Texas Banks Are Sitting on Piles of Cash — But They’re Not Lending
Total deposits at Texas banks spiked by nearly 80% in the first six months of this year even as lending rose only by 11.8%, according to new data published by the federal government.
Since the outbreak of the coronavirus pandemic, more than 1.7 million Texans have lost their jobs, forcing them to dip into savings. But for banks, that was more than offset by a flood of federal stimulus checks, unemployment payments, and deposits by still-employed Texans who adopted more cautious spending habits in the face of economic uncertainty.
According to quarterly data published by the Federal Deposit Insurance Corporation last week, covering the months of April through June, deposits at FDIC-insured institutions rose by more than $76 billion, adding to a first-quarter surge of $279 billion.
Most business shutdowns in Texas began in March, at the end of the first quarter, including shops, restaurants, and bars. That meant that customers had fewer ways to spend a paycheck.
The lockdown also coincided with the spring homebuying season, a time when many Texans normally would draw down savings in order to purchase a home.
By June 30, the last day of the reporting period, Texas banks were holding deposits of $805.7 billion, 79% more than six months earlier (the most recent pre-pandemic datapoint).
Even as deposits surged, Texas banks increased their lending only modestly. Total loans rose from $337.5 billion to $387.9 billion during the first six months of the year, a 15% change, according to the FDIC dataset.
That’s a bigger bump than usual, reflecting lending to cash-starved businesses that drew down credit lines or took out term loans. But it still pales in comparison to the 79% jump in deposits.
What did the banks do with all that cash?
Given the risks of lending into an economic downturn, banks generally opted to park the money in relative safety. During the first two quarters of 2020, Texas banks poured $385 billion into “earning assets,” an accounting category that includes low-risk, low-reward investments like U.S. Treasury bonds and mortgage-backed securities.
They also stashed away more money for loan losses, in case more borrowers end up defaulting. Nonperforming loans rose modestly, from 0.77% in December 2019 to 0.99% in June 2020, even as banks braced for worse yet to come.
Nationally, banks have put the brakes on lending even as they raked in additional deposits. But the trend in Texas was far more exaggerated, with deposits rising 79% over six months compared to a mere 16.8% rise nationally.
For banks, the growing cash piles actually are problematic, not profitable, because banks consider income-producing loans to be assets whereas deposits are liabilities. Profits for the banking industry as a whole dropped 70% in the second quarter compared to the same quarter a year ago, according to the FDIC’s Quarterly Banking Profile.
In Texas that drop was less extreme, with year-to-date net income for all FDIC-insured institutions in the state falling from $7 billion to $3.7 billion, a 48% decline.
Besides the costs of growing deposits, lower interest rates set by the policy-making central bank, the Federal Reserve, are squeezing bank profits. Net interest margin, a key metric for banks, dropped from 3.95% to 2.93% over the first six months of the year.
That measure reflects the average spread between banks’ rates on loans and deposits.
FDIC’s data includes 415 lending institutions in Texas, including the major retail banks like Chase, Bank of America, and Wells Fargo, but not credit unions.