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Too Many Underperforming Branches Are Still Open

June 30, 2016


This article originally appeared in American Banker

Bank executives are doing their best to shut down low-performing branches that fail
to pull their weight. … Or are they?

A new study shows they may not be moving fast enough, something analysts have
been telling bankers for months.

The number of U.S. branches has dropped steadily since 2009, when the total
peaked at 99,540, according to the Federal Deposit Insurance Corp.’s latest
Summary of Deposits report. Banks operated a total of 94,715 branches at June 30
of this year, a 5% decline from 2009.

The closures have come partly as a result of M&A deals, when banks consolidate
branches that overlap with existing networks, and from a broader effort to pare back
excess capacity.

Technology is also driving the trend. In one recent example, the $3.3 billion-asset First Bancorp in Southern Pines, N.C., said in August it would close 10 branches because of “a significant spike in online and mobile banking usage.” Yet another important measurement — the number of underperforming branches — is on the rise, according to a new study by FMSI, a banking-software firm in Alpharetta, Ga (recently acquired by Kronos).

FMSI, a Kronos company, defines a branch as low volume if it processes no more than 3,000 transactions per month. The number of such branches, as a proportion of all branches, rose to 25% this year. That was up from 21.9% in 2011. FMSI obtains the data for its report through its customer contacts and limits the details that it makes available.

The upward spike occurred as the nationwide branch count has shrunk, because “even branches that once had heavy volume are now falling into the low-volume category,” said Meredith Deen, Direct of Product & Services at FMSI.

The situation is costing banks an arm and a leg, at a time when they can ill-afford any expense leakage. Banks should look at reducing the number of workers at a branch, cutting back on operating hours or closing underperforming branches, Deen said.

“Low volume branches can be very costly to operate,” Deen said.

Shutting down a branch is easier said than done, said Mark Oldenberg, the chief financial officer at Citizens Community Bancorp in Eau Claire, Wis. The $570 million-asset company said last month that it will close three branches in Wisconsin and Minnesota. It was hard because “non-quantitative factors” play a role, such as community attachment to a certain branch, he said.

“Nobody likes closing a branch,” Oldenberg said. “Every branch that we looked at closing, we tried to find a way to keep it open. At some point, there was a realization it was going to take more resources than we had to make it successful.”

It is often more difficult for a community bank to close branches, because of the emotional attachment the bank’s employees and directors have to their communities, said Howard Bluver, the chief executive of the $1.8 billion-asset Suffolk Bancorp in Riverhead, N.Y.

“Many of my board members are intimately involved with their communities. It’s where they live, where they work and own a business,” he said.

“But as a board member, when you show them the analytics, if it’s a mature board, they will say that it’s too bad to close the branch, but it’s the right thing to do,” Bluver said. “When you do a thorough profitability analysis of the branch, it sort of jumps off the page, the decision you need to make.”

Suffolk looked at transaction volume and several other factors in determining which of its branches to close, including deposits per branch and geographic proximity to another branch, Bluver said. The most important factor was a specific branch’s level of profitability. Suffolk has closed six branches in the past year, with the goal of saving about $2.4 million annually.

“When I first got here about three years ago, I found Suffolk was like a lot of community banks that are more than 100 years old,” he said. “A relatively small percentage of our branches constituted a relatively larger percentage of our deposits.”

Banks have taken varying approaches in how they tackle inefficient branches. FMSI, for example, sells software to help banks better manage tellers and working hours to save money. Suffolk’s Bluver hired an individual banker, whom he knew from his time at the former Greenpoint Bank in Brooklyn, to examine Suffolk’s branch network and suggest changes.

And then there is the example of really going all-in. The $22 billion-asset Webster Financial in Waterbury, Conn., signed a five-year contract with commercial real estate-services firm JLL to oversee all of its real estate and consult on potential closures.

“The JLL relationship has given us a lot more discipline around … rationalizing our branch network,” Jim Smith, Webster’s chairman and CEO, said during an Apr. 17 conference call. JLL has helped Webster cut costs in downsizing or closing “corporate-type facilities” and retail branches, Smith said. “You’ll see more on the expense-reduction line as we go forward,” Smith said.

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