Objective data lead the way.
Community Bank executive teams and directors are increasingly preoccupied with quantifying the impact of regulatory oversight on important strategic decisions.
Regulatory costs, combined with fierce competition from the marketplace, particularly as it relates to loan pricing, and declining demand for branch services, are causing many Community Banks to evaluate the future viability of existing branch facilities.
However, the last thing a bank wants is a CRA challenge with accusations of reducing or eliminating services to low‐ and moderate‐ income families and neighborhoods.
This begs the question, “How do you move forward with strategic initiatives relating to closing unprofitable branches in no / low growth locations, enabling you to reinvest in other markets, without running afoul of CRA commitments and obligations?”
Navigating these seemingly conflicting objectives is possible, but requires hard data and sound, consistent decision‐making, based on business principles that regulators will understand and accept.
Considered among the best rationales for the closure of individual branches is a branch profitability analysis combined with a branch closure test to demonstrate overall improvements in bank profitability.
Let’s take these two metrics individually.
Branch profitability analysis allows management to compare the dollars of profit or (loss), ROA and ROE by branch to bank‐wide averages, and enables the ranking of branches in descending order of return.
Typically, branches considered for closure will reflect either very low profit and return levels, or actual losses on a freestanding basis, before the allocation of overhead expenses, which may not decline when and if branches are closed. Most often, these branches will rank low or last in the bank’s overall ranking of branch performance.
An effective strategy to avoid CRA challenges to branch closure decisions should include empirically – driven assessments of branch performance and market growth potential, among other metrics that can be applied across the bank’s overall branch network.
Since CRA commitments are intended to be “…consistent with the safe and sound operation of the institution…,” factual evidence in the form of a branch closure test demonstrates objectivity in the branch closure assessment process.
The branch closure test is an analytical procedure which incorporates branch profitability information in both asking and answering the question “Is the bank better off financially without this branch?” This process also enables management and directors to assess safety and soundness implications of a branch closure strategy.
In the branch closure analysis, product profitability information is used to determine if the hard dollar cost savings created by closing the branch is greater than the lost profitability due to product balance run‐off, (typically core deposit products weigh heavily in this analysis, since they generally are the most profitable products provided by the branch).
Community banks should have board level policies on branch closure in place which incorporates an objective decision‐making process, including branch profitability metrics among other factors. CRA concerns are either minimized or eliminated if the decision to close an office is consistent with these policies, and derived from assessments of objective metrics and criteria rather than demographically oriented characteristics.
Many strategies and decisions contemplated by Community Bank executives and directors unfortunately are evaluated through the prism of regulatory scrutiny and pushback.
Developing sound branch performance and profitability criteria, and applying them consistently, will facilitate branch closure decisions, and perhaps minimize some of the regulatory angst that often accompanies these decisions.