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PERFORMANCE MEASUREMENT/PROFITABILITY ANALYSIS

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Co., LP. 5. EIGHT FUNDAMENTAL MOVEMENTS: De-Regulation/Re-Regulation. Asset Liability Management ... Non-Fund Products (NFP) generally have only incidental balances. ... – PowerPoint PPT presentation

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Title: PERFORMANCE MEASUREMENT/PROFITABILITY ANALYSIS


1
Financial Managers SocietyNew York-New Jersey
ChapterAll Day SeminarSeptember 14, 2005
  • PERFORMANCE MEASUREMENT/PROFITABILITY ANALYSIS
  • Organizational/Branch/Line-of-Business/Product/Cus
    tomer/Relationship/Market Segment
  • Funds Transfer Pricing/Cost-Capital Assignment
  • Robert E. Kafafian, President C.E.O.
  • Office - (973) 299-0300 Ext. 106 Fax (973)
    299-1002
  • RKafafian_at_KafafianGroup.com
  • www.KafafianGroup.com

2
Alvin Toffler-Author FUTURE SHOCK, THE THIRD
SHIFT, POWER SHIFT
  • Bankers have been saying for years that they are
    in the information business .......... but they
    fail to realize how deeply they are in an
    information business. Bankers also over rate
    their ability to use information.

2
3
Robert Slater, Editor BANKERS MONTHLY
  • In the business world those that have
    information will prosper. Those that dont will
    face great obstacles in achieving their goals.
    Nowhere is this more true then in the banking
    industry. Ironically, much of the information
    banks need to compete effectively is already in
    their possession. The trick is learning how to
    compile it and use it successfully.

3
4
Jim McCormick, President First Manhattan Consultin
g Group
  • A profitability reporting system that shows
    risk-adjusted return on equity by business unit
    is essential. Banks should use such management
    information systems in strategic planning,
    budgeting, risk management, performance
    measurement, and incentive compensation. The
    best banks, with useful MIS and disciplined
    management processes are moving away from the
    pack ........ this is no longer optional .

4
5
Richard Bove, Banking Analyst Punk Ziegel Co.,
LP
  • MAKE YOUR BANK EASY FOR WALL STREET TO UNDERSTAND
  • Specifically, this means each bank must
  • Define the markets into which it sells products
  • Define the products sold
  • Indicate the profitability of product lines
  • If investors do not get such information, they
    will continue to see banks as undefined packages
    of assets. As a result, bank stocks will not
    attain high multiples. The prices will reflect
    investors feeling that they cannot reliably
    predict banks rates of return.

5
6
  • EIGHT FUNDAMENTAL MOVEMENTS
  • De-Regulation/Re-Regulation
  • Asset Liability Management
  • Performance Measurement
  • Product Diversification
  • Service/Sales Culture
  • Risk Management
  • Industry Consolidation/Convergence
  • Technology-Information Management

6
7
  • 1. DE-REGULATION/RE-REGULATION
  • Product/Rate
  • Industry Mix
  • CRA/Privacy
  • Gramm-Leach-Bliley Act/ Financial
    Modernization Act
  • Sarbanes/Oxley
  • Money Laundering/USA Patriot Act
  • Cross Industry/Regulatory Control

7
8
  • 2. ASSET LIABILITY MANAGEMENT
  • Balance Sheet Management
  • GAP Management
  • Interest-Rate Risk
  • Focus on remaining maturity
  • Front-end to Budget/ Planning Process
  • Limited slicing of data
  • Limited NIE analysis
  • Usually presented at a high-level

8
9
  • 3. PROFITABILITY ANALYSIS
  • More detailed analysis of various organizational
    components and slices
  • More detailed expense analysis and breakdown to
    the bottom-line
  • Organizational/Product/Customer
  • Relationship/Market Segment
  • Focus on original maturity
  • Rank/Compare/Trend
  • Usable throughout all
  • areas of the organization

9
10
  • 4. PRODUCT DIVERSIFICATION
  • Loan Deposit
  • Fee-Based
  • Trust
  • Brokerage
  • Insurance
  • Delivery Channels
  • Internet Banking
  • Sales Culture (Trusted Advisor Culture)

10
11
  • 5. SERVICE/SALES CULTURE
  • Cross-Selling
  • Products Per Customer
  • Service Opportunities
  • Sales Opportunities
  • Incentives/Disincentives
  • Service/Sales Training
  • Service/Sales Tools

11
12
12
  • 6. RISK MANAGEMENT
  • Traditional Risk
  • Credit-Oriented
  • Current View of Risk
  • Risk-Adjusted Return
  • on Capital (RAROC)
  • Types of Risk

12
13
  • 7. INDUSTRY CONSOLIDATION/ CONVERGENCE
  • Financial Services
  • Mortgage
  • Credit Card
  • Brokerage
  • Insurance
  • Communications
  • Technology

13
14
  • 8. TECHNOLOGY-INFORMATION MANAGEMENT
  • Encompasses the Other Six Movements
  • Technology Lag
  • Sourcing Opportunities
  • Information Systems
  • Accounting/Marketing/IT
  • Delivery Channels
  • The Internet

14
15
  • Keys to Profitability Survival Success
  • Marketing effort or study to determine what
    products and services do our customers want,
    through what delivery channels
  • Internal analysis to determine what products and
    services do we sell that they want in what
    combination of delivery channels
  • ..AT A PROFIT

15
16
  • PREREQUISITES TO MEANINGFUL
  • MANAGEMENT INFORMATION
  • Senior managements support
  • Reflect managements operating philosophy
  • Provide management information, not just
    regulatory information
  • Understandable to the end-user
  • Consistently applied
  • Provide value as well as benefit

16
17
  • MANAGEMENT INFORMATION
  • 1. Asset Liability Management
  • 2. Budget and Planning Process
  • 3. Responsibility Reporting
  • PROFITABILITY ANALYSIS
  • 4. Organizational Profitability Reporting
  • 5. Product Profitability Reporting
  • 6. Branch Profitability Reporting
  • 7. Customer/Relationship Profitability
    Reporting
  • 8. Market Segment Profitability Reporting
  • 9. Opportunity Profitability Reporting
  • SUPPORT FUNCTIONS
  • 10. Funds Transfer Pricing
  • 11. Cost-Capital Assignment/ABC/Performance
    Measurement
  • 12. Data Warehousing/Mining/Mapping/MCIF/CRM

17
18
  • REPORTING CONSIDERATIONS
  • Reconcilable
  • Audit Trails
  • Ranking Reports
  • Comparative Reports
  • Trend Reports
  • Summary and Detailed Levels
  • Macro versus Micro Approach
  • Rate/Volume Analysis
  • ROA/ROE, Efficiency, Risk Based Capital, etc.
  • Peer Group Analysis

18
19
  • LINE-OF-BUSINESS PROFITABILITY
  • Similar and or part of responsibility reporting
  • Organization structure - hierarchy table
  • Part of, or roll-up of all other profitability
  • Financial information about profit centers
  • Assessing performance of groups of staff engaged
    in profit-producing activity

19
20
20
21
  • TYPES OF PRODUCTS
  • Fund Providing
  • Demand Deposits
  • Savings Deposits
  • Time Deposits
  • Other Borrowings
  • Fund Using
  • Investments
  • Short-Term Assets
  • Loans
  • Non-Fund/Fee-Based
  • Safe Deposit Boxes
  • Mortgage Servicing
  • Trust, Insurance, Brokerage, etc.

21
22
  • FUND PROVIDING PRODUCTS
  • Fund Providing Products (FPP) are primarily an
    accumulation of fund sources or deposits.
    Branches typically generate the majority of
    deposit products, however, borrowed funds, or
    purchased or brokered deposits, are also sources
    of funds available to banks.

22
23
  • EX FUND PROVIDING PRODUCTS
  • Regular Savings Time Deposits
  • Statement Savings 0-3 Months
  • Money Market 6-12 Months
  • IRA Accounts 1-2 Years
  • Club Accounts 2-5 Years
  • DDA-Individual 5 Years
  • DDA-Business CDs 100,000
  • Now Accounts Public Funds
  • FF-Purchased Other Borrowings

23
24
  • FUND USING PRODUCTS
  • Fund Using Products (FUP) are primarily earning
    assets, normally consisting of loans or
    investments typically found in a special purpose
    revenue center, and often consisting of several
    homogeneous products.

24
25
  • EX FUND USING PRODUCTS
  • Liquidity Portfolio Commercial-Fixed
  • Investment Portfolio Commercial-Floating
  • Fed Funds Sold Commercial-Adjustable
  • Mtg-Adjustable Commercial-SBA
  • Mtg-Fixed Home Equity
  • Mtg-Commercial Second Mortgages
  • Consumer-Auto Overdrafts
  • Consumer-Personal
  • Consumer-Floor Plan

25
26
  • NON-FUND/FEE-BASED PRODUCTS
  • Non-Fund Products (NFP) generally have only
    incidental balances. The sole source of revenue
    for these products is typically fees for
    services.

26
27
  • EX NON-FUND/FEE-BASED PRODUCTS
  • Trust Services Safe Deposit Boxes
  • ATM Services Brokerage Services
  • Secondary Market Mortgage Servicing
  • Travelers Checks Series E Bonds
  • Checkbook Services Insurance Services

27
28
  • CUSTOMER PROFITABILITY
  • Account Level Profitability
  • Individual Relationship Profitability
  • Extended Relationship Profitability
  • Market Segment Profitability

28
29
  • MARKET SEGMENT PROFITABILITY
  • WWII Generation (65 and Over)
  • Swing Generation (56-64)
  • Baby Boomers (33-55)
  • Generation X (19-32)
  • Baby Boomlets (Under 19)
  • Other Categories (Empty Nesters, DINKS, etc.)

29
30
  • MCIF-MARKERTING CUSTOMER INFORMATION FILE
  • Connectivity of Data
  • Matching Markets/Products/Sales/Service
  • Market Demographics

30
31
  • CRM-CUSTOMER RELATIONSHIP MANAGEMENT
  • Contact Information
  • Sales and Service Tracking
  • Performance Measures

31
32
  • MINING AND MAPPING DATA
  • Where are the opportunities?
  • Where should the focus be?
  • Geographic
  • Customer type
  • Advertising/marketing/promotion/sales and service

32
33
  • PROFITABILITY EMPHASIS
  • CMTY
  • BKS MEL
  • Fund Using/
  • Fund Providing
  • 83 Products 31/15
  • - - - - - - - - - - - - - -
  • Interest Income/
  • Interest Expense
  • Non-Fund Products
  • 17 - - - - - - - - - - - - - -
    69/85
  • Non-Interest Income

33
34
  • FUNDS TRANSFER PRICING
  • Single Rate/Pool
  • Specific Matching
  • Multiple Pool Matching - Actual Cost of Funds
  • Matched Maturity Coterminous

34
35
Asset Spread
Total Interest Spread
Treasury Spread
Liability Spread
Data Warehouse/ Funds Transfer
Pricing
General Ledger
Other Databases
Loans Deposits Securities
35
36
  • Cost Basis CQTR LQTR DIFF
  • Interest Income 7.81 7.75 0.06
  • Interest Expense 3.45 3.43 0.02
  • Net Spread 4.36 4.32 0.04

36
37
  • Market Basis CQTR LQTR DIFF
  • Fund Using
  • Interest Income 7.81 7.75 0.06
  • FTP-Charge 6.25 6.15 0.10
  • Spread 1.56 1.60 (0.04)
  • Fund Providing
  • FTP-Credit 6.11 6.07 0.04
  • Interest Expense 3.45 3.43 0.02
  • Spread 2.66 2.64 0.02
  • Maturity Gap 0.14 0.08 0.06
  • Net Spread 4.36 4.32 0.04

37
38
  • Cost Basis CQTR LQTR DIFF
  • Interest Income 7.81 7.75 0.06
  • Interest Expense 3 45 3.43 0.02
  • Net Spread 4.36 4.32 0.04
  • Market Basis CQTR LQTR DIFF
  • Fund Using
  • Interest Income 7.81 7.75 0.06
  • FTP-Charge 6 25 6.15 0.10
  • Spread 1.56 1.60 (0.04)
  • Fund Providing
  • FTP-Credit 6.11 6.07 0.04
  • Interest Expense 3.45 3.43 0.02
  • Spread 2.66 2.64 0.02
  • Maturity Gap 0.14 0.08 0.06

38
39
  • TRANSFER PRICING-
  • PRODUCT CHARACTERISTICS
  • Original Maturity
  • Stated Maturity
  • Stated Repricing
  • Duration
  • Cash Flow
  • Blended Rate

39
40
  • CURVES
  • Treasury
  • FHLB
  • Swap
  • LIBOR
  • Build
  • Other
  • Supplemental Margins

40
41
  • SUPPLEMENTAL MARGINS
  • Incremental Margins
  • Market Risk
  • Credit Risk
  • Risk Based-Capital
  • Prepayment Penalties
  • Early Withdrawal Penalties
  • Other

41
42
  • HIGHLIGHTS OF MATCHED MATURITY
  • Places focus on original maturity, duration,
    cash-flow, or blended rate
  • Levels playing field by consistently pricing to
    market driven indices
  • Isolates fund using, fund providing, and treasury
    responsibility and contribution
  • Induces managers to make incremental decisions
  • Forces managers to actively manage interest
    spread
  • Enables management to assess true profitability
    for each product and line-of-business
  • Illustrates effects of changes in product mix
    within lines-of-business
  • Identifies negative and positive trends, problems
    and opportunities
  • Permits easier comparisons to industry/peer
    groups

42
43
Marginal Contribution CDs One
Year Maturity
43
44
Marginal Contribution CDs One Year Maturity
44
45
Marginal Contribution CDs One Year
Maturity
45
46
Marginal Contribution CDs One Year
Maturity
46
47
  • PERFORMANCE MEASUREMENT-
  • COST/CAPITAL ASSIGNMENT
  • Activity-based-costing
  • Full absorption versus standard costing
  • Variable/fixed-direct/indirect costs
  • Isolating efficiencies/inefficiencies
  • Capacity utilization
  • Allocations methodologies
  • Average balances
  • Fixed percentages
  • Statistical databases
  • Regulatory/Risk-Based Capital
  • Internally developed capital assignment (RAROC)

47
48
E I S


Organization Profitability
Ad - Hoc Profitability
Product Profitability
Customer Profitability
Opportunity Profitability
ALM
MCIF
Data Warehouse/ FTP
Funds Transfer Pricing
Cost Allocation
Interface Engine
General Ledger
Other Databases
Loans/Deposits/Securities
48
49
  • OVERALL OBJECTIVES OF MIS
  • Assist in strategic decision making and the
    budget process
  • Provide information to manage GAP, Organizational
    Units, Products, Branches, Customers,
    Relationships, Market Segments, Exposures, etc.
  • Assist in the measurement of performance (i.e.,
    units/people)
  • Assist in the determining of performance rewards,
    i.e. compensation, bonuses, incentives
  • Provide the detail to understand and evaluate
    complex issues and problems
  • Remembering the 80/20 rule ..... Get enough
    information to be accurate ..... not all
    inclusive information, which can cause needless
    complexity and sometimes misleading results

49
50
  • MEASURING AND ACHIEVING SUCCESS
  • Develop meaningful management information to make
    more informed decisions and manage riski.e., the
    users use the system
  • Productivity will be increased
  • Performance should be rewarded
  • The Bottom-Line is improved
  • All constituencies are satisfied

50
51
Financial Managers SocietyNew York-New Jersey
ChapterAll Day SeminarSeptember 14, 2005
  • PERFORMANCE MEASUREMENT/PROFITABILITY ANALYSIS
  • Organizational/Branch/Line-of-Business/Product/Cus
    tomer/Relationship/Market Segment
  • Funds Transfer Pricing/Cost-Capital Assignment
  • Robert E. Kafafian, President C.E.O.
  • Office - (973) 299-0300 Ext. 106 Fax (973)
    299-1002
  • RKafafian_at_KafafianGroup.com
  • www.KafafianGroup.com
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