Some banks have built term funding to attract new customers and lock in funding costs while they remain low.
While short-term interest rates have begun to creep up and could increase further this year, most banks have worked to shrink term funding on their balance sheets. Many banks are decreasing CDs as a portion of their balance sheets while rates remain low, but some institutions are employing strategies they believe will help grow their customer bases while limiting increases in deposit costs if interest rates increase further.
The banking industry as a whole reported only modest growth in CDs in the first quarter. Accordingly, CDs fell to a median of 30.13% of deposits in the first quarter from 31.90% a year earlier.
The decline was consistent across banks of all sizes, except among those with assets ranging from $50 billion to $250 billion, where CDs inched up to a median 10.45% of deposits from 10.42% one year ago.The year-over-year increase in that asset group was primarily due to M&T Bank Corp.'s acquisition of Hudson City. When the deal closed, the target had $35.1 billion in assets and far higher CD balances than M&T. After the transaction, M&T saw CDs grow to 14.26% of its deposits from 3.83% in the quarter before completing the acquisition.
The sizable increase in CDs caused M&T's cost of funds to increase in the period as well, but the company said it plans to maintain pricing on Hudson City's time deposits, at least for the time being.Other banks saw notable growth in their CD balances as they worked to grow their deposit bases. Geoffrey Greenwade, president of Green Bancorp Inc., said at the Gulf South Bank conference in early May that the company has some bankers focused purely on growing deposits. He said Green Bancorp's portfolio bankers will not get paid for the loan growth they generate if they do not hit at least half of their deposit growth goal. He further said the company is running weekly advertisements in newspapers, while increasing direct mail to customers and businesses in its footprint.
Green Bancorp reported the fifth-largest year-over-year growth in CDs in an S&P Global Market Intelligence analysis, which included institutions with more than $1 billion in assets, CD balances of more than $100 million and loan-to-deposit ratios in excess of 50%. Institutions that have not disclosed current rates for three-month, one-year and three-year CDs were excluded from the analysis.