Utilizing Data to Drive Deposit Strategies In the Current ...fhlbsf.com/events/SpringSeminar2019/darlingpresentation.pdf · Value in Differentiated Pricing & Product Strategies Deposit

© 2019 Darling Consulting Group, Inc. Page 1

Risk Management Strategy & Solutions

© 2019 Darling Consulting Group, Inc. • 260 Merrimac Street • Newburyport, MA 01950 • Tel: 978.463.0400 • DarlingConsulting.com

Utilizing Data to Drive Deposit StrategiesIn the Current Environment

April 16 & 17, 2019

Matthew D. Pieniazek, [email protected]

http://www.fhlbsf.com/default.asp

Page 2© 2019 Darling Consulting Group, Inc. Page 2

PERSPECTIVE…

…At the Center of Effective Risk Management

…& Effective Strategy Development


Importance of Looking Through Different Lenses

Context & Current Market Realities Data & Deposit Strategy

Setting the tone If COF truly important…? “Segmentation” matters Attrition Marginal COF “Specials” & new product strategies Differentiated market strategies Other “stuff”

Regulatory & Liquidity Management Considerations What Else On Mind?

Liability Sensitive


No “One-Size Fits All” or “Silver Bullet” Strategies… Business strategy Balance sheet risk profile Peculiarities of customer base Various market dynamic realities

Institution-Specific Deposit Strategies


Strategy Development (Including Deposit Related)

Creating Clarity For Balance Sheet Management

Interest Rate Risk

Liquidity

Credit

Capital/Earnings


Economic Outlook…“Ch Ch Ch Changes”

To…

…“just below” neutral (11/18)

“…long way from neutral” (10/18)

To…

…“will be patient” (1/19)

To…

…“in the range of neutral” (1/30)


March Dot Plot


YIELD CURVE


Industry Realities

Curve flattening elevating potential NIM challenges Funding Costs rising more notably for many… a main focus of industry analysts Banks/ALCOs questioning growing loans at thinner spreads Incremental loan growth increasingly expensive to fund

Bank 2019 loan growth outlook facing “headwinds” Meaningful loan balances set to reprice notably higher in the next 6-18 months Treadmill is speeding up for many with large origination volume over past few years Concentrations becoming more of an issue for many

Economic Cycle “long in the tooth”… When will the next recession occur? Will it be a “soft landing”?

Signs of brewing asset quality “issues”


Deposits: Higher Short Rates & Accelerating Pricing PressuresSlowing growth rates & increased disintermediationMore negotiations…and at higher interest rates Increased incidence of “Specials” (CDs & MMDA) Seeing changes in tactics (pricing levels and terms)

BUT, KEY ISSUE: “What If The Fed Truly IS Done?”

Some Current Deposit Observations


Even If Fed Is Done Raising Rates, Will Deposit Pricing Pressure

Continue Through 2019?

?

So, What If The Fed Truly IS Done?



The Power of Data Analytics


“Winning” the Battle for Deposits…


Don’t Let Fear, Competition or Minority of DepositorsDrive Deposit “Strategy”

Set the Tone for Deposit Strategy


Asset Size & Growth Drive Funding Needs & Timelines

Balance Sheet Risk Positions Can Influence Priorities and Trade-Offs Especially liquidity Interest rate risk too

Right-Sizing Deposit Strategy General Business Issues That Matter


Take Deeper Dives Into Your Deposit Data…Don’t Underestimate Its Value

In Developing “Winning Strategies”

Cost of Funds Management Truly Important?


Develop Clear Offensive & Defensive Deposit Strategies…

…They Differ Greatly



Have Ready-to-Go Shelf Products (MMDA, MMS, CDs)



Get Compliance & Operations In Sync With Your Deposit Strategy Needs



Business vs. Consumer

“Isolate” Largest Deposit Customers (Commercial & Retail)

Segment Deposit Base Into Logical “Strategy Segments”


Lay Out Very Specific Strategies for Each of Your “Largest” Accounts/Relationships

Logical Strategy Segments


Plan for Largest Customers?




Single Relationship Accounts (CDs, MMDA)



Single Deposit Relationship: Threat or Opportunity?

$179MMSource: Deposits360°®





Similar Relationships/Value Propositions



Common Value Proposition Dilemma

“1-Dimensional” Products with LARGE Total Balances “Comingling” of VERY DIFFERENT Customers

Impedes Ability to Manage Funding Costs

http://www.google.com/url?sa=i&rct=j&q=&esrc=s&frm=1&source=images&cd=&cad=rja&docid=nzIToB8KNqukMM&tbnid=zPxa0sGVzh-YpM:&ved=0CAUQjRw&url=http://www.roberttercek.com/2010/12/the-elephant-in-the-room-at-humanity/&ei=Q_pqUo-2E87xkQerxIDoAQ&psig=AFQjCNEs1wt-wmoF-4ss8wMyRlvfxZ6mPw&ust=1382828937447425


Segmenting Customers

Source: Deposits360°®


Understand who your older customers are and where their money may potentially move

Segmentation: Customer Age Demographics (NMD Base)






Similar Relationships / Value Propositions

Revisit Tier Structures



Adjust Tiered Products to Reflect Realities of Current Account Balance Distribution

Logical Strategy Segments


Revisit MMDA Tiering/Pricing

Opportunities withinTier Structures?

ProductMinimum Daily Balance to Earn

APY

Annual Percetage Yield (APY)

MMDA $10 - $10,000 0.05%$10,000 - $25,000 0.10%$25,000 - $50,000 0.20%$50,000 - $100,000 0.30%$100,000 + 0.35%

Bank's Current Tier Structure






Similar Relationships / Value Propositions

Revisit Tier Structures

Public Funds (Operating vs. Discretionary)

“CDARS”

Etc.



Important Growth Strategy: Understanding, Managing and Heading Off Attrition

An Overlooked Deposit Growth Strategy Deposit Attrition


Deposit Attrition: “Tell Me What’s Happening”

3% Net GrowthBUT

23% “Activity”

Value in Data



Deposit Attrition: Deeper Dives

5.7% “Growth”

Value in Data



Watch List: Declining Balances


Relationships at Risk?


“Dusting Off” Marginal Cost of Funds Analysis

“Specials”: Designing, Monitoring & Augmenting


WHY Should I Borrow When I Can Pay My Customer The Same or Even a Slightly Lower Rate?

Importance of Marginal Cost of Funds Discussion

2.47%



Successful CD Promotion?



Importance of Marginal Cost of Funds Discussion

11 Month CD Special: No Hurdles

CD Special: New Money Minimum



Introducing New MMDA Product



Indexed MMDA: New Money Match



Monitor: “Legacy” MMDA Trends

Lost just $10MM Retained $30MM through promotional MMDA & CDs Maintain $100MM at just 30 bps



Monitor: CD Specials “Post Maturity”

Retained 87% of CD Special Balances



COST OF FUNDS MANAGEMENTThe Importance of

Marginal Cost Analysis

An Invaluable Decision Support Tool

http://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0CAcQjRxqFQoTCMWZ4-nk5ccCFcY7PgodQg0BqA&url=http://www.slideshare.net/petelaburn/standard-bank-presentation-pli-2010&bvm=bv.102022582,d.cWw&psig=AFQjCNFWwA9V3fSOMepgjfTCpL0YuN68Zg&ust=1441744926862506


BALANCE: $243,385,000

CURRENT RATE: 0.29%

RATE INCREASE0.21% 0.71% 1.21%

10.00% 2.39% 7.39% 12.39%20.00% 1.34% 3.84% 6.34%30.00% 0.99% 2.66% 4.32%40.00% 0.82% 2.07% 3.32%50.00% 0.71% 1.71% 2.71%60.00% 0.64% 1.47% 2.31%70.00% 0.59% 1.30% 2.02%80.00% 0.55% 1.18% 1.80%90.00% 0.52% 1.08% 1.63%99.99% 0.50% 1.00% 1.50%

RUNOFF PROTECTED

MCOF: A Simple LookHow Much Is Truly Rate Sensitive?


Marginal Cost of Changing Existing RatesBenchmarkWholesale

Costs

Deposit Strategy…

Cost of Funds Management vs. Liquidity Conundrum


Deposit Strategy…

How Much Growth Need To Cover Cost Increase?


Value in Differentiated Pricing & Product Strategies

Deposit geography & penetration (distribution of deposits by product & customer types)

Branch/regional specific market shares? vs. growth potential?

Competitor landscape differences by market area

Different Strategies for Different Markets?



Key Component of Successful Deposit Strategies:

Internal Communication & Education

“Last” But Not Least: CommunicationImportance Frequently Overlooked


OK, One More Thing: Importance of IRR Assumptions Support



Attrition Who’s leaving? Can we slow it down? What are the trigger points that lead to defection?

Deposit Promotions How much do they really cost? How do we maximize new money and minimize cannibalization? How well have we done in retaining/growing new relationships?

Customer Base Who are the at-risk customers? Who are the most valuable customers? Are there opportunities to increase wallet share?

Deposit Initiatives


Regulatory Lens: Liquidity Management Realities

Industry On Balance Sheet Liquidity: A Key Regulatory Focus

Loan/Deposit Ratio Discussions “Resurfacing”… …Same with the Dependency Ratio Notable Increase in Interim Liquidity Exams Deeper Dives Into Contingency Liquidity Planning

Robustness

Asset Sensitive

Liquidity, Liquidity, Liquidity!


Regulatory Concerns

Potentially Volatile Funding Sources

Liquidity Management

High Rate Deposits

Uninsured Deposits

Single Source Concentrations

Wholesale Concentrations


1.50%

2.05%1.90%

Product NationalRate

Rate Cap

Savings 0.10 0.85

Checking 0.06 0.81

MMDA 0.18 0.93

6M CD 0.38 1.13

12M CD 0.65 1.40

24M CD 0.85 1.60

36M CD 0.98 1.73


Rate Cap

Savings 0.06 0.81

Checking 0.04 0.79

MMDA 0.09 0.84

6M CD 0.17 0.92

12M CD 0.29 1.04

24M CD 0.44 1.19

36M CD 0.59 1.34


Rate Cap

Savings 0.06 0.81

Checking 0.04 0.79

MMDA 0.08 0.83

6M CD 0.13 0.88

12M CD 0.22 0.97

24M CD 0.36 1.11

36M CD 0.49 1.24

Regulatory Concerns: High Rate Deposits

December 2016

December 2017

March 2019

Fed Funds: .75%FHLB 1 Year: 1.15%

Brokered CD 1 Year: 1.10%

2.25%2.70%2.45%


High Rate Deposit – National Rate Caps



Uninsured Customer Segmentation



Identify Plausible Strategies for the Role & Use of Wholesale Funding (reciprocal, brokered, borrowings)



Loan Strategy

Deposit Pricing Strategy

Investment Strategy

Growth Strategy

Earnings

Your Perspective on Liquidity and the Role ofWholesale Funding WILL IMPACT:

Liquidity Management



All Roads…Lead to ALCO


ALCO Effectiveness Does Matter

http://www.google.com/url?sa=i&rct=j&q=dysfunctional%2Bteams&source=images&cd=&cad=rja&docid=ahDy60DwQ4SajM&tbnid=-AvIx5y1jg4jdM:&ved=0CAUQjRw&url=http://governmentloanscanada.blogspot.com/2009/11/is-your-office-dysfunctional-rebecca.html&ei=aK3AUcHBGofa0QG4zoHgDA&psig=AFQjCNFnF3iPFGwKjcrHNAxlOgDT2z-00g&ust=1371668006184823

http://www.google.com/url?sa=i&rct=j&q=&source=images&cd=&cad=rja&docid=MYqQDu4CsXv__M&tbnid=e3oB8AmnLtpc9M:&ved=0CAUQjRw&url=http://www.business2community.com/business-innovation/business-process-automation-modeling-vs-execution-0485257&ei=R6vAUfCiNMix0QG38YHwCw&bvm=bv.47883778,d.dmQ&psig=AFQjCNF9v7fU_EHmXqZGgW_CpYn1mQ7bGA&ust=1371667553104940

http://www.google.com/url?sa=i&rct=j&q=effective%2Bprocess&source=images&cd=&cad=rja&docid=cJZTsNS0k-FlcM&tbnid=r4cngN-NtrzgNM:&ved=0CAUQjRw&url=http://upperroommedia.com/services/website-strategy-services&ei=8avAUZq3Mqqx0QHpsoCADA&bvm=bv.47883778,d.dmQ&psig=AFQjCNFBpaIbRFPC-imVKl-S_-D-eJTgbA&ust=1371667708722547



Key Takeaways

Data Matters…Appropriate Analytics Matter Much More

Let Your Balance Sheet & Growth Strategy Talk

Ensure Appropriate Preparedness For Deposit Strategies In Current Rate Environment

Revisit Wholesale Funding Strategy, Policies, and Contingency Liquidity Planning

Don’t Forget About Declining Rates

CREATE APPROPRITE PERSPECTIVE



Just in Case….

Joe KennersonManaging DirectorDarling Consulting Group978-463-0400 [email protected]


Documents

Utilizing Data to Drive Deposit Strategies In the Current ...fhlbsf.com/events/SpringSeminar2019/darlingpresentation.pdf · Value in Differentiated Pricing & Product Strategies Deposit