A Maryland County Presses Small Banks to Make Deposits Switch Pay Off

Community banks claim they know their local communities better than megabanks, will lend to local businesses that cannot get credit elsewhere and are better equipped to spur job creation in those locales.

Now, a local government near the nation's capital is saying to community banks, "Prove it."

The county council in Montgomery County, Md., a D.C. suburb of about 972,000 people, has decided to withdraw $10 million from its primary bank vendor, PNC Financial Services Group (PNC), and spread the deposits among five community banks that have their headquarters in the county.

The funds will be deposited at Eagle Bancorp (EGBN), a $2.8 billion-asset company based in Bethesda; OBA Financial Services, a $392 million-asset, Germantown-based holding company for the thrift OBA Bank; the $384 million-asset Monument Bank of Bethesda; Capital Bank, a $368 million-asset company in Rockville; and the $317 million-asset Congressional Bank of Potomac.

In exchange, each bank promises to match the amount it receives from the county and use the combined funds to make loans to local businesses — in effect doubling the payback for the community.

While there have been numerous attempts across the country to persuade local governments to shift deposits out of big banks and into local community banks or credit unions, those efforts typically have come at the urging of consumer advocates like the organizers of BankTransfer Day, the Move Your Money Project and the Occupy movement.

In Montgomery County, the community banks provided the impetus, says Ron Paul, Eagle's chairman and chief executive.

"I've been working on this for more than three years," Paul says. "I'm hopeful that I can prove to the public and to the county that this is such an important part of jump-starting the economy in the county that we'll get more money out of it eventually."

It is easier to lobby for moving money to small banks than to actually get it done, bankers and advocates in other U.S. cities say. In Austin, Tex., for example, the Occupy Austin group and others called for the city council to move its money out of Bank of America (BAC) to smaller banks. The city responded favorably and sent out requests-for-proposal to banks. But Austin ultimately chose JPMorgan Chase (JPM), far from a community bank.

Other cities have made more progress. The cities of New York, Los Angeles, Pittsburgh and Portland, Ore., have approved ordinances to require big banks holding municipal deposits to prove they're lending in low-income neighborhoods. The state treasurer of Ohio has created a program to pool investments from municipalities and redistribute the funds as interest-bearing accounts to Ohio community banks.

A big obstacle for community banks is that large local governments often need complex financial services, like cash management, which they are not equipped to provide. That is one reason OBA Bank has rarely bid on government banking contracts with local governments, and why the Montgomery County funds will be the first deposits that the thrift has received from any local government.

"I've found that until you reach a certain size and sophistication on the commercial side, it's difficult to compete for this kind of money, and it's an all-or-nothing situation," where many counties pick only one bank for their deposits, says Chuck Weller, the president and chief executive of OBA Financial.

That lack of financial sophistication has not stopped the calls for community banks to be the holders of local government money, under the reasoning that taxes should remain in the place where they are collected, not sent to a bank headquarters in another state.

Montgomery County officials are sympathetic to the cause, says Joe Beach, the county's finance director. But community banks cannot provide many of the services the county needs, so Montgomery had never sent an RFP to a community bank until now, he says. And even with the new program, the county still keeps most of its deposits at PNC.

"Obviously we're a very large account, and it wouldn't work out for [community banks] to be our main depository bank," Beach says.

A PNC spokesman said local governments sometimes spread deposits around "once their more complex banking needs are met through a contract with a full-service national bank like PNC. We share the county's desire to see an increase in small business borrowing, and we hope that qualified demand in that sector will return when the economy improves."

Montgomery County has other depository accounts with Bank of America and Capital One Financial (COF) in addition to PNC and the small banks, Beach says.

Speaking of Capital One, it has 61 branch offices in Montgomery County, the most of any bank, according to the Federal Deposit Insurance Corp. But Capital One was disqualified from the small business-lending program because it is based just across the Potomac River in McLean, Va., Beach says.

A Capital One spokeswoman did not return a call seeking comment.

Credit unions were also blackballed, because they typically do not make commercial loans, Beach says. The largest credit unions based in Montgomery County include the $342 million-asset Lafayette Federal Credit Union and the $108 million-asset Energy Federal Credit Union.

Unlike the U.S. Treasury Department's Small Business Lending Fund (SBLF), the lending program in Montgomery County will provide banks with liquidity instead of capital, Paul says. Though many community banks are holding more deposits than they prefer to have, EagleBank wants more deposits, he says.

The county's funds will be counted by regulators as brokered deposits, and placed into the Certificate of Deposit Account Registry Service (CDARS), a private program that helps banks maximize deposit insurance coverage.