Recently published federal data that showed the smallest banks losing ground in deposit gathering was no one-time blip.
New liquidity requirements, changes in technology and business practices, M&A activity and money market fund reform are several reasons bigger banks have outperformed smaller banks. As long as interest rates remain near zero, community banks will likely continue to fall further behind, bankers and analysts say.
Big banks outpaced smaller banks in deposit growth over the past year, according to the Federal Deposit Insurance Corp.'s Summary of Deposits report. Deposits at banks with assets of at least $10 billion rose 6.67% from July 1, 2015, to June 30 of this year. For banks with less than $100 million in assets, deposits fell 8.71%, and the two other asset categories below $1 billion were in negative territory, too.
The largest banks have a huge reason to covet deposits. The liquidity coverage ratio (LCR), which measures the stability of funding in the short term, and the proposed net stable funding ratio (NSFR), a measurement of long-term stability, both give greater weight to deposits at banks over $50 billion in assets, said Bill Nelson, the chief economist at the Clearing House Association, which represents the largest U.S. commercial banks.
"The regulations are designed to encourage banks to value more highly a liquid balance sheet and to fund themselves with liabilities that are less prone to evaporate under stress," Nelson said.
Banks with assets of more than $50 billion posted healthy growth rates. Deposits at JPMorgan Chase rose 7.6%. Wells Fargo's deposits rose 5.9%, and at Citigroup they rose 5.3%. Banks of America's deposits rose 3.1%, according to the FDIC report.
Memories of the meltdown made the biggest banks reassess the importance of deposits, Nelson said. "The financial crisis has led everyone to revise up their estimates of the cost of being illiquid," he said.
Community banks have additional reasons to worry that they will keep lagging their bigger rivals. Money center banks and regional banks typically have invested more heavily in mobile-banking applications and as those apps have been refined, they have made deposit-gathering more efficient, said Greg Baer, president of the Clearing House Association.
Another disadvantage is that many community banks are located in rural areas, where it Is more difficult to gather deposits, said Tom Broughton, the chief executive of the $5.6 billion-asset ServisFirst Bank in Birmingham, Ala.
"The smaller banks that are in rural areas have little or no deposit growth — or even shrinkage," Broughton said.
Yet the activity at megabanks and large regionals explains only part of the deposit gap between big and small institutions. In fact, midsize banks have added deposits at a faster clip. Deposits rose 7.47% at banks with assets of $3 billion to $10 billion, a higher rate than the industry average of 5.7%. At Broughton's bank, ServisFirst, deposits rose 20.2% to $4.5 billion over the 12-month period that ended on June 30.
Mergers and acquisitions by banks in the midsize category certainly have played a part, but there are other reasons.
One is that midsize banks offer better rates on certificates of deposit and other deposit products than larger rivals, Broughton said.
"The largest banks obviously have excess liquidity, or they wouldn't be paying such low rates," he said. "You see what they pay on money market accounts and other deposit products, and it's substantially lower than banks in our size range."
A recent Morgan Stanley Research report bears that out. The $26 billion-asset BankUnited in Miami Lakes, Fla., paid 1.35% on a three-year certificate of deposit at Sept. 30, according to that report. Wells Fargo paid 0.2%, and Bank of America paid 0.12%. The report did not break out data about, or provide examples of, the smallest banks' CD rates.
The national average on three-year CDs was 0.71% to 0.73% on Tuesday, according to the Informa Research Services rate tracker on americanbanker.com.
Another reason for the strong deposit performance among midsize banks is that the largest banks have narrowed their target markets, creating an opportunity for smaller rivals to step in.
"They're onboarding the customers they want and de-banking the customers they don't see as profitable," said Zoya Lieberman, director of commercial products at Informa Research.
Midsize banks are happy to pursue many of those customers, said Chris Murphy, the chairman and CEO of 1st Source Bank in South Bend, Ind.
"Some of the larger guys have been chasing away deposits," Murphy said. "Core deposits are critical for our long-term funding."
Deposits at the $5.4 billion-asset 1st Source rose 9.2% to $4.3 billion in the 12-month period measured by the FDIC's Summary of Deposits.
Money market fund reform may also be helping banks boost deposit-gathering, although it is unclear whether larger banks are getting most of that benefit, Nelson said.
New rules that take effect this month provide an incentive to institutional investors to shift money out of prime funds. Much of that money is going to government funds, but some has also gone to banks.
"One of the things that we saw particularly in September now is that with money market reform starting to become more of a reality, that a lot of institutional money is coming to U.S. Bank in the form of deposits," Terry Dolan, U.S. Bancorp's chief financial officer, said at the Minneapolis company's Sept. 15 investor day.
Interest rates are so low that institutional money managers are not going to put cash into a Treasury instead of using a bank deposit, Nelson said. As long as rates stay low, it is likely those deposits will stay at banks, he said.
Some executives at midsize banks said they think they will be able to hang on to their elevated deposit levels regardless of what happens to interest rates.
"We've been focusing on growing our deposits since 2008," said Daniel Walker, CEO of the $6.3 billion-asset Farmers & Merchants Bank of Long Beach in California. The bank's deposits rose 14.5% over the 12-month period measured by the FDIC.
"We have not overcommitted to CDs" by choice, which means that most of the bank's depositors will stick around even if interest rates rise, Walker said. "Our focus is on relationships that will be with us for a lifetime or longer."