Bungle-free branching.

• Author: Purchia, Michael J.
• Position: Fundamentals: Branch Planning, Part I

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The recent growth of branching has been driven largely by a surge in retail deposits following the bearish stock market in 2000, when many investors turned to banks as a safer haven for their funds. Today, both large and small banks see retail as their fastest-growing business, and are expanding their branch networks in order to gain a competitive foothold in existing and new markets.

But, remaining competitive in this context must also be balanced with risk management. To the extent that a bank avoids seat-of-the-pants branch siting and applies proven modeling and site-selection expertise to its branching, the better the chance its risk profile will be reduced, enabling bank management to effectively leverage its capital.

Branch network optimization

There are three common expansion strategies:

* Adding branch locations through mergers and acquisitions.

* De novo branching or picking up viable spin-off branches from megabanks, like Bank of America or Wachovia.

* A combination of the two above using a small acquisition to enter a new market and then expanding market share through branching.

The advantage of a merger and acquisition strategy is that the acquirer can quickly gain a significant market share as soon as the ink is dry on the deal papers. However, acquisitions can also end up costing more than their purchase price if wall Street or the market turns sour on the deal.

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Growing the branch network can be more targeted and less costly than making acquisitions. It is executed on a more modest scale and creates far less distraction for the organization. Branching also does not require the conversion of an acquired bank's culture since branching seeks to propagate the existing culture. However, branching also represents a longer-term investment than merger and acquisition, as it can take up to three years for a new branch to break even, making the process of selecting the branch site especially important. It is possible for a new $2- to $3-million branch to break even in 18 months if the bank pays close attention to the many factors influencing site selection.

The third approach, using a small acquisition to enter a new market and then expanding market share through branching, can be especially effective in highly consolidated markets where the number of available, existing bank buildings for sale or vacant plots of land are relatively small. The on-the-ground experience of the acquired...