2. 1 Security for Public Deposits Act Overview and Recent Developments Department of the Treasury April 21, 2010

3. 2 Presentation Outline Virginia Security for Public Deposits Act Definitions Program Overview Responsibilities of Public Officials Program Statistics Recent Developments Contacts Fraud Prevention Disbursement Accounts

4. 3 Virginia Security for Public Deposits Act The Virginia Security for Public Deposits Act (SPDA), Chapter 44 Title 2.2 was enacted by the 1973 General Assembly. The Virginia Security for Public Deposits Act Regulations were enacted by the Treasury Board of the Commonwealth of Virginia on November 18, 1993. SPDA creates a single body of law to secure public deposits of Virginia governmental entities. SPDA centralizes the procedures to secure public deposits at the state level to promote efficiencies in administration.

5. 4 Definitions

6. 5 Section 2.2-4401 of the Code of Virginia ‘public deposit’ means moneys of the Commonwealth or of any county, city, town or other political subdivision thereof, including moneys of any commission, institution, committee, board or officer of the foregoing and any state, circuit, county or municipal court, which moneys are deposited in any qualified public depository in any of the following types of accounts: nonnegotiable or registered time deposits, demand deposits, savings deposits, and any other transaction accounts, and security for such deposit is required by other provisions of law, or is required due to an election of the public depositor. Public Deposit Defined

7. 6 Participants Defined Participants Defined Qualified Public Depositories " Qualified public depository" means any national banking association, federal savings and loan association or federal savings bank located in Virginia, any bank, trust company or savings institution organized under Virginia law, or any state bank or savings institution organized under the laws of another state located in Virginia, that receives or holds public deposits that are secured pursuant to this chapter. "Located in Virginia" means having a main office or branch office in the Commonwealth where deposits are accepted, checks are paid, and money is lent. Treasurer and Public Depositors The terms “treasurer” and “public depositor” shall mean the State Treasurer, a county, city or town treasurer or director of finance or similar officer and the custodian of any other public deposits secured pursuant to this chapter.

8. 7 Public Depositors Accounts established by Commonwealth of Virginia governmental entities StateCourts CitiesTowns CountiesOther Political subdivisions Accounts established by component units of the above AgenciesDepartments AuthoritiesFunds BoardsInstitutions CommissionsOfficers CommitteesSchools (does not include activity fees)

9. 8 Participants Defined Treasury Board The Treasury Board of the Commonwealth created by Section 2.2-2415 of the Code of Virginia consists of the State Treasurer, the State Comptroller, the State Tax Commissioner, and four citizen members appointed by the Governor. Escrow Agent An escrow agent is selected by a qualified public depository for the purpose of holding collateral pledged to the Treasury Board under SPDA and must meet the selection criteria outlined in Section 140 of the SPDA regulations.

10. 9 Treasury Board Duties, Powers and Responsibilities Make and enforce regulations to perform its functions under the SPDA Make and enforce regulations to perform its functions under the SPDA Fix terms and conditions by which public deposits may be held Fix terms and conditions by which public deposits may be held Determine securities that are eligible to be held as collateral Determine securities that are eligible to be held as collateral Ensure that all Code of Virginia and SPDA Regulations requirements are met by each qualified depository Ensure that all Code of Virginia and SPDA Regulations requirements are met by each qualified depository Establish escrow agent criteria Establish escrow agent criteria In case of default or insolvency, take action as deemed advisable in accordance with program requirements to recover public funds In case of default or insolvency, take action as deemed advisable in accordance with program requirements to recover public funds Report to public depositors any non-compliance with the Code or Regulations by qualified depositories Report to public depositors any non-compliance with the Code or Regulations by qualified depositories Require additional collateral in excess of required collateral as it may determine prudent Require additional collateral in excess of required collateral as it may determine prudent

11. 10 Program Overview

12. 11 How Does SPDA Work? Creates a single body of law to secure Virginia public deposits. Requires qualified public depositories to secure public deposits by pledging securities as collateral to be held in escrow for the Virginia Treasury Board. Provides Treasury Board a perfected security interest in pledged collateral. Empowers Treasury Board to make and enforce regulations to administer SPDA. Creates a pooled collateral method to secure public deposits among qualified public depositories: mutuality of responsibility among depositories cross guarantee among depositories 50% minimum collateral requirement In the event of a default, assesses each qualified public depository its proportionate share of the loss of any uncollateralized and uninsured public deposits held by the defaulting depository based on the ratio that each depository’s average public deposits bear to the average total of all public deposits for the preceding twelve months.

13. 12 Public Deposit Security Agreement Execution required before public depository can accept or retain any public deposit. Execution required before public depository can accept or retain any public deposit. Tri-party agreement. Tri-party agreement. Perfected security interest to the collateral by the Treasury Board. Perfected security interest to the collateral by the Treasury Board. TREASURY BOARD QUALIFIED PUBLIC DEPOSITORY ESCROW AGENT

14. 13 Reporting TREASURY BOARD Summary of Depository Status Report Monthly and Quarterly Statistics Monthly Qualified Depository Listing ESCROW AGENT Monthly securities report Confirmations of deposits, substitutions and collateral withdrawals Qualified Public Depository Monthly Depository Report List of Public Depositors Quarterly Depositor Notice Public Depositor

15. 14 SECURITY FOR PUBLIC DEPOSITS SUMMARY OF DEPOSITORY STATUS FOR THE MONTH ENDED NOVEMBER 2009 UNDERCOLLATERALIZEDSTATUS: DEPOSITORIES: None NEW QUALIFIED DEPOSITORIES: WashingtonFirst Bank Washington, DC MERGED QUALIFIED DEPOSITORIES: None DEPOSITORIES WITH NAME CHANGES: None

16. 15 Summary of Qualified Depositories As of November 2009 Bank NameSPDA contact location Access National BankReston, VA Alliance BankChantilly,VA American National Bank and Trust CompanyDanville,VA Bank of AmericaDallas, TX Bank of BotetourtBuchanan, VA Bank of Charlotte CountyPhenix, VA Bank of Clarke CountyBerryville, VA Bank of EssexTappahannock, VA Bank of FincastleFincastle, VA Bank of FloydFloyd, VA Bank of GeorgetownWashington, DC website link: http://www.trs.virginia.gov/documents/ops/Report.pdf website link: http://www.trs.virginia.gov/documents/ops/Report.pdf

17. 16 Audit Certification In accordance with section 110 of the Virginia SPDA Regulations In accordance with section 110 of the Virginia SPDA Regulations With the submission of the “Public Depository Monthly Report” to the State Treasurer for the month ending June 30, qualified public depositories shall attach an annual certification from an independent certified public accountant or their internal audit department, attesting to the accuracy of the public deposit balances reported to the State Treasurer during their previous fiscal year.

18. 17 Audit Certification Recommended Audit Procedures Recommended Audit Procedures Testing of the compilation and accuracy of public deposit account balances reported Testing of the compilation and accuracy of public deposit account balances reported Calculation of average daily deposit balances reported Calculation of average daily deposit balances reported Omission of public deposit accounts Omission of public deposit accounts Accuracy in the calculation of FDIC for public deposit accounts Accuracy in the calculation of FDIC for public deposit accounts

19. Responsibilities of Public Officials

20. 19 Section 58.1-3158. Duties of treasurers Section 58.1-3158. Duties of treasurers -No treasurer shall permit any public deposit to be deposited with any depository unless it is a “qualified public depository” as defined in Section 2.2-4401. All such deposits shall be secured pursuant to the Virginia Security for Public Deposits Act (Section 2.2-4400 et seq.) Section 58.1-3177.B Duties of the clerk; deposit of funds; investment of funds; failure to pay out. Section 58.1-3177.B Duties of the clerk; deposit of funds; investment of funds; failure to pay out. -All moneys received by the clerk shall be deposited intact as soon as practical and secured in accordance with the Virginia Security for Public Deposits Act (Section 2.2-4400 et seq.) Responsibilities of Public Officials

21. 20 Responsibilities of Public Officials Section 2.2-4408. Authority to deposit public funds. Section 2.2-4408. Authority to deposit public funds. A. All treasurers and public depositors are hereby authorized to deposit funds under their control in qualified public depositories securing public deposits pursuant to this chapter. B. Local officials handling public funds in the Commonwealth may not require from a depository institution any pledge of collateral for their deposits in such institution which is in excess of the requirements of this chapter. Section 2.2-4410. Liability of treasurers or public depositors. Section 2.2-4410. Liability of treasurers or public depositors. When deposits are made in accordance with this chapter no treasurer or public depositor shall be liable for any loss thereof resulting from the failure or default of any depository in the absence of negligence, malfeasance, misfeasance, or nonfeasance on his part or on the part of his assistants or employees.

22. 21 Responsibilities of Public Officials To ensure public deposits are deposited in a “qualified public depository” as defined in Section 2.2-4401 of the Code of Virginia. To ensure public deposits are deposited in a “qualified public depository” as defined in Section 2.2-4401 of the Code of Virginia. Ensure that locality’s funds remain with a qualified depository during mergers, acquisitions and name changes. Ensure that locality’s funds remain with a qualified depository during mergers, acquisitions and name changes. To ensure locality’s depositories know that locality’s demand deposit accounts and non-negotiable certificates of deposit are considered public deposits under the SPDA and are collateralized accordingly. To ensure locality’s depositories know that locality’s demand deposit accounts and non-negotiable certificates of deposit are considered public deposits under the SPDA and are collateralized accordingly. To ensure locality’s depositories comply with the SPDA by reviewing the Summary of Depository Status Report (available at www.trs.virginia.gov in the Operations Division). To ensure locality’s depositories comply with the SPDA by reviewing the Summary of Depository Status Report (available at www.trs.virginia.gov in the Operations Division).www.trs.virginia.gov To review quarterly public depositor report (bank statements) and notify the State Treasurer’s office of any discrepancies between the statement and the depositor’s records. To review quarterly public depositor report (bank statements) and notify the State Treasurer’s office of any discrepancies between the statement and the depositor’s records. To notify locality’s depository of large deposits pending so the depository can have sufficient collateral pledged to cover the deposit. To notify locality’s depository of large deposits pending so the depository can have sufficient collateral pledged to cover the deposit.

23. 22 Program Statistics

24. 23 Total Public Deposits $4,980,997,063 $3,406,834,368 (net of FDIC coverage) Total Market Value Collateral $4,208,218,256 Total Required Collateral $2,594,631,522 Percentage of Public Deposits held by the six largest Public Depositories 64% Total Qualified Public Depositories 121 Total banks required to pledge at 100% - 24 Total savings banks required to pledge at 110% - 1 Statistics as of September 30, 2009

25. 24 Public Deposits by Bank Type September 30, 2009 Bank Type September 30, 2009 Total Public Deposits % of Total September 30, 2009 Treasurer of VA Accounts % of Total Virginia National Banks 197,531,263.955.80% 24,405,510.2118.20% Virginia State Chartered Bank 932,916,021.5427.38% 28,064,281.6220.92% Total Virginia Banks 1,130,447,285.4933.18% 52,469,791.8339.12% Out of State National Banks 862,780,272.9125.32% 58,291,169.0843.46% Out of State- State Chartered Banks 1,411,990,902.1041.45% 23,363,738.1217.42% Total Out of State Banks 2,274,771,175.0166.77% 81,654,907.2060.88% Savings and Loans 1,615,907.580.05%00.00% Grand Total 3,406,834,368.08100.00% 134,124,699.03100.00%

26. 25 Recent Developments

27. 26 Need for Change (Fall 2008) Continued weakness in banking sector Continued weakness in banking sector Concentration of Virginia public deposits-Six banks hold 64% of public deposits Concentration of Virginia public deposits-Six banks hold 64% of public deposits Only 50% collateral requirements for most banks Only 50% collateral requirements for most banks Desire on the part of banks to opt out of collateral pool, reducing their risk of loss under the SPDA program Desire on the part of banks to opt out of collateral pool, reducing their risk of loss under the SPDA program

28. 27 Change in Collateral Requirements Increased collateral that banks holding public deposits must pledge (effective February 2009) Increased collateral that banks holding public deposits must pledge (effective February 2009) public deposits (net of FDIC) under $50 million collateralized at 50% public deposits (net of FDIC) under $50 million collateralized at 50% public deposits between $50 million and $250 million collateralized at 75% public deposits between $50 million and $250 million collateralized at 75% public deposits over $250 million collateralized at 100% public deposits over $250 million collateralized at 100%

29. 28 2009 Legislative Action Enactment of HB1761 by 2009 General Assembly Enactment of HB1761 by 2009 General Assembly Allows banks that fully collateralize their public deposits to “opt out” of the collateral pool and be responsible for only securing their public deposits; no partial liability for the loss of Virginia public deposits held by another bank that defaults Allows banks that fully collateralize their public deposits to “opt out” of the collateral pool and be responsible for only securing their public deposits; no partial liability for the loss of Virginia public deposits held by another bank that defaults Implementation effective January 1, 2010, Treasury Board established guidelines to allow banks to opt out of the pooled arrangement Implementation effective January 1, 2010, Treasury Board established guidelines to allow banks to opt out of the pooled arrangement

30. 29 Collateralization of Public Deposits Effective January 2010 Two choices: Two choices: Pooled Method Pooled Method Dedicated Method Dedicated Method Annual Election Period Annual Election Period November 1 thru December 1 for next calendar year November 1 thru December 1 for next calendar year Savings banks can only use dedicated method Savings banks can only use dedicated method

31. 30 Pooled Method Liable for proportionate share of losses of uninsured and uncollateralized public deposits held by SPDA bank in default Liable for proportionate share of losses of uninsured and uncollateralized public deposits held by SPDA bank in default Collateralization requirements same as those adopted by Treasury Board in February 2009 Collateralization requirements same as those adopted by Treasury Board in February 2009 100% collateralization of public deposits if ranked “below average” by IDC bank rating service 100% collateralization of public deposits if ranked “below average” by IDC bank rating service Monthly reporting of public deposit balances Monthly reporting of public deposit balances Monthly reporting and pricing of collateral Monthly reporting and pricing of collateral No change in types of eligible securities that can be pledged as collateral No change in types of eligible securities that can be pledged as collateral

32. 31 Pooled Method Collateral Calculation Public Deposits (net of FDIC) $500,000,000 Collateral Requirement Tier 1 (50% of $50 million) $ 25,000,000 Tier 2 (75% of $ 200 million) $150,000,000 Tier 3 (100% of excess balances) $250,000,000 Total$425,000,000

33. 32 Dedicated Method No contingent liability for losses of public deposits when another qualified public depository fails. No contingent liability for losses of public deposits when another qualified public depository fails. Collateral requirements based on financial strength of each banking institution Collateral requirements based on financial strength of each banking institution Financial strength based on ratings assigned by IDC bank rating service Financial strength based on ratings assigned by IDC bank rating service Weekly and monthly reporting of public deposit balances Weekly and monthly reporting of public deposit balances Weekly and monthly reporting and pricing of securities held as collateral Weekly and monthly reporting and pricing of securities held as collateral Mortgage-backed securities and non-Virginia municipal securities valued at 80% of market value Mortgage-backed securities and non-Virginia municipal securities valued at 80% of market value Virginia municipal securities valued at 90% of market value Virginia municipal securities valued at 90% of market value

34. 33 Dedicated Method Collateral Requirements Banks rated superior – 105% Banks rated superior – 105% Banks rated excellent – 110% Banks rated excellent – 110% Banks rated below average – 120% Banks rated below average – 120% Banks rated lowest rating tier – 130% Banks rated lowest rating tier – 130%

35. 34 Dedicated Method Collateral Calculation Public Deposits (net of FDIC) $500,000,000 Collateral Requirement Bank rated “Average” @ 110% $550,000,000

36. 35 Composition of Pooled and Opt-out Banks

37. 36 2010 Legislative Action Legislation was introduced to amend Security for Public Deposits Act for recent changes Legislation was introduced to amend Security for Public Deposits Act for recent changes Codifies the pooled and dedicated methods Codifies the pooled and dedicated methods Redefines “public deposit” Redefines “public deposit” Simplifies payment of losses Sections 2.2- 4403 and 2.2-4404 Simplifies payment of losses Sections 2.2- 4403 and 2.2-4404 SB456 and HB1036 SB456 and HB1036

38. 37 Public Deposits Defined-Effective July 2010 “Public deposit” means moneys held by a public depositor who is charged with the duty to receive or administer such moneys and is acting in an official capacity, such moneys being deposited in any of the following types of accounts: non-negotiable time deposits, demand deposits, savings deposits, or any other transaction accounts. “Public deposit” means moneys held by a public depositor who is charged with the duty to receive or administer such moneys and is acting in an official capacity, such moneys being deposited in any of the following types of accounts: non-negotiable time deposits, demand deposits, savings deposits, or any other transaction accounts.

39. 38 Contacts

40. 39 SPDA Treasury Contacts (As of January 2010) Thelma Ingle Manager, Agency Accounting(804) 371-6009 Thelma.Ingle@trs.virginia.gov Kristin Reiter Director, Operations Division(804) 225-3240 Kristin.Reiter@trs.virginia.gov E-mail:SPDAMail@trs.virginia.govSPDAMail@trs.virginia.gov SPDA information on Treasury’s website: www.trs.virginia.gov/Operations/operations.aspx

41. 40 Department of the Treasury Fraud Prevention Disbursement Accounts

42. 41 Payee Match Positive Pay Definition The Payee Match Positive Pay service provides the Commonwealth of Virginia (COV) with a high level of protection against unauthorized disbursements and fraudulent checks. Checks presented for payment, including those presented for encashment in the branches, are matched by check number, dollar amount and payee name against COV’s check issue file. COV is then notified of any checks that do not match this criteria and instructs the bank to pay or return the item.

43. 42 Payee Match Positive Pay MAJOR FEATURES COV issues and mails checks on behalf of each agency. 24 hours prior to the issuance, COV sends an electronic data transmission file containing the check information to the bank. The bank updates the check issue information to the teller system several times per day, which assists in making sure the most recent check data is available to the tellers for verification. The bank matches the paid (posted) checks against the issued checks and notifies the COV of unmatched items via an Internet-based bank information reporting service.

44. 43 Payee Match Positive Pay How It Works COV’s check-issue information is electronically transmitted to the bank at least 24 hours prior to the issuing of checks. Any manual check issues or cancellations are entered via the bank’s Internet-based information reporting service up until the end of each business day. As checks are presented for payment, the bank matches the check number, amount and payee against the issue file to identify unauthorized items. Notification of any checks that do not match COV’s issue information is provided through the bank’s Internet-based information reporting service, whereupon COV indicates its decision to accept or return each check online. Images of the checks in question are provided. The pay/no pay decision must be made by 2 p.m. ET. If a pay or return decision is not made by the daily cut-off time, exceptions are either paid or returned based on COV’s pre-determined default decision.

45. 44 Payee Match Positive Pay Benefits COV is protected against unauthorized check disbursements. Reduces research time and expense as only authorized checks are paid. Reduces potential legal expenses for COV. Helps control/reduce audit costs associated with fraudulent checks.