understand customer profitability and effective pricing ...€¦ · 1. size matters in pricing 2....

Welcome

2 © 2015 Jack Henry & Associates, Inc.

Understand Customer Profitability and

Effective Pricing Strategies

March 31, 2016


Brad Dahlman

Brad has 25 years of experience with

financial institutions. He has held senior

roles in audit, finance, operations, and

technology. Over the past 10 years, he has

focused on Profitability (Branch, Product,

and Relationship) and Pricing.

Brad was a co-founder of the RPM

product, which was sold to Jack Henry in

2005. He now manages Profitability and

Pricing solutions.


Understanding your clients…

How much to you know about your clients?

How do you use this information to engage with them?


Profit is Highly Concentrated!

(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

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

“Grow” “Up or Out”Annual Profit

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

Annual Profit $12,606,960 $720,461 ($2,636) ($294,663) ($420,957) ($565,610) ($829,480) ($1,006,724) ($1,247,660) ($3,124,221)

% of Total Profit 216% 12% 0% -5% -7% -10% -14% -17% -21% -54%

Ave Profit/Cust. $4,623 $264 ($1) ($108) ($154) ($207) ($304) ($369) ($457) ($1,146)

“Protect”


Agenda

• What Drives Profitability

• Understanding Client Profitability

• Building Effective Pricing Strategies

• Questions & Answers


What Drives Profitability?


How banks make money…

• Revenues

- 63% spread (Interest Income – Interest Expense)

- 37% fees

• Expenses

- 42% Personnel

- 10% Facilities & Equipment

- 8% Charge-offs

- 44% Other (Data processing, supplies/postage)

Source: FDIC 12-31-2015


How Do We Determine Relationship

Profitability?

• Margin

- Interest income on loans (less funding cost)

- Interest expense on deposits (plus funding credit)

• - Credit Cost (for loans)

• + Fee Income

• - Expenses (direct, allocation, taxes)

• = Net Income


A simplistic example…

Which of these three clients is most profitable?

• Client behind door A… $2MM Loan

• Client behind door B… $100K CD

• Client behind door C… $500 DDA

You actually have all the info to pick the right customer – you just

need it aggregate/summarized in a meaningful way!


A Simplistic Example

Category Client A

$2MM Loan

Client B

$100K CD

Client C

Free Checking

Average Balance $2,000,000 $100,000 $500

Rate of Interest 4.75% 2.00% 0%

Cost/Value of Funds

(single pool)

3.50% 3.50% 3.50%

Margin 1.25% (4.75-3.50) 1.50% (3.50-2.00) 3.50% (3.50 -0)

Risk Adjustment 1.0% (5 rated loan) N/A N/A

Adjusted Margin .25% 1.50% 3.50%

Annual Margin ($) $5,000 $1,500 $17.50

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

Expense to Support $2,400 ($200 mo) $84 ($7 mo) $120 ($10 mo)

Net Income $2,600 $1,416 $137.50


What if…

Category Client A

$2MM Loan

Client B

$100K CD

Client C

Free Checking

Average Balance $2,000,000 $100,000 $500

Rate of Interest 4.75% 2.80% 0%

Cost/Value of Funds

(single pool)

3.50% 3.50% 3.50%

Margin 1.25% (4.75-3.50) .70% (3.50-2.80) 3.50% (3.50 -0)

Risk Adjustment 1.50% (6 rated loan) N/A N/A

Adjusted Margin -.25% .70% 3.50%

Annual Margin ($) -$5,000 $700 $17.50

Annual Fee Income $0 $0 $1,200 ($100 mo)

Expense to Support $2,400 ($200 mo) $84 ($7 mo) $120 ($10 mo)

Net Income -$7,600 $616 $1,097.50


The Challenges!

• Scale – You have thousands of clients and each client has many

products and services.

• Dynamics – Balances, risk ratings, and transactions are different

each month. These all affect profitability.

• Channel Use – Clients 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 regularly determine and broadly

distribute information.


Understanding Customer Profitability


Customer Profitability – What is it…

• The ability to determine the contribution to profit that comes

from each account summed by customer (historic view).

• Based on…

– Balance

– Rates

– Terms

– Credit Risk

– Fee Income

– Costs (origination/servicing and transactional)

• Provides an accurate picture of who your most profitability

(valuable) clients are


Profit is Highly Concentrated!

(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

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

“Grow” “Up or Out”Annual Profit

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

Annual Profit $12,606,960 $720,461 ($2,636) ($294,663) ($420,957) ($565,610) ($829,480) ($1,006,724)($1,247,660)($3,124,221)

% of Total Profit 216% 12% 0% -5% -7% -10% -14% -17% -21% -54%

Ave Profit/Cust. $4,623 $264 ($1) ($108) ($154) ($207) ($304) ($369) ($457) ($1,146)

“Protect”


Loan & Deposit Balance by Decile

-

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

Assets

Deposits

Balances

Deciles


Adjust Margin by Decile

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

Interest Inc

Interest Exp

Interest w Fee & CC

Deciles

Interest Rate


Monthly Fee Income by Decile

-

100,000

200,000

300,000

400,000

500,000

600,000

Loan Fees

Deposit Fees

Fee Income

Deciles


An Officers Portfolio of Clients…


Valuable Client and their Products…


Detailed Profitability for an Account……


Pricing Strategies


Don’t let your competition

price your loans…

Make the deal work for

both the client and the

FI…


Process of Commercial Pricing

• Understanding existing profit, ROA, ROE

• Ability to add new loans, deposits, and services

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

account and new relationship


1. Size matters in pricing

2. Clients like options (fixed,

variable, adjustable)

3. Terms of transaction

effect pricing

4. Valuing the pricing power

of deposits & services

5. Setting consumer pricing

vs competition

Strategies


Size Matters… 18% ROE example

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

$- $100,000 $200,000 $300,000 $400,000 $500,000 $600,000 $700,000 $800,000 $900,000 $1,000,000


Provide the client options…


Terms affect price…


Pricing Power… - $100k DDA


Consumer Pricing…


The Key Formula

Knowledge + Tools + Discipline = Results


The Payoff…

Clients that have profitability and pricing solutions have

greater margins. Our clients have consistently had

higher NIM and ROE than the industry. Historically

between 6 – 10 bp greater margin than the industry.

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

• Profitability is very concentrated.

• Pricing is complex and has many variables (size,

rate, terms, fixed/floating/adjustable…)

• Profitability & Pricing are available. Info from them

must be used to achieve value.

- Determining Client Profitability

- Setting Pricing guidelines (ROE Targets)

- Embedding loan pricing in approval process


How Can We Help?

• We offer a full range of financial management tools.

- Asset Liability Management (ALM)

- Budgeting/Financial Reporting

- Profitability Solutions (branch, product, customer)

- Pricing (commercial and consumer)

• We would love to talk about your needs.


Future Direction…

Currently developing a hosted set of financial tools to meet all

your financial needs…

• Financial Reporting

• Budgeting

• ALM

• Profitability

• Pricing

Benefits include: Single download; consistency of report/results;

one user interface; less administration; no hardware!


Questions?


Thank You

Brad Dahlman – ProfitStars®

1140 Centre Point Drive, Suite 800

Mendota Height MN 55120

800.356.9099

[email protected]

mailto:[email protected]

The views expressed in this presentation are those of the speakers and do not necessarily reflect the views of Promontory Interfinancial Network, LLC or any of its affiliates. Nothing in this presentation is intended as, or should be construed as, legal advice.

understand customer profitability and effective pricing ...€¦ · 1. size matters in pricing 2....

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