Seeding loans via CDs

Long before TALF and TARP, there was CUCBI ”“ and in the spirit of the age, some want to expand the program that aims to boost lending by community banks in Connecticut neighborhoods.

In 2004, the state enacted the Credit Union and Community Bank Initiative that guarantees community banks and credit unions with less than $500 million in assets can compete exclusively for the business of taking in state money in the form of certificates of deposit.

The original goal of the bill was twofold: to help banks furnish more credit in underserved areas, including for mom and pop businesses; and to force the state to utilize community banks instead of investing all certificates of deposit (CDs) with a predecessor company to Bank of America Corp., its practice at the time.

Banks are barred from participating if they do not register at least a “satisfactory” rating in the federal Community Reinvestment Act requirements on which they are periodically judged.

“That was one of the reasons we proposed and supported legislation back in 2003 ”“ the concept being that additional funds available to community banks are more likely to invest in their communities,” said Larry Wilson, assistant treasurer for cash management in the office of Connecticut Treasurer Denise Nappier.

Banks can bid for state investments in CDs in denominations from $500,000 to $5 million, with maturities ranging from one month to 18 months.

To date, 11 banks and one credit union have signed up, according to Wilson.

Since May 2006, the state has held 54 auctions and has awarded $327 million in CDs, with a peak investment level of $79 million. Currently, $28 million is outstanding in CDs with community banks and the credit unions.

In the latest round of bidding completed at the start of April, the treasurer”™s office awarded four CD contracts valued at $12 million in the aggregate. The next auction will be held in early May, when eight CDs totaling $24 million will be put out to bid.
Under the program, no bank can hold more than 20 percent of available CD money at any one point in time, unless approved by Nappier.

“We haven’t had as much participation recently, and ”¦ we’ve queried the banks that are eligible and have signed up for the program,” Wilson said. “In some cases, they”™ve told us that they have sufficient deposits on hand and they aren’t looking for additional deposits. We”™ve also heard that they were looking for CDs of longer maturities and so we”™ve responded to that and lengthened the maturities. However, the auction we had just earlier this week, one financial institution participated. And for the previous 14 or so auctions, we had two financial institutions participating. I don”™t think I can, with confidence, indicate what their motivation or lack of motivation is.”

Unknown is the extent to which those community banks actually increased lending as a direct result of the program. By increasing their deposits and so their capital ratios, the CDs should enable the banks to make loans and profitable investments that add to their bottom line.

According to the Federal Deposit Insurance Corp., total loans outstanding by Connecticut savings banks were down more than 20 percent between June 2003 and December 2004, but that was a period during which the Connecticut Department of Banking approved 13 bank mergers, many of them involving larger commercial banks snapping up smaller savings institutions, and so skewing the statistics against the latter group.

Those mergers included Bank of America”™s acquisition of FleetBoston Financial Corp., giving the Charlotte, N.C. company the largest deposit market share in the state of Connecticut.