Financial Questions
Who holds the collateral bonds and can the bonds be held by the participating bank?
The bonds are held in safekeeping in the Foundation’s account at National Bank of Commerce as third party custodian. Safekeeping receipts are issued to the participating Bank evidencing ownership of the bond by the Foundation and 100% pledge to the Bank.
The custodian provides the Foundation with financial information for booking to its general ledger each month. With investors across the United States, this accounting function is best managed if all bonds are held by one custodian.
Can the bond have a maturity that does not coincide with the transaction maturity date?
Yes. The bond can have a mid term maturity or call. The only requirement of the Foundation is that it not be in an unsecured position. A replacement bond should be provided to the Foundation on the call/maturity date, or as close to that date as possible.
Along those same lines, if an investor wants to swap collateral during the course of the commitment period, this can be done on an infrequent basis.
What type of bond can be used?
A non-amortizing bond of investment grade with a coupon rate of at least 1.875%. It can be a Treasury, Government agency, or corporate. Because of the liquidation feature of mortgage backed bonds, they cannot be used as collateral.
In addition, municipal bonds can be used; however, as the bonds are owned by the Foundation, there is no tax free benefit to the Bank.
How do I fund the transaction?
A bond can be used to fund the transaction by one of three ways. It can be transferred from the bank’s current portfolio (constitutes a sale of the bond), the bank can use their broker to purchase a new bond and have that broker transfer the bond free to the Foundation’s safekeeping account with NBC, or the bank can use the Foundation’s broker to purchase a new bond.
If participation is through an investment, do the Dividends qualify for dividend exclusion?
This should be discussed with the Bank’s accounting firm. Items to take into consideration are the 5 year term and automatic renewals.
If participation is through an investment, how many shares of preferred stock does the bank receive?
Each share is valued at $1,000, with one stock certificate issued for the total participation ($1,000,000 would be one certificate for 1,000 shares).
How does a bank participant record the transaction?
If the bank participates through a loan, then the loan is booked through the loan system, with the interest rate equal to the bond coupon rate less 1.875%.
If the bank participates through an investment, we have customers who have recorded the investment as an other asset and not mark-to-market, and we have customers who carry the preferred stock as an other equity investment and mark-to-market based on the collateral market value. In both cases, the dividend accrual would equal the coupon rate less 1.875%.
In both the loan and the investment, the bond premium or discount would be amortized to income as a yield adjustment.
How does the bank receive the interest or dividend income?
The collateral bonds are held in the Foundation’s name, the trigger for the participating bank to receive CRA credit, and the Foundation receives the coupon income. The Foundation remits to the bank the interest or dividends due via check after deducting the 1.875% portion retained by the Foundation from the coupon. Example: If the collateral is a 4.0% coupon bond, the Foundation retains a yield of 1.875% and remits 2.125% to the Bank.