Failed Kansas bank quickly borrowed $21 million from home loan lenders

Heartland Tristate Bank raised about $21 million in advances from the federal home loan banking system before it collapsed last July, according to a report from the Federal Reserve’s Office of Inspector General and the Consumer Financial Protection Bureau. The bank’s chief executive allegedly diverted bank and client funds into cryptocurrency investments to enrich himself.

Bloomberg News

WASHINGTON — Heartland Tri-State Bank borrowed $21 million before the Federal Home Loan Bank System collapsed in July, stipulating another example Troubled banks exploited the system before failing.

Heartland Tri-State fails over former CEO Shan Hanes Obvious misappropriation of funds Hanes took funds from the $139 million bank and its clients and used the funds to purchase doomed cryptocurrency investments. Hanes was indicted in U.S. District Court for the District of Kansas earlier this month.

At the same time that Hanes allegedly misappropriated bank funds, Heartland Tri-State reportedly borrowed approximately $21 million from an unnamed federal home loan bank. a new report From the Office of the Inspector General and the Consumer Financial Protection Bureau of the Board of Governors of the Federal Reserve System.

The advances were obtained during June and July 2023, the report said. Such advances are unusual for the bank. Heartland Tri-State has not borrowed any funds from the home loan banking system over the past three years.

In court documents in the Hanes case, prosecutors said the corruption began around May 30 and continued until at least July 7.

“A small bank’s FHLB borrowings can go from zero to over $20 million in two months with no warning,” said Aaron Klein, senior fellow for economic studies at the Brookings Institution. The idea is shocking.”

The $21 million upfront represents a significant portion of Heartland Tri-State’s assets – about 15 percent.

“FHLB’s lending cost the bank more money and cost taxpayers even more,” Klein said. “The bank’s failure is expected to cost the bank $54 million.” [Federal Deposit Insurance Corp.], this number is more likely because the FHLB is always repaid before the FDIC. ”

Heartland Tri-State “nearly exhausted its liquidity sources to fund the CEO’s wire transfers,” the report from the Office of the Inspector General said. Heartland Tri-State had not borrowed money from any institution as of the bank’s March 31 call. Then, as of the last week in July 2023, when the bank failed, it had used up about $24 million of its credit lines with corresponding banks for processing wire transfers, leaving only about $700,000.

During last March’s regional banking crisis, lawmakers and other critics noted that home loan banks made large advances to banks that eventually failed. Silicon Valley Bank, Signature Bank and Silvergate Bank were among the largest borrowers in the home loan banking system last year. The three banks – two of which were shut down by regulators and one which went into liquidation – received a combined $30.6 billion from home loan lenders last year, just months before they collapsed.

Other banks that have also experienced stress or failed include San Francisco’s First Republic Bank, which collapsed last May, and New York Community Bancorp, which also saw its share price plummet this month amid financial strains. Bank (Home Loan Bank) is one of the largest borrowers in the system.

some legislators, including Ohio Democratic Sen. Sherrod Brownhas begun questioning the Federal Housing Finance Agency, which oversees home loan banks, for allegedly using the system as a lender of last resort.

FHFA said in a long-awaited report released in October It would seek to transform home loan banks into housing finance roots, rather than having the Great Recession-era program act as a lender of last resort for troubled financial institutions. Announcement of 100 Year Review September 2022, well before the banking turmoil in March 2023.

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