Too Many Branches on the Bank Tree?

“I went to the bank and asked to borrow a cup of money. They said, ‘What for?’ I said, I’m going to buy some sugar.” -Steven Wright

It’s time to have a hard talk about branches and branch capacity.

In tough times, industries analyze and adjust capacity. Whether the economy is in or headed to the “R” word, we are experiencing this adjustment almost everywhere we look.

• Nearly every airline has reduced flights and grounded planes.
• Starbucks, the retail expansion story of the decade, is closing 600 stores.
• The automakers are closing plants, slowing output and re-directing manufacturing to smaller vehicles.

 In banking, “capacity” is measured in terms of branches, si? So let’s look at current capacity.

 Nobody I know is a better source to talk with about branches and branching strategy than our friend Steven Reider at Bancography. He tracks, analyzes and opines well on all things branch-related, and in looking at some of the data he generously shared, there are some pretty striking trends. For your consideration:

1. There were 1,167 households per branch in 2000. In 2007, there were 1,151. For years, the conventional wisdom I have heard is that a healthy target is in the 1,600 – 1,800 range.Bear in mind that this statistic doesn’t take into account the fact that a household in any area could have relationships with several branches, so any individual branch can outperform and beat the averages. The bottom line, however? In the last eight years we grew branches as fast as we grew the population. Was that the idea in 2000?
2. Even in high growth areas, the number of households per branch declined. Certainly, that’s not to say that there weren’t banks that did very well getting their share of the growth. Rather, it is to say that virtually no area has a higher number of households per branch now than it did seven years ago. Take a look at some MSAs (metropolitan statistical areas) and the net change in households per branch over seven years:
   

   MSA	Households per branch, 2007	Households per branch, 2000
   Chicago-Naperville-Joliet, IL-IN-WI	1,047	1,298
   San Francisco-Oakland-Fremont, CA	1,471	1,498
   Las Vegas-Paradise, NV	1,770	1,911
   Detroit-Warren-Livonia, MI	1,321	1,427
   Seattle-Tacoma-Bellevue, WA	1,379	1,387
   Phoenix-Mesa-Scottsdale, AZ	1,776	2,103
   Sioux Falls, SD	597	589
   Denver-Aurora, CO	1,284	1,569
   Milwaukee-Waukesha-West Allis, WI	1,004	1,057
   Riverside-San Bernardino-Ontario, CA	2,275	2,289
   Sacramento-Roseville, CA	1,819	1,998
   Oklahoma City, OK	1,210	1,310
   Omaha-Council Bluffs, NE-IA	978	1,030
   Des Moines-West Des Moines, IA	950	924
   Wichita, KS	948	984
   Santa Barbara, CA	1,334	1,408
   Bakersfield, CA	2,500	2,006
   Davenport-Moline-Rock Island, IA-IL	904	966
   Salinas, CA	1,420	1,616
   Eugene-Springfield, OR	1,351	1,403
   San Luis Obispo-Paso Robles, CA	1,330	1,325
   Cedar Rapids, IA	888	931
   Champaign-Urbana, IL	843	835
   Lincoln, NE	790	791
   Salem, OR	1,421	1,223
   Fargo, ND-MN	737	769
   Rochester, MN	1,051	1,059
   Visalia-Porterville, CA	1,898	1,698
   Waterloo-Cedar Falls, IA	865	870
   Medford, OR	1,076	1,118
   Wausau, WI	746	822
   Napa, CA	1,029	966
   Sioux City, IA-NE-SD	742	837
   Rapid City, SD	1,062	1,060
   Merced, CA	2,066	1,994
   Manhattan, KS	797	1,064
   Eureka-Arcata-Fortuna, CA	1,638	1,553
   Bismarck, ND	933	894
   Yuba City, CA	2,143	2,068
   St. Joseph, MO-KS	775	694
   Cheyenne, WY	928	1,101
   Idaho Falls, ID	1,059	912
   Missoula, MT	1,073	1,068
   US Overall	1,151	1,167
   Source: Bancography

   It is hard to look at this list and find very many arguments for the number of branches we have built.

3. Because of this, we haven’t grown the average branch size much at all in seven years. In June 2000, the median-size branch (half of all branches bigger, half smaller) was $27.5 million. In June 2007, it was $31 million. That’s 13% total growth in seven years, less than 2% a year, which unless I’m a bit dim today would appear to be well less than the interest re-invested in deposit accounts over that time. Now, to be fair, some of the newer branches are supermarket branches with less cost/footprint and lower break-even targets. Even so, I don’t think that any of us would have said in 2000 that we would have expected the median-size branch to only have grown 13% in seven years.In fact, if you look at average branch sizes at every level, growth has been about the same. The following table shows seven-year growth of branches at every level:
   

   Branch Deposits Percentile	June 2000	June 2007	5 Year Growth
   90	85,722	93,513	9%
   80	58,219	64,272	10%
   70	44,375	49,303	11%
   60	35,099	39,072	11%
   50	27,563	31,077	13%
   40	21,945	24,221	10%
   30	16,692	18,326	10%
   20	11,779	12,753	8%
   10	6,761	7,059	4%
   Source: Bancography

   A brief explanation – in 2000, your branch would have been bigger than 90% of all branches if it had $85.7 million in deposits. In 2007, you would have needed $93.5 million to be in the same position. That’s only 9% more in seven years. The point of this is that massive growth in big branches hasn’t funded investments in new ones.

4. In June 2000, 53% of branches had less that $30 million in branches. In 2007, that percentage was 48%. In other words, we have the same number of smaller branches as we used to.
5. And, just to put a top on it, in the de novo branches opened in the year 2001, the average deposit balance is $17 million (Steve calls them the “class of ’01”). Only 16% of those branches, in seven years, have attained $40 million in deposits. I mention $40 million because it is the number mentioned most often as the targeted break-even number when we talk to CFOs. Even if you think the break-even target is lower, nobody in 2000 would have said $17 million would be acceptable.

Lest this all comes across as a pile of second-guessing, we need to recognize that branching decisions were made with the best data and financial forecasts available at the time. In 2000, nobody’s crystal ball was magical enough to show us that industry net interest margins would have declined 44bp, non-interest income would have dropped 52bp, charge-offs courtesy of the mortgage mess would be what they are, and overall ROA in the industry would have declined from 1.14% to .59%.

 But they have, and every bank will need to think about how and where branches need to be consolidated. Now, it’s easy here to say that banks will need to close branches, and it’s easy to say we have to make the smaller branches we keep more profitable, but how?

 No fast, elegant answer has shown itself in the land of Gonz. The fact is that over the next few years banks will need to take quick advantage of individual opportunities that present themselves. We already assume you’re looking at closing unprofitable branches. Here are some additional thoughts:

• Let’s get active and creative with branch swaps. You have an unprofitable branch somewhere that could consolidate with another branch in the same area. So do your peers. You want to keep every dollar of deposits. So do your peers. Take out the map and start looking for opportunities to turn two smaller, unprofitable branches into one that is profitable as many times as you can. So the payoff won’t come in year one. And sure, there will be operational issues. But this is no time to wait seven years to grow to $17 million.
• Let’s get smart real estate people in the mix. One of the first questions we always hear when talking about branch consolidation is this: So what do we do with the real estate? And it’s a very legitimate question. Well, maybe it’s time to recognize that it may be the real estate part of the deal that will be the catalyst to close or swap a branch. It may be time to have an employee or agent with real expertise in this area to start looking at selling, subletting, or doing something else that causes that opportunity and then taking advantage of what they dig up. In many banks, facilities management has neither the expertise nor the mandate to do this. Maybe it’s time.

For branches you’re keeping:

• Let’s take a hard look at small branch hours, days of operation, and employee full-time, part-time mix. Can you be open fewer hours a day without risking deposit loss? Probably yes. Do you really need Saturday hours? Probably not. Smaller branches that aren’t growing don’t need to compete on convenience. If that idea worked, they wouldn’t still be small.
• Let’s focus on filling the capacity we can’t take out. We must get small branches to acceptable profit levels faster by recognizing that the operating model for running them has to change. In the last few years, truth be told, we could walk into most branches and find a lot of specialists (loan, investments, deposits) being rewarded for growth.
• In the small branch of the future, we must have generalists who are rewarded for profitability. We won’t be able to afford a commercial lender, branch manager, and investment officer in an area with no growth. Maybe it’s time to develop (or go back to) the type of manager or branch president who can handle all but the most specialized of products and deals. Maybe it’s time to use the promise of automation, workflow and standardization to enable this in smaller branches. Maybe it’s time to incent bottom-line profitability more than growth.My partner Steve Williams was telling me about a meeting he had recently with the manager of a small rural branch. The loans in the branch had declined 20% in three years. However, the profitability of the branch had grown 25%. How? The manager was this generalist who not only could sell and fulfill all bank products, but who also managed every last income and expense with a vengeance. He negotiated the right price on loan deals. He charged his fees. He watched staff levels carefully without compromising service. He even negotiated the landscaping contract to get it reduced. It’s funny. Maybe the scrappy, focused branch management style we’ll need to manage through hard times might end up producing those entrepreneurs we’ve wanted for so long in our offices.

The bottom line is this. Fat margins, sterling credit and great fee income are as likely to come back as dollar gas. We need to reduce capacity. It won’t be easy, but it’s necessary. We can’t blithely assume that we’ll grow into it.

The glass isn’t half empty. It’s just too big for the water it has to hold.

 “Sometimes it seems like such a hard life, but there’s good times around the bend. Rollercoasters gotta roll to the bottom, if you want to climb to the top again.” –String Cheese Incident
–tr