How much green to hold deposits?

By Nathan Stovall and Robb Soukup, SNL Financial staff writers

Everyone is guessing what will happen to deposits when rates rise, but opinions and strategies to prepare for rate increases vary among bankers.

That much was clear after listening to bankers sound off on the issue at the KBW Community Bank Investor Conference on July 28 and 29. KBW analysts asked virtually every bank presenting at the event what they believe will happen to their deposit base when the Federal Reserve finally begins increasing interest rates, which many expect to occur later this year, beginning with a 25-basis-point increase to the targeted federal funds rate.

What optimistic executives told analysts

Bankers acknowledge that higher rates will likely increase their cost of deposits, but some expressed doubt that the funding costs would move much higher due to a 25-basis-point hike in short-term rates.

Cascade Bancorp Chief Banking Officer Charles Reeves said his company is modeling a 20% to 50% deposit beta, meaning that deposit costs will rise by just 20% to 50% of the change in the Fed Funds rate. In such a scenario, deposit costs would increase by 5 to 12.5 basis points if the Fed raised short-term rates by 25 basis points. Reeves believes deposit costs could rise at the low end of that range when the Fed first takes action with short-term rates.

"I honestly don't believe the first 25 basis, 50 basis points that we're going to have much reaction from our customer base, especially on the consumer side of the business," Reeves said at the KBW conference.

Southside Bancshares Inc. CFO Lee Gibson III shared a similar view. He said Southside might have to move the rate on its money market accounts 75% to 80% higher along with the first increase in short-term rates, but he believes the rates on other deposit accounts could prove much more stable.

"With NOWs and savings accounts, with the first 25-basis-point move, I'm not sure we'll have to move any. By the third or fourth move, you're going to have to move them a little," Gibson said at the event.

Yadkin Financial Corp. CFO Terry Earley agreed that changes in deposit costs will vary from product to product. He said Yadkin has assumed the highest deposit beta on its money market accounts.

Some execs expect higher prices to hold ‘em

Other bankers are assuming that larger changes will occur. For instance, United Financial Bancorp Inc. CFO Eric Newell believes depositors will react more strongly to changes in interest rates than in prior rate hike cycles simply because rates have been so low for so long. He noted that a big shift in the banking industry's deposit base has occurred since 2007.

SNL data show that noninterest bearing deposits had risen to 25.73% of the banking industry's deposits at the end of the first quarter of 2015 from 15.21% at year-end 2007. Money market accounts and savings accounts, meanwhile, have grown to 59.17% of deposits from 41.47% during the same time period.

Newell is "undoing" the shift that has occurred over the last eight years in his model and assumes that his company will pass on the cost to its depositors.

BancorpSouth Inc. CFO William Prater said any bank's outlook for their deposit business in a rising environment ultimately is driven by their model and assumptions. The change in the deposit business could also prove different than in prior rate cycles given that short-term rates have been near zero since the financial crisis.

"We're cognizant of the fact that rates have been low for a long, long time," Prater said.

Hanmi Financial Corp. President and CEO C.G. Kum believes that bankers are not expecting enough change in their assumptions. He said deposit pricing is going to become "much more aggressive" than bankers are prepared for and believes institutions that have relied heavily on rate-sensitive products could be in for a rude awakening.

"I think they are going to be in for a shock, because as we speak right now the LIBOR rate is already moving," Kum said at the event.

Banks try out pricing strategies

Some banks are taking action to get ahead of any changes in the marketplace. C1 Financial Inc. President and CEO Trevor Burgess said his company has built its term funding ahead of raising rates, adding longer-term Federal Home Loan Bank borrowings.

"So yes, that's costing me money today, but if rates go up I'll do very well," Burgess said. "This allows me to be very confident in the ability of our bank to perform very well in a higher rate environment."

Sandy Spring Bancorp Inc. CFO Philip Mantua said his company has worked to grow its CD balances to prepare for rising rates. He believes that CDs could increase from the current level of 15% of its deposits to 20% or even 25% over time, but does not expect the concentration of time deposits to move back to the bank's peak historical level of 30% of its deposits.

Sandy Spring President and CEO Daniel Schrider added that the company has worked to grow its deposit relationships and has created a cross-functional sales team with a referral system and coordinated calling efforts across its lending, mortgage and wealth management businesses.

Enterprise Financial Services Corp CFO Keene Turner said his company is working to build deposits in its commercial business, where it believes deposits will be stickier. He also said the company has taken steps to wean itself off brokered CDs while working to build deposits tied to a relationship.

Scott Goodman, president of the company's banking subsidiary Enterprise Bank & Trust, said the institution has capitalized on large banks' reaction to certain regulations such as the liquidity coverage ratio. That regulation has prompted some banks to push out large corporate deposits, which receive less favorable treatment under the provision.

Enterprise's approach followed the prevailing wisdom among bankers presenting at the KBW conference. Bankers might not be exactly sure or agree what will happen to deposits when rates rise, but they do think building deposit relationships and locking in some term funding at today's low rates could serve them well in the future.

This article originally appeared on SNL Financial’s website under the title “As rate hikes loom, deposits a hot topic that leaves bankers guessing.”