| TECHNOLOGY TOPICS |
If the banking industry had its own museum, a sort of financial Smithsonian, there would be an exhibit tucked in some corner with a placard reading, "The Age of the Core Deposit."
As you entered you'd see a glass case stuffed with plush toys, some carrying names quaintly reminiscent of banks past. You'd see a Crocker Spaniel, a Hubert the Harris Lion, an old Chase Banker Bear, and all their fellows.
Another case would contain china and glassware, the items that would draw in housewives week after week to add to passbook accounts.
A glint of light from shiny metal would, of course, draw your attention to a special display of toasters, so ubiquitous an item in the bank marketing arsenal of yore that they inspired jokes.
Only the historical-minded likely would ever visit this shrine to the age when Regulation Q still ruled. Though that era was only about 20 years ago, it seems longer gone than that. And while a few deposit premiums can still be found, customers in today's more demanding world mostly want three things: return, return, and return.
A widening arsenal for a changing war
Bankers are having to adapt to a new world of funding. Deposits are still essential, but banks must frequently be cagier than they once were to get them. This is an age when depositors not only shop their local banks and thrifts, but compare what banks offer to mutual funds and more. It is an age where comparative shopping around the entire nation is as close as any personal computer with a modem, on a web site operated by Bank Rate Monitor (www.bankrate.com, for the curious).
Brokered deposits no longer carry the stigma they used to, though many community bankers we talked to still shy away from them. There are advances to be had, for members, from the Federal Home Loan Bank System, though some community bankers tend to regard advances as a fire extinguisher, rather than a prime source. There are cooperative efforts between cash-poor community banks and those community banks with excess cash available for loan participations.
The epitaph for the traditional deposit-gathering mindset can be plainly read in statistics quoted by Mike Brosnan, acting senior deputy comptroller for capital markets. Brosnan notes that as recently as 1989, money market funds held $1 trillion in funds, while the banking system held $2.5 trillion in deposits. At the end of 1996, Brosnan notes, money market funds held $3 trillion, while bank deposits came in around the same number.
"There's been a secular shift in how consumers are apportioning their money," says OCC's Brosnan.
The flip side of this, according to Brosnan, is banks' lending activity. In 1985, the loan-to-deposit ratio for all banks was 77%. In 1996, he says, that ratio came in at 89%.
And some banks don't even care for the traditional loan-to-deposit ratio as a representative measure of their activity any longer, reflecting the alternative funding methods some have explored. At Park National Bank, Newark, Ohio, for instance, the ratio of choice is the "loan-to-assets," according to John W. Kozak, vice-president, investments. Park National frequently uses repurchase agreements-borrowings from companies and local governments secured by items in the bank's investment portfolio-to fund its assets.
While the trend has not grown to alarming proportions, indicating instability, some observers worry about the relative growth of loans versus deposits. While total loans increased by 7.1% in the third quarter of 1996 compared to the same period in 1995, according to FDIC statistics, interest-bearing deposits, which account for the majority of bank deposits, rose only 3.9%. Noninterest bearing deposits rose by 12.9% in the same period over 1995's third quarter, but these deposits account for a much smaller portion of banks' liabilities. The chart below shows a four-year trend based on all types of deposits.
These statistics do require some tempering, however. Jon Kozlowski, vice-president and an asset-liability management consultant to community banks at SunTrust Capital Markets, Inc., Atlanta, points out, for instance, that many small banks in his region are still paying 1% or so for negotiable order of withdrawal accounts. "That's just not the way things go during a liquidity crunch," says Kozlowski.
And take the case of $175 million-assets Mercantile Bank. Gordon W. Campbell, chairman, president, and CEO of the St. Petersburg, Fla., bank says when loan demand rises, all his institution has to do "is offer an eighth of a percent more than everybody else, and retirees will drive from miles away to open accounts."
Not a problem here
Other anecdotal evidence suggests that a funding squeeze is a spotty proposition. Plenty of banks contacted are, if anything, flush with deposits and looking for loans. Woburn (Mass.) National Bank is running a loan-to-deposit ratio of 76%, according to Harold C. Foley, president and CEO. Deposits at the $156 million-assets bank are keeping pace with loans.
In fact, Foley would be happier if loans pulled ahead. "We're looking for loans," says Foley. He says the bank is re-emphasizing officer calling, in hopes of stimulating interest in borrowing. "But we banks are stealing from one another, quite honestly," says Foley.
In Pierre, S.D., $130 million-assets First National Bank is quite liquid and finds competition for deposits quite moderate, according to Brent Dykstra, president. Dykstra says the bank is actually in the midst of training some employees for the sale of nontraditional investment products. While there is always the concern that this could siphon off deposits, Dykstra says, "One of our sister banks did this and it didn't have any significant impact on its deposits."
Where deposits lag loans
For a sharp contrast to those situations, shift to southern California.
"We're definitely at the worrying point," says James A. Boyce, president and CEO of $120 million-assets Rancho Santa Fe National Bank, situated just north of San Diego.
Boyce says his bank's loans are growing at a faster rate than are its deposits. It's a result of the comeback of southern California's economy. For the last year and a half, Boyce says, his bank has offered a money-market deposit account with a rate pegged to an index of money-market-mutual-fund rates. This has raised the bank's cost of funds, says Boyce, but the bank has needed the money.
One of the ways that Boyce has struck back is to establish an informal network of other community banks who have ample funds to lend and less opportunity to use them in their local markets.
Washington State banker Michael J. Clementz is also on the hunt for deposits. In 1996, Clementz explains, the $157 million-assets North Sound Bank, Poulsbo, felt its deposits were growing too quickly, so much so that the growth had overtaken the bank's earning power. Deposit growth was throttled down by underpaying the market, says Clementz, which gave the bank time to regroup its lending efforts.
Having since gotten back on track, the bank is now finding that to get depositors to return, it has to encourage them with higher rates. "We're either about even with the market or leading the market," says Clementz.
Deposit shortfalls are a concern for many rural banks, particularly where local economic development has slowed. Jeffrey L. Plagge, a banker active in ABA's efforts to improve rural economic development, notes that there has been trouble raising deposits here and there among the ag banks already, but that it's the future that worries him and others.
"It may show its face down the road," says Plagge, president and CEO, $91 million-assets First National Bank, Waverly, Iowa. He points out that in his own state, loan-to-deposit ratios averaged 40% to 50% five or six years ago. Now 70% to 80% is more typical.
"There are rural community banks with 90% loan-to-deposit ratios," says Plagge.
Your friendly Home Loan Bank
The potential demise in this Congress of the federal thrift charter renews the focus on a funding advantage once exclusively maintained for thrifts-advances from the Federal Home Loan Bank System.
Bank participation in the system has steadily grown, so that today more than 4,000 banks belong to a Federal Home Loan Bank, and banks comprise about two-thirds of the membership of the once-thrift-only system.
"More and more of these banks are those that have relied historically on retail deposits," says Jon Kozlowski of SunTrust.
However, while banks represent a majority of the membership of Home Loan Banks, they account for a minority portion of the advances drawn from the Home Loan Bank system.
There are several reasons for this. For one, banks don't enjoy the same quality of membership in the system, at least not under current law. There is a limit on systemwide advances made to nonthrift members, for example.
In addition, some banks that would like to be FHLB members can't qualify because there is a home lending test that must be met.
Is there a solution on the horizon? Maybe. Legislation reintroduced by Rep. Richard Baker (R.-La.) would open the system up to all regulated financial institutions with assets of less than $500 million, regardless of asset mix.
Baker is head of the House Banking Committee's Capital Markets, Securities and Government Sponsored Enterprises (GSE) Subcommittee, and while House Banking Committee Chairman Jim Leach (R.-Iowa) favors some aspects of the bill, its chances are uncertain thus far.
More favorable membership terms would be of interest to Dennis Utter, president and CEO of Adams County Bank, Kenesaw, Neb. Utter's $40 million-assets ag bank experiences the feast-or-famine loan demand that many ag banks see because of the cyclical nature of farm credit needs. The bank's loan-to-deposit ratio swings from a low of 60% or so to as high as 90% at the peak, according to Utter.
Utter says he believes that being able to join the Home Loan Bank system would help his bank through tight periods. At present, he says, his bank doesn't do enough home-related lending to qualify for membership.
Your friendly Farm Credit Bank?
One possible avenue of funding for rural banks-though highly speculative at best under current circumstances-amounts to going to an old competitor for aid.
For several years ABA and other groups have been working to gain access for community banks to the Farm Credit System, much the same way that they have obtained access to the previously thrift-only Federal Home Loan Bank System.
Farm Credit institutions not surprisingly have resisted this suggestion, and, in the face of that, interested rural bankers have tried another tack: seeking the creation of a bank-related subsidiary of the Farm Credit System.
Ag banker Jeff Plagge thinks access to the system in this manner could help smaller banks engage in matched funding of their borrowers' preferred loan terms to the banks' liability mix by providing a source for medium-term borrowings. ABA plans to keep pushing for this access, but it's not likely to bear fruit any time soon.
| Many community banks still resist securitization because they don't want their customers feeling like a commodity |
Securitization not yet feasible
Securitization of assets is often touted as a solution to an expected or actual decrease in deposit funds. The practice has grown tremendously, for sure, but many community bankers still resist the idea in part because they don't want their customers feeling like a commodity.
"It's hard for us to get enthusiastic about selling loans off into the marketplace," says Plagge. Furthermore, he says, "it's difficult for Main Street-type lending to be securitized. These loans don't necessarily fit in the box."
Nevertheless, some small banks have made use of securitization in cases where established secondary markets exist.
At deposit-hungry Rancho Santa Fe National, for instance, James Boyce takes some comfort in the bank's active Small Business Administration loan program. Loans made under SBA's mainline 7 (a) program are readily saleable-the guaranteed portion, that is-to an established secondary market, he notes. On the other hand, he points out, that only helps banks with term loans.
Some potential good news for banks in this regard is a ways over the horizon. One of the lesser-known aspects of the 1996 banking law orders the SBA to bar the sale of the unguaranteed portion of SBA 7 (a) loans as of March 31, 1997. This activity has been dominated by nonbanks. During the period of the ban, SBA is supposed to devise regulations that provide a level playing field for banks and nonbanks that wish to sell the unguaranteed portion.
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