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OVERLAND PARK, Kansas – Access to another liquidity source and to cheap long-term funding is enticing a number of corporate CUs to look at joining one of the 12 Federal Home Loan Banks. U.S. Central CU, Overland Park, Kansas, has joined the Federal Home Loan Bank of Topeka, and other corporate CUs say they are on the verge of joining an FHLB. Federal Home Loan Banks are government-sponsored enterprises (GSEs) and as such can borrow money at very favorable rates. They typically issue debt at just slightly higher rates than Treasury bonds. Corporate CUs and natural person CUs alike are looking to take advantage of long-term borrowing opportunities at FHLBs as well as shoring up another liquidity source. “You can never have too many liquidity facilities,” said Bruce Fox, senior vice president/chief investment officer for Southwest Corporate FCU, Dallas. “We’ll also be able to have access to lower cost long-term borrowing. These are long-term funding options that we don’t really think we have right now at an efficient level,” said Fox. Southwest Corporate FCU has been looking at joining the Federal Home Loan Bank of Dallas for some time now. Fox said the corporate would have joined already, however it is waiting for the FHLB of Dallas to finalize its changes to capital requirements. To join an FHLB an institution has to essentially buy stock in the FHLB based on a percentage of their mortgage assets. Fox said Southwest Corporate has seen some of its larger member CUs joining FHLBs. “My understanding from my membership here is they want access to longer-term funding opportunities that they can use to match their mortgage portfolio,” said Fox. As credit unions get deeper into mortgage lending, they are looking for longer-term borrowing to mitigate risk. Right now, FHLBs, with their GSE status, provide lower cost long-term funding than corporates, which excel in short-term funding. “Agency funding rates are generally 15 to 20 basis points below LIBOR,” said Fox. Fox said Southwest hopes to be able to take advantage of the FHLB of Dallas’ low-cost, long-term funding and pass that on to its smaller to mid-sized member CUs that may not want the cost of joining an FHLB directly. But one of the key reasons for Southwest Corporate joining an FHLB, said Fox, is shoring up another liquidly source. U.S. Central CU, the corporate of corporates, is now a member of the $30 billion Federal Home Loan Bank of Topeka. “Last summer liquidity got pretty tight. Any time liquidity gets tight you start evaluating liquidity sources, looking at additional alternatives,” said Dave Dickens, senior vice president of ALM for U.S. Central. Access to cheap long-term funds is also key, said Dickens. “If you’re a government agency, you can borrow cheaper, that’s particularly relevant in the greater than three-year maturity area,” said Dickens. “Shorter term we would tend to borrow in the capital markets using commercial paper issuance.” Rather than going out and issuing debt in the capital markets, corporates are finding that it may be cheaper and easier to utilize an FHLB. Dickens said he doesn’t expect U.S. Central to be borrowing from the FHLB of Topeka on any regular basis to meet liquidity needs. He did say the FHLB will help U.S. Central meet its corporate members’ longer-term borrowing needs, in essence pasing on the benefits its FHLB membership to its member corporates. “There wouldn’t be a yield advantage on the borrowing side for a corporate to join an FHLB,” said Dickens. At press time, representatives of the Federal Home Loan Bank of San Francisco were on their way to meet with WesCorp officials to discuss WesCorp potentially joining the FHLB. “We’ve looked at them in the past and we think that most of the corporates are joining for additional liquidity. We don’t have a liquidity problem at this point. That does not mean we’re not continuing to look at it for long-range planning,” said Dick Johnson, president/CEO of WesCorp. Johnson said in recent years he as watched as more and more natural person CUs have joined FHLBs. “We don’t ever fight with anybody that wants to do that. We’re within one basis point of FHLB’s rates, but generally they’re better off than we are. The subsidy they have is a wonderful thing for them,” said Johnson. Johnson stressed however that WesCorp would not be joining an FHLB to borrow from them and then turn around and lend to its members. “We wouldn’t do it for a way to arbitrage.The reason we would join right now is long-term liquidity,” said Johnson. “We’ve been looking at it for the past year. We haven’t come to any conclusion yet. We’re doing some modeling on our investment portfolio to see if it makes sense for us to purchase the securities we need to have in order to qualify for membership,” said Ed Fox, president/CEO of Mid-Atlantic Corporate FCU. In order to join an FHLB, an institution must have a certain amount of mortgage securities. Fox said he doesn’t yet consider FHLBs a competitor, though some corporates do. “I think they have something that they can offer us that we ought to check out,” said Fox. That something is cheap long-term funding. “When you’re a credit union competing with manufacturers for auto loans, maybe this is a way to get more profitable loans on the books,” said Fox. Fox said the FHLB option is a little less appealing right now because U.S. Central has already joined one, and Mid-Atlantic doesn’t want to duplicate something U.S. Central is already doing. However, Fox and others interviewed pointed out that each of the 12 FHLBs is very different and they each excel in different areas. “We’d have to look at our FHLB of Pittsburgh and see how it differs from the Topeka FHLB,” said Fox. Fox does see some value in Mid-Atlantic joining and acting as a sort of conduit for its individual member CUs to the FHLB, so that its smaller CUs don’t have to qualify individually for the FHLB. Some corporates are tight-lipped on the issue, but acknowledge that FHLBs are now a serious consideration. “We are analyzing the situation at this time,” Diane Mahar, vp of credit for Empire Corporate FCU. As of year-end 2000, about 500 CUs belonged to FHLBs. Frank Tiernan, senior vice president/treasurer for the Federal Home Loan Bank of Topeka said an increase in mortgage lending by CUs has caused them to look at joining FHLBs. “Credit unions were not able to be a member (of an FHLB) and borrow until 1989. If you look back that far I don’t know of a lot of credit unions that had mortgage assets sitting on their books. Now a lot more credit unions are in the mode of having mortgage portfolios,” said Tiernan, and they are looking to longer-term funding to mitigate mortgage portfolio risk. “We’re one of the only sources that they may have to get long-term funding. Theoretically they could probably try to issue in the capital markets, but that might be a little more difficult,” said Tiernan. [email protected]

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