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ITEM: CONSENT CALENDAR |
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6. |
CONSIDER RENEWAL OF A $1.5
MILLION LINE OF CREDIT WITH BANK OF |
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Meeting
Date: |
March 15, 2010 |
Budgeted: |
No (to be funded from Contingency Account) |
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From: |
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Program/ |
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General
Manager |
Line Item No.: Acct. No. 8900 |
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Prepared
By: |
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Cost Estimate: |
$7,500 |
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General Counsel Review: N/A |
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Committee Recommendation: The Administrative Committee considered this
item on March 9, 2010 and voted 3-0 to recommend a one-year renewal of the line
of credit with Bank of
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CEQA Compliance: N/A |
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SUMMARY: Bank
of
At the direction of the Chair and Vice-Chair, the District’s Chief
Financial Office (CFO) requested a proposal from First National Bank (FNB) which
was the other bank that responded to the District’s 2008 request for proposal
for the line of credit. While FNB has
indicated it is willing to submit a proposal, it was unable to do so in time
for this Board meeting. District staff is
in the process of contacting other banks and Fremont Bank has also indicated
interest in submitting a proposal.
The Administrative Committee considered this item at its March 9, 2010
meeting. Some of the issues discussed by
the Committee were as follows:
·
Current
economic conditions affecting banks
·
District
need for a line of credit at this time
·
District’s
long-time relationship with BofA
·
Solvency
and reliability of BofA vs. other banks in case of further economic
deterioration
·
Staff
time and costs associated with transfer of District’s checking and money market
accounts to a new bank
·
District’s
ability to establish a line of credit at any time with another bank if economic
conditions change (no prepayment penalty on BofA line of credit, it would just
expire)
After considerable discussion, the Committee concurred that the best
course of action would be to renew the line of credit with BofA in the amount
of $1.5 million for a period of one year, and to monitor economic conditions
and stability of banks to see if a change is warranted in the future.
RECOMMENDATION: The Administrative Committee considered this item on March 9, 2010 and voted 3-0 to recommend a one-year renewal of the line of credit with Bank of America in the amount of $1.5 million with an interest rate of the bank’s prime rate plus 0.25% and a renewal fee of $7,500.
BACKGROUND: In October 2008, the District entered into a
Loan Agreement with BofA to establish a $2.5 million line of credit to fund
development of water supply projects.
The interest rate was equal to the bank’s prime rate minus 0.75%. The line of credit officially expired on
January 31, 2010, but BofA has approved renewal and extended the expiration
date pending negotiation of new terms.
The terms proposed by BofA for renewal of the $2.5 million line of
credit is an increase
in the interest rate from the Bank’s prime rate minus 0.75% to prime rate plus
0.25% and a renewal fee of 1% ($25,000) of the amount of the line of
credit. BofA indicated that the proposed
increases were due to changing economic conditions and the fact that the
District has utilized only a small portion of the line of credit while the bank
had to reserve the total amount for our use.
This matter was discussed at the
Chair/Vice-Chair meeting on February 26, 2010, and as directed by the Chair and
Vice-Chair, the CFO began to gather information to get new proposals for the
District’s line of credit. Specifically,
as suggested by the Vice-Chair, the CFO had a discussion with Roland Pascua of
FNB. During that discussion, the CFO
indicated that the District might be looking to replace the District’s current
line of credit with BofA because of an increased interest rate and renewal fee
proposed by BofA. After further
discussion, Mr. Pascua indicated that FNB would also charge a similar fee in that
situation and that he did not feel that the 1% was unreasonable. While Mr. Pascua indicated FNB would likely
be interested in providing a proposal for a line of credit, he said that he
would need to review the District’s latest audited financial statements before
doing so.
The CFO also contacted the BofA representative
and told him of the direction from the Chair and Vice-Chair. However, based on previous suggestions from
him on how to lower the costs, the CFO asked him how the bank could reduce the
renewal fee and/or interest rate if the amount of the credit line was reduced
and the District deposited additional funds with BofA. He has since offered to renew the line of
credit as discussed in the summary section above.
Based on the proposals received for the
current line of credit, if the District were to establish a new line of credit
with a different bank, we could expect to pay up to $5,000 in setup costs, and
the new bank would almost certainly require that we transfer all of our
operating and investment accounts from BofA, and possibly from the State of
California Local Agency Investment Fund.
That would require a considerable effort from staff to set up new
checking and money market accounts, direct deposits of employee’s paychecks,
etc., and the District would incur additional costs for replacement check stock
and other bank related supplies. Also,
as indicated by Mr. Pascua of FNB, we would likely be back in the same
situation with the new bank if we did not substantially utilize the full amount
of the line of credit in the upcoming year.
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