Meerkats — small mongooses found in southern Africa — live in groups of up to 30 individuals. They are known for their cooperative behavior, with individuals observing each other to decide when to forage, when to run, and even when to take turns standing guard. Essentially, they rely on their peer group to make smarter, safer decisions. While community financial institutions (CFIs) don’t need to worry about eagles or snakes, they do face a constantly shifting market, and a well-chosen peer group can be just as vital to their success.Peer group analysis can be hugely beneficial to CFIs. Benchmarking key performance metrics against similar organizations can help a CFI identify strengths and pinpoint areas for improvement, while enabling it to set realistic, measurable goals grounded in industry norms. This type of analysis can also form part of a sound risk management strategy by highlighting overexposures or vulnerabilities relative to peers. What’s more, it promotes operational efficiency by revealing best practices in cost management, lending strategies, and revenue diversification.
Selecting Your Peer Group for Best ResultsThe key to successful peer group analysis is the selection of a relevant peer group. Depending on the goal of the comparison — performance benchmarking, risk assessment, or growth evaluation — different factors may be more influential than others. In general, more meaningful results can be achieved if CFIs compare themselves against institutions with similar characteristics, such as:
Selecting Your Peer Group for Best ResultsThe key to successful peer group analysis is the selection of a relevant peer group. Depending on the goal of the comparison — performance benchmarking, risk assessment, or growth evaluation — different factors may be more influential than others. In general, more meaningful results can be achieved if CFIs compare themselves against institutions with similar characteristics, such as:
- Asset size. The most commonly used filter, it ensures that a $500MM CFI is not comparing itself with a multi-billion-asset regional bank. It’s a good place to start your comparison before you dig further into the more nuanced characteristics of potential peers. You can base this on Federal Financial Institutions Examination Council (FFIEC) classifications.
- Geographic footprint. This includes institutions operating in comparable markets, where local economic conditions similarly influence loan demand, deposit growth, and credit quality.
- Business model. You’ll want to hone in on organizations with a similar focus — whether commercial or retail banking, rural or urban markets, niche offerings, or full-service banking.
- Demographics. CFIs that serve customer bases with similar profiles in terms of age, wealth, and financial behavior will be the most applicable to compare yourself to.
- Risk profile. Focus on institutions with comparable credit quality, capital adequacy, and interest rate sensitivity to ensure that performance gaps are not simply a reflection of differing risk appetites.
Moreover, it is important to have a good number of institutions in your peer group. Too few might skew the results towards outliers, while too many could make the analysis overly complex. When using the FFIEC custom peer group bank report, a minimum of six organizations must be selected. Meanwhile, Josh White from accounting firm Elliot Davis suggests that between 15 and 24 would be a good number of institutions to include in a comparison, to ensure that results aren’t skewed due to YoY changes in asset class, mergers and acquisitions, or other outlying factors.Finally, your peer group should be reviewed multiple times per year. You might assess more frequently when significant market shifts occur, such as mergers and acquisitions, changes in strategic direction, or new market entrants.What Metrics Should You Compare?Typically, institutions look at the following areas to assess their performance against their peers.
- Profitability. Metrics such as return on assets (ROA), return on equity (ROE), net interest margin (NIM), and the noninterest income ratio help assess overall profitability. Together, they reveal how effectively the institution generates earnings from its assets, leverages shareholder equity, manages lending margins, and diversifies revenue streams.
- Efficiency. The efficiency ratio evaluates how much a CFI spends to generate a dollar of revenue, while the ratio of operating expenses to average assets is useful for comparing cost structures.
- Asset quality. The non-performing loan ratio tracks the percentage of loans that are in default or at risk, serving as a key indicator of credit health.
- Capital adequacy. The leverage ratio evaluates how much capital the institution holds relative to its total assets, indicating resilience and capacity to absorb market stress.
- Liquidity. The loan-to-deposit ratio compares total loans to total deposits, showing the degree to which the bank relies on deposits to fund lending activities.
- Growth. The loan growth to deposit growth ratio illustrates whether the loan portfolio is expanding at a sustainable pace relative to deposit growth.
To be effective, peer group analysis cannot be an annual exercise — it must be a dynamic, ongoing part of your CFI’s strategic process. When integrated properly, peer data becomes the foundation for executive decisions and board discussions, fostering a culture of data-driven accountability. To facilitate the process, CFIs can use the Federal Deposit Insurance Corporation’s (FDIC) benchmarking tool or the FFIEC tool to start with, but it’s important to look deeper than just surface characteristics that these tools filter for when comparing peer institutions. It should provide a starting point for you and provide institutions to choose from that then get whittled down into a more specific list of peers that share a similar market and goals to your own CFI.
Gaining Valuable Insights from Peer Group AnalysisBy benchmarking these metrics against peer institutions, CFIs can gain a deeper, more nuanced understanding of their relative strengths and weaknesses. Underperformance against a specific metric can be a trigger for further investigation into the root cause of the issue, allowing CFIs to take corrective action and set clear, measurable targets that align with the organization’s strategic vision. When communicated effectively, these goals create a shared sense of purpose, enabling employees at every level to focus their efforts on initiatives that drive meaningful performance improvements and long-term success.
Gaining Valuable Insights from Peer Group AnalysisBy benchmarking these metrics against peer institutions, CFIs can gain a deeper, more nuanced understanding of their relative strengths and weaknesses. Underperformance against a specific metric can be a trigger for further investigation into the root cause of the issue, allowing CFIs to take corrective action and set clear, measurable targets that align with the organization’s strategic vision. When communicated effectively, these goals create a shared sense of purpose, enabling employees at every level to focus their efforts on initiatives that drive meaningful performance improvements and long-term success.
