Abstract: Part 1 of a series About a year ago, ABA Banking Journal ran a feature story, Oh toaster, where are you now? that questioned whether the shortage of deposit funding had changed the liability side of banking for good (Feb. 1997, p. 46). At the time, the problem was spotty, and no major shifts were seen. Exactly one year later, the results of a national survey showed that six out of ten banks saw loan demand outstripping available deposits and nearly half of the banks surveyed were tapping non-deposit sources for funding. This finding was one of the dominant themes of the ABA/ABA Banking Journal Community Bank Competitiveness Survey (Feb. 1998, p. 47). Face of the future? A group of community bankers who reviewed these findings talked about the difficulty of making traditional deposits seem attractive in the face of a stock market that seems to have forgotten gravity. Some, however, looking beyond tradition, spoke of the possibility of the current trouble being an entree to a new form of community banking, one in which traditional funding based on deposits becomes less and less an element. In its place, they suggest, is the community bank as a different sort of middleman-funding loans with money from out of town. Think local mutual fund and you begin to see what these bankers are thinking. Far fetched? Maybe not. No one is saying that traditional deposits will disappear. Indeed, in some markers in me markets that had earlier seendeposit growth lag, things have improved. There can be wide variations even in the same state. Consider these two reports from Iowa: For the first time in a long time, we're seeing more growth in deposits than in reports Jim Schipper, president and CEO of $57 million-assets American State Bank, Osceola. We're in a college town, where everybody reads everything in sight, so they know all the alternatives that are out there, says W.R. Dick Summerwill, president and CEO of $335 million-asset Iowa State Bank, Iowa City. It's been like that ever since the stock market got hot. The lack of deposit growth-evidenced by a loan-to-deposit ratio of 86%-has Summerwill and his team looking at things that might have been unthinkable for a community bank once upon a time. The bank already sells off portions of conventional commercial loans to downstream correspondent banks and it is looking into selling other types of loans as well. Auto loans are a key item on Summerwill's list, not only because of the need for liquidity, because the securitization of these loans by other, larger competitors enables them to price lower than he can, using conventional funding. We know now with the auto loans P that we need to find a way to sell themoff simply to compete, says the Iowa banker. Summerwill sees much of the asset side of the bank going this way-the bank is also looking at sale of the guaranteed portion of Small Business Administration loans, for instance. It's frankly a shame, says the longtime community banker, but this seems to be the wave of the future. Franklin (Tenn.) National Bank has embraced this potential future out of necessity. The $300 million-assets institution is situated between two high-growth areas: Spring Hill, site of the Saturn auto plant, and Nashville. When it comes to liquidity in this market, prayer helps a lot, says Richard Herrington, chief financial officer. The bank started in late 1989 in a county that Herrington says has nearly always been a net importer of capital. We have tried every creative source of funds and still can't meet all of our demand, Herrington continues. We see ourselves in the future more as a broker of loans, rather than someone who makes and holds loans. Deposits are getting harder and harder to obtain, and even if we could get them, they cost more than other methods, so our margins related to deposits are shrinking. TOOLS YOU CAN USE In a series of follow-up interviews with the survey respondents who indicated they were exploring nontraditional sources of funding, ABA Banking Journal found that for the most part, the sources they selected aren't brand new; what's new is their increase in relative importance and the forms that these sources now take. …
Publication Year: 1998
Publication Date: 1998-05-01
Language: en
Type: article
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