Measuring Success – Part II

Measuring Success – Part II
First Year & Chief Retail Officer Perspective Jill Enabnit

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

Team Room Assignment What did you learn? Any surprises?
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 What did you learn? Any surprises?

Measuring Success – Part II

What have we learned? Basic accounting and key retail banking performance metrics How banks generate profits from assets and liabilities How ‘your bank’ is reflected in key performance indicators Business choices lead to outcomes and those outcome are reflected in the reports versus

You explored key metrics tied to the Balance Sheet & Income Statement
Securities Deposits Net Interest Income Operating Expenses Loans Animate Comments: this morning we saw how the balance sheet relates to the income statement. Or in other words how a bank generates income from their assets and liabilities. At a high level, you can use a balanced scorecard to measure performance. BUT – How do you know what is ‘good’ and what to track to truly measure your success Non-Interest Income Other Debt Net Income Equity Other Assets

…and a balanced scorecard for your bank
Metric Year 0 Year 1 B/(W) Return on Equity 15.18% Provision to Assets 1.46% Return on Assets 0.84% Loan to Deposit Ratio 110.75% Market Share Index 20.00% Customer Turnover Ratio 0.00% Efficiency Ratio 65.30% Average Cost per Transaction $1.22 Net Interest Margin 4.48% Non-Interest Income to Assets 3.57% How do you know what is ‘good’ though?!

This Session’s Critical Topics
Quantity and quality of earnings Determining actionable metrics to optimize business outcomes Aligning metrics with desired business strategy What kind of bank are you creating and how is that reflected in key performance indicators? Business choices lead to outcomes and those outcome are reflected in the reports versus

Start with the basics Net Interest Income $88.1MM Non Interest Income
Total Assets $2.96B Total Liabilities $2.68B Treasury Borrowing $0.2879B Start with the basics Net Interest Income $88.1MM Non Interest Income $105.7MM Total Costs + Taxes $169.0MM Net Income after Tax $24.8MM Identify that we are only showing the retail bank (not the full balance sheet) Paul: Change income statement from hexagons to circles (TO SHOW DIFFERENCE BETWEEN STOCKS IN THE BALANCE SHEET VS FLOWS IN THE INCOME STATEMENT)

….but banks have metrics for everything
Lines $96MM Money Market $514MM Home Equity $2218MM CDs $1142MM Investments $5.3MM Total Assets $2.96B Total Liabilities $2.68B Credit Cards $400MM Checking $483MM Savings $532MM ….but banks have metrics for everything Loans $250MM Treasury Borrowing $0.2879B Net Interest Income $88.1MM Non Interest Income $105.7MM Total Costs + Taxes $169.0MM Net Income after Tax $24.8MM

Lines $96MM Money Market $514MM Home Equity $2218MM Product Marketing CDs $1142MM Investments $5.3MM Total Assets $2.96B Spread to FTP Total Liabilities $2.68B Credit Cards $400MM Checking $483MM Savings $532MM ….but banks have metrics for everything Loans $250MM Transaction Fees Delivery Channel Treasury Borrowing $0.2879B Overdraft Net Interest Income $88.1MM Non Interest Income $105.7MM Total Costs + Taxes $169.0MM Net Income after Tax $24.8MM

Lines $96MM Money Market $514MM Home Equity $2218MM Product Marketing CDs $1142MM Investments $5.3MM Total Assets $2.96B Spread to FTP Total Liabilities $2.68B Credit Cards $400MM Checking $483MM Savings $532MM It becomes complicated quickly! ….but banks have metrics for everything Loans $250MM Transaction Fees Delivery Channel Treasury Borrowing $0.2879B Segment Appeal Overdraft Average Balance per Account Monthly Fees ATM Fee Net Interest Income $88.1MM Non Interest Income $105.7MM Total Costs + Taxes $169.0MM Net Income after Tax $24.8MM

How can you systematically determine metrics to drive optimal outcomes?

Success measurement starts with clear understanding here
Measuring Success Driving success begins with your strategy Business Strategy Metrics from the Balanced Scorecard CRA Product Breadth Access to Delivery Customer Service Market Share Turnover Cost per Tran Targeted Segments The decisions you make that drive short and long-term outcomes Success measurement starts with clear understanding here

The decisions you make that drive short and long-term outcomes
Drivers of Success Outcomes BUSINESS STRATEGY CRA, Product Breadth, Access to Delivery, Customer Service, Market Share, Turnover, Cost per Tran Targeted Segments The decisions you make that drive short and long-term outcomes QUANTITY OF EARNINGS ROE ROA QUALITY OF EARNINGS Asset Quality, Liquidity Ratio, Efficiency Ratio, NIM, Non-interest income to Assets Add animation – CHANGE THIS VISUAL TO MORE APPEALING COLORS/VIEW BSI – changed product breadth and delivery access to customer satisfaction – now uses appeal points in aggregate to appeal to your segments (not the ‘targeted’, but who is actually in your customer base): THIS IS A HUGE CHANGE Call report grades – now reflect the ranking – letter grade is now A = ranked 1st down to 5th rank = C: YES! THIS MAKES THOSE GRADES AN EFFECTIVE MEASURE OF HOW THEY ARE DOINT.

Ensure you business strategy and organizational structure complement optimization
Delivery Products Marketing Access to Delivery & Customer Service: Branches: #, type, Location ATMs: #, type, location Call Center: type/services Digital: type/services Optimize: # Transactions and Cost Product Breadth What types How many Price Optimize: Net interest income Non-interest income Expenses Marketshare & CRA Who What Where Optimize: How much

How do product and marketing strategies influence delivery metrics?
Measuring Success Strategy and metrics must connect across silos How do product and marketing strategies influence delivery metrics? How do delivery strategies influence product and marketing metrics? When have you seen sub-optimal outcomes due to lack of connection? Your experience and intuition can inform metrics to explore.

Targeted segments can help unify outcomes and interpretation of success metrics
Delivery Products Marketing Branches: #, type, Location ATMs: #, type, location Call Center: type/services Digital: type/services Optimize BY SEGMENT: # Transactions Cost per Transaction What types How many Price Optimize BY SEGMENT: Net interest income Non-interest income Expenses Who What Where Optimize BY SEGMENT: How much TARGETED SEGMENTS

By focusing success metrics
Credit Products Products per customer Contribution per customer Breakdown of revenue sources Product specific profitability Marketshare Marketing Appeal Deposit Products Segment A …you are able to see how decisions contribute (or detract) from strategic success Other Channels Branch ATM

Be aware of unintended appeal and consequences
Credit Products Uses low cost off us ATM benefit Low balances and minimal revenue to offset costs Marketing Appeal Deposit Products Segment A Segment B Other Channels Branch ATM High transaction costs Low revenue drivers

Customer Based Profitability
Customers Products per Customer Product Profitability Delivery Costs Profits Customer Based Profitability Moves financials out of accounting to the people who generate the profits Can be computed on a single customer, a geography, or a market segment Actionable information

Extend the concept to multiple segments
Credit Products Marketing Appeal Deposit Products A B …measure which decisions are favorable across segments Other Channels Branch C ATM

Use business strategy metrics to drill down to levers that optimze outcomes Drivers of Success Outcomes BUSINESS STRATEGY CRA, Product Breadth, Access to Delivery, Customer Service, Market Share, Turnover, Cost per Tran Targeted Segments The decisions you make that drive short and long-term outcomes QUANTITY OF EARNINGS ROE ROA QUALITY OF EARNINGS Asset Quality, Liquidity Ratio, Efficiency Ratio, NIM, Non-interest income to Assets Add animation – CHANGE THIS VISUAL TO MORE APPEALING COLORS/VIEW BSI – changed product breadth and delivery access to customer satisfaction – now uses appeal points in aggregate to appeal to your segments (not the ‘targeted’, but who is actually in your customer base): THIS IS A HUGE CHANGE Call report grades – now reflect the ranking – letter grade is now A = ranked 1st down to 5th rank = C: YES! THIS MAKES THOSE GRADES AN EFFECTIVE MEASURE OF HOW THEY ARE DOINT.

MarketSim Example Outcome metrics: Quantity and Quality of Earnings don’t explain the success drivers Dig into the business strategy metrics and the underlying levers to determine what is (or isn’t) driving success

Measuring Success Quantity of Earnings measures: Team 1 or Team 5 had similary measures, but diverged in Year 2

Quantity of Earnings measures: Team 1 or Team 5 diverged in Year 2
Measuring Success Quantity of Earnings measures: Team 1 or Team 5 diverged in Year 2

Measuring Success Quality of Earnings measures begin to indicate where the strategy and tactics drive financial outcomes

Measuring Success Quality of Earnings: measures begin to indicate where the strategy and tactics drive financial outcomes

We all have a tendency to start with the outcomes --- but the drivers are in the business strategy and optimizing for your targeted segments

Depends on the quality of earnings driven by your business strategy.
Measuring Success Where do you start to determe the drivers of your results? Business Strategy metrics! Is smaller always bad? Depends on the quality of earnings driven by your business strategy.

Is lower turnover an indication of improved targeting?
Measuring Success Where do you start to determe the drivers of your results? Business Strategy metrics! Is lower turnover an indication of improved targeting?

Measuring Success Where do you start to determe the drivers of your results? Business Strategy metrics! Deeper relationships?

Remember the increasing efficiency ratio?
Measuring Success Where do you start to determe the drivers of your results? Business Strategy metrics! Remember the increasing efficiency ratio?

Remember the lower efficiency ratio in the Quality of Earnings?
Measuring Success Where do you start to determine the drivers of your results? Business Strategy metrics! Remember the lower efficiency ratio in the Quality of Earnings?

Measuring Success MarketSim allows you to drill down into key revenue and expense categories to measure business strategy success

Bank 1 metrics summary Measuring Success Key business strategies
Business Strategy Marketshare ↓ Turnover Products per Customer ↔ Average Cost per Transaction Average Contribution per Account ↑ Key business strategies Attract profitable checking base Product breadth for profitable, products per customer Balanced loan-to-deposits Diverse revenue streams including fee income Reduced fixed costs Quantity of Earnings Net Income ↑ ROA ROE Quality of Earnings Efficiency Ratio ↓ Loan-to-Deposit Ratio NIM ↑ Provision Non-Interest Income to Assets

Did the business actions translate to success?
Measuring Success Did the business actions translate to success? Balance Sheet Last Year This Year % Difference Assets Loans $256,084,126 $207,158,649 -19.11% Lines $104,402,202 $73,388,363 -29.71% Credit Cards $446,009,610 $254,787,743 -42.87% Home Equity $3,028,401,222 $3,050,131,233 0.72% Total $3,834,897,160 $3,585,465,988 -6.50% Liabilities Checking Total $452,639,802 $875,165,817 93.35% Savings $211,773,350 $489,127,716 130.97% Investments $5,301,500 $0 % Money Market $546,203,710 $429,054,743 -21.45% CD $1,042,152,053 $456,892,417 -56.16% $2,258,070,415 $2,250,240,693 -0.35% Treasury Treasury Borrowing $1,576,826,745 $1,335,225,296 -15.32% Treasury Funding 0.00% Treasury Cost* $7,884,134 $6,676,126 *Treasury Rate 0.50% Intentional? Not clear in business strategy ↑ balances, but what about customers and profitability ↓ borrowing, but what is related spread

↑ expenses vs stated business strategy to ↓
Measuring Success Did the business actions translate to success? Income Statement Last Year This Year % Difference Income Net Interest Income (Assets) $123,514,770 $107,920,553 -13.00% Interest Bearing Assets $3,834,897,160 $3,585,465,990 -7.00% Net Interest Margin (Assets)/Assets 3.22% 3.01% -6.55% Net Interest Income (Liabilities) $46,909,488 $72,425,613 54.00% Interest Bearing Liabilities $2,258,070,434 $2,250,240,724 0.00% Net Interest Margin (Liabilities)/Liabilities 2.08% 54.93% Total Net Interest Income $170,424,258 $180,346,166 6.00% Loan Loss Provisions $70,344,410 $57,688,871 -18.00% Treasury Balancing Cost $7,884,134 $6,676,126 -15.00% Net Interest Income After LLP and Treasury $92,195,714 $115,981,169 25.80% Non Interest Revenue $134,143,780 $170,148,989 27.00% Total Revenue $226,339,494 $286,130,158 24.00% Expenses Variable Costs $123,783,003 $119,182,659 -4.00% Fixed Costs $26,225,000 $26,425,000 1.00% Delivery Costs $36,137,763 $39,035,849 8.00% Marketing Costs $14,300,000 $17,900,000 25.00% Alternative Channel Costs $6,841,351 $8,048,770 18.00% Corporate, Compliance, and Regulatory Expenses $3,000,000 $4,000,000 33.00% Total Costs $210,287,116 $214,592,278 2.00% Net Income before taxes $16,052,378 $71,537,880 346.00% Taxes $5,618,332 $25,038,258 Net Income after taxes $10,434,045 $46,499,622 346% Revenue grew faster than expenses => Improving efficiency ratio ↑ non-interest revenue. Which areas showed change? Volume, fee amounts, mix shift? ↑ expenses vs stated business strategy to ↓

Where does segment fit into this?
Measuring Success – Customer Segment report Where does segment fit into this? This Year Last Year % Difference Blue Collar Segment Data Number of Customers 13,692 13,882 -1.37% Market Share 14.87% 15.08% Products per Customer 7.11 6.87 3.49% Performance Data Spread Revenue $21,637,060 $21,691,252 -0.25% Non-Interest Revenue $18,763,843 $13,889,399 35.09% Loan Loss Provisions $8,197,153 $9,804,814 -16.40% Total Revenue $32,203,751 $25,775,837 24.94% Variable Cost $13,428,430 $13,591,330 -1.20% Fixed Cost $9,332,395 $8,199,203 13.82% Total Cost $22,760,826 $21,790,533 4.45% Net Contribution $9,442,925 $3,985,304 136.94% Net Contribution per Customer $690 $287 140.42% Accounts Checking 17,112 13,742 24.52% Savings, Money Market, CD's 12,734 12,908 -1.35% Investment 1,110 % Mortgage 7,667 7,774 -1.38% Loans, Lines, and Credit Cards 58,193 59,002 Origination Products 1,643 834 97.00% Total Accounts 97,349 95,370 2.08% Optimize for targeted segments and understand sources of unintended appeal Where are you winning with specific segments? Where is there opportunity to optimize? Reduce costs Delivery capacity Product set Improve experience Refine marketing tactics

Measuring Success: Customer Report by Segment & Product; Product Financial report
Determine sources of revenue and expense at the segment level to better target marketing, product and delivery decisions Segment & Some type of checking Segment X Customer Information Number Of Accounts 9,857 Total Balances $49,636,402 Balance/Account $5,036 Bundle Penetration: None 0.00% Revenues Interest Income $2,233,638 Non Interest Revenue $1,137,005 Loan Loss $0 Total Revenues $3,370,643 Expenses Variable Costs $551,992 Fixed Costs $427,323 Total Costs $979,315 Net Income Before Tax $2,391,329 Per Customer $243 Last Year This Year % Difference Some type of Checking Number Of Accounts 69,960 70,354 1% Total Balances $151,130,770 $349,237,080 131% Average Balances $2,160 $4,964 130% Spread Revenues $6,800,885 $15,715,669 Non Interest Revenue $8,880,620 $8,134,952 -8% Loan Losses $0 0% Total Revenue $15,681,504 $23,850,621 52% Variable Costs $3,887,025 $3,909,337 Fixed Costs $2,450,000 $3,050,000 24% Total Costs $6,337,025 $6,959,336 10% Net Contribution $9,344,479 $16,891,285 81% Per Account $134 $240 79% How can you use for defining metrics & activating your business strategy? Example: What portion of each revenue and cost category is attributed to each segment? Are some segments driving higher portions of cost vs revenue?

Extend the concept across all revenue and expense categories
Measuring Success: Delivery and Sector reporting Extend the concept across all revenue and expense categories Distribution Report By Channel for This Year Channel Type # of Transactions Fixed Expense Variable Expense Total Expense Fixed Cost per Transaction Variable Cost per Transaction Total Cost per Transaction Branches 5,595,156 $30,438,000 $4,144,244 $34,582,244 $5.44 $0.74 $6.18 Anchor $0 $0.00 FullService 81,086 $774,000 $9.55 Traditional 3,439,497 $20,160,000 $1,306,290 $21,466,290 $5.86 $0.38 $6.24 Instore 2,074,573 $9,000,000 $2,837,954 $11,837,954 $4.34 $1.37 $5.71 Tellerless $504,000 ATMs Branch Based 5,253,715 $1,927,000 $323,296 $2,250,296 $0.37 $0.06 $0.43 Cash 5,051,878 $1,875,000 $303,113 $2,178,113 Advanced 201,837 $52,000 $20,184 $72,184 $0.26 $0.10 $0.36 ATM Standalone Network 2,180,247 $887,000 $120,322 $1,007,322 $0.41 $0.46 262,328 $12,000 $5,247 $17,247 $0.05 $0.02 $0.07 1,917,919 $875,000 $115,075 $990,075 $0.52 Call Center 4,391,850 $3,000,000 $0.68 Online Banking 12,023,083 $2,400,000 $240,462 $2,640,462 $0.20 $0.22 Mobile Banking 830,863 $8,309 $2,408,309 $2.89 $0.01 $2.90 Off Us ATMS 1,195,987 $1,195,987 $1.00 TOTAL 31,470,901 $41,052,000 $6,032,619 $47,084,619 $1.30 $0.19 $1.50 Distribution Report – understand ALL channels in total Segment Bedroom Community Downtown Industrial Corridor Light Industrial New Suburbia Old Money Old Suburbia Start Up Trade Up Suburbia Working Class Total Segment X 573 622 2,470 2,238 955 378 843 2,027 1,027 2,559 13,692 Customer by Sector Report – layer on what you know about your targeted segments to optimize delivery to serve their needs Sector Number of Customers % of Customers Number of Transactions % Of Transactions Transactions per Customer Number of Accounts Transactions per Account Total Cost % Of Costs Average Cost Per Transaction Bedroom Community 4,772 4.13% 234,815 4.20% 49.21 36,767 6.39 $1,872,000 5.41% $7.97 Downtown 7,136 6.17% 368,011 6.58% 51.57 56,989 6.46 $2,688,000 7.77% $7.30 Industrial Corridor 15,172 13.13% 600,067 10.72% 39.55 115,500 5.2 $2,908,765 8.41% $4.85 Light Industrial 16,473 14.25% 789,615 14.11% 47.93 121,591 6.49 $3,474,369 10.05% $4.40 New Suburbia 9,614 8.32% 500,377 8.94% 52.05 77,848 6.43 $3,888,000 11.24% $7.77 Old Money 7,541 6.52% 426,771 7.63% 56.59 66,229 6.44 $4,662,000 13.48% $10.92 Old Suburbia 12,564 10.87% 716,217 12.80% 57.01 109,272 6.55 $5,304,000 15.34% $7.41 Start Up 17,310 14.98% 758,679 13.56% 43.83 123,086 6.16 $3,442,172 9.95% $4.54 Trade Up Suburbia 8,744 7.57% 422,680 7.55% 48.34 69,167 6.11 $3,288,000 9.51% $7.78 Working Class 16,249 14.06% 777,924 13.90% 47.88 119,163 6.53 $3,054,937 8.83% $3.93 Total 115,575 100% 5,595,156 48.41 895,612 6.25 $34,582,244 $6.18 Distribution Report by Sector – understand usage by sector

Measuring Success Success metrics are specific to your business strategy Each bank must set a strategic framework with expected business outcomes Different strategic plans mean Different segment goals Different product offers Different delivery strategies Key success metrics should be specific to the strategy BUT the outcome key metrics such as ROA, ROE and Efficiency Ratio help normalize the comparison to meet shareholders expectations

Align your goals for success metrics with the business strategy and then execute Drivers of Success Outcomes BUSINESS STRATEGY CRA, Product Breadth, Access to Delivery, Customer Service, Market Share, Turnover, Cost per Tran Targeted Segments The decisions you make that drive short and long-term outcomes QUANTITY OF EARNINGS ROE ROA QUALITY OF EARNINGS Asset Quality, Liquidity Ratio, Efficiency Ratio, NIM, Non-interest income to Assets Add animation – CHANGE THIS VISUAL TO MORE APPEALING COLORS/VIEW BSI – changed product breadth and delivery access to customer satisfaction – now uses appeal points in aggregate to appeal to your segments (not the ‘targeted’, but who is actually in your customer base): THIS IS A HUGE CHANGE Call report grades – now reflect the ranking – letter grade is now A = ranked 1st down to 5th rank = C: YES! THIS MAKES THOSE GRADES AN EFFECTIVE MEASURE OF HOW THEY ARE DOINT.

Business Drivers and Outcomes
In order to drive long-term sustainability and current period balance sheet and income statement outcomes, Retail officers must focus on the underlying drivers. Drivers must… Outcomes must… Be actionable Be measurable Be controllable by Retail bank management Lead to long-term predictable expected outcomes Represent the future of your strategy Be long-run focused Be not only bottom line focused Drive current period financial performance and great long-term value Take single segment decision debrief slide 9 (Thursday AM) as potential questions to ask 51

Team Room Assignment 3 unique bank strategies
Measuring Success Team Room Assignment 3 unique bank strategies High volume provider that provides low cost, mass market solutions for consumers Best in class customer service where ‘customers expect and receive the Rolls Royce of banking’ Define a strategy within your team What 5 key metrics are appropriate for each strategy? Must include at least 2 ‘Outcome’ metrics. What drill down metrics would you track to deliver on results? Include metrics inclusive of delivery, product and segment. What metrics would be ok to de-emphasize for each strategy? Why? What short-term outcomes may be sacrificed for long-term sustainability? (ex: is decreasing marketshare ok?) What goal would you assign to each metric? Put a stake in the ground on a number. How did your bank perform in those metrics? What would you change for business decisions to align the actions to the expected success metrics? Identify the drill down metrics that helped you assess your performance and business drivers. Be prepared to discuss with your community leader your choices and rationale.

Measuring Success – Part II

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