The other day, my friend's daughter was jumping on her bed. After several attempts to talk her down, he raised his voice and sternly said, "Andrea, stop jumping on the bed!" Kneeling on the bed and supported by her hands, she looked up at my friend and said, "I'm not jumping, Daddy, I'm landing."
While they each had a different perspective as to what she was doing, there was the universal knowledge that it was against house rules. Similarly, in the realm of banking, one may observe that big banks and small banks have different perspectives of their industry; however there are often underlying universal trends.
In this quarter's Deposit Monitor, we will look at how vastly different deposit growth rates have been relative to an institution's asset size. More importantly, we examine the deposit type customers have been trending toward over the past two years, regardless of institution size. Additionally, we explore how the CD yield curve has changed over the past three years and revisit an article written earlier this year to estimate the year-end national median cost of funds.
Over the past five years (between March of 2001 and March of 2006), the industry's deposit growth rate has been fairly strong, producing a compounded annual growth rate (CAGR) of 8.14 percent. However, there is always a problem with looking at overall industry results because they are often skewed. For example, during this time period, banks with assets greater than $1 billion produced a CAGR of 9.51 percent while banks with assets between $100 million and $1 billion had a CAGR of 4.06 percent-less than half that of the industry.1
Not only do we see a significant skew in the five-year CAGR results, but also in the yearly growth rates of total deposits, cash-type and time deposits. In Figure 1, we show the growth rates over the past five years for the industry and four peer groups. From this figure, we can glean the following:
- Over the past four years, total industry deposits growth has been strong. The average annual deposit growth rate for the past 20 years was 4.11 percent.
- The annual growth rate in deposits for banks with assets greater than $1 billion (both commercial and savings institutions) has been well above the industry average
- Banks with assets between $100 million and $1 billion produced growth rates that were much lower than the industry.
- There has been a net outflow of cash-type deposits at institutions with assets between $100 million and $1 billion over the past year.
- One similarity between the industry figures and the four peer groups is that there has been a much stronger trend in growth rates for time deposits compared to cash-type deposits over the past two years.
- In all but one group (savings institution with assets between $100 million and $1 billion), the growth rate in time deposits was in the double digits over the past year.
Figure 1: Annual Growth Rates
| |
3/31/2006 |
3/31/2005 |
3/31/2004 |
3/31/2003 |
3/31/2002 |
5-year CAGR |
| All Banks |
| Total Deposits |
9.09% |
9.38% |
8.01% |
9.79% |
4.52% |
8.14% |
| Time Deposits |
19.63% |
14.92% |
-3.06% |
-0.55% |
-6.60% |
4.36% |
| Cash-type Deposits |
5.08% |
7.41% |
12.59% |
14.72% |
10.81% |
10.07% |
| Commercial Banks over $1B |
| Total Deposits |
10.07% |
11.50% |
10.12% |
11.52% |
3.75% |
9.35% |
| Time Deposits |
21.79% |
19.29% |
-1.70% |
2.02% |
-8.29% |
5.97% |
| Cash-type Deposits |
6.75% |
9.48% |
13.67% |
14.74% |
8.57% |
10.60% |
| Commercial Banks $100M to $1B |
| Total Deposits |
5.35% |
4.75% |
3.71% |
7.45% |
5.05% |
5.26% |
| Time Deposits |
12.83% |
5.27% |
-0.75% |
4.20% |
-2.48% |
3.68% |
| Cash-type Deposits |
-0.06% |
4.38% |
7.16% |
10.12% |
12.14% |
6.66% |
| Savings Institutions over $1B |
| Total Deposits |
11.99% |
8.59% |
8.07% |
9.77% |
13.90% |
10.44% |
| Time Deposits |
28.79% |
25.50% |
-6.15% |
-9.71% |
-3.51% |
5.73% |
| Cash-type Deposits |
2.02% |
0.56% |
16.47% |
25.77% |
33.71% |
14.98% |
| Savings Institutions $100M to $1B |
| Total Deposits |
1.38% |
-2.49% |
-3.50% |
3.82% |
-1.24% |
-0.44% |
| Time Deposits |
9.27% |
-1.27% |
-7.77% |
-2.15% |
-8.67% |
-2.32% |
| Cash-type Deposits |
-6.19% |
-3.63% |
0.87% |
10.73% |
9.02% |
1.94% |
The last two points are most notable because many banks have been trying to reduce their exposure to time deposits. While some have been successful at implementing this strategy, many have fallen short, which is not surprising given the overall trend in the growth in time deposits. Because this deposit class has been exhibiting such strong growth rates it is important that we look at the trend in rates offered on these products and how they have changed over the past three years.
In Figure 2, we present the national average CD yield curves over the past three years. As you can see, the CD yield curves have increased significantly. The product with the biggest change was the one-year term. (Over the entire period, the one-year CD rate increased by 256 basis points (bp) versus 243 bp for the 6-month rate.)
However, we should note that the curves presented are the rollover or standard-term rates and not the special-term rates. This is important because special-term rates are often significantly higher than standard-term rates. For example, in the July 19 issue of the American Banker on page 7, it reports that the average premium for seven to eight month special-term CDs is 135 bp above the standard six-month rate. Therefore, using the rate for the six-month CD as of July 27, 2006, of 3.69 percent the special-term rate would be 5.04 percent. This special-term rate represents the rate that will need to be paid in order to bring in new funds and/or retain some maturing money.
Figure 2: Trend in National Average CD Yield Curve
So what does this mean for banks as it relates to their cost of funds? To answer this question, let's look at the CD repricing schedule within the March 31, 2006, Call Reports. An analysis of this schedule reveals that over the next 12 month (through March 31, 2007), 76.9 percent of CDs held by commercial banks will mature or reprice. Furthermore, within the next three months (through June of 2006) 35.7% of CDs will mature or reprice. (Although the June 2006 Call Reports are not available for us to analyze, we would expect to see similar figures if not higher percentages.)
Because of the high level of repricing coupled with the significant increases in CD rates, banks can expect to see their cost of funds continue to rise throughout 2006 and into 2007, even if CD rates were to stay at their current levels.
Ultimately, the result will be increased downward pressure on net interest margins throughout 2006. In a previous article ("Community Banks Face Rising Cost of Funds in 2006," BNK Focus, April 2006), we presented research that indicated that the national median cost of funds peaks six to eight months after the Fed pauses its tightening strategy at about 80 percent of the fed funds rate. Thus, if the Fed maintains the fed funds rate at 5.25 percent, then sometime between January and March 2007, the national median cost of funds should peak at about 4.20 percent.