Bank of America (NYSE:BAC) has been responding well to the streamlining efforts of CEO Brian Moynihan. Part of his Project New BAC entails selling off as many as 750 branch locations, and so far, the bank hasn't had any trouble finding buyers in the form of community banks looking to expand their own banking footprint.
Seemingly, this scenario sounds like a match made in heaven. It does, however, bring a couple of questions to mind: Is B of A being a bit hasty in unloading its branches? And, on the other side of the coin: Are these smaller banks going to wind up with a bellyache after indulging in this feeding frenzy?
Community banks have been waiting in the wings
Several community banks have been feasting on the crumbs from Bank of America's table. But the biggest beneficiary so far is Arkansas-based Arvest Bank, which has contracted to purchase 29 of B of A's branches in the states of Missouri, Kansas, and Oklahoma, as well as locations in Arkansas. Northwest Bank bought five branches in Iowa last spring, and Camden National Bank scarfed up 15 branches in the state of Maine.
From the looks of things, these banks have had expansion in mind for some time. Northwest's CFO told American Banker that his bank had been eyeballing B of A's small-town locations for several years, even resorting to phoning a few times each year to remind the bank of its interest. Arvest wanted the branches because they would help extend its reach within and around its current market area, while Camden had a keen interest in grabbing more market share in Maine , particularly in areas such as Bangor and Augusta.
A good deal for B of A?
Although the banks aren't talking numbers, Northwest's CFO noted that both parties were happy with the deal. Analysts note that prices of branch locations are variable, and there is no evidence that these acquisitions are being bought at fire-sale prices.
That's good to know, though it seems unlikely that B of A would give away its branches, considering how ready the market to purchase them seems to be. Also, the whole point is to continue to slim down and add to the bank's now-comfy cash cushion, not to sell cheap.
In addition, B of A is shuttering branches in less desirable markets while opening new ones in more lucrative areas. For example, the bank recently closed four more branches in Boston, Massachusetts, while planning to open a newer, larger location in the downtown area mid-year. It is at these newer spaces that Bank of America has been showcasing its services to new customers, a smart business move that earned it accolades from business consulting firm Celent.
Mobile banking initiative will cut costs
One of these services is mobile banking, an area that B of A is looking to expand far beyond its current customer base of 12 million. Since the bank knows that mobile banking gives customers the service they want at reduced cost to the institution, this is a smart move, indeed.
Bank of America isn't the only bank to notice that mobile and online banking can help trim costs by allowing banks to shrink their footprints. Just as B of A needs to reduce assets that contributed to bloat after many acquisitions, both PNC Financial (NYSE:PNC) and KeyCorp (NYSE:KEY) also have plans to shed some of the branch locations that they took on during recent purchases.
KeyCorp, which bought 37 branches last year from HSBC (NYSE:HSBC), hoped to close about 50 of its more than 1,000 locations by the end of 2012. PNC, like Bank of America, sees online and mobile banking as a way to cut down on physical bank locations. The bank is installing hundreds of new ATMs that cut transaction costs by one-sixth.
A matter of scale
The idea that B of A would cut loose many of its branches has been around a while, and predates Moynihan's reign . In 2009, then-CEO Ken Lewis told CBS News that the system would have to be trimmed, and a 10% range was bandied about. At that time, B of A had 6,100 branches nationwide; as of the end of Q3 2012, that number had been reduced to 5,540 .
Overall, branch banking still matters. For the biggest banks, however, too many branches can become burdensome, whereas branch networks seem to give smaller banks a growth advantage. Crisis-era success story BankUnited (NYSE:BKU), for example, recently announced new branch openings in southern Florida, a real hothouse for branch banking. Still, the bank plans to top off at a smidge over 100 locations in that sunny clime, plus a handful of new branches in New York. Compare that to B of A's number, and the bloat becomes obvious.
Bank of America is closing branches according to a plan, and it seems to be working. As for the smaller banks, growth is important, and the economy is starting to show signs of life. This means more business for banks with a larger footprint, a fact these banks are apparently quite aware of. While the branch sell-off is not a loss for B of A, it is definitely a gain for the community banks that are scooping them up.
Fool contributor Amanda Alix has no positions in the stocks mentioned above. The Motley Fool owns shares of Bank of America, KeyCorp, and PNC Financial Services. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.