• Hefty threats: Battles on deposit at banks, credit unions

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Digital Federal Credit Union teller Julian Chestna of Webster, right, helps a customer Feb. 18 at the branch on Tobias Boland Way in Worcester. T&G Staff/Paul Kapteyn
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  By Lisa Eckelbecker
  Telegram & Gazette Staff
  

  
  Posted Feb. 21, 2016 at 6:00 AM
  Updated at 9:14 AM
  
  
  

  The rivalry between banks and credit unions is heating up, as both press for changes in Massachusetts law that would impact the way they do business.

  One battle focuses on whether credit unions should be able to accept deposits from cities, towns, school districts and the state. For now, only banks can do that. Another battle aims to change how credit unions can open up to new members.

  It’s the kind of conflict that might seem far removed from ordinary consumers, but both sides say changes could have important impacts on everything from tax payments to lending levels.

  Or as Richard K. Bennett, president and chief executive of Marlborough Savings Bank, said, “it’s a spiral.”

  Banks and credit unions share certain characteristics. Both accept deposits from consumers. Both lend money. Both are overseen by regulators.

  They also differ. Banks are for-profit businesses owned by stockholders or members. They concentrate on services for consumers and businesses.

  Credit unions are nonprofit institutions owned by members who have something in common such as working for the same company or living in the same community. They concentrate on services for members.

  Worcester County is home to about 20 banks with nearly $10 billion in assets and 18 credit unions with $5 billion in assets, according to data from the Federal Deposit Insurance Corp. and the National Credit Union Administration.

  At the top of the rankings are Commerce Bank & Trust Co. of Worcester, which had nearly $1.8 billion in assets as of September 2015, and Workers’ Credit Union of Fitchburg with nearly $1.3 billion in assets.

  Both are dwarfed by a competitor that sits just outside Worcester County. Digital Federal Credit Union of Marlboro had about $6.5 billion in assets, as of September 2015, and about 500,000 members, mostly in Massachusetts and New Hampshire.

  It’s that kind of heft that riles traditional community banks.
  

  Bankers say it’s unfair that they must pay corporate income taxes while credit unions pay none, allowing credit unions to potentially use that cash to offer higher interest rates on deposits and lower interest rates on loans.

  “Our fight isn’t with the small, little mom-and-pop credit union that sticks to its common bond,” said Kevin F. Kiley, executive vice president and chief operating officer of the Massachusetts Bankers Association, referring to the common workplace or association that binds together some credit union members. “It’s with these large credit unions that, for all intents and purposes, are banks.”

  The bankers association, a trade group, is pushing a bill in the state House of Representatives that would tamp down the ability of credit unions to grow by opening up their membership to people outside the organizing group or workplace.

  A representative for a credit union trade group shrugged off that effort. The bigger battle may be over whether credit unions should be able to accept deposits from public entities, and on that front, it’s banks that have an unfair advantage, according to Paul Gentile, president and chief executive of the Cooperative Credit Union Association, which represents credit unions in Massachusetts, New Hampshire and Rhode Island.

  “Many of our credit unions serve municipal workers,” Mr. Gentile said. “They cannot take the funds of those towns, cities, school districts. There’s a gap there.”

  In Central Massachusetts, the state has deposits in Commerce Bank & Trust Co., Fidelity Bank, Hometown Bank, Bay State Savings Bank, Rollstone Bank & Trust and Southbridge Savings Bank.

  The Massachusetts Municipal Association and the office of state Treasurer Deborah B. Goldberg did not respond to messages seeking comment on whether they favor opening credit unions to public deposits.

  A number of states, including Rhode Island and Connecticut, allow credit unions to accept deposits from public entities. But Massachusetts bankers fear what it would mean for their deposit levels and ability to lend money to consumers and businesses if public money went to their credit union competitors.

  Marlborough Savings Bank held about $39 million in state and other public entity deposits at the end of 2015, or about 9 percent of all deposits, according to a filing with the FDIC. The community bank, which competes with Digital Federal Credit Union and other nearby credit unions, pays about $1.5 million in corporate income taxes a year and has lost deals to Digital, said Mr. Bennett, the president and CEO.

  If credit unions, which don’t pay income taxes, win the ability to accept public deposits, the competition for those deposits would be challenging, he said.

  “To be able to replace those municipal deposits, we’re going to have to pay up for other deposits or increase rates on CDs (certificates of deposit), which would reduce margins and income,” Mr. Bennett said.

  Credit unions argue that they pay property taxes, which benefit cities and towns, and that more competition with banks would be good for consumers and public entities.

  “Whenever credit unions and banks compete, it’s the consumer that wins,” said John P. Lahair, spokesman for Digital Federal Credit Union. “Even if we don’t win the business, if we’re given the opportunity, at least we were given the opportunity."

  Contact Lisa Eckelbecker at lisa.eckelbecker@telegram.com. Follow her on Twitter @LisaEckelbecker.

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  Maybe a better idea would be to start a State Bank like North Dakota :

  
  

  Public Banks: Bank of North Dakota

  | Written by ILSR Admin| 0 Comments| Updated on Jul 2, 2015The content that follows was originally published on the Institute for Local Self-Reliance website at https://ilsr.org/rule/bank-of-north-dakota-2/

  North Dakota is the only state that has established a publicly owned bank.   Founded in 1919, the Bank of North Dakota’s mission is to “promote agriculture, commerce, and industry” and “be helpful to and assist in the development of… financial institutions… within the State.”

   

  
  

  BND functions mainly as a “banker’s bank” — meaning that most of its lending is done in partnership with local banks and credit unions.  About half of the bank’s $3.9 billion loan portfolio consists of business and agricultural loans that are originated by a local financial institution and funded in part by BND.  By participating in these loans, BND expands the lending capacity of North Dakota’s community banks, giving them added strength in competing against big out-of-state banks.

  
  

  The remainder of BND’s loan portfolio consists of residential mortgages and student loans.  In keeping with its mission to support, rather than compete with, local banks, BND does not make home loans directly.  Instead, it provides a secondary market, buying up mortgages originated by the state’s local banks and credit unions.

  
  

   

  
  

  Student loans are the only part of the bank’s lending in which it works directly with borrowers.  At a time when many students leave college burdened by high-interest rate loans, BND offers some of the lowest student loan rates in the country.

  
  

  Thanks in large part to BND, community banks are much more numerous and robust in North Dakota than in other states.  North Dakota has more banks and credit unions per capita than any other state.  In fact, it has nearly six times as many local financial institutions per person as the country overall.  While locally owned small and mid-sized banks and credit unions (those under $10 billion in assets) account for only 29 percent of deposits nationally (see this graph), in North Dakota they have a remarkable 83 percent of the market.

  
  

  By helping to sustain a large number of local banks and credit unions, BND has strengthened North Dakota’s economy, enabled small businesses and farms grow, and spurred job creation in the state.

  
  

  Over the last 21 years, BND has generated almost $1 billion in profit.  Nearly $400 million of that, or about $3,300 per household, has been transferred into the state’s general fund, providing support for education and other public services, while reducing the tax burden on residents and businesses.

  
  History and Structure

   

  
  

  Desperately poor and tired of being at the mercy of out-of-state economic powers, North Dakota’s farmers launched the Nonpartisan League in 1915.  This political party united progressives, reformers, and radicals behind a platform that called for returning control of the state’s economy to its people.  At the time, farmers were utterly dependent on out-of-state grain milling companies, national railroads, and Minneapolis banks, all of which had been gouging farmers.

  
  

  In the 1918 elections, the League won both houses of the legislature.  One of the first bills these new lawmakers passed created a publicly owned grain mill, the North Dakota Mill and Elevator, and a publicly owned bank, the Bank of North Dakota (BND).

  
  

   

  
  

  BND is governed by the state’s Industrial Commission, consisting of the governor, attorney general, and the commissioner of agriculture, all elected officials. The commission, in effect, serves as the bank’s board of directors.  The bank also has a seven-member advisory board, which is appointed by the Governor and consists of people with expertise in banking, including representatives of community banks.

  
  

  The primary deposit base of the BND is the State of North Dakota.  All state funds and funds of state agencies (excluding pension funds and trusts managed by the state) are deposited with the bank.  The bank pays a competitive interest rate that is generally at about the midpoint of rates paid by other banks in the state.

  
  

  Individuals may also open accounts at the bank, but BND does not market these services and does not have ATMs, branch offices, and other standard features common to retail banks.  This is in keeping with the bank’s mission to support local banks, rather than compete with them.

  In contrast to most commercial banks, BND is not a member of the Federal Depository Insurance Corporation.  Its deposits are instead guaranteed by the state of North Dakota.
  
  Capitalizing the Local Economy

  
  

  The core mission of the Bank of North Dakota is to cultivate the state’s economy by supporting local banks and credit unions.  The more these community-based financial institutions flourish, the thinking goes, the more capacity they have for financing new and growing businesses.  BND works with almost all of the state’s 89 local banks and many of its credit unions.

  
  

   

  
  

  One of the chief ways BND fulfills this mission is through its lending.  The bank’s $3.9 billion loan portfolio has four main components: business, farm, residential, and student loans.

  Its business and farm loans, which comprise half of its lending, are almost exclusively “participation” loans.  These loans are originated by local banks and credit unions, but BND provides part of the funds. In doing so, BND expands the lending capacity of the state’s local financial system.  At the end of 2014, BND had almost $2 billion in participation loans in its portfolio, an amount equal to 10 percent of the total value of loans outstanding on the books of the state’s small and mid-sized community banks and credit unions.  This partnership helps local banks compete is by enabling them to make larger loans than they could on their own.  As their business customers grow and require larger loans, North Dakota’s local banks, with the support of BND, can continue to meet their needs, rather than lose these borrowers to large out-of-state banks.

  
  

  Another segment of BND’s portfolio is comprised of mortgages.  About 20 years ago, the bank began buying home loans made by local banks and credit unions.  At the time, local banks were looking for an alternative to the conventional secondary mortgage market.  They no longer wanted to sell their home loans to Wells Fargo and other large banks, a practice that was giving their biggest competitors a steady stream of new customers.  BND stepped in and offered to purchase their mortgages instead.  This gave local banks a way to move loans off their books, thus freeing them up to make new loans, but without handing the business to their competitors.

  This arrangement also benefits borrowers.  First, BND services the mortgages it buys, ensuring that North Dakota homeowners continue to have in-state servicing for their loans.  Second, it ensures that the mortgage interest homeowners pay each month stays in the state rather than flowing to Wall Street.  In 2010, BND purchased about 7 percent of the home loans originated in the state.  It currently holds about $650 million in residential mortgages. Between BND’s mortgages and those held by local banks and credit unions, roughly 20-25 percent of the state’s mortgage debt is held and serviced within North Dakota.

  
  

  The final component of BND’s loan portfolio consists of student loans.  This is the only area of lending in which the bank works directly with borrowers.  BND offers loans to state residents enrolled in schools located anywhere, as well as to out-of-state residents attending schools in North Dakota or any adjacent state. Its interest rates are widely regarded as some of the lowest in the country.  In early 2015, the bank’s rates were about 2 percent for a variable-rate loan and 5 percent for a fixed-rate — substantially lower than the 10-15 percent rates typical of private student loans.  In April 2014, the bank launched a new program that allows residents to consolidate their student loan debt.  By the end of the year, the bank had refinanced over $100 million in student loans, saving borrowers money by cutting their interest payments.

  
  

  Backing Community Banks and Credit Unions

  
  

  BND supports the state’s financial institutions in other ways as well.  One of its explicit goals is to expand local ownership of banks and increase their capitalization.  To this end, the bank has a bank stock loan program, which provides loans to finance the purchase of bank stock by North Dakota residents.  In 2008, for example, BND provided a loan to help the employees of Ramsey National Bank & Trust in Devil’s Lake, North Dakota, gain a controlling interest in the bank, ensuring that this institution, which was founded in 1892 and has about $200 million in assets, would continue to be owned locally.

  
  

  BND functions as a kind of mini Federal Reserve.  It clears checks for both banks and credit unions, provides coin and currency, and maintains an Automated Clearing House system that allows local banks to offer direct deposit and automated payment services to their customers.  Its Federal Funds program assists local banks with short-term liquidity needs and has a daily volume of over $300 million.

  
  

  The state bank also enables North Dakota’s local banks to take deposits and manage funds for municipal and county governments.  This is rare in other states, because banks must meet fairly onerous collateral requirements in order to accept public deposits.  This can make taking public funds more costly than it’s worth.  But in North Dakota, those collateral requirements are waived by a letter of credit from BND. This gives local banks an additional source of deposits and benefits residents by ensuring that their city and county funds are held locally rather than turned over to distant Wall Street banks.

  
  

  In tough economic times, BND helps stabilize North Dakota’s banking system.  During the aftermath of the recent financial meltdown, as community banks in other states struggled to retain sufficient capital levels as many of the loans on their books went unpaid — a balance-sheet crisis that caused a staggering number to fail — North Dakota’s banks turned to BND.  The state bank helped them increase their capital ratios by buying loans on their books and infusing them with new equity investment through its bank stock loan program.

  Federal data show that North Dakota’s local banks are healthier than their peers.  They are more efficient, devote more of their resources to productive lending, and earn better returns on their assets than community banks nationally.

  
  

  Impact of the Bank of North Dakota

   

  BND has helped North Dakota maintain a local banking sector that is markedly more robust than that of other states.  North Dakota has more local banks (relative to population) than any other state.  Over the last ten years, the amount of lending per capita by small community banks (those under $1 billion in assets) in North Dakota has averaged about $12,000, compared to $9,000 in South Dakota and $3,000 nationally.  The gap is even greater for small business lending.  North Dakota community banks averaged 49 percent more lending for small businesses over the last decade than those in South Dakota and 434 percent more than the national average. (To see graphs of these measures and others, go here.)

  
  

  
  
  Not only are community banks more numerous and more active in North Dakota, but there is some indication that the Bank of North Dakota has enabled them to maintain a higher average loan-to-asset ratio — meaning they are able to devote more of their assets to economically productive lending, rather than safer holdings like U.S. government securities.  North Dakota’s community banks have generally maintained a higher average loan-to-asset ratio than their counterparts in four neighboring states and nationwide.  That ratio also declined much less steeply during the recession.

  
  

  Expanding Economic Opportunity

  
  

  By and large, BND is run on a for-profit basis.  The bank evaluates loan opportunities according to how likely they are to be repaid and provide a return for BND.  As the bank’s president and chief executive, Eric Hardmeyer, said in an interview with American Banker magazine, “If you are going to have a state-owned bank, you have to staff it with bankers.  If you staff it with economic developers you are going to have a very short-lived, very expensive experiment. Economic developers have never seen a deal they didn’t like. We deal with that every day.”

  
  

  BND does forego some profit, however, in order to further economic development in the state.  The bank offers several programs that accept higher levels of risk or lower returns on certain kinds of loans.  Through its PACE Fund (“Partnership in Assisting Community Expansion”), for example, BND buys down the interest rate by 1-5 percent for some job-creating business loans.  In 2009, this program saved business borrowers $3.5 million in interest payments.  BND makes about 50 of these loans a year (all in partnership with a community bank and a local economic development entity) and currently has about 300 outstanding, valued at $50 million.  BND operates a similar program for farmers called Ag PACE.

  
  

  BND also has a Business Development Loan Program, which enables new and existing businesses to obtain loans that have a higher degree of risk than would normally be acceptable to a lending institution, while its Beginning Entrepreneur Loan Guarantee Program guarantees 85 percent of a loan of up to $100,000 made by a local bank to a start-up entrepreneur.

  
  

  Profitability and Returns for the State

   

  At the of end of 2014, the Bank of North Dakota had $652 million in capital and $7.2 billion in assets.  The bank has grown substantially over the last two decades.  Its assets have expanded sevenfold, and its net income, or profit, rose from $22 million in 1995 to $111 million in 2014.

  
  

  Although BND has foregone some profit in order to expand credit and lower the cost of loans for borrowers in North Dakota, the bank still earns a very healthy return on its assets.  BND’s ROA, or return-on-assets, a standard measure of bank performance, was 1.54 percent in 2014, compared to an average ROA  of 1.01 percent for all banks nationwide.

   

  Part of the bank’s profits are used to expand its capital base, which in turn enables it to make more loans.  The rest are paid into the state government’s general fund, reducing the amount of tax revenue the state needs to collect.  How much of each year’s earnings are transferred to the state is determined through negotiations between the legislature and the bank’s Governing Board.  Over the last 20 years, BND has made $385 million in payments to the general fund.  That works out to about $3,300 per family — meaning North Dakota households received $3,300 more in public services than they had to pay for through taxes.

  
  

  BND provides other direct financial benefits to the state.  It can borrow at the Federal Reserve’s discount window, for example, and lend directly to local governments at lower rates than the municipal bond market provides.

  
  

  BND can also provide emergency financing that would otherwise have to be shouldered solely by state and local government.  When the Red River valley underwent massive flooding in 1997, BND quickly established a $25 million line of credit for the City of Grand Forks, $12 million for the University of North Dakota in Grand Forks, and $25 million for state emergency management.  It also set up a disaster relief loan program for families and businesses.  Partly as result of this support, the Grand Forks economy recovered much more quickly than its sister city of East Grand Forks just across the river in Minnesota.

  
  

  More: 

  • Bank of North Dakota web site

  • Video: Bank of North Dakota
    This 26-minute video, produced by Prairie Public Broadcasting, chronicles the bank’s history and current operations.

  • North Dakota State Statutes
    See sections beginning at 6-09 for the portion of the code that establishes the bank and governs its operations.

  • Policy of the Bank of North Dakota
    Adopted in 1920, sets out the mission and purpose of the bank.

  • Oregonians for a State Bank

  • Oregon State Bank FAQ

  • Center for State Innovation’s Analysis of an Oregon State Bank

  • Banking on America:  How Main Street Partnership Banks Can Improve  Local Economies, Demos, April 2011
  • The Maine Partnership Bank: Promote a strong and resilient local financial system by partnering with Maine community institutions  — report by Jared Gardner, March 2013