FHLBank Topeka’s member institutions saw commercial loan growth exceeding 5% in 2014, and 2015 is off and running with early indications of positive growth in the commercial sector.

In a recent survey conducted by FHLBank Topeka, more than 75% of respondents fix commercial loan rates for no longer than three to five years, whether for real estate or equipment loans. The vast majority of respondents use Prime as an index to price commercial real estate and equipment loans. 

With the Fed signaling a rate hike, now might be the time to consider blending in some FHLBank advances to hedge the interest rate risk in your commercial portfolio.  

Current offerings priced with 3- to 5-year balloons or repricing frequency are in the efficient part of the interest rate curve with good spreads between asset yields and funding costs existing.

The Current Commercial Environment

The graph at the left illustrates the current market environment with commercial loans being priced around 150 bps above Prime.

Many members are locking the rate for 3 to 5 years with those terms at very efficient funding costs.

Members repricing the loan rate every 3 years at Prime+150 bps would have a net interest spread of 357 bps.

Blending Advances with Deposits

Members with additional available liquidity may choose to blend deposits into the funding mix. This will often increase the initial spread. Because deposit repricing often lags upward movements in interest rates, margins over the 3-year repricing period will likely hold up.  

The graph at the left illustrates a 15-year commercial loan that reprices every 3 years to Prime+150 bps with a blend of advances and deposits. Because the deposit cost of funds is lower than the advance, the member’s initial spread would widen to 381 bps.