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37June 2012

Based on a recent Novantas study othe entire U.S. branch system, nearly

16,000 units are acing closure over

the next three years. Representing

about 18% o the industry total, these

zombie branches are not doingenough business to justiy their exis-

tence, and the odds or revival are slim

to none under current ownership.

Many banks have put o ques-

tions about branch closures, hop-

ing that interim cost cuts would tide

them over until market conditions

improve. But even under optimistic

market growth scenarios, our analysis

oers little hope or todays crop o

zombie outlets i they try to continue

under present circumstances.

One immediate implication is a

rising pace o U.S. branch closures,

yet the situation is not hopeless. Instead

o shuttering outlets at total loss,

we estimate that roughly 11,000 o

the impaired branches, or two-thirds

o the total, could be salvaged by

transerring them to better-managed

banks and more solid local networks.

Nationally, about three-ourths o

all local markets are in need o branch

consolidation. The major options

include in-market mergers; spinos o

various local networks; and targeted

sales o individual branches.

All o the options depend on a

clear understanding o local marketopportunity and the role o network

presence in winning customer patron-

age. Area networks perorm best

with adequate density o coverage,

and this density actor will be a

critical guide in helping acquirers to

optimize customer share o market.

It will take time to sort through

the options and deal possibilities.

That is why banks will need interim

strategies to slash overhead at zombie

branches. Quick moves include

adjusting stafng levels and hours o

operation, based on an understand-

ing o emerging customer transaction

patterns and preerences or service.

Considering the options

From a strategic perspective, the most

aggressive option or dealing with

zombie branches is in-market consolida-

tion, where a bank buys smaller and/

or weaker competitors purely to grow

customers and reduce distribution

capacity within the current network

ootprint. There have been ew such

transactions in recent years. However,

within the 75% o U.S. markets where

we expect signifcant consolidation, atleast 55% have regional or super-re-

gional banks which could be candi-

dates or merger-based consolidation.

The second option is to identiy

entire markets or exit, or example,

large city markets where the banks

network does not have adequate

het, or small rural markets where the

bank is unable to earn a hurdle rate

or branch investment. Time is o the

essence in making such decisions.

Given the ongoing deterioration in

troubled branches, the longer the

bank waits to exit a market, the less

value the local network will bring.

The third option is to pursue

targeted branch sales, an avenue

that could be especially useul or

smaller banking companies that need

to retrench around a core market and

customer base. Our analysis indicates

that super-community and community

banks have especially high percentage

BY DAVE KAYTES AND KEVIN TRAVIS

Do banks face a hopeless situation with failing branches? It is a pressing question as the

industry gears up for 2012. Everywhere you look, networks are being dragged down bybranches that were crippled during the recession and may never recover.

Avoiding Branch Fatalities

This local market perspective not only provides a much stronger context for decisions about neces-

sary branch cuts, but also will be essential in crafting merger and spinoff transactions that will

help to avert closures at total loss.

COMMENTARY

As seen in BAI Banking Strategies

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38

concentrations o impaired branches

25% or higher in many cases

creating an especially pressing

need to avoid closures at total loss.Ater all other avenues are

exhausted the ourth option is to close

the No Regrets branches (units that

may never meet the parent companys

hurdle rate) in all markets. These

could include marginal branches in

low opportunity markets and isolated

branches in good markets. Closures

could also extend to de novo units

opened as part o the recent real

estate boom in branching, which

will never achieve breakeven basedon current orecasts o deposit

growth and customer proftability.

Nationally, the perormance drag

posed by ailing branches has been

masked by a trend o improving

credit quality, which has put earn-

ings reports on steroids as banks

slashed loan-loss provisions. But the

peak benefts o this trend soon will

be exhausted, ully exposing the

industrys lackluster revenue dynam-

ics and cost challenge o maintaining

impaired branch network capacity.Where some banks will go wrong,

however, is in sweeping network cuts

that only consider individual branch

profts. Our national research con-

tinues to show material perormance

benefts or branches that operate

within solid local networks, which

oer more convenience or custom-

ers and carry more brand impact.

This local market perspective

not only provides a much stronger

context or decisions about neces-sary branch cuts, but also will be

essential in crating merger and

spino transactions that will help

to avert closures at total loss.

Dave Kaytes is a Managing Partner and Kevin Travis is a

Partner at Novantas LLC, a management consultancy.

Nationally, the performance

drag posed by failing

branches has been maskedby a trend of improving

credit quality...but this trend

soon will be exhausted.

Fig 1: Branches in Failing Financial Condition

Nearly 16,000 U.S. branches have lost fnancial viability and aceclosure over the next three years. However, about 11,000 could bevaluable in mergers, market spinos and standalone sales.

Peer Group # of Branches at Risk % of Frequent Branch Users

National

Super-regional

Regional

Super-community

Community

Unit & non-network

602

2,235

2,286

5,046

5,249

444

3%

10%

21%

26%

32%

23%

Source: 2011 U.S. branch study by Novantas, LLC.

Avoiding Branch Fatalities