While community banks have reduced their exposures to certificates of deposits, larger regional banks have continued to grow their CD balances and rates.
These regional banks have passed on much of the Federal Reserve's three rate hikes in 2017 to their customers.
Among banks with assets between $50 billion and $250 billion, the average rate on one-year CDs with minimum balances of $10,000 rose 16 basis points between Dec. 8, 2017, and March 2, 2018. Between Dec. 9, 2016, and March 2, 2018, that rate rose by 34 basis points.
That compares to a 7-basis-point increase in the average rate on one-year CDs offered by the banking industry during the same period.
The higher rate offered by larger regional banks during 2017 implies a deposit beta, or just how much of the change in market rates those institutions passed onto their customers, of roughly 33% on one-year CDs. That compares to a 24% beta on retail CDs recorded by the banking industry in 2017.

Some banks raised CD rates by even greater amounts. Looking at rates on one-year CDs with a minimum balance of $10,000, 293 banks raised rates by more than 25 basis points in the roughly three months following the Fed's December 2017 rate increase. The top 25 institutions in that group lifted rates on those products in the range of 100 and 146 basis points.
Through the fourth quarter of 2017, banks with assets between $50 billion and $250 billion grew CDs by 11.1% from year-ago levels, while banks with assets in the range of $10 billion to $50 billion increased the accounts by 13.9% during the same period.
Community banks have become less reliant on CDs for funding, particularly the nation's smallest banks. Institutions with less than $1 billion in assets reported a 5.2% year-over-year decrease in CDs in fourth quarter 2017, while banks with assets between $1 billion and $10 billion only grew CDs by 0.9% in the period.
Still, community banks still maintain far larger concentrations of CDs on their balance sheets than their larger counterparts and could look to build that maturity funding in the coming year as they grow their loan portfolios. Banks in the two smallest asset groups — institutions with assets between $1 billion and $10 billion; and banks with assets below $1 billion — have seen their median loan-to-deposit ratios rise by greater amounts than larger institutions, increasing that ratio by 175 basis points and 130 basis points, respectively.
Seventeen of the top 20 banks that reported the largest increases in CD composition in 2017 were community banks.

Some larger institutions that have not reported notable increases in CD balances have tested their markets to see how responsive their customers would be to higher rates.
For instance, M&T Bank Corp. executives said at a recent investor conference that they believe consumers often begin to change their behavior when banks offer deposits with rates around 3%. M&T CFO Darren King said the company tested that theory 12 to 18 months ago, marketing a five-year CD with a rate of 3%, which was well above peers at the time. In early December 2016, the industry's average rate on a five-year CD was just 1.22%.
Despite the elevated rate, King said at the conference that there was not much interest in the product given the length of its term. He said consumers remain the most active in 1-year CDs and expects that to continue as the Fed likely raises rates further in 2018.
"So even though it was a very good rate relative to where things were," King said of M&T's past CD offering, "people weren't looking to commit their money longer term. I think there's still the anticipation that rates are going to go up, and therefore, one year is OK, two years maybe. Outside of that, I'd rather stay short and wait for rates to go up and I'll put my money in."
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Click here for a template to help estimate the impact of deposit mix shifts on a bank's "earnings at risk." Click here for a template that allows users to analyze loan and deposit compositions at banks and thrifts. Commercial and savings banks report deposit information on call report Schedule RC-E, while holding companies report such information on Y-9C Schedule HC-E. These schedules can be accessed under the Regulatory Financials section of a company's Briefing Book page on the Market Intelligence website or in MI Office. |

