A deposit boon for small Georgia banks?

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Georgia lawmakers have just made it a whole lot easier for community banks in the state to accept government deposits that they can then use to fund loans in their local markets.

Republican Gov. Brian Kemp signed into law Thursday a bill that would allow community banks to accept public funds that exceed the $250,000 on federal deposit insurance without having to put up higher amounts of collateral for them.

Specifically, the new law lets banks use third-party deposit-placement providers, including Promontory Interfinancial Network in Arlington, Va., or StoneCastle Partners in New York, to split large-dollar deposits among multiple banks so that they are covered by deposit insurance.

Georgia had been the last state in the country that prohibited its banks from using third-party vendors to split public deposits between multiple banks. Banks there have had access to other programs that allow them to pool municipal deposits, but the collateral requirements — sometimes as high as 110% of the deposit amount — were prohibitive for many banks, particularly those in rural markets.

Previous proposals to ease collateralization burdens on local government deposits for smaller banks in Georgia have stalled in recent years, largely because the state’s legislative session is a mere 40 days and lawmakers had other priorities.

But the issue has taken on more importance of late as many banks in the state have struggled to attract enough deposits to keep pace with surging loan demand. Loan-to-core-deposit ratios at Georgia banks stood at 95.4% at Dec. 31 according to Federal Deposit Insurance Corp. data, up from 91.2% a year earlier and well above the national average of 90.8%.

The Community Bankers Association of Georgia estimates that banks hold about $22 billion in public deposits from local municipalities. More than 80% of those funds are held by large banks, which can more easily absorb the cost of collateral.

The group met with Kemp early in the state's abbreviated legislative season and claimed that by accessing more public deposits without the collateral burdens, community banks could reinvest it into as much as $6 billion in new lending over the next five years.

The bill cleared both the state's House of Representatives and Senate unanimously last month. In signing it Thursday, Kemp said, “This legislation is another positive step toward a new day in rural Georgia. I thank the General Assembly and the Community Bankers Association for their hard work on this important issue and their efforts to bring prosperity to all corners of the state.”

John McNair, the president of the Community Bankers Association of Georgia, that said smaller banks often hold some funds from the local municipalities "to be a good community citizen" even if it's not the best move for their balance sheet.

Freed from stringent collateral requirements, small banks can be more aggressive about bidding for public deposits that they can then use to stimulate economic development.

"This is going to be really significant for community banks,” McNair said.

Joe Brannen, president of the Georgia Bankers Association, another trade group in the state that represents larger firms in addition to smaller ones, said the vast majority of banks there already hold some public funds.

Brannen said bankers will have to weigh the cost of using deposit-placement services versus more commonly used letters of credit from Federal Home Loan banks that many banks use to collateralize their public deposits.

Still, he said, the new option provided in the bill signed into law this week would help those firms that are having liquidity issues.

"It’s good for banks to have several alternatives so they can work with their depositors and choose the best for each relationship," Brannen said.

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