Bankers Rethink Strategies for CDs as Rates Head Up

For several years now, banks have been content to let certificates of deposit run off because loan demand was weak and they didn't necessarily need the deposits — especially those that carried higher rates than savings or checking accounts.

But with loan demand expected to pick up, bankers are suddenly less eager to see those CDs walk out the door. While they are not quite ready to run aggressive promotions, many are trying to figure out ways to lock investors into longer-term CDs now, before rates inevitably rise. Already there are signs that rates — which have been falling steadily for years — are on the rise, and as rates inch up higher, bankers risk losing CD customers to competitors that might offer better yields.

"I don't think it's smart to think that liquidity will be there when bankers want it," says Frank Sorrentino, chairman and chief executive at the $1 billion-asset ConnectOne Bank, in Englewood Cliffs, N.J. "The wave of liquidity that was moving into banks [after the financial crisis] is starting to turn around and go the other way."

Sorrentino says he is preparing for the loss of consumer deposits by selling longer-term CDs to institutional investors.

"I would rather have longer-term deposits on my balance sheet than money that can move quickly in a rising rate environment," he says. "Because there is so much money out there on the street lying dormant in banks, there's this false sense of security that the money is going to stay put."

To be sure, interest rates on deposits are at their lowest point in the last five years and most investors consider CD rates pathetic: the rate on 5-year CDs was 0.74% as of July 1, according to the FDIC.

But Dan Geller, an executive vice president of Market Rates Insight, says July is the first month in the last five years in which the average rate on deposits was the same as in the prior month — a strong signal that rates are poised to rise.

"Finally we are seeing a leveling off and an indication that rates might be going up," Geller says. "The challenge for banks right now is to walk this tightrope. If you don't protect your turf, somebody else will take it. So banks will try to entice their customers to shift money from all liquid accounts into term accounts and the longer the better."

Geller says deposit rate increases will not be "sudden and sharp," but rather will be "gradual and moderate," over the next 12 months.

Bob Koncerak, the chief financial officer at $522 million-asset Peoples Bank of Alabama in Cullman, says his bank has considered offering new CD promotions in an effort to capture more long-term depositors but has held off for fear of touching off a local rate war.

"What happens is in a smaller community market, you can set off alarms and I don't want to alarm my customers and competitors by doing CD promotions in the press," Koncerak says.

Instead, Koncerak says he is looking to attract institutional investors and municipalities interested in purchasing longer-term CDs by working through a New York company, eCD Market, a unit of StoneCastle Partners, that matches banks with institutional investors.

"Conceptually, when interest rates are at their lowest is when banks should be getting the longest term money they can for the lowest possible rate," Koncerak says. "I'd rather go to the institutional market and get funding first than do a promotion for a customer CD."

Kevin Forristall, a risk analytics manager and vice president at $263 million-asset Treynor State Bank in Iowa, agrees that promotional CD specials can backfire. He notes that savvy customers understand that rates are likely to rise and won't take too kindly to their banker selling them a 5-year CD at today's rates.

"It's a challenging interaction between banks and clients," Forristall says. "Banks want the longest term at the shortest cost and customers want" the shortest term at the highest yield. "When rates are rising it's hard to find a client base that wants a 60-month CD."