Executives at some community banks in New Jersey are saying the creation of a state-run financial institution like the one proposed by Gov. Phil Murphy could be devastating to local municipalities and borrowers.
The reasoning behind this, according to Michael Affuso, director of government relations at the New Jersey Banking Association, is that a state bank has the potential to siphon off municipal deposits from community banks, which often use those deposits to reinvest in their communities or pay for services and charitable causes.
Collectively, municipal deposits represent several billion dollars across the state’s 565 townships and cities.
The municipal deposits also help community banks adhere to rules set forth under the federal government’s 1977 Community Reinvestment Act (CRA), which requires local banks to use money deposited from local governments to meet the credit and lending needs of the communities they operate in.
While details of state Congress’ proposal to create a state bank are still being hashed out, Affuso told NJBIZ the 140 local banks in New Jersey would be significantly hurt if a state bank were to handle municipal deposits. That could also translate into downgraded CRA ratings from the Federal Deposit Insurance Corp.; most community banks in the state have received “outstanding” CRA ratings, according to Affuso.
“The CRA was essentially designed to keep banks from taking deposits from one community and lending them to another,” he said. “If you look at 2017 and prior year CRA ratings, there have been only five banks in the state that have received unsatisfactory ratings. Of the 140 banks in New Jersey, the 95 percent of banks in New Jersey have received a satisfactory or outstanding ratings in terms of small business lending in their communities.
“Many of them use municipal deposits for that lending. If you pull that money out, it becomes very problematic.”
Thomas Shara, CEO of Lakeland Bank, said he is waiting to have a meeting with Murphy to discuss how a state bank would impact municipal deposits.
“We’re still trying to figure out the need for a state bank,” Shara said. “I understand that one of Murphy’s goals is to move state deposits from foreign banks to U.S. banks, but if that reaches its way down to municipal deposits, that would be a great concern to us.”
Shara said his bank operates with hundreds of millions of dollars from municipal deposits that have been collected in its nearly 50 years of operations.
“We take those deposits and lend them into the local community to support consumers and small businesses,” he said. “To the extent that municipal deposits would dry up under a state bank, that would be very problematic for community banks.
“Small business and consumer lending is our core business. Lending to small- and middle-market businesses represents 99 percent of the loans that we make, so that funding is a critical component of what we do,” he continued. “We’ve heard Gov. Murphy talk about making student loans and small business loans, but that’s our bread and butter. We already do that well and we don’t need a state bank to do that.”
A state bank could not assess risk as well as local banks, Shara added, because it wouldn’t interact as much with small business owners in the various communities. He also surmised that if small business lenders did indeed seek financing from a state bank, it would be an indication they’ve probably already been rejected by local banks and therefore would present a credit risk to taxpayers.
“I’ve heard the governor say that government deposits in the state bank would not be FDIC-insured; rather, they would be insured by the full faith and credit of New Jersey,” Shara said. “That’s fine, but the credit losses on loans that we make have to be absorbed by us, the taxpayers.
“We understand risk, we deal with risk and understand local customers, and lending to them is something that we do incredibly well. I don’t think a state bank could replicate that.”
The legislation to authorize creation of a state bank, introduced Jan. 16 by state Democratic Sens. Nia Gill, 34th District, and Richard Codey, 27th District, would create a 13-member board of directors and require the state treasurer to deposit state funds into it. The language in terms of how it could affect municipal deposits gets fuzzy from there, however.
According to the bill, the state bank would create a 13-member board of directors and have the authority to, among other things, “receive deposits from any public source and deposit its funds in any bank or other financial institution; coordinate with the higher education student assistance authority to further access to postsecondary education, whether by loans, grants, scholarships, savings programs, or other means; and provide loans or other assistance to small businesses.”
Murphy first introduced the idea of a state bank in September 2016 in a speech at the New Jersey Institute of Technology. The idea behind it was to ensure that state money is not being invested overseas by foreign banks.
“We will invest directly in our state and its people by establishing a public bank and putting New Jersey’s resources to work for New Jerseyans,” Murphy said.
At a campaign rally in April, Murphy told a crowd in Trenton that a state bank would not hurt local banks, and instead, would look to partner with them to help small businesses grow.
“It will allow us in our state to invest in you so you can invest in Main Street," he said." This is money that belongs to the taxpayers of New Jersey, so it should be invested in them."
Repeated calls and emails for comment to Murphy’s office, as well as those of Sens. Codey and Gill, were not returned.
Jane Rey, the COO of Elmwood Park-based Spencer Bank, said she also believes taking municipal deposits away would hurt local banks’ abilities to contribute to their neighborhoods.
“There will be an impact to communities because of the relationships that communities have with local banks,” she said. “If that goes away we are not going to have that connection to the community as strongly has we had it before. For example, Garfield, which is one of the areas where Spencer was founded and has been in the community for about 80 years, took funding from us last year to help celebrate its 100th-year anniversary. They reached out to us, so we partnered with them last year as a sponsor for a number of their events that took place. Those events could not have happened had it not been for our funding.”
Indeed, M&T Bank last year reported it invested $927,000 into the communities where its branches are located through loans and charitable giving, while Rutherford-based Boiling Springs Savings Bank said its biggest expenditure in 2017 were contributions it made to nonprofit group Community Alliance Program, which has disbursed more than $2.5 million to other nonprofits.