Branch Sales Start to Gain Favor Among Small Banks

Banking consultants have long advocated closing branches to cut costs, and more banks are buying into that philosophy.

That's just fine with Bristol County Savings Bank, which has agreed to buy four Admirals Bank branches in southeastern Massachusetts and $42.7 million of deposits housed at the branches.

The $1.4 billion-asset mutual thrift is taking advantage of a wave of branch sales or shutdowns. The owners of these branches have tended to be big banks such as Bank of America (BAC) and UnionBanCal, but in this deal the seller, with assets of $628 million, is smaller than the buyer.

Buying the branches would allow Bristol County Savings to expand beyond its home turf in Taunton, Mass., says Pat Murray, its president and chief executive. "We maxed out our market share" in Taunton, he says. "This fell in our laps."

Two of Admirals' branches are in New Bedford; the others are in Fall River and Raynham. Bristol County did not disclose how much it would pay for them.

Since 2007, Bristol County has opened two branches in southeast Massachusetts. Buying branches in that area should create more opportunities to originate commercial real estate loans and residential mortgages, Murray says. "As we look to expand as a mutual, this fits into what we have wanted to do," he says.

A number of larger banks are shedding small branches deemed too expensive to operate. Bank of America is selling dozens of branches to community banks, including Arvest Bank in Fayetteville, Ark.

Other companies, such as the $93 billion-asset UnionBanCal, are closing inefficient branches. UnionBanCal, a unit of Bank of Tokyo-Mitsubishi UFJ, is closing 15 branches in central and Southern California.

A decision to sell branches is consistent with Admirals' hub-and-spoke model, which emphasizes affluent clients and has loan officers work a large percentage of their time off-site, says Fergus Gordon, a partner at the consulting firm A.T. Kearney.

The loan officers "spend most of their time on the road," Gordon says. Those lenders are "better able to be where their customers are while freeing up the fixed costs associated with branches."

Such a business model is more efficient than having full-service branches staffed with a couple of on-site lenders, says Dimitri Nionakis, general counsel at Admirals, of Boston.

For many banks it's difficult to justify keeping smaller branches open, says Jeff Marsico, executive vice president at consulting firm Kafafian Group. The average U.S. bank branch generates annual revenue roughly equal to 2% of its deposits, and the average annual cost to operate a branch is $500,000 to $600,000.

To put it into perspective, the annual expenses associated with running a branch with $10 billion in deposits could be triple the amount of revenue that the branch generates. "You can see how it's easy … to lose money at these branches," Marsico says.

Representatives at Admirals and Bristol County did not provide data on the branches' revenue or profitability.

Many banks have decided that it is better to cut bait with money-losing branches than try to restore their viability, says Jamie Eads, an analyst at Bancography, a Birmingham, Ala., bank consultant. "It's what banks are doing all over the country — decreasing the cost of brick-and-mortar facilities to be as efficient as possible," she says.

Formerly Domestic Bank, Admirals has been adjusting its branch strategy since it sold itself in 2010 to Nicholas Lazares, who became the thrift's chairman and chief executive, and an investor group. One of the group's first moves involved closing six in-store branches at Walmart stores.

Admirals bought three of the four branches it is selling to Bristol County from Investors Bancorp (ISBC) in May 2010. A year later the thrift moved its headquarters to Boston from Cranston, R.I. Admirals plans to open a branch in Providence, R.I., where it has some of its back-office operations.