Recent Trends With Commercial Deposits, April 6

April 6, 2020 Jim Young

Jim and Dallas discuss current trends with commercial deposits and dive into the CARES Act, PPP loans and how banks are acting and reacting in today's market environment.


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Jim Young: Hi and welcome to The Purposeful Banker, the podcast brought to you by PrecisionLender where we discuss the big topics on the minds of today's best bankers. I'm Jim Young, director of content in PrecisionLender and I'm joined again by Dallas Wells, our EVP of strategy. As I mentioned in our last podcast, we're moving away from our regular once every two weeks podcast schedule for the immediate future, trying to be a little more timely delivering you content right now. We'll likely be podcasting once a week for now, recording these earlier in the previous week and then dropping them early on Monday mornings. So again, bear with us. It's a process. We're still ironing things out.

Jim Young: With that disclaimer out of the way, let's move on to today's topic, which is commercial deposits. Dallas, lately we've been getting a lot of questions from bankers about what we're seeing regarding deposits when we look at our PrecisionLender database. With rates so low, I'm curious why is that on the minds of bankers right now?

Dallas Wells: I think there's two things that our bankers are looking at. So one of them is that I think there's an awful lot of PTSD from the financial crisis, which it felt like it was starting to fade from memory a little bit. We were more than a decade past it, but the volatility and market craziness that we've seen over the past couple of weeks, I think bankers can't help but go back to that and look to some of the things that feel familiar. And I think the reason for that is because we saw an unprecedented reaction from the Federal Reserve through the financial crisis and they're going back to some of those very same things. So emergency rate cuts that were out of cycle, these multi-letter guarantee programs that are out there in the credit markets to make sure that they keep functioning.

And those were all things that were brand new in 2009, it was the first time they'd ever been used, most of them. And so we thought those were one-time events and now here they are, they're back again. And so one of the repercussions of that was that a lot of that liquidity when the Fed just basically, to use Ben Bernanke's term for it, it was dropping money from helicopters. It was just add liquidity into the system wherever you can find places to add it just to keep the system functioning. And a lot of that liquidity landed on bank balance sheets. And so you had just like loan demand completely drying up. And then all of this liquidity landing on balance sheets, both because the fed pumped it in, and also because depositors were seeking safety. So an FDIC insured bank account is a safe place to park money and weather the storm.

And so there was all these deposits sitting there and basically nothing to do with them, very low interest rates, almost nonexistent loan demand. So then banks are out there in the bond markets trying to find places to put money to work. And a lot of times it was at negative spreads, they just couldn't make money on it. The other thing that, which is particularly interesting about our data versus a lot of the other data you'll see is that this is commercial deposit accounts. These are business operating deposit accounts. So there's some also element of credit health that is interesting there too of how flush are the businesses that are the customers of these banks? And so you have some conflicting things that banks are wary of there. And we've seen some early indicators.

There was just some... the Fed does these weekly changes in C&I loans and deposits and it's for the very biggest banks, but they're looking at these top level numbers. And there was big spikes in C&I loan balances, which is banks extending credit to lots of businesses that need it. And then also big spikes in deposit balances. But that's across the board all over the place, all kinds of depositors. And that's not been exactly what we've seen in our data. So anyway, that's why we're getting that question a lot and I think why it's top of mind for bankers.

Jim Young: Okay. And yeah, I guess I'm wondering about that because deposits became a problem in 2008 but I'm wondering if they... it doesn't sound like you're saying they present that same problem right now. I mean, I know again, talking about our database this month, we've seen a spike in loan demand, commercial loan demand. And so I'm wondering if the conditions of 2008 aren't matched here and is this a potential problem or not?

Dallas Wells: Well, we're really early. So when we say that a lot of that liquidity landed on bank balance sheets, it's not an instantaneous thing. It's not like the Fed announces these things and the next day the money is sitting in your vaults. It takes some time to filter through the system. And a lot of these programs are just announced, they're not even fully functioning yet. And a lot of them are just backstops that haven't actually been put to use much yet. So what we are seeing some early indications of, and I'll apologize for, audio is maybe not the best format for this, but we do have written content out there that lines up with this.

In addition to just looking at average balances, we also were looking at the dispersion of accounts. So we're looking at standard deviation of balances. And what we're seeing is that there's a lot more noise introduced into those averages. So average balances are actually coming down in what we would consider operating accounts for businesses, but with a bigger standard deviation. Some of those balances are way up and some of them are way down. And I think that's what you're seeing anecdotally makes sense. There are parts of the economy that have just literally shut down and so those businesses are really bleeding and hurting. And then there are others that are full speed ahead just trying to keep up with demand.

And then what we also see is we've seen lots of draws on lines of credit. And if you follow the relationship data on those that we have, you can see a big draw on a line of credit and a same day deposit into the operating account. So you see borrowers literally seeing the potential damage around them and saying, "I want cash in hand, not a potentially available line of credit as long as I'm still in the good graces of the bank, but I want to draw down on that, have cash on hand with which to survive and operate." So lots of interesting things happening. That is when we're just looking at averages, I think there's telling things in there, but there's a lot of story that gets buried within those averages that we're having lots of discussions with banks on.

Jim Young: I'm curious. One of the things when we talked about what happened in 2008, we talked about that left hand, right hand problem at banks where deposits teams were thinking this is the greatest thing ever. Our job is to bring in deposits and we're bringing them in by gush and then the lending team was saying, "You're killing us over here." And I'm wondering if banks are better positioned now. We've taught digital transformation till we're blue in the face and that becomes a buzzy term and that sort of stuff. But I'm wondering if you feel like banks are better positioned now to at least, regardless of some of the market stuff you can or can't control, but at least be able to control and understanding what's going on on their own balance sheets and having a universal understanding of that.

Dallas Wells: We definitely made progress and where we've made progress is I think awareness of what's happening. So banks are... they see both sides of the balance sheet more clearly. And basically it's the proliferation of analytics and business intelligence and dashboards all over the place, right? So I think bankers now have dashboards and some of those things are blinking red where we haven't necessarily seen as much progress yet. We've seen pockets of it, but we haven't seen widespread changes as, all right, when it blinks red, what the heck do you do about it? How do you actually now put an action in place?

And I'll give you a tangible example of that that's going to be really, really interesting to watch over the next few weeks is as a part of the CARES Act, of course there was a $350 billion addition to SBA loans and they're called PPP loans. So Paycheck Protection Program is what it's called, just so that we could add some more acronyms to banking. So these PPP loans are basically SBA guaranteed loans. The SBA guarantee level is at 100%, it's typically lower than that. And the really interesting part of these is that portions of the loaned balance are forgivable and they are forgivable if they're spent on certain qualifying criteria over an eight week span. And this program is supposed to go live pretty much immediately, the funds have to be dispersed by the end of June.

And then some of the guarantees and flipping to different structures and some of the technical stuff happens at the end of the year. So what that means is you've got $350 billion of SBA guaranteed loans that need to be approved and dispersed. It's a brand new program we've never done before. We don't know exactly the mechanics, we don't know exactly how it's going to work. We don't know exactly the economics of it just yet, and there's a ticking clock on it. These things have to be out by June 30 and the businesses need the money like yesterday. So you've got an industry now that's got to spin up procedures and policies and risk management stuff on a brand new SBA program in a matter of days. And so I think that's where this, do we know what one side's doing with the other?

So as we have borrowers coming in and saying, "Hey, I need help, I need some liquidity," are they PPP program kind of businesses? Is this business as usual and you just extend them credit? In many cases, what's probably better for that business is to put them into the SBA program even if you don't really want to because then that money is going to get forgiven and it's basically a grant from the Federal government, but you actually lose some of your potential outstandings. So anyway, some interesting dynamics there that I think have implications for the deposit topic that we're talking about here and being able to follow what's going to happen on one side of the balance sheet based on actions you take on the other. And it's not just seeing the analytics and measuring and being aware of it, you have to have a cohesive strategy there. That's what I'm not sure the banks are ready to pull off.

Jim Young: I was curious if... and again, my usual layman non-banker caveat with this question here, but just thinking through it again, looking back to 2008 and what we talked about with an imbalance and just wondering if we might end up with the opposite situation here where, I mean, we talked about people... there's a lot of people out there who really need funding right now and sometimes stopgap sometimes is longer than that. And it would seem to me... and you mentioned the line of credit one, which was an interesting aspect of it, but there's a lot more wanting funding rather than a place to stash funds. And so I guess what I'm wondering about for banks and if it gets to that situation, it's not only people bringing deposits because the rates are so low and they really just need to add funds.

What then can banks do to try to keep their cost of funds down if there's that big gap between loan demand and deposit supply?

Dallas Wells: That's the danger of I think banks trying to fight the last war and the scar tissue that still remains from that. So in the financial crisis, that was really... the origin was in the credit markets and in banks themselves. Right? So there was a lot of dysfunction within the system and that's not really the case at this time. This is really truly an economic shock and it's almost more of a natural disaster kind of event than some sort of-

Jim Young: Systemic issue, right?

Dallas Wells: Yeah, right. It's not a systemic thing within the credit markets where you have fear of the system surviving. And so I think there will be lots of different behaviors and the winning tactic for banks the last time around was basically get your cost of funds to zero as fast as possible. Because no matter how much you cut deposit rates, the depositers weren't leaving, they weren't going somewhere else. There was no alternatives for them to go find. And that may not be the case this time. Again, we have functioning financial markets, there are other alternatives and there's this whole fintech ecosystem of competitors out there who have really, some of it's been technological and customer service advancements, no doubt, but a lot of it's also just been plain old fashioned high rate buying deposits.

And so there's those players out there that are a part of the decision process now that weren't before. So I think there's just enough elements that are different that if the bank goes out and just says, "Hey, I've seen this before and I know exactly what to do, just slash all the deposit rates to zero across the board, the Feds at zero and don't worry, nobody's going to go anywhere. We're just going to be a wash and deposits." I don't know that that's going to be the case. And I don't know that you can just ignore the liability side of the balance sheet like we did for essentially seven or eight years last time around. You just didn't have to pay attention to it because the deposits were always there.

To your point, I think it is different this time and this is an economic liquidity shock instead of a financial markets liquidity shock.

Jim Young: Got you. I was wondering about end of last year, second half of 2019 really, cross-selling was the topic de jure and that was the big thing. Again, it was you got to get deposits, get those fees, loan rates and that sort of stuff is not where it's at. In some cases it's okay to be a loss leader in that category. And I'm wondering, in the same way that we've had conversations within our marketing department about, let's dial back on trying to be too salesy in our tone right now and everybody is, I'm wondering for our bankers cautious about maybe doing too much, for lack of a better word, negotiation right now. I mean, they've got businesses in need right now for funding. Is it possible to just have the, "Hey, okay, I can give this to you, but I need you to bring in this," sort of conversation. Or is that really not kosher right now?

Dallas Wells: I think the gut feel there is now is not the time and I think you're seeing bank behavior lineup with that. So quite a few articles recently that are showing the way banks are responding to this and the difference from the last time around is night and day, right? Again, banks were the walking wounded last time around and were in survival mode. This time they're in help mode. They're coming from a position of strength and they're also, here's what I think is really important. They're viewing this as a temporary issue because we were just having a discussion with a bank earlier today about putting in place a program for cross-selling.

So they're not going to go out and do that tomorrow or next week or next month. But they can see right around the corner, there's a time when it's like, okay, back to business as usual, we go back to cross-selling, we go back to trying to expand wallet share and deepen the relationships that we have with customers. So there's like the short term right in front of you weather the crisis and weather it with your customers, be a backstop for them and just get them what they need and then later we'll come back and deal with the cross-selling. And so we talked about this a week or two ago of the, I think really what it's more about now is setting yourself up to be able to have that conversation. Meaning build some trust, build some goodwill by just doing what's right and don't add any unnecessary friction to that.

What are they going to do? Bring you all the paperwork down to the branch? Don't make this hard. They're trying to make payroll or make some version of payroll at this point. So don't make it difficult so that you stay on track for your quarterly cross-sell bonus or whatever. I don't think that's how bankers are viewing it, but they do see this as very much a temporary thing. And I think that's what we'll have to just see is how temporary is it and what are the longer follow on effects of this that may linger with us longer than the banks expect and how many of the industries won't be able to quickly come out of this and now you have some actual underlying credit issues to deal with. So there will be some of those. It's just a matter of how deep and how long. And we just don't know that yet.

But this is a weird one in that it just feels like banks are saying, "Well, maybe it's a couple of weeks, maybe it's a couple months, but this will blow over and we'll be back to where we were."

Jim Young: As we noted in the beginning, this episode topic came from questions we're getting from clients about what we're seeing in our PrecisionLender database. Again, if you've got questions you'd like us to research or topic you want us to tackle on the podcast, please send me an email. It's initial and I'll put that in the show notes as well. All right, well, that will do it for this week's show. Dallas, thanks for coming on again.

Dallas Wells: You bet. Thank you.

Jim Young: And thank you so much for listening. Now for a few friendly reminders, if you want to listen to more podcasts or check out more of our content, you can visit the resource page at or head over to our homepage to learn more about the company behind the content. And if you like what you've been hearing, make sure to subscribe to the feed in iTunes, Google Play, or Stitcher. We love to get ratings and feedback on any of those platforms. Until next time, this is Jim Young and Dallas Wells. You've been listening to The Purposeful Banker.


About the Author

Jim Young

Jim Young, Director of Content at PrecisionLender, is an award-winning writer with experience in a range of positions in media and marketing, from reporter to website editor to content marketer. Throughout his career Jim has focused on the story – how to find it, how to understand it, and how best to share it with others. At PrecisionLender, he manages the many ways in which the company shares its philosophy on banking and the power of relationships. Jim graduated Phi Beta Kappa from Duke University and holds a masters degree in journalism from Columbia University.

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