CHAPTER 20 by xuyuzhu


									Chapter 04 - Establishing New Banks, Branches, ATMs, Telephone Services, and Web Sites

                                              CHAPTER 4

                                       Establishing New Banks,
                                          Branches, ATMs,
                                         Telephone Services,
                                            and Web Sites

Goal of This Chapter: The purpose of this chapter is to learn how new banks are chartered by
state and federal authorities in the United States, to determine what makes a good site for a new
branch office, to recognize how the role of branch offices is changing, and to explore the
advantages and disadvantages of automated banking facilities.

                                      Key Topics in This Chapter

               Chartering New Financial-Service Institutions
               The Performance of New Banks
               Establishing Full-Service Branches and In-Store Branching
               Establishing Limited-Service Facilities
               ATMs and Telephone Centers
               The INTERNET and Online Banking

                                             Chapter Outline

I.      Introduction
        A.     The Importance of Convenience and Timely Access to Customers
        B.     Service Options Available Today
               1.     Chartering New (De Novo) Financial Institutions
               2.     Establishing New Full-Service Branch Offices
               3.     Setting Up Limited-Service Facilities
II.     Chartering a New ( De Novo ) Financial-Service Institution
III.    The Bank Chartering Process in the United States
        A.     The Chartering Authorities in the U.S.
        B.     Benefits of Applying for a Federal (National) Charter
        C.     Benefits of Applying for a State Charter
IV.     Questions Regulators Usually Ask the Organizers of a New ( De Novo ) Bank
V.      Factors Weighing on the Decision to Seek a New Charter
        A.     External Factors
               1.     Level of Economic Activity
               2.     Growth of Economic Activity
               3.     The Need for a new financial firm.
               4.     The Strength and Character of Competition in Supplying Financial

Chapter 04 - Establishing New Banks, Branches, ATMs, Telephone Services, and Web Sites

        B.      Internal Factors
                1.      Qualifications and Contacts of the Organizers
                2.      Management Quality
                3.      Pledging of Capital to Cover the Cost of Filing a Charter Application and
                        Getting Underway
VI.     Volume and Characteristics of New Charters
        A.      Numbers of New Charters
        B.      Characteristics of New Charter Markets
VII.    How Well Do New Charters Perform?
        A.      New Bank Financial Performance
        B.      Pro-Competitive Effects on Service Offerings and Service Pricing
VIII.   Establishing Full-Service Branch Offices: Choosing Locations and Designing New
        A.      Advantages of Full-Service Branches
        B.      Trends in the Design of New Branches
        C.      Desirable Sites for New Branches
                1.      Expected Rate of Return
                2.      Geographic Diversification
        D.      Branch Regulation
        E.      The Changing Role of Financial-Service Branch Offices
        F.      In-Store Branching
IX.     Establishing and Monitoring Automated Limited-Service Facilities
        A.      Point-of-Sale Terminals
        B.      Automated Tellers (ATMs)
                1.      History of ATMs
                2.      ATM Services
                3.      Advantages and Disadvantages of ATMs
                4.      The Decision to Install a New ATM
                5.      Example of the ATM Capital-Budgeting Decision
X.      Home and Office Banking
        A.      Telephone Banking and Call Centers
        B.      INTERNET Banking
                1.      Services Provided through the INTERNET
                2.      Challenges in Providing INTERNET Services
                3.      The Net and Customer Privacy and Security
XI.     Financial-Service Facilities of the Future
XII.    Summary of the Chapter

Chapter 04 - Establishing New Banks, Branches, ATMs, Telephone Services, and Web Sites

                                             Concept Checks

4-1. Why is the physical presence of a bank still important to many customers despite recent
advances in long-distance communications technology?

Many customers still prefer the personal attention and personal service that contact with bank
employees provide. Moreover, for those services where problems can arise that require detailed
information and explanation-for example, when a customer discovers that his or her account is
overdrawn, or if he or she suspects an account is being victimized by identity theft, or when the
customer’s estimate of an account balance does not agree with the institution that holds that
account, and checks or charges begin to bounce, the presence of a nearby service facility may
become important.

4-2. Why is the creation (chartering) of new banks closely regulated? What about nonbank
financial firms?

The creation of new banks is regulated to insure the safety and soundness of existing banks and
to avoid excessive numbers of bank failures. The same arguments are usually made for non-bank
financial firms. Financial-Service firms hold the public’s savings, are the heart of the payment
system and create money. The failure of these firms could disrupt the economy and too many
could mean in excessive growth in the money supply and inflation.

4-3. What do you see as the principal benefits and costs of government regulation of the
number of financial service charters issued?

While control over the entry of new banks may reduce the number of failures, it also limits
competition, so that the public may receive a smaller volume or lower quality of services at
excessive prices.

4-4.    Who charters new banks in the United States? New thrift institutions?

New banks are chartered by the banking commissions of the individual states or, at the federal
level, by the Comptroller of the Currency. Thrift institutions are chartered by the states or at the
federal level by the Office of Thrift Supervision.

4-5.    What key role does the FDIC play in the chartering process?

The FDIC exercises some control over state bank charter activity as well as federal charters
because most states insist that their new banks qualify for federal deposit insurance before they
can open for business.

Chapter 04 - Establishing New Banks, Branches, ATMs, Telephone Services, and Web Sites

4-6.    What are the advantages of having a national bank charter? A state bank charter?

The benefits of a national charter are:
       a.)     It brings added prestige due to stricter regulatory standards that may help attract
       b.)     In times of trouble the technical assistance supplied to a struggling institution by
               national authorities may be of better quality, giving the troubled bank a better
               chance to survive.
       c.)     Federal rules can pre-empt state laws.

The benefits of a state charter are:
       a.)     It may be easier and less costly to secure a state charter and supervisory fees are
               usually lower.
        b.)     The bank does not have to join the Federal Reserve and therefore avoids buying
                and holding low yield stock of the Federal Reserve
        c.)     Some states allow a bank to lend a higher percentage of its capital to a single borrower.

        d.)     State chartered banks may be able to offer certain services that a national banks
                may not be able to offer.

4-7. What kinds of information must the organizers of new national banks provide the
Comptroller of the Currency in order to get a charter? Why might this required information be

The applicants for a national bank charter are required to submit a detailed business plan, which
contains a description of the proposed bank and its marketing, management, and financial plans.
The Comptroller of the Currency asks for information on the number of competing banks and
bank-like institutions in the service area of the proposed bank. More competitive market
situations limit the profit potential and perhaps the growth potential of a new bank. Also
requested is information about shopping centers, retail and wholesale business activity, recent
population growth, traffic counts, and personal income levels - all viewed as indicators of
potential demand for banking services in the service area of the proposed new bank. Applicants
must also provide background information on the organizers and proposed management of a new
bank so the Comptroller can decide if these people are qualified, law-abiding, and trustworthy to
manage the public's funds as well as their own.

Chapter 04 - Establishing New Banks, Branches, ATMs, Telephone Services, and Web Sites

4-8. Why do you think the organizers of a new financial firm are usually expected to put
together a detailed business plan, including marketing, management, and financial components?

This demonstrates to regulators that the organizers of the bank have the expertise, experience and
skills necessary to be successful in managing the new bank. If the organizers of a bank do not
know where they are going, they are unlikely to be successful. In addition, it demonstrates
whether the organizers of the new bank have a realistic picture of the community they are
planning on serving and whether the organizers have a realistic view of the profit potential in the
new bank.

4-9. What are the key factors the organizers of a new financial firm should consider before
deciding to seek a charter?

While a variety of factors are examined by different business people interested in establishing a
new bank, most look at some or all of the following factors.

        1.      External Factors

                a.       The level of local economic activity.
                b.       Growth of local economic activity.
                c.       The need for a new financial firm.
                d.       The strength and character of competition in supplying financial services.

        2.      Internal Factors

                a.       Qualifications and contacts of the organizers.
                b.       Management quality.
                c.       Pledging of capital to cover the cost of filing a charter application and
                         begin operations.

4-10. Where are most new banks chartered in the United States?

New charters tend to be concentrated in large urban areas where expected rates of return on the
organizers investments are likely to be the highest. As the population increases relative to the
number of financial firms, the number of new charters increases. The success of local banks
already in the area suggests that new financial firms would also be successful. Places where the
concentration ratio for new banks has increased tend to have fewer new bank charters.

Chapter 04 - Establishing New Banks, Branches, ATMs, Telephone Services, and Web Sites

4-11. How well do most new banks perform for the public and for their owners?

Most new banks succeed, especially those whose organizers can bring in new deposits and loan
accounts during the first year of the bank's operation. Most are profitable within two to three
years of opening. There is some evidence that newly charted banks are financially ‘fragile’ and
more prone to failure than existing banks. They appear to be more vulnerable to real estate crises
than established banks. New banks tend to under perform their competitors until they have been
around for a while and new banks are more closely supervised than established banks.

4-12. Why is the establishment of new branch offices usually favored over the chartering of
new financial firms as a vehicle for delivering financial services?

The chartering of a new financing corporation is normally a lengthy and expensive process,
requiring the completion of elaborate federal or state application forms, while the branch
application process is normally far simpler and less costly. Moreover, with the increase in the
number of failures in recent years regulatory-imposed capital requirements for new charters have
increased substantially, while new branch offices usually carry significantly lower capital
requirements. Moreover, branch offices themselves are often much less elaborate and costly to
build and maintain than are the headquarters' facility of a new institution where some duplicate
facilities can be eliminated (for example, checking processing, credit analysis, and records

4-13. What factors are often considered in evaluating possible sites for new branch offices?

Bankers first need to decide the goals and objectives of a new facility. Often this means
assessing whether the proposed new branch is aimed at selling one or more particular services,
such as deposits or loans, and also deciding how closely correlated cash flows and returns from
the new branch office may be with cash flows and returns from the other facilities operated by
the bank. If returns or cash flows through the proposed new institution are negatively correlated
or display low positive correlation with the institution's other facilities, they may be able to lower
the variance of its returns or cash flows by proceeding to establish the new office.

Other considerations revolve around the economic strength of the proposed branch office site-
whether there is adequate traffic volume, large numbers of stores and shops, older or younger
age populations who often require slightly different menus of services, recent area population
growth, density and income, the occupational and residential makeup of the proposed new
branch area, a large enough population to generate enough customers to breakeven and the
number and size of facilities operated by competitors. Generally, for branches designed to attract
and hold deposits key factors to consider usually revolve around individual and family incomes,
concentrations of retail stores and shops, older-than-average residents, and homeowners rather
than renters. For branch facilities emphasizing credit services residential areas with substantial
new construction activity, heavy traffic flow, and high concentrations of stores and shopping
centers are typically desirable for consumer and retail loan demand, while central city office
locations are often chosen as locations for commercial loan facilities.

Chapter 04 - Establishing New Banks, Branches, ATMs, Telephone Services, and Web Sites

4-14. What changes are occurring in the design of, and the roles played by, branch offices?
Please explain why these changes are occurring.

Bank branches are increasingly becoming selling platforms in which more and more fee-based
services are attractively and prominently advertised in order to maximize the fee-income
generating potential of each branch. Moreover, branches are becoming increasingly automated to
reduce personnel and other operating costs and improve speed, efficiency, and accuracy in
handling a growing service volume. Branch design has come to reflect these trends with
automated facilities placed at easy access points, along with information booths to speedily direct
customers to the service areas they need. Human tellers may be placed deeper inside branch
facilities so that customers must pass by other service departments and conspicuous advertising
in order to encourage customers to become aware of and avail themselves of other bank services.

4-15. What laws and regulations affect the creation of new bank and thrift branches and the
closing of existing branches? What advantages and what problems can the closing of a branch
office create?

The opening of new branch offices must be approved by a bank's or thrift’s principal federal or
state supervisor. Closing a branch office has become much more complicated in recent years as
the result of several new laws and regulations. For example, the FDIC Improvement Act requires
90 days advance notice of branch closings to both customers and the principal supervisory
agency and a posting on the branch site at least 30 days prior to closing. Banks and thrifts must
also make an "affirmative effort" to reach all segments of their communities without
discrimination under the terms of the Community Reinvestment Act which raises the danger of
customer protests against closings if it appears the bank is under-serving certain groups of
customers. Finally, the Community Reinvestment Act can be used as a vehicle to prevent U.S.
banks and thrifts from branching expansion when they have a poor record of serving all
segments of their communities.

Closing selected branch offices can reduce operating costs and divert resources from less
profitable to more profitable uses. However, they risk alienating good customer relationships
unless it can serve those same customers with its remaining facilities.

4-16. What new and innovative sites have been selected for new branch offices in recent years?
Why have these sites been chosen by some financial firms? Do you have any ideas about other
sites that you believe should be considered?

Rapid increases in new branches located in grocery stores, shopping centers, and inside other
businesses and facilities where the public frequently gathers have helped to reduce branch
construction costs and promote cross-selling of goods and financial services. Other branches
have been opened in apartment complexes, senior citizen centers, and other customer-convenient
locations as bankers come to realize they must adjust their service locations and service hours to
conform to customer needs in an intensely competitive financial-services environment.

Chapter 04 - Establishing New Banks, Branches, ATMs, Telephone Services, and Web Sites

4-17. What are POS terminals, and where are they usually located?

Point-of-sale terminals are set up to accommodate customer purchases of goods and services.
These computer terminals normally are located in supermarkets, gasoline stations, and similar
places with a link to the banks’ own computer records. When a customer of the bank makes a
purchase, the amount of the transaction is deducted from the customer's deposit account and
added to the store's account. Because the customer immediately loses funds many bank
customers have been hesitant to use the service as opposed to paying by check or credit card
where payment is delayed for a few days. However, this depends on whether the POS terminal is
an offline or online terminal. An offline terminal accumulates all transactions until the end of the
day when all transactions are subtracted from a customer’s account. This type of terminal is less
costly for the bank to operate. An online terminal subtracts the transactions immediately from the
customer’s account and reduces the chance of an overdraft occurring but is more expensive for
the bank to operate. Consumer reluctance to use POS terminals appears to be fading and as fees
for other services rise this reluctance will continue to disappear.

4-18. What services do ATMs provide? What are the principal limitations of ATMs as a service
provider? Should ATM carry fees? Why?

The earliest ATMs provided a convenient mechanism for cashing checks, making deposits, and
verifying checking account balances, often at hours when the full-service branch offices were
closed. Today, ATMs frequently provide a wide menu of old and new services, including bill
paying, transfer of funds between accounts, and the purchase of tickets for travel and
entertainment. Most authorities expect ATM usage to grow rapidly as these machines offer more
services and as bankers increasingly move to restrict customer access to more costly human
tellers and other bank personnel, often by charging extra fees for personal service.

ATMs do have some significant limitations that bankers will have to work to overcome. They
break down and need to be replaced, sometimes quite frequently and annoyingly for customers,
and as technology changes often become quickly outdated. Customer activity around ATMs,
particularly at night, has invited criminals to steal money and injure customers, sometimes
creating liability for banks. Moreover, not all customers make use of these facilities due to a
preference for personalized service, fear of crime, or unfamiliarity with how the machines work.
Customer education and better service pricing are two important tools that could help with these
problem areas in the future. In addition, ATMs do not rank high in their ability to sell peripheral
services. Some banks have found that there has been a sharp decline in their ability to sell other
services. Finally, ATMs are not necessarily profitable for all banks. Because they are available
24 hours, some customers may make more frequent and smaller withdrawals from the machine
than they would with a human teller, driving up the costs. In addition, these same customers will
often still demand a human teller to deposit their pay check, making the bank keep both tellers
and ATM machines.

Chapter 04 - Establishing New Banks, Branches, ATMs, Telephone Services, and Web Sites

Whether ATM should carry a fee is rather controversial. Recently, two of the largest ATM
networks have decided to let owners of ATMs charge non-customers a surcharge. Several
regional have begun to charge fees as well. These fees reflect the usage of ATMs. About 85% of
all ATM transactions consist of cash withdrawals and only about 10 percent represent incoming
deposits. In addition, in many places, ATM usage has declined as customers pass over ATMs in
favor of credit and debit cards, onsite terminals and the INTERNET.

4-19. What are self-service terminals and what advantages do they have for financial
institutions and their customers?

Self-service terminals include ATMs and other computer-based limited-service facilities that
permit a customer to call up information about his or her account and recent transactions with the
institution or information about different services that the customer might be interested in
purchasing. Many are accessible 24 hours a day or are easier to get to rather than wait for the
help of personnel. They can save on resources by saving on staff time. Many institutions are
adding telephones and video screens so that customers with problems can dial up an employee
day or night with problems. This is also saving money because they can avoid duplication of
staff at each branch.

4-20. Why do many experts regard the telephone as a key instrument in the delivery of
financial services in the future? What advantages does the telephone have over other service-
delivery vehicles?

Many different services can be marketed, delivered, and verified at low cost via the phone. It is
among the most popular channels for putting customers in touch with financial-service providers
today. Thus many expert regards the telephone to be the key financial-service delivery device
into the future. Increased call centers to assist customers in obtaining account information and in
carrying out transactions, leads to avoiding walking or driving to a branch office or ATM. The
key feature of today’s telephone is mobility. The biggest advantage of the cell phone is that it is
easily transportable and not tied to any particular location. Phone has revolutionized
communications and delivery of services, lowering dramatically the cost of both. The recent
development of bigger and cleaner screens on mobile phones and the recent implementation of
tighter security procedures in accessing accounts have made cell phones increasingly comparable
to personal computers and even more convenient than PCs when traveling.

4-21. What financial services are currently available on the INTERNET? What problems have
been encountered in trying to offer INTERNET-delivered services?

Customers can make payments, check on account balances, confirm that deposits funds have
been received, checks have cleared, move funds between accounts and get applications for loans,
deposits and other services. In addition banks can advertise on the web. Some of the problems
include protecting customers’ privacy and heading off crime. In addition, the web does not make
it easy for a bank to get to know their customers personally. The cost may also be prohibitive to
some customers.

Chapter 04 - Establishing New Banks, Branches, ATMs, Telephone Services, and Web Sites

4-22. How can financial firms better promote INTERNET service options?

They need to emphasize the safety of their INTERNET services. They need to promote their
home page at every opportunity and update it frequently to keep customers’ interest. They need
to do customers survey about their satisfaction with the services and encourage dialogue via e-
mail to resolve problems. They can also provide programs to download to act as screen savers
(and advertisements) and also information about the institution and the services it provides.


4-1. A group of businesspeople from Gwynne Island are considering filing an application with
the state banking commission to charter a new bank. Due to a lack of current banking facilities
within a 10-mile radius of the community, the organizing group estimates that the initial banking
facility would cost about $2.7 million to build along with another $500,000 in other organizing
expenses and would last for about 20 years. Total revenues are projected to be $410,000 the first
year, while total operating expenses are projected to reach $180,000 in year 1. Revenues are
expected to increase 5 percent annually after the first year, while expenses will grow an
estimated 3 percent annually after year 1. If the organizers require a minimum of a 10 percent
annual rate of return on their investment of capital in the proposed new bank, are they likely to
proceed with their charter application given the above estimates?

Chapter 04 - Establishing New Banks, Branches, ATMs, Telephone Services, and Web Sites

  Year         Revenues             Op Expense     Net Profit
      1            $410,000             $180,000     $230,000
      2            $430,500             $185,400     $245,100
      3            $452,025             $190,962     $261,063
      4            $474,626             $196,691     $277,935
      5            $498,358             $202,592     $295,766
      6            $523,275             $208,669     $314,606
      7            $549,439             $214,929     $334,510
      8            $576,911             $221,377     $355,534
      9            $605,757             $228,019     $377,738
     10            $636,045             $234,859     $401,185
     11            $667,847             $241,905     $425,942
     12            $701,239             $249,162     $452,077
     13            $736,301             $256,637     $479,664
     14            $773,116             $264,336     $508,780
     15            $811,772             $272,266     $539,506
     16            $852,361             $280,434     $571,926
     17            $894,979             $288,847     $606,131
     18            $939,728             $297,513     $642,215
     19            $986,714             $306,438     $680,276
     20           $1,036,050            $315,631     $720,418

          Initial investment                         $3,200,000
          Required Rate of Return                          0.10

          Present value of Future Cash               $3,084,869
          Net Present Value of Investment            ($115,131)

Given the above information, the organizers are not likely to proceed given that the net present
value of this investment is negative. The return they are going to earn is less than the 10% they
need to earn.

4-2. Hampton Savings Bank is considering the establishment of a new branch office at the
corner of Queen Street and Victoria Boulevard. The savings association’s economics department
projects annual operating revenues of $1.6 million from fee income generated by service sales
and annual branch operating expenses of $795,000. The cost of procuring the property is $1.75
million and branch construction will total an estimated $2.65 million; the facility is expected to
last 16 years. If the savings bank has a minimum acceptable rate of return on its invested capital
of 12 percent, will Hampton savings likely proceed with this branch office project?

Chapter 04 - Establishing New Banks, Branches, ATMs, Telephone Services, and Web Sites

   Year           Revenues          Op Expense      Net Profit
           1        $1,600,000          $795,000       $805,000
           2        $1,600,000          $795,000       $805,000
           3        $1,600,000          $795,000       $805,000
           4        $1,600,000          $795,000       $805,000
           5        $1,600,000          $795,000       $805,000
           6        $1,600,000          $795,000       $805,000
           7        $1,600,000          $795,000       $805,000
           8        $1,600,000          $795,000       $805,000
           9        $1,600,000          $795,000       $805,000
          10        $1,600,000          $795,000       $805,000
          11        $1,600,000          $795,000       $805,000
          12        $1,600,000          $795,000       $805,000
          13        $1,600,000          $795,000       $805,000
          14        $1,600,000          $795,000       $805,000
          15        $1,600,000          $795,000       $805,000
          16        $1,600,000          $795,000       $805,000

               Initial investment                     $4,400,000
               Required Rate of Return                      0.12

               Present value of Future Cash            5,614,059
               Net Present Value of Investment         1,214,059
Hampton is likely to proceed with this project because the net present value is positive. This
means that the interest rate that Hampton will earn on this project is higher than the 12% they
need to earn.

4-3. Lifetime Savings Bank estimates that building a new branch office in the newly
developed Washington township will yield an annual expected return of 12 percent with an
estimated standard deviation of 10 percent. The bank’s marketing department estimates that cash
flows from the proposed Washington branch will be mildly positively correlated (with a
correlation coefficient of + 0.20) with the bank’s other sources of cash flow. The expected
annual return from the bank’s existing facilities and other assets is 10 percent with a standard
deviation of 3 percent. The branch will represent just 15 percent of Lifetime’s total assets. Will
the proposed branch increase Lifetime’s overall rate of return? Its overall risk?
The estimated total rate of return would be:

                                 E (R) = 0.15 (12%) + 0.85 (10%) = 10.3%

Chapter 04 - Establishing New Banks, Branches, ATMs, Telephone Services, and Web Sites

The risk attached to this overall return rate would be:

                            σ2 = (.15)2 (.1)2 + (.85)2 (.03)2 + 2(.15)(.85)(.2)(.1)(0.03)
                                                   σ2 = .00102825

Thus   3.21% and the branch will slightly increase the bank's expected return but slightly
increase its overall risk. The bank should proceed with this project.

4-4. The following statistics and estimates were compiled by Blue Skies Bank regarding a
proposed new branch office and the bank itself:

        Branch Office Expected Return                           14%
        Standard Deviation of Return                 =           7%
        Bank’s overall expected return               =          12%
        Standard deviation of bank’s return          =            3%
        Branch Asset Value as a Percent
        of Total Bank Assets                         =          12%
        Correlation of Cash Flows                    =          + 0.56

What will happen to the Blue Skies’ total expected return and overall risk if the proposed new
branch project is adopted?

The bank's total expected return is:

                        E (R) = 0.12 (14%) + 0.88 (12%)                  =         12.24%

The bank's risk exposure is:

                           σ2 = (.12)2 (.07)2 + (.88)2 (.03)2 + 2(.12)(.88)(.56)(.07)(.03)
                                                    σ2 = .0010159

                                        And thus σ = .03187 or 3.19%

The proposed project raises the savings banks expected return slightly and but slightly increase
its overall risk. The bank should proceed with this project.

Chapter 04 - Establishing New Banks, Branches, ATMs, Telephone Services, and Web Sites

4-5      Wildflower Financial Services has provided Good Things to Eat Groceries a proposal for
in-store branches in two of its four Livingston locations. Good Things to Eat counterproposed
opening one in-store branch in one of the two proposed locations as a test case. The locations
would be identified as the Lily Branch or the Daisy Branch. Given the following statistics and
forecasts compiled by Wildflower regarding the two alternatives, which branch should be used as
a test case? Base your recommendation on returns and risk.

                                                                             Correlation          Percentage
                                       Expected         Standard           Coefficient with        of Total
                                        Return          Deviation          Other Services           Assets
In-store branch at Lily location         14.00%            7.00%                    0.5             5.00%
In-store branch at Daisy                  15.00             8.50                   0.35              5.00
Existing facilities                       12.00             5.00                                    95.00

Lily location-
The total expected return is:
                           E (R) = 0.05 (14%) + 0.95 (12%)                     =          12.1%

Risk exposure is:
                            σ2 = (.05)2 (.07)2 + (.95)2 (.05)2 + 2(.05)(.95)(.5)(.07)(.05)
                                                    σ2 = .00243475
                                          And thus σ = .04934 or 4.93%
Daisy location-
The total expected return is:
                           E (R) = 0.05 (15%) + 0.95 (12%)                    =         12.15%

Risk exposure is:
                           σ2 = (.05)2 (.09)2 + (.95)2 (.05)2 + 2(.05)(.95)(.35)(.09)(.05)
                                                    σ2 = .0024156
                                         And thus σ = .049149 or 4.91%

Based on the statistics and forecasts, the expected return of Daisy location is slightly higher and
the risk is slightly lower compared to Lily location, and thus Daisy location should be used as a
test case.

Chapter 04 - Establishing New Banks, Branches, ATMs, Telephone Services, and Web Sites

4-6. First National Bank of Leesville is considering installing three ATMs in its Westside
branch. The new machines are expected to cost $37,000 apiece. Installation costs will amount to
about $12,000 per machine. Each machine has a projected useful life of 10 years. Due to rapid
growth in the Westside district, these three machines are expected to handle 75,000 cash
transactions per year. On average, each cash transaction is expected to save 50 cents in teller
expenses. If First National has a 12 percent cost of capital, should the bank proceed with this
investment project?

  Year              Savings
      1                       $37,500   (.50*75,000)
      2                       $37,500
      3                       $37,500
      4                       $37,500
      5                       $37,500
      6                       $37,500
      7                       $37,500
      8                       $37,500
      9                       $37,500
     10                       $37,500

Initial Investment                             147000    (37000*3+12000*3)
Required Rate of Return                          0.12

Present Value of Future Cash               $211,883.36
Net Present Value                              $64,883

The net present value of this project is positive. First National Bank of Leesville should add the
ATM machines to the Westside.

4-7. First State Security Bank is planning to set up its own web page to advertise its location
and services on the INTERNET and to offer customers selected service options, such as paying
recurring household bills, verification of account balances, and dispensing deposit account and
loan application forms. What factors should First State take into account as it plans its own web
page and INTERNET service menu? How can the bank effectively differentiate itself from other
banks currently present on the INTERNET? How might the bank be able to involve its own
customers in designing its web site and pricing its INTERNET service package?

Chapter 04 - Establishing New Banks, Branches, ATMs, Telephone Services, and Web Sites

The bank should remember that while the INTERNET is a relatively low cost way of expanding
and allows customers to find the bank rather than the bank having to find customers, there are
serious concerns about privacy. In addition, the INTERNET is not limited by geography and
while there are thousands of potential customers, there are also many financial institutions
around the world competing for customer deposits and loans. The bank needs to be aware that
there are many bank web pages out there and that they will need to invest in employees with the
technical expertise to manage the new web site well. One of the first things the bank needs to do
is to take steps to protect its customers and let its customers know what its privacy and security
policies are. Another step the bank can take is to start with a customer survey to find out what its
customers want and need from the bank’s INTERNET services. They can run this as a contest
and give away some small items to the customer with the best ideas for the web page and
INTERNET service. This should help get customers involved in the design and implementation
of the web page and may help the bank start building an online customer base.


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