Measuring Line of Business Success Year One – Chief Retail Officer Perspective Mike Allen

Chief Executive Officer Chief Financial Officer Executive Banking School Roadmap GROWING Capability Confidence Courage YEAR THREE Chief Executive Officer Perspective YEAR TWO Chief Financial Officer Perspective YEAR ONE Chief Retail Officer Perspective

Chief Executive Officer Chief Financial Officer Executive Banking School Roadmap GROWING Capability Confidence Courage YEAR THREE Chief Executive Officer Perspective YEAR TWO Chief Financial Officer Perspective YEAR ONE Chief Retail Officer Perspective

Year One – Chief Retail Officer Perspective Retail Strategy Curriculum Leadership Communication Leading the Retail Line of Business via a Balanced Scorecard Discovering Customer Segments & Consumer Behaviors Successfully Communicating & Advertising in Retail Banking Developing and Pricing Profitable Bank Products Modernizing & Optimizing Delivery to Meet Customer Requirements Facing Ethical Dilemmas in Banking Applying Concepts Learned to Today’s Market Chief Retail Officer Perspective

Year One – Chief Retail Officer Perspective Retail Strategy Curriculum Leadership Communication Leading the Retail Line of Business via a Balanced Scorecard Discovering Customer Segments & Consumer Behaviors Successfully Communicating & Advertising in Retail Banking Developing and Pricing Profitable Bank Products Modernizing & Optimizing Delivery to Meet Customer Requirements Facing Ethical Dilemmas in Banking Applying Concepts Learned to Today’s Market Chief Retail Officer Perspective

This Session’s Critical Topics Basics of Financial Accounting How Do Banks Generate Profits? How Does a Retail Line of Business Generate Profits? Key Retail Banking Performance Metrics Balanced Scorecard What kind of bank are you creating and how is that reflected in key performance indicators?

Basics of Financial Accounting

Fundamental Financial Statements Basics of Financial Accounting Fundamental Financial Statements In measuring the success of businesses three principal financial statements are used Balance Sheet Income Statement Statement of Cash Flows We will be working with only the Balance Sheet and Income Statement

The Balance Sheet Is a point in time report Basics of Financial Accounting The Balance Sheet Is a point in time report Shows what the bank “owns” & what it “owes” What it “owns” are Assets What is “owes” are Liabilities & Shareholder Equity Fundamental rule to remember: For every dollar invested in assets must be funded by a combination of Liabilities and Shareholder Equity Or Simply said, “The Balance Sheet must balance!”

Balance Sheet Accounts Basics of Financial Accounting Balance Sheet Accounts Assets:

Balance Sheet Accounts Basics of Financial Accounting Balance Sheet Accounts Liabilities: Shareholder Equity

Typical Balance Sheet BALANCE SHEET AS OF DEC. 31, 2016 Basics of Financial Accounting Typical Balance Sheet BALANCE SHEET AS OF DEC. 31, 2016

Retail Bank MarketSim Balance Sheet Basics of Financial Accounting Retail Bank MarketSim Balance Sheet

Retail Bank MarketSim Balance Sheet Basics of Financial Accounting Retail Bank MarketSim Balance Sheet

Retail Bank MarketSim Balance Sheet Basics of Financial Accounting Retail Bank MarketSim Balance Sheet There are three questions that now need answering: Where is Shareholder Equity? Where are the Other Assets and Debt? What is Treasury Borrowing and Funding? Before we move on to the Income Statement are there any other questions?

Basics of Financial Accounting The Income Statement The Income Statement presents the results of business activities of a bank over a period of time The Income Statement shows: Revenues earned from Assets (Interest income) Expenses paid on Liabilities (Interest expense) Revenues from other sources (Non-interest income) Expenses from other sources (Non-interest expense) Estimates of new potential losses in the loan portfolio

Income Statement Line Items Basics of Financial Accounting Income Statement Line Items Interest earned on securities Interest earned on loans Interest paid on deposits Interest paid on other debt Provision for loan losses Non-interest income Non-interest expenses Taxes Net Income

INCOME STATEMENT FOR THE PERIOD JAN. 1 2016 - DEC. 31, 2016 Basics of Financial Accounting Typical Income Statement INCOME STATEMENT FOR THE PERIOD JAN. 1 2016 - DEC. 31, 2016

Retail Bank MarketSim Income Statement Basics of Financial Accounting Retail Bank MarketSim Income Statement

Retail Bank MarketSim Income Statement Basics of Financial Accounting Retail Bank MarketSim Income Statement

Retail Bank MarketSim Income Statement How Do Banks Generate Profits? Retail Bank MarketSim Income Statement Questions that need answering: Where is interest income? Where is interest expense? What about salaries and benefits?

What Have We Just Done? We now understand the: Balance Sheet Basics of Financial Accounting What Have We Just Done? We now understand the: Balance Sheet Introduced the Income Statement Know why we don’t use Statement of Cash Flows

Questions

How Do Banks Generate Profits?

Basic Balance Sheet Liabilities Assets How Do Banks Generate Profits? Shareholder Equity

Basic Income Statement How Do Banks Generate Profits? Basic Income Statement Income Expense Net Income Interest Income - Interest Expense =Net Interest Income - Provision for Loan Losses =Net Int. Income after Provision +Non Interest Income -Non Interest Expense =Net Income before Taxes

How do Banks Generate Profits? Loans Securities Deposits Interest Income Interest Expense Net Interest Income Provision for Loan Losses Net Int. Income after Provision Non Interest Income Non Interest Expense Net Income before Taxes Other Borrowings Shareholder Equity

Interest Income Interest Income Interest Expense Net Interest Income How Do Banks Generate Profits? Interest Income Loans Securities Deposits Interest Income Interest Expense Net Interest Income Provision for Loan Losses Net Int. Income after Provision Non Interest Income Non Interest Expense Net Income before Taxes Other Borrowings Shareholder Equity

Interest Expense Interest Income Interest Expense Net Interest Income How Do Banks Generate Profits? Interest Expense Loans Securities Deposits Interest Income Interest Expense Net Interest Income Provision for Loan Losses Net Int. Income after Provision Non Interest Income Non Interest Expense Net Income before Taxes Other Borrowings Shareholder Equity

Net Interest Income Interest Income -Interest Expense How Do Banks Generate Profits? Net Interest Income Loans Securities Deposits Interest Income -Interest Expense =Net Interest Income Provision for Loan Losses Net Int. Income after Provision Non Interest Income Non Interest Expense Net Income before Taxes Other Borrowings Shareholder Equity

Margin “Net Interest Margin” is net interest income divided by assets How Do Banks Generate Profits? Margin “Net Interest Margin” is net interest income divided by assets In our managerial accounting world “Margin” is the interest income earned on both deposits and loans

Provision of Loan Losses How Do Banks Generate Profits? Provision of Loan Losses Loans Securities Deposits Interest Income Interest Expense Net Interest Income Provision for Loan Losses Net Int. Income after Provision Non Interest Income Non Interest Expense Net Income before Taxes Other Borrowings Shareholder Equity

Provision of Loan Losses How Do Banks Generate Profits? Provision of Loan Losses Loans Securities Deposits Interest Income Interest Expense Net Interest Income - Provision for Loan Losses =Net Int. Inc. after Provision Non Interest Income Non Interest Expense Net Income before Taxes Other Borrowings Shareholder Equity

Provision for Loan Losses How Do Banks Generate Profits? Provision for Loan Losses “Provision for Loan Losses” is money taken from income and set aside for future losses In our managerial accounting world Provision for Loan Losses is money taken from income from specific loans and set aside for future losses

Expanded Balance Sheet How Do Banks Generate Profits? Expanded Balance Sheet Loans Securities Deposits Other Borrowings Shareholder Equity Other Assets

Non Interest Income Interest Income Interest Expense How Do Banks Generate Profits? Non Interest Income Securities Loans Deposits Interest Income Interest Expense Net Interest Income Provision for Loan Losses Net Int. Income after Provision Non Interest Income Non Interest Expense Net Income before Taxes Other Borrowings Shareholder Equity Other Assets

Non Interest Expense Interest Income Interest Expense How Do Banks Generate Profits? Non Interest Expense Securities Loans Deposits Interest Income Interest Expense Net Interest Income Provision for Loan Losses Net Int. Income after Provision Non Interest Income Non Interest Expense Net Income before Taxes Other Borrowings Shareholder Equity Other Assets

Net Income before Taxes How Do Banks Generate Profits? Net Income before Taxes Securities Loans Deposits Interest Income Interest Expense Net Interest Income Provision for Loan Losses Net Int. Inc. after Provision + Non Interest Income - Non Interest Expense = Net Income before Taxes Other Borrowings Shareholder Equity Other Assets

Questions

How Does a Retail Line of Business Generate Profits?

Remember Net Income? Interest Income Interest Expense How Does a Retail Line of Business Generate Profits? Remember Net Income? Loans Securities Deposits Interest Income Interest Expense Net Interest Income Provision for Loan Losses Net Int. Income after Provision Non Interest Income Non Interest Expense Net Income before Taxes Other Borrowings Shareholder Equity

Retail Bank MarketSim Income Statement How Do Banks Generate Profits? Retail Bank MarketSim Income Statement

How Do Banks Generate Profits? Margin

Margin Margin times Balances equals Net Interest Income How Do Banks Generate Profits? Margin Margin times Balances equals Net Interest Income Funds Transfer Pricing Bigger is better for the bank, smaller is better for the customer

How Do Banks Generate Profits? Margin Margin represents what the retail division is paid for loan and deposit balances Saying it differently, both deposits and loans margin equals yield less FTP divided by balances Bigger is better for the bank, smaller is better for the customer

Margin – Product Report How Do Banks Generate Profits? Margin – Product Report

Margin – Product Report How Do Banks Generate Profits? Margin – Product Report

Key Retail Bank Performance Metrics

Financial Ratios Return on Equity Return on Assets Key Retail Bank Performance Metrics Financial Ratios Return on Equity Return on Assets Net Interest Income to Assets (Margin) Non-Interest Income to Assets Net Income Efficiency Ratio

Financial Ratios Return on Equity Return on Assets Key Retail Bank Performance Metrics Financial Ratios Return on Equity 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒/𝐴𝑙𝑙𝑜𝑐𝑎𝑡𝑒𝑑_𝐸𝑞𝑢𝑖𝑡𝑦 Return on Assets 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒/𝐴𝑠𝑠𝑒𝑡𝑠 Net Interest Income to Assets (Margin) 𝑁𝑒𝑡 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐼𝑛𝑐𝑜𝑚𝑒/𝐴𝑠𝑠𝑒𝑡𝑠 Non-Interest Income to Assets 𝑁𝑜𝑛 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐼𝑛𝑐𝑜𝑚𝑒/𝐴𝑠𝑠𝑒𝑡𝑠 Efficiency Ratio 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡/𝑇𝑜𝑡𝑎𝑙_𝑅𝑒𝑣𝑒𝑛𝑢𝑒

Key Retail Bank Performance Metrics Financial Ratios

Key Retail Bank Performance Metrics Financial Ratios

Financial Ratios Calculate the following: Key Retail Bank Performance Metrics Financial Ratios Calculate the following: Net Interest Income to Assets Non-interest Income to Assets

Customers Number of Customers Customer Turnover Ratio Key Retail Bank Performance Metrics Customers Number of Customers Customer Turnover Ratio Customer Segment Profitability Customer Market Share Products per Customer Customer Satisfaction Products Delivery Service

Key Retail Bank Performance Metrics Customers

Customers Key Retail Bank Performance Metrics Calculate Customer Turnover Ratio – 𝐿𝑜𝑠𝑡_𝐶𝑢𝑠𝑡𝑜𝑚𝑒𝑟𝑠/((𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔+𝐸𝑛𝑑𝑖𝑛𝑔)/2)

Key Retail Bank Performance Metrics Customers

Key Retail Bank Performance Metrics Customers

Key Retail Bank Performance Metrics Customers

Measures the attractiveness of your decisions in the eyes of customers Key Retail Bank Performance Metrics Customers Measures the attractiveness of your decisions in the eyes of customers

Products Balances Unit Profitability Total Contribution Key Retail Bank Performance Metrics Products Balances Unit Profitability Total Contribution Basis Point Analysis All of the above by Segment Market share: Loans Deposits

Key Retail Bank Performance Metrics Products

Key Retail Bank Performance Metrics Products

Products – Basis Point Analysis Key Retail Bank Performance Metrics Products – Basis Point Analysis A basis point is 1/100 of a percent – to generate a basis point a analysis, first common size by dividing each line by Total Balances

Products – Basis Point Analysis Key Retail Bank Performance Metrics Products – Basis Point Analysis A basis point is 1/100 of a percent – to generate a basis point a analysis, first common size by dividing each line by Total Balances

Key Retail Bank Performance Metrics Product by Segment

Key Retail Bank Performance Metrics Product by Segment

Key Retail Bank Performance Metrics Market Share

Key Retail Bank Performance Metrics Market Share

Delivery Cost Per Transaction Excess Capacity Management Key Retail Bank Performance Metrics Delivery Cost Per Transaction Excess Capacity Management

Key Retail Bank Performance Metrics Delivery

Key Retail Bank Performance Metrics Delivery

Key Retail Bank Performance Metrics Expenses

Other CRA Loan to Deposit Ratio Provision to Assets Key Retail Bank Performance Metrics Other CRA Loan to Deposit Ratio Provision to Assets

Key Retail Bank Performance Metrics Financial Ratios

Key Retail Bank Performance Metrics Other

Competition Competitive Report Call Report Market Intelligence Key Retail Bank Performance Metrics Competition Competitive Report Market Intelligence Analysis Call Report

Key Retail Bank Performance Metrics Competition

Key Retail Bank Performance Metrics Competition

Key Retail Bank Performance Metrics Competition

Key Retail Bank Performance Metrics Competition

Balanced Scorecard

Balanced Scorecard Index Bank Management Return on Equity Provision to Assets CRA Return on Assets Loan to Deposit Ratio Market Measures Market Share Index Customer Turnover Ratio Customer Satisfaction Product Breadth Access to Delivery Customer Service Performance Management Efficiency Ratio Cost per Transaction Net Interest Margin Non-Interest Income to Assets

Balanced Scorecard Index

Breakout Assignment

Measuring Success Team Room Assignment Breakout Assignment Measuring Success Team Room Assignment Balance Sheet Analysis Common size it Concentrations? Observations? Income Statement Analysis Customer Report Analysis Profitability Market share Next level analysis: Where do the live? Customer by Segment Report, Customer by Sector Report What is driving profitability? Customer Segment Report Product Report Analysis Profitability on three levels: total contribution, unit contribution, basis points contribution Next level analysis: Checking accounts: # per customer, profitability drivers, detail by segment Loan Loss Provision analysis: Basis points per loan product Basis points by segment by loan Observations? Transaction by Channel Report Analysis Identifying systemic excess capacity in the branch network Identifying excess capacity in the call center Evaluating ATM network (Not sure how to do this) Identifying excess capacity in branches and what to do about it Online & Mobile & Call Center investment evaluation

Questions

Year One – Chief Retail Officer Perspective Retail Strategy Curriculum Leadership Communication Leading the Retail Line of Business via a Balanced Scorecard Discovering Customer Segments & Consumer Behaviors Successfully Communicating & Advertising in Retail Banking Developing and Pricing Profitable Bank Products Modernizing & Optimizing Delivery to Meet Customer Requirements Facing Ethical Dilemmas in Banking Applying Concepts Learned to Today’s Market Chief Retail Officer Perspective

Chief Executive Officer Chief Financial Officer Executive Banking School Roadmap GROWING Capability Confidence Courage YEAR THREE Chief Executive Officer Perspective YEAR TWO Chief Financial Officer Perspective YEAR ONE Chief Retail Officer Perspective