Deposits have continued to pile up on U.S. bank balance sheets, and banks say they aren't done cutting funding costs yet.

After plummeting in the second quarter, deposit costs across the industry ticked closer to the zero lower bound in third quarter, according to data from S&P Global Market Intelligence. At 14 basis points, the cost of savings deposits — which account for the majority of bank funding — hit its lowest level in more than five years. The same is true for the overall cost of funds at 28 basis points.

Total deposits across the industry increased $152 billion from the second quarter to $15.67 trillion in the third quarter, with growth in transaction and savings deposits more than offsetting declines in time deposits. Commercial banks added roughly another $275 billion in deposits in the first six weeks of the fourth quarter, according to weekly Federal Reserve data, as the central bank has continued to increase its bond holdings.

With such abundant liquidity, banks have room to reduce deposit rates further, according to Peter Gilchrist, executive vice president at the bank analytics and advisory company Novantas.

"We still see a lot of commercial deposits earning more than 25 basis points," Gilchrist said. "That doesn't sound like a lot, but it is more than, in our minds, is necessary to retain the deposits when you consider that commercial deposits have grown by about 40% at the industry level this year. There is not a need for banks to have these deposits, and so we don't think they should be paying for them."

Banks like New York Community Bancorp Inc., which have relatively large portfolios of high-cost certificates of deposits, also have room to keep cutting funding costs as these deposits mature.

Deposits surged in the first half of the year as the Fed expanded its balance sheet by roughly 70% to support the economy. Meanwhile, corporations built cash cushions to ride out the pandemic, and trillions of dollars in federal relief payments landed directly in individuals' and businesses' bank accounts.

Despite intense stress on millions of unemployed workers, households in the aggregate have continued to salt away much of their income after a spike in the savings rate in April, and deposits largely appear to have stayed put.

Data Novantas collects have shown "significant resilience" in both retail and commercial deposit levels, Gilchrist said. "A lot of the funding that came in is still sitting there, waiting. Waiting to be spent, waiting for the pandemic to end, to know when that liquidity can be used."

At a presentation on Nov. 17, M. Deron Smithy, Regions Financial Corp.'s treasurer, said that both consumers and businesses have "put a priority on maintaining liquidity" and that deposit growth continues to be strong, a trend the bank expects into next year. He said the inflows have enabled Regions to "pay off all of our wholesale borrowings."

During the bank's earnings call in October, President and CEO John Turner Jr. said Regions could ultimately bring its cost of deposits to 2 to 4 basis points, after a decline of 3 basis points from the second quarter to 11 basis points in the third quarter. "We're going to challenge ourselves as we go into the fourth quarter and into 2021," he said.

Wells Fargo & Co., which has worked to limit nonoperational wholesale deposits to keep under an asset cap imposed by regulators because of past consumer abuses, has continued to project that its cost of deposits would bottom out in the low single-digit basis points after falling to 9 basis points in the third quarter. The bank has also reported that it has been reducing its "earnings credit rate," or the amount it gives to commercial clients to offset treasury management service fees on non-interest deposits.

Direct banks like Ally Financial Inc. have also cut rates relatively quickly. Ally reported that its retail deposits increased by $4.98 billion in the third quarter to $120.79 billion even as it dropped the rate on its core savings account offering by 50 basis points to 60 basis points. On the bank's earnings call, CFO Jennifer LaClair said that it took "some 35, 36 months" after the financial crisis a decade ago for the industry to make reductions of a comparable magnitude.

Gilchrist said banks "tiptoed their way down" the last time market rates were so low, but now "they'd been there and they knew that they could lower [deposit rates] without customers fleeing."

Novantas has projected that retail deposits could increase by another $1 trillion in 2021 with a signficant additional stimulus package, or that they could fall by the same amount without more federal help if a new wave of shutdowns squeezes households and deposits flow from consumers to commercial and institutional accounts.

While overall deposit levels are unlikely to drop because of the mechanics of money markets and the Fed's supportive stance, the uncertainty does create challenges for banks, Gilchrist said.

For one thing, retail deposits tend to be the stickiest and least expensive. Further, "different banks have very different access into different types of deposits, like retail versus commercial versus institutional," Gilchrist said. "Even if the system is going to increase, if I don't have access into the part of it that's increasing, I might be not in as good of a position."