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For many years the deposit institutions were holding back from building branches.

from "Competition and Costs Aside, Further Branching in the Works", by Jim Cole, American Banker 1/10/06

Sung Won Sohn, the chief executive of Hanmi Financial Corp. in Los Angeles, says branch expansion will be more expensive this year than last year, but the added costs will not deter him, or his competitors, from building branches.

Even though higher interest rates and competition are making branches more costly, he expects 20 branches to open this year in southern California's crowded ethnic banking market -- an 18% increase from last year.

Like Mr. Sohn, other bankers did not let the competition for prime locations deter them from entering hot markets and building branches last year, the 10th straight year of growth in the number of new branches in the United States.

Texas had the highest branch growth rate (7% on June 30 from a year earlier), according to the Federal Deposit Insurance Corp.'s annual count of insured institutions, followed closely by Arizona, Nevada, and Illinois (6% each).

The number of branches rose 4% in Florida, 3% in California and Colorado, and just over 2% in New York.

"There's a finite market to be divvied up," Mr. Sohn said. However, the $3.4 billion-asset Hanmi plans to open two branches this year in southern California.

"You've got to have brick and mortar and be more convenient and more visible. You need warm bodies if you want to cross-sell," he said in an interview last week.

Banking executives and analysts agree that competition and higher interest rates and deposit costs will make branch-building a bit more costly this year than it was last year, when the number of branches nationwide grew 2.5%. Still, observers tend to agree that there is room for more branches, particularly in fast-growing areas of the South and Southwest.

This year the $12.7-billion asset TCF Financial Corp. of Wayzata, Minn., plans to open about 28 branches -- the same number it did last year -- including one or two in a new market, Phoenix.

TCF is now expanding in Arizona, as it did in Colorado several years ago, to take advantage of the strong population and housing growth there, Jason Korstange, a spokesman for the company, said in an interview Friday.

As of June 30, the number of bank and savings institution branches in and around Phoenix had grown 7% from a year earlier, to 752, according to the FDIC. The number of branches grew 11% in the year before that and 6% between June 2002 and June 2003.

"It looks very similar to us as the Denver market did about five or six years ago when we went in there -- it's growing, but it's not overbanked. And it's more than just retirees now. There's a full-service industry that has developed in Phoenix, and there are a lot of jobs there," Mr. Korstange said.

In addition to Phoenix, markets where the branching boom will likely continue this year include New York City, Florida, and Chicago.

Commerce Bancorp Inc. of Cherry Hill, N.J., one of the more aggressive branch-builders in the business, outlined its plans for this year in a Securities and Exchange Commission filing Dec. 9. The $38 billion-asset Commerce plans to build 65 branches -- 17 more than it did last year. Thirty of the new branches will be in the New York area, five in Philadelphia, 15 in Washington, and 15 in southeast Florida.

Wachovia Corp. opened about 100 branches last year, and G. Kennedy Thompson, the $532 billion-asset Charlotte company's chairman and CEO, said last month that it expects to do the same this year.

Jeff K. Davis, an analyst at First Horizon National Corp.'s FTN Midwest Research Securities Corp., said in an interview last month that branch-building "may slow down a little bit, because deposit growth is slowing down."

But, he was quick to add, "It is a function of economic activity in any one area. If you have expected high growth in certain counties of north Georgia, you're going to see building activity there, and if there's nothing going on in northeast Ohio, you'll see less activity there."

However, Gary Townsend of Friedman, Billings, Ramsey & Co. Inc. said in an interview Monday that the higher costs will have only a minor effect on branch growth this year.

"Some branches in some locations may be viewed as less desirable at these interest rate levels than before, but I think it's at the margin, and I don't think we will see an enormous impact" on the number of branches built, he said.

In the 12-month period that ended June 30, the number of branches in the United States and Puerto Rico rose 2.5%, to 91,970, according to the FDIC. The number rose 2% in the year before that and about 1.5% the year before that.

Michael Moebs, the CEO of the Lake Bluff, Ill., research and consulting firm Moebs Services Inc., said in an interview last week that for many years branches have needed roughly $40 million of annual income to be viable. According to the current U.S. population and income growth, there is still ample room for more branches, he said.

"For many years the deposit institutions were holding back from building branches. Do we have enough branches for the United States? I would tell you right now, we do not," Mr. Moebs said.

Mr. Thompson said that by June, Wachovia, which had no branches in Texas two years ago, will have 150 in Houston, Dallas, San Antonio, and Austin.

It gained 19 branches in southern California through an acquisition last year, and Mr. Thompson has promised further growth in that market.

"We will start looking at southern California, just like we have looked at Texas, and just like we look at our own footprint," he said. "And I think over time, it's safe to assume that you will see us doing some de novo activity in southern California," but good locations there are tough to find.

Still, Scott Siefers, an analyst at Sandler O'Neill & Partners LP, said in an interview last month, "We're moving into a tougher time" for branch-building. "The extraordinary deposit-growth environment has leveled out."

At an investor conference last month, Washington Mutual Inc. chairman and CEO Kerry Killinger said, "The competitive environment is much greater today than it was five or six years ago," when Wamu began its aggressive branch-building campaign.

"Competition and overcapacity that may be building in certain markets" prompted the $333.6 billion-asset Seattle thrift company, which has built 250 branches a year for several years, to reduce its 2006 target to 150 to 200, Mr. Killinger said.

New branches will be built "in existing markets, with an emphasis on the southern high-growth parts of the country," he said. "Southern California, Arizona, Nevada, Texas, Florida, Georgia will get the bulk of the new store openings."

Some say that a slowdown in branch-building by some companies is being accompanied by a shift in spending toward refurbishing old branches and making them more productive.

The $1.3 trillion-asset Bank of America Corp. expects to open about 100 branches a year for the next few years. But CEO Kenneth D. Lewis talked of "saturation" at a conference last month. "A lot more dollars are going into refurbishment," he said. "Any good retailer will tell you that success and survival depends much more on refurbishment of your stores than it does new stores."

That's been the story for some time at the $10.1 billion-asset Bank of Hawaii Corp., since there are few expansion opportunities on the Hawaiian islands.

"We've been focused on renovating older branches. We've just been gradually going through our branch network and trying to bring that up to date," chairman and CEO Allan Landon said in an interview last month.

Jerry Silva, the research director for retail banking at MasterCard International's TowerGroup Inc., said in an interview last week that the industry is emerging from a "knee-jerk" branch-building frenzy and starting to look for ways to "work smarter, rather than pouring more money into what we've already got."

He expects companies to spend more on training tellers, aligning their compensation to increasing sales, installing lead-management technology to help tellers connect customers with salespeople, and using customer queuing systems to monitor and reduce wait time in branches.

"Those are the kinds of innovations you'll see in 2006" to increase sales per branch, Mr. Silva said. Companies will seek answers to the question of "What can we do to make the visit to the branch more pleasurable for the customer and more successful from a business perspective for us?" (c) 2006 American Banker and SourceMedia, Inc. All rights reserved.

Written By: vhorizon
Date Posted: 1/11/2006
Number of Views: 2962