10...the market is changing 10 5% biggest three banks gobble up $2.4 trillion in new deposits since...

©2018 Promontory Interfinancial Network, LLC

The Changing Deposit / Funding Landscape

The Market Is Changing

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5%

Biggest Three Banks Gobble Up $2.4 Trillion in New Deposits Since CrisisNow that many transactions are done online or through smartphones, customers are increasingly choosing national banks

U.S. Banks in “arms race” for deposits as rates rise

Funding pressures knocking at community bank doors

S&P Global Market Intelligence, July 16, 2018

Wall Street Journal, March 22, 2018Financial Times, March 22, 2018

These Bank Customers Are Making a Bundle on Their DepositsInstead of toasters for opening accounts, banks are handing out cash

Wall Street Journal, June 22, 2018

The Market Is ChangingCompetition 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.

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The time for community banks to act is NOW.

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 fromnonmaturity 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 goingforward; funding costs are likely to continuegrowing. Indeed, bank executives in everyFed region expect funding costs to increaseover the next 12 months.

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Source: Based on responses from 390 unique banks in Promontory Interfinancial Network’s Bank Executive Business Outlook Survey report for Q2 2018. 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.

Expectations for Funding Costs–Next 12 Months

Competition for Deposits Intense and GrowingBank 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.

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Source: Promontory Interfinancial Network’s Bank Executive Business Outlook Survey report, Q2 2018

Expectations for Deposit Competition–Next 12 Months

Expectation of Banks with <$1 Billion in Assets

Expectation of Banks with $1 - $10 Billion in Assets

© 2018 Darling Consulting Group, Inc.

Deposit Strategies that Increase Franchise Value



Don’t Let Fear, Competition or Small Fraction of Depositors Drive Deposit “Strategy”

Set Tone for Deposit Strategy


Importance of Communication Frequently Overlooked Strategy Value Proposition Objection Handling Etc.

Internal Communication




Identify Plausible Strategies For the Role & Use of Wholesale Funding (reciprocal, brokered, borrowings)

Complementary Wholesale Funding Strategy



Balance Sheet Risk Positions Can Influence Priorities and Trade-Offs Especially liquidity Interest rate risk too

Asset Size & Growth Drive Funding Needs & Timelines

Right-Sizing Deposit Strategy



Don’t Underestimate Value of Data In Developing “Winning Strategies”

Take Deeper Dives Into Deposit Data



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

DATA: Different Strategies For Different Markets


An Overlooked Deposit Growth Strategy

Important Growth Strategy: Understanding, Managing and Heading Off Attrition

DATA: Deposit Attrition


Value in Data

Deposit Attrition: “Tell Me What’s Happening”

3% Net GrowthBUT

23% “Activity”


Deposit Attrition: Deeper Dives

5.7% “Growth”

Value in Data


Developing Early Warning Systems

Value in Data

Relationships at Risk?


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: Deposits360°™


Segment Deposit Base Into Logical “Strategy Segments”

Geography / Market Area

“Isolate” Largest Deposit Customers (Commercial & Retail)

Single Relationship Accounts (CDs, MMDA)

Similar Relationships / Value Propositions

Public Funds

Wholesale

CDARS

Etc.

Value in Data

© 2018

DEPOSIT STRATEGIES THAT INCREASE FRANCHISE VALUE

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David KochPresident\CEOP: (608) 661-4217E: [email protected]

© 2018 29

First - Defining Franchise ValueTraditional 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.

© 2018

Data vs. Knowledge vs. StrategyData alone is not enough…

How does more data support your definition of “franchise value”?

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© 2018 31

Big Data and FundingExamples 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?

© 2018 32

ALCO

Staff

CAPITAL PLAN DRIVES IT ALL!

© 2018

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?

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© 2018

Deposit Strategies vs. TacticsIs 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?

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CAPITAL PLAN DRIVES IT ALL!

© 2018 35

Current StrategyBank 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?

© 2018 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 SpreadStrategy 1 104,071 1,124 1.08% 2.77% 1.69%Strategy 2 112,311 1,379 1.23% 2.77% 1.54%Marginal Cost 8,240 255 3.10% 2.77% 0.33%Marginal Cost Model SummaryStrategy 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%.

© 2018

Battle Strategy Vs. Tactics - Deposit AcquisitionCost management is critical to earnings, but what’s your long-term 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?

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© 2018

Regular savings

Ignoring “dormant” accounts, what is the average balance for that month s balance vs. largest balance ever recorded.

© 2018

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 rates @ 21%.

Are we ok with that result?Is there still a larger looming lag reaction!

Calculate recent beta – validate core study

© 2018

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.

Single pool decay test – validate core study

© 2018

Keys to monitoring systemMust have the larger objectives in placeUnderstand role of each “battle field” and set appropriate performance indicators for eachDeploy 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

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© 2018

Strategy ConsiderationsPlan 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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10...the market is changing 10 5% biggest three banks gobble up $2.4 trillion in new deposits since...

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