McGraw-Hill/Irwin ©2008 The McGraw-Hill Companies, All Rights Reserved Chapter Four Establishing New Banks, Branches, ATMs, Telephone Services, and Web Sites

4-2 McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Responding to Changing Customer Demand Chartering New (De Novo) Financial Institutions Establishing New Full-Service Branch Offices Setting Up Limited Service Facilities

4-3 McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Charters for New Banks Office of the Comptroller of the Currency for National Banks State Banking Commissions in the 50 States for State Banks

4-4 McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Reasons for Oversight of Charters Financial Institutions Hold the Public’s Savings Financial Institutions are the Heart of the Payment System Financial Institutions Create Money

4-5 McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Benefits of a National Charter Brings Added Prestige Due to Stricter Standards Which May Bring Larger Deposits In Times of Trouble, Technical Assistance May Be Better

4-6 McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Benefits of a State Charter May Be Easier and Less Costly to Secure a State Charter Bank Does Not Need to Join the Federal Reserve System State May Allow Bank to Lend More of its Capital to a Single Borrower May Be Able to Offer Wider Range of Loans and Other Services

4-7 McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Questions for Organizers of New Banks Population and Geographic Boundaries of Primary Service Area (PSA) Competing Financial Institutions in PSA Number and Types of Businesses in PSA Traffic Patterns in PSA Population Growth in PSA Banking History in PSA Amount and Holders of Stock in New Bank Business and Banking Experience of Organizers Projections for New Bank in First 3 to 5 Years

4-8 McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. External Factors that Affect Decision for New Charter Level of Economic Activity Growth of Local Economic Activity The Need for a New Bank The Strength and Character of Local Competition in Supplying Financial Services

4-9 McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Internal Factors that Affect Decision for New Bank Qualifications and Contacts of Organizers Management Quality Capital Pledged

4-10 McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Desirable Sites for New Branches Heavy Traffic Count Large Number of Retail Shops and Stores Above Average Age of Local Populations Area Contains Substantial Number of Managers, Business Owners and Professionals Steady or Declining Number of Service Facilities Operated by Competitors Above Average Population Growth Above Average Population Density Relatively High Target Population per Branch Above Average Levels of Household Income

4-11 McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Expected Rate of Return The Decision of Whether to Establish a Branch Office is a Capital Budgeting Decision. The Present Value of the Net Future Cash Flows Should Be Larger Than the Initial Outlay

4-12 McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Geographic Diversification Reducing a Bank’s Overall Risk Exposure to its Total Return By Establishing Service Facilities in Different Market Areas Whose Individual Returns are Not Highly Correlated with the Returns from a Bank’s Existing Market Locations

4-13 McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Branch Regulation FDIC Improvement Act Requires Institutions to Contact Their Regulatory Agency and Customers 90 Days Prior to Closing a Branch Community Reinvestment Act Requires Them to Make an Effort to Reach All Segments of Their Communities With Services

4-14 McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. In-Store Branching Banking Offices Set Up Inside Retail Stores or in Malls in Order to Reduce Construction Costs

4-15 McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Advantages and Disadvantages of In-Store Branches Advantages Lest Costly to Build and Maintain Experience More Traffic Flow than Normal Branches Deposit Volume May be Heavier Because they Attract Store’s Own Deposits Disadvantages May Need More Aggressive Marketing Many Financial Transactions Need More Financial Expertise No Drive-in Window

4-16 McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Limited-Service Facilities Point of Sale (POS)Terminals Automated Teller Machines (ATMs) Home and Office Banking Telephone Banking and Call Centers Internet-Banking

4-17 McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Decision to Add ATMs The Bank Examines the Present Value of the Stream of Cash Savings from the New ATM Machine

4-18 McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Common Call Center Services Current Balance of Loan, Deposit or Investment Account Verification of Transactions Through Customer’s Account Amount of Interest Paid or Earned on Accounts How to Move Funds Among Accounts Fax or Downloadable Copies of Applications and Account Statements Details on Different Services Currently Available

4-19 McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Services Provided Through the Internet Verify Real-Time Account Balance Move Funds Instantly Among Accounts Confirm Deposits Made, Checks Cleared and Online Transactions Have Taken Place View and Print Images of Checks Place Orders for New Checks Submit Applications for Loans and Credit Cards Carry Out On-Line Bill Paying

4-20 McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. The Internet and Customer Safety Especially Vulnerable to Fraud and Identity Theft Authentication Factors –Something a Customer Knows –Something a Customer Has –Something a Customer is Move to Multi-Factor Authentication From Single Factor Authentication Today