A continued slowdown in the growth of certificates of deposit has some bankers forecasting trouble ahead.
A midyear look by a handful of bank executives last week suggests that the growth slide that began in April may accelerate in the near term if the Federal Reserve cuts rates further.
Indeed, during the last week of June consumer CDs grew at an annual rate of only 6.24%, according to the latest Fed data. That's the slowest pace since last summer, and a far cry from February's frantic 40.9%.
The slippage in these CDs - with balances of $100,000 or less - diminishes a cheap source of funding that many banks use for consumer and commercial loans.
Should the economy rev up, and stimulate higher loan demand, some banks might artificially prop up CD rates to keep the money flowing in. Or, at the very least, banks might have to seek more costly funds on the open market.
"If loan demand were to suddenly surge, we may be back doing special CD promotions by the fourth quarter or the beginning of the next year," said R. Philip Altman, a senior vice president in charge of branch administration for Great Western Bank, Chatsworth, Calif.
At the crux is the Federal Reserve, which - for the first time in 17 months - loosened short-term interest rates a quarter of a percent on July 6. That decision, some bankers say, signals the beginning of a long hibernation for CDs.
"Right now, there is little appeal for consumers to lock up their money," said Joseph H. LaBrie, director of retail product management for Salt Lake City-based Zions First National Bank. "It's just not enough; the yield curve is flat."
Zions customers have been opting for liquidity, he said, choosing money market accounts and traditional savings accounts over CDs. The move shows that customers are parking their money while they search for better yields elsewhere, he added.
Certificates of deposit grew 10% last month at Zions, the lead institution of $5 billion-asset Zions Bancorp. But its interest-earning demand deposits increased 20%, and Mr. LaBrie says that pattern is unlikely to change in the rest of the year.
Robert N. Hall, vice president of funds management for Meridian Bancorp, Reading, Pa., said the $15 billion-asset banking company stopped two CD promotions last month because the bank could not offer a competitive rate.
In June, "for the first time in a long time, we saw inflows that were flat or slightly below that," Mr. Hall said, though he would not disclose exact figures.
Until recently, Meridian has been aggressively courting long-term CD dollars to lock in funds to feed commercial loan demand, which has been up 5% so far this year.
Meridian's lending efforts "are core-deposit funded, but in terms of finding the dollars, it's not necessarily important to us because we have access to the market," Mr. Hall said. "But we still find it important to have that source of cheaper funding."
Steven R. Bluhm, senior vice president of funds management for Banc One Corp., says banks haven't had many signs to follow this year.
"1995 hasn't given us much direction as to where rates are going," Mr. Bluhm said. "We've by choice had to be very interest rate neutral."
Last year, $90 billion-asset Banc One aggressively marketed certificates of deposit to reduce its liability sensitivity, but has slowed that effort this year, he said.
At Wachovia Corp., certificates of deposit have taken a back seat to products such as money market accounts, as the bank mulls what direction the economy is going in, said W. Doug King, executive vice president of retail products.
Mr. King said it's too soon to tell what the impact of the slowdown in deposits will be, but he doesn't expect the growth to fizzle out anytime this year.
The $40 billion-asset banking company based in Winston-Salem, N.C., raised over $1 billion in March through CD promotions and attracted 28,000 new customers.
The money helped to fund both commercial and consumer lending - the latter in the form of an aggressive credit card expansion, he said.
Mr. King said, "We've had some good growth the first six months, and we've not had to pay out-of-line rates as far as alternative sourcing. I hope we won't have to pay an artificially high rate now."
David R. Archibald, a senior vice president and manager of corporate marketing for Huntington Bancshares, Columbus, Ohio, says that CD growth "going to zero or negatives" is a definite possibility by the end of the year.
The $17.7 billion-asset banking company didn't chase after customers interested in certificates of deposit, he said, citing uncertainty about where interest rates were headed.
"We've been really cautious in 1995, and I think that caution has been warranted," Mr. Archibald said. "Specifically, if we had been aggressive in chasing after longer-term CDs, we would have bought ourselves even greater pressure on the margin."
Huntington has already changed its marketing strategies, focusing on promoting money market accounts and savings accounts, he said.
Mitchell Ratliff, group marketing manager for deposits and investments at New York's Chase Manhattan Corp., said the $114 billion-asset banking company has moved away from product-oriented marketing in order to better ride out interest rate fluctuations.
"We're trying not to be totally beholden to these interest rate cycles," Mr. Ratliff said. "We'd rather go out and build our business around relationships."
Mr. Ratliff said that while there has been a slowing in the amount of money going into small time deposits, the cash has simply shifted into other savings and "wherever it is now it is likely to stay there."
"All bets are off," he said, if a major stock market correction sends prices down. "The simple fact remains that the stock market is at a high point right now, and many people are locked out, but we could see funds flowing out of deposits if that changes."