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The WSFS-Bryn Mawr Merger Is Expensive, but It Will Pay Off

By Bram Berkowitz - Mar 17, 2021 at 10:10AM

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In the banking industry now, scale is key, and this acquisition will give WSFS a major boost in that regard.

Recently, WSFS Financial  (WSFS 2.82%) announced that it intends to acquire Bryn Mawr Bank (BMTC) in an all-stock deal valued at close to $1 billion. The tie-up between these two high performers will create a nearly $20 billion regional bank in the Philadelphia-Wilmington-Camden metropolitan statistical area (MSA) with a sizable wealth management business. While the deal looks pricey up front, I think it will work out great over the long term.

An expensive deal

WSFS, which is based in Wilmington, Delaware, is paying $48.55 per share for Pennsylvania-based Bryn Mawr, a price that values it at 229% of its tangible book value (equity minus intangible assets and goodwill).

That's a high multiple to pay in an all-stock deal, especially when WSFS is trading at a lower multiple. (All-stock deals are more attractive when the buyer trades at a higher multiple than the seller.) As a result, WSFS will see its tangible book value diluted by more than 6%, an amount the bank expects to take 3.2 years to earn back. These days, investors typically don't like to see an earn-back period that long, and a number of analysts in recent days have downgraded WSFS.

Picture of two people shaking hands.

Image source: Getty Images.

I also think the earnings per share accretion looks a little bit low considering that WSFS expects to eliminate 45% of Bryn Mawr's operating expenses. WSFS management anticipates that the acquisition will be accretive to its earnings by 6.7% in year one and 13.4% in year two. In other words, WSFS's post-acquisition earnings in the first year following completion of the deal will be 6.7% higher than both of the banks' earnings combined on a stand-alone basis. But again, the dilution, the somewhat lengthy earn-back period, and perhaps the lower earnings accretion are all tied back to the high deal price.

A rare opportunity

While the deal is expensive, WSFS probably figured it will be worth it in terms of the long-term prosperity of the bank. After all, it's unlikely that Bryn Mawr's valuation is going to drop too much from here, and I'm sure both institutions recognize how vital scale is in the banking industry right now.

Scale allows banks to spread their operating expenses over a larger revenue base, which typically allows the bank to be more profitable because it is spending less to generate more revenue. In recent years, expenses at banks have really added up, from regulatory costs to the need to invest in better technology infrastructure. With technology becoming more of a necessity for traditional banks, and loan competition being fierce where there is actual loan demand, scale has become more important, leading to more consolidation in the industry.

And the deal is attractive on several fronts. For one, the two banks were direct competitors, and once they team up, the resulting institution will control a 6.5% share of the deposit market in the Philadelphia-Wilmington-Camden MSA. That will be the largest fraction of the deposit market controlled by any true local bank in the area. And it's an attractive market that has experienced population growth and rising median household incomes in recent years.

The combined bank will also have a low-cost and sticky deposit franchise and an excellent core fee revenue base. Although it only has about $5.4 billion in assets, Bryn Mawr runs a powerhouse wealth management brand. Combined with WSFS's larger wealth management business, the franchise will have more than $43 billion in assets under management spread out between corporate trust, wealth management, and private banking services. Management expects this division to generate more than $100 million in fee income; it will be the sixth-largest wealth management unit in the country among banks with less than $100 billion in assets.

WSFS also runs a fee income business called Cash Connect that provides cash management services to financial institutions and independent ATM deployers. This revenue source will provide 17% of the bank's fee income once the acquisition is completed, adding some diversity to the fee revenue mix. The combined bank will derive nearly 30% of its total revenue from fee income, which is an attractive feature to a lot of investors who don't favor banks that are too reliant on interest income from loans.

Revenue break down of WSFS after acquisition of Bryn Mawr.

Image source: WSFS investor presentation.

Overall, following its acquisition of Bryn Mawr, WSFS expects the combined bank will generate a 1.3% return on average assets and a more than 15% return on average tangible common equity in 2022. Both of those metrics would place WSFS toward the top of its national peer group.

A good move for the long term

The premium that WSFS is paying up front is certainly not small, but this is a rare opportunity. The deal gives it a significant boost to its deposit market share, while eliminating a competitor and making WSFS a dominant local lender in the area. It also creates a franchise with a low-cost deposit base, a strong core fee income base, and one that generates high returns. And the deal allows these two organizations to gain scale, something that is top of mind for nearly every bank right now.

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WSFS Financial Corporation Stock Quote
WSFS Financial Corporation
$42.28 (2.82%) $1.16
Bryn Mawr Bank Corporation Stock Quote
Bryn Mawr Bank Corporation

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