FMS Forum 2010_Branch Network Optimization_June21(1)

8/7/2019 FMS Forum 2010_Branch Network Optimization_June21(1)

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Branch Network Optimization

June 21, 2010 10:20 11:20

Presented by:

Chris GillDirector, Banking &Professional Services GroupSNL Financial1 SNL Plaza

Charlottesville, VA 22902P: 434-951-4428E: [email protected]


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SNL Financial Company Overview

Company founded in 1987

Headquartered in Charlottesville, VA More than 1300 employees worldwide

Leading provider of financial data and analytical tools on the financial services industry

Coverage of more than 20,000 commercial banks, thrifts, and credit unions

Sophisticated mapping tools, branch analytics, and merger models

Client base includes 48 of the top 50 banks, as well as more than 650 community banks

Subscription-based product

Enterprise-wide license with unlimited number of users

Company tenets focused on data accuracy, timeliness, comprehensiveness and relevance

Community bank solutions focused on:

Balance Sheet Analysis

Revenue and Expense Analysis

Market Assessment and Branch Footprint Analysis

Merger Analysis Reporting for Key Stakeholders (e.g., investors, regulators)

Investor Relations

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Agenda

I. Current Industry Situation

II. Analytical Framework

Corporate Strategy

External Market Assessment

Internal Performance Analysis

III. Branch Network Planning Case Study

IV. Critical Success Factors

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Current Industry Situation

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Branch growth in the U.S. has moderated after several years of significantexpansion

#Branches 89,983 92,179 94,905

97,535 99,491 98,960

50,000

60,000

70,000

80,000

90,000100,000

110,000

120,000

2004 2005 2006 2007 2008 2009

U.S. Commercial Banks and ThriftsActive Branches

2004 - 2009

2,196

2,726 2,630

1,956

(531)(1,000)

(500)

0

500

1,000

1,500

2,000

2,500

3,000

2005 2006 2007 2008 2009

U.S. Bank BranchesNet Change by Year

2005 - 2009

#Branches

CAGR = 1.9%*

*Note: U.S. population growth averaged approximately 1% per year during this time periodSource: SNL Financial

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Growth in retail networks was supported by consumers continued demand forbranch access, particularly for more complex sales and service interactions

Importance of Branch Convenience

About two-thirds of banking customers live

within two miles of their principal branch Many consumers (43%) and small

businesses (30%) pick their bank primarilybased on branch location

Location is one of the most frequently-cited reasons for sticking with a bank

Source: Forrester Research, Consumer Preference for Banking Channels

Channel Preference for

Opening a New Account

82%

11% 6%

0%

20%

40%

60%

80%

100%

Branch Phone Web

Channel Preference forProblem Resolution

51%

40%

6%2%

0%

10%

20%

30%

40%

50%

60%

Branch Phone Web IVR

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Branches account for a significant percentage of a banks cost base, in anindustry that is expected to yield lower returns over the next several years

BranchNetwork

50%

Operations20%

Marketing15%

ATM, CallCenter, Online

6%

Overhead5%

Other4%

Operating Cost BreakdownTypical Community Bank

Source: Peak Performance Consulting Group

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New technologies such as remote deposit capture and ATM check imaging arelikely to impact branch transaction volume

4%

10%

32%

8%

50%

97%

3%

21%

62%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2007 2009

Smaller Banks* Larger Banks** All Banks

Community Banks OfferingRemote Deposit Capture

*Banks with $500MM in assets***Represents activity at envelope-less ATMs (CA only for Wells)Source: ICBA Community Bank Payments Survey, BAI Banking Strategies

10%

20%

40%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Industry Average Bank ofAmerica***

Wells Fargo***

ATM TransactionsDeposits as % Total

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Given these industry dynamics, it is imperative that banks adopt a structuredanalytical framework to evaluate their branch network

Corporate Strategy

External MarketAssessment

Internal PerformanceAnalysis

Key Take-aways

Role of the branch andother channels inachieving your banks

objectives

Performance analysis

of your branches Understanding of the

value branches deliverto your business

Assessment of marketdynamics

Understanding of yourbanks competitive

position

Branch NetworkStrategy

Key Outcome

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Analytical Framework

Corporate Strategy

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Your banks corporate strategy should drive the development and

implementation of your branch network strategy

Corporate Strategy

Target CustomerSegments

CompetitivePositioning

Key Questions to Address

What is your vision statement and what implications does ithave for your branch network?

What are your strategic objectives: expansion vs.maintaining the status quo?

What appetite does your team have for trying newapproaches that may differentiate your bank in the market?

What is your relative competitive position in your existingmarkets?

Which institutions are better positioned with respect totheir branch network in your markets?

How does your share of deposits in each marketcompare to your share of branches?

Is your institution focused on specific segments of themarket (e.g., small business, mass market, etc.)?

What implications does this segment focus have for yourbranch strategy?

Customer ValueProposition

Why would a current or prospective client bank with you? How critical is convenient branch access to your value

proposition?

Dimensions to Assess

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Impact on Branch Strategy Branches located in or near

commercial districts

Transactional needs can behandled in facilities with lesssquare footage

Branch hours need to reflecttypical operations of businessclients

Branch staff well-versed incommercial/small businessproducts, including cash

management services Night depository access or

merchant self-service center

Channel preferences of specific customer segments need to be addressed inyour branch strategy in order to deliver the value these clients expect

Bank ASmall Business Focus

ILLUSTRATIVE

Impact on Branch Strategy Branches located in or near

retail districts

Bigger facilities needed toaccommodate teller servicesand platform sales

Access to specialists inmortgages and investments

Staff knowledgeable in handlingproblems

Saturday hours 24 hour drive-up ATM

Bank BMass Market Focus

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Your institutions relative competitive position should also be consideredwhen developing your branch network plans for each market

Institution Company Name

TotalActive

Branches2009

TotalDeposits

2009($000)

DepositMarket

Share 2009(%)

Bank of America NA 31 7,078,857 27.20

Wells Fargo Bank NA 65 6,471,185 24.86SunTrust Bank 47 2,972,759 11.42

Branch Banking & Trust Co. 48 2,467,897 9.48

Union First Market Bank 46 1,681,991 6.46

Franklin Federal Savings Bank 8 660,243 2.54

Village Bank 15 484,159 1.86

First Capital Bank 7 398,463 1.53

Citizens & Farmers Bank 11 396,802 1.52

Essex Bank 8 387,465 1.49

Other Market Participants

(28)

100 3,027,531 11.63

Market Total 386 26,027,352 100.00

Institution Company Name

TotalActive

Branches2009

TotalDeposits

2009 ($000)

DepositMarket

Share 2009(%)

Wells Fargo Bank NA 54 3,911,272 19.63

SunTrust Bank 43 3,007,816 15.10TowneBank 19 2,605,250 13.08

Branch Banking & Trust Co. 55 2,562,947 12.86

Bank of America NA 46 2,494,579 12.52

Bank of the Commonwealth 19 875,926 4.40

Bank of Hampton Roads 29 802,925 4.03

Old Point National Bank of Phoebus 23 627,654 3.15

Monarch Bank 10 503,968 2.53

RBC Bank (USA) 12 403,626 2.03

Farmers Bank Windsor VA 5 338,710 1.70

Chesapeake Bank 7 243,182 1.22Heritage Bank 6 230,799 1.16

Fulton Bank NA 5 225,779 1.13

Union First Market Bank 6 152,732 0.77

Other Market Participants (19) 46 936,814 4.70

Market Total 385 19,923,979 100.00

Case Study: Union First Market Bank ($3.8B assets)

Market: Richmond, VA Market: Virginia Beach, VA

13Source: SNL Financial



Your institutions ability to capture and grow market share is typically a

function of your share of branches in the market

The S-Curve EffectTypical Branch Share / Market Share Relationship

Low branch share typically

results in achieving less thanfair share of market

Diminishing returns fromadding more branches givenexisting scale in the market

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External Market Assessment

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Assessing your markets across multiple dimensions is critical to making theright decisions about managing your network

slide 16

MarketDemographics

Market Demand

MarketCharacteristics

Sample Factors to Analyze

Total population and households Household growth historical and projected Population density Household income Customer segment mix; consumer vs. business mix

Commuting patterns Geographic boundaries (e.g., rivers, highways, etc.) Real estate availability Real estate development (i.e., new shopping centers) Local / regional economic conditions

Current market demand for various financial products

(e.g., DDA accounts, HELOCs, etc.) Projected growth in market demand

Competitive Intensity

Number of competitors Type of competitors Number of branches in the market Branch density (households per branch)




Projected household growth in your markets needs to be reviewed in thecontext of how many households are in each trade area

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ILLUSTRATIVE

Source: SNL Financial

Projected Household Growth, 2009 2014Southwest Denver, CO

High growth, but much lowerpopulation density

Low household growth, butvery densely populated


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Evaluating relative population density is important in assessing the potentialtraffic that could be attracted to your branch

Population Density 2009Northwest Atlanta, GA

Potential gaps in BrandBanks market coverage

Source: SNL Financial 18

ILLUSTRATIVE


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Understanding average income levels is important given the customersegment focus your bank may be pursuing

Median Household Income 2009Northwest Atlanta, GA

Gaps in Brand Bankfootprint relativelylower income areas

Source: SNL Financial 19


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For banks that focus on small business, it is also critical to understand wherebusinesses are concentrated in the market

Number of Businesses by Census Tract 2009Omaha MSA


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Geographic boundaries can have a major impact on your ability to capturenew business and retain customers

Maple / Telegraph Area

Oakland County - Metro Detroit


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Ottumwa, IA

Highly-trafficked TelegraphRd acts as major barrier

Primary trade area forMaple/Telegraph branch does notcover area east of Telegraph Rd.

Des Moines River acts asmajor barrier; customers inSouth Ottumwa typically donot bank in North Ottumwa,

and vice versa


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It is important to assess how many institutions are already in the market, theirrelative strength, and whether you can effectively compete against them

Chelsea, MI Market(Southeast Michigan)


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Saline, MI Market(Southeast Michigan)

Chelsea State Bank 54%deposit share; locally owned;

$221MM assets

Total of 7 competitors, four ofwhich have a relatively equalshare of the market; primarily

non-community banks


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Internal Performance Analysis

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Analysis of your existing network needs to be conducted along severaldimensions in order to develop an in-depth understanding of the value ofeach location

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Sales Performance

Transaction Volumes

FinancialPerformance

Sample Factors to Analyze

Current and historical sales volumes Sales mix (deposits vs. loans; consumer vs. commercial) Average balances of new accounts Customer segment mix; new vs. existing customers Trade area for sales where are sales coming from?

Branch profitability Direct vs. indirect costs Profitability trend Potential impact of re-domiciling accounts on profitability

Transaction mix (i.e., complex vs. routine transactions, on-us vs. non-on-us)

Trade area for transactions where are transacting clientscoming from?

What is value of clients who use the branch?

FacilityCharacteristics

Required capital improvements Facility size appropriateness of branch size given

existing traffic and potential for growth Branch appeal are improvements required to enhance

your positioning in the market?

Leased vs. owned



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It is critical to understand where your existing sales are coming fromrelative to growth in the market

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Broomfield, CO Trade Area(Metro Denver)

ILLUSTRATIVE

Sales trade area for oldbranch location

New branch locationlocated in close proximity to

high growth trade areaSource: SNL Financial


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Determining the trade area for each branch is critical in identifying gapsin the market that your institution is potentially under-penetrating

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ILLUSTRATIVEWest Omaha (NE) Trade Area

Branch trade areatransacting clients

Relatively high-growthtrade area in which thebank has low market

penetrationSource: SNL Financial

Bank A branches


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Banks with larger networks and a mix of branches in older and newercommunities may want to consider a re-domiciling analysis to ensure branchprofitability is being accurately measured

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Objective: Review transaction patterns of existing clients and assign all of a clients accounts to the

branch they use most frequently

Potential Impact of Re-domicilingExample

Branch A

Established in 1904 Urban location in downtown business district Monthly teller transactions: 5,000 Reported deposits: $100MM Profitability: High

Deposits post-re-domiciling: $60MM

Branch B

Established in 2005 Suburban location in high-growth area Monthly teller transactions: 15,000 Reported deposits: $25MM Profitability: Marginal

Deposits post re-domiciling: $50MM


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Branch Network Plan

Case Study

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Case Study Branch Network Optimization

Commercial Federal Bank $13 billion assets 190 branches Major markets: Omaha, Denver, Kansas City, Des Moines Vision statement: Bank of Choice in the Communities We Serve

Omaha Market 25 branches (21 freestanding, 4 in-store) $901MM deposits 8% deposit market share Ranked 4th in the market behind First National Bank of Omaha, U.S. Bank and Wells Fargo


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Commercial Federal Bank (now part of Bank of the West)Omaha, NE

Branch Network as of 2010

Changes post-networkoptimization



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Branch Network Plan Omaha Market

New Branches* 180th/Center 168th/Harrison Bellevue Council Bluffs

Rationale Higher-growth area little coverage from existing locations Higher-growth area little coverage from existing locations Higher-growth area little coverage from existing locations Market gap no branch in the area

Consolidations** 132nd St Hy-Vee OakView Hy-Vee 88th/Center Hy-Vee

Rationale Overlap with existing branch across the street Poorly performing location in a low traffic grocery store Overlap with existing branch located mile away; also a poorly

performing location

*Open 1-2 per year over a 3 year period**Close at lease expiration


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Proposed Consolidation132nd St. Hy-Vee In-Store Branch


132nd StHy-Vee

(in-store)

132nd St /Dodge

(freestanding)

In-store branchtrade area

Freestandingbranch trade area


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Critical Success Factors

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A successful branch network optimization strategy requires analytical rigorand strong organizational commitment

Senior management commitment to taking action No sacred cows

Openness to new ideas On the ground analysis

Getting input from people in the field

Listening to customer feedback Access to analytical tools Geographic information systems Mapping Demographic data Branch financial data

Getting market buy-in to the network plan across lines of business (e.g., Retail,Commercial, etc.)

Building a comprehensive business case methodology quantifying the return on

investment of each proposed action Building a cross-functional team to implement the plan across the bank Measuring performance and holding people accountable for results

Critical Success Factors

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