The current squeeze on profitability and spreading credit issues have forced many institutions to postpone their market expansion plans and focus their attention on controlling expenses and managing credit risk, rather than new growth. While this change in priorities may be necessary for banks that are facing serious asset quality issues and deterioration in their capital positions, for many community banks the current economic environment opens new branching opportunities.
Changing Competitive Landscape and New Market Entry Opportunities
There is a limit on how many branches a single market can profitably support. Over the past several years, on average, six new branches were opened each day. The aggressive branch expansion in many communities has translated into intense competition and overbanked markets with limited revenue potential per branch. As some financial institutions are now forced to reassess the effectiveness and efficiency of the existing branch networks, we are beginning to see companies pulling back or getting out of the market. The challenging economic environment is wearing some banks down, making them less competitive and willing to consider divesting current branches or future branch land holdings. This may create new growth opportunities in markets that might have previously been overbanked or where branch sites were not available.
Fear Factor and New Value of Bank Reputation
Reports about some institutions’ credit troubles, branch closures, and bank sale speculations make many customers concerned and willing to consider other alternatives. People are becoming more diligent about looking for financial institutions they can trust and count on in the future. The
markets where the major competitors are vulnerable to the “fear factor” may offer new opportunities for other institutions that can position themselves as credible and stable banking alternatives, and gain customers at the expense of the weaker competitors.
New Loan Growth Potential
Large mortgage bankers exiting the market leave consumers with fewer loan sources. At the same time, many consumers are facing rate resets on their mortgage loans and are looking to refinance. Community banks that have the credibility and the ability to leverage their local market knowledge are in a good position to generate additional loan growth without an increased credit risk.
Lower Land and Building Costs
As the slower economy has stalled land sales and new construction, land prices and building costs are becoming more favorable relative to recent price levels. This makes many attractive branch locations less expensive and more feasible. The lower initial investment translates into a shorter time period necessary for break-even, and thus lower risk associated with expansion.
In Conclusion
The current economic environment changes the competitive landscape and offers opportunities to gain new markets for those banks that are prepared to respond to the specific market needs better than their competitors. If you are interested in discussing this article or evaluating your bank’s potential expansion opportunities, please give me a call at 1.800.525.9775 or
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