Saturday, March 31, 2018

A Time of Reckoning for Your Bank's Core Deposits?

Bye-bye municipal deposits. 

So worries New Jersey Banker's Association CEO John McWeeney since state-owned bank advocate Phil Murphy was elected governor. The state's municipal deposits approximate $20 billion, $13 billion of which are in community banks. A significant source of liquidity.

I got news for you John. We might lose municipal deposits regardless.

And we might lose a lot more than municipal deposits.

According to the Investment Company Institute, money market funds stood at $2.8 trillion this week. And as the chart below shows, these funds are typically paying more than double the community bank money market account rate. 

These rates were at March 29, 2018. I used Wells Fargo because it is a money market fund that I use. By default. When they bought Strong Asset Management. Marcus is Goldman Sachs online bank. FDIC insured. And Mid Penn Bank is a $1.2 billion in assets financial institution based near Harrisburg, Pennsylvania. I had to call Mid Penn for their rate. It is a tiered money market, and the 0.55% is their top tier for accounts greater than $50,000. The next lower tier is 0.35%. 

Mid Penn boasted about their cost of deposits and funds in their 2016 annual meeting investor presentation (pages 21-22). They currently have a 0.58% cost of funds. Can they maintain it? Will their ALCO model betas prove true? Or will customers demand they bridge the rate gap, so vividly portrayed above?

My colleague recently sent me a link for, a soon to be released banking app that boasts a 2%-4% rate for your cash, FDIC insured (they are partnering with a bank). They haven't launched. But they have over 76,000 customers that signed up already. Could some be your customers?

In strategy sessions the past couple of months, I'm hearing more bankers talk about pressure from large depositors on rate. The old arguments are starting to play out. Not bringing large deposits with their loan deal because rates are too low. Municipalities hemming and hawing. Will the traditional retail and small business depositor be next?

There is an inflection point where our Rip Van Winkle bread-and-butter depositor will wake up to think "hey, I'm getting screwed by my bank!" What sized rate gap will trigger it? I don't know. I'm no futurist. The above rates are still below the inflation rate. So keeping money in any of those accounts will result in a real decline in value. Do you know where your customer inflection point is?

Because a business model based on the sleepiness of your depositors is unsustainable. 

Are you feeling the pressure yet?

~ Jeff

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