Symmetrical Advances Help Mitigate Losses when Interest Rates Rise

The Symmetrical Difference

The symmetrical advance’s foundation is similar to FHLBI’s most popular advance product, the traditional fixed-rate bullet advance: fixed rate, fixed term, and non-amortizing. In fact, in declining rate environments, essentially no difference exists between a traditional fixed-rate bullet advance and a symmetrical advance. If members want to prepay an advance with an above-market interest rate, prepayment fees for both advance types are calculated the same way.

In a rising rate environment, symmetrical advances can appreciate in value. For a small premium over traditional fixed-rate bullet advance rates, members are eligible for a prepayment credit of up to 10% of the advance’s principal balance, allowing members to monetize gains.

With the markets anticipating an increase in interest rates in 2015, now is the time to begin thinking about the symmetrical advance.

What Members are Saying

Farmers & Merchants Bank in Boswell, Indiana traditionally has a high concentration in agricultural loans on its balance sheet. A recent increase in residential real estate lending led executives to begin considering strategies to lengthen liabilities as longer- term assets on their balance sheet grew.

“We were thinking of taking a seven- to ten-year advance, but hadn’t done any-thing yet,” said Jason Hume, Farmers & Merchant’s CFO. “We were very comfort-able when we pulled the trigger. We were going to go with bullet funding anyway, and we viewed the symmetrical feature as a bonus.”

Hume had noted the release of the symmetrical advance and called the Marketing Department to learn more. After a few phone conversations and studying some educational pieces provided by FHLBI, Farmers & Merchants participated in an advance special featuring the symmetrical. “These specials allow smaller institutions to take advantage of products that normally have a minimum trade size,” noted Hume.

The entire process was simpler for Farmers & Merchants because they were ready to borrow. All agreements were in place and up to date, and they had already pledged collateral. “We were amazed at how easy the process was,” said Hume.

MutualBank in Muncie, Indiana was one of FHLBI’s first members to take a symmetrical advance. Chris Cook, SVP and CFO, already knew about the product but learned more about it at the Shareholder Symposium. “At first I was skeptical of the symmetrical advance. More specifically, I had a hard time understanding why I would prepay a below-market rate advance in a rising rate environment. However, after the Shareholder Symposium, I had a much better understanding of the product and its advantages,” said Cook.

Interest rate volatility during May 2013 gave Cook a good glimpse into the potential impact rising interest rates could have on MutualBank’s investment portfolio. As such, he noted that the symmetrical advance is a wholesale funding tool that could help mitigate the impact of rising interest rates.

Cook said that at some point, Mutual-Bank may want to either reduce the size of its securities portfolio or realign it by liquidating some existing positions. Faced with the prospect of liquidating portions of the investment securities portfolio at a loss, Cook is always looking for ways to reduce the overall impact on MutualBank. If rates rise, Cook could realize a gain upon prepayment of the symmetrical advance that would offset some of the securities liquidation losses.

About the Symmetrical Advance:

  • Term: Maturities are offered from 1 to 10 years
  • Rate: An additional spread is applied to the fixed-rate bullet advance rate offered to the member in exchange for the right to receive a prepayment credit
  • Termination Fee: The advance termination fee is the greater of 10 basis points multiplied by the advance notional value or 10% of the difference between the advance’s present value and its principal balance
  • Prepayment: If the advance rate is above market rates relative to an advance with a similar term, the settlement amount will be similar to the prepayment fees calculated for long-term fixed-rate bullet advances as outlined in our Credit Policy. If the advance rate is below current market rates relative to an advance with a like maturity, the member would be eligible for a prepayment credit and realize up to a 10% gain when the advance is prepaid

For more information about this advance or other products, please contact FHLBI's Advances Desk at 800.442.2568.