WSFS Financial in Wilmington, Del., is relying on its biggest bank acquisition to fund an ambitious technology push.
The $7.1 billion-asset WSFS agreed on Wednesday to buy the $5.7 billion-asset Beneficial Bancorp in Philadelphia for $1.5 billion in cash and stock. The deal is the third-biggest bank acquisition announced this year, and Beneficial is more than three times larger than the combined size of the company's last four acquired banks.
The acquisition is notable for other reasons. It will significantly boost the WSFS footprint across Philadelphia, and it will take the company's assets above the $10 billion-asset regulatory threshold where a cap on interchange fees will take a bite out of revenue.
The most compelling aspect of the deal — and the component other acquisitive banks should follow closely — is how WSFS will use a large portion of the acquisition's expense savings to fund more than $30 million in technology upgrades.
“This combination allows us to address the question in every bank's boardroom — that is how and when are we going to adjust to the new realities of banking delivery to meet the changing customer behavior and their needs?” Mark Turner, the company's chairman, president and CEO, said during a conference call to discuss the deal. “We will take this opportunity using a much larger platform … to transform both franchises.”
Turner has long been a forward thinker in technology and innovation. He spent three months in 2016 visiting financial institutions, tech and fintech firms, traditional retailers and medical device companies. The goal was to gather ideas to make WSFS a better bank. The company has also worked with the online lender SoFi to offer a cash management account.
The technology tour had a significant impact on the company's plans, Turner said in an interview. In fact, the acquisition wasn't overly compelling until WSFS began to look at it as a way to innovate.
Turner, who is retiring as president and CEO at the end of this year, became sold on the deal when it became apparent that WSFS could use savings from closing inefficient and underperforming branches to invest in better delivery channels.
"Let’s not just look at this in a traditional M&A way, but with an eye towards providing the scope and scale and opportunity to reinvest in digital," Turner said. "To meld the physical and digital to deliver an omnichannel experience that, frankly, will give both organizations a competitive edge."
The strategy is an example of bold long-term planning, said Russell Gunther, an analyst at D.A. Davidson.
"Being able to get out in front of regional competition by accelerating what you would do in a normal course of business should give them a meaningful competitive advantage over time, certainly over banks of their own size, while enabling them to keep up with the big boys," Gunther said.
WSFS will focus on four areas: customer experience, risk management, workflow automation and improving its data platform.
The customer experience component could include peer-to-peer payments, streamlined account opening and personal financial management tools. WSFS plans to improve its cybersecurity, add real-time fraud alerts and integrate internal control monitoring.
WSFS wants to create a “next-generation” platform that covers customer relationship management, data warehousing and customer intelligence. It also wants to standardize and digitize processes to operate more efficiently.
The company would have made technology investments even if it hadn't agreed to buy Beneficial, Turner said. Still, cost savings from the acquisition empower WSFS to hasten the overhaul. WSFS plans to close roughly a quarter of its branches after the deal closes in the first quarter.
“The value here is that we now have a transaction, a larger platform and are generating significant economies of scale and taking some of those savings to do this in a concentrated period while others might do this incrementally over a longer period of time,” Turner said. “We're going to accelerate those investments to give us a bank for the next generation, much quicker than we … would do it otherwise.”
The technology overhaul would focus on streamlining and improving the customer experience, executives said. While WSFS customers can currently open accounts online, “the process can be time-consuming and cumbersome,” said Rodger Levenson, the chief operating officer at WSFS and Turner's successor.
“Although this is a similar experience to that of many of our peers, it's inconsistent with the seamless experiences our customers are experiencing elsewhere in their lives,” Levenson said. “Think Uber and Amazon. By leveraging technology, we can significantly reduce the time, friction and glitch in this process.”
The company plans to hire consultants and vendors to help with the upgrades.
“We believe that after completing this transaction and the corresponding delivery transformation, we will position WSFS with the scale and delivery capability ... to drive sustainable top-quintile performance at or above our current ROA and ROTCE metrics,” Levenson said.
WSFS executives said they have identified “achievable” ways to add $29 million of revenue from the acquisition, though they excluded those opportunities in their deal projections. WSFS generates a much greater percentage of revenue from fees than Beneficial and its net interest margin is 78 basis points higher.
While “stunned” that Beneficial is selling, Ted Peters, a retired CEO at Bryn Mawr Bank, said the deal should turn WSFS from a large community bank into a regional player. WSFS, meanwhile, has a strong track record with acquisitions and integrations.
"Those guys know what they're doing," added Peters, the chairman and CEO of Bluestone Financial Institutions Fund, a firm that invests in the banking sector.
John Reosti contributed to this article.