Clallam and Jefferson county treasurers, seriously concerned in February upon learning about a new state rule that requires banks that hold public funds to prove they have enough cash to protect taxpayer dollars invested in those private institutions, are breathing a bit more easily.
Clallam County Treasurer Judy Scott and Jefferson County Treasurer Judi Morris last week traveled to Olympia to share their worries with state Treasurer James McIntire about the rule, effective July 1, which he supports.
The rule requires banks to collateralize their uninsured public deposits 100 percent.
The original rule, which dates back to the 1970s, required only 10 percent.
“That’s a big deal for many banks,” said Morris, who since October has been president of Washington State Association of Counties.
“Some don’t want to take that much of their assets out of circulation.”
The new rule came about after the Bank of Clarke County failed and the state Department of Financial Institutions closed it. The state appointed the Federal Deposit Insurance Corp. as the failed bank’s receiver.
The new rule was initiated to protect public deposits in the bank, which totaled $15 million.
State Treasurer McIntire said in a letter to county treasurers, including Scott and Morris, that the rule was necessary to protect public deposits.
As a result, Morris said, “Some banks in the state have said they are going to stop playing; as a matter of fact, some have said they will stop playing immediately.
Interest rate drop
Clallam County’s Scott said that much of her concern was that the interest rate would drop from as high as 3.5 percent on public deposits with banks and the state pool to below 1 percent, maybe as low as 0.05 percent.
She said her department felt fortunate that a 36-month locked-in rate had been set with First Savings Bank of Renton at $3.1 million.
Besides that bank, Clallam has $1 million deposited in First Federal, $416,000 in Sterling Bank and $7.1 million in the state pool.
“We have laddered out some monies, putting it out for up to two years,” she said. “So we feel pretty secure.
“The new ruling is not scaring me, but we are cognizant of the fact that we know it will be bringing some of our rates down.”
Prudent investments
Morris explained that part of her job is to keep Jefferson County dollars invested safely and to grow those dollars “risk free.”
“Making it a prudent investment is more important than high yield,” she said.
As of Friday, Morris said, all private institutions but Frontier Bank, which holds the largest amount of county funds at $8.1 million, had agreed to play by the new rule.
Those banks agreeing to live with it are American Marine Bank, which holds $3.75 million of Jefferson County public funds, Sterling Bank, $1.25 million, and First Federal, $1 million, said Morris.
The county also has about $11.5 million in a statewide pool, she said.
Joan Broughton, Port Townsend Frontier Bank manager, deferred the matter to her company’s chief executive officer, John Dixon, who was not prepared to comment last week.
Financial institutions
Larry Hueth, chief financial officer and treasurer at Port Angeles-based First Federal — which has branches across the North Olympic Peninsula — said that the bank has sufficient collateral to support the state rule on public agency deposits.
“We will meet this standard and will confidently continue to serve the needs of public agencies in Clallam and Jefferson counties,” he said.
Rex Townsend, president and CEO of American Marine Bank, said the system to protect public deposits in private institutions statewide remains “totally safe.”
“The reason that the state Treasurer’s Office and the Legislature pushed for a change in the system was that under the previous scheme, the actual liability incurred by a bank accepting public funds was almost impossible to determine,” Townsend said.
“After the assessments that most Washington banks were charged as a result of the failure of the Bank of Clark County earlier this year, many banks have expressed that they wouldn’t continue accepting public funds under the old model.
“Changing to a plan where banks post 100 percent collateral for public deposits over FDIC limits ensures that, once all banks have posted the necessary collateral, there should be little if any liability to other Washington banks if a bank that accepts public deposits fails.”
He said it was unfortunate that banks that accept public funds now will have to tie up bonds or other securities as collateral for those deposits at a time when they are working hard to ensure that they have adequate unencumbered sources of liquidity to weather the current recession.
What this is likely to mean for counties is that banks that don’t have the benefit of the county’s checking accounts are less likely to want to accept certificates of deposit or money market account deposits from the county much in excess of the FDIC insurance limit of $250,000.
“Interest rates are very low now anyway, but it is unlikely that [counties] will see multiple banks bidding for their business as they once did,” Townsend said.
“Indeed, banks may start looking at banking for their county or city more as a necessary service that they are performing for their community rather than as a profit-making venture.”
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Port Townsend-Jefferson County Editor Jeff Chew can be reached at 360-385-2335 or at jeff.chew@peninsuladailynews.com.
