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Win Business and Generate Income with Letters of Credit
Advances and Letters of Credit

August 2018 - In today’s environment of persistent net interest margin pressures and intense competition for lending business, community bankers need an ever-growing arsenal of tools to achieve their growth and profitability targets. Financial strategies and solutions that provide balance sheet flexibility, preserve net interest margins, and help institutions build relationships in their local markets are key to gaining a competitive edge.

While FHLBank Atlanta shareholder institutions have long relied on advances to fund lending and manage interest-rate risk, a growing number of institutions are also seeing the advantages Letters of Credit can bring to their business development and balance sheet management strategies. The Bank’s Letters of Credit function as an independent guarantee of an institution’s obligation to a third party, and serve a number of purposes – from providing credit enhancements on bond transactions to securing lease deposits to collateralizing deposits from public entities. They can help institutions of all sizes strengthen relationships, win new business, and generate valuable fee income.

Securing Public Unit Deposits

The most common usage of the Bank’s Letters of Credit is to collateralize public unit deposits (PUDs) that exceed the amount insured by the FDIC. Quantum National Bank, an FHLBank Atlanta shareholder based in Suwanee, Georgia, has used the Bank’s Letters of Credit to secure PUDs for several years.

According to Quantum’s Chief Financial Officer Dana Litman, the community bank historically has not held a large securities portfolio and the process to pledge and release securities to back deposits from local municipal customers was too dependent on human intervention. Using a Letter of Credit to collateralize PUDs not only reduced Quantum’s administrative work, but also helped the institution simplify and strengthen its relationship with their public entity partners.

“Once we got the public entity comfortable with the letter of credit process, it was an easily understood and efficient way to collateralize deposits,” said Litman.

“We’ve worked diligently over the last three years to expand and deepen business relationships with local public entities and FHLBank Atlanta is helping us do that,” continued Litman. “We expect this effort to continue to bear fruit and we are seeing an increase of about 50 percent in business with public entities." 

Furthermore, with a Letter of Credit serving as deposit collateral, institutions can deploy assets for higher income-generating uses, such as investment partnerships and originating new loans. Litman of Quantum cited this benefit as another advantage of the Letter of Credit.

“Quantum has one of the highest net interest margins in the state of Georgia and solutions like the Letter of Credit contribute to these margins,” said Litman. “The Letters of Credit helped us free up funds to pursue various growth strategies on both sides of the balance sheet."

Boost Earnings with Letters of Credit*

Before Using Letter of Credit (LOC)

Secure PUD with $5mm, 5-year Treasury note 
yielding 2.84%
Income: $5mm x 2.84% = $142,000

After Using LOC

Secure PUD with $5mm FHLBank Atlanta LOC at cost of 9bps and lend $5mm in 1-4 first mortgages
at 4.73%
Income: $5mm x (4.73%-0.09%) = $191,500

Shareholder Benefit

$191,500 - $142,000 = $49,500 additional income when using FHLBank Atlanta LOC

*Rates and calculations are for illustrative purposes only. 

Win Business and Generate Income with a Confirming Letter of Credit

Two critical challenges facing most financial institutions today are the decline of fee income and the highly competitive lending market. Fee income is being compressed on multiple fronts, hurting revenue growth in an already low interest-rate environment. Credit card processing fees have fallen and overdraft fees have been slashed through legislation. Additionally, the cut-throat competition for lending has driven down loan origination fees and rates.

An FHLBank Atlanta Confirming Letter of Credit can serve as an excellent alternative to facilitating commercial financing deals, reducing costs for the borrower and generating valuable fee income from an off-balance sheet transaction for the lender.

Cullman Savings Bank, a community bank headquartered in Cullman, Alabama, used an FHLBank Atlanta Confirming Letter of Credit to both of these advantages. The Letter of Credit provided credit enhancement on the re-marketing of a bond issuance by the Surgery Center of Cullman. Access to the FHLBank Atlanta Letter of Credit enabled Cullman Savings to establish a new relationship with the surgery center and generate valuable fee income.

“The surgery center was looking for a banking relationship that was more hands-on and personal,” said John Riley, chief executive officer at Cullman Savings. “The Letter of Credit was critical for us to secure this relationship with the center, and they have turned into a very good customer for our institution.”

Katrina Stephens, chief financial officer at Cullman Savings, adds that the fee income from the Letter of Credit was an important side benefit as well as the ability to help this new customer save money.

“Both parties benefited from the letter of credit. Cullman Savings generated fee income while the credit enhancement to the bond enabled the surgery center to reduce their financing costs,” said Stephens. “It’s an all-around good deal for the relationship and our trust level with this customer remains very good.”

Benefits of Confirming Letters of Credit vs. Commercial Loans

- Reduce customer’s financing costs, strengthening the relationship
- Improve marketability of the customer’s bond financing in the capital markets 
- Generate fee income from the Letter of Credit 
- Facilitate customer financing without taking on interest-rate risk 
(Letter of Credit is off-balance sheet)
- Compete on structure and trusted advisor relationship with customers vs. loan pricing


For additional information on Letters of Credit, call Patrick Rutledge, Public Finance Relationship Manager at 404.888.8328 or

 The Federal Home Loan Bank of Atlanta is not a registered investment advisor. Nothing herein is an offer to sell or a solicitation of an offer to buy any securities or derivative products. You should consult your own legal, financial, and accounting advisors before entering into any transaction. Interest rates presented in this article are for illustrative purposes only. 

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