Merchant Evaluation ReviewMerchant Evaluation ReviewDecember 7, 2009
AgendaAgendaObjectivesMethodologyFunctional ReviewDecision MatrixOptions
◦ Harvest◦ Invest◦ Divest
Conclusion
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Value Exchange Analysis: Proprietary and Confidential
ObjectivesObjectives 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).
1. Provide functional assessment of NewAlliance’s current Merchant Business/Portfolio in such a way as to maximize value.
2. 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.
3. 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.
4. Analyze and evaluate the proposal from Processing Solutions, an Independent Sales Organization (ISO) a possible expansion opportunity.
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Value Exchange Analysis: Proprietary and Confidential
MethodologyMethodology 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: ◦ Functional Analysis of the entire business: Risk Management, Sales, Processing/Service
◦ Detailed descriptions of each individual option: Review – recap of the areas/items analyzed Findings – results/conclusions Suggested Actions – recommended actions to be taken if option is chosen Pros/Cons – positive and negative attributes of the option
◦ Summary Financial Analysis of each option◦ Decision Matrix to evaluate Risk vs Reward
The additional following steps were taken to provide a comprehensive analysis:◦ In person interviews with NAB’s Merchant management staff.◦ Due Diligence on each segment of the business to fully understand all portfolio/business
performance characteristics.◦ Compared and contrasted a previous marketplace analysis (July 2004) to Value Exchange
recent findings.
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Value Exchange Analysis: Proprietary and Confidential
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Functional AnalysisFunctional Analysis
Value Exchange Analysis: Proprietary and Confidential
Risk ManagementRisk Management Credit Policy/Underwriting:
◦ 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.
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.
◦ 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.
Loss Reserve:◦ 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”.
Note: The combination of the conservative underwriting policy and the loss reserve helps lower the potential for loss in this business.
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2008 Merchant Category by Volume
Value Exchange Analysis: Proprietary and Confidential
SalesSales Lead Generation:
◦ NewAlliance’s has designed a lead generation system through a Tele-consulting team that focuses on the following areas: Lead qualification for volume and type of business Geographic location of the merchant to determine which sales rep to
provide the lead.
◦ This is an industry “Best Practice” as this process helps streamline the sales force with pre-qualified leads that can be easily closed.
◦ This should allow the sales force to increase production and add to overall portfolio profitability.
New Account Production:◦ NewAlliance has a well established outside sales team (13 team
members, majority tenured).◦ Goals are primarily set with an income focus.◦ 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.
◦ 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.
◦ Industry average new account production per sales rep is 12-14 with an average of 50-90 basis which includes ancillary products.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.
Compensation Plan:◦ 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.
◦ 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.
◦ 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.
◦ A majority of industry bank focused compensation plans are higher base pay and one-time commission payouts.
Bank vs Non-Bank Customers:◦ Less than 25%* of the NewAlliance merchants are bank
customers. ◦ There are no clear joint goals for selling merchant within
the branch system.◦ Industry “Best Practice” is 80-90% bank customer
penetration.◦ The benefits to having a merchant customer as a banking
customer are multi-facited: Fraud – bank has direct access to the merchant funds Profitability – bank has float on the deposits “Stickiness” - with more banking products, it is harder to move a
relationship Cross –selling opportunities
*NewAlliance merchant management reported.
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Value Exchange Analysis: Proprietary and Confidential
Processing/ServiceProcessing/Service Processing Contracts:
◦ 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.
◦ NewAlliance has three processing platforms , First Data (FDMS), Elavon (Nova), and Fidelity (FIS).
◦ Volume is driven based on the average ticket. FDMS has better pricing for large tickets vs Elavon and Fidelity for lower average tickets.
◦ 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.
Internal Sales/Service System:◦ NewAlliance has a an Access database that has
been formatted over time to serve the needs of the department.
◦ 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.
Quality Assurance:◦ NewAlliance currently keys data into various
systems for new and existing accounts. Further, some information is faxed to the various processors to be keyed.
◦ Currently, there is limited oversight into the various entry methods to ensure quality control.
◦ Key areas of impact: Pricing/Profitability Transaction Qualification Settlement
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% Based on Volume
Value Exchange Analysis: Proprietary and Confidential
Low Risk High Risk
Low Profit
High Profit
Decision MatrixThe Decision Matrix quantifies the expected outcome and allowsNewAlliance 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
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Strategic OptionsStrategic Options
Value Exchange Analysis: Proprietary and Confidential
OptionsOptions
#1. Status Quo - Continue current business model.
#2. ISO Expansion - Continue current business
model, however invest by adding an external ISO partner.
#3. Transform the business - Transition
current business model to a “Bank Centric” model by investing in suggested modifications/changes.
#4. Outsource - Divest current merchant function
and portfolios, while leveraging an outsource
partner to deliver on the “Bank Centric” model.
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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.
Maintain
Invest
Divest
Status Quo
Expansion
Transform
Outsource
Strategic Options:
Value Exchange Analysis: Proprietary and Confidential
#1 Status Quo: Continue current business model
Review
•A comprehensive review of the business was completed.
•The business was categorized into five core components.
•Each component has critical elements to successfully running the business: - Sales - Operations - Human Resources - Risk/Compliance - Financials
Findings
•NewAlliance has a knowledgeable merchant management team.
•The business can continue to operate under the current practices.
•However, the business unit will be susceptible to the following without further review:
- Gradual shrinking profit margins under the current pricing methods
- Quality of customer service is unknown due to lack of measurements.
- Lower than industry average sales production under current compensation plans
- Increased pricing/servicing complexity by positioning merchants on various processing platforms
Suggested Actions
•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.
•Develop a detailed quality assurance process to ensure accuracy across all processing platforms for new account entry as wells as maintenance.
•Simplify the sales compensation plan so that it can be easily understood and applied. Further, make it consistent across the entire sales team.
Pros/Cons
Pros:1.Lead generation and appointment system2.Competent Credit Policy & Process3.Industry “Best Practice” Loss Reserve
Cons:1.Limited production from tenured sales rep’s2.Limited Quality Assurance process3.Multiple Processors – deters economies of scale4.Compensation Plans are relatively rich for sales results produced5.Does not take advantage of the bank franchise / customer base6.Marginal financial performance levels for a portfolio this size
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Maintain
Value Exchange Analysis: Proprietary and Confidential
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Status QuoNew 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%
Value Exchange Analysis: Proprietary and Confidential
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STATUS QUOBANK 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%
Value Exchange Analysis: Proprietary and Confidential
Review
•A proposal has been presented to NewAlliance from Processing Solutions an ISO in the industry.
•The proposal indicates that it would increase sales and revenue growth by leveraging the current bank (merchant department) infrastructure.
•The growth would be achieved by adding sales staff that would be managed directly by Processing Solutions.
•In the proposal, Processing Solutions owns a majority (80%)of the profit while the bank continues to hold the entire risk.
Findings
• NewAlliance has an opportunity to grow the merchant business with limited up-front investment.
•The ISO expansion model strategically positions the merchant department as a “separate business unit” away from the bank focused on non-bank customers.
• 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.
•Under the terms of this agreement the ISO has an opportunity to sell for Agent banks with NewAlliance maintaining liability
Suggested Actions
•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.
•NewAlliance should establish performance thresholds that must be met with appropriate options if not achieved.
•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.
•Recommend that NewAlliance require the ISO to fund a proportionate amount of the loss reserve.
Pros/Cons
Pros:1.Potential for quick , incremental sales and profit growth2.Opportunity for expansion with limited “up-front” expense due to expense reimbursement from ISO
Cons:1.NewAlliance takes virtually all the fraud/risk responsibility2.Sales force is managed by the ISO – NewAlliance has no control of production/hiring/firing3.ISO has proposed processing for Agent banks which will further dilute profit and cause potential conflict by selling in the same market4.If revenues not achieved, expense reimbursement may be in jeopardy
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#2 ISO Expansion - Continue current business model, however invest by adding an external ISO partner.
Invest
Value Exchange Analysis: Proprietary and Confidential
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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.
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Overall NewAlliance Bank - Processing Solutions - Merchant RelationshipSummary - 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
Value Exchange Analysis: Proprietary and Confidential
#3 Transform the Business - Transition current business model to a “Bank Centric” model by investing in suggested modifications/changes
Review
•NewAlliance currently has a merchant area that is positioned similar to an ISO selling to non-bank customers.
•Industry practice for merchant areas that fall under bank ownership is that they are positioned to grow bank relationships and profitability.
•Furthermore, sales compesation plans are usually built around base salary with nominal incentives going to both branch and merchant sale reps.
•NewAlliance has a core infrastructure built within the merchant area that can be enhanced and transformed to become more efficient and bank focused.
Findings
•With the proper investment, NewAlliance can transform and enhance the current business model.
•A “Bank Centric “ model can be achieved driving cross-selling efforts across the bank which will improve overall profitability and enhance customer loyalty.
•Compensation and sales systems would need comprehensive revision to create focus on branch and TM referral opportunities, and cross-sell of bank products.
Suggested Actions
• NewAlliance would need to invest in the following areas to improve internal efficiency and ensure customer satisfaction: - Automated Sales/Service system integrated into the bank. - Banker/customer service group.
•NewAlliance will also need to invest into staff to create more of a “Bank Centric” sales model: - Retail Field Sales Representatives would be aligned with the branches regionally to drive sales production.
•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
•The compensation programs would need to be develop in conjunction with Human Resources
•Consolidate the portfolios onto a single platform gaining economies of scale and pricing concessions
Pros/Cons
Pros:1.Improved sales & service effectiveness2.Increased profitability3.Simplified operating environment4.Leverage NewAlliance customer base to achieve Bank goals (deposits, fee income, cross-sell)
Cons:1.Up-front investment in staff and internal process improvement is significant2.Timeframe to consolidate merchant portfolios into optimal processing arrangement could prove to be considerable
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Invest
Value Exchange Analysis: Proprietary and Confidential
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Value Exchange Analysis: Proprietary and Confidential
TRANSFORM THE BUSINESS Total 2008 Actuals % of Total 2009 Projected % of Total 2010 Projected 2011 Projected 2012 ProjectedBANK 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 annuallyCustomer 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
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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
#4 Outsource - Divest current merchant function and portfolios, while leveraging an outsource partner to deliver on the “Bank Centric” model.Review
•NewAlliance has three portfolios that can be sold together or separately.
•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.
•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.
Findings
•NewAlliance can maximize value by selling it’s merchant portfolios separate from the business unit (see pg.20)
•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.
•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.
Suggested Actions
•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.
•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.
•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.
Pros/Cons
Pros:1.NewAlliance receives the financial gain from selling the portfolio to invest in other strategic initiatives2.Limited or no exposure to fraud losses3.Recapture existing loss reserve after sale4.Improved retention of exisitng NewAlliance business customers by using a “Bank Centric” sales approach5.No Significant up-front investment for merchant start-up6.New, simple sales and service operating environment7.No future technology or compliance investments
Cons:1.NewAlliance may wish to eventually transition merchant customers back to the bank which would require a capital investment2.Sales/servicing performed by non-bank employees
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Divest
Value Exchange Analysis: Proprietary and Confidential
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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 scenarioNote: These totals include NewAlliance Bank customers which may be eventually excluded from the sale
Value Exchange Analysis: Proprietary and Confidential
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Outsource OptionProforma
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.
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Summary Financial AnalysisSummary Financial Analysis&&
Decision MatrixDecision Matrix
Value Exchange Analysis: Proprietary and Confidential
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Financial Overview of all Options
MaintainInvest Invest
Divest
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Value Exchange Analysis: Proprietary and Confidential
Financial Overview of all Options
Year 1 Year 2 Year 3 TotalStatus 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
Low Risk High Risk
Low Profit
High Profit
Decision Matrix
Status Quo
ISO Expansion
Transition the
Business
Outsource
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ConclusionsConclusions
Value Exchange Analysis: Proprietary and Confidential
ConclusionsConclusionsThe 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:
high compensation low margin pricing reduced economies from multiple processors lack of focus on bank customer base No Bank/Merchant goal alignment ( internal referral process)
While the bank has several options available, capital investment becomes a key variable in setting NewAlliance’s preferred direction:
- - 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:
# 1 Status Quo# 2 ISO Expansion
Note: The key difference between the strategies is that the ISO Expansion while being more profitable,
has increased execution and credit risk.
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Value Exchange Analysis: Proprietary and Confidential
Conclusions - Conclusions - continuedcontinued- - If the Bank is willing to invest capital, it should consider an Invest
strategy such as: # 3 Transforming the Business
Note: This option will produces synergy with Retail Bank Objectives such as deposit growth, bank customer
satisfaction and retention and additional cross-sell opportunities
- - If the Bank seeks a source of capital to redeploy against other company priorities, then the viable and attractive alternative would be:
# 4 Outsource
Note: A significant amount of capital could be raised (up to $11MM) while at the same time, long-term
profitability will not be compromised (within a 3-5 year period net income will be at or above current levels)
and exposure to risk will be virtually eliminated.
◦
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Value Exchange Analysis: Proprietary and Confidential
Conclusions - Conclusions - continuedcontinued
If the bank chooses to keep the business internally, there are several functional areas that NewAlliance can pursue for immediate improvement:
◦ Increase profitability by refining pricing strategies◦ Restructuring the compensation plans◦ Streamlining internal processes/consolidating platforms◦ Formalized referral/goal process between Merchant Services and the Retail
branch system. All the above activities would help reverse current trends of
declining margins and lower profitability.
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Value Exchange Analysis: Proprietary and Confidential