This month’s Review highlights notable trends and projections in DCG’s Deposits360°® Cross Institution Analytics database and deposit pricing and volume models.
Pricing Trends
Deposit rates moved higher over the last month as the lagging impact of the 2022-2023 Fed rate hikes continues to reverberate through portfolios. Total deposits moved 6bp higher while non-maturity portfolios moved up 2bp on average. Within money market portfolios, the spread between high-balance-tier rates and low-balance-tier rates widened further, with the largest pricing gains in the >$250 thousand tiers. We did observe, however, that newly funded time deposit rates are 3bp lower than last month, indicating that price reductions on intermediate-term Special CDs (6-to-24 month) and rollovers are becoming more widespread.
Source: Darling Consulting Group Deposits360°®
The next two graphs support the notion that deposit rates are nearing their peak (assuming that the Fed is done hiking in this cycle). The first graph shows newly opened MMDA rates. While the average rate increased slightly in the last month, the 90th percentile rate dropped for the first time since before the current tightening cycle.
Source: Darling Consulting Group, Deposits360°®
The next chart looks at pricing on newly opened 1 Yr CD Specials. The average rate moved incrementally higher while the 90th percentile rate plateaued at the same level as the effective Fed Funds rate. It is worth noting that in previous rate cycles, the average 1 Yr CD Special rate trended higher than the Fed Funds rate. Each cycle has different dynamics at play. For example, many of the Special promotions over the last 6-12 months have been shorter than 12 months. It may be a fruitful exercise to evaluate how your institution’s Specials are priced relative to the Fed Funds rate, relative to FHLB rates, and relative to history.
Source: Darling Consulting Group, Deposits360°®
In light of market expectations for Fed rate cuts later this year, and targeted rate cuts already occurring within portfolios, it is important to understand that it will take some time before cost relief is realized at the total deposit level. Two dynamics are playing out at the same time: 1) rates on interest-bearing product types are still ‘catching up’ to the current rate environment via negotiated rates; and 2) depositors continue to shift out of DDA and lower-rate accounts into premium rate Savings/MMDA accounts and into CD Specials, leading to upward cost pressure. To put this into perspective, DCG’s pricing models are projecting 14bp of upward pressure on total deposits in 2024 if rates move consistent with the implied forward curve (currently factoring in 75bp of Fed Funds rate cuts in 2024).
Source: Darling Consulting Group, Deposits360°®
Balance Trends
We continue to see changes in the funding mix. NMD balances are drawing down or shifting into CDs, which is driving up the cost of funds for many institutions. In the composition of DCG’s Cross-Institution database by product type, all NMD product types declined over the current rate cycle, while CDs made a notable jump. Many institutions have also been forced to backfill deposit outflows with FHLB borrowings, which has contributed to further funding cost pressure.
Source: Darling Consulting Group, Deposits360°®
Looking at growth trends for NMDs, CDs, and Total Deposits, it is clear that the levels of net outflow in the latter half of 2022 and the first half of 2023 have moderated. Total deposits have been relatively flat over the last six months, despite the upward trend in cost.
Source: Darling Consulting Group, Deposits360°®
Looking at average account balances, non-maturity balances are shrinking while CD growth rates are holding steady. At the total deposit level, the average account size is at the same level as June 2021. Many of DCG’s Deposits360° users have been focusing on leveraging the application to win back funds from depositors that have reduced their wallet share. Deposits360° allows institutions to develop targeted win-back campaigns which isolate customers that fit specific criteria such as having multiple-account relationships, showing a trend of steady balance outflow, or having a long relationship history with the institution.
Source: Darling Consulting Group Deposits360°®
With the backdrop of market wariness over ‘if and when’ the Fed may begin to cut interest rates, it is important to understand that we are still in an environment where, despite some indications that rising deposit costs are beginning to slow, the projections for 2024 remain sobering. Assuming that rates move in line with the implied forward curve, DCG is still projecting that deposits will decline by more than 2% at the Cross-Institution level over the next 12 months. ALCO should continue to include the implications of continued deposit balance shifts and outflow in strategic discussions.
Source: Darling Consulting Group Deposits360°®
Darling Consulting Group will continue to monitor the Cross-Institution data in Deposits360° and bring you insights to help you manage your deposit portfolio.
To learn more about how DCG's Cross-Institution analytics can help drive strategic decision-making, click here.
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