A Denver certificate of deposit broker is trying to pair investors with banks in hurricane-ravaged areas that could use the money, but so far it has been slow going.
Though Gulf Coast bankers say liquidity is one of their most pressing needs, many are still trying to get phones and lights turned back and have not been actively soliciting new deposits. That has presented a bit of a challenge to Index Powered Financial LLC, which needs a critical mass of banks before it can offer its CD product to investors, said Robert Colvin, the company’s president and chief executive officer.
“A lot of these people have not been able to respond because of the conditions down there,” Mr. Colvin said.
Index has created an investment security that is backed by a pool of CDs in the same way that mortgage-backed securities are by a pool of loans. The advantage to the security is that it is safe for investors because the Federal Deposit Insurance Corp. insures the underlying collateral — CDs of $100,000 from individual banks. But the FDIC requires that the company have at least 100 banks in each security it creates to minimize risk to the insurance fund.
Because Index is only halfway to that target and is trying to find investors who will buy into a seven-year security at slightly below market rates, closing the first pool has taken some time, Mr. Colvin said. He said he hopes to be able to begin selling the securities to investors in the next week to 10 days.
Index’s other business is providing online markets for banks to sell CDs and Fed funds to institutional investors. It unveiled its Capital Market CD in August, and sold the first one of these that month to investors using 100 CDs from banks in 33 states. When Hurricane Katrina hit in late August, Index saw a way to use the product to help spur recovery in the affected areas, Mr. Colvin said.
Its Capital Market CD is tied to U.S. Treasury rates. Index would buy seven-year CDs from banks at Treasury rates, currently 4.13%, plus 25 basis points, and sell pieces of the pool to investors at the Treasury rate. (Index makes its money on the spread.)
Jeremy C. Colvin, the CEO’s son and Index’s director of institutional sales, said Index is offering to buy CDs at Treasury rates from banks in Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, Texas, and Tennessee, the states that took in the most refugees from Hurricanes Katrina and Rita.
Index is looking for investors among government organizations and socially conscious investors wishing to play a role in restarting the local economies, Robert Colvin said.
“For this specific purpose it is an institutional investor that has a social purpose or an interest,” he said.
Index is sending letters about the Capital Market CD to banks in the eight states and pitching it through its Web site to users of its other services. It is also contacting banking associations, the CEO said.
His son said that for banks in states hit hardest by the storms, the CD securities would have seven- to 10-year maturities, which are longer than most bank CDs, and would give banks a stable source of funds.
Derek Shants, the chief financial officer of the $507 million-asset Central Progressive Bank in Lacombe, La., said Index’s rate is favorable. He said he is seeing six-month CDs at 4.3% and 12-month CDs at 4.58%.
The CD would mean welcome money for the $776 million-asset Peoples Bank and Trust Co. in Selma, Ala., which was searching for liquidity even before the storms struck.
Lynn Swindal, the executive vice president of Peoples’ retail division, said that before Katrina, Peoples was offering five-year CDs with a 4.78% rate to its customers, so seven years at 4.38% is a better deal for the bank. But because of FDIC insurance limits, each bank can offer only $100,000 per pool — hardly enough to solve a liquidity crunch.
“Realistically, with $100,000 there is not a lot I can do,” Ms. Swindal said.
The younger Mr. Colvin said Index wants to draw enough attention to its CD-backed securities that it could sell several of them weekly and allow banks to participate in multiple pools.
