Case Study: Community Development Advance Strategies

Case Study:  Community Development Advance Strategies

0:02 
Everyone, my name is John Kornacki. I'm the Financial Strategist here at the Federal Home Loan Bank of Boston. Thanks for tuning in today. Today, we have a case study titled, “Community Development Advance Strategies.”
0:19 
So, before we go into the details here, I just want to provide an overview of what a CDA Advance is. CDA is short for a Community Development Advance and these are discounted advance products that support affordable housing and economic development initiatives. We have two specific products, CDA and CDA Extra. Each of them has different requirements in order to qualify, which I've shown here, and there's more detail that it's worth exploring with your relationship manager. With CDA Extra Advance you can qualify for up to $15 million per year, and [with] the CDA you can qualify for up to $35 million per year.
1:04 
Community Development Advances really offer a lot of value to our members that qualify and utilize them.
1:12 
It's our lowest cost of funding product that we offer, and it allows our members to expand community development lending within their local markets.
1:22 
And by having access to this low-cost funding, you can compete on term and rate in your market as well as manage your balance sheet effectively in terms of locking in spread and managing interest-rate risks. So, they offer a lot of value when thinking about: how do you fund your balance sheet and compete … in your local markets.
1:49 
I mentioned that the CDA products are lowest cost advance products. So, I just want to put some numbers behind that to give you some perspective on how much savings we're talking about.
2:00 
So, the rates here were pulled October 28 of 2021, and this graph on the top is showing different rates across the term spectrum, from one year out to five years, with the green line showing our Classic Advances and the different shades of blue showing CDA and CDA Extra. So, you can see by looking at the table below, just how much savings we're talking about here, if you go out to two years and beyond, you're looking at over 20 basis points of savings, whether it's the CDA or CDA Extra. And now to four or five years on the CDA Extra, specifically, you're seeing 27 basis points of savings. So, there's some real savings there, and it's definitely worth taking a look at. And we're going to go into some strategies in the next few slides where this may make sense for you.
2:52 
The first strategy I want to get into here is utilizing our Forward Starting Advance feature.
2:58 
And, this is a feature that can be used with a number of our advance products.
3:02 
But today, specifically, I'm going to focus on CDA Advances.
3:09 
And this is a feature that allows you to initiate an advance today where you lock in the rate, but the funding actually gets dispersed in the future period of your choosing -- out to two years.
3:22 
And so, there's a lot of benefits to utilizing a Forward Starting Advance, which
3:29 
you know, the main one here being you can mitigate interest-rate risk exposure.
3:34 
So, if you're worried about rising rates, whether that you have a conviction that rates are going to rise substantially in the near term,
3:43 
or your balance sheet is exposed to rising short-term rates, then this is a feature that can allow you to, you know, lock in rates today and get that funding disbursed at a future period.
3:59 
Another great benefit here is you can plan for deposit runoff.
4:04 
So, if you have CDs that are going to run off and you don't think those are going to renew, then you can … fill the gap in funding by taking out a Forward Starting Advance. Same thing on the asset side of the balance sheet.
4:19 
If you have growth that you're planning for, whether it's a loan purchase or an investment, then you can fund it and time it for when that asset is going to come on the books.
4:34 
Then, when looking at in terms of the CDA Advance, … we talked about the limits per year.
4:42 
And so, this graph is showing that you could initiate a forward starting CDA in 2021 and disburse that in 2022 and that advance would go towards your 2021 allotment. So that would not prohibit you from still utilizing your 2022 advance alignment. So … that's a great benefit here as we approach year end in thinking about how to, if you have a funding need for next year that needs to be filled, that this forward starting CDA
5:17
is a great, a great feature that can help you fill that gap.5:24 The next strategy I want to discuss here is restructuring advances.
5:28 
And this is a topic that's especially top of mind for a lot of our members and, you know, trying to find ways to reduce cost of funds.
5:38 
And so, this is a strategy where if you have an existing advance, you may be able to reduce that rate on the advance and extend, by extending the maturity on the advance.
5:52 
And so, what we're talking about today is utilizing this strategy of restructuring advances but combining that with restructuring into a CDA product, whether that's CDA or CDA Extra to increase the savings.
6:10 
So, with a restructuring strategy, typically you extend the maturity on the advance, you reduce the rate, and what that does is that mitigates your exposure to rising rates because you're extending that maturity increase in the average life on your liabilities.
6:29 
Another great thing … there's no additional funding needed.
6:32 
So if you have excess cash, you don't need cash, but you're either exposed to rising, intermediate rates, or you are worried about rising intermediate rates, you can utilize this strategy without any additional funding being added to your balance sheet.
6:50 
And so, when you combine the restructuring of the advance with the CDA and CDA Extra product, you get additional savings.6:58 So, this chart here is showing … you get savings from 109 basis points with the typical Classic restructure to 130 basis points with a CDA structure. And so, a little over 20 basis points additional savings on that. And so, you went from 266 on the initial advance and you extend out to three years, and you see 130 basis points of savings which is substantial in today's environment,
7:33 
when we're seeing asset pressure from loans repricing and low-yielding investment options on the asset side of the balance sheet. So, every little bit on the liability side of the balance sheet certainly helps in today's environment.
7:53 
Another great benefit of our CDA products and in that, you know, with the decreased interest cost is that you can add flexibility to the liability side of your balance sheet without taking on additional cost above a Classic Advance rate.
8:11 
And so what we're looking at here is if we were to look at our Member-Option Advance, and if you're not familiar with what a Member-Option Advance is, it’s essentially, you, the borrower, has the option -- you own the option -- to collapse the funding early.
8:28 
And there's different structures, and we can customize structures depending on … if there's an asset that you're trying to fund or what you're trying to do on your balance sheet.
8:36 
But I've given a couple of different examples here. One is a three year, one-year Member-Option, and the other is a five-year, three-year Member-Option. So, let's focus on the left side here, for simplicity, and look at the three-year, one-year Member-Option. So, this is a three-year final maturity.
8:55 
And then after there's an initial lockout period of one year, meaning that the advance has to stay on the books for at least one year. But at that one-year mark, you have the ability to collapse the funding and then every six months after that until the final maturity in three years.
9:11 
So, if rates decrease, or, you know, … you don't need the funding anymore, you have the ability to collapse the funding on the option dates. And if rates rise and you continue to need that funding, you hold onto that advance out to maturity.
9:29 
So, when you look at it from a pricing perspective, again, we're looking at the chart on the left side here,
9:35 
the three- year, one-year Member-Option is pricing at 138, and compared to the three-year Classic Advanced, that comes as a premium and remember, you own the option here, so you're paying for that option, and the ability to collapse the funding early.
9:52 
But if you were to take out a three-year, a one-year Member-Option CDA, you're looking at 117 or a three-year, one-year Member-Option CDA Extra
10:02 
you're looking at 113. So, you have the ability to get that optionality, own that optionality in an advance, and be able to collapse it early,
10:13 
and you can get it at a cost that's pretty close to the three-year Classic and actually below the cost, if you're using the CDA Extra. So, there's some flexibility that can be added to the liability side of your balance sheet if you need it. And …. this is really a tailor-made product for funding mortgages, as you know, mortgage prepayment speeds
10:38 
change with the market interest rates, so this is a great product to have if you see mortgage prepayment speeds pick up and you no longer need the funding. This allows you to collapse the funding and you can do it as at a reasonable cost.
10:57 
So, I just wanted to provide a few additional resources here if the CDA and CDA Extra product is new to you, linking out to our website.
11:07 
So, we have a page that describes the advance products, as well as eligibility for each of these. So, this will hopefully get you started in the in the right direction.
11:20 
That concludes today's presentation. As always, thanks for listening. Please feel free to reach out to myself if you want to dig into any of these strategies.
11:29 
If this is a new product for you, if you're not familiar with CDA or CDA Extra, also just please feel free to reach out to your relationship manager and they'd be happy to discuss it in more detail and help you to determine if you're eligible and how to take advantage of this low-cost funding.
11:46 
​So, again, thanks for listening and have a great rest of your day.