Want to Make a Banker's Day? Yank Your Deposits

There is bad news for those who withdrew funds on Bank Transfer Day to punish the targets of their ire.

Most banks don't really need their money — at least not right now.

The brutal truth is that the banking industry has more deposits than it can realistically handle. Good loan opportunities are hard to come by, investing in long-term bonds and munis remains a risky proposition, and many bankers are intimidated about testing the waters by buying corporate notes.

I have been to several conferences in recent weeks attended by chief executives of banks. Though most are still adamant that they want the customer relationship, you discover with very little prodding that bankers have their hands full putting deposits to work. The Federal Reserve certainly hasn't helped, vowing in August to keep the fed funds rate near zero until 2013.

"We're going to have this cash for two more years. What are we going to do with it?" Craig Meader, the chairman and CEO of First National Bank of Kansas in Waverly, said at the American Bankers Association's annual meeting in San Antonio. He made the comment after bemoaning the absence of good investments during a panel discussion on the future of banking.

"The industry certainly doesn't need more deposits today," Fred Cannon, the chief equity strategist at KBW Inc.'s Keefe, Bruyette & Woods, declared at an American Banker analyst roundtable last week. "The Fed made sure of that. The industry is awash in liquidity, which has turned into a problem for many banks across the country."

Many bankers are doing what they can to discourage big inflows of deposits. Bank Transfer Day notwithstanding, many feel like Mickey Mouse in the Sorcerer's Apprentice scene in Fantasia; the brooms keep dumping water into the tower as Mickey futilely attempts to toss water out the window.

"We keep driving down the rates on our deposits, but every time we do that it seems like more deposits come in," Michael Bauer, the chief credit officer at Community Bank Shares in New Albany, Ind., said in an interview Tuesday. The notion of hot money — when a customer leaves a bank after finding a higher rate elsewhere — seems to have gone away, too. "It has gotten to the point that customers don't even shop around for rates anymore," Bauer said.

"We've had to suppress deposit growth a little bit," added Mark Long, the president and CEO at First Commercial Bank in Sequin, Texas. His bank is facing stiff competition from bigger banks when it comes to courting and keeping its best borrowers, he said in an interview Tuesday.

While small banks don't necessarily want or need deposits, consumers seem more eager than ever to move their money to smaller banks. Based on recent data from the Independent Community Bankers of America, the group's "community bank locator" website drew nearly 11,000 hits from Oct. 8 to Nov. 8. (A year earlier, the site drew less than 400 hits.)

It would seem at first glance that banks would be sitting pretty in a low-rate environment, particularly when interest on deposit accounts hovers at historical lows. But holding onto these largely idle deposits is costing banks more than you might think.

Dan Geller, an executive vice president at Market Rates Insight in San Anselmo, Calif., estimates that federal deposit insurance is costing banks $1 for every $1,000 in deposits they hold. Banks are also incurring at least $200 in annual overhead costs for each checking account, regardless of whether a balance is $100 or $10,000, he said.

And those costs exclude any interest payment to the customer. The current average interest rate on deposits is 0.57%, which banks have to pay regardless of their need for liquidity, Geller said. At Oct. 31, the excess liquidity deposited at the Fed by banks amounts to $1.5 trillion, earning a rate of 0.25%, Geller said.

Marty Hansen, the president of First State Bank in Fairfax, Okla., concurred, noting that his bank is enduring a 52% loan-to-deposit ratio right now. That's right. His bank has twice as many deposits as it does loans.

Nationwide, that ratio was 73% at midyear, according to the FDIC's quarterly banking report. That translates into roughly $8.86 in deposits for every $6.37 in loans on banks' balance sheets. Those funds have to go somewhere if a bank wants to make any money.

When the financial crisis hit, Congress let banks park money at the Federal Reserve for a paltry 25-basis-point return. Banks have made generous use of this option, which still exists; 72% of all deposit inflows from January to June were moved to the Fed, according to the FDIC.

Some bankers are getting resourceful. Bradley Koehn, southern regional president at Midwest Bank in Lincoln, Neb., told me the agricultural bank was using some of its short-term deposits to secure longer-term certificates of deposit at other banks.

"We stay within the FDIC insurance limits," Koehn said, given the potential for bank failures. I asked what they would do it the bank needed its cash back, given penalties for early withdrawal. "The penalties are so low right now," he said.

To be sure, deposits will eventually regain value as loan demand picks back up. And there are some bankers who still believe that they can use deposit accounts to market other services, particularly on the commercial side.

"I think community bankers also know that over time the biggest value added they have is going to be sticky deposit relationships," Cannon said. "We're in this kind of Catch-22 period of deposits in banking in the U.S. where you don't want more of them, but you do want those relationships over time."

John Stumpf, the chairman and chief executive of Wells Fargo & Co., recently defended his bank's efforts to keep bringing in deposits. "If you were short term in your thinking you could make that argument" that Wells is taking in too many deposits, he said at an Atlanta Press Club meeting last month.

Stumpf makes sense. It would be great to have all these deposits — in another year or two, some bankers say. And it makes sense to take them in now if a bank is strong enough in terms of fee revenue and capital position to absorb hits to the net interest margin.

"We're growing households, and we want to get positioned for growth," said David Freeman, the president of QNB Corp., told me during a quick conversation at the ABA's annual conference. Still, he acknowledged that loan growth continues to be a challenge for the Quakertown, Pa., company.

"There's still an overall lack of confidence," Freeman said. "We've got great deposit growth, but there's not a lot we can do with it."

So bankers shouldn't fret when the Credit Union National Association releases data declaring that credit unions added 40,000 members and $80 million in deposits on Saturday. That averages out to $2,000 per account and $8 million in annual overhead costs that the banks are no longer tasked with incurring.

This might sound brutal or harsh, but by closing a savings account, the switchers might have done a favor for the bankers that have been drowning in your cash, at least in the short run.

The overall lesson? If consumers really want to punish the banks and hurt them financially … they should consider bringing that cash back and opening a CD.