June 16, 2010

CUES’ Credit Union Management’s online-only “Facility Solutions” column runs the third Tuesday of every month.

In April we presented an outline of the findings from our recent branch network optimization survey of credit unions and banks across the nation. In May we focused on responses to the first three questions:

1. How important is maximizing branch network performance?

2. How efficient is your current branch network?

3. How often do you assess your entire branch network’s efficiency and productivity?

In this third installment we will share our thoughts concerning the following two questions that focus on financial institutions’ intent to grow their branch networks locally and nationally.

4. Will your branch network be larger or smaller in five years?

                  0 - 10% Larger                                   46%

            10 – 30% Larger                                  23%

            30 – 50% Larger                                  23%

             0 – 10% Smaller                                  8%

            10 – 50% Smaller                                 0%

We were a bit surprised by the percentage of institutions that indicated they intend to grow their branch networks in view of the current economy and naysayers in the industry. 82 percent of the responders said their branch networks would be at least 10 percent larger in five years. A shocking 23 percent said they would have 30 to 50 percent more branches.

There may be some correlation between the projected number of bank failures, NCUA’s estimate of over 900 credit unions with CAMEL ratings of 4 in two years and the possibility of mergers to gain new branches and market coverage. The issue for existing branch network optimization is that the focus may continue to be on new branch acquisitions over increasing existing branch network performance.

As we discussed in March, credit unions can no longer afford to build their expanding branch networks on inefficient foundations. There is great opportunity for credit unions to analyze their existing and potential new markets prior to or as they consider a merger with a credit union or acquisition of bank branches. By doing this they will understand what needs to be done to pursue maximum market efficiency and productivity as they acquire new branches no matter the market location.

For example, a credit union in Michigan recently purchased bank branches in a new market that was underserved by the CU’s existing branches. This opened new markets and relationship opportunities. Even if the deposit accounts are not sold along with the facilities, as is the case with the recent PNC surplus branch sales in Louisville, Ky., surplus branches offer a real opportunity to grow. As we know from past and recent polls, and the success of shared branching, physical convenience remains as the top selection factor for new members. If a bank, credit union or even a CU service center (which happened in Baton Rouge, La., this year) decide to sell its facilities, there is a ready audience that already finds the location convenient. Growth can be accelerated by pursuing this strategy.

The price of these facilities is sometimes an issue, but most of these existing branches are offered at a relatively low cost. Many in fact, due to the age of the buildings, sell for about the value of the land alone. If a building is in reasonable condition, can be rebranded at a reasonable cost and is located at a highly desirable location, these facilities can be an excellent long-term investment. As an aside, we have seen some financial institutions offering their surplus branches with one caveat: If you are a financial institution they may not sell to you or they may want 20 to 40 percent on top of the sale price as a “competition fee.”

The responses to questions number 4 and the following number 5 suggest there is much change coming to the American credit union industry. Many credit unions are pursuing the advantages of scale and potential efficiencies of larger and more well-positioned branches and more dynamically productive networks.

5. Do you plan to acquire additional branches or branch networks in the next five years?

                             Yes                                         46%

                        No                                           8%

                        Depends on opportunity         46%

Acquisition of a branch or branch networks is taking many forms. In the past, banks acquired branches and credit unions merged with other credit unions. Today savvy credit unions are considering all opportunities to expand and enhance their branch coverage. A credit union may just purchase a building and then build its membership in the traditional ways. Other credit unions are finding that banks are offering their buildings and the book of deposit business as a package. Pricing for these packages is typically a multiple of book value determined by set valuation guidelines.

Glenn Christensen, managing principal of CEO Advisory Group, Kent, Wash., who provides merger and acquisition and growth advice to credit unions, states, “There are a significant number of un-pursued branch acquisition opportunities across the county. These branches may be offered when a bank acquires another and some of the joined branch network branches become redundant. They may be legacy branches that are in markets considered to be too small, or a credit union may be operating remote branches in other states where selling to a local credit union would be best for members and allow the selling credit union to reinvest in its own local branch network. We help credit unions value the opportunities and negotiate the deals, but we also find that these opportunities can be created for a credit union through market and competitor analysis and a third party white-hat pursuit.”

Christensen provides a bank branch example: “Let’s say a 3,200-square-foot bank building is selling for $850,000. The branch has 4,000 customers with $30 million in deposits. Assuming a 5 percent deposit premium, the cost of purchasing the branch and its book of deposit business is $2.35 million. We know from recent studies that the cost of acquiring a new member ranges between $600 and $950 on average all-in. This means the value of the deal in terms of new member acquisition is between $2.4 million and $3.8 million and the credit union has acquired a physical asset for about half the cost of new construction. We also know that most credit unions will be able to develop a loan-to-share ratio of 65 to 90 percent within a few years.”

The responses to our survey suggests there will be many opportunities over the next five years for savvy credit unions to grow and thrive through mergers and acquisitions and provide a high value to each new community they serve.

Paul Seibert, CMC, is VP/financial services at CUES Supplier member EHS Design, Seattle, and the author of CUES Complete Guide to Credit Union Facilities.