Taking a Rational Approach to Branch Rationalization

It’s a common sight these days across the banking trade publications: headlines of bank branch closings – whether through consolidation, sale, or outright closures. And industry research supports this trend; according to data from the FDIC and compiled by FIS, the number of overall bank branches was in decline even before the pandemic.

As banks still need to deliver personal interaction and face-to-face advisory services, most find that they still need branches. The key to profitable long term success in any business is taking a rational approach on which branches to close, which to keep open and which to invest in. The good news is there are questions you can ask and steps to take toward achieving a rational approach to branch closures.

Is the branch or branches in question satisfying profit contribution objectives?

A discussion about generating a profit at least equal to the risk-adjusted cost of capital deployed to support a branch is critical.  The efficacy of your financial modeling is also critical and should include consideration of at least the following key elements:

• Account for a branches’ physical configuration so as to include technology such as cash dispensers, ATMs, in-store online access, etc.
• Credit for services provided to account holders not domiciled in the target office. 
• Ensure that the interest income earned from branch-based loans is adjusted for loan loss provision expense rather than simply reflecting gross yields.
• Determine a normalized transfer pricing credit rate for excess deposit balances generated in the branch. 
• Consider of unallocated expenses, particularly overhead costs for administration that are variable. 
• If the running rate contribution of the office is inadequate to satisfy the bank’s financial goals, a secondary analysis of the cost to close the facility will eventually be required.

Is a branch falling short of required profit contribution?

The next step in the process involves evaluating the potential of the market served by the branch to support a profitable operation.  The objective of the analysis is to understand what a fair share of any given market holds in the way of profit potential, contrasted with the share of business already being held by the branch and put a value on the gap between current and future business.

The key questions to be answered to gain a clear understanding of upside potential include:

• What business does the bank service in each census tract and is supported by a branch today?
• How does that compare to the estimate of available business, assuming that the branch captures a fair share of the potential?
• Will a fair share of the available market potential produce a viable profit contribution from the office? 

Conduct a competitive product evaluation

Deposit and credit products are in their greatest period of change in the past 25 years thanks to regulatory and statutory changes and the overall credit environment. 

In addition to these changes, ever-expanding digital and yet unknown alternative channels are driving evolution to customer preferences. These changes add a layer of complexity on top of changes to fundamental underlying products.  The unsettled nature of offerings creates both confusion and inertia.

FIS has two observations as related to this continuing evolution:  First, uncertainty is going to continue and, second, profitability will continue to be under-pressure.  Waiting for perfect insight is impractical and a deterrent to improving profitability.

Our point of view is that sufficient insight is available from competitive market surveys to move forward in adjusting products and services to the extent that an evaluation of market trends shows your institution to be lagging with regard to either the array of products in demand by the segments evaluated in Step Two.

Re-evaluate personnel practices

Working with clients across the country, I have found the following practices to be all too common impediments to improving branch effectiveness:

• Inadequate criteria for identifying the characteristics of effective sales staff and recruiting qualified staff
• An emphasis on one-shot sales training seminars as the solution to creating a sales environment
• Failure to align sales staff with appropriate skills and knowledge against quantifiable market potential
• Misalignment of sales goals and incentive programs that fail to consider market potential or reward gross account opening rather than net business growth
• Inadequate management reporting resulting in a lack of visibility to aid sales management
• Inadequate performance evaluations, coaching and remedial action to address short-comings

Invite partners into your branch to expand services

Many community and regional banks are reinventing or repurposing their offices to meet the changing needs of their customers and communities. To help defer costs and offer a wider range of services within a branch, some banks are partnering with local businesses such as a coffee vendor, insurance broker, education organization or tech services firm to share space within their facilities.  As a result, these banks and their branches remain vital pieces of the surrounding communities. Noah Wilcox, the Independent Community Bankers of America chairman, in a recent article describes the community bank branch as its community’s “front porch.”

Each of the above actions can be addressed with proven techniques and in virtually every case we have observed, the changes have improved overall sales effectiveness in markets that have upside potential.