Deposits Are in High Demand, But Are Branches?

Few banks are interested in buying branches, but they’re not closing them either.

Just 18% of respondents to Bank Director’s 2024 Bank M&A Survey say their organization is likely to buy branches in the next year. By comparison, 35% say they’re likely to buy another bank and a quarter believe they are likely to lift out a lending team from another bank. 

The interest in buying branches has declined dramatically since before the Covid-19 pandemic, when the need for physical distancing accelerated the broader shift toward digital banking channels. In the same survey conducted in September 2019, 27% of bank executives and directors said they were likely to buy branches in the year ahead. 

Though branches may be expensive to maintain, for many banks they are still critical for holding onto low-cost retail deposits, which are in high demand right now. Very few respondents to the 2024 Bank M&A Survey say their bank actually took steps to shrink its balance sheet, and a majority of those who did say that shrinking the branch footprint is not in play.

“I don’t think there’s gonna be that many sellers of branches right now because everybody needs deposits,” says Don Musso, president and founder of the bank consulting firm FinPro. “Pre-Covid, we were flush with cash; we had more deposits than God. Now that’s shifted, and deposits are running out the door.”  

A working paper issued in July by the National Bureau of Economic Research suggests there’s some validity to the idea that branches are critical for holding onto deposits. The report found that while banks with low branch density experienced large deposit inflows between 2016 and 2020, they were also more vulnerable to larger outflows and declining stock prices during the banking crisis in Spring 2023. 

“Our results suggest that digital banking enabled banks to grow faster and attract uninsured deposits, but those large deposits inflows took the form of ‘hot money’ that changed its course when economic conditions worsened,” the report’s authors write. 

They theorize that the very lower branch densities of Santa Clara, California-based Silicon Valley Bank, San Francisco-based First Republic Bank and New York-based Signature Bank reflected the nature of their depositors, and that digital banking allowed those clients to withdraw their money more quickly. 

The industry may be responding by cutting back on branch closures, at least temporarily. Net branch closures fell to 43 nationwide in the month of October, down from 73 in September and from the monthly average of 117 for the 12 months prior, according to data from S&P Global Market Intelligence. JPMorgan Chase & Co. closed 14 branches in October, at the same time that it also opened 22 branches. Meanwhile, Wells Fargo & Co. closed the most branches, shuttering 30 in that time period.  

John Behringer, national leader of the financial institutions sector and risk consulting partner with RSM US, believes that interest in branch deals may actually be understated. He thinks that bank leaders may be more interested in doing branch deals to take out specific competitors or get into certain markets, and that might not come out when they’re asked about branch deals more broadly. 

“I’m honestly surprised the number was that low,” Behringer says of the 18% who say they’re likely to buy branches in 2024. “There’s a lot of nuances to that question that it’s not as easy as, ‘Would I do a branch acquisition or not?’”

He also theorizes that banks under $3 billion of assets may be even more interested in branch deals, which is somewhat borne out by the 2024 Bank M&A Survey results. Nearly a quarter of respondents under $500 million and between $1 billion and $5 billion say they are likely to buy branches in 2024. 

For many community banks, “you definitely need branches in an area to secure your brand and to secure your customers,” says Patrick Vernon, advisory services senior manager with Crowe LLP, which sponsored the Bank M&A Survey. “But as the populace moves towards more of the younger generations, we’re seeing a shift in how they bank.” 

Musso believes that interest in branch deals may come down to the type of market and customer base a given bank is catering to. In urban and suburban markets, he anticipates more banks could sell their larger branches and lease back a smaller amount of space to cut costs. In more rural markets, a branch presence is a real game-changer. 

“In rural areas, you still get that sphere of influence if you’ve got a presence there. There’s still the folks in that rural town who don’t want to bank with somebody from New York or Chicago,” he says. “It’s very important that you’re in that community in some way, shape or form.”