Getting Rid of Branches? Think Reality, Not Just Banking

When banks merge, the biggest cost savings usually come from shedding overlapping branches.

But while disposing of excess brick and mortar may look like quick way to slash costs, it can also be a nightmare. Banks face regulatory concerns, the vagaries of local real estate markets, leases that must be terminated or property that must be sold, sometimes at a loss.

But some experts say there are steps banks can take to ease the process of branch consolidation.

"Banks just plain need to give this attention," said Robert H. Hoge, an Ostendorf Morris Co. consultant specializing in branch divestitures. "Many of these bank deals are done with very little attention to the real estate component." The nut-and-bolts of managing bank real estate has often been obscured by managements' craving for big post-merger savings.

Bankers and analysts who have been through major branch closings offer these pointers.

Stay flexible. "There's a lot more change going on, and banks need to be able to adapt quickly," said Andrew Mayer, an Ernst & Young consultant in New York.

Experts say it's often better to lease branches than to own them, especially for banks in an acquisition mode. Two options are a short-term (five year) lease with options to renew or a longer-term lease with an exit clause.

While such terms mean higher rents, they do provide for more flexibility when branch-closing decisions are made.

Many banks have already done shed the burdens of branch ownership by sale-leaseback - selling the brick and mortar and then leasing it back from the new owners. The strategy was popular in the 1980s, when rising real estate values enabled banks to bolster their balance sheets by selling off branches.

"You'll find a hell of a lot of banks today that don't own anywhere near as much branch property that they once did," noted one banker.

Observers estimate that about only about half of all U.S. commercial bank branches are owned by the banks. The rest are leased.

Make a clean break. "It's all or nothing," said Bryan P. Berthold, a consumer business planner with Fleet Financial Group in Providence. "We don't look to or benefit from subleasing" or becoming a landlord.

Mr. Hoge noted there are also barriers to subleasing. Federal regulations require that a sublease be "coterminous" - that is, it must expire when the primary lease does. And renewal options can't be passed along to the tenant.

Sell to a competitor. A property will have a greater market value if it needs only cosmetic changes, and not a complete overhaul. "The night deposit box, drive-through, security cameras, and bullet-proof glass - all those things are an asset to the highest and best user, which would be another bank," said Mr. Hoge. "They are a potential liability if it becomes a pizza shop or men's clothing store."

For example, he said it costs as much as $75,000 to remove a vault. Removing a massive turn-of-the-century vault can cost more than twice that much. A buyer facing such costs won't want to spend as much for the building.

But though buyers can be found for branches and the deposits that go with them, finding a bank to buy just the branch facility can be much harder.

Mr. Hoge, who says he has worked on about 500 such transactions, estimated that fewer than 20% of those offices are sold to other banks. "The rest have gone to professional service operations and some retailers," he said.

Mr. Berthold said dry cleaners, fast-food restaurants, and other franchises have expressed interest in bank branches following Fleet's acquisition of Shawmut National Corp.

Be ready to write off losses. "When you start getting rid of sites that aren't all that desirable, you may have a heck of a pill to take up front in order to get the ongoing savings of shutting the operation down," said one executive at a regional bank, who asked not to be identified. "If it doesn't make any sense to you, it doesn't make any sense to another retailer."

Or to another bank, for that matter. "Too many banks may already be there," said Mr. Hoge. "The same reason it's being closed is why no one will move into it."

David Tetenbaum, vice president at First Manhattan Consulting Group, estimated that banks lose money on 65% to 70% of branches they shed.

And if you expect to take a hit, keep in mind that the Federal regulations require that the bank anticipate the loss and reserve for it. The regulatory approval process can take three to six months.

Don't leave the branch vacant. "Selling it empty with no income can be a very painful experience," said Mr. Hoge. "When you make it a vacant building and you kill it as a branch, you've had a significant (negative) impact on value."

What's good for the branch is good for the operations center. "Most of the large banks are left with large surplus property" following an acquisition, said Gene DePrez of Fluor Daniel Consulting, Morristown, N.J. He recommends five-year leases for back-office space, or an exit clause on a longer-term contract. One plus for opting out of redundant operations centers, however, is that the space is often more versatile than a branch.

Yet many banks remain stuck leasing now-vacant property, he said, in part because downsizings have reduced the number of real estate asset managers who handle the job.

Keep an eye on the regulations. In recent years, big bank mergers have been closely watched by community activists concerned that banks will shirk Community Reinvestment Act responsibilities.

"It's not that simple to just close a branch and abandon a community," noted Mr. Hoge.

Location, location, location. Banks planning to shed branches have been relying increasingly on census data and an analysis of customer behavior before deciding which offices to close.

Though those tools are essential, experts caution that bankers should still go out into the field to see how the projections jibe with geography and travel patterns.

Look at the numbers closely. The move toward closing branches, especially after in-market mergers, is a no-brainer. "If you combine two branches the enhanced profitability is pretty profound," said D. Bruce Wheeler, a partner and vice chairman of Omega Performance Inc., a San Francisco consulting firm. "Even if you lose 10% or 15% of your customers, the return that you get can more than double what you get out of the individual branches."

But Mr. Berthold, the Fleet banker, said it can be challenging to accommodate customers of a shuttered branch at the remaining office. If the assumptions about customer runoff are too high, for example, the remaining branch may not be equipped to handle the new business. And tight budgets may mean the bank can't simply hire more tellers.

In some cases, said Mr. Berthold, Fleet has had to extend office hours and add automated teller machines. *** You Ain't Seen Nothing Yet

Many bank watchers say branch closings will increase dramatically in coming years.

First Manhattan Consulting Group, for example, has estimated that by the year 2000, the number of traditional branches could decline by 25%. Just the top 10 merger deals announced in 1995 will result in more than 800 branch closing, the banks involved say.

So far, though, the total has continued to grow: Since 1991 it has increased about 5%, to more than 54,000.

But many branches are changing hands. Robert H. Hoge, an Ostendorf Morris Co. consultant in Cleveland, estimated that 4,000 branches are on the market at any given time.

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