franchise expansion - american bankers association · and digital franchise expansion plans....
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FRANCHISE EXPANSION CAPSTONE PROJECT CLASS OF 2019 SUBMISSION DEADLINE: MARCH 1, 2019
Executive Summary In 1875, a small group of local businessmen had a vision to establish a safe and
convenient hometown resource, committed to serving the financial needs of local families and
businesses. It was a venture destined to have a prominent and successful part in the growth of
Guilford and the surrounding shoreline towns.
On August 17, 1975, The “XXX”Bank was founded. On that day, The New Haven
Register published this item: “Guilford: The last legislature incorporated a savings bank for The
Shore Line towns to be located here. On Saturday the Corporators met, adopted by-laws and
elected officers. This bank will be a great convenience to the people of The Shore Line towns as
a place of deposit and a place whence loans can be obtained upon good property in those towns.”
Today, “XXX” offers the same value proposition to its constituents. Its Mission
Statement reads: “To provide comprehensive financial solutions to individuals, families, and
businesses predicated upon building mutually beneficial, strong, and lasting relationships.”
Since that day, “XXX” has grown to over $93 million in capital and nearly $800 million
in total assets. Furthermore, today’s 5-year Strategic Plan calls for asset growth of roughly 8%
per year from 2019 through 2023, with a goal of exceeding $1 billion by 2023.
Not surprisingly, the Plan also addresses appropriate management of the balance sheet,
rate and earnings risk mitigation, liquidity, credit quality and capital levels while aggressively
growing its loan and core deposit portfolios. “XXX” is charting a growth strategy to capitalize
on economies of scale.
For a mutual savings bank, asset growth can only occur through retained earnings. This
brings forth the need to expand its market either organically or through mergers and acquisitions.
The current Connecticut banking environment offers limited potential for mergers of
banks of similar sizes or acquisitions. Furthermore, the state suffers from an aging demographic
and a hostile tax environment that is leading to a dramatic a projected population exodus of both
old and young. As dim as the future for CT banks may appear from the state perspective, there
are markets that are still viable for de novo banks or branches.
“XXX”’s current market, as defined by its branch footprint is deemed “weak” for deposit
growth potential. However, “XXX”’s capital position is strong at nearly two and a half times that
of the FDIC’s requirement to be defined as a “well-capitalized” bank. The Bank can absorb the
expense and risk of the investment needed for expanding into new markets. New branches would
be smaller and more cost-effective to operate than their predecessors. With technology and self-
service options readily available, fewer staff would be needed at a branch site.
The ideal branch model would incorporate such technology as cash recyclers, virtual
teller machines, digital conferencing, and instant issue debit cards. Space design considerations
include a coffee bar, community/social space, lobby engagement (greeters), self-service zones,
transaction zones and private meeting offices. Self-service kiosks will be accessible before and
after normal office hours.
With this knowledge, “XXX” procured research from two firms who specialize in
identifying the top markets and specific neighborhoods for branching. One such market
identified by both firms is the Central Business District of New Haven (CBDNH). The research
defines this market as “under-banked” which presents opportunities for consumer deposit
acquisition, commercial lending, financial planning advisory services and low-cost business
deposits. For a community bank such as “XXX”, CBDNH represents the best chance for
establishing a successful foothold into this market by way of a de novo branch.
The financial impact projections indicate a strong potential for achieving profitability by
year three. The income generated would contribute to the Bank’s retained earnings. Added
growth in deposits would fund additional loan activities, leading to the overall increase in Bank
assets. Therefore, it is recommended that “XXX” execute on its plan to open a branch in the
NHCBD within the next 18-months.
This is yet another step in “XXX”’s journey to become the preeminent independent
community bank in Connecticut.
TABLE OF CONTENTS
INTRODUCTION 1 History 1 Business model and Strategic Plan 1 Financial condition 3 Market share and competitive landscape 6
STRATEGY/IMPLEMENTATION 8 Franchise Expansion 8 Why does “XXX” need to expand its market? 8 Franchise Expansion as a Strategic Plan Objective 13 Future Opportunities 14 Improved Processes 14 Project Charter & Milestones 14
FINANCIAL IMPACT 15 Size & Type of Investment 15 Projected P & L – capital and years, 2, 3 and 5 17 Annual Expense Assumptions 20 Other profitability measures related to customer base 21 Evaluate and mitigate risk 27 Argument for or against the investment 28
NON-FINANCIAL IMPACT 33 Logistical and organizational hurdles 33 Overcoming challenges 34 Measures used to evaluate non-financial impact 35 Effect to long-term profitability 38
CONCLUSION 41
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INTRODUCTION History
“XXX”Bank (“XXX”), established in 1875, has grown from an initial investment of
$17,000 to $768 million in assets as of June 2018. The Bank was originally located on the west
side of the Guilford green and later relocated to Park Street on the east side where its headquarters
still resides.
“XXX” has six branches along the mid-shoreline of CT; Branford, two in Guilford, two in
Madison and one in Old Saybrook. The first branch opened in 1981, on the Boston Post Road in
Guilford. In addition to its retail space, it is also home to its loan origination and servicing
departments.
In 1997, “XXX” hired its first president from outside the organization, Mr. Charles
O’Malley. President O’Malley quickly determined that expansion was necessary in order for the
bank to grow, provide opportunities for its staff and ensure sustainability. Under his leadership, the
bank opened locations in Branford and Old Saybrook, and leased office space in downtown and
North Madison between 1998 and 2007.
Business model and Strategic Plan
What is “XXX”’s value proposition? This is best defined by “XXX”’s mission and vision
statements. Mission: “To provide comprehensive financial solutions to individuals, families, and
businesses predicated upon building mutually beneficial, strong, and lasting relationships.” Vision:
“Guided by our values and an unwavering commitment to improve the lives of those served, we
endeavor to be the preeminent independent community bank in Connecticut.” Simply put, “XXX”
strives to combine small bank values with big bank capabilities.
The Bank offerings include traditional products and services and a full range of
commercial solutions. Furthermore, its digital services are top-notch, supported by leading edge
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technology. These services are delivered to customers at a reasonable and fair cost as the bank
remains committed to increasing earnings through sustainable growth, not by charging top-of-
market fees.
A pool of extremely talented managers and staff, led by an experienced and open-minded
team of executive officers have the full backing of its diverse board of Trustees. The current
president, Timothy Geelan, champions the Servant Leadership philosophy.
The Bank’s strategic plan begins with this paragraph, “The primary goal of the Board of
Trustees is to maintain independence as a mutual institution. As a mutual institution, Trustees &
Management recognize that funding for future growth and capital accretion is primarily derived
through earnings. This Strategic Plan is designed to provide a roadmap for achieving and
maintaining an acceptable level of financial performance by serving the financial needs of the
Bank’s constituencies.”
One of the most critical initiatives within the five-year horizon per the Strategic Plan, is to
replace its core data service provider and related systems (including internet banking) by 2019. It
is considered a top priority that will command substantial human resources, management focus,
and board oversight.
Upon completion of this conversion, a number of earmarked initiatives will be actively
pursued. These projects include Bank-level merger and acquisition activities as well as physical
and digital franchise expansion plans.
Balance sheet management, mitigation of interest rate and earnings risk, appropriate
liquidity positioning, and maintenance of stellar credit quality and capital levels are all addressed
within the 5-year plan. Organic growth and retention will be stressed on both sides of the balance
sheet. Attracting and retaining low cost core deposits are considered essential, particularly in the
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face of an accelerating, higher interest rate environment. Commercial lending and related activities
will dovetail with the deposit objectives.
Efforts to reduce the Bank’s reliance on margin income will also continue. In this regard,
planning and execution relative to the Bank’s wealth services offering through its wholly owned
subsidiary, “XXX” Wealth Management, LLC, will figure prominently. This includes succession,
growth in assets under management (AUM), and incorporation of additional service offerings.
Financial condition
Total assets for the Bank as of June 2018, were $768 million with total loans of $563
million. Total retail deposits of $576 million included nearly 30% or 171 million in checking
account deposits. Goals stated within the strategic plan call for 32% of deposits in checking at
year-end 2018 and 34% by the end of 2021. The June 2018 Statement of Financial Condition is
displayed in figure 1.
Statements of Financial Condition(In thousands)
June 30,2018
AssetsLoans:
Residential real estate $ 299,743HELOC & second mortgages 30,523Commercial real estate 217,452Commercial Installment, CLOC & other CML loans 13,124Other loans 8,634Total loans 569,476
Less allowance for possible loan losses 5,686Net loans 563,790
Securities:Debt securities, AFS, at fair value 94,479Equity securities, AFS, at fair value 16,898Federal funds -Restricted stock - FHLB & Bankers' Bank Northeast 4,899Total securities 116,276
Interest bearing bank balances and CDs 40,022Total securites and interest bearing deposits 156,298
Bank owned life insurance 22,058Total interest bearing assets 742,146
Cash & due from banks 5,394Other real estate owned -Premises & equipment 12,085Accrued interest receivable 1,846Other assets 6,781
Total assets $ 768,252
Liabilities & CapitalDeposits:
Certificates of deposit $ 142,154Money market accounts 136,861Savings accounts 117,269Interest bearing checking accounts 85,788Escrow accounts 7,882Demand deposits 86,062Total retail deposits 576,016
Brokered CDs 9,350Total deposits 585,366
Other liabilities:Secured borrowings (sweep accounts) -FHLB borrowings 85,634Other liabilities 3,967
Total other liabilities 89,601Capital:Retained earnings
93,285
Total liabilities and capital $ 768,252
Figure 1
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The Bank’s core earnings for the six months ending June 30, 2018 were $3.3 million,
$679,000 favorable to budget (figure 2).
Nearly every one of the selected financial ratios year-to-date 2018, are favorable to budget
as shown in figure 3. Unfortunately, it should also be noted that these positive ratios are a result of
underperformance in commercial loan and total deposit growth.
The Bank surpassed the $700 million asset mark in 2017 (figure 4). Since 2013, assets have
increased 32.6%, or $182.5 million. That is the #12 growth rate in the State and #4 in the local
Guilford Savings BankStatements of Operations
One Month Ended
Six Months Ended
(In thousands) June 30, 2018 2018Interest incomeResidential real estate loans $ 947 $ 5,550HELOC & second mortgages 106 617Commercial real estate 838 4,916Other loans 79 542Investments & Federal Funds 383 2,206
Total interest income 2,353 13,831Total interest expense 350 1,869Net interest income after provision for loan losses
2,003 11,772
Total non-interest income 133 824Total non-interest expense 1,687 9,249
Core Earnings 449 3,347Total expenses for strategic initiatives (485) 843Income before income taxes 934 2,526Provision for income taxes 167 396
Net income $ 767 $ 2,130
Figure 2
Figure 3
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peer group, which consists of 19 banks including “XXX” and a mixture of public and mutual
institutions.1
Total loans (figure 5) have grown 58.2% or $201.8 million over the last five years. On a
percentage basis, this placed “XXX” at #14 out of all 40 banks in the State and #5 in its local peer
group.
Deposits (figure 6) grew $120.3 million or 26.7%. Equity improved $19.5million to $91.8
million over the period, or 27.0%. Although the Bank has been in business for 142 years, nearly a
quarter of its equity growth occurred in the last five years.
1. 1 http://www.bankregdata.com/bkPR.asp?inst=C18194
0100,000,000200,000,000300,000,000400,000,000500,000,000600,000,000700,000,000800,000,000
Total Assets
Figure 4 Figure 5
Figure 6
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“XXX” Wealth Management gross revenue improved 123.8% and net income increased
180.4% since 2012. Assets under management (AUM) ended at $228.4 million, an improvement
of 111.4% over 12/31/2012.
Market share and competitive landscape
There are eleven competitor banks in the towns in which “XXX” has a branch. “XXX”’s
main office is located in Guilford, CT and it has retained over 45% of the Guilford market share of
deposits for many years. In the aggregate, “XXX” has accumulated 15.3% of total deposits within
its entire branch footprint, per the FDIC Report of Deposits as of June 2018 (figure 7).
“XXX” utilizes Fiserv’s BankAnalyst to analyze existing market factors and growth
projections. The program incorporates FDIC call data, market demographics from various sources
and census data for growth projections. “XXX”’s customized its Defined Market Area (DMA) as a
five-mile radius surrounding each branch location.
The Market Growth Potential analysis (figure 8) projects the estimated potential market
growth for products and services in the Bank’s defined market area (DMA) by county. “XXX” has
Guilford Savings Bank, 15.36%
Bank of America, 16.06%
Webster, 9.83%
KeyBank…Citizens, 8.27%
Capital One, 4.70%
People's United, 8.80%
Wells Fargo, 11.82%
TD Bank, 2.72%
Liberty, 8.29%Essex Savings Bank, 3.22%
“XXX”Figure 7
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five branch offices within New Haven County and one within Middlesex County. This analysis
suggests that growth potential for Total Deposits is “weak” within the Bank’s DMA.
Consumer Growth Potential (figure 9), with an estimated five-year projected deposit
growth rate in the DMA of 1.29% is considered “weak” as compared to county and state growth
projections. Conversely, projected consumer loan demand is rated “exceptional”. Commercial
Growth Potential (figure 10) is “sub-optimal” as the projected five year average gross revenues for
businesses in the DMA are below State and US projections.
Figure 8
Figure 9
Figure 10
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STRATEGY/IMPLEMENTATION Franchise Expansion
“XXX”Bank is charting a growth strategy to capitalize on economies of scale, compete for
market share, and generate earnings momentum. As a result, the Bank is examining the potential
for branch franchise expansion.
This initiative, nicknamed “Project Voyager” will examine markets within a geography
which possesses a New Haven or Hartford market orientation supported by I-95 and I-91
commuting corridors. The goal will be to ultimately identify up to five primary markets or
communities for further consideration.
The initial analysis will include FDIC deposit data and proximity of market to existing
footprint. The second phase of investigation will consider current and projected population,
demographics and deposits and loan demand.
Why does “XXX” need to expand its market?
As we know, economies of scale are achieved by operating maximum efficiency. The
Bank, like all businesses, has a set of fixed costs that do not adjust relative to growth or increased
profitability. For example, a Human Resource department of three may be capable of managing 25
employees or 125 employees. The base cost of a core processor is required for 5,000 or 50,000
clients, with lesser incremental increases.
In banking, one means of measuring efficiency is appropriately named the Efficiency
Ratio. This ratio is a calculation of non-interest expenses divided by net income. In other words,
how much does it cost the bank to earn a dollar? A general rule of thumb for optimal efficiency is
50%.2 “XXX”’s Efficiency Ratio for the most recent five years is displayed in Figure 11.
1. 2 https://finance.yahoo.com/news/efficiency-ratio-profitable-bank-224842868.html
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In addition to improved efficiencies, the Bank’s future sustainability is at risk if it cannot
afford to adopt new technologies, particularly with the increased competition posed by the rise in
Financial Technology firms (Fintechs). Fintech “is an umbrella term for any kind of technological
innovation used to support or provide financial services. Within the broad fintech category, fintech
banks follow one specific type of business model ... in which the production and delivery of
banking products and services are based on technology-enabled innovation”.3
1. 3 https://www.bankingsupervision.europa.eu/about/ssmexplained/html/fintech.en.html
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Generally speaking, “XXX”’s believes that the Bank would operate at peak efficiency with
$1billion assets. The management and board members are committed to reaching this goal by
2025.
There are two ways to accomplish this goal, through organic growth or mergers and
acquisitions. While both are under consideration, Project Voyager is focused on organic growth
through branch franchise expansion.
Organic growth must be attained primarily through core deposits in order to maintain a
source of stable funding that enables the bank to make profitable loans. It is still alleged that
customers number one factor in determining where to bank is based on convenience. Historically,
that meant a physical branch location and/or ATM near home or work. In 2018, that level of
convenience can be achieved through omni-channel banking; however, that requires a substantial
amount of marketing to raise enough brand awareness to be top of mind when a prospect is
considering changing their banking relationship. That presents a significant challenge for smaller,
community banks.
In 2017, with one exception, the banks that performed best in core deposit growth were
large regional banks. Wells Fargo came in second and has still managed to grow deposits, despite
its recent scandals. Scale and marketing power matters; this allows the bank to aggressively steal
market share by offering incentives for core deposits promoted through targeted digital media
channels. Effectively rewarding customers using a broad array of the bank’s products and services
will further expand share of wallet with existing customers who are less likely to leave for a rate
differential.
The same theory holds true for commercial clients. Several years ago, the Bank began
offering incentives to principals of commercial accounts. More recently, it has tied preferential
rates to commercial loans based on the depth of the deposit relationship.
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The US Census bureau reported Connecticut as the 6th or 7th “oldest” state in the nation
(refer to figure 12) for the past few years. It is projected that by 2013, all baby boomers will be
older than 65; one in every five residents will be of retirement age. It further reported Connecticut
as one of the slowest growing states (2010-2015).
The economic impact of this aging population is daunting. This aging population is
partially to blame for diminished economic growth in the state. Connecticut is noted to have one of
the largest reductions in eligible workforce with its higher concentration of middle-aged and
elderly residents.
While the State’s economy may not be growing, there are pockets within the state with
positive growth projections, associated banking needs and therefore opportunities. “XXX” needs
to be positioned in such a way to leverage those opportunities.
One objective is to be prepared to serve a more diverse community. The Bank’s existing
client base is primarily in the Padded Nest and Empty Nested segments as defined in Figure 13. A
more diversified demographic exists outside of the central CT shoreline, “XXX”’s existing market
footprint.
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To be successful in these new markets, the Bank must evaluate its current product offering
and potentially modify its rewards and incentives to better align with the demands of a younger,
more technologically adaptive demographic. Some examples include improved online account
opening processes, customized debit card rewards, first-time home buyer specials, self-directed
investing tools (i.e. AI/robo-advisors) and similar programs.
In 2016, I served as SVP, Director of Retail and Marketing. Given my role and 30+ years
of experience, I was tasked with launching an investigation into Franchise Expansion, now known
as “Project Voyager”. I welcomed the opportunity to lead the Bank’s first physical expansion
beyond the mid-shoreline community. This was a high-profile project that would require the ability
to engage and direct consulting firms, lead research teams and ultimately persuade the executive
team and Board of Trustees to invest in this expansion venture.
Later that year, after some initial research had been conducted, management determined
that the need to assess core service providers had reached a critical state. Service failures, delays in
product enhancements and increased costs led to a shift in priorities. At that time, Project Voyager
was placed on hold as all resources were focused on finding a new core processing partner and the
subsequent transition to the new core provider, typically a 24-30 month commitment.
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Project Constellation, as it was named, commenced in early 2017 and will conclude in
November 2019. Around the same time, I transitioned into a new role as Director of Marketing &
Cash Management as the management team recognized the need to grow core commercial deposits
statewide. In this new role, I would serve on the Steering committee for Constellation but was not
needed in a day-to-day capacity. Therefore, Project Voyager was dusted-off and is set to relaunch
in early 2019.
Franchise Expansion as a Strategic Plan Objective
As was stated earlier, physical and digital expansion has remained a primary objective in
the Bank’s five-year strategic plan with a goal of cementing a firm plan prior to 2020. In addition
to ensuring future sustainability, the Strategic Plan states the Bank’s mission to maintain its mutual
charter in order to remain focused on supporting local communities. As a $1billion institution,
management and the Board believe “XXX” is able to do accomplish its mission of supporting
communities throughout the state.
The first phase of the project involved the hiring of a firm to investigate fertile markets
within the commuting routes of the Bank’s existing client base. That would allow it to build upon
its current brand awareness while working to introduce “XXX” into these new markets. Efforts
have already begun in this endeavor as the Non-Profit Council of the Bank expanded its
sponsorships, donations, volunteerism and board-level involvement into several of the targeted
communities.
Community banks have an inherent advantage over their regional and national competitors
by their very nature of being a “community” bank. The community bank business model,
according to is based upon the Bank’s ability to pivot upon knowledge of the market, and customer
relationships. “XXX” as a mutual savings bank has the additional advantage of not having to pay
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its stockholders or manage to a quarterly dividend. That allows for more flexibility in longer-range
planning and capital investing.
Future Opportunities
Future opportunities gained through expansion statewide include improving the local
economy by providing employment opportunities and advancements for employees. A larger,
more seasoned workforce will help position the Bank for future mergers and acquisitions. It will
further enhance its ability to be more nimble in meeting market demands and faster to market with
new technologies.
Improved Processes
As the Bank strives to meet its growth goals, further process improvements must be
implemented. The commercial loan process in particular, needs to be streamlined. Deposit
operations and residential lending have made great strides in adopting paperless processes.
However, efforts will need to be accelerated to achieve full-scale adoption.
Project Charter & Milestones
Moving ahead with Project Voyager will begin with creating the Charter and associated
Milestones. The Project Charter defines the business case, goals, objectives, strategic plan
alignment, in/out of scope, assumptions and resource requirements. It will also include
recommendations, justifications and alternative options. The Charter, cost-benefit analysis and risk
assessment will be reviewed by Senior Management prior to the Board presentation.
Research conducted in 2015 and 2016, identified four primary market areas that are within
the commuting corridor as stated earlier. A high-level view of the timeline and associated
milestones is shown below in figure 14.
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FINANCIAL IMPACT Size & Type of Investment
Industry experts have debated the “branch of the future” ad nauseam. The management of
“XXX” does not subscribe to a ‘one size fits all’ solution for franchise expansion. Although virtual
banking had taken on different forms and enjoyed rapid growth, there is still a need for a physical
presence in many markets.
Figure 14
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As outlined in the project timeline, determining the size and type of space needed is the
first milestone following board approval. According to Connecticut-based branch design-build
firm Solidus, in a proposal prepared for “XXX” in early 2016, “there are four keys to retail
banking success:
• Branch location and design that reflects digital channel integration
• Expansion of branch personnel duties
• Utilization of multi-sensory marketing communications
• Focus on overarching efficiency”
The site selection must be based on in-depth current and projected market data which is
readily available from numerous sources. As stated earlier, research conducted in 2017 identified
four primary market areas in which “XXX” will consider for one or more retail offices. Due to the
decline in branch foot traffic, the size of office is planned to be 1,500 – 2,000 square feet. The
space will incorporate consultative-based services along with digital and virtual banking solutions.
In considering a build or lease option, “XXX” management would prefer to lease, allowing
for maximum flexibility and limited capital outlay.
Universal bankers fulfill the roles of personal banker, manager, lender, and financial
advisor. Integrated digital and virtual banking channels will to complete the banking experience.
Communication and marketing within the branches and externally is critical to the branch’s
success. Interactive displays, digital kiosks and similar messaging channels within the branch aid
in sales efforts and expanding share of wallet.
Lastly, the branch must operate at peak efficiency. Shared office and conference space will
require full utilization of today’s technology; taking advantage of the efficiencies provided via
virtual meetings and the electronic document sharing and retention of documents.
For purpose of this proposal, the analytics and projections were based upon a 2,000 square-
foot office located in the Central Business District of New Haven (CBDNH). Having previously
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stated management’s desire to lease rather than own future sites, the capital investment considered
build-out expenses, not new construction.
Estimates provided by the Bank’s architectural and commercial real estate associates
project the cost of the build-out with moderate finishes at $50/sf. Furniture includes desks, chairs,
conference room, kitchenette, and customer seating areas.
Ideally, the new site is located in a high-foot traffic area near daytime destinations such as
a popular coffee shop, UPS store or pharmacy. As such, this will be the first “XXX” store to offer
Virtual Teller Machine (VTM) services that would be accessible beyond office hours.
Additional equipment would include cash recyclers along with computers, printers, copiers
and other peripherals. The conference room would be equipped with large-screen, smart monitors
that could be used to Skype with business specialists, clients and vendors.
Initial conversations with the Bank’s marketing agency determined a budget of $100,000
for years one through five. Further recommendations included $50,000/year for additional
donations and sponsorships.
Although “XXX” draws employees from all parts of the state, a goal for this location
would be to hire one or more individuals who are well-known within the local business
community. Therefore, a recruiter may be required to assist in finding such individuals.
Projected P & L – capital and years, 2, 3 and 5
Branch profitability can be calculated in a number of different ways. Using the “XXX”’s
model, branches receive an allocation of the yield on loans and fee income based upon each
branch’s deposit balances. Revenues received from branch deposits and fee income are fully
credited to the branch income statement.
In projecting profit and loss for the new site for years two through five, income and
expenses for the total Bank’s remained fixed, using September 30, 2018, balances. The new office
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is expected to achieve $17 million in deposits by year two, with 63% growth in year three. Year
five anticipates 46% growth from year three, with total deposits of over $40 million. Below is a
snapshot of the growth projections.
Equally important to overall deposit growth is the deposit mix. Low-cost core deposits are
the basis for expanding relationships (i.e. share of wallet), and critical for achieving profitability. A
$50 million branch with 50% of deposits in high-cost CDs is not likely to be profitable nor is it
sustainable. However, a $50 million branch with 50% in core deposits should be very profitable
and better positioned for sustainable growth.
According to the Bank’s strategic plan, checking deposits are targeted to be 31.9% of total
deposits at year-end 2018 and 34% by 2021. The new branch should be similarly aligned and
therefore target goals for checking accounts are projected to be 29% of total deposits by year two
and 35% by year five.
New Office Projections
Year 2
New Office Projections
Year 3
New Office Projections
Year 5Growth Year 3
vs Year 2Growth Year 5
vs Year 3Average Deposit Balances YTD:Checking 5,000,000 8,600,000 14,000,000 72% 63%Savings 3,000,000 6,500,000 8,200,000 117% 26%Money Markets 5,000,000 6,500,000 10,100,000 30% 55%Certificates of Deposit 4,000,000 6,100,000 8,100,000 53% 33%
17,000,000 27,700,000 40,400,000 63% 46%
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Earnings credit is applied for deposits based upon average duration. The purpose is to
assign a present-day value to those funds. See the calculation shown below.
The Bank Strategic Plan projects total asset growth of 6.4% in 2019 and 8% per year
thereafter, through 2023. Total loan growth is budgeted at 8.9% in 2019, and 8%-10% for the
following four years. In 2019, interest income is budgeted at $32 million, a 13% increase over
2018. The earnings are nearly evenly split between commercial and consumer loans. As previously
stated, the Bank’s methodology for calculating branch profitability includes the distribution of
revenue based upon the entire Bank’s yield on earning assets.
The staff of the new office are expected to originate
roughly $1-2 million new residential and consumer loans each
year; far less than “XXX”’s current market goals given the fewer
number of homeowners in the NHCBD. Production from
external mortgage loan officers is captured in the Bank’s total
loan activity.
New commercial loan opportunities and the associated interest and fee income is assumed,
but not adjusted for, in the de novo branch profitability projections. Branch staff are not expected
to generate a significant number of commercial loan referrals.
The Bank’s 2019 budget states the yield on earning assets of 4.10%. Cost of funds is
projected to be 1.04%, resulting in a net interest margin of 3.16%. Refer to Appendix A.
Additional fee income generated from branch activity would include fees from deposit
accounts and consumer loans originated from that office. On average, the Bank earns about .07%
of fee income on deposit accounts. Based upon the deposit mix and demographics of this new
Checking Core Deposits - 6 year avg life 3.54%Savings 7 year avg life 3.61%Money Markets 4 year avg life 3.30%Certificates of Deposit 2 year avg life 3.16%
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market, the projections suggest a more generous fee income of .12%, which is more aligned with
competitor banks in that market.
Other total Bank fee income is allocated to each branch based upon branch deposits.
Similarly, expenses are allocated as a percentage of the Bank’s total operating costs and direct
operating costs associated with a branch. Direct costs include interest expense, salary & benefits,
occupancy, FF&E, professional services and “other”. Each branch also assumes a percentage of
the total overhead costs for functions and services which support the entire Bank operations. These
include all of the “back-office” salaries and expenses, marketing, donations, data processing, etc.
Annual Expense Assumptions
Lease expense of $82,800NNN/year on 2,000 square feet in prime retail space located in
downtown New Haven was based on current leased space available as of June 2018.
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Utilities and similar operating costs estimated at $30,000/year based on similar branch
space.
FF&E is estimated at $100,000/year which is twice that of a similar leased branch property
located in North Madison. However, the New Haven location will have two VTMs or similar self-
service kiosks.
Salaries and benefits for one manager $105,000 and 3 universal banker equivalents $185K.
Commission-based loan production officers accounted for in fee income/expenses.
Ongoing marketing expenses after year one and through year five projected to be $100K.
Increased donations and contributions budget of $50K to support expanded market
penetration.
Based upon the assumptions and assumptions and projections stated previously, the de
novo branch should be contributing income to the Bank in Year 3. The impact to the Bank’s net
income is detailed in the statement as attached Appendix B.
Other profitability measures related to customer base
An analysis conducted by The Long Group in 2016 provided demographic characteristics
of the NHCBC.
The study further evaluated the total demand for financial services and benchmarked
competitiveness within the markets.
The Long Group made the following statements regarding the methodology used:
• Household population, demographics, business population and statistics are
calculated from census data.
• “XXX”Bank's small business market was defined as firms with an annual sales
volume of $10 million or less.
• The total demand for banking services within each market is profiled by referencing
a database of businesses and consumer households. Both product usage and average
balance behavior are based upon the unique demographics of each community.
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• Deposits banked reflect branch reported data, June 2015.
• Comparisons are made to “XXX”Bank's current branch market.
In 2015, the NHCBD market contained 27,031 households (hhlds) and 3,976 businesses.
This market is comprised of younger, less affluent apartment dwellers as compared to “XXX”’s
existing branch market. FDIC data reported $1.7 billion total in-market deposits. The Long Group
identified $1.3 billion of consumer and $451 million in business deposits. At that time, loan
demand was $1.5 billion; loans to consumers represented $839.7 billion with commercial loans
totaling $611.9 million. The market was defined as “a net supplier of funds, having greater deposit
appetite than loan demand”.
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In general, national banking brands and super regionals dominate the market share
landscape which will therefore require “XXX” to steal market share. However, these large
competitors tend to churn their client base, which is an advantage for community banks.
This market area is deemed “Under Banked” using a ‘fair market share calculation’
(determined by dividing total market deposits by the number of bank branches within the market).
The NHCBD is serviced by 20 branches, excluding credit unions as that deposit data is not
publically available. CT bank branches service 977 hhld per branch. “XXX”’s current market
services 727 hhlds per branch. New Haven bank branches are currently servicing 1,352 hhlds per
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branch. The charts below depicts total households and businesses in the market, by branch, as well
as projected deposit growth (19% three year annual average growth) and future branch capacity.
New Haven represents an employment draw with a greater number of individuals
employed within New Haven than employed residents; more than one in two residents are
employed in New Haven. Employment behavior and synergy within the “XXX” and NHCBD as
shown in the exhibit below, states that 5%-8% of the commuter population lives or works between
New Haven and “XXX”’s current branch market:
153
99
N E W H A V E N A L L C T
EM PLO YM ENT DRAW
*Markets with an index of less than 100 represent an employment exodus; employment base is less than its employed resident population.
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In order to quantify sales and income opportunities unique to the market, additional
demographic information was considered. According to US Census Bureau, the total number of
households in the NHCBD were reported as 27,031, compared to a total of 31,849 hhlds within the
entire “XXX” branch footprint (Branford, Guilford, Madison and Old Saybrook). The population
growth is projected to be over 9,000 as compared to “XXX”’s population decline within its current
market.
The Long Group reported average hhld age in NHCBD as 38.2 versus “XXX” at 50.5.
Average household income is significantly less in NHCBD as compared to “XXX”’s existing
market.
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These factors can also be used to build lifestyle segmentation; the marketing practice of
dividing customers/prospects into subgroups to predict buying patterns. Customer segmentation
solutions assist in distinguishing customers by economic value and forecasting more profitable
segments. Segmentation is often determined by demographics, life stages, attitudes, and behaviors.
Subgroups also consider how customers live, what they like, want or need. Similar criteria may be
applied to a bank’s business customers and prospects as well.
Using sales information based on past campaigns, data can be analyzed to show the best-
selling products/services within a subgroup. As these patterns emerge, sales and marketing
activities can be specific to these micro-segments, resulting in targeted, cost-effective approaches
with a greater return on investment. Furthermore, customer loyalty and retention are improved as
products and services are more relevant to the group. A deeper understanding of behaviors and
desires will also lead to the development of new products and services, potentially ahead of
competitors.
Four common segments are geographic, demographic, psychographic and behavioral. The
NHCBD population’s attributes are listed within these four segments shown in this table:
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Geographic
• New Haven Central Business District, a/k/a Downtown New Haven.
• Utilizes public transportation • Apartment dweller; no mortgage; no
home maintenance • Frequents retailers/services within a 15-
minute walking distance
Demographic
• Average hhld age 38.2 • Average hhld income $53,000 • Student loan debt • Average hhld 2.4; assume married, one
child present • Saving for home purchase
Psychographic
• Child/children enrolled in private schools • Values local culture; museums, concerts,
theater, arts • Mobile; no roots • Tech-savvy
Behavioral
• Will shop for best value, rewards, or speedy delivery
• Uses ACH, online, debit and credit cards • Mobile banking
Evaluate and mitigate risk
Falling short of P&L projections for the de novo branch would damage management’s
reputation with the Board and banking authorities. The inability to achieve growth goals within the
five-year forecast would be a drag on the Bank’s earnings. If significant, it would further impede
the Bank from opening additional branches, investing in capital improvements and infrastructure,
including technology and staffing.
Several factors affect the branch’s ability to succeed and each should be evaluated and
appropriate mitigations implemented. Beginning with the site location of this office. If the market
potential, traffic flows, surrounding businesses and housing development projections used were
based on faulty assumptions, the deposit and growth goals could be over-stated. Two studies were
conducted by separate firms in 2015 and 2017. Both arrived at similar conclusions regarding the
factors previously mentioned. The Voyager team will also apprise themselves of current data prior
to making a decision on the final site location.
A delay with the timeline in finding a suitable location, negotiating the contract, receiving
approvals or completing the build-out would increase start-up expenses and an extended burden on
resources. There is also a risk of “leaks”, potentially increasing competitor interest in procuring
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branch space in the same market. Working with a seasoned commercial realtor and architectural
build firm familiar with the market should ensure the timeline is met.
There is limited synergy with “XXX”Bank’s current branch market suggesting customer
onboarding, the local economic environment, attempted fraud activity, and operational support will
demand customized training unique to this market. As suggested earlier, branch staff must be
familiar with the community, local government, and businesses (including the non-profit sector).
A significant investment in marketing and donation is necessary to increase brand
awareness, familiarity and favorability. Should market share not be achieved in a timely manner,
management must be nimble and responding quickly to change strategies. Maintaining a strong
partnership with an experienced advertising firm and the continued employment of a dedicated
community development officer are added safeguards against failure.
Argument for or against the investment
In all scenarios, the branch expense is well-below that of any branch in “XXX”’s
operations today. This allows for an extended period of time to achieve market penetration in the
event unforeseen challenges arise or those previously mentioned are not properly mitigated.
The best case scenario would be to exceed projected goals by year two. Worst case
scenario would be to continue to operate at a loss through year five.
Throughout the 80’s and 90’s, bank consolidation peaked, creating several mega-banks
with wide-ranging branch networks. And then came 2008. Between 2008 and 2016, over 6,000 of
the 95,018 bank branches were lost as a result of that financial crisis. This represents over 6% of
branches nationally.4
1. 4 https://ncrc.org/wp-content/uploads/2017/05/NCRC_Branch_Deserts_Research_Memo_050517_2.pdf
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Today, banks are again expanding their franchises through acquisitions; however, at a
much slower pace than what occurred in the 1990’s. Banks in general, but particularly community
banks are choosing to build their growth through branching.
"Community banks have a critical role in keeping their local economies vibrant and
growing by lending to creditworthy borrowers in their regions," said then-Chairman of the Fed,
Ben Bernanke in 2012. "They often respond with greater agility to lending requests than their
national competitors because of their detailed knowledge of the needs of their customers and their
close ties to the communities they serve. Those effects are felt at a local level and may appear at
first glance to be fairly modest, but when you multiply these effects across the thousands of
community banks in the United States, you really see how the lending decisions they make help
the broader national economy."
Community banks hold approximately 40-50 percent of small business loans nationwide,
according to the FDIC.
In February 2018, Bank of America announced it would be opening 500 new branches
within the next four years. Yet, their total branch network continued to decline as of June 2018. It
seems Bank of Amercia is expanding market penetration while simultaneously consolidating its
total number of branches. The goal is to provide in-person service in a less-expensive office
environment, increase the use of self-service and continue to grow its customer base nationwide.
Other regional and national banks are following suit. However, franchise expansion
through branching has become far more prevalent among community banks, as these institutions
recognize the need to build market share through growth as acquisitions opportunities are limited.
And, it is likely be a more cost-effective solution as well.
That is not to suggest that branching is a quick or easy strategy to execute. The time and
investment to launch a de novo will place an added strain on resources, both capital and human.
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Reportedly, new branches can take between three and four years to become profitable. Branching
should be understood as a long-term growth strategy that will take several years to achieve the
desired return on investment.
A de novo strategy needs to be conceived and executed carefully. It’s also important to
remember that for “XXX”, the NHCBD is an entirely new market. Sales strategies, product
offerings and staffing skills needed will vary from our current branch structure. The degree to
which “XXX” has been successful is a not a proxy for how successful it is going to be in new
markets.
There is increased competition due to the number of new banks opening as a result of the
easing of regulation, more specifically, the rolling back key portions of the Dodd-Frank Act of
2010. Furthermore, the FDIC reduced its requirement of bank start-ups with regard to business
plans; from seven-year plan to a three year plan. All indications suggest that the Trump
administration is encouraging new bank formations as part of its strategy to improve the economy.
The “XXX” brand is not widely recognized in this market and, faced with increased
competition from potential de novo banks creates new challenges. Start-ups and other community
banks not currently operating in the NHCBD will see the same under-banked opportunities that
drew “XXX” to this market. The smaller community banks will actually be tougher opponents, as
in recent years community banks have been growing deposits at a higher rate than regional banks.5
In general, a successful branch would be in a large market with the population per branch
to support it, as stated earlier. Each characteristic identified in the earlier studies is used to predict
whether or not a market can support the new branch. Market segments indicate the propensity for
growth in deposits, residential and commercial loans.
1. 5 https://www.bizjournals.com/stlouis/news/2018/01/30/small-banks-gain-deposits-faster-than-big-banks-a.html
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For example, a younger market would typically suggest a good source of residential loans.
Although the NHCBD is a fairly young market (average hhld age 38.2), there are few residential
homes in the area and the market reports a rate of 20% homeownership. It might be safe to assume
many of these prospective clients will look to purchase homes outside of the downtown area at
some point. Cultivating those relationships now will secure future business opportunities.
This same demographic is beginning to build their retirement funds and saving for their
children’s education. They have active checking accounts and seek rewards through the checking
and associated debit card activity. This generation is known for the willingness to pay small fees
for valued services delivered quickly (immediately) and conveniently. Consider the number of
households using grocery delivery or prepped meal services, and instant fund transfers via mobile
devices.
A strong base of small and mid-size businesses exists, as well as a large medical
community which provide commercial loan and deposit potential.
The branch plan will also include an exit strategy. At what point is it deemed riskier to
remain in operation rather than close the doors? If targeted goals falls short by more than 20% by
year three, the branch should be considered at-risk. Additional resources will be allocated; changes
in marketing and sales strategies and/or staff will also occur. Close oversight and scrutiny of
branch activities and financial results over the next 12-18 months will determine the de novo’s
fate. Continued shortages of greater than 20% would result in unacceptable losses. The branch will
be closed. The snippet below uses the original branch projections with a 20% shortfall in Year 3
and Year 5. The full detail is shown in Appendix C.
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The cost of recovery would include a small lease termination penalty as the lease will have
provided for 5-year renewal option. Staff reassignment would create an added expense for a short
period, pending turnover.
Losses can be expected from customer attrition as some will choose to find a competitor
bank branch within the market.
In spite of the challenges and risks discussed, it appears that “XXX” would be wise to
pursue franchise expansion through branching. The evidence stated throughout this paper strongly
supports the NHCBD market as the optimal location for its next de novo branch.
The following is a condensed version of a case study6 written by an Oxford Graduate
student in January 2011.
Case Study: Embarcadero Bank Embarcadero Bank, based in San Diego, California, opened for business in November 2006 after raising $21.6 million in initial equity capital. Embarcadero’s start-up expenses were di minimis. Of the 133 de novos in the 2006 vintage, only five (including Embarcadero) managed to show positive retained earnings at year-end 2006.
Because we viewed the lending environment in San Diego as somewhat unfavorable from a risk-adjusted standpoint when we opened the bank, Embarcadero’s balance sheet grew very slowly for the first two years. We kept a skeleton crew staff and concentrated on preserving capital, as opposed to leveraging our capital to generate profits. While our typical peer was rapidly leveraging its balance sheet, we kept our feet planted firmly on the brakes. Embarcadero also avoided any significant exposure to Construction, Development, Acquisition and Land Development Loans (CDALs). Consequently, at year-end 2009 Embarcadero had just 4.7% of its total loan portfolio in CDALs, as compared to 18.5% for its typical peer. While Embarcadero availed itself of hot money deposits, it did so to a much lower extent than its typical peer. Specifically, at year-end 2009 roughly 23.7% of the bank’s deposits were considered hot money, as compared to 37.9% for the typical 2006-vintage de novo. Our conservative underwriting and operating posture (alluded to above), however, was the direct result of our concern that San Diego’s residential housing market – and economy in general – was in danger of meaningful contraction.
Clearly, from a strategic perspective, we embraced the conventional wisdom with respect to the factors discussed in this paper. To that end, we had virtually no start-up costs, grew our loan portfolio slowly, generally avoided CDALs, and did not rely heavily on hot money deposits. From an operating perspective, we merely focused on the x-factors inherent in underwriting loans, gathering deposits and minimizing operating expenses. There was no magic, nothing fancy – just a constant focus on execution.
Coincidentally, Embarcadero is currently far along in discussions to acquire another San Diego-based bank (from the 2005 de novo vintage). This bank – which I’ll refer to as “Target” – followed the opposite strategy to our own. That is, Target had very high startup costs, grew loans rapidly, concentrated heavily in CDALs, and embraced hot money deposits. The result is that Target
1. 6 http://www.mch-inc.com/pdf/Oxford%20Grad%20Dip%20Thesis%20DFS1028.pdf
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has depleted its equity, has a high level of nonperforming loans, and is under regulatory pressure to sell to Embarcadero at a fraction of its original offering price.
The following table summarizes Embarcadero’s position relative to its peers (and Target mentioned above) with respect to the factors discussed herein. Embarcadero’s cumulative per-share profit (actually, a 2.72% loss since inception) at year-end 2009 ranked 26th out of the 133 banks from the 2006 de novo vintage.
Focusing on “XXX”’s strengths and prudent growth will lead to success with the Bank’s
franchise expansion initiative.
NON-FINANCIAL IMPACT Logistical and organizational hurdles
Opening a new branch in a new market impacts the organization in areas not reflected on
the Bank’s financial statements.
Logistical and organizational hurdles must be overcome. New staff members hired with
specific skill sets and local connections may find it difficult to fit into the Bank’s culture.
Conversely, existing employees will be challenged with accepting a shift in the organizational
culture.
A new customer demographic will strain the operational systems and support teams.
“XXX” has been operating on in the CT central shoreline community since 2000, when it opened
its first branch outside of Guilford. Although branching expanded into three new markets since
2000, the customer demographic remained virtually unchanged. The departure into a lesser-known,
urban market will demand intensive sales training with strict adherence to procedures and as the
customer base is simply unknown to “XXX” staffers. There is little or no history with these
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customers and aggressive adoption goals will mean a large influx of new customers in a relatively
short time period.
Staffing within existing branches will be affected as UBs and others exchange staff
between branches. Most “XXX” bankers are familiar with the customers that frequent “XXX”
branches. Consistently asking for identification and verifying factors while attempting to uncover
additional banking needs with each and every transaction may be challenging for tenured
employees.
Overcoming challenges
Managers must be cognizant of these challenges and be prepared to provide additional
support, training and human resources as needed, particularly in the branches early years. The
Board needs to be educated on these challenges as well, in order to understand the new
opportunities presented by a younger, more diversified customer base.
Other strategies may be implemented to aid in overcoming these challenges in addition to
those previously mentioned. A number of logistical hurdles will be avoided with proper planning
and preparation. For example, Bank technology was mentioned. One-on-one and small group
meetings can be successfully conducted with Skype video chatting and screen sharing. The sense
of being in-person is not lost; body language, facial expressions and other critical non-verbal
communication methods are captured using this technology.
Skype also allows for screen-sharing for use in small group training sessions or to support
users remotely. This is particularly effective with staff meetings, ensuring that all are engaged and
involved. Regularly scheduled virtual meetings, open and consistent communication between retail
staff in all locations and support team members will be required.
This and similar technology may be implemented in private offices for engaging with
customers and banking specialists not physically present in the branch location. Furthermore,
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executive team members may be introduced to new customers or engage with existing customers.
The idea of the Bank president Skyping in to meet with a prospect or say “thank-you” to an
existing client can be quite powerful.
Staff member rotation between branch locations allows bankers to gain a better
understanding of each market and its unique set of customers. It also helps ensure consistency with
processes and procedures throughout the organization. Managers and employees alike benefit by
working for, and with, a variety of personalities and work-styles.
Outside bank-sanctioned and volunteer activities will continue to be expanded. Such events
today include off-site team building exercises, kickball games, picnics, races, sporting events,
dinners, and many opportunities to volunteer at non-profit events. These activities will be planned
in locations throughout the branch footprint, with an emphasis in the new market. The entire
organization benefits as team members interact with each other on a personal level. Having those
connections helps humanize the ‘voice at the other end of the line’. By nature, people will be more
compassionate, empathetic and responsive to someone they know or have shared experiences with.
The upper echelons of management engaging with each other and other team members
brings about a level of familiarity and comfort. Employees are less fearful of sharing ideas in a
group meeting when executives are in attendance.
Measures used to evaluate non-financial impact
Measuring the success of a new branch opening using the financial goals stated in the
projections is fairly straight-forward. However, evaluating the success of the non-financial impact
of opening this branch is a bit more abstract.
There are three categories of measures to be included in the project plan for supporting the
de novo’s success and providing a road map for future branch openings.
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The first is customer impact. Customer impact is evaluated through satisfaction surveys,
acquisition and attrition rates, customer profitability, referrals, market share penetration and brand
recognition/satisfaction.
Surveys conducted via email, phone and in-person will present management with the level
of satisfaction expressed by branch customers.
The Bank uses Touché Analyzer to create reports on individuals, households and
businesses. Such reports will be used to measure acquisition and attrition rates and trends.
Comparisons will be made to current branch statistics and industry averages. The same system and
comparisons will assess customer profitability.
Customer referrals are another useful means of gauging customer satisfaction. This is
particularly important in this era of social media. Good and bad experiences are not just spread to a
few friends, but rather to an entire portfolio of social media “friends” – whose numbers reach in
the hundreds. Furthermore, studies indicate that Millennials rely heavily on recommendations and
reviews posted on common social media sites when making buying decisions.
Market share penetration is easily measured using data from the FDIC web site and others.
In Connecticut and Massachusetts, for example, publications like The Commercial Record provide
detailed information on residential and commercial loan transactions. These companies compile
data in a manner that can be used to easily compare institutions and brokers within a specific
market (by town).
Lastly, brand awareness and the emotions tied to a brand are critical in customer
acquisition and retention. How effective have the marketing teams been in promoting the brand
and branch? Are more resources needed or a complete change of strategy? Surveys and focus
groups will provide useful insight into the success of marketing campaigns and
sponsorship/donation activities.
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The second category addresses organizational impact. With the added burden of supporting
additional branches, specifically those geographically and demographically distant from the
corporate center, operational workflows and responsiveness will be measured. Using existing
workflows for comparison, similar activities for the de novo will be compared to help identify gaps
in service and support so that corrective action can be taken.
Training specific to the uniqueness of this new market will be ongoing for all personnel to
aid in providing the highest level of support. This will include attending local events, workshops,
and networking meetings to gain market knowledge.
As with other branch profitability reporting, the efficiency ratio is another key indicator to
consider. The lower the number, the more effectively, and profitably the branch is operating.
Lastly, how do we measure employee impact? Retention is an obvious measure.
Advancements and the degree to which staff is engaged in committees and outside activities
indicate employee satisfaction.
PEAK (Performance, Engagement, Accountability, and Knowledge) principals were
created and adopted by the management of “XXX” in 2010. It’s designed after Maslow’s hierarchy
of needs. Simply stated, “YOU” are essential to the Bank’s success – personal behavior and
performance, you as a member of your department and the Bank. It’s all inter-connected and the
organization cannot be successful unless each level is operating at its PEAK.
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“XXX” endorses “stay interviews” which occur several times a year between a manager
and their report. While meetings are not documented, the feedback has proven valuable. At-risk
employees may be re-engaged by providing opportunities for them to lead a project or be involved
in one that is outside of their normal job function. Others may be interested in training for an
entirely new role, whether or not an opening pending.
Effect to long-term profitability
Expanding the franchise through branching is a means to ensure long-term profitability.
“XXX” has remained successful and profitable for 144 years. It has faced multiple financial crises,
economic downturns, and recessions at the national and local levels. It could possibly survive for
many more years, struggling to increase retained earnings each year, enough to support Bank
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operations. Fortunately, we have a Board and management team that believes we need to do more
than survive.
Increasing bank size can increase profitability by allowing the bank to realize the
economies of scale; spreading fixed costs over a greater asset base, thereby reducing average costs.
The rising cost of compliance and technology demands earnings which significantly outpace
operational expenses. In order for the Bank to thrive and provide high-valued services performed
by educated, engaged staff members utilizing today’s technology, it must grow to at least $1
billion in assets.
Achieving this pace of growth is achievable by expanding the Bank’s market service area.
In other words, “XXX” needs a bigger pond to fish in. And, considering that 180 degrees of the
current branch footprint is in Long Island sound, the expression is particularly apropos.
New markets open up opportunities to serve a more diversified demographic. The current
market is suffering from an aging demographic. Add to that the projections for a declining
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population and the reduction in young families moving into CT’s shoreline towns. Product and
service offerings for the younger, apartment dweller group include wealth management services,
first-time home buyer loans, checking and savings accounts, retirement savings, debit and credit
cards, financial planning, and more. They may be less invested in their current bank and open to
change.
Commercial loan leads are often provided by a referral source, such as commercial real
estate brokers. As these relationships deepen, and mutual trust is earned, more referrals are made.
Many of these brokers operate in urban areas such as New Haven. Enhanced brand awareness
through a physical branch location and strong marketing presence will help “XXX” get ‘a seat at
the table’ for brokered deals and meetings with prospective clients.
Often a new branch adds to profitability by creating a new standard for improved service
and efficiency. Working with advanced technology from the start is apt to improve staff and
customer adoption. Appropriate use of technology creates efficiencies in areas that may not have
been previously explored. Too often, branch staff members are so experienced with the procedures
and operations that they cannot conceive of a different process. New technology only seems to
hinder their ability to perform routine tasks mindlessly. New processes are often slower at the start
until one is on the other side of the learning curve.
Operating a branch with fewer, more versatile staff members will further improve overhead
ratios and henceforth, branch profitability. Learning to perform effectively in this “new” branch
model is more easily accomplished in a new branch, rather than trying to implement change in an
existing branch. Not only can staff be resistant, but so might the customers be resistant.
In 2012, “XXX” renovated an historic home and relocated its downtown Madison office
literally across the street into the new building. It was the first attempt at minimizing the “teller
line” and creating Universal Banker (UB) spaces, both seated and standing. A dialog tower was
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created in the lobby and UBs and managers each station themselves in that area to perform lobby
engagement throughout the day. While it may not have been the complete transformation to the
latest style of open-concept banking, it was a departure from its traditional branches. The Madison
client base fully embraced the changes.
Fast forward to 2015, when the Bank renovated the branch space within the corporate
headquarters on the Guilford green. Similar approaches to concepts and design from the Madison
Office were implemented. The customer reaction was favorable with regard to the colors,
furniture, fixtures and design. However, complaints about the lack of privacy as a result of the
same open concepts embraced in Madison, continue to be heard even today.
Of further importance to future, long-standing profitability is to be well-poised to seize
upon merger and acquisition opportunities. At less than $1 billion in assets, the odds of being the
“acquirer” rather than the “acquired” are less than favorable.
As per its Vision Statement, “XXX” endeavors to be the preeminent independent
community bank in Connecticut.
CONCLUSION “XXX” is a strong retail organization with a very successful track record of sustained
growth through earnings. The culture is one of servant-leadership, with its “focus on the growth
and well-being of people and the communities to which they belong”.7 PEAK concepts tout the
value of performance, engagement, accountability and knowledge. A committee of whose
members include the President, is dedicated to ensuring all employees have the tools and skills
necessary to enjoy a long and fulfilling career at “XXX”. The Board, management and staff are
well-positioned to expand the Bank’s franchise into new markets.
1. 7 https://www.greenleaf.org/what-is-servant-leadership
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The opening of a small, low-cost branch with self-service and remote support capabilities
presents a low-risk to the Bank. Worse-case scenario, the branch does not prove profitable and the
Bank absorbs the losses for a maximum of five years. Given “XXX”’s capital position, the losses
might decrease projected earnings by 7.5% (assumed annual losses of $300,000 and Bank annual
income of $4 million) in each of the five years.
Best case scenario, the branch exceeds projected goals and returns a profit in year two.
Additional branching, LPOs and commercial loan offices would be positioned to open in
subsequent years, further expanding market opportunities. The Bank achieves its goal of growing
to $1 billion in assets and is in the market to acquire smaller mutual banks, brokerage firms, wealth
management advisory teams and possibly even credit unions.
The research and facts presented in this paper support a recommendation to establish a de
novo branch within the NHCBD. The organization will benefit from the opportunities to grow
market share, provide advancement opportunities, expand product and service offerings with
enhanced technology and increased earnings.
Expanding into a new market is a means in which “XXX” will achieve its goal of
becoming the preeminent bank in Connecticut.
Appendix A
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Appendix B
Appendix C
Impact to Bank's Net Income by Branch
New Office Projections
Year 2
New Office Projections
Year 3
New Office Projections
Year 5Annualize - Indirect Income Allocation - Earnings Credit Based on YTD Avg Deposit Balances
Checking & Now Core Deposits - 6 year avg l 3.54% 177,000$ 495,600$ Savings 7 year avg life 3.61% 108,300 296,020Money Market 4 year avg life 3.30% 165,000 333,300Certificates of Deposit 2 year avg life 3.16% 126,400 255,960Income Based on Earnings Credit 576,700 757,080 966,616
Annualize - Interest Expense on DepositsInterest Expense on Deposits 89,348 186,868Allocated Back Office Interest Expense 1,630 3,409
Total Interest Expense on Deposits 90,978 109,518 133,194
Net Interest Income 485,722 647,562 833,422
Annualize - Indirect Noninterest IncomeIncome allocation for loan origination
(Net 100 bps on $ loan balances originated at branch) Loans Originated 13,333 26,667Income allocation of back office service fees Deposit Volume 16,446 37,575
Annualize - Direct Noninterest IncomeConsumer account charges Actual per Branch P&L 8,000 10,120Commercial account charges Actual per Branch P&L 8,000 10,120ATM income Actual per Branch P&L 3,000 3,795Misc. Income Actual per Branch P&L 4,000 5,060
Total Noninterest Income 52,779 58,211 78,784
Annualize - Direct Noninterest ExpenseSalary expense 238,000 245,140 252,494Benefits 59,500 61,285 63,124Occupancy expense Actual per Branch P&L 112,800 112,800 112,800Professional Actual per Branch P&L 2,200 2,200 2,200F.F.&E. Actual per Branch P&L 100,000 100,000 100,000Other (inc. branch specific Donations & Marketing) Actual per Branch P&L 165,000 165,000 165,000
Total Direct Noninterest Expense 677,500 686,425 695,618
Net Income Contribution Before Overhead Allocations (138,998) 19,349 216,588
Annualize - Overhead Expense AllocationOccupancy Budgeted FTEs 3,360 3,360 3,360Professional Services Budgeted FTEs 39,806 39,806 39,806Data processing Deposit Volume 71,355 87,544 87,544Advertising Deposit Volume 11,719 14,378 14,378FDIC / State Assessments Deposit Volume 7,580 9,299 9,299Contributions & Donations Deposit Volume 8,250 10,122 10,122
Total Overhead Allocated 142,070 164,509 164,509
(281,068)$ (145,160)$ 52,079$
Actual gross salary expense for retail employees25% of retail salary expense above
Net Contribution
Impact based on 20% shortfall in years 3 and 5
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