GOT MONEY? October 6, 2009

1. GOT MONEY?October 6, 2009

2. Introduction This session will provide you with a foundational look at the collateralization of public funds deposits in South Carolina. Also, we will detail the changes in FDIC coverage that occurred in October 2008 and have recently been extended.

3. Why? • There are two pieces of the South Carolina Legislative code that deal directly with this subject • Section 11-13-60 • (A) A qualified public depository, as defined in subsection (E) of this section, upon the deposit of state funds by the State Treasurer, must secure these deposits by deposit insurance, surety bonds, investment securities, or letters of credit to protect the State against loss in the event of insolvency or liquidation of the institution or for any other cause. To the extent that these deposits exceed the amount of insurance coverage provided by the Federal Deposit Insurance Corporation, the qualified public depository, at the time of deposit, shall: • (1) furnish an indemnity bond in a responsible surety company authorized to do business in this State; or

4. Why? • Section 11-13-60 • (2) pledge as collateral: • (a) obligations of the United States; • (b) obligations fully guaranteed both as to principal and interest by the United States; • (c) general obligations of this State or any political subdivision of this State; or • (d) obligations of the Federal National Mortgage Association, the Federal Home Loan Bank, Federal Farm Credit Bank, or the Federal Home Loan Mortgage Corporation; or

5. Why? • Section 11-13-60 • (3) provide an irrevocable letter of credit issued by the Federal National Mortgage Association, the Federal Home Loan Bank, Federal Farm Credit Bank, or the Federal Home Loan Mortgage Corporation, in which the State Treasurer is named as beneficiary and the letter of credit otherwise meets the criteria established and prescribed by the State Treasurer. The State Treasurer shall exercise prudence in accepting collateral securities or other forms of deposit security.

6. Why? • Section 11-13-60 • (B)(1) A qualified public depository has the following options: • (a) To secure all or a portion of uninsured state funds under the Dedicated Method where all or a portion of the uninsured state funds are secured separately. The qualified public depository shall maintain a record of all securities pledged, with the record being an official record of the qualified public depository and made available to examiners or representatives of all regulatory agencies. The State Treasurer shall maintain a record of the securities pledged for monitoring purposes. • (b) To secure all or the remainder of uninsured state funds under the Pooling Method where a pool of collateral is established by the qualified public depository under the direction of the State Treasurer for the benefit of the State. The State Treasurer shall determine the requirements and operating procedures for this pool. The depository shall maintain a record of all securities pledged, with the record being an official record of the qualified public depository and made available to examiners or representatives of all regulatory agencies. The State Treasurer shall maintain a record of the securities pledged for monitoring purposes. • (2) Notwithstanding the provisions of item (1) of this subsection, the State Treasurer, when other federal or state law applies, may require a qualified public depository to secure all uninsured state funds separately under the Dedicated Method.

7. Why? • Section 11-13-60 • (C) A qualified public depository shall not accept or retain any state funds that are required to be secured unless it has deposited eligible collateral equal to its required collateral with some proper depository pursuant to this chapter. • (D) The State Treasurer may assess a fee against the investment earnings of various state funds managed or invested by the State Treasurer to cover the operation and management costs associated with this section and Section 6-5-15(E)(1)(b). These fees may be retained and expended to provide these services and may not exceed the actual costs associated with providing the services. • (E) "Qualified public depository" means any national banking association, state banking association, federal savings and loan association, or federal savings bank located in this State, and any bank, trust company, or savings institution organized under the law of this State that receives or holds state funds that are secured pursuant to this chapter.

8. Why? • Section 11-9-660 • A) The State Treasurer has full power to invest and reinvest all funds of the State in any of the following: • (1) obligations of the United States, its agencies and instrumentalities; • (2) obligations issued or unconditionally guaranteed by the International Bank for Reconstruction and Development, the African Development Bank, and the Asian Development Bank; • (3) obligations of a corporation, state, or political subdivision denominated in United States dollars, if the obligations bear an investment grade rating of at least two nationally recognized rating services;

9. Why? • Section 11-9-660 • (4) certificates of deposit, if the certificates are secured collaterally by securities of the types described in items (1) and (3) of this section and held by a third party as escrow agent or custodian and are of a market value not less than the amount of the certificates of deposit so secured, including interest; except that this collateral is not required to the extent the certificates of deposit are insured by an agency of the federal government; • (5) repurchase agreements, if collateralized by securities of the types described in items (1) and (3) of this section and held by a third party as escrow agent or custodian and of a market value not less than the amount of the repurchase agreement so collateralized, including interest; and

10. Why? • Section 11-9-660 • (6) guaranteed investment contracts issued by a domestic or foreign insurance company or other financial institution, whose long-term unsecured debt rating bears the two highest ratings of at least two nationally recognized rating services. • (B) The State Treasurer may contract to lend securities invested pursuant to this section. • (C) The State Treasurer shall not invest in obligations issued by any country or corporation principally located in any country which the United States Department of State determines commits major human rights violations based on the Country Reports on Human Rights Practices by the Bureau of Democracy, Human Rights and Labor of the U. S. Department of State.

11. Federal Depository Insurance Corporation • Purpose • The Federal Deposit Insurance Corporation (FDIC) preserves and promotes public confidence in the U.S. financial system by insuring deposits in banks and thrift institutions by identifying, monitoring and addressing risks to the deposit insurance funds; and by limiting the effect on the economy and the financial system when a bank or thrift institution fails.

12. Federal Depository Insurance Corporation • October 3, 2008 • President George W. Bush signed the Emergency Economic Stabilization Act of 2008, which temporarily raises the basic limit on federal deposit insurance coverage from $100,000 to $250,000 per depositor. The temporary increase in deposit insurance coverage became effective immediately upon the President’s signature. The legislation provides that the basic deposit insurance limit will return to $100,000 on December 31, 2009. • This has now been extended thru December 31, 2013.

13. Federal Depository Insurance Corporation • Temporary Liquidity Guarantee Program (TLGP) • October 14, 2008 - FDIC announced its temporary Transaction Account Guarantee Program, which provides full coverage for noninterest-bearing transaction deposit accounts at FDIC-insured institutions that agree to participate in the program. The transaction account guarantee applies to all personal and business checking deposit accounts that do not earn interest at participating institutions. This unlimited insurance coverage is temporary and will remain in effect for participating institutions through December 31, 2009. • This has been extended for six months thru June 30, 2010

14. Investment Options • Certificates of Deposit • Collateralized CD’s • CDARS • One statement, one banking relationship, one rate • Full FDIC coverage • SC does not require additional collateral outside of FDIC coverage

15. Investment Options • NOW Account *** • Deposit accounts which consist solely of funds in which the entire beneficial interest is held by: • One or more individuals, including sole-proprietorships. • A not-for-profit organization operated primarily for religious, philanthropic, charitable, educational, political, or other similar purpose. • Officers, employees, or agents of public entities (public funds). • Funds held in a fiduciary capacity (bank trust department, individual fiduciary, or trustee in bankruptcy), provided that all beneficiaries are natural persons. ***NOW Accounts paying 50bp or less are eligible for 100% coverage according to the FDIC’s TLG Program.

16. Investment Options • Money Market Deposit Account • An MMDA is a savings deposit that permits, under the terms of the deposit contract or by practice of the financial institution, the depositor to make no more than six transfers and withdrawals per calendar month or statement cycle of at least four weeks to another account of the depositor or to a third party. No more than three of the six transfers can be made by check, draft, debit card, or similar order to a third party. • Insured to the $250,000.00 limit by FDIC

17. Repurchase Sweep Account • A Repurchase Sweep takes any excess balances above an established Target Balance and invests in obligations or those that are fully guaranteed as to the principal and interest by the U.S. Government or agency and are collaterized at or above 100% of market value. • The Bank’s Treasury Desk maintains an account at the Federal Reserve that holds a “pool” of securities that may include the following: • Freddie Mac • Fannie Mae • Ginnie Mae • Federal Home Loan Bank • Federal Farm Credit Bank

18. Repurchase Sweep Account • Each repurchase client will receive daily notices of what their collateral consists of • Each day as the bank repurchases the collateral, the principal plus interest earned sweeps back into the deposit account

19. Repurchase Sweep Account • Government Sponsored Entities • US Conservatorship in 2008 • Repurchase Sweeps invest in mortgage backed securities (bonds) and not in the stock of the GSE

20. Sour Instruments • Collateralized Debt Obligation • Investors bear the credit risk • Multitude of credits of varying risk and maturity • Three Categories • Senior • Mezzanine • Subordinated/Equity

21. Sour Instruments • Subprime Mortgage • Lower credit scores • Interest only • Adjustable Rate Mortgage • Minimum payment, Interest only, ARM • Higher Foreclosure • Rates reset, payments triple

22. Apocalypse Now? • What happens when an institution fails: • A) FDIC sells the assets and liabilities to another institution, or • B) FDIC assumes the responsibility for all liabilities (deposits) according to the published limts, and sells the assets (loans) over a period of time • In the case of an Overnight sweep function, at the close of business all debits and credits are performed including the investment into a repurchase sweep. If the FDIC performs option A, then the funds will sweep back into the account under the new institution name, and if the FDIC performs option B, then the holder of the collateral will sell that on the open market via the Federal Reserve account holder in order to regain their liquid funds.

23. THANK YOU! Questions?