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Deposits Everywhere…And No Place to Put Them

Strategically Speaking
May 9, 2012

Joel Rosenberg Author: Joel Rosenberg, CFA,

Interestingly, much has been written recently in financial publications about the need to prepare for rising rates and pressure to originate deposits in the future. While planning for eventualities is always a good procedure, many bank and credit union executives must shake their heads wondering how they are going to deploy the current glut of deposits in this low interest rate environment. Most good forecasters, including pronouncements from the Federal Reserve, indicate that the economy will not be experiencing high or even moderate interest rates until at least 2013 and possibly beyond. Also, economic events can always lay well thought out assumptions asunder, but it seems increasingly likely that rates will be tame for a couple more years.  With gyrations in the stock market and a large number of baby boomers and others saving for retirement, lack of deposit flows at this point doesn’t seem to be a problem for most institutions. This is particularly interesting in light of the continued decline in deposit rates. Average MMDA rates have decreased by about 50 basis points from March 2009 through late September 2011 and twelve month CD rates have fallen by about 1.1% during that period.

National average deposit rates

Using our customized database on community banks based on FDIC data (we exclude most banks over $20 billion in assets, bankers banks, and specialty banks like credit card institutions or foreign entities), average deposits, both total and retail, per community bank have risen substantially since 2008.

Growth in Deposits per community bank

Growth in deposits is generally not a bad development, but if there isn’t complimentary growth in loans, the funds are just invested in low yielding securities. This situation can be captured by the loan to deposit ratio which continues to decline from 2008 through 2011.

Loans to deposits at community banks

Financial institutions have plenty of funds, but in many cases there are not a lot of good opportunities to deploy those funds. The last chart shows growth or perhaps lack of growth of loans at community banks.

Total loans at community banks

Should we prepare for a period of deposit shortage, the answer is definitely yes. This may be a time of plenty deposit-wise, but times of plenty can quickly turn into famine. After all, if one examines the first decade of 2000, except for 2002-2004 and at the end of the decade, banks were scrambling for deposits during most of the period. Now is definitely a good time to be preparing for those periods when deposits will be scarce. Bankers need to make sure that their systems and procedures are in place to handle the inevitable need to raise more funds through deposits.

What are some procedures and processes that we should consider? If your institution isn’t taking action in the following areas you need to get started. Below is a short check-list of items a well-managed institution should be initiating.

    • Have a Profitability committee that meets at a schedule time regularly;
    • Collect market intelligence on competitors;
    • Review national and regional market rates and economic information;
    • Produce reports on upcoming maturing CDs;
    • Have good means to monitor closed accounts; and
    • Use a deposit pricing model to understand the profitability of actions taken or to be initiated.

What are some of the procedures and processes you’re thinking about to address this situation?

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