Awash with deposits that have surged amid a pandemic-rocked economy and billions of dollars in federal aid, Wisconsin banks are trying to make the most of the excess liquidity. 

At the end of 2020, deposits at banks based in Wisconsin were up 15% from the year before, driven largely by federal covid relief aid to businesses and consumers, credit paydowns, and a reduction in consumer and corporate spending. 

The U.S. personal saving rate, which stood at 7.6% at the beginning of 2020, was 13.6% in February of this year. Now, with federal COVID relief of $2.3 billion headed to Wisconsin’s local governments over the next two years as part of the $1.9 trillion American Rescue Plan, deposits are expected to swell further. 

“Anecdotally, our members have told us they are swimming in liquidity,” said Ashish Tripathy, portfolio manager at the Federal Home Loan Bank of Chicago. 

Bankers in Wisconsin are strategizing to deal with the glut of deposits. The approaches are limited, and the excess liquidity can be especially problematic for small banks that are reliant on net interest margin and don’t have units such as insurance or wealth management to generate other fee income. 

“When spreads narrow, narrow, narrow down and money is really cheap and deposits aren’t worth anything, that’s when it’s tougher,” said Jim Popp, president and chief executive officer of Johnson Financial Group in Racine. 

Popp noted that about 40% of Johnson’s Financial’s income comes from fees, which is helping the company deal with the liquidity surge. 

“The banks that have complimentary fee-based business — that don’t rely so heavily or solely on net interest margin — are those that I think are managing,” Popp said. 

Some banks are buying securities to cope with the deposit growth, while some are repaying Federal Home Loan Bank advances or other debt borrowings. Some are trimming low deposit rates a bit more. All are looking for good loans to absorb some of the deposits that are piling up. 

Tripathy said bankers have to ask themselves: “Should I just keep this liquidity at the Fed and make just 10 basis points while waiting for loan demand to come back?” 

Tripathy also noted that bankers may choose to buy securities in the hope of getting a better rate. They can select between short-term securities with a skimpy return or long-term ones with a higher yield. Some choose both to keep balance while being prepared for a return to a better lending environment. 

Some banks are finding growth in several categories of loans, such as multifamily lending and mortgages. 

“Many are just sitting on liquidity, too, so it’s a mixed bag,” Tripathy said. 

Mike Molepske, CEO of Bank First in Manitowoc, said his bank currently is “sitting on $250 million in excess funds.” 

“And we have another $250 million of PPP (Payroll Protection Program loans) yet to get forgiven. On top of that, we just had the next round of stimulus checks going out, which is adding more liquidity,” he said. 

Molepske said much of the $2.3 billion in COVID relief money coming to local governments in the state will end up in banks until it’s utilized. 

Bank First has opted to pay off Federal Home Loan Bank borrowing as one way to cope with the excess liquidity. 

“It’s been a good opportunity for banks that have relied on wholesale funding – brokered deposits and such – it’s been a great opportunity to deleverage themselves from those other forms of wholesale funding,” Molepske said. 

His bank has experienced growth in business lending, which helps, Molepske. But it’s not enough yet to put much of a dent in deposit growth. 

“We are seeing good business loan growth, albeit it’s not going to be anywhere close to burn what we have in excess funds,” he said. 

Molepske said it’s important for banks, in a period of excess liquidity, not to make loans they wouldn’t normally make. 

“One thing the industry should really avoid doing is knee-jerk reactions. I call it ‘avoid stupid,’” Molepske said. “It’s OK to have a little extra money. It’ll be there tomorrow, it’ll be there a year from now, six months from now. The industry’s not in a rush to deploy all the liquidity. You need to be prudent about it.” 

Tripathy said it’s logical that banks will reduce deposit interest rates at a time like this. 

“You’ve got to look at your deposits, segment them, and pay only the good relationships the higher money, but reduce the interest rates to almost zero for everything else,” Tripathy said. 

Even that can be tricky, though, in a competitive market. 

“You don’t want to cut your spreads so low that you drive your customers someplace else, because eventually it’s going to normalize,” said Johnson Bank’s Popp. “You kind of have to grind through it and keep your customers through the process.” 

Kelly Brown said her Pewaukee-based firm, American Deposit Management, has been working on the excess liquidity issue. Banks in places where the economy is open and taking off, like Florida and Texas, can use deposits that are sitting in banks in states with long lockdowns, like New York and California. ADM connects banks that need deposits with banks that have too much. 

“By doing that, in 2020, we had the best year this company’s ever had,” Brown said. “It’s been unbelievably busy here.” 

Tripathy pointed out that the Federal Home Loan Bank of Chicago’s advance borrowing rates have come down “very close to Treasuries,” and that the agency pays a dividend. 

Although the excess liquidity situation would lessen if the economy takes off in a way that dramatically increases lending, no one knows how fast the economy will grow. 

“I really do think the economy is poised for some pretty strong growth this year, and that’s positive for this situation. The question is how quickly can we reopen the entire economy and get people spending all that money they’ve been saving up,” said James Hotchkiss, vice president and director of Member Strategy and Solutions for the Federal Home Loan Bank of Chicago. 

Large-scale vacationing and travel, for instance, would be an important boost to the economy. 

“Loan demand is still struggling right now,” Hotchkiss said. “It’s better at small banks than it is at larger banks, but if loans pick up at the same time deposit inflows slow down, banks could see a quicker normalization of their balance sheet. But it’s really how quickly that spending happens.” 

With so much money accumulating in bank deposits, and with another $2.3 billion on the way to Wisconsin’s local governments, legislation to protect public funds in the event of a bank failure is being drafted in the Wisconsin legislature. The bill would increase to $1 million – from the current $400,000 – the amount of compensation available from the Wisconsin Department of Financial Institutions for losses suffered by a state or local government if their money was on deposit at a financial institution that fails. 

The Department of Financial Institution said it couldn’t comment on the bill because it’s still only in draft form. 

Whether inflation is eventually coming because there’s so much money in the economy – or whether this time is different – is anyone’s guess. 

Popp said he believes Federal Reserve Chairman Jerome Powell doesn’t want to do anything that upsets the recovery. 

“I think it’s kind of how we’re viewing it, too,” said Popp. “We haven’t viewed inflation as being an overly problematic situation at this point. We’re more focused on let’s get back to an economy that’s really humming, and especially in sectors like hospitality, airlines, and some of the things that really drive growth in the economy.” 

Hotchkiss said if there is a “spending bonanza from all that cash” the country could see substantial inflation for the first time in 30 years. 

Although there are signs of price pressure in some reports, a rise in wages isn’t occurring, he said. 

“You can’t really have sustained inflation without wage growth,” Hotchkiss said. “Right now, wages are coming down, which normally is not a good thing. But in this case, it is a good thing because that means all of those lower-paid workers, in the service sector especially, are coming back into the economy and that’s lowering the average hourly earning number. But you really can’t see sustained inflation unless people have more money to spend.” 

Bank First’s Molepske said inflation is coming, but doesn’t know when. 

“In 2008 and during the pandemic, we really just threw out a lot of what we were taught in economics classes. But one thing that hasn’t been thrown out in economics is Economics 101. It’s called supply and demand,” he said. 

Molepske added: “It’s not different this time. There will be higher interest rates, in my opinion. It could be six months, it could be 18 months, it could be two years. But at some point, it has to happen.” 

The Federal Home Loan Bank of Chicago is a WBA Gold Associate Member.

Paul Gores is a journalist who covered business news for the Milwaukee Journal Sentinel for 20 years. Have a story idea? Contact him at paul.gores57@gmail.com