Bankers looking to close branches to cut costs must pay attention to the location of such closures or run the risk of a Community Reinvestment Act ratings downgrade.
BBVA Compass Bancshares recently disclosed that it faces restrictions on acquisitions and branch openings after an issue turned up in its latest CRA exam. While CRA oversight may be most concerning for expansion-minded institutions like BBVA, it could also become problematic for banks looking to pare back.
"Bankers need to be very careful," said Carl Chaney, president and co-CEO of Hancock Holding in Gulfport, Miss. "In their zeal to reduce expenses they may well find themselves pulling out of markets that could cause CRA issues."
Nearly every bank has re-evaluated its branch network in recent years, as revenue has been squeezed and customers have migrated to digital banking. Several larger banks, including PNC Financial and Webster Financial, have announced major overhauls, while others have announced less extensive cuts.
Regulators are paying close attention to the size and scope of such cuts, industry observers said. In particular, they will be watching to make sure banks are maintaining a presence in low- and moderate-income communities. In many ways, CRA and compliance with the Bank Secrecy Act are clearly in regulators' cross hairs.
"CRA and BSA/AML used to be second-tier issues if you were going to close a branch or close an M&A transaction," said Phillip Smith, a lawyer at Gerrish McCreary Smith, a Memphis law firm and consultancy. "They have now become top-tier issues."
Federal law requires lenders to submit a branch-closing application to its primary regulator before the proposed closing, then post a public notice of the closing. Applications must include the reason for the closing and any hard data to support the decision.
Fulton Financial in Lancaster, Pa., announced plans this year to close 14 branches after an analysis of each branch's profitability. Though none of the locations were in low- or moderate-income census tracts, Fulton included its CRA officers in discussion over which branches to close, said Craig Roda, senior executive vice president of community banking.
"I think we've had more scrutiny on CRA policies and procedures the whole industry has," Roda said. "That's an industry given."
Such scrutiny has been gradually becoming more intensive since 2007, said Ken Thomas, a Miami consultant and economist who works on CRA issues. In 2007, regulators issued seven "outstanding" CRA ratings for every failing grade. Now the ratio is about one-to-one, Thomas said.
Some dispute the claim that regulators have gotten more stringent. John Taylor, president of the National Community Reinvestment Coalition, called the notion that regulators have gotten tough on branch closings "nonsense." While "outstanding" grades have become less common, he said the overall rate of failure has gone from around 11% in the early 1990s to 1%.
"Regulators are simply not enforcing this part of the law," Taylor said.
Bankers and CRA activists agree that it is relatively easy to secure regulatory permission to close branches. Regulators "won't fault you if you have a good business reason" for closing a particular branch, Thomas said. Acceptable reasons could include a branch's profitability or excessive competition in a particular market.
The key is to exhibit consistency in selecting which branches to close, Roda said. "If you leave a market altogether, whether or not it's in a low- to moderate-income tract, you have to be consistent in how you make the decision" on closures, he added.
A greater concern involves instances when community groups object to a planned closing, Smith said.
"Most banks and bankers are more concerned about the community reaction," Smith said. "We spend much more time asking, 'Do we have key stockholders that won't like this? Are there key borrowers that may be concerned? What will be the impact on the community?'"
Still, bankers could expect some pushback from regulators if they attempt to close the last branch in a specific community, Thomas said.
"The problem is that banks may say, 'Do I want to go into that low- or moderate-income area? Because if I don't make money and close it, I'll have a CRA issue,' " he said.
None of the seven branches CenterState Banks closed earlier this year were in low-income areas, but CRA was an important part of internal discussions, said Dan Bockhorst, the Davenport, Fla., company's chief risk officer. CenterState also evaluates other ways to fulfill CRA requirements that don't involve branches, he said.
"Branching is part of the CRA requirements, but not the end-all, be-all," Bockhorst said. "There are multiple ways to meet the needs of a community, including lending, investment and community service."