Time Deposits: Profitable or Not?

Neil Stanley
January 23, 2012 | COMMENTS

Today, your bank is issuing time deposits at rates significantly below what they were just a few years ago and renewing CDs at a lesser rate than they were just last term. So, what’s the goal? Should bankers be pleased when they find that CDs renewed at 20 basis points below last term’s rate? Does it matter if the volume is shrinking or growing? How should the term-to-maturity of your newly booked CDs impact your assessment of their profitability? How can you make decisions about CD pricing and know that your measurement process will consistently help you understand if those decisions are contributing to or detracting from your bank’s profitability?

Many bankers will point to current cost-of-funds when asked about their bank’s funding performance. To declare that your bank’s funding is well managed because your cost-of-funds is declining today is superficial and dangerous. While cost-of-funds is certainly a relevant accounting measure, it doesn’t help us understand if the pricing decisions made last month regarding funding are contributing to profits, and if so, to what extent.

The solution is simple. We need to measure newly booked CD performance consistently. Without a measurement method that is capable of assessing the contribution to profit of the current activity within our portfolio, bank leadership has no legitimate way of gauging success.

Measure and track your bank’s newly booked CD performance results by using reports generated from these six data fields: branch, balance, APY or rate, maturity date, last renewal date and original creation date. With this data and current market yields such as Federal Home Loan Bank advances, your bank can create reports showing count, volume, weighted average term, weighted average APY/rate, spread weighted by “dollar-months,” and the mix of auto renewed and not-auto renewed CD production for the month. Plotting volume and spread weighted by “dollar-months” will clearly reveal the contribution to profitability your bank is getting from its recent management of time deposits.

Without taking and tracking these measurements a significant piece of your managerial effectiveness is left to circumstance. When tracking these results, your bank will find, as in other areas of business, that what is measured can then be better managed.