It's a common word of advice to bankers: close scores of branches to cut costs and improve service. But now there's an alternative: take out your hatchet on the front end.
Fifth Third Bancorp is a pioneer in the new approach by booking an impairment charge on real estate it owns. The reason? The Cincinnati company had planned to open branches on these lots, but new appraisals show the property is now worth far less than what it paid and its need for new branches has disappeared.
The $131 billion-asset Fifth Third may be creating a blueprint for other banks to follow. Banks that have reassessed their real estate holdings realize "they paid a lot for them and now they can't get even half of what they're on the hook for," said Justin Berryman, director of real estate services at Franklin Street in Atlanta.
In the second quarter, Fifth Third said that because of new appraisals, it took a $17 million impairment charge to cover the loss in value on "land upon which the [company] no longer expects to build branches," it said in a news release.
"We determined that a number of properties we had originally intended for future banking centers no longer meet our targets," Tayfun Tuzun, Fifth Third's chief financial officer, said in a July 17 conference call. Fifth Third has not disclosed the number of properties it devalued or their locations.
The step of devaluing real estate is likely a precursor to putting it up for sale, observers said.
Fifth Third has reassessed its real estate holdings and taken a big impairment charge previously, but the latest recent decision was based on consumers' rapid moves to digital banking, Kevin Kabat, vice chairman and chief executive, said in an interview.
"Real estate devaluing is not a new discipline for us," Kabat said. "The new piece is the assessment we have done relative to the retail distribution changes we're anticipating, as well as the speed with which the customers we deal with are changing how they do business with us."
As of midyear, about 30% of Fifth Third's total consumer deposit volume came through enhanced ATMs or mobile applications, Tuzun said. That's up from 26% as of the end of 2013.
Fifth Third's decision to devalue its real estate is curious, if not unprecedented, said Chris Marinac, an analyst at FIG Partners.
"It is a little bizarre," Marinac said. "Fifth Third may have been holding the land at inflated values with the anticipation of creating value by building a branch."
Fifth Third may have been put in this situation because of the extremely aggressive growth strategies it pursued in Florida and elsewhere before the financial crisis, said Marty Mosby, an analyst at Vining Sparks.
"At the height of the real estate market, [Fifth Third] was having to buy land at expensive prices," Mosby said. "They were very much in a growth mode going into the recession. Then they hit the wall in those markets."
Indeed, Fifth Third has been highlighted as one of the regional banks that could gain the most from widespread branch closures. In a May 8 research report, Sanford C. Bernstein analyst Kevin St. Pierre estimated that Fifth Third could cut its noninterest expenses by 24% by closing about 43% (or 572) of its branches.
There may have been some situations where Fifth Third got way ahead of itself in building out its branch network. The Jacksonville Business Journal reported that Fifth Third in 2011 built and fully equipped two branches in the Jacksonville area that never opened for business. Those branches remained vacant as of late February of 2013, the paper reported last year.
The two vacant offices were said to be located at the corner of Beach and Kernan boulevards in Jacksonville, and on Atlantic Boulevard in Neptune Beach, Fla. Fifth Third does not operate branches in either location, according to the Federal Deposit Insurance Corp.'s most recent Summary of Deposits.
A Fifth Third spokeswoman declined to comment whether those buildings remain vacant or if they have been sold. She also would not say whether the company devalued some real estate because it tried to grow too rapidly in Florida or other places.
Some banks have taken to subleasing their branches, often at a significant loss to the monthly lease payments they still owe, Berryman said. Others are writing down the value of what they own, as Fifth Third has done, he said, although he declined to name the banks.
Others are putting unwanted branches up for sale. Berryman pointed to recent PNC Financial Services Group listings in which it's selling three 4,100-square-foot branches in the Atlanta area. PNC also lists its branch-related real estate lots available for sale or leaseback on its website, a spokeswoman said.
Even with all the ominous signs that surround the future of branches, Kabat stressed that Fifth Third is not going to abandon retail banking.
"It's not as if Fifth Third will become a branchless bank," Kabat said. "We will still have some very traditional branches, even with the addition and expansion of technology."