Like many other small financial institutions, Gloucester County Federal Savings Bank has had its growth plans hampered by fierce deposit competition, both from other local banks and from online ones.
The challenges the Sewell, N.J., thrift faces hit home for Robert C. Ahrens, its president, during a management meeting one day early last year, when he learned that nearly half the employees in the room had savings accounts with ING Bank, an online arm of the Dutch banking giant ING Group NV.
"To me that was telling," Mr. Ahrens said in an interview this month. He thought, "Maybe we should investigate a little further doing exactly that type of account, in order to keep their deposits … in their own bank."
So in October, Gloucester County launched CyberSaver, a series of online accounts whose yields are tiered according to account balances. For accounts with balances of up to $24,999, depositors receive a 3.5% annual percentage yield; customers with $25,000 to $99,999 earn about 5%, and those with $100,000 or more earn about 5.4%.
And since it began advertising its rates on Bankrate.com Inc. in December, Gloucester County has gained about 455 accounts and about $25 million of deposits, Tim Hand, its chief operating officer, said in an interview this month. More than 95% of the money has come from outside the thrift's market, and deposits are continuing to come in, at a rate of about $800,000 a week.
The $372 million-asset thrift is hardly the only community bank that has established online accounts to stem the flow of deposits to ING Bank and the online arms of other large banking companies, but it is among the smallest.
Gloucester County is counting on the added deposits to help fund "dramatic balance-sheet growth planned for the next five years," Mr. Hand said. Specifically, its goal is to fund the high-rate deposits generated online with higher-yielding specialty loans.
Though Gloucester County is not heavily advertising its online savings accounts, it is already more than halfway toward its goal of generating $40 million of deposits through the channel.
Mr. Hand said the Internet has helped the thrift boost deposits without cannibalizing its lower-cost deposits through in-branch specials. Some local customers have found the CyberSaver accounts on the Internet, but Gloucester County discourages them by charging a $15 fee to service an online account at a branch.
The thrift has developed a niche in personal aircraft lending. Mr. Ahrens said it established its online accounts in large part to fund those loans. According to Mr. Hand, the loans yield anywhere from 7.5% to 10%. "They're certainly higher-yielding than anything we've been doing, and they're not small dollars, either."
Mr. Ahrens said that even though some borrowing may be necessary to fund the loans, matching online deposits with the specialty loans is "all part of the long-range plan."
Some industry experts say that gathering online deposits can be a risky game that is not too different from wholesale borrowing.
"What is the burden cost of raising that dollar of deposits, versus just picking up the phone and buying the funds wholesale? That's what it comes down to," said Chris Whalen, managing director of Lord, Whalen LLC's Institutional Risk Analytics.
David B. Moore, the president of Marathon Capital Holdings Inc., a San Diego firm that invests in community banks, said, "It looks to me like it's pretty hot money. I'm not saying that it can't work, but any sort of strategy that does not involve some level of personal contact" is not going to be that profitable. (He sits on the boards of two community banks.)
Mr. Hand and Mr. Ahrens said that online customers are just as profitable as local ones, who showed how loyal they are by searching for higher yields at banks down the street.
"The online market is low-cost acquisition of higher-cost deposits, versus the branches being high-cost acquisition of lower-cost deposits," Mr. Hand said. "It costs us no more than 10 or 12 basis points in advertising to generate deposits. Even in our investment yield rates, we're still making 60 or 80 basis points, worst-case scenario, and if we stick it into an aircraft loan or commercial loan, we might be making 250 or 300 basis points."
Another advantage of gathering deposits rather than borrowing from its Federal Home Loan bank is that Gloucester County can cross-sell other products to online depositors, he said.
It has no plans to offer those depositors loans, but some have opened checking accounts.
The thrift also is touting its participation in the Certificate of Deposit Account Registry Service program, in which wealthy clients can gain Federal Deposit Insurance Corp. coverage above $100,000 through a swap arrangement offered by Promontory Interfinancial Network LLC.
Mr. Hand said that the thrift has taken in about $8 million through that program.
Matthew Kelley, an analyst at Sterne, Agee & Leach Inc., agreed that paying high rates on online deposits is a better option than wholesale borrowing.
The rate on two-year advances from Home Loan banks in the Northeast is about 5.5%, he said, and even at the highest end, Gloucester County still pays online depositors less than that.
Gathering deposits online "will afford some better opportunities," Mr. Kelley said.
