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Managing Your Government Banking Relationships

2018 NYGFOA ANNUAL CONFERENCEFriday, March 23, 2018

Types of Banking Relationships

Is Your banking relationship Transactional or Relational?

TRANSACTIONAL

Short term focusCommitment to a SalePrimarily price driven

Impersonal

Retail or branch basedLimited interaction

No specialistOne-way marketing

Long term focusCommitment to Client

Mutually BeneficialConsultative

Dedicated Expertise

Trusted AdvisorAccountabilityTransparency

AvailabilityBuilt on Integrity

What Impacts Your GovernmentBanking Relationship and your Bank?

Basel III Liquidity Coverage Ratio (“LCR”)

Large Banks (assets over $50B) are subject to LCR requirements

40% (generally) of public funds must be held in High Quality Liquid Assets (HQLA) which can limit the banks ability to earn vs consumer or business deposits

Deposits become more expensive to collateralize

Decreased attractiveness of public funds has resulted in reduced “interest”

Basel III Liquidity & Capital Ratio Requirements

Community Banks (assets under $50B) & Local Communities

Growth in public fund deposits occurring at community banks

Increased funds available for local lending

Your deposits are re-invested locally to support residents, businesses, &

municipalities

Balance Sheet and Margin Management

Loan to Deposit RatioFlush with cash – may not wish to grow depositsSignificant Loan Growth – deposits are neededGenerally less costly than borrowing from the Fed

Cost of Funds/Net Interest Margin Bank performance vs peers Industry trends

2012 2013 2014 2015 2016 2017

Branch Net Closings by Banks & Thrifts since 2012

98,403 88,812

Steady Acceleration of Branch Closures YoY

Source: S&P Global Market Intelligence, 01/23/2018

New Tax Law - Impact on Muni Notes & SIBs

Lower Corporate Tax RateMay reduce demand for bank qualified

municipal notes/SIBs from banks

The Good News…

Relatively high after-tax yields on Municipal notes are still attractive to individual investors.

Earnings Credit Rate (ECR)

Earnings Credits Used to eliminate or reduce fees for banking services

Generated from Checking/NOW balances

Applied toward banking service activity costs.

Earnings Credit Rate (ECR)

Generally calculated on checking/NOW accounts, not savings or MMAs.

Depending upon the bank, savings and MMA balances remain desirable

Often correlated with the U.S. Treasury Bill rates, but not always.

Low Interest Rate environment means balances generate less in Earnings Allowance due to a low Earnings Credit Rate

Earnings Credit Calculation

(Service Cost/ECR) X (Days in Yr/Days in Mo.) (Reserve Requirement)

= $1,802 ($1.00/0.0075) X (365/30) (0.90)

Monthly BalanceRequirement=

Monthly balance required per dollar of service:

Example:

Earnings Credit Calculation

Balance Requirement for total monthly Service cost:

Service Cost/(ECR x 30/365)Reserve Requirement

$1,000/(0.0075 x 30/365)0.90

Monthly Balance Requirement

=

$1,802,000 =Example:

Minimizing Costs & Maximizing Potential

Reduce Number of Bank AccountsMultiple bank accounts

Hamper effective cash control Increase balance requirements

Create frequent interbank transactions Driving up costs Increasing potential for errors

Time-consuming to manageSource: NYS OSC Pub. “Investing & Protecting Public Funds; April 2016

Minimizing Costs & Maximizing Potential

Consolidating accounts

Consistent with accounting requirements to minimize fees

Co-mingling of funds permissible under GML Sec.11(6)

Improves overall interest earnings potential

Source: NYS OSC Pub. “Investing & Protecting Public Funds; April 2016

Proposal for Banking Services

Formal RFP

Clear outline of response and requirements by bank and municipality. Can help meet unique needs Larger or more complex municipality Can become transactional Restrictive in responses Significant time/resources required

Proposal for Banking Services

Informal RFP Smaller or less complex municipalitySavings in time/resourcesAllows for creativity and flexibilityNot always apples to apples when reviewing offers

Frequency Can be open ended

- Changes at current bank, changes in industry, - Changes in your market

Defined period – every X number of years

QUESTIONS

Director of Government Banking

mohearn@evansbank.com716-926-8451 – Office716-560-3996 – Mobile

BANK ING   | IN SURANCE   | INVESTMENTS   | EMPLOYEE  BENEF I T S  

Top 10 Ways to Strengthen Your Banking Relationship

Presented By: Joe Rulison

Communicate

Appreciation 

Technology

Rising Rates

Hard Fees vs. 

Soft Fees

Value of Liquidity 

Asset

Treasury Service Plan

Options

QUESTIONS?