As loan demand continues to grow in St. Louis, some commercial banks are starting to sing the blues as a battle heats up for deposits needed to fund the asset growth.

Led by a 6.02% promotional yield offered on money market deposits by $800 million Southwest Bank of St. Louis, deposit rates in the Gateway City have risen above comparable rates in other parts of the country. And some analysts say the net result will be a narrowing of net interest margins.

"It's not so much that rates on CDs have gone up" as that there has just been a shift in the mix of deposits, said Frank Anderson with Stephens Inc. in Dallas.

A survey of deposit rates prepared by Bank Rate Monitor highlights the higher rates. For the week ended Aug. 9, the average interest rate paid on money market accounts at St. Louis' five largest commercial banks was 49 basis points higher than the national average.

And the higher rates were not limited just to money market accounts. In fact, the survey showed that St. Louis banks were paying 20-to-50-basis- point premiums in all deposit categories except NOW accounts and three- month certificates of deposit.

Leading this charge is Southwest Bank, the lead bank of publicly held Mississippi Valley Bancshares. As part of a promotion to gain attention for its fifth office, the bank is paying a guaranteed rate of 5.06% for money market deposits above $2,500 through Nov. 1, for an annual yield of 6.02. The 3.75% rate paid by Mark Twain Bank was closest to Southwest promotion, according to Bank Rate Monitor.

Joe Stieven with Stifel, Nicolaus & Co. in St. Louis, said this strategy is not new for the company.

"Their strategy when they open a new branch is to run an aggressive deposit promotion, and that has an effect on the entire market," he said.

In 1993, Stifel Nicolaus helped the company raise $7.9 million through an initial public offering of its common stock.

While the bank's strategy will hurt its net interest margins in the short run, it is a small price to pay given the alternatives, said Linn Bealke, president of Mississippi Valley.

"There is no drag on earnings and there are no acquisition headaches," he said. "The net result of doing things this way is that we have one of the lowest efficiency ratios of any bank anywhere."

Mr. Bealke said a few years ago the company looked at buying an $80 million-asset bank in a St. Louis suburb at 1.6 times book value. At that price, the premium would have amounted to $4 million over book value.

Instead of paying the premium, the company built its own office in the same suburb and spent $1.2 million on a promotional interest rate and advertising it. By the end of the year, the bank had its $80 million presence and saved $2.8 million, which is part of the reason the company's efficiency ratio was 46% last year.

The promotion is causing headaches for local institutions at a time when loan demand has intensified to the point of causing funding shortages, said Anat Bird, chief operating officer with Roosevelt Financial Group of St. Louis.

"It has negative implications on your spreads if you choose to play the game," she said. But, she added, it depends "on where each institution is on the yield curve."

For example, an institution wanting to make 22-month auto loans at 8.25% may be able to afford paying more than 6% for money market funds.

But Roosevelt holds more than $5 billion in marketable securities, Ms. Bird said, giving it the flexibility it needs to avoid "playing the game." Instead of paying up for deposits, the company can sell securities to fund loan growth.

Still, one institution's lead must be matched to some degree by everyone else in the market, said Mr. Anderson.

"If you try to underprice the competition, you run the risk of losing your deposit base," he said.

On the other hand, he pointed out that paying higher rates may lead to a complete repricing of the institution's deposit portfolio.

"It's a real job trying to run the liability side of the balance sheet these days," he said.

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