US bank branch sales set for resurgence following strong start to 2024

After years of slowing activity, bank branch M&A is off to a hot start in 2024 as buyers seek funding and sellers look to optimize their operations.

Like whole bank M&A, branch deals have come to a standstill over the last year. But now, the number of bank branch transactions announced in the first quarter is already double that of the first quarter of 2023 and sources said they expect the industry will soon return to a steady flow of branch M&A.

"Activity is picking up, and we will see more branch transactions this year than last year," Michael Bell, the leader of Honigman LLP's financial institutions practice, said in an interview. "No question about it."

Seller motivation

Improving profitability by trimming their footprints and expenses is one major reason banks look to offload branches. The two most recent bank branch sellers are both involved in ongoing transformation strategies.

Heartland Financial USA Inc. is exiting Montana with its sale of nine branches to two buyers, a move that is part of its ongoing strategic transformation.

The Montana branches were disconnected from the rest of Heartland's footprint and the company has better opportunities for growth in other markets such as Phoenix, Denver, Kansas City, Milwaukee, Minneapolis and California's Central Valley, President and CEO Bruce K. Lee said in an interview.

"Those six markets have greater growth potential for us than what we were experiencing in Montana," Lee said. "This is also a better use of our capital and overall, will enhance our return on assets."

Heartland did not have the scale it wanted in Montana and the transaction will free up capital for reinvestment, Stephens analyst Terry McEvoy said in an interview. Still, the company ranked 10th in deposit market share in the state.

Heartland will reinvest the proceeds from the transaction into hiring talent and the company's digital platform to improve outreach to small businesses, commercial customers and consumers in its higher growth markets, Lee said.

Berkshire Hills, which recently announced the sale of 10 branches to three different buyers, is similarly working on a transformation plan to improve profitability. Shrinking the company's footprint makes strategic sense and is a positive for Berkshire Hills, Piper Sandler analyst Mark Fitzgibbon wrote in a note following the announcement.

It makes sense for large regional banks with sizeable branch networks to shed branches in lesser-performing markets, Armstrong Teasdale partner Paul Cambridge said in an interview. Sellers want to maximize efficiency, and branch sales allow them to refocus resources into their best-performing locations, Honigman's Bell said.

Still, it can be hard for buyers to let go of deposits through branch sales, which is one reason these transactions have slowed down over the past two years as liquidity was top of mind, advisers said. But for some, the expense of operating an underperforming branch can outweigh the need for deposits, Cambridge said.

Following the nine-branch sale, Heartland's pro forma non-brokered deposits will fall to $14.40 billion from $15.04 billion at the end of the fourth quarter of 2023. Deposits at the branches make up between 4% and 5% of Heartland's deposit base, but the company is not concerned about the loss, Lee said.

"While that's a big number, it's not that significant," the CEO said. "During the last two quarters overall, we grew roughly 4% annualized."

Berkshire's 10-branch sale consists of $485.5 million in deposits.

Buyer motivation

For branch sellers, small community banks are often natural buyers as they can profitably run branches in low-growth markets, Cambridge said.

"They love brick-and-mortar locations," Cambridge said. "We'll continue to see further consolidation in the branch marketplace over time, primarily with the larger banks shedding branches and being purchased by smaller community banks."

One of Heartland's buyers was Stockman Financial Corp. subsidiary Stockman Bank of Montana, which had $6.33 billion in assets at Dec. 31, 2023 and ranked 3rd in deposit market share in Montana. Berkshire's three buyers all had less than $10 billion in total assets respectively.

Even so, small banks are not always the buyers. Glacier Bancorp Inc.'s unit Glacier Bank, which bought six Heartland branches, will further solidify its top spot in Montana deposit market share with the purchase.

Credit unions have also shown to be active bank branch buyers, participating in three of the 13 most recent bank branch sales.

Community banks and credit unions are chomping at the bit to buy branches as they seek liquidity and scale, Bell said.

"We're still in a part of the cycle where liquidity does have value, and the strong performers need it," Bell said.

The need for funding means buyers are willing to pay a higher premium for branches, Olsen Palmer managing partner Christopher Olsen said in an interview.

"We're seeing some of the strongest pricing we've ever seen," Olsen said. "Looking ahead, we do expect a lot of activity on the M&A both whole bank and branch in the coming years."