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Street Talk Episode 78: The case to build deposits in a market flush with cash

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Listen: Street Talk Episode 78: The case to build deposits in a market flush with cash

Revenue pressures from excess liquidity could create opportunities for community banks to take market share while competitors retreat.

Presenters at S&P Global Market Intelligence's annual community bankers conference talked about lending to industries most heavily impacted by the pandemic, investing in technology to remain relevant and how banks should take a contrarian view to the challenging revenue environment and build core deposits.

Jeff Marsico, president at bank advisory firm Kafafian Group, and Jeff Weaver, president and CEO at Dallas-based American Bank NA, kicked off the community bankers conference as guests on a live episode of the "Street Talk" podcast and said even in the face of mounting excess liquidity across the industry, it is worthwhile to keep the deposits flowing in.

Banks currently sit on an unprecedented amount of excess cash due to explosive deposit growth and lackluster loan demand that persisted since the beginning of the pandemic. Low interest rates have left institutions with few attractive yield opportunities to put funds to work, resulting in considerable pressure on net interest margins. With loan-to-deposit ratios sitting near historic lows, some banks have even considered discouraging depositors from keeping so much cash in their accounts.

But, Kafafian's Marsico said banks should focus on the long term, build core deposit relationships while they can, even though the value of those funds might not seem that great today.

"Even though that's not going to help your net interest margin in the short run, it still might help net interest income growth," Marsico said. "When times are good and loan demand picks up, that's when the competition gets pretty intense. That's when you start getting $400 to switch your checking account offers."

American Bank's Weaver echoed that sentiment. American Bank doubled its loan portfolio in 2020 and even managed to grow loans more than 60% when excluding loans made through the Paycheck Protection Program. American Bank ended 2020 with a loan-to-deposit ratio in the low 70s, but Weaver said the institution remains committed to attracting new depositors.

"We probably are giving up some basis points here and there as we're growing our deposit portfolio, but we really have a long-term view of this. And we want to build those relationships today that are going to be with us a long time," Weaver said.

In 2020, American Bank reported a return on average assets of 1.23% and a return on average equity of 8.98%, compared to 1.13% and 10.08%, respectively, for the community bank aggregate.

The institution came under new ownership a few years ago and Weaver took over the helm as its CEO. Weaver said the bank was a de novo with an auto loan portfolio, a bond portfolio and "little else." The new ownership put together a strategic plan to build a top-performing community bank and began making commercial loans. Weaver said the bank moved quickly to participate in the PPP and gained many new customers by supporting small businesses during their time of need. American Bank also bolstered growth by acquiring a branch and a factoring lending team from another bank in the Dallas market.

While growing at an elevated pace, Weaver said the bank made sure to communicate regularly with its regulators and get buy-in on their strategic plan. The executive further noted that the bank had the opportunity to hire a rainmaker commercial lender shortly after the new leadership team took control of the institution but ultimately opted to hire a chief credit officer and risk manager instead to build the proper controls and infrastructure to allow for future growth.

"Because of the opportunities that have come to us through our active board and referrals, business development hasn't been the number one issue for us. It was, 'let's build the controls and build the kind of bank we want this to be when we grow up,'" Weaver said.

Weaver sees future growth opportunities in industries heavily impacted by the pandemic, such as the hospitality sector. The executive said some transactions are occurring in that sector at 50% of replacement cost, creating a "buyer's market" for lenders.

Weaver and Marsico noted, though, that community banks also need to invest in technology to remain competitive in the current environment.

Marsico said community banks should utilize technology to migrate back-office transactions such as reconciliation of accounts or interventions associated with past-due loans to artificial intelligence. Marsico said community banks can work with their core providers to become more efficient but usually also have three to four fintech firms that they could partner with to upgrade their technology.

"I think there's a lot of work to be done in running the gears of banking using technology to reduce that burden that has to be paid for by frontline lines of businesses," Marsico said.

Weaver said American Bank rolled out online account opening during the pandemic and believes the offering is necessary to compete since some people might not ever come back to branches. Weaver said community banks cannot be all things to all people and should not try to replicate the full slate of offerings of large banks like Bank of America Corp. The executive said community banks should let the largest banks be on the bleeding edge and then become fast followers when the market begins demanding new products.

"I think niches are what community banks are all about, on top of the relationships and execution excellence. That's what's going to keep us relevant in the long haul," Weaver said.

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