Friday, January 12, 2007  By Clint Riley, The Wall Street Journal, as reprinted in the Pittsburg Post-Gazette

The nation's banks and savings institutions are facing a severe deposit crunch.

Total deposits as a percentage of assets on hand at the end of September at the country's more than 8,700 insured banks and thrifts reached the lowest level since the Federal Deposit Insurance Corp. was established in 1933. At the same time, the banking industry's net interest margin — the difference between the average rate banks earned on their interest-bearing investments and the rate they paid to fund those investments — dropped to a 17-year low in the third quarter of 2006.

So, in the scramble to sign up new customers for savings, checking and other accounts, the industry has decided it needs a new specialist: the chief deposit officer.

This new breed of banker — popping up from Maine to Florida — is still relatively few in number, but the ranks are swelling. While commercial, industrial and development lending has continued at a double-digit pace, deposit growth has been heading in the opposite direction. These deposit-focused bankers are largely being employed at regional banks and smaller financial institutions where much of that lending growth is occurring.

Their mission is clear: increase deposits. Just as their lending counterparts have done for years, these bankers typically attend community events and meet with existing and potential customers, small businesses and others and pitch various deposit- and cash-management products.

With retail banks large and small facing fierce competition, a tough interest-rate environment and a drop in deposit growth since 2004, these deposit gatherers should earn their pay in 2007.

"Deposits are more important than ever and they are nowhere to be had," said Kevin J. St. Pierre, a banking analyst at Sanford C. Bernstein & Co. "It's a tough time for all banks, but the deposit growers are best positioned to grow."

Still, the job of significantly increasing deposits will likely be hard no matter how the environment that retail banks currently operate in is viewed. According to the FDIC, the 10 largest banks by assets in the United States — including the two biggest retail banks, Bank of America Corp. and J.P. Morgan Chase & Co. — hold nearly 40 percent of all domestic deposits and 51 percent of the industry's assets.

With all types of deposit growth down, the equation gets even tougher for the rest of the industry, where many have less ability to tap into the capital markets as a funding source.

Even at banks such as Cherry Hill, N.J.-based Commerce Bancorp Inc., where low-cost deposit-gathering has been central to its growth strategy, new deposits have slowed from an average of 36 percent a year between 2001 and 2005 to just over 20 percent during the first three quarters of 2006.

One reason: Individuals and businesses are continuing to shift a larger share of their cash into higher-yielding securities and other investments and away from partly insured but lower-yielding bank accounts. Consider that in 1989, U.S. households deposited 30 percent of their financial assets in banks, according to the Federal Reserve. By 2004, that had declined to 17 percent, while the amount of money in stocks, bonds, mutual funds and retirement accounts grew to 69 percent from 50 percent.

Since 2004, the trend away from keeping money in low-interest-bearing checking and savings accounts has only accelerated with the ability of consumers to electronically move their money and shop around for the best money-market and certificate-of-deposit offers.

Banks unable to raise enough money from their depositors to fund lending and investment must go to the capital markets or elsewhere and borrow money on a short-term basis, often at higher, more volatile rates. The yield curve — the difference between long-term and short-term interest rates — inverted within the past year and that has been a much more costly proposition for banks these days.

With interest rates on short-term U.S. Treasury bills currently exceeding those on longer-term debt issues, a squeeze has been placed on the income bankers can make from borrowing cash at lower interest rates and lending it or investing it at higher rates.

The net profit that banks, especially the bigger ones, can make from their credit-card operations and their currency, securities and other financial trading also is affected.

Most bankers and analysts don't expect the current yield curve to change much this year with the Fed in a holding pattern on whether to raise or lower the current overnight bank lending rate of 5.25 percent.

To keep his bank profitably growing, Greg Dufour, president and chief executive of Camden National Bank in Maine, says "our No. 1 strategic priority is growing deposits."

He adds: "We came to the conclusion that banks haven't pushed the deposit side with the same amount of vigor as the loan side. We felt they were equally important. You need that business line focus on deposits as much as you do on the loan side."

As a result, Mr. Dufour helped oversee the formation in October of a "deposit group" overseen by a designated chief deposit officer as part of a restructuring at the bank's parent, Camden National Corp., a $1.7 billion asset financial-holding company based near Portland, Maine.

Jefferson L. Harralson, a bank analyst at Keefe, Bruyette & Woods, says he believes such changes signal that bankers may have finally awoken to the declining deposit trends confronting the industry.

"This change is causing culture changes at banks," Mr. Harralson says. "I think you are going to see them try every trick they have."