Preparation and Planning for the Next Wave of Franchise Expansion

By Arp D. Trivedi, DEI Incorporated

The year 2007 proved to be a difficult year for the banking industry. Literally every segment of the market was hurt by the “economic slowdown” and the erratic nature of both the commodities and capital markets. In this context, it is interesting to understand the stock price trends of leading indices, overall market forces, and the windows of opportunity that lie in wait for western independent bankers 2008 and beyond. 

Overall, the western bankers fared well in this recent onslaught. The 66 banks in SNL’s composite index lost just over 20% of their aggregate stock price, but fared better than many of their peers throughout the industry. The following table reveals much more about the performance of the west versus the rest:

The overall SNL Bank index lost nearly 32% of their aggregate stock price in 2007. The micro-caps, those banks with market capitalizations less than $250M, staved off the larger losses as well. But they did so with slimmer interest margins and overall weaker earnings compared to their peers in the western states. Overall ROAA for the western banks was 1.42%, exactly twice the micro-cap banks’ aggregate return of .71%.  Phenomenal! What to do now?

One could imagine that it is time to take a breather. However, with the pending economic uncertainty and the continued price pressures on commodities, now is the time to develop a sound strategy. 

A specific focus should be continued expansion. It is critical to do this at the right pace, in the right markets, and at the right time for a successful market expansion plan. With the recent performance of western banks, they are positioned to extend their high performance franchises into more and more markets. A specific methodology exists to achieve this level of success.

Analysis
Three key components comprise the analysis portion of the franchise expansion plan.  First is the marketplace. The marketplace is the combination of three important areas of data: 

• Demographic

• Competitive

• Customer information

By reviewing data combinations, one can derive overarching strategies, such as: de novo, convenience, hybrid, turnaround, and even hub/spoke. Qualitative factors are also in play, demanding bankers consider the macroeconomic components of the marketplace, like: general economic development, employment, infrastructure, and various incentives, to name a few.

The second component is the service delivery model of the franchise. The market will drive the design of a new or renovated location’s service delivery method. Whether it is a traditional teller line, nouveau teller line, remote teller system, or complete electronic delivery via Check21-enabled ATMs, banks must seek the best method for servicing customers.

Finally, financial impact is paramount. Consolidated balance sheets and income statement analysis, including the potential impact on critical market indicators (EPS, P/E, EPS growth, etc.), is incredibly important. Understanding the impact upon capital, fixed assets, and earnings remain. Determining net present value of proposed projects cannot be neglected either.

Simulation
It is better to measure twice and cut once, the old saying goes. Simulating all of the various combinations of marketplace moves, the operational overhead associated with those moves, and the financial impact is priceless – literally. In the face of spending millions of dollars on land, facilities, and personnel, the simulation of all these items on a pro forma basis is critical. Cars today are made with computers and clay models. So can banking organizations of the future be crafted move by move and market by market well before production accelerates. Western independent banks, poised to grow to higher strata, should do so with proper preparation and planning.

Data as of 03/18/08. Institutions not yet reporting year end results are not included.

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