trending Market Intelligence /marketintelligence/en/news-insights/trending/7At7EfwLfhMh9Gdarr1e-Q2 content esgSubNav
In This List

Fed rate hikes prompt notable increases in CD rates at large regional US banks

Podcast

Street Talk Episode 87

Blog

A New Dawn for European Bank M&A Top 5 Trends

Blog

Insight Weekly: US banks' loan growth; record share buybacks; utility M&A outlook

Blog

Banking Essentials Newsletter 2021: December Edition


Fed rate hikes prompt notable increases in CD rates at large regional US banks

Larger regional banks are increasing their exposures to certificates of deposits while raising rates on the products by greater amounts than the rest of the U.S. banking industry.

Two short-term rate hikes by the Federal Reserve in the first half of 2017 pushed CD rates higher across the banking industry, but the cost of those funds continued to rise the most among larger regional institutions. The Fed raised rates again Dec. 13, setting the stage for further increases in CD rates early in 2018.

The average rate on one-year CDs with minimum balances of $10,000, among banks with assets between $50 billion and $250 billion, rose 13 basis points between June 9, less than a week before the Fed increased the benchmark fed funds rate by 25 basis points, and Dec. 1. That compares to a 6-basis-point increase in the average rate on one-year CDs offered by the banking industry during the same period.

SNL Image

The higher rate offered by larger regional banks implies a deposit beta, or just how much of the change in market rates those institutions passed onto their customers, of 50% on one-year CDs. That compares to a 23.6% beta on retail CDs recorded by the banking industry during the same period.

Some banks raised CD rates by even greater amounts. Looking at rates on one-year CDs, with a minimum balance of $10,000, 260 banks raised rates by more than 25 basis points in the roughly six months following the Fed's June rate increase. The top 25 institutions in that group lifted rates on those products in the range of 85 to 121 basis points.

Still, most institutions have reduced their reliance on CDs for funding, save for regional banks. The median concentration of CDs at banks in the $50 billion to $250 billion asset group rose to 10.7% of deposits from 10.2% a year earlier, while the accounts climbed to 15.3% of deposits at banks with assets ranging from $10 billion to $50 billion, up from 14.6% one year ago.

Banks in both assets groups reported double-digit year-over-year growth in CDs, while the rest of the industry managed to shrink those balances. Those larger regional banks have seen their median loan-to-deposit ratios rise by greater amounts than smaller and larger institutions through the first nine months of 2017.

SNL Image

The growth caught the attention of bankers, who say they witnessed a change in market behavior in the fall. BB&T Corp. CFO Daryl Bible said at an investor conference in November that banks began paying up for deposits in October when many institutions offered deposit specials on business and retail accounts at rates over 1%. Deposit specials are limited time offerings aimed at luring customers to the franchise.

"We finally jumped in after we saw all the big guys and all the regionals out there with specials over 1%," Bible said at the event.

Community bankers told a similar tale during third-quarter earnings season. Chuck Christmas, CFO of Mercantile Bank Corp., which has close to 50 branches spread across most of Michigan, said on his company's earnings call that some institutions have run "very aggressive campaigns" to attract new deposits.

Some of those campaigns have been targeted in specific markets, Bank of the Ozarks has employed a strategy of putting about one-fifth of its offices in what it calls "spin-up mode." With that approach, the company increases marketing activity while offering deposit specials.

Tyler Vance, chief banking officer and COO at Bank of the Ozarks, said on his company's third-quarter earnings call that it had 47 offices in 34 cities in spin-up mode. The company did not specify where it is employing the strategy but the vast majority of Bank of the Ozarks' branches are in Arkansas, Texas, Georgia, North Carolina and Florida. Vance said the CDs specials range from 10- to 17-month terms, with annual percentage yields between 1.10% and 1.61%. Those rates are substantially higher than offerings outside of spin-up offices, where 1-year CDs carry rates in the range of 25 to 50 basis points, he said.

Banks almost certainly will experiment with those offerings as the cost of deposits moves higher. Deposit betas have risen in the last three months, and many bankers expect them to rise further as the Fed continues tightening.

As that occurs, higher rates likely will entice more customers to put funds in CDs, causing those balances to steadily grow across the banking industry.

SNL Image

SNL Image

Did you enjoy this analysis? Click here to set up real-time alerts for data-driven articles on the U.S. financial sector.

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 SNL website or in SNLxl.