Cardinal Financial Corp.'s acquisition last year of a large mortgage company nearly doubled its assets, to $1.2 billion, but did not bring in any new deposits, which it would need to fund anticipated loan growth.
So before its deal for George Mason Mortgage LLC closed in July, the 8-year-old McLean, Va., bank enlisted deposit brokers to round up deposits from all over the country, and soon had added roughly $132 million of new funds.
"We got introduced to … [brokered deposits] because we had to," said Bernard Clineburg, Cardinal's chief executive officer. "But once we did, we realized that they are a pretty good source of funding and a good liquidity vehicle."
He is not the only banker warming to the idea of brokered deposits, which are typically short-term certificates of deposit.
The latest Federal Deposit Insurance Corp. statistics show that 25% of community banks with $1 billion of assets or less use brokered deposits, against 16% three years ago and 8% a decade ago. Industrywide, banks reported $422 billion of brokered deposits at the end of 2004, 28% more than a year earlier.
The FDIC attributes the surge to the fact that loan growth is largely outpacing core deposit growth - consumers have grown more confident in the economy and more comfortable putting money back into the stock market.
"Although deposit growth has been relatively strong, assets have grown faster still, thereby putting pressure on FDIC-insured institutions to increase their use of noncore funding sources," the agency said in its regional Spring Outlook.
Bankers also said that intense competition for core deposits is forcing them to seek alternative sources of funds.
Daniel Speight, the chief financial officer of the $819 million-asset Flag Bank in Atlanta, said that while banks do have to pay higher rates on brokered CDs than on core deposits, the cost of acquiring those deposits is minimal.
"It's easier to bring in deposits when you know the cost associated with a phone call rather than going through your branch network to gather deposits from local customers," Mr. Speight said.
Even regulators, who have often frowned on banks' reliance on brokered deposits because of their volatility, seem less critical of these deposits lately.
Historically, regulators have discouraged banks from having too many brokered deposits on their books. Their argument has been that investors looking for a better rate could quickly pull their money out, possibly causing a liquidity crisis.
But in its Spring Outlook, released this month, the FDIC said that if administered properly, brokered deposits and other wholesale funds could work to a bank's advantage. It further explained, "Many institutions have found that brokered deposits can be a more cost-effective deposit-gathering mechanism than building a new branch."
Cardinal has experienced the volatility firsthand. Between Sept. 30 and Dec. 31 of last year its volume of brokered deposits fell 34%, to $86 million.
Still, that is $86 million of deposits that Cardinal did not have a year earlier, and those funds have gone a long way to helping fund the company's expansion.
"You probably won't see us use brokered deposits when we are not in a rapid-growth phase," Mr. Clineburg said. "But they are a terrific tool to have in our belt now."
According to the FDIC, banks most in the market for brokered deposits these days are larger community banks in metropolitan markets, where deposit competition is fiercest, or smaller banks in rural markets, where large local deposits are hard to come by.
At Dec. 31, commercial banks with assets of $1 billion to $10 billion reported a combined $42 billion of brokered deposits, 38% more than a year earlier. They accounted for 6.3% of those banks' deposits, up from 4.6% a year earlier.
One large community bank, the $5.6 billion-asset Republic Bank in Lansing, Mich., nearly doubled its brokered deposits in 2004, to $228 million. Thomas F. Menacher, its treasurer and CFO, said that diminished interest in CDs due to low interest rates prompted Republic to become more aggressive in acquiring brokered deposits.
"In 2004 there weren't a lot of retail customers that wanted CDs, so we are using brokered deposits to fill that hole," he said.
Banks typically pay rates about 1% higher than traditional CDs for brokered deposits. But Mr. Speight and other bankers said that depending on the day, the rates on brokered deposits can be even more favorable than rates on Federal Home Loan Bank advances.
Brokered deposits increased fourfold at Flag Bank last year, to $133 million.
Mr. Speight said that these deposits were used primarily to fund the increased loan demand in the Atlanta area. Flag's total loan volume rose 25% in 2004, to $609 million, and Mr. Speight said the growth was entirely organic.
Most bankers and observers do not expect brokered deposits' newfound popularity to last. Joseph Stieven, an analyst with Stifel Nicolaus & Co. Inc. in St. Louis, said that as interest rates continue to rise, consumers will deposit more of their savings in local banks, reducing the need for brokered funds.
Christopher Marinac, an analyst with FIG Partners LLC, said most banks view brokered funds as part of the overall deposit mix and know enough not to rely too heavily on them. He said any bank whose brokered deposits account for more than 15% of deposits over all is inviting scrutiny not only from regulators, but also from stockholders.
"If you have a strong base of core deposits, it generally makes you more valuable to investors," he said.
