Augmenting the Retail Deposit Franchise in Today's Environment. Kevin Kirksey

Transcription

1 Augmenting the Retail Deposit Franchise in Today's Environment Kevin Kirksey

2 Agenda Trends in non-maturity deposits Critical non-maturity deposit variables RATE CHANGE COEFFICIENT (BETA) NON-INTEREST COST FORWARD CURVE 2 WEIGHTED AVERAGE LIFE Effective final maturity Decay rates Additional non-maturity deposit considerations SURGE BALANCES PROTECTING AND GROWING NON-MATURITY BALANCES

3 Cost of Funds 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% % 1.00% 0.50% 0.00% Banks Credit Unions *Source: SNL Financial

4 NMD Allocation NMD/Deposits 90.00% 80.00% 70.00% 60.00% 50.00% 40.00% % 20.00% 10.00% 0.00% Banks Credit Unions *Source: SNL Financial

5 Money Market Trend MMDA as Percent of Deposits 35.00% 30.00% 25.00% 20.00% 15.00% % 5.00% 0.00% MMDA Allocation *Source: SNL Financial

6 Non-Interest Deposits 25.00% Non-Interest Deposits as Percent of Total Deposits 20.00% 15.00% 10.00% % 0.00% Non-Interest Deposits *Source: SNL Financial

7 CDI Premium 5.00% CDI Premium 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% % 1.00% 0.50% 0.00% CDI Premium *Source: SNL Financial

8 Rate Change Coefficient The rate change coefficient, or beta, drives projected offering rate Beta is generally determined after performing linear regression between the deposit rate and index rate FEDERAL FUNDS RATE AND LIBOR ARE POPULAR REGRESSION INDICES Historical regressions are not always the best means of informing rate coefficient 8 IF HISTORICAL REGRESSIONS DO NOT ACCURATELY REPRESENT STRATEGY GOING FORWARD, INSTITUTION SHOULD UTILIZE ANTICIPATED STRATEGY

9 9 Coefficient Regression Date Rate Fed Funds 4/30/ /31/ /30/ /31/ /31/ /30/ /31/ /30/ /31/ /31/ /28/ /31/ /30/ /31/ /30/ SUMMARY OUTPUT Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations 111 ANOVA df SS Regression Residual Total Coefficients Standard Error Intercept X Variable The above regression is an abbreviated summary of a significantly longer series. The resulting coefficient is 24% as indicated by the summary output to the right of the regression series.

10 Coefficient Regression (continued..) A historical regression should be performed over a complete rate cycle A COMPLETE RATE CYCLE WOULD REQUIRE DATA REACHING BACK TO 2001 DATA SHOULD BE MONTHLY A minimum of 60 months of data is required for regression series to be significant THE RECENT HISTORY OF A FLAT RATE ENVIRONMENT MAY SKEW ESTIMATED BETA 10 THE NEXT RATE CYCLE MAY NOT MIMIC PREVIOUS RATE CYCLES

11 Effective Fed Funds Fed Funds History 7.00% 6.00% 5.00% 4.00% 3.00% % 1.00% 0.00% Fed Funds *Source: Federal Reserve

12 Non-Interest Cost All non-maturity deposit valuations should incorporate net non-interest costs The net non-interest component should include both income and expense from: OVERHEAD ALLOCATED TO RUNNING NMD FRANCHISE ATM FEES REWARDS COSTS 12 SPECIAL DIVIDENDS CARD PROCESSING FEES OVERDRAFT FEES The non-interest component can be a significant portion of deposit cash outflow Institution-specific data are encouraged and can be obtained through an internal cost accounting study

13 History of Non-Interest Cost In lieu of an internal cost accounting study, assumptions from the former Office of Thrift Supervision (OTS) are suggested THE VALUES FROM THE OTS STUDY ARE STALE COST STRUCTURES HAVE EVOLVED WITH TECHNOLOGY Experience has shown the OTS assigned non-interest costs are often greater and, therefore, more punitive than internal cost accounting studies suggest as appropriate 13 OTS Non-Interest Cost Savings 1.39% Non-Interest Checking 2.57% Interest Checking 1.80% Money Market 0.86%

14 Forward Curve Non-maturity deposits are viewed as inherently variable products DEPOSIT RATES SHOULD FLUCTUATE THROUGH THE PROJECTED LIFE OF THE ACCOUNT IT IS UNREALISTIC TO BELIEVE THE RATE WILL STAY CONSTANT FOR UP TO 10 YEARS THE FORWARD CURVE IS WIDELY USED IN THE INDUSTRY TO PREVENT ARBITRAGE PRICING 14 The use of a forward curve is considered best practice in the industry and will lead to increase non-maturity deposit valuations

15 Forward Curve Through Time From time 0 to time t, the deposit rate will adjust by the change in the forward curve with the beta coefficient dampening the magnitude of change 15 Time Forward Curve Deposit Rate Change In Forward Forward Chg w/ Beta % 0.24% 0.00% 0.00% % 0.25% 0.03% 0.01% % 0.26% 0.04% 0.01% % 0.28% 0.07% 0.02% % 0.31% 0.09% 0.03% % 0.36% 0.18% 0.05% % 0.44% 0.27% 0.08% % 0.44% 0.00% 0.00% % 0.79% 1.18% 0.35% % 0.77% -0.08% -0.02% % 0.76% -0.01% 0.00% % 0.85% 0.29% 0.09% % 0.96% 0.37% 0.11% % 0.98% 0.07% 0.02% % 1.02% 0.14% 0.04% % 1.06% 0.12% 0.03% % 1.11% 0.17% 0.05% % 1.13% 0.07% 0.02% % 1.15% 0.07% 0.02% % 1.16% 0.06% 0.02% % 1.18% 0.05% 0.01% *The above chart assumes a 30% beta coefficient. The time horizon has been shortened.

16 Forward Curve and Deposit Rate 4.00% Forward and Deposit Rate Curves 3.50% 3.00% 2.50% 16 Rate 2.00% 1.50% 1.00% 0.50% 0.00% Time Forward Curve Deposit Rate *Source: SNL Financial

17 Weighted Average Life Weighted average life (WAL) for non-maturity deposits is driven by two main factors: EFFECTIVE MATURITY DECAY RATES Accounts which stay competitive with the market should expect to have longer lives A LONGER WAL FOR NMDS IS MORE BENEFICIAL TO AN INSTITUTION AS INTEREST RATES INCREASE 17

18 WAL: Effective Final Maturity Effective final maturity serves as the endpoint of cash flows NO CASH FLOW WILL EXTEND BEYOND EFFECTIVE MATURITY Maturity can be calculated from a historical regression Regulatory authorities suggest capping maturities at 10 years 18 APPROXIMATELY 95 PERCENT OF ACQUISITIONS OF DEPOSIT FRANCHISES AMORTIZE CDI (CORE DEPOSIT INTANGIBLE) OVER 10 YEARS

19 WAL: Decay Rates Decay rates are employed to project principal cash flow from non-maturity accounts Since NMDs do not have a contractual cash flow stream, a theoretical cash flow stream is assumed through decay rates In the base scenario, an institution may use institution-specific data Decay speeds should be dynamic 19 ASSUMPTIONS SHOULD BE MADE IN ALTERNATIVE RATE SCENARIOS TO ACCOUNT FOR THE LACK OF INSTITUTION-SPECIFIC HISTORY IN SHOCKED RATE ENVIRONMENTS

20 Surge Balances Surge balances represent the proportion of the non-maturity deposit portfolio that is considered non-core OFTEN CALLED HOT MONEY Surge deposits represent a volatile liquidity source WHEN INVESTMENT OPPORTUNITIES ARE POOR, SURGE BALANCES WILL INCREASE REPRESENTING INCREASED LIQUIDITY FOR THE INSTITUTION 20 WHEN INVESTMENT OPPORTUNITIES IMPROVE, SURGE BALANCES WILL QUICKLY EXIT THE INSTITUTION DIMINISHING LIQUIDITY

21 Surge Growth 9.00% 8.00% Deposit Growth S&P Declined Avg. 14.0% 7.00% 6.00% 5.00% % 3.00% S&P Declined Avg. 36.0% 2.00% 1.00% 0.00% Deposit Growth *Source: SNL Financial; Standard & Poor s

22 Depository Trends Since 1990: INCLUDING FAILED BANKS, M&A ACTIVITY HAS BEEN CONSISTENT AT 3 4% PER YEAR OVERCAPACITY AND REGULATION WILL FUEL CONTINUED CONSOLIDATION Recent deal multiples have been the lowest since the credit crisis began in late DEPRESSED EARNINGS AT TARGETS HAVE CREATED ABNORMALITIES IN PRICING STATISTICS (BUYERS FOCUS ON TANGIBLE BOOK VALUE) The average core deposit intangible generated over the last three years is about 50% lower than pre-2008

23 Depository Trends From early 2013 to present: INCREASING VOLUME OF LOANS TO ASSETS AVERAGE LOAN YIELD CONTINUES TO ROLL DOWN DECLINING VOLUME OF OTHER INVESTMENTS AND SECURITIES TO ASSETS INCREASING VOLUME OF NMD TO TOTAL LIABILITIES 23 NIM MAINTAINED THROUGH ROCK-BOTTOM DEPOSIT RATES CAPITAL RAISING IS EXPENSIVE, BUYERS ARE RELUCTANT TO DILUTE THEIR EQUITY, AND SELLERS DO NOT TRUST DISTRESSED LOAN VALUATIONS TECHNOLOGICAL ADVANCES SHOULD IMPROVE EFFICIENCY AND CUSTOMER EXPERIENCE ABOVE COMPETITIVE LENDING LANDSCAPE

24 Focus on Shareholder Value Increased size does not always translate into increased profitability UNABLE TO MAINTAIN RELATIONSHIPS WELL-DEVELOPED BUSINESS STRATEGY SHOULD DRIVE BALANCE SHEET COMPOSITION, NOT COMPOSITION DRIVING STRATEGY Aim to create shareholder value over time rather than in the short run 24 SHOULD NOT BE VERY CONCERNED ABOUT SHARE PRICE OVER THE NEXT WEEK OR MONTH LOOK AT VALUE OVER THE NEXT FEW YEARS AND BEYOND INSTEAD OF COMPARING STRATEGIC DECISIONS IN TERMS OF THE ESTIMATED IMPACT ON REPORTED EARNINGS, MEASURING AGAINST THE EXPECTED INCREMENTAL VALUE OF FUTURE CASH FLOWS Delivering value means finding the balance between the tangible and intangible, the savings and the service

25 Understanding the Deposit Franchise Review incentive structures for new deposit products to prevent cannibalization WANT TO ATTRACT NEW SOURCES OF FUNDING, NOT TRANSFER FUNDING FROM ONE PRODUCT TO ANOTHER Can increased technology help drive growth? CONVENIENCE IS OFTEN THE MOST CITED REASON FOR DEPOSIT LOCATION Consider cost of organic growth compared to inorganic growth 25

26 The Future and Deposits Assuming market rates increase, how will you re-price the deposit franchise? WILL YOUR INSTITUTION BE AGGRESSIVE AND INCREASE RATES? WILL YOUR INSTITUTION INCREASE AVAILABILITY OF SERVICES? How much liquidity will be needed in the future? WITH RISING RATES, WILL LOAN GROWTH BE SIGNIFICANT? 26 Will regulation require changes in deposit strategy?

27 Consumer Trends With over 90% of adults in the United States owning a mobile phone, opportunities to reach consumers through mobile channels continues to grow ALLOWS FOR 24/7 CONNECTION TO CONSUMERS In 2011, the average consumer had 6.1 financial products, but only about half of these were maintained at the consumer s primary financial institution OPPORTUNITY TO INCREASE WALLET SHARE 27 85% of bank customers are satisfied with banks customer service but an increasing number of customers are switching to other institutions SWITCHING FINANCIAL INSTITUTIONS IS BECOMING EASIER THROUGH DECREASED AND REMOVED BARRIERS

28 Increased Efficiencies Cross-selling CAN BE 8-10X MORE COSTLY TO ACQUIRE THAN TO CROSS SELL DEPOSITORS WITH MORE THAN ONE ACCOUNT AT AN INSTITUTION REMAIN CUSTOMERS ON AVERAGE FOR MORE THEN 2.5X THOSE WITH ONE ACCOUNT New technology adoption 28 AGING BANKING SYSTEMS ARE BECOMING INCREASINGLY COSTLY Nonintegrated systems causing higher costs Inability to provide real-time access to information and services CAN HELP INCREASE THE INSTITUTION S REVENUES THROUGH CHANNEL OPTIMIZATION NEED TO MEET CUSTOMER EXPECTATIONS

29 New Banking Platforms Online Banking CONSUMERS USE ONLINE BANKING MOST FREQUENTLY, WITH 60% OF CONSUMERS USING IT WEEKLY Mobile Technology NEW DISTRIBUTION CHANNELS; CONTINUALLY UPDATE MOBILE STRATEGIES 29 OF SMARTPHONE OWNERS WITH A BANK ACCOUNT IN 2015, 52% HAD USED MOBILE BANKING IN THE PREVIOUS YEAR MUST KEEP UP WITH CHANGING TECHNOLOGY IN ORDER TO MEET CONSUMER EXPECTATIONS (REMOTE DEPOSIT CAPTURE, TWO-WAY TEXT BANKING, APPS FOR LOCATING BRANCHES AND ATMS, AND BILL PAYMENT) Social Media DEVELOP STRATEGY TO MONITOR WHAT IS BEING SAID ABOUT THE INSTITUTION ENGAGE WITH CONSUMERS IN A MEANINGFUL WAY TO BUILD BRAND AWARENESS

30 FinTech In 2014, Fintech-related activities accounted for nearly 60% of banks profits At mid-sized banks, the portion of a borrower s loan balance at the institution fell from 63% in 2012 to 56% in 2016 THIS DROP IS ATTRIBUTED TO NON-BANK FINANCIERS MOVING INTO THE SPACE Rising consumer expectation of seamless and customized financial services 30 Incorporating constantly evolving financial technology allows for the space to be reimagined DIGITAL DISRUPTION DOES NOT HAVE TO BE NEGATIVE OPPORTUNITY TO INNOVATE AND GROW ORGANICALLY

31 Channels of the Future Online banking remains dominate and the prominence of mobile banking continues to grow 46% of consumers report willingness to use robo-advice INSIGHT-BASED FINANCIAL RECOMMENDATIONS MADE THROUGH ANALYZING QUESTIONNAIRES AND ADVANCED ALGORITHMS 31 However, brick and mortar locations remain important 87% OF CONSUMERS ANTICIPATE FUTURE USE OF BRANCHES IN THE FUTURE CONSUMERS DESIRE HUMAN INTERACTION WHEN UTILIZING PHYSICAL LOCATION SERVICES Moving forward will be finding the balance between low-cost products and heightened levels of service while creating a seamless transition between channels

32 Conclusion Assumptions vary between NMD modelers ENSURE ASSUMPTIONS ARE SOUND AND BENCHMARKED TO MARKET AND PEER USE INSTITUTION-SPECIFIC ASSUMPTIONS WHEN POSSIBLE Modeling non-maturity deposits can be ambiguous FREQUENTLY ANALYZE NMD WHAT-IF SCENARIOS AND MANIPULATE CORE NMD ASSUMPTIONS 32 Stratify core deposit base from non-core Protect liquidity position by growing core deposits and relentlessly focus on wallet share

33 Community Banking Conference The material appearing in this presentation is for informational purposes only and should not be construed as advice of any kind, including, without limitation, legal, accounting, or investment advice. This information is not intended to create, and receipt does not constitute, a legal relationship, including, but nor limited to, an accountant-client relationship. Although this information may have been prepared by professionals, it should not be used as a substitute for professional services. If legal, accounting, investment, or other professional advice is required, the services of a professional should be sought. Assurance, tax, and consulting offered through Moss Adams LLP. Wealth management offered through Moss Adams Wealth Advisors LLC. Investment banking offered through Moss Adams Capital LLC.