ABA Banking Journal - February 2009 - (Page 32)
FUNDING STRATEGY “If you constantly have to go out and buy funds, you can pick them up. Of course, relying on outside funds too much can kill your margins” — Jim Rakes, National Bankshares od in 2007, and a 40% jump last year from the second quarter to the fourth. 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 32 FEBRUARY 2009/ABA BANKING JOURNAL 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 peri- 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-thanusual 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 Subscribe at www.ababj.com
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