REPORT FROM THE PRESIDENT

José R. González

On November 19, the FHLBNY declared a 4.10% dividend for the third quarter of 2015. The following day, the FHLBNY distributed $54.5 million in dividend payments to our members. In each of the first three quarters of the year, our dividend has been 4.10% and, through the first nine months of 2015, the FHLBNY has paid $163.8 million in dividends, a steady return on our members’ investment in our cooperative. This stability in our dividend is consistent with our history:  the FHLBNY has long provided our members with a consistent and reasonable quarterly dividend.

 

A STRATEGIC FOCUS

This consistency in our dividend is reflective of the overall strength and stability of our franchise.  This is seen in the daily availability of our advances – we closed the month of October with $88.8 billion in funding being put to work by our members. 

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25 YEARS OF THE AFFORDABLE HOUSING PROGRAM AND 20 YEARS OF THE FIRST
HOME CLUBSM

One of our Strategic Objectives is to provide value to the membership through relevant, mission-oriented products and services.  Since its creation 25 years ago, the Affordable Housing Program (AHP) has become part of the fabric of our cooperative.  It is a reflection of our mission and our purpose, and its relevance to our members and the communities we serve has never been stronger. 

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GIVING BACK

Providing community support is a priority for our business, and it is also a personal focus of our employees.  This year, our employees adopted the theme of “Let’s Give Back” for all of our employee teambuilding events, centered on activities that help our communities across the District.  We started with “PaintFest,” an event organized by The Foundation for Hospital Art to boost the spirits of patients and help the healing process. 

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Sincerely,

José R. González
President and CEO 

 
 

FHLBNY FUNDING STRATEGY

CONSIDERATIONS TO ADDRESS RISK AND CAPITALIZE ON YOUR FHLBNY RELATIONSHIP IN THE NEW YEAR

As we head into year-end, it appears that the Federal Reserve (Fed) is finally reaching a point where they are reducing their level of significant accommodation.  The Fed Fund Futures indicates that there is a 68% chance that the Fed will soon have its first rate increase since June 29, 2006.  In 2015 short-term interest rates remained virtually unchanged, while longer-term advances moved within a tight range, as seen in the following chart — the 5-year benchmark Fixed-Rate Advance rate varied by as much as of 54 basis points. 

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"The Callable Advance gives the member the option to extinguish funding after a pre-determined lock-out period."

THE CALLABLE ADVANCE

The Callable Advance gives the member the option to extinguish funding after a pre-determined lock-out period. For example, a member can book a 5-year fixed-rate Callable Advance with a one year “non-call” period.  After one year, the member can extinguish this advance with no prepayment charge, either one time or on a quarterly basis thereafter.  With the possibility that short-term rate hikes may be part of the Fed’s monetary policy, you may want to consider adding a term Callable Advance to extend liabilities and shield yourself against rising rates. 

In addition, you can use this advance to protect yourself from rates remaining stagnant or even declining, as this advance can be extinguished and rebooked down the line at potentially lower rates while maintaining the same average life of the existing advance.  If the composition of your balance sheet changes (i.e., if mortgage prepayments speed up and balances decline), the Callable Advance allows for a partial prepayment as well, and the member can extinguish unneeded funding. If you need liability extension now, but are considering being a part of a merger or acquisition, you may want to consider the Callable Advance.  In the event balance sheet repositioning may be required upon the deal closing, the Callable Advance will allow you to minimize your prepayment costs.

FIXED-RATE ADVANCE WITH A LIBOR CAP (FIXED-RATE WITH CAP)

This advance is structured as a fixed-rate advance with an embedded option tied to 3-Month LIBOR (3ML).  As 3ML rises and breaches a pre-determined strike threshold, the coupon on this advance will reset downward, on a quarterly basis, either a basis point for every basis point 3ML is above the strike threshold (1× multiplier) or one basis point for every two basis points that the index is over the strike (0.5× multiplier).  The value in this advance is twofold; it offers:

»  Real interest rate risk protection — should short-term rates rise rapidly causing deposits to reprice upward, the Fixed-Rate with Cap can offer interest expense relief and reprice downward, and

» Value when running your regulatory shock scenarios.  For example, if you have a 3ML strike threshold of 2.00% (with a current 3ML level of approximately 38 basis points) and you “shock” your balance sheet upward 200, 300, or 400 basis points, this advance quickly becomes “in the money.”  If you booked this advance with a 1-year or 2-year term with a high cap, the cost of the cap is minimal but very supportive of your Economic Value of Equity at Risk measurements. 

KEEP HIGH QUALITY LIQUID ASSETS (HQLA) UNENCUMBERED

One of the competitive advantages of the FHLBank System is the ability of members to obtain liquidity from whole loan mortgage collateral, a relatively illiquid asset.  Keeping high quality liquid assets unencumbered has become part of the regulatory framework for larger financial institutions (> $50 billion in total assets), which are now guided by the inter-agency LCR and the proposed NSFR. These liquidity measures stemmed from BASEL III reform, a response to the financial crisis with an objective “to improve the banking sector’s ability to absorb shocks arising from financial and economic stress, whatever the source, thus reducing the risk of spillover from the financial sector to the real economy.”2  As a result of the LCR and the proposed NSFR ratio standards, those required to comply are incented to keep HQLAs unencumbered, thus using FHLBNY advances to a larger degree versus other wholesale funding substitutes requiring securities as collateral.  In addition to our advance products, members have found significant value in using whole loan collateral to secure municipal deposits.  Our Municipal Letter of Credit (MULOC) program has expanded exponentially over the past several years, and now hovers at the $12 billion mark.  This is largely a result of members desiring to keep their HQLAs unencumbered, ease of use, and an improving economy causing security portfolios to shrink in lieu of loan growth.  The cost of our MULOC is 9 basis points3 and its par value never fluctuates, so there is no need to monitor collateral levels based on market conditions.  MULOCs are available in terms from two weeks to one year. 

2Bank for International Settlements: Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems, December 2010 (revised June 2011).

3Members in weaker financial condition may be required to pay 11 basis points per annum for a MULOC.

MEMBER-DIRECTOR EDUCATION PROGRAM

The unprecedented pace of change in the global and domestic economies and the associated impacts can be difficult to monitor and manage.  The FHLBNY has a very diverse membership and we monitor the operating landscape of all our members very closely.  We offer an education program specifically created for our members’ directors and managers and we encourage you to use us as a resource.  We will visit your institution or you can use our corporate headquarters in New York City.  We welcome the opportunity to discuss the operating landscape, trends for the future, and strategies to consider to help address current and future risks.

Session held at the FHLBNY’s corporate headquarters in New York City for member, The North Country Savings Bank, Canton, NY

 

Our message to you as we head into 2016 is this: consider the many ways in which you can leverage your relationship with the FHLBNY. We are here to serve you, our shareholders.  Contact your Calling Officer at (212) 441-6700 to discuss your specific business needs.

1As reported in the FDIC’s Statistics on Depository Institutions Report and Quarterly Banking Profile - Second Quarter 2015.

 

FOUR NEW MEMBERS WELCOMED IN 2015

» American Home Assurance   » Belmont Insurance Company
» Genesee Valley Federal Credit Union  » Savoy Bank

  FOLLOW US TO SEE HOW WE’RE CONNECTING TO COMMUNITIES

 

 


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