Community banks should get used to borrowing from Federal Home Loan banks to boost liquidity and fund growth, consultant Robert Colvin told a group of Illinois bankers here last week.

Speaking at the annual gathering of the Illinois Bankers Association, Mr. Colvin, managing director of Sheshunoff Information Services' community bank division, said deposits have left banks permanently for mutual funds and other investments. Therefore, banks must use other sources of funding.

"You say, 'We just don't like that borrowed money,'" Mr. Colvin said. "It's viewed as a temporary source of money instead of a permanent source of money. That's got to change."

More than 6,500 banks, thrifts, and credit unions already belong to the Federal Home Loan Bank System. And membership is expected to increase significantly this year in the wake of new guidelines relaxing requirements for joining one of the system's 12 banks.

Nevertheless, Mr. Colvin said, many bankers have not yet overcome the perceived stigma of borrowing money to fund loan demand. "Wholesale deposits have to increase if you want to grow," he said.

In the next five years, wholesale deposits are expected to nearly triple, to 28% of banks' total funding. Much of those deposits are expected to come from Home Loan banks, but brokered deposits and certificates of deposit sold over the Internet would also be factors, he said.

The shift toward more purchased deposits would also mark a change in strategy for many bankers as they learn to manage interest rate risk on deposits for the first time. "If you start to buy money, you've really got to think about what you're doing," he said. "This is going to force you to be a balance sheet manager, not just a lender."

But the risk associated with Home Loan bank advances, for example, can be minimized through customized contracts that include puts and calls, amortization schedules, or prepayments, Mr. Colvin said.

Shirley B. Kessler, president of Community Bank and Trust, Olney, Ill., agreed that bankers should view wholesale funds as they would traditional deposits.

"It's borrowed funds whether it's from the customer or the Federal Home Loan Bank," she said.

Ms. Kessler said she expects her $210 million-asset bank to rely increasingly on borrowed funds as baby boomers age.

"The younger generation doesn't look at needing a bank," she said. "They're looking at the return on their investment."

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