Banks and credit unions began to see deposit balances grow in the early days of the pandemic, and 18 months later, the influx of cash continues.

“Early on, the feeling was that these balances would go out as quickly as they came in,” said Jeffrey Reynolds, a managing director at Newburyport, Massachusetts-based Darling Consulting Group. “No matter what it seems like is happening, the deposit balances just continue to rise.”

Government aid packages for individuals and businesses, along with less spending and higher savings rates throughout the pandemic, have helped drive deposit growth at financial institutions across the United States.

Banks with offices in Connecticut had $178.6 billion in deposits on June 30, a 9.5 percent increase over the same day last year, when banks held $163.1 billion in deposits, according to the FDIC’s annual Summary of Deposits survey, which captures bank deposits on June 30 each year. For the two-year period beginning June 30, 2019, Connecticut banks together have seen deposits grow 27.7 percent.

Connecticut credit unions have seen deposits grow as well, with a year-over-year increase of 11 percent as of June 30, according to the National Credit Union Administration’s Quarterly U.S. Map Review.

But with many banks struggling to match these deposits with loan growth, this excess liquidity could grow into a concern for in the coming quarters.

Banks with Biggest Growth

The banks with the most Connecticut deposits remained unchanged from 2020: Bank of America, Bridgeport-based People’s United Bank and Waterbury-based Webster Bank. These three banks combined held nearly 55 percent of the state’s deposits on June 30.

Bank of America had 24.6 percent of the deposit share on June 30, with $43.9 billion in deposits. BofA saw its deposits increase year-over-year by 19.7 percent.

The two Connecticut-based banks with the largest year-over-year deposit growth were Greenwich-based Fieldpoint Private Bank & Trust, which saw deposits rise to $821.86 million, a 27 percent increase, and Salisbury-based National Iron Bank, which saw deposits swell 24.1 percent to $203 million.

Since the start of the pandemic, most banks and credit unions are looking at deposit balances that are about 20 percent higher than they would have expected in a low interest rate environment if there had been no pandemic stimulus applied, Reynolds said, adding that in a typical year, deposit growth would be between 5 to 8 percent for those same institutions.

Darling Consulting Group maintains a deposit analytics platform based on nearly 250 community-sized institutions in the U.S. From the first quarter of 2020 through July 2021, deposits have grown about 26 percent, with April 2020 – the start of federal pandemic economic aid payments – seeing a 7 percent increase alone.

Deposits remained elevated over pre-pandemic levels throughout 2020, said Billy Guthrie, a deposit consultant with Darling. Another surge followed beginning at the end of December into the first quarter of 2021, Guthrie said, peaking with 3 percent growth just in March, driven in large part by additional federal aid payments.

While May and June saw deposit growth start to flatten and even contract in some cases, Guthrie said the pace picked up again in July and August, with changes in spending patterns and the payment of federal child tax credits contributing to some of that growth.

Lenders Could Be Pressured

Much of that deposit growth has come from banks’ existing customers, Guthrie said, though April 2020 saw an increase in new accounts when small businesses had to work with different banks to get Paycheck Protection Program loans. One of the few downward trends for bank deposits resulted from businesses moving PPP funds over to primary bank accounts, Guthrie said.

“[The withdrawals] weren’t enough on a net basis to outweigh the amount of additional growth that you were seeing within your existing customer base,” he said.

Deposit balances have shown few other signs of dropping, but if banks did start to see more withdrawals, he added, the typical deposit growth that banks expect to see each year would likely offset any losses.

As the 2021 round of PPP loans starts to go through the forgiveness process and come off balance sheets, Reynolds said, banks have struggled to increase their loan portfolios, adding to margin pressure.

Even with this pressure, banks have managed to see strong earnings during the pandemic because of the gains that banks have realized from selling their mortgage loans on the secondary market and the substantial PPP income, Reynolds said. Over the next several quarters, he added, banks will need to look at their liquidity positions differently. Though he has only seen a few banks criticized by regulators for growing too much, leverage ratios could become an issue as well.

“It’s kind of like a sugar high – we’re heading for the sugar crash,” Reynolds said. “Unless they come out with another round of PPP, that’s a non-recurring revenue stream that is going to dry up, and I think that what you are going to see is that banks are going to be pressed to optimize their liquidity position and pick up some yield on it, a lot more than they have been.”