Financial Insights– Fall 2008

Welcome to another edition of Financial Institutions Insights, a publication of KeyBank's Financial Institutions Group. Access the articles below for insights into the economy, a strategy for enhancing relationships with municipalities, and ideas for generating financing income without burdening your institution's balance sheet. FALL 2008 LEARN MORE ABOUT OUR SERVICES FOR FINANCIAL INSTITUTIONS PRINT ENTIRE E-NEWSLETTER DID YOU KNOW ... Economic Update The commodity-led boom in emerging market economies was expected to soften the blow from U.S. housing woes. But has the historic commodity boom been busted? Learn More • KeyBank offers financial institutions opportunities to purchase loan and lease pools? • Key Equipment Finance is the second-largest bank-held equipment financing company in the United States based on new business volume, which is typically more than $6 billion a year? Retain clients without burdening your balance sheet Banks referring multifamily apartment loans and leasing business to Key can earn fee income and improve client retention without using their balance sheets. Read the Entire Article FOUR DECADES OF SERVICE Looking to serve municipalities but don't have the resources? Local banks generally have a leg up on the competition for local government business. But how do you realize this "home field" advantage if you don't have the sophisticated financing capabilities municipalities sometimes require? Read the Entire Article It is with mixed emotions that we announce the retirement of KeyBank Financial Institutions Group's longest-tenured employee, Charlene Grinolds. Char provided 38 years of dedicated service to KeyBank; its predecessor, Seattle Trust & Savings Bank; and to her many loyal customers. Please join us in congratulating Charlene on a great run! DeAnna Poling, West Region Manager, Financial Institutions Financial Institutions Insights is a service of KeyBank's Financial Institutions Group. The articles within this e-newsletter are for informational purposes only and the information contained herein does not constitute and shall not be construed to constitute tax or legal advice by KeyBank or its affiliates as to any specific matter or service. KeyBank makes no representation or warranty as to the accuracy, completeness or timeliness of such information. No part of this e-newsletter may be copied or reproduced in any way without the prior written consent of KeyBank. PODCASTS AND WEBCASTS View our latest webcasts in the Virtual Seminar Series Fall 2008 ECONOMIC UPDATE Has the Historic Commodity Boom Been Busted? By Tom Russo, KeyBank In our previous Economic Update (Summer 2008), we expressed skepticism regarding published forecasts for a speedy resolution to trouble in the financial services world. Since then, policymakers have undertaken extraordinary fiscal, regulatory and liquidity measures that have pulled the stock prices of these firms out of frightful nose dives. These measures, however, haven’t done much to change the actual prospects for economic recovery or the efficacy of current business models. What’s worse, as the industry-wide asset write-down/capital-raising maneuver has continued, one of the few remaining hopes for the industry has now also given way. We are referring to the commodity-led boom in emerging market economies around the globe that was expected to soften the blow from U.S. housing woes. We ourselves spoke of that glimmer of hope as a fruitful market in which to sell financial services. For two years, divergent economies and monetary policy were believed to be undermining the value of the U.S. dollar (USD) around the world, feeding the commodity price frenzy but also facilitating the export of U.S. goods and services. However, history again has shown us how quickly markets can turn when the entire investment community has its finger precariously situated on a trigger and everyone is chasing the same moving target. In just a three-week period this summer, crude oil softened 25% from its high price near $150 per barrel, gold declined 20% from its high price above $1,000 per ounce, and the CRB commodity index fell 25% from its 40-year highs, leading the USD to advance 7% from its own extreme levels. Today, that same mass of global investors has to decide whether the historic commodity boom has indeed been busted, whether the USD has finally found a bottom and what the prospects for U.S. economic growth will be in a world where Asian and European economic growth has finally rolled over in sympathy with but lagged behind growth in the United States. Central banks are not likely to have an easy time managing policy in this environment, nor should we expect much success in reducing the spread premiums in interest rate and credit markets that are retarding growth when it does attempt to take root. The only bright spot here is the symmetrical descent in previously hyperbolic commodity prices that had been giving central bankers so much to worry about. Hopefully, they can begin to rest easier, calm down the inflation rhetoric and convince markets that lower not higher official rates are on the horizon. ® 2008 KeyBank Financial Institutions Insights Fall 2008 Earn financing fees, retain clients without burdening your balance sheet In today’s tight credit environment, banks are wary of adding new debt to their balance sheets, even though the pressure remains to be profitable and nurture commercial relationships. This state of affairs is making opportunities to provide financing referrals and earn fee income from Key very attractive. Partnering with Key through its financing referral programs can enable banks to widen their product base and retain clients. Multifamily financing referrals The newest opportunity is to refer multifamily apartment loans of up to $5 million to Key. Our bank clients can earn fees on such referrals of 1/2% to 1% of the loan and meet the needs of existing commercial customers without using their balance sheets. “Money is tight and lenders don’t have a lot of capital to deploy,” says Charles Krawitz, Managing Director of Key Commercial Mortgage Access, a unit of KeyBank Real Estate Capital. “Our referral program opens the door to multifamily lending and to non-interest income and fantastic returns far in excess of what a bank could earn by booking a loan on its balance sheet.” The ability to refer apartment loans to Key provides banks with a competitive advantage. Key Commercial Mortgage Access (CMA) is one of only 16 Fannie Mae small loan lenders, meaning it can offer “the best interest rate alternative in the marketplace” for loans of this type and size, Krawitz says. Additionally, CMA offers extremely efficient service to borrowers, Krawitz says. “All we do at CMA is close small-balance multifamily loans, and we do it very well.” In CMA referrals, Key looks for permanent loans with 5-, 7- and 10-year balloon maturities on properties that have exhibited historically consistent cash flow. Unlike many lenders, Key will consider loans on properties in tertiary (rural) markets. Borrowers should have a middle FICO score of 680 or greater. ® 2008 KeyBank Financial Institutions Insights Referring banks gather and deliver to Key application materials such as property photographs, rent-roll information and year-to-date and historical operating data. Banks receive their referral fees after the loans close, typically 45 to 60 days from application. Leasing referrals Referring leasing business to Key Equipment Finance (KEF) provides a similar opportunity. Leasing is a particularly attractive commercial financing option in these tight credit conditions, but it’s costly to offer because of the knowledge and administrative capabilities it requires. Referring leasing business to Key allows banks to offer existing clients a popular form of financing without having to absorb the costs of maintaining a leasing program. And, similar to the multifamily loan referral program, referring banks can typically earn a fee of 1/2% to 1% of the cost of the leased asset without using their balance sheets. As the nation’s second-largest bank-owned leasing company, Key Equipment Finance originates about $6 billion in commercial leases each year. KEF offers a smorgasbord of leasing products, including operating and finance leases, government leases such as taxexempt municipal leases, and sale-leasebacks. Its leases can finance everything from construction and industrial equipment to vehicles, hardware and software, office furniture and more. Key also has the remarketing and other resources to provide residual-based leasing. “We do transactions as small as $10,000 up to those worth several million dollars and even larger,” says Jim Epstein, Vice President and Global Program Manager for KEF. The referral process requires little more than a hand-off from the referring bank, and referral fees are paid promptly upon the lessee’s receipt and acceptance of the asset, Epstein says. Private label leasing You can achieve many of the same benefits of leasing referrals, while further enhancing your bank’s image, by partnering with Key on a private label leasing program. With this option, your customers can access the same leasing products but those products bear your brand; Key’s involvement is transparent. To take advantage of private label leasing, a bank must have an existing leasing program, must commit to at least $5 million in annual leasing volume, and must assume some administrative tasks during program set-up. Contact me for more information about Key’s CMA and leasing referral programs or private label leasing. ® 2008 KeyBank Financial Institutions Insights Fall 2008 Looking to serve municipalities but don’t have the resources? Banks, like sports teams, often can benefit from a “home field advantage.” Local banks generally find they have a leg up when competing for business from local governments, which typically prefer to patronize locally headquartered institutions. In banking, as in sports, you don’t want to squander your home field advantage. But what happens when a municipality client or prospect needs banking capabilities that go beyond basic cash management and deposit services — capabilities that require knowledge and resources that your bank may not have? Partnering with KeyBank A regional bank that operates in two Western states recently illustrated how partnering with KeyBank can help a financial institution realize its home field advantage. The regional bank has a branch in a small but growing city. In terms of competing for the municipality’s business, the bank was sitting pretty. There was only one other bank in town, and the municipality had indicated a preference for doing business with the regional bank. But here was the challenge: The municipality needed a bank that could facilitate a complex bond issuance. To enhance its relationship with the municipality, the regional bank turned to Key and its sophisticated financing resources. By partnering with Key, the regional bank secured a mandate to underwrite the municipality’s bond issue and fix the city’s financing costs on the floating-rate debt through an interest rate swap. What’s more, Key has arranged for the regional bank partner to take up to a $10 million participation in the transaction. “The regional bank gets to keep the city’s deposit and cash management business, as well as participate in the credit side of the transaction,” says Mark Herman, Senior Vice President and Regional Manager in Key’s Public Sector Group. “And, by offering this solution, the local bank looks like a hero to the city.” ® 2008 KeyBank Financial Institutions Insights Leverage our capabilities Serving the public sector requires special expertise, particularly in the financing arena where government agencies these days need more help than ever, due to the credit crisis and declining tax revenues. “By partnering with Key, smaller institutions can benefit from our balance sheet capabilities,” notes Derek Chauvette, Executive Director, Public Sector Group. “They may want to hold $5 million or $10 million of a $30 million government financing, but they can’t hold the entire $30 million. So we structure the transaction to enable them to participate at the level they are comfortable with, for a client they know very well.” In addition to the bond underwriting and swap services noted in the example above, Key can support bond issuance through credit enhancement. For instance, let’s say a city plans to issue bonds but it doesn’t have a debt rating. By issuing a letter of credit, Key can enhance the bond’s credit rating for the municipality. Tax-exempt leasing Another example of a complex financing product that municipalities find extremely attractive today — but which only select banks have the resources to offer — is taxexempt (or municipal) leasing. A tax-exempt lease provides municipalities with an easy method to finance capital equipment and projects at tax-exempt interest rates. These leases are subject to annual renewal, which is just one of the reasons they create an administrative challenge. As a client of Key, you can make tax-exempt leasing available to municipalities in one of two ways. You can simply refer clients to Key Equipment Finance and earn a referral fee. Or you can enter into a private label leasing arrangement with Key in which the municipal lease product is administered by Key but offered under your bank’s brand. Defend the home field Your bank has a built-in geographic advantage when competing for the business of government agencies within its footprint. Partnering with Key to provide the complex financing services that municipalities need can enable you to fully realize your home field advantage. Contact me to learn more about how KeyBank can help you earn and retain the business of municipality clients. Securities products and services such as investment banking and capital raising are offered by KeyBanc Capital Markets Inc., Member NYSE/FINRA/SIPC. Banking products are offered by KeyBank National Association. ® 2008 KeyBank Financial Institutions Insights