What impact will be the latest cut in interest rates have on the economy and loan demand?

Not much, according to seven chief executives interviewed last week by the American Banker.

The bankers remain decidedly pessimistic about the economy, although some see hints of strength in their regions.

Depositors Disgruntled

All agree that rate cuts alone won't spur lending. "If our customers don't have new business, they won't borrow money no matter what the interest rate is," says John C. Canepa of Old Kent Financial Corp. in Grand Rapids, Mich.

Some are hesitant to cut deposit rates any further for fear of driving away longtime customers. That could put pressure on profit margins, they say.

And many pointed out that depositors were not bashful about voicing their unhappiness at the low yields even before the half-point cut in the discount rate 10 days ago. John Medlin of Wachovia Corp. in Winston-Salem, N.C., says his own 78-year-old mother called to complain she couldn't live on what you pay me on CDs right now."

Still, Mr. Medlin says, with little demand for loans, liquidity is hardly a problem. And when depositors balk about rates, Boatmen's Bancshares Inc. in St. Louis refers them to its brokerage unit. "If our depositors seek other investments, we can offer that to them," says Andrew B. Craig 3d.

All the CEOs expect a slow, drawn-out recovery, and few think the Federal Reserve will ease again. "If they don't see any demand being generated from this level," says Ira Stepanian of Bank of Boston Corp., "I don't see the point frankly of cutting further."

The opinions of the seven chief executives follows.

Leonard W. Quill

Wilmington Trust Co. Wilmington, Del.

Mr. Quill knows the Fed's latest rate cut is supposed to rekindle loan demand. But he just doesn't buy it.

"I really don't see that happening," he says. "I don't think there's a direct connection."

What's needed, in his opinion, is for consumers and businesses to see more proof that the economy is rebounding. "As far as loan demand is concerned, the controlling factor is the economic recovery."

Having said that, Mr. Quill acknowledges that Wilmington Trust, which has $4.3 billion in assets, is bucking a nationwide trend toward declining loan volume.

"Our commercial lending business has been strong, really," he says. "Our loan portfolio has been growing 6%."

One reason: After years of courting new clients, Wilmington Trust has own some commercial borrowers from other banks. Another factor is that the regional economy has fared better than in other areas.

For Wilmington Trust, increased pressure on interest income will be the main result of the Fed's latest easing.

"There will be some immediate compression in our margins," Mr. Quill says. "When the prime rate is reduced, that has an immediate and across-the-board impact. It takes a while for savings rates to reflect lower interest rates."

Mr. Quill doesn't see much likelihood that the Fed will cut rates again. "It could always happen, but I think we're getting to the point where rates are pretty close to the bottom."

Andrew B. Craig 3D

Boatmen's Bancshares Inc. St. Louis

Boatmen's lead bank has seen loan demand pick up of late, but that has little to do with declining interest rates, says Mr. Craig.

"As the economy continues to improve, our customers, particularly small and medium-size businesses, will continue to borrow money," Mr. Craig says. But even before the latest Fed easing, interest rate "did not seem to be a deterrent to borrowing."

Mr. Craig is hopeful that his $18.6 billion-asset company will be able to maintain its net interest margins. And, while the bank's deposit rates are already "bumping along the bottom," Mr. Craig is not averse to taking them down some more. Unhappy depositors will be directed to higher-yielding investments offered by the bank.

The Fed is likely to keep interest rates where they are for a long time, Mr. Craig predicts.

Meanwhile, the slow pace of the recovery is not all bad. "We operate well in that kind of environment," Mr. Craig says. "We maintain our spreads, control our costs, and continue to steal market share.

JAMES F. MONTGOMERY

Great Western Financial Corp. Beverly Hills

Mr. Montgomery believes the rate cut will spur mortgage demand in the slumbering Southern California market. But he is quick to qualify his optimism.

"Any radical changes in the market dynamics are more likely to be linked to consumer confidence than anything else," he says.

In recent months, Great Western -- the nation's second-largest thrift, with $39.6 billion in assets -- has seen an increasing number of customers moving funds from savings accounts to higher-yielding investments offered by its securities unit. "With a lower discount rate, the pace of that movement might pick up," he says.

Mr. Montgomery thinks an upturn in the economic fortunes of southern California banks is perhaps two quarters away.

"I would expect the rate cuts to be a temporary measure, only because I don't think the low rates will be necessary once the consumer psyche improves," he says.

John C. Canepa

Old Kent Financial Corp. Grand Rapids, Mich.

Mr. Canepa says it will take a lot more than a cut in the discount rate to spur his bank's borrowers back into action. What's needed is a healthier economy. "In the markets we are in, interest rates don't really drive loan demand," he says.

Old Kent, which has $8.8 billion in assets, is reluctant to take its deposit rates down much further. 'We're close to the floor now," Mr. Canepa says. "Deposit growth has really slowed down, with a lot of money going to money-market mutual funds and the stock market."

He fears that many passbook savers have left Old Kent forever.

But certificates of deposit are another matter. "If you want to recapture some of that money, you can be aggressive in your pricing, and you will get some of that business back."

Mr. Canepa expects the Fed to ease once more before the end of the year. "Our outlook is for continued slow growth," he says. In fact, Old Kent does not expect the economy's annual growth to exceed 3% for four or five years.

"For us, that translate into loan growth in the single digits, as compared with the double-digit growth of the 1980s," he says.

As a result, Old Kent wants to vigorously cut costs and increase fee income. It's becoming more aggressive in the trust and private banking arenas and is continuing to invest in its growing mortgage-servicing business. The company has also started offering insurance and mutual funds through a third-party company.

John G. Medlin Jr.

Wachovia Corp. Winston-Salem, N.C.

Mr. Medlin expects Wachovia to feel little impact from the drop in short-term rates.

Before the economy will see any measurable benefit, he says, long-term rates -- which affect mortgages and term business loans -- must fall. "Congress should cut spending and the deficit," he says. "That's the only thing that's going to bring long rates down."

Deposit rates are near rock bottom, and Wachovia is reluctant to push them down much further. Mr. Medlin says customers are already experiencing "CD sticker shock." Elderly people who depend on deposit yields are especially hurting. "Part of the reason for the weakness in the economy, I think, is the reduction in interest income of individuals."

At the same time, Wachovia is not likely to push its loan rates down much. Therefore, Mr. Medlin thinks his company, which has $32.2 billion in assets, will be able to maintain its hefty net interest margin, which climbed to 4.69% in the first quarter.

In Mr. Medlin's view, the economy began stirring out of recession in the second quarter, when Wachovia saw its strongest loan demand in two years. Automobile loans provided the major impetus, but Wachovia also heard "more conversation about business loans," and "even a real estate project or two here and there."

Still, he foresees "continued slow growth, certainly over the rest of this year and on into the middle of this decade, as far as I'm concerned. I think our part of the country is going to grow better than the nation, on average. But I think it will be slow growth, nevertheless."

Mr. Medlin doesn't expect further stimulus from the Fed.

R. Blair Hawkes

Ireland Bank Malad City, Idaho

In the alfalfa fields of Idaho, the Fed's rate cuts are beginning to work against Ireland Bank.

The $56 million-asset institution saw its net interest margin grow last year amid declining rates. But the latest cut may prove to be a double-edged sword, says Mr. Hawkes.

On the one hand, there's pressure to cut loan rates, while, on the other, depositors are squawking about low yields. "Every day people come in and want more for their savings, and borrowers come in wanting to reduce their rates."

To make matters worse, loan demand is likely to remain weak because of a six-year drought that has crippled the agribusiness community in the southeast part of the state. While the conservatively run Ireland Bank has managed to weather the drought in good shape, the resulting downturn has taken a toll on most of its customers.

Mr. Hawkes thinks rate cuts are becoming counterproductive for the banking industry. He says politics now appear to be the driving force, and warns that any temporary gains could be offset by a renewal of inflation.

In any event, Ireland Bank's fate at this point is tied more closely to Mother Nature than Uncle Sam. "We have kids six years old here that haven't ever seen the rain," Mr. Hawkes says.

Ira Stepanian

Bank of Boston Corp.

Falling rates have helped Bank of Boston get its real estate loan problems under control and boost its interest income. But now rates have gotten so low that they're giving executives headaches.

With deposit rates hovering at or below the inflation rate, the bank must begin to choose whether to sacrifice profit spreads for customers. That's an issue no banker likes to think about.

"There is no doubt when rates get as low as they are now . . . the spread is obviously going to be narrower," says Mr. Stepanian, and "that you're going to have less flexibility" to lower rates without losing depositors.

So far, the company has cut CD rates twice since the discount rate was cut to 3% on July 2.

On Friday, three-month certificates of deposit were yielding 3.15%, down from 3.25% earlier in the week and 3.40% before the discount rate cut.

The bank's lending rates aren't likely to spur a rush for new loans. "You have to have business activity," Mr. Stepanian says. Businesses "don't borrow just because [they] can borrow cheaply."

But he hopes Fed officials won't bush rates any lower. "We have to be pretty close to the bottom," he says.

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