A quirk in New York State's municipal finance law effectively bars savings institutions in the state from accepting government deposits, but a handful are taking advantage of ways around the prohibition.
For example, Greene County Bancorp Inc. of Catskill chartered a commercial banking subsidiary in May 2004 for the sole purpose of accepting municipal deposits.
J. Bruce Whittaker, Greene County's president, said the unit held $11 million of deposits from nearby towns and villages at the end of the third quarter.
That is a modest level even for a company with $291 million of assets and $250 million of deposits, he said, but enough to produce a return on an equally modest investment.
Total deposits are about as much as a year-old branch would generate without nearly the start-up and operating costs, Mr. Whittaker said.
Greene County is one of nine thrift companies to have set up commercial banking subsidiaries in New York since a 1999 change in federal law made it easier for federally chartered thrift companies to do so and a similar law passed a year later gave state-chartered thrift companies the same powers. Two have chartered commercial banks in the state since Aug. 1, including the $2 billion-asset Berkshire Hills Bancorp Inc. of Pittsfield, Mass., the first out-of-state thrift company to do so.
Two other thrift companies have gained access to municipal deposits by opening branches in "banking development districts" under a 4-year-old state law that gives banks a variety of incentives to move into areas where there are few banking services. One of the incentives, of use only to thrift companies, is entitlement to accept municipal deposits.
Municipal deposits may not provide great riches but they are worth pursuing, bankers say.
In upstate New York, where economic growth is slow, municipal deposits offer thrift companies an avenue for expansion without building costly, full-service branches, said Thomas W. Schneider, the president and chief executive officer of Pathfinder Bancorp Inc. in Oswego. About $38 million of the $310 million-asset company's $280 million of deposits belong to Pathfinder Commercial Bank, which opened in October 2002.
Mr. Whittaker said that accepting municipal deposits is a natural extension of Greene County's business. As consolidation has removed many small commercial banks from its markets, he said, his company has made more and more loans to nearby municipalities, many of which have asked why they could not keep deposits with Greene County, too.
Michael Giaquinto, the head of consumer banking at First Niagara Financial Group Inc. in Lockport, said that taking deposits allows First Niagara to pitch its full range of services to municipalities.
First Niagara has $252 million of deposits in its commercial banking unit, about 4.7% of its total deposits.
New York is believed to be the only state that still bars thrifts from accepting municipal deposits. The policy dates to when commercial banks and savings institutions were much less alike than they are now, said Michael P. Smith, the president of the New York Bankers Association.
"The differences have been blurred to a great extent for a couple of decades," Mr. Smith said. "This is one of the last remaining differences."
But the law has not been modified, observers say, largely because commercial banks have fought hard to persuade legislators to retain it.
"Ever since I've been here, we've been trying to get the law changed," said Peter Baynes, the executive director of the New York State Conference of Mayors and Municipal Officials and a staff member with the organization for 20 years.
Mr. Smith said his group, which is merging this month with the Community Bankers of New York State Inc., a thrift group, would probably back proposals to allow municipalities to deposit funds with thrifts if deposit insurance reform legislation under consideration in Congress sharply expands coverage on municipal funds.
Under New York State law, banks must collateralize deposits above the limits of deposit insurance, so raising the limits makes municipal deposits more attractive to thrifts. However, it is far from certain that coverage will be expanded from $200,000 per account to $2 million, as proposed in some versions of the reform legislation.
As a result, setting up special-purpose commercial banks appears to be the quickest way to enter the municipal deposit business. Pathfinder's Mr. Schneider and Greene County's Mr. Whittaker both said that creating the entities costs about $50,000.
Though Mr. Whittaker said nearby towns would like to save with a local bank, Mr. Schneider is not so sure. He said that if a local bank is not offering the best rates, many municipalities will take their business elsewhere.
Mr. Baynes said his organization's members will balance a desire to do business locally with the yield offered on their money.
"If it's a nominal difference in rates, there would be an interest among local officials to keep some of their deposits in a local bank," he said.
So far, municipal deposit balances are relatively low in limited-purpose banks, exceeding $100 million in just three cases. And not every bank that sets up a commercial bank is going to use it for long. New York Community Bancorp Inc. in Westbury, with $25 billion of assets, created New York Commercial Bank in August, but is getting into commercial banking in a bigger way by buying the $533 million-asset Long Island Financial Corp.
Four thrift companies have also opened branches in banking development districts, including two that had previously established municipal deposit subsidiaries. For the other two, Carver Bancorp Inc. of New York City and Great Lakes Bancorp Inc. of Buffalo, opening in such districts affords access to municipal deposits.
Carver opened branches in two underbanked areas as much to bring service to communities that had no bank branches as to use the municipal deposits to help fund its growth, said its president, Deborah C. Wright, in an e-mail message.
A $50 million deposit by New York State in one and a $50 million deposit by New York City in the other made it possible, she said.
Carver needs about $30 million of deposits to turn a profit at a new branch, and attracting that much would have taken a long time without the state and city funds, Ms. Carver said.
Mr. Schneider said municipal deposits alone is a thin-margin business. "So you have to be careful how you operate it."
He said it costs Pathfinder about $200,000 a year, including pay for a full-time calling officer and preparation of regulatory filings associated with a separate charter, to operate its municipal deposit unit.
Mr. Whittaker put annual operating costs at between $25,000 and $50,000, mostly for legal and regulatory requirements. Operating a new branch would cost considerably more, he said.
