Bank branch acquisitions gather momentum

As some banks look to unload branches to save money in an era of high real estate costs and festering inflation, others are stepping in to buy them to bolster deposits following a bruising year for funding bases.

The result: U.S. branch deals are mounting early in 2024. Through the week that ended March 24, banks announced nine such transactions, putting the industry on pace to soar past the 13 deals announced in 2023 and the 20 inked the year before that, according to S&P Global Market Intelligence data. At the current rate, branch sales would approach the 44 announced in 2021, the highest level of the past five years.

The number of branches agreed to be sold so far this year — 36 — already tops the 20 sold in all of 2023. By extensions, more deposits are slated to be transferred as part of the deals: $1.59 billion, up from $656 million through last year, according to S&P Global.

Many banks are also selling branches to reduce physical costs and reinvest savings into digital platforms, given the acceleration in online banking in the wake of the pandemic. Bankers say customers increasingly prefer to manage routine transactions remotely, reducing needs for branches. Yet retail locations are often the home base for depositors. As such, banks that are eager to acquire big chunks of deposits at once, rather than compete for customers one at a time, are buying branches as they hit the market.

This approach has grown in prominence after two years of high interest rates — following the Federal's Reserve's campaign against inflation — and related jumps in banks' funding costs. When rates rise, banks pay more for deposits.

The Risk Management Association surveyed community banks early this year and found that, over the prior 12 months, interest rate risk (57%) had the most negative effect on banks' strategic plans. A related risk — liquidity — came in second (32%), RMA analyst Michael Bender wrote in a report.

"The high-for-longer interest rates prompted by pandemic-related inflation continue to dominate concerns," he said.

Industrywide, banks' fourth-quarter cost of funds increased 21 basis points from the prior quarter to 2.48%. That marked a modestly lower pace of increase from earlier in 2023, but it continued an upward trend that began early in 2022, S&P Global data shows.

Piper Sandler surveyed bank executives during the first quarter and found that funding costs remained a top concern. "Importantly, just over half are seeing some easing of pricing pressure," yet another "third of the banks have seen pressure plateau but are still waiting to see signs of relief," said Mark Fitzgibbon, Piper Sandler's head of research. Nearly a fifth said funding costs were still rising.

Fed policymakers left their benchmark rate untouched at their March meeting. But they increased rates multiple times between March 2022 and July 2023, to a range of 5.25% and 5.5%. The Fed forced rates higher to curb inflation that soared above 9% in 2022 and reached the highest level of this century. The inflation rate has since dropped close to 3%, yet it remains above the Fed's target level of 2%.

M&A

Credit union purchases of banks on pace for record after latest deal

March 22, 2024 1:39 PM

A deal case in point: Berkshire Hills Bancorp in March announced a plan to sell 10 upstate New York branches to three different sellers as part of an effort to curb real estate costs and free up money for investments elsewhere. Selling branches, rather than shuttering them, also provides financial benefits beyond the sale proceeds.

"These transactions allow us to exit these branches without incurring severance or real estate costs while reducing expenses and contributing positively to our long-term profitability," David Rosato, chief financial officer of the $12.4 billion-asset Berkshire Hills in Boston, said in the branch deal announcement.

The three buyers of the branches, meanwhile, each got a share of $485.5 million of deposits, as well as $60.5 million of related residential mortgage and consumer loans along with all branch premises and equipment.

The increase in branch sales helps to explain why the pace of branch closures slowed in 2023.

There were about 77,500 bank branches in the U.S. at the end of 2023, according to estimates from S&P Global. A net 1,409 bank branches closed in 2023, compared with 1,854 in 2022. Both years were down notably from the all-time high in 2021 when banks shuttered a net 2,928 branches.