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Strategies to Grow Deposits, Manage Liquidity

By: Katie Kuehner-Hebert

While deposits on average declined at banks with $10 billion or less in assets in 2010, according to the FDIC, a number of well-performing banks have enjoyed core deposit growth, including a young California institution that steered clear of speculative real estate lending, a private bank in Denver and a St. Louis-area middle-market lender that entered Arizona by buying three failed banks.

Larry D. Hartwig, president and chief executive of the $239 million-asset California Community Bank in Escondido; Scott Wylie, chairman and CEO of First Western Trust Bank in Denver; and Jack Barry, market president of the Phoenix office of St. Louis-based Enterprise Bank & Trust, each share how their institutions have been able to grow core deposits in the post-crisis environment, while at the same time managing excess liquidity.

A Community Focus

California Community Bank was founded in 2003 in the north San Diego County city of Escondido, just as the state’s “go-go” era of residential construction and other speculative commercial real estate lending was gaining steam. The young Escondido bank, however, steered clear of that sector while others overloaded to their demises, Hartwig said, and now California Community is benefiting from customers seeking a locally owned stable community bank.

“We’ve gone through this troubled time where banks have disappeared on a Friday night, so customers are more inclined to go with bankers who are local decision-makers,” Hartwig said. “We try to state our value proposition to customers: we’re reliable and we focus on our local community. We did not participate in the wild ride of speculative real estate lending, so basically we have had no problems.”

While California Community’s total deposits in 2010 rose just 1.5 percent, demand deposits increased 25 percent, to $51 million; in the first quarter, demand deposits grew to $53 million. About 60 percent of its deposits are interest-bearing. Consumer deposits make up about 22 percent of the total, with the balance coming from businesses, their owners and the direct deposits and payroll deposits of their employees.

California Community offers remote deposit, but Hartwig says the real key to attracting commercial customers is offering debit cards. “We are finding businesses really like to use debit cards.”

California Community also markets itself to business owners by offering them luncheons with economists, accountants or other experts who provide tips on growing their companies, he said.

In 2010, the bank adopted a new policy: Borrowers that also open business checking accounts are offered better rates.

“There’s a lot of banks out there struggling with their loan portfolio, but we are not,” Hartwig said. “If we’re good enough to lend money to businesses, then we’re good enough to get deposits from them.”

While California Community waits for more qualified borrowers, the bank places its excess funds in overnight money market instruments. The bank has been in a positive liquidity position since 2005, and has never had to rely on brokered deposits. It has never used Federal Home Loan borrowings as a funding source, but last year the bank used FHLB bonds to match off some of its five- and seven-year fixed rate loans, as a way to secure its margin.

California Community’s liquidity contingency plan allows for it to have two correspondent bank lines and as much as $25 million in securities on its balance sheet that the bank could liquidate quickly if needed.

“But we’ve never had to look at the plan, because we’ve always been in a positive funding position,” Hartwig said.

Benefitting from a Flight to Quality

First Western Trust Bank in Denver, which also operates in Arizona and California, was ranked as one of the fastest-growing private companies in 2010 by Inc. magazine. In 2010, deposits at the $493 million-asset private bank rose 15 percent from a year earlier, to $418 million; since the end of 2008, deposits have risen a compounded 24 percent. Deposits fell slightly in the first quarter from year-end, but rose 21 percent from a year earlier, to $409 million. Roughly 80 percent of its deposits are interest-bearing.

“At First Western, we really focus exclusively on private banking and large relationships with high net-worth individuals, their families, foundations and their companies,” Wylie said. “Relationships have been very helpful to us in driving up pretty steady deposit growth rates.”

Practically all of First Western’s new customers come from referrals from existing clients as well as from “centers of influence” — lawyers and accountants, he said. Most deposits are gathered through First Western’s nine offices, though the bank supports customers with online banking, remote deposit and automated teller machines.

During the recession, First Western benefited from a “flight to safety” — but it was not so much from stocks and bonds, Wylie said.

“I don’t think we’ve benefited that much from a shift from securities to deposits, but I definitely think we benefited from ‘a flight to quality’ — people who weren’t comfortable at other small banks, big banks or investment banks,” he said. “A few years ago, if anyone said that First Western was much better than Bear Stearns or Merrill Lynch, that would be laughable, but that’s exactly how it played out — at least that’s what clients told us.”

Market Rates Insight predicts that a greater share of bank funding will come from consumer deposits as non-deposit liabilities are added to the insurance assessment base. Wylie agrees, adding that regulators now view core deposits from consumers to be more attractive than brokered deposits, and even deposits through the Certificate of Deposit Account Registry Service as well as funds secured through Federal Home Loan borrowings.

“There’s a lot of regulatory pressure to reduce those funding sources, which is problematic for us,” Wylie said. “Our clients like benefiting from reciprocal CDARs so they can get higher deposit insurance and we like being able to manage our interest-rate risk from Federal Home Loan borrowings. But there’s such a regulatory taint, that we’ve now reduced them by 25 percent compounded over the last couple of years.”

With loan demand still limited, First Western has a fair amount of excess liquidity, which the bank places in investments, cash and liquid sources.

“Hopefully over time we can fund additional loans — if we can find quality loans that we want to do,” he said.

Acquisitions Produce Growth

St. Louis-based Enterprise Bank & Trust had a loan production office in Phoenix for some time, but in December of 2009, the company expanded its presence by buying the failed $40 million-asset Valley Capital Bank in Mesa in an FDIC-assisted transaction. Last year, it bought $250 million of Arizona-originated assets from the failed Home National in Blackwell, Okla., and this past January, Enterprise acquired the failed $130 million-asset Legacy Bank in its third FDIC-assisted deal there.

Enterprise has continued to grow deposits in Arizona, including about $75 million from a money market campaign.

“We’re a new name in the valley and it was a way to introduce Enterprise to the market,” Barry said. The success of the campaign also likely reflected a “continued flight to safety, particularly for more mature households who are seeking a respectable yield with a safe FDIC-insured deposit. I think the recession opened the eyes of many households to the importance of liquidity, of maintaining a certain level of bank deposits.”

The bank also benefited from local positive press after buying Legacy.

“We’ve begun to make a name for ourselves — the fact that over a relatively short period of time — 13 months — we did three FDIC-assisted transactions for failed banks in the market — that was newsworthy,” Barry said.

Enterprise has also been luring more commercial middle-market businesses to bring all of their relationships to the bank.

“Loan demand has improved over the prior period, as we’re getting some clients reaching levels of frustration with their banks not being able to lend and are seeking banks who can lend,” Barry said. “We think that having an expertise in C&I, we’ll attract more operating companies to us.”

At the corporate level, Enterprise has excess liquidity, but in Arizona, loan demand has increased so well in the last 45 days, that “some of that liquidity will be absorbed over the next 60 to 90 days,” he said.

However, the bank will not stop its efforts at gathering more core deposits.
“Even though the liquidity levels are higher than historical levels, the gathering of core deposits is beneficial to be a successful banking company in today’s economic environment — you can never get enough core deposits,” Barry said.

Katie Kuehner-Hebert is a contributing writer in San Diego.

Copyright © July 2011 BankNews Media