Few Hoosiers outside banking circles have a clue what the Federal Home Loan Bank of Indianapolis does, if they even know it exists.
They might be surprised to learn that it has $47 billion in assets—making it the largest Indiana-based bank—and that it has 159 well-paid employees, including three earning more than a million dollars.
So recent speculation that the quasi-governmental institution might merge itself out of existence by consolidating with one of the nation’s other 11 federal home loan banks was cause for consternation. Despite its obscurity—which stems from its role as a bank for bankers—the Federal Home Loan Bank of Indianapolis is a powerful force in the local economy.
The recent chatter, including a Wall Street Journal blog post last month, followed the bank board’s decision to award CEO Milton J. Miller II a severance agreement entitling him to extra pay in the event of a reorganization or merger.
The agreement states that Miller, 54, “desires assurance that, in the event of any consolidation … he will continue to have the responsibility and status he has earned.”
Here’s the good news: The board’s decision was an entirely routine matter and did not stem from any merger negotiations or the board’s desire to launch them. That’s according to Miller himself, as well as another banker privy to the board’s thinking.
“This was certainly not done in anticipation of any merger discussion,” said Miller, who’s run the Indianapolis bank since 2007.
He added: “I can’t sit here and say it never will happen. But we certainly have no imminent plan.”
Miller is no Johnny-come-lately looking to make a quick buck in a merger. He’s been with the bank more than 30 years, including a long stint as chief financial officer.
He was serving in that role when the bank in 2006 rolled out a cost-cutting plan that included early retirement offers for longtime employees. Miller accepted—as did then-CEO Martin Heger. Board members’ search for new leadership led them back to Miller, who after seven months of retirement returned to fill the top job.
Miller had had a severance agreement when he was CFO, and two other current executives have similar pacts. So the deal struck late last month was far from revolutionary. Under certain circumstances, it entitles Miller to twice his annual salary of $538,461 and certain other compensation and enhances his retirement benefits. Miller last year earned more than $2 million, most stemming from a $1.2 million increase in the value of his pension.
But that’s not to say the concept of the Federal Home Loan Bank of Indianapolis’ eventually merging is far-fetched. Some of the financial benefits touted in traditional bank mergers—such as saving money by eliminating redundant jobs—would carry over to the federal home loan banks.
All 12 federal home loan banks have remained intact since Congress established the system in 1932 to rescue the housing finance market, which had been decimated by the Great Depression.
Before opting for cost-cutting, the Indianapolis bank board in 2006 evaluated a range of options, including finding a merger partner. In 2007, the home loan banks in Dallas and Chicago began merger talks, but they broke off the next year, in part because of complications stemming from the Chicago bank’s financial troubles.
The Indianapolis bank’s financial firepower remains formidable. It has a triple-A credit rating from Standard & Poor’s. And in 2009, it posted profit of $121 million, despite taking a $60 million hit on mortgage-backed securities.
Like the other home loan banks, the Indianapolis institution’s primary business is making advances for home mortgages. Its customers—and its owners—are 417 banks, credit unions and insurance companies in Indiana and Michigan.
In the wake of the housing market’s collapse, it’s a shrinking business. The Indianapolis bank closed the first quarter with advances to members of $21 billion, down 30 percent from the end of 2008.
That’s not the only challenge. Just three customers accounted for one-third of the advances—an awkwardly large concentration. Worse, one of the three, Bank of America Corp., stopped taking new draws in late 2008 because it merged bank charters, leaving it without an institution in the Indianapolis bank’s two-state region.
Financials for the first quarter of 2010 show the sky isn’t falling. Profit was robust, rising 48 percent compared with a year earlier. But in a regulatory filing, the Indianapolis bank acknowledges, “The loss of any large customer could further adversely impact our profitability and our ability to achieve business objectives.”•