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Understanding and Using Member Profitability

Brad Dahlman, Profitstars

Brad Dahlman

Brad has 25 years of experience within financial industry. He has held senior roles in audit, finance, operations, and technology. Over the past 10 years, he has focused on Profitability and Pricing with Profitstars.

Brad was a co-founder of the RPM product, which was sold to Profitstars in 2005. He now is the Product Manager for Profitability (Branch/Product/Member), Pricing and Dashboarding solutions.

Agenda

• Industry Financial Trends

• What Drives Profitability?

• Understanding Member Profitability

• Using Member Profitability

• Questions & Answers

Total CU’s

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2009 2010 2011 2012 2013

Net Income (with Stabilization Cost)

-$2,000,000,000

$0

$2,000,000,000

$4,000,000,000

$6,000,000,000

$8,000,000,000

$10,000,000,000

2009 2010 2011 2012 2013

Balance Sheet

$0

$100,000,000,000

$200,000,000,000

$300,000,000,000

$400,000,000,000

$500,000,000,000

$600,000,000,000

$700,000,000,000

$800,000,000,000

$900,000,000,000

$1,000,000,000,000

2009 2010 2011 2012 2013

TOTAL LOANS

TOTAL SHARES &DEPOSITS

Loan to Share Ratio

76%

72%

69% 68%

71%

64%

66%

68%

70%

72%

74%

76%

78%

2009 2010 2011 2012 2013

Margin Vs. Fee Income

$0

$5,000,000,000

$10,000,000,000

$15,000,000,000

$20,000,000,000

$25,000,000,000

$30,000,000,000

2009 2010 2011 2012 2013

Margin

Fee Income

Yields

6.24% 6.10% 5.72%

5.30%

4.83%

1.97%

1.38% 1.05%

0.82% 0.68% 0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

2009 2010 2011 2012 2013

Average Loan Yield

Average Dividend Expense

Industry Summary

• Few/Strong CU’s

• Strong balance sheet - excess cash (and low rate investments)

• Starting to see loan growth

• Yields are compressing

• Fee income flattening

What Drives Profitability?

How do we determine Member Profitability?

• Margin

– Interest income on loans (less funding cost)

– Dividend expense on deposits (plus funding credit)

• - Credit Cost (for Loans)

• + Fee Income

• - Expenses (direct, allocation, taxes)

• = Net Income

A Simplistic Example

Category Member A $200k Loan

Client B $100 k CD

Client C Free Checking

Average balance $200,000 $100,000 $500

Rate of interest 4.50% 1.75% 0%

Cost/Value of Funds (Single pool)

2.50% 2.50% 2.50%

Margin 2.00% (4.50-2.50) .75% (2.50-1.75) 2.50% (2.50 -0)

Risk Adjustment 1.0% (680 beacon) N/A N/A

Adjusted Margin 1.00% .75% 2.50%

Annual Margin ($) $2,000 $750 $12.50

Annual Fee Income $0 $0 $240 ($20 mo)

Expense to support $600 ($50 mo) $72 ($6 mo) $120 ($10 mo)

Net Income $1,400 $678 $132.50

The Challenges! • Scale – You have thousands of members and each member

has many products and services. • Dynamic - Balances, risk ratings and transactions are

different each month. These all affect profitability. • Channel Use - Members use various distribution channels

to transact business (lobby, ATM, internet, remote deposit). These channels have unique revenues and expenses.

• Distribution of Information - It isn’t enough to simply calculate this info – you must also distribute it and give guidance on its use.

Therefore, you need a process to regular determine and broadly distribute information.

Understanding Member Profitability

Understanding Member Profitability

How much do you really know about your members?

Member Decile Profitability

Decile 90-100 80-90 70-80 60-70 50-60 40-50 30-40 20-30 10-20 0-10

Annual Profit $1,356,967 $2,690,283 $583,681 ($232,741) ($359,697) ($361,704) ($482,337) ($808,304) ($1,086,948) ($3,804,585)

% of Total Profit 127% 25% 5% -2% -3% -3 -5% -8% -10% -26%

Ave Profit/Member $1,819 $361 $78 ($31) ($48) ($248 ($65) ($108)) ($146) ($376)

(4,000,000)

(2,000,000)

-

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

91-100 81-90 71-80 61-70 51-60 41-50 31-40 21-30 11-20 0-10

“Grow” “Improve” “Key”

Balances

-

50,000,000

100,000,000

150,000,000

200,000,000

250,000,000

300,000,000

350,000,000

400,000,000

450,000,000

91-100 81-90 71-80 61-70 51-60 41-50 31-40 21-30 11-20 0-10

Assets

Deposits

Adjusted Margin

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

91-100 81-90 71-80 61-70 51-60 41-50 31-40 21-30 11-20 0-10

Interest Income

Interest Expense

Interest IncomeWith Fees and CC

Credit Risk

0.00%

0.10%

0.20%

0.30%

0.40%

0.50%

0.60%

0.70%

0.80%

0.90%

91-100 81-90 71-80 61-70 51-60 41-50 31-40 21-30 11-20 0-10

Annual Fee Income

-

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

91-100 81-90 71-80 61-70 51-60 41-50 31-40 21-30 11-20 0-10

DepositFeeIncomeLoan FeeIncome

Product Segmentation

Cross

Sell Average Balance

Profit/ Member Top 3 Product Combinations

All Members

2.10 $7,057

$11.93 Share only (36%); Share/Share Draft

(30%); Share/Loan (16%)

100 Most Profitable Members

4.02 $ 202,884

$1,680.72

Share/Share Draft/Loan (46%); Share/Share Draft (23%);

Share/Loan (12%)

100 Least Profitable Members

3.71 $ 32,521

$(357.83)

Share/Share Draft (46%); Share/Share Draft/Loan (30%);

Share/Loan (17%)

Key Uses for Member Profitability

Key Uses for Profitability

• Effective Pricing

• Relationship Management

• Feed Marketing Campaigns

• Measuring for Profit Improvement

Effective Pricing

• Understanding existing profit, ROA, ROE

• Ability to change existing loans, deposit and service parameters (balance, rate, term…)

• Ability to add new loans, deposits and services

• Ability to see profit, ROA and ROE on both new account and relationship

• Embed in loan approval process

Effective Pricing Example

Relationship Management

• Fee Waivers

• Outbound Calling Programs

• VIP Status/Invites to Special Events

• Assigning a Banker

• Key Member Identification and Retention

Viewing Profitability Results

Last Contact Date for Customer

Are you contacting most valuable members on a regular basis?

Key Member Retention

Do you know who your key clients are? (4,000,000)

(2,000,000)

-

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

91-100 81-90 71-80 61-70 51-60 41-50 31-40 21-30 11-20 0-10

“Grow” “Improve” “Key”

Key Member Retention • JD Powers 8.7% of clients switch FIs last year

• Assume your FI 6% attrition

• What if… Target 2% attrition for “key clients” (4% reduction)

4% drop in attrition for “key clients” (74.6k total) = 298 fewer

clients lost

With each client in the top 10% worth $1,819

per year…

…the retained “key clients” are worth

$542,062 per year

Key Member Benefits (Top 10%) Percentile Annual Profit Rank Benefits

Top 2% Above $2,400 ($200 mo.)

Platinum Assigned Officer; Outbound call Quarterly; Fee waivers to $100; 50 bp Bump rate on CDs

Next 2% Above $1,800 ($150 mo.)

Gold Assigned Officer; Outbound call Semi-Annually; Fee waivers to $50; 25 bp Bump rate on CDs

Next 3% Above $600 ($75 mo.)

Silver Assigned Officer; Outbound call Annually; Fee waivers to $50; 25 bp Bump rate on CDs

Next 3% Above $500 ($50 mo.)

Bronze Assigned Officer; No Outbound call; Fee waivers to $25; 10 bp Bump rate on CDs

Would these benefits reduce attrition of key members?

Feeding Marketing Systems

Reward Systems

ROI

Clients that have our profitability system achieve 10 bp greater margin than the industry as a whole.

Asset Size Added bp Annual Value

$100 MM 10 bp $100,000

$250 MM 10 bp $250,000

$500 MM 10 bp $500,000

$1B 10 bp $1,000,000

Summary • Industry improving but very competitive

• Member profitability is very concentrated.

• Determining AND distributing profitability data to the front-line can empower line personnel.

• Your most profitability members may not use your branch, so how do you build a relationship – outreach

• Profitability info must be used to achieve value… – Effective Pricing

– Member Relationship Management

– Marketing Programs

– Reward Systems

How Can We Help? • We offer a full range of financial management tools

– Asset Liability Management (ALM)

– Budgeting/Financial Reporting

– Profitability Solutions (branch, product, member)

– Pricing (commercial and consumer)

• We would love to talk about your needs.

• We have booths in exhibit hall if you want to see more of any of these product during the conference.

© 2013 Jack Henry & Associates, Inc. All Rights Reserved

Do you have any questions?

Thank You!

Brad Dahlman - ProfitStars

1140 Centre Pointe Drive

Suite 800

Mendota Heights, MN 55120

952.738.9189

bdahlman@profitstars.com