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Banks with low deposit betas share their special sauce


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According to Market Intelligence, April 2023

Banks with low deposit betas share their special sauce

Deposit costs are rising at a quicker pace across the banking industry, but more than a handful of institutions have bucked the trend.

Some of those banks presented at the recent KBW Community Bank Investor Conference last week and attributed their outperformance to building sticky relationships with their customers through multiple product offerings.

Low-cost funding relationships are proving even more beneficial these days, with the cost of interest-bearing deposits across U.S.-based banking subsidiaries rising to 0.74% in the second quarter, up 29 basis points from a year earlier. The federal funds rate has increased 79 basis points during the same period, implying a deposit beta — or the percentage of changes in market rates banks passed on to their customers — of 36.6% for the 12 months ended June 30.

Ontario, Calif.-based CVB Financial Corp. has recorded one of the lowest betas in the industry, with its cost of interest-bearing deposits rising just 2 basis points year over year, equating to a beta of 2.5%. Even with that success, CVB Financial President and CEO Christopher Myers has incentivized his bankers to keep growing deposits, but the bank has been willing to let more rate-sensitive funds go to competitors.

Myers said on a podcast hosted by KBW that the institution has worked to retain operating accounts and business deposits, while selling more relationship-based products focused on cybersecurity and fraud prevention.

"Those services, most of these companies don't want to pay for, so they have to keep a certain balance in noninterest-bearing accounts to be able to support those," Myers said. At the end of the second quarter, noninterest-bearing deposits made up 61% of CVB's deposit base.

Another California-based bank, Heritage Commerce Corp., recorded a beta of 6.3% in the 12 months ended June 30, in part due to its focus on business customers, Heritage President and CEO Walt Kaczmarek said at the KBW event. Kaczmarek said many of those customers like to keep their funds in more-liquid accounts, as opposed to maturity deposits that carry a higher rate. The executive further said that many of the bank's depositors are also borrowers who receive loans at lower rates due to their funding relationship.

Banks in other parts of the country also touted the ability to keep deposit costs low by capturing a greater share of their clients' wallet. Executives at Maine-based Camden National Corp., whose deposit beta was nearly 10 percentage points lower than the banking industry in the second quarter, see pricing pressure across their market, in no small part because many of their competitors have high loan-to-deposit ratios. But Camden National has held deposit costs fairly steady by attracting larger deposit relationships through investments in treasury and cash management products, they said.

Camden President and CEO Gregory Dufour said the bank has targeted relationship-based deposits because he believes many mutual savings banks and credit unions that operate in the bank's market could eventually "start a pricing war on CDs."

Some banks say they have benefited from operating in rural markets, where they can compete more effectively for sizable deposit relationships. Southern Missouri Bancorp Inc., which recorded a beta in the second quarter slightly below the industry, has grown deposits by adding public unit funds such as school districts. Southern Missouri President and CEO Greg Steffens said many banks operating in rural markets do not have the technology to offer customers cash management products that complement their deposit relationship.

Other bankers presenting at the KBW event said deposit costs are now increasing at a faster clip, particularly in the mid-Atlantic region, where many banks' funding needs are greater. Bankers also say they see more institutions seeking to attract customers by marketing CD specials — one-time promotional offerings aimed at enticing new deposit relationships.

Thomas Coughlin, president and CEO of Bayonne, N.J.-based BCB Bancorp Inc., said his bank just marketed a special, a 15-month CD at 2.75%, to build liquidity. The bank reported a loan-to-deposit ratio of 107.84% at the end of the second quarter and noted that other banks that recently raised capital in its market are offering CDs in the low-3% range.

Customers seem to have taken notice. Prosperity Bancshares Inc. Chairman and CEO David Zalman, for one, said customers are paying closer attention to their deposits now that rates have moved materially higher. The executive, whose bank recorded a beta of 21.5% in the second quarter, said the greater awareness among customers has led to faster increases in deposit costs than some previously expected.

The trend seems unlikely to abate in the near term as short-term rates continue to move higher and many banks' funding needs grow. Bankers might be wise to find ways to deepen their relationships with existing customers while they can and avoid having to chase them solely on rate.