Branch sales have revved up this year, and the predominant motivation for the sellers has shifted from survival to profit growth.
In past years, many banks were selling branches in an effort to raise desperately needed capital. Now, most sellers seem eager to improve efficiencies as they look for ways to increase the bottom line in a sputtering economy.
"The recovery is so flat that bankers are having to focus on expenses and re-evaluate their weakest-performing branches," says John Corbett, the president and chief executive of CenterState Bank of Florida.
CenterState (CSFL) closed four branches in its home state in the first quarter and is looking for others to sell. Corbett is aiming to drive down expenses and improve the parent company's efficiency ratio after acquiring eight banks in three years.
Fortunately for bankers in his position, there are still plenty of banks with fresh capital that prefer buying branches over whole banks because they often get to pick and choose the assets that are part of the deal.
During the first quarter, banks announced 22 transactions involving branches, according to data from Sandler O'Neill & Partners.
Those branches collectively held $5.3 billion of deposits, marking one of the best quarters for such sales since the financial crisis.
The third quarter of 2011 was technically the strongest by this measure, but it featured First Niagara Financial Group's (FNFG) agreement to buy nearly 200 branches and $15 billion of deposits from HSBC Holdings (HBC).
"We're seeing a natural evolution, where [branch] locations are switching from one owner to another owner," says Nick Schorsch, the CEO of American Realty Capital, a real estate investment advisory firm that leases branches to banking companies.
In many instances, sellers have grown impatient with branches that have been slow to make money.
"It used to be that you could put a branch in the ground and grow it to a size that would break even in a couple years," Corbett says. "I've got some [branches] that we put in the ground at the peak of the boom [that] haven't broken even yet."
Most banks have historically bought branches more so for the deposits than the actual real estate. However, deposits are no longer as attractive to buyers since many banks are already flush with liquidity with few new loans to deploy their deposits.
As a result, premiums are lower than they were before the financial crisis. The median franchise premium in the first quarter was 3.6%, according to Sandler O'Neill. That's a far cry from the frequent double-digit deposit premiums sellers received before 2008.
"The 8% to 10% rule use to be what people paid in deposit premium maybe five to 10 years ago," says Bill Massey, an accountant and consultant at Saltmarsh, Cleaveland & Gund. "Right now, nobody's looking to pay a whole lot of premium on deposits because so many banks have enough deposits already."
Though it would seem to be a buyer's market because of the depressed premiums, industry observers say most would-be buyers are not interested in picking up unprofitable branches.
"I know several banks in this situation," says Dan Trigg, a partner at the accounting firm McGladrey & Pullen.
"I know of one banker who's been trying to sell [a branch] for the better part of the year and can't attract any buyer. The banker may end up closing that branch or selling it to a nonbanking company."
Trigg says banks that are trying to unload unprofitable branches can do so more successfully if they can market the locations as a "franchise buy" with quality loans or highly attractive real estate.
In such instances, buyers who once preferred building a bank from scratch are finding it is less expensive to buy an existing branch.
If it's a strategic purchase, "it's not cheap … but it is cheaper than building a branch," says Hal Roberts, the president and chief operating officer of Harbor Community Bank in Indiantown, Fla.
His bank recently agreed to buy four branches from the struggling Grand Bank and Trust of Florida in West Palm Beach after Roberts was unable to buy the entire bank.
The branch deal includes more than $56 million of deposits at no premium, along with $40 million in loans.
"There are opportunities to acquire some very desirable sites for next year or so," Roberts says. Still, "you have to be selective when acquiring offices … and you have to understand what you're going to do with it."
It's too soon to say branch deals will make a full-fledged comeback.
There are still some dynamics that could impede these transactions in coming months.
Corbett says most of the branches banks are putting on the market now are in overbuilt states and were built at the height of the market.
Therefore, many of those branches lost a significant amount of market value. This is what he calls the "real problem" in selling. Corbett points to a branch he picked up from a failed-bank deal that recently sold for $800,000, compared with the $1.5 million valuation it once had just six months earlier.
"A lot of new branches were built in anticipation of" growth, he says. "By time they opened the doors, the music stopped playing and the branches just flatlined," Corbett says.
"If you put a branch on the books in the summer of 2006, it's likely down 35% to 40% on market value. You're just like the customer who's upside down on their home loan. Many banks are upside down on branches built in the boom."