Regional Franchises Vary Widely in Deposit Costs

As with the league of competitors further up the asset-size scale, some midsize regional banking companies have held on to sharp advantages in deposit pricing over peers despite a low-rate environment that makes funding generally cheap for everyone.

Among institutions with assets of $10 billion to $40 billion at June 30, SVB Financial Group had the lowest cost of deposits in the second quarter at just 18 basis points, according to data from Financial Information Systems LLC. First BanCorp paid the most at 185 basis points.

The data reflects the variety of business models and competencies within the group, in some cases validating reputations for strong service cultures and deep relationships with customers. It also mirrors challenges unique to specific geographic markets.

TCF Financial Corp., which is widely regarded for its retail strategy, had the seventh-cheapest cost of deposits, 48 basis points, among the 35 companies considered here. (Franklin Resources Inc., an investment management company, and a credit card-focused subsidiary of Barclays PLC were excluded. At both, deposits were less than 50% of assets.)

"That's just the philosophy of the company," Anthony Davis, a managing director of Stifel Nicolaus & Co., said of TCF. "They substitute convenience for rates."

Like the rest of the industry, TCF has cut back on free checking and is overhauling other pricing schemes in response to new regulations limiting debit card revenue and overdraft fees.

But Davis said he does not expect the disruptions to TCF's retail model to be sufficient to dislodge its hold on its core base of customers, or substantially erode its edge in deposit costs.

He cited the company's relatively small securities portfolio and modest appetite for funding in an environment of weak loan demand. "They simply haven't had to stretch," he said.

SVB Financial, the top-ranked company in terms of cheap deposits, has been inundated with flows from its cash-rich customers in the technology and venture capital industries.

The growth is posing problems, however, threatening to create a bulge in SVB's balance sheet that, by undercutting the company's leverage ratio, could alarm regulators, says Julianna Balicka at Keefe, Bruyette & Woods.

At the other end of the spectrum are Popular Inc., which ranked second-to-last at 125 basis points, and First BanCorp, which ranked last at 185 basis points.

Both are based in Puerto Rico, where deposits have been scarce compared with the size of the balance sheets of the financial institutions that operate on the island, according to Joe Gladue, an analyst at B. Riley & Co.

"The banks have competed fairly aggressively to attract" deposits, he said.

Now, however, government-assisted consolidation in Puerto Rico, along with moves by survivors to trim assets, could help reduce pressure to pay up for funding, Gladue said.