Federal Home Loan Bank helps small banks and boosts affordable housing

Cindy Konich joined FHLBI in 1984 and has been its CEO since 2013. (IBJ Photo/Eric Learned)

The Federal Home Loan Bank of Indianapolis is a large bank with a low profile and deep reach into Indiana and Michigan communities.

The bank, which has $65.4 billion in assets, does not provide mortgages or deal with retail customers. It is a cooperative that lends money and buys mortgages to its members – 373 banks, credit unions, insurers and community development financial institutions in Indiana and Michigan.

Last year, the bank had $32.7 billion in outstanding loans to its members, allowing them to expand their business reach further than they could on their own.

“We really strive to serve small community institutions. It’s kind of our bread and butter,” said Cindy Konich, President and CEO of FHLBI.

Many of the bank’s members are institutions with assets of $1 billion or less, Konich said.

Home Bank, based in Martinsville, is a typical member. The community bank borrows money and sells its mortgages to FHLBI, giving it immediate access to additional capital when needed. Home Bank also uses FHLBI grant programs which support affordable housing and community development projects.

“We’re like the poster child for the Federal Home Loan Bank. We really need it,” said Dan Moore, CEO of Home Bank and Chairman of the Board of FHLBI.

Moore

Moore said FHLBI loans play a key role in helping his bank meet loan demand.

Business is booming in Martinsville, Moore said, and loan demand is high, posing a challenge for Home Bank.

Home Bank has assets of $315 million, which puts it squarely in small bank territory. (In comparison, Old National Bank, based in Evansville, the largest bank based in Indiana, has assets of $19.7 billion. JPMorgan Chase & Co., based in New York, the largest bank in the country , has assets of $2.7 trillion.)

Banks use their customers’ deposits as a key source of funding for loans, and a small bank doesn’t have many deposits on hand.

“Loan demand can, on many occasions, exceed our ability to fund them,” Moore said.

This is where FHLBI comes in. Home Bank can obtain advances from the institution, using its own mortgages or other assets as collateral. In turn, Home Bank can use this advance to fund new loans to customers.

Moore said FHLBI advances allow his institution to make 10-15% more loans than it otherwise could.

“That’s a pretty significant number,” he said.

Roots of the Great Depression

FHLBI, with its 246 employees based in Woodfield at the Crossing Business Park near Keystone Avenue and East 86th Street, is one of 11 regional banks that span the United States to make up the Federal Home Loan Bank system.

Gopalan

More than 7,300 credit institutions, or about 80% of the national total, are members of a federal mortgage bank.

Congress created the system in 1932, three years after the start of the Great Depression, to bolster the availability of mortgages, as mass defaults had undermined banks’ ability to fund mortgages through traditional means.

It is a government-sponsored company, but its banks are owned by their members and the system does not receive any taxpayer money.

The 11 federal mortgage banks have the same mission, Konich said, but they all operate independently. “We all have this regional flavor that we try to serve.”

Yadav Gopalan, an assistant professor of accounting at Indiana University’s Kelley School of Business in Bloomington, described the Federal Home Loan Bank of Indianapolis as “a bank for banks” especially helpful for smaller institutions.

“The big difference between small banks and large banks is that their ability to access different types of funding is going to be fundamentally different,” said Gopalan, who is also a visiting scholar at the Federal Reserve Bank of St. Louis.

Big banks, Gopalan said, likely do business internationally and have a vast network of resources they can tap into for funding.

“If I’m Citigroup, I can go get financing from the bond market or any other form of domestic capital,” he said.

Small institutions are less likely to have access to other sources of capital, he said.

One of the ways banks can raise capital is to increase their deposit base – by enticing customers to open savings accounts or add to existing ones – by increasing the interest rate paid on these accounts.

Carlstedt

This can be tricky, however, as banks make money from the spread between what they earn in interest on loans and what they pay in interest on deposit accounts.

Thus, Gopalan said, a bank that raises interest rates on its savings runs the risk of reducing its profitability.

Traded deposits are another option for raising capital, i.e. buying deposits from another bank. But these deposits can be expensive, further closing the spread, and banks need a willing seller.

“If the Federal Home Loan Bank wasn’t here, we’d be at the mercy of the market,” Home Bank’s Moore said.

Affordable Housing Mission

Each year, FHLBI sets aside 10% of profits for its Affordable Housing Program, which provides grants of up to $500,000 for affordable housing in Indiana and Michigan. Member institutions apply for grants on behalf of local projects. Last year, FHLBI awarded 29 grants totaling $13.1 million.

Last year, it launched another program, Elevate, which provides grants of up to $25,000 for small business development. So far, Elevate has awarded 28 grants to small businesses, distributing $255,595 last year and $391,751 this year.

Membership in the Federal Home Loan Bank system has been open to community development financial institutions since 2010, and the Indianapolis Neighborhood Housing Partnership joined in 2014.

To date, INHP ​​has secured two $500,000 Affordable Housing Program grants.

“$500,000 is a lot of money in our business, in the grantmaking world,” said INHP ​​CEO Moira Carlstedt.

The first grant, awarded in 2017, helped fund IndyEast Homes, a $7 million John H. Boner Community Center project to renovate and build 36 rental units on the Near East Side.

The second, awarded in 2018, was awarded to Partners in Housing Development Corp. for its $8.7 million Blue Triangle project at 725 N. Pennsylvania St. and its $11.6 million Mozingo Place project at 2811 E. 10th St. Both sites provide housing for people. at risk of homelessness.

INHP also used the Elevation program.

He secured $25,000 for Efficient Systems Inc., a heating, air conditioning, plumbing and electrical contractor on the West Side. The company used the grant to purchase training materials for its technicians.

FHLBI has established its Small Business Grant Program, which is unique in the federal home loan bank system, because its member institutions have expressed interest.

“The bank is ready to explore how it can do more with its partners,” Carlstedt said. “It’s an example of them thinking, ‘How can we do more?'”

Home Bank in Martinsville in 2016 secured a $285,100 Affordable Housing Program grant on behalf of nonprofit Stability First Inc., which used it to help create Magdalene House, a 16-story facility. beds in Martinsville for homeless women.

Moore, who sits on the board of Stability First, said the grant covered most of the cost of the project, which involved renovating a given building for use as a shelter.

Without the grant, Moore said, the project would not have happened as the fundraising burden would have been overwhelming.

“This is a great example of the Federal Home Loan Bank of Indianapolis making a difference in people’s lives,” he said.•

Bernadine J. Perkins