Chapel Hill, NC/December 12, 2008:  Under-performing branches become, at some point, candidates for closure, consolidation or sale.  "But there is a fourth alternative," says Tom McGrath, Banking Business Consulting Manager for FIS Consulting. "We call this the 'Branch Swap' alternative."

McGrath was joined in his presentation, hosted by OnsiteConference, Inc. on December 3, 2009, by Scott Morgano, Practice Manager for FIS.

Morgano provided an overview of industry trends impacting the bank branch network, while McGrath provided an example of the analysis behind selecting candidate offices for potential trade to another banking service provider.

"According to the FDIC, the number of branch offices operated by FDIC-insured financial institutions continues to grow each year. In fact, in 2009 there was a net growth of 358 offices despite industry consolidation," observed Morgano.   The reason behind the growth in offices is that there remain opportunities to follow population growth.

"This growth is occurring despite a steady decline in the number of households served by the average branch," noted Morgano.   He cited FDIC/U.S. Census Bureau data indicating a nearly 8% decline in average number of households served by a branch in just the last six years, to 1,220 households per branch.

"On top of the decline in households served, there is also a clear trend, as noted by the TowerGroup, that on-line and call-center transaction volume will continue to grow significantly," stated Morgano.  "The forecast is flat for branch transaction volume," adding, "By 2012, TowerGroup is predicting that 81% of transactions will be conducted electronically."

Morgano also cited statistics showing that the percentage of accounts opened through the branch network is also on decline.  "In 2008, 6% of accounts opened were done so on-line, with another 11% opened through the call center.  By 2012, just 67% of accounts opened will come through the branch, with 17% opened on-line and another 16% through the call center," said Morgano.

"Small branches just cost more to run relative to their funding contribution," stated Morgano.  Citing data developed by FIS, Morgano estimated that the average direct operating expense as a percentage of deposit balances was 6.9% for offices with under $5 million in deposits, while those with $20 million or more carried less than a 1% direct operating expense ratio.

"Some argue that the relationship developed and maintained at the branch level is critical to profitability. But others are questioning the value of the branch network," commented Morgano.  He added, “Either way, now is the time that all banks need to consider how to improve the profitability of the delivery network."

McGrath agreed that “business as usual” made less and less sense.  He also observed that, "There is an extreme reluctance to address the issue of declining activity and the value contribution of branches.  "Part of the reluctance is that most branches are still profitable on a minimal marginal contribution basis. There are also CRA concerns and fear of negative public reaction when you close an office," he noted.

"Taking the analytical approach is where you need to begin when it comes to branch evaluation,” recommended McGrath. "You have to know in any geographic region the household demographic and product propensity demand projections to understand market potential."  He added,  "Start with evaluating whether the branch holds its fair share of the market. That is, if you have, say 10% of the branches in a market, you should hold 10% of the market's available deposits."

"Household growth is the best indicator of the potential attractiveness of a market," stated McGrath.  "And we all want to operate in attractive markets with higher fair shares," he continued.  "You need to consider investing in growth markets where your fair share is not quite what you want."

"If you have a significantly negative fair share, there may be very little that can be done to improve that market's profit contribution and funding potential.  So, the question becomes what to do with those branches that aren't contributing their fair share and are in declining markets," said McGrath.

The primary benefits of a branch swap are that such consolidation improves efficiency, focusing scarce resources on the development of priority markets, while helping to maintain low cost of funds and liquidity.

Swapping branch offices overcomes most of the barriers faced with regards to closing an office.  "Swaps get rid of objections such as loss of funding and servicing issues," offered McGrath.  "The trick with a swap is to identify the branches you don’t want and swap them to a bank that has no reason not to grow in the market.  A good broker can help with that process," McGrath added.

McGrath commented that, "Since the small branch is difficult to support, the future for that office may be uncertain.   Rather than ask the consumer to go out of their way to reach your other office, the swap gives them a chance to be part of something larger and more certain."

For more information about branch swaps and how to identify prospective swap candidates, the presenters may be reached directly at:

Tom.McGrath@metavante.com or 734.368.8529
Scott.Morgano@metavante.com or 414.357.3671

FIS Consulting and Professional Services is a merger of Fidelity National Information Services and Metavante Technologies, Inc. Visit FISglobal.com for more information.