As a start-up flush with capital, Allegiance Bank Texas in Houston has had little trouble attracting deposits of late.
Nevertheless, in mid-July it signed up for a popular deposit-sharing service just to give customers with more than $100,000 extra confidence that their money would be safe.
Within 10 days the $142 million-asset Allegiance had to stop marketing Promontory Interfinancial Network LLC's Certificate of Deposit Account Registry Service, because it had hit a self-imposed cap on brokered deposits, according to Daryl Bohls, the bank's president.
"We had a customer walk in off the street today and ask to put $500,000 into the CDARS program," Mr. Bohls said in an interview Tuesday. "He said he didn't care about the rate, as long as it was safe. He just wanted the insurance."
Spooked by news coverage of recent bank failures, wealthy depositors like the one Mr. Bohls described are nervously seeking alternatives to traditional bank accounts.
And in response to their fears, many community banks are adding deposit products and services such as Promontory's CDARS — which splits large deposits into chunks of just under $100,000 and distributes them across multiple banks — or money market accounts that invest in Treasury and government-backed securities.
In doing so, these banks are hoping to hang on to a portion of the roughly 40% of deposits that are not insured by the Federal Deposit Insurance Corp., even if that means moving deposits off their balance sheets.
Reserve Management Corp., a New York provider of money management for financial institutions, offers off-balance-sheet products in which deposits are swept out of a customer's bank account into money market mutual funds.
Steve Genereau, the director of bank channel sales, said about 80 banks have either added Reserve's sweep products or inquired about them in the last two months. The amount invested in its safest vehicles — Treasury and government money market funds — has increased by 50%, to $300 million, over the same period.
"Definitely it is a flight to quality and a flight to safety," he said. Banks "are specifically interested in Treasury money market mutual funds for customers with excess of $100,000."
Darcie Henderson, the cash management officer at Coppermark Bank in Oklahoma City, said it recently started offering money market accounts from Reserve Management to ensure customers do not have to move their cash elsewhere. "It's about building a relationship and providing solutions for our customers that meet their needs," she said.
Promontory is also experiencing a surge of interest in its CDARS program. In the eight-day period that ended July 24, 131 banks asked to join the program. Last year on average 15 banks a week enrolled.
Allegiance has had little trouble drawing deposits on its own, because Houston's economy is strong, and depositors are getting more conscious about parking money in well-capitalized banks. Allegiance's Tier 1 capital ratio was 22% as of June 30.
"We are overcapitalized, and our customers know it," Mr. Bohls said. Customers "are nervous to have money hanging around in banks with 6% capital, so they want to move it to us."
By adding the CDARS program to the mix Allegiance was able to increase its deposits by 9% last month, to $9.8 million.
Great Florida Bank in Coral Gables has offered CDARS program to business customers since 2006 and last week it began offering it to consumers who were expressing concerns about the safety of their deposits after the IndyMac Bancorp Inc. collapse, according to chief financial officer Gary Laurash.
"Now everybody is concerned about credit risk, whether they have $50,000 in a savings account or a multimillion-dollar corporate account," he said.
Increased interest in the CDARS program has prompted the American Bankers Association to ask the Federal Deposit Insurance Corp. to reconsider its classification of the deposits as brokered. In a July 29 letter to FDIC Chairman Sheila Bair, the trade group said deposits generated through the program are stickier and less costly than typical brokered deposits, and it urged the agency to recognize the differences during examinations.
