Rapid shifts in deposit composition strain banks

A lurch toward costlier funding is playing out unevenly across banks as the particulars of deposit franchises at a number of institutions drive especially high-velocity moves into certificates of deposit and away from non-interest-bearing accounts.

Time deposits increased by a median 12.0% sequentially in the fourth quarter of 2022 at a group of nearly 200 publicly traded banks in the U.S., according to S&P Global Market Intelligence data. Individual performance varied widely, with gaps averaging 41.3 percentage points and the sequential change ranging from a decrease of 30.7% to an increase of 353.2%. The picture was similar for non-interest-bearing deposits, which increased by as much as 25.7% and decreased by as much as 67.9%.

Big shifts into more expensive deposit mixes have been consequential for many banks, offering an important read on strains from a rapid increase in interest rates since the beginning of 2022 and sometimes contributing to sharp sell-offs in bank stocks.

CD comeback

Time deposits, which banks can use to capture rate-sensitive balances and dampen pricing pressure on other portfolios, bottomed in the first quarter of 2022 at about 6.8% of aggregate deposits industrywide, down from 15.4% at the end of 2019, on the eve of the pandemic, according to a previous analysis of regulatory data by S&P Global Market Intelligence.

The subsequent shift back into CDs accelerated into the third quarter of 2022, with time deposits then accounting for about 8.3% of the total.

Customers Bancorp Inc. ranked both among the banks with the highest sequential increases in CDs in the 2022 fourth quarter, at 123.9%, and the biggest drops in non-interest-bearing deposits, at 37.0%.

The bank said that the vast majority of its deposits come from corporate or institutional customers, which tend to watch yields closely and demand price increases. Customers Bancorp's shares dropped 16.0% the day after it posted its fourth-quarter 2022 results, though they recovered the losses by Feb. 2.

Some large sequential percentage increases in CDs reflect jumps off of low bases in the post-pandemic era.

At Truist Financial Corp., a 62.4% increase meant that time deposits went to 5.7% of total deposits from 3.5%, well below the median of 12.1% for the group. Deposit costs at the bank have been in line with guidance so far, and it projected that net interest income across 2023 will hold about steady with the level set in the 2022 fourth quarter.

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Non-interest bleeding

Non-interest-bearing, or NIB, accounts form the core of banks' spread income machines, providing free funding as asset yields rise with interest rates.

But ratios of NIB to total deposits fell by a median 1.2 percentage points sequentially to 29.6% among the group. Silvergate Capital Corp. was at the top end of the decrease, with a drop of 29.5 percentage points to 61.2%. The crypto-focused bank experienced a stunning outflow of deposits amid the cryptocurrency meltdown.

Western Alliance Bancorp.'s ratio of time to total deposits increased 382 basis points sequentially to 9.4%, and its ratio of NIB to total deposits fell by 813 basis points to 36.7%. The bank, which also focuses on commercial customers, said it experienced unusually sharp seasonal outflows of mortgage warehouse demand deposits in the 2022 fourth quarter, a considerable portion of which has since returned to its balance sheet.

It is targeting deposit growth of 13% to 17% in 2023 with the aim of outrunning loan growth, including help from business specialties like homeowners' association deposits. It expects much of the 2023 growth to come from money market accounts and expects further increases in CDs, and it is prioritizing net interest income growth over restraining deposit costs.

"Our deposits are going to be floating at the marginal higher end of interest expense," Western Alliance CEO and President Kenneth Vecchione said during an earnings conference call. But "we have the ability take those deposits and put them in 100% beta loans," referring to the sensitivity of loan yields relative to underlying interest rates.