State bank deposits up 26% since ’19
Bank deposits in Arkansas have jumped by $14 billion, or 26%, in two years, driven largely by consumers and businesses conserving cash during the coronavirus pandemic, according to new data from the Federal Deposit Insurance Corp.
Deposits at Arkansas banks continue to climb during the pandemic, creating earnings pressure for the lenders as they grapple simultaneously with near-zero interest rates and slow loan volumes.
Bank deposits in Arkansas have doubled in the past two reporting years compared with the previous two years, according to FDIC’s annual summary of deposits report.
“Over the years we’ve had steady continued growth at Arkansas banks in total assets and total deposits, and that’s all good,” state Bank Commissioner Susannah Marshall said Wednesday. “But truly the pandemic has led to a significant increase in deposits and is creating challenges for banks.”
The FDIC report examines deposits for the 12-month period ending June 30 and includes total deposits at 84 financial institutions chartered in Arkansas.
Deposits reached $70.16 billion as of June 30 compared with $64.8 billion in 2020 and $56.04 billion for the 2019 period.
That does not include out-of-state banks operating in Arkansas, such as Bank of America or Regions Financial Corp.
“Because of the influx in deposits, interest rates have remained low and will continue to be low until banks are able to utilize the funds in making loans,” Garland Binns, a Little Rock attorney who works with banks across the state, said Wednesday. “Deposits during the past two years in Arkansas banks and nationwide have outstripped the demand for loans resulting
in substantially low deposit rates offered by banks.”
The FDIC on Wednesday also released its analysis of second-quarter 2021 performance results for the 4,951 financial institutions the agency insures.
The report amplifies the difficult environment banks are operating in as loan volumes remain stalled and yields on securities investments remain low.
U.S. financial institutions reported aggregate net income of $70.4 billion in the quarter, a 281% increase from the same period in 2020. “The banking industry reported strong earnings in second quarter 2021, supported by continued economic growth and further improvements in credit quality,” FDIC Chairman Jelena McWilliams said in a statement announcing the results.
The Arkansas economy has improved during the pandemic, but banks remain challenged as consumers and businesses hang on to their cash and stuff it in bank deposits, according to Marshall.
“Households and businesses are still staying patient, conserving cash and watching their spending as we work through the pandemic,” she said. “The environment is especially creating problems with net interest margins for banks.”
The second-quarter analysis from the FDIC notes that net interest margins, a key measure of the profits banks produce on interest earnings, “continued to contract to a new record low.” Average net interest margins dropped 0.31% to 2.5% and “the lowest level on record,” the FDIC said in a statement announcing the quarterly results.
Margins were reduced as net interest income overall declined by 1.7% or $2.2 billion compared with the second quarter of 2020. The aggregate return on average assets ratio was 1.24% from a year ago, but down 0.14 percentage points from this year’s first quarter.
Another important metric — loan volumes — were up slightly from the first quarter of the year, a 0.3% bump, and registered the first increase since the second quarter of last year.
FitchRatings issued a report in August noting that bank deposits grew nine times faster than loan volumes for the 12-month period from June 2020 to June 2021.
The nation’s banking industry is strong and “remains well positioned to support the country’s lending needs as the economy continues to recover from the pandemic,” Diane Ellis, director of the FDIC’s division of insurance and research, said in a statement released Wednesday in conjunction with the earnings information.
“However, low interest rates and modest loan demand will likely continue to present challenges for the banking industry in the near term,” she added. “Further, the banking industry may face additional challenges as the pandemic-support programs for borrowers wind down and loan forbearance periods end.”