Worcester Business Journal

20 Worcester Business Journal | September 28, 2020 | wbjournal.com F O C U S B A N K I N G & F I N A N C E T he coronavirus pandemic and the economic pain it is causing has brought a flood of new deposits to banks in Central Massa- chusetts and nationally. e trend hasn't been entirely good. "Everyone can see the storm clouds on the horizon, and we just keep waiting for them to come," said Todd Tallman, president of Cornerstone Bank in Southbridge. Banks have seen net incomes drop precipitously and are setting aside far greater amounts of expected potential losses in loans and leases, according to a Worcester Business Journal review of Federal Deposit Insurance Corp. data. Across the 15 largest locally-based banks by deposits, the first half of 2020 saw deposits soar by 18%, or more than $2.5 billion, compared to a year earlier. "Banks on the whole are flush with deposits," said Brian McEvoy, a senior vice president at Webster Five Cents Savings Bank, who leads its retail banking division. "Growth year-to- year is really historic." Bank profits, though, dropped by 45%, or more than $30 million, due in part by exceptionally low interest rates. Central Mass. banks are seeing far more deposits, but are expecting hard times ahead Preparing for the coming storm BY GRANT WELKER Worcester Business Journal News Editor And in a sign banks may be ex- pecting credit repayment issues, the amount of money they're setting aside for those losses is more than four times the amount they set aside for such losses in the first half of 2019. ose banks set aside nearly $26 million for what are called credit-loss provi- sions in the first six months of 2020. Among them, Mid- dlesex Savings Bank, the largest Central Massachusetts-based bank by deposits, put $4 million aside for those losses this year. Last year, it didn't report having any money in that account. Nationally, the FDIC has seen the same trends. For the second straight quarter, new deposits exceeded $1 trillion, something FDIC Chairwoman Jelena McWilliams said surpassed anything seen nationally by banks before. De- posits grew 21% from a year prior. "ese inflows demonstrate public confidence in the banking system, as well as the system's ability to accom- modate unprecedented customer demand," McWilliams said. Soaring deposits Bank industry leaders locally said spiking deposit numbers are attributable to a few causes. Most people have kept their jobs but have fewer places to spend without traveling or going out to eat as much. Many are putting more money aside in secure bank accounts to ride out a less predictable time for the stock market. "When there's uncertainty in econom- ic times, people tend to be more conser- vative with their investments," said Jon Skarin, the executive vice president of the Massachusetts Bankers Association. Americans are saving far more money than they have in decades. e national personal savings rate spiked to 34% in April and remained at nearly 18% in July, according to the Federal Reserve Bank of St. Louis. Since such records began in the 1950s, the rate has never before exceeded 17%, and that was in 1975. Federal aid is playing a factor. e $669-billion federal Paycheck Protection Program gave small busi- nesses a financial lifeline during the pandemic, including 346 loans of $1 million or more in Central Massachu- setts. Much of those loans don't need to be repaid if they keep people employed. Nearly all Americans received $1,200 stimulus checks. In the cases of both businesses and individuals, enough of those federal funds are sitting in bank accounts to make a substantial differ- ence, bank officials said. At Webster Five, more than 60% of deposit growth came from business customers compared to individuals, a reversal from what the bank typically sees, McEvoy said. Dropping profitability Banks' net incomes in the first six months of the year dropped 45% in Central Massachusetts. Nationally, banks' net incomes fell by 70%. Each of the 15 largest Central Massa- chusetts-based banks were profitable in the first half of the year, but four saw net income fall by more than half. Two factors led most directly to that drop: rock-bottom interest rates and banks choosing to put far more money aside for expected losses. Banks are generally seeing less fee revenue because of a drop in spending and borrowing. e federal interest rate was 0.1% in August, down from a range around 2.4% last year, and a fraction of rates in the upper teens in the early 1980s. nterest rates are the biggest driver of profitability loss, Skarin said, and some- thing banks expect to continue for the foreseeable future. Smaller banks are faring better than their regional or national counterparts, however, McEvoy said. "We're looking at very different conversations here," he said, with such smaller banks having a different lending portfolio and having mutual ownership that buffers them from quarterly earn- Cornerstone Bank (left) and Hudson's Avidia Bank (above) were among those with rising deposits but falling profits in the first half of 2020. Todd Tallman, Cornerstone Bank president Mark O'Connell, Avidia Bank's president and CEO, saw diverting revenue trends. PHOTOS/GRANT WELKER

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