Deposit Growth Strategies and Balance Sheet Management

Transcription

1 Deposit Growth Strategies and Balance Sheet Management Presented by: Frank Santucci Managing Director ALM Services

2 Frank Santucci - Managing Director ALM Services First Empire Securities, Inc. / Balance Sheet management Services, Inc. Frank has been working with institutional investors including credit unions, banks, insurance companies and municipalities for over 33 years. Frank is the principal author of the BSMS ALM Model which has been used to measure monitor and manage interest rate risk by over 1000 institutions ranging in size from $10 Million to $8 Billion in total assets. Along with his team, they provide comprehensive ALM Analysis, ALCO and Board Education, budget and strategic planning support and consultation. Frank currently holds the Securities Industry and Financial Markets Association: Series 7 license (General Securities Registered Representative); the Series 63 license, (State Registrations) and the Series 24 license, (General Securities Principal). Frank is also an Eagle Scout in the Boy Scouts of America. First Empire Securities, Inc. is a full service institutional fixed income broker-dealer servicing customers nationwide for more than thirty-five years. Other affiliated companies include: Balance Sheet Management Services, Inc, LPC Services, Inc. and First Empire CD Management, Inc., Combined First Empire Securities, Inc. and its affiliated companies currently work with over 20% of the credit union industry. 2 2

3 Generally, the credit union industry has ample liquidity today; however, it has been getting tighter over the past several years. If the economy continues to strengthen and the Federal Reserve continues to tighten, liquidity going forward will likely come under some additional pressure. June 30, 2003 June 30, 2007 Change Fed Funds Target Rate 1.00% 5.25% bps 2-year US Treasury Yield 1.30% 4.86% bps Credit Union Industry June 30, 2003 June 30, 2007 Change Loans as a % of Total Assets 54.94% 68.49% % Investments as a % of Total Assets 39.91% 26.69% % September 30, 2012 September 15, 2018 Change Fed Funds Target Rate 0-25 bps bps bps 2-year US Treasury Yield 0.23% 2.78% bps Credit Union Industry September 30, 2012 June 30, 2018 Change Loans as a % of Total Assets 58.78% 70.35% % Investments as a % of Total Assets 36.63% 24.86% % 3 Source: Bloomberg Finance LLC, NCUA FOIA Call Report data files

4 Natural Person Credit Unions Median Year over Year Deposit Growth Idaho 5.20% Utah 5.10% Maine 5.40% New Jersey -.06% Arkansas -.05% Louisiana % CU Industry 5.40% Deposit Growth CU Median 1.90% Jun 2017 Jun Source for Data: NCUA Quarterly U.S. Map Review

5 Natural Person Credit Unions Jun Jun Balance Sheet Jun-17 Jun-18 As a % of Funding Y over Y Grow th Annualized Grow th Rate 12- month 43 Share Drafts $168,448,078 $182,209, % +$13,761, % 44 Regular Shares $424,808,791 $452,471, % +$27,662, % 45 Money Market Shares $260,261,460 $265,201, % +$4,939, % 46 Share Certificates $207,170,906 $221,992, % +$14,821, % 47 IRA Accounts $79,096,979 $78,232, % -$864, % 48 Other Shares $10,724,719 $11,263, % +$538, % 49 Deposits $9,220,587 $10,953, % +$1,732, % 50 Total Shares and Deposits $1,159,731,522 $1,222,323, % +$62,591, % 56 Total Borrow ings $48,252,549 $53,901, % +$5,649, % 57 Total Interest Bearing Funding $1,207,984,071 $1,276,225, % +$68,240, % Certificates 17.39% Share Certificates 17.39% Natural Person Credit Unions Funding Distribution As of June 30, 2018 Deposits Other Shares Borrowings Deposits Other Shares.86% 0.86% Total Borrowings IRA s.88% 4.22% 0.88% 4.22% Share Drafts 6.13% IRA Accounts Share Drafts 6.13% Total CU Borrowings 14.28% $53,901, % Advances from FHLB $50,245,008 % Borrow ings from FHLB 93.22% Money Market 20.78% Money Market Shares 20.78% Regular Shares 35.45% Regular Shares 35.45% 5 Source for Data: NCUA FOIA Call Report Data Files

6 Calendar Year Natural Person Credit Unions Seasonality of Member Share Growth As of June 30, 2018 Beginning Balance Q1 Grow th Q2 Grow th Q3 Grow th Q4 Grow th Period Ending Balance Net Grow th Annualized Grow th Rate 2008 $644,296,978 $32,409,670 $9,200,713 ($8,779,788) $11,970,950 $689,098,523 $44,801, % 2009 $689,098,523 $43,619,341 $11,097,942 $2,640,719 $14,539,118 $760,995,643 $71,897, % 2010 $760,995,643 $20,914,596 $4,158,205 $2,084,416 $6,626,573 $794,779,433 $33,783, % 2011 $794,779,433 $25,594,868 $411,535 $6,961,364 $8,430,957 $836,178,157 $41,398, % 2012 $836,178,157 $39,202,416 $2,700,957 $899,945 $8,193,860 $887,175,335 $50,997, % 2013 $887,175,335 $32,467,522 ($825,198) ($3,937,505) $4,091,583 $918,971,737 $31,796, % 2014 $918,971,737 $32,993,064 ($3,341,052) ($1,836,982) $11,407,954 $958,194,721 $39,222, % 2015 $958,194,721 $33,473,101 $2,090,651 $5,207,752 $23,362,898 $1,022,329,123 $64,134, % 2016 $1,022,329,123 $34,780,520 $7,703,646 $18,502,680 $14,924,957 $1,098,240,926 $75,911, % 2017 $1,098,240,926 $45,862,219 $6,407,789 $4,731,198 $8,097,633 $1,163,339,765 $65,098, % 2018 $1,163,339,765 $44,290,324 $3,739,687 $1,211,369,776 $48,030, % TOTAL/AVG. $385,607,641 $43,344,875 $26,473,799 $111,646,483 $567,072, % First Quarter: 68% of net share growth 2009: Fastest year for net member share growth % Fourth Quarter: 20% of net share growth 2013: Slowest year for net member share growth +3.58% Second Quarter: 8% of net share growth 2018 YTD Annualized: Net member share growth +8.26% Third Quarter: 4% of net share growth 6 Source for Data: NCUA FOIA Call Report Data Files

7 7 7 Dividend Rates & Deposit Beta in a Rising Rate Environment Fed Funds Cumulative FdFd Change Cost of Shares Cumulative COF Change Beta NMD MM Time Deposits Jun % 1.50% 58.62% 19.04% 22.34% Sep % 0.25% 1.53% 0.03% 12.00% 59.59% 18.42% 21.99% Dec % 0.25% 1.63% 0.13% 52.00% 58.91% 18.31% 22.77% Mar % Cumulative 1.75% Fed 1.64% Funds 0.14% Rate Change 8.00% 59.21% 1.75% 17.87% 22.93% Jun % Implied 2.25% COF Change 0.27% 41% BETA 12.00% 57.73% 0.72% 17.81% 24.46% Sep % 2.75% 1.94% 0.44% 16.00% 57.58% 17.27% 25.15% Dec % 3.25% Cost 2.17% of Shares 0.67% Sep % 56.90% 0.52% 16.89% 26.22% Mar % 3.75% 2.23% 0.73% 19.47% 56.27% 16.81% 26.92% Implied Cost of Shares Peak 1.24% Jun % 4.25% 2.44% 0.94% 22.12% 54.96% 16.70% 28.35% Sep % 4.25% 2.69% Cost of Shares 1.19% Jun % 53.63% 0.63% 16.43% 29.94% Dec % 4.25% 2.98% 1.48% 34.82% 53.55% 16.08% 30.37% Mar % Implied 4.25% Future 2.93% Dividend 1.43% Increases 33.65% 51.74% 0.61% 16.77% 31.48% Jun % 4.25% 3.04% 1.54% 36.24% 50.33% 17.24% 32.44% Sep % -0.50% 3.13% 1.63% 38.35% 49.61% 17.14% 33.24% Dec % -1.00% 3.26% 1.76% 41.41% 50.51% 16.78% 32.71% Fed Funds Cumulative FdFd Change Cost of Shares Cumulative COF Change Beta NMD MM Time Deposits Sep % 0.52% 57.77% 23.09% 19.14% Dec % 0.25% 0.57% 0.05% 20.00% 58.25% 22.95% 18.81% Mar % 0.25% 0.52% 0.00% 0.00% 58.70% 22.78% 18.51% Jun % 0.25% 0.52% 0.00% 0.00% 58.55% 22.86% 18.60% Sep % 0.25% 0.53% 0.01% 4.00% 58.71% 22.81% 18.49% Dec % 0.50% 0.57% 0.05% 10.00% 58.65% 22.97% 18.38% Mar % 0.75% 0.52% 0.00% 0.00% 59.46% 22.68% 17.87% Jun % 1.00% 0.54% 0.02% 2.00% 59.37% 22.62% 18.01% Sep % 1.00% 0.56% 0.04% 4.00% 59.12% 22.62% 18.26% Dec % 1.25% 0.62% 0.10% 8.00% 59.02% 22.55% 18.42% Mar % 1.50% 0.59% 0.07% 4.67% 59.89% 22.08% 18.04% Jun % 1.75% 0.63% 0.11% 6.29% 59.78% 21.89% 18.33% Source for Data: NCUA FOIA Call Report Data Files Bloomberg LLC

8 What might be different this time: 1.Online/Mobile/Payments: 81% of American have on-line banking/mobile payment apps. This electronic access has increased the velocity of money, reduced switching costs and has lowered transactional expenses. Back in 2006, it took personal branch visits and more than two hours to close and then open an account at another institution. In 2018, this can be done in less than fifteen minutes from the comfort of your home. 2.Technology Sticky: Institutions without robust mobile and online applications will find themselves at a disadvantage to attract inexpensive deposits. As such, rates on deposits will have to be higher, and terms will have to be more attractive to be able to attract deposits away from the large national banks that have a fully digital banking platform. 3.Specialized Banks: General purpose banks and credit unions now have to compete with deposit-hungry specialty banks such as Goldman Sachs, Discover, American Express and Synchrony. These organizations financed their assets through non-deposit methods during the previous rate cycle. Now, they are competing for insured deposits. 4.Liquidity Regulation: Large banks are now subject to meeting the minimum Liquidity Coverage Ratio specified by BASEL 3. Retail deposits are more valuable for large banks in that calculation. That means that large national banks will increase competition for retail deposits and reduce reliance on brokered deposits and borrowings. This will likely cause retail deposit rates to go up faster and likely increase the deposit beta of the industry. 8 8

9 Ideas: 1. Target market to your members with large balances in their accounts with CD specials and other incentives. For example, if they refer a family member who joins the CU you will give them a bonus on their account. 2. Offer rate bonuses for members that meet certain criteria such as: If you have direct deposit into your checking account, and are signed up for on-line bill pay, and have a debit card and credit card, and you agree to e-statements, then we will give this bonus rate on their account. 3.Do not raise existing money market rates. Instead introduce a new and improved money market account and introduce the higher dividend rates on that new tier structure. 4. If you run a CD special, run it at an odd term (eg: 13-mo, 25-mo, 37 mo). 5. Run a really aggressive rate special but for new money only! 6. Run an IRA CD special. 7. Track cannibalization when you run a CD special. (eg. How much of the total brought in was new money. How much came from maturing certificates. How much moved from non-maturity shares.) 8. Make sure you have a robust mobile banking app and on-line banking platform. 9. As you increase dividends you must proactively manage your investment portfolio and also raise loan rates. If cost of funds is going to go up 60+ basis points we need yield on earning assets to also increase. 9 9

10 10 10 SNL and Datatrac. Rates based upon a survey of 205,697 financial institution locations in 19,518 markets across the United States as of 9/18/2018. Credit Union Credit Union Credit Union Product High Average Low 3 Mo CD - $10k Mo CD - $10k Yr CD - $10k Mo CD - $10k Yr CD - $10k Mo CD - $10k Yr CD - $10k Yr CD - $10k Yr CD - $10k Mo CD - $100k Mo CD - $100k Mo CD - $100k Mo CD - $100k Yr CD - $100k Yr CD - $100k Yr CD - $100k Mo CD - $250k Mo CD - $250k Yr CD - $250k Yr CD - $250k Yr CD - $250k mo bump up Certificate Money Market - $2.5k Money Market - $10k Money Market - $25k Money Market - $50k Money Market - $100k Money Market - $250k Interest Checking - $5k Regular Savings - $1k Liquid IRA Account

11 11 When comparing wholesale versus retail funding strategies you should consider the marginal cost of acquiring new deposits when running a CD Special. Total Deposits Generated at the "CD Special" Rate: $10,000,000 Term of the CD Special 3 Year Rate offered on CD special: 3.00% Rate Currently Paid on Core Savings: 0.75% % of Deposits "Cannibalized" from Core Savings: 10.00% 20.00% 30.00% 40.00% 50.00% Total Deposits "Cannibalized" from Core Savings: $1,000,000 $2,000,000 $3,000,000 $4,000,000 $5,000,000 Total New Money Acquired: $9,000,000 $8,000,000 $7,000,000 $6,000,000 $5,000,000 Annual Interest Expense on Core 0.75% $7,500 $15,000 $22,500 $30,000 $37,500 Annual Interest Expense on Core 3.00% $30,000 $60,000 $90,000 $120,000 $150,000 Net Interest Expense Increase on Core Savings: $22,500 $45,000 $67,500 $90,000 $112,500 Annual Interest Expense on New Time 3.00% $270,000 $240,000 $210,000 $180,000 $150,000 PLUS Net Interest Expense Increase on Core Savings: $22,500 $45,000 $67,500 $90,000 $112,500 TOTAL INTEREST EXPENSE TO GENERATE NEW MONEY: $292,500 $285,000 $277,500 $270,000 $262,500 EFFECTIVE COST OF NEW TIME DEPOSITS: 3.25% 3.56% 3.96% 4.50% 5.25% By Comparison: 5-year FHLB Advance Rate = 3.20% (as of Sep 18, 2018 FHLB Boston)

12 Other Liquidity Management Considerations: Comprehensive liquidity risk measurement and monitoring systems (including assessments of the current and prospective cash flows or sources and uses of funds) that are commensurate with the complexity and business activities of the institution. SOURCES OF FUNDS New Shares and Deposits Loan Principal Payments and Cashflow Investment Maturities and Cashflows Interest Income Non-interest Income Corp CU Overnights or Fed Funds Sold Sales of Securities, Loans, Other Assets Sale of Loan Participations Early Withdrawal of Investment CDs Non-member Deposits or Brokered CDs Corp CU Lines of Credit FHLB Advances Repurchase Agreements (Repo of Securities) Other Lines of Credit (Correspondent Banks) Federal Reserve Advances Central Liquidity Facility Facility USES OF FUNDS Share and Deposit Withdrawals New Loan Originations Dividends on Shares and Deposits Interest Expense on Borrowings Operating Expenses NCUSIF Deposit & Assessments Pay-off of Existing Borrowings Fixed Asset Purchases or Expenditures Investment Purchases Purchase of Loans or Loan Participations 12 12

13 Contingent Liquidity and Contingent Liabilities Current Contingent Liquidity As of: Jun-18 Overnight Funds, Cash Equivalents, Cash, Coin and Currency 1 $103,209,520 Net Securities Available for Liquidation 2 $149,563,593 Investment CDs Net of 6-mo Early Withdrawal Penalty 3 $40,623,966 Available Lines of Credit: 4 $288,115,570 Available Net Non-member Deposits: 5 $231,320,514 Estimated Total Available Contingent Liquidity $812,833,163 (1) Source for Data: NCUA Call Report As a % of Total Assets 56.20% (2) Securities market value appraisal from BondEdge Solutions LLC and/or Bloomberg LP. (3) BSMS ALM Analysis net of assumed 6-month early withdrawal penalty (4) Data provided by the credit union (5) Source for Data: NCUA Reg (b) - max 20% of member shares Contingent Liabilities As of: Jun-18 Total Unfunded Loan Commitments 1 $240,927,079 Pending Bond Claims 1 $15,485 Loans Transferred with Recourse 1 $3,712,117 Other Contingent Liabilities 1 $148,654 Total Contingent Liabilities $244,803,334 As a % of Total Assets 16.93% Source: BSMS Sample Credit Union Liquidity and Funding Risk Analysis 13 13

14 The Market for Negotiable Brokered Deposits (Low-income Designated CUs) Credit Unions 2aF Institutions Independent BD Bank Retail Regional BD Clearing Firm Wire Houses ECN Private Banks RIA Types of Brokered Deposits Fixed Rate Bullet 3.05% Coupon Fixed Rate Callable 3.10% Coupon Step-up Callable 3.15% IRR 3.30% All-in Cost 3.35% All-in Cost 3.4% All-in Cost 14 3-year Maturity 2.5-yr Duration 2-year Duration

15 Natural Person Credit Unions Quarterly Amount of Loan Participations Sold $ Amounts in Billions $4.00 $3.50 $3.00 Credit Unions sold $2.89 Billion Loan Participations last quarter, $11.87 Billion over the past four quarters. $2.50 $2.00 $1.50 $1.00 $0.50 $ Source for Data: NCUA FOIA Call Report Data Files

16 16 Other Liquidity Management Considerations: Make sure your securities are classified as Available-for Sale under ASC320 (formerly SFAS #115). If your CU is not a member of the Federal Home Loan Bank already go join. The CU industry has $50.2 Billion in borrowings from the FHLB as of June 30, The FHLB is the lender of choice for the industry with 93% of all borrowings from the FHLB and only 7% from the Corporate CU network. (source: FHLB-OF, NCUA FOIA Call Report data) If your CU is not a member of the Federal Reserve already go join. The Federal Reserve Bank is the lender of last resort in a crisis. Establish a Loan Participation Policy as a means of expanding available contingent liquidity. The two great advantages of selling loan participations compared to every other source of contingent liquidity: 1) The borrowing is a perfectly matched transaction with zero interest rate risk. 2) The CU never has to pay back the borrowing (your member does it for you as they pay down their loan). Make sure your Liquidity Policy and Contingency Funding Plan allow for all of the available sources of funds, and that Policy Limits match the legal allowable limits. If you belong to the FHLB: Have the FHLB analyze your mortgage loan portfolio as collateral for borrowings/advances. This will then free up your marketable securities to be sold if need be). If you are a Low-income Designated CU consider underwriting Negotiable CDs as a source of liquidity. 16

17 17 WHO IS FIRST EMPIRE?

18 For ins(tu(onal use only. The informa(on in this document has been obtained from sources we believe to be reliable, however, we do not guarantee it is accurate or complete. From (me to (me officers, employees of the firm, or the firm itself holds a posi(on in the securi(es referred herein, or acts as principal in transac(ons referred to herein. Parts of this document are based on assump(ons, which we believe to be reasonable and supportable, however, future events may influence actual performance. The projec(ons contained herein are hypothe(cal in nature, and do not reflect actual balance sheet or investment results and are not guarantees of future results. This document is not and should not be construed as an offer or solicita(on of an offer to buy or sell any security or securi(es. Securi(es have inherent risk, including credit, prepayment, extension and market risk. This informa(on is subject to change without no(ce. First Empire Holding Corp. (First Empire) is the parent company of First Empire Securi(es, Balance Sheet Management Services, LPC Services, First Empire CD Management and First Empire Asset Management, At (mes, these companies may receive compensa(on or fees from shared clients and, as a result, the companies may have conflicted interests, loyal(es and responsibili(es. First Empire Securi(es, Inc., is solely a member of FINRA/SIPC. The other First Empire companies are not members of FINRA/SIPC.