Allegacy Federal Credit Union

Allegacy Federal Credit Union’s mission is to help its members make smart financial choices. The Allegacy team understands that being successful is not just about offering a full portfolio of financial products, but also taking the time to understand members’ needs, providing sound advice and innovative solutions, and creating an environment where members’ best interests are being met. These guiding principles have been a recipe for success for the Winston-Salem based institution, propelling Allegacy to become one of the largest credit unions in North Carolina, serving more than 110,000 members.

Offering mortgage products is an important way for Allegacy to meet its members’ needs. Over the last few years, the credit union has sold the majority of its fixed-rate mortgage originations on the secondary market. This activity, combined with growing retail deposits, left Allegacy flush with on-balance sheet liquidity. In 2011, the management team began considering strategies for loan growth to help put this liquidity to work and increase net interest income. This analysis included the potential to retain 15-year and shorter fixed-rate mortgages on the balance sheet.

Managing Growth and Risk

Initially, Allegacy funded its growing mortgage production with proceeds from maturing securities. After a significant reduction in the securities portfolio, Allegacy sought additional sources of funding that would not only provide liquidity for lending but also help them manage risk associated with holding long-term assets on the balance sheet.

“We were not looking to match-fund specific loans but instead wanted a macro-hedging solution that would enable us to manage risk to the balance sheet overall,” said Cosby Davis, chief financial officer for Allegacy Federal Credit Union. “After considerable analysis of mortgage prepayment possibilities and resulting loan pay-down patterns, we turned to FHLBank Atlanta to help us mitigate the interest rate risks of our retention strategy.”

The hedging strategy developed with FHLBank Atlanta involved two phases. The first phase included a strategic restructuring of Allegacy’s existing advance portfolio with FHLBank Atlanta. Through this restructuring, Allegacy was able to lengthen its liabilities in a very low interest rate environment and ultimately reduce average borrowing costs.

The second phase included two new advance structures. Allegacy leveraged the Bank’s expanded advance product portfolio to create a customized structure that would help fund loan growth while providing specific features to manage risk on the balance sheet. The credit union secured two amortizing Fixed Rate Credit Hybrid advances with a forward-starting call option, which allows Allegacy to repay the advance on a future date with no pre-payment fee. The call option was included to hedge against prepayment risk in the mortgage portfolio and added a very minimal amount to the advance interest rate.

A Trusted Resource

Much as Allegacy’s members rely on the credit union to help them make smart financial choices, Allegacy’s management team is leveraging its relationship with FHLBank Atlanta to make good funding choices. In addition to funding products, Allegacy’s team has taken advantage of educational opportunities hosted by the Bank. According to Cathy Pace, president of the credit union division of Allegacy Federal Credit Union, the team has gained insight into strategies for new product development and how to move forward in the current market while managing risks. Through these opportunities, the cooperative relationship between Allegacy and FHLBank Atlanta has evolved into a true partnership where Allegacy can rely on the Bank as a trusted resource to help it serve its members.

Davis added that the relationship with FHLBank Atlanta is helping Allegacy manage its financial responsibilities to the credit union’s members. Having the opportunity to lock in a known cost of funds, without early withdrawal risk, allows Allegacy to be comfortable that certain types of lending will contribute to capital growth. Additionally, by accessing stable, longer-term funding, beyond the traditional five-year member certificate term, the credit union can meet the fixed-rate mortgage needs of its members while managing overall interest rate risk.

“From a financial perspective, we have a responsibility in the interest of our members to manage the necessary growth of Allegacy’s capital and the exposure of net interest income to rate changes,” said Davis. “FHLBank Atlanta helps us with both of these critical objectives.”