Cost of bank loans could go up

Branch growth is outstripping deposits in D-FW

New data suggests that bank deposits are growing more slowly in Dallas, Fort Worth and across Texas than the rest of the country.

As banks have a harder time finding deposits as a result, customers could soon see loans costing more.

For several years, the surge in banks expanding and entering Dallas-Fort Worth have created a win-win-win for potential borrowers, depositors and the new banks.

For borrowers, more competition for loans has meant good deals.

For depositors, banks have rolled out more services and paid more on savings accounts and other deposits.

For the newcomer banks, good population growth has made it easy for those institutions to grab a slice of a growing pie.

Institutions still are finding it easy to make loans, but finding the deposits to back them up is getting tougher.

For four years running, institutions have added more bank offices in Texas than any other state. In North Texas alone, banks added 153 new branches between June 30, 2004 and June 30, 2005.

On the surface, there may appear to be enough banking business to support the influx of new institutions and stores. But a closer look shows that bank deposits aren't growing as fast as institutions put up new offices to handle them.

Below-average growth

Data compiled annually by bank regulators shows that Dallas-Fort Worth is home to $113.4 billion in bank deposits as of June 30, 2005. That's up 21.9% from the prior 12-month period.

But the largest single chunk of those deposits resided with Treasury Bank N.A., an institution owned by mortgage giant Countrywide Financial Corp. (In September, that institution took the name Countrywide Bank.)

Treasury Bank reported housing deposits of $30.4 billion in the Metroplex. One year before, its lone Dallas-Fort Worth bank office listed $15 billion in deposits.

That money is tied to savings accounts, home mortgage escrow accounts and related financings -- and not necessarily North Texas banking customers. The bulk of the Countrywide institution's banking activities involve landing interest-bearing savings accounts from all parts and handling home financing -- not local bank work.

Excluding the $30.4 billion from Treasury Bank, Dallas-Fort Worth banks held $82.9 billion at June 30, the annual survey date for banking regulators.

That's an increase of 6.6% -- less than the national average of 8.6% deposit growth.

Excluding Treasury Bank and some other non-Texas deposits, banking analyst Scott Alaniz calculates that statewide deposits have grown at about 6%.

Why deposits matter

Banks make most of their money by charging interest on loans. Deposits are important for banks because they're the raw material that allows them to make those loans.

"Deposits are effectively the assets of the bank," said Gary Townsend, a banking analyst with Friedman Billings Ramsey.

Banks that get low-cost funds from checking account deposits can make a wider margin on the loans they make and stay more profitable, he said.

But with more banks competing for deposits, the cost of getting that money goes up.

And for the first time in a decade, interest rates are trending upward. That means banks will have even more reason to charge more for their loans.

Banks typically do a good job of linking their cost of funds and what they make on loans, said James Gardner, senior managing director of Samco Capital Markets.

The challenge will come when loan costs grow to the point that they soak up the borrower's potential profits. For example, building a commercial office building might not make business sense for a customer if the loan comes with a 10% interest charge.

And if banks charge more for loans, fewer loans will be made.

"We could see the lending community become less liquid over time," said Bruce Bradford, Frost Bank market president for Dallas-Fort Worth.

On a wider scale, banks have gained new competition for their moneyholding work, particularly from investment brokers ranging from Merrill Lynch to E*Trade Financial.

In the 1970s, banking institutions held roughly half the money available for deposit nationally. Banks now hold about a quarter of the money available.

For example, Houston-area holding company SNB Bancshares Inc. recently slashed its earnings forecast because the rates it pays for deposits have climbed more quickly than what it makes on its loans.

It earnings thus far this year have plummeted 47.9%.

In mid-November, SNB agreed to sell to another Houston-area banking company, Prosperity Bancshares Inc. (Banks analysts say banks must remain strong to stay independent, and that weak performance can make a sale more appealing to shareholders.)

Easy lending

By contrast, institutions have found plenty of chances to lend money.

"A lot of people are involved in transactions right now," said Roy Salley, chairman and chief executive of Sovereign Bank in Dallas.

With lending chances plentiful, Salley says he's seeing banks scrambling for deposits.

When banks can't get money in the door in the traditional ways, they look at other options, Gardner noted.

In July, for instance, the parent organization of Irving's Bank of the West struck a deal to buy the Bank of Vernon, northwest of Wichita Falls.

Bank of the West has offices in Irving, Carrollton, Lewisville, Southlake and Grapevine.

"They have huge loan demand," Gardner said.

The Vernon bank has the opposite. It has one branch in the rural town of Vernon, population 11,474.

As of June 30, it reported deposits of about $14 million and loans of about $5.7 million. The acquisition is a classic example of taking deposits in the country and making loans in the city, Gardner said.

Buying deposits

Short of buying a country bank like Bank of Vernon, institutions can "buy" deposits by offering a higher interest rate than competitors on certificates of deposit or money market accounts.

That's part of Sovereign's game plan as it expands in Austin.

Sovereign opened its downtown Austin location in November. In concert with that, the bank plans to offer a higher money-market rate to get deposits in the door.

"Banks haven't been able to get deposits at the old rates," Salley said.

In a different era, paying for deposits was a sign that a bank was in trouble, says Rockwell Clancy, director of policy and development at banking consultancy Sheshunoff Management Services L.P.

"Those are no longer taboo," he says.

Banks that offer higher rates usually do so because they're very skilled at managing those costs or they're new to an area and looking to bring in some money, Clancy said.

Otherwise, paying top dollar for deposits is a strategy that only works in the short term.

More fundamentally, bank executives should key on how their individual locations perform rather than expect good growth because they set up shop in a "good" area, Clancy said.

Pie fight ahead

Ultimately, the pace of new deposits is going to grow in concert with population and new development, Clancy said.

Based on continuing population increases, Dallas-Fort Worth still appears attractive.

"You go to places where the pie is growing fastest," Clancy said. "Compared to other areas, (D-FW) is pretty nice."

But the furious pace of branch openings is absorbing all that new growth, Alaniz said.

"What's happening is that new branches are taking all the incremental deposit growth," he said.

In a different era, banks added branches when their existing ones couldn't handle any more business.

Banks didn't suffer as much as other businesses in the recent recession, and growth assumptions have been very positive.

"The banking business has been so good for the past few years, we're kind of extrapolating off of the best numbers," Alaniz said.

But, relying too heavily on the best numbers could set some institutions up for a fall.

What are people saying about mortgages today:

Rates on 30-year mortgages edged down last week to a seven-month low. Mortgage-giant Freddie Mac reported Thursday that 30-year, fixed-rate mortgages fell to 6.3 percent, down slightly from 6.31 percent two weeks ago. It put rates at the lowest level since they were at 6.24 percent the first week of March.

Bank of Hawaii, Central Pacific Bank, Territorial Savings Bank and Wells Fargo Home Mortgages all cut their 30-year mortgage rates to 5.75 percent this week.

Most people think of a mortgage as a means to an end. After all, you buy a house, not a home loan. But a mortgage is much more than the path to homeownership. It is a financial instrument that must be managed, just like any other financial investment.