Indiana bank joins list of those shedding branches

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Joining a groundswell of banks pruning their branch networks, Merchants Bancorp in Carmel, Indiana, plans to sell four branches as it sharpens its focus on mortgage lending.

The $13.1 billion-asset Merchants, the parent of Merchants Bank of Indiana and Farmers-Merchants Bank of Illinois, said in a press release Friday that it lined up a pair of deals to sell the branches in Illinois.

Bank of Pontiac in Pontiac, Michigan, agreed to buy Merchants branches in Paxton, Melvin and Piper City. CBI Bank & Trust in Muscatine, Iowa, inked a deal to acquire a branch in Joy.

The $962 million-asset Bank of Pontiac would acquire $157 million of deposits and $22 million of loans, while the $1.2 billion-asset CBI Bank & Trust would acquire $62 million of deposits and $27 million of loans.

Terms were not disclosed. The transactions are expected to close in the first quarter.

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The deals would allow "Merchants to focus on its core business of single and multifamily mortgage lending," Michael Petrie, chairman of Merchants, said in the statement. "The agreement strategically aligns Farmers-Merchants with institutions that share a similar business model and will provide Farmers-Merchants the ability to offer additional products to its customers.

"Both Bank of Pontiac and CBI Bank & Trust, like Farmers-Merchants, are deeply rooted in similar communities and share a strong commitment to serving their local markets," Petrie said. "Farmers-Merchants and its employees have played a valuable role in Merchants' success, and they will continue to thrive with their new partners."

Getting ready for mortgage rates to fall – but will they?

Selling these branches could set up Merchants to focus on its mortgage business, but it could be some time before housing loans take off again, given high interest rates. Sam Khater, Freddie Mac's chief economist, said mortgage rates remain elevated — about three times the level of two years ago — following a series of Federal Reserve rate hikes since early 2022. The 30-year fixed-rate mortgage averaged 7.12% last week, he said, "straining potential homebuyers."

This has kept many would-be buyers on the sidelines, slowing home sales. A limited supply of housing in many markets also has curbed activity, Khater said. However, he said, current conditions are creating pent-up demand that could drive robust mortgage volumes once interest rates start to decline and more new homes get built. Given that, banks such as Merchants that specialize in home lending have reason to gear up for busier periods ahead.

Branch networks continue to shrink

Broadly, banks have been downsizing branch networks for years, both to reduce costs and to focus more on digital banking. Americans increasingly managed more of their banking online over the past decade. The trend accelerated amid the pandemic.

Taking into account openings and closings, U.S. banks shuttered a net 2,927 branches in 2021, according to a tally by S&P Global Market Intelligence. That lowered the U.S. branch count to about 80,950. It also set a record for net closings — and marked an increase of 38% from the rate in 2020, the previous record year, the firm's data shows. The branch total fell further last year to about 79,000.

The trend was hastened by the social distancing measures enacted to combat coronavirus outbreaks. The temporary changes brought branch traffic to a standstill and drove increased adoption of digital products and services, S&P noted.