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9 The Changing Deposit / Funding Landscape 2018 Promontory Interfinancial Network, LLC

10 The Market Is Changing Funding pressures knocking at community bank doors S&P Global Market Intelligence, July 16, 2018 These Bank Customers Are Making a Bundle on Their Deposits Instead of toasters for opening accounts, banks are handing out cash Wall Street Journal, June 22, % Biggest Three Banks Gobble Up $2.4 Trillion in New Deposits Since Crisis Now that many transactions are done online or through smartphones, customers are increasingly choosing national banks Wall Street Journal, March 22, 2018 U.S. Banks in arms race for deposits as rates rise Financial Times, March 22,

11 The Market Is Changing Competition for funding is heating up. The Fed continues to raise rates and reverse QE. Banks balance sheet positions continue to tighten. Wholesale funding is often more expensive than deposit funding. Large banks are spending substantial amounts of money on technology and marketing. Regulatory changes are impacting how certain banks view different types of deposits. The time for community banks to act is NOW. 11

12 Banks Looking to Add Cost-Effective Deposits Years of excess liquidity and low loan growth (post-financial crisis) are behind us. Depositors are more open to switching financial institutions and to moving from nonmaturity deposits to time deposits as interest rates continue to rise. Fed is unwinding QE2. Fed is reducing securities holdings by billions per month. J.P. Morgan estimates $1.5 trillion in deposits will eventually leave banks. Loan growth could exceed deposit growth by $200-$300 billion per year. Deposit betas are not likely to lag much going forward; funding costs are likely to continue growing. Indeed, bank executives in every Fed region expect funding costs to increase over the next 12 months. Expectations for Funding Costs Next 12 Months Source: Based on responses from 390 unique banks in Promontory Interfinancial Network s Bank Executive Business Outlook Survey report for Q The Bank Executive Business Outlook Survey is completed on a quarterly basis and incorporates responses from hundreds of unique banks as provided by bank CEOs, presidents, and CFOs from across the country. The survey is published by Promontory Interfinancial Network with data released every fiscal quarter. 12

13 Competition for Deposits Intense and Growing Bank leaders expect deposit competition to increase over the next 12 months, and the number of executives expecting deposit competition to grow are at record-high levels for almost every region. Expectations for Deposit Competition Next 12 Months Expectation of Banks with <$1 Billion in Assets Expectation of Banks with $1 - $10 Billion in Assets Source: Promontory Interfinancial Network s Bank Executive Business Outlook Survey report, Q

14 Deposit Strategies that Increase Franchise Value 2018 Darling Consulting Group, Inc. Page 14

15 Deposit Strategies that Increase Franchise Value Set Tone for Deposit Strategy Don t Let Fear, Competition or Small Fraction of Depositors Drive Deposit Strategy 2018 Darling Consulting Group, Inc. Page 15

16 Deposit Strategies that Increase Franchise Value Internal Communication Importance of Communication Frequently Overlooked Strategy Value Proposition Objection Handling Etc Darling Consulting Group, Inc. Page 16

17 Deposit Strategies that Increase Franchise Value Complementary Wholesale Funding Strategy Identify Plausible Strategies For the Role & Use of Wholesale Funding (reciprocal, brokered, borrowings) 2018 Darling Consulting Group, Inc. Page 17

18 Deposit Strategies that Increase Franchise Value Right-Sizing Deposit Strategy Balance Sheet Risk Positions Can Influence Priorities and Trade-Offs Especially liquidity Interest rate risk too Asset Size & Growth Drive Funding Needs & Timelines 2018 Darling Consulting Group, Inc. Page 18

19 Deposit Strategies that Increase Franchise Value Take Deeper Dives Into Deposit Data Don t Underestimate Value of Data In Developing Winning Strategies 2018 Darling Consulting Group, Inc. Page 19

20 Deposit Strategies that Increase Franchise Value DATA: Different Strategies For Different Markets 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 2018 Darling Consulting Group, Inc. Page 20

21 An Overlooked Deposit Growth Strategy DATA: Deposit Attrition Important Growth Strategy: Understanding, Managing and Heading Off Attrition 2018 Darling Consulting Group, Inc. Page 21

22 Deposit Attrition: Tell Me What s Happening Value in Data 3% Net Growth BUT 23% Activity 2018 Darling Consulting Group, Inc. Page 22

23 Deposit Attrition: Deeper Dives Value in Data 5.7% Growth 2018 Darling Consulting Group, Inc. Page 23

24 Developing Early Warning Systems Value in Data Relationships at Risk? 2018 Darling Consulting Group, Inc. Page 24

25 Big Concern Cannibalization Value in Data 72% cannibalization in this Promoted CD special ($35MM of which from NMDs) drove up marginal cost of funds on promotion. Source: Deposits Darling Consulting Group, Inc. Page 25

26 Segment Deposit Base Into Logical Strategy Segments Value in Data Geography / Market Area Isolate Largest Deposit Customers (Commercial & Retail) Single Relationship Accounts (CDs, MMDA) Similar Relationships / Value Propositions Public Funds Wholesale CDARS Etc Darling Consulting Group, Inc. Page 26

27 Deposit Strategies that Increase Franchise Value 2018 Darling Consulting Group, Inc. Page 27

28 DEPOSIT STRATEGIES THAT INCREASE FRANCHISE VALUE David Koch President\CEO P: (608) E:

29 First - Defining Franchise Value Traditional Finance Definition Associated to the total value of the bank s assets & liabilities resulting from the business model that provides a positive equity position greater than book value of equity. Alternate Definition: Franchise value does not refer to the traditional franchise business model, but instead is used to describe a company or brand that has such superior popularity it has extraordinary "mindshare" among consumers; that, all else equal, it is the one they are going to reach for on the shelf or associated with a product

30 Data vs. Knowledge vs. Strategy Data alone is not enough How does more data support your definition of franchise value?

31 Big Data and Funding Examples of data as a starting point: 5% of all MMDA account holders control 50% of total balances Historically 20% of our deposits in time deposits with original maturities > 18 months Long-time account holders are less volatile than more recently opened accounts Does data say much? Is it actionable? Is the sky falling? Data can appear to be an answer, but Is the real danger in the data we don t have or consider?

32 CAPITAL PLAN DRIVES IT ALL! Staff ALCO

33 The story of Chicken Little In the post crisis economy, community banks were warned about risk of rising interest rates. What rates were big banks were preparing for? Did we walk into the Fox s den? Hindsight: some longer term asset yields would have looked good? Did ALM reports warn us rising rates were bad? What about now?

34 Deposit Strategies vs. Tactics Is your current approach to funding: Based on long-term plans or short-term needs? High loan\deposit rate Response to market pressures How does your product design fit to the needs of today s vs. historical consumer? How do you measure success of your deposit initiatives? New accounts? Balances? Transactions? Fees? CAPITAL PLAN DRIVES IT ALL!

35 Current Strategy Bank is looking to grow deposits and wants to control interest expense in rising rates MMDA balances have been declining (-8.5% thru 6/18) Local survey data shows rates in line with competition so where is the money going? Total deposits up 11% YTD, but declining 5% without National and Brokered CDs Began offering 33 month special CD rate in hopes of attracting 5-10% growth in funding ($10-20 million) in the coming year. Oh, and by the way, bank is showing as asset sensitive in their ALM reports Why are we growing long-term deposits when we are not liability sensitive?

36 Is this a good idea? Using the 3.1%, 33 month CD to retain funds in bank raises overall funding costs by $255k per year. Retaining expected runoff of $8.24 million in total balance Cost of the retention = 3.10% Current 1 year advance rate is 2.77% Spending an extra 33bp to manage the retail funds. But what about capturing our new deposit growth? Balance Expense Cost Bnchmk Spread Strategy 1 104,071 1, % 2.77% 1.69% Strategy 2 112,311 1, % 2.77% 1.54% Marginal Cost 8, % 2.77% 0.33% Marginal Cost Model Summary Strategy 2 raised $8240 thousand of new funds. Interest expense increased by $255 thousand. Marginal cost of the additional funds was 3.10%. Benchmark is 2.77%

37 Battle Strategy Vs. Tactics - Deposit Acquisition Cost management is critical to earnings, but what s your longterm plan? What are our risks to maintaining\growing each sector? What is our contingency plan for unforeseen events? What are the most critical things we get right? How do we monitor battles on both short & long term front? Do we have the right products to wage the battle? Who we are engaging, and do we know how best to engage? Do we have enough data to, How past trends have influenced where we are today? Develop a reasonable prediction of potential results? Really use the data to determine how well we are waging the battle? Is the time right to strike?

38 Regular savings Ignoring dormant accounts, what is the average balance for that month s balance vs. largest balance ever recorded. 2018

39 Free checking account 2018

40 Calculate recent beta validate core study Institution is concerned about rising cost of funds in MMDA sector. Core study betas = 16% for standard MMDA and 61% for premium MMDA. This shows the actual beta through past 2 years of the rising 21%. Are we ok with that result? Is there still a larger looming lag reaction! 2018

41 Single pool decay test validate core study Core study predicted 15% annual weighted decay in first year in a +100 rate environment. Actual decay over 12 months = 19%. Running the decay analysis on each individual product line showed exactly where the migration was coming from. 2018

42 Keys to monitoring system Must have the larger objectives in place Understand role of each battle field and set appropriate performance indicators for each Deploy proper early warning detection systems to monitor key assumptions Migration of funds assumption Poor execution by giving away the specials Inadequate growth in market share

43 Strategy Considerations Plan and Segment by Sector Offense or defense Design Product Ensure you have the right plan for the right market Define market segment we are soliciting Millennials, wealth banking, college students? What are the right features\message to meet this market s expectation? Risk\reward: Comparing current penetration to market opportunity Do we have the right intelligence to attack or defend effectively? Keys to spark this segment to commit How do we reach them? Internet advertising, direct mail, personal invitation? Spend money on the weapons to achieve goals! Define realistic timeframes Make commitments of resources to get the job done Sets real timeline and metrics for success Establish proper monitoring systems Ensure proper barriers to control cannibalization? Keep the mission focused

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