Case Study: Symmetrical Prepayment Advance

Case Study: Symmetrical Prepayment Advance

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Hi everyone. Thanks for tuning in today.
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Welcome to another edition of our case study series, this one titled Symmetrical Prepayment Advance.
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To start off here, I'm going to provide an overview of what the Symmetrical Prepayment Advance is,
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and in order to do that, I'm going to compare it to the Classic Advance, which everyone is familiar with.
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So, starting on the left side here you see a table showing the Symmetrical and Classic side by side with the product features listed below.
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And what you notice is most things are the same. The Classic and Symmetrical are both fixed-rate advances with fixed terms with principal due at maturity, and they're both prepayment eligible.
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The key difference here between these two products is the prepayment fee,
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and specifically, what happens to the prepayment fee if rates rise. And, you know, with the Classic Advance
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If … rates rise you're capped at zero, meaning, you know, if you're in the money there you can't realize a gain with the Classic Advance. You could prepay the advance and you wouldn't have to pay a fee. With the Symmetrical,
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however, if rates rise enough then when you prepay the advance and you're in the money, you can actually receive a credit 
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and that's going to be super beneficial depending on, you know, what your needs are and your balance sheet and what you're trying to do, what you're trying to use funding for.
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So, we're going to throughout this presentation, kind of touch on where this can come … into play
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But the key difference here is that, you know, this product provides you flexibility beyond what the Classic can provide you in certain rate environments, and certain strategies that you're trying … to utilize at your institution.
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OK, so now that you have a little bit of an overview here now, we're going to just touch on pricing real quick.
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So, same thing. We're going to compare the Symmetrical versus Classic 
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and this … graph here is showing various terms out to five years for both the Classic Advance shown in green and the Symmetrical Prepayment Advance shown in that light blue. And you can see across all terms here we're looking at about two basis point premium above the Classic Advance.
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And so we talked about, you have that additional feature there with, you know, the ability to realize a gain if rates rise and so there's value there. And so that value comes in the form of a two basis point, premium above the Classic and really in the grand scheme of … 
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things it's very minimal, and you'll see as we talk through some of these strategies, you know, two basis points … may seem like a lot in a low rate environment, but two basis points can actually materialize in your favor substantially when rates rise.
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So, now that we've talked about pricing and talked about the features of the Symmetrical, now we're going to get into … what happens in different rate environments to the value of the advance and the value that you can … realize as well.
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So, we're looking at an example five- ear advance.
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We're fast forwarding two years and we're looking at different rate shocks to that advance, both down and up environments.
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So you can see, on the X axis of this chart in a down rate environment, the Classic and theSsymmetrical move pretty close together in terms of the prepayment fee that you would have to pay if you were going to collapse the funding.
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However, when you look at the upright environments, you see the divergence, and you know what happens with the value of that advance.3:58With the Classic, you're capped at zero if you prepare the advance and up 150,
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you prepay par
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and the advance is collapsed.
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However, in the Symmetrical, you see that that value continues to rise and upright environments
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so as rates rise, the value of your advance decreases, which is a good thing for a liability. So if you prepay that advance and up 150, you actually can realize a 2% gain on that advance,
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and we're going to talk about the strategies in the next few slides. But …. it's important to see this, this graphical representation to show you where there's value in different rate environments. And you can utilize your liabilities to realize that value and help your institution.
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Alright so … now that you have … the overview of what the advance is, you know how the pricing is, and you know what happens in different rate environments, we're going to look at an actual example here.
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And so we're going to look at a $20 million Symmetrical Prepayment Advance5:05and we're going to go back in time to September of 2020, say what happens, what would happen if you took the advance back in September 2020, and where we are today.
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And so, you can see on the chart on the left side here the Classic Advance is priced at 77 basis points.
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in September and the Symmetrical is priced at 79 basis points. So we talked about that two basis point premium
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for the Symmetrical over the Classic, and that may seem like a lot at the time
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but fast-forward to today five years at 120.
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And so what does that mean for your Symmetrical?
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So if you see … this bluish gray circle here,
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in this first year you paid additional $4,000 of interest expense for the Symmetrical above that of the Classic Advance.
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But you also are in the money because we talked about if rates rise you can … realize that gain
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on the Symmetrical Prepayment Advance. So right now you have a $45,000 unrealized gain on this advance so we're still holding in our books right now in this example
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but we're going to talk through the different options that you have and where we talked about the flexibility that it can be afforded here i taking the Symmetrical over the Classic Advance when it makes sense.
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So, this first point here, you know, you took out a 79 basis points advance, it's now 120, it's the 120 market,
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you can keep that advance, right?
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You’re 40 basis points below the current five- year and your 20 basis points below the current four-year advance so obviously, as … rates rise and you have a liability that benefits … the liability and you keep your cost of funds low
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So you can keep that advance on the books and maintain your low cost of funds.
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Option two: partially pay down some of that advance and realize some of the gains.
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So … if you need earnings and need an earnings boost because of contracting margins, you can realize some of that gain and flow it through earnings and then, you know, replace it with either … low-cost core deposits that you may have inflows of or another advance.
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And then the last option here is you pay off the advance in full,
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you realize the gain, and you rebalance your deposit portfolio similar to what we do with the partial paydown replacing either a new Symmetrical or another advance that meets your needs or core deposits. So with this you benefit from the flexibility in different rate environments with the Symmetrical Advance above that of the Classic Advance.
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Alright so now bringing it all together and kind of going through a few different strategies here
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we've touched on them a little bit. You know the Symmetrical Prepayment Advance we talked about
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it adds flexibility above that of the Classic Advance.
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And so when you think about how you can utilize this advance, you know, the first point being you can support earnings in a rising rate environment.
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So as we touched on, as rates rise, that's a benefit
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to your liabilities as the market value decreases, and with the Symmetrical Prepayment Advance, you can actually realize the gain when you collapse the funding of the advance.
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So if you need a new an earnings boost, you can utilize your liabilities to help with that.
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Second point here, you know, in times when you need to rebalance or restructure loan or investment portfolios, for whatever reason, if there's credit risk, if you’re reaching concentration limits
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and you're kind of forced to take a loss on … the asset side,
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you can use the liability side to offset some of the impact to your income statement here.
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And then, the last point here … if you don't need borrowings any more, you know maybe you had a large increase of deposits … inflows
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prepaying this advance if you're in the money, can provide an efficient way to reconfigure your liability mix. So you can realize that gain on the … prepayment and boost earnings and then replace with that new inflow of deposits at lower cost funding so your NIM expands as well,
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so that can be super beneficial in certain rate environments as well as, you know, what your balance sheet is calling for.
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This concludes today's presentation. Hopefully you learned something here in … talking about our Symmetrical Prepayment Advance and what it can do to benefit you
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… add it to your toolkit. And when the pricing is opportunistic and … your balance sheet calls for it, know that this product can add a lot of value here. So, as always, if you have any follow-up questions, please reach out to myself or your relationship manager.
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Thanks for listening in today.