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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