After years of struggling to attract deposits, community banks appear to have caught a break from the decline in equity markets.

Deposit data from the Federal Deposit Insurance Corp., as well as first-quarter reports from dozens of small banks, show a pattern of substantial deposit growth in the last six months. If the trend continues, it could help ease the liquidity woes that have plagued community banks since the mid-1990s. Century Bancorp in Medford, Mass., with assets of $1.02 billion, increased its deposits by 20%, to $740.6 million, from March 31, 2000, to March 31 of this year. From 1999 to 2000, Century's deposits had grown an anemic 2.7%

Paul V. Cusick 2d, Century's vice president and treasurer, said a slumping stock market has left many people "feeling the need to be more liquid."

This need has been a windfall for Century. The rise in deposits reduced pressure on its net interest margin, which widened by 10 basis points, to 4.08%.

"This is still a numbers game," Mr. Cusick said. "We get a lot of excitement out of those 10 basis points."

Community banks could certainly use a healthy dose of deposits. In the mid- and late 1990s, as the Nasdaq and the New York Stock Exchange broke record after record, bank deposit growth slowed to a trickle. While the Dow Jones Industrial Average more than doubled from 1995 to the end of 1999, industrywide deposit growth was just 4% in 1999, the slowest pace since 1993.

Starved for deposits - their cheapest source of money - banks with less than $1 billion of assets turned to more expensive forms of funding, such as Federal Home Loan banks. Not surprisingly, this trend began to squeeze their net interest margins - from an average 4.7% in 1995 to about 4.5% in 2000.

David Littmann, a senior economist at $42 billion-asset Comerica Inc. in Detroit, said the increase in deposits reported by many community banks is consistent with consumer confidence surveys that have been in broad decline since the stock markets began falling last year.

A trend toward higher deposit growth "is very compatible with the confidence numbers," Mr. Littmann said. "People feel the need to restore their liquidity."

Big banks, however, are not reporting the same sort of gains. Though only a handful have reported first-quarter earnings, many that have - including SunTrust Banks Inc., First Union Corp., and Fifth Third Bancorp - have shown slight declines. Bank of America Corp. reported a 0.2% rise in deposits.

"Clients at big banks are more oriented toward money markets," said Mr. Littmann. As a result, he said, regional and larger banks "face a very uphill battle" in gathering deposits.

But $560 million-asset Mercantile Bank of Western Michigan, in Grand Rapids, is having no such trouble.

Mercantile, which has usually relied on brokered deposits to fund its rapid growth, has increased local deposits by 14% since Dec. 31. This was enough to outpace its rate of asset growth and help buttress its margin - despite a precipitous drop in the prime interest rate, said chief financial officer Charles E. Christmas.

Mercantile's margin could have been expected to narrow significantly during the first quarter, since nearly 40% of its $459.7 million loan portfolio is tied to the prime interest rate, which dropped 1.5 percentage points from January through March. Instead, the interest rate hit was offset by an influx of low-cost deposits, leaving the net interest margin unchanged at 2.83%.

Century and Mercantile are just two names on a lengthening list of community banks reporting double-digit deposit growth in the first quarter. Others include $454.1 million-asset Cascade Bancorp in Bend, Ore., where deposits grew 18.4% from the first quarter of 2000, to $393.6 million at March 31.

California's Bank of Sacramento, with assets of $101 million, reported a 45% increase in deposits during the quarter, to $90 million.

The surge in bank deposits seems to have begun in the fourth quarter. From October to December, the Federal Deposit Insurance Corp. noted an "unusually large bump" in both checking and savings deposits at commercial banks, said Don Inscoe, associate director of the agency's division of research and statistics.

According to Mr. Inscoe, checking deposits grew by $41.6 billion in the fourth quarter, compared with $12.8 billion the year earlier. Similarly, savings account deposits grew $69.4 billion in the fourth quarter, more than three times the $21.6 billion jump the year earlier.

The FDIC will not finish compiling its first-quarter statistics until June, and Mr. Inscoe stopped short of calling the fourth-quarter results a trend. But the agency's numbers, combined with advance data from the Federal Home Loan banks, seem to indicate one.

The Council of Federal Home Loan Banks, a Washington trade group that represents 10 of the 12 Home Loan banks, said that community banks borrowed $147 billion in the fourth quarter, 13.4% less than the year earlier.

But both Comerica's Mr. Littmann and Mr. Cusick of Century Bancorp cautioned that it is too early for community banks to celebrate, or even to feel relieved.

Mr. Littmann said the gains produced by higher deposits would be quickly wiped out if loan chargeoffs rise simultaneously.

And Mr. Cusick likened the loss of trillions of dollars in equity value to "watching an atom bomb explode from a distance.

"You can't hear or feel anything, but you know something is going to hit you," he said.

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