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Enhance Your Net Interest Margin and Reduce Operational Expenses
with FHLBNY Municipal Letters of Credit
Maintaining a sustainable income in today’s low interest rate environment is no small achievement, especially when increased compliance costs associated with new regulatory requirements and an overall weak economy put additional strains on income. As a result, members continue to look for ways to reduce expenses and increase profitability. Members faced with flat to declining net interest margins understand more than ever that every basis point counts and are looking to the FHLBNY for solutions.
Historically, municipal deposits have provided a stable and valuable source of funding for lenders. Over the last decade, the amount of municipal deposits held by members has steadily grown (top chart).
This in turn has resulted in an increased need for pledgeable securities to collateralize municipal deposits. However, members are reluctant to purchase investment securities to collateralize these deposits given the low yields associated with these instruments. As a result, the amount of securities available to be pledged has declined, as seen in the bottom chart.
To meet the collateralization demand, members have reconsidered the traditional practice of using securities due to the additional costs and time associated with pledging securities as collateral. Members have been partnering with the FHLBNY to support their municipal deposit business by utilizing triple-A-rated FHLBNY Municipal Letters of Credit (MULOCs) as a substitute for securities collateral.
Enhance Net Interest Margin
Why purchase low-yielding securities as collateral for municipal deposits? Instead of purchasing securities specifically earmarked as collateral for municipal deposits, consider using the low cost MULOC to help increase net interest margins by investing cash into much higher yielding loans. The cost of a MULOC was reduced to 9 bps per annum in 2012, making this product even more attractive.
Reduce Operational Expenses
The MULOC can also be utilized to help reduce or completely eliminate the costs associated with holding and reporting securities collateral at a third-party correspondent. The resulting savings and convenience easily offsets the cost of the MULOC.
For example, assume a member acquires a $5 million deposit from a municipality. Collateralizing the deposit with a $5 million, 5-year agency note yielding 1.02% would result in an annual income of $51,000 (assuming there are no haircuts). Alternately, if the member was to collateralize the deposit with a $5 million FHLBNY MULOC priced at a cost of $4,500 per annum ($5,000,000 x .09 bps) and originate $5 million in additional 30-year, 1-to-4- family residential loans yielding 3.62%, the resulting annual income, net of the MULOC fee, would be $176,500.
Additional Option — the Refundable MULOC
A Refundable MULOC is also available for those members that hold municipal deposits in transaction accounts. The Refundable MULOC offers all of the benefits of a MULOC, but is more efficient for collateralizing transaction accounts since it provides an opportunity for a partial fee reimbursement if the MULOC is not fully utilized. Members can request a Refundable MULOC equal to the estimated highest balance in a transactional account from 2 weeks to 1 year. If the actual high-balance in the transaction account remains below the estimated balance of the Refundable MULOC during its entire term, a portion of the fee will be refunded to the member when the MULOC matures.
MULOCs: Widely Accepted at the State and Municipal Level
MULOCs are recognized by municipalities and members alike as a very attractive and efficient way to collateralize municipal deposits. They are widely accepted by municipalities in both New York and New Jersey as collateral for deposits. Municipalities also find FHLBNY MULOCs appealing because it eliminates the need to monitor the value of pledged securities. Unlike securities, the value of a MULOC remains constant and does not change with market fluctuations. In addition, in the unlikely event of a member default, the municipality can submit a draw request to the FHLBNY for prompt payment, as opposed to waiting until the securities are liquidated.
“MULOCs have provided us with a low-cost, more efficient way to collateralize our local government deposits. They eliminate the need to monitor principal paydowns and security calls, which allows us to reduce the operational expenses associated with monitoring deposits. Using MULOCS also frees up our security portfolio for other uses.”
Schelin Crosby, President and CFO
The Citizens National Bank of Hammond - Hammond, NY
“The MULOC is an excellent alternative for us to collateralize governmental deposits because we can pledge our whole loans and keep our liquid securities free for contingency funding purposes. Furthermore, while the process to obtain the MULOC is very easy and the cost is fair, the operational efficiencies are significant as there are no security pay downs or margin calls to contend with.”
Maria C. Lopes, Vice President/Treasury Manager
Investors Bank - Short Hills, NJ
MULOC/Refundable MULOC Features and Benefits
- Utilize the FHLBNY's triple-A credit rating to secure deposits
- Increase a member’s liquidity position by freeing up the securities portfolio for other uses
- Increase earnings on the investment portfolio (MULOC can take the place of lower-yielding investments, such as Treasuries)
- Reduce the operational expense associated with monitoring deposits (eliminates the need to match CUSIPs, monitor principal paydowns, monitor securities calls, etc.)
- Reduce MULOC fees if full MULOC is not utilized
- Eliminate over-collateralization of municipal deposits with fluctuating balances » Are operationally efficient
MULOCs are available for terms from 2 weeks to 3 years and Refundable MULOC terms are from 2 weeks to 1 year. There is a $100 administrative fee if a refund is requested and a $100 draw fee applies to either if there is a default on the MULOC.
Visit the Letters of Credit section for additional information, or contact a Calling Officer at
(212) 441-6700 to discuss how MULOCs can be used to help positively impact your institution’s bottom line.
New Jersey Credit Union Members: Applying to be a GUDPA Participant?
The FHLBNY Can Help.
Now that insured credit unions in New Jersey are eligible to become depositories for public funds under New Jersey law, your credit union may be seeking participation in the Governmental Unit Deposit Protection Act (GUDPA) program.
Did you know that new GUDPA participants are required to collateralize 100% of their public deposits for a period of at least twelve months? As a FHLBNY member, you can take advantage of the MULOC or Refundable MULOC to help you efficiently collateralize municipal deposits.
Check out the new page the FHLBNY created specifically for members interested in participating in the New Jersey GUDPA Program.