ROTCE, and EPS growth highlights the successful optimization of previous acquisitions, good organic growth, our diversified revenue sources, cost discipline, and the differentiation and sustainability of our business model. For the quarter, we recorded core EPS of $0.90 and a core ROA of 1.67%, which represent significant improvements from the prior year, even before the favorable impact of lower federal tax rates in the current year. Net interest income grew 12%, driven by a net interest margin of 4.10%, and core fee income grew 13% from 2Q 2017, which reflect strong and diversified growth across our core banking and fee income franchises.  Loans and customer deposits grew mid-to-high single digits compared to both 1Q 2018 and 2Q 2017, consistent with our stated growth targets. Our credit quality metrics remained strong and improved across all key ratios, and disciplined expense management was evidenced by a very good 3 percentage points of positive core operating leverage compared to 2Q 2017, and a 2Q 2018 core efficiency ratio of a healthy 59.6%."

Mr. Turner continued, “We firmly believe that our consistent commitment to Associate and Customer engagement continues to be the driver of our sustainable high performance. Our continued robust organic growth, strong financial performance, and marketplace accolades demonstrate our intense focus on and the success of our strategy of ‘Engaged Associates delivering stellar experiences growing Customer Advocates and value for our Owners’.”

Second Quarter 2018 Discussion of Financial Results

Net interest margin increase reflects rising-rate environment and balance sheet management

Net interest margin for 2Q 2018 was 4.10%, an increase of 17 bps from 3.93% for 2Q 2017. Excluding a 7 bps increase related to the redemption of $55.0 million of our senior notes in late 3Q 2017 and a 3 bps reduction from the expected decline in reverse mortgage income, the net interest margin increased organically 13 bps compared to 2Q 2017. The 13 bps increase includes an estimated 11 bps resulting from the higher short-term interest rate environment and disciplined pricing, and approximately 2 bps from prudent balance sheet management, including a planned favorable change in mix of assets and liabilities. The anticipated year-over-year decline in reverse mortgage income was due to the continued run-off of this small and high-yielding purchased loan portfolio. Net interest income for 2Q 2018 was $61.0 million, an increase of $6.7 million, or 12%, compared to 2Q 2017.

Compared with 1Q 2018, net interest margin increased 9 bps from 4.01% and net interest income increased $3.3 million, or 6% (not annualized). The increase in net interest margin resulted primarily from 6 bps of higher purchased loan accretion during the quarter and an estimated 5 bps from the higher short-term rate environment. These increases were offset by an expected 2 bps reduction in the aforementioned reverse mortgage income.

Loan growth balanced and consistent with mid-to high single digit stated goals

At June 30, 2018, WSFS’ net loan portfolio was $4.90 billion, an increase of $79.0 million, or 7% (annualized), from March 31, 2018. The increase includes a $42.9 million, or 7% (annualized), increase in commercial and industrial (C&I) loans and a $36.2 million, or 25% (annualized), increase in consumer loans. The growth in commercial loans was achieved despite an anticipated large amount of loan pay-downs and pay-offs during the quarter and the highly competitive pricing environment. The growth in consumer loans was primarily related to purchases of second-lien home equity installment loans through our partnership with Spring EQ.

Compared to June 30, 2017, net loans increased $285.6 million, or 6%. The increase includes $51.2 million decline in residential mortgages, consistent with our ongoing strategy of selling most newly-originated residential mortgages in the secondary market. Excluding the intentional decrease in residential mortgages, net loans increased $336.8 million, or 8%, including an increase of $180.6 million, or 7%, in C&I loans, and an increase of $126.7 million, or 26%, in consumer loans.

The following table summarizes loan balances and composition at June 30, 2018 compared to March 31, 2018 and June 30, 2017:

Credit quality remains strong and trends improve across key metrics

Credit quality metrics improved during 2Q 2018 reflecting continued strength in the portfolio.

Total problem assets, which includes all criticized, classified, and nonperforming loans as well as other real estate owned (OREO), were $143.0 million at June 30, 2018, an improvement compared to $151.8 million at March 31, 2018. Classified assets, which are included in total problem assets, improved $8.0 million to $98.7 million at June 30, 2018 compared to $106.7 million at March 31, 2018.

Total delinquencies, which include nonperforming delinquencies, were $26.7 million at June 30, 2018, or 0.54%, of gross loans compared to $27.1 million, or 0.56%, of gross loans at March 31, 2018. Excluding nonperforming delinquencies, performing loan delinquencies were only 0.17% of gross loans at June 30, 2018.

Total nonperforming assets improved $1.7 million, or 3%, to $55.1 million at June 30, 2018, as compared to $56.9 million at March 31, 2018. The nonperforming assets to total assets ratio likewise improved to 0.78% at June 30, 2018 from 0.81% at March 31, 2018.

Net charge-offs for 2Q 2018 were $2.3 million, or 0.19%, (annualized), of average gross loans, an improvement from $3.4 million, or 0.29%, (annualized), for 1Q 2018, and an increase from $1.7 million, or 0.15% (annualized), during 2Q 2017. Total credit costs (provision for loan losses, loan workout expenses, OREO expenses and other credit costs), which can be uneven, were $3.2 million for 2Q 2018, an improvement from $4.1 million during 1Q 2018 and an increase from $2.3 million in 2Q 2017.

The ratio of the ALLL to total gross loans was 0.84% at both June 30, 2018 and March 31, 2018, respectively.  Excluding the balances for acquired loans (marked-to-market at acquisition), the ALLL to total gross loans ratio would have been 0.94% at June 30, 2018 compared with 0.96% at March 31, 2018. The ALLL was 113% of nonaccruing loans at June 30, 2018 compared to 120% at March 31, 2018 and 104% at June 30, 2017.

Customer funding reflects continued core deposit strength and mid-to-high single digit growth

Total customer funding was $5.03 billion at June 30, 2018, an $85.3 million, or 7% (annualized), increase from March 31, 2018, highlighted by a $62.3 million, or 18% (annualized), increase in noninterest bearing accounts. In addition, during 2Q 2018, we continued to take the opportunity to attract longer-term, fixed-rate funding and lengthen our overall funding duration in a rising-rate environment. As a result, Certificates of Deposit (CDs) increased $48.2 million, or 30% (annualized), in 2Q 2018.

Customer funding increased $382.5 million, or 8%, compared to June 30, 2017. This included a core deposit increase of $227.3 million, or 6%, over the prior year, with $154.1 million of that attributable to no- and low-cost checking deposit accounts. CDs also increased $155.2 million over the prior year consistent with our strategy to attract longer-term, fixed-rate funding in a rising-rate environment.

Core deposits were 86% of total customer deposits, and no- and low-cost checking deposit accounts represented a robust 48% of total customer deposits at June 30, 2018. These core deposits predominantly represent longer-term, less price-sensitive customer relationships, which are especially valuable in a rising-rate environment. The ratio of loans to customer deposits was 97% at June 30, 2018.

The following table summarizes customer funding balances and composition at June 30, 2018 compared to March 31, 2018 and June 30, 2017:

Core fee income is well diversified, growing a strong 13% year-over-year

Core fee income (noninterest income) increased by $4.0 million, or 13%, to $35.0 million compared to 2Q 2017. This organic growth demonstrates our ability to execute on our high-service, fee-based strategy. These strong results represent growth across most of our businesses, and include increases of $1.8 million from credit/debit card and ATM income, $1.4 million from investment management and fiduciary revenue, and $0.8 million related to our more traditional banking business.

When compared to the seasonally slower 1Q 2018, core fee income increased $2.9 million, or 9% (not annualized), including a $1.1 million increase from investment management and fiduciary revenue, $0.9 million from credit/debit card and ATM income, and $0.9 million from our traditional banking business.

For 2Q 2018, core fee income was 36.3% of core net revenue, compared to 36.0% for 2Q 2017, and was diversified among various sources, including traditional banking, mortgage banking, wealth management and cash logistics services (Cash Connect^®).

Noninterest expenses reflect improved efficiency and positive operating leverage

Core noninterest expense for 2Q 2018 was $57.4 million, an increase of $5.0 million, or 10%, from $52.4 million in 2Q 2017. Contributing to the year-over-year increase was $1.3 million of higher variable incentive compensation and $1.0 million of additional performance-based earn-out expense from our recent acquisitions, both as a result of stronger performance against our operating plans. In addition, we incurred $1.4 million of higher compensation and benefit costs to support overall franchise growth, and $1.2 million of higher variable costs to support Cash Connect^® revenue growth.

When compared to 1Q 2018, core noninterest expense increased $2.3 million, or $3.2 million after excluding the one-time impact of $0.9 million of net transaction costs incurred from the surrender of our BOLI policies during 1Q 2018. Contributing to the quarter-over-quarter increase was $1.1 million of higher compensation and benefit costs primarily from increased incentive compensation, $0.6 million of higher professional fees, $0.5 million of higher operating costs to support Cash Connect^® revenue growth, and $0.3 million from higher marketing costs. The remaining net $0.7 million increase was due primarily to higher variable operating expenses associated with seasonally stronger revenues.

Our core efficiency ratio was 59.6% in 2Q 2018, compared to 61.1% in 1Q 2018, and 60.9% in 2Q 2017. These improvements reflect our focus on optimization of our acquisitions, organic growth and continued economies of scale as we grow.

Income taxes

We recorded a $6.9 million income tax provision in 2Q 2018, compared to provisions of $10.8 million in 1Q 2018 and $10.9 million in 2Q 2017.

The effective tax rate was 19.4% in 2Q 2018, 22.4% in 1Q 2018, and 34.5% in 2Q 2017. The lower tax rate in 2Q 2018 compared to 1Q 2018 resulted primarily from higher benefits realized from increased stock-based compensation activity. The lower tax rates in 2018 compared with 2017 primarily reflects the reduction of the corporate federal tax rate beginning in 1Q 2018.

Selected Business Segments (included in previous results):

Wealth Management segment fee revenue grows 16% over the prior year

The Wealth Management segment provides a broad array of planning and advisory services, investment management, trust services, and credit and deposit products to individual, corporate, and institutional clients through multiple integrated businesses. Combined, these businesses had $19.09 billion in assets under management (AUM) and assets under administration (AUA) as of June 30, 2018.

Total Wealth Management revenue (net interest income, fiduciary fees and other fee income) was $14.3 million for 2Q 2018. This represented an increase of $1.5 million, or 12%, compared to 2Q 2017 and an increase of $1.3 million, or 10% (not annualized), compared to 1Q 2018. The year-over-year increase resulted primarily from a $1.5 million, or 16%, increase in fee revenue, which reflected continued organic growth across our business lines, with particular strength in the capital markets and corporate trust services businesses.

Total noninterest expense (including intercompany allocations and provision for loan losses and credit costs) was $9.2 million in 2Q 2018, an increase of $0.1 million compared to 2Q 2017 and an increase of $1.1 million compared to 1Q 2018. The slight year-over-year increase was primarily the result of higher compensation and benefits costs to support overall growth, partially offset by lower professional fees, which can be uneven. The $1.1 million increase in expenses from 1Q 2018 was primarily due to higher professional fees and provision for loan losses.

Pre-tax income in 2Q 2018 was $5.1 million, reflecting a strong 36% return on revenue, compared to $4.8 million in 1Q 2018 and $3.6 million in 2Q 2017 and was driven by the above mentioned factors.

Cash Connect^® net revenue increases 10% over same quarter in 2017

Cash Connect^® is a premier provider of ATM vault cash and smart safe cash logistics services in the United States. Cash Connect^® services approximately 26,000 non-bank ATMs and retail safes nationwide with approximately $944 million in cash and other fee-based services. Cash Connect^® also operates 439 ATMs for WSFS Bank, which has the largest branded ATM network in Delaware.

Our Cash Connect^® division recorded $10.0 million of net revenue (fee income less funding costs) in 2Q 2018, an increase of $0.9 million, or 10%, from 2Q 2017, primarily due to continued growth in the bailment, cash management and smart safe lines of business, partially offset by higher funding costs. Compared to 1Q 2018, net revenue increased $0.5 million, or 6% (not annualized), due to higher cash balances, increased ATM managed services, and smart safe fee income.

Non-interest expense (including intercompany allocations of expense) was $8.6 million in 2Q 2018, an increase of $1.3 million compared to 2Q 2017 and an increase of $0.6 million compared to 1Q 2018. The year-over-year increase in expenses was primarily due to higher operating costs associated with growth, higher funding costs, and investment in enhancing our smart safe technology platform. Cash Connect^® reported pre-tax income of $1.5 million for 2Q 2018, which was a decrease of $0.4 million, from 2Q 2017 and flat compared to 1Q 2018 as a result of investments in growth and margin compression.

During the first half of 2018, Cash Connect^® has been impacted by rising interest rates that have challenged its customers' profitability and created margin compression for the ATM industry.  Cash Connect is focused on optimizing its cash and customers cash balances to maximize efficiency. Cash Connect continues to build its presence in the strategic remote cash capture (smart safe, recycler, and kiosk) space, with approximately 2,000 devices currently under service and a strong pipeline driven by several national channel partners.

Capital management

WSFS’ total stockholders’ equity increased $22.7 million, or 3% (not annualized), to $769.0 million at June 30, 2018 from $746.3 million at March 31, 2018, primarily due to quarterly earnings, partially offset by the impacts of market-value changes on available-for-sale securities, stock buybacks and the payment of the common stock dividend during the quarter.

WSFS’ tangible common equity⁽²⁾ increased $23.2 million, or 4% (not annualized), to $581.7 million at June 30, 2018 from $558.5 million at March 31, 2018 for the reasons described in the paragraph above.

WSFS’ common equity to assets ratio was 10.81% at June 30, 2018, and its tangible common equity to tangible assets ratio⁽²⁾ increased by 19 bps during the quarter to 8.40%.  At June 30, 2018, book value per share was $24.25, a $0.53, or 2%, increase from March 31, 2018, and tangible common book value per share⁽²⁾ was $18.35, a $0.60, or 3%, increase from March 31, 2018.

At June 30, 2018, WSFS Bank’s Tier 1 leverage ratio of 10.36%, Common Equity Tier 1 capital ratio and Tier 1 capital ratio of 11.97%, and Total Capital ratio of 12.68% were all substantially in excess of the “well-capitalized” regulatory benchmarks.

In 2Q 2018, WSFS repurchased 50,000 shares of common stock at an average price of $51.56 as part of our 5% buyback program approved by the Board of Directors in 4Q 2015. WSFS has 579,194 shares, or slightly less than 2% of outstanding shares, remaining to repurchase under this current authorization. In addition, the Board of Directors approved a quarterly cash dividend of $0.11 per share of common stock. This dividend will be paid on August 24, 2018 to stockholders of record as of August 10, 2018.

⁽²⁾ As used in this release, tangible common equity, tangible common equity to assets and tangible common book value per share are non-GAAP financial measures. For a reconciliation of these measures to their comparable GAAP measures, see "Non-GAAP Reconciliation" at the end of this press release.

Second quarter 2018 earnings release conference call

Management will conduct a conference call to review 2Q 2018 results at 1:00 p.m. Eastern Time (ET) on Tuesday, July 24, 2018. Interested parties may listen to this call by dialing 1-877-312-5857. A rebroadcast of the conference call will be available beginning at 4 pm on Tuesday, July 24, 2018 until Tuesday, August 7, 2018 at 4 pm. by dialing 1-855-859-2056 and using Conference ID #5263058.

About WSFS Financial Corporation

WSFS Financial Corporation is a multi-billion dollar financial services company. Its primary subsidiary, WSFS Bank, is the oldest and largest locally-managed bank and trust company headquartered in Delaware and the Delaware Valley. As of June 30, 2018, WSFS Financial Corporation had $7.11 billion in assets on its balance sheet and $19.09 billion in assets under management and administration. WSFS operates from 77 offices located in Delaware (46), Pennsylvania (29), Virginia (1) and Nevada (1) and provides comprehensive financial services including commercial banking, retail banking, cash management and trust and wealth management. Other subsidiaries or divisions include Christiana Trust, Christiana Trust of DE, WSFS Wealth Investments, WSFS Wealth Client Management, Cypress Capital Management, LLC, West Capital Management, Powdermill Financial Solutions, Cash Connect®, WSFS Mortgage and Arrow Land Transfer. Serving the Delaware Valley since 1832, WSFS Bank is one of the ten oldest banks in the United States continuously operating under the same name. For more information, please visit wsfsbank.com.

Forward-Looking Statement Disclaimer

This press release contains estimates, predictions, opinions, projections and other "forward-looking statements" as that phrase is defined in the Private Securities Litigation Reform Act of 1995. Such statements include, without limitation, references to the Company's predictions or expectations of future business or financial performance as well as its goals and objectives for future operations, financial and business trends, business prospects, and management's outlook or expectations for earnings, revenues, expenses, capital levels, liquidity levels, asset quality or other future financial or business performance, strategies or expectations. The words “believe,” “expect,” “anticipate,” “plan,” “estimate,” “target,” “project” and similar expressions, among others, generally identify forward-looking statements. Such forward-looking statements are based on various assumptions (some of which may be beyond the Company's control) and are subject to risks and uncertainties (which change over time) and other factors which could cause actual results to differ materially from those currently anticipated. Such risks and uncertainties include, but are not limited to, those related to difficult market conditions and unfavorable economic trends in the United States generally, and particularly in the markets in which the Company operates and in which its loans are concentrated, including the effects of declines in housing markets, an increase in unemployment levels and slowdowns in economic growth; the Company's level of nonperforming assets and the costs associated with resolving problem loans including litigation and other costs; possible additional loan losses and impairment of the collectability of loans; changes in market interest rates which may increase funding costs and reduce earning asset yields and thus reduce margin; the impact of changes in interest rates and the credit quality and strength of underlying collateral and the effect of such changes on the market value of the Company's investment securities portfolio; the credit risk associated with the substantial amount of commercial real estate, construction and land development, and commercial and industrial loans in our loan portfolio; the extensive federal and state regulation, supervision and examination governing almost every aspect of the Company's operations including the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules and regulations issued in accordance with this statute and potential expenses associated with complying with such regulations; the Company's ability to comply with applicable capital and liquidity requirements (including the finalized Basel III capital standards), including our ability to generate liquidity internally or raise capital on favorable terms; possible changes in trade, monetary and fiscal policies, laws and regulations and other activities of governments, agencies, and similar organizations; any impairment of the Company's goodwill or other intangible assets; failure of the financial and operational controls of the Company's Cash Connect® division; conditions in the financial markets that may limit the Company's access to additional funding to meet its liquidity needs; the success of the Company's growth plans, including the successful integration of past and future acquisitions; The Company's ability to fully realize the cost savings and other benefits of its acquisitions, manage risks related to business disruption following those acquisitions, and post-acquisition customer acceptance of the Company's products and services and related Customer disintermediation; negative perceptions or publicity with respect to the Company's trust and wealth management business; adverse judgments or other resolution of pending and future legal proceedings, and cost incurred in defending such proceedings; system failure or cybersecurity breaches of the Company's network security; the Company's ability to recruit and retain key employees; the effects of problems encountered by other financial institutions that adversely affect the Company or the banking industry generally; the effects of weather and natural disasters such as floods, droughts, wind, tornadoes and hurricanes as well as effects from geopolitical instability and man-made disasters including terrorist attacks; possible changes in the speed of loan prepayments by the Company's customers and loan origination or sales volumes; possible changes in the speed of prepayments of mortgage-backed securities due to changes in the interest rate environment, and the related acceleration of premium amortization on prepayments in the event that prepayments accelerate; regulatory limits on the Company's ability to receive dividends from its subsidiaries and pay dividends to its stockholders; the effects of any reputation, credit, interest rate, market, operational, legal, liquidity, regulatory and compliance risk resulting from developments related to any of the risks discussed above; and the effects other risks and uncertainties, including those discussed in the Company's Form 10-K for the year ended December 31, 2017 and other documents filed by the Company with the Securities and Exchange Commission from time to time.

We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date on which they are made, and the Company disclaims any duty to revise or update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company for any reason, except as specifically required by law.  As used in this press release, the terms "WSFS", "the Company", "registrant", "we", "us", and "our" mean WSFS Financial Corporation and its subsidiaries, on a consolidated basis, unless the context indicates otherwise.

Notes:

Investor Relations Contact: Dominic C. Canuso
(302) 571-6833
dcanuso@wsfsbank.com
Media Contact: Jimmy A. Hernandez
(302) 571-5254
jhernandez@wsfsbank.com