The planned merger of BB&T (NYSE:BBT) and SunTrust Banks (NYSE:STI) could have major impacts on investors, customers, and employees alike, who are most likely to see and feel the changes from a leaned-out branch network. The banks have a goal to eliminate $1.6 billion of annual operating expenses after merging, a target that necessitates thinning out their offices.

Branches are a necessary evil in the banking industry. On one hand, they're costly to maintain and make running a bank operationally more difficult. On the other, they're magnets for low-cost deposits and still very important for generating revenue from noninterest sources like investment management and insurance sales.

Consumers may not care about proximity to the nearest bank branch, but small businesses certainly do. Nearby offices are invaluable for retailers, gas stations, and other small businesses that need to make daily cash drops. And it's these customers that help banks rake in deposits at low interest rates.

Check out the latest BB&T and SunTrust earnings call transcripts.

Sign that reads "branch closed" in a bank window.

Image source: Getty Images.

City meets rural

BB&T and SunTrust have very different branch systems. Allison Dukes, chief financial officer of SunTrust, summed it up best on the conference call explaining the rationale for the merger. "BB&T's community bank model brings a slightly more rural deposit base, which helps to balance out SunTrust's slightly more urban oriented deposit base."

BB&T does have a very community bank-like deposit distribution. Nearly 15% of its branches have less than $25 million in deposits versus just 6% of SunTrust's branches. Roughly 46% of BB&T's branches have less than $50 million in deposits, branches that are unlikely to be particularly profitable if the bulk of their value comes from sourcing liabilities rather than generating noninterest income.

Bar chart of BB&T and SunTrust branches by deposit ranges.

Data source: FDIC.

BB&T has closed offices for years, but its signs can still be found sprinkled along interstates and highways in small towns in the rural South and in the mountains of Tennessee and North Carolina. Last year, on a conference call, BB&T's CEO, Kelly King, said that the bank has "a lot of small branches in a lot of rural areas, and we're being much more aggressive in terms of rationalizing that structure," implying the bank would continue to thin out its rural branch network.

Selling the scraps

In a presentation, BB&T and SunTrust said they expect to sell branches that together house roughly $1.4 billion in deposits. Smaller community banks typically buy these branches in one-off transactions or as part of a portfolio. For a community bank, buying branches is an easier and less-risky way to expand into new markets or lock down market share in their home turf. The buyer typically pays a modest, single-digit deposit premium of 4% to 8% of the branches' deposit base.

For example, last year, Wells Fargo sold 52 branches to Flagstar Bancorp, collecting a premium for branches that weren't profitable enough for the $2 trillion bank to justify. Though they weren't needle moving for Wells Fargo, they made a difference for Flagstar Bancorp, which needed deposits to bridge the gap between its loan portfolio and deposit base.

For the seller, a branch sale is a way to eliminate ongoing operating costs and part with a branch in a way that doesn't leave customers feeling left behind. In smaller cities or towns, a branch closure can alienate customers more than selling the office to a smaller institution. Given BB&T and SunTrust's desire to shave $1.6 billion in operating expenses (roughly 12.5% of their combined annual spending) by 2022, hundreds of branch sales and closures are likely over the next three years.