Time to Rethink Your Funding Diet (1998)

traditional passbook has long been a historical curiosity, it lends itself to illustration far better than a one-sheet bank statement--or an on-line balance report. That's why we chose it as a handy bit of toast for the toaster accompanying this month's column as well as last month's, which opened our two-part report on alternative funding. Bankers in many parts of the country believe that the traditional deposit-based community bank will increasingly become a thing of the past. To a great degree these bankers have been forced to this conclusion by the falloff in deposit growth seen in many parts of the country. This month we continue our review of nontraditional funding methods used by community banks. Many of those cited here responded to the ABA/ABA B] 1998 Community Bank Competitiveness Survey, saying they had explored nontraditional funding. Bankers' banks: Allernative for some At Park Bank of Madison, Wis., many alternatives have been explored. They are expensive to obtain and the drain of potential deposits into the equities continues, says Robert Gorsch. $145 million-assets bank, among other things, has built up a great deal of experience selling loans. Madison is a good, strong market and other banks are interested in getting a finger in there, says Gorsuch. Some of this is handled bank to bank. But the bank is also part of a group of bank lenders that participate in business loans originated by members of the group, coordinated through the Bankers' Bank of Madison, Wis. Bankers' Bank has been offering its loan sharing program for about 17 years, according to Helge Christensen, president. Christensen says the program has gone through its evolutions, nowadays relies on a midnight fax to members regarding loans available for participation. rule is: first come, first served. Sellers generally find more banks interested in a piece of their loan than there are pieces. Everybody wants into the deal, says Christensen. One of the largest credits ever participated through the Wisconsin bankers' bank network was shared by 60 banks. Christensen says a group of 15-20 lenders is more typical. Those banks that make an initial commitment to a deal receive copies of the loan package for evaluation; later, they decide whether to remain on board. The deals don't have to be investment-grade, says Christensen, but they do have to be community bank credit quality. In the program's 17 years, it has never seen a loss. Not all states have bankers' banks. There are 17 in all (in the states of Arkansas, California, Colorado, Florida, Georgia, Illinois, Kansas, Kentucky, Louisiana, Minnesota, Missouri, Ohio, Oklahoma, Pennsylvania, Texas, Virginia, and Wisconsin), with at least one more (Connecticut) in the process of getting organized. range of services offered varies from institution to institution, so the likelihood of receiving liquidity assistance depends on the geographical area. Some bankers' banks serve more than one state now-Christensen's, for instance, expanded to Iowa-while others still restrict themselves to a one state. But if the option is available, the state bankers' bank may have a liquidity tool for you. Christensen points out that his institution offers several programs beyond the loan network; one entails a network of banks willing to buy and sell Fed funds among themselves, while another shifts around CD monies. Securitization avenues Turning loans into securities and putting the proceeds of the securitization back into lending isn't new, community bankers appear to be more and more comfortable with it. Many of the banks we talked to routinely use Fannie Mae, Freddie Mac, or other conduits to sell off mortgage production, for instance. practice and comfort level has spread quite quickly to other parts of the loan portfolio as well. Take the guaranteed portion of Small Business Administration-guaranteed business loans. …