Pub. 8 2017 Issue 3

Fall 2017 23 West Virginia Banker M unicipal deposits can be a valuable source of funds for banks to diversify and grow their deposit base, increase liquidity and help their communities. Munici- pal deposits keep local dollars local. When placed at a local bank, revenues generated through taxes or other public utilities remain within the community and are often reinvested into mortgag- es, small business loans and the dreams of West Virginia families. Relying solely on securities to collater- alize these types of deposits can limit a financial institution’s options for asset/li- ability management. West Virginia banks that want more flexibility in the collateral types used to secure public unit de- posits have another option: FHLBank Pittsburgh letters of credit (LCs). Why Consider an LC? FHLBank’s LCs make sense for three good reasons. First, member assets are typically already pledged to FHLBank. Those assets – including real estate loans that are less liquid than most securities – can be used as collateral to support the LC. By using an LC, banks can use loan collateral and free up their marketable securities, thereby increasing available liquidity. The second reason LCs make sense for municipal deposits is efficiency. Bankers (municipal depositors, too) appreci- ate that the value of an LC does not fluctuate, thus eliminating the need to monitor and even potentially replace se- curities due to changes in market values. LCs also give members an additional investment in FHLBank Pittsburgh cap- ital stock, which may lead to increased dividend income, reducing the all-in cost of the LC and adding to an already efficient process. The final and perhaps most important reason West Virginia bankers are turning to LCs is to enhance their customer rela- tionships. Municipal depositors appreci- ate the safety of an LC that is irrevocable and secures the public funds with the Bank’s Aaa/AA+ credit rating. And they sleep better at night knowing they have direct recourse to FHLBank Pittsburgh, a $101 billion institution, should the member bank fail to pay the principal and interest of the deposit. Putting LCs to Work FHLBank LCs are issued directly to the municipal depositor on behalf of the member financial institution. Municipal entities in West Virginia are authorized to accept these LCs, as outlined in the West Virginia Banking Code cited below. Across the country, 47 states, the District of Columbia and the U.S. Virgin Islands accept FHLBank Pittsburgh LCs for pub- lic deposits. Specifically, Chapter 12 of the West Virginia Banking Code includes this paragraph that explicitly names LCs of Federal Home Loan Banks: The collateral security for the bond shall consist of bonds of the United States, or bonds or letters of credit of the federal land banks, of the federal home loan banks, or bonds of the State of West Virginia or of any county, district or municipality of this state, or other bonds, letters of credit, or securities approved by the treasurer. All bonds so secured are here designated as collaterally se- cured bonds. Applying for an FHLBank LC is easy. Once approved, members can achieve same-day execution online and retain beneficiary information for convenient future use. Cooperative Strength FHLBank Pittsburgh is one of 11 Banks in the Federal Home Loan Bank System, which was established by Congress in 1932. In more than eight decades, no FHLBank has ever incurred a credit loss. This remarkable record can be attributed to a business model requiring collat- eralization of all loans, conservative underwriting standards and strong credit monitoring policies. The System as a whole, and each FHLBank individually, holds a pristine credit rating. West Vir- ginia bankers and municipalities can rest assured knowing their FHLBank letter of credit is rock-solid.  For additional information or to apply, FHLBank Pittsburgh members can call their relationship manager or FHLBank’s Product Delivery Service Center at 800-288-3400, option 2. Letters of Credit Help Banks Gain Municipal Deposits By Larry Swingle and Vincent Moye, FHLBank Pittsburgh