As Big Banks Leave Small Towns, Local Banks Snap Up Branches

Community banks nationwide are finding opportunities where their bigger rivals saw only expense. They're gobbling up the branches that the big banks don't want anymore.

"It was like manna falling from heaven," said John F. Burger of Six Rivers National Bank, referring to Bank of America's decision this year to sell 27 of its California branches.

Six Rivers, based in Eureka, bought four of those branches, doubling its asset size to $200 million.

To Bank of America, it was a chance to unload what it considered less profitable branches in rural Northern California. But to Six Rivers, it meant an escape from acquisition by nearby rival Hamboldt Bank.

As Mr. Burger put it, "Beauty is in the eye of the beholder." That is exactly why so many buyers of branches these days are community banks. Community bankers see the branches as an opportunity to add deposits and expand into new markets without the cost of starting from scratch.

So far this year, 729 bank branches have been sold, according to Sheshunoff Information Services Inc., Austin, Tex. That is up from 521 branches sold in all of 1996.

Of this year's sales, 44%, or 324 branches, have been sold by a bank with more than $3 billion of assets to a bank with less than $3 billion of assets, according to American Banker's analysis of the data. That is up from 1996, when banks with less than $3 billion of assets bought 37.8%, or 197, of the branches sold.

Why are big banks shedding branches?

Cleveland-based KeyCorp wants to sell 140 of its 1,200 branches so it can focus primarily on urban markets, said Jennifer Engle, spokeswoman for $72 billion-asset bank. So far, KeyCorp has announced 117 branch sales to 14 banks, most of which are community banks in rural areas.

Branches in rural markets are a better match for community banks because there is less pressure on smaller banks to show returns, said Richard X. Bove, senior vice president of Raymond James & Associates, St. Petersburg, Fla.

"Regional banks need to grow at a certain rate, and they can't do that if too many of their branches are not growing at that rate," Mr. Bove said. "But a community bank can take a profitable branch that isn't growing and be satisfied by the profit it is making."

And community institutions are better suited to sell products to the customers they are adding, said Gerard S. Cassidy, analyst with Tucker Anthony Inc., Portland, Maine.

"Regionals are relying on mass marketing and generic products," he said. "That is very attractive to some customers. But the smaller institutions tend to offer more personal service, and that is still important in rural markets."

"We know these markets, we know what people want," said Mr. Burger of Six Rivers.

Among the winning bidders for KeyCorp branches is Community First Bankshares of Fargo, N.D. In July, Community First closed a deal to acquire $1.1 billion of assets from all of KeyCorp's 25 branches in Wyoming.

Such branch acquisitions have helped Community First swell into a $4.2 billion-asset holding company with branches in nine states. And Community First is buying 37 Banc One Corp. branches in Colorado, Utah, and Arizona.

On a smaller scale, Camden (Maine) National Bank had almost a 50% market share in its home county, so it needed to branch out to grow. The bank decided it could enter two new counties by buying four KeyCorp branches. The deal is expected to close during the first quarter.

"We were looking at de novo branching into those areas, but that is a long and costly process," said Robert W. Daigle, president and chief executive officer of the $485 million-asset bank.

Camden National had determined it would take three to five years to break even with a new branch. Mr. Daigle said he expects the bank to recoup the undisclosed price it paid for the branches within three years.

Though a size boost is nice, community bankers buying these branches say the biggest attraction is that the locations are profitable.

Klamath First Bancorp bought 25 branches from Wells Fargo & Co., San Francisco, in July. The deal added $240 million of deposits to the company's subsidiary, Klamath First Federal Savings and Loan, at a cost of about $2 million.

Marshall J. Alexander, vice president and chief financial officer of the Klamath Falls, Ore.-based thrift holding company, said that even though his company received only the real estate and deposits, the branches were profitable almost immediately.

Klamath did not want the loans, he said, because that would mean assuming someone else's risks. The deposits they bought were primarily electronic accounts that were cheap to maintain, so the thrift was able to invest the funds and make a quick profit.

Bankers say retaining customers is vital to making the deals worthwhile.

Mr. Alexander said deposits are up slightly at the 25 branches Klamath bought this summer.

Camden National was so concerned with retention that it took the step of evaluating its reputation in the prospective markets. Mr. Daigle said he hopes to keep 90% of the branch customers after the sale is closed.

Even though some large banks are getting out of small towns, community banks say there is still plenty of competition. The big banks often hold on to the loans from the branches, and may still try to sell products to these customers. But primarily, the competition in these rural markets comes from other community banks and nonbank competitors.

"We still compete with Key and community banks," Mr. Daigle said. "But we are also competing with Countrywide for mortgages, Fidelity for funds, and MBNA for credit cards. We still have plenty of competition."

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