|Deposit gathering in hard times (February 2009)|
The FDIC’s decision to raise premiums has become just another challenge in a challenging time. While many community banks did well in 2008, gathering deposits in 2009 is a different story. Here’s what some of them are doing, and some suggested strategies.
By Lauren Bielski, senior editor
“Flight to quality” hasn’t occurred everywhere, but a higher cost of insurance has. Banks are adjusting tactics to new rules of engagement
They say timing is everything. The cliché certainly applies—in the negative sense—to the Federal Deposit Insurance Corporation’s decision to levy a premium hike for insurance this quarter. Banks in all risk categories will see premiums increase by seven cents for every $100 of deposits, because of, and despite, current conditions.
It’s one more element that makes the business of banking, including deposit gathering, a lot harder.
Under the final rule, issued Dec. 16, risk-based rates will range between 12 and 50 basis points, annualized, for the first-quarter 2009 assessment. (Given their risk profiles, most institutions will, in fact, be charged between 12 and 14 basis points.)
“This is bad news for the industry,” says John Boucher, CEO, of the $950 million assets South Shore Savings Bank, South Weymouth, Mass. “This is bad news for this bank, operating as it does in the state of Massachusetts where the Depositors Insurance Fund (DIF), applies. In effect, it will cost us about $600,000.”
His comments echo the frustrations of many bankers over the double whammy of sharply increased premiums (they were not needed at all for years) and a much higher level of insured deposit coverage. The scenario is complicating the already difficult math of deposit and loan pricing. While banks recognize the need for the premiums to rebuild the fund—and largely welcome the higher coverage—the frustration comes over the underlying causes of all this, which most of the industry had little to do with.
Current events have certainly made most traditional bankers edgy. There was a coordinated pushback by the ABA and various state associations when the FDIC first announced its proposal. Their point was that rebuilding the fund faster than necessary would drain funds from banks that could otherwise be loaned. That message had some effect because the FDIC originally wanted a steeper rate hike—particularly for institutions with less than stellar risk ratings. In its December release, FDIC settled on a phased-in approach, with additional changes taking place in the second quarter.
Strictly speaking, the rate hike was planned as early as last March, when drains on FDIC reserves kicked off rumblings of the need to rebuild the FDIC’s fund. But clearly increase was in response to the drain on the fund from recent failed-bank resolutions, plus increased coverage and other commitments.
“Does anyone believe that the increase to $250,000 will be temporary?” Boucher asks rhetorically. In fact, bankers polled at ABA’s Annual Convention last fall indicated by an overwhelming majority that a rollback wouldn’t be likely.
“Flight” varies by region
By now, anyone who cares knows the story cold: Wall Street investment banks and assorted hangers on had a run of excess, flamed out like a troubled airplane falling from the sky, and the economy has been left staggering as a result.
In terms of deposits, conditions were set for a classic flight to safety.
That is, if you can find the pattern—and read it like a trail of smoke.
Charles Runde, president and CEO, First National Bank of Platteville in Wisconsin, wonders why the flight phenomenon hasn’t been more pronounced for his $150.8 million-assets institution.
“It could be that, at the bottom of the cycle, people are afraid to move their money,” Runde says. Instead of seeking preservation or comparatively modest creep-back of value, consumers may be leaving funds parked on the Street waiting for a rebound.
While he sees the logic to it, First National’s CEO is still disappointed: “I would have expected more in the way of funds coming in,” he says.
John Boucher (pronounced Bu-shay) says, in contrast, that his bank’s experience of the flight to safety was immediate and dramatic in September and October, when some individuals came in with checks to deposit for $300,000. He estimates that during a single month in that strange, dark time his bank pulled in about $20 million.
“Some of that has do with DIF,” he says, again referring to the Depositors Insurance Fund, which is available to mutual banks in Massachusetts, and effectively provides complete coverage for deposits. “Now that the DIF effect has been erased, we lost our advantage,” Boucher relates. As of early January, Boucher indicated that, as far as most bankers were concerned, it was probably cheaper to raise money by going to the Federal Home Loan system or the Federal Reserve than by raising deposits during what is shaping up to be a deeper competitive struggle for funds.
“What’s happening, in Massachusetts anyway, is that big banks here—BofA, Sovereign, and TD Banknorth primarily—are finding that it’s cheaper to raise deposits by being super competitive on CDs than it is to garner commercial paper.”
Overall, domestic deposit growth has been slowing dramatically for several years, from 9.6% in 2004 to 4.2% in 2007, according to FDIC data. Mack Wood, a vice-president and managing partner, consulting, Metavante Corp., Milwaukee notes that the industry’s total capacity to fund loans has declined over the last decade as well.
“It’s tough to cultivate permanent deposits,” acknowledges James Rakes, chairman, president, and CEO of $900-million assets National Bankshares, Inc., Blacksburg, Va. Describing the nine markets in which he operates as “low growth” —with the exception of Blacksburg, a university town—Rakes says that his bank has had a terrific year anyway, utilizing what funds it did have wisely. Its big lift was mostly due to picking up, on the credit side, some loan business from former Wachovia customers. “We also didn’t get hit with bad loans and bad bonds,” says Rakes.
Where have the funds gone?
In a schematic sense, how have funds flowed over recent months? Basically, Gordon Goetzmann, executive vice president, First Manhattan Consulting Group, N.Y., sees big banks that didn’t have “subprime issues” as gaining deposits from the fleeing customers of those that did. His data, published early in December predicted that the top-ten banks would control at least 45% of deposits by Dec. 31.
In contrast, Terry Moore, managing director, North American Banking, for Accenture, sees deposit-luring winners lined up at every tier of the market. “It’s very much a factor of how individual banks need to price funds and attract new business given their balance sheets, strategies, and overall health,” he says.
Charles Runde, for instance, indicated his agricultural bank made the most of a trying year in the southwest corner of Wisconsin, traditionally a fur trading and small-farming area and now known mostly for the University of Wisconsin-Platteville. He says that 2008 was a slower year than others with an okay-but-not-brilliant deposit growth rate of five percent.
“We did fine, considering the environment,” says Runde. He adds that to stay competitive in the year ahead the bank has attracted the services of a new marketing firm and is working on a branch redesign.
National Bankshare’s Rakes, meanwhile, describes his Virginia-based bank, with a low loan-to-deposit ratio of 70%, as a “seller of funds.”
“But if you’re not in our position, and you constantly have to go out and buy funds, you can pick them up,” says Rakes. “Of course, relying on outside funds too much can kill your margins,” he adds.
But what about the enduring, traditional customer? Rakes makes the observation that “even the traditional customer isn’t traditional anymore.” Big CD holders, in his view, are rate shoppers.
As another gauge of bank performance when it comes to gathering funds, you can look directly at demand for sources of alternative funding. Shawn O’Brien is the president of Qwikrate, a Marietta, Ga.-based listing service for non-brokered deposits (https://www.qwickrate.com/qrweb/XSP/home/home.xsp). He says that 2008 was a period that saw a tremendous jump in his subscriber base: there was an increase of 26% in the first quarter over the same period in 2007, and a 40% jump last year from the second quarter to the fourth.
Tactics in tough times
Few people are expecting a return to “normal” any time soon. Aaron Fine, partner in the retail and banking practice with Oliver Wyman credits the massive Treasury effort for getting the banking industry to a less extreme place. Yet, he points out, there are future patterns of charge-offs to consider, which will effect bank performance, and drive the need for a troubled bank to price funds too richly. That will have an indirect effect on funding for other banks by governing competition in a given area.
According to Accenture’s Moore, deposit gathering tactics that are based on “business as usual just won’t be an option.”
Heavy in the strategic rotation will be relying on the internet to pull in funds from consumers, and perhaps the micro business segment, in other geographic regions, Moore notes.
Otherwise, says Moore, banks should opt to get new business in local markets with a bold marketing message that underscores the safety and soundness issue first—then later, emphasize product innovation.
First Manhattan’s Goetzmann adds that the marketing messages, whether in direct mail, at the branch, or online, should also be heavy on such “take it for granted” facts as the existence of FDIC insurance and its increase to $250,000.
Many bankers, in addition, are making use of tools such as the Certificate of Deposit Account Registry System, CDARS, the ABA-sponsored product offered by Promontory Interfinancial Network, to provide much higher-than-usual insured deposit protection. They should advertise that fact in promotions.
Beyond the safety message, Metavante advises placing resources in high-potential markets as opposed to keeping a branch open in every village, town, nook, and cranny.
Moore adds that online strategies will require banks to invest in such things as search engine optimization. “Banks that find ways to stay close to existing customers,” he says, “will benefit.” BJ
The economy is the big unknown
At a time when a slowing economy makes it tougher for ordinary consumers to think much about taking on more debt, a lack of trust in the credit markets and the rush to hold onto funds that happened this fall caused rates to spike for a time.
“Cost of funds is coming down but funds aren’t cheap,” says Michael Quick, chairman with $14 billion-assets Susquehanna Bancshares, Camden, N.J. “CDs can range from 2% to 4%. At the same time, loan pricing is competitive,”
Quick says. “Then, there’s the whole issue with TARP funds. We took some, when the criteria expanded. But we’re not in trouble. We’re just trying to make the most of an opportunity. Yet didn’t the local paper run a story with the headline, ‘Susquehanna takes bailout money’? It’s a perception challenge. The typical consumer doesn’t realize that we are paying for those funds. It’s not the giveaway that it’s being billed as to the public.”
And as to the economy: “The fourth quarter [bank performance] figures will be quite poor,” predicted New York-based bank stock analyst Anthony Polini in late December, “but those figures will represent the bottom of cycle.”
To Polini, who works at Raymond James Associates, a comforting fact is that bank performance statistics tend to be early indicators, signaling the start of a cycle that will ultimately take the economy with it—even if it takes it kicking and screaming.
But as a banker who believes in tried-and-true ways, Michael Quick says that the unhinging affect of an uncertain economy can’t be ignored. He adds that while certain industries are doing fine—medical, the defense industry, legal services, and so on, at least in his state of New Jersey—retail and others are floundering.
“Why are you, the local business owner, going to borrow money when you think you may lose your business? Same goes for a consumer. Who is going to borrow more when they don’t know if they can pay, due to job loss? This is a consideration,” Quick says.
He relates that he saw one Korean car maker advertise that it would make car loans to consumers—and that, if they lost their jobs, the bank would take the cars back.
“I’ve never seen that in all my days,” says Quick. “I’ve lived through prime plus 22%. I’ve lived through the S&L situation,” he adds. “This is global and unprecedented. So we’ll all have to take our time with it.” — L.B.
The electronic version of this article available at: http://lb.ec2.nxtbook.com/nxtbooks/sb/ababj0209/index.php?startid=28
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