benchmarking with a purpose. ask 50 people what is important and what should be measured. you will...

Benchmarking with a Purpose

Ask 50 people what is important and what should be measured.

You will get 50 different answers.

2

Objective:

Develop a benchmarking framework to guide leaders toward key aspects about strategies and operations.

3

Objective is not:

Detailed process metricsDetailed market analytics

(narrowly focused; difficult to collect/compare)

Internal policyRegulatory requirements

(no universal standards; subject to interpretation)

4

Benchmarking must be a part of your planning process.

Difficult to set a course, and monitor environment without

a reference point.

5

Why ROA is a horriblebenchmark of success…

6

7

Singular Profit Mandate

MaximizeReturn

8

Credit Union Dual Mandate

Maximize ROAStay adequately

capitalized

Minimize ROAProvide tangible

benefit to members

9

Priority #1 Should Be…

Credit UnionSustainability

• Long Term Survival/Prosperity• Recurring Value for Members• Job Security for Employees

10

Expense Growth

Credit Losses

Net Revenue Engine

Balance Sheet Growth

Capital Growth(ROE)

IndustryDynamicsCircle of Life orSpiral of Death

11

Now +1 Yr +2 Yrs +3 Yrs +4 Yrs +5 Yrs

10.0%9.6%

9.3%8.9%

8.6%8.3%

Capital Ratio

Slow Death

Expense Growth

Credit Losses

Net Revenue Engine


Capital Growth(ROE)

12


10.0% 10.0% 10.0% 10.0% 10.0% 10.0%

Capital Ratio

Sustainability

Expense Growth

Credit Losses

Net Revenue Engine


Capital Growth(ROE)

13


10.0%10.3%

10.7%11.0%

11.2%11.5%

Capital Ratio

Prosperity

Expense Growth

Credit Losses

Net Revenue Engine


Capital Growth(ROE)

14

Expense Growth

Credit Losses

Net Revenue Engine

Balance Sheet

Growth

Capital Growth(ROE)

Grow CapitalFaster than

Assets or Die!

Benchmarking requires everyone on the “same sheet of music”

15

16

Balance Sheet Mapping (Simple Example)Assets Loans

Surplus Funds

Loan Loss Reserve (ALLL)

Non-Earning Assets

Liabilities & Equity (Net Worth) Relationship Funding

Rate-Sensitive Funding

Other Liabilities

Equity Capital (Net Worth)

17

Income Statement Mapping (Simple Example)Net Revenue Interest Income

Interest/Dividend Expense

Non-Interest Income

Net Revenue ROA Top line ROA.

Operating Expense Personnel, Premise & Other Operating Expense

Surplus before Provision ROA after operating expense.

Credit Loss Expense Provision for Loan Loss Expense

Surplus after Provision ROA after credit loss expense.

Extraordinary Items Unusual income/expense and gains/losses

Income Taxes As applicable

Net Income ROA after all items.

18

Growth

Product Mix

Interest Rates

Operating Expense

Credit Losses

Capital Adequacy

ROE Must Meet or Exceed Asset Growth

Capital Growth(ROE)

Sustainability Benchmarks

19

Growth

Product Mix

Interest Rates

Operating Expense

Credit Losses

Capital Adequacy

Key Benchmarks Include…

Balance Growth

Loans as Percentage of Assets

Relationship Funding as Percentage of Assets

Rate Sensitive Funding as Percentage of Assets

Non-Interest Income as Percentage of Assets

Offer Rate: Loans

Yield: Surplus Funds

Offer Rate: Relationship Funding

Offer Rate: Rate Sensitive Funding

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The battle is NOT won or lost on the income statement; it is won or

lost on the balance sheet.

Income statement is what has happened;Balance sheet is what is going to happen.

Where do you want to go?

Establish Target Product Mix

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Rate Senstive Relationship Loans Non-Int Inc0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0.00%

0.50%

1.00%

1.50%

35%

55%

65%

Product Mix: Percentage of AssetsTarget/Peer

Lowest Strategic Value Highest


10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0.00%

0.50%

1.00%

1.50%

50% 40% 55% 0.009

Product Mix: Percentage of AssetsCU

35%

55%

65%

Chart Current Product Mix

22

Identify Product Mix Gaps

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10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0.00%

0.50%

1.00%

1.50%

50% 40% 55% 0.009

35%

55%

65%

Product Mix: Percentage of AssetsCUTarget/Peer

5.6 YearsAway

4.3 YearsAway

5.1 YearsAway

Years to Target at5% Growth Rate

Understand Implication of Gaps

24

Rate Sensi-tive

Relationship Loans Non-Int Inc0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0.00%

0.50%

1.00%

1.50%

50% 40% 55% 0.009

35%

55%

65%

Product Mix: Percentage of AssetsCU

Target

NR ROA3.00%

3.25%

3.50%

3.75%

4.00%

4.25%

3.35%

4.10%

75bps

Improving product mix improves ROA by 75 bps

Establish Target Offer Rates

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Rate Sensitive Relationship Investments Loans0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

1.00%

0.20%

1.10%

5.25%

Offer RatesCUPeer

Current 1.25% 0.20% 1.00% 5.00%

Target/Peer 1.00% 0.20% 1.10% 5.25%

Variance 0.25% 0.00% (0.10%) 0.25%

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Growth

Product Mix

Interest Rates

Operating Expense

Credit Losses

Capital Adequacy


Efficiency Ratio

Total Expense / Activity Balance

Activity Balance / FTE

Activity Balance / Branch

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Efficiency Ratio

• Efficiency RatioOperating Expense as a percentage of net revenue

$75 Operating Expense/ $100 Net Revenue= 75% Efficiency= 25% Remaining to cover credit

losses and provide capital growth

Efficiency Ratio Ranges

> 100% Failure is Imminent

90-100% Slow Death

80-90% Skating on Thin Ice

75-80% Surviving

70-75% Thriving

60-70% Highly Productive

<60% Extremely Productive (or getting greedy)

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Activity Balance

• Loan Balance, plus

• Relationship Funding Balance, plus

• Non-Interest Income Equivalent Asset Balance(Non-Interest Income / Net Interest Margin)

If net interest income was an asset,how big would it be?

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Activity Balance Benchmarks

• Expense as Percentage of Activity Balance(expense leverage into strategic drivers)

• Activity Balance per Branch(branch network leverage)

• Activity Balance per FTE(human leverage)

Operating Expense

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Efficiency Ratio Op Exp / Activity Bal Activity Bal / Branch Activity Bal / FTE

CU

CU

CU

CU

Peer

Peer PeerPeer

Productivity Metrics

31

Growth

Product Mix

Interest Rates

Operating Expense

Credit Losses

Capital Adequacy


Leading Indicators: Underwriting

Leading Indicators: Post Underwriting

Lagging Indicator: Net Charge-Offs

Self Insurance Fund: Loan Loss Reserve

Asset Quality Pipeline

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Avg Credit Score Delinq 0-30 Delinq 30-90 Net Charge-Offs Loan Loss Reserve

CU

CU

CU

CU

CU

Peer

Peer Peer PeerPeer

Credit Quality Metrics

33

Growth

Product Mix

Interest Rates

Operating Expense

Credit Losses

Capital Adequacy


Capital / Total Assets

Risk Based Net Worth Requirement

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Growth

Product Mix

Interest Rates

Operating Expense

Credit Losses

Capital Adequacy

Peer Groups Thoughts…

• Rule #1: Perfect peer does not exist (Sasquatch)

• Population: 10-30 Peers

• Span of Data 3-5 Yr History(NEVER Annualize Current Year)

• Asset/Branch Peer• Geographic Peer• Charter Peer• Custom Peer• Mixed Peer

• Tradeoffs exist; can’t be best at everything.

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Growth

Product Mix

Interest Rates

Operating Expense

Credit Losses

Capital Adequacy

Local/regional peer may be best.

Industry best practice peer (indifferent to location)


Equivalent asset/branch peer may be best.



36

Growth

Product Mix

Interest Rates

Operating Expense

Credit Losses

Capital Adequacy

Sample Benchmarking Scorecard Top Middle Bottom

Loan Growth

Relationship Funding Growth

Member Growth

Net Revenue ROA

Non-Interest Income

Loans

Relationship Funding

Net Interest Margin

Loan Yield; Offer Rate

Surplus Funds Yield

Relationship Funding Offer Rate

Rate Sensitive Funding Cost; Offer Rate

Efficiency Ratio

Total Expense / Activity Balance

Activity Balance / Branch

Activity Balance / FTE

Delinquencies

Net Charge-Offs

Loan Loss Reserve

Capital Ratio

Risk Based Net Worth Requirement

37

Member Value Assessment

• Member value is created when:

– Product mix is stronger than peer/target

– Interest rates are favorable to members (ROA drag)

– Productivity is greater than peer

– Credit losses are fewer than standard(s)

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0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

0.70%

0.35%

1.00%

0.15%

0.25%

Return on AssetsRe

turn

on

Ass

ets

39

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

0.70%

0.35%

1.00%

0.15%

0.25%

Member Value AssessmentRe

turn

on

Ass

ets

40

-0.20%

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

0.70% 0.70%0.65%

0.15%0.25%

Member Value AssessmentRe

turn

on

Ass

ets

0.35% 0.35%

Reduce member favorable pricing.

Benchmarking with a Purpose

benchmarking with a purpose. ask 50 people what is important and what should be measured. you will...

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