After three years of buying fee-based businesses and adding products, Waypoint Financial Corp. has turned its attention to geographic expansion.
The $5.6 billion-asset Harrisburg, Pa., company was formed in October 2000, when Harris Financial Inc. of Harrisburg bought York Financial Corp. Since then it has acquired three insurance agencies and an employee benefits consulting firm.
It had opened just a handful of branches until this summer, when it began shifting its focus to building its retail banking franchise.
In July it said it would buy two branches in Chambersburg from the $4.6 billion-asset First Commonwealth Financial Corp. of Indiana, Pa. Then last month it announced a campaign to build six branches by next summer. It currently operates 60 in Pennsylvania and Maryland, and it is looking at additional acquisition opportunities.
Analysts say Waypoint has more than enough capital to finance such an expansion, and Pennsylvania has proven to be fertile ground for deals. The state has been one of the most active M&A markets in the country, with 33 deals announced there since Nov. 1, 2000, including 11 this year. Only Texas, Illinois, and California have been busier this year; the other 46 states have had an average of 2.4 deals each.
David E. Zuern, Waypoint's president and chief executive officer, says he wants it to take advantage of the resulting flux in Pennsylvania's banking market.
"There's been a lot of dislocation because of mergers in Pennsylvania, more than anywhere else," he said. "Clearly we want to offer ourselves as an alternative to the big banks."
The purchases and openings represent the final phase of a three-part strategy his company devised in 2000, Mr. Zuern said.
"The first step was to merge York and Harris," he said. "Then we needed to build a modern financial services company, and that's essentially complete. Now we're ready to grow from the foundations we've laid. That's where we are now."
The results of its emphasis on insurance, brokerage, trust, and other fee-based lines of business are evident on its balance sheet. Through June 30, fee income this year totaled $4.3 million; for all of 2001 it was only $2.7 million.
But it has been less successful in attracting deposits, which have declined by 2% since the York acquisition, to $2.58 billion on June 30. The main goal of the branch-building effort, Mr. Zuern said, is to generate more deposits and reduce borrowing costs. Waypoint's Federal Home Loan bank advances totaled $2.46 billion on June 30, compared with $1.43 billion just after the York purchase.
There are two things it will do to meet that goal, Mr. Zuern said: Plug holes in the branch network, which stretches from Harrisburg in south central Pennsylvania to Hagerstown, Md., just north of Baltimore, and build its operations in affluent suburban communities, particularly those surrounding Philadelphia and Baltimore.
The move into Chambersburg (where Waypoint plans to open a branch in addition to the two it is buying), as well as new branches slated for the Pennsylvania towns of Gettysburg, Shippensburg, and Grantham, all fill gaps in the network.
State College, where Waypoint expects to open two branches, would be a new retail banking market, though a loan production office there has generated $44 million of commercial loans since the fall of last year, Mr. Zuern said.
"That is ahead of plan," he said. "We anticipated good growth" in State College, "and that is what has happened."
As it eyes other markets, Mr. Zuern said, Waypoint would prefer to acquire banks, or at least their branches, rather than building. "You like to enter a new market with a base if you can get it. If we can get the right price, an acquisition is preferable."
It has a solid capital base from which to build, and $2.8 billion of investment securities on its books. Much of that portfolio could be sold if needed to raise capital. (As of June 30 its equity/assets ratio was 7.7%, and its ratio of Tier 1 capital to risk-weighted assets was 11.8%; both figures were in line with those of other well-capitalized banking companies.)
"If you back out all the securities they own, that is when they would be just towering over their peers in terms of capital," said David Chiaverini, an analyst with Advest Inc. in New York.
But despite its firepower, Waypoint is unlikely to open its wallet very wide, Mr. Chiaverini said. "They haven't been active in merger and acquisition, because of the prices" many potential targets have been demanding. "I don't necessarily see them giving in and paying a high premium for a bank."
Mr. Zuern, 54, who joined Harris just before it bought York, had been Pennsylvania's secretary of banking and before that a regional president for PNC Financial Services Group Inc. in Pittsburgh.
Harris and York "had tried to modernize, with spotty success," he said. So Mr. Zuern spent most of his first three years with the company broadening its product line.
He was responsible not only for adding the insurance offerings and benefits consulting, but also got it to start selling mutual funds and other investment products, as well as brokerage and asset management services.
