Branching Out

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It turns out, reports of the demise of retail branch banking have been greatly exaggerated.


Not so long ago, bank branches were expected to become an endangered species as banks consolidated and moved services online.


Instead, the opposite has happened: Over the last five years banks have opened up scores of new branches in L.A., adding staff and boosting services in a fight to retain and expand their customer base.


Indeed, the total number of retail bank branches countywide has grown nearly 10 percent over the last five years to more than 1,700, its highest level since 1994, according to figures from the Federal Deposit Insurance Corp.


“Everybody had these theories that the brick-and-mortar branch would disappear. But people still want to go to their local branch, and if you want to be a successful retail banking operation, you’ve got to focus on the branch,” said Wade Francis, president of Unicon Financial Services, a Long Beach-based banking consultancy.


The growth in L.A. bank branches is part of a larger development that has seen a reversal of the cost-cutting moves of the 1990s. In fact, the total number of bank branches nationwide grew 9.7 percent between 2003 and 2007, virtually the same rate as L.A. County’s 9.6 percent.


Retail banking executives, consultants and analysts point to several reasons for this growth in branches:


— As the major banks consolidated and shed branches in the 1990s, smaller community banks formed and began taking away many of their best customers, ultimately forcing the major banks to put more resources into branch operations;


— Opening up branches serves the huge numbers of fast-growing small businesses that have formed over the last several years;


— As ethnic communities particularly Asians and Hispanics have grown more affluent, banks have rushed in to pick up new customers; and


— There’s a growing realization that online banking wasn’t replacing traditional bank branch visits but instead was complementing them.


“People began doing more banking than ever before, choosing to access us more frequently, using whatever means they have available and that means they want more convenient and better service,” said Brad Dinsmore, west division executive with Bank of America Corp.


The Charlotte, N.C.-based bank has opened 13 L.A. County branches in the last five years and plans eight more for next year, bringing its total to more than 260. The bank is spending more than $100 million on these branch openings and on upgrading scores of existing branches in the county.



Branch closings


One of Bank of America’s main competitors, San Francisco-based Wells Fargo & Co., has been even more aggressive with 38 branch openings in L.A. County over the past five years. Wells’ Regional President Shelley Freeman said the banking giant has added more than 2,000 loan production officers, financial consultants and business bankers over the past five years in L.A. County, more than doubling the size of the sales force. That figure doesn’t even include bank tellers.


What’s more, many of the branches are growing larger in size, reversing a decades-long trend of shrinking branches. For example, once-small supermarket branches have now turned into full-fledged banking centers. All this has been supplemented by ever-expanding online, phone and automated teller machine operations. “What customers have shown us is that they want to do their banking anytime, anywhere,” Freeman said.


That attitude also explains why many banks have extended their branch hours, often until 6 p.m. or 7 p.m. on weeknights and longer into the afternoon on Saturdays. Some have even added Sunday hours.


The online banking phenomenon that was supposed to herald the end of the retail branch was not the first time the days of the bank branch were said to be numbered. A quarter-century ago, shortly after the automated teller machine debuted, the prevailing industry thinking was that ATMs would eventually push aside branch banking and save banks lots of money in staff and office operating costs. A few years later, the same thinking permeated the advent of phone-based banking.


But things didn’t turn out that way, in part because complex transactions and loan applications still needed to be completed inside the branch offices.


Instead, the pressure on bank branches came from an unexpected quarter: wave after wave of bank mergers and consolidations. Locally, Bank of America bought L.A.-based Security Pacific Bank, Wells Fargo bought First Interstate Bank and Washington Mutual Bank acquired Glendale Federal Bank and Coast Federal Savings. As each merger took place, branches in close proximity were closed.


Adding to the downsizing pressure in L.A. was the deep regional recession of the early 1990s. As aerospace companies and their subcontractors scaled back or disappeared, the much-coveted middle class bank account holders went with them.


By 1999, the number of bank branches in L.A. County hit its nadir of 1,500, a drop of 13 percent from 1994 levels. “So many old bank branch buildings were vacant and snapped up for other uses,” said Kevin Klowden, managing economist with the Milken Institute in Santa Monica.


At the same time came the advent of online banking, which was expected to deliver the “coup de grace” to the bank branch as more and more transactions would migrate online.



On the upswing


But then came the dot-com bust and the simultaneous realization by bank executives that not all transactions would migrate to the virtual world. Customers were taking to online bill paying and account monitoring in droves, but for anything more complex, they still wanted the personal touch one can only get inside a bank branch.


“Around the time of the dot-com bust, banks concluded that traditional branches were still important,” said David Choi, assistant professor of entrepreneurship and management at Loyola Marymount University in Westchester.


Small community-based banks came to this realization first, sensing a void in customer service as big banks had scaled back their presence. For example, Choi noted, First Republic Bank advertised that its personal bankers could be reached on weekends for the busy entrepreneur needing to complete a transaction.


But these new banks only had a limited number of branches. As the economy rebounded from the twin shocks of the dot-com bust and the Sept. 11 terrorist attacks, L.A. was still underserved with bank branches.


So while Wells Fargo and Bank of America were busy expanding their local branch networks, other banks outside L.A. plunged into the region in the last couple years, drawn by the lucrative marketplace that had been underserved.


Making a big splash has been Wachovia Corp., also based in Charlotte, N.C. Last year, Wachovia purchased Oakland-based World Savings and has been busy converting the 15 World Savings branches in L.A. County to the Wachovia name. By the end of this year, Wachovia also expects to have opened 10 new branches, known in the industry as “de novo” branches.


“California is by far the biggest banking market in the nation and L.A. is the biggest market in California. There’s more market potential in L.A. County alone than in the five entire states I used to manage,” said George Swygert, retail bank executive with Wachovia. “The big question in my mind is why it took us so long to get to California. Now that we’re here, it’s a huge opportunity for market growth.”


Another mid-sized bank drawn to the Southern California market has been Comerica Bank, a subsidiary of Dallas-based Comerica Inc., which has opened up eight branches in the last five years, more than doubling its L.A. presence.


For Comerica, which established its reputation as a business-focused bank, the draw of Southern California has been the huge number of small businesses that have formed over the last 15 years.


“The number of small businesses has grown so rapidly that there simply weren’t enough banks to service them and that has created a tremendous opportunity for us,” said Betty Rentifo Tucker, executive vice president of the Western market for Comerica.


The bank’s strategy has been to open “high visibility banking centers in high visibility locations,” Tucker said. These include a new regional headquarters in the just-completed 2000 Avenue of the Stars building in Century City, home to one of the largest concentrations of professional firms on the West Coast.


As part of the effort to offer better service to customers, banks also have begun experimenting with layouts. Some banks have replaced the traditional “teller wall” with kiosks, while others have employees whose job it is to steer entering customers to the appropriate section of a branch. And, in many areas, bilingual or even multi-lingual tellers and bankers are common.


“What we’ve found from our customers is that the better service we provide, the more our customers are likely to deepen their relationships with us,” said Dinsmore, the Bank of America executive.


Some banks have taken things a step further. To speed up the teller line, at many Washington Mutual branches customers no longer get cash from the teller; instead, they go to separate cash dispensing stations.


Even overseas banks have been drawn to the region. BBVA Bancomer USA, the California-based unit of Mexican bank Grupo Financiero BBVA Bancomer, has recently upgraded 11 remittance centers in L.A. County into full-service banks.


The move is part of a strategy to penetrate a region with one of the largest Hispanic populations in the world. The Mexican bank is itself a subsidiary of Bilbao, Spain-based banking giant Banco Bilbao Vizcaya Argentaria S.A.


“It was a small purchase, and the main reason was so that we could obtain a California banking license to open up more full-service branches. We are trying to become the dominant Hispanic bank in Los Angeles,” said Manuel Orozco, president and chief executive of BBVA Bancomer USA.



Cautionary note


The Mexican subsidiary first decided to enter the Southern California market in 2004 with the purchase of Moreno Valley-based Valley Bank, which had four branches. BBVA Bancomer has also opened five de-novo branches in L.A. County in the last two years.


But Orozco said there were no immediate plans to add to BBVA Bancomer’s presence in L.A. “Right now, we need a little time to digest the recent upgrades and branch start-ups. We’re focusing more now on testing new products and services for our customers.”


BBVA Bancomer’s recent caution is expected to spread throughout the banking industry over the next year or so, putting an end to the rapid branch expansion of the last several years. The housing bust and resulting credit crunch along with what appears to be a pullback in consumer spending are expected to take their toll on banks’ balance sheets, leaving less room for expansion in the region.


Besides, with so many branches added in recent years, many areas are now well served. “There will always be some neighborhoods that can use more branches, but the overall percentage growth in branches is going to drop,” said Klowden of the Milken Institute.

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Howard Fine
Howard Fine is a 23-year veteran of the Los Angeles Business Journal. He covers stories pertaining to healthcare, biomedicine, energy, engineering, construction, and infrastructure. He has won several awards, including Best Body of Work for a single reporter from the Alliance of Area Business Publishers and Distinguished Journalist of the Year from the Society of Professional Journalists.

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