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No matter how many remote services your credit union may offer, no matter how many touchpoints you've got out there, members want a place to go. They want a local branch, and more than ever, credit unions are trying to answer the call.

Even Greg Smith, CEO of the quasi-branchless Pennsylvania State Employees CU (see related story, page 50) concedes, "One thing I have learned is that consumers think they need a place to go, they really do. If there's a problem, I'm going to need a physical place to go."

Banks have recognized this market demand, with players such as Bank of America and Citibank seemingly on every corner. Credit unions significantly trail banks in building branch networks; indeed, it's relatively few credit unions that can use the phrase "branch network."

But as credit unions expand their physical presence, they are discovering significant challenges in managing the operation. For starters, many credit unions are relatively new to branching, having a limited number of facilities that were typically tied to their sponsors' locations. That has meant that some have grown before even developing a strategy for doing so.

That's a big problem, because branching has to be a long-term strategy, according to State Employees CU CEO Jim Blaine, whose credit union boasts 185 branches, with another 15 on the way next year and 45 on its current long-range plan (see related story, page 50).

Expensive To Be Expansive

"This is an expensive strategy, and it's something you have to roll out over time," Blaine advised. "You start with the most concentrated areas (in terms of number of members) and then move out from there."

SECU's branch strategy dates back to 1969, and Blaine says the $13-billion credit union still has many more branches to build.

When SECU first started branching, the CU looked for areas that had at least 10,000 potential members. But over the years, it has whittled that number down to a "potential members times two" formula-1,200 potential members, then multiply that by two on the assumption that those 1,200 potential members have family members who can join, so now the credit union looks for areas with about 2,400 to 2,500 potential members to support a new branch.

But it's not simply a matter of where the members are, it's also a matter of what the members want.

"We work with a lot of credit unions that have become community credit unions or gotten TIP charters, and they're faced with the question of how to branch out now that they have a much wider charter," said Bill Dean, vice president of business administration at the branch strategy wing at St. Louis-based NewGround. "In a lot of these cases, you're talking about a credit union that's going from a membership of 20,000 to (a potential) half-a-million people. They need to know exactly who and what the credit union is before they start branching out."

Dean said he takes credit unions through a process called the "imagine model" that helps credit unions develop a vision of their market as it exists today and what they want it to be in the future.

For example, a credit union may determine that the market it really wants to reach out to are 25- to 34-year-olds-new members who are out of college and making about $75,000 a year. From there, the CU can figure out which zip codes have the strongest presence of that segment.

The next step is to determine what types of products and services these markets use and make sure this matches with what the credit union has to offer.

No Standard Formula

"There's not really a standard formula for when it's time to open a new branch or what it takes to determine a given market will support a new branch," Dean suggested. "It really depends on what the credit union is looking for: net income, return on equity? One credit union might say, 'If I can get $20 million in deposits and $10 million in loans, I can support that new branch.' Another credit union might be more concerned about the break-even point and say, "I want the branch to break even in 15 months. If I had to pick just one standard, I guess I'd say you need more than 2,500 members in a market to be successful, but often times it's not necessarily the number of members but the amount of deposits per member and loans per member that make the real difference."

In Cincinnati, DEI's branch operations strategists agree it's as important to look at market characteristics as it is to look at the number of potential members in a given area.

"You have to look at the demographics, the penetration levels you currently have in some of these markets. and figure out which ones have the best fit," said DEI's Mike King. "It's also important to look at your competition's penetration. There is a direct correlation between the growth of the credit union in a given market and the growth of the competitors who are already in that market."

In some cases, he noted, credit unions are literally branching into markets where they currently have no members at all. Usually this happens when a credit union adds a community to its charter, so there are plenty of potential members, but few or no active members.

When that's the case, King said, credit unions need to evaluate the market very carefully and ensure they are not going into an area that is projected to decline in any way.

To determine what type of branch to build, a credit union needs to have a sense of the projected total number of members expected in the next five years, what efficiency ratios it has in terms of the number of employees per assets, and the ratio of employees to members. "This allows the credit union to determine how many employees they're going to need, and then we know what kind of office they're going to need."

When credit unions go to multiple branch operations they are faced with a need for more staffing, and, in particular, more leaders-and questions about training and the amount of local control versus centralization and consistency come into play.

"When you go to multiple branch operations, you dilute the number of people who live and breathe the culture of the organization," Dean offered. "You've got to have a training department that everyone goes through to ensure a level of consistency for the member experience."

Blaine agrees. That's why SECU has several regional training centers and why, although branch managers are allowed to hire their own people locally, there are certain positions such as loan officers and administrative managers, that must be interviewed by three people at headquarters, as well.

Moreover, SECU has a call center for its staff, providing instant answers to any questions that could come up that the local staff isn't sure how to handle.

The way Blaine sees it, having all these well-trained branch managers around means creating a pool of future credit union leaders, so although headquarters sets general principles for its entire operations-such as rates, products and services-he leaves it up to the local managers to determine how best to deliver those products and services.

Dean said that's a good way to handle such a far-flung empire. "Personally, I believe you need to decentralize the leadership and hire managers who can do the job and then hold them accountable," he commented.

At Vienna, Va.-based Navy FCU, branch managers for all of the its 109 member service centers (two of which are in New Orleans and are currently shut down because of Hurricane Katrina) are trained in the same way, which takes them through the first 120 days of their management of an MSC.

"That way we can make sure the same operational philosophy is being employed at each MSC," said Lee Gound, vice president of field operations for the world's largest credit union. "We bring them back every other year-half one year, half the next, and so on-for eight days to focus on the leadership perspective."

Gound said Navy probably has about half the number of branches it would like to have, and it develops a five-year-plan every year that includes expanding the branch operations. The credit union looks for where its members are-about 5,000 to support a new branch-and where members are either underserved (which Navy defines as being more than five to seven miles away from a facility) or not served locally at all.

Like SECU, Navy empowers its local branch managers to make decisions without too much interference from headquarters. "our objective is to allow each leadership team to b the decision makers on the spot," he suggested. "We don't try to manipulate things from headquarters."

Navy generally looks for a new MSC to grow by about 40% in the first three years.

Both Navy and SECU report they have never had to close a branch-and even with base closures expected from the latest round from the Base Realignment and Closure list, Navy has no intention of shuttering any of its current MSCs.

But the need to close or consolidate branches can be a very real-and painful-necessity, according to King.

"There can be so many changes in a market that affect profitability," he suggested. "If there's a change in traffic patterns, you may have to reevaluate whether you're in the right position. If a branch isn't profitable anymore, it might not mean you have too many branches, but it's a sure sign you need to relocate."

Credit unions that grow through mergers often have painful decisions to make about branches, particularly in cases where there are branches too close together, DEI's King noted.

"Credit unions don't like to close branches," he said. "But you do have to evaluate your overall facility usage. We have worked with credit unions where we have recommended closing a branch, but we don't expect that to be a trend."

And contrary to popular belief, credit unions shouldn't branch for the sake of being convenient to existing members, according to Portland Oregon Teachers CU's Tom Glatt, who participated in Callahan & Associate's recent research on branching, "A Brave New Brick & Mortar World."

"A new branch shouldn't be built for the convenience of existing members-you'll just spread business around, "The best reason to build a new branch is for market penetration to get new members."

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