‘When we build it, they come’

Rhode Island banks and credit unions have gone on a bit of a building spree over the last decade, despite the state’s stagnant population growth and the proliferation of online and mobile banking.
The number of Rhode Island residents increased by 0.4 percent from 2000 to 2010, but the number of bank and credit union branches in the state climbed by more than 15 percent over the same time period. That’s one of the highest bank-branch growth rates among the states that saw little population growth in the last 10 years, according to Market Rates Insight, a company that tracks the industry.
And the growth looks like it will continue, at least in the short term.
TD Bank entered the Rhode Island market late last year and has quickly opened four locations. Plans call for eight more in the next few years. And Michigan-based Flagstar Bank, which is making a push into New England, has raised the possibility of opening branches in Rhode Island, too.
What gives?
The industry has undergone substantial consolidation in the last decade or so as big banks have swallowed up smaller ones. And experts have been predicting for years that bank branch networks would shrink as more customers migrated to online and mobile banking, allowing financial institutions to cut back on the overhead of operating numerous offices.
That really hasn’t happened yet, in part because the opening of a new branch can still bring an influx of new customers and deposits, the lifeblood of the banking business. Deposits tend to be a less expensive way to get cash for lending and to shore up a balance sheet.
Usually, those customers and the money come from the immediate area around the new branch.
“Consultants continue to say the primary reason customers join a bank is one of its branches being located close to home,” said Bruce E. Spitzer, spokesman for the Massachusetts Bankers Association.
That has been the experience of Westerly-based Washington Trust Co., which has added five branches in the last decade. Its Rhode Island offices now number 16, and another retail branch is in the works in East Providence. Right now, Washington Trust is behind only Bank of America and Citizens Bank in amount of deposits in Rhode Island.
“When we build it, they come,” Elizabeth B. Eckel, Washington Trust’s senior vice president for marketing and investor relations, said of new customers’ reactions when the bank opens a branch in a new community. Banks in Rhode Island aren’t alone in the branch-building frenzy.
In fact, the number of branches nationwide grew at a much faster clip in the last decade than Rhode Island’s 15 percent, according to Peter Nigro, finance professor at Bryant University.
Nigro said the number of branches across the country jumped from 64,000 in 2000 to 100,000 last year – more than a 50 percent increase, and up from 35,000 in 1980 and 50,000 in 1990. But he believes branch creation has peaked.
“I think we’ve over-branched, and we’re going to see a lot of these banks start to close down brick and mortar branches,” Nigro said recently.
Indeed, Federal Deposit Insurance Corp. data show the number of branches in the United States dwindled to 98,500 in 2010, the first annual decline in 15 years.
Nigro said changes to interstate banking regulations in the 1990s fueled much of the branch boom. Now he said government regulation, such as an effort to cap interchange fees that banks charge small businesses for debit card and credit card transactions, is prodding banks to cut back.
In an effort to maintain their bottom line, banks may prune their branch networks and the expenses associated with them, Nigro said.
Bank of America is in that process right now. A top executive said recently that the nation’s largest bank may cut its branch network by as much as 10 percent over the next few years.
BofA shuttered four Rhode Island locations last year. It also closed its Warren branch earlier this month, and will shut its Jamestown location next month, bringing its Rhode Island branch count to 38.
But right now, Bank of America is an exception.
Rhode Island’s FDIC-insured bank branches and offices grew to 259 as of June 2010, up from 220 in 2000. Over the same period, the number of banking institutions operating in the Ocean State climbed from 16 to 25 and total deposits grew from $14.47 billion to $39.91 billion.
Community banks and credit unions such as Washington Trust and BankNewport have added locations in recent years, despite Rhode Island’s sagging economy.
And Pawtucket Credit Union, the Ocean State’s largest by assets, doubled the number of its locations since 2000, and spread its footprint well beyond Pawtucket. Most recently, plans are in the works for an East Greenwich location.
PCU President Karl Kozak said there was a lull in branch construction in the mid-2000s, as financial institutions waited to see if automation and other technology lessened the need for retail branches. While use of online banking increased, PCU found that its members weren’t quite ready to let go of their local branches, even if they were visiting less. “They need to know they have a place to go if there is a problem,” Kozak said.
Eckel said some Rhode Islanders’ provincial tendencies might partially explain some of the banks’ desire to build more offices. In the Midwest, people are more accustomed to driving longer distances to get to their bank.
“We’re moving into communities where we don’t have that convenience right now,” Eckel said.
The increased ease of online and mobile banking has led to a shift in the way branches are used. Fewer individuals may be visiting branches, but small-business owners still are, particularly those without remote deposit capabilities.
“When you’re … say an electrician – and you get paid, you want to deposit that check right away and you come to the branch,” Eckel said.
The topic of banks and branches came up at last month’s R.I. Economic Development Corporation meeting, when TD Bank sought tax breaks to construct several new branches in exchange for creating jobs.
New EDC board member Stanley Weiss raised concerns that Rhode Island is already “overbanked,” and that TD Bank’s new hires may not add to the state’s total employment but rather lead to people moving from one in-state bank to another.
The tax break was approved, and later Robert Kolb, TD Bank’s Rhode Island market president, told Providence Business News that he didn’t agree with Weiss’ assessment.
“There’s always room for competition,” Kolb said. In a situation “where the ultimate capital pie increases and the opportunity for jobs increases, I don’t really see the negativity in that at all.”
For all the branch construction over the last 10 years – and the work that is on the drawing board – calculations by the Massachusetts Bankers Association show that branches per capita in Rhode Island – roughly one per 4,000 people – is significantly lower than in Massachusetts (one per 2,970 people) and nationwide (one per 3,116 people).
And even if there were too many branches, Kolb said that shouldn’t be a problem, either.
“If there are more branches in neighborhoods to service people’s banking needs, that’s fine,” Kolb said. “There’s no downside to it.” •