Good morning, Mr. Chairman and Members of the Committee. I am Robert Gulledge, the Chairman, President and CEO of Citizen's Bank, a community bank located in Robertsdale, Alabama with $56 million in assets. We are located in Baldwin County, one of the fastest growing areas of the state. We have a diverse loan base that includes, residential mortgages, consumer and small business loans. My bank is one of the few in the area that continues to make agricultural loans.
The Independent Bankers Association of America represents about 5,500 independent community banks nation-wide. The IBAA is the only national trade association that exclusively represents the interests of community banks.
Thank you for giving me the opportunity to testify on behalf of the IBAA regarding S. 1423, the "Federal Home Loan Bank System Modernization Act of 1997." I would like to thank the committee for its initiative in holding this hearing. Also, I would like to particularly acknowledge the efforts of Senators Hagel, Bennett, Grams, and Kerrey, the co-sponsors of this important legislation, who have shown a commitment to helping community banks gain better access to FHLB membership and advances so we have funds to meet the credit needs of the residents of the communities we serve.
FHLB legislation is urgently needed to permit the FHLBs to modernize their operations to meet the needs of a changing membership. S. 1423 takes us significantly in the right direction.
Community banks need consistent, reliable sources of funds to keep credit flowing into their communities so residents can buy houses and small businesses, including farms, can grow and provide jobs. Historically, deposits have been the primary source of funds for community bank lending operations. Now, community banks are having difficulty attracting and maintaining deposits due to the explosive growth of mutual funds that compete for deposit dollars.
For example, from 1990 to 1994, the assets of the mutual fund industry as a whole and the number of shareholder accounts nearly doubled. Assets invested in mutual funds rose from a total of $295 billion in 1982 to over $3 trillion at the end of June, 1997. Similarly, the sheer number of funds offered increased dramatically from 857 in 1982, to 5,375 at the end of 1994. The primary source of dollars flowing into mutual funds in the last two decades has been the disintermediation of bank and thrift deposits. Deposits now comprise only 28 percent of household discretionary assets compared to 49 percent a decade ago.
Attracting and maintain deposits is a particularly acute problem for community banks serving communities in rural America. The population in many rural areas is declining as residents age and move to larger cities. All I too often community banks rural areas find that when an elderly borrower with large CDs passes away, heirs transfer the funds out of the bank and outside the community. The community is just too small to provide replacement deposits.
The FHLBs play a critical role in helping community banks address this problem since FHLB advances can replace lost deposits and meet the lending needs of rural residents. While large financial institutions can go directly to the money markets for funds to supplement deposits, community banks are too small to do this.
Historically, community banks have tended to make short-term loans due to the short-term duration of their deposits. They have not had access to long-term -funds for long-term lending purposes. FHLB long-term advances have opened up a business opportunity for eligible community banks and have given the residents of their communities access to long-term loans. Since becoming a FHLB member, my bank can now make 15- and 20-year fixed-rate loans without significant interest rate risk.
For many rural communities, their long-term survival is dependent on.- the ability to attract new businesses or expand existing ones. However, housing must be available for the workers who will fill the new jobs. Unfortunately, the housing stock in rural America is aging and limited. Community bankers have faced serious challenges in being able to make long-term residential mortgage loans to provide housing. The secondary market for residential mortgages has not been a solution for many rural community banks with limited staff resources, and because underwriting standards are complex and do not work well with rural properties. With FHLB membership, community banks now have access to long-term funds to make long-term residential mortgages.
The benefits of FHLB membership extend far beyond the funding window-- Community banks are relatively small and have limited staff resources. When an opportunity for a large or complex housing project comes along, a community bank may have difficulty structuring the loan. A community bank can go to its FHLB for technical assistance to structure the loan and obtain advances to fund it. The FHLBs can and do play a major role in providing technical and other assistance to community banks. Thousands of community banks have recognized the value of FHLB products and services and have already joined a FHLB. But others have been unable to join since they cannot satisfy the FHLB membership test because 10 percent of their assets are not mortgage assets. Also, many community banks that have joined find that they do not have sufficient eligible collateral to support their advance needs.
In our view, S. 1423 will modernize the FHLB system, enabling it to better meet the funding needs of community banks so that they can provide long-term loans for residential housing, small businesses, agriculture and community development projects in the communities they serve.
We also believe the legislation will help put rural community banks on an equal footing with other rural lenders who enjoy special privileges, including tax exemptions, GSE status and lighter regulatory burdens. This, in turn,, will help stimulate greater competition, which all rural lenders have in times past said they would endorse. The bill would not totally level the competitive playing field, but would be a logical step in the right direction.
Provisions in the bill that the IBAA finds particularly important include section 2 which would define a "community financial institution" as an "FDIC-insured institution with less than $500 million in assets," and section which exempts community financial institutions from the FHLBs' current membership eligibility requirement that at least IO percent of total assets be in residential mortgage loans.
These extremely important provisions would open access to membership for community banks currently unable to meet the membership criteria, especially given the fact that the potential volume of housing loans available in a particular bank's community is dwarfed by the volume of agriculture, small business and other loans in the community.
The IBAA also supports section 5 which would authorize the FHLBs to make long-term advances to any community financial institution for small businesses, agricultural, rural development, or low-income community development lending. The IBAA supports moving the FHLB's mission beyond its current focus on affordable housing to other types of lending consistent with community banking. The economy of many rural communities is dependent upon agriculture. The income of residents is directly or indirectly linked to agriculture. And farms and agri-businesses are dependent on the community for its workers. It is not uncommon for a producing agricultural property to be the site of housing for farm workers or residents with jobs elsewhere in the community. In rural areas, the "community" extends beyond Main Street into the countryside. By including agriculture and rural development within the focus of FHLB activities, S. 1423 recognizes this interdependence.
We also support provisions authorizing FHLBs to obtain as collateral secured loans for small business, agriculture, rural development, or low- income community development, and certain types of securities. Eligible collateral needs to be expanded so that once a community bank becomes a member, it is able to borrow a sufficient amount of funds to meet its lending and liquidity needs.
The IBAA, has long supported voluntary membership in the FHLB system. Any member should be able leave the FHLB system and retire their member stock so long as it does not jeopardize the safety and soundness of a FHLB or the FHLB system.
With respect to the capital structure provisions in section 14, the IBAA believes that member stock purchase requirements and FHLB capital requirements should be such that they provide for the safety and soundness of the FHLB system. We support provisions that would allow each individual FBLB to determine what capital structure is most appropriate for its membership and operating needs.
The IBAA is concerned that the proposed minimum stock purchase requirement based on the percentage of total assets of the shareholder may impose a higher stock purchase requirement on some community banks than under current requirements. Many community banks that have joined FHLBs are only beginning to actively use advances. It takes some time for new members to become accustomed to using advances. We are concerned that if the proposed maximum amount of 0.6 percent of total assets becomes an automatic requirement, it will discourage many community banks from being members. We believe that 0.6 percent should be the required level only when necessary for safety and soundness purposes.
The IBAA is also concerned that proposed changes to the procedures for director elections will cause members in some states to loose their opportunity for board representation. FHLB districts cover large geographic areas that can have diverse needs. It is important that directors are elected to best represent the diversity contained in a district.
Finally, the IBAA applauds the fact that the bill does not place the Secretary of the Treasury on the Federal Housing Finance Board since this would politicize the operations of the Board unnecessarily.
In conclusion, I would like to reaffirm the need for the FHLB system
and its importance to community bankers. S. 1423 acknowledges the need
for the FBLBs to evolve so they can serve the changing needs of their
membership. With the passage of S. 1423, we can look forward to a healthy
future for the FHLB system, community banks and the communities across
America that they serve.
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