Total deposits in U.S. banks increased 8.5% ($1.2 Trillion) during the first quarter of 2020 and 13.3% for the 12 month period. With interest rates near zero, and much of the influx coming from PPP loans, which by nature will have a short shelf life, a good amount of the increase was in non-interest bearing accounts (about 1/3rd).
The other 2/3rds has no doubt contributed to a pinch in interest margins. According to the FDIC Quarterly Banking Profile, 45% of banks reported declines in their net interest income from a year earlier, yet the average net interest margin (NIM) dropped 29 basis points over the 12 month period (to 3.13%). With a 1% cap on PPP loan interest, that margin is apt to get squeezed even more over the coming quarters.
After adjusting prior periods for mergers, community bank deposits grew 5.4% over the 12 month period. Brokered deposits at these banks were down 12.4%. Avoiding or eliminating high cost brokered deposits is a good way to help with those margins. Another way to help, (which you won’t want to hear, but know all too well) is by letting more expensive CDs expire.
While we always strive to get you the best CD rates at “credit-worthy” banks, you have undoubtedly noticed that attractive rates are scarce. We’ll keep trying. In fact, this week we added three new listees (highlighted in blue on the rate pages). But it looks like we are all going to need to exercise patience.
While we are in “Pandemic-Mode”:
- Aside from PPP, there is not much appetite for new loans— from consumers or businesses;
- The Federal Reserve is unlikely to make any change to the Fed Funds rate anytime soon;
- Recent volatility has spooked some stock market money back to the safety of federally-insured deposits;
- PPP funding has been parked, albeit temporarily, into deposit accounts;
- Unemployment will serve to decrease savings deposits but is unlikely to increase lending.
Post-Pandemic, we will look forward to getting back to some sense of normalcy. The question of course, is how long will that take?
That being said, the 50 community banks listed on page 7 reported the highest percent of deposit growth during the first quarter of 2020. In addition to the deposit increase reasons we explained on page 1, you’ll notice we included the established date on the top three. These are all brand new banks.
In fact, all banks listed with certificate numbers beginning with “591” are newly established banks and are expected to have rapid deposit (and asset) growth. It would be worrisome if they did not. However, we do want to draw your attention to one in particular.
Unlike the other newly established community banks, 3½-Star Piermont Bank, New York, NY has been making use of brokered deposits to grow. Piermont Bank bills itself as “A Different Kind of Bank”. It is. Owned and led by women, Piermont Bank caters to women-owned and minority-owned businesses. It caters to many other industries as well, including real estate, healthcare, manufacturing, the arts and more, but it is not as diversified as it sounds.
At March 31st, over 83% of Piermont Bank’s loans were in commercial real estate. The other 17% were in commercial and industrial loans. To fund these loans, Piermont Bank turned to brokered deposits. While brokered deposits are not innately harmful or bad, like anything else, when not used judiciously, they can be.
Brokered Deposits:
- Tend to be more expensive than other deposits; and
- May not be available in times of stress or adverse conditions.
While the adverse conditions and stress we are all facing are no fault of the bank’s, commercial real estate can be risky in the best of times. Today, it is exponentially more so. In relying on expensive brokered deposits to fund these loans, Piermont Bank has an interest margin of just 1.82% (1.875% on earning assets) putting it in the bottom 2% of the industry. Remember the average is 3.13%.
The bank may have to rethink its operating methods.