Oregon has become the prime field test for a municipal movement that rewards banks for investing in their communities.

The cities of Beaverton and Lake Oswego have launched programs this year to move public funds from state investment pools into certificates of deposit at local, civic-minded banks. The Oregon Bankers Association is also lobbying to change state policy to make it easier for small banks to accept money from public entities.

Such programs help cities earn bigger returns as local banks often offer better deposit pricing. Banks get lower-cost funding, which helps them manage the liability side of the balance sheet and fund loans when demand picks back up. The partnerships also create bonds between political leaders and bankers.

"We're trying to encourage people to buy local, spend local, and it just was a logical extension to say, 'Well let's bank local, too,' " said Denny Doyle, Beaverton's mayor.

The city invested about $1.7 million earlier this month in the local branches of seven Oregon financial institutions, including the $10.8 billion-asset Umpqua Holdings Corp. in Portland, the $2.5 billion-asset West Coast Bancorp in Lake Oswego, the $1.1 billion-asset Pacific Continental Corp. in Eugene and the $378 million-asset Columbia Commercial Bancorp in Hillsboro.

The initiative was part of a 10-point plan that city officials laid out last winter to help spur economic development in Beaverton.

The city transferred the money from its $70 million investment portfolio, of which about $40 million is held in the Oregon Local Government Investment Pool, in which banks may deposit funds and withdraw on short notice. It took money from the state pool to invest about $240,000 in 12-month CDs at each of the seven institutions, including three credit unions.

The state pool was paying an interest rate of only about 0.5%, and the banks beat that rate by at least 15 basis points — some by up to 70 basis points, said Patrick O'Claire, Beaverton's finance director. "So actually it will help our earnings interest a bit," O'Claire said.

The only criteria: The bank had to be based in Oregon and have branches in Beaverton. Officials also considered size and community involvement, Doyle said. Eight institutions were invited to participate, and all but one accepted.

"What's exciting about the banks here is all these folks are fairly active within the community in other ways so it's nice that we're able to partner with them and help them, because they do a lot of outreach for citizens here," Doyle said.

Cities outside Oregon have considered programs rewarding banks that are active in local communities. One example is Los Angeles, which adopted a requirement in March that public funds would be invested in banks that meet the city council's social responsibility objectives.

Mike Wallace, the principal associate for finance and development at the National League of Cities, said the movement is spreading elsewhere.

"I know a lot of mayors and local leaders are looking for financial institutions who first and foremost are good with the taxpayer's money," Wallace said. "But secondarily, it's those financial institutions that are good partners with the cities in which they do business, so this is a way to reward those."

Officials at the Oregon municipalities were hard-pressed to find other programs similar to what they were offering. "You typically look for models out there, but I honestly didn't find any before we started this program," said Jane Blackstone, the economic development manager in Lake Oswego.

That city launched its community bank deposit program in March, placing $200,000 at six local banks, including Umpqua, West Coast, the $173.7 million-asset Bank of Oswego, the $131.4 million-asset Northwest Bank and the $72.6 million-asset Pacific West Bank. The city also invested in an out-of-state bank, the $4.5 billion-asset Banner Corp. in Walla Walla, Wash., which has two branches in Lake Oswego.

Blackstone said the city also looked at each bank's record of community activity. But like Beaverton, Lake Oswego officials kept the program simple — it doesn't require the banks to sponsor a certain number of activities or contribute a certain dollar amount to local charities, Blackstone said.

As in Beaverton, officials in Lake Oswego said public feedback has been positive. The program's investments are safe, and the funds are not needed to pay for daily city expenses, Blackstone said.

Steve Braden, an executive vice president at Umpqua and regional manager for the greater Portland area, said the additional dollars on deposit allow the local branches to invest in other ways in the community. But perhaps the program's biggest draw is the connection it develops between the banks and the cities in which they operate.

"The dollars on deposit really are irrelevant to just the partnership and the willingness to just roll up our sleeves and get involved with the community, and have the cities do the same thing," Braden said.

The Oregon Bankers Association is encouraging such investments by pushing for concessions from the state treasurer that would make it easier for banks to accept municipal deposits above the $250,000 limit for insured deposits set by the Federal Deposit Insurance Corp.

In most states, banks must pledge collateral — often in the form of securities — for any deposits from public entities above the FDIC limit.

In Oregon, the collateral goes into a state pool. If a member of the pool fails and its deposits are not acquired by another institution, any uninsured deposits from public entities will be repaid with money from the pool.

Linda Navarro, the association's president, said it's an unlikely event, but one that happened last year in Washington. Since then, Oregon has boosted its collateral requirement to 100% from 10%, making it more expensive for banks to accept the funds.

Blackstone said Lake Oswego purposely kept its investments below the FDIC limit, and Beaverton officials said they would be interested in investing millions more into local banks as long as they met the state's collateral requirements.

As the deposit programs attract more attention and interest from other communities, Navarro said it's important for the state to consider lowering the collateral amount. "Yes, it's great to deposit money locally, and have the money be deployed in the form of loans," Navarro said. "But when you're collateralizing deposits dollar-for-dollar, you're not really deploying any money above the insured limit, because you're having to take those deposits and buy securities with them."

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