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YOY deposit growth highest in low-income neighborhoods

Banking Essentials Newsletter December Edition Part 2

Banking Essentials Newsletter - November Edition

University Essentials | COVID-19 Economic Outlook in Banking: Rates and Long-Term Expectations: Q&A with the Experts

Estimating Credit Losses Under COVID-19 and the Post-Crisis Recovery


YOY deposit growth highest in low-income neighborhoods

Bank branches in low-income neighborhoods posted the strongest deposit growth of any income segment through the second quarter, a period when expanded unemployment benefits and government stimulus checks arrived for many consumers. Meanwhile, national banks continued to shutter branches in low-income areas, and the bank that opened the most collects abnormally high overdraft and service charges.

Across the nearly 4,000 bank branches in low-income neighborhoods, the median year-over-year deposit growth was 19.5% at June 30, outpacing the 16.9% median growth for upper-income neighborhoods, according to Summary of Deposits data from the Federal Deposit Insurance Corp. As in prior years, deposit growth in both low-income and upper-income neighborhoods outpaced the industrywide aggregate.

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Researchers have found that the COVID-19 pandemic has more severely affected low-income workers, who are less likely to be able to work from home. At the same time, government stimulus and expanded unemployment benefits have provided a more significant boost for these workers.

In a Sept. 8 paper published by the W.E. Upjohn Institute for Employment Research, authors found that workers in the bottom third of earnings received 49% of emergency COVID-19 benefits. The researchers found that low-income workers were more likely to lose their jobs due to the COVID-19 pandemic. And because lawmakers targeted the median worker when increasing unemployment benefits by $600 per week, low-income workers were likely to receive more in unemployment than they would have earned on the job.

On the other hand, the research cites another paper, published in the National Bureau of Economic Research, that shows low-income individuals were more likely to spend COVID-19 relief funds.

While that provides a larger boost to the local economy, it also might mean the recent deposit growth could be short-lived.

A recent Federal Reserve survey, the Survey of Consumer Finances, showed a median net worth of $9,300 for households in the bottom quintile of income in 2019. While that represented a 32.5% jump from the median in 2016 — the survey is conducted every three years — the figure was still 14.3% lower than the 2007 reading.

Deposit growth data as a proxy for local economic conditions is somewhat limited by banks' approach to their branches. Banks often move deposits by the billions from one branch to another, necessitating the use of median figures instead of aggregate numbers. And the consolidation of branches could complicate growth figures as banks move deposits from closed branches to nearby ones that are still operating.

Branch closures have been more prevalent in low-income neighborhoods in recent years. Since 2013, banks have closed 11.3% of their branches in low-income areas, below the 11.7% figure for the industry and a 7.9% closure rate for upper-income areas. Closure rates are on a net basis, accounting for branch openings and closings.

However, the latest data shows a reversal of that trend, with low-income areas seeing the fewest closures, on a proportional basis. Banks closed, on net, 0.7% of their branches in low-income neighborhoods, about half the nationwide closure rate of 1.4%.

By bank, the companies that have been the most active in closing branches shuttered the most branches in low- to moderate-income neighborhoods. U.S. Bancorp led the way by total number count, closing 56 branches, on net, in the 12 months ended June 30, representing 7.1% of its branch network in low- and moderate-income areas. That was a slightly higher closure clip than its 6.6% closure rate in all other areas. Wells Fargo & Co. was next with 45 net closures, or 2.8% of its branch network in low- to moderate-income areas. U.S. Bancorp and Wells Fargo closed the most branches in 2019.

At the other end of the spectrum was Woodforest Financial Group Inc., which led all banks in terms of net openings in low- to moderate-income areas with 23 additional branches over the 12 months. The company's main subsidiary bank, Woodforest National Bank, is among the nation's most aggressive banks when it comes to service charges. In the last 12 months ended June 30, Woodforest was the only bank under $10 billion in assets to be among the top 20 banks by service charges, which accounted for 31.9% of the bank's operating revenue. The industrywide median was 1.6%.

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