Banks increasingly rely on certificates of deposit as they seek to attract new funds and meet growing customer demands.
In the fourth quarter of 2018, CDs grew by more than 14% from year-ago levels. The growth pushed CDs up to 14.1% of the industry's deposits in the fourth quarter, the highest level since the fourth quarter of 2014.
The recent growth has come at a cost since CDs usually carry higher rates than other deposit products and tend to be more rate sensitive when they mature, but the terms associated with the product allow banks to retain the funds and lock in their cost for a certain amount of time. Some banks have looked to CDs to attract new funds and retain customers seeking higher yields.
With the increases in short-term rates over the last few years, many CDs now carry rates that gain attention from potential deposits.
"A year or two years ago, I couldn't give away a CD," Carl Carlson, CFO at Boston-based Brookline Bancorp Inc. said on the company's fourth-quarter earnings call in late January. "Now there is quite a bit of appetite, particularly in the markets that we serve."
Brookline, which had about $7.4 billion in assets at year-end 2018, ranked in the top 50 institutions reporting the greatest year-over-year increases in CD concentration in the fourth quarter. Among the top 20 institutions reporting the largest increase in CD reliance for funding, 16 had assets between $1 billion and $10 billion.
Still, larger regional banks, with assets ranging from $10 billion to $50 billion, grew CDs the most in the fourth quarter, increasing the balances 23.4% from a year earlier.
Community banks, which rely more on CDs for their funding but had not grown the balances as much over the last year, increased rates on the product the most during a recent three-month period. Among banks with $1 billion to $10 billion in assets, the average rate on 1-year CDs with minimum balances of $10,000 rose by nearly 7 basis points between Dec. 14, 2018, and March 8, 2019.
The increase in the rate on 1-year CDs among community banks compares to a 7-basis-point increase offered by the broader banking industry during the recent three-month period. Between Sept. 21, 2018, and Dec. 28, 2018, the average rate rose by 16 basis points across the banking industry.
The higher rate offered by community banks implies a deposit beta of 32% on 1-year CDs during the recent three-month period. That compares to a 34% beta on 1-year CDs based on the average rate offered across the banking industry during the same time frame.
Looking at 1-year CDs with a minimum balance of $10,000, 314 banks raised rates by more than 25 basis points in the roughly three months following the Federal Reserve's mid-December 2018 rate increase. The top 50 institutions in that group lifted rates on those products in the range of 100 to 245 basis points.
While those increases are noteworthy, many of those institutions could have marketed CD specials — promotional offerings seeking to attract new funds. Banks that raised rates on 1-year CDs by more than the change in the fed funds rate during the recent three-month period recorded a beta of 100% or more on those products. While a large number of institutions were in that camp, the group is less than half the size it was during the final three months of 2018.
New York Community Bancorp Inc., which ranks in the top 20 institutions growing CD concentrations the most in the fourth quarter, said it has not raised rates on CDs since the Fed's rate hike in September 2018. New York Community did not change its CD rates even after the Fed lifted short-term rates in December, CFO Tom Cangemi said on the company's fourth-quarter earnings call.
While short-term rates have pushed the cost of deposits broadly higher across the industry, Cangemi said the company tries to offer CD rates fairly close to the level of Treasurys. On the short end of the yield curve, the executive said New York Community offers CDs at "probably an eighth below" Treasurys. Further out the yield curve, the company offers CDs at similar rates to Treasurys, he said.
"A customer has a choice to go — buy a treasury or put a CD that's insured, and it's been relatively consistent throughout 2018. And we've had some good deposit growth as a business strategy for us," Cangemi said on the call.
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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.