“We had a feeling rates were going to rise. When the lending officer at FHLBank Topeka suggested a Forward Settling Advance and the rate was cheaper, it was a no brainer!” said Homer Green, cashier at Citizens Bank of Kansas in Kingman, Kan.
FHLBank Topeka began offering bullet and amortizing advances with a forward settling feature in 2013. Since that time, 27 members have requested over 75 advances totaling $345 million. More and more members, just like Homer, are seeing the benefit of the Forward Settling Advance (FSA) commitment.
FSA is a good funding choice when you are:
- Locking in a rate today for future funding
- Protecting against rising rates
- Replacing maturing advances or brokered CDs
- Preparing for future loan growth
FSAs can be bullet or amortizing advances where the proceeds of the advance disburse (settle) up to two years in the future. Collateral and stock aren’t required until the settlement date. And, there are no interest charges during the pre-settlement period. Our minimum amount is $2.5 million for amortizing FSAs. The FSA bullet advance minimum recently was lowered to $10,000 to make it more accessible to all stockholders.
Rate Hikes Loom
The recent Federal Open Market Committee (FOMC) meeting indicated that economic conditions remained strong, GDP growth is increasing and labor markets have posted strong gains.
The FOMC projects, with 70% certainty, four rate hikes in 2018. The forward curve illustrates the market’s expectation of the rise in future interest rates through the forward swap curve. Using the 6-month forward swap curve, we can somewhat estimate where our bullet rates will likely be six months from today. Those rates can be compared to an FSA with a 6-month forward settlement. Beginning at the 5-year maturity, the FSA rate is projected to be lower than a current comparable bullet with a 6-month forward settlement. The benefits to using an FSA in this case are:
- The forward curve implies the FSA rate will be cheaper
- You don’t owe any interest for the six months until the advance settles
- If you need immediate liquidity, you can add a line of credit or a short-term bullet to carry you to the settlement date.
- The best benefit…. you know the cost today and don’t have to worry about where interest rates will be in the future.
"If you have cash needs: Lock in the rate today with an FSA, and when it settles, park at the Fed until you need it."
Homer Green | Citizens Bank of Kansas, Kingman
A Member’s Perspective
Last fall, Homer Green was planning how he would replace an advance maturing in May and fund the loan growth that was projected over the next several months. Citizen Bank of Kansas’ liquidity position would not support the loss of these funds, so Homer was happy to learn about the FSA, especially considering the rate would even be lower than the equivalent bullet. Homer discussed it with his ALCO committee and in October 2017, his bank locked two FSAs to replace a $6 million maturity in May 2018 and to cover February 2018 funding needs. Citizens Bank realized the additional benefit of not paying interest until the advance settles.
“The FSA provides great protection for your balance sheet against the current rising rate environment,” Homer said.
When the first FSA settled, Homer put pen to paper and figured the FSA saved them around $400,000 in interest expense versus a standard bullet. Homer has made a habit of comparing the FSA rates daily using FHLBank’s emailed rate indications.
Homer isn’t the only FSA fan. Joe Bedwell, vice president at First United Bank & Trust Co. in Durant, Okla., just entered into their seventh FSA commitment. Joe also learned about the FSA from an FHLBank lending officer who suggested this advance to fund long-term lending projects. Joe found that no matter how much he attempted to push adjustable rate loans, his customers prefer a fixed rate. “The FSA advance makes this situation more palatable,” said Joe.
First United has used FSAs to hedge some of their future fixed rate loans and to protect against rising rates. According to Joe, the math works. He calculated their savings, and on two FSAs their cost of funds was over 1% lower when compared to the bullet rate at the time the advances settled.
Both members agree the process is very easy. As Joe said, “Ask for a quote, lock it and sign a paper. That’s it!”.
Call the Lending Desk today at 800.809.2733 to discuss the FSA. We would be happy to quote a rate, discuss the process or provide a comparison.