Federal Home Loan Bank advance rates have fallen steadily since January, but community banks have barely reacted.
Though the balance of advances outstanding from the 12 Federal Home Loan banks increased $37.2 billion, or 8.7%, in the past 12 months, this growth pales next to the dizzying 37.3% rise in 1999, or the 17.7% jump from the third quarters of 1999 to 2000.
The borrowing slowdown has come as the fixed rate the Home Loan banks charge for a five-year advance is less than 5%, compared with more than 6.5% a year ago.
As attractive as the current advance rates are, they have failed to generate a significant response because community banks are flush with cash. Surging deposit growth, largely the result of consumers shunning the equity markets, has eased the liquidity problems that bedeviled banks for years. Meanwhile, a slackening economy has depressed loan demand.
But some economists say community banks are missing a rare opportunity to lock in rates that are at their lowest in four decades. They could use the money to pay down older, more expensive debt, fund loan growth, or make new investments, these economists said.
They are forecasting a recovery in early 2002 and said the smart move for banks would be to borrow now though deposits are plentiful rather than wait until the economy picks up steam and rates head upward.
Now is when funds most need to be borrowed, said Harry Davis, the chief economist at the North Carolina Bankers Association and a professor at Appalachian State University in Boone, N.C. The absolute best time to take out a loan is when you dont need the money. Thats when rates are the lowest.
David Littmann, the chief economist at Comerica Inc. in Detroit, said the spurt of new deposits is tied to a mass exodus from the stock market this year, which was worsened by the Sept. 11 terrorist assault. Many banks are having trouble finding outlets for all the money flowing into their coffers, he added.
Even so, Mr. Littmann said banks that decide to wait until liquidity begins to dry up, or until rates hit rock bottom, before locking in a low-cost FHLB advance, risk letting an opportunity slip by.
With the Federal Reserves yearlong rate-reduction campaign nearing its end he predicted one more, quarter-point cut on Nov. 6 banks are almost certain to resume borrowing from the FHLB. By then, however, rates will have started climbing again.
The flurry is about a month away, but its coming, said Mr. Littmann. The savvy [banks] are the ones that get their advances before that happens.
Most banks, however, seem content to rely on a steady stream of deposits until they see evidence that it is diminishing.
FHLB advance rates are extraordinarily low, but deposit increases have made borrowing unnecessary, said Brian C. Reinhardt, the chief financial officer at $764 million-asset First State Bancorp. in Albuquerque, N.M., where deposits have grown 24% since the third quarter of 2000, and totaled $620.1 million at Sept. 30.
The same was true at $1.17 billion-asset Peoples Bancorp in Marietta, Ohio. Officials said that in the third quarter Peoples outstanding debt, which consisted mainly of FHLB advances, fell 3.7%, or $8.2 million, from the second-quarter total. Its deposits have grown 11.2%, to $842.6 million, since Jan. 1.
Mr. Davis acknowledged that banks would have a tough time justifying borrowing from the FHLB when deposits are plentiful and loan demand weak. Nevertheless, he said, they could make money if they seized this opportunity.
Theres no doubt banks might take a small loss in the short run before they found a use for the advance, he said. But the spread they would receive once they did put the money to work would, in the long run, be more than sufficient to recoup those initial losses.
For now, banks appear to have decided to wait until their deposit situation changes before turning to the FHLB a verdict Mr. Reinhardt endorsed.
If deposit growth slows appreciably, we might look at borrowing from the FHLB, he said. The five-year money looks very attractive.
Any talk of a flurry of new borrowing would probably be welcome to the Home Loan banks, where advances slowed noticeably in the third quarter. At the Federal Home Loan Bank of Pittsburgh, growth was just 0.9%, to $26.03 billion.
Results were better at the Federal Home Loan Bank of Indianapolis, but in the words of one official, Nobody was popping champagne corks. Its new advances were $1.4 billion in the quarter, an increase of 5.6%.
Not surprisingly, many FHLB officials said they think the opportunity is ripe.
If somebody is thinking about borrowing, now would be a good time, said Thomas Williams, a spokesman for the Indianapolis bank.
