Welcome
Welcome
2 © 2015 Jack Henry & Associates, Inc.
Understand Customer Profitability and
Effective Pricing Strategies
March 31, 2016
3 © 2015 Jack Henry & Associates, Inc.
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.
4 © 2015 Jack Henry & Associates, Inc.
Understanding your clients…
How much to you know about your clients?
How do you use this information to engage with them?
5 © 2015 Jack Henry & Associates, Inc.
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”
6 © 2015 Jack Henry & Associates, Inc.
Agenda
• What Drives Profitability
• Understanding Client Profitability
• Building Effective Pricing Strategies
• Questions & Answers
7 © 2015 Jack Henry & Associates, Inc.
What Drives Profitability?
8 © 2015 Jack Henry & Associates, Inc.
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
9 © 2015 Jack Henry & Associates, Inc.
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
10 © 2015 Jack Henry & Associates, Inc.
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!
11 © 2015 Jack Henry & Associates, Inc.
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
12 © 2015 Jack Henry & Associates, Inc.
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
13 © 2015 Jack Henry & Associates, Inc.
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.
14 © 2015 Jack Henry & Associates, Inc.
Understanding Customer Profitability
15 © 2015 Jack Henry & Associates, Inc.
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
16 © 2015 Jack Henry & Associates, Inc.
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”
17 © 2015 Jack Henry & Associates, Inc.
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
18 © 2015 Jack Henry & Associates, Inc.
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
19 © 2015 Jack Henry & Associates, Inc.
Monthly Fee Income by Decile
-
100,000
200,000
300,000
400,000
500,000
600,000
Loan Fees
Deposit Fees
Fee Income
Deciles
20 © 2015 Jack Henry & Associates, Inc.
An Officers Portfolio of Clients…
21 © 2015 Jack Henry & Associates, Inc.
Valuable Client and their Products…
22 © 2015 Jack Henry & Associates, Inc.
Detailed Profitability for an Account……
23 © 2015 Jack Henry & Associates, Inc.
Pricing Strategies
24 © 2015 Jack Henry & Associates, Inc.
Don’t let your competition
price your loans…
Make the deal work for
both the client and the
FI…
25 © 2015 Jack Henry & Associates, Inc.
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
26 © 2015 Jack Henry & Associates, Inc.
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
27 © 2015 Jack Henry & Associates, Inc.
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
28 © 2015 Jack Henry & Associates, Inc.
Provide the client options…
29 © 2015 Jack Henry & Associates, Inc.
Terms affect price…
30 © 2015 Jack Henry & Associates, Inc.
Terms affect price…
31 © 2015 Jack Henry & Associates, Inc.
Pricing Power… - $100k DDA
32 © 2015 Jack Henry & Associates, Inc.
Consumer Pricing…
33 © 2015 Jack Henry & Associates, Inc.
Consumer Pricing…
34 © 2015 Jack Henry & Associates, Inc.
The Key Formula
Knowledge + Tools + Discipline = Results
35 © 2015 Jack Henry & Associates, Inc.
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
36 © 2015 Jack Henry & Associates, Inc.
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
37 © 2015 Jack Henry & Associates, Inc.
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.
38 © 2015 Jack Henry & Associates, Inc.
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!
39 © 2015 Jack Henry & Associates, Inc.
Questions?
40 © 2015 Jack Henry & Associates, Inc.
Thank You
Brad Dahlman – ProfitStars®
1140 Centre Point Drive, Suite 800
Mendota Height MN 55120
800.356.9099
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.