Rising deposits, tight interest margins, increased preference for digital banking – the past two years since the pandemic began have brought a lot of change to community banks.
Fiscal stimulus provided by the federal government has worked its way through the banking system, bolstering deposits, said Jeffrey A. Stopko, president and CEO of AmeriServ Financial Inc.
“We saw strong deposit growth evident across the banking sector continuing into 2021,” he said. “I would expect it to probably level off here in 2022, because the amount of stimulus the government has provided has kind of come down now.”
Before the pandemic, the country’s money supply was growing at around 5.5% a year, Somerset Trust chairman and chief executive Sean Cook said. Then the pandemic hit in 2020 and the money supply grew by about 25% as federal fiscal and monetary policies aimed to support the economy.
“It was really a shock to the system,” Cook said. “Money supply increased by just under five times its normal growth rate in one year, then in 2021 it grew by just under 13%, so it is still significant compared to the years before pandemic.”
“Strong production of loans”
Congress has directed trillions of dollars into the economy for COVID-19 relief.
Bank accounts also swelled because there just weren’t many places to spend money, said Eric Renner, president and CEO of 1st Summit Bank.
“Restaurants were closed, a lot of businesses were closed, and people weren’t going on vacation, so there were also a lot of pretty big savings items that caused deposit accounts to balloon,” Renner said. “It is interesting to note that these deposits have remained blocked.
“How long they will stay with all of us banks remains to be seen.”
The increase in deposits has strengthened the ability of banks to deploy loans. With the Federal Reserve System having kept interest rates near zero since 2020, lending activity has increased significantly for banks, particularly in new mortgages, refinancing and business lending.
Total loan production at Ameri-Serv increased from $253 million in 2019 to $384 million in 2020, although federal PPP loans are included in this increase. In 2021, loan production remained higher than in 2019, at $332 million.
“We’ve had two very good years of loan production in both business lending and personal lending,” Stopko said. “I expect 2022 to have another good year of loan production.”
But with inflation soaring, the Fed is poised to implement small rate increases this year that could dampen some residential mortgage activity, he said.
In addition to raising interest rates, the Fed plans to scale back its bond purchases as measures to reduce inflation, Cook said.
“A lot of the discussion is that there will not just be rate increases, but potentially a reduction in the Federal Reserve balance sheet, which would really slow monetary growth,” he said.
“Broaden Those Margins”
Interest rate hikes could occur sometime late in the first quarter or early in the second quarter of this year.
However, Renner said the increases would be small.
While borrowers can continue to benefit from affordable rates, the Federal Reserve’s maintenance of historically low interest rates has put pressure on banks’ already tight margins.
“The bank is in terrific condition,” Renner said. “But I think as banks look to the future in 2022 and 2023, with this ongoing rate environment, I think the pressure on bank margins is going to continue. Some rate hikes are going to help, but the speed and frequency will be a determining factor in whether banks are able to expand those margins.
“There’s really pressure on banks’ net interest margins, which is our main way of making money,” he said.
Additionally, salary pressures have increased due to the pandemic, Stopko said.
“I’m only talking about AmeriServ, it’s been difficult to fill the positions,” he said.
“Currently, in the economy, there are more jobs than workers. This creates wage pressures.
Tight margins coupled with an increase in online banking led some banks to close branches in late 2020, Cook said.
However, Cook credits growth in Somerset Trust deposits with opening new branches.
“Several banks in the region have decided to start closing branches, but we are taking the other route,” he said.
“We try to grow through branches, and we’ve been successful in doing that.”
As the pandemic has accelerated customer preference for digital banking services, Somerset Trust has seen this trend flatten since the peak in the second quarter of 2020.
“I think it depends on our ability to bring branches back to normal operations and hours,” he said.
“Managing Your Money”
Consumer preferences continue to shift toward digital tools, Renner said, which has had positive effects on account balances.
“People who weren’t using online banking or mobile banking forced themselves to learn this during the pandemic,” he said. “People are increasingly comfortable with online channels for doing their banking, whether it’s taking a picture of a check and depositing it or checking their account balance online. .
“It’s actually had an impact on the level of overdraft activity, because as customers become more aware of how they manage their money and understand what’s in their account, they’re able to to avoid overdrafts.
Renner said he thinks the decrease in overdraft cases may also be linked to an increase in online shopping.
“If you’re sitting at home, about to buy something on Amazon, you might be more likely to say, ‘Oh, what’s my balance?’ But if you’re in a restaurant or Walmart and want to buy something, you don’t have access.
Digital transactions through Ameri-Serv grew about 18%, Stopko said. and about a third of these transactions are done using a smartphone or tablet, and two-thirds are done via a computer.
“The trend is more phone traffic, but I found it interesting that even though we as a society are still on the phone, we still get more traffic to our website through the computer,” he said. he declares.
Russ O’Reilly is a reporter for The Tribune-Democrat. Follow him on Twitter @RussellOReilly.