Capital Markets School - Case Study

 Fed funds purchased. Upside

Downside

Efficient means of overnight funding. Relatively inexpensive funding source.

Limited availability (14-day window). Interest rate sensitive.

Contact:

First National Bankers Bank, Availability $9.0 million Bryant Bank, Availability $3.425 million CenterState Bank, Availability $14.0 million ServisFirst Bank, Availability $5.0 million

 Repurchase agreements. Upside

Downside

Efficient if collateral is available. Readily available with numerous structure options. Relatively inexpensive funding source.

Must be collateralized with eligible securities. Interest rate sensitive, if short-term.

 FHLB advances. Upside

Downside

Maximum flexibility structurally with cost relatively tight to Treasury curve. Can use mortgage loans as collateral. Can utilize an LOC from the FHLB in lieu of securities as collateral for public funds. Can reduce interest rate risk by matching structure to cover asset/liability gaps.

Borrowing terms depend on a credit rating which is based on internal credit rating. Must be collateralized. Credit rating determines if “blanket lien” or “custody” status is met.

Contact:

Federal Home Loan Bank, Availability $11.5 million as of September 30, 2021

The FHLB uses an internal risk analysis of a bank’s financial condition and performance and assigns an internal credit rating accordingly. This risk-focused approach evaluates a bank’s critical capital cushion, return on equity, and provision expense percentage. Generally, banks assigned credit ratings of A, B, or C may borrow under the blanket lien (blanket lien status) while banks rated D or E must deliver Qualifying Collateral to the FHLB (custody status). Members assigned a credit rating of E* are classified as “restricted members.” Based on the criteria explained above, the Bank’s rating as of September 30, 2021 is estimated to be a B, which allows the Bank to use its availability under the blanket lien status. See Exhibit B for specifics. Further, FHLB of Atlanta specifically uses a numerical rating system whereby the banks assigned a rating of 1 to 10 may borrow without restriction. The Bank’s current rating falls within this unrestricted range.

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