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Branch Network Optimization

June 21, 2010 10:20 – 11:20

Presented by:
Chris Gill
Director, Banking &
Professional Services Group
SNL Financial
1 SNL Plaza
Charlottesville, VA 22902
P: 434-951-4428

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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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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 significant

U.S. Commercial Banks and Thrifts U.S. Bank Branches

Active Branches Net Change by Year
2004 - 2009 2005 - 2009
120,000 CAGR = 1.9%* 3,000 2,726 2,630
110,000 2,500 2,196
100,000 94,905 97,535 99,491 98,960 1,956
89,983 92,179 2,000
# Branches


# Branches
60,000 500

50,000 0
2004 2005 2006 2007 2008 2009 2005 2006 2007 2008 2009

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

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

Channel Preference for

Opening a New Account
Importance of Branch Convenience
20% 11% 6% • About two-thirds of banking customers live
0% within two miles of their principal branch
Branch Phone Web • Many consumers (43%) and small
businesses (30%) pick their bank primarily
Channel Preference for
Problem Resolution
based on branch location
• Location is one of the most frequently-
51% cited reasons for sticking with a bank
10% 6%
Branch Phone Web IVR

Source: Forrester Research, “Consumer Preference for Banking Channels”

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Branches account for a significant percentage of a bank’s cost base, in an
industry that is expected to yield lower returns over the next several years

Operating Cost Breakdown

Typical Community Bank
Overhead 4%
ATM, Call 5%
Center, Online

15% Branch


Source: Peak Performance Consulting Group

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

Community Banks Offering ATM Transactions

Remote Deposit Capture Deposits as % Total
100% 45%
97% 40%
90% 40%

80% 35%
70% 30%
60% 62%
50% 50% 20%
30% 32% 10%
20% 21%
10% 8%
4% 0%
0% 3% Industry Average Bank of Wells Fargo***
2005 2007 2009 America***

Smaller Banks* Larger Banks** All Banks

*Banks with <$500MM in assets

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

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

Key Take-aways Key Outcome

• Role of the branch and

Corporate Strategy other channels in
achieving your bank’s

• Assessment of market
External Market dynamics
• Understanding of your Branch Network
bank’s competitive Strategy

• Performance analysis
Internal Performance of your branches
• Understanding of the
value branches deliver
to your business

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Analytical Framework –
Corporate Strategy

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Your bank’s corporate strategy should drive the development and
implementation of your branch network strategy
Dimensions to Assess Key Questions to Address
• What is your vision statement and what implications does it
have for your branch network?
• What are your strategic objectives: expansion vs.
Corporate Strategy maintaining the status quo?
• What appetite does your team have for trying new
approaches that may differentiate your bank in the market?

• Is your institution focused on specific segments of the

Target Customer market (e.g., small business, mass market, etc.)?
Segments • What implications does this segment focus have for your
branch strategy?

• Why would a current or prospective client bank with you?

Customer Value
• How critical is convenient branch access to your value
Proposition proposition?

• What is your relative competitive position in your existing

Competitive • Which institutions are better positioned with respect to
Positioning their branch network in your markets?
• How does your share of deposits in each market
compare to your share of branches?

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

Bank A Bank B
Small Business Focus Mass Market Focus

Impact on Branch Strategy Impact on Branch Strategy

• Branches located in or near • Branches located in or near
commercial districts retail districts
• Transactional needs can be • Bigger facilities needed to
handled in facilities with less accommodate teller services
square footage and platform sales
• Branch hours need to reflect • Access to specialists in
typical operations of business mortgages and investments
clients • Staff knowledgeable in handling
• Branch staff well-versed in problems
commercial/small business • Saturday hours
products, including cash • 24 hour drive-up ATM
management services
• Night depository access or
merchant self-service center

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Your institution’s relative competitive position should also be considered
when developing your branch network plans for each market

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

Market: Richmond, VA Market: Virginia Beach, VA

Total Total Deposit Total Deposit
Active Deposits Market Active Total Market
Branches 2009 Share 2009 Branches Deposits Share 2009
Institution Company Name 2009 ($000) (%) Institution Company Name 2009 2009 ($000) (%)
Bank of America NA 31 7,078,857 27.20 Wells Fargo Bank NA 54 3,911,272 19.63
Wells Fargo Bank NA 65 6,471,185 24.86 SunTrust Bank 43 3,007,816 15.10
SunTrust Bank 47 2,972,759 11.42 TowneBank 19 2,605,250 13.08
Branch Banking & Trust Co. 48 2,467,897 9.48 Branch Banking & Trust Co. 55 2,562,947 12.86
Union First Market Bank 46 1,681,991 6.46 Bank of America NA 46 2,494,579 12.52
Franklin Federal Savings Bank 8 660,243 2.54 Bank of the Commonwealth 19 875,926 4.40
Village Bank 15 484,159 1.86 Bank of Hampton Roads 29 802,925 4.03
First Capital Bank 7 398,463 1.53 Old Point National Bank of Phoebus 23 627,654 3.15
Citizens & Farmers Bank 11 396,802 1.52 Monarch Bank 10 503,968 2.53
Essex Bank 8 387,465 1.49 RBC Bank (USA) 12 403,626 2.03
Other Market Participants 100 3,027,531 11.63 Farmers Bank Windsor VA 5 338,710 1.70
(28) Chesapeake Bank 7 243,182 1.22
Market Total 386 26,027,352 100.00 Heritage 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

Source: SNL Financial

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Your institution’s ability to capture and grow market share is typically a
function of your share of branches in the market

The S-Curve Effect

Typical Branch Share / Market Share Relationship

Diminishing returns from

adding more branches given
existing scale in the market

Low branch share typically

results in achieving less than
fair share of market

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Analytical Framework –
External Market Assessment

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Assessing your markets across multiple dimensions is critical to making the
right decisions about managing your network
Dimensions to Assess Sample Factors to Analyze
• Total population and households
• Household growth – historical and projected
• Population density
Demographics • Household income
• Customer segment mix; consumer vs. business mix

• Current market demand for various financial products

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

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

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

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

Projected Household Growth, 2009 – 2014

Southwest Denver, CO

Low household growth, but

very densely populated

High growth, but much lower

population density
Source: SNL Financial
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Evaluating relative population density is important in assessing the potential
traffic that could be attracted to your branch
Population Density – 2009
Northwest Atlanta, GA

Potential gaps in Brand

Bank’s market coverage

Source: SNL Financial

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Understanding average income levels is important given the customer
segment focus your bank may be pursuing
Median Household Income – 2009
Northwest Atlanta, GA

Gaps in Brand Bank

footprint – relatively
lower income areas

Source: SNL Financial

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

Number of Businesses by Census Tract – 2009

Omaha MSA

Source: SNL Financial

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

Maple / Telegraph Area Ottumwa, IA

Oakland County - Metro Detroit

Primary trade area for

Maple/Telegraph branch does not Des Moines River acts as
Highly-trafficked Telegraph
cover area east of Telegraph Rd. Rd acts as major barrier major barrier; customers in
South Ottumwa typically do
not bank in North Ottumwa,
and vice versa
Source: SNL Financial

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

Chelsea, MI Market Saline, MI Market

(Southeast Michigan) (Southeast Michigan)

Chelsea State Bank – 54%

deposit share; locally owned; Total of 7 competitors, four of
$221MM assets which have a relatively equal
share of the market; primarily
non-community banks

Source: SNL Financial

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Analytical Framework –
Internal Performance Analysis

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Analysis of your existing network needs to be conducted along several
dimensions in order to develop an in-depth understanding of the value of
each location
Dimensions to Assess Sample Factors to Analyze
• Current and historical sales volumes
• Sales mix (deposits vs. loans; consumer vs. commercial)
Sales Performance • Average balances of new accounts
• Customer segment mix; new vs. existing customers
• Trade area for sales – where are sales coming from?

• Transaction mix (i.e., complex vs. routine transactions, on-

us vs. non-on-us)
Transaction Volumes • Trade area for transactions – where are transacting clients
coming from?
• What is value of clients who use the branch?

• Required capital improvements

• Facility size – appropriateness of branch size given
Facility existing traffic and potential for growth
Characteristics • Branch appeal – are improvements required to enhance
your positioning in the market?
• Leased vs. owned

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

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It is critical to understand where your existing sales are coming from
relative to growth in the market
Broomfield, CO Trade Area
(Metro Denver)

Sales trade area for old New branch location

branch location located in close proximity to
high growth trade area
Source: SNL Financial

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Determining the trade area for each branch is critical in identifying gaps
in the market that your institution is potentially under-penetrating
West Omaha (NE) Trade Area

Branch trade area –

transacting clients

Bank A branches

Relatively high-growth
trade area in which the
bank has low market
Source: SNL Financial

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Banks with larger networks and a mix of branches in older and newer
communities may want to consider a ‘re-domiciling’ analysis to ensure branch
profitability is being accurately measured

Objective: Review transaction patterns of existing clients and assign all of a client’s accounts to the
branch they use most frequently

Potential Impact of Re-domiciling


Branch A Branch B

• Established in 1904 • Established in 2005

• Urban location in downtown business district • Suburban location in high-growth area
• Monthly teller transactions: 5,000 • Monthly teller transactions: 15,000
• Reported deposits: $100MM • Reported deposits: $25MM
• Profitability: High • Profitability: Marginal

• Deposits post-re-domiciling: $60MM • 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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Case Study – Branch Network Optimization

Commercial Federal Bank (now part of Bank of the West)

Omaha, NE
Branch Network as of 2010

Changes post-

Source: SNL Financial

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Case Study – Branch Network Optimization

Branch Network Plan – Omaha Market

New Branches* Rationale

•180th/Center • Higher-growth area – little coverage from existing locations
• 168th/Harrison • Higher-growth area – little coverage from existing locations
• Bellevue • Higher-growth area – little coverage from existing locations
• Council Bluffs • Market gap – no branch in the area

Consolidations** Rationale
•132nd St Hy-Vee • Overlap with existing branch across the street
• OakView Hy-Vee • Poorly performing location in a low traffic grocery store
• 88th/Center Hy-Vee • Overlap with existing branch located ¼ 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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Case Study – Branch Network Optimization

Proposed Consolidation
St. Hy-Vee In-Store Branch

branch trade area

In-store branch
132nd St / trade area
(freestanding) 132nd St

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Critical Success Factors

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A successful branch network optimization strategy requires analytical rigor
and strong organizational commitment

Critical Success Factors

• 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

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