When credit union executives think about improving their institution’s branch networks, the focus naturally turns to new branches and where to find expansion opportunities.  New branches are exciting and glamourous!  We get to look at property, choose finishes and paint colors! 

However, it can take nearly a year to find and build a new branch, and typically four years thereafter for that the new branch to turn accretive.  But, if you can identify whether any current branches are diluting earnings, then closing those can immediately bolster the income statement.  Accordingly, branch closure decisions are as important as new-branch decisions.

In determining whether a branch merits closure, bankers must consider financial performance, market potential, strategic alignment and replacement capacity. 

Financial Performance and Market Potential

Financial performance is the most obvious consideration for branch closure.  Simply put, is the branch generating revenue in excess of its expenses?  If the answer is no, that does not necessarily imply closure.  Rather, it raises the next question: can we reconfigure the expense structure to allow profitability, perhaps by reducing staff, or downsizing and/or relocating to a less costly location, while still maintaining current revenue levels?

If the credit union cannot resolve unprofitability via the expense side of the income statement, the next item to consider is market potential.  Is the branch unprofitable because it operates in an untenable environment (too few households in the market, too competitively fragmented); or is the branch underperforming in a favorable market, indicating a solvable sales management issue rather than a constrained potential one?  Framed another way, do we have a $20 million (in deposits) branch that has eked out all it can from a demographically or competitively challenged market, or do we have a $20 million branch that should be $50 million branch, given market conditions?

There are only two ways to increase earnings: spend less or sell more.  If you’ve exhausted the spend-less avenues, and if an analysis of market potential confirms a terminally untenable situation (i.e., if $20 million is all the market can be expected to yield), then closure discussions must commence.

Strategic Alignment

Still, there could be a rationale for maintaining that structurally unprofitable location.  Bankers must consider strategic alignment: whether the location addresses a target demographic market segment and/or fosters a cohesive geographic franchise.  Branches that lack such demographic and geographic strategic alignment may merit consideration for closure even if exceeding profitability thresholds. 

Conversely, branches lagging profitability thresholds may nonetheless merit a continued place in the network, if those locations can help fulfill strategic objectives for the bank overall.  Most notably, a credit union may find an unprofitable location beneficial because it provides awareness and improves perceptions of convenience for clients marketwide, even if those clients use one of the credit union’s other locations for their banking needs.

Replacement Capacity

This raises the final consideration – replacement capacity – or how likely the credit union can replace the closed branch’s services at its remaining branches.  Bankers typically think of this in the context of retention, the proportion of the closed branch’s customers that remain with the bank post-closure.  Retention is critical, and all branch-close analyses should include a breakeven runoff calculation, revealing what proportion of balances the branch can afford to lose before margin-revenue losses eclipse noninterest-expense savings. 

However, the credit union also must consider replenishment likelihood.  For a branch holding 1,000 accounts on January 1 and 1,000 accounts on December 31, those are not all the same 1,000 accounts.  On average, a branch loses 12% of its accounts each year to wholly uncontrollable causes: mortality, relocation out of market, product no longer needed.  Thus, of the 1,000 accounts booked on January 1, only 880 might remain on December 31.  So how does the branch still have 1,000 accounts at year end?  Because as 120 accounts were closing, 120 new accounts opened, replenishing the base.

Now consider if the branch closes: do we have other branches near enough that local residents can still open with our credit union, even absent the closed branch?  Or alternate means to gain those relationships, such as an online channel?  Unless other branches or channels can replace the new-account capacity of the closed branch, then the credit union’s portfolio in that area will wither to minimal levels, with the balance and revenue loss negating any expense savings.  Thus, it is imperative to assess what level of gaps closure would leave in the credit union’s geographic coverage before finalizing a closure decision.

In sum, paring non-viable branches can prove accretive nearly immediately.  However, closure decisions must consider profitability, market potential, alignment, retention and replenishment; else, the bank may forgo more in long-term revenues than it gains from immediate cost savings.

For more on branching trends, visit https://bancography.com/bancology/.