Proper Benchmarking Is The Key To Effective Competition In Any Market

A Q&A with Maps Credit Union on how it evaluates its local bank and credit union competitors.

 
 

Maps Credit Union ($464.3, Salem, OR) evaluates its financial performance through the lens of what other local bank and credit union competitors have been able to achieve. This type of well-rounded benchmarking helps the credit union avoid tunnel vision and better understand its entire market. Its efforts have paid off in the form of 17.21% annual loan growth for 2013, which is more than triple the 5.55% average of Oregon credit unions. Its 4.26% 12-month member growth also bests its state peers’ average of 3.92%, according to Search & Analyze data on CreditUnions.com.

CU QUICK FACTS

  • MAPS CREDIT UNION
  • HQ: Salem, OR
  • ASSETS: $464.3M
  • MEMBERS: 46,223
  • BRANCHES: 9
  • 12-MO SHARE GROWTH: 5.20%
  • 12-MO LOAN GROWTH: 17.21%
  • ROA: 0.81%

In this Q&A, Kevin Cole, chief financial officer for Maps, discusses how benchmarking against the right institutions using the right metrics is a vital component in determining how successful a credit union is performing and how effectively it is competing.

Why is it important for credit unions to benchmark?

Kevin Cole: There are two sides to benchmarking in my opinion, and Maps might look at it a little differently as we don’t limit our competition to other credit unions but also consider our market share in relation to banks within the areas we serve. The first side is to simply know how you are performing in relation to your competition. How much of the market are you capturing? For us, this means we don’t necessarily look only at the credit unions the NCUA defines as our peer group. We also look at the largest credit unions in the region we serve as they have similar state regulation and market conditions.

The other side, which can be missed, is to make adjustments for your credit union’s unique strategy. It is easy to get caught up in looking at one number without taking strategic business decisions into account. For example, we have a higher operating expense ratio than other financial institutions. This is because Maps is a core deposit franchise and we have more branches and staff because of that business choice. When we look at our operating expenses ratio, we look at it on a net basis by adjusting it for cost of funds and non-interest income factors. This helps us benchmark our performance while also measuring how well we are executing our own business strategy.

Who do you compare Maps’ performance against on a regular basis?

KC: On the market share side we look at all of the banks and credit unions with branches in our market. We use FDIC and credit union data to do that. We benchmark on a market by market basis, so we have different competitors within different geographic areas. Some are saturated with branches and others are less saturated.

A few specific competitors we look at include U.S. Bank, Wells Fargo, and Columbia Bank. In terms of credit unions, we have a primary peer group of northwest credit unions with more than $400 million in assets that we’ve set-up in Callahan’s Peer-to-Peer software. This is a group of 32 credit unions that are most similar to Maps. Sometimes we will further refine that to just credit unions in the state of Oregon, which narrows it down to 14 credit unions. This is much different than our NCUA peer group, which is any credit union between $50 million and $500 million in assets nationwide.

On the loan side, we see a few different competitors. For example, Chase Bank is one we see more often in the mortgage and business lending market.

What key performance data do you focus on?

KC: We look at quite a bit of data, but evaluating growth rates and market share are particularly important for us. We also look at earnings. It is interesting to see what other credit unions are doing to generate income, so we look at balance sheet structure and see where they are adding or shedding assets. Beyond that we look at a lot of key ratios such as non-interest income, cost of funds, and expenses and compare the same net number that we create for Maps.

Do you look at different things when evaluating bank competitors?

KC: On the bank side it is interesting to look at the efficiency ratios and get a feel for what the banks are doing to drive it so low. We review which lines of business banks are targeting with their pricing and strategy, which tends to shift more often than on the credit union side. For example, we had one local competitor that made a complete move away from consumer banking about three years ago and has since been acquired by a bank that is interested in consumer banking again. Since 2009, we’ve brought in a large number of new core checking relationships from that competitor so it’s important for us to keep track of what it is focused on.  

Market share is the biggest component we evaluate on the bank side. In our primary market, we’re now No. 4 in market share behind U.S. Bank, Wells Fargo, and Columbia Bank. In 2013, we surpassed Chase in our local market in terms of deposits.

As part of your benchmarking, you’ve also been comparing Basel III requirements and the new risk-weighted capital standards from NCUA. Can you talk more about that?

KC: We’re working on our comment letter, but there is a lot of concern that we’re going to operate under a very different set of capital standards than our competitors. Based on the proposed rule, that is definitely the case. NCUA has tried to incorporate risks into our proposed rule that are not included on the banking side.

Basel III risk weights are established solely based on credit risk. The NCUA proposal is taking that and layering interest rate, concentration, and liquidity risk on top of that. The credit risk model wasn’t intended to incorporate all of those other types of risk. Therefore, the risk weights are way out of line in some areas. There is also the fundamental question of whether there needs to be more capital in the credit union system. There does not appear to be any evidence out there to support that additional capital is needed.

It wouldn’t surprise me if we see a legislative solution as the current proposal will cause serious problems for the industry, especially as we try to compete against local banks. One of the most troubling things to me is the definition of complex being any credit union with $50 million in assets. 

How Do You Compare?

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April 14, 2014


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