Branches help credit unions better serve existing members and attract more members by offering easier access to the credit union. But in an era of lower interest income and ongoing stabilization expenses, credit unions are carefully balancing the benefits of new branches with the increased operating costs that come with them.
A careful analysis of current and historic branch trends and corresponding credit union performance can help institutions on the fence about future development clarify their direction and make better decisions about this critical service channel.
A Comparison Of Branch Strategies
Credit unions have long debated whether adding a new branch is worth the investment. An analysis of credit unions with assets between $250 million and $500 million and either a above or below average number of branch locations for their asset size reveals some interesting points on the new branch debate. The average credit union in this peer group has seven branches. For this comparison, credit unions with an above average number of branches have nine or more, and credit unions with a below average number of branches have four or less.
Credit unions with an above average number of branches post higher growth figures for every chosen metric than the credit unions with fewer branches. Member growth at the credit unions with more branches is more than double that for those with fewer branches. One of the major differences between the two groups is reflected in loan growth. Credit unions with four or fewer branches post negative loan growth of 42 basis points in the first quarter of 2012. Meanwhile, the credit unions with nine or more branches post loan growth of 2.8%.
This growth comes at a time when credit unions are trying to figure out what to do with the increased liquidity they’ve faced since the start of the financial crisis. The loan-to-share ratio is 68.6% at credit unions that have a larger branch network, substantially higher than the 56.8% ratio recorded at the credit unions with smaller branch networks. Share growth and asset growth is also significantly higher at the credit unions with more branches.
Although credit unions with a larger branch footprint excel in many of the balance sheet metrics, there are areas where credit unions with fewer branches rank higher.
For one, credit unions with a larger branch network have lower average member relationships. Their average deposits and loans per member total nearly $13,000, more than $4,000 less than credit unions with a smaller branch network. This is due in part to above average member growth which has driven down member relationships. New members, though, can bring with them loan accounts and deposits and push up the average member relationship over time. The field of membership is another explanation for the higher average member relationship at the credit unions with fewer branches. Credit unions with a smaller branch network tend to focus on a specific segment of the community, and their members are typically more affluent. Credit unions with a larger branch network serve more of the community and might be more apt to take on members with less deposits and lower credit.
Understanding Branch Cost, Productivity, And Profitability
Increased operating costs are the largest expense with opening a branch. Utility costs, employee compensation, and rent all increase as credit unions add branches. Credit unions with a larger branch networks spent 4.0% of their average assets on operating expenses, while the credit unions with smaller branch networks spent only 2.8%.
Although credit unions that have more branches generally report higher balance sheet growth, the productivity at these credit unions is not as high as the credit unions with fewer branches.
At credit unions with more branches than the norm, the average employee handles 327 members. Employees at institutions with a smaller branch networks manage 418. This discrepancy is due to the amount of employees needed to fully staff additional branches. Because members are spread out over many branches, the average employee may handle fewer members and transactions. This makes the credit union appear less productive even if its branch network as a whole is handling higher traffic.
Members per branch and deposits per branch also reflect lower productivity. The credit unions with a smaller branch network have nearly 9,000 members per branch, while credit unions with a larger footprint have slightly more than 3,600. Deposits per branch total $100.3 million at credit unions with fewer branches than average and $28.3 million at credit unions with more.
Higher operating expenses combined with lower productivity per employee results in a higher efficiency ratio at the credit unions with a larger branch network. These institutions have an efficiency ratio of 76.8%, meaning it takes them nearly 77 cents to earn $1. The credit unions with fewer branches than their peers report an efficiency ratio of only 74.8%, as it only took them 75 cents to earn $1.
Credit unions with more branches also welcome other financial benefits from their additional locations. Those with more branches post higher amounts of non-interest income, a crucial financial metric when income from loans is low. Credit unions with nine or more branches derive 31.3% of their total income from non-interest income, 10% higher than those institutions with four or less locations. Annual fee income per member is $99 at the credit unions with large branch networks. It is $66 per member at those with smaller networks.
Increased non-interest income helps boost the return on assets at credit unions with a more than average number of branch locations. Diverse sources of income keep non-interest income flowing even if interest income from loans remains low or declines further. This increase in income outweighs the increase in operating expenses. Collectively, these credit unions report an average ROA of 74 basis points in the first quarter, 38 basis points higher than the credit unions with a smaller branch network.
Branches are an important asset to credit unions. Although they require an upfront investment and can decrease operating efficiency, the long-term financial benefits such as higher balance sheet growth, non-interest income, and return on assets can be substantial.