After one of the most contentious, acrimonious, and, quite honestly at times, incredibly bizarre Presidential election cycles, the electorate has made its choice. This piece is going to print as the polls remain open and the Nation decides who will occupy the White House for the next four years. I sense that, as in the past, the resiliency of the Republic will be tested in the coming months. My hope is that Washington, D.C. heard loud and clear from the American people about their level of frustration, anger and general fatigue with its dysfunction on both sides of the aisle and seemingly dystopian future. It is time for the executive and legislative branches to actually get to work in addressing our Nation’s many challenges. The opportunity to implement necessary structural reform – tax, regulatory, health care, to name a few – should position the U.S. to build upon the tepid economic growth coming out of the Great Recession.
While I am confident that we will survive the results of this election, it does create a convenient segue into a broad overview of branch activity (nationally and in Michigan) within the financial sector. Are branches now taboo, or simply in need of careful assessment in addressing the technologically-driven transformations that have been reshaping the banking sector for the past few decades? There is no indication of a slow down anytime soon. My colleagues on the technology and profitability consulting side, Steve Heckard and Jeff Morris, will be co-hosting a complimentary webinar on November 15 that will dive deeper into the issues that many of you are addressing.
In 2000, there were approximately 85,000 branches nationwide, and the industry consistently added branches at a rate of one to three percent per year through the decade before peaking at nearly 100,000 branches by late 2008 and early 2009. From that point forward, a net change in branch count has witnessed a roughly one to two percent annual decline in the number of branches, primarily being shed at the nation’s largest institutions, whittling the total branch count for the industry back into the low 90,000 range per the last recorded FDIC Summary of Deposit Survey dated June 30, 2015. SNL Financial (S&P Global Market Intelligence) extrapolated upon this data further by analyzing announcements and completed mergers since Summer 2015 to arrive at a count as of September 15, 2016, while also providing a more granular view of activity over the past 10 years based upon the relative asset size of institutions within a banking sector.
I have condensed this data to provide a summary look of net branch openings and closings by asset size since 2006, and much like last month’s comments on the decline in bank charters across the industry over the years, the overall logic framed by technological change reflects the occurrence of what SNL quaintly characterizes as “the smallest U.S. banks pruning their branch networks as larger banks are taking out the chainsaw.”
This chart provides a succinct pictorial with regard to relative branch activity across broad asset classes within the industry. Keep in mind that the Net Branch Openings and Closings Chart (Above) shows annual activity with regard to branch openings and closings when isolating the institution’s asset size. The Aggregate Branch Count by Asset Size Chart (Below) outlines the subtle shift in the concentration of branches across these asset classes. As banks have merged, the relative ranks have thinned within the smaller size range, meaning the branches associated with those smaller charters in past years have basically been absorbed by bigger entities. Consequently, as the consolidation wave over the years has reshaped industry dynamics, it doesn’t mean, for example, that institutions under $1 billion in assets have added nearly 3,300 branches over the past 10 years (effectively, that “growth” has largely inured to the bigger banks via consolidation). While that has been the net relative activity within this asset class, keep in mind that over these same 10 years the decline in the number of smaller institutions has been dramatic (as I talked about last month). Hence, aggregate branch count among the asset classes has also shifted dramatically, so while larger banks have been absorbing the industry’s smaller players and trimming physical branches, the concentration of branch count has slowing migrated to these larger institutions as the industry has collectively shed more than 3,000 branches over the past decade.
Branches are not disappearing. They continue to be critical components of successful community bank operations. In many cases, branches are the primary contact points for customer development and core funding retention. Multiple studies highlight the declining levels of branch customer utilization, the elevated costs of branches versus alternative delivery channels for transactions occurring outside the branch, the increasing utilization of technology applications across all age ranges, but particularly with millennials. Carefully assessing your cost structure while remaining technologically competitive is critical. Branches are far from obsolete, but their focus and utilization are changing dramatically. Just about everyone with a phone or a computer can visit a branch at their fingertips.
While third quarter results reflected continued strong capital levels, solid asset quality metrics and good fundamental earnings, despite margin pressures and an increasingly competitive lending environment (framed by the ongoing lower-for-longer interest rate picture), uncertainty with regard to the Presidential election and potential action by the Fed has elevated volatility in the markets. Remember, roughly a year ago after a December 15 rate hike the Fed signaled the likelihood of four rate increases in 2016. We are still waiting for the first. The Market Indices November 2016 (Link Below) and the Michigan Summary November 2016 (Link Below) continue to reflect modest out-performance since last month by Michigan’s publicly-traded institutions when compared to national and regional indices (the anomaly in the negative Quarter-to-Date return is primarily a function of Talmer Bank disappearing from the weighted average group and Chemical Bank experiencing some modest profit taking post-consolidation with Talmer).
I recognize that each of you, to varying degrees, are assessing and addressing the challenges of this “lower for longer” environment and its attendant margin pressures, the competitive conditions that continue to escalate on both sides of the balance sheet, the potential implications of CECL coming on the heels of more stringent capital requirements, the potential implications of breaching stated CRE concentration thresholds, possible succession considerations as you and your Board look to the future, and the increased regulatory burden across just about every aspect of your business. Please do not hesitate to reach out to me and/or my colleagues at Austin Associates if we can be of any assistance as you take your organizations forward. In the interim, my best wishes for continued success.