Criticize them as expensive anachronisms all you want, but the economic value of bank branches actually increased in 1994.
For all the denigration it receives as a high-cost and highly inefficient distribution channel for retail banking products, reports of the branch's demise are - as Mark Twain might have observed - greatly exaggerated.
There's no better proof than the prices paid to acquire branches in 1994, which doubled to 5% or more of accompanying deposits, according to financial advisors in the field. "We have seen premiums skyrocket just in the last year," says Linda Farrell, a director at Washington, DC-based Kaplan Associates.
A variety of factors are behind this sharp increase. The Resolution Trust Corp. has sold off virtually all of the broken thrifts in its care. By year-end the RTC was down to just one: Carteret Savings, a $2.4-billion-asset institution based in Newark, NJ. And with the agency no longer dumping product on the market, prices responded to the law of supply and demand - supply was down and demand at least remain steady.
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Banks also are carrying more capital on their balance sheets than they know what to do with (see "Drowning in a Sea of Capital, p. 18), and some of them used their excess capital to buy branches. "With higher returns being demanded by shareholders, the acquisition of a strategic branch location also provides one way to effectively leverage excess cash and improve the return to shareholders," says Wade Schuessler, an assistant vice president at Alex Sheshunnoff & Co. in Austin, TX.
Branch acquisitions are usually done as all-cash transactions or with a combination of cash and cash equivalents, generally loans. The price - or premium as it's often called - is calculated as a percentage of the accompanying deposits. The fact that banks were actively searching for ways to spend money helped lift premiums a notch or two. Says Farrell, "One reason why premiums are so strong is that banks have excess capital, and these aren't doggy branches."
Banks also continued to fine-tune their retail networks, a process that always helps drive sales activity. "For many buyers, the entry into a growth market was more attractive through an existing branch acquisition when compared to opening a new branch and incurring start-up costs, or by purchasing an existing banking organization in the desired market," says Schuessler.
What this all adds up to is this: For all their shortcomings, bank branches are still the linchpin of just about every institution's retail strategy. For anyone who doubts the branch's continued importance, "I would point to Fidelity (Investors) and Dreyfus, who are building branches - walk-in branches," says Charles Nathan, a managing director and head of mergers and acquisitions for the financial institutions group at Smith Barney Inc. And while there are "partisans" on both sides of the branch debate, adds Nathan, "I think very few people are prepared to write the branch off."
The 1994 U.S. Banker ranking of advisory firms who midwifed branch acquisitions showed the largest deposit volume - $12.4 billion - since 1991, when it came in at a truly robust $24.3 billion. But 1994 was still a significant improvement over 1993 and 1992 deposit volumes of $5.4 billion and $7.1 billion, respectively. There was also a sharp increase in the number of deals in 1994 over 1993, 55 compared to only 19. This year's ranking was based on deals that closed between Dec. 1, 1993 and Nov. 30, 1994.
The single largest transaction last-year was the purchase by NationsBank Corp. of California Federal Bank's entire 44-branch network in Florida. Nationsbank paid a premium of 4.3% to acquire $3.9 billion in deposits. Nathan - who represented CalFed - believes the deal was a "seminal transaction" since it created a new "pricing parameter" for branch sales that followed. "We went back to '88 and found no higher premium," he says.
The deal was brought about by CalFed's well-publicized problems with deteriorating asset quality. The large thrift had been going through a difficult restructuring and needed to raise cash, especially since it had posted losses for several consecutive quarters. Smith Barney advised it to sell the Florida operation, although Nathan says there was considerable debate whether the branches would fetch any where near the firm's target price. "Originally, people were skeptical about our ability to ever get that premium," says Nathan. Instead, the premium actually came in at the high end of Smith Barney's projected range.
The next largest transaction was the purchase by Dutch banking giant ABN-AMRO Holding NV - owner of LaSalle National Bank in Chicago and Uniondale, NY-based European American Bank - of 26 Illinois branches with $1.6 billion in deposits from H.F. Ahmanson & Co., another big California thrift. (Jacksonville-based Barnett Banks Inc. also acquired 60 Florida branches with deposits of $3.6 billion from Glendale Federal Bank FSB, but the deal had not closed by the deadline for inclusion in U.S. Banker's 1994 survey.)
Not only did total deposit volume and number of deals make a substantial recovery in 1994 from a year earlier, but prices rebounded nicely as well. Farrell at Kaplan says that if premiums hovered around 2.5% in 1993, they were more like 4% or 5% for many deals last year.
In some instances, premiums went even higher. Nathan at Smith Barney said he knew of one thrift property that was being shopped at a 15% premium, and that asking prices generally for thrift branches on Florida's west coast shot up after the CalFed deal.
What will the market look like in 19957 Two factors are expected to play an important, although at this point somewhat undetermined, role: The industry's renewed emphasis on core funding and the advent of interstate branching.
A series of interest rates increases by the Federal Reserve since the beginning of last year has finally pressured banks into raising the rates they pay on liability products like NOW accounts and certificates of deposit. Some banks' loan-to-deposit ratios are so high that they will have to acquire more expensive incremental funding to keep pace with brisk loan demand. In an environment like this, stable, branch-based core deposits are of great strategic value to banks.
"All institutions are looking for low-cost funding," says Richard Maroney, an executive vice president and principal at Austin Associates Inc. in Toledo, OH. Maroney expects this new imperative to "keep premiums at the high end."
Kaplan's Farrell tends to concur. In a low interest rate environment, "branches aren't as valuable to big banks because they can go out and buy money as cheaply as getting it through the branch." But when rates go up, she explains, low-cost transaction accounts - which are an important staple of core deposits - become more valuable because they are a cheaper source of funding than CDs purchased through large brokers, a typical example of incremental funding.
Branch Value to Decline?
Nathan is not sure he agrees with this logic. As the gap between short- and long-term rates narrows and the yield cure flattens, he thinks the economic value of core deposits may decline. Should competitive pressures force banks to raise rates on their core deposits and they begin to lose their cost advantage, "people will pay less for them," says Nathan. "They'll be worth less." He adds that the best buyers for branch-based core funds will be those institutions caught in a liquidity crunch.
The other factor which may influence the value of branches in 1995 is nationwide banking, which will roll out in June 1997 unless individual states opt out before then. Nathan says the new law makes it easier to open de novo branches, which may tend to depress the value of existing properties somewhat.
But another school of thought holds that large regional institutions will begin to fine-tune their retail networks in anticipation of interstate branching, and this will stimulate demand for branches.
This was already evident in 1994, notes Schuessler at Sheshunoff. "There was a move by banking organizations to build franchise value due to the passage of interstate banking, and many banking organizations made strategic decisions to expand their presence in an existing market or gain entry into a new market," he says.