The traditional brick-and-mortar branch location is not as prevalent as it once was. Three hundred and ninety-five credit union branches have closed their doors over the past 12 months, representing a 1.8% decline in branch locations since March 2012, according to Callahan Associates’ Peer-to-Peer analytics. Part of this decrease is the result of credit unions taking advantage of economies of scale and merging, but credit unions are also strategically reducing their branch networks.
Credit unions maintained slightly more than 21,000 branch locations throughout the United States in the first quarter of 2013. With 1,627 locations, Texas took top billing for the state with the highest number of credit union branches; Delaware, with 60, was the state with the fewest.
A total of 395 credit unions added at least one branch since March 2012, with Navy Federal Credit Union ($54.4B, Merrifield, VA) topping the list at nine new branches. At the same time, 988 credit unions decreased their branch numbers. The average credit union, however, did not gain or lose any branches in the past 12 months.
The consolidation of branch outposts is not unique to the credit union industry. According to a March 2013 article in the Wall Street Journal, U.S. banks and thrifts closed 2,267 branches in 2012. The 2.4% decrease brings the number of branches for banks and thrifts to 93,000. AlixPartners, a business consulting firm in New York City, expects that figure to drop to 80,000 over the next decade.
The rise of mobile banking is contributing to the decline in traffic at brick-and-mortar locations. With the tap of a smartphone, consumers can deposit checks, transfer money, and monitor balances and transactions. According to AlixPartners, online banking accounts for 53% of total transactions, whereas in-branch transactions make up only 14%.
Larger credit unions typically have larger branch networks, but many credit unions of all sizes struggle with the risk of expanding their branch footprint too far. Institutions must ask themselves whether it is additional locations or a reinvestment in the existing branch footprint that will translate into higher growth and increased revenue.
To illustrate how financial performance is impacted by different branching strategies, Callahan Associates analyzed credit unions with $250 million to $500 million in assets. The average credit union in this peer group had a total of seven branches as of March 2013. Callahan broke the peer group into credit unions with a more-than-average number of branches, nine or more, and credit unions with fewer-than-average branches, four or less.
The 111 credit unions with more than nine branches posted a 12-month loan growth of 7.3%. This is more than double the loan growth of their peers with less than four branches and is also significantly higher than the 4.8% average for all credit unions nationally. Loan growth outpaced share growth at these credit unions, which is a rare trend over the past few years. Share, member, and asset growth was also stronger than the average posted by similarly sized peers with fewer branches.
Higher growth rates are typically seen at credit unions with more branches, as they tend to serve a larger portion of the community. Credit unions with fewer branches tend to focus on a specific community segment or employee group. This leaves them with a smaller, but often times more affluent, membership. Proof of this can be seen in the average member relationship metric, which measures the average loan and share balance per member. Credit unions with more branches had an average member relationship of $13,226 in the first quarter of 2013; their peers with fewer than four branches reported an average member relationship of $17,778.
Credit unions with larger branch networks derived a larger percentage of their income from non-interest income sources. Diversifying your income through non-interest sources is important, especially when interest rates are low. This strategy can provide a security net if interest income declines as it has in recent years. Non-interest income made up 32.5% of total income at credit unions with nine or more branches; that’s nearly 10% more than their peers with four or fewer branches. Annualized fee income per member was $97 at credit unions with more than nine branches versus $63 at credit unions with fewer than four branches.
Higher loan growth, which typically leads to higher interest income, combined with higher non-interest income has helped credit unions with a vast branch network post a higher return on assets, one of the major metrics of financial strength. Credit unions with at least nine branches posted an ROA of 67 basis points compared to the ROA of 60 basis points for credit unions with four or fewer locations in their branch network.
Although credit unions with more branches have higher balance sheet growth on average, productivity and efficiency measures are lower than at credit unions with fewer branches because of the overhead costs associated with opening a branch. Each new branch requires increased staff, rent, and utilities as well as upfront expenditures such as renovation or construction costs. This leads to a higher operating expense ratio at credit unions with a greater number of branches. Credit unions in this peer group with at least nine branches spent 3.99% of their average assets on operating expenses. Credit unions with four or fewer branches spent 2.76%.
Increased branch expenses are also evident in the efficiency ratio, which measures how much it takes a credit union to earn $1 in income. The lower the efficiency ratio, the better. The efficiency ratio for credit unions with at least nine branches was 80.53%, meaning it took them slightly more than 80 cents to earn $1. It took credit unions with fewer than four branches approximately 78 cents to earn that same dollar.
Employees at credit unions with more branches tend to handle fewer members on average. Member sprawl over the branch network, coupled with the fact each branch requires a full staff, drives down this metric for credit unions with more branches. Employees at credit unions with at least nine branches handle an average of 321 members, compared to 412 members at credit unions with four or less branches.
Overall, the long-term benefits can mitigate the upfront costs associated with opening branches. Although saturating a market with too many branches can be detrimental, allowing members more access points to a credit union can result in increased balance sheet growth, a more diverse income composition, and higher returns.