The first signs of a possible liquidity tightening surfaced last quarter.

If they continue when banks report third-quarter results in a few weeks, lenders may have to swing into action to ensure they have adequate funding to sustain their growing efforts in consumer lending and as they await a pickup in commercial lending.

And this time it may take more than a CD rate special to prevent depositors from shifting their money elsewhere.

Core deposits, generally considered the best source of low-cost funds for loan growth, declined 0.3% to $10.46 trillion from the first quarter to the second quarter, according to, which compiles call report data. The drop came after more than five years of steady growth in core deposits.

Bankers have known this day would come after the Federal Reserve in December 2015 approved the first in a series of four interest rate hikes. That has not made the decision any easier regarding which steps to take to stem shifts in deposits to mutual funds, stocks and other nonbank destinations.

“Banks would absolutely prefer to hold on to core deposits,” said Bruce Fields, group treasurer at INTL FCStone, which manages bank deposits for institutional clients. “Some smaller banks are getting a little concerned that they’ll hear a large swooshing sound as deposits fly out of their accounts.”

Some banks may decide to expand their use of Federal Home Loan bank advances, due to their pricing appeal, Fields said.

“That’s going to be the cheapest way for a bank to borrow,” Fields said.

Home Loan bank advances can be used to fuel growth in any type of loan category. The $16 billion-asset Flagstar Bancorp in Troy, Mich., has used them to expand mortgage originations, even during the current down cycle in that market, Chief Financial Officer Jim Ciroli said.

Flagstar has expanded its portfolio of mortgage loans held for sale through Home Loan bank advances, which can be structured to mature in very short durations, he said.

“Our loans held for sale are our most liquid assets, and we want to fund those with FHLB advances,” Ciroli said.

David Jeffers, a spokesman for the Council of FHLBanks, declined to comment on future demand for advances.

“Our purpose is to provide reliable liquidity to member institutions to support housing finance and community investment,” Jeffers said.

The $531 million-asset SouthCrest Bank in Atlanta just closed on its first Home Loan bank advance since 2010 to help boost deposits, said CEO Brian Schmitt. SouthCrest is also trying to lure more commercial deposits, even if they carry higher rates.

“We have been making more commercial loans, and when you make those loans we want the deposits to come with them,” Schmitt said. “If they won’t bring in their deposit relationship with me, I view it as a one-sided relationship, and I’m not near as aggressive in trying to get their business.”

Banks have already raised pricing on commercial deposits to prevent those customers from leaving or to attract new business. If a bank can secure higher rates on commercial loans to accompany those deposits, it will be worth it, bankers and analysts say.

A bank’s securities portfolio can also be managed to support loan growth, in lieu of deposits, said Ronald Magoon, CEO of the $453 million-asset Franklin Savings Bank in Franklin, N.H.

“One of the best things you can do is to make sure you purchase and hold securities that have well-structured cash flow profiles,” Magoon said. “Buy securities that will provide cash for when you anticipate rates will rise.”

Another option, one that many banks have already pursued, is expanding their use of wholesale funding, especially brokered deposits. That route, however, carries the potential for pushback from regulators.

The Federal Depost Insurance Corp.'s deputy director of risk management said during a July advisory committee meeting that concentrated levels of wholesale funding can expose certain banks to liquidity risks. The FDIC is watching closely for banks with wholesale funding equal to at least a fifth of total assets.

Franklin Savings avoids brokered deposits, a nod to its heritage as a conservatively managed mutual bank, Magoon said.

“We’re focused on core deposit growth,” he said. “We look for deeper relationships with our customers.”

Finally, there is always the option of running a rate special on certificates of deposit or money market accounts. The $24 billion-asset Investors Bank in Short Hills, N.J., introduced a rate special in July, offering 1.6% on a 15-month CD. The special had generated about $300 million in new deposits through mid-August, according to Barclays analyst Matthew Keating. Investors Bank declined to comment.

While special offers carry the risk of recruiting rate-chaser customers who could leave at the drop of a hat, it is still a valid business strategy, Schmitt said. In fact, it is probably a mandatory tactic.

“You have to” run deposit rate specials, Schmitt said. “You still have to be competitive.”

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