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At no time in recent memory have local bankers seen so many deposits in their banks. They're seeing a trend similar to what a California-based financial institution research firm reported last week.
Market Rate Insights said deposits held in Federal Deposit Insurance Corp.-insured accounts reached an all-time high of $9.8 trillion at the end of June.
At any other time, being flush with deposits would be a great opportunity to make loans.
Trouble is, bankers said, demand for loans by consumers and businesses is flat to down.
And banks' option to invest the deposits in instruments such as government and municipal bonds isn't attractive either because the interest rates are so low.
"Usually the safest vehicle to invest them in is government bonds, but they're not paying anything right now," said Jim Faith, Sunflower Bank's Wichita president.
He said a recent rate on a 90-day Treasury was zero percent.
"There's not much you can do with them (extra deposits)," Faith said.
First and foremost, banks make the most money from deposits when they can lend against them.
"That's the way, the optimum way, our bank is going to be most successful... as opposed to investing the money in securities or just collecting interest at the Fed," said Lyndon Wells, Intrust Bank executive vice president.
Added Rick LeCompte, a Wichita State University finance professor: "It's in their best interests" to lend off deposits rather then invest them.
Bankers said they want to make loans and would gladly do so, if companies wanted them.
"Our business is based on collecting deposits and lending" from those deposits, Wells said.
"Borrowers still have to have a business plan and creditworthiness. Demand has been way down.
"There's not the real estate development going on. There's not the planned expansion going on."
Holding onto cash
Like Market Rate Insight's Dan Geller noted in his report, Steve Carr thinks the reason for the increase in bank deposits is customers feel their money is protected because most banks and thrifts have FDIC insurance.
Businesses are hesitant to spend, bankers said, because of the political fallout from raising the federal debt ceiling, concerns about a national double-dip recession, and locally, a slow-to-recover general aviation industry.
"I think there's just a lot of money sitting in accounts, waiting for things to improve," said Carr, president of Community Bank of Wichita.
In many cases, businesses are holding onto lots of cash in the bank in money market, checking and even savings accounts, they said. One banker said he heard of a local company holding $6.5 million in a checking account.
"It's just business confidence is not as strong as it needs to be," said Intrust's Wells.
Bankers such as Faith disputed the notion that banks are hesitant to lend because of regulatory pressure.
It's true that regulators have clamped down on how much of their loan portfolio can be in real estate. But bankers said companies aren't even tapping their existing lines of credit or seeking business equipment loans, which aren't as heavily scrutinized.
"I don't think you can point to the regulatory environment," Faith said. "I think the lack of loan demand is due to just a general lack of economic activity."
But WSU's LeCompte thinks that regulators have sufficiently "scared" bankers from making loans, except to perhaps long-time customers with really good credit. Besides, LeCompte said, commercial real estate projects have dried up, rates on a 30-year fixed mortgage are so low as to be unattractive to make loans on, and non-bank lenders such as auto finance companies can offer customers a lower rate than banks can.
"It's hard to see what they are going to lend on to get things going," he said.
And LeCompte says there's not much banks can do to change the situation right now.
"They have nowhere to go," he said. "They have to sit and wait."
Faith agreed and said there's really only one other option, and that's to start charging for deposits. It's an extreme measure and one that Faith said no bank in Wichita has done or probably will do.
But Bank of New York Mellon, a large industrial bank that does not serve the traditional retail market, announced last month that it would charge customers a fee to hold cash deposits of more than $50 million.
What customers don't realize, Faith said, is it costs banks money to hold deposits, such as fees for FDIC insurance.
But turning away deposits to shrink the balance sheet is a "slippery slope" for a bank and not worth the short-term gain, he said.
"It's a very unusual environment in which we are operating today," Faith said.
