Community Bankers Association of Illinois

FHLB President Feldman Briefs CBAI Leadership on Bank’s Condition

Matt Feldman, President and CEO of the Federal Home Loan Bank of Chicago (FHLBC), met with the CBAI board of directors on Thursday, June 18, 2009, to provide an update on the financial condition and future direction of their bank. The bank’s first quarter net loss of $39 million resulted from improved net interest income being more than offset by the impact of other-than-temporary impairment (OTTI) on its private label mortgage-backed securities and losses from derivative and hedging activities. However, Feldman noted the bank continues to comply with all regulatory capital requirements and has the highest ratio of retained earnings to assets among the FHLBs.

Feldman also said that changes they have made to their balance sheet management approach are having a positive impact on net interest income, which is essential to return the FHLBC to consistent profitability, build retained earnings, and restore dividend payments to members. Ultimately, he said that the FHLBC must be made simpler to operate. As part of this effort, the bank is refocusing on its traditional “advances” business of providing loans to its member banks. In time, advance spreads need to support the bank’s operating expenses while investment spreads will provide retained earnings growth and dividend payments to members.

One consequence of the new business model was a decision by the FHLBC board to stop purchasing Mortgage Partnership Finance® (MPF®) loans from members as investments to be held on its balance sheet. The FHLBC now facilitates the sale of members’ mortgage loans to Fannie Mae through the MPF Xtra™ product. Members are not required to provide a credit enhancement (CE) on these loans, nor is there a risk-based capital requirement. The FHLB, however, is working to develop an alternative of MPF Xtra that does include a CE option.

Feldman was asked why members’ CE obligation on MPF loans are not reduced as the loans prepay. He replied that FHLB regulations require a certain amount of CE to be in place, but also that the CE amount is reset after the first 5 or 10 years, depending on the MPF product, and then each year after that. Also, members’ CE obligation will never exceed the unpaid principal balance of the loan pool. But he also acknowledged that this issue been mentioned by members frequently as mortgage refinancing increases. The bank is well aware of the issue and is looking to see what can be done to give members some relief.

The FHLBC is also focusing on converting its members’ capital stock as required under the Gramm-Leach-Bliley Act of 1999. The new capital structure will provide for a class of bank stock to be redeemable on five years’ notice. Conversion will lay the groundwork for the Bank to emerge from its Consent Cease and Desist Order, which currently governs stock redemptions. Once the conversion is completed, the Bank’s transition to its new business model is likely to accelerate.

Responding to a question about when the FHLBC will resume making dividend payments to members, Feldman answered that the bank must first return to profitability on an ongoing basis and prove to its Washington regulator that it has sufficient retained earnings. Nonetheless, Feldman said that paying a dividend, no matter how small, to the members of the cooperative is a top priority.

  800.736.2224 (IL) | 217.529.2265  
  DISCLAIMER: The association is not responsible for and has no control over the subject matter, content, information, or graphics when viewing links attached to this association's site.