Larry Maschhoff is frustrated with customers who cannot commit.
The president and chief executive officer of the $139 million-asset Bank of Illinois in Normal said he cannot get customers to buy certificates of deposit that last longer than 12 months.
“I think it is just the psychology of the depositor: ‘Rates are going to go up, and I will wait to get a higher rate,’ ” Mr. Maschhoff said.
What he would like is longer-term deposits he could match with loans. That is why he voted for having the Community Bankers Association of Illinois endorse the Capital Markets CD program offered by Index Powered Financial Services LLC of Denver. Mr. Maschhoff is a member of the trade group’s board.
The program works like this: Investors buy three-year notes from Index Powered Financial that are backed by CDs from at least 100 banks. Index Powered uses the money from the notes to buy three-year CDs at a fixed rate from banks that agree to participate in the program.
Investors make money by collecting the interest, banks have a supply of deposits they can use to make loans, and Index Powered makes money by charging the banks a fee — about 20 basis points — to participate in a pool, said Robert Colvin, the company’s president and CEO.
“If you look at the all-in funding costs of the coupon plus the fee, it is going to be commensurate with the Federal Home Loan offered rate or brokered deposits or CD networks that exist,” Mr. Colvin said.
On July 6, Index Powered sold its second note under the year-old program, at an interest rate of 5.62%. The company had hoped to issue notes regularly, but Mr. Colvin said it has had a hard time getting 100 banks to sign up. In September 2005 it saw a chance to ensure a steady supply of CDs by offering the program to banks affected by Hurricane Katrina. They were interested at first but soon found they did not need the money, Mr. Colvin said.
“When the insurance money started flowing back into banks, the banks had more money than they knew what to do with,” he said.
Now banks must commit to selling the CDs 12 weeks before selling them, to ensure there will be enough banks for each issue, Mr. Colvin said.
The Federal Deposit Insurance Corp. will allow Index Powered to sell the CD-backed notes only if there are 100 participating banks, to ensure that investors’ money is spread out over many banks to reduce risk, he said.
Douglas A. Dawson, the vice president of membership and services for the Iowa Independent Bankers Association, which has endorsed the program, said it was competitively priced with other sources of funding, such as Federal Home Loan banks or brokered CDs.
“It is not designed to replace or compete with the Federal Home Loan bank. It is a supplement to that kind of funding,” Mr. Dawson said.
Mr. Maschhoff agreed with that assessment and said that banks are primarily limited in how much they can borrow from the Home Loan banks by the number of mortgages they have.
“If someone has used up their availability at the Home Loan bank, they could go this direction, too,” he said.
The Iowa group has been promoting the product since May and has signed up 25 to 30 of its bankers, Mr. Dawson said. The trade group has informed bankers about the program through mailers, teleconferences, and faxes. He said he would like 300 bankers to sign up for the program over the next two years and is counting on word of mouth to be the best form of promotion.
“I think it will catch on fairly quickly once we have more people involved. Word travels, and people see that it works or doesn’t work,” he said.
Michael W. Kelley, the president of Community BancService Corp., a subsidiary of the Community Bankers Association of Illinois, said it plans to promote the program as the Iowa group does. He said the large number of banks in Illinois and high loan demand has hurt the liquidity of many of the state’s banks.
“Illinois is one of those states that has a higher loan demand than deposit growth, so community banks are constantly struggling to find funding to fit their loan demand,” Mr. Kelley said.
He said his group’s board unanimously voted to recommend the program to its 500 members, because it believed the program could provide an ongoing source of funds.
Mr. Colvin said that he has investors lined up to buy the bonds, and that now all he needs is enough banks to ensure a steady supply of CDs. He said the company is working with the state trade groups to get more banks signed up.
“We would hope to have 250 banks before the end of the year,” he said.
