Magazine article American Banker

Look at the Success Stories before You Dismiss the Branching Strategy

Magazine article American Banker

Look at the Success Stories before You Dismiss the Branching Strategy

Article excerpt

Branch-building is in, and the consensus is that it's a bad idea.

To the extent that our business has been known for its colossal lemming-like mistakes, the naysayers are right. The last in, last out principle has never worked: Early entrants reap all the profit, and then the margins shrink when others follow. Some banks are left holding the bag -- and the losses. Examples abound, ranging from highly leveraged transactions to the Japanese equity warrant market.

However, the criticism of this trend is all too sweeping.

The early arrivals have indeed created wealth and shareholder value, and there is no reason this will change in the near future -- at least, until the market gets oversaturated with new branches and a correction takes place.

Consider MidFirst, an $8 billion-asset Oklahoma bank. Half of its branches have been de novos and almost all have exceeded expectations. Some broke even in 18 months or less, and core deposit growth has been impressive.

Consider Sterling Bank of Houston, which has been building branches for years. Its growth has been amazing -- including a 34% increase in deposits in non-interest-bearing accounts.

And consider Capitol Bancorp, a $2 billion-asset collection of new banks. These start-ups typically have one or two branches and are highly profitable in markets where there is no geographic leverage and where others have failed.

These three banks may not have gotten the notice that others with high-profile branching strategies have, but that can't be bothering their shareholders much. The banks broke even relatively fast and have had strong and steady growth; they have demonstrated that de novo branching can be valid for nonacquisitive banks.

It's notable that these banks employed dramatically different strategies.

One involved the community in the investment and business development process well before the branch opened. …

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