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Which banks are positioned for low rates, digital adoption brought by pandemic

Some U.S. banks are ahead of the pack having taken actions before the pandemic to right-size branch networks, often through M&A.

As digital adoption has grown during the pandemic, banks have trimmed their branch networks at an accelerated pace, while investing in new technology to meet changes in customer behavior. A handful of institutions took action even before the pandemic began to position themselves for the rapid digital transformation, and advisers believe many others will be forced to follow to reduce their fixed-cost base against a challenging operating environment, marked by low interest rates and lackluster loan growth.

For an in-depth examination of the banking industry's performance, click here to read the full 2021 US Bank Market Report.

Banks have recognized for some time that branches are a higher-cost distribution system, but the expense associated with those networks stands out even more today. Many branches were built to gather deposits, and the value of those funds has declined considerably as banks remain sodden with excess liquidity and continue to face persistently low interest rates. The pandemic has also prompted customers to rely even less on branches for basic banking services, and now they increasingly use digital channels.

S&P Global Market Intelligence's 2021 mobile banking survey of more than 3,800 U.S. mobile bank app users, conducted between February 2021 and March 2021, found that branch traffic had declined notably since the pandemic began, while usage of mobile apps increased. More than 20% of respondents in the survey further said they used mobile app features that provided basic banking services such as transferring money between accounts, depositing checks and paying bills for the first time post-pandemic.

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Basic transactions are expensive for the bank when conducted at the branch. But large institutions like Bank of America Corp. have said performing those basic services through digital channels is 90% cheaper than at physical locations.

The banking industry seems to have recognized that it simply has too many branches and slashed a record amount of locations in 2020, adding to cuts over the last few years. While most banks have shrunk branch networks, a number of institutions have grown into larger asset categories over the last five years, in part through M&A activity. Regional banks — those with assets between $10 billion and $50 billion — have actually increased their branch counts since 2015. However, many banks grew into regional franchises during that time frame.

The number of banks in the $10 billion to $50 billion asset group grew 52.3% between 2015 and 2020. Branch data is based on the June 30 FDIC Summary of Deposits filing for each year. Those institutions held just 10.3% of the industry's assets at year-end 2020 but had purchased 25.4% of all assets sold and 21.6% of all branches acquired between Jan. 1, 2015, and April 13, 2021.

The nation's largest banks have reported modest growth in branches for similar reasons, with the number of institutions with more than $250 billion in assets increasing to 13 in 2020 from eight in 2015. The largest banks have also led the way on digital investments and steadily reported greater digital adoption even heading into the pandemic. Those gains appear to have continued.

Bank of America, for instance, noted in an investor presentation associated with its first-quarter earnings that digital sales made up 49% of all sales in the period, up substantially from 33% a year ago and 30% two years ago. BofA further said 85% of deposits occurred through digital channels or ATMs in the first quarter of 2021, up from 79% a year earlier and 77% two years ago.

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As banks have moved customers to digital channels, larger institutions appear to have been the most effective in culling branches while retaining customers, at least when measuring deposits per branch across the industry. Large regional banks — banks with assets between $50 billion and $250 billion — have achieved the greatest gains on that front over the last five years, growing deposits per branch to $151.9 million, or by 51.2% from 2015 to 2020.

However, the nation's largest banks, institutions with more than $250 billion in assets, easily maintained the highest median deposit branch at $306.3 million and increased that balance by 45.0% since 2015.

The industry's biggest banks began investing heavily in technology and digital channels not long after the Great Recession, but a number of large regional banks have tried to follow suit with tech investments of their own in recent years. Some of those strategies have been implemented in conjunction with mergers such as the combination of BB&T/SunTrust, which formed Truist Financial Corp. When announcing the merger, BB&T said the transaction would allow for investments in technology to meet growing client demands.

Among banks with at least 20 branches, Truist has experienced the 11th largest gain in deposit per branch since 2018. M&A has also played an active role in the strategy of other banks recording the largest gains in deposit branch, including Sterling Bancorp and Atlantic Union Bankshares Corp., which ranked fifth and 10th among institutions with more than 20 branches.

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Institutions with digital-only banks stand out among those reporting gains in deposits per branch as well. Midland Financial Co. has grown its deposits per branch by 91.3% since 2018 — the most of any bank with more than 20 branches. In August 2018, the Oklahoma-based bank launched Vio Bank, an online bank offering certificates of deposit and savings accounts.

HSBC Bank USA NA and Capital One Financial Corp., which have experienced the third and fourth largest increases in deposit per branch since 2018, have well-established digital banks.

Meanwhile, some banks have seen their deposits per branch decline. Of course, many institutions have their own unique set of circumstances such as Heritage Southeast Bancorp. Inc., which has experienced the greatest decline in deposits per branch and was the product of a merger of equals completed in September 2019. More recently, the bank fetched an attractive offer from a credit union.

Others like The Bank of Princeton, whose deposits per branch have fallen 20.7% since 2018, have also recently sought to expand their footprint through branch deals and opening branches as they still see the opportunity to gain customers through physical locations.

Ultimately, the branch might not be dead, but the pandemic seems to have clearly illustrated that banks can effectively serve their customers with fewer locations. While banks will likely still selectively open branches as they expand into new geographies, revenue pressures should only accelerate the continued shrinkage of branch networks.

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