Member Services | Member Resources « Market Intelligence»

Market Intelligence

FHLBank Pittsburgh Advances – Looking Back, Looking Ahead

With a flat to inverted interest-rate yield curve, a softening of the mortgage market and an increase in competition for deposits and commercial assets, bankers have had a challenging year. Yet even in this environment, many member financial institutions continue to use FHLBank Pittsburgh advances to support their activities. Advance products of choice in 2006 included the Mid-term Repo, Convertible Select and Community Lending Program (CLP) advances – and the reasons for continued interest are as varied as the advances themselves.

Mid-term Repo Advances

Mid-term Repos are fixed- and adjustable-rate advances with terms from 3 months to 3 years. FHLBank Pittsburgh's advance portfolio shows outstanding Mid-term Repo advance balances increasing 25 percent from December 31, 2005, to November 30, 2006. The average term of the Mid-term Repo portfolio is 18 months, with a weighted average term of 9 months.

Advances in this maturities range seem the safe haven for funding balance sheets ahead of a possible Fed move. Many FHLBank Pittsburgh members who believe a Fed rate cut is more likely than a hike are making use of adjustable-rate advances or shorter term fixed-rate advances to be in position to refund themselves in the event of a future lower-rate environment.

Other members are taking on funding where it's cheapest, and the dip in the yield curve in the mid-term range provides some opportunity for the most inexpensive bullet funding. As of December 11, 2006, the least expensive fixed-rate bullet advance was the 3-year advance at a rate of 4.98%.

Convertible Select Advances

This desire for inexpensive funding is also shown by members' rekindled interest in Convertible Select advances. The Convertible Select advance carries an attractive upfront rate, provided the member sells FHLBank Pittsburgh the option(s) to convert the loan to a 3-month LIBOR adjustable-rate loan plus a spread at specific times in the future.

To help mitigate margin compression in the short-term, members are locking in rates from 30 to 100 basis points (bps) lower than that of standard advance products. While historically most members have been interested in fixed-rate Convertible Selects, more and more members are inquiring about adjustable-rate Convertible Selects, where initial rates of 3-month LIBOR minus 50 or 100 bps can be achieved.

Since this type of funding can be converted by FHLBank Pittsburgh when most advantageous to the FHLBank, members know that this funding strategy is only a short-term solution to margin compression and that it contains risks. Therefore, members should use this product in measured fashion.

Community Lending Program (CLP) Advances

Member financial institutions use CLP advances to support a wide range of community lending activities. After a request is approved by the Community Investment Department, members have access to funding at FHLBank Pittsburgh's cost of funds, 23 to 34 bps lower than standard advance rates.

Many members who make use of CLP advances return for more, finding it a cost-effective way to support local communities. Outstanding balances of the CLP advance portfolio continued to increase in 2006. As of November 30, 2006, CLP advances were $428.7 million.

Market Intelligence

In 2007, financial institutions will remain vigilant for any signs of weakness in the economy that could drive a response by the Fed. They will also continue to watch for the most cost-effective funding, whether playing it safe with the cheapest shorter-term advances or adding risk with attractive convertible advance funding.

Many member financial institutions will once again make FHLBank Pittsburgh advances a big part of their funding strategies in 2007. Look for FHLBank to explore new products and additional strategies as the needs of the marketplace change.

FHLBank Pittsburgh appreciates the business of its members in 2006 and looks forward to providing them with funding opportunities in 2007 and the years ahead. For more information on FHLBank Pittsburgh advances – or for assistance with funding strategies - contact your relationship manager, or call the FHLBank's member money desk at 1-800-288-3400.

DISCLAIMER

FHLBank Pittsburgh has taken reasonable steps to compile the data presented above, or has obtained such data from generally available public sources. FHLBank makes no representations or warranties, express or implied, as to the accuracy, completeness and timeliness of any assumptions or any other data presented herein.

The information presented herein is not investment or business advice, nor is it an offer to extend credit or buy any security or financial product; it is provided for informational purposes only. The customer must not rely on any of this information when making any investment, business or credit decision.

FHLBank products are governed by various agreements between FHLBank and its customers, as well as certain FHLBank policies and applicable regulations. In the event of any inconsistencies between information contained herein and such agreements, policies and regulations, the agreements, policies and regulations will be determinative.