Why Lenders Return to FHLBs for Financing

Strong loan growth has caused lenders to return to Federal Home Loan Banks for advances, with lenders turning to FHLBs to re-fund their loans after mostly avoiding them during the pandemic.

The rise reflects a reversal of a dominant trend in banking over the past two years: the large glut of deposits with few loans to use them.

Now customers are spending those deposits and needing more credit from banks. Banks, in turn, are increasingly funding their loans by borrowing from FHLBs, which the consultants say is an easier and cheaper method than paying depositors higher rates to boost liquidity.

“Loan growth is outpacing deposit growth,” and banks have to “fund it somehow,” said Eric Segal, who leads the banking and financial institutions practice at CFO Consulting Partners.

Advances at the 11 home loan banks soared to $518.9 billion at the end of the second quarter, from around $350 billion at the end of last year, when advances were at their lowest level in 15 years old. While progress is still below pre-pandemic levels, the increase represents a notable uptick after depots flooded in 2020 drastically decline in demand from banks for FHLB funds. The figures also include all advances that FHLBs make to credit unions and insurance companies.

The growth of FHLB advances was stronger in regional banks than in megabanks. Investors are “generally cash-rich” and have expressed a desire to see some of their deposits decline, according to Mark Cabana, head of US interest rate strategy at Bank of America’s research division.

Advances from FHLB last quarter rose from near zero to about $12 billion at Citizens Bank of Providence, Rhode Island, and $10 billion at PNC Bank of Pittsburgh, Cabana wrote in a note. to customers this month. Others have leveraged FHLBs more, including Citibank, First Republic Bank, Capital One, Fifth Third Bank, KeyBank, and Truist Bank.

Ally Bank increased its FHLB advances by more than $3.8 billion during the second quarter. The rise came in the middle increasing competition in the high-yield savings account space, where Ally, Capital One, Synchrony Financial and Goldman Sachs’ Marcus are major players and are raising the rates they pay savers.

The bank “will continue to be opportunistic as we consider alternative funding sources” that are not deposits, Jenn LaClair, chief financial officer of Ally Financial, told analysts last month.

Smaller banks and credit unions are also turning to FHLBs more often, largely because loan growth “surpassed” their estimates earlier this year, said Matt Pieniazek, president and CEO of Darling. ConsultingGroup.

One of the benefits of FHLBs is that banks can “pick up the phone and instantly get” the financing they need with a variety of loan terms, Pieniazek said.

This strategy is easier — and faster — than advertising higher rates online or in newspapers to attract more deposits, Pieniazek said. It also does not carry the risk of depositors migrating to higher-yielding options and ultimately making the bank more expensive to operate, he added.

“You can’t just pick up what you want from the retail deposit market,” Pieniazek said. “You have to pay. And if you want to get it, how do you get the message out in front of people?”

Deposit growth has slowed — or in some cases, declined — as consumers and businesses spend more of the money they accumulated earlier in the pandemic. Small businesses, for example, continue to spend the money they received under the Paycheck Protection Program, said Segal of CFO Consulting Partners.

The Federal Reserve’s fight against inflation this year has also contributed to deposit outflows. The aggressive pace of central bank interest rate hikes has made money market funds and other safe investments more attractive, and the continued shrinking of its balance sheet is also remove cash of the financial system.

At Kalispell, Montana-based Glacier Bancorp, deposits edged up to nearly $21.8 billion in the second quarter, up less than 0.5% from the prior quarter. Loans grew much faster, rising about 4.7% in the quarter to $14.4 billion.

The bank is using FHLB advances to ‘fill in the gaps’ resulting from the mismatch between ‘very strong’ loan growth and mild deposit growth, Chief Financial Officer Byron Pollan told analysts last month, according to a transcript from S&P Global Market Intelligence.

“What we’re seeing here is just a temporary shift in the cash flow timing,” Pollan said.

Glacier Bancorp said in an earnings statement that it borrowed $580 million in the second quarter from the FHLB system – up from $80 million the previous quarter – to “support liquidity needs induced by the increase in the portfolio of ready”. Advances “will continue to fluctuate to supplement liquidity needs during the year,” the bank said.

The “wildcard” for FHLB’s future advances in the industry will be whether the current pace of loan growth can continue, Pieniazek said, or whether growing economic uncertainty reduces appetite for borrowing.

“If activity is still strong and robust, then I think those levels could actually increase,” Pieniazek said.

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