MADISON, Wis. — Determining branch profitability can be a tricky business, as there is no standardized method for doing so, which is why CUES is addressing that issue in its Branch Profitability Series.
"Systems to measure and compare branch performance are highly individual," author Karen Bankston writes in the report, Assessing Current Performance. "There is no one established formula for measuring branch profitability-no step-by-step process - and every credit union must identify the system that best suits its operations and goals."
Philosophical Differences
Philosophical differences and technological limitations are chief among the reasons that few credit unions evaluate branch performance the same way.
"Some executive management teams want to push everything out to the branch, including all the costs of the credit union," noted Gene Palm, president and COO of Profit Resources. "Other teams want to [include] the expenses that those branches are responsible for, so a lot of the corporate overhead is not pushed out."
In assessing present performance, CUs need to look far deeper than simply which are considered the "flagship" locations and go deep into the value of the business at each branch. When looking at that business, it is critical that households and their accounts are properly assigned to both get a clear revenue picture and keep morale up.
"It's essential to take the time and effort to develop a branch profitability model that accurately assigns members and their accounts, revenue, and expenses to branches in a way that gains branch manager and employee buy-in," Bankston told Credit Union Journal. "The primary reason to develop a profitability assessment system is to measure performance in quantitative terms as the base of incentive pay and to hold staff accountable for performance. If the staff doesn't accept the model, all that work may be for naught."
Palm explained that credit unions with core systems that are capable of dynamically assigning members to branches based on transaction activity tend to get the most accurate depiction of their locations' performances and prevent any sourness on the part of branch managers who may feel lucrative accounts have been assigned incorrectly. But some CUs don't have that luxury - many of which end up member relationships marked at multiple branches.
As the recession drags on, a number of institutions are assessing their branches performance for the first time in a long time with the idea of finding the weakest locations and closing them to cut costs. That attitude is counter-productive, Bankston argues, as it may close off potential opportunities. "Be willing to go where the numbers take you," she said. "A comprehensive analysis may uncover the many ways that branches support the credit union - from anchoring those core transaction accounts to serving as a prime referral source for mortgages and investment services."
Avoiding the Trap
At the same time, it is critical to not fall into the trap that ensnares the vast majority of credit unions-excessively high revenue projections for new branches in their first few years.
"I think it really comes back to the fact that most credit unions really don't understand how much deposits and loans they need in order to break even for a new branch," said Palm, noting that CUs need to accept that most new locations don't get into the black for at least a few years. "It is an investment and it will become profitable if it's in a good area, but it just takes time."
