How this New York program is helping to save at-risk branches

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Popular Bank’s use of a unique New York program that encourages banks to operate in underserved markets may have shielded its branch in Brooklyn’s Ocean Hill-Brownsville neighborhood from the budget ax.

The Pitkin Avenue branch became the latest to receive the state’s banking development district designation. Bankers say the long-established program, which infuses millions of dollars of subsidized public deposits into branches, is a valuable tool for keeping branches viable at a time when branch traffic is declining.

“It wasn’t necessarily on a list to be closed, but that was always a consideration,” Chief Operating Officer Manuel Chinea said of the Pitkin Avenue branch. “When you operate in these markets it’s a little more difficult to make the numbers work.”

The banking development district program “helps secure the future of the branch so we can continue to provide services to the community,” he said.

The New York program is at once an inspiration and a dash of cold water. It’s used in rural and urban markets alike. It’s widely popular among banks of all sizes, municipalities and community groups, and it could serve as a model for saving branches in low-income areas, industry officials said.

Yet efforts to establish analogous programs in Pennsylvania, Illinois, California and other states have failed, and the response to similar programs in Louisiana and New Jersey has been tepid at best.

Strong tax and deposit incentives are key advantages to the New York program, observers said.

Branches approved under New York’s banking development district program receive $10 million in low-cost subsidized public deposits from the state. Those approved under a similar program in New York City can receive another $5 million or $10 million more in city deposits. Local governments sometimes offer property tax exemptions to those approved branches, too.

New York’s banking development district program was established in 1998, but the state’s banking regulator paused approval of new applications between 2011 and 2013, partly because the state’s banking and insurance regulators merged during that time.

Approvals of new banking development districts resumed in 2014 and have picked up speed since. The Department of Financial Services has approved 12 new banking development districts since 2014.

Though the program is more than 20 years old, bankers say its infusion of low-cost deposits is particularly helpful today, as it could give banks incentive to retain branches in low-income areas that might otherwise be on the chopping block.

Branch closings hit low-income areas the hardest, and rural markets often suffer the most from the loss of a bank branch. When banks do open new branches now, they tend to be smaller and are more frequently located in wealthier and faster-growing metro markets.

Apart from increasing the viability of branches in low-income markets by adding more low-cost deposits, the program can also be a foot in the door for a financial institution that wants to establish a municipal banking relationship, said Mike Smith, president and CEO of the New York Bankers Association.

“There’s a lot of competition for deposits. That was underlying the establishment of this program and it probably means more today than ever,” he said.

New Jersey is the only other state with a similar program, but bankers there haven’t embraced it because it lacks the tax incentives that New York municipalities often offer. Louisiana established its own banking development program in 2007 but has yet to receive a single application.

The American Bankers Association and several other organizations focused on financial inclusion said they were not aware of similar programs under consideration elsewhere.

In a statement emailed to American Banker, Linda Lacewell, New York’s superintendent of financial institutions, said the program serves the state’s broader goal of improving access to affordable banking products.

“This designation of Brooklyn’s Ocean Hill-Brownsville neighborhoods as a Banking Development District builds on the state’s efforts to meet the local banking needs of underserved communities,” she said.

The designation at its Ocean Hill-Brownsville location is the third for the $10 billion-asset Popular and the 51st for the entire state of New York. The mainland subsidiary of Puerto Rico’s Banco Popular also received this designation for a branch in the Bronx in 2018 and for a branch on Manhattan’s Lower East Side in 2006.

Chinea said that Popular intends to expand its financial education efforts at the Ocean Hill-Brownsville branch. Basic deposit products and unsecured consumer loans are popular at that location and so is its credit builder program for consumers with no credit or poor credit histories, he said. Popular will also ramp up its financial literacy efforts in the community.

“This is a very effective tool to improve and secure the performances of branches operating in these challenging markets,” he said. “We hope to obtain this designation in some of our other branches.”

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