As banks contend with worsening efficiency ratios, fintech competition, and ever-increasing regulatory burdens, 2016 is looking to be a tough year for banks, especially community and smaller banks.
A somewhat positive – or less negative, I suppose – trend is that of bank closures. By this time last year, four banks had already failed. Only one has failed so far in 2016. Both of these figures are significantly better than the peak of bank closures in 2010 when 157 banks shuttered. In fact, according to SNL and the FDIC, only 8 institutions have closed their doors for good since January 1st, 2015.
However, of those 8 banks, two items stick out to us from a branch real estate point of view: none had more than $300 million in assets and, on average, their branches were WAY oversized.
We’re not suggesting that branch sizes were the only or even a main factor in the failure of these banks. There are many factors that contribute to bank closures. However, we could not help but notice that these banks had average branch sizes more than two times the current average branch size. These days, any bank that operates a branch with more than 3,000 square feet should be on guard and seeking options and solutions!
Bauer Financial predicts that 90% of banks are too small to survive — especially when they have poor branch efficiency ratios AND assets below $100 million. The article warns that further regulatory burden will increase their efficiency ratios to an unsustainable level.
So, what’s a bank to do? Down-size. Right-size. (And in the process, modernize!) Create multi-tenant options. Think about employing a hub and spoke branch network model. Generate capital from some of the branches. Lower costs EVERYWHERE in the branch operation. Basically, banks need to consider all kinds of options to get the real estate working in your favor.
Our next post will address the failed banks in more detail: branch square footage, asset sizes, and how they compared to the current recommended branch size.