Which of your branches are most profitable? And how can you keep track?
By Mary S. Gilbert
Intuitively, Christine Brown knew something was wrong. When she joined Tyco Electronics Federal Credit Union, Redwood City, Calif., in 1992 as CEO, the board was uncertain about the profitability of the North Carolina branch. The financial pros on the board knew that even though the numbers indicated it was breaking even, it was not, and it had not been profitable for some time. Other board members saw that average loan balances were up, along with increases in membership, and thought otherwise.
"We were just measuring share and loan accounts and direct expenses, and that's a useless number that showed we were breaking even when we really weren't. The board was making decisions based on assumptions. I knew it wasn't profitable, but we needed to know for a fact," CUES member Brown recalls.
Aided by a newly hired VP/finance with cost accounting experience, Brown called upon her own financial background and introduced $71 million Tyco Electronics FCU to the previously unknown world of measuring profitability for its two locations.
"Branch profitability means whether or not a branch is contributing to or harming the overall credit union," she explains. "We began looking at every expense, income and balance sheet item. We looked at every invoice. We had to have a philosophy in place of how to allocate indirect expenses, including my salary. For a while, we allocated my salary based on the number of members between each branch. But I spend most of my time on human resource issues, so now my salary is allocated based on the number of employees in each branch.
"It took us five years to get North Carolina to break even and now it's profitable."
An Emerging Trend
The concept of measuring branch profitability is not new. It may, though, be the least discussed and least understood process in CU land. Yet, it is an essential component for branch management.
"CEOs don't talk about it, and it's an interesting topic, so it makes me think they don't do it," Brown says. "Maybe they talk about it at the CFO level."
"In the past, credit unions weren't motivated and they didn't have branch accounting systems in place. They aggregated all credit union branches together as one. They had high and low performances, but they couldn't tell which branch was profitable and which was not. They only asked, 'Is the credit union healthy and is it returning a reasonable amount on investment?'
"Unlike banks, which have to provide branch-to-branch reports, credit unions haven't had to operate in that regulatory environment. However, the pressure from credit unions to become retail-based with multiple branch networks is changing that. Ten years ago less than 30 percent of our clients measured branch profitability at our first engagement; today, all of them do. It has brought a business structure to branches to ensure the performance of the building, the marketing and the staff. What we're after is a high-performance branch, and measurement allows us to track that, gives us something solid to look at. It allows credit unions to become more efficient, more financially savvy and sophisticated and to compete better against banks."
Gene Palm, president/COO of Profit Resources, a consulting firm in Lakeland, Fla., weighs in on CUs' historic struggle with the issue of measurement. "Credit unions haven't invested in profitability systems and cost accounting," he notes. "All of it requires thinking outside of the box, and they're often not used to doing that. Their financials aren't set up for measuring product profitability and they haven't fully developed their cost center accounting."
CUES member Bill Vogeney, SVP/ chief lending officer at $1.7 billion, 156,000-member Ent, Colorado Springs, Colo. with 19 branches, underscores the importance of cost accounting.
"Most credit unions tend not to have a lot of expertise in cost accounting. That's typically for a production environment. We're not producing widgets, but we are producing a product. There's a lot of art in cost accounting and some science, and a lot of flexibility in how to account for revenue and expense. How you allocate expenses and revenue, meaning fee income, loan income and non-interest income, plays a part in the eventual branch profitability analysis."
Measuring branch profitability can be intimidating, as looking at all line items over all the branches requires some effort. It takes CUs beyond measuring the usual criteria of transactions and member satisfaction. They can track products; determine how effective the staff is at promoting products and services; see if introducing a direct mail campaign can migrate members to more profitable product segments; see what products they should market or not, what prices to tweak or leave alone; and segue into whether to open a branch.
By employing advanced customer information files, Seibert notes, CUs can enhance the process. They can get profitability down to member households and develop correlations between length of membership, age, income and profitability. They can model characteristics to develop new markets. Seibert's firm now even relates the physical environment—a branch's square footage—to staff, loans, deposits and the member base to ascertain market potential, as retailers might be expected to do.
The Reality Of Reassignments
Being able to measure branch profitability plays a key role with member reassignments, a current hot button in the industry, according to Palm.
"A member could have opened a checking account at one branch, but conducts business at another one," Palm says. "The controversy is that the branch with the account gets the profitability without doing the work, while the one doing the work gets penalized. The technical solution we propose is that the credit union should have a dynamic way to assign members to a branch. They should look at the transaction volume generated over the last 90 days, and the branch with the most business should be credited with the account."
When $444 million SF Police Credit Union opened its first branch (it now has three), Roz Reilly, EVP/chief operations officer, found that the most challenging task was identifying industry trends and standards relating to the viability of branch reassignments. The San Francisco CU benchmarked several CUs, and learned that they were employing two main processes: 1) reassigning the full demographic within a particular radius of the new branch, or 2) waiting—unsure as to how to move forward.
Regulators the 21,000-member CU contacted said branch reassignments were typically made based on the location of the member's residence and/or employment, which left the option open for a CU to tailor-make this decision according to its own operations.
"With so many opinions, attitudes and approaches, we discovered that there was a need for additional dialogue within the industry regarding branch reassignments, and that we weren't alone in wanting more in-depth exchanges of information on the subject," Reilly says. "Ultimately, rather than reassigning our full demographic located near our new branch location, we decided to reassign only those members who used the new branch as their primary branch."
SF Police CU's host system is ULTRADATA [parent company Harland Financial Solutions, Portland, Ore., is a member of CUES FSF], and the implementation of the credit union's reassignment strategy coincided with the initiation of the branch accounting feature available to ULTRADATA clients.
"Our branch reporting reflects membership statistics specific to shares, loans and certificates regardless of where the member opened the account," Reilly says. "Branch production is now measurable and specific. The net result is that branch accounting is a significant and essential component of our total branch profitability analysis."
Vogeney follows the same basic approach. "At Ent, with branch profitability analysis, we allocate loans by the branch where members do business," he explains. "For example, say we made a loan to John Smith at our South Side branch. Some might allocate it to that branch for the life of the loan. But say John moves to the North Side. We'll then reallocate his loan to the north branch. Is it right? That's the $64,000 question."
Continual tweaking and refining of branch profitability systems is the norm, says Vogeney. "Anyone who says they've got branch profitability down and it's perfect is a distant cousin of Pinocchio."
Mary S. Gilbert owns The Gilbert Group, Pittsburgh.