Holding Fast


An FDIC study finds digital winds aren’t blowing away brick-and-mortar branches

By Kelly Pike

On the Future of Retail Offices

How central of a role will physical retail offices play in the future of your community bank’s retail delivery strategy?

  • 8%—An increasing role (Retail offices will play an even more significant role than they do today.)
  • 57%—About the same role (Today’s balance of physical officers and digital channels won’t change much.)
  • 32%—A decreasing role (Digital channels will reduce the need for retail offices somewhat.)
  • 3%—Significantly reduced role (Digital channels will drastically reduce the need for retail offices.)

Source: ICBA NewsWatch Today poll, March 2015

In 1977 customers had few choices when it came to banking transactions. Credit cards, ATMs and telephone banking were available, but chances were that a customer would go into the bank if she needed something. There were 2.9 banking offices for every 10,000 people.

Two banking crises, the lifting of branching regulations, population shifts and an explosion of digital banking options have greatly changed the banking landscape—and there still are 2.9 banking offices for every 10,000 people.

That’s according to the FDIC’s newest study on retail bank offices, “Brick-and-Mortar Banking Remains Prevalent in an Increasingly Digital World.” The study examines branching trends between 1935 and 2014, finding that 6,669 banks and thrifts operate 94,725 banking offices as of June 2014, down just 4.8 percent from 2009’s all-time high. ICBA research of year-end 2014 FDIC data shows the number of community bank branches stands at 45,826.

“The idea that branch banking is dead now that we have smartphones is greatly exaggerated,” says Richard Brown, FDIC chief economist and associate director for regional operations. Between 1970 and 2014, the total number of banking offices grew 109 percent, nearly twice as fast as the U.S. population.

Yet branch offices are contracting. Nationally, the per-capita number of banking offices has dropped by about 15 percent since 1987. Between 2008 and 2014, about 11,000 new offices were opened and 15,500 offices were closed.

The FDIC attributes the recent decline in bank offices to the consolidation from bank failures during the Wall Street crisis from seven years ago, noting that the 4.8 percent decrease in offices since 2008 is comparable to the 5.7 percent decline during the last crisis-induced contraction, which lasted from 1989 to 1995.

“I don’t have particular concern with the recent decline,” says Brown, noting that relationship-banking is here for the long run for community banks and their customers. “The measures show a pretty robust network.”

The proof is in the density. Thousands more offices exist today at a higher per-capita rate than they did in 1970, when there were just 4.2 offices for every 10,000 people. These results suggest technology is not necessarily a substitute for physical locations and has “had, at best, a limited effect on the prevalence of offices,” the study says.

This is particularly true for community banks, according to the FDIC’s study, which differentiated between community and noncommunity bank openings and closings for the first time, Brown says. Community banks opened proportionately more offices and closed fewer offices than noncommunity banks. Between 2008 and 2014, “the number of new offices opened by community banks was equal to 11.5 percent of the offices they operated in 2008, compared with 9.5 percent for noncommunity banks,” the study states. Community bank office closures equaled 13 percent of the offices they operated in 2008 compared with 17.3 percent for noncommunity banks.

“Whatever the mix of services that these community banks and all banks deliver, physical banking is still an integral part of that,” says Brown. “There is real value there. The number of branches still operating is evidence enough.”

That’s not to say community banks didn’t close offices. In fact, the total number of community bank offices declined more than the number of noncommunity banks, mainly because of charter conversions caused by failures, mergers and other changes to institutions’ size and structure, the study finds.

Yet while community bank charters dropped 45 percent over the past 20 years, the number of community bank offices declined by just 6.5 percent. The average community bank office network increased by 2.3 offices to 5.5 offices—a size conducive to local control and decision-making, the study notes.

“With charter consolidation, you don’t see offices going away,” Brown says. “You see larger networks.”

Ups and downs

Bank retail office growth has been increasingly cyclical since the 1980s, the FDIC reports. From 1945 to 1989, the total number of bank offices increased after contracting between 1935 and 1945. Since then there have been three alternating periods of contraction and growth—with offices declining 5.7 percent between 1989 and 1995, increasing 22.9 percent between 1995 and 2009 and declining again by 4.8 percent between 2009 and 2014. Despite these shifts, far more offices have been added than lost; there were 67,222 more offices operating last year than the 27,503 offices operating in 1935 during the Great Depression.

Yet banking crises and technology aren’t the only factors influencing branch expansion and contraction. Growing and geographically shifting population and the relaxation of branching laws play a role. Since 1991 banks put the most new offices in the Sun Belt states, such as Texas and Florida, where population boomed. The Northeast lost population and bank offices.

The Midwest saw substantial growth in office density despite its population loss thanks to the relaxation of state banking laws and the nationwide expansion of interstate banking with The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, the FDIC finds. The number of offices in states with previous restrictions grew 1.5 percent from 1989 to 1995, even when the rest of the industry was contracting.

Read the Study

The FDIC has published findings about its study “Brick-and-Mortar Banking Remains Prevalent in an Increasingly Digital World,” in its first quarter FDIC Quarterly publication this year. Find the publication on the agency’s website, www.fdic.gov.

Perhaps most important to community banks that are developing retail delivery strategies are population trends, Brown says. Although the majority of community banks’ deposits come from metropolitan areas, community banks’ greatest market share is in rural areas. Office density in these areas is inherently higher than in urban areas because it takes more offices to serve a spread-out population.

Also more business, such as small-business lending, is done face-to-face, he points out. Yet density has “remained fairly stable” over the past 20 years. Offices in micro and rural areas made up 21 percent of offices in 2008, yet they made up just 15 percent of office closings and 11 percent of office openings.

“In metro areas, maybe there has been more substitution in terms of physical offices versus other delivery channels,” Brown suggests of these results, while noting that much of the difference in density stems from long-term rural to urban migration decreasing metro density.

Community banks and their branch networks will continue to consolidate over the next few years yet remain vital, says Chris Cole, ICBA executive vice president, senior regulatory counsel. “The branch system will continue to be the primary means that community banks will deliver financial services to their customers,” he says.

But to thrive, community banks will need to compete in both physical and virtual spaces to meet customer expectations, Brown adds. “It really validates the notion that relationship banking is particularly important to community banks,” he says of the study. “If you don’t have relationships with customers, technology won’t get you very far.”

Kelly Pike is a freelance writer in Virginia.