William J. Jennings 2d disagrees with critics of Haven Bancorp's supermarket strategy. The way he tells it, his Westbury, N.Y., thrift company simply allows the sale of groceries in its CFS Bank.

"I once asked an analyst what he would feel if we put a Starbucks Coffee in a traditional branch," says Mr. Jennings, who is the president and chief operating officer of $2.9 billion-asset Haven and of CFS. "He said, 'Wow, what a great idea!'

I said, 'I've got an even better one: I'm going to put in a supermarket.' Somehow he didn't see the logic -- but I fail to see the difference."

Haven has been on the defensive in recent months. Investors and analysts have been critical of the four-year-old strategy and the thrift's high expenses.

One major critic has been PL Capital Group of Oak Brook, Ill., which holds 6.4% of Haven's shares. Unhappy about the company's financial performance, PL Capital had been pressuring it to find itself a buyer.

But two weeks ago Haven announced it had resolved the dispute. In return for two board seats, PL Capital agreed to vote for Haven's nominees at the annual shareholders meeting May 17 and to stop pushing for sale.

The presence of former dissidents on its board will not change the company's direction, said Haven's chairman and chief executive officer, Philip S. Messina. Though the supermarket branches have dragged down earnings, Mr. Messina insists that supermarket banking represents Haven's best chance for growth.

"I'm convinced it is working," he says.

Pretax earnings from the supermarket branches rose from $675,000 in the fourth quarter to about $1 million in the first, Mr. Messina said. Noninterest income from the branches totaled $4.7 million, up from $4.4 million, the company said

All but eight of the company's 70 branches are in supermarkets, such as Pathmark and ShopRite stores, in the New York metropolitan area. And having opened 54 in-store branches in the last three years, Haven has struggled mightily to control expenses.

Haven's peers aim for a 50% efficiency ratio, said Mark Fitzgibbon, an analyst at Sandler O'Neill & Partners in New York. Haven's was a much worse 73.9% in the first quarter, about level with the fourth. But Haven executives point out that the ratio has improved as the branches have become more profitable; the full-year 1998 figure was 83%.

The company has been trying to cut costs. It recently eliminated about 70 jobs in a restructuring, which is expected to save $14 million year. It also sold off most of its residential mortgage business, and plans to sell the rest next month.

Haven took a $7.1 million restructuring charge in first quarter but at least removed the unprofitable mortgage unit "hanging around its neck," said CFS' chief financial officer, Catherine Califano.

Since CFS began its supermarket strategy, deposits have risen to $898 million. Fifteen percent of the people who use the supermarkets where CFS has branches hold CFS accounts, Mr. Messina said, and he predicted that the figure will double in the next couple of years."Many of the very successful supermarket bank operators attract upwards of 30% to 35% of their retailers' customers," he said. "Our objective this year is to significantly increase our penetration of our retailers customer base."

Though supermarket strategies are fairly common in other regions of the country, the Northeast has few successful examples. Observers suggest several reasons for the regional differences, from increased foot traffic in stores elsewhere to a high concentration of branches in parts of the Northeast.

Nevertheless, Mr. Messina said it makes sense to put branches where potential customers are -- which means supermarkets. Twenty thousand customers a week shop at some individual markets where CFS has branches, he said. The supermarket branches average three full-time employees and offer the same products and services as at CFS' traditional branches.

"We view the supermarket offices as extensions of our traditional branch presence," Mr. Messina said -- they are not "limited-service facilities."

Mr. Messina said he is confident that the supermarket strategy will ultimately provide the kinds of earnings that will satisfy its critics.

However, the company is keeping its options open. Last month it hired the Lehman Brothers investment bank to explore strategic alternatives.

Mr. Fitzgibbon said he is not convinced that the company could be sold in its current form. "I have difficulty figuring out who the logical buyer for the company would be," he said. He has talked to several logical buyers, he said, but none of them wants to own a thrift with so many in-store branches.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.