|Beyond the usual suspects (September 2010)|
Beyond the usual...municipal loans
BY BERNARD WRIGHT
How an investment portfolio (and the bank) can benefit from municipal loans
The primary role of a bank’s investment portfolio, of course, is to be ready and able to support the liquidity needs of the bank. Once that role is secure, however, it can also provide other benefits.
LCNB Bank’s conservative lending culture and long history of very low losses helps limit the need to tap the investment portfolio for liquidity. It also means we often face more deposit growth than we can find quality loan growth to match. We therefore have the ability to use the investment portfolio for purposes that stretch beyond the norm.
One example is custom loans to municipalities. We do this instead of buying municipal securities packaged by underwriters, where the yield is lower. True, these loans could be handled by the lending department, but we’ve found they’re a good fit for our investment portfolio.
We work to develop relationships with our local municipal entities. These cities, villages, townships, school districts, and other public entities often have needs for funds that do not necessarily match well with standard municipal bond market practices. Often their cash flow is sporadic. Like any careful financial entity, they would prefer to match their cash obligations out with their expected cash in. Sometimes they want to finance a particular small project for an odd dollar amount that would not be attractive to the market. Because of our relationships, when municipal treasurers call us to discuss possibilities, we have an understanding of who we are dealing with.
We also make sure we understand the statutory scheme that governs municipal borrowings in Ohio. A municipality cannot usually give a mortgage to secure their borrowings, so we want to be sure we know exactly what backs up their promise to repay. We therefore avoid most industrial revenue bond proposals in favor of direct lending that is most often secured by general or limited taxing authority.
We look for opportunities where we can offer a flexible solution. An example is financing sidewalk repairs that the property owners wanted rolled into their real estate tax bill. Other projects have involved loans for new kitchen equipment for a school cafeteria, fire engines, sewer and water line extensions, and township meeting halls.
Our investment portfolio acquires a great asset, but it is important to remember several important characteristics. First, it will undoubtedly be hard to sell. The municipalities are generally not rated, the issues are not of standard sizes and there has been no offering statement prepared. So as an investor, we consider them Held to Maturity. On the positive side, because of those same factors, these issues ought to yield a premium over any issue that is readily marketable. We price them to do that.
These projects don’t carry CRA investment credit, but we think each of them improves the quality of life for the residents of our communities. From our point of view, we help our communities while we also help our shareholders. •
Bernard H. (Barney) Wright, Jr., is senior executive vice-president and trust officer for LCNB National Bank, Lebanon, Ohio. He oversees the $775 million-asset bank’s investment portfolio.
The electronic version of this article available at: http://www.nxtbook.com/nxtbooks/sb/ababj0910/index.php?startid=54
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