November 28, 2020 / VOLUME NO. 133
Should You Trim Branches By 20%?

Banks have spent three quarters grappling with Covid-19’s impact on the operating environment. The heightened risk of in-person interactions, customer prioritization of digital channels and pressure on banks to control expenses to offset collapsed margins all have coalesced around one line item: branches.

It’s obvious to see why.

“We believe branch consolidation/divestiture announcements will accelerate in the next few quarters,” wrote Brett Rabatin, director of research at Hovde Group, in an October report. “The pandemic has further increased adoption of digital banking, and the industry is faced with intense pressure to create operating leverage via lowering expenses in a tougher revenue environment.”

A number of banks have taken advantage of pandemic-related closures and the dramatic hit to in-store transactions by announcing footprint reductions — some exceeding 20%.

Twenty percent seems to be the “magic number” that a number of banks have settled on, observed Frank Schiraldi, managing director at Piper Sandler, in a late October report. “We expect … this sort of level of consolidation will become par for the course.”

Schiraldi was writing specifically about Univest Financial Corp.’s announcement that it would close eight branches, but he could’ve been writing about Midland States Bancorp (13 branches, 20% of its network), Northwest Bancshares (42 branches, 20%) or Orrstown Financial Services (six branches, 19%). Orrstown Financial’s recent closures come on the heels of previous consolidation, accounting for 30% of its footprint since December 2019.

Other banks eyeing double-digit closures — based on my best-efforts tally — include First Midwest Bancorp (15%), Heritage Financial Corp. (15%), Umpqua Holdings (13% to 22% over two years) and U.S. Bancorp (15%, or an additional 400 on top of last year’s 300 closings).

It’s no surprise in-branch transactions are down; Univest disclosed a 21% year-over-year decrease in its announcement.

Many banks are seeing that existing customers who preferred visiting branches pre-pandemic are now comfortable using digital channels; they’re unlikely to leave the bank if their local location closes. Case in point: Half of the 17 branches that First Midwest Bancorp announced it would consolidate have been closed for more than six months. This “likely signifies that client attrition has been negligible thus far,” wrote Piper Sandler senior research analyst Nathan Race in an October report.

Branches aren’t dead by any means. But maybe your bank could prune 20% of them.

• Kiah Lau Haslett, managing editor of Bank Director
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