Tea-Leaf Readers, Take Note: 2 Banks Take Plunge on Rates

As the world waits for Federal Reserve policymakers to make up their minds about interest rates, two community banks in the Midwest have acted.

West Des Moines State Bank in Iowa cut its prime lending rate last Tuesday by 25 basis points, to 8.25%. Two days later, Southwest Bank of St. Louis slashed its prime by 50 basis points, to 8%.

The Federal Open Market Committee is widely expected to follow suit at its Tuesday meeting. Many Fed watchers predict a cut of 25 to 50 basis points in the federal funds rate, which is currently at 5.5%.

Getting out ahead of the Fed on interest rate moves is a time-honored way for small banks to grab national headlines. Southwest Bank's late chairman, I.A. Long, made a career of it. Mr. Long, who died in 1993, often led the nation with prime rate changes in the 1980s.

But the two banks insist their pre-FOMC rate cuts are no gimmick.

Both said it was time to ease rates because their funding costs are declining. After all, yields on 30-year Treasury bonds are tumbling, inflation is in check, and commodity prices are falling. And if some see the moves as a publicity stunt or a not-too-subtle hint to the Fed, so be it.

"We had a guilt complex," said David L. Miller, chairman and chief executive officer of the Iowa bank. "The bank has been waiting for the prime interest rate to drop, but it hasn't. We have a responsibility to our customers."

The prime-traditionally, the rate a bank charges its best business borrowers-is something of an anachronism. In big-league commercial lending, the London interbank offered rate long ago displaced it as a benchmark.

But the prime remains an important indicator for small-business and consumer loans. It reflects numerous factors, including a bank's cost of funds and local competition.

And it is clearly important for community banks. Two-thirds of borrowers at $650 million-asset West Des Moines State Bank have rates linked to the prime, Mr. Miller said. Many are small businesses and will benefit from the cut, he said.

The move will cost the bank about $1,000 a day on its existing loans and as much as $750,000 over the next 12 months. But Mr. Miller said he believes the 8.5% prime rate is "artificially high."

Keith Leggett, senior bank economist at the American Bankers Association, agreed that the prime is out of balance with other indexes. He added that "there is some motivation for these banks to stabilize demand in their markets."

Still, competitors of West Des Moines State Bank said they have no plan to follow Mr. Miller's lead.

"That's a market decision they made," said Rick R. Messerschmidt, CEO of First Bank in West Des Moines. "In this competitive market, nothing surprises me."

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