The Pursuit of Growth and Partnership with the FHLBNY
Since the financial crisis of 2008, many of our members have found it increasingly difficult to maintain and grow profitability. Margin compression has been the recurring theme given the limited opportunities to add assets at desirable levels. Members have sought additional yield through investing in longer-term securities and maintaining long-term mortgage production, adding to interest rate risk in the process. Some have embarked on significant change, where they have sought to capitalize on new business opportunities by entering new markets, expanding product lines such as multi-family, commercial real estate and consumer lending or broadening fee-based revenue streams by investing in or purchasing new fee-based business lines. Furthermore, members are increasing their investment in technological infrastructure to grow their business and attract new clients as they prepare for the “coming of age” of the millennial generation.
In a recent SNL1 blog post, ConnectOne CEO Frank Sorrentino stated “change is the only constant” and stressed that financial institutions must think differently, and adjust the way they do business to address changes in regulation, capitalize on evolving consumer behaviors, and achieve growth.
The FHLBNY can be a valuable resource to assist members in leveraging capital, growing assets and boosting earnings. The FHLBNY can provide the funding necessary to broaden your business lines or to improve your institution’s infrastructure so that you can be better positioned to thrive now and in the future.
Leverage Capital and Achieve Balance Sheet Growth
Since the financial crisis, several factors and concerns have altered the way members view how to leverage capital and grow the balance sheet:
1. Sitting on Cash: Some members have elected to maintain large cash balances due to concerns regarding the tenor of post-crisis liquidity inflows. We have seen that some members took years to deploy excess cash, and some still have significant cash balances because “surge deposits” can leave at a moment’s notice and they don’t want to be caught short.
2. Interest Rate Risk: Interest rate risk is a major concern in this low rate environment. Depending on the institution, opportunities to leverage capital may entail maintaining long-term mortgage production or purchasing securities with long-term maturities. Should core deposits experience a rapid outflow, interest rate risk positions could change significantly.
3. Intense Competition and Loan Pricing: Competition for deals has been fierce, limiting opportunities for balance sheet growth. Throughout our district, intense competition has driven loan pricing down to levels some consider “irrational.” This situation has put consumers in the “driver’s seat,” pushing down pricing and lengthening traditional loan terms. Operating profitably under these circumstances is challenging.
The FHLBNY can help members navigate through these issues and challenges profitably and conservatively.
Create Opportunity by Maximizing Borrowing Potential
Now is the time to ensure you have maximum borrowing potential at the FHLBNY to capitalize on opportunity and mitigate risk. Ensuring that sufficient back-up liquidity is in place at the FHLBNY can empower you to make the right decision regarding deploying cash reserves, leveraging your capital and growing your balance sheet, so that you can operate more profitably in a risk averse manner. Additional borrowing potential enables you to test the price elasticity of your deposit base by running different deposit pricing strategies, with the security of knowing you can “back-fill” liquidity shortfalls with FHLBNY advances should deposits move off the balance sheet. Speak to your Relationship Manager for a collateral review to determine if there are opportunities to enhance your liquidity position at the FHLBNY.
Liquidity at the Proper Duration
The FHLBNY has a variety of term products to assist with match funding assets that can help your institution profitably deploy capital while maintaining your desired interest-rate risk profile.
Regular Fixed-Rate and Amortizing Advances: Members who are portfolio lenders often retain a significant portion of long-term, fixed-rate mortgage production on their balance sheet. To mitigate interest rate risk, some elect to “lengthen” liabilities and reduce funding mismatches by using term fixed-rate advances, where they execute “laddered” strategies using a mixture of short and long-term advances, and fund to the average life of the underlying mortgage pool. Other members choose to fund mortgages and mortgage pools with amortizing advances.
Callable Advances2: This product allows members to extinguish their advance, in whole or in part, after a pre-determined lockout period either on a one-time or quarterly basis. Members can extinguish “out of the money” advances after the lockout, or they may opt to extinguish in part should prepayments on mortgages be greater than anticipated. Callable Advances can be used to fund the “tail” of a mortgage pool should the underlying mortgages experience extension (if not, it can be extinguished).
Fixed-Rate Advance with a LIBOR Cap2: This product offers members fixed-rate term funding with an embedded cap tied to 3-month LIBOR. If 3-month LIBOR breaks through a predetermined “strike” threshold (selected by the member), the advance will reprice downward, either a basis point for every 1 basis point that 3-month LIBOR is above the strike (1× multiplier), or 1 basis point for every two basis points that 3-month LIBOR is above the strike (0.5× multiplier), flooring at zero. Members have found this advance to be a good “macro” hedge to the balance sheet to preserve spread in the event of rising rates. As interest expense associated with other funding sources increase during a rising rate environment, this advance could potentially drop in cost. It may also be particularly helpful when running regulatory rate-shock scenarios, as this advance quickly becomes “in the money” in upward interest rate scenarios, assisting with Economic Value of Equity at Risk measurements.
Although the banking industry appears to be moving away from broadening branch footprints toward using technological innovation to engage customers, some members are still engaged in strategically expanding or revamping brick-and-mortar branches. Members can use the FHLBNY’s Community Lending Program (CLP) to help purchase, renovate, or start de novo branches. The CLP enables members to obtain reduced cost financing if they build, open or purchase a branch in a census tract that is at or below certain area median incomes. Additionally, CLP funding can be used to “prefund” branches so money is available to lend and to purchase securities in anticipation that deposit inflows will occur to eventually pay off the CLP advance. CLP Advances are generally 20-25 basis points lower than traditional advances; however, price reductions vary for structured products booked under the CLP. There are several ways to qualify for CLP Advances – consult your Calling Officer or visit the Community section on our website for further details.
New Business Lines
Members can leverage their FHLBNY partnership to help broaden existing business lines or enter into new ventures, such as multi-family and commercial real estate lending programs. Intense competition experienced in these categories has caused lenders to extend maturity terms more freely, creating additional risk exposure. Members often use FHLBNY advances as match funding to mitigate interest rate risk associated with these programs. Downward pressure on pricing has been prevalent for good loan deals post crisis as well – projects that qualify for our CLP could receive a reduced rate on advances, allowing spread to be maintained while mitigating interest rate risk. Some members new to these business lines may largely use FHLBNY advances to match fund deals initially, until sufficient prepayment data is obtained so that they can opt for different funding strategies. Callable advances are a potentially good choice to match fund commercial, multi-family, and CRE deals as well, as members can extinguish the advance (entirely or in part) after the lockout period should unexpected prepayments occur.
The FHLBNY is ready to assist and welcomes the opportunity to discuss the advantages of our partnership to your management teams and Board of Directors. If you would like to plan a FHLBNY presentation for your team, or have any questions regarding the strategies discussed in this article, please contact your Relationship Manager at (212) 441-6700.
1 Dobbs, Kevin. “ConnectOne CEO says banks can power through ‘gut-wrenching change’.” SNL Community Corner Blog. Web. 17 April 2015.
2 The Callable Advance and Fixed-Rate Advance with a LIBOR Cap require a $5 million dollar minimum.
1LinkSK® — the FHLBNY’s New Safekeeping Platform. Make the Switch Today!
The FHLBNY has implemented a new Securities Safekeeping platform called 1LinkSK®. This new online platform includes intuitive self-service features that provide your institution’s authorized users with the opportunity to:
View “real-time” monitoring of account activity, and
Customize reports and delivery methods.
Beginning on June 1st and running through December 31st, an additional discount of $5 per transaction will be applied to Purchases / Sales transactions initiated by members using the 1LinkSK® self-service feature.
Should you need assistance or more information about 1LinkSK®, our Custody and Pledging Services team are readily available every step of the way, at (800) 546-5101, or by e-mail at [email protected].
Enhancements to the Refundable Municipal Letter of Credit for Members Participating in the New Jersey Department of Banking and Insurance GUDPA Program
Report from the President: FHLBNY Files 2020 Form 10-K – Stability Throughout the Year
FHLBNY Announces Fourth Quarter and Full-Year 2020 Operating Highlights
A Review of Housing Statistics at the End of 2019
Five Ways to Manage Your Balance Sheet in a Volatile Rate Environment