Hartford Business Journal

10 Hartford Business Journal • November 30, 2020 • www.HartfordBusiness.com By Matt Pilon mpilon@hartfordbusiness.com C onnecticut bank accounts are positively brim- ming with cash, thanks to COVID-19 federal stimulus and the pandemic's ongoing impact on consumers' spending and saving habits. Across all 56 banks operating in Connecticut, customer deposits over the last year have spiked by more than $28 billion, or nearly 21%. It's by far the sharpest growth Con- necticut accounts have seen since at least the turn of the century, accord- ing to a Hartford Business Journal analysis of Federal Deposit Insurance Corp. data. The influx has been similar nationwide, with U.S. banks taking in an additional $2 trillion as of June, much of it from Paycheck Protection Program business loans and individ- ual stimulus payments. Area bankers say the growth has also been driven by a flight to safety by many consum- ers, who have moved investments into bank accounts and generally saved more and spent less this year amid economic uncertainty caused by the COVID-19 pandemic. "This is truly an unprecedented flow of funds into the banking system in such a short period," Deloitte financial services advisors wrote in a September research report. But the situation has also put banks in a bit of a pickle. Lenders use cus- tomer deposits to make new loans and other investments in order to produce a profit margin. Normally, a big increase in balances would be a good thing. Plus, it gener- ally indicates that customers like a bank's service and offerings. "But the second step of that is then 'what do you do with that money, what do you in- vest it in?' " said Paul H. Bruce, executive vice president and chief financial of- ficer at Danbury- based Union Savings Bank, where deposits have grown about 22% this year, well above Connecticut's average annual deposit growth rate of 4% to 6%. With loan demand generally not keeping pace with the spike in depos- its, and a low-interest environment in general, there are no easy answers. "There's really not anything that will give you a good return as the money sits there," said George Her- mann, CEO of Windsor Federal Sav- ings Bank, which has seen its deposits grow by nearly $100 million, or 21%, during the first nine months of 2020. Many banks are parking some excess deposits in safe, low-yield investments with the U.S. Treasury or Federal Reserve. Meantime, banks are simultaneous- ly reducing what it costs them to hold those deposits, which means lowering interest rates on customer checking and savings accounts and higher-cost certificates of deposit. The average interest rate on a one- year CD with less than $100,000 was 0.17% as of Nov. 16, according to the FDIC. "There's really no other choice," said Bruce, who noted that bank profit- ability depends on the spread between what lenders earn on loan and invest- ment interest vs. what they pay out to consumers. Lowering interest rates, which has happened at virtually every bank in Connecticut and nationwide this year, can be a delicate dance. Banks don't want to upset customers, but de- positors will likely find similarly lower rates elsewhere, too. "You want to be there for the customer. You want to be fair," said Paul Young, CFO of Mid- dletown-based Liberty Bank, the third-largest Connecticut- headquartered lender. "I don't want to have the low- est rate, but I don't want to have the highest one either." Liberty tacked on nearly $1 billion in deposits between Jan. 1 and Sept. 30, which is four or five times more than could be expected in a typical year. Young estimates that roughly half of the increase is pandemic related, while the remainder is from a mix of strategic initiatives, such as a greater focus on government banking, and typical deposit growth unrelated to coronavirus. Banks that already have low deposit costs and can't make up for the surge in account balances with rate reduc- tions alone may be forced to cut overhead expenses. "That's not something any company wants to get into," Union Savings' Bruce said. "We have not had to do that, luckily." A challenge, but not a crisis Inflated deposits and low rates are one challenge for banks. Another is a decrease in fee income, as transac- tion activity has fallen this year. Loan portfolios are also more stressed than usual, particularly for banks with a greater number of hospitality and retail borrowers. However, lenders remain well capi- talized and don't view the situation as an emergency. Banks that juggle their mix of li- abilities and assets the best will come out stronger when the pandemic subsides and economy rebounds, and those that manage the situation poorly could weaken their position and become acquisition targets, Lib- erty's Young said. "I have over 700 employees depend- ing on me," he said. "Asset manage- ment is the financial heartbeat of the company. I don't want to overstate it, but banks could succeed or fail during this time." One reason that many may not fail is because of stronger capital require- ments financial regulators put into place after the Great Recession, a period in which banks suffered from a lack of liquidity. "I think the best news heading into this crisis is that the industry was just a lot stronger than it was 10 years ago," Bruce said. "It can handle the margin compression for a short period of time, but it's not a long-term pleasant situation." Much will depend on how CO- VID-19 progresses in the year ahead, whether recently introduced vaccines are effective, and how the economy responds. All of the potential scenarios make budgeting for next year harder than ever. "It's the most difficult budget I've ever been involved with in my 20 years in banking because of all the Excess Liquidity CT banks struggle to make hay from pandemic-induced deposit flood George Hermann, CEO of Windsor Federal Savings, has seen an approximately $100 million increase in deposits this year, due to pandemic stimulus and changing spending and savings habits. FOCUS: BANKING & FINANCE HBJ PHOTO | STEVE LASCHEVER Paul H. Bruce, Union Savings Bank Paul Young, Liberty Bank

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