Putting it together: Banking consumers puzzling between security and profit

Published on: April 27, 2012

Cole Epley, Memphis Business Journal

The certificate of deposit has long been a go-to instrument designed to offer consumers a guaranteed return without the volatility of stocks and bonds, but with current inflation hovering around 200 basis points higher than the national average yield for short-term CDs, sinking money into time deposits can present a dilemma to risk-averse investors.

According to data from Market Rates Insight, the balance of all CDs has dropped by nearly $700 billion nationally in the last five years. Dan Geller, an executive vice president with the California-based financial market research firm. says the downward trend is ongoing, and that the proportion of total bank deposits comprising CDs fell from 31 percent of all bank deposits in January 2007 to just 18 percent at the end of 2011.

"Nationally, the decline has to do with the fact that we're still facing a relatively soft lending market," he says. "Banks have to maintain low interest expense in order to preserve healthy net interest margins."

But even with rock-bottom interest rates, consumers still need to go somewhere with their cash, and the interest in time deposits as safe havens for cash appears to be healthy in the local market.

The ongoing uncertainty surrounding a decisive economic turnaround means investors are likely to turn to CDs for the foreseeable future, says Scott Stafford, president, director and CEO at Evolve Bank & Trust.

"It will be some time, if ever, before CDs lose favor as a safe haven among investors," he says. "There are many who spent a lifetime building their net worth only to see it vaporize in recent years."

At Financial Federal Savings Bank, where time deposits like CDs are a vital part of the bank's funding strategy, president William Tayloe says such instruments make up 70 percent of the bank's deposit base, which totaled $215.8 million as of June 30, 2011. Tayloe says the low interest rate environment has pushed consumers 10 extend the terms of their time deposits with the bank.

"With rates at the present levels, we see depositors who used 6- or 12-month CDs push them out to 24- or 36-months for the extra yield. They're still comfortable with the security it offers," he says.

But the individual consumer is far from the only one using CDs. Foreign banks, for example, use large time deposits - any deposit exceeding $100,000 - to raise cash, although the euro crisis of the past two years has seen large-time deposits at foreign banks fall by more than $200 billion since March 2011, according to global financial research firm BBVA Research.

John Paul Koch, senior managing director of private banking at Metropolitan Bank, also points to the wide range of businesses both large and small as well as various nonprofit entities and foundations who use CDs. While low interest rates bode well for those looking to borrow money, those looking to save are caught in what he calls a "tug of war" between safety and yield.

"The battle between safety and yield with cash reserves is won by safety in this post-crisis world," Koch says.

Still, as of the end of first quarter 2012, time deposits made up approximately $199 million of Metropolitan's more than $350 million in deposits ending the same period - all for a bank that was founded in 2007.

In that time, CDs have also grown significantly at Evolve Bank & Trust - from $18.5 million in 2007 to more than $110 million as of March 31, 2012.

Stafford expects a continued increase in the bank's CD deposit base as it expands its trust and wealth management divisions and grows throughout the market and beyond.

"Also, at some point, monetary policy will tighten and rates will increase," he says, "which will become even more attractive to an expanded customer base."

When that point in time will be realized is what Financial Federal's Tayloe calls the "million-dollar question," He attributes at least some term extension of time deposits to speculation as to when the interest rates will rebound, while Geller of Market Rates Insight anticipates a continued shift to liquid accounts - at least until interest rates start to rise.

"In the puzzle of economic uncertainty, people's natural reaction is to stay liquid. They want instant access to money, which is not possible with CDs," Geller says. "This (shift) is not a permanent thing, just a reflection of economic reality."