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As Branches Decline, How Do Bankers Continue to Comply with CRA?

Recent revisions to regulatory guidance do not strip the bank branch of its importance for achieving compliance with the Community Reinvestment Act. Still, regulators realize that bankers are serving communities increasingly in digital ways.

Bankers working to comply with the Community Reinvestment Act (CRA) might feel in times like these stuck between brick and mortar and a hard place.

At a time when US banks are closing hundreds of branches per year, financial institutions must continue to comply with the CRA, which places importance on the full-service branch in gauging how well banks are ensuring the availability of credit and services.

Financial institutions shuttered more than 3,900 branches from June 30, 2011, to June 30, 2016, in metropolitan statistical areas in the Lower 48 states—a 5.4 percent decline—according to data from the Federal Deposit Insurance Corporation (FDIC). Those closures are the result of consolidation in the industry and a change in customer habits, according to industry insiders.

The number of bank branches in metro areas in the Lower 48 has been dropping since 2011 and is now nearly what it was a decade ago.

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It’s clear in recent revisions to regulatory guidance around the CRA that bankers have sought clarity on how examiners will weigh branches and alternative delivery systems as banks’ business models continue to evolve. One banker says he can’t recall a time when the scrutiny and community activism involving banks were “quite as intense” as they’ve been during the past 2 or 3 years. A number of institutions’ CRA ratings have been downgraded, he notes.

The Community Reinvestment Act was passed in 1977 to encourage banks to help meet the credit needs of their entire communities, including low- and moderate-income (LMI) neighborhoods, in ways consistent with safe and sound bank operations. The aforementioned revisions to guidance about the act do not strip the bank branch of its importance but do expand the definition of alternative delivery systems that banks are using to serve customers today.

As part of the Federal Financial Institutions Examination Council, the 3 federal banking agencies with supervisory responsibility for CRA collectively issued in July 2016 updates to the Interagency Questions and Answers Regarding Community Reinvestment, or Q&A, which provides guidance on the interpretation and application of the CRA. The recent changes to it are the first since 2013.

In so issuing these changes, the agencies—the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, and the FDIC—gave notice that they’d withdrawn proposed revisions that would have deleted the statement that “performance standards place primary emphasis on full-service branches.” They withdrew that particular revision, according to the notice, in order to avoid the unintended implication that branches are less important in providing financial services to low- and moderate-income neighborhoods.

Commenters from community organizations had opposed the proposed revisions, highlighting the importance of face-to-face contact in banking transactions in order to overcome language barriers and effectively provide services such as explaining terms and conditions. Those commenters also feared the proposed changes would result in more branches being shuttered.

Closed bank branch on Route 18 in Medina, Ohio. Photo courtesy of Pamela Tabar.​

Closed bank branch on Route 18 in Medina, Ohio. Photo courtesy of Pamela Tabar.

Complying in the digital age

The number of bank branches actually climbed before and during the recent recession, but that number has declined since 2009, when the recession ended, in both the region the Cleveland Fed serves and the Lower 48.

According to FDIC data, the number of bank headquarters declined before, during, and after the most recent recession, but by a greater percentage in the Fourth Federal Reserve District—Ohio, western Pennsylvania, the northern panhandle of West Virginia, and eastern Kentucky—than it did in the Lower 48.

Metro areas in the Fourth District* have lost more bank headquarters (-62 percent) than have metro areas in the Lower 48 (-55 percent) since 1994.

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Area banks, among them Pittsburgh-based PNC Financial Services Group, Inc., and Cincinnati-based Fifth Third Bancorp, also continue to close branches both to reduce expenses and because of changing customer preferences.

Locally and elsewhere, mergers and acquisitions are another driver of main office and branch closures.

Poor Community Reinvestment Act performance can stall bank mergers and acquisitions. Banks’ CRA records are considered, too, when they apply to open new locations and business lines.

In 2014 and 2015, the Cleveland Fed examined 11 institutions for CRA performance. None of the institutions achieved the highest rating (“outstanding”), 10 received a “satisfactory” rating, and 1 received “needs to improve.” The lowest rating is “substantial noncompliance.”

CRA evaluations are about “more than just branches,” says Michael J. Coleman, a banking supervisor for the corporate compliance risk team of the Federal Reserve Bank of Cleveland.

“It’s pretty well known that examiners are going to analyze where a bank’s branches are, but bank management can also provide additional information for consideration such as what alternative service methods are being utilized,” Coleman says. “Does the bank offer mobile banking? Does the bank offer Internet banking? Where are the bank’s deposit-taking ATMs located?

“Really, the question is, is access to banking products and services declining as the number of bank branches declines?” he continues. “The answer may be no.”

To that end, as a means of acknowledging that many other alternative delivery channels are utilized by financial institutions, a minor revision published in July to the Q&A removed references to automated teller machines (ATMs) as the only example of alternative delivery systems.

Robert Rowe

And newer channels are sure to come: The American Bankers Association’s Robert Rowe notes the trade group is increasingly hearing bankers ask how they can partner with fintech firms, or financial technology firms, to deliver financial services.

In assessing compliance with the CRA, examiners conduct lending, investment, and service tests. Lending, Coleman explains, is weighted the heaviest. The service test performance standards place primary emphasis on full-service branches while still considering alternative systems. The service test also considers an institution’s community development activities.

But Coleman cautions, “We can’t discount the impact of a branch distribution weakness in low- and moderate-income tracts and have that made up by strong community development services. If a bank closes all of its LMI branches, but remains in the market and still has the profile of a retail branch bank, bank management still needs to demonstrate how they are serving the banking and credit needs of these communities.”

As branch networks shrink, the concerns are people’s being left only with check-cashing and similarly expensive options and small businesses’ not having access to financial services they need, Coleman explains.

“The large retail stores are not sending their employees into the branches; they’re using armored cars,” he says. “What about those small businesses that have needs such as for cash and coin or that want to apply for a loan? That’s something that concerns me.

“I don’t have the answer to what the future looks like, but the current expectation and requirement is still going to be out there that bankers need to serve the needs of their entire market areas,” Coleman adds. “I recognize the challenge that the banking industry has. As you make strategic decisions to have less brick and mortar, banks still have to demonstrate how they are meeting the credit needs of their markets.”

How branches factor into the future

Jeff Thompson

Some banks are opening and building new branches, notes Jeff Thompson, a certified regulatory compliance manager with United Bankers’ Bank, headquartered in Minneapolis with an office in Worthington, Ohio. Of the approximately 35 banks with which he consults, probably less than 10 percent are doing so, though many consider the best bet to be buying a competitor and its existing footprint. Building branches is a riskier proposition than it used to be, given the stagnant interest rate environment, compressed margins, and more, Thompson explains.

“One of the things bankers tell us is the physical presence is still important,” says Rowe, vice president and associate chief counsel, regulatory compliance, for the American Bankers Association. “Even though customers rely increasingly on technology, when opening accounts or when they have a problem, they like to go in and talk.”

What Rowe is unsure of is how much of the credit bankers extend today is the product of someone’s walking into a brick-and-mortar location versus using other channels.

“Part of the challenge with that is, what I hear from bankers is it’s a mixed kind of interaction between the borrower and the bank,” Rowe says. “The customer will take the first couple steps online and once they have an idea—‘I want this kind of loan’—they’ll go into a branch to talk to someone. [In this example] it started online but it finishes in person.”

Norman Bliss, senior vice president and director of community development for Cleveland-based KeyBank, which has received 8 consecutive outstanding CRA ratings, concurs.

Norman Bliss

“It’s not either/or, it’s both,” he says.

Bliss attributes KeyBank’s ratings, in part, to a branching strategy that involves so-called KeyBank Plus centers that operate like traditional branches and also offer additional services related to financial education and literacy.

FDIC data reveal that the share of operating branches that are standalone locations is declining. Meanwhile, the number of retail branches such as those in grocers has increased more in the Fourth Federal Reserve District than it has in the Lower 48.

The number of branches, despite recent years of decline, is higher than it was in 1994 in both the Lower 48 and the Fourth District*, but the share of branches that are standalone storefronts has dropped.

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Such in-store presences have their advantages, the Cleveland Fed’s Coleman notes.

“It’s great for the retailer because they can lease out their space,” he begins. “It’s great for the bank because you have people coming in—a captive audience.

“They’re less costly to get up and running compared to traditional standalone branches,” he adds of such locations. “You’re not investing in the overhead to build brick and mortar, pay to maintain the parking lot, the landscaping. These in-store locations, you just move right in. The buildout of the space is relatively simple and doesn’t require a long timeline.”

The downside is that retail locations also leave financial institutions without control. When, for example, a grocer closes in a low- or moderate-income census tract, the bank’s location inside the store closes with it.

Plus, Thompson notes, in-store locations don’t tend to generate much lending activity.

“You’re not going to put a lender at a Walmart or a Kroger,” Thompson asserts. “That’s not where a customer’s going to go for a loan.”

Where do banking insiders expect banks’ revenue growth to come from in the near term, and how do branches, no matter their type, factor in?

Rowe says it will be small business and commercial lending driving growth, and Thompson agrees. But Thompson notes that most commercial lending doesn’t happen inside a branch.

“Most commercial customers don’t come into the bank,” he explains. “A good commercial loan officer isn’t tied to his desk. He’s out in the community talking through credit needs.”

Rowe expects to see bankers increasingly banking with customers, not inside standalone and retail branches, but inside other places.

“I’m Rob Rowe [the banker], I’ve got a safe connection to the bank, I can go out into the local office of XYZ company and sit down there and chat with the president,” he explains. “I can go call on customers, they can hand me a check, and we can do remote deposits. As a person, I can be a branch. From a community development perspective, instead of having people come into the branch, I can go to [a church, for example] and open accounts for people and answer questions.”

Indeed, KeyBank executives are considering partnering with local libraries to host forums on financial wellness, according to Bliss.

“So whereas we might not have a branch in that community, the library could be a point of access,” he explains. “Those are ideas we’re floating. How do we engage differently with our communities in places where we may have optimized [closed] branches?”

Federal Reserve Bank of Cleveland policy analyst Matthew Klesta contributed to this article.

Sum and substance: It’s a time of declining bank branch numbers, but bank examiners continue to expect bankers to meet the credit needs of their communities. How bankers meet those needs is evolving.

Read more

A Cleveland Fed research economist finds that bank branches allow financial institutions access to better information about the local economy, which in turn allows them to make better lending decisions. Read the Economic Commentary.

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