First National Bank of Portland (Ind.) always thought it made money on consumer loans over $1,000.

Then it bought a marketing customer information file, or MCIF, system. The software showed that $108 million-asset First National was losing hundreds of dollars on consumer loans under $3,500.

"Needless to say, we were quite surprised," said Robert G. Bell, senior vice president at First National, which installed its MCIF system this year.

Not that First National has stopped making small consumer loans that do not turn a profit. Community banks, according to Mr. Bell, have a responsibility to serve all customers and, as he put it, "a lot of our market needs to borrow less than $3,500."

Still, First National would never have known which of its consumer loans were unprofitable without its profitability analysis system, which was developed by Centrax Group of Dallas. Now the bank can identify which products and which customers make money for the bank, and use that information to sell even more products to its best customers.

First National is one of many community banks buying software to assess customer profitability. Though big banks have been examining profitability for years-and, as some community bankers complain, sending unprofitable customers their way-many small banks are beginning to make the investment.

"To be as competitive as possible we need to know where we are profitable and where we are not," said Larry Cole, executive vice president at $127 million-asset First Commerce Bank in Commerce, Ga. "Without mapping out a strategy, it's tough to do this."

It is tough to quantify the number of community banks investing in profitability software, and even harder to determine how many are actually using it.

"More, but not enough, community banks are using this software," said Diane M. Casey, national director of financial services at Grant Thorton. "About half are doing some sort of profitability analysis, but a fair number of them are still relying on their knowledge of their customers."

There is no shortage of technology available. Many vendors sell MCIF systems designed for community banks, including Centrax, Harland Financial Marketing Services of Orlando, Customer Insights Co. of Englewood, Colo., Deluxe Corp. of Shoreview, Minn., and Harte-Hanks Data Technologies Inc. of Orlando.

ASI Financial Services Inc. of New York is marketing its own profitability product, which First Commerce is depending on to merge account, household, and product data even better than more established systems.

Financial Technology Inc. of Chicago has been selling profitability analysis software since 1994. And at least two companies, Action Systems of Dallas and Interglobal Financial Systems of New York, are marketing products designed to help bankers determine what to do with the data.

"Community banks have typically relied on operating traditional systems, which would tell them how many checks a household writes or how often they make deposits," said Thomas Hershberger, president of Cross Financial Services, a Lincoln, Neb., bank consulting firm. "The new systems can better identify what relationships the customers have and what delivery systems they use."

Jerry Weiner, chairman and chief executive of IPS-Sendero, a financial and management accounting software vendor in Norcross, Ga., agreed that profitability analysis is evolving to provide bankers a fuller picture.

"MCIFs contain the basic customer account level information that is used as part of the profitability measurement process, but they are incomplete without funds-transfer pricing, unit costs, and capital allocations," he said.

The customer profitability system IPS-Sendero has sold to about 100 banks would cost a $1 billion-asset bank with 200,000 customers roughly $50,000 to $100,000, Mr. Weiner said.

What are these systems telling bankers?

Alice Tatro, marketing director at $92 million-asset Geneva (Neb.) State Bank, said that when the bank installed the Harland system in January it immediately decided to test the "80-20" rule-the belief that 20% of a bank's customers account for 80% of its profits. What the bank found was that even the last customer of the top 20% was still costing the bank about $300 a year.

Greer (S.C.) State Bank, with $115 million of assets, found that unless a customer maintains a balance above $2,200, most checking accounts are unprofitable. Meanwhile, 30% of the bank's overhead is devoted to supporting checking accounts.

The bank, which tested the Centrax system before installing the Harte- Hanks product about a month ago, also found that 35% of its customer households supply 90% of the bank's deposits.

"We'd been playing pin the tail on the donkey with blindfolds on," said Dennis Hennett, president and chief executive officer at Greer. "The MCIF takes the blindfolds off."

Bankers used to believe the customer who came into the branch every day was the most profitable, said First Commerce's Mr. Cole. But it is the customer with the large loan balance who pays by mail each month who is making money for the bank.

It is that customer community banks are going after.

Geneva State Bank, for example, plans to call its newly identified profitable customers three or four times a year to cross-sell additional products, Ms. Tatro said. It is also planning a direct mail campaign focusing on customers likely to take out home equity loans.

Some bankers are counting on the software to turn unprofitable customers into profitable ones. Dallas Enger, president and CEO at Linn-Benton Bank, Albany, Ore., said "there's no question" that the bank will invest in profitability analysis software and expects to do so by the fall.

Of course, many community banks have yet to embrace profitability analysis. Chicago's Financial Technology has been marketing its "Profit Vision" since 1994 and has only 60 community bank customers. And despite the acclaim given the Harte-Hanks product-it has been endorsed by the American Bankers Association and several state trade groups-only about 90 community banks have purchased the product.

One reason is cost. Depending on asset size, community banks pay $10,000 to $50,000 for systems. J. Kimbrough Davis, chief financial officer at Capital City Bank Group in Tallahassee, Fla., said that when personnel and training costs are included, the price tag can run as high as $100,000.

Technophobia is another issue. Though most observers agree that profitability software is far more user-friendly than it was just two years ago, the learning curve can still be steep. "It's not like they just put something in and it will work," said Ms. Tatro at Geneva State Bank.

For systems to work properly, banks must provide vendors with detailed cost information on loans, deposits, and transactions, as well as codes for each product and account. That process typically takes three to four months. Then, after the system is installed, bank employees must continuously update the data.

"You need to spend a lot of quality time with the MCIF," said Mr. Hennett, adding that he expects the bank's marketing director to spend 80% of her time with the software over the next three months.

Indeed, it is not uncommon for a community bank to purchase a profitability analysis package and let it sit unused, one vendor acknowledged. The problem is that banks either cannot devote the time to the system or aren't quite sure what to do with the data.

"I've had conversations with other banks," said Mr. Kimbrough, whose bank is considering buying a profitability system. "They said, 'If you're not willing to change, you ought not to get into it.'"

Robert E. Hall, president of Action Systems in Dallas, said banks should make the investment only if they plan to deliver the information to the tellers, loan officers, and other front-line personnel.

Too often, Mr. Hall said, the data is made available only to top executives and the marketing staff. In his view, it is far more effective to provide data to those who interact with customers most.

"Don't just give the director of marketing a list to send direct mail fliers to customers who may qualify for home equity loans," said Mr. Hall. "Provide that information to the front-liners who can say, 'Here's a way to finance your children's education.'"

Still, profitability analysis is not just about selling more products. Robert J. Colucci, president of Harte-Hank's Marketing Advantage division, said it can also help a bank guard against unwise decisions. For example, a bank could decide to charge higher fees on all unprofitable checking accounts. But in merging checking account data with household data it finds that one of those accounts belongs to the teenage daughter of a very profitable corporate customer.

"How do you think that customer is going to feel when you send his daughter a letter saying her fees have gone up?" he said.

Next: How profitability analysis is changing the way banks do business.

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