Merchant Evaluation Review December 7, 2009
Agenda <ul><li>Objectives </li></ul><ul><li>Methodology </li></ul><ul><li>Functional Review </li></ul><ul><li>Decision Mat...
Objectives <ul><li>Based on discussions with Executive Management, the following objectives were agreed upon. An additiona...
Methodology <ul><li>Value Exchange has been requested to complete a “High Level” review of the NewAlliance Merchant busine...
Functional Analysis Value Exchange Analysis: Proprietary and Confidential
Risk Management <ul><li>Credit Policy/Underwriting : </li></ul><ul><ul><li>NewAlliance has a very conservative Underwritin...
Sales <ul><li>Lead Generation : </li></ul><ul><ul><li>NewAlliance’s has designed a lead generation system through a Tele-c...
Processing/Service <ul><li>Processing Contracts: </li></ul><ul><ul><li>One of the primary costs associated with processing...
Low Risk High Risk Low Profit High Profit Decision Matrix The Decision Matrix quantifies the expected outcome and allows N...
Strategic Options Value Exchange Analysis: Proprietary and Confidential
Options <ul><ul><li>#1.   Status Quo  - Continue current business model. </li></ul></ul><ul><ul><li>#2.   ISO Expansion  -...
#1   Status Quo :  Continue current business model Value Exchange Analysis: Proprietary and Confidential <ul><li>Review </...
Value Exchange Analysis: Proprietary and Confidential Status Quo New Alliance Performance by Portfolio 2008 Elavon FDMS FI...
Value Exchange Analysis: Proprietary and Confidential STATUS QUO BANK GENERAL LEDGER TOTALS Total 2008 Actuals % of Total ...
#2 ISO Expansion  -   Continue current business model, however    invest by adding an external ISO partner.  Value Exchang...
NewAlliance ISO Income and Reimbursement Value Exchange Analysis: Proprietary and Confidential NewAlliance ISO Income Shar...
Value Exchange Analysis: Proprietary and Confidential Overall NewAlliance Bank  - Processing Solutions -  Merchant Relatio...
#3 Transform the Business  -  Transition current business    model to a “Bank Centric” model by investing in suggested mod...
Value Exchange Analysis: Proprietary and Confidential TRANSFORM THE BUSINESS Total 2008 Actuals % of Total 2009 Projected ...
Value Exchange Analysis: Proprietary and Confidential Growth with Investment Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov D...
#4 Outsource  -  Divest current merchant function and portfolios, while   leveraging an outsource partner to deliver on th...
Value Exchange Analysis: Proprietary and Confidential Divest Portfolio   Multiples   2009 YTD*     The Value of a Portfoli...
Value Exchange Analysis: Proprietary and Confidential Outsource Option Proforma Jan Feb Mar Apr May Jun Jul Aug Sep Oct No...
Summary Financial Analysis & Decision Matrix Value Exchange Analysis: Proprietary and Confidential
Financial Overview of all Options Maintain Invest Invest Divest Value Exchange Analysis: Proprietary and Confidential
Value Exchange Analysis: Proprietary and Confidential Financial Overview of all Options Year 1 Year 2 Year 3 Total Status ...
Low Risk High Risk Low Profit High Profit Decision Matrix Status Quo ISO Expansion Transition the Business Outsource Value...
Conclusions Value Exchange Analysis: Proprietary and Confidential
Conclusions <ul><li>The present Merchant operating environment is producing a relatively low/marginal return on capital an...
Conclusions -  continued <ul><ul><li>- -  If the Bank is willing to invest capital, it should consider an Invest strategy ...
Conclusions -  continued <ul><li>If the bank chooses to keep the business internally, there are several functional areas t...
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Merchant executive summary 1

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Merchant executive summary 1

  1. 1. Merchant Evaluation Review December 7, 2009
  2. 2. Agenda <ul><li>Objectives </li></ul><ul><li>Methodology </li></ul><ul><li>Functional Review </li></ul><ul><li>Decision Matrix </li></ul><ul><li>Options </li></ul><ul><ul><li>Harvest </li></ul></ul><ul><ul><li>Invest </li></ul></ul><ul><ul><li>Divest </li></ul></ul><ul><li>Conclusion </li></ul>Value Exchange Analysis: Proprietary and Confidential
  3. 3. Objectives <ul><li>Based on discussions with Executive Management, the following objectives were agreed upon. An additional option was requested to be included in this analysis (listed below as #4). </li></ul><ul><ul><li>Provide functional assessment of NewAlliance’s current Merchant Business/Portfolio in such a way as to maximize value. </li></ul></ul><ul><ul><li>Design and develop strategic options that would align the Merchant services product offer with whatever strategic direction the bank ultimately chooses: Harvesting, Investing or Divesting. </li></ul></ul><ul><ul><li>Analyze and evaluate the potential for a turn-key outsource opportunity, including a high level evaluation of the existing portfolios current market value. Such an option would eliminate merchant liability, internal salary and overhead expenses. </li></ul></ul><ul><ul><li>Analyze and evaluate the proposal from Processing Solutions, an Independent Sales Organization (ISO) a possible expansion opportunity. </li></ul></ul>Value Exchange Analysis: Proprietary and Confidential
  4. 4. Methodology <ul><li>Value Exchange has been requested to complete a “High Level” review of the NewAlliance Merchant business. Strategic options have been identified which include, continuing to Maintain operations, Investment for growth, or Divesting the entire businessline. The evaluation utilizes several tools to complete this analysis: </li></ul><ul><ul><li>Functional Analysis of the entire business: Risk Management, Sales, Processing/Service </li></ul></ul><ul><ul><li>Detailed descriptions of each individual option: </li></ul></ul><ul><ul><ul><li>Review – recap of the areas/items analyzed </li></ul></ul></ul><ul><ul><ul><li>Findings – results/conclusions </li></ul></ul></ul><ul><ul><ul><li>Suggested Actions – recommended actions to be taken if option is chosen </li></ul></ul></ul><ul><ul><ul><li>Pros/Cons – positive and negative attributes of the option </li></ul></ul></ul><ul><ul><li>Summary Financial Analysis of each option </li></ul></ul><ul><ul><li>Decision Matrix to evaluate Risk vs Reward </li></ul></ul><ul><li>The additional following steps were taken to provide a comprehensive analysis: </li></ul><ul><ul><li>In person interviews with NAB’s Merchant management staff. </li></ul></ul><ul><ul><li>Due Diligence on each segment of the business to fully understand all portfolio/business performance characteristics. </li></ul></ul><ul><ul><li>Compared and contrasted a previous marketplace analysis (July 2004) to Value Exchange recent findings. </li></ul></ul>Value Exchange Analysis: Proprietary and Confidential
  5. 5. Functional Analysis Value Exchange Analysis: Proprietary and Confidential
  6. 6. Risk Management <ul><li>Credit Policy/Underwriting : </li></ul><ul><ul><li>NewAlliance has a very conservative Underwriting policy compared to the industry. A conservative policy lends to merchants who generally have lower chargebacks* . Further a good policy reviews closely the financial strength of a company. </li></ul></ul><ul><ul><li>Note : A chargeback is a customer disputed item for goods or services provided by the merchant. If the merchant cannot cover the cost of the chargeback, the bank is then left liable. </li></ul></ul><ul><ul><li>In the years 2004-2008, NewAlliance has processed more than $4.5B in sales volume with only $188K in losses. That is less than ½ of a basis point on volume when the industry average in losses range from 2-4 basis points. 2009 is tracking closer to 1bp for NewAlliance. </li></ul></ul><ul><li>Loss Reserve : </li></ul><ul><ul><li>NewAlliance has a loss reserve that segments risk in its portfolio by low, moderate and high risk and targets the necessary amount to set aside for the volume processed. This is an industry “Best Practice”. </li></ul></ul><ul><ul><li>Note: The combination of the conservative underwriting policy and the loss reserve helps lower the potential for loss in this business. </li></ul></ul>2008 Merchant Category by Volume Value Exchange Analysis: Proprietary and Confidential
  7. 7. Sales <ul><li>Lead Generation : </li></ul><ul><ul><li>NewAlliance’s has designed a lead generation system through a Tele-consulting team that focuses on the following areas: </li></ul></ul><ul><ul><ul><li>Lead qualification for volume and type of business </li></ul></ul></ul><ul><ul><ul><li>Geographic location of the merchant to determine which sales rep to provide the lead. </li></ul></ul></ul><ul><ul><li>This is an industry “Best Practice” as this process helps streamline the sales force with pre-qualified leads that can be easily closed. </li></ul></ul><ul><ul><li>This should allow the sales force to increase production and add to overall portfolio profitability. </li></ul></ul><ul><li>New Account Production : </li></ul><ul><ul><li>NewAlliance has a well established outside sales team (13 team members, majority tenured). </li></ul></ul><ul><ul><li>Goals are primarily set with an income focus. </li></ul></ul><ul><ul><li>Approximately 50% of their leads are received from the Tele-consulting group, and the other 50% of the leads are generated by the sales staff directly. </li></ul></ul><ul><ul><li>The average sales rep produces approximately 6 accounts per month with a income goal of $5,000. This equates to $1.8M in new volume per month per sales rep at approximately 27 basis points per account. </li></ul></ul><ul><ul><li>Industry average new account production per sales rep is 12-14 with an average of 50-90 basis which includes ancillary products. </li></ul></ul><ul><ul><ul><li>Note: Currently the overall portfolio margin is 39 basis points, down from 41 basis points in 2008. New sales production at lower margins is a part of the overall decline in portfolio profitability. </li></ul></ul></ul><ul><li>Compensation Plan : </li></ul><ul><ul><li>NewAlliance’s has multiple compensation plans within the same sales team. The old plans are mostly commission based and the newer plans are based more on base salary with less commission. </li></ul></ul><ul><ul><li>Based on the current commission structure, the payout ratio to the income and units produced when compared to the industry average is almost double. This is primarily due to the commission plans that pay out for the life of an account. </li></ul></ul><ul><ul><li>Primarily tenured sales reps are on the commission based plan and are paid quite well with the current structure of the plan and have moderate to low production. </li></ul></ul><ul><ul><li>A majority of industry bank focused compensation plans are higher base pay and one-time commission payouts. </li></ul></ul><ul><li>Bank vs Non-Bank Customers : </li></ul><ul><ul><li>Less than 25%* of the NewAlliance merchants are bank customers. </li></ul></ul><ul><ul><li>There are no clear joint goals for selling merchant within the branch system. </li></ul></ul><ul><ul><li>Industry “Best Practice” is 80-90% bank customer penetration. </li></ul></ul><ul><ul><li>The benefits to having a merchant customer as a banking customer are multi-facited: </li></ul></ul><ul><ul><ul><li>Fraud – bank has direct access to the merchant funds </li></ul></ul></ul><ul><ul><ul><li>Profitability – bank has float on the deposits </li></ul></ul></ul><ul><ul><ul><li>“ Stickiness” - with more banking products, it is harder to move a relationship </li></ul></ul></ul><ul><ul><ul><li>Cross –selling opportunities </li></ul></ul></ul><ul><ul><ul><li>*NewAlliance merchant management reported. </li></ul></ul></ul>Value Exchange Analysis: Proprietary and Confidential
  8. 8. Processing/Service <ul><li>Processing Contracts: </li></ul><ul><ul><li>One of the primary costs associated with processing for merchants is the back-office cost per transaction. To be competitive in the industry and grow the business, a low cost per transaction must be negotiated. </li></ul></ul><ul><ul><li>NewAlliance has three processing platforms , First Data (FDMS), Elavon (Nova), and Fidelity (FIS). </li></ul></ul><ul><ul><li>Volume is driven based on the average ticket. FDMS has better pricing for large tickets vs Elavon and Fidelity for lower average tickets. </li></ul></ul><ul><ul><li>Most acquiring banks have a primary processor that affords them very competitive pricing compared to positioning smaller amounts of business on various platforms, thus losing economies of scale. </li></ul></ul><ul><li>Internal Sales/Service System : </li></ul><ul><ul><li>NewAlliance has a an Access database that has been formatted over time to serve the needs of the department. </li></ul></ul><ul><ul><li>There is an opportunity for NewAlliance to invest in an updated Sales/Service system, one that is automated. Automation can streamline the new account process with integrated applications that have logic that helps to eliminate errors. Further, much of the process could be on-line eliminating paper. </li></ul></ul><ul><li>Quality Assurance : </li></ul><ul><ul><li>NewAlliance currently keys data into various systems for new and existing accounts. Further, some information is faxed to the various processors to be keyed. </li></ul></ul><ul><ul><li>Currently, there is limited oversight into the various entry methods to ensure quality control. </li></ul></ul><ul><ul><li>Key areas of impact: </li></ul></ul><ul><ul><ul><li>Pricing/Profitability </li></ul></ul></ul><ul><ul><ul><li>Transaction Qualification </li></ul></ul></ul><ul><ul><ul><li>Settlement </li></ul></ul></ul>% Based on Volume Value Exchange Analysis: Proprietary and Confidential
  9. 9. Low Risk High Risk Low Profit High Profit Decision Matrix The Decision Matrix quantifies the expected outcome and allows NewAlliance to determine their acceptability of Risk vs Reward Each strategic option should be evaluated based on parameters of where it would fall Value Exchange Analysis: Proprietary and Confidential
  10. 10. Strategic Options Value Exchange Analysis: Proprietary and Confidential
  11. 11. Options <ul><ul><li>#1. Status Quo - Continue current business model. </li></ul></ul><ul><ul><li>#2. ISO Expansion - Continue current business </li></ul></ul><ul><ul><li>model, however invest by adding an external ISO </li></ul></ul><ul><ul><li>partner. </li></ul></ul><ul><ul><li>#3. Transform the business - Transition </li></ul></ul><ul><ul><li>current business model to a “Bank Centric” model </li></ul></ul><ul><ul><li>by investing in suggested modifications/changes. </li></ul></ul><ul><ul><li>#4. Outsource - Divest current merchant function </li></ul></ul><ul><ul><li>and portfolios, while leveraging an outsource </li></ul></ul><ul><ul><li>partner to deliver on the “Bank Centric” model . </li></ul></ul>ISO – Represents an Independent Sales Organization that focuses on sales production through external independent agents: however the credit/risk remains within the bank . “ Bank Centric” – Primary focus on existing small business bank clients with a strategy of building deposits, fee income and cross-sell activities. Status Quo Expansion Transform Outsource Strategic Options: Value Exchange Analysis: Proprietary and Confidential Maintain Invest Divest
  12. 12. #1 Status Quo : Continue current business model Value Exchange Analysis: Proprietary and Confidential <ul><li>Review </li></ul><ul><li>A comprehensive review of the business was completed. </li></ul><ul><li>The business was categorized into five core components. </li></ul><ul><li>Each component has critical elements to successfully running the business: </li></ul><ul><li>- Sales </li></ul><ul><li>- Operations </li></ul><ul><li>- Human Resources </li></ul><ul><li>- Risk/Compliance </li></ul><ul><li>- Financials </li></ul><ul><li>Findings </li></ul><ul><li>NewAlliance has a knowledgeable merchant management team. </li></ul><ul><li>The business can continue to operate under the current practices. </li></ul><ul><li>However, the business unit will be susceptible to the following without further review: </li></ul><ul><li>- Gradual shrinking profit margins under the current pricing methods </li></ul><ul><li>- Quality of customer service is unknown due to lack of measurements. </li></ul><ul><li>- Lower than industry average sales production under current compensation plans </li></ul><ul><li>- Increased pricing/servicing complexity by positioning merchants on various processing platforms </li></ul><ul><li>Suggested Actions </li></ul><ul><li>Perform a competitive analysis of the NewAlliance markets to determine opportunities with overall pricing methods. It should include ancillary products and services that would enhance profitability. </li></ul><ul><li>Develop a detailed quality assurance process to ensure accuracy across all processing platforms for new account entry as wells as maintenance. </li></ul><ul><li>Simplify the sales compensation plan so that it can be easily understood and applied. Further, make it consistent across the entire sales team. </li></ul><ul><li>Pros/Cons </li></ul><ul><li>Pros: </li></ul><ul><li>Lead generation and appointment system </li></ul><ul><li>Competent Credit Policy & Process </li></ul><ul><li>Industry “Best Practice” Loss Reserve </li></ul><ul><li>Cons: </li></ul><ul><li>Limited production from tenured sales rep’s </li></ul><ul><li>Limited Quality Assurance process </li></ul><ul><li>Multiple Processors – deters economies of scale </li></ul><ul><li>Compensation Plans are relatively rich for sales results produced </li></ul><ul><li>Does not take advantage of the bank franchise / customer base </li></ul><ul><li>Marginal financial performance levels for a portfolio this size </li></ul>Maintain
  13. 13. Value Exchange Analysis: Proprietary and Confidential Status Quo New Alliance Performance by Portfolio 2008 Elavon FDMS FIS Total Volume $ 304,435,568 $ 424,164,718 $ 296,248,154 $ 1,024,848,440 # Transactions 4,494,258 1,880,433 3,104,101 9,478,792 Average Ticket $ 68 $ 226 $ 95 $ 108 Net Residual $ 1,620,204 $ 1,714,866 $ 816,763 $ 4,151,833 Net Spread 0.53% 0.40% 0.28% 0.41% Active Merchants 1,425 1,068 1,165 3,658 2009 Elavon FDMS FIS Total Volume $ 265,681,017 $ 351,424,186 $ 450,321,021 $ 1,067,426,223 # Transactions 4,243,548 1,659,889 5,283,692 11,187,129 Average Ticket $ 63 $ 212 $ 85 $ 95 Net Residual $ 1,342,631 $ 1,433,319 $ 1,342,211 $ 4,118,161 Net Spread 0.51% 0.41% 0.30% 0.39% Active Merchants 1,155 943 1,450 3,548 2009 over 2008 Projected Volume Growth 4% Projected Active Merchant Growth -3% Projected Net Residual Growth -1% Projected New Sales Income Growth 4%
  14. 14. Value Exchange Analysis: Proprietary and Confidential STATUS QUO BANK GENERAL LEDGER TOTALS Total 2008 Actuals % of Total 2009 Projected % of Total   2010 Projected   2011 Projected   2012 Projected               TOTAL NON INTEREST INCOME $ 4,706,377   $ 4,055,612   $ 4,258,393 $ 4,471,312 $ 4,694,878 37986 - SBM MERCHANT SERVICES INCOME $ 4,481,590 95% $ 3,833,723 95% $ 4,025,409 $ 4,226,679 $ 4,438,013 37999 - OTHER FEES $ 151,288 3% $ 141,465 3% $ 148,539 $ 155,966 $ 163,764 TOTAL OTHER INCOME $ 73,499 2% $ 80,424 2% $ 84,445 $ 88,667 $ 93,101               TOTAL NON-INTEREST EXPENSE $ 3,230,671   $ 2,658,628   $ 2,791,559 $ 2,931,137 $ 3,077,694 SALARIES & WAGES $ 1,006,611 31% $ 907,808 34% $ 953,198 $ 1,000,858 $ 1,050,901 BONUSES $ 1,410,304 44% $ 1,128,907 42% $ 1,185,352 $ 1,244,620 $ 1,306,851               NET INCOME $ 1,475,706   $ 1,396,984   $ 1,466,833 $ 1,540,175 $ 1,617,184 PROJECTED GROWTH -5% 5% 5% 5%
  15. 15. #2 ISO Expansion - Continue current business model, however invest by adding an external ISO partner. Value Exchange Analysis: Proprietary and Confidential <ul><li>Review </li></ul><ul><li>A proposal has been presented to NewAlliance from Processing Solutions an ISO in the industry. </li></ul><ul><li>The proposal indicates that it would increase sales and revenue growth by leveraging the current bank (merchant department) infrastructure. </li></ul><ul><li>The growth would be achieved by adding sales staff that would be managed directly by Processing Solutions. </li></ul><ul><li>In the proposal, Processing Solutions owns a majority (80%)of the profit while the bank continues to hold the entire risk. </li></ul><ul><li>Findings </li></ul><ul><li>NewAlliance has an opportunity to grow the merchant business with limited up-front investment. </li></ul><ul><li>The ISO expansion model strategically positions the merchant department as a “separate business unit” away from the bank focused on non-bank customers. </li></ul><ul><li>There is a larger opportunity for increased fraud losses due to the expanded sales force. Further the sales force is not in direct control by the bank. </li></ul><ul><li>Under the terms of this agreement the ISO has an opportunity to sell for Agent banks with NewAlliance maintaining liability </li></ul><ul><li>Suggested Actions </li></ul><ul><li>NewAlliance would need to perform an extensive legal review of the Letter of Intent as well as the final contract. The bank would need to establish clear levels of bank liability and financial participation. </li></ul><ul><li>NewAlliance should establish performance thresholds that must be met with appropriate options if not achieved. </li></ul><ul><li>Strategically, NewAlliance needs the ability to approve the market areas of the ISO sales representatives as the bank may wish to avoid sales overlap with existing bank personnel. </li></ul><ul><li>Recommend that NewAlliance require the ISO to fund a proportionate amount of the loss reserve. </li></ul><ul><li>Pros/Cons </li></ul><ul><li>Pros: </li></ul><ul><li>Potential for quick , incremental sales and profit growth </li></ul><ul><li>Opportunity for expansion with limited “up-front” expense due to expense reimbursement from ISO </li></ul><ul><li>Cons: </li></ul><ul><li>NewAlliance takes virtually all the fraud/risk responsibility </li></ul><ul><li>Sales force is managed by the ISO – NewAlliance has no control of production/hiring/firing </li></ul><ul><li>ISO has proposed processing for Agent banks which will further dilute profit and cause potential conflict by selling in the same market </li></ul><ul><li>If revenues not achieved, expense reimbursement may be in jeopardy </li></ul>Invest
  16. 16. NewAlliance ISO Income and Reimbursement Value Exchange Analysis: Proprietary and Confidential NewAlliance ISO Income Share Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Processing Income $ 108,000 $ 409,200 $ 900,540 $ 1,491,613 $ 2,084,332 $ 2,662,616 $ 3,211,985 $ 3,733,886 $ 4,229,691 $ 4,700,707 Co-Management Fees $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - Equipment Sales $ 1,350 $ 5,115 $ 11,257 $ 18,645 $ 26,054 $ 33,283 $ 40,150 $ 46,674 $ 52,871 $ 58,759 Miscellaneous $ 2,700 $ 10,230 $ 22,514 $ 37,290 $ 52,108 $ 66,565 $ 80,300 $ 93,347 $ 105,742 $ 117,518 Less Loss Reserve $ (100,000) $ (90,000) $ (325,000) $ (500,000) $ (600,000) $ (600,000) $ (600,000) $ (600,000) $ (600,000) $ (600,000) TOTAL: $ 12,050 $ 334,545 $ 609,310 $ 1,047,548 $ 1,562,495 $ 2,162,464 $ 2,732,434 $ 3,273,906 $ 3,788,305 $ 4,276,983 NewAlliance Expense Reimbursement* Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Administrative Staff $ 67,500 $ 127,500 $ 187,500 $ 187,500 $ 187,500 $ 375,000 $ 375,000 $ 375,000 $ 375,000 $ 375,000 Business Development Staff $ 157,500 $ 297,500 $ 437,500 $ 437,500 $ 437,500 $ 437,500 $ 437,500 $ 437,500 $ 437,500 $ 437,500 Total $ 225,000 $ 425,000 $ 625,000 $ 625,000 $ 625,000 $ 812,500 $ 812,500 $ 812,500 $ 812,500 $ 812,500 * This will be a straight pass through as NewAlliance will hire staff to support the sales process Note : These financials were obtainend through NewAlliance from Processing Solutions sales proposal. Value Exchange has not conducted a comprehensive review of the assumptions and drivers, however, forecasted sales and income appear to be quite aggrressive givin industry norms.
  17. 17. Value Exchange Analysis: Proprietary and Confidential Overall NewAlliance Bank - Processing Solutions - Merchant Relationship Summary - March 2009 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Net Income Annual $ (1,258,650) $ (1,315,200) $ (706,274) $ 1,455,931 $ 3,606,485 $ 5,521,736 $ 7,518,333 $ 9,414,906 $ 11,216,023 $ 12,926,449 Cumulative $ (1,258,650) $ (2,573,850) $ (3,280,124) $ (1,824,193) $ 1,782,292 $ 7,304,028 $ 14,822,361 $ 24,237,267 $ 35,453,290 $ 48,379,739 Portfolio Appreciation Annual $ 1,007,640 $ 2,810,196 $ 4,584,202 $ 5,514,711 $ 5,530,072 $ 5,395,384 $ 5,125,615 $ 4,869,334 $ 4,625,867 $ 4,394,574 Cumulative $ 1,007,640 $ 3,817,836 $ 8,402,038 $ 13,916,749 $ 19,446,821 $ 24,842,205 $ 29,967,820 $ 34,837,154 $ 39,463,021 $ 43,857,595 Composite Return Annual $ (251,010) $ 1,494,996 $ 3,877,929 $ 6,970,642 $ 9,136,557 $ 10,917,120 $ 12,643,947 $ 14,284,240 $ 15,841,890 $ 17,321,023 Cumulative $ (251,010) $ 1,243,986 $ 5,121,915 $ 12,092,556 $ 21,229,113 $ 32,146,233 $ 44,790,180 $ 59,074,420 $ 74,916,311 $ 92,237,334
  18. 18. #3 Transform the Business - Transition current business model to a “Bank Centric” model by investing in suggested modifications/changes Value Exchange Analysis: Proprietary and Confidential <ul><li>Review </li></ul><ul><li>NewAlliance currently has a merchant area that is positioned similar to an ISO selling to non-bank customers. </li></ul><ul><li>Industry practice for merchant areas that fall under bank ownership is that they are positioned to grow bank relationships and profitability. </li></ul><ul><li>Furthermore, sales compesation plans are usually built around base salary with nominal incentives going to both branch and merchant sale reps. </li></ul><ul><li>NewAlliance has a core infrastructure built within the merchant area that can be enhanced and transformed to become more efficient and bank focused. </li></ul><ul><li>Findings </li></ul><ul><li>With the proper investment, NewAlliance can transform and enhance the current business model. </li></ul><ul><li>A “Bank Centric “ model can be achieved driving cross-selling efforts across the bank which will improve overall profitability and enhance customer loyalty. </li></ul><ul><li>Compensation and sales systems would need comprehensive revision to create focus on branch and TM referral opportunities, and cross-sell of bank products. </li></ul><ul><li>Suggested Actions </li></ul><ul><li>NewAlliance would need to invest in the following areas to improve internal efficiency and ensure customer satisfaction: </li></ul><ul><li>- Automated Sales/Service </li></ul><ul><li>system integrated into </li></ul><ul><li>the bank. </li></ul><ul><li>- Banker/customer </li></ul><ul><li>service group. </li></ul><ul><li>NewAlliance will also need to invest into staff to create more of a “Bank Centric” sales model: </li></ul><ul><li>- Retail Field Sales </li></ul><ul><li>Representatives </li></ul><ul><li>would be aligned with </li></ul><ul><li>the branches regionally </li></ul><ul><li>to drive sales production. </li></ul><ul><li>The Merchant group would need to align its goals with both the Retail branch system and the Business Banking group to maximize cross-selling efforts </li></ul><ul><li>The compensation programs would need to be develop in conjunction with Human Resources </li></ul><ul><li>Consolidate the portfolios onto a single platform gaining economies of scale and pricing concessions </li></ul><ul><li>Pros/Cons </li></ul><ul><li>Pros : </li></ul><ul><li>Improved sales & service effectiveness </li></ul><ul><li>Increased profitability </li></ul><ul><li>Simplified operating environment </li></ul><ul><li>Leverage NewAlliance customer base to achieve Bank goals (deposits, fee income, cross-sell) </li></ul><ul><li>Cons: </li></ul><ul><li>Up-front investment in staff and internal process improvement is significant </li></ul><ul><li>Timeframe to consolidate merchant portfolios into optimal processing arrangement could prove to be considerable </li></ul>Invest
  19. 19. Value Exchange Analysis: Proprietary and Confidential TRANSFORM THE BUSINESS Total 2008 Actuals % of Total 2009 Projected % of Total 2010 Projected 2011 Projected 2012 Projected BANK GENERAL LEDGER TOTALS               TOTAL NON INTEREST INCOME $ 4,706,377   $ 4,055,612   $ 4,460,218 $ 5,321,062 $ 6,110,428 37986 - SBM MERCHANT SERVICES INCOME $ 4,481,590 95% $ 3,833,723 95% $ 4,025,409 $ 4,226,679 $ 4,438,013 37999 - OTHER FEES $ 151,288 3% $ 141,465 3% $ 148,539 $ 155,966 $ 163,764 INCREMENTAL LIFT FROM INVESTMENT         $ 201,825 $ 649,750 $ 1,215,550 TOTAL OTHER INCOME $ 73,499 2% $ 80,424 2% $ 84,445 $ 88,667 $ 93,101               TOTAL NON-INTEREST EXPENSE $ 3,230,671   $ 2,658,628   $ 3,256,182 $ 3,838,669 $ 3,838,669 SALARIES & WAGES $ 1,006,611 31% $ 907,808 34% $ 953,198 $ 1,143,838 $ 1,372,606 ADDITIONAL STAFFING INVESTMENT         $ 405,000 $ 425,250 $ 445,500 BONUSES $ 1,410,304 44% $ 1,128,907 42% $ 1,185,352 $ 1,422,422 $ 1,706,907 INVESTMENT IN INFRASTRUCTURE         $ 40,000 $ 40,000 $ 40,000 ALL OTHER EXPENSES         $ 672,632 $ 807,158 $ 968,590               NET INCOME $ 1,475,706   $ 1,396,984   $ 1,204,035 $ 1,482,393 $ 2,271,759 PROJECTED GROWTH -5% -14% 23% 53% Investment Re-Negotiation of Processing Contract Retail Field Reps 5* $ 65,000 $ 325,000 Overall processing cost reduction of $.02 equates to approximately $200,000 annually Customer Service Reps 2* $ 40,000 $ 80,000 (4% increase in portfolio revenue annually when entire portfolio is positioned on one platfrom - start in 2011) Investment in Infrastructure ($200,000 amoritized over 5yrs) $ 40,000 Total Investment   $ 445,000
  20. 20. Value Exchange Analysis: Proprietary and Confidential Growth with Investment Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Year 1 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% Projected additonal Units 25 30 35 60 60 45 45 50 75 75 50 50 Cumulative Units 25 55 90 150 210 255 300 350 425 500 550 600 Projected Volume $ 312,500 $ 687,500 $ 1,125,000 $ 1,875,000 $ 2,625,000 $ 3,187,500 $ 3,750,000 $ 4,375,000 $ 5,312,500 $ 6,250,000 $ 6,875,000 $ 7,500,000 Less loss reserve $ 125 $ 275 $ 450 $ 750 $ 1,050 $ 1,275 $ 1,500 $ 1,750 $ 2,125 $ 2,500 $ 2,750 $ 3,000 Projected Portfolio Income $ 1,438 $ 3,163 $ 5,175 $ 8,625 $ 12,075 $ 14,663 $ 17,250 $ 20,125 $ 24,438 $ 28,750 $ 31,625 $ 34,500 $ 201,825 Year 2 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% Projected additonal Units 50 40 40 75 75 60 60 65 100 100 60 60 Cumulative Units 600 640 680 755 830 890 950 1,015 1,115 1,215 1,275 1,335 Projected Volume $ 7,500,000 $ 8,000,000 $ 8,500,000 $ 9,437,500 $ 10,375,000 $ 11,125,000 $ 11,875,000 $ 12,687,500 $ 13,937,500 $ 15,187,500 $ 15,937,500 $ 16,687,500 Less loss reserve $ 3,000 $ 3,200 $ 3,400 $ 3,775 $ 4,150 $ 4,450 $ 4,750 $ 5,075 $ 5,575 $ 6,075 $ 6,375 $ 6,675 Projected Portfolio Income $ 34,500 $ 36,800 $ 39,100 $ 43,413 $ 47,725 $ 51,175 $ 54,625 $ 58,363 $ 64,113 $ 69,863 $ 73,313 $ 76,763 $ 649,750 Year 3 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% Projected additonal Units 60 50 50 100 100 70 70 75 125 125 70 70 Cumulative Units 1,335 1,385 1,435 1,535 1,635 1,705 1,775 1,850 1,975 2,100 2,170 2,240 Projected Volume $ 16,687,500 $ 17,312,500 $ 17,937,500 $ 19,187,500 $ 20,437,500 $ 21,312,500 $ 22,187,500 $ 23,125,000 $ 24,687,500 $ 26,250,000 $ 27,125,000 $ 28,000,000 Less loss reserve $ 6,675 $ 6,925 $ 7,175 $ 7,675 $ 8,175 $ 8,525 $ 8,875 $ 9,250 $ 9,875 $ 10,500 $ 10,850 $ 11,200 Projected Portfolio Income $ 76,763 $ 79,638 $ 82,513 $ 88,263 $ 94,013 $ 98,038 $ 102,063 $ 106,375 $ 113,563 $ 120,750 $ 124,775 $ 128,800 $ 1,215,550
  21. 21. #4 Outsource - Divest current merchant function and portfolios, while leveraging an outsource partner to deliver on the “Bank Centric” model . Value Exchange Analysis: Proprietary and Confidential <ul><li>Review </li></ul><ul><li>NewAlliance has three portfolios that can be sold together or separately. </li></ul><ul><li>The portfolios have contracts that would allow the bank to transfer them to the seller without penalty. However, the bank is obligated to let the current processors have a review and first right of refusal. </li></ul><ul><li>There are opportunities in the industry for NewAlliance to partner with Merchant Sales and Service organizations that are “Bank Focused.” Further, fraud losses can be mitigated since these organizations are responsible for the full amount of the risk. </li></ul><ul><li>Findings </li></ul><ul><li>NewAlliance can maximize value by selling it’s merchant portfolios separate from the business unit (see pg.20) </li></ul><ul><li>A go-forward strategy would be to utilize an outsource option. There are outsourcing opportunities available in the industry that would allow NewAlliance to maximize revenue without taking any of the risk. </li></ul><ul><li>By utilizing the proper provider who is knowledgeable in the “Bank Centric” model, NewAlliance can share in the growth by penetrating their current customer base. </li></ul><ul><li>Suggested Actions </li></ul><ul><li>NewAlliance would need to package and market the three separate portfolios for sale. Each portfolio is transferable based on proper notification to the processors. Each portfolio could be offered serparetly or in combination with each other. </li></ul><ul><li>The majority of the existing internal business unit would be disbanded. However, there are areas within the current business unit that could be successfully redeployed elsewhere. An example would be the current telesales group being redeployed into the retail bank to set-up business appointments. </li></ul><ul><li>NewAlliance would need to select an appropriate outsource partner that provides a “Bank Centric” model to grow its fee income and deposits while eliminating risk. </li></ul><ul><li>Pros/Cons </li></ul><ul><li>Pros: </li></ul><ul><li>NewAlliance receives the financial gain from selling the portfolio to invest in other strategic initiatives </li></ul><ul><li>Limited or no exposure to fraud losses </li></ul><ul><li>Recapture existing loss reserve after sale </li></ul><ul><li>Improved retention of exisitng NewAlliance business customers by using a “Bank Centric” sales approach </li></ul><ul><li>No Significant up-front investment for merchant start-up </li></ul><ul><li>New, simple sales and service operating environment </li></ul><ul><li>No future technology or compliance investments </li></ul><ul><li>Cons: </li></ul><ul><li>NewAlliance may wish to eventually transition merchant customers back to the bank which would require a capital investment </li></ul><ul><li>Sales/servicing performed by non-bank employees </li></ul>Divest
  22. 22. Value Exchange Analysis: Proprietary and Confidential Divest Portfolio   Multiples   2009 YTD*     The Value of a Portfolio is a function of the performance of the business in the future : Elavon 2X 2.2X** 2.7X Primary Drivers in the evaluation: Volume 265,681,017       Net Income 1,342,631 $ 2,685,262 $ 3,020,920 $ 3,625,103 1) Margin (net spread) - The average net spreads for larger portfolios in your range 50-60 BP # Merchants 1,155             2) Ownership of Merchants Accounts - If the seller owns the portfolios then it becomes FDMS       more valuable as it can be transported to another processor with lower cost structure. Volume 351,424,186       Net Income 1,433,319 $ 2,866,639 $ 3,224,969 $ 3,869,962 3) Merchant Concentration - A portfolio of many smaller merchants rather than several large # Merchants 943       merchants makes it more valuable as there is less risk for attrition.       FIS       4) Credit Quality - A portfolio with low risk Merchants makes it less risky and more Volume 450,321,021       profitable as there is less chance for fraud. Net Income 1,342,211 $ 2,684,422 $ 3,019,975 $ 3,623,969 # Merchants 1,450       5) Portfolio Size - A larger portfolio provides increase economies of scale.       Total       6) Processing platform and contract terms - The valuation will be measured heavily on Volume 1,067,426,223       the contract term and the termination penalties, and any liquidation of damages. Net Income 4,118,161 $ 8,236,322 $ 9,265,863 $ 11,119,035 # Merchants 3,548     7) Attrition - Average annual attrition can dilute the value of the portfolio. Industry attrition       annually ranges from 8%-25%. The higher the attrition rate, the less value the portfolio will bring. *2009 Projected as numbers provided were through September ** Most likely scenario Note: These totals include NewAlliance Bank customers which may be eventually excluded from the sale
  23. 23. Value Exchange Analysis: Proprietary and Confidential Outsource Option Proforma Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Implementation/conversion* Year 1 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% Projected Units 175 175 175 30 40 50 60 80 100 100 60 50 Cumulative Units - 350 525 555 595 645 705 785 885 985 1,045 1,095 Projected Volume $ - $ 4,375,000 $ 6,562,500 $ 6,937,500 $ 7,437,500 $ 8,062,500 $ 8,812,500 $ 9,812,500 $ 11,062,500 $ 12,312,500 $ 13,062,500 $ 13,687,500 Projected Portfolio Income $ - $ 21,875 $ 32,813 $ 34,688 $ 37,188 $ 40,313 $ 44,063 $ 49,063 $ 55,313 $ 61,563 $ 65,313 $ 68,438 NewAlliance Revenue Share $ - $ 10,938 $ 16,406 $ 17,344 $ 18,594 $ 20,156 $ 22,031 $ 24,531 $ 27,656 $ 30,781 $ 32,656 $ 34,219 $ 255,313 Year 2 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% Projected Units 90 100 130 150 150 120 120 150 200 200 150 100 Cumulative Units 1,185 1,285 1,415 1,565 1,715 1,835 1,955 2,105 2,305 2,505 2,655 2,755 Projected Volume $ 14,812,500 $ 16,062,500 $ 17,687,500 $ 19,562,500 $ 21,437,500 $ 22,937,500 $ 24,437,500 $ 26,312,500 $ 28,812,500 $ 31,312,500 $ 33,187,500 $ 34,437,500 Projected Portfolio Income $ 74,063 $ 80,313 $ 88,438 $ 97,813 $ 107,188 $ 114,688 $ 122,188 $ 131,563 $ 144,063 $ 156,563 $ 165,938 $ 172,188 NewAlliance Revenue Share $ 37,031 $ 40,156 $ 44,219 $ 48,906 $ 53,594 $ 57,344 $ 61,094 $ 65,781 $ 72,031 $ 78,281 $ 82,969 $ 86,094 $ 727,500 Year 3 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% Projected Units 150 160 180 250 250 170 170 200 275 275 230 150 Cumulative Units 2,905 3,065 3,245 3,495 3,745 3,915 4,085 4,285 4,560 4,835 5,065 5,215 Projected Volume $ 36,312,500 $ 38,312,500 $ 40,562,500 $ 43,687,500 $ 46,812,500 $ 48,937,500 $ 51,062,500 $ 53,562,500 $ 57,000,000 $ 60,437,500 $ 63,312,500 $ 65,187,500 Projected Portfolio Income $ 181,563 $ 191,563 $ 202,813 $ 218,438 $ 234,063 $ 244,688 $ 255,313 $ 267,813 $ 285,000 $ 302,188 $ 316,563 $ 325,938 NewAlliance Revenue Share $ 90,781 $ 95,781 $ 101,406 $ 109,219 $ 117,031 $ 122,344 $ 127,656 $ 133,906 $ 142,500 $ 151,094 $ 158,281 $ 162,969 $ 1,512,969 * Implementation/conversion acounts are projected at 15% of current portfolio.
  24. 24. Summary Financial Analysis & Decision Matrix Value Exchange Analysis: Proprietary and Confidential
  25. 25. Financial Overview of all Options Maintain Invest Invest Divest Value Exchange Analysis: Proprietary and Confidential
  26. 26. Value Exchange Analysis: Proprietary and Confidential Financial Overview of all Options Year 1 Year 2 Year 3 Total Status Quo Existing Portfolio $ 1,466,833 $ 1,540,175 $ 1,617,184 $ 4,624,192 Total $ 4,624,192 ISO Expansion ISO Model - NewAlliance Share $ 12,050 $ 334,545 $ 609,310 $ 955,905 Existing Portfolios $ 1,466,833 $ 1,540,175 $ 1,617,184 $ 4,624,192 Total $ 5,580,097 Transform the Business Investment in business $ 1,204,035 $ 1,482,393 $ 2,271,759 $ 4,958,188 Total $ 4,958,188 Outsource Divest Portfolio ($10,295,403) - Amitorization $ 3,088,621 $ 3,088,621 $ 3,088,621 $ 9,265,863 Reverse Fraud Loss Reserve $ 355,262 $ 355,262 Outsource $ 255,313 $ 727,500 $ 1,512,969 $ 2,495,781 Total $ 12,116,906
  27. 27. Low Risk High Risk Low Profit High Profit Decision Matrix Status Quo ISO Expansion Transition the Business Outsource Value Exchange Analysis: Proprietary and Confidential
  28. 28. Conclusions Value Exchange Analysis: Proprietary and Confidential
  29. 29. Conclusions <ul><li>The present Merchant operating environment is producing a relatively low/marginal return on capital and it operates on a “Stand Alone” basis (apart from Retail objectives) due to the following reasons: </li></ul><ul><ul><ul><li>high compensation </li></ul></ul></ul><ul><ul><ul><li>low margin pricing </li></ul></ul></ul><ul><ul><ul><li>reduced economies from multiple processors </li></ul></ul></ul><ul><ul><ul><li>lack of focus on bank customer base </li></ul></ul></ul><ul><ul><ul><li>No Bank/Merchant goal alignment ( internal referral process) </li></ul></ul></ul><ul><li>While the bank has several options available, capital investment becomes a key variable in setting NewAlliance’s preferred direction : </li></ul><ul><ul><li>- - If the bank is inclined to not invest further capital but desires to maintain merchant services as a stand-alone business entity, then it should consider either of the maintenance strategies: </li></ul></ul><ul><ul><ul><ul><li># 1 Status Quo </li></ul></ul></ul></ul><ul><ul><ul><ul><li># 2 ISO Expansion </li></ul></ul></ul></ul><ul><ul><li>Note : The key difference between the strategies is that the ISO Expansion while being more profitable, </li></ul></ul><ul><ul><li>has increased execution and credit risk. </li></ul></ul>Value Exchange Analysis: Proprietary and Confidential
  30. 30. Conclusions - continued <ul><ul><li>- - If the Bank is willing to invest capital, it should consider an Invest strategy such as: </li></ul></ul><ul><ul><li> # 3 Transforming the Business </li></ul></ul><ul><ul><ul><li>Note : This option will produces synergy with Retail Bank Objectives such as deposit growth, bank customer </li></ul></ul></ul><ul><ul><ul><li>satisfaction and retention and additional cross-sell opportunities </li></ul></ul></ul><ul><ul><li>- - If the Bank seeks a source of capital to redeploy against other company priorities, then the viable and attractive alternative would be: </li></ul></ul><ul><ul><li># 4 Outsource </li></ul></ul><ul><ul><li>Note : A significant amount of capital could be raised (up to $11MM) while at the same time, long-term </li></ul></ul><ul><ul><li>profitability will not be compromised (within a 3-5 year period net income will be at or above current levels) </li></ul></ul><ul><ul><li>and exposure to risk will be virtually eliminated. </li></ul></ul>Value Exchange Analysis: Proprietary and Confidential
  31. 31. Conclusions - continued <ul><li>If the bank chooses to keep the business internally, there are several functional areas that NewAlliance can pursue for immediate improvement: </li></ul><ul><ul><li>Increase profitability by refining pricing strategies </li></ul></ul><ul><ul><li>Restructuring the compensation plans </li></ul></ul><ul><ul><li>Streamlining internal processes/consolidating platforms </li></ul></ul><ul><ul><li>Formalized referral/goal process between Merchant Services and the Retail branch system. </li></ul></ul><ul><li>All the above activities would help reverse current trends of declining margins and lower profitability. </li></ul>Value Exchange Analysis: Proprietary and Confidential

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