Captive Insurer Ban Takes Toll on Some Home Loan Banks

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A Federal Housing Finance Agency rule that will force some members of the Federal Home Loan Bank System out next year is likely to have a material effect on several of the cooperative institutions.

In second-quarter filings, the Chicago, Cincinnati, Des Moines and Indianapolis Home Loan banks predicted a drop in the level of advances as captive insurance companies prepare to terminate their relationships with the banks.

The Des Moines bank only has 13 captive insurance company members, but their $15.2 billion in advances equal 13% of the bank's total advances outstanding. Three out of the bank's top five borrowers as of yearend 2015 were captive insurance company members.

The Indianapolis bank, meanwhile, reported a 2% decline in advances in the first half of the year, "due primarily to repayments by, and restrictions upon new or renewed advances to captive insurance companies as a result of the final membership rule," according to the bank's press release.

The FHFA finalized the rule in February, arguing that captive insurance companies were not meant to be part of the Home Loan Bank system. The rule requires them to exit, but gives more time to firms that have been members for longer. Captive insurance companies which were admitted as members prior to Sept. 12, 2014 must leave by Feb. 19, 2021. But any firms which joined after that cutoff date must exit prior to Feb. 19, 2017.

The Des Moines bank said seven of its 13 captive insurance members, which hold $4 billion in outstanding advances, must leave by the 2017 deadline. The Indianapolis bank has 11 captive insurance members, eight of which must exit by next year.

The Cincinnati Home Loan Bank had 15 members, with $6.6 billion in advances as of Dec. 31, which must exit the system by 2017. But the bank said that will not pose a significant blow. As of June 30, the bank has $74.5 billion in advances, up 2% from the fourth quarter.

"Remaining advances to these members totaled $1.5 billion at the end of the first quarter. The subsequent loss of this membership segment will not significantly affect our financial condition or results of operations," the Cincinnati FHLB stated in its first-quarter securities filing.

The Chicago Federal Home Loan Bank has just three captive insurer members, all of which must exit the system by 2021. They held $13.0 billion in advances as of March 31, representing a significant chunk of the $46.4 billion in advances the bank held as of June 30.

For other banks, the impact of the FHFA rule will be negligible. The Atlanta Home Loan Bank said it had just two captive insurance members, but they "don't have any outstanding advances," a spokeswoman for the Atlanta bank said.

Overall, the Home Loan Bank system had an uneven quarter, with six of the banks reporting declines in income from a year earlier, while the remainder saw more positive results. Net income at the combined banks totaled $797 million, up 10% from the second quarter of 2015.

A significant chunk of that combined income was from the Federal Home Loan Bank of Des Moines, which was bolstered by a $200 million legal settlement that helped boost its net income to $232 million.

Advances also increased at the banks, jumping 11.4% from yearend 2015 to $689.7 billion in the second quarter.

The Chicago, Dallas and San Francisco Home Loan banks experienced a more than 20% increase in advances in the second quarter from December 31, 2015 thanks to demand from member banks, thrifts and credit unions. The Des Moines bank saw a 30% increase.

"Advances increased $27.1 billion primarily due to borrowings from a wide range of members with the most significant increase from a large depository institution member," the Des Moines FHLB said in a press release. That large member is Wells Fargo NA.

Most FHLBs posted modest increases in demand, however. The Atlanta and Cincinnati FHLBs experienced a 2% increase in advances during the first six months of 2016.

The New York FHLB reported $95.3 billion in advances as of June 30, up just 1.4% from the start of the year.

"The pace of balance sheet growth experienced in the previous years was driven by the borrowing activities of a few large members," according to a securities filing by the New York FHLB. "We expect limited demand for large intermediate and long-term advances because many members have adequate liquidity."

The Pittsburgh Home Loan Bank, meanwhile, reported $66.3 billion in advances as of June 30, down 11% from the second quarter of 2015. Five of the bank's largest members held 73.7% of total advances as of March 31, 2016.

"A significant amount of the advances continued to be generated from the bank's five largest borrowers, reflecting the asset concentration mix of the bank's membership base," the Pittsburgh bank said in its first quarter filing.

Ron Haynie, senior vice president at the Independent Community Bankers of America, said "most community banks are not hurting for liquidity."

"They can meet credit demand with deposits," Haynie said.

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