Don’t Let the Pandemic Be a Death Sentence on Branch Profitability

There is an old story about the new CEO of a community bank with four branches. As he reviewed the profitability, he saw he had one branch doing very well, two barely profitable, and one doing poorly. He thought he would make the brilliant move of closing the one unprofitable branch, and did so with a lot of fanfare from senior management and the board of directors. The next year was a surprise to him as he saw his star branch remain on top, but one of his mediocre branches had turned unprofitable. So, he decided again to close the one unprofitable branch without the same fanfare and found himself managing only two branches. The following year, as you can probably guess, he had a one-star branch and the other was unprofitable. Again, he decided to close the branch in the red. Over the following years, he watched his customer base shrink, and he never understood what happened.

Look Beyond the Branch Level

As we work to recover from the economic impacts of the coronavirus in the coming months, branch (or product) profitability analysis should not be used to shrink a bank. Rather, it should be a tool to investigate and calculate what branches are doing right and how to grow the balance sheet so that a positive impact is made to the income statement.

So, how do we increase branch profitability? Opportunities for growth with the next best product or educating the customer base on different delivery channels like online or mobile banking may help the bottom line. Discouraging a portion of the customer base rarely works well short term or in the long run. Transactional information should also be used to more accurately allocate so that not only branch and product information are correct, but also customer and specific products.

Ultimately, bank executives should ask three simple, but imperative questions: “what are we doing right?” not just at the branch network level, but at the whole institution, “what are we doing wrong?” and “what can we correct?”  Now more than ever, it is important that we are properly measuring transactions and accurately calculating funds transfer pricing. This will ensure the profitability we are looking at is reliable and we can make the best decisions to grow our bank or credit union.

Once you’ve sufficiently answered these questions, out-of-the-box thinking is needed to differentiate within the financial institution market. Products should be priced aggressively in the market and be a positive force for customers. Senior leaders should find a tool such as ProfitGen that has the flexibility and agility to integrate transactional information and have a margin allocation that will work for your institution. Tools such as what-if pricing can be used to anticipate the profitability so that a new product can go to market with expected positive results.

During these unprecedented times, it can be tempting to get tunnel vision around unprofitable branches. However, following the herd will get you nowhere except mediocrity, and a stagnant income statement that grows slower than your balance sheet.

Author Bio

As the Manager of Implementations for our profitability model and over 15 years’ experience, Jeff Dwornicki leads the discussion for funds transfer pricing and expense allocations to reflect the institution’s own reality. He understands that every institution has different outlooks and environments, so flexibility in taking different methods to fit each client is one of his strong suits.

Jeff manages all Implementations of new financial institutions for the profitability model for Baker Hill. His background with general ledgers and understanding allocations within the model allow him to guide new clients to build the best model for their needs.