The cost of interest-bearing transaction accounts has doubled over the last year, underscoring how deposit costs have emerged as a top concern for bankers.
For the first quarter, the cost of interest-bearing transaction accounts, which cover most checking accounts, was 81 basis points, up 8 basis points from the previous quarter and more than double the 37 basis points reported in the year-ago quarter.
Interest-bearing transaction accounts include demand deposit accounts and negotiable order of withdrawal accounts, commonly referred to as NOW accounts. Typically, demand deposit accounts allow customers instantaneous withdrawal of funds while paying very little interest while NOW accounts pay more interest but can require more advanced notice for withdrawals.
Banks' costs for savings accounts such as money market deposit accounts increased as well, though not as dramatically. In the first quarter, the industry paid 31 basis points, on average, for savings accounts, an increase of 4 basis points from the previous quarter and 13 basis points from the year-ago period. Including total interest expense for the industry, which includes commercial banks, savings banks and savings and loan associations, cost of funds increased just 6 basis point quarter over quarter to 63 basis points in the first quarter. Compared to the year-ago period, the cost of funds increased 20 basis points.
For years, the Federal Reserve's increases in its Fed funds rate has not translated to higher deposit costs for banks. That appears to have changed in recent months, and the results were evident in first-quarter earnings reports. Investment bankers say the movement has made deposits the top consideration by banks interested in mergers and acquisitions. Banks with sticky, core deposits are less likely to see their cost of funds jump up, making them much more attractive targets among acquisitive banks.
"It's very important in the banking industry to grow book deposits, and [the need for] funding in a rising-rate environment is going to be more and more amplified," said Jeff Rulis, an analyst covering banks for D.A. Davidson.
On the other hand, the rising-rate environment has also benefited banks by increasing the amount of interest they charge on assets. As a result, net interest margins increased for most regional and community banks in the first quarter despite the higher deposit costs. Lakeland Financial Corp. CFO Lisa O'Neill said the bank has seen a big increase in its asset yields, in turn enabling a competitive approach to raising its deposit rates.
"Because of our asset-sensitive balance sheet, we can afford to give up a little bit of margin to be aggressive on deposit pricing since our loan book reprices so much quicker," O'Neill said in an interview.
Among the largest banks in the industry, there have been some significant shifts in the types of deposits. JPMorgan Chase & Co.'s banking subsidiary, JPMorgan Chase Bank NA, has altered its deposit mix the most since the Fed started raising rates. In the three years from the 2015 first quarter through the 2018 first quarter, the bank decreased its concentration of money market deposit accounts by 25 percentage points while increasing its "other savings" accounts concentration by 24 percentage points. Other savings accounts include passbook savings or statement savings, which are accounts that generally do not permit check transfers.
While JPMorgan's figures changed dramatically, the banking industry broadly saw a reduction in money market deposit accounts and an increase in "other savings" accounts. Across all commercial banks, savings banks and savings and loan associations, the industry in aggregate has increased other savings accounts by 3.5 percentage points and decreased money market deposit accounts by 2.3 percentage points since the 2015 first quarter.
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