Brokered CDs - Bankers` Bank of the West

BANKER’S RESOURCE: Brokered CDs
WHAT?
Brokered Certificates of Deposit are issued by individual banks and sold to retail investors across the country who typically buy in smaller increments as low as $1,000. Because each investor will usually keep his or her purchase in each
bank under the FDIC limit, the investors get the benefit of the guarantee, as does the issuing bank in the form of lower
interest expense.
As with every part of any bank’s balance sheet, BBW Capital Advisors strongly urges our clients to consider all consequences and contributions to the overall risk/reward profile of the institution. Please call our offices to discuss the specifics of this and other related opportunities for your bank.
WHY?
There are a number of attractive features for issuing banks:
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These deposits are stable deposits, and typically not eligible for withdrawal except for death of the beneficial owner.
Allows banks to sell larger CDs in one transaction, usually $2 million - $25 million.
Provides long-term, stable, fixed-rate funding—ability to issue typically from 3 months to 10 years.
Increase in FDIC limits and “flight to quality” have created tremendous investor demand for CDs in recent months,
lowering the cost for issuers as investors seek the comfort of government guarantees.
Banks can issue callable CDs, where the issuer retains the call option, thereby taking advantage of falling interest rate
environments.
No collateral posting requirements.
Brokered CD rates have been very competitive with FHLB advance rates in recent months.
Lowers loan-to-deposit ratios when replacing non-deposit funding.
Timeline is typically only 8 days from pricing to funding.
Regulatory considerations? Recent proposals by the FDIC would raise insurance premiums on fast-growing banks that
are already heavily dependent upon wholesale funding. This is not to say that the increased premiums are not worth
paying in the context of many bank models, but might be a consideration for some.
(800) 977-0718
HOW?
DTC Eligible, Book Entry Form
Accounting
FDIC insured institutions can qualify to issue DTC
(Depository Trust Company) eligible certificates of deposit.
Brokered Deposits are standardized in the United States. All
banks and brokers use the same program, documents, and
procedures to clear the deposits through DTC. Issues are
deposited into the bank under a single Master Certificate of
Deposit in the name of “CEDE & Company, as nominee
for others.”
✓ DTC eligible CDs must be booked in your call report
under schedule RC-E Deposit Liabilities and Schedule
RC-O.
Available Structures
Interest Payments/Return of Principal
upon Maturity
✓ Non-callable (“bullets”)
✓ Callable
✓ Swapped
Types of Underwritings
“Best Efforts”—Best efforts to obtain the total amount of
the issue during the Offering Period at a specified rate. This
is typically the most cost-effective and widely used method.
“Firm/Guaranteed”—The rates and total amount of the
issue are guaranteed by the underwriter. This method is
usually 5 – 10 basis points more expensive than Best Efforts
underwritings.
Pricing
Rates indications are provided every Monday morning and
periodically during the week. Each individual issue is negotiated between the issuing institution and the retail broker
networks with the assistance of BBW Capital Advisors.
Amounts
Minimum: $2,000,000
Maximum: No limit, apart from market constraints, if any.
✓ The CD is booked for the actual amount of the CD,
FDIC insured and in the Memoranda section as “fully
insured brokered deposits” per the instructions provided
by the FFIEC.
Interest payments and principal can be paid to DTC via
wire or ACH.
Patriot Act Compliance/Customer
Identification
Compliance for banks issuing a brokered CD is minimal.
The due diligence required is mostly done at the registered
brokerage firm level. Banks are generally required to have
their Brokered CD underwriters furnish them with evidence
of FINRA and SEC registration and annual outside audits
which confirm the brokerage firm is completing the AML
due diligence required by the regulators. This is submitted
to your bank on an annual basis by the underwriter. The
rest of the work is done at the brokerage firm level, which
means that your bank doesn’t need to spend time and resources dealing with the paperwork required to open a new
accounts, send out monthly statements, confirms, and the
typical documentation associated with a new account.
Call BBW Capital Advisors to discuss further,
or email us at [email protected].
(800) 977-0718