benchmarking with a purpose. ask 50 people what is important and what should be measured. you will...
TRANSCRIPT
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Benchmarking with a Purpose
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Ask 50 people what is important and what should be measured.
You will get 50 different answers.
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Objective:
Develop a benchmarking framework to guide leaders toward key aspects about strategies and operations.
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Objective is not:
Detailed process metricsDetailed market analytics
(narrowly focused; difficult to collect/compare)
Internal policyRegulatory requirements
(no universal standards; subject to interpretation)
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Benchmarking must be a part of your planning process.
Difficult to set a course, and monitor environment without
a reference point.
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Why ROA is a horriblebenchmark of success…
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Singular Profit Mandate
MaximizeReturn
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Credit Union Dual Mandate
Maximize ROAStay adequately
capitalized
Minimize ROAProvide tangible
benefit to members
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Priority #1 Should Be…
Credit UnionSustainability
• Long Term Survival/Prosperity• Recurring Value for Members• Job Security for Employees
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Expense Growth
Credit Losses
Net Revenue Engine
Balance Sheet Growth
Capital Growth(ROE)
IndustryDynamicsCircle of Life orSpiral of Death
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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
Balance Sheet Growth
Capital Growth(ROE)
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Now +1 Yr +2 Yrs +3 Yrs +4 Yrs +5 Yrs
10.0% 10.0% 10.0% 10.0% 10.0% 10.0%
Capital Ratio
Sustainability
Expense Growth
Credit Losses
Net Revenue Engine
Balance Sheet Growth
Capital Growth(ROE)
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Now +1 Yr +2 Yrs +3 Yrs +4 Yrs +5 Yrs
10.0%10.3%
10.7%11.0%
11.2%11.5%
Capital Ratio
Prosperity
Expense Growth
Credit Losses
Net Revenue Engine
Balance Sheet Growth
Capital Growth(ROE)
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Expense Growth
Credit Losses
Net Revenue Engine
Balance Sheet
Growth
Capital Growth(ROE)
Grow CapitalFaster than
Assets or Die!
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Benchmarking requires everyone on the “same sheet of music”
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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)
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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.
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Growth
Product Mix
Interest Rates
Operating Expense
Credit Losses
Capital Adequacy
ROE Must Meet or Exceed Asset Growth
Capital Growth(ROE)
Sustainability Benchmarks
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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?
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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
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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%
50% 40% 55% 0.009
Product Mix: Percentage of AssetsCU
35%
55%
65%
Chart Current Product Mix
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Identify Product Mix Gaps
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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%
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
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Understand Implication of Gaps
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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
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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
Key Benchmarks Include…
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)
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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
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Growth
Product Mix
Interest Rates
Operating Expense
Credit Losses
Capital Adequacy
Key Benchmarks Include…
Leading Indicators: Underwriting
Leading Indicators: Post Underwriting
Lagging Indicator: Net Charge-Offs
Self Insurance Fund: Loan Loss Reserve
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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
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Growth
Product Mix
Interest Rates
Operating Expense
Credit Losses
Capital Adequacy
Key Benchmarks Include…
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)
Local/regional peer may be best.
Equivalent asset/branch peer may be best.
Local/regional peer may be best.
Local/regional peer may be best.
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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
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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
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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%
Member Value AssessmentRe
turn
on
Ass
ets
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-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.
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Benchmarking with a Purpose