The $9.9 billion-asset First Federal Bank of California has joined the growing list of banks and thrifts with online-only units meant to gather deposits.
Its FirstFedDirect went live Dec. 5. James P. Giraldin, the president and chief operating officer of the thrift and its holding company, FirstFed Financial Corp., said they are counting on the online unit to help fund soaring demand for loans, particularly single-family mortgages.
By the end of the third quarter the thrift's loan portfolio was nearly twice as big as a year earlier. To fund those loans it had to increase use of Federal Home Loan bank borrowings, reverse-repurchase agreements, and brokered deposits.
"Our bank has grown to about $10 billion in assets, and we cannot build our branches fast enough to keep up with that growth," Mr. Giraldin said. "We hope this new offering will replace some of our wholesale funding and lower our cost of funds."
The Web site's signature product is the Internet Advantage Savings Account, a money-market account with a current rate of 4.03%. First Federal is also offering certificates of deposit with durations of three, six, nine, and 12 months.
It is marketing the site and the products only through Bankrate.com, and for customers in every state but California, so as not to cannibalize the deposits in its 30 branches there.
Bank and thrift companies that have set up similar online divisions recently include the $12.1 billion-asset Emigrant Bancorp Inc. in New York and the $619 million-asset National Bank of Kansas City (based in Leawood, Kan.). And last month Washington Mutual Bank, a unit of the $333 billion-asset Washington Mutual Inc. in Seattle, said it was testing a Web-only bank, Wamu Direct, in four metropolitan markets.
The U.S. online-only bank with the most deposits - nearly $38 billion of them - is ING Bank FSB of Wilmington, Del., the U.S. incarnation of ING Direct. The Dutch banking giant ING Group NV opened the U.S. operation in 2000.
Its success has inspired others, and Gwenn Bezard, a research director at Aite Group LLC of Boston, said the competition is likely to intensify.
Still, Mr. Bezard said, "few banks are really taking advantage of the online channel now, so for the next few years it really creates a significant opportunity for those banks willing to give it a try."
Campbell Chaney, an analyst at Sanders Morris Harris Group in San Francisco, said that FirstFed is smart to look for alternative funding sources, because the California deposit market is the most competitive in the country.
But whether the online operation will lower the thrift's cost of funds, 2.59% on Sept. 30, remains to be seen. Mr. Chaney noted that though online banks have less overhead, they generally have to pay up for deposits to attract customers. Anyway, he doubts that FirstFedDirect will get big enough for the thrift to wean itself off more expensive funding.
In the 12 months through September the FHLB advances on First Federal's books jumped 42%, to $3.65 billion; brokered CDs more than doubled, to $1.67 billion; and reverse-repurchase agreements soared more than tenfold, to $1.1 billion.
First Federal has not stopped building branches. Mr. Giraldin said it opened one, in Commerce, Calif., in November and will open at least six - in Anaheim, Pasadena, Palos Verdes and in the Simi Valley, north of Los Angeles - over the next year.
It needs to add deposits to keep pace with loan volume. Mr. Giraldin said it has not been making many more loans, but their dollar value has soared as California home prices have continued to skyrocket.
Many of those loans are option adjustable-rate mortgages, which are becoming more popular in expensive markets like southern California. Such loans can become more risky as interest rates rise, but Mr. Giraldin said FirstFed has been making them since 1985 and is comfortable with them.