Bank of America (NYSE:BAC) closed more branches than any other bank in late 2014, and recently announced that it plans to lay off more than 200 employees from a Norfolk-based loan servicing unit.This is just the latest round of layoffs in the legacy asset servicing division, which has seen its numbers dwindle from about 42,000 in 2012 to less than 16,000 currently.
Now, at first glance, layoffs and downsizing the physical footprint may sound like a company that's struggling. However, I believe the exact opposite is true.
What's the story with the layoffs?
Obviously, it's always unfortunate when layoffs are necessary, as real people are losing real jobs. However, in Bank of America's case it is an indication of health, rather than weakness in the company.
The division where the latest round of layoffs is taking place was created in 2011 in order to assist mortgage holders who were at risk of foreclosure or default. As you may suspect, the number of delinquent loans has fallen considerably since 2011 as the economy and housing market has been gaining traction. In fact, Bank of America announced that its number of delinquent loans is one-seventh of its peak level.
The company said that it will continue to provide help to borrowers who are struggling with their mortgages, but that staffing is in the process of returning to normal levels.
Why are branches closing?
In a nutshell, Bank of America has been closing branches because it simply has more than it needs. With the increased technology available to consumers through mobile banking software, people have less of a need to go to a physical banking branch. Bank of America has wisely decided that it can still provide adequate service with a smaller physical presence.
Bank of America was the most aggressive bank in terms of closing branches in 2014, shutting 148 of its approximately 5,000 branches in 2014 after closing more than 300 in 2013. In all, the bank's physical branch network has dropped from more than 6,100 to just about 5,000 since the financial crisis ended.
To illustrate how fewer branches can translate to higher efficiency, consider the case of Bank of Internet, which has no physical branches and operates out of a single office. The bank achieves a return on equity of 19%, a return on assets of 1.65%, and an efficiency ratio of 41.1%, all of which handily beat Bank of America's numbers of 4.84%, 0.57%, and 50%, respectively.
Of course, these two companies are not an apples-to-apples comparison, and Bank of America has no desire to ever completely eliminate its branch network, but it does show how much the costs associated with running branches can eat into a bank's profitability.
On the right path
In a nutshell, even though closings and layoffs sound bad, they really are a sign that Bank of America is on the right path and that the bank's asset quality has dramatically improved.
I fully expect the closings to continue for some time, especially as mobile banking technology continues to evolve, and as the bank's physical footprint gets smaller, its efficiency (and therefore its profitability) should grow.
Matthew Frankel owns shares of Bank of America. The Motley Fool recommends Bank of America and BofI Holding. The Motley Fool owns shares of Bank of America and BofI Holding. 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.