Independent Banker - October 2017 - 62

Lender Life
expense needs, capital improvement
projects and equipment purchases.
Union Bank is particularly active
on tax anticipation notes or revenue
anticipation notes, where it provides
fi nancing for communities in anticipation
of their receipt of proceeds,
such as from property taxes. " We
bridge the gap and provide a loan
from the time they need to pay
expenses from the time they actually
" Municipalities
represent a very
strong deposit
opportunity, and we
strive to be the bank of
account for as many of
our local municipalities
as we can. "
-DAVID SILVERMAN, UNION BANK
receive the taxes, " Silverman says.
How cities access fi nancing varies
on a case-by-case basis. The city
of Delano, Minn., for example, is a
Minneapolis suburb of about 6,000
people that generally uses existing
revenues and cash reserves to fi nance
its smaller projects. The city seeks
outside fi nancing only once or twice
each year for major capital purchases
or construction projects, notes city
administrator Phil Kern.
The vast majority of Delano's
fi nancing efforts involves issuing
tax-exempt bonds for 10- to 20-year
terms, Kern says. For example, the
city made a $5 million bond issuance
last year for a street and utility
construction project. Those bonds are
put forth for banks and other investment
groups to publicly bid on, and
cities accept the bid with the most
favorable terms.
" Community and local banks
are just as competitive as others,
although sometimes the size and
scope of what we are looking for
exceeds the interest or desire of a
local bank to bid on it, " Kern says.
Tough competition
Several factors are fueling banks'
appetite for municipal lending. The
big driver for many is to serve the
local community-and to retain those
municipal customers long after the
original loan is granted.
" When it comes to municipal
lending, it boils down to a lot of relationship
management, " says Rhonda
L. Bennett, vice president of commercial
and municipal services at Union
Bank. Those transactions open the
door to other business on the deposit
side for those municipalities, as well
as more automated banking services,
such as remote deposit capture.
Union Bank does most of its municipal
business with towns, villages and
school districts within a 30-minute
drive from any of its 20 branch
locations across Vermont and New
Hampshire. " Municipalities represent
a very strong deposit opportunity, and
we strive to be the bank of account
for as many of our local municipalities
as we can, " Silverman says.
Other banks have a more targeted
focus on municipal lending as a
specialty niche. For example, the
$1.7 billion-asset KS StateBank in
Manhattan, Kan., merged with Baystone
Government Finance 10 years
ago. The division originates and funds
about $200 million in municipal
obligations annually for equipment
purchases and projects across the US.
Municipal fi nancing can be
profi table. However, that profi tability
depends on pricing. " This is a
competitive business, and the muni
lease companies will aggressively go
after deals that fi t their profi le, " says
Evan Howe, director of Baystone
Government Finance. Howe adds that
community banks also typically bid
low rates on transactions where they
want to win that local business.
Profi tability also depends on
creating effi ciencies to manage that
business. " About half the states have
specifi c laws that affect municipal
leasing, " Howe says. " You have to
know the laws and manage that
process. " Banks do incur legal costs,
and processors need to be trained
to manage the documentation. " You
must manage the documentation
process effi ciently if you want to keep
your costs down and stay competitive
in the marketplace, " he says. " In other
words, you can't just decide to start
doing municipal leasing and expect to
have a high-quality, large, profi table
portfolio jump into your bank. "
Managing credit risk
Howe says municipal leasing risks
are not much different from other
commercial lending risks. One way
to mitigate those risks is to balance a
portfolio by ensuring differentiation
among the issuers and types of
equipment or projects being fi nanced.
Some lenders are also more cautious
in fi nancing controversial projects.
For example, Baystone tries to avoid
fi nancing politically unpopular deals,
such as those the community voted
against on a bond issue.
" There is risk in municipal leasing, "
Howe says. " However, if you go after
the essential-use equipment, fi nance
62 ICBA IndependentBanker October 2017
Independent Banker - October 2017

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