On December 13, the FDIC released FDIC Quarterly¸ a quarterly comprehensive summary of the most current financial results for the banking industry. Within this summary is a featured article titled “2018 Summary of Deposit Highlights: Deposit Growth Slows and Office Decline Continues.”
The article states that deposits increased by 3.8 percent in the year ending June 2018, which is a slower rate than the average annual growth rate over the previous five years (5.4 percent). Moreover, both community and noncommunity banks reported declines in merger-adjusted deposit growth rates.[1]
During the same period, the number of banking offices operated by FDIC-insured institutions declined by 2 percent. This decline is consistent with the trend of declining U.S. bank offices since 2009. Most of the decline occurs in metropolitan counties.
The merger-adjusted office data for the year ended June 2018 reveals a contrast between community and noncommunity banks as it pertains to opening and closing offices. It shows that noncommunity banks acquired offices from other banks but closed far more offices than they acquired. Because noncommunity banks acquired community banks and closed offices, the aggregate number of community bank offices declined.
However, this was driven by acquisitions by noncommunity banks rather than by closures by currently operating community banks. In fact, currently operating community banks acquired offices and opened more offices, on net, during the year.
This once again counters the conventional wisdom surrounding the future of brick and mortar offices. While Fintech, acquisitions, population migration and efforts to improve efficiency suggest a continued decrease in the number of offices in the future, community banks continue to expand and find that their consumers prefer a bank with local offices nearby.
It should be noted that over the period examined in the article, 55.5 percent of noncommunity banks and 86.9 percent of community banks reported no changes to the number of offices. And, of the 397 banks that reduced offices, 10 banks accounted for more than one-third of the total office closures.
Nevertheless, the data implies operating offices are expensive. On average, institutions that closed more offices than they opened improved their efficiency ratios, which consider the ratio of revenue to noninterest expenses. Accordingly, institutions with greater declines in office counts experienced greater improvement to pre-tax return on assets (ROA).
[1] Merger-adjusted growth rates account for mergers and designation changes in the calculation of growth rates. For example, if Bank A, a community bank, acquires Bank B, a non-community bank, in January 2018, Bank-B’s deposits are treated as community bank deposits in the annual growth rates from July 2017 to June 2018.