Pin-Pointing Performance

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SCOTTSDALE, Ariz.-Identifying whether or not a branch is performing well or not is not a mysterious process, according to Terence Roche.

Roche, principal for Cornerstone Advisors, based here, said when it is time for a credit union to consider which, if any, of its branches should be closed there are several key factors to examine.

While the current deposit base is important, he began, the trend line is equally important. CUs should look back at a branch's total deposits to see if there have been changes during the previous two to four years-and project if the numbers can be expected to continue.

"A $20-million branch that had $20 million three years ago, I might guess it will not grow any more," he said. "On the other hand, a branch that has $20 million in deposits but opened three years ago and has grown $6 million per year might be better."

Other factors: Is the branch drawing checking accounts or other sticky products? Or does it trend more toward CDs from people looking for a good rate? If a branch is not growing deposits, is there a way to control costs?

External demographic information in the neighborhood around the branch is important, Roche added, noting there are 118,000 bank and credit union branches in the U.S. and 118-million households, or roughly one branch for every 1,000 households.

"So consider the density of branches in the area and what type of opportunity is there," he advised. "If there is one branch for every 400 households, that's not good. If there is one branch for every 2,000 households, that might be an opportunity. With that said, sometimes it is better to have four branches in one city than one branch each in four cities. Concentrating branches helps lift all of them. So look at the external demographics and the credit union's existing concentration in the area.

"All this information is available to a credit union. The question is how they apply it," he added.

Branching Binge

Roche noted America's credit unions went on something of a branching binge from 2003 to 2007. The average branch built during that time has attracted about $20 million in deposits, which he said probably was less than CEOs or CFOs were expecting. Roche said the general rule of thumb is a branch is not profitable until it gets to $30 million or $40 million in deposits, which means those new branches, on average, were not profitable.

Although credit union branch closures have drawn a lot of attention in recent years, Roche said many of those were due to mergers and consolidation.

"If someone asks a CFO is he or she cares if the credit union has two $20-million branches or one $40-million branch, he/she will say as long as they both have the same ROI they don't care."

Breaking Up Is Hard To Do

But even with a full set of data on profitability, it remains "very hard" to close a branch, Roch assessed. For starters, there are leases the CU still has to pay, or a building it owns. There are long-term employees to either move somewhere else or let go. Those factors can mean it might take up to two years to realize a benefit from shutting down a branch. "What credit unions should start looking at is how to take a branch and make it more profitable," he counseled.

Post-Merger Consolidation

Consolidation of branches in the wake of a merger is "trickier" than a CU deciding to close an underperforming branch, Roche said. He advised credit union management to be "realistic" about the runoff, or those members who used to go to a branch who will close their accounts rather than go to the new branch.

Other considerations to weigh include the respective physical footprints of two or more branches being compared, the lease expiration dates, and the locations and sizes of the branches. For CUs executing small business banking strategies, they must consider the number of small businesses in the area.

"Which strategy brings the least loss of members?" he said. "Which lease is better? From a financial standpoint, does this turn two unprofitable branches into one profitable one?"

Despite numerous predictions about the death of branches, Roche said on the deposit side and the consumer loan side, branches are still the place where people go.

"There is a lot of talk about people using the Internet or mobile phones, but almost all deposit accounts are opened in branches, as are most consumer loans. The other channels are more for transactions."

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