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Meeting Borrower Needs and Fueling Portfolio Growth with Mortgages Part 3: Fund Now and Increase Later

Competition for lending business in many Southeastern markets is intense. Offering a winning mortgage rate to attract and retain customers can put additional pressures on already-slim net interest margins. What if a lender could beat the competition by offering below-market rates while preserving its net interest margins? 

An FHLBank Atlanta Expander advance can be part of an innovative strategy that allows an institution to benefit in a rising-rate environment by taking on additional funding in the future at an interest rate determined today. The lender can be better positioned to grab market share by passing “yesterday’s rates” to borrowers, or to increase rates along with competitors and improve net interest margin.

Learn more about the Expander advance in the example below.

Fund Now and Increase Later

  • Goal: Offer more competitive pricing on 10- and 15-year fixed-rate residential mortgages to retain and attract customers
  • Solution: Five-year Expander advance with option to increase principal amount by two times after year one at the initial interest rate
  • Results: Ability to win new business by offering loans at below-market rates while preserving net interest margins

A $1 billion commercial bank in Charlotte, N.C., was formed in 2007 as one of the last de novo banks to open before the financial crisis. The timing of the institution’s formation allowed its management team to be aggressive, yet prudent in growing its deposit and lending portfolios because it was not constrained by declining asset quality. The bank quickly became a stable and trusted brand in its markets, growing from $200 million to $1 billion in assets in less than eight years. However, as the banking landscape stabilized and its competitors’ balance sheets improved, it began to see a decline in the production of 10- and 15-year fixed-rate residential mortgage portfolio loans. The bank’s management team elected to go on the offensive, seeking to offer more competitive pricing to solidify its status as a market leader, retain its current customers, and compete for new customers.

 mortgage-portfolio-part-3

After conferring with FHLBank Atlanta, the management team decided to use an Expander advance (Fig. 3) to give its lending team a targeted pool of funds to use in competing for current and new portfolio mortgage customers. The Expander enabled the bank to secure a fixed-rate advance today while retaining the option to borrow additional funds at the same initial rate at a predetermined date in the future.

The bank borrowed $5 million in a five-year Expander, which was priced at 1.75 percent. Although this rate was 20 basis points above the five-year Fixed Rate Credit advance rate, the bank gained the option to increase the original principal by up to two times the original $5 million at the end of the first year. When interest rates rose, the management team offered its loan officers the opportunity to receive another $10 million in funding at “yesterday’s rates” to compete for more portfolio customers. The loan officers quickly agreed, and the bank exercised its option to expand the principal. The Expander enabled the lending officers to protect the portfolio that they’d worked to build, while also giving them the opportunity to win additional business by offering very attractive rates.

Strategic Benefits of the Expander Advance

  • Lock in Low-cost Funding Now – and Later: The Expander allows the bank to secure low-cost fixed-rate funding today, with the option to borrow (expand) up to two times the original principal balance at a predetermined future date at the same initial rate. An Expander advance can be structured with the option to borrow up to five times the original principal balance at the same initial rate.

  • Pass the Benefit of Yesterday’s Rates on to Borrowers…or Bank It: When rates rise, the Expander provides the ability to grab market share by passing “yesterday’s rates” to borrowers, or to increase rates along with competitors and improve net interest margin.

  • Keep Key Customers and Loan Officers Happy: The ability to offer below-market interest rates on mortgage loans makes for happy customers. It also makes for happy loan officers, who have the ability to office something that the competition can’t – and win more business in the process.

For more information on the Expander advance and other strategies to fund portfolio lending, call your FHLBank Atlanta relationship manager at 1.800.536.9650.

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 and advance rates presented in this article are for illustrative purposes only.

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