Academic journal article ABA Banking Journal

Beyond the Usual Suspects: How an Investment Portfolio (and the Bank) Can Benefit from Municipal Loans

Academic journal article ABA Banking Journal

Beyond the Usual Suspects: How an Investment Portfolio (and the Bank) Can Benefit from Municipal Loans

Article excerpt

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.

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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. …

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