BID® Daily Newsletter
Feb 9, 2007

BID® Daily Newsletter

Feb 9, 2007

THE RISE OF THE BUSINESS CENTER BRANCH


While branch expansion plans remain hot, the pendulum is starting to swing back. Many banks are now questioning the need for expensive real estate and many new branches remain unprofitable. The pressure for cheaper deposits and increased loan growth, however, continues to force many CEOs to take a chance on regional expansion by way of expensive brick and mortar. One alternative that we will be discussing at our upcoming Executive Management Conference in March is the rise of the "Business Center Branch." Whereas a standard branch now costs approximately $1.8mm to open, the smaller and more nimble business center branch costs in the neighborhood of $325k. Often located in retail centers, office parks and on the upper floors of popular office buildings, the Business Center Branch is designed to be a full service branch, but in smaller form. Instead of a series of teller stations, the business branch has 1 or 2 desks for accounts and teller activity and another 2 desks for loans. The look is smaller and less customized, but still high-end. The key to this strategy being used by banks is to hire away critical personnel from a competitor, give them a piece of the profitability of the location, make these smaller branches convenient to their home and use both to attract small and mid-sized businesses. Locations are usually directly in the growth path of a metro market, or used as in-fill locations to increase penetration. One key element to this strategy is to increase marketing dollar expenses to provide larger than normal signage calling attention to the location. While a standard branch would need about $35mm of deposits to breakeven, these Business Center Branches need only $7mm. As we track the Business Center Branches that were opened in the past 2 to 3 years, we see an average growth rate of 35%, average deposit balances of $12mm and profitability of more than 27%, making them one of the more cost effective distribution points within a bank. While opening up branches that look similar to real estate offices may not be for everyone, certain geographical locations and banks with established brands and flexible management styles may find the Business Center Branch just the channel needed to keep the efficiency rate low and earnings on an upward swing.
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