Opportunities for Branch Expansion

CU360
May 6, 2008 | COMMENTS

Two weeks ago, CU360 reported how branch expansion slows amid the current economic troubles. Indeed, many institutions plan to delay branch-expansion programs. Results of interviews published by the planning firm Bancography confirm that reductions of 30% to 50% in planned branch openings are common throughout the banking industry.

While such reductions might be necessary for institutions that have suffered severe erosions in their capital positions, the current economic slowdown presents some branching opportunities for many institutions. Reasons to consider branch-site acquisition include:

Land purchases don't affect an institution's asset base or earnings. The transaction to purchase property is a simple asset-to-asset shift on the balance sheet—fromcash to fixed assets. Though there's an opportunity cost of the capital tied up in the land, the actual purchase of a non-depreciating asset has no impact on current earnings or total assets. Planned land purchases should be deferred only if an institution has a severe capital-adequacy problem.

Slowing real estate activity has greatly reduced land costs, even for prime parcels. With the slowing economy scaring institutions and retailers away from immediate purchases, and some developers caught in illiquid positions, the price of some properties in some major metropolitan areas has dropped precipitously. This creates an opportunity to offer low bids to landowners.

Slowdowns in housing and construction have idled many contractors, causing building costs to moderate. Just as the slowing economy has stalled land sales, it has also stalled new construction. The building industry is susceptible to the laws of supply and demand, and idled contractors will bid aggressively.

For projects started now, the economy could be in recovery by the time the new branch is ready. Lead times between land contracts and branch openings often exceed one year. In many municipalities, the zoning, permitting, and other pre-construction processes are so complex that they add another six months. If the process from letter of intent to grand opening takes 12 to18 months, then the economy could be well on its way to rebounding by the time today's land purchases open as branches.

Just because you buy doesn't mean you have to build. Even if your institution's current earnings level prohibits it from taking on the non-interest expense burden of a new branch, it's still wise to purchase prime properties while prices remain favorable. Your institution can then hold the property in ‘land bank' status until income rebounds sufficiently to allow the temporary earnings dilution a new branch will bring.

The most distressed competitors are seeking to dispose of unbuilt sites or underperforming branches. Be sure to have your entire senior management group networking in the community to find out if any competitors are considering divesting current branches or future land bank holdings. If a local competitor is known to be facing financial difficulty, consider a direct CEO-to-CEO inquiry as to the possibility of branch or land sales. Such a transaction could benefit both institutions.

As competitors defer expansion plans, any branches your institution can add will create a distinct competitive advantage and leave it better positioned than your rivals when the economy recovers.

CU360 contains a tool called Pointrac to help credit unions that subscribe at the Expanded or Complete level find and evaluate potential branch locations.