Defining Good Performance, Historical Data Key To Evaluating Branches
SEATTLE-The key to measuring branch profitability demands an understanding of what constitutes good performance, what is bad performance, and having numbers going back at least three or four years.
That is the message from Paul Seibert, VP financial services for EHS Design, who noted that only approximately half of cCUs in the U.S. had branch-level accounting four or five years ago. As a consequence, when the recession caused CUs to contemplate shuttering one or more of their branches in a cost-saving effort, many did not have actionable data.
"Certainly the decline in the economy and the poor performance of branches caused people to look beyond the entire branch network," Seibert said. "This led to an examination of what makes one branch perform well and another to perform poorly."
Among the factors he cited: the types of members that frequent a given branch, the households in the neighborhood, and staffing.
Sometimes, he continued, the biggest single factor in productivity is the branch manager. According to Seibert, two branches might have the same corners, same traffic, same relationship to a mall, same household characteristics-but one performs at twice the level of another branch because one branch manager runs it differently.
Characteristics Of Strong Manager
"The successful branch manager is out in the community, being a strong coach who is leading by example in creating and nurturing relationships," he said. "The successful branch manager is an advocate for the branch. When it comes to the staff, the better branch manager is teaching credit union employees how to be a professional, and how to be a team moving toward the same goal rather than being split."
Still another element is the quality of the location. Seibert said some consultants have location scoring systems, including EHS, which scores markets for quality of the nearby households, quality of small businesses, and the location that will best serve the target market area. "This requires strong local knowledge and technical ability," he said.
Seibert asserts many financial institution branches today are oversized. He said the key metric is branch efficiency. Today, a branch of 2,500 square feet can handle what a 5,500-square-foot branch could do 10 years ago in terms of deposits and loans.
"The ratio of facility size to funds under management needs to be changed," he declared. "We are developing branches with smaller footprints-1,500 to 2,500 square feet-that are focused on very defined target markets."
Of course, the details and execution of the concept depend on a given FI's strategy. Seibert said Bank of America is closing small branches and opening regional centers that allow it to offer many services at one location, including mortgages, investments and insurance. For CUs, he said, the branch still is the best place to develop relationships and create advocacy. "So rather than be general and put two branches 10 miles apart, target specific markets and then place smaller branches to serve smaller convenience radii of just two to three miles," he offered. "This will increase penetration of households by offering more convenience. When there are overlapping convenience radii there can be a 50% increase in membership penetration."
For the credit union pursuing the overlapping convenience radii strategy, Seibert said the facilities can be smaller branches with smaller staffs and smaller footprints. The cost of an individual branch would be less in these circumstances, but the CU still is increasing its target market coverage.
Some markets may require a traditional hub and spoke arrangement of branches, with a larger regional financial center of 3,500 square feet and then a number of smaller branches (1,500 to 2,500 square feet) around it, he added.
EHS examines at least 300 branches per year, and one fault that is observed over and over again is "retail inefficiency." Seibert said most facilities today have 65% retail efficiency, which refers to the amount of space used for communicating with members versus the back office. In the firm's planning, he said, branches of client FIs average 85% retail efficiency. "Credit unions should be looking at their long-term efficiency as they are building branches or signing leases, and how it impacts the bottom line," he said. "It comes down to how the space is designed. It should be designed to provide 85% retail efficiency. This yields a smaller branch doing the same things."
If a decision is made to close one or more branches, Seibert said the outlook should not be "backwards in fear over losing money." Instead, he recommends looking forward to what a closure would mean to a branch network in 10 years. "If a credit union closes a branch, what will the entire branch network lose? When a branch is closed, it has an immediate impact and a longer-term impact,."
Questions To Ask
CUs should ask"What will a perfect branch network look like in 10 years?" Then, overlay the existing branch network on that picture to help avoid strategic errors, he explained.
"Figure out how to get there over a 7- to 10-year period. How is the credit union going to continue to grow? If it closes a branch, is there shared branching available? Do not make decisions based on the next year or two, look at the long-term strategy. Perform a long-term cost/benefit analysis."