Depositors have not spent down the deposits they built up during 2020, and additional savings during 2021 have made the excess deposit problem worse for local lenders.
Banks and credit unions began to see deposit balances grow in the early days of the pandemic, and 18 months later, the influx of cash continues.
“Early on, the feeling was that these balances would go out as quickly as they came in,” said Jeffrey Reynolds, a managing director at Newburyport-based Darling Consulting Group. “No matter what it seems like is happening, the deposit balances just continue to rise.”
Government aid packages for individuals and businesses, along with less spending and higher savings rates throughout the pandemic, have helped drive deposit growth at financial institutions across the United States.
Banks with offices in Massachusetts, excluding State Street Bank, had $402.88 billion in deposits on June 30, an 11.4 percent increase over the same day last year, when banks held $361.66 billion, according to the FDIC’s annual Summary of Deposits survey, which captures bank deposits on June 30 each year. For the two-year period beginning June 30, 2019, Massachusetts banks together have seen deposits grow 34.2 percent
Local credit unions have seen deposits grow as well, with a year-over-year increase of 11.3 percent as of June 30, according to the National Credit Union Administration’s Quarterly U.S. Map Review.
But with many lenders struggling to match these deposits with loan growth, this excess liquidity could become a concern for banks in the coming quarters.
No Signs of Change
Since the start of the pandemic, most banks and credit unions are looking at deposit balances that are about 20 percent higher than they would have expected in a low interest-rate environment if there had been no pandemic stimulus applied, Reynolds said, adding that in a typical year, deposit growth would be between 5 to 8 percent for those same institutions.
Darling Consulting Group maintains a deposit analytics platform based on nearly 250 community-sized institutions in the U.S. From the first quarter of 2020 through July 2021, deposits have grown about 26 percent, with April 2020 – when the first federal pandemic economic aid payments went out – seeing a 7 percent increase.
Deposits remained elevated over pre-pandemic levels throughout 2020, said Billy Guthrie, a deposit consultant with Darling Consulting Group. Another surge followed beginning at the end of December into the first quarter of 2021, Guthrie said, peaking with 3 percent growth in March alone, driven in large part by additional economic aid payments.
While May and June saw deposit growth start to flatten and even contract in some cases, Guthrie said the pace picked up again in July and August, with changes in spending patterns and the payment of federal child tax credits contributing to some of that growth.
Much of that deposit growth has come from banks’ existing customers, Guthrie said, though April 2020 saw an increase in new accounts when small businesses had to work with different banks to get Paycheck Protection Program loans. One of the few downward trends for bank deposits resulted from businesses moving PPP funds over to primary bank accounts, Guthrie said.
“[The withdrawals] weren’t enough on a net basis to outweigh the amount of additional growth that you were seeing within your existing customer base,” he said.
PPP ‘Like a Sugar Rush’
Deposit balances have shown few other signs of dropping, but if banks did start to see more withdrawals, he added, the typical deposit growth that banks expect to see each year would likely offset any losses.
As the 2021 round of PPP loans starts to go through the forgiveness process and come off balance sheets, Reynolds said, banks have struggled to increase their loan portfolios, adding to margin pressure.
Even with this pressure, banks have managed to see strong earnings during the pandemic because of the gains that banks have realized from selling their mortgage loans on the secondary market and substantial fee income from PPP loans, Reynolds said. Over the next several quarters, he added, banks will need to look at their liquidity positions differently. Though he has only seen a few banks criticized by regulators for growing too much, leverage ratios could become an issue as well.
“It’s kind of like a sugar high – we’re heading for the sugar crash,” Reynolds said. “Unless they come out with another round of PPP, that’s a non-recurring revenue stream that is going to dry up, and I think that what you are going to see is that banks are going to be pressed to optimize their liquidity position and pick up some yield on it, a lot more than they have been.”
Tech, CRE Help Relieve Margin Pressure
Some banks have been able to find opportunities to use the cash to increase lending. Arlington-based Leader Bank saw deposits increase 37 percent from June 30, 2020, to $2.2 billion on June 30 of this year, according to FDIC data. Bank President Jay Tuli said the institution has increased its residential lending as well as commercial real estate lending. The bank’s residential purchase lending in the first half of 2021 was up nearly 115 percent by dollar volume, compared to the first half of 2019 according to The Warren Group, publisher of Banker & Tradesman. Its commercial real estate purchase and refinance lending was similarly up by 312 percent by dollar volume on the same basis.
While net interest margins have come down, Tuli said, technology has helped to reduce operational costs, particularly since the bank has not had to open new branches to expand.
Some of Leader Bank’s deposit growth has been driven by new accounts, Tuli said, with the region’s mergers and acquisitions already driving customers to search for smaller banks, including former People’s United Bank and Boston Private customers.
Diane McLaughlin
Tuli said he is not yet concerned about excess liquidity but added that Leader Bank is carefully watching that metric. While he does expect outflows from the banking system once the Federal Reserve begins raising interest rates, Tuli said he expects Leader Bank’s deposit market share to continue to increase. The bank has doubled its mortgage lending over the past two years, he said, and added marketing staff to help raise awareness of the bank.
Deposits at Holyoke-based PeoplesBank grew 20.8 percent year-over-year from June 30, 2020, to $2.4 billion on June 30 of this year, according to the FDIC. President and CEO Tom Senecal said the bank has seen deposits grow by 50 percent from January 2020, just before the pandemic, to Aug. 31, 2021.
About 80 percent of that growth during the pandemic came on the consumer side, Senecal said, including through its new online bank, which takes deposits nationwide. PeoplesBank also launched a strategy this year to increase its commercial customer base.
A low interest-rate environment would normally lead to deposit outflows rather than growth, Senecal said, and the lower loan demand has continued to put pressure on the bank’s margin. Mortgage refinancing has also contributed to the lower loan demand since customers now have fewer borrowing needs. Even though loan originations have been strong, Senecal said, they have been offset by loan payoffs.
“Over the next 12 months, I don’t see much changing at all,” Senecal said. “I see continued pressure on margins for all banks right now as this influx of liquidity in the system is really driving margins down, driving rates down.”
