UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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x | | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20122015
or
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o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to __________.
Commission File No. 000-51399
FEDERAL HOME LOAN BANK OF CINCINNATI
(Exact name of registrant as specified in its charter)
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Federally chartered corporation | | 31-6000228 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
1000600 Atrium Two, P.O. Box 598, | | |
Cincinnati, Ohio | | 45201-0598 |
(Address of principal executive offices) | | (Zip Code) |
Registrant's telephone number, including area code
(513) 852-7500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class B Stock, par value $100 per share
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
o Yes x No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d).
o Yes x No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o | Accelerated filer o | Non-accelerated filer x | Smaller reporting company o |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes x No
As of February 28, 201329, 2016, the registrant had 43,588,54643,340,502 shares of capital stock outstanding, which included stock classified as mandatorily redeemable. The capital stock of the registrant is not listed on any securities exchange or quoted on any automated quotation system, only may be owned by members and former members and is transferable only at its par value of $100 per share.
Documents Incorporated by Reference: None
Table of Contents
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| PART I | |
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Item 1. | Business | |
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Item 1A. | Risk Factors | |
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Item 1B. | Unresolved Staff Comments | |
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Item 2. | Properties | |
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Item 3. | Legal Proceedings | |
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Item 4. | Mine Safety Disclosures | |
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| PART II | |
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Item 5. | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | |
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Item 6. | Selected Financial Data | |
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Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations | |
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Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | |
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Item 8. | Financial Statements and SupplementalSupplementary Data | |
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| Financial Statements for the Years Ended 2012, 2011,2015, 2014, and 20102013 | |
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| Notes to Financial Statements | |
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| Supplemental Financial Data | |
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Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | |
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Item 9A. | Controls and Procedures | |
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Item 9B. | Other Information | |
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| PART III | |
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Item 10. | Directors, Executive Officers and Corporate Governance | |
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Item 11. | Executive Compensation | |
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Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | |
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Item 13. | Certain Relationships and Related Transactions, and Director Independence | |
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Item 14. | Principal Accountant Fees and Services | |
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| PART IV | |
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Item 15. | Exhibits and Financial Statement Schedules | |
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Signatures | | |
PART I
Special Cautionary Notice Regarding Forward Looking Information
This document contains forward-looking statements that describe the objectives, expectations, estimates, and assessments of the Federal Home Loan Bank of Cincinnati (FHLBank)(the FHLB). These statements use words such as “anticipates,” “expects,” “believes,” “could,” “estimates,” “may,” and “should.” By their nature, forward-looking statements relate to matters involving risks or uncertainties, some of which we may not be able to know, control, or completely manage. Actual future results could differ materially from those expressed or implied in forward-looking statements or could affect the extent to which we are able to realize an objective, expectation, estimate, or assessment. Some of the risks and uncertainties that could affect our forward-looking statements include the following:
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▪ | the effects of economic, financial, credit, market, and member conditions on our financial condition and results of operations, including changes in economic growth, general liquidity conditions, inflation and deflation, interest rates, interest rate spreads, interest rate volatility, mortgage originations, prepayment activity, housing prices, asset delinquencies, and members' mergers and consolidations, deposit flows, liquidity needs, and loan demand; |
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▪ | political events, including legislative, regulatory, federal government, judicial or other developments that could affect us, our members, our counterparties, other FHLBanksFederal Home Loan Banks (FHLBanks) and other government-sponsored enterprises (GSEs), and/or investors in the Federal Home Loan Bank System's (FHLBank System) debt securities, which are called Consolidated Obligations or Obligations; |
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▪ | competitive forces, including those related to other sources of funding available to members, to purchases of mortgage loans, and to our issuance of Consolidated Obligations; |
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▪ | the financial results and actions of other FHLBanks that could affect our ability, in relation to the FHLBank System's joint and several liability for Consolidated Obligations, to access the capital markets on favorable terms or preserve our profitability, or could alter the regulations and legislation to which we are subject; |
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▪ | changes in investor demand for Consolidated Obligations; |
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▪ | the volatility of market prices, interest rates, credit quality, and other indices that could affect the value of investments and collateral we hold as security for member obligations and/or for counterparty obligations; |
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▪ | the ability to attract and retain skilled management and other key employees; |
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▪ | the ability to develop, secure and support technology and information systems that effectively manage the risks we face; |
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▪ | the ability to successfully manage new products and services; and |
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▪ | the risk of loss arising from litigation filed against us or one or more other FHLBanks. |
We do not undertake any obligation to update any forward-looking statements made in this document.
In this filing, the interrelated disruptions in the financial, credit, housing, capital, and mortgage markets during 2008 and 2009 are referred to generally as the “financial crisis.”
COMPANY INFORMATION
Organizational Structure
The FHLBankFHLB is a regional wholesale bank that provides financial products and services to our member financial institutions.members. We are onepart of 12 District Banks in the FHLBank System; ourSystem (or System). Each FHLBank operates as a separate entity with its own stockholders, employees, Board of Directors, and business model. Our region, known as the Fifth District, comprisesis comprised of Kentucky, Ohio and Tennessee.
The U.S. Congress chartered the FHLBank System in the Federal Home Loan Bank Act of 1932 (the FHLBank Act) to improvehelp provide liquidity in the U.S. housing market. Each District Bank is a government-sponsored enterprise (GSE)FHLBanks are GSEs of the United States of America and operates as a separate entity with its own stockholders, employees, and Board of Directors.America. A GSE combines private sector ownership with public sector sponsorship. In addition to being GSEs, the FHLBanks are cooperative institutions, privately and wholly owned by their members, who purchase capital stock and who are the primary customers.
The FHLBanks are not government agencies and are exempt from federal, state, and local taxation (except real property taxes). Thethe U.S. government does not guarantee, directly or indirectly, the debt securities or other obligations of the FHLBank System.
The FHLBank System also includes the Federal Housing Finance Agency (Finance Agency) and the Office of Finance. The Finance Agency is an independent agency in the executive branch of the U.S. government that regulates the FHLBanks, the Federal National Mortgage Association (Fannie Mae) and, the Federal Home Loan Mortgage Corporation (Freddie Mac). The Finance Agency oversees, and the conservatorshipsOffice of Fannie Mae and Freddie Mac.Finance. The Office of Finance is a joint office of the District Banks regulated by the Finance Agency to facilitateFHLBanks that facilitates the issuance and servicing of the FHLBank System's Consolidated Obligations (or Obligations).
In addition to being GSEs, the FHLBanks are cooperative institutions, which means our stockholders are also our primary customers. Private-sector financial institutions within our district voluntarily become members of our FHLBank and purchase capital stock in order to gain access to products and services. Only members can purchase capital stock. All Fifth District federally insured depository institutions, certain insurance companies, and community development financial institutions chartered in the Fifth District may voluntarily apply for membership. Such applicantsmembership in our FHLB. Applicants must satisfy membership requirements in accordance with federal legislationstatutes and Finance Agency regulations. These requirements deal primarily with home financing activities, satisfactory financial condition such that Advances may be made safely, to the member, and matters related to the regulatory, supervisory and management oversight of the applicant. By law, an institution is permitted to be a member of only one Federal Home Loan Bank,FHLBank, although a holding company may have memberships in more than one District BankFHLBank through its subsidiaries.
We require each member to own capital stock as a condition of membership and to hold additional stock above the membership stock amount when utilizing certain services. We issue, redeem, and repurchase capital stock only at its stated par value of $100 per share. By law, our stock may not be publicly traded.
The combination of public sponsorship and private ownership that drives our business model is reflected in the composition of our 17-member Board of Directors, all of whom our members elect. Ten directors are officers and/or directors of our member institutions, while the remaining directors are independent directors who represent the public interest.
The number of our members has been relatively stable in the last 10 years, ranging between 720 and 760. At December 31, 2012,2015, we had 742699 members, 195203 full-time employees, and 4no part-time employees.employee. Our employees are not represented by a collective bargaining unit.
Mission and Corporate Objectives
The FHLBank'sFHLB's mission is to provide financial intermediation between the capital markets and our member stockholders and the capital markets in order to facilitate and expand the availability of financing and flow of credit for housing and community lending throughoutand investment.
How We Achieve Our Mission
We achieve our mission through a cooperative business model. We raise private-sector capital from member stockholders and issue high-quality debt securities in the Fifth District. Wecapital markets (along with other FHLBanks) in order to provide products and services (called Mission Asset Activity) to members with competitive services and generate a competitive return on their FHLBank capital investment through quarterly dividend payments. Ourin our company.
The primary services include a reliable,products we offer are readily available low-cost source of fundsloans called Advances, and purchases of certain whole mortgage loans sold by our qualifying members. An important componentmembers through the Mortgage Purchase Program (MPP), and Letters of our mission related to public sector sponsorship is providingCredit. We also offer affordable housing programs and related activities to support members in their efforts to assist low- and moderate- income peoplemoderate-income households and their local communities. We finance our operations mostly by raising private-sector capital from member stockholders and by issuing high-quality debt in the capital markets with other FHLBanks.
Our corporate objectives are to:
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▪ | operate safely and soundly, remain able to raise funds in the capital markets, and optimize our counterparty and deposit ratings; |
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▪ | expand business activity with members; |
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▪ | earn and pay a stable long-term competitive return on members' capital stock; |
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▪ | maximize the effectiveness of contributions to Housing and Community Investment programs; and |
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▪ | maintain effective corporate governance processes. |
To accomplish these objectives, we strive to maintain a conservative risk profile that will ensure we operate safely and soundly, promote prudent growth in Mission Asset Activity, consistently generate competitive earnings, and protect the par value of members' capital stock investment. We believe our business is financially sound and adequately capitalized on a risk-adjusted basis.
We practice this conservative philosophy in many ways:
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▪ | We believe we operate with moderate market risk and limited residual credit risk, liquidity risk, operational risk, and capital impairment risk. |
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▪ | We have a priority to ensure competitive and relatively stable profitability. |
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▪ | We make conservative investment choices. |
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▪ | We use derivatives only to hedge individual assets and liabilities, not for macro balance sheet hedging. |
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▪ | We normally operate with less financial leverage than regulation permits. |
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▪ | We have not instituted large-scale, district-wide repurchases of excess stock. |
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▪ | We have significantly increased retained earnings in recent years. |
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▪ | We create a working and operating environment that emphasizes a stable employee base. |
Member stockholders derive value from two sources: the competitive prices, terms, and characteristics of our products; and a competitive dividend return on their capital investment. We strike a balance between offering more attractively priced products, which tend to lower dividend payments, and paying attractive dividends. We believe members' investment in our capital stock is comparable to investing in high-grade short-term, or adjustable-rate, money market instruments or in adjustable-rate preferred equity instruments. Therefore, we structure our risk exposures so that earnings tend to move in the same direction as changes in short-term market rates, which provides member stockholders a degree of predictability on their dividend returns. One measure of this success in paying competitive dividends is that relatively few member stockholders have historically chosen, absent mergers and consolidations, to withdraw from membership or to request redemption of their stock held in excess of minimum requirements.
Our conservative risk management principles and having a long-term performance orientation that balance the two sources of membership value are motivated by the FHLBank's cooperative business model in which stockholders and customers are the same entities.
Business Activities
Our principal activity is making readily available, competitively priced and fully collateralized Advances to members. Together with the issuance of collateralized Letters of Credit, Advances constitute our “Credit Services” business. As a secondary business line, we purchase qualifying residential mortgages through the Mortgage Purchase Program (MPP) and hold them as portfolio investments. This program offers members a competitive alternative to the traditional secondary mortgage market. Together, these product offerings constitute our “Mission Asset Activity.”
In addition, through various Housing and Community Investment programs, we assist members in serving very low-, low-, and moderate-income housing markets and community economic development. These programs provide Advances at below-market rates of interest, as well as direct grants and subsidies, and can help members satisfy their regulatory requirements under the Community Reinvestment Act.
To a more limited extent, we also offer members varioushave several correspondent services that assist themmembers in the administration of their operations.operational administration.
To help us achieve our mission,The primary way we invest in highly-rated debt instruments of financial institutions and the U.S. government and in mortgage-related securities. In practice, these investments normally include shorter-term liquidity instruments and longer-term mortgage-backed securities. Investments furnish liquidity, help us manage market risk exposure, enhance earnings, and (through the purchase of mortgage-related securities) support the housing market.
Our primary source ofobtain funding and liquidity is through participation in the issuance of the FHLBank System's unsecured debt securities, -called Consolidated Obligations, - in the global capital markets. A secondary sourceSecondary sources of funding isare capital and deposits we accept from our capital. Obligations are the joint and several obligations of all 12 FHLBanks, backed only by the financial resources of these institutions.members. A critical component of the success of the System's operationsFHLBank System is its ability to maintain a comparative
advantage in funding, which is due largely to its GSE status.status and low risk operations. We regularly issue Obligations under a wide range of maturities, structures, and amounts, and at relatively favorable spreads to benchmark market interest rates (represented by U.S. Treasury securities and the London InterBank Offered Rate (LIBOR)) compared with many other financial institutions.
Because we are a cooperative organization with some members using our products more heavily than others and members having different percentages of capital stock, we must achieve a balance in generating membership value from product prices and characteristics and paying a competitive dividend rate. We also execute derivative transactionsattempt to help hedge market risk exposure. These capabilities enable us to offer members a wide range ofachieve this balance by pricing Mission Asset Activity at relatively narrow spreads over funding costs, compared with other financial institutions, while still achieving acceptable profitability.
Corporate Objectives
Our corporate objectives, listed below, are to promote housing finance among members and enableensure our operations and governance are effective and efficient. The first three objectives drive how members to accessderive value from being in the capital markets, throughcooperative.
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▪ | Mission Asset Activity:Implement strategies and tactics to effectively manage ongoing operations and promote members’ usage of our products and services. |
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▪ | Stock Return: Earn adequate profitability so that members receive a competitive long-term dividend rate on their capital stock investment. |
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▪ | Housing and Community Investment Programs: Maintain effective housing and community investment programs that maximize mandatory programs and offer additional voluntary contributions. |
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▪ | Safe and Sound Operations:Optimize the FHLB’s counterparty and deposit ratings, achieve an acceptable rating on annual regulatory examinations, and maintain an adequate amount and composition of capital. |
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▪ | Risk Management: Employ effective risk management practices and maintain risk exposures at low to moderate levels. |
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▪ | Governance: Operate in accordance with effective corporate governance processes. |
Business Activities
Mission Asset Activity
The following are our principal business activities with the FHLBank, in ways that may not be availablemembers:
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▪ | We lend readily-available, competitively-priced, and fully-collateralized Advances. |
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▪ | We issue collateralized Letters of Credit. |
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▪ | We purchase qualifying residential mortgage loans through the MPP and hold them on our balance sheet. |
Together, these product offerings constitute “Mission Asset Activity.” We refer to them without our services.Advances and Letters of Credit as Credit Services.
RatingsAffordable Housing and Community Investment
In addition, through various Housing and Community Investment programs, we assist members in serving very low-, low-, and moderate-income households and community economic development. These programs provide Advances at below-market rates of Nationally Recognized Statistical Rating Organizationsinterest, as well as direct grants.
The System's comparative advantageInvestments
To help us achieve our mission and corporate objectives, we invest in funding is acknowledged in its excellent credit ratings from nationally recognized statistical rating organizations (NRSROs). Moody's Investors Service (Moody's) currently assign, and historically has assigned, the System's Obligations the highest ratings available: long-termhighly-rated debt is rated Aaa and short-term debt is rated P-1. It also assigns a Prime-1 short-term bond rating on each FHLBank. It affirmed these ratings in 2012. This action was taken based on Moody's expectation that the respective long-term ratings are unlikely to fall below the AA level and that the FHLBanks have sufficient asset liquidity for business operations in the event there would be any short-term disruptions in the short-term debt markets.
In August 2011, Standard & Poor's, in conjunction with its downgradesinstruments of the long-term sovereign rating of the United States from AAA to AA+ with a negative outlook, lowered the ratings on the FHLBank System's senior unsecured long-term debtfinancial institutions and the counterparty rating on our FHLBank from AAA to AA+ with a negative outlook. It also lowered ratingsU.S. government and in mortgage-related securities. In practice, these investments normally include shorter-term liquidity instruments and longer-term mortgage-backed securities, as permitted by Finance Agency regulation. Investments provide liquidity, help us manage market risk exposure, enhance earnings, and through the purchase of other GSE's. The GSE ratings actions were based onmortgage-related securities, support the downgrade of the United States because in the application of Standard & Poor's Government Related Entities criteria, GSE ratings are constrained by the long-term sovereign rating of the United States. These ratings changes have not resulted in any material impact on our debt issuance capabilities.
The agencies' rationales for the System's and our ratings include the FHLBank System's status as a GSE, the joint and several liability for Obligations, excellent overall asset quality, extremely strong capacity to meet our commitments to pay timely principal and interest on debt, strong liquidity, conservative use of derivatives, adequate capitalization relative to our risk profile, a stable capital structure, and the fact that no FHLBank has ever defaulted on repayment of, or delayed return of principal or interest on, any Obligation.
A credit rating is not a recommendation to buy, sell or hold securities. A rating organization may revise or withdraw its ratings at any time, and each rating should be evaluated independently of any other rating. We cannot predict what future actions, if any, a rating organization may take regarding the System's and our ratings.housing market.
Sources of Earnings
Our major source of revenue is interest income earned on Advances, MPP notes,loans, and investments.
Major items of expense are:
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▪ | interest paid on Consolidated Obligations and deposits to fund assets; |
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▪ | costs of providing below-market-cost Advances and direct grants and subsidies under the Affordable Housing Program; and |
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▪ | non-interest expenses (i.e., other expenses on the Statements of Income).expenses. |
The largest component of earnings is net interest income, which equals interest income minus interest expense. We derive net interest income from the interest rate spread earned on assets versus funding costs and the use of financial leverage. Each of these can vary over time with changes in market conditions, including most importantly interest rates, business conditions and our risk management activities.
We believe members' capital investment is comparable to investing in adjustable-rate preferred equity instruments. Therefore, we structure our balance sheet risk exposures so that earnings tend to move in the same direction as changes in short-term market rates, which can help provide a degree of predictability for dividend returns.
Capital
Due to our cooperative structure, we obtain capital from members. Each member must own capital stock as a condition of membership and normally must hold additional stock above the membership stock amount in order to gain access to Advances and possibly to sell us MPP loans. We issue, redeem, and repurchase capital stock only at its stated par value of $100 per share. By law, our stock is not publicly traded.
We strive to ensure that assets are self-capitalizing, meaning that we acquire capital primarily in connection with growth in Mission Asset Activity. We also maintain an amount of capital to ensure we meet all of our regulatory and business requirements relating to capital adequacy and protection of creditors against losses. We hold retained earnings to protect members' stock investment against impairment risk.
Tax Status
We are exempt from all federal, state, and local taxation other than real property taxes. Any cash dividends we issue are taxable to members and do not benefit from the corporate dividends received exclusion. Notes 1 and 14 of the Notes to Financial Statements provide additional details regarding the assessment for the Affordable Housing Program.
Ratings of Nationally Recognized Statistical Rating Organizations
The FHLBank System's comparative advantage in funding is acknowledged in its excellent credit ratings from nationally recognized statistical rating organizations (NRSROs). Moody's Investors Service (Moody's) currently assigns, and historically has assigned, the System's Consolidated Obligations the highest ratings available: long-term debt is rated Aaa and short-term debt is rated P-1. It also assigns a Prime-1 short-term bond rating on each FHLBank. It affirmed these ratings in 2015 and maintained a stable outlook. In 2015, Standard & Poor's affirmed its issuer credit ratings on each FHLBank and its AA+ ratings on the System's senior debt and also maintained a stable outlook.
The ratings closely follow the U.S. sovereign ratings from both agencies. The lower-than AAA debt ratings from Standard & Poor's has had no discernible impact on the System's debt issuance capabilities since the rating change occurred in 2011.
The agencies' rationales for their ratings of the System and our FHLB include the System's status as a GSE; the joint and several liability for Obligations; excellent overall asset quality; extremely strong capacity to meet commitments to pay timely principal and interest rate spread is the difference between the interest we earn on assetsdebt; strong liquidity; conservative use of derivatives; adequate capitalization relative to our risk profile; a stable capital structure; and the fact that no FHLBank has ever defaulted on repayment of, or delayed return of principal or interest we pay on, liabilities. Financial leverage results from fundingany Obligation.
A credit rating is not a portionrecommendation to buy, sell or hold securities. A rating organization may revise or withdraw its ratings at any time, and each rating should be evaluated independently of interest-earning assets with capital on which we do not pay interest.any other rating. We cannot predict what future actions, if any, a rating organization may take regarding the System's or our ratings.
Regulatory Oversight
The Finance Agency is headed by a director (the Director)Director who has sole authority to promulgate Agency regulations and to make other Agency decisions. The Finance Agency is charged with ensuring that each FHLBank carries out its housing and community development finance mission, remains adequately capitalized, operates in a safe and sound manner, and complies with Finance Agency Regulations.regulations.
To carry out these responsibilities, the Finance Agency conducts on-site examinations at least annually of each FHLBank, as well as periodic on- and off-site reviews, and receives monthly information on each FHLBank's financial condition and operating results. While an individual FHLBank has substantial discretion in governance and operational structure, the Finance Agency maintains broad supervisory and regulatory authority. In addition, the Comptroller General has authority to audit or examine the Finance Agency and the FHLBanks, to decide the extent to which the FHLBanks fairly and effectively fulfill the purposes of the FHLBank Act, and to review any audit, or conduct its own audit, of the financial statements of an FHLBank.
BUSINESS SEGMENTS
We manage the development, resource allocation, product delivery, pricing, credit risk management, and operational administration of our Mission Asset Activity in two business segments: Traditional Member Finance and the MPP. Traditional Member Finance includes Credit Services, Housing and Community Investment, Investments, some correspondent and deposit services, and other financial products of the FHLBank.FHLB. See the “Segment Information” section of “Results of Operations” in Item 7 and Note 1918 of the Notes to Financial Statements for more information on our business segments, including their results of operations.
Traditional Member Finance
Credit Services
Advances. Advances provide membersare competitively priced sources of fundingfunds available for members to help manage their asset/liability and liquidity needs. Advances can both complement and be alternatives to retail deposits, other wholesale funding sources, and corporate debt issuance. We strive to facilitate efficient, fast, and continual member access to funds for our members, which we believe provides them with substantial benefits.funds. In most cases members can access funds on a same-day basis.
We price 13a variety of standard Advance programs every business day and several other standard programs on demand. We also offer customized, non-standard Advances that fall under one of the standard programs.Advances. Having diverse programs gives members the flexibility to choose and customize their borrowings according to size, maturity, interest rate, interest rate index (for adjustable-rate coupons), interest rate options, and other features.
Repurchase based (REPO) Advances are short-term, fixed-rate instruments structured similarly to repurchase agreements from investment banks, with one principal difference. Members collateralize their REPO Advances through our normal collateralization process, instead of being required to pledge specific securities as would be required in a repurchase agreement. A majority of REPO Advances outstanding normally have overnight maturities.
LIBOR Advances have adjustable interest rates typically priced off 1- or 3-month LIBOR indices. LIBOR Advances may be structured at the member's option as either prepayable with a fee or prepayable without a fee if the prepayment is made on a repricing date.
Regular Fixed RateFixed-Rate Advances have terms of three3 months to 30 years, with interest normally paid monthly and principal repayment normally at maturity. Members may choose to purchase call options on these Advances, although in the last 5five years, balances with call options have been at or close to zero.
Putable Advances are fixed- or adjustable-ratefixed-rate Advances that provide us an option to terminate the Advance, usually after an initial “lockout” period. Most have fixed-rates with long-term original maturities. Selling us these options enables members to secure lower rates on Putable Advances compared to Regular Fixed RateFixed-Rate Advances with the same final maturity.
Mortgage-Related Advances are fixed-rate, amortizing Advances with final maturities of 5 to 30 years. Some of these Advances, at the choice of the member, provide members with prepayment options without fees.
We also offer severalvarious other Advance programs that have smaller outstanding balances.
Letters of Credit. We offer Letters of Credit which are collateralized contractual commitments we issue on a member's behalf to guarantee its performance to third parties. A Letter of Credit may obligate us to make direct payments to a third party, in which case it is treated as an Advance to the member. The most popular use of Letters of Credit is as collateral supporting public unit deposits, which are deposits held by governmental units at financial institutions. We earn fees on Letters of Credit based on the actual notional amount of the Letters utilized.
How We Manage Risks of Credit Services Risks.Services. We manage market risk onfrom Advances by tending to match fund Advancesfunding them with similar-duration Consolidated Obligations including the use ofand interest rate swaps to matchthat have similar interest rate risk characteristics as the repricing termsAdvances. The net effect is that in practice we mitigate nearly all of Obligations (net of the swaps) and the Advances.Advances' market risk exposures.
In addition, for many, but not all, Advance programs, Finance Agency Regulationsregulations require us to charge members prepayment fees for early termination of principal when the early termination results in an economic loss to us. Some Advance programs are structured as non-prepayable, such as REPO Advances. We determine prepayment fees using standard present-value calculations that make us economically indifferent to the prepayment. The prepayment fee equals the present value of the estimated profit that we would have earned over the remaining life of the prepaid Advance. If a member prepays principal on an Advance that we have hedged with an interest rate swap, we may also assess the member a fee to compensate us for the cost we incur in terminating the swap before its stated final maturity. Some Advance programs are structured as non-prepayable and may have additional restrictions in order to terminate.
The primary way weWe manage credit risk on Advances is to requireby requiring each member to supply us with a security interest in eligible collateral with anthat in the aggregate has estimated value in excess of the total Advances and Letters of Credit. Collateral is comprised mostly of single familysingle-family loans, home equity lines, multi-family loans and bond securities. We believe that theThe combination of conservative collateral policies and risk-based credit underwriting activities effectively mitigatemitigates virtually all potential credit risk associated with Advances.Advances and Letters of Credit. We have never experienced a credit loss on Advances, nor have we ever determined it necessary to establish a loan loss reserve.reserve for Advances. Item 7's “Quantitative and Qualitative Disclosures About Risk Management” and Notes 8 and 10 of the Notes to Financial Statements have more detail on our credit risk management of member borrowings.
Housing and Community Investment
Our Housing and Community Investment Programs include the Affordable Housing Program and various housing and community economic development-related Advance programs. We fund the Affordable Housing Program with an accrual equal to 10 percent of our previous year's regulatory income,net earnings, mandated by the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA).1989. See Note 14 of the Notes to Financial Statements for a complete description of the Affordable Housing Program calculation.
The Affordable Housing Program provides funding for the development of affordable housing. The Program consists of a competitive programCompetitive Program and a homeownership set-aside program called the Welcome Home, Program.which assists homebuyers with down payments and closing costs. Under the competitive program,Competitive Program, we currently distribute funds in the form of either grants or below-market rate Advances to members that apply and successfully compete in semiannual offerings.an annual offering. Under the Welcome Home, Program,we make funds are normally available beginning in March until they have been fully committed. For both programs, the income of qualifying individuals or households must be 80 percent or less of the area median income. UpWe set aside up to 35 percent of the Affordable Housing Program accrual is set aside for the Welcome Home Program and allocate the remainder allocated to the competitive program.Competitive Program.
Our Board of Directors also may allocate funds to voluntary housing programs, which it reviews annually.programs. In March 2012 and again in January 2013,2015, the Board authorizedre-authorized an additional $1.0$1 million forto the Carol M. Peterson Housing Fund. The Carol M. Peterson Housing Fund resourcesfor use during the year. These funds are primarily used as grants to pay for accessibility rehabilitation and emergency repairs for special needs and elderly homeowners. In March 2016, the Board re-authorized this fund in the amount of $1.5 million for use in 2016. In 2012, the Board of Directors also established the Disaster Reconstruction Program. The Disaster Reconstruction Program, is a $5 million voluntary housing program that provides grants for purchase or rehabilitation of a home to Fifth District residents that have suffered loss or damage to their primary residence as a result of a state or federally declared disaster occurring withindisaster. Since the Fifth District.program's inception, we have disbursed nearly $3 million to assist 177 households.
Two other housing programs that fall outside the auspices of the Affordable Housing Program are the Community Investment Program and the Economic Development Program. Advances under the former program have rates equal to our cost of funds, while Advances under the latter program have rates equal to our cost of funds plus three basis points. Members use the Community Investment Program to serve housing needs of low- and moderate-income peoplehouseholds and, under certain
conditions, community economic development projects. The Economic Development Program is a discounted Advance program used exclusively forto promote economic development projects.and job creation and retention.
Investments
Types of Investments. WeOne reason we hold bothinvestments is to carry sufficient asset liquidity. Permissible liquidity investments most of which normally have short-term maturities, and longer-term investments. Liquidity investments are permitted to include overnight and term Federal funds, certificates of deposit, bank notes, bankers' acceptances, commercial paper, securities purchased under agreements to resell, and debt securities issued by the U.S. government or its agencies. The first five categories represent unsecured lending to private counterparties. We also may place deposits with the Federal Reserve Bank. We are prohibited by Finance Agency Regulationregulations from investing (secured or unsecured) in financial investments issued by non-U.S. entities other than those issued by U.S. branches and agency offices of foreign commercial banks. We also may place deposits with the Federal Reserve Bank.Most liquidity investments have short-term maturities.
We are also permitted by Finance Agency Regulationsregulation to purchase the following other investments, most of which have longer-termlonger original maturities than liquidity investments:
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▪ | mortgage-backed securities and collateralized mortgage obligations supported by mortgage securities (together, referred to as mortgage-backed securities) and issued by GSEs or private issuers; |
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▪ | asset-backed securities collateralized by manufactured housing loans or home equity loans and issued by GSEs or private issuers; and |
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▪ | marketable direct obligations of certain government units or agencies (such as state housing finance agencies) that supply needed funding for housing or community lending and that do not exceed 20 percent of our regulatory capital. |
We have never purchased any asset-backed securitysecurities and currently do not own any privately-issued mortgage-backed securities. Per regulation,Finance Agency regulations, the total investment in mortgage-backed securities and asset-backed securities may not exceed, on a book value basis, 300 percent of previous month-end regulatory capital on the day we purchase the securities. (SeeSee the “Capital Resources” section below for the definition of regulatory capital.)
Purposes of MakingHaving Investments. The investments portfolio helps us achieve our corporate objectives in the following ways:
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▪ | Liquidity management. As their name implies, liquidityLiquidity investments help us manage liquidity and support ourthe ability to fund most Advancesassets on the same day members request them. We can structure short-term debt issuances so that the liquiditya timely basis, especially Advances. These investments mature sooner than this debt, providingsupply a source of liquidity.liquidity because we normally ensure they have shorter maturities than the debt we issue to fund them. We also may be able to transformobtain liquidity by selling certain investments tofor cash without a significant loss of value. |
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▪ | Earnings enhancement. The investments portfolio assists with earning a competitive return on capital, which also increases our commitment tofunding for Housing and Community Investment programs. |
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▪ | Market risk management. Liquidity investments help stabilize earnings because they typically earn a relatively stable spread to the cost of debt issued to fund them, with less market risk than mortgage assets. |
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▪ | Debt issuance management. Maintaining a short-term liquidity investment portfolio can help us participate in attractively priced debt issuances, on an opportunistic basis. We can temporarily invest proceeds from debt issuances in short-term liquid assets and quickly access them to fund demand for Mission Asset Activity, rather than having debt issuances dictated solely by the timing of member demand. |
in short-term liquid assets and quickly access them to fund demand for Mission Asset Activity, rather than having debt issuances dictated solely by the timing of member demand.
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▪ | Support of housing market. Investment in mortgage-backed securities and state housing finance agency bonds directly supports the residential mortgage market by providing capital and financing for mortgages. |
How We Manage Investment Risks.Risks of Investments. We strive to ensure our investment purchasesholdings have a moderate degree of market risk and limited credit risk, which tends to lower the returns we can expect to earn on these securities. We believe that a philosophy of purchasing investments with a high amount of market or credit risk would be inconsistent with our GSE status.status and corporate objectives.
Market risk associated with short-term investments tends to be moderateminimal because of their short maturities and because we typically fund them with similar duration short-term Consolidated Obligations. We mitigate much of the market risk of mortgage-backed securities, which exists primarily from changes in mortgage prepayment speeds, by limiting their balances to
300 percent of regulatory capital, and by issuing and dynamically rebalancingfunding them with a portfolio of long-term unswapped fixed-rate callable and noncallable Consolidated Bonds.Obligations, and by managing the market risk exposure of the entire balance sheet within prudent policy limits.
Finance Agency Regulationsregulations and internal policies also provide controls on market risk exposure by restricting the types of mortgage loans, mortgage-backed securities and other investments we can hold. These restrictions prohibit, among others, the purchase of interest only or principal only stripped mortgage-backed securities and mortgage-backed securities whose average life varies more than six years under a 300 basis points interest rate shock.
Our internal policies specify general guidelines for, and relatively tight constraints on, the types and amounts of short-term investments we are permitted to hold and the maximum amount of credit risk exposure we are permitted to have with eligible counterparties. We are permitted to invest only in the instruments of counterparties with high credit ratings, and because of our conservative investment policies and practices, we believe all of our investments have high credit quality. We have never had a credit loss or credit-related write down of any investment security.
By Finance Agency Regulations, unsecured liquidity investments to a counterparty or group of affiliated counterparties are limited to maturities not exceeding nine months and limited to an amount based on a percentage of eligible regulatory capital. Eligible capital is defined as the lesser of our total regulatory capital or the eligible amount of Tier 1 capital, or if not available other comparable capital, of the counterparty. The permissible percentage ranges from one percent to 15 percent based on the counterparty's lowest long-term credit rating of its debt from an NRSRO. The lowest long-term credit rating for a counterparty to which we are permitted to extend credit is double-B. In practice, for many years we have maintained a tighter restriction and generally invested funds only in those eligible institutions with long-term credit ratings of at least single-A. Item 7's “Quantitative and Qualitative Disclosures About Risk Management” has more detail on our investment's credit and market risk management.
Deposits
We provide a variety of deposit programs, including demand, overnight, term and Federal funds, which enable depositors to invest funds in short-term liquid assets. We accept deposits from members, other FHLBanks, any institution to which we offer correspondent services, and other government instrumentalities. The rates of interest we pay on deposits are subject to change daily based on comparable money market interest rates. The balances in deposit programs tend to vary positively with the amount of idle funds members have available to invest, as well as, the level of short-term interest rates. Deposits have represented a small component of our funding in recent years, typically betweenless than one and two percent of our funding sources.
Mortgage Purchase Program (MPP or Mortgage Loans Held for Portfolio)
Description of the MPP
Types of Loans and Benefits. Finance Agency Regulationsregulations permit the FHLBanks to purchase and hold specified whole mortgage loans from their members. We offermembers, which offers members a competitive alternative to the MPP, whichtraditional secondary mortgage market and directly supports our public policy mission of supporting housing finance. We account for MPP loans as mortgage loans held for portfolio. By selling mortgage loans to us, members can increase their balance sheet liquidity and reduce theirlower interest rate and mortgage prepayment risks. The MPP particularly enables small- and medium-sized community-based financial institutions to use their existing relationship with us to participate more effectively in the secondary mortgage market. Finally, the MPP enhances our long-term profitability on a risk-adjusted basis, which augments the return on member stockholders' capital investment.
Under the MPP, we purchase two types of mortgage loans: qualifying conforming fixed-rate conventional 1-4 family residential loansmortgages and residential mortgages fully guaranteedinsured by the Federal Housing Administration (FHA). Members approved to sell us these loans are referred to as Participating Financial Institutions (PFIs).We hold purchased mortgage loans on our balance sheet and account
for them as mortgage loans held for portfolio.. Although regulations permit us to purchase qualifying mortgage loans originated within any state or territory of the United States, forbeginning several years ago we have not purchasedno longer purchase loans originated in New York, Massachusetts, Maine, Rhode Island or New Jersey due to features of those states' Anti-Predatory Lending laws that are less restrictive than we prefer.
A “conventional” mortgage refers to a non-government-guaranteed mortgage. A “conforming” mortgage refers to the maximum amount permissible to be lent as a regular prime (i.e., non-jumbo, non-subprime) mortgage. For 2013,2016, the Finance Agency established thatre-established the conforming limit at $417,000 the same as 2006-2012, with loans originated in a limited number of high-cost cities and counties receiving higher conforming limits. Our policies prohibit us from purchasing conformingWe do not purchase mortgages subject to these higher amounts.
Loan Purchase Process. A Master Commitment Contract is negotiated with each PFI, in which the PFI agrees to make a best efforts attempt to sell us a specific dollar amount of mortgage loans generally over a period of up to 12 months. We purchase loans pursuant to a Mandatory Delivery Contract, which is a legal commitment we make to purchase, and a PFI makes to deliver, a specified dollar amount of mortgage loans, with a forward settlement date, at a specified range of mortgage note rates and prices.
Shortly before delivering the loans that will fill in the Mandatory Delivery Contract, the PFI must submit loan level detail including underwriting information. We apply procedures through the automated Loan Acquisition System designed to screen loans that do not comply with our policies. Our underwriting guidelines generally mirror those of Fannie Mae and Freddie Mac for conforming conventional loans, although our guidelines and pool composition requirements are more conservative in a number of ways in order to further limit credit risk exposure. PFIs are required to make certain representations and warranties against our underwriting guidelines on the loans they sell to us. If loans are solda PFI sells us a loan in breach of those representations and warranties, we have the contractual right to require the PFI to repurchase those loans.the loan.
How We Manage Risks of the MPP Risks
Market Risk.We mitigate the MPP's market risk similarly to how we mitigate market risk from mortgage-backed securities, as described above and in Item 7's "Quantitative and Qualitative Disclosures About Risk Management."securities.
Regarding credit risk, aCredit Risk - Conventional Mortgage Loans. A unique feature of the MPP is that it separates the various activities and risks associated with residential mortgage lending for conventional loans and allows these risks and activities to be taken on by different entities. We manage the funding of the loans, market risk (including interest rate risk (includingand prepayment risk), and liquidity risk. PFIs manage marketing, originating and, in most cases, servicing the loans. PFIs may either retain servicing or sell it to a qualified and approved third-party servicer (also referred to as a PFI). Because PFIs manage and bear most of the credit risk, they do not pay us a guarantee fee to transfer credit risk.
CreditWe manage credit risk exposure is mitigated for conventional loans through underwriting and pool composition requirements and by applying layered credit enhancements. These enhancements, which apply after a homeowner's equity is exhausted, include (in order of priority) primary mortgage insurance (when applicable), the Lender Risk Account (discussed below), and for loans acquired before February 2011, Supplemental Mortgage Insurance (when applicable) that the PFI purchased from one of our approved third-party providers naming us as the beneficiary.
Beginning in February 2011, we discontinued use of Supplemental Mortgage Insurance for new loan purchases and replaced it with expanded use of the Lender Risk Account and aggregation of loan purchases into larger pools to provide diversification in credit risk exposure. These credit enhancements are designed to adequately protect the FHLBankus against credit losses in scenarios of severe downward movements in housing prices and unfavorable changes in other factors that can affect loan delinquencies and defaults.
The Lender Risk Account is a key component of how we manage residual credit risk. It is a purchase-price holdback that PFIs may receive back from us, startingof a portion of the initial purchase price. Starting after five years from the loan purchase date, we may return the holdback to PFIs if they manage credit risk to pre-defined acceptable levels of exposure on the loan pools they sell to us. Actual loan losses are deducted from the amount of the purchase-price holdback we return to the PFI. The Lender Risk Account provides PFIs with a strong incentive to sell us high quality performing mortgage loans.
Beginning in February 2011, we changed our credit enhancement structure to further enhance credit risk management. We discontinued use of SupplementalCredit Risk - FHA Mortgage Insurance for new loan purchases and replaced it with expanded use ofLoans. Because the Lender Risk Account and aggregation of loan purchases into larger pools to provide diversification in credit risk exposure. These changes were motivated by the deterioration in the housing and mortgage markets in 2007-2010; one result of which has been that the providers of supplemental mortgage insurance used in the MPP now have ratings below the double-A rating required by a Finance Agency Regulation. In addition, the insurers increased the cost of purchasing supplemental mortgage insurance several times, which made it more difficult to competitively price mortgages in the MPP.
We believe we bear no credit riskFHA makes an explicit guarantee on purchased FHA loans, due to the explicit FHA guarantee and therefore we do not require any credit enhancements on these loans beyond underwriting, homeowner's equity, and primary mortgage insurance.
Item 7's “Quantitative and Qualitative Disclosures About Risk Management” hasprovides more detail on ourhow we manage market and credit risk management ofrisks for the MPP.
Earnings from the MPP
The MPP enhances long-term profitability on a risk-adjusted basis and augments the return on member stockholders' capital investment. We generate earnings in the MPP from monthly interest payments minus the cost of funding and the cost of hedging the MPP's interest rate risk. Interest income on each loan is computed as the mortgage note rate multiplied by the loan's principal balance:
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▪ | minus servicing costs (0.25 percent for conventional loans and 0.44 percent for FHA loans); |
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▪ | minus the cost of Supplemental Mortgage Insurance (as applicable)(for applicable loans); and |
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▪ | adjusted for the amortization of purchase premiums or the accretion of purchase discounts and for the amortization or accretion of fair value adjustments on loans initially classified as mortgage loan commitments. |
For new loan purchases, we consider the cost of the Lender Risk Account when we set conventional loan prices and evaluate the MPP's expected return. The pricing of each structure depends on a number of factors and is specific to the PFI and to the loan pool. We do not receive fees or income for retaining the risk of losses in excess of any credit enhancements.
FUNDING - CONSOLIDATED OBLIGATIONS
Our primary source of funding and hedging market risk exposure is through participation in the sale of Consolidated Obligations. debt securities (Consolidated Obligations) to global investors. Obligations are the joint and several obligations of all the FHLBanks, backed only by the financial resources of these institutions.
There are two types of Consolidated Obligations: Consolidated Bonds (Bonds) and Consolidated Discount Notes (Discount Notes). We participate in the issuance of Bonds for three purposes:
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▪ | to finance and hedge intermediate- and long-term fixed-rate Advances and mortgage assets; |
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▪ | to finance and hedge short-term, LIBOR-indexed adjustable-rate Advances, and swapped Advances, typically by synthetically transforming fixed-rate Bonds to adjustable-rate LIBOR funding through the execution of interest rate swaps; and |
Bonds may have fixed or adjustable (i.e., variable) rates of interest. Fixed-rate Bonds are either noncallable or callable. A callable Bond is one that we are able to redeem in whole or in part at our discretion on one or more predetermined call dates according to the Bond's offering notice. The maturity of Bonds typically ranges from one year to 20 years. Generally, ourOur adjustable-rate Bonds use LIBOR for interest rate resets. In the last five years, we have not issued step-up Bonds,participated in the issuance of range Bonds, zero coupon Bonds, or indexed principal redemption Bonds.
We use fixed-rate Bonds or other similarly complex instruments.to fund longer-term fixed-rate Advances and longer-term fixed-rate mortgage assets, and use adjustable-rate Bonds to fund adjustable-rate LIBOR Advances.
We transact in interest rate swaps to synthetically convert some fixed-rate Bonds to adjustable-rate terms indexed to LIBOR. These are used to hedge adjustable-rate LIBOR Advances.
We participate in the issuance of Discount Notes to fund short-term Advances, adjustable-rate LIBOR Advances, putable Advances (which we normally swap to LIBOR), liquidity investments, and a portion of longer-term fixed-rate assets. Discount Notes have maturities from one day to one year, with most of ours normally maturing within three months.
The mix of Obligations fluctuates in response to relative changes in short-term versus long-term assets, relative changes in fixed-rate versus adjustable-rate assets, decisions on market risk management (particularly the amount of funding of longer-term assets with short-term Obligations), and differences in relative costs of various Obligations. We use fixed-rate Bonds to fund longer-term fixed-rate Advances and longer-term fixed rate mortgage assets, and use adjustable-rate Bonds to fund adjustable-rate LIBOR Advances. We may transact in interest rate swaps to synthetically convert some fixed-rate Bonds to adjustable-rate terms, mostly indexed to LIBOR. These are used normally to hedge adjustable-rate LIBOR Advances.
We participate in the issuance of Discount Notes to fund short-term Advances, adjustable-rate LIBOR Advances, putable Advances (which are normally swapped to LIBOR), liquidity investments, and a portion of longer-term fixed-rate assets. Discount Notes have maturities from one day to one year, with many of ours normally maturing within three months.
There are frequent changes in the interestInterest rates and prices ofon Obligations, and inincluding their interest cost relationship to other products such as U.S. Treasury securities and LIBOR. Interest costsLIBOR, are affected by a multitude of factors including (but not limited to):such as: overall economic and credit conditions; credit ratings of the FHLBank System; investor demand and preferences for our debt securities; the level of interest rates and the shape of the U.S. Treasury curve and the LIBOR swap curve; and the supply, volume, timing, and characteristics of debt issuances by the FHLBanks, other GSEs, and other highly rated issuers.
Finance Agency Regulationsregulations govern the issuance of Consolidated Obligations. An FHLBank may not issue individual debt securities without Finance Agency approval, and we have never done so. The Office of Finance services Obligations, prepares the FHLBank System's quarterly and annual combined financial statements, and serves as a source of information for the FHLBanks on capital market developments.
We have the primary liability for our portion of Obligations, i.e., those issued on our behalf for which we receivereceived the proceeds. However, we also are jointly and severally liable with the other 11 FHLBanks for the payment of principal and interest on all Obligations. If we do not pay the principal or interest in full when due on any Obligation issued on our FHLBank'sFHLB's behalf, we are prohibited from paying dividends or redeeming or repurchasing shares of capital stock. If another FHLBank were unable to repay its participation in an Obligation for which it is the primary obligor, the Finance Agency could call on each of the other FHLBanks to repay all or part of the Obligation. The Finance Agency has never invoked this authority.
An FHLBank may not issue individual debt securities without Finance Agency approval.
LIQUIDITY
The FHLBank's operations requireOur business requires a continual and substantial amount of liquidity to meet financial obligations (primarily maturing Consolidated Obligations) in a timely and cost-efficient manner and to provide members access to timely Advance funding and mortgage loan sales in all financial environmentsenvironments. We obtain liquidity by issuing debt, holding short-term assets that mature before their associated funding, and having the ability to meet financial obligations (primarilysell certain investments without significant accounting or economic consequences. Sources of asset liquidity include cash, maturing Consolidated Obligations) as they come due in a timelyAdvances, maturing investments, principal paydowns of mortgage assets, the ability to sell certain investments, and cost-efficient manner. Liquidity risk isinterest payments received. Uses of liquidity include repayments of Obligations, issuances of new Advances, purchases of loans under the risk that we will be unable to satisfy these obligations or to meet the AdvanceMPP, purchases of investments, and MPP funding needspayments of members in a timely and cost-efficient manner. interest.
Liquidity requirements are significant because Advance balances can be highly volatile, many have short-term maturities, and we strive to offer accessallow members to borrow Advances on the same day membersthey request them. We regularly monitor liquidity risks and the investment and cash resources available to meet liquidity needs, as well as statutory and regulatory liquidity requirements.
Because Obligations have favorable credit ratings and because the FHLBank System is one of the largest sellers of debt in the worldwide capital markets, the System historically has been able to satisfy its liquidity needs through debt issuance across a wide range of structures at relatively favorable spreads to benchmark market interest rates. This was the case even during the severe financial crisis of late 2008 and early 2009 and the federal government's political stresses over fiscal policy in mid-2011 and late-2012.
Besides proceeds from debt issuances, we also raise liquidity via our liquidity investment portfolio and the ability to sell certain investments without significant accounting consequences. Our sources of asset liquidity include cash, maturing Advances, maturing investments, principal paydowns of mortgage assets, the ability to sell certain investments, and interest payments received. Uses of liquidity include repayments of Obligations, issuances of new Advances, purchases of loans under the MPP, purchases of investments, and payments of interest.
CAPITAL RESOURCES
Capital Plan
Basic Characteristics
Under Finance Agency Regulations,regulations, regulatory capital is composed of all capital stock (including stock classified as mandatorily redeemable), retained earnings, general loss allowances, and other amounts from sources the Finance Agency determines are available to absorb losses. Currently, our regulatory capital consists of capital stock and retained earnings. Under the Gramm-Leach-Bliley Act of 1999 (GLB Act), permanent capital equals Class B stock plus retained earnings and is available to absorb financial losses.
Our Capital Plan has the following basic characteristics:
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▪ | We offer only one class of capital stock, Class B, which is redeemable upon a member's five-year advance written notice, with certain conditions described below. We may elect, at our discretion, to repurchase stock redemption requests sooner than five years. |
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▪ | We issue shares of capital stock as required for an institution to become a member or maintain membership, as required for members to capitalize Mission Asset Activity, and when we may pay dividends in the form of additional shares of stock. |
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▪ | The Capital Plan enables us to efficiently expand and contract capital stock needed to capitalize assets in response to changes in our membership base and theirdemand for Mission Asset needs, thereby maintainingActivity. This enables us to maintain a prudent amount of financial leverage in compliance with regulatory capital requirements and also consistent with generating earnings to provideconsistently generate a competitive dividend returns and a sufficient amount of retained earnings. |
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▪ | The Capital Plan permits us to issue shares of capital stock only under the following circumstances: as required for an institution to become a member or maintain membership; as required for a member to capitalize Mission Asset Activity; and to pay stock dividends.return. |
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▪ | We may, subject to the restrictions described below, repurchase certain capital stock (i.e., "excess" capital stock) in a timely and prudent manner.. |
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▪ | The concept of “cooperative capital”capital,” explained below, better aligns the interests of heavy users of our products with light users by enhancing the dividend return. |
Prudent risk management requires us to maintain effective financial leverage to minimize risk to capital stock while preserving profitability and to hold an adequate amount of retained earnings. Pursuant to these objectives, Finance Agency regulations stipulate that we must comply with three limits on capital leverage and risk-based capital. We have always complied with the regulatory capital requirements.
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▪ | By statute and Finance Agency requirement, weWe must satisfy three capital requirements, the most important of which aremaintain at least a minimum four percent minimum regulatory capital-to-assets ratio. This has historically been the regulatory capital requirement that has been closest to affecting our operations. |
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▪ | We must maintain at least a five percent minimum leverage ratio andof capital divided by total assets, which includes a 1.5 weighting factor applicable to permanent capital. Because all of our Class B stock is permanent capital, this requirement is met automatically if we satisfy the four percent unweighted capital requirement. |
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▪ | We are subject to a risk-based capital requirement. Capital requirements are further discussedrule in which we must hold an amount of "permanent" capital that exceeds the “Capital Adequacy” sectionamount of Item 7's “Quantitativeexposure to market risk, credit risk, and Qualitative Disclosures About Risk Management.”operational risk. How we determine the amount of these risk exposures is stipulated by Finance Agency regulation. Permanent capital includes retained earnings and the regulatory amount of Class B capital stock. |
In addition to the minimum capital requirements, the GLB Act and our Capital Plan promote the adequacy of our capital to absorb financial losses in three ways, which combine to give member stockholders a clear incentive to require us to minimize our risk profile:
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▪ | the five-year redemption period for Class B stock; |
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▪ | the option we have to call on members to purchase additional capital if required to preserve safety and soundness; and |
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▪ | the limitations, described below, on our ability to honor requested redemptions of capital if we are at risk of not maintaining safe and sound operations. |
GAAP capital excludes mandatorily redeemable capital stock, while regulatory capital includes it. Mandatorily redeemable capital stock, which is stock subject to pending redemption, is accounted for as a liability on our Statements of Condition and related dividend payments are accounted for as interest expense. The classification of some capital stock as a liability has no effect on our safety and soundness, liquidity position, market risk exposure, or ability to meet interest payments on our participation in Obligations. Mandatorily redeemable capital stock is fully available to absorb losses until the stock is redeemed or repurchased. See Note 1615 of the Notes to Financial Statements for more discussion of mandatorily redeemable capital stock.
Components of Capital Stock Purchases and Operations of the Capital Plan
Our Capital Plan ties the amount of each member's required capital stock to both the amount of the member's assets (membership stock) and the amount and type of its Mission Asset Activity with us (activity stock). Membership stock is required to become a member and maintain membership. The amount required for each member currently ranges from a minimum of $1 thousand to a maximum of $25 million for each member, with the amount within thethat range determined as a percentage of member assets.
In addition to its membership stock, a member may be required to purchase and hold activity stock to capitalize its Mission Asset Activity. For purposes of the Capital Plan, Mission Asset Activity includes the principal balance of Advances, guaranteed funds and rate Advance commitments, (GFR), and the principal balance of loans and commitments in the MPP that occurred after implementation of the Capital Plan.
The FHLBankFHLB must capitalize all Mission Asset Activity with capital stock at a rate of at least four percent. By contrast,However, each member mustis permitted to maintain an amount of Class B activity stock within the range of minimum and maximum percentages for each type of Mission Asset Activity. The current percentages are as follows:
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Mission Asset Activity | | Minimum Activity Percentage | | Maximum Activity Percentage |
Advances | | 2% | | 4% |
Advance Commitments | | 2 | | 4 |
MPP | | 0 | | 4 |
If a member's capitalization of Mission Asset Activity falls to one of the minimum percentages, it must purchase additional stock to capitalize further Mission Asset Activity. If a member owns more stock than is needed to satisfy both its membership stock requirement and the maximum activity stock percentages for its Mission Asset Activity, we designate the remaining stock as the member's excess capital stock. The member may utilize its excess stock to capitalize additional Mission Asset Activity.
If an individual member's excess stock reaches zero, the Capital Plan normally permits us, within certain limits, to capitalize additional Mission Asset Activity of that member with excess stock owned by other members at the maximum percentage rate. This feature, called “cooperative capital,” enables us to more effectively utilize our capital stock. A member's use of cooperative capital reduces the ratio of its activity stock to its Mission Asset Activity for each type of Mission Asset Activity. There is a limit to how much cooperative capital a member may use, which we currently set at $200 million.
When a member's ratio of activity stock to its Mission Asset Activity reaches the minimum activity stock percentage for all types of Mission Asset Activity, the member must capitalize additional Mission Asset Activity of a given type by purchasing capital stock at that asset type's minimum percentage rate.rate, assuming availability of cooperative capital.
Statutory and Regulatory Restrictions on Capital Stock Redemption and Repurchases
In accordance with the GLB Act, our stock is putable by members. However, for us and the other FHLBanks, there are significant statutory and regulatory restrictions on our obligation or right to redeem or repurchase outstanding stock, including, but not limited to, the following:
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▪ | We may not redeem any capital stock if, following the redemption, we would fail to satisfy any of our minimumRegulatory capital requirements. By law, we may not redeem any stock if we become undercapitalized. |
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▪ | We may not redeem any capital stock without approval of the Finance Agency if either our Board of Directors or the Finance Agency determines that we have incurred or are likely to incur losses resulting or expected to result in a charge against capital. |
If our FHLBankFHLB is liquidated and after payment in full to our creditors, stockholders willwould be entitled to receive the par value of their capital stock. In addition, each stockholder willwould be entitled to any retained earnings in an amount proportional to the stockholder's share of the total shares of capital stock. In the event of a merger or consolidation of the FHLBank,FHLB, the Board of Directors shall determine the rights and preferences of the FHLBank'sFHLB's stockholders, subject to any terms and conditions imposed by the Finance Agency.
Retained Earnings
Purposes and Amount of Retained Earnings
Retained earnings are important to protect members' capital stock investment against the risk of impairment and to enhance our ability to pay stable and competitive dividends when earnings may be volatile in light of the risks we face. Impairment risk is the risk that members would have to write down the par value of their capital stock investment in our FHLBankFHLB as a result of their analysis of ultimate recoverability. An extreme situation of earnings instability, in which losses exceeded the amount of our retained earnings for a period of time determined to be other-than-temporary, could result in a determination that the value of our capital stock was impaired.
Our Retained Earnings and Dividends PolicyWe have a policy that sets forth a range for the amount of retained earnings we believe is needed to mitigate impairment risk and augmentfacilitate dividend stability in light of the risks we face. The minimumcurrent retained earnings requirement is currentlyranges from $375 million to $600 million, based on mitigating all of our combinedquantifiable risks under stressvery stressed business and market scenarios to at least a 99 percent confidence level. Given the recent financial and regulatory environment, we have been carryingcarry a greater amount of retained earnings in the last several years than required by the Policy. At the end of 2012,2015, our retained earnings totaled
$538 million. $765 million. We believe the current amount of retained earnings is sufficient to protect our capital stock against impairment risk and to provide the opportunity for dividend stability.stability if needed.
2011 Joint Capital Agreement to Augment Retained Earnings
The 12 Federal Home Loan BanksFHLBanks entered into a Joint Capital Enhancement Agreement (the “Capital Agreement”) in February 2011. The Capital Agreement provides that each FHLBank will allocate quarterly at least 20 percent of its net income to a restricted retained earnings account (the “Account”). The 20 percent reserve allocation to the Account is similar to what had been required under the FHLBanks' REFCORP obligation, which was satisfied in 2011. The Account is not available to be distributed as dividends except under certain limited circumstances. The Capital Agreement does not limit theour ability to use our retained earnings held outside of the Account to pay dividends.
Although we have always maintained compliance with our capital requirements, we believe the Capital Agreement enhances risk mitigation by building a larger capital buffer over time to absorb unexpected losses, if any, that we may experience. Therefore, the Capital Agreement provides additional protection against impairment risk to stockholders' capital investment. It also strengthens the long-term viability of the Affordable Housing Program because the higher amount of retained earnings raises future earnings.
USE OF DERIVATIVES
Finance Agency Regulationsregulations and FHLBankour policies establish guidelines for the execution and use of derivative transactions. We are prohibited from trading in, or the speculative use of, derivatives and have limits on the amount of credit risk to which we may be exposed. Most of our derivatives activity involves interest rate swaps, some of which may include options. We account for all derivatives at their fair values.
Similar to our participation in debt issuances, use of derivatives help us hedgeis integral to hedging market risk created by offering Advances, purchasing mortgage assets, and transacting mortgage commitments. Derivatives related to Advances most commonly hedge either:
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▪ | below-market rates and/or the market risk exposure on Putable Advances, and certain other Advances, for which members have sold us options embedded within the Advances; or |
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▪ | Regular Fixed RateFixed-Rate Advances when it may not be as advantageous to issue Obligations or when it may improve our market risk management. |
Derivatives related to mortgage assets are used to augment debt issuance in the hedging of market risk. We also use derivatives to hedge the market risk created by commitment periods of Mandatory Delivery Contractsassociated with fixed-rate mortgage purchase commitments in the MPP.
Other derivativesDerivatives transactions related to Bonds also help us intermediate between the normal preferencespreference of capital market investors for intermediate- and long-term fixed-rate debt securities and the normal preferencespreference of our members for shorter-term or adjustable-rate Advances. We can satisfy the preferences of both groups by issuing long-term fixed-rate Bonds and entering into an interest rate swap that synthetically converts the Bonds to an adjustable-rate LIBOR funding basis that matches up with the short-term and adjustable-rate Advances, thereby preserving a favorable interest rate spread.
Use of derivatives can result in a substantial amount of volatility of accounting and economic earnings. Because we have a cooperative business model, our Board of Directors has emphasized the importance of minimizingcontrolling earnings volatility, including volatility from the use of derivatives.volatility. Accordingly, our strategy is to execute derivatives that we expect to be highly effective hedges of market risk exposure. Therefore,exposure relative to their impacts on profitability. As a result, the volatility in the market value of equity and earnings from our use of derivatives has historically tended to be moderate. In this context, we have not executed derivatives to hedge market risk exposure outside of specifically and individually identified assets or liabilities. We believe that the economic benefits of using derivatives to hedge risks in the entire balance sheet instead of individual instruments would generally be less than the increased hedging costs and risks, which include potentially higher earnings volatility.
RISK MANAGEMENT
Our FHLBank faces various risks that could affect the ability to achieve our mission and corporate objectives. We categorize risks into 1) business/strategic risk, 2) regulatory/legislative risk), 3) market risk (also referred to as interest rate or prepayment risk), 4) capital adequacy, 5) credit risk, 6) funding/liquidity risk, 7) accounting risk, and 8) operational risk. Our Board of Directors establishes corporate objectives regarding risk philosophy, risk tolerances, and financial performance expectations. We have numerous Board-adopted policies and processes that address risk management. These policies establish risk tolerances, limits, and guidelines, must comply with Finance Agency Regulations, and are designed to achieve continual safe and sound operations. The Board delegates day-to-day responsibility for managing and controlling most of these risks to senior management. Our cooperative business model, corporate objectives, capital structure, and regulatory oversight provide us clear incentives to minimize risk exposures to the extent possible. Risk management practices are infused throughout all of our business activities.
Our policies and operating practices are designed to limit risk exposures from ongoing operations in the following broad ways:
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▪ | by anticipating potential business risks and appropriate responses; |
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▪ | by defining permissible lines of business; |
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▪ | by limiting the kinds of assets we are permitted to hold in terms of their credit risk exposure and the kinds of hedging and financing arrangements we are permitted to use; |
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▪ | by limiting the amount of market risk and capital risk to which we are permitted to be exposed; |
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▪ | by specifying very conservative tolerances for credit risk posed by Advances; |
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▪ | by specifying capital adequacy minimums; and |
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▪ | by requiring strict adherence to internal controls and operating procedures, adequate insurance coverage, and comprehensive Human Resources policies, procedures, and strategies. |
We actively manage risk exposures on a departmental basis and through a company-wide enterprise risk management framework. We also manage risk via regular reporting to and discussion with the Board of Directors and its committees, particularly the Finance and Risk Management Committee and the Audit Committee, as well as by continuous discussion and decision-making among key personnel across the FHLBank.
COMPETITION
Numerous economic and financial factors influence themembers' use of Advances by our members as a competitive alternative for their balance sheet funding needs.Mission Asset Activity. One of the most important factors that affect Advance demand is the availability to our membersamount of competitively-priced local retailmember deposits, which for most members view asare their primary funding source.source of funds. In addition, both small and, in particular, large members typically have access to brokered deposits, repurchase agreements and public unit deposits, each of which presents a competitive alternative towholesale funds besides FHLB Advances. Larger members also have greater access to other competitive sources of funding and asset/liability management facilitated via the national and global credit markets. These sources include subordinated debt, interbank loans, covered bonds, interest rate swaps, options, bank notes, and commercial paper.
Another important source of competition for Advances exists fromis the various ongoing fiscal and monetary stimuli initiated by the federal government to combat the continued difficulties in the housing market and broader economy. These government actions, and their effects on our business, areThis is discussed in Item 1A's “Risk Factors” and in Item 7's “Executive Overview" and "Conditions in the Economy and Financial Markets.Overview."
The holding companies of some of our large asset members have membership(s) in other FHLBanks through affiliates chartered in other FHLBank Districts.their affiliates. Others could initiate memberships in other Districts. The competition among FHLBanks for the business of multiple-membership institutions is similar to the FHLBanks' competition with other wholesale lenders and other mortgage investors. We compete with other FHLBanks on the offerings and pricing of Mission Asset Activity, earnings and dividend performance, collateral policies, capital plans, and members' perceptions of our relative safety and soundness.
Some members may also evaluate benefits of diversifying business relationships among FHLBankFHLB memberships. We regularly monitor to the extent possible, these competitive forces among the FHLBanks.
The primary competitors for mortgage loans we purchase in the MPP are Fannie Mae and Freddie Mac, government agencies such as the Government National Mortgage Association (Ginnie Mae), and private issuers, and, beginning in 2009, the U.S. government. We compete primarily based on price, products, and services.issuers. Fannie Mae and Freddie Mac, in particular, have long-established and efficient programs and are the dominant purchasers of residential conforming fixed-rate conventional mortgages. In addition, a number of private financial institutions have well-established securitization programs, although they may not currently be as active as they were historically. The MPP also competes with the Federal Reserve to the extent it purchases mortgage-backed securities and affects market prices and availability of supply.
For debt issuance, the FHLBank System competes with issuers in the national and global debt markets, including most importantly the U.S. government and other GSEs. Competitive factors include, but are not limited to, interest rates offered; the amount of debt offered; the market's perception of the credit quality of the issuing institutions and the liquidity of the debt; the types of debt structures offered; and the effectiveness of debt marketing activities.
TAX STATUS
We are exempt from all federal, state, and local taxation other than real property taxes. However, any cash dividends we issue are taxable to members and do not benefit from the corporate dividends received exclusion. Notes 1, 14, and 15 of the Notes to Financial Statements have additional details regarding the assessments for the Affordable Housing Program and REFCORP.
Item 1A. Risk Factors.
The following are the most important risks we currently face. The realization of one or more of the risks could negatively affect our results of operations, financial condition, and, at the extreme, the viability of our business franchise. The effects could include reductions in Mission Asset Activity, lower earnings and dividends, and, inat the extreme, situations, impairment of our capital or an inability to participate in issuances of Consolidated Obligations. The risks identified below are not the only risks we face. AdditionalOther risks not presently known or which we deem to be currently deem immaterial may also impact our business, andbusiness. Additionally, the risks identified may adversely affect our business in ways we do not anticipated.expect or anticipate.
Economy.An economic downturn could reducelower Mission Asset Activity and profitability.
Member demand for Mission Asset Activity depends in large part on the general health of the economy and overall business conditions. Numerous external factors can affect our Mission Asset Activity and earnings including:
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▪ | the general state and trends of the economy and financial institutions, especially in our Fifth District; |
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▪ | conditions in the financial, credit, mortgage, and housing markets; |
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▪ | competitive alternatives to our products, such as retail deposits and other sources of wholesale funding; |
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▪ | actions of the Federal Reserve to affect liquidity reserves of financial institutions and the money supply; |
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▪ | the willingness and ability of financial institutions to expand lending; and |
Because our business tends to be cyclical, a recessionary economy or an economy characterized by stagflation, normally lowers the amount of Mission Asset Activity, can decrease profitability, and can cause stockholders to request redemption of a portion of their capital or request withdrawal from membership (both referred to herein this document as “request withdrawal of capital”). These unfavorable effects are more likely to occur and be more severe if a weak economy is accompanied by significant changes in interest rates, stresses in the housing market, elevated competitive forces, or actual or potential changes in the legislative and regulatory environment for the FHLBank System.environment.
AllSince the last recession, which officially ended in 2009, the economy has grown at a measured pace, contributing to tempered broad-based member demand for Mission Asset Activity. In addition, overall Advance demand has been and continues to be unfavorably affected by the substantial amount of deposit based liquidity provided to financial institutions through the monetary actions of the Federal Reserve, and a more onerous regulatory environment for our members. Acceleration of these factors have existed since 2008, and together they have adversely affected trends in balances and member utilization rates ofconditions or another recession could decrease Mission Asset Activity, especially Advances. Although in 2012 Advance balances increased, the growth was due mostly to one new large-asset member, not broad based gains in utilization across the membership. Another recession could further decrease the broad-usage of Mission Asset Activity or sharply lower Advance balances which could in turn reduce profitability. As discussed in another risk factor, an extremely severe economic downturn, especially if combined with significant disruptions in housing conditions or other adverse external events, could result in additional and substantial credit losses in the MPP and, at the extreme, credit losses on other assets.
Competition.The recently elevated competitive environment for our products could decreaseadversely affect business activities, including decreasing the level and utilization rates of Mission Asset Activity, earnings, and capitalization.
We operate in a highly competitive environment for our Mission Asset Activity and debt issuance.Activity. Increased competition cancould decrease the amount of Mission Asset Activity and narrow net spreadsprofitability on that activity, both of which can result in lower profitability andcould cause stockholders to request withdrawalwithdrawals of capital. Historically, our chiefprimary competition has been from other wholesale lenders and debt issuers, including other GSEs. A substantial source of competition in the last eight years has come from
the federal government's actions to stimulate the economy, especially the actions of the Federal Reserve System inthrough its policies of quantitative easing and maintaining extremely low interest rates. Among other effects, these actions have significantly expanded liquidity and excess reserves available to many members, which lowered our Advance demand.members. We cannot predict how long these negative effects will continue or what the effects of further government stimulus policies might be. However, we expect overall, broad-based growth in Advance demand will remain weakmodest until the government reduces these initiatives by tightening monetary policy and winding down its purchasesholdings of U.S. Treasury and mortgage-backed securities. Even if these events take place, we cannot provide assurance regarding the pace or strength of the renewed Advance demand that we would anticipate.
In addition, the FHLBank System competes for funds through issuance of debt with the U.S. Treasury, Fannie Mae, Freddie Mac, other GSEs, and corporate, state, and sovereign entities, among others. Increases in the supply and types of competing debt products or other regulatory factors could adversely affect the System's ability to access funding or increase the cost of our debt issuance. Either of these effects could in turn adversely affect our financial conditions and results of operations and the value of FHLB membership.
GSE Reform.Potential GSE reform considered by the U.S. government could unfavorably affect our business model, financial condition, and results of operations.
The FHLBank System's regulator, the Finance Agency, also regulates Fannie Mae and Freddie Mac, which continueMac. While there appears to be in conservatorship. While there is agreementconsensus that a permanent financial and political solution forto the current conservatorship status of Fannie Mae and Freddie Mac should be implemented, which could include maintaining the current structure, no consensus has evolved to date around any of the various options proposed to date, and no legislation has been proposed.legislative proposals. However, some policy proposals have included provisions--suchprovisions applicable to the FHLBanks, such as limitations on Advances and portfolio investments, development of a covered bond market, and restrictions on GSE mortgage finance--thatfinance, that could threaten the FHLBanks'FHLBank System's long-standing business model.
Because all the GSEs shareFHLBanks shares a common regulator with Fannie Mae and general housing mission,Freddie Mac, the FHLBanks could be subject to legislation relatedultimate resolution to the ultimate dispositionconservatorship of Fannie Mae and Freddie Mac.Mac could affect the FHLBanks. There are significant differences between the FHLBank System and Fannie Mae and Freddie Mac, including the System's focus on lending as opposed to guaranteeing mortgages and ourits distinctive cooperative business model. However, future legislationLegislation could inadequately account for these differences, which could imperil the ability of the FHLBanksFHLBank System to continue operating effectively within theirits current business model or could change the System's business model. We cannot predict the effects on the System if GSE reform were to be enacted.
At this time, we are unable to predict what effects GSE reform will ultimately have on the FHLBank System's business model or our financial condition and results of operations, or whether the effects will be positive or negative.
FHLB Regulatory Environment.We face a continued heightened regulatory and legislative environment, which could increase unfavorable effects onunfavorably affect our business model, financial condition, and results of operations.
In addition to potential GSE reform, the legislative and regulatory environment in which the FHLBank System operates continues to undergo rapid change driven principally by reforms underemanating from the Housing and Economic Reform Act of 2008 (HERA) and the Dodd-Frank Act. There are numerous new regulations promulgatedWall Street Reform and more in the process of being promulgated relative to the FHLBank System. CurrentConsumer Protection Act (Dodd-Frank Act). Recently-promulgated and future legislative and regulatory actions could significantly affect us, as summarized below.our business model, financial condition, or results of operations.
In general, there has been a renewed regulatory focus on the FHLBanks' core mission activity of utilizing their GSE status to provide funding and liquidityaddition, in support of the housing markets. This focus is manifested in several regulatory initiatives, in revamped examination processes, and in evolving expectations ofJanuary 2016, the Finance Agency aboutpublished a final rule regarding membership requirements, part of which will negatively affect our business. The rule prohibits captive insurance companies membership eligibility in the proportion of assets heldFHLBank System. The membership regulation is discussed further in activities considered core to the FHLBanks' mission. The Finance Agency's renewed focus on FHLBanks' core mission activities includes a request for each FHLBank to develop and submit a strategic plan to achieve core mission asset benchmarks that each FHLBank identifies.Item 7's "Executive Overview."
We believe thethat, taken as a whole, legislative and regulatory environment hasactions have raised our operating costs and imparted added uncertainty regarding the business model under which the FHLBanks may operate in the future. We are unable at this time to predict whatthe ultimate effects the heightened regulatory environment willcould have on the FHLBank System's business model or on our financial condition and results of operations.
SupervisionLiquidity and Regulation of Nonbank Financial Companies.Market Access. In April 2012, the Financial Stability Oversight Council (the Oversight Council) issued a final rule and guidance on the standards and procedures the Oversight Council will follow in determining whether to designate a nonbank financial company for supervision by the Federal Reserve Board (the Federal Reserve), which would subject such companies to certain heightened prudential standards. The final rule provides that, in making its determinations, the Oversight Council will consider as one factor whether a nonbank financial company is subject to oversight by a primary financial regulatory agency (for the FHLBank, the Finance Agency). We would be designated a nonbank financial company pursuant to a separate rule that has been proposed by the Federal Reserve. If we are designated by the Oversight Council for supervision by the Federal Reserve and subject to additional prudential standards, our operations and business could be adversely impacted by the resulting additional regulatory costs and potential restrictions on our business activities.
Dodd-Frank Act Developments. Together with the other FHLBanks, we continue to monitor rulemaking under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Although many of the Dodd-Frank Act's requirements have not yet been promulgated, we continue to implement the processes and documentation necessary to comply with the law as we currently understand it.
Under the Dodd-Frank Act, the FHLBanks are subject to additional statutory and regulatory requirements for derivatives transactions and reporting. These requirements could raise expenses of transacting derivatives, negatively impact the liquidity and pricing of certain derivative transactions, and harm our ability to use derivatives as effective risk mitigation tools. Until the various regulatory agencies complete the process of adopting regulations related to the Dodd-Frank Act and we fully implement processes to comply with them, we cannot predict how the FHLBanks in general and our FHLBank in particular may be directly or indirectly affected by the law.
The following major regulatory actions related to the Dodd-Frank Act were issued in 2012.
In April 2012, a joint regulatory ruling determined that the FHLBanks will not be required to register as either major swap participants or as swap dealers because the derivative transactions the FHLBanks transact are for the purposes of hedging and managing market risk exposure.
In December 2012, the U.S. Commodity Futures Trading Commission (CFTC) issued rules regarding which swaps will be subject to mandatory clearing requirements. The swap determination rule stated that swaps containing optionality would not be required to clear. The rule also included a compliance schedule indicating that the FHLBank would have to submit swaps for clearing starting approximately in June 2013.
Regulation on Prudential Management and Operations Standards. In June 2012, the Finance Agency issued a final rule regarding prudential standards for the management and operations of the FHLBanks. If the Finance Agency determines that the FHLBank has failed to meet one or more of the standards, the FHLBank may be required to file a corrective action plan. If an acceptable corrective action plan is not submitted by the deadline or the terms of such a plan are not complied with, the Director of the Finance Agency can impose sanctions, such as limits on asset growth, increases in the level of retained earnings, and prohibitions on dividends or the redemption or repurchase of capital stock.
Proposed Regulation on Stress Testing.The Finance Agency issued a proposed rule in October 2012 that would implement a provision in the Dodd-Frank Act requiring certain financial companies to conduct annual capital stress tests, which would be used to evaluate capital adequacy to absorb losses under adverse economic and market conditions. The Finance Agency will issue guidance on how to conduct the stress tests, which, as required by the Dodd-Frank Act, would be generally consistent to those established by the Federal Reserve. An FHLBank would be required to provide an annual report on the results of the stress test to the Finance Agency and Federal Reserve and to publicly disclose a summary report. Because the final rule has not been promulgated and specific requirements for stress tests have not yet been established, we cannot predict the impact, if any, of the stress test requirement on our financial condition or results of operations.
Proposed Guidance on Collateralization of Advances and Other Credit Products Provided to Insurance Company Members.In October 2012, the Finance Agency issued a notice requesting comments on a proposed Advisory Bulletin that would set forth standards to guide the Finance Agency in its supervision of secured lending to insurance company members of the FHLBanks. The proposed Bulletin is based on the Finance Agency's contention that lending to insurance company members may expose the FHLBanks to certain risks that are not associated with Advances to insured depository institution members. Although we currently believe the proposal, if implemented, would primarily result in making changes in and expanding operational management to how we mitigate credit risk related to insurance company members given our existing policies and practices, we cannot yet predict the impacts, if any, on our financial condition or results of operations.
Impaired access to the capital markets for debt issuance could increase liquidity risk, decrease the amount of Mission Asset Activity, lower earnings by raising debt costs and, at the extreme, result in realization of liquidity risk preventing the System from meeting its financial obligations.
Our principal long-term source of funding, liquidity, and market risk management is through access to the capital markets for participation in the issuances of debt securities and execution of derivative transactions at prices and yields that are adequate to support our business model. Our ability to obtain funds through the sale of Consolidated Obligations depends in part on prevailing conditions in the capital markets, particularly the short-term capital markets, due to a large reliance on short-term funding. Access to the capital markets on favorable terms isand strong investor demand for FHLBank System debt are the fundamental source of the
FHLBank System's business franchise. The System's strong debt ratings, the implicit U.S. government backing of our debt, and effective funding management are instrumental in ensuring satisfactory access to the capital markets. The
We are exposed to liquidity risk if there are significant disruptions in the capital markets. Although the last several years experienced ongoing issues with the federal government's fiscal condition and changes in the regulatory environment that affected the functioning of capital markets, the FHLBank System has been able to maintain access to the capital markets
for debt issuances on acceptable terms (including when the FHLBank System's debt was downgraded by Standard & Poor's). However, there is no assurance this will continue to be the case. Future ability to effectively access the capital markets could be adversely affected by external events (such as general economic and financial instabilities, political instability, wars, and natural disasters), continued evolution of capital markets in response to financial regulations, and by the System's joint and several liability for Consolidated Obligations, which exposes us to events at other FHLBanks. If access to capital markets were to be impaired for any extended period, the effect on our financial condition and results of operations could be material. At the extreme, the System's ability to achieve its mission and satisfy its financial obligations could be threatened.
Although the last several years have been characterized by ongoing stresses in the federal government's fiscal condition, we were able to access the capital markets for debt issuances on acceptable terms (including when the FHLBank System's debt was downgraded by Standard & Poor's in 2011). We believe the chance of a liquidity or funding crisis in the FHLBank System is currently remote. However, we can provide no assurance that this will remain true.
Credit and Counterparty Risk.We are exposed to credit risk that, if realized, could materially affect our ability to pay members a competitive dividend.
We believe we have a minimalde minimis overall amount of residual credit risk exposure related to Credit Services, purchases of investments, and transactions in derivatives;derivatives, and a moderateminimal amount of credit risk exposure related to the MPP. However, we can make no assurances that credit losses will not materially affect our financial condition or results of operations. An extremely severe and prolonged economic downturn, especially if combined with continued significant disruptions in housing or mortgage markets, could result in credit losses on our assets that could impair our financial condition or results of operations.
The FHLBankFHLB is a collateral-based assetan asset-based lender for Advances and Letters of Credit. Although Advances are overcollateralizedover-collateralized and we have a perfected first lien position on all pledged loan collateral, most members arecollateral. However, we do not have full information on the characteristics of nor do we estimate current market values on a blanket lien status for Advances which, because it does not require specific loan collateral to be delivered, impartslarge portion of collateral. This results in a degree of uncertainty as to what typesthe precise amount of loans members have pledged to collateralize their Advances and what their market values are.over-collateralization.
We recorded a provision forAlthough credit losses in the MPP for the first time in 2010 primarily because of thehave historically been small, they could increase in defaults on loans in the MPP resulting from the difficult housing markets and economic conditions since 2007. The increase in defaults has resulted in the exhaustion of, or estimated exhaustion of, credit enhancements in certain mortgage pools. Adverseunder adverse economic scenarios involving further significant and sustained reductions in home prices and sustained elevated levels of unemployment and other factors that influence delinquencies and defaults could substantially increase our credit losses in the portfolio.defaults.
Some of our liquidity investments are unsecured, as are all of the uncollateralized portions of interest rate swaps. Although weWe make unsecured liquidity investments in and transact derivatives with highly rated, investment-grade institutions, have conservative limits on dollar and maturity exposure to each institution, and have strong credit underwriting practices, failurepractices. Failure of an investment or derivative counterparty with which we have a large unsecured position could have a material adverse effect on our financial conditions and results of operations. To the extent we engage in derivative transactions required to be cleared under provisions of the Dodd-Frank Act, we may be exposed to nonperformance from central clearinghouses and Futures Commission Merchants.
Financial institutions are increasingly inter-related as a result of trading, clearing, counterparty, and other relationships. As a result, actual or potential defaults of one or more financial institutions could lead to market-wide disruptions making it difficult for us to find qualified counterparties for transactions.
Market Risk.Changes in interest rates and mortgage prepayment speeds (together referred to as market risk exposure or interest rate risk exposure) could significantly reduce our ability to pay members a competitive dividend from current earnings.
Exposure of earnings to unhedged changes in interest rates and mortgage prepayment speeds is by design, one of our largest ongoing residual risks. We derive most of our income from the interest earned on assets less the interest paid on Consolidated Obligations and deposits used to fund the assets. We hedge mortgage assets and hedge them with a combination of Consolidated Obligations, derivatives transactions, and capital. Interest rate movements can lower profitability in two ways: 1) directly due to their impact on earnings from cash flow mismatches between assets and liabilities; and 2) indirectly via their impact on prepayment speeds, which can unfavorably affect the cash flow mismatches. The effects on income can include changesacceleration in the amortization of purchasepurchased premiums on mortgage assets.
Because it is normally cost-prohibitive to completely mitigate market risk exposure, , a residual amount of market risk normally remains after incorporating risk management activities. Sharp increases in interest rates, especially short-term rates, or sharp decreases in long-term interest rates could adversely affect us and our stockholders by making dividend rates less competitive relative to the returns available to members on alternative investments .investments.
In some extremely stressful scenarios, changes in interest rates and prepayment speeds could result in dividends being below stockholders' expectations for an extended period of time. In such a situation, members could engage in less Mission
Asset Activity and could request a withdrawal of capital. See Item 7's "Quantitative and Qualitative Disclosures About Risk Management" for additional information on the amount ofabout market risk exposure in the mortgage assets portfolio.exposure.
Asset Profitability.Spreads on assets to funding costs may narrow because of changes in market conditions and competitive factors, resulting in lower profitability.
Spreads on many of our assets tend to be narrow compared to those of many other financial institutions due to our cooperative business model, resulting in relatively lower profitability.model. Market conditions, and competitive forces, and, as discussed above, market risk exposure could cause these already narrow asset spreads to decline, substantially, which could substantially reduce our profitability. ThisA key spread relationship is that we tend to utilize Consolidated Discount Notes to fund a significant amount of assets that have adjustable-rates tied to LIBOR. Because rates on Discount Notes do not perfectly correlate with LIBOR, a narrowing of this spread, for example from investors changing perceptions about the quality of our debt, could result in lower dividendsincome and reductions inreduce balances of Mission Asset Activity.
Capital Adequacy. Failure to meet capital adequacy requirements mandated by Finance Agency regulations and by our policies, or not being able to pay dividends or repurchase or redeem capital stock, may lower demand for Mission Asset Activity, affect results of operations, and lower membership value.
To ensure safe and sound operations, we must hold a minimum amount of capital relative to our asset levels. We must also hold a minimum amount of retained earnings to, among other things, help protect members' capital stock investment against impairment risk. If we were to violate any capital requirement, we may be unable to pay dividends or redeem and repurchase capital stock. This could adversely affect the value of membership including members' capital investment. Outcomes could be reduced demand for Mission Asset Activity, decreased profitability, requests from members to redeem a portion of their capital or to withdraw from membership, or increased investors' perception of the riskiness of our FHLB.
Business Concentration and Industry Consolidation and Composition. Sharp reductions in Mission Asset Activity resulting from lower usage by large members, consolidation of large members or growth in lending activities by entities not eligible for FHLB membership could adversely impact our net income and dividends.
The concentrationamount of Mission Asset Activity and capital is concentrated among a smallhandful of large members. The financial industry continues to consolidate among a smaller number of members could reduce dividend rates available if several large members were to withdraw from membership or sharply reduce their activity.
A few members provideinstitutions and the majoritymarket share of our Mission Asset Activity and capital. Thesemortgage financing has shown a systemic trend towards financial institutions who are currently ineligible for FHLB membership. Our members could decrease their Mission Asset Activity and the amount of their FHLBank capital stock as a result of merger and acquisition activity or their reduced demand for Mission Assets.continued loss of market share to ineligible FHLB members. At December 31, 2012,2015, one member, JPMorgan Chase Bank, N.A., held almostnearly half of our Advances and one member PFI, Union Savings Bank, accounted for over 25 percent of the outstanding MPP principal balance. Our business model is structured to be able to absorb sharp changes in Mission Asset Activity because we can undertake commensurate reductions in liability balances and capital and because of our relatively lowmodest operating expenses. However, an extremely large and sustained reduction in Mission Asset Activity for any reason could materially affect our profitability and possibly our ability to pay competitive dividends.dividends, as well as, at the FHLBank System level, raise policy questions about the relevance of the FHLBank System in its traditional mission of supporting housing finance.
Exposure to FHLBank System.Financial difficulties at other FHLBanks could require us to provide financial assistance to another FHLBank, which could adversely affect our results of operations or our financial condition.
Each FHLBank has a joint and several liability for principal and interest payments on Consolidated Obligations, which are backed only by the financial resources of the FHLBanks. Although no FHLBank has ever defaulted on its principal or interest share of an Obligation, there can be no assurance that this will continue to be the case. Financial performance issues could require our FHLBankFHLB to provide financial assistance to one or more other FHLBanks, for example, by making a payment on an Obligation on behalf of another FHLBank. Such assistance could adversely affect our financial condition, earnings, ability to pay dividends, or ability to redeem or repurchase capital stock.
Member Regulatory Environment.Members face increased regulatory scrutiny, which could further decrease Mission Asset Activity and lower profitability.
In the last severalnumber of years, members' regulators have heightened regulatory requirementsregulation and scrutiny especially inof the areas of capitalization, asset classifications, reliance on Advances for funding, and interest rate risk management.financial industry has increased significantly. We believe these activities have resulted indecreased members' decreased utilizationoverall usage of Advances. The FDIC has changed several of its practices that has reduced or could reduce members' ability or preferences to engage in Mission Asset Activity. These practices include raising coverage levels of deposit insurance and requiring certain depository institutions to include Advances when calculating their deposit insurance premiums.
The Basel Committee on Banking Supervision (the Basel Committee) has developed a proposed new capital regime for internationally active banks. Banks subject to the new regime will beare required, among other things, to have higher capital ratios. While it is uncertain how the new capital regime and other standards, such as those related to liquidity, developed by the Basel Committee will ultimately be implemented by the U.S. regulatory authorities, the new regime could require some of our members to divest assets in order to comply with the regime's more stringent capital and liquidity requirements, thereby tending to decreasepossibly lowering Advance demand. The proposedAdditionally, the liquidity requirements maybeing implemented could adversely impact Advance demand and investor demand for Consolidated Obligations because they would limit the ability of members to fully include Advances and Consolidated Obligations in required liquidity calculations. This could raise our debt costs and, in turn, raise the Advance rates we are able to offer members, thereby harming the ability to fulfill our business model.
Personnel Risk.Our financial condition and results of operations could suffer if we are unable to hire and retain skilled key personnel.
The success of our business mission depends, in large part, on the ability to attract and retain key personnel, including maintaining effective succession planning.personnel. Competition for qualified people or ineffective succession planning could affect the ability to hire or retain effective key personnel, thereby harming our financial condition and results of operations.
Operational and Compliance Risks.Failures or interruptions in our internal controls, compliance activities, information systems and other operating technologies could harm our financial condition, results of operations, reputation, and relations with members.
Control failures, including failures in our controls over financial reporting, or business interruptions with members and counterparties could occur from human error, fraud, breakdowns in information and computer systems and financial and business models we use, lapses in operating processes, or natural or man-made disasters. If a significant control failure or business interruption were to occur, it could materially damage our financial condition and results of operations. We may not be able to foresee, prevent, mitigate, reverse or repair the negative effects of such failures or interruptions.
Moreover, weWe rely heavily on internal and third partythird-party information systems and other technology to conduct and manage our business. Our operations rely on the secure processing, storage and transmission of confidential and other information in computer systems and networks. Computer systems, software and networks can be vulnerable to failures and interruptions including “cyberattacks” (e.g.,“cyberattacks,” which are breaches, unauthorized access, misuse, computer viruses or other malicious code and other events) thatevents against information owned by our company and customers. These failures and interruptions could jeopardize the confidentiality or integrity of information, or otherwise cause interruptions or malfunctions in operations.
We can make no assurance that we will be able to prevent, timely and adequately address, or mitigate the negative effects of failures, interruptions, or cyberattacks"cyberattacks" in information systems and other technology. If we experience a failure, interruption, or cyberattack"cyberattack" in any of these systems, we may be unable to effectively conduct or manage our business activities, operating processes, and risk management, which could significantly harm customer relations, our reputation, or profitability, potentially resulting in material adverse effects on our financial condition and results of operations.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our offices are located in 70,879approximately 79,000 square feet of leased space in downtown Cincinnati, Ohio. We also maintain a leased, fully functioning, back-up facility in suburban Cincinnati. Additionally, we lease a small office in Nashville, Tennessee
for the area marketing representative. We believe that our facilities are in good condition, well maintained, and adequate for our current needs.
Item 3. Legal Proceedings.
WeFrom time to time, we are subject to various pending legal proceedings arising in the normal course of business. Management does not anticipate that the ultimate liability, if any, arising out of these matters will have a material adverse effect on our financial condition or results of operations.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
| |
Item 5. | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
By law our stock is not publicly traded, and only our members (and former members with a withdrawal notice pending) may own our stock. The par value of our capital stock is $100 per share. As of December 31, 2012,2015, we had 742699 stockholders and 4044 million shares of capital stock outstanding, all of which were Class B Stock.
We paid quarterly dividends in 20122015 and 20112014 as outlined in the table below.
| | (Dollars in millions) | (Dollars in millions) | | | | | | | | (Dollars in millions) | | | | | | | |
| | 2012 | | 2011 | | 2015 | | 2014 |
| | | | Annualized | | | | Annualized | | | | | Annualized | | | | Annualized | |
Quarter | | Amount | | Rate | | Form | | Quarter | | Amount | | Rate | | Form | | Amount | | Rate | | Form | | Quarter | | Amount | | Rate | | Form |
First | | $ | 35 |
| | 4.50 | % | | Cash | | First | | $ | 35 |
| | 4.50 | % | | Cash | | $ | 43 |
| | 4.00 | % | | Cash | | First | | $ | 47 |
| | 4.00 | % | | Cash |
Second | | 33 |
| | 4.25 |
| | Cash | | Second | | 34 |
| | 4.50 |
| | Cash | | 42 |
| | 4.00 |
| | Cash | | Second | | 44 |
| | 4.00 |
| | Cash |
Third | | 33 |
| | 4.25 |
| | Cash | | Third | | 31 |
| | 4.00 |
| | Cash | | 43 |
| | 4.00 |
| | Cash | | Third | | 42 |
| | 4.00 |
| | Cash |
Fourth | | 40 |
| | 4.75 |
| | Cash | | Fourth | | 32 |
| | 4.00 |
| | Cash | | 44 |
| | 4.00 |
| | Cash | | Fourth | | 43 |
| | 4.00 |
| | Cash |
Total | | $ | 141 |
| | 4.44 |
| | Total | | $ | 132 |
| | 4.25 |
| | | $ | 172 |
| | 4.00 |
| | Total | | $ | 176 |
| | 4.00 |
| |
Generally, our Board of Directors has discretion to declare or not declare dividends and to determine the rate of any dividend declared. Our Retained Earnings and Dividend Policy states that dividends for a quarter are declared and paid from retained earnings after the close of a calendar quarter and are based on average stock balances for the then closed quarter. Our Board of Directors' decision to declare dividends is influenced by the financial condition, overall financial performance and retained earnings of the FHLBank,FHLB, and actual and anticipated developments in the overall economic and financial environment including, most importantly, interest rates and the mortgage and credit markets. The dividend rate is generally referenced as a spread to average short-term interest rates experienced during the quarter to help assess a competitive level for our stockholders. Our earnings, and therefore dividends, generally increase as short-term interest rates rise and decrease as short-term interest rates fall.
A Finance Agency Capital Rule prohibits an FHLBankus from issuing new excess capital stock to members, either by paying stock dividends or otherwise, if before or after the issuance the amount of member excess capital stock exceeds or would exceed one percent of the FHLBank'sFHLB's assets. Excess capital stock for this regulatory purpose is calculated as the aggregate of capital stock owned that is in excess of all membership and Mission Asset Activity requirements (as defined in our Capital Plan). In accordance with this Rule, we paid cash dividends in each quarter of 2012 and 2011. Our Board, and we believe our members, continue to have a stated preference for dividends in the form of stock.
We may not declare a dividend if, at the time, we are not in compliance with all of our capital requirements. We also may not declare or pay a dividend if, after distributing the dividend, we would fail to meet any of our capital requirements or if we determine that the dividend would create a safety and soundness issue for the FHLBank.FHLB. See Note 1615 of the Notes to the Financial Statements for additional information regarding our capital stock.
RECENT SALES OF UNREGISTERED SECURITIES
From time to time, we provide Letters of Credit in the ordinary course of business to support members' obligations issued in support of unaffiliated, third-party offerings of notes, bonds or other securities. We provided $8 million and $21$17 million of such credit support during 2012 and 2010.2015. We did not provide such credit support during 2011.2014 and 2013. To the extent that these Letters of Credit are securities for purposes of the Securities Act of 1933, their issuance is exempt from registration pursuant to section 3(a)(2) thereof.
| |
Item 6. | Selected Financial Data. |
Item 6.Selected Financial Data.
The following table presents selected Statement of Condition information,data, Statement of Income data and financial ratios for the five years ended December 31, 2012.2015.
| | | Year Ended December 31, | Year Ended December 31, |
(Dollars in millions) | 2012 | | 2011 | | 2010 | | 2009 | | 2008 | 2015 | | 2014 | | 2013 | | 2012 | | 2011 |
STATEMENT OF CONDITION DATA: | | | | | | | | | | |
STATEMENT OF CONDITION DATA AT PERIOD END: | | | | | | | | | | |
Total assets | $ | 81,562 |
| | $ | 60,397 |
| | $ | 71,631 |
| | $ | 71,387 |
| | $ | 98,206 |
| $ | 118,797 |
| | $ | 106,640 |
| | $ | 103,181 |
| | $ | 81,562 |
| | $ | 60,397 |
|
Advances | 53,944 |
| | 28,424 |
| | 30,181 |
| | 35,818 |
| | 53,916 |
| 73,292 |
| | 70,406 |
| | 65,270 |
| | 53,944 |
| | 28,424 |
|
Mortgage loans held for portfolio | 7,548 |
| | 7,871 |
| | 7,782 |
| | 9,366 |
| | 8,632 |
| 7,982 |
| | 6,989 |
| | 6,826 |
| | 7,548 |
| | 7,871 |
|
Allowance for credit losses on mortgage loans | 18 |
| | 21 |
| | 12 |
| | — |
| | — |
| 2 |
| | 5 |
| | 7 |
| | 18 |
| | 21 |
|
Investments (1) | 19,950 |
| | 21,941 |
| | 33,314 |
| | 24,193 |
| | 35,325 |
| 37,356 |
| | 26,007 |
| | 22,364 |
| | 19,950 |
| | 21,941 |
|
Consolidated Obligations, net: | | | | | | | | | | | | | | | | | | |
Discount Notes | 30,840 |
| | 26,136 |
| | 35,003 |
| | 23,187 |
| | 49,336 |
| 77,199 |
| | 41,232 |
| | 38,210 |
| | 30,840 |
| | 26,136 |
|
Bonds | 44,346 |
| | 28,855 |
| | 30,697 |
| | 41,222 |
| | 42,393 |
| 35,105 |
| | 59,217 |
| | 58,163 |
| | 44,346 |
| | 28,855 |
|
Total Consolidated Obligations, net | 75,186 |
| | 54,991 |
| | 65,700 |
| | 64,409 |
| | 91,729 |
| 112,304 |
| | 100,449 |
| | 96,373 |
| | 75,186 |
| | 54,991 |
|
Mandatorily redeemable capital stock | 211 |
| | 275 |
| | 357 |
| | 676 |
| | 111 |
| 38 |
| | 63 |
| | 116 |
| | 211 |
| | 275 |
|
Capital: | | | | | | | | | | | | | | | | | | |
Capital stock - putable | 4,010 |
| | 3,126 |
| | 3,092 |
| | 3,063 |
| | 3,962 |
| 4,429 |
| | 4,267 |
| | 4,698 |
| | 4,010 |
| | 3,126 |
|
Retained earnings | 538 |
| | 444 |
| | 438 |
| | 412 |
| | 326 |
| 765 |
| | 689 |
| | 621 |
| | 538 |
| | 444 |
|
Accumulated other comprehensive loss | (11 | ) | | (11 | ) | | (7 | ) | | (8 | ) | | (6 | ) | (13 | ) | | (17 | ) | | (9 | ) | | (11 | ) | | (11 | ) |
Total capital | 4,537 |
| | 3,559 |
| | 3,523 |
| | 3,467 |
| | 4,282 |
| 5,181 |
| | 4,939 |
| | 5,310 |
| | 4,537 |
| | 3,559 |
|
| | | | | | | | | | |
STATEMENT OF INCOME DATA: | | | | | | | | | | | | | | | | | | |
Net interest income | $ | 308 |
| | $ | 249 |
| | $ | 275 |
| | $ | 387 |
| | $ | 364 |
| $ | 322 |
| | $ | 317 |
| | $ | 328 |
| | $ | 308 |
| | $ | 249 |
|
Provision for credit losses | 1 |
| | 12 |
| | 13 |
| | — |
| | — |
| |
Other income (loss) | 13 |
| | (5 | ) | | 20 |
| | 38 |
| | 9 |
| |
Other expenses | 58 |
| | 57 |
| | 56 |
| | 59 |
| | 51 |
| |
(Reversal) provision for credit losses | | — |
| | — |
| | (7 | ) | | 1 |
| | 12 |
|
Non-interest income (loss) | | 30 |
| | 23 |
| | 20 |
| | 13 |
| | (5 | ) |
Non-interest expense | | 75 |
| | 68 |
| | 64 |
| | 58 |
| | 57 |
|
Assessments | 27 |
| | 37 |
| | 62 |
| | 98 |
| | 86 |
| 28 |
| | 28 |
| | 30 |
| | 27 |
| | 37 |
|
Net income | $ | 235 |
| | $ | 138 |
| | $ | 164 |
| | $ | 268 |
| | $ | 236 |
| $ | 249 |
| | $ | 244 |
| | $ | 261 |
| | $ | 235 |
| | $ | 138 |
|
FINANCIAL RATIOS: | | | | | | | | | | |
Dividend payout ratio (2) | 60.09 | % | | 95.42 | % | | 84.13 | % | | 68.16 | % | | 83.07 | % | 69.2 | % | | 72.2 | % | | 68.1 | % | | 60.1 | % | | 95.4 | % |
Weighted average dividend rate (3) | 4.44 |
| | 4.25 |
| | 4.38 |
| | 4.63 |
| | 5.31 |
| 4.00 |
| | 4.00 |
| | 4.18 |
| | 4.44 |
| | 4.25 |
|
Return on average equity | 6.20 |
| | 3.89 |
| | 4.67 |
| | 6.38 |
| | 5.73 |
| 4.90 |
| | 4.93 |
| | 5.10 |
| | 6.20 |
| | 3.89 |
|
Return on average assets | 0.35 |
| | 0.21 |
| | 0.24 |
| | 0.32 |
| | 0.25 |
| 0.24 |
| | 0.24 |
| | 0.28 |
| | 0.35 |
| | 0.21 |
|
Net interest margin (4) | 0.46 |
| | 0.37 |
| | 0.40 |
| | 0.46 |
| | 0.39 |
| 0.31 |
| | 0.31 |
| | 0.35 |
| | 0.46 |
| | 0.37 |
|
Average equity to average assets | 5.68 |
| | 5.29 |
| | 5.08 |
| | 4.96 |
| | 4.37 |
| 4.81 |
| | 4.90 |
| | 5.47 |
| | 5.68 |
| | 5.29 |
|
Regulatory capital ratio (5) | 5.84 |
| | 6.37 |
| | 5.43 |
| | 5.81 |
| | 4.48 |
| 4.40 |
| | 4.71 |
| | 5.27 |
| | 5.84 |
| | 6.37 |
|
Operating expense to average assets | 0.067 |
| | 0.068 |
| | 0.070 |
| | 0.057 |
| | 0.041 |
| |
Operating expenses to average assets (6) | | 0.058 |
| | 0.054 |
| | 0.055 |
| | 0.067 |
| | 0.068 |
|
| |
(1) | Investments include interest bearing deposits in banks, securities purchased under agreements to resell, Federal funds sold, trading securities, available-for-sale securities, and held-to-maturity securities. |
| |
(2) | Dividend payout ratio is dividends declared in the period as a percentage of net income. |
| |
(3) | Weighted average dividend rates are dividends paid in stock and cash divided by the average number of shares of capital stock eligible for dividends. |
| |
(4) | Net interest margin is net interest income before (reversal)/provision for credit losses as a percentage of average earning assets. |
| |
(5) | Regulatory capital ratio is period-end regulatory capital (capital stock, mandatorily redeemable capital stock and retained earnings) as a percentage of period-end total assets. |
| |
(6) | Operating expenses comprise compensation and benefits and other operating expenses, which are included in non-interest expense. |
| |
Item 7. | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
|
EXECUTIVE OVERVIEW
Financial Condition
Mission Asset Activity
The following table summarizes our financial condition.
| | | Year Ended December 31, | Year Ended December 31, |
| Ending Balances | | Average Balances | Ending Balances | | Average Balances |
(In millions) | 2012 | | 2011 | | 2012 | | 2011 | 2015 | | 2014 | | 2015 | | 2014 |
| | | | | | | | |
Total Assets | $ | 81,562 |
| | $ | 60,397 |
| | $ | 66,702 |
| | $ | 67,288 |
| $ | 118,797 |
| | $ | 106,640 |
| | $ | 105,569 |
| | $ | 101,157 |
|
Mission Asset Activity: | | | | | | | | | | | | | | |
Advances (principal) | 53,621 |
| | 27,839 |
| | 32,273 |
| | 28,635 |
| 73,242 |
| | 70,299 |
| | 70,355 |
| | 66,492 |
|
MPP: | | | | | | | | |
Mortgage Purchase Program (MPP): | | | | | | | | |
Mortgage loans held for portfolio (principal) | 7,366 |
| | 7,752 |
| | 7,821 |
| | 7,610 |
| 7,758 |
| | 6,796 |
| | 7,396 |
| | 6,620 |
|
Mandatory Delivery Contracts (notional) | 124 |
| | 431 |
| | 260 |
| | 268 |
| 450 |
| | 451 |
| | 471 |
| | 273 |
|
Total MPP | 7,490 |
| | 8,183 |
| | 8,081 |
| | 7,878 |
| 8,208 |
| | 7,247 |
| | 7,867 |
| | 6,893 |
|
Letters of Credit (notional) | 10,152 |
| | 4,838 |
| | 4,584 |
| | 5,219 |
| 19,555 |
| | 17,780 |
| | 17,694 |
| | 15,154 |
|
Total Mission Asset Activity | $ | 71,263 |
| | $ | 40,860 |
| | $ | 44,938 |
| | $ | 41,732 |
| $ | 101,005 |
| | $ | 95,326 |
| | $ | 95,916 |
| | $ | 88,539 |
|
In 2012,2015, the FHLBank continued to effectively fulfillFHLB fulfilled its mission by providing readily available and competitively priced wholesale funding to its member financial institutions, supporting its commitment to affordable housing, and paying stockholders a competitive dividend return on their capital investment. As
The balance of Mission Asset Activity – which we define as Advances, Letters of Credit, and total MPP (including purchase commitments) – was $101.0 billion at December 31, 2015, an increase of $5.7 billion (six percent) from year-end 2014. This growth was primarily driven by an increase in the last few years,principal balance of Advances. As of December 31, 2015, members funded on average 3.4 percent of their assets with Advances, and the vastmarket penetration rate was relatively stable with approximately 70 percent of members holding Mission Asset Activity. The majority of our members had limitedcontinued to have modest demand for new Advance growthborrowings due to the tepidmeasured economic expansiongrowth, an abundance of deposits and significant amounts of liquidity made available to members as a result of the actions of the Federal Reserve System. However, we did experience a significant amount of Advance growth in the second half of the year from one new, large-asset member.
Total assets at December 31, 2012increased$21.2 billion (35 percent) from year-end 2011, led by Advances. By contrast, average asset balances in 2012 were $0.6 billion (one percent) lower than 2011's average, mostly due to lower balances of liquidity investments.
The balance of Mission Asset Activity – comprising Advances, Letters of Credit, and the MPP – was $71.3 billion at December 31, 2012, an increase of $30.4 billion (74 percent) from year-end 2011. The growth was led by a $25.8 billionincrease in the principal balance of Advances. Average Advance principal balances in 2012increased$3.6 billion (13 percent) from 2011's average.
The principal balance of mortgage loans held for portfolio in the MPP at December 31, 20122015 fellrose $0.41.0 billion (five14 percent) from year-end 20112014. ThroughoutThe growth reflected ongoing improvements in the housing market and low mortgage rates. During 20122015, the FHLBankwe purchased $2.3$2.4 billion of mortgage loans, while principal paydownsreductions totaled $2.7 billion.
Despite the recent years' difficulties$1.4 billion. Residual credit risk exposure in the economy and housing market, in 2012 members funded on average 3.1 percent of their assets with Advances, and the penetration rate was relatively stable with almost 75 percent of members holding Mission Asset Activity. These ratios were similarmortgage loan portfolio continued to those of 2011. Also, the number of active sellers and participants, and member interest, in the MPP remained at strong levels.be minimal.
Based on 20122015 earnings, we contributed $27$28 million to the Affordable Housing Program (AHP) pool of funds to be awarded to members in 2013. This continued a trend of adding to the available funds each year since the inception of the program in 1990.2016. In addition, we also continued our voluntary sponsorship of two other housing programs, which provide resources to sponsor a voluntary housing program (the Carol M. Peterson Housing Fund)pay for accessibility rehabilitation and established a new voluntary program (the Disaster Reconstruction Program). In 2012, $3 million was awarded under these programs, both of which have been authorized by the Board of Directorsemergency repairs for special needs and elderly homeowners and to be continued in 2013.help members aid their communities following natural disasters.
Investments and Other Assets
The balance of investments at December 31, 20122015 was $20.0$37.4 billion,, a decrease an increase of $2.0$11.3 billion (nine percent) (44 percent) from year-end 2011. Average investment balances were $25.7 billion in 2012, a decrease2014. Most of $4.3 billion (14 percent) from 2011's average.
Year-end 2012the increase was because we held more short-term liquidity investments at the end of 2015. At December 31, 2015, investments included $12.8$15.3 billion of mortgage-backed securities and $7.2$22.1 billion of other investments, which arewere mostly short-term liquidity instruments. Although the amountinstruments held for liquidity.
Investment balances averaged $27.3 billion in 2015, a decrease of $0.2 billion (one percent) from 2014's average. This reflected minimal changes in average liquidity investments declined in 2012 (which corresponded to the growth in Advances), we maintained an adequate amount of asset liquidity throughout the year under standard liquidity measures.and mortgage-backed securities. All of our mortgage-backed securities held at December 31, 20122015 were issued and guaranteed by Fannie Mae, Freddie Mac or a U.S. agency.
The balance of cash and due from banks at December 31, 2015 was $10 million, compared to $3.1 billion at December 31, 2014. The 2014 balance was larger than normal due to holding $3.1 billion in deposits at the Federal Reserve on that date.
We maintained an adequate amount of asset liquidity throughout the year under a variety of liquidity measures as discussed in the "Liquidity Risk" section of "Quantitative and Qualitative Disclosures About Risk Management."
Capital
Capital adequacy continued to beremained strong in 2012,throughout 2015, exceeding all minimum regulatory capital requirements. The GAAP capital-to-assets ratio at December 31, 20122015 was 5.564.36 percent,, while the regulatory capital-to-assets ratio was 5.84 percent.4.40 percent. Both ratios were well aboveexceeded the regulatory required minimum of four percent but were lower than year-end 2011's ratios due to an increase in financial leverage resulting from the Advance growth.percent. Regulatory capital includes mandatorily redeemable capital stock accounted for as a liability under GAAP. The average GAAP and regulatory capital ratios in 2015 were 4.81 percent and 4.88 percent, respectively, higher than the year-end ratios. The year-end ratios reflected the higher amount of short-term liquidity balances we carried on that date.
The amounts of GAAP and regulatory capital increased $978$242 million and $914$213 million, respectively, between year-end 2011 and 2012, resulting from members'in 2015, due primarily to purchases of capital stock purchasesby members to support Advance growth and additional retained earnings.growth.
Total retained earnings were $538765 million at December 31, 20122015, an increase of $9476 million (2111 percent) from year-end 20112014. RetainedWe believe the amount of retained earnings were comprisedis sufficient to protect against members' impairment risk of $479 million unrestrictedtheir capital stock investment in the FHLB and $59 million restricted.to provide the opportunity to stabilize future dividends. Our Capital Plan also has safeguards to prevent financial leverage ratios from falling below regulatory minimum levels.
Results of Operations
Overall Results
The table below summarizes our results of operations.
| | | Year Ended December 31, | Year Ended December 31, |
(Dollars in millions) | 2012 | | 2011 | | 2010 | 2015 | | 2014 | | 2013 |
| | | | | | |
Net income | $ | 235 |
| | $ | 138 |
| | $ | 164 |
| $ | 249 |
| | $ | 244 |
| | $ | 261 |
|
Affordable Housing Program accrual | 27 |
| | 17 |
| | 20 |
| 28 |
| | 28 |
| | 30 |
|
Return on average equity (ROE) | 6.20 | % | | 3.89 | % | | 4.67 | % | 4.90 | % | | 4.93 | % | | 5.10 | % |
Return on average assets | 0.35 |
| | 0.21 |
| | 0.24 |
| 0.24 |
| | 0.24 |
| | 0.28 |
|
Weighted average dividend rate | 4.44 |
| | 4.25 |
| | 4.38 |
| 4.00 |
| | 4.00 |
| | 4.18 |
|
Average 3-month LIBOR | 0.43 |
| | 0.34 |
| | 0.34 |
| 0.32 |
| | 0.23 |
| | 0.27 |
|
Average overnight Federal funds effective rate | 0.14 |
| | 0.10 |
| | 0.18 |
| 0.13 |
| | 0.09 |
| | 0.11 |
|
ROE spread to 3-month LIBOR | 5.77 |
| | 3.55 |
| | 4.33 |
| 4.58 |
| | 4.70 |
| | 4.83 |
|
Dividend rate spread to 3-month LIBOR | 4.01 |
| | 3.91 |
| | 4.04 |
| 3.68 |
| | 3.77 |
| | 3.91 |
|
ROE spread to Federal funds effective rate | 6.06 |
| | 3.79 |
| | 4.49 |
| 4.77 |
| | 4.84 |
| | 4.99 |
|
Dividend rate spread to Federal funds effective rate | 4.30 |
| | 4.15 |
| | 4.20 |
| 3.87 |
| | 3.91 |
| | 4.07 |
|
Net income in 2015 was $5 million (two percent) higher than in 2014. ROE was similar in the last two years and we paid the same dividend rate in each of the last nine quarters. Although there were a number of factors that affected earnings, in the aggregate they nearly offset one another and no individual factor experienced a change that significantly affected operating results or indicated a concern about future profitability. This steady performance reflected the net impact of a stable business and interest rate environment, a modest increase in average assets, a relatively constant composition of assets, a consistent and conservative management of risk, a moderate increase in operating expenses, and a prudent use of derivative transactions.
The spreads between ROE and short-term interest rates, for which we use 3-month LIBOR and Federal funds, as a proxy, are market benchmarks we believe member stockholders use to assess the competitiveness of the return on their capital investment in our company. Earnings continued to be sufficient to provide competitive returns toon stockholders' capital investment.
Consistent with experience over the last several years, ROE was significantly above short-term rates, resulting in the ROE spreads being wider than the long-term historical average spreads.spread.
Effect of Interest Rate Environment
Trends in market interest rates strongly influence the results of operations via how they affect members' demand for Mission Asset Activity, spreads on assets, funding costs and decisions in managing the tradeoffs in our market risk/return profile. The following table presents key market interest rates (obtained from Bloomberg L.P.).
|
| | | | | | | | | | | | | | | | | |
| Year 2015 | | Year 2014 | | Year 2013 |
| Ending | | Average | | Ending | | Average | | Ending | | Average |
Federal funds effective | 0.20 | % | | 0.13 | % | | 0.06 | % | | 0.09 | % | | 0.07 | % | | 0.11 | % |
3-month LIBOR | 0.61 |
| | 0.32 |
| | 0.26 |
| | 0.23 |
| | 0.25 |
| | 0.27 |
|
2-year LIBOR | 1.18 |
| | 0.88 |
| | 0.90 |
| | 0.62 |
| | 0.49 |
| | 0.44 |
|
10-year LIBOR | 2.19 |
| | 2.18 |
| | 2.28 |
| | 2.65 |
| | 3.09 |
| | 2.47 |
|
2-year U.S. Treasury | 1.05 |
| | 0.67 |
| | 0.67 |
| | 0.45 |
| | 0.38 |
| | 0.30 |
|
10-year U.S. Treasury | 2.27 |
| | 2.13 |
| | 2.17 |
| | 2.53 |
| | 3.03 |
| | 2.34 |
|
15-year mortgage current coupon (1) | 2.32 |
| | 2.13 |
| | 2.10 |
| | 2.34 |
| | 2.68 |
| | 2.21 |
|
30-year mortgage current coupon (1) | 3.02 |
| | 2.88 |
| | 2.85 |
| | 3.23 |
| | 3.63 |
| | 3.07 |
|
|
| | | | | | | | | | | |
| Year 2015 by Quarter - Average |
| Quarter 1 | | Quarter 2 | | Quarter 3 | | Quarter 4 |
Federal funds effective | 0.11 | % | | 0.13 | % | | 0.13 | % | | 0.16 | % |
3-month LIBOR | 0.26 |
| | 0.28 |
| | 0.31 |
| | 0.41 |
|
2-year LIBOR | 0.84 |
| | 0.86 |
| | 0.88 |
| | 0.93 |
|
10-year LIBOR | 2.09 |
| | 2.24 |
| | 2.28 |
| | 2.10 |
|
2-year U.S. Treasury | 0.59 |
| | 0.60 |
| | 0.68 |
| | 0.82 |
|
10-year U.S. Treasury | 1.97 |
| | 2.15 |
| | 2.22 |
| | 2.18 |
|
15-year mortgage current coupon (1) | 1.96 |
| | 2.09 |
| | 2.25 |
| | 2.20 |
|
30-year mortgage current coupon (1) | 2.71 |
| | 2.88 |
| | 2.98 |
| | 2.94 |
|
| |
(1) | Simple average of current coupon rates of Fannie Mae and Freddie Mac par mortgage-backed security indications. |
Short-term interest rates remained low in 2015. In December 2015, the Federal Reserve increased its target overnight Federal funds from a zero to 0.25 percent range to a 0.25 to 0.50 percent range. Other short-term interest rates remained consistent with their historical relationships to Federal funds during 2015. Average long-term rates were modestly lower in 2015 compared to 2014.
Using our current balance sheet and operating expense structure, we estimate thatThe persistence in 2015 of the long-term average ROE in a stable market andlow interest rate environment would be incontinued to favorably affect our results of operations relative to the rangelevel of 2.50 to 3.50 percentage points above short-term interest rates. Ongoing factors determiningrates for the following reasons:
| |
▪ | Reductions in, and low, market interest rates raise ROE compared to market rates to the extent we fund a portion of long-term assets with shorter-term debt. |
| |
▪ | The long-standing low rate environment has provided us the opportunity to retire many Consolidated Bonds and replace them with lower cost Obligations, at a pace exceeding paydowns of high-yielding mortgage assets, which have been slower than would be expected in more normal housing and mortgage environments. |
| |
▪ | Earnings generated from funding assets with interest-free capital have not decreased as much as the reduction in overall interest rates because long-term assets do not reprice immediately to the lower rates. |
The current elevated trend level of ROE spread to market interest rates compared tois above the long-term historical range, includeaverage trend because of the extremely low levelfactors referenced above. However, these factors have improved our net income by a smaller amount more recently because they have been present for many years. For example, over time paydowns of short-term rates, our ability to retire a large amounthigh-yielding mortgage assets cumulatively have increased, which has offset much of the benefit from previously retiring high-cost Bonds before their final maturities, and muted acceleration of mortgage prepayment speeds.Bonds.
The $97 million increase in net income and the 2.31 percentage point increase in ROE in 2012 over 2011 resulted primarily from the following favorable factors, in order of magnitude:
| |
▪ | The FHLBank System’s REFCORP obligation was satisfied at the end of the second quarter of 2011. Payment of the REFCORP obligation, which had been recorded as a reduction to net income, was replaced with an allocation of 20 percent of net income to a separate restricted retained earnings account under the Joint Capital Enhancement Agreement. This change increased net income by $19 million in 2012. |
| |
▪ | Portfolio funding costs declined due to our strategies and actions related to asset-liability management, which improved net interest income by an estimated $19-$28 million and ROE by an estimated 0.45-0.67 percentage points. As in the last several years, we continued to call a significant amount of high-cost debt (Bonds) before their final maturities and replaced them with new debt at substantially lower rates. Second, the amount of mortgage assets we funded with short-term debt increased in the third quarter of 2012. Third, the spread between LIBOR-indexed assets and Discount Note funding costs widened slightly in 2012. |
| |
▪ | Prepayment fees on Advances rose $14 million. |
| |
▪ | Realized gains from the clean-up sales of certain mortgage-backed securities rose $13 million. Each of the securities sold had less than 15 percent of the original acquired principal remaining and were sold under a periodic clean-up process.
|
| |
▪ | The growth in average Advance balances and new capital stock purchased to support this growth improved net interest income by an estimated $12 million and ROE by an estimated 0.08 percentage points. The net impact on ROE was relatively modest because of the additional stock associated with the Advance growth. |
| |
▪ | The provision for credit losses was reduced $11 million due to improvements in the housing market. |
| |
▪ | Unrealized market values of derivatives and hedging activities increased $11 million.
|
| |
▪ | Net amortization expense of purchase premiums on mortgage assets and of premium/discounts and concession costs on Consolidated Obligations decreased $7 million, due primarily to slower mortgage prepayment speeds.
|
Several of the factors contributing to the increase in 2012's profitability will not significantly affect future earnings from ongoing business operations. These factors--which include the Advance prepayment fees, securities gains, and changes to derivatives values--represented approximately 0.87 percentage points of the total 2.31 percentage points increase in ROE and approximately 1.38percentage points of the 6.20 percent total 2012 ROE. Therefore, even if these factors had not been present in 2012, profitability as represented by ROE would have remained significantly above short-term interest rates.
Business Outlook and Risk Management
This section summarizes the business outlook and what we believe are our current major risk exposures. Item 1A's “Risk Factors” has a detailed discussion of risk factors that could affect our corporate objectives, financial condition, and results of operations. "Quantitative and Qualitative Disclosures About Risk Management" provides details on current risk exposures. Many of the issues related to our financial condition, results of operations, and liquidity discussed throughout this document relate directly to the ongoing effects of the weak economic recovery and to the federal government's actions to stimulate economic growth.
Strategic/Business Risk
Advances.We cannot predict the future trend of Mission Asset Activity because it depends on, among other things, the state of the economy, conditions in the housing markets, the government's liquidity programs, the willingness and ability of financial institutions to expand lending, regulatory initiatives that could affect demand for our Mission Asset Activity, and the actions of several large members. Our business is cyclical and Mission Asset Activity normally grows slowly, stabilizes, or declines in periods of difficult macro-economic conditions, when financial institutions have ample liquidity, or when there is significant growth in the money supply. AllSince the end of these conditions continuethe recession in 2009, measured economic growth has resulted in relatively slow growth in consumer, mortgage and commercial loans across the broad membership both in absolute terms and relative to exist.deposit growth. Other factors continuing to constrain widespread demand for Advances are the extremely low levels of interest rates and little deviation in Advance rates versus deposit rates, and the Federal Reserve's ongoing actions to provide an extraordinary amount of deposit-based liquidity to attempt to stimulate economic growth.
In the last several years, the percentage of assets that members funded with Advances showed little variation, in the range of three to four percent. We would expect to see a broad-based increase in Advance demand when the economy experiences aan improved and sustained improvementgrowth trend or if changes in Federal Reserve policy reduce other sources of liquidity available to our members. Additionally, there are $3.6 billion of Advances held by former members that will mature over the next several years.
Two national financialThe relative balance between loan and deposit fluctuations can provide an indication of potential member Advance demand. From September 30, 2014 to September 30, 2015 (the most recent period for which data are available), aggregate loan portfolios of Fifth District depository institutions becamegrew $106.8 billion (8.4 percent) while their aggregate deposit balances fell $29.9 billion (1.4 percent). The data include the effect of large mergers and acquisitions only when they are available for both comparison dates. Most of the loan growth and deposit decline in this period occurred from our largest members, in 2012. One had Advance borrowings at December 31, 2012 totaling $26.0 billion. The addition of these new members may, over time, result in further increases to Advance balances that also may further changewhich is consistent with the concentration of Advances and the identity of our largest Advance borrowers.
We continue to be concerned about several regulatory initiatives that could affect Advance demand over time. One rule already implemented increased FDIC assessments for large financial institutions that utilize Advances, effectively raising the cost of borrowing from an FHLBank for certain members. Although we cannot determine whether this rule has affected Advance balances to date (due in part to members' already subdued demand for Advances), it could adversely affect Advance demand over time to the extent the changes in assessments increase the cost of Advances for affected members.activity.
There are several potential statutoryExcluding the five members with over $50 billion of assets and regulatory changes, as well as existing changes that must be implemented, thatrecent acquisitions, aggregate loans increased $13.1 billion (6.6 percent) in the 12-month period while aggregate deposits grew $12.1 billion (5.1 percent). This more recent trend of loan growth exceeding deposit growth could affect our Advance business. These are discussed in Item 1A's “Risk Factors.”produce increased demand for Advances over time.
MPP. MPP balances are influenced by conditions in the housing and mortgage markets, the competitiveness of prices we offer to purchase loans as well as program features, and activity from our largest sellers.
Our ongoing strategy for the MPP continues to emphasize moderate growth and a prudent principal balance limit relative to capital. This strategy will help ensure that our exposure to market and credit risk remains consistent with our conservative risk management principles. We will continue to emphasize recruiting community financial institution members and increasinghas two components: 1) increase the number of regular sellers.
The primary regulation currently affecting growth of MPPsellers and participants in the program; and 2) increase purchases while maintaining balances is that ifat a prudent level relative to capital and total assets to effectively manage market and credit risks consistent with our purchases in a calendar year exceed $2.5 billion, we are required by regulation to enact affordable housing goals for the MPP. We believe these could be operationally costly to administer and could increase our credit risk exposure and reputational risk. As a result, we currently plan to limit our calendar year purchases to less than $2.5 billion as long as this regulatory requirement is in place.appetite.
Regulatory and Legislative Risk
General.The FHLBank System currently faces heightened legislative and regulatory risks and uncertainties, which we believe has affected, and could continue to affect, our Mission Asset Activity, capitalization, and results of operations. Current such risks are discussedLegislative and regulatory actions applicable to the FHLBank System in the last eight years have raised our operating costs and increased uncertainty regarding the business model under which the FHLBanks may operate in the future. This is due primarily to the uncertainty around potential future GSE reform, which shows no signs of resolution. See Item 1A's “Risk Factors.”"Risk Factors" for more discussion.
Core Mission Achievement. Over the years, we have adopted numerous indicators to assess achievement of our mission. These include metrics related to Mission Asset Activity, profitability, capital adequacy and safety and soundness. In July 2015, the Finance Agency issued an Advisory Bulletin to formalize a measure of FHLBank mission achievement across the System. The Advisory Bulletin established a goal for the sum of average Advances and purchased mortgage loans (collectively called Primary Mission Assets) to equal or exceed 70 percent of average Consolidated Obligations (i.e., the Primary Mission Assets ratio). Consolidated Obligations is used as a comparison because it reflects the major source of our franchise value as a GSE. If the metric falls below the 70 percent preferred ratio, an FHLBank would be expected to include in its strategic plan actions aimed at increasing the ratio, which could include consideration of Supplemental Mission Assets and Activities, such as Letters of Credit issued to members. During 2015, our Primary Mission Assets metric exceeded the Finance Agency's preferred ratio.
Membership Requirements.In January 2016, the Finance Agency issued a final rule on membership requirements. The primary changes to membership requirements are to:
| |
▪ | ban currently-eligible captive insurance companies as eligible members in an FHLBank, and |
| |
▪ | clarify matters related to defining the principal place of business for eligible financial institution members for purposes of determining their appropriate FHLBank district. |
As a result, our current captive insurance company members must terminate their memberships one year after the rule's effective date. In addition, the rule allows these members until the end of the one-year period to repay their existing Advances, but prohibits them from taking new Advances or renewing existing Advances that expire after the rule’s effective date.
We believe that the final rule will not materially affect our financial condition or results of operations despite the loss of current and potential captive insurance members. However, we are concerned that the rule could constrain the ability of the FHLBanks to fulfill their mission of promoting housing finance through providing liquidity and funding to financial institutions engaged in housing finance activities. We believe captive insurance companies are important institutions in helping to deepen and diversify the flow of funds in the mortgage markets.
Privately Insured Credit Unions. In December 2015, the U.S. Congress passed into law a provision permitting privately-insured state-chartered credit unions to apply for membership in the FHLBank System. Based on the number and size of such institutions in our district, we believe that this change in eligible members will have only a small effect on Mission Asset Activity.
Dodd-Frank Act and Related Regulations.Regulatory agencies continue to promulgate rules covering derivatives activities as required by the Dodd-Frank Act. A joint rule of several agencies issued in 2015 that will affect the FHLBanks mandates the exchange of initial and variation margin for interest rate swaps not cleared through a central clearinghouse. Margins are based on swaps' market value and their relative risk. The rule is effective April 1, 2016 and has a staggered implementation schedule of up to four years. We already post and collect margin on uncleared swaps. Therefore, we believe the largest impact of the rule will be the elimination of thresholds permitted on daily variation margin for new swaps transacted after the implementation date. This will eliminate the amount of uncollateralized exposure between derivative counterparties and reduce counterparty risk. We believe the impact of the rule will not be material to our company.
Market Risk and Profitability
AverageDuring 2015, as in 2014, the market risk exposure in 2012 remainedto changing interest rates was moderate overall and well within policy limits. Based on the totality of our market risk analysis, we expect that profitability, defined as the level of ROE compared with short-term market rates, will remain competitive unless interest rates change by extremely large amounts in a short period of time. Decreases in long-term interest rates, even up to two percentage points (which would put fixed-rate mortgages at two percent or less), would still result in ROE being above market interest rates. However, sharp reductions in long-term rates could result in an immediate large accelerated recognition of amortization of mortgage asset premiums, which could negatively impact our results of operations.
We believe that profitability would not become uncompetitive unless long-term rates were to permanently increase immediately and permanentlyover the next 12 months by fourfive percentage points or more combined with short-term rates increasing to at least eightseven percent. Such large changes in interest rates would not result in negative earnings, unless these rate environments occurred quickly, lasted for a long period of time, and were coupled with very unfavorable changes in other market and business variables or our business model. We believe such a stress scenario is extremely unlikely to occur.occur in the foreseeable future. Our market risk exposure to lower long-term interest rates, even up to two percentage points, would result in ROE remaining well above market interest rates.
Capital Adequacy
We have alwaysbelieve members place a high value on their capital investment in our company. We maintained compliance with ourregulatory capital requirements. Capital ratios at December 31, 2015 and all throughout the year exceeded the regulatory required minimum of four percent. We believe that the amount of our retained earnings is sufficient to protect against impairment risk of capital stock and to provide the opportunity to stabilize dividends. Our Capital Plan has safeguards to prevent financial leverage from increasing beyond regulatory minimums or below safe levels. We believe members continue to place a high value on their capital investment in our company. Capital ratios in 2012 were well above the regulatory required minimum of four percent but were lower than year-end 2011's ratios due to an increase in financial leverage resulting from the Advance growth.
Credit Risk
WeIn 2015, we continued in 2012 to experience limiteda de minimis level of overall residual credit risk exposure from offering Advances,our Credit Services, making investments, and executing derivative transactions. We believe policies and procedures related to credit underwriting, Advance collateral management, and transactions with investment and derivative counterparties continue to fully mitigate these risks. Therefore, we have never experienced any credit losses and we continue to have no loan loss reserves or impairment recorded for these instruments.
The FHLBank is a collateral-based asset lender for Advances and Letters of Credit. We have robust policies, strategies and processes designed to manageResidual credit risk on Credit Services. Advances are overcollateralizedexposure in the mortgage loan portfolio was minimal. The allowance for credit losses in the MPP continued to decline and we have a perfected first lien position on all pledged loan collateral, as well as conservative policies and procedures related to managing credit risk on Advances. We do not anticipate any losses from Advances or Letters of Credit.was $2 million at December 31, 2015.
The MPP is comprised of conforming fixed-rate conventional loans and loans fully insured by the Federal Housing Administration. Credit enhancements on the MPP's conventional loans are designed to adequately protect the FHLBank against credit losses in scenarios of severe downward movements in housing prices and unfavorable changes in other factors that can affect loan delinquencies and defaults. Actual MPP delinquencies and defaults on conventional loans are well below national averages on similar loans. At the end of 2012, the allowance for credit losses in the MPP was $18 million. We believe the portfolio's credit risk will remain moderate and manageable. However, in an adverse scenario of further large reductions in home prices, sustained elevated levels of unemployment, or failure of one or more mortgage insurance providers, credit losses experienced in the portfolio net of credit enhancements could increase substantially.
We believe we face limited credit risk exposure in our investments. As in prior years, we did not evaluate any investments to be other-than-temporarily impaired in 2012. As of the end of 2012, we held no private label mortgage-backed securities; all our mortgage-backed securities were issued and guaranteed by Fannie Mae or Freddie Mac, which we believe have the backing of the U.S. government, or by the National Credit Union Administration, which issues guaranteed securities.
Liquidity investments are either unsecured, guaranteed by the U.S. government, or secured (i.e., collateralized). For unsecured liquidity investments, we invest in the debt securities of highly rated, investment-grade institutions, have conservative limits on dollar and maturity exposure to each institution, and have strong credit underwriting practices. We believe our exposure within investment activity to European sovereign debt is limited.
Finally, we collateralize most of the credit risk exposure resulting from interest rate swap transactions. The uncollateralized portion of our derivative asset position, which is normally relatively small, presents unsecured credit risk exposure to us.
Funding and Liquidity Risk
Our liquidity position remained ample and strong during 20122015, as did our overall ability to fund operations through the issuance of Consolidated Obligation issuancesObligations at acceptable terms, availability, and interest costs. While thereInvestor demand for FHLBank System debt continued to be robust. There were no substantive stresses on market access or liquidity from external market and political events. Although we can bemake no assurances, we expect this to continue to be the case and believe there is only a remote possibility of a fundingliquidity or liquidityfunding crisis in the FHLBank System that could impair our FHLBank's ability to access the capital markets,participate, on a cost-effective basis, in issuances of new debt, service outstanding debt, maintain adequate capitalization, or pay competitive dividends. The System continued to experience uninterrupted access on acceptable terms to the capital markets for its debt issuance and funding needs. Spreads on the System's longer-term Consolidated Obligations to U.S. Treasury rates and LIBOR did not change materially in 2012.
CONDITIONS IN THE ECONOMY AND FINANCIAL MARKETS
Effect of Economy and Financial Markets on Mission Asset Activity
The primary external factors that affect our Mission Asset Activity and earnings are the general state and trends of the economy and financial institutions, especially in our Fifth District; conditions in the financial, credit, mortgage, and housing markets; interest rates; and competitive alternatives to our products, such as retail deposits and other sources of wholesale funding.
In the last several years, the relatively weak economy and continued housing and mortgage market stresses have resulted in slow growth in consumer, mortgage and commercial loans across the broad membership both in absolute terms and relative to deposit growth. This trend has limited many members' demand for Advances. From September 30, 2011 to September 30, 2012 (the most recent period for which data are available), aggregate loan portfolios of Fifth District depository institutions' grew $69.4 billion (6.3 percent) while their aggregate deposit balances rose $52.2 billion (2.9 percent). However, most of the loan growth in this period occurred from our largest members, which is consistent with nationwide trends in the last several years of increasing concentration of financial activity among large financial companies. Excluding the five members with assets over $50 billion, aggregate loans increased only $3.7 billion (2.0 percent) in the 12-month period while aggregate deposits grew $5.7 billion (2.5 percent). We have no reason to believe that these trends changed materially in the fourth quarter of 2012.
Other factors also continuing to negatively impact demand for our credit services are the extremely low levels of interest rates and the Federal Reserve's ongoing actions to provide an extraordinary amount of liquidity to stimulate economic growth, as discussed elsewhere.
Interest Rates
Trends in market interest rates affect members' demand for Mission Asset Activity, earnings, spreads on assets, funding costs and decisions in managing the tradeoffs in our market risk/return profile. The following tables present key market interest rates (obtained from Bloomberg L.P.).
|
| | | | | | | | | | | | | | | | | |
| Year 2012 | | Year 2011 | | Year 2010 |
| Ending | | Average | | Ending | | Average | | Ending | | Average |
Federal funds target | 0-0.25% |
| | 0-0.25% |
| | 0-0.25% |
| | 0-0.25% |
| | 0-0.25% |
| | 0-0.25% |
|
Federal funds effective | 0.09 |
| | 0.14 |
| | 0.04 |
| | 0.10 |
| | 0.13 |
| | 0.18 |
|
| | | | | | | | | | | |
3-month LIBOR | 0.31 |
| | 0.43 |
| | 0.58 |
| | 0.34 |
| | 0.30 |
| | 0.34 |
|
2-year LIBOR | 0.39 |
| | 0.50 |
| | 0.72 |
| | 0.72 |
| | 0.79 |
| | 0.93 |
|
5-year LIBOR | 0.86 |
| | 0.98 |
| | 1.23 |
| | 1.79 |
| | 2.17 |
| | 2.17 |
|
10-year LIBOR | 1.84 |
| | 1.88 |
| | 2.04 |
| | 2.90 |
| | 3.38 |
| | 3.26 |
|
| | | | | | | | | | | |
2-year U.S. Treasury | 0.25 |
| | 0.27 |
| | 0.24 |
| | 0.44 |
| | 0.60 |
| | 0.69 |
|
5-year U.S. Treasury | 0.72 |
| | 0.75 |
| | 0.83 |
| | 1.51 |
| | 2.01 |
| | 1.92 |
|
10-year U.S. Treasury | 1.76 |
| | 1.78 |
| | 1.88 |
| | 2.76 |
| | 3.30 |
| | 3.20 |
|
| | | | | | | | | | | |
15-year mortgage current coupon (1) | 1.71 |
| | 1.64 |
| | 2.05 |
| | 2.83 |
| | 3.43 |
| | 3.14 |
|
30-year mortgage current coupon (1) | 2.22 |
| | 2.54 |
| | 2.92 |
| | 3.74 |
| | 4.15 |
| | 3.98 |
|
| | | | | | | | | | | |
15-year mortgage note rate (2) | 2.86 |
| | 3.15 |
| | 3.24 |
| | 3.68 |
| | 4.20 |
| | 4.10 |
|
30-year mortgage note rate (2) | 3.52 |
| | 3.84 |
| | 3.95 |
| | 4.45 |
| | 4.86 |
| | 4.69 |
|
|
| | | | | | | | | | | |
| Year 2012 by Quarter - Average |
| Quarter 1 | | Quarter 2 | | Quarter 3 | | Quarter 4 |
Federal Funds Target | 0-0.25% |
| | 0-0.25% |
| | 0-0.25% |
| | 0-0.25% |
|
Federal Funds Effective | 0.10 |
| | 0.15 |
| | 0.14 |
| | 0.16 |
|
| | | | | | | |
3-month LIBOR | 0.51 |
| | 0.47 |
| | 0.42 |
| | 0.32 |
|
2-year LIBOR | 0.59 |
| | 0.59 |
| | 0.44 |
| | 0.38 |
|
5-year LIBOR | 1.17 |
| | 1.09 |
| | 0.86 |
| | 0.81 |
|
10-year LIBOR | 2.12 |
| | 1.95 |
| | 1.73 |
| | 1.74 |
|
| | | | | | | |
2-year U.S. Treasury | 0.28 |
| | 0.28 |
| | 0.25 |
| | 0.26 |
|
5-year U.S. Treasury | 0.89 |
| | 0.78 |
| | 0.66 |
| | 0.69 |
|
10-year U.S. Treasury | 2.02 |
| | 1.80 |
| | 1.63 |
| | 1.69 |
|
| | | | | | | |
15-year mortgage current coupon (1) | 1.92 |
| | 1.77 |
| | 1.34 |
| | 1.55 |
|
30-year mortgage current coupon (1) | 2.90 |
| | 2.78 |
| | 2.32 |
| | 2.16 |
|
| | | | | | | |
15-year mortgage note rate (2) | 3.19 |
| | 3.04 |
| | 2.84 |
| | 2.89 |
|
30-year mortgage note rate (2) | 3.92 |
| | 3.79 |
| | 3.55 |
| | 3.55 |
|
| |
(1) | Simple average of current coupon rates of Fannie Mae and Freddie Mac par mortgage-backed security indications. |
| |
(2) | Simple weekly average of 125 national lenders' mortgage rates for prime borrowers having a 20 percent down payment as surveyed and published by Freddie Mac. |
Short-term rates remained at historic lows in 2012. The Federal Reserve maintained the overnight Federal funds target and effective rates between zero and 0.25 percent, with other short-term rates generally consistent with their historical relationships to Federal funds.
Intermediate- and long-term rates, including those on fixed-rate mortgages, declined throughout 2012 and at December 31, 2012 were generally lower than at the end of 2011. Average intermediate- and long-term rates declined more than ending rates because rates also fell throughout 2011.
The interest rate trends had several effects on our results of operations in 2012, as discussed in "Executive Overview" and "Results of Operations." The Federal Reserve has indicated that it currently plans to hold certain short-term rates at or near zero until at least mid-2015. This projection could change if actual economic growth or inflation, or its forecast thereof, accelerate. Future changes in long-term rates are more difficult to predict since the Federal Reserve has less control over these rates. As discussed in "Executive Overview" and the "Market Risk" section of "Quantitative and Qualitative Disclosures About Risk Management," we believe our market risk profile is positioned to remain moderate and our profitability competitive across a wide range of interest rate environments.
Despite the continued trend of declining intermediate- and long-term rates during 2012, the interest rate environment remained favorable for our results of operations in terms of the spread between our level of profitability (ROE) and the levels of interest rates. This spread averaged 5.77 percentage points (relative to 3-month LIBOR) in 2012 and 3.55 percentage points in 2011. In the 10 years prior to 2011, which had higher interest rate environments across all maturities on the yield curve, this spread averaged 3.18 percentage points.
In general, when interest rates decline, our profitability relative to short-term interest rates widens. The rate environment has been a net benefit to our profitability relative to interest rate levels, for several reasons:
| |
▪ | Reductions in market interest rates raise ROE compared to market rates to the extent we fund a portion of long-term assets with shorter-term debt. |
| |
▪ | The lower intermediate- and long-term rates have provided us the opportunity to retire many Bonds before their final maturities and replace them with lower cost Obligations, at a pace exceeding mortgage paydowns. |
| |
▪ | Earnings generated from funding assets with interest-free capital have not decreased as much as the reduction in overall interest rates because long-term assets do not reprice immediately to the lower rates. |
ANALYSIS OF FINANCIAL CONDITION
Mission Asset Activity
Mission Assets are the primary means by which we fulfill our mission with direct connections to members. We regularly monitor the balance sheet concentration of Mission Asset Activity. In 2015, our Primary Mission Asset ratio, as defined in "Regulatory and Legislative Risk" of the Executive Overview, was 79 percent. In assessing mission achievement, we also consider supplemental sources of Mission Asset Activity, the most significant of which is Letters of Credit issued to members.
Credit Services
Credit Activity and Advance Composition
The tables below show annual and quarterly trends in Advance balances by major programs and in the notional amount of Letters of Credit.
| | (Dollars in millions) | December 31, 2012 | | December 31, 2011 | December 31, 2015 | | December 31, 2014 |
| Balance | | Percent(1) | | Balance | | Percent(1) | Balance | | Percent(1) | | Balance | | Percent(1) |
Adjustable/Variable Rate Indexed: | | | | | | | | | | | | | | |
LIBOR | $ | 35,578 |
| | 66 | % | | $ | 9,649 |
| | 35 | % | $ | 47,312 |
| | 65 | % | | $ | 51,839 |
| | 74 | % |
Other | 406 |
| | 1 |
| | 229 |
| | 1 |
| 617 |
| | 1 |
| | 515 |
| | 1 |
|
Total | 35,984 |
| | 67 |
| | 9,878 |
| | 36 |
| 47,929 |
| | 66 |
| | 52,354 |
| | 75 |
|
| | | | | | | | |
Fixed-Rate: | | | | | | | | | | | | | | |
REPO | 7,655 |
| | 14 |
| | 3,085 |
| | 11 |
| 10,568 |
| | 14 |
| | 5,201 |
| | 7 |
|
Regular Fixed Rate | 4,573 |
| | 9 |
| | 5,013 |
| | 18 |
| |
Regular Fixed-Rate | | 9,248 |
| | 13 |
| | 7,398 |
| | 11 |
|
Putable (2) | 2,587 |
| | 5 |
| | 6,204 |
| | 22 |
| 1,046 |
| | 1 |
| | 1,617 |
| | 2 |
|
Convertible (2) | 63 |
| | — |
| | 1,178 |
| | 4 |
| |
Amortizing/Mortgage Matched | 2,353 |
| | 4 |
| | 2,232 |
| | 8 |
| 2,706 |
| | 4 |
| | 2,734 |
| | 4 |
|
Other | 406 |
| | 1 |
| | 249 |
| | 1 |
| 1,745 |
| | 2 |
| | 995 |
| | 1 |
|
Total | 17,637 |
| | 33 |
| | 17,961 |
| | 64 |
| 25,313 |
| | 34 |
| | 17,945 |
| | 25 |
|
| | | | | | | | |
Other Advances | — |
| | — |
| | — |
| | — |
| |
Total Advances Principal | $ | 53,621 |
| | 100 | % | | $ | 27,839 |
| | 100 | % | $ | 73,242 |
| | 100 | % | | $ | 70,299 |
| | 100 | % |
| | | | | | | | | | | | | | |
Letters of Credit (notional) | $ | 10,152 |
| | | | $ | 4,838 |
| | | $ | 19,555 |
| | | | $ | 17,780 |
| | |
| | (Dollars in millions) | | December 31, 2015 | | September 30, 2015 | | June 30, 2015 | | March 31, 2015 |
| December 31, 2012 | | September 30, 2012 | | June 30, 2012 | | March 31, 2012 | Balance | | Percent(1) | | Balance | | Percent(1) | | Balance | | Percent(1) | | Balance | | Percent(1) |
| Balance | Percent(1) | | Balance | Percent(1) | | Balance | Percent(1) | | Balance | Percent(1) | |
Adjustable/Variable Rate Indexed: | | | | | | | | | | | | |
Adjustable/Variable-Rate Indexed: | | | | | | | | | | | | | | | | |
LIBOR | $ | 35,578 |
| 66 | % | | $ | 17,337 |
| 49 | % | | $ | 13,641 |
| 39 | % | | $ | 9,659 |
| 36 | % | $ | 47,312 |
| | 65 | % | | $ | 49,313 |
| | 64 | % | | $ | 48,242 |
| | 68 | % | | $ | 49,103 |
| | 73 | % |
Other | 406 |
| 1 |
| | 216 |
| — |
| | 263 |
| 1 |
| | 155 |
| 1 |
| 617 |
| | 1 |
| | 565 |
| | 1 |
| | 597 |
| | 1 |
| | 407 |
| | 1 |
|
Total | 35,984 |
| 67 |
| | 17,553 |
| 49 |
| | 13,904 |
| 40 |
| | 9,814 |
| 37 |
| 47,929 |
| | 66 |
| | 49,878 |
| | 65 |
| | 48,839 |
| | 69 |
| | 49,510 |
| | 74 |
|
| | | | | | | | | | | | |
Fixed-Rate: | | | | | | | | | | | | | | | | | | | | | | | | | | |
REPO | 7,655 |
| 14 |
| | 6,389 |
| 18 |
| | 6,126 |
| 18 |
| | 2,322 |
| 9 |
| 10,568 |
| | 14 |
| | 12,023 |
| | 16 |
| | 8,499 |
| | 12 |
| | 4,061 |
| | 6 |
|
Regular Fixed Rate | 4,573 |
| 9 |
| | 5,154 |
| 15 |
| | 7,983 |
| 23 |
| | 4,940 |
| 19 |
| |
Regular Fixed-Rate | | 9,248 |
| | 13 |
| | 9,385 |
| | 12 |
| | 8,184 |
| | 11 |
| | 7,977 |
| | 12 |
|
Putable (2) | 2,587 |
| 5 |
| | 2,649 |
| 7 |
| | 2,832 |
| 8 |
| | 5,992 |
| 22 |
| 1,046 |
| | 1 |
| | 1,557 |
| | 2 |
| | 1,570 |
| | 2 |
| | 1,580 |
| | 3 |
|
Convertible (2) | 63 |
| — |
| | 1,100 |
| 3 |
| | 1,143 |
| 3 |
| | 1,174 |
| 4 |
| |
Amortizing/Mortgage Matched | 2,353 |
| 4 |
| | 2,308 |
| 7 |
| | 2,315 |
| 7 |
| | 2,209 |
| 8 |
| 2,706 |
| | 4 |
| | 2,723 |
| | 3 |
| | 2,703 |
| | 4 |
| | 2,662 |
| | 4 |
|
Other | 406 |
| 1 |
| | 364 |
| 1 |
| | 299 |
| 1 |
| | 213 |
| 1 |
| 1,745 |
| | 2 |
| | 1,637 |
| | 2 |
| | 1,223 |
| | 2 |
| | 825 |
| | 1 |
|
Total | 17,637 |
| 33 |
| | 17,964 |
| 51 |
| | 20,698 |
| 60 |
| | 16,850 |
| 63 |
| 25,313 |
| | 34 |
| | 27,325 |
| | 35 |
| | 22,179 |
| | 31 |
| | 17,105 |
| | 26 |
|
| | | | | | | | | | | | |
Other Advances | — |
| — |
| | — |
| — |
| | — |
| — |
| | — |
| — |
| |
Total Advances Principal | $ | 53,621 |
| 100 | % | | $ | 35,517 |
| 100 | % | | $ | 34,602 |
| 100 | % | | $ | 26,664 |
| 100 | % | $ | 73,242 |
| | 100 | % | | $ | 77,203 |
| | 100 | % | | $ | 71,018 |
| | 100 | % | | $ | 66,615 |
| | 100 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Letters of Credit (notional) | $ | 10,152 |
| | | $ | 3,971 |
| | | $ | 3,997 |
| | | $ | 4,218 |
| | $ | 19,555 |
| | | | $ | 17,594 |
| | | | $ | 19,006 |
| | | | $ | 16,905 |
| | |
| |
(1) | As a percentage of total Advances principal. |
| |
(2) | Excludes Putable/ConvertiblePutable Advances where the related put/conversionput options have expired. Such Advances are classified based on their current terms. |
The increasemodest growth and variability in Advance balances in 2012 occurred from borrowings2015 was driven primarily by a small number of large-asset institutions, particularly a large new member. Advance growth was comprised almost entirely of adjustable-rate LIBOR Advanceschanges in variable-rate and short-term REPOrepurchase (REPO) Advances (mostly having overnight maturities). We do not know ifas the Advance growth experienced in 2012 will continue or develop into increased Advance usage by members more broadly. Economic factors continuing to limit Advance demand are discussed in "Conditionsreduction in the Economy and Financial Markets" andneed for variable-rate funding from our largest member was more than offset by REPO Advance borrowings. The increase in REPO Advance borrowings was primarily from new insurance company members. However, the borrowings from these new members are required to be paid off over the next year due to the Finance Agency's 2016 final rule on membership requirements, which is discussed further in the "Executive Overview." Additionally, former members hold $3.6 billion in Advances (seven percent), of which approximately $2.0 billion are scheduled to mature in 2013. When these are paid down, the former members will not be able to replace them with new Advances.
Members increased their available lines in the Letters of Credit program by $5.3$1.8 billion (10 percent) in 20122015. The lines rose principally because of more activity from a few large members who heavily use Letters of Credit and whose usage can be volatile.balances averaged $17.7 billion during 2015, an increase of $2.5 billion (17 percent) from the average balance during 2014. We believe these members increased usage
normally earn fees on Letters of Credit based on the actual notionalaverage amount of the Letters utilized, which normallygenerally is less than the available lines.notional amount issued.
Housing and Community Investment
Our Housing and Community Investment Programs include the Affordable Housing Program and various housing and community economic development-related Advance Usageprograms. We fund the Affordable Housing Program with an accrual equal to 10 percent of our previous year's net earnings, mandated by the Financial Institutions Reform, Recovery and Enforcement Act of 1989. See Note 14 of the Notes to Financial Statements for a complete description of the Affordable Housing Program calculation.
The Affordable Housing Program provides funding for the development of affordable housing. The Program consists of a Competitive Program and a homeownership program called Welcome Home, which assists homebuyers with down payments and closing costs. Under the Competitive Program, we currently distribute funds in the form of grants to members that apply and successfully compete in an annual offering. Under Welcome Home, we make funds available beginning in March until they have been fully committed. For both programs, the income of qualifying individuals or households must be 80 percent or less of the area median income. We set aside up to 35 percent of the Affordable Housing Program accrual for Welcome Home and allocate the remainder to the Competitive Program.
Our Board of Directors also may allocate funds to voluntary housing programs. In 2015, the Board re-authorized an additional $1 million to the Carol M. Peterson Housing Fund for use during the year. These funds are primarily used as grants to pay for accessibility rehabilitation and emergency repairs for special needs and elderly homeowners. In March 2016, the Board re-authorized this fund in the amount of $1.5 million for use in 2016. In 2012, the Board of Directors also established the Disaster Reconstruction Program, a $5 million voluntary housing program that provides grants for purchase or rehabilitation of a home to Fifth District residents that have suffered loss or damage to their primary residence as a result of a state or federally declared disaster. Since the program's inception, we have disbursed nearly $3 million to assist 177 households.
Two other housing programs that fall outside the auspices of the Affordable Housing Program are the Community Investment Program and the Economic Development Program. Advances under the former program have rates equal to our cost of funds, while Advances under the latter program have rates equal to our cost of funds plus three basis points. Members use the Community Investment Program to serve housing needs of low- and moderate-income households and, under certain
conditions, community economic development projects. The Economic Development Program is a discounted Advance program used to promote economic development and job creation and retention.
Investments
Types of Investments. One reason we hold investments is to carry sufficient asset liquidity. Permissible liquidity investments include Federal funds, certificates of deposit, bank notes, bankers' acceptances, commercial paper, securities purchased under agreements to resell, and debt securities issued by the U.S. government or its agencies. The first five categories represent unsecured lending to private counterparties. We also may place deposits with the Federal Reserve Bank. We are prohibited by Finance Agency regulations from investing (secured or unsecured) in financial investments issued by non-U.S. entities other than those issued by U.S. branches and agency offices of foreign commercial banks. Most liquidity investments have short-term maturities.
We are also permitted by regulation to purchase the following table presents Advances outstandingother investments, which have longer original maturities than liquidity investments:
| |
▪ | mortgage-backed securities and collateralized mortgage obligations supported by mortgage securities (together, referred to as mortgage-backed securities) and issued by GSEs or private issuers; |
| |
▪ | asset-backed securities collateralized by manufactured housing loans or home equity loans and issued by GSEs or private issuers; and |
| |
▪ | marketable direct obligations of certain government units or agencies (such as state housing finance agencies) that supply needed funding for housing or community lending and that do not exceed 20 percent of our regulatory capital. |
We have never purchased asset-backed securities and do not own any privately-issued mortgage-backed securities. Per Finance Agency regulations, the total investment in mortgage-backed securities and asset-backed securities may not exceed, on a book value basis, 300 percent of previous month-end regulatory capital on the day we purchase the securities. See the “Capital Resources” section below for the definition of regulatory capital.
Purposes of Having Investments. The investments portfolio helps us achieve corporate objectives in the following ways:
| |
▪ | Liquidity management. Liquidity investments help support the ability to fund assets on a timely basis, especially Advances. These investments supply a source of liquidity because we normally ensure they have shorter maturities than the debt we issue to fund them. We also may be able to obtain liquidity by selling certain investments for cash without a significant loss of value. |
| |
▪ | Earnings enhancement. The investments portfolio assists with earning a competitive return on capital, which also increases funding for Housing and Community Investment programs. |
| |
▪ | Market risk management. Liquidity investments help stabilize earnings because they typically earn a relatively stable spread to the cost of debt issued to fund them, with less market risk than mortgage assets. |
| |
▪ | Debt issuance management. Maintaining a short-term liquidity investment portfolio can help us participate in attractively priced debt issuances, on an opportunistic basis. We can temporarily invest proceeds from debt issuances in short-term liquid assets and quickly access them to fund demand for Mission Asset Activity, rather than having debt issuances dictated solely by the timing of member demand. |
| |
▪ | Support of housing market. Investment in mortgage-backed securities and state housing finance agency bonds directly supports the residential mortgage market by providing capital and financing for mortgages. |
How We Manage Risks of Investments. We strive to ensure our investment holdings have a moderate degree of market risk and limited credit risk, which tends to lower the returns we can expect to earn on these securities. We believe that a philosophy of purchasing investments with a high amount of market or credit risk would be inconsistent with our GSE status and corporate objectives.
Market risk associated with short-term investments tends to be minimal because of their short maturities and because we typically fund them with similar duration short-term Consolidated Obligations. We mitigate much of the market risk of mortgage-backed securities, which exists primarily from changes in mortgage prepayment speeds, by member type. Commercial banks continued in 2012limiting their balances to
300 percent of regulatory capital, by funding them with a portfolio of long-term fixed-rate callable and noncallable Obligations, and by managing the market risk exposure of the entire balance sheet within prudent policy limits.
Finance Agency regulations and internal policies also provide controls on market risk exposure by restricting the types of mortgage loans, mortgage-backed securities and other investments we can hold. These restrictions prohibit, among others, the purchase of interest only or principal only stripped mortgage-backed securities and mortgage-backed securities whose average life varies more than six years under a 300 basis points interest rate shock.
Our internal policies specify guidelines for, and relatively tight constraints on, the types and amounts of short-term investments we are permitted to hold and the maximum amount of credit risk exposure we are permitted to have with eligible counterparties. We are permitted to invest only in the instruments of counterparties with high credit ratings, and because of our conservative investment policies and practices, we believe all of our investments have high credit quality. We have never had a credit loss or credit-related write down of any investment security.
Deposits
We provide a variety of deposit programs, including demand, overnight, term and Federal funds, which enable depositors to invest funds in short-term liquid assets. We accept deposits from members, other FHLBanks, any institution to which we offer correspondent services, and other government instrumentalities. The rates of interest we pay on deposits are subject to change daily based on comparable money market interest rates. The balances in deposit programs tend to vary positively with the amount of idle funds members have available to invest, as well as, the level of short-term interest rates. Deposits have represented a small component of our funding in recent years, typically less than one percent of our funding sources.
Mortgage Purchase Program (MPP or Mortgage Loans Held for Portfolio)
Description of the MPP
Types of Loans and Benefits. Finance Agency regulations permit FHLBanks to purchase and hold specified whole mortgage loans from their members, which offers members a competitive alternative to the traditional secondary mortgage market and directly supports housing finance. We account for MPP loans as mortgage loans held for portfolio. By selling mortgage loans to us, members can increase their balance sheet liquidity and lower interest rate and mortgage prepayment risks. The MPP particularly enables small- and medium-sized community-based financial institutions to use their existing relationship with us to participate more effectively in the secondary mortgage market.
Under the MPP, we purchase two types of mortgage loans: qualifying conforming fixed-rate conventional 1-4 family residential mortgages and residential mortgages fully insured by the Federal Housing Administration (FHA). Members approved to sell us these loans are referred to as Participating Financial Institutions (PFIs). Although regulations permit us to purchase qualifying mortgage loans originated within any state or territory of the United States, beginning several years ago we no longer purchase loans originated in New York, Massachusetts, Maine, Rhode Island or New Jersey due to features of those states' Anti-Predatory Lending laws that are less restrictive than we prefer.
A “conventional” mortgage refers to a non-government-guaranteed mortgage. A “conforming” mortgage refers to the maximum amount permissible to be lent as a regular prime (i.e., non-jumbo, non-subprime) mortgage. For 2016, the Finance Agency re-established the conforming limit at $417,000 with loans originated in a limited number of high-cost cities and counties receiving higher conforming limits. We do not purchase mortgages subject to these higher amounts.
Loan Purchase Process. A Master Commitment Contract is negotiated with each PFI, in which the PFI agrees to make a best efforts attempt to sell us a specific dollar amount of mortgage loans generally over a period of up to 12 months. We purchase loans pursuant to a Mandatory Delivery Contract, which is a legal commitment we make to purchase, and a PFI makes to deliver, a specified dollar amount of mortgage loans, with a forward settlement date, at a specified range of note rates and prices.
Shortly before delivering the loans that will fill the Mandatory Delivery Contract, the PFI must submit loan level detail including underwriting information. We apply procedures through the automated Loan Acquisition System designed to screen loans that do not comply with our policies. Our underwriting guidelines generally mirror those of Fannie Mae and Freddie Mac for conforming conventional loans, although our guidelines and pool composition requirements are more conservative in a number of ways in order to further limit credit risk exposure. PFIs are required to make certain representations and warranties against our underwriting guidelines on the loans they sell to us. If a PFI sells us a loan in breach of those representations and warranties, we have the contractual right to require the PFI to repurchase the loan.
How We Manage Risks of the MPP
Market Risk. We mitigate the MPP's market risk similarly to how we mitigate market risk from mortgage-backed securities.
Credit Risk - Conventional Mortgage Loans. A unique feature of the MPP is that it separates the various activities and risks associated with residential mortgage lending for conventional loans and allows these risks and activities to be taken on by different entities. We manage the funding of the loans, market risk (including interest rate risk and prepayment risk), and liquidity risk. PFIs manage marketing, originating and, in most cases, servicing the loans. PFIs may either retain servicing or sell it to a qualified and approved third-party servicer (also referred to as a PFI). Because PFIs manage and bear most of the credit risk, they do not pay us a guarantee fee to transfer credit risk.
We manage credit risk exposure for conventional loans through underwriting and pool composition requirements and by applying layered credit enhancements. These enhancements, which apply after a homeowner's equity is exhausted, include (in order of priority) primary mortgage insurance (when applicable), the Lender Risk Account (discussed below), and for loans acquired before February 2011, Supplemental Mortgage Insurance that the PFI purchased from one of our approved third-party providers naming us as the beneficiary.
Beginning in February 2011, we discontinued use of Supplemental Mortgage Insurance for new loan purchases and replaced it with expanded use of the Lender Risk Account and aggregation of loan purchases into larger pools to provide diversification in credit risk exposure. These credit enhancements are designed to adequately protect us against credit losses in scenarios of severe downward movements in housing prices and unfavorable changes in other factors that can affect loan delinquencies and defaults.
The Lender Risk Account is a key component of how we manage residual credit risk. It is a holdback of a portion of the initial purchase price. Starting after five years from the loan purchase date, we may return the holdback to PFIs if they manage credit risk to pre-defined acceptable levels of exposure on the loan pools they sell to us. Actual loan losses are deducted from the amount of the purchase-price holdback we return to the PFI. The Lender Risk Account provides PFIs with a strong incentive to sell us high quality performing mortgage loans.
Credit Risk - FHA Mortgage Loans. Because the FHA makes an explicit guarantee on FHA loans, we do not require any credit enhancements on these loans beyond underwriting, homeowner's equity, and primary mortgage insurance.
Item 7's “Quantitative and Qualitative Disclosures About Risk Management” provides more detail on how we manage market and credit risks for the MPP.
Earnings from the MPP
The MPP enhances long-term profitability on a risk-adjusted basis and augments the return on member stockholders' capital investment. We generate earnings in the MPP from monthly interest payments minus the cost of funding and the cost of hedging the MPP's interest rate risk. Interest income on each loan is computed as the mortgage note rate multiplied by the loan's principal balance:
| |
▪ | minus servicing costs (0.25 percent for conventional loans and 0.44 percent for FHA loans); |
| |
▪ | minus the cost of Supplemental Mortgage Insurance (for applicable loans); and |
| |
▪ | adjusted for the amortization of purchase premiums or the accretion of purchase discounts and for the amortization or accretion of fair value adjustments on loans initially classified as mortgage loan commitments. |
For new loan purchases, we consider the cost of the Lender Risk Account when we set conventional loan prices and evaluate the MPP's expected return. The pricing of each structure depends on a number of factors and is specific to the PFI and to the loan pool. We do not receive fees or income for retaining the risk of losses in excess of any credit enhancements.
FUNDING - CONSOLIDATED OBLIGATIONS
Our primary source of funding and hedging market risk exposure is through participation in the sale of debt securities (Consolidated Obligations) to global investors. Obligations are the joint and several obligations of all the FHLBanks, backed only by the financial resources of these institutions.
There are two types of Consolidated Obligations: Consolidated Bonds (Bonds) and Consolidated Discount Notes (Discount Notes). We participate in the issuance of Bonds for three purposes:
| |
▪ | to finance and hedge intermediate- and long-term fixed-rate Advances and mortgage assets; |
| |
▪ | to finance and hedge short-term, LIBOR-indexed adjustable-rate Advances, and swapped Advances, typically by synthetically transforming fixed-rate Bonds to adjustable-rate LIBOR funding through the execution of interest rate swaps; and |
Bonds may have fixed or adjustable rates of interest. Fixed-rate Bonds are either noncallable or callable. A callable Bond is one that we are able to redeem in whole or in part at our discretion on one or more predetermined call dates according to the Bond's offering notice. The maturity of Bonds typically ranges from one year to 20 years. Our adjustable-rate Bonds use LIBOR for interest rate resets. In the last five years, we have not participated in the issuance of range Bonds, zero coupon Bonds, or indexed principal redemption Bonds.
We use fixed-rate Bonds to fund longer-term fixed-rate Advances and longer-term fixed-rate mortgage assets, and use adjustable-rate Bonds to fund adjustable-rate LIBOR Advances.
We transact in interest rate swaps to synthetically convert some fixed-rate Bonds to adjustable-rate terms indexed to LIBOR. These are used to hedge adjustable-rate LIBOR Advances.
We participate in the issuance of Discount Notes to fund short-term Advances, adjustable-rate LIBOR Advances, putable Advances (which we normally swap to LIBOR), liquidity investments, and a portion of longer-term fixed-rate assets. Discount Notes have maturities from one day to one year, with most of ours normally maturing within three months.
The mix of Obligations fluctuates in response to relative changes in short-term versus long-term assets, relative changes in fixed-rate versus adjustable-rate assets, decisions on market risk management (particularly the amount of funding of longer-term assets with short-term Obligations), and differences in relative costs of various Obligations.
Interest rates on Obligations, including their relationship to other products such as U.S. Treasury securities and LIBOR, are affected by a multitude of factors such as: overall economic and credit conditions; credit ratings of the FHLBank System; investor demand and preferences for our debt securities; the level of interest rates and the shape of the U.S. Treasury curve and the LIBOR swap curve; and the supply, volume, timing, and characteristics of debt issuances by the FHLBanks, other GSEs, and other highly rated issuers.
Finance Agency regulations govern the issuance of Obligations. An FHLBank may not issue individual debt securities without Finance Agency approval, and we have never done so. The Office of Finance services Obligations, prepares the FHLBank System's quarterly and annual combined financial statements, and serves as a source of information for the FHLBanks on capital market developments.
We have the primary liability for our portion of Obligations, i.e., those issued on our behalf for which we received the proceeds. However, we also are jointly and severally liable with the other FHLBanks for the payment of principal and interest on all Obligations. If we do not pay the principal or interest in full when due on any Obligation issued on our FHLB's behalf, we are prohibited from paying dividends or redeeming or repurchasing shares of capital stock. If another FHLBank were unable to repay its participation in an Obligation for which it is the primary obligor, the Finance Agency could call on each of the other FHLBanks to repay all or part of the Obligation. The Finance Agency has never invoked this authority.
LIQUIDITY
Our business requires a continual and substantial amount of liquidity to meet financial obligations (primarily maturing Consolidated Obligations) in a timely and cost-efficient manner and to provide members access to timely Advance funding and mortgage loan sales in all financial environments. We obtain liquidity by issuing debt, holding short-term assets that mature before their associated funding, and having the ability to sell certain investments without significant accounting or economic consequences. Sources of asset liquidity include cash, maturing Advances, maturing investments, principal paydowns of mortgage assets, the ability to sell certain investments, and interest payments received. Uses of liquidity include repayments of Obligations, issuances of new Advances, purchases of loans under the MPP, purchases of investments, and payments of interest.
Liquidity requirements are significant because Advance balances can be volatile, many have short-term maturities, and we strive to allow members to borrow Advances on the same day they request them. We regularly monitor liquidity risks and the investment and cash resources available to meet liquidity needs, as well as statutory and regulatory liquidity requirements.
Because Obligations have favorable credit ratings and because the FHLBank System is one of the largest portionsellers of Advances. This reflectsdebt in the worldwide capital markets, the System historically has been able to satisfy its liquidity needs through debt issuance across a wide range of structures at relatively favorable spreads to benchmark market interest rates.
CAPITAL RESOURCES
Capital Plan
Basic Characteristics
Under Finance Agency regulations, regulatory capital is composed of all capital stock (including stock classified as mandatorily redeemable), retained earnings, general loss allowances, and other amounts from sources the Finance Agency determines are available to absorb losses. Currently, our regulatory capital consists of capital stock and retained earnings. Under the Gramm-Leach-Bliley Act of 1999 (GLB Act), permanent capital equals Class B stock plus retained earnings and is available to absorb financial losses.
Our Capital Plan has the following basic characteristics:
| |
▪ | We offer only one class of capital stock, Class B, which is redeemable upon a member's five-year advance written notice, with certain conditions described below. We may elect, at our discretion, to repurchase stock redemption requests sooner than five years. |
| |
▪ | We issue shares of capital stock as required for an institution to become a member or maintain membership, as required for members to capitalize Mission Asset Activity, and when we may pay dividends in the form of additional shares of stock. |
| |
▪ | The Capital Plan enables us to efficiently expand and contract capital stock needed to capitalize assets in response to changes in our membership base and demand for Mission Asset Activity. This enables us to maintain a prudent amount of financial leverage and also consistently generate a competitive dividend return. |
| |
▪ | We may, subject to the restrictions described below, repurchase certain capital stock (i.e., "excess" capital stock). |
| |
▪ | The concept of “cooperative capital,” explained below, better aligns the interests of heavy users of our products with light users by enhancing the dividend return. |
Prudent risk management requires us to maintain effective financial leverage to minimize risk to capital stock while preserving profitability and to hold an adequate amount of retained earnings. Pursuant to these objectives, Finance Agency regulations stipulate that we must comply with three limits on capital leverage and risk-based capital. We have always complied with the regulatory capital requirements.
| |
▪ | We must maintain at least a four percent minimum regulatory capital-to-assets ratio. This has historically been the regulatory capital requirement that has been closest to affecting our operations. |
| |
▪ | We must maintain at least a five percent minimum leverage ratio of capital divided by total assets, which includes a 1.5 weighting factor applicable to permanent capital. Because all of our Class B stock is permanent capital, this requirement is met automatically if we satisfy the four percent unweighted capital requirement. |
| |
▪ | We are subject to a risk-based capital rule in which we must hold an amount of "permanent" capital that exceeds the amount of exposure to market risk, credit risk, and operational risk. How we determine the amount of these risk exposures is stipulated by Finance Agency regulation. Permanent capital includes retained earnings and the regulatory amount of Class B capital stock. |
In addition to the minimum capital requirements, the GLB Act and our Capital Plan promote the adequacy of our capital to absorb financial losses in three ways, which combine to give member stockholders a clear incentive to require us to minimize our risk profile:
| |
▪ | the five-year redemption period for Class B stock; |
| |
▪ | the option we have to call on members to purchase additional capital if required to preserve safety and soundness; and |
| |
▪ | the limitations, described below, on our ability to honor requested redemptions of capital if we are at risk of not maintaining safe and sound operations. |
GAAP capital excludes mandatorily redeemable capital stock, while regulatory capital includes it. Mandatorily redeemable capital stock, which is stock subject to pending redemption, is accounted for as a liability on our Statements of Condition and related dividend payments are accounted for as interest expense. The classification of some capital stock as a liability has no effect on our safety and soundness, liquidity position, market risk exposure, or ability to meet interest payments on our participation in Obligations. Mandatorily redeemable capital stock is fully available to absorb losses until the stock is redeemed or repurchased. See Note 15 of the Notes to Financial Statements for more discussion of mandatorily redeemable capital stock.
Components of Capital Stock Purchases and Operations of the Capital Plan
Our Capital Plan ties the amount of each member's required capital stock to both the amount of the member's assets (membership stock) and the amount and type of its Mission Asset Activity with us (activity stock). Membership stock is required to become a member and maintain membership. The amount required for each member currently ranges from a minimum of $1 thousand to a maximum of $25 million for each member, with the amount within that range determined as a percentage of member assets.
In addition to its membership stock, a member may be required to purchase and hold activity stock to capitalize its Mission Asset Activity. For purposes of the Capital Plan, Mission Asset Activity includes the principal balance of Advances, guaranteed funds and rate Advance commitments, and the principal balance of loans and commitments in the MPP that occurred after implementation of the Capital Plan.
The FHLB must capitalize all Mission Asset Activity with capital stock at a rate of at least four percent. However, each member is permitted to maintain an amount of activity stock within the range of minimum and maximum percentages for each type of Mission Asset Activity. The current percentages are as follows:
|
| | | | |
Mission Asset Activity | | Minimum Activity Percentage | | Maximum Activity Percentage |
Advances | | 2% | | 4% |
Advance Commitments | | 2 | | 4 |
MPP | | 0 | | 4 |
If a member owns more stock than is needed to satisfy both its membership stock requirement and the maximum activity stock percentages for its Mission Asset Activity, we designate the remaining stock as the member's excess capital stock. The member may utilize its excess stock to capitalize additional Mission Asset Activity.
If an individual member's excess stock reaches zero, the Capital Plan normally permits us, within certain limits, to capitalize additional Mission Asset Activity of that member with excess stock owned by other members at the maximum percentage rate. This feature, called “cooperative capital,” enables us to more effectively utilize our capital stock. A member's use of cooperative capital reduces the ratio of its activity stock to its Mission Asset Activity for each type of Mission Asset Activity. There is a limit to how much cooperative capital a member may use, which we currently set at $200 million.
When a member's ratio of activity stock to its Mission Asset Activity reaches the minimum activity stock percentage for all types of Mission Asset Activity, the member must capitalize additional Mission Asset Activity of a given type by purchasing capital stock at that asset type's minimum percentage rate, assuming availability of cooperative capital.
Statutory and Regulatory Restrictions on Capital Stock Redemption and Repurchases
In accordance with the GLB Act, our stock is putable by members. However, for us and the other FHLBanks, there are significant statutory and regulatory restrictions on our obligation or right to redeem or repurchase outstanding stock, including, but not limited to, the following:
| |
▪ | We may not redeem any capital stock if, following the redemption, we would fail to satisfy any Regulatory capital requirements. By law, we may not redeem any stock if we become undercapitalized. |
| |
▪ | We may not redeem any capital stock without approval of the Finance Agency if either our Board of Directors or the Finance Agency determines that we have incurred or are likely to incur losses resulting or expected to result in a charge against capital. |
If our FHLB is liquidated and after payment in full to our creditors, stockholders would be entitled to receive the par value of their capital stock. In addition, each stockholder would be entitled to any retained earnings in an amount proportional to the stockholder's share of the total shares of capital stock. In the event of a merger or consolidation of the FHLB, the Board of Directors shall determine the rights and preferences of the FHLB's stockholders, subject to any terms and conditions imposed by the Finance Agency.
Retained Earnings
Purposes and Amount of Retained Earnings
Retained earnings are important to protect members' capital stock investment against the risk of impairment and to enhance our ability to pay stable and competitive dividends when earnings may be volatile in light of the risks we face. Impairment risk is the risk that members would have to write down the par value of their capital stock investment in our FHLB as a result of their analysis of ultimate recoverability. An extreme situation of earnings instability, in which losses exceeded the amount of our retained earnings for a period of time determined to be other-than-temporary, could result in a determination that the value of our capital stock was impaired.
We have a policy that sets forth a range for the amount of retained earnings we believe is needed to mitigate impairment risk and facilitate dividend stability in light of the risks we face. The current retained earnings requirement ranges from $375 million to $600 million, based on mitigating quantifiable risks under very stressed business and market scenarios to a 99 percent confidence level. Given the regulatory environment, we carry a greater amount of retained earnings than required by the Policy. At the end of 2015, our retained earnings totaled $765 million. We believe the current amount of retained earnings is sufficient to protect our capital stock against impairment risk and to provide dividend stability if needed.
Joint Capital Agreement to Augment Retained Earnings
The FHLBanks entered into a Joint Capital Enhancement Agreement (the “Capital Agreement”) in February 2011. The Capital Agreement provides that each FHLBank will allocate quarterly at least 20 percent of its net income to a restricted retained earnings account (the “Account”). The 20 percent reserve allocation to the Account is similar to what had been required under the FHLBanks' REFCORP obligation, which was satisfied in 2011. The Account is not available to be distributed as dividends except under certain limited circumstances. The Capital Agreement does not limit our ability to use retained earnings held outside of the Account to pay dividends.
Although we have always maintained compliance with our capital requirements, we believe the Capital Agreement enhances risk mitigation by building a larger capital buffer over time to absorb unexpected losses, if any, that we may experience. Therefore, the Capital Agreement provides additional protection against impairment risk to stockholders' capital investment.
USE OF DERIVATIVES
Finance Agency regulations and our policies establish guidelines for the execution and use of derivative transactions. We are prohibited from trading in, or the speculative use of, derivatives and have limits on the amount of credit risk to which we may be exposed. Most of our derivatives activity involves interest rate swaps, some of which may include options. We account for all derivatives at their fair values.
Similar to our participation in debt issuances, use of derivatives is integral to hedging market risk created by offering Advances, purchasing mortgage assets, and transacting mortgage commitments. Derivatives related to Advances most commonly hedge either:
| |
▪ | below-market rates and/or the market risk exposure on Putable Advances, and certain other Advances, for which members have sold us options embedded within the Advances; or |
| |
▪ | Regular Fixed-Rate Advances when it may not be as advantageous to issue Obligations or when it may improve our market risk management. |
Derivatives related to mortgage assets are used to augment debt issuance in the hedging of market risk. We also use derivatives to hedge the market risk associated with fixed-rate mortgage purchase commitments in the MPP.
Derivatives transactions related to Bonds also help us intermediate between the preference of capital market investors for intermediate- and long-term fixed-rate debt securities and the preference of our members for shorter-term or adjustable-rate Advances. We can satisfy the preferences of both groups by issuing long-term fixed-rate Bonds and entering into an interest rate swap that synthetically converts the Bonds to an adjustable-rate LIBOR funding basis that matches up with the short-term and adjustable-rate Advances, thereby preserving a favorable interest rate spread.
Use of derivatives can result in a substantial amount of volatility of accounting and economic earnings. Because we have a cooperative business model, our Board of Directors has emphasized the importance of controlling earnings volatility. Accordingly, our strategy is to execute derivatives that we expect to be effective hedges of market risk exposure relative to their impacts on profitability. As a result, the volatility in the market value of equity and earnings from our use of derivatives has historically tended to be moderate.
COMPETITION
Numerous economic and financial factors influence members' use of Mission Asset Activity. One of the most important factors that affect Advance demand is the amount of member deposits, which for most members are their primary source of funds. In addition, both small and, in particular, large members typically have access to wholesale funds besides FHLB Advances. Another important source of competition for Advances is the ongoing fiscal and monetary stimuli initiated by the federal government to combat the continued difficulties in the housing market and broader economy. This is discussed in Item 1A's “Risk Factors” and in Item 7's “Executive Overview."
The holding companies of some of our large asset members have membership(s) in other FHLBanks through their affiliates. Others could initiate memberships in other Districts. The competition among FHLBanks for the business of multiple-membership institutions is similar to the FHLBanks' competition with other wholesale lenders and mortgage investors. We compete with other FHLBanks on the offerings and pricing of Mission Asset Activity, earnings and dividend performance, collateral policies, capital plans, and members' perceptions of our relative safety and soundness. Some members may also evaluate benefits of diversifying business relationships among FHLB memberships. We regularly monitor these competitive forces among the FHLBanks.
The primary competitors for mortgage loans we purchase in the MPP are Fannie Mae and Freddie Mac, government agencies such as the Government National Mortgage Association (Ginnie Mae), and private issuers. Fannie Mae and Freddie Mac, in particular, have long-established and efficient programs and are the dominant purchasers of fixed-rate conventional mortgages. In addition, a number of commercial bank members (see "Membershipprivate financial institutions have well-established securitization programs, although they may not currently be as active as they were historically. The MPP also competes with the Federal Reserve to the extent it purchases mortgage-backed securities and Stockholders" below)affects market prices and availability of supply.
For debt issuance, the
fact that there are more large commercial banks than large membersFHLBank System competes with
other charter typesissuers in the
Fifth District.national and global debt markets, including most importantly the U.S. government and other GSEs. |
| | | | | | | | | | | | | |
(Dollars in millions) | December 31, 2012 | | December 31, 2011 |
| Par Value of Advances | | Percent of Total Par Value of Advances | | Par Value of Advances | | Percent of Total Par Value of Advances |
Commercial banks | $ | 43,453 |
| | 81 | % | | $ | 16,792 |
| | 60 | % |
Thrifts and Savings Banks | 2,978 |
| | 5 |
| | 3,094 |
| | 11 |
|
Credit unions | 554 |
| | 1 |
| | 589 |
| | 2 |
|
Insurance companies | 3,017 |
| | 6 |
| | 2,608 |
| | 10 |
|
Total member Advances | 50,002 |
| | 93 |
| | 23,083 |
| | 83 |
|
Former member borrowings | 3,619 |
| | 7 |
| | 4,756 |
| | 17 |
|
Total par value of Advances | $ | 53,621 |
| | 100 | % | | $ | 27,839 |
| | 100 | % |
Item 1A.Risk Factors.
The following tables present principal balances forare the most important risks we currently face. The realization of one or more of the risks could negatively affect our top five Advance borrowers.results of operations, financial condition, and, at the extreme, the viability of our business franchise. The effects could include reductions in Mission Asset Activity, lower earnings and dividends, and, at the extreme, impairment of our capital or an inability to participate in issuances of Consolidated Obligations. The risks identified below are not the only risks we face. Other risks not presently known or which we deem to be currently immaterial may also impact our business. Additionally, the risks identified may adversely affect our business in ways we do not expect or anticipate.
|
| | | | | | | | | | | | | | | | |
(Dollars in millions) | | | | | | | | | | |
December 31, 2012 | | December 31, 2011 |
Name | | Par Value of Advances | | Percent of Total Par Value of Advances | | Name | | Par Value of Advances | | Percent of Total Par Value of Advances |
| | | | | | | | | | |
JPMorgan Chase Bank, N.A. | | $ | 26,000 |
| | 48 | % | | U.S. Bank, N.A. | | $ | 7,314 |
| | 26 | % |
Fifth Third Bank | | 4,732 |
| | 9 |
| | PNC Bank, N.A. (1) | | 3,996 |
| | 14 |
|
U.S. Bank, N.A. | | 4,586 |
| | 8 |
| | Fifth Third Bank | | 2,533 |
| | 9 |
|
PNC Bank, N.A. (1) | | 2,986 |
| | 6 |
| | Protective Life Insurance Company | | 1,000 |
| | 4 |
|
Protective Life Insurance Company | | 1,071 |
| | 2 |
| | Republic Bank & Trust Company | | 935 |
| | 4 |
|
Total of Top 5 | | $ | 39,375 |
| | 73 | % | | Total of Top 5 | | $ | 15,778 |
| | 57 | % |
(1)Economy.Former member. An economic downturn could lower Mission Asset Activity and profitability.
The concentration ratioMember demand for Mission Asset Activity depends in large part on the general health of the top five borrowers had fluctuatedeconomy and overall business conditions. Numerous external factors can affect our Mission Asset Activity and earnings including:
| |
▪ | the general state and trends of the economy and financial institutions, especially in our Fifth District; |
| |
▪ | conditions in the financial, credit, mortgage, and housing markets; |
| |
▪ | competitive alternatives to our products, such as retail deposits and other sources of wholesale funding; |
| |
▪ | actions of the Federal Reserve to affect liquidity reserves of financial institutions and the money supply; |
| |
▪ | the willingness and ability of financial institutions to expand lending; and |
Because our business tends to be cyclical, a recessionary economy normally lowers the amount of Mission Asset Activity, can decrease profitability, and can cause stockholders to request redemption of a portion of their capital or request withdrawal from membership (both referred to in this document as “request withdrawal of capital”). These unfavorable effects are more likely to occur and be more severe if a weak economy is accompanied by significant changes in interest rates, stresses in the range of 50 to 65 percenthousing market, elevated competitive forces, or actual or potential changes in the legislative and regulatory environment.
Since the last recession, which officially ended in 2009, the economy has grown at a measured pace, contributing to tempered broad-based member demand for Mission Asset Activity. In addition, overall Advance demand has been and continues to be unfavorably affected by the substantial amount of deposit based liquidity provided to financial institutions through the monetary actions of the Federal Reserve, and a more onerous regulatory environment for our members. Acceleration of these conditions or another recession could decrease Mission Asset Activity, which could reduce profitability.
Competition. The competitive environment for our products could adversely affect business activities, including decreasing the level and utilization rates of Mission Asset Activity, earnings, and capitalization.
We operate in a highly competitive environment for Mission Asset Activity. Increased competition could decrease the amount of Mission Asset Activity and narrow profitability on that activity, both of which could cause stockholders to request withdrawals of capital. Historically, our primary competition has been from other wholesale lenders and debt issuers, including other GSEs. A substantial source of competition in the last eight years has come from the federal government's actions to stimulate the economy, especially the actions of the Federal Reserve System through its policies of quantitative easing and maintaining extremely low interest rates. Among other effects, these actions have significantly expanded liquidity and excess reserves available to many members. We expect overall, broad-based growth in Advance demand will remain modest until the government reduces these initiatives by tightening monetary policy and winding down its holdings of U.S. Treasury and mortgage-backed securities. Even if these events take place, we cannot provide assurance regarding the pace or strength of the renewed Advance demand that we would anticipate.
In addition, the FHLBank System competes for funds through issuance of debt with the U.S. Treasury, Fannie Mae, Freddie Mac, other GSEs, and corporate, state, and sovereign entities, among others. Increases in the supply and types of competing debt products or other regulatory factors could adversely affect the System's ability to access funding or increase the cost of our debt issuance. Either of these effects could in turn adversely affect our financial conditions and results of operations and the value of FHLB membership.
GSE Reform. Potential GSE reform could unfavorably affect our business model, financial condition, and results of operations.
The FHLBank System's regulator, the Finance Agency, also regulates Fannie Mae and Freddie Mac. While there appears to be consensus that a permanent financial and political solution to the current conservatorship status of Fannie Mae and Freddie Mac should be implemented, which could include maintaining the current structure, no consensus has evolved to date around any of the various legislative proposals. However, some policy proposals have included provisions applicable to the FHLBanks, such as limitations on Advances and portfolio investments, development of a covered bond market, and restrictions on GSE mortgage finance, that could threaten the FHLBank System's long-standing business model.
Because the FHLBanks shares a common regulator with Fannie Mae and Freddie Mac, the ultimate resolution to the conservatorship of Fannie Mae and Freddie Mac could affect the FHLBanks. There are significant differences between the FHLBank System and Fannie Mae and Freddie Mac, including the System's focus on lending as opposed to guaranteeing mortgages and its distinctive cooperative business model. Legislation could inadequately account for these differences, which could imperil the ability of the FHLBank System to continue operating effectively within its current business model or could change the System's business model. We cannot predict the effects on the System if GSE reform were to be enacted.
FHLB Regulatory Environment. We face a heightened regulatory and legislative environment, which could unfavorably affect our business model, financial condition, and results of operations.
In addition to potential GSE reform, the legislative and regulatory environment in which the FHLBank System operates continues to undergo rapid change driven principally by reforms emanating from the Housing and Economic Reform Act of 2008 (HERA) and the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Recently-promulgated and future legislative and regulatory actions could significantly affect our business model, financial condition, or results of operations.
In addition, in January 2016, the Finance Agency published a final rule regarding membership requirements, part of which will negatively affect our business. The rule prohibits captive insurance companies membership eligibility in the FHLBank System. The membership regulation is discussed further in Item 7's "Executive Overview."
We believe that, taken as a whole, legislative and regulatory actions have raised our operating costs and imparted added uncertainty regarding the business model under which the FHLBanks may operate in the future. We are unable at this time to predict the ultimate effects the heightened regulatory environment could have on the FHLBank System's business model or on our financial condition and results of operations.
Liquidity and Market Access. Impaired access to the capital markets for debt issuance could increase liquidity risk, decrease the amount of Mission Asset Activity, lower earnings by raising debt costs and, at the extreme, result in realization of liquidity risk preventing the System from meeting its financial obligations.
Our principal long-term source of funding, liquidity, and market risk management is through access to the capital markets for participation in the issuances of debt securities and execution of derivative transactions at prices and yields that are adequate to support our business model. Our ability to obtain funds through the sale of Consolidated Obligations depends in part on prevailing conditions in the capital markets, particularly the short-term capital markets, due to a large reliance on short-term funding. Access to the capital markets on favorable terms and strong investor demand for FHLBank System debt are the fundamental source of the FHLBank System's business franchise. The System's strong debt ratings, the implicit U.S. government backing of our debt, and effective funding management are instrumental in ensuring satisfactory access to the capital markets.
We are exposed to liquidity risk if there are significant disruptions in the capital markets. Although the last several years priorexperienced ongoing issues with the federal government's fiscal condition and changes in the regulatory environment that affected the functioning of capital markets, the FHLBank System has been able to 2012. In 2012,maintain access to the concentration increasedcapital markets
for debt issuances on acceptable terms (including when the FHLBank System's debt was downgraded by Standard & Poor's). However, there is no assurance this will continue to be the case. Future ability to effectively access the capital markets could be adversely affected by external events (such as general economic and financial instabilities, political instability, wars, and natural disasters), continued evolution of capital markets in response to financial regulations, and by the System's joint and several liability for Consolidated Obligations, which exposes us to events at other FHLBanks. If access to capital markets were to be impaired for any extended period, the effect on our financial condition and results of operations could be material. At the extreme, the System's ability to achieve its mission and satisfy its financial obligations could be threatened.
Credit and Counterparty Risk.73 percent We are exposed to credit risk that, if realized, could materially affect our ability to pay members a competitive dividend.
We believe we have a de minimis overall amount of residual credit risk exposure related to Credit Services, purchases of investments, and transactions in derivatives, and a minimal amount of credit risk exposure related to the MPP. However, we can make no assurances that credit losses will not materially affect our financial condition or results of operations. An extremely severe and prolonged economic downturn, especially if combined with continued significant disruptions in housing or mortgage markets, could result in credit losses on assets that could impair our financial condition or results of operations.
The FHLB is an asset-based lender for Advances and Letters of Credit. Advances are over-collateralized and we have a perfected first lien position on collateral. However, we do not have full information on the characteristics of nor do we estimate current market values on a large portion of collateral. This results in a degree of uncertainty as to the precise amount of over-collateralization.
Although credit losses in the MPP have historically been small, they could increase under adverse economic scenarios involving significant and sustained reductions in home prices and sustained elevated levels of unemployment and other factors that influence delinquencies and defaults.
Some of our liquidity investments are unsecured, as are uncollateralized portions of interest rate swaps. We make unsecured liquidity investments in and transact derivatives with highly rated, investment-grade institutions, have conservative limits on dollar and maturity exposure to each institution, and have strong credit underwriting practices. Failure of an investment or derivative counterparty with which we have a large unsecured position could have a material adverse effect on our financial conditions and results of operations. To the extent we engage in derivative transactions required to be cleared under provisions of the Dodd-Frank Act, we may be exposed to nonperformance from central clearinghouses and Futures Commission Merchants.
Financial institutions are increasingly inter-related as a result of trading, clearing, counterparty, and other relationships. As a result, actual or potential defaults of one or more financial institutions could lead to market-wide disruptions making it difficult for us to find qualified counterparties for transactions.
Market Risk. Changes in interest rates and mortgage prepayment speeds (together referred to as market risk exposure or interest rate risk exposure) could significantly reduce our ability to pay members a competitive dividend from current earnings.
Exposure of earnings to unhedged changes in interest rates and mortgage prepayment speeds is one of our largest ongoing residual risks. We derive most of our income from the interest earned on assets less the interest paid on Consolidated Obligations and deposits used to fund the assets. We hedge mortgage assets with a combination of Consolidated Obligations, derivatives transactions, and capital. Interest rate movements can lower profitability in two ways: 1) directly due to new borrowingstheir impact on earnings from cash flow mismatches between assets and liabilities; and 2) indirectly via their impact on prepayment speeds, which can unfavorably affect the cash flow mismatches. The effects on income can include acceleration in the amortization of purchased premiums on mortgage assets.
Because it is normally cost-prohibitive to completely mitigate market risk exposure, a residual amount of market risk normally remains after incorporating risk management activities. Sharp increases in interest rates, especially short-term rates, or sharp decreases in long-term interest rates could adversely affect us and our stockholders by making dividend rates less competitive relative to the returns available to members on alternative investments.
In some extremely stressful scenarios, changes in interest rates and prepayment speeds could result in dividends being below stockholders' expectations for an extended period of time. In such a situation, members could engage in less Mission Asset Activity and could request a withdrawal of capital. See Item 7's "Quantitative and Qualitative Disclosures About Risk Management" for additional information about market risk exposure.
Asset Profitability. Spreads on assets to funding costs may narrow because of changes in market conditions and competitive factors, resulting in lower profitability.
Spreads on our assets tend to be narrow compared to those of many other financial institutions due to our cooperative business model. Market conditions, competitive forces, and, as discussed above, market risk exposure could cause these already narrow asset spreads to decline, which could substantially reduce our profitability. A key spread relationship is that we tend to utilize Consolidated Discount Notes to fund a significant amount of assets that have adjustable-rates tied to LIBOR. Because rates on Discount Notes do not perfectly correlate with LIBOR, a narrowing of this spread, for example from investors changing perceptions about the quality of our debt, could lower income and reduce balances of Mission Asset Activity.
Capital Adequacy. Failure to meet capital adequacy requirements mandated by Finance Agency regulations and by our policies, or not being able to pay dividends or repurchase or redeem capital stock, may lower demand for Mission Asset Activity, affect results of operations, and lower membership value.
To ensure safe and sound operations, we must hold a minimum amount of capital relative to our asset levels. We must also hold a minimum amount of retained earnings to, among other things, help protect members' capital stock investment against impairment risk. If we were to violate any capital requirement, we may be unable to pay dividends or redeem and repurchase capital stock. This could adversely affect the value of membership including members' capital investment. Outcomes could be reduced demand for Mission Asset Activity, decreased profitability, requests from members to redeem a portion of their capital or to withdraw from membership, or increased investors' perception of the riskiness of our FHLB.
Business Concentration and Industry Consolidation and Composition. Sharp reductions in Mission Asset Activity resulting from lower usage by large members, consolidation of large members or growth in lending activities by entities not eligible for FHLB membership could adversely impact our net income and dividends.
The amount of Mission Asset Activity and capital is concentrated among a handful of large members. The financial industry continues to consolidate among a smaller number of institutions and the market share of mortgage financing has shown a systemic trend towards financial institutions who are currently ineligible for FHLB membership. Our members could decrease their Mission Asset Activity and the amount of their capital stock as a result of merger and acquisition activity or continued loss of market share to ineligible FHLB members. At December 31, 2015, one member, JPMorgan Chase Bank, N.A., held nearly half of our Advances and one member PFI, Union Savings Bank, accounted for over 25 percent of the outstanding MPP principal balance. Our business model is structured to be able to absorb sharp changes in Mission Asset Activity because we can undertake commensurate reductions in liability balances and capital and because of our relatively modest operating expenses. However, an extremely large and sustained reduction in Mission Asset Activity could affect our profitability and ability to pay competitive dividends, as well as, at the FHLBank System level, raise policy questions about the relevance of the FHLBank System in its traditional mission of supporting housing finance.
Exposure to FHLBank System. Financial difficulties at other FHLBanks could require us to provide financial assistance to another FHLBank, which could adversely affect our results of operations or our financial condition.
Each FHLBank has a joint and several liability for principal and interest payments on Consolidated Obligations, which are backed only by the financial resources of the FHLBanks. Although no FHLBank has ever defaulted on its principal or interest share of an Obligation, there can be no assurance that this will continue to be the case. Financial performance issues could require our FHLB to provide financial assistance to one or more other FHLBanks, for example, by making a payment on an Obligation on behalf of another FHLBank. Such assistance could adversely affect our financial condition, earnings, ability to pay dividends, or ability to redeem or repurchase capital stock.
Member Regulatory Environment. Members face increased regulatory scrutiny, which could further decrease Mission Asset Activity and lower profitability.
In the last number of years, regulation and scrutiny of the financial industry has increased significantly. We believe these activities have decreased members' overall usage of Advances.
The Basel Committee on Banking Supervision (the Basel Committee) has developed a proposed new capital regime for internationally active banks. Banks subject to the new regime are required, among other things, to have higher capital ratios. While it is uncertain how the new capital regime and other standards, such as those related to liquidity, developed by the Basel Committee will ultimately be implemented by U.S. regulatory authorities, the new regime could require some of our members to divest assets in order to comply with the regime's more stringent capital and liquidity requirements, thereby possibly lowering Advance demand. Additionally, the liquidity requirements being implemented could adversely impact Advance demand and investor demand for Consolidated Obligations because they would limit the ability of members to fully include Advances and Consolidated Obligations in required liquidity calculations. This could raise our debt costs and, in turn, raise the Advance rates we are able to offer members, thereby harming the ability to fulfill our business model.
Personnel Risk. Our financial condition and results of operations could suffer if we are unable to hire and retain skilled key personnel.
The success of our business mission depends, in large part, on the ability to attract and retain key personnel. Competition for qualified people or ineffective succession planning could affect the ability to hire or retain effective key personnel, thereby harming our financial condition and results of operations.
Operational and Compliance Risks. Failures or interruptions in our internal controls, compliance activities, information systems and other operating technologies could harm our financial condition, results of operations, reputation, and relations with members.
Control failures, including failures in our controls over financial reporting, or business interruptions with members and counterparties could occur from human error, fraud, breakdowns in information and computer systems and financial and business models we use, lapses in operating processes, or natural or man-made disasters. If a significant control failure or business interruption were to occur, it could materially damage our financial condition and results of operations. We may not be able to foresee, prevent, mitigate, reverse or repair the negative effects of such failures or interruptions.
We rely heavily on internal and third-party information systems and other technology to conduct and manage our business. Our operations rely on the secure processing, storage and transmission of confidential and other information in computer systems and networks. Computer systems, software and networks can be vulnerable to failures and interruptions including “cyberattacks,” which are breaches, unauthorized access, misuse, computer viruses or other malicious code and other events against information owned by our company and customers. These failures and interruptions could jeopardize the confidentiality or integrity of information, or otherwise cause interruptions or malfunctions in operations.
We can make no assurance that we will be able to prevent, timely and adequately address, or mitigate the negative effects of failures, interruptions, or "cyberattacks" in information systems and other technology. If we experience a failure, interruption, or "cyberattack" in any of these systems, we may be unable to effectively conduct or manage our business activities, operating processes, and risk management, which could significantly harm customer relations, our reputation, or profitability, potentially resulting in material adverse effects on our financial condition and results of operations.
Item 1B.Unresolved Staff Comments.
None.
Item 2.Properties.
Our offices are located in approximately 79,000 square feet of leased space in downtown Cincinnati, Ohio. We also maintain a leased, fully functioning, back-up facility in suburban Cincinnati. Additionally, we lease a small office in Nashville, Tennessee
for the area marketing representative. We believe that having largeour facilities are in good condition, well maintained, and adequate for our current needs.
Item 3.Legal Proceedings.
From time to time, we are subject to various legal proceedings arising in the normal course of business. Management does not anticipate that the ultimate liability, if any, arising out of these matters will have a material adverse effect on our financial institutions who actively use our Mission Asset Activity augments the valuecondition or results of membership to all members because it improves operating efficiency, increases financial leverage and earnings, and may enable us to obtain more favorable funding costs and maintain competitively priced Mission Asset Activity.operations.
Item 4. Mine Safety Disclosures.
Not applicable.
The following table shows the unweighted average ratio of each member's Advance balance to its most-recently available figures for total assets.
|
| | | | | | | | | | | | | | |
| December 31, 2012 | | September 30, 2012 | | June 30, 2012 | | March 31, 2012 | | December 31, 2011 |
Average Advances-to-Assets for Members | | | | | | | | | |
Assets less than $1.0 billion (678 members) | 3.12 | % | | 3.20 | % | | 3.29 | % | | 3.43 | % | | 3.69 | % |
Assets over $1.0 billion (64 members) | 2.90 | % | | 3.07 | % | | 3.04 | % | | 2.80 | % | | 3.04 | % |
All members | 3.10 | % | | 3.19 | % | | 3.27 | % | | 3.37 | % | | 3.63 | % |
PART II
| |
Item 5. | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
Advance usage ratios continued to decline in 2012 consistent with the several years prior. Despite the difficult economic environment
By law our stock is not publicly traded, and significant levels of financial institution liquidity as a result of actions of the Federal Reserve,only our members as(and former members with a whole funded over three percentwithdrawal notice pending) may own our stock. The par value of their assets with Advances.
Mortgage Loans Held for Portfolio (Mortgage Purchase Program, or "MPP")
Our focus for the MPP continues to be on recruiting community-based members to sell us mortgage loansour capital stock is $100 per share. As of December 31, 2015, we had 699 stockholders and on increasing the number44 million shares of regular sellers. The numbercapital stock outstanding, all of regular sellers remains at a high level compared to historical trends, and a substantial number of other members either are actively interested in joining or are in the process of joining the MPP.
The table below shows principal paydowns and purchases of loans in the MPP for each of the last two years.
|
| | | | | | | |
(In millions) | 2012 | | 2011 |
Balance, beginning of year | $ | 7,752 |
| | $ | 7,701 |
|
Principal purchases | 2,285 |
| | 1,975 |
|
Principal paydowns | (2,671 | ) | | (1,924 | ) |
Balance, end of year | $ | 7,366 |
| | $ | 7,752 |
|
The principal loan balance fell moderately, by $386 million (five percent), in 2012. The decline in balance resulted from the moderately fast prepayments and our need to manage annual purchases below the regulatory threshold of $2.5 billion. The purchases reflected activity with the largest seller in the MPP, ongoing sales by over 65 community-based financial institutions, and a continuing trend of growth in the number of regular sellers. The trend in stable to declining mortgage rates throughout 2012 also prompted an increase in loan refinancings.
The following tables show the percentage of principal balances from PFIs supplying five percent or more of total principal and the percentage of principal balances from all other PFIs.
|
| | | | | | | | | | | | | | |
(Dollars in millions) | December 31, 2012 | | | December 31, 2011 |
| Principal | | % of Total | | | Principal | | % of Total |
Union Savings Bank | $ | 1,984 |
| | 27 | % | | PNC Bank, N.A. (1) | $ | 2,338 |
| | 30 | % |
PNC Bank, N.A. (1) | 1,818 |
| | 25 |
| | Union Savings Bank | 2,068 |
| | 27 |
|
Guardian Savings Bank FSB | 431 |
| | 6 |
| | Guardian Savings Bank FSB | 643 |
| | 8 |
|
All others | 3,133 |
| | 42 |
| | Liberty Savings Bank | 419 |
| | 5 |
|
Total | $ | 7,366 |
| | 100 | % | | All others | 2,284 |
| | 30 |
|
|
|
| |
|
| | Total | $ | 7,752 |
| | 100 | % |
(1)Former member.
The unpaid principal balance supplied by sellers providing less than five percent of balances increased by $0.8 billion (37 percent) and by the end of 2012 these sellers accounted for 42 percent of total unpaid principal compared to 30 percent at the end of 2011.which were Class B Stock.
We closely trackpaid quarterly dividends in 2015 and 2014 as outlined in the refinancing incentivestable below.
|
| | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | | | | | | | | | | | | |
| | 2015 | | | | 2014 |
| | | | Annualized | | | | | | | | Annualized | | |
Quarter | | Amount | | Rate | | Form | | Quarter | | Amount | | Rate | | Form |
First | | $ | 43 |
| | 4.00 | % | | Cash | | First | | $ | 47 |
| | 4.00 | % | | Cash |
Second | | 42 |
| | 4.00 |
| | Cash | | Second | | 44 |
| | 4.00 |
| | Cash |
Third | | 43 |
| | 4.00 |
| | Cash | | Third | | 42 |
| | 4.00 |
| | Cash |
Fourth | | 44 |
| | 4.00 |
| | Cash | | Fourth | | 43 |
| | 4.00 |
| | Cash |
Total | | $ | 172 |
| | 4.00 |
| | | | Total | | $ | 176 |
| | 4.00 |
| | |
Generally, our Board of Directors has discretion to declare or not declare dividends and to determine the rate of any dividend declared. Our Retained Earnings and Dividend Policy states that dividends for a quarter are declared and paid from retained earnings after the close of a calendar quarter and are based on average stock balances for the then closed quarter. Our Board of Directors' decision to declare dividends is influenced by the financial condition, overall financial performance and retained earnings of the FHLB, and actual and anticipated developments in the overall economic and financial environment including, most importantly, interest rates and the mortgage and credit markets. The dividend rate is generally referenced as a spread to average short-term interest rates experienced during the quarter to help assess a competitive level for our mortgage assets (includingstockholders.
A Finance Agency Capital Rule prohibits us from issuing new excess capital stock to members, either by paying stock dividends or otherwise, if before or after the MPPissuance the amount of member excess capital stock exceeds or would exceed one percent of the FHLB's assets. Excess capital stock for this regulatory purpose is calculated as the aggregate of capital stock owned that is in excess of all membership and mortgage-backed securities) becauseMission Asset Activity requirements (as defined in our Capital Plan).
We may not declare a dividend if, at the option for homeowners to change their principal payments normally represents almosttime, we are not in compliance with all of our market risk exposure. MPPcapital requirements. We also may not declare or pay a dividend if, after distributing the dividend, we would fail to meet any of our capital requirements or if we determine that the dividend would create a safety and soundness issue for the FHLB. See Note 15 of the Notes to the Financial Statements for additional information regarding our capital stock.
RECENT SALES OF UNREGISTERED SECURITIES
From time to time, we provide Letters of Credit in the ordinary course of business to support members' obligations issued in support of unaffiliated, third-party offerings of notes, bonds or other securities. We provided $17 million of such credit support during 2015. We did not provide such credit support during 2014 and 2013. To the extent that these Letters of Credit are securities for purposes of the Securities Act of 1933, their issuance is exempt from registration pursuant to section 3(a)(2) thereof.
| |
Item 6. | Selected Financial Data. |
The following table presents selected Statement of Condition data, Statement of Income data and financial ratios for the five years ended December 31, 2015.
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
(Dollars in millions) | 2015 | | 2014 | | 2013 | | 2012 | | 2011 |
STATEMENT OF CONDITION DATA AT PERIOD END: | | | | | | | | | |
Total assets | $ | 118,797 |
| | $ | 106,640 |
| | $ | 103,181 |
| | $ | 81,562 |
| | $ | 60,397 |
|
Advances | 73,292 |
| | 70,406 |
| | 65,270 |
| | 53,944 |
| | 28,424 |
|
Mortgage loans held for portfolio | 7,982 |
| | 6,989 |
| | 6,826 |
| | 7,548 |
| | 7,871 |
|
Allowance for credit losses on mortgage loans | 2 |
| | 5 |
| | 7 |
| | 18 |
| | 21 |
|
Investments (1) | 37,356 |
| | 26,007 |
| | 22,364 |
| | 19,950 |
| | 21,941 |
|
Consolidated Obligations, net: | | | | | | | | | |
Discount Notes | 77,199 |
| | 41,232 |
| | 38,210 |
| | 30,840 |
| | 26,136 |
|
Bonds | 35,105 |
| | 59,217 |
| | 58,163 |
| | 44,346 |
| | 28,855 |
|
Total Consolidated Obligations, net | 112,304 |
| | 100,449 |
| | 96,373 |
| | 75,186 |
| | 54,991 |
|
Mandatorily redeemable capital stock | 38 |
| | 63 |
| | 116 |
| | 211 |
| | 275 |
|
Capital: | | | | | | | | | |
Capital stock - putable | 4,429 |
| | 4,267 |
| | 4,698 |
| | 4,010 |
| | 3,126 |
|
Retained earnings | 765 |
| | 689 |
| | 621 |
| | 538 |
| | 444 |
|
Accumulated other comprehensive loss | (13 | ) | | (17 | ) | | (9 | ) | | (11 | ) | | (11 | ) |
Total capital | 5,181 |
| | 4,939 |
| | 5,310 |
| | 4,537 |
| | 3,559 |
|
STATEMENT OF INCOME DATA: | | | | | | | | | |
Net interest income | $ | 322 |
| | $ | 317 |
| | $ | 328 |
| | $ | 308 |
| | $ | 249 |
|
(Reversal) provision for credit losses | — |
| | — |
| | (7 | ) | | 1 |
| | 12 |
|
Non-interest income (loss) | 30 |
| | 23 |
| | 20 |
| | 13 |
| | (5 | ) |
Non-interest expense | 75 |
| | 68 |
| | 64 |
| | 58 |
| | 57 |
|
Assessments | 28 |
| | 28 |
| | 30 |
| | 27 |
| | 37 |
|
Net income | $ | 249 |
| | $ | 244 |
| | $ | 261 |
| | $ | 235 |
| | $ | 138 |
|
FINANCIAL RATIOS: | | | | | | | | | |
Dividend payout ratio (2) | 69.2 | % | | 72.2 | % | | 68.1 | % | | 60.1 | % | | 95.4 | % |
Weighted average dividend rate (3) | 4.00 |
| | 4.00 |
| | 4.18 |
| | 4.44 |
| | 4.25 |
|
Return on average equity | 4.90 |
| | 4.93 |
| | 5.10 |
| | 6.20 |
| | 3.89 |
|
Return on average assets | 0.24 |
| | 0.24 |
| | 0.28 |
| | 0.35 |
| | 0.21 |
|
Net interest margin (4) | 0.31 |
| | 0.31 |
| | 0.35 |
| | 0.46 |
| | 0.37 |
|
Average equity to average assets | 4.81 |
| | 4.90 |
| | 5.47 |
| | 5.68 |
| | 5.29 |
|
Regulatory capital ratio (5) | 4.40 |
| | 4.71 |
| | 5.27 |
| | 5.84 |
| | 6.37 |
|
Operating expenses to average assets (6) | 0.058 |
| | 0.054 |
| | 0.055 |
| | 0.067 |
| | 0.068 |
|
| |
(1) | Investments include interest bearing deposits in banks, securities purchased under agreements to resell, Federal funds sold, trading securities, available-for-sale securities, and held-to-maturity securities. |
| |
(2) | Dividend payout ratio is dividends declared in the period as a percentage of net income. |
| |
(3) | Weighted average dividend rates are dividends paid divided by the average number of shares of capital stock eligible for dividends. |
| |
(4) | Net interest margin is net interest income before (reversal)/provision for credit losses as a percentage of average earning assets. |
| |
(5) | Regulatory capital ratio is period-end regulatory capital (capital stock, mandatorily redeemable capital stock and retained earnings) as a percentage of period-end total assets. |
| |
(6) | Operating expenses comprise compensation and benefits and other operating expenses, which are included in non-interest expense. |
| |
Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations. |
EXECUTIVE OVERVIEW
Financial Condition
Mission Asset Activity
The following table summarizes our financial condition.
|
| | | | | | | | | | | | | | | |
| Year Ended December 31, |
| Ending Balances | | Average Balances |
(In millions) | 2015 | | 2014 | | 2015 | | 2014 |
Total Assets | $ | 118,797 |
| | $ | 106,640 |
| | $ | 105,569 |
| | $ | 101,157 |
|
Mission Asset Activity: | | | | | | | |
Advances (principal) | 73,242 |
| | 70,299 |
| | 70,355 |
| | 66,492 |
|
Mortgage Purchase Program (MPP): | | | | | | | |
Mortgage loans held for portfolio (principal) | 7,758 |
| | 6,796 |
| | 7,396 |
| | 6,620 |
|
Mandatory Delivery Contracts (notional) | 450 |
| | 451 |
| | 471 |
| | 273 |
|
Total MPP | 8,208 |
| | 7,247 |
| | 7,867 |
| | 6,893 |
|
Letters of Credit (notional) | 19,555 |
| | 17,780 |
| | 17,694 |
| | 15,154 |
|
Total Mission Asset Activity | $ | 101,005 |
| | $ | 95,326 |
| | $ | 95,916 |
| | $ | 88,539 |
|
principal paydowns inIn 20122015, the FHLB fulfilled its mission by providing readily available and competitively priced wholesale funding to its member financial institutions, supporting its commitment to affordable housing, and paying stockholders a competitive dividend return on their capital investment.
The balance of Mission Asset Activity – which we define as Advances, Letters of Credit, and total MPP (including purchase commitments) – was $101.0 billion equated to a 29at December 31, 2015, an increase of $5.7 billion (six percent annual constant prepayment rate,) from year-end 2014. This growth was primarily driven by an increase in the principal balance of Advances. As of December 31, 2015, members funded on average 3.4 percent of their assets with Advances, and the market penetration rate was relatively stable with approximately 70 percent of members holding Mission Asset Activity. The majority of members continued to have modest demand for new Advance borrowings due to measured economic growth, an abundance of deposits and significant amounts of liquidity made available as a result of the actions of the Federal Reserve System.
The principal balance of mortgage loans held for portfolio at December 31, 2015rose$1.0 billion (14 percent) from year-end 2014. The growth reflected ongoing improvements in the 20housing market and low mortgage rates. During 2015, we purchased $2.4 billion of mortgage loans, while principal reductions totaled $1.4 billion. Residual credit risk exposure in the mortgage loan portfolio continued to be minimal.
Based on 2015 earnings, we contributed $28 million to the Affordable Housing Program (AHP) pool of funds to be awarded to members in 2016. In addition, we continued our voluntary sponsorship of two other housing programs, which provide resources to pay for accessibility rehabilitation and emergency repairs for special needs and elderly homeowners and to help members aid their communities following natural disasters.
Investments and Other Assets
The balance of investments at December 31, 2015 was $37.4 billion, an increase of $11.3 billion (44 percent) from year-end 2014. Most of the increase was because we held more short-term liquidity investments at the end of 2015. At December 31, 2015, investments included $15.3 billion of mortgage-backed securities and $22.1 billion of other investments, which were mostly short-term instruments held for liquidity.
Investment balances averaged $27.3 billion in 2015, a decrease of $0.2 billion (one percent) from 2014's average. This reflected minimal changes in average liquidity investments and mortgage-backed securities. All of our mortgage-backed securities held at December 31, 2015 were issued and guaranteed by Fannie Mae, Freddie Mac or a U.S. agency.
The balance of cash and due from banks at December 31, 2015 was $10 million, compared to $3.1 billion at December 31, 2014. The 2014 balance was larger than normal due to holding $3.1 billion in deposits at the Federal Reserve on that date.
We maintained an adequate amount of asset liquidity throughout the year under a variety of liquidity measures as discussed in the "Liquidity Risk" section of "Quantitative and Qualitative Disclosures About Risk Management."
Capital
Capital adequacy remained strong throughout 2015, exceeding all minimum regulatory capital requirements. The GAAP capital-to-assets ratio at December 31, 2015 was 4.36 percent, ratewhile the regulatory capital-to-assets ratio was 4.40 percent. Both ratios exceeded the regulatory required minimum of four percent. Regulatory capital includes mandatorily redeemable capital stock accounted for allas a liability under GAAP. The average GAAP and regulatory capital ratios in 2015 were 4.81 percent and 4.88 percent, respectively, higher than the year-end ratios. The year-end ratios reflected the higher amount of 2011.short-term liquidity balances we carried on that date.
The MPP'samounts of GAAP and regulatory capital increased $242 million and $213 million, respectively, in 2015, due primarily to purchases of capital stock by members to support Advance growth.
Total retained earnings were $765 million at December 31, 2015, an increase of $76 million (11 percent) from year-end 2014. We believe the amount of retained earnings is sufficient to protect against members' impairment risk of their capital stock investment in the FHLB and to provide the opportunity to stabilize future dividends. Our Capital Plan also has safeguards to prevent financial leverage ratios from falling below regulatory minimum levels.
Results of Operations
Overall Results
The table below summarizes our results of operations.
|
| | | | | | | | | | | |
| Year Ended December 31, |
(Dollars in millions) | 2015 | | 2014 | | 2013 |
Net income | $ | 249 |
| | $ | 244 |
| | $ | 261 |
|
Affordable Housing Program accrual | 28 |
| | 28 |
| | 30 |
|
Return on average equity (ROE) | 4.90 | % | | 4.93 | % | | 5.10 | % |
Return on average assets | 0.24 |
| | 0.24 |
| | 0.28 |
|
Weighted average dividend rate | 4.00 |
| | 4.00 |
| | 4.18 |
|
Average 3-month LIBOR | 0.32 |
| | 0.23 |
| | 0.27 |
|
Average overnight Federal funds effective rate | 0.13 |
| | 0.09 |
| | 0.11 |
|
ROE spread to 3-month LIBOR | 4.58 |
| | 4.70 |
| | 4.83 |
|
Dividend rate spread to 3-month LIBOR | 3.68 |
| | 3.77 |
| | 3.91 |
|
ROE spread to Federal funds effective rate | 4.77 |
| | 4.84 |
| | 4.99 |
|
Dividend rate spread to Federal funds effective rate | 3.87 |
| | 3.91 |
| | 4.07 |
|
Net income in 2015 was $5 million (two percent) higher than in 2014. ROE was similar in the last two years and we paid the same dividend rate in each of the last nine quarters. Although there were a number of factors that affected earnings, in the aggregate they nearly offset one another and no individual factor experienced a change that significantly affected operating results or indicated a concern about future profitability. This steady performance reflected the net impact of a stable business and interest rate environment, a modest increase in average assets, a relatively constant composition of balancesassets, a consistent and conservative management of risk, a moderate increase in operating expenses, and a prudent use of derivative transactions.
The spreads between ROE and short-term interest rates, 3-month LIBOR and Federal funds, are market benchmarks we believe member stockholders use to assess the competitiveness of the return on their capital investment in our company. Earnings continued to be sufficient to provide competitive returns on stockholders' capital investment. Consistent with experience over the last several years, ROE was significantly above short-term rates, resulting in the ROE spreads being wider than the long-term historical average spread.
Effect of Interest Rate Environment
Trends in market interest rates strongly influence the results of operations via how they affect members' demand for Mission Asset Activity, spreads on assets, funding costs and decisions in managing the tradeoffs in our market risk/return profile. The following table presents key market interest rates (obtained from Bloomberg L.P.).
|
| | | | | | | | | | | | | | | | | |
| Year 2015 | | Year 2014 | | Year 2013 |
| Ending | | Average | | Ending | | Average | | Ending | | Average |
Federal funds effective | 0.20 | % | | 0.13 | % | | 0.06 | % | | 0.09 | % | | 0.07 | % | | 0.11 | % |
3-month LIBOR | 0.61 |
| | 0.32 |
| | 0.26 |
| | 0.23 |
| | 0.25 |
| | 0.27 |
|
2-year LIBOR | 1.18 |
| | 0.88 |
| | 0.90 |
| | 0.62 |
| | 0.49 |
| | 0.44 |
|
10-year LIBOR | 2.19 |
| | 2.18 |
| | 2.28 |
| | 2.65 |
| | 3.09 |
| | 2.47 |
|
2-year U.S. Treasury | 1.05 |
| | 0.67 |
| | 0.67 |
| | 0.45 |
| | 0.38 |
| | 0.30 |
|
10-year U.S. Treasury | 2.27 |
| | 2.13 |
| | 2.17 |
| | 2.53 |
| | 3.03 |
| | 2.34 |
|
15-year mortgage current coupon (1) | 2.32 |
| | 2.13 |
| | 2.10 |
| | 2.34 |
| | 2.68 |
| | 2.21 |
|
30-year mortgage current coupon (1) | 3.02 |
| | 2.88 |
| | 2.85 |
| | 3.23 |
| | 3.63 |
| | 3.07 |
|
|
| | | | | | | | | | | |
| Year 2015 by Quarter - Average |
| Quarter 1 | | Quarter 2 | | Quarter 3 | | Quarter 4 |
Federal funds effective | 0.11 | % | | 0.13 | % | | 0.13 | % | | 0.16 | % |
3-month LIBOR | 0.26 |
| | 0.28 |
| | 0.31 |
| | 0.41 |
|
2-year LIBOR | 0.84 |
| | 0.86 |
| | 0.88 |
| | 0.93 |
|
10-year LIBOR | 2.09 |
| | 2.24 |
| | 2.28 |
| | 2.10 |
|
2-year U.S. Treasury | 0.59 |
| | 0.60 |
| | 0.68 |
| | 0.82 |
|
10-year U.S. Treasury | 1.97 |
| | 2.15 |
| | 2.22 |
| | 2.18 |
|
15-year mortgage current coupon (1) | 1.96 |
| | 2.09 |
| | 2.25 |
| | 2.20 |
|
30-year mortgage current coupon (1) | 2.71 |
| | 2.88 |
| | 2.98 |
| | 2.94 |
|
| |
(1) | Simple average of current coupon rates of Fannie Mae and Freddie Mac par mortgage-backed security indications. |
Short-term interest rates remained low in 2015. In December 2015, the Federal Reserve increased its target overnight Federal funds from a zero to 0.25 percent range to a 0.25 to 0.50 percent range. Other short-term interest rates remained consistent with their historical relationships to Federal funds during 2015. Average long-term rates were modestly lower in 2015 compared to 2014.
The persistence in 2015 of the low interest rate environment continued to favorably affect our results of operations relative to the level of interest rates for the following reasons:
| |
▪ | Reductions in, and low, market interest rates raise ROE compared to market rates to the extent we fund a portion of long-term assets with shorter-term debt. |
| |
▪ | The long-standing low rate environment has provided us the opportunity to retire many Consolidated Bonds and replace them with lower cost Obligations, at a pace exceeding paydowns of high-yielding mortgage assets, which have been slower than would be expected in more normal housing and mortgage environments. |
| |
▪ | Earnings generated from funding assets with interest-free capital have not decreased as much as the reduction in overall interest rates because long-term assets do not reprice immediately to the lower rates. |
The current trend level of ROE spread to market interest rates is above the long-term average trend because of the factors referenced above. However, these factors have improved our net income by loan typea smaller amount more recently because they have been present for many years. For example, over time paydowns of high-yielding mortgage assets cumulatively have increased, which has offset much of the benefit from previously retiring high-cost Bonds.
Business Outlook and original final maturity did not change materiallyRisk Management
This section summarizes the business outlook and what we believe are our current major risk exposures. Item 1A's “Risk Factors” has a detailed discussion of risk factors that could affect our corporate objectives, financial condition, and results of operations. "Quantitative and Qualitative Disclosures About Risk Management" provides details on current risk exposures.
Strategic/Business Risk
Advances. Our business is cyclical and Mission Asset Activity normally grows slowly, stabilizes, or declines in 2012 versusperiods of difficult macro-economic conditions, when financial institutions have ample liquidity, or when there is significant growth in the prior several years. Atmoney supply. Since the end of the year,recession in 2009, measured economic growth has resulted in relatively slow growth in consumer, mortgage and commercial loans across the broad membership both in absolute terms and relative to deposit growth. Other factors continuing to constrain widespread demand for Advances are the extremely low levels of interest rates and little deviation in Advance rates versus deposit rates, and the Federal Reserve's ongoing actions to provide an extraordinary amount of deposit-based liquidity to attempt to stimulate economic growth.
In the last several years, the percentage of assets that members funded with Advances showed little variation, in the range of three to four percent. We would expect to see a broad-based increase in Advance demand when the economy experiences an improved and sustained growth trend or if changes in Federal Reserve policy reduce other sources of liquidity available to members.
The relative balance between loan and deposit fluctuations can provide an indication of potential member Advance demand. From September 30, 2014 to September 30, 2015 (the most recent period for which data are available), aggregate loan portfolios of Fifth District depository institutions grew $106.8 billion (8.4 percent) while their aggregate deposit balances fell $29.9 billion (1.4 percent). The data include the effect of large mergers and acquisitions only when they are available for both comparison dates. Most of the loan growth and deposit decline in this period occurred from our largest members, which is consistent with the concentration of financial activity.
Excluding the five members with over $50 billion of assets and recent acquisitions, aggregate loans increased $13.1 billion (6.6 percent) in the 12-month period while aggregate deposits grew $12.1 billion (5.1 percent). This more recent trend of loan growth exceeding deposit growth could produce increased demand for Advances over time.
MPP. MPP balances are influenced by conditions in the housing and mortgage markets, the competitiveness of prices we offer to purchase loans as well as program features, and activity from our largest sellers.
Our ongoing strategy for the MPP was comprisedhas two components: 1) increase the number of 74 percent 30-year mortgages, 23 percent 15-year mortgagesregular sellers and 3 percent 20-year mortgages. Conventionalparticipants in the program; and 2) increase purchases while maintaining balances at a prudent level relative to capital and total assets to effectively manage market and credit risks consistent with our risk appetite.
Regulatory and Legislative Risk
General. The FHLBank System currently faces heightened legislative and regulatory risks and uncertainties, which we believe has affected, and could continue to affect, our Mission Asset Activity, capitalization, and results of operations. Legislative and regulatory actions applicable to the FHLBank System in the last eight years have raised our operating costs and increased uncertainty regarding the business model under which the FHLBanks may operate in the future. This is due primarily to the uncertainty around potential future GSE reform, which shows no signs of resolution. See Item 1A's "Risk Factors" for more discussion.
Core Mission Achievement. Over the years, we have adopted numerous indicators to assess achievement of our mission. These include metrics related to Mission Asset Activity, profitability, capital adequacy and safety and soundness. In July 2015, the Finance Agency issued an Advisory Bulletin to formalize a measure of FHLBank mission achievement across the System. The Advisory Bulletin established a goal for the sum of average Advances and purchased mortgage loans made up 87(collectively called Primary Mission Assets) to equal or exceed 70 percent of average Consolidated Obligations (i.e., the portfolio, withPrimary Mission Assets ratio). Consolidated Obligations is used as a comparison because it reflects the remainder being government-guaranteed FHA loans. Allmajor source of our franchise value as a GSE. If the 2012 purchases were conventional loans.metric falls below the 70 percent preferred ratio, an FHLBank would be expected to include in its strategic plan actions aimed at increasing the ratio, which could include consideration of Supplemental Mission Assets and Activities, such as Letters of Credit issued to members. During 2015, our Primary Mission Assets metric exceeded the Finance Agency's preferred ratio.
Membership Requirements.In January 2016, the Finance Agency issued a final rule on membership requirements. The weighted average mortgage note rate fell from 5.09 percent atprimary changes to membership requirements are to:
| |
▪ | ban currently-eligible captive insurance companies as eligible members in an FHLBank, and |
| |
▪ | clarify matters related to defining the principal place of business for eligible financial institution members for purposes of determining their appropriate FHLBank district. |
As a result, our current captive insurance company members must terminate their memberships one year after the rule's effective date. In addition, the rule allows these members until the end of 2011the one-year period to 4.74 percent atrepay their existing Advances, but prohibits them from taking new Advances or renewing existing Advances that expire after the end of 2012. This decline reflected prepayments of higher rate mortgages and purchases of lower rate mortgages.rule’s effective date.
MPP yields earned during 2012,We believe that the final rule will not materially affect our financial condition or results of operations despite the loss of current and potential captive insurance members. However, we are concerned that the rule could constrain the ability of the FHLBanks to fulfill their mission of promoting housing finance through providing liquidity and funding to financial institutions engaged in housing finance activities. We believe captive insurance companies are important institutions in helping to deepen and diversify the flow of funds in the mortgage markets.
Privately Insured Credit Unions. In December 2015, the U.S. Congress passed into law a provision permitting privately-insured state-chartered credit unions to apply for membership in the FHLBank System. Based on the number and size of such institutions in our district, we believe that this change in eligible members will have only a small effect on Mission Asset Activity.
Dodd-Frank Act and Related Regulations.Regulatory agencies continue to promulgate rules covering derivatives activities as required by the Dodd-Frank Act. A joint rule of several agencies issued in 2015 that will affect the FHLBanks mandates the exchange of initial and variation margin for interest rate swaps not cleared through a central clearinghouse. Margins are based on swaps' market value and their relative risk. The rule is effective April 1, 2016 and has a staggered implementation schedule of up to funding costs,four years. We already post and collect margin on uncleared swaps. Therefore, we believe the largest impact of the rule will be the elimination of thresholds permitted on daily variation margin for new swaps transacted after the implementation date. This will eliminate the amount of uncollateralized exposure between derivative counterparties and reduce counterparty risk. We believe the impact of the rule will not be material to our company.
Market Risk
During 2015, as in 2014, the market risk exposure to changing interest rates was moderate overall and well within policy limits. We believe that profitability would not become uncompetitive unless long-term rates were to permanently increase over the next 12 months by five percentage points or more combined with short-term rates increasing to at least seven percent. We believe such a stress scenario is extremely unlikely to occur in the foreseeable future. Our market risk exposure to lower long-term interest rates, even up to two percentage points, would result in ROE remaining well above market interest rates.
Capital Adequacy
We believe members place a high value on their capital investment in our company. We maintained compliance with regulatory capital requirements. Capital ratios at December 31, 2015 and all throughout the year exceeded the regulatory required minimum of four percent. We believe that the amount of our retained earnings is sufficient to protect against impairment risk of capital stock and to provide the opportunity to stabilize dividends. Our Capital Plan has safeguards to prevent financial leverage from increasing beyond regulatory minimums or below safe levels.
Credit Risk
In 2015, we continued to offerexperience a de minimis level of overall residual credit risk exposure from our Credit Services, making investments, and executing derivative transactions. We believe policies and procedures related to credit underwriting, Advance collateral management, and transactions with investment and derivative counterparties continue to fully mitigate these risks. Therefore, we have never experienced any credit losses and we continue to have no loan loss reserves or impairment recorded for these instruments.
Residual credit risk exposure in the mortgage loan portfolio was minimal. The allowance for credit losses in the MPP continued to decline and was $2 million at December 31, 2015.
Liquidity Risk
Our liquidity position remained strong during 2015, as did our overall ability to fund operations through the issuance of Consolidated Obligations at acceptable risk-adjusted returns, despiteinterest costs. Investor demand for FHLBank System debt continued to be robust. There were no substantive stresses on market access or liquidity from external market and political events. Although we can make no assurances, we expect this to continue to be the substantial fluctuationscase and believe there is only a remote possibility of a liquidity or funding crisis in mortgage premium amortization describedthe FHLBank System that could impair our ability to participate, on a cost-effective basis, in "Resultsissuances of Operations." For discussionnew debt, service outstanding debt, maintain adequate capitalization, or pay competitive dividends.
ANALYSIS OF FINANCIAL CONDITION
Mission Asset Activity
Mission Assets are the primary means by which we fulfill our mission with direct connections to members. We regularly monitor the balance sheet concentration of net amortization, seeMission Asset Activity. In 2015, our Primary Mission Asset ratio, as defined in "Regulatory and Legislative Risk" of the "Net Interest Income" sectionExecutive Overview, was 79 percent. In assessing mission achievement, we also consider supplemental sources of "ResultsMission Asset Activity, the most significant of Operations.which is Letters of Credit issued to members.
Credit Services
Credit Activity and Advance Composition
The tables below show trends in Advance balances by major programs and in the notional amount of Letters of Credit.
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| | | | | | | | | | | | | |
(Dollars in millions) | December 31, 2015 | | December 31, 2014 |
| Balance | | Percent(1) | | Balance | | Percent(1) |
Adjustable/Variable Rate Indexed: | | | | | | | |
LIBOR | $ | 47,312 |
| | 65 | % | | $ | 51,839 |
| | 74 | % |
Other | 617 |
| | 1 |
| | 515 |
| | 1 |
|
Total | 47,929 |
| | 66 |
| | 52,354 |
| | 75 |
|
Fixed-Rate: | | | | | | | |
REPO | 10,568 |
| | 14 |
| | 5,201 |
| | 7 |
|
Regular Fixed-Rate | 9,248 |
| | 13 |
| | 7,398 |
| | 11 |
|
Putable (2) | 1,046 |
| | 1 |
| | 1,617 |
| | 2 |
|
Amortizing/Mortgage Matched | 2,706 |
| | 4 |
| | 2,734 |
| | 4 |
|
Other | 1,745 |
| | 2 |
| | 995 |
| | 1 |
|
Total | 25,313 |
| | 34 |
| | 17,945 |
| | 25 |
|
Total Advances Principal | $ | 73,242 |
| | 100 | % | | $ | 70,299 |
| | 100 | % |
| | | | | | | |
Letters of Credit (notional) | $ | 19,555 |
| | | | $ | 17,780 |
| | |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | December 31, 2015 | | September 30, 2015 | | June 30, 2015 | | March 31, 2015 |
| Balance | | Percent(1) | | Balance | | Percent(1) | | Balance | | Percent(1) | | Balance | | Percent(1) |
Adjustable/Variable-Rate Indexed: | | | | | | | | | | | | | | | |
LIBOR | $ | 47,312 |
| | 65 | % | | $ | 49,313 |
| | 64 | % | | $ | 48,242 |
| | 68 | % | | $ | 49,103 |
| | 73 | % |
Other | 617 |
| | 1 |
| | 565 |
| | 1 |
| | 597 |
| | 1 |
| | 407 |
| | 1 |
|
Total | 47,929 |
| | 66 |
| | 49,878 |
| | 65 |
| | 48,839 |
| | 69 |
| | 49,510 |
| | 74 |
|
Fixed-Rate: | | | | | | | | | | | | | | | |
REPO | 10,568 |
| | 14 |
| | 12,023 |
| | 16 |
| | 8,499 |
| | 12 |
| | 4,061 |
| | 6 |
|
Regular Fixed-Rate | 9,248 |
| | 13 |
| | 9,385 |
| | 12 |
| | 8,184 |
| | 11 |
| | 7,977 |
| | 12 |
|
Putable (2) | 1,046 |
| | 1 |
| | 1,557 |
| | 2 |
| | 1,570 |
| | 2 |
| | 1,580 |
| | 3 |
|
Amortizing/Mortgage Matched | 2,706 |
| | 4 |
| | 2,723 |
| | 3 |
| | 2,703 |
| | 4 |
| | 2,662 |
| | 4 |
|
Other | 1,745 |
| | 2 |
| | 1,637 |
| | 2 |
| | 1,223 |
| | 2 |
| | 825 |
| | 1 |
|
Total | 25,313 |
| | 34 |
| | 27,325 |
| | 35 |
| | 22,179 |
| | 31 |
| | 17,105 |
| | 26 |
|
Total Advances Principal | $ | 73,242 |
| | 100 | % | | $ | 77,203 |
| | 100 | % | | $ | 71,018 |
| | 100 | % | | $ | 66,615 |
| | 100 | % |
| | | | | | | | | | | | | | | |
Letters of Credit (notional) | $ | 19,555 |
| | | | $ | 17,594 |
| | | | $ | 19,006 |
| | | | $ | 16,905 |
| | |
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(1) | As a percentage of total Advances principal. |
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(2) | Excludes Putable Advances where the related put options have expired. Such Advances are classified based on their current terms. |
The modest growth and variability in Advance balances in 2015 was driven primarily by changes in variable-rate and short-term repurchase (REPO) Advances as the reduction in the need for variable-rate funding from our largest member was more than offset by REPO Advance borrowings. The increase in REPO Advance borrowings was primarily from new insurance company members. However, the borrowings from these new members are required to be paid off over the next year due to the Finance Agency's 2016 final rule on membership requirements, which is discussed further in the "Executive Overview."
Members increased their available lines in the Letters of Credit program by $1.8 billion (10 percent) in 2015. Letters of Credit balances averaged $17.7 billion during 2015, an increase of $2.5 billion (17 percent) from the average balance during 2014. We
normally earn fees on Letters of Credit based on the actual average amount of the Letters utilized, which generally is less than the notional amount issued.
Housing and Community Investment
Our Housing and Community Investment Programs include the Affordable Housing Program and various housing and community economic development-related Advance programs. We fund the Affordable Housing Program with an accrual equal to 10 percent of our previous year's net earnings, mandated by the Financial Institutions Reform, Recovery and Enforcement Act of 1989. See Note 14 of the Notes to Financial Statements for a complete description of the Affordable Housing Program calculation.
The Affordable Housing Program provides funding for the development of affordable housing. The Program consists of a Competitive Program and a homeownership program called Welcome Home, which assists homebuyers with down payments and closing costs. Under the Competitive Program, we currently distribute funds in the form of grants to members that apply and successfully compete in an annual offering. Under Welcome Home, we make funds available beginning in March until they have been fully committed. For both programs, the income of qualifying individuals or households must be 80 percent or less of the area median income. We set aside up to 35 percent of the Affordable Housing Program accrual for Welcome Home and allocate the remainder to the Competitive Program.
Our Board of Directors also may allocate funds to voluntary housing programs. In 2015, the Board re-authorized an additional $1 million to the Carol M. Peterson Housing Fund for use during the year. These funds are primarily used as grants to pay for accessibility rehabilitation and emergency repairs for special needs and elderly homeowners. In March 2016, the Board re-authorized this fund in the amount of $1.5 million for use in 2016. In 2012, the Board of Directors also established the Disaster Reconstruction Program, a $5 million voluntary housing program that provides grants for purchase or rehabilitation of a home to Fifth District residents that have suffered loss or damage to their primary residence as a result of a state or federally declared disaster. Since the program's inception, we have disbursed nearly $3 million to assist 177 households.
Two other housing programs that fall outside the auspices of the Affordable Housing Program are the Community Investment Program and the Economic Development Program. Advances under the former program have rates equal to our cost of funds, while Advances under the latter program have rates equal to our cost of funds plus three basis points. Members use the Community Investment Program to serve housing needs of low- and moderate-income households and, under certain
conditions, community economic development projects. The Economic Development Program is a discounted Advance program used to promote economic development and job creation and retention.
Investments
Types of Investments. One reason we hold investments is to carry sufficient asset liquidity. Permissible liquidity investments include Federal funds, certificates of deposit, bank notes, bankers' acceptances, commercial paper, securities purchased under agreements to resell, and debt securities issued by the U.S. government or its agencies. The first five categories represent unsecured lending to private counterparties. We also may place deposits with the Federal Reserve Bank. We are prohibited by Finance Agency regulations from investing (secured or unsecured) in financial investments issued by non-U.S. entities other than those issued by U.S. branches and agency offices of foreign commercial banks. Most liquidity investments have short-term maturities.
We are also permitted by regulation to purchase the following other investments, which have longer original maturities than liquidity investments:
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▪ | mortgage-backed securities and collateralized mortgage obligations supported by mortgage securities (together, referred to as mortgage-backed securities) and issued by GSEs or private issuers; |
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▪ | asset-backed securities collateralized by manufactured housing loans or home equity loans and issued by GSEs or private issuers; and |
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▪ | marketable direct obligations of certain government units or agencies (such as state housing finance agencies) that supply needed funding for housing or community lending and that do not exceed 20 percent of our regulatory capital. |
We have never purchased asset-backed securities and do not own any privately-issued mortgage-backed securities. Per Finance Agency regulations, the total investment in mortgage-backed securities and asset-backed securities may not exceed, on a book value basis, 300 percent of previous month-end regulatory capital on the day we purchase the securities. See the “Capital Resources” section below for the definition of regulatory capital.
Purposes of Having Investments. The investments portfolio helps us achieve corporate objectives in the following ways:
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▪ | Liquidity management. Liquidity investments help support the ability to fund assets on a timely basis, especially Advances. These investments supply a source of liquidity because we normally ensure they have shorter maturities than the debt we issue to fund them. We also may be able to obtain liquidity by selling certain investments for cash without a significant loss of value. |
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▪ | Earnings enhancement. The investments portfolio assists with earning a competitive return on capital, which also increases funding for Housing and Community Investment programs. |
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▪ | Market risk management. Liquidity investments help stabilize earnings because they typically earn a relatively stable spread to the cost of debt issued to fund them, with less market risk than mortgage assets. |
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▪ | Debt issuance management. Maintaining a short-term liquidity investment portfolio can help us participate in attractively priced debt issuances, on an opportunistic basis. We can temporarily invest proceeds from debt issuances in short-term liquid assets and quickly access them to fund demand for Mission Asset Activity, rather than having debt issuances dictated solely by the timing of member demand. |
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▪ | Support of housing market. Investment in mortgage-backed securities and state housing finance agency bonds directly supports the residential mortgage market by providing capital and financing for mortgages. |
How We Manage Risks of Investments. We strive to ensure our investment holdings have a moderate degree of market risk and limited credit risk, which tends to lower the returns we can expect to earn on these securities. We believe that a philosophy of purchasing investments with a high amount of market or credit risk would be inconsistent with our GSE status and corporate objectives.
Market risk associated with short-term investments tends to be minimal because of their short maturities and because we typically fund them with similar duration short-term Consolidated Obligations. We mitigate much of the market risk of mortgage-backed securities, which exists primarily from changes in mortgage prepayment speeds, by limiting their balances to
300 percent of regulatory capital, by funding them with a portfolio of long-term fixed-rate callable and noncallable Obligations, and by managing the market risk exposure of the entire balance sheet within prudent policy limits.
Finance Agency regulations and internal policies also provide controls on market risk exposure by restricting the types of mortgage loans, mortgage-backed securities and other investments we can hold. These restrictions prohibit, among others, the purchase of interest only or principal only stripped mortgage-backed securities and mortgage-backed securities whose average life varies more than six years under a 300 basis points interest rate shock.
Our internal policies specify guidelines for, and relatively tight constraints on, the types and amounts of short-term investments we are permitted to hold and the maximum amount of credit risk exposure we are permitted to have with eligible counterparties. We are permitted to invest only in the instruments of counterparties with high credit ratings, and because of our conservative investment policies and practices, we believe all of our investments have high credit quality. We have never had a credit loss or credit-related write down of any investment security.
Deposits
We provide a variety of deposit programs, including demand, overnight, term and Federal funds, which enable depositors to invest funds in short-term liquid assets. We accept deposits from members, other FHLBanks, any institution to which we offer correspondent services, and other government instrumentalities. The rates of interest we pay on deposits are subject to change daily based on comparable money market interest rates. The balances in deposit programs tend to vary positively with the amount of idle funds members have available to invest, as well as, the level of short-term interest rates. Deposits have represented a small component of our funding in recent years, typically less than one percent of our funding sources.
Mortgage Purchase Program (MPP or Mortgage Loans Held for Portfolio)
Description of the MPP
Types of Loans and Benefits. Finance Agency regulations permit FHLBanks to purchase and hold specified whole mortgage loans from their members, which offers members a competitive alternative to the traditional secondary mortgage market and directly supports housing finance. We account for MPP loans as mortgage loans held for portfolio. By selling mortgage loans to us, members can increase their balance sheet liquidity and lower interest rate and mortgage prepayment risks. The MPP particularly enables small- and medium-sized community-based financial institutions to use their existing relationship with us to participate more effectively in the secondary mortgage market.
Under the MPP, we purchase two types of mortgage loans: qualifying conforming fixed-rate conventional 1-4 family residential mortgages and residential mortgages fully insured by the Federal Housing Administration (FHA). Members approved to sell us these loans are referred to as Participating Financial Institutions (PFIs). Although regulations permit us to purchase qualifying mortgage loans originated within any state or territory of the United States, beginning several years ago we no longer purchase loans originated in New York, Massachusetts, Maine, Rhode Island or New Jersey due to features of those states' Anti-Predatory Lending laws that are less restrictive than we prefer.
A “conventional” mortgage refers to a non-government-guaranteed mortgage. A “conforming” mortgage refers to the maximum amount permissible to be lent as a regular prime (i.e., non-jumbo, non-subprime) mortgage. For 2016, the Finance Agency re-established the conforming limit at $417,000 with loans originated in a limited number of high-cost cities and counties receiving higher conforming limits. We do not purchase mortgages subject to these higher amounts.
Loan Purchase Process. A Master Commitment Contract is negotiated with each PFI, in which the PFI agrees to make a best efforts attempt to sell us a specific dollar amount of mortgage loans generally over a period of up to 12 months. We purchase loans pursuant to a Mandatory Delivery Contract, which is a legal commitment we make to purchase, and a PFI makes to deliver, a specified dollar amount of mortgage loans, with a forward settlement date, at a specified range of note rates and prices.
Shortly before delivering the loans that will fill the Mandatory Delivery Contract, the PFI must submit loan level detail including underwriting information. We apply procedures through the automated Loan Acquisition System designed to screen loans that do not comply with our policies. Our underwriting guidelines generally mirror those of Fannie Mae and Freddie Mac for conforming conventional loans, although our guidelines and pool composition requirements are more conservative in a number of ways in order to further limit credit risk exposure. PFIs are required to make certain representations and warranties against our underwriting guidelines on the loans they sell to us. If a PFI sells us a loan in breach of those representations and warranties, we have the contractual right to require the PFI to repurchase the loan.
How We Manage Risks of the MPP
Market Risk. We mitigate the MPP's market risk similarly to how we mitigate market risk from mortgage-backed securities.
Credit Risk - Conventional Mortgage Loans. A unique feature of the MPP is that it separates the various activities and risks associated with residential mortgage lending for conventional loans and allows these risks and activities to be taken on by different entities. We manage the funding of the loans, market risk (including interest rate risk and prepayment risk), and liquidity risk. PFIs manage marketing, originating and, in most cases, servicing the loans. PFIs may either retain servicing or sell it to a qualified and approved third-party servicer (also referred to as a PFI). Because PFIs manage and bear most of the credit risk, they do not pay us a guarantee fee to transfer credit risk.
We manage credit risk exposure for conventional loans through underwriting and pool composition requirements and by applying layered credit enhancements. These enhancements, which apply after a homeowner's equity is exhausted, include (in order of priority) primary mortgage insurance (when applicable), the Lender Risk Account (discussed below), and for loans acquired before February 2011, Supplemental Mortgage Insurance that the PFI purchased from one of our approved third-party providers naming us as the beneficiary.
Beginning in February 2011, we discontinued use of Supplemental Mortgage Insurance for new loan purchases and replaced it with expanded use of the Lender Risk Account and aggregation of loan purchases into larger pools to provide diversification in credit risk exposure. These credit enhancements are designed to adequately protect us against credit losses in scenarios of severe downward movements in housing prices and unfavorable changes in other factors that can affect loan delinquencies and defaults.
The Lender Risk Account is a key component of how we manage residual credit risk. It is a holdback of a portion of the initial purchase price. Starting after five years from the loan purchase date, we may return the holdback to PFIs if they manage credit risk to pre-defined acceptable levels of exposure on the loan pools they sell to us. Actual loan losses are deducted from the amount of the purchase-price holdback we return to the PFI. The Lender Risk Account provides PFIs with a strong incentive to sell us high quality performing mortgage loans.
Credit Risk - FHA Mortgage Loans. Because the FHA makes an explicit guarantee on FHA loans, we do not require any credit enhancements on these loans beyond underwriting, homeowner's equity, and primary mortgage insurance.
Item 7's “Quantitative and Qualitative Disclosures About Risk Management” provides more detail on how we manage market and credit risks for the MPP.
Earnings from the MPP
The MPP enhances long-term profitability on a risk-adjusted basis and augments the return on member stockholders' capital investment. We generate earnings in the MPP from monthly interest payments minus the cost of funding and the cost of hedging the MPP's interest rate risk. Interest income on each loan is computed as the mortgage note rate multiplied by the loan's principal balance:
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▪ | minus servicing costs (0.25 percent for conventional loans and 0.44 percent for FHA loans); |
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▪ | minus the cost of Supplemental Mortgage Insurance (for applicable loans); and |
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▪ | adjusted for the amortization of purchase premiums or the accretion of purchase discounts and for the amortization or accretion of fair value adjustments on loans initially classified as mortgage loan commitments. |
For new loan purchases, we consider the cost of the Lender Risk Account when we set conventional loan prices and evaluate the MPP's expected return. The pricing of each structure depends on a number of factors and is specific to the PFI and to the loan pool. We do not receive fees or income for retaining the risk of losses in excess of any credit enhancements.
FUNDING - CONSOLIDATED OBLIGATIONS
Our primary source of funding and hedging market risk exposure is through participation in the sale of debt securities (Consolidated Obligations) to global investors. Obligations are the joint and several obligations of all the FHLBanks, backed only by the financial resources of these institutions.
There are two types of Consolidated Obligations: Consolidated Bonds (Bonds) and Consolidated Discount Notes (Discount Notes). We participate in the issuance of Bonds for three purposes:
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▪ | to finance and hedge intermediate- and long-term fixed-rate Advances and mortgage assets; |
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▪ | to finance and hedge short-term, LIBOR-indexed adjustable-rate Advances, and swapped Advances, typically by synthetically transforming fixed-rate Bonds to adjustable-rate LIBOR funding through the execution of interest rate swaps; and |
Bonds may have fixed or adjustable rates of interest. Fixed-rate Bonds are either noncallable or callable. A callable Bond is one that we are able to redeem in whole or in part at our discretion on one or more predetermined call dates according to the Bond's offering notice. The maturity of Bonds typically ranges from one year to 20 years. Our adjustable-rate Bonds use LIBOR for interest rate resets. In the last five years, we have not participated in the issuance of range Bonds, zero coupon Bonds, or indexed principal redemption Bonds.
We use fixed-rate Bonds to fund longer-term fixed-rate Advances and longer-term fixed-rate mortgage assets, and use adjustable-rate Bonds to fund adjustable-rate LIBOR Advances.
We transact in interest rate swaps to synthetically convert some fixed-rate Bonds to adjustable-rate terms indexed to LIBOR. These are used to hedge adjustable-rate LIBOR Advances.
We participate in the issuance of Discount Notes to fund short-term Advances, adjustable-rate LIBOR Advances, putable Advances (which we normally swap to LIBOR), liquidity investments, and a portion of longer-term fixed-rate assets. Discount Notes have maturities from one day to one year, with most of ours normally maturing within three months.
The mix of Obligations fluctuates in response to relative changes in short-term versus long-term assets, relative changes in fixed-rate versus adjustable-rate assets, decisions on market risk management (particularly the amount of funding of longer-term assets with short-term Obligations), and differences in relative costs of various Obligations.
Interest rates on Obligations, including their relationship to other products such as U.S. Treasury securities and LIBOR, are affected by a multitude of factors such as: overall economic and credit conditions; credit ratings of the FHLBank System; investor demand and preferences for our debt securities; the level of interest rates and the shape of the U.S. Treasury curve and the LIBOR swap curve; and the supply, volume, timing, and characteristics of debt issuances by the FHLBanks, other GSEs, and other highly rated issuers.
Finance Agency regulations govern the issuance of Obligations. An FHLBank may not issue individual debt securities without Finance Agency approval, and we have never done so. The Office of Finance services Obligations, prepares the FHLBank System's quarterly and annual combined financial statements, and serves as a source of information for the FHLBanks on capital market developments.
We have the primary liability for our portion of Obligations, i.e., those issued on our behalf for which we received the proceeds. However, we also are jointly and severally liable with the other FHLBanks for the payment of principal and interest on all Obligations. If we do not pay the principal or interest in full when due on any Obligation issued on our FHLB's behalf, we are prohibited from paying dividends or redeeming or repurchasing shares of capital stock. If another FHLBank were unable to repay its participation in an Obligation for which it is the primary obligor, the Finance Agency could call on each of the other FHLBanks to repay all or part of the Obligation. The Finance Agency has never invoked this authority.
LIQUIDITY
Our business requires a continual and substantial amount of liquidity to meet financial obligations (primarily maturing Consolidated Obligations) in a timely and cost-efficient manner and to provide members access to timely Advance funding and mortgage loan sales in all financial environments. We obtain liquidity by issuing debt, holding short-term assets that mature before their associated funding, and having the ability to sell certain investments without significant accounting or economic consequences. Sources of asset liquidity include cash, maturing Advances, maturing investments, principal paydowns of mortgage assets, the ability to sell certain investments, and interest payments received. Uses of liquidity include repayments of Obligations, issuances of new Advances, purchases of loans under the MPP, purchases of investments, and payments of interest.
Liquidity requirements are significant because Advance balances can be volatile, many have short-term maturities, and we strive to allow members to borrow Advances on the same day they request them. We regularly monitor liquidity risks and the investment and cash resources available to meet liquidity needs, as well as statutory and regulatory liquidity requirements.
Because Obligations have favorable credit ratings and because the FHLBank System is one of the largest sellers of debt in the worldwide capital markets, the System historically has been able to satisfy its liquidity needs through debt issuance across a wide range of structures at relatively favorable spreads to benchmark market interest rates.
CAPITAL RESOURCES
Capital Plan
Basic Characteristics
Under Finance Agency regulations, regulatory capital is composed of all capital stock (including stock classified as mandatorily redeemable), retained earnings, general loss allowances, and other amounts from sources the Finance Agency determines are available to absorb losses. Currently, our regulatory capital consists of capital stock and retained earnings. Under the Gramm-Leach-Bliley Act of 1999 (GLB Act), permanent capital equals Class B stock plus retained earnings and is available to absorb financial losses.
Our Capital Plan has the following basic characteristics:
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▪ | We offer only one class of capital stock, Class B, which is redeemable upon a member's five-year advance written notice, with certain conditions described below. We may elect, at our discretion, to repurchase stock redemption requests sooner than five years. |
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▪ | We issue shares of capital stock as required for an institution to become a member or maintain membership, as required for members to capitalize Mission Asset Activity, and when we may pay dividends in the form of additional shares of stock. |
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▪ | The Capital Plan enables us to efficiently expand and contract capital stock needed to capitalize assets in response to changes in our membership base and demand for Mission Asset Activity. This enables us to maintain a prudent amount of financial leverage and also consistently generate a competitive dividend return. |
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▪ | We may, subject to the restrictions described below, repurchase certain capital stock (i.e., "excess" capital stock). |
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▪ | The concept of “cooperative capital,” explained below, better aligns the interests of heavy users of our products with light users by enhancing the dividend return. |
Prudent risk management requires us to maintain effective financial leverage to minimize risk to capital stock while preserving profitability and to hold an adequate amount of retained earnings. Pursuant to these objectives, Finance Agency regulations stipulate that we must comply with three limits on capital leverage and risk-based capital. We have always complied with the regulatory capital requirements.
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▪ | We must maintain at least a four percent minimum regulatory capital-to-assets ratio. This has historically been the regulatory capital requirement that has been closest to affecting our operations. |
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▪ | We must maintain at least a five percent minimum leverage ratio of capital divided by total assets, which includes a 1.5 weighting factor applicable to permanent capital. Because all of our Class B stock is permanent capital, this requirement is met automatically if we satisfy the four percent unweighted capital requirement. |
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▪ | We are subject to a risk-based capital rule in which we must hold an amount of "permanent" capital that exceeds the amount of exposure to market risk, credit risk, and operational risk. How we determine the amount of these risk exposures is stipulated by Finance Agency regulation. Permanent capital includes retained earnings and the regulatory amount of Class B capital stock. |
In addition to the minimum capital requirements, the GLB Act and our Capital Plan promote the adequacy of our capital to absorb financial losses in three ways, which combine to give member stockholders a clear incentive to require us to minimize our risk profile:
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▪ | the five-year redemption period for Class B stock; |
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▪ | the option we have to call on members to purchase additional capital if required to preserve safety and soundness; and |
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▪ | the limitations, described below, on our ability to honor requested redemptions of capital if we are at risk of not maintaining safe and sound operations. |
GAAP capital excludes mandatorily redeemable capital stock, while regulatory capital includes it. Mandatorily redeemable capital stock, which is stock subject to pending redemption, is accounted for as a liability on our Statements of Condition and related dividend payments are accounted for as interest expense. The classification of some capital stock as a liability has no effect on our safety and soundness, liquidity position, market risk exposure, or ability to meet interest payments on our participation in Obligations. Mandatorily redeemable capital stock is fully available to absorb losses until the stock is redeemed or repurchased. See Note 15 of the Notes to Financial Statements for more discussion of mandatorily redeemable capital stock.
Components of Capital Stock Purchases and Operations of the Capital Plan
Our Capital Plan ties the amount of each member's required capital stock to both the amount of the member's assets (membership stock) and the amount and type of its Mission Asset Activity with us (activity stock). Membership stock is required to become a member and maintain membership. The amount required for each member currently ranges from a minimum of $1 thousand to a maximum of $25 million for each member, with the amount within that range determined as a percentage of member assets.
In addition to its membership stock, a member may be required to purchase and hold activity stock to capitalize its Mission Asset Activity. For purposes of the Capital Plan, Mission Asset Activity includes the principal balance of Advances, guaranteed funds and rate Advance commitments, and the principal balance of loans and commitments in the MPP that occurred after implementation of the Capital Plan.
The FHLB must capitalize all Mission Asset Activity with capital stock at a rate of at least four percent. However, each member is permitted to maintain an amount of activity stock within the range of minimum and maximum percentages for each type of Mission Asset Activity. The current percentages are as follows:
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| | | | |
Mission Asset Activity | | Minimum Activity Percentage | | Maximum Activity Percentage |
Advances | | 2% | | 4% |
Advance Commitments | | 2 | | 4 |
MPP | | 0 | | 4 |
If a member owns more stock than is needed to satisfy both its membership stock requirement and the maximum activity stock percentages for its Mission Asset Activity, we designate the remaining stock as the member's excess capital stock. The member may utilize its excess stock to capitalize additional Mission Asset Activity.
If an individual member's excess stock reaches zero, the Capital Plan normally permits us, within certain limits, to capitalize additional Mission Asset Activity of that member with excess stock owned by other members at the maximum percentage rate. This feature, called “cooperative capital,” enables us to more effectively utilize our capital stock. A member's use of cooperative capital reduces the ratio of its activity stock to its Mission Asset Activity for each type of Mission Asset Activity. There is a limit to how much cooperative capital a member may use, which we currently set at $200 million.
When a member's ratio of activity stock to its Mission Asset Activity reaches the minimum activity stock percentage for all types of Mission Asset Activity, the member must capitalize additional Mission Asset Activity of a given type by purchasing capital stock at that asset type's minimum percentage rate, assuming availability of cooperative capital.
Statutory and Regulatory Restrictions on Capital Stock Redemption and Repurchases
In accordance with the GLB Act, our stock is putable by members. However, for us and the other FHLBanks, there are significant statutory and regulatory restrictions on our obligation or right to redeem or repurchase outstanding stock, including, but not limited to, the following:
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▪ | We may not redeem any capital stock if, following the redemption, we would fail to satisfy any Regulatory capital requirements. By law, we may not redeem any stock if we become undercapitalized. |
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▪ | We may not redeem any capital stock without approval of the Finance Agency if either our Board of Directors or the Finance Agency determines that we have incurred or are likely to incur losses resulting or expected to result in a charge against capital. |
If our FHLB is liquidated and after payment in full to our creditors, stockholders would be entitled to receive the par value of their capital stock. In addition, each stockholder would be entitled to any retained earnings in an amount proportional to the stockholder's share of the total shares of capital stock. In the event of a merger or consolidation of the FHLB, the Board of Directors shall determine the rights and preferences of the FHLB's stockholders, subject to any terms and conditions imposed by the Finance Agency.
Retained Earnings
Purposes and Amount of Retained Earnings
Retained earnings are important to protect members' capital stock investment against the risk of impairment and to enhance our ability to pay stable and competitive dividends when earnings may be volatile in light of the risks we face. Impairment risk is the risk that members would have to write down the par value of their capital stock investment in our FHLB as a result of their analysis of ultimate recoverability. An extreme situation of earnings instability, in which losses exceeded the amount of our retained earnings for a period of time determined to be other-than-temporary, could result in a determination that the value of our capital stock was impaired.
We have a policy that sets forth a range for the amount of retained earnings we believe is needed to mitigate impairment risk and facilitate dividend stability in light of the risks we face. The current retained earnings requirement ranges from $375 million to $600 million, based on mitigating quantifiable risks under very stressed business and market scenarios to a 99 percent confidence level. Given the regulatory environment, we carry a greater amount of retained earnings than required by the Policy. At the end of 2015, our retained earnings totaled $765 million. We believe the current amount of retained earnings is sufficient to protect our capital stock against impairment risk and to provide dividend stability if needed.
Joint Capital Agreement to Augment Retained Earnings
The FHLBanks entered into a Joint Capital Enhancement Agreement (the “Capital Agreement”) in February 2011. The Capital Agreement provides that each FHLBank will allocate quarterly at least 20 percent of its net income to a restricted retained earnings account (the “Account”). The 20 percent reserve allocation to the Account is similar to what had been required under the FHLBanks' REFCORP obligation, which was satisfied in 2011. The Account is not available to be distributed as dividends except under certain limited circumstances. The Capital Agreement does not limit our ability to use retained earnings held outside of the Account to pay dividends.
Although we have always maintained compliance with our capital requirements, we believe the Capital Agreement enhances risk mitigation by building a larger capital buffer over time to absorb unexpected losses, if any, that we may experience. Therefore, the Capital Agreement provides additional protection against impairment risk to stockholders' capital investment.
USE OF DERIVATIVES
Finance Agency regulations and our policies establish guidelines for the execution and use of derivative transactions. We are prohibited from trading in, or the speculative use of, derivatives and have limits on the amount of credit risk to which we may be exposed. Most of our derivatives activity involves interest rate swaps, some of which may include options. We account for all derivatives at their fair values.
Similar to our participation in debt issuances, use of derivatives is integral to hedging market risk created by offering Advances, purchasing mortgage assets, and transacting mortgage commitments. Derivatives related to Advances most commonly hedge either:
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▪ | below-market rates and/or the market risk exposure on Putable Advances, and certain other Advances, for which members have sold us options embedded within the Advances; or |
| |
▪ | Regular Fixed-Rate Advances when it may not be as advantageous to issue Obligations or when it may improve our market risk management. |
Derivatives related to mortgage assets are used to augment debt issuance in the hedging of market risk. We also use derivatives to hedge the market risk associated with fixed-rate mortgage purchase commitments in the MPP.
Derivatives transactions related to Bonds also help us intermediate between the preference of capital market investors for intermediate- and long-term fixed-rate debt securities and the preference of our members for shorter-term or adjustable-rate Advances. We can satisfy the preferences of both groups by issuing long-term fixed-rate Bonds and entering into an interest rate swap that synthetically converts the Bonds to an adjustable-rate LIBOR funding basis that matches up with the short-term and adjustable-rate Advances, thereby preserving a favorable interest rate spread.
Use of derivatives can result in a substantial amount of volatility of accounting and economic earnings. Because we have a cooperative business model, our Board of Directors has emphasized the importance of controlling earnings volatility. Accordingly, our strategy is to execute derivatives that we expect to be effective hedges of market risk exposure relative to their impacts on profitability. As a result, the volatility in the market value of equity and earnings from our use of derivatives has historically tended to be moderate.
COMPETITION
Numerous economic and financial factors influence members' use of Mission Asset Activity. One of the most important factors that affect Advance demand is the amount of member deposits, which for most members are their primary source of funds. In addition, both small and, in particular, large members typically have access to wholesale funds besides FHLB Advances. Another important source of competition for Advances is the ongoing fiscal and monetary stimuli initiated by the federal government to combat the continued difficulties in the housing market and broader economy. This is discussed in Item 1A's “Risk Factors” and in Item 7's “Executive Overview."
The holding companies of some of our large asset members have membership(s) in other FHLBanks through their affiliates. Others could initiate memberships in other Districts. The competition among FHLBanks for the business of multiple-membership institutions is similar to the FHLBanks' competition with other wholesale lenders and mortgage investors. We compete with other FHLBanks on the offerings and pricing of Mission Asset Activity, earnings and dividend performance, collateral policies, capital plans, and members' perceptions of our relative safety and soundness. Some members may also evaluate benefits of diversifying business relationships among FHLB memberships. We regularly monitor these competitive forces among the FHLBanks.
The primary competitors for mortgage loans we purchase in the MPP are Fannie Mae and Freddie Mac, government agencies such as the Government National Mortgage Association (Ginnie Mae), and private issuers. Fannie Mae and Freddie Mac, in particular, have long-established and efficient programs and are the dominant purchasers of fixed-rate conventional mortgages. In addition, a number of private financial institutions have well-established securitization programs, although they may not currently be as active as they were historically. The MPP also competes with the Federal Reserve to the extent it purchases mortgage-backed securities and affects market prices and availability of supply.
For debt issuance, the FHLBank System competes with issuers in the national and global debt markets, including most importantly the U.S. government and other GSEs.
Item 1A.Risk Factors.
The following are the most important risks we currently face. The realization of one or more of the risks could negatively affect our results of operations, financial condition, and, at the extreme, the viability of our business franchise. The effects could include reductions in Mission Asset Activity, lower earnings and dividends, and, at the extreme, impairment of our capital or an inability to participate in issuances of Consolidated Obligations. The risks identified below are not the only risks we face. Other risks not presently known or which we deem to be currently immaterial may also impact our business. Additionally, the risks identified may adversely affect our business in ways we do not expect or anticipate.
Economy. An economic downturn could lower Mission Asset Activity and profitability.
Member demand for Mission Asset Activity depends in large part on the general health of the economy and overall business conditions. Numerous external factors can affect our Mission Asset Activity and earnings including:
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▪ | the general state and trends of the economy and financial institutions, especially in our Fifth District; |
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▪ | conditions in the financial, credit, mortgage, and housing markets; |
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▪ | competitive alternatives to our products, such as retail deposits and other sources of wholesale funding; |
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▪ | actions of the Federal Reserve to affect liquidity reserves of financial institutions and the money supply; |
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▪ | the willingness and ability of financial institutions to expand lending; and |
Because our business tends to be cyclical, a recessionary economy normally lowers the amount of Mission Asset Activity, can decrease profitability, and can cause stockholders to request redemption of a portion of their capital or request withdrawal from membership (both referred to in this document as “request withdrawal of capital”). These unfavorable effects are more likely to occur and be more severe if a weak economy is accompanied by significant changes in interest rates, stresses in the housing market, elevated competitive forces, or actual or potential changes in the legislative and regulatory environment.
Since the last recession, which officially ended in 2009, the economy has grown at a measured pace, contributing to tempered broad-based member demand for Mission Asset Activity. In addition, overall Advance demand has been and continues to be unfavorably affected by the substantial amount of deposit based liquidity provided to financial institutions through the monetary actions of the Federal Reserve, and a more onerous regulatory environment for our members. Acceleration of these conditions or another recession could decrease Mission Asset Activity, which could reduce profitability.
Competition. The competitive environment for our products could adversely affect business activities, including decreasing the level and utilization rates of Mission Asset Activity, earnings, and capitalization.
We operate in a highly competitive environment for Mission Asset Activity. Increased competition could decrease the amount of Mission Asset Activity and narrow profitability on that activity, both of which could cause stockholders to request withdrawals of capital. Historically, our primary competition has been from other wholesale lenders and debt issuers, including other GSEs. A substantial source of competition in the last eight years has come from the federal government's actions to stimulate the economy, especially the actions of the Federal Reserve System through its policies of quantitative easing and maintaining extremely low interest rates. Among other effects, these actions have significantly expanded liquidity and excess reserves available to many members. We expect overall, broad-based growth in Advance demand will remain modest until the government reduces these initiatives by tightening monetary policy and winding down its holdings of U.S. Treasury and mortgage-backed securities. Even if these events take place, we cannot provide assurance regarding the pace or strength of the renewed Advance demand that we would anticipate.
In addition, the FHLBank System competes for funds through issuance of debt with the U.S. Treasury, Fannie Mae, Freddie Mac, other GSEs, and corporate, state, and sovereign entities, among others. Increases in the supply and types of competing debt products or other regulatory factors could adversely affect the System's ability to access funding or increase the cost of our debt issuance. Either of these effects could in turn adversely affect our financial conditions and results of operations and the value of FHLB membership.
GSE Reform. Potential GSE reform could unfavorably affect our business model, financial condition, and results of operations.
The FHLBank System's regulator, the Finance Agency, also regulates Fannie Mae and Freddie Mac. While there appears to be consensus that a permanent financial and political solution to the current conservatorship status of Fannie Mae and Freddie Mac should be implemented, which could include maintaining the current structure, no consensus has evolved to date around any of the various legislative proposals. However, some policy proposals have included provisions applicable to the FHLBanks, such as limitations on Advances and portfolio investments, development of a covered bond market, and restrictions on GSE mortgage finance, that could threaten the FHLBank System's long-standing business model.
Because the FHLBanks shares a common regulator with Fannie Mae and Freddie Mac, the ultimate resolution to the conservatorship of Fannie Mae and Freddie Mac could affect the FHLBanks. There are significant differences between the FHLBank System and Fannie Mae and Freddie Mac, including the System's focus on lending as opposed to guaranteeing mortgages and its distinctive cooperative business model. Legislation could inadequately account for these differences, which could imperil the ability of the FHLBank System to continue operating effectively within its current business model or could change the System's business model. We cannot predict the effects on the System if GSE reform were to be enacted.
FHLB Regulatory Environment. We face a heightened regulatory and legislative environment, which could unfavorably affect our business model, financial condition, and results of operations.
In addition to potential GSE reform, the legislative and regulatory environment in which the FHLBank System operates continues to undergo rapid change driven principally by reforms emanating from the Housing and Economic Reform Act of 2008 (HERA) and the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Recently-promulgated and future legislative and regulatory actions could significantly affect our business model, financial condition, or results of operations.
In addition, in January 2016, the Finance Agency published a final rule regarding membership requirements, part of which will negatively affect our business. The rule prohibits captive insurance companies membership eligibility in the FHLBank System. The membership regulation is discussed further in Item 7's "Executive Overview."
We believe that, taken as a whole, legislative and regulatory actions have raised our operating costs and imparted added uncertainty regarding the business model under which the FHLBanks may operate in the future. We are unable at this time to predict the ultimate effects the heightened regulatory environment could have on the FHLBank System's business model or on our financial condition and results of operations.
Liquidity and Market Access. Impaired access to the capital markets for debt issuance could increase liquidity risk, decrease the amount of Mission Asset Activity, lower earnings by raising debt costs and, at the extreme, result in realization of liquidity risk preventing the System from meeting its financial obligations.
Our principal long-term source of funding, liquidity, and market risk management is through access to the capital markets for participation in the issuances of debt securities and execution of derivative transactions at prices and yields that are adequate to support our business model. Our ability to obtain funds through the sale of Consolidated Obligations depends in part on prevailing conditions in the capital markets, particularly the short-term capital markets, due to a large reliance on short-term funding. Access to the capital markets on favorable terms and strong investor demand for FHLBank System debt are the fundamental source of the FHLBank System's business franchise. The System's strong debt ratings, the implicit U.S. government backing of our debt, and effective funding management are instrumental in ensuring satisfactory access to the capital markets.
We are exposed to liquidity risk if there are significant disruptions in the capital markets. Although the last several years experienced ongoing issues with the federal government's fiscal condition and changes in the regulatory environment that affected the functioning of capital markets, the FHLBank System has been able to maintain access to the capital markets
for debt issuances on acceptable terms (including when the FHLBank System's debt was downgraded by Standard & Poor's). However, there is no assurance this will continue to be the case. Future ability to effectively access the capital markets could be adversely affected by external events (such as general economic and financial instabilities, political instability, wars, and natural disasters), continued evolution of capital markets in response to financial regulations, and by the System's joint and several liability for Consolidated Obligations, which exposes us to events at other FHLBanks. If access to capital markets were to be impaired for any extended period, the effect on our financial condition and results of operations could be material. At the extreme, the System's ability to achieve its mission and satisfy its financial obligations could be threatened.
Credit and Counterparty Risk. We are exposed to credit risk that, if realized, could materially affect our ability to pay members a competitive dividend.
We believe we have a de minimis overall amount of residual credit risk exposure related to Credit Services, purchases of investments, and transactions in derivatives, and a minimal amount of credit risk exposure related to the MPP. However, we can make no assurances that credit losses will not materially affect our financial condition or results of operations. An extremely severe and prolonged economic downturn, especially if combined with continued significant disruptions in housing or mortgage markets, could result in credit losses on assets that could impair our financial condition or results of operations.
The FHLB is an asset-based lender for Advances and Letters of Credit. Advances are over-collateralized and we have a perfected first lien position on collateral. However, we do not have full information on the characteristics of nor do we estimate current market values on a large portion of collateral. This results in a degree of uncertainty as to the precise amount of over-collateralization.
Although credit losses in the MPP have historically been small, they could increase under adverse economic scenarios involving significant and sustained reductions in home prices and sustained elevated levels of unemployment and other factors that influence delinquencies and defaults.
Some of our liquidity investments are unsecured, as are uncollateralized portions of interest rate swaps. We make unsecured liquidity investments in and transact derivatives with highly rated, investment-grade institutions, have conservative limits on dollar and maturity exposure to each institution, and have strong credit underwriting practices. Failure of an investment or derivative counterparty with which we have a large unsecured position could have a material adverse effect on our financial conditions and results of operations. To the extent we engage in derivative transactions required to be cleared under provisions of the Dodd-Frank Act, we may be exposed to nonperformance from central clearinghouses and Futures Commission Merchants.
Financial institutions are increasingly inter-related as a result of trading, clearing, counterparty, and other relationships. As a result, actual or potential defaults of one or more financial institutions could lead to market-wide disruptions making it difficult for us to find qualified counterparties for transactions.
Market Risk. Changes in interest rates and mortgage prepayment speeds (together referred to as market risk exposure or interest rate risk exposure) could significantly reduce our ability to pay members a competitive dividend from current earnings.
Exposure of earnings to unhedged changes in interest rates and mortgage prepayment speeds is one of our largest ongoing residual risks. We derive most of our income from the interest earned on assets less the interest paid on Consolidated Obligations and deposits used to fund the assets. We hedge mortgage assets with a combination of Consolidated Obligations, derivatives transactions, and capital. Interest rate movements can lower profitability in two ways: 1) directly due to their impact on earnings from cash flow mismatches between assets and liabilities; and 2) indirectly via their impact on prepayment speeds, which can unfavorably affect the cash flow mismatches. The effects on income can include acceleration in the amortization of purchased premiums on mortgage assets.
Because it is normally cost-prohibitive to completely mitigate market risk exposure, a residual amount of market risk normally remains after incorporating risk management activities. Sharp increases in interest rates, especially short-term rates, or sharp decreases in long-term interest rates could adversely affect us and our stockholders by making dividend rates less competitive relative to the returns available to members on alternative investments.
In some extremely stressful scenarios, changes in interest rates and prepayment speeds could result in dividends being below stockholders' expectations for an extended period of time. In such a situation, members could engage in less Mission Asset Activity and could request a withdrawal of capital. See Item 7's "Quantitative and Qualitative Disclosures About Risk Management" for additional information about market risk exposure.
Asset Profitability. Spreads on assets to funding costs may narrow because of changes in market conditions and competitive factors, resulting in lower profitability.
Spreads on our assets tend to be narrow compared to those of many other financial institutions due to our cooperative business model. Market conditions, competitive forces, and, as discussed above, market risk exposure could cause these already narrow asset spreads to decline, which could substantially reduce our profitability. A key spread relationship is that we tend to utilize Consolidated Discount Notes to fund a significant amount of assets that have adjustable-rates tied to LIBOR. Because rates on Discount Notes do not perfectly correlate with LIBOR, a narrowing of this spread, for example from investors changing perceptions about the quality of our debt, could lower income and reduce balances of Mission Asset Activity.
Capital Adequacy. Failure to meet capital adequacy requirements mandated by Finance Agency regulations and by our policies, or not being able to pay dividends or repurchase or redeem capital stock, may lower demand for Mission Asset Activity, affect results of operations, and lower membership value.
To ensure safe and sound operations, we must hold a minimum amount of capital relative to our asset levels. We must also hold a minimum amount of retained earnings to, among other things, help protect members' capital stock investment against impairment risk. If we were to violate any capital requirement, we may be unable to pay dividends or redeem and repurchase capital stock. This could adversely affect the value of membership including members' capital investment. Outcomes could be reduced demand for Mission Asset Activity, decreased profitability, requests from members to redeem a portion of their capital or to withdraw from membership, or increased investors' perception of the riskiness of our FHLB.
Business Concentration and Industry Consolidation and Composition. Sharp reductions in Mission Asset Activity resulting from lower usage by large members, consolidation of large members or growth in lending activities by entities not eligible for FHLB membership could adversely impact our net income and dividends.
The amount of Mission Asset Activity and capital is concentrated among a handful of large members. The financial industry continues to consolidate among a smaller number of institutions and the market share of mortgage financing has shown a systemic trend towards financial institutions who are currently ineligible for FHLB membership. Our members could decrease their Mission Asset Activity and the amount of their capital stock as a result of merger and acquisition activity or continued loss of market share to ineligible FHLB members. At December 31, 2015, one member, JPMorgan Chase Bank, N.A., held nearly half of our Advances and one member PFI, Union Savings Bank, accounted for over 25 percent of the outstanding MPP principal balance. Our business model is structured to be able to absorb sharp changes in Mission Asset Activity because we can undertake commensurate reductions in liability balances and capital and because of our relatively modest operating expenses. However, an extremely large and sustained reduction in Mission Asset Activity could affect our profitability and ability to pay competitive dividends, as well as, at the FHLBank System level, raise policy questions about the relevance of the FHLBank System in its traditional mission of supporting housing finance.
Exposure to FHLBank System. Financial difficulties at other FHLBanks could require us to provide financial assistance to another FHLBank, which could adversely affect our results of operations or our financial condition.
Each FHLBank has a joint and several liability for principal and interest payments on Consolidated Obligations, which are backed only by the financial resources of the FHLBanks. Although no FHLBank has ever defaulted on its principal or interest share of an Obligation, there can be no assurance that this will continue to be the case. Financial performance issues could require our FHLB to provide financial assistance to one or more other FHLBanks, for example, by making a payment on an Obligation on behalf of another FHLBank. Such assistance could adversely affect our financial condition, earnings, ability to pay dividends, or ability to redeem or repurchase capital stock.
Member Regulatory Environment. Members face increased regulatory scrutiny, which could further decrease Mission Asset Activity and lower profitability.
In the last number of years, regulation and scrutiny of the financial industry has increased significantly. We believe these activities have decreased members' overall usage of Advances.
The Basel Committee on Banking Supervision (the Basel Committee) has developed a proposed new capital regime for internationally active banks. Banks subject to the new regime are required, among other things, to have higher capital ratios. While it is uncertain how the new capital regime and other standards, such as those related to liquidity, developed by the Basel Committee will ultimately be implemented by U.S. regulatory authorities, the new regime could require some of our members to divest assets in order to comply with the regime's more stringent capital and liquidity requirements, thereby possibly lowering Advance demand. Additionally, the liquidity requirements being implemented could adversely impact Advance demand and investor demand for Consolidated Obligations because they would limit the ability of members to fully include Advances and Consolidated Obligations in required liquidity calculations. This could raise our debt costs and, in turn, raise the Advance rates we are able to offer members, thereby harming the ability to fulfill our business model.
Personnel Risk. Our financial condition and results of operations could suffer if we are unable to hire and retain skilled key personnel.
The success of our business mission depends, in large part, on the ability to attract and retain key personnel. Competition for qualified people or ineffective succession planning could affect the ability to hire or retain effective key personnel, thereby harming our financial condition and results of operations.
Operational and Compliance Risks. Failures or interruptions in our internal controls, compliance activities, information systems and other operating technologies could harm our financial condition, results of operations, reputation, and relations with members.
Control failures, including failures in our controls over financial reporting, or business interruptions with members and counterparties could occur from human error, fraud, breakdowns in information and computer systems and financial and business models we use, lapses in operating processes, or natural or man-made disasters. If a significant control failure or business interruption were to occur, it could materially damage our financial condition and results of operations. We may not be able to foresee, prevent, mitigate, reverse or repair the negative effects of such failures or interruptions.
We rely heavily on internal and third-party information systems and other technology to conduct and manage our business. Our operations rely on the secure processing, storage and transmission of confidential and other information in computer systems and networks. Computer systems, software and networks can be vulnerable to failures and interruptions including “cyberattacks,” which are breaches, unauthorized access, misuse, computer viruses or other malicious code and other events against information owned by our company and customers. These failures and interruptions could jeopardize the confidentiality or integrity of information, or otherwise cause interruptions or malfunctions in operations.
We can make no assurance that we will be able to prevent, timely and adequately address, or mitigate the negative effects of failures, interruptions, or "cyberattacks" in information systems and other technology. If we experience a failure, interruption, or "cyberattack" in any of these systems, we may be unable to effectively conduct or manage our business activities, operating processes, and risk management, which could significantly harm customer relations, our reputation, or profitability, potentially resulting in material adverse effects on our financial condition and results of operations.
Item 1B.Unresolved Staff Comments.
None.
Item 2.Properties.
Our offices are located in approximately 79,000 square feet of leased space in downtown Cincinnati, Ohio. We also maintain a leased, fully functioning, back-up facility in suburban Cincinnati. Additionally, we lease a small office in Nashville, Tennessee
for the area marketing representative. We believe that our facilities are in good condition, well maintained, and adequate for our current needs.
Item 3.Legal Proceedings.
From time to time, we are subject to various legal proceedings arising in the normal course of business. Management does not anticipate that the ultimate liability, if any, arising out of these matters will have a material adverse effect on our financial condition or results of operations.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
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Item 5. | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
By law our stock is not publicly traded, and only our members (and former members with a withdrawal notice pending) may own our stock. The par value of our capital stock is $100 per share. As of December 31, 2015, we had 699 stockholders and 44 million shares of capital stock outstanding, all of which were Class B Stock.
We paid quarterly dividends in 2015 and 2014 as outlined in the table below.
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| | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | | | | | | | | | | | | |
| | 2015 | | | | 2014 |
| | | | Annualized | | | | | | | | Annualized | | |
Quarter | | Amount | | Rate | | Form | | Quarter | | Amount | | Rate | | Form |
First | | $ | 43 |
| | 4.00 | % | | Cash | | First | | $ | 47 |
| | 4.00 | % | | Cash |
Second | | 42 |
| | 4.00 |
| | Cash | | Second | | 44 |
| | 4.00 |
| | Cash |
Third | | 43 |
| | 4.00 |
| | Cash | | Third | | 42 |
| | 4.00 |
| | Cash |
Fourth | | 44 |
| | 4.00 |
| | Cash | | Fourth | | 43 |
| | 4.00 |
| | Cash |
Total | | $ | 172 |
| | 4.00 |
| | | | Total | | $ | 176 |
| | 4.00 |
| | |
Generally, our Board of Directors has discretion to declare or not declare dividends and to determine the rate of any dividend declared. Our Retained Earnings and Dividend Policy states that dividends for a quarter are declared and paid from retained earnings after the close of a calendar quarter and are based on average stock balances for the then closed quarter. Our Board of Directors' decision to declare dividends is influenced by the financial condition, overall financial performance and retained earnings of the FHLB, and actual and anticipated developments in the overall economic and financial environment including, most importantly, interest rates and the mortgage and credit markets. The dividend rate is generally referenced as a spread to average short-term interest rates experienced during the quarter to help assess a competitive level for our stockholders.
A Finance Agency Capital Rule prohibits us from issuing new excess capital stock to members, either by paying stock dividends or otherwise, if before or after the issuance the amount of member excess capital stock exceeds or would exceed one percent of the FHLB's assets. Excess capital stock for this regulatory purpose is calculated as the aggregate of capital stock owned that is in excess of all membership and Mission Asset Activity requirements (as defined in our Capital Plan).
We may not declare a dividend if, at the time, we are not in compliance with all of our capital requirements. We also may not declare or pay a dividend if, after distributing the dividend, we would fail to meet any of our capital requirements or if we determine that the dividend would create a safety and soundness issue for the FHLB. See Note 15 of the Notes to the Financial Statements for additional information regarding our capital stock.
RECENT SALES OF UNREGISTERED SECURITIES
From time to time, we provide Letters of Credit in the ordinary course of business to support members' obligations issued in support of unaffiliated, third-party offerings of notes, bonds or other securities. We provided $17 million of such credit support during 2015. We did not provide such credit support during 2014 and 2013. To the extent that these Letters of Credit are securities for purposes of the Securities Act of 1933, their issuance is exempt from registration pursuant to section 3(a)(2) thereof.
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Item 6. | Selected Financial Data. |
The following table presents selected Statement of Condition data, Statement of Income data and financial ratios for the five years ended December 31, 2015.
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
(Dollars in millions) | 2015 | | 2014 | | 2013 | | 2012 | | 2011 |
STATEMENT OF CONDITION DATA AT PERIOD END: | | | | | | | | | |
Total assets | $ | 118,797 |
| | $ | 106,640 |
| | $ | 103,181 |
| | $ | 81,562 |
| | $ | 60,397 |
|
Advances | 73,292 |
| | 70,406 |
| | 65,270 |
| | 53,944 |
| | 28,424 |
|
Mortgage loans held for portfolio | 7,982 |
| | 6,989 |
| | 6,826 |
| | 7,548 |
| | 7,871 |
|
Allowance for credit losses on mortgage loans | 2 |
| | 5 |
| | 7 |
| | 18 |
| | 21 |
|
Investments (1) | 37,356 |
| | 26,007 |
| | 22,364 |
| | 19,950 |
| | 21,941 |
|
Consolidated Obligations, net: | | | | | | | | | |
Discount Notes | 77,199 |
| | 41,232 |
| | 38,210 |
| | 30,840 |
| | 26,136 |
|
Bonds | 35,105 |
| | 59,217 |
| | 58,163 |
| | 44,346 |
| | 28,855 |
|
Total Consolidated Obligations, net | 112,304 |
| | 100,449 |
| | 96,373 |
| | 75,186 |
| | 54,991 |
|
Mandatorily redeemable capital stock | 38 |
| | 63 |
| | 116 |
| | 211 |
| | 275 |
|
Capital: | | | | | | | | | |
Capital stock - putable | 4,429 |
| | 4,267 |
| | 4,698 |
| | 4,010 |
| | 3,126 |
|
Retained earnings | 765 |
| | 689 |
| | 621 |
| | 538 |
| | 444 |
|
Accumulated other comprehensive loss | (13 | ) | | (17 | ) | | (9 | ) | | (11 | ) | | (11 | ) |
Total capital | 5,181 |
| | 4,939 |
| | 5,310 |
| | 4,537 |
| | 3,559 |
|
STATEMENT OF INCOME DATA: | | | | | | | | | |
Net interest income | $ | 322 |
| | $ | 317 |
| | $ | 328 |
| | $ | 308 |
| | $ | 249 |
|
(Reversal) provision for credit losses | — |
| | — |
| | (7 | ) | | 1 |
| | 12 |
|
Non-interest income (loss) | 30 |
| | 23 |
| | 20 |
| | 13 |
| | (5 | ) |
Non-interest expense | 75 |
| | 68 |
| | 64 |
| | 58 |
| | 57 |
|
Assessments | 28 |
| | 28 |
| | 30 |
| | 27 |
| | 37 |
|
Net income | $ | 249 |
| | $ | 244 |
| | $ | 261 |
| | $ | 235 |
| | $ | 138 |
|
FINANCIAL RATIOS: | | | | | | | | | |
Dividend payout ratio (2) | 69.2 | % | | 72.2 | % | | 68.1 | % | | 60.1 | % | | 95.4 | % |
Weighted average dividend rate (3) | 4.00 |
| | 4.00 |
| | 4.18 |
| | 4.44 |
| | 4.25 |
|
Return on average equity | 4.90 |
| | 4.93 |
| | 5.10 |
| | 6.20 |
| | 3.89 |
|
Return on average assets | 0.24 |
| | 0.24 |
| | 0.28 |
| | 0.35 |
| | 0.21 |
|
Net interest margin (4) | 0.31 |
| | 0.31 |
| | 0.35 |
| | 0.46 |
| | 0.37 |
|
Average equity to average assets | 4.81 |
| | 4.90 |
| | 5.47 |
| | 5.68 |
| | 5.29 |
|
Regulatory capital ratio (5) | 4.40 |
| | 4.71 |
| | 5.27 |
| | 5.84 |
| | 6.37 |
|
Operating expenses to average assets (6) | 0.058 |
| | 0.054 |
| | 0.055 |
| | 0.067 |
| | 0.068 |
|
| |
(1) | Investments include interest bearing deposits in banks, securities purchased under agreements to resell, Federal funds sold, trading securities, available-for-sale securities, and held-to-maturity securities. |
| |
(2) | Dividend payout ratio is dividends declared in the period as a percentage of net income. |
| |
(3) | Weighted average dividend rates are dividends paid divided by the average number of shares of capital stock eligible for dividends. |
| |
(4) | Net interest margin is net interest income before (reversal)/provision for credit losses as a percentage of average earning assets. |
| |
(5) | Regulatory capital ratio is period-end regulatory capital (capital stock, mandatorily redeemable capital stock and retained earnings) as a percentage of period-end total assets. |
| |
(6) | Operating expenses comprise compensation and benefits and other operating expenses, which are included in non-interest expense. |
| |
Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations. |
EXECUTIVE OVERVIEW
Financial Condition
Mission Asset Activity
The following table summarizes our financial condition.
|
| | | | | | | | | | | | | | | |
| Year Ended December 31, |
| Ending Balances | | Average Balances |
(In millions) | 2015 | | 2014 | | 2015 | | 2014 |
Total Assets | $ | 118,797 |
| | $ | 106,640 |
| | $ | 105,569 |
| | $ | 101,157 |
|
Mission Asset Activity: | | | | | | | |
Advances (principal) | 73,242 |
| | 70,299 |
| | 70,355 |
| | 66,492 |
|
Mortgage Purchase Program (MPP): | | | | | | | |
Mortgage loans held for portfolio (principal) | 7,758 |
| | 6,796 |
| | 7,396 |
| | 6,620 |
|
Mandatory Delivery Contracts (notional) | 450 |
| | 451 |
| | 471 |
| | 273 |
|
Total MPP | 8,208 |
| | 7,247 |
| | 7,867 |
| | 6,893 |
|
Letters of Credit (notional) | 19,555 |
| | 17,780 |
| | 17,694 |
| | 15,154 |
|
Total Mission Asset Activity | $ | 101,005 |
| | $ | 95,326 |
| | $ | 95,916 |
| | $ | 88,539 |
|
In 2015, the FHLB fulfilled its mission by providing readily available and competitively priced wholesale funding to its member financial institutions, supporting its commitment to affordable housing, and paying stockholders a competitive dividend return on their capital investment.
The balance of Mission Asset Activity – which we define as Advances, Letters of Credit, and total MPP (including purchase commitments) – was $101.0 billion at December 31, 2015, an increase of $5.7 billion (six percent) from year-end 2014. This growth was primarily driven by an increase in the principal balance of Advances. As of December 31, 2015, members funded on average 3.4 percent of their assets with Advances, and the market penetration rate was relatively stable with approximately 70 percent of members holding Mission Asset Activity. The majority of members continued to have modest demand for new Advance borrowings due to measured economic growth, an abundance of deposits and significant amounts of liquidity made available as a result of the actions of the Federal Reserve System.
The principal balance of mortgage loans held for portfolio at December 31, 2015rose$1.0 billion (14 percent) from year-end 2014. The growth reflected ongoing improvements in the housing market and low mortgage rates. During 2015, we purchased $2.4 billion of mortgage loans, while principal reductions totaled $1.4 billion. Residual credit risk exposure in the mortgage loan portfolio continued to be minimal.
Based on 2015 earnings, we contributed $28 million to the Affordable Housing Program (AHP) pool of funds to be awarded to members in 2016. In addition, we continued our voluntary sponsorship of two other housing programs, which provide resources to pay for accessibility rehabilitation and emergency repairs for special needs and elderly homeowners and to help members aid their communities following natural disasters.
Investments and Other Assets
The balance of investments at December 31, 2015 was $37.4 billion, an increase of $11.3 billion (44 percent) from year-end 2014. Most of the increase was because we held more short-term liquidity investments at the end of 2015. At December 31, 2015, investments included $15.3 billion of mortgage-backed securities and $22.1 billion of other investments, which were mostly short-term instruments held for liquidity.
Investment balances averaged $27.3 billion in 2015, a decrease of $0.2 billion (one percent) from 2014's average. This reflected minimal changes in average liquidity investments and mortgage-backed securities. All of our mortgage-backed securities held at December 31, 2015 were issued and guaranteed by Fannie Mae, Freddie Mac or a U.S. agency.
The balance of cash and due from banks at December 31, 2015 was $10 million, compared to $3.1 billion at December 31, 2014. The 2014 balance was larger than normal due to holding $3.1 billion in deposits at the Federal Reserve on that date.
We maintained an adequate amount of asset liquidity throughout the year under a variety of liquidity measures as discussed in the "Liquidity Risk" section of "Quantitative and Qualitative Disclosures About Risk Management."
Capital
Capital adequacy remained strong throughout 2015, exceeding all minimum regulatory capital requirements. The GAAP capital-to-assets ratio at December 31, 2015 was 4.36 percent, while the regulatory capital-to-assets ratio was 4.40 percent. Both ratios exceeded the regulatory required minimum of four percent. Regulatory capital includes mandatorily redeemable capital stock accounted for as a liability under GAAP. The average GAAP and regulatory capital ratios in 2015 were 4.81 percent and 4.88 percent, respectively, higher than the year-end ratios. The year-end ratios reflected the higher amount of short-term liquidity balances we carried on that date.
The amounts of GAAP and regulatory capital increased $242 million and $213 million, respectively, in 2015, due primarily to purchases of capital stock by members to support Advance growth.
Total retained earnings were $765 million at December 31, 2015, an increase of $76 million (11 percent) from year-end 2014. We believe the amount of retained earnings is sufficient to protect against members' impairment risk of their capital stock investment in the FHLB and to provide the opportunity to stabilize future dividends. Our Capital Plan also has safeguards to prevent financial leverage ratios from falling below regulatory minimum levels.
Results of Operations
Overall Results
The table below summarizes our results of operations.
|
| | | | | | | | | | | |
| Year Ended December 31, |
(Dollars in millions) | 2015 | | 2014 | | 2013 |
Net income | $ | 249 |
| | $ | 244 |
| | $ | 261 |
|
Affordable Housing Program accrual | 28 |
| | 28 |
| | 30 |
|
Return on average equity (ROE) | 4.90 | % | | 4.93 | % | | 5.10 | % |
Return on average assets | 0.24 |
| | 0.24 |
| | 0.28 |
|
Weighted average dividend rate | 4.00 |
| | 4.00 |
| | 4.18 |
|
Average 3-month LIBOR | 0.32 |
| | 0.23 |
| | 0.27 |
|
Average overnight Federal funds effective rate | 0.13 |
| | 0.09 |
| | 0.11 |
|
ROE spread to 3-month LIBOR | 4.58 |
| | 4.70 |
| | 4.83 |
|
Dividend rate spread to 3-month LIBOR | 3.68 |
| | 3.77 |
| | 3.91 |
|
ROE spread to Federal funds effective rate | 4.77 |
| | 4.84 |
| | 4.99 |
|
Dividend rate spread to Federal funds effective rate | 3.87 |
| | 3.91 |
| | 4.07 |
|
Net income in 2015 was $5 million (two percent) higher than in 2014. ROE was similar in the last two years and we paid the same dividend rate in each of the last nine quarters. Although there were a number of factors that affected earnings, in the aggregate they nearly offset one another and no individual factor experienced a change that significantly affected operating results or indicated a concern about future profitability. This steady performance reflected the net impact of a stable business and interest rate environment, a modest increase in average assets, a relatively constant composition of assets, a consistent and conservative management of risk, a moderate increase in operating expenses, and a prudent use of derivative transactions.
The spreads between ROE and short-term interest rates, 3-month LIBOR and Federal funds, are market benchmarks we believe member stockholders use to assess the competitiveness of the return on their capital investment in our company. Earnings continued to be sufficient to provide competitive returns on stockholders' capital investment. Consistent with experience over the last several years, ROE was significantly above short-term rates, resulting in the ROE spreads being wider than the long-term historical average spread.
Effect of Interest Rate Environment
Trends in market interest rates strongly influence the results of operations via how they affect members' demand for Mission Asset Activity, spreads on assets, funding costs and decisions in managing the tradeoffs in our market risk/return profile. The following table presents key market interest rates (obtained from Bloomberg L.P.).
|
| | | | | | | | | | | | | | | | | |
| Year 2015 | | Year 2014 | | Year 2013 |
| Ending | | Average | | Ending | | Average | | Ending | | Average |
Federal funds effective | 0.20 | % | | 0.13 | % | | 0.06 | % | | 0.09 | % | | 0.07 | % | | 0.11 | % |
3-month LIBOR | 0.61 |
| | 0.32 |
| | 0.26 |
| | 0.23 |
| | 0.25 |
| | 0.27 |
|
2-year LIBOR | 1.18 |
| | 0.88 |
| | 0.90 |
| | 0.62 |
| | 0.49 |
| | 0.44 |
|
10-year LIBOR | 2.19 |
| | 2.18 |
| | 2.28 |
| | 2.65 |
| | 3.09 |
| | 2.47 |
|
2-year U.S. Treasury | 1.05 |
| | 0.67 |
| | 0.67 |
| | 0.45 |
| | 0.38 |
| | 0.30 |
|
10-year U.S. Treasury | 2.27 |
| | 2.13 |
| | 2.17 |
| | 2.53 |
| | 3.03 |
| | 2.34 |
|
15-year mortgage current coupon (1) | 2.32 |
| | 2.13 |
| | 2.10 |
| | 2.34 |
| | 2.68 |
| | 2.21 |
|
30-year mortgage current coupon (1) | 3.02 |
| | 2.88 |
| | 2.85 |
| | 3.23 |
| | 3.63 |
| | 3.07 |
|
|
| | | | | | | | | | | |
| Year 2015 by Quarter - Average |
| Quarter 1 | | Quarter 2 | | Quarter 3 | | Quarter 4 |
Federal funds effective | 0.11 | % | | 0.13 | % | | 0.13 | % | | 0.16 | % |
3-month LIBOR | 0.26 |
| | 0.28 |
| | 0.31 |
| | 0.41 |
|
2-year LIBOR | 0.84 |
| | 0.86 |
| | 0.88 |
| | 0.93 |
|
10-year LIBOR | 2.09 |
| | 2.24 |
| | 2.28 |
| | 2.10 |
|
2-year U.S. Treasury | 0.59 |
| | 0.60 |
| | 0.68 |
| | 0.82 |
|
10-year U.S. Treasury | 1.97 |
| | 2.15 |
| | 2.22 |
| | 2.18 |
|
15-year mortgage current coupon (1) | 1.96 |
| | 2.09 |
| | 2.25 |
| | 2.20 |
|
30-year mortgage current coupon (1) | 2.71 |
| | 2.88 |
| | 2.98 |
| | 2.94 |
|
| |
(1) | Simple average of current coupon rates of Fannie Mae and Freddie Mac par mortgage-backed security indications. |
Short-term interest rates remained low in 2015. In December 2015, the Federal Reserve increased its target overnight Federal funds from a zero to 0.25 percent range to a 0.25 to 0.50 percent range. Other short-term interest rates remained consistent with their historical relationships to Federal funds during 2015. Average long-term rates were modestly lower in 2015 compared to 2014.
The persistence in 2015 of the low interest rate environment continued to favorably affect our results of operations relative to the level of interest rates for the following reasons:
| |
▪ | Reductions in, and low, market interest rates raise ROE compared to market rates to the extent we fund a portion of long-term assets with shorter-term debt. |
| |
▪ | The long-standing low rate environment has provided us the opportunity to retire many Consolidated Bonds and replace them with lower cost Obligations, at a pace exceeding paydowns of high-yielding mortgage assets, which have been slower than would be expected in more normal housing and mortgage environments. |
| |
▪ | Earnings generated from funding assets with interest-free capital have not decreased as much as the reduction in overall interest rates because long-term assets do not reprice immediately to the lower rates. |
The current trend level of ROE spread to market interest rates is above the long-term average trend because of the factors referenced above. However, these factors have improved our net income by a smaller amount more recently because they have been present for many years. For example, over time paydowns of high-yielding mortgage assets cumulatively have increased, which has offset much of the benefit from previously retiring high-cost Bonds.
Business Outlook and Risk Management
This section summarizes the business outlook and what we believe are our current major risk exposures. Item 1A's “Risk Factors” has a detailed discussion of risk factors that could affect our corporate objectives, financial condition, and results of operations. "Quantitative and Qualitative Disclosures About Risk Management" provides details on current risk exposures.
Strategic/Business Risk
Advances. Our business is cyclical and Mission Asset Activity normally grows slowly, stabilizes, or declines in periods of difficult macro-economic conditions, when financial institutions have ample liquidity, or when there is significant growth in the money supply. Since the end of the recession in 2009, measured economic growth has resulted in relatively slow growth in consumer, mortgage and commercial loans across the broad membership both in absolute terms and relative to deposit growth. Other factors continuing to constrain widespread demand for Advances are the extremely low levels of interest rates and little deviation in Advance rates versus deposit rates, and the Federal Reserve's ongoing actions to provide an extraordinary amount of deposit-based liquidity to attempt to stimulate economic growth.
In the last several years, the percentage of assets that members funded with Advances showed little variation, in the range of three to four percent. We would expect to see a broad-based increase in Advance demand when the economy experiences an improved and sustained growth trend or if changes in Federal Reserve policy reduce other sources of liquidity available to members.
The relative balance between loan and deposit fluctuations can provide an indication of potential member Advance demand. From September 30, 2014 to September 30, 2015 (the most recent period for which data are available), aggregate loan portfolios of Fifth District depository institutions grew $106.8 billion (8.4 percent) while their aggregate deposit balances fell $29.9 billion (1.4 percent). The data include the effect of large mergers and acquisitions only when they are available for both comparison dates. Most of the loan growth and deposit decline in this period occurred from our largest members, which is consistent with the concentration of financial activity.
Excluding the five members with over $50 billion of assets and recent acquisitions, aggregate loans increased $13.1 billion (6.6 percent) in the 12-month period while aggregate deposits grew $12.1 billion (5.1 percent). This more recent trend of loan growth exceeding deposit growth could produce increased demand for Advances over time.
MPP. MPP balances are influenced by conditions in the housing and mortgage markets, the competitiveness of prices we offer to purchase loans as well as program features, and activity from our largest sellers.
Our ongoing strategy for the MPP has two components: 1) increase the number of regular sellers and participants in the program; and 2) increase purchases while maintaining balances at a prudent level relative to capital and total assets to effectively manage market and credit risks consistent with our risk appetite.
Regulatory and Legislative Risk
General. The FHLBank System currently faces heightened legislative and regulatory risks and uncertainties, which we believe has affected, and could continue to affect, our Mission Asset Activity, capitalization, and results of operations. Legislative and regulatory actions applicable to the FHLBank System in the last eight years have raised our operating costs and increased uncertainty regarding the business model under which the FHLBanks may operate in the future. This is due primarily to the uncertainty around potential future GSE reform, which shows no signs of resolution. See Item 1A's "Risk Factors" for more discussion.
Core Mission Achievement. Over the years, we have adopted numerous indicators to assess achievement of our mission. These include metrics related to Mission Asset Activity, profitability, capital adequacy and safety and soundness. In July 2015, the Finance Agency issued an Advisory Bulletin to formalize a measure of FHLBank mission achievement across the System. The Advisory Bulletin established a goal for the sum of average Advances and purchased mortgage loans (collectively called Primary Mission Assets) to equal or exceed 70 percent of average Consolidated Obligations (i.e., the Primary Mission Assets ratio). Consolidated Obligations is used as a comparison because it reflects the major source of our franchise value as a GSE. If the metric falls below the 70 percent preferred ratio, an FHLBank would be expected to include in its strategic plan actions aimed at increasing the ratio, which could include consideration of Supplemental Mission Assets and Activities, such as Letters of Credit issued to members. During 2015, our Primary Mission Assets metric exceeded the Finance Agency's preferred ratio.
Membership Requirements.In January 2016, the Finance Agency issued a final rule on membership requirements. The primary changes to membership requirements are to:
| |
▪ | ban currently-eligible captive insurance companies as eligible members in an FHLBank, and |
| |
▪ | clarify matters related to defining the principal place of business for eligible financial institution members for purposes of determining their appropriate FHLBank district. |
As a result, our current captive insurance company members must terminate their memberships one year after the rule's effective date. In addition, the rule allows these members until the end of the one-year period to repay their existing Advances, but prohibits them from taking new Advances or renewing existing Advances that expire after the rule’s effective date.
We believe that the final rule will not materially affect our financial condition or results of operations despite the loss of current and potential captive insurance members. However, we are concerned that the rule could constrain the ability of the FHLBanks to fulfill their mission of promoting housing finance through providing liquidity and funding to financial institutions engaged in housing finance activities. We believe captive insurance companies are important institutions in helping to deepen and diversify the flow of funds in the mortgage markets.
Privately Insured Credit Unions. In December 2015, the U.S. Congress passed into law a provision permitting privately-insured state-chartered credit unions to apply for membership in the FHLBank System. Based on the number and size of such institutions in our district, we believe that this change in eligible members will have only a small effect on Mission Asset Activity.
Dodd-Frank Act and Related Regulations.Regulatory agencies continue to promulgate rules covering derivatives activities as required by the Dodd-Frank Act. A joint rule of several agencies issued in 2015 that will affect the FHLBanks mandates the exchange of initial and variation margin for interest rate swaps not cleared through a central clearinghouse. Margins are based on swaps' market value and their relative risk. The rule is effective April 1, 2016 and has a staggered implementation schedule of up to four years. We already post and collect margin on uncleared swaps. Therefore, we believe the largest impact of the rule will be the elimination of thresholds permitted on daily variation margin for new swaps transacted after the implementation date. This will eliminate the amount of uncollateralized exposure between derivative counterparties and reduce counterparty risk. We believe the impact of the rule will not be material to our company.
Market Risk
During 2015, as in 2014, the market risk exposure to changing interest rates was moderate overall and well within policy limits. We believe that profitability would not become uncompetitive unless long-term rates were to permanently increase over the next 12 months by five percentage points or more combined with short-term rates increasing to at least seven percent. We believe such a stress scenario is extremely unlikely to occur in the foreseeable future. Our market risk exposure to lower long-term interest rates, even up to two percentage points, would result in ROE remaining well above market interest rates.
Capital Adequacy
We believe members place a high value on their capital investment in our company. We maintained compliance with regulatory capital requirements. Capital ratios at December 31, 2015 and all throughout the year exceeded the regulatory required minimum of four percent. We believe that the amount of our retained earnings is sufficient to protect against impairment risk of capital stock and to provide the opportunity to stabilize dividends. Our Capital Plan has safeguards to prevent financial leverage from increasing beyond regulatory minimums or below safe levels.
Credit Risk
In 2015, we continued to experience a de minimis level of overall residual credit risk exposure from our Credit Services, making investments, and executing derivative transactions. We believe policies and procedures related to credit underwriting, Advance collateral management, and transactions with investment and derivative counterparties continue to fully mitigate these risks. Therefore, we have never experienced any credit losses and we continue to have no loan loss reserves or impairment recorded for these instruments.
Residual credit risk exposure in the mortgage loan portfolio was minimal. The allowance for credit losses in the MPP continued to decline and was $2 million at December 31, 2015.
Liquidity Risk
Our liquidity position remained strong during 2015, as did our overall ability to fund operations through the issuance of Consolidated Obligations at acceptable interest costs. Investor demand for FHLBank System debt continued to be robust. There were no substantive stresses on market access or liquidity from external market and political events. Although we can make no assurances, we expect this to continue to be the case and believe there is only a remote possibility of a liquidity or funding crisis in the FHLBank System that could impair our ability to participate, on a cost-effective basis, in issuances of new debt, service outstanding debt, maintain adequate capitalization, or pay competitive dividends.
ANALYSIS OF FINANCIAL CONDITION
Mission Asset Activity
Mission Assets are the primary means by which we fulfill our mission with direct connections to members. We regularly monitor the balance sheet concentration of Mission Asset Activity. In 2015, our Primary Mission Asset ratio, as defined in "Regulatory and Legislative Risk" of the Executive Overview, was 79 percent. In assessing mission achievement, we also consider supplemental sources of Mission Asset Activity, the most significant of which is Letters of Credit issued to members.
Credit Services
Credit Activity and Advance Composition
The tables below show trends in Advance balances by major programs and in the notional amount of Letters of Credit.
|
| | | | | | | | | | | | | |
(Dollars in millions) | December 31, 2015 | | December 31, 2014 |
| Balance | | Percent(1) | | Balance | | Percent(1) |
Adjustable/Variable Rate Indexed: | | | | | | | |
LIBOR | $ | 47,312 |
| | 65 | % | | $ | 51,839 |
| | 74 | % |
Other | 617 |
| | 1 |
| | 515 |
| | 1 |
|
Total | 47,929 |
| | 66 |
| | 52,354 |
| | 75 |
|
Fixed-Rate: | | | | | | | |
REPO | 10,568 |
| | 14 |
| | 5,201 |
| | 7 |
|
Regular Fixed-Rate | 9,248 |
| | 13 |
| | 7,398 |
| | 11 |
|
Putable (2) | 1,046 |
| | 1 |
| | 1,617 |
| | 2 |
|
Amortizing/Mortgage Matched | 2,706 |
| | 4 |
| | 2,734 |
| | 4 |
|
Other | 1,745 |
| | 2 |
| | 995 |
| | 1 |
|
Total | 25,313 |
| | 34 |
| | 17,945 |
| | 25 |
|
Total Advances Principal | $ | 73,242 |
| | 100 | % | | $ | 70,299 |
| | 100 | % |
| | | | | | | |
Letters of Credit (notional) | $ | 19,555 |
| | | | $ | 17,780 |
| | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | December 31, 2015 | | September 30, 2015 | | June 30, 2015 | | March 31, 2015 |
| Balance | | Percent(1) | | Balance | | Percent(1) | | Balance | | Percent(1) | | Balance | | Percent(1) |
Adjustable/Variable-Rate Indexed: | | | | | | | | | | | | | | | |
LIBOR | $ | 47,312 |
| | 65 | % | | $ | 49,313 |
| | 64 | % | | $ | 48,242 |
| | 68 | % | | $ | 49,103 |
| | 73 | % |
Other | 617 |
| | 1 |
| | 565 |
| | 1 |
| | 597 |
| | 1 |
| | 407 |
| | 1 |
|
Total | 47,929 |
| | 66 |
| | 49,878 |
| | 65 |
| | 48,839 |
| | 69 |
| | 49,510 |
| | 74 |
|
Fixed-Rate: | | | | | | | | | | | | | | | |
REPO | 10,568 |
| | 14 |
| | 12,023 |
| | 16 |
| | 8,499 |
| | 12 |
| | 4,061 |
| | 6 |
|
Regular Fixed-Rate | 9,248 |
| | 13 |
| | 9,385 |
| | 12 |
| | 8,184 |
| | 11 |
| | 7,977 |
| | 12 |
|
Putable (2) | 1,046 |
| | 1 |
| | 1,557 |
| | 2 |
| | 1,570 |
| | 2 |
| | 1,580 |
| | 3 |
|
Amortizing/Mortgage Matched | 2,706 |
| | 4 |
| | 2,723 |
| | 3 |
| | 2,703 |
| | 4 |
| | 2,662 |
| | 4 |
|
Other | 1,745 |
| | 2 |
| | 1,637 |
| | 2 |
| | 1,223 |
| | 2 |
| | 825 |
| | 1 |
|
Total | 25,313 |
| | 34 |
| | 27,325 |
| | 35 |
| | 22,179 |
| | 31 |
| | 17,105 |
| | 26 |
|
Total Advances Principal | $ | 73,242 |
| | 100 | % | | $ | 77,203 |
| | 100 | % | | $ | 71,018 |
| | 100 | % | | $ | 66,615 |
| | 100 | % |
| | | | | | | | | | | | | | | |
Letters of Credit (notional) | $ | 19,555 |
| | | | $ | 17,594 |
| | | | $ | 19,006 |
| | | | $ | 16,905 |
| | |
| |
(1) | As a percentage of total Advances principal. |
| |
(2) | Excludes Putable Advances where the related put options have expired. Such Advances are classified based on their current terms. |
The modest growth and variability in Advance balances in 2015 was driven primarily by changes in variable-rate and short-term repurchase (REPO) Advances as the reduction in the need for variable-rate funding from our largest member was more than offset by REPO Advance borrowings. The increase in REPO Advance borrowings was primarily from new insurance company members. However, the borrowings from these new members are required to be paid off over the next year due to the Finance Agency's 2016 final rule on membership requirements, which is discussed further in the "Executive Overview."
Members increased their available lines in the Letters of Credit program by $1.8 billion (10 percent) in 2015. Letters of Credit balances averaged $17.7 billion during 2015, an increase of $2.5 billion (17 percent) from the average balance during 2014. We
normally earn fees on Letters of Credit based on the actual average amount of the Letters utilized, which generally is less than the notional amount issued.
Advance Usage
In addition to analyzing Advance balances by dollar trends and the number of members utilizing them, we monitor the degree to which members use Advances to fund their balance sheets. The following table shows the unweighted, average ratio of each member's Advance balance to its most-recently available figures for total assets.
|
| | | | | | | | | | | | | | |
| December 31, 2015 | | September 30, 2015 | | June 30, 2015 | | March 31, 2015 | | December 31, 2014 |
Average Advances-to-Assets for Members | | | | | | | | | |
Assets less than $1.0 billion (623 members) | 3.26 | % | | 3.20 | % | | 3.14 | % | | 3.06 | % | | 3.24 | % |
Assets over $1.0 billion (76 members) | 4.35 |
| | 4.75 |
| | 3.90 |
| | 3.08 |
| | 3.75 |
|
All members | 3.37 |
| | 3.35 |
| | 3.22 |
| | 3.06 |
| | 3.29 |
|
Advance usage ratios were slightly higher at year-end 2015 compared to year-end 2014, driven primarily by an increase in short-term borrowings and the inclusion of borrowings from several new insurance company members. Usage ratio trends for members with assets less than $1.0 billion were stable within a narrow range during the same time periods.
The following table shows Advance usage of members by charter type. |
| | | | | | | | | | | | | |
(Dollars in millions) | December 31, 2015 | | December 31, 2014 |
| Par Value of Advances | | Percent of Total Par Value of Advances | | Par Value of Advances | | Percent of Total Par Value of Advances |
Commercial Banks | $ | 53,479 |
| | 73 | % | | $ | 59,119 |
| | 84 | % |
Thrifts and Savings Banks | 5,220 |
| | 7 |
| | 4,067 |
| | 6 |
|
Credit Unions | 957 |
| | 1 |
| | 1,110 |
| | 1 |
|
Insurance Companies | 13,428 |
| | 19 |
| | 5,408 |
| | 8 |
|
Community Development Financial Institutions | 2 |
| | — |
| | 1 |
| | — |
|
Total member Advances | 73,086 |
| | 100 |
| | 69,705 |
| | 99 |
|
Former member borrowings | 156 |
| | — |
| | 594 |
| | 1 |
|
Total par value of Advances | $ | 73,242 |
| | 100 | % | | $ | 70,299 |
| | 100 | % |
The following tables present principal balances for the five members with the largest Advance borrowings.
|
| | | | | | | | | | | | | | | | |
(Dollars in millions) | | | | | | | | | | |
December 31, 2015 | | December 31, 2014 |
Name | | Par Value of Advances | | Percent of Total Par Value of Advances | | Name | | Par Value of Advances | | Percent of Total Par Value of Advances |
JPMorgan Chase Bank, N.A. | | $ | 35,350 |
| | 48 | % | | JPMorgan Chase Bank, N.A. | | $ | 41,300 |
| | 59 | % |
U.S. Bank, N.A. | | 10,086 |
| | 14 |
| | U.S. Bank, N.A. | | 8,338 |
| | 12 |
|
Capstead Insurance, LLC | | 2,875 |
| | 4 |
| | The Huntington National Bank | | 2,083 |
| | 3 |
|
Nationwide Life Insurance Company | | 2,279 |
| | 3 |
| | Nationwide Life Insurance Company | | 1,761 |
| | 3 |
|
Third Federal Savings and Loan Association | | 2,162 |
| | 3 |
| | Western-Southern Life Assurance Co | | 1,623 |
| | 2 |
|
Total of Top 5 | | $ | 52,752 |
| | 72 | % | | Total of Top 5 | | $ | 55,105 |
| | 79 | % |
Advance concentration ratios are influenced by, and generally similar to, concentration ratios of financial activity among our Fifth District financial institutions. We believe that having large financial institutions that actively use our Mission Asset Activity augments the value of membership to all members. For example, such activity improves our operating efficiency, increases our earnings and thereby contributions to housing and community investment programs, may enable us over time to obtain more favorable funding costs, and helps us maintain competitively priced Mission Asset Activity.
Mortgage Loans Held for Portfolio (Mortgage Purchase Program, or "MPP")
The table below shows principal purchases and reductions of loans in the MPP for each of the last two years.
|
| | | | | | | |
(In millions) | 2015 | | 2014 |
Balance, beginning of year | $ | 6,796 |
| | $ | 6,643 |
|
Principal purchases | 2,348 |
| | 1,226 |
|
Principal reductions | (1,386 | ) | | (1,073 | ) |
Balance, end of year | $ | 7,758 |
| | $ | 6,796 |
|
The increase in principal loan balances in 2015 resulted from higher amounts of loan purchases, particularly from our two largest sellers who drive program balances. In 2015, 99 members sold us mortgage loans, with the number of monthly sellers averaging 65. All loans acquired in 2015 were conventional loans.
The following tables show the percentage of principal balances from PFIs supplying five percent or more of total principal and the percentage of principal balances from all other PFIs. As shown in the table below, MPP activity is concentrated amongst a few members.
|
| | | | | | | | | | | | | | |
(Dollars in millions) | December 31, 2015 | | | December 31, 2014 |
| Principal | | % of Total | | | Principal | | % of Total |
Union Savings Bank | $ | 2,242 |
| | 29 | % | | Union Savings Bank | $ | 1,593 |
| | 23 | % |
PNC Bank, N.A. (1) | 839 |
| | 11 |
| | PNC Bank, N.A. (1) | 1,074 |
| | 16 |
|
Guardian Savings Bank FSB | 633 |
| | 8 |
| | Guardian Savings Bank FSB | 406 |
| | 6 |
|
All others | 4,044 |
| | 52 |
| | All others | 3,723 |
| | 55 |
|
Total | $ | 7,758 |
| | 100 | % | | Total | $ | 6,796 |
| | 100 | % |
(1)Former member.
We closely track the refinancing incentives of our mortgage assets (including loans in the MPP and mortgage-backed securities) because the option for homeowners to change their principal payments normally represents a large portion of our market risk exposure. MPP principal paydowns in all of 2015 equated to a 14 percent annual constant prepayment rate, up from the 12 percent rate for all of 2014, as the refinancing incentives for many of our mortgage assets increased.
The MPP's composition of balances by loan type, original final maturity, and weighted-average mortgage note rate did not change materially in 2015. The weighted average mortgage note rate fell from 4.36 percent at the end of 2014 to 4.14 percent at the end of 2015. This decline reflected a continuing trend of prepayments of higher rate mortgages and purchases of lower rate mortgages. MPP yields earned in 2015, after consideration of funding costs, continued to offer favorable returns relative to their market risk exposure.
Housing and Community Investment
In 2012,2015, we accrued $27$28 million of earnings for the Affordable Housing Program, which will be awarded to members in 2013.2016. This amount represents a $10 million (62 percent) increaseno change from 2011,2014 due to 2012's higher income.the similar amount of earnings in each year.
Including funds available in 20122015 from previous years, we had $25$27 million of funds available for the competitive Affordable Housing Program in 2012. Of that total, $19 million was2015, which we awarded to 6970 projects through twoa single competitive offerings.offering. In addition, $6we disbursed $9 million was awarded to 138171 members on behalf of more than 1,2001,869 homebuyers through the Welcome Home Program. This Program, is a set-aside of the Affordable Housing Program thatwhich assists homebuyers with down payments and closing costs. In total, almostjust over one-quarter of members received approval for funding under the two Affordable Housing Program. Programs.
Additionally, in 20122015 our Board authorizedcommitted $1 million to continue the Carol M. Peterson Housing Fund (CMP Fund), which helped 151 homeowners, and continued its commitment to the $5 million for the establishment of the Disaster Reconstruction Program (DRP).Program. Both are voluntary programs beyond the 10 percent of earnings that we are required by law to set aside for the Affordable Housing Program. In January 2013, the Board elected to reauthorize another $1 million for the CMP Fund and continued the current DRP.
Finally, ourOur activities to support affordable housing and economic development also include offering Advances through the Affordable Housing Program, Community Investment Program and Economic Development Program with below-market interest rates at
or near zero profit for us. At the end of 2012,2015, Advance balances relatedunder these programs totaled $449 million. AHP Advance balances have declined in recent years, reflecting our preference to the Affordable Housing Program declined slightly to $137 million due to higher demand for affordable housingdistribute AHP subsidy in the form of grants. Community Investment and Economic Development Program Advances declined to $334 million, which reflected the overall decline in demand for Advances.
Investments
We hold investments in order to provide liquidity, enhance earnings, and help manage market risk. We hold both shorter-term investments, which we refer to as "liquidity investments" because most of them serve to augment asset liquidity, and longer-term mortgage-backed securities. The table below presents the ending and average balances of our investments.the investment portfolio.
| | (In millions) | 2012 | | 2011 | 2015 | | 2014 |
| Ending Balance | | Average Balance | | Ending Balance | | Average Balance | Ending Balance | | Average Balance | | Ending Balance | | Average Balance |
Liquidity investments | $ | 7,176 |
| | $ | 13,943 |
| | $ | 10,737 |
| | $ | 18,411 |
| $ | 22,110 |
| | $ | 12,590 |
| | $ | 11,319 |
| | $ | 11,856 |
|
Mortgage-backed securities | 12,774 |
| | 11,375 |
| | 11,204 |
| | 11,100 |
| 15,246 |
| | 14,664 |
| | 14,688 |
| | 15,594 |
|
Other investments (1) | — |
| | 408 |
| | — |
| | 469 |
| — |
| | 85 |
| | — |
| | 98 |
|
Total investments | $ | 19,950 |
| | $ | 25,726 |
| | $ | 21,941 |
| | $ | 29,980 |
| $ | 37,356 |
| | $ | 27,339 |
| | $ | 26,007 |
| | $ | 27,548 |
|
| |
(1) | The average balance includes the rights or obligations to cash collateral, which are included in the fair value of derivative assets or derivative liabilities on the Statements of Condition at period end. |
We continued to maintain an ample amount of asset liquidity. Liquidity investment levels can vary significantly as based on liquidity needs, the availability of acceptable net spreads, the number of eligible counterparties that meet our unsecured credit risk criteria, and changes in the amount of Mission Assets. The declineIt is normal for liquidity investments to vary by up to several billion dollars on a daily basis.
Certain dealers, who play a large role in facilitating the distribution of our debt to investors, are being more reluctant to expand the amount of liquidity investments in 2012 corresponded to the growth in Advances. We continued to maintain an adequate amount of asset liquidity throughout the year under standard liquidity measures.
The investment balances at December 31, 2012our debt on their balance sheets over quarter- and 2011 exclude $16 million and $2,034 million, respectively, in funds held in deposits at the Federal Reserve, which are reflected in cash and due from banks on the Statements of Condition. The large balance in such deposits at year-end 2011 wasyear-ends primarily due to the extremely low yields available on short-term investments.perceived growing burden of their regulatory capital environment associated with Basel. Because of this, we conservatively carried a larger amount of liquidity leading up to year-end 2015 to satisfy any potential member borrowing needs during a period where accessing additional liquidity may be more challenging.
Our overarching strategy for mortgage-backed securities is to keep our holdings as close as possible to the regulatory maximum of three times regulatory capital, subject to the availability of securities that we believe provide favorableacceptable risk/return tradeoffs. The balance of mortgage-backed securities at December 31, 20122015 represented a 2.682.91 multiple of regulatory capital and consisted of $11.4$11.3 billion of securities issued by Fannie Mae or Freddie Mac (of which $1.91.7 billion were floating-rate securities) and $1.4, $0.9 billion of floating-rate securities issued by the National Credit Union Administration.Administration (NCUA), and $3.0 billion of securities issued by Ginnie Mae (a majority of which are fixed rate). The NCUA securities have coupons tied to one-month LIBOR with interest rate caps ranging from seven to eight percent. We held no private-label mortgage-backed securities at securities.December 31, 2012.
The table below shows principal purchases paydowns and salespaydowns of our mortgage-backed securities for each of the last two years.
| | (In millions) | Mortgage-backed Securities Principal | Mortgage-backed Securities Principal |
| 2012 | | 2011 | 2015 | | 2014 |
Balance, beginning of year | $ | 11,163 |
| | $ | 11,591 |
| $ | 14,715 |
| | $ | 16,087 |
|
Principal purchases | 5,335 |
| | 3,836 |
| 3,099 |
| | 722 |
|
Principal paydowns | (3,263 | ) | | (3,699 | ) | (2,611 | ) | | (2,094 | ) |
Principal sales | (478 | ) | | (565 | ) | |
Balance, end of year | $ | 12,757 |
| | $ | 11,163 |
| $ | 15,203 |
| | $ | 14,715 |
|
Principal paydowns in 20122015 equated to a 2416 percent annual constant prepayment rate, down slightlyup from the 28a 13 percent rate in 2011. The2014. Purchases have outpaced paydowns this year due to the availability of mortgage securities sales were composed of securities that had less than 15 percent of the original acquired principal outstanding at the time of the sale.offering attractive risk/return trade-offs.
Purchases during the year were concentrated in fixed-rate CMO securities, with purchase prices near par. This practice was driven by our assessment that these types of securities had a more favorable risk/return tradeoff compared to traditional pass-through mortgage-backed securities and floating-rate securities, especially in light of the relatively high premium prices of many fixed-rate pass-through securities.
Only 10 percent of total pass-through mortgage-backed securities had 30-year fixed-rate mortgages as collateral. Because approximately 75 percent of MPP loans have 30-year original terms, purchasing pass-throughs with shorter than 30-year original terms is one way we diversify mortgage assets to help manage market risk exposure.
Yields earned during 2012 on new mortgage-backed securities, relative to funding costs, continued to offer acceptable risk-adjusted returns.
Consolidated Obligations
The table below presents the ending and average balances of our participations in Consolidated Obligations.
| | (In millions) | 2012 | | 2011 | 2015 | | 2014 |
| Ending Balance | | Average Balance | | Ending Balance | | Average Balance | Ending Balance | | Average Balance | | Ending Balance | | Average Balance |
Discount Notes: | | | | | | | | | | | | | | |
Par | $ | 30,848 |
| | $ | 29,504 |
| | $ | 26,138 |
| | $ | 32,295 |
| $ | 77,225 |
| | $ | 52,714 |
| | $ | 41,238 |
| | $ | 35,996 |
|
Discount | (8 | ) | | (5 | ) | | (2 | ) | | (3 | ) | (26 | ) | | (8 | ) | | (6 | ) | | (4 | ) |
Total Discount Notes | 30,840 |
| | 29,499 |
| | 26,136 |
| | 32,292 |
| 77,199 |
| | 52,706 |
| | 41,232 |
| | 35,992 |
|
Bonds: | | | | | | | | | | | | | | |
Unswapped fixed-rate | 21,689 |
| | 18,680 |
| | 18,882 |
| | 20,123 |
| 26,962 |
| | 26,350 |
| | 26,124 |
| | 25,513 |
|
Unswapped adjustable-rate | 14,830 |
| | 3,086 |
| | 1,440 |
| | 681 |
| 4,065 |
| | 13,385 |
| | 27,610 |
| | 29,355 |
|
Swapped fixed-rate | 7,704 |
| | 9,197 |
| | 8,404 |
| | 7,904 |
| 4,010 |
| | 6,489 |
| | 5,390 |
| | 3,697 |
|
Total par Bonds | 44,223 |
| | 30,963 |
| | 28,726 |
| | 28,708 |
| 35,037 |
| | 46,224 |
| | 59,124 |
| | 58,565 |
|
Other items (1) | 123 |
| | 128 |
| | 129 |
| | 140 |
| 68 |
| | 90 |
| | 93 |
| | 116 |
|
Total Bonds | 44,346 |
| | 31,091 |
| | 28,855 |
| | 28,848 |
| 35,105 |
| | 46,314 |
| | 59,217 |
| | 58,681 |
|
Total Consolidated Obligations (2) | $ | 75,186 |
| | $ | 60,590 |
| | $ | 54,991 |
| | $ | 61,140 |
| $ | 112,304 |
| | $ | 99,020 |
| | $ | 100,449 |
| | $ | 94,673 |
|
| |
(1) | Includes unamortized premiums/discounts, fair value option valuation adjustments, hedging and other basis adjustments. |
| |
(2) | The 1211 FHLBanks have joint and several liability for the par amount of all of the Consolidated Obligations issued on their behalves. The par amount of the outstanding Consolidated Obligations for all of all 12the FHLBanks was (in millions) $687,902905,202 and $691,868847,175 at December 31, 20122015 and 2011,2014, respectively. |
The increase in the ending balancesOur preferred sources of unswappedfunding for LIBOR-indexed assets are Discount Notes, adjustable-rate Bonds, and short-termswapped fixed-rate Bonds because they give us the ability to effectively match the LIBOR rate reset periods embedded in these assets. During 2015, we shifted the composition of this funding more towards Discount Notes funded the growth in Advances. The increaseNotes. This change provided lower funding costs in the ending balance of unswapped fixed-rate Bonds reflected primarily growth in mortgage assets, while the decline in its average balance reflected actions during the year related to asset-liability management (ascurrent market environment and therefore improved earnings as discussed in the "Net Interest Income”Income" section of “Results"Results of Operations”).Operations." Discount Note balances also increased due to growth in Advance balances, most of which was in the short-term REPO program, as well as liquidity investments in order to ensure that member borrowing needs were met at year-end 2015.
Long-term Bonds normally have anThis change in funding composition increases risk to changes in spreads between cashflows received on LIBOR-indexed assets and interest cost at a spread above U.S. Treasury securities and below LIBOR.paid on Discount Notes, swapped Bonds, and adjustable-rate Bonds normally have interest costs below LIBOR. The levelNotes. We believe the increased usage of these spreads and their volatility in 2012 were comparable to historical ranges.Discount Note funding did not materially raise this risk because of the historically favorable relationship between the two rate indices.
The composition of unswapped fixed-rate Bonds, which typically have initial maturities greater than one year, was relatively stable in 2015 compared to 2014. The following table shows the allocation on December 31, 20122015 of unswapped fixed-rate Bonds according to their final remaining maturity and next call date (for callable Bonds). The allocations were similar compared to those of the last several years. We believe that the allocations of Bonds among these classifications provide effective mitigation of market risk exposure to both higher and lower mortgageinterest rates.
| | (In millions) | Year of Maturity | | Year of Next Call | Year of Maturity | | Year of Next Call |
| Callable | Noncallable | Amortizing | Total | | Callable | Callable | Noncallable | Amortizing | Total | | Callable |
Due in 1 year or less | $ | — |
| $ | 5,612 |
| $ | 5 |
| $ | 5,617 |
| | $ | 5,349 |
| $ | 30 |
| $ | 3,343 |
| $ | 1 |
| $ | 3,374 |
| | $ | 6,229 |
|
Due after 1 year through 2 years | — |
| 2,477 |
| 1 |
| 2,478 |
| | 200 |
| 410 |
| 3,628 |
| — |
| 4,038 |
| | 240 |
|
Due after 2 years through 3 years | 425 |
| 1,791 |
| 48 |
| 2,264 |
| | 15 |
| 1,270 |
| 3,205 |
| — |
| 4,475 |
| | — |
|
Due after 3 years through 4 years | 690 |
| 1,705 |
| 2 |
| 2,397 |
| | — |
| 995 |
| 3,020 |
| — |
| 4,015 |
| | — |
|
Due after 4 years through 5 years | 722 |
| 1,857 |
| — |
| 2,579 |
| | — |
| 553 |
| 2,383 |
| — |
| 2,936 |
| | — |
|
Thereafter | 3,727 |
| 2,627 |
| — |
| 6,354 |
| | — |
| 3,211 |
| 4,913 |
| — |
| 8,124 |
| | — |
|
Total | $ | 5,564 |
| $ | 16,069 |
| $ | 56 |
| $ | 21,689 |
| | $ | 5,564 |
| $ | 6,469 |
| $ | 20,492 |
| $ | 1 |
| $ | 26,962 |
| | $ | 6,469 |
|
Deposits
Members'Total deposits with us are normally a relatively minor source of low-cost funding. Total interest bearing deposits at December 31, 20122015 were $1.20.8 billion, an increase of $0.1 billion (nine10 percent) from year-end 20112014. The average balance of total interest bearing deposits in 20122015 was $1.2$0.8 billion,, a decrease of sixone percent from the average balance induring 20112014.
Derivatives Hedging Activity and Liquidity
Our use of and accounting for derivatives is discussed in the "Effect of the Use of Derivatives on Net Interest Income" section in "Results of Operations." Liquidity is discussed in the "Liquidity Risk" section in “Quantitative and Qualitative Disclosures About Risk Management.” We did not change our strategy of using derivatives solely to manage market risk exposure in 2012.
Capital Resources
The GLB Act and Finance Agency Regulationsregulations specify limits on how much we can leverage capital by requiring that we maintain, at all times, at least a four percent regulatory capital-to-assets ratio. A lower ratio indicates more leverage. If financial leverage increases too much, or becomes too close to the regulatory limit, we have discretionary ability within our Capital Plan to enact changes to ensure capitalization remains strong and in compliance with regulatory limits.
We have always complied with our regulatory capital requirements. The following tables present capital amounts and capital-to-assets ratios, on both a GAAP and regulatory basis.
| | GAAP and Regulatory Capital | Year Ended December 31, | |
| 2012 | | 2011 | Year Ended December 31, |
(In millions) | Period End | | Average | | Period End | | Average | 2015 | | 2014 |
| | Period End | | Average | | Period End | | Average |
GAAP and Regulatory Capital | | | | | | | | |
GAAP Capital Stock | $ | 4,010 |
| | $ | 3,297 |
| | $ | 3,126 |
| | $ | 3,109 |
| $ | 4,429 |
| | $ | 4,344 |
| | $ | 4,267 |
| | $ | 4,298 |
|
Mandatorily Redeemable Capital Stock | 211 |
| | 252 |
| | 275 |
| | 327 |
| 38 |
| | 61 |
| | 63 |
| | 105 |
|
Regulatory Capital Stock | 4,221 |
| | 3,549 |
| | 3,401 |
| | 3,436 |
| 4,467 |
| | 4,405 |
| | 4,330 |
| | 4,403 |
|
Retained Earnings | 538 |
| | 501 |
| | 444 |
| | 455 |
| 765 |
| | 745 |
| | 689 |
| | 666 |
|
Regulatory Capital | $ | 4,759 |
| | $ | 4,050 |
| | $ | 3,845 |
| | $ | 3,891 |
| $ | 5,232 |
| | $ | 5,150 |
| | $ | 5,019 |
| | $ | 5,069 |
|
| | | | 2015 | | 2014 |
| | | | | | | | | | | | Period End | | Average | | Period End | | Average |
GAAP and Regulatory Capital-to-Assets Ratio | | | | | | | | | | |
| 2012 | | 2011 | |
| Period End | | Average | | Period End | | Average | |
GAAP | 5.56 | % | | 5.68 | % | | 5.89 | % | | 5.29 | % | 4.36 | % | | 4.81 | % | | 4.63 | % | | 4.90 | % |
Regulatory | 5.84 |
| | 6.07 |
| | 6.37 |
| | 5.78 |
| 4.40 |
| | 4.88 |
| | 4.71 |
| | 5.01 |
|
The following table presents the sources of change in our regulatory capital stock balance in 2011 and 2012.
|
| | | | | | | |
(In millions) | 2012 | | 2011 |
Regulatory stock balance at beginning of year | $ | 3,401 |
| | $ | 3,449 |
|
Stock purchases: | | | |
Membership stock | 63 |
| | 37 |
|
Activity stock | 862 |
| | 11 |
|
Stock repurchases: | | | |
Member redemptions | (40 | ) | | (22 | ) |
Withdrawals | (65 | ) | | (74 | ) |
Regulatory stock balance at the end of the year | $ | 4,221 |
| | $ | 3,401 |
|
Both the GAAP and regulatory capital-to-assets ratios were well above the regulatory required minimum of four percent.
We consider the regulatory ratio to be a better representation of financial leverage than the GAAP ratio because, although the GAAP ratio treats mandatorily redeemable capital stock as a liability, it protects investors in our debt in the same way thatmanner as GAAP capital stock and retained earnings do. Financial leverage is defined asearnings. Both GAAP and regulatory capital-to-assets ratios remained above the inverseregulatory required minimum of capitalfour percent. The reduction in these ratios and therefore increases as capital ratios decline.
Our capital base increased substantially in 2012 due mostly to required stock purchases. The $820 million increase in regulatory capital stock (net of $105 million of redemptions and repurchases) from year-end 2011 to at December 31, 20122015 was a temporary result of the elevated liquidity we carried at that time due mostly to stock purchases (stock required to support Mission Assets) from two large, national financial institutions that became members in 2012, one of which had significant Advance borrowings resulting in $851 million growth in activity stock.
the reasons discussed above.
The increasefollowing table presents the sources of change in financial leverage from year-end 2011 to year-end 2012 (as represented by a lower regulatory capital-to-assets ratio) resulted from the Advance growth, partially offset by more capital stock balances in 2015 and a reduction in short-term investment balances.2014.
|
| | | | | | | |
(In millions) | 2015 | | 2014 |
Regulatory stock balance at beginning of year | $ | 4,330 |
| | $ | 4,814 |
|
Stock purchases: | | | |
Membership stock | 13 |
| | 11 |
|
Activity stock | 178 |
| | 73 |
|
Stock repurchases/redemptions: | | | |
Redemption of member excess | (1 | ) | | (1 | ) |
Repurchase of member excess | — |
| | (498 | ) |
Withdrawals | (53 | ) | | (69 | ) |
Regulatory stock balance at the end of the year | $ | 4,467 |
| | $ | 4,330 |
|
The table below shows the amount of excess capital stock.
| | (In millions) | December 31, 2012 | | December 31, 2011 | December 31, 2015 | | December 31, 2014 |
Excess capital stock (Capital Plan definition) | $ | 1,071 |
| | $ | 1,321 |
| $ | 461 |
| | $ | 504 |
|
Cooperative utilization of capital stock | $ | 385 |
| | $ | 197 |
| $ | 521 |
| | $ | 441 |
|
Mission Asset Activity capitalized with cooperative capital stock | $ | 9,633 |
| | $ | 4,917 |
| $ | 13,034 |
| | $ | 11,020 |
|
The amountA portion of excess capital stock declined by $250 million in 2012 dueis excess, meaning it is not required as a condition to the Advance growth. The substantial amount of excessbeing a member and not required to capitalize Mission Asset Activity. Excess capital stock (over $1.0 billion) provides a base of capital to manage financial leverage at prudent levels, augmentaugments loss protections for bondholders, and capitalizecapitalizes a portion of potential growth in new Mission Assets.
A Finance Agency Regulation prohibits us from paying stock dividends if the The amount of our regulatory excess capital stock, (asas defined by the Finance Agency) exceeds one percent of our total assets on a dividend payment date. Since the end of 2008, this regulatory threshold has been exceeded and, therefore, we have been required to pay cash dividends.
At Capital Plan, was $461 million at December 31, 2012, retained earnings were comprised2015, a decrease of $479 million unrestricted (an increase of $47$43 million from year-end 2011) and $59 million restricted (an increase of $47 million), which are not permitted to be distributed as dividends. We believe that the amount of retained earnings is sufficient to protect against impairment risk of capital stock and to provide the opportunity to stabilize dividends if earnings experience exceptional stress. Further discussion is in the "Capital Adequacy" section of "Quantitative and Qualitative Disclosures About Risk Management."2014.
Membership and Stockholders
In 2012,2015, we added 1521 new member stockholders and lost 14,27 members, ending the year at 742. The new member stockholders were comprised of eight credit unions, three insurance companies, three commercial banks,699. Most members lost merged with other Fifth District members and, one community development financial institution. With regard totherefore, the 14 institutions that are no longer members, 10 merged into other members in our district, three were closed by the Tennessee Department of Financial Institutions, and one member's charter was terminated by its parent company. The impact on our earnings and Mission Asset Activity fromwas small. Of the members lost, was negligible. We estimate there are approximately 50 eligible17 merged with other members, eight merged out of the District, one merged with a District non-member, institutions with assetsand one relocated its charter out of at least $100 million remaining in our district. District.
In 2012,2015, there were no material changes in the allocation of membership by state, charter type, or asset size except for two large, national financial institutions that became members during the year.size. At the end of 2012,2015, the composition of membership by state was Ohio with 326,304, Tennessee with 199, and Kentucky with 217,196.
The Finance Agency issued a final rule on FHLBank membership in January 2016. This rule imposes new membership requirements and Tennessee with 199.eliminates all currently eligible captive insurance companies from FHLBank membership, as discussed in "Executive Overview." The ruling also requires that these entities, which represented 15 members totaling $6.6 billion in Advances at December 31, 2015, pay off existing Advances within one year and cease any new borrowings. The subsequent loss of this membership segment will not significantly affect our financial condition or results of operations.
The following table provides the number of member stockholders by charter type.
| | | December 31, | December 31, |
| 2012 | | 2011 | 2015 | | 2014 |
Commercial Banks | 469 |
| | 470 |
| 418 |
| | 442 |
|
Thrifts and Savings Banks | 113 |
| | 119 |
| 99 |
| | 101 |
|
Credit Unions | 121 |
| | 117 |
| 124 |
| | 120 |
|
Insurance Companies | 35 |
| | 32 |
| 54 |
| | 38 |
|
Community Development Financial Institutions | 4 |
| | 3 |
| 4 |
| | 4 |
|
Total | 742 |
| | 741 |
| 699 |
| | 705 |
|
The following table provides the ownership of capital stock by charter type.
| | (In millions) | December 31, | December 31, |
| 2012 | | 2011 | 2015 | | 2014 |
Commercial Banks | $ | 3,197 |
| | $ | 2,310 |
| $ | 3,425 |
| | $ | 3,441 |
|
Thrifts and Savings Banks | 418 |
| | 450 |
| 378 |
| | 376 |
|
Credit Unions | 116 |
| | 107 |
| 128 |
| | 121 |
|
Insurance Companies | 279 |
| | 259 |
| 497 |
| | 328 |
|
Community Development Financial Institutions | | 1 |
| | 1 |
|
Total GAAP Capital Stock | 4,010 |
| | 3,126 |
| 4,429 |
| | 4,267 |
|
Mandatorily Redeemable Capital Stock | 211 |
| | 275 |
| 38 |
| | 63 |
|
Total Regulatory Capital Stock | $ | 4,221 |
| | $ | 3,401 |
| $ | 4,467 |
| | $ | 4,330 |
|
Credit union members hold relatively less stock than their membership proportion because they tend to be smaller than the average member and borrow less. Insurance company members hold relatively more stock than their membership proportion because they tend to be larger than the average member and borrow more.
The following table provides a summary of member stockholders by asset size.
| | | December 31, | December 31, |
Member Asset Size (1) | 2012 | | 2011 | 2015 | | 2014 |
Up to $100 million | 204 |
| | 210 |
| 177 |
| | 182 |
|
> $100 up to $500 million | 403 |
| | 405 |
| 370 |
| | 381 |
|
> $500 million up to $1 billion | 71 |
| | 64 |
| 76 |
| | 76 |
|
> $1 billion | 64 |
| | 62 |
| 76 |
| | 66 |
|
Total Member Stockholders | 742 |
| | 741 |
| 699 |
| | 705 |
|
| |
(1) | The December 31 membership composition reflects members' assets as of September 30.the most-recently available figures for total assets. |
Most members are smallsmaller community financial institutions, with 8278 percent having assets up to $500 million. As noted elsewhere, having larger members is important to help achieve our mission objectives, including providing valuable products and services to all members.
RESULTS OF OPERATIONS
Components of Earnings and Return on Equity
The following table is a summary income statement for each of the last three years. Each ROE percentage is computed by dividing income or expense for the category by the average amount of stockholders' equity for the period. Factors determining the level of, and changes in, net income and ROE are explained in the remainder of this section.
|
| | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | 2012 | | 2011 | | 2010 |
| Amount | | ROE (a) | | Amount | | ROE (a) | | Amount | | ROE (a) |
Net interest income | $ | 308 |
| | 8.14 | % | | $ | 249 |
| | 7.00 | % | | $ | 275 |
| | 7.82 | % |
Provision for credit losses | (1 | ) | | (0.04 | ) | | (12 | ) | | (0.35 | ) | | (13 | ) | | (0.39 | ) |
Net interest income after provision for credit losses | 307 |
| | 8.10 |
| | 237 |
| | 6.65 |
| | 262 |
| | 7.43 |
|
Net gains (losses) on derivatives and hedging activities | 9 |
| | 0.23 |
| | (2 | ) | | (0.05 | ) | | 8 |
| | 0.22 |
|
Other non-interest income (loss) | 4 |
| | 0.12 |
| | (3 | ) | | (0.09 | ) | | 12 |
| | 0.34 |
|
Total non-interest income (loss) | 13 |
| | 0.35 |
| | (5 | ) | | (0.14 | ) | | 20 |
| | 0.56 |
|
Total revenue | 320 |
| | 8.45 |
| | 232 |
| | 6.51 |
| | 282 |
| | 7.99 |
|
Total other expense | (58 | ) | | (1.53 | ) | | (57 | ) | | (1.59 | ) | | (56 | ) | | (1.58 | ) |
Assessments | (27 | ) | | (0.72 | ) | | (37 | ) | | (1.03 | ) | | (62 | ) | | (1.74 | ) |
Net income | $ | 235 |
| | 6.20 | % | | $ | 138 |
| | 3.89 | % | | $ | 164 |
| | 4.67 | % |
|
| | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | 2015 | | 2014 | | 2013 |
| Amount | | ROE (1) | | Amount | | ROE (1) | | Amount | | ROE (1) |
Net interest income | $ | 322 |
| | 6.35 | % | | $ | 317 |
| | 6.40 | % | | $ | 328 |
| | 6.40 | % |
Reversal for credit losses | — |
| | — |
| | — |
| | (0.01 | ) | | (7 | ) | | (0.15 | ) |
Net interest income after reversal for credit losses | 322 |
| | 6.35 |
| | 317 |
| | 6.41 |
| | 335 |
| | 6.55 |
|
Net gains on derivatives and hedging activities | 13 |
| | 0.26 |
| | 7 |
| | 0.13 |
| | 8 |
| | 0.16 |
|
Other non-interest income | 17 |
| | 0.33 |
| | 16 |
| | 0.32 |
| | 12 |
| | 0.23 |
|
Total non-interest income | 30 |
| | 0.59 |
| | 23 |
| | 0.45 |
| | 20 |
| | 0.39 |
|
Total revenue | 352 |
| | 6.94 |
| | 340 |
| | 6.86 |
| | 355 |
| | 6.94 |
|
Total non-interest expense | 75 |
| | 1.49 |
| | 68 |
| | 1.38 |
| | 64 |
| | 1.26 |
|
Assessments | 28 |
| | 0.55 |
| | 28 |
| | 0.55 |
| | 30 |
| | 0.58 |
|
Net income | $ | 249 |
| | 4.90 | % | | $ | 244 |
| | 4.93 | % | | $ | 261 |
| | 5.10 | % |
| |
(a)(1) | The ROE amounts have been computed using dollars in thousands. Accordingly, recalculations based upon the disclosed amounts (millions) in this table may produce nominally different results. |
The $97 million increaseNet income was steady in net income2015 compared to 2014, although there was variation in individual factors that determine earnings. Profitability remained competitive as ROE continued to significantly exceed our benchmarks relative to short-term interest rates. Details on the individual factors contributing to the level and 2.31 percentage point increasechanges in ROEprofitability are explained in 2012 versus 2011 resulted mostly from the following favorable factors (in order of magnitude):
| |
▪ | satisfaction of the FHLBank System REFCORP funding obligation in the second half of 2011, which had been assessed against earnings at an annual rate of approximately 20 percent; |
| |
▪ | the continuation from 2011 of management's asset-liability actions to respond to the low interest rate environment; |
| |
▪ | higher prepayment fees on Advances; |
| |
▪ | realized gains on sales of certain mortgage-backed securities; |
| |
▪ | growth in the balances of Mission Asset Activity, especially Advances; |
| |
▪ | reduced provision for credit losses; |
| |
▪ | an increase in unrealized market value gains on derivatives and hedging activities; and |
| |
▪ | decrease in net amortization expense. |
Profitability in 2011 was below that of 2010 due primarily to several effects from the reductions in long-term interest rates and lower balances of Mission Asset Activity.
sections below.
Net Interest Income
The largest component of net income has historically beenis net interest income. We manageOur principal goal in managing net interest income withis to balance trade-offs between maintaining a view to managing tradeoffs betweenmoderate market risk profile and return.ensuring profitability remains competitive. Effective risk/return management requires us to focus principally on the relationships among assets and liabilities that affect net interest income, rather than individual balance sheet and income statement accounts in isolation.
Our ROE normally is lower than that of many other financial institutions because of the cooperative wholesale business model that results in narrow spreads to funding costs on our primary assets (Advances), the moderate overall risk profile, and the management of our balance sheet that results instrategic objective to have a positive correlation of dividends to short-term interest rates.
Components of Net Interest Income
We generate net interest income from the following two components:
| |
▪ | Net interest rate spread. This component equals the balance of total earning assets multiplied by the difference between the book yield on interest-earning assets and the book cost of interest-bearing liabilities. It is composed of net (amortization)/accretion, prepayment fees on Advances, and all other earnings from interest-earning assets net of funding costs. The latter is the largest component and represents the coupon yields of interest-earning assets net of the coupon costs of Consolidated Obligations and deposits. |
| |
▪ | Earnings from funding assets with capital (“earnings from capital”). Because of our relatively low net interest rate spread compared to other financial institutions, we have historically derived a substantial proportion of net interest income from deploying interest-free capital in interest-earning assets. We deploy much of the capital in short-term and adjustable-rate assets in order to help ensure that ROE moves in the same direction as short-term interest rates and to help control market risk exposure. |
The following table shows the major components of net interest income for each of the last three years.income. Reasons for the variance in net interest income between the periods are discussed below.
| | (Dollars in millions) | 2012 | | 2011 | | 2010 | 2015 | | 2014 | | 2013 |
| Amount | Pct of Earning Assets | | Amount | Pct of Earning Assets | | Amount | Pct of Earning Assets | Amount | | % of Earning Assets | | Amount | | % of Earning Assets | | Amount | | % of Earning Assets |
Components of net interest rate spread: | | | | | | | | | |
Other components of net interest rate spread | $ | 293 |
| 0.44 | % | | $ | 247 |
| 0.37 | % | | $ | 230 |
| 0.33 | % | |
Components of net interest rate spread: | | | | | | | | | | | | |
Net (amortization)/accretion (1) (2) | (49 | ) | (0.07 | ) | | (56 | ) | (0.09 | ) | | (32 | ) | (0.04 | ) | $ | (30 | ) | | (0.03 | )% | | $ | (11 | ) | | (0.01 | )% | | $ | (1 | ) | | — | % |
Prepayment fees on Advances, net (2) | 20 |
| 0.03 |
| | 6 |
| 0.01 |
| | 8 |
| 0.01 |
| 3 |
| | — |
| | 4 |
| | — |
| | 2 |
| | — |
|
Other components of net interest rate spread | | 314 |
| | 0.30 |
| | 291 |
| | 0.29 |
| | 290 |
| | 0.31 |
|
Total net interest rate spread | 264 |
| 0.40 |
| | 197 |
| 0.29 |
| | 206 |
| 0.30 |
| 287 |
| | 0.27 |
| | 284 |
| | 0.28 |
| | 291 |
| | 0.31 |
|
Earnings from funding assets with interest-free capital | 44 |
| 0.06 |
| | 52 |
| 0.08 |
| | 69 |
| 0.10 |
| 35 |
| | 0.04 |
| | 33 |
| | 0.03 |
| | 37 |
| | 0.04 |
|
Total net interest income/net interest margin (3) | $ | 308 |
| 0.46 | % | | $ | 249 |
| 0.37 | % | | $ | 275 |
| 0.40 | % | $ | 322 |
| | 0.31 | % | | $ | 317 |
| | 0.31 | % | | $ | 328 |
| | 0.35 | % |
| |
(1) | Includes (amortization)/accretion of premiums/discounts on mortgage assets and Consolidated Obligations and deferred transaction costs (concession fees) for Consolidated Obligations. |
| |
(2) | These components of net interest rate spread have been segregated here to display their relative impact. |
| |
(3) | Net interest margin is net interest income before (reversal)/provision for credit losses as a percentage of average total interest earning assets. |
Earnings From Capital. The earnings from funding assets with interest-free capital has become a smaller proportion of net interest income due to the low interest rate environment. Although long-term market interest rates continued on downward trends in 2012, the reduction in overall average rates of assets and liabilities was tempered because short-term rates remained relatively constant, and therefore, the earnings from capital fell $8 million in 2012 after declining $17 million in 2011 and by larger amounts in the three years prior to 2011. See "Conditions in the Economy and Financial Markets" and the "Average Balance Sheet and Rates" table below for information on interest rates.
Net Amortization/Accretion.Accretion: Net amortization/accretion (generally referred to as "amortization") includes monthly recognition of premiums and discounts paid on purchases of mortgage assets, andas well as premiums, discounts and concessions paid on most Consolidated Obligations. Periodic amortization adjustments do not necessarily indicate a trend in economic return over the entire life of mortgage assets, although amortization over the entire livesit is one component of lifetime economic returns.
At December 31, 2012, theAmortization increased in 2015, compared to 2014, because net premium balance of mortgage assets totaled $199 million compared to $161 million at the end of 2011. In 2012, the MPP net premium balance increased from $120 million to $182 million while the mortgage-backed securities portfolio net premium balance decreased from $41 million to $17 million. The growth in net premium balance in the MPP portfolio was partially offset in 2012 by the purchase of mortgage-backed securities at prices near par or in some cases at slight discounts.
Premium prices on MPP loans continued to be elevated in 2012 as they have been in the last several years. Conditions prevailing in the mortgage markets limited the widespread availabilitybalances grew and risk-return attractiveness of loans in the MPP that were priced close to par or at discounts. In addition, a change we made in early 2011 to the MPP's credit enhancement structure (described further in the "Credit Risk" section of "Quantitative and Qualitative Disclosures About Risk Management") resulted
in increased premium balances on new loans (with the benefit of reducing overall expense for the same level of credit risk protection).
As it has been in other periods in the last several years, net amortization expense in 2012 was substantial (as reflected in the table above) and volatile across quarters and months. For both 2012 and 2011 net amortization was at relatively "normal" levels consistent with the amount of book premiums. Although the premium balance increased in 2012, there was a $7 million reduction in net amortization due to:
| |
▪ | a comparatively smaller decline in long-term LIBOR and primary mortgagelong-term interest rates in 2012; and, |
| |
▪ | ongoing enhancements in 2012 to our modeling estimates of future mortgage rates and prepayment speeds derived from our market risk and prepayment models. |
The modeling enhancements are discussed in the “Market Risk” section of “Quantitative and Qualitative Disclosures About Risk Management.” Regarding mortgage amortization, the model enhancements resulted in both one-time favorable adjustments to mortgage amortization and reduced volatility of future amortization.
Despite the large amount of, and volatility in, recent periodic net amortization, we believe that the economic profitability of current and new premium mortgage assets has offered and will continue to offer acceptable compensation for the risks of unprofitable or volatile returns that could occur under extremely unfavorable stressed interest rate scenarios.fluctuate around very low levels. Amortization was lower than normal in 2013 due to a decline in actual and projected prepayment speeds in response to higher mortgage rates.
Prepayment Fees on Advances.Advances: Fees for members' early repayment of certain Advances are designed to make us economically indifferent to whether members hold Advances to maturity or repay them before maturity. Although Advance prepayment fees can be and have been significant in the past, have been, significant. Prepayment fees totaled $20 millionthey were minimal in 2012, $13 million2015, 2014 and 2013, reflecting a low amount of which occurred in the fourth quarter. The 2012 fees were $14 million higher compared to those in 2011.member prepayments of Advances.
Other Components of Net Interest Rate Spread.Spread: Excluding net amortization and prepayment fees, the total other components of net interest rate spread rose $46increased $23 million (18 percent) in 20122015 compared to 2011 and $172014, while it increased only $1 million (seven percent) in 20112014 compared to 2010.2013. The following factors, discussed belowpresented in estimated approximate order of impact from largest to smallest, were responsibleaccounted for the changes in other components of net interest rate spread due to other components.spread.
20122015 Versus 2011
2014
| |
▪ | Asset-liability management-LIBOR Asset funding-Favorable: Management strategies and actions relatedNet interest income increased by an estimated $18 million because we transitioned the funding of LIBOR-indexed assets from adjustable-rate LIBOR Bonds more towards lower-cost Discount Notes in response to asset-liability management and market risk exposure improved earnings by lowering our portfolio funding costs, as follows:a reduction in the cost of Discount Notes compared to the cost of adjustable-rate LIBOR Bonds.
|
| |
1)▪ | In MPP growth-2012, we called $7.6 billionFavorable: The average balance of unswapped Bonds (most ofmortgage loans held for portfolio increased $0.8 billion, which funded mortgage assets) before their final maturities and replaced them with new Consolidated Obligations at substantially lower rates than the Bonds called. Additionally, $3.5 billion of unswapped Bonds were called in the second half of 2011, which benefited earnings for all of 2012.increased net interest income by an estimated $11 million.
|
A total of $5.9 billion in mortgage assets were paid down in 2012. We replaced these principal paydowns with new mortgage assets at lower rates, reducing interest income. However, the net effect of replacing Bonds called and mortgages paid down was to increase the net interest spread. This is because the amount of Bond calls exceeded the amount of mortgage paydowns, and because, the book rates of the unswapped Bonds fell more than the book rates on the mortgage assets.
| |
2) | Market risk exposure to higher interest rates increased in the third quarter of 2012, primarily as a result of our actions to lower the average maturity of remaining long-term Bonds and to fund more mortgage assets with short-term debt by replacing a portion of the called Bonds with short-term Discount Notes. We returned average short funding levels and bond maturities in the fourth quarter to levels more consistent with historical levels. |
| |
3) | We normally fund a substantial amount of LIBOR-indexed assets (mostly Advances) with Discount Notes. In 2012, the average portfolio market spread between LIBOR and Discount Notes widened slightly compared to 2011. |
We estimate that the overall impact of asset-liability management increased interest income by $19-$28 million and ROE by 0.45-0.67 percentage points.
| |
▪ | Advance growth-Favorable: Advance principal balances grew significantly during 2012, althoughThe $3.8 billion growth in average Advance balances increased by only $3.5 billion. We estimate the direct impact onimproved net interest income from the average Advance growth was approximatelyby an estimated $8 million. Also, in accordance with the Capital Plan, the Advance growth |
required members to make new capital stock purchases (net of redemptions and repurchases of other stock), which we leveraged with mortgage-backed securities. This resulted in a secondary effect on net interest from the Advance growth, totaling an estimated $4 million. Although the total $12 million earnings increase from Advance growth was similar to the effect of asset-liability management, the total impact on ROE -- 0.08 percentage points -- from Advance growth was less than the effect of asset-liability management because of the additional stock associated with the Advance growth.
| |
▪ | Trading securities-Fixed-rate asset funding-Favorable: Unfavorable:In 2012, we held a portion A reduction in the amount of our investment portfolio in short-term trading securities (including instruments of the U.S. Treasury and government-sponsored enterprises) in order to enhance asset liquidity and manage counterparty credit risk. Many of the trading securities were purchased with above-market coupon rates, which resulted indebt funding longer-term fixed-rate mortgages lowered net interest income by an estimated $7 million increasemillion.
|
| |
▪ | Lower MPP spread-Unfavorable: The continued paydown of higher-yielding mortgage assets and low-cost debt led to a decline in the spread earned on mortgage loans, decreasing net interest income in 2012 compared to 2011. However, this was offset by earnings reductions in other non-interest income (specifically, net unrealized market value losses on trading securities), with the resulting combined earnings from the trading securities reflecting at-market rates. See “Non-Interest Income and Non-Interest Expense” below for a discussion of the net losses on trading securities.an estimated $6 million. |
| |
▪ | Lower balances and tighter spreads on the short-term investment portfolio-mortgage-backed securities-Unfavorable: Average balancesThe average balance of the mortgage-backed securities portfolio declined $0.9 billion, which decreased net interest income by an estimated $5 million. |
| |
▪ | Other factors-Favorable: Various other factors, including, but not limited to, a decrease in the amount of mandatorily redeemable capital stock and higher spreads earned on mortgage-backed securities, increased net interest income by an estimated $4 million. |
2014 Versus 2013
| |
▪ | Asset-liability management-Unfavorable: Management strategies and actions related to reducing our market risk exposure, along with changes in the market rate environment, lowered earnings on a net basis of $29 million for short-term investmentsthe following reasons: |
| |
1) | Net interest income decreased $3.5 billion$18 million due to a decline in 2012, whilemortgage asset spreads tightened in 2012 due toresulting from management actions to extendreduce market risk exposure by extending debt maturities on short-term fundingand from continued run-off of higher yielding mortgages. |
| |
2) | Net interest income declined $11 million primarily because the cost of Discount Notes rose relative to enhance liquidity. We estimateLIBOR. Secondarily, we extended maturities of Discount Notes in order to reduce the earnings reduction from changesburden of replacing Discount Notes as frequently. |
| |
▪ | Advance growth-Favorable: The $5.1 billion growth in the short-term investment portfolio was approximately $5-8average Advance balances at higher spreads improved net interest income by an estimated $26 million. |
| |
▪ | Additional factors-Favorable: Other factors included a modestly higher average MPP balance, modestly wider spreadsHigher balances on new MPP purchases, and lower average balances of mandatorily redeemable stock (which lowers interest expense).
|
2011 Versus 2010
| |
▪ | Asset-liability management-Favorable: In the last six months of 2010 and all of 2011, reductions in intermediate- and long-term interest rates enabled us to call $10.6 billion of unswapped Bonds before their final maturities and replace them with new Consolidated Obligations, most at substantially lower rates than the Bonds called. Most of the Bonds called funded mortgage assets. The Bonds called in the second half of 2010 benefited our earnings for all of 2011.
|
| |
▪ | Tradingmortgage-backed securities-Favorable: As indicated in the 2012 versus 2011 analysis, in 2011 we began holding a large amount of investments in short-term trading securities purchased with above-market coupon rates. This resulted in an estimated $19 million increase in net interest income in 2011.
|
| |
▪ | Decrease in mortgage asset balances-Unfavorable:The average principal balance on MPP loans and mortgage-backed securities decreased $1.3 billion. These assets normally earn wider spreads than most of our other assets.
|
| |
▪ | Narrower net spreads on new mortgage assets-Unfavorable: In 2011, we purchased $5.8 billion of new mortgage assets. Net spreads relative to funding costs on the purchased assets were on average narrower than the net spreads that had been earned on the mortgages that paid down.
|
| |
▪ | Wider portfolio spreads on LIBOR-indexed assets-Favorable: The average spread between LIBOR and Discount Notes widened approximately eight basis pointsbalance of the mortgage-backed security portfolio increased $1.3 billion compared to 2013's average, which increased net interest income approximately $10by an estimated $5 million.
|
Earnings from Capital: The earnings from funding assets with interest-free capital did not change significantly in 2015 compared to 2014 and 2013 due to the continued low interest rate environment.
Average Balance Sheet and Rates
The following table provides average ratesbalances and average balancesrates for major balance sheet accounts, which determine the changes in the net interest rate spread. All data include the impact of interest rate swaps, which we allocate to each asset and liability category according to their designated hedging relationship. The changes in the net interest rate spread and net interest margin in 20122015 versus 20112014 and in 20112014 versus 20102013 occurred mostly from the net impact of the factors discussed above in “Components of Net Interest Income.”
| | (Dollars in millions) | 2012 | | 2011 | | 2010 | 2015 | | 2014 | | 2013 |
| Average Balance | | Interest | | Average Rate (1) | | Average Balance | | Interest | | Average Rate (1) | | Average Balance | | Interest | | Average Rate (1) | Average Balance | | Interest | | Average Rate (1) | | Average Balance | | Interest | | Average Rate (1) | | Average Balance | | Interest | | Average Rate (1) |
Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Advances | $ | 32,781 |
| | $ | 261 |
| | 0.80 | % | | $ | 29,261 |
| | $ | 236 |
| | 0.81 | % | | $ | 32,158 |
| | $ | 294 |
| | 0.91 | % | $ | 70,458 |
| | $ | 369 |
| | 0.52 | % | | $ | 66,642 |
| | $ | 318 |
| | 0.48 | % | | $ | 61,574 |
| | $ | 308 |
| | 0.50 | % |
Mortgage loans held for portfolio (2) | 7,981 |
| | 313 |
| | 3.92 |
| | 7,705 |
| | 335 |
| | 4.35 |
| | 8,696 |
| | 413 |
| | 4.75 |
| 7,611 |
| | 246 |
| | 3.23 |
| | 6,804 |
| | 237 |
| | 3.48 |
| | 7,065 |
| | 269 |
| | 3.80 |
|
Federal funds sold and securities purchased under resale agreements | 8,004 |
| | 11 |
| | 0.14 |
| | 6,858 |
| | 7 |
| | 0.10 |
| | 9,414 |
| | 17 |
| | 0.17 |
| 11,493 |
| | 14 |
| | 0.12 |
| | 9,673 |
| | 7 |
| | 0.07 |
| | 9,110 |
| | 8 |
| | 0.09 |
|
Interest-bearing deposits in banks (3) (4) (5) | 1,955 |
| | 3 |
| | 0.17 |
| | 4,303 |
| | 9 |
| | 0.20 |
| | 5,535 |
| | 13 |
| | 0.24 |
| 1,141 |
| | 2 |
| | 0.20 |
| | 2,244 |
| | 3 |
| | 0.15 |
| | 1,414 |
| | 2 |
| | 0.14 |
|
Mortgage-backed securities | 11,375 |
| | 293 |
| | 2.58 |
| | 11,100 |
| | 385 |
| | 3.47 |
| | 11,414 |
| | 510 |
| | 4.47 |
| 14,664 |
| | 326 |
| | 2.22 |
| | 15,594 |
| | 343 |
| | 2.20 |
| | 14,320 |
| | 313 |
| | 2.19 |
|
Other investments (4) | 4,392 |
| | 40 |
| | 0.90 |
| | 7,719 |
| | 39 |
| | 0.51 |
| | 1,927 |
| | 7 |
| | 0.37 |
| 41 |
| | — |
| | 0.11 |
| | 37 |
| | — |
| | 0.08 |
| | 26 |
| | — |
| | 0.12 |
|
Loans to other FHLBanks | 3 |
| | — |
| | 0.12 |
| | 3 |
| | — |
| | 0.10 |
| | 5 |
| | — |
| | 0.16 |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4 |
| | — |
| | 0.13 |
|
Total earning assets | 66,491 |
| | 921 |
| | 1.39 |
| | 66,949 |
| | 1,011 |
| | 1.51 |
| | 69,149 |
| | 1,254 |
| | 1.81 |
| |
Total interest-earning assets | | 105,408 |
| | 957 |
| | 0.91 |
| | 100,994 |
| | 908 |
| | 0.90 |
| | 93,513 |
| | 900 |
| | 0.96 |
|
Less: allowance for credit losses on mortgage loans | 20 |
| | | | | | 15 |
| | | | | | 1 |
| | | | | 2 |
| | | | | | 6 |
| | | | | | 12 |
| | | | |
Other assets | 231 |
| | | | | | 354 |
| | | | | | 219 |
| | | | | 163 |
| | | | | | 169 |
| | | | | | 190 |
| | | | |
Total assets | $ | 66,702 |
| | | | | | $ | 67,288 |
| | | | | | $ | 69,367 |
| | | | | $ | 105,569 |
| | | | | | $ | 101,157 |
| | | | | | $ | 93,691 |
| | | | |
Liabilities and Capital | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Term deposits | $ | 114 |
| | — |
| | 0.22 |
| | $ | 161 |
| | — |
| | 0.24 |
| | $ | 221 |
| | 1 |
| | 0.37 |
| $ | 132 |
| | — |
| | 0.20 |
| | $ | 93 |
| | — |
| | 0.19 |
| | $ | 120 |
| | — |
| | 0.17 |
|
Other interest bearing deposits (5) | 1,050 |
| | — |
| | 0.01 |
| | 1,077 |
| | — |
| | 0.02 |
| | 1,415 |
| | — |
| | 0.04 |
| 704 |
| | — |
| | 0.01 |
| | 753 |
| | — |
| | 0.01 |
| | 955 |
| | — |
| | 0.01 |
|
Short-term borrowings | 29,499 |
| | 31 |
| | 0.10 |
| | 32,292 |
| | 28 |
| | 0.09 |
| | 27,914 |
| | 41 |
| | 0.15 |
| |
Discount Notes | | 52,706 |
| | 65 |
| | 0.12 |
| | 35,992 |
| | 28 |
| | 0.08 |
| | 34,574 |
| | 37 |
| | 0.11 |
|
Unswapped fixed-rate Bonds | 18,738 |
| | 544 |
| | 2.90 |
| | 20,186 |
| | 700 |
| | 3.47 |
| | 23,719 |
| | 897 |
| | 3.78 |
| 26,425 |
| | 528 |
| | 2.00 |
| | 25,605 |
| | 519 |
| | 2.03 |
| | 23,117 |
| | 488 |
| | 2.11 |
|
Unswapped adjustable-rate Bonds | 3,086 |
| | 7 |
| | 0.23 |
| | 681 |
| | 1 |
| | 0.19 |
| | 852 |
| | 1 |
| | 0.15 |
| 13,385 |
| | 21 |
| | 0.15 |
| | 29,355 |
| | 33 |
| | 0.11 |
| | 24,319 |
| | 35 |
| | 0.14 |
|
Swapped Bonds | 9,267 |
| | 19 |
| | 0.21 |
| | 7,981 |
| | 19 |
| | 0.23 |
| | 10,080 |
| | 21 |
| | 0.21 |
| 6,504 |
| | 19 |
| | 0.29 |
| | 3,721 |
| | 7 |
| | 0.20 |
| | 4,673 |
| | 7 |
| | 0.15 |
|
Mandatorily redeemable capital stock | 252 |
| | 12 |
| | 4.64 |
| | 327 |
| | 14 |
| | 4.27 |
| | 413 |
| | 18 |
| | 4.28 |
| 61 |
| | 2 |
| | 4.00 |
| | 105 |
| | 4 |
| | 4.01 |
| | 139 |
| | 5 |
| | 3.95 |
|
Other borrowings | 1 |
| | — |
| | 0.29 |
| | — |
| | — |
| | — |
| | 1 |
| | — |
| | 0.32 |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4 |
| | — |
| | 0.12 |
|
Total interest-bearing liabilities | 62,007 |
| | 613 |
| | 0.99 |
| | 62,705 |
| | 762 |
| | 1.22 |
| | 64,615 |
| | 979 |
| | 1.51 |
| 99,917 |
| | 635 |
| | 0.64 |
| | 95,624 |
| | 591 |
| | 0.62 |
| | 87,901 |
| | 572 |
| | 0.65 |
|
Non-interest bearing deposits | 18 |
| | | | | | 14 |
| | | | | | 9 |
| | | | | — |
| | | | | | 4 |
| | | | | | 18 |
| | | | |
Other liabilities | 888 |
| | | | | | 1,013 |
| | | | | | 1,222 |
| | | | | 578 |
| | | | | | 573 |
| | | | | | 651 |
| | | | |
Total capital | 3,789 |
| | | | | | 3,556 |
| | | | | | 3,521 |
| | | | | 5,074 |
| | | | | | 4,956 |
| | | | | | 5,121 |
| | | | |
Total liabilities and capital | $ | 66,702 |
| | | | | | $ | 67,288 |
| | | | | | $ | 69,367 |
| | | | | $ | 105,569 |
| | | | | | $ | 101,157 |
| | | | | | $ | 93,691 |
| | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest rate spread | | | | | 0.40 | % | | | | | | 0.29 | % | | | | | | 0.30 | % | | | | | 0.27 | % | | | | | | 0.28 | % | | | | | | 0.31 | % |
Net interest income and net interest margin (6) | | | $ | 308 |
| | 0.46 | % | | | | $ | 249 |
| | 0.37 | % | | | | $ | 275 |
| | 0.40 | % | | | $ | 322 |
| | 0.31 | % | | | | $ | 317 |
| | 0.31 | % | | | | $ | 328 |
| | 0.35 | % |
Average interest-earning assets to interest-bearing liabilities | | | | | 107.23 | % | | | | | | 106.77 | % | | | | | | 107.02 | % | | | | | 105.50 | % | | | | | | 105.62 | % | | | | | | 106.38 | % |
| |
(1) | Amounts used to calculate average rates are based on dollars in thousands. Accordingly, recalculations based upon the disclosed amounts (millions) may not produce the same results. |
| |
(2) | Non-accrual loans are included in average balances used to determine average rate. |
| |
(3) | Includes certificates of deposit and bank notes that are classified as available-for-sale securities. |
| |
(4) | Includes available-for-sale securities based on their amortized costs. The yield information does not give effect to changes in fair value that are reflected as a component of stockholders' equity for available-for-sale securities. |
| |
(5) | The average balance amounts include the rights or obligations to cash collateral, which are included in the fair value of derivative assets or derivative liabilities on the Statements of Condition at period end. |
| |
(6) | Net interest margin is net interest income before (reversal)/provision for credit losses as a percentage of average total interest earning assets. |
2015 Versus 2014.Rates on short-term interest-earning assets rose because average short-term interest rates were slightly higher in 2015. The average rate on mortgage-backed securities also rose nominally due to a change in composition. However, the average rate of total interest-earning assets increased only 0.01 percentage point in 2015 because of the continued very low interest rate environment and higher net amortization.
2012 Versus 2011The average rate on total interest-bearing liabilities increased marginally due to modest increases in short-term interest rates that were partially offset by lower average long-term rates, more favorable funding spreads to market rates, and the transition of a large amount of LIBOR-indexed funding into lower-cost Discount Notes funding.
NetThe net interest spread and net interest margin increased due primarily to asset and liability management actionsremained stable as describedthe higher recognition of mortgage premium amortization was offset by the net other components of net interest rate spread discussed in the previous section, higher Advance prepayment fees,section.
2014 Versus 2013. The net interest spread and lower net amortizationinterest margin decreased due to an increase in 2012.Advances balances and, secondarily, to the net effect of the other earnings factors discussed in the previous section. Although the Advance growth increased net interest income because of a larger asset base, the growth lowered the spread and margin because Advances tend to have narrower spreads to funding costs compared to mortgage assets.
The average rate on both total earning assets and interest-bearing liabilities decreased, driven by principal paydowns at higher rates than the rates on replacement and new instruments. This is most evident in the mortgage asset and unswapped fixed-rate Bonds yields in the table above.
The average rate on other investments increased in 2012 for two reasons. First, the average balance of GSE Discount Notes, which are shorter term and typically earn lower yields, decreased $4 billion in 2012. Second, most of the remaining investments in this portfolio were trading securities with above-market coupons purchased at premiums, with corresponding market value adjustments reflected in other non-interest income as losses to the securities' fair values, as discussed further in "Non-Interest Income and Non-Interest Expense."
2011 Versus 2010
The average rate on both total earning assets and interest-bearing liabilities decreased, driven by lower average rates on long-term assets and long-term liability accounts. As the long-term assets and liabilities mature or are paid down over time, new long-term assets and liabilities are put on the balance sheet at lower rates, which cumulatively builds over time to reduced portfolio rates. A much higher amortization of mortgage purchase premiums in 2011 also contributed to the declines in average rates on earnings assets.
Average rates on our short-term and adjustable-rate assets and liabilities experienced small fluctuations in 2011. However, short-term LIBOR rose moderately in the fourth quarter. This resulted in a small increasedecline in the average rate on total earning assets and total interest-bearing liabilities resulted from the swapped Bonds accountcontinued low rate environment and an increase in the adjustable-rate Bonds account,balance sheet composition of instruments (due to the Advance growth) that tend to carry lower interest rates. The low rate environment particularly resulted in a decline in the average rate of long-term assets (such as certain Advances and mortgage loans held for portfolio) and long-term liabilities (unswapped fixed-rate Bonds). This is because a substantial portion of the principal paid down on these assets and liabilities, which are both tied to short-term LIBOR.had higher rates, was replaced with new assets and liabilities at lower rates.
The averageRates on short-term assets (Federal funds sold and securities sold under resale agreements) and liabilities (short-term borrowings and unswapped adjustable-rate Bonds) decreased slightly in 2014 as the low-rate rate on other investments increased due to a shift towards longer term investments, which typically earn higher yields, and, as stated in the 2012 versus 2011 comparison, many of these investments were trading securities with above market coupons purchased at premiums.
environment continued.
Volume/Rate Analysis
Changes in both average balances (volume) and interest rates influence changes in net interest income. The following table summarizes these changes and trends in interest income and interest expense.
| | (In millions) | 2012 over 2011 | | 2011 over 2010 | 2015 over 2014 | | 2014 over 2013 |
| Volume (1)(3) | | Rate (2)(3) | | Total | | Volume (1)(3) | | Rate (2)(3) | | Total | Volume (1)(3) | | Rate (2)(3) | | Total | | Volume (1)(3) | | Rate (2)(3) | | Total |
Increase (decrease) in interest income | | | | | | | | | | | | | | | | | | | | | | |
Advances | $ | 28 |
| | $ | (3 | ) | | $ | 25 |
| | $ | (25 | ) | | $ | (33 | ) | | $ | (58 | ) | $ | 19 |
| | $ | 32 |
| | $ | 51 |
| | $ | 25 |
| | $ | (15 | ) | | $ | 10 |
|
Mortgage loans held for portfolio | 12 |
| | (34 | ) | | (22 | ) | | (45 | ) | | (33 | ) | | (78 | ) | 27 |
| | (18 | ) | | 9 |
| | (10 | ) | | (22 | ) | | (32 | ) |
Federal funds sold and securities purchased under resale agreements | 1 |
| | 3 |
| | 4 |
| | (4 | ) | | (6 | ) | | (10 | ) | 1 |
| | 6 |
| | 7 |
| | 1 |
| | (2 | ) | | (1 | ) |
Interest-bearing deposits in banks | (4 | ) | | (2 | ) | | (6 | ) | | (2 | ) | | (2 | ) | | (4 | ) | (2 | ) | | 1 |
| | (1 | ) | | 1 |
| | — |
| | 1 |
|
Mortgage-backed securities | 9 |
| | (101 | ) | | (92 | ) | | (14 | ) | | (111 | ) | | (125 | ) | (20 | ) | | 3 |
| | (17 | ) | | 28 |
| | 2 |
| | 30 |
|
Other investments | (21 | ) | | 22 |
| | 1 |
| | 29 |
| | 3 |
| | 32 |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Loans to other FHLBanks | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total | 25 |
| | (115 | ) | | (90 | ) | | (61 | ) | | (182 | ) | | (243 | ) | 25 |
| | 24 |
| | 49 |
| | 45 |
| | (37 | ) | | 8 |
|
Increase (decrease) in interest expense | | | | | | | | | | | | | | | | | | | | | | |
Term deposits | — |
| | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Other interest-bearing deposits | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Short-term borrowings | (3 | ) | | 6 |
| | 3 |
| | 6 |
| | (19 | ) | | (13 | ) | |
Discount Notes | | 16 |
| | 21 |
| | 37 |
| | 1 |
| | (10 | ) | | (9 | ) |
Unswapped fixed-rate Bonds | (48 | ) | | (108 | ) | | (156 | ) | | (126 | ) | | (71 | ) | | (197 | ) | 17 |
| | (8 | ) | | 9 |
| | 51 |
| | (20 | ) | | 31 |
|
Unswapped adjustable-rate Bonds | 6 |
| | — |
| | 6 |
| | — |
| | — |
| | — |
| (22 | ) | | 10 |
| | (12 | ) | | 7 |
| | (9 | ) | | (2 | ) |
Swapped Bonds | 3 |
| | (3 | ) | | — |
| | (5 | ) | | 3 |
| | (2 | ) | 7 |
| | 5 |
| | 12 |
| | (2 | ) | | 2 |
| | — |
|
Mandatorily redeemable capital stock | (3 | ) | | 1 |
| | (2 | ) | | (4 | ) | | — |
| | (4 | ) | (2 | ) | | — |
| | (2 | ) | | (1 | ) | | — |
| | (1 | ) |
Other borrowings | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total | (45 | ) | | (104 | ) | | (149 | ) | | (130 | ) | | (87 | ) | | (217 | ) | 16 |
| | 28 |
| | 44 |
| | 56 |
| | (37 | ) | | 19 |
|
Increase (decrease) in net interest income | $ | 70 |
| | $ | (11 | ) | | $ | 59 |
| | $ | 69 |
| | $ | (95 | ) | | $ | (26 | ) | $ | 9 |
| | $ | (4 | ) | | $ | 5 |
| | $ | (11 | ) | | $ | — |
| | $ | (11 | ) |
| |
(1) | Volume changes are calculated as the change in volume multiplied by the prior year rate. |
| |
(2) | Rate changes are calculated as the change in rate multiplied by the prior year average balance. |
| |
(3) | Changes that are not identifiable as either volume-related or rate-related, but rather are equally attributable to both volume and rate changes, have been allocated to the volume and rate categories based upon the proportion of the absolute value of the volume and rate changes. |
Effect of the Use of Derivatives on Net Interest Income
The following table shows the effect of using derivatives on net interest income. The table does not show the effect on earnings from the non-interest components of derivatives related to market value adjustments. Thisadjustments is provided in the next section “Non-Interest Income and Non-Interest Expense.”
| | (In millions) | 2012 | | 2011 | | 2010 | 2015 | | 2014 | | 2013 |
Advances: | | | | | | | | | | |
Amortization/accretion of hedging activities in net interest income | $ | (4 | ) | | $ | (2 | ) | | $ | (1 | ) | |
Amortization of hedging activities in net interest income | | $ | (3 | ) | | $ | (3 | ) | | $ | (3 | ) |
Net interest settlements included in net interest income | (245 | ) | | (364 | ) | | (439 | ) | (84 | ) | | (91 | ) | | (107 | ) |
Mortgage loans: | | | | | | | | | | |
Amortization of derivative fair value adjustments in net interest income | (3 | ) | | (1 | ) | | — |
| (4 | ) | | (4 | ) | | (2 | ) |
Consolidated Obligation Bonds: | | | | | | | | | | |
Amortization/accretion of hedging activities in net interest income | — |
| | — |
| | 2 |
| |
Net interest settlements included in net interest income | 37 |
| | 64 |
| | 113 |
| 20 |
| | 18 |
| | 27 |
|
Decrease to net interest income | $ | (215 | ) | | $ | (303 | ) | | $ | (325 | ) | $ | (71 | ) | | $ | (80 | ) | | $ | (85 | ) |
Most of our use of derivatives synthetically convert the intermediate- and long-term fixed interest rates on certain Advances and Bonds to adjustable-coupon rates tied to short-term LIBOR (mostly one-andone- and three-month repricing resets). These adjustable-
rateadjustable-rate coupons normally carry lower interest rates than the fixed rates. The use of derivatives lowered net interest income in each period primarily because the Advances that were swapped to short-term LIBOR had higher fixed interest rates than the Bonds
that were swapped to short-term LIBOR. ThisWe accepted this reduction in earnings was acceptable because it enabled us, as we designed, to significantly lower market risk exposure by creating a much closer match of actual cash flows between assets and liabilities than would occur otherwise.
See Item 1 The reduction in earnings was similar in 2015, 2014, and the section “Use of Derivatives in Market Risk Management” in “Quantitative and Qualitative Disclosures About Risk Management” for further information on our use of derivatives.2013.
Provision for Credit Losses
In 2012,2015 and 2014, delinquency trends in the MPP continued to decrease while home prices were relatively steady, resulting in no provision for estimated incurred credit losses in 2015 and a $0.5 million reversal for estimated incurred credit losses in 2014. In 2013, we recorded a $1.5$7.5 million provision reversal for estimated incurred credit losses in the MPP compared to $12.6 milliondriven by higher home prices combined with improved delinquency trends in 2011. The decreases in estimated credit losses were a result of improvements in the housing market, partially offset by a reduction in estimated collectability on supplemental mortgage insurance policies we hold due to potential non-performance of mortgage insurers.that year. Further information is in the "Credit Risk - MPP" section in "Quantitative and Qualitative Disclosures About Risk Management" and Note 10 of the Notes to Financial Statements.
Non-Interest Income and Non-Interest Expense
The following table presents non-interest income and non-interest expense for each of the last three years.
|
| | | | | | | | | | | |
(Dollars in millions) | 2012 | | 2011 | | 2010 |
Other Non-Interest Income | | | | | |
Net gains on held-to-maturity securities | $ | 29 |
| | $ | 16 |
| | $ | 8 |
|
Net gains (losses) on derivatives and hedging activities | 9 |
| | (2 | ) | | 8 |
|
Other non-interest (loss) income, net | (25 | ) | | (19 | ) | | 4 |
|
Total other non-interest income (loss) | $ | 13 |
| | $ | (5 | ) | | $ | 20 |
|
| | | | | |
Other Expense | | | | | |
Compensation and benefits | $ | 31 |
| | $ | 31 |
| | $ | 34 |
|
Other operating expense | 14 |
| | 15 |
| | 15 |
|
Finance Agency | 6 |
| | 5 |
| | 4 |
|
Office of Finance | 3 |
| | 4 |
| | 3 |
|
Other | 4 |
| | 2 |
| | — |
|
Total other expense | $ | 58 |
| | $ | 57 |
| | $ | 56 |
|
Average total assets | $ | 66,702 |
| | $ | 67,288 |
| | $ | 69,367 |
|
Average regulatory capital | 4,050 |
| | 3,891 |
| | 3,942 |
|
Total other expense to average total assets (1) | 0.09 | % | | 0.08 | % | | 0.08 | % |
Total other expense to average regulatory capital (1) | 1.43 |
| | 1.46 |
| | 1.42 |
|
|
| | | | | | | | | | | |
(Dollars in millions) | 2015 | | 2014 | | 2013 |
Non-interest income | | | | | |
Net gains on derivatives and hedging activities | $ | 13 |
| | $ | 7 |
| | $ | 8 |
|
Other non-interest income, net | 17 |
| | 16 |
| | 12 |
|
Total non-interest income | $ | 30 |
| | $ | 23 |
| | $ | 20 |
|
Non-interest expense | | | | | |
Compensation and benefits | $ | 40 |
| | $ | 37 |
| | $ | 34 |
|
Other operating expense | 22 |
| | 17 |
| | 17 |
|
Finance Agency | 7 |
| | 7 |
| | 5 |
|
Office of Finance | 4 |
| | 4 |
| | 5 |
|
Other | 2 |
| | 3 |
| | 3 |
|
Total non-interest expense | $ | 75 |
| | $ | 68 |
| | $ | 64 |
|
Average total assets | $ | 105,569 |
| | $ | 101,157 |
| | $ | 93,691 |
|
Average regulatory capital | 5,150 |
| | 5,069 |
| | 5,271 |
|
Total non-interest expense to average total assets (1) | 0.07 | % | | 0.07 | % | | 0.07 | % |
Total non-interest expense to average regulatory capital (1) | 1.47 |
| | 1.35 |
| | 1.22 |
|
| |
(1) | Amounts used to calculate percentages are based on dollars in thousands. Accordingly, recalculations based upon the disclosed amounts (millions) may not produce the same results. |
The netNon-interest income increased in 2015 compared to 2014 primarily from larger gains on held-to-maturity securitiesderivatives and hedging activities in 2012 occurred from the sales of $478 million of mortgage-backed securities. Each of the securities sold had less than 15 percent of the original acquired principal remaining and were sold under the FHLBank's periodic clean-up process. The gains represent potential future lost income from the higher yielding securities sold.
The larger other non-interest loss in 2012 and 2011 was due primarily to higher losses on trading securities. As discussed above in “Components of Net Interest Income,” the losses on the trading securities occurred because these securities had above-market coupon rates and, therefore, were purchased at prices above par. The related premiums paid are reflected as mark-to-market losses to the securities as their fair values approach par at maturity. As noted earlier, the resulting net earnings from the trading securities reflected at-market returns.
Other expenses continued to be relatively stable in 20122015 compared to 20112014, as presented in the table below. The change in non-interest expense in 2015 resulted primarily from higher legal fees and 2010.compensation and benefits.
Effect of Derivatives and Hedging Activities
| | (In millions) | 2012 | | 2011 | | 2010 | 2015 | | 2014 | | 2013 |
Net gains (losses) on derivatives and hedging activities | | | | | | |
Net gains on derivatives and hedging activities | | | | | | |
Advances: | | | | | | | | | | |
Gains on fair value hedges | $ | 7 |
| | $ | 8 |
| | $ | 8 |
| $ | 2 |
| | $ | 5 |
| | $ | 10 |
|
Losses on derivatives not receiving hedge accounting | (5 | ) | | (9 | ) | | (7 | ) | |
Gains on derivatives not receiving hedge accounting | | 1 |
| | — |
| | 5 |
|
Mortgage loans: | | | | | | | | | | |
Gains (losses) on derivatives not receiving hedge accounting | 1 |
| | (4 | ) | | 2 |
| 1 |
| | — |
| | (11 | ) |
Consolidated Obligation Bonds: | | | | | | | | | | |
Gains on fair value hedges | — |
| | 1 |
| | 1 |
| 1 |
| | — |
| | 1 |
|
Gains on derivatives not receiving hedge accounting | 6 |
| | 2 |
| | 4 |
| 8 |
| | 2 |
| | 3 |
|
Total net gains (losses) on derivatives and hedging activities | 9 |
| | (2 | ) | | 8 |
| |
Net gains (losses) on financial instruments held at fair value (1) | 2 |
| | (3 | ) | | — |
| |
Total net gains on derivatives and hedging activities | | 13 |
| | 7 |
| | 8 |
|
Net gains on financial instruments held at fair value (1) | | 1 |
| | 2 |
| | — |
|
Total net effect of derivatives and hedging activities | $ | 11 |
| | $ | (5 | ) | | $ | 8 |
| $ | 14 |
| | $ | 9 |
| | $ | 8 |
|
| |
(1) | Includes only those gains or losses on financial instruments held at fair value that have an economic derivative "assigned." |
The changes in net gains (losses) on derivatives and hedging activities represented unrealized market value adjustments. The amounts of income volatility in derivatives and hedging activities were relatively modest compared to the notional principal amounts, well within the range of normal historical fluctuation, and consistent with the close hedging relationships of our derivative transactions. In each of the years shown, the market value adjustment, as a percentage of notional derivatives principal, was less than 0.10 percentage points.
REFCORP and Affordable Housing Program Assessments
Until the third quarter of 2011, assessments against earnings had included both a REFCORP obligation and expenses for the Affordable Housing Program. The FHLBank System's REFCORP obligation was satisfied at the end of the second quarter of 2011. Under the Capital Agreement of 2011, the REFCORP obligation, which had been recorded as reduction to net income, was replaced with a 20 percent allocation of net income to restricted retained earnings for all FHLBanks. Although the restricted retained earnings are not recorded in the income statement, they are not available to be distributed as dividends to stockholders. Therefore, the replacement of REFCORP with the Capital Agreement had only a marginal impact on net earnings available for distribution as dividends. See Item 1's "Capital Resources" section for more information.
This change resulted in a $19 million increase in 2012's net income compared to that in 2011 and a corresponding reduction in assessments. There have been no changes in our Affordable Housing Program.
In 2012, assessments totaled $27 million and lowered ROE by 0.72 percentage points. In 2011, assessments totaled $37 million and lowered ROE by 1.03 percentage points. The smaller impact of assessments on ROE in 2012 was due to the satisfaction of the REFCORP obligation.
Analysis of QuarterlyMarket Risk
During 2015, as in 2014, the market risk exposure to changing interest rates was moderate overall and well within policy limits. We believe that profitability would not become uncompetitive unless long-term rates were to permanently increase over the next 12 months by five percentage points or more combined with short-term rates increasing to at least seven percent. We believe such a stress scenario is extremely unlikely to occur in the foreseeable future. Our market risk exposure to lower long-term interest rates, even up to two percentage points, would result in ROE remaining well above market interest rates.
The following table summarizesCapital Adequacy
We believe members place a high value on their capital investment in our company. We maintained compliance with regulatory capital requirements. Capital ratios at December 31, 2015 and all throughout the componentsyear exceeded the regulatory required minimum of 2012's quarterly ROEfour percent. We believe that the amount of our retained earnings is sufficient to protect against impairment risk of capital stock and provides quarterly ROE for 2011 and 2010.
|
| | | | | | | | | | |
| 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | Total |
Components of 2012 ROE: | | | | | |
Net interest income: | | | | | |
Other net interest income | 9.39 | % | 8.75 | % | 9.37 | % | 8.12 | % | 8.88 | % |
Net (amortization)/accretion | (0.63 | ) | (3.13 | ) | (0.85 | ) | (0.61 | ) | (1.27 | ) |
Prepayment fees | 0.39 |
| 0.18 |
| 0.19 |
| 1.26 |
| 0.53 |
|
Total net interest income | 9.15 |
| 5.80 |
| 8.71 |
| 8.77 |
| 8.14 |
|
(Provision)/reversal for credit losses | (0.16 | ) | — |
| 0.05 |
| (0.05 | ) | (0.04 | ) |
Net interest income after (provision)/reversal for credit losses | 8.99 |
| 5.80 |
| 8.76 |
| 8.72 |
| 8.10 |
|
Net gains (losses) on derivatives and hedging activities | 0.42 |
| 0.35 |
| 0.36 |
| (0.16 | ) | 0.23 |
|
Other non-interest (loss) income | (0.50 | ) | 2.10 |
| (0.80 | ) | (0.22 | ) | 0.12 |
|
Total non-interest (loss) income | (0.08 | ) | 2.45 |
| (0.44 | ) | (0.38 | ) | 0.35 |
|
Total revenue | 8.91 |
| 8.25 |
| 8.32 |
| 8.34 |
| 8.45 |
|
Total other expense | (1.64 | ) | (1.52 | ) | (1.57 | ) | (1.40 | ) | (1.53 | ) |
Assessments | (0.77 | ) | (0.70 | ) | (0.70 | ) | (0.72 | ) | (0.72 | ) |
2012 ROE | 6.50 | % | 6.03 | % | 6.05 | % | 6.22 | % | 6.20 | % |
| | | | | |
2011 ROE | 4.80 | % | 4.28 | % | 2.07 | % | 4.44 | % | 3.89 | % |
| | | | | |
2010 ROE | 4.98 | % | 4.66 | % | 4.11 | % | 4.94 | % | 4.67 | % |
to provide the opportunity to stabilize dividends. Our Capital Plan has safeguards to prevent financial leverage from increasing beyond regulatory minimums or below safe levels.
Quarterly ROEs increasedCredit Risk
In 2015, we continued to levels above six percentexperience a de minimis level of overall residual credit risk exposure from our Credit Services, making investments, and executing derivative transactions. We believe policies and procedures related to credit underwriting, Advance collateral management, and transactions with investment and derivative counterparties continue to fully mitigate these risks. Therefore, we have never experienced any credit losses and we continue to have no loan loss reserves or impairment recorded for these instruments.
Residual credit risk exposure in 2012 due to the factors discussed above, most notably management's asset-liability and market risk strategies, higher Advance prepayment fees, lower net amortization, and the reduction in provisionmortgage loan portfolio was minimal. The allowance for credit losses. The growth in Advance balances affected primarily the third and fourth quarters of the year. In the second quarter of 2012, almost all of the unfavorable impact of an increase in net amortization was offset by gains from the clean-up sale of mortgage-backed securities, which is accounted forlosses in the "Other non-interest (loss) income" component in the table above. Because quarterly ROEMPP continued to decline and was modestly volatile in 2012 and significantly higher than short-term interest rates, we were able to distribute relatively stable quarterly dividend returns to stockholders in 2012.
ROE in the third quarter of 2011 was negatively affected mostly by a large increase in net amortization due to declines in mortgage rates in that quarter. Excluding that quarter, quarterly ROE was relatively stable in 2010 and 2011.
$2 million at December 31, 2015.
Segment InformationLiquidity Risk
Our liquidity position remained strong during 2015, as did our overall ability to fund operations through the issuance of Consolidated Obligations at acceptable interest costs. Investor demand for FHLBank System debt continued to be robust. There were no substantive stresses on market access or liquidity from external market and political events. Although we can make no assurances, we expect this to continue to be the case and believe there is only a remote possibility of a liquidity or funding crisis in the FHLBank System that could impair our ability to participate, on a cost-effective basis, in issuances of new debt, service outstanding debt, maintain adequate capitalization, or pay competitive dividends.
ANALYSIS OF FINANCIAL CONDITION
Note 19Mission Asset Activity
Mission Assets are the primary means by which we fulfill our mission with direct connections to members. We regularly monitor the balance sheet concentration of Mission Asset Activity. In 2015, our Primary Mission Asset ratio, as defined in "Regulatory and Legislative Risk" of the NotesExecutive Overview, was 79 percent. In assessing mission achievement, we also consider supplemental sources of Mission Asset Activity, the most significant of which is Letters of Credit issued to Financial Statements presents informationmembers.
Credit Services
Credit Activity and Advance Composition
The tables below show trends in Advance balances by major programs and in the notional amount of Letters of Credit.
|
| | | | | | | | | | | | | |
(Dollars in millions) | December 31, 2015 | | December 31, 2014 |
| Balance | | Percent(1) | | Balance | | Percent(1) |
Adjustable/Variable Rate Indexed: | | | | | | | |
LIBOR | $ | 47,312 |
| | 65 | % | | $ | 51,839 |
| | 74 | % |
Other | 617 |
| | 1 |
| | 515 |
| | 1 |
|
Total | 47,929 |
| | 66 |
| | 52,354 |
| | 75 |
|
Fixed-Rate: | | | | | | | |
REPO | 10,568 |
| | 14 |
| | 5,201 |
| | 7 |
|
Regular Fixed-Rate | 9,248 |
| | 13 |
| | 7,398 |
| | 11 |
|
Putable (2) | 1,046 |
| | 1 |
| | 1,617 |
| | 2 |
|
Amortizing/Mortgage Matched | 2,706 |
| | 4 |
| | 2,734 |
| | 4 |
|
Other | 1,745 |
| | 2 |
| | 995 |
| | 1 |
|
Total | 25,313 |
| | 34 |
| | 17,945 |
| | 25 |
|
Total Advances Principal | $ | 73,242 |
| | 100 | % | | $ | 70,299 |
| | 100 | % |
| | | | | | | |
Letters of Credit (notional) | $ | 19,555 |
| | | | $ | 17,780 |
| | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | December 31, 2015 | | September 30, 2015 | | June 30, 2015 | | March 31, 2015 |
| Balance | | Percent(1) | | Balance | | Percent(1) | | Balance | | Percent(1) | | Balance | | Percent(1) |
Adjustable/Variable-Rate Indexed: | | | | | | | | | | | | | | | |
LIBOR | $ | 47,312 |
| | 65 | % | | $ | 49,313 |
| | 64 | % | | $ | 48,242 |
| | 68 | % | | $ | 49,103 |
| | 73 | % |
Other | 617 |
| | 1 |
| | 565 |
| | 1 |
| | 597 |
| | 1 |
| | 407 |
| | 1 |
|
Total | 47,929 |
| | 66 |
| | 49,878 |
| | 65 |
| | 48,839 |
| | 69 |
| | 49,510 |
| | 74 |
|
Fixed-Rate: | | | | | | | | | | | | | | | |
REPO | 10,568 |
| | 14 |
| | 12,023 |
| | 16 |
| | 8,499 |
| | 12 |
| | 4,061 |
| | 6 |
|
Regular Fixed-Rate | 9,248 |
| | 13 |
| | 9,385 |
| | 12 |
| | 8,184 |
| | 11 |
| | 7,977 |
| | 12 |
|
Putable (2) | 1,046 |
| | 1 |
| | 1,557 |
| | 2 |
| | 1,570 |
| | 2 |
| | 1,580 |
| | 3 |
|
Amortizing/Mortgage Matched | 2,706 |
| | 4 |
| | 2,723 |
| | 3 |
| | 2,703 |
| | 4 |
| | 2,662 |
| | 4 |
|
Other | 1,745 |
| | 2 |
| | 1,637 |
| | 2 |
| | 1,223 |
| | 2 |
| | 825 |
| | 1 |
|
Total | 25,313 |
| | 34 |
| | 27,325 |
| | 35 |
| | 22,179 |
| | 31 |
| | 17,105 |
| | 26 |
|
Total Advances Principal | $ | 73,242 |
| | 100 | % | | $ | 77,203 |
| | 100 | % | | $ | 71,018 |
| | 100 | % | | $ | 66,615 |
| | 100 | % |
| | | | | | | | | | | | | | | |
Letters of Credit (notional) | $ | 19,555 |
| | | | $ | 17,594 |
| | | | $ | 19,006 |
| | | | $ | 16,905 |
| | |
| |
(1) | As a percentage of total Advances principal. |
| |
(2) | Excludes Putable Advances where the related put options have expired. Such Advances are classified based on their current terms. |
The modest growth and variability in Advance balances in 2015 was driven primarily by changes in variable-rate and short-term repurchase (REPO) Advances as the reduction in the need for variable-rate funding from our largest member was more than offset by REPO Advance borrowings. The increase in REPO Advance borrowings was primarily from new insurance company members. However, the borrowings from these new members are required to be paid off over the next year due to the Finance Agency's 2016 final rule on membership requirements, which is discussed further in the "Executive Overview."
Members increased their available lines in the Letters of Credit program by $1.8 billion (10 percent) in 2015. Letters of Credit balances averaged $17.7 billion during 2015, an increase of $2.5 billion (17 percent) from the average balance during 2014. We
normally earn fees on Letters of Credit based on the actual average amount of the Letters utilized, which generally is less than the notional amount issued.
Advance Usage
In addition to analyzing Advance balances by dollar trends and the number of members utilizing them, we monitor the degree to which members use Advances to fund their balance sheets. The following table shows the unweighted, average ratio of each member's Advance balance to its most-recently available figures for total assets.
|
| | | | | | | | | | | | | | |
| December 31, 2015 | | September 30, 2015 | | June 30, 2015 | | March 31, 2015 | | December 31, 2014 |
Average Advances-to-Assets for Members | | | | | | | | | |
Assets less than $1.0 billion (623 members) | 3.26 | % | | 3.20 | % | | 3.14 | % | | 3.06 | % | | 3.24 | % |
Assets over $1.0 billion (76 members) | 4.35 |
| | 4.75 |
| | 3.90 |
| | 3.08 |
| | 3.75 |
|
All members | 3.37 |
| | 3.35 |
| | 3.22 |
| | 3.06 |
| | 3.29 |
|
Advance usage ratios were slightly higher at year-end 2015 compared to year-end 2014, driven primarily by an increase in short-term borrowings and the inclusion of borrowings from several new insurance company members. Usage ratio trends for members with assets less than $1.0 billion were stable within a narrow range during the same time periods.
The following table shows Advance usage of members by charter type. |
| | | | | | | | | | | | | |
(Dollars in millions) | December 31, 2015 | | December 31, 2014 |
| Par Value of Advances | | Percent of Total Par Value of Advances | | Par Value of Advances | | Percent of Total Par Value of Advances |
Commercial Banks | $ | 53,479 |
| | 73 | % | | $ | 59,119 |
| | 84 | % |
Thrifts and Savings Banks | 5,220 |
| | 7 |
| | 4,067 |
| | 6 |
|
Credit Unions | 957 |
| | 1 |
| | 1,110 |
| | 1 |
|
Insurance Companies | 13,428 |
| | 19 |
| | 5,408 |
| | 8 |
|
Community Development Financial Institutions | 2 |
| | — |
| | 1 |
| | — |
|
Total member Advances | 73,086 |
| | 100 |
| | 69,705 |
| | 99 |
|
Former member borrowings | 156 |
| | — |
| | 594 |
| | 1 |
|
Total par value of Advances | $ | 73,242 |
| | 100 | % | | $ | 70,299 |
| | 100 | % |
The following tables present principal balances for the five members with the largest Advance borrowings.
|
| | | | | | | | | | | | | | | | |
(Dollars in millions) | | | | | | | | | | |
December 31, 2015 | | December 31, 2014 |
Name | | Par Value of Advances | | Percent of Total Par Value of Advances | | Name | | Par Value of Advances | | Percent of Total Par Value of Advances |
JPMorgan Chase Bank, N.A. | | $ | 35,350 |
| | 48 | % | | JPMorgan Chase Bank, N.A. | | $ | 41,300 |
| | 59 | % |
U.S. Bank, N.A. | | 10,086 |
| | 14 |
| | U.S. Bank, N.A. | | 8,338 |
| | 12 |
|
Capstead Insurance, LLC | | 2,875 |
| | 4 |
| | The Huntington National Bank | | 2,083 |
| | 3 |
|
Nationwide Life Insurance Company | | 2,279 |
| | 3 |
| | Nationwide Life Insurance Company | | 1,761 |
| | 3 |
|
Third Federal Savings and Loan Association | | 2,162 |
| | 3 |
| | Western-Southern Life Assurance Co | | 1,623 |
| | 2 |
|
Total of Top 5 | | $ | 52,752 |
| | 72 | % | | Total of Top 5 | | $ | 55,105 |
| | 79 | % |
Advance concentration ratios are influenced by, and generally similar to, concentration ratios of financial activity among our Fifth District financial institutions. We believe that having large financial institutions that actively use our Mission Asset Activity augments the value of membership to all members. For example, such activity improves our operating efficiency, increases our earnings and thereby contributions to housing and community investment programs, may enable us over time to obtain more favorable funding costs, and helps us maintain competitively priced Mission Asset Activity.
Mortgage Loans Held for Portfolio (Mortgage Purchase Program, or "MPP")
The table below shows principal purchases and reductions of loans in the MPP for each of the last two years.
|
| | | | | | | |
(In millions) | 2015 | | 2014 |
Balance, beginning of year | $ | 6,796 |
| | $ | 6,643 |
|
Principal purchases | 2,348 |
| | 1,226 |
|
Principal reductions | (1,386 | ) | | (1,073 | ) |
Balance, end of year | $ | 7,758 |
| | $ | 6,796 |
|
The increase in principal loan balances in 2015 resulted from higher amounts of loan purchases, particularly from our two operating business segments. largest sellers who drive program balances. In 2015, 99 members sold us mortgage loans, with the number of monthly sellers averaging 65. All loans acquired in 2015 were conventional loans.
The following tables show the percentage of principal balances from PFIs supplying five percent or more of total principal and the percentage of principal balances from all other PFIs. As shown in the table below, MPP activity is concentrated amongst a few members.
|
| | | | | | | | | | | | | | |
(Dollars in millions) | December 31, 2015 | | | December 31, 2014 |
| Principal | | % of Total | | | Principal | | % of Total |
Union Savings Bank | $ | 2,242 |
| | 29 | % | | Union Savings Bank | $ | 1,593 |
| | 23 | % |
PNC Bank, N.A. (1) | 839 |
| | 11 |
| | PNC Bank, N.A. (1) | 1,074 |
| | 16 |
|
Guardian Savings Bank FSB | 633 |
| | 8 |
| | Guardian Savings Bank FSB | 406 |
| | 6 |
|
All others | 4,044 |
| | 52 |
| | All others | 3,723 |
| | 55 |
|
Total | $ | 7,758 |
| | 100 | % | | Total | $ | 6,796 |
| | 100 | % |
(1)Former member.
We manage financial operationsclosely track the refinancing incentives of our mortgage assets (including loans in the MPP and mortgage-backed securities) because the option for homeowners to change their principal payments normally represents a large portion of our market risk exposure. MPP principal paydowns in all of 2015 equated to a 14 percent annual constant prepayment rate, up from the 12 percent rate for all of 2014, as the refinancing incentives for many of our mortgage assets increased.
The MPP's composition of balances by loan type, original final maturity, and weighted-average mortgage note rate did not change materially in 2015. The weighted average mortgage note rate fell from 4.36 percent at the end of 2014 to 4.14 percent at the end of 2015. This decline reflected a continuing trend of prepayments of higher rate mortgages and purchases of lower rate mortgages. MPP yields earned in 2015, after consideration of funding costs, continued to offer favorable returns relative to their market risk exposure.
Housing and Community Investment
In 2015, we accrued $28 million of earnings for the Affordable Housing Program, which will be awarded to members in 2016. This amount represents no change from 2014 due to the similar amount of earnings in each year.
Including funds available in 2015 from previous years, we had $27 million available for the competitive Affordable Housing Program in 2015, which we awarded to 70 projects through a single competitive offering. In addition, we disbursed $9 million to 171 members on behalf of 1,869 homebuyers through the Welcome Home Program, which assists homebuyers with down payments and closing costs. In total, just over one-quarter of members received approval for funding under the two Affordable Housing Programs.
Additionally, in 2015 our Board committed $1 million to the Carol M. Peterson Housing Fund (CMP Fund), which helped 151 homeowners, and continued its commitment to the $5 million Disaster Reconstruction Program. Both are voluntary programs beyond the 10 percent of earnings that we are required by law to set aside for the Affordable Housing Program.
Our activities to support affordable housing and economic development also include offering Advances through the Affordable Housing Program, Community Investment Program and Economic Development Program with below-market interest rates at
or near zero profit for us. At the end of 2015, Advance balances under these programs totaled $449 million. AHP Advance balances have declined in recent years, reflecting our preference to distribute AHP subsidy in the form of grants.
Investments
The table below presents the ending and average balances of the investment portfolio.
|
| | | | | | | | | | | | | | | |
(In millions) | 2015 | | 2014 |
| Ending Balance | | Average Balance | | Ending Balance | | Average Balance |
Liquidity investments | $ | 22,110 |
| | $ | 12,590 |
| | $ | 11,319 |
| | $ | 11,856 |
|
Mortgage-backed securities | 15,246 |
| | 14,664 |
| | 14,688 |
| | 15,594 |
|
Other investments (1) | — |
| | 85 |
| | — |
| | 98 |
|
Total investments | $ | 37,356 |
| | $ | 27,339 |
| | $ | 26,007 |
| | $ | 27,548 |
|
| |
(1) | The average balance includes the rights or obligations to cash collateral, which are included in the fair value of derivative assets or derivative liabilities on the Statements of Condition at period end. |
We continued to maintain an ample amount of asset liquidity. Liquidity investment levels can vary significantly based on liquidity needs, the availability of acceptable net spreads, the number of eligible counterparties that meet our unsecured credit risk criteria, and changes in the amount of Mission Assets. It is normal for liquidity investments to vary by up to several billion dollars on a daily basis.
Certain dealers, who play a large role in facilitating the distribution of our debt to investors, are being more reluctant to expand the amount of our debt on their balance sheets over quarter- and year-ends primarily due to the perceived growing burden of their regulatory capital environment associated with Basel. Because of this, we conservatively carried a larger amount of liquidity leading up to year-end 2015 to satisfy any potential member borrowing needs during a period where accessing additional liquidity may be more challenging.
Our overarching strategy for mortgage-backed securities is to keep holdings as close as possible to the regulatory maximum of three times regulatory capital, subject to the availability of securities that we believe provide acceptable risk/return tradeoffs. The balance of mortgage-backed securities at December 31, 2015 represented a 2.91 multiple of regulatory capital and consisted of $11.3 billion of securities issued by Fannie Mae or Freddie Mac (of which $1.7 billion were floating-rate securities), $0.9 billion of floating-rate securities issued by the National Credit Union Administration (NCUA), and $3.0 billion of securities issued by Ginnie Mae (a majority of which are fixed rate). The NCUA securities have coupons tied to one-month LIBOR with interest rate caps ranging from seven to eight percent. We held no private-label mortgage-backed securities.
The table below shows principal purchases and paydowns of our mortgage-backed securities for each of the last two years.
|
| | | | | | | |
(In millions) | Mortgage-backed Securities Principal |
| 2015 | | 2014 |
Balance, beginning of year | $ | 14,715 |
| | $ | 16,087 |
|
Principal purchases | 3,099 |
| | 722 |
|
Principal paydowns | (2,611 | ) | | (2,094 | ) |
Balance, end of year | $ | 15,203 |
| | $ | 14,715 |
|
Principal paydowns in 2015 equated to a 16 percent annual constant prepayment rate, up from a 13 percent rate in 2014. Purchases have outpaced paydowns this year due to the availability of mortgage securities offering attractive risk/return trade-offs.
Consolidated Obligations
The table below presents the ending and average balances of our participations in Consolidated Obligations.
|
| | | | | | | | | | | | | | | |
(In millions) | 2015 | | 2014 |
| Ending Balance | | Average Balance | | Ending Balance | | Average Balance |
Discount Notes: | | | | | | | |
Par | $ | 77,225 |
| | $ | 52,714 |
| | $ | 41,238 |
| | $ | 35,996 |
|
Discount | (26 | ) | | (8 | ) | | (6 | ) | | (4 | ) |
Total Discount Notes | 77,199 |
| | 52,706 |
| | 41,232 |
| | 35,992 |
|
Bonds: | | | | | | | |
Unswapped fixed-rate | 26,962 |
| | 26,350 |
| | 26,124 |
| | 25,513 |
|
Unswapped adjustable-rate | 4,065 |
| | 13,385 |
| | 27,610 |
| | 29,355 |
|
Swapped fixed-rate | 4,010 |
| | 6,489 |
| | 5,390 |
| | 3,697 |
|
Total par Bonds | 35,037 |
| | 46,224 |
| | 59,124 |
| | 58,565 |
|
Other items (1) | 68 |
| | 90 |
| | 93 |
| | 116 |
|
Total Bonds | 35,105 |
| | 46,314 |
| | 59,217 |
| | 58,681 |
|
Total Consolidated Obligations (2) | $ | 112,304 |
| | $ | 99,020 |
| | $ | 100,449 |
| | $ | 94,673 |
|
| |
(1) | Includes unamortized premiums/discounts, fair value option valuation adjustments, hedging and other basis adjustments. |
| |
(2) | The 11 FHLBanks have joint and several liability for the par amount of all of the Consolidated Obligations issued on their behalves. The par amount of the outstanding Consolidated Obligations for all of the FHLBanks was (in millions) $905,202 and $847,175 at December 31, 2015 and 2014, respectively. |
Our preferred sources of funding for LIBOR-indexed assets are Discount Notes, adjustable-rate Bonds, and swapped fixed-rate Bonds because they give us the ability to effectively match the LIBOR rate reset periods embedded in these assets. During 2015, we shifted the composition of this funding more towards Discount Notes. This change provided lower funding costs in the current market environment and therefore improved earnings as discussed in the "Net Interest Income" section of "Results of Operations." Discount Note balances also increased due to growth in Advance balances, most of which was in the short-term REPO program, as well as liquidity investments in order to ensure that member borrowing needs were met at year-end 2015.
This change in funding composition increases risk to changes in spreads between cashflows received on LIBOR-indexed assets and interest paid on Discount Notes. We believe the increased usage of Discount Note funding did not materially raise this risk because of the historically favorable relationship between the two rate indices.
The composition of unswapped fixed-rate Bonds, which typically have initial maturities greater than one year, was relatively stable in 2015 compared to 2014. The following table shows the allocation on December 31, 2015 of unswapped fixed-rate Bonds according to their final remaining maturity and next call date (for callable Bonds). We believe that the allocations of Bonds among these classifications provide effective mitigation of market risk exposure primarily at the macro level,to both higher and within the context of the entire balance sheet, rather than exclusively at the level of individual segments. Under this approach, the market risk/return profile of each segment may not match, or possibly even have the same trends as, what would occur if we managed each segment on a stand-alone basis. The tables below summarize each segment's operating results for the periods shown.lower interest rates.
|
| | | | | | | | | | | | | | | | |
(In millions) | Year of Maturity | | Year of Next Call |
| Callable | Noncallable | Amortizing | Total | | Callable |
Due in 1 year or less | $ | 30 |
| $ | 3,343 |
| $ | 1 |
| $ | 3,374 |
| | $ | 6,229 |
|
Due after 1 year through 2 years | 410 |
| 3,628 |
| — |
| 4,038 |
| | 240 |
|
Due after 2 years through 3 years | 1,270 |
| 3,205 |
| — |
| 4,475 |
| | — |
|
Due after 3 years through 4 years | 995 |
| 3,020 |
| — |
| 4,015 |
| | — |
|
Due after 4 years through 5 years | 553 |
| 2,383 |
| — |
| 2,936 |
| | — |
|
Thereafter | 3,211 |
| 4,913 |
| — |
| 8,124 |
| | — |
|
Total | $ | 6,469 |
| $ | 20,492 |
| $ | 1 |
| $ | 26,962 |
| | $ | 6,469 |
|
Deposits
Total deposits with us are normally a relatively minor source of low-cost funding. Total interest bearing deposits at December 31, 2015 were $0.8 billion, an increase of 10 percent from year-end 2014. The average balance of total interest bearing deposits in 2015 was $0.8 billion, a decrease of one percent from the average balance during 2014.
Derivatives Hedging Activity and Liquidity
Our use of and accounting for derivatives is discussed in the "Effect of the Use of Derivatives on Net Interest Income" section in "Results of Operations." Liquidity is discussed in the "Liquidity Risk" section in “Quantitative and Qualitative Disclosures About Risk Management.”
Capital Resources
The GLB Act and Finance Agency regulations specify limits on how much we can leverage capital by requiring that we maintain, at all times, at least a four percent regulatory capital-to-assets ratio. A lower ratio indicates more leverage. If financial leverage increases too much, or becomes too close to the regulatory limit, we have discretionary ability within our Capital Plan to enact changes to ensure capitalization remains strong and in compliance with regulatory limits.
We have always complied with our regulatory capital requirements. The following tables present capital amounts and capital-to-assets ratios, on both a GAAP and regulatory basis.
|
| | | | | | | | | | | | | | | |
| Year Ended December 31, |
(In millions) | 2015 | | 2014 |
| Period End | | Average | | Period End | | Average |
GAAP and Regulatory Capital | | | | | | | |
GAAP Capital Stock | $ | 4,429 |
| | $ | 4,344 |
| | $ | 4,267 |
| | $ | 4,298 |
|
Mandatorily Redeemable Capital Stock | 38 |
| | 61 |
| | 63 |
| | 105 |
|
Regulatory Capital Stock | 4,467 |
| | 4,405 |
| | 4,330 |
| | 4,403 |
|
Retained Earnings | 765 |
| | 745 |
| | 689 |
| | 666 |
|
Regulatory Capital | $ | 5,232 |
| | $ | 5,150 |
| | $ | 5,019 |
| | $ | 5,069 |
|
|
| | | | | | | | | | | |
| 2015 | | 2014 |
| Period End | | Average | | Period End | | Average |
GAAP and Regulatory Capital-to-Assets Ratio | | | | | | | |
GAAP | 4.36 | % | | 4.81 | % | | 4.63 | % | | 4.90 | % |
Regulatory | 4.40 |
| | 4.88 |
| | 4.71 |
| | 5.01 |
|
We consider the regulatory ratio to be a better representation of financial leverage than the GAAP ratio because, although the GAAP ratio treats mandatorily redeemable capital stock as a liability, it protects investors in our debt in the same manner as GAAP capital stock and retained earnings. Both GAAP and regulatory capital-to-assets ratios remained above the regulatory required minimum of four percent. The reduction in these ratios at December 31, 2015 was a temporary result of the elevated liquidity we carried at that time due to the reasons discussed above.
The following table presents the sources of change in regulatory capital stock balances in 2015 and 2014.
|
| | | | | | | |
(In millions) | 2015 | | 2014 |
Regulatory stock balance at beginning of year | $ | 4,330 |
| | $ | 4,814 |
|
Stock purchases: | | | |
Membership stock | 13 |
| | 11 |
|
Activity stock | 178 |
| | 73 |
|
Stock repurchases/redemptions: | | | |
Redemption of member excess | (1 | ) | | (1 | ) |
Repurchase of member excess | — |
| | (498 | ) |
Withdrawals | (53 | ) | | (69 | ) |
Regulatory stock balance at the end of the year | $ | 4,467 |
| | $ | 4,330 |
|
The table below shows the amount of excess capital stock.
|
| | | | | | | |
(In millions) | December 31, 2015 | | December 31, 2014 |
Excess capital stock (Capital Plan definition) | $ | 461 |
| | $ | 504 |
|
Cooperative utilization of capital stock | $ | 521 |
| | $ | 441 |
|
Mission Asset Activity capitalized with cooperative capital stock | $ | 13,034 |
| | $ | 11,020 |
|
A portion of capital stock is excess, meaning it is not required as a condition to being a member and not required to capitalize Mission Asset Activity. Excess capital stock provides a base of capital to manage financial leverage at prudent levels, augments loss protections for bondholders, and capitalizes a portion of growth in Mission Assets. The amount of excess capital stock, as defined by our Capital Plan, was $461 million at December 31, 2015, a decrease of $43 million from year-end 2014.
Membership and Stockholders
In 2015, we added 21 new member stockholders and lost 27 members, ending the year at 699. Most members lost merged with other Fifth District members and, therefore, the impact on our earnings and Mission Asset Activity was small. Of the members lost, 17 merged with other members, eight merged out of the District, one merged with a District non-member, and one relocated its charter out of District.
In 2015, there were no material changes in the allocation of membership by state, charter type, or asset size. At the end of 2015, the composition of membership by state was Ohio with 304, Tennessee with 199, and Kentucky with 196.
The Finance Agency issued a final rule on FHLBank membership in January 2016. This rule imposes new membership requirements and eliminates all currently eligible captive insurance companies from FHLBank membership, as discussed in "Executive Overview." The ruling also requires that these entities, which represented 15 members totaling $6.6 billion in Advances at December 31, 2015, pay off existing Advances within one year and cease any new borrowings. The subsequent loss of this membership segment will not significantly affect our financial condition or results of operations.
The following table provides the number of member stockholders by charter type.
|
| | | | | |
| December 31, |
| 2015 | | 2014 |
Commercial Banks | 418 |
| | 442 |
|
Thrifts and Savings Banks | 99 |
| | 101 |
|
Credit Unions | 124 |
| | 120 |
|
Insurance Companies | 54 |
| | 38 |
|
Community Development Financial Institutions | 4 |
| | 4 |
|
Total | 699 |
| | 705 |
|
The following table provides the ownership of capital stock by charter type.
|
| | | | | | | |
(In millions) | December 31, |
| 2015 | | 2014 |
Commercial Banks | $ | 3,425 |
| | $ | 3,441 |
|
Thrifts and Savings Banks | 378 |
| | 376 |
|
Credit Unions | 128 |
| | 121 |
|
Insurance Companies | 497 |
| | 328 |
|
Community Development Financial Institutions | 1 |
| | 1 |
|
Total GAAP Capital Stock | 4,429 |
| | 4,267 |
|
Mandatorily Redeemable Capital Stock | 38 |
| | 63 |
|
Total Regulatory Capital Stock | $ | 4,467 |
| | $ | 4,330 |
|
Credit union members hold relatively less stock than their membership proportion because they tend to be smaller than the average member and borrow less. Insurance company members hold relatively more stock than their membership proportion because they tend to be larger than the average member and borrow more.
The following table provides a summary of member stockholders by asset size.
|
| | | | | |
| December 31, |
Member Asset Size (1) | 2015 | | 2014 |
Up to $100 million | 177 |
| | 182 |
|
> $100 up to $500 million | 370 |
| | 381 |
|
> $500 million up to $1 billion | 76 |
| | 76 |
|
> $1 billion | 76 |
| | 66 |
|
Total Member Stockholders | 699 |
| | 705 |
|
|
| | | | | |
(1) | | | | | The December 31 membership composition reflects members' assets as of the most-recently available figures for total assets. |
Most members are smaller community financial institutions, with 78 percent having assets up to $500 million. As noted elsewhere, having larger members is important to help achieve our mission objectives, including providing valuable products and services to all members.
RESULTS OF OPERATIONS
Components of Earnings and Return on Equity
The following table is a summary income statement for the last three years. Each ROE percentage is computed by dividing income or expense for the category by the average amount of stockholders' equity for the period.
|
| | | | | | | | | | | |
(Dollars in millions) | Traditional Member Finance | | Mortgage Purchase Program | | Total |
2012 | | | | | |
Net interest income after provision for credit losses | $ | 210 |
| | $ | 97 |
| | $ | 307 |
|
Net income | $ | 154 |
| | $ | 81 |
| | $ | 235 |
|
Average assets | $ | 58,708 |
| | $ | 7,994 |
| | $ | 66,702 |
|
Assumed average capital allocation | $ | 3,335 |
| | $ | 454 |
| | $ | 3,789 |
|
Return on Average Assets (1) | 0.26 | % | | 1.01 | % | | 0.35 | % |
Return on Average Equity (1) | 4.62 | % | | 17.76 | % | | 6.20 | % |
| | | | | |
2011 | | | | | |
Net interest income after provision for credit losses | $ | 176 |
| | $ | 61 |
| | $ | 237 |
|
Net income | $ | 100 |
| | $ | 38 |
| | $ | 138 |
|
Average assets | $ | 59,563 |
| | $ | 7,725 |
| | $ | 67,288 |
|
Assumed average capital allocation | $ | 3,148 |
| | $ | 408 |
| | $ | 3,556 |
|
Return on Average Assets (1) | 0.17 | % | | 0.49 | % | | 0.21 | % |
Return on Average Equity (1) | 3.18 | % | | 9.35 | % | | 3.89 | % |
| | | | | |
2010 | | | | | |
Net interest income after provision for credit losses | $ | 180 |
| | $ | 82 |
| | $ | 262 |
|
Net income | $ | 109 |
| | $ | 55 |
| | $ | 164 |
|
Average assets | $ | 60,632 |
| | $ | 8,735 |
| | $ | 69,367 |
|
Assumed average capital allocation | $ | 3,077 |
| | $ | 444 |
| | $ | 3,521 |
|
Return on Average Assets (1) | 0.18 | % | | 0.63 | % | | 0.24 | % |
Return on Average Equity (1) | 3.55 | % | | 12.45 | % | | 4.67 | % |
|
| | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | 2015 | | 2014 | | 2013 |
| Amount | | ROE (1) | | Amount | | ROE (1) | | Amount | | ROE (1) |
Net interest income | $ | 322 |
| | 6.35 | % | | $ | 317 |
| | 6.40 | % | | $ | 328 |
| | 6.40 | % |
Reversal for credit losses | — |
| | — |
| | — |
| | (0.01 | ) | | (7 | ) | | (0.15 | ) |
Net interest income after reversal for credit losses | 322 |
| | 6.35 |
| | 317 |
| | 6.41 |
| | 335 |
| | 6.55 |
|
Net gains on derivatives and hedging activities | 13 |
| | 0.26 |
| | 7 |
| | 0.13 |
| | 8 |
| | 0.16 |
|
Other non-interest income | 17 |
| | 0.33 |
| | 16 |
| | 0.32 |
| | 12 |
| | 0.23 |
|
Total non-interest income | 30 |
| | 0.59 |
| | 23 |
| | 0.45 |
| | 20 |
| | 0.39 |
|
Total revenue | 352 |
| | 6.94 |
| | 340 |
| | 6.86 |
| | 355 |
| | 6.94 |
|
Total non-interest expense | 75 |
| | 1.49 |
| | 68 |
| | 1.38 |
| | 64 |
| | 1.26 |
|
Assessments | 28 |
| | 0.55 |
| | 28 |
| | 0.55 |
| | 30 |
| | 0.58 |
|
Net income | $ | 249 |
| | 4.90 | % | | $ | 244 |
| | 4.93 | % | | $ | 261 |
| | 5.10 | % |
| |
(1) | The ROE amounts have been computed using dollars in thousands. Accordingly, recalculations based upon the disclosed amounts (millions) in this table may produce nominally different results. |
Net income was steady in 2015 compared to 2014, although there was variation in individual factors that determine earnings. Profitability remained competitive as ROE continued to significantly exceed our benchmarks relative to short-term interest rates. Details on the individual factors contributing to the level and changes in profitability are explained in the sections below.
Net Interest Income
The largest component of net income is net interest income. Our principal goal in managing net interest income is to balance trade-offs between maintaining a moderate market risk profile and ensuring profitability remains competitive. Effective risk/return management requires us to focus principally on the relationships among assets and liabilities that affect net interest income, rather than individual balance sheet and income statement accounts in isolation.
Our ROE normally is lower than that of many other financial institutions because of the cooperative wholesale business model that results in narrow spreads to funding costs on our primary assets (Advances), the moderate overall risk profile, and the strategic objective to have a positive correlation of dividends to short-term interest rates.
Components of Net Interest Income
We generate net interest income from the following two components:
| |
▪ | Net interest rate spread. This component equals the balance of total earning assets multiplied by the difference between the book yield on interest-earning assets and the book cost of interest-bearing liabilities. It is composed of net (amortization)/accretion, prepayment fees on Advances, and all other earnings from interest-earning assets net of funding costs. The latter is the largest component and represents the coupon yields of interest-earning assets net of the coupon costs of Consolidated Obligations and deposits. |
| |
▪ | Earnings from funding assets with capital (“earnings from capital”). Because of our relatively low net interest rate spread compared to other financial institutions, we have historically derived a substantial proportion of net interest income from deploying interest-free capital in interest-earning assets. We deploy much of the capital in short-term and adjustable-rate assets in order to help ensure that ROE moves in the same direction as short-term interest rates and to help control market risk exposure. |
The following table shows the major components of net interest income. Reasons for the variance in net interest income between the periods are discussed below.
|
| | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | 2015 | | 2014 | | 2013 |
| Amount | | % of Earning Assets | | Amount | | % of Earning Assets | | Amount | | % of Earning Assets |
Components of net interest rate spread: | | | | | | | | | | | |
Net (amortization)/accretion (1) (2) | $ | (30 | ) | | (0.03 | )% | | $ | (11 | ) | | (0.01 | )% | | $ | (1 | ) | | — | % |
Prepayment fees on Advances, net (2) | 3 |
| | — |
| | 4 |
| | — |
| | 2 |
| | — |
|
Other components of net interest rate spread | 314 |
| | 0.30 |
| | 291 |
| | 0.29 |
| | 290 |
| | 0.31 |
|
Total net interest rate spread | 287 |
| | 0.27 |
| | 284 |
| | 0.28 |
| | 291 |
| | 0.31 |
|
Earnings from funding assets with interest-free capital | 35 |
| | 0.04 |
| | 33 |
| | 0.03 |
| | 37 |
| | 0.04 |
|
Total net interest income/net interest margin (3) | $ | 322 |
| | 0.31 | % | | $ | 317 |
| | 0.31 | % | | $ | 328 |
| | 0.35 | % |
| |
(1) | Includes (amortization)/accretion of premiums/discounts on mortgage assets and Consolidated Obligations and deferred transaction costs (concession fees) for Consolidated Obligations. |
| |
(2) | These components of net interest rate spread have been segregated to display their relative impact. |
| |
(3) | Net interest margin is net interest income before (reversal)/provision for credit losses as a percentage of average total interest earning assets. |
Net Amortization/Accretion: Net amortization/accretion (generally referred to as "amortization") includes monthly recognition of premiums and discounts paid on purchases of mortgage assets, as well as premiums, discounts and concessions paid on Consolidated Obligations. Periodic amortization adjustments do not necessarily indicate a trend in economic return over the entire life of mortgage assets, although it is one component of lifetime economic returns.
Amortization increased in 2015, compared to 2014, because net premium balances grew and long-term interest rates continue to fluctuate around very low levels. Amortization was lower than normal in 2013 due to a decline in actual and projected prepayment speeds in response to higher mortgage rates.
Prepayment Fees on Advances: Fees for members' early repayment of certain Advances are designed to make us economically indifferent to whether members hold Advances to maturity or repay them before maturity. Although Advance prepayment fees can be and have been significant in the past, they were minimal in 2015, 2014 and 2013, reflecting a low amount of member prepayments of Advances.
Other Components of Net Interest Rate Spread: Excluding net amortization and prepayment fees, the total other components of net interest rate spread increased $23 million in 2015 compared to 2014, while it increased only $1 million in 2014 compared to 2013. The following factors, presented in approximate order of impact from largest to smallest, accounted for the changes in other components of net interest rate spread.
2015 Versus 2014
| |
▪ | LIBOR Asset funding-Favorable: Net interest income increased by an estimated $18 million because we transitioned the funding of LIBOR-indexed assets from adjustable-rate LIBOR Bonds more towards lower-cost Discount Notes in response to a reduction in the cost of Discount Notes compared to the cost of adjustable-rate LIBOR Bonds. |
| |
▪ | MPP growth-Favorable: The average balance of mortgage loans held for portfolio increased $0.8 billion, which increased net interest income by an estimated $11 million. |
| |
▪ | Advance growth-Favorable: The $3.8 billion growth in average Advance balances improved net interest income by an estimated $8 million. |
| |
▪ | Fixed-rate asset funding-Unfavorable: A reduction in the amount of short-term debt funding longer-term fixed-rate mortgages lowered net interest income by an estimated $7 million. |
| |
▪ | Lower MPP spread-Unfavorable: The continued paydown of higher-yielding mortgage assets and low-cost debt led to a decline in the spread earned on mortgage loans, decreasing net interest income by an estimated $6 million. |
| |
▪ | Lower balances on mortgage-backed securities-Unfavorable: The average balance of the mortgage-backed securities portfolio declined $0.9 billion, which decreased net interest income by an estimated $5 million. |
| |
▪ | Other factors-Favorable: Various other factors, including, but not limited to, a decrease in the amount of mandatorily redeemable capital stock and higher spreads earned on mortgage-backed securities, increased net interest income by an estimated $4 million. |
2014 Versus 2013
| |
▪ | Asset-liability management-Unfavorable: Management strategies and actions related to reducing our market risk exposure, along with changes in the market rate environment, lowered earnings on a net basis of $29 million for the following reasons: |
| |
1) | Net interest income decreased $18 million due to a decline in mortgage asset spreads resulting from management actions to reduce market risk exposure by extending debt maturities and from continued run-off of higher yielding mortgages. |
| |
2) | Net interest income declined $11 million primarily because the cost of Discount Notes rose relative to LIBOR. Secondarily, we extended maturities of Discount Notes in order to reduce the burden of replacing Discount Notes as frequently. |
| |
▪ | Advance growth-Favorable: The $5.1 billion growth in average Advance balances at higher spreads improved net interest income by an estimated $26 million. |
| |
▪ | Higher balances on mortgage-backed securities-Favorable: The average balance of the mortgage-backed security portfolio increased $1.3 billion compared to 2013's average, which increased net interest income by an estimated $5 million. |
Earnings from Capital: The earnings from funding assets with interest-free capital did not change significantly in 2015 compared to 2014 and 2013 due to the continued low interest rate environment.
Average Balance Sheet and Rates
The following table provides average balances and rates for major balance sheet accounts, which determine the changes in the net interest rate spread. All data include the impact of interest rate swaps, which we allocate to each asset and liability category according to their designated hedging relationship. The changes in the net interest rate spread and net interest margin in 2015 versus 2014 and in 2014 versus 2013 occurred mostly from the net impact of the factors discussed above in “Components of Net Interest Income.”
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | 2015 | | 2014 | | 2013 |
| Average Balance | | Interest | | Average Rate (1) | | Average Balance | | Interest | | Average Rate (1) | | Average Balance | | Interest | | Average Rate (1) |
Assets | | | | | | | | | | | | | | | | | |
Advances | $ | 70,458 |
| | $ | 369 |
| | 0.52 | % | | $ | 66,642 |
| | $ | 318 |
| | 0.48 | % | | $ | 61,574 |
| | $ | 308 |
| | 0.50 | % |
Mortgage loans held for portfolio (2) | 7,611 |
| | 246 |
| | 3.23 |
| | 6,804 |
| | 237 |
| | 3.48 |
| | 7,065 |
| | 269 |
| | 3.80 |
|
Federal funds sold and securities purchased under resale agreements | 11,493 |
| | 14 |
| | 0.12 |
| | 9,673 |
| | 7 |
| | 0.07 |
| | 9,110 |
| | 8 |
| | 0.09 |
|
Interest-bearing deposits in banks (3) (4) (5) | 1,141 |
| | 2 |
| | 0.20 |
| | 2,244 |
| | 3 |
| | 0.15 |
| | 1,414 |
| | 2 |
| | 0.14 |
|
Mortgage-backed securities | 14,664 |
| | 326 |
| | 2.22 |
| | 15,594 |
| | 343 |
| | 2.20 |
| | 14,320 |
| | 313 |
| | 2.19 |
|
Other investments (4) | 41 |
| | — |
| | 0.11 |
| | 37 |
| | — |
| | 0.08 |
| | 26 |
| | — |
| | 0.12 |
|
Loans to other FHLBanks | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4 |
| | — |
| | 0.13 |
|
Total interest-earning assets | 105,408 |
| | 957 |
| | 0.91 |
| | 100,994 |
| | 908 |
| | 0.90 |
| | 93,513 |
| | 900 |
| | 0.96 |
|
Less: allowance for credit losses on mortgage loans | 2 |
| | | | | | 6 |
| | | | | | 12 |
| | | | |
Other assets | 163 |
| | | | | | 169 |
| | | | | | 190 |
| | | | |
Total assets | $ | 105,569 |
| | | | | | $ | 101,157 |
| | | | | | $ | 93,691 |
| | | | |
Liabilities and Capital | | | | | | | | | | | | | | | | | |
Term deposits | $ | 132 |
| | — |
| | 0.20 |
| | $ | 93 |
| | — |
| | 0.19 |
| | $ | 120 |
| | — |
| | 0.17 |
|
Other interest bearing deposits (5) | 704 |
| | — |
| | 0.01 |
| | 753 |
| | — |
| | 0.01 |
| | 955 |
| | — |
| | 0.01 |
|
Discount Notes | 52,706 |
| | 65 |
| | 0.12 |
| | 35,992 |
| | 28 |
| | 0.08 |
| | 34,574 |
| | 37 |
| | 0.11 |
|
Unswapped fixed-rate Bonds | 26,425 |
| | 528 |
| | 2.00 |
| | 25,605 |
| | 519 |
| | 2.03 |
| | 23,117 |
| | 488 |
| | 2.11 |
|
Unswapped adjustable-rate Bonds | 13,385 |
| | 21 |
| | 0.15 |
| | 29,355 |
| | 33 |
| | 0.11 |
| | 24,319 |
| | 35 |
| | 0.14 |
|
Swapped Bonds | 6,504 |
| | 19 |
| | 0.29 |
| | 3,721 |
| | 7 |
| | 0.20 |
| | 4,673 |
| | 7 |
| | 0.15 |
|
Mandatorily redeemable capital stock | 61 |
| | 2 |
| | 4.00 |
| | 105 |
| | 4 |
| | 4.01 |
| | 139 |
| | 5 |
| | 3.95 |
|
Other borrowings | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4 |
| | — |
| | 0.12 |
|
Total interest-bearing liabilities | 99,917 |
| | 635 |
| | 0.64 |
| | 95,624 |
| | 591 |
| | 0.62 |
| | 87,901 |
| | 572 |
| | 0.65 |
|
Non-interest bearing deposits | — |
| | | | | | 4 |
| | | | | | 18 |
| | | | |
Other liabilities | 578 |
| | | | | | 573 |
| | | | | | 651 |
| | | | |
Total capital | 5,074 |
| | | | | | 4,956 |
| | | | | | 5,121 |
| | | | |
Total liabilities and capital | $ | 105,569 |
| | | | | | $ | 101,157 |
| | | | | | $ | 93,691 |
| | | | |
| | | | | | | | | | | | | | | | | |
Net interest rate spread | | | | | 0.27 | % | | | | | | 0.28 | % | | | | | | 0.31 | % |
Net interest income and net interest margin (6) | | | $ | 322 |
| | 0.31 | % | | | | $ | 317 |
| | 0.31 | % | | | | $ | 328 |
| | 0.35 | % |
Average interest-earning assets to interest-bearing liabilities | | | | | 105.50 | % | | | | | | 105.62 | % | | | | | | 106.38 | % |
| |
(1) | Amounts used to calculate returnsaverage rates are based on numbersdollars in thousands. Accordingly, recalculations based upon the disclosed amounts (millions) may not produce the same results. |
| |
(2) | Non-accrual loans are included in average balances used to determine average rate. |
| |
(3) | Includes certificates of deposit and bank notes that are classified as available-for-sale securities. |
| |
(4) | Includes available-for-sale securities based on their amortized costs. The yield information does not give effect to changes in fair value that are reflected as a component of stockholders' equity for available-for-sale securities. |
| |
(5) | The average balance amounts include the rights or obligations to cash collateral, which are included in the fair value of derivative assets or derivative liabilities on the Statements of Condition at period end. |
| |
(6) | Net interest margin is net interest income before (reversal)/provision for credit losses as a percentage of average total interest earning assets. |
Traditional Member Finance Segment2015 Versus 2014.Rates on short-term interest-earning assets rose because average short-term interest rates were slightly higher in 2015. The average rate on mortgage-backed securities also rose nominally due to a change in composition. However, the average rate of total interest-earning assets increased only 0.01 percentage point in 2015 because of the continued very low interest rate environment and higher net amortization.
The average rate on total interest-bearing liabilities increased marginally due to modest increases in short-term interest rates that were partially offset by lower average long-term rates, more favorable funding spreads to market rates, and the transition of a large amount of LIBOR-indexed funding into lower-cost Discount Notes funding.
The net interest spread and net interest margin remained stable as the higher recognition of mortgage premium amortization was offset by the net other components of net interest rate spread discussed in the previous section.
2014 Versus 2013. The net interest spread and net interest margin decreased due to an increase in Advances balances and, secondarily, to the net effect of the other earnings factors discussed in the previous section. Although the Advance growth increased net interest income because of a larger asset base, the growth lowered the spread and margin because Advances tend to have narrower spreads to funding costs compared to mortgage assets.
The decline in the average rate on total earning assets and total interest-bearing liabilities resulted from the continued low rate environment and an increase in the balance sheet composition of instruments (due to the Advance growth) that tend to carry lower interest rates. The low rate environment particularly resulted in a decline in the average rate of long-term assets (such as certain Advances and mortgage loans held for portfolio) and long-term liabilities (unswapped fixed-rate Bonds). This is because a substantial portion of the principal paid down on these assets and liabilities, which had higher rates, was replaced with new assets and liabilities at lower rates.
Rates on short-term assets (Federal funds sold and securities sold under resale agreements) and liabilities (short-term borrowings and unswapped adjustable-rate Bonds) decreased slightly in 2014 as the low-rate rate environment continued.
Volume/Rate Analysis
Changes in both average balances (volume) and interest rates influence changes in net interest income. The following table summarizes these changes and trends in interest income and ROE in 2012 reflected primarily the following factors (each factor is discussed in more detail in sections above):interest expense.
|
| | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | 2015 over 2014 | | 2014 over 2013 |
| Volume (1)(3) | | Rate (2)(3) | | Total | | Volume (1)(3) | | Rate (2)(3) | | Total |
Increase (decrease) in interest income | | | | | | | | | | | |
Advances | $ | 19 |
| | $ | 32 |
| | $ | 51 |
| | $ | 25 |
| | $ | (15 | ) | | $ | 10 |
|
Mortgage loans held for portfolio | 27 |
| | (18 | ) | | 9 |
| | (10 | ) | | (22 | ) | | (32 | ) |
Federal funds sold and securities purchased under resale agreements | 1 |
| | 6 |
| | 7 |
| | 1 |
| | (2 | ) | | (1 | ) |
Interest-bearing deposits in banks | (2 | ) | | 1 |
| | (1 | ) | | 1 |
| | — |
| | 1 |
|
Mortgage-backed securities | (20 | ) | | 3 |
| | (17 | ) | | 28 |
| | 2 |
| | 30 |
|
Other investments | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Loans to other FHLBanks | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total | 25 |
| | 24 |
| | 49 |
| | 45 |
| | (37 | ) | | 8 |
|
Increase (decrease) in interest expense | | | | | | | | | | | |
Term deposits | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Other interest-bearing deposits | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Discount Notes | 16 |
| | 21 |
| | 37 |
| | 1 |
| | (10 | ) | | (9 | ) |
Unswapped fixed-rate Bonds | 17 |
| | (8 | ) | | 9 |
| | 51 |
| | (20 | ) | | 31 |
|
Unswapped adjustable-rate Bonds | (22 | ) | | 10 |
| | (12 | ) | | 7 |
| | (9 | ) | | (2 | ) |
Swapped Bonds | 7 |
| | 5 |
| | 12 |
| | (2 | ) | | 2 |
| | — |
|
Mandatorily redeemable capital stock | (2 | ) | | — |
| | (2 | ) | | (1 | ) | | — |
| | (1 | ) |
Other borrowings | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total | 16 |
| | 28 |
| | 44 |
| | 56 |
| | (37 | ) | | 19 |
|
Increase (decrease) in net interest income | $ | 9 |
| | $ | (4 | ) | | $ | 5 |
| | $ | (11 | ) | | $ | — |
| | $ | (11 | ) |
| |
▪(1) | Volume changes are calculated as the ending ofchange in volume multiplied by the REFCORP obligation;prior year rate. |
| |
▪(2) | our actions on asset-liability management and market risk exposure;Rate changes are calculated as the change in rate multiplied by the prior year average balance. |
| |
▪(3) | higher Advance prepayment fees;Changes that are not identifiable as either volume-related or rate-related, but rather are equally attributable to both volume and rate changes, have been allocated to the volume and rate categories based upon the proportion of the absolute value of the volume and rate changes. |
| |
▪ | gains on sales of mortgage-backed securities; |
Effect of the Use of Derivatives on Net Interest Income
The following table shows the effect of using derivatives on net interest income. The effect on earnings from the non-interest components of derivatives related to market value adjustments is provided in “Non-Interest Income and Non-Interest Expense.”
|
| | | | | | | | | | | |
(In millions)
| 2015 | | 2014 | | 2013 |
Advances: | | | | | |
Amortization of hedging activities in net interest income | $ | (3 | ) | | $ | (3 | ) | | $ | (3 | ) |
Net interest settlements included in net interest income | (84 | ) | | (91 | ) | | (107 | ) |
Mortgage loans: | | | | | |
Amortization of derivative fair value adjustments in net interest income | (4 | ) | | (4 | ) | | (2 | ) |
Consolidated Obligation Bonds: | | | | | |
Net interest settlements included in net interest income | 20 |
| | 18 |
| | 27 |
|
Decrease to net interest income | $ | (71 | ) | | $ | (80 | ) | | $ | (85 | ) |
Most of our use of derivatives synthetically convert the intermediate- and long-term fixed interest rates on certain Advances and Bonds to adjustable-coupon rates tied to short-term LIBOR (mostly one- and three-month repricing resets). These adjustable-rate coupons normally carry lower interest rates than the fixed rates. The use of derivatives lowered net interest income in each period primarily because the Advances that were swapped to short-term LIBOR had higher fixed interest rates than the Bonds
| |
▪ | increase in unrealized gains on derivatives and hedging activities; and |
| |
▪ | a $14 million decrease in net amortization of mortgage-backed securities, due to our actions to reduce the premium balance of mortgage-backed securities. |
that were swapped to short-term LIBOR. We accepted this reduction in earnings because it enabled us, as we designed, to significantly lower market risk exposure by creating a much closer match of actual cash flows between assets and liabilities than would occur otherwise. The reduction in earnings was similar in 2015, 2014, and 2013.
MPP SegmentProvision for Credit Losses
The
In 2015 and 2014, delinquency trends in the MPP continued to earndecrease while home prices were relatively steady, resulting in no provision for estimated incurred credit losses in 2015 and a substantial level of return compared with market interest rates, with$0.5 million reversal for estimated incurred credit losses in 2014. In 2013, we recorded a moderate amount of market risk and$7.5 million reversal for estimated incurred credit risk. In 2012,losses in the MPP averaged 12 percent of total average assets but accounted for 34 percent of earnings. The substantial increasedriven by higher home prices combined with improved delinquency trends in that year. Further information is in the MPP's net"Credit Risk - MPP" section in "Quantitative and Qualitative Disclosures About Risk Management" and Note 10 of the Notes to Financial Statements.
Non-Interest Income and Non-Interest Expense
The following table presents non-interest income and ROE in 2012 reflectednon-interest expense for each of the following factors in estimated order of importance, which are discussed in more detail above;last three years.
|
| | | | | | | | | | | |
(Dollars in millions) | 2015 | | 2014 | | 2013 |
Non-interest income | | | | | |
Net gains on derivatives and hedging activities | $ | 13 |
| | $ | 7 |
| | $ | 8 |
|
Other non-interest income, net | 17 |
| | 16 |
| | 12 |
|
Total non-interest income | $ | 30 |
| | $ | 23 |
| | $ | 20 |
|
Non-interest expense | | | | | |
Compensation and benefits | $ | 40 |
| | $ | 37 |
| | $ | 34 |
|
Other operating expense | 22 |
| | 17 |
| | 17 |
|
Finance Agency | 7 |
| | 7 |
| | 5 |
|
Office of Finance | 4 |
| | 4 |
| | 5 |
|
Other | 2 |
| | 3 |
| | 3 |
|
Total non-interest expense | $ | 75 |
| | $ | 68 |
| | $ | 64 |
|
Average total assets | $ | 105,569 |
| | $ | 101,157 |
| | $ | 93,691 |
|
Average regulatory capital | 5,150 |
| | 5,069 |
| | 5,271 |
|
Total non-interest expense to average total assets (1) | 0.07 | % | | 0.07 | % | | 0.07 | % |
Total non-interest expense to average regulatory capital (1) | 1.47 |
| | 1.35 |
| | 1.22 |
|
| |
▪(1) | our actions relatedAmounts used to asset-liability management and market risk exposure;calculate percentages are based on dollars in thousands. Accordingly, recalculations based upon the disclosed amounts (millions) may not produce the same results. |
Non-interest income increased in 2015 compared to 2014 primarily from larger gains on derivatives and hedging activities in 2015 compared to 2014, as presented in the table below. The change in non-interest expense in 2015 resulted primarily from higher legal fees and compensation and benefits.
Effect of Derivatives and Hedging Activities
|
| | | | | | | | | | | |
(In millions) | 2015 | | 2014 | | 2013 |
Net gains on derivatives and hedging activities | | | | | |
Advances: | | | | | |
Gains on fair value hedges | $ | 2 |
| | $ | 5 |
| | $ | 10 |
|
Gains on derivatives not receiving hedge accounting | 1 |
| | — |
| | 5 |
|
Mortgage loans: | | | | | |
Gains (losses) on derivatives not receiving hedge accounting | 1 |
| | — |
| | (11 | ) |
Consolidated Obligation Bonds: | | | | | |
Gains on fair value hedges | 1 |
| | — |
| | 1 |
|
Gains on derivatives not receiving hedge accounting | 8 |
| | 2 |
| | 3 |
|
Total net gains on derivatives and hedging activities | 13 |
| | 7 |
| | 8 |
|
Net gains on financial instruments held at fair value (1) | 1 |
| | 2 |
| | — |
|
Total net effect of derivatives and hedging activities | $ | 14 |
| | $ | 9 |
| | $ | 8 |
|
| |
▪(1) | the decrease in the provision for credit losses; and |
| |
▪ | the ending of the REFCORP obligation.Includes only those gains or losses on financial instruments held at fair value that have an economic derivative "assigned." |
The previous factorsamounts of income volatility in derivatives and hedging activities were partially offset by lower spreads on new MPP loans relativemodest compared to spreads earned on MPPthe notional principal paid down. The amountamounts, well within the range of MPP net amortization was similar in 2012normal historical fluctuation, and 2011, $38 million versus $35 million, respectively.consistent with the close hedging relationships of our derivative transactions.
Compared to the Traditional Member Finance segment, the MPP segment can exhibit more earnings volatility relative to short-term interest rates and more credit risk exposure, but also provides the opportunity for enhancing risk-adjusted returns which normally augments earnings. As discussed elsewhere, although mortgage assets are the largest source of our market risk, we believe that we have historically managed the risk prudently and that these assets do not excessively elevate the balance sheet's overall market risk exposure.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT RISK MANAGEMENT
Market Risk
During 2015, as in 2014, the market risk exposure to changing interest rates was moderate overall and well within policy limits. We believe that profitability would not become uncompetitive unless long-term rates were to permanently increase over the next 12 months by five percentage points or more combined with short-term rates increasing to at least seven percent. We believe such a stress scenario is extremely unlikely to occur in the foreseeable future. Our market risk exposure to lower long-term interest rates, even up to two percentage points, would result in ROE remaining well above market interest rates.
Capital Adequacy
We believe members place a high value on their capital investment in our company. We maintained compliance with regulatory capital requirements. Capital ratios at December 31, 2015 and all throughout the year exceeded the regulatory required minimum of four percent. We believe that the amount of our retained earnings is sufficient to protect against impairment risk of capital stock and to provide the opportunity to stabilize dividends. Our Capital Plan has safeguards to prevent financial leverage from increasing beyond regulatory minimums or below safe levels.
Credit Risk
In 2015, we continued to experience a de minimis level of overall residual credit risk exposure from our Credit Services, making investments, and executing derivative transactions. We believe policies and procedures related to credit underwriting, Advance collateral management, and transactions with investment and derivative counterparties continue to fully mitigate these risks. Therefore, we have never experienced any credit losses and we continue to have no loan loss reserves or impairment recorded for these instruments.
Residual credit risk exposure in the mortgage loan portfolio was minimal. The allowance for credit losses in the MPP continued to decline and was $2 million at December 31, 2015.
Liquidity Risk
Our liquidity position remained strong during 2015, as did our overall ability to fund operations through the issuance of Consolidated Obligations at acceptable interest costs. Investor demand for FHLBank System debt continued to be robust. There were no substantive stresses on market access or liquidity from external market and political events. Although we can make no assurances, we expect this to continue to be the case and believe there is only a remote possibility of a liquidity or funding crisis in the FHLBank System that could impair our ability to participate, on a cost-effective basis, in issuances of new debt, service outstanding debt, maintain adequate capitalization, or pay competitive dividends.
ANALYSIS OF FINANCIAL CONDITION
Mission Asset Activity
Mission Assets are the primary means by which we fulfill our mission with direct connections to members. We regularly monitor the balance sheet concentration of Mission Asset Activity. In 2015, our Primary Mission Asset ratio, as defined in "Regulatory and Legislative Risk" of the Executive Overview, was 79 percent. In assessing mission achievement, we also consider supplemental sources of Mission Asset Activity, the most significant of which is Letters of Credit issued to members.
Credit Services
Credit Activity and Advance Composition
The tables below show trends in Advance balances by major programs and in the notional amount of Letters of Credit.
|
| | | | | | | | | | | | | |
(Dollars in millions) | December 31, 2015 | | December 31, 2014 |
| Balance | | Percent(1) | | Balance | | Percent(1) |
Adjustable/Variable Rate Indexed: | | | | | | | |
LIBOR | $ | 47,312 |
| | 65 | % | | $ | 51,839 |
| | 74 | % |
Other | 617 |
| | 1 |
| | 515 |
| | 1 |
|
Total | 47,929 |
| | 66 |
| | 52,354 |
| | 75 |
|
Fixed-Rate: | | | | | | | |
REPO | 10,568 |
| | 14 |
| | 5,201 |
| | 7 |
|
Regular Fixed-Rate | 9,248 |
| | 13 |
| | 7,398 |
| | 11 |
|
Putable (2) | 1,046 |
| | 1 |
| | 1,617 |
| | 2 |
|
Amortizing/Mortgage Matched | 2,706 |
| | 4 |
| | 2,734 |
| | 4 |
|
Other | 1,745 |
| | 2 |
| | 995 |
| | 1 |
|
Total | 25,313 |
| | 34 |
| | 17,945 |
| | 25 |
|
Total Advances Principal | $ | 73,242 |
| | 100 | % | | $ | 70,299 |
| | 100 | % |
| | | | | | | |
Letters of Credit (notional) | $ | 19,555 |
| | | | $ | 17,780 |
| | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | December 31, 2015 | | September 30, 2015 | | June 30, 2015 | | March 31, 2015 |
| Balance | | Percent(1) | | Balance | | Percent(1) | | Balance | | Percent(1) | | Balance | | Percent(1) |
Adjustable/Variable-Rate Indexed: | | | | | | | | | | | | | | | |
LIBOR | $ | 47,312 |
| | 65 | % | | $ | 49,313 |
| | 64 | % | | $ | 48,242 |
| | 68 | % | | $ | 49,103 |
| | 73 | % |
Other | 617 |
| | 1 |
| | 565 |
| | 1 |
| | 597 |
| | 1 |
| | 407 |
| | 1 |
|
Total | 47,929 |
| | 66 |
| | 49,878 |
| | 65 |
| | 48,839 |
| | 69 |
| | 49,510 |
| | 74 |
|
Fixed-Rate: | | | | | | | | | | | | | | | |
REPO | 10,568 |
| | 14 |
| | 12,023 |
| | 16 |
| | 8,499 |
| | 12 |
| | 4,061 |
| | 6 |
|
Regular Fixed-Rate | 9,248 |
| | 13 |
| | 9,385 |
| | 12 |
| | 8,184 |
| | 11 |
| | 7,977 |
| | 12 |
|
Putable (2) | 1,046 |
| | 1 |
| | 1,557 |
| | 2 |
| | 1,570 |
| | 2 |
| | 1,580 |
| | 3 |
|
Amortizing/Mortgage Matched | 2,706 |
| | 4 |
| | 2,723 |
| | 3 |
| | 2,703 |
| | 4 |
| | 2,662 |
| | 4 |
|
Other | 1,745 |
| | 2 |
| | 1,637 |
| | 2 |
| | 1,223 |
| | 2 |
| | 825 |
| | 1 |
|
Total | 25,313 |
| | 34 |
| | 27,325 |
| | 35 |
| | 22,179 |
| | 31 |
| | 17,105 |
| | 26 |
|
Total Advances Principal | $ | 73,242 |
| | 100 | % | | $ | 77,203 |
| | 100 | % | | $ | 71,018 |
| | 100 | % | | $ | 66,615 |
| | 100 | % |
| | | | | | | | | | | | | | | |
Letters of Credit (notional) | $ | 19,555 |
| | | | $ | 17,594 |
| | | | $ | 19,006 |
| | | | $ | 16,905 |
| | |
| |
(1) | As a percentage of total Advances principal. |
| |
(2) | Excludes Putable Advances where the related put options have expired. Such Advances are classified based on their current terms. |
The modest growth and variability in Advance balances in 2015 was driven primarily by changes in variable-rate and short-term repurchase (REPO) Advances as the reduction in the need for variable-rate funding from our largest member was more than offset by REPO Advance borrowings. The increase in REPO Advance borrowings was primarily from new insurance company members. However, the borrowings from these new members are required to be paid off over the next year due to the Finance Agency's 2016 final rule on membership requirements, which is discussed further in the "Executive Overview."
Members increased their available lines in the Letters of Credit program by $1.8 billion (10 percent) in 2015. Letters of Credit balances averaged $17.7 billion during 2015, an increase of $2.5 billion (17 percent) from the average balance during 2014. We
normally earn fees on Letters of Credit based on the actual average amount of the Letters utilized, which generally is less than the notional amount issued.
Advance Usage
In addition to analyzing Advance balances by dollar trends and the number of members utilizing them, we monitor the degree to which members use Advances to fund their balance sheets. The following table shows the unweighted, average ratio of each member's Advance balance to its most-recently available figures for total assets.
|
| | | | | | | | | | | | | | |
| December 31, 2015 | | September 30, 2015 | | June 30, 2015 | | March 31, 2015 | | December 31, 2014 |
Average Advances-to-Assets for Members | | | | | | | | | |
Assets less than $1.0 billion (623 members) | 3.26 | % | | 3.20 | % | | 3.14 | % | | 3.06 | % | | 3.24 | % |
Assets over $1.0 billion (76 members) | 4.35 |
| | 4.75 |
| | 3.90 |
| | 3.08 |
| | 3.75 |
|
All members | 3.37 |
| | 3.35 |
| | 3.22 |
| | 3.06 |
| | 3.29 |
|
Advance usage ratios were slightly higher at year-end 2015 compared to year-end 2014, driven primarily by an increase in short-term borrowings and the inclusion of borrowings from several new insurance company members. Usage ratio trends for members with assets less than $1.0 billion were stable within a narrow range during the same time periods.
The following table shows Advance usage of members by charter type. |
| | | | | | | | | | | | | |
(Dollars in millions) | December 31, 2015 | | December 31, 2014 |
| Par Value of Advances | | Percent of Total Par Value of Advances | | Par Value of Advances | | Percent of Total Par Value of Advances |
Commercial Banks | $ | 53,479 |
| | 73 | % | | $ | 59,119 |
| | 84 | % |
Thrifts and Savings Banks | 5,220 |
| | 7 |
| | 4,067 |
| | 6 |
|
Credit Unions | 957 |
| | 1 |
| | 1,110 |
| | 1 |
|
Insurance Companies | 13,428 |
| | 19 |
| | 5,408 |
| | 8 |
|
Community Development Financial Institutions | 2 |
| | — |
| | 1 |
| | — |
|
Total member Advances | 73,086 |
| | 100 |
| | 69,705 |
| | 99 |
|
Former member borrowings | 156 |
| | — |
| | 594 |
| | 1 |
|
Total par value of Advances | $ | 73,242 |
| | 100 | % | | $ | 70,299 |
| | 100 | % |
The following tables present principal balances for the five members with the largest Advance borrowings.
|
| | | | | | | | | | | | | | | | |
(Dollars in millions) | | | | | | | | | | |
December 31, 2015 | | December 31, 2014 |
Name | | Par Value of Advances | | Percent of Total Par Value of Advances | | Name | | Par Value of Advances | | Percent of Total Par Value of Advances |
JPMorgan Chase Bank, N.A. | | $ | 35,350 |
| | 48 | % | | JPMorgan Chase Bank, N.A. | | $ | 41,300 |
| | 59 | % |
U.S. Bank, N.A. | | 10,086 |
| | 14 |
| | U.S. Bank, N.A. | | 8,338 |
| | 12 |
|
Capstead Insurance, LLC | | 2,875 |
| | 4 |
| | The Huntington National Bank | | 2,083 |
| | 3 |
|
Nationwide Life Insurance Company | | 2,279 |
| | 3 |
| | Nationwide Life Insurance Company | | 1,761 |
| | 3 |
|
Third Federal Savings and Loan Association | | 2,162 |
| | 3 |
| | Western-Southern Life Assurance Co | | 1,623 |
| | 2 |
|
Total of Top 5 | | $ | 52,752 |
| | 72 | % | | Total of Top 5 | | $ | 55,105 |
| | 79 | % |
Advance concentration ratios are influenced by, and generally similar to, concentration ratios of financial activity among our Fifth District financial institutions. We believe that having large financial institutions that actively use our Mission Asset Activity augments the value of membership to all members. For example, such activity improves our operating efficiency, increases our earnings and thereby contributions to housing and community investment programs, may enable us over time to obtain more favorable funding costs, and helps us maintain competitively priced Mission Asset Activity.
Mortgage Loans Held for Portfolio (Mortgage Purchase Program, or "MPP")
The table below shows principal purchases and reductions of loans in the MPP for each of the last two years.
|
| | | | | | | |
(In millions) | 2015 | | 2014 |
Balance, beginning of year | $ | 6,796 |
| | $ | 6,643 |
|
Principal purchases | 2,348 |
| | 1,226 |
|
Principal reductions | (1,386 | ) | | (1,073 | ) |
Balance, end of year | $ | 7,758 |
| | $ | 6,796 |
|
The increase in principal loan balances in 2015 resulted from higher amounts of loan purchases, particularly from our two largest sellers who drive program balances. In 2015, 99 members sold us mortgage loans, with the number of monthly sellers averaging 65. All loans acquired in 2015 were conventional loans.
The following tables show the percentage of principal balances from PFIs supplying five percent or more of total principal and the percentage of principal balances from all other PFIs. As shown in the table below, MPP activity is concentrated amongst a few members.
|
| | | | | | | | | | | | | | |
(Dollars in millions) | December 31, 2015 | | | December 31, 2014 |
| Principal | | % of Total | | | Principal | | % of Total |
Union Savings Bank | $ | 2,242 |
| | 29 | % | | Union Savings Bank | $ | 1,593 |
| | 23 | % |
PNC Bank, N.A. (1) | 839 |
| | 11 |
| | PNC Bank, N.A. (1) | 1,074 |
| | 16 |
|
Guardian Savings Bank FSB | 633 |
| | 8 |
| | Guardian Savings Bank FSB | 406 |
| | 6 |
|
All others | 4,044 |
| | 52 |
| | All others | 3,723 |
| | 55 |
|
Total | $ | 7,758 |
| | 100 | % | | Total | $ | 6,796 |
| | 100 | % |
(1)Former member.
We closely track the refinancing incentives of our mortgage assets (including loans in the MPP and mortgage-backed securities) because the option for homeowners to change their principal payments normally represents a large portion of our market risk exposure. MPP principal paydowns in all of 2015 equated to a 14 percent annual constant prepayment rate, up from the 12 percent rate for all of 2014, as the refinancing incentives for many of our mortgage assets increased.
The MPP's composition of balances by loan type, original final maturity, and weighted-average mortgage note rate did not change materially in 2015. The weighted average mortgage note rate fell from 4.36 percent at the end of 2014 to 4.14 percent at the end of 2015. This decline reflected a continuing trend of prepayments of higher rate mortgages and purchases of lower rate mortgages. MPP yields earned in 2015, after consideration of funding costs, continued to offer favorable returns relative to their market risk exposure.
Housing and Community Investment
In 2015, we accrued $28 million of earnings for the Affordable Housing Program, which will be awarded to members in 2016. This amount represents no change from 2014 due to the similar amount of earnings in each year.
Including funds available in 2015 from previous years, we had $27 million available for the competitive Affordable Housing Program in 2015, which we awarded to 70 projects through a single competitive offering. In addition, we disbursed $9 million to 171 members on behalf of 1,869 homebuyers through the Welcome Home Program, which assists homebuyers with down payments and closing costs. In total, just over one-quarter of members received approval for funding under the two Affordable Housing Programs.
Additionally, in 2015 our Board committed $1 million to the Carol M. Peterson Housing Fund (CMP Fund), which helped 151 homeowners, and continued its commitment to the $5 million Disaster Reconstruction Program. Both are voluntary programs beyond the 10 percent of earnings that we are required by law to set aside for the Affordable Housing Program.
Our activities to support affordable housing and economic development also include offering Advances through the Affordable Housing Program, Community Investment Program and Economic Development Program with below-market interest rates at
or near zero profit for us. At the end of 2015, Advance balances under these programs totaled $449 million. AHP Advance balances have declined in recent years, reflecting our preference to distribute AHP subsidy in the form of grants.
Investments
The table below presents the ending and average balances of the investment portfolio.
|
| | | | | | | | | | | | | | | |
(In millions) | 2015 | | 2014 |
| Ending Balance | | Average Balance | | Ending Balance | | Average Balance |
Liquidity investments | $ | 22,110 |
| | $ | 12,590 |
| | $ | 11,319 |
| | $ | 11,856 |
|
Mortgage-backed securities | 15,246 |
| | 14,664 |
| | 14,688 |
| | 15,594 |
|
Other investments (1) | — |
| | 85 |
| | — |
| | 98 |
|
Total investments | $ | 37,356 |
| | $ | 27,339 |
| | $ | 26,007 |
| | $ | 27,548 |
|
| |
(1) | The average balance includes the rights or obligations to cash collateral, which are included in the fair value of derivative assets or derivative liabilities on the Statements of Condition at period end. |
We continued to maintain an ample amount of asset liquidity. Liquidity investment levels can vary significantly based on liquidity needs, the availability of acceptable net spreads, the number of eligible counterparties that meet our unsecured credit risk criteria, and changes in the amount of Mission Assets. It is normal for liquidity investments to vary by up to several billion dollars on a daily basis.
Certain dealers, who play a large role in facilitating the distribution of our debt to investors, are being more reluctant to expand the amount of our debt on their balance sheets over quarter- and year-ends primarily due to the perceived growing burden of their regulatory capital environment associated with Basel. Because of this, we conservatively carried a larger amount of liquidity leading up to year-end 2015 to satisfy any potential member borrowing needs during a period where accessing additional liquidity may be more challenging.
Our overarching strategy for mortgage-backed securities is to keep holdings as close as possible to the regulatory maximum of three times regulatory capital, subject to the availability of securities that we believe provide acceptable risk/return tradeoffs. The balance of mortgage-backed securities at December 31, 2015 represented a 2.91 multiple of regulatory capital and consisted of $11.3 billion of securities issued by Fannie Mae or Freddie Mac (of which $1.7 billion were floating-rate securities), $0.9 billion of floating-rate securities issued by the National Credit Union Administration (NCUA), and $3.0 billion of securities issued by Ginnie Mae (a majority of which are fixed rate). The NCUA securities have coupons tied to one-month LIBOR with interest rate caps ranging from seven to eight percent. We held no private-label mortgage-backed securities.
The table below shows principal purchases and paydowns of our mortgage-backed securities for each of the last two years.
|
| | | | | | | |
(In millions) | Mortgage-backed Securities Principal |
| 2015 | | 2014 |
Balance, beginning of year | $ | 14,715 |
| | $ | 16,087 |
|
Principal purchases | 3,099 |
| | 722 |
|
Principal paydowns | (2,611 | ) | | (2,094 | ) |
Balance, end of year | $ | 15,203 |
| | $ | 14,715 |
|
Principal paydowns in 2015 equated to a 16 percent annual constant prepayment rate, up from a 13 percent rate in 2014. Purchases have outpaced paydowns this year due to the availability of mortgage securities offering attractive risk/return trade-offs.
Consolidated Obligations
The table below presents the ending and average balances of our participations in Consolidated Obligations.
|
| | | | | | | | | | | | | | | |
(In millions) | 2015 | | 2014 |
| Ending Balance | | Average Balance | | Ending Balance | | Average Balance |
Discount Notes: | | | | | | | |
Par | $ | 77,225 |
| | $ | 52,714 |
| | $ | 41,238 |
| | $ | 35,996 |
|
Discount | (26 | ) | | (8 | ) | | (6 | ) | | (4 | ) |
Total Discount Notes | 77,199 |
| | 52,706 |
| | 41,232 |
| | 35,992 |
|
Bonds: | | | | | | | |
Unswapped fixed-rate | 26,962 |
| | 26,350 |
| | 26,124 |
| | 25,513 |
|
Unswapped adjustable-rate | 4,065 |
| | 13,385 |
| | 27,610 |
| | 29,355 |
|
Swapped fixed-rate | 4,010 |
| | 6,489 |
| | 5,390 |
| | 3,697 |
|
Total par Bonds | 35,037 |
| | 46,224 |
| | 59,124 |
| | 58,565 |
|
Other items (1) | 68 |
| | 90 |
| | 93 |
| | 116 |
|
Total Bonds | 35,105 |
| | 46,314 |
| | 59,217 |
| | 58,681 |
|
Total Consolidated Obligations (2) | $ | 112,304 |
| | $ | 99,020 |
| | $ | 100,449 |
| | $ | 94,673 |
|
| |
(1) | Includes unamortized premiums/discounts, fair value option valuation adjustments, hedging and other basis adjustments. |
| |
(2) | The 11 FHLBanks have joint and several liability for the par amount of all of the Consolidated Obligations issued on their behalves. The par amount of the outstanding Consolidated Obligations for all of the FHLBanks was (in millions) $905,202 and $847,175 at December 31, 2015 and 2014, respectively. |
Our preferred sources of funding for LIBOR-indexed assets are Discount Notes, adjustable-rate Bonds, and swapped fixed-rate Bonds because they give us the ability to effectively match the LIBOR rate reset periods embedded in these assets. During 2015, we shifted the composition of this funding more towards Discount Notes. This change provided lower funding costs in the current market environment and therefore improved earnings as discussed in the "Net Interest Income" section of "Results of Operations." Discount Note balances also increased due to growth in Advance balances, most of which was in the short-term REPO program, as well as liquidity investments in order to ensure that member borrowing needs were met at year-end 2015.
This change in funding composition increases risk to changes in spreads between cashflows received on LIBOR-indexed assets and interest paid on Discount Notes. We believe the increased usage of Discount Note funding did not materially raise this risk because of the historically favorable relationship between the two rate indices.
The composition of unswapped fixed-rate Bonds, which typically have initial maturities greater than one year, was relatively stable in 2015 compared to 2014. The following table shows the allocation on December 31, 2015 of unswapped fixed-rate Bonds according to their final remaining maturity and next call date (for callable Bonds). We believe that the allocations of Bonds among these classifications provide effective mitigation of market risk exposure to both higher and lower interest rates.
|
| | | | | | | | | | | | | | | | |
(In millions) | Year of Maturity | | Year of Next Call |
| Callable | Noncallable | Amortizing | Total | | Callable |
Due in 1 year or less | $ | 30 |
| $ | 3,343 |
| $ | 1 |
| $ | 3,374 |
| | $ | 6,229 |
|
Due after 1 year through 2 years | 410 |
| 3,628 |
| — |
| 4,038 |
| | 240 |
|
Due after 2 years through 3 years | 1,270 |
| 3,205 |
| — |
| 4,475 |
| | — |
|
Due after 3 years through 4 years | 995 |
| 3,020 |
| — |
| 4,015 |
| | — |
|
Due after 4 years through 5 years | 553 |
| 2,383 |
| — |
| 2,936 |
| | — |
|
Thereafter | 3,211 |
| 4,913 |
| — |
| 8,124 |
| | — |
|
Total | $ | 6,469 |
| $ | 20,492 |
| $ | 1 |
| $ | 26,962 |
| | $ | 6,469 |
|
Deposits
Total deposits with us are normally a relatively minor source of low-cost funding. Total interest bearing deposits at December 31, 2015 were $0.8 billion, an increase of 10 percent from year-end 2014. The average balance of total interest bearing deposits in 2015 was $0.8 billion, a decrease of one percent from the average balance during 2014.
Derivatives Hedging Activity and Liquidity
Our use of and accounting for derivatives is discussed in the "Effect of the Use of Derivatives on Net Interest Income" section in "Results of Operations." Liquidity is discussed in the "Liquidity Risk" section in “Quantitative and Qualitative Disclosures About Risk Management.”
Capital Resources
The GLB Act and Finance Agency regulations specify limits on how much we can leverage capital by requiring that we maintain, at all times, at least a four percent regulatory capital-to-assets ratio. A lower ratio indicates more leverage. If financial leverage increases too much, or becomes too close to the regulatory limit, we have discretionary ability within our Capital Plan to enact changes to ensure capitalization remains strong and in compliance with regulatory limits.
We have always complied with our regulatory capital requirements. The following tables present capital amounts and capital-to-assets ratios, on both a GAAP and regulatory basis.
|
| | | | | | | | | | | | | | | |
| Year Ended December 31, |
(In millions) | 2015 | | 2014 |
| Period End | | Average | | Period End | | Average |
GAAP and Regulatory Capital | | | | | | | |
GAAP Capital Stock | $ | 4,429 |
| | $ | 4,344 |
| | $ | 4,267 |
| | $ | 4,298 |
|
Mandatorily Redeemable Capital Stock | 38 |
| | 61 |
| | 63 |
| | 105 |
|
Regulatory Capital Stock | 4,467 |
| | 4,405 |
| | 4,330 |
| | 4,403 |
|
Retained Earnings | 765 |
| | 745 |
| | 689 |
| | 666 |
|
Regulatory Capital | $ | 5,232 |
| | $ | 5,150 |
| | $ | 5,019 |
| | $ | 5,069 |
|
|
| | | | | | | | | | | |
| 2015 | | 2014 |
| Period End | | Average | | Period End | | Average |
GAAP and Regulatory Capital-to-Assets Ratio | | | | | | | |
GAAP | 4.36 | % | | 4.81 | % | | 4.63 | % | | 4.90 | % |
Regulatory | 4.40 |
| | 4.88 |
| | 4.71 |
| | 5.01 |
|
We consider the regulatory ratio to be a better representation of financial leverage than the GAAP ratio because, although the GAAP ratio treats mandatorily redeemable capital stock as a liability, it protects investors in our debt in the same manner as GAAP capital stock and retained earnings. Both GAAP and regulatory capital-to-assets ratios remained above the regulatory required minimum of four percent. The reduction in these ratios at December 31, 2015 was a temporary result of the elevated liquidity we carried at that time due to the reasons discussed above.
The following table presents the sources of change in regulatory capital stock balances in 2015 and 2014.
|
| | | | | | | |
(In millions) | 2015 | | 2014 |
Regulatory stock balance at beginning of year | $ | 4,330 |
| | $ | 4,814 |
|
Stock purchases: | | | |
Membership stock | 13 |
| | 11 |
|
Activity stock | 178 |
| | 73 |
|
Stock repurchases/redemptions: | | | |
Redemption of member excess | (1 | ) | | (1 | ) |
Repurchase of member excess | — |
| | (498 | ) |
Withdrawals | (53 | ) | | (69 | ) |
Regulatory stock balance at the end of the year | $ | 4,467 |
| | $ | 4,330 |
|
The table below shows the amount of excess capital stock.
|
| | | | | | | |
(In millions) | December 31, 2015 | | December 31, 2014 |
Excess capital stock (Capital Plan definition) | $ | 461 |
| | $ | 504 |
|
Cooperative utilization of capital stock | $ | 521 |
| | $ | 441 |
|
Mission Asset Activity capitalized with cooperative capital stock | $ | 13,034 |
| | $ | 11,020 |
|
A portion of capital stock is excess, meaning it is not required as a condition to being a member and not required to capitalize Mission Asset Activity. Excess capital stock provides a base of capital to manage financial leverage at prudent levels, augments loss protections for bondholders, and capitalizes a portion of growth in Mission Assets. The amount of excess capital stock, as defined by our Capital Plan, was $461 million at December 31, 2015, a decrease of $43 million from year-end 2014.
Membership and Stockholders
In 2015, we added 21 new member stockholders and lost 27 members, ending the year at 699. Most members lost merged with other Fifth District members and, therefore, the impact on our earnings and Mission Asset Activity was small. Of the members lost, 17 merged with other members, eight merged out of the District, one merged with a District non-member, and one relocated its charter out of District.
In 2015, there were no material changes in the allocation of membership by state, charter type, or asset size. At the end of 2015, the composition of membership by state was Ohio with 304, Tennessee with 199, and Kentucky with 196.
The Finance Agency issued a final rule on FHLBank membership in January 2016. This rule imposes new membership requirements and eliminates all currently eligible captive insurance companies from FHLBank membership, as discussed in "Executive Overview." The ruling also requires that these entities, which represented 15 members totaling $6.6 billion in Advances at December 31, 2015, pay off existing Advances within one year and cease any new borrowings. The subsequent loss of this membership segment will not significantly affect our financial condition or results of operations.
The following table provides the number of member stockholders by charter type.
|
| | | | | |
| December 31, |
| 2015 | | 2014 |
Commercial Banks | 418 |
| | 442 |
|
Thrifts and Savings Banks | 99 |
| | 101 |
|
Credit Unions | 124 |
| | 120 |
|
Insurance Companies | 54 |
| | 38 |
|
Community Development Financial Institutions | 4 |
| | 4 |
|
Total | 699 |
| | 705 |
|
The following table provides the ownership of capital stock by charter type.
|
| | | | | | | |
(In millions) | December 31, |
| 2015 | | 2014 |
Commercial Banks | $ | 3,425 |
| | $ | 3,441 |
|
Thrifts and Savings Banks | 378 |
| | 376 |
|
Credit Unions | 128 |
| | 121 |
|
Insurance Companies | 497 |
| | 328 |
|
Community Development Financial Institutions | 1 |
| | 1 |
|
Total GAAP Capital Stock | 4,429 |
| | 4,267 |
|
Mandatorily Redeemable Capital Stock | 38 |
| | 63 |
|
Total Regulatory Capital Stock | $ | 4,467 |
| | $ | 4,330 |
|
Credit union members hold relatively less stock than their membership proportion because they tend to be smaller than the average member and borrow less. Insurance company members hold relatively more stock than their membership proportion because they tend to be larger than the average member and borrow more.
The following table provides a summary of member stockholders by asset size.
|
| | | | | |
| December 31, |
Member Asset Size (1) | 2015 | | 2014 |
Up to $100 million | 177 |
| | 182 |
|
> $100 up to $500 million | 370 |
| | 381 |
|
> $500 million up to $1 billion | 76 |
| | 76 |
|
> $1 billion | 76 |
| | 66 |
|
Total Member Stockholders | 699 |
| | 705 |
|
| |
(1) | The December 31 membership composition reflects members' assets as of the most-recently available figures for total assets. |
Most members are smaller community financial institutions, with 78 percent having assets up to $500 million. As noted elsewhere, having larger members is important to help achieve our mission objectives, including providing valuable products and services to all members.
RESULTS OF OPERATIONS
Components of Earnings and Return on Equity
The following table is a summary income statement for the last three years. Each ROE percentage is computed by dividing income or expense for the category by the average amount of stockholders' equity for the period.
|
| | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | 2015 | | 2014 | | 2013 |
| Amount | | ROE (1) | | Amount | | ROE (1) | | Amount | | ROE (1) |
Net interest income | $ | 322 |
| | 6.35 | % | | $ | 317 |
| | 6.40 | % | | $ | 328 |
| | 6.40 | % |
Reversal for credit losses | — |
| | — |
| | — |
| | (0.01 | ) | | (7 | ) | | (0.15 | ) |
Net interest income after reversal for credit losses | 322 |
| | 6.35 |
| | 317 |
| | 6.41 |
| | 335 |
| | 6.55 |
|
Net gains on derivatives and hedging activities | 13 |
| | 0.26 |
| | 7 |
| | 0.13 |
| | 8 |
| | 0.16 |
|
Other non-interest income | 17 |
| | 0.33 |
| | 16 |
| | 0.32 |
| | 12 |
| | 0.23 |
|
Total non-interest income | 30 |
| | 0.59 |
| | 23 |
| | 0.45 |
| | 20 |
| | 0.39 |
|
Total revenue | 352 |
| | 6.94 |
| | 340 |
| | 6.86 |
| | 355 |
| | 6.94 |
|
Total non-interest expense | 75 |
| | 1.49 |
| | 68 |
| | 1.38 |
| | 64 |
| | 1.26 |
|
Assessments | 28 |
| | 0.55 |
| | 28 |
| | 0.55 |
| | 30 |
| | 0.58 |
|
Net income | $ | 249 |
| | 4.90 | % | | $ | 244 |
| | 4.93 | % | | $ | 261 |
| | 5.10 | % |
| |
(1) | The ROE amounts have been computed using dollars in thousands. Accordingly, recalculations based upon the disclosed amounts (millions) in this table may produce nominally different results. |
Net income was steady in 2015 compared to 2014, although there was variation in individual factors that determine earnings. Profitability remained competitive as ROE continued to significantly exceed our benchmarks relative to short-term interest rates. Details on the individual factors contributing to the level and changes in profitability are explained in the sections below.
Net Interest Income
The largest component of net income is net interest income. Our principal goal in managing net interest income is to balance trade-offs between maintaining a moderate market risk profile and ensuring profitability remains competitive. Effective risk/return management requires us to focus principally on the relationships among assets and liabilities that affect net interest income, rather than individual balance sheet and income statement accounts in isolation.
Our ROE normally is lower than that of many other financial institutions because of the cooperative wholesale business model that results in narrow spreads to funding costs on our primary assets (Advances), the moderate overall risk profile, and the strategic objective to have a positive correlation of dividends to short-term interest rates.
Components of Net Interest Income
We generate net interest income from the following two components:
| |
▪ | Net interest rate spread. This component equals the balance of total earning assets multiplied by the difference between the book yield on interest-earning assets and the book cost of interest-bearing liabilities. It is composed of net (amortization)/accretion, prepayment fees on Advances, and all other earnings from interest-earning assets net of funding costs. The latter is the largest component and represents the coupon yields of interest-earning assets net of the coupon costs of Consolidated Obligations and deposits. |
| |
▪ | Earnings from funding assets with capital (“earnings from capital”). Because of our relatively low net interest rate spread compared to other financial institutions, we have historically derived a substantial proportion of net interest income from deploying interest-free capital in interest-earning assets. We deploy much of the capital in short-term and adjustable-rate assets in order to help ensure that ROE moves in the same direction as short-term interest rates and to help control market risk exposure. |
The following table shows the major components of net interest income. Reasons for the variance in net interest income between the periods are discussed below.
|
| | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | 2015 | | 2014 | | 2013 |
| Amount | | % of Earning Assets | | Amount | | % of Earning Assets | | Amount | | % of Earning Assets |
Components of net interest rate spread: | | | | | | | | | | | |
Net (amortization)/accretion (1) (2) | $ | (30 | ) | | (0.03 | )% | | $ | (11 | ) | | (0.01 | )% | | $ | (1 | ) | | — | % |
Prepayment fees on Advances, net (2) | 3 |
| | — |
| | 4 |
| | — |
| | 2 |
| | — |
|
Other components of net interest rate spread | 314 |
| | 0.30 |
| | 291 |
| | 0.29 |
| | 290 |
| | 0.31 |
|
Total net interest rate spread | 287 |
| | 0.27 |
| | 284 |
| | 0.28 |
| | 291 |
| | 0.31 |
|
Earnings from funding assets with interest-free capital | 35 |
| | 0.04 |
| | 33 |
| | 0.03 |
| | 37 |
| | 0.04 |
|
Total net interest income/net interest margin (3) | $ | 322 |
| | 0.31 | % | | $ | 317 |
| | 0.31 | % | | $ | 328 |
| | 0.35 | % |
| |
(1) | Includes (amortization)/accretion of premiums/discounts on mortgage assets and Consolidated Obligations and deferred transaction costs (concession fees) for Consolidated Obligations. |
| |
(2) | These components of net interest rate spread have been segregated to display their relative impact. |
| |
(3) | Net interest margin is net interest income before (reversal)/provision for credit losses as a percentage of average total interest earning assets. |
Net Amortization/Accretion: Net amortization/accretion (generally referred to as "amortization") includes monthly recognition of premiums and discounts paid on purchases of mortgage assets, as well as premiums, discounts and concessions paid on Consolidated Obligations. Periodic amortization adjustments do not necessarily indicate a trend in economic return over the entire life of mortgage assets, although it is one component of lifetime economic returns.
Amortization increased in 2015, compared to 2014, because net premium balances grew and long-term interest rates continue to fluctuate around very low levels. Amortization was lower than normal in 2013 due to a decline in actual and projected prepayment speeds in response to higher mortgage rates.
Prepayment Fees on Advances: Fees for members' early repayment of certain Advances are designed to make us economically indifferent to whether members hold Advances to maturity or repay them before maturity. Although Advance prepayment fees can be and have been significant in the past, they were minimal in 2015, 2014 and 2013, reflecting a low amount of member prepayments of Advances.
Other Components of Net Interest Rate Spread: Excluding net amortization and prepayment fees, the total other components of net interest rate spread increased $23 million in 2015 compared to 2014, while it increased only $1 million in 2014 compared to 2013. The following factors, presented in approximate order of impact from largest to smallest, accounted for the changes in other components of net interest rate spread.
2015 Versus 2014
| |
▪ | LIBOR Asset funding-Favorable: Net interest income increased by an estimated $18 million because we transitioned the funding of LIBOR-indexed assets from adjustable-rate LIBOR Bonds more towards lower-cost Discount Notes in response to a reduction in the cost of Discount Notes compared to the cost of adjustable-rate LIBOR Bonds. |
| |
▪ | MPP growth-Favorable: The average balance of mortgage loans held for portfolio increased $0.8 billion, which increased net interest income by an estimated $11 million. |
| |
▪ | Advance growth-Favorable: The $3.8 billion growth in average Advance balances improved net interest income by an estimated $8 million. |
| |
▪ | Fixed-rate asset funding-Unfavorable: A reduction in the amount of short-term debt funding longer-term fixed-rate mortgages lowered net interest income by an estimated $7 million. |
| |
▪ | Lower MPP spread-Unfavorable: The continued paydown of higher-yielding mortgage assets and low-cost debt led to a decline in the spread earned on mortgage loans, decreasing net interest income by an estimated $6 million. |
| |
▪ | Lower balances on mortgage-backed securities-Unfavorable: The average balance of the mortgage-backed securities portfolio declined $0.9 billion, which decreased net interest income by an estimated $5 million. |
| |
▪ | Other factors-Favorable: Various other factors, including, but not limited to, a decrease in the amount of mandatorily redeemable capital stock and higher spreads earned on mortgage-backed securities, increased net interest income by an estimated $4 million. |
2014 Versus 2013
| |
▪ | Asset-liability management-Unfavorable: Management strategies and actions related to reducing our market risk exposure, along with changes in the market rate environment, lowered earnings on a net basis of $29 million for the following reasons: |
| |
1) | Net interest income decreased $18 million due to a decline in mortgage asset spreads resulting from management actions to reduce market risk exposure by extending debt maturities and from continued run-off of higher yielding mortgages. |
| |
2) | Net interest income declined $11 million primarily because the cost of Discount Notes rose relative to LIBOR. Secondarily, we extended maturities of Discount Notes in order to reduce the burden of replacing Discount Notes as frequently. |
| |
▪ | Advance growth-Favorable: The $5.1 billion growth in average Advance balances at higher spreads improved net interest income by an estimated $26 million. |
| |
▪ | Higher balances on mortgage-backed securities-Favorable: The average balance of the mortgage-backed security portfolio increased $1.3 billion compared to 2013's average, which increased net interest income by an estimated $5 million. |
Earnings from Capital: The earnings from funding assets with interest-free capital did not change significantly in 2015 compared to 2014 and 2013 due to the continued low interest rate environment.
Average Balance Sheet and Rates
The following table provides average balances and rates for major balance sheet accounts, which determine the changes in the net interest rate spread. All data include the impact of interest rate swaps, which we allocate to each asset and liability category according to their designated hedging relationship. The changes in the net interest rate spread and net interest margin in 2015 versus 2014 and in 2014 versus 2013 occurred mostly from the net impact of the factors discussed above in “Components of Net Interest Income.”
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | 2015 | | 2014 | | 2013 |
| Average Balance | | Interest | | Average Rate (1) | | Average Balance | | Interest | | Average Rate (1) | | Average Balance | | Interest | | Average Rate (1) |
Assets | | | | | | | | | | | | | | | | | |
Advances | $ | 70,458 |
| | $ | 369 |
| | 0.52 | % | | $ | 66,642 |
| | $ | 318 |
| | 0.48 | % | | $ | 61,574 |
| | $ | 308 |
| | 0.50 | % |
Mortgage loans held for portfolio (2) | 7,611 |
| | 246 |
| | 3.23 |
| | 6,804 |
| | 237 |
| | 3.48 |
| | 7,065 |
| | 269 |
| | 3.80 |
|
Federal funds sold and securities purchased under resale agreements | 11,493 |
| | 14 |
| | 0.12 |
| | 9,673 |
| | 7 |
| | 0.07 |
| | 9,110 |
| | 8 |
| | 0.09 |
|
Interest-bearing deposits in banks (3) (4) (5) | 1,141 |
| | 2 |
| | 0.20 |
| | 2,244 |
| | 3 |
| | 0.15 |
| | 1,414 |
| | 2 |
| | 0.14 |
|
Mortgage-backed securities | 14,664 |
| | 326 |
| | 2.22 |
| | 15,594 |
| | 343 |
| | 2.20 |
| | 14,320 |
| | 313 |
| | 2.19 |
|
Other investments (4) | 41 |
| | — |
| | 0.11 |
| | 37 |
| | — |
| | 0.08 |
| | 26 |
| | — |
| | 0.12 |
|
Loans to other FHLBanks | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4 |
| | — |
| | 0.13 |
|
Total interest-earning assets | 105,408 |
| | 957 |
| | 0.91 |
| | 100,994 |
| | 908 |
| | 0.90 |
| | 93,513 |
| | 900 |
| | 0.96 |
|
Less: allowance for credit losses on mortgage loans | 2 |
| | | | | | 6 |
| | | | | | 12 |
| | | | |
Other assets | 163 |
| | | | | | 169 |
| | | | | | 190 |
| | | | |
Total assets | $ | 105,569 |
| | | | | | $ | 101,157 |
| | | | | | $ | 93,691 |
| | | | |
Liabilities and Capital | | | | | | | | | | | | | | | | | |
Term deposits | $ | 132 |
| | — |
| | 0.20 |
| | $ | 93 |
| | — |
| | 0.19 |
| | $ | 120 |
| | — |
| | 0.17 |
|
Other interest bearing deposits (5) | 704 |
| | — |
| | 0.01 |
| | 753 |
| | — |
| | 0.01 |
| | 955 |
| | — |
| | 0.01 |
|
Discount Notes | 52,706 |
| | 65 |
| | 0.12 |
| | 35,992 |
| | 28 |
| | 0.08 |
| | 34,574 |
| | 37 |
| | 0.11 |
|
Unswapped fixed-rate Bonds | 26,425 |
| | 528 |
| | 2.00 |
| | 25,605 |
| | 519 |
| | 2.03 |
| | 23,117 |
| | 488 |
| | 2.11 |
|
Unswapped adjustable-rate Bonds | 13,385 |
| | 21 |
| | 0.15 |
| | 29,355 |
| | 33 |
| | 0.11 |
| | 24,319 |
| | 35 |
| | 0.14 |
|
Swapped Bonds | 6,504 |
| | 19 |
| | 0.29 |
| | 3,721 |
| | 7 |
| | 0.20 |
| | 4,673 |
| | 7 |
| | 0.15 |
|
Mandatorily redeemable capital stock | 61 |
| | 2 |
| | 4.00 |
| | 105 |
| | 4 |
| | 4.01 |
| | 139 |
| | 5 |
| | 3.95 |
|
Other borrowings | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4 |
| | — |
| | 0.12 |
|
Total interest-bearing liabilities | 99,917 |
| | 635 |
| | 0.64 |
| | 95,624 |
| | 591 |
| | 0.62 |
| | 87,901 |
| | 572 |
| | 0.65 |
|
Non-interest bearing deposits | — |
| | | | | | 4 |
| | | | | | 18 |
| | | | |
Other liabilities | 578 |
| | | | | | 573 |
| | | | | | 651 |
| | | | |
Total capital | 5,074 |
| | | | | | 4,956 |
| | | | | | 5,121 |
| | | | |
Total liabilities and capital | $ | 105,569 |
| | | | | | $ | 101,157 |
| | | | | | $ | 93,691 |
| | | | |
| | | | | | | | | | | | | | | | | |
Net interest rate spread | | | | | 0.27 | % | | | | | | 0.28 | % | | | | | | 0.31 | % |
Net interest income and net interest margin (6) | | | $ | 322 |
| | 0.31 | % | | | | $ | 317 |
| | 0.31 | % | | | | $ | 328 |
| | 0.35 | % |
Average interest-earning assets to interest-bearing liabilities | | | | | 105.50 | % | | | | | | 105.62 | % | | | | | | 106.38 | % |
| |
(1) | Amounts used to calculate average rates are based on dollars in thousands. Accordingly, recalculations based upon the disclosed amounts (millions) may not produce the same results. |
| |
(2) | Non-accrual loans are included in average balances used to determine average rate. |
| |
(3) | Includes certificates of deposit and bank notes that are classified as available-for-sale securities. |
| |
(4) | Includes available-for-sale securities based on their amortized costs. The yield information does not give effect to changes in fair value that are reflected as a component of stockholders' equity for available-for-sale securities. |
| |
(5) | The average balance amounts include the rights or obligations to cash collateral, which are included in the fair value of derivative assets or derivative liabilities on the Statements of Condition at period end. |
| |
(6) | Net interest margin is net interest income before (reversal)/provision for credit losses as a percentage of average total interest earning assets. |
2015 Versus 2014.Rates on short-term interest-earning assets rose because average short-term interest rates were slightly higher in 2015. The average rate on mortgage-backed securities also rose nominally due to a change in composition. However, the average rate of total interest-earning assets increased only 0.01 percentage point in 2015 because of the continued very low interest rate environment and higher net amortization.
The average rate on total interest-bearing liabilities increased marginally due to modest increases in short-term interest rates that were partially offset by lower average long-term rates, more favorable funding spreads to market rates, and the transition of a large amount of LIBOR-indexed funding into lower-cost Discount Notes funding.
The net interest spread and net interest margin remained stable as the higher recognition of mortgage premium amortization was offset by the net other components of net interest rate spread discussed in the previous section.
2014 Versus 2013. The net interest spread and net interest margin decreased due to an increase in Advances balances and, secondarily, to the net effect of the other earnings factors discussed in the previous section. Although the Advance growth increased net interest income because of a larger asset base, the growth lowered the spread and margin because Advances tend to have narrower spreads to funding costs compared to mortgage assets.
The decline in the average rate on total earning assets and total interest-bearing liabilities resulted from the continued low rate environment and an increase in the balance sheet composition of instruments (due to the Advance growth) that tend to carry lower interest rates. The low rate environment particularly resulted in a decline in the average rate of long-term assets (such as certain Advances and mortgage loans held for portfolio) and long-term liabilities (unswapped fixed-rate Bonds). This is because a substantial portion of the principal paid down on these assets and liabilities, which had higher rates, was replaced with new assets and liabilities at lower rates.
Rates on short-term assets (Federal funds sold and securities sold under resale agreements) and liabilities (short-term borrowings and unswapped adjustable-rate Bonds) decreased slightly in 2014 as the low-rate rate environment continued.
Volume/Rate Analysis
Changes in both average balances (volume) and interest rates influence changes in net interest income. The following table summarizes these changes and trends in interest income and interest expense.
|
| | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | 2015 over 2014 | | 2014 over 2013 |
| Volume (1)(3) | | Rate (2)(3) | | Total | | Volume (1)(3) | | Rate (2)(3) | | Total |
Increase (decrease) in interest income | | | | | | | | | | | |
Advances | $ | 19 |
| | $ | 32 |
| | $ | 51 |
| | $ | 25 |
| | $ | (15 | ) | | $ | 10 |
|
Mortgage loans held for portfolio | 27 |
| | (18 | ) | | 9 |
| | (10 | ) | | (22 | ) | | (32 | ) |
Federal funds sold and securities purchased under resale agreements | 1 |
| | 6 |
| | 7 |
| | 1 |
| | (2 | ) | | (1 | ) |
Interest-bearing deposits in banks | (2 | ) | | 1 |
| | (1 | ) | | 1 |
| | — |
| | 1 |
|
Mortgage-backed securities | (20 | ) | | 3 |
| | (17 | ) | | 28 |
| | 2 |
| | 30 |
|
Other investments | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Loans to other FHLBanks | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total | 25 |
| | 24 |
| | 49 |
| | 45 |
| | (37 | ) | | 8 |
|
Increase (decrease) in interest expense | | | | | | | | | | | |
Term deposits | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Other interest-bearing deposits | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Discount Notes | 16 |
| | 21 |
| | 37 |
| | 1 |
| | (10 | ) | | (9 | ) |
Unswapped fixed-rate Bonds | 17 |
| | (8 | ) | | 9 |
| | 51 |
| | (20 | ) | | 31 |
|
Unswapped adjustable-rate Bonds | (22 | ) | | 10 |
| | (12 | ) | | 7 |
| | (9 | ) | | (2 | ) |
Swapped Bonds | 7 |
| | 5 |
| | 12 |
| | (2 | ) | | 2 |
| | — |
|
Mandatorily redeemable capital stock | (2 | ) | | — |
| | (2 | ) | | (1 | ) | | — |
| | (1 | ) |
Other borrowings | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total | 16 |
| | 28 |
| | 44 |
| | 56 |
| | (37 | ) | | 19 |
|
Increase (decrease) in net interest income | $ | 9 |
| | $ | (4 | ) | | $ | 5 |
| | $ | (11 | ) | | $ | — |
| | $ | (11 | ) |
| |
(1) | Volume changes are calculated as the change in volume multiplied by the prior year rate. |
| |
(2) | Rate changes are calculated as the change in rate multiplied by the prior year average balance. |
| |
(3) | Changes that are not identifiable as either volume-related or rate-related, but rather are equally attributable to both volume and rate changes, have been allocated to the volume and rate categories based upon the proportion of the absolute value of the volume and rate changes. |
Effect of the Use of Derivatives on Net Interest Income
The following table shows the effect of using derivatives on net interest income. The effect on earnings from the non-interest components of derivatives related to market value adjustments is provided in “Non-Interest Income and Non-Interest Expense.”
|
| | | | | | | | | | | |
(In millions)
| 2015 | | 2014 | | 2013 |
Advances: | | | | | |
Amortization of hedging activities in net interest income | $ | (3 | ) | | $ | (3 | ) | | $ | (3 | ) |
Net interest settlements included in net interest income | (84 | ) | | (91 | ) | | (107 | ) |
Mortgage loans: | | | | | |
Amortization of derivative fair value adjustments in net interest income | (4 | ) | | (4 | ) | | (2 | ) |
Consolidated Obligation Bonds: | | | | | |
Net interest settlements included in net interest income | 20 |
| | 18 |
| | 27 |
|
Decrease to net interest income | $ | (71 | ) | | $ | (80 | ) | | $ | (85 | ) |
Most of our use of derivatives synthetically convert the intermediate- and long-term fixed interest rates on certain Advances and Bonds to adjustable-coupon rates tied to short-term LIBOR (mostly one- and three-month repricing resets). These adjustable-rate coupons normally carry lower interest rates than the fixed rates. The use of derivatives lowered net interest income in each period primarily because the Advances that were swapped to short-term LIBOR had higher fixed interest rates than the Bonds
that were swapped to short-term LIBOR. We accepted this reduction in earnings because it enabled us, as we designed, to significantly lower market risk exposure by creating a much closer match of actual cash flows between assets and liabilities than would occur otherwise. The reduction in earnings was similar in 2015, 2014, and 2013.
Provision for Credit Losses
In 2015 and 2014, delinquency trends in the MPP continued to decrease while home prices were relatively steady, resulting in no provision for estimated incurred credit losses in 2015 and a $0.5 million reversal for estimated incurred credit losses in 2014. In 2013, we recorded a $7.5 million reversal for estimated incurred credit losses in the MPP driven by higher home prices combined with improved delinquency trends in that year. Further information is in the "Credit Risk - MPP" section in "Quantitative and Qualitative Disclosures About Risk Management" and Note 10 of the Notes to Financial Statements.
Non-Interest Income and Non-Interest Expense
The following table presents non-interest income and non-interest expense for each of the last three years.
|
| | | | | | | | | | | |
(Dollars in millions) | 2015 | | 2014 | | 2013 |
Non-interest income | | | | | |
Net gains on derivatives and hedging activities | $ | 13 |
| | $ | 7 |
| | $ | 8 |
|
Other non-interest income, net | 17 |
| | 16 |
| | 12 |
|
Total non-interest income | $ | 30 |
| | $ | 23 |
| | $ | 20 |
|
Non-interest expense | | | | | |
Compensation and benefits | $ | 40 |
| | $ | 37 |
| | $ | 34 |
|
Other operating expense | 22 |
| | 17 |
| | 17 |
|
Finance Agency | 7 |
| | 7 |
| | 5 |
|
Office of Finance | 4 |
| | 4 |
| | 5 |
|
Other | 2 |
| | 3 |
| | 3 |
|
Total non-interest expense | $ | 75 |
| | $ | 68 |
| | $ | 64 |
|
Average total assets | $ | 105,569 |
| | $ | 101,157 |
| | $ | 93,691 |
|
Average regulatory capital | 5,150 |
| | 5,069 |
| | 5,271 |
|
Total non-interest expense to average total assets (1) | 0.07 | % | | 0.07 | % | | 0.07 | % |
Total non-interest expense to average regulatory capital (1) | 1.47 |
| | 1.35 |
| | 1.22 |
|
| |
(1) | Amounts used to calculate percentages are based on dollars in thousands. Accordingly, recalculations based upon the disclosed amounts (millions) may not produce the same results. |
Non-interest income increased in 2015 compared to 2014 primarily from larger gains on derivatives and hedging activities in 2015 compared to 2014, as presented in the table below. The change in non-interest expense in 2015 resulted primarily from higher legal fees and compensation and benefits.
Effect of Derivatives and Hedging Activities
|
| | | | | | | | | | | |
(In millions) | 2015 | | 2014 | | 2013 |
Net gains on derivatives and hedging activities | | | | | |
Advances: | | | | | |
Gains on fair value hedges | $ | 2 |
| | $ | 5 |
| | $ | 10 |
|
Gains on derivatives not receiving hedge accounting | 1 |
| | — |
| | 5 |
|
Mortgage loans: | | | | | |
Gains (losses) on derivatives not receiving hedge accounting | 1 |
| | — |
| | (11 | ) |
Consolidated Obligation Bonds: | | | | | |
Gains on fair value hedges | 1 |
| | — |
| | 1 |
|
Gains on derivatives not receiving hedge accounting | 8 |
| | 2 |
| | 3 |
|
Total net gains on derivatives and hedging activities | 13 |
| | 7 |
| | 8 |
|
Net gains on financial instruments held at fair value (1) | 1 |
| | 2 |
| | — |
|
Total net effect of derivatives and hedging activities | $ | 14 |
| | $ | 9 |
| | $ | 8 |
|
| |
(1) | Includes only those gains or losses on financial instruments held at fair value that have an economic derivative "assigned." |
The amounts of income volatility in derivatives and hedging activities were modest compared to the notional principal amounts, well within the range of normal historical fluctuation, and consistent with the close hedging relationships of our derivative transactions.
Analysis of Quarterly ROE
The following table summarizes the components of 2015's quarterly ROE and provides quarterly ROE for 2014 and 2013.
|
| | | | | | | | | | |
| 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | Total |
Components of 2015 ROE: | | | | | |
Net interest income: | | | | | |
Other net interest income | 6.84 | % | 6.80 | % | 6.89 | % | 6.98 | % | 6.88 | % |
Net amortization | (0.61 | ) | (0.07 | ) | (0.93 | ) | (0.70 | ) | (0.58 | ) |
Prepayment fees | 0.08 |
| 0.02 |
| 0.03 |
| 0.08 |
| 0.05 |
|
Total net interest income | 6.31 |
| 6.75 |
| 5.99 |
| 6.36 |
| 6.35 |
|
Reversal for credit losses | — |
| — |
| — |
| — |
| — |
|
Net interest income after reversal for credit losses | 6.31 |
| 6.75 |
| 5.99 |
| 6.36 |
| 6.35 |
|
Net gains on derivatives and hedging activities | 0.43 |
| 0.18 |
| 0.42 |
| — |
| 0.26 |
|
Other non-interest income | 0.23 |
| 0.26 |
| 0.31 |
| 0.52 |
| 0.33 |
|
Total non-interest income | 0.66 |
| 0.44 |
| 0.73 |
| 0.52 |
| 0.59 |
|
Total revenue | 6.97 |
| 7.19 |
| 6.72 |
| 6.88 |
| 6.94 |
|
Total non-interest expense | 1.44 |
| 1.51 |
| 1.46 |
| 1.53 |
| 1.49 |
|
Assessments | 0.56 |
| 0.58 |
| 0.53 |
| 0.54 |
| 0.55 |
|
2015 ROE | 4.97 | % | 5.10 | % | 4.73 | % | 4.81 | % | 4.90 | % |
| | | | | |
2014 ROE | 4.51 | % | 5.00 | % | 5.07 | % | 5.14 | % | 4.93 | % |
| | | | | |
2013 ROE | 5.49 | % | 4.80 | % | 5.37 | % | 4.78 | % | 5.10 | % |
The moderate volatility in quarterly ROEs in 2015 was primarily due to net amortization, net gains on derivatives and hedging activities, and gains on financial instruments held at fair value, which are included in other non-interest income. Quarterly ROEs in 2014 and 2013 had similar levels of volatility as experienced in 2015.
Segment Information
Note 18 of the Notes to Financial Statements presents information on our two operating business segments. We manage financial operations and market risk exposure primarily at the macro level, and within the context of the entire balance sheet, rather than exclusively at the level of individual segments. Under this approach, the market risk/return profile of each segment may not match, or possibly even have the same trends as, what would occur if we managed each segment on a stand-alone basis. The tables below summarize each segment's operating results for the periods shown.
|
| | | | | | | | | | | |
(Dollars in millions) | Traditional Member Finance | | MPP | | Total |
2015 | | | | | |
Net interest income after reversal for credit losses | $ | 250 |
| | $ | 72 |
| | $ | 322 |
|
Net income | $ | 192 |
| | $ | 57 |
| | $ | 249 |
|
Average assets | $ | 97,932 |
| | $ | 7,637 |
| | $ | 105,569 |
|
Assumed average capital allocation | $ | 4,707 |
| | $ | 367 |
| | $ | 5,074 |
|
Return on average assets (1) | 0.20 | % | | 0.74 | % | | 0.24 | % |
Return on average equity (1) | 4.08 | % | | 15.41 | % | | 4.90 | % |
| | | | | |
2014 | | | | | |
Net interest income after reversal for credit losses | $ | 238 |
| | $ | 79 |
| | $ | 317 |
|
Net income | $ | 181 |
| | $ | 63 |
| | $ | 244 |
|
Average assets | $ | 94,333 |
| | $ | 6,824 |
| | $ | 101,157 |
|
Assumed average capital allocation | $ | 4,622 |
| | $ | 334 |
| | $ | 4,956 |
|
Return on average assets (1) | 0.19 | % | | 0.93 | % | | 0.24 | % |
Return on average equity (1) | 3.91 | % | | 18.96 | % | | 4.93 | % |
| | | | | |
2013 | | | | | |
Net interest income after reversal for credit losses | $ | 229 |
| | $ | 106 |
| | $ | 335 |
|
Net income | $ | 184 |
| | $ | 77 |
| | $ | 261 |
|
Average assets | $ | 86,609 |
| | $ | 7,082 |
| | $ | 93,691 |
|
Assumed average capital allocation | $ | 4,733 |
| | $ | 388 |
| | $ | 5,121 |
|
Return on average assets (1) | 0.21 | % | | 1.09 | % | | 0.28 | % |
Return on average equity (1) | 3.88 | % | | 20.00 | % | | 5.10 | % |
| |
(1) | Amounts used to calculate returns are based on numbers in thousands. Accordingly, recalculations based upon the disclosed amounts (millions) may not produce the same results. |
Traditional Member Finance Segment
2015 Versus 2014. The increase in net income was due to higher spreads earned on Advances primarily from lower funding costs as a result of using more Discount Notes, growth in average Advance balances, and larger unrealized net gains on derivatives and hedging activities. These items were partially offset by lower average balances on mortgage-backed securities.
2014 Versus 2013. The increase in net interest income was due to Advance growth, an increase in mortgage-backed securities leverage, and a decrease in net amortization expense of mortgage-backed securities. However, net income decreased as these factors were more than offset by a decrease in unrealized net gains on derivatives and hedging activities. Despite the decrease in net income, ROE increased slightly in 2014 primarily due to a lower amount of capital.
MPP Segment
Compared to the Traditional Member Finance segment, the MPP segment can exhibit more earnings volatility relative to short-term interest rates and more credit risk exposure. However, the MPP segment also provides the opportunity for enhancing risk-adjusted returns, which normally augments earnings. Although mortgage assets are the largest source of our market risk, we
believe that we have historically managed this risk prudently and consistently with our risk appetite and corporate objectives. We also believe that these assets do not excessively elevate the balance sheet's overall market risk exposure.
The MPP continued to earn a substantial level of profitability compared to market interest rates, with a moderate amount of market risk and small amount of credit risk. In 2015, the MPP averaged seven percent of total average assets while accounting for 23 percent of earnings.
2015 Versus 2014.Net interest income decreased resulting from higher net amortization expense and the continued paydown of higher-yielding mortgage assets and low-cost debt, which were partially offset by growth in MPP balances.
2014 Versus 2013.Net interest income decreased resulting from higher net amortization expense, smaller reversals of MPP credit losses, management actions to extend debt maturities, run-off of higher yielding MPP loans, and lower average MPP balances. Net income decreased by a smaller amount because the factors above were partially offset by a small gain in 2014, compared to losses in 2013, on derivatives and hedging activities.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT RISK MANAGEMENT
Overview
We face various risks that could affect the ability to achieve our mission and corporate objectives. We generally categorize risks as: 1) business/strategic risk, 2) regulatory/legislative risk, 3) market risk (also referred to as interest rate or prepayment risk), 4) credit risk, 5) capital adequacy (capital risk), 6) funding/liquidity risk, 7) accounting risk, and 8) operational risk. Our Board of Directors establishes objectives regarding risk philosophy, risk appetite, risk tolerances, and financial performance expectations. Market, capital, credit, liquidity, and operational risks are discussed below. Other risks are discussed throughout this filing.
We strive to maintain a risk profile that ensures we operate safely and soundly, promotes prudent growth in Mission Asset Activity, consistently generates competitive earnings, and protects the par value of members' capital stock investment. We believe our business is financially sound and adequately capitalized on a risk-adjusted basis.
We practice this conservative risk philosophy in many ways:
| |
▪ | We operate with moderate market risk and limited residual credit risk, liquidity risk, operational risk, and capital impairment risk. |
| |
▪ | We have a priority to ensure competitive and relatively stable profitability. |
| |
▪ | We make conservative investment choices in terms of the types of investments we purchase and counterparties with which we engage. |
| |
▪ | We use derivatives to hedge individual assets and liabilities and to help hedge market risk exposure. |
| |
▪ | We maintain a prudent amount of financial leverage. |
| |
▪ | We are judicious in instituting regular, large-scale, district-wide repurchases of excess stock. |
| |
▪ | We have significantly increased retained earnings in recent years and hold an amount that we believe is consistent with protecting the par value of capital stock and providing for dividend stabilization. |
| |
▪ | We create a working and operating environment that emphasizes a stable employee base. |
We have numerous Board-adopted policies and processes that address risk management including risk appetite, tolerances, limits, guidelines, and regulatory compliance. Our cooperative business model, corporate objectives, capital structure, and regulatory oversight provide us clear incentives to minimize risk exposures. Our policies and operating practices are designed to limit risk exposures from ongoing operations in the following broad ways:
| |
▪ | by anticipating potential business risks and developing appropriate responses; |
| |
▪ | by defining permissible lines of business; |
| |
▪ | by limiting the kinds of assets we are permitted to hold in terms of their credit risk exposure and the kinds of hedging and financing arrangements we are permitted to use; |
| |
▪ | by limiting the amount of market risk and capital risk to which we are permitted to be exposed; |
| |
▪ | by specifying very conservative tolerances for credit risk posed by Advances; |
| |
▪ | by specifying capital adequacy minimums; and |
| |
▪ | by requiring strict adherence to internal controls and operating procedures, adequate insurance coverage, and comprehensive Human Resources policies, procedures, and strategies. |
Market Risk
Overview
Market risk exposure is the risk that net incomeprofitability and the value of stockholders' capital investment in the FHLBank may decrease and that our profitability may be uncompetitive as a result of changes and volatility in the market environment and business conditions.economy. Along with business/strategic risk, market risk is normally one of our largest residual risks. We attemptrisk.
Our risk appetite is to minimizemaintain market risk exposure withinin a prudentmoderate range while earning a competitive return on members' capital stock investment. There is normally a tradeoff between long-term market risk exposure and shorter-term exposure. Effective management of both components is important in order to attract and retain members and capital and to support Mission Asset Activity.
The primary challenges in managing market risk exposure arise from 1) the tradeoff between earning a competitive return and correlating profitability with short-term interest rates and 2) the market risk exposure of owning mortgage assets. Mortgage assets grant homeowners prepayment options that tend tocould adversely affect usour financial performance when interest rates increase or decrease. We mitigate the market risk of mortgage assets primarily by funding them with a portfolio of long-term unswapped fixed-rate callable and noncallable Bonds that have expected cash flows similar to the aggregate cash flows expected from mortgage assets under a wide range of interest rate and prepayment environments. Because it is normally cost-prohibitive to completely mitigate mortgage prepayment risk, a residual amount of market risk normally remains after funding and hedging activities. In 2015, we introduced the use of purchasing options on interest rate swaps (swaptions derivatives) as an additional hedging strategy. Use of these derivatives represent, and will continue to represent, a small component of overall hedging practices.
We analyze market risk using numerous analytical measures under a variety of interest rate and business scenarios, including stressed scenarios, and perform sensitivity analyses on the many variables that can affect market risk, using several market risk models from third-party software companies. These models employ rigorous valuation techniques for the optionality that exists in mortgage prepayments, call and put options, and caps/floors. We regularly assess the effects of different assumptions, techniques and methodologies on the measurements of market risk exposure, including comparisons to alternative models and information from brokers/dealers.
We have historically emphasized strategies aimed at ensuring a moderate level of market risk, with the goal of providing a competitive earnings stream over a wide variety of market and business environments and having a relatively small amount of earnings volatility. These strategies include, among others: 1) conservative management of market risk exposure, 2) controlled growth in mortgage assets and 3) accounting and hedging practices that attempt to appropriately minimize earnings volatility from the use of derivatives.
Policy Limits on Market Risk Exposure
We have five sets of policy limits regarding market risk exposure, which primarily addressmeasure long-term market risk exposure. We determine compliance with our policy limits at every month end or more frequently if market or business conditions change significantly or are volatile.
| |
▪ | Market Value of Equity Sensitivity. The market value of equity for the entire balance sheet in two hypothetical interest rate scenarios (up 200 basis points and down 200 basis points from the current interest rate environment) must be between positive and negative 1510 percent of the current balance sheet's market value of equity. The interest rate movements are “shocks,” defined as instantaneous, permanent, and parallel changes in interest rates in which every point on the yield curve is changed by the same amount. |
movements are “shocks,” defined as instantaneous, permanent, and parallel changes in interest rates in which every point on the yield curve is changed by the same amount.
| |
▪ | Duration of Equity. The duration of equity for the entire balance sheet in the current (“flat rate” or “base case”) interest rate environment must be between positive and negative six years. In addition, the duration of equityfive years and in each of the two interest rate shock scenarios (up 200 basis points and down 200 basis points from the current interest rate environment) must be withinbetween positive and negative eightsix years. |
| |
▪ | Market Capitalization. The market capitalization ratio (defined as the ratio of the market value of equity to the par value of regulatory stock) must be above 95 percent in the current rate environment and must be above 85 percent in each of the two interest rate shock scenarios.
|
| |
▪ | Mortgage Assets Portfolio. The change in net market value of the mortgage assets portfolio as a percentage of the book value of portfolio assets must be between positive and negative three percent in each of the two interest rate shock scenarios. Net market value is defined as the market value of assets minus the market value of liabilities, with no assumed capital allocation. |
| |
▪ | Market Capitalization. The market capitalization ratio (defined as the ratio of the market value of equity to the par value of regulatory stock) must be above 95 percent in the current rate environment and must be above 90 percent in each of the two interest rate shock scenarios. |
| |
▪ | Mortgage Assets as a Multiple of Regulatory Capital. The amount of mortgage assets must be less than sevensix times the amount of regulatory capital. |
In addition, Finance Agency Regulationsregulations and an internal policy provide controls on market risk exposure by restricting the types of mortgage loans, mortgage-backed securities and other investments we can hold. Historically, our purchases of collateralized mortgage obligations have tended to be the front-end prepayment tranches, which can have less prepayment volatility than other tranches. We also manage market risk exposure by charging members prepayment fees on many Advance programs where an early termination of an Advance would result in an economic loss to us.
Market Value of Equity and Duration of Equity - Entire Balance Sheet
Two key measures of long-term market risk exposure are the sensitivities of the market value of equity and the duration of equity to changes in interest rates and other variables, as presented in the following tables for various instantaneous and permanent interest rate shocks. AverageWe compiled average results are compiled using data for each month end. Given the current very low level of rates, the down rate shocks are nonparallel scenarios, with short-term rates decreasing less than long-term rates sosuch that no rate falls below zero.
Market Value of Equity
| | (Dollars in millions) | Down 300 | | Down 200 | | Down 100 | | Flat Rates | | Up 100 | | Up 200 | | Up 300 | Down 300 | | Down 200 | | Down 100 | | Flat Rates | | Up 100 | | Up 200 | | Up 300 |
Average Results | | | | | | | | | | | | | | | | | | | | | | | | | | |
2012 Full Year | | | | | | | | | | | | | | |
2015 Full Year | | | | | | | | | | | | | | |
Market Value of Equity | $ | 4,281 |
| | $ | 4,279 |
| | $ | 4,292 |
| | $ | 4,330 |
| | $ | 4,337 |
| | $ | 4,186 |
| | $ | 3,955 |
| $ | 4,697 |
| | $ | 4,792 |
| | $ | 4,958 |
| | $ | 4,969 |
| | $ | 4,875 |
| | $ | 4,729 |
| | $ | 4,568 |
|
% Change from Flat Case | (1.1 | )% | | (1.2 | )% | | (0.9 | )% | | — |
| | 0.2 | % | | (3.3 | )% | | (8.7 | )% | (5.5 | )% | | (3.6 | )% | | (0.2 | )% | | — |
| | (1.9 | )% | | (4.8 | )% | | (8.1 | )% |
2011 Full Year | | | | | | | | | | | | | | |
2014 Full Year | | | | | | | | | | | | | | |
Market Value of Equity | $ | 3,944 |
| | $ | 3,972 |
| | $ | 4,026 |
| | $ | 4,108 |
| | $ | 4,075 |
| | $ | 3,904 |
| | $ | 3,692 |
| $ | 4,763 |
| | $ | 4,908 |
| | $ | 4,961 |
| | $ | 4,889 |
| | $ | 4,771 |
| | $ | 4,626 |
| | $ | 4,479 |
|
% Change from Flat Case | (4.0 | )% | | (3.3 | )% | | (2.0 | )% | | — |
| | (0.8 | )% | | (5.0 | )% | | (10.1 | )% | (2.6 | )% | | 0.4 | % | | 1.5 | % | | — |
| | (2.4 | )% | | (5.4 | )% | | (8.4 | )% |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Month-End Results | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2012 | | | | | | | | | | | | | | |
December 31, 2015 | | | | | | | | | | | | | | |
Market Value of Equity | $ | 4,991 |
| | $ | 4,976 |
| | $ | 4,947 |
| | $ | 4,878 |
| | $ | 4,759 |
| | $ | 4,585 |
| | $ | 4,401 |
| $ | 4,565 |
| | $ | 4,652 |
| | $ | 4,849 |
| | $ | 4,888 |
| | $ | 4,795 |
| | $ | 4,656 |
| | $ | 4,507 |
|
% Change from Flat Case | 2.3 | % | | 2.0 | % | | 1.4 | % | | — |
| | (2.4 | )% | | (6.0 | )% | | (9.8 | )% | (6.6 | )% | | (4.8 | )% | | (0.8 | )% | | — |
| | (1.9 | )% | | (4.7 | )% | | (7.8 | )% |
December 31, 2011 | | | | | | | | | | | | | | |
December 31, 2014 | | | | | | | | | | | | | | |
Market Value of Equity | $ | 3,958 |
| | $ | 3,964 |
| | $ | 3,996 |
| | $ | 4,090 |
| | $ | 4,191 |
| | $ | 4,102 |
| | $ | 3,915 |
| $ | 4,714 |
| | $ | 4,824 |
| | $ | 4,938 |
| | $ | 4,920 |
| | $ | 4,835 |
| | $ | 4,688 |
| | $ | 4,524 |
|
% Change from Flat Case | (3.2 | )% | | (3.1 | )% | | (2.3 | )% | | — |
| | 2.5 | % | | 0.3 | % | | (4.3 | )% | (4.2 | )% | | (2.0 | )% | | 0.4 | % | | — |
| | (1.7 | )% | | (4.7 | )% | | (8.1 | )% |
Duration of Equity
|
| | | | | | | | | | | | | | | | | | | | |
(In years) | Down 300 | | Down 200 | | Down 100 | | Flat Rates | | Up 100 | | Up 200 | | Up 300 |
Average Results | | | | | | | | | | | | | |
2012 Full Year | 1.8 |
| | 1.3 |
| | 0.4 |
| | (1.4 | ) | | 2.0 |
| | 4.9 |
| | 6.4 |
|
2011 Full Year | (0.2 | ) | | (0.8 | ) | | (1.4 | ) | | (1.1 | ) | | 3.2 |
| | 5.3 |
| | 6.0 |
|
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Month-End Results | | | | | | | | | | | | | |
December 31, 2012 | 1.8 |
| | 1.8 |
| | 1.8 |
| | 1.9 |
| | 3.2 |
| | 4.1 |
| | 4.1 |
|
December 31, 2011 | 0.5 |
| | (0.3 | ) | | (1.2 | ) | | (3.8 | ) | | 0.5 |
| | 3.7 |
| | 5.5 |
|
In 2012, the average market risk exposure to both higher and lower interest rates, similar to 2011, was moderate, well within policy limits, and below long-term historical average exposure. Overall market risk exposure and earnings trends to further reductions in long-term rates are benefiting from slower mortgage prepayment speeds, given the level of rates, than would be expected under normal conditions for housing markets where homeowner equity is widely sufficient and credit is more accessible.
Consistent with 2011, there were several periods in 2012 where long-term rates fell to historical lows, which were key contributors in the moderate levels of market risk exposure, particularly to rising rate scenarios.
Late in the second quarter and during the third quarter of 2012, we took actions to moderately raise market risk exposure, primarily by increasing beyond the long-term historical average the amount of long-term mortgage assets we funded with short-term debt and lowering the average maturity of long-term Bonds. The elevated market risk exposure substantially raised earnings in the third quarter and somewhat less for the full year, as discussed in "Results of Operations." In the fourth quarter, we reduced market risk exposure to within the historical range by issuing long-term Bonds.
Over the last several years and especially in the latter half of 2012, we and our model vendors made several changes to the market risk and prepayment models we use, in order to adapt them to the constantly evolving and unprecedented conditions in
the mortgageDuration of Equity
|
| | | | | | | | | | | | | | | | | | | | |
(In years) | Down 300 | | Down 200 | | Down 100 | | Flat Rates | | Up 100 | | Up 200 | | Up 300 |
Average Results | | | | | | | | | | | | | |
2015 Full Year | (5.7 | ) | | (4.6 | ) | | (1.7 | ) | | 1.0 |
| | 2.8 |
| | 3.4 |
| | 3.5 |
|
2014 Full Year | (3.7 | ) | | (2.1 | ) | | 1.0 | | 2.0 | | 3.0 | | 3.3 | | 3.3 |
Month-End Results | | | | | | | | | | | | | |
December 31, 2015 | (6.9 | ) | | (5.7 | ) | | (2.8 | ) | | 0.6 |
| | 2.8 |
| | 3.3 |
| | 3.2 |
|
December 31, 2014 | (3.8 | ) | | (3.4 | ) | | (0.2 | ) | | 1.0 |
| | 2.6 |
| | 3.5 |
| | 3.7 |
|
During 2015, as in 2014, consistent with our historical practice and housing markets. These modeling enhancements modestly slowed prepayment speeds in many rate environments and reduced the sensitivity of the market risk measures to rate changes. Overall, the impacts of the modeling changes were to moderately increase measuredappetite, we positioned market risk exposure to risinghigher interest raterates at a moderate level. Market risk exposure to lower rates continued to be slightly favorable in most scenarios andunless all interest rates decline to moderately increase expected earnings trends. We have no current plans to implement any additional model enhancements, but there is a possibility we will make future improvements as conditions in the mortgage and housing markets continue to evolve.levels at (or near) zero.
Based on the totality of our market risk analysis, we expect that profitability, defined as the level of ROE compared with short-term market rates, will remain competitive unless interest rates change by extremely large amounts in a short period of time. Decreases in long-term interest rates even up to two percentage points (which would put fixed-rate mortgages atbelow two percent or less)percent) would still result in ROEprofitability being well above market interest rates. WeSimilarly, we believe that profitability would not become uncompetitive in a rising rate environment unless long-term rates were to permanently increase in a short period of timeover the next 12 months by fourfive percentage points or more, combined with short-term rates increasing to at least seven percent. Such large changes in interest rates would not result in negative earnings, unless these rate environments occurred quickly, lasted for a long period of time, and were coupled with very unfavorable changes in other market and business variables or our business model. We believe such a scenario is extremely unlikely to occur.
Market Capitalization Ratio
The ratio of the market value of equity to the par value of regulatory capital stock (called the "market capitalization ratio") indicates the theoretical net market value of portfolio assets after subtracting the theoretical net market cost of liabilities. The market capitalization ratio excludes retained earnings in the denominator and therefore shows the ability of the market value of equity to protect the value of stockholders' investment in our company.
To the extent the market capitalization ratio differs from 100 percent, it can represent potential real economic gains or losses, unrealized opportunity benefits or costs, temporary fluctuations in asset or liability prices, or market value remaining in a liquidation of the FHLBank in which all assets were sold and all liabilities were terminated or transferred. The ratio does not sufficiently measure the value of our company as a going concern because it does not consider franchise value, future new business activity, future risk management strategies, or the net profitability of assets after funding costs.
The following table presents the market capitalization ratios for the interest rate environments for which we have policy limits, as described above.
|
| | | | | | | | |
| December 31, 2012 | | Monthly Average Year Ended December 31, 2012 | | December 31, 2011 |
Market Value of Equity to Par Value of Regulatory Capital Stock | 116 | % | | 121 | % | | 120 | % |
Market Value of Equity to Par Value of Regulatory Capital Stock - Down Shock of 200 bps | 117 |
| | 120 |
| | 118 |
|
Market Value of Capital to Par Value of Regulatory Capital Stock - Up Shock of 200 bps | 109 |
| | 117 |
| | 121 |
|
In 2012, the market capitalization ratios in the scenarios indicated continued to be well above 100 percent and in compliance with policy limits, but trended modestly lower during the fourth quarter of 2012. The overall favorable level of these measures provides additional support for our assessment that we have a moderate amount of overall market risk exposure.
Even with the recent decline, the ratios remain at favorable (high) levels due to the combination of 1) the fact that retained earnings are currently 13 percent of regulatory capital stock, 2) we have maintained market risk exposure at moderate levels, and 3) market prices of mortgage assets continue to be at elevated levels compared to prices of our Bonds. The factors causing the modest reduction observed in the fourth quarter were moderately lower mortgage asset pricing and an overall reduction in total mortgage assets relative to capital.
Market Risk ExposureCapital Adequacy
We believe members place a high value on their capital investment in our company. We maintained compliance with regulatory capital requirements. Capital ratios at December 31, 2015 and all throughout the year exceeded the regulatory required minimum of four percent. We believe that the Mortgage Assets Portfolio
The mortgage assets portfolio accounts for almost allamount of our marketretained earnings is sufficient to protect against impairment risk of capital stock and to provide the opportunity to stabilize dividends. Our Capital Plan has safeguards to prevent financial leverage from increasing beyond regulatory minimums or below safe levels.
Credit Risk
In 2015, we continued to experience a de minimis level of overall residual credit risk exposure because of prepayment volatility thatfrom our Credit Services, making investments, and executing derivative transactions. We believe policies and procedures related to credit underwriting, Advance collateral management, and transactions with investment and derivative counterparties continue to fully mitigate these risks. Therefore, we cannot completely hedge while maintaining positive net spreads. Sensitivities of the market value of equity allocatedhave never experienced any credit losses and we continue to have no loan loss reserves or impairment recorded for these instruments.
Residual credit risk exposure in the mortgage assetsloan portfolio under interest rate shocks (in basis points) are shown below. At was minimal. The allowance for credit losses in the MPP continued to decline and was $2 million at December 31, 2012 the mortgage assets portfolio had an assumed par-value equity (capital) allocation of $1.2 billion based on the entire balance sheet's regulatory capital-to-assets ratio. Average results are compiled using data for each month-end. The market value sensitivities are one measure we use to analyze the portfolio's estimated market risk exposure.
% Change in Market Value of Equity-Mortgage Assets Portfolio
|
| | | | | | | | | | | | | | | | | | | |
| Down 300 | | Down 200 | | Down 100 | | Flat Rates | | Up 100 | | Up 200 | | Up 300 |
Average Results | | | | | | | | | | | | | |
2012 Full Year | (9.2 | )% | | (8.2 | )% | | (5.4 | )% | | — | | 2.0 | % | | (8.2 | )% | | (24.7 | )% |
2011 Full Year | (20.1 | )% | | (15.8 | )% | | (9.2 | )% | | — | | (1.0 | )% | | (14.6 | )% | | (32.1 | )% |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Month-End Results | | | | | | | | | | | | | |
December 31, 2012 | 3.5 | % | | 3.5 | % | | 3.1 | % | | — | | (10.0 | )% | | (24.0 | )% | | (39.1 | )% |
December 31, 2011 | (17.1 | )% | | (15.2 | )% | | (10.3 | )% | | — | | 10.3 | % | | 4.2 | % | | (10.6 | )% |
The sensitivities indicate that the market risk exposure of the mortgage assets portfolio had similar trends across interest rate shocks as those of the entire balance sheet. The dollar amount of exposure for any individual rate shock can be obtained by multiplying the percentage change by the assumed equity allocation. We believe the mortgage assets portfolio continues to have a moderate amount of market risk exposure relative to the inherent market risks of owning mortgages and relative to their actual and expected profitability. We believe this exposure is consistent with our conservative risk philosophy and cooperative business model.2015.
Liquidity Risk
Our liquidity position remained strong during 2015, as did our overall ability to fund operations through the issuance of Consolidated Obligations at acceptable interest costs. Investor demand for FHLBank System debt continued to be robust. There were no substantive stresses on market access or liquidity from external market and political events. Although we can make no assurances, we expect this to continue to be the case and believe there is only a remote possibility of a liquidity or funding crisis in the FHLBank System that could impair our ability to participate, on a cost-effective basis, in issuances of new debt, service outstanding debt, maintain adequate capitalization, or pay competitive dividends.
ANALYSIS OF FINANCIAL CONDITION
Mission Asset Activity
Mission Assets are the primary means by which we fulfill our mission with direct connections to members. We regularly monitor the balance sheet concentration of Mission Asset Activity. In 2015, our Primary Mission Asset ratio, as defined in "Regulatory and Legislative Risk" of the Executive Overview, was 79 percent. In assessing mission achievement, we also consider supplemental sources of Mission Asset Activity, the most significant of which is Letters of Credit issued to members.
Credit Services
Credit Activity and Advance Composition
The tables below show trends in Advance balances by major programs and in the notional amount of Letters of Credit.
|
| | | | | | | | | | | | | |
(Dollars in millions) | December 31, 2015 | | December 31, 2014 |
| Balance | | Percent(1) | | Balance | | Percent(1) |
Adjustable/Variable Rate Indexed: | | | | | | | |
LIBOR | $ | 47,312 |
| | 65 | % | | $ | 51,839 |
| | 74 | % |
Other | 617 |
| | 1 |
| | 515 |
| | 1 |
|
Total | 47,929 |
| | 66 |
| | 52,354 |
| | 75 |
|
Fixed-Rate: | | | | | | | |
REPO | 10,568 |
| | 14 |
| | 5,201 |
| | 7 |
|
Regular Fixed-Rate | 9,248 |
| | 13 |
| | 7,398 |
| | 11 |
|
Putable (2) | 1,046 |
| | 1 |
| | 1,617 |
| | 2 |
|
Amortizing/Mortgage Matched | 2,706 |
| | 4 |
| | 2,734 |
| | 4 |
|
Other | 1,745 |
| | 2 |
| | 995 |
| | 1 |
|
Total | 25,313 |
| | 34 |
| | 17,945 |
| | 25 |
|
Total Advances Principal | $ | 73,242 |
| | 100 | % | | $ | 70,299 |
| | 100 | % |
| | | | | | | |
Letters of Credit (notional) | $ | 19,555 |
| | | | $ | 17,780 |
| | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | December 31, 2015 | | September 30, 2015 | | June 30, 2015 | | March 31, 2015 |
| Balance | | Percent(1) | | Balance | | Percent(1) | | Balance | | Percent(1) | | Balance | | Percent(1) |
Adjustable/Variable-Rate Indexed: | | | | | | | | | | | | | | | |
LIBOR | $ | 47,312 |
| | 65 | % | | $ | 49,313 |
| | 64 | % | | $ | 48,242 |
| | 68 | % | | $ | 49,103 |
| | 73 | % |
Other | 617 |
| | 1 |
| | 565 |
| | 1 |
| | 597 |
| | 1 |
| | 407 |
| | 1 |
|
Total | 47,929 |
| | 66 |
| | 49,878 |
| | 65 |
| | 48,839 |
| | 69 |
| | 49,510 |
| | 74 |
|
Fixed-Rate: | | | | | | | | | | | | | | | |
REPO | 10,568 |
| | 14 |
| | 12,023 |
| | 16 |
| | 8,499 |
| | 12 |
| | 4,061 |
| | 6 |
|
Regular Fixed-Rate | 9,248 |
| | 13 |
| | 9,385 |
| | 12 |
| | 8,184 |
| | 11 |
| | 7,977 |
| | 12 |
|
Putable (2) | 1,046 |
| | 1 |
| | 1,557 |
| | 2 |
| | 1,570 |
| | 2 |
| | 1,580 |
| | 3 |
|
Amortizing/Mortgage Matched | 2,706 |
| | 4 |
| | 2,723 |
| | 3 |
| | 2,703 |
| | 4 |
| | 2,662 |
| | 4 |
|
Other | 1,745 |
| | 2 |
| | 1,637 |
| | 2 |
| | 1,223 |
| | 2 |
| | 825 |
| | 1 |
|
Total | 25,313 |
| | 34 |
| | 27,325 |
| | 35 |
| | 22,179 |
| | 31 |
| | 17,105 |
| | 26 |
|
Total Advances Principal | $ | 73,242 |
| | 100 | % | | $ | 77,203 |
| | 100 | % | | $ | 71,018 |
| | 100 | % | | $ | 66,615 |
| | 100 | % |
| | | | | | | | | | | | | | | |
Letters of Credit (notional) | $ | 19,555 |
| | | | $ | 17,594 |
| | | | $ | 19,006 |
| | | | $ | 16,905 |
| | |
| |
(1) | As a percentage of total Advances principal. |
| |
(2) | Excludes Putable Advances where the related put options have expired. Such Advances are classified based on their current terms. |
The modest growth and variability in Advance balances in 2015 was driven primarily by changes in variable-rate and short-term repurchase (REPO) Advances as the reduction in the need for variable-rate funding from our largest member was more than offset by REPO Advance borrowings. The increase in REPO Advance borrowings was primarily from new insurance company members. However, the borrowings from these new members are required to be paid off over the next year due to the Finance Agency's 2016 final rule on membership requirements, which is discussed further in the "Executive Overview."
Members increased their available lines in the Letters of Credit program by $1.8 billion (10 percent) in 2015. Letters of Credit balances averaged $17.7 billion during 2015, an increase of $2.5 billion (17 percent) from the average balance during 2014. We
normally earn fees on Letters of Credit based on the actual average amount of the Letters utilized, which generally is less than the notional amount issued.
Advance Usage
In addition to analyzing Advance balances by dollar trends and the number of members utilizing them, we monitor the degree to which members use Advances to fund their balance sheets. The following table shows the unweighted, average ratio of each member's Advance balance to its most-recently available figures for total assets.
|
| | | | | | | | | | | | | | |
| December 31, 2015 | | September 30, 2015 | | June 30, 2015 | | March 31, 2015 | | December 31, 2014 |
Average Advances-to-Assets for Members | | | | | | | | | |
Assets less than $1.0 billion (623 members) | 3.26 | % | | 3.20 | % | | 3.14 | % | | 3.06 | % | | 3.24 | % |
Assets over $1.0 billion (76 members) | 4.35 |
| | 4.75 |
| | 3.90 |
| | 3.08 |
| | 3.75 |
|
All members | 3.37 |
| | 3.35 |
| | 3.22 |
| | 3.06 |
| | 3.29 |
|
Advance usage ratios were slightly higher at year-end 2015 compared to year-end 2014, driven primarily by an increase in short-term borrowings and the inclusion of borrowings from several new insurance company members. Usage ratio trends for members with assets less than $1.0 billion were stable within a narrow range during the same time periods.
The following table shows Advance usage of members by charter type. |
| | | | | | | | | | | | | |
(Dollars in millions) | December 31, 2015 | | December 31, 2014 |
| Par Value of Advances | | Percent of Total Par Value of Advances | | Par Value of Advances | | Percent of Total Par Value of Advances |
Commercial Banks | $ | 53,479 |
| | 73 | % | | $ | 59,119 |
| | 84 | % |
Thrifts and Savings Banks | 5,220 |
| | 7 |
| | 4,067 |
| | 6 |
|
Credit Unions | 957 |
| | 1 |
| | 1,110 |
| | 1 |
|
Insurance Companies | 13,428 |
| | 19 |
| | 5,408 |
| | 8 |
|
Community Development Financial Institutions | 2 |
| | — |
| | 1 |
| | — |
|
Total member Advances | 73,086 |
| | 100 |
| | 69,705 |
| | 99 |
|
Former member borrowings | 156 |
| | — |
| | 594 |
| | 1 |
|
Total par value of Advances | $ | 73,242 |
| | 100 | % | | $ | 70,299 |
| | 100 | % |
The following tables present principal balances for the five members with the largest Advance borrowings.
|
| | | | | | | | | | | | | | | | |
(Dollars in millions) | | | | | | | | | | |
December 31, 2015 | | December 31, 2014 |
Name | | Par Value of Advances | | Percent of Total Par Value of Advances | | Name | | Par Value of Advances | | Percent of Total Par Value of Advances |
JPMorgan Chase Bank, N.A. | | $ | 35,350 |
| | 48 | % | | JPMorgan Chase Bank, N.A. | | $ | 41,300 |
| | 59 | % |
U.S. Bank, N.A. | | 10,086 |
| | 14 |
| | U.S. Bank, N.A. | | 8,338 |
| | 12 |
|
Capstead Insurance, LLC | | 2,875 |
| | 4 |
| | The Huntington National Bank | | 2,083 |
| | 3 |
|
Nationwide Life Insurance Company | | 2,279 |
| | 3 |
| | Nationwide Life Insurance Company | | 1,761 |
| | 3 |
|
Third Federal Savings and Loan Association | | 2,162 |
| | 3 |
| | Western-Southern Life Assurance Co | | 1,623 |
| | 2 |
|
Total of Top 5 | | $ | 52,752 |
| | 72 | % | | Total of Top 5 | | $ | 55,105 |
| | 79 | % |
Advance concentration ratios are influenced by, and generally similar to, concentration ratios of financial activity among our Fifth District financial institutions. We believe that having large financial institutions that actively use our Mission Asset Activity augments the value of membership to all members. For example, such activity improves our operating efficiency, increases our earnings and thereby contributions to housing and community investment programs, may enable us over time to obtain more favorable funding costs, and helps us maintain competitively priced Mission Asset Activity.
Mortgage Loans Held for Portfolio (Mortgage Purchase Program, or "MPP")
The table below shows principal purchases and reductions of loans in the MPP for each of the last two years.
|
| | | | | | | |
(In millions) | 2015 | | 2014 |
Balance, beginning of year | $ | 6,796 |
| | $ | 6,643 |
|
Principal purchases | 2,348 |
| | 1,226 |
|
Principal reductions | (1,386 | ) | | (1,073 | ) |
Balance, end of year | $ | 7,758 |
| | $ | 6,796 |
|
The increase in principal loan balances in 2015 resulted from higher amounts of loan purchases, particularly from our two largest sellers who drive program balances. In 2015, 99 members sold us mortgage loans, with the number of monthly sellers averaging 65. All loans acquired in 2015 were conventional loans.
The following tables show the percentage of principal balances from PFIs supplying five percent or more of total principal and the percentage of principal balances from all other PFIs. As shown in the table below, MPP activity is concentrated amongst a few members.
|
| | | | | | | | | | | | | | |
(Dollars in millions) | December 31, 2015 | | | December 31, 2014 |
| Principal | | % of Total | | | Principal | | % of Total |
Union Savings Bank | $ | 2,242 |
| | 29 | % | | Union Savings Bank | $ | 1,593 |
| | 23 | % |
PNC Bank, N.A. (1) | 839 |
| | 11 |
| | PNC Bank, N.A. (1) | 1,074 |
| | 16 |
|
Guardian Savings Bank FSB | 633 |
| | 8 |
| | Guardian Savings Bank FSB | 406 |
| | 6 |
|
All others | 4,044 |
| | 52 |
| | All others | 3,723 |
| | 55 |
|
Total | $ | 7,758 |
| | 100 | % | | Total | $ | 6,796 |
| | 100 | % |
(1)Former member.
We closely track the refinancing incentives of our mortgage assets (including loans in the MPP and mortgage-backed securities) because the option for homeowners to change their principal payments normally represents a large portion of our market risk exposure. MPP principal paydowns in all of 2015 equated to a 14 percent annual constant prepayment rate, up from the 12 percent rate for all of 2014, as the refinancing incentives for many of our mortgage assets increased.
The MPP's composition of balances by loan type, original final maturity, and weighted-average mortgage note rate did not change materially in 2015. The weighted average mortgage note rate fell from 4.36 percent at the end of 2014 to 4.14 percent at the end of 2015. This decline reflected a continuing trend of prepayments of higher rate mortgages and purchases of lower rate mortgages. MPP yields earned in 2015, after consideration of funding costs, continued to offer favorable returns relative to their market risk exposure.
Housing and Community Investment
In 2015, we accrued $28 million of earnings for the Affordable Housing Program, which will be awarded to members in 2016. This amount represents no change from 2014 due to the similar amount of earnings in each year.
Including funds available in 2015 from previous years, we had $27 million available for the competitive Affordable Housing Program in 2015, which we awarded to 70 projects through a single competitive offering. In addition, we disbursed $9 million to 171 members on behalf of 1,869 homebuyers through the Welcome Home Program, which assists homebuyers with down payments and closing costs. In total, just over one-quarter of members received approval for funding under the two Affordable Housing Programs.
Additionally, in 2015 our Board committed $1 million to the Carol M. Peterson Housing Fund (CMP Fund), which helped 151 homeowners, and continued its commitment to the $5 million Disaster Reconstruction Program. Both are voluntary programs beyond the 10 percent of earnings that we are required by law to set aside for the Affordable Housing Program.
Our activities to support affordable housing and economic development also include offering Advances through the Affordable Housing Program, Community Investment Program and Economic Development Program with below-market interest rates at
or near zero profit for us. At the end of 2015, Advance balances under these programs totaled $449 million. AHP Advance balances have declined in recent years, reflecting our preference to distribute AHP subsidy in the form of grants.
Investments
The table below presents the ending and average balances of the investment portfolio.
|
| | | | | | | | | | | | | | | |
(In millions) | 2015 | | 2014 |
| Ending Balance | | Average Balance | | Ending Balance | | Average Balance |
Liquidity investments | $ | 22,110 |
| | $ | 12,590 |
| | $ | 11,319 |
| | $ | 11,856 |
|
Mortgage-backed securities | 15,246 |
| | 14,664 |
| | 14,688 |
| | 15,594 |
|
Other investments (1) | — |
| | 85 |
| | — |
| | 98 |
|
Total investments | $ | 37,356 |
| | $ | 27,339 |
| | $ | 26,007 |
| | $ | 27,548 |
|
| |
(1) | The average balance includes the rights or obligations to cash collateral, which are included in the fair value of derivative assets or derivative liabilities on the Statements of Condition at period end. |
We continued to maintain an ample amount of asset liquidity. Liquidity investment levels can vary significantly based on liquidity needs, the availability of acceptable net spreads, the number of eligible counterparties that meet our unsecured credit risk criteria, and changes in the amount of Mission Assets. It is normal for liquidity investments to vary by up to several billion dollars on a daily basis.
Certain dealers, who play a large role in facilitating the distribution of our debt to investors, are being more reluctant to expand the amount of our debt on their balance sheets over quarter- and year-ends primarily due to the perceived growing burden of their regulatory capital environment associated with Basel. Because of this, we conservatively carried a larger amount of liquidity leading up to year-end 2015 to satisfy any potential member borrowing needs during a period where accessing additional liquidity may be more challenging.
Our overarching strategy for mortgage-backed securities is to keep holdings as close as possible to the regulatory maximum of three times regulatory capital, subject to the availability of securities that we believe provide acceptable risk/return tradeoffs. The balance of mortgage-backed securities at December 31, 2015 represented a 2.91 multiple of regulatory capital and consisted of $11.3 billion of securities issued by Fannie Mae or Freddie Mac (of which $1.7 billion were floating-rate securities), $0.9 billion of floating-rate securities issued by the National Credit Union Administration (NCUA), and $3.0 billion of securities issued by Ginnie Mae (a majority of which are fixed rate). The NCUA securities have coupons tied to one-month LIBOR with interest rate caps ranging from seven to eight percent. We held no private-label mortgage-backed securities.
The table below shows principal purchases and paydowns of our mortgage-backed securities for each of the last two years.
|
| | | | | | | |
(In millions) | Mortgage-backed Securities Principal |
| 2015 | | 2014 |
Balance, beginning of year | $ | 14,715 |
| | $ | 16,087 |
|
Principal purchases | 3,099 |
| | 722 |
|
Principal paydowns | (2,611 | ) | | (2,094 | ) |
Balance, end of year | $ | 15,203 |
| | $ | 14,715 |
|
Principal paydowns in 2015 equated to a 16 percent annual constant prepayment rate, up from a 13 percent rate in 2014. Purchases have outpaced paydowns this year due to the availability of mortgage securities offering attractive risk/return trade-offs.
Consolidated Obligations
The table below presents the ending and average balances of our participations in Consolidated Obligations.
|
| | | | | | | | | | | | | | | |
(In millions) | 2015 | | 2014 |
| Ending Balance | | Average Balance | | Ending Balance | | Average Balance |
Discount Notes: | | | | | | | |
Par | $ | 77,225 |
| | $ | 52,714 |
| | $ | 41,238 |
| | $ | 35,996 |
|
Discount | (26 | ) | | (8 | ) | | (6 | ) | | (4 | ) |
Total Discount Notes | 77,199 |
| | 52,706 |
| | 41,232 |
| | 35,992 |
|
Bonds: | | | | | | | |
Unswapped fixed-rate | 26,962 |
| | 26,350 |
| | 26,124 |
| | 25,513 |
|
Unswapped adjustable-rate | 4,065 |
| | 13,385 |
| | 27,610 |
| | 29,355 |
|
Swapped fixed-rate | 4,010 |
| | 6,489 |
| | 5,390 |
| | 3,697 |
|
Total par Bonds | 35,037 |
| | 46,224 |
| | 59,124 |
| | 58,565 |
|
Other items (1) | 68 |
| | 90 |
| | 93 |
| | 116 |
|
Total Bonds | 35,105 |
| | 46,314 |
| | 59,217 |
| | 58,681 |
|
Total Consolidated Obligations (2) | $ | 112,304 |
| | $ | 99,020 |
| | $ | 100,449 |
| | $ | 94,673 |
|
| |
(1) | Includes unamortized premiums/discounts, fair value option valuation adjustments, hedging and other basis adjustments. |
| |
(2) | The 11 FHLBanks have joint and several liability for the par amount of all of the Consolidated Obligations issued on their behalves. The par amount of the outstanding Consolidated Obligations for all of the FHLBanks was (in millions) $905,202 and $847,175 at December 31, 2015 and 2014, respectively. |
Our preferred sources of funding for LIBOR-indexed assets are Discount Notes, adjustable-rate Bonds, and swapped fixed-rate Bonds because they give us the ability to effectively match the LIBOR rate reset periods embedded in these assets. During 2015, we shifted the composition of this funding more towards Discount Notes. This change provided lower funding costs in the current market environment and therefore improved earnings as discussed in the "Net Interest Income" section of "Results of Operations." Discount Note balances also increased due to growth in Advance balances, most of which was in the short-term REPO program, as well as liquidity investments in order to ensure that member borrowing needs were met at year-end 2015.
This change in funding composition increases risk to changes in spreads between cashflows received on LIBOR-indexed assets and interest paid on Discount Notes. We believe the increased usage of Discount Note funding did not materially raise this risk because of the historically favorable relationship between the two rate indices.
The composition of unswapped fixed-rate Bonds, which typically have initial maturities greater than one year, was relatively stable in 2015 compared to 2014. The following table shows the allocation on December 31, 2015 of unswapped fixed-rate Bonds according to their final remaining maturity and next call date (for callable Bonds). We believe that the allocations of Bonds among these classifications provide effective mitigation of market risk exposure to both higher and lower interest rates.
|
| | | | | | | | | | | | | | | | |
(In millions) | Year of Maturity | | Year of Next Call |
| Callable | Noncallable | Amortizing | Total | | Callable |
Due in 1 year or less | $ | 30 |
| $ | 3,343 |
| $ | 1 |
| $ | 3,374 |
| | $ | 6,229 |
|
Due after 1 year through 2 years | 410 |
| 3,628 |
| — |
| 4,038 |
| | 240 |
|
Due after 2 years through 3 years | 1,270 |
| 3,205 |
| — |
| 4,475 |
| | — |
|
Due after 3 years through 4 years | 995 |
| 3,020 |
| — |
| 4,015 |
| | — |
|
Due after 4 years through 5 years | 553 |
| 2,383 |
| — |
| 2,936 |
| | — |
|
Thereafter | 3,211 |
| 4,913 |
| — |
| 8,124 |
| | — |
|
Total | $ | 6,469 |
| $ | 20,492 |
| $ | 1 |
| $ | 26,962 |
| | $ | 6,469 |
|
Deposits
Total deposits with us are normally a relatively minor source of low-cost funding. Total interest bearing deposits at December 31, 2015 were $0.8 billion, an increase of 10 percent from year-end 2014. The average balance of total interest bearing deposits in 2015 was $0.8 billion, a decrease of one percent from the average balance during 2014.
Derivatives Hedging Activity and Liquidity
Our use of and accounting for derivatives is discussed in the "Effect of the Use of Derivatives on Net Interest Income" section in Market"Results of Operations." Liquidity is discussed in the "Liquidity Risk" section in “Quantitative and Qualitative Disclosures About Risk ManagementManagement.”
Capital Resources
The GLB Act and Finance Agency regulations specify limits on how much we can leverage capital by requiring that we maintain, at all times, at least a four percent regulatory capital-to-assets ratio. A lower ratio indicates more leverage. If financial leverage increases too much, or becomes too close to the regulatory limit, we have discretionary ability within our Capital Plan to enact changes to ensure capitalization remains strong and in compliance with regulatory limits.
We have always complied with our regulatory capital requirements. The following tables present capital amounts and capital-to-assets ratios, on both a GAAP and regulatory basis.
|
| | | | | | | | | | | | | | | |
| Year Ended December 31, |
(In millions) | 2015 | | 2014 |
| Period End | | Average | | Period End | | Average |
GAAP and Regulatory Capital | | | | | | | |
GAAP Capital Stock | $ | 4,429 |
| | $ | 4,344 |
| | $ | 4,267 |
| | $ | 4,298 |
|
Mandatorily Redeemable Capital Stock | 38 |
| | 61 |
| | 63 |
| | 105 |
|
Regulatory Capital Stock | 4,467 |
| | 4,405 |
| | 4,330 |
| | 4,403 |
|
Retained Earnings | 765 |
| | 745 |
| | 689 |
| | 666 |
|
Regulatory Capital | $ | 5,232 |
| | $ | 5,150 |
| | $ | 5,019 |
| | $ | 5,069 |
|
|
| | | | | | | | | | | |
| 2015 | | 2014 |
| Period End | | Average | | Period End | | Average |
GAAP and Regulatory Capital-to-Assets Ratio | | | | | | | |
GAAP | 4.36 | % | | 4.81 | % | | 4.63 | % | | 4.90 | % |
Regulatory | 4.40 |
| | 4.88 |
| | 4.71 |
| | 5.01 |
|
We consider the regulatory ratio to be a better representation of financial leverage than the GAAP ratio because, although the GAAP ratio treats mandatorily redeemable capital stock as a liability, it protects investors in our debt in the same manner as GAAP capital stock and retained earnings. Both GAAP and regulatory capital-to-assets ratios remained above the regulatory required minimum of four percent. The reduction in these ratios at December 31, 2015 was a temporary result of the elevated liquidity we carried at that time due to the reasons discussed above.
The following table presents the sources of change in regulatory capital stock balances in 2015 and 2014.
|
| | | | | | | |
(In millions) | 2015 | | 2014 |
Regulatory stock balance at beginning of year | $ | 4,330 |
| | $ | 4,814 |
|
Stock purchases: | | | |
Membership stock | 13 |
| | 11 |
|
Activity stock | 178 |
| | 73 |
|
Stock repurchases/redemptions: | | | |
Redemption of member excess | (1 | ) | | (1 | ) |
Repurchase of member excess | — |
| | (498 | ) |
Withdrawals | (53 | ) | | (69 | ) |
Regulatory stock balance at the end of the year | $ | 4,467 |
| | $ | 4,330 |
|
The table below shows the amount of excess capital stock.
|
| | | | | | | |
(In millions) | December 31, 2015 | | December 31, 2014 |
Excess capital stock (Capital Plan definition) | $ | 461 |
| | $ | 504 |
|
Cooperative utilization of capital stock | $ | 521 |
| | $ | 441 |
|
Mission Asset Activity capitalized with cooperative capital stock | $ | 13,034 |
| | $ | 11,020 |
|
A portion of capital stock is excess, meaning it is not required as a condition to being a member and not required to capitalize Mission Asset Activity. Excess capital stock provides a base of capital to manage financial leverage at prudent levels, augments loss protections for bondholders, and capitalizes a portion of growth in Mission Assets. The amount of excess capital stock, as defined by our Capital Plan, was $461 million at December 31, 2015, a decrease of $43 million from year-end 2014.
Membership and Stockholders
In 2015, we added 21 new member stockholders and lost 27 members, ending the year at 699. Most members lost merged with other Fifth District members and, therefore, the impact on our earnings and Mission Asset Activity was small. Of the members lost, 17 merged with other members, eight merged out of the District, one merged with a District non-member, and one relocated its charter out of District.
In 2015, there were no material changes in the allocation of membership by state, charter type, or asset size. At the end of 2015, the composition of membership by state was Ohio with 304, Tennessee with 199, and Kentucky with 196.
The Finance Agency issued a final rule on FHLBank membership in January 2016. This rule imposes new membership requirements and eliminates all currently eligible captive insurance companies from FHLBank membership, as discussed in "Executive Overview." The ruling also requires that these entities, which represented 15 members totaling $6.6 billion in Advances at December 31, 2015, pay off existing Advances within one year and cease any new borrowings. The subsequent loss of this membership segment will not significantly affect our financial condition or results of operations.
The following table provides the number of member stockholders by charter type.
|
| | | | | |
| December 31, |
| 2015 | | 2014 |
Commercial Banks | 418 |
| | 442 |
|
Thrifts and Savings Banks | 99 |
| | 101 |
|
Credit Unions | 124 |
| | 120 |
|
Insurance Companies | 54 |
| | 38 |
|
Community Development Financial Institutions | 4 |
| | 4 |
|
Total | 699 |
| | 705 |
|
The following table provides the ownership of capital stock by charter type.
|
| | | | | | | |
(In millions) | December 31, |
| 2015 | | 2014 |
Commercial Banks | $ | 3,425 |
| | $ | 3,441 |
|
Thrifts and Savings Banks | 378 |
| | 376 |
|
Credit Unions | 128 |
| | 121 |
|
Insurance Companies | 497 |
| | 328 |
|
Community Development Financial Institutions | 1 |
| | 1 |
|
Total GAAP Capital Stock | 4,429 |
| | 4,267 |
|
Mandatorily Redeemable Capital Stock | 38 |
| | 63 |
|
Total Regulatory Capital Stock | $ | 4,467 |
| | $ | 4,330 |
|
Credit union members hold relatively less stock than their membership proportion because they tend to be smaller than the average member and borrow less. Insurance company members hold relatively more stock than their membership proportion because they tend to be larger than the average member and borrow more.
The following table provides a summary of member stockholders by asset size.
|
| | | | | |
| December 31, |
Member Asset Size (1) | 2015 | | 2014 |
Up to $100 million | 177 |
| | 182 |
|
> $100 up to $500 million | 370 |
| | 381 |
|
> $500 million up to $1 billion | 76 |
| | 76 |
|
> $1 billion | 76 |
| | 66 |
|
Total Member Stockholders | 699 |
| | 705 |
|
| |
(1) | The December 31 membership composition reflects members' assets as of the most-recently available figures for total assets. |
Most members are smaller community financial institutions, with 78 percent having assets up to $500 million. As noted elsewhere, having larger members is important to help achieve our mission objectives, including providing valuable products and services to all members.
RESULTS OF OPERATIONS
Components of Earnings and Return on Equity
The following table is a summary income statement for the last three years. Each ROE percentage is computed by dividing income or expense for the category by the average amount of stockholders' equity for the period.
|
| | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | 2015 | | 2014 | | 2013 |
| Amount | | ROE (1) | | Amount | | ROE (1) | | Amount | | ROE (1) |
Net interest income | $ | 322 |
| | 6.35 | % | | $ | 317 |
| | 6.40 | % | | $ | 328 |
| | 6.40 | % |
Reversal for credit losses | — |
| | — |
| | — |
| | (0.01 | ) | | (7 | ) | | (0.15 | ) |
Net interest income after reversal for credit losses | 322 |
| | 6.35 |
| | 317 |
| | 6.41 |
| | 335 |
| | 6.55 |
|
Net gains on derivatives and hedging activities | 13 |
| | 0.26 |
| | 7 |
| | 0.13 |
| | 8 |
| | 0.16 |
|
Other non-interest income | 17 |
| | 0.33 |
| | 16 |
| | 0.32 |
| | 12 |
| | 0.23 |
|
Total non-interest income | 30 |
| | 0.59 |
| | 23 |
| | 0.45 |
| | 20 |
| | 0.39 |
|
Total revenue | 352 |
| | 6.94 |
| | 340 |
| | 6.86 |
| | 355 |
| | 6.94 |
|
Total non-interest expense | 75 |
| | 1.49 |
| | 68 |
| | 1.38 |
| | 64 |
| | 1.26 |
|
Assessments | 28 |
| | 0.55 |
| | 28 |
| | 0.55 |
| | 30 |
| | 0.58 |
|
Net income | $ | 249 |
| | 4.90 | % | | $ | 244 |
| | 4.93 | % | | $ | 261 |
| | 5.10 | % |
| |
(1) | The ROE amounts have been computed using dollars in thousands. Accordingly, recalculations based upon the disclosed amounts (millions) in this table may produce nominally different results. |
Net income was steady in 2015 compared to 2014, although there was variation in individual factors that determine earnings. Profitability remained competitive as ROE continued to significantly exceed our benchmarks relative to short-term interest rates. Details on the individual factors contributing to the level and changes in profitability are explained in the sections below.
Net Interest Income
The largest component of net income is net interest income. Our principal goal in managing net interest income is to balance trade-offs between maintaining a moderate market risk profile and ensuring profitability remains competitive. Effective risk/return management requires us to focus principally on the relationships among assets and liabilities that affect net interest income, rather than individual balance sheet and income statement accounts in isolation.
Our ROE normally is lower than that of many other financial institutions because of the cooperative wholesale business model that results in narrow spreads to funding costs on our primary assets (Advances), the moderate overall risk profile, and the strategic objective to have a positive correlation of dividends to short-term interest rates.
Components of Net Interest Income
We generate net interest income from the following two components:
| |
▪ | Net interest rate spread. This component equals the balance of total earning assets multiplied by the difference between the book yield on interest-earning assets and the book cost of interest-bearing liabilities. It is composed of net (amortization)/accretion, prepayment fees on Advances, and all other earnings from interest-earning assets net of funding costs. The latter is the largest component and represents the coupon yields of interest-earning assets net of the coupon costs of Consolidated Obligations and deposits. |
| |
▪ | Earnings from funding assets with capital (“earnings from capital”). Because of our relatively low net interest rate spread compared to other financial institutions, we have historically derived a substantial proportion of net interest income from deploying interest-free capital in interest-earning assets. We deploy much of the capital in short-term and adjustable-rate assets in order to help ensure that ROE moves in the same direction as short-term interest rates and to help control market risk exposure. |
The following table shows the major components of net interest income. Reasons for the variance in net interest income between the periods are discussed below.
|
| | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | 2015 | | 2014 | | 2013 |
| Amount | | % of Earning Assets | | Amount | | % of Earning Assets | | Amount | | % of Earning Assets |
Components of net interest rate spread: | | | | | | | | | | | |
Net (amortization)/accretion (1) (2) | $ | (30 | ) | | (0.03 | )% | | $ | (11 | ) | | (0.01 | )% | | $ | (1 | ) | | — | % |
Prepayment fees on Advances, net (2) | 3 |
| | — |
| | 4 |
| | — |
| | 2 |
| | — |
|
Other components of net interest rate spread | 314 |
| | 0.30 |
| | 291 |
| | 0.29 |
| | 290 |
| | 0.31 |
|
Total net interest rate spread | 287 |
| | 0.27 |
| | 284 |
| | 0.28 |
| | 291 |
| | 0.31 |
|
Earnings from funding assets with interest-free capital | 35 |
| | 0.04 |
| | 33 |
| | 0.03 |
| | 37 |
| | 0.04 |
|
Total net interest income/net interest margin (3) | $ | 322 |
| | 0.31 | % | | $ | 317 |
| | 0.31 | % | | $ | 328 |
| | 0.35 | % |
| |
(1) | Includes (amortization)/accretion of premiums/discounts on mortgage assets and Consolidated Obligations and deferred transaction costs (concession fees) for Consolidated Obligations. |
| |
(2) | These components of net interest rate spread have been segregated to display their relative impact. |
| |
(3) | Net interest margin is net interest income before (reversal)/provision for credit losses as a percentage of average total interest earning assets. |
Net Amortization/Accretion: Net amortization/accretion (generally referred to as "amortization") includes monthly recognition of premiums and discounts paid on purchases of mortgage assets, as well as premiums, discounts and concessions paid on Consolidated Obligations. Periodic amortization adjustments do not necessarily indicate a trend in economic return over the entire life of mortgage assets, although it is one component of lifetime economic returns.
Amortization increased in 2015, compared to 2014, because net premium balances grew and long-term interest rates continue to fluctuate around very low levels. Amortization was lower than normal in 2013 due to a decline in actual and projected prepayment speeds in response to higher mortgage rates.
Prepayment Fees on Advances: Fees for members' early repayment of certain Advances are designed to make us economically indifferent to whether members hold Advances to maturity or repay them before maturity. Although Advance prepayment fees can be and have been significant in the past, they were minimal in 2015, 2014 and 2013, reflecting a low amount of member prepayments of Advances.
Other Components of Net Interest Rate Spread: Excluding net amortization and prepayment fees, the total other components of net interest rate spread increased $23 million in 2015 compared to 2014, while it increased only $1 million in 2014 compared to 2013. The following factors, presented in approximate order of impact from largest to smallest, accounted for the changes in other components of net interest rate spread.
2015 Versus 2014
| |
▪ | LIBOR Asset funding-Favorable: Net interest income increased by an estimated $18 million because we transitioned the funding of LIBOR-indexed assets from adjustable-rate LIBOR Bonds more towards lower-cost Discount Notes in response to a reduction in the cost of Discount Notes compared to the cost of adjustable-rate LIBOR Bonds. |
| |
▪ | MPP growth-Favorable: The average balance of mortgage loans held for portfolio increased $0.8 billion, which increased net interest income by an estimated $11 million. |
| |
▪ | Advance growth-Favorable: The $3.8 billion growth in average Advance balances improved net interest income by an estimated $8 million. |
| |
▪ | Fixed-rate asset funding-Unfavorable: A reduction in the amount of short-term debt funding longer-term fixed-rate mortgages lowered net interest income by an estimated $7 million. |
| |
▪ | Lower MPP spread-Unfavorable: The continued paydown of higher-yielding mortgage assets and low-cost debt led to a decline in the spread earned on mortgage loans, decreasing net interest income by an estimated $6 million. |
| |
▪ | Lower balances on mortgage-backed securities-Unfavorable: The average balance of the mortgage-backed securities portfolio declined $0.9 billion, which decreased net interest income by an estimated $5 million. |
| |
▪ | Other factors-Favorable: Various other factors, including, but not limited to, a decrease in the amount of mandatorily redeemable capital stock and higher spreads earned on mortgage-backed securities, increased net interest income by an estimated $4 million. |
2014 Versus 2013
| |
▪ | Asset-liability management-Unfavorable: Management strategies and actions related to reducing our market risk exposure, along with changes in the market rate environment, lowered earnings on a net basis of $29 million for the following reasons: |
| |
1) | Net interest income decreased $18 million due to a decline in mortgage asset spreads resulting from management actions to reduce market risk exposure by extending debt maturities and from continued run-off of higher yielding mortgages. |
| |
2) | Net interest income declined $11 million primarily because the cost of Discount Notes rose relative to LIBOR. Secondarily, we extended maturities of Discount Notes in order to reduce the burden of replacing Discount Notes as frequently. |
| |
▪ | Advance growth-Favorable: The $5.1 billion growth in average Advance balances at higher spreads improved net interest income by an estimated $26 million. |
| |
▪ | Higher balances on mortgage-backed securities-Favorable: The average balance of the mortgage-backed security portfolio increased $1.3 billion compared to 2013's average, which increased net interest income by an estimated $5 million. |
Earnings from Capital: The earnings from funding assets with interest-free capital did not change significantly in 2015 compared to 2014 and 2013 due to the continued low interest rate environment.
Average Balance Sheet and Rates
The following table provides average balances and rates for major balance sheet accounts, which determine the changes in the net interest rate spread. All data include the impact of interest rate swaps, which we allocate to each asset and liability category according to their designated hedging relationship. The changes in the net interest rate spread and net interest margin in 2015 versus 2014 and in 2014 versus 2013 occurred mostly from the net impact of the factors discussed above in “Components of Net Interest Income.”
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | 2015 | | 2014 | | 2013 |
| Average Balance | | Interest | | Average Rate (1) | | Average Balance | | Interest | | Average Rate (1) | | Average Balance | | Interest | | Average Rate (1) |
Assets | | | | | | | | | | | | | | | | | |
Advances | $ | 70,458 |
| | $ | 369 |
| | 0.52 | % | | $ | 66,642 |
| | $ | 318 |
| | 0.48 | % | | $ | 61,574 |
| | $ | 308 |
| | 0.50 | % |
Mortgage loans held for portfolio (2) | 7,611 |
| | 246 |
| | 3.23 |
| | 6,804 |
| | 237 |
| | 3.48 |
| | 7,065 |
| | 269 |
| | 3.80 |
|
Federal funds sold and securities purchased under resale agreements | 11,493 |
| | 14 |
| | 0.12 |
| | 9,673 |
| | 7 |
| | 0.07 |
| | 9,110 |
| | 8 |
| | 0.09 |
|
Interest-bearing deposits in banks (3) (4) (5) | 1,141 |
| | 2 |
| | 0.20 |
| | 2,244 |
| | 3 |
| | 0.15 |
| | 1,414 |
| | 2 |
| | 0.14 |
|
Mortgage-backed securities | 14,664 |
| | 326 |
| | 2.22 |
| | 15,594 |
| | 343 |
| | 2.20 |
| | 14,320 |
| | 313 |
| | 2.19 |
|
Other investments (4) | 41 |
| | — |
| | 0.11 |
| | 37 |
| | — |
| | 0.08 |
| | 26 |
| | — |
| | 0.12 |
|
Loans to other FHLBanks | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4 |
| | — |
| | 0.13 |
|
Total interest-earning assets | 105,408 |
| | 957 |
| | 0.91 |
| | 100,994 |
| | 908 |
| | 0.90 |
| | 93,513 |
| | 900 |
| | 0.96 |
|
Less: allowance for credit losses on mortgage loans | 2 |
| | | | | | 6 |
| | | | | | 12 |
| | | | |
Other assets | 163 |
| | | | | | 169 |
| | | | | | 190 |
| | | | |
Total assets | $ | 105,569 |
| | | | | | $ | 101,157 |
| | | | | | $ | 93,691 |
| | | | |
Liabilities and Capital | | | | | | | | | | | | | | | | | |
Term deposits | $ | 132 |
| | — |
| | 0.20 |
| | $ | 93 |
| | — |
| | 0.19 |
| | $ | 120 |
| | — |
| | 0.17 |
|
Other interest bearing deposits (5) | 704 |
| | — |
| | 0.01 |
| | 753 |
| | — |
| | 0.01 |
| | 955 |
| | — |
| | 0.01 |
|
Discount Notes | 52,706 |
| | 65 |
| | 0.12 |
| | 35,992 |
| | 28 |
| | 0.08 |
| | 34,574 |
| | 37 |
| | 0.11 |
|
Unswapped fixed-rate Bonds | 26,425 |
| | 528 |
| | 2.00 |
| | 25,605 |
| | 519 |
| | 2.03 |
| | 23,117 |
| | 488 |
| | 2.11 |
|
Unswapped adjustable-rate Bonds | 13,385 |
| | 21 |
| | 0.15 |
| | 29,355 |
| | 33 |
| | 0.11 |
| | 24,319 |
| | 35 |
| | 0.14 |
|
Swapped Bonds | 6,504 |
| | 19 |
| | 0.29 |
| | 3,721 |
| | 7 |
| | 0.20 |
| | 4,673 |
| | 7 |
| | 0.15 |
|
Mandatorily redeemable capital stock | 61 |
| | 2 |
| | 4.00 |
| | 105 |
| | 4 |
| | 4.01 |
| | 139 |
| | 5 |
| | 3.95 |
|
Other borrowings | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4 |
| | — |
| | 0.12 |
|
Total interest-bearing liabilities | 99,917 |
| | 635 |
| | 0.64 |
| | 95,624 |
| | 591 |
| | 0.62 |
| | 87,901 |
| | 572 |
| | 0.65 |
|
Non-interest bearing deposits | — |
| | | | | | 4 |
| | | | | | 18 |
| | | | |
Other liabilities | 578 |
| | | | | | 573 |
| | | | | | 651 |
| | | | |
Total capital | 5,074 |
| | | | | | 4,956 |
| | | | | | 5,121 |
| | | | |
Total liabilities and capital | $ | 105,569 |
| | | | | | $ | 101,157 |
| | | | | | $ | 93,691 |
| | | | |
| | | | | | | | | | | | | | | | | |
Net interest rate spread | | | | | 0.27 | % | | | | | | 0.28 | % | | | | | | 0.31 | % |
Net interest income and net interest margin (6) | | | $ | 322 |
| | 0.31 | % | | | | $ | 317 |
| | 0.31 | % | | | | $ | 328 |
| | 0.35 | % |
Average interest-earning assets to interest-bearing liabilities | | | | | 105.50 | % | | | | | | 105.62 | % | | | | | | 106.38 | % |
| |
(1) | Amounts used to calculate average rates are based on dollars in thousands. Accordingly, recalculations based upon the disclosed amounts (millions) may not produce the same results. |
| |
(2) | Non-accrual loans are included in average balances used to determine average rate. |
| |
(3) | Includes certificates of deposit and bank notes that are classified as available-for-sale securities. |
| |
(4) | Includes available-for-sale securities based on their amortized costs. The yield information does not give effect to changes in fair value that are reflected as a component of stockholders' equity for available-for-sale securities. |
| |
(5) | The average balance amounts include the rights or obligations to cash collateral, which are included in the fair value of derivative assets or derivative liabilities on the Statements of Condition at period end. |
| |
(6) | Net interest margin is net interest income before (reversal)/provision for credit losses as a percentage of average total interest earning assets. |
2015 Versus 2014.Rates on short-term interest-earning assets rose because average short-term interest rates were slightly higher in 2015. The average rate on mortgage-backed securities also rose nominally due to a change in composition. However, the average rate of total interest-earning assets increased only 0.01 percentage point in 2015 because of the continued very low interest rate environment and higher net amortization.
The average rate on total interest-bearing liabilities increased marginally due to modest increases in short-term interest rates that were partially offset by lower average long-term rates, more favorable funding spreads to market rates, and the transition of a large amount of LIBOR-indexed funding into lower-cost Discount Notes funding.
The net interest spread and net interest margin remained stable as the higher recognition of mortgage premium amortization was offset by the net other components of net interest rate spread discussed in the previous section.
2014 Versus 2013. The net interest spread and net interest margin decreased due to an increase in Advances balances and, secondarily, to the net effect of the other earnings factors discussed in the previous section. Although the Advance growth increased net interest income because of a larger asset base, the growth lowered the spread and margin because Advances tend to have narrower spreads to funding costs compared to mortgage assets.
The decline in the average rate on total earning assets and total interest-bearing liabilities resulted from the continued low rate environment and an increase in the balance sheet composition of instruments (due to the Advance growth) that tend to carry lower interest rates. The low rate environment particularly resulted in a decline in the average rate of long-term assets (such as certain Advances and mortgage loans held for portfolio) and long-term liabilities (unswapped fixed-rate Bonds). This is because a substantial portion of the principal paid down on these assets and liabilities, which had higher rates, was replaced with new assets and liabilities at lower rates.
Rates on short-term assets (Federal funds sold and securities sold under resale agreements) and liabilities (short-term borrowings and unswapped adjustable-rate Bonds) decreased slightly in 2014 as the low-rate rate environment continued.
Volume/Rate Analysis
Changes in both average balances (volume) and interest rates influence changes in net interest income. The following table summarizes these changes and trends in interest income and interest expense.
|
| | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | 2015 over 2014 | | 2014 over 2013 |
| Volume (1)(3) | | Rate (2)(3) | | Total | | Volume (1)(3) | | Rate (2)(3) | | Total |
Increase (decrease) in interest income | | | | | | | | | | | |
Advances | $ | 19 |
| | $ | 32 |
| | $ | 51 |
| | $ | 25 |
| | $ | (15 | ) | | $ | 10 |
|
Mortgage loans held for portfolio | 27 |
| | (18 | ) | | 9 |
| | (10 | ) | | (22 | ) | | (32 | ) |
Federal funds sold and securities purchased under resale agreements | 1 |
| | 6 |
| | 7 |
| | 1 |
| | (2 | ) | | (1 | ) |
Interest-bearing deposits in banks | (2 | ) | | 1 |
| | (1 | ) | | 1 |
| | — |
| | 1 |
|
Mortgage-backed securities | (20 | ) | | 3 |
| | (17 | ) | | 28 |
| | 2 |
| | 30 |
|
Other investments | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Loans to other FHLBanks | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total | 25 |
| | 24 |
| | 49 |
| | 45 |
| | (37 | ) | | 8 |
|
Increase (decrease) in interest expense | | | | | | | | | | | |
Term deposits | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Other interest-bearing deposits | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Discount Notes | 16 |
| | 21 |
| | 37 |
| | 1 |
| | (10 | ) | | (9 | ) |
Unswapped fixed-rate Bonds | 17 |
| | (8 | ) | | 9 |
| | 51 |
| | (20 | ) | | 31 |
|
Unswapped adjustable-rate Bonds | (22 | ) | | 10 |
| | (12 | ) | | 7 |
| | (9 | ) | | (2 | ) |
Swapped Bonds | 7 |
| | 5 |
| | 12 |
| | (2 | ) | | 2 |
| | — |
|
Mandatorily redeemable capital stock | (2 | ) | | — |
| | (2 | ) | | (1 | ) | | — |
| | (1 | ) |
Other borrowings | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total | 16 |
| | 28 |
| | 44 |
| | 56 |
| | (37 | ) | | 19 |
|
Increase (decrease) in net interest income | $ | 9 |
| | $ | (4 | ) | | $ | 5 |
| | $ | (11 | ) | | $ | — |
| | $ | (11 | ) |
| |
(1) | Volume changes are calculated as the change in volume multiplied by the prior year rate. |
| |
(2) | Rate changes are calculated as the change in rate multiplied by the prior year average balance. |
| |
(3) | Changes that are not identifiable as either volume-related or rate-related, but rather are equally attributable to both volume and rate changes, have been allocated to the volume and rate categories based upon the proportion of the absolute value of the volume and rate changes. |
Effect of the Use of Derivatives on Net Interest Income
The following table shows the effect of using derivatives on net interest income. The effect on earnings from the non-interest components of derivatives related to market value adjustments is provided in “Non-Interest Income and Non-Interest Expense.”
|
| | | | | | | | | | | |
(In millions)
| 2015 | | 2014 | | 2013 |
Advances: | | | | | |
Amortization of hedging activities in net interest income | $ | (3 | ) | | $ | (3 | ) | | $ | (3 | ) |
Net interest settlements included in net interest income | (84 | ) | | (91 | ) | | (107 | ) |
Mortgage loans: | | | | | |
Amortization of derivative fair value adjustments in net interest income | (4 | ) | | (4 | ) | | (2 | ) |
Consolidated Obligation Bonds: | | | | | |
Net interest settlements included in net interest income | 20 |
| | 18 |
| | 27 |
|
Decrease to net interest income | $ | (71 | ) | | $ | (80 | ) | | $ | (85 | ) |
Most of our use of derivatives synthetically convert the intermediate- and long-term fixed interest rates on certain Advances and Bonds to adjustable-coupon rates tied to short-term LIBOR (mostly one- and three-month repricing resets). These adjustable-rate coupons normally carry lower interest rates than the fixed rates. The use of derivatives lowered net interest income in each period primarily because the Advances that were swapped to short-term LIBOR had higher fixed interest rates than the Bonds
that were swapped to short-term LIBOR. We accepted this reduction in earnings because it enabled us, as we designed, to significantly lower market risk exposure by creating a much closer match of actual cash flows between assets and liabilities than would occur otherwise. The reduction in earnings was similar in 2015, 2014, and 2013.
Provision for Credit Losses
In 2015 and 2014, delinquency trends in the MPP continued to decrease while home prices were relatively steady, resulting in no provision for estimated incurred credit losses in 2015 and a $0.5 million reversal for estimated incurred credit losses in 2014. In 2013, we recorded a $7.5 million reversal for estimated incurred credit losses in the MPP driven by higher home prices combined with improved delinquency trends in that year. Further information is in the "Credit Risk - MPP" section in "Quantitative and Qualitative Disclosures About Risk Management" and Note 10 of the Notes to Financial Statements.
Non-Interest Income and Non-Interest Expense
The following table presents non-interest income and non-interest expense for each of the last three years.
|
| | | | | | | | | | | |
(Dollars in millions) | 2015 | | 2014 | | 2013 |
Non-interest income | | | | | |
Net gains on derivatives and hedging activities | $ | 13 |
| | $ | 7 |
| | $ | 8 |
|
Other non-interest income, net | 17 |
| | 16 |
| | 12 |
|
Total non-interest income | $ | 30 |
| | $ | 23 |
| | $ | 20 |
|
Non-interest expense | | | | | |
Compensation and benefits | $ | 40 |
| | $ | 37 |
| | $ | 34 |
|
Other operating expense | 22 |
| | 17 |
| | 17 |
|
Finance Agency | 7 |
| | 7 |
| | 5 |
|
Office of Finance | 4 |
| | 4 |
| | 5 |
|
Other | 2 |
| | 3 |
| | 3 |
|
Total non-interest expense | $ | 75 |
| | $ | 68 |
| | $ | 64 |
|
Average total assets | $ | 105,569 |
| | $ | 101,157 |
| | $ | 93,691 |
|
Average regulatory capital | 5,150 |
| | 5,069 |
| | 5,271 |
|
Total non-interest expense to average total assets (1) | 0.07 | % | | 0.07 | % | | 0.07 | % |
Total non-interest expense to average regulatory capital (1) | 1.47 |
| | 1.35 |
| | 1.22 |
|
| |
(1) | Amounts used to calculate percentages are based on dollars in thousands. Accordingly, recalculations based upon the disclosed amounts (millions) may not produce the same results. |
Non-interest income increased in 2015 compared to 2014 primarily from larger gains on derivatives and hedging activities in 2015 compared to 2014, as presented in the table below. The change in non-interest expense in 2015 resulted primarily from higher legal fees and compensation and benefits.
Effect of Derivatives and Hedging Activities
|
| | | | | | | | | | | |
(In millions) | 2015 | | 2014 | | 2013 |
Net gains on derivatives and hedging activities | | | | | |
Advances: | | | | | |
Gains on fair value hedges | $ | 2 |
| | $ | 5 |
| | $ | 10 |
|
Gains on derivatives not receiving hedge accounting | 1 |
| | — |
| | 5 |
|
Mortgage loans: | | | | | |
Gains (losses) on derivatives not receiving hedge accounting | 1 |
| | — |
| | (11 | ) |
Consolidated Obligation Bonds: | | | | | |
Gains on fair value hedges | 1 |
| | — |
| | 1 |
|
Gains on derivatives not receiving hedge accounting | 8 |
| | 2 |
| | 3 |
|
Total net gains on derivatives and hedging activities | 13 |
| | 7 |
| | 8 |
|
Net gains on financial instruments held at fair value (1) | 1 |
| | 2 |
| | — |
|
Total net effect of derivatives and hedging activities | $ | 14 |
| | $ | 9 |
| | $ | 8 |
|
| |
(1) | Includes only those gains or losses on financial instruments held at fair value that have an economic derivative "assigned." |
The amounts of income volatility in derivatives and hedging activities were modest compared to the notional principal amounts, well within the range of normal historical fluctuation, and consistent with the derivatives used to hedge other financial instruments classified by how we designateclose hedging relationships of our derivative transactions.
Analysis of Quarterly ROE
The following table summarizes the hedging relationship.components of 2015's quarterly ROE and provides quarterly ROE for 2014 and 2013.
|
| | | | | | | | | | | | | | |
(In millions) | | December 31, 2012 | | December 31, 2011 |
Hedged Item/Hedging Instrument | Hedging Objective | Fair Value Hedge | Economic Hedge | | Fair Value Hedge | Economic Hedge |
Advances: | | | | | | |
Pay-fixed, receive floating interest rate swap (without options) | Converts the Advance's fixed rate to a variable rate index. | $ | 1,519 |
| $ | — |
| | $ | 2,269 |
| $ | — |
|
Pay-fixed, receive floating interest rate swap (with options) | Converts the Advance's fixed rate to a variable rate index and offsets option risk in the Advance. | 2,604 |
| 174 |
| | 7,326 |
| 184 |
|
Pay-float with embedded features, receive floating interest rate swap (non-callable) | Reduces interest-rate sensitivity and repricing gaps by offsetting embedded option risk in the Advance. | 35 |
| — |
| | 70 |
| — |
|
Total Advances | | 4,158 |
| 174 |
| | 9,665 |
| 184 |
|
Mortgage Loans: | | | | | | |
Forward settlement agreement | Protects against changes in market value of fixed rate Mandatory Delivery Contracts resulting from changes in interest rates. | — |
| — |
| | — |
| 375 |
|
Consolidated Obligations Bonds: | | | | | | |
Receive-fixed, pay floating interest rate swap (without options) | Converts the Bond's fixed rate to a variable rate index. | 2,269 |
| 3,400 |
| | 2,229 |
| 3,570 |
|
Receive-fixed, pay floating interest rate swap (with options) | Converts the Bond's fixed rate to a variable rate index and offsets option risk in the Bond. | 1,835 |
| 200 |
| | 1,780 |
| 1,325 |
|
Total Consolidated Obligations Bonds | | 4,104 |
| 3,600 |
| | 4,009 |
| 4,895 |
|
Stand-Alone Derivatives: | | | | | | |
Mandatory Delivery Contracts | Protects against fair value risk associated with fixed rate mortgage purchase commitments. | — |
| 124 |
| | — |
| 431 |
|
Total | | $ | 8,262 |
| $ | 3,898 |
| | $ | 13,674 |
| $ | 5,885 |
|
|
| | | | | | | | | | |
| 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | Total |
Components of 2015 ROE: | | | | | |
Net interest income: | | | | | |
Other net interest income | 6.84 | % | 6.80 | % | 6.89 | % | 6.98 | % | 6.88 | % |
Net amortization | (0.61 | ) | (0.07 | ) | (0.93 | ) | (0.70 | ) | (0.58 | ) |
Prepayment fees | 0.08 |
| 0.02 |
| 0.03 |
| 0.08 |
| 0.05 |
|
Total net interest income | 6.31 |
| 6.75 |
| 5.99 |
| 6.36 |
| 6.35 |
|
Reversal for credit losses | — |
| — |
| — |
| — |
| — |
|
Net interest income after reversal for credit losses | 6.31 |
| 6.75 |
| 5.99 |
| 6.36 |
| 6.35 |
|
Net gains on derivatives and hedging activities | 0.43 |
| 0.18 |
| 0.42 |
| — |
| 0.26 |
|
Other non-interest income | 0.23 |
| 0.26 |
| 0.31 |
| 0.52 |
| 0.33 |
|
Total non-interest income | 0.66 |
| 0.44 |
| 0.73 |
| 0.52 |
| 0.59 |
|
Total revenue | 6.97 |
| 7.19 |
| 6.72 |
| 6.88 |
| 6.94 |
|
Total non-interest expense | 1.44 |
| 1.51 |
| 1.46 |
| 1.53 |
| 1.49 |
|
Assessments | 0.56 |
| 0.58 |
| 0.53 |
| 0.54 |
| 0.55 |
|
2015 ROE | 4.97 | % | 5.10 | % | 4.73 | % | 4.81 | % | 4.90 | % |
| | | | | |
2014 ROE | 4.51 | % | 5.00 | % | 5.07 | % | 5.14 | % | 4.93 | % |
| | | | | |
2013 ROE | 5.49 | % | 4.80 | % | 5.37 | % | 4.78 | % | 5.10 | % |
The moderate volatility in quarterly ROEs in 2015 was primarily due to net amortization, net gains on derivatives and hedging activities, and gains on financial instruments held at fair value, which are included in other non-interest income. Quarterly ROEs in 2014 and 2013 had similar levels of volatility as experienced in 2015.
Segment Information
Note 18 of the Notes to Financial Statements presents information on our two operating business segments. We manage financial operations and market risk exposure primarily at the macro level, and within the context of the entire balance sheet, rather than exclusively at the level of individual segments. Under this approach, the market risk/return profile of each segment may not match, or possibly even have the same trends as, what would occur if we managed each segment on a stand-alone basis. The tables below summarize each segment's operating results for the periods shown.
|
| | | | | | | | | | | |
(Dollars in millions) | Traditional Member Finance | | MPP | | Total |
2015 | | | | | |
Net interest income after reversal for credit losses | $ | 250 |
| | $ | 72 |
| | $ | 322 |
|
Net income | $ | 192 |
| | $ | 57 |
| | $ | 249 |
|
Average assets | $ | 97,932 |
| | $ | 7,637 |
| | $ | 105,569 |
|
Assumed average capital allocation | $ | 4,707 |
| | $ | 367 |
| | $ | 5,074 |
|
Return on average assets (1) | 0.20 | % | | 0.74 | % | | 0.24 | % |
Return on average equity (1) | 4.08 | % | | 15.41 | % | | 4.90 | % |
| | | | | |
2014 | | | | | |
Net interest income after reversal for credit losses | $ | 238 |
| | $ | 79 |
| | $ | 317 |
|
Net income | $ | 181 |
| | $ | 63 |
| | $ | 244 |
|
Average assets | $ | 94,333 |
| | $ | 6,824 |
| | $ | 101,157 |
|
Assumed average capital allocation | $ | 4,622 |
| | $ | 334 |
| | $ | 4,956 |
|
Return on average assets (1) | 0.19 | % | | 0.93 | % | | 0.24 | % |
Return on average equity (1) | 3.91 | % | | 18.96 | % | | 4.93 | % |
| | | | | |
2013 | | | | | |
Net interest income after reversal for credit losses | $ | 229 |
| | $ | 106 |
| | $ | 335 |
|
Net income | $ | 184 |
| | $ | 77 |
| | $ | 261 |
|
Average assets | $ | 86,609 |
| | $ | 7,082 |
| | $ | 93,691 |
|
Assumed average capital allocation | $ | 4,733 |
| | $ | 388 |
| | $ | 5,121 |
|
Return on average assets (1) | 0.21 | % | | 1.09 | % | | 0.28 | % |
Return on average equity (1) | 3.88 | % | | 20.00 | % | | 5.10 | % |
| |
(1) | Amounts used to calculate returns are based on numbers in thousands. Accordingly, recalculations based upon the disclosed amounts (millions) may not produce the same results. |
Traditional Member Finance Segment
In addition2015 Versus 2014. The increase in net income was due to issuing long-term Bonds, an important way that we managehigher spreads earned on Advances primarily from lower funding costs as a result of using more Discount Notes, growth in average Advance balances, and hedge market risk exposure islarger unrealized net gains on derivatives and hedging activities. These items were partially offset by engaging in derivatives transactions, primarily interest rate swaps. Our hedging and risk management strategies in using derivatives did not change materially in 2012 from 2011, nor were there any changes in the accounting treatment of new or existing derivative hedge transactions that materially affected our results of operations.lower average balances on mortgage-backed securities.
2014 Versus 2013.The increase in net interest income was due to Advance growth, an increase in mortgage-backed securities leverage, and a decrease in net amortization expense of mortgage-backed securities. However, net income decreased as these factors were more than offset by a decrease in unrealized net gains on derivatives and hedging activities. Despite the decrease in net income, ROE increased slightly in 2014 primarily due to a lower amount of derivativescapital.
MPP Segment
Compared to the Traditional Member Finance segment, the MPP segment can exhibit more earnings volatility relative to short-term interest rates and more credit risk exposure. However, the MPP segment also provides the opportunity for enhancing risk-adjusted returns, which normally augments earnings. Although mortgage assets are the largest source of our market risk, we used
believe that we have historically managed this risk prudently and consistently with our risk appetite and corporate objectives. We also believe that these assets do not excessively elevate the balance sheet's overall market risk exposure.
The MPP continued to hedge Advancesearn a substantial level of profitability compared to market interest rates, with a moderate amount of market risk and small amount of credit risk. In 2015, the MPP averaged seven percent of total average assets while accounting for 23 percent of earnings.
2015 Versus 2014.Net interest income decreased in 2012 because such Advances matured, whereas mostresulting from higher net amortization expense and the continued paydown of the Advancehigher-yielding mortgage assets and low-cost debt, which were partially offset by growth in 2012 was funded by unswapped Consolidated Obligations.MPP balances.
In 2011, we began2014 Versus 2013.Net interest income decreased resulting from higher net amortization expense, smaller reversals of MPP credit losses, management actions to account for certain Bond-relatedextend debt maturities, run-off of higher yielding MPP loans, and lower average MPP balances. Net income decreased by a smaller amount because the factors above were partially offset by a small gain in 2014, compared to losses in 2013, on derivatives using an accounting election called "fair value option," which is included in the economic hedge category in the table. This change in accounting election resulted in a negligible amount of additional unrealized earnings volatility from accounting for derivatives. See "Critical Accounting Policies and Estimates" for further discussion.hedging activities.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT RISK MANAGEMENT
The differences betweenOverview
We face various risks that could affect the ability to achieve our mission and corporate objectives. We generally categorize risks as: 1) business/strategic risk, 2) regulatory/legislative risk, 3) market risk (also referred to as interest rate or prepayment risk), 4) credit risk, 5) capital adequacy (capital risk), 6) funding/liquidity risk, 7) accounting under "fairrisk, and 8) operational risk. Our Board of Directors establishes objectives regarding risk philosophy, risk appetite, risk tolerances, and financial performance expectations. Market, capital, credit, liquidity, and operational risks are discussed below. Other risks are discussed throughout this filing.
We strive to maintain a risk profile that ensures we operate safely and soundly, promotes prudent growth in Mission Asset Activity, consistently generates competitive earnings, and protects the par value option"of members' capital stock investment. We believe our business is financially sound and under "fair value hedge" are:adequately capitalized on a risk-adjusted basis.
We practice this conservative risk philosophy in many ways:
| |
1)▪ | "Fair value hedge" accounting carries theWe operate with moderate market risk that hedge effectiveness testing may fail, which results in recording the derivative at its fair market value with no offsetting changes in the market value of the hedged instrument.and limited residual credit risk, liquidity risk, operational risk, and capital impairment risk. |
| |
2)▪ | "Fair value option" accounting records the fair market value of the hedged instrument at its full fair value instead of only the value of hedging the benchmark interest rate (designatedWe have a priority to be LIBOR for these swaps).ensure competitive and relatively stable profitability. |
| |
▪ | We make conservative investment choices in terms of the types of investments we purchase and counterparties with which we engage. |
| |
▪ | We use derivatives to hedge individual assets and liabilities and to help hedge market risk exposure. |
| |
▪ | We maintain a prudent amount of financial leverage. |
| |
▪ | We are judicious in instituting regular, large-scale, district-wide repurchases of excess stock. |
| |
▪ | We have significantly increased retained earnings in recent years and hold an amount that we believe is consistent with protecting the par value of capital stock and providing for dividend stabilization. |
| |
▪ | We create a working and operating environment that emphasizes a stable employee base. |
We have numerous Board-adopted policies and processes that address risk management including risk appetite, tolerances, limits, guidelines, and regulatory compliance. Our cooperative business model, corporate objectives, capital structure, and regulatory oversight provide us clear incentives to minimize risk exposures. Our policies and operating practices are designed to limit risk exposures from ongoing operations in the following broad ways:
| |
▪ | by anticipating potential business risks and developing appropriate responses; |
| |
▪ | by defining permissible lines of business; |
| |
▪ | by limiting the kinds of assets we are permitted to hold in terms of their credit risk exposure and the kinds of hedging and financing arrangements we are permitted to use; |
| |
▪ | by limiting the amount of market risk and capital risk to which we are permitted to be exposed; |
| |
▪ | by specifying very conservative tolerances for credit risk posed by Advances; |
| |
▪ | by specifying capital adequacy minimums; and |
| |
▪ | by requiring strict adherence to internal controls and operating procedures, adequate insurance coverage, and comprehensive Human Resources policies, procedures, and strategies. |
Market Risk
Overview
Market risk exposure is the risk that profitability and the value of stockholders' capital investment may decrease and that profitability may be uncompetitive as a result of changes and volatility in the market environment and economy. Along with business/strategic risk, market risk is normally our largest residual risk.
Our risk appetite is to maintain market risk exposure in a moderate range while earning a competitive return on members' capital stock investment. There is normally a tradeoff between long-term market risk exposure and shorter-term exposure. Effective management of both components is important in order to attract and retain members and capital and to support Mission Asset Activity.
The primary challenges in managing market risk exposure arise from 1) the tradeoff between earning a competitive return and correlating profitability with short-term interest rates and 2) the market risk exposure of owning mortgage assets. Mortgage assets grant homeowners prepayment options that could adversely affect our financial performance when interest rates increase or decrease. We mitigate the market risk of mortgage assets primarily by funding them with a portfolio of long-term fixed-rate callable and noncallable Bonds that have expected cash flows similar to the aggregate cash flows expected from mortgage assets under a wide range of interest rate and prepayment environments. Because it is normally cost-prohibitive to completely mitigate mortgage prepayment risk, a residual amount of market risk normally remains after funding and hedging activities. In 2015, we introduced the use of purchasing options on interest rate swaps (swaptions derivatives) as an additional hedging strategy. Use of these derivatives represent, and will continue to represent, a small component of overall hedging practices.
We analyze market risk using numerous analytical measures under a variety of interest rate and business scenarios, including stressed scenarios, and perform sensitivity analyses on the many variables that can affect market risk, using several market risk models from third-party software companies. These models employ rigorous valuation techniques for the optionality that exists in mortgage prepayments, call and put options, and caps/floors. We regularly assess the effects of different assumptions, techniques and methodologies on the measurements of market risk exposure, including comparisons to alternative models and information from brokers/dealers.
Policy Limits on Market Risk Exposure
We have five sets of policy limits regarding market risk exposure, which primarily measure long-term market risk exposure. We determine compliance with our policy limits at every month end or more frequently if market or business conditions change significantly or are volatile.
| |
▪ | Market Value of Equity Sensitivity. The market value of equity for the entire balance sheet in two hypothetical interest rate scenarios (up 200 basis points and down 200 basis points from the current interest rate environment) must be between positive and negative 10 percent of the current balance sheet's market value of equity. The interest rate |
movements are “shocks,” defined as instantaneous, permanent, and parallel changes in interest rates in which every point on the yield curve is changed by the same amount.
| |
▪ | Duration of Equity. The duration of equity for the entire balance sheet in the current (“flat rate” or “base case”) interest rate environment must be between positive and negative five years and in the two interest rate shock scenarios (up 200 basis points and down 200 basis points from the current interest rate environment) must be between positive and negative six years. |
| |
▪ | Mortgage Assets Portfolio.The change in net market value of the mortgage assets portfolio as a percentage of the book value of portfolio assets must be between positive and negative three percent in each of the two interest rate shock scenarios. Net market value is defined as the market value of assets minus the market value of liabilities, with no assumed capital allocation. |
| |
▪ | Market Capitalization. The market capitalization ratio (defined as the ratio of the market value of equity to the par value of regulatory stock) must be above 95 percent in the current rate environment and must be above 90 percent in each of the two interest rate shock scenarios. |
| |
▪ | Mortgage Assets as a Multiple of Regulatory Capital. The amount of mortgage assets must be less than six times the amount of regulatory capital. |
In addition, Finance Agency regulations and an internal policy provide controls on market risk exposure by restricting the types of mortgage loans, mortgage-backed securities and other investments we can hold. We also manage market risk exposure by charging members prepayment fees on many Advance programs where an early termination of an Advance would result in an economic loss to us.
Market Value of Equity and Duration of Equity - Entire Balance Sheet
Two key measures of long-term market risk exposure are the sensitivities of the market value of equity and the duration of equity to changes in interest rates and other variables, as presented in the following tables for various instantaneous and permanent interest rate shocks. We compiled average results using data for each month end. Given the current very low level of rates, the down rate shocks are nonparallel scenarios, with short-term rates decreasing less than long-term rates such that no rate falls below zero.
Market Value of Equity
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | Down 300 | | Down 200 | | Down 100 | | Flat Rates | | Up 100 | | Up 200 | | Up 300 |
Average Results | | | | | | | | | | | | | |
2015 Full Year | | | | | | | | | | | | | |
Market Value of Equity | $ | 4,697 |
| | $ | 4,792 |
| | $ | 4,958 |
| | $ | 4,969 |
| | $ | 4,875 |
| | $ | 4,729 |
| | $ | 4,568 |
|
% Change from Flat Case | (5.5 | )% | | (3.6 | )% | | (0.2 | )% | | — |
| | (1.9 | )% | | (4.8 | )% | | (8.1 | )% |
2014 Full Year | | | | | | | | | | | | | |
Market Value of Equity | $ | 4,763 |
| | $ | 4,908 |
| | $ | 4,961 |
| | $ | 4,889 |
| | $ | 4,771 |
| | $ | 4,626 |
| | $ | 4,479 |
|
% Change from Flat Case | (2.6 | )% | | 0.4 | % | | 1.5 | % | | — |
| | (2.4 | )% | | (5.4 | )% | | (8.4 | )% |
Month-End Results | | | | | | | | | | | | | |
December 31, 2015 | | | | | | | | | | | | | |
Market Value of Equity | $ | 4,565 |
| | $ | 4,652 |
| | $ | 4,849 |
| | $ | 4,888 |
| | $ | 4,795 |
| | $ | 4,656 |
| | $ | 4,507 |
|
% Change from Flat Case | (6.6 | )% | | (4.8 | )% | | (0.8 | )% | | — |
| | (1.9 | )% | | (4.7 | )% | | (7.8 | )% |
December 31, 2014 | | | | | | | | | | | | | |
Market Value of Equity | $ | 4,714 |
| | $ | 4,824 |
| | $ | 4,938 |
| | $ | 4,920 |
| | $ | 4,835 |
| | $ | 4,688 |
| | $ | 4,524 |
|
% Change from Flat Case | (4.2 | )% | | (2.0 | )% | | 0.4 | % | | — |
| | (1.7 | )% | | (4.7 | )% | | (8.1 | )% |
Duration of Equity
|
| | | | | | | | | | | | | | | | | | | | |
(In years) | Down 300 | | Down 200 | | Down 100 | | Flat Rates | | Up 100 | | Up 200 | | Up 300 |
Average Results | | | | | | | | | | | | | |
2015 Full Year | (5.7 | ) | | (4.6 | ) | | (1.7 | ) | | 1.0 |
| | 2.8 |
| | 3.4 |
| | 3.5 |
|
2014 Full Year | (3.7 | ) | | (2.1 | ) | | 1.0 | | 2.0 | | 3.0 | | 3.3 | | 3.3 |
Month-End Results | | | | | | | | | | | | | |
December 31, 2015 | (6.9 | ) | | (5.7 | ) | | (2.8 | ) | | 0.6 |
| | 2.8 |
| | 3.3 |
| | 3.2 |
|
December 31, 2014 | (3.8 | ) | | (3.4 | ) | | (0.2 | ) | | 1.0 |
| | 2.6 |
| | 3.5 |
| | 3.7 |
|
During 2015, as in 2014, consistent with our historical practice and risk appetite, we positioned market risk exposure to higher interest rates at a moderate level. Market risk exposure to lower rates continued to be slightly favorable in most scenarios unless all interest rates decline to levels at (or near) zero.
Based on the totality of our risk analysis, we expect that profitability, defined as the level of ROE compared with short-term market rates, will remain competitive unless interest rates change by extremely large amounts in a short period of time. Decreases in long-term interest rates even up to two percentage points (which would put fixed-rate mortgages below two percent) would still result in profitability being well above market interest rates. Similarly, we believe that profitability would not become uncompetitive in a rising rate environment unless long-term rates were to permanently increase over the next 12 months by five percentage points or more, combined with short-term rates increasing to at least seven percent.
Capital Adequacy
We believe members place a high value on their capital investment in our company. We maintained compliance with regulatory capital requirements. Capital ratios at December 31, 2015 and all throughout the year exceeded the regulatory required minimum of four percent. We believe that the amount of our retained earnings is sufficient to protect against impairment risk of capital stock and to provide the opportunity to stabilize dividends. Our Capital Plan has safeguards to prevent financial leverage from increasing beyond regulatory minimums or below safe levels.
Credit Risk
In 2015, we continued to experience a de minimis level of overall residual credit risk exposure from our Credit Services, making investments, and executing derivative transactions. We believe policies and procedures related to credit underwriting, Advance collateral management, and transactions with investment and derivative counterparties continue to fully mitigate these risks. Therefore, we have never experienced any credit losses and we continue to have no loan loss reserves or impairment recorded for these instruments.
Residual credit risk exposure in the mortgage loan portfolio was minimal. The allowance for credit losses in the MPP continued to decline and was $2 million at December 31, 2015.
Liquidity Risk
Our liquidity position remained strong during 2015, as did our overall ability to fund operations through the issuance of Consolidated Obligations at acceptable interest costs. Investor demand for FHLBank System debt continued to be robust. There were no substantive stresses on market access or liquidity from external market and political events. Although we can make no assurances, we expect this to continue to be the case and believe there is only a remote possibility of a liquidity or funding crisis in the FHLBank System that could impair our ability to participate, on a cost-effective basis, in issuances of new debt, service outstanding debt, maintain adequate capitalization, or pay competitive dividends.
ANALYSIS OF FINANCIAL CONDITION
Mission Asset Activity
Mission Assets are the primary means by which we fulfill our mission with direct connections to members. We regularly monitor the balance sheet concentration of Mission Asset Activity. In 2015, our Primary Mission Asset ratio, as defined in "Regulatory and Legislative Risk" of the Executive Overview, was 79 percent. In assessing mission achievement, we also consider supplemental sources of Mission Asset Activity, the most significant of which is Letters of Credit issued to members.
Credit Services
Credit Activity and Advance Composition
The tables below show trends in Advance balances by major programs and in the notional amount of Letters of Credit.
|
| | | | | | | | | | | | | |
(Dollars in millions) | December 31, 2015 | | December 31, 2014 |
| Balance | | Percent(1) | | Balance | | Percent(1) |
Adjustable/Variable Rate Indexed: | | | | | | | |
LIBOR | $ | 47,312 |
| | 65 | % | | $ | 51,839 |
| | 74 | % |
Other | 617 |
| | 1 |
| | 515 |
| | 1 |
|
Total | 47,929 |
| | 66 |
| | 52,354 |
| | 75 |
|
Fixed-Rate: | | | | | | | |
REPO | 10,568 |
| | 14 |
| | 5,201 |
| | 7 |
|
Regular Fixed-Rate | 9,248 |
| | 13 |
| | 7,398 |
| | 11 |
|
Putable (2) | 1,046 |
| | 1 |
| | 1,617 |
| | 2 |
|
Amortizing/Mortgage Matched | 2,706 |
| | 4 |
| | 2,734 |
| | 4 |
|
Other | 1,745 |
| | 2 |
| | 995 |
| | 1 |
|
Total | 25,313 |
| | 34 |
| | 17,945 |
| | 25 |
|
Total Advances Principal | $ | 73,242 |
| | 100 | % | | $ | 70,299 |
| | 100 | % |
| | | | | | | |
Letters of Credit (notional) | $ | 19,555 |
| | | | $ | 17,780 |
| | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | December 31, 2015 | | September 30, 2015 | | June 30, 2015 | | March 31, 2015 |
| Balance | | Percent(1) | | Balance | | Percent(1) | | Balance | | Percent(1) | | Balance | | Percent(1) |
Adjustable/Variable-Rate Indexed: | | | | | | | | | | | | | | | |
LIBOR | $ | 47,312 |
| | 65 | % | | $ | 49,313 |
| | 64 | % | | $ | 48,242 |
| | 68 | % | | $ | 49,103 |
| | 73 | % |
Other | 617 |
| | 1 |
| | 565 |
| | 1 |
| | 597 |
| | 1 |
| | 407 |
| | 1 |
|
Total | 47,929 |
| | 66 |
| | 49,878 |
| | 65 |
| | 48,839 |
| | 69 |
| | 49,510 |
| | 74 |
|
Fixed-Rate: | | | | | | | | | | | | | | | |
REPO | 10,568 |
| | 14 |
| | 12,023 |
| | 16 |
| | 8,499 |
| | 12 |
| | 4,061 |
| | 6 |
|
Regular Fixed-Rate | 9,248 |
| | 13 |
| | 9,385 |
| | 12 |
| | 8,184 |
| | 11 |
| | 7,977 |
| | 12 |
|
Putable (2) | 1,046 |
| | 1 |
| | 1,557 |
| | 2 |
| | 1,570 |
| | 2 |
| | 1,580 |
| | 3 |
|
Amortizing/Mortgage Matched | 2,706 |
| | 4 |
| | 2,723 |
| | 3 |
| | 2,703 |
| | 4 |
| | 2,662 |
| | 4 |
|
Other | 1,745 |
| | 2 |
| | 1,637 |
| | 2 |
| | 1,223 |
| | 2 |
| | 825 |
| | 1 |
|
Total | 25,313 |
| | 34 |
| | 27,325 |
| | 35 |
| | 22,179 |
| | 31 |
| | 17,105 |
| | 26 |
|
Total Advances Principal | $ | 73,242 |
| | 100 | % | | $ | 77,203 |
| | 100 | % | | $ | 71,018 |
| | 100 | % | | $ | 66,615 |
| | 100 | % |
| | | | | | | | | | | | | | | |
Letters of Credit (notional) | $ | 19,555 |
| | | | $ | 17,594 |
| | | | $ | 19,006 |
| | | | $ | 16,905 |
| | |
| |
(1) | As a percentage of total Advances principal. |
| |
(2) | Excludes Putable Advances where the related put options have expired. Such Advances are classified based on their current terms. |
The modest growth and variability in Advance balances in 2015 was driven primarily by changes in variable-rate and short-term repurchase (REPO) Advances as the reduction in the need for variable-rate funding from our largest member was more than offset by REPO Advance borrowings. The increase in REPO Advance borrowings was primarily from new insurance company members. However, the borrowings from these new members are required to be paid off over the next year due to the Finance Agency's 2016 final rule on membership requirements, which is discussed further in the "Executive Overview."
Members increased their available lines in the Letters of Credit program by $1.8 billion (10 percent) in 2015. Letters of Credit balances averaged $17.7 billion during 2015, an increase of $2.5 billion (17 percent) from the average balance during 2014. We
normally earn fees on Letters of Credit based on the actual average amount of the Letters utilized, which generally is less than the notional amount issued.
Advance Usage
In addition to analyzing Advance balances by dollar trends and the number of members utilizing them, we monitor the degree to which members use Advances to fund their balance sheets. The following table shows the unweighted, average ratio of each member's Advance balance to its most-recently available figures for total assets.
|
| | | | | | | | | | | | | | |
| December 31, 2015 | | September 30, 2015 | | June 30, 2015 | | March 31, 2015 | | December 31, 2014 |
Average Advances-to-Assets for Members | | | | | | | | | |
Assets less than $1.0 billion (623 members) | 3.26 | % | | 3.20 | % | | 3.14 | % | | 3.06 | % | | 3.24 | % |
Assets over $1.0 billion (76 members) | 4.35 |
| | 4.75 |
| | 3.90 |
| | 3.08 |
| | 3.75 |
|
All members | 3.37 |
| | 3.35 |
| | 3.22 |
| | 3.06 |
| | 3.29 |
|
Advance usage ratios were slightly higher at year-end 2015 compared to year-end 2014, driven primarily by an increase in short-term borrowings and the inclusion of borrowings from several new insurance company members. Usage ratio trends for members with assets less than $1.0 billion were stable within a narrow range during the same time periods.
The following table shows Advance usage of members by charter type. |
| | | | | | | | | | | | | |
(Dollars in millions) | December 31, 2015 | | December 31, 2014 |
| Par Value of Advances | | Percent of Total Par Value of Advances | | Par Value of Advances | | Percent of Total Par Value of Advances |
Commercial Banks | $ | 53,479 |
| | 73 | % | | $ | 59,119 |
| | 84 | % |
Thrifts and Savings Banks | 5,220 |
| | 7 |
| | 4,067 |
| | 6 |
|
Credit Unions | 957 |
| | 1 |
| | 1,110 |
| | 1 |
|
Insurance Companies | 13,428 |
| | 19 |
| | 5,408 |
| | 8 |
|
Community Development Financial Institutions | 2 |
| | — |
| | 1 |
| | — |
|
Total member Advances | 73,086 |
| | 100 |
| | 69,705 |
| | 99 |
|
Former member borrowings | 156 |
| | — |
| | 594 |
| | 1 |
|
Total par value of Advances | $ | 73,242 |
| | 100 | % | | $ | 70,299 |
| | 100 | % |
The following tables present principal balances for the five members with the largest Advance borrowings.
|
| | | | | | | | | | | | | | | | |
(Dollars in millions) | | | | | | | | | | |
December 31, 2015 | | December 31, 2014 |
Name | | Par Value of Advances | | Percent of Total Par Value of Advances | | Name | | Par Value of Advances | | Percent of Total Par Value of Advances |
JPMorgan Chase Bank, N.A. | | $ | 35,350 |
| | 48 | % | | JPMorgan Chase Bank, N.A. | | $ | 41,300 |
| | 59 | % |
U.S. Bank, N.A. | | 10,086 |
| | 14 |
| | U.S. Bank, N.A. | | 8,338 |
| | 12 |
|
Capstead Insurance, LLC | | 2,875 |
| | 4 |
| | The Huntington National Bank | | 2,083 |
| | 3 |
|
Nationwide Life Insurance Company | | 2,279 |
| | 3 |
| | Nationwide Life Insurance Company | | 1,761 |
| | 3 |
|
Third Federal Savings and Loan Association | | 2,162 |
| | 3 |
| | Western-Southern Life Assurance Co | | 1,623 |
| | 2 |
|
Total of Top 5 | | $ | 52,752 |
| | 72 | % | | Total of Top 5 | | $ | 55,105 |
| | 79 | % |
Advance concentration ratios are influenced by, and generally similar to, concentration ratios of financial activity among our Fifth District financial institutions. We believe that having large financial institutions that actively use our Mission Asset Activity augments the value of membership to all members. For example, such activity improves our operating efficiency, increases our earnings and thereby contributions to housing and community investment programs, may enable us over time to obtain more favorable funding costs, and helps us maintain competitively priced Mission Asset Activity.
Mortgage Loans Held for Portfolio (Mortgage Purchase Program, or "MPP")
The table below shows principal purchases and reductions of loans in the MPP for each of the last two years.
|
| | | | | | | |
(In millions) | 2015 | | 2014 |
Balance, beginning of year | $ | 6,796 |
| | $ | 6,643 |
|
Principal purchases | 2,348 |
| | 1,226 |
|
Principal reductions | (1,386 | ) | | (1,073 | ) |
Balance, end of year | $ | 7,758 |
| | $ | 6,796 |
|
The increase in principal loan balances in 2015 resulted from higher amounts of loan purchases, particularly from our two largest sellers who drive program balances. In 2015, 99 members sold us mortgage loans, with the number of monthly sellers averaging 65. All loans acquired in 2015 were conventional loans.
The following tables show the percentage of principal balances from PFIs supplying five percent or more of total principal and the percentage of principal balances from all other PFIs. As shown in the table below, MPP activity is concentrated amongst a few members.
|
| | | | | | | | | | | | | | |
(Dollars in millions) | December 31, 2015 | | | December 31, 2014 |
| Principal | | % of Total | | | Principal | | % of Total |
Union Savings Bank | $ | 2,242 |
| | 29 | % | | Union Savings Bank | $ | 1,593 |
| | 23 | % |
PNC Bank, N.A. (1) | 839 |
| | 11 |
| | PNC Bank, N.A. (1) | 1,074 |
| | 16 |
|
Guardian Savings Bank FSB | 633 |
| | 8 |
| | Guardian Savings Bank FSB | 406 |
| | 6 |
|
All others | 4,044 |
| | 52 |
| | All others | 3,723 |
| | 55 |
|
Total | $ | 7,758 |
| | 100 | % | | Total | $ | 6,796 |
| | 100 | % |
(1)Former member.
We closely track the refinancing incentives of our mortgage assets (including loans in the MPP and mortgage-backed securities) because the option for homeowners to change their principal payments normally represents a large portion of our market risk exposure. MPP principal paydowns in all of 2015 equated to a 14 percent annual constant prepayment rate, up from the 12 percent rate for all of 2014, as the refinancing incentives for many of our mortgage assets increased.
The MPP's composition of balances by loan type, original final maturity, and weighted-average mortgage note rate did not change materially in 2015. The weighted average mortgage note rate fell from 4.36 percent at the end of 2014 to 4.14 percent at the end of 2015. This decline reflected a continuing trend of prepayments of higher rate mortgages and purchases of lower rate mortgages. MPP yields earned in 2015, after consideration of funding costs, continued to offer favorable returns relative to their market risk exposure.
Housing and Community Investment
In 2015, we accrued $28 million of earnings for the Affordable Housing Program, which will be awarded to members in 2016. This amount represents no change from 2014 due to the similar amount of earnings in each year.
Including funds available in 2015 from previous years, we had $27 million available for the competitive Affordable Housing Program in 2015, which we awarded to 70 projects through a single competitive offering. In addition, we disbursed $9 million to 171 members on behalf of 1,869 homebuyers through the Welcome Home Program, which assists homebuyers with down payments and closing costs. In total, just over one-quarter of members received approval for funding under the two Affordable Housing Programs.
Additionally, in 2015 our Board committed $1 million to the Carol M. Peterson Housing Fund (CMP Fund), which helped 151 homeowners, and continued its commitment to the $5 million Disaster Reconstruction Program. Both are voluntary programs beyond the 10 percent of earnings that we are required by law to set aside for the Affordable Housing Program.
Our activities to support affordable housing and economic development also include offering Advances through the Affordable Housing Program, Community Investment Program and Economic Development Program with below-market interest rates at
or near zero profit for us. At the end of 2015, Advance balances under these programs totaled $449 million. AHP Advance balances have declined in recent years, reflecting our preference to distribute AHP subsidy in the form of grants.
Investments
The table below presents the ending and average balances of the investment portfolio.
|
| | | | | | | | | | | | | | | |
(In millions) | 2015 | | 2014 |
| Ending Balance | | Average Balance | | Ending Balance | | Average Balance |
Liquidity investments | $ | 22,110 |
| | $ | 12,590 |
| | $ | 11,319 |
| | $ | 11,856 |
|
Mortgage-backed securities | 15,246 |
| | 14,664 |
| | 14,688 |
| | 15,594 |
|
Other investments (1) | — |
| | 85 |
| | — |
| | 98 |
|
Total investments | $ | 37,356 |
| | $ | 27,339 |
| | $ | 26,007 |
| | $ | 27,548 |
|
| |
(1) | The average balance includes the rights or obligations to cash collateral, which are included in the fair value of derivative assets or derivative liabilities on the Statements of Condition at period end. |
We continued to maintain an ample amount of asset liquidity. Liquidity investment levels can vary significantly based on liquidity needs, the availability of acceptable net spreads, the number of eligible counterparties that meet our unsecured credit risk criteria, and changes in the amount of Mission Assets. It is normal for liquidity investments to vary by up to several billion dollars on a daily basis.
Certain dealers, who play a large role in facilitating the distribution of our debt to investors, are being more reluctant to expand the amount of our debt on their balance sheets over quarter- and year-ends primarily due to the perceived growing burden of their regulatory capital environment associated with Basel. Because of this, we conservatively carried a larger amount of liquidity leading up to year-end 2015 to satisfy any potential member borrowing needs during a period where accessing additional liquidity may be more challenging.
Our overarching strategy for mortgage-backed securities is to keep holdings as close as possible to the regulatory maximum of three times regulatory capital, subject to the availability of securities that we believe provide acceptable risk/return tradeoffs. The balance of mortgage-backed securities at December 31, 2015 represented a 2.91 multiple of regulatory capital and consisted of $11.3 billion of securities issued by Fannie Mae or Freddie Mac (of which $1.7 billion were floating-rate securities), $0.9 billion of floating-rate securities issued by the National Credit Union Administration (NCUA), and $3.0 billion of securities issued by Ginnie Mae (a majority of which are fixed rate). The NCUA securities have coupons tied to one-month LIBOR with interest rate caps ranging from seven to eight percent. We held no private-label mortgage-backed securities.
The table below shows principal purchases and paydowns of our mortgage-backed securities for each of the last two years.
|
| | | | | | | |
(In millions) | Mortgage-backed Securities Principal |
| 2015 | | 2014 |
Balance, beginning of year | $ | 14,715 |
| | $ | 16,087 |
|
Principal purchases | 3,099 |
| | 722 |
|
Principal paydowns | (2,611 | ) | | (2,094 | ) |
Balance, end of year | $ | 15,203 |
| | $ | 14,715 |
|
Principal paydowns in 2015 equated to a 16 percent annual constant prepayment rate, up from a 13 percent rate in 2014. Purchases have outpaced paydowns this year due to the availability of mortgage securities offering attractive risk/return trade-offs.
Consolidated Obligations
The table below presents the ending and average balances of our participations in Consolidated Obligations.
|
| | | | | | | | | | | | | | | |
(In millions) | 2015 | | 2014 |
| Ending Balance | | Average Balance | | Ending Balance | | Average Balance |
Discount Notes: | | | | | | | |
Par | $ | 77,225 |
| | $ | 52,714 |
| | $ | 41,238 |
| | $ | 35,996 |
|
Discount | (26 | ) | | (8 | ) | | (6 | ) | | (4 | ) |
Total Discount Notes | 77,199 |
| | 52,706 |
| | 41,232 |
| | 35,992 |
|
Bonds: | | | | | | | |
Unswapped fixed-rate | 26,962 |
| | 26,350 |
| | 26,124 |
| | 25,513 |
|
Unswapped adjustable-rate | 4,065 |
| | 13,385 |
| | 27,610 |
| | 29,355 |
|
Swapped fixed-rate | 4,010 |
| | 6,489 |
| | 5,390 |
| | 3,697 |
|
Total par Bonds | 35,037 |
| | 46,224 |
| | 59,124 |
| | 58,565 |
|
Other items (1) | 68 |
| | 90 |
| | 93 |
| | 116 |
|
Total Bonds | 35,105 |
| | 46,314 |
| | 59,217 |
| | 58,681 |
|
Total Consolidated Obligations (2) | $ | 112,304 |
| | $ | 99,020 |
| | $ | 100,449 |
| | $ | 94,673 |
|
| |
(1) | Includes unamortized premiums/discounts, fair value option valuation adjustments, hedging and other basis adjustments. |
| |
(2) | The 11 FHLBanks have joint and several liability for the par amount of all of the Consolidated Obligations issued on their behalves. The par amount of the outstanding Consolidated Obligations for all of the FHLBanks was (in millions) $905,202 and $847,175 at December 31, 2015 and 2014, respectively. |
Our preferred sources of funding for LIBOR-indexed assets are Discount Notes, adjustable-rate Bonds, and swapped fixed-rate Bonds because they give us the ability to effectively match the LIBOR rate reset periods embedded in these assets. During 2015, we shifted the composition of this funding more towards Discount Notes. This change provided lower funding costs in the current market environment and therefore improved earnings as discussed in the "Net Interest Income" section of "Results of Operations." Discount Note balances also increased due to growth in Advance balances, most of which was in the short-term REPO program, as well as liquidity investments in order to ensure that member borrowing needs were met at year-end 2015.
This change in funding composition increases risk to changes in spreads between cashflows received on LIBOR-indexed assets and interest paid on Discount Notes. We believe the increased usage of Discount Note funding did not materially raise this risk because of the historically favorable relationship between the two rate indices.
The composition of unswapped fixed-rate Bonds, which typically have initial maturities greater than one year, was relatively stable in 2015 compared to 2014. The following table shows the allocation on December 31, 2015 of unswapped fixed-rate Bonds according to their final remaining maturity and next call date (for callable Bonds). We believe that the allocations of Bonds among these classifications provide effective mitigation of market risk exposure to both higher and lower interest rates.
|
| | | | | | | | | | | | | | | | |
(In millions) | Year of Maturity | | Year of Next Call |
| Callable | Noncallable | Amortizing | Total | | Callable |
Due in 1 year or less | $ | 30 |
| $ | 3,343 |
| $ | 1 |
| $ | 3,374 |
| | $ | 6,229 |
|
Due after 1 year through 2 years | 410 |
| 3,628 |
| — |
| 4,038 |
| | 240 |
|
Due after 2 years through 3 years | 1,270 |
| 3,205 |
| — |
| 4,475 |
| | — |
|
Due after 3 years through 4 years | 995 |
| 3,020 |
| — |
| 4,015 |
| | — |
|
Due after 4 years through 5 years | 553 |
| 2,383 |
| — |
| 2,936 |
| | — |
|
Thereafter | 3,211 |
| 4,913 |
| — |
| 8,124 |
| | — |
|
Total | $ | 6,469 |
| $ | 20,492 |
| $ | 1 |
| $ | 26,962 |
| | $ | 6,469 |
|
Deposits
Total deposits with us are normally a relatively minor source of low-cost funding. Total interest bearing deposits at December 31, 2015 were $0.8 billion, an increase of 10 percent from year-end 2014. The average balance of total interest bearing deposits in 2015 was $0.8 billion, a decrease of one percent from the average balance during 2014.
Derivatives Hedging Activity and Liquidity
Our use of and accounting for derivatives is discussed in the "Effect of the Use of Derivatives on Net Interest Income" section in "Results of Operations." Liquidity is discussed in the "Liquidity Risk" section in “Quantitative and Qualitative Disclosures About Risk Management.”
Capital LeverageResources
Prudent risk management dictates
The GLB Act and Finance Agency regulations specify limits on how much we can leverage capital by requiring that we maintain, effectiveat all times, at least a four percent regulatory capital-to-assets ratio. A lower ratio indicates more leverage. If financial leverage increases too much, or becomes too close to minimize riskthe regulatory limit, we have discretionary ability within our Capital Plan to enact changes to ensure capitalization remains strong and in compliance with regulatory limits.
We have always complied with our regulatory capital requirements. The following tables present capital amounts and capital-to-assets ratios, on both a GAAP and regulatory basis.
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| | | | | | | | | | | | | | | |
| Year Ended December 31, |
(In millions) | 2015 | | 2014 |
| Period End | | Average | | Period End | | Average |
GAAP and Regulatory Capital | | | | | | | |
GAAP Capital Stock | $ | 4,429 |
| | $ | 4,344 |
| | $ | 4,267 |
| | $ | 4,298 |
|
Mandatorily Redeemable Capital Stock | 38 |
| | 61 |
| | 63 |
| | 105 |
|
Regulatory Capital Stock | 4,467 |
| | 4,405 |
| | 4,330 |
| | 4,403 |
|
Retained Earnings | 765 |
| | 745 |
| | 689 |
| | 666 |
|
Regulatory Capital | $ | 5,232 |
| | $ | 5,150 |
| | $ | 5,019 |
| | $ | 5,069 |
|
|
| | | | | | | | | | | |
| 2015 | | 2014 |
| Period End | | Average | | Period End | | Average |
GAAP and Regulatory Capital-to-Assets Ratio | | | | | | | |
GAAP | 4.36 | % | | 4.81 | % | | 4.63 | % | | 4.90 | % |
Regulatory | 4.40 |
| | 4.88 |
| | 4.71 |
| | 5.01 |
|
We consider the regulatory ratio to be a better representation of financial leverage than the GAAP ratio because, although the GAAP ratio treats mandatorily redeemable capital stock as a liability, it protects investors in our debt in the same manner as GAAP capital stock and retained earnings. Both GAAP and regulatory capital-to-assets ratios remained above the regulatory required minimum of four percent. The reduction in these ratios at December 31, 2015 was a temporary result of the elevated liquidity we carried at that time due to the reasons discussed above.
The following table presents the sources of change in regulatory capital stock balances in 2015 and 2014.
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| | | | | | | |
(In millions) | 2015 | | 2014 |
Regulatory stock balance at beginning of year | $ | 4,330 |
| | $ | 4,814 |
|
Stock purchases: | | | |
Membership stock | 13 |
| | 11 |
|
Activity stock | 178 |
| | 73 |
|
Stock repurchases/redemptions: | | | |
Redemption of member excess | (1 | ) | | (1 | ) |
Repurchase of member excess | — |
| | (498 | ) |
Withdrawals | (53 | ) | | (69 | ) |
Regulatory stock balance at the end of the year | $ | 4,467 |
| | $ | 4,330 |
|
The table below shows the amount of excess capital stock.
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| | | | | | | |
(In millions) | December 31, 2015 | | December 31, 2014 |
Excess capital stock (Capital Plan definition) | $ | 461 |
| | $ | 504 |
|
Cooperative utilization of capital stock | $ | 521 |
| | $ | 441 |
|
Mission Asset Activity capitalized with cooperative capital stock | $ | 13,034 |
| | $ | 11,020 |
|
A portion of capital stock is excess, meaning it is not required as a condition to being a member and not required to capitalize Mission Asset Activity. Excess capital stock provides a base of capital to manage financial leverage at prudent levels, augments loss protections for bondholders, and capitalizes a portion of growth in Mission Assets. The amount of excess capital stock, as defined by our Capital Plan, was $461 million at December 31, 2015, a decrease of $43 million from year-end 2014.
Membership and Stockholders
In 2015, we added 21 new member stockholders and lost 27 members, ending the year at 699. Most members lost merged with other Fifth District members and, therefore, the impact on our earnings and Mission Asset Activity was small. Of the members lost, 17 merged with other members, eight merged out of the District, one merged with a District non-member, and one relocated its charter out of District.
In 2015, there were no material changes in the allocation of membership by state, charter type, or asset size. At the end of 2015, the composition of membership by state was Ohio with 304, Tennessee with 199, and Kentucky with 196.
The Finance Agency issued a final rule on FHLBank membership in January 2016. This rule imposes new membership requirements and eliminates all currently eligible captive insurance companies from FHLBank membership, as discussed in "Executive Overview." The ruling also requires that these entities, which represented 15 members totaling $6.6 billion in Advances at December 31, 2015, pay off existing Advances within one year and cease any new borrowings. The subsequent loss of this membership segment will not significantly affect our financial condition or results of operations.
The following table provides the number of member stockholders by charter type.
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| | | | | |
| December 31, |
| 2015 | | 2014 |
Commercial Banks | 418 |
| | 442 |
|
Thrifts and Savings Banks | 99 |
| | 101 |
|
Credit Unions | 124 |
| | 120 |
|
Insurance Companies | 54 |
| | 38 |
|
Community Development Financial Institutions | 4 |
| | 4 |
|
Total | 699 |
| | 705 |
|
The following table provides the ownership of capital stock by charter type.
|
| | | | | | | |
(In millions) | December 31, |
| 2015 | | 2014 |
Commercial Banks | $ | 3,425 |
| | $ | 3,441 |
|
Thrifts and Savings Banks | 378 |
| | 376 |
|
Credit Unions | 128 |
| | 121 |
|
Insurance Companies | 497 |
| | 328 |
|
Community Development Financial Institutions | 1 |
| | 1 |
|
Total GAAP Capital Stock | 4,429 |
| | 4,267 |
|
Mandatorily Redeemable Capital Stock | 38 |
| | 63 |
|
Total Regulatory Capital Stock | $ | 4,467 |
| | $ | 4,330 |
|
Credit union members hold relatively less stock than their membership proportion because they tend to be smaller than the average member and borrow less. Insurance company members hold relatively more stock than their membership proportion because they tend to be larger than the average member and borrow more.
The following table provides a summary of member stockholders by asset size.
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| | | | | |
| December 31, |
Member Asset Size (1) | 2015 | | 2014 |
Up to $100 million | 177 |
| | 182 |
|
> $100 up to $500 million | 370 |
| | 381 |
|
> $500 million up to $1 billion | 76 |
| | 76 |
|
> $1 billion | 76 |
| | 66 |
|
Total Member Stockholders | 699 |
| | 705 |
|
| |
(1) | The December 31 membership composition reflects members' assets as of the most-recently available figures for total assets. |
Most members are smaller community financial institutions, with 78 percent having assets up to $500 million. As noted elsewhere, having larger members is important to help achieve our mission objectives, including providing valuable products and services to all members.
RESULTS OF OPERATIONS
Components of Earnings and Return on Equity
The following table is a summary income statement for the last three years. Each ROE percentage is computed by dividing income or expense for the category by the average amount of stockholders' equity for the period.
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| | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | 2015 | | 2014 | | 2013 |
| Amount | | ROE (1) | | Amount | | ROE (1) | | Amount | | ROE (1) |
Net interest income | $ | 322 |
| | 6.35 | % | | $ | 317 |
| | 6.40 | % | | $ | 328 |
| | 6.40 | % |
Reversal for credit losses | — |
| | — |
| | — |
| | (0.01 | ) | | (7 | ) | | (0.15 | ) |
Net interest income after reversal for credit losses | 322 |
| | 6.35 |
| | 317 |
| | 6.41 |
| | 335 |
| | 6.55 |
|
Net gains on derivatives and hedging activities | 13 |
| | 0.26 |
| | 7 |
| | 0.13 |
| | 8 |
| | 0.16 |
|
Other non-interest income | 17 |
| | 0.33 |
| | 16 |
| | 0.32 |
| | 12 |
| | 0.23 |
|
Total non-interest income | 30 |
| | 0.59 |
| | 23 |
| | 0.45 |
| | 20 |
| | 0.39 |
|
Total revenue | 352 |
| | 6.94 |
| | 340 |
| | 6.86 |
| | 355 |
| | 6.94 |
|
Total non-interest expense | 75 |
| | 1.49 |
| | 68 |
| | 1.38 |
| | 64 |
| | 1.26 |
|
Assessments | 28 |
| | 0.55 |
| | 28 |
| | 0.55 |
| | 30 |
| | 0.58 |
|
Net income | $ | 249 |
| | 4.90 | % | | $ | 244 |
| | 4.93 | % | | $ | 261 |
| | 5.10 | % |
| |
(1) | The ROE amounts have been computed using dollars in thousands. Accordingly, recalculations based upon the disclosed amounts (millions) in this table may produce nominally different results. |
Net income was steady in 2015 compared to 2014, although there was variation in individual factors that determine earnings. Profitability remained competitive as ROE continued to significantly exceed our benchmarks relative to short-term interest rates. Details on the individual factors contributing to the level and changes in profitability are explained in the sections below.
Net Interest Income
The largest component of net income is net interest income. Our principal goal in managing net interest income is to balance trade-offs between maintaining a moderate market risk profile and ensuring profitability remains competitive. Effective risk/return management requires us to focus principally on the relationships among assets and liabilities that affect net interest income, rather than individual balance sheet and income statement accounts in isolation.
Our ROE normally is lower than that of many other financial institutions because of the cooperative wholesale business model that results in narrow spreads to funding costs on our primary assets (Advances), the moderate overall risk profile, and the strategic objective to have a positive correlation of dividends to short-term interest rates.
Components of Net Interest Income
We generate net interest income from the following two components:
| |
▪ | Net interest rate spread. This component equals the balance of total earning assets multiplied by the difference between the book yield on interest-earning assets and the book cost of interest-bearing liabilities. It is composed of net (amortization)/accretion, prepayment fees on Advances, and all other earnings from interest-earning assets net of funding costs. The latter is the largest component and represents the coupon yields of interest-earning assets net of the coupon costs of Consolidated Obligations and deposits. |
| |
▪ | Earnings from funding assets with capital (“earnings from capital”). Because of our relatively low net interest rate spread compared to other financial institutions, we have historically derived a substantial proportion of net interest income from deploying interest-free capital in interest-earning assets. We deploy much of the capital in short-term and adjustable-rate assets in order to help ensure that ROE moves in the same direction as short-term interest rates and to help control market risk exposure. |
The following table shows the major components of net interest income. Reasons for the variance in net interest income between the periods are discussed below.
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| | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | 2015 | | 2014 | | 2013 |
| Amount | | % of Earning Assets | | Amount | | % of Earning Assets | | Amount | | % of Earning Assets |
Components of net interest rate spread: | | | | | | | | | | | |
Net (amortization)/accretion (1) (2) | $ | (30 | ) | | (0.03 | )% | | $ | (11 | ) | | (0.01 | )% | | $ | (1 | ) | | — | % |
Prepayment fees on Advances, net (2) | 3 |
| | — |
| | 4 |
| | — |
| | 2 |
| | — |
|
Other components of net interest rate spread | 314 |
| | 0.30 |
| | 291 |
| | 0.29 |
| | 290 |
| | 0.31 |
|
Total net interest rate spread | 287 |
| | 0.27 |
| | 284 |
| | 0.28 |
| | 291 |
| | 0.31 |
|
Earnings from funding assets with interest-free capital | 35 |
| | 0.04 |
| | 33 |
| | 0.03 |
| | 37 |
| | 0.04 |
|
Total net interest income/net interest margin (3) | $ | 322 |
| | 0.31 | % | | $ | 317 |
| | 0.31 | % | | $ | 328 |
| | 0.35 | % |
| |
(1) | Includes (amortization)/accretion of premiums/discounts on mortgage assets and Consolidated Obligations and deferred transaction costs (concession fees) for Consolidated Obligations. |
| |
(2) | These components of net interest rate spread have been segregated to display their relative impact. |
| |
(3) | Net interest margin is net interest income before (reversal)/provision for credit losses as a percentage of average total interest earning assets. |
Net Amortization/Accretion: Net amortization/accretion (generally referred to as "amortization") includes monthly recognition of premiums and discounts paid on purchases of mortgage assets, as well as premiums, discounts and concessions paid on Consolidated Obligations. Periodic amortization adjustments do not necessarily indicate a trend in economic return over the entire life of mortgage assets, although it is one component of lifetime economic returns.
Amortization increased in 2015, compared to 2014, because net premium balances grew and long-term interest rates continue to fluctuate around very low levels. Amortization was lower than normal in 2013 due to a decline in actual and projected prepayment speeds in response to higher mortgage rates.
Prepayment Fees on Advances: Fees for members' early repayment of certain Advances are designed to make us economically indifferent to whether members hold Advances to maturity or repay them before maturity. Although Advance prepayment fees can be and have been significant in the past, they were minimal in 2015, 2014 and 2013, reflecting a low amount of member prepayments of Advances.
Other Components of Net Interest Rate Spread: Excluding net amortization and prepayment fees, the total other components of net interest rate spread increased $23 million in 2015 compared to 2014, while preserving profitabilityit increased only $1 million in 2014 compared to 2013. The following factors, presented in approximate order of impact from largest to smallest, accounted for the changes in other components of net interest rate spread.
2015 Versus 2014
| |
▪ | LIBOR Asset funding-Favorable: Net interest income increased by an estimated $18 million because we transitioned the funding of LIBOR-indexed assets from adjustable-rate LIBOR Bonds more towards lower-cost Discount Notes in response to a reduction in the cost of Discount Notes compared to the cost of adjustable-rate LIBOR Bonds. |
| |
▪ | MPP growth-Favorable: The average balance of mortgage loans held for portfolio increased $0.8 billion, which increased net interest income by an estimated $11 million. |
| |
▪ | Advance growth-Favorable: The $3.8 billion growth in average Advance balances improved net interest income by an estimated $8 million. |
| |
▪ | Fixed-rate asset funding-Unfavorable: A reduction in the amount of short-term debt funding longer-term fixed-rate mortgages lowered net interest income by an estimated $7 million. |
| |
▪ | Lower MPP spread-Unfavorable: The continued paydown of higher-yielding mortgage assets and low-cost debt led to a decline in the spread earned on mortgage loans, decreasing net interest income by an estimated $6 million. |
| |
▪ | Lower balances on mortgage-backed securities-Unfavorable: The average balance of the mortgage-backed securities portfolio declined $0.9 billion, which decreased net interest income by an estimated $5 million. |
| |
▪ | Other factors-Favorable: Various other factors, including, but not limited to, a decrease in the amount of mandatorily redeemable capital stock and higher spreads earned on mortgage-backed securities, increased net interest income by an estimated $4 million. |
2014 Versus 2013
| |
▪ | Asset-liability management-Unfavorable: Management strategies and actions related to reducing our market risk exposure, along with changes in the market rate environment, lowered earnings on a net basis of $29 million for the following reasons: |
| |
1) | Net interest income decreased $18 million due to a decline in mortgage asset spreads resulting from management actions to reduce market risk exposure by extending debt maturities and from continued run-off of higher yielding mortgages. |
| |
2) | Net interest income declined $11 million primarily because the cost of Discount Notes rose relative to LIBOR. Secondarily, we extended maturities of Discount Notes in order to reduce the burden of replacing Discount Notes as frequently. |
| |
▪ | Advance growth-Favorable: The $5.1 billion growth in average Advance balances at higher spreads improved net interest income by an estimated $26 million. |
| |
▪ | Higher balances on mortgage-backed securities-Favorable: The average balance of the mortgage-backed security portfolio increased $1.3 billion compared to 2013's average, which increased net interest income by an estimated $5 million. |
Earnings from Capital: The earnings from funding assets with interest-free capital did not change significantly in 2015 compared to 2014 and 2013 due to the continued low interest rate environment.
Average Balance Sheet and Rates
The following table provides average balances and rates for major balance sheet accounts, which determine the changes in the net interest rate spread. All data include the impact of interest rate swaps, which we allocate to each asset and liability category according to their designated hedging relationship. The changes in the net interest rate spread and net interest margin in 2015 versus 2014 and in 2014 versus 2013 occurred mostly from the net impact of the factors discussed above in “Components of Net Interest Income.”
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | 2015 | | 2014 | | 2013 |
| Average Balance | | Interest | | Average Rate (1) | | Average Balance | | Interest | | Average Rate (1) | | Average Balance | | Interest | | Average Rate (1) |
Assets | | | | | | | | | | | | | | | | | |
Advances | $ | 70,458 |
| | $ | 369 |
| | 0.52 | % | | $ | 66,642 |
| | $ | 318 |
| | 0.48 | % | | $ | 61,574 |
| | $ | 308 |
| | 0.50 | % |
Mortgage loans held for portfolio (2) | 7,611 |
| | 246 |
| | 3.23 |
| | 6,804 |
| | 237 |
| | 3.48 |
| | 7,065 |
| | 269 |
| | 3.80 |
|
Federal funds sold and securities purchased under resale agreements | 11,493 |
| | 14 |
| | 0.12 |
| | 9,673 |
| | 7 |
| | 0.07 |
| | 9,110 |
| | 8 |
| | 0.09 |
|
Interest-bearing deposits in banks (3) (4) (5) | 1,141 |
| | 2 |
| | 0.20 |
| | 2,244 |
| | 3 |
| | 0.15 |
| | 1,414 |
| | 2 |
| | 0.14 |
|
Mortgage-backed securities | 14,664 |
| | 326 |
| | 2.22 |
| | 15,594 |
| | 343 |
| | 2.20 |
| | 14,320 |
| | 313 |
| | 2.19 |
|
Other investments (4) | 41 |
| | — |
| | 0.11 |
| | 37 |
| | — |
| | 0.08 |
| | 26 |
| | — |
| | 0.12 |
|
Loans to other FHLBanks | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4 |
| | — |
| | 0.13 |
|
Total interest-earning assets | 105,408 |
| | 957 |
| | 0.91 |
| | 100,994 |
| | 908 |
| | 0.90 |
| | 93,513 |
| | 900 |
| | 0.96 |
|
Less: allowance for credit losses on mortgage loans | 2 |
| | | | | | 6 |
| | | | | | 12 |
| | | | |
Other assets | 163 |
| | | | | | 169 |
| | | | | | 190 |
| | | | |
Total assets | $ | 105,569 |
| | | | | | $ | 101,157 |
| | | | | | $ | 93,691 |
| | | | |
Liabilities and Capital | | | | | | | | | | | | | | | | | |
Term deposits | $ | 132 |
| | — |
| | 0.20 |
| | $ | 93 |
| | — |
| | 0.19 |
| | $ | 120 |
| | — |
| | 0.17 |
|
Other interest bearing deposits (5) | 704 |
| | — |
| | 0.01 |
| | 753 |
| | — |
| | 0.01 |
| | 955 |
| | — |
| | 0.01 |
|
Discount Notes | 52,706 |
| | 65 |
| | 0.12 |
| | 35,992 |
| | 28 |
| | 0.08 |
| | 34,574 |
| | 37 |
| | 0.11 |
|
Unswapped fixed-rate Bonds | 26,425 |
| | 528 |
| | 2.00 |
| | 25,605 |
| | 519 |
| | 2.03 |
| | 23,117 |
| | 488 |
| | 2.11 |
|
Unswapped adjustable-rate Bonds | 13,385 |
| | 21 |
| | 0.15 |
| | 29,355 |
| | 33 |
| | 0.11 |
| | 24,319 |
| | 35 |
| | 0.14 |
|
Swapped Bonds | 6,504 |
| | 19 |
| | 0.29 |
| | 3,721 |
| | 7 |
| | 0.20 |
| | 4,673 |
| | 7 |
| | 0.15 |
|
Mandatorily redeemable capital stock | 61 |
| | 2 |
| | 4.00 |
| | 105 |
| | 4 |
| | 4.01 |
| | 139 |
| | 5 |
| | 3.95 |
|
Other borrowings | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4 |
| | — |
| | 0.12 |
|
Total interest-bearing liabilities | 99,917 |
| | 635 |
| | 0.64 |
| | 95,624 |
| | 591 |
| | 0.62 |
| | 87,901 |
| | 572 |
| | 0.65 |
|
Non-interest bearing deposits | — |
| | | | | | 4 |
| | | | | | 18 |
| | | | |
Other liabilities | 578 |
| | | | | | 573 |
| | | | | | 651 |
| | | | |
Total capital | 5,074 |
| | | | | | 4,956 |
| | | | | | 5,121 |
| | | | |
Total liabilities and capital | $ | 105,569 |
| | | | | | $ | 101,157 |
| | | | | | $ | 93,691 |
| | | | |
| | | | | | | | | | | | | | | | | |
Net interest rate spread | | | | | 0.27 | % | | | | | | 0.28 | % | | | | | | 0.31 | % |
Net interest income and net interest margin (6) | | | $ | 322 |
| | 0.31 | % | | | | $ | 317 |
| | 0.31 | % | | | | $ | 328 |
| | 0.35 | % |
Average interest-earning assets to interest-bearing liabilities | | | | | 105.50 | % | | | | | | 105.62 | % | | | | | | 106.38 | % |
| |
(1) | Amounts used to calculate average rates are based on dollars in thousands. Accordingly, recalculations based upon the disclosed amounts (millions) may not produce the same results. |
| |
(2) | Non-accrual loans are included in average balances used to determine average rate. |
| |
(3) | Includes certificates of deposit and bank notes that are classified as available-for-sale securities. |
| |
(4) | Includes available-for-sale securities based on their amortized costs. The yield information does not give effect to changes in fair value that are reflected as a component of stockholders' equity for available-for-sale securities. |
| |
(5) | The average balance amounts include the rights or obligations to cash collateral, which are included in the fair value of derivative assets or derivative liabilities on the Statements of Condition at period end. |
| |
(6) | Net interest margin is net interest income before (reversal)/provision for credit losses as a percentage of average total interest earning assets. |
2015 Versus 2014.Rates on short-term interest-earning assets rose because average short-term interest rates were slightly higher in 2015. The average rate on mortgage-backed securities also rose nominally due to a change in composition. However, the average rate of total interest-earning assets increased only 0.01 percentage point in 2015 because of the continued very low interest rate environment and higher net amortization.
The average rate on total interest-bearing liabilities increased marginally due to modest increases in short-term interest rates that were partially offset by lower average long-term rates, more favorable funding spreads to market rates, and the transition of a large amount of LIBOR-indexed funding into lower-cost Discount Notes funding.
The net interest spread and net interest margin remained stable as the higher recognition of mortgage premium amortization was offset by the net other components of net interest rate spread discussed in the previous section.
2014 Versus 2013. The net interest spread and net interest margin decreased due to an increase in Advances balances and, secondarily, to the net effect of the other earnings factors discussed in the previous section. Although the Advance growth increased net interest income because of a larger asset base, the growth lowered the spread and margin because Advances tend to have narrower spreads to funding costs compared to mortgage assets.
The decline in the average rate on total earning assets and total interest-bearing liabilities resulted from the continued low rate environment and an increase in the balance sheet composition of instruments (due to the Advance growth) that tend to carry lower interest rates. The low rate environment particularly resulted in a decline in the average rate of long-term assets (such as certain Advances and mortgage loans held for portfolio) and long-term liabilities (unswapped fixed-rate Bonds). This is because a substantial portion of the principal paid down on these assets and liabilities, which had higher rates, was replaced with new assets and liabilities at lower rates.
Rates on short-term assets (Federal funds sold and securities sold under resale agreements) and liabilities (short-term borrowings and unswapped adjustable-rate Bonds) decreased slightly in 2014 as the low-rate rate environment continued.
Volume/Rate Analysis
Changes in both average balances (volume) and interest rates influence changes in net interest income. The following table summarizes these changes and trends in interest income and interest expense.
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| | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | 2015 over 2014 | | 2014 over 2013 |
| Volume (1)(3) | | Rate (2)(3) | | Total | | Volume (1)(3) | | Rate (2)(3) | | Total |
Increase (decrease) in interest income | | | | | | | | | | | |
Advances | $ | 19 |
| | $ | 32 |
| | $ | 51 |
| | $ | 25 |
| | $ | (15 | ) | | $ | 10 |
|
Mortgage loans held for portfolio | 27 |
| | (18 | ) | | 9 |
| | (10 | ) | | (22 | ) | | (32 | ) |
Federal funds sold and securities purchased under resale agreements | 1 |
| | 6 |
| | 7 |
| | 1 |
| | (2 | ) | | (1 | ) |
Interest-bearing deposits in banks | (2 | ) | | 1 |
| | (1 | ) | | 1 |
| | — |
| | 1 |
|
Mortgage-backed securities | (20 | ) | | 3 |
| | (17 | ) | | 28 |
| | 2 |
| | 30 |
|
Other investments | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Loans to other FHLBanks | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total | 25 |
| | 24 |
| | 49 |
| | 45 |
| | (37 | ) | | 8 |
|
Increase (decrease) in interest expense | | | | | | | | | | | |
Term deposits | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Other interest-bearing deposits | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Discount Notes | 16 |
| | 21 |
| | 37 |
| | 1 |
| | (10 | ) | | (9 | ) |
Unswapped fixed-rate Bonds | 17 |
| | (8 | ) | | 9 |
| | 51 |
| | (20 | ) | | 31 |
|
Unswapped adjustable-rate Bonds | (22 | ) | | 10 |
| | (12 | ) | | 7 |
| | (9 | ) | | (2 | ) |
Swapped Bonds | 7 |
| | 5 |
| | 12 |
| | (2 | ) | | 2 |
| | — |
|
Mandatorily redeemable capital stock | (2 | ) | | — |
| | (2 | ) | | (1 | ) | | — |
| | (1 | ) |
Other borrowings | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total | 16 |
| | 28 |
| | 44 |
| | 56 |
| | (37 | ) | | 19 |
|
Increase (decrease) in net interest income | $ | 9 |
| | $ | (4 | ) | | $ | 5 |
| | $ | (11 | ) | | $ | — |
| | $ | (11 | ) |
| |
(1) | Volume changes are calculated as the change in volume multiplied by the prior year rate. |
| |
(2) | Rate changes are calculated as the change in rate multiplied by the prior year average balance. |
| |
(3) | Changes that are not identifiable as either volume-related or rate-related, but rather are equally attributable to both volume and rate changes, have been allocated to the volume and rate categories based upon the proportion of the absolute value of the volume and rate changes. |
Effect of the Use of Derivatives on Net Interest Income
The following table shows the effect of using derivatives on net interest income. The effect on earnings from the non-interest components of derivatives related to market value adjustments is provided in “Non-Interest Income and Non-Interest Expense.”
|
| | | | | | | | | | | |
(In millions)
| 2015 | | 2014 | | 2013 |
Advances: | | | | | |
Amortization of hedging activities in net interest income | $ | (3 | ) | | $ | (3 | ) | | $ | (3 | ) |
Net interest settlements included in net interest income | (84 | ) | | (91 | ) | | (107 | ) |
Mortgage loans: | | | | | |
Amortization of derivative fair value adjustments in net interest income | (4 | ) | | (4 | ) | | (2 | ) |
Consolidated Obligation Bonds: | | | | | |
Net interest settlements included in net interest income | 20 |
| | 18 |
| | 27 |
|
Decrease to net interest income | $ | (71 | ) | | $ | (80 | ) | | $ | (85 | ) |
Most of our use of derivatives synthetically convert the intermediate- and long-term fixed interest rates on certain Advances and Bonds to adjustable-coupon rates tied to short-term LIBOR (mostly one- and three-month repricing resets). These adjustable-rate coupons normally carry lower interest rates than the fixed rates. The use of derivatives lowered net interest income in each period primarily because the Advances that were swapped to short-term LIBOR had higher fixed interest rates than the Bonds
that were swapped to short-term LIBOR. We accepted this reduction in earnings because it enabled us, as we designed, to significantly lower market risk exposure by creating a much closer match of actual cash flows between assets and liabilities than would occur otherwise. The reduction in earnings was similar in 2015, 2014, and 2013.
Provision for Credit Losses
In 2015 and 2014, delinquency trends in the MPP continued to decrease while home prices were relatively steady, resulting in no provision for estimated incurred credit losses in 2015 and a $0.5 million reversal for estimated incurred credit losses in 2014. In 2013, we recorded a $7.5 million reversal for estimated incurred credit losses in the MPP driven by higher home prices combined with improved delinquency trends in that year. Further information is in the "Credit Risk - MPP" section in "Quantitative and Qualitative Disclosures About Risk Management" and Note 10 of the Notes to Financial Statements.
Non-Interest Income and Non-Interest Expense
The following table presents non-interest income and non-interest expense for each of the last three years.
|
| | | | | | | | | | | |
(Dollars in millions) | 2015 | | 2014 | | 2013 |
Non-interest income | | | | | |
Net gains on derivatives and hedging activities | $ | 13 |
| | $ | 7 |
| | $ | 8 |
|
Other non-interest income, net | 17 |
| | 16 |
| | 12 |
|
Total non-interest income | $ | 30 |
| | $ | 23 |
| | $ | 20 |
|
Non-interest expense | | | | | |
Compensation and benefits | $ | 40 |
| | $ | 37 |
| | $ | 34 |
|
Other operating expense | 22 |
| | 17 |
| | 17 |
|
Finance Agency | 7 |
| | 7 |
| | 5 |
|
Office of Finance | 4 |
| | 4 |
| | 5 |
|
Other | 2 |
| | 3 |
| | 3 |
|
Total non-interest expense | $ | 75 |
| | $ | 68 |
| | $ | 64 |
|
Average total assets | $ | 105,569 |
| | $ | 101,157 |
| | $ | 93,691 |
|
Average regulatory capital | 5,150 |
| | 5,069 |
| | 5,271 |
|
Total non-interest expense to average total assets (1) | 0.07 | % | | 0.07 | % | | 0.07 | % |
Total non-interest expense to average regulatory capital (1) | 1.47 |
| | 1.35 |
| | 1.22 |
|
| |
(1) | Amounts used to calculate percentages are based on dollars in thousands. Accordingly, recalculations based upon the disclosed amounts (millions) may not produce the same results. |
Non-interest income increased in 2015 compared to 2014 primarily from larger gains on derivatives and hedging activities in 2015 compared to 2014, as presented in the table below. The change in non-interest expense in 2015 resulted primarily from higher legal fees and compensation and benefits.
Effect of Derivatives and Hedging Activities
|
| | | | | | | | | | | |
(In millions) | 2015 | | 2014 | | 2013 |
Net gains on derivatives and hedging activities | | | | | |
Advances: | | | | | |
Gains on fair value hedges | $ | 2 |
| | $ | 5 |
| | $ | 10 |
|
Gains on derivatives not receiving hedge accounting | 1 |
| | — |
| | 5 |
|
Mortgage loans: | | | | | |
Gains (losses) on derivatives not receiving hedge accounting | 1 |
| | — |
| | (11 | ) |
Consolidated Obligation Bonds: | | | | | |
Gains on fair value hedges | 1 |
| | — |
| | 1 |
|
Gains on derivatives not receiving hedge accounting | 8 |
| | 2 |
| | 3 |
|
Total net gains on derivatives and hedging activities | 13 |
| | 7 |
| | 8 |
|
Net gains on financial instruments held at fair value (1) | 1 |
| | 2 |
| | — |
|
Total net effect of derivatives and hedging activities | $ | 14 |
| | $ | 9 |
| | $ | 8 |
|
| |
(1) | Includes only those gains or losses on financial instruments held at fair value that have an economic derivative "assigned." |
The amounts of income volatility in derivatives and hedging activities were modest compared to the notional principal amounts, well within the range of normal historical fluctuation, and consistent with the close hedging relationships of our derivative transactions.
Analysis of Quarterly ROE
The following table summarizes the components of 2015's quarterly ROE and provides quarterly ROE for 2014 and 2013.
|
| | | | | | | | | | |
| 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | Total |
Components of 2015 ROE: | | | | | |
Net interest income: | | | | | |
Other net interest income | 6.84 | % | 6.80 | % | 6.89 | % | 6.98 | % | 6.88 | % |
Net amortization | (0.61 | ) | (0.07 | ) | (0.93 | ) | (0.70 | ) | (0.58 | ) |
Prepayment fees | 0.08 |
| 0.02 |
| 0.03 |
| 0.08 |
| 0.05 |
|
Total net interest income | 6.31 |
| 6.75 |
| 5.99 |
| 6.36 |
| 6.35 |
|
Reversal for credit losses | — |
| — |
| — |
| — |
| — |
|
Net interest income after reversal for credit losses | 6.31 |
| 6.75 |
| 5.99 |
| 6.36 |
| 6.35 |
|
Net gains on derivatives and hedging activities | 0.43 |
| 0.18 |
| 0.42 |
| — |
| 0.26 |
|
Other non-interest income | 0.23 |
| 0.26 |
| 0.31 |
| 0.52 |
| 0.33 |
|
Total non-interest income | 0.66 |
| 0.44 |
| 0.73 |
| 0.52 |
| 0.59 |
|
Total revenue | 6.97 |
| 7.19 |
| 6.72 |
| 6.88 |
| 6.94 |
|
Total non-interest expense | 1.44 |
| 1.51 |
| 1.46 |
| 1.53 |
| 1.49 |
|
Assessments | 0.56 |
| 0.58 |
| 0.53 |
| 0.54 |
| 0.55 |
|
2015 ROE | 4.97 | % | 5.10 | % | 4.73 | % | 4.81 | % | 4.90 | % |
| | | | | |
2014 ROE | 4.51 | % | 5.00 | % | 5.07 | % | 5.14 | % | 4.93 | % |
| | | | | |
2013 ROE | 5.49 | % | 4.80 | % | 5.37 | % | 4.78 | % | 5.10 | % |
The moderate volatility in quarterly ROEs in 2015 was primarily due to net amortization, net gains on derivatives and hedging activities, and gains on financial instruments held at fair value, which are included in other non-interest income. Quarterly ROEs in 2014 and 2013 had similar levels of volatility as experienced in 2015.
Segment Information
Note 18 of the Notes to Financial Statements presents information on our two operating business segments. We manage financial operations and market risk exposure primarily at the macro level, and within the context of the entire balance sheet, rather than exclusively at the level of individual segments. Under this approach, the market risk/return profile of each segment may not match, or possibly even have the same trends as, what would occur if we managed each segment on a stand-alone basis. The tables below summarize each segment's operating results for the periods shown.
|
| | | | | | | | | | | |
(Dollars in millions) | Traditional Member Finance | | MPP | | Total |
2015 | | | | | |
Net interest income after reversal for credit losses | $ | 250 |
| | $ | 72 |
| | $ | 322 |
|
Net income | $ | 192 |
| | $ | 57 |
| | $ | 249 |
|
Average assets | $ | 97,932 |
| | $ | 7,637 |
| | $ | 105,569 |
|
Assumed average capital allocation | $ | 4,707 |
| | $ | 367 |
| | $ | 5,074 |
|
Return on average assets (1) | 0.20 | % | | 0.74 | % | | 0.24 | % |
Return on average equity (1) | 4.08 | % | | 15.41 | % | | 4.90 | % |
| | | | | |
2014 | | | | | |
Net interest income after reversal for credit losses | $ | 238 |
| | $ | 79 |
| | $ | 317 |
|
Net income | $ | 181 |
| | $ | 63 |
| | $ | 244 |
|
Average assets | $ | 94,333 |
| | $ | 6,824 |
| | $ | 101,157 |
|
Assumed average capital allocation | $ | 4,622 |
| | $ | 334 |
| | $ | 4,956 |
|
Return on average assets (1) | 0.19 | % | | 0.93 | % | | 0.24 | % |
Return on average equity (1) | 3.91 | % | | 18.96 | % | | 4.93 | % |
| | | | | |
2013 | | | | | |
Net interest income after reversal for credit losses | $ | 229 |
| | $ | 106 |
| | $ | 335 |
|
Net income | $ | 184 |
| | $ | 77 |
| | $ | 261 |
|
Average assets | $ | 86,609 |
| | $ | 7,082 |
| | $ | 93,691 |
|
Assumed average capital allocation | $ | 4,733 |
| | $ | 388 |
| | $ | 5,121 |
|
Return on average assets (1) | 0.21 | % | | 1.09 | % | | 0.28 | % |
Return on average equity (1) | 3.88 | % | | 20.00 | % | | 5.10 | % |
| |
(1) | Amounts used to calculate returns are based on numbers in thousands. Accordingly, recalculations based upon the disclosed amounts (millions) may not produce the same results. |
Traditional Member Finance Segment
2015 Versus 2014. The increase in net income was due to higher spreads earned on Advances primarily from lower funding costs as a result of using more Discount Notes, growth in average Advance balances, and larger unrealized net gains on derivatives and hedging activities. These items were partially offset by lower average balances on mortgage-backed securities.
2014 Versus 2013. The increase in net interest income was due to Advance growth, an increase in mortgage-backed securities leverage, and a decrease in net amortization expense of mortgage-backed securities. However, net income decreased as these factors were more than offset by a decrease in unrealized net gains on derivatives and hedging activities. Despite the decrease in net income, ROE increased slightly in 2014 primarily due to a lower amount of capital.
MPP Segment
Compared to the Traditional Member Finance segment, the MPP segment can exhibit more earnings volatility relative to short-term interest rates and more credit risk exposure. However, the MPP segment also provides the opportunity for enhancing risk-adjusted returns, which normally augments earnings. Although mortgage assets are the largest source of our market risk, we
believe that we hold an adequatehave historically managed this risk prudently and consistently with our risk appetite and corporate objectives. We also believe that these assets do not excessively elevate the balance sheet's overall market risk exposure.
The MPP continued to earn a substantial level of profitability compared to market interest rates, with a moderate amount of retainedmarket risk and small amount of credit risk. In 2015, the MPP averaged seven percent of total average assets while accounting for 23 percent of earnings. Pursuant
2015 Versus 2014.Net interest income decreased resulting from higher net amortization expense and the continued paydown of higher-yielding mortgage assets and low-cost debt, which were partially offset by growth in MPP balances.
2014 Versus 2013.Net interest income decreased resulting from higher net amortization expense, smaller reversals of MPP credit losses, management actions to theseextend debt maturities, run-off of higher yielding MPP loans, and lower average MPP balances. Net income decreased by a smaller amount because the factors above were partially offset by a small gain in 2014, compared to losses in 2013, on derivatives and hedging activities.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT RISK MANAGEMENT
Overview
We face various risks that could affect the ability to achieve our mission and corporate objectives. We generally categorize risks as: 1) business/strategic risk, 2) regulatory/legislative risk, 3) market risk (also referred to as interest rate or prepayment risk), 4) credit risk, 5) capital adequacy (capital risk), 6) funding/liquidity risk, 7) accounting risk, and 8) operational risk. Our Board of Directors establishes objectives Finance Agency Regulations stipulateregarding risk philosophy, risk appetite, risk tolerances, and financial performance expectations. Market, capital, credit, liquidity, and operational risks are discussed below. Other risks are discussed throughout this filing.
We strive to maintain a risk profile that ensures we must comply with three limitsoperate safely and soundly, promotes prudent growth in Mission Asset Activity, consistently generates competitive earnings, and protects the par value of members' capital stock investment. We believe our business is financially sound and adequately capitalized on capital leverage and risk-based capital.a risk-adjusted basis.
We practice this conservative risk philosophy in many ways:
| |
▪ | We must maintain at least a four percent minimum regulatory capital-to-assets ratio. This has historically been the regulatoryoperate with moderate market risk and limited residual credit risk, liquidity risk, operational risk, and capital requirement that has the greatest effect on our operations.impairment risk. |
| |
▪ | We musthave a priority to ensure competitive and relatively stable profitability. |
| |
▪ | We make conservative investment choices in terms of the types of investments we purchase and counterparties with which we engage. |
| |
▪ | We use derivatives to hedge individual assets and liabilities and to help hedge market risk exposure. |
| |
▪ | We maintain at least a five percent minimum leverage ratioprudent amount of capital divided by total assets, which includes a 1.5 weighting factor applicable to permanent capital. Because all of our Class B stock is permanent capital, this requirement is met automatically if we satisfy the four percent unweighted capital requirement.financial leverage. |
| |
▪ | We are subjectjudicious in instituting regular, large-scale, district-wide repurchases of excess stock. |
| |
▪ | We have significantly increased retained earnings in recent years and hold an amount that we believe is consistent with protecting the par value of capital stock and providing for dividend stabilization. |
| |
▪ | We create a working and operating environment that emphasizes a stable employee base. |
We have numerous Board-adopted policies and processes that address risk management including risk appetite, tolerances, limits, guidelines, and regulatory compliance. Our cooperative business model, corporate objectives, capital structure, and regulatory oversight provide us clear incentives to minimize risk exposures. Our policies and operating practices are designed to limit risk exposures from ongoing operations in the following broad ways:
| |
▪ | by anticipating potential business risks and developing appropriate responses; |
| |
▪ | by defining permissible lines of business; |
| |
▪ | by limiting the kinds of assets we are permitted to a risk-basedhold in terms of their credit risk exposure and the kinds of hedging and financing arrangements we are permitted to use; |
| |
▪ | by limiting the amount of market risk and capital rule, as discussed below.risk to which we are permitted to be exposed; |
| |
▪ | by specifying very conservative tolerances for credit risk posed by Advances; |
| |
▪ | by specifying capital adequacy minimums; and |
| |
▪ | by requiring strict adherence to internal controls and operating procedures, adequate insurance coverage, and comprehensive Human Resources policies, procedures, and strategies. |
Market Risk
Overview
Market risk exposure is the risk that profitability and the value of stockholders' capital investment may decrease and that profitability may be uncompetitive as a result of changes and volatility in the market environment and economy. Along with business/strategic risk, market risk is normally our largest residual risk.
Our risk appetite is to maintain market risk exposure in a moderate range while earning a competitive return on members' capital stock investment. There is normally a tradeoff between long-term market risk exposure and shorter-term exposure. Effective management of both components is important in order to attract and retain members and capital and to support Mission Asset Activity.
The primary challenges in managing market risk exposure arise from 1) the tradeoff between earning a competitive return and correlating profitability with short-term interest rates and 2) the market risk exposure of owning mortgage assets. Mortgage assets grant homeowners prepayment options that could adversely affect our financial performance when interest rates increase or decrease. We mitigate the market risk of mortgage assets primarily by funding them with a portfolio of long-term fixed-rate callable and noncallable Bonds that have expected cash flows similar to the aggregate cash flows expected from mortgage assets under a wide range of interest rate and prepayment environments. Because it is normally cost-prohibitive to completely mitigate mortgage prepayment risk, a residual amount of market risk normally remains after funding and hedging activities. In 2015, we introduced the use of purchasing options on interest rate swaps (swaptions derivatives) as an additional hedging strategy. Use of these derivatives represent, and will continue to represent, a small component of overall hedging practices.
We analyze market risk using numerous analytical measures under a variety of interest rate and business scenarios, including stressed scenarios, and perform sensitivity analyses on the many variables that can affect market risk, using several market risk models from third-party software companies. These models employ rigorous valuation techniques for the optionality that exists in mortgage prepayments, call and put options, and caps/floors. We regularly assess the effects of different assumptions, techniques and methodologies on the measurements of market risk exposure, including comparisons to alternative models and information from brokers/dealers.
Policy Limits on Market Risk Exposure
We have always compliedfive sets of policy limits regarding market risk exposure, which primarily measure long-term market risk exposure. We determine compliance with our policy limits at every month end or more frequently if market or business conditions change significantly or are volatile.
| |
▪ | Market Value of Equity Sensitivity. The market value of equity for the entire balance sheet in two hypothetical interest rate scenarios (up 200 basis points and down 200 basis points from the current interest rate environment) must be between positive and negative 10 percent of the current balance sheet's market value of equity. The interest rate |
movements are “shocks,” defined as instantaneous, permanent, and parallel changes in interest rates in which every point on the yield curve is changed by the same amount.
| |
▪ | Duration of Equity. The duration of equity for the entire balance sheet in the current (“flat rate” or “base case”) interest rate environment must be between positive and negative five years and in the two interest rate shock scenarios (up 200 basis points and down 200 basis points from the current interest rate environment) must be between positive and negative six years. |
| |
▪ | Mortgage Assets Portfolio.The change in net market value of the mortgage assets portfolio as a percentage of the book value of portfolio assets must be between positive and negative three percent in each of the two interest rate shock scenarios. Net market value is defined as the market value of assets minus the market value of liabilities, with no assumed capital allocation. |
| |
▪ | Market Capitalization. The market capitalization ratio (defined as the ratio of the market value of equity to the par value of regulatory stock) must be above 95 percent in the current rate environment and must be above 90 percent in each of the two interest rate shock scenarios. |
| |
▪ | Mortgage Assets as a Multiple of Regulatory Capital. The amount of mortgage assets must be less than six times the amount of regulatory capital. |
In addition, Finance Agency regulations and an internal policy provide controls on market risk exposure by restricting the types of mortgage loans, mortgage-backed securities and other investments we can hold. We also manage market risk exposure by charging members prepayment fees on many Advance programs where an early termination of an Advance would result in an economic loss to us.
Market Value of Equity and Duration of Equity - Entire Balance Sheet
Two key measures of long-term market risk exposure are the sensitivities of the market value of equity and the duration of equity to changes in interest rates and other variables, as presented in the following tables for various instantaneous and permanent interest rate shocks. We compiled average results using data for each capital requirement. month end. Given the current very low level of rates, the down rate shocks are nonparallel scenarios, with short-term rates decreasing less than long-term rates such that no rate falls below zero.
Market Value of Equity
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | Down 300 | | Down 200 | | Down 100 | | Flat Rates | | Up 100 | | Up 200 | | Up 300 |
Average Results | | | | | | | | | | | | | |
2015 Full Year | | | | | | | | | | | | | |
Market Value of Equity | $ | 4,697 |
| | $ | 4,792 |
| | $ | 4,958 |
| | $ | 4,969 |
| | $ | 4,875 |
| | $ | 4,729 |
| | $ | 4,568 |
|
% Change from Flat Case | (5.5 | )% | | (3.6 | )% | | (0.2 | )% | | — |
| | (1.9 | )% | | (4.8 | )% | | (8.1 | )% |
2014 Full Year | | | | | | | | | | | | | |
Market Value of Equity | $ | 4,763 |
| | $ | 4,908 |
| | $ | 4,961 |
| | $ | 4,889 |
| | $ | 4,771 |
| | $ | 4,626 |
| | $ | 4,479 |
|
% Change from Flat Case | (2.6 | )% | | 0.4 | % | | 1.5 | % | | — |
| | (2.4 | )% | | (5.4 | )% | | (8.4 | )% |
Month-End Results | | | | | | | | | | | | | |
December 31, 2015 | | | | | | | | | | | | | |
Market Value of Equity | $ | 4,565 |
| | $ | 4,652 |
| | $ | 4,849 |
| | $ | 4,888 |
| | $ | 4,795 |
| | $ | 4,656 |
| | $ | 4,507 |
|
% Change from Flat Case | (6.6 | )% | | (4.8 | )% | | (0.8 | )% | | — |
| | (1.9 | )% | | (4.7 | )% | | (7.8 | )% |
December 31, 2014 | | | | | | | | | | | | | |
Market Value of Equity | $ | 4,714 |
| | $ | 4,824 |
| | $ | 4,938 |
| | $ | 4,920 |
| | $ | 4,835 |
| | $ | 4,688 |
| | $ | 4,524 |
|
% Change from Flat Case | (4.2 | )% | | (2.0 | )% | | 0.4 | % | | — |
| | (1.7 | )% | | (4.7 | )% | | (8.1 | )% |
Duration of Equity
|
| | | | | | | | | | | | | | | | | | | | |
(In years) | Down 300 | | Down 200 | | Down 100 | | Flat Rates | | Up 100 | | Up 200 | | Up 300 |
Average Results | | | | | | | | | | | | | |
2015 Full Year | (5.7 | ) | | (4.6 | ) | | (1.7 | ) | | 1.0 |
| | 2.8 |
| | 3.4 |
| | 3.5 |
|
2014 Full Year | (3.7 | ) | | (2.1 | ) | | 1.0 | | 2.0 | | 3.0 | | 3.3 | | 3.3 |
Month-End Results | | | | | | | | | | | | | |
December 31, 2015 | (6.9 | ) | | (5.7 | ) | | (2.8 | ) | | 0.6 |
| | 2.8 |
| | 3.3 |
| | 3.2 |
|
December 31, 2014 | (3.8 | ) | | (3.4 | ) | | (0.2 | ) | | 1.0 |
| | 2.6 |
| | 3.5 |
| | 3.7 |
|
During 2015, as in 2014, consistent with our historical practice and risk appetite, we positioned market risk exposure to higher interest rates at a moderate level. Market risk exposure to lower rates continued to be slightly favorable in most scenarios unless all interest rates decline to levels at (or near) zero.
Based on the totality of our risk analysis, we expect that profitability, defined as the level of ROE compared with short-term market rates, will remain competitive unless interest rates change by extremely large amounts in a short period of time. Decreases in long-term interest rates even up to two percentage points (which would put fixed-rate mortgages below two percent) would still result in profitability being well above market interest rates. Similarly, we believe that profitability would not become uncompetitive in a rising rate environment unless long-term rates were to permanently increase over the next 12 months by five percentage points or more, combined with short-term rates increasing to at least seven percent.
Market Risk Exposure of the Mortgage Assets Portfolio
The regulatory capital ratio averaged 6.07 percent in 2012. The regulatory capital-to-assets ratio atmortgage assets portfolio normally accounts for almost all market risk exposure because of prepayment volatility that we cannot completely hedge while maintaining sufficient net spreads. Sensitivities of the market value of equity allocated to the mortgage assets portfolio under interest rate shocks (in basis points) are shown below. At December 31, 2012 was 5.84 percent2015, which means that, given the amountmortgage assets portfolio had an assumed capital allocation of $1.1 billion based on the entire balance sheet's regulatory capital, total assets could increase by at least $37 billion beforecapital-to-assets ratio. Average results are compiled using data for each month-end. The market value sensitivities are one measure we use to analyze the capital-to-assets ratio would fall to four percent. This amount of growth in assets is unlikely to occur and, if it did, our Capital Plan would require us to obtain additional amounts of capital well before the four percent policy limit on capitalization would be reached.portfolio's estimated market risk exposure.
See the “Capital Resources” section% Change in Market Value of “Analysis of Financial Condition” and Note 16Equity-Mortgage Assets Portfolio
|
| | | | | | | | | | | | | | | | | | | |
| Down 300 | | Down 200 | | Down 100 | | Flat Rates | | Up 100 | | Up 200 | | Up 300 |
Average Results | | | | | | | | | | | | | |
2015 Full Year | (33.1 | )% | | (22.7 | )% | | (4.1 | )% | | — | | (8.0 | )% | | (21.3 | )% | | (36.3 | )% |
2014 Full Year | (19.1 | )% | | (3.9 | )% | | 3.6 | % | | — | | (9.7 | )% | | (22.1 | )% | | (35.0 | )% |
Month-End Results | | | | | | | | | | | | | |
December 31, 2015 | (41.7 | )% | | (30.8 | )% | | (6.4 | )% | | — | | (9.6 | )% | | (24.4 | )% | | (40.7 | )% |
December 31, 2014 | (25.0 | )% | | (13.7 | )% | | (1.0 | )% | | — | | (7.9 | )% | | (21.4 | )% | | (36.6 | )% |
The risk exposure of the Notesmortgage assets portfolio to Financial Statementschanging interest rates was similar in 2015 compared to 2014 except in extreme falling rate scenarios where all interest rates are at or marginally above zero. The dollar amount of exposure for more information onany individual rate shock can be obtained by multiplying the percentage change by the assumed equity allocation. We believe the mortgage assets portfolio continued to have an acceptable amount of market risk exposure relative to its actual and expected profitability and consistent with our capital adequacy.risk appetite philosophy.
Use of Derivatives in Market Risk Management
A key component of hedging market risk exposure is the use of derivatives transactions, as discussed in Item 1 "Business." The following table presents the notional principal amounts of the derivatives classified by how we designate the hedging relationship. The notional amount of derivatives at December 31, 2015 decreased by $0.4 billion (four percent) from the end of 2014.
|
| | | | | | | | | | | | | | |
(In millions) | | December 31, 2015 | | December 31, 2014 |
Hedged Item/Hedging Instrument | Hedging Objective | Fair Value Hedge | Economic Hedge | | Fair Value Hedge | Economic Hedge |
Advances: | | | | | | |
Pay-fixed, receive-float interest rate swap (without options) | Converts the Advance's fixed rate to a variable-rate index. | $ | 3,007 |
| $ | 15 |
| | $ | 1,734 |
| $ | 15 |
|
Pay-fixed, receive-float interest rate swap (with options) | Converts the Advance's fixed rate to a variable-rate index and offsets option risk in the Advance. | 1,187 |
| 48 |
| | 1,653 |
| 128 |
|
Total Advances | | 4,194 |
| 63 |
| | 3,387 |
| 143 |
|
Mortgage Loans: | | | | | | |
Forward settlement agreement | Protects against changes in market value of fixed-rate Mandatory Delivery Contracts resulting from changes in interest rates. | — |
| 462 |
| | — |
| 439 |
|
Consolidated Obligations Bonds: | | | | | | |
Receive-fixed, pay-float interest rate swap (without options) | Converts the Bond's fixed rate to a variable-rate index. | 1,184 |
| 2,494 |
| | 760 |
| 2,215 |
|
Receive-fixed, pay-float interest rate swap (with options) | Converts the Bond's fixed rate to a variable-rate index and offsets option risk in the Bond. | 170 |
| 162 |
| | 155 |
| 2,277 |
|
Total Consolidated Obligations Bonds | | 1,354 |
| 2,656 |
| | 915 |
| 4,492 |
|
Balance Sheet: | | | | | | |
Interest rate swaptions | Provides the option to enter into an interest rate swap to offset interest-rate or prepayment risk. | — |
| 281 |
| | — |
| — |
|
Stand-Alone Derivatives: | | | | | | |
Mandatory Delivery Contracts | Exposure to fair-value risk associated with fixed rate mortgage purchase commitments. | — |
| 450 |
| | — |
| 451 |
|
Total | | $ | 5,548 |
| $ | 3,912 |
| | $ | 4,302 |
| $ | 5,525 |
|
Capital Adequacy
Retained Earnings
We must hold sufficient capital to protect against exposure to various risks, including market, credit, and operational. We regularly conduct a variety of measurements and assessments for capital adequacy. Our Board-approved Retained Earnings and Dividend Policycurrent retained earnings policy sets forth a range forof $375 million to $600 million as the amount of retained earnings we believe is needednecessary to mitigate impairment risk and augmentprovide for dividend stability in lightstability. At December 31, 2015, the $765 million of the risks we face. The current minimum retained earnings requirement is $375was comprised of $556 million based on mitigating quantifiable risks under stress scenariosunrestricted (an increase of $27 million from year-end 2014) and $209 million restricted (an increase of $49 million from year-end 2014), which by the FHLBank System's Joint Capital Enhancement Agreement we are not permitted to at least a 99 percent confidence level. Givendistribute as dividends.
Due to the recent financial and regulatory environment and employing abundance of caution, we have been carryingwill continue to carry a greater amount of retained earnings in the last several years than required by the Policy. As discussed elsewhere, wepolicy and will continue to bolster capital adequacy over time by allocating a portion of earnings to a separate restricted retained earnings account in accordance with the FHLBank System's Joint Capital Enhancement Agreement. We believe that the current amount of retained earnings is sufficient to mitigate members' impairment risk of their capital stock investment and to provide the opportunity to stabilize dividends when profitability may be volatile.
Risk-Based Capital Regulatory Requirement
We must hold sufficient capital to protect against exposure to market risk, credit risk, and operational risk. The GLB Act and Finance Agency Regulations require total permanent capital, which includes retained earnings and the regulatory amount of Class B capital stock, to be at least equal to the amount of risk-based capital. Risk-based capital is the sum of market, credit, and operational risk-based capital as specified by the Regulations. The following table shows the amount of risk-based capital required based on the measurements,Finance Agency prescribed measurements. By regulation, we are required to hold permanent capital at least equal to the amount of permanent capital, and the amount of excess permanentrisk-based capital.
| | (Dollars in millions) | Year-end 2012 | | Monthly Average 2012 | | Year-end 2011 | December 31, 2015 | | Monthly Average 2015 | | December 31, 2014 |
Market risk-based capital | $ | 171 |
| | $ | 148 |
| | $ | 125 |
| $ | 206 |
| | $ | 155 |
| | $ | 125 |
|
Credit risk-based capital | 205 |
| | 178 |
| | 173 |
| 280 |
| | 253 |
| | 246 |
|
Operational risk-based capital | 113 |
| | 98 |
| | 89 |
| 145 |
| | 122 |
| | 111 |
|
Total risk-based capital requirement | 489 |
| | 424 |
| | 387 |
| 631 |
| | 530 |
| | 482 |
|
Total permanent capital | 4,759 |
| | 4,050 |
| | 3,845 |
| 5,232 |
| | 5,150 |
| | 5,019 |
|
Excess permanent capital | $ | 4,270 |
| | $ | 3,626 |
| | $ | 3,458 |
| $ | 4,601 |
| | $ | 4,620 |
| | $ | 4,537 |
|
Risk-based capital as a percent of permanent capital | 10 | % | | 10 | % | | 10 | % | 12 | % | | 10 | % | | 10 | % |
The risk-based capital requirement has historically not been a constraint on operations and we do not use it to actively manage any of our risks. It has normally ranged from 10 to 20 percent which is significantly less than the amount of permanent capital. This measure has been at the low end of the range for several years, primarily due to the low level of interest rates during this period truncatinglimiting estimated exposure to extreme lower rate scenarios. The amount of required risk-based capital increased at year-end 2015 versus year-end 2014 due to higher MPP balances and changes in interest rate volatility that affected the market risk component.
Dodd-Frank Stress Test
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, all FHLBanks are required to perform an annual stress test for capital adequacy. Our test was completed and published in July 2015, based on our financial condition as of September 30, 2014 and the methodology prescribed by the Finance Agency. Capital adequacy was sufficient under all established scenarios to fully absorb losses under both adverse and severely adverse economic conditions.
Market Capitalization Ratios
We measure two sets of market capitalization ratios. One measures the market value of equity (i.e., total capital) relative to the par value of regulatory capital stock (which is GAAP capital stock and mandatorily redeemable capital stock). The other measures the market value of total capital relative to the book value of total capital, which includes all components of capital. The measures provide a point-in-time indication of the FHLB's liquidation or franchise value and can also serve as a measure of realized or potential market risk exposure.
The following table presents the market value of equity to regulatory capital stock (excluding retained earnings) for several interest rate environments. |
| | | | | | | | |
| December 31, 2015 | | Monthly Average Year Ended December 31, 2015 | | December 31, 2014 |
Market Value of Equity to Par Value of Regulatory Capital Stock - Base Case (Flat Rates) Scenario | 109 | % | | 113 | % | | 114 | % |
Market Value of Equity to Par Value of Regulatory Capital Stock - Down Shock (1) | 109 |
| | 113 |
| | 114 |
|
Market Value of Equity to Par Value of Regulatory Capital Stock - Up Shock (2) | 104 |
| | 107 |
| | 108 |
|
| |
(1) | Represents a down shock of 100 basis points. |
| |
(2) | Represents an up shock of 200 basis points. |
A base case value below par could indicate that, in the remote event of an immediate liquidation scenario involving redemption of all capital stock, capital stock may be returned to stockholders at a value below par. This could be due to experiencing risks that lower the market value of capital and/or to having an insufficient amount of retained earnings. In 2015, the market capitalization ratios in the scenarios presented continued to be above the minimum policy limits identified above. Although the ratios declined slightly at December 31, 2015 compared to the end of 2014 and average for 2015, they remained acceptable because retained earnings were 17 percent of regulatory capital stock at December 31, 2015 and we maintained risk exposures at moderate levels.
The following table presents the market value of equity to the book value of total capital.
|
| | | | | | | | |
| December 31, 2015 | | Monthly Average Year Ended December 31, 2015 | | December 31, 2014 |
Market Value of Equity to Book Value of Capital - Base Case (Flat Rates) Scenario (1) | 94 | % | | 97 | % | | 98 | % |
Market Value of Equity to Book Value of Capital - Down Shock (1)(2) | 93 |
| | 97 |
| | 99 |
|
Market Value of Equity to Book Value of Capital - Up Shock (1)(3) | 89 |
| | 92 |
| | 94 |
|
| |
(1) | Capital includes total capital and mandatorily redeemable capital stock. |
| |
(2) | Represents a down shock of 100 basis points. |
| |
(3) | Represents an up shock of 200 basis points. |
A base-case value below par indicates that we have realized or could realize risks (especially market risk) such that the market value of total capital owned by stockholders, which includes regulatory capital stock and retained earnings, is below par value (i.e., below 100 percent of the total book value). The base-case ratio of 94 percent at December 31, 2015 indicates that the market value of total capital is $345 million below the par value of total capital. In a scenario in which interest rates increase 200 basis points, the market value of total capital would be $577 million below the par value of total capital, which indicates that capital stock would still be redeemable at par but stockholders would not receive the full sum of their ownership claims in the FHLB which include both capital stock and retained earnings.
Credit Risk
Overview
We assumeOur business entails a substantialsignificant amount of inherent credit risk exposure inexposure. We believe our dealings with members, purchases of investments, and transactions of derivatives. Forrisk management practices, discussed below, bring the reasons detailed below, we believe we have a minimal overall amount of residual credit risk exposure related to oura minimal level. We have no loan loss reserves or impairment recorded for Credit Services, purchases of investments, and transactions in derivatives and a moderateminimal amount of legacy credit risk exposure related to the MPP.
Credit Services
Overview.Overview: We have policies and practices to manage credit risk exposure from our secured lending activities, which include Advances and Letters of Credit. The objective of our credit risk management is to equalize risk exposure across members and counterparties to a zero level of expected losses, consistent with our conservative risk management principles and desire to have virtually no residual credit risk related to member borrowings. Despite continued effects from the deterioration in the last five years in the credit conditions of many of our members and in the value of some pledged collateral, we believe that credit risk exposure in our secured lending activities continued to be minimal in 2012. We base this assessment on the following factors:
| |
▪ | a conservative approach to collateralizing credit services that results in significant over-collateralization; |
| |
▪ | close monitoring of members' financial conditions and repayment capacities; |
| |
▪ | a risk-focused process for reviewing and verifying the quality, documentation, and administration of pledged loan collateral; |
| |
▪ | significant upward adjustments on collateral margins assigned to almost all of the subprime and nontraditional mortgages pledged as collateral; and |
| |
▪ | a history of never experiencing a credit loss or delinquency on any Advance. |
Because of these factors, we have never established a loan loss reserve for Advances. We expect to collect all amounts due according to the contractual terms of Advances and Letters of Credit.
Collateral.Collateral: We require each member to provide us a security interest in eligible collateral before it can undertake any secured borrowing. At December 31, 20122015, our policy of over-collateralization resulted in total collateral pledged of $198.0306.5 billion to serve members' total borrowing capacity of $140.4260.6 billion. Lower borrowing capacity results because we apply Collateral Maintenance Requirements (CMRs) to discount theThe estimated value of pledged collateral is discounted in order to mitigateoffset market, credit, and liquidity risks that may affect the collateral's realizable value in the event weit must liquidate it.be liquidated. Over-collateralization by one member is not applied to another member.
The table below shows the total pledged collateral (unadjusted for CMRs) on December 31, 2012 and 2011Collateral Maintenance Requirements).
| | | December 31, 2012 | | December 31, 2011 | December 31, 2015 | | December 31, 2014 |
(Dollars in billions) | | | | Percent of Total | | | | Percent of Total |
| Collateral Amount | | Percent of Total | | Collateral Amount | | Percent of Total | Collateral Amount | | Pledged Collateral | | Collateral Amount | | Pledged Collateral |
| ($ Billions) | | Pledged Collateral | | ($ Billions) | | Pledged Collateral | |
Single family loans | $ | 111.6 |
| | 56 | % | | $ | 97.0 |
| | 62 | % | |
Single-family loans | | $ | 174.0 |
| | 57 | % | | $ | 140.4 |
| | 55 | % |
Multi-family loans | | 44.9 |
| | 15 |
| | 38.2 |
| | 15 |
|
Bond securities | 25.0 |
| | 13 |
| | 13.5 |
| | 8 |
| 32.9 |
| | 11 |
| | 22.3 |
| | 9 |
|
Commercial real estate | | 31.0 |
| | 10 |
| | 29.5 |
| | 12 |
|
Home equity loans/lines of credit | 24.1 |
| | 12 |
| | 26.2 |
| | 17 |
| 23.1 |
| | 7 |
| | 22.0 |
| | 9 |
|
Commercial real estate | 19.2 |
| | 10 |
| | 17.1 |
| | 11 |
| |
Multi-family loans | 17.6 |
| | 9 |
| | 2.6 |
| | 2 |
| |
Farm real estate | 0.5 |
| | (a) |
| | 0.4 |
| | (a) |
| 0.6 |
| | — |
| | 0.6 |
| | — |
|
Total | $ | 198.0 |
| | 100 | % | | $ | 156.8 |
| | 100 | % | $ | 306.5 |
| | 100 | % | | $ | 253.0 |
| | 100 | % |
| |
(a) | Less than one percent of total pledged collateral. |
At December 31, 2012, 682015, 64 percent of collateral was related to residential mortgage lending in single familysingle-family loans and home equity lines.loans/lines of credit. The increase in multi-family loans and bond securities between these two periods was due tocollateral composition remained consistent with the collateral pledged by a large new member.end of 2014.
We assign each member one of four levels of collateral status-Blanket,status: Blanket, Securities, Listing, and Physical Delivery-basedDelivery. Assignment is based in part on ouran internal credit rating model that reflects our view of the member's current financial condition capitalization, level of problem assets, and other risk factors.performance. Blanket collateral status, which we assign to approximately 8590 percent of borrowers, is the least restrictive status and is available for lower risk institutions. Over 90to lower-risk bank and credit union members. Approximately 53 percent of single family mortgage loanpledged collateral and commercial real estate collateral and almost all home equity loan collateral areis under the Blanket status. We monitor the level of eligible collateral pledged under Blanket status using quarterly regulatory financial reports or periodic collateral “Certification” documents submitted by all significant borrowers.
Under Listing collateral status, a member pledges and provides us detailed information on specifically identified individual loans and securities that meet certain minimum qualifications. Physical Delivery is the most restrictive collateral status, which we assign to members experiencing significant financial difficulties, insurance companies pledging loans, and newly chartered institutions. We require borrowers assigned toin Physical Delivery to deliver into our possessioncustody securities and/or original notes, mortgages or deeds of trust. SomeUnder any collateral status, members may elect to pledge bond securities, which we either hold in Physical Delivery collateral status.our custody or, less often, have third parties control on our behalf. We use third-party services to regularly estimate market values of collateral under Listing and Physical status using detailed information on the collateral and a third-party pricing service.status.
Borrowing Capacity/Lendable Value.Value: We determine borrowing capacity against pledged collateral by applying CMRs.establishing minimum levels of over-collateralization (Collateral Maintenance Requirements or CMRs). CMRs are intended to capture market, credit, liquidity, and prepayment risks that may affect the realizableresult in a lendable value, of each pledged asset in the event we must liquidate collateral. CMRs are discounts determined by statistical analysis and certain management assumptions applied to the estimated market value of pledged collateral, and therefore their application results inor borrowing capacity that is less than the amount of pledged collateral. The discounts
CMRs are determined by dividing one bystatistical analysis and management assumptions relating to historical price volatility, inherent credit risks, liquidation costs, and the CMR; for example, acurrent credit and economic environment. We apply CMR results to the estimated values of 150 percent translates into a discount of 66.7 percent, which means that 66.7 percentpledged assets. CMRs vary among pledged assets and members based on the financial strength of the valuemember institution, the level of collateral status, the issuer of bond collateral or the quality of securitized assets, the marketability of the pledged assets, the payment performance of pledged loan collateral, and the quality of loan collateral as reflected in the manner in which it was underwritten and is eligible for borrowing. Members and collateral with a higher risk profile, more risky credit quality, and/or less favorable performance are generally assigned higher CMRs.administered.
The table below indicates the range of lendable values remaining after the application of CMRs for each major collateral type pledged at December 31, 20122015. These ranges did not change from the end of 2014.
|
| |
| Lending Values Applied to Collateral |
Blanket StatusStatus: | |
Prime 1-4 family loans | 67-83%67-87% |
Multi-family loans | 41-53%53-77% |
HomePrime home equity loans/lines of credit | 48-63%57-77% |
Commercial real estate loans | 44-56%61-80% |
Farm real estate loans | 51-69% |
| 65-83% |
Listing Status/Physical DeliveryDelivery: | |
Cash/U.S. Government/U.S. Treasury/U.S. agency securities | 93-100%79-100% |
U.S. agency MBS/CMOsmortgage-backed securities/collateralized mortgage obligations | 90-96%79-98% |
Private-label MBS/CMOs | 65-87% |
Commercialresidential mortgage-backed securities | 48-83%43-87% |
Private-label commercial mortgage-backed securities | 33-86% |
Municipal securities | 25-93% |
Small Business Administration certificates | 91%88-93% |
1-4 family loans | 70-83%67-94% |
Multi-family loans | 57-83%57-87% |
Home equity loans/lines of credit | 53-69%63-87% |
Commercial real estate loans | 53-67%65-91% |
Farm real estate loans | 67-91% |
The ranges of lendable values for Blanket collateral status are expressed as percentages of collateral book value and exclude subprime and nontraditional mortgage loan collateral. The ranges of lendable value for Listing and Physical collateral status are expressed as a percentage of estimated market value. Loans pledged under a Blanket statusby lower risk members for which we require only high level, summary reporting of eligible balances are generally are discounted more heavily than loans on which we have detailed loan structure and underwriting information.
We periodically evaluate the CMRs applied by completing internal evaluations or engaging third-party specialists. Beginning in June, we engaged a market-recognized vendor to perform this regular update to the CMRs. The first update, completed in July, addressed For any form of loan collateral, composed of multi-family loans because the amount of that collateral type grew materially in June. Theadditional
result of the update wascredit risk based adjustments may be made to increasean individual member’s collateral that results in a lower lendable values approximately 20 to 33 percent, for this type of collateral pledged by members to whom we assign strong internal credit ratings and who elect to pledge collateral under Listing status. The second update, implementedvalue than that indicated in the first quarter of 2013, addressed all other collateral types and generally increased lendable values by a range of 5 to 30 percent, with the most notable increases existing in commercial real estate collateral. Some collateral types received no changes or minor decreases in lendable values.
The changes in CMRs were influenced by the general stabilization in the credit environment. We believe these updated CMRs maintain a rigorous amount of credit protection consistent with our conservative risk management principles.above table.
Subprime and Nontraditional Mortgage Loan Collateral.Collateral: We have policies and processes to identify subprime and nontraditional residential mortgage loans pledged by members to which we have high credit risk exposure or have extended significant credit.members. We perform on-site collateral reviews, sometimes engaging third parties, of members we deem to have high credit risk exposure. The reviews include identification ofdetermine whether the pledged loans that meet our definitionsdefinition of subprime, nontraditional, or both. Depending on the quality of underwriting and nontraditional. Our definitionsadministration, we may subject these loans to higher CMRs. We also limit the overall percentage of subprime loans and nontraditional mortgage loans (NTM) are expansive and conservative. During the review process, we estimate overallborrowing capacity that members can receive from subprime and nontraditional mortgage exposure levels by performing random statistical sampling of residential loans in the members' pledged portfolios.collateral.
Based on our collateral reviews, we estimate that approximately 20 to 25 percent of pledged residential loan collateral has one or more subprime characteristics and that approximately five to seven percent of pledged collateral meets the industry definition of “nontraditional.”These percentages have increased slightly over the last several years. We apply significantly higher adjustments to the standard CMRs on almost all collateral identified as subprime and/or nontraditional mortgages. No security known to have more than one-third subprime collateral is eligible for pledge to support additional credit borrowings.
Internal Credit Ratings.Ratings: We assign all memberperform credit underwriting of our members and nonmember borrowers and assign them an internal credit rating based on a combinationscale of one to seven, with a higher number representing a less favorable assessment of the institution's credit and overall financial condition. The credit ratings are based on internal credit analysis and consideration of available credit ratings from independent credit rating organizations. The analysis focuses on asset quality, financial performance, earnings quality, liquidity, and capital adequacy. The credit ratings are used in conjunction with other measures of the credit risk posed by members and pledged collateral, as described above, in managing credit risk exposure of Advances. to member and nonmember borrowers.
A lower internalless favorable credit rating can cause us to 1) decrease the institution's borrowing capacity via higher CMRs, 2) require the institution to provide an increased level of detail on pledged collateral, 3) require it to deliver collateral into our custody, and/or 4) prompt us to more closely and/or frequently monitor the institution using several established processes.processes, and/or 5) limit the institution's exposure through borrowing restrictions (e.g., maturity restrictions on new Advances or requiring prepayments on existing Advances).
Collateralization of Former Members. Underwriting criteria, including the forms of collateral that may be pledged, are generally the same for members and former members. One exception is that former members of our FHLBank with outstanding Advances must either deliver sufficient collateral into our custody to cover their Advances (regardless of whether they would qualify for Blanket or Listing status as a member) or have their Advances covered by a subordination or other acceptable form of intercreditor agreement from/by another FHLBank. On December 31, 2012, we had $3,619 million of Advances outstanding to former members. Of this amount, $3,029 million was supported by subordination or other intercreditor security agreements with other FHLBanks, with collateral totaling $3,786 million based on our required collateral levels. The remaining $590 million of Advances was collateralized by $20 million of marketable securities and $1,521 million in loan collateral held in our custody. Subordination agreements mitigate our risk in the event of borrower default by giving our claim to the value of collateral priority over the interests of the subordinating FHLBank, thus providing that FHLBank an incentive to ensure pledged collateral values are sufficient to cover all parties.
The following tables show the distribution of internal credit ratings we assigned to member and nonmember borrowers, which we use to help manage credit risk exposure. The lower the numerical rating, the higher our assessment of the member's credit quality.
| | (Dollars in billions) | (Dollars in billions) | | | | | | | (Dollars in billions) | | | | | | |
December 31, 2012 | | December 31, 2011 | |
December 31, 2015 | | December 31, 2015 | | December 31, 2014 |
| | Borrowers | | | | Borrowers | | Borrowers | | | | Borrowers |
| | | | Collateral-Based | | | | | Collateral-Based | | | | Collateral-Based | | | | | Collateral-Based |
Credit | | | | Borrowing | | Credit | | | | Borrowing | | | | Borrowing | | Credit | | | | Borrowing |
Rating | | Number | | Capacity | | Rating | | Number | | Capacity | | Number | | Capacity | | Rating | | Number | | Capacity |
1-3 | | 485 |
| | $ | 67.9 |
| | 1-3 | | 420 |
| | $ | 57.0 |
| | 582 |
| | $ | 251.7 |
| | 1-3 | | 547 |
| | $ | 131.1 |
|
4 | | 126 |
| | 66.2 |
| | 4 | | 181 |
| | 41.0 |
| | 85 |
| | 5.2 |
| | 4 | | 107 |
| | 74.9 |
|
5 | | 71 |
| | 4.3 |
| | 5 | | 72 |
| | 2.0 |
| | 29 |
| | 3.6 |
| | 5 | | 37 |
| | 3.6 |
|
6 | | 31 |
| | 0.8 |
| | 6 | | 34 |
| | 0.7 |
| | 8 |
| | 0.1 |
| | 6 | | 14 |
| | 0.2 |
|
7 | | 38 |
| | 1.2 |
| | 7 | | 46 |
| | 1.8 |
| | 7 |
| | — |
| | 7 | | 12 |
| | 0.3 |
|
Total | | 751 |
| | $ | 140.4 |
| | Total | | 753 |
| | $ | 102.5 |
| | 711 |
| | $ | 260.6 |
| | Total | | 717 |
| | $ | 210.1 |
|
A “4” rating is our assessment of the lowest level of satisfactory performance. Many members continue to be adversely affected by the last recession, the weak economic recovery, and the continued distress in the housing market, although at a lower overall level compared to trends in 2008-2011. As ofAt December 31, 20122015, 14044 borrowers (19six percent of the total) had credit ratings of 5"5" through 7,"7," a net decrease of 1219 from the end of 2011.2014. These members had $6.33.7 billion of borrowing capacity at year end.December 31, 2015. There was a net decrease of 5522 members who had a 4"4" credit rating and a net increase of 6535 members with credit ratings of 1, 2,"1," "2," or 3. There was a net decrease of 11 members with the two lowest credit ratings. We believe these"3." These trends indicate a general stabilization and improvement in the overall financial condition of our members althoughduring the improvement to date has been most evident among members with already-acceptable "4" credit ratings.recovery cycle for the overall economy and housing market.
Member Failures, Closures, and Receiverships.Receiverships: There were threeno member failures duringin 20122015. These institutions had no Advances outstanding with us.
MPP
Overview.We believe that the residual amount of credit risk exposure to loans in the MPP is moderate,minimal, based on the following factors:
| |
▪ | various credit enhancements for conventional loans, which are designed to protect us against credit losses; |
| |
▪ | conservative underwriting and loan characteristics consistent with favorable expected credit performance; |
| |
▪ | a relatively moderatesmall overall amount of delinquencies and defaults experienced when compared to national averages; |
| |
▪ | charge-offscredit losses totaling only $4.3$1.9 million in 20122015 and $9.7$16.7 million program-to-date through over the life of the program, which represent an immaterial percentage of conventional loans' current unpaid principal balances at December 31, 2012 in relation to $6.4 billion2015 and of conventional loans unpaid principal balance at December 31, 2012;total purchases-to-date for the entire MPP; and
|
| |
▪ | in addition to the low program-to-date charge-offs,credit losses, based on financial analysis, suggestingwe believe that future credit losses will not harm capital adequacy and will not significantly affect profitability except under the most extreme and unlikely credit conditions. |
Portfolio Loan Characteristics.Characteristics:The following table shows Fair Isaac and Company (FICOFICO®) credit scores of homeowners at origination dates for the conventional loan portfolio.
| | FICO® Score (1) | | December 31, 2012 | | December 31, 2011 | | December 31, 2015 | | December 31, 2014 |
< 620 | | — | % | | — | % | | — | % | | — | % |
620 to < 660 | | 3 |
| | 4 |
| | 1 |
| | 2 |
|
660 to < 700 | | 9 |
| | 10 |
| | 7 |
| | 8 |
|
700 to < 740 | | 18 |
| | 18 |
| | 17 |
| | 18 |
|
>= 740 | | 70 |
| | 68 |
| | 75 |
| | 72 |
|
| | | | | | | | |
Weighted Average | | 757 |
| | 754 |
| | 762 |
| | 760 |
|
| |
(1) | Represents the original FICO® score.score at origination. |
There was little change in the distribution of FICO® score distributionscores at origination in 20122015 compared with 2011. We believe theto 2014. The distribution of FICO® scores at origination is one indication of the portfolio's overall favorable credit quality. At the end of 2012, 70December 31, 2015, 75 percent of the portfolio had scores at an excellent level of 740 or above and 8892 percent had scores above 700, which is a threshold generally considered indicative of homeowners' with good credit quality.
A high loan-to-value ratio, in which a homeowner has little or no equity at stake, is a driver in many mortgage delinquencies and defaults. The following tables show loan-to-value ratios for conventional loans based on values estimated at the origination dates and current values estimated at the noted periods. The estimated current ratios are based on original loan values, principal paydowns that have occurred since origination, and a third-party estimate of changes in historical home prices for the metropolitan statistical areazip code in which each loan resides. Both measures are weighted by current unpaid principal.
| | | | Based on Estimated Origination Value | | | Based On Estimated Current Value | | Based on Estimated Origination Value | | | Based On Estimated Current Value |
Loan-to-Value | | December 31, 2012 | | December 31, 2011 | | Loan-to-Value | | December 31, 2012 | | December 31, 2011 | | December 31, 2015 | | December 31, 2014 | | Loan-to-Value | | December 31, 2015 | | December 31, 2014 |
<= 60% | | 20 | % | | 21 | % | | <= 60% | | 27 | % | | 26 | % | | 16 | % | | 17 | % | | <= 60% | | 33 | % | | 34 | % |
> 60% to 70% | | 18 |
| | 18 |
| | > 60% to 70% | | 20 |
| | 17 |
| | 16 |
| | 16 |
| | > 60% to 70% | | 22 |
| | 25 |
|
> 70% to 80% | | 52 |
| | 52 |
| | > 70% to 80% | | 29 |
| | 29 |
| | 55 |
| | 55 |
| | > 70% to 80% | | 28 |
| | 25 |
|
> 80% to 90% | | 6 |
| | 6 |
| | > 80% to 90% | | 14 |
| | 14 |
| | 8 |
| | 7 |
| | > 80% to 90% | | 13 |
| | 12 |
|
> 90% | | 4 |
| | 3 |
| | > 90% to 100% | | 5 |
| | 6 |
| | 5 |
| | 5 |
| | > 90% to 100% | | 4 |
| | 3 |
|
| | | | | | > 100% | | 5 |
| | 8 |
| | | | | | > 100% | | — |
| | 1 |
|
Weighted Average | | 70 | % | | 70 | % | | Weighted Average | | 69 | % | | 72 | % | | 72 | % | | 72 | % | | Weighted Average | | 65 | % | | 65 | % |
OverallThe levels of loan-to-value ratios ofin the current portfolio of loans have deteriorated moderately since origination.last several years are consistent with the portfolio's excellent credit quality. At December 31, 20122015, we estimated that 2417 percent of loans were estimated to have current loan-to-value ratios above 80 percent, up from 10 percent at origination. We believerelatively unchanged compared to the overall trend is consistent with an acceptable credit qualityend of the portfolio, in light of the significant deterioration in national average housing prices in recent years. In 2014.2012, the loan-to-value ratios improved modestly; the percentage of loans having estimated current loan-to-value ratios above 80 percent declined by four percent.
We believe this decline results from, in part, the overall sustained improvement in the housing market observed in 2012.
Based on the available data, we believe we have littleminimal exposure to loans in the MPP considered to have characteristics of “subprime” or “alternative/nontraditional” loans. Further, we do not knowingly purchase any loan that violates the terms of our Anti-Predatory Lending Policy.
The geographical allocation of conventional loans in the MPP is concentrated in Ohio, as shown onin the following table based on unpaid principal balance.
| | | December 31, 2012 | | December 31, 2011 | December 31, 2015 | | December 31, 2014 |
Ohio | 56 | % | | Ohio | 53 | % | 63 | % | | Ohio | 61 | % |
Kentucky | 11 |
| | Kentucky | 11 |
| 14 |
| | Kentucky | 13 |
|
Indiana | 9 |
| | Indiana | 8 |
| 10 |
| | Indiana | 8 |
|
California | 3 |
| | California | 3 |
| |
Tennessee | 2 |
| | Maryland | 2 |
| 3 |
| | Tennessee | 3 |
|
Michigan | | 1 |
| | Michigan | 2 |
|
All others | 19 |
| | All others | 23 |
| 9 |
| | All others | 13 |
|
Total | 100 | % | | Total | 100 | % | 100 | % | | Total | 100 | % |
Lender Risk Account.Credit Enhancements: Conventional mortgage loans are supported against credit losses by various combinations of primary mortgage insurance (PMI), supplemental mortgage insurance (SMI) (for loans purchased before February 2011), and the Lender Risk Account.Account (LRA). The Lender Risk AccountLRA is a purchase-price holdback that PFIs may receive back from us, starting after five years from the loan purchase date, for managing credit risk to pre-defined acceptable levels of exposure on loan pools they sell to us. The Lender Risk Account is funded by the FHLBank from a portion of the initial purchase proceedsprice to cover expected credit losses for a specific pool of loans. Starting after five years from the loan purchase date, we may return the holdback to PFIs if they manage credit risk to predefined acceptable levels of exposure on the loan pools they sell to us. As a result, some pools of loans may have sufficient credit enhancements to recapture all losses while other pools of loans may not have enough credit enhancements to recapture all losses.not. The amount of loss claims against the Lender Risk Account in 2012 was approximately $3 million. The AccountLRA had balances of $103158 million and $69$129 million at December 31, 20122015 and 20112014, respectively. The increase in the balance of the Account from year-end 2011 is a result of the discontinued use of SMI in 2011 as a credit enhancement and instead, augmenting credit enhancement with a greater amount of the purchase proceeds added to the Lender Risk Account. For more information, see Note 10 of the Notes to Financial Statements.
Credit Performance.Performance: The table below provides an analysis of conventional loans delinquent or in the process of foreclosure, along with the national average serious delinquency rate.
| | | Conventional Loan Delinquencies | Conventional Loan Delinquencies |
(Dollars in millions) | December 31, 2012 | | December 31, 2011 | December 31, 2015 | | December 31, 2014 |
Early stage delinquencies - unpaid principal balance (1) | $ | 64 |
| | $ | 82 |
| $ | 51 |
| | $ | 61 |
|
Serious delinquencies - unpaid principal balance (2) | 76 |
| | 91 |
| $ | 32 |
| | $ | 43 |
|
Early stage delinquency rate (3) | 1.0 | % | | 1.3 | % | 0.7 | % | | 1.0 | % |
Serious delinquency rate (4) | 1.2 |
| | 1.4 |
| 0.4 | % | | 0.7 | % |
National average serious delinquency rate (5) | 3.7 |
| | 4.1 |
| 1.8 | % | | 2.4 | % |
| |
(1) | Includes conventional loans 30 to 89 days delinquent and not in foreclosure. |
| |
(2) | Includes conventional loans that are 90 days or more past due or where the decision of foreclosure or a similar alternative such as pursuit of deed-in-lieu has been reported. |
| |
(3) | Early stage delinquencies expressed as a percentage of the total conventional loan portfolio. |
| |
(4) | Serious delinquencies expressed as a percentage of the total conventional loan portfolio. |
| |
(5) | National average number of fixed-rate prime conventional loans that are 90 days or more past due or in the process of foreclosure is based on the most recent national delinquency data available. The December 31, 20122015 rate is based on September 30, 20122015 data. |
The MPP has experienced a moderatesmall amount of delinquencies and foreclosures. The rates continuedforeclosures with the serious delinquency rate continuing to be well below national averages and we expect this to continue to be the case. Delinquency rates for both the early stage and serious categories declined in 2012. We are cautiously optimistic that these data indicate an improving trend in housing market conditions, and we continue to closely monitor these data to evaluate the sustainability of the trend.averages.
We consider a high risk loan as having a current loan-to-value ratio above 100 percent. At December 31, 20122015, high risk loans had experienced relativelya moderate amount of serious delinquencies (i.e., delinquencies that are 90 days or more past due or in the process of foreclosure). For example, of the $299$20 million of conventional principal balances with current estimated loan-to-values above 100 percent, only $26$1 million (ninesix percent) were seriously delinquent. We believe these data further support our view that the overall portfolio is comprised of high qualityhigh-quality, well-performing loans.
Credit Losses.Losses: The following table shows the effects of credit enhancements on the determinationestimation of the allowance for credit losses at the noted periods:periods. Estimated incurred credit losses, after credit enhancements, are accounted for in the allowance for credit loss or as a charge off (i.e., a reduction to the principal of mortgage loans held for portfolio).
| | (In millions) | December 31, 2012 | | December 31, 2011 | December 31, 2015 | | December 31, 2014 |
Estimated incurred credit losses, before credit enhancements | $ | (56 | ) | | $ | (64 | ) | $ | (14 | ) | | $ | (23 | ) |
Estimated amounts deemed recoverable by: | | | | | | |
Primary mortgage insurance | 5 |
| | 5 |
| 1 |
| | 2 |
|
Supplemental mortgage insurance | 25 |
| | 30 |
| 8 |
| | 13 |
|
Lender Risk Account | 8 |
| | 8 |
| 2 |
| | 3 |
|
Allowance for credit losses, after credit enhancements | $ | (18 | ) | | $ | (21 | ) | |
Estimated incurred credit losses, after credit enhancements | | $ | (3 | ) | | $ | (5 | ) |
The data presented above are aggregatedprovide further information on the aggregate health of the overall portfolio. Credit risk exposure depends on the actual and potential credit performance of the loans in each pool compared to the pool's equity (on individual loans) and credit enhancements, including PMI, (for individual loans), the Lender Risk Account,LRA, and SMI.
The reduction in the allowance forestimate of credit losses at December 31, 2015 decreased from the end of 2012 compared2014 due to the end of 2011 was based primarily on a modest growth in national home prices of approximately 5 to 7 percent. This growth in national home prices resulted in a stabilization of loss severities and contributed to the decrease in the number of loans assessed to have incurred losses. We cannot predict the future course of factors that determine incurredrealized credit losses including homeas problem loans continued to liquidate and as delinquency trends and housing prices macro-economic conditions such as unemployment rates, estimated loss severities, the health of mortgage insurance providers, and regulatory or accounting guidance.improved.
In addition to the allowance for credit losses recorded, we regularly analyze using recognized third-party credit and prepayment models, potential ranges of additional lifetime credit risk exposure for the loans in the MPP. Even under adverse scenarios for either home prices or unemployment rates, (and assuming the two SMI providers continue to pay claims), we do not expect that further credit losses towould not significantly decrease our overall annual profitability or dividends payable to members, or to materially affect our capital adequacy. For example, for an additional 20 percent decline in all home prices over the next two years, we estimate that our lifetime credit losses could increase by approximately $60 million, which would decrease annual ROE by approximately 0.23 percentage points over the next five years (most of the losses are estimated to occur in the next five years).profitability.
Credit Risk Exposure to Insurance Providers.Providers:
Primary Mortgage InsurancePMI
Some of our conventional loans carry PMI as a credit enhancement feature. Based on the guidelines of the MPP, we have assessed that we do not have any credit risk exposure to the primary mortgage insuranceour PMI providers.
Supplemental Mortgage InsuranceSMI
Another credit enhancement feature on some conventional loans is SMI purchased from Genworth and MGIC.Mortgage Guaranty Insurance Corporation (MGIC). Beginning February 1, 2011, we discontinued use of SMI as a credit enhancement for new loan purchases; instead, we now augment credit enhancements with a greater amount of the purchase proceeds added to the Lender Risk Account. However,LRA. At December 31, 2015, we have $3.3had $1.4 billion of conventional loans purchased prior to February 2011 with outstanding SMI coverage through Genworth and MGIC. Over time, as existing loansMGIC that are paying down over time. Due to the possibility that MGIC and Genworth may not pay all of the future insurance claims we make, we estimate that $0.3 million of payments are not probable, which is reflected in the MPP are paid off and replaced with new loans that do not rely on SMI, the amountour allowance for credit losses at December 31, 2015. The estimation of SMI exposure, will diminish.
We subject both SMI providerssimilar to a standard credit underwriting analysis. Both providers have experienced weakened financial conditions inoverall trends of our loan losses, has declined over the last several years. Currently,
Investments
Liquidity Investments: Liquidity investments are either unsecured, guaranteed by the U.S. government, or secured (i.e., collateralized). For unsecured liquidity investments, we invest in the debt securities of highly rated, investment-grade institutions, have appropriate and conservative limits on dollar and maturity exposure to each institution, and have strong credit underwriting practices, including active monitoring of credit quality of our counterparties and of the environment in which they operate. We purchase liquidity investments from counterparties that have a strong ability to repay principal and interest.
Our unsecured liquidity investments to a counterparty or group of affiliated counterparties are limited by Finance Agency regulations to maturities of no more than nine months and limited to a dollar amount based on a percentage of eligible regulatory capital (defined as the lessor of our regulatory capital or the eligible amount of a counterparty's Tier 1 capital). The permissible percentage ranges from one percent to 15 percent based on the counterparty's lowest long-term credit rating of its debt from a nationally recognized statistical rating organizations (NRSROs) is B-organization (NRSRO). In addition, pursuant to a Finance Agency regulation, we complement reliance on NRSRO ratings for MGIC and B for Genworth, with bothunsecured investment activity by also considering internal credit risk analytics on negative outlook. Our exposure to these providers is that they may be unable to fulfill their contractual coverage on loss claims. In a scenario in which home prices do not change and both providers fail to pay their insurance coverage on defaulting loans (with an assumption that we would obtain a 50 percent recovery rate), we estimate our exposure at December 31, 2012 to the providers over the life of the MPP loans to be approximately $17 million. In an adverse scenario in which home prices decline an additional 20 percent over the next two years and both providers fail to pay claims (with the same recovery assumption), we estimate exposure to be approximately $28 million.unsecured counterparties.
Based on our most-recent analysis including consulting with a third-party rating agency, we believe it is likely each provider will fulfill its contractual insurance obligations. However, this assessment is uncertain because of the combination
of potential impacts on the mortgage insurance industry from the current conditionsThe lowest long-term credit rating for a counterparty to which we are permitted to extend credit is double-B. In practice, for many years, we have generally invested funds only in the economy and housing markets, the providers' stressed financial performance and condition, and their below-investment gradethose eligible institutions with long-term credit ratings of at least single-A. In addition, we restrict maturities, reduce dollar exposure, and negative outlooks. Based on these factors,avoid new investments with counterparties we concluded, as of December 31, 2012, that payments on a portion of our SMI coverage may not be probable and have incorporated an estimate of such in our loan loss reserve. Of the total amount of estimated exposure from the providers (assuming a 50 percent recovery rate), we believe that $2.0 million of payments may not be probable at December 31, 2012.deem to represent elevated credit risk.
Investments
Liquidity Investments.The following table presents the carrying value of liquidity investments outstanding in relation to the counterparties' lowest long-term credit ratings provided by Standard & Poor's, Moody's, and/or Fitch Advisory Services. (For resellFor resale agreements, the ratings shown are based on ratings onof the associated collateral.)
| | (In millions) | December 31, 2012 | December 31, 2015 |
| Long-Term Rating | Long-Term Rating |
| AAA | | AA | | A | | Total | AA | | A | | Total |
Unsecured Liquidity Investments | | | | | | | | | | | | |
Federal funds sold | $ | — |
| | $ | 1,640 |
| | $ | 1,710 |
| | $ | 3,350 |
| $ | 4,305 |
| | $ | 6,540 |
| | $ | 10,845 |
|
Certificates of deposit | | 600 |
| | 100 |
| | 700 |
|
Total unsecured liquidity investments | — |
| | 1,640 |
| | 1,710 |
| | 3,350 |
| 4,905 |
| | 6,640 |
| | 11,545 |
|
Guaranteed/Secured Liquidity Investments | | | | | | | | | | | | |
Securities purchased under agreements to resell | — |
| | 3,800 |
| | — |
| | 3,800 |
| 10,532 |
| | — |
| | 10,532 |
|
Government-sponsored enterprises (1) | — |
| | 26 |
| | — |
| | 26 |
| 33 |
| | — |
| | 33 |
|
Total guaranteed/secured liquidity investments | — |
| | 3,826 |
| | — |
| | 3,826 |
| 10,565 |
| | — |
| | 10,565 |
|
Total liquidity investments | $ | — |
| | $ | 5,466 |
| | $ | 1,710 |
| | $ | 7,176 |
| $ | 15,470 |
| | $ | 6,640 |
| | $ | 22,110 |
|
| | | December 31, 2011 | December 31, 2014 |
| Long-Term Rating | Long-Term Rating |
| AAA | | AA | | A | | Total | AA | | A | | Total |
Unsecured Liquidity Investments | | | | | | | | | | | | |
Federal funds sold | $ | — |
| | $ | 540 |
| | $ | 1,730 |
| | $ | 2,270 |
| $ | 2,100 |
| | $ | 4,500 |
| | $ | 6,600 |
|
Certificates of deposit | — |
| | 2,329 |
| | 1,625 |
| | 3,954 |
| 950 |
| | 400 |
| | 1,350 |
|
Other (2) | 217 |
| | — |
| | — |
| | 217 |
| |
Total unsecured liquidity investments | 217 |
| | 2,869 |
| | 3,355 |
| | 6,441 |
| 3,050 |
| | 4,900 |
| | 7,950 |
|
Guaranteed/Secured Liquidity Investments | | | | | | | | | | | | |
U.S. Treasury obligations | — |
| | 331 |
| | — |
| | 331 |
| |
Securities purchased under agreements to resell | | 3,343 |
| | — |
| | 3,343 |
|
Government-sponsored enterprises (1) | — |
| | 2,554 |
| | — |
| | 2,554 |
| 26 |
| | — |
| | 26 |
|
TLGP (3) | — |
| | 1,411 |
| | — |
| | 1,411 |
| |
Total guaranteed/secured liquidity investments | — |
| | 4,296 |
| | — |
| | 4,296 |
| 3,369 |
| | — |
| | 3,369 |
|
Total liquidity investments | $ | 217 |
| | $ | 7,165 |
| | $ | 3,355 |
| | $ | 10,737 |
| $ | 6,419 |
| | $ | 4,900 |
| | $ | 11,319 |
|
| |
(1) | Consists of securities that are issued and effectively guaranteed by Fannie Mae and/or Freddie Mac, which have the support of the U.S. government, although they are not obligations of the U.S. government. |
| |
(2) | Consists of debt securities issued by International Bank for Reconstruction and Development. |
| |
(3) | Represents corporate debentures issued or guaranteed by the Federal Deposit Insurance Corporation (FDIC) under the Temporary Liquidity Guarantee Program (TLGP). |
We actively monitor our credit exposure and the credit quality of allDuring 2015, we purchased a portion of our counterparties. This includes ongoing assessments of each counterparty's financial condition, performance, and capital adequacy, sovereign support,total liquidity investments from counterparties for which the market's current perceptions of the counterparty's market presence and activities, and general macro-economic, political, and market conditions.investments are secured with collateral (secured resale agreements). We believe all of the liquiditythese investments were purchased from counterparties that have a strong abilitypresent little or no credit risk exposure to repay principal and interest. We currently limit such investments to counterparties with credit ratings at time of purchase at single-A or above, and we are aggressive in restricting maturities, reducing dollar exposure, and suspending new investments with counterparties we deem to represent elevated credit risk.us.
In the last few years, we have generally invested in secured resale agreements, guaranteed investments, overnight Federal funds, and certificates of deposit which are negotiable and held in available-for-sale accounts. At December 31, 2012 and 2011, a substantial amount of liquidity investments were purchased from counterparties that provide explicit guarantees from the U.S.
government, that are effectively guaranteed (government-sponsored enterprises), or that are secured with collateral (securities purchased under agreements to resell). We believe the guaranteed and secured investments represent no credit risk exposure to us.
The following table presents credit ratings of our unsecured investment credit exposures by the domicile of the counterparty or the domicile of the counterparty's parent for U.S. branches and agency offices of foreign commercial banks. More discussion on the reduction in unsecured balances can be found in “Analysis of Financial Condition.”
| | (In millions) | | December 31, 2012 | | December 31, 2015 |
| | Counterparty Rating (1) | | | | Counterparty Rating (1) | | |
Domicile of Counterparty | | Sovereign Rating (1) | | AA | | A | | Total | | Sovereign Rating (1) | | AA | | A | | Total |
Domestic | | AA+ | | $ | — |
| | $ | 555 |
| | $ | 555 |
| | AA+ | | $ | 840 |
| | $ | 2,190 |
| | $ | 3,030 |
|
U.S. branches and agency offices of foreign commercial banks: | | | | | | | | | | | | |
Canada | | AAA | | — |
| | 770 |
| | 770 |
| | AAA | | 1,765 |
| | 940 |
| | 2,705 |
|
Sweden | | | AAA | | 200 |
| | 940 |
| | 1,140 |
|
Australia | | AAA | | 595 |
| | — |
| | 595 |
| | AAA | | 1,100 |
| | — |
| | 1,100 |
|
Finland | | AAA | | 595 |
| | — |
| | 595 |
| | AAA | | 1,000 |
| | — |
| | 1,000 |
|
Germany | | | AAA | | — |
| | 940 |
| | 940 |
|
Norway | | | AAA | | — |
| | 940 |
| | 940 |
|
Netherlands | | AAA | | 450 |
| | — |
| | 450 |
| | AAA | | — |
| | 440 |
| | 440 |
|
Sweden | | AAA | | — |
| | 385 |
| | 385 |
| |
United Kingdom | | | AA+ | | — |
| | 250 |
| | 250 |
|
Total U.S. branches and agency offices of foreign commercial banks | |
| | 1,640 |
| | 1,155 |
| | 2,795 |
| |
| | 4,065 |
| | 4,450 |
| | 8,515 |
|
Total unsecured investment credit exposure | |
| | $ | 1,640 |
| | $ | 1,710 |
| | $ | 3,350 |
| |
| | $ | 4,905 |
| | $ | 6,640 |
| | $ | 11,545 |
|
| |
(1) | Represents the lowest long-term credit rating provided by Standard & Poor's, Moody's, and/or Fitch Advisory Services. |
The following table presents the remaining contractual maturity of our unsecured investment credit exposure by the domicile of the counterparty or the domicile of the counterparty's parent for U.S. branches and agency offices of foreign commercial banks.
|
| | | | | | | | | | | | | | | | |
(In millions) | | December 31, 2015 |
Domicile of Counterparty | | Overnight | | Due 2 days through 30 days | | Due 31 days through 90 days | | Total |
Domestic | | $ | 3,030 |
| | $ | — |
| | $ | — |
| | $ | 3,030 |
|
U.S. branches and agency offices of foreign commercial banks: | | | | | | | | |
Canada | | 2,405 |
| | 100 |
| | 200 |
| | 2,705 |
|
Sweden | | 940 |
| | 100 |
| | 100 |
| | 1,140 |
|
Australia | | 1,000 |
| | — |
| | 100 |
| | 1,100 |
|
Finland | | 1,000 |
| | — |
| | — |
| | 1,000 |
|
Germany | | 940 |
| | — |
| | — |
| | 940 |
|
Norway | | 940 |
| | — |
| | — |
| | 940 |
|
Netherlands | | 440 |
| | — |
| | — |
| | 440 |
|
United Kingdom | | 150 |
| | — |
| | 100 |
| | 250 |
|
Total U.S. branches and agency offices of foreign commercial banks | | 7,815 |
| | 200 |
| | 500 |
| | 8,515 |
|
Total unsecured investment credit exposure | | $ | 10,845 |
| | $ | 200 |
| | $ | 500 |
| | $ | 11,545 |
|
At December 31, 20122015, all of the $3.411.5 billion of unsecured liquidityinvestment exposure was to counterparties with holding companies domiciled in countries receiving between triple-A and double-Aeither AAA or AA+ long-term sovereign ratings, and allratings. Furthermore, we restrict a significant portion of the unsecured investments hadlending to overnight maturities.maturities, which further limits risk exposure to these counterparties. By Finance Agency Regulations,regulation, all counterparties exposed to non-U.S. countries are required to be domestic U.S. branches of foreign counterparties.
We believe we face minimalalso limit exposure in our unsecured investments to counterparties and countries that could have significant direct or indirect exposure to European sovereign debt, especially to those countries currently experiencing financial distress, and we are aggressive in limiting exposure to such counterparties. The exposure to non-U.S. countries at debt.December 31, 2012 was comprised
Mortgage-Backed Securities.
GSE Mortgage-Backed Securities
Historically, almost allAt December 31, 2015, $11.3 billion of our mortgage-backed securities have been residentialheld were GSE securities issued by Fannie Mae and Freddie Mac, which provide credit safeguards by guaranteeing either timely or ultimate payments of principal and interest, and agency securities issued by Ginnie Mae, which the federal government guarantees.interest. We believe that the conservatorships of Fannie Mae and Freddie Mac lower the chance that they would not be able to fulfill their credit guarantees; we believeguarantees and that the securities issued by these two GSEs are effectively government guaranteed. In addition, based on the data available to us and on our purchase practices, we believe that most of the mortgage loans backing our GSE mortgage-backed securities are of high quality with acceptable credit performance.
Mortgage-Backed Securities Issued by Other Government Agencies
Beginning in the fourth quarter of 2010, we investedWe also invest in mortgage-backed securities issued and guaranteed by Ginnie Mae and the National Credit Union Administration.NCUA. These investments totaled $1.4$3.9 billion at December 31, 20122015. These securities have floating rate coupons tied to one-month LIBOR with interest rate caps ranging from seven to eight percent. We believe that the strength of the issuer's guaranteeissuers' guarantees and backing by the full faith and credit of the U.S. government is sufficient to protect us against credit losses on these securities.
Private Label Mortgage-Backed Securities
The FHLBank did not hold any private-label mortgage-backed securities at December 31, 2012.
Derivatives
Credit Risk Exposure.Exposure: We mitigate most of the credit risk exposure resulting from derivative transactions through collateralization. The table below presents the grossderivative positions to which we had credit risk exposure (i.e., the market value) and net exposure of derivatives outstanding at December 31, 20122015. Based on both the gross and net exposures, we had a minimal amount of residual credit risk exposure throughout 2012, totaling $6 million at the end of the year. Gross exposure would likely increase if interest rates rise and could increase if the composition of our derivatives change; however, contractual collateral provisions in these derivatives limit our exposure to acceptable levels.
| | (In millions) | | | | | | | | | | | | | | | |
Credit Rating (1) | Total Notional | | Gross Credit Exposure | | Cash Collateral Held | | Credit Exposure Net of Cash Collateral Held | | Total Notional | | Net Derivatives Fair Value Before Collateral | | Cash Collateral Pledged To (From) Counterparty | | Net Credit Exposure to Counterparties |
Aaa/AAA | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| |
Aa/AA | 1,385 |
| | 5 |
| | — |
| | 5 |
| |
Non-member counterparties: | | | | | | | | | |
Asset positions with credit exposure: | | | | | | | | | |
Uncleared derivatives: | | | | | | | | | |
A | 8,051 |
| | 3 |
| | (2 | ) | | 1 |
| | $ | 385 |
| | $ | 2 |
| | $ | — |
| | $ | 2 |
|
Baa/BBB | 2,600 |
| | — |
| | — |
| | — |
| | 536 |
| | 2 |
| | (2 | ) | | — |
|
Member institutions (2) | 124 |
| | — |
| | — |
| | — |
| |
Liability positions with credit exposure: | | | | | | | | | |
Cleared derivatives (2) | | | 5,952 |
| | (6 | ) | | 31 |
| | 25 |
|
Total derivative positions with credit exposure to non-member counterparties | | | 6,873 |
| | (2 | ) | | 29 |
| | 27 |
|
Member institutions (3) | | | 130 |
| | — |
| | — |
| | — |
|
Total | $ | 12,160 |
| | $ | 8 |
| | $ | (2 | ) | | $ | 6 |
| | $ | 7,003 |
| | $ | (2 | ) | | $ | 29 |
| | $ | 27 |
|
| |
(1) | Each category includes the related plus (+) and minus (-) ratings (i.e., “A” includes “A+” and “A-” ratings). |
| |
(2) | Represents derivative transactions cleared with clearinghouses, which are not rated. |
| |
(3) | Represents Mandatory Delivery Contracts. |
The following table presents counterparties that provided 10 percent or more ofBased on both the total notionalgross and net exposures, we had a minimal amount of residual credit risk exposure on uncleared derivatives throughout 2015. Gross exposure would likely increase if interest rate swaprates rise and could increase if the composition of our derivatives outstanding.
|
| | | | | | | | | | | | | | | | | | |
(In millions) | | | | | | | | | | |
December 31, 2012 | | | | | | December 31, 2011 | | | | |
Counterparty | Credit Rating Category | Notional Principal | | Net Unsecured Exposure | | Counterparty | Credit Rating Category | Notional Principal | | Net Unsecured Exposure |
BNP Paribas | A | $ | 2,181 |
| | $ | — |
| | Barclays Bank PLC | A | $ | 3,596 |
| | $ | — |
|
Citigroup Financial Products Inc. | Baa/BBB | 1,542 |
| | — |
| | BNP Paribas | A | 2,830 |
| | — |
|
Wells Fargo Bank, N.A. | Aa/AA | 1,365 |
| | 4 |
| | Deutsche Bank AG | A | 2,116 |
| | — |
|
Royal Bank of Scotland PLC | A | 1,324 |
| | — |
| | Royal Bank of Scotland PLC | A | 1,981 |
| | — |
|
All others (10 counterparties) | Baa/BBB to Aa/AA | 5,624 |
| | 2 |
| | All others (9 counterparties) | A to Aa/AA | 8,230 |
| | 3 |
|
Total | | $ | 12,036 |
| | $ | 6 |
| | Total | | $ | 18,753 |
| | $ | 3 |
|
change. However, contractual collateral provisions in these derivatives would limit net exposure to acceptable levels.
Although we cannot predict if we will realize credit risk losses from any of our derivatives counterparties, we do not believe that anyall of them will be unableable to continue making timely interest payments or,and, more generally, to continue to satisfy the terms and conditions of their derivative contracts with us.
Several of our larger members are approved as eligible unsecured counterparties; however, our preference is to conduct lending to these members through Advance activities. In addition, because of their credit ratings from NRSROs, several of these members are currently suspended as unsecured counterparties. The actual amount of any unsecured lending to our members depends also on members' preferences for borrowing Advances versus funds in the money market, yields available for Advances compared to unsecured lending, and the timing of members' intra-day funding needs.
As of December 31, 2012,2015, we had $0.6$0.3 billion of notional principal of interest rate swaps outstanding to one member, JPMorgan Chase Bank, N.A., which also had outstanding credit services with us totaling $26.0 billion.us. Due to the amount of market value collateralization, we had no outstanding derivatives credit exposure to this counterparty.counterparty related to interest rate swaps outstanding.
Lehman Brothers Derivatives: See Note 20 of the Notes to Financial Statements for information on derivatives we had with Lehman Brothers at the time of their bankruptcy in September 2008.
Lehman Brothers Derivatives. On September 15, 2008, Lehman Brothers Holdings, Inc. ("Lehman Brothers") filed a petition for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. We had 87 derivative transactions (interest rate swaps) outstanding with a subsidiary of Lehman Brothers, Lehman Brothers Special Financing, Inc. ("LBSF"), with a total notional principal amount of $5.7 billion. Under the provisions of our master agreement with LBSF, all of these swaps automatically terminated immediately priorExposure to the bankruptcy filing by Lehman Brothers. The close-out provisions of the Agreement required us to pay LBSF a net settlement of approximately $189 million, which represented the swaps' total estimated market value at the close of business on Friday, September 12, 2008. We paid LBSF approximately $14 million to settle all of the transactions, comprised of the $189 million market value amount minus the value of collateral we had delivered previously and other interest and expenses. On September 16, 2008, we replaced these swaps with new swaps transacted with other counterparties. The new swaps had the same terms and conditions as the terminated LBSF swaps. The counterparties to the new swaps paid us a net amount of approximately $232 million to enter into these transactions based on the estimated market values at the time we replaced the swaps.Member Concentration
The $43 million difference between the settlement amount we paid Lehman and the market value payment we received on the replacement swaps represented an economic gain to us based on changes in the interest rate environment between the termination date and the replacement date. Although the difference was a gain to us in this instance, because it represented exposureWe regularly assess concentration risks from terminating and replacing derivatives, it could have been a loss if the interest rate environment had been different. We are amortizing the gain into earnings according to the swaps' final maturities, most of which occurred by the end of 2012.
In March 2010, representatives of the Lehman bankruptcy estate advised us that they believed that we had been unjustly enriched and that the bankruptcy estate was entitled to the $43 million difference between the settlement amount we paid Lehman and the market value payment we received on the replacement swaps. In May 2010, we received a Derivatives Alternative Dispute Resolution notice from the Lehman bankruptcy estate with a settlement demand of $65.8 million, plus interest accruing primarily at LIBOR plus 14.5 percent since the bankruptcy filing, based on their view of how the settlement amount should have been calculated. In accordance with the Alternative Dispute Resolution Order of the Bankruptcy Court administering the Lehman estate, senior management participated in a non-binding mediation in New York in August 2010, and our legal counsel continued discussions with the court-appointed mediator for several weeks thereafter. The mediation concluded in October 2010 without a settlement of the claims asserted by the Lehman bankruptcy estate.business activity. We believe that we correctly calculated,the current concentration of Advance activity is consistent with our risk management philosophy, and fully satisfied, our obligationthe impact of borrower concentration on market risk, credit risk, and operational risk, after considering mitigating controls, is small.
Our business is designed to Lehmansupport significant changes in September 2008, and we intendasset levels without having to vigorously dispute any claimundergo material changes in staffing, operations, risk practices, or general resource needs. A key reason for this scalability is that the Capital Plan provides for additional amounts.capital when Mission Assets grow and the opportunity for us to retire capital when Mission Assets decline, thereby acting, along with our efficient operating expenses, to preserve competitive profitability.
We believe the effect on credit risk exposure from borrower concentration is minimal because of our application of normal credit risk mitigations, the most important of which is over-collateralization of borrowings. In the remote possibility of failure of a member to whom we lent a large amount of Advances, combined with the Federal Deposit Insurance Corporation's decision not to repay Advances, we would implement our member failure plan. Our member failure plan, which we test periodically, would liquidate collateral to recover losses from losing principal and interest on the Advance balances.
Advance concentration has a minimal effect on market risk exposure because Advances are largely match funded. Furthermore, additional increases in Advance concentration would not materially affect capital adequacy because Advance growth is supported by new purchases of capital stock as required by the Capital Plan.
Liquidity Risk
Liquidity Overview
Our principal long-termThe FHLBank System's primary source of funding and liquidityfunds is from cost effective accessthe sale of Consolidated Obligations in the capital markets. Our ability to obtain funds through the sale of Consolidated Obligations depends in part on prevailing conditions in the capital markets, through participation inparticularly the issuance of FHLBank System debt securities (Consolidated Obligations) and through execution of derivative transactions. We also raise liquidity via our liquidity investment portfolio and the abilityshort-term capital markets, due to sell certain investments without significant accounting consequences.a large reliance on short-term funding. As shown on the Statements of Cash Flows, in 20122015, our participations inportion of the System's debt issuances totaled $250.6306.0 billion for Discount Notes and $35.119.0 billion for Bonds. The System's favorable debt ratings, the implicit U.S. government backing of our debt, and our effective fundingrisk management were, and continue to be,have been instrumental in ensuring satisfactory access to the capital markets.
Our liquidity position remained strong during 20122015, and our overall ability to fund our operations through debt issuances at acceptable interest costs remained sufficient. Investor demand of System debt remains robust and, we believe, increased in 2015. Although we can make no assurances, we expect this to continue to be the case, and wecase. We believe the possibility of a liquidity or funding crisis in the FHLBank System that would impair our FHLBank's ability to participate, on a cost-effective basis, in issuances of new debt, service outstanding debt, maintain adequate capitalization, or pay competitive dividends is remote.
In 2015, the Office of Finance instituted several enhancements to its short-term debt issuance programs on behalf of the FHLBanks. The enhancements were responses to certain dealers, who ultimately distribute our debt to investors, being more reluctant to temporarily hold as much debt on their balance sheets at quarter- and year-ends. Such reluctance is a result of the perceived growing burden of their regulatory capital environment. Enhancements included modifying the Discount Notes auction to a single-price (Dutch) award method to determine winning bids, replacing the 9-week maturity with an 8-week maturity, extending the marketing period for debt issuance, and changes to the dealer compensation structure. We believe these enhancements will improve the ability of System debt to reach investors in a timely manner in the changing regulatory environment.
We must meet both operational and contingency liquidity requirements. We satisfied the operational liquidity requirement by both by meeting thea contingency liquidity requirement, discussed below, and because we were able to adequately access the capital markets to issue Obligations.debt. Liquidity investments, most of which were overnight, were generally in the range of $5 billion to $15 billion during the first nine months of 2015 before increasing above $20 billion in the fourth quarter. The increase was driven by the dealer balance sheet constraints and positioning to fulfill possible same-day member Advance demand. Liquidity balances decreased towards the $10 billion to $15 billion range in the first quarter of 2016. In addition, Finance Agency guidance requires us to target at least 5 to 15 consecutive days of positive liquidity based on specific assumptions. In practice, we tend to hold over 20assumptions under two scenarios. We target holding at least three extra days of positive liquidity. Theliquidity under each scenario, although as market conditions warrant we may hold, and often do hold, additional amounts. Similar to the increase in the amount of liquidity per the Finance Agency guidance and our internal operational liquidity measures was generally in the rangefourth quarter, we also increased the number of $4 billion to $8 billion during 2012.days of positive liquidity.
Contingency Liquidity Requirement
Contingency liquidity risk is the potential inability to meet liquidity needs because our access to the capital markets to issue Consolidated Obligations is restricted or suspended for a period of time due to a market disruption, operational failure, or real or perceived credit quality problems. In 2012, weWe continued to hold an ample amount of liquidity reserves to protect against contingency liquidity risk.
| | Contingency Liquidity Requirement (in millions) | December 31, 2012 | | December 31, 2011 | |
(In millions) | | December 31, 2015 | | December 31, 2014 |
Contingency Liquidity Requirement | | | | |
Total Contingency Liquidity Reserves (1) | $ | 23,199 |
| | $ | 23,599 |
| $ | 41,932 |
| | $ | 30,594 |
|
Total Requirement (2) | (10,942 | ) | | (6,669 | ) | (28,420 | ) | | (12,155 | ) |
Excess Contingency Liquidity Available | $ | 12,257 |
| | $ | 16,930 |
| $ | 13,512 |
| | $ | 18,439 |
|
| |
(1) | Includes, among others, cash, overnight Federal funds, overnight deposits, self-liquidating term Federal funds, 95 percent of the market value of available-for-sale negotiable securities, and 75 percent of the market value of certain held-to-maturity obligations, including obligations of the United States, U.S. government agency obligations and mortgage-backed securities. |
| |
(2) | Includes net liabilities maturing in the next seven business days, assets traded not yet settled, Advance commitments outstanding, Advances maturing in the next seven business days, and a three percent hypothetical increase in Advances. |
Deposit Reserve Requirement
To support our member deposits, we also must meet a statutory deposit reserve requirement. The sum of our investments in obligations of the United States, deposits in eligible banks or trust companies, and Advances with a final maturity not exceeding five years must equal or exceed the current amount of member deposits. The following table presents the components of this liquidity requirement.
| | Deposit Reserve Requirement (in millions) | December 31, 2012 | | December 31, 2011 | |
(In millions) | | December 31, 2015 | | December 31, 2014 |
Deposit Reserve Requirement | | | | |
Total Eligible Deposit Reserves | $ | 54,943 |
| | $ | 33,733 |
| $ | 82,036 |
| | $ | 77,920 |
|
Total Member Deposits | (1,158 | ) | | (1,067 | ) | (804 | ) | | (730 | ) |
Excess Deposit Reserves | $ | 53,785 |
| | $ | 32,666 |
| $ | 81,232 |
| | $ | 77,190 |
|
Contractual Obligations
The following table summarizes our contractual obligations at December 31, 20122015. The allocations according to the expiration terms and payment due dates of these obligations were not materially different from those at the end of 20112014. Changes reflected normal business variations. We believe that, as in the past, we will continue to have sufficient liquidity, including from access to the debt markets to issue Consolidated Obligations, to satisfy these obligations timely.on a timely basis.
| | (In millions) | < 1 year | | 1<3 years | | 3<5 years | | > 5 years | | Total | < 1 year | | 1 < 3 years | | 3 < 5 years | | > 5 years | | Total |
Contractual Obligations | | | | | | | | | | | | | | | | | | |
Long-term debt (Bonds) - par (1) | $ | 18,660 |
| | $ | 13,987 |
| | $ | 5,207 |
| | $ | 6,369 |
| | $ | 44,223 |
| $ | 9,809 |
| | $ | 9,958 |
| | $ | 7,131 |
| | $ | 8,139 |
| | $ | 35,037 |
|
Operating leases (include premises and equipment) | 1 |
| | 1 |
| | 2 |
| | 7 |
| | 11 |
| 1 |
| | 2 |
| | 1 |
| | 5 |
| | 9 |
|
Mandatorily redeemable capital stock | 3 |
| | 208 |
| | — |
| | — |
| | 211 |
| 33 |
| | — |
| | 5 |
| | — |
| | 38 |
|
Commitments to fund mortgage loans | 124 |
| | — |
| | — |
| | — |
| | 124 |
| 450 |
| | — |
| | — |
| | — |
| | 450 |
|
Pension and other postretirement benefit obligations | 3 |
| | 5 |
| | 5 |
| | 19 |
| | 32 |
| 3 |
| | 5 |
| | 5 |
| | 25 |
| | 38 |
|
Total Contractual Obligations | $ | 18,791 |
| | $ | 14,201 |
| | $ | 5,214 |
| | $ | 6,395 |
| | $ | 44,601 |
| $ | 10,296 |
| | $ | 9,965 |
| | $ | 7,142 |
| | $ | 8,169 |
| | $ | 35,572 |
|
| |
(1) | Does not include Discount Notes and contractual interest payments related to Bonds. Total is based on contractual maturities; the actual timing of payments could be affected by factors affecting redemptions. |
Off-Balance Sheet Arrangements
The following table summarizes our off-balance sheet items at December 31, 20122015. The allocations according to the expiration terms and payment due dates of these items were not materially different from those at the end of 20112014, and changes reflected normal business variations. For more information, see Note 20 of the Notes to Financial Statements.
| | (In millions) | < 1 year | | 1<3 years | | 3<5 years | | > 5 years | | Total | < 1 year | | 1 < 3 years | | 3 < 5 years | | > 5 years | | Total |
Off-balance sheet items (1) | | | | | | | | | | | | | | | | | | |
Standby Letters of Credit | $ | 9,959 |
| | $ | 102 |
| | $ | 37 |
| | $ | 54 |
| | $ | 10,152 |
| $ | 19,417 |
| | $ | 41 |
| | $ | 42 |
| | $ | 55 |
| | $ | 19,555 |
|
Standby bond purchase agreements | 313 |
| | 67 |
| | — |
| | — |
| | 380 |
| 86 |
| | 26 |
| | 10 |
| | — |
| | 122 |
|
Consolidated Obligations traded, not yet settled | 750 |
| | 40 |
| | 50 |
| | 20 |
| | 860 |
| — |
| | 10 |
| | 30 |
| | 20 |
| | 60 |
|
Total off-balance sheet items | $ | 11,022 |
| | $ | 209 |
| | $ | 87 |
| | $ | 74 |
| | $ | 11,392 |
| $ | 19,503 |
| | $ | 77 |
| | $ | 82 |
| | $ | 75 |
| | $ | 19,737 |
|
| |
(1) | Represents notional amount of off-balance sheet obligations. |
Operational Risk
Operational risk is defined as the risk of an unexpected loss resulting from human error, fraud, unenforceability ofinability to enforce legal contracts, or deficiencies in internal controls or information systems. We mitigate operational risk through adherence to internal policies, conformance with entity level controls, department procedures and controls, use of tested information systems, disaster recovery provisions for those systems, acquisition of insurance coverage to help protect us from financial exposure relating to errors or fraud by our personnel, and comprehensive policies and procedures related to Human Resources. In addition, the Internal Audit Department, which reports directly to the Audit Committee of the Board of Directors, regularly monitors and tests compliance with our policies, procedures, applicable regulatory requirements and best practices. In 2013, we will implement an integrated and comprehensive framework for operational risk management and document our activities regarding a regulation on prudential management and operating standards.
A development related to operational risk exposure is discussed in Item 1A's “Risk Factors.”
Internal Department Procedures and Controls
Each of our departments maintains and regularly reviews and enhances, as needed, a system of internal procedures and controls, including those that address proper segregation of duties. Each system is designed to prevent any one individual from processing the entirety of a transaction that affects member accounts, correspondent FHLBankFHLB accounts or third-party servicers providing support to us. We review daily and periodic transaction activity reports in a timely manner to detect erroneous or fraudulent activity. Procedures and controls also are assessed on an enterprise-wide basis, independently from the business unit departments. We also are in compliance with Sarbanes-Oxley Sections 302 and 404, which focus on the control environment over financial reporting.
Information Systems
We rely heavily upon internal and third-party information systems and other technology to conduct and manage our business. Our operations rely on the secure processing, storage and transmission of confidential and other information in our computer systems and networks. Our computer systems, software and networks may be subjected to “cyberattacks” (e.g., breaches, unauthorized access, misuse, computer viruses or other malicious code and other events) that could jeopardize the confidentiality or integrity of such information, or otherwise cause interruptions or malfunctions in our operations.
We seek to mitigate the risk associated with “cyberattacks”cyberattacks through the implementation of multiple layers of security controls. Administrative, physical, and logical controls are in place for establishing, administering and actively monitoring system access, sensitive data, and system change. Additionally, separate groups within our organization and/or third parties validate the strength of our security and confirm that established policies and procedures are beingadequately followed.
We also have a committee of the Board of Directors that has oversight responsibility to ensure our investment in and utilization of information technology supports our strategic business plan and associated mission and goals. A related management committee reports to the Board Committee, approves short- and long-range information technology initiatives and annual disaster recovery test plans, and reviews data security policy and related standards and safeguards.
We employ a systems development life cycle methodology to implement business solutions via significant software changes, new applications, or system upgrades as well as a business resumption and contingency plan to mitigate solution availability risk. The testing and validation of this plan, which includes documented test plans, cases and evaluations, is designed to ensure continuity of business processing.
Disaster Recovery Provisions
We have a Business Resumption Contingency Plan that provides us with the ability to maintain operations in various scenarios of business disruption. A committee of staff reviews and updates this plan periodically to ensure that it serves our changing operational needs and those of our members. We have an off-site facility in a suburb of Cincinnati, Ohio, which is tested at least annually. We also have a back-up agreement in place with theanother FHLBank of Indianapolis in the event that both of our Cincinnati-based facilities are inoperable.
Insurance Coverage
We have insurance coverage for cyber risks, employee fraud, forgery and wrongdoing, as well asand Directors' and Officers' liabilityliability. This coverage thatprimarily provides protection for claims alleging breach of duty, misappropriation of funds, neglect, acts of omission, employment practices, and fiduciary liability. We also have property, casualty, computer equipment, automobile, and various types of other coverage as well.
Human Resources Policies and Procedures
The risks associated with our Human Resources function are categorized as either Employment Practices Risk or Human Capital Risk. Employment Practices Risk is the potential failure to properly administer our policies regarding employment practices and compensation and benefit programs for eligible staff and retirees, and the potential failure to observe and properly comply with federal, state and municipal laws and regulations. Human Capital Risk is the potential inability to attract and retain appropriate levels of qualified human resources to maintain efficient operations.
Comprehensive policies and procedures are in place to limit Employment Practices Risk. These are supported by an established internal control system that is routinely monitored and audited. With respect to Human Capital Risk, we strive to maintain a competitive salary and benefit structure, which is regularly reviewed and updated as appropriate to attract and retain qualified staff. In addition, we have a management succession plan that is reviewed and approved by our Board of Directors.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Introduction
The preparation of financial statements in accordance with GAAP requires management to make a number of significant judgments, estimates, and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities (if applicable), and the reported amounts of income and expenses during the reported periods. Although management believes its judgments, estimates, and assumptions are reasonable, actual results may differ and other parties could arrive at different conclusions.
We have identified the following critical accounting policies that require management to make subjective or complex judgments about inherently uncertain matters. Our financial condition and results of operations could be materially affected under different conditions or different assumptions related to these accounting policies.
Accounting for Derivatives and Hedging Activity
In accordance with Finance Agency Regulations,regulations, we execute all derivatives to reducemanage market risk exposure, not for speculation or solely for earnings enhancement. As in past years, in 2012 all outstanding derivatives hedged specific assets, liabilities, or Mandatory Delivery Contracts. We record derivative instruments at their fair values on the Statements of Condition, and we record changes in these fair values in current period earnings. We generally planstrive to ensure that our use of derivatives to maximizemaximizes the probability that they are highly effective in offsetting changes in the market values of the designated balance sheet instruments.
Fair Value Hedges
As indicated in the "Use of Derivatives in Market Risk Management" section of "Quantitative and Qualitative Disclosures About Risk Management," we designate the majoritya portion of our derivatives as fair value hedges. Fair value hedge accounting permits the changes in fair values of the hedged risk in the hedged instruments to be recorded in the current period, thus offsetting, partially or fully, the change in fair value of the derivatives. For derivatives accounted as fair value hedges, the hedged risk is designated to be changes in LIBOR benchmark interest rates. The result is that there has been a relatively small amount of unrealized earnings volatility from hedging market risk with derivatives.
In order to determine if a derivative qualifies for fair value hedge accounting, we must assess how effective the derivative has been, and is expected to be, in hedging changes in the fair values of the risk being hedged. To do this, eachEach month we perform
effectiveness testing using a consistently applied standard statistical methodology, regression analysis, that measures the degree of correlation and relationship between the fair values of the derivative and hedged instrument. The results of the statistical measures must pass pre-definedpredefined threshold values to enable us to conclude that the fair values of the derivative transaction have a close correlation and strong relationship with the fair values of the hedged instrument. If any measure is outside of its respective tolerance, the hedge would no longer qualifiesqualify for fair value hedge accounting. This then means we must then record the fair value change of the derivative in current earnings without any offset in the fair value change of the related hedged instrument. Due to the intentional matching of terms between the derivative and the hedged instrument, we expect that failing an effectiveness test will be infrequent, which has been the case historically.
Each month, we compute fair values on all derivatives and related hedged instruments across a range of interest rate scenarios. As of year-end 2012, for derivatives receiving long-haul fair value hedge accounting, the total net difference between the fair values of the derivatives and related hedged instruments under an assumption of stressed interest rate environments was in a range of negative $1 million to positive $2 million. This range is minimal compared to the amount of notional principal amount.
As noted previously, each derivative/hedged instrument transaction had very closely related, or exactly matched, characteristics such as notional amount, final maturity, options, interest payment frequencies, reset dates, etc. Fair value differences that have actually occurred have historically resulted in a relatively small amount of earnings volatility. These differences are primarily because of the following factors:
| |
▪ | Our interest rate swaps have an adjustable-rate LIBOR leg (which is referenced to 1- or 3-month LIBOR), whereas the hedged instruments do not. |
| |
▪ | Option values of the swaps versus those of hedged instruments may have different changes in values. |
| |
▪ | Use of overnight indexed swap curves to value interest rate swaps may result in differences in fair values between derivatives and hedged items or less measured effectiveness of swap transactions. |
An important element of effectiveness testing is the duration of the derivative and the hedged instrument. The effective duration is affected primarily by the final maturity and any option characteristics. In general, the shorter the effective duration the more likely it is that effectiveness testing will fail. This is because, given a relatively short duration, the LIBOR leg of the swap is a relatively important component (i.e., very small dollar changes may result in relatively large statistical movements) of the monthly change in the derivative's fair value, and there is no offsetting LIBOR leg on the hedged instrument.
If a derivative/hedged instrument transaction fails effectiveness testing, it does not mean that the hedge relationship is no longer successful in achieving its intended economic purpose. For example, ana Consolidated Obligation hedged with an interest rate swap creates adjustable-rate LIBOR funding, which is used to match fund adjustable-rate LIBOR and other short-term Advances. The hedge achieves the desired result (matching the net funding with the asset) because, economically, the Advance is part of the overall hedging strategy and the reason for engaging in the derivative transaction.
Fair value differences that have actually occurred have historically resulted in a relatively small amount of earnings volatility. Each month, we compute fair values on all derivatives and related hedged instruments across a range of interest rate scenarios. As of year-end 2015, for derivatives receiving long-haul fair value hedge accounting, the total net difference between the fair values of the derivatives and related hedged instruments under an assumption of stressed interest rate environments was in a range of zero to negative $3 million. This range is minimal compared to the notional principal amount.
Fair Value Option--Economic Hedge
We account for certaina portion of Advance and Bond-related derivatives using an accounting election called "fair value option," which is included in the economic hedge category. An economic hedge under the fair value option does not require passing effectiveness testing to permit the derivatives' fair market value to be offset with the market value of the hedged instrument, as is required under a fair value hedge. However, it records the fair market value of the hedged instrument at its full fair value instead of only the value of hedging the benchmark interest rate (LIBOR).
The effect of electing full fair value is that the hedged instruments' market value includes the impact of changes in spreads between LIBOR and the interest rate index related to the hedged instrument. This spread includes a credit risk component. Therefore, full fair value results in a different kind of unrealized earnings volatility, (whichwhich could be higher or lower)lower, compared to accounting under fair value hedge treatment. The magnitude and direction depends on changes in interest rates, changes in LIBOR versus Consolidated Obligation debt costs, and the dollar amount of hedges that may fail effectiveness testing under the fail value hedging treatment.
Accounting for Premiums and Discounts on Mortgage Loans and Mortgage-Backed Securities
The accounting for amortization/accretion of premiums/discounts can result in substantial earnings volatility, most of which relates to our MPP, mortgage-backed securities, and Consolidated Obligations. Normally, earnings volatility associated with amortization/accretion of premiums/discounts for Obligations is less pronounced than that for mortgage assets.
When we purchase or invest in mortgages, we normally pay an amount that differs from the principal balance. A premium price is paid if the purchase price exceeds the principal amount. A discount price is paid if the purchase price is less than the principal amount. Premiums/discounts are required to be deferred and amortized/accreted to net interest income in a manner such that the yield recognized each month on the underlying asset is constant over the asset's historical life and estimated future life. This is called the constant effective (level) yield method.
We typically pay more than the principal balance when the interest rate on a purchased mortgage is greater than the prevailing market rate for similar mortgages. The net purchase premium is amortized as a reduction in the mortgage's book yield. Similarly, if we pay less than the principal balance, the net discount is accreted in the same manner as the premium, resulting in an increase in the mortgage's book yield.
We have historically purchased most MPP loans at premium prices. Mortgage-backed securities outstanding at the end of the loans in the MPP at premiums. Overall, mortgage-backed securities have been2015 were purchased at net premium prices close to par. At the end of 2012,2015, the MPP had a net premium balance of $182$224 million and mortgage-backed securities had a net premium balance of $17$44 million,, resulting in a total mortgage net premium balance of $199 million.$268 million.
When mortgage principal cash flows are volatile, there can be substantial fluctuation in the accounting recognition of premiums and discounts. We update the constant effective yield method monthly using actual historical and projected principal cash flows. Projected principal cash flows requires us to estimate mortgage prepayment speeds, which are driven primarily by changes in interest rates. When interest rates decline, actual and projected prepayment speeds are likely to increase. This accelerates the amortization/accretion, resulting in a reduction in the mortgages' book yields on premium balances and an increase in book yields on discount balances. The opposite effect tends to occur when interest rates rise. The immediate adjustment and the schedules for future amortization/accretion are based on applying the new constant effective yield as if it had been in effect since the purchase of the assets. See Note 1 of the Notes to Financial Statements for additional information.
Our mortgages under the MPP are stratified for amortization purposes into multiple portfolios according to common characteristics such as coupon interest rate, state of origination, final original maturity (mostly 15, 20, and 30 years), loan age, and type of mortgage (i.e., conventional and FHA). We compute amortization/accretion for each mortgage-backed security separately. Projected prepayment speeds are derived using a market-tested third-party prepayment model. We estimate prepayment speeds using a single interest rate scenario of implied forward interest rates for LIBOR and residential mortgages computed from the daily average market interest rate environment from the previous month. We use implied forward interest rates because they underlie many market practices, both from a theoretical and operational perspective. We regularly test the reasonableness and accuracy of the prepayment model by comparing its projections to actual prepayment results experienced over time and to dealer prepayment indications.
It is difficult to calculate how much amortization/accretion is likely to change over time because prepayment projections are inherently subject to uncertainty. Exact trends depend on the relationship between market interest rates and coupon rates on outstanding mortgage assets, the historical evolution of mortgage interest rates, the age of the mortgage loans, demographic and population trends, and other market factors. Changes in amortization/accretion also depend on 1) the accuracy of prepayment projections compared to actual realized prepayments and 2) term structure models used to simulate possible future evolution of various interest rates. The term structure models depend heavily on theories and assumptions related to future interest rates and interest rate volatility. We strive to maintain consistency in our use of prepayment and term structure models, although we do enhance these models based on developments in theories, technologies, best practices, and market conditions.
We regularly perform analyses that test the sensitivity of premium/discount recognition for mortgage assets to changes in prepayment speeds. The following table shows, as of year-end 2012,2015, the estimated adjustments to the immediate recognition of premium amortization/discount accretion for various interest rate shocks (with interest rates not permitted to fall below zero percent). Although some of the changes shown below would result in a substantial change in ROE in the quarter in which the rate change occurred, it currently would not materially threaten the competitiveness ofour profitability.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | | -200 | | -100 | | -50 | | Base | | +50 | | +100 | | +200 |
| | $ | (32 | ) | | $ | (21 | ) | | $ | (13 | ) | | $ | (2 | ) | | $ | 9 |
| | $ | 16 |
| | $ | 23 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | | -200 | | -100 | | -50 | | Base | | +50 | | +100 | | +200 |
| | $ | (76 | ) | | $ | (35 | ) | | $ | (12 | ) | | $ | (3 | ) | | $ | 1 |
| | $ | 3 |
| | $ | 7 |
|
Provision for Credit Losses
We evaluate Advances and the MPP to assure an adequate reserve is maintained to absorb probable losses inherent in these portfolios.
Advances
We evaluate probable credit losses inherent in Advances due to borrower default or delayed receipt of interest and principal, taking into consideration the amount recoverable from the collateral pledged.pledged by members to secure Advances. This analysis is performed for each member separately on at least a quarterly basis. We believe we have adequate policies and procedures in place to effectively manage credit risk exposure on Advances. These include monitoring the creditworthiness and financial condition of the institutions to which we lend funds, reviewingdetermining the quality and value of collateral pledged, by members to secure Advances, estimating borrowing capacity based on collateral value and type for each member, and evaluating historical loss experience. At December 31, 2012,2015, we had rights to collateral (either loans or securities), on a member-by-member basis, with an estimated fair value that exceeds the amount of outstanding Advances. At the end of 2012,2015, the aggregate estimated value of this collateral was $198.0 billion.$306.5 billion. Although some of this overcollateralization may reflect a desire to maintain excess borrowing capacity, all of a member's pledged collateral would be available as necessary to cover any of that member's credit obligations to the FHLBank.FHLB.
Based on the nature and quality of the collateral held as security for Advances, including overcollateralization, our credit analyses of members and collateral, and members' prior repayment history (i.e., we have never recorded a loss from an Advance), we believe that no allowance for losses was necessary at December 31, 2012.2015. See Notes 1 and 10 of the Notes to Financial Statements for additional information.
Mortgage Loans Acquired Under the MPP
We analyze loans in the MPP on at least a quarterly basis by 1) estimating the incurred credit losses inherent in the portfolio and comparing these to credit enhancements, including the recoverability of insurance, and 2) establishing reserves based on the results. We apply a consistent methodology to determine our estimates.
We acquire both FHA and conventional fixed-rate mortgage loans under the MPP. Because FHA mortgage loans are U.S. government insured, we have determined that they do not require a loan loss allowance. We are protected against credit losses on conventional mortgage loans from several sources, in order of priority:
| |
▪ | having the related real estate as collateral, which effectively includes the borrower's equity,equity; and |
| |
▪ | by credit enhancements including 1) primary mortgage insurance, if applicable, 2) the member's available funds remaining in the Lender Risk Account, and 3) if applicable, Supplemental Mortgage Insurance coverage up to the policy limit, applied on a loan-by-loan basis. |
We assume any credit exposure if losses exceed the related real estate residual value and credit enhancements.
The key estimates and assumptions that affect our allowance for credit losses generally include:
| |
▪ | the characteristics of specific conventional loans outstanding under the MPP; |
| |
▪ | evaluations of the overall delinquent loan portfolio through the use of migration analysis; |
| |
▪ | loss severity estimates; |
| |
▪ | historical claims and default experience; |
| |
▪ | expected proceeds from credit enhancements; |
| |
▪ | evaluation of exposure to Supplemental Mortgage Insurance providers and their ability to pay claims; |
| |
▪ | comparisons to industry reported data; and |
| |
▪ | current economic trends and conditions. |
These estimates require significant judgments, especially considering the current national housing market, the inability to readily determine the fair value of all underlying properties, the application of pool level credit enhancements, and the uncertainty in other macroeconomic factors that make estimating defaults and severity imprecise.
Based on our analysis, as of December 31, 2012,2015, we determined that an allowance for credit losses of $18$2 million was required for our conventional mortgage loans in the MPP. Further substantialSubstantial reductions in home prices or other economic variables that affect mortgage defaults could increase credit losses experienced in the portfolio.
Other-Than-Temporary Impairment Analysis for Investment Securities
Due to the decline in value of residential U.S. real estate and difficult conditions in the credit and mortgage markets, weWe closely monitor the performance of our investment securities to evaluate our exposure to the risk of loss of principal or interest on these investments and to determine on a quarterly basis whether this risk of loss represents an other-than-temporary impairment.
An investment security is deemed impaired if the fair value of the security is less than its amortized cost. To determine whether an impairment is other-than-temporary, we assess whether the amortized cost basis of the security will be recovered by considering numerous factors, as described in Notes 1 and 7 of the Notes to Financial Statements. We must recognize impairment losses if we intend to sell the security or if available evidence indicates it is more likely than not we will be required to sell the security before the recovery of its amortized cost basis. We also must recognize impairment losses when any credit losses are expected for the security. This includes consideration of market conditions and projections of future results, which requires significant judgments, estimates and assumptions, especially considering the unprecedented deteriorationuncertainty in the national housing market and the uncertainty in other macroeconomic factors that make estimating future results imprecise.
If we were to determine that an other-than-temporary impairment existed, the security would initially be written down to current market value, with the loss recognized in non-interest income if we intend to sell the security or it is more likely than not we will be required to sell the security before recovery of the amortized cost basis. If we do not intend to sell the security and it is not more likely than not we will be required to sell the security before recovery, the security would be written down to current market value with a separate display of losses related to credit deterioration and losses related to all other factors on the income statement. Any non-credit loss related amounts would then be reclassified and recorded in other comprehensive income, resulting in only net credit-related losses recorded on the income statement. As of December 31, 20122015 we did not consider any of our investment securities to be other-than-temporarily impaired.
Fair Values
Fair values play an important role in the valuation ofWe carry certain assets and liabilities and derivative transactions, which may be presented inon the StatementsStatement of Condition or related Notes to the Financial StatementsConditions at estimated fair value. We carryvalue, including all derivatives, investments classified as available-for-sale and trading, and all derivatives, on the Statements of Condition at fair value. Additionally, any financial instruments where we elected the fair value option election has been made are carried at fair value on the Statements of Condition.
option. Fair value is defined as the price - the “exit price” - that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. Because our investments currentlyfinancial instruments generally do not have available quoted market prices, we determine fair values based on 1) our valuation models or 2) dealer indications, which may be based on the dealers' own valuation models and/or prices of similar instruments.
Valuation models and their underlying assumptions are based on the best estimates of management with respect to discount rates, prepayments, market volatility, and other factors. These assumptions may have a significant effect on the reported fair values of assets and liabilities, including derivatives, and the income and expense related thereto. The use of different assumptions or changes in the models and assumptions, as well as changes in market conditions, could result in materially different net income and retained earnings.
We have control processes designed to ensure that fair value measurements are appropriate and reliable, that they are based on observable inputs wherever possible and that our valuation approaches and assumptions are reasonable and consistently applied. Where applicable, valuations are also compared to alternative external market data (e.g., quoted market prices, broker or dealer indications, pricing services and comparative analyses to similar instruments). For further discussion regarding how we measure financial assets and financial liabilities at fair value, see Note 2019 of the Notes to Financial Statements.
We categorize each of our financial instruments carried at fair value into one of three levels in accordance with the fair value hierarchy. The hierarchy is based upon the transparency (observable or unobservable) of inputs to the valuation of an asset or liability as of the measurement date. Observable inputs reflect market data obtained from independent sources (Levels 1 and 2), while unobservable inputs reflect our assumptions of market variables (Level 3). Management utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Because items classified as Level 3 are valued using significant unobservable inputs, the process for determining the fair value of these items is generally more subjective and involves a high degree of management judgment and use of assumptions.
The following table summarizesDecember 31, 2015 and 2014, all of our assets and liabilities measured at fair value on a recurring basis by level of valuation hierarchy.
|
| | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | December 31, 2012 |
| Assets | | Liabilities |
| Trading Securities | | Derivative Assets(1) | | Total | | Derivative Liabilities(1) | | Consolidated Obligation Bonds (2) | | Total |
Level 1 | — | % | | — | % | | — | % | | — | % | | — | % | | — | % |
Level 2 | 100 |
| | 100 |
| | 100 |
| | 100 |
| | 100 |
| | 100 |
|
Level 3 | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total | 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % |
Total GAAP Fair Value | $ | 2 |
| | $ | 6 |
| | $ | 8 |
| | $ | 115 |
| | $ | 3,402 |
| | $ | 3,517 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | December 31, 2011 |
| Assets | | Liabilities |
| Trading Securities | | Available-for-sale Securities | | Derivative Assets(1) | | Total | | Derivative Liabilities(1) | | Consolidated Obligation Bonds (2) | | Total |
Level 1 | — | % | | — | % | | — | % | | — | % | | — | % | | — | % | | — | % |
Level 2 | 100 |
| | 100 |
| | 100 |
| | 100 |
| | 100 |
| | 100 |
| | 100 |
|
Level 3 | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total | 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % |
Total GAAP Fair Value | $ | 2,863 |
| | $ | 4,171 |
| | $ | 5 |
| | $ | 7,039 |
| | $ | 105 |
| | $ | 4,900 |
| | $ | 5,005 |
|
(1) Based on total fair value of derivative assets and liabilities after effect of counterparty netting and cash collateral netting.
(2) Represents Consolidated Obligation Bonds recorded underwere classified as Level 2 within the fair value option.hierarchy.
RECENTLY ISSUED ACCOUNTING STANDARDS AND INTERPRETATIONS
See Note 2 of the Notes to Financial Statements for a discussion of recently issued accounting standards and interpretations.
OTHER FINANCIAL INFORMATION
Income Statements
Summary income statements for each quarter within the two years ended December 31, 20122015 are provided in the tables below.
| | | | 2012 | 2015 |
(In millions) | | 1st Quarter | | 2nd Quarter | | 3rd Quarter | | 4th Quarter | | Total | 1st Quarter | | 2nd Quarter | | 3rd Quarter | | 4th Quarter | | Total |
Interest income | | $ | 246 |
| | $ | 212 |
| | $ | 232 |
| | $ | 231 |
| | $ | 921 |
| $ | 225 |
| | $ | 234 |
| | $ | 238 |
| | $ | 260 |
| | $ | 957 |
|
Interest expense | | 165 |
| | 159 |
| | 149 |
| | 140 |
| | 613 |
| 148 |
| | 149 |
| | 161 |
| | 177 |
| | 635 |
|
Net interest income | | 81 |
| | 53 |
| | 83 |
| | 91 |
| | 308 |
| 77 |
| | 85 |
| | 77 |
| | 83 |
| | 322 |
|
Provision for credit loss | | 1 |
| | — |
| | — |
| | — |
| | 1 |
| |
Non-interest (loss) income | | (1 | ) | | 22 |
| | (4 | ) | | (4 | ) | | 13 |
| |
Reversal for credit losses | | — |
| | — |
| | — |
| | — |
| | — |
|
Non-interest income | | 8 |
| | 5 |
| | 10 |
| | 7 |
| | 30 |
|
Non-interest expense | | 21 |
| | 20 |
| | 22 |
| | 22 |
| | 85 |
| 24 |
| | 26 |
| | 26 |
| | 27 |
| | 103 |
|
Net income | | $ | 58 |
| | $ | 55 |
| | $ | 57 |
| | $ | 65 |
| | $ | 235 |
| $ | 61 |
| | $ | 64 |
| | $ | 61 |
| | $ | 63 |
| | $ | 249 |
|
| | | | 2011 | 2014 |
(In millions) | | 1st Quarter | | 2nd Quarter | | 3rd Quarter | | 4th Quarter | | Total | 1st Quarter | | 2nd Quarter | | 3rd Quarter | | 4th Quarter | | Total |
Interest income | | $ | 277 |
| | $ | 263 |
| | $ | 231 |
| | $ | 240 |
| | $ | 1,011 |
| $ | 229 |
| | $ | 226 |
| | $ | 228 |
| | $ | 225 |
| | $ | 908 |
|
Interest expense | | 207 |
| | 196 |
| | 187 |
| | 172 |
| | 762 |
| 152 |
| | 149 |
| | 145 |
| | 145 |
| | 591 |
|
Net interest income | | 70 |
| | 67 |
| | 44 |
| | 68 |
| | 249 |
| 77 |
| | 77 |
| | 83 |
| | 80 |
| | 317 |
|
Provision for credit loss | | 2 |
| | 1 |
| | 2 |
| | 7 |
| | 12 |
| |
Non-interest income (loss) | | 4 |
| | — |
| | (7 | ) | | (2 | ) | | (5 | ) | |
(Reversal) provision for credit losses | | — |
| | (1 | ) | | — |
| | 1 |
| | — |
|
Non-interest income | | 4 |
| | 6 |
| | 4 |
| | 9 |
| | 23 |
|
Non-interest expense | | 30 |
| | 28 |
| | 17 |
| | 19 |
| | 94 |
| 24 |
| | 23 |
| | 25 |
| | 24 |
| | 96 |
|
Net income | | $ | 42 |
| | $ | 38 |
| | $ | 18 |
| | $ | 40 |
| | $ | 138 |
| $ | 57 |
| | $ | 61 |
| | $ | 62 |
| | $ | 64 |
| | $ | 244 |
|
Investment Securities
Data on investments for the years ended December 31, 2015, 2014 and 2013 are provided in the tables below.
|
| | | | | | | | | | | |
(In millions) | Carrying Value at December 31, |
| 2015 | | 2014 | | 2013 |
Trading securities: | | | | | |
Mortgage-backed securities: | | | | | |
Other U.S. obligation single-family mortgage-backed securities | $ | 1 |
| | $ | 2 |
| | $ | 2 |
|
Total trading securities | 1 |
| | 2 |
| | 2 |
|
Available-for-sale securities: | | | | | |
Certificates of deposit | 700 |
| | 1,350 |
| | 2,185 |
|
Total available-for-sale securities | 700 |
| | 1,350 |
| | 2,185 |
|
Held-to-maturity securities: | | | | | |
Government-sponsored enterprises | 33 |
| | 26 |
| | 28 |
|
Mortgage-backed securities: | | | | | |
Other U.S. obligation single-family mortgage-backed securities | 3,894 |
| | 2,039 |
| | 1,909 |
|
Government-sponsored enterprise single-family mortgage-backed securities | 10,891 |
| | 12,647 |
| | 14,150 |
|
Government-sponsored enterprise multi-family mortgage-backed securities | 460 |
| | — |
| | — |
|
Total held-to-maturity securities | 15,278 |
| | 14,712 |
| | 16,087 |
|
Total securities | 15,979 |
| | 16,064 |
| | 18,274 |
|
Securities purchased under agreements to resell | 10,532 |
| | 3,343 |
| | 2,350 |
|
Federal funds sold | 10,845 |
| | 6,600 |
| | 1,740 |
|
Total investments | $ | 37,356 |
| | $ | 26,007 |
| | $ | 22,364 |
|
Investment Securities
Data on investments for the years ended As of December 31, 2012, 2011 and 2010 are provided in the tables below.
|
| | | | | | | | | | | | |
(In millions) | | Carrying Value at December 31, |
| | 2012 | | 2011 | | 2010 |
Trading securities: | | | | | | |
U.S. Treasury obligations | | $ | — |
| | $ | 331 |
| | $ | 1,905 |
|
Government-sponsored enterprises | | — |
| | 2,530 |
| | 4,496 |
|
Mortgage-backed securities: | | | | | | |
Other U.S. obligation residential mortgage-backed securities | | 2 |
| | 2 |
| | 2 |
|
Total trading securities | | 2 |
| | 2,863 |
| | 6,403 |
|
| | | | | | |
Available-for-sale securities: | | | | | | |
Certificates of deposit | | — |
| | 3,954 |
| | 5,790 |
|
Other * | | — |
| | 217 |
| | — |
|
Total available-for-sale securities | | — |
| | 4,171 |
| | 5,790 |
|
| | | | | | |
Held-to-maturity securities: | | | | | | |
Government-sponsored enterprises | | 26 |
| | 24 |
| | 22 |
|
States and local housing agency obligations | | — |
| | — |
| | 3 |
|
TLGP | | — |
| | 1,411 |
| | 1,011 |
|
Mortgage-backed securities: | | | | | | |
Other U.S. obligation residential mortgage-backed securities | | 1,411 |
| | 1,501 |
| | 910 |
|
Government-sponsored enterprise residential mortgage-backed securities | | 11,361 |
| | 9,684 |
| | 10,657 |
|
Private-label residential mortgage-backed securities | | — |
| | 17 |
| | 88 |
|
Total held-to-maturity securities | | 12,798 |
| | 12,637 |
| | 12,691 |
|
| | | | | | |
Total securities | | 12,800 |
| | 19,671 |
| | 24,884 |
|
| | | | | | |
Securities purchased under agreements to resell | | 3,800 |
| | — |
| | 2,950 |
|
Federal funds sold | | 3,350 |
| | 2,270 |
| | 5,480 |
|
Total investments | | $ | 19,950 |
| | $ | 21,941 |
| | $ | 33,314 |
|
| |
* | Consists of debt securities issued by International Bank for Reconstruction and Development. |
As of December 31, 2012,2015, investments had the following maturity and yield characteristics.
| | (Dollars in millions) | Due in one year or less | Due after one year through five years | Due after five through 10 years | Due after 10 years | Carrying Value | Due in one year or less | Due after one year through five years | Due after five through 10 years | Due after 10 years | Carrying Value |
Trading securities: | | |
Mortgage-backed securities*: | | |
Other U.S. obligation residential mortgage-backed securities | $ | — |
| $ | — |
| $ | — |
| $ | 2 |
| $ | 2 |
| |
Mortgage-backed securities(1): | | |
Other U.S. obligation single-family mortgage-backed securities | | $ | — |
| $ | — |
| $ | 1 |
| $ | — |
| $ | 1 |
|
Total trading securities | — |
| — |
| — |
| 2 |
| 2 |
| — |
| — |
| 1 |
| — |
| 1 |
|
Yield on trading securities | — | % | — | % | — | % | 2.44 | % | | — | % | — | % | 2.25 | % | — | % | |
| | |
Available-for-sale securities: | | |
Certificates of deposit | | $ | 700 |
| $ | — |
| $ | — |
| $ | — |
| $ | 700 |
|
Total available-for-sale securities | | 700 |
| — |
| — |
| — |
| 700 |
|
Yield on available-for sale securities | | 0.31 | % | — | % | — | % | — | % | |
Held-to-maturity securities: | | |
Government-sponsored enterprises | 26 |
| — |
| — |
| — |
| 26 |
| $ | 33 |
| $ | — |
| $ | — |
| $ | — |
| $ | 33 |
|
Mortgage-backed securities*: | | |
Other U.S. obligation residential mortgage-backed securities | — |
| 309 |
| 1,102 |
| — |
| 1,411 |
| |
Government-sponsored enterprise residential mortgage-backed securities | — |
| — |
| 659 |
| 10,702 |
| 11,361 |
| |
Mortgage-backed securities(1): | | |
Other U.S. obligation single-family mortgage-backed securities | | — |
| 884 |
| — |
| 3,010 |
| 3,894 |
|
Government-sponsored enterprise single-family mortgage-backed securities | | — |
| 174 |
| 647 |
| 10,070 |
| 10,891 |
|
Government-sponsored enterprise multi-family mortgage-backed securities | | — |
| — |
| — |
| 460 |
| 460 |
|
Total held-to-maturity securities | 26 |
| 309 |
| 1,761 |
| 10,702 |
| 12,798 |
| 33 |
| 1,058 |
| 647 |
| 13,540 |
| 15,278 |
|
Yield on held-to-maturity securities | 0.12 | % | 0.57 | % | 2.20 | % | 2.32 | % | | 0.14 | % | 1.37 | % | 3.38 | % | 2.26 | % | |
| | |
Total securities | 26 |
| 309 |
| 1,761 |
| 10,704 |
| 12,800 |
| $ | 733 |
| $ | 1,058 |
| $ | 648 |
| $ | 13,540 |
| $ | 15,979 |
|
| | |
Securities purchased under agreements to resell | 3,800 |
| — |
| — |
| — |
| 3,800 |
| 10,532 |
| — |
| — |
| — |
| 10,532 |
|
Federal funds sold | 3,350 |
| — |
| — |
| — |
| 3,350 |
| 10,845 |
| — |
| — |
| — |
| 10,845 |
|
Total investments | $ | 7,176 |
| $ | 309 |
| $ | 1,761 |
| $ | 10,704 |
| $ | 19,950 |
| $ | 22,110 |
| $ | 1,058 |
| $ | 648 |
| $ | 13,540 |
| $ | 37,356 |
|
| |
*(1) | Mortgage-backed securities allocated based on contractual principal maturities assuming no prepayments. |
As of December 31, 2012,2015, the FHLBankFHLB held securities of the following issuers with a book value greater than 10 percent of FHLBankFHLB capital. The table includes government-sponsored enterprises, securities of the U.S. government, and government agencies and corporations.
| | (In millions) | | Total | | Total | | Total | | Total |
Name of Issuer | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Freddie Mac | | $ | 4,127 |
| | $ | 4,246 |
| | $ | 4,160 |
| | $ | 4,152 |
|
Fannie Mae | | 7,260 |
| | 7,516 |
| | 7,224 |
| | 7,205 |
|
National Credit Union Administration Trust | | 1,411 |
| | 1,415 |
| | 884 |
| | 886 |
|
Government National Mortgage Association | | 2 |
| | 2 |
| | 3,011 |
| | 2,988 |
|
Certificates of deposit (4 issuers) | | | 700 |
| | 700 |
|
Total investment securities | | $ | 12,800 |
| | $ | 13,179 |
| | $ | 15,979 |
| | $ | 15,931 |
|
Loan Portfolio Analysis
The FHLBank'sFHLB's outstanding loans, loans 90 days or more past due and accruing interest, and allowance for credit loss information for the five years ended December 31 are shown below. The FHLBank'sFHLB's interest and related shortfall on non-accrual loans and loans modified in troubled debt restructurings was not material during the years presented below.
| | (Dollars in millions) | 2012 | | 2011 | | 2010 | | 2009 | | 2008 | 2015 | | 2014 | | 2013 | | 2012 | | 2011 |
Domestic: | | | | | | | | | | | | | | | | | | |
Advances | $ | 53,944 |
| | $ | 28,424 |
| | $ | 30,181 |
| | $ | 35,818 |
| | $ | 53,916 |
| $ | 73,292 |
| | $ | 70,406 |
| | $ | 65,270 |
| | $ | 53,944 |
| | $ | 28,424 |
|
Real estate mortgages | $ | 7,548 |
| | $ | 7,871 |
| | $ | 7,782 |
| | $ | 9,366 |
| | $ | 8,632 |
| $ | 7,982 |
| | $ | 6,989 |
| | $ | 6,826 |
| | $ | 7,548 |
| | $ | 7,871 |
|
Real estate mortgages past due 90 days or more (including those in process of foreclosure) and still accruing interest | $ | 113 |
| | $ | 145 |
| | $ | 133 |
| | $ | 135 |
| | $ | 73 |
| $ | 42 |
| | $ | 66 |
| | $ | 89 |
| | $ | 113 |
| | $ | 145 |
|
Non-accrual loans, unpaid principal balance (1) | $ | 3 |
| | $ | 2 |
| | $ | — |
| | $ | — |
| | $ | — |
| $ | 7 |
| | $ | 4 |
| | $ | 3 |
| | $ | 3 |
| | $ | 2 |
|
Troubled debt restructurings (not included above) | $ | 3 |
| | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | — |
| $ | 8 |
| | $ | 5 |
| | $ | 4 |
| | $ | 3 |
| | $ | 1 |
|
Allowance for credit losses on mortgage loans, beginning of year | $ | 21 |
| | $ | 12 |
| | $ | — |
| | $ | — |
| | $ | — |
| $ | 5 |
| | $ | 7 |
| | $ | 18 |
| | $ | 21 |
| | $ | 12 |
|
Charge-offs | (4 | ) | | (3 | ) | | (1 | ) | | — |
| | — |
| (3 | ) | | (2 | ) | | (4 | ) | | (4 | ) | | (3 | ) |
Provision for credit losses | 1 |
| | 12 |
| | 13 |
| | — |
| | — |
| |
(Reversal) provision for credit losses | | — |
| | — |
| | (7 | ) | | 1 |
| | 12 |
|
Allowance for credit losses on mortgage loans, end of year | $ | 18 |
| | $ | 21 |
| | $ | 12 |
| | $ | — |
| | $ | — |
| $ | 2 |
| | $ | 5 |
| | $ | 7 |
| | $ | 18 |
| | $ | 21 |
|
Ratio of net charge-offs during the period to average loans outstanding during the period | 0.06 | % | | 0.05 | % | | 0.02 | % | | — | % | | — | % | 0.04 | % | | 0.03 | % | | 0.05 | % | | 0.06 | % | | 0.05 | % |
| |
(1) | See Note 1 of the Notes to Financial Statements for an explanation of the FHLBank'sFHLB's non-accrual policy. |
Other Borrowings
Borrowings with original maturities of one year or less are classified as short-term. The following is a summary of short-term borrowings exceeding 30 percent of total capital for the years ended December 31:
| | (Dollars in millions) | | 2012 | | 2011 | | 2010 | 2015 | | 2014 | | 2013 |
Discount Notes | | | | | | | | | | | |
Outstanding at year-end (book value) | | $ | 30,840 |
| | $ | 26,136 |
| | $ | 35,003 |
| $ | 77,199 |
| | $ | 41,232 |
| | $ | 38,210 |
|
Weighted average rate at year-end (1) (2) | | 0.13 | % | | 0.03 | % | | 0.11 | % | 0.24 | % | | 0.09 | % | | 0.09 | % |
Daily average outstanding for the year (book value) | | $ | 29,499 |
| | $ | 32,292 |
| | $ | 27,914 |
| $ | 52,706 |
| | $ | 35,992 |
| | $ | 34,574 |
|
Weighted average rate for the year (2) | | 0.10 | % | | 0.09 | % | | 0.15 | % | 0.12 | % | | 0.08 | % | | 0.11 | % |
Highest outstanding at any month-end (book value) | | $ | 32,556 |
| | $ | 37,902 |
| | $ | 36,101 |
| $ | 77,199 |
| | $ | 41,232 |
| | $ | 38,926 |
|
Bonds (short-term) | | | | | | | | | | | |
Outstanding at year-end (par value) | | $ | 9,140 |
| | $ | 2,725 |
| | $ | 2,350 |
| $ | 4,415 |
| | $ | 17,810 |
| | $ | 21,650 |
|
Weighted average rate at year-end (2) (3) | | 0.17 | % | | 0.20 | % | | 0.43 | % | 0.23 | % | | 0.10 | % | | 0.11 | % |
Daily average outstanding for the year (par value) | | $ | 3,527 |
| | $ | 2,635 |
| | $ | 3,187 |
| $ | 6,974 |
| | $ | 18,810 |
| | $ | 16,583 |
|
Weighted average rate for the year (2) (3) | | 0.19 | % | | 0.29 | % | | 0.56 | % | 0.13 | % | | 0.10 | % | | 0.13 | % |
Highest outstanding at any month-end (par value) | | $ | 9,140 |
| | $ | 3,200 |
| | $ | 5,859 |
| $ | 13,825 |
| | $ | 22,235 |
| | $ | 22,010 |
|
| |
(1) | Represents an implied rate without consideration of concessions. |
| |
(2) | Amounts used to calculate weighted average rates for the year are based on dollars in thousands. Accordingly, recalculations based upon amounts in millions may not produce the same results. |
| |
(3) | Represents the effective coupon rate. |
Term Deposits
At December 31, 2012,2015, term deposits in denominations of $100,000 or more totaled $118,350,000.$151,775,000. The table below presents the maturities for term deposits in denominations of $100,000 or more:
|
| | | | | | | | | | | | | | | | | | | |
By remaining maturity at December 31, 2012 | 3 months or less | | Over 3 months but within 6 months | | Over 6 months but within 12 months | | Over 12 months but within 24 months | | Total |
(In millions) | | | | | | | | | |
Time certificates of deposit | | | | | | | | | |
($1 or more) | $ | 41 |
| | $ | 26 |
| | $ | 36 |
| | $ | 15 |
| | $ | 118 |
|
|
| | | | | | | | | | | | | | | | | | | |
(In millions) By remaining maturity at December 31, 2015 | 3 months or less | | Over 3 months but within 6 months | | Over 6 months but within 12 months | | Over 12 months but within 24 months | | Total |
Time certificates of deposit | $ | 79 |
| | $ | 48 |
| | $ | 16 |
| | $ | 9 |
| | $ | 152 |
|
Ratios
| | | | 2012 | | 2011 | | 2010 | 2015 | | 2014 | | 2013 |
Return on average assets | | 0.35 | % | | 0.21 | % | | 0.24 | % | 0.24 | % | | 0.24 | % | | 0.28 | % |
Return on average equity | | 6.20 |
| | 3.89 |
| | 4.67 |
| 4.90 |
| | 4.93 |
| | 5.10 |
|
Average equity to average assets | | 5.68 |
| | 5.29 |
| | 5.08 |
| 4.81 |
| | 4.90 |
| | 5.47 |
|
Dividend payout ratio | | 60.09 | % | | 95.42 | % | | 84.13 | % | 69.24 | % | | 72.20 | % | | 68.10 | % |
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Information required under this Item is set forth in the “Quantitative and Qualitative Disclosures About Risk Management” caption at Part II, Item 7, of this filing.
| |
Item 8. | Financial Statements and Supplementary Data. |
Item 8.Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
of the Federal Home Loan Bank of Cincinnati:
In our opinion, the accompanying statements of condition and the related statements of income, comprehensive income, capital, and cash flows present fairly, in all material respects, the financial position of the Federal Home Loan Bank of Cincinnati (the "FHLBank""FHLB") at December 31, 20122015 and 2011,2014, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20122015 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the FHLBankFHLB maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012,2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The FHLBank'sFHLB's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included under Item 9A in Management's Report on Internal Control over Financial Reporting.Reporting. Our responsibility is to express opinions on these financial statements and on the FHLBank'sFHLB's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company'scompany’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financialfinancial reporting and the preparationpreparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company'scompany’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company'scompany’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Cincinnati, Ohio
March 21, 201317, 2016
FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF CONDITION
(In thousands, except par value)
| | | December 31, | December 31, |
| 2012 | | 2011 | 2015 | | 2014 |
ASSETS | | | | | | |
Cash and due from banks (Note 3) | $ | 16,423 |
| | $ | 2,033,944 |
| $ | 10,136 |
| | $ | 3,109,970 |
|
Interest-bearing deposits | 151 |
| | 119 |
| 99 |
| | 119 |
|
Securities purchased under agreements to resell | 3,800,000 |
| | — |
| 10,531,979 |
| | 3,343,000 |
|
Federal funds sold | 3,350,000 |
| | 2,270,000 |
| 10,845,000 |
| | 6,600,000 |
|
Investment securities: | | | | | | |
Trading securities (Note 4) | 1,922 |
| | 2,862,648 |
| 1,159 |
| | 1,341 |
|
Available-for-sale securities (Note 5) | — |
| | 4,171,142 |
| 700,081 |
| | 1,349,977 |
|
Held-to-maturity securities (includes $0 and $0 pledged as collateral in 2012 and 2011, respectively, that may be repledged) (a) (Note 6) | 12,798,448 |
| | 12,637,373 |
| |
Held-to-maturity securities (includes $0 and $0 pledged as collateral in 2015 and 2014, respectively, that may be repledged) (a) (Note 6) | | 15,278,206 |
| | 14,712,271 |
|
Total investment securities | 12,800,370 |
| | 19,671,163 |
| 15,979,446 |
| | 16,063,589 |
|
Advances (Note 8) | 53,943,961 |
| | 28,423,774 |
| |
Advances (includes $15,057 and $15,042 at fair value under fair value option in 2015 and 2014, respectively) (Note 8) | | 73,292,172 |
| | 70,405,616 |
|
Mortgage loans held for portfolio: | | | | | | |
Mortgage loans held for portfolio (Note 9) | 7,548,019 |
| | 7,871,019 |
| 7,981,293 |
| | 6,989,602 |
|
Less: allowance for credit losses on mortgage loans (Note 10) | 17,907 |
| | 20,750 |
| 1,686 |
| | 4,919 |
|
Mortgage loans held for portfolio, net | 7,530,112 |
| | 7,850,269 |
| 7,979,607 |
| | 6,984,683 |
|
Accrued interest receivable | 83,904 |
| | 114,266 |
| 94,855 |
| | 81,384 |
|
Premises, software, and equipment, net | 9,143 |
| | 9,193 |
| 10,436 |
| | 11,282 |
|
Derivative assets (Note 11) | 5,877 |
| | 4,912 |
| 26,996 |
| | 14,699 |
|
Other assets | 22,209 |
| | 18,891 |
| 26,055 |
| | 26,077 |
|
TOTAL ASSETS | $ | 81,562,150 |
| | $ | 60,396,531 |
| $ | 118,796,781 |
| | $ | 106,640,419 |
|
LIABILITIES | | | | | | |
Deposits (Note 12): | | | | |
Interest bearing | $ | 1,158,252 |
| | $ | 1,067,288 |
| |
Non-interest bearing | 18,353 |
| | 16,244 |
| |
Total deposits | 1,176,605 |
| | 1,083,532 |
| |
Deposits (Note 12) | | $ | 804,342 |
| | $ | 729,936 |
|
Consolidated Obligations, net (Note 13): | | | | | | |
Discount Notes | 30,840,224 |
| | 26,136,303 |
| 77,199,208 |
| | 41,232,127 |
|
Bonds (includes $3,402,366 and $4,900,296 at fair value under fair value option in 2012 and 2011, respectively) | 44,345,917 |
| | 28,854,544 |
| |
Bonds (includes $2,214,590 and $4,209,640 at fair value under fair value option in 2015 and 2014, respectively) | | 35,104,764 |
| | 59,216,557 |
|
Total Consolidated Obligations, net | 75,186,141 |
| | 54,990,847 |
| 112,303,972 |
| | 100,448,684 |
|
Mandatorily redeemable capital stock (Note 16) | 210,828 |
| | 274,781 |
| |
Mandatorily redeemable capital stock (Note 15) | | 37,895 |
| | 62,963 |
|
Accrued interest payable | 106,885 |
| | 142,212 |
| 118,823 |
| | 114,781 |
|
Affordable Housing Program payable (Note 14) | 82,672 |
| | 74,195 |
| 107,352 |
| | 98,103 |
|
Derivative liabilities (Note 11) | 114,888 |
| | 105,284 |
| 31,087 |
| | 63,767 |
|
Other liabilities | 147,362 |
| | 166,573 |
| 212,254 |
| | 183,177 |
|
Total liabilities | 77,025,381 |
| | 56,837,424 |
| 113,615,725 |
| | 101,701,411 |
|
Commitments and contingencies (Note 21) |
| |
| |
CAPITAL (Note 16) | | | | |
Capital stock Class B putable ($100 par value); issued and outstanding shares: 40,106 shares in 2012 and 31,259 shares in 2011 | 4,010,622 |
| | 3,125,895 |
| |
Commitments and contingencies (Note 20) | |
| |
|
CAPITAL (Note 15) | | | | |
Capital stock Class B putable ($100 par value); issued and outstanding shares: 44,288 shares in 2015 and 42,665 shares in 2014 | | 4,428,756 |
| | 4,266,543 |
|
Retained earnings: | | | | | | |
Unrestricted | 479,253 |
| | 432,530 |
| 556,139 |
| | 529,367 |
|
Restricted | 58,628 |
| | 11,683 |
| 209,438 |
| | 159,694 |
|
Total retained earnings | 537,881 |
| | 444,213 |
| 765,577 |
| | 689,061 |
|
Accumulated other comprehensive loss (Note 17) | (11,734 | ) | | (11,001 | ) | |
Accumulated other comprehensive loss (Note 16) | | (13,277 | ) | | (16,596 | ) |
Total capital | 4,536,769 |
| | 3,559,107 |
| 5,181,056 |
| | 4,939,008 |
|
TOTAL LIABILITIES AND CAPITAL | $ | 81,562,150 |
| | $ | 60,396,531 |
| $ | 118,796,781 |
| | $ | 106,640,419 |
|
| |
(a) | Fair values: $13,177,11715,229,965 and $13,035,50314,794,326 at December 31, 20122015 and 2011,2014, respectively. |
The accompanying notes are an integral part of these financial statements.
FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF INCOME
(In thousands)
| | | For the Years Ended December 31, | For the Years Ended December 31, |
| 2012 | | 2011 | | 2010 | 2015 | | 2014 | | 2013 |
INTEREST INCOME: | | | | | | | | | | |
Advances | $ | 240,637 |
| | $ | 230,263 |
| | $ | 285,803 |
| $ | 366,651 |
| | $ | 314,800 |
| | $ | 305,658 |
|
Prepayment fees on Advances, net | 20,064 |
| | 5,808 |
| | 8,168 |
| 2,723 |
| | 3,624 |
| | 2,473 |
|
Interest-bearing deposits | 571 |
| | 470 |
| | 923 |
| 88 |
| | 85 |
| | 185 |
|
Securities purchased under agreements to resell | 4,527 |
| | 2,115 |
| | 4,311 |
| 2,147 |
| | 1,261 |
| | 1,872 |
|
Federal funds sold | 6,844 |
| | 4,542 |
| | 12,076 |
| 12,106 |
| | 5,426 |
| | 6,232 |
|
Investment securities: | | | | | | |
Trading securities | 35,580 |
| | 35,266 |
| | 6,754 |
| 22 |
| | 25 |
| | 31 |
|
Available-for-sale securities | 2,794 |
| | 8,302 |
| | 12,254 |
| 2,198 |
| | 3,204 |
| | 1,827 |
|
Held-to-maturity securities | 297,127 |
| | 389,117 |
| | 510,698 |
| 325,449 |
| | 343,042 |
| | 313,181 |
|
Total investment securities | | 327,669 |
| | 346,271 |
| | 315,039 |
|
Mortgage loans held for portfolio | 312,696 |
| | 334,857 |
| | 413,237 |
| 245,876 |
| | 236,882 |
| | 268,691 |
|
Loans to other FHLBanks | 3 |
| | 3 |
| | 8 |
| — |
| | — |
| | 5 |
|
Total interest income | 920,843 |
| | 1,010,743 |
| | 1,254,232 |
| 957,260 |
| | 908,349 |
| | 900,155 |
|
INTEREST EXPENSE: | | | | | | | | | | |
Consolidated Obligations - Discount Notes | 30,699 |
| | 27,654 |
| | 40,959 |
| |
Consolidated Obligations - Bonds | 569,949 |
| | 719,538 |
| | 918,886 |
| |
Consolidated Obligations: | | | | | | |
Discount Notes | | 65,217 |
| | 27,439 |
| | 36,686 |
|
Bonds | | 566,970 |
| | 559,480 |
| | 529,788 |
|
Total Consolidated Obligations | | 632,187 |
| | 586,919 |
| | 566,474 |
|
Deposits | 383 |
| | 594 |
| | 1,401 |
| 360 |
| | 264 |
| | 326 |
|
Loans from other FHLBanks | 1 |
| | — |
| | 1 |
| — |
| | — |
| | 5 |
|
Mandatorily redeemable capital stock | 11,690 |
| | 13,955 |
| | 17,664 |
| 2,432 |
| | 4,190 |
| | 5,506 |
|
Other borrowings | 1 |
| | — |
| | 1 |
| |
Total interest expense | 612,723 |
| | 761,741 |
| | 978,912 |
| 634,979 |
| | 591,373 |
| | 572,311 |
|
NET INTEREST INCOME | 308,120 |
| | 249,002 |
| | 275,320 |
| 322,281 |
| | 316,976 |
| | 327,844 |
|
Provision for credit losses | 1,459 |
| | 12,573 |
| | 13,601 |
| |
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES | 306,661 |
| | 236,429 |
| | 261,719 |
| |
OTHER NON-INTEREST INCOME (LOSS) : | | | | | | |
Reversal for credit losses | | — |
| | (500 | ) | | (7,450 | ) |
NET INTEREST INCOME AFTER REVERSAL FOR CREDIT LOSSES | | 322,281 |
| | 317,476 |
| | 335,294 |
|
NON-INTEREST INCOME: | | | | | | |
Net losses on trading securities | (32,770 | ) | | (23,546 | ) | | (3,348 | ) | (18 | ) | | (9 | ) | | (19 | ) |
Net realized losses from sale of available-for-sale securities | — |
| | — |
| | (90 | ) | |
Net realized gains from sale of held-to-maturity securities | 29,292 |
| | 16,219 |
| | 7,967 |
| |
Net gains (losses) on Consolidated Obligation Bonds held under fair value option | 1,939 |
| | (2,896 | ) | | — |
| |
Net gains (losses) on derivatives and hedging activities | 8,735 |
| | (1,717 | ) | | 7,825 |
| |
Net gains on financial instruments held under fair value option | | 1,057 |
| | 2,174 |
| | 330 |
|
Net gains on derivatives and hedging activities | | 13,037 |
| | 6,627 |
| | 7,903 |
|
Standby Letters of Credit fees | | 13,098 |
| | 10,767 |
| | 8,066 |
|
Other, net | 6,216 |
| | 7,096 |
| | 7,507 |
| 2,720 |
| | 3,071 |
| | 3,511 |
|
Total other non-interest income (loss) | 13,412 |
| | (4,844 | ) | | 19,861 |
| |
OTHER EXPENSE: | | | | | | |
Total non-interest income | | 29,894 |
| | 22,630 |
| | 19,791 |
|
NON-INTEREST EXPENSE: | | | | | | |
Compensation and benefits | 30,854 |
| | 30,577 |
| | 34,058 |
| 39,766 |
| | 36,777 |
| | 33,992 |
|
Other operating | 14,048 |
| | 14,884 |
| | 14,728 |
| |
Other operating expenses | | 21,728 |
| | 17,454 |
| | 17,493 |
|
Finance Agency | 6,002 |
| | 5,273 |
| | 3,944 |
| 6,793 |
| | 7,084 |
| | 5,203 |
|
Office of Finance | 3,442 |
| | 3,819 |
| | 3,164 |
| 4,698 |
| | 4,374 |
| | 4,535 |
|
Other | 3,624 |
| | 2,201 |
| | (67 | ) | 2,566 |
| | 2,559 |
| | 3,164 |
|
Total other expense | 57,970 |
| | 56,754 |
| | 55,827 |
| |
Total non-interest expense | | 75,551 |
| | 68,248 |
| | 64,387 |
|
INCOME BEFORE ASSESSMENTS | 262,103 |
| | 174,831 |
| | 225,753 |
| 276,624 |
| | 271,858 |
| | 290,698 |
|
Affordable Housing Program | 27,379 |
| | 16,914 |
| | 20,231 |
| |
REFCORP | — |
| | 19,644 |
| | 41,104 |
| |
Total assessments | 27,379 |
| | 36,558 |
| | 61,335 |
| |
Affordable Housing Program assessments | | 27,906 |
| | 27,605 |
| | 29,620 |
|
NET INCOME | $ | 234,724 |
| | $ | 138,273 |
| | $ | 164,418 |
| $ | 248,718 |
| | $ | 244,253 |
| | $ | 261,078 |
|
The accompanying notes are an integral part of these financial statements.
FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
| | | For the Years Ended December 31, | For the Years Ended December 31, |
| 2012 | | 2011 | | 2010 | 2015 | | 2014 | | 2013 |
Net income | $ | 234,724 |
| | $ | 138,273 |
| | $ | 164,418 |
| $ | 248,718 |
| | $ | 244,253 |
| | $ | 261,078 |
|
Other comprehensive income adjustments: | | | | | | | | | | |
Net unrealized gains (losses) on available-for-sale securities | 1,014 |
| | (750 | ) | | 100 |
| 105 |
| | 97 |
| | (121 | ) |
Pension and postretirement benefits | (1,747 | ) | | (2,528 | ) | | 285 |
| 3,214 |
| | (7,651 | ) | | 2,813 |
|
Total other comprehensive income adjustments | (733 | ) | | (3,278 | ) | | 385 |
| 3,319 |
| | (7,554 | ) | | 2,692 |
|
Total comprehensive income | $ | 233,991 |
| | $ | 134,995 |
| | $ | 164,803 |
| |
Comprehensive income | | $ | 252,037 |
| | $ | 236,699 |
| | $ | 263,770 |
|
The accompanying notes are an integral part of these financial statements.
FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF CAPITAL
(In thousands)
| | | Capital Stock Class B - Putable | | Retained Earnings | | | | | Capital Stock Class B - Putable | | Retained Earnings | | Accumulated Other Comprehensive | | Total |
| Shares | | Par Value | | Unrestricted | Restricted | Total | | Accumulated Other Comprehensive Loss | | Total Capital | Shares | | Par Value | | Unrestricted | | Restricted | | Total | | Loss | | Capital |
BALANCE, DECEMBER 31, 2009 | 30,635 |
| | $ | 3,063,473 |
| | $ | 411,782 |
| $ | — |
| $ | 411,782 |
| | $ | (8,108 | ) | | $ | 3,467,147 |
| |
BALANCE, DECEMBER 31, 2012 | | 40,106 |
| | $ | 4,010,622 |
| | $ | 479,253 |
| | $ | 58,628 |
| | $ | 537,881 |
| | $ | (11,734 | ) | | $ | 4,536,769 |
|
Proceeds from sale of capital stock | 698 |
| | 69,811 |
| | | | | | 69,811 |
| 7,208 |
| | 720,820 |
| | | | | | | | | | 720,820 |
|
Net shares reclassified to mandatorily redeemable capital stock | (409 | ) | | (40,907 | ) | | | | | | (40,907 | ) | (334 | ) | | (33,457 | ) | | | | | | | | | | (33,457 | ) |
Comprehensive income | | | | | 164,418 |
| — |
| 164,418 |
| | 385 |
| | 164,803 |
| | | | | 208,863 |
| | 52,215 |
| | 261,078 |
| | 2,692 |
| | 263,770 |
|
Dividends on capital stock: | | | | | | | | | | |
Cash | | | | | (138,326 | ) | | (138,326 | ) | | | | (138,326 | ) | |
BALANCE, DECEMBER 31, 2010 | 30,924 |
| | 3,092,377 |
| | 437,874 |
| — |
| 437,874 |
| | (7,723 | ) | | 3,522,528 |
| |
Cash dividends on capital stock | | | | | | (177,795 | ) | | | | (177,795 | ) | | | | (177,795 | ) |
BALANCE, DECEMBER 31, 2013 | | 46,980 |
| | 4,697,985 |
| | 510,321 |
| | 110,843 |
| | 621,164 |
| | (9,042 | ) | | 5,310,107 |
|
Proceeds from sale of capital stock | | 835 |
| | 83,543 |
| | | | | | | | | | 83,543 |
|
Repurchase of capital stock | | (4,979 | ) | | (497,875 | ) | | | | | | | | | | (497,875 | ) |
Net shares reclassified to mandatorily redeemable capital stock | | (171 | ) | | (17,110 | ) | | | | | | | | | | (17,110 | ) |
Comprehensive income | | | | | | 195,402 |
| | 48,851 |
| | 244,253 |
| | (7,554 | ) | | 236,699 |
|
Cash dividends on capital stock | | | | | | (176,356 | ) | | | | (176,356 | ) | | | | (176,356 | ) |
BALANCE, DECEMBER 31, 2014 | | 42,665 |
| | 4,266,543 |
| | 529,367 |
| | 159,694 |
| | 689,061 |
| | (16,596 | ) | | 4,939,008 |
|
Proceeds from sale of capital stock | 477 |
| | 47,731 |
| | | | | | 47,731 |
| 1,912 |
| | 191,132 |
| | | | | | | | | | 191,132 |
|
Net shares reclassified to mandatorily redeemable capital stock | (142 | ) | | (14,213 | ) | | | | | | (14,213 | ) | (289 | ) | | (28,919 | ) | | | | | | | | | | (28,919 | ) |
Comprehensive income | | | | | 126,590 |
| 11,683 |
| 138,273 |
| | (3,278 | ) | | 134,995 |
| | | | | 198,974 |
| | 49,744 |
| | 248,718 |
| | 3,319 |
| | 252,037 |
|
Dividends on capital stock: | | | | | | | | | |
| |
Cash | | | | | (131,934 | ) | | (131,934 | ) | | | | (131,934 | ) | |
BALANCE, DECEMBER 31, 2011 | 31,259 |
| | 3,125,895 |
| | 432,530 |
| 11,683 |
| 444,213 |
| | (11,001 | ) | | 3,559,107 |
| |
Proceeds from sale of capital stock | 9,248 |
| | 924,853 |
| | | | | | 924,853 |
| |
Net shares reclassified to mandatorily redeemable capital stock | (401 | ) | | (40,126 | ) | | | | | | (40,126 | ) | |
Comprehensive income | | | | | 187,779 |
| 46,945 |
| 234,724 |
| | (733 | ) | | 233,991 |
| |
Dividends on capital stock: | | | | | | | | | | | |
Cash | | | | | (141,056 | ) | | (141,056 | ) | | | | (141,056 | ) | |
BALANCE, DECEMBER 31, 2012 | 40,106 |
| | $ | 4,010,622 |
| | $ | 479,253 |
| $ | 58,628 |
| $ | 537,881 |
| | $ | (11,734 | ) | | $ | 4,536,769 |
| |
Cash dividends on capital stock | | | | | | (172,202 | ) | | | | (172,202 | ) | | | | (172,202 | ) |
BALANCE, DECEMBER 31, 2015 | | 44,288 |
| | $ | 4,428,756 |
| | $ | 556,139 |
| | $ | 209,438 |
| | $ | 765,577 |
| | $ | (13,277 | ) | | $ | 5,181,056 |
|
The accompanying notes are an integral part of these financial statements.
FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF CASH FLOWS
(In thousands)
| | | For the Years Ended December 31, | For the Years Ended December 31, |
| 2012 | | 2011 | | 2010 | 2015 | | 2014 | | 2013 |
OPERATING ACTIVITIES: | | | | | | | | | | |
Net income | $ | 234,724 |
| | $ | 138,273 |
| | $ | 164,418 |
| $ | 248,718 |
| | $ | 244,253 |
| | $ | 261,078 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | |
Depreciation and amortization | 59,389 |
| | 53,303 |
| | 29,903 |
| 41,511 |
| | 8,188 |
| | (512 | ) |
Change in net fair value adjustment on derivative and hedging activities | 69,279 |
| | 167,194 |
| | 199,442 |
| |
Net change in derivative and hedging activities | | 12,651 |
| | 16,224 |
| | 35,607 |
|
Net change in fair value adjustments on trading securities | 32,770 |
| | 23,546 |
| | 3,348 |
| 18 |
| | 9 |
| | 19 |
|
Net change in fair value adjustments on Consolidated Obligation Bonds held at fair value | (1,939 | ) | | 2,896 |
| | — |
| |
Net change in fair value adjustments on financial instruments held under fair value option | | (1,057 | ) | | (2,174 | ) | | (330 | ) |
Other adjustments | (27,830 | ) | | (3,609 | ) | | 5,766 |
| (11 | ) | | (393 | ) | | (7,464 | ) |
Net change in: | | | | | | | | | | |
Accrued interest receivable | 30,354 |
| | 18,129 |
| | 19,315 |
| (13,473 | ) | | 3,746 |
| | (1,216 | ) |
Other assets | (726 | ) | | 1,108 |
| | 2,717 |
| (1,120 | ) | | (739 | ) | | (3,244 | ) |
Accrued interest payable | (36,317 | ) | | (46,116 | ) | | (118,281 | ) | 4,694 |
| | (3,177 | ) | | 10,829 |
|
Other liabilities | 42,856 |
| | 1,284 |
| | (31,369 | ) | 41,036 |
| | 19,252 |
| | 25,470 |
|
Total adjustments | 167,836 |
| | 217,735 |
| | 110,841 |
| 84,249 |
| | 40,936 |
| | 59,159 |
|
Net cash provided by operating activities | 402,560 |
| | 356,008 |
| | 275,259 |
| 332,967 |
| | 285,189 |
| | 320,237 |
|
| | | | | | | | | | |
INVESTING ACTIVITIES: | | | | | | | | | | |
Net change in: | | | | | | | | | | |
Interest-bearing deposits | 279,777 |
| | (64,239 | ) | | 13,644 |
| 12,092 |
| | 30,579 |
| | 119,127 |
|
Securities purchased under agreements to resell | (3,800,000 | ) | | 2,950,000 |
| | (2,850,000 | ) | (7,188,979 | ) | | (993,000 | ) | | 1,450,000 |
|
Federal funds sold | (1,080,000 | ) | | 3,210,000 |
| | (3,330,000 | ) | (4,245,000 | ) | | (4,860,000 | ) | | 1,610,000 |
|
Premises, software, and equipment | (2,129 | ) | | (1,332 | ) | | (2,839 | ) | (1,834 | ) | | (686 | ) | | (7,203 | ) |
Trading securities: | | | | | | | | | | |
Proceeds from maturities of long-term | | 164 |
| | 228 |
| | 325 |
|
Available-for-sale securities: | | | | | | |
Net decrease (increase) in short-term | 2,510,301 |
| | 3,845,864 |
| | (2,602,439 | ) | 650,000 |
| | 835,000 |
| | (2,185,000 | ) |
Held-to-maturity securities: | | | | | | |
Net (increase) decrease in short-term | | (6,585 | ) | | 1,386 |
| | (1,247 | ) |
Proceeds from maturities of long-term | 317,746 |
| | 291 |
| | 256 |
| 2,611,029 |
| | 2,093,933 |
| | 2,686,432 |
|
Purchases of long-term | — |
| | (321,930 | ) | | — |
| |
Available-for-sale securities: | | | | | | |
Net decrease in short-term | 4,172,157 |
| | 1,617,844 |
| | 879,878 |
| |
Held-to-maturity securities: | | | | | | |
Net decrease (increase) in short-term | 835,392 |
| | (119,829 | ) | | (691,714 | ) | |
Proceeds from maturities of long-term | 3,771,382 |
| | 4,009,177 |
| | 4,059,393 |
| |
Proceeds from sale of long-term | 507,531 |
| | 580,668 |
| | 325,453 |
| |
Purchases of long-term | (5,323,500 | ) | | (4,379,865 | ) | | (4,905,967 | ) | (3,172,521 | ) | | (719,833 | ) | | (5,977,152 | ) |
Advances: | | | | | | | | | | |
Proceeds | 749,327,365 |
| | 214,078,820 |
| | 315,883,571 |
| 930,146,812 |
| | 1,120,239,271 |
| | 697,384,820 |
|
Made | (775,104,699 | ) | | (212,401,401 | ) | | (310,263,889 | ) | (933,090,216 | ) | | (1,125,441,755 | ) | | (708,852,213 | ) |
Mortgage loans held for portfolio: | | | | | | | | | | |
Principal collected | 2,666,537 |
| | 1,919,727 |
| | 2,436,554 |
| 1,383,198 |
| | 1,070,820 |
| | 1,890,141 |
|
Purchases | (2,374,523 | ) | | (2,034,172 | ) | | (873,495 | ) | (2,414,064 | ) | | (1,260,888 | ) | | (1,203,883 | ) |
Net cash (used in) provided by investing activities | (23,296,663 | ) | | 12,889,623 |
| | (1,921,594 | ) | |
Net cash used in investing activities | | (15,315,904 | ) | | (9,004,945 | ) | | (13,085,853 | ) |
| | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
The accompanying notes are an integral part of these financial statements. | | | | | | The accompanying notes are an integral part of these financial statements. | | | | |
| | | | | | |
| | | | | | | | | | | | | | | | | |
(continued from previous page) | | | | | | | | | | |
FEDERAL HOME LOAN BANK OF CINCINNATI | STATEMENTS OF CASH FLOWS | (In thousands) | | For the Years Ended December 31, | For the Years Ended December 31, |
| 2012 | | 2011 | | 2010 | 2015 | | 2014 | | 2013 |
FINANCING ACTIVITIES: | | | | | | | | | | |
Net increase (decrease) in deposits and pass-through reserves | $ | 108,546 |
| | $ | (370,695 | ) | | $ | (659,994 | ) | $ | 74,725 |
| | $ | (200,660 | ) | | $ | (260,961 | ) |
Net payments on derivative contracts with financing elements | (113,976 | ) | | (170,918 | ) | | (174,120 | ) | (28,458 | ) | | (31,195 | ) | | (42,054 | ) |
Net proceeds from issuance of Consolidated Obligations: | | | | | | | | | | |
Discount Notes | 250,629,492 |
| | 413,488,846 |
| | 675,425,546 |
| 305,975,240 |
| | 270,415,559 |
| | 165,083,112 |
|
Bonds | 35,063,026 |
| | 18,026,094 |
| | 19,347,546 |
| 19,042,816 |
| | 41,461,146 |
| | 34,035,263 |
|
Bonds transferred from other FHLBanks | — |
| | — |
| | 161,722 |
| |
Payments for maturing and retiring Consolidated Obligations: | | | | | | | | | | |
Discount Notes | (245,932,389 | ) | | (422,356,907 | ) | | (663,614,538 | ) | (270,027,809 | ) | | (267,394,419 | ) | | (157,714,961 | ) |
Bonds | (19,557,835 | ) | | (19,845,393 | ) | | (30,021,349 | ) | (43,118,354 | ) | | (40,358,950 | ) | | (20,166,866 | ) |
Proceeds from issuance of capital stock | 924,853 |
| | 47,731 |
| | 69,811 |
| 191,132 |
| | 83,543 |
| | 720,820 |
|
Payments for redemption of mandatorily redeemable capital stock | (104,079 | ) | | (96,134 | ) | | (359,683 | ) | |
Payments for repurchase/redemption of mandatorily redeemable capital stock | | (53,987 | ) | | (70,000 | ) | | (128,432 | ) |
Payments for repurchase of capital stock | | — |
| | (497,875 | ) | | — |
|
Cash dividends paid | (141,056 | ) | | (131,934 | ) | | (138,326 | ) | (172,202 | ) | | (176,356 | ) | | (177,795 | ) |
Net cash provided by (used in) financing activities | 20,876,582 |
| | (11,409,310 | ) | | 36,615 |
| |
Net cash provided by financing activities | | 11,883,103 |
| | 3,230,793 |
| | 21,348,126 |
|
Net (decrease) increase in cash and cash equivalents | (2,017,521 | ) | | 1,836,321 |
| | (1,609,720 | ) | (3,099,834 | ) | | (5,488,963 | ) | | 8,582,510 |
|
Cash and cash equivalents at beginning of the period | 2,033,944 |
| | 197,623 |
| | 1,807,343 |
| 3,109,970 |
| | 8,598,933 |
| | 16,423 |
|
Cash and cash equivalents at end of the period | $ | 16,423 |
| | $ | 2,033,944 |
| | $ | 197,623 |
| $ | 10,136 |
| | $ | 3,109,970 |
| | $ | 8,598,933 |
|
Supplemental Disclosures: | | | | | | | | | | |
Interest paid | $ | 649,609 |
| | $ | 805,791 |
| | $ | 1,036,296 |
| $ | 642,179 |
| | $ | 621,865 |
| | $ | 584,640 |
|
AHP payments, net | $ | 18,902 |
| | $ | 30,756 |
| | $ | 30,535 |
| |
REFCORP assessments paid | $ | — |
| | $ | 30,646 |
| | $ | 42,292 |
| |
Affordable Housing Program payments, net | | $ | 18,657 |
| | $ | 23,291 |
| | $ | 18,503 |
|
The accompanying notes are an integral part of these financial statements.
FEDERAL HOME LOAN BANK OF CINCINNATI
NOTES TO FINANCIAL STATEMENTS
Background Information
The Federal Home Loan Bank of Cincinnati (the FHLBank)FHLB), a federally chartered corporation, is one of 1211 District Federal Home Loan Banks (FHLBanks). The FHLBanks serve the public by enhancing the availability of credit for residential mortgages and targeted community development. The FHLBankFHLB provides a readily available, competitively-priced source of funds to its member institutions. The FHLBankFHLB is a cooperative whose member institutions own nearly all of the capital stock of the FHLBankFHLB and may receive dividends on their investment to the extent declared by the FHLBank'sFHLB's Board of Directors. Former members own the remaining capital stock to support business transactions still carried on the FHLBank'sFHLB's Statements of Condition. Regulated financial depositories and insurance companies engaged in residential housing finance may apply for membership. Housing associates, including state and local housing authorities, may also borrow from the FHLBank;FHLB; while eligible to borrow, housing authorities are not members of the FHLBankFHLB and, as such,therefore, are not allowed to hold capital stock. A housing authority is eligible to utilize the Advance programs of the FHLBankFHLB if it meets applicable statutory requirements. It must be a U.S. Department of Housing and Urban Development approved mortgagee and must also meet applicable mortgage lending, financial condition, as well as charter, inspection and supervision requirements.
All members must purchase stock in the FHLBank.FHLB. Members must own capital stock in the FHLBankFHLB based on the amount of their total assets. Each member also may be required to purchase activity-based capital stock as it engages in certain business activities with the FHLBank.FHLB. As a result of these requirements, the FHLBankFHLB conducts business with stockholders in the normal course of business. For financial statement purposes, the FHLBankFHLB defines related parties as those members with more than 10 percent of the voting interests of the FHLBank'sFHLB's outstanding capital stock. See Note 2322 for more information relating to transactions with stockholders.
The Federal Housing Finance Agency (Finance Agency) was established and becameis the independent Federal regulator of the FHLBanks, Federal Home Loan Mortgage Corporation (Freddie Mac) and Federal National Mortgage Association (Fannie Mae), effective July 30, 2008 with the passage of the “Housing and Economic Recovery Act of 2008” (HERA). Pursuant to HERA, all regulations, orders, determinations, and resolutions that were issued, made, prescribed, or allowed to become effective by the former Federal Housing Finance Board will remain in effect until modified, terminated, set aside, or superseded by the Finance Agency Director, any court of competent jurisdiction, or operation of law. The Finance Agency's stated mission with respect to the FHLBanks is to provide effective supervision, regulationensure that the housing government-sponsored enterprises (GSEs) operate in a safe and housing mission oversightsound manner so that they serve as a reliable source of the FHLBanks to promote their safetyliquidity and soundness, supportfunding for housing finance and affordable housing, and support a stable and liquid mortgage market.community investment.
Each FHLBank operates as a separate entity with its own management, employees, and board of directors. The FHLBankFHLB does not have any special purpose entities or any other type of off-balance sheet conduits.
The Office of Finance is a joint office of the FHLBanks established to facilitate the issuance and servicing of the debt instruments of the FHLBanks, known as Consolidated Obligations, and to prepare combined quarterly and annual financial reports of all 12FHLBanks. As provided by the Federal Home Loan Bank Act of 1932, as amended (the FHLBank Act), or by Finance Agency Regulation,regulation, the FHLBanks' Consolidated Obligations are backed only by the financial resources of the FHLBanks and are the primary source of funds for the FHLBanks. Deposits, other borrowings, and capital stock issued to members provide other funds. The FHLBankFHLB primarily uses its funds to provide Advances to members and to purchase loans from members through its Mortgage Purchase Program (MPP). The FHLBankFHLB also provides member institutions with correspondent services, such as wire transfer, security safekeeping, and settlement services.
Note 1 - Summary of Significant Accounting Policies
Basis of Presentation. The FHLBank'sFHLB's accounting and financial reporting policies conform to accounting principles generally accepted in the United States of America (GAAP).
Cash Flows. In the Statements of Cash Flows, the FHLBankFHLB considers non-interest bearing cash and due from banks as cash and cash equivalents. Federal funds sold are not treated as cash equivalents for purposes of the Statements of Cash Flows, but are instead treated as short-term investments and are reflected in the investing activities section of the Statements of Cash Flows.
Reclassifications. Certain amounts in the 2011 and 2010 financial statements and footnotes have been reclassified to conform to the 2012 presentation.
Subsequent Events. The FHLBankFHLB has evaluated subsequent events for potential recognition or disclosure through the issuance of these financial statements and believes there have been no material subsequent events requiring additional disclosure or recognition in these financial statements.
Use of Estimates. The preparation of financial statements in accordance with GAAP requires management to make subjective assumptions and estimates. These assumptions and estimates affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. Actual results could differ from these estimates.
Fair Values. Some of the FHLBank'sFHLB's financial instruments lack an available trading market with prices characterized as those that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. Therefore, the FHLBankFHLB uses pricing services and/or internal models employing significant estimates and present value calculations when disclosing fair values. See Note 2019 for more information.
Interest Bearing Deposits, Securities Purchased Under Agreements to Resell, and Federal Funds Sold. These investments provide short-term liquidity and are carried at cost. Interest bearing deposits include certificates of deposits (CDs) not meeting the definition of aan investment security. The FHLBank also invests in certain CDs that meet the definition of a security and are recorded as held-to-maturity and available-for-sale securities. The FHLBankFHLB treats securities purchased under agreements to resell as short-term collateralized loans, which are classified as assets inon the Statements of Condition. Securities purchased under agreements to resell are held in safekeeping in the name of the FHLBankFHLB by third-party custodians approved by the FHLBank.FHLB. If the market value of the underlying securities decrease below the market value required as collateral, the counterparty has the option to (1) place an equivalent amount of additional securities in safekeeping in the name of the FHLBankFHLB or (2) remit an equivalent amount of cash; otherwise, the dollar value of the resale agreement will be decreased accordingly.cash. Federal funds sold consist of short-term, unsecured loans generally madetransacted with counterparties that are considered by the FHLB to investment-grade counterparties.be of investment quality.
Investment Securities. The FHLBankFHLB classifies investmentsinvestment securities as trading, available-for-sale and held-to-maturity at the date of acquisition. Purchases and sales of securities are recorded on a trade date basis.
Trading. Securities classified as trading are acquired for liquidity purposes and asset/liability management and carried at fair value. The FHLBankFHLB records changes in the fair value of these securities through other income as a net gain or loss on trading securities. However, the FHLBankFHLB does not participate in speculative trading practices and holds these investments indefinitely as management periodically evaluates its liquidity needs.
Available-for-Sale. Securities that are not classified as held-to-maturity or trading are classified as available-for-sale and are carried at fair value. The change in fair value of available-for-sale securities is recorded in other comprehensive income as a net unrealized gain or loss on available-for-sale securities.
Held-to-Maturity. Securities that the FHLBankFHLB has both the ability and intent to hold to maturity are classified as held-to-maturity and are carried at amortized cost, representing the amount at which an investment is acquired adjusted for periodic principal repayments, amortization of premiums and accretion of discounts.
Certain changes in circumstances may cause the FHLBankFHLB to change its intent to hold a security to maturity without calling into question its intent to hold other debt securities to maturity in the future. Thus, the sale or transfer of a held-to-maturity security due to certain changes in circumstances, such as evidence of significant deterioration in the issuer's creditworthiness or changes in regulatory requirements, is not considered to be inconsistent with its original classification. Other events that are isolated, nonrecurring, and unusual for the FHLBankFHLB that could not have been reasonably anticipated may cause the FHLBankFHLB to sell or transfer a held-to-maturity security without necessarily calling into question its intent to hold other debt securities to maturity.
In addition, sales of held-to-maturity debt securities that meet either of the following two conditions may be considered as maturities for purposes of the classification of securities: (1) the sale occurs near enough to the security's maturity date (or call date if exercise of the call is probable) that interest rate risk is substantially eliminated as a pricing factor and changes in market interest rates would not have a significant effect on the security's fair value, or (2) the sale of the security occurs after the FHLBankFHLB has already collected a substantial portion (at least 85 percent) of the principal outstanding at acquisition due either to prepayments on the security or to scheduled payments on the security payable in equal installments (both principal and interest) over its term.
Premiums and Discounts. The FHLBankFHLB amortizes purchased premiums and accretes purchased discounts on mortgage-backed securities and other investment categories with a term of greater than one year using the retrospective level-yield method (retrospective method). The retrospective method requires that the FHLBankFHLB estimate prepayments over the estimated life of the securities and make a retrospective adjustment of the effective yield each time that the FHLBankFHLB changes the estimated life and/or prepayments as if the new estimate had been known since the original acquisition date of the securities. The FHLBankFHLB uses nationally recognized third-party prepayment models to project estimated cash flows. Due to their short term nature, the FHLBankFHLB amortizes premiums and accretes discounts on other investment categories with a term of one year or less using a straight-line methodology based on the contractual maturity of the securities. Analyses of the straight-line compared to the level-yield
methodology have been performed by the FHLBankFHLB and it has determined that the impact of the difference on the financial statements for each period reported, taken individually and as a whole, is not material.
Gains and Losses on Sales. The FHLBankFHLB computes gains and losses on sales of investment securities using the specific identification method and includes these gains and losses in other income.
Investment Securities - Other-than-Temporary Impairment. The FHLBankFHLB evaluates its individual available-for-sale and held-to-maturity securities in an unrealized loss position for other-than-temporary impairment on a quarterly basis. A security is considered impaired when its fair value is less than its amortized cost. The FHLBankFHLB considers an other-than-temporary impairment to have occurred under any of the following circumstances:
| |
▪ | Ifif the FHLBankFHLB has an intent to sell the impaired debt security; |
| |
▪ | If,if, based on available evidence, the FHLBankFHLB believes it is more likely than not that it will be required to sell the impaired debt security before the recovery of its amortized cost basis; or |
| |
▪ | Ifif the FHLBankFHLB does not expect to recover the entire amortized cost basis of the debt security. |
Recognition of Other-than-Temporary Impairment. If either of the first two conditions above is met, the FHLBankFHLB recognizes an other-than-temporary impairment charge in earnings equal to the entire difference between the security's amortized cost basis and its fair value as of the Statement of Condition date.
For securities in an unrealized loss position that do not meet neithereither of the first twothese conditions, the FHLBank performs an analysis to determine if it will recover the entire amortized cost basis of each of these securities; this analysis includes a cash flow test for private-label mortgage-backed securities. The present value of the cash flows expected to be collected is compared to the amortized cost basis of the debt security to determine whether a credit loss exists. If there is a credit loss (the difference between the present value of the cash flows expected to be collected and the amortized cost basis of the debt security), the carrying value of the debt security is adjusted to its fair value. However, rather than recognizing the entire difference between the amortized cost basis and fair value in earnings, only the amount of the impairment representing the credit loss (i.e., the credit component) is recognized in earnings, while the amount related to all other factors (i.e., the non-credit component) is recognized in accumulated other comprehensive income, which is a component of equity. The credit loss on a debt security is limited to the amount of that security's unrealized loss. Theposition, or total other-than-temporary impairment, is presented inevaluated to determine the statement of income with an offset for theextent and amount of the total other-than-temporary impairment that is recognized in accumulated other comprehensive income. Subsequent non-other-than-temporary impairment-related changes in the fair value of available-for-sale securities are included in accumulated other comprehensive income. The other-than-temporary impairment recognized in accumulated other comprehensive income for debt securities classified as held-to-maturity is accreted over the remaining life of the debt security as an increase in the carrying value of the security (with no effect on earnings unless the security is subsequently sold or there is additional other-than-temporary impairment related to credit loss recognized).
Accounting for Other-than-Temporary Impairment Recognized in Accumulated Other Comprehensive Income. For subsequent accounting of other-than-temporarily impaired securities, if the present value of principal cash flows expected to be collected is less than the amortized cost basis, the FHLBank would record an additional other-than-temporary impairment. The amount of total other-than-temporary impairment for an available-for-sale security that was previously impaired is determined as the difference between its amortized cost less the amount of other-than-temporary impairment recognized in accumulated other comprehensive income prior to the determination of other-than-temporary impairment and its fair value.loss.
Advances. The FHLBankFHLB reports Advances (loans to members, former members or housing associates) either at amortized cost or at fair value when the fair value option is elected. Advances carried at amortized cost are reported net of premiums, discounts (including discounts on Advances related to the Affordable Housing Program (AHP), as discussed below), unearned commitment fees and hedging adjustments. The FHLBankFHLB amortizes the premiums and accretes the discounts on Advances to interest income using a level-yield methodology. The FHLBankFHLB records interest on Advances to income as earned. For Advances carried at fair value, interest income is recognized based on the contractual interest rate.
Advance Modifications. In cases in which the FHLBankFHLB funds a new Advance concurrent with or within a short period of time before or after the prepayment of an existing Advance, the FHLBankFHLB evaluates whether the new Advance meets the accounting criteria to qualify as a modification of an existing Advance or whether it constitutes a new Advance. The FHLBankFHLB compares the present value of cash flows on the new Advance to the present value of cash flows remaining on the existing Advance. If there is at least a 10 percent difference in the cash flows, or if the FHLBankFHLB concludes the differences between the Advances are more than minor based on qualitative factors, the Advance is accounted for as a new Advance. In all other instances, the new Advance is accounted for as a modification.
Prepayment Fees. The FHLBankFHLB charges a borrower a prepayment fee when the borrower prepays certain Advances before the original maturity. The FHLBankFHLB records prepayment fees, net of basis adjustments related to hedging activities included in the bookcarrying value of the Advances, as “Prepayment fees on Advances, net” in the interest income section of the Statements of Income.
If a new Advance qualifies as a modification of the existing Advance, the net prepayment fee on the prepaid Advance is deferred, recorded in the basis of the modified Advance, and amortized/accreted using a level-yield methodology over the life of the modified Advance to Advance interest income.
For prepaid Advances that are hedged and meet the hedge accounting requirements, the FHLBankFHLB terminates the hedging relationship upon prepayment and records the associated fair value gains and losses, adjusted for the prepayment fees, in interest income. If the FHLBank funds a new Advance to a member concurrent with or within a short period of time after the prepayment of a previous Advance to that member, the FHLBank evaluates whether the new Advance qualifies as a modification of the original hedged Advance. If the new Advance qualifies as a modification of the original hedged Advance, the fair value gains or losses of the Advance and the prepayment fees are included in the carrying amountbasis of the modified Advance, and gains or losses and prepayment fees are amortized in interest income over the life of the modified Advance using a level-yield methodology. If the modified Advance also is also hedged and the hedge meets the hedging criteria, the modified Advance is marked to fair value after the modification, and subsequent fair value changes are recorded in other income.
If a new Advance does not qualify as a modification of an existing Advance, itthe existing Advance is treated as an Advance termination with subsequent funding of a new Advance and the existing fees, net of related hedging adjustments, are recorded in interest income as “Prepayment fees on Advances, net.”
The FHLBankFHLB defers commitment fees for Advances and amortizes them to interest income using a level-yield methodology. Refundable fees are deferred until the commitment expires or until the Advance is made. The FHLBankFHLB records commitment fees for Standby Letters of Credit as a deferred credit when it receives the fees and accretes them using a straight-line methodology over the term of the Standby Letter of Credit. Based upon past experience, the FHLBank'sFHLB's management believes that the likelihood of Standby Letters of Credit being drawn upon is remote.
Mortgage Loans Held for Portfolio. The FHLBankFHLB classifies mortgage loans as held for portfolio and, accordingly, reports them at their principal amount outstanding net of unamortized premiums and discounts and mark-to-market basis adjustments on loans initially classified as mortgage loan commitments. The FHLBankFHLB has the intent and ability to hold these mortgage loans to maturity.
Premiums and Discounts. The FHLBankFHLB defers and amortizes premiums and accretes discounts paid to and received by the FHLBank'sFHLB's participating members (Participating Financial Institutions, or PFIs) and mark-to-market basis adjustments, as interest income using the retrospective method. The FHLBankFHLB aggregates the mortgage loans by similar characteristics (type, maturity, note rate and acquisition date) in determining prepayment estimates for the retrospective method.
Other Fees. The FHLBankFHLB may receive non-origination fees, called pair-off fees. Pair-off fees represent a make-whole provision and are assessed when a member fails to deliver the quantity of loans committed to in a Mandatory Delivery Contract. Pair-off fees are recorded in other income. A Mandatory Delivery Contract is a legal commitment the FHLBankFHLB makes to purchase, and a PFI makes to deliver, a specified dollar amount of mortgage loans, with a forward settlement date, at a specified range of mortgage note rates and prices.
Allowance for Credit Losses. An allowance for credit losses is separately established for each identified portfolio segment, if it is probable that a loss triggering event has occurred in the FHLBank'sFHLB's portfolio as of the Statements of Condition date and the amount of loss can be reasonably estimated. To the extent necessary, an allowance for credit losses for off-balance sheet credit exposures is recorded as a liability. See Note 10 for details on each allowance methodology.
Portfolio Segments. A portfolio segment is defined as the level at which an entity develops and documents a systematic methodmethodology for determining its allowance for credit losses. The FHLBankFHLB has developed and documented a systematic methodology for determining an allowance for credit losses, where applicable, for (1) Advances, letters of credit and other extensions of credit to members, collectively referred to as “credit products”; (2) government-guaranteed or insuredFederal Housing Administration (FHA) mortgage loans held for portfolio; and (3) conventional mortgage loans held for portfolio.
Classes of Financing Receivables. Classes of financing receivables generally are a disaggregation of a portfolio segment to the extent needed to understand the exposure to credit risk arising from these financing receivables. The FHLBankFHLB determined that no further disaggregation of the portfolio segments identified above is needed as the credit risk arising from these financing receivables is assessed and measured by the FHLBankFHLB at the portfolio segment level.
Impairment Methodology. A loan is considered impaired when, based on current information and events, it is probable that the FHLBankFHLB will be unable to collect all amounts due according to the contractual terms of the loan agreement.
Loans that are on non-accrual status and that are considered collateral-dependent are measured for impairment based on the fair value of the underlying property (net of estimated selling costs) and the amount of applicable credit enhancements less the estimated costs associated with maintaining and disposing of the property.enhancements. Loans are considered collateral-dependent if repayment is expected to be provided solely by the sale of the underlying property, that is, there is no other available and reliable source of repayment. Collateral-dependent loans are impaired if the fair value of the underlying collateral is insufficient to recover the unpaid principal balance on the loan. Interest income on impaired loans is recognized in the same manner as non-accrual loans noted below.
Non-accrual Loans. The FHLBankFHLB places a conventional mortgage loan on non-accrual status if it is determined that either (1) the collection of interest or principal is doubtful (e.g., when a related allowance for credit losses is recorded on a loan considered to be a troubled debt restructuring as a result of the individual evaluation for impairment), or (2) interest or principal is past due for 90 days or more, except when the loan is well-secured and in the process of collection (e.g., through credit enhancements and with monthly settlements on a schedule/scheduled basis). Loans with settlements on a schedule/scheduled basis means the FHLBankFHLB receives monthly principal and interest payments from the servicer regardless of whether the mortgagee is making payments to the servicer. Loans with monthly settlement on an actual/actual basis are considered well-secured; however, servicers of actual/actual loan types contractually do not advance principal and interest regardless of borrower creditworthiness. As a result, these loans are placed on non-accrual status once they become 90 days delinquent.
For those mortgage loans placed on non-accrual status, accrued but uncollected interest is reversed against interest income. The FHLBankFHLB records cash payments received on non-accrual loans first as interest income and then as a reduction of principal as specified in the contractual agreement, unless the collection of the remaining principal amount due is considered doubtful. If the collection of the remaining principal amount due is considered doubtful, cash payments received are applied first solely to principal until the remaining principal amount due is expected to be collected and then as a recovery of any charge-off, if applicable, followed by recording interest income. A loan on non-accrual status may be restored to accrual status when (1) none of its contractual principal and interest is due and unpaid, and the FHLBankFHLB expects repayment of the remaining contractual interest and principal, or (2) it otherwise becomes well secured and in the process of collection.
Charge-off Policy. A charge-off is recorded if it is estimated that the recorded investment in a loan will not be recovered. The FHLBankFHLB evaluates whether to record a charge-off on a conventional mortgage loan upon the occurrence of a confirming event. Confirming events include, but are not limited to, the occurrence of foreclosure or notification of a claim against any of the credit enhancements. A charge-off is recorded ifAs a result of adopting the recorded investmentFinance Agency's Advisory Bulletin 2012-02, the FHLB charges off the portion of outstanding conventional mortgage loan balances in excess of fair value of the loan will not be recovered.underlying property, less cost to sell and adjusted for any available credit enhancements, for loans that are 180 days or more delinquent and/or certain loans that the borrower has filed for bankruptcy.
Premises, Software and Equipment, Net. The FHLBankFHLB records premises, software and equipment at cost less accumulated depreciation and amortization. The FHLBank'sFHLB's accumulated depreciation and amortization related to these items was $18,827,000$20,867,000 and $16,875,000$18,556,000 at December 31, 20122015 and 2011.2014. The FHLBankFHLB computes depreciation on a straight-line methodology over the estimated useful lives of assets ranging from three to ten years. The FHLBankFHLB amortizes leasehold improvements on a straight-line basis over the shorter of the estimated useful life of the improvement or the remaining term of the lease. The FHLBankFHLB capitalizes improvements and major renewals but expenses ordinary maintenance and repairs when incurred. Depreciation and amortization expense for premises, software and equipment was $2,176,000, $2,543,000,$2,691,000, $3,108,000, and $2,724,000$2,549,000 for the years ended December 31, 2012, 2011,2015, 2014, and 2010.2013.
The FHLBankFHLB includes gains and losses on disposal of premises, software and equipment in other income. The net realized lossgain (loss) on disposal of premises, software and equipment was $3,000, $37,000$11,000, $(106,000), and $42,000 in 2012, 2011,$13,000 for the years ended December 31, 2015, 2014, and 2010.2013.
The cost of computer software developed or obtained for internal use is capitalized and amortized over future periods. As of December 31, 20122015 and 2011,2014, the FHLBankFHLB had $7,789,000$5,887,000 and $7,614,000$6,659,000 in unamortized computer software costs.
Amortization of computer software costs charged to expense was $1,528,000, $1,836,000,$1,965,000, $2,433,000, and $1,954,000$1,814,000 for the years ended December 31, 2012, 2011,2015, 2014, and 2010.2013.
Derivatives. All derivatives are recognized on the Statements of Condition at their fair values and are reported as either derivative assets or derivative liabilities, net of cash collateral and accrued interest from counterparties. The fair values of derivatives are netted by counterparty pursuant towhen the provisions of the FHLBank's master netting arrangements.requirements have been met. If these netted amounts are positive, they are classified as an asset and, if negative, they are classified as a liability. Cash flows associated with derivatives are reflected as cash flows from operating activities in the Statement of Cash Flows unless the derivative meets the criteria to be a financing derivative.
Derivative Designations. Each derivative is designated as one of the following:
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1. | a qualifying hedge of the fair value of a recognized asset or liability or an unrecognized firm commitment (a "fair value" hedge); or |
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2. | a non-qualifying hedge (“economic hedge”) for asset/liability management purposes. |
Accounting for Fair Value Hedges. If hedging relationships meet certain criteria including, but not limited to, formal documentation of the hedging relationship and an expectation to be highly effective, they are eligible for fair value hedge accounting and the offsetting changes in fair value of the hedged items attributable to the hedged risk may be recorded in earnings. The application of hedge accounting generally requires the FHLBankFHLB to evaluate the effectiveness of the hedging relationships at inception and on an ongoing basis and to calculate the changes in fair value of the derivatives and related hedged items independently. This is known as the “long-haul” method of accounting. Transactions that meet more stringent criteria qualify for the “shortcut” method of hedge accounting in which an assumption can be made that the change in fair value of a hedged item exactly offsets the change in value of the related derivative. The FHLBankFHLB discontinued use of the shortcut method effective July 1, 2009 for all new hedging relationships.
Derivatives are typically executed at the same time as the hedged Advances or Consolidated Obligations, and the FHLBankFHLB designates the hedged item in a qualifying hedge relationship as of the trade date. In many hedging relationships, the FHLBankFHLB may designate the hedging relationship upon its commitment to disburse an Advance or trade a Consolidated Obligation in which settlement occurs within the shortest period of time possible for the type of instrument based on market settlement conventions. The FHLBankFHLB records the changes in fair value of the derivative and the hedged item beginning on the trade date.
Changes in the fair value of a derivative that is designated and qualifies as a fair value hedge, along with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk, are recorded in other income as “Net gain (loss)gains on derivatives and hedging activities.”
Accounting for Economic Hedges. An economic hedge is defined as a derivative hedging specific or non-specific underlying assets, liabilities, or firm commitments that does not qualify, or was not designated, for hedge accounting, but is an acceptable hedging strategy under the FHLBank'sFHLB's risk management program. These economic hedging strategies also comply with Finance Agency regulatory requirements prohibiting speculative hedge transactions. An economic hedge by definition introduces the potential for earnings variability caused by the changes in fair value of the derivatives that are recorded in the FHLBank'sFHLB's income but that are not offset by corresponding changes in the value of the economically hedged assets, liabilities, or firm commitments. As a result, the FHLBankFHLB recognizes only the change in fair value of these derivatives in other income as “Net gain (loss)gains on derivatives and hedging activities” with no offsetting fair value adjustments for the assets, liabilities, or firm commitments.
The difference between accruals of interest receivables and payables on derivatives that are designated as fair value hedge relationships is recognized as adjustments to the interest income or expense of the designated hedged item. The differentials between accruals of interest receivables and payables on economic hedges are recognized in other income as “Net gain (loss)gains on derivatives and hedging activities.”
Embedded Derivatives. The FHLBankFHLB may issue debt, make Advances, or purchase financial instruments in which a derivative instrument is “embedded.” Upon execution of these transactions, the FHLBankFHLB assesses whether the economic characteristics of the embedded derivative are clearly and closely related to the economic characteristics of the remaining component of the Advance, debt, or purchased financial instrument (the host contract) and whether a separate, non-embedded instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument. When the FHLBankFHLB determines that (1) the embedded derivative has economic characteristics that are not clearly and closely related to the economic characteristics of the host contract and (2) a separate, stand-alone instrument with the same terms would qualify as a derivative
instrument, the embedded derivative is separated from the host contract, carried at fair value, and designated as a stand-alone derivative instrument pursuant to an economic hedge. However, the entire contract is carried at fair value and no portion of the contract is designated as a hedging instrument if the entire contract (the host contract and the embedded derivative) is to be measured at fair value, with changes in fair value reported in current-period earnings (such as an investment security classified as “trading” as well as hybrid financial instruments that are eligibleselected for the fair value option), or if the FHLBankFHLB cannot reliably identify and measure the embedded derivative for purposes of separating that derivative from its host contract.
Discontinuance of Hedge Accounting. The FHLBankFHLB discontinues hedge accounting prospectively when: (1) it determines that the derivative is no longer effective in offsetting changes in the fair value of a hedged item;item attributable to the hedged risk; (2) the derivative and/or the hedged item expires or is sold, terminated, or exercised; or (3) management determines that designating the derivative as a hedging instrument is no longer appropriate.
When hedge accounting is discontinued because the FHLBankFHLB determines that the derivative no longer qualifies as an effective fair value hedge of an existing hedged item, the FHLBankFHLB continues to carry the derivative on the Statements of Condition at its fair value, ceases to adjust the hedged asset or liability for changes in fair value, and amortizes the cumulative basis adjustment on the hedged item into earnings over the remaining life of the hedged item using a level-yield methodology.
Consolidated Obligations. Consolidated Obligations are recorded at amortized cost unless the FHLBankFHLB has elected the fair value option, in which case the Consolidated Obligations are carried at fair value.
Concessions. Dealers receive concessions in connection with the issuance of certain Consolidated Obligations. The Office of Finance prorates the amount of the concession to the FHLBankFHLB based upon the percentage of the debt issued that is assumed by the FHLBank.FHLB. Concessions paid on Consolidated Obligations designated under the fair value option are expensed as incurred in other non-interest expense. Concessions paid on Consolidated Obligation Bonds not designated under the fair value option are deferred and amortized, using a level-yield methodology, over the terms to maturity or the expected lives of the Consolidated Obligation Bonds. Unamortized concessions are included in “Other assets”assets,” and the amortization of suchthose concessions is included in Consolidated Obligation Bond interest expense.
The FHLBankFHLB charges to expense as incurred the concessions applicable to Consolidated Obligation Discount Notes because of the short maturities of these Notes. Analyses of expensing concessions as incurred compared to a level-yield methodology have been performed by the FHLBankFHLB, and it has determined that the impact of the difference on the financial statements for each period reported, taken individually and as a whole, is not material.
Discounts and Premiums. The FHLBankFHLB accretes the discounts and amortizes the premiums on Consolidated Obligation Bonds to interest expense using a level-yield methodology over the terms to maturity or estimated lives of the corresponding Consolidated Obligation Bonds. Due to their short-term nature, itthe FHLB expenses the discounts on Consolidated Obligation Discount Notes using a straight-line methodology over the term of the Notes. Analyses of a straight-line compared to a level-yield methodology have been performed by the FHLBankFHLB, and the FHLBankFHLB has determined that the impact of the difference on the financial statements for each period reported, taken individually and as a whole, is not material.
Mandatorily Redeemable Capital Stock. The FHLBankFHLB reclassifies stock subject to redemption from equity to liability upon expiration of the “grace period” after a member provides written notice of redemption, gives notice of intent to withdraw from membership, or attains nonmember status by merger or acquisition, charter termination, or involuntary termination from membership, because the member shares then meet the definition of a mandatorily redeemable financial instrument. Shares meeting this definition are reclassified to a liability at fair value. Dividends declared on shares classified as a liability are accrued at the expected dividend rate and reflected as interest expense in the Statements of Income. The repurchase or redemption of mandatorily redeemable capital stock is reflected as a cash outflow in the financing activities section of the Statements of Cash Flows.
If a member cancels its written notice of redemption or notice of withdrawal, the FHLBankFHLB reclassifies the mandatorily redeemable capital stock from a liability to equity. After the reclassification, dividends on the capital stock are no longer classified as interest expense.
Employee Benefit Plans. The FHLBankFHLB records the periodic benefit cost associated with its employee retirement plans and its contributions associated with its defined contribution plans as compensation and benefits expense in the Statements of Income.
Restricted Retained Earnings. In 2011, the 12 FHLBanks entered into a Joint Capital Enhancement Agreement, as amended (Capital Agreement). Under the Capital Agreement, beginning in the third quarter of 2011, the FHLBankFHLB contributes 20 percent of its quarterly net income to a separate restricted retained earnings account until the account balance equals at least one percent
of the FHLBank'sFHLB's average balance of outstanding Consolidated Obligations for the previous quarter. These restricted retained earnings are not available to pay dividends and are presented separately on the Statements of Condition.
Finance Agency Expenses. The FHLBankFHLB funds its proportionate share of the costs of operating the Finance Agency. The portion of the Finance Agency's expenses and working capital fund paid by each FHLBank has been allocated based on theeach FHLBank's pro rata share of total annual assessments (which are based on the ratio between each FHLBank's minimum required regulatory capital and the aggregate minimum required regulatory capital of every FHLBank).
Office of Finance Expenses. The FHLBankFHLB is assessed for its proportionate share of the costs of operating the Office of Finance. As approved by the Office of Finance Board of Directors, effective January 1, 2011, eachEach FHLBank's proportionate share of Office of Finance operating and capital expenditures is calculated using a formula that is based upon the following components: (1) two-thirds based upon each FHLBank's share of total Consolidated Obligations outstanding and (2) one-third based upon an equal pro-ratapro rata allocation. Prior to January 1, 2011, the FHLBank was assessed for Office of Finance operating and capital expenditures based equally on each FHLBank's percentage of capital stock, percentage of Consolidated Obligations issued and percentage of Consolidated Obligations outstanding.
Voluntary Housing Programs. The FHLBankFHLB classifies amounts awarded under its voluntary housing programs as other expenses.
Affordable Housing Program (AHP). The FHLBank Act requires each FHLBank to establish and fund an AHP. The FHLBankFHLB charges the required funding for AHP to earnings and establishes a liability. The AHP funds provide subsidies to members to assist in the purchase, construction, or rehabilitation of housing for very low-, low-, and moderate-income households. The FHLBankFHLB issues AHP Advances at interest rates below the customary interest rate for non-subsidized Advances. When the FHLBankFHLB makes an AHP Advance, the present value of the variation in the cash flow caused by the difference in the interest rate between the AHP Advance rate and the FHLBank'sFHLB's related cost of funds for comparable maturity funding is charged against the AHP liability and recorded as a discount on the AHP Advance. As an alternative, the FHLBankFHLB also has the authority to make the AHP subsidy available to members as a grant. The discount on AHP Advances is accreted to interest income on Advances using a level-yield methodology over the life of the Advance.
Resolution Funding Corporation (REFCORP).Although the FHLBanks are exempt from ordinary Federal, state, and local taxation except for local real estate tax, they were required to make quarterly payments to REFCORP through the second quarter of 2011. These payments represented a portion of the interest on bonds that were issued by REFCORP. REFCORP is a corporation established by Congress in 1989 that provided funding for the resolution and disposition of insolvent savings institutions. Officers, employees, and agents of the Office of Finance are authorized to act for and on behalf of REFCORP to carry out the functions of REFCORP.
Note 2 - Recently Issued Accounting Standards and Interpretations
Joint and Several Liability Arrangements.Leases. On February 28, 2013,25, 2016, the Financial Accounting Standards Board (FASB) issued guidance forwhich requires recognition measurementof lease assets and lease liabilities on the Statement of Condition and disclosure of obligations resulting from jointkey information about leasing arrangements. In particular, this guidance requires a lessee, of operating or finance leases, to recognize on the Statement of Condition a liability to make lease payments and several liability arrangementsa right-of-use asset representing its right to use the underlying asset for which the total amountlease term. However, for leases with a term of 12 month or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and lease liabilities.The guidance becomes effective for the FHLB for the interim and annual periods beginning after December 15, 2018, and early application is permitted. The guidance requires lessors and lessees to recognize and measure leases at the beginning of the obligation withinearliest period presented in the scopefinancial statements using a modified retrospective approach. The FHLB is in the process of evaluating this guidance, is fixed atand its effect on the reporting date.FHLB's financial condition, results of operations, and cash flows has not yet been determined.
Recognition and Measurement of Financial Assets and Financial Liabilities. On January 5, 2016, the FASB issued amended guidance on certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This guidance requires an entityincludes, but is not limited to, measure these obligationsthe following:
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▪ | Requires equity investments (with certain exceptions) to be measured at fair value with changes in fair value recognized in net income. |
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▪ | Require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected the fair value option. |
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▪ | Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements. |
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▪ | Eliminates the requirement for public entities to disclose the method(s) and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost on the balance sheet. |
The guidance becomes effective for the FHLB for the interim and annual periods beginning after December 15, 2017, and early adoption is only permitted for certain provision. The amendments, in general, should be applied by means of a cumulative-effect adjustment to the balance sheet as of the sumbeginning of (1) the amountperiod of adoption. The FHLB is in the reporting entity agreed to payprocess of evaluating this guidance and its effect on the basisFHLB's financial condition, results of itsoperations, and cash flows.
Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. On April 15, 2015, the FASB issued amendments to clarify the accounting for cloud computing arrangements. The amendments provide guidance to customers on determining whether a cloud computing arrangement among its co-obligors and (2) any additional amountincludes a software license. If the reporting entity expects to pay on behalfarrangement includes a software license, then the customer should account for the software license element of its co-obligors.the arrangement consistent with the acquisition of other software licenses. If the arrangement does not contain a software license, the customer should account for the arrangement as a service contract. This guidance isbecame effective for the FHLB for the interim and annual periods beginning on or after December 15, 2013January 1, 2016, and should be applied retrospectively.was adopted prospectively. The FHLBank does not expect the newadoption of this guidance to have ahad no material effect on itsthe FHLB's financial condition, results of operations, and cash flows.
Disclosures about Offsetting Assets and Liabilities.Simplifying the Presentation of Debt Issuance Costs. On December 16, 2011,April 7, 2015, the FASB andissued guidance to simplify the International Accounting Standards Board (IASB) issued common disclosure requirements intended to help investors and other financial statement users better assess the effect or potential effectpresentation of offsetting arrangements on a company's financial position, whether a company's financial statements are prepared on the basis of GAAP or International Financial Reporting Standards (IFRS).debt issuance costs. This guidance was amended on January 31, 2013requires that debt issuance costs related to clarify that its scope includes only certain financial instruments that are either offset ona recognized debt liability be presented in the balance sheet or are subject to an enforceable master netting arrangement or similar agreement. The FHLBank will be required to disclose both gross and net information about derivative, repurchase and security lending instruments, which meet these criteria.Statement of Condition as a direct deduction from the carrying amount of the liability, consistent with the presentation of debt discounts. This guidance as amended, became effective for the FHLB for the interim and annual periods beginning on January 1, 2013 and will be applied retrospectively for all comparative periods presented. The adoption of this guidance will result in additional financial statement disclosures, but will not affect the FHLBank's financial condition, results of operations, or cash flows.
Presentation of Comprehensive Income. On June 16, 2011, the FASB issued guidance to increase the prominence of other comprehensive income in financial statements. This guidance required an entity that reports items of other comprehensive income to present comprehensive income in either a single statement or in two consecutive statements. This guidance eliminates the option to present other comprehensive income in a statement of capital. This guidance was effective for interim and annual periods beginning after December 15, 2011 (January 1, 2012 for the FHLBank)2016, and was applied retrospectively for all periods presented. The FHLBank elected the two-statement approach beginning on January 1, 2012. The adoption of this guidance was limited to the presentation of the interim and annual financial statements and did not affect the FHLBank's financial condition, results of operations, or cash flows. See Note 17 for disclosures required under this amended guidance.
On February 5, 2013, the FASB issued guidance to improve the transparency of reporting reclassifications out of accumulated other comprehensive income. This guidance requires the FHLBank to present, either on the face of the financial statement where net income is presented or in the footnotes, significant amounts reclassified out of accumulated other comprehensive income by component. These amounts would be presented only if the amount is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, the FHLBank is required to cross-reference to other required disclosures that provide additional detail about these other amounts. This guidance became effective for the FHLBank for interim and annual periods beginning on January 1, 2013 and will be applied prospectively. The adoption of this guidance will result in additional financial statement disclosures, but will not affect the FHLBank's financial condition, results of operations or cash flows.
Fair Value Measurement and Disclosure Convergence. On May 12, 2011, the FASB and the IASB issued substantially converged guidance on fair value measurement and disclosure requirements. This guidance clarifies how fair value accounting should be applied where its use is already required or permitted by other guidance within GAAP or International Financial Reporting Standards. These amendments do not require additional fair value measurements. This guidance generally represents clarifications to the application of existing fair value measurement and disclosure requirements, and includes some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This guidance was effective for interim and annual periods beginning on or after December 15, 2011 (January 1, 2012 for the FHLBank) and was applied prospectively.adopted retrospectively. The adoption of this guidance resulted in increased financial statement disclosures, but did not have a reclassification of debt issuance costs from other assets to Consolidated Obligations for each applicable prior period. The adoption of this guidance had no material effect on the FHLBank'sFHLB's financial condition, results of operations, or cash flows. See Note 20 for disclosures required under this amended guidance.
Framework for Adversely Classifying Loans, Other Real Estate Owned, and Other Assets and Listing Assets for Special Mention. On April 9, 2012, the Finance Agency issued Advisory Bulletin 2012-02, Framework for Adversely Classifying Loans, Other Real Estate Owned, and Other Assets and Listing Assets for Special Mention. This guidance establishes a standard and uniform methodology for adverse classification and identification of special mention assets and off-balance sheet credit exposures at the FHLBanks, excluding investment securities. The advisory bulletin states that it was effective for the FHLBanks upon issuance. However, the Finance Agency issued additional guidance in 2012 that extends the effective date of this advisory bulletin to January 1, 2014. The FHLBank is currently assessing the provisions of this advisory bulletin and has not yet determined the effect, if any, that this guidance will have on the FHLBank's financial condition, results of operations, or cash flows.condition.
Note 3 - Cash and Due from Banks
Compensating Balances. The FHLBankFHLB maintains collected cash balances with commercial banks in return for certain services. These agreements contain no legal restrictions on the withdrawal of funds. The average collected cash balances for the years ended December 31, 20122015 and 20112014 were approximately $53,000$63,000 and $50,000.$77,000.
Effective on July 12, 2012, the Federal Reserve eliminated its Contractual Clearing Balance Program. Prior to July 12, 2012, the FHLBank maintained average required balances with various Federal Reserve Banks for this program. At December 31, 2011, these average required balances were $1,000,000.89
Pass-through Deposit Reserves. The FHLBankFHLB acts as a pass-through correspondent for member institutions required to deposit reserves with the Federal Reserve Banks. The amount shown as “Cash and due from banks” includes pass-through reserves deposited with Federal Reserve Banks of approximately $18,353,000$238,000 and $16,244,000$298,000 as of December 31, 20122015 and 2011.2014.
Note 4 - Trading Securities
Table 4.1 - Trading Securities by Major Security Types (in thousands) |
| | | | | | | |
| December 31, 2012 | | December 31, 2011 |
| Fair Value | | Fair Value |
Non-mortgage-backed securities: | | | |
U.S. Treasury obligations | $ | — |
| | $ | 331,207 |
|
GSE * | — |
| | 2,529,311 |
|
Total non-mortgage-backed securities | — |
| | 2,860,518 |
|
Mortgage-backed securities: | | | |
Other U.S. obligation residential mortgage-backed securities ** | 1,922 |
| | 2,130 |
|
Total | $ | 1,922 |
| | $ | 2,862,648 |
|
|
| | | | | | | |
Fair Value | December 31, 2015 | | December 31, 2014 |
Mortgage-backed securities: | | | |
Other U.S. obligation single-family mortgage-backed securities (1) | $ | 1,159 |
| | $ | 1,341 |
|
Total | $ | 1,159 |
| | $ | 1,341 |
|
| |
* | Consists of debt securities issued and effectively guaranteed by Federal Home Loan Mortgage Corporation (Freddie Mac) and/or Federal National Mortgage Association (Fannie Mae) which have the support of the U.S. government, although they are not obligations of the U.S. government. |
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**(1) | Consists of Government National Mortgage Association (Ginnie Mae) mortgage-backed securities. |
Table 4.2 - Net Losses on Trading Securities (in thousands)
|
| | | | | | | | | | | |
| For the Years Ended December 31, |
| 2012 | | 2011 | | 2010 |
Net gains (losses) on trading securities held at period end | $ | 8 |
| | $ | (2,034 | ) | | $ | (3,119 | ) |
Net losses on securities matured during the period | (32,778 | ) | | (21,512 | ) | | (229 | ) |
Net losses on trading securities | $ | (32,770 | ) | | $ | (23,546 | ) | | $ | (3,348 | ) |
|
| | | | | | | | | | | |
| For the Years Ended December 31, |
| 2015 | | 2014 | | 2013 |
Net losses on trading securities held at period end | $ | (18 | ) | | $ | (9 | ) | | $ | (19 | ) |
Net losses on trading securities | $ | (18 | ) | | $ | (9 | ) | | $ | (19 | ) |
Note 5 - Available-for-Sale Securities
Table 5.1 - Available-for-Sale Securities by Major Security Types (in thousands)
|
| | | | | | | | | | | | | | | |
| December 31, 2015 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Certificates of deposit | $ | 700,000 |
| | $ | 81 |
| | $ | — |
| | $ | 700,081 |
|
Total | $ | 700,000 |
| | $ | 81 |
| | $ | — |
| | $ | 700,081 |
|
| | | | | | | |
| December 31, 2014 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Certificates of deposit | $ | 1,350,001 |
| | $ | 3 |
| | $ | (27 | ) | | $ | 1,349,977 |
|
Total | $ | 1,350,001 |
| | $ | 3 |
| | $ | (27 | ) | | $ | 1,349,977 |
|
There were no available-for-saleAll securities outstanding as of with gross unrealized losses at December 31, 2012. Available-for-sale securities as of December 31, 20112014 were as follows:in a continuous unrealized loss position for less than 12 months.
|
| | | | | | | | | | | | | | | |
| December 31, 2011 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized (Losses) | | Fair Value |
Certificates of deposit | $ | 3,954,999 |
| | $ | 6 |
| | $ | (988 | ) | | $ | 3,954,017 |
|
Other * | 217,157 |
| | — |
| | (32 | ) | | 217,125 |
|
Total | $ | 4,172,156 |
| | $ | 6 |
| | $ | (1,020 | ) | | $ | 4,171,142 |
|
| |
* | Consists of debt securities issued by International Bank for Reconstruction and Development. |
Table 5.2 - Available-for-Sale Securities by Contractual Maturity (in thousands)
| | | December 31, 2011 | December 31, 2015 | | December 31, 2014 |
Year of Maturity | Amortized Cost | | Fair Value | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
Due in one year or less | $ | 4,172,156 |
| | $ | 4,171,142 |
| $ | 700,000 |
| | $ | 700,081 |
| | $ | 1,350,001 |
| | $ | 1,349,977 |
|
Table 5.3 - Interest Rate Payment Terms of Available-for-Sale Securities (in thousands)
| | | December 31, 2011 | December 31, 2015 | | December 31, 2014 |
Amortized cost of available-for-sale securities: | | | | |
Fixed-rate | $ | 4,172,156 |
| $ | 700,000 |
| | $ | 1,350,001 |
|
Realized Gains and Losses. The FHLBankFHLB had no sales of securities out of its available-for-sale portfolio for the years endedDecember 31, 2012 or 2011. The FHLBank received (in thousands) $854,910 in proceeds and realized (in thousands) $90 in gross losses and no gross gains from the sale of available-for-sale securities during the year ended December 31, 20102015., 2014 or 2013.
Note 6 - Held-to-Maturity Securities
Table 6.1 - Held-to-Maturity Securities by Major Security Types (in thousands)
| | | December 31, 2012 | December 31, 2015 |
| Amortized Cost (1) | | Gross Unrecognized Holding Gains | | Gross Unrecognized Holding (Losses) | | Fair Value | Amortized Cost (1) | | Gross Unrecognized Holding Gains | | Gross Unrecognized Holding Losses | | Fair Value |
Non-mortgage-backed securities: | | | | | | | | | | | | | | |
GSE * | $ | 26,238 |
| | $ | 2 |
| | $ | — |
| | $ | 26,240 |
| |
Government-sponsored enterprises (GSE) (2) | | $ | 32,683 |
| | $ | — |
| | $ | — |
| | $ | 32,683 |
|
Total non-mortgage-backed securities | 26,238 |
| | 2 |
| | — |
| | 26,240 |
| 32,683 |
| | — |
| | — |
| | 32,683 |
|
Mortgage-backed securities: | | | | | | | | | | | | | | |
Other U.S. obligation residential mortgage-backed securities ** | 1,410,720 |
| | 4,320 |
| | — |
| | 1,415,040 |
| |
GSE residential mortgage-backed securities *** | 11,361,490 |
| | 375,372 |
| | (1,025 | ) | | 11,735,837 |
| |
Other U.S. obligation single-family mortgage-backed securities (3) | | 3,894,432 |
| | 3,629 |
| | (25,292 | ) | | 3,872,769 |
|
GSE single-family mortgage-backed securities (4) | | 10,891,089 |
| | 122,044 |
| | (148,589 | ) | | 10,864,544 |
|
GSE multi-family mortgage-backed securities (4) | | 460,002 |
| | — |
| | (33 | ) | | 459,969 |
|
Total mortgage-backed securities | 12,772,210 |
| | 379,692 |
| | (1,025 | ) | | 13,150,877 |
| 15,245,523 |
| | 125,673 |
| | (173,914 | ) | | 15,197,282 |
|
Total | $ | 12,798,448 |
| | $ | 379,694 |
| | $ | (1,025 | ) | | $ | 13,177,117 |
| $ | 15,278,206 |
| | $ | 125,673 |
| | $ | (173,914 | ) | | $ | 15,229,965 |
|
| | | | | | | | | | | | | | |
| December 31, 2011 | December 31, 2014 |
| Amortized Cost (1) | | Gross Unrecognized Holding Gains | | Gross Unrecognized Holding (Losses) | | Fair Value | Amortized Cost (1) | | Gross Unrecognized Holding Gains | | Gross Unrecognized Holding Losses | | Fair Value |
Non-mortgage-backed securities: | | | | | | | | | | | | | | |
GSE * | $ | 23,900 |
| | $ | 1 |
| | $ | — |
| | $ | 23,901 |
| |
TLGP **** | 1,411,131 |
| | 458 |
| | (323 | ) | | 1,411,266 |
| |
GSE (2) | | $ | 26,099 |
| | $ | — |
| | $ | — |
| | $ | 26,099 |
|
Total non-mortgage-backed securities | 1,435,031 |
| | 459 |
| | (323 | ) | | 1,435,167 |
| 26,099 |
| | — |
| | — |
| | 26,099 |
|
Mortgage-backed securities: | | | | | | | | | | | | | | |
Other U.S. obligation residential mortgage-backed securities ** | 1,500,781 |
| | 1,799 |
| | (3,071 | ) | | 1,499,509 |
| |
GSE residential mortgage-backed securities *** | 9,684,628 |
| | 401,754 |
| | (2,678 | ) | | 10,083,704 |
| |
Private-label residential mortgage-backed securities | 16,933 |
| | 190 |
| | — |
| | 17,123 |
| |
Other U.S. obligation single-family mortgage-backed securities (3) | | 2,038,960 |
| | 10,021 |
| | (1,017 | ) | | 2,047,964 |
|
GSE single-family mortgage-backed securities (4) | | 12,647,212 |
| | 191,870 |
| | (118,819 | ) | | 12,720,263 |
|
Total mortgage-backed securities | 11,202,342 |
| | 403,743 |
| | (5,749 | ) | | 11,600,336 |
| 14,686,172 |
| | 201,891 |
| | (119,836 | ) | | 14,768,227 |
|
Total | $ | 12,637,373 |
| | $ | 404,202 |
| | $ | (6,072 | ) | | $ | 13,035,503 |
| $ | 14,712,271 |
| | $ | 201,891 |
| | $ | (119,836 | ) | | $ | 14,794,326 |
|
| |
(1) | Carrying value equals amortized cost. |
| |
*(2) | Consists of debt securities issued and effectively guaranteed by Freddie Mac and/or Fannie Mae, which have the support of the U.S. government, although they are not obligations of the U.S. government. |
| |
**(3) | Consists of Ginnie Mae mortgage-backed securities and/or mortgage-backed securities issued or guaranteed by the National Credit Union Administration (NCUA) and the U.S. government. |
| |
***(4) | Consists of mortgage-backed securities issued and effectively guaranteed by Freddie Mac and/or Fannie Mae, which have the support of the U.S. government, although they are not obligations of the U.S. government. |
| |
**** | Represents corporate debentures issued or guaranteed by the Federal Deposit Insurance Corporation (FDIC) under the Temporary Liquidity Guarantee Program (TLGP). |
Table 6.2 - Net Purchased Premiums (Discounts) Included in the Amortized Cost of Mortgage-backed Securities Classified as Held-to-Maturity (in thousands)
| | | December 31, 2012 | | December 31, 2011 | December 31, 2015 | | December 31, 2014 |
Premiums | $ | 41,808 |
| | $ | 60,080 |
| $ | 84,450 |
| | $ | 24,473 |
|
Discounts | (24,965 | ) | | (18,863 | ) | (40,667 | ) | | (51,357 | ) |
Net purchased premiums | $ | 16,843 |
| | $ | 41,217 |
| |
Net purchased premiums (discounts) | | $ | 43,783 |
| | $ | (26,884 | ) |
Table 6.3 summarizes the held-to-maturity securities with unrealized losses, which are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position.
Table 6.3 - Held-to-Maturity Securities in a Continuous Unrealized Loss Position (in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2012 |
| Less than 12 Months | | 12 Months or more | | Total |
| Fair Value | | Gross Unrealized (Losses) | | Fair Value | | Gross Unrealized (Losses) | | Fair Value | | Gross Unrealized (Losses) |
Mortgage-backed securities: | | | | | | | | | | | |
GSE residential mortgage-backed securities * | $ | 90,130 |
| | $ | (1,025 | ) | | $ | — |
| | $ | — |
| | $ | 90,130 |
| | $ | (1,025 | ) |
Total | $ | 90,130 |
| | $ | (1,025 | ) | | $ | — |
| | $ | — |
| | $ | 90,130 |
| | $ | (1,025 | ) |
| | | | | | | | | | | |
| December 31, 2011 |
| Less than 12 Months | | 12 Months or more | | Total |
| Fair Value | | Gross Unrealized (Losses) | | Fair Value | | Gross Unrealized (Losses) | | Fair Value | | Gross Unrealized (Losses) |
Non-mortgage-backed securities: | | | | | | | | | | | |
TLGP ** | $ | 830,369 |
| | $ | (323 | ) | | $ | — |
| | $ | — |
| | $ | 830,369 |
| | $ | (323 | ) |
Total non-mortgage-backed securities | 830,369 |
| | (323 | ) | | — |
| | — |
| | 830,369 |
| | (323 | ) |
Mortgage-backed securities: | | | | | | | | | | | |
Other U.S. obligation residential mortgage-backed securities *** | 967,312 |
| | (3,071 | ) | | — |
| | — |
| | 967,312 |
| | (3,071 | ) |
GSE residential mortgage-backed securities * | 1,283,456 |
| | (2,678 | ) | | — |
| | — |
| | 1,283,456 |
| | (2,678 | ) |
Total mortgage-backed securities | 2,250,768 |
| | (5,749 | ) | | — |
| | — |
| | 2,250,768 |
| | (5,749 | ) |
Total | $ | 3,081,137 |
| | $ | (6,072 | ) | | $ | — |
| | $ | — |
| | $ | 3,081,137 |
| | $ | (6,072 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2015 |
| Less than 12 Months | | 12 Months or more | | Total |
| Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
Mortgage-backed securities: | | | | | | | | | | | |
Other U.S. obligation single-family mortgage-backed securities (1) | $ | 2,574,649 |
| | $ | (25,292 | ) | | $ | — |
| | $ | — |
| | $ | 2,574,649 |
| | $ | (25,292 | ) |
GSE single-family mortgage-backed securities (2) | 4,332,237 |
| | (74,068 | ) | | 2,065,926 |
| | (74,521 | ) | | 6,398,163 |
| | (148,589 | ) |
GSE multi-family mortgage-backed securities (2)
| 459,969 |
| | (33 | ) | | — |
| | — |
| | 459,969 |
| | (33 | ) |
Total | $ | 7,366,855 |
| | $ | (99,393 | ) | | $ | 2,065,926 |
| | $ | (74,521 | ) | | $ | 9,432,781 |
| | $ | (173,914 | ) |
| | | | | | | | | | | |
| December 31, 2014 |
| Less than 12 Months | | 12 Months or more | | Total |
| Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
Mortgage-backed securities: | | | | | | | | | | | |
Other U.S. obligation single-family mortgage-backed securities (1) | $ | — |
| | $ | — |
| | $ | 197,625 |
| | $ | (1,017 | ) | | $ | 197,625 |
| | $ | (1,017 | ) |
GSE single-family mortgage-backed securities (2) | 631,907 |
| | (1,348 | ) | | 5,555,049 |
| | (117,471 | ) | | 6,186,956 |
| | (118,819 | ) |
Total | $ | 631,907 |
| | $ | (1,348 | ) | | $ | 5,752,674 |
| | $ | (118,488 | ) | | $ | 6,384,581 |
| | $ | (119,836 | ) |
| |
*(1) | Consists of Ginnie Mae mortgage-backed securities. |
| |
(2) | Consists of mortgage-backed securities issued and effectively guaranteed by Freddie Mac and/or Fannie Mae, which have the support of the U.S. government, although they are not obligations of the U.S. government. |
| |
** | Represents corporate debentures issued or guaranteed by the FDIC under the TLGP. |
| |
*** | Consists of mortgage-backed securities issued or guaranteed by the NCUA and the U.S. government. |
Table 6.4 - Held-to-Maturity Securities by Contractual Maturity (in thousands)
| | | December 31, 2012 | | December 31, 2011 | December 31, 2015 | | December 31, 2014 |
Year of Maturity | Amortized Cost (1) | | Fair Value | | Amortized Cost (1) | | Fair Value | Amortized Cost (1) | | Fair Value | | Amortized Cost (1) | | Fair Value |
Non-mortgage-backed securities: | | | | | | | | | | | | | | |
Due in 1 year or less | $ | 26,238 |
| | $ | 26,240 |
| | $ | 1,435,031 |
| | $ | 1,435,167 |
| $ | 32,683 |
| | $ | 32,683 |
| | $ | 26,099 |
| | $ | 26,099 |
|
Due after 1 year through 5 years | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
|
Due after 5 years through 10 years | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
|
Due after 10 years | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
|
Total non-mortgage-backed securities | 26,238 |
| | 26,240 |
| | 1,435,031 |
| | 1,435,167 |
| 32,683 |
| | 32,683 |
| | 26,099 |
| | 26,099 |
|
Mortgage-backed securities (2) | 12,772,210 |
| | 13,150,877 |
| | 11,202,342 |
| | 11,600,336 |
| 15,245,523 |
| | 15,197,282 |
| | 14,686,172 |
| | 14,768,227 |
|
Total | $ | 12,798,448 |
| | $ | 13,177,117 |
| | $ | 12,637,373 |
| | $ | 13,035,503 |
| $ | 15,278,206 |
| | $ | 15,229,965 |
| | $ | 14,712,271 |
| | $ | 14,794,326 |
|
| |
(1) | Carrying value equals amortized cost. |
| |
(2) | Mortgage-backed securities are not presented by contractual maturity because their expected maturities will likely differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees. |
Table 6.5 - Interest Rate Payment Terms of Held-to-Maturity Securities (in thousands)
| | | December 31, 2012 | | December 31, 2011 | December 31, 2015 | | December 31, 2014 |
Amortized cost of non-mortgage-backed securities: | | | | | | |
Fixed-rate | $ | 26,238 |
| | $ | 1,435,031 |
| $ | 32,683 |
| | $ | 26,099 |
|
Total amortized cost of non-mortgage-backed securities | 26,238 |
| | 1,435,031 |
| 32,683 |
| | 26,099 |
|
Amortized cost of mortgage-backed securities: | | | | | | |
Fixed-rate | 9,509,167 |
| | 8,165,857 |
| 12,664,603 |
| | 12,091,591 |
|
Variable-rate | 3,263,043 |
| | 3,036,485 |
| 2,580,920 |
| | 2,594,581 |
|
Total amortized cost of mortgage-backed securities | 12,772,210 |
| | 11,202,342 |
| 15,245,523 |
| | 14,686,172 |
|
Total | $ | 12,798,448 |
| | $ | 12,637,373 |
| $ | 15,278,206 |
| | $ | 14,712,271 |
|
Realized Gains and Losses. The FHLBank soldFrom time to time the FHLB may sell securities out of its held-to-maturity portfolio during the periods noted below in Table 6.6, each of which hadportfolio. These securities, generally, have less than 15 percent of the acquired principal outstanding at the time of the sale. These sales are considered maturities for the purposes of security classification. For the years ended December 31, 2015, 2014, or 2013, the FHLB did not sell any held-to-maturity securities.
Table 6.6 - Proceeds and Gross Gains from Sale of Held-to-Maturity Securities (in thousands)
|
| | | | | | | | | | | |
| For the Years Ended December 31, |
| 2012 | | 2011 | | 2010 |
Proceeds from sale of held-to-maturity securities | $ | 507,531 |
| | $ | 580,668 |
| | $ | 325,453 |
|
Gross gains from sale of held-to-maturity securities | 29,292 |
| | 16,219 |
| | 7,967 |
|
Note 7 - Other-Than-Temporary Impairment Analysis
The FHLBankFHLB evaluates any of its individual available-for-sale and held-to-maturity investment securities holdings in an unrealized loss position for other-than-temporary impairment on a quarterly basis. As part of its securities' evaluation for other-than-temporary impairment, the FHLBank considers its intent to sell each debt security and whether it is more likely than not that the FHLBank will be required to sell the security before its anticipated recovery. If either of these conditions is met, the FHLBank recognizes an other-than-temporary impairment in earnings equal to the entire difference between the security's amortized cost basis and its fair value at the balance sheet date. For securities in unrealized loss positions that meet neither of these conditions, the FHLBank performs analyses to determine if any of these securities are other-than-temporarily impaired.
For its otherOther U.S. obligations and government-sponsored enterpriseGSE investments (mortgage-backed securities and non-mortgage-backed securities), the FHLBankFHLB has determined that the strength of the issuers' guarantees through direct obligations or support from the U.S. government is sufficient to protect the FHLBankFHLB from losses based on current expectations. As a result, the FHLBankFHLB determined that, as of December 31, 20122015, all of the gross unrealized losses on these investments were temporary
as the declines in market value of these securities were not attributable to credit quality. Furthermore, the FHLBankFHLB does not intend to sell the investments, and it is not more likely than not that the FHLBankFHLB will be required to sell the investments before recovery of their amortized cost bases. As a result, the FHLBankFHLB did not consider any of these investments to be other-than-temporarily impaired at December 31, 20122015.
The FHLBankFHLB did not consider any of its investments to be other-than-temporarily impaired at December 31, 20112014.
Note 8 - Advances
The FHLBankFHLB offers a wide range of fixed- and variable-rate Advance products with different maturities, interest rates, payment characteristics and optionality. Fixed-rate Advances generally have maturities ranging from one day to 30 years. Variable-rate advances generally have maturities ranging from less than 30 days to 10 years, where the interest rates reset periodically at a fixed spread to the London Interbank Offered Rate (LIBOR) or other specified index. At December 31, 2012 and 2011, the FHLBank hadThe following table presents Advance redemptions by contractual maturity, including index-amortizing Advances, outstanding, including Affordable Housing Program (AHP) Advances (see Note 14), at interest rates ranging from 0.00 percentwhich are presented according to 9.20 percent. Advances with interest ratestheir predetermined amortization schedules.
Table 8.1 - Advance Redemption Terms (dollars in thousands)
| | | | December 31, 2012 | | December 31, 2011 | | December 31, 2015 | | December 31, 2014 |
Redemption Term | | Amount | | Weighted Average Interest Rate | | Amount | | Weighted Average Interest Rate | | Amount | | Weighted Average Interest Rate | | Amount | | Weighted Average Interest Rate |
| | | | | | | | | |
Due in 1 year or less | | $ | 12,178,645 |
| | 0.48 | % | | $ | 10,351,507 |
| | 2.17 | % | | $ | 27,177,311 |
| | 0.57 | % | | $ | 14,139,630 |
| | 0.40 | % |
Due after 1 year through 2 years | | 5,020,941 |
| | 1.07 |
| | 3,590,712 |
| | 1.53 |
| | 12,360,345 |
| | 0.79 |
| | 14,810,847 |
| | 0.54 |
|
Due after 2 years through 3 years | | 6,505,107 |
| | 0.73 |
| | 3,140,472 |
| | 1.63 |
| | 15,839,007 |
| | 0.77 |
| | 12,829,760 |
| | 0.69 |
|
Due after 3 years through 4 years | | 6,171,525 |
| | 0.86 |
| | 2,083,094 |
| | 1.66 |
| | 11,107,509 |
| | 0.78 |
| | 14,222,722 |
| | 0.60 |
|
Due after 4 years through 5 years | | 9,131,953 |
| | 0.88 |
| | 4,280,282 |
| | 2.12 |
| | 3,391,892 |
| | 1.06 |
| | 10,724,619 |
| | 0.54 |
|
Thereafter | | 14,612,607 |
| | 0.74 |
| | 4,392,430 |
| | 2.36 |
| | 3,366,205 |
| | 1.69 |
| | 3,570,929 |
| | 1.51 |
|
Total par value | | 53,620,778 |
| | 0.75 |
| | 27,838,497 |
| | 2.01 |
| | 73,242,269 |
| | 0.75 |
| | 70,298,507 |
| | 0.60 |
|
Commitment fees | | (836 | ) | | | | (996 | ) | | | | (629 | ) | | | | (699 | ) | | |
Discounts on AHP Advances | | (19,308 | ) | | | | (22,955 | ) | | | |
Discount on AHP Advances | | | (9,396 | ) | | | | (12,110 | ) | | |
Premiums | | 3,774 |
| | | | 4,126 |
| | | | 2,744 |
| | | | 3,058 |
| | |
Discount | | (13,578 | ) | | | | (13,485 | ) | | | |
Discounts | | | (8,386 | ) | | | | (12,572 | ) | | |
Hedging adjustments | | 353,131 |
| | | | 618,587 |
| | | | 65,513 |
| | | | 129,390 |
| | |
Fair value option valuation adjustments and accrued interest | | | 57 |
| | | | 42 |
| | |
Total | | $ | 53,943,961 |
| | | | $ | 28,423,774 |
| | | | $ | 73,292,172 |
| | | | $ | 70,405,616 |
| | |
The FHLBankFHLB offers certain fixed and variable-rate Advances to members that may be prepaid on specified dates (call dates) without incurring prepayment or termination fees (callable Advances). In exchange for receiving the right to call the Advance on a predetermined call schedule, the member typically pays a higher rate for the Advance relative to an equivalent maturity, non-callable Advance. If the call option is exercised, replacement funding may be available. At December 31, 2015 and 2014, the FHLB had callable Advances (in thousands) of $14,095,712 and $15,098,357. Other Advances may only be prepaid subject to a prepayment fee paid to the FHLBank (prepayment fee)FHLB that makes the FHLBankFHLB financially indifferent to the prepayment of the Advance. At December 31, 2012 and 2011, the FHLBank had callable Advances (in thousands) of $12,012,609 and $9,798,715.
Table 8.2 - Advances by Year of Contractual Maturity or Next Call Date for Callable Advances (in thousands)
| | Year of Contractual Maturity or Next Call Date | December 31, 2012 | | December 31, 2011 | December 31, 2015 | | December 31, 2014 |
Due in 1 year or less | $ | 20,726,461 |
| | $ | 18,589,350 |
| $ | 33,384,838 |
| | $ | 23,003,946 |
|
Due after 1 year through 2 years | 3,563,705 |
| | 1,833,661 |
| 11,289,035 |
| | 12,159,384 |
|
Due after 2 years through 3 years | 4,776,457 |
| | 1,648,651 |
| 13,959,002 |
| | 9,659,975 |
|
Due after 3 years through 4 years | 3,746,205 |
| | 1,087,444 |
| 10,356,770 |
| | 12,295,893 |
|
Due after 4 years through 5 years | 6,732,368 |
| | 1,854,961 |
| 2,747,419 |
| | 9,970,280 |
|
Thereafter | 14,075,582 |
| | 2,824,430 |
| 1,505,205 |
| | 3,209,029 |
|
Total par value | $ | 53,620,778 |
| | $ | 27,838,497 |
| $ | 73,242,269 |
| | $ | 70,298,507 |
|
The FHLBankFHLB also offers putable Advances. With a putable Advance, the FHLBankFHLB effectively purchases a put optionoptions from the member that allows the FHLBankFHLB to terminate the Advance at predetermined dates. The FHLBankFHLB normally would exercise its put option when interest rates increase relative to contractual rates. At December 31, 20122015 and 2011,2014, the FHLBankFHLB had putable Advances, excluding those where the related put options have expired, totaling (in thousands) $2,587,2501,046,400 and $6,204,4501,617,400.
Through December 2005, the FHLBank offered convertible Advances. Convertible Advances allow the FHLBank to convert an Advance from one interest-payment term structure to another. At December 31, 2012 and 2011, the FHLBank had convertible Advances, excluding those where the related conversion options have expired, totaling (in thousands) $63,000 and $1,178,500.94
Table 8.3 - Advances by Year of Contractual Maturity or Next Put/Convert Date for Putable/Convertible Advances (in thousands)
| | Year of Contractual Maturity or Next Put/Convert Date | December 31, 2012 | | December 31, 2011 | December 31, 2015 | | December 31, 2014 |
Due in 1 year or less | $ | 14,792,295 |
| | $ | 14,267,457 |
| $ | 28,111,211 |
| | $ | 15,753,030 |
|
Due after 1 year through 2 years | 4,672,041 |
| | 3,475,312 |
| 11,895,945 |
| | 14,663,847 |
|
Due after 2 years through 3 years | 6,193,507 |
| | 2,727,572 |
| 15,549,007 |
| | 12,115,860 |
|
Due after 3 years through 4 years | 6,019,525 |
| | 1,731,594 |
| 11,098,009 |
| | 13,649,722 |
|
Due after 4 years through 5 years | 8,125,303 |
| | 3,113,282 |
| 3,391,892 |
| | 10,715,119 |
|
Thereafter | 13,818,107 |
| | 2,523,280 |
| 3,196,205 |
| | 3,400,929 |
|
Total par value | $ | 53,620,778 |
| | $ | 27,838,497 |
| $ | 73,242,269 |
| | $ | 70,298,507 |
|
Table 8.4 - Advances by Interest Rate Payment Terms (in thousands)
| | Par value of Advances | December 31, 2012 | | December 31, 2011 | |
| | December 31, 2015 | | December 31, 2014 |
Fixed-rate (1) | | | | | | |
Due in one year or less | $ | 9,412,060 |
| | $ | 8,565,327 |
| $ | 15,599,101 |
| | $ | 8,638,946 |
|
Due after one year | 8,224,609 |
| | 9,395,455 |
| 9,713,857 |
| | 9,306,104 |
|
Total fixed-rate(1) | 17,636,669 |
| | 17,960,782 |
| 25,312,958 |
| | 17,945,050 |
|
Variable-rate (1) | | | | | | |
Due in one year or less | 2,363,338 |
| | 1,390,502 |
| 11,578,210 |
| | 5,500,684 |
|
Due after one year | 33,620,771 |
| | 8,487,213 |
| 36,351,101 |
| | 46,852,773 |
|
Total variable-rate(1) | 35,984,109 |
| | 9,877,715 |
| 47,929,311 |
| | 52,353,457 |
|
Total par value | $ | 53,620,778 |
| | $ | 27,838,497 |
| $ | 73,242,269 |
| | $ | 70,298,507 |
|
| |
(1) | Payment terms based on current interest rate terms, which would reflect any option exercises or rate conversions that have occurred subsequent to the related Advance issuance. |
At December 31, 2012 and 2011, 24 percent and 54 percent, respectively, of the FHLBank's fixed-rate Advances were swapped to a variable rate.
Credit Risk Exposure and Security Terms.Exposure. The FHLBank'sFHLB's potential credit risk from Advances is concentrated in commercial banks and insurance companies. At December 31, 2012 and 2011, the FHLBank had $41.4 billion and $14.8 billion ofThe FHLB's Advances outstanding that were greater than or equal to $1.0$1.0 billion per borrower.borrower were $57.4 billion (78.4 percent) and $56.6 billion (80.5 percent) at December 31, 2015 and 2014, respectively. These Advances were made to 78 and 46 borrowers (members and former members), which represented 77.2 percent and 53.3 percent of total Advances outstanding at December 31, 20122015 and 2011.2014. See Note 10 for information related to the FHLBank'sFHLB's credit risk on Advances and allowance methodology for credit losses.
Table 8.5 - Borrowers Holding Five Percent or more of Total Advances, Including Any Known Affiliates that are Members of the FHLBankFHLB (dollars in millions)
| | December 31, 2012 | | December 31, 2011 | |
December 31, 2015 | | December 31, 2015 | | December 31, 2014 |
| Principal | | % of Total | | Principal | | % of Total | Principal | | % of Total Par Value of Advances | | Principal | | % of Total Par Value of Advances |
JPMorgan Chase Bank, N.A. | $ | 26,000 |
| | 48 | % | | U.S. Bank, N.A. | $ | 7,314 |
| | 26 | % | $ | 35,350 |
| | 48 | % | | JPMorgan Chase Bank, N.A. | $ | 41,300 |
| | 59 | % |
Fifth Third Bank | 4,732 |
| | 9 |
| | PNC Bank, N.A. (1) | 3,996 |
| | 14 |
| |
U.S. Bank, N.A. | 4,586 |
| | 8 |
| | Fifth Third Bank | 2,533 |
| | 9 |
| 10,086 |
| | 14 |
| | U.S. Bank, N.A. | 8,338 |
| | 12 |
|
PNC Bank, N.A. (1) | 2,986 |
| | 6 |
| | Total | $ | 13,843 |
| | 49 | % | |
Total | $ | 38,304 |
| | 71 | % | | | | | | $ | 45,436 |
| | 62 | % | | Total | $ | 49,638 |
| | 71 | % |
Note 9 - Mortgage Loans Held for Portfolio
Total mortgage loans held for portfolio represent residential mortgage loans under the MPP that the FHLBank'sFHLB's members originate, credit enhance, and then sell to the FHLBank.FHLB. The FHLBankFHLB does not service any of these loans. The FHLBankFHLB plans to retain its existing portfolio of mortgage loans.
Table 9.1 - Mortgage Loans Held for Portfolio (in thousands) | | | December 31, 2012 | | December 31, 2011 | December 31, 2015 | | December 31, 2014 |
Unpaid principal balance: | | | | | | |
Fixed rate medium-term single-family mortgage loans (1) | $ | 1,695,018 |
| | $ | 1,655,696 |
| $ | 1,478,780 |
| | $ | 1,393,525 |
|
Fixed rate long-term single-family mortgage loans | 5,671,123 |
| | 6,095,880 |
| 6,278,904 |
| | 5,402,479 |
|
Total unpaid principal balance | 7,366,141 |
| | 7,751,576 |
| 7,757,684 |
| | 6,796,004 |
|
Premiums | 164,243 |
| | 110,663 |
| 205,600 |
| | 179,540 |
|
Discounts | (3,605 | ) | | (4,136 | ) | (1,989 | ) | | (2,460 | ) |
Hedging basis adjustments (2) | 21,240 |
| | 12,916 |
| 19,998 |
| | 16,518 |
|
Total mortgage loans held for portfolio | $ | 7,548,019 |
| | $ | 7,871,019 |
| $ | 7,981,293 |
| | $ | 6,989,602 |
|
| |
(1) | Medium-term is defined as a term of 15 years or less. |
| |
(2) | Represents the unamortized balance of the mortgage purchase commitments' market values at the time of settlement. The market value of the commitment is included in the basis of the mortgage loan and amortized accordingly. |
Table 9.2 - Mortgage Loans Held for Portfolio by Collateral/Guarantee Type (in thousands) | | | December 31, 2012 | | December 31, 2011 | December 31, 2015 | | December 31, 2014 |
Unpaid principal balance: | | | | | | |
Conventional mortgage loans | $ | 6,382,835 |
| | $ | 6,502,550 |
| $ | 7,277,584 |
| | $ | 6,203,318 |
|
Government-guaranteed/insured mortgage loans | 983,306 |
| | 1,249,026 |
| |
FHA mortgage loans | | 480,100 |
| | 592,686 |
|
Total unpaid principal balance | $ | 7,366,141 |
| | $ | 7,751,576 |
| $ | 7,757,684 |
| | $ | 6,796,004 |
|
For information related to the FHLBank'sFHLB's credit risk on mortgage loans and allowance for credit losses, see Note 10.10.
Table 9.3 - Members, Including Any Known Affiliates that are Members of the FHLBank,FHLB, and Former Members Selling Five Percent or more of Total Unpaid Principal (dollars in millions)
| | | December 31, 2012 | | | December 31, 2011 | December 31, 2015 | | | December 31, 2014 |
| Principal | | % of Total | | | Principal | | % of Total | Principal | | % of Total | | | Principal | | % of Total |
Union Savings Bank | $ | 1,984 |
| | 27 | % | | PNC Bank, N.A. (1) | $ | 2,338 |
| | 30 | % | $ | 2,242 |
| | 29 | % | | Union Savings Bank | $ | 1,593 |
| | 23 | % |
PNC Bank, N.A. (1) | 1,818 |
| | 25 |
| | Union Savings Bank | 2,068 |
| | 27 |
| 839 |
| | 11 |
| | PNC Bank, N.A. (1) | 1,074 |
| | 16 |
|
Guardian Savings Bank FSB | 431 |
| | 6 |
| | Guardian Savings Bank FSB | 643 |
| | 8 |
| 633 |
| | 8 |
| | Guardian Savings Bank FSB | 406 |
| | 6 |
|
Total | $ | 4,233 |
| | 58 | % | | Liberty Savings Bank | 419 |
| | 5 |
| |
|
|
| |
|
| | Total | $ | 5,468 |
| | 70 | % | |
Note 10 - Allowance for Credit Losses
The FHLBankFHLB has established an allowance methodology for each of the FHLBank'sFHLB's portfolio segments: credit products; government-guaranteed or insuredproducts (Advances, Letters of Credit and other extensions of credit to members); FHA mortgage loans held for portfolio; and conventional mortgage loans held for portfolio.
Credit products
The FHLBankFHLB manages its credit exposure to credit products through an integrated approach that provides forincludes establishing a credit limit to be established for each borrower, includes an ongoing review of each borrower's financial condition and is coupled with detailed collateral and lending policies to limit risk of loss while balancing borrowers' needs for a reliable source of funding. In addition, the FHLBankFHLB lends to financial institutions within its districteligible borrowers in accordance with federal statutes, including the Federal Home Loan BankFHLBank Act (FHLBank Act), and Finance Agency Regulations, regulations,
which require the FHLBankFHLB to obtain sufficient collateral to fully secure credit products. The estimated value of the collateral required to secure each member's credit products is calculated by applying collateral discounts, or haircuts, to the value of the collateral. The FHLBankFHLB accepts certain investment securities, residential mortgage loans, deposits and other real estate related assets as collateral. In addition, community financial institutions (CFIs) are eligible to utilize expanded statutory collateral provisions for small business, agriculture loans and agriculturecommunity development loans. The FHLBank'sFHLB's capital stock owned by its member borrowerborrowers is also pledged as collateral. Collateral arrangements and a member’s borrowing capacity vary based on the financial condition and performance of the institution, the types of collateral pledged and the overall quality of those assets. The FHLBankFHLB can call foralso require additional or substitute collateral to protect its security interest. Management of the FHLBankFHLB believes that these policies effectively manage the FHLBank'sFHLB's credit risk from credit products.
Members experiencing financial difficulties are subject to FHLBank-performedFHLB-performed “stress tests” of the impact of poorly performing assets on the member’s capital and loss reserve positions. Depending on the results of these tests and the level of overcollateralization, a member may be allowed to maintain pledged loan assets in its custody, may be required to deliver those loans into the custody of the FHLBankFHLB or its agent, and/or may be required to provide details on these loans to facilitate an estimate of their fair value. The FHLBankFHLB perfects its security interest in all pledged collateral. The FHLBank Act affords any security interest granted to the FHLBankFHLB by a member priority over the claims or rights of any other party except for claims or rights of a third party that would be entitled to priority under otherwise applicable law and that are held by a bona fide purchaser for value or by a secured party holding a prior perfected security interest.
Using a risk-based approach, the FHLBankFHLB considers the payment status, collateral types and concentrationcollateralization levels, and borrower's financial condition to be indicators of credit quality onfor its credit products. At December 31, 20122015 and 2011,2014, the FHLBankFHLB had rights to collateral on a member-by-member basis with an estimated value in excess of its outstanding extensions of credit.
The FHLBank continues to evaluateFHLB evaluates and makemakes changes to its collateral guidelines, as necessary, based on current market conditions. At December 31, 20122015 and 2011,2014, the FHLBankFHLB did not have any Advances that were past due, in non-accrual status or impaired. In addition, there were no troubled debt restructurings related to credit products of the FHLBankFHLB during 20122015 or 20112014.
The FHLBankFHLB has not experienced any credit losses on Advances since it was founded in 1932. Based upon the collateral held as security, its credit extension and collateral policies management's credit analysis and the repayment history on credit
products, the FHLBankFHLB did not record any credit losses on credit products as of December 31, 20122015 or 2011.2014. Accordingly, the FHLBankFHLB did not record any allowance for credit losses on Advances.
At December 31, 20122015 and 2011, no2014, the FHLB did not record any liability to reflect an allowance for credit losses for off-balance sheet credit exposures was recorded.exposures. See Note 2120 for additional information on the FHLBank'sFHLB's off-balance sheet credit exposure.
Mortgage Loans Held for Portfolio - Government-guaranteed or InsuredFHA
The FHLBankFHLB invests in government-guaranteed or insured fixed-rate mortgage loans secured by one-to-four family residential properties. Government-guaranteed mortgage loans are mortgage loans guaranteed orproperties insured by the Federal Housing Administration (FHA). AnyFHA. The FHLB expects to recover any losses from such loans are expected to be recovered from the FHA. Any losses from suchthese loans that are not recovered from the FHA would be due to a claim rejection by the FHA and, as such, would be recoverable from the selling participating financial institutions (PFIs).institutions. Therefore, the FHLBankFHLB only has credit risk for these loans if the seller or servicer fails to pay for losses not covered by insurance or guarantees.the FHA insurance. As a result, the FHLBankFHLB did not establish an allowance for credit losses on government-guaranteed orits FHA insured mortgage loans. Furthermore, due to the government guarantee or insurance, none of these mortgage loans have been placed on non-accrual status.
Mortgage Loans Held for Portfolio - Conventional MPPMortgage Purchase Program (MPP)
The FHLB determines the allowance for conventional loans is determined bythrough analyses that include consideration of various data observations such as past performance, current performance, loan portfolio characteristics, collateral-related characteristics, industry data, and prevailing economic conditions. The measurement of the allowance for credit losses consists of: (1) collectively evaluating homogeneous pools of residential mortgage loans; (2) reviewing specifically identified loans for impairment; and (3) considering other relevant qualitative factors.
Collectively Evaluated Mortgage Loans. The credit risk analysis of conventional loans evaluated collectively for impairment considers historical delinquency migration, applies estimated loss severities, and incorporates the associated credit enhancements in order to determine the FHLBank'sFHLB's best estimate of probable incurred losses at the reporting date. The FHLB performs the credit risk analysis of all conventional mortgage loans is performed at the individual Master Commitment Contract level to properly determine the credit enhancements available to recover losses on loans under each individual Master Commitment Contract. The Master Commitment Contract is an agreement with a member in which the member agrees to make everya best efforts attempt to sell a specific dollar amount of loans to the FHLBankFHLB generally over a one-year period. Migration analysis is a
methodology for determining, through the FHLBank'sFHLB's experience over a historical period, the rate of default on pools of similar loans. The FHLBankFHLB applies migration analysis to loans based on payment status categories such as current, 30, 60, and 90 days past due. The FHLBankFHLB then estimates, based on historical experience, how many loans in these categories may migrate to a loss realization event and applies a current loss severity to estimate losses. The estimated losses are then reduced by the probable cash flows resulting from available credit enhancements available.enhancements. Any credit enhancement cash flows that are projected and assessed as not probable of receipt do not reduce estimated losses.
Individually Evaluated Mortgage Loans. Conventional mortgage loans that are considered troubled debt restructurings are specifically identified for purposes of calculating the allowance for credit losses. The FHLBankFHLB measures impairment of these specifically identified loans by either estimating the present value of expected cash flows, estimating the loan's observable market price, or estimating the fair value of the collateral if the loan is collateral dependent. SpecificallyThe FHLB removes specifically identified loans evaluated for impairment are removed from the collectively evaluated mortgage loan population.
Qualitative Factors. The FHLBankFHLB also assesses other qualitative factors in its estimation of loan losses for the homogeneouscollectively evaluated population. This amount represents a subjective management judgment, based on facts and circumstances that exist as of the reporting date, that is intended to cover other inherentincurred losses that may not otherwise be captured in the methodology described above.
Rollforward of Allowance for Credit Losses on Mortgage Loans. The following tables present a rollforward of the allowance for credit losses on conventional mortgage loans as well as the recorded investment in mortgage loans by impairment methodology. The recorded investment in a loan is the unpaid principal balance of the loan adjusted for accrued interest, unamortized premiums or discounts, hedging basis adjustments and direct write-downs. The recorded investment is not net of any allowance.
Table 10.1 - Rollforward of Allowance for Credit Losses on Conventional Mortgage Loans (in thousands)
|
| | | | | | | | | | | |
Allowance for credit losses: | 2012 | | 2011 | | 2010 |
Balance, beginning of period | $ | 20,750 |
| | $ | 12,100 |
| | $ | — |
|
Charge-offs | (4,302 | ) | | (3,923 | ) | | (1,501 | ) |
Provision for credit losses | 1,459 |
| | 12,573 |
| | 13,601 |
|
Balance, end of period | $ | 17,907 |
| | $ | 20,750 |
| | $ | 12,100 |
|
|
| | | | | | | | | | | |
| For the Years Ended December 31, |
| 2015 | | 2014 | | 2013 |
Balance, beginning of period | $ | 4,919 |
| | $ | 7,233 |
| | $ | 17,907 |
|
Net charge offs | (3,233 | ) | | (1,814 | ) | | (3,224 | ) |
Reversal for credit losses | — |
| | (500 | ) | | (7,450 | ) |
Balance, end of period | $ | 1,686 |
| | $ | 4,919 |
| | $ | 7,233 |
|
Table 10.2 - Allowance for Credit Losses and Recorded Investment on Conventional Mortgage Loans by Impairment Methodology (in thousands)
| | | | | | | | | December 31, 2015 | | December 31, 2014 |
Allowance for credit losses, end of period: | December 31, 2012 | | December 31, 2011 | | | |
Collectively evaluated for impairment | $ | 17,775 |
| | $ | 20,653 |
| $ | 1,686 |
| | $ | 4,766 |
|
Individually evaluated for impairment | $ | 132 |
| | $ | 97 |
| — |
| | 153 |
|
Total allowances for credit losses | | $ | 1,686 |
| | $ | 4,919 |
|
Recorded investment, end of period: | | | | | | |
Collectively evaluated for impairment | $ | 6,570,856 |
| | $ | 6,633,380 |
| $ | 7,510,089 |
| | $ | 6,402,994 |
|
Individually evaluated for impairment | 5,249 |
| | 2,650 |
| 9,385 |
| | 8,639 |
|
Total recorded investment | $ | 6,576,105 |
| | $ | 6,636,030 |
| $ | 7,519,474 |
| | $ | 6,411,633 |
|
Credit Enhancements. The conventional mortgage loans under the MPP are supported by some combination of credit enhancements (primary mortgage insurance (PMI), supplemental mortgage insurance (SMI) and the Lender Risk Account (LRA), including pooled LRA for those members participating in an aggregated MPP pool). The amount of credit enhancements needed to protect the FHLBankFHLB against credit losses is determined through use of a third-party default model. These credit enhancements apply after a homeowner's equity is exhausted. Beginning in February 2011, the FHLBankFHLB discontinued the use of SMI for all new loan purchases and replaced it with expanded use of the LRA. The LRA is funded by the FHLBankFHLB as a portion of the purchase proceeds to cover expected losses. The LRA is recorded in other liabilities in the Statements of Condition. Excess funds over required balances are distributed to the member in accordance with a step-down schedule that is established upon execution of a Master Commitment Contract, subject to performance of the related loan pool. The LRA established for a pool of loans is limited to only covering losses of that specific pool of loans.
Table 10.3 - Changes in the LRA (in thousands) | | | | | | | | | | For the Years Ended December 31, |
| December 31, 2012 | | December 31, 2011 | 2015 | | 2014 | | 2013 |
LRA at beginning of year | $ | 68,684 |
| | $ | 44,104 |
| $ | 129,213 |
| | $ | 115,236 |
| | $ | 102,680 |
|
Additions | 39,111 |
| | 31,071 |
| 33,100 |
| | 18,947 |
| | 18,331 |
|
Claims | (3,409 | ) | | (4,755 | ) | (1,747 | ) | | (2,075 | ) | | (4,118 | ) |
Scheduled distributions | (1,706 | ) | | (1,736 | ) | (2,556 | ) | | (2,895 | ) | | (1,657 | ) |
LRA at end of period | $ | 102,680 |
| | $ | 68,684 |
| $ | 158,010 |
| | $ | 129,213 |
| | $ | 115,236 |
|
Credit Quality Indicators. Key credit quality indicators for mortgage loans include the migration of past due loans, non-accrual loans, and loans in process of foreclosure. The table below summarizes the FHLBank'sFHLB's key credit quality indicators for mortgage loans.
Table 10.4 - Recorded Investment in Delinquent Mortgage Loans (dollars in thousands)
| | | December 31, 2012 | December 31, 2015 |
| Conventional MPP Loans | | Government-Guaranteed or Insured Loans | | Total | Conventional MPP Loans | | FHA Loans | | Total |
Past due 30-59 days delinquent | $ | 47,189 |
| | $ | 60,056 |
| | $ | 107,245 |
| $ | 42,606 |
| | $ | 31,846 |
| | $ | 74,452 |
|
Past due 60-89 days delinquent | 18,103 |
| | 18,445 |
| | 36,548 |
| 10,125 |
| | 9,887 |
| | 20,012 |
|
Past due 90 days or more delinquent | 77,113 |
| | 37,890 |
| | 115,003 |
| 30,575 |
| | 17,426 |
| | 48,001 |
|
Total past due | 142,405 |
| | 116,391 |
| | 258,796 |
| 83,306 |
| | 59,159 |
| | 142,465 |
|
Total current mortgage loans | 6,433,700 |
| | 883,381 |
| | 7,317,081 |
| 7,436,168 |
| | 429,551 |
| | 7,865,719 |
|
Total mortgage loans | $ | 6,576,105 |
| | $ | 999,772 |
| | $ | 7,575,877 |
| $ | 7,519,474 |
| | $ | 488,710 |
| | $ | 8,008,184 |
|
Other delinquency statistics: | | | | | | | | | | |
In process of foreclosure, included above (1) | $ | 67,016 |
| | $ | 15,843 |
| | $ | 82,859 |
| $ | 23,171 |
| | $ | 7,043 |
| | $ | 30,214 |
|
Serious delinquency rate (2) | 1.17 | % | | 3.82 | % | | 1.52 | % | 0.42 | % | | 3.63 | % | | 0.62 | % |
Past due 90 days or more still accruing interest (3) | $ | 76,871 |
| | $ | 37,890 |
| | $ | 114,761 |
| $ | 25,016 |
| | $ | 17,426 |
| | $ | 42,442 |
|
Loans on non-accrual status, included above | $ | 2,538 |
| | $ | — |
| | $ | 2,538 |
| $ | 6,753 |
| | $ | — |
| | $ | 6,753 |
|
| | | | | | | | | | |
| December 31, 2011 | December 31, 2014 |
| Conventional MPP Loans | | Government-Guaranteed or Insured Loans | | Total | Conventional MPP Loans | | FHA Loans | | Total |
Past due 30-59 days delinquent | $ | 58,559 |
| | $ | 80,457 |
| | $ | 139,016 |
| $ | 49,053 |
| | $ | 42,744 |
| | $ | 91,797 |
|
Past due 60-89 days delinquent | 25,861 |
| | 26,893 |
| | 52,754 |
| 13,597 |
| | 12,881 |
| | 26,478 |
|
Past due 90 days or more delinquent | 90,835 |
| | 55,720 |
| | 146,555 |
| 42,991 |
| | 25,045 |
| | 68,036 |
|
Total past due | 175,255 |
| | 163,070 |
| | 338,325 |
| 105,641 |
| | 80,670 |
| | 186,311 |
|
Total current mortgage loans | 6,460,775 |
| | 1,103,124 |
| | 7,563,899 |
| 6,305,992 |
| | 522,042 |
| | 6,828,034 |
|
Total mortgage loans | $ | 6,636,030 |
| | $ | 1,266,194 |
| | $ | 7,902,224 |
| $ | 6,411,633 |
| | $ | 602,712 |
| | $ | 7,014,345 |
|
Other delinquency statistics: | | | | | | | | | | |
In process of foreclosure, included above (1) | $ | 76,471 |
| | $ | 27,154 |
| | $ | 103,625 |
| $ | 34,854 |
| | $ | 11,687 |
| | $ | 46,541 |
|
Serious delinquency rate (2) | 1.38 | % | | 4.41 | % | | 1.87 | % | 0.68 | % | | 4.27 | % | | 0.99 | % |
Past due 90 days or more still accruing interest (3) | $ | 90,835 |
| | $ | 55,720 |
| | $ | 146,555 |
| $ | 41,857 |
| | $ | 25,045 |
| | $ | 66,902 |
|
Loans on non-accrual status, included above | $ | 1,699 |
| | $ | — |
| | $ | 1,699 |
| $ | 3,574 |
| | $ | — |
| | $ | 3,574 |
|
| |
(1) | Includes loans where the decision of foreclosure or a similar alternative such as pursuit of deed-in-lieu has been reported. Loans in process of foreclosure are included in past due or current loans dependent on their delinquency status. |
| |
(2) | Loans that are 90 days or more past due or in the process of foreclosure (including past due or current loans in the process of foreclosure) expressed as a percentage of the total loan portfolio class recorded investment amount. |
| |
(3) | Each conventional loan past due 90 days or more still accruing interest is on a schedule/scheduled monthly settlement basis and contains one or more credit enhancements. Loans that are well secured and in the process of collection as a result of remaining credit enhancements and schedule/scheduled settlement are not placed on non-accrual status. |
The FHLBankFHLB did not have any real estate owned at December 31, 20122015 or 2014.
Individually Evaluated Impaired Loans.2011 Table 10.5 presents the recorded investment, unpaid principal balance, and related allowance associated with loans individually evaluated for investment..
Table 10.5 - Individually Evaluated Impaired Loan Statistics by Product Class Level (in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2015 | | December 31, 2014 |
Conventional MPP loans | Recorded Investment | | Unpaid Principal Balance | | Related Allowance | | Recorded Investment | | Unpaid Principal Balance | | Related Allowance |
With no related allowance | $ | 9,385 |
| | $ | 9,187 |
| | $ | — |
| | $ | 5,297 |
| | $ | 5,165 |
| | $ | — |
|
With an allowance | — |
| | — |
| | — |
| | 3,342 |
| | 3,293 |
| | 153 |
|
Total | $ | 9,385 |
| | $ | 9,187 |
| | $ | — |
| | $ | 8,639 |
| | $ | 8,458 |
| | $ | 153 |
|
Table 10.6 - Average Recorded Investment of Individually Evaluated Impaired Loans and Related Interest Income Recognized (in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| 2015 | | 2014 | | 2013 |
Individually impaired loans | Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized |
Conventional MPP Loans | $ | 8,433 |
| | $ | 438 |
| | $ | 8,029 |
| | $ | 417 |
| | $ | 6,615 |
| | $ | 348 |
|
Troubled Debt Restructurings. A troubled debt restructuring is considered to have occurred when a concession is granted to a borrower for economic or legal reasons related to the borrower's financial difficulties and that concession would not have been considered otherwise. The FHLBank does not consider loans with SMI policies that have been discharged in Chapter 7 bankruptcy to be troubled debt restructurings. The FHLBank'sFHLB's troubled debt restructurings primarily involve both loans where an agreement permits the recapitalization of past due amounts up to the original loan amount and certain loans without SMI policies discharged in Chapter 7 bankruptcy. Under both types of modification, no other terms of the original loan are modified,
including the borrower's original interest rateThe FHLB had 60 and contractual maturity. The FHLBank had 26 and 1353 modified loans considered troubled debt restructurings at December 31, 20122015 and 2011,2014, respectively.
A loan considered a troubled debt restructuring is individually evaluated for impairment when determining its related allowance for credit losses. Credit loss is measured by factoring in expected cash shortfalls (i.e., loss severity rate) incurred as of the reporting date.
Table 10.5 - Recorded Investment in Troubled Debt Restructurings (in thousands)
|
| | | | | | | |
Troubled debt restructurings: | December 31, 2012 | | December 31, 2011 |
Conventional MPP Loans | $ | 5,249 |
| | $ | 2,650 |
|
Due to the minimal change in terms of modified loans (i.e., no principal forgiven), the FHLBank's pre-modification recorded investment was not materially different than the post-modificationThe FHLB's recorded investment in troubled debt restructurings.
Certain conventional MPPmodified loans modified within the previous 12 months and considered troubled debt restructurings experienced a payment default as noted in the table below. A borrower is considered to have defaulted on awas (in thousands) $9,385 and $8,639 at December 31, 2015 and 2014, respectively. The amount of troubled debt restructuring if their contractually due principalrestructurings is not considered material to the FHLB's financial condition, results of operations, or interest is 60 days or more past due at any time during the past 12 months.
Table 10.6 - Recorded Investment of Financing Receivables Modified within the Previous 12 Months and Considered Troubled Debt Restructurings that Subsequently Defaulted (in thousands)cash flows.
|
| | | | | | | |
| For the Years Ended December 31, |
| 2012 | | 2011 |
Defaulted troubled debt restructurings: | | | |
Conventional MPP Loans | $ | — |
| | $ | 1,119 |
|
Modified loans that subsequently default may recognize a higher probability of loss when calculating the allowance for credit losses.
Individually Evaluated Impaired Loans. At December 31, 2012 and 2011, only certain conventional MPP loans individually evaluated for impairment required an allowance for credit losses. Table 10.7 presents the recorded investment, unpaid principal balance, and related allowance associated with these loans.
Table 10.7 - Individually Evaluated Impaired Loan Statistics by Product Class Level (in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2012 | | December 31, 2011 |
Conventional MPP loans: | Recorded Investment | | Unpaid Principal Balance | | Related Allowance | | Recorded Investment | | Unpaid Principal Balance | | Related Allowance |
With no related allowance | $ | 2,798 |
| | $ | 2,751 |
| | $ | — |
| | $ | 951 |
| | $ | 934 |
| | $ | — |
|
With an allowance | 2,451 |
| | 2,423 |
| | 132 |
| | 1,699 |
| | 1,682 |
| | 97 |
|
Total | $ | 5,249 |
| | $ | 5,174 |
| | $ | 132 |
| | $ | 2,650 |
| | $ | 2,616 |
| | $ | 97 |
|
Table 10.8 - Average Recorded Investment of Individually Evaluated Impaired Loans and Related Interest Income Recognized (in thousands)
|
| | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| 2012 | | 2011 |
Individually impaired loans: | Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized |
Conventional MPP Loans | $ | 4,331 |
| | $ | 228 |
| | $ | 1,515 |
| | $ | 83 |
|
Note 11 - Derivatives and Hedging Activities
Nature of Business Activity
The FHLBankFHLB is exposed to interest rate risk primarily from the effect of interest rate changes on its interest-earning assets and on the funding sourcesinterest-bearing liabilities that finance these assets. The goal of the FHLBank'sFHLB's interest-rate risk management strategy is not to eliminate interest-rate risk, but to manage it within appropriate limits. To mitigate the risk of loss, the FHLBankFHLB has established policies and procedures, which include guidelines on the amount of exposure to interest rate changes it is willing to accept. In addition, the FHLBankFHLB monitors the risk to its interest income, net interest margin and average maturity of interest-earning assets and funding sources.interest-bearing liabilities.
The FHLB transacts its derivatives with large banks and major broker-dealers. Some of these banks and broker-dealers or their affiliates buy, sell, and distribute Consolidated Obligations. Derivative transactions may be either executed with a counterparty (uncleared derivatives) or cleared through a Futures Commission Merchant (i.e., clearing agent) with a Derivative Clearing Organization (cleared derivatives).
Once a derivative transaction has been accepted for clearing by a Derivative Clearing Organization (Clearinghouse), the derivative transaction is novated and the executing counterparty is replaced with the Clearinghouse. The FHLB is not a derivative dealer and does not trade derivatives for short-term profit.
Consistent with Finance Agency Regulations,regulations, the FHLBankFHLB enters into derivatives to manage the interest rate risk exposures inherent in otherwise unhedged assets and funding positions, to achieve the FHLBank'sFHLB's risk management objectives and to act as an intermediary between its members and counterparties. The use of derivatives is an integral part of the FHLBank'sFHLB's financial management strategy. However, Finance Agency Regulationsregulations and the FHLBank'sFHLB's financial management policy prohibit trading in, or the speculative use of, derivative instruments and limit credit risk arising from them.
The most common ways in which the FHLBankFHLB uses derivatives are to:
| |
▪ | reduce the interest rate sensitivity and repricing gaps of assets and liabilities; |
| |
▪ | manage embedded options in assets and liabilities; |
| |
▪ | reduce funding costs by combining a derivative with a Consolidated Obligation Bond, as the cost of a combined funding structure can be lower than the cost of a comparable Consolidated Obligation Bond; |
| |
▪ | preserve a favorable interest rate spread between the yield of an asset (e.g., an Advance) and the cost of the related liability (e.g., the Consolidated Obligation Bond used to fund the Advance); without the use of derivatives, this interest rate spread could be reduced or eliminated when a change in the interest rate on the Advance does not match a change in the interest rate on the Bond; and |
| |
▪ | protect the value of existing asset or liability positions. |
Types of Derivatives
The FHLBankFHLB may enter into interest rate swaps (including callable and putable swaps), swaptions, interest rate cap and floor agreements, calls, puts, futures, and forward contracts to manage its exposure to changes in interest rates.
Interest rate swaps - An interest rate swap is an agreement between two entities to exchange cash flows in the future. The agreement sets the dates on which the cash flows will be paid and the manner in which the cash flows will be calculated. One of the simplest forms of an interest rate swap involves the promise by one party to pay cash flows equivalent to the interest on a notional principal amount at a predetermined fixed rate for a given period of time. In return for this promise, this party receives cash flows equivalent to the interest on the same notional principal amount at a variable-rate index for the same period of time. The variable-rate transacted by the FHLBankFHLB in its derivatives is LIBOR.
Swaptions - A swaption is an option on a swap that gives the London Interbank Offered Rate (LIBOR).buyer the right to enter into a specified interest rate swap at a certain time in the future. The FHLB may enter into both payer swaptions and receiver swaptions. A payer swaption is the option to make fixed interest payments at a later date and a receiver swaption is the option to receive fixed interest payments at a later date.
Forwards Contracts - The FHLB may use forward contracts in order to hedge interest-rate risk. For example, certain mortgage purchase commitments entered into by the FHLB are considered derivatives. The FHLB may hedge these commitments by selling to-be-announced (TBA) mortgage-backed securities for forward settlement. A TBA represents a forward contract for the sale of mortgage-backed securities at a future agreed upon date for an established price.
Application of Interest Rate SwapsDerivatives
The FHLBank generally usesFHLB may use certain derivatives as fair value hedges of underlyingassociated financial instruments. However, because the FHLBankFHLB uses interest rate swapsderivatives when they are considered to be the most cost-effective alternative to achieve the FHLBank'sFHLB's financial and risk management objectives, it may enter into interest rate swapsderivatives that do not necessarily qualify for hedge accounting (economic hedges). The FHLBankFHLB re-evaluates its hedging strategies from time to time and may change the hedging techniques it uses or adopt new strategies.
The FHLBank transacts most of its derivatives with large banks and major broker-dealers. Some of these banks and broker-dealers or their affiliates buy, sell, and distribute Consolidated Obligations. The FHLBank is not a derivatives dealer and does not trade derivatives for short-term profit.
Types of Hedged Items
The FHLBankFHLB documents at inception all relationships between derivatives designated as hedging instruments and the hedged items, its risk management objectives and strategies for undertaking various hedge transactions, and its method of assessing effectiveness. This process includes linking all derivatives that are designated as fair value hedges to assets and liabilities on the Statements of Condition. The FHLBankFHLB also formally assesses (both at the hedge's inception and at least quarterly) whether the derivatives that are used in hedging transactions have been effective in offsetting changes in the fair value of the hedged items and whether those derivatives may be expected to remain effective in future periods. The FHLBankFHLB currently uses regression analyses to assess the effectiveness of its hedges. The types of assets and liabilities currently hedged with derivatives are:
Investments - The interest rate and prepayment risks associated with the FHLB's investment securities are managed through a combination of debt issuance and, possibly, derivatives. The FHLB may manage the prepayment and interest rate risks by funding investment securities with Consolidated Obligations that have call features or by hedging the prepayment risk with caps or floors, callable swaps or swaptions. The FHLB may also purchase swaptions to minimize the prepayment risk embedded in certain investments. Although these derivatives are valid economic hedges against the prepayment risk of the investments, they are not specifically linked to individual investments and therefore do not receive fair value hedge accounting. These derivatives are marked-to-market through earnings.
Advances- The FHLB offers a wide array of Advance structures to meet members' funding needs. These Advances may have maturities up to 30 years with variable or fixed rates and may include early termination features or options. The repricing characteristics and optionality embedded in certain Advances may create interest-rate risk. The FHLB may use derivatives to manage the repricing and/or option characteristics of Advances in order to more closely match the characteristics of the FHLB's funding liabilities. In general, whenever a member executes a fixed-rate Advance or a variable-rate Advance with embedded options, the FHLB will simultaneously execute a derivative with terms that offset the terms and embedded options, if any, in the Advance. For example, the FHLB may hedge a fixed-rate Advance with an interest rate swap where the FHLB pays a fixed-rate coupon and receives a floating-rate coupon, effectively converting the fixed-rate Advance to a floating-rate Advance. These types of hedges are typically treated as fair value hedges.
When issuing a putable Advance, the FHLB effectively purchases a put option from the member that allows the FHLB to put or extinguish the fixed-rate Advance, which the FHLB normally would exercise when interest rates increase. The FHLB may hedge these Advances by entering into a cancelable derivative.
Mortgage Loans - The FHLB invests in fixed-rate mortgage loans. The prepayment options embedded in these mortgage loans can result in extensions or contractions in the expected repayment of these investments, depending on changes in estimated prepayment speeds. The FHLB may manage the interest rate and prepayment risks associated with mortgages through a combination of debt issuance and derivatives. The FHLB issues both callable and noncallable debt and prepayment linked Consolidated Obligations to achieve cash flow patterns and liability durations similar to those expected on the mortgage loans. The FHLB may purchase swaptions to minimize the prepayment risk embedded in mortgage loans. Although these derivatives are valid economic hedges against the prepayment risk of the loans, they are not specifically linked to individual loans and therefore do not receive fair value hedge accounting. These derivatives are marked-to-market through earnings.
Consolidated Obligations - The FHLBankFHLB enters into derivatives to hedge the interest rate risk associated with its specific debt issuances. The FHLBankFHLB manages the risk arising from changing market prices and volatility of a Consolidated Obligation by matching the cash inflow on a derivative with the cash outflow on the Consolidated Obligation.
For instance, in a typical transaction,example, fixed-rate Consolidated Obligations are issued for one or more FHLBanks, and the FHLBankFHLB may simultaneously entersenter into a matching interest rate swap in which the counterparty pays fixed cash flows to the FHLBankFHLB designed to mirror in timing and amount the cash outflows the FHLBankFHLB pays on the Consolidated Obligation. The FHLBankFHLB pays a variable cash flow that closely matches the interest payments it receives on short-term or variable-rate Advances, typically 3-month LIBOR. These transactions are treated as fair value hedges.
This strategy of issuing Bonds while simultaneously entering into derivatives enables the FHLBankFHLB to offer a wider range of attractively priced Advances to its members and may allow the FHLBankFHLB to reduce its funding costs. The continued attractiveness of such debt depends on yield relationships between the Bond and the derivative markets. If conditions in these markets change, the FHLBankFHLB may alter the types or terms of the Bonds that it issues. By acting in both the capital and the swap markets, the FHLBankFHLB may raise funds at lower costs than through the issuance of simple fixed- or variable-rate Consolidated Obligations in the capital markets alone.
Advances- The FHLBank offers a wide array103
When issuing a putable Advance, the FHLBank effectively purchases a put option from the member that allows the FHLBank to put or extinguish the fixed-rate Advance, which the FHLBank normally would exercise when interest rates increase. The FHLBank may hedge these Advances by entering into a cancelable derivative.
Mortgage Loans - The FHLBank invests in fixed-rate mortgage loans. The prepayment options embedded in these mortgage loans can result in extensions or contractions in the expected repayment of these investments, depending on changes in estimated prepayment speeds. The FHLBank may manage the interest rate and prepayment risks associated with mortgages through a combination of debt issuance and derivatives. The FHLBank issues both callable and noncallable debt and prepayment linked Consolidated Obligations to achieve cash flow patterns and liability durations similar to those expected on the mortgage loans. The FHLBank is also permitted to use derivatives to match the expected prepayment characteristics of the mortgages, although to date it has not done so.
Firm Commitments - Certain mortgage purchase commitments are considered derivatives. The FHLBankFHLB may hedge these commitments by selling to-be-announced (TBA)TBA mortgage-backed securities for forward settlement. A TBA represents a forward contract for the sale of mortgage-backed securities at a future agreed upon date for an established price. The mortgage purchase commitment and the TBA used in the firm commitment hedging strategy (economic hedge) are recorded as a derivative asset or derivative liability at fair value, with changes in fair value recognized in the current period earnings. When the mortgage purchase commitment derivative settles, the current market value of the commitment is included in the basis of the mortgage loan and amortized accordingly.
Investments - The interest rate and prepayment risks associated with the FHLBank's investment securities are managed through a combination of debt issuance and, possibly, derivatives. The FHLBank may manage the prepayment and interest rate risks by
funding investment securities with Consolidated Obligations that have call features or by hedging the prepayment risk with caps or floors, callable swaps or swaptions.
Financial Statement Effect and Additional Financial Information
The notional amount of derivatives serves as a factor in determining periodic interest payments or cash flows received and paid. The notional amount reflects the FHLB's involvement in the various classes of financial instruments and represents neither the actual amounts exchanged nor the overall exposure of the FHLBankFHLB to credit and market risk.risk; the overall risk is much smaller. The risks of derivatives only can be measured meaningfully on a portfolio basis that takes into account the counterparties, the types of derivatives, the items being hedged and any offsets between the derivatives and the items being hedged.
Table 11.1 summarizes the fair value of derivative instruments.instruments, including the effect of netting adjustments and cash collateral. For purposes of this disclosure, the derivative values include the fair value of derivatives and the related accrued interest.
Table 11.1 - Fair Value of Derivative Instruments (in thousands)
| | | December 31, 2012 | December 31, 2015 |
| Notional Amount of Derivatives | | Derivative Assets | | Derivative Liabilities | Notional Amount of Derivatives | | Derivative Assets | | Derivative Liabilities |
Derivatives designated as fair value hedging instruments: | | | | | | | | | | |
Interest rate swaps | $ | 8,262,375 |
| | $ | 66,836 |
| | $ | 372,959 |
| $ | 5,548,351 |
| | $ | 12,205 |
| | $ | 77,950 |
|
Derivatives not designated as hedging instruments: | | | | | | | | | | |
Interest rate swaps | 3,774,000 |
| | 2,686 |
| | 15,930 |
| 2,719,000 |
| | 1,051 |
| | 4,029 |
|
Interest rate swaptions | | 281,000 |
| | 683 |
| | — |
|
Forward rate agreements | | 462,000 |
| | 1,680 |
| | 69 |
|
Mortgage delivery commitments | 123,588 |
| | 155 |
| | 584 |
| 449,856 |
| | 342 |
| | 1,650 |
|
Total derivatives not designated as hedging instruments | 3,897,588 |
| | 2,841 |
| | 16,514 |
| 3,911,856 |
| | 3,756 |
| | 5,748 |
|
Total derivatives before netting and collateral adjustments | $ | 12,159,963 |
| | 69,677 |
| | 389,473 |
| $ | 9,460,207 |
| | 15,961 |
| | 83,698 |
|
Netting adjustments | | | (61,900 | ) | | (61,900 | ) | |
Cash collateral and related accrued interest | | | (1,900 | ) | | (212,685 | ) | |
Total collateral and netting adjustments (1) | | | (63,800 | ) | | (274,585 | ) | |
Netting adjustments and cash collateral (1) | | | | 11,035 |
| | (52,611 | ) |
Total derivative assets and total derivative liabilities | | | $ | 5,877 |
| | $ | 114,888 |
| | | $ | 26,996 |
| | $ | 31,087 |
|
| | | | | | | | | | |
| December 31, 2011 | December 31, 2014 |
| Notional Amount of Derivatives | | Derivative Assets | | Derivative Liabilities | Notional Amount of Derivatives | | Derivative Assets | | Derivative Liabilities |
Derivatives designated as fair value hedging instruments: | | | | | | | | | | |
Interest rate swaps | $ | 13,673,975 |
| | $ | 77,803 |
| | $ | 665,903 |
| $ | 4,301,547 |
| | $ | 19,826 |
| | $ | 138,150 |
|
Derivatives not designated as hedging instruments: | | | | | | | | | | |
Interest rate swaps | 5,079,000 |
| | 216 |
| | 17,609 |
| 4,635,000 |
| | 900 |
| | 6,559 |
|
Forward rate agreements | 375,000 |
| | — |
| | 3,143 |
| 439,000 |
| | 6 |
| | 4,924 |
|
Mortgage delivery commitments | 431,264 |
| | 2,281 |
| | 79 |
| 451,292 |
| | 3,799 |
| | 1 |
|
Total derivatives not designated as hedging instruments | 5,885,264 |
| | 2,497 |
| | 20,831 |
| 5,525,292 |
| | 4,705 |
| | 11,484 |
|
Total derivatives before netting and collateral adjustments | $ | 19,559,239 |
| | 80,300 |
| | 686,734 |
| $ | 9,826,839 |
| | 24,531 |
| | 149,634 |
|
Netting adjustments | | | (73,188 | ) | | (73,188 | ) | |
Cash collateral and related accrued interest | | | (2,200 | ) | | (508,262 | ) | |
Total collateral and netting adjustments (1) | | | (75,388 | ) | | (581,450 | ) | |
Netting adjustments and cash collateral (1) | | | | (9,832 | ) | | (85,867 | ) |
Total derivative assets and total derivative liabilities | | | $ | 4,912 |
| | $ | 105,284 |
| | | $ | 14,699 |
| | $ | 63,767 |
|
| |
(1) | Amounts represent the effectsapplication of legally enforceable masterthe netting agreementsrequirements that allow the FHLBankFHLB to settle positive and negative positions and ofalso cash collateral and related accrued interest held or placed by the FHLB with the same counterparties.clearing agent and/or counterparty. Cash collateral posted and related accrued interest was (in thousands) $66,685 and $78,755 at December 31, 2015 and 2014. Cash collateral received and related accrued interest was (in thousands) $3,039 and $2,720 at December 31, 2015 and 2014. |
Table 11.2 presents the components of net gains (losses) on derivatives and hedging activities as presented in the Statements of Income.
Table 11.2 - Net Gains (Losses) on Derivatives and Hedging Activities (in thousands)
| | | For the Years Ended December 31, | For the Years Ended December 31, |
| 2012 | | 2011 | | 2010 | 2015 | | 2014 | | 2013 |
Derivatives and hedged items in fair value hedging relationships: | | | | | | | | | | |
Interest rate swaps | $ | 6,864 |
| | $ | 8,412 |
| | $ | 8,799 |
| $ | 2,762 |
| | $ | 5,127 |
| | $ | 10,837 |
|
Derivatives not designated as hedging instruments: | | | | | | | | | | |
Economic hedges: | | | | | | | | | | |
Interest rate swaps | 3,771 |
| | (9,424 | ) | | (6,622 | ) | 2,515 |
| | 628 |
| | 7,456 |
|
Interest rate swaptions | | (274 | ) | | — |
| | — |
|
Forward rate agreements | (8,645 | ) | | (19,982 | ) | | (399 | ) | (1,090 | ) | | (15,465 | ) | | (845 | ) |
Net interest settlements | (2,378 | ) | | 3,330 |
| | 3,247 |
| 6,623 |
| | 706 |
| | 328 |
|
Mortgage delivery commitments | 9,123 |
| | 15,947 |
| | 2,800 |
| 2,501 |
| | 15,631 |
| | (9,873 | ) |
Total net gains (losses) related to derivatives not designated as hedging instruments | 1,871 |
| | (10,129 | ) | | (974 | ) | 10,275 |
| | 1,500 |
| | (2,934 | ) |
Net gains (losses) on derivatives and hedging activities | $ | 8,735 |
| | $ | (1,717 | ) | | $ | 7,825 |
| |
Net gains on derivatives and hedging activities | | $ | 13,037 |
| | $ | 6,627 |
| | $ | 7,903 |
|
Table 11.3 presents by type of hedged item, the gains (losses) on derivatives and the related hedged items in fair value hedging relationships and the impact of those derivatives on the FHLBank'sFHLB's net interest income.
Table 11.3 - Effect of Fair Value Hedge RelatedHedge-Related Derivative Instruments (in thousands)
| | | For the Years Ended December 31, | For the Years Ended December 31, |
2012 | Gain/(Loss) on Derivative | | Gain/(Loss) on Hedged Item | | Net Fair Value Hedge Ineffectiveness | | Effect of Derivatives on Net Interest Income(1) | |
2015 | | Gain/(Loss) on Derivative | | Gain/(Loss) on Hedged Item | | Net Fair Value Hedge Ineffectiveness | | Effect of Derivatives on Net Interest Income(1) |
Hedged Item Type: | | | | | | | | | | | | | | |
Advances | $ | 268,944 |
| | $ | (261,817 | ) | | $ | 7,127 |
| | $ | (248,475 | ) | $ | 62,657 |
| | $ | (60,453 | ) | | $ | 2,204 |
| | $ | (83,571 | ) |
Consolidated Bonds | (8,666 | ) | | 8,403 |
| | (263 | ) | | 36,836 |
| (10,930 | ) | | 11,488 |
| | 558 |
| | 19,787 |
|
Total | $ | 260,278 |
| | $ | (253,414 | ) | | $ | 6,864 |
| | $ | (211,639 | ) | $ | 51,727 |
| | $ | (48,965 | ) | | $ | 2,762 |
| | $ | (63,784 | ) |
2011 | | | | | | | | |
2014 | | | | | | | | |
Hedged Item Type: | | | | | | | | | | | | | | |
Advances | $ | 93,114 |
| | $ | (85,211 | ) | | $ | 7,903 |
| | $ | (366,248 | ) | $ | 76,295 |
| | $ | (71,315 | ) | | $ | 4,980 |
| | $ | (91,232 | ) |
Consolidated Bonds | (15,842 | ) | | 16,351 |
| | 509 |
| | 64,117 |
| (15,633 | ) | | 15,780 |
| | 147 |
| | 18,298 |
|
Total | $ | 77,272 |
| | $ | (68,860 | ) | | $ | 8,412 |
| | $ | (302,131 | ) | $ | 60,662 |
| | $ | (55,535 | ) | | $ | 5,127 |
| | $ | (72,934 | ) |
2010 | | | | | | | | |
2013 | | | | | | | | |
Hedged Item Type: | | | | | | | | | | | | | | |
Advances | $ | 30,673 |
| | $ | (22,673 | ) | | $ | 8,000 |
| | $ | (439,664 | ) | $ | 156,025 |
| | $ | (145,843 | ) | | $ | 10,182 |
| | $ | (106,452 | ) |
Consolidated Bonds | (15,123 | ) | | 15,922 |
| | 799 |
| | 114,579 |
| (26,341 | ) | | 26,996 |
| | 655 |
| | 27,038 |
|
Total | $ | 15,550 |
| | $ | (6,751 | ) | | $ | 8,799 |
| | $ | (325,085 | ) | $ | 129,684 |
| | $ | (118,847 | ) | | $ | 10,837 |
| | $ | (79,414 | ) |
| |
(1) | The net interest oneffect of derivatives, in fair value hedge relationships, on net interest income is included in the interest income/income or interest expense line item of the respective hedged item.item type. These amounts include the effect of net interest settlements attributable to designated fair value hedges but do not include (in thousands) $(3,424), $(3,310), and $(3,022) of (amortization)/accretion related to fair value hedging activities for the years ended December 31, 2015, 2014, and 2013. |
Managing Credit Risk on Derivatives
The FHLBankFHLB is subject to credit risk due to nonperformancethe risk of non-performance by counterparties to its derivative agreements. The degree of counterparty risk depends on the extent to which master netting arrangements are included in the contracts to mitigate the risk. The FHLBanktransactions and manages counterparty credit risk through credit analysis, collateral requirements and adherence to the requirements set forth in FHLBankits policies, U.S. Commodity Futures Trading Commission regulations, and Finance Agency Regulations.regulations. For uncleared derivatives, the degree of credit risk depends on the extent to which master netting arrangements are included in these contracts to mitigate the risk. The FHLBankFHLB requires collateral agreements on all derivatives that establishwith collateral delivery thresholds. Basedthresholds on credit analyses and collateral requirements at December 31, 2012 and2011, the FHLBank management did not anticipate any credit losses onmajority of its derivative agreements. See Note 20 for discussion regardinguncleared derivatives.
For cleared derivatives, the FHLBank's fair value methodology for derivative assets/liabilities, includingClearinghouse is the evaluationFHLB's counterparty. The Clearinghouse notifies the clearing agent of the potential forrequired initial and variation margin and the fair value of these instrumentsclearing agent in turn notifies the FHLB. The requirement that the FHLB post initial and variation margin through the clearing agent, to be affected by counterpartythe Clearinghouse, exposes the FHLB to credit risk and Note 21 for a discussionif the clearing agent or the Clearinghouse fails to meet its obligations. The use of a dispute with a past counterparty.
Table 11.4 presentscleared derivatives is intended to mitigate credit risk exposure on derivative instruments, excluding circumstances wherebecause a counterparty's pledgedcentral counterparty is substituted for individual counterparties and collateral tofor changes in the FHLBank exceeds the FHLBank's net position.value of cleared derivatives is posted daily through a clearing agent.
Table 11.4 - Credit Risk Exposure (in thousands)The FHLB has analyzed the enforceability of offsetting rights incorporated in its cleared derivative transactions and determined that the exercise of those offsetting rights by a non-defaulting party under these transactions should be upheld under applicable law upon an event of default including bankruptcy, insolvency, or similar proceeding involving the Clearinghouse or the FHLB's clearing agent, or both. Based on this analysis, the FHLB presents a net derivative receivable or payable for all of its transactions through a particular clearing agent with a particular Clearinghouse.
|
| | | | | | | |
| December 31, 2012 | | December 31, 2011 |
Total net exposure at fair value (1) | $ | 7,777 |
| | $ | 7,112 |
|
Cash collateral | 1,900 |
| | 2,200 |
|
Net positive exposure after cash collateral | $ | 5,877 |
| | $ | 4,912 |
|
| |
(1) | Includes net accrued interest receivables of (in thousands) $1,902 and $1,060 at December 31, 2012 and 2011.
|
Certain of the FHLBank's interest rate swapFHLB's uncleared derivative contracts contain provisions that require the FHLBankFHLB to post additional collateral with its counterparties if there is deterioration in the FHLBank'sFHLB's credit ratings. The aggregate fair value of all interest rate swapsuncleared derivatives with credit-risk-related contingent features that were in a net liability position (before cash collateral and related accrued interest) at December 31, 20122015 was (in thousands) $326,989,$64,235, for which the FHLBankFHLB had posted collateral with a fair value of (in thousands) $212,685$34,867 in the normal course of business.
If one of the FHLBank'sFHLB's credit ratings had been lowered to the next lower rating that would have triggered additional collateral to be delivered, the FHLBankFHLB would have been required to deliver up to an additional (in thousands) $28,178$5,588 of collateral at fair value to its derivatives counterparties at December 31, 2015.
For cleared derivatives, the Clearinghouse determines initial margin requirements and generally credit ratings are not factored into the initial margin. However, clearing agents may require additional initial margin to be posted based on credit considerations, including, but not limited to, credit rating downgrades. At December 31, 2015, the FHLB was not required to post additional initial margin by its clearing agents based on credit considerations.
Offsetting of Derivative Assets and Derivative Liabilities
The FHLB presents derivative instruments, related cash collateral, including initial and variation margin, received or pledged, and associated accrued interest, on a net basis by clearing agent and/or by counterparty when it has met the netting requirements.
Table 11.4 presents separately the fair value of derivative instruments meeting or not meeting netting requirements, including the related collateral received from or pledged to counterparties. At December 31, 20122015. and 2014, the FHLB did not receive or pledge any non-cash collateral. Any overcollateralization under an individual clearing agent and/or counterparty level is not included in the determination of the net unsecured amount.
Table 11.4 - Offsetting of Derivative Assets and Derivative Liabilities (in thousands) |
| | | | | | | | | | | | | | | |
| December 31, 2015 | | December 31, 2014 |
| Derivative Assets | | Derivative Liabilities | | Derivative Assets | | Derivative Liabilities |
Derivative instruments meeting netting requirements: | | | | | | | |
Gross recognized amount: | | | | | | | |
Uncleared derivatives | $ | 8,046 |
| | $ | 70,178 |
| | $ | 19,585 |
| | $ | 141,352 |
|
Cleared derivatives | 5,893 |
| | 11,801 |
| | 1,141 |
| | 3,357 |
|
Total gross recognized amount | 13,939 |
| | 81,979 |
| | 20,726 |
| | 144,709 |
|
Gross amounts of netting adjustments and cash collateral: | | | | | | | |
Uncleared derivatives | (7,844 | ) | | (40,810 | ) | | (19,544 | ) | | (82,510 | ) |
Cleared derivatives | 18,879 |
| | (11,801 | ) | | 9,712 |
| | (3,357 | ) |
Total gross amounts of netting adjustments and cash collateral | 11,035 |
| | (52,611 | ) | | (9,832 | ) | | (85,867 | ) |
Net amounts after netting adjustments and cash collateral: | | | | | | | |
Uncleared derivatives | 202 |
| | 29,368 |
| | 41 |
| | 58,842 |
|
Cleared derivatives | 24,772 |
| | — |
| | 10,853 |
| | — |
|
Total net amounts after netting adjustments and cash collateral | 24,974 |
| | 29,368 |
| | 10,894 |
| | 58,842 |
|
Derivative instruments not meeting netting requirements (1): | | | | | | | |
Uncleared derivatives | 2,022 |
| | 1,719 |
| | 3,805 |
| | 4,925 |
|
Total derivative instruments not meeting netting requirements (1) | 2,022 |
| | 1,719 |
| | 3,805 |
| | 4,925 |
|
Total derivative assets and total derivative liabilities: | | | | | | | |
Uncleared derivatives | 2,224 |
| | 31,087 |
| | 3,846 |
| | 63,767 |
|
Cleared derivatives | 24,772 |
| | — |
| | 10,853 |
| | — |
|
Total derivative assets and total derivative liabilities | $ | 26,996 |
| | $ | 31,087 |
| | $ | 14,699 |
| | $ | 63,767 |
|
| |
(1) | Represents mortgage delivery commitments and forward rate agreements that are not subject to an enforceable netting agreement. |
Note 12 - Deposits
The FHLBankFHLB offers demand and overnight deposits to members and qualifying nonmembers. In addition, the FHLBankFHLB offers short-term interest bearing deposit programs to members.members, and in certain cases, qualifying nonmembers. A member that services mortgage loans may deposit in the FHLBank funds collected in connection with the mortgage loans at the FHLB, pending disbursement of such funds to the owners of the mortgage loans. The FHLBankFHLB classifies these items as other interest bearing deposits.
Certain financial institutions have agreed to maintain compensating balances in consideration for correspondent and other non-credit services. These balances are included in interest bearing deposits on the accompanying financial statements. The compensating balances required to be held by the FHLBankFHLB averaged (in thousands) $4,102,364$3,171,708 and $3,120,090$3,597,698 during 20122015 and 2011.2014.
Deposits classified as demand, overnight, and other pay interest based on a daily interest rate. Term deposits pay interest based on a fixed rate determined at the issuance of the deposit. The average interest rates paid on interest bearing deposits during 2012, 2011, and 2010 were 0.03was 0.04 percent, 0.050.03 percent, and 0.09 percent.0.03 percent during 2015, 2014, and 2013.
Non-interest bearing deposits represent funds for which the FHLBankFHLB acts as a pass-through correspondent for member institutions required to deposit reserves with the Federal Reserve Banks.
Table 12.1- Deposits (in thousands)
| | | December 31, 2012 | | December 31, 2011 | December 31, 2015 | | December 31, 2014 |
Interest bearing: | | | | | | |
Demand and overnight | $ | 1,014,399 |
| | $ | 952,743 |
| $ | 646,902 |
| | $ | 624,446 |
|
Term | 118,425 |
| | 90,925 |
| 151,825 |
| | 99,600 |
|
Other | 25,428 |
| | 23,620 |
| 5,377 |
| | 5,592 |
|
Total interest bearing | 1,158,252 |
| | 1,067,288 |
| 804,104 |
| | 729,638 |
|
| | | | | | |
Non-interest bearing: | | | | | | |
Other | 18,353 |
| | 16,244 |
| 238 |
| | 298 |
|
Total non-interest bearing | 18,353 |
| | 16,244 |
| 238 |
| | 298 |
|
Total deposits | $ | 1,176,605 |
| | $ | 1,083,532 |
| $ | 804,342 |
| | $ | 729,936 |
|
The aggregate amount of time deposits with a denomination of $100$250 thousand or more was (in thousands) $118,350$151,775 and $90,850$99,550 as of December 31, 20122015 and 2011.2014, respectively.
Note 13 - Consolidated Obligations
Consolidated Obligations consist of Consolidated Bonds and Discount Notes. The FHLBanks issue Consolidated Obligations through the Office of Finance as their agent. In connection with each debt issuance, each FHLBank specifies the amount of debt it wants issued on its behalf. The Office of Finance tracks the amount of debt issued on behalf of each FHLBank. In addition, the FHLBank separately tracks and records as a liability its specific portion of Consolidated Obligations for which it is the primary obligor.
The Finance Agency and the U.S. Secretary of the Treasury have oversight overoversee the issuance of FHLBank debt through the Office of Finance. Consolidated Bonds are issued primarily to raise intermediate- and long-term funds for the FHLBanks and are not subject to any statutory or regulatory limits on maturity. Consolidated Discount Notes are issued primarily to raise short-term funds and have original maturities up to one year. These notes generally sell at less than their face amount and are redeemed at par value when they mature.
Although the FHLBankFHLB is primarily liable for its portion of Consolidated Obligations, (i.e., those issued on its behalf), the FHLBankFHLB is also jointly and severally liable with the other eleven10 FHLBanks for the payment of principal and interest on all Consolidated Obligations of each of the other FHLBanks. The Finance Agency, at its discretion, may require any FHLBank to make principal or interest payments due on any Consolidated Obligation whether or not the Consolidated Obligation represents a primary liability of such FHLBank. Although itan FHLBank has never occurred, topaid the extent that an FHLBank makes any paymentprincipal or interest payments due on a Consolidated Obligation on behalf of another FHLBank, if that is primarily liable for the Consolidated Obligation,event should occur, Finance Agency Regulationsregulations provide that the paying FHLBank is entitled to reimbursement from the non-complying FHLBank for those payments and other associated costs, (includingincluding interest to be determined by the Finance Agency).Agency. If, however, the Finance Agency determines that the non-complying FHLBank is unable to satisfy its repayment obligations, the Finance Agency may allocate the outstanding liabilities of the non-complying FHLBank among the remaining FHLBanks on a pro rata basis in proportion to each FHLBank's participation in all Consolidated Obligations outstanding or in any other manner it may determine to ensure that the FHLBanks operate in a safe and sound manner.
The par values of the 1211 FHLBanks' outstanding Consolidated Obligations were approximately $687.9$905.2 billion and $691.9$847.2 billion at December 31, 20122015 and 2011.2014. Regulations require the FHLBankFHLB to maintain unpledged qualifying assets equal to its participation in the Consolidated Obligations outstanding. Qualifying assets are defined as cash; secured Advances; assets with an assessment or rating at least equivalent to the current assessment or rating of the Consolidated Obligations; obligations of or fully guaranteed by the United States; obligations, participations, or other instruments of or issued by Fannie Mae or Ginnie Mae; mortgages, obligations, or other securities which are or ever have ever been sold by Freddie Mac under the FHLBank Act; and such securities as fiduciary and trust funds may invest in under the laws of the state in which the FHLBankFHLB is located. Any assets subject to a lien or pledge for the benefit of holders of any issue of Consolidated Obligations are treated as if they were free from lien or pledge for purposes of compliance with these regulations.
Table 13.1 - Consolidated Bonds Outstanding by Contractual Maturity (dollars in thousands)
|
| | | | | | | | | | | | | | |
| | December 31, 2012 | | December 31, 2011 |
Year of Contractual Maturity | | Amount | | Weighted Average Interest Rate | | Amount | | Weighted Average Interest Rate |
Due in 1 year or less | | $ | 18,656,450 |
| | 0.82 | % | | $ | 10,198,600 |
| | 1.52 | % |
Due after 1 year through 2 years | | 11,371,500 |
| | 0.83 |
| | 6,351,450 |
| | 2.08 |
|
Due after 2 years through 3 years | | 2,566,000 |
| | 1.96 |
| | 2,723,500 |
| | 3.01 |
|
Due after 3 years through 4 years | | 2,550,000 |
| | 2.62 |
| | 1,600,000 |
| | 2.81 |
|
Due after 4 years through 5 years | | 2,654,000 |
| | 1.81 |
| | 1,873,000 |
| | 3.36 |
|
Thereafter | | 6,369,000 |
| | 2.53 |
| | 5,861,000 |
| | 3.59 |
|
Index amortizing notes | | 56,162 |
| | 5.08 |
| | 118,397 |
| | 4.99 |
|
Total par value | | 44,223,112 |
| | 1.30 |
| | 28,725,947 |
| | 2.41 |
|
| | | | | | | | |
Premiums | | 80,956 |
| | | | 76,482 |
| | |
Discounts | | (18,851 | ) | | | | (19,990 | ) | | |
Hedging adjustments | | 58,334 |
| | | | 66,809 |
| | |
Fair value option valuation adjustment and accrued interest | | 2,366 |
| | | | 5,296 |
| | |
| | | | | | | | |
Total | | $ | 44,345,917 |
| | | | $ | 28,854,544 |
| | |
Table 13.2 - Consolidated Discount Notes Outstanding (dollars in thousands)
|
| | | | | | | | | | |
| Book Value | | Par Value | | Weighted Average Interest Rate(1) |
December 31, 2012 | $ | 30,840,224 |
| | $ | 30,848,612 |
| | 0.13 | % |
December 31, 2011 | $ | 26,136,303 |
| | $ | 26,137,977 |
| | 0.03 | % |
|
| | | | | | | | | | |
| Book Value | | Par Value | | Weighted Average Interest Rate (1) |
December 31, 2015 | $ | 77,199,208 |
| | $ | 77,225,334 |
| | 0.24 | % |
December 31, 2014 | $ | 41,232,127 |
| | $ | 41,238,122 |
| | 0.09 | % |
| |
(1) | Represents an implied rate without consideration of concessions. |
Table 13.3 - Consolidated Bonds Outstanding by Features (in thousands)
|
| | | | | | | |
| December 31, 2012 | | December 31, 2011 |
Par value of Consolidated Bonds: | | | |
Non-callable | $ | 36,724,112 |
| | $ | 20,981,947 |
|
Callable | 7,499,000 |
| | 7,744,000 |
|
Total par value | $ | 44,223,112 |
| | $ | 28,725,947 |
|
Table 13.413.2 - Consolidated Bonds Outstanding by Contractual Maturity or Next Call Date (in thousands)
|
| | | | | | | | |
Year of Contractual Maturity or Next Call Date | | December 31, 2012 | | December 31, 2011 |
Due in 1 year or less | | $ | 24,370,450 |
| | $ | 15,855,600 |
|
Due after 1 year through 2 years | | 11,466,500 |
| | 5,703,450 |
|
Due after 2 years through 3 years | | 1,936,000 |
| | 2,406,500 |
|
Due after 3 years through 4 years | | 1,860,000 |
| | 1,080,000 |
|
Due after 4 years through 5 years | | 1,907,000 |
| | 1,403,000 |
|
Thereafter | | 2,627,000 |
| | 2,159,000 |
|
Index amortizing notes | | 56,162 |
| | 118,397 |
|
| | | | |
Total par value | | $ | 44,223,112 |
| | $ | 28,725,947 |
|
Table 13.5 - Consolidated Bonds by Interest-rate Payment Type (in(dollars in thousands)
|
| | | | | | | |
| December 31, 2012 | | December 31, 2011 |
Par value of Consolidated Bonds: | | | |
Fixed-rate | $ | 29,393,112 |
| | $ | 27,285,947 |
|
Variable-rate | 14,830,000 |
| | 1,440,000 |
|
Total par value | $ | 44,223,112 |
| | $ | 28,725,947 |
|
|
| | | | | | | | | | | | | | |
| | December 31, 2015 | | December 31, 2014 |
Year of Contractual Maturity | | Amount | | Weighted Average Interest Rate | | Amount | | Weighted Average Interest Rate |
Due in 1 year or less | | $ | 9,808,000 |
| | 0.91 | % | | $ | 32,477,000 |
| | 0.24 | % |
Due after 1 year through 2 years | | 5,143,750 |
| | 1.42 |
| | 6,918,000 |
| | 1.19 |
|
Due after 2 years through 3 years | | 4,814,000 |
| | 1.64 |
| | 4,594,000 |
| | 1.56 |
|
Due after 3 years through 4 years | | 4,090,000 |
| | 1.89 |
| | 4,245,000 |
| | 1.79 |
|
Due after 4 years through 5 years | | 3,041,000 |
| | 2.09 |
| | 2,647,000 |
| | 2.08 |
|
Thereafter | | 8,139,000 |
| | 2.80 |
| | 8,217,000 |
| | 2.79 |
|
Index amortizing notes | | 943 |
| | 5.25 |
| | 25,297 |
| | 5.07 |
|
Total par value | | 35,036,693 |
| | 1.74 |
| | 59,123,297 |
| | 1.00 |
|
Premiums | | 90,189 |
| | | | 103,477 |
| | |
Discounts | | (24,525 | ) | | | | (25,161 | ) | | |
Hedging adjustments | | 3,817 |
| | | | 15,304 |
| | |
Fair value option valuation adjustment and accrued interest | | (1,410 | ) | | | | (360 | ) | | |
Total | | $ | 35,104,764 |
| | | | $ | 59,216,557 |
| | |
Consolidated Obligations outstanding were issued with either fixed-rate coupon payment terms or variable-rate coupon payment terms that may use a variety of indices for interest rate resets, including LIBOR. To meet the expected specific needs of certain investors in Consolidated Obligations, both fixed-rate Bonds and variable-rate Bonds may contain features that result in complex coupon payment terms and call options. When suchthese Consolidated Obligations are issued, the FHLBankFHLB may enter into derivatives containing features that offset the terms and embedded options, if any, of the Consolidated Obligations. At
Table 13.3 - Consolidated Bonds Outstanding by Call Features (in thousands)
|
| | | | | | | |
| December 31, 2015 | | December 31, 2014 |
Par value of Consolidated Bonds: | | | |
Non-callable | $ | 28,235,693 |
| | $ | 49,976,297 |
|
Callable | 6,801,000 |
| | 9,147,000 |
|
Total par value | $ | 35,036,693 |
| | $ | 59,123,297 |
|
Table 13.4 - Consolidated Bonds Outstanding by Contractual Maturity or Next Call Date (in thousands)December 31, 2012 and 2011, 26 percent and 33 percent
|
| | | | | | | | |
Year of Contractual Maturity or Next Call Date | | December 31, 2015 | | December 31, 2014 |
Due in 1 year or less | | $ | 16,339,000 |
| | $ | 40,774,000 |
|
Due after 1 year through 2 years | | 4,881,750 |
| | 5,413,000 |
|
Due after 2 years through 3 years | | 3,499,000 |
| | 3,317,000 |
|
Due after 3 years through 4 years | | 3,020,000 |
| | 2,685,000 |
|
Due after 4 years through 5 years | | 2,383,000 |
| | 1,992,000 |
|
Thereafter | | 4,913,000 |
| | 4,917,000 |
|
Index amortizing notes | | 943 |
| | 25,297 |
|
Total par value | | $ | 35,036,693 |
| | $ | 59,123,297 |
|
Consolidated Bonds, beyond having fixed-rate or variable-rate interest-rate payment terms, may also have a step-up interest-rate payment type. Step-up bonds pay interest at increasing fixed rates for specified intervals over the life of the FHLBank's fixed-rateConsolidated Bond. These Consolidated Bonds were swappedgenerally contain provisions enabling the FHLB to a variable rate.call the Consolidated Bonds at its option on the step-up dates.
Table 13.5 - Consolidated Bonds by Interest-rate Payment Type (in thousands)
|
| | | | | | | |
| December 31, 2015 | | December 31, 2014 |
Par value of Consolidated Bonds: | | | |
Fixed-rate | $ | 30,806,693 |
| | $ | 31,363,297 |
|
Variable-rate | 4,065,000 |
| | 27,610,000 |
|
Step-up | 165,000 |
| | 150,000 |
|
Total par value | $ | 35,036,693 |
| | $ | 59,123,297 |
|
Concessions on Consolidated Obligations. Unamortized concessions included in other assets were (in thousands) $14,29913,042 and $11,70714,184 at December 31, 20122015 and 2011.2014. The amortization of these concessions is included in Consolidated Obligation interest expense and totaled (in thousands) $13,280, $21,704, $15,6867,380, and $24,659 in 2012, 2011,$7,026 for the years ended December 31, 2015, 2014, and 2010.2013, respectively.
Note 14 - Affordable Housing Program (AHP)
The FHLBank Act requires each FHLBank to establish an AHP. Each FHLBank provides subsidies in the form of direct grants and below-market interest rate Advances to members who use the funds to assist in the purchase, construction, or rehabilitation of housing for very low-, low-, and moderate-income households. Annually, the FHLBanks must set aside for the AHP the greater of $100$100 million or 10 percent of net earnings. For purposes of the AHP calculation, net earnings is defined as net income before assessments, plus interest expense related to mandatorily redeemable capital stock, less the assessment for REFCORP until the FHLBanks' REFCORP obligation was satisfied.stock. The FHLBankFHLB accrues AHP expense monthly based on its net earnings. The FHLBankFHLB reduces the AHP liability as members use subsidies. See Note 15 for a discussion of the REFCORP calculation.
As discussed in Note 15, the FHLBank fully satisfied its REFCORP obligation in 2011. Because the REFCORP assessment reduced the amount of net earnings used to calculate the AHP assessment, it had the effect of reducing the total amount of funds allocated to the AHP. The amounts allocated to the new restricted retained earnings account, however, are not treated as an assessment and do not reduce each FHLBank's net income. As a result, each FHLBank's AHP contributions as a percentage of pre-assessment earnings increase because the REFCORP obligation has been fully satisfied.
If the FHLBankFHLB experienced a net loss during a quarter, but still had net earnings for the year, the FHLBank'sFHLB's obligation to the AHP would be calculated based on the FHLBank'sFHLB's year-to-date net earnings. If the FHLBankFHLB had net earnings in subsequent quarters, it would be required to contribute additional amounts to meet its calculated annual obligation. If the FHLBankFHLB experienced a net loss for a full year, the FHLBankFHLB would have no obligation to the AHP for the year, because each FHLBank'sFHLB's required annual AHP contribution is limited to its annual net earnings. If the aggregate 10 percent calculation described above
was less than $100$100 million for all 12the FHLBanks, each FHLBank would be required to contribute a pro rata amount sufficient to assure that the aggregate contributions of the FHLBanks equaled $100$100 million. The pro ration would be made on the basis of an FHLBank's income in relation to the income of all FHLBanks for the previous year.
There was no shortfall, as described above, in 2012, 20112015, 2014, or 2010.2013. If an FHLBank finds that its required AHP obligations are contributing to its financial instability, it may apply to the Finance Agency for a temporary suspension of its contributions. The FHLBankFHLB has never made such an application. The FHLBankFHLB had outstanding principal in AHP-related Advances (in thousands) of $137,020$85,145 and $149,243$102,465 at December 31, 20122015 and 2011.2014.
Table 14.1 - Analysis of the FHLBank's AHP Liability (in thousands)
| | | 2012 | | 2011 | 2015 | | 2014 |
Balance at beginning of year | $ | 74,195 |
| | $ | 88,037 |
| $ | 98,103 |
| | $ | 93,789 |
|
Expense (current year additions) | 27,379 |
| | 16,914 |
| |
Assessments (current year additions) | | 27,906 |
| | 27,605 |
|
Subsidy uses, net | (18,902 | ) | | (30,756 | ) | (18,657 | ) | | (23,291 | ) |
Balance at end of year | $ | 82,672 |
| | $ | 74,195 |
| $ | 107,352 |
| | $ | 98,103 |
|
Note 15 - Resolution Funding Corporation (REFCORP)
On August 5, 2011, the Finance Agency certified that the FHLBanks had fully satisfied their REFCORP obligation with their payment made on July 15, 2011, which was accrued as applicable in each FHLBank's June 30, 2011 financial statements. The FHLBanks entered into a Joint Capital Enhancement Agreement, as amended, which requires each FHLBank to allocate 20 percent of its net income to a separate restricted retained earnings account, beginning in the third quarter of 2011. See Note 16 for additional information on the FHLBank's Joint Capital Enhancement Agreement and REFCORP Certification.
Prior to the satisfaction of the FHLBanks' REFCORP obligation, each FHLBank was required to make payments to REFCORP (20 percent of annual GAAP net income before REFCORP assessments and after payment of AHP assessments) until the total amount of payments actually made was equivalent to a $300 million annual annuity whose final maturity date was April 15, 2030. The Finance Agency shortened or lengthened the period during which the FHLBanks made payments to REFCORP based on actual payments made relative to the referenced annuity. The Finance Agency, in consultation with the U.S. Secretary of the Treasury, selected the appropriate discounting factors used in calculating the annuity. See Note 14 for additional information on the FHLBank's AHP calculation.
Note 16 - Capital
The FHLBankFHLB is subject to three capital requirements under its Capital Plan and the Finance Agency rules and regulations. Regulatory capital does not include accumulated other comprehensive income, but does include mandatorily redeemable capital stock.
| |
1. | Risk-based capital. The FHLBankFHLB must maintain at all times permanent capital, defined as Class B stock and retained earnings, in an amount at least equal to the sum of its credit risk, market risk, and operations risk capital requirements, all of which are calculated in accordance with the rules and regulations of the Finance Agency. |
| |
2. | Total regulatory capital. The FHLBankFHLB is required to maintain at all times a total regulatory capital-to-assets ratio of at least four percent. Total regulatory capital is the sum of permanent capital, Class A stock, any general loss allowance, if consistent with GAAP and not established for specific assets, and other amounts from sources determined by the Finance Agency as available to absorb losses. |
| |
3. | Leverage capital. The FHLBankFHLB is required to maintain at all times a leverage capital-to-assets ratio of at least five percent. Leverage capital is defined as the sum of permanent capital weighted 1.5 times and all other capital without a weighting factor. |
The Finance Agency may require the FHLBankFHLB to maintain greater permanent capital than is required based on Finance Agency rules and regulations.
At December 31, 20122015 and 2011,2014, the FHLBankFHLB was in compliance with each of these capital requirements.
Table 16.115.1 - Capital Requirements (dollars in thousands)
| | | December 31, 2012 | | December 31, 2011 | | | | | | | | | |
| Required | | Actual | | Required | | Actual | December 31, 2015 | | December 31, 2014 |
| | | | | | | | Minimum Requirement | | Actual | | Minimum Requirement | | Actual |
Risk-based capital | $ | 488,754 |
| | $ | 4,759,331 |
| | $ | 387,038 |
| | $ | 3,844,889 |
| $ | 630,604 |
| | $ | 5,232,228 |
| | $ | 481,835 |
| | $ | 5,018,567 |
|
Capital-to-assets ratio (regulatory) | 4.00 | % | | 5.84 | % | | 4.00 | % | | 6.37 | % | 4.00 | % | | 4.40 | % | | 4.00 | % | | 4.71 | % |
Regulatory capital | $ | 3,262,486 |
| | $ | 4,759,331 |
| | $ | 2,415,861 |
| | $ | 3,844,889 |
| $ | 4,751,871 |
| | $ | 5,232,228 |
| | $ | 4,265,617 |
| | $ | 5,018,567 |
|
Leverage capital-to-assets ratio (regulatory) | 5.00 | % | | 8.75 | % | | 5.00 | % | | 9.55 | % | 5.00 | % | | 6.61 | % | | 5.00 | % | | 7.06 | % |
Leverage capital | $ | 4,078,108 |
| | $ | 7,138,997 |
| | $ | 3,019,827 |
| | $ | 5,767,334 |
| $ | 5,939,839 |
| | $ | 7,848,342 |
| | $ | 5,332,021 |
| | $ | 7,527,851 |
|
The FHLBankFHLB currently offers only Class B stock, which is issued and redeemed at a par value of $100$100 per share. Class B stock may be issued to meet membership and activity stock purchase requirements, to pay dividends, and to pay interest on mandatorily redeemable capital stock. Membership stock is required to become a member of and maintain membership in the FHLBank.FHLB. The membership stock requirement is based upon a percentage of the member's total assets, currently determined within a declining range from 0.150.12 percent to 0.03 percent of each member's total assets, with a current minimum of $1$1 thousand and a current maximum of $25$25 million for each member. In addition to membership stock, a member may be required to hold activity stock to capitalize its Mission Asset Activity with the FHLBank.FHLB.
Mission Asset Activity includes Advances, certain funds and rate Advance commitments, and MPP activity that occurred after implementation of the Capital Plan on December 30, 2002. Members must maintain an activity stock balance at least equal to the minimum activity allocation percentage, which currently is zero percent for the MPP and two percent for all other Mission
Asset Activity. If a member owns more than the maximum activity allocation percentage, which currently is four percent of all Mission Asset Activity, the additional stock is that member's excess stock. The FHLBank'sFHLB's unrestricted excess stock is defined as total Class B stock minus membership stock, activity stock calculated at the maximum allocation percentage, shares reserved for exclusive use after a stock dividend, and shares subject to redemption and withdrawal notices. The FHLBank'sFHLB's excess stock may normally be used by members to support a portion of their activity stock requirement as long as those members maintain at least their minimum activity stock allocation percentage.
A member may request redemption of all or part of its Class B stock or may withdraw from membership by giving five years' advance written notice. When the FHLBankFHLB repurchases capital stock, it must first repurchase shares for which a redemption or withdrawal notice's five-yearfive-year redemption period or withdrawal period has expired. Since its Capital Plan was implemented, the FHLBankFHLB has repurchased, at its discretion, all member shares subject to outstanding redemption notices prior to the expiration of the five-yearfive-year redemption period.
The Gramm-Leach-Bliley Act of 1999 (GLB Act) made membership in the FHLBanks voluntary for all members. Any member that has withdrawn from membership may not be readmitted to membership in any FHLBank until five years from the divestiture date for all capital stock that was held as a condition of membership, unless the institution has cancelledcanceled its notice of withdrawal prior to the divestiture date. This restriction does not apply if the member is transferring its membership from one FHLBank to another on an uninterrupted basis.
In accordance with the FHLBank Act, each class of FHLBankFHLB stock is considered putable by the member and the FHLBankFHLB may repurchase, in its sole discretion, any member's stock investments that exceed the required minimum amount. However, there are significant statutory and regulatory restrictions on the obligation to redeem, or right to repurchase, the outstanding stock. As a result, whether or not a member may have its capital stock in the FHLBankFHLB repurchased (at the FHLBank'sFHLB's discretion at any time before the end of the redemption period) or redeemed (at a member's request, completed at the end of a redemption period) will depend on whether the FHLBankFHLB is in compliance with those restrictions.
The FHLBank'sFHLB's retained earnings are owned proportionately by the current holders of Class B stock. The holders' interest in the retained earnings is realized at the time the FHLBankFHLB periodically declares dividends or at such time as the FHLBankFHLB is liquidated. The FHLBank'sFHLB's Board of Directors may declare and pay dividends in either cash or capital stock, assuming the FHLBankFHLB is in compliance with Finance Agency rules.rules and regulations.
Restricted Retained Earnings. The Joint Capital Enhancement Agreement (Capital Agreement) is intended to enhance the capital position of each FHLBank. The Capital Agreement provides that each FHLBank will contribute contributes 20 percent of its net income each quarter to a separate restricted retained earnings account until the balance of that account equals at least one
percent of that FHLBank's average balance of outstanding Consolidated Obligations for the previous quarter. These restricted retained earnings are not available to pay dividends but are available to absorb unexpected losses, if any, that the FHLBank may experience.At December 31, 20122015 and 20112014 the FHLBankFHLB had (in thousands) $58,628209,438 and $11,683159,694 in restricted retained earnings.
Mandatorily Redeemable Capital Stock. The FHLBankFHLB is a cooperative whose members and former members own all of the FHLBank'sFHLB's capital stock. Member shares cannot be purchased or sold except between the FHLBankFHLB and its members at its $100$100 per share par value, as mandated by the FHLBank'sFHLB's Capital Plan. The FHLBankFHLB reclassifies stock subject to redemption from equity to liability upon expiration of the “grace period” after a member submits a written redemption request or withdrawal notice, or when the member attains nonmember status by merger or acquisition, relocation, charter termination, or involuntary termination of membership. A member may cancel or revoke its written redemption request or its withdrawal notice prior to the end of the five-yearfive-year redemption period. Under the FHLBank'sFHLB's Capital Plan, there is a five calendar day “grace period” for revocation of a redemption request and a 30 calendar day “grace period” for revocation of a withdrawal notice during which the member may cancel the redemption request or withdrawal notice without a penalty or fee. The cancellation fee after the “grace period” is currently two percent of the requested amount in the first year and increases one percent a year until it reaches a maximum of six percent in the fifth year. The cancellation fee can be waived by the FHLBank'sFHLB's Board of Directors for a bona fide business purpose.
Stock subject to a redemption or withdrawal notice that is within the “grace period” continues to be considered equity because there is no penalty or fee to retract these notices. Expiration of the “grace period” triggers the reclassification from equity to a liability (mandatorily redeemable capital stock) at fair value because after the “grace period” the penalty to retract these notices is considered substantive. If a member cancels its written notice of redemption or notice of withdrawal, the FHLBankFHLB will reclassify mandatorily redeemable capital stock from a liability to equity. Dividends related to capital stock classified as a liability are accrued at the expected dividend rate and reported as interest expense in the Statements of Income. The repayment of these mandatorily redeemable financial instruments is reflected as a cash outflow in the financing activities section of the Statements of Cash Flows. For the years
ended December 31, 2012, 2011,2015, 2014, and 20102013 dividends on mandatorily redeemable capital stock in the amount (in thousands) of $11,690, $13,955,$2,432, $4,190 and $17,664$5,506 were recorded as interest expense.
Table 16.215.2 - Mandatorily Redeemable Capital Stock Roll Forward (in thousands)
|
| | | | | | | | | |
| 2012 | 2011 | 2010 |
Balance, beginning of year | $ | 274,781 |
| $ | 356,702 |
| $ | 675,479 |
|
Capital stock subject to mandatory redemption reclassified from equity: | | | |
Withdrawals | 193 |
| 12,137 |
| 10,455 |
|
Other redemptions | 39,933 |
| 2,076 |
| 30,452 |
|
Redemption (or other reduction) of mandatorily redeemable capital stock: | | | |
Withdrawals | (64,146 | ) | (74,058 | ) | (270,119 | ) |
Other redemptions | (39,933 | ) | (22,076 | ) | (89,565 | ) |
Balance, end of year | $ | 210,828 |
| $ | 274,781 |
| $ | 356,702 |
|
|
| | | | | | | | | |
| 2015 | 2014 | 2013 |
Balance, beginning of year | $ | 62,963 |
| $ | 115,853 |
| $ | 210,828 |
|
Capital stock subject to mandatory redemption reclassified from equity | 28,919 |
| 17,110 |
| 33,457 |
|
Redemption (or other reduction) of mandatorily redeemable capital stock | (53,987 | ) | (70,000 | ) | (128,432 | ) |
Balance, end of year | $ | 37,895 |
| $ | 62,963 |
| $ | 115,853 |
|
The number of stockholders holding the mandatorily redeemable capital stock was 15, 11, 13, and 1611 at December 31, 2012, 2011,2015, 2014, and 2010.2013.
As of December 31, 2012,2015 there were no members or former memberswas one member that had requested redemptions of capital stock whose stock had not been reclassified as mandatorily redeemable capital stock because the “grace periods” had not yet expired on these requests.
Table 16.315.3 shows the amount of mandatorily redeemable capital stock by contractual year of redemption. The year of redemption in the table is the end of the five-year redemption period. Consistent with the Capital Plan currently in effect, the FHLBankFHLB is not required to redeem membership stock until five years after either (i) the membership is terminated or (ii) the FHLBankFHLB receives notice of withdrawal. The FHLBankFHLB is not required to redeem activity-based stock until the later of the expiration of the notice of redemption or until the activity to which the capital stock relates no longer remains outstanding. If activity-based stock becomes excess stock as a result of an activity no longer remaining outstanding, the FHLBankFHLB may repurchase such shares, in its sole discretion, subject to the statutory and regulatory restrictions on capital stock redemption discussed below.redemption.
The GLB Act states that an FHLBank may repurchase, in its sole discretion, any member's stock investments that exceed the required minimum amount.
Table 16.315.3 - Mandatorily Redeemable Capital Stock by Contractual Year of Redemption (in thousands)
|
| | | | | | | | |
Contractual Year of Redemption | | December 31, 2012 | | December 31, 2011 |
Due in 1 year or less | | $ | 1,750 |
| | $ | 104 |
|
Due after 1 year through 2 years | | 207,439 |
| | 1,976 |
|
Due after 2 years through 3 years | | 130 |
| | 268,675 |
|
Due after 3 years through 4 years | | — |
| | 530 |
|
Due after 4 years through 5 years | | — |
| | 1,800 |
|
Past contractual redemption date due to remaining activity(1) | | 1,509 |
| | 1,696 |
|
Total par value | | $ | 210,828 |
| | $ | 274,781 |
|
|
| | | | | | | | |
Contractual Year of Redemption | | December 31, 2015 | | December 31, 2014 |
Year 1 | | $ | — |
| | $ | 130 |
|
Year 2 | | — |
| | — |
|
Year 3 | | 41 |
| | — |
|
Year 4 | | 2,265 |
| | 55 |
|
Year 5 | | 2,876 |
| | 2,278 |
|
Past contractual redemption date due to remaining activity (1) | | 32,713 |
| | 60,500 |
|
Total | | $ | 37,895 |
| | $ | 62,963 |
|
| |
(1) | Represents mandatorily redeemable capital stock that is past the end of the contractual redemption period because there is activity outstanding to which the mandatorily redeemable capital stock relates. |
Excess Capital Stock. Finance Agency rulesregulations limit the ability of an FHLBank to create member excess stock under certain circumstances. The FHLBankFHLB may not pay dividends in the form of capital stock or issue new excess stock to members if its excess stock exceeds one percent of its total assets or if the issuance of excess stock would cause the FHLBank'sFHLB's excess stock to exceed one percent of its total assets. At December 31, 2012,2015, the FHLBankFHLB had excess capital stock outstanding totaling moreless than one percent of its total assets. At December 31, 2012,2015, the FHLBankFHLB was in compliance with the Finance Agency's excess stock rules.
Note 1716 - Accumulated Other Comprehensive (Loss) Income
The following table summarizestables summarize the changes in accumulated other comprehensive (loss) income for the years ended December 31, 20122015, 20112014, and 2010.2013.
Table 17.116.1 - Accumulated Other Comprehensive (Loss) Income (in thousands)
|
| | | | | | | | | | | |
| Net unrealized (losses) gains on available-for-sale securities | | Pension and postretirement benefits | | Total accumulated other comprehensive (loss) income |
BALANCE, DECEMBER 31, 2009 | $ | (364 | ) | | $ | (7,744 | ) | | $ | (8,108 | ) |
Other comprehensive income | 100 |
| | 285 |
| | 385 |
|
BALANCE, DECEMBER 31, 2010 | (264 | ) | | (7,459 | ) | | (7,723 | ) |
Other comprehensive loss | (750 | ) | | (2,528 | ) | | (3,278 | ) |
BALANCE, DECEMBER 31, 2011 | (1,014 | ) | | (9,987 | ) | | (11,001 | ) |
Other comprehensive income | 1,014 |
| | (1,747 | ) | | (733 | ) |
BALANCE, DECEMBER 31, 2012 | $ | — |
| | $ | (11,734 | ) | | $ | (11,734 | ) |
|
| | | | | | | | | | | |
| Net unrealized (losses) gains on available-for-sale securities | | Pension and postretirement benefits | | Total accumulated other comprehensive (loss) income |
BALANCE, DECEMBER 31, 2012 | $ | — |
| | $ | (11,734 | ) | | $ | (11,734 | ) |
Other comprehensive income before reclassification: | | | | | |
Net unrealized loss | (121 | ) | | — |
| | (121 | ) |
Net actuarial gains | — |
| | 803 |
| | 803 |
|
Reclassifications from other comprehensive income to net income: | | | | | |
Amortization - pension and postretirement benefits | — |
| | 2,010 |
| | 2,010 |
|
Net current period other comprehensive (loss) income | (121 | ) | | 2,813 |
| | 2,692 |
|
BALANCE, DECEMBER 31, 2013 | (121 | ) | | (8,921 | ) | | (9,042 | ) |
Other comprehensive income before reclassification: | | | | | |
Net unrealized gains | 97 |
| | — |
| | 97 |
|
Net actuarial loss | — |
| | (9,496 | ) | | (9,496 | ) |
Reclassifications from other comprehensive income to net income: | | | | | |
Amortization - pension and postretirement benefits | — |
| | 1,845 |
| | 1,845 |
|
Net current period other comprehensive income (loss) | 97 |
| | (7,651 | ) | | (7,554 | ) |
BALANCE, DECEMBER 31, 2014 | (24 | ) | | (16,572 | ) | | (16,596 | ) |
Other comprehensive income before reclassification: | | | | | |
Net unrealized gains | 105 |
| | — |
| | 105 |
|
Net actuarial gains | — |
| | 598 |
| | 598 |
|
Reclassifications from other comprehensive income to net income: | | | | | |
Amortization - pension and postretirement benefits | — |
| | 2,616 |
| | 2,616 |
|
Net current period other comprehensive income | 105 |
| | 3,214 |
| | 3,319 |
|
BALANCE, DECEMBER 31, 2015 | $ | 81 |
| | $ | (13,358 | ) | | $ | (13,277 | ) |
Note 1817 - Pension and Postretirement Benefit Plans
Qualified Defined Benefit Multi-employer Plan. The FHLBankFHLB participates in the Pentegra Defined Benefit Plan for Financial Institutions (Pentegra Defined Benefit Plan), a tax-qualified defined benefit pension plan. The Pentegra Defined Benefit Plan is treated as a multi-employer plan for accounting purposes, but operates as a multiple-employer plan under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code. As a result, certain multi-employer plan disclosures, including the certified zone status, are not applicable to the Pentegra Defined Benefit Plan. Under the Pentegra Defined Benefit Plan, contributions made by one participating employer may be used to provide benefits to employees of other participating employers because assets contributed by an employer are not segregated in a separate account or restricted to
provide benefits only to employees of that employer. Also, in the event a participating employer is unable to meet its contribution requirements, the required contributions for the other participating employers could increase proportionately. The Pentegra Defined Benefit Plan covers substantially all officers and employees of the FHLBankFHLB who meet certain eligibility requirements.
The Pentegra Defined Benefit Plan operates on a plan year from July 1 through June 30. The Pentegra Defined Benefit Plan files one Form 5500 on behalf of all employers who participate in the plan. The Employer Identification Number is 13-5645888 and the three-digit plan number is 333.333. There are no collective bargaining agreements in place at the FHLBank.FHLB.
The Pentegra Defined Benefit Plan's annual valuation process includes calculating the plan's funded status and separately calculating the funded status of each participating employer. The funded status is defined as the market value of assets divided by the funding target (100 percent of the present value of all benefit liabilities accrued at that date). As permitted by ERISA, the Pentegra Defined Benefit Plan accepts contributions for the prior plan year up to eight and a half months after the end of the prior plan year. As a result, the market value of assets at the valuation date (July 1) will increase by any subsequent contributions designated for the immediately preceding plan year ended June 30.
The most recent Form 5500 available for the Pentegra Defined Benefit Plan is for the year ended June 30, 2011.2014. The FHLBankFHLB did not contribute more than five percent of the total contributions to the Pentegra Defined Benefit Plan for the plan year ended June 30, 2011. The FHLBank contributed more than five percent (5.6 percent) of the total contributions to the Pentegra Defined Benefit Plan for the plan year ended June 30, 2010.2014 and 2013.
Table 18.117.1 - Pentegra Defined Benefit Plan Net Pension Cost and Funded Status (dollars in thousands)
|
| | | | | | | | | | | |
| 2012 | | 2011 | | 2010 |
Net pension cost charged to compensation and benefit expense for the year ended December 31 | $ | 4,638 |
| | $ | 4,275 |
| | $ | 8,141 |
|
Pentegra Defined Benefit Plan funded status as of July 1 | 108.22 | % | (a) | 90.29 | % | (b) | 87.98 | % |
FHLBank's funded status as of July 1 | 110.48 | % | | 92.81 | % | | 93.01 | % |
(a) The Pentegra Defined Benefit Plan's funded status as of July 1, 2012 is preliminary and may increase because the plan's participants were permitted to make contributions for the plan year ended June 30, 2012 through March 15, 2013. Contributions made on or before March 15, 2013, and designated for the plan year ended June 30, 2012, will be included in the final valuation as of July 1, 2012. The final funded status as of July 1, 2012 will not be available until the Form 5500 for the plan year July 1, 2012 through June 30, 2013 is filed (this Form 5500 is due to be filed no later than April 2014). |
| | | | | | | | | | | |
| 2015 | | 2014 | | 2013 |
Net pension cost charged to compensation and benefit expense for the year ended December 31 | $ | 6,348 |
| | $ | 6,041 |
| | $ | 5,516 |
|
Pentegra Defined Benefit Plan funded status as of July 1 | 106.89 | % | (a) | 111.44 | % | (b) | 101.31 | % |
FHLB's funded status as of July 1 | 124.97 | % | | 128.27 | % | | 107.36 | % |
| |
(b)(a) | The Pentegra Defined Benefit Plan's funded status as of July 1, 20112015 is preliminary and may increase because the plan's participants were permitted to make contributions for the plan year ended June 30, 20112015 through March 15, 2012.2016. Contributions made on or before March 15, 2012,2016, and designated for the plan year ended June 30, 2011,2015, will be included in the final valuation as of July 1, 2011.2015. The final funded status as of July 1, 20112015 will not be available until the Form 5500 for the plan year July 1, 20112015 through June 30, 20122016 is filed (this Form 5500 is due to be filed no later than April 2013)2017). |
| |
(b) | The Pentegra Defined Benefit Plan's funded status as of July 1, 2014 is preliminary and may increase because the plan's participants were permitted to make contributions for the plan year ended June 30, 2014 through March 15, 2015. Contributions made on or before March 15, 2015, and designated for the plan year ended June 30, 2014, will be included in the final valuation as of July 1, 2014. The final funded status as of July 1, 2014 will not be available until the Form 5500 for the plan year July 1, 2014 through June 30, 2015 is filed (this Form 5500 is due to be filed no later than April 2016). |
Qualified Defined Contribution Plan. The FHLBankFHLB also participates in the Pentegra Defined Contribution Plan for Financial Institutions, a tax-qualified, defined contribution pension plan. The FHLBankFHLB contributes a percentage of the participants' compensation by making a matching contribution equal to a percentage of voluntary employee contributions, subject to certain limitations. The FHLBankFHLB contributed $848,000, $802,000,$992,000, $943,000, and $797,000$875,000 in the years ended December 31, 2012, 2011,2015, 2014, and 2010.2013, respectively.
Nonqualified Supplemental Defined Benefit Retirement Plan. The FHLBankFHLB maintains a nonqualified, unfunded defined benefit plan. The plan ensures that participants receive the full amount of benefits to which they would have been entitled under the qualified defined benefit plan in the absence of limits on benefit levels imposed by the IRS. There are no funded plan assets. The FHLBankFHLB has established a grantor trust, which is included in held-to-maturity securities on the Statements of Condition, to meet future benefit obligations and current payments to beneficiaries.
Postretirement Benefits Plan. The FHLBankFHLB also sponsors a postretirement benefits plan that includes health care and life insurance benefits for eligible retirees. Future retirees are eligible for the postretirement benefits plan if they were hired prior to August 1, 1990, are age 55 or older, and their age plus years of continuous service at retirement are greater than or equal to 80. Spouses are covered subject to required contributions. There are no funded plan assets that have been designated to provide postretirement benefits.
Table 18.217.2 presents the obligations and funding status of the FHLBank'sFHLB's nonqualified supplemental defined benefit retirement plan and postretirement benefits plan. The benefit obligation represents projected benefit obligation for the nonqualified supplemental defined benefit retirement plan and accumulated postretirement benefit obligation for the postretirement benefits plan.
Table 18.217.2 - Benefit Obligation, Fair Value of Plan Assets and Funded Status (in thousands)
| | | Defined Benefit Retirement Plan | | Postretirement Benefits Plan | Defined Benefit Retirement Plan | | Postretirement Benefits Plan |
Change in benefit obligation: | 2012 | 2011 | | 2012 | 2011 | 2015 | 2014 | | 2015 | 2014 |
Benefit obligation at beginning of year | $ | 26,088 |
| $ | 22,816 |
| | $ | 4,307 |
| $ | 3,507 |
| $ | 33,860 |
| $ | 26,511 |
| | $ | 5,197 |
| $ | 3,957 |
|
Service cost | 578 |
| 473 |
| | 72 |
| 54 |
| 668 |
| 524 |
| | 74 |
| 53 |
|
Interest cost | 963 |
| 1,129 |
| | 200 |
| 197 |
| 1,222 |
| 1,234 |
| | 203 |
| 190 |
|
Actuarial loss (gain) | 2,261 |
| 2,754 |
| | 440 |
| 679 |
| |
Actuarial (gain) loss | | (413 | ) | 8,335 |
| | (185 | ) | 1,161 |
|
Benefits paid | (2,597 | ) | (1,084 | ) | | (160 | ) | (130 | ) | (2,797 | ) | (2,744 | ) | | (173 | ) | (164 | ) |
Benefit obligation at end of year | 27,293 |
| 26,088 |
| | 4,859 |
| 4,307 |
| 32,540 |
| 33,860 |
| | 5,116 |
| 5,197 |
|
Change in plan assets: | | | | | | |
Fair value of plan assets at beginning of year | — |
| — |
| | — |
| — |
| — |
| — |
| | — |
| — |
|
Employer contribution | 2,597 |
| 1,084 |
| | 160 |
| 130 |
| 2,797 |
| 2,744 |
| | 173 |
| 164 |
|
Benefits paid | (2,597 | ) | (1,084 | ) | | (160 | ) | (130 | ) | (2,797 | ) | (2,744 | ) | | (173 | ) | (164 | ) |
Fair value of plan assets at end of year | — |
| — |
| | — |
| — |
| — |
| — |
| | — |
| — |
|
Funded status at end of year | $ | (27,293 | ) | $ | (26,088 | ) | | $ | (4,859 | ) | $ | (4,307 | ) | $ | (32,540 | ) | $ | (33,860 | ) | | $ | (5,116 | ) | $ | (5,197 | ) |
Amounts recognized in “Other liabilities” on the Statements of Condition for the FHLBank'sFHLB's nonqualified supplemental defined benefit plan and postretirement benefits plan as of December 31, 20122015 and 20112014 were (in thousands) $32,152$37,656 and $30,395.$39,057.
Table 18.317.3 - Amounts Recognized in Accumulated Other Comprehensive Income (in thousands)
|
| | | | | | | | | | | | | | | |
| Defined Benefit Retirement Plan | | Postretirement Benefits Plan |
| 2012 | | 2011 | | 2012 | | 2011 |
Net actuarial loss (gain) | $ | 10,652 |
| | $ | 9,323 |
| | $ | 1,082 |
| | $ | 664 |
|
|
| | | | | | | | | | | | | | | |
| Defined Benefit Retirement Plan | | Postretirement Benefits Plan |
| 2015 | | 2014 | | 2015 | | 2014 |
Net actuarial loss | $ | 12,447 |
| | $ | 15,409 |
| | $ | 911 |
| | $ | 1,163 |
|
Table 18.417.4 - Net Periodic Benefit Cost and Other Amounts Recognized in Accumulated Other Comprehensive Income (in thousands)
| | | For the years ended December 31, | For the Years Ended December 31, |
| Defined Benefit Retirement Plan | | Postretirement Benefits Plan | Defined Benefit Retirement Plan | | Postretirement Benefits Plan |
| 2012 | | 2011 | | 2010 | | 2012 | | 2011 | | 2010 | 2015 | | 2014 | | 2013 | | 2015 | | 2014 | | 2013 |
Net Periodic Benefit Cost | | | | | | | | | | | | | | | | | | | | | | |
Service cost | $ | 578 |
| | $ | 473 |
| | $ | 527 |
| | $ | 72 |
| | $ | 54 |
| | $ | 46 |
| $ | 668 |
| | $ | 524 |
| | $ | 494 |
| | $ | 74 |
| | $ | 53 |
| | $ | 58 |
|
Interest cost | 963 |
| | 1,129 |
| | 1,123 |
| | 200 |
| | 197 |
| | 192 |
| 1,222 |
| | 1,234 |
| | 986 |
| | 203 |
| | 190 |
| | 199 |
|
Amortization of prior service benefit | — |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| |
Amortization of net loss | 932 |
| | 906 |
| | 764 |
| | 22 |
| | — |
| | — |
| 2,549 |
| | 1,845 |
| | 1,948 |
| | 67 |
| | — |
| | 62 |
|
Net periodic benefit cost | 2,473 |
| | 2,507 |
| | 2,414 |
| | 294 |
| | 251 |
| | 238 |
| $ | 4,439 |
| | $ | 3,603 |
| | $ | 3,428 |
| | $ | 344 |
| | $ | 243 |
| | $ | 319 |
|
| | | | | | | | | | | | |
Other Changes in Benefit Obligations Recognized in Other Comprehensive Income | | | | | | | | | | | | | | | | | | | | | �� | |
Net loss (gain) | 2,261 |
| | 2,754 |
| | 687 |
| | 440 |
| | 679 |
| | (208 | ) | |
Net (gain) loss | | (413 | ) | | 8,335 |
| | 215 |
| | (185 | ) | | 1,161 |
| | (1,018 | ) |
Amortization of net loss | (932 | ) | | (906 | ) | | (764 | ) | | (22 | ) | | — |
| | — |
| (2,549 | ) | | (1,845 | ) | | (1,948 | ) | | (67 | ) | | — |
| | (62 | ) |
Amortization of prior service benefit | — |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| |
Total recognized in other comprehensive income | 1,329 |
| | 1,849 |
| | (77 | ) | | 418 |
| | 679 |
| | (208 | ) | (2,962 | ) | | 6,490 |
| | (1,733 | ) | | (252 | ) | | 1,161 |
| | (1,080 | ) |
Total recognized in net periodic benefit cost and other comprehensive income | $ | 3,802 |
| | $ | 4,356 |
| | $ | 2,337 |
| | $ | 712 |
| | $ | 930 |
| | $ | 30 |
| $ | 1,477 |
|
| $ | 10,093 |
|
| $ | 1,695 |
|
| $ | 92 |
|
| $ | 1,404 |
|
| $ | (761 | ) |
Table 18.517.5 presents the estimated net actuarial loss and prior service benefit that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year.
Table 18.517.5 - Amortization for Next Fiscal Year (in thousands)
|
| | | | | | | |
| Defined Benefit Retirement Plan | | Postretirement Benefits Plan |
Net actuarial loss | $ | 1,132 |
| | $ | 57 |
|
|
| | | | | | | |
| Defined Benefit Retirement Plan | | Postretirement Benefits Plan |
Net actuarial loss | $ | 1,839 |
| | $ | 46 |
|
Table 18.617.6 presents the key assumptions used for the actuarial calculations to determine benefit obligations for the nonqualified supplemental defined benefit retirement plan and postretirement benefits plan.
Table 18.617.6 - Benefit Obligation Key Assumptions
| | | Defined Benefit Retirement Plan | | Postretirement Benefits Plan | Defined Benefit Retirement Plan | | Postretirement Benefits Plan |
| 2012 | | 2011 | | 2012 | | 2011 | 2015 | | 2014 | | 2015 | | 2014 |
Discount rate | 3.26 | % | | 3.96 | % | | 4.16 | % | | 4.73 | % | 4.02 | % | | 3.67 | % | | 4.33 | % | | 3.96 | % |
Salary increases | 4.50 | % | | 4.50 | % | | N/A |
| | N/A |
| 4.50 | % | | 4.50 | % | | N/A |
| | N/A |
|
Table 18.717.7 presents the key assumptions used for the actuarial calculations to determine net periodic benefit cost for the FHLBank'sFHLB's defined benefit retirement plans and postretirement benefit plans.
Table 18.717.7 - Net Periodic Benefit Cost Key Assumptions
| | | Defined Benefit Retirement Plan | | Postretirement Benefits Plan | Defined Benefit Retirement Plan | | Postretirement Benefits Plan |
| 2012 | | 2011 | | 2010 | | 2012 | | 2011 | | 2010 | 2015 | | 2014 | | 2013 | | 2015 | | 2014 | | 2013 |
Discount rate | 3.96 | % | | 4.99 | % | | 5.58 | % | | 4.73 | % | | 5.72 | % | | 6.15 | % | 3.67 | % | | 4.32 | % | | 3.26 | % | | 3.96 | % | | 4.88 | % | | 4.16 | % |
Salary increases | 4.50 | % | | 4.50 | % | | 4.50 | % | | N/A |
| | N/A |
| | N/A |
| 4.50 | % | | 4.50 | % | | 4.50 | % | | N/A |
| | N/A |
| | N/A |
|
Table 18.817.8 - Postretirement Benefits Plan Assumed Health Care Cost Trend Rates
| | | 2012 | | 2011 | 2015 | | 2014 |
Assumed for next year | 7.50 | % | | 8.00 | % | 8.00 | % | | 8.50 | % |
Ultimate rate | 5.25 | % | | 5.25 | % | 5.50 | % | | 5.25 | % |
Year that ultimate rate is reached | 2020 |
| | 2020 |
| 2020 |
| | 2024 |
|
The effect of a percentage point increase in the assumed health care trend rates would be an increase in net periodic postretirement benefit expense of $56,000$63,000 and in accumulated postretirement benefit obligation (APBO) of $960,000.$1,022,000. The effect of a percentage point decrease in the assumed health care trend rates would be a decrease in net periodic postretirement benefit expense of $44,000$49,000 and in APBO of $760,000.$805,000.
The discount rates for the disclosures as of December 31, 20122015 were determined by using a discounted cash flow approach, which incorporates the timing of each expected future benefit payment. Estimated future benefit payments are based on each plan's census data, benefit formulaeformulas and provisions, and valuation assumptions reflecting the probability of decrement and survival. The present value of the future benefit payments is determined by using weighted average duration based interest rate yields from a variety of highly rated relevant corporate bond indices as of December 31, 2012,2015, and solving for the single discount rate that produces the same present value.
Table 17.9 presents the estimated future benefits payments reflecting expected future services for the years ended after December 31, 2012.2015.
Table 18.917.9 - Estimated Future Benefit Payments (in thousands)
|
| | | | | | | | | | | | |
| | | | Postretirement Benefit Plan |
Years | | Defined Benefit Retirement Plan | | Gross Benefit Payments | | Estimated Medicare Retiree Drug Subsidy |
2013 | | $ | 2,623 |
| | $ | 162 |
| | $ | 22 |
|
2014 | | 2,645 |
| | 172 |
| | 24 |
|
2015 | | 2,676 |
| | 188 |
| | 24 |
|
2016 | | 2,745 |
| | 200 |
| | 26 |
|
2017 | | 1,964 |
| | 216 |
| | 27 |
|
2018 - 2022 | | 8,338 |
| | 1,314 |
| | 164 |
|
|
| | | | | | | | |
Years | | Defined Benefit Retirement Plan | | Postretirement Benefit Plan |
2016 | | $ | 3,006 |
| | $ | 161 |
|
2017 | | 2,227 |
| | 161 |
|
2018 | | 2,197 |
| | 176 |
|
2019 | | 2,278 |
| | 172 |
|
2020 | | 1,902 |
| | 184 |
|
2021 - 2025 | | 8,547 |
| | 1,179 |
|
Note 1918 - Segment Information
The FHLBankFHLB has identified two primary operating segments based on its method of internal reporting: Traditional Member Finance and the MPP. These segments reflect the FHLBank'sFHLB's two primary Mission Asset Activities and the manner in which they are managed from the perspective of development, resource allocation, product delivery, pricing, credit risk and operational administration. The segments identify the principal ways the FHLBankFHLB provides services to member stockholders. The FHLBank,FHLB, as an interest rate spread manager, considers a segment's net interest income, net interest rate spread and, ultimately, net income as the key factors in allocating resources. Resource allocation decisions are made by considering these profitability measures in the context of the historical, current and expected risk profile of each segment and the entire balance sheet, as well as current incremental profitability measures relative to the incremental market risk profile.
Overall financial performance and risk management are dynamically managed primarily at the level of, and within the context of, the entire balance sheet rather than at the level of individual business segments or product lines. Also, the FHLBankFHLB hedges specific asset purchases and specific subportfolios in the context of the entire mortgage asset portfolio and the entire balance sheet. Under this holistic approach, the market risk/return profile of each business segment does not correspond, in general, to the performance that each segment would generate if it were completely managed on a separate basis, and it is not possible to accurately determine what the performance would be if the two business segments were managed on a stand-alone basis. Further, because financial and risk management is a dynamic process, the performance of a segment over a single identified period may not reflect the long-term expected or actual future trends for the segment.
The Traditional Member Finance segment includes products such as Advances and investments and the borrowing costs related to those assets. The FHLBankFHLB assigns its investments to this segment primarily because they historically have been used to provide liquidity for Advances and to support the level and volatility of earnings from Advances. All interest rate swaps and a portion of swaptions, including their market value adjustments, are allocated to the Traditional Member Finance segment. The FHLB executed all of its interest rate swaps in its management of market risk for the Traditional Member Finance segment. The FHLB enters into swaptions to minimize the prepayment risk in its overall mortgage asset portfolio.
Income from the MPP is derived primarily from the difference, or spread, between the yield on mortgage loans and the borrowing cost of Consolidated Obligations outstanding allocated to this segment at the time debt is issued. MPP income also includes the gains (losses) on derivatives associated with the MPP segment, comprising all mortgage delivery commitments and forward rate agreements and a portion of swaptions.
Both segments also earn income from investment of interest-free capital. Capital is allocated proportionate to each segment's average assets based on the total balance sheet's average capital-to-assets ratio. Expenses are allocated based on cost accounting techniques that include direct usage, time allocations and square footage of space used. AHP and REFCORP assessments are calculated using the current assessment rates based on the income before assessments for each segment. All interest rate swaps, including their market value adjustments, are allocated to the Traditional Member Finance segment because the FHLBank has not executed interest rate swaps in its management of the MPP's market risk. All derivatives classified as mandatory delivery commitments and forward rate agreements are allocated to the MPP segment.
The following tables set forth the FHLBank'sFHLB's financial performance by operating segment for the years ended December 31.
Table 19.118.1 - Financial Performance by Operating Segment (in thousands)
|
| | | | | | | | | | | |
| For the Years Ended December 31, |
| Traditional Member Finance | | MPP | | Total |
2012 | | | | | |
Net interest income | $ | 209,636 |
| | $ | 98,484 |
| | $ | 308,120 |
|
Provision for credit losses | — |
| | 1,459 |
| | 1,459 |
|
Net interest income after provision for credit losses | 209,636 |
| | 97,025 |
| | 306,661 |
|
Other income | 12,930 |
| | 482 |
| | 13,412 |
|
Other expenses | 50,082 |
| | 7,888 |
| | 57,970 |
|
Income before assessments | 172,484 |
| | 89,619 |
| | 262,103 |
|
Affordable Housing Program | 18,417 |
| | 8,962 |
| | 27,379 |
|
Net income | $ | 154,067 |
| | $ | 80,657 |
| | $ | 234,724 |
|
Average assets | $ | 58,707,558 |
| | $ | 7,994,445 |
| | $ | 66,702,003 |
|
Total assets | $ | 74,003,271 |
| | $ | 7,558,879 |
| | $ | 81,562,150 |
|
| | | | | |
2011 | | | | | |
Net interest income | $ | 175,718 |
| | $ | 73,284 |
| | $ | 249,002 |
|
Provision for credit losses | — |
| | 12,573 |
| | 12,573 |
|
Net interest income after provision for credit losses | 175,718 |
| | 60,711 |
| | 236,429 |
|
Other loss | (814 | ) | | (4,030 | ) | | (4,844 | ) |
Other expenses | 48,799 |
| | 7,955 |
| | 56,754 |
|
Income before assessments | 126,105 |
| | 48,726 |
| | 174,831 |
|
Affordable Housing Program | 12,668 |
| | 4,246 |
| | 16,914 |
|
REFCORP | 13,378 |
| | 6,266 |
| | 19,644 |
|
Total assessments | 26,046 |
| | 10,512 |
| | 36,558 |
|
Net income | $ | 100,059 |
| | $ | 38,214 |
| | $ | 138,273 |
|
Average assets | $ | 59,562,912 |
| | $ | 7,725,120 |
| | $ | 67,288,032 |
|
Total assets | $ | 52,513,856 |
| | $ | 7,882,675 |
| | $ | 60,396,531 |
|
| | | | | |
2010 | | | | | |
Net interest income | $ | 180,304 |
| | $ | 95,016 |
| | $ | 275,320 |
|
Provision for credit losses | — |
| | 13,601 |
| | 13,601 |
|
Net interest income after provision for credit losses | 180,304 |
| | 81,415 |
| | 261,719 |
|
Other income | 17,452 |
| | 2,409 |
| | 19,861 |
|
Other expenses | 47,191 |
| | 8,636 |
| | 55,827 |
|
Income before assessments | 150,565 |
| | 75,188 |
| | 225,753 |
|
Affordable Housing Program | 14,093 |
| | 6,138 |
| | 20,231 |
|
REFCORP | 27,294 |
| | 13,810 |
| | 41,104 |
|
Total assessments | 41,387 |
| | 19,948 |
| | 61,335 |
|
Net income | $ | 109,178 |
| | $ | 55,240 |
| | $ | 164,418 |
|
Average assets | $ | 60,631,703 |
| | $ | 8,735,556 |
| | $ | 69,367,259 |
|
Total assets | $ | 63,827,138 |
| | $ | 7,804,124 |
| | $ | 71,631,262 |
|
|
| | | | | | | | | | | |
| For the Years Ended December 31, |
| Traditional Member Finance | | MPP | | Total |
2015 | | | | | |
Net interest income after reversal for credit losses | $ | 250,076 |
| | $ | 72,205 |
| | $ | 322,281 |
|
Non-interest income | 28,586 |
| | 1,308 |
| | 29,894 |
|
Non-interest expense | 64,925 |
| | 10,626 |
| | 75,551 |
|
Income before assessments | 213,737 |
| | 62,887 |
| | 276,624 |
|
Affordable Housing Program assessments | 21,618 |
| | 6,288 |
| | 27,906 |
|
Net income | $ | 192,119 |
| | $ | 56,599 |
| | $ | 248,718 |
|
Average assets | $ | 97,932,122 |
| | $ | 7,637,197 |
| | $ | 105,569,319 |
|
Total assets | $ | 110,789,438 |
| | $ | 8,007,343 |
| | $ | 118,796,781 |
|
2014 | | | | | |
Net interest income | $ | 237,828 |
| | $ | 79,148 |
| | $ | 316,976 |
|
Reversal for credit losses | — |
| | (500 | ) | | (500 | ) |
Net interest income after reversal for credit losses | 237,828 |
| | 79,648 |
| | 317,476 |
|
Non-interest income | 22,460 |
| | 170 |
| | 22,630 |
|
Non-interest expense | 58,876 |
| | 9,372 |
| | 68,248 |
|
Income before assessments | 201,412 |
| | 70,446 |
| | 271,858 |
|
Affordable Housing Program assessments | 20,560 |
| | 7,045 |
| | 27,605 |
|
Net income | $ | 180,852 |
| | $ | 63,401 |
| | $ | 244,253 |
|
Average assets | $ | 94,333,213 |
| | $ | 6,824,283 |
| | $ | 101,157,496 |
|
Total assets | $ | 99,629,924 |
| | $ | 7,010,495 |
| | $ | 106,640,419 |
|
2013 | | | | | |
Net interest income | $ | 229,559 |
| | $ | 98,285 |
| | $ | 327,844 |
|
Reversal for credit losses | — |
| | (7,450 | ) | | (7,450 | ) |
Net interest income after reversal for credit losses | 229,559 |
| | 105,735 |
| | 335,294 |
|
Non-interest income (loss) | 30,505 |
| | (10,714 | ) | | 19,791 |
|
Non-interest expense | 55,459 |
| | 8,928 |
| | 64,387 |
|
Income before assessments | 204,605 |
| | 86,093 |
| | 290,698 |
|
Affordable Housing Program assessments | 21,011 |
| | 8,609 |
| | 29,620 |
|
Net income | $ | 183,594 |
| | $ | 77,484 |
| | $ | 261,078 |
|
Average assets | $ | 86,609,248 |
| | $ | 7,081,377 |
| | $ | 93,690,625 |
|
Total assets | $ | 96,336,915 |
| | $ | 6,843,787 |
| | $ | 103,180,702 |
|
Note 2019 - Fair Value Disclosures
The fair value amounts recorded on the Statements of Condition and presented in the related note disclosures for the periods presented have been determined by the FHLBankFHLB using available market and other pertinent information and reflect the FHLBank'sFHLB's best judgment of appropriate valuation methods. The fair values reflect the FHLBank'sFHLB's judgment of how a market participant would estimate the fair values.
Fair Value Hierarchy. The FHLBankFHLB records trading securities, available-for-sale securities, derivative assets, derivative liabilities, certain Advances and certain Consolidated Obligation Bonds at fair value on a recurring basis, and on occasion, certain mortgage loans held for portfolio on a nonrecurring basis. TheGAAP establishes a fair value hierarchy and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The inputs are evaluated and an overall level for the measurement is determined. This overall level is an indication of how market observable the fair value measurement is. An entity must disclose the level within the fair value hierarchy in which the measurements are classified.
The fair value hierarchy prioritizes the inputs used to measure fair value into three broad levels:
Level 1 Inputs - Quoted prices (unadjusted) for identical assets or liabilities in an active market that the reporting entity can access on the measurement date.
Level 2 Inputs - Inputs other than quoted prices within Level 1 that are observable inputs for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 2 inputs include the following: (1) quoted prices for similar assets or liabilities in active markets; (2) quoted prices for identical or similar assets or liabilities in markets that are not active; (3) inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates and yield curves that are observable at commonly quoted intervals, and implied volatilities); and (4) inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 Inputs - Unobservable inputs for the asset or liability.
The FHLBankFHLB reviews the fair value hierarchy classifications on a quarterly basis. Changes in the observability of the valuation inputs may result in a reclassification of certain financial assets or liabilities. Such reclassifications are reported as transfers in/out at fair value as of the beginning of the quarter in which the changes occur. The FHLBankFHLB did not have any transfers of assets or liabilities recorded at fair value on a recurring basis during the years ended December 31, 20122015 or 20112014.
Table 20.119.1 presents the carrying value, fair value, and fair value hierarchy of financial assets and liabilities of the FHLBank.FHLB. These values do not represent an estimate of the overall market value of the FHLBankFHLB as a going concern, which would take into account future business opportunities and the net profitability of assets versus liabilities.
Table 20.119.1 - Fair Value Summary (in thousands)
| | | December 31, 2012 | December 31, 2015 |
| | | Fair Value | | | Fair Value |
Financial Instruments | Carrying Value | | Total | | Level 1 | | Level 2 | | Level 3 | | Netting Adjustments and Cash Collateral (1) | Carrying Value | | Total | | Level 1 | | Level 2 | | Level 3 | | Netting Adjustments and Cash Collateral (1) |
Assets: | | | | | | | | | | | | | | | | | | | | | | |
Cash and due from banks | $ | 16,423 |
| | $ | 16,423 |
| | $ | 16,423 |
| | $ | — |
| | $ | — |
| | $ | — |
| $ | 10,136 |
| | $ | 10,136 |
| | $ | 10,136 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Interest-bearing deposits | 151 |
| | 151 |
| | — |
| | 151 |
| | — |
| | — |
| 99 |
| | 99 |
| | — |
| | 99 |
| | — |
| | — |
|
Securities purchased under resale agreements | 3,800,000 |
| | 3,800,000 |
| | — |
| | 3,800,000 |
| | — |
| | — |
| |
Securities purchased under agreements to resell | | 10,531,979 |
| | 10,531,979 |
| | — |
| | 10,531,979 |
| | — |
| | — |
|
Federal funds sold | 3,350,000 |
| | 3,350,000 |
| | — |
| | 3,350,000 |
| | — |
| | — |
| 10,845,000 |
| | 10,845,000 |
| | — |
| | 10,845,000 |
| | — |
| | — |
|
Trading securities | 1,922 |
| | 1,922 |
| | — |
| | 1,922 |
| | — |
| | — |
| 1,159 |
| | 1,159 |
| | — |
| | 1,159 |
| | — |
| | — |
|
Available-for-sale securities | | 700,081 |
| | 700,081 |
| | — |
| | 700,081 |
| | — |
| | — |
|
Held-to-maturity securities | 12,798,448 |
| | 13,177,117 |
| | — |
| | 13,177,117 |
| | — |
| | — |
| 15,278,206 |
| | 15,229,965 |
| | — |
| | 15,229,965 |
| | — |
| | — |
|
Advances | 53,943,961 |
| | 54,070,350 |
| | — |
| | 54,070,350 |
| | — |
| | — |
| |
Advances (2) | | 73,292,172 |
| | 73,089,912 |
| | — |
| | 73,089,912 |
| | — |
| | — |
|
Mortgage loans held for portfolio, net | 7,530,112 |
| | 7,860,090 |
| | — |
| | 7,790,290 |
| | 69,800 |
| | — |
| 7,979,607 |
| | 8,106,224 |
| | — |
| | 8,075,390 |
| | 30,834 |
| | — |
|
Accrued interest receivable | 83,904 |
| | 83,904 |
| | — |
| | 83,904 |
| | — |
| | — |
| 94,855 |
| | 94,855 |
| | — |
| | 94,855 |
| | — |
| | — |
|
Derivative assets | 5,877 |
| | 5,877 |
| | — |
| | 69,677 |
| | — |
| | (63,800 | ) | 26,996 |
| | 26,996 |
| | — |
| | 15,961 |
| | — |
| | 11,035 |
|
| | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | | | | | | | |
Deposits | 1,176,605 |
| | 1,176,474 |
| | — |
| | 1,176,474 |
| | — |
| | — |
| 804,342 |
| | 804,140 |
| | — |
| | 804,140 |
| | — |
| | — |
|
Consolidated Obligations: | | | | | | | | | | | | | | | | | | | | | | |
Discount Notes | 30,840,224 |
| | 30,843,064 |
| | — |
| | 30,843,064 |
| | — |
| | — |
| 77,199,208 |
| | 77,183,854 |
| | — |
| | 77,183,854 |
| | — |
| | — |
|
Bonds (2)(3) | 44,345,917 |
| | 45,069,294 |
| | — |
| | 45,069,294 |
| | — |
| | — |
| 35,104,764 |
| | 35,317,688 |
| | — |
| | 35,317,688 |
| | — |
| | — |
|
Mandatorily redeemable capital stock | 210,828 |
| | 210,828 |
| | 210,828 |
| | — |
| | — |
| | — |
| 37,895 |
| | 37,895 |
| | 37,895 |
| | — |
| | — |
| | — |
|
Accrued interest payable | 106,885 |
| | 106,885 |
| | — |
| | 106,885 |
| | — |
| | — |
| 118,823 |
| | 118,823 |
| | — |
| | 118,823 |
| | — |
| | — |
|
Derivative liabilities | 114,888 |
| | 114,888 |
| | — |
| | 389,473 |
| | — |
| | (274,585 | ) | 31,087 |
| | 31,087 |
| | — |
| | 83,698 |
| | — |
| | (52,611 | ) |
| | | | | | | | | | | | |
Other: | | | | | | | | | | | | | | | | | | | | | | |
Standby bond purchase agreements | — |
| | 1,198 |
| | — |
| | 1,198 |
| | — |
| | — |
| — |
| | 698 |
| | — |
| | 698 |
| | — |
| | — |
|
| |
(1) | Amounts represent the effectsapplication of legally enforceable masterthe netting agreementsrequirements that allow the FHLBankFHLB to settle positive and negative positions and ofalso cash collateral and related accrued interest held or placed by the FHLB with the same counterparties.counterparty. |
| |
(2) | Includes (in thousands) $15,057 of Advances recorded under the fair value option at December 31, 2015. |
| |
(3) | Includes (in thousands) $3,402,3662,214,590 of Consolidated Obligation Bonds recorded under the fair value option at December 31, 20122015. |
| | | | | | | | | | December 31, 2014 |
| December 31, 2011 | | | Fair Value |
Financial Instruments | Carrying Value | | Fair Value | Carrying Value | | Total | | Level 1 | | Level 2 | | Level 3 | | Netting Adjustments and Cash Collateral (1) |
Assets: | | | | | | | | | | | | | | |
Cash and due from banks | $ | 2,033,944 |
| | $ | 2,033,944 |
| $ | 3,109,970 |
| | $ | 3,109,970 |
| | $ | 3,109,970 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Interest-bearing deposits | 119 |
| | 119 |
| 119 |
| | 119 |
| | — |
| | 119 |
| | — |
| | — |
|
Securities purchased under resale agreements | — |
| | — |
| |
Securities purchased under agreements to resell | | 3,343,000 |
|
| 3,343,002 |
| | — |
| | 3,343,002 |
| | — |
| | — |
|
Federal funds sold | 2,270,000 |
| | 2,270,000 |
| 6,600,000 |
| | 6,600,000 |
| | — |
| | 6,600,000 |
| | — |
| | — |
|
Trading securities | 2,862,648 |
| | 2,862,648 |
| 1,341 |
| | 1,341 |
| | — |
| | 1,341 |
| | — |
| | — |
|
Available-for-sale securities | 4,171,142 |
| | 4,171,142 |
| 1,349,977 |
| | 1,349,977 |
| | — |
| | 1,349,977 |
| | — |
| | — |
|
Held-to-maturity securities | 12,637,373 |
| | 13,035,503 |
| 14,712,271 |
| | 14,794,326 |
| | — |
| | 14,794,326 |
| | — |
| | — |
|
Advances | 28,423,774 |
| | 28,699,758 |
| |
Advances (2) | | 70,405,616 |
| | 70,279,438 |
| | — |
| | 70,279,438 |
| | — |
| | — |
|
Mortgage loans held for portfolio, net | 7,850,269 |
| | 8,342,709 |
| 6,984,683 |
| | 7,219,198 |
| | — |
| | 7,178,047 |
| | 41,151 |
| | — |
|
Accrued interest receivable | 114,266 |
| | 114,266 |
| 81,384 |
| | 81,384 |
| | — |
| | 81,384 |
| | — |
| | — |
|
Derivative assets | 4,912 |
| | 4,912 |
| 14,699 |
| | 14,699 |
| | — |
| | 24,531 |
| | — |
| | (9,832 | ) |
| | | | |
Liabilities: | | | | | | | | | | | | | | |
Deposits | 1,083,532 |
| | 1,083,312 |
| 729,936 |
| | 729,782 |
| | — |
| | 729,782 |
| | — |
| | — |
|
Consolidated Obligations: | | | | | | | | | | | | | | |
Discount Notes | 26,136,303 |
| | 26,137,014 |
| 41,232,127 |
| | 41,224,739 |
| | — |
| | 41,224,739 |
| | — |
| | — |
|
Bonds (1)(3) | 28,854,544 |
| | 29,774,780 |
| 59,216,557 |
| | 59,496,247 |
| | — |
| | 59,496,247 |
| | — |
| | — |
|
Mandatorily redeemable capital stock | 274,781 |
| | 274,781 |
| 62,963 |
| | 62,963 |
| | 62,963 |
| | — |
| | — |
| | — |
|
Accrued interest payable | 142,212 |
| | 142,212 |
| 114,781 |
| | 114,781 |
| | — |
| | 114,781 |
| | — |
| | — |
|
Derivative liabilities | 105,284 |
| | 105,284 |
| 63,767 |
| | 63,767 |
| | — |
| | 149,634 |
| | — |
| | (85,867 | ) |
| | | | |
Other: | | | | | | | | | | | | | | |
Standby bond purchase agreements | — |
| | 1,595 |
| — |
| | 1,381 |
| | — |
| | 1,381 |
| | — |
| | — |
|
| |
(1) | Amounts represent the application of the netting requirements that allow the FHLB to settle positive and negative positions and also cash collateral and related accrued interest held or placed by the FHLB with the same counterparty. |
| |
(2) | Includes (in thousands) $4,900,29615,042 of Advances recorded under the fair value option at December 31, 2014. |
| |
(3) | Includes (in thousands) $4,209,640 of Consolidated Obligation Bonds recorded under the fair value option at December 31, 20112014. |
Summary of Valuation Methodologies and Primary Inputs.
Cash and due from banks: The fair value equals the carrying value.
Interest-bearing deposits: The fair value is determined based on each security's quoted prices, excluding accrued interest, as of the last business day of the period.
Securities purchased under agreements to resell: The fair value of overnight securities purchased under agreements to resell approximates the carrying value. The fair value of term securities purchased under agreements to resell is determined by calculating the present value of the future cash flows and reducing the amount for accrued interest receivable. The discount rates used in these calculations are the rates for securities with similar terms. Based on the fair value of the related collateral held, the securities purchased under agreements to resell were fully collateralized for the periods presented.
Federal funds sold: The fair value of overnight Federal funds sold approximates the carrying value. The fair value of term Federal funds sold is determined by calculating the present value of the expected future cash flows. The discount rates used in these calculations are the rates for Federal funds with similar terms, as approximated by adding an estimated current spread to the LIBOR Swap Curve for Federal funds with similar terms. The fair value excludes accrued interest.
Trading securities: The FHLBank'sFHLB's trading portfolio generally consists of U.S. Treasury obligations, discount notes and bonds issued by Freddie Mac and/or Fannie Mae (non-mortgage-backed securities), and mortgage-backed securities issued by Ginnie Mae. Quoted market prices in active markets are not available for these securities.
In general, in order to determine the fair value of its non-mortgage backed securities, the FHLBank can use either (a) an income approach based on a market-observable interest rate curve that may be adjusted for a spread, or (b) prices received from third-party pricing vendors. The income approach uses indicative fair values derived from a discounted cash flow methodology. The FHLBank believes that both methodologies result in fair values that are reasonable and similar in all material respects based on the nature of the financial instruments being measured.
For its U.S. Treasury obligations and discount notes and bonds issued by Freddie Mac, and/or Fannie Mae, the FHLBank determines the fair value using the income approach. The market-observable interest rate curves used by the FHLBank and the related financial instruments they measure are as follows:
| |
▪ | Treasury Curve: U.S. Treasury obligations; and |
| |
▪ | U.S. Government Agency Fair Value Curve: Government-sponsored enterprises. |
To value mortgage-backed security holdings, the FHLBankFHLB obtains prices from four designated third-party pricing vendors, when available. The pricing vendors use various proprietary models to price mortgage-backed securities. The inputs to those models are derived from various sources including, but not limited to: benchmark yields, reported trades, dealer estimates, issuer spreads, benchmark securities, bids, offers and other market-related data. Because many mortgage-backed securities do not trade on a daily basis, the pricing vendors use available information such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing to determine the prices for individual securities. Each pricing vendor has an established challenge process in place for all mortgage-backed security valuations, which facilitates resolution of potentially erroneous prices identified by the FHLBank.FHLB.
The FHLBankFHLB has conducted reviews of the pricing methods employed by the third-party vendors, to confirm and further augment its understanding of the vendors' pricing processes, methodologies and control procedures for specific instruments.
The FHLBank'sFHLB's valuation technique first requires the establishment of a “median” price for each security. If four prices are received, the average of the middle two prices is the median price; if three prices are received, the middle price is the median price; if two prices are received, the average of the two prices is the median price; and if one price is received, it is the median price (and also the final price) subject to validation.validation of outliers. All prices that are within a specified tolerance threshold of the median price are included in the “cluster” of prices that are averaged to compute a “default” price.
All prices that are outside the threshold (“outliers”) are subject to further analysis (including, but not limited to, comparison to prices provided by an additional third-party valuation service, prices for similar securities, non-binding dealer estimates, and/or use of an internal model that is deemed most appropriate) to determine if an outlier is a better estimate of fair value. If an outlier (or some other price identified in the analysis) is determined to be a better estimate of fair value, then the outlier (or the other price as appropriate) is used as the final price rather than the default price. Alternatively, if the analysis confirms that an outlier is in fact not representative of fair value and the default price is the best estimate, then the default price is used as the final price. In all cases, the final price is used to determine the fair value of the security.
If all prices received for a security are outside the tolerance threshold level of the median price, then there is no default price, and the final price is determined by an evaluation of all outlier prices as described above.
Four vendor prices were received for most of the FHLBank'sFHLB's mortgage-backed security holdings and the final prices for those securities were computed by averaging the prices received. Based on the FHLBank'sFHLB's review of the pricing methods and controls employed by the third-party pricing vendors and the relative lack of dispersion among the vendor prices, the FHLBankFHLB believes its final prices result in reasonable estimates of fair value and further that the fair value measurements are classified appropriately in the fair value hierarchy.
Available-for-sale securities: The FHLBank'sFHLB's available-for-sale portfolio generally consists of certificates of deposit and other debt securities.deposit. Quoted market prices in active markets are not available for these securities. Therefore, the fair value is determined based on each security's indicative fair value obtained from a third-party vendor. The FHLBankFHLB performs several validation steps in order to verify the accuracy and reasonableness of these fair values. These steps may include, but are not limited to, a detailed review of instruments with significant periodic price changes and a derived fair value from an option-adjusted discounted cash flow methodology using market-observed inputs for the interest rate environment and similar instruments.
Held-to-maturity securities: The FHLBank'sFHLB's held-to-maturity portfolio generally consists of discount notes issued by Freddie Mac and/or Fannie Mae TLGP notes,(non-mortgage-backed securities), and mortgage-backed securities. Quoted market prices are not available for these securities. The fair value for each individual mortgage-backed security is determined by using the third-party vendor approach described above. TheIn general, in order to determine the fair value for discount notes is determined usingof its non-mortgage backed securities, the FHLB can use either (a) an income approach described above. The fair value for TLGP notes is determined based on each security's indicative market price obtained from a third-party vendor excluding accrued interest. The FHLBank uses various techniques to validate the fair valuesmarket-observable interest rate curve that may be adjusted for a spread, or (b) prices received from third-party vendors for accuracypricing vendors. The income approach uses indicative fair values derived from a discounted cash flow methodology. The FHLB believes that both methodologies result in fair values that are reasonable and reasonableness.similar in all material respects based on the nature of the financial instruments being measured.
For its discount notes issued by Freddie Mac, and/or Fannie Mae, the FHLB determines the fair value using the income approach. The market-observable interest rate curve used by the FHLB includes the U.S. Government Agency Fair Value Curve.
Advances: The FHLBankFHLB determines the fair values of Advances by calculating the present value of expected future cash flows from the Advances excluding accrued interest. The discount rates used in these calculations are the replacement rates for Advances with similar terms, as approximated either by adding an estimated current spread to the LIBOR Swap Curve or by using current indicative market yields, as indicated by the FHLBank'sFHLB's pricing methodologies for Advances with similar current terms. Advance pricing is determined based on the FHLBank'sFHLB's rates on Consolidated Obligations. In accordance with Finance Agency Regulations,regulations, Advances with a maturity and repricing period greater than six months require a prepayment fee sufficient to make the FHLBankFHLB financially indifferent to the borrower's decision to prepay the Advances. Therefore, the fair value of Advances does not assume prepayment risk.
For swapped option-based Advances, the fair value is determined (independently of the related derivative) by the discounted cash flow methodology based on the LIBOR Swap Curve and forward rates at period end adjusted for the estimated current spread on new swapped Advances to the swap curve. For swapped Advances with a conversion option, the conversion option is valued by taking into account the LIBOR Swap Curve and forward rates at period end and the market's expectations of future interest rate volatility implied from current market prices of similar options.
Mortgage loans held for portfolio, net: The fair values of performing mortgage loans are determined based on quoted market prices offered to approved members as indicated by the FHLBank'sFHLB's MPP pricing methodologies for mortgage loans with similar current terms excluding accrued interest. The quoted prices offered to members are based on Fannie Mae price indications on to-be-announced (TBA) mortgage-backed securities and FHA price indications on government-guaranteed loans. The FHLBankFHLB then adjusts these indicative prices to account for particular features of the FHLBank'sFHLB's MPP that differ from the Fannie Mae and FHA securities. These features include, but may not be limited to, the MPP's credit enhancements, and marketing adjustments that reflect the FHLBank'sFHLB's cooperative business model and preferences for particular kinds of loans and mortgage note rates. These quoted prices, however, can change rapidly based upon market conditions and are highly dependent upon the underlying prepayment assumptions. In order to determine the fair values, the loan amounts are also reduced for the FHLBank'sFHLB's estimate of expected net credit losses. The fair value of non-performing conventional mortgage loans 90 days or more delinquent are based on the estimated values of the underlying collateral or the present value of future cash flows and as such are classified as Level 3 in the fair value hierarchy.
Impaired mortgage loans held for portfolio: The estimated fair values of impaired mortgage loans held for portfolio on a non-recurring basis are based on property values obtained from a third-party pricing vendor.
Accrued interest receivable and payable: The fair value approximates the carrying value.
Derivative assets/liabilities: The FHLBank'sFHLB's derivative assets/liabilities generally consist of interest rate swaps, to-be-announcedinterest rate swaptions, TBA mortgage-backed securities (forward rate agreements), and mortgage delivery commitments. The FHLBank'sFHLB's interest rate swapsrelated derivatives (swaps and swaptions) are not listed on an exchange.traded in the over-the-counter market. Therefore, the FHLBankFHLB determines the fair value of each individual interest rate swapinstrument using market value models that use readily observable market inputs as their basis (inputs that are actively quoted and can be validated to external sources). The FHLBankFHLB uses a mid-market pricing convention as a practical expedient for fair value measurements within a bid-ask spread. These models reflect the contractual terms, of the interest rate swaps, including the period to maturity, as well as the significant inputs noted below. The fair value determination uses the standard valuation technique of discounted cash flow analysis.
The FHLBankFHLB performs several validation steps to verify the reasonableness of the fair value output generated by the primary market value model. In addition to an annual model validation, the FHLBankFHLB prepares a monthly reconciliation of the model's fair values to estimates of fair values provided by the derivative counterparties. The FHLBankFHLB believes these processes provide a reasonable basis for it to place continued reliance on the derivative fair values generated by the model.
The fair value of TBA mortgage-backed securities is based on independent indicative and/or quoted prices generated by market transactions involving comparable instruments. The FHLBankFHLB determines the fair value of mortgage delivery commitments using market prices from the TBA/mortgage-backed security market or TBA/Ginnie Mae market and adjustments noted below.
The FHLBank'sFHLB's discounted cash flow analysis uses market-observable inputs. Inputs, by class of derivative, are as follows:
Interest-rate swaps:Interest rate swaps and interest rate swaptions:
| |
▪ | Discount rate assumption. Overnight Index Swap Curve; |
| |
▪ | Forward interest rate assumption. LIBOR Swap Curve; |
| |
▪ | Discount rate assumption. Prior to December 31, 2012, the FHLBank utilized the LIBOR swap curve. At December 31, 2012, the FHLBank utilized the overnight index swap curve; and |
| |
▪ | Volatility assumption. Market-based expectations of future interest rate volatility implied from current market prices for similar options. |
To-be-announcedTBA mortgage-backed securities:
| |
▪ | Market-based prices by coupon class and expected term until settlement. |
Mortgage delivery commitments:
| |
▪ | TBA price.securities prices. Market-based prices of TBAs by coupon class and expected term until settlement, adjusted to reflect the contractual terms of the mortgage delivery commitments, similar to the mortgage loans held for portfolio process. The adjustments to the market prices are market observable, or can be corroborated with observable market data. |
The FHLBankFHLB is subject to credit risk in derivatives transactions due to potentialthe risk of nonperformance by counterparties to its derivative transactions. For uncleared derivatives, counterparties, allthe degree of which are highly-rated institutions. To mitigate thiscredit risk depends on the FHLBank has entered intoextent to which master netting arrangements are included in these contracts to mitigate the risk. In addition, the FHLB requires collateral agreements with all ofcollateral delivery thresholds on its derivative counterparties. In addition, to limit the FHLBank's net unsecured credit exposure to these counterparties, the FHLBank has entered into bilateral security agreements with all active derivatives dealer counterparties that provide for delivery of collateral at specified levels.uncleared derivatives. The FHLBankFHLB has evaluated the potential for the fair value of the instruments to be impacted by counterparty credit risk and has determined that no adjustments were significant or necessary to the overall fair value measurements at December 31, 2012 or 2011.measurements.
The fair values of the FHLBank'sFHLB's derivatives include accrued interest receivable/payable and related cash collateral remitted to/received from counterparties. The estimated fair values of the accrued interest receivable/payable and cash collateral approximate their carrying values due to their short-term nature. The fair values of derivativesDerivatives are nettedpresented on a net basis by counterparty pursuant towhen it has met the provisions of the FHLBank's master netting agreements.requirements. If these netted amounts are positive, they are classified as an asset and if negative, they are classified as a liability.
Deposits: The FHLBankFHLB determines the fair values of FHLBankFHLB deposits with fixed rates by calculating the present value of expected future cash flows from the deposits and reducing this amount for accrued interest payable. The discount rates used in these calculations are the cost of deposits with similar terms.
Consolidated Obligations: The FHLBankFHLB determines the fair values of Discount Notes by calculating the present value of expected future cash flows from the Discount Notes excluding accrued interest. The discount rates used in these calculations are current replacement rates for Discount Notes with similar current terms, as approximated by adding an estimated current spread to the LIBOR Swap Curve. Each month's cash flow is discounted at that month's replacement rate.
The FHLBankFHLB determines the fair values of non-callablenon-option-based Consolidated Obligation Bonds (both unswapped and swapped) by calculating the present value of scheduled future cash flows from the bonds excluding accrued interest. Inputs used to determine fair value of these Consolidated Obligation Bonds are the discount rates, which are estimated current market yields, as follows:indicated by the Office of Finance, for bonds with similar current terms.
| |
▪ | The discount rates used, which are estimated current market yields, as indicated by the Office of Finance, for bonds with similar current terms. |
The FHLBankFHLB determines the fair values of callableoption-based Consolidated Obligation Bonds (both unswappedbased on pricing received from designated third-party pricing vendors. The pricing vendors used apply various proprietary models to price Consolidated Obligation Bonds. The inputs to those models are derived from various sources including, but not limited to, benchmark yields, reported trades, dealer estimates, issuer spreads, benchmark securities, bids, offers, and swapped)other market-related data. Since many Consolidated Obligation Bonds do not trade on a daily basis, the pricing vendors use available information, as applicable, such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing to determine the prices for individual Consolidated Obligation Bonds. Each pricing vendor has an established challenge process in place for all valuations, which facilitates resolution of potentially erroneous prices identified by calculating the presentFHLB.
When pricing vendors are used, the FHLB's valuation technique first requires the establishment of a “median” price for each Consolidated Obligation Bond. If four prices are received, the average of the middle two prices is the median price; if three prices are received, the middle price is the median price; if two prices are received, the average of the two prices is the median price; and if one price is received, it is the median price (and also the final price) subject to validation of outliers. All prices that
are within a specified tolerance threshold of the median price are included in the “cluster” of prices that are averaged to compute a “default” price.
All prices that are outside the threshold (“outliers”) are subject to further analysis (including, but not limited to, comparison to prices provided by an additional third-party valuation service, prices for similar securities, non-binding dealer estimates, and/or use of an internal model that is deemed most appropriate) to determine if an outlier is a better estimate of fair value. If an outlier (or some other price identified in the analysis) is determined to be a better estimate of fair value, then the outlier (or the other price as appropriate) is used as the final price rather than the default price. Alternatively, if the analysis confirms that an outlier is in fact not representative of fair value and the default price is the best estimate, then the default price is used as the final price. In all cases, the final price is used to determine the fair value of expected future cash flows from the bonds excluding accrued interest. The fair valuessecurity.
If all prices received for a Consolidated Obligation Bond are outside the tolerance threshold level of the median price, then there is no default price, and the final price is determined by an evaluation of all outlier prices as described above.
Four vendor prices were received for the discounted cash flow methodology basedFHLB's Consolidated Obligation Bonds and the final prices for those bonds were computed by averaging the prices received. Based on the following inputs for these Consolidated Obligations:FHLB's review of the pricing methods and controls employed by the third-party pricing vendors and the relative lack of dispersion among the vendor prices, the FHLB believes its final prices result in reasonable estimates of fair value and that the fair value measurements are classified appropriately in the fair value hierarchy.
| |
▪ | Volatility assumption. Market-based expectations of future interest rate volatility implied from current market prices for similar options; and |
| |
▪ | Spread adjustment. Represents an adjustment to the curve. |
The FHLB has conducted reviews of its pricing vendors to confirm and further augment its understanding of the vendors' pricing processes, methodologies and control procedures for Consolidated Obligation Bonds.
Adjustments may be necessary to reflect the 1211 FHLBanks' credit quality when valuing Consolidated Obligation Bonds measured at fair value. Due to the joint and several liability for Consolidated Obligations, the FHLBankFHLB monitors its own creditworthiness and the creditworthiness of the other FHLBanks to determine whether any credit adjustments are necessary in its fair value measurement of Consolidated Obligation Bonds. No adjustments were considered necessary at December 31, 20122015 or 2011.2014.
Mandatorily redeemable capital stock: The fair value of capital stock subject to mandatory redemption is par value for the dates presented, as indicated by member contemporaneous purchases and sales at par value. FHLBankFHLB stock can only be acquired by members at par value and redeemed at par value. FHLBankFHLB stock is not traded and no market mechanism exists for the exchange of stock outside the cooperative structure.
Commitments: The fair values of standby bond purchase agreements are based on the present value of the estimated fees taking into account the remaining terms of the agreements.
Subjectivity of estimates. Estimates of the fair values of financial assets and liabilities using the methods described above and other methods are highly subjective and require judgments regarding significant matters such as the amount and timing of future cash flows, prepayment speeds, interest rate volatility, distributions of future interest rates used to value options, and discount rates that appropriately reflect market and credit risks. The judgments also include the parameters, methods, and assumptions used in models to value the options. The use of different assumptions could have a material effect on the fair value estimates. Since these estimates are made as of a specific point in time, they are susceptible to material near term changes.
Fair Value Measurements.
Table 20.219.2 presents the fair value of financial assets and liabilities whichthat are recorded on a recurring or nonrecurring basis at December 31, 20122015 or 2011,2014, by level within the fair value hierarchy. The FHLB records nonrecurring fair value adjustments to reflect partial write-downs on certain mortgage loans.
Table 20.219.2 - Fair Value Measurements (in thousands)
| | | | | Fair Value Measurements at December 31, 2012 | Fair Value Measurements at December 31, 2015 |
| Total | | Level 1 | | Level 2 | | Level 3 | | Netting Adjustment and Cash Collateral (1) | Total | | Level 1 | | Level 2 | | Level 3 | | Netting Adjustment and Cash Collateral (1) |
Recurring Fair Value Measurements - Assets | | | | | | | | | | |
Recurring fair value measurements - Assets | | | | | | | | | | |
Trading securities: | | | | | | | | | | | | | | | | | | |
Other U.S. obligation residential mortgage-backed securities | $ | 1,922 |
| | $ | — |
| | $ | 1,922 |
| | $ | — |
| | $ | — |
| |
Other U.S. obligation single-family mortgage-backed securities | | $ | 1,159 |
| | $ | — |
| | $ | 1,159 |
| | $ | — |
| | $ | — |
|
Available-for-sale securities: | | | | | | | | | | |
Certificates of deposit | | 700,081 |
| | — |
| | 700,081 |
| | — |
| | — |
|
Advances | | 15,057 |
| | — |
| | 15,057 |
| | — |
| | — |
|
Derivative assets: | | | | | | | | | | | | | | | | | | |
Interest rate swaps | 5,722 |
| | — |
| | 69,522 |
| | — |
| | (63,800 | ) | |
Interest rate related | | 24,974 |
| | — |
| | 13,939 |
| | — |
| | 11,035 |
|
Forward rate agreements | | 1,680 |
| | — |
| | 1,680 |
| | — |
| | — |
|
Mortgage delivery commitments | 155 |
| | — |
| | 155 |
| | — |
| | — |
| 342 |
| | — |
| | 342 |
| | — |
| | — |
|
Total derivative assets | 5,877 |
| | — |
| | 69,677 |
| | — |
| | (63,800 | ) | 26,996 |
| | — |
| | 15,961 |
| | — |
| | 11,035 |
|
Total assets at fair value | $ | 7,799 |
| | $ | — |
| | $ | 71,599 |
| | $ | — |
| | $ | (63,800 | ) | $ | 743,293 |
| | $ | — |
| | $ | 732,258 |
| | $ | — |
| | $ | 11,035 |
|
| | | | | | | | | | | | | | | | | | |
Recurring Fair Value Measurements - Liabilities | | | | | | | | | | |
Consolidated Obligation Bonds (2) | $ | 3,402,366 |
| | $ | — |
| | $ | 3,402,366 |
| | $ | — |
| | $ | — |
| |
Recurring fair value measurements - Liabilities | | | | | | | | | | |
Consolidated Obligation Bonds | | $ | 2,214,590 |
| | $ | — |
| | $ | 2,214,590 |
| | $ | — |
| | $ | — |
|
Derivative liabilities: | | | | | | | | | | | | | | | | | | |
Interest rate swaps | 114,304 |
| | — |
| | 388,889 |
| | — |
| | (274,585 | ) | |
Interest rate related | | 29,368 |
| | — |
| | 81,979 |
| | — |
| | (52,611 | ) |
Forward rate agreement | | 69 |
| | — |
| | 69 |
| | — |
| | — |
|
Mortgage delivery commitments | 584 |
| | — |
| | 584 |
| | — |
| | — |
| 1,650 |
| | — |
| | 1,650 |
| | — |
| | — |
|
Total derivative liabilities | 114,888 |
| | — |
| | 389,473 |
| | — |
| | (274,585 | ) | 31,087 |
| | — |
| | 83,698 |
| | — |
| | (52,611 | ) |
Total liabilities at fair value | $ | 3,517,254 |
| | $ | — |
| | $ | 3,791,839 |
| | $ | — |
| | $ | (274,585 | ) | $ | 2,245,677 |
| | $ | — |
| | $ | 2,298,288 |
| | $ | — |
| | $ | (52,611 | ) |
| | | | | | | | | | |
Nonrecurring fair value measurements - Assets (2) | | | | | | | | | | |
Mortgage loans held for portfolio | | $ | 6,270 |
| | $ | — |
| | $ | — |
| | $ | 6,270 |
| | |
| |
(1) | Amounts represent the effectsapplication of legally enforceable masterthe netting agreementsrequirements that allow the FHLBankFHLB to settle positive and negative positions and ofalso cash collateral and related accrued interest held or placed by the FHLB with the same counterparties.counterparty. |
| |
(2) | Represents Consolidated Obligation Bonds recorded underThe fair value information presented is as of the date the fair value option.adjustment was recorded during the year ended December 31, 2015. |
| | | | | Fair Value Measurements at December 31, 2011 | Fair Value Measurements at December 31, 2014 |
| Total | | Level 1 | | Level 2 | | Level 3 | | Netting Adjustment and Cash Collateral (1) | Total | | Level 1 | | Level 2 | | Level 3 | | Netting Adjustment and Cash Collateral (1) |
Recurring Fair Value Measurements - Assets | | | | | | | | | | |
Recurring fair value measurements - Assets | | | | | | | | | | |
Trading securities: | | | | | | | | | | | | | | | | | | |
U.S. Treasury obligations | $ | 331,207 |
| | $ | — |
| | $ | 331,207 |
| | $ | — |
| | $ | — |
| |
GSE debt securities | 2,529,311 |
| | — |
| | 2,529,311 |
| | — |
| | — |
| |
Other U.S. obligation residential mortgage-backed securities | 2,130 |
| | — |
| | 2,130 |
| | — |
| | — |
| |
Total trading securities | 2,862,648 |
| | — |
| | 2,862,648 |
| | — |
| | — |
| |
Other U.S. obligation single-family mortgage-backed securities | | $ | 1,341 |
| | $ | — |
| | $ | 1,341 |
| | $ | — |
| | $ | — |
|
Available-for-sale securities: | | | | | | | | | | | | | | | | | | |
Certificates of deposit | 3,954,017 |
| | — |
| | 3,954,017 |
| | — |
| | — |
| 1,349,977 |
| | — |
| | 1,349,977 |
| | — |
| | — |
|
Other non-mortgage-backed securities | 217,125 |
| | — |
| | 217,125 |
| | — |
| | — |
| |
Total available-for-sale securities | 4,171,142 |
| | — |
| | 4,171,142 |
| | — |
| | — |
| |
Advances | | 15,042 |
| | — |
| | 15,042 |
| | — |
| | — |
|
Derivative assets: | | | | | | | | | | | | | | | | | | |
Interest rate swaps | 2,631 |
| | — |
| | 78,019 |
| | — |
| | (75,388 | ) | |
Interest rate related | | 10,894 |
| | — |
| | 20,726 |
| | — |
| | (9,832 | ) |
Forward rate agreements | | 6 |
| | — |
| | 6 |
| | — |
| | — |
|
Mortgage delivery commitments | 2,281 |
| | — |
| | 2,281 |
| | — |
| | — |
| 3,799 |
| | — |
| | 3,799 |
| | — |
| | — |
|
Total derivative assets | 4,912 |
| | — |
| | 80,300 |
| | — |
| | (75,388 | ) | 14,699 |
| | — |
| | 24,531 |
| | — |
| | (9,832 | ) |
Total assets at fair value | $ | 7,038,702 |
| | $ | — |
| | $ | 7,114,090 |
| | $ | — |
| | $ | (75,388 | ) | $ | 1,381,059 |
| | $ | — |
| | $ | 1,390,891 |
| | $ | — |
| | $ | (9,832 | ) |
| | | | | | | | | | | | | | | | | | |
Recurring Fair Value Measurements - Liabilities | | | | | | | | | | |
Consolidated Obligation Bonds (2) | $ | 4,900,296 |
| | $ | — |
| | $ | 4,900,296 |
| | $ | — |
| | $ | — |
| |
Recurring fair value measurements - Liabilities | | | | | | | | | | |
Consolidated Obligation Bonds | | $ | 4,209,640 |
| | $ | — |
| | $ | 4,209,640 |
| | $ | — |
| | $ | — |
|
Derivative liabilities: | | | | | | | | | | | | | | | | | | |
Interest rate swaps | 102,062 |
| | — |
| | 683,512 |
| | — |
| | (581,450 | ) | |
Interest rate related | | 58,842 |
| | — |
| | 144,709 |
| | — |
| | (85,867 | ) |
Forward rate agreements | 3,143 |
| | — |
| | 3,143 |
| | — |
| | — |
| 4,924 |
| | — |
| | 4,924 |
| | — |
| | — |
|
Mortgage delivery commitments | 79 |
| | — |
| | 79 |
| | — |
| | — |
| 1 |
| | — |
| | 1 |
| | — |
| | — |
|
Total derivative liabilities | 105,284 |
| | — |
| | 686,734 |
| | — |
| | (581,450 | ) | 63,767 |
| | — |
| | 149,634 |
| | — |
| | (85,867 | ) |
Total liabilities at fair value | $ | 5,005,580 |
| | $ | — |
| | $ | 5,587,030 |
| | $ | — |
| | $ | (581,450 | ) | $ | 4,273,407 |
| | $ | — |
| | $ | 4,359,274 |
| | $ | — |
| | $ | (85,867 | ) |
| |
(1) | Amounts represent the effectsapplication of legally enforceable masterthe netting agreementsrequirements that allow the FHLBankFHLB to settle positive and negative positions and ofalso cash collateral and related accrued interest held or placed by the FHLB with the same counterparties. |
| |
(2) | Represents Consolidated Obligation Bonds recorded under the fair value option.counterparty. |
Fair Value Option. The fair value option provides an irrevocable option to elect fair value as an alternative measurement for selected financial assets, financial liabilities, unrecognized firm commitments, and written loan commitments not previously carried at fair value. It requires a company to display the fair value of those assets and liabilities for which it has chosen to use fair value on the face of the Statements of Condition. Fair value is used for both the initial and subsequent measurement of the designated assets, liabilities and commitments, with the changes in fair value recognized in net income. If elected, interest income and interest expense on Advances and Consolidated Bonds carried at fair value are recognized based solely on the contractual amount of interest due or unpaid and anyunpaid. Any transaction fees or costs are immediately recognized into other non-interest income or other non-interest expense. Additionally, concessions paid on Consolidated Obligations designated under the fair value option are expensed as incurred in other non-interest expense.
The FHLBankFHLB has elected the fair value option for certain Consolidated Obligation Bond transactions. The FHLBank elected thefinancial instruments that either do not qualify for hedge accounting or may be at risk for not meeting hedge effectiveness requirements. These fair value option for these transactions so aselections were made primarily in an effort to mitigate the potential income statement volatility that can arise when only the corresponding derivatives are marked at fair value in transactions that do not, or may not, meet hedge effectiveness requirements or otherwise qualify for hedge accounting (i.e.,from economic hedging transactions).relationships in which the carrying value of the hedged item is not adjusted for changes in fair value.
Table 20.3 – Fair Value Option Financial Liabilities (in thousands)
|
| | | | | | | |
| For the Years Ended December 31, |
| 2012 | | 2011 |
| Consolidated Bonds | | Consolidated Bonds |
Balance at beginning of period | $ | (4,900,296 | ) | | $ | — |
|
New transactions elected for fair value option | (3,365,000 | ) | | (7,671,000 | ) |
Maturities and terminations | 4,860,000 |
| | 2,776,000 |
|
Net gains (losses) on instruments held under fair value option | 1,939 |
| | (2,896 | ) |
Change in accrued interest | 991 |
| | (2,400 | ) |
Balance at end of period | $ | (3,402,366 | ) | | $ | (4,900,296 | ) |
Table 20.419.3 – Changes in Fair Values for Items Measured at Fair Value Pursuant to the Election of the Fair Value Option (in thousands)
|
| | | | | | | |
| For the Years Ended December 31, |
| 2012 | | 2011 |
| Consolidated Bonds | | Consolidated Bonds |
Interest expense | $ | (8,934 | ) | | $ | (8,884 | ) |
Net gains (losses) on changes in fair value under fair value option | 1,939 |
| | (2,896 | ) |
Total changes in fair value included in current period earnings | $ | (6,995 | ) | | $ | (11,780 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| 2015 | | 2014 | | 2013 |
| Advances | | Consolidated Bonds | | Advances | | Consolidated Bonds | | Advances | | Consolidated Bonds |
Interest income (expense) | $ | 255 |
| | $ | (13,201 | ) | | $ | 82 |
| | $ | (5,899 | ) | | $ | — |
| | $ | (4,914 | ) |
Net gains on changes in fair value under fair value option | 15 |
| | 1,042 |
| | 20 |
| | 2,154 |
| | — |
| | 330 |
|
Total changes in fair value included in current period earnings | $ | 270 |
| | $ | (12,159 | ) | | $ | 102 |
| | $ | (3,745 | ) | | $ | — |
| | $ | (4,584 | ) |
For instruments recorded under the fair value option, the related contractual interest income and contractual interest expense are recorded as part of net interest income on the StatementStatements of Income. The remaining changes in fair value for instruments in which the fair value option has been elected are recorded as “Net gains (losses) on Consolidated Obligation Bondsfinancial instruments held under fair value option” in the Statements of Income. The FHLBankFHLB has determined that no adjustments to the fair values of its instruments recorded under the fair value option for instrument-specific credit risk were necessary as of December 31, 20122015 or 2011.2014.
The following table reflects the difference between the aggregate unpaid principal balance outstanding and the aggregate fair value for Advances and Consolidated Bonds for which the fair value option has been elected.
Table 20.519.4 – Aggregate Unpaid Balance and Aggregate Fair Value (in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2012 | | December 31, 2011 |
| Aggregate Unpaid Principal Balance | | Aggregate Fair Value | | Fair Value Over/(Under) Aggregate Unpaid Principal Balance | | Aggregate Unpaid Principal Balance | | Aggregate Fair Value | | Fair Value Over/(Under) Aggregate Unpaid Principal Balance |
Consolidated Bonds | $ | 3,400,000 |
| | $ | 3,402,366 |
| | $ | 2,366 |
| | $ | 4,895,000 |
| | $ | 4,900,296 |
| | $ | 5,296 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2015 | | December 31, 2014 |
| Aggregate Unpaid Principal Balance | | Aggregate Fair Value | | Aggregate Fair Value Over/(Under) Aggregate Unpaid Principal Balance | | Aggregate Unpaid Principal Balance | | Aggregate Fair Value | | Aggregate Fair Value Over/(Under) Aggregate Unpaid Principal Balance |
Advances (1) | $ | 15,000 |
| | $ | 15,057 |
| | $ | 57 |
| | $ | 15,000 |
| | $ | 15,042 |
| | $ | 42 |
|
Consolidated Bonds | 2,216,000 |
| | 2,214,590 |
| | (1,410 | ) | | 4,210,000 |
| | 4,209,640 |
| | (360 | ) |
| |
(1) | At December 31, 2015 and 2014, none of the Advances were 90 days or more past due or had been placed on non-accrual status. |
Note 2120 - Commitments and Contingencies
As previously described, Consolidated Obligations are backed only by the financial resources of the FHLBanks. The joint and several liability Finance Agency Regulationregulation authorizes the Finance Agency to require any FHLBank to repay all or a portion of the principal and interest on Consolidated Obligations for which another FHLBank is the primary obligor. No FHLBank has ever been asked or required to repay the principal or interest on any Consolidated Obligation on behalf of another FHLBank, and as of December 31, 2012,2015, and through the filing date of this report, the FHLBankFHLB does not believe that it is probable that it will be asked to do so.
The FHLBankFHLB determined that it was not necessary to recognize a liability for the fair values of its joint and several obligation related to other FHLBanks' Consolidated Obligations at December 31, 20122015 or 2011.2014. The joint and several obligations are
mandated by Finance Agency Regulationsregulations and are not the result of arms-length transactions among the FHLBanks. The FHLBanks have no control over the amount of the guaranty or the determination of how each FHLBank would perform under the joint and several obligation.
Table 21.120.1 - Off-Balance Sheet Commitments (in thousands)
| | | December 31, 2012 | | December 31, 2011 | December 31, 2015 | | December 31, 2014 |
Notional Amount | Expire within one year | | Expire after one year | | Total | | Expire within one year | | Expire after one year | | Total | Expire within one year | | Expire after one year | | Total | | Expire within one year | | Expire after one year | | Total |
Standby Letters of Credit outstanding | $ | 9,958,329 |
| | $ | 193,635 |
| | $ | 10,151,964 |
| | $ | 4,684,850 |
| | $ | 152,933 |
| | $ | 4,837,783 |
| $ | 19,417,093 |
| | $ | 137,995 |
| | $ | 19,555,088 |
| | $ | 17,233,206 |
| | $ | 546,385 |
| | $ | 17,779,591 |
|
Commitments for standby bond purchases | 313,055 |
| | 66,760 |
| | 379,815 |
| | 35,000 |
| | 363,780 |
| | 398,780 |
| 85,865 |
| | 36,510 |
| | 122,375 |
| | 37,490 |
| | 149,705 |
| | 187,195 |
|
Commitment to purchase mortgage loans | 123,588 |
| | — |
| | 123,588 |
| | 431,264 |
| | — |
| | 431,264 |
| |
Unsettled Consolidated Bonds, at par (1) (2) | 110,000 |
| | — |
| | 110,000 |
| | 540,000 |
| | — |
| | 540,000 |
| |
Commitments to purchase mortgage loans | | 449,856 |
| | — |
| | 449,856 |
| | 451,292 |
| | — |
| | 451,292 |
|
Unsettled Consolidated Bonds, at par (1)(2) | | 60,000 |
| | — |
| | 60,000 |
| | 17,000 |
| | — |
| | 17,000 |
|
Unsettled Consolidated Discount Notes, at par (2)(1) | 750,000 |
| | — |
| | 750,000 |
| | 57,729 |
| | — |
| | 57,729 |
| — |
| | — |
| | — |
| | 5,000 |
| | — |
| | 5,000 |
|
| |
(1) | Expiration is based on settlement period rather than underlying contractual maturity of Consolidated Obligations. |
| |
(2) | Of the total unsettled Consolidated Bonds, $0 and $500,000$17,000 (in thousands) were hedged with associated interest rate swaps at December 31, 20122015 and 20112014, respectively. |
| |
(2) | Expiration is based on settlement period rather than underlying contractual maturity of Consolidated Obligations. |
Standby Letters of Credit. A Standby Letter of Credit is a financing arrangement between the FHLBankFHLB and its member. Standby Letters of Credit are executed for members for a fee. If the FHLBankFHLB is required to make payment for a beneficiary's draw, the payment amount is converted into a collateralized Advance to the member. The original terms of theseThese Standby Letters of Credit range from lesshave original expiration periods of up to 19 years, currently expiring no later than one month to 18 years, with a final expiration in 2024.2024. Unearned fees and the value of guarantees related to Standby Letters of Credit are recorded in other liabilities and amounted to (in thousands) $2,518$4,666 and $1,865$4,441 at December 31, 20122015 and 2011.2014.
The FHLBankFHLB monitors the creditworthiness of its members that have Standby Letters of Credit. In addition, Standby Letters of Credit are fully collateralized at the time of issuance. As a result, the FHLBankFHLB has deemed it unnecessary to record any additional liability on these commitments.
Standby Bond Purchase Agreements. The FHLBankFHLB has executed standby bond purchase agreements with one state housing authority whereby the FHLBank,FHLB, for a fee, agrees as a liquidity provider if required, to purchase and hold the authority's bonds until the designated marketing agent can find a suitable investor or the housing authority repurchases the bonds according to a schedule established by the standby agreement. Each standby agreement dictates the specific terms that would require the FHLBankFHLB to purchase the bonds. The bond purchase commitments entered into by the FHLBankFHLB have original expiration periods up to six5 years, currently no later than 2015,2020, although some are renewable at the option of the FHLBank.FHLB. During 20122015 and 2011,2014, the FHLBankFHLB was not required to purchase any bonds under these agreements.
Commitments to Purchase Mortgage Loans. The FHLBankFHLB enters into commitments that unconditionally obligate the FHLBankFHLB to purchase mortgage loans. Commitments are generally for periods not to exceed 90 days. The delivery commitments are recorded as derivatives at their fair values.
Pledged Collateral. The FHLBank generally executes derivatives with major banks and broker-dealers and generally enters into bilateralFHLB may pledge (collateral) agreements. As of December 31, 2012 and 2011, the FHLBank had nosecurities, pledged as collateral, related to broker-dealers.derivatives. See Note 11 - Derivatives and Hedging Activities for additional information about the FHLB's pledged collateral and other credit-risk-related contingent features.
Lease Commitments. The FHLBankFHLB charged to operating expenses net rental and related costs of approximately $1,905,000,$1,966,000, $1,832,000,1,816,000, and $1,813,000$1,713,000 for the years ending December 31, 2012, 2011,2015, 2014, and 2010.2013.
Table 21.220.2 - Future Minimum Rentals for Operating Leases (in thousands)
| | Year | | Premises | | Equipment | | Total | | Premises | | Equipment | | Total |
2013 | | $ | 645 |
| | $ | 142 |
| | $ | 787 |
| |
2014 | | 350 |
| | 114 |
| | 464 |
| |
2015 | | 828 |
| | 114 |
| | 942 |
| |
2016 | | 752 |
| | 114 |
| | 866 |
| | $ | 768 |
| | $ | 146 |
| | $ | 914 |
|
2017 | | 755 |
| | 76 |
| | 831 |
| | 771 |
| | 143 |
| | 914 |
|
2018 | | | 791 |
| | 72 |
| | 863 |
|
2019 | | | 796 |
| | — |
| | 796 |
|
2020 | | | 812 |
| | — |
| | 812 |
|
Thereafter | | 7,367 |
| | — |
| | 7,367 |
| | 5,053 |
| | — |
| | 5,053 |
|
Total | | $ | 10,697 |
| | $ | 560 |
| | $ | 11,257 |
| | $ | 8,991 |
| | $ | 361 |
| | $ | 9,352 |
|
Lease agreements for FHLBankFHLB premises generally provide for increases in the basic rentals resulting from increases in property taxes and maintenance expenses. Such increases are not expected to have a material effect on the FHLBank.FHLB.
Legal Proceedings. The FHLBankFrom time to time, the FHLB is subject to legal proceedings arising in the normal course of business. In March 2010, the FHLBankFHLB was advised by representatives of the Lehman Brothers Holdings, Inc. bankruptcy estate that they believed that the FHLBankFHLB had been unjustly enriched in connection with the close out of its interest rate swap transactions with Lehman at the time of the Lehman bankruptcy in 2008 and that the bankruptcy estate was entitled to the $43 million difference between the settlement amount the FHLBankFHLB paid Lehman in connection with the automatic early termination of thoseclose-out transactions and the market value payment the FHLBankFHLB received when replacing the swaps with new swaps transacted with other counterparties. In May 2010, the FHLBankFHLB received a Derivatives Alternative Dispute Resolution notice from the Lehman bankruptcy estate with a settlement demand of $65.8 million, plus interest accruing primarily at LIBOR plus 14.5 percent since the bankruptcy filing, based on their view of how the settlement amount should have been calculated. In accordance with the Alternative Dispute Resolution Order of the Bankruptcy Court administering the Lehman estate, senior management of the FHLBankFHLB participated in a non-binding mediation in New York in August 2010, and counsel for the FHLBankFHLB continued discussions with the court-appointed mediator for several weeks thereafter. The mediation concluded in October 2010 without a settlement of the claims asserted by the Lehman bankruptcy estate. In April 2013, Lehman Brothers Special Financing Inc., through Lehman Brothers Holdings Inc. and the Plan Administrator under the Modified Third Amended Joint Chapter 11 Plan of Lehman Brothers Holdings Inc. and its Affiliated Debtors, filed an adversary complaint in the United States Bankruptcy Court for the Southern District of New York against the FHLB seeking (a) a declaratory judgment on the interpretation of certain provisions and the calculation of amounts due under the agreement governing the 2008 swap transactions described above, and (b) additional amounts alleged as due as part of the termination of such transactions. The FHLBankFHLB believes that it correctly calculated, and fully satisfied its obligation to Lehman in September 2008, and the FHLBankFHLB intends to vigorously dispute any claim for additional amounts.defend itself.
The FHLBankFHLB also is subject to other legal proceedings arising in the normal course of business. The FHLB would record an accrual for a loss contingency when it is probable that a loss has been incurred and the amount can be reasonably estimated. After consultation with legal counsel, management does not anticipate that the ultimate liability, if any, arising out of these matters will have a material effect on the FHLBank'sFHLB's financial condition or results of operations.
Note 2221 - Transactions with Other FHLBanks
The FHLBankFHLB notes all transactions with other FHLBanks on the face of its financial statements. Occasionally, the FHLBankFHLB loans short-term funds to and borrows short-term funds from other FHLBanks. These loans and borrowings are transacted at then current market rates when traded. There were no such loans or borrowings outstanding at December 31, 20122015, 2011,2014, or 2010.2013. The following table details the average daily balance of lending and borrowing between the FHLBankFHLB and other FHLBanks for the for the years endedDecember 31.31.
Table 22.121.1 - Lending and Borrowing Between the FHLBankFHLB and Other FHLBanks (in thousands)
| | | Average Daily Balances for the Years Ended December 31, | Average Daily Balances for the Years Ended December 31, |
| 2012 | | 2011 | | 2010 | 2015 | | 2014 | | 2013 |
Loans to other FHLBanks | $ | 2,514 |
| | $ | 3,141 |
| | $ | 4,907 |
| $ | — |
| | $ | 438 |
| | $ | 3,740 |
|
Borrowings from other FHLBanks | 273 |
| | — |
| | 342 |
| 68 |
| | 68 |
| | 4,110 |
|
The FHLBankIn addition, the FHLB may, from time to time, assume the outstanding primary liability for Consolidated Obligations of another FHLBank (at then current market rates on the day when the transfer is traded) rather than issuing new debt for which the FHLBankFHLB is the primary obligor. The FHLBankFHLB then becomes the primary obligor on the transferred debt. There are no formal arrangements governing the transfer of Consolidated Obligations between the FHLBanks, and these transfers are not investments of one FHLBank in another FHLBank. Transferring debt at current market rates enables the FHLBank System to satisfy the debt issuance needs of individual FHLBanks without incurring the additional selling expenses (concession fees)
associated with new debt. It also provides the transferring FHLBanks with outlets for extinguishing debt structures no longer required for their balance sheet management strategies.
There were no Consolidated Obligations transferred to the FHLBankFHLB during the years ended December 31, 2012 or 2011. During the year ended December 31, 20102015, the par amount of the liability on Consolidated Obligations transferred to the FHLBank totaled (in thousands) $145,0002014. All such transfers during the year ended December 31, 2010 were from the FHLBank of Chicago., or 2013. The net premiums associated with these transactions were (in thousands) $16,722 in 2010. The FHLBank accounts for these transfers in the same manner as it accounts for new debt issuances (see Note 13). The FHLBankFHLB had no Consolidated Obligations transferred to other FHLBanks during these periods.
Note 2322 - Transactions with Stockholders
As a cooperative, the FHLBank'sFHLB's capital stock is owned by its members, by former members that retain the stock as provided in the FHLBank'sFHLB's Capital Plan and by nonmember institutions that have acquired members and must retain the stock to support Advances or other activities with the FHLBank.FHLB. All Advances are issued to members and all mortgage loans held for portfolio are purchased from members. The FHLBankFHLB also maintains demand deposit accounts for members, primarily to facilitate settlement activities that are directly related to Advances and mortgage loan purchases. Additionally, the FHLBankFHLB may enter into interest rate swaps with its stockholders. The FHLBankFHLB may not invest in any equity securities issued by its stockholders and it has not purchased any mortgage-backed securities securitized by, or other direct long-term investments in, its stockholders.
For financial statement purposes, the FHLBankFHLB defines related parties as those members with more than 10 percent of the voting interests of the FHLBankFHLB capital stock outstanding. Federal legislation prescribes the voting rights of members in the election of both member and independent directors. For member directorships, the Finance Agency designates the number of member directorships in a given year and an eligible voting member may vote only for candidates seeking election in its respective state. For independent directorships, the FHLBank'sFHLB's Board of Directors nominates candidates to be placed on the ballot in an at-large election. For both member and independent directorship elections, a member is entitled to vote one share of required capital stock, subject to a statutory limitation, for each applicable directorship. Under this limitation, the total number of votes that a member may cast is limited to the average number of shares of the FHLBank'sFHLB's capital stock that were required to be held by all members in that state as of the record date for voting. Nonmember stockholders are not eligible to vote in director elections. Due to the abovementioned statutory limitation, no member owned more than 10 percent of the voting interests of the FHLBankFHLB at December 31, 20122015 or 2011.2014.
All transactions with stockholders are entered into in the ordinary course of business. Finance Agency Regulationsregulations require the FHLBankFHLB to offer the same pricing for Advances and other services to all members regardless of asset or transaction size, charter type, or geographic location. However, the FHLBankFHLB may, in pricing its Advances, distinguish among members based upon its assessment of the credit and other risks to the FHLBankFHLB of lending to any particular member or upon other reasonable criteria that may be applied equally to all members. The FHLBank'sFHLB's policies and procedures require that such standards and criteria be applied consistently and without discrimination to all members applying for Advances.
Transactions with Directors' Financial Institutions. In the ordinary course of its business, the FHLBankFHLB may provide products and services to members whose officers or directors serve as directors of the FHLBankFHLB (Directors' Financial Institutions). Finance Agency Regulationsregulations require that transactions with Directors' Financial Institutions be made on the same terms as those with any other member. The following table reflects balances with Directors' Financial Institutions for the items indicated below. The FHLB had no mortgage-backed securities or derivatives transactions with Directors' Financial Institutions at December 31, 2015 or 2014.
Table 23.122.1 - Transactions with Directors' Financial Institutions (dollars in millions)
| | | December 31, 2012 | | December 31, 2011 | December 31, 2015 | | December 31, 2014 |
| Balance | | % of Total (1) | | Balance | | % of Total (1) | Balance | | % of Total (1) | | Balance | | % of Total (1) |
Advances | $ | 948 |
| | 1.8 | % | | $ | 883 |
| | 3.2 | % | $ | 3,867 |
| | 5.3 | % | | $ | 2,929 |
| | 4.2 | % |
MPP | 41 |
| | 0.6 |
| | 42 |
| | 0.5 |
| 186 |
| | 2.4 |
| | 154 |
| | 2.3 |
|
Mortgage-backed securities | — |
| | — |
| | — |
| | — |
| |
Regulatory capital stock | 229 |
| | 5.4 |
| | 173 |
| | 5.1 |
| 236 |
| | 5.3 |
| | 225 |
| | 5.2 |
|
Derivatives | — |
| | — |
| | — |
| | — |
| |
| |
(1) | Percentage of total principal (Advances), unpaid principal balance (MPP), principal balance (mortgage-backed securities),and regulatory capital stock, and notional balances (derivatives).stock. |
Concentrations. The following table shows regulatory capital stock balances, outstanding Advance principal balances, and unpaid principal balances of mortgage loans held for portfolio at the dates indicated to members and former membersstockholders holding five percent or more of regulatory capital stock and include any known affiliates that are members of the FHLBank.FHLB.
Table 23.222.2 - Stockholders Holding Five Percent or more of Regulatory Capital Stock Advances, and MPP Principal Balances to Members and Former Members (dollars in millions)
| | | Regulatory Capital Stock | | Advance | | MPP Unpaid | Regulatory Capital Stock | | Advance | | MPP Unpaid |
December 31, 2012 | Balance | | % of Total | | Principal | | Principal Balance | |
December 31, 2015 | | Balance | | % of Total | | Principal | | Principal Balance |
JPMorgan Chase Bank, N.A. | $ | 865 |
| | 20 | % | | $ | 26,000 |
| | $ | — |
| $ | 1,533 |
| | 34 | % | | $ | 35,350 |
| | $ | — |
|
U.S. Bank, N.A. | 592 |
| | 14 |
| | 4,586 |
| | 55 |
| 475 |
| | 11 |
| | 10,086 |
| | 33 |
|
Fifth Third Bank | 401 |
| | 9 |
| | 4,732 |
| | 6 |
| 248 |
| | 6 |
| | 20 |
| | 3 |
|
Total | $ | 1,858 |
| | 43 | % | | $ | 35,318 |
| | $ | 61 |
| |
|
| | | | | | | | | | | | | | |
| Regulatory Capital Stock | | Advance | | MPP Unpaid |
December 31, 2011 | Balance | | % of Total | | Principal | | Principal Balance |
U.S. Bank, N.A. | $ | 591 |
| | 17 | % | | $ | 7,314 |
| | $ | 67 |
|
Fifth Third Bank | 401 |
| | 12 |
| | 2,533 |
| | 7 |
|
PNC Bank, N.A. (1) | 243 |
| | 7 |
| | 3,996 |
| | 2,338 |
|
KeyBank, N.A. | 179 |
| | 5 |
| | 220 |
| | — |
|
Total | $ | 1,414 |
| | 41 | % | | $ | 14,063 |
| | $ | 2,412 |
|
|
| | | | | | | | | | | | | | |
| Regulatory Capital Stock | | Advance | | MPP Unpaid |
December 31, 2014 | Balance | | % of Total | | Principal | | Principal Balance |
JPMorgan Chase Bank, N.A. | $ | 1,533 |
| | 35 | % | | $ | 41,300 |
| | $ | — |
|
U.S. Bank, N.A. | 475 |
| | 11 |
| | 8,338 |
| | 38 |
|
Fifth Third Bank | 248 |
| | 6 |
| | 24 |
| | 3 |
|
Nonmember Affiliates. The FHLBankFHLB has relationships with three nonmember affiliates, the Kentucky Housing Corporation, the Ohio Housing Finance Agency and the Tennessee Housing Development Agency. The FHLBankFHLB had no investments in or borrowings extended to any of these nonmember affiliates duringat December 31, 2015 or 2014. The FHLB has executed standby bond purchase agreements with one state housing authority whereby the FHLB, for a fee, agrees as a liquidity provider if required, to purchase and hold the authority's bonds until the designated marketing agent can find a suitable investor or the housing authority repurchases the bond according to a schedule established by the standby agreement. For the years ended December 31, 2012 or 2011. The FHLBank had principal investments in2015 and 2014, the FHLB was not required to purchase any bonds of the Kentucky Housing Corporation of $2,955,000 for the year ended December 31, 2010.under these agreements.
SUPPLEMENTAL FINANCIAL DATA
Supplemental financial data required is set forth in the “Other Financial Information” caption at Part II, Item 7 of this report.
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Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
There were no changes in or disagreements with our accountants on accounting and financial disclosure during the two most recent fiscal years.
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Item 9A. | Controls and Procedures. |
DISCLOSURE CONTROLS AND PROCEDURES
As of December 31, 2012,2015, the FHLBank'sFHLB's management, including its principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, these two officers each concluded that, as of December 31, 2012,2015, the FHLBankFHLB maintained effective disclosure controls and procedures designed to ensure that information required to be disclosed in the reports that it files under the Exchange Act is (1) accumulated and communicated to management as appropriate to allow timely decisions regarding disclosure and (2) recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of the FHLBankFHLB is responsible for establishing and maintaining adequate internal control over financial reporting. The FHLBank'sFHLB's internal control over financial reporting is designed by, or under the supervision of, the FHLBank'sFHLB's management, including its principal executive officer and principal financial officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The FHLBank'sFHLB's management assessed the effectiveness of the FHLBank'sFHLB's internal control over financial reporting as of December 31, 2012.2015. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based on its assessment, management of the FHLBankFHLB determined that, as of December 31, 2012,2015, the FHLBank'sFHLB's internal control over financial reporting was effective based on those criteria.
The effectiveness of the FHLBank'sFHLB's internal control over financial reporting as of December 31, 20122015 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included in “Item 8. Financial Statements and Supplementary Data."
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in the FHLBank'sFHLB's internal control over financial reporting that occurred during the fourth quarter ended December 31, 20122015 that materially affected, or are reasonably likely to materially affect, the FHLBank'sFHLB's internal control over financial reporting.
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Item 9B. | Other Information. |
Not applicable.
PART III
Item 10.Directors, Executive Officers and Corporate Governance.
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Item 10. | Directors, Executive Officers and Corporate Governance. |
NOMINATION AND ELECTION OF DIRECTORS
The Finance Agency has authorized us to have a total of 17 directors: 10 member directors and seven independent directors. Two of our independent directors are designated as public interest directors and all 17 directors are elected by our members.
For both member and independent directorship elections, a member institution may cast one vote per seat or directorship up for election for each share of stock that the member was required to hold as of December 31 of the calendar year immediately preceding the election year. However, the number of votes that any member may cast for any one directorship cannot exceed the average number of shares of FHLBankFHLB stock that were required to be held by all members located in its state. The election process is conducted by mail. Our Board of Directors does not solicit proxies nor is any member institution permitted to solicit proxies in an election.
Finance Agency regulations also provide for two separate selection processes for member and independent director candidates.
Member director candidates are nominated by any officer or director of a member institution eligible to vote in the respective statewide election, including the candidate's own institution. After the FHLBankFHLB determines that the candidate meets all member director eligibility requirements per Finance Agency regulations, the candidate may run for election and the candidate's name is placed on the ballot.
Independent director candidates are self-nominated. Any individual may submit an independent director application form to the FHLBankFHLB and request to be considered for election. The FHLBankFHLB reviews all application forms to determine that the individual satisfies the appropriate public interest or non-public interest independent director eligibility requirements per Finance Agency regulations before forwarding the application form to the Board for review of the candidate's qualifications and skills. The Board then nominates an individual whose name will appear on the ballot after consultation with the Affordable Housing Advisory Council and after the nominee information has been submitted to the Finance Agency for review. As part of the nomination process, the Board may consider several factors including the individual's contributions and service on the Board, if a former or incumbent director, and the specific experience and qualifications of the candidate. The Board will also considerconsiders diversity in nominating independent directors and how the attributes of the candidate may add to the overall strength and skill set of the Board. These same factors are considered when the Board fills a member or independent director vacancy.
DIRECTORS
The following table sets forth certain information (ages as of March 1, 2013)2016) regarding each of our current directors.
| | Name | Age | Director Since | Expiration of Term as a Director | Independent or Member (State) | Age | Director Since | Expiration of Term as a Director | Independent or Member (State) |
J. Lynn Anderson | | 52 | 2011 | 12/31/16 | Member (OH) |
Grady P. Appleton | 65 | 2007 | 12/31/13 | Independent (OH) | 68 | 2007 | 12/31/17 | Independent (OH) |
B. Proctor Caudill, Jr., Vice Chair | 63 | 2004 | 12/31/13 | Member (KY) | |
Greg W. Caudill | | 57 | 2014 | 12/31/17 | Member (KY) |
James R. DeRoberts | 56 | 2008 | 12/31/14 | Member (OH) | 59 | 2008 | 12/31/18 | Member (OH) |
Mark N. DuHamel | 55 | 2009 | 12/31/15 | Member (OH) | |
Leslie D. Dunn | 67 | 2007 | 12/31/16 | Independent (OH) | 70 | 2007 | 12/31/16 | Independent (OH) |
James A. England | 61 | 2011 | 12/31/14 | Member (TN) | 64 | 2011 | 12/31/18 | Member (TN) |
J. Lynn Greenstein | 49 | 2011 | 12/31/16 | Member (OH) | |
Charles J. Koch | 66 | 2008 (1) | 12/31/14 | Independent (OH) | 69 | 2008 (1) | 12/31/18 | Independent (OH) |
Robert T. Lameier | | 63 | 2016 | 12/31/19 | Member (OH) |
Michael R. Melvin | 68 | (1995-2001) 2006 | 12/31/15 | Member (OH) | 71 | (1995-2001) 2006 | 12/31/19 | Member (OH) |
Thomas L. Moore | 66 | 2013 | 12/31/16 | Member (OH) | 69 | 2013 | 12/31/16 | Member (OH) |
Donald J. Mullineaux | 67 | 2010 | 12/31/15 | Independent (KY) | |
Donald J. Mullineaux, Chair | | 70 | 2010 | 12/31/19 | Independent (KY) |
Alvin J. Nance | 55 | 2009 | 12/31/16 | Independent (TN) | 58 | 2009 | 12/31/16 | Independent (TN) |
Charles J. Ruma | 71 | (2002-2004) 2007 | 12/31/15 | Independent (OH) | 74 | (2002-2004) 2007 | 12/31/19 | Independent (OH) |
William J. Small | 62 | 2007 | 12/31/13 | Member (OH) | |
David E. Sartore | | 55 | 2014 | 12/31/17 | Member (KY) |
William J. Small, Vice Chair | | 65 | 2007 | 12/31/17 | Member (OH) |
William S. Stuard, Jr. | 58 | 2011 | 12/31/14 | Member (TN) | 61 | 2011 | 12/31/18 | Member (TN) |
Billie W. Wade | 63 | 2007 | 12/31/13 | Member (KY) | |
Carl F. Wick, Chair | 73 | 2003 | 12/31/14 | Independent (OH) | |
Nancy E. Uridil | | 64 | 2015 | 12/31/18 | Independent (OH) |
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(1) | Mr. Koch, an independent director beginning in 2008, also served as a member director from 1990-1995 and 1998-2006. |
Member Directors
Finance Agency regulations govern the eligibility requirements for our member directors. Each member director, and each nominee to a member directorship, must be a U.S. citizen and an officer or director of a member that: is located in the voting state to be represented by the member directorship, was a member of the FHLBankFHLB as of the record date, and meets all minimum capital requirements established by its appropriate Federal banking agency or state regulator.
Each member director is nominated and elected by our members through an annual voting process administered by us. Any member that is entitled to vote in the election may nominate an eligible individual to fill each available member directorship for its voting state, and all eligible nominees must be presented to the membership in the voting state. In accordance with Finance Agency regulations, except when acting in a personal capacity, no director, officer, attorney, employee or agent of the FHLBankFHLB may communicate in any manner that he or she directly or indirectly, supports or opposes the nomination or election of a particular individual for a member directorship or take any other action to influence the voting with respect to a particular individual. As a result, the FHLBankFHLB is not in a position to know which factors its member institutions considered in nominating candidates for member directorships or in voting to elect member directors.
Ms. Anderson became Senior Vice President-Member Solutions Integration for Nationwide Mutual Insurance Company, Columbus, Ohio in March 2016. She also served as President of Nationwide Bank from November 2009 to March 2016.
Mr. Caudill has been involved in banking for over 40 years. He served as President and Chief Executive Officer of PeoplesFarmers National Bank, Morehead and Sandy Hook,Danville, Kentucky from 1981 until July 2006. Since August 2006, Mr. Caudill has served as a director of Kentucky Bancshares, Inc. and its subsidiary, Kentucky Bank, of Paris, Kentucky.since December 2002.
Mr. DeRoberts is a founding directorhas been Chairman of The Arlington Bank, headquartered in Upper Arlington, Ohio since 1999 and has served the bank as its Chairman since 1999. In addition, from June 1978 to April 2006, Mr. DeRoberts was associated with Dick DeRoberts & Company, Inc., an independent insurance agency headquartered in Columbus, Ohio. He served as President beginning in 1995. In April 2006, Dick DeRoberts & Company merged with Gardiner Allen Insurance Associates to forma partner at Gardiner Allen DeRoberts Insurance LLC, where Mr. DeRobertsColumbus, Ohio since 2006. He also serves as a partner.director of Park National Corporation, Newark, Ohio.
Mr. DuHamelEngland has been a director and theChairman of Decatur County Bank, Decaturville, Tennessee since 1990. He also served as Chief Executive Vice PresidentOfficer of FirstMeritDecatur County Bank N.A., Akron, Ohio, since February 2005 and Treasurer of FirstMerit Bank, N.A. since March 1996.from 1990 to 2013.
Mr. England Lameierhas been Chairman andPresident, Chief Executive Officer, and a director of Decatur CountyMiami Savings Bank, Decaturville, Tennessee since 1990.
Ms. Greenstein has been the President and Chief Executive Officer of Nationwide Bank, Columbus,Miamitown, Ohio since November 2009. She also served as the Senior Vice President-Property and Casualty Product and Pricing for Nationwide Mutual Insurance Company from March 2003 until November 2009.1993.
Mr. Melvin has been President and a director of Perpetual Federal Savings Bank, Urbana, Ohio since 1980.
Mr. Moore has been a director at First Federal Bank of Ohio, Galion, Ohio, since 1995, serving as Chairman from November 2011 to November 2014. He also served as President and Chief Executive Officer of First Federal Bank of Ohio Galion,from 1995 to January 2014.
Mr. Sartore became Executive Vice President and Chief Financial Officer of Field & Main Bank, Henderson, Kentucky in January 2015 when Ohio Valley Financial Group and BankTrust Financial merged to form Field & Main Bank. Previously, Mr. Sartore was Senior Vice President and Chief Financial Officer of Ohio Valley Financial Group since 1995. Since November 2011, he also served as Chairman at First Federal Bank of Ohio.1992.
Mr. Small has been Chairman and Chief Executive Officer of First Defiance Financial Corp. and Chairman of its subsidiary bank, First Federal Bank of the Midwest, of Defiance, Ohio, since 1999. He also served as Chief Executive Officer of First Defiance Financial Corp. from 1999 to December 2013. In addition, he served as Chief Executive Officer of First Federal Bank of the Midwest from 1999 until December 2008.
Mr. Stuardhas been Chairman of F&M Bank, Clarksville, Tennessee, since January 2016 and President and Chief Executive Officer of F&M Bank Clarksville, Tennessee, since January 1991.
Mr. Wade has served as Executive Director of HOPE of Kentucky, LLC since January 2011. HOPE of Kentucky, LLC is a consortium of Kentucky banks formed to make permanent loans on affordable housing projects. Mr. Wade had worked as a self-employed consultant to affordable housing organizations and real estate developers from August 2010 to January 2011. Mr. Wade was the Chief Executive Officer of Citizens Union Bank, Shelbyville, Kentucky, from 1991 to March 2010. He also served as President of Citizens Union Bank from 1991 through 2007. Mr. Wade has been a Director of First Farmers Bank and Trust Company, Owenton, Kentucky, since 1993. Mr. Wade had been a Director of Dupont State Bank, Dupont, Indiana, from 2001 until September 2012 when the bank sold.
Independent Directors
Finance Agency regulations also govern the eligibility requirements of our independent directors. Each independent director, and each nominee to an independent directorship, must be a U.S. citizen and bona fide resident of our District. At least two of our independent directors must be designated by our Board as public interest directors. Public interest independent directors must have more than four years experience representing consumer or community interest in banking services, credit needs, housing, or consumer financial protections. All other independent directors must have knowledge of or experience in one or more of the following areas: auditing and accounting; derivatives; financial management; organizational management; project development; risk management practices; and the law. Our Board of Directors nominates candidates for independent directorships. Directors, officers, employees, attorneys, or agents of the FHLBankFHLB are permitted to support directly or indirectly the nomination or election of a particular individual for an independent directorship.
Mr. Appleton has served as President and Chief Executive DirectorOfficer of East Akron Neighborhood Development Corporation (EANDC), Akron, Ohio, since January 2014. He previously served as Executive Director of EANDC for more than 30 years. The EANDC's mission is to develop East AkronEANDC improves communities by providing quality and other communities throughaffordable housing, comprehensive homeownership services and economic development activities, such as affordable housing programs and programs to support home ownership.opportunities. Mr. Appleton's years of experience with EANDC bring insight to the Board that contributes to the FHLBank'sFHLB's corporate objective of maximizing the effectiveness of contributions to Housing and Community Investment programs. Mr. Appleton also served as a member of the FHLBank'sFHLB's Advisory Council from 1997 until 2006.
Ms. Dunn was Senior Vice President of Business Development, General Counsel and Secretary of Cole National Corporation, a New York Stock Exchange listed retailer now owned by Luxottica Group S.p.A., from September 1997 until October 2004. Prior to joining Cole, she had been a partner since 1985 in the Business Practice of the Jones Day law firm. She currently is engaged in various business and private company board activities and serves in leadership positions with a number of civic and philanthropic organizations. Ms. Dunn has served as a director of New York Community Bancorp, Inc. and on its Audit, Risk Assessment and Nominating and Corporate Governance Committees since September 2015. Ms. Dunn's experience as a senior officer of a publicly held company and as a law firm partner representing numerous publicly held companies brings perspective to the Board regarding the FHLBank'sFHLB's status as an SEC registrant, corporate governance matters, and the Board's responsibility to oversee the FHLBank'sFHLB's operations.
Mr. Koch is the retired Chairman of the Board and Chief Executive Officer of Charter One Bank, N.A., Cleveland, Ohio. He served as Charter One's Chief Executive Officer from 1987 to 2004, and as its Chairman of the Board from 1995 to 2004, when the bank was sold to Royal Bank of Scotland. Mr. Koch was a director of the Royal Bank of Scotland from 2004 until February 2009. He is currently a director of Assurant Inc. and Home Properties, Inc.Citizens Financial Group. Mr. Koch's prior leadership positions within the banking industry and various board positions held contribute skills important to the Board's responsibility for approving a strategic business plan that supports the FHLBank'sFHLB's mission and corporate objectives.
Dr. Mullineaux has heldis the Emeritus duPont Endowed Chair in Banking and Financial Services in the Gatton College of Business and Economics at the University of Kentucky since 1984.Kentucky. He held the duPont Endowed Chair from 1984 until 2014. Previously, he was on the staff of the Federal Reserve Bank of Philadelphia, where he served as Senior Vice President and Director of Research from
1979 until 1984. He also served as a director of Farmers Capital Bank Corporation from 2005 until 2009. He has published numerous articles and lectured on a variety of banking topics, including risk management, financial markets and economics. He has served as the Curriculum Director for the ABA's Stonier Graduate School of Banking since 2001. Dr. Mullineaux brings knowledge and experience to the Board in areas vital to the operation of financial institutions in today's economy.
Mr. Nance has been Chief Executive Officer of the Development and Property Management operating divisions of LHP Capital, Knoxville, Tennessee, since April 2015. Previously, he was Executive Director and the Chief Executive Officer of Knoxville's Community Development Corporation (KCDC) Knoxville, Tennessee since 2000.from 2000 to 2015. The KCDC is the public housing and redevelopment authority for the City of Knoxville and Knox County, which strives to improve Knoxville's neighborhoods and communities, including through providing quality affordable housing. Mr. Nance also served an eight-year term where he held the office of Vice Chairman on the Tennessee Housing Development Agency, the state's housing finance agency, which promotes the production of more affordable new housing units for very low, low, and moderate, income individuals and families in the state. Mr. Nance also serves on the Board of Knoxville Habitat for Humanity. Mr. Nance's depth of experience with these organizations brings insight to the Board that contributes to the FHLBank'sFHLB's corporate objective of maximizing the effectiveness of its contributions to Housing and Community Investment programs.
Mr. Ruma has been President and Chief Executive Officer of Virginia Homes Ltd., a Columbus, Ohio area homebuilder, since 1975. He served on the board of the Ohio Housing Finance Agency (OHFA), the state's housing agency, from 2004 to 2009. OHFA helps Ohio's first-time homebuyers, renters, senior citizens, and others find quality, affordable housing that meets their needs. OHFA's programs also support developers and property managers of affordable housing throughout the state. Mr. Ruma's years of experience in the home building industry and with the OHFA bring insight to the Board that contributes to the FHLBank'sFHLB's mission and corporate objectives.
Mr. WickMs. Uridil was employed by the NCR Corporation (oneSenior Vice President of Global Operation for Moen Incorporated, North Olmsted, Ohio, from September 2005 until March 2014. Ms. Uridil is currently on the two leading manufacturersBoard of IT banking systems inDirectors of Flexsteel Industries, Inc., where she serves on the world atCompensation Committee and chairs the time) from 1966 to 1994, when he retired. He continued with NCR into 1997 on a contractual basis. Mr. Wick's work at NCR included trainingNominations and support for NCR computer banking system installations, managing NCR's customer support and education centers in Chicago and Dallas and servingGovernance Committee. Previously, Ms. Uridil served as a director in NCR's R&D division. He's the ownerSenior Vice President of Wick and Associates, a business consulting firm. HeEstée Lauder Companies, from 2000 to 2005. Ms. Uridil also served as a memberSenior Vice President of the Ohio Board of Education for 8½ years, chairing several key policy committees. He retiredMary Kay, Incorporated, from the State Board in 2009. Mr. Wick's1996 to 2000. Ms. Uridil's qualifications and insight provide valuable skills to the Board in the important areas of technology, personnel, compensation, information technology and organizational development. Mr. Wick has been a member of the Council of Federal Home Loan Banks since 2005 and currently serves as Chairman of the Council.operations.
EXECUTIVE OFFICERS
The following table sets forth certain information (ages as of March 1, 2013)2016) regarding our executive officers.
| | Name | Age | Position | Employee of the FHLBank Since | Age | Position | Employee of the FHLB Since |
Andrew S. Howell | 51 | President and Chief Executive Officer | 1989 | 54 | President and Chief Executive Officer | 1989 |
Donald R. Able | 52 | Executive Vice President-Chief Operating Officer | 1981 | 55 | Executive Vice President-Chief Operating Officer and Chief Financial Officer | 1981 |
R. Kyle Lawler | 55 | Executive Vice President-Chief Business Officer | 2000 | 58 | Executive Vice President-Chief Business Officer | 2000 |
Damon v. Allen | 42 | Senior Vice President-Community Investment Officer | 1999 | 45 | Senior Vice President-Community Investment Officer | 1999 |
Thomas J. Ciresi | 59 | Senior Vice President-Member Services | 1981 | |
Carole L. Cossé | 65 | Senior Vice President-Chief Financial Officer | 1979 | |
J. Christopher Bates | | 40 | Senior Vice President-Chief Accounting Officer | 2005 |
Roger B. Batsel | | 44 | Senior Vice President-Chief Information Officer | 2014 |
James G. Dooley, Sr. | 59 | Senior Vice President-Internal Audit | 2006 | 62 | Senior Vice President-Internal Audit | 2006 |
David C. Eastland | | 58 | Senior Vice President-Chief Credit Officer | 1999 |
Tami L. Hendrickson | | 55 | Senior Vice President-Treasurer | 2006 |
Stephen J. Sponaugle | 50 | Senior Vice President-Chief Risk Officer | 1992 | 53 | Senior Vice President-Chief Risk and Compliance Officer | 1992 |
Except as described below, all of the executive officers named above have held their current positions for at least the past five years.
Mr. Howell became President and Chief Executive Officer in June 2012. Previously, he served as the Executive Vice President-Chief Operating Officer since January 2008.
Mr. Able became the Executive Vice President-Chief Operating Officer and Chief Financial Officer in January 2015. Mr. Able served as the Executive Vice President-Chief Operating Officer and Interim Chief Financial Officer since March 2014. He became Executive Vice President-Chief Operating Officer in August 2012 and has served as the Principal Financial Officer
since January 2007. Prior to that, he had served as the Senior Vice President-Chief Accounting and Technology Officer since January 2011, and as the Senior Vice President-Controller since March 2006.2011.
Mr. Lawler became Executive Vice President-Chief Business Officer in August 2012. Previously, he served as the Senior Vice President-Chief Credit Officer since May 2007.
Mr. Allen became Senior Vice President-Community Investment Officer in January 2012. Previously, he served as the FHLBank'sFHLB's Vice President and Community Investment Officer since July 2011, and as Vice President-Housing and Community Investment from January 2009 to June 2011, and as the Assistant Vice President-Housing and Community Investment from November 2007 to December 2008.2011.
Mr. Ciresi Batesbecame Senior Vice President-Chief Accounting Officer in January 2015. Previously, he served as the FHLB's Vice President-Controller since January 2013 and as Vice President-Assistant Controller from January 2011 to January 2013.
Mr. Batsel became Senior Vice President-Chief Information Officer in January 2014. Previously, he was the Senior Vice President-Member Services in March 2010.President, Chief Information Officer at MidCountry Financial Corp. from September 2011 to January 2014. Prior to that, he had served aswas the FHLBank'sSenior Vice President and Managing Director of Marketing since 1990.Information Systems at Republic Bank from April 2006 to September 2011.
Mr. Dooley became Senior Vice President-Internal Audit in January 2013. Previously, he served as Vice President-Internal Audit since 2006.
Mr. Eastland became the Senior Vice President-Chief Credit Officer in January 2015. Prior to that, he had served as the FHLB's Vice President-Credit Risk Management since January 2002.
Ms. Hendrickson became Senior Vice President-Treasurer in January 2015. Previously, she served as the FHLB's Vice President-Treasurer since January 2010.
Mr. Sponaugle became the Senior Vice President-Chief Risk and Compliance Officer in November 2015. Prior to that, he had served as the FHLB's Senior Vice President-Chief Risk Officer since January 2007.
All officers are appointed annually by our Board of Directors.
AUDIT COMMITTEE FINANCIAL EXPERT
The Board of Directors has determined (1) that each of Mr. Billie W. Wade,Ms. J. Lynn Anderson, Chairman of the Audit Committee, and Committee member Mr. Mark N. DuHamelDavid E. Sartore, have the relevant accounting and related financial management expertise, and therefore are qualified, to serve as Audit Committee financial experts within the meaning of the regulations of the SEC and (2) that each is independent under SEC Rule 10A-3(b)(1). Mr. WadeMs. Anderson's experience has extensive auditing experienceprincipally been in the internal audit disciplines within the financial industry and wasis a partner in a public accounting firm.Certified Public Accountant. Mr. DuHamel'sSartore's experience has principally been in the accounting finance and treasuryfinance disciplines within the financial industry and has included managing various accounting functions.is a Certified Public Accountant. For additional information regarding the independence of the directors of the FHLBank,FHLB, see “Item 13. Certain Relationships and Related Transactions, and Director Independence.”
CODES OF ETHICS
The Board of Directors has adopted a “Code of Ethics for Senior Financial Officers” that applies to the principal executive officer and the principal financial officer, as well as all other executive officers. This policy serves to promote honest and ethical conduct, full, fair and accurate disclosure in the FHLBank'sFHLB's reports to regulatory authorities and other public communications, and compliance with applicable laws, rules and regulations. The Code is posted on the FHLBank'sFHLB's Web site (www.fhlbcin.com). If a waiver of any provision of the Code is granted to a covered officer, information concerning the waiver will be posted on our Web site.
The Board of Directors has also adopted a “Standards of Conduct” policy that applies to all employees. The purpose of this policy is to promote a strong ethical climate that protects the FHLBankFHLB against fraudulent activities and fosters an environment in which open communication is expected and protected.
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Item 11.Executive Compensation. | Executive Compensation. |
20122015 COMPENSATION DISCUSSION AND ANALYSIS
The following provides discussion and analysis provides information onregarding our compensation program for executive officers for 2012, including2015, and in particular the executive officers named in the Summary Compensation Table below (theour Named Executive Officers).Officers. Our Named Executive Officers for 2015 were: Andrew S. Howell, President and Chief Executive Officer; Donald R. Able, Executive Vice President- Chief Operating Officer and Chief Financial Officer; R. Kyle Lawler, Executive Vice President- Chief Business Officer; Stephen J. Sponaugle, Senior Vice President- Chief Risk and Compliance Officer and James G. Dooley, Sr., Senior Vice President- Internal Audit.
Compensation Program Overview (Philosophy and Objectives)
Our Board of Directors (the Board) is responsible for determining the philosophy and objectives of the compensation program. The philosophy of the program is to provide a flexible and market-based approach to compensation that attracts, retains and motivates high performing, accomplished financial services executives who, by their individual and collective performance, achieve strategic business initiatives and thereby enhance stockholder value. The program is primarily designed to focus executives on achieving the FHLBank'sFHLB's mission through increased business with member institutions within established risk and profitability tolerance levels, while also encouraging teamwork.
To achieve this, we compensate executive officers using a combination of base salary, short and long-term variable (incentive-based) cash compensation, retirement benefits and modest fringe benefits. We believe the compensation program communicates short and long-term goals and standards of performance for the FHLBank'sFHLB's mission and key business objectives and appropriately motivates and rewards executives commensurate with their contributions and achievements. The combination of base salary, which rewards individual performance, and short and long-term incentives, which reward teamwork, creates a total compensation opportunity for executives who contribute to and influence strategic plans and who are primarily responsible for the FHLBank'sFHLB's performance.
Oversight of the compensation program is the responsibility of the Personnel and Compensation Committee of the Board (the Committee). The Committee annually reviews the components of the compensation program to ensure that it is consistent with and supports the FHLBank'sFHLB's mission, strategic business objectives and annual goals. In carrying out its responsibilities, the Committee may engage executive compensation consultants to assist in evaluating the effectiveness of the compensation program and in determining the appropriate mix of compensation provided to executive officers. Because individuals are not permitted to own the FHLBank'sFHLB's capital stock, all compensation is paid in cash and we have no equity compensation plans or arrangements.
The Committee recommends the President's annual compensation package to the Board, which is responsible for approving all compensation provided to the President. Additionally, the Committee is responsible for reviewing and approving the compensation programs for all officers, including the other Named Executive Officers, and submitting its recommendations to the Board for final approval.
Management Involvement - Executive Compensation
While the Board is ultimately responsible for determining the compensation of the President and all other executive officers, the President and the Human Resources department periodically advise the Committee regarding competitive and administrative issues affecting our compensation program. The President and the Human Resources department also present recommendations to the Committee regarding the compensation of all other executive officers.officers, and administer programs approved by the Committee and the Board.
Finance Agency Oversight - Executive Compensation
HERA requires that theThe Director of the Finance Agency preventis required by regulation to prohibit an FHLBank from paying compensation to its executive officers that is not reasonable and comparable to that paid for employment in similar businesses involving similar duties and responsibilities. The Finance Agency has issued proposed rules to implement these statutory requirements with respect to the FHLBanks. Until such time as final rules are issued,direct the FHLBanks have been directed to provide all compensation actions affecting their Named Executive Officers to the Finance Agency for review. Accordingly, following our Board's November 20122015 and January 20132016 meetings, we submitted the 20132016 base salaries as well as short and long-term incentive payments earned for 20122015 for our Named Executive Officers to the Finance Agency. At this time, we do not expect the statutoryregulatory requirements to have a material impact on our executive compensation plans.
Use of Comparative Compensation Data
The compensation program is designed to provide a market competitive compensation package when recruiting and retaining highly talented executives seeking stable, long-term employment. To this end, we gather compensation data from a wide variety of sources, including broad-based national and regional surveys, presentations at FHLBank System meetings, and formal and informal interactions with our compensation consultant. Our consultant, McLagan, is associated with McLagan, a nationally recognized compensation consulting firm specializing in the financial services industry. When determining compensation for our executive officers, the Committee and the President use this information to inform themselves regarding trends in compensation practices and as a comparison check against general market data (market check) to evaluate the reasonableness and effectiveness of our total compensation program and its components.
We also participate in multiple surveys including the annual McLagan Federal Home Loan Bank Custom Survey and the annual Federal Home Loan Bank System Key Position Compensation Survey conducted by Riemer Consulting.Survey. Both surveys contain executive and non-executive compensation information for various key positions across the 12all FHLBanks. In addition, in the fall of 2012, we engaged McLagan to perform an executive compensation market update in light of the recent organizational changes including the retirement of former President David H. Hehman and subsequent promotions of key executives.
In setting 20132016 compensation, we concentrated our attention on information from the Riemer survey,McLagan Federal Home Loan Bank Custom Survey as it encompassed information relating to 2012 and expected 20132015 compensation from other FHLBanks, trend information and market compensation data updates from our consultant, and broad-based surveys. Although McLagan's data for mortgage banks, and commercial financial institutions, continues to serve as a reference point (market check),and other FHLBanks. While McLagan's compensation analysis included those financial institutions that typically had assets of less than $20 billion, we believe the positions at other FHLBanks generally are more directly comparable to ours given the unique nature of the FHLBank System. The FHLBanks share the same public policy mission, interact routinely with each other, and share a common regulator and common regulatory constraints, including the need for Finance Agency review of all compensation actions affecting our executive officers. However, there are significant differences across the FHLBank System, including the sizes of the various FHLBanks, the complexity of their operations, their organizational and cost structures and the types of compensation packages offered. Thus, we do not and, as a practical matter, could not calculate compensation packages for our Named Executive Officers based solely on comparisons to the other FHLBanks.
Compensation Program Approach
The Committee utilizes a balanced approach for delivering base salary and short and long-term incentive pay with our compensation program. While our annual (short-term) incentive compensation component rewards all officers and staff for the achievement of FHLBankFHLB annual strategic business goals, our deferred (long-term) incentive compensation component is provided to executive and senior officers for achievement of specific, strategic and mission-related goals for which FHLBankFHLB performance is measured over a three-year period. The Committee has not established or assigned specific percentages to each element of the FHLBank'sFHLB's executive compensation program. Instead, the Committee strives to create a program that generally delivers a total compensation opportunity, i.e., base salary, annual and deferred incentive compensation and other benefits (including retirement plan), to each executive officer that, when the FHLBankFHLB meets its target performance goals, is at or near the median of the other FHLBanks and is generally consistent with our market check. However, individual elements of compensation as well as total compensation for individual executives may vary from the median due to an executive's tenure, experience and responsibilities.
While the competitiveness of the compensation program is considered an important factor for attracting and retaining executives, the Committee also reviews all elements of compensation to ensure the program is well designed and fiscally responsible from both a regulatory and corporate governance perspective.
Impact of Risk-Taking on Compensation Program
The Committee reviews the overall program to ensure the compensation of executive officers does not encourage unnecessary or excessive risk-taking that could threaten the long-term value of the FHLBank.FHLB. Risk management is an integral part of our culture. The Committee believes that base salary which exceeds incentive compensation, is a sufficient percentage of total compensation to discourage such risk-taking by our executive officers. The Committee also believes the mix of incentive goals, which include risk-related metrics, does not encourage unnecessary or excessive risk-taking and achieves an appropriate balance of incentive for performance between the short and long-term organizational goals. Moreover, the Committee retains the discretion to reduce or withhold incentive compensation payments if it determines an executive has caused the FHLBankFHLB to incur such a risk that could threaten the long-term value of the FHLBank.
In January 2012, at the request of the Committee, McLagan was engaged to redesign our incentive compensation plans in order to align with regulatory guidance that focuses on risk management while remaining market competitive and aligned with member interests. To this end, several major changes to the plans were instituted in 2012 including increasing base pay and decreasing incentive opportunities, modifying annual and deferred goals and performance metrics, and deferring a significant portion of executive pay requiring future payments to be made contingent upon performance over several years. These changes, described further below, were approved by the Board of Directors in March 2012.
FHLB.
Elements of Total Compensation Program
The following table summarizes all compensation to the FHLBank'sFHLB's Named Executive Officers for the years ended December 31, 2012, 20112015, 2014 and 2010.2013. Discussion of each component follows the table.
Summary Compensation Table
|
| | | | | | | | | | | | | | | | | | | | | |
Name and Principal Position | Year | | Salary (1) | | Non-Equity Incentive Plan Compensation (2) | | Change in Pension Value & Non-Qualified Deferred Compensation Earnings (3) | | All Other Compensation (4) | | Total |
Current Named Executive Officers: | | | | | | | | | | | |
Andrew S. Howell | 2012 | | $ | 491,055 |
| | $ | 271,561 |
| | $ | 810,000 |
| | $ | 15,000 |
| | $ | 1,587,616 |
|
President and Chief Executive Officer | 2011 | | 320,962 |
| | 203,546 |
| | 676,000 |
| | 14,700 |
| | 1,215,208 |
|
Principal Executive Officer | 2010 | | 312,569 |
| | 211,729 |
| | 377,000 |
| | 14,700 |
| | 915,998 |
|
| | | | | | | | | | | |
Donald R. Able | 2012 | | 291,989 |
| | 135,824 |
| | 680,000 |
| | 15,000 |
| | 1,122,813 |
|
Executive Vice President- | 2011 | | 238,692 |
| | 117,046 |
| | 664,000 |
| | 14,700 |
| | 1,034,438 |
|
Chief Operating Officer | 2010 | | 229,450 |
| | 123,050 |
| | 296,000 |
| | 14,700 |
| | 663,200 |
|
Principal Financial Officer | | | | | | | | | | | |
| | | | | | | | | | | |
Carole L. Cossé | 2012 | | 319,085 |
| | 144,891 |
| | 638,000 |
| | 15,000 |
| | 1,116,976 |
|
Senior Vice President- | 2011 | | 281,596 |
| | 141,752 |
| | 958,000 |
| | 12,260 |
| | 1,393,608 |
|
Chief Financial Officer | 2010 | | 275,900 |
| | 150,149 |
| | 583,000 |
| | 12,529 |
| | 1,021,578 |
|
| | | | | | | | | | | |
R. Kyle Lawler | 2012 | | 277,020 |
| | 133,056 |
| | 227,000 |
| | 15,000 |
| | 652,076 |
|
Executive Vice President- | 2011 | | 235,725 |
| | 122,028 |
| | 257,000 |
| | 14,700 |
| | 629,453 |
|
Chief Business Officer | 2010 | | 229,700 |
| | 132,019 |
| | 125,000 |
| | 14,700 |
| | 501,419 |
|
| | | | | | | | | | | |
Stephen J. Sponaugle (5) | 2012 | | 224,339 |
| | 107,451 |
| | 232,000 |
| | 15,000 |
| | 578,790 |
|
Senior Vice President- | | | | | | | | | | |
|
|
Chief Risk Officer | | | | | | | | | | |
|
|
| | | | | | | | | | | |
Former Named Executive Officer: | | | | | | | | | | | |
David H. Hehman (6) | 2012 | | 274,426 |
| | 274,192 |
| | 3,466,000 |
| | 47,878 |
| | 4,062,496 |
|
Former President and | 2011 | | 621,150 |
| | 512,671 |
| | 2,217,000 |
| | 25,932 |
| | 3,376,753 |
|
Chief Executive Officer | 2010 | | 645,506 |
| | 547,269 |
| | 1,382,000 |
| | 14,700 |
| | 2,589,475 |
|
|
| | | | | | | | | | | | | | | | | | | | | |
Name and Principal Position | Year | | Salary(1) | | Non-Equity Incentive Plan Compensation(2) | | Change in Pension Value & Non-Qualified Deferred Compensation Earnings(3) | | All Other Compensation(4) | | Total |
Andrew S. Howell | 2015 | | $ | 728,482 |
| | $ | 544,843 |
| | $ | 889,000 |
| | $ | 29,536 |
| | $ | 2,191,861 |
|
President and Chief Executive Officer | 2014 | | 692,016 |
| | 479,622 |
| | 2,431,000 |
| | 15,600 |
| | 3,618,238 |
|
| 2013 | | 617,775 |
| | 340,546 |
| | 189,000 |
| | 15,300 |
| | 1,162,621 |
|
| | | | | | | | | | | |
Donald R. Able | 2015 | | 383,125 |
| | 242,198 |
| | 465,000 |
| | 15,900 |
| | 1,106,223 |
|
Executive Vice President- | 2014 | | 358,788 |
| | 207,972 |
| | 1,498,000 |
| | 15,600 |
| | 2,080,360 |
|
Chief Operating Officer and Chief Financial Officer | 2013 | | 320,800 |
| | 160,354 |
| | — |
| | 15,300 |
| | 496,454 |
|
| | | | | | | | | | | |
R. Kyle Lawler | 2015 | | 357,885 |
| | 229,316 |
| | 244,000 |
| | 15,900 |
| | 847,101 |
|
Executive Vice President- | 2014 | | 331,154 |
| | 199,572 |
| | 646,000 |
| | 15,600 |
| | 1,192,326 |
|
Chief Business Officer | 2013 | | 315,087 |
| | 157,180 |
| | 26,000 |
| | 15,300 |
| | 513,567 |
|
| | | | | | | | | | | |
Stephen J. Sponaugle | 2015 | | 306,752 |
| | 176,417 |
| | 181,000 |
| | 15,900 |
| | 680,069 |
|
Senior Vice President- | 2014 | | 281,292 |
| | 138,781 |
| | 694,000 |
| | 15,600 |
| | 1,129,673 |
|
Chief Risk and Compliance Officer | 2013 | | 245,725 |
| | 117,640 |
| | — |
| | 11,922 |
| | 375,287 |
|
| | | | | | | | | | | |
James G. Dooley, Sr. (5) | 2015 | | 233,627 |
| | 118,814 |
| | 39,000 |
| | 15,900 |
| | 407,341 |
|
Senior Vice President- | | | | | | | | | | |
|
|
Internal Audit | | | | | | | | | | |
|
|
| |
(1) | Includes excess accrued vacation benefits automatically paid in accordance with established policy (applicable to all employees), which for 20122015 were as follows: Mr. Howell, $21,046;$53,482; Mr. Able, $18,254; Mrs. Cossé, $22,085;$18,125; Mr. Lawler, $12,062;$17,885; Mr. Sponaugle $2,939;$6,752; and Mr. Hehman, $4,778.Dooley $2,527. |
| |
(2) | Amounts shown for 20122015 reflect total payments pursuant to the current portion of the 20122015 Incentive Plan and the 2010-2012 Long-Term Non-Equitydeferred portion of the 2012 Incentive Plan (2013 - 2015 performance period), as follows: |
| | Name | | Annual Incentive Plan | | Long-Term Incentive Plan | | Total | | 2015 Incentive Plan (current incentive) | | 2012 Incentive Plan (three-year deferred incentive) | | Total |
Andrew S. Howell | | $ | 193,460 |
| | $ | 78,101 |
| | $ | 271,561 |
| | $ | 324,084 |
| | $ | 220,759 |
| | $ | 544,843 |
|
Donald R. Able | | 89,388 |
| | 46,436 |
| | 135,824 |
| | 140,196 |
| | 102,002 |
| | 242,198 |
|
Carole L. Cossé | | 90,698 |
| | 54,193 |
| | 144,891 |
| |
R. Kyle Lawler | | 86,514 |
| | 46,542 |
| | 133,056 |
| | 130,594 |
| | 98,722 |
| | 229,316 |
|
Stephen J. Sponaugle | | 67,922 |
| | 39,529 |
| | 107,451 |
| | 98,910 |
| | 77,507 |
| | 176,417 |
|
David H. Hehman | | 118,521 |
| | 155,671 |
| | 274,192 |
| |
James G. Dooley, Sr. | | | 76,841 |
| | 41,973 |
| | 118,814 |
|
| |
(3) | Represents change in the actuarial present value of accumulated pension benefits only, which is primarily dependent on changes in interest rates, years of benefit service and salary. No above market or preferential earnings are paid on deferred compensation. |
| |
(4) | Amounts represent matching contributions to the qualified defined contribution pension plan in 2012.2015. For Mr. Hehman, 2012Howell, 2015 also includes perquisites totaling $32,878$13,636, which included theconsisted of personal use and retirement gift of an FHLBank-ownedFHLB-owned vehicle, ($31,868),premiums for an Executive long-term disability plan, spousal travel expenses and professional income tax services ($1,010).an airline program membership. The value of perquisites are based on the actual cash cost to the FHLB. |
| |
(5) | Mr. Sponaugle's 2011Dooley's 2014 and 20102013 compensation amounts are not included as he was not a Named Executive Officer in those years. |
| |
(6) | Mr. Hehman's 2012 compensation was earned through June 1, 2012, the date of his retirement. |
Salary
Base salary is both a key component of the total compensation program and a key factor when attracting and retaining executive talent. While base salaries for the Named Executive Officers are influenced by a number of factors, theythe Board generally targettargets the median of the competitive market. Other factors affecting an executive's base salary include length of time in position, relevant experience, individual achievement, and the size and scope of assigned responsibilities as compared to the responsibilities of other executives. Base salary increases traditionally take effect at the beginning of each calendar year and are granted after a review of the individual's performance and leadership contributions to the achievement of our annual business plan goals and strategic objectives.
Each of the Named Executive Officers received a base salary increase at the beginning of 2012.2015. Total salary increases, including merit and market adjustments, ranged from 2.235.53 percent to 6.7713.21 percent. For the Named Executive Officers other than the former President, the Committee's actions were based on the former President's recommendation for each executive, which took into consideration market data, and an evaluation of each executive's annual performance. Former President David Hehman's 2012 merit increase was 3.00 percent. In recommending and approving his increase, the Committee and Board considered the directors' appraisals of Mr. Hehman's performance during the year and noted, in particular, that directors had rated him especially high on qualities of importance during challenging economic times - leadership, strategic vision and direction, and safe and sound operations appropriately balanced with strong financial results.
As mentioned above, our incentive compensation plans were redesigned in early 2012 (subsequent to the approved base salaries), which had the effect of decreasing incentive opportunities and thereby, decreasing total cash compensation. In order to maintain a relatively cash neutral impact at the target level of performance, increases in base salaries retroactive to January 1, 2012 were instituted for the Named Executive Officers. Upon receipt of the Finance Agency's completed review of our redesigned compensation plans in May 2012, total base salaries were increased up to 11 percent.
With the retirement of Mr. Hehman effective June 1, 2012, Andrew S. Howell was appointed as the President and Chief Executive Officer with his base salary increased to $554,300 effective June 1, 2012. Subsequently, on July 19, 2012, the Board of Directors approved the promotions of Donald R. Able to Executive Vice President, Chief Operating Officer with a base salary of $300,000 and R. Kyle Lawler to Executive Vice President, Chief Business Officer with a base salary of $290,000. Increases for Mr. Able and Mr. Lawler were effective August 1, 2012. The FHLBank received notification of the Finance Agency's completed review of Mr. Howell's salary on July 12, 2012 and Mr. Able's and Mr. Lawler's salaries on September 10, 2012.
In October 2012, the Committee recommended and the Board approved a 4.00 percent salary increase pool for 2013 for all employees, comprised of 2.50 percent for merit increases and 1.50 percent for market and promotional adjustments. At meetings in November 2012, the Committee recommended, and the Board approved, the following 2013 base salaries for the Named Executive Officers: Mr. Howell, $568,000; Mr. Able, $307,500; Mrs. Cossé, $304,400; Mr. Lawler, $300,000; and Mr. Sponaugle, $244,000. In 2013, total salary increases, including merit and market adjustments, ranged from 2.47 percent to 10.21 percent.
As in prior years, for the Named Executive Officers other than the President, the Committee's actions were based on the President's recommendations for each individual executive, which took into consideration recent market data corresponding to the positions and an evaluation of the executive's performance over the past year including performance since recent promotions for Messrs. Able and Lawler. In determining Mr. Howell's 2013 salary, the Committee and Board discussed how his strong leadership and deep knowledge of the FHLBank System provided a seamless transition to his role as President. Individually, directors provided feedback to the Chair, and the Committee recommended, and the Board subsequently approved a salary increase of 9.22 percent for Mr. Howell. In recommending and approving the 2015 increase, the Committee and Board took into consideration competitive market analysis and the directors' appraisals of Mr. Howell's performance during the year.
In October 2015, the Committee recommended and the Board approved a 5.25 percent salary increase pool for 2016 for all employees, comprised of 3.00 percent for merit increases and 2.25 percent for market and promotional adjustments. Using the same process as described above, the Committee recommended, and the Board approved, the following 2016 base salaries and percent increases for the Named Executive Officers: Mr. Howell, of 2.47 percent.$750,000 (11.11 percent); Mr. Able, $400,000 (9.59 percent); Mr. Lawler, $365,000 (7.35 percent); Mr. Sponaugle, $325,000 (8.33 percent); and Mr. Dooley, $250,000 (8.18 percent). On December 20, 2012,17, 2015, we were informed that the Finance Agency had completed its review of the Board-approved compensation actions affecting the Named Executive Officers in 2013.2016.
Incentive Compensation Plan (Non-Equity)
TheNon-Equity Incentive Compensation Plan (Incentive Plan),
The Incentive Plan is a cash-based annual incentive plan with a long-term deferral component, was redesigned and approved by the Board of Directors in March 2012 subject to completion of the Finance Agency's review, which was received in May 2012.
The 2012 Incentive Plan establishes a total incentive award that is divided into two equal parts: (1) a current incentive award, and (2) a three-year deferred incentive award. The current component of the Incentive Plan is awarded annually and designed to promote and reward higher levels of performance for accomplishing Board-approved shorter-term goals. The long-term component of the Incentive Plan is a three-year deferred incentive award that is designed to promote higher levels of long-term performance and serve as an employment retention tool for selected executive and senior officers, including the Named Executive Officers.
The Incentive Plan goals generally reflect desired financial, operational and public mission objectives for the current and future fiscal years. Each goal is weighted reflecting its relative importance and potential impact on our strategic initiatives and annual
business plan, and each is assigned a quantitative threshold, target and maximum level of performance. Each Named Executive Officer's award opportunity is based entirely on bank-wide performance. However, the Chief Risk Officer's (CRO) award opportunity is weighted 75 percent on bank-wide goals and 25 percent on Enterprise Risk Management (ERM) specific goals in order to provide incentive and maintain a certain level of independence for risk management initiatives. Additionally, the Senior Vice President - Internal Audit's award opportunity is based entirely on Internal Audit specific goals, which are developed with the Audit Committee, to maintain independence for the internal audit function.
When establishing the Incentive Plan goals and corresponding performance levels, the Board anticipates that we will successfully achieve a threshold level of performance nearly every year. The target level is aligned with expected performance and is anticipated to be reasonably achievable in a majority of plan years. The maximum level of performance reflects a graduated level of difficulty from the target performance level and requires superior performance to achieve.
Each executive officer, including the Named Executive Officers, is assigned a total incentive award opportunity, stated as a percentage of base salary, which corresponds to the individual's level of organizational responsibility and ability to contribute to and influence overall performance. The total incentive award opportunity established for executives is designed to be comparable to incentive opportunities for executives with similar duties and responsibilities at other financial institutions, primarily other FHLBanks, and generally consistent with our market check. The Board believes the total incentive opportunity and plan design provide an appropriate, competitive reward to all officers, including the Named Executive Officers, commensurate with the achievement levels expected for the incentive goals.
The authorization for payment of current and/or deferred incentive plan awards, if any, is generally granted following certification of the period-end performance results by the Board at its January meeting. The total incentive award earned is determined based on the actual achievement level for each goal in comparison with the performance levels established for that goal.
The total incentive award opportunities for the 2015 plan year stated as a percentage of base salary were as follows:
|
| | | | | | | | | |
| | Incentive Opportunity |
Name | | Threshold | | Target | | Maximum |
Andrew S. Howell | | 50.0 | % | | 75.0 | % | | 100.0 | % |
Donald R. Able | | 40.0 |
| | 60.0 |
| | 80.0 |
|
R. Kyle Lawler | | 40.0 |
| | 60.0 |
| | 80.0 |
|
Stephen J. Sponaugle | | 30.0 |
| | 50.0 |
| | 70.0 |
|
James G. Dooley, Sr. | | 30.0 |
| | 50.0 |
| | 70.0 |
|
If actual performance falls below the threshold level of performance, no payment is made for that goal. If actual performance exceeds the maximum level, only the value assigned as the performance maximum is paid. When actual performance falls between the assigned threshold, target and maximum performance levels, an interpolated achievement is calculated for that goal. The achievement for each goal is then multiplied by the corresponding incentive weight assigned to that goal and the results for each goal are summed to arrive at the final incentive award payable to the executive. No final awards (or payments) will be made to executives under the Incentive Plan if we receive the lowest "Composite Rating" during the most recent examination by the Finance Agency. Such a rating would indicate that we have been found to be operating in an unacceptable manner, that we exhibit serious deficiencies in corporate governance, risk management or financial condition and performance, or that we are in substantial noncompliance with laws, Finance Agency regulations or supervisory guidance.
Fifty percent of the total opportunity for the Incentive Plan is awarded in cash following the plan year (current incentive award) and 50 percent is mandatorily deferred for three years after the end of the Plan year (deferred incentive award). Deferred incentive awards are calculated based on the actual performance or achievement level for each deferred plan goal at the end of each three-year performance period, with interpolations made for results between achievement levels. The achievement level for each goal then is multiplied by the corresponding incentive weight assigned to that goal. The final value of the deferred award can be increased, decreased or remain the same based on the goal achievement level determined using separate performance measures over the three-year deferral period. If a goal achievement level over the three-year deferral period is below the threshold, no payment is made for that deferred goal. The following table presents the percentages, categorized by achievement level, in which the deferred award will be adjusted:
|
| | | | | | | | | |
| | Achievement Levels |
Name | | Threshold | | Target | | Maximum |
Andrew S. Howell | | 75.0 | % | | 100.0 | % | | 125.0 | % |
Donald R. Able | | 75.0 |
| | 100.0 |
| | 125.0 |
|
R. Kyle Lawler | | 75.0 |
| | 100.0 |
| | 125.0 |
|
Stephen J. Sponaugle | | 75.0 |
| | 100.0 |
| | 125.0 |
|
James G. Dooley, Sr. | | 75.0 |
| | 100.0 |
| | 125.0 |
|
Except as noted above with respect to exam ratings, the Board has ultimate authority over the Incentive Plan described above and may modify or terminate the Plan at any time or for any reason. The Board also has sole discretion to increase or decrease any Incentive Plan awards. In addition, payments under the Plan are subject to certain claw back provisions which allow the FHLB to recover any incentive plan awards, including the abilitypaid to approvea participant based on achievement of financial or operational goals that subsequently are deemed to be inaccurate, misstated or misleading. Our Board believes these claw back requirements serve as deterrents to any manipulation of financial statements or performance metrics in a manner that would assure and/or increase an additional incentive payment for extraordinary individual performance.payment.
Current Incentive Award.For calendar year 2012,2015, the Board approved a total of 10six performance measures in the functional areas of Franchise Value Promotion, Member Asset Activity Franchise Value Promotion and Stockholder Risk/Return. The mix of financial and non-financial goals measures performance across our mission and corporate objectives and is intended to discourage unnecessary or excessive risk-taking. Because we consider risk management to be an essential component in the achievement of our mission and corporate objectives, the goals below include a separate risk-related metric.
At its January 2016 meeting, following certification of the 2015 performance results and in accordance with those results, the Board authorized the distribution to the Named Executive Officers of the current awards shown in Note 2 to the Summary Compensation Table. For the 2015 plan year, we cumulatively achieved approximately 96 percent of the available maximum
incentive opportunity for FHLB goals. This was an increase in overall FHLB performance from the 91 percent achieved for 2014 primarily due to improved performance on the new Mandatory Delivery Commitments and Market Value of Equity goals.
The following table presents the incentive weights, threshold, target and maximum performance levels, and the actual results achieved for the 20122015 Incentive Plan performance measures.measures for all Named Executive Officers other than the Senior Vice President - Internal Audit.
20122015 Incentive Plan Performance Levels and Results
|
| | | | | | | | | | |
(Dollars in thousands) | | | | | |
Member Asset Activity | Incentive Weight | | Target Performance | | Results Achieved |
a) Average Advances | 7.5 | % | | $ | 23,000,000 |
| | $ | 23,608,408 |
|
b) Average Advance Balances for Members with Assets of $1 Billion or less | 7.5 |
| | $ | 5,600,000 |
| | $ | 5,230,013 |
|
c) Mortgage Purchase Program New Mandatory Delivery Commitments | 10.0 |
| | $ | 650,000 |
| | $ | 1,449,871 |
|
Franchise Value Promotion | | | | | |
a) Advance Product Users | 5.0 |
| | 400 |
| | 403 |
|
b) Mortgage Purchase Program Sellers | 5.0 |
| | 74 |
| | 88 |
|
c) AHP Competitive Program Disbursement and Deobligation Rate | 5.0 |
| | 43 | % | | 40 | % |
d) Community Outreach Events | 5.0 |
| | 68 |
| | 86 |
|
e) Membership Approvals | 5.0 |
| | 8 |
| | 13 |
|
Stockholder Risk/Return | | | | | |
a) Market Value of Equity Volatility | 25.0 |
| | < 10% |
| | 4.2 | % |
b) Profitability Versus Projected Average 3-month LIBOR rate | 25.0 |
| | 275 bps |
| | 445 bps |
|
|
| | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | | | | | | | | |
| Incentive Weight | | Threshold Performance | | Target Performance | | Maximum Performance | | Results Achieved |
Franchise Value Promotion | | | | | | | | | |
1) Mission Outreach | 10.0 | % | | 80 |
| | 92 |
| | 110 |
| | 99 |
|
2) Mission Asset Participation | 10.0 |
| | 64 | % | | 69 | % | | 76 | % | | 78 | % |
Member Asset Activity | | | | | | | | | |
3) Average Advance Balances for Members with Assets of $50 Billion or less | 15.0 |
| | $ | 14,500,000 |
| | $ | 15,500,000 |
| | $ | 16,900,000 |
| | $ | 19,955,968 |
|
4) Mortgage Purchase Program New Mandatory Delivery Commitments | 15.0 |
| | 1,750,000 |
| | 1,900,000 |
| | 2,500,000 |
| | 2,408,500 |
|
Stockholder Risk/Return | | | | | | | | | |
5) Decline in Market Value of Equity | 25.0 |
| | < 10% |
| | < 8% |
| | 4% or less |
| | 4.8 | % |
6) Profitability-Available Earnings vs. Average 3-month LIBOR rate | 25.0 |
| | 350 bps |
| | 390 bps |
| | 440 bps |
| | 435 bps |
|
During 2012,2015, the Board, the Committee and the President periodically reviewed the Incentive Plan goals presented above to determine progress toward the goals. Although the Board and the President discussed various external factors that were affecting achievement of the performance measures, the Board did not take any actions to revise or change the Incentive Plan goals.
The incentive program for the Chief Risk Officer (CRO)CRO is comprised of both theweighted 75 percent on bank-wide goals, shown above, at 75and 25 percent andon the ERM department goal, at 25 percent as indicated below.follows:
Further develop and matureImplement specific initiatives of the FHLBank's Enterprise Risk Management program.FHLB's ERM program within the ERM Department.
Threshold: 6 initiatives implemented*
Target: 9 initiatives implemented*
Maximum: 14 initiatives implemented* | |
Weight of Goal: | 100 percent |
| |
Threshold: | 4 initiatives satisfactorily completed* |
| |
Target: | 5 initiatives satisfactorily completed* |
| |
Maximum: | 7 initiatives satisfactorily completed* |
Results Achieved: 12 initiatives implemented*
| |
2015 Results Achieved: | 6.3 initiatives satisfactorily completed* |
| |
* | Specific implementationsinitiatives include initiativesefforts in Governance, Operational Risk, Credit Risk, or Market Risk.improvement of the FHLB's general ERM program, operational risk and compliance and market risk. |
The 2015 Incentive Plan measures for the Senior Vice President - Internal Audit were based entirely on achievement of specific internal audit function goals, including issuance of a certain number of audit reports, complete testing of identified internal controls, compliance with regulatory standards, and general effectiveness and leadership of the internal auditor. Based on these goals, 95 percent of the maximum performance was achieved during 2015.
The total incentive award opportunities for the 2012 plan year were as follows:
|
| | | | | | | | | | | |
| | | | Incentive Opportunity |
Name | | Date | | Threshold | | Target | | Maximum |
Current Named Executive Officers: | | | | | | | | |
Andrew S. Howell | | June 1, 2012 - December 31, 2012 | | 50.0 | % | | 75.0 | % | | 100.0 | % |
| | January 1, 2012 - May 31, 2012 | | 40.0 |
| | 60.0 |
| | 80.0 |
|
Donald R. Able | | August 1, 2012 - December 31, 2012 | | 40.0 |
| | 60.0 |
| | 80.0 |
|
| | January 1, 2012 - July 31, 2012 | | 30.0 |
| | 50.0 |
| | 70.0 |
|
R. Kyle Lawler | | August 1, 2012 - December 31, 2012 | | 40.0 |
| | 60.0 |
| | 80.0 |
|
| | January 1, 2012 - July 31, 2012 | | 30.0 |
| | 50.0 |
| | 70.0 |
|
Carole L. Cossé | | January 1, 2012 - December 31, 2012 | | 30.0 |
| | 50.0 |
| | 70.0 |
|
Stephen J. Sponaugle | | January 1, 2012 - December 31, 2012 | | 30.0 |
| | 50.0 |
| | 70.0 |
|
Former Named Executive Officer: | | | | | | | | |
David H. Hehman | | January 1, 2012 - June 1, 2012 | | 50.0 |
| | 75.0 |
| | 100.0 |
|
The current component of the Incentive Plan is cash-based compensation awarded annually and designed to promote and reward higher levels of performance for accomplishing Board-approved goals. The long-term component of the Incentive Plan is a three-year deferred incentive award that is designed to promote higher levels of performance and long-term employment retention of selected executive and senior officers, including the Named Executive Officers.
Fifty percent of the total opportunity for the Incentive Plan will be awarded in cash following the plan year and 50 percent will be mandatorily deferred for three years after the end of the Plan year. The final value of the deferred award can be increased, decreased or remain the same based on the goal achievement level during the three-year period. If the goal achievement level over the three-year deferral period is below the threshold, no payment of the deferred award will be made. The following table presents the percentages, categorized by achievement level, in which the deferred award will be adjusted:
|
| | | | | | | | | |
| | Achievement Levels (1) |
Name | | Threshold | | Target | | Maximum |
Current Named Executive Officers: | | | | | | |
Andrew S. Howell | | 75.0 | % | | 100.0 | % | | 125.0 | % |
Donald R. Able | | 75.0 |
| | 100.0 |
| | 125.0 |
|
R. Kyle Lawler | | 75.0 |
| | 100.0 |
| | 125.0 |
|
Carole L. Cossé | | 75.0 |
| | 100.0 |
| | 125.0 |
|
Stephen J. Sponaugle | | 75.0 |
| | 100.0 |
| | 125.0 |
|
| |
(1) | Earned incentive awards that fall between any of the designated achievement levels (i.e. threshold, target, and maximum) will be interpolated. |
The achievement levels presented above are determined using separate performance measures over the three-year deferral period (2013-2015).
The following table presents the performance measures and incentive weights used to determine the achievement level reached during the three-year deferral period:
2012 Incentive Plan Deferred Goals
|
| |
OPERATING EFFICIENCY: | |
Ranking of Operating Efficiency Ratio in comparison to other FHLBanks | Weight: 25% |
| |
RISK ADJUSTED PROFITABILITY: | |
Ranking of Risk Adjusted Profitability in comparison to other FHLBanks | Weight: 25% |
| |
MARKET CAPITALIZATION RATIO: | |
Ratio of Market Value of Equity (MVE) to Par Value of Regulatory Capital Stock | Weight: 25% |
| |
ADVANCE UTILIZATION RATIO: | |
Ranking of average of each member's Advances-to-Assets ratio multiplied by the average member borrower penetration ratio in comparison to other FHLBanks | Weight: 25% |
At its January 2013 meeting, following certification of the 2012 performance results and in accordance with those results, the Board authorized the distribution to the Named Executive Officers of the current awards shown in Note 2 to the Summary Compensation Table. For the 2012 plan year, we cumulatively achieved approximately 88 percent of the available maximum incentive opportunity. This was an increase in overall FHLBank performance from the 75 percent achieved for 2011 primarily because the FHLBank achieved the maximum performance level for profitability, MPP New Mandatory Delivery Commitments and MPP Sellers.
The Board has ultimate authority over the Incentive Plan described above and the Transition Plan (described below) and may modify or terminate the Plans at any time or for any reason. In addition, payments under the Plans are subject to certain claw back provisions which allow the FHLBank to recover any incentive paid to a participant based on achievement of financial or operational goals that subsequently are deemed to be inaccurate, misstated or misleading. Our Board believes these claw back requirements will serve as deterrents to any manipulation of financial statements or performance metrics in a manner that would assure and/or increase an incentive payment.
At its November 20122015 meeting, the Board established the 20132016 Incentive Plan goals, the incentive weights and the performance levels (measures)measures corresponding to each Incentive Plan goal and award opportunity for the 20132016 Incentive Plan. In December 2012,2015, the 20132016 Incentive Plan was sent to the Finance Agency and we received notification of theirthe completion of their review in March 2013.January 2016. The 2013 incentive award opportunities2016 Incentive Plan goals for our executives are set forth below.
20132016 Incentive Plan Goals
|
| |
Franchise Value Promotion | |
Mission Outreach | Weight: 10.0% |
Mission Asset Participation | Weight: 10.0% |
MemberMission Asset Activity | |
Average Advances Balances for Members with Assets of $50 billion or less | Weight: 15.0% |
Mortgage Purchase Program New Mandatory Delivery Commitments | Weight: 15.0% |
Stockholder Risk/Return | |
Decline in Market Value of Equity | Weight: 25.0% |
Profitability Versus ProjectedProfitability-Available Earnings vs. Average 3-month LIBOR rateRate | Weight: 25.0% |
2013 CRO's Goal
Implement specific itemsAs reflected above, the Board decided to keep all of the FHLBank's ERM program within2016 goals the ERM Department.
Weight of Goal: 100 percent
Threshold: 3 initiatives satisfactorily completed*
Target: 4 initiatives satisfactorily completed*
Maximum: 7 initiatives satisfactorily completed*
| |
* | Specific initiatives include efforts in credit risk, operational risk, model governance programs, Prudential Management Standards, market risk metrics and analytics, and other areas impacting ERM. |
same as those in 2015 although the performance metrics have been adjusted. In setting the performance measures for the 20132016 Incentive Plan, the Board considered guidance from the Finance Agency regarding limiting the number of goals and subsequently assigned six annual performance goals. When determining specific goals and performance metrics, the Board reviewed the results against target for 20122015 and considered relevant aspects of our financial outlook for 20132016 including the continued uncertainty of the economy and the government's liquidity programs that continue to affect Mission Asset Activity and profitability. The Board also considered opportunities to facilitate outreach to membership and increase mission asset participation by members. The goals for the deferred component of the 2013 Incentive Plan, which include the 2014 - 2016 performance period, are expected to be set at the November 2013 Board meeting.
As reflected above, for 2013, the Board decided to reduce the number of goals to two under each main category - Franchise Value Promotion, Member Asset Activity and Stockholder Risk/Return. Three of the 2013 goals are the same as those in 2012 although the performance metrics have been adjusted.
Within the Franchise Value Promotion category there will be one goal for Mission Outreach and one goal for Mission Asset Participation. Both goals are similar to previous goals but have been redefined to address current business interests.
The Member Asset Activity category will include one goal for Advances which will focus on Average Advances Balances for Members with Assets of $50 billion or less. This is a change from last year where two goals measured overall Average Advances and Average Advances Balances for Members with $1 billion or less in assets. The intent with this goal is to focus on small to medium size asset members, while capturing the impact of our larger members in the Profitability goal. There will also be a Mortgage Purchase Program goal which is defined the same as last year.
The goals within the Stockholder Risk/Return category remain unchanged, with the exception of the assigned performance metrics, and consist of the Market Value of Equity Volatility and Profitability related goals.
The Board also approved a separate ERM department goal related to the continued advancement of the ERM function, for the CRO, whichwhose annual incentive is weighted at75 percent on bank-wide goals and 25 percent on the ERM goal.
2016 CRO's Goal
Implement specific initiatives of the CRO's total annual incentive opportunity.FHLB's ERM program within the ERM Department.
| |
Weight of Goal: | 100 percent |
| |
Threshold: | 4 initiatives satisfactorily completed* |
| |
Target: | 6 initiatives satisfactorily completed* |
| |
Maximum: | 7 initiatives satisfactorily completed* |
| |
* | Specific initiatives include efforts in improvement of the FHLB's general ERM program, operational risk and compliance and market risk. |
2012Finally, upon recommendation of the Audit Committee, the Board approved the separate 2016 Internal Audit department goals for the Senior Vice President - 2014 Transitional Executive Long-term Incentive Plan (Transition Plan)
Internal Audit. The Transition Plan was adoptedBoard decided to assist inkeep all of the transition of our executive incentive plan from two incentive plans (short-term and long-term) to a single plan with a deferred component. The Transition Plan is only applicable to2016 goals the 2012 – 2014 period. It bridges the participants’ cash compensation levelssame as those in 2015, to close what otherwise would be a gap in compensation untilalthough some of the performance metrics have been adjusted.
Three-Year Deferred Incentive Award.During 2015, the Board, the Committee and the President periodically reviewed progress toward the deferred componentplan goals for each ongoing performance period. At its January 2016 meeting, following certification of the performance results for the deferred portion of the 2012 Incentive Plan is fully implemented(2013 - 2015 performance period) and in 2016.accordance with those results, the Board authorized the distribution of payments to eligible officers including the Named Executive Officers. Cumulatively, we achieved approximately 91 percent of the available maximum incentive opportunity for FHLB goals. The award levels anddeferred payments for the 2013 - 2015 performance measuresperiod are consistent withshown in Note 2 to the previous Executive Long-Term Incentive (LTI) Plan described below.Summary Compensation Table.
The following table presents, for all Named Executive Officers, except the Senior Vice President - Internal Audit, the incentive weights, threshold, target and maximum performance levels, and the actual results achieved for each of the goals in the deferred portion of the 2012 Incentive Plan (2013 - 2015 performance period):
|
| | | | | | | | | |
| Incentive Weight | | Threshold Performance | | Target Performance | | Maximum Performance | | Results Achieved |
OPERATING EFFICIENCY: | | | | | | | | | |
Ranking of Operating Efficiency Ratio in comparison to other FHLBanks | 25% | | 8th of 12 | | 4th of 12 | | 1st of 12 | | 1st of 12 |
RISK ADJUSTED PROFITABILITY: | | | | | | | | | |
Ranking of Risk Adjusted Profitability in comparison to other FHLBanks | 25% | | 8th of 12 | | 4th of 12 | | 1st of 12 | | 1st of 12 |
MARKET CAPITALIZATION RATIO: | | | | | | | | | |
Ratio of Market Value of Equity to Par Value of Regulatory Capital Stock | 25% | | 95% | | 100% | | 110% | | 105% |
ADVANCE UTILIZATION RATIO: | | | | | | | | | |
Ranking of average of each member's Advances-to-Assets ratio multiplied by the average member borrower penetration ratio in comparison to other FHLBanks | 25% | | 8th of 12 | | 4th of 12 | | 1st of 12 | | 5th of 12 |
For the Senior Vice President - Internal Audit, the following table presents the incentive weights, threshold, target and maximum performance levels, and the actual results achieved for each of the Internal Audit goals in the deferred portion of the 2012 Incentive Plan (2013 - 2015 performance period):
|
| | | | | | | | | |
| Incentive Weight | | Threshold Performance | | Target Performance | | Maximum Performance | | Results Achieved |
AUDIT COMMITTEE CHARTER FULFILLMENT: | | | | | | | | | |
Average of the Audit Committee's annual performance review ratings | 50% | | 3 | | 4 | | 5 | | 4.72 |
FINDINGS TRACKING: | | | | | | | | | |
Results of Audit Committee's evaluation of monitoring, tracking and reporting on findings as a result of audits and examinations | 25% | | 3 | | 4 | | 5 | | 4.84 |
SUCCESSION PLANNING AND READINESS: | | | | | | | | | |
Level of readiness based on Audit Committee assessment | 25% | | Minimally Prepared (3) | | Prepared (4) | | Highly Prepared (5) | | 4.30 |
At its November 2015 meeting, the Board established the goals, incentive weights and performance measures to determine the achievement level reached during the 2016 - 2018 deferral period of the 2015 Incentive Plan. The following 2012 - 2014 Transition Plantable presents the goals and related incentive weights for each goal:all Named Executive Officers, except the Senior Vice President - Internal Audit:
2015 Deferred Incentive Plan Goals (2016 - 2018 Performance Period)
|
| |
1) OPERATING EFFICIENCY: | |
Ranking of Operating Efficiency Ratio in comparison to other FHLBanks | Weight: 30%20% |
| |
RISK2) EARNINGS VOLATILITY ADJUSTED PROFITABILITY: | |
Ranking of RiskEarnings Volatility Adjusted Profitability in comparison to other FHLBanks | Weight: 30%20% |
| |
3) MARKET CAPITALIZATION RATIO: | |
Ratio of Market Value of Equity (MVE) to Par Value of Regulatory Capital Stock | Weight: 30%20% |
4) ADVANCE UTILIZATION RATIO: | |
MARKET PENETRATION:Ranking of average of each member's Advances-to-Assets ratio multiplied by the average member borrower penetration ratio in comparison to other FHLBanks | Weight: 20% |
5) STRATEGIC BUSINESS PLAN ACHIEVEMENT: | |
RatioPercentage of Member Advances to Member AssetsStrategic Business Plan strategies achieved | Weight: 10%20% |
Residual Long-Term Non-Equity Incentive Plan Compensation
The former LTI Plan was a cash-based, performance unit plan designedmeasures and incentive weights used to promote higher levels of performance and long-term employment retention by selected executive and senior officers, includingdetermine the Named Executive Officers,achievement level reached during the three-year deferral period for accomplishing Board-approved long-term goals. Since the LTI Plan was initially created, the Board had established a new three-year performance period annually, commencing each January 1, so that three overlapping performance periods are in effect at one time. However, on May 18, 2012, we received notificationSenior Vice President - Internal Audit included: (1) fulfillment of the completionAudit Committee Charter (50 percent weighting) and (2) tracking of the review by the Finance Agency of certain 2012 executive compensation actions, which effectively discontinued the LTI Plan for future plan periods beyond 2012 - 2014. As described above, a single Incentive Plan that incorporates both shortfindings from internal audits, external audits and long-term components will remain.examination findings (50 percent weighting).
The LTI goals for residual plan periods reflect desired financial, operational and public mission objectives measured over each three-year period, which we believe promotes and encourages long-term success and financial viability and thereby enhances stockholder value. Historically, the Board of Directors approved LTI goals in the areas of Operating Efficiency, Risk Adjusted Profitability, Market Penetration and Affordable Housing/Community Investment. In early 2010, the Board added a Market Capitalization goal beginning with the 2010-2012 performance period. Each approved LTI goal is assigned an incentive weight reflecting its relative importance and potential impact on the strategic long-term initiatives, and each is assigned a quantitative threshold, target and maximum level of performance.
At the beginning of each performance period, the Board established a base award opportunity for each executive officer in the form of a grant of a fixed number of performance units, with an assigned value of $100 per unit, equal to a percentagedeferred component of the participant's base salary. The value of each performance unit then fluctuates as a function of2016 Incentive Plan, which include the actual performance in comparison with the performance levels established for each LTI goal. Generally, the higher the level of an executive officer's organizational responsibility, the higher the LTI award opportunity. The award opportunity established for each executive officer for target performance is designed to be comparable with the LTI opportunities available to executives with similar duties and responsibilities at other financial institutions, primarily other FHLBanks, and generally consistent with our market check.
When establishing LTI goals for a performance period and the corresponding performance levels, the Board anticipates the successful achievement of the threshold level of performance nearly every performance period. The target level is aligned with expected performance and is anticipated to be reasonably achievable. The maximum level reflects a graduated level of difficulty from the target performance level and requires exceptional performance for the FHLBank to achieve.
LTI incentive awards are calculated based on the actual performance or achievement level for each LTI goal at the end of each three-year performance period, with interpolations made for results between achievement levels. The achievement level for each LTI goal then is multiplied by the corresponding incentive weight assigned to that goal. The results for each goal are summed and multiplied by the executive officer's respective number of performance units to arrive at the final LTI award payable.
If, however, actual performance fails to meet the threshold (minimum) level for the Affordable Housing/Community Investment goal, no residual LTI award is paid to any participant for that performance period. If actual performance falls below the threshold level of performance for any other LTI goal, no payment is made for that goal. If actual performance exceeds the performance maximum for an LTI goal, only the maximum for that goal is paid. The Board has sole discretion to increase or decrease LTI awards up to 10 percent to recognize performance not captured by the total achievement level of the LTI goals.
During 2012, the Board, the Committee and the President periodically reviewed progress toward LTI goals for each remaining performance period. At its January 2013 meeting, following certification of the performance results for the 20102017 - 2012 performance period and in accordance with those results, the Board authorized the distribution of LTI Plan payments to eligible officers including the Named Executive Officers. Cumulatively, we achieved approximately 64 percent of the available maximum incentive opportunity for FHLBank goals. The LTI Plan payments for the residual 2010 - 20122019 performance period, are shown in Note 2expected to be set at the Summary Compensation Table.
The following table presents the incentive weights, target performance level, and the actual results achieved for the 2010 - 2012 LTI goals.
|
| | | | | | | |
| Incentive Weight | | Target Performance | | Results Achieved |
OPERATING EFFICIENCY: | | | | | |
Ranking of Operating Efficiency Ratio in comparison to other FHLBanks | 25% | | 2nd quartile | | 1 of 12 |
RISK ADJUSTED PROFITABILITY: | | | | | |
Ranking of Risk Adjusted Profitability in comparison to other FHLBanks | 25% | | 2nd quartile | | 2 of 12 |
MARKET CAPITALIZATION RATIO: | | | | | |
Ratio of Market Value of Equity (MVE) to Par Value of Regulatory Capital Stock | 25% | | 95 | % | | 114 | % |
MARKET PENETRATION: | | | | | |
Ratio of Member Advances to Member Assets | 25% | | 5.50 | % | | 3.81 | % |
| Multiplier | | Target Performance | | Results Achieved |
AFFORDABLE HOUSING/COMMUNITY INVESTMENT: | | | | | |
Percent of Participating Members using one or more HCI Programs | +/- 10% | | 32.00 | % | | 29.72 | % |
At the January 2013 meeting, theNovember 2016 Board also reviewed the measurements and achievement levels for each LTI goal for the remaining three-year performance periods operating concurrently. Based on the results to date, we project an achievement level between the target and maximum levels of performance for the 2011 - 2013 and 2012 - 2014 performance periods.meeting.
Non-Equity Incentive Plan Compensation Grants - 2012
The following table provides information on grants made under the 2012our Incentive Plan and the 2012 - 2014 Transition Plan.Plans.
2012 Grants of Plan-Based Awards
| | | | | | Estimated Future Payouts Under Non-Equity Incentive Plan Awards | | Estimated Future Payouts Under Non-Equity Incentive Plan Awards |
Name | | Plan | | Grant Date | | Threshold | | Target | | Maximum | | Grant Date (1) | | Threshold | | Target | | Maximum |
Current Named Executive Officers: | | | | | | | | | |
Andrew S. Howell | | Incentive Plan (1) | | March 15, 2012 | | $ | 220,073 |
| | $ | 330,108 |
| | $ | 440,145 |
| | November 19, 2015 | | $ | 375,000 |
| | $ | 562,500 |
| | $ | 750,000 |
|
| | Transition Plan | | March 15, 2012 | | 69,973 |
| | 155,496 |
| | 256,568 |
| |
| | | | | | | |
Donald R. Able | | Incentive Plan (1) | | March 15, 2012 | | 94,649 |
| | 149,396 |
| | 204,144 |
| | November 19, 2015 | | 160,000 |
| | 240,000 |
| | 320,000 |
|
| | Transition Plan | | March 15, 2012 | | 31,649 |
| | 70,330 |
| | 116,044 |
| |
| | | | | | | |
Carole L. Cossé | | Incentive Plan (1) | | March 15, 2012 | | 89,100 |
| | 148,500 |
| | 207,900 |
| |
| | Transition Plan | | March 15, 2012 | | 26,730 |
| | 59,400 |
| | 98,010 |
| |
| | | | | | | |
R. Kyle Lawler | | Incentive Plan (1) | | March 15, 2012 | | 91,598 |
| | 144,591 |
| | 197,582 |
| | November 19, 2015 | | 146,000 |
| | 219,000 |
| | 292,000 |
|
| | Transition Plan | | March 15, 2012 | | 30,604 |
| | 68,009 |
| | 112,214 |
| |
| | | | | | | |
Stephen J. Sponaugle | | Incentive Plan (1) | | March 15, 2012 | | 66,420 |
| | 110,700 |
| | 154,980 |
| | November 19, 2015 | | 97,500 |
| | 162,500 |
| | 227,500 |
|
| | Transition Plan | | March 15, 2012 | | 19,926 |
| | 44,280 |
| | 73,062 |
| |
| | | | | | | |
Former Named Executive Officer: | | | | | | | |
David H. Hehman (2) | | Incentive Plan | | March 15, 2012 | | 134,824 |
| | 202,235 |
| | 269,647 |
| |
| | Transition Plan | | March 15, 2012 | | 11,996 |
| | 26,658 |
| | 43,986 |
| |
James G. Dooley, Sr. | | | November 19, 2015 | | 75,000 |
| | 125,000 |
| | 175,000 |
|
| |
(1) | For current Named Executive Officers, 50 percent of the estimated future payout will be awarded in cash following the plan year. The other 50 percent of the estimated future payout will be mandatorily deferred for three years after the end of the Plan year. The final value of the deferred award can be increased, decreased or remain the same basedAwards granted on the achievement level of the deferred goals during the three-year period. Refer to the "Incentive Compensation Plan (Non-Equity)" section above for further detail. |
| |
(2) | Mr. Hehman's estimated future payouts under the Incentive Plan and Transition Plan were pro-rated based on his retirementthis date of June 1, 2012. As such, he is ineligibleare for the 2013 - 2015 deferred portion of the estimated future payout under the2016 Incentive Plan. |
Under the awards shown above, 50 percent of the estimated future payout will be awarded in cash following the Plan year. The other 50 percent of the estimated future payout will be mandatorily deferred for three years after the end of the Plan year. The final value of the deferred award can be increased, decreased or remain the same based on the achievement level of the deferred goals during the three-year period. See the "Non-Equity Incentive Compensation Plan (Incentive Plan)" section above for further detail.
Retirement Benefits
We maintain a comprehensive retirement program for executive officers comprised of two qualified retirement plans - a(a defined benefit plan and a defined contribution plan -plan) and a non-qualified pension plan. For our qualified plans, we participate in the Pentegra Defined Benefit Plan for Financial Institutions and the Pentegra Defined Contribution Plan for Financial Institutions. The non-qualified plan, the Benefit Equalization Plan (BEP), restores benefits that eligible highly compensated employees would have received were it not for Internal Revenue Service limitations on benefits from the defined benefit plan (DB/BEP). Generally, benefits under the BEP vest and are payable according to the corresponding provisions of the qualified plans.
The plans provide benefits based on a combination of an employee's tenure and annual compensation. As such, the benefits provided by the plans are one component of the total compensation opportunity for executive officers and, the Board believes, serve as valuable retention tools since retirement benefits increase as executives' tenure and compensation with the FHLBankFHLB grow.
Qualified Defined Benefit Pension Plan. The Pentegra Defined Benefit Plan for Financial Institutions (Pentegra DB) is a funded tax-qualified plan that is maintained on a non-contributory basis, i.e., employee contributions are not required. Participants' pension benefits vest upon completion of five years of service.
The pension benefits payable under the Pentegra DB plan are determined using a pre-established formula that provides a single life annuity payable monthly at age 65 or normal retirement. The benefit formula for employees hired prior to January 1, 2006, which includes all Named Executive Officers,Messrs. Howell, Able, Lawler, and Sponaugle, is 2.52.50 percent for each year of benefit service multiplied by the highest three-year average compensation. Average compensationCompensation is defined as base salary, excess accrued vacation benefits and annual incentive compensation and excludes any long-term or deferred incentive payments or payments received from the LTI Plan.payments. In the event of retirement prior to attainment of age 65, a reduced pension benefit is payable under the plan, with payments commencing as early as age 45. TheFor employees who are hired after January 1, 2006, which includes Mr. Dooley, the Pentegra DB plan
alsobenefit service multiplied by the highest five-year average compensation, where compensation is defined as base salary only and excludes all other forms of compensation. In addition, the current plan provides for a reduced pension benefit in the event of retirement prior to attainment of age 65 with payment commencing as early as age 55 if the participant has 10 years or more of service. Lastly, the Pentegra DB plan provides certain actuarially equivalent forms of benefit payments other than a single life annuity, including a limited lump sum distribution option.option, which is available only to employees, including Named Executive Officers, hired prior to February 1, 2006.
Non-Qualified Defined Benefit Pension Plan. Executive officers and other employees whose pay exceeds IRS pension limitations are eligible to participate in the Defined Benefit component of the Benefit Equalization Plan (DB/BEP), an unfunded, non-qualified pension plan that mirrors the Pentegra DB plan in all material respects. In determining whether a restoration of retirement benefits is due an eligible employee, the DB/BEP utilizes the identical benefit formula applicable to the Pentegra DB plan. In the event that the benefits payable from the Pentegra DB plan have been reduced or otherwise limited, the executive's lost benefits are payable under the terms of the DB/BEP. Because the DB/BEP is a non-qualified plan, the benefits received from this plan do not receive the same tax treatment and funding protection associated with the qualified plan.
The following table provides the present value of benefits payable to the Named Executive Officers upon retirement at age 65 from the Pentegra DB plan and the DB/BEP, and is calculated in accordance with the formula currently in effect for specified years-of-service and remuneration for participating in both plans. Our pension benefits do not include any reduction for a participant's Social Security benefits.
20122015 Pension Benefits
| | Name | | Plan Name | | Number of Years Credited Service (1) | | Present Value (2) of Accumulated Benefits | | Payments During Year Ended December 31, 2012 | | Plan Name | | Number of Years Credited Service (1) | | Present Value (2) of Accumulated Benefits |
Current Named Executive Officers: | | | | | | | |
Andrew S. Howell | | Pentegra DB | | 22.50 |
| | $ | 1,223,000 |
| | $ | — |
| | Pentegra DB | | 25.50 |
| | $ | 1,665,000 |
|
| | DB/BEP | | 22.50 |
| | 1,581,000 |
| | — |
| | DB/BEP | | 25.50 |
| | 4,648,000 |
|
| | | | | | | | | | |
Donald R. Able | | Pentegra DB | | 31.42 |
| | 1,494,000 |
| | — |
| | Pentegra DB | | 34.42 |
| | 1,800,000 |
|
| | DB/BEP | | 31.42 |
| | 1,094,000 |
| | — |
| |
| | | | | | | |
Carole L. Cossé | | Pentegra DB | | 32.92 |
| | 2,552,000 |
| | — |
| |
| | DB/BEP | | 32.92 |
| | 2,648,000 |
| | — |
| | DB/BEP | | 34.42 |
| | 2,653,000 |
|
| | | | | | | | | | |
R. Kyle Lawler | | Pentegra DB | | 11.50 |
| | 721,000 |
| | — |
| | Pentegra DB | | 14.50 |
| | 1,112,000 |
|
| | DB/BEP | | 11.50 |
| | 288,000 |
| | — |
| | DB/BEP | | 14.50 |
| | 813,000 |
|
| | | | | | | | | | |
Stephen J. Sponaugle | | Pentegra DB | | 19.33 |
| | 1,003,000 |
| | — |
| | Pentegra DB | | 22.33 |
| | 1,393,000 |
|
| | DB/BEP | | 19.33 |
| | 136,000 |
| | — |
| | DB/BEP | | 22.33 |
| | 548,000 |
|
| | | | | | | | | | |
Former Named Executive Officer: | | | | | | | |
David H. Hehman | | Pentegra DB | | 34.42 |
| | 198,000 |
| | 2,198,000 |
| |
James G. Dooley, Sr. | | | Pentegra DB | | 8.33 |
| | 265,000 |
|
| | DB/BEP | | 34.42 |
| | 11,351,000 |
| | 1,580,000 |
| | DB/BEP | | 8.33 |
| | — |
|
| |
(1) | For pension plan purposes, the calculation of credited service begins upon completion of a required waiting period following the date of employment. Accordingly, the years shown are less than the executive's actual years of employment. Because IRS regulations generally prohibit the crediting of additional years of service under the qualified plan, such additional service also is precluded under the DB/BEP, which only restores those benefits lost under the qualified plan. |
| |
(2) | See Note 1817 of the Notes to Financial Statements for details regarding valuation assumptions. |
Qualified Defined Contribution Plan. The Pentegra Defined Contribution Plan for Financial Institutions (Pentegra DC) is a tax-qualified defined contribution plan to which we make tenure-based matching contributions. Matching contributions begin upon completion of one year of employment and subsequently increase based on length of employment to a maximum of six percent of eligible compensation. Eligible compensation in the Pentegra DC plan is defined as base salary and annual bonus (STI compensation)(current incentive award) and excludes any deferred incentive payments or payments received from the LTI Plan.awards.
Under the Pentegra DC plan, a participant may elect to contribute up to 100 percent of eligible compensation on either a before-tax i.e., 401(k), or after-tax basis. The plan permits participants to self-direct investment elections into one or more investment funds. All returns are at the market rate of the related fund. Investment fund elections may be changed daily by the participants. A participant may withdraw vested account balances while employed, subject to certain plan limitations, which include those under IRS regulations. Participants also are permitted to revise their contribution/deferral election once each pay period. However, the revised election is only applicable to future earnings and may also be limited by IRS regulations.
Fringe Benefits and Perquisites
Executive officers are eligible to participate in the traditional fringe benefit plans made available to all other employees, including participation in the pensionretirement plans, medical, dental and vision insurance program and group term life and standard long term disability (LTD) insurance plans, as well as annual leave (i.e., vacation) and sick leave policies. Executives participate in our subsidized medical, dental and vision insurance and group term life and standard LTD insurance programs on the same basis and terms as all of our employees. However, executives are required to pay higher premiums for medical coverage. Executive officers also receive on-site parking at our expense.
In accordance with Board policy,During 2015, the perquisites provided by the FHLBank represent a small fraction of an executive officer's annual compensation and are provided in accordance with market practices for executives in similar positions and with similar responsibilities. During 2012, the current and former President were eachwas also provided with an FHLBank-ownedFHLB-owned vehicle for theirhis business and personal use. The operating expenses associated with the vehicle, including an automobile club membership for emergency roadside assistance, also were provided. An executive officer's personal use of an FHLBank-ownedFHLB-owned vehicle, including use for the daily commute to and from work, is reported as a taxable fringe benefit. In addition to the standard LTD insurance plan provided to all FHLB employees, Named Executive Officers may elect to receive additional LTD coverage. The premiums the FHLB pays for the additional LTD coverage are considered a taxable fringe benefit. Additionally, with prior approval, our current Travel Policy permits a spouse to
accompany an executive officer on authorized business trips. The transportation and other related expenses associated with the spouse's travel are reimbursed by the FHLBankFHLB and reported as a taxable fringe benefit. We also maintain
The perquisites provided by the FHLB represent a membership in our President's name insmall fraction of an airline waiting area designated for frequent travelers.executive officer's annual compensation. During 2012, these2015, perquisites which included certain retirement gifts, totaled $32,878$13,636 for Mr. Hehman,Howell, as shown in the Summary Compensation Table. Perquisites did not individually or collectively exceed $10,000 for any other Named Executive OfficerOfficers and are therefore excluded from the Summary Compensation Table.
Other than normal pension benefits and eligibility to participate in our retiree supplemental benefits program (if hired prior to August 1, 1990), no perquisites or other special benefits are provided to our executive officers in the event of a change in control, resignation, retirement or other termination of employment.
President and Chief Executive Officer Retirement
In January 2012, David H. Hehman announced his retirement as President and Chief Executive Officer effective June 1, 2012. Mr. Hehman joined the FHLBank in 1977 and had served as President and Chief Executive Officer since 2003. Upon his retirement, Mr. Hehman was eligible to receive his pension plan benefit (qualified and non-qualified) and defined contribution account balance. Additionally, Mr. Hehman received all accrued but unused vacation, and had the option to convert his life and long-term disability insurance coverages to individual coverage policies at his expense. Because Mr. Hehman was hired prior to August 1, 1990 and met the “Rule of 80” with respect to his age and years of service, he had the option to participate in the supplemental retiree benefits program which includes medical coverage subject to payment of current retiree health insurance premiums and $5,000 in life insurance paid for annually by the FHLBank.
Employment Arrangements and Severance Benefits
Pursuant to the FHLBank Act, all employees of the FHLBankFHLB are “at will” employees. Generally, the President works at the pleasure of the Board and all other employees work at the pleasure of the President. Accordingly, an employee may resign employment at any time and an employee's employment may be terminated at any time for any reason, with or without cause and with or without notice.
We have no employment arrangements with any Named Executive Officer. Other than normal pension benefits and eligibility to participate in our retiree supplemental benefits program (if hired prior to August 1, 1990), no perquisites, tax gross-ups or other special benefits are provided to our executive officers in the event of a change in control, resignation, retirement or other termination of employment.
We have a severance policy under which employees, including executive officers, may receive benefits in the event of termination of employment resulting from job elimination, substantial job modification, job relocation or a planned reduction in staff that causes an involuntary termination of employment. Under this policy, an executive officer is entitled to one month's pay for every full year of employment, pro-rated for partial years of employment, with a minimum of one month and a maximum of six months' severance pay. At our discretion, executive officers and employees receiving benefits under this policy may also receive outplacement assistance as well as continuation of health insurance coverage on a limited basis.
We have no termination of employment, severance or change-in-control arrangements with any Named Executive Officer.
COMPENSATION COMMITTEE REPORT
The Personnel and Compensation Committee of the Board of Directors (the Committee) of the FHLBankFHLB has furnished the following report for inclusion in this annual report on Form 10-K:
The Committee has reviewed and discussed the 20122015 Compensation Discussion and Analysis set forth above with the FHLBank'sFHLB's management. Based on such review and discussions, the Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this annual report on Form 10-K.
Grady P. Appleton
B. Proctor Caudill, Jr. (Vice Chair)
Leslie D. Dunn
Charles J. Koch
Michael R. Melvin
|
|
Donald J. Mullineaux (Chair) |
Grady P. Appleton |
Leslie D. Dunn |
Charles J. Koch |
Michael R. Melvin |
William J. Small (Vice Chair) |
COMPENSATION OF DIRECTORS
As required by Finance Agency Regulationsregulations and the FHLBank Act, we have established a formal policy governing the compensation and travel reimbursement provided to our directors. The goal of the policy is to compensate Board members for work performed on behalf of the FHLBank.FHLB.
2015 Compensation. Under our 2015 policy, compensation iswas comprised of per meeting fees, subject to an annual cap, and reimbursement for reasonable FHLBankFHLB travel-related expenses. The fees were intended to compensate directors for time spent reviewing materials sent to them, preparing for meetings, participating in other FHLB activities and attending the meetings of the Board of Directors and its committees.
The following table sets forth the per meeting fees and the annual caps for 2015:
|
| | | | | | | |
| 2015 |
| Per Meeting Fee | | Annual Meeting Fee Cap |
Chair | $ | 15,000 |
| | $ | 105,000 |
|
Vice Chair | 13,750 |
| | 95,000 |
|
Other Members | 10,500 |
| | 72,500 |
|
In addition, under the 2015 policy, annual fees were paid as follows for certain Board Committee assignments that involved significant time and responsibilities. These fees were subject to certain attendance requirements.
|
| | | |
| 2015 |
Audit Committee: | |
Chair | $ | 17,000 |
|
Other members | 9,500 |
|
Finance and Market Risk Management Committee: | |
Chair | 14,000 |
|
Other members | 7,000 |
|
All other committees: | |
Chair | 14,000 |
|
However, the Board Chair did not receive additional compensation for chairing any committee and no director received fees totaling more than the annual amount paid to the Board Chair.
2016 Compensation. At its November 2015 meeting, the Board approved a revision to the directors' fee structure, effective January 1, 2016. Under our revised policy, compensation is comprised of a maximum base fee that is divided into two equal parts: (1) a quarterly retainer fee, and (2) a per meeting fee, subject to an annual cap, and reimbursement for reasonable FHLB travel-related expenses. As in prior years, the fees are intended to compensate directors for time spent reviewing materials sent to them, preparing for meetings, participating in other FHLBankFHLB activities and attending the meetings of the Board of Directors and its committees.
To appropriately compensate directors for fulfilling their increasing responsibilities, 2013 fees were increased so as to continue to attract and retain valued guidance and expertise, and recognize the increasing time directors spend on behalf of the FHLBank. The following table sets forth the per meeting fees and the annual caps for 2012 and 2013:
| | | 2012 | | 2013 | 2016 |
| Per Meeting Fee | | Annual Cap | | Per Meeting Fee | | Annual Cap | Quarterly Retainer Fee | | Per Meeting Fee | | Maximum Base Fees |
Chair | $ | 9,750 |
| | $ | 78,000 |
| | $ | 12,250 |
| | $ | 98,000 |
| $ | 16,875 |
| | $ | 9,650 |
| | $ | 135,000 |
|
Vice Chair | 8,625 |
| | 69,000 |
| | 10,625 |
| | 85,000 |
| 15,000 |
| | 8,580 |
| | 120,000 |
|
Other Members | 7,000 |
| | 56,000 |
| | 8,750 |
| | 70,000 |
| 12,500 |
| | 7,150 |
| | 100,000 |
|
In addition to the base fees, under the 2016 policy, annual fees are paid as follows for certain Board Committee assignments that involve significant time and responsibilities.
|
| | | | | | | |
| 2012 | | 2013 |
Audit Committee: | | | |
Chair | $ | 15,000 |
| | $ | 17,000 |
|
Other members | 8,000 |
| | 9,500 |
|
Finance and Market Risk Management Committee: | | | |
Chair | 12,000 |
| | 14,000 |
|
Other members | 6,000 |
| | 7,000 |
|
All other committees: | | | |
Chair | 12,000 |
| | 14,000 |
|
In 2013, in addition to the per meetingAudit Committee Chair and committeeOther Committee Chairs of $17,000 and $14,000, respectively. These fees above, the Board Chair will receive $10,000 as compensation for chairing the Council of FHLBanks. However, excluding the Council of FHLBanks fee, the Board Chair does not receive additional compensation for chairing any committee and no director may receive fees totaling more than the annual amount paidare subject to the Board Chair. Committee members are required to attend 75 percent of all the respective committee meetings or the fee is paid pro-rata based on theircertain attendance ratio.requirements.
During 2012,2015, total directors' fees and travel expenses incurred by the FHLBankFHLB were $1,133,284$1,457,125 and $258,103,$229,189, respectively.
With prior approval, our current Travel Policy permits a spouse to accompany a director on authorized business trips. The transportation and other related expenses associated with the spouse's travel are reimbursed by the FHLBankFHLB, subject to certain limitations, and reported as a taxable fringe benefit. During 2012,2015, there were 1213 directors that received reimbursement for spousal travel expenses. These expenses did not individually or collectively exceed $10,000 for any director and are therefore excluded from the Directors Compensation Table below.
The following table sets forth the meeting fees earned by each director and expenses paid to each director for the year ended December 31, 2012.2015.
20122015 Directors Compensation Table | | Name | Fees Earned or Paid in Cash | | Total Expenses (1) | | Total | | Fees Earned or Paid in Cash | | Total |
J. Lynn Anderson | | | $ | 96,000 |
| | $ | 96,000 |
|
Grady P. Appleton | $ | 64,000 |
| | $ | 384 |
| | $ | 64,384 |
| | 82,000 |
| | 82,000 |
|
B. Proctor Caudill, Jr., Vice Chair | 69,000 |
| | 1,123 |
| | 70,123 |
| |
Greg W. Caudill | | | 79,625 |
| | 79,625 |
|
James R. DeRoberts | 64,000 |
| | — |
| | 64,000 |
| | 82,000 |
| | 82,000 |
|
Mark N. DuHamel | 68,284 |
| | — |
| | 68,284 |
| | 87,000 |
| | 87,000 |
|
Leslie D. Dunn | 76,000 |
| | 1,024 |
| | 77,024 |
| | 96,000 |
| | 96,000 |
|
James A. England | 64,000 |
| | 598 |
| | 64,598 |
| | 82,000 |
| | 82,000 |
|
J. Lynn Greenstein | 62,000 |
| | — |
| | 62,000 |
| |
Stephen D. Hailer | 76,000 |
| | 1,875 |
| | 77,875 |
| |
Charles J. Koch | 49,000 |
| | 1,686 |
| | 50,686 |
| | 79,500 |
| | 79,500 |
|
Michael R. Melvin | 62,000 |
| | 487 |
| | 62,487 |
| | 79,500 |
| | 79,500 |
|
Donald J. Mullineaux | 62,000 |
| | 2,247 |
| | 64,247 |
| |
Thomas L. Moore | | | 79,500 |
| | 79,500 |
|
Donald J. Mullineaux, Chair | | | 105,000 |
| | 105,000 |
|
Alvin J. Nance | 56,000 |
| | 855 |
| | 56,855 |
| | 72,500 |
| | 72,500 |
|
Charles J. Ruma | 74,000 |
| | — |
| | 74,000 |
| | 93,500 |
| | 93,500 |
|
William J. Small | 70,000 |
| | 678 |
| | 70,678 |
| |
David E. Sartore | | | 89,000 |
| | 89,000 |
|
William J. Small, Vice Chair | | | 95,000 |
| | 95,000 |
|
William S. Stuard, Jr. | 62,000 |
| | 635 |
| | 62,635 |
| | 79,500 |
| | 79,500 |
|
Billie W. Wade | 77,000 |
| | — |
| | 77,000 |
| |
Carl F. Wick, Chair | 78,000 |
| | 970 |
| | 78,970 |
| |
Nancy E. Uridil | | | 79,500 |
| | 79,500 |
|
Total | $ | 1,133,284 |
| | $ | 12,562 |
| | $ | 1,145,846 |
| | $ | 1,457,125 |
| | $ | 1,457,125 |
|
| |
(1) | Total expenses are comprised of spousal travel expenses reimbursed to the director by the FHLBank; directors' travel expenses are not included. |
The following table summarizes the total number of board meetings and meetings of its designated committees held in 20112014 and 2012.2015.
| | | | Number of Meetings Held | | Number of Meetings Held |
Meeting Type | | 2011 | | 2012 | | 2014 | | 2015 |
Board Meeting | | 12 | | 10 |
| | 9 | | 9 |
Audit Committee | | 13 | | 11 |
| | 11 | | 11 |
Finance and Risk Management Committee | | 6 | | 7 |
| | 7 | | 7 |
Governance | | 4 | | 3 |
| | 7 | | 6 |
Housing and Community Development Committee | | 4 | | 4 |
| | 5 | | 5 |
Personnel and Compensation Committee | | 5 | | 7 |
| | 8 | | 6 |
Executive Committee | | | 1 | | 1 |
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Personnel and Compensation Committee of the Board of Directors is charged with responsibility for the FHLBank'sFHLB's compensation policies and programs. None of the 20122015 or 20132016 Personnel and Compensation Committee members are or previously were officers or employees of the FHLBank.FHLB. Additionally, none of the FHLBank'sFHLB's executive officers served or serve on the board of directors or the compensation committee of any entity whose executive officers served on the FHLBank'sFHLB's Personnel and Compensation Committee or Board of Directors. This Committee was and is composed of the following members:
|
| | |
2012 | | 2013 |
Carl F. Wick (Chair) | | Carl F. Wick (Chair) |
Grady P. Appleton | | Grady P. Appleton |
B. Proctor Caudill, Jr. (Vice Chair) | | B. Proctor Caudill, Jr. (Vice Chair) |
Stephen D. Hailer | | Leslie D. Dunn |
Charles J. Koch | | Charles J. Koch |
Michael R. Melvin | | Michael R. Melvin |
| | William J. Small |
|
|
2015 and 2016 |
Donald J. Mullineaux (Chair) |
Grady P. Appleton |
Leslie D. Dunn |
Charles J. Koch |
Michael R. Melvin |
William J. Small (Vice Chair) |
| |
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
We have one class of capital stock, Class B Stock, all of which is owned by our current and former member institutions. Individuals, including directors and officers of the FHLBank,FHLB, are not permitted to own our capital stock. Therefore, we have no equity compensation plans.
The following table lists institutions holding five percent or more of outstanding capital stock at February 28, 201329, 2016 and includes any known affiliates that are members of the FHLBank:FHLB:
| | (Dollars in thousands) | | | | | | |
| | Capital | Percent of Total | Number | | Capital | Percent of Total | Number |
Name | Address | Stock | Capital Stock | of Shares | Address | Stock | Capital Stock | of Shares |
JPMorgan Chase Bank, N.A. | 1111 Polaris Parkway Columbus, OH 43240 | $ | 1,093,000 |
| 25 | % | 10,930,000 |
| 1111 Polaris Parkway Columbus, OH 43240 | $ | 1,439,000 |
| 33 | % | 14,390,000 |
|
U.S. Bank, N.A. | 425 Walnut Street Cincinnati, OH 45202 | 592,241 |
| 14 |
| 5,922,408 |
| 425 Walnut Street Cincinnati, OH 45202 | 475,393 |
| 11 |
| 4,753,927 |
|
Fifth Third Bank | 38 Fountain Square Plaza Cincinnati, OH 45202 | 400,619 |
| 9 |
| 4,006,191 |
| 38 Fountain Square Plaza Cincinnati, OH 45263 | 247,687 |
| 6 |
| 2,476,870 |
|
The following table lists capital stock outstanding as of February 28, 201329, 2016 held by member institutions that have an officer or director who serves as a director of the FHLBank:FHLB:
| | (Dollars in thousands) | | | | | | |
| | Capital | Percent of Total | | Capital | Percent of Total |
Name | Address | Stock | Capital Stock | Address | Stock | Capital Stock |
FirstMerit Bank, N.A. | 111 Cascade Plaza, 7th Floor Akron, OH 44308 | $ | 119,145 |
| 2.7 | % | |
Nationwide (1) | One Nationwide Plaza Columbus, OH 43215 | 70,340 |
| 1.6 |
| One Nationwide Plaza Columbus, OH 43215 | $ | 123,102 |
| 2.8 | % |
First Federal Bank of the Midwest | 601 Clinton Street Defiance, OH 43512 | 19,340 |
| 0.4 |
| 601 Clinton Street Defiance, OH 43512 | 13,792 |
| 0.3 |
|
Kentucky Bank | 401 Main Street Paris, KY 40361 | 6,731 |
| 0.2 |
| |
F&M Bank | 50 Franklin Street Clarksville, TN 37040 | 3,353 |
| 0.1 |
| 50 Franklin Street Clarksville, TN 37040 | 3,378 |
| 0.1 |
|
Perpetual Federal Savings Bank | 120 North Main Street Urbana, OH 43078 | 3,044 |
| 0.1 |
| 120 North Main Street Urbana, OH 43078 | 2,794 |
| 0.1 |
|
First Federal Bank of Ohio | 140 North Columbus Street Galion, OH 44833 | 1,902 |
| 0.0 |
| 140 North Columbus Street Galion, OH 44833 | 1,902 |
| 0.0 |
|
First Farmers Bank and Trust Company | 127 North Thomas Street Owenton, KY 40359 | 1,617 |
| 0.0 |
| |
Middlefork Financial Group (2) | 22023 Main Street Hyden, KY 41749 | 1,593 |
| 0.0 |
| |
Farmers National Bank | | 304 West Main Street Danville, KY 40422 | 1,722 |
| 0.0 |
|
Field & Main Bank | | 140 North Main Street Henderson, KY 42420 | 1,628 |
| 0.0 |
|
The Arlington Bank | 777 Goodale Boulevard, #200 Columbus, OH 43212 | 1,025 |
| 0.0 |
| 2130 Tremont Center Upper Arlington, OH 43221 | 1,055 |
| 0.0 |
|
Miami Savings Bank | | 8008 Ferry Street Miamitown, OH 45041 | 722 |
| 0.0 |
|
Decatur County Bank | 56 North Pleasant Street Decaturville, TN 38329 | 646 |
| 0.0 |
| 56 North Pleasant Street Decaturville, TN 38329 | 646 |
| 0.0 |
|
The Plateau Group (3) | 2701 North Main Street Crossville, TN 38555 | 74 |
| 0.0 |
| |
The Plateau Group (2) | | 2701 North Main Street Crossville, TN 38555 | 93 |
| 0.0 |
|
| |
(1) | Includes Nationwide Bank, Nationwide Life Insurance Co., and Nationwide Mutual Insurance Co., which are FHLBankFHLB members. |
| |
(2) | Includes three subsidiaries (Hyden Citizens Bank, Farmers State Bank and Farmers & Traders Bank of Campton), which are FHLBank members. |
| |
(3) | Includes two subsidiaries (Plateau Casualty Insurance Company and Plateau Insurance Company), which are FHLBankFHLB members. |
| |
Item 13. | Certain Relationships and Related Transactions, and Director Independence. |
DIRECTOR INDEPENDENCE
Because we are a cooperative, capital stock ownership is a prerequisite to transacting any business with us. Transactions with our stockholders are part of the ordinary course of - and are essential to the purpose of - our business.
Our capital stock is not permitted to be publicly traded and is not listed on any stock exchange. Therefore, we are not governed by stock exchange rules relating to director independence. If we were so governed, arguably none of our industry directors, who are elected by our members, would be deemed independent because all are directors and/or officers of members that do business with us. Messrs. Wick, Appleton, Koch, Mullineaux, Nance and Ruma and Ms.Mses. Dunn and Uridil, our seven non-industry directors, have no material transactions, relationships or arrangements with the FHLBankFHLB other than in their capacity as directors. Therefore, our Board of Directors has determined that each of them is independent under the independence standards of the New York Stock Exchange.
The Finance Agency director independence standards specify independence criteria for members of our Audit Committee. Under these criteria, all of our directors serving on the Audit Committee are independent.
TRANSACTIONS WITH RELATED PERSONS
See Note 2322 of the Notes to Financial Statements for information on transactions with stockholders, including information on transactions with Directors' Financial Institutions and concentrations of business, and transactions with nonmember affiliates, which information is incorporated herein by reference.
See also “Item 11. Executive Compensation - Compensation Committee Interlocks and Insider Participation.”
Review and Approval of Related Persons Transactions. Ordinary course transactions with Directors' Financial Institutions and with members holding five percent or more of our capital stock are reviewed and approved by our management in the normal course of events so as to assure compliance with Finance Agency Regulations.regulations.
As required by Finance Agency Regulations,regulations, we have a written conflict of interest policy. This policy requires directors (1) to disclose to the Board of Directors any known personal financial interests that they, their immediate family members or their business associates have in any matter to be considered by the Board and in any other matter in which another person or entity does or proposes to do business with the FHLBankFHLB and (2) to recuse themselves from considering or voting on any such matter. The scope of the Finance Agency's conflict of interest Regulation (available at www.fhfa.gov) and our conflict of interest policy (posted on our Web site at www.fhlbcin.com) is similar, although not identical, to the scope of the SEC's requirements governing transactions with related persons. In March 2007, our Board of Directors adopted a written related person transaction policy that is intended to close any gaps between Finance Agency and SEC requirements. The policy includes procedures for identifying, approving and reporting related person transactions as defined by the SEC. One of the tools that we used to monitor non-ordinary course transactions and other relationships with our directors and executive officers is an annual questionnaire that uses the New York Stock Exchange criteria for independence. Finally, our Insider Trading Policy provides that any request for redemption of excess stock (except for de minimis amounts) held by a Director's Financial Institution must be approved by the Board of Directors or by the Executive Committee of the Board.
We believe these policies are effective in bringing to the attention of management and the Board any non-ordinary course transactions that require Board review and approval and that all such transactions since January 1, 20122015 have been so reviewed and approved.
| |
Item 14. | Principal Accountant Fees and Services. |
The following table sets forth the aggregate fees billed to the FHLBankFHLB for the years ended December 31, 20122015 and 20112014 by its independent registered public accounting firm, PricewaterhouseCoopers LLP:
| | | For the Years Ended | For the Years Ended |
(In thousands) | December 31, | December 31, |
| 2012 | | 2011 | 2015 | | 2014 |
Audit fees | $ | 671 |
| | $ | 669 |
| $ | 695 |
| | $ | 661 |
|
Audit-related fees | 84 |
| | 143 |
| 53 |
| | 67 |
|
Tax fees | — |
| | — |
| — |
| | — |
|
All other fees | — |
| | — |
| 20 |
| | — |
|
Total fees | $ | 755 |
| | $ | 812 |
| $ | 768 |
| | $ | 728 |
|
Audit fees were for professional services rendered for the audits of the FHLBank'sFHLB's financial statements.
Audit-related fees were for assurance and related services primarily related to accounting consultations, and control advisory services.services and fees related to participation in and presentations at conferences.
The FHLBankFHLB is exempt from all federal, state and local income taxation. Therefore, no fees were paid for tax services during the years presented.
All other fees represent non-audit services related to an FHLBank System project on certain employee benefits during 2015. There were no other fees paid during the years presented.2014.
The Audit Committee approves the annual engagement letter for the FHLBank'sFHLB's audit. The Audit Committee also establishes a fixed dollar limit for other recurring annual accounting related consultations, which include the FHLBank'sFHLB's share of FHLBank System-related accounting issues. The status of these services is periodically reviewed by the Audit Committee throughout the year with any increase in these services requiring pre-approval. All other services provided by the independent accounting firm are specifically approved by the Audit Committee in advance of commitment.
The FHLBankFHLB paid additional fees to PricewaterhouseCoopers LLP in the form of assessments paid to the Office of Finance. The FHLBankFHLB is assessed its proportionate share of the costs of operating the Office of Finance, which includes the expenses associated with the annual audits of the combined financial statements of the 12 FHLBanks. These assessments, which totaled $46,000$51,000 in 2015 and $44,000 in 2012 and 2011, respectively,2014 are not included in the table above.
PART IV
| |
Item 15. | Exhibits and Financial Statement Schedules. |
| |
(a) | Financial Statements. The following financial statements of the Federal Home Loan Bank of Cincinnati, set forth in Item 8 above, are filed as a part of this registration statement. |
Report of Independent Registered Public Accounting Firm
Statements of Condition as of December 31, 20122015 and 20112014
Statements of Income for the years ended December 31, 2012, 20112015, 2014 and 20102013
Statements of Comprehensive Income for the years ended December 31, 2012, 20112015, 2014 and 20102013
Statements of Capital for the years ended December 31, 2012, 20112015, 2014 and 20102013
Statements of Cash Flows for the years ended December 31, 2012, 20112015, 2014 and 20102013
Notes to Financial Statements
See Index of Exhibits
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, as of the 21st17th day of March 2013.2016.
FEDERAL HOME LOAN BANK OF CINCINNATI
(Registrant)
|
| |
By: | /s/ Andrew S. Howell |
| Andrew S. Howell |
| President and Chief Executive Officer (principal executive officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated as of the 21st17th day of March 2013.2016.
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| Signatures | | Title |
| | | |
| /s/ Andrew S. Howell | | President and Chief Executive Officer |
| Andrew S. Howell | | (principal executive officer) |
| | | |
| /s/ Donald R. Able | | Executive Vice President -President-Chief Operating Officer and Chief Financial Officer |
| Donald R. Able | | Operating Officer
(principal financial officer) |
| | | |
| /s/ J. Christopher Bates | | Senior Vice President-Chief Accounting Officer |
| J. Christopher Bates | | (principal accounting officer) |
| | | |
| /s/ J. Lynn Anderson* | | Director |
| J. Lynn Anderson | | |
| | | |
| /s/ Grady P. Appleton* | | Director |
| Grady P. Appleton | | |
| | | |
| /s/ B. Proctor Caudill, Jr.*Greg W. Caudill* | | Director (Vice Chair) |
| B. ProctorGreg W. Caudill Jr. | | |
| | | |
| /s/ James R. DeRoberts* | | Director |
| James R. DeRoberts | | |
| | | |
| /s/ Mark N. DuHamel* | | Director |
| Mark N. DuHamel | | |
| | | |
| /s/ Leslie D. Dunn* | | Director |
| Leslie D. Dunn | | |
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| /s/ James A. England* | | Director |
| James A. England | | |
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| /s/ Charles J. Lynn Greenstein*Koch* | | Director |
| Charles J. Lynn GreensteinKoch | | |
| | | |
| /s/ Charles J. Koch*Robert T. Lameier* | | Director |
| Charles J. KochRobert T. Lameier | | |
| | | |
| /s/ Michael R. Melvin* | | Director |
| Michael R. Melvin | | |
| | | |
| /s/ Thomas L. Moore* | | Director |
| Thomas L. Moore | | |
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| | | |
| /s/ Donald J. Mullineaux* | | Director (Chair) |
| Donald J. Mullineaux | | |
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| /s/ Alvin J. Nance* | | Director |
| Alvin J. Nance | | |
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| /s/ Charles J. Ruma* | | Director |
| Charles J. Ruma | | |
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| /s/ David E. Sartore* | | Director |
| David E. Sartore | | |
| | | |
| /s/ William J. Small* | | Director (Vice Chair) |
| William J. Small | | |
| | | |
| /s/ William S. Stuard, Jr.* | | Director |
| William S. Stuard, Jr. | | |
| | | |
| /s/ Billie W. Wade*Nancy E. Uridil* | | Director |
| Billie W. Wade | | |
| | | |
| /s/ Carl F. Wick* | | Director (Chair) |
| Carl F. WickNancy E. Uridil | | |
| | | |
| * Pursuant to Power of Attorney | | |
| | | |
| /s/ Andrew S. Howell | | |
| Andrew S. Howell | | |
| Attorney-in-fact | | |
INDEX OF EXHIBITS
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Exhibit Number (1) | | Description of exhibit | | Document filed or furnished, as indicated below |
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3.1 | | Organization Certificate | | Form 10, filed December 5, 2005 |
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3.2 | | Bylaws, as amended through March 18, 2010January 21, 2016 | | Form 10-K, filed
March 18, 2010 Filed Herewith |
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4 | | Capital Plan, as amended through July 21, 2011of April 17, 2015 | | Form 8-K,10-Q, filed August 5, 2011May 7, 2015 |
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10.1.A | | Form of Blanket Agreement for Advances and Security Agreement, as in effect for signatories prior to November 21, 2005 | | Form 10, filed December 5, 2005 |
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10.1.B | | Form of Blanket Security Agreement, for new signatories on and after November 21, 2005 | | Form 10, filed December 5, 2005 |
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10.2 | | Form of Mortgage Purchase Program Master Selling and Servicing Master Agreement | | Form 10, filed December 5, 2005 |
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10.3 | | Federal Home Loan Banks P&I Funding and Contingency Plan Agreement, entered into as of July 20, 2006, by and among the Office of Finance and each of the Federal Home Loan Banks | | Form 8-K, filed June 28, 2006 |
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10.4 | | Joint Capital Enhancement Agreement, as amended on August 5, 2011, by and among each of the Federal Home Loan Banks | | Form 8-K, filed August 5, 2011 |
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10.5 (2) | | Incentive Compensation Plan | | Form 10-Q, filed August 9, 2012 |
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10.6 (2) | | Transitional Executive Long-Term Incentive Plan | | Form 10-Q, filed August 9, 2012 |
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10.7 (2) | | Executive Long-Term Incentive Plan, as amended February, 2011 | | Form 10-K, filed March 18, 2011 |
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10.8 (2)
| | Federal Home Loan Bank of Cincinnati Benefit Equalization Plan (December 2008 Restatement) | | Form 10-K, filed March 18, 2010 |
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10.910.8 (2)
| | First Amendment to the Federal Home Loan Bank of Cincinnati Benefit Equalization Plan (December 2008 Restatement) | | Form 10-K, filed March 18, 2010 |
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10.1010.9 (2)
| | Form of indemnification agreement effective as of July 29, 2009 between the Federal Home Loan Bank and each of its directors and executive officers | | Form 8-K, filed July 30, 2009 |
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12 | | Statements of Computation of Ratio of Earnings to Fixed Charges | | Filed Herewith |
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24 | | Powers of Attorney | | Filed Herewith |
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31.1 | | Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer | | Filed Herewith |
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31.2 | | Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer | | Filed Herewith |
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32 | | Section 1350 Certifications | | Furnished Herewith |
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Exhibit Number (1) | | Description of exhibit | | Document filed or furnished, as indicated below |
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99.1 | | Audit Committee Letter | | Furnished Herewith |
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99.2 | | Audit Committee Charter | | Furnished Herewith |
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101.INS | | XBRL Instance Document | | FurnishedFiled Herewith |
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101.SCH | | XBRL Taxonomy Extension Schema Document | | FurnishedFiled Herewith |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | FurnishedFiled Herewith |
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101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | FurnishedFiled Herewith |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | FurnishedFiled Herewith |
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101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | FurnishedFiled Herewith |
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(1) | Numbers coincide with Item 601 of Regulation S-K. |
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(2) | Indicates management compensation plan or arrangement. |