First Citizens to Improve Commercial Banking Profitability

Case Type: improve profitability; organizational behavior.
Consulting Firm: American Express final round full time job interview.
Industry Coverage: banking; financial services.

Case Interview Question #01329: Your client First Citizens Bank (NASDAQ: FCNCA) is a regional bank in the Southeast with corporate and commercial operations in eight states. Based in Raleigh, North Carolina, First Citizens Bank serves clients in more than 120 branches in Alabama, Florida, Mississippi, Georgia, North Carolina, South Carolina, Tennessee, and Virginia.

First Citizens Bank has expanded rapidly through acquisitions in recent years. It has a separate charter in each of the 8 states and banks in each state operate autonomously. Its rapid growth, lack of business focus and segmentation in commercial banking have contributed to commercial banking problems. It is unable to determine profitability, which is especially important to the bank’s management.

Your consulting firm has been hired to help the client improve their profitability. The objective is to make the corporate bank sought by customers, feared by competitors and a source of pride for employees. If you were the engagement manager on this case, what would be your approach and potential solution?

Possible Answers:

1. Case Overview

It is important the candidate understands and probes why the bank is in this position. Both quantitative and qualitative sides of the case need to be analyzed. There are multiple angles for this case. Some of the issues the candidate needs to address/assess are:

* The profitability question.
* The current image of the bank within its external and internal customers.
* Identify potential reasons for lack of high brand image, if any.
* Key question to answer in this case: issues of focus and whether the “Is bigger better?” philosophy works for First Citizens Bank.

2. Detailed Analysis

Profits = Revenues – Costs. For answering the profitability question, one has to analyze the cost side and revenue sides of the client’s banking operation.

Candidate: What is the customer base of the bank across regions?

Interviewer: One million commercial customers.

Candidate: What is the average size of a customer?

Interviewer: It has customers of all sizes.

Candidate: Do we have any information about the spread?

Interviewer: Bank borrows from the Fed at a rate of 3% and lends money at 6%.

Candidate: If we look at the cost side, what information is available?

Interviewer: Major cost comes from the credit officers, which totals $75,000,000 per year.

Candidate: That’s a huge cost. Does this vary according to the credit amount?

Interviewer: Each credit officer spends the same amount of time on each credit proposal, no matter what the size.

Candidate: And how many are there at present?

Interviewer: 750 credit officers in total.

Candidate: If we look at the cost side again, what information is available on variable costs?

Interviewer: There’s no exact figure for the entire bank at this point, but the industry average for similar operations is between 2% to 2.5% of the operational size.

Candidate: That’s interesting! Is there any information about the average balance per customer for the bank?

Interviewer: Average balance per customer is about $50,000.

(a) Quantitative analysis regarding profitability

With the available information and some assumptions, the candidate can calculate the following:

* Revenue = 3% (the spread of 6% – 3%) * 1,000,0000 (customer size) * $50,000 (average balance) = $1.5 billion
* Costs are divided into variable costs (charge offs) and fixed costs (salary, rent, etc.). Assuming the industry range, the variable costs can be charged at 2.5% of total deposits. Hence, variable costs are $50 billion (number of customers * average balance) * 2.5% = $1.25 billion.
* Therefore, the Contribution Margin = (Revenue – Variable Cost) / Revenue = ($1.5B – $1.25B) / $1.5B = 16.7%

The candidate can further try to calculate the break-even volume of loans each credit officer must process in a year to justify the cost incurred.

* Given that the spread is 6% – 3% = 3%
* Assume charge off = 2.5%
* Therefore at break-even:
3% (X) = 2.5% (X) + $100,000 (cost spent on each credit officer = $75M / 750 = $100K).
Solve for X, X = $20 million = volume of business each credit officer should handle each year.

(b) Possible recommendation for improving profitability

This gives the candidate a decent peek at the bank’s profitability. A thorough study of its variable costs and fixed costs can be undertaken to come across a more accurate figure. The bank’s management should also make a decision on whether the credit officers’ costs are justifiable and whether they will be able to generate the required volume of business.

From the given information, one can also come to the conclusion that the bank is taking too many small loan applications. It should reduce the amount of time on small loans, increase the rate for small loans or exit the small loan business entirely.

(c) Possible solutions for image-building among both external and internal customers

For analyzing the image question, the candidate can adopt the three Cs (company, customer and competition) analysis. Then he or she can probe to identify potential reasons for the bank’s decline in customer service, if any.

Candidate: The first issue I would like to address is why customers would want to come to this bank over others. Does it offer better rates or lower processing fees?

Interviewer: The bank’s rates are very competitive and some of the lowest in the industry.

Candidate: Do the customers face any other problems in terms of customer service?

Interviewer: Service time is a problem. Customers have to call a different phone number for each type of question or problem. Call wait times are often long.

Candidate: Is there any reason why customers avoid this bank or the area where the bank wants to improve?

Interviewer: The bank has inconsistent credit underwriting skills, though it maintains good credit quality.

Candidate: Is the inconsistency due to its many branches in different states adopting various processes for underwriting?

Interviewer: Yes, your guess is right. Also, cost and credit controls have tightened while the bank has actively acquired new banks, thereby complicating the commercial banking process.

Candidate: Has there been any research on why the underwriting skills are inconsistent?

Interviewer: The bank is not providing a high quality of service to customers due to growing friction between the account officers, product units and credit administration.

Candidate: Has there been a problem of workforce turnover within the bank?

Interviewer: Yes, the bank has not been able to attract and retain the best account officers.

Candidate: Are these problems in one particular state or across locations?

Interviewer: In most of the states.

Candidate: How competitive is the environment? Is there any bank operating in the same landscape in all locations?

Interviewer: There’s no single bank within all states but there are a number of smaller local banks in every state that are highly competitive.

From the above information the candidate can identify that due to expansion through acquisitions, the focus on commercial banking has been shaken and customers of the acquired banks in different states are suffering.

(d) Possible recommendation for customer service issue

The following are some possibilities:

* To maintain uniformity and to improve quality of customer service, the bank needs to consolidate the commercial operations across all of the states in which it operates.
* Institute relationship managers and service managers to improve the quality of customer service. The company can consider a workforce restructure (e.g., adding more repair personnel or more technically knowledgeable staff to the help desk), as well as a job tracking system, which would allow the staffer to send a repair person familiar with that customer or type of system.
* Focus on the HR policy and make an effort to retain the best talent. Introduce performance-based incentive systems.
* Harmonize relationships and make sure there are formal communication channels between the account officers and credit administration.

One should question the implications of “market leader” status and recognize that customer service is often best conducted by smaller, more customer-focused organizations. One can also try to pinpoint what has recently changed in the industry (recent bankruptcies or acquisitions, etc.) and adopt policies accordingly.

The final part of the case analysis involves whether the bank needs to expand through acquisitions or consolidate its current operations. This is a demand-oriented question, and one can perform a SWOT analysis (strength, weakness, opportunities and threats) to formulate an answer.

(e) SWOT analysis

The candidate already has information from the above discussions. The situation can be quickly summarized as follows:

Strengths
* The bank has grown through multiple acquisitions.
* It has good credit writing skills and a good customer base.
* It has already established commercial banking skills.

Weakness
* There is a lack of established processes at this point, especially in determining profitability for the bank as a whole. Growing bigger without consolidating existing operations will only make the banking operation more complicated.
* Quality of customer service and falling brand equity are issues.

Opportunities
* The absence of a single banking giant in the Southeast area.
* Once the bank’s operations are consolidated and formalized, it will definitely have a competitive advantage and can expand its business.

Threats
More than threats, the bank must research the following before making any future acquisitions.
* The client must examine if any new acquisition would complement its existing competence and strategy (i.e., commercial banking, high growth or high profitability, etc.) and what purpose it would serve.
* The demographics of the area surrounding the prospective acquisition should be examined. Population, business concentration, income levels, etc., should be compared with those of historically successful banks. Location of competitors should also be considered.

3. Conclusion & Recommendation

* The bank should now concentrate on focus and aim to fulfill the objective of making the corporate bank sought by customers, feared by competitors and a source of pride for employees.

* At this point, “bigger is better” is not a viable solution, given that the profitability of the bank is not exceptionally good.

Key takeaways

This case can prove to be lengthy and very involved, given the three components that the candidate is expected to consider. It is not expected that an interviewee would cover all of the above topics, but rather work through selected topics in a logical fashion. It is important that the candidate pursues a solution that is holistic and understands the complete nature of the banking issues involved. The recommendations for improving customer service and for the issue of focus are a few possible solutions among many. The candidate may come up with his or her own ideas.