May 18, 2010

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

In the April column we presented the findings of our 2010 Branch Network Optimization survey of banks and credit unions from across the nation. We promised to follow these findings with a discussion of the responses and possible solutions. In this article, we will take on the first three questions from the study.

1.  How important is maximizing branch network performance?

Very important – Critical           100%

In the recent past, branch network growth and ROI were fueled primarily by geographic expansion or acquisition of new branch networks. While expansion by merger or acquisition may currently be most attractive for credit unions and banks with good capital in this economic environment, most need to look to their existing branch networks to increase market efficiency, productivity and profitability.

Many medium and large institutions are currently being forced to re-engineer their branch networks to counter economic and regulatory adversity, but they should also be thinking about re-engineering to enhance their ROI. For example, Bank of America announced late last year that it will close 10 percent of its branches. If done correctly, it could be a godsend to the institution, and it could serve as a model for other institutions as well.

Even if an institution is planning to expand its branch network, it ought to study its network efficiency and productivity to ensure the entire branch platform is making the most of market potential. No longer is it sufficient to just understand the value of adding one new branch here or there, or making an acquisition in this or that market. Credit unions must understand how their current and target markets will evolve over a five- to seven-year planning period, and how they need to re-engineer their branch networks toward perfection.

A 3,500 square-foot free-standing branch costs $2.2 to $3.5 million today, depending on location. A 2,500 square-foot leased facility typically ranges between $550,000 and $950,000, and an in-store branch, between $250,000 and $450,000. The real cost, though, lies in staffing. Credit unions need to get the maximum return from every branch location, but many suffer poor network performance as supported by the responders to the following question.

2.  How efficient is your current branch network?

Efficiency                      % of Responders

            50%                             31%

            60%                             15%

            70%                             38%

            80%                             0%

            90%                             15%

            100%                           0%

Can any branch or network realize 100 percent efficiency? The answer is yes, but typically only at a single point in time. If a market is fixed in terms of growth, competition and dynamics, it is possible to reach and remain at maximum target market penetration. We have seen this in small to medium remote markets where a credit union or bank may dominate a market and enjoy 40, 50, or even 60 percent market share. But most markets are not stable, which creates many opportunities to suffer decreased or increased efficiency.

One of the reasons cited for not pursuing branch network optimization and potentially closing, relocating or remodeling branches is the cost and/or potential loss of existing members. But, let’s look at the potential cost of doing nothing in this example.

A credit union has evolved to three branches in a market of 100,000 households. The market potential is 14 percent market penetration, or 14,000 households, at $9,500 per household. Due to the branch delivery array, the credit union has 6 percent market share. This means the credit union has just 6,000 households and $57 million in deposits, when by re-engineering the network and adding a branch, it could potentially have 14,000 households and $133 million in deposits.

This is very close to a real-life example where a credit union invested $3.5 million in branch enhancements, relocation and one new branch and maximized market penetration within five years. The result was $76 million in deposits and $55 million in loans at a 72 percent loan-to-share ratio.

You can see there is much room for improvement and enhanced ROI when you realize that 31 percent of the responding institutions feel they are less than 50 percent market efficient and another 15 percent less than 60 percent efficiency.

You can also see from the responses below that 31 percent of institutions never assess their entire branch networks for efficiency and productivity and only 38 percent do this every year. If there is so much opportunity then why is so little being done?

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

More than once a year                         38%

Once every two years                           23%

Once every five years                           8%

Do not assess entire network              31%

A number of credit unions and banks need their financial resources to weather the storm and feel they cannot afford to invest in enhancing network performance at this time. But, a number of credit unions are realizing that now is the time to prepare for economic recovery and take advantage of many opportunities like wholesale land and building prices, low-cost-lease facilities that can be tied up for 10 to 15 years, the 20 percent reduction in construction cost and materials experienced over the past year, surplus branches and merger opportunities.

Even credit unions with below-average capital should be thinking about recovery in terms beyond survival and start planning their strategies to thrive. But, before any of the many opportunities are pursued, credit unions need to complete an assessment of individual branch and network performance to maximize potential so they understand how to best deploy their resources and when.

Next month we will be looking at how financial institutions can create a plan to maximize the performance of their branch networks. The following month we will discuss specific tactics that are helping credit unions win target market share and thrive.

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.

P.S: Additional information about branch and branch network optimization is available in CUES manual titled: CUES Complete Guide to Credit Union Facilities. And read more in CUES Branch Profitability Series.