April 19, 2011

Credit Union Management magazine’s Web-only “Facility Solutions” column runs the third Tuesday of each month.

Many in our industry feel there are too many financial institution branches in the market. The real question for individual credit unions should be: Do we operate branches and branch networks that deliver relationship-building and service through the right type of delivery system? Our surveys indicate that over 40 percent of credit unions feel their branch networks could be much more efficient and productive.

As the recession ebbs, we are seeing a significant uptick in credit unions’ desire to re-engineer their branch networks with right-sized branches placed to target specific communities. This is a trend away from scattered branches trying to attract and serve members within five-, 10-, and even 20-mile radii. A more focused service delivery approach is to target markets within two to three miles, with high demographic and potential financial use scores, strong potential, and low break-even thresholds.

While this tighter market focus is helping credit unions and banks increase market share and share-of-wallet, another trend is emerging toward an even tighter market core to maximize efficiency and productivity — the “neighborhood branch.” These branches are centered within one-half to two miles of primary member support and are highly productive. For example, Umpqua Bank has pursued the neighborhood branch strategy for over five years. Many of Umpqua’s branches hold two to three more times the deposits, loans and funds under management than their local and national competitors.

And it’s not just Umpqua Bank. Huntington Bank is spending $70 million on branch brand renovation and expansion. Neighborhood branches will be an important component of its future branching strategy. TD Bank in Canada is following this same methodology with excellent success. Also in Canada, North Shore Credit Union has pursued this strategy for the past six years and grown from $750 million to $2.3 billion during that same period.
    
So, what is so different about a neighborhood branch? It is not so much the concept, as neighborhood branches have been employed in metropolitan areas for years. It is more the location of the model that is different. The new neighborhood branches are being placed in the center of small communities with no drive-ups, limited parking, and are often in leased retail spaces. In the past, most institutions would have required a free-standing branch with a large drive-thru, lots of parking, and a corner for high visibility.

Neighborhood branches must be in a retail core where people walk or drive from their home or business for services and are accessible by foot. Most desirable retail pedestrian cores are only a few blocks long, one block wide, and have no current vacancies.

The reason I use the phrase “a real estate race” in my headline is that multiple banks and credit unions are starting to vie for limited prime locations in the same neighborhood market at the same time. For example, we are working with two financial institutions pursuing locations in the same two-block market. We know of two others seeking the same market position. This is being repeated in markets across the country as banks and credit unions realize the productivity and efficiency of adding this delivery model to their network strategy.

I just finished working with a board of directors that decided to refocus from a regional to a neighborhood strategy over the next five years. The reasoning was that the financial institution has been significantly more successful in small markets than at regional locations. It has the ability to closely align with the values and interest of target community segments. The marketing budget has the greatest impact on member growth, and market penetration. Operational efficiency and return on investment are highest at this geographic scale.

Getting the most out of neighborhood branches requires four things: the right location for pedestrians; an accurate investment model; highly knowledgeable and motivated staff; and a strong brand image and experience.

If neighborhood branches are right for you, how can you compete for the best locations? Five factors immerge:

1. Plan strategically by prioritizing target neighborhood markets based on highest potential and market efficiency.
2. Develop a five- to seven-year strategic plan with a rolling list of three- to four-year priorities. By doing the latter you will be looking at multiple markets at the same time and be able to move quickly when the rare great site becomes available. This methodology removes the one-market-at-a-time approach which is frustrating for staff and the board and can result in site selection compromises that reduce potential long-term growth and ROI.
3. Operate a committed and constant real estate search process. This cannot be left to the efforts of most Realtors. Neighborhood branch spaces are small and the lease commission is small compared to a Realtor’s effort. They must be motivated to do more than just send you a list of what is available. Opportunities are very limited — agents must help you create opportunities by understanding all the lease situations and timing in a targeted one- to two-block market area, contacting owners, and even talking with existing retailers about their plans for the future.
4. Gain board approval for the CEO to move forward with a “letter of intent” on a desirable space without prior approval so you can move quickly when an opportunity arises.
5. Develop a branch business model and prototype that presents a strong brand experience for members and staff and can be easily translated into any size or shape neighborhood branch without compromise.

If you are interested in neighborhood branching, now is the time to get ahead of the land rush and position your credit union for growth.

Paul Seibert, CMC, is VP/financial services for EHS Design, Seattle.

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