Deposit growth not always a good thing

From a prestige standpoint, having the highest percentage of bank deposits in a region is nice. From a profitability standpoint, bank deposits can be burden.

In early October the Federal Deposit Insurance Corp. released bank deposit data based on accounts as of June 30, 2011. In the Fort Smith area, First National Bank of Fort Smith was tops with 17.88% of the market share. Arvest Bank was king of the deposit hill statewide with 10.73% of the market share.

The problem for banks is simple: Reduced loan demand and low interest rates have created a combination in which banks are unable to garner the most return on the dollars sitting in their vaults — or at least their electronic vaults.

Several bankers interviewed by The City Wire said money is flooding out of stock markets into banks, and people are parking their money in deposits until they have a better feel for the direction of the stock markets and/or the national economy. While the investment options are complex, following is the primary issue banks now face with deposits.
• Susie wants to cash out of her stock market investments and place the money in a CD for safekeeping. She gets a one-year CD for 0.5%.
• The bank, unable to use the money elsewhere because of flat to declining loan demand, parks the funds with the Federal Reserve and collects about 0.25%.
• The bank also pays FDIC insurance of about 0.1%. Therefore, the bank has lost about 0.35% on the deal with Susie.
• Multiply that transaction by millions of dollars and, well, it’s not a good picture for a bank.

Craig Rivaldo, CEO of Arvest’s Fort Smith-River Valley division, said about 36 months ago many banks needed deposits to help fund growth in loan demand. But with loan demand weaker, the deposits become more of an expense than a revenue generator.

“If a bank needs deposits to help fund strong loan demands, a bank can raise their interest rates on deposits to handle the funding. In today’s economic environment, loan demand is significantly reduced from ‘pre-recession’ demand, therefore a bank’s need for expensive deposits are minimized significantly,” Rivaldo explained.

Loan growth has declined in the U.S. and Arkansas.

As of June 30, 2011, the value of loans and leases in Arkansas was $142.884 billion, down 21.18% compared to June 30, 2009, according to FDIC figures. In the U.S., the value of loans and leases at June 30, 2011, was $7.313 trillion, down from $7.414 trillion on June 30, 2009.

“We’re not turning down a lot of deals, it’s just that we’re getting fewer requests,” said Sam Sicard, First Bank Corp. president and CEO. The bank holding company owns First National Bank of Fort Smith, Citizens Bank & Trust in Van Buren and other banks in Oklahoma and Northwest Arkansas.

Sicard said the bond and equities markets hold little value with respect to a good place to park deposits. He said most banks are hesitant to lock their money up on a 10-year note that generates around 2% interest.

However, Sicard said the bank’s philosophy attempts to blend financial realities with relationships.

“Unless you are putting money into loans, sure, it’s hard to make money on deposits. But our focus is on the long-term, and we are about developing those relationships that often come from those (deposits),” Sicard said.

Rivaldo said Arvest seeks to grow its “core deposits,” such as non-interest checking, checking accounts, regular savings accounts and money markets. But he said many banks are careful with “hot money” deposits. Such deposits include brokered deposits and certificates of deposit from municipalities, school districts and other large institutions seeking to park money for a few months looking strictly for higher rates.

Hot money deposits are often too expensive for a bank to accept because not only does a bank have to pay the interest, but may often had to provide additional FDIC insurance or pledge securities to cover deposits over $250,000.