Most financial institutions don’t understand that the majority of their relationships are not profitable. This results in poor strategic planning especially when dealing with issues with the balance sheet. Senior Management has to understand and deal with different types of risk, along with income statement stagnation in these times of rising interest rates.

1. Jeff Dwornicki – Baker Hill
Scott Sills – Citizens National Bank of Meridian
Why Knowing Profitability is the Key
to Success at Your Institution

2. Agenda
• Culture
• Environment
• Process
• Understanding profitability
• Pricing
• Summary

3. Who am I?
• The guru of profitability for Baker
Hill NextGen® Analytics
• Design fund transfer pricing for all
clients
• Build transactional allocations for
NII and NIE
• For 14 years at Baker Hill, worked
with CFOs to build the financial
rules for their database
• For 14 years, translated financial
rules to Marketing to help build
campaigns and matrix programs

4. My Co-presenter
• Scott Sills is currently serving in his 28th year with Citizens
National Bank, and has achieved his Certified Financial
Marketing Professional certification.
• Sills has served in a number of capacities over his career
with the Bank including leadership positions in the
Meridian, Waynesboro and Hattiesburg markets as well
as serving as the Bank’s North MS Regional President
before moving into the role of Chief Marketing Officer.
• Citizens National Bank is an independent, Mississippi-
owned community bank, which has 26 bank locations
For 14 years, translates Financial rules to Marketing to
help build campaigns and Matrix programs.
• The Bank has assets in excess of $1.3 billion and manages
over $1 billion in its Wealth Management Division, which is
committed to assisting clients with the accumulation,
preservation and transfer of wealth.

5. Banking culture

6. Banking culture
• Wait for growth to walk through the door
Banking hours
• Drive growth by selling and cross – selling anything to
everyone who comes through the door
Sales culture
• Maximize profitable growth by selling and up-selling
profitable products and target the correct markets
Profitability

7. Typical bank planning
• Use last year’s results for this
year’s financial plan
• Adjustments made
depending upon
environment
• Provide marketing and sales
goals based on balance
sheet targets
• Promotions and products built
to meet sales goals
• Track quarterly relative to
balance sheet as the bottom
line

8. Typical bank planning
• Sales culture measurements
– Simple sales volume
– Simple cross-sell ratio
– Simple deposit and/or loan growth
• Sales culture methodology
– More is better
– Campaign to all
– Silver bullet products
– Price for volumes; reward for volume

9. Banking
environment

10. Profit risk
• Is the total profit for our top
10% most profitable
relationships (households)
divided by total profit of the
institution
• Most financial institutions’
are about 200 – 400%
• Very few are less than 200%

11. Profitability risk – top 10%
Percent​ Number of Relationships​ Total Profitability​ Concentration​
1% 281 $6,135,006 277%
2% 281 $1,296,752 59%
3% 281 $813,830 37%
4% 281 $581,217 26%
5% 281 $451,285 20%
6% 281 $368,878 17%
7% 281 $302,031 14%
8% 281 $252,220 11%
9% 281 $203,199 9%
10% 282 $166,852 8%
Top 10% 2811 $10,571,270 478%
Institution 28,110​ $2,211,039 100%

12. Profit risk – institution profit vs. top 10% profit
5.6
26.2
6.9
33.0
7.7
38.0
2016 2016 2017 2017 2018 2018
Profit Risk
InMillions($)

13. Net Income stagnation
Non interest income
$19.8M (Dec 2018)
Non interest expense
$42.8M (Dec 2018)
Net interest margin
$36.2M (Dec 2018)
Net income $13.2M (Dec 2018)
Net interest margin
$31.7M (Dec 2017)
Non interest income
$18.6M (Dec 2017)
Non interest expense
$37.5M (Dec 2017)
Net income $12.8M (Dec 2017)

14. Income statement stagnation
Unprofitable
70%
Profitable
30%

15. Profitability – service
Product/Service​ Number of Accounts​ Total Profitability​ Concentration​
Mortgages​ 1,592​ $1,966,884 89%
Home Equity Loans/Lines​ 1,889​ $937,630 42%
Money Market​ 1,476​ $780,341 35%
Interest Checking​ 2,787​ $624,687 28%
Business Loans​ 354​ $502,561 23%
Auto Loans​ 4,629​ $435,138 20%
Business Checking​ 1,678​ $181,216 8%
Retirement​ 2,462​ $64,023 3%
Investments/Insurance​ 2,042​ -$61,919 -3%
Certificates of Deposit​ 5,796​ -$196,668 -9%
Credit Cards​ 3,278​ -$405,223 -18%
Electronic Services​ 23,524​ -$616,835 -28%
Free Checking​ 15,894​ -$949,738 -43%
Savings​ 11,590​ -$1,051,058 -48%
Total​ 78,991​ $2,211,039 100%

16. Rising yield curve
0.00
0.05
0.10
0.15
0.20
0.25
2016 2017 2018
Cost of Funds
3.32
3.36
3.40
3.44
3.48
3.52
3.56
2016 2017 2018
Yield

17. Balance sheet – loans to deposits
76.7%
82.7%
89.4%
50%
55%
60%
65%
70%
75%
80%
85%
90%
95%
2016 2017 2018

18. Why we need to know about our profitability
• Profit risk
• Income statement stagnation
• Most customers are unprofitable

19. Getting to big
data

20. Inputs to data driven planning
• Complete allocation of the GL
• Income statement for every account
• Full allocation of non-interest income
• Full allocation of non-interest expense
• Full allocation of net interest income (margin) through funds
transfer pricing

21. Inputs to data driven planning
• Income statement for all customers/members/relationship
• Unique, not average profitability
• Fees go to accounts who create the fee, no guessing
• Rank from most unprofitable to most profitable

22. Building the database
Systems of
Record
General
Ledger
BH
Analytics
Service
Branch
Region
Institution
Individual
Relationship
(Household)
Customer/
Member
Product
Group
Product
Allocation
Rules
Account Level

23. Identify
• What does the strategic plan call for?
• In need of deposits or loans?
• Concerns about customers leaving?
• Which products are selling well now?
• Which products are profitable?
• Who are the profitable consumers?

24. Create a plan
• Choose the products based on profitability
• If unprofitable, use what-if and stratification research to
determine interest rate and average balance to reach targeted
profitability
• Target customers with propensity and capacity
• Optimize market channel based on ROI and effectiveness
• Consider frequency requirements during campaign
development

25. Review and manage
Are we hitting
targets – profitability
of campaign,
volume, and cost?
Are we achieving
our goals?
Why and how do
we change if we
need or want to be
more successful?

26. Understand
your
profitability
and products

27. Identify the need
• In need of deposits & selling loan portfolios
• Want to expand margin
• High interest reward checking and reverse MM hitting the
market
• What-if showed closed reward checking profitable at average
balance of $15,000

28. Prepared for a promo CD, but…
• Re-opened reward checking product
• High interest rate up to $25,000
• 12 debit card POS
• eStatements
• Direct deposit of $100 or more
• Log in online once a month

29. Reward checking
• Re-open the product to new
customers
• Big attractive post on website
• Taught tellers to interface about
the product
• Mailing involved with newsletter
• Onboard to new customers

30. Create loyalty with a lower cost of fund product
• Cannibalization on interest
checking product
• No cannibalization on free
checking
• Reward checking has greater
cross-sell
• Reward checking is much more
profitable
• $54 million in new checking
balances
• Doubled the profitability of their
retail checking line in one year

31. Profit review – up selling checking
• Interest checking & reward checking are “stickier”
• Both encourage higher balances
• Reward checking creates interchange
• Low cost to upsell and cross-sell
• Higher balances can often trump interest rates
• Customer much more loyal
• Creates opportunity for additional deposit gathering

32. Profitability – checking
Product Interest Rate Average Balance Average Profit
Free Checking 0.00 $995 -$7
Interest Checking 0.20 $4,747 $90
Reward Checking 2.50 $33,857 $599

33. Understanding
your
profitability
and pricing

34. Profitability review – business loans
Loan Product Code
Number of
Accounts
Number of
Relationships Total Balances
Average Balance
Per Account
Weighted
Average Rate
Weighted Avg.
Maturity in Months
Annualized Average
Profit Per Account
Business Loan/Line 4,560 3,080 $1,255,208,117 $275,265 5.09 66.2/ (4,003) $2,414
Commercial Ag Land Loan 6010 201 196 $24,481,038 $121,796 4.87 252.0 /(192) $960
AG RE 365/3601B LN-30 38 36 $7,307,551 $192,304 4.99 143.1 /(38) $1,275
AG RE 365/365 1B LN-31 6 6 $413,013 $68,835 4.76 26.1 /(6) $725
AG RE 30/360 1B LN-32 155 152 $16,379,041 $105,671 4.8 311.0 /(146) $883
AG RE 30/360 1B LN-33 2 2 $381,433 $190,717 5.45 51.0 /(2) $1,722
Commercial Jr Lien 6025 5 5 $364,286 $72,857 4.68 99.7 /(4) $9,860
CML RE 1C2B 365/365 LN-34 1 1 $137,147 $137,147 4.05 119.4 /(1) $11,097
CML RE 1C2B 365/360 LN-36 4 4 $227,139 $56,785 5.06 87.8 /(3) $9,550
Commercial Ag Loan 6030 86 75 $6,230,369 $72,446 6.30 11.2 /(78) $1,016
Agri 365/360 3 LN-29 86 75 $6,230,369 $72,446 6.30 11.2 /(78) $1,016
Commercial Warehouse Lending 6035 2 2 $9,561,616 $4,780,808 3.95 4.7 /(2) $5,071
Warehouse Lending LN-WL 2 2 $9,561,616 $4,780,808 3.95 4.7 /(2) $5,071
Commercial & Industrial 6040 1,959 1,329 $187,272,445 $95,595.94 5.40 34.1 /(1,702) $647
CML 4A 365/365 LN-1 58 50 $7,995,094 $137,846 5.16 20.6 /(23) $998
CML Loan 4A 365/360 LN-3 1,901 1,191 $179,277,350 $94,307 5.42 34.7 /(1,679) $632
Commercial MF & Land 6041 308 249 $160,274,754 $520,373 5.52 38.4 /(256) $7,917
COMML 1A2 365/365 LN-10 11 11 $3,200,531 $290,957 5.02 128.4 /(6) $2,044
COMML 1A2 30/360 LN-11 7 7 $54,629 $7,804 5.25 55.7 /(3) ($79)
COMML 1A2 365/360 LN-12 290 232 $157,019,594 $541,447 5.53 36.6 /(247) $8,333
Commercial Revolving 6044 13 $13 $3,060,198 235400 6.58 5.3 /(13) $6,398
CML RE 1C1 365/360 LN-54 13 $13 $3,060,198 235400 6.58 5.3 /(13) $6,398

35. Deposit and loan portfolios
7%
1%
1%
2%
11%
3%
6%
65%
1%
4%
22%
16%
6%
9%
22%
21%
3%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Deposits Loans
IOLTA & Escrow
Business Checking
Retail Checking
Retail Savings
Public &Public & NP
Business Savings
Retail Money Market Deposit
State & Political
Loans
Home Equity
Loan/Line
Business
Consumer
SBA Lending
ODLOC

36. Pricing profitability – business loans
• Retail loans account for 24% of
the loans
• Retail deposits account for 56%
of total deposits
• Need to engage retail
customers for loans
• Need to engage business
customers for deposits

37. Profitability review – business loans
Loan Product Code
Number of
Accounts
Number of
Relationships Total Balances
Average Balance
Per Account
Weighted
Average
Rate
Weighted Avg.
Maturity in
Months
Annualized
Average Profit Per
Account
Business Loan/Line 187 140 $57,561,186 $307,814 4.65 130.9/ (168) ($4,726)
Business Comm'l RE Loan Fixed Rate 6040 46 38 $13,993,293 $304,202 4.24 140.2 /(46) ($5,304)
INVESTMENTPROPERTY L107 11 11 $1,059,754 $96,341 3.74 297.2 /(11) ($4,273)
BUS FIXEDHOME EQUITY L109 2 2 $300,212 $150,106 5.63 47.5 /(2) ($3,341)
Commercial Fixed Mort. L110 5 5 $1,280,687 $256,137 4.67 73.9 /(5) ($3,710)
Commercial Participation L111 4 2 $1,518,755 $379,689 4.64 121.0 /(4) ($5,043)
Commercial Fixed Balloon L112 10 9 $1,597,507 $159,751 5.30 29.7 /(10) ($4,491)
Senior Housing Rehab L121 1 1 $14,152 $14,152 4.25 36.6 /(1) ($4,826)
BSR L129 4 3 $250,358 $62,589 5.29 27.1 /(4) ($3,113)
3/1 Investment ARM Business L130 2 2 $125,738 $62,869 3.44 319.4 /(2) ($5,131)
Participation Commercial ARM L136 7 4 $7,846,130 $1,120,876 3.87 160.5 /(7) ($11,305)
Business Comm'l RE Loan Variable 6050 58 49 $36,599,418 $631,024 4.81 134.7 /(51) ($3,586)
Commercial ARM L132 31 28 $11,876,577 $383,115 5.16 133.3 /(31) ($2,299)
Bus LOC Vari Unsecured L169 5 5 $4,665 $933 9.68 0 ($5,754)
Business LOC Var Secured L170 2 2 $69,530 $34,765 5.96 0 ($5,362)
Commercial ARM - Fixed L175 2 2 $499,155 $249,577 7.09 55.4 /(2) $1,682
Commercial ARM - Balloon L176 18 13 $24,149,491 $1,341,638 4.58 137.1 /(18) ($5,590)
Business Line of Credit - Commercial 6200 31 29 $2,313,875 $74,641 4.41 9.7 /(24) ($5,718)
Business Participation- Sold L123 2 1 $1,471,625 $735,813 2.61 11.2 /(2) ($31,699)
BUSINESSVR LOC L68 7 6 $445,442 $63,635 7.79 19.1 /(3) ($3,303)
BUSINESSLOAN LOC-FIXED L77 15 15 $80,706 $5,380 10.2 7.1 /(13) ($4,320)
BUSINESSLOAN FCL L83 5 5 $257,775 $51,555 6.61 2.8 /(5) ($3,538)
BUS LOAN HE LOC L88 2 2 $58,326 $29,163 6.00 5.3 /(1) ($4,124)

38. Pricing profitability – business loans
• Problem
– Portfolio size
– Capacity
– Overhead
• Solution
– Reallocate workforce
– Grow/purchase portfolio

39. Profitability review - auto
Loan Product Code
Number
of
Accounts
Number of
Relationships
Total
Balances
Average
Balance Per
Account
Weighted
Average
Rate
Weighted Avg.
Maturity in
Months
Annualized
Average Profit
Per Account
Auto & Rec Vehicles Loans 2,853 2,484 $38,009,822 $13,323 5.81 51.8/ (2,819) $68
New Auto Loan Direct 7010 321 310 $6,697,081 $20,863 4.82 59.5 /(321) $134
NEW VEHICLE A+ L1 154 150 $2,852,702 $18,524 2.97 52.7 /(0(1)54) ($81)
NEW VEHICLE A L2 43 43 $950,290 $22,100 3.99 66.7 /(0(4)3) $59
NEW VEHICLE B+ L3 31 29 $741,352 $23,915 4.97 63.3 /(0(3)1) $194
NEW VEHICLE B L4 46 46 $1,088,848 $23,671 6.22 61.8 /(0(4)6) $350
NEW VEHICLE C L5 29 29 $650,693 $22,438 7.62 66.8 /(0(2)9) $511
NEW VEHICLE D L6 18 18 $413,196 $22,955 11.2 65.7 /(0(1)8) $895
Used Auto Loan Direct 7012 2,532 2,235 $31,312,741 $12,367 6.02 50.2 /(2,498)
USED VEHICLE A+ L11 746 695 $10,559,605 $14,155 3.64 50.7 /(0(7)45) ($52)
USED VEHICLE A L12 397 378 $5,432,760 $13,685 4.43 51.6 /(0(3)95) $17
USED VEHICLE B+ L13 239 227 $3,186,054 $13,331 5.25 53.8 /(0(2)38) $55
USED VEHICLE B L14 435 411 $5,354,302 $12,309 6.52 50.5 /(0(4)28) $88
USED VEHICLE C L15 291 280 $5,354,302 $10,954 9.08 47.8 /(0(2)80) $146
USED VEHICLE D L16 331 303 $3,062,439 $9,252 12.96 46.2 /(0(3)20) $231
NEXT AUTO LOAN L17 93 92 $530,013 $5,699 11.17 37.9 /(0(9)2) $127

40. Pricing profitability – auto
• Happy with results – part of
game plan
• “A paper” is relationship pricing
• Don’t be afraid to ask why
• Most customers are unprofitable

41. Summary

42. Banking culture
• Wait for growth to walk through the door
Banking hours
• Drive growth by sell and cross – selling anything to
everyone who comes through the door
Sales culture
• Maximize profitable growth by selling and up-selling
profitable products and target the correct markets
Profitability

43. Profit risk – institution profit vs. top 10% profit
5.6
26.2
6.9
33.0
7.7
38.0
2016 2016 2017 2017 2018 2018
Profit Risk
InMillions($)

44. Net income stagnation
Non interest income
$19.8M (Dec 2018)
Non interest expense
$42.8M (Dec 2018)
Net interest margin
$36.2M (Dec 2018)
Net income $13.2M (Dec 2018)
Net interest margin
$31.7M (Dec 2017)
Non interest income
$18.6M (Dec 2017)
Non interest expense
$37.5M (Dec 2017)
Net income $12.8M (Dec 2017)

45. Profitability – service
Product/Service​ Number of Accounts​ Total Profitability​ Concentration​
Mortgages​ 1,592​ $1,966,884 89%
Home Equity Loans/Lines​ 1,889​ $937,630 42%
Money Market​ 1,476​ $780,341 35%
Interest Checking​ 2,787​ $624,687 28%
Business Loans​ 354​ $502,561 23%
Auto Loans​ 4,629​ $435,138 20%
Business Checking​ 1,678​ $181,216 8%
Retirement​ 2,462​ $64,023 3%
Investments/Insurance​ 2,042​ -$61,919 -3%
Certificates of Deposit​ 5,796​ -$196,668 -9%
Credit Cards​ 3,278​ -$405,223 -18%
Electronic Services​ 23,524​ -$616,835 -28%
Free Checking​ 15,894​ -$949,738 -43%
Savings​ 11,590​ -$1,051,058 -48%
Total​ 78,991​ $2,211,039 100%

46. Building the database
Systems of
record
General
ledger
BH
Analytics
Service
Branch
Region
Institution
Individual
Relationship
(household)
Customer/
member
Product
group
Product
Allocation
rules
Account level

47. Questions?
Jeff.Dwornicki@bakerhill.com