Pub. 8 2018 Issue 1

14 www.azbankers.org Deposit Composition and Funding Channels By: D. James Lutter Co-authors: Todd Terrazas and Nolan Meehan Until the recent rate hikes starting at the end of 2015, banks have had unprecedented access to cheap funding sources. Over the last decade, banks across all asset sizes witnessed extraordinary growth in core deposits due to general risk aversion among the population. This allowed banks to deleverage balance sheets and restructure liabilities to reduce interest rate sensitivity. However, as interest rates have begun to rise again, it’s important for banks to reassess their current deposit composition and fund - ing sources. The next set of graphs looks at time depos- its (both retail and jumbo) and breaks them into differing maturity buckets. During the last rate hike cycle community and regional banks held the majority of their time depos - its in the 3 month to 1 year range, which is still true for our current rate cycle. Money center banks have held about equal levels of deposits in less than 3 months and 3 months to 1 year range. The graphs take a look at median percent - age of deposits for time deposits, non-in- terest bearing deposits, and money market accounts (MMA) and savings deposits across community, regional, and money center banks. The time frames assessed are Q2 2004, The graphs take a look at median percentage of deposits for time deposits, non-interest bearing deposits, and mon- ey market accounts (MMA) and savings deposits across community, regional, and money center banks. The time frames as- sessed are Q2 2004, Q2 2006, Q4 2015 and Q3 2017 (the most recent accessible data) as these periods represent the beginning and end of rate hike cycles (with the exclusion of Q3 2017 which is used to compare cur- rent trends). Looking at the graphs you’ll notice some similarities and differences during the last rate hike cycle and today’s environment. As rates rose during the last rate cycle (Q2 2004 through Q2 2006), not surprisingly time deposits grew whereas non-interest bearing deposits and MMA and savings deposits subsequently decreased, albeit marginally. Money center banks expe- rienced the greatest variance in composition, while the delta for community banks was more muted. Looking at today’s current rate cycle the landscape has changed. Through Q3 2017, growth in time deposits is marginal across banks. However, there has been growth in MMA and savings deposits. This trend should be closely monitored as continued rising rates could lead to an exodus out of non-maturity deposits like MMA and savings deposits. In order for a bank to maintain institutional MMA balances in a rising rate environment, they need to incorporate a market-based pricing/rate for these accounts to mitigate investors’ temptations to seek higher yields. Source: SNL Financial Source: SNL Financial