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A Community Banker's Guide to Surviving the Next 184 Years

At first glance, the partnership between the upstart Zenbanx and WSFS Financial in Wilmington, Del., would appear to be an odd one.

Zenbanx is every bit a neobank, a Silicon Valley-based, mobile-only player offering a unique, multicurrency bank account that chiefly targets world travelers or individuals who frequently send money overseas. Its founder is Arkadi Kuhlmann, the former chief executive of ING Direct who made his career disrupting the banking industry.

WSFS is one of the country's oldest banks, founded as the Wilmington Savings Fund Society in 1832, when Andrew Jackson was president. Though it's grown a lot since then, it remains very much a community bank, serving Delaware and southeast Pennsylvania through a network of roughly 50 brick-and-mortar branches. It even continues to use a savings association charter, which many others have given up in favor of becoming more of a commercial bank.

Yet traditional as it is, WSFS also has an innovative streak. In the late 1990s it established a side business servicing and providing cash for nonbank automated teller machines nationwide, and today that unit, branded CashConnect, is a key driver of the bank's fee income. It was an early investor in EverBank, when that bank was still an online-only competitor to ING. And it recently rolled out a new mobile-banking feature that allows customers to withdraw funds simply by waving their phone at an ATM screen. No debit card or PIN needed.

So when WSFS President and CEO Mark Turner learned from Delaware Gov. Jack Markell that Zenbanx was in need of a charter to get up and running, he was intrigued. The governor, who knew Kuhlmann from Wilmington-based ING, brokered a meeting with Turner, and after close to two years of negotiating the details, working out various kinks and clearing all the regulatory hurdles, Zenbanx went live in September, with WSFS' help.

WSFS' role is largely behind the scenes — accounts are opened on the Zenbanx app. But the $5.6 billion-asset WSFS holds the deposits and serves as Zenbanx's liaison with regulators. It's also an investor in Zenbanx, so it stands to gain financially if the unique bank account — which allows users to hold their money in up to five different currencies and transfer that money from one currency to another at will — catches on with consumers.

"I'm a big fan of Jim Collins" — author of the famed business books "Good to Great" and "Built to Last" — "and one of his expressions is, 'Preserve the core and stimulate progress,' " Turner said during an interview in WSFS' Wilmington headquarters. "Our core is basic banking operations. It's 80% to 90% of who we are and we have to be able to do it really well. But we also have to be willing to take 10-20% of our executive mindshare, our balance sheet and our capital to do novel and forward-looking things."

A handful of other community banks are out there experimenting with new technology while simultaneously trying to grow their core business. Some have their own in-house innovation labs, while others are replacing branches with video ATMs or boosting loan growth by teaming with online-only lenders. Nearly all are, in one way or another, looking at ways to improve the mobile-banking experience for customers. It's what small banks must do if they hope to stay relevant at a time when big banks keep getting bigger and fintech companies continue to siphon off some of their most profitable types of business, Turner said.

It's important, though, that bank executives stay open-minded when pursuing innovation because business models can, and often will, change, he added. Zenbanx could look a lot different in 2018 than it does today.

And they must keep in mind that not all outside ventures will pan out as well as, say, CashConnect has for WSFS. The bank cashed out of its investment in EverBank before that startup found its stride (and went public) and Turner acknowledged that Zenbanx — for all the brainpower behind it — could "go nowhere, go sideways or be a home run."

Still, even if Zenbanx flops, he said, WSFS will have gained valuable insight into how fintech companies think about disrupting the banking business.

"Every day we are working with [Zenbanx] we are learning what the future of deposit accounts will look like, what the future of payments will look like," Turner said. "The best way to avoid being disrupted is to disrupt yourself."



WSFS is in position to invest in new business ventures because it's performing at such a high level. Since the end of 2011, its profits have increased nearly 150%, to $55 million in 2015. Over the same period, its returns on tangible common equity and assets have more than doubled, to 13.83% and 1.24%, respectively, and its stock price, though it has languished of late, was still up 128% as of Jan. 29.

Its recent run of success can be traced to a range of factors, including opportunistic acquisitions that have further diversified income and the sale of rival Wilmington Trust to M&T Bank, which left WSFS as Delaware's largest local bank and helped it capture new loans and deposits. A proactive board — whose decisions were shaped by memories of the savings and loan crisis of the early 1990s — helped the bank escape the recent financial crisis relatively unscathed.

An engaged workforce is a factor too. WSFS was an early adopter of the universal teller model, and in 2007 it brought in Peggy Eddens as director of human capital, sending a clear message to its employees that WSFS puts its people first. (She is now chief human capital officer, reporting directly to Turner.) These efforts and others have paid off in both workplace happiness and customer satisfaction. The Wilmington News-Journal has ranked WSFS among Delaware's top five places to work for 10 years running, and the bank has been ranked No. 1 in customer satisfaction by News-Journal readers for five straight years.

Turner also deserves credit for raising WSFS' game in recent years, said Marvin "Skip" Schoenhals, the bank's chairman and Turner's predecessor as CEO.

Schoenhals, who ran the bank from 1990 to 2007, brought in Turner as controller in 1996, promoted him to chief financial officer in 1998 and appointed him chief operating officer — essentially his top deputy — in 2001. Over the next several years he put Turner in charge of various units, from retail banking to operations and technology, to give him broader experience. Turner succeeded at every turn because "he's a great leader and great team builder," Schoenhals said.

"Mark values the quality of the team and he works very hard to get that team working together ... so that there's no competition between team members," Schoenhals added. "As logical as that sounds, that we are all working together to fight for the greater good, few cultures really achieve that."

Turner, 52, was born and raised in a working-class neighborhood of North Philadelphia, with 11 people in a small, three-bedroom house (he shared one of the bedrooms with four brothers and four sisters shared another). It was the kind of close-knit neighborhood where "you didn't have one set of parents, you had 30," he said.

He stayed close to home for college, attending LaSalle University in Philadelphia, where he majored in accounting, and took his first job at Peat Marwick Mitchell, which later became KPMG. He left after eight years to head the internal audit department of a retail chain, but found himself out of a job six months later when the company was sold.

Tapping his old contacts at KPMG, he then landed a job in the corporate development department at Meridian Bank, where he evaluated acquisitions. Three years later, in 1996, Meridian was itself sold to CoreStates, and while Turner did not lose his job this time, he didn't stick around long.

"I got to a point in my career working for a large bank where I could have worked 24/7 or not come in at all and it wouldn't have mattered," said Turner. "When I came to that conclusion, I decided I wanted to find something where I could make a difference. That led me to WSFS."

At the time, WSFS was just a few years removed from its near-death experience following the S&L crisis and it was finally in a position to shift from survival to growth mode. Turner saw challenges ahead, but said, "I also saw lots of upside opportunity."

As a finance guy, Turner had not had much experience managing teams of customer-facing employees until he was put in charge of WSFS' retail operations for a stretch in the early 2000s. So as part of the process of grooming Turner to move further up the ranks, Schoenhals sent him back to school, first to Wharton for an executive MBA and then to the University of Nebraska, in a program jointly run with the Gallup Organization, for a master's degree in executive leadership.

Turner was elevated to CEO in April 2007, when he was just 43. He couldn't have known it then, but over the next nine years, he would lead WSFS through the most transformational period in its history.

First, though, he had to weather the financial crisis.



Like most banks, WSFS suffered losses on real estate loans during the crisis, but some key decisions made in the years leading up to the housing bust helped it get through those dark days better than most. In 2003 it sold off its subprime mortgage subsidiary, at a hefty profit, because management and the board felt that the market was getting "too frothy," according to Schoenhals. Then in 2005 — a year before federal regulators warned banks against loading up on construction and development loans — it put in place new concentration limits on such loans.

"We experienced pain during the crisis, but it wasn't debilitating and the reason was good governance," said Turner. "This bank almost failed in the early 1990s and we still had people on the board, including Skip, who saved the bank at the time, and when they saw the bubble building, they put in concentration limits. That's what made our pain manageable."

Another key decision was made way back in 1998, when Schoenhals blessed an idea from then-chief technology officer Tom Stevenson to establish a new business servicing nonbank ATMs. (Stevenson became and still is CashConnect's president.) The unit services more than 16,000 ATMs across the country, and if it weren't for millions of dollars in fees it generates each year, WSFS would have lost money in 2009. As it turned out, the bank earned a modest profit.

Turner also credits the "engagement culture" at WSFS with helping it get through the crisis.

When the bank started measuring employee engagement with help from Gallup in 2003, the results were unimpressive. For every 1.5 engaged employees at the bank there was one disengaged employee. That led the company to put in a series of measures that empowered employees to make decisions to best serve customers and publicly celebrated their work. By the time Turner took over, the engagement scores were off the charts: 14.5 engaged employees for every disengaged worker.

"Engagement really helped us during that period," Turner said.

"When times get tough, people either split apart or they band together to protect what's valuable. People in this organization knew what we had here was something valuable and they willingly accepted no pay raises, no bonuses and the cuts we needed to make to avoid laying people off."

With the worst of the crisis behind the bank — and its biggest competitor, Wilmington Trust, struggling mightily — Turner and the board decided it was time to accelerate the growth plan. From 2010 to 2012, WSFS picked up scores of relationship managers, added new branches and loan offices, moved branches to better locations and, most significantly, entered the trust and wealth management business with its acquisition of Christiana Bank & Trust. It was WSFS' first whole-bank acquisition since 1995.

"At the time there were explosions all around us, including big ones right across the street and in Pennsylvania, which suggested that if you had the cash, the capital and the courage this would be a great time to grow and take permanent market share," said Turner. "We basically made five to seven years of investment in a three-year time frame."

Those investments have paid off handsomely. While some of its larger rivals have been just hanging on to or even losing market share in Delaware, WSFS has been reporting double-digit deposit growth in its home state over the last several years. Its revenue from trust and wealth management, nonexistent before the Christiana acquisition, topped $21 million in 2015, and the hiring of relationship managers from rival banks has allowed it to build a healthy portfolio of owner-occupied commercial real estate loans essentially from scratch.

Its two most recent acquisitions, the $302 million-asset First National Bank of Wyoming in Delaware in 2014 and the $408 million-asset Alliance Bancorp in Broomall, Pa., in October, have further bolstered its profits and market share.

"So often we see banks go on an acquisition spree and you look back at their earnings per share, or return on assets, or efficiency ratio, and you realize they were all better before they started acquiring," said Jeff Marsico, executive vice president at the Kafafian Group in Parsippany, N.J. "At WSFS, they are all better" after the acquisitions, he said, pointing to the earnings-per-share metric in particular. In 2011, the bank earned 76 cents per share; in 2015, it earned $1.85.

Frank Schiraldi, an analyst at Sandler O'Neill & Partners, is confident that WSFS can keep the momentum going in 2016 and beyond. He's so bullish, in fact, that he has selected WSFS as his top pick among bank stocks for this year.

"What it boils down to is that WSFS has better growth prospects than many of its peers," Schiraldi said. "Fees are growing in the high single digits and, for CashConnect, low double digits. In the traditional bank, it's the only local option of any size in Delaware, and its growth there is being supplemented by the move into southeastern Pennsylvania, which is probably a better market overall."

At the end of 2015, WSFS' stock had a price-to-book ratio similar to its mid-Atlantic peers, "but given its profitability profile, I think it deserves to be trading at a premium," Schiraldi said.



Southeastern Pennsylvania is a market where WSFS sees significant opportunity for growth as local banks continue to get rolled up by large, out-of-market buyers. It recently announced its second deal in the state, for the $649 million-asset Penn Liberty Bank in Wayne, and when the deal closes it will have more than two dozen branches in some of the state's most affluent counties.

"The space in southern Pennsylvania used to be filled with dozens of local banks," said Rodger Levenson, WSFS' former head of commercial lending and now its acting chief financial officer. "Most of them have been rolled up by now," making WSFS the largest locally managed bank in the Philadelphia, Camden, N.J., and Wilmington metropolitan statistical area.

Levenson said that he receives "at least a call week" from small banks looking for a buyer. The focus at the moment is the Penn Liberty deal, but he said WSFS would consider more acquisitions as long as the banks are in the right markets with the right management team and have clean balance sheets.

"We stay away from fixing other people's problems," Levenson said. "It takes away from keeping the rest of the organic growth going."

Much of that organic growth has been in its home state, and Levenson said the bank will continue to work hard to win over more former Wilmington Trust customers. To date, he said, deposit runoff from the sale has been slower than expected, primarily because M&T is a fierce competitor with lots of experience entering new markets. Still, he added, "Wilmington Trust was around for more than 100 years. We don't want to do anything that's going to distract us from taking advantage of a once-in-a-generation opportunity" to gain market share.

WSFS also will continue its innovation push. It's one of just four banks in the country to let customers withdraw funds from ATMs using a barcode on their phones, and while that service is available only at branch ATMs, marketing director Justin Dunn said the goal is to offer it at WSFS' more than 500 stand-alone ATMs in Delaware and Pennsylvania in the not-too-distant future.

CashConnect, meanwhile, continues to broaden its array of services, offering its expertise to help other banks manage their ATM programs and working with retailers to help keep cash safe during the stretches between bank deposits. It's even launched a spinoff company that helps small firms with limited technology budgets detect cybersecurity threats.

Most intriguing, though, is the partnership with Zenbanx. The agreement between the two companies is for two years, and WSFS executives like having the option to exit at that time, justin case.

Still, Dunn said they feel comfortable with the compliance risk, having worked for so long to get regulators' blessing before Zenbanx launched. (A soft launch in September preceded a big December debut.)

The Zenbanx accounts take eight minutes to open and involve several steps, including submitting a photo ID and a selfie. Dunn said WSFS has rejected several applications where it suspected someone was trying to open an account fraudulently.

As of early January, Zenbanx had roughly 1,800 accounts; its founder, Kuhlmann, said he believes it can get up to 40,000 by marketing to professionals and government workers who frequently travel abroad, international students, and others who have homes or financial assets in other countries. The account comes with a debit card that allows users to pull from their positions in the currency of the country they are traveling in — euros in Italy, for example — without having to pay international transaction fees.

Kuhlmann, who did not know the folks at WSFS well when he ran ING, said he's been impressed with their commitment to Zenbanx and their embrace of fintech in general.

"They have their own markets and focus on their core business, but they are always looking at what's new on the innovation front and what new techniques are out there that could move their business forward," he said. "They are very strategic in their view of things."

To Turner, the Zenbanx partnership just makes sense. Beyond the more obvious financial opportunity, it has benefits from a research and development perspective. "We have a handful of people here who look at fintech, but it's just a small part of what they do," he said. "Zenbanx has 100 people and all they do, 24/7, is think about the future of how banking is delivered. They've essentially become, through strategic partnership, our R&D."

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