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2011 Highlights — The Year in Review
As the end of another year approaches, we would like to review several changes made in 2011 to enhance your membership and improve our strategic partnership. Products were extended or expanded, processes were simplified, and various system adjustments were made as we continually strived to provide value to our members through relevant, mission-oriented products and services.
Product and Service Updates Made for You to Maximize Your HLB Membership
Changes to Advance Terms
The term of the Repo Advance was extended from 5 to 10 years providing members with an additional savings on term advances when investment securities are used to collateralize the advance. In addition, the minimum term for Adjustable Rate Credit Advances was reduced from 1 year to 6 months for 3-month LIBOR advances and from 1 year to 3 months for 1-month LIBOR advances, adding greater flexibility for members looking to fund assets and reduce basis risk.
Parameters Expanded for Advance Modifications
The parameters of the Putable Advance Modifications Program were changed to add the ability for members to, not only modify the terms of existing Putable Advances, but also modify Putable Advances into new Fixed-Rate Advances.
We simplified the way members utilized their pledged securities collateral between Repo and non-Repo accounts. The new process enables greater flexibility between these accounts by reducing the number of correspondences between the HLB and members regarding collateral shortfalls. It also enables the HLB to pledge a member’s unencumbered eligible investment securities collateral to the appropriate indebtedness account, if the member elects the HLB to do so on their behalf.
Dividend and Membership — Continued Performance and Growth
Members continued to enjoy above-market-rate dividends throughout 2011. The annual HLB dividend for the year has averaged 4.33% thus far. To illustrate the added benefit of the HLB dividend, consider the following example.
|Example of HLB Dividend Benefit Using an Overnight Advance (O/N)
|Principal Amount of O/N Advance
|Required Stock @ 4.5% of Principal Amount
|O/N Interest Cost on Advance @ .35%
|O/N Interest (dividend) on HLB Stock @ 4.33%
|O/N Interest on Alternative Fed Funds Investment @ .25%
|Net Interest Benefit of HLB Stock
|Effective O/N Advance Rate with HLB Dividend Benefit
|Rate Savings with HLB Dividend Benefit
*Note: ($97.22 - $50.26)/$10,000,000 x 360 = 0.17%
The example looks at a $10 million borrowing at the overnight rate of 35 bps (indication from December 21, 2011). The borrowing would trigger a stock purchase of 4.5% of the borrowing (a $450,000 purchase), yielding on average 4.33% (based on an Actual/365 daycount basis) in 2011 compared to an alternative overnight investment yield of 25 bps. The benefit of the stock purchase would decrease the overnight borrowing rate to 17 bps — a rate savings of approximately 18 bps.
Membership continued to be an attractive option for financial institutions looking for access to wholesale liquidity. This year, 15 new members joined the HLB, and several membership applications are in the process of being finalized.
In addition, many members who had not borrowed in the past came in to test their borrowing capacity with the HLB. In recent interagency guidance, the FDIC, OCC, Federal Reserve, and NCUA have all indicated that it is no longer sufficient to simply maintain lines of credit — they must be periodically tested to ensure their viability. Some members who tested their borrowing capacity realized just how convenient it was to borrow from the HLB and ended up taking advantage of our long-term rates. With Fixed-Rate Advances at historical lows, the cost to extend further out on the curve has become more attractive (see chart provided).
Community Lending Program — Helping Communities Devastated by Hurricane Irene
On September 6, the HLB doubled its commitment to disaster relief efforts from up to $250 million to up to $500 million in response to the damage to many local communities by Hurricane Irene. Disaster relief funding is offered to begin the process of rebuilding communities designated by the Federal Emergency Management Agency (FEMA) as disaster areas. The funds are available through our Community Lending Program (CLP) and members can tap these low-cost funds to meet the
short-, medium-, and long-term funding needs of FEMA-designated communities.
Discounted CLP Advances can be used for small business lending, commercial/economic development activities, and gap financing while your customers’ insurance settlements are being worked out. Accessing funding through the HLB’s various Community Lending Programs is the cheapest way to borrow from the HLB.
Changes to the Member Products Guide and Correspondent Services Manual
In 2011, the HLB improved the Member Products Guide by modifying several of the following sections.
Changes to Prepayment Language and Rules
The 10% prepayment fee associated with Putable Advances transacted prior to January 1, 2007, was eliminated, the Adjustable Credit Rate Advance prepayment fee now separates the current period (which has a fixed rate) from later floating reset periods, and a prepayment methodology for the Callable Advance was added.
Collateral Updates and Changes
The maximum lendable value for securities collateral was changed for SBA Notes, FHLBank Debt, FICO Bonds, and Agency Z Bonds and Strips. In addition, the Representation and Warranties language was revised to reflect today’s regulatory environment.
Correspondent Services Manual Updates
Many Safekeeping transaction fees, such as Wire Notifications and Book Wires, were either eliminated or reduced if transacted using the 1Linksm website. (Please note that no changes are being made to fees for 2012.)
Although there were significant changes and improvements made in 2011, there’s still more to come. We will continue to seek ways to enhance our products and services for our members. If you have product suggestions that you would like us to consider, contact a Calling Officer at (212) 441-6700. We value your business and look forward to partnering with you in the New Year.
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