Financial Managers Society New York-New Jersey Chapter All Day Seminar September 14, 2005

1. PERFORMANCE MEASUREMENT/PROFITABILITY ANALYSIS Organizational/Branch/Line-of-Business/Product/Customer/Relationship/Market Segment Funds Transfer Pricing/Cost-Capital Assignment Robert E. Kafafian, President & C.E.O. Office - (973) 299-0300 Ext. 106 Fax � (973) 299-1002 RKafafian@KafafianGroup.com www.KafafianGroup.com Financial Managers SocietyNew York-New Jersey ChapterAll Day SeminarSeptember 14, 2005

2. �Bankers have been saying for years that they are in the information business .......... but they fail to realize how deeply they are in an information business. Bankers also over rate their ability to use information.�

3. �In the business world those that have information will prosper. Those that don�t will face great obstacles in achieving their goals. Nowhere is this more true then in the banking industry. Ironically, much of the information banks need to compete effectively is already in their possession. The trick is learning how to compile it and use it successfully.�

4. �A profitability reporting system that shows risk-adjusted return on equity by business unit is essential. Banks should use such management information systems in strategic planning, budgeting, risk management, performance measurement, and incentive compensation. The best banks, with useful MIS and disciplined management processes are moving away from the pack ........ this is no longer optional .�

5. MAKE YOUR BANK EASY FOR WALL STREET TO UNDERSTAND �Specifically, this means each bank must: Define the markets into which it sells products Define the products sold Indicate the profitability of product lines If investors do not get such information, they will continue to see banks as undefined packages of assets. As a result, bank stocks will not attain high multiples. The prices will reflect investors� feeling that they cannot reliably predict banks� rates of return.�

6. EIGHT FUNDAMENTAL MOVEMENTS: De-Regulation/Re-Regulation Asset Liability Management Performance Measurement Product Diversification Service/Sales Culture Risk Management Industry Consolidation/Convergence Technology-Information Management

7. 1. DE-REGULATION/RE-REGULATION: Product/Rate Industry Mix CRA/Privacy Gramm-Leach-Bliley Act/ Financial Modernization Act Sarbanes/Oxley Money Laundering/USA Patriot Act Cross Industry/Regulatory Control

8. 2. ASSET LIABILITY MANAGEMENT: Balance Sheet Management GAP Management Interest-Rate Risk Focus on remaining maturity Front-end to Budget/ Planning Process Limited slicing of data Limited NIE analysis Usually presented at a high-level

9. 3. PROFITABILITY ANALYSIS: More detailed analysis of various organizational components and slices More detailed expense analysis and breakdown to the bottom-line Organizational/Product/Customer Relationship/Market Segment Focus on original maturity Rank/Compare/Trend Usable throughout all areas of the organization

10. 4. PRODUCT DIVERSIFICATION: Loan & Deposit Fee-Based Trust Brokerage Insurance Delivery Channels Internet Banking Sales Culture (�Trusted Advisor Culture�)

11. 5. SERVICE/SALES CULTURE: Cross-Selling Products Per Customer Service Opportunities Sales Opportunities Incentives/Disincentives Service/Sales Training Service/Sales Tools

12. 6. RISK MANAGEMENT: Traditional Risk Credit-Oriented Current View of Risk Risk-Adjusted Return on Capital (RAROC) Types of Risk

13. 7. INDUSTRY CONSOLIDATION/ CONVERGENCE: Financial Services Mortgage Credit Card Brokerage Insurance Communications Technology

14. 8. TECHNOLOGY-INFORMATION MANAGEMENT: Encompasses the Other Six Movements Technology Lag Sourcing Opportunities Information Systems Accounting/Marketing/IT Delivery Channels The Internet

15. Keys to Profitability & Survival Success Marketing effort or study to determine what products and services do our customers want, through what delivery channels Internal analysis to determine what products and services do we sell that they want in what combination of delivery channels .�.�AT A PROFIT�

16. PREREQUISITES TO MEANINGFUL MANAGEMENT INFORMATION: Senior management�s support Reflect management�s operating philosophy Provide management information, not just regulatory information Understandable to the end-user Consistently applied Provide value as well as benefit

17. MANAGEMENT INFORMATION: 1. Asset Liability Management 2. Budget and Planning Process 3. Responsibility Reporting PROFITABILITY ANALYSIS: 4. Organizational Profitability Reporting 5. Product Profitability Reporting 6. Branch Profitability Reporting 7. Customer/Relationship Profitability Reporting 8. Market Segment Profitability Reporting 9. Opportunity Profitability Reporting SUPPORT FUNCTIONS: 10. Funds Transfer Pricing 11. Cost-Capital Assignment/ABC/Performance Measurement 12. Data Warehousing/Mining/Mapping/MCIF/CRM

18. REPORTING CONSIDERATIONS: Reconcilable Audit Trails Ranking Reports Comparative Reports Trend Reports Summary and Detailed Levels Macro versus Micro Approach Rate/Volume Analysis ROA/ROE, Efficiency, Risk Based Capital, etc. Peer Group Analysis

19. LINE-OF-BUSINESS PROFITABILITY: Similar and or part of responsibility reporting Organization structure - hierarchy table Part of, or roll-up of all other profitability Financial information about profit centers Assessing performance of groups of staff engaged in profit-producing activity

21. TYPES OF PRODUCTS: Fund Providing: Demand Deposits Savings Deposits Time Deposits Other Borrowings Fund Using: Investments Short-Term Assets Loans Non-Fund/Fee-Based: Safe Deposit Boxes Mortgage Servicing Trust, Insurance, Brokerage, etc.

22. FUND PROVIDING PRODUCTS: Fund Providing Products (FPP) are primarily an accumulation of fund sources or deposits. Branches typically generate the majority of deposit products, however, borrowed funds, or purchased or brokered deposits, are also sources of funds available to banks.

23. EX: FUND PROVIDING PRODUCTS: Regular Savings Time Deposits: Statement Savings 0-3 Months Money Market 6-12 Months IRA Accounts 1-2 Years Club Accounts 2-5 Years DDA-Individual 5+ Years DDA-Business CD�s $100,000+ Now Accounts Public Funds FF-Purchased Other Borrowings

24. FUND USING PRODUCTS: Fund Using Products (FUP) are primarily earning assets, normally consisting of loans or investments typically found in a special purpose revenue center, and often consisting of several homogeneous products.

25. EX: FUND USING PRODUCTS: Liquidity Portfolio Commercial-Fixed Investment Portfolio Commercial-Floating Fed Funds Sold Commercial-Adjustable Mtg-Adjustable Commercial-SBA Mtg-Fixed Home Equity Mtg-Commercial Second Mortgages Consumer-Auto Overdrafts Consumer-Personal Consumer-Floor Plan

26. NON-FUND/FEE-BASED PRODUCTS: Non-Fund Products (NFP) generally have only incidental balances. The sole source of revenue for these products is typically fees for services.

27. EX: NON-FUND/FEE-BASED PRODUCTS: Trust Services Safe Deposit Boxes ATM Services Brokerage Services Secondary Market Mortgage Servicing Travelers Checks Series E Bonds Checkbook Services Insurance Services

28. CUSTOMER PROFITABILITY: Account Level Profitability Individual Relationship Profitability Extended Relationship Profitability Market Segment Profitability

29. MARKET SEGMENT PROFITABILITY: WWII Generation (65 and Over) Swing Generation (56-64) Baby Boomers (33-55) Generation X (19-32) Baby Boomlets (Under 19) Other Categories (Empty Nesters, DINKS, etc.)

30. MCIF-MARKERTING CUSTOMER INFORMATION FILE: Connectivity of Data Matching Markets/Products/Sales/Service Market Demographics

31. CRM-CUSTOMER RELATIONSHIP MANAGEMENT: Contact Information Sales and Service Tracking Performance Measures

32. MINING AND MAPPING DATA: Where are the opportunities? Where should the focus be? Geographic Customer type Advertising/marketing/promotion/sales and service

33. PROFITABILITY EMPHASIS: CMTY BK�S MEL Fund Using/ Fund Providing 83% Products 31%/15% - - - - - - - - - - - - - - Interest Income/ Interest Expense Non-Fund Products 17% - - - - - - - - - - - - - - 69%/85% Non-Interest Income

34. FUNDS TRANSFER PRICING: Single Rate/Pool Specific Matching Multiple Pool Matching - Actual Cost of Funds Matched Maturity � Coterminous

36. Cost Basis CQTR LQTR DIFF Interest Income 7.81% 7.75% 0.06% Interest Expense 3.45% 3.43% 0.02% Net Spread 4.36% 4.32% 0.04%

37. Market Basis CQTR LQTR DIFF Fund Using Interest Income 7.81% 7.75% 0.06% FTP-Charge 6.25% 6.15% 0.10% Spread 1.56% 1.60% (0.04%) Fund Providing FTP-Credit 6.11% 6.07% 0.04% Interest Expense 3.45% 3.43% 0.02% Spread 2.66% 2.64% 0.02% Maturity Gap 0.14% 0.08% 0.06% Net Spread 4.36% 4.32% 0.04%

38. Cost Basis CQTR LQTR DIFF Interest Income 7.81% 7.75% 0.06% Interest Expense 3 45% 3.43% 0.02% Net Spread 4.36% 4.32% 0.04% Market Basis CQTR LQTR DIFF Fund Using Interest Income 7.81% 7.75% 0.06% FTP-Charge 6 25% 6.15% 0.10% Spread 1.56% 1.60% (0.04%) Fund Providing FTP-Credit 6.11% 6.07% 0.04% Interest Expense 3.45% 3.43% 0.02% Spread 2.66% 2.64% 0.02% Maturity Gap 0.14% 0.08% 0.06% Net Spread 4.36% 4.32% 0.04%

39. TRANSFER PRICING- PRODUCT CHARACTERISTICS: Original Maturity Stated Maturity Stated Repricing Duration Cash Flow Blended Rate

40. CURVES: Treasury FHLB Swap LIBOR Build Other Supplemental Margins

41. SUPPLEMENTAL MARGINS: Incremental Margins Market Risk Credit Risk Risk Based-Capital Prepayment Penalties Early Withdrawal Penalties Other

42. HIGHLIGHTS OF MATCHED MATURITY: Places focus on original maturity, duration, cash-flow, or blended rate Levels playing field by consistently pricing to market driven indices Isolates fund using, fund providing, and treasury responsibility and contribution Induces managers to make incremental decisions Forces managers to actively manage interest spread Enables management to assess �true� profitability for each product and line-of-business Illustrates effects of changes in product mix within lines-of-business Identifies negative and positive trends, problems and opportunities Permits easier comparisons to industry/peer groups

43. Marginal Contribution CD�s � One Year Maturity

44. Marginal Contribution CD�s � One Year Maturity

45. Marginal Contribution CD�s � One Year Maturity

46. Marginal Contribution CD�s � One Year Maturity

47. PERFORMANCE MEASUREMENT- COST/CAPITAL ASSIGNMENT: Activity-based-costing Full absorption versus standard costing Variable/fixed-direct/indirect costs Isolating efficiencies/inefficiencies Capacity utilization Allocations methodologies: Average balances Fixed percentages Statistical databases Regulatory/Risk-Based Capital Internally developed capital assignment (RAROC)

49. OVERALL OBJECTIVES OF MIS: Assist in strategic decision making and the budget process Provide information to manage GAP, Organizational Units, Products, Branches, Customers, Relationships, Market Segments, Exposures, etc. Assist in the measurement of performance (i.e., units/people) Assist in the determining of performance rewards, i.e. compensation, bonuses, incentives Provide the detail to understand and evaluate complex issues and problems Remembering the 80/20 rule ..... Get enough information to be accurate ..... not �all inclusive� information, which can cause needless complexity and sometimes misleading results

50. MEASURING AND ACHIEVING SUCCESS: Develop meaningful management information to make more informed decisions and manage risk�i.e., the users use the system Productivity will be increased Performance should be rewarded The �Bottom-Line� is improved All constituencies are satisfied

51. PERFORMANCE MEASUREMENT/PROFITABILITY ANALYSIS Organizational/Branch/Line-of-Business/Product/Customer/Relationship/Market Segment Funds Transfer Pricing/Cost-Capital Assignment Robert E. Kafafian, President & C.E.O. Office - (973) 299-0300 Ext. 106 Fax � (973) 299-1002 RKafafian@KafafianGroup.com www.KafafianGroup.com Financial Managers SocietyNew York-New Jersey ChapterAll Day SeminarSeptember 14, 2005