There are two important trends that together will impact the nature of branch banking over the next decade. First, despite the increasing adoption rate of online banking, many bankers will tell you that the branch is instrumental in their plans for future growth. The language in that sentence is important—it doesn’t say that the branch is key to servicing customers, or maintaining presence. Bankers are saying that the branch network is key to their growth plans.
Second, we are in the midst of another wave of acquisitions. While many of these are FDIC assisted acquisitions, and therefore take place under a tight time frame, the first trend tells us that banks will be wise to make every effort to value the acquisition candidate’s branch network in their decision process. So far this year we have observed deals on both ends of the spectrum—some where the geographic footprint is paramount and others where it appears irrelevant. We discuss assessing the candidate’s branch network in a compressed due diligence process, and provide some keys to success on crafting an expedient, yet insightful analysis.
It is understood that the financial analysis of the acquisition—and the loan portfolio, in particular—is the primary driver in most deals today; however, a strong argument can be made that the quality of branch network, as defined by the placement of branches relative to the opportunity within market, is equally important to the long term success of the acquisition. Given today’s acquisition environment where most deals are completed at a faster pace than during normal economic conditions, it is critical not to overlook the branch network in the process. After all—the branch network you acquire today not only provides you opportunities today with an entirely new set of customers, it can also lay the foundation for future growth and success.
You can take many of the steps necessary to determine if an institution is worthy of consideration in advance. More importantly, planning in advance can allow proactive measures rather than simply reacting to the information on the market. The following recommended analyses will help you understand if the acquisition candidate fits your target market, fits your current footprint, and creates opportunity for growth and costs savings. With those concepts in mind, knowing what to ask of your analysts will become easy.
Is the overall market attractive?
The best place to start is to get a sense of whether the bank is in a desirable market. This may seem a bit obvious, but even for a bank that is in footprint, it is worth understanding whether that is a market where you want to invest. It’s not always the case that you want to continue to invest in a market simply because you are there today.
One way to do this is to maintain a database of descriptive data across many markets. Then, you can use this database to pull the key metrics that are important to you and assess the viability of the market. Typically, the types of things that make a viable market would include:
• A sufficient base of households to support branch deployment
• A measure of competitive saturation, such as households or deposit demand per branch
• A growth metric that provides a sense of direction of the market
• A count of small businesses or daytime worker pop if your strategy requires
• How many branches—or investment—do you need to be competitive in this market
• Market-specific rate environment, particularly if the market is far removed from your current network
• Market costs, e.g, labor costs associated with operating in a new market or real estate costs associated with the branch network
This is work that can be done at any time, not necessarily when you have an acquisition candidate lined up. To judge the market, you could choose the metrics that are important to the success of your bank, weight those variables according to importance, and rank and correlate the metrics. The easiest way to interpret the data is to perform this exercise for existing footprint markets and target markets. This provides a quick and objective way to compare the new market to those that you know well.
Is the network attractive today?
The next major question that the analysis should answer is whether the bank is positioned for success in this market. This matters for both in market and out of footprint acquisitions, but in a different way for each.
For an out of footprint acquisition—the question is whether the candidate’s positioning fits with how your bank succeeds in a market. There are many strategies to deploying a successful branch network. Some banks succeed with critical mass, others with thin footprints, and others yet with a niche offering. The success level of these strategies varies by bank, but generally banks are competent with one strategy in several markets, but are not as competitive with many types of networks. That said; it is important to understand if the acquisition candidate has the type of branch network that your bank is successful operating—that will provide a good sense of how likely it is that you can win in this set of circumstances.
For an in footprint acquisition—the question is how would this network change your position in this market. Would you move from the 2nd tier to a market leader? Does this allow you to capitalize on a more dominant presence?
In either case a review of the S-Curve for the target market can quickly provide you a view of the bank’s competitive positioning. And, it’s fairly easy for an analyst to put this together quickly. The S-Curve, typically depicted at the market or MSA level, describes the relationship between branch network size and the market-share performance of the banks in a market. The results almost always represent economies of scale in branch banking—the larger branch networks are able to generate higher-than-average deposit share—and this relationship is S shaped (see graph below) indicating that the top four or five networks in a market tend to enjoy these benefits before a steep drop off to the smaller networks.
Once you have a sense of the overall market competitive positioning, drilling down to the next level to review the geographic coverage of the network is critical to get a better understand of the markets that you are buying. After all, five percent branch share in one market can mean different things. With a simple map displaying the branch locations—potentially overlaid on a thematic of market attractiveness—you can start to think about key strategic implications with questions such as these:
• Who are we competing against?
• What position do we occupy in the market—is the network thinly spread across the market or concentrated in one part of the market?
• How does the position effect things like marketing spend and management logistics?
• What is required to achieve a critical mass in the market—if that is the goal?
Most important is to balance these questions against the experience of your bank. If you operate thin networks in several markets, then acquiring a thin network could work for you. On the other hand, if you have no experience operating thin networks, then you might only do this acquisition along with others in the market or with a well-defined plan to expand further in the market.
What opportunity does the network hold for the future?
That leads nicely into some of the analysis you can perform to think about optimizing the network post-acquisition. While this is more complex than the previous examples, it does not have to wait until after the acquisition. Much of this is more pressing for in-footprint acquisitions. Generally speaking, an in-footprint acquisition presents more opportunity to reduce overlap within the combined network and realize cost savings . Given the time, it is worth thinking about what the combined network will look like five or ten years out, and what tactics will make that network the most attractive to consumers.
A comprehensive network optimization study is the best way to think about the long term positioning of your branch network. This would include consolidation analysis, market in-fill, relocations, renovations, and denovo expansion. The most pressing of these is likely consolidation analysis to reduce unnecessary overlap and cut expenses after the acquisition. But, that is not the only optimization analysis required. Does the combined network leave any room for additional infill growth in the market? Does the acquisition candidate fill a gap in your existing network that you are already seeking to fill? Much of this is the same type of analysis that banks should use regardless of the acquisition climate.
What you are trying to determine by thinking about these questions is, what is the candidate fit, and how does that fit guide the analysis. Regardless of the specific tactics to consider, the end result should be to produce an optimal distribution network that provides the best opportunity for your organizations future growth.