Study Examines Key Measures Of Branch Productivity, Offers Strategies

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There are lots of different branch strategies out there, but it's safe to say most agree-profitability is key.

In Callahan & Associates' branch strategies report "A Brave New Brick & Mortar World," Heritage CU CEO Bob Lestina shared a branch break-even analysis. If the branch grows by $1 million in loans outstanding and the credit union generates a net interest margin of 5%, then gross income increases by $50,000 per year or $1 million times .05.

If the branch grows by $2 million in loans outstanding, then income increases by $100,000. If the branch continues to grow, the bottom line should be strengthened. To determine an approximate break-even point, total up the extra operating costs connected with constructing the new office and divide the amount by the net interest margin.

If building a new branch will increase annual costs by $100,000 per year and the credit union's net interest margin is 4.5%, divide the $100,000 by .045. The result is that the branch needs to reach $2.2 million in loans outstanding to be revenue neutral.

If it grows by less than $2.2 million, there will be a net loss until it reaches the break-even point. If it grows by more than the break-even amount, net income will be increased.

With that in mind, Lestina suggests, a credit union must direct the CU's resources to the most promising branches first, if it is growth that offsets the extra costs.

Among the other lessons learned from the Callahan study:

* Electronic delivery options will be critical to CU's future success, automated services cannot stand alone. Calling financial security being "at their heart very human issues," Callahan's said, "An ATM can dispense cash for the weekend, but only an engaged, empathetic credit union officer...provides the assurances that come with a home mortgage, personal savings account or even that initial car loan for a young consumer. Those assurances are best made in person and branches are the primary means through which they're delivered."

* Noting a myriad of successful branch strategies, Callahan's suggested the only consistency for branch development is how members want their services delivered and how that delivery profile matches CU growth and market development strategies.

* Expect the number of branches to continue to grow, despite the continued growth in electronic services.

* Watch for specialized "one-off" facilities that offer a specific product or service to augment the more traditional full-service branches. "At one time, all branches felt they had to replicate all services offered by the main office," Callahan's wrote. "Today, product segmentation shows that specialized offices can be an advantage both for the institution and the members it serves."

Branches not only offer more convenience to members but also serve as "beachheads" into new communities, the report states.

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