Between Paycheck Protection Program cash in business customers accounts and less spending by most consumers, banks are trying to figure out what to do with growing deposits.
Even as the pandemic shuttered businesses and led Massachusetts to the highest unemployment rate in the country, billions of dollars flowed into the state’s banks.
Some of the responses to COVID-19 and the recession – by the government, businesses and individuals – helped bank deposits in Massachusetts grow this year by more than 20 percent, according to recent data from the Federal Deposit Insurance Corp. The Paycheck Protection Program and other government aid have brought cash into banks, while limited spending by both businesses and individuals has kept money sitting in deposit accounts.
While this additional cash offers banks opportunities to increase lending and grow their balance sheets, concerns remain about the pandemic.
“I don’t know if [deposit growth] is a slam-dunk, great thing or a terrible thing for institutions,” said Tom O’Connor, a partner with GT Reilly and Co., a Milton-based firm offering audit and tax services to community banks and credit unions. “I think a lot of them are looking ahead six months and nine months, and they’re worried – and they should be concerned about – businesses in certain segments.”
Year-Over-Year Growth
Banks with Massachusetts offices had $362.5 billion in deposits in June 30, a 20.7 percent increase over the same day last year, when banks held $300.2 billion, according to the FDIC’s annual Summary of Deposits report. Produced each September, the report captures the June 30 bank deposits and market share for each FDIC-insured institution.
While Bank of America had 27 percent of the state’s deposit share on June 30 with about $98.8 billion, up 25.3 percent from 2019, community banks headquartered in Massachusetts still saw significant growth. More than 100 local banks had about $141 billion in deposits on June, up almost 15 percent from last year.
Massachusetts credit unions also saw deposits grow year-over-year as of June 30 by almost 11 percent, according to the National Credit Union Administration.
A significant driver of the deposit growth was the PPP, O’Connor said, adding that much of that money had not been used up yet by the end of June. He said he would not be surprised if deposits have decreased since June 30.
Beyond the PPP, O’Connor said, business clients had taken steps to preserve cash, including through payroll and other cost–cutting measures, keeping the money in banks. Individual customers have also contributed to deposit growth.
“People were treating the unknown just as a business would, where they couldn’t go out, so that forced a lot of people to save money and stockpile some liquidity in case things got even worse,” O’Connor said.
Government aid, including unemployment, also contributed extra cash to banks’ coffers.
Growing deposits had not been a priority for some banks in recent years, O’Connor said, with margins tightened between what banks pay on deposit accounts and receive on loan products. Those banks likely took short-term advances from the Federal Home Loan Bank of Boston.
The recent influx of cash has given these banks opportunities to pay down some of those advances, O’Connor said. He added that because of the low interest rates on deposits, banks have opportunities to do additional lending and pick up some margin growth.
O’Connor said mortgage lending offers one opportunity for banks looking to grow their balance sheets, although the lack of homes for sale in Massachusetts could limit opportunities there.
Relationships Grow with Deposits
Arlington-based Leader Bank saw deposits grow by more than 38 percent to $1.6 billion as of June 30. The PPP helped fuel deposit growth, said Jay Tuli, Leader Bank’s president, and the growth continued as new business customers that the bank had helped during the PPP have moved the full relationship there.
The low interest rates on Treasury bonds have also driven deposit growth, Tuli said, as investors have been choosing banks instead when looking for a place to park their cash. As long as rates remain low, Tuli expects much of those deposits to remain at banks.
Even low mortgage rates have had a role in deposit growth with some of Leader Bank’s clients, Tuli said, as attorneys working in the mortgage industry have seen their income increase, adding funds to their deposit accounts.
“We’re pretty excited about it,” Tuli said. “We built a lot of new long-term relationships and with that extra deposit growth, our plans are to grow the balance sheet, do more lending and grow.”
Tuli said the bank plans to increase its residential, commercial and small business lending, though hospitality, commercial office space and multifamily lending are some areas where the bank will remain cautious.
“On the whole I would say businesses are faring a lot better than we had anticipated,” Tuli said. “And I think part of that is due to the various government programs out there.”
Needham Bank, which had $2 billion in deposits on June 30, according to the FDIC, saw deposits grow 27 percent. But President and CEO Joe Campanelli, said the FDIC’s report does not capture the full picture of what has been happening at community banks.
“It’s not just the amount of deposits that are attributable to business and personal behaviors,” Campanelli said. “The number of accounts have increased equally.”
Diane McLauglin
Campanelli said Needham Bank’s deposit growth – as well as the increase in the number of customers – came fairly equally from consumers, small businesses and middle market companies. Going into 2021, he expects to see more growth on the business side.
During the pandemic, he has seen a shift to consumers and businesses working with local banks.
“We want to continue to grow and deploy those deposits into helping companies grow,” Campanelli said. “You need both sides of your balance sheet to execute that strategy, and that’s why we started out a while back really building products and services and really differentiating ourselves through high quality service.”
