Big banks' closed branches are community bankers' big opportunities

Mark Kauzlarich/Bloomberg

Everything was going great at the new bank branch's grand opening until an important stockholder asked the CEO about a competitor's closed branch at the opposite corner of the same intersection. "Since you spent over $5 million on this new branch, how much are they asking for that similarly sized closed branch?"

When the CEO answered, "I don't know, we never looked into it," the shareholder politely smiled, left the event and later sold his stock.

Not only did the CEO's failure to investigate and ultimately purchase the closed branch cost the bank a few million dollars and tons of time, but that equally attractive corner branch was scooped up by a much smarter bank that became its major competitor.

Lesson learned: One bank's closed branch can be another bank's treasure.

But this is not always the case, because some branches should never have been opened at all. These problem branches may have been built on property owned or leased by a director or a friend, where they made good financial sense for them but not the bank.

This is one reason why the banking landscape is littered with closed branches. Freestanding bank branches, like bowling alleys, have a limited number of alternative uses. You can always tell when a Starbucks or other business is located in a former bank branch.

Banks are closing a record number of branches, not only because of M&A deals but also for financial reasons, such as generating cash to offset losses from the sale of underwater securities. 

The total number of bank offices approached 100,000 in 2009 but declined to 77,770 as of midyear 2023, a nearly 25% reduction in just 14 years.

Banks open branches to generate new deposits and other business, but their closing can be justified with the increased use of digital banking.

The smartest bankers understand that while customers no longer visit a branch weekly or even monthly, they always want the option of a local office with a live person. Who wants to wait on the phone to discuss an urgent banking matter with someone from another country?

Starting with the ATM and other technologies, it was clear that even if we had a "cashless" society, it would never mean a "branchless" one.

Some bankers believe this more than others: JPMorgan Chase is the leading "net opener" of branches, while Wells Fargo is the leading "net closer." I have accounts at both banks, and my local branches have many people. The difference is that at JPMorgan Chase they are tellers and service personnel and at Wells Fargo they are customers waiting in line.

While every bank wants the "100% location" for its next office, "placement" is only one of the six p's or determinants of a successful branch. A good branch must have customer-friendly personnel and policies, including weekend and extended hours. It must also offer the right products for its target market segment at the right price and be effectively promoting those products.

Branch deals

Old Second to acquire five Chicago-area branches from First Merchants

The $23 million cash transaction boosts Old Second's presence in its home Windy City market, while marking Muncie, Indiana-based First Merchants' exit from Illinois.

By John Reosti

August 27

Opening a new branch, whether leased or owned, can cost several million dollars. A great alternative for many community banks is acquiring a closed branch. But only if the answers to ten feasibility questions are consistent with these six "marketing mix" factors.

First, and most importantly, is it a good location? This is the most important yet least understood of the six p's. A good location has three components: It must be at the "right" site (e.g., corner) in the "right" immediate area of shopping, commercial, employment or other activity, and in the "right" geographic submarket or community.

Second, what is its deposit history? The historic deposit break-even level has been around $25 million, but the most preferred closed branches had at least $50 million, with some over $100 million. Public FDIC deposit data, however, does not distinguish between low- and high-cost deposits.

Third, what is the proposed branch deposit premium? The recommended premium is zero. This is because customers are loyal to a location, not a bank, since they change names more than politicians change promises. Why pay anything for deposits if former bank customers keep using the same convenient branch?

Fourth, is the branch for sale or lease? Many banks prefer ownership to maintain control and avoid difficult landlords, some of whom base rent on published FDIC deposits. Some nonbank owners, however, may be willing to sell, because they realize the limited number of alternative uses for branches in an environment where banks are closing rather than opening.

Fifth, how long has the branch been closed? Ideally, under a year where it has been well-maintained with the air conditioning left on to prevent mold. The longer a branch is closed, the former bank deposit "decay curve" worsens. Some banks have a minimum one-year "dark" period preventing a sale to a competitor, but this is sometimes waived for a small community bank.

Sixth, why was the branch closed? The best opportunities are from M&A deals where a branch was closed because of overlap or antitrust concerns.

Seventh, where is the closest branch of the closing bank? The best opportunity for maximizing deposit retention is when the closed branch was their only office in a community.

Eighth, what are the demographics of the closed branch? A branch in a low- or moderate-income, or LMI, census tract has Community Reinvestment Act, or CRA, benefits. Banks closing LMI branches can reduce CRA risk by encouraging a quick sale, especially if it is the only branch within or near a community.

Ninth, where are the former branch and assistant branch managers? Key branch personnel of a high-deposit closed branch should be offered an attractive deposit-based compensation package. Besides knowing the former customer base and having local community contacts, they understand the area's competitive, demographic and economic landscape.

Tenth, did the closed branch have any special hours, rates, products, etc., that made it unique, such as free pet treats or a community bulletin board? Again, former personnel know what services previous customers expect.

This closed bank branch feasibility checklist can not only save a community bank millions of dollars and months of time on a new branch, but it may even help its stock price and CEO's reputation.