Banks are heading back to the future—before the era of aggressive lending that predated today's softer economy—judging by the changed relationship between two important figures on their balance sheets.

Partly because of slackening demand for loans, deposit totals on banks' balance sheets were higher than loan totals in the latest annual results institutions released recently.

"What you're seeing now is your loan-to-deposit ratios are falling under 100 percent and back toward old norms," says Pete Stanton, chairman and CEO of Washington Trust Bank, of Spokane. "In the old days, you didn't want to loan more than you had in deposits."

Up until about a decade ago, banks' total loans usually were about 70 percent to 80 percent as high as their deposits, Stanton says. Then, he says, banks began to rely on other sources of funds to lend besides deposits, such as trust preferred securities, borrowed money from the Federal Home Loan Bank or the Federal Reserve, or brokered certificates of deposit. Banks created trusts, which issued trust preferred securities, then issued debentures, a form of debt, against the securities; brokered CDs are placed by brokers for banks, typically outside their market area, with customers that seek higher returns.

Today, says Stanton, "There's not much loan demand. There's probably shrinkage in loans, as loans are paid off or written off."

The shift is apparent on Washington Trust's balance sheet. On Dec. 31, 2009, it had $3.39 billion in deposits versus $3 billion in loans. A year earlier, it had $3.24 billion in loans, compared with $3.07 billion in deposits.

Randall L. Fewel, president and CEO of Inland Northwest Bank, of Spokane, says the change exemplifies how banks are going about their business now that the U.S. economy has slowed.

"The last few years, banks were chasing earnings," says Fewel. "Your highest-earning assets are your loans. Lots of banks ran their loan-to-deposit ratios up over 100 percent. The FDIC has made it really clear they don't want you to do that anymore. They want you to increase your on-balance-sheet liquidity."

Loans, listed on banks' balance sheets as assets, aren't considered to be very liquid, but if a bank buys a bond, it can sell that bond and convert it to cash if necessary, Fewel says. Thus, owning more bonds increases on-balance-sheet liquidity.

Bill Before, vice president of finance and chief financial officer at Spokane Teachers Credit Union, says the loan-to-deposit ratio at many credit unions already was under 100 percent, and that isn't likely to change.

He says credit unions have much less risk in their loan portfolios than banks do because their mission—to provide credit to members—is different than a bank's mission, which is to make loans and make profits.

At about 100 percent, STCU has had a higher-than-average loan-to-deposit ratio than most credit unions the last few years, he says. "We did more mortgages last year than we've ever done. We do more mortgage loans than many credit unions do, but we set limits on that so we don't get in trouble with regulators."

Of course, one of the things that the FDIC, or Federal Deposit Insurance Corp., is trying to do is to make sure that banks are solid. Fewel says, though, that with political leaders in Washington, D.C., urging banks to make loans to help jump-start the lagging economy, "there's a disconnect between what the people back in Washington, D.C., are saying and what the FDIC is saying" as it does bank examinations at banks' offices.

The FDIC won't come right out and say that it wants banks' loan-to-deposit ratios at 80 percent, but will say that it wants cash and investments to exceed 15 percent of total assets, which means "you've got to get loans down below 85 percent," Fewel says.

"It's a little more conservative banking," he says. "It's going back to the way things were 20 years ago. It's appropriate for what's happening today. There's nothing wrong with that. Banks can produce earnings with an 80 percent loan-to-deposit ratio. Earnings won't hit the levels that they did, but maybe they shouldn't."

Inland Northwest Bank had $316.1 million in deposits and $334.4 million in loans at the end of 2008, but at the end of 2009, it had $337.8 million in deposits and $314.2 million in loans.

Stanton says regulators want more capital on banks' balance sheets, and one way for banks to improve their capital ratio is to reduce loans.

"Deleveraging of balance sheets is a global phenomenon," Stanton says. "There was a lot of debt out in the world, and probably too much. Loans are down, from Main Street to worldwide markets."

Stanton adds, "All sorts of forces are working to reduce loans right now. In a recession, you keep more of your balance sheet in deposits. When times are good, your ratio (of loans to deposits) is higher."

He adds, "The deposit market is still fairly robust. People want to keep some money in the bank. I think that's part of that."

For those who seek investments that yield higher rates of return than the interest they can receive on bank deposits, "it's hard to know where to go out on a limb right now," Stanton says. Because of that, he adds, "People are parking money in deposits."

Other institutions also reflect the trend. At AmericanWest Bank here, loans, at $1.58 billion, barely exceeded deposits, at $1.57 billion, at the end of 2008, but the bank had reduced its loans by $353 million, or 22 percent, a year later, while its deposits had fallen by just 4 percent. As of Dec. 31, it had $1.2 billion in loans, compared with $1.5 billion in deposits.

Sterling Financial Corp., of Spokane, reported it had slashed its loan portfolio by almost $1.5 billion last year. At the end of 2008, it had $8.8 billion in loans and $8.35 billion in deposits. During 2009, Sterling's deposits fell by 7 percent, and it reduced its reliance on highly transitory brokered deposits by 27 percent.

As of Dec. 31, Sterling had $7.8 billion in deposits and $7.3 billion in loans, and President and CEO Greg Seibly told analysts that its net loans-to-deposits ratio, at 94 percent, down from 105 percent a year earlier, was "at its best level in our history, having improved by almost 11 percentage points during 2009."