Branch Sellers Driven By Desire to Boost Profits

by Mercator Advisory Group 0

Branch sales have revved up this year, and the predominant motivation for the sellers has shifted from survival to profit growth. In past years, many banks were selling branches in an effort to raise desperately needed capital. Now, most sellers seem eager to improve efficiencies as they look for ways to increase the bottom line in a sputtering economy.

“The recovery is so flat that bankers are having to focus on expenses and re-evaluate their weakest-performing branches,” says John Corbett, the president and chief executive of CenterState Bank of Florida.

CenterState (CSFL) closed four branches in its home state in the first quarter and is looking for others to sell. Corbett is aiming to drive down expenses and improve the parent company’s efficiency ratio after acquiring eight banks in three years.

Fortunately for bankers in his position, there are still plenty of banks with fresh capital that prefer buying branches over whole banks because they often get to pick and choose the assets that are part of the deal.

During the first quarter, banks announced 22 transactions involving branches, according to data from Sandler O’Neill & Partners.
Those branches collectively held $5.3 billion of deposits, marking one of the best quarters for such sales since the financial crisis.
The third quarter of 2011 was technically the strongest by this measure, but it featured First Niagara Financial Group’s (FNFG) agreement to buy nearly 200 branches and $15 billion of deposits from HSBC Holdings (HBC).

“We’re seeing a natural evolution, where [branch] locations are switching from one owner to another owner,” says Nick Schorsch, the CEO of American Realty Capital, a real estate investment advisory firm that leases branches to banking companies.

In many instances, sellers have grown impatient with branches that have been slow to make money.

“It used to be that you could put a branch in the ground and grow it to a size that would break even in a couple years,” Corbett says. “I’ve got some [branches] that we put in the ground at the peak of the boom [that] haven’t broken even yet.”

Most banks have historically bought branches more so for the deposits than the actual real estate. However, deposits are no longer as attractive to buyers since many banks are already flush with liquidity with few new loans to deploy their deposits.
With financial institutions reeling from the difficult economic times over the last few, the role of the branch as part of a multichannel strategy is fundamentally changing.

FIs are searching for ways to profitably retain as many branches as possible, but realize that the overall number of branches in service is trending downward nationally.

For more information on changes in the branch channel, see the recent report from Mercator Advisory Group entitled “The Evolution of Branch-Based Advice in Multichannel Banking.”

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