MONTGOMERY COUNTY, Md.-Community banks claim they know their local communities better than megabanks, will lend to local businesses that cannot get credit elsewhere and are better equipped to spur job creation in those locales.

Now, a local government is saying to community banks, "Prove it."

The county council in Montgomery County, Md., a D.C. suburb of about 972,000 people, has decided to withdraw $10 million from its primary bank vendor, PNC Financial Services Group (PNC), and spread the deposits among five community banks that have their headquarters in the county, according to American Banker, an affiliate of Credit Union Journal

Why CUs Were Blackballed

Credit unions were blackballed because they typically do not make commercial loans, according to county officials. The largest CUs based in Montgomery County include the $342-million- Lafayette FCU and the $108-million Energy FCU.

The funds will be deposited at Eagle Bancorp, a $2.8-billion company based in Bethesda; OBA Financial Services, a $392-million, Germantown-based holding company for the thrift OBA Bank; the $384-million Monument Bank of Bethesda; Capital Bank, a $368-million company in Rockville; and the $317-million Congressional Bank of Potomac.

In exchange, each bank promises to match the amount it receives and use the funds to make loans to local businesses-in effect doubling the payback for the community.

While there have been numerous attempts across the country to persuade local governments to shift deposits out of big banks and into local community banks or credit unions, those efforts typically have come at the urging of consumer advocates like the organizers of BankTransfer Day, the Move Your Money Project and the Occupy movement. In Montgomery County, the community banks provided the impetus, Ron Paul, Eagle's chairman and chief executive, told American Banker.

"I've been working on this for more than three years," Paul said. "I'm hopeful that I can prove to the public and to the county that this is such an important part of jump-starting the economy in the county that we'll get more money out of it eventually."

It is easier to lobby for moving money to small banks than to actually get it done, bankers and advocates in other U.S. cities say. In Austin, Tex., for example, the Occupy Austin group and others called for the city council to move its money out of Bank of America (BAC) to smaller banks. The city responded favorably and sent out requests-for-proposal to banks. But Austin ultimately chose JPMorgan Chase (JPM), far from a community bank.

Other cities have made more progress. The cities of New York, Los Angeles, Pittsburgh and Portland, Ore., have approved ordinances to require big banks holding municipal deposits to prove they're lending in low-income neighborhoods. The state treasurer of Ohio has created a program to pool investments from municipalities and redistribute the funds as interest-bearing accounts to Ohio community banks.

A big obstacle for community banks is that large local governments often need complex financial services, like cash management, which they are not equipped to provide. That is one reason OBA Bank has rarely bid on government banking contracts with local governments, and why the Montgomery County funds will be the first deposits that the thrift has received from any local government.

"I've found that until you reach a certain size and sophistication on the commercial side, it's difficult to compete for this kind of money, and it's an all-or-nothing situation," where many counties pick only one bank for their deposits, says Chuck Weller, the president and chief executive of OBA Financial.

Calls For Keeping It Local Keep Coming

That lack of financial sophistication has not stopped the calls for community banks to be the holders of local government money, under the reasoning that taxes should remain in the place where they are collected, not sent to a bank headquarters in another state.

Montgomery County officials are sympathetic to the cause, said Joe Beach, the county's finance director. But community banks cannot provide many of the services the county needs, so Montgomery had never sent an RFP to a community bank until now, he says. And even with the new program, the county still keeps most of its deposits at PNC.

Unlike the U.S. Treasury Department's Small Business Lending Fund, the program in Montgomery County will provide banks with liquidity instead of capital, Paul says.

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