© 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]
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PERSPECTIVE…
…At the Center of Effective Risk Management
…& Effective Strategy Development
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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
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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
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Strategy Development (Including Deposit Related)
Creating Clarity For Balance Sheet Management
Interest Rate Risk
Liquidity
Credit
Capital/Earnings
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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)
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March Dot Plot
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YIELD CURVE
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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”
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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
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Even If Fed Is Done Raising Rates, Will Deposit Pricing Pressure
Continue Through 2019?
?
So, What If The Fed Truly IS Done?
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The Power of Data Analytics
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“Winning” the Battle for Deposits…
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Don’t Let Fear, Competition or Minority of DepositorsDrive Deposit “Strategy”
Set the Tone for Deposit Strategy
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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
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Take Deeper Dives Into Your Deposit Data…Don’t Underestimate Its Value
In Developing “Winning Strategies”
Cost of Funds Management Truly Important?
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Develop Clear Offensive & Defensive Deposit Strategies…
…They Differ Greatly
Cost of Funds Management Truly Important?
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Have Ready-to-Go Shelf Products (MMDA, MMS, CDs)
Cost of Funds Management Truly Important?
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Get Compliance & Operations In Sync With Your Deposit Strategy Needs
Cost of Funds Management Truly Important?
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Business vs. Consumer
“Isolate” Largest Deposit Customers (Commercial & Retail)
Segment Deposit Base Into Logical “Strategy Segments”
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Lay Out Very Specific Strategies for Each of Your “Largest” Accounts/Relationships
Logical Strategy Segments
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Plan for Largest Customers?
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Business vs. Consumer
“Isolate” Largest Deposit Customers (Commercial & Retail)
Single Relationship Accounts (CDs, MMDA)
Segment Deposit Base Into Logical “Strategy Segments”
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Single Deposit Relationship: Threat or Opportunity?
$179MMSource: Deposits360°®
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Business vs. Consumer
“Isolate” Largest Deposit Customers (Commercial & Retail)
Single Relationship Accounts (CDs, MMDA)
Similar Relationships/Value Propositions
Segment Deposit Base Into Logical “Strategy Segments”
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Common Value Proposition Dilemma
“1-Dimensional” Products with LARGE Total Balances “Comingling” of VERY DIFFERENT Customers
Impedes Ability to Manage Funding Costs
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Segmenting Customers
Source: Deposits360°®
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Understand who your older customers are and where their money may potentially move
Segmentation: Customer Age Demographics (NMD Base)
Source: Deposits360°®
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Business vs. Consumer
“Isolate” Largest Deposit Customers (Commercial & Retail)
Single Relationship Accounts (CDs, MMDA)
Similar Relationships / Value Propositions
Revisit Tier Structures
Segment Deposit Base Into Logical “Strategy Segments”
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Adjust Tiered Products to Reflect Realities of Current Account Balance Distribution
Logical Strategy Segments
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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
Source: Deposits360°®
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Business vs. Consumer
“Isolate” Largest Deposit Customers (Commercial & Retail)
Single Relationship Accounts (CDs, MMDA)
Similar Relationships / Value Propositions
Revisit Tier Structures
Public Funds (Operating vs. Discretionary)
“CDARS”
Etc.
Segment Deposit Base Into Logical “Strategy Segments”
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Important Growth Strategy: Understanding, Managing and Heading Off Attrition
An Overlooked Deposit Growth Strategy Deposit Attrition
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Deposit Attrition: “Tell Me What’s Happening”
3% Net GrowthBUT
23% “Activity”
Value in Data
Source: Deposits360°®
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Deposit Attrition: Deeper Dives
5.7% “Growth”
Value in Data
Source: Deposits360°®
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Watch List: Declining Balances
Source: Deposits360°®
Relationships at Risk?
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“Dusting Off” Marginal Cost of Funds Analysis
“Specials”: Designing, Monitoring & Augmenting
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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%
Source: Deposits360°®
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Successful CD Promotion?
Source: Deposits360°®
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Importance of Marginal Cost of Funds Discussion
11 Month CD Special: No Hurdles
CD Special: New Money Minimum
Source: Deposits360°®
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Introducing New MMDA Product
Source: Deposits360°®
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Indexed MMDA: New Money Match
Source: Deposits360°®
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Monitor: “Legacy” MMDA Trends
Lost just $10MM Retained $30MM through promotional MMDA & CDs Maintain $100MM at just 30 bps
Source: Deposits360°®
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Monitor: CD Specials “Post Maturity”
Retained 87% of CD Special Balances
Source: Deposits360°®
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COST OF FUNDS MANAGEMENTThe Importance of
Marginal Cost Analysis
An Invaluable Decision Support Tool
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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?
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Marginal Cost of Changing Existing RatesBenchmarkWholesale
Costs
Deposit Strategy…
Cost of Funds Management vs. Liquidity Conundrum
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Deposit Strategy…
How Much Growth Need To Cover Cost Increase?
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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?
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Key Component of Successful Deposit Strategies:
Internal Communication & Education
“Last” But Not Least: CommunicationImportance Frequently Overlooked
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OK, One More Thing: Importance of IRR Assumptions Support
Source: Deposits360°®
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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
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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!
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Regulatory Concerns
Potentially Volatile Funding Sources
Liquidity Management
High Rate Deposits
Uninsured Deposits
Single Source Concentrations
Wholesale Concentrations
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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
Product NationalRate
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
Product NationalRate
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%
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High Rate Deposit – National Rate Caps
Source: Deposits360°®
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Uninsured Customer Segmentation
Source: Deposits360°®
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Identify Plausible Strategies for the Role & Use of Wholesale Funding (reciprocal, brokered, borrowings)
Cost of Funds Management Truly Important?
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Loan Strategy
Deposit Pricing Strategy
Investment Strategy
Growth Strategy
Earnings
Your Perspective on Liquidity and the Role ofWholesale Funding WILL IMPACT:
Liquidity Management
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All Roads…Lead to ALCO
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ALCO Effectiveness Does Matter
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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
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Just in Case….
Joe KennersonManaging DirectorDarling Consulting Group978-463-0400 [email protected]
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