Brokered deposits in region nearly doubled

Based on deposit numbers alone, Northern Colorado looks quite liquid.

Deposits in Weld and Larimer banks increased by 11 percent from 2004 to 2005, according to the Federal Deposit Insurance Corp. deposit market share report. That represents an increase of $640 million in deposits for the region, to $6.32 billion as of June 30, 2005.

But many bankers caution against such a shallow examination. While a majority of deposits in the region are from local sources, the growth rate of brokered deposits at locally based banks is far outpacing the total growth.

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Brokered deposits, as defined by the U.S. Office of Thrift Supervision, are those placed in a savings institution by a broker on behalf of others. The broker gathers funds and packages them in batches, then shops for the highest rates and takes out multiple large certificates of deposit.

According to a statement from bank regulatory agencies, “customers who focus exclusively on rates are highly rate-sensitive and provide less stable funding than do those with local retail deposit relationships.”

From 2004 to 2005, brokered deposits for Northern Colorado-based institutions grew by 90 percent, according to the FDIC call reports. Because the reports do not break down brokered deposits by branches, tallying the number of brokered deposits for every bank operating in Northern Colorado is not possible. But for the 14 banks based in the region that submitted June 30 call reports in 2004 and 2005, brokered deposits increased from $124 million to $236 million.

The June 30 call reports are not yet available. However, as of March 31, Northern Colorado’s 16 banks held $406.7 million in brokered deposits.

Relationships first

Not all banks in the region accept brokered deposits, however.

“We believed in relationship banking,´ said Don Churchwell, CEO of The Home State Bank, one of five Northern Colorado banks that held no brokered deposits as of March 31. “If you take brokered deposits, there is no relationship with it.”

The others banks without brokered deposits were FirstBank of Northern Colorado, FirstBank of Greeley, Union Colony Bank and First National Bank of Estes Park.

For Home State, founded in Loveland in 1950, having been in the community for so long has resulted in deep customer relationships. “I think that people that bank with us tend to have numerous relationships with us,” Churchwell said, adding that a bulk of the bank’s deposits come from such multifaceted connections.

Churchwell believes that it becomes more difficult to plan year-to-year with brokered deposits as opposed to core deposits. Many bankers who don’t accept brokered deposits call them “hot money” because once the term is up on the deposit the broker will shop around again for the best rate.

“We just don’t like the variability of it,´ said Patrick Brady, president of FirstBank of Northern Colorado and FirstBank of Greeley. “We do not accept brokered deposits of any type, locally or nationally.”

Brady echoes Churchwell’s sentiment that his bank focuses on gaining core deposits. He marks up FirstBank’s ability to gather enough deposits to satisfy loan demand to the bank’s large network, with 115 branches in Colorado and California.

Big two for brokered deposits

Of Northern Colorado’s brokered deposits, more than half of them are held by two institutions – New Frontier Bank and Bank of Choice.

“There’s a practical limit to how much you want to get involved with brokered deposits,´ said Joe Tennessen, senior vice president for cultural enhancement for New Frontier Bank. “We have a limit that we set on that and we don’t go over it.”

New Frontier took over the top spot in the deposit market share report for Weld County last year. The bank also claims the top spot in the region for the amount of brokered deposits it holds. From 2004 to 2005, the bank’s brokered deposits increased by 139 percent to $68.1 million on June 30, 2005. As of March 31, the bank reported $164.4 million in brokered deposits – about 23 percent of the bank’s total deposits.

“The real key, is what we have to pay for money locally,” Tennessen said.

He explained that the bank takes brokered deposits because it is often more economical to do so.

The same holds true for Ault-based Farmers Bank.

“There isn’t sufficient deposits in this region,´ said Fred Bauer, president of Farmers Bank. “I’ve been in banking for 35 years and there’s never been enough deposits along the Front Range to satisfy loan demand.”

Farmers Bank held $52.9 million in brokered deposits as of March 31, representing about 49 percent of its total deposits.

Bauer explained that in order to gather more deposits locally, he would need to spend more on advertising and bricks and mortar. Farmers Bank can’t compete with the bigger banks on spending for either of those, he said. Farmers Bank can more economically gather brokered deposits and is able to get them when the bank needs them.

“We want to get it the quickest and most economical way that we can,” Bauer said.

Tool for growth

Brokered deposits are another available tool for banks to use to grow, but do not perform in the same way that core deposits do. In 2001, the bank regulatory agencies released a joint advisory statement on brokered and rate-sensitive deposits.

“The issue (with the advisory) wasn’t so much a concern as a reminder,´ said Jason Cave, associate director for the FDIC division of supervision and consumer protection. “This has been a long-standing advisory.”

The statement was a reminder of the potential risks associated with brokered deposits.

“When prudently managed, these deposits can be and often are beneficial to banks,” the advisory states. “However, without proper monitoring and management, they may be an unstable source of funding for an institution.”

The bank regulatory agencies do not limit the amount of brokered deposits that a bank can have, but are concerned that banks with such deposits have a plan or process in place to manage them.

“It’s good money,” Cave said. “It’s needed and supports asset growth.”

The key, he added, is whom the brokered deposits came from, where they are invested and how they are managed.