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Despite Deposit, Rate Challenges, Banks Remain on Solid Footing

By Contributor
Banking and Financial Services

Checks and Balances

 

By Mark Morris

About a year into the pandemic, banks found themselves in a strange position.

When the federal government pumped stimulus and Paycheck Protection Program (PPP) money into the economy to help consumers and businesses regain their footing, it created an unprecedented glut of deposits.

In normal times, banks would have celebrated the excess in the form of making more loans — and generating more revenue — but these were different times. Consumers and businesses kept their money in banks to take advantage of FDIC protection while they figured out their next moves.

Despite record-low interest rates, uncertainty from the pandemic also resulted in reduced loan activity. When deposits sit idle, banks don’t generate revenue — or profits. As one executive noted at the time, all these deposits became a burden, a concept that went against everything they were taught about banking.

Another executive said simply, “back then, cash was a four-letter word.”

“There’s a rate battle these days because, with higher interest rates, we have to offer more generous rates on CDs to keep deposits here and attract new funds.”

Mary McGovern

Mary McGovern

Things began to change by the third and fourth quarter of last year as excess deposits began flowing out. Some people withdrew money to pay for increases in daily living expenses, while other depositors sought to move their money into financial products that pay higher rates than banks.

As a result, what was once a problem of too much liquidity became a matter of banks competing for deposits.

“There’s a rate battle these days because, with higher interest rates, we have to offer more generous rates on CDs to keep deposits here and attract new funds,” said Mary McGovern, executive vice president and chief financial and operating officer for Country Bank.

Jeff Sullivan, president and CEO of New Valley Bank, added that, with excess liquidity a thing of the past, his staff is working harder to bring in deposits because demand for loans remains strong for his four-year-old institution.

“If we can raise new deposits, we can keep generating new loans and keep growing our franchise,” he noted.

These forces have been compounded by recent events in the banking world, which was rocked in March when Silicon Valley Bank (SVB) failed and was shut down by the state of California. News like that can create panic in bank customers everywhere. The bankers BusinessWest spoke with all said they communicated with their respective customers early and often to allay any fears.

“When I saw the news about Silicon Valley Bank, I sent emails and text blasts to our members to let them know everything was safe, secure, and that we are well-capitalized,” said Michael Ostrowski, president and CEO of Arrha Credit Union. He also credited the Massachusetts Division of Banks for calling every institution to make sure there were no problems.

Sullivan agreed the industry did a good job preventing a bigger problem.

“We certainly made phone calls with our customers and communicated as much as we could,” he said. “As a result, we did not see any outflows caused by people worried about the system.”

Dan Moriarty, president and CEO of Monson Savings Bank, said the deposit spend-down, along with higher interest rates for loans, particularly mortgages, have caused a paradigm shift.

“If we can raise new deposits, we can keep generating new loans and keep growing our franchise.”

Jeff Sullivan

Jeff Sullivan

“Most banks have seen a drop in their residential mortgage business due to higher interest rates, low inventory of available houses, and the high cost of houses,” he explained. “So we are seeing a couple different forces at play, and that’s a dramatic change compared even to last year.”

For this issue and its focus on banking and financial services, BusinessWest looks at these colliding forces and how they are impacting local banks — or not, as the case may be.

 

Points of Interest

The foundation of the banking system has long been the Federal Deposit Insurance Corporation (FDIC), which insures accounts up to $250,000, an amount that provides sufficient protection for most people. McGovern noted that, in today’s banking world, people with higher assets don’t usually keep their money in one place.

There are situations, however, when FDIC coverage isn’t enough for an account. For example, a small business that keeps its payroll in a savings bank or a consumer who has sold a house or other large transaction can exceed the FDIC limit.

To address those needs, Country Bank and Monson Savings Bank are two of 78 savings banks in Massachusetts that take part in the Depositors Insurance Fund. The DIF is supplemental insurance to protect deposited amounts that exceed $250,000. McGovern and Moriarty said having the extra protection of the DIF gives everyone peace of mind.

“We made sure to educate our customers that all the deposits in Country Bank, even the ones over $250,000, are safe and insured,” McGovern said.

“Because Monson Savings has both FDIC and DIF, it calmed a lot of nerves during the weekend when Silicon Valley Bank failed,” Moriarty added. “We had conversations with some of our customers, but their concerns quickly subsided.”

Having conversations with clients and explaining acronyms like FDIC and DIF has become a somewhat unexpected addition to the workload for area banks, which have been placed in a situation of explaining what has happened at SVB and other institutions, and why the fallout has not extended to the smaller community banks populating this market.

Indeed, those we spoke with pointed out that Silicon Valley Bank’s troubles stemmed from mismanagement and went against the norms of good banking practices. “By contrast, the bankers in our area do things the right way, and the regulators do a good job, too,” Ostrowski said.

Silicon Valley Bank also had a handful of customers with billions of dollars in deposits. Money movements by these few contributed to destabilizing the bank. When Silicon Valley failed, it provided an opportunity for McGovern to reassure Country Bank customers.

“We explained that we have $1.3 billion in deposits, and we are in sound financial condition,” she said. “We have a diversified depository clientele, so there was no risk of large outflows of the kind Silicon Valley experienced.”

“We are seeing a couple different forces at play, and that’s a dramatic change compared even to last year.”

Dan Moriarty

Dan Moriarty

While local bankers remain mostly unscathed by these highly publicized events, they are keeping their focus on raising deposits and managing the fallout from increases in interest rates.

Ostrowski noted that first-time homebuyers face perhaps the sternest challenge because housing prices are at an all-time high and interest rates are higher than they’ve been in recent years.

“Young people buying their first home have never experienced anything but very low interest rates,” he said, adding that today’s mortgage rates of 6% to 7% aren’t exceedingly high, but when combined with high housing prices, they can keep buyers on the sidelines.

Still, while loan volume might be down, mortgage activity continues.

“People are still moving and buying houses,” McGovern said. “Many are taking out adjustable mortgages thinking that rates may adjust down.”

In recent years, many homeowners refinanced their mortgages to take advantage of the low interest rates. Sullivan pointed out there’s no incentive for people to pursue refinancing today. “The folks who refinanced at 3% a few years ago are obviously not looking to do it again at today’s rates.”

 

By All Accounts

Even with the challenges they face, the bankers we spoke with remain optimistic. Interest rates have begun to stabilize and, in some cases, go down.

“We may find that the crisis at Silicon Valley and the other banks may have caused a credit pullback and stabilized the market without the federal government having to raise interest rates,” McGovern said.

Sullivan predicted there may be smaller bumps in the road, but nothing of the magnitude of SVB in the near future.

While the remainder of the year looks slow and steady on the retail side at Monson Savings, Moriarty believes there may be better news on the commercial side of his business.

“We’ve been hearing that some areas of manufacturing are still robust,” he said. “There could be opportunities for us if a manufacturer decides to expand or purchase some new machinery.”

Despite all the challenges local bankers have seen, they are moving forward in a strong position.

“The system is working correctly, just as it was designed,” Ostrowski said. “That’s important to hear because people need to have trust in our financial system. The good news is, it’s not going anywhere.”

Deposits Are Soaring, but Banks Struggle to Put Them to Work

By Contributor
John Howland calls the recent flood of deposits an “unprecedented” situation.
Banking and Financial Services

Developments of Interest

By Mark Morris

John Howland calls the recent flood of deposits an “unprecedented” situation.

John Howland calls the recent flood of deposits an “unprecedented” situation.

John Howland admits that the word ‘unprecedented’ is overused these days. But for him and others in the banking business, it seems like the right word to describe all that’s going on.

Howland, president and CEO of Greenfield Savings Bank, was talking specifically about the record amounts of deposits flooding into banks — and what’s happening with those deposits, or not happening, as the case may be.

In the early months of the pandemic, from January to June of 2020, banks in the U.S. saw a surge of nearly $2 trillion in deposits. At that time, most people were staying close to home and had reduced their spending to necessities.

As a local example, PeoplesBank reported deposit increases of 33% since last April, or nearly $700 million in additional deposits.

More deposits arrived as businesses applied for Paycheck Protection Program (PPP) loans and consumers received stimulus checks from the government. During normal times, money gets deposited but does not stay in an account for long. These days, however, deposits are staying and growing to an extent Howland and his counterparts in Western Mass. have never seen before.

And while record deposits would seem like a good thing, all that cash is sitting still, for the most part, and the key to any bank generating revenue and earning profits is loaning its deposits out to borrowers.

“I never thought I would say there are too many deposits and not enough people to lend the money to,” said Tony Worden, president and chief operating officer of Greenfield Cooperative Bank. “The point of our business is to get deposits … so this goes against everything we were taught.”

In normal times, banks take in deposits and lend that money out to businesses and individuals. Balancing the number of loans to deposits helps determine what interest rates will be paid to savers and charged to borrowers. Banks profit on the difference between the two.

“I never thought I would say there are too many deposits and not enough people to lend the money to. The point of our business is to get deposits … so this goes against everything we were taught.”

But these are certainly not normal times. These days, banks have record deposits and diminished loan demand — for several reasons, which we’ll get into later — which translates to lower interest rates for savers and borrowers, as well as lower profits for banks.

Howland pointed out that the lower interest rates are great news for people looking for a business loan or a mortgage.

“The residential and commercial rates are down to levels that were inconceivable 10 years ago,” he said, adding that, moving forward, banks will be competing much harder to entice people to borrow money than deposit it.

 

By All Accounts

There are many theories as to why deposits have soared at area banks — and why those deposits are going largely untouched.

Dan Moriarty, president and CEO of Monson Savings Bank, suggested that once people tightened their spending during the pandemic, they may have changed their overall spending patterns, which is in many ways good for consumers, but not for the overall economy.

“It’s good for consumers to increase their savings and their capacity to have money, but it also slows down the economy,” Moriarty told BusinessWest. “We believe there is still some pent-up rebound spending by both consumers and businesses that we will be seeing.”

Howland agreed, noting that there are a number of reasons contributing to the surge in deposits, with one of them bring what he called a “flight to quality.”

“With all the uncertainty in the world, people understand that putting their money into a bank where their deposits are insured by the FDIC is one of the safest moves you can make,” he said, adding that, despite the consistently upward movement of the stock markets, many consumers are seeking a safe harbor in which to park their money.

Tony Worden says he never expected there to be too many deposits and not enough people to lend to.

Tony Worden says he never expected there to be too many deposits and not enough people to lend to.

As for the business of converting those deposits into loans — and revenue — many of those same factors are holding some consumers back from borrowing, said those we spoke with, although many have pressed ahead with purchases of new cars, new homes, and vacation homes.

Meanwhile, a number of businesses, still struggling to fully recover from the pandemic, are being cautious about moving ahead with expansions or new ventures. And for those that have the confidence to move forward, the current workforce crisis is keeping them from doing so.

Indeed, Worden said the current labor market is affecting activity in commercial lending. “We have businesses that can’t take on all the jobs they want because they don’t have enough staff to get them done.”

Moriarty agreed, but spoke optimistically about the prospects for improvement when people return to the workforce in large numbers. “Once our businesses can hire the staff they need and expand their products and services, they may look to the banks to borrow and grow.”

The surge in deposits and frustrating inability to put much of them to work has been one of many stories to unfold during what has been a challenging — and very different — year for area banks.

They all played a key role in helping businesses apply for PPP loans when they became available last spring. During two rounds of PPP loan offerings, Moriarty said, Monson Savings processed 565 loans totaling nearly $50 million.

In the early days of the pandemic, qualifications for PPP loans included every small business that was affected by COVID-19. Tom Senecal, president and CEO of PeoplesBank, said many applied because they didn’t know if they were going to be impacted.

“It’s good for consumers to increase their savings and their capacity to have money, but it also slows down the economy. We believe there is still some pent-up rebound spending by both consumers and businesses that we will be seeing.”

“There were many businesses that thought they were going to be hit hard but really weren’t,” he noted, giving an example of construction companies that were closed early in the pandemic but were then designated as essential and allowed to reopen.

Worden added that many companies that received PPP loans in the first round didn’t touch the money until it became clear their loan would be forgiven by the government. Once they figured out how to get loan forgiveness, they didn’t sit on the next round.

“We’ve had around 96% of our first- and second-round PPP loans forgiven with no denials,” he said. “The only ones who haven’t been forgiven have all started the process.”

All the bankers who spoke with BusinessWest said they were grateful to process PPP loans for area businesses. Worden said the urgency to get the first-round applications done required an “all hands on deck” approach that brought in many outside the loan department. His story reflects similar efforts from the other banks.

Dan Moriarty

Dan Moriarty says the pandemic changed people’s spending patterns, which may not be good for the overall economy.

Another dominant story during the pandemic was the real-estate boom, driven in part by record-low interest rates. Moriarty said activity on the buying and selling side has been brisk for some time. “We’ve seen a lot of activity where people are moving into a new house or buying a second home, whether it’s for vacation or an investment.”

The low interest rates have also brought a significant increase in people looking to refinance their mortgage.

“While it’s smart for people to refinance their current debt to get a lower rate, it doesn’t necessarily create new funds for the bank,” Worden said.

In early 2020, Monson Savings opened a new branch in East Longmeadow to increase its access to more companies and consumers. Moriarty admitted he had some anxiety about the timing.

“We made the decision back when no one predicted the pandemic would last so long,” he said, noting that, after a soft opening in August 2020, the branch has performed far above its forecasted numbers. “We’ve seen deposits increase 40% to 50% from when we opened.”

 

Bottom Line

All the bankers we talked with agreed the next three to six months will give everyone a better idea of where the economy, COVID, and the prospects for area banks are headed.

“I think we need to focus on getting through these next few months, and let’s get through the Delta variant,” Worden said. “We all have short-range goals, but we’re also keeping our eye on the long range.”

And that long-range forecast will hopefully call for taking that surge in deposits and putting it to work in ways that will bolster the local economy.

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