Solving the Scale Challenge in Deposit Analytics for Community and Midsized Regional

October 2014

RESEARCH In today’s market, midsized regional and community banks face increased competition for deposits. To overcome their scale challenges and improve their competitive position, leading banks are arming themselves with powerful yet easy to use deposit analytics.

Community and midsized regional banks have lagged their larger siblings in deposit growth since the start of the financial crisis. As rates rise, competing for deposits will continue to be difficult. How well prepared is your to meet these challenges? Consider the following:

• Community and midsized regional banks continue to fight for market share as larger peers have further consolidated during the last 5 years. • Less traditional mono-line competitors – like Ally, GE Capital, , and USAA – have gained credibility as deposit institutions in the last few years as consumers preferences have shifted. Additionally, their to deposit ratios are much higher than the traditional banking sector, suggest- ing that as a group they will be more competitive with rates. • The growth in liquidity of commercial customers will cost the largest banks more in the future as large institutions will effectively be required to hold high-quality liquid securities against many commercial deposits. Low cost core deposits will become even more desirable. • Deposits may flee. A recent article in American Banker spoke to the issue of deposits disappearing from the bank balance sheets as rates rise, and quoted Bill Demchak of PNC as saying, “As the Fed reduces its balance sheet, it will pull deposits out of the industry.” In fact, M&T Bank noted an esti- mated 8.6% loss of their deposits as rates rise on their earnings call. • Finally, Customer loyalty with banks has been seriously tested. With all the negative impacts of the perception of TARP and regulatory communications around bank products and pricing – consumers’ views of banks are marred. With significant pent up demand for higher rates on deposits, will con- sumers stay loyal to their current financial institution when rates begin to rise?

As a group, community and midsized regional Share of Total Deposits: FDIC All Depository banks will be in a competitive battle for deposits Institutions (2008 – 2Q14 YTD) in a rising rate environment; it will be more critical than ever for them to have a strong grasp on what 2008 2014 makes their deposit portfolios tick.

41% 57%

22% 14% 11% 8%

26% 21%

Assets > $200B Assets $50–200B Assets $10–50B Assets < $10B

2 Source: Bank and Regulatory Filings via FIS, FDIC, Novantas Analysis. Notes from a Banker

Why scale makes a difference

Over the last 30 years in my career, I have worked for both for success before we ever pulled a large lever. To help ex- large and small banks, from $2.5 billion to $650 billion in ecute, however, I had a staff of 75 professionals. assets. The differences between a large and a small bank Most community and midsized regional banks have one are significant; however, when maybe two people assigned to the same activities in product it comes to regulatory burdens related roles to manage the same tasks. To top it off, they are Betty Cowell is an expert and competition, the types of often very smart but relatively new and are asked to take the executive with problems that need to be solved lead directly from a line manager. Prior to my joining Com- extensive experience in running are effectively the same at all munity and Southern Bank in Atlanta, for example, their line deposit businesses across the banks. The analytics to improve leaders were expected to own and drive product related issues decision making and regulatory with minimal support while also managing the execution side entire spectrum of banking. In transparency is where scale re- of the business. This often leads to gaps on either side of the response to impending industry ally matters. equation depending on the experience of the leader. shifts, Novantas asked Betty At Wachovia, we managed The key for community and midsized regional banks will to analyze the state of deposit $250 billion in deposits, and be to focus on the right activities with the most pay back for analytics in the market, and once a month, we were expect- their situation, and to continue to leverage two of their big- ed to deliver an in depth busi- gest strengths: being nimble and customer loyalty. I have seen provide her insights on how ness unit review that included first-hand how much faster smaller banks can react to chang- technology can help solve the every driver of performance. The ing market opportunities than larger banks. Community and challenges facing community team would assess product and midsized regional banks also generally enjoy a baseline level and midsized regional banks. pricing strategies, compliance of customer loyalty that larger banks would envy. However, and operational risk, and migrat- to capitalize on this loyalty in the rising rate environment and ing new customers through acquisition, sales, retention and make better, quicker decisions, you will need to have the most attrition for each market. We were also able to validate large relevant customer deposit information at your fingertips in a bets with test and learn strategies to determine our chances manner that is easy to use and explain.

Loan-to-Deposit Ratios: FDIC All Depository Institutions vs. Direct Banks*

2Q 2008 – 2Q 2014 2Q 2014

160% USAA 74% 140% Ally 181%

120% American Express 199% GE Capital 108% 100% Discover 148% 80% EverBank 122% Barclays 138% 60% '08 '09 '10 '11 '12 '13 '14 All DIs 71% All DIs Direct Banks

* Direct bank line is a representative sample of large direct banks in 2014. Source: Bank and Bank Holding Company Regulatory Filings via FIS, FDIC, Novantas Analysis. Source: Bank and Bank Holding Company Regulatory Filings via FIS, FDIC, Novantas Analysis. 3 How can community and midsized regional banks address the scale challenge in deposit analytics?

While strong leaders can overcome many issues, community efficient internal and external database for deposit analytics. and midsized regional banks face deficits in resources, data, 2. Automated Performance and Predictive Analytics. Analytics and technology putting them at a distinct disadvantage. Aside are generally organized into 2 major categories — per- from team sizes and challenges hiring and retaining ana- formance (also referred to as prescriptive) and predictive lytically charged people, it is unpredictably expensive (and analytics. A single automated platform should support all therefore risky) to develop from scratch the data structures and deposit committee portfolio reporting and enable predictive analytical technologies that will meet day-to-day portfolio man- analytics with pre-canned models for elasticity and optimiza- agement and pricing requirements. tion. The pricing space tends to attract heavy quantitative Innovations in the market are evolving to specifically help experts but managing deposits is not only about solving a community and midsized regional banks overcome these chal- math problem. The best systems set up and flow the way a lenges. Much of the innovation involves banks “renting” capa- bank analyst would think and support a wide range of bank bilities across data, technology and/or select expertise to fill executive questions. or augment talent or resource deficits. The specific areas of 3. ‘Just-In-Time’ Decision Support. There is a lot of history to targeted support include: deposit pricing with experiences across many bank types, 1. Pre-Designed Deposit Datamart. Community and midsized market conditions and product strategies. From time to time, regional banks can now work with “off the shelf” data struc- regardless of industry experience, all bankers will want a tures with embedded 3rd party rate and market competi- little expertise to help improve strategy. Be cautious here. tive information that are proven to be effective in supporting Most software-heavy companies only have a “veneer” of ex- analytics around pricing, customer elasticity and portfolio pertise with limited actual experience. Make sure your sup- balance flows. This saves smaller banks the time, money and plier has extensive deposit management, market and pricing project risk of having to test and learn their way to the most expertise and is not just a software company.

4 Portfolio Performance and Predictive Analytics in Action

Performance analytics include reporting that describes perfor- Most importantly, he did not have to become a BI (Business mance in granular and multi-dimensional ways. Automating Intelligence) reporting expert. The pre-designed performance bank reporting provides predefined charts and graphs for regu- analytics allows him to use less experienced analysts to sup- lar meetings, which frees up your staff and line resources. Plus, port complex questions. the data can be sliced and diced by geography, segment or Beyond performance metrics that are crucial for daily product providing insights at a more granular level. The best execution and portfolio management, the platforms have pre- performance tools require the least amount of technical expert dictive capabilities that allow institutions to be more proactive resources as all of the x and y axis variables are easily selected about decision making. Using the segmentation and forecasting from drop down boxes, and the mixing and matching is perfect- analytics, banks can understand how deposits in different seg- ly transparent. Also, the performance analysis capability and ments (e.g. by class such as Government, Mass Consumer, and

reporting should be totally seamless — as soon as you visualize Commercial or by behavior such as high vs. low bank user) a relationship that is useful, you can print it to PowerPoint or behave over time and treat them accordingly. The platforms that Excel and capture the relationship for future reporting. are set up to recognize these differences at the customer level I recently talked to a user of one of these platforms and enable better forecasting of the balance sheet as required by asked about these capabilities. He explained that the charts ALCO and senior management. The user I spoke with was able and graphs make it much easier for him to communicate with to forecast his deposits in the previous month of $8.5 billion to his management team, who don’t live and breathe deposits within $60,000, which is quite impressive and not typically seen every day. The visualization of the data communicates more at most banks. quickly and concisely than he could otherwise do on his own. The predictive capability is driven by customer segment

5 "Bottom line — I wish I had platforms like this when I was managing deposits at each of the banks I served!" and regional elasticity models, as well as portfolio optimization model algorithms and calculations for model validation com- capabilities. Across the industry, many banks are now creat- mittees. Models need to be “white box” to best serve you in ing sophisticated elasticity models to understand what products, this increased regulatory environment markets and segments are more elastic versus inelastic. These Bottom line — I wish I had platforms like this when I was demand side models create a higher level of precision in pro- managing deposits at each of the banks I served! jecting demand at various price points and can indicate which Results oriented readers will be wondering: do these tools segments will produce the best results. Analytic platforms of this actually produce better results? The answer is absolutely yes. type enable a bank to make educated decisions that will pro- Research from one provider conducted on the top 25 bank duce more volume of growth for an overall lower cost. deposit portfolios in the US demonstrated that institutions using Again I asked the user: what are the largest benefits of elas- an analytic platform grew at a CAGR of 4.24% over the last ticity modeling capabilities? He told me that management came 3 years versus CAGR of 3.50% for non-users.1 Moreover, this to him two months ago requesting $250 million in new deposit growth was accomplished even though these banks brought growth over the next two months to balance building loan pipe- their cost of funds down more quickly than non-users. The bot- lines. With the elasticity modeling capabilities, he was able to tom line is that users were able to grow balances at a higher present management with a promotion plan that he was confi- growth rate while maintaining a lower overall cost of funds. dent would produce expected results at the lowest overall cost Taken together, winners and losers will be defined by of funds. Plus, he knew which markets would be most and least the preparations made as the economy improves. Community responsive to the promotions, so he knew where to place market- and midsized regional banks will find the competition getting ing dollars to produce the results most efficiently. Overall, with an tougher for deposits on many fronts, but if they are armed with analytic platform at his disposal, he was able to respond to the the right tool set they can compete effectively in a way that need of his management team quickly and get to market faster supports their key competitive advantages - being quicker and with a plan he was confident would succeed. more nimble. Community banks might be smaller and have Finally, with the ever increasing regulatory scrutiny of fewer resources than their larger siblings, but that doesn’t every aspect of your balance sheet, analytical platforms with mean they have to operate without the necessary knowledge these enhanced capabilities will allow your management team for good decision making. to confidently interact with regulators and demonstrate that they understand the dynamics of their deposit portfolios. And you should make sure vendors provide full transparency of all 1 Merger adjusted FDIC data, Novantas Analysis

About the Author Betty Cowell is an experienced Retail Banking Executive with over 30 years in the industry. She is an expert at driving retail and small business growth, and has held key executive positions with a specialty in deposit optimization at a range of leading US Banks, including Bank South, First Union/Wachovia/Wells Fargo and Whitney Bank. Throughout her career, Betty has led significant performance improvement initiatives by lever- aging management and organizational processes, performance metrics and incentives, product and channel capabilities, customer value propositions, and marketing/sales campaigns.

Today, Betty has joined forces with Bank Earnings Solutions to support business development objectives for BES clients. She can be reached at [email protected].

6 About Novantas, Inc. Novantas, Inc. is the leader in customer science and revenue management strategy for the financial industries. A FinTech 100 Company, its Advisory Services, Analytical Solutions, Research and Marketing Services spe- cialize in investigating and interpreting customer needs, attitudes, and behaviors to help banks refine pricing, marketing decisions, customer strategies, and sales and service activities, and to accelerate their immediate and ongoing economic performance. For more information, visit www.novantas.com.

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