MADISON, Wis. (9/22/14)--Federal Home Loan Banks (FHLB), a system of 12 regional cooperatively owned institutions, offer a number of products that can potentially help financial institutions grapple with liquidity, interest-rate risk and investments, among other operations.
This is Part 3 in a series on the relationship between credit unions and the Federal Home Loan Bank system. For Part 1 and Part 2, please use the resource links.
Nationwide, credit unions, which make up roughly 10% of the overall system's membership, have been using the products offered by FHLBs in various ways.
For example, American Heritage FCU, Philadelphia, with $1.4 billion in assets, has begun accepting public money as a public depository, and the FHLB of Pittsburgh facilitates that process by issuing a letter of credit so the credit union can take in the funds.
"In that arena you need to put up collateral to cover the deposits you're taking in from the municipality," Brian Schmitt, chief financial officer for American Heritage FCU, told
"Because we're a credit union, we're restricted on just taking any public funds in, so we have to specifically find a third party to issue a letter of credit on our behalf, and that's what we've done," he said.
American Heritage also utilizes five- and seven-year loans, or advances, at the FHLB of Pittsburgh, which it matches with its mortgage portfolio to hedge long-term interest-rate risk on its mortgage loans.
"The [National Credit Union Administration] likes this, using the leveraging for long-term borrowings vs. long-term assets," said Bruce Foulke, president/CEO of American Heritage. "They really like the idea of that because it's better managing your asset liability."
Uniquely, American Heritage works through a credit union service organization (CUSO) that recently qualified for membership at the FHLB of Pittsburgh to facilitate mortgage lending.
The CUSO qualified when all of the members of the organization successfully applied to the FHLB, which Schmitt said traditionally can take between nine months to a year.
"If you're a small credit union, $50 million to $60 million, you might not have" the capability to apply, Schmitt said. "$150 million-plus, they probably have the things they need."
Membership at a FHLB might become more difficult, meanwhile, thanks to a recent proposal by the Federal Housing Finance Agency to require credit unions to hold 10% of residential mortgages on an ongoing basis, rather than just when they apply.
The Credit Union National Association is collecting data on the number of credit union FHLB members that might fall below the 10% threshold and have their FHLB membership put at risk.
"Based on an initial review of the proposal, it may be harder for credit unions to maintain eligibility for FHLB membership because of the 10% requirement," said Robin Cook, CUNA assistant general counsel for special projects (
With $544 million in assets, Denali Alaskan FCU has qualified and remained a member of the FHLB of Seattle for years.
Among other services, the Anchorage-based credit union relies on the cooperative bank to safe-keep bonds and mitigate interest-rate risk.
Bob Teachworth, Denali Alaskan president/CEO and board member of the FHLB of Seattle, said that the FHLB offers generally better rates and terms than other sources on long-term borrowings.
"We're kind of a unique credit union because, right now, we're 105% loaned out, and about three or four months ago we sold $31 million in loans to Catalyst Corporation," Teachworth told
. "We're funding loan growth through advances from the Federal Home Loan Bank."
Credit unions also use FHLBs as a source of emergency liquidity.
Todd Pietzsch, spokesperson for BECU, Tukwila, Wash., with $12.6 billion in assets, told
that the FHLB of Seattle is a part of the credit union's contingency funding plan.
Foulke agreed that the FHLBs can be a big help in that regard.
"It's nice having (FHLBs) as an emergency funding source if you need it," Foulke said. "Now we don't need it, and I guess most credit unions don't need it today, but when liquidity gets in a crunch, at least you have another avenue to do that."
"People have relationships with the centrals and that's fine," Foulke added. "But for people that want an alternative, we'd say it's a great alternative you should really seriously consider, because they're strong institutions and they have great rates."