What is a peer bank? A seemingly simple question that has become anything but simple to answer. Peer banks are a hugely important item that can vastly affect the portrayal of your institution, and thus it is paramount that when you define an institution as a “Peer Bank,” you are identifying the correct organization. There are many ways to define peer banks. The regulators have their own definition that we all know to be any lender from 50% to 200% your own institution’s asset size. While this serves as a general definition, this really appears to be a very expansive definition of a peer bank. Factors such as the number of applications, geography, regulating body, and lending profiles should also be considerations when identifying peer banks. However, peer banks should not be selected based purely on a formula. There also needs to be a human element that helps with the final touches by adding or removing institutions based on factors not able to be detected by the variables available such as competitive conditions.
While the CFPB’s 50%-200% percent peer bank criterion provides a broad understanding strategy for all institutions, it may not reflect an accurate picture of how an institution compares to its most similar peers. However, it is up to your institution to refine a large list of potential peer banks and choose only the institutions that most closely reflect the same types and location of loans. The next few paragraphs will outline a strategy we encourage all institutions to follow to ensure that your peers banks are as accurate as possible.
One of the first steps to take when choosing peers banks is to look at your institution’s geographic branch locations in comparison to another institutions’ branch locations. When looking at how certain institutions compare to one another, only those with branches in the same Market Service Area (MSA) as your bank ought to be considered. If an institution does not have a branch in an MSA where your institution does exist, you are not both targeting the same population, and it would not be reasonable to compare the two institutions in that particular MSA. It is important to note here that this means just because “Institution A” might be listed as a peer bank in MSA 1, it does not mean that “Institution A” will be listed as a possible peer bank in all or any other of your MSAs. Therefore, your list of peer banks may and very well should vary from one MSA to another. Lastly, MSA is used as the geographic standard because this is the data provided in the HMDA LAR database. The 2015 HMDA LAR database provides the MSAs of each branch for an institution which, as mentioned above, can be used to determine which institution’s branch locations overlap with your own. Furthermore, the size of MSAs lend themselves well to finding peer banks because they are larger in sparse population geographies and smaller in dense population geographies.
Bank Size and Regulatory Agency
After determining which companies exist in the same geographic areas as your own, you may want to consider your bank’s size and regulatory agency. However, from this point organizations must be mindful of how they are proceeding and how each refinement to their peer definition affects the results potential peer banks in each MSA. This is important because as each alteration is made, the number of banks are reduced, and the scenario may arise that there are no qualifying peer banks based on the definition implemented to that point. Not having any peer banks to compare against in an MSA will not be acceptable during a regulatory review. Regardless of how unique an institution may be, the goal of self-defining a peer bank list is to find the most similar institutions to your own. You should aim to have three or four peer banks in each MSA to compare your institution against; however, some MSAs may have more while others may have less. But there should always be at least one.
As mentioned above the next possible step might be for an organization to narrow down the list of peer banks based on asset size, number of applications, and regulatory agency if the data allow. Institutions should first define their peer banks as those within a certain percentage of their loan and/or asset size. While some may believe that they should only compare themselves with organizations also being monitored by the same regulatory body, this filter should only be included if needed after a sizing filter has been made on the potential peer bank list. An alternative way to look at bank sizing is market share. This can be done based on either asset or LAR count. After determining each bank’s market share within a given MSA, select the institutions immediately surrounding your own (some from above and some from under for balance). These companies can serve as a filtered list of potential peer banks based on asset and/or application count. However, there is a chance you will still find more peer banks than desired or that none of the institutions closest to your bank’s size are not ones you are familiar or would expect. At this point there must be a filter which narrows down institutions based on loan profile.
Similar Loan Portfolios
Creating a filter for loan profile should identify institutions who originate similar loans. For example, it’s not hard to imagine that a bank whose loan portfolio consists mainly of Refinance-Multi Family-Non Owner Occupied-First Lien loans would have dramatically different application and origination figures than that of a bank consisting mostly of Purchase-Single Family-Owner Occupied-First Lien loans. Therefore, pinpointing institutions with similar loan profiles can be very important when defining peer banks. This may be the filter with the largest impact on the potential peer banks and should be the filter first considered after then organizations in the appropriate MSA are found. As mentioned before, the purpose of the peer bank list is to find the institutions most similar to your own. While an institution’s size is a factor in determining similarities, a bank is better off comparing against a larger bank with a similar portfolio than a bank of similar size with a completely different portfolio.