Benchmarking Using the Right Peer Group

In the coming weeks, credit unions will develop quarterly financial analysis reports that benchmark their performance. A key indicator used in performance measures is how a credit union faired in comparison to an average of its peers. The most widely used factor in developing peer groups is total assets. While defining a peer group by asset size is a good starting point, it is just that, a starting point. For a more relevant benchmark of performance, credit unions must consider factors in addition to asset size that influence ratios and other performance measures.

 
 

In the coming weeks, credit unions will develop quarterly financial analysis reports that benchmark their performance. A key indicator used in performance measures is how a credit union faired in comparison to an average of its peers. The most widely used factor in developing peer groups is total assets. While defining a peer group by asset size is a good starting point, it is just that, a starting point. For a more relevant benchmark of performance, credit unions must consider factors in addition to asset size that influence ratios and other performance measures.

At third quarter 2001, credit unions between $50-$100 million had average operating expenses of $1.96 million while those between $100-$250 million had an average of $4.1 million. Since larger credit unions are likely to have a greater number of members served, employees, and branches in operation, it is no surprise that they have higher operating expenses. However, these same factors can cause significant differences in expense figures for credit unions within each asset-based peer group. For example, a credit union with assets between $100-$250 million and at least ten branches that measured itself against a peer group based only on assets could find itself substantially over the average operating expense for the peer group. However, they should not be hasty in concluding that they are not managing expenses well.

A better peer group for the example credit union would take other factors into consideration. For example, below are expense averages for two peer groups, one based solely on asset size and a second group selected by assets and branches in operation.

Data as of September 2001
Credit Unions
$100-$250 M
Credit Unions
$100- $250 M
with 10+ Branches
Total Operating Expenses
$4.1 Million
$5.4 Million
Office Operations Expense
$910 Thousand
$1.2 Million
Office Occupancy Expense
$271 Thousand
$305 Thousand
Employee Compensation
$2.0 Million
$2.8 Million

It is obvious that credit unions with more branches in operation would average higher employee compensation, office operating and occupancy expenses. By narrowing the peer group based on both assets and branches in operation, we have created a better standard for credit unions that are well branched.

Taking it one step further, operating expenses can be influenced by geographic region as well, due to differences in leasing and employee compensation expenses. For example a comparison of credit unions in the Western region to those in the Mid-Western region shows a slight difference in average operating expenses. Credit unions between $100-$250 million in assets in the Western region had an average operating expense of $4.2 million compared to Mid-Western region credit unions at $4.0 million.

As credit unions gear up to analyze year-end financial figures, it is important to look beyond asset-based peer groups for an accurate measure of performance and benchmarking averages.

Additional information on creating multi-factor peer groups is available through Callahan's Peer-to-Peer software. Information on Peer-to-Peer software may be found by contacting us at: 800-446-7453 or online .

 

 

 

Feb. 18, 2002


Comments

 
 
 

No comments have been posted yet. Be the first one.