DEPOSIT ANALYTICS. Correlations, pricing betas, and volume forecasting. Webinar

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1 DEPOSIT ANALYTICS Correlations, pricing betas, and volume forecasting Webinar 1

2 PRESENTERS Rob Craig, VP Client Success Keaton Baughan, Data Scientist 2

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4 AGENDA 1 2 DEPOSIT & MARKET CORRELATIONS PRICING BETAS 3 DEPOSIT VOLUME FORECASTING 4

5 AGENDA 1 2 DEPOSIT & MARKET CORRELATIONS PRICING BETAS 3 DEPOSIT VOLUME FORECASTING 5

6 Deposit Types Regular Shares (Savings) Lower rates Limited in their services Typically long life, but not as long as share drafts Current Median Rate: 0.14% Share Drafts (Checking) Generally lowest rates Offer various services Typically have longer lives than other share types Current Median Rate: 0.10% Money Market Shares Generally higher rates Limited in their services Shorter lives Current Median Rate: 0.25% Time Deposits Share Certificates Generally highest rates Very limited Mature Current Median Rate: 0.62% DATA + EXPERIENCE = SUCCESS 6

7 Correlations 7

8 CORRELATION DEFINITION A statistical measure of how deposit rates and market rates move in relation to one another Measures strength and direction of linear relationship 8

9 CORRELATION DEFINITION 9

10 CORRELATION RELATIONSHIPS: EXAMPLES 10

11 CORRELATION DEPOSIT: EXAMPLE CORRELATION:

12 AGENDA 1 2 DEPOSIT & MARKET CORRELATIONS PRICING BETAS 3 DEPOSIT VOLUME FORECASTING 12

13 Pricing Betas 13

response to changes in market rates How to quantify

14 PRICING BETA DEFINITION Indicates the magnitude of change the institution would likely make in response to changes in market rates How to quantify this magnitude simple linear regression (SLR), of course 14

15 SLR DEFINITION 15

16 SLR EXAMPLE 16

17 SLR EXAMPLE Interpretation: For every 100 basis point increase in the FHLB 4-year rate, we expect a 25 basis point increase in the aggregated regular share rate average. Beta Up:

18 SLR EXAMPLE Interpretation: For every 100 basis point decrease in the FHLB 4-year rate, we expect a 25 basis point decrease in the aggregated regular share rate average. Beta Down:

19 Correlations & Pricing Betas Analysis 19

20 MARKET RATES MOVE PAST STATIC REPORTING UNDERSTAND CUSTOMER BEHAVIOR ACCELERATE GROWTH BETTER FULFILL MISSION What happened? Why did this happen? Predict what will happen Study behavior of individuals Study behavior of groups, or segments of customers. Forbes Report: Companies that put data at center of marketing decisions exceed MROI by 15-20% Increased growth means better or increased service to customers or members More customers across more products 20

21 MARKET RATES MOVE PAST STATIC REPORTING UNDERSTAND CUSTOMER BEHAVIOR ACCELERATE GROWTH BETTER FULFILL MISSION What happened? Why did this happen? Predict what will happen Study behavior of individuals Study behavior of groups, or segments of customers. Forbes Report: Companies that put data at center of marketing decisions exceed MROI by 15-20% Increased growth means better or increased service to customers or members More customers across more products 21

22 MARKET RATES MOVE PAST STATIC REPORTING UNDERSTAND CUSTOMER BEHAVIOR ACCELERATE GROWTH BETTER FULFILL MISSION What happened? Why did this happen? Predict what will happen Study behavior of individuals Study behavior of groups, or segments of customers. Forbes Report: Companies that put data at center of marketing decisions exceed MROI by 15-20% Increased growth means better or increased service to customers or members More customers across more products 22

23 MARKET RATES MOVE PAST STATIC REPORTING UNDERSTAND CUSTOMER BEHAVIOR ACCELERATE GROWTH BETTER FULFILL MISSION What happened? Why did this happen? Predict what will happen Study behavior of individuals Study behavior of groups, or segments of customers. Forbes Report: Companies that put data at center of marketing decisions exceed MROI by 15-20% Increased growth means better or increased service to customers or members More customers across more products 23

24 MARKET RATES MOVE PAST STATIC REPORTING UNDERSTAND CUSTOMER BEHAVIOR ACCELERATE GROWTH BETTER FULFILL MISSION What happened? Why did this happen? Predict what will happen Study behavior of individuals Study behavior of groups, or segments of customers. Forbes Report: Companies that put data at center of marketing decisions exceed MROI by 15-20% Increased growth means better or increased service to customers or members More customers across more products 24

25 REGULAR SHARES CORRELATION LAG Fed. Bank 1-Month 3-Month FHLB Funds Prime Treasury Treasury 4-Year

26 REGULAR SHARES PRICING BETAS BETA UP: 0.28 BETA DOWN:

27 SHARE DRAFTS CORRELATION LAG 1- Month Treasury 3- Month Treasury Fed. Funds Bank Prime FHLB 4-Year

28 SHARE DRAFTS PRICING BETAS BETA UP: 0.11 BETA DOWN:

29 MONEY MARKET SHARES CORRELATION LAG Fed. Bank 1-Month 3-Month FHLB Funds Prime Treasury Treasury 4-Year

30 MONEY MARKET SHARES PRICING BETAS BETA UP: 0.49 BETA DOWN:

31 SHARE CERTIFICATES CORRELATION LAG Fed. Bank 1-Month 3-Month FHLB Funds Prime Treasury Treasury 4-Year

32 SHARE CERTIFICATES PRICING BETAS BETA UP: 0.84 BETA DOWN:

33 AGGREGATE DEPOSIT SUMMARY CORRELATIONS DEPOSIT RATE MARKET RATE CORRELATION Regular Shares FHLB 4-Year Lag Share Drafts FHLB 4-Year Lag Money Market Shares FHLB 4-Year Lag Share Certificates FHLB 4-Year Lag PRICING BETAS Beta Up Beta Down Regular Shares DATA + EXPERIENCE 0.28 = SUCCESS 0.25 Share Drafts Money Market Shares Share Certificates

34 CREDIT UNION LEVEL CORRELATIONS Median Maximum Correlation Magnitude % Positive Most Correlated Rate Regular Shares % FHLB 4-Year Lag 3 Share Drafts % FHLB 4-Year Lag 3 Money Market Shares % FHLB 4-Year Lag 3 Share Certificates % FHLB 4-Year Lag 3 34

35 CREDIT UNION LEVEL PRICING BETAS Average Beta Up Down Regular Shares Share Drafts Money Market Shares Share Certificates

36 AGENDA 1 DEPOSIT & MARKET CORRELATIONS 2 PRICING BETAS 13 DEPOSIT VOLUME FORECASTING 36

37 Deposit Volumes 37

38 DEPOSIT VOLUMES 38

39 DEPOSIT VOLUMES 39

40 DEPOSIT VOLUMES 40

41 DEPOSIT VOLUMES 41

42 REGULAR RATES VS. VOLUMES BY PEER 42

43 SHARE DRAFT RATES VS. VOLUMES BY PEER 43

44 MONEY MARKET RATES VS. VOLUMES BY PEER 44

45 SHARE CERTIFICATE RATES VS. VOLUMES BY PEER 45

46 DEPOSIT VOLUME FORECASTING Market Rates Deposit Rates Deposit Volumes Gaussian Process ARIMA (Autoregressive Integrated Moving Average) 46

47 DEPOSIT VOLUME FORECASTING 47

48 DEPOSIT VOLUMES 48

49 SUMMARY Correlations help us understand relationships between market and deposit rates Pricing betas estimate the sensitivity between the two rates Market and deposit rates also affect deposit volumes Pricing Betas Market Rates Correlations Deposit Volumes 49

50 MOVING FORWARD Look at longer periods of increasing and decreasing market rate environments Explore other market rates and spreads Incorporate other covariates in deposit volume forecasting 50

51 QUESTIONS 51

52 THANK YOU FOR MORE INFORMATION PLEASE CONTACT:

Developing Deposit Strategies for Rising Rates Session 1. Agenda

Developing Deposit Strategies for Rising Rates Session 1 Thomas A. Farin President tfarin@farin.com 1 Agenda Session 1 - Deposit Analytics Are We In a Rising Rate Environment? Establishing Cash Flows Contractual