Peer Group Comparison: Do Branches Drive Expenses?

A peer group comparison demonstrates larger branch networks can increase operating expenses, but the right approach can drive growth and increase sales productivity.


With provisions for loan losses at all time highs, credit unions are increasing their focus on reducing operating expenses to preserve capital. Credit unions across the U.S. are announcing branch closings for various reasons including the expectation of decreasing expense ratios. Branches, of course, do drive up expense ratios. From the increased employee costs in terms of salary and benefits to the electricity bill each month, branches can be expense hogs. Yet, branches – associated with the overall expansion of the credit union, can propel growth.

Source: Callahan's Peer-to-Peer Software | 800-446-7453

For a selected peer group of all U.S. credit unions with asset bases of $250M to $500M at September 30, 2008, we took a look at key ratios and growth numbers within two groups – credit unions with larger than average branch networks (9 or more branches), and credit unions with smaller than average branch networks (7 or fewer branches). Credit unions with larger branch networks had more success in attracting net new members. Twelve month member growth was twice the industry average and was 67 basis points higher than their peers. Notably though, there was no difference in year-over-year share growth between the two groups, and each group had similar loan and share accounts per member ratio (2.3). There are certainly other factors beyond the size of an individual branch network. Considerations beyond the number of branches include credit union location, a recent expansion of branch network and more.

Peer Group Comparison

The key differences were in loan growth, average member balances and operating expenses. As expected, operating expenses grew more quickly at credit unions with larger branch networks, and the overall annualized operating expense ratio was substantially higher for credit unions with more branches.

In this example, credit unions with larger branch networks have not seen increased member relationships through average balances. Average loan and share balances are significantly below their peers. Credit unions with the larger branch networks may see decreased member relationships due to the strong member growth. As the newer members transfer funds or old accounts to the credit union, the average balances should increase.

Another Way to Measure Branch Effectiveness

If you are worried about efficiency, think about increasing your sales rather than cutting costs. Smart Financial ($389M in Houston, TX) focused on sales productivity throughout 2008. In 2007, the credit union offered a wide range of incentives to frontline staff totaling 1.7% of their total operating expense budget. For 2008, though, they narrowed their sales focus to key areas with the goal of increased member service and retention. The credit union provided their Member Service Representatives with the tools needed to succeed. Credit union executives and branch managers involved the representatives with setting goals and tracking results. Supervisors at all levels provided coaching on a weekly and monthly basis. Michael Warrell, VP of Member Satisfaction, said that using positive communication made a difference and helped create a retail environment that lead to success. Year-end figures include 19% growth in share draft accounts; 73% growth in credit card accounts, with 65% of cards carrying a balance; and 9% growth in average share balance per member.