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$Page 1: WPTA Key Banking Presentation V2 presentations/Banking Services 360.pdf.h\&rus &rqilghqwldo 'lvforvxuhv ] o } µ w.h\%dqf&dslwdo 0dunhwv lv d wudgh qdph xqghu zklfk frusrudwh dqg lqyhvwphqw$
KeyCorp Confidential

2019 WPTA – Banking 360

April 10th, 2019


Disclosures

Disclosures:KeyBanc Capital Markets is a trade name under which corporate and investment banking products and services of KeyCorp and its subsidiaries, KeyBancCapital Markets Inc., Member FINRA/SIPC, and KeyBank National Association (“KeyBank N.A.”), are marketed. Securities products and services are offered by KeyBanc Capital Markets Inc. and its licensed securities representatives, who may also be employees of KeyBank N.A.. Banking products and services are offered by KeyBank N.A..

The information contained in this report has been obtained from sources deemed to be reliable but is not represented to be complete, and it should not be relied upon as such. This report does not purport to be a complete analysis of any security, issuer, or industry and is not an offer or a solicitation of an offer to buy or sell any securities. This report is prepared for general information purposes only and does not consider the specific investment objectives, financial situation and particular needs of any individual person or entity.

KeyBanc Capital Markets Inc. is not acting as a municipal advisor or fiduciary and any opinions, views or information herein is not intended to be, and should not be construed as, advice within the meaning of Section 15B of the Securities Exchange Act of 1934.


Economic Update

3As of April 1, 2019 Sources: Bloomberg, KBCM & TM3

• A Rebound in U.S. EmploymentAfter a gloomy February, payroll gains were very strong in March. Nonfarm payrolls grew by 180,000 after February’s anemic 20,000. In addition to this, new unemployment filings have fallen to 202,000 for the weekend ending March 30, which is the lowest seen since 1969. This bodes well for the economy as new unemployment claims have preceded previous downturns.

• Calling foul on the Yield CurveMarch saw the yield curve invert as the 10-year yield dipped below the 3-month for about a week, contributing to fears of a looming recession. While the curve has since reverted, lingering fear from the event remains.

• Fed Calls a Timeout on Rate HikesAfter meeting in March, the FOMC has decided to temper the discussion around rate hikes; largely in response to poor economic performance in February. This is quite a change from even a few months prior. The FOMC has now revised their expected number of rate hikes from two to zero in 2019.

• Overseas Activity Playing Tight Defense on the Global EconomyMultiple events overseas are raising questions on the state of the global economy. Italy is burdened with a debt ratio of more than 130 percent of GDP, and may be forced to freeze many of its planned public expenditures this year. Elsewhere in Europe, Germany is showing signs of a slowdown, with industrial factory orders posting their worst decline since the financial crisis. Meanwhile in Asia, fears of a slow down in China have replaced the ongoing trade war as the number one concern for American investors (according to a recent a Bloomberg survey).


Economic Update Con’t


Recession Indicator – As of February, risk of recession stands at 20%. The historical average for probability of recession is 22%, indicating there is no need for panic just yet.Consumer Confidence – Though consumer confidence fell in March, it remains elevated. The Conference Board’s consumer confidence index dropped 7.3 points to 124.1.Jobless Claims – Initial claims for unemployment insurance benefits fell from 212,000 to 202,000 in the week ended March 30, their lowest level since December 6, 1969.Industrial Sector – Industrial production rose 0.1% in February, rebounding modestly after January's decline.

The yield curve (defined as the difference between the 10-year and three-month Treasury yields) inverted in March for the first timesince 2007. Because of its track record, the inverted yield curve ignited concerns of a recession. While there are reasons for both optimism and concern, the following points suggest that we still have some runway left before a recession or significant slowdown:

1. Inflation is in check - Generally, recessions occur because imbalances develop in asset prices or the economy overheats, generating inflationary pressures that cause the Fed to aggressively raise interest rates. Neither appears to be threatening now.2. Accommodative Monetary Policy – Currently, monetary policy isn’t restrictive. Past inversions in the curve have coincided with an actual fed funds rate noticeably above the long-run equilibrium fed funds rate.3. Some of the Recent Pain is Self Imposed - Another reason to be optimistic is that a big weight on the economy could be easily removed. The trade tensions between the U.S. and China are clearly hurting business sentiment, investment and global growth. If the Trump administration resolves the trade tensions, the economy would have a better chance of escaping a near term slowdown4. The Fed Could Act - At a Hong Kong speaking engagement, former Fed Chair Janet Yellen stated that “an inverted Treasury yield curve is not necessarily the harbinger of a recession, but that the yield curve inversion does suggest the Fed might want to lower the federal funds rate target. By quickly lowering the fed funds’ midpoint to 2.125%, the Fed can instantaneously remove the inverted yield curve and, thereby, lower the perceived risk of a recession.”

Of course a flattening and inversion in the yield curve raise concerns and could affect the economy by hurting business and consumer sentiment, beginning a negative feedback loop. For example, though there may not be a direct causal effect, the yield curve does cause changes in stock market returns, which by extension can affect business and consumer sentiment. Therefore, we should not completely discount the psychological impact that an inversion in the yield curve could have.


Interest Rate Environment – Near Term Rate Change Unlikely

5

10-Year UST Yields & Volatility (since Jan. 2018) Historical & Projected 3-Month LIBOR

Yield Curve Has Inverted on the Short End Fed Funds Rate Hike Probabilities

Source: Bloomberg* BAML Move Index is a yield curve weighted index of the normalized implied volatility on 1-month Treasury options

Cumulative Probability of Effective Fed Funds Rate

Meeting 1.5-1.75% 1.75-2% 2-2.25% 2.25-2.5%

Date 3+ Cuts 2+ Cuts 1+ Cut Current

1-May-19 -- -- 5.7% 94.3%

19-Jun-19 -- 0.8% 19.6% 80.4%

31-Jul-19 0.1% 2.6% 27.0% 73.0%

18-Sep-19 0.8% 10.0% 49.4% 50.6%

30-Oct-19 1.7% 13.7% 54.1% 45.9%

11-Dec-19 5.0% 25.1% 67.1% 32.9%

29-Jan-20 8.1% 31.6% 72.2% 27.8%


Fed Funds Rates

6

What are Fed Funds?• U.S. banks must hold reserves with the banks that make up the Federal Reserve Bank system, the central bank of the

United States. Since these reserves do not earn interest, banks have an incentive to lend any excess funds to otherbanks in need of reserves. These interbank transactions are collectively known as the fed funds market.

How does Federal Reserve “Target” Fed Funds?• Most often used method is to buy and sell Treasury securities to member banks and in turn credit or remove credit from

the Bank’s Federal Reserve Balance. This encourages banks to systematically decrease or increase overnight fed fundsrespectively.

• Permanent Open Market Operations – Treasuries / MBS• Temporary Open Market Operations – Repos / Reverse Repos

• Fed Balance Sheet was $870 Billion in 2007; $4.5 Trillion in 2015: $4.0 Trillion in March 2019• As of March 2019 – Fed slowing “Normalization”

How do we calculate probability of Fed Policy?• Fed Funds Futures Price is discount to Par – (i.e. Rate = 100 - contract price)

• So, for a given month, the Fed Funds Futures price can be thought of as an “average expected” price for FedFunds in a given month

• If the current fed funds target rate is 1.25% and the current price of next month’s futures contract is 98.60, then,• Implied rate next month is 1.40% (100-98.60), an increase of 15bps from today’s rate• Market “priced in” a 60% chance of rate increase (15bps/25bps) or;

𝐹𝑒𝑑 𝑓𝑢𝑛𝑑𝑠 𝑟𝑎𝑡𝑒 𝑖𝑚𝑝𝑙𝑖𝑒𝑑 𝑏𝑦 𝑓𝑢𝑡𝑢𝑟𝑒𝑠 𝑐𝑜𝑛𝑡𝑟𝑎𝑐𝑡 − 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑓𝑒𝑑 𝑓𝑢𝑛𝑑𝑠 𝑟𝑎𝑡𝑒

𝐹𝑒𝑑 𝑓𝑢𝑛𝑑𝑠 𝑟𝑎𝑡𝑒 𝑎𝑠𝑠𝑢𝑚𝑖𝑛𝑔 ℎ𝑖𝑘𝑒 − 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑓𝑒𝑑 𝑓𝑢𝑛𝑑𝑠 𝑟𝑎𝑡𝑒


MMD Rates Over the Past Five Years


1.86%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18 Mar-19

30yr 20yr 10yr

2.60%

2.44%


Municipal Interest Rate Environment

8

MMD Yield Curve Over Time 10- 20- & 30- Year MMD Yields Over the Past Year

Credit Spreads Over the Past Year Short Term Benchmarks Over the Past Year

As of April 1, 2019 Sources: Bloomberg, KBCM & TM3

2.60%2.44%

1.86%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

Mar-18 May-18 Jun-18 Jul-18 Sep-18 Oct-18 Nov-18 Jan-19 Feb-19 Mar-19

30yr 20yr 10yr

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

March 29, 2019 1 Month Prior 3 Months Prior

0

20

40

60

80

100


Spread to Baa Spread to A Spread to AA

75 bps

bps

12 bps

36 bps

2.50%2.40%

1.50%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%


1 Month LIBOR Fed Funds SIFMA


0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

'AA' Spread to 'AAA' 'A' Spread to 'AAA' 'BBB' Spread to 'AAA'

Generic Credit Spreads – ‘AAA’ GO MMD vs. ‘AA’, ‘A’ & ‘BBB’ Revenue Curves (10-yr Paper)


`

'AA' 'A' 'BBB'

Minimum 0.12% 0.36% 0.73%

Maximum 0.31% 1.57% 3.54%

Avg (since 2009) 0.21% 0.70% 1.40%

Avg (since 2010) 0.21% 0.67% 1.31%

Current 0.12% 0.36% 0.75%

'AAA' Spread To:


Tax-Exempt and Taxable Yield Curve Comparison

• The current MMD/UST ratio averages 82.60% across the yield curve with a minimum of 61.67% occurring in year one

• MMD currently demonstrates value vs. USTs across the entirety of the yield curve (1– 11 year MMD/UST ratios are currently below 80%)


Tax-Exempt MMD AAA GO Curve vs. Taxable Treasuries

1 1.48% 2.40% 61.67%

2 1.49% 2.27% 65.64%

3 1.50% 2.21% 67.87%

4 1.53% 2.22% 68.92%

5 1.57% 2.23% 70.40%

6 1.62% 2.27% 71.37%

7 1.67% 2.31% 72.29%

8 1.72% 2.34% 73.40%

9 1.78% 2.38% 74.89%

10 1.86% 2.41% 77.18%

11 1.95% 2.45% 79.59%

12 2.04% 2.49% 81.93%

13 2.11% 2.53% 83.40%

14 2.17% 2.57% 84.44%

15 2.21% 2.61% 84.67%

16 2.26% 2.63% 85.93%

17 2.31% 2.65% 87.17%

18 2.36% 2.67% 88.39%

19 2.40% 2.69% 89.22%

20 2.44% 2.71% 90.04%

21 2.47% 2.72% 90.78%

22 2.50% 2.73% 91.51%

23 2.52% 2.74% 91.87%

24 2.54% 2.75% 92.23%

25 2.55% 2.77% 92.22%

26 2.56% 2.78% 92.22%

27 2.57% 2.79% 92.21%

28 2.58% 2.80% 92.21%

29 2.59% 2.81% 92.20%

30 2.60% 2.82% 92.20%

MATURITY MMD USTMMD as % of

UST

0%

25%

50%

75%

100%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

AAA MMD GO UST MMD as a % to UST

Solid lines correspond with the axis on the left w hereas thedotted line corresponds with the axis on the right


Current “Buzzwords” Discussed

11

Economic and Public Sector Market Update

• Fed Funds Rates

• Politicized

• Inverted Yield Curve

• Recession? What does that mean?

• Fed Balance Sheet Run-Off

• Why is this important

• Global Economic Slowdown

• What is the impact on Treasury rates – and Muni rates?

• Trade war with China

• Inflation

• Economics 101?

• Marijuana

• Oil & Gas “Brown” exposure

• Asset Liability Management

• LIBOR


LIBOR Transition

12

New benchmark reference rate; Secured Overnight Financing Rate (SOFR) expected to replace LIBOR in 2021

• LIBOR born in the 1960s because a group of banks wanted to lend money to overseas clients

• Worked its way into swaps market in 1980’s and now tied to derivatives well above $100 trillion in notional

• LIBOR is an estimated unsecured lending rate for seven maturities produced daily by the Intercontinental Exchange (ICE) via survey of banks with significant presence in the London market

• Credit risk embedded

• Partially transaction based

• Banking crisis changed the way Banks fund themselves and daily value of transactions dwindled

• $500M of underlying daily transactions feeding nearly $200 trillion in notional

• SOFR expected to set on $700-800 Billion on a daily basis

• SOFR is an overnight, secured reference rate administered by the NY FED that broadly measures the cost of borrowing cash overnight with US Treasuries as collateral (Repo Market)

• Transaction based

• Minimal credit risk

• SOFR underlying transactions currently trading

Source: JP Morgan “Leaving LIBOR: A Landmark Transition” January 2019


Overall Banking Management

13

Loans

Cash

Investment Securities

Deposits

As

sets

Lia

bilitie

sDebt

Eq

uity

Capital

Asset/Liability Management

Swaps

Off B

/S

Decision Support

Capital Management Group

Capital

Market Strategies and Execution

Cash Investment Securities

DebtSwaps

Loans Investment Securities

Deposits Debt

Interest Income

Interest Expense

Net Interest Income

Liquidity Risk

Loans

Cash


vsDeposits

Debt

Interest Rate Risk

Corporate Treasury

Lines of Business

LOB Finance

Accounting

Tax

Balance Sheet Optimization

FTP

Loans

Cash


Deposits

Debt

Balance Sheet of Bank


Earnings Credit Rates

14

Earnings Credit Rates are Garnering More Attention in the “Higher” Interest Rate Environment

• Earnings Credit Rates were a response in the mid-1960s to the 1933 Glass-Steagall Act which prohibited commercial banks from paying interest on transactional accounts

• An ECR is not an interest rate – it is “soft-dollar credit” on non-interest bearing deposits

• Not all ECRs are created equal:

• FDIC Assessment

• Reserve Requirement

• Roll forward

• Other

• ECR is negotiable and we encourage dialogue!

• Interest on Excess Balances

• Tie to an index?

• Homogeneity for all clients? -

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

0.00% 0.25% 0.50% 0.75% 1.00% 1.25% 1.50% 1.75% 2.00% 2.25%

Balance Needed to Cover $25,000 in Banking Fees


Pricing Loans

15

Gross Interest RevenueOther Depository RevenueFuture Fee RevenueFixed Overhead / Transaction CostsLiquidity Premium or Borrowing CostsCorporate Taxes (if taxable)

Probability Weighted Credit Loss or Reserve• Risk or “Credit” Rating• Term of the Facility

Net Revenue per Loan


Bank Loans

16

Bank Loans – A Banker’s Perspective

• Take advantage of flexible terms

• Leverage the Relationship with your bank(s)• Banks can’t “tie” capital markets transactions but you

can!• Tie depository relationships

• Negotiate Terms – The Term Sheet is just a start

• No “Market Clearing Price” • Every bank has different means of calculating profitability• Relationship pricing

• Take Advantage of optionality – “Extraordinary Redemptions”

• Explore long interest rate lock periods

• Use the Subordinate or Junior Lien

• Cast a wide net for solicitation; similar to negotiated bond sale• Consider “placement agent” model for wider solicitation

and ability to negotiate on your behalf

• Explore Revolver or Short-Term Financing to limit negative arbitrage in the Construction/Bond Fund

• Consider the Banking Team and Lender’s Counsel experience with similar transactions

• Documentation process can be similar to public transaction depending on the institution

• GFOA best practices re: loan solicitation, evaluation, and disclosure: http://www.gfoa.org/bank-loans

• Ensure the purpose, planned use, and desired terms are thorough enough in the RFP to allow “Apples to Apples” comparison amongst firms

• Financial Reporting deadlines are “negotiable”

• 15C2-12 Amendments


Banking Services 101

Payables

– Controlled Disbursement

– Account Reconciliation / Positive Pay

– ACH Origination

– Wires

– Purchasing Card

– AP Automation

Reporting

– Online

– Transmission

– Mobile

17

Receivables

– Branch / Cash Vault

– Lockbox

– Remote Deposit / Image Cash Letter

– ACH Received

– Wires

– AR Optimization

Balances

– Earnings Credit Rate

– Investment Sweep

– Excess funds?

Primary ThemesImprove Efficiencies Paper-to-Electronic

Manage/Minimize Risk


Commercial Liquidity Continuum

18

Fundamental questions to a strategic liquidity discussion

• How much short-term cash do you currently hold and for what purpose(s)? Expected duration?

• How are you currently investing this cash?

• What rate(s) of return are you earning?

• Do you have an investment policy or guidelines?

Short-term liquidity(up to one year)

Long-term liquidity(1-2 years)

I. Daily operating cash II. Reserve cash III. Strategic cash

Cash needed to support day-to-day operations

Serves as a cushion for unforeseen events

Reserved for a particular duration and purpose

• Commercial DDAs with earnings credit or interest

• Sweep services

• Commercial MMDAs• Less than one-year CDs

• Variable maturity time deposit• Greater than one-year CDs

Understanding the cash segmentation approach and liquidity objectives are essential to a strategic liquidity conversation. Insight into short-term cash

strategy can lead to optimizing cash across the liquidity continuum.


AP Payments Automation Economics

19

Manual Entries

Description

Manual bill payment created on Key2Purchase.com

Integration Required

None

Partial Automation

Description

Batch payments file uploaded to execute all transactions

KeyBank maps to your file space


ERP system be able to build in functionality to indicate which payments are card transactions.

Fully Automated

Description

Client creates a file transfer protocol (FTP) which creates an automated connection to KeyBank to route card payments.


Partial automation requirements plus ability to build the FTP transaction.

Integration options available

Level of Automation

No AutomationLevel of Automation

75% AutomationLevel of Automation

100% Automation


Cen

tral

ized

Acc

ount

VCC

ACH

Check

Check

VCC

Responsibility Shifts from client

Check 32554 ACH (D)Check 66844 ACH (D)

ACH (D)Check 33648

Check

VCC

VCC

ACH

Check 66854 ACH (D)

Check 69964 ACH (D)

ACH (D)Check 33648

Check 66647 ACH (D)

Check 58485 ACH (D)

ACH (D)Check 64456

Payment Type Status

Existing Operating Account Structure Stays in Place

Daily Payment Status Visibility

DDA 1

DDA 2

DDA 3

Electronic Item Reconciled

Check Number

Key Total Pay

Nightly Batch File

Weekly Excel Report

Emailed

AP Automation – Flow of Funds

20

Day 1 Day 2

• Card payment made via email / outbound call

• Checks are mailed 1st Class USPS

• KeyTotal Pay Direct ACH direct deposit into vendor account

• Vendor Match for payment type

• ACH debits for each individual payment

• Total funds placed in clearing (centralized) account

• Checks printed & packaged, not mailed


21

KeyTotal Invoice & Pay Economic Impact - Example

*All costs/savings are represented In an annualized amount.

Cost per Invoice $1.30

Annual PO Box Fee $400

Implementation – One Time (Key will waive)

$3,500

KeyTotal Pay

Monthly $95

Per Payment $0.68

Current State Future State

Paper Checks ($7/each) $126,000

Paper Invoices ($4.50/each) $81,000

Total Manual Costs/Year $207,000

KeyTotal Pay ($95/mo.) $1,140

Per Payment ($0.68/ea.) $12,240

Annual PO Box Fee $400

Per Invoice ($1.30/ea.) $23,400

Total Automated Costs/Year $37,180

Anticipated Annual Savings

$12,600 $16,800Projected Savings per Year Estimated Annual Rebate – 60bps$169,820

Current Check Cost Per Item: $7.00

Number of Checks: 18,000

Current Invoice Cost Per Item: $4.50

Number of Invoices: 18,000

Eligible AP Spend: $10.0MM

Current State Assumptions

KeyTotal Invoice

High AdoptionLow Adoption


22

Consolidated Payables – How it Works

See page 4 for additional details

FedWire

Vendors view remittance details

View Reporting

Submit File

File Approval

Vendors Paid

Clearing House

Print & Mail

Vendor SwipesCard

Check

Wire

ACH

1 432

Payments Prepared

5

6


Questions?

23

Documents

WPTA Key Banking Presentation V2 presentations/Banking Services 360.pdf.h\&rus &rqilghqwldo 'lvforvxuhv ] o } µ w.h\%dqf&dslwdo 0dunhwv lv d wudgh qdph xqghu zklfk frusrudwh dqg lqyhvwphqw