WSFS Financial Corp. billed its planned buyout of Philadelphia-based Beneficial Bancorp Inc. as a way to efficiently bolster its presence in one of the largest markets in the country while gaining needed scale to invest in technology and absorb the costs that come with surpassing $10 billion in assets.
Wilmington, Del.-based WSFS, which had about $7.1 billion in assets as of June 30, said Aug. 8 it would pay an estimated $1.5 billion to acquire the nearly $5.8 billion-asset Beneficial. Assuming the deal closes as planned in early 2019, the combined bank would have about $13 billion in assets, allowing it to leap over the $10 billion line and spread new costs out over a wide base. When banks eclipse the threshold, they lose some debit card interchange income and regulatory expenses increase.
WSFS executives also said that by combining the two large community banks to create a regional company, they would double lending limits and generate substantial deal cost savings that will both boost profitability and accelerate the efforts of each to invest in digital banking offerings to customers. Those advantages, executives said during a call to discuss the deal, would give the combined bank greater ability to compete with megabanks such as JPMorgan Chase & Co. and Bank of America Corp. as well as increasingly active lenders in the financial technology arena.
WSFS Chairman, President and CEO Mark Turner said the benefits of scale and WSFS' intention to continue making relatively quick local lending decisions should help the company gain market share throughout the Delaware Valley and Greater Philadelphia.
"This is intended to level that playing field" with national banks and aggressive fintechs, Turner said.
Investors, however, balked. Shares of WSFS declined nearly 7% in morning trading Aug. 8. Analysts noted that investors in 2018 have at least initially responded unfavorably to large deals — those over $1 billion in value — as costs and potential for integration challenges often increase with size.
So far this year, bank buyers have announced five deals with values greater than $1 billion. In every case, investors pushed down the buyers' shares after the transactions were announced.
"So part of this is just the fact that the market has generally reacted negatively to buyers in larger deals," Stephens bank analyst Austin Nicholas said in an interview.
Nicholas also noted that WSFS expects to earn back tangible book value dilution of 4.3% in about 3.7 years. He said that is near the high end of what investors typically find palatable. He said investors tend to cheer earnback periods shorter than three years.
Analyst Joseph Gladue of Merion Capital Group said that, with the WSFS deal, some investors are likely concerned that the seller has not generated key earnings metrics on par with the buyer. WSFS' fee income ratio, for example, is more than double that of Beneficial, according to a deal presentation. The buyer reported a year-to-date net interest margin of 4.06% at the close of the second quarter, well above the seller's 3.28%.
"WSFS is taking on a bank that has lower profitability and lower growth, and that's often a concern," Gladue said in an interview.
That noted, both Nicholas and Gladue said they found appeal in the deal, which is expected to be accretive to WSFS's earnings per share in the first full year of combined operations, and 8% accretive after all cost savings are realized in 2021. By that year, the buyer is targeting annual synergies of $68 million.
Approximately $56 million of those synergies, or 37%, of Beneficial's annualized noninterest expense base, is expected to come from nonbranch operations and personnel costs, the buyer said. The rest would come from both organizations as they close overlapping branches and invest substantial amounts of the deal savings into new digital offerings aimed at more efficiently delivering better online services.
"We think there is a tremendous opportunity to reposition the combined institution" as a digital leader capable of competing with much larger players, Rodger Levenson, the WSFS COO who will become president and CEO of WSFS at the start of 2019, said on the call.
Analysts noted that WSFS has closed several deals in recent years and has a reputation for successfully rolling out new technology initiatives. They also said Philadelphia, the fifth-largest depository market in the U.S., is ripe with opportunity for deposit and loan growth.
The market boasts a median household income of $71,000 versus a national median of $61,000, according to the deal presentation. Nicholas said the strength of the market and the buyer's strong growth track record provides a reason to believe WSFS can boost the fee income and interest income levels in legacy Beneficial business lines.