FHLBank Pittsburgh

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FHLBank Pittsburgh June 2008 Regional
Conference ALM and Balance Sheet Management
Strategies
Steve Twersky Senior VP and Manager Portfolio
Strategies Group FTN Capital Markets
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Agenda

• The Depository Landscape
• The Bond Market
• Earnings Enhancement Strategies

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Depository Landscape

• Heightened Credit Focus
• Emphasis on Capital
• Liquidity Disruptions
• Performance Pressures

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Credit Focus

• Lending
• Residential mortgage deterioration
• Domino effect
• Full extent of downturn still uncertain
• Investment Portfolio
• Non agency MBS
• Other asset backs
• Corporate bonds
• Municipal insurers

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Liquidity Disruptions

• Funding for many institutional segments
  evaporated quickly
• Greatly impacted demand for certain asset classes
  
• Additionally forced large liquidations of assets
• Created a snowball effect
• Textbook example of supply/demand impact

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Sector Spreads Widen
15-yr MBS Spreads (Jan 2007 to present)
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Sector Spreads Widen
15-yr MBS Spreads (Nov 2000 to present)
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Interest Rates Much Lower
Fed funds target rate 5-yr UST yield
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Yield Curve Much Steeper
What a difference a year makes
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Yield Curve Slope
2 to 10-yr Treasury Yield Spread (Nov 2000 to
present)
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Impact on Risk/Earnings Profile

• Two groups
• PA banks under 1 billion in assets (173 banks)
• PA banks from 1 to 10 billion in assets (27
  banks)

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Credit Risk
Non-Performing Loan
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Credit Risk
Reserves to Total Loans
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Liquidity Risk
Loan to Deposit Ratio
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Liquidity Risk
Borrowings as of Assets
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Earnings Profile
Net Interest Margin
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Bond Market

• Key Issues
• Spreads
• Credit and Liquidity
• Impact on valuations

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Bond Market Credit

• Agencies (GSEs)
• Liquidity and capital key issues
• Credit less of a factor

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Bond Market Credit

• Bank Qualified (BQ) Municipals
• Subprime exposure of insurers
• Financial stress on municipalities
• General market bonds have been impacted more than
  BQs

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Bond Market Credit
Insurer Ratings
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Bond Market Credit
Moodys Rating Scale Equivalents
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Bond Market Credit

• Non Agency Mortgage Securities
• Much more focus on underlying collateral
• Liquidity impacted across the board
• Will tend to mirror macro issues

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Bond Market Credit

• Corporate Securities
• Spreads have widened from historically tight
  levels
• Divergence between financial and non-financial
  issues
• Wide variances within same sector and rating
  categories

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Bond Market Credit

• Pooled Trust Preferreds
• Valuations impacted by sharp changes in demand
  profile
• Large European buyers of AAA classes lost funding
  mechanisms
• Sector has segmented based on structure and
  collateral
• Limited secondary trading

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Bond Market Examples
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Earnings Enhancement Strategies

• Taking Gains
• Yield Pickup Swap
• Prefund Strategy
• Wholesale Leverage

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Yield Curve Slope
What a difference a year makes
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Booking Gains-Example

• 2-Year Bullet Agency
• 5 million par value
• 4.75 book yield
• 138 thousand unrealized gain
• 3.30 take-out yield

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Booking Gains-Example
Take out yield of bond sold
Book yield of bond sold
amounts in thousands
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Yield Pick-Up Strategy Example
Sale Candidates
amounts in thousands
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Yield Pick-Up Strategy Example

• Reinvestment
• 20-yr 5.5 MBS
• 5.51 yield
• 5.8 yr avg life
• Results
• Sell 5 million at an 8 thousand net gain
• Pick-up 85 basis points in book yield
• Increase annual income by over 42 thousand

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Portfolio Structure
Cashflow Profile
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Prefund Strategy

• Borrow 10 million matched to 1 to 2-year
  roll-off
• Average cost of 3.37
• Purchase 20-yr MBS at 5.51 yield
• Results
• Earn a spread of 214 bp
• Impact on pre-tax income

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Wholesale Leverage Strategies
Current Funding Rates
3.88 avg
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Wholesale Leverage Strategies
3 Examples using 20-yr 5.5 MBS
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Wholesale Leverage Option Three
1-yr Bullet 10/5 Convert 162 Spread
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Wholesale Leverage Option Three
1-yr Bullet 10/5 Convert 162 Spread
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Depository Landscape

• Heightened Credit Focus
• Emphasis on Capital
• Liquidity Disruptions
• Performance Pressures

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Disclaimer

• This material was produced by an FTN Financial
  Strategist and is not considered research and is
  not a product of any research department.
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  well as to FTN Financials trading desk. The
  trading desk may trade as principal in the
  products discussed in this material. Strategists
  may have consulted with the trading desk while
  preparing this material and the trading desk may
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