By John J. Coffey, C.P.A. and Gene Palm, www.profitres.com, originally published November 2000, ABA Bank Marketing

What kinds of profitability assumptions are used in your MCIF?

How do you integrate your financials into your MCIF?

How do you use profitability data within your MCIF?

You’ve probably heard the statement, “We’re losing money but we’ll make it up in volume!”  As marketers in today’s marketplace, it is no longer good enough to simply increase the number of accounts or the level of balances of the products at your bank.  You need to have the tools to help you make decisions that increase your bank’s profitability.

What kinds of profitability assumptions are used in your MCIF?

Unlike other businesses that sell tangible products, you sell intangible services.  The income and expenses these intangible services generate are difficult to measure at the product level because your bank’s income statement and balance sheet aren’t set up for this task.  In light of this, you need to allocate or assign various types of income and expenses to your products.  This is an art as well as a science!

Product profitability has four components:

§         Net Interest Income

This is by far the largest driver of profitability.  It is the difference between the interest income that is generated from your loans and the interest expense that is paid on your deposits.  There are various means of calculating this at the product level, but the most accurate method is called historical funds transfer pricing (FTP).  This method assigns a funding expense to a loan or funding income to a time deposit on the date the account was opened.

§         Non-interest Income

Your bank probably has a detailed non-interest income statement that breaks out the fees generated by your products.  However, these fees are not organized by product groupings.  For instance, your NSF fees need to be allocated to your checking products and your late fees on loans need to be allocated to your loan products.

§         Non-interest Expense

Your bank may also have a detailed non-interest expense statement that breaks out the costs of the bank.  Again, these costs are not organized by product groupings.  For instance, you can allocate the cost of your loan collection personnel to your various loan portfolios that generated late payments and charge-offs.  If most of your marketing efforts are geared toward increasing your bank’s deposits, you can allocate these expenses to your deposit products.

§         Provision for Loan Losses

Unfortunately, some of your loans will need to be written off and the bank needs provide for this eventuality.  Some loan products such as unsecured personal loans will have a higher percentage of bad loans than home equity loans and this needs to be taken into consideration when allocating these expenses to your loan products.

How do you integrate your financials into your MCIF?

For your MCIF to calculate the profitability of individuals and households, it needs to contain product profitability assumptions in a useful format.  Net-interest income and provision for loan losses will need to be broken down to percentages of balances for particular product groupings.  Non-interest income and non-interest expenses need to be broken down to unit fees and unit costs that will be applied at the account and transaction levels.