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The Revised Seattle Bank Capital Plan: What�s Your Next Move?
As we draw closer to the effective date of the recently approved amendments to the Seattle Bank's Capital Plan, it may be useful to consider several "real-life" examples of how the revisions might impact a member institution's funding strategies.
By way of background, the Seattle Bank’s Capital Plan is intended to encourage new advance activity by Seattle Bank members via two key provisions:
- Creation of a pool of excess stock to support advances with maturities of less than one-year. This is ideal for those institutions that have fully utilized their Seattle Bank stock and who would otherwise be compelled to purchase additional Class B stock
- The addition of a new Class A stock with a six-month redemption period. Class A stock is a great tool for Seattle Bank members that have fully utilized their Class B stock and want to continue borrowing from the Seattle Bank. It can be used to support new advances or renewing advances initially capitalized by the excess stock pool.
How might these changes apply to your business? Let’s take a look at three example scenarios.
Case Study 1
On December 15, the 12th District National Bank wants to borrow $50 million in 91-day advances, but is constrained by a lack of excess Class B stock. This ongoing constraint has prompted the bank to increase its wholesale funding within the brokered CD market of late—notwithstanding the fact that brokered CD volumes are close to maximum internal guidelines, set as a percentage of total deposits. At last count, the bank had only $2.0 million in remaining borrowing power from the Seattle Bank before it would have to purchase additional Class B stock. Advance growth has been frozen in recent weeks, as the bank’s board of directors has been reluctant to purchase additional Seattle Bank shares.
Bank Details:
Credit Line: 25% of assets ($200 million)
Eligible Collateral: $225.0 million
Outstanding Advances: $125 million
Available Credit: $75.0 million
Additional Advances Presently Supported by Available Stock: $2.0 million
Solution:
The 12th District National Bank may access the pool of excess stock, given that the advance maturity is less than one year and, as such, will not be subject to the purchase of activity-based stock. In this case, the bank decides to borrow an additional $50 million in 91-day advances—and requests that the Seattle Bank increase its credit line to 30 percent in order to more closely correlate with collateral availability.
Case Study 2
On December 15, First Fourth Credit Union wants to borrow $5 million in seven-year Floating-to-Fixed Convertible (FFC) advances. Prior to the effective date of the Capital Plan revision, the institution had no available stock to support additional advance activity. Although First Fourth has been regularly purchasing Class B stock throughout the year in concert with its increased advance activity, in recent months the bank has been reluctant to make additional purchases of an equity class with a five-year redemption freeze.
Bank Details:
Credit Line: 30% of assets ($50 million)
Eligible Collateral: $50.0 million
Outstandings: $30.0 million
Available Credit:$20.0 million
Additional Advances Presently Supported by Available Stock: -0-
Solution:
First Fourth Credit Union may not access the pool of excess stock because the FFC term exceeds one year. Instead, the credit union elects to purchase $200,000 (4% activity-based requirement) worth of new Class A stock and requests to redeem the shares in six months’ time. Alternatively, First Fourth could pay down some existing advances in order to allocate enough of its own excess stock in order to satisfy the new advance requirement.
Case Study 3
On December 15, a de novo member of the Seattle Bank wishes to borrow $10.0 million in six-month advances. As a new member, based upon 0.50% of its mortgage-related assets, the institution is subject to an assumed membership stock requirement of $100,000.
Bank Details:
Credit line: $50 million (20% of assets)
Collateral: $50 million
Outstanding advances: -0-
Available credit: $50 million
Assumed Membership Stock Requirement: $100,000
Because the maturity of the advance is less than one year, the member may access the excess stock pool and would not be subject to the purchase of activities-based stock. The new member would still be obliged to purchase $100,000 in Class B stock in order to fulfill the membership stock purchase requirement.
The advance stock purchase requirement would be calculated as $300,000:
[($10,000,000*.04) = $400,000; less $100,000 of membership stock requirement = $300,000]
The $100,000 of membership stock would be applied to the advance stock purchase requirement first. In this instance, the $300,000 advance stock purchase requirement may be satisfied by utilizing the excess stock pool.
What’s your next move?
The Seattle Bank’s revised capital plan has been designed to address your unique circumstances and to afford your institution maximum funding flexibility. The plan is also focused on allowing the Seattle Bank, as your cooperative, to continue to grow advance volumes and enhance its profitability.
The amendments to our Capital Plan will go into effect in early December. Contact your Seattle Bank relationship manager today, to plan your next move.
John P. Biestman, CFA, is Director of Business Development at the Federal Home Loan Bank of Seattle.
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