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CAASB-Bucknell 1996

VIEWS: 3 PAGES: 51

									                   Financial Managers Society
                      New York-New Jersey Chapter
                            All Day Seminar
                           September 14, 2005




   PERFORMANCE MEASUREMENT/PROFITABILITY ANALYSIS
Organizational/Branch/Line-of-Business/Product/Customer/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@KafafianGroup.com
                                    www.KafafianGroup.com
                              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
                            Robert Slater, Editor
                           BANKERS MONTHLY



“In the business world those that have information
  will prosper. Those that don’t 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
                            Jim McCormick, President
                                First Manhattan
                                Consulting 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
                                    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
EIGHT FUNDAMENTAL MOVEMENTS:
1. De-Regulation/Re-Regulation
2. Asset Liability Management
3. Performance Measurement
4. Product Diversification
5. Service/Sales Culture
6. Risk Management
7. Industry Consolidation/Convergence
8. Technology-Information Management


                                        6
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
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
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
4. PRODUCT DIVERSIFICATION:
 Loan & Deposit
 Fee-Based
 Trust
 Brokerage
 Insurance
 Delivery Channels
 Internet Banking
 Sales Culture (“Trusted Advisor Culture”)


                                          10
5. SERVICE/SALES CULTURE:

 Cross-Selling
 Products Per  Customer
 Service Opportunities
 Sales Opportunities
 Incentives/Disincentives
 Service/Sales Training
 Service/Sales Tools



                             11
                             12
6. RISK MANAGEMENT:
 Traditional Risk
   Credit-Oriented



 Current View      of Risk
   Risk-Adjusted Return
    on Capital (RAROC)


 Types of   Risk

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


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


                                        14
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
PREREQUISITES TO MEANINGFUL
MANAGEMENT INFORMATION:
 Senior management’s support
 Reflect management’s operating philosophy
 Provide management information, not just
  regulatory information
 Understandable to the end-user
 Consistently applied
 Provide value as well as benefit


                                          16
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
REPORTING CONSIDERATIONS:
1.    Reconcilable
2.    Audit Trails
3.    Ranking Reports
4.    Comparative Reports
5.    Trend Reports
6.    Summary and Detailed Levels
7.    Macro versus Micro Approach
8.    Rate/Volume Analysis
9.    ROA/ROE, Efficiency, Risk Based Capital, etc.
10.   Peer Group Analysis


                                                      18
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
                        Line of Business/Organizational Profitability

                                              Board


                                              Total
                                              Bank


       Branch     Investments     Trust      Lending    Marketing    Human       Operations
       Banking                                                      Resources


Region A     Region B           Commercial   Mortgage   Consumer           Data Proc   Bookkeeping


Branch A     Branch C


Branch B     Branch D




                                                                                              20
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
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
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        CD’s $100,000+
Now Accounts        Public Funds
FF-Purchased        Other Borrowings




                                       23
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
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
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
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
CUSTOMER PROFITABILITY:
 Account Level Profitability


 Individual Relationship Profitability


 Extended Relationship Profitability


 Market Segment Profitability




                                          28
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
MCIF-MARKERTING CUSTOMER
 INFORMATION FILE:

 Connectivity of   Data

 Matching Markets/Products/Sales/Service


 Market Demographics




                                      30
CRM-CUSTOMER RELATIONSHIP
 MANAGEMENT:

 Contact Information


 Sales and Service   Tracking

 Performance   Measures



                                 31
MINING AND MAPPING DATA:

 Where are   the opportunities?

 Where should the   focus be?
   Geographic
   Customer type


 Advertising/marketing/promotion/sales and
 service


                                        32
       PROFITABILITY EMPHASIS:
CMTY
BK’S                         MEL
       Fund Using/
       Fund Providing
83%    Products              31%/15%
       --------------
       Interest Income/
       Interest Expense


       Non-Fund Products
17%    --------------        69%/85%
       Non-Interest Income



                                       33
FUNDS TRANSFER PRICING:

 Single Rate/Pool
 Specific Matching
 Multiple Pool Matching - Actual Cost of Funds
 Matched Maturity – Coterminous




                                            34
                                      Asset
                                      Spread
Total
                           Treasury
Interest                   Spread
Spread
                                      Liability
                                      Spread

                 Data
              Warehouse/
               Funds
               Transfer
               Pricing


General                         Other
Ledger     Loans Deposits     Databases
             Securities

                                                  35
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
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
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%

    Net Spread     4.36%   4.32%   0.04%




                                             38
TRANSFER PRICING-
PRODUCT CHARACTERISTICS:

 Original Maturity
   Stated Maturity
   Stated Repricing
 Duration
 Cash Flow
 Blended Rate


                           39
CURVES:
 Treasury
 FHLB
 Swap
 LIBOR
 Build
 Other
 Supplemental Margins




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


                               41
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
     Marginal Contribution
     CD’s – One Year Maturity
9%
                                           Treasury Rates
                                           Credit for Funds
8%


7%


6%


5%
      8  9   10   11   12    1    2    3    4    5    6    7    8    9
     90 90   90   90   90   91   91   91   91   91   91   91   91   91




                                                                         43
 Marginal Contribution
 CD’s – One Year Maturity
                                             Cost of Funds             9%
                                             Treasury Rates
                                             Credit for Funds
                                                                       8%


                                                                       7%


                                                                       6%


                                                                       5%
 8    9   10   11   12    1    2    3    4     5    6    7    8    9
90   90   90   90   90   91   91   91   91    91   91   91   91   91



                                                                            44
      Marginal Contribution
      CD’s – One Year Maturity
9%
                                                  Treasury Rates
                                                  Credit for Funds
8%                                                Cost of Funds


7%


6%


5%
      8    9   10   11   12    1    2    3    4     5    6    7    8    9
     90   90   90   90   90   91   91   91   91    91   91   91   91   91



                                                                            45
      Marginal Contribution
      CD’s – One Year Maturity
                Maturities
9%              Deposit Inflows                                                6,000,000
                Treasury Rates
                Credit for Funds                                               5,000,000
                Cost of Funds
8%
                                                                               4,000,000

7%                                                                             3,000,000

                                                                               2,000,000
6%
                                                                               1,000,000

5%                                                                             0
      8    9   10   11   12        1    2    3    4    5    6    7    8    9
     90   90   90   90   90       91   91   91   91   91   91   91   91   91




                                                                                           46
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
                                  E IS
  Organization     Product         Ad - Hoc       Customer        Opportunity
  Profitability   Profitability   Profitability   Profitability   Profitability



    ALM                                                                MCIF
                                     Data
                                  Warehouse/
     Cost                            FTP                     Funds
                                                             Transfer
   Allocation                                                Pricing

                            Interface Engine

General Ledger                                            Other Databases
                        Loans/Deposits/Securities

                                                                             48
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
MEASURING AND ACHIEVING SUCCESS:
 Develop meaningful management information to
  make more informed decisions and manage
  risk…i.e., the users use the system

   Productivity will be increased

   Performance should be rewarded

   The “Bottom-Line” is improved

   All constituencies are satisfied

                                                 50
                   Financial Managers Society
                      New York-New Jersey Chapter
                            All Day Seminar
                           September 14, 2005




   PERFORMANCE MEASUREMENT/PROFITABILITY ANALYSIS
Organizational/Branch/Line-of-Business/Product/Customer/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@KafafianGroup.com
                                    www.KafafianGroup.com

								
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