U.S. banks hastened a shift to digital platforms during the height of the pandemic and, in the process, accelerated the pace of branch closures in a trend that continues into this year. However, the Biden administration may have thrown a lifeline to brick-and-mortar banking.
As enforcement of the Community Reinvestment Act intensifies under Biden, regulators are asking more questions about planned closures, working to ensure that residents of low- and moderate-income communities are not left without convenient access to physical banks — a hallmark of the CRA.
"If you have a branch in an LMI area" — low- to moderate-income market — "you have to be very careful to make sure your business justification reasons are very strong. And that means you probably need to have another branch very nearby," Ken Thomas, founder and CEO of Community Development Fund Advisors in Miami, said in an interview.
"The COVID excuse is no longer valid. That drove things to record levels when we had a deregulation environment" under former President Donald Trump's administration, Thomas, a veteran bank consultant, added. "The regulatory pendulum has swung the other way under Biden, and you now have to make sure you are not leaving a town or neighborhood in a big city without a bank. If you are the last bank standing, you really can't leave. The view now is, when the last bank goes, there's no way but down for that community."
The decline in branch banking is no recent phenomenon, but the pace reached a record level in 2021 because the social distancing measures enacted to
Taking into account openings and closings, U.S. banks shuttered a net 2,927 branches last year, according to a tally by S&P Global Market Intelligence. That set a record — and was an increase of 38% from 2020, the previous record year, the firm's data shows.
Net branch closing through the first half of 2022, however, totaled just 1,261, S&P Global found. If the pace continues through the second half of the year, net closures would fall nearly 15% from last year's total.
The heightened regulatory scrutiny of bank mergers and acquisitions is likely further contributing to the slowdown, following new
Banks often pursue acquisitions of competitors to carve out overlapping staff, services and facilities, Thomas noted. The savings fall to the bottom line and can make M&A highly profitable. In recent years, closing branches has proven integral to deal-related cost-cutting, Thomas said.
As banks tried to save costs while also growing via deals, M&A activity surged in 2021 to 210 announced deals, up from 112 the prior year, according to S&P Global.
Now, however, bank M&A announcements are relatively few,
Banks inked 35 bank deals during the second quarter. That was down from 49 the prior quarter and well below the 66 announced transactions in the year-earlier quarter, according to a Raymond James analysis.
The 84 announced deals through June of this year put the industry on track for a total of 168 across all of 2022. That would be the second-lowest number since 2012, after only 2020, a year during which the pandemic temporarily stalled activity.
"Slower M&A absolutely is adding to the slower pace of branch closings," Thomas said. "Banks have to be exceedingly careful now, and that's causing banks to rethink M&A and branch plans. … This is a totally different environment from just a little while ago."
Still, analysts say banks are bound to further shift resources toward their online platforms, where customers manage increasingly more of their banking transactions. This will further diminish the need for large branch networks. It may also enable banks to further downsize their physical footprints and reinvest the savings in digital services — though likely no longer at a record pace.
"Banks are always looking to get more efficient," said Robert Bolton, president of Iron Bay Capital.
Large national and regional banks have led the downsizing charge, mostly because they have the largest branch networks and therefore the most cutting to do.
Leading the industry, Bank of America shuttered 45 branches in June, the most recent month for which data was available. Over the 12 months that ended in June, BofA closed a net 340 branches, according to S&P Global.
Wells Fargo was second, closing 24 branches in June. Wells closed a net 234 branches between mid-2021 and June 30 of this year. Representatives from Bank of America and Wells Fargo did not respond to requests for comment by deadline.
However, Bolton said in an interview, banks of all sizes are shifting investments away from physical locations and toward digital platforms.
Bolton, who is also a director of the $4.1 billion-asset Carter Bank & Trust in Martinsville, Virginia, said the bank closed several branches over the past couple of years, as did many of its peers. He expects to see more across the industry, but he also said more aggressive regulatory oversight is slowing the pace.
"Closing a branch may be the right decision for shareholders while not at all hurting a community, but the idea could easily be villainized in this environment," Bolton said. "So the solid majority of the slowdown we've seen in branch rationalization is regulatory."
