Bank Deposits Surged In Poorer Neighborhoods During Pandemic, But Branch Closures Accelerated

U.S. bank branches in low-income neighborhoods delivered the highest year-over-year deposit growth during the second quarter, according to data from the Federal Deposit Insurance Corp., or FDIC.

Among almost 4,000 bank branches in low-income neighborhoods, deposits surged by 19.5% year-over-year through June 30, besting the 16.9% deposit growth for branches in upper-income neighborhoods.

The average deposit growth for all branches amounted to 16%. That 16% growth spurt greatly exceeded previous years’ data – for the second quarter of 2019, all banks saw year-over-year deposit growth of 3.4%.

S&P Global Market Intelligence noted that deposits in low-income enclaves were likely augmented by “expanded unemployment benefits and government stimulus checks.”

Ironically, in conjunction, many national banks have been closing branches in low-income areas – partly due to the COVID-19 pandemic – meaning that banks that remained open in poor areas also received “abnormally high overdraft and service charges.”

S&P noted that the COVID-19 pandemic has more “severely affected” low-income workers, who are less likely to be able to work from home. But government stimulus and expanded unemployment benefits have also “provided a more significant boost for these workers.”

For example, banks in Northeast Ohio – which is dominated by Cleveland, one of the poorest cities in the nation, with a poverty rate of 36.2% – saw deposits surge by 29% year-over-year through June 30. For Ohio as a whole, bank deposits rose by 23%.

"A lot of borrowers that took cash for defensive purposes – have been keeping cash in the bank that otherwise might have gone to other purposes," Charlie Crowley, a managing director with asset manager Boenning & Scattergood, told Crain’s. "There were some people who took [Paycheck Protection Program] money and drew on unused lines of credit with the rainy-day mentality."

Similarly in Chattanooga, Tennessee – a city with a 20.7% poverty rate – deposits in the city’s 27 commercial banks jumped by 12% year-over-year through June 30 – to a record high of more than $12.1 billion. In Tennessee as a whole, bank deposits soared by almost 20.5%.

"This has been a very unusual year and some of this [deposit] growth is probably just a temporary thing due to the unprecedented stimulus measures from the government and the cautious attitude toward spending and many activities until we get a vaccine for this virus," Collin Barrett, president of the Tennessee Bankers Association, told the Chattanooga Times Free Press. "These numbers are somewhat artificially inflated this year and they will go back down."

In fact, a recent study by the W.E. Upjohn Institute for Employment Research revealed that workers in the bottom one-third of the earnings pie received nearly half (49%) of emergency COVID-19 benefits from the government.

“Because lawmakers targeted the median worker when increasing unemployment benefits by $600 per week, low-income workers were likely to receive more in unemployment than they would have earned on the job,” S&P stated.

However, another study by the National Bureau of Economic Research suggested that low-income people were more likely to spend their COVID-19 relief funds – meaning the recent spike in their bank deposit growth might be temporary.

Further, the deposit growth data must be examined through other complicating factors.

“Deposit growth data as a proxy for local economic conditions is somewhat limited by banks' approach to their branches,” S&P observed. “Banks often move deposits by the billions from one branch to another, necessitating the use of median figures instead of aggregate numbers. And the consolidation of branches could complicate growth figures as banks move deposits from closed branches to nearby ones that are still operating.”

Indeed, banks have been shutting down branches in low-income areas at a swift rate.

Since 2013, U.S. banks have closed 11.3% of their branches in low-income areas, but only 7.9% in upper-income neighborhoods.

U.S. Bancorp (USB) closed 56 branches for the year ended June 30, accounting for 7.1% of its branch network in low- and moderate-income areas. Wells Fargo & Co. (WFC) had 45 closures, or 2.8% of its branch network in low- to moderate-income areas.

In contrast, Woodforest Financial Group Inc., parent of Woodforest National Bank, opened 23 new branches in low- and moderate-income areas with over the 12 months ended June 30.

Woodforest National Bank, S&P indicated, is among the nation's “most aggressive banks” when it comes to service charges.

For the last 12 months ended June 30, Woodforest was the only bank with less than $10 billion in assets to rank among the top 20 banks by service charges. Such charges accounted for nearly one-third (31.9%) of the bank's operating revenue – versus industrywide median of only 1.6%.