Loan demand is showing no signs of abating in fast-growing western markets, where bankers say their challenge is to attract enough deposits to keep pace.
D. Michael Jones, the president and chief executive of the $3 billion-asset Banner Corp. in Walla Walla, Wash., said at an investor conference last week near San Diego that bankers in his region "have no problem growing loans; it's getting core deposits to fund that growth that's been tough."
Mr. Jones and other community bankers at the conference, hosted by Sandler O'Neill & Partners LP, said they are aggressively competing for deposits by rapidly opening many branches, offering remote services to capture more commercial deposits, and paying incentives to loan officers who bring in deposits.
For example, Banner opened 11 branches last year, in Washington, Idaho, and Oregon. The new branches helped boost core deposits 40% from 2004, to $329 million; reduced the company's reliance on more costly Federal Home Loan bank advances; and improved its net interest margin.
The expansion did not come cheaply. Banner's operating expenses rose about 22% last year, and a $6 million penalty for prepaying Home Loan bank advances resulted in a $2.9 million fourth-quarter loss.
Still, Mr. Jones said the new branches, particularly those in large markets such as Portland, Ore.; Seattle; and Boise, Idaho, will let the company continue to bring in more low-cost deposits.
Banner plans to open three more branches in Idaho this year, he said.
Attracting core deposits has become more difficult as interest rates have risen and as customers have moved money out of lower-yielding demand and money market accounts and into higher-paying certificates of deposit and other instruments.
Though U.S. commercial banks' deposits rose 8% last year, to $5.73 trillion, the amount of money in transaction accounts dropped 2.7%, to $659.7 billion, according to Federal Reserve Board data. Meanwhile, the amount of money in nontransaction accounts, such as CDs, rose 8.4%, to $5.1 trillion.
Banking companies in California and the Pacific Northwest have generally had more success gathering deposits than those in other regions. This is because markets such as Boise, Sacramento, and Seattle are among the fastest-growing in the country, and the new residents and businesses need to park their money somewhere.
Nevertheless, competition for loans in the West is fierce, and in a panel discussion at the Sandler O'Neill conference, bankers said that they need to keep competing aggressively for deposits.
West Coast Bancorp increased its core deposits 20% last year, to $422 million, in part by introducing a free checking product that includes free bill payment and online banking, said Robert D. Sznewajs, its president and CEO. The $2 billion-asset Lake Oswego, Ore., company also introduced remote-deposit services for business customers.
"It's still a challenge to get core deposits. You just have to work at it every day and make sure you have the right products to make banking more convenient for customers," Mr. Sznewajs said in an interview.
Other bankers attending the conference focused on how employee incentive programs can boost core deposits.
The $908 million-asset Community Bancorp of Escondido, Calif., pays its commercial loan officers incentives if they persuade borrowers to deposit the operating cash for their businesses, said Michael J. Perdue, its president and CEO.
So does the $1.1 billion-asset AmericanWest Bancorp. of Spokane, which also pays branch employees incentives if they bring in more demand deposits than CDs, said Robert M. Daugherty, its president and CEO. AmericanWest also offers prospective retail customers switch kits, which authorize a customer's bank to electronically transfer funds to a new account at AmericanWest Bank.
Some bankers at the conference said they have not had to think twice about getting enough core deposits.
Ron L. Wilson, the president and CEO of Desert Community Bank of Victorville, Calif., said it has no problem attracting core deposits, particularly in its primary markets, which are north of Riverside, because people keep flocking to the more affordable high desert communities. Demand deposits and money market accounts increased 20% last year, to $166 million; more than 34% of the $540 million-asset bank's deposits are in no-interest accounts.
Barstow which is north of Victorville, is one of Desert Community's markets that is growing rapidly. "One of our board members is a city councilman there, and while he couldn't give us details about negotiations with developers, he told us that the city's future for the next decade looks really great," Mr. Wilson said.
