Table of Contents
SECURITIES AND EXCHANGE COMMISSION
Federally chartered corporation | 31-6000228 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1000 Atrium Two, P.O. Box 598, Cincinnati, Ohio | 45201-0598 | |
(Address of principal executive offices) | (Zip Code) |
Class B Stock, par value $100 per share | ||
(Title of class) |
Table of Contents
3 | ||||
23 | ||||
For the Three- and Nine-Month Periods Ended September 30, 2005 and 2004 | 25 | |||
66 | ||||
137 | ||||
137 | ||||
139 | ||||
142 | ||||
145 | ||||
146 | ||||
146 | ||||
146 | ||||
147 | ||||
154 | ||||
155 | ||||
175 | ||||
182 | ||||
222 | ||||
225 | ||||
226 | ||||
227 |
2
Table of Contents
3
Table of Contents
§ | Statement of Financial Accounting Standards (SFAS) No. 133,Accounting for Derivative Instruments and Hedging Activities[as amended by SFAS No. 137,Accounting for Derivative Instruments and Hedging Activities—Deferral of Effective Date of FASB Statement No. 133, SFAS No. 138,Accounting for Certain Derivative Instruments and Certain Hedging Activities, and SFAS No. 149,Amendment of Statement 133 on Derivative Instruments and Hedging Activities(herein referred to as “SFAS 133”)]. | ||
§ | SFAS No. 91,Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases(herein referred to as “SFAS 91”). |
4
Table of Contents
§ | Promoting the expansion of Mission Asset Activity, through competitive pricing of these products, in order to support the availability of financing for housing and community development. | ||
§ | Achieving and maintaining an adequate amount of retained earnings to help ensure safety and soundness and promote dividend stability. | ||
§ | Maximizing our ability to earn a competitive return on members’ stock investment in order to attract and retain members and capital, encourage growth in Mission Asset Activity, and be consistent with maximizing the long-term total return on members’ investment. | ||
§ | Maximizing contributions to Housing and Community Investment. | ||
§ | Minimizing the exposure of economic and accounting earnings to volatility, subject to full compliance with all accounting standards. | ||
§ | Minimizing long-term market risk exposure. | ||
§ | Minimizing credit risk exposure. |
5
Table of Contents
§ | size: from $1 to a maximum amount limited by our leverage requirements, collateral requirements, available liquidity, and members’ borrowing capacities; | ||
§ | final maturity: from overnight to 30 years; | ||
§ | interest rate: fixed-rate or adjustable-rate coupons; | ||
§ | interest rate index on adjustable-rate coupons (e.g., 1-month LIBOR, 3-month LIBOR); | ||
§ | rate reset for adjustable-rate Advances: monthly, quarterly, or other; | ||
§ | prepayment ability: no, partial, or full prepayment options, some of which involve a fee; | ||
§ | principal paydown: with no, partial, or full amortization of principal; and | ||
§ | interest rate options embedded in Advances (e.g., caps, floors, collars, etc.). |
6
Table of Contents
7
Table of Contents
§ | debt securities issued by the United States government or its agencies; | ||
§ | mortgage-backed securities and collateralized mortgage obligations supported by mortgage securities (together, mortgage-backed securities), issued by government-sponsored enterprises or private issuers that on the purchase date are rated Aaa by Moody’s or AAA by Standard & Poor’s; | ||
§ | asset-backed securities, collateralized by manufactured housing loans or home equity loans, issued by government-sponsored enterprises or private issuers that on the purchase date are rated Aaa by Moody’s or AAA by Standard & Poor’s; and | ||
§ | marketable direct obligations of state, local, or tribal government units or agencies, rated Aaa by Moody’s or AAA by Standard & Poor’s, where the purchase of such obligations by the FHLBank provides to the issuer the customized terms, necessary liquidity, or favorable pricing required to generate needed funding for housing or community lending. |
8
Table of Contents
§ | Liquidity management. As discussed in the “Risk Management” section (page 17), we use the investments portfolio in liquidity management. | ||
§ | Management of market risk. The investments portfolio assists us in managing exposure to market risk. Short-term money market investments help stabilize earnings because they typically earn a “locked in” match-funded spread with little market risk. The mortgage-backed securities portfolio provides us with flexibility in managing the market risk exposure of the total balance sheet, for example, by enabling us to diversify certain features of the Mortgage Purchase Program such as its preponderance of loans with 30-year terms. | ||
§ | Earnings enhancement. Earnings from the investments portfolio help provide a competitive return to stockholders and help accommodate members’ preferences to hold voluntary capital in excess of the minimum required to capitalize Advances and mortgage loans. The additional earnings also enhance our commitment to Housing and Community Investment. | ||
§ | Support for 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, and management of, the liquidity, interest rate, and options risks inherent in mortgages. |
9
Table of Contents
10
Table of Contents
§ | servicing costs (which equal 0.25 percent for conventional loans and 0.44 percent for FHA loans and which are retained by the servicer of the loan); | ||
§ | the cost of Supplemental Mortgage Insurance; | ||
§ | the net amortization or accretion of premiums or discounts on purchased loans; and | ||
§ | the net amortization or accretion of fair value adjustments (recorded in accordance with SFAS 133) for the commitments under the Mortgage Purchase Program. |
§ | to finance and hedge intermediate- and long-term fixed-rate Advances and mortgage assets; and | ||
§ | to finance short-term and adjustable-rate Advances by synthetically transforming the Consolidated Bonds to adjustable-rate LIBOR funding through the execution of interest rate swaps. |
11
Table of Contents
§ | cash; | ||
§ | obligations of, or fully guaranteed by, the United States; | ||
§ | secured Advances; | ||
§ | mortgages, which have any guaranty, insurance, or commitment from the United States or any agency of the United States; | ||
§ | investments described in Section 16(a) of the Act, which, among other items, include securities that a fiduciary or trust fund may purchase under the laws of the state in which the FHLBank is located; and | ||
§ | other securities with long-term ratings of Aaa by Moody’s or AAA by Standard & Poor’s. |
12
Table of Contents
13
Table of Contents
§ | We are subject to risk-based capital rules, as detailed in Item 2.’s “Role of the Capital Plan in Risk Management” section (page 128). Only permanent capital can satisfy the risk-based capital requirement. | ||
§ | We must maintain a four percent minimum capital-to-assets ratio. | ||
§ | We must maintain a five percent minimum leverage ratio of capital divided by total assets, which includes a 1.5 weighting factor applicable to permanent capital. |
§ | if we are not, or would not be upon the redemption or repurchase, in compliance with any of these capital requirements; or | ||
§ | if the Finance Board, or our Board of Directors, determines that we have incurred, or are likely to incur, losses that result in, or are likely to result in, charges against capital, even if we comply with our minimum capital requirements. |
14
Table of Contents
Mission Asset Activity | Minimum Percentage | Maximum Percentage | ||||||
Advances | 2% | 4% | ||||||
GFR | 2 | 4 | ||||||
Mortgage Purchase Program | 0 | 4 |
§ | total membership stock; | ||
§ | total activity stock calculated at the member’s maximum activity stock percentages; | ||
§ | excess shares created by the most recently paid dividend that are reserved for exclusive use by each member for one quarter after the dividend payment; and | ||
§ | shares subject to redemption and withdrawal notices. |
15
Table of Contents
§ | carries out its housing and community development finance mission; | ||
§ | remains adequately capitalized; | ||
§ | operates in a safe and sound manner; and | ||
§ | complies with its Regulations. |
16
Table of Contents
§ | The Board of Directors must adopt, have in place at all times, and review annually a Risk Management Policy that establishes policies and procedures addressing exposure to market risk, credit risk, liquidity risk, operational risk, and business risk. These policies and procedures must comply with all Finance Board Regulations and must be designed to achieve continuing compliance with safe and sound operations. The Risk Management Policy also requires senior management to perform annually, in writing, a thorough assessment of all material risks, which our Board of Directors reviews. | ||
§ | The Board of Directors must have in place at all times a Strategic Business Plan that describes how our business activities will achieve our mission and manage our risks. |
17
Table of Contents
§ | by defining permissible lines of business; | ||
§ | by limiting the kinds of assets we may hold and the kinds of hedging and financing arrangements we may use; | ||
§ | by strictly limiting the amount of market risk, credit risk, liquidity risk, and accounting risk to which we may be exposed; | ||
§ | by requiring strict adherence to internal controls, adequate insurance coverage, and tested and high quality information systems; and | ||
§ | by emphasizing the anticipation of and responses to business risk. |
§ | hedge market risk exposure; and | ||
§ | provide intermediation between the preferences of the capital markets for the kinds of debt securities in which they want to invest and the preferences of member institutions for the kinds of Advances they want to hold and the kinds of mortgage loans they want to sell. |
§ | movements in interest rates; | ||
§ | changes in actual and expected mortgage prepayment speeds; | ||
§ | changes in the relationship between short-term and long-term interest rates (i.e., the slope of the Treasury, LIBOR, and Consolidated Obligation yield curves); | ||
§ | changes in the relationship between FHLBank System debt spreads and other interest rate indices, primarily LIBOR and U.S. Treasury yields; | ||
§ | changes in the relationship between FHLBank System debt spreads and mortgage yields; and | ||
§ | changes in the relationship between fixed rates and variable rates. |
§ | preserve a favorable interest rate spread between the yield of an asset and the cost of the supporting Consolidated Obligations. Without the use of derivatives, this interest rate spread could be reduced or eliminated if the structures of the asset and Consolidated Obligations do not have similar characteristics such as maturity and the level and characteristic of the interest rates (e.g., fixed/variable terms); | ||
§ | reduce funding costs by executing a derivative concurrently with the issuance of Consolidated Bonds; | ||
§ | fund and hedge below-market rate Advances (e.g., Convertible Rate Advances) where our members have sold us options embedded within the Advances; |
18
Table of Contents
§ | mitigate the adverse earnings effects from the contraction or extension of the cash flows from mortgage assets with prepayment options we have sold; and | ||
§ | hedge the market risk associated with timing differences in the settlement of commitments in the Mortgage Purchase Program and Consolidated Obligations. |
September 30, | December 31, | |||||||||||||||
2005 | 2004 | 2003 | 2002 | |||||||||||||
Commercial Banks | 500 | 516 | 521 | 521 | ||||||||||||
Thrifts and Savings Banks | 142 | 148 | 157 | 164 | ||||||||||||
Credit Unions | 94 | 87 | 75 | 61 | ||||||||||||
Insurance Companies | 4 | 3 | 2 | 1 | ||||||||||||
Total Member Stockholders | 740 | 754 | 755 | 747 | ||||||||||||
19
Table of Contents
September 30, | December 31, | |||||||||||||||
Member Asset Size(1) | 2005 | 2004 | 2003 | 2002 | ||||||||||||
Up to $100 million | 299 | 301 | 310 | 336 | ||||||||||||
> $100 up to $500 million | 361 | 370 | 368 | 338 | ||||||||||||
> $500 million up to $1 billion | 41 | 41 | 39 | 36 | ||||||||||||
> $1 billion | 39 | 42 | 38 | 37 | ||||||||||||
Total Member Stockholders | 740 | 754 | 755 | 747 | ||||||||||||
(1) | The above September 30, 2005 membership numbers reflect members’ assets as of June 30, 2005 except for insurance company members whose assets are as of December 31, 2004. |
20
Table of Contents
§ | interest rates offered on debt; | ||
§ | the market’s perception of the credit quality of the issuing institutions regarding the ability to make timely principal and interest payments; | ||
§ | the market’s perception of the liquidity of debt; | ||
§ | the types of debt structures offered, including the issuance of debt linked with the concurrent execution of derivatives; and | ||
§ | the effectiveness of marketing and executing the various debt structures to meet investors’ needs for diversification in their holdings. |
21
Table of Contents
22
Table of Contents
September 30, | December 31, | |||||||
(Dollars in thousands) | 2005 | 2004 | ||||||
BALANCE SHEET DATA: | ||||||||
Total assets | $ | 75,848,282 | $ | 76,576,528 | ||||
Advances | 43,409,426 | 41,300,942 | ||||||
Mortgage loans held for portfolio, net | 8,674,290 | 8,370,495 | ||||||
Investments(1) | 23,477,834 | 26,654,963 | ||||||
Deposits | 950,982 | 1,031,641 | ||||||
Consolidated Obligations(2) | 69,772,166 | 70,450,665 | ||||||
Mandatorily redeemable capital stock | 410,119 | 34,344 | ||||||
Affordable Housing Program | 87,218 | 88,919 | ||||||
Payable to REFCORP | 13,953 | 15,110 | ||||||
Capital stock — Class B putable | 3,456,794 | 3,799,852 | ||||||
Retained earnings | 194,766 | 167,540 | ||||||
Total capital | 3,649,300 | 3,963,163 |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
INCOME STATEMENT DATA: | ||||||||||||||||
Net interest income(3) | $ | 87,964 | $ | 88,703 | $ | 245,027 | $ | 220,502 | ||||||||
Provision for credit losses on mortgage loans | — | — | — | — | ||||||||||||
Net interest income after provision for credit losses on mortgage loans | 87,964 | 88,703 | 245,027 | 220,502 | ||||||||||||
Other income | (1,164 | ) | 9,349 | 439 | 32,791 | |||||||||||
Other expenses | 10,280 | 8,818 | 31,527 | 27,516 | ||||||||||||
Income before assessments | 76,520 | 89,234 | 213,939 | 225,777 | ||||||||||||
Assessments | 20,707 | 23,708 | 57,360 | 59,981 | ||||||||||||
Net income | $ | 55,813 | $ | 65,526 | �� | $ | 156,579 | $ | 165,796 | |||||||
Dividends paid in stock | $ | 41,910 | $ | 39,260 | $ | 129,241 | $ | 111,400 | ||||||||
Dividends paid in cash | 38 | 37 | 112 | 205 | ||||||||||||
Total dividends paid | $ | 41,948 | $ | 39,297 | $ | 129,353 | $ | 111,605 | ||||||||
Weighted average dividend rate(5) | 4.88 | % | 4.25 | % | 4.75 | % | 4.08 | % | ||||||||
Return on average equity | 6.13 | 6.83 | 5.46 | 5.87 | ||||||||||||
Return on average assets | 0.29 | 0.31 | 0.26 | 0.28 | ||||||||||||
Average net interest margin (3) (6) | 0.45 | 0.43 | 0.41 | 0.37 | ||||||||||||
Capital-to-assets ratio at period end | 4.81 | 4.65 | 4.81 | 4.65 | ||||||||||||
Average capital-to-assets ratio | 4.67 | 4.59 | 4.83 | 4.70 | ||||||||||||
Operating expense to average assets | 0.044 | 0.034 | 0.042 | 0.036 |
(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) | The 12 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 of all 12 FHLBanks was as follows (in millions): |
September 30, | December 31, | |||||||
2005 | 2004 | |||||||
$ | 920,369 | $ | 869,242 | |||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
SFAS 133 basis adjustments(4) | $ | (363 | ) | $ | (9,511 | ) | $ | (1,082 | ) | $ | (28,329 | ) | ||||
Prepayment fees on Advances, net | 97 | 32,478 | 294 | 49,626 | ||||||||||||
Total | $ | (266 | ) | $ | 22,967 | $ | (788 | ) | $ | 21,297 | ||||||
(4) | Amortization of basis adjustments on modified hedge relationships decreased “Net interest income” and increased the gain on SFAS 133 market adjustments in “Other income” by these amounts. |
(5) | Weighted average dividend rates are dividends paid in stock and cash divided by the average number of shares of capital stock eligible for dividends. |
(6) | Net interest margin is net interest income as a percentage of average earning assets. |
23
Table of Contents
Year Ended December 31 | ||||||||||||||||||||
(Dollars in thousands) | 2004 | 2003 | 2002 | 2001 | 2000 | |||||||||||||||
BALANCE SHEET DATA: | ||||||||||||||||||||
Total assets | $ | 76,576,528 | $ | 77,143,574 | $ | 71,070,673 | $ | 61,300,722 | $ | 55,617,469 | ||||||||||
Advances | 41,300,942 | 43,129,143 | 40,063,195 | 35,222,620 | 31,934,509 | |||||||||||||||
Mortgage loans held for portfolio, net | 8,370,495 | 8,101,158 | 3,766,684 | 566,334 | 30,654 | |||||||||||||||
Loans to other FHLBanks | — | — | — | 100,000 | — | |||||||||||||||
Investments(1) | 26,654,963 | 25,610,320 | 26,808,247 | 25,084,378 | 23,146,579 | |||||||||||||||
Deposits | 1,031,641 | 1,413,057 | 2,332,278 | 1,635,000 | 1,135,858 | |||||||||||||||
Consolidated Obligations(2) | 70,450,665 | 69,804,325 | 63,033,687 | 55,167,796 | 51,076,233 | |||||||||||||||
Mandatory redeemable capital stock | 34,344 | — | — | — | — | |||||||||||||||
Affordable Housing Program | 88,919 | 85,632 | 82,213 | 75,183 | 65,957 | |||||||||||||||
Payable to REFCORP | 15,110 | 11,770 | 12,432 | 11,912 | 13,043 | |||||||||||||||
Capital stock — putable | 3,799,852 | 3,645,253 | 3,548,001 | 3,197,393 | 2,789,202 | |||||||||||||||
Retained earnings | 167,540 | 92,150 | 64,708 | 42,940 | 52,201 | |||||||||||||||
Total capital | 3,963,163 | 3,733,673 | 3,611,244 | 3,239,811 | 2,840,692 | |||||||||||||||
INCOME STATEMENT DATA: | ||||||||||||||||||||
Net interest income(3) | $ | 301,758 | $ | 227,668 | $ | 264,646 | $ | 273,262 | $ | 281,566 | ||||||||||
Provision for credit losses on mortgage loans | — | — | — | — | — | |||||||||||||||
Net interest income after provision for credit losses on mortgage loans | 301,758 | 227,668 | 264,646 | 273,262 | 281,566 | |||||||||||||||
Other income | 43,876 | 36,026 | 4,226 | 7,235 | 3,579 | |||||||||||||||
Other expenses | 36,448 | 31,287 | 25,942 | 22,886 | 22,249 | |||||||||||||||
Income before assessments | 309,186 | 232,407 | 242,930 | 257,611 | 262,896 | |||||||||||||||
Assessments | 82,139 | 61,659 | 64,451 | 68,100 | 69,748 | |||||||||||||||
Income before cumulative effect of change in accounting principle | 227,047 | 170,748 | 178,479 | 189,511 | 193,148 | |||||||||||||||
Cumulative effect of change in accounting principle (5) | — | — | — | (926 | ) | — | ||||||||||||||
Net income | $ | 227,047 | $ | 170,748 | $ | 178,479 | $ | 188,585 | $ | 193,148 | ||||||||||
Dividends paid in stock | $ | 151,415 | $ | 143,153 | $ | 156,268 | $ | 197,662 | $ | 186,342 | ||||||||||
Dividends paid in cash | 242 | 153 | 443 | 184 | 161 | |||||||||||||||
Total dividends paid | $ | 151,657 | $ | 143,306 | $ | 156,711 | $ | 197,846 | $ | 186,503 | ||||||||||
Weighted average dividend rate(6) | 4.13 | % | 4.00 | % | 4.63 | % | 6.72 | % | 7.35 | % | ||||||||||
Return on average equity | 5.97 | 4.66 | 5.17 | 6.22 | 7.25 | |||||||||||||||
Return on average assets | 0.28 | 0.22 | 0.27 | 0.32 | 0.36 | |||||||||||||||
Average net interest margin (3) (7) | 0.38 | 0.30 | 0.40 | 0.47 | 0.54 | |||||||||||||||
Capital-to-assets ratio at period end | 5.18 | 4.84 | 5.08 | 5.29 | 5.11 | |||||||||||||||
Operating expense to average assets | 0.035 | 0.032 | 0.032 | 0.034 | 0.036 |
(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) | The 12 FHLBanks have joint and several liability for the par amount of all of the Consolidated Obligations issued on their behalves. See Note 12 of the Notes to Financial Statements for additional detail and discussion related to Consolidated Obligations (page 199). The par amount of the outstanding Consolidated Obligations of all 12 FHLBanks was as follows (in millions): |
$ | 869,242 | $ | 759,529 | $ | 680,695 | $ | 637,332 | $ | 614,065 | |||||||||||||
(3) | Includes Advances-related items of (in thousands): | |||||||||||||||||||||
SFAS 133 basis adjustments(4) Prepayment fees on Advances, net | $ | (37,560 69,244 | ) | $ | (24,718 29,817 | ) | $ | — 26,341 | $ | — 2,474 | $ | — 757 | ||||||||||
Total | $ | 31,684 | $ | 5,099 | $ | 26,341 | $ | 2,474 | $ | 757 | ||||||||||||
(4) | Amortization of basis adjustments on modified hedge relationships decreased “Net interest income” and increased the gain on SFAS 133 market adjustments in “Other income” by these amounts. |
(5) | We adopted SFAS 133 as of January 1, 2001, and recorded a net gain of $2.1 million on trading securities and a $3.0 million net realized and unrealized loss on derivatives and hedging activities. |
(6) | Weighted average dividend rates are dividends paid in stock and cash divided by the average number of shares of capital stock eligible for dividends. |
(7) | Net interest margin is net interest income as a percentage of average earning assets. |
24
Table of Contents
26 | ||||||||
For the Three- and Nine-Month Periods Ended September 30, 2005 and 2004 | ||||||||
27 | ||||||||
29 | ||||||||
29 | ||||||||
31 | ||||||||
43 | ||||||||
55 | ||||||||
For the Years Ended December 31, 2004, 2003, and 2002 | ||||||||
66 | ||||||||
67 | ||||||||
68 | ||||||||
69 | ||||||||
71 | ||||||||
89 | ||||||||
105 | ||||||||
106 | ||||||||
130 | ||||||||
EX-3.1 | ||||||||
EX-3.2 | ||||||||
EX-4 | ||||||||
EX-10.1.A | ||||||||
EX-10.1.B | ||||||||
EX-10.2 | ||||||||
EX-10.3 | ||||||||
EX-10.4 | ||||||||
EX-10.5 | ||||||||
EX-10.6 | ||||||||
EX-10.7 | ||||||||
EX-10.8 | ||||||||
EX-12 |
25
Table of Contents
§ | the effects of economic and market conditions on demand for Advances and mortgage assets, including changes in economic growth, interest rates, interest rate spreads, interest rate volatility, mortgage origination and prepayment activity; | ||
§ | the demand for Advances resulting from changes in members’ merger and consolidation activity, deposit flows and credit demands; | ||
§ | political events, including legislative, regulatory, judicial, or other developments that could affect the FHLBank, our members, counterparties, and/or investors in the FHLBank System’s Consolidated Obligations; | ||
§ | competitive forces, including those related to other sources of funding available to members, purchases of mortgage loans and issuance of Consolidated Obligations; | ||
§ | the ability to attract and retain skilled individuals; | ||
§ | the ability to sufficiently develop and support technology and information systems to effectively manage the risks we face; | ||
§ | changes in investor demand for Consolidated Obligations and/or in the terms of derivatives; | ||
§ | the timing and volume of market activity; | ||
§ | the ability to successfully manage new products and services; | ||
§ | the volatility of market prices, rates, and indices that could affect the value of collateral we hold as security for member obligations and/or for counterparties to derivatives; | ||
§ | the risk of loss arising from litigation filed against us or one or more of the other FHLBanks; and | ||
§ | inflation and deflation. |
26
Table of Contents
27
Table of Contents
28
Table of Contents
Nine Months Ended | Three Months Ended | ||||||||||||||||||
September 30, 2005 | September 30, 2005 | ||||||||||||||||||
Average | Ending | Average | Ending | ||||||||||||||||
Federal funds target | 2.93 | % | 3.75 | % | 3.42 | % | 3.75 | % | |||||||||||
3-month LIBOR | 3.30 | 4.07 | 3.77 | 4.07 | |||||||||||||||
2-year U.S. Treasury | 3.67 | 4.17 | 3.94 | 4.17 | |||||||||||||||
5-year U.S. Treasury | 3.92 | 4.19 | 4.02 | 4.19 | |||||||||||||||
10-year U.S. Treasury | 4.21 | 4.33 | 4.20 | 4.33 | |||||||||||||||
15-year mortgage current coupon(1) | 4.80 | 5.08 | 4.89 | 5.08 | |||||||||||||||
30-year mortgage current coupon(1) | 5.26 | 5.52 | 5.34 | 5.52 |
Year Ended | Nine Months Ended | ||||||||||||||||||
December 31, 2004 | September 30, 2004 | ||||||||||||||||||
Average | Ending | Average | Ending | ||||||||||||||||
Federal funds target | 1.34 | % | 2.25 | % | 1.14 | % | 1.75 | % | |||||||||||
3-month LIBOR | 1.62 | 2.56 | 1.39 | 2.02 | |||||||||||||||
2-year U.S. Treasury | 2.36 | 3.07 | 2.21 | 2.61 | |||||||||||||||
5-year U.S. Treasury | 3.41 | 3.61 | 3.39 | 3.37 | |||||||||||||||
10-year U.S. Treasury | 4.26 | 4.22 | 4.29 | 4.12 | |||||||||||||||
15-year mortgage current coupon(1) | 4.63 | 4.62 | 4.65 | 4.59 | |||||||||||||||
30-year mortgage current coupon(1) | 5.30 | 5.25 | 5.34 | 5.25 |
(1) | Simple average of Fannie Mae and Freddie Mac mortgage-backed securities current coupon rates. |
29
Table of Contents
§ | earnings from the investment of capital increased; | ||
§ | actual mortgage prepayment speeds (which are strongly affected by the historical evolution of interest rates, especially long-term interest rates) relative to retirement of Consolidated Obligations slowed, on average, during the second half of 2004 and the first nine months of 2005, compared with 2003 and the first half of 2004, although they were still faster in 2005 than retirements of related debt; | ||
§ | the book yields on new mortgage assets compared to the cost of new Consolidated Obligations decreased; and | ||
§ | the rising short-term interest rates and flatter yield curve prompted us, beginning in the second half of 2004, to reduce our market risk exposure to potential significant increases in long-term interest rates, in part because the flatter yield curve lowered the opportunity cost of reducing our market risk exposure (in terms of foregone earnings from mismatched funding). |
30
Table of Contents
September 30, 2005 | December 31, 2004 | September 30, 2004 | September 30, 2005 | |||||||||||||||||||||||||||||||||||||
% of | % of | % of | Change From | Change From | ||||||||||||||||||||||||||||||||||||
Total | Total | Total | December 31, 2004 | September 30, 2004 | ||||||||||||||||||||||||||||||||||||
Balance | Assets | Balance | Assets | Balance | Assets | Amount | Pct | Amount | Pct | |||||||||||||||||||||||||||||||
Advances | ||||||||||||||||||||||||||||||||||||||||
Principal | $ | 43,253 | 57.0 | % | $ | 40,919 | 53.4 | % | $ | 44,997 | 54.3 | % | $ | 2,334 | 5.7 | % | $ | (1,744 | ) | (3.9 | )% | |||||||||||||||||||
Other items(1) | 156 | 0.2 | 382 | 0.6 | 652 | 0.8 | (226 | ) | (59.2 | ) | (496 | ) | (76.1 | ) | ||||||||||||||||||||||||||
Total book value | 43,409 | 57.2 | 41,301 | 54.0 | 45,649 | 55.1 | 2,108 | 5.1 | (2,240 | ) | (4.9 | ) | ||||||||||||||||||||||||||||
Mortgage loans held for portfolio | �� | |||||||||||||||||||||||||||||||||||||||
Principal | 8,581 | 11.3 | 8,272 | 10.8 | 8,127 | 9.8 | 309 | 3.7 | 454 | 5.6 | ||||||||||||||||||||||||||||||
Other items | 93 | 0.1 | 99 | 0.1 | 100 | 0.2 | (6 | ) | (6.1 | ) | (7 | ) | (7.0 | ) | ||||||||||||||||||||||||||
Total book value | 8,674 | 11.4 | 8,371 | 10.9 | 8,227 | 10.0 | 303 | 3.6 | 447 | 5.4 | ||||||||||||||||||||||||||||||
Investments | ||||||||||||||||||||||||||||||||||||||||
Mortgage-backed securities | ||||||||||||||||||||||||||||||||||||||||
Principal | 11,877 | 15.7 | 11,659 | 15.3 | 11,645 | 14.1 | 218 | 1.9 | 232 | 2.0 | ||||||||||||||||||||||||||||||
Other items | 16 | — | 23 | — | 26 | — | (7 | ) | (30.4 | ) | (10 | ) | (38.5 | ) | ||||||||||||||||||||||||||
Total book value | 11,893 | 15.7 | 11,682 | 15.3 | 11,671 | 14.1 | 211 | 1.8 | 222 | 1.9 | ||||||||||||||||||||||||||||||
Short-term money market | ||||||||||||||||||||||||||||||||||||||||
Principal | 11,557 | 15.3 | 14,939 | 19.5 | 16,968 | 20.5 | (3,382 | ) | (22.6 | ) | (5,411 | ) | (31.9 | ) | ||||||||||||||||||||||||||
Other items | (3 | ) | — | (4 | ) | — | (3 | ) | — | 1 | 25.0 | — | — | |||||||||||||||||||||||||||
Total book value | 11,554 | 15.3 | 14,935 | 19.5 | 16,965 | 20.5 | (3,381 | ) | (22.6 | ) | (5,411 | ) | (31.9 | ) | ||||||||||||||||||||||||||
Other long-term investments | 31 | — | 38 | — | 38 | — | (7 | ) | (18.4 | ) | (7 | ) | (18.4 | ) | ||||||||||||||||||||||||||
Total investments | 23,478 | 31.0 | 26,655 | 34.8 | 28,674 | 34.6 | (3,177 | ) | (11.9 | ) | (5,196 | ) | (18.1 | ) | ||||||||||||||||||||||||||
Total earning assets | 75,561 | 99.6 | 76,327 | 99.7 | 82,550 | 99.7 | (766 | ) | (1.0 | ) | (6,989 | ) | (8.5 | ) | ||||||||||||||||||||||||||
Other assets | 287 | 0.4 | 250 | 0.3 | 247 | 0.3 | 37 | 14.8 | 40 | 16.2 | ||||||||||||||||||||||||||||||
Total assets | $ | 75,848 | 100.0 | % | $ | 76,577 | 100.0 | % | $ | 82,797 | 100.0 | % | $ | (729 | ) | (1.0 | ) | $ | (6,949 | ) | (8.4 | ) | ||||||||||||||||||
Other Business Activity (Notional) | ||||||||||||||||||||||||||||||||||||||||
Letters of Credit | $ | 1,374 | $ | 1,415 | $ | 1,945 | $ | (41 | ) | (2.9 | ) | $ | (571 | ) | (29.4 | ) | ||||||||||||||||||||||||
Mandatory Delivery Contracts | $ | 66 | $ | 75 | $ | 115 | $ | (9 | ) | (12.0 | ) | $ | (49 | ) | (42.6 | ) | ||||||||||||||||||||||||
Total Mission Asset Activity(2)(Principal and Notional) | $ | 53,274 | 70.2 | % | $ | 50,681 | 66.2 | % | $ | 55,184 | 66.6 | % | $ | 2,593 | 5.1 | $ | (1,910 | ) | (3.5 | ) | ||||||||||||||||||||
(1) | The majority of these balances are SFAS 133-related basis adjustments. | |
(2) | Includes Advances, mortgage loans held for portfolio, Letters of Credit and Mandatory Delivery Contracts. |
31
Table of Contents
Nine Months Ended | Year Ended | Nine Months Ended | September 30, 2005 | |||||||||||||||||||||||||||||||||||||
September 30, 2005 | December 31, 2004 | September 30, 2004 | Change From | Change From | ||||||||||||||||||||||||||||||||||||
% of | % of | % of | Year Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||
Total | Total | Total | December 31, 2004 | September 30, 2004 | ||||||||||||||||||||||||||||||||||||
Balance | Assets | Balance | Assets | Balance | Assets | Amount | Pct | Amount | Pct | |||||||||||||||||||||||||||||||
Advances | ||||||||||||||||||||||||||||||||||||||||
Principal | $ | 45,057 | 56.7 | % | $ | 44,688 | 55.5 | % | $ | 44,510 | 55.5 | % | $ | 369 | 0.8 | % | $ | 547 | 1.2 | % | ||||||||||||||||||||
Other items(1) | 272 | 0.4 | 878 | 1.1 | 974 | 1.2 | (606 | ) | (69.0 | ) | (702 | ) | (72.1 | ) | ||||||||||||||||||||||||||
Total book value | 45,329 | 57.1 | 45,566 | 56.6 | 45,484 | 56.7 | (237 | ) | (0.5 | ) | (155 | ) | (0.3 | ) | ||||||||||||||||||||||||||
Mortgage loans held for portfolio | ||||||||||||||||||||||||||||||||||||||||
Principal | 8,311 | 10.5 | 8,092 | 10.1 | 8,087 | 10.1 | 219 | 2.7 | 224 | 2.8 | ||||||||||||||||||||||||||||||
Other items | 95 | 0.1 | 106 | 0.1 | 108 | 0.1 | (11 | ) | (10.4 | ) | (13 | ) | (12.0 | ) | ||||||||||||||||||||||||||
Total book value | 8,406 | 10.6 | 8,198 | 10.2 | 8,195 | 10.2 | 208 | 2.5 | 211 | 2.6 | ||||||||||||||||||||||||||||||
Investments | ||||||||||||||||||||||||||||||||||||||||
Mortgage-backed securities | ||||||||||||||||||||||||||||||||||||||||
Principal | 11,907 | 15.0 | 11,168 | 13.9 | 11,031 | 13.8 | 739 | 6.6 | 876 | 7.9 | ||||||||||||||||||||||||||||||
Other items | 19 | — | 27 | — | 28 | — | (8 | ) | (29.6 | ) | (9 | ) | (32.1 | ) | ||||||||||||||||||||||||||
Total book value | 11,926 | 15.0 | 11,195 | 13.9 | 11,059 | 13.8 | 731 | 6.5 | 867 | 7.8 | ||||||||||||||||||||||||||||||
Short-term money market | ||||||||||||||||||||||||||||||||||||||||
Principal | 13,481 | 17.0 | 15,189 | 18.9 | 15,079 | 18.8 | (1,708 | ) | (11.2 | ) | (1,598 | ) | (10.6 | ) | ||||||||||||||||||||||||||
Other items | (3 | ) | — | (1 | ) | — | (1 | ) | — | (2 | ) | (200.0 | ) | (2 | ) | (200.0 | ) | |||||||||||||||||||||||
Total book value | 13,478 | 17.0 | 15,188 | 18.9 | 15,078 | 18.8 | (1,710 | ) | (11.3 | ) | (1,600 | ) | (10.6 | ) | ||||||||||||||||||||||||||
Other long-term investments | 34 | — | 42 | 0.1 | 43 | 0.1 | (8 | ) | (19.0 | ) | (9 | ) | (20.9 | ) | ||||||||||||||||||||||||||
Total investments | 25,438 | 32.0 | 26,425 | 32.9 | 26,180 | 32.7 | (987 | ) | (3.7 | ) | (742 | ) | (2.8 | ) | ||||||||||||||||||||||||||
Loans to other FHLBanks | 13 | — | 57 | 0.1 | 62 | 0.1 | (44 | ) | (77.2 | ) | (49 | ) | (79.0 | ) | ||||||||||||||||||||||||||
Total earning assets | 79,186 | 99.7 | 80,246 | 99.8 | 79,921 | 99.7 | (1,060 | ) | (1.3 | ) | (735 | ) | (0.9 | ) | ||||||||||||||||||||||||||
Other assets | 255 | 0.3 | 249 | 0.2 | 252 | 0.3 | 6 | 2.4 | 3 | 1.2 | ||||||||||||||||||||||||||||||
Total assets | $ | 79,441 | 100.0 | % | $ | 80,495 | 100.0 | % | $ | 80,173 | 100.0 | % | $ | (1,054 | ) | (1.3 | ) | $ | (732 | ) | (0.9 | ) | ||||||||||||||||||
Other Business Activity (Notional) | ||||||||||||||||||||||||||||||||||||||||
Letters of Credit | $ | 1,419 | $ | 1,803 | $ | 1,795 | $ | (384 | ) | (21.3 | ) | $ | (376 | ) | (20.9 | ) | ||||||||||||||||||||||||
Mandatory Delivery Contracts | $ | 166 | $ | 210 | $ | 229 | $ | (44 | ) | (21.0 | ) | $ | (63 | ) | (27.5 | ) | ||||||||||||||||||||||||
Total Mission Asset Activity(2)(Principal and Notional) | $ | 54,953 | 69.2 | % | $ | 54,793 | 68.1 | % | $ | 54,621 | 68.1 | % | $ | 160 | 0.3 | $ | 332 | 0.6 | ||||||||||||||||||||||
(1) | The majority of these balances are SFAS 133-related basis adjustments. | |
(2) | Includes Advances, mortgage loans held for portfolio, Letters of Credit and Mandatory Delivery Contracts. |
§ | principal balance outstanding of Advances; | ||
§ | the notional principal amount outstanding of Letters of Credit; | ||
§ | the principal balance outstanding in the Mortgage Purchase Program; and | ||
§ | the notional principal amount outstanding of Mandatory Delivery Contracts. |
32
Table of Contents
September 30, 2005 | June 30, 2005 | March 31, 2005 | ||||||||||||||||||||||
(Dollars in millions) | Balance | Percent(1) | Balance | Percent(1) | Balance | Percent(1) | ||||||||||||||||||
Short-Term and Adjustable-Rate | ||||||||||||||||||||||||
REPO/Cash Management | $ | 9,604.3 | 22.2 | % | $ | 9,240.4 | 21.8 | % | $ | 10,234.0 | 22.8 | % | ||||||||||||
LIBOR | 18,994.0 | 43.9 | 18,345.4 | 43.4 | 20,313.4 | 45.3 | ||||||||||||||||||
Total | 28,598.3 | 66.1 | 27,585.8 | 65.2 | 30,547.4 | 68.1 | ||||||||||||||||||
Long-Term Fixed Rate | ||||||||||||||||||||||||
Regular Fixed-Rate | 4,737.2 | 11.0 | 4,677.3 | 11.1 | 4,390.7 | 9.8 | ||||||||||||||||||
Convertible Rate(2) | 7,274.7 | 16.8 | 7,372.7 | 17.4 | 7,387.7 | 16.5 | ||||||||||||||||||
Mortgage-Related | 2,152.1 | 5.0 | 2,187.2 | 5.2 | 2,138.7 | 4.9 | ||||||||||||||||||
Total | 14,164.0 | 32.8 | 14,237.2 | 33.7 | 13,917.1 | 31.2 | ||||||||||||||||||
Other Advances | 491.0 | 1.1 | 458.8 | 1.1 | 335.4 | 0.7 | ||||||||||||||||||
Total Advances Principal | 43,253.3 | 100.0 | % | 42,281.8 | 100.0 | % | 44,799.9 | 100.0 | % | |||||||||||||||
Other Items | 156.1 | 295.3 | 199.6 | |||||||||||||||||||||
Total Advances Book Value | $ | 43,409.4 | $ | 42,577.1 | $ | 44,999.5 | ||||||||||||||||||
(1) | As a percentage of total Advances principal. | |
(2) | Before related interest rate swaps executed to hedge these Advances. |
December 31, 2004 | September 30, 2004 | |||||||||||||||
(Dollars in millions) | Balance | Percent(1) | Balance | Percent(1) | ||||||||||||
Short-Term and Adjustable-Rate | ||||||||||||||||
REPO/Cash Management | $ | 8,524.9 | 20.8 | % | $ | 10,620.5 | 23.6 | % | ||||||||
LIBOR | 18,123.9 | 44.3 | 18,190.2 | 40.4 | ||||||||||||
Total | 26,648.8 | 65.1 | 28,810.7 | 64.0 | ||||||||||||
Long-Term Fixed Rate | ||||||||||||||||
Regular Fixed-Rate | 4,431.5 | 10.9 | 3,869.9 | 8.6 | ||||||||||||
Convertible Rate(2) | 7,395.2 | 18.1 | 9,855.3 | 21.9 | ||||||||||||
Mortgage-Related | 2,146.8 | 5.2 | 2,151.0 | 4.8 | ||||||||||||
Total | 13,973.5 | 34.2 | 15,876.2 | 35.3 | ||||||||||||
Other Advances | 296.9 | 0.7 | 310.6 | 0.7 | ||||||||||||
Total Advances Principal | 40,919.2 | 100.0 | % | 44,997.5 | 100.0 | % | ||||||||||
Other Items | 381.7 | 651.7 | ||||||||||||||
Total Advances Book Value | $ | 41,300.9 | $ | 45,649.2 | ||||||||||||
(1) | As a percentage of total Advances principal. | |
(2) | Before related interest rate swaps executed to hedge these Advances. |
33
Table of Contents
September 30, 2005 | ||||||||
(Dollars in millions) | Weighted Average | |||||||
Balance | Interest Rate | |||||||
Charter One Bank, N.A.(1) | $ | 9,652 | 3.67 | % | ||||
U.S. Bank, N.A. | 4,509 | 3.81 | ||||||
Ohio Savings Bank | 3,923 | 4.02 | ||||||
National City Bank | 3,254 | 4.06 | ||||||
Fifth Third Bank | 3,045 | 4.02 | ||||||
Total of Top 5 | $ | 24,383 | 3.85 | |||||
Total Advances (Principal) | $ | 43,253 | 4.02 | |||||
Top 5 Percent of Total | 56 | % | ||||||
(1) | Charles J. Koch, Chairman of the Board of Charter One Bank, is also a director (Chair) of the FHLBank. Advances made to Charter One Bank were on the same terms and rates available to other members with similar financial conditions. |
34
Table of Contents
December 31, 2004 | ||||||||
(Dollars in millions) | Weighted Average | |||||||
Balance | Interest Rate | |||||||
Charter One Bank, N.A.(1) | $ | 8,527 | 2.17 | % | ||||
Fifth Third Bank | 4,345 | 2.77 | ||||||
Ohio Savings Bank | 3,912 | 3.02 | ||||||
U.S. Bank, N.A. | 3,208 | 2.28 | ||||||
National Bank of Commerce | 2,589 | 2.88 | ||||||
Total of Top 5 | $ | 22,581 | 2.53 | |||||
Total Advances (Principal) | $ | 40,919 | 3.00 | |||||
Top 5 Percent of Total | 55 | % | ||||||
(1) | Charles J. Koch, Chairman of the Board of Charter One Bank, is also a director (Chair) of the FHLBank. Advances made to Charter One Bank were on the same terms and rates available to other members with similar financial conditions. |
35
Table of Contents
Conventional | FHA (Gov’t | |||||||||||||||||||||||
(Dollars in millions) | 30 Year | 20 Year | 15 Year | Total | Guaranteed) | Total | ||||||||||||||||||
4.00 — 4.50 Percent | $ | — | $ | — | $ | 0.8 | $ | 0.8 | $ | — | $ | 0.8 | ||||||||||||
> 4.50 — 5.00 Percent | 0.3 | 1.1 | 418.4 | 419.8 | 1.8 | 421.6 | ||||||||||||||||||
> 5.00 — 5.50 Percent | 256.1 | 143.2 | 852.7 | 1,252.0 | 159.2 | 1,411.2 | ||||||||||||||||||
> 5.50 — 6.00 Percent | 2,949.5 | 191.9 | 334.1 | 3,475.5 | 820.9 | 4,296.4 | ||||||||||||||||||
> 6.00 — 6.50 Percent | 1,150.7 | 40.0 | 41.4 | 1,232.1 | 808.4 | 2,040.5 | ||||||||||||||||||
> 6.50 Percent | 211.6 | 4.1 | 15.4 | 231.1 | 245.8 | 476.9 | ||||||||||||||||||
Total | $ | 4,568.2 | $ | 380.3 | $ | 1,662.8 | $ | 6,611.3 | $ | 2,036.1 | $ | 8,647.4 | ||||||||||||
Percent of Total | 52.9 | % | 4.4 | % | 19.2 | % | 76.5 | % | 23.5 | % | 100.0 | % | ||||||||||||
Weighted Average | ||||||||||||||||||||||||
Mortgage Note Rate | 5.85 | % | 5.58 | % | 5.21 | % | 5.67 | % | 5.95 | % | 5.74 | % |
36
Table of Contents
September 30, 2005 | December 31, 2004 | |||||||||||||||
Unpaid | Unpaid | |||||||||||||||
(Dollars in millions) | Principal | % of Total | Principal | % of Total | ||||||||||||
National City Bank | $ | 4,768 | 55.6 | % | $ | 4,349 | 52.6 | % | ||||||||
Union Savings Bank | 2,229 | 26.0 | 2,257 | 27.3 | ||||||||||||
Total | $ | 6,997 | 81.6 | % | $ | 6,606 | 79.9 | % | ||||||||
§ | the reduction in capital from our $125 million repurchase of member excess stock in June 2005; and |
§ | a relatively large movement in stock from the GAAP capital stock account to the mandatorily redeemable capital stock account. |
37
Table of Contents
(In millions) | September 30, 2005 | December 31, 2004 | ||||||
Security Type | ||||||||
Collateralized mortgage obligations | $ | 6,460.0 | $ | 6,641.4 | ||||
Pass-throughs(1) | 5,417.5 | 5,018.0 | ||||||
Total | $ | 11,877.5 | $ | 11,659.4 | ||||
Collateral Type | ||||||||
15-year collateral | $ | 7,673.0 | $ | 7,199.7 | ||||
30-year collateral | 4,204.5 | 4,459.7 | ||||||
Total | $ | 11,877.5 | $ | 11,659.4 | ||||
Issuer | ||||||||
GSE residential mortgage-backed securities | $ | 11,312.0 | $ | 10,957.7 | ||||
Agency residential mortgage-backed securities | 60.4 | 101.6 | ||||||
Private-label residential mortgage-backed securities | 505.1 | 600.1 | ||||||
Total | $ | 11,877.5 | $ | 11,659.4 | ||||
(1) | All but $6.7 million and $8.4 million of the pass-throughs were 15-year fixed-rate pass-throughs at September 30, 2005 and December 31, 2004, respectively. The other amounts were 30-year adjustable-rate mortgages. |
38
Table of Contents
Nine Months Ended | Year Ended | Nine Months Ended | ||||||||||||||||||||||
(In millions) | September 30, 2005 | December 31, 2004 | September 30, 2004 | |||||||||||||||||||||
Ending | Average | Ending | Average | Ending | Average | |||||||||||||||||||
Balance | Balance | Balance | Balance | Balance | Balance | |||||||||||||||||||
Consolidated Discount Notes: | ||||||||||||||||||||||||
Par | $ | 17,504 | $ | 22,294 | $ | 18,660 | $ | 28,407 | $ | 28,027 | $ | 29,676 | ||||||||||||
Discount | (52 | ) | (48 | ) | (28 | ) | (30 | ) | (37 | ) | (27 | ) | ||||||||||||
Total Consolidated Discount Notes | 17,452 | 22,246 | 18,632 | 28,377 | 27,990 | 29,649 | ||||||||||||||||||
Consolidated Bonds (Par): | ||||||||||||||||||||||||
Unswapped fixed-rate | 26,123 | 25,499 | 24,715 | 23,633 | 24,856 | 23,238 | ||||||||||||||||||
Unswapped adjustable-rate | 3,015 | 2,413 | 2,030 | 1,254 | 1,070 | 1,203 | ||||||||||||||||||
Swapped fixed-rate | 23,506 | 23,398 | 25,235 | 20,740 | 22,603 | 19,477 | ||||||||||||||||||
Total Par Consolidated Bonds | 52,644 | 51,310 | 51,980 | 45,627 | 48,529 | 43,918 | ||||||||||||||||||
Other items(1) | (324 | ) | (238 | ) | (161 | ) | (17 | ) | (60 | ) | 10 | |||||||||||||
Total Consolidated Bonds | 52,320 | 51,072 | 51,819 | 45,610 | 48,469 | 43,928 | ||||||||||||||||||
Total Consolidated Obligations | $ | 69,772 | $ | 73,318 | $ | 70,451 | $ | 73,987 | $ | 76,459 | $ | 73,577 | ||||||||||||
(1) | Includes unamortized premiums/discounts, SFAS 133 and other basis adjustments. |
§ | Spreads on noncallable Bonds with long-term maturities showed generally modest trend reductions. |
§ | Long-term callable Bonds showed modest trend reductions in the second half of 2004 and moderately wider spreads beginning in the first quarter of 2005. |
§ | Intermediate-term noncallable and callable Bonds showed relatively constant spreads. |
39
Table of Contents
§ | The daily volatility of spreads did not appear to exhibit a discernible trend over the last five quarters. Spreads on Callable Bonds consistently tend to be more volatile than those on noncallable Bonds. |
(In millions) | September 2005 | December 2004 | ||||||
Total Par Value Eligible Assets | $ | 75,305 | $ | 75,829 | ||||
Total Par Value Consolidated Obligations | (70,148 | ) | (70,640 | ) | ||||
Excess Eligible Assets | $ | 5,157 | $ | 5,189 | ||||
40
Table of Contents
Nine Months Ended | Year Ended | Nine Months Ended | ||||||||||||||||||||||
September 30, 2005 | December 31, 2004 | September 30, 2004 | ||||||||||||||||||||||
(In millions) | Period End | Average | Period End | Average | Period End | Average | ||||||||||||||||||
GAAP Capital Stock | $ | 3,456.8 | $ | 3,642.6 | $ | 3,799.9 | $ | 3,675.3 | $ | 3,705.4 | $ | 3,650.1 | ||||||||||||
SFAS 150-Related Stock | 410.1 | 204.3 | 34.3 | 32.6 | 33.6 | 32.3 | ||||||||||||||||||
Regulatory Capital Stock | 3,866.9 | 3,846.9 | 3,834.2 | 3,707.9 | 3,739.0 | 3,682.4 | ||||||||||||||||||
Retained Earnings | 194.8 | 194.9 | 167.5 | 133.3 | 146.3 | 123.8 | ||||||||||||||||||
Regulatory Capital | $ | 4,061.7 | $ | 4,041.8 | $ | 4,001.7 | $ | 3,841.2 | $ | 3,885.3 | $ | 3,806.2 | ||||||||||||
Nine Months Ended | Year Ended | Nine Months Ended | ||||||||||||||||||||||
September 30, 2005 | December 31, 2004 | September 30, 2004 | ||||||||||||||||||||||
GAAP | Regulatory | GAAP | Regulatory | GAAP | Regulatory | |||||||||||||||||||
Average | 4.83 | % | 5.09 | % | 4.73 | % | 4.77 | % | 4.70 | % | 4.75 | % | ||||||||||||
Period End | 4.81 | 5.36 | 5.18 | 5.23 | 4.65 | 4.69 |
(In millions) | ||||
Regulatory stock balance at December 31, 2004 | $ | 3,834.2 | ||
Stock purchases: | ||||
Membership stock | 15.9 | |||
Activity stock | 7.0 | |||
Quarterly stock dividends | 136.6 | |||
Stock repurchases: | ||||
Excess stock redemption requests | (125.7 | ) | ||
Other stock repurchases | (1.1 | ) | ||
Regulatory stock balance at September 30, 2005 | $ | 3,866.9 | ||
41
Table of Contents
(In millions) | September 30, 2005 | June 30, 2005 | March 31, 2005 | December 31, 2004 | ||||||||||||
FHLBank cooperative excess stock | $ | 651.1 | $ | 637.7 | $ | 882.2 | $ | 1,010.6 | ||||||||
Cooperative utilization of capital stock | $ | 363.9 | $ | 311.1 | $ | 300.9 | $ | 323.6 | ||||||||
Mission Asset Activity capitalized with cooperative stock | $ | 9,097.0 | $ | 7,777.5 | $ | 7,522.5 | $ | 8,090.0 | ||||||||
42
Table of Contents
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(In thousands) | 2005 | 2004 | 2005 | 2004 | ||||||||||||
Net interest income | $ | 87,964 | $ | 88,703 | $ | 245,027 | $ | 220,502 | ||||||||
Securities (losses) gains | (76 | ) | 17 | (111 | ) | (5 | ) | |||||||||
Net realized and unrealized (losses) gains on derivatives and hedging activities | (2,264 | ) | 8,163 | (2,811 | ) | 29,563 | ||||||||||
Other non-interest income | 1,176 | 1,169 | 3,361 | 3,233 | ||||||||||||
Total non-interest income | (1,164 | ) | 9,349 | 439 | 32,791 | |||||||||||
Total revenue | 86,800 | 98,052 | 245,466 | 253,293 | ||||||||||||
Total other expenses | (10,280 | ) | (8,818 | ) | (31,527 | ) | (27,516 | ) | ||||||||
Assessments | (20,707 | ) | (23,708 | ) | (57,360 | ) | (59,981 | ) | ||||||||
Net income | $ | 55,813 | $ | 65,526 | $ | 156,579 | $ | 165,796 | ||||||||
43
Table of Contents
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Net interest income | 7.06 | % | 6.79 | % | 6.26 | % | 5.74 | % | ||||||||
Securities (losses) gains | (0.01 | ) | — | — | — | |||||||||||
Net realized and unrealized (losses) gains on derivatives and hedging activities | (0.18 | ) | 0.63 | (0.07 | ) | 0.77 | ||||||||||
Other non-interest income | 0.09 | 0.09 | 0.08 | 0.08 | ||||||||||||
Total non-interest income | (0.10 | ) | 0.72 | 0.01 | 0.85 | |||||||||||
Total revenue | 6.96 | 7.51 | 6.27 | 6.59 | ||||||||||||
Total other expenses | (0.83 | ) | (0.68 | ) | (0.81 | ) | (0.72 | ) | ||||||||
Total ROE | 6.13 | % | 6.83 | % | 5.46 | % | 5.87 | % | ||||||||
Change for the Three Months | Change for the Nine Months | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
(Dollars in thousands) | 2005 vs. 2004 | 2005 vs. 2004 | ||||||||||||||
Amount | Percent | Amount | Percent | |||||||||||||
Total interest income | $ | 230,436 | 44.1 | % | $ | 712,034 | 51.7 | % | ||||||||
Total interest expense | 231,175 | 53.2 | 687,509 | 59.5 | ||||||||||||
Net interest income | (739 | ) | (0.8 | ) | 24,525 | 11.1 | ||||||||||
Service fees | (73 | ) | (17.3 | ) | (9 | ) | (0.7 | ) | ||||||||
Net (losses) gains on trading securities | (96 | ) | (480.0 | ) | (109 | ) | (5,450.0 | ) | ||||||||
Net realized losses from sale of other securities | 3 | 100.0 | 3 | 100.0 | ||||||||||||
Net realized and unrealized (losses) gains on derivatives and hedging activities | (10,427 | ) | (127.7 | ) | (32,374 | ) | (109.5 | ) | ||||||||
Other, net | 80 | 10.7 | 137 | 6.8 | ||||||||||||
Total non-interest income | (10,513 | ) | (112.5 | ) | (32,352 | ) | (98.7 | ) | ||||||||
Salaries and benefits | 1,080 | 24.0 | 2,726 | 20.2 | ||||||||||||
Other operating expenses | 358 | 13.3 | 1,047 | 13.2 | ||||||||||||
Finance Board | 87 | 11.7 | 262 | 11.8 | ||||||||||||
Office of Finance | (74 | ) | (16.1 | ) | (6 | ) | (0.4 | ) | ||||||||
Other expenses | 11 | 2.6 | (18 | ) | (0.8 | ) | ||||||||||
Total other expenses | 1,462 | 16.6 | 4,011 | 14.6 | ||||||||||||
Affordable Housing Program | (573 | ) | (7.8 | ) | (316 | ) | (1.7 | ) | ||||||||
REFCORP | (2,428 | ) | (14.8 | ) | (2,305 | ) | (5.6 | ) | ||||||||
Total assessments | (3,001 | ) | (12.7 | ) | (2,621 | ) | (4.4 | ) | ||||||||
Net income | $ | (9,713 | ) | (14.8 | ) | $ | (9,217 | ) | (5.6 | ) | ||||||
§ | Net interest income was $24.5 million (11.1 percent) higher, which improved the ROE contribution by 0.52 percentage points (from 5.74 percent to 6.26 percent). The net interest income change was comprised of the following factors, which are also shown in the table in the “Components of Net Interest Income” section and discussed throughout the “Net Interest Income” section: |
1. | Advance prepayment fees decreased $49.3 million. |
44
Table of Contents
2. | The amount of reclassification of the amortization of SFAS 133-related market value basis adjustments on modified Advance hedging relationships decreased $27.2 million, which had a positive effect on net interest income. This amortization decreases Net interest income and increases the gain on SFAS 133-related market value adjustments in “Other Income” by the same amount, resulting in no effect on net income. Most of the modified Advances subject to this reclassification were prepaid by members in the fourth quarter of 2004. | ||
3. | The net effect of other components of the net interest rate spread increased $8.8 million. | ||
4. | Earnings from investment of interest-free capital were $37.8 million higher. |
§ | The SFAS 133 market-value adjustment (referenced in the income statement as “Net realized and unrealized (loss) gain on derivatives and hedging activities”) decreased $32.4 million. Of this decrease, $27.2 million occurred from the smaller amount of reclassified amortization related to modified Advances (discussed above). Excluding this reclassification, the SFAS 133 account decreased by $5.2 million, which represented the change in the ineffectiveness from the application of SFAS 133, as shown in the table in the “Effect of SFAS 133 on Earnings” section. | ||
§ | Total other expenses were $4.0 million (14.6 percent) higher, which decreased ROE by 0.09 percentage points. |
§ | Net interest income was $0.7 million (0.8 percent) lower. This immaterial change, combined with the $206.1 million reduction in the average balance of GAAP capital (shown on the table on the next page), resulted in an improvement in the ROE contribution by 0.27 percentage points (from 6.79 percent to 7.06 percent). The net interest income change was comprised of the following factors: |
1. | Advance prepayment fees decreased $32.4 million. | ||
2. | The amount of reclassification of the amortization of SFAS 133-related market value basis adjustments on modified Advance hedging relationships decreased $9.2 million. | ||
3. | The net effect of other components of the net interest rate spread increased $9.0 million. | ||
4. | Earnings from investment of interest-free capital were $13.5 million higher. |
§ | The SFAS 133 market-value adjustment decreased $10.4 million. Of this decrease, $9.2 million occurred from the smaller amount of reclassified amortization related to modified Advances. Excluding this reclassification, the SFAS 133 account decreased $1.2 million, which represented the change in ineffectiveness from the application of SFAS 133. | ||
§ | Total other expenses were $1.5 million (16.6 percent) higher, which decreased ROE by 0.15 percentage points. |
45
Table of Contents
(Dollars in thousands)
Three Months Ended | Three Months Ended | |||||||||||||||||||||||
September 30, 2005 | September 30, 2004 | |||||||||||||||||||||||
Average | Average | Average | Average | |||||||||||||||||||||
Balance | Interest | Rate | Balance | Interest | Rate | |||||||||||||||||||
Assets | ||||||||||||||||||||||||
Advances | $ | 44,585,081 | $ | 402,495 | 3.58 | % | $ | 48,882,816 | $ | 245,049 | 1.99 | % | ||||||||||||
Mortgage loans held for portfolio(1) | 8,686,672 | 113,571 | 5.19 | 8,212,237 | 99,354 | 4.81 | ||||||||||||||||||
Federal funds sold and securities purchased under resale agreements | 7,010,127 | 62,263 | 3.52 | 6,279,247 | 23,173 | 1.47 | ||||||||||||||||||
Other short-term investments (2) | 1,126,135 | 9,853 | 3.47 | 1,003,906 | 3,764 | 1.49 | ||||||||||||||||||
Interest-bearing deposits in banks | 3,575,711 | 31,093 | 3.45 | 7,098,704 | 25,421 | 1.42 | ||||||||||||||||||
Mortgage-backed securities | 11,948,737 | 133,493 | 4.43 | 11,329,761 | 125,452 | 4.41 | ||||||||||||||||||
Other long-term investments | 32,003 | 449 | 5.57 | 39,578 | 541 | 5.44 | ||||||||||||||||||
Loans to other FHLBanks | 12,978 | 111 | 3.39 | 37,162 | 138 | 1.48 | ||||||||||||||||||
Total earning assets | 76,977,444 | 753,328 | 3.88 | 82,883,411 | 522,892 | 2.51 | ||||||||||||||||||
Allowance for credit losses on mortgage loans | — | — | ||||||||||||||||||||||
Other assets | 269,359 | 234,592 | ||||||||||||||||||||||
Total assets | $ | 77,246,803 | $ | 83,118,003 | ||||||||||||||||||||
Liabilities and Capital | ||||||||||||||||||||||||
Term deposits | $ | 121,129 | $ | 1,019 | 3.34 | $ | 130,729 | $ | 470 | 1.43 | ||||||||||||||
Other interest-bearing deposits | 805,065 | 6,314 | 3.11 | 955,258 | 2,589 | 1.08 | ||||||||||||||||||
Short-term borrowings | 19,915,342 | 168,128 | 3.35 | 29,120,193 | 102,501 | 1.40 | ||||||||||||||||||
Unswapped fixed-rate Consolidated Bonds | 26,113,550 | 266,760 | 4.05 | 24,346,681 | 244,627 | 4.00 | ||||||||||||||||||
Unswapped adjustable-rate Consolidated Bonds | 3,020,040 | 25,869 | 3.40 | 1,510,218 | 5,585 | 1.47 | ||||||||||||||||||
Swapped Consolidated Bonds | 22,166,816 | 192,298 | 3.44 | 21,910,679 | 77,990 | 1.42 | ||||||||||||||||||
Mandatorily redeemable capital stock | 405,042 | 4,976 | 4.87 | 39,318 | 419 | 4.24 | ||||||||||||||||||
Other borrowings | — | — | — | 2,628 | 8 | 1.21 | ||||||||||||||||||
Total interest-bearing liabilities | 72,546,984 | 665,364 | 3.64 | 78,015,704 | 434,189 | 2.21 | ||||||||||||||||||
Non interest-bearing deposits | — | — | ||||||||||||||||||||||
Other liabilities | 1,088,995 | 1,285,421 | ||||||||||||||||||||||
Total capital | 3,610,824 | 3,816,878 | ||||||||||||||||||||||
Total liabilities and capital | $ | 77,246,803 | $ | 83,118,003 | ||||||||||||||||||||
Net interest rate spread | 0.24 | % | 0.30 | % | ||||||||||||||||||||
Net interest income and net interest margin | $ | 87,964 | 0.45 | % | $ | 88,703 | 0.43 | % | ||||||||||||||||
Average interest-earnings assets to interest-bearing liabilities | 106.11 | % | 106.24 | % | ||||||||||||||||||||
(1) | Nonperforming loans are included in average balances used to determine average rate. There were none for the periods displayed. | |
(2) | The investment securities classified as available-for-sale are 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. |
46
Table of Contents
(Dollars in thousands)
Nine Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 30, 2005 | September 30, 2004 | |||||||||||||||||||||||
Average | Average | Average | Average | |||||||||||||||||||||
Balance | Interest | Rate | Balance | Interest | Rate | |||||||||||||||||||
Assets | ||||||||||||||||||||||||
Advances | $ | 45,329,347 | $ | 1,072,704 | 3.16 | % | $ | 45,483,408 | $ | 569,421 | 1.67 | % | ||||||||||||
Mortgage loans held for portfolio(1) | 8,405,673 | 314,327 | 5.00 | 8,195,396 | 306,206 | 4.99 | ||||||||||||||||||
Federal funds sold and securities purchased under resale agreements | 7,448,733 | 167,411 | 3.00 | 7,133,949 | 62,335 | 1.17 | ||||||||||||||||||
Other short-term investments(2) | 1,351,958 | 30,190 | 2.99 | 1,043,489 | 9,411 | 1.20 | ||||||||||||||||||
Interest-bearing deposits in banks | 4,677,782 | 102,978 | 2.94 | 6,900,811 | 62,170 | 1.20 | ||||||||||||||||||
Mortgage-backed securities | 11,925,819 | 399,503 | 4.48 | 11,058,801 | 364,927 | 4.41 | ||||||||||||||||||
Other long-term investments | 33,804 | 1,412 | 5.58 | 43,052 | 1,769 | 5.49 | ||||||||||||||||||
Loans to other FHLBanks | 12,744 | 281 | 2.95 | 61,821 | 533 | 1.15 | ||||||||||||||||||
Total earning assets | 79,185,860 | 2,088,806 | 3.53 | 79,920,727 | 1,376,772 | 2.30 | ||||||||||||||||||
Allowance for credit losses on mortgage loans | — | — | ||||||||||||||||||||||
Other assets | 254,751 | 251,932 | ||||||||||||||||||||||
Total assets | $ | 79,440,611 | $ | 80,172,659 | ||||||||||||||||||||
Liabilities and Capital | ||||||||||||||||||||||||
Term deposits | $ | 164,110 | $ | 3,548 | 2.89 | $ | 172,591 | $ | 1,526 | 1.18 | ||||||||||||||
Other interest-bearing deposits | 834,800 | 16,314 | 2.61 | 1,104,890 | 6,787 | 0.82 | ||||||||||||||||||
Short-term borrowings | 22,246,072 | 478,072 | 2.87 | 29,648,630 | 254,294 | 1.15 | ||||||||||||||||||
Unswapped fixed-rate Consolidated Bonds | 25,495,701 | 773,692 | 4.06 | 23,244,297 | 711,797 | 4.09 | ||||||||||||||||||
Unswapped adjustable-rate Consolidated Bonds | 2,412,871 | 54,690 | 3.03 | 1,203,212 | 10,945 | 1.22 | ||||||||||||||||||
Swapped Consolidated Bonds | 23,163,612 | 510,097 | 2.94 | 19,480,924 | 169,851 | 1.16 | ||||||||||||||||||
Mandatorily redeemable capital stock | 204,428 | 7,365 | 4.82 | 32,281 | 991 | 4.10 | ||||||||||||||||||
Other borrowings | 37 | 1 | 3.61 | 10,120 | 79 | 1.04 | ||||||||||||||||||
Total interest-bearing liabilities | 74,521,631 | 1,843,779 | 3.31 | 74,896,945 | 1,156,270 | 2.06 | ||||||||||||||||||
Non interest-bearing deposits | — | — | ||||||||||||||||||||||
Other liabilities | 1,085,458 | 1,505,511 | ||||||||||||||||||||||
Total capital | 3,833,522 | 3,770,203 | ||||||||||||||||||||||
Total liabilities and capital | $ | 79,440,611 | $ | 80,172,659 | ||||||||||||||||||||
Net interest rate spread | 0.22 | % | 0.24 | % | ||||||||||||||||||||
Net interest income and net interest margin | $ | 245,027 | 0.41 | % | $ | 220,502 | 0.37 | % | ||||||||||||||||
Average interest-earnings assets to interest-bearing liabilities | 106.26 | % | 106.71 | % | ||||||||||||||||||||
(1) | Nonperforming loans are included in average balances used to determine average rate. There were none for the periods displayed. | |
(2) | The investment securities classified as available-for-sale are 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. |
§ | Net interest rate spread. This component equals total earning assets multiplied by the difference between the book yield on interest-earning assets and the book cost of interest-bearing liabilities. |
47
Table of Contents
§ | Earnings from investment of interest-free capital. We must invest our interest-free funds (primarily capital) to generate earnings. As interest rates change, asset yields also move but there is no corresponding change in the interest-free funds that finance a portion of interest-earning assets. We tend to invest a majority of our capital in short-term assets to help ensure that earnings correlate with short-term interest rates. |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
(Dollars in thousands) | 2005 | 2004 | 2005 | 2004 | ||||||||||||||||||||||||||||
Pct of | Pct of | Pct of | Pct of | |||||||||||||||||||||||||||||
Earning | Earning | Earning | Earning | |||||||||||||||||||||||||||||
Amount | Assets | Amount | Assets | Amount | Assets | Amount | Assets | |||||||||||||||||||||||||
Components of net interest rate spread: | ||||||||||||||||||||||||||||||||
Other components of net interest rate spread | $ | 47,460 | 0.24 | % | $ | 38,431 | 0.19 | % | $ | 130,415 | 0.22 | % | $ | 121,647 | 0.21 | % | ||||||||||||||||
Prepayment fees on Advances, net(1) | 97 | — | 32,478 | 0.16 | 294 | — | 49,626 | 0.08 | ||||||||||||||||||||||||
Amortization of basis adjustments on modified Advance hedges(1) | (363 | ) | — | (9,511 | ) | (0.05 | ) | (1,082 | ) | — | (28,329 | ) | (0.05 | ) | ||||||||||||||||||
Total net interest rate spread(2) | 47,194 | 0.24 | 61,398 | 0.30 | 129,627 | 0.22 | 142,944 | 0.24 | ||||||||||||||||||||||||
Earnings from investment of interest-free capital(3) | 40,770 | 0.21 | 27,305 | 0.13 | 115,400 | 0.19 | 77,558 | 0.13 | ||||||||||||||||||||||||
Total net interest income/net interest margin | $ | 87,964 | 0.45 | % | $ | 88,703 | 0.43 | % | $ | 245,027 | 0.41 | % | $ | 220,502 | 0.37 | % | ||||||||||||||||
(1) | These components of net interest rate spread have been segregated here to display their relative impact. | |
(2) | Total earning assets times (book yield on interest-earning assets minus book cost of interest-bearing liabilities). | |
(3) | Average cost of interest-bearing liabilities times (amount of interest-earning assets minus amount of interest-bearing liabilities). |
§ | Higher Short-Term Interest Rates.Higher short-term interest rates had three independent effects: |
1. | Favorable: As discussed above, because we tend to invest a majority of our capital in short-term and/or adjustable-rate assets, the increase in short-term interest rates improved earnings. | ||
2. | Unfavorable: Because we tend to have more long-term unswapped assets than long-term unswapped Consolidated Bonds (i.e., a positive long-term gap as discussed in the next bullet point) and a positive duration of equity (as discussed in the “Market Risk” section of “Quantitative and Qualitative Disclosures about Risk Management”), earnings decreased as short-term interest rates rose. | ||
3. | Favorable: Because we have a large positive overnight asset gap (i.e., we have a large amount of overnight Federal funds and overnight-maturity REPO Advances compared to overnight funding sources, earnings increased as short-term interest rates rose. |
48
Table of Contents
§ | Lower mortgage spreads.Unfavorable: Net book spreads to funding costs earned on new mortgage assets began to narrow in the second half of 2003. This narrowing continued throughout 2004 and accelerated in the second quarter of 2005. Net mortgage spreads recovered slightly in the third quarter of 2005, but they were still well below the spreads on the majority of mortgage assets outstanding. Because we purchased new mortgage assets in 2004 and the first nine months of 2005 at lower spreads compared to the spreads on the mortgage assets being paid down, the reduction in earnings was cumulatively larger in 2005 than 2004. The trend of lower net book spreads occurred due to, among other reasons, the flatter market yield curve, a decrease in the supply of fixed-rate mortgages, and a reduction in the market’s expected volatility of future interest rates. | ||
§ | Advance Composition.Unfavorable: There was a large shift (of approximately $7.5 billion) in the composition of Advances from Convertible Rate Advances towards LIBOR and other Advance Programs throughout 2004, which was maintained in 2005. This change in Advance composition lowered earnings because Convertible Rate Advances tend to have wider net spreads to funding costs than LIBOR Advances and many other Advance programs. | ||
§ | Changes in the Market Risk/Return Profile.Unfavorable:Beginning in the second half of 2004, we adjusted our market risk/return profile by decreasing the exposure of our market value of equity and the long-term earnings risk of the entire balance sheet to significant changes in market interest rates. As the short-term interest rates increased and the market yield curve flattened, there was a smaller opportunity cost, in terms of lower earnings, from reducing market risk exposure. This strategy was implemented as a response to the flatter market yield curve and the potential for further interest rate increases in this stage of the business cycle. We implemented the strategy by decreasing the difference between the amount of long-term fixed-rate unswapped assets and long-term fixed-rate unswapped Consolidated Bonds. We also increased the relative percentage amount of noncallable and callable Consolidated Bonds that have long final maturities. | ||
The market risk/return profile can significantly affect the level and volatility of earnings over the short term and long term. Given our cooperative ownership structure and relatively low risk profile, our spreads between asset yields and liability costs tend to be narrow. In order to help pay a competitive dividend return on members’ capital investment, we normally engage in a limited amount of funding of long-term assets with shorter-term liabilities to benefit from the fact that, on average over time, the yield curve has been historically upward sloping. With a market environment of an upward-sloping yield curve, funding long-term assets with shorter-term liabilities raises book spreads while using longer-term liabilities lowers book spreads. | |||
There are two summary measures, among others, of the market risk/return profile. One is the duration of equity, which is normally greater than zero in constant and higher interest rate environments. A greater amount of short funding correlates with a higher duration of equity. Another measure is the “long-term gap,” which is the difference between the principal amount of long-term fixed-rate unswapped assets and the principal amount of long-term fixed-rate unswapped Consolidated Bonds. (We define long-term for this purpose as assets or liabilities with original final maturities of over one year.) The long-term gap has averaged 23 percent of capital since 2002. | |||
The following table presents the average long-term gap (in millions) and the average duration of equity (in years, for a constant interest rate environment) for selected periods. |
Average Gap | Average Duration | |||||||
Full Year 2003 | $ | 83 | 1.20 | |||||
First Nine Months of 2004 | 1,193 | 2.96 | ||||||
Fourth Quarter 2004 | 556 | 1.05 | ||||||
Full Year 2004 | 1,034 | 2.48 | ||||||
First Nine Months of 2005 | 935 | 0.90 |
49
Table of Contents
§ | Maturity of low-rate debt.Unfavorable: In the last quarter of 2004 and the first three quarters of 2005, we retired a large amount of unswapped Consolidated Bonds, which tended to have book costs that were below the average book cost of all outstanding unswapped Bonds. These retired Bonds were issued in 2001-2003 during the low point of the interest rate cycle. To the extent we replaced these retired Bonds with new funding, we had to replace them at higher interest costs due to rising short-term and intermediate-term interest rates. To the extent we did not replace these Bonds (because the related assets experienced a similar, or larger, amount of principal paydowns), there was a resulting increase in the composition of longer-term, higher-rate Bonds. | ||
§ | Reclassification of mandatorily redeemable capital stock.Unfavorable: The GAAP reclassification of mandatorily redeemable capital stock from the capital stock account to a liability, in accordance with SFAS 150, decreased net interest income by $6.4 million. As discussed above in the “Capital Resources” section, the classification of mandatorily redeemable capital stock as a liability augments the dividend rate payable because the expense reduces the REFCORP assessment. | ||
§ | Less net amortization of premiums/discounts and Bond concessions.Favorable: Net amortization on mortgage assets and Consolidated Bonds, in accordance with SFAS 91, was $5.6 million less in the first nine months of 2005 than the same period in 2004. A majority of the decrease was associated with amortization/accretion related to concessions and premium/discounts on Consolidated Bonds. We called fewer Bonds in 2005 than in 2004. |
(In thousands) | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Advances(1) | $ | (23,464 | ) | $ | (108,964 | ) | $ | (99,149 | ) | $ | (389,695 | ) | ||||
Mortgage purchase commitments(2) | 564 | 620 | 1,197 | 1,676 | ||||||||||||
Consolidated Obligations(1) | (14,758 | ) | 71,471 | 2,708 | 252,329 | |||||||||||
Decrease to net interest income | $ | (37,658 | ) | $ | (36,873 | ) | $ | (95,244 | ) | $ | (135,690 | ) | ||||
(1) | Relates to interest rate swap interest. | |
(2) | Relates to the amortization of derivative fair value adjustments. |
§ | a smaller balance of Convertible Rate Advances in 2005, which are most of the Advances we hedged with derivatives; and | ||
§ | an increase in short-term LIBOR interest rates, which raised the interest earned on the adjustable-rate receive leg of the swaps. |
50
Table of Contents
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
(In thousands) | September 30, 2005 over 2004 | September 30, 2005 over 2004 | ||||||||||||||||||||||
Volume | Rate | Total | Volume | Rate | Total | |||||||||||||||||||
Increase (decrease) in interest income | ||||||||||||||||||||||||
Advances | $ | (16,327 | ) | $ | 173,773 | $ | 157,446 | $ | (1,929 | ) | $ | 505,212 | $ | 503,283 | ||||||||||
Mortgage loans held for portfolio | 5,938 | 8,279 | 14,217 | 7,857 | 264 | 8,121 | ||||||||||||||||||
Federal funds sold and securities purchased under resale agreements | 2,204 | 36,886 | 39,090 | 2,751 | 102,325 | 105,076 | ||||||||||||||||||
Other short-term investments | 641 | 5,448 | 6,089 | 2,782 | 17,997 | 20,779 | ||||||||||||||||||
Interest-bearing deposits in banks | (11,582 | ) | 17,254 | 5,672 | (20,027 | ) | 60,835 | 40,808 | ||||||||||||||||
Mortgage-backed securities | 6,853 | 1,188 | 8,041 | 28,611 | 5,965 | 34,576 | ||||||||||||||||||
Other long-term investments | (104 | ) | 12 | (92 | ) | (380 | ) | 23 | (357 | ) | ||||||||||||||
Loans to other FHLBanks | (95 | ) | 68 | (27 | ) | (423 | ) | 171 | (252 | ) | ||||||||||||||
Total | (12,472 | ) | 242,908 | 230,436 | 19,242 | 692,792 | 712,034 | |||||||||||||||||
Increase (decrease) in interest expense | ||||||||||||||||||||||||
Term deposits | (33 | ) | 582 | 549 | (75 | ) | 2,097 | 2,022 | ||||||||||||||||
Other interest-bearing deposits | (483 | ) | 4,208 | 3,725 | (1,659 | ) | 11,186 | 9,527 | ||||||||||||||||
Short-term borrowings | (30,586 | ) | 96,213 | 65,627 | (63,491 | ) | 287,269 | 223,778 | ||||||||||||||||
Unswapped fixed-rate Consolidated Bonds | 17,574 | 4,559 | 22,133 | 68,943 | (7,048 | ) | 61,895 | |||||||||||||||||
Unswapped adjustable-rate Consolidated Bonds | 5,602 | 14,682 | 20,284 | 11,004 | 32,741 | 43,745 | ||||||||||||||||||
Swapped Consolidated Bonds | 4,844 | 109,464 | 114,308 | 32,109 | 308,137 | 340,246 | ||||||||||||||||||
Mandatorily redeemable capital stock | 3,817 | 740 | 4,557 | 5,285 | 1,089 | 6,374 | ||||||||||||||||||
Other borrowings | (8 | ) | — | (8 | ) | (79 | ) | 1 | (78 | ) | ||||||||||||||
Total | 727 | 230,448 | 231,175 | 52,037 | 635,472 | 687,509 | ||||||||||||||||||
Increase (decrease) in net interest income | $ | (13,199 | ) | $ | 12,460 | $ | (739 | ) | $ | (32,795 | ) | $ | 57,320 | $ | 24,525 | |||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(In thousands) | 2005 | 2004 | 2005 | 2004 | ||||||||||||
Other Income | ||||||||||||||||
Service fees | $ | 348 | $ | 421 | $ | 1,220 | $ | 1,229 | ||||||||
Net (loss) gain on trading securities | (76 | ) | 20 | (111 | ) | (2) | ||||||||||
Net loss on other securities | — | (3) | — | (3) | ||||||||||||
Net realized and unrealized (losses) gains on derivatives and hedging activities | (2,264 | ) | 8,163 | (2,811 | ) | 29,563 | ||||||||||
Other non-interest income, net | 828 | 748 | 2,141 | 2,004 | ||||||||||||
Total other income | $ | (1,164 | ) | $ | 9,349 | $ | 439 | $ | 32,791 | |||||||
Other Expense | ||||||||||||||||
Salaries and benefits | $ | 5,578 | $ | 4,498 | $ | 16,192 | $ | 13,466 | ||||||||
Other operating expense | 3,053 | 2,695 | 8,980 | 7,933 | ||||||||||||
Finance Board | 828 | 741 | 2,484 | 2,222 | ||||||||||||
Office of Finance | 385 | 459 | 1,600 | 1,606 | ||||||||||||
Other expenses | 436 | 425 | 2,271 | 2,289 | ||||||||||||
Total other expense | $ | 10,280 | $ | 8,818 | $ | 31,527 | $ | 27,516 | ||||||||
51
Table of Contents
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(In thousands) | 2005 | 2004 | 2005 | 2004 | ||||||||||||
Fair Value Hedge | ||||||||||||||||
Advances(1) | $ | 468 | $ | 9,871 | $ | 981 | $ | 27,848 | ||||||||
Mortgage Purchase Program | — | — | — | — | ||||||||||||
Consolidated Obligations | (2,162 | ) | (2,227 | ) | (3,188 | ) | 1,852 | |||||||||
Total Fair Value Hedge | (1,694 | ) | 7,644 | (2,207 | ) | 29,700 | ||||||||||
Economic Hedge | ||||||||||||||||
Advances | 51 | — | 54 | — | ||||||||||||
Mandatory Delivery Contracts | (4,725 | ) | 1,737 | (118 | ) | (6,578 | ) | |||||||||
To-be-announced Mortgage-Backed Securities Hedges | 4,104 | (1,375 | ) | (540 | ) | 6,340 | ||||||||||
Investments | — | — | — | (56 | ) | |||||||||||
Consolidated Obligations | — | 157 | — | 157 | ||||||||||||
Total Economic Hedge | (570 | ) | 519 | (604 | ) | (137 | ) | |||||||||
Total net realized and unrealized (losses) gains on derivatives and hedging activities | $ | (2,264 | ) | $ | 8,163 | $ | (2,811 | ) | $ | 29,563 | ||||||
(1) | Includes SFAS 133 basis adjustments of $363 and $9,511 in the three months ended September 30, 2005 and 2004, respectively, and $1,082 and $28,329 in the nine months ended September 30, 2005 and 2004, respectively. These amounts increased “Net interest income” and decreased the gain on SFAS 133 market adjustments. |
52
Table of Contents
Traditional | Mortgage | |||||||||||
Member | Purchase | |||||||||||
Finance | Program | Total | ||||||||||
Three Months Ended September 30, 2005 | ||||||||||||
Net interest income | $ | 65,561 | $ | 22,403 | $ | 87,964 | ||||||
Net income | $ | 40,737 | $ | 15,076 | $ | 55,813 | ||||||
Average assets | $ | 67,619,425 | $ | 9,627,378 | $ | 77,246,803 | ||||||
Assumed average capital allocation | $ | 3,158,193 | $ | 452,631 | $ | 3,610,824 | ||||||
Return on Average Assets | 0.24 | % | 0.62 | % | 0.29 | % | ||||||
Return on Average Equity | 5.12 | % | 13.21 | % | 6.13 | % | ||||||
Three Months Ended September 30, 2004 | ||||||||||||
Net interest income | $ | 72,338 | $ | 16,365 | $ | 88,703 | ||||||
Net income | $ | 54,802 | $ | 10,724 | $ | 65,526 | ||||||
Average assets | $ | 74,905,766 | $ | 8,212,237 | $ | 83,118,003 | ||||||
Assumed average capital allocation | $ | 3,437,334 | $ | 379,544 | $ | 3,816,878 | ||||||
Return on Average Assets | 0.29 | % | 0.52 | % | 0.31 | % | ||||||
Return on Average Equity | 6.34 | % | 11.24 | % | 6.83 | % | ||||||
Nine Months Ended September 30, 2005 | ||||||||||||
Net interest income | $ | 191,386 | $ | 53,641 | $ | 245,027 | ||||||
Net income | $ | 121,369 | $ | 35,210 | $ | 156,579 | ||||||
Average assets | $ | 70,240,897 | $ | 9,199,714 | $ | 79,440,611 | ||||||
Assumed average capital allocation | $ | 3,389,176 | $ | 444,346 | $ | 3,833,522 | ||||||
Return on Average Assets | 0.23 | % | 0.51 | % | 0.26 | % | ||||||
Return on Average Equity | 4.79 | % | 10.59 | % | 5.46 | % | ||||||
Nine Months Ended September 30, 2004 | ||||||||||||
Net interest income | $ | 149,496 | $ | 71,006 | $ | 220,502 | ||||||
Net income | $ | 117,591 | $ | 48,205 | $ | 165,796 | ||||||
Average assets | $ | 71,977,263 | $ | 8,195,396 | $ | 80,172,659 | ||||||
Assumed average capital allocation | $ | 3,381,741 | $ | 388,462 | $ | 3,770,203 | ||||||
Return on Average Assets | 0.22 | % | 0.79 | % | 0.28 | % | ||||||
Return on Average Equity | 4.64 | % | 16.58 | % | 5.87 | % | ||||||
Year Ended December 31, 2004 | ||||||||||||
Net interest income | $ | 216,330 | $ | 85,428 | $ | 301,758 | ||||||
Net income | $ | 169,429 | $ | 57,618 | $ | 227,047 | ||||||
Average assets | $ | 72,174,510 | $ | 8,320,169 | $ | 80,494,679 | ||||||
Assumed average capital allocation | $ | 3,407,884 | $ | 396,872 | $ | 3,804,756 | ||||||
Return on Average Assets | 0.24 | % | 0.69 | % | 0.28 | % | ||||||
Return on Average Equity | 4.97 | % | 14.52 | % | 5.97 | % | ||||||
53
Table of Contents
§ | Favorable factors: Earnings increased from the higher short-term interest rate environment. | ||
§ | Unfavorable factors: The cumulative effect of narrower incremental spreads on mortgage-backed securities, the shift towards LIBOR Advances from Convertible Rate Advances, and the significant reduction ($49.3 million) of prepayment fees on Advances in 2005 versus 2004. |
§ | Net book spreads on new mortgage assets were significantly narrower than outstanding mortgage assets. | ||
§ | The strategy to reduce exposure to market risk was implemented primarily in the Mortgage Purchase Program segment because these tend to be our longest term and thus riskiest assets. | ||
§ | We retired a large amount of unswapped Consolidated Bonds (which had been assigned at their issuance to the Mortgage Purchase Program), which tended to have relatively low book costs. In the 12 months after September 30, 2004, $1,576 million of Bonds allocated to this Program were retired with an average book cost of 3.87 percent, compared to $1,773 million of principal paydowns of mortgage assets with an average book yield of 5.15 percent. | ||
§ | The amount of SFAS 91 net premium amortization (including market value adjustments) was approximately the same in the first three quarters of 2004 and the first three quarters of 2005: $19.3 million in the former period and $18.2 million in the latter period. |
54
Table of Contents
55
Table of Contents
56
Table of Contents
(Dollars in millions) | Down 200 | Down 100 | Down 50 | Flat Rates | Up 50 | Up 100 | Up 200 | |||||||||||||||||||||
September 30, 2005 | ||||||||||||||||||||||||||||
Market Value of Equity | $ | 3,947.5 | $ | 4,118.6 | $ | 4,152.5 | $ | 4,136.0 | $ | 4,082.3 | $ | 4,003.8 | $ | 3,822.5 | ||||||||||||||
% Change from Flat Case | (4.6 | )% | (0.4 | )% | 0.4 | % | (1.3 | )% | (3.2 | )% | (7.6 | )% | ||||||||||||||||
Average of Nine Months Ended, September 30, 2005 | ||||||||||||||||||||||||||||
Market Value of Equity | $ | 3,890.6 | $ | 4,097.0 | $ | 4,153.9 | $ | 4,163.4 | $ | 4,124.6 | $ | 4,051.7 | $ | 3,862.5 | ||||||||||||||
% Change from Flat Case | (6.6 | )% | (1.6 | )% | (0.2 | )% | (0.9 | )% | (2.7 | )% | (7.2 | )% | ||||||||||||||||
2004 Year End | ||||||||||||||||||||||||||||
Market Value of Equity | $ | 3,786.9 | $ | 4,040.8 | $ | 4,110.1 | $ | 4,122.6 | $ | 4,082.2 | $ | 4,002.7 | $ | 3,796.1 | ||||||||||||||
% Change from Flat Case | (8.1 | )% | (2.0 | )% | (0.3 | )% | (1.0 | )% | (2.9 | )% | (7.9 | )% | ||||||||||||||||
Average of Nine Months Ended, September 30, 2004 | ||||||||||||||||||||||||||||
Market Value of Equity | $ | 3,645.8 | $ | 3,818.6 | $ | 3,837.1 | $ | 3,799.6 | $ | 3,728.4 | $ | 3,624.0 | $ | 3,372.8 | ||||||||||||||
% Change from Flat Case | (4.0 | )% | 0.5 | % | 1.0 | % | (1.9 | )% | (4.6 | )% | (11.2 | )% |
(In years) | Down 200 | Down 100 | Down 50 | Flat Rates | Up 50 | Up 100 | Up 200 | |||||||||||||||||||||
September 30, 2005 | (4.73 | ) | (2.34 | ) | (0.32 | ) | 1.88 | 3.49 | 4.53 | 5.06 | ||||||||||||||||||
Average of Nine Months Ended September 30, 2005 | (5.72 | ) | (3.62 | ) | (1.51 | ) | 0.90 | 2.97 | 4.31 | 5.25 | ||||||||||||||||||
2004 Year End | (7.16 | ) | (4.49 | ) | (1.82 | ) | 0.85 | 3.13 | 4.67 | 5.60 | ||||||||||||||||||
Average of Nine Months Ended September 30, 2004 | (6.63 | ) | (2.67 | ) | 0.33 | 2.96 | 5.05 | 6.38 | 7.03 |
57
Table of Contents
Down 200 | Down 100 | Down 50 | Flat Rates | Up 50 | Up 100 | Up 200 | ||||||||||||||||||||||
September 30, 2005 | (1.1 | )% | (0.2 | )% | (0.0 | )% | — | (0.2 | )% | (0.5 | )% | (1.3 | )% | |||||||||||||||
Average of Nine Months Ended September 30, 2005 | (1.5 | )% | (0.5 | )% | (0.1 | )% | — | (0.1 | )% | (0.4 | )% | (1.2 | )% | |||||||||||||||
2004 Year End | (1.8 | )% | (0.5 | )% | (0.1 | )% | — | (0.2 | )% | (0.5 | )% | (1.4 | )% |
§ | to synthetically transform long-term fixed-rate callable Consolidated Bonds, which are the type of debt securities the investor community prefers, and to a lesser degree, long-term fixed-rate noncallable Consolidated Bonds, to an adjustable-rate LIBOR funding basis (usually 3-month LIBOR) in order to offer and hedge competitively-priced LIBOR Advances and other short-term Advances; | ||
§ | to hedge below-market fixed rates on, for example, Convertible Rate Advances that have a put option on interest rates permitting, or requiring, us to convert them to adjustable-rate LIBOR Advances (usually after an initial lockout period); | ||
§ | to hedge Regular Fixed-Rate Advances when it may not be advantageous to issue unswapped fixed-rate Consolidated Bonds; | ||
§ | to hedge the interest rate and interest rate options on certain Advances and investments that have caps and/or floors we have purchased; and | ||
§ | to hedge the market risk exposure during the commitment period of Mandatory Delivery Contracts. |
58
Table of Contents
September 30, | December 31, | September 30, | ||||||||||||||
(In millions) | 2005 | 2004 | 2004 | |||||||||||||
Hedged Item | Hedging Instrument | |||||||||||||||
Consolidated Obligations | Interest rate swap | $ | 23,785 | $ | 25,235 | $ | 22,603 | |||||||||
Convertible Advances | Interest rate swap | 7,275 | 7,395 | 9,855 | ||||||||||||
Advances and Investments with purchased caps and/or floors | Interest rate swap(1) | 10 | 14 | 19 | ||||||||||||
Regular Fixed-Rate Advances | Interest rate swap | 240 | 240 | 240 | ||||||||||||
Mandatory Delivery Contracts | Commitments to sell to-be-announced mortgage-backed securities | 41 | 53 | 73 | ||||||||||||
Total based on hedged item(2) | $ | 31,351 | $ | 32,937 | $ | 32,790 |
(1) | On September 30, 2005, these swaps hedged only Advances. | |
(2) | The FHLBank enters into Mandatory Delivery Contracts (commitments to purchase loans) in the normal course of business and economically hedges them with commitments to sell to-be-announced mortgage-backed securities. Therefore, the Mandatory Delivery Contracts (which are derivatives) are the objects of the hedge (the Hedged Item) and are not listed as a Hedging Instrument in this table. |
59
Table of Contents
September 30, | December 31, | September 30, | ||||||||||
(In millions) | 2005 | 2004 | 2004 | |||||||||
Shortcut (Fair Value) Treatment | ||||||||||||
Advances | $ | 7,233 | $ | 7,408 | $ | 7,568 | ||||||
Mortgage Purchase Program | — | — | — | |||||||||
Investments | — | — | — | |||||||||
Consolidated Obligations | 17,415 | 15,325 | 11,978 | |||||||||
Total | 24,648 | 22,733 | 19,546 | |||||||||
Long-haul (Fair Value) Treatment | ||||||||||||
Advances | 282 | 237 | 2,537 | |||||||||
Mandatory Delivery Contracts | — | — | — | |||||||||
Investments | — | — | — | |||||||||
Consolidated Obligations | 6,370 | 9,910 | 10,475 | |||||||||
Total | 6,652 | 10,147 | 13,012 | |||||||||
Economic Hedges | ||||||||||||
Advances | 10 | — | — | |||||||||
Mandatory Delivery Contracts | 66 | 75 | 115 | |||||||||
To-be-announced mortgage-backed securities hedges | 41 | 53 | 73 | |||||||||
Investments | — | 4 | 9 | |||||||||
Consolidated Obligations | — | — | 150 | |||||||||
Total | 117 | 132 | 347 | |||||||||
Total derivatives | $ | 31,417 | $ | 33,012 | $ | 32,905 | ||||||
60
Table of Contents
All Members and Borrowing | ||||||||||||||||||||
Nonmembers | All Borrowers | |||||||||||||||||||
Member | Collateral-Based | Credit | Collateral-Based | |||||||||||||||||
Credit | Borrowing | Services | Borrowing | |||||||||||||||||
Rating | Number | Capacity | Number | Outstanding | Capacity | |||||||||||||||
1 | 276 | $ | 53,660 | 190 | $ | 15,111 | $ | 51,955 | ||||||||||||
2 | 424 | 46,664 | 363 | 27,776 | 45,374 | |||||||||||||||
3 | 38 | 3,836 | 25 | 1,621 | 3,443 | |||||||||||||||
4 | 7 | 37 | 4 | 24 | 35 | |||||||||||||||
5 | 10 | 113 | 10 | 95 | 114 | |||||||||||||||
Total | 755 | $ | 104,310 | 592 | $ | 44,627 | $ | 100,921 | ||||||||||||
Nine Months Ended | Year Ended | |||||||
(In thousands) | September 30, 2005 | December 31, 2004 | ||||||
Lender Risk Account at beginning of period | $ | 37,243 | $ | 30,265 | ||||
Additions | 4,810 | 7,054 | ||||||
Claims | (45 | ) | (55 | ) | ||||
Scheduled distributions | — | (21 | ) | |||||
Lender Risk Account at end of period | $ | 42,008 | $ | 37,243 | ||||
61
Table of Contents
Percent | Percent | |||||
Loan-to-Value | of Principal | FICO Score | of Principal | |||
<= 60% | 23.9% | < 620 | 0.0% | |||
> 60% to 70% | 19.5 | 620 to < 660 | 5.4 | |||
> 70% to 80% | 48.1 | 660 to < 700 | 12.9 | |||
> 80% to 90% | 5.1 | 700 to < 740 | 20.4 | |||
> 90% | 3.4 | >= 740 | 61.3 | |||
Average | 69.00% | 745 |
(In millions) | September 30, 2005 | December 31, 2004 | ||||||
Aaa/AAA | $ | 455.0 | $ | 500.0 | ||||
Aa/AA | 6,327.0 | 8,254.8 | ||||||
A | 4,650.0 | 5,310.0 | ||||||
Total | $ | 11,432.0 | $ | 14,064.8 | ||||
62
Table of Contents
Mark-to- | Market Value | Market Value | Net Market- | |||||||||||||||||||||
Credit Rating | Number of | Notional | Market | of Collateral | of Collateral | to-Market | ||||||||||||||||||
Category | Counterparties | Principal | Valuation | Held | Delivered | Exposure | ||||||||||||||||||
Aaa/AAA | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||
Aa/AA | 8 | 5,842,500 | (43,303 | ) | — | — | (43,303 | ) | ||||||||||||||||
A | 8 | 25,467,825 | (364,073 | ) | — | 124,217 | (239,856 | ) | ||||||||||||||||
Total | 16 | $ | 31,310,325 | $ | (407,376 | ) | $ | — | $ | 124,217 | $ | (283,159 | ) | |||||||||||
§ | Operational liquidity risk is the potential inability to meet anticipated or unanticipated day-to-day liquidity needs through our normal sources of funding. | ||
§ | Contingency liquidity risk is the potential inability to meet liquidity needs because our access to the capital markets is restricted or suspended for a period of time due to a market disruption, operational failure, or real or perceived credit quality problems. |
§ | 100 percent of liabilities maturing or called in the next seven business days (net of liabilities issued, not yet settled); | ||
§ | 100 percent of assets traded, not yet settled, and Advance commitments; | ||
§ | 100 percent of Advances maturing; and | ||
§ | a percentage increase in potential Advances, computed based on recent balance experience. |
63
Table of Contents
2005 | 2004 | |||||||||||||||
Contingency Liquidity Requirement (In millions) | September | June | March | December | ||||||||||||
Total Contingency Liquidity Reserves | $ | 25,264 | $ | 25,638 | $ | 29,560 | $ | 29,877 | ||||||||
Total Requirement | (14,770 | ) | (15,949 | ) | (22,721 | ) | (18,369 | ) | ||||||||
Excess Contingency Liquidity Available | $ | 10,494 | $ | 9,689 | $ | 6,839 | $ | 11,508 | ||||||||
2005 | 2004 | |||||||||||||||
Deposit Reserve Requirement (In millions) | September | June | March | December | ||||||||||||
Total Eligible Deposit Reserves | $ | 40,976 | $ | 38,735 | $ | 42,688 | $ | 39,088 | ||||||||
Total Member Deposits | (951 | ) | (1,035 | ) | (1,068 | ) | (1,032 | ) | ||||||||
Excess Deposit Reserves | $ | 40,025 | $ | 37,700 | $ | 41,620 | $ | 38,056 | ||||||||
§ | 20 percent of the sum of our daily average demand and overnight deposits and other overnight borrowings, plus | ||
§ | 10 percent of the sum of our daily average term deposits, Consolidated Obligations, and other borrowings that mature within one year. |
2005 | 2004 | |||||||||||||||
Daily Liquidity Requirement (In millions) | September | June | March | December | ||||||||||||
Total Eligible Investments | $ | 9,257 | $ | 9,618 | $ | 11,413 | $ | 11,805 | ||||||||
Total Reserve Requirement | (3,275 | ) | (3,461 | ) | (4,174 | ) | (4,990 | ) | ||||||||
Excess Daily Liquidity Reserves | $ | 5,982 | $ | 6,157 | $ | 7,239 | $ | 6,815 | ||||||||
(In millions) | < 1 year | 1<3 years | 3<5 years | > 5 years | Total | |||||||||||||||
Long-term debt (Consolidated Bonds) — par | $ | 12,628.4 | $ | 24,596.6 | $ | 6,814.0 | $ | 8,605.4 | $ | 52,644.4 | ||||||||||
Mandatorily redeemable capital stock | — | 21.6 | 388.5 | — | 410.1 | |||||||||||||||
Other long-term obligations (term deposits) — par | 79.2 | 2.2 | — | — | 81.4 | |||||||||||||||
Capital lease obligations | — | — | — | — | — | |||||||||||||||
Operating leases (includes premises and equipment) | 0.9 | 2.0 | 1.7 | 3.5 | 8.1 | |||||||||||||||
Total Contractual Obligations before off-balance sheet items | 12,708.5 | 24,622.4 | 7,204.2 | 8,608.9 | 53,144.0 | |||||||||||||||
Off-balance sheet items(1) | ||||||||||||||||||||
Commitments to fund additional Advances | 8.3 | — | — | — | 8.3 | |||||||||||||||
Standby Letters of Credit | 1,210.6 | 62.8 | 58.1 | 42.1 | 1,373.6 | |||||||||||||||
Standby bond purchase agreements | — | 39.5 | 212.1 | — | 251.6 | |||||||||||||||
Commitments to fund mortgage loans | 65.8 | — | — | — | 65.8 | |||||||||||||||
Unused line of credits and other commitments | — | — | — | — | — | |||||||||||||||
Consolidated Obligations traded, not yet settled | 162.9 | 935.0 | 100.0 | 60.0 | 1,257.9 | |||||||||||||||
Total off-balance sheet items | 1,447.6 | 1,037.3 | 370.2 | 102.1 | 2,957.2 | |||||||||||||||
Total Contractual Obligations and off-balance sheet items | $ | 14,156.1 | $ | 25,659.7 | $ | 7,574.4 | $ | 8,711.0 | $ | 56,101.2 | ||||||||||
(1) | Represents notional principal amount of related off-balance sheet obligations. |
64
Table of Contents
Monthly Average | ||||||||||||
Quarter End | Nine Months Ended | Year End | ||||||||||
(Dollars in millions) | September 30, 2005 | September 30, 2005 | 2004 | |||||||||
Market risk-based capital | $ | 243.3 | $ | 269.7 | $ | 294.2 | ||||||
Credit risk-based capital | 191.2 | 190.9 | 197.0 | |||||||||
Operational risk-based capital | 130.3 | 138.2 | 147.4 | |||||||||
Total risk-based capital | 564.8 | 598.8 | 638.6 | |||||||||
Total permanent capital | 4,061.7 | 4,041.8 | 4,001.7 | |||||||||
Excess permanent capital | $ | 3,496.9 | $ | 3,443.0 | $ | 3,363.1 | ||||||
Risk-based capital as a percent of permanent capital | 13.9 | % | 14.8 | % | 16.0 | % | ||||||
65
Table of Contents
66
Table of Contents
67
Table of Contents
§ | Mission Asset Activity Levels. There is a potential for Mission Asset Activity balances to experience a systematic decrease because of merger activity in our membership (especially given the relative concentration of our Mission Asset Activity), competitive alternatives for wholesale funding that are increasingly available to members, and the possibility of multi-district membership (although this is not currently permitted). Significantly lower amounts of Mission Asset Activity also would likely decrease earnings and result in a less efficient deployment of capital. | ||
§ | Debt Issuance and Funding Cost. Potential external and internal events could affect the FHLBank System’s ability to issue high quality, cost effective, liquid debt securities. Reductions in the credit ratings for our FHLBank or the FHLBank System’s Consolidated Obligations could have a material adverse impact on the costs of Consolidated Obligations, the ability to attract and maintain members, and the ability to continue to expand Mission Asset Activity. The joint and several obligation of FHLBank System debt securities makes preserving the funding cost of debt securities more difficult, because events beyond our control at other FHLBanks could materially impact the cost, liquidity, and structures of our debt securities. | ||
§ | Volatility of Earnings and Market Risk. Purchase of mortgages under the Mortgage Purchase Program is expected to increase the volatility of our earnings and market risk profile, given the loans’ long-term maturities and prepayment options. We also expect that growth in the Mortgage Purchase Program will continue to raise the average level of earnings. Just as with mortgage-backed securities, in which we have invested for over 10 years, the ability to mitigate this market risk depends primarily on the ability of the FHLBank System to issue long-term debt securities at favorable interest rates and the ability to execute, when appropriate, derivative hedge transactions. | ||
§ | Regulatory/Legislative. New Finance Board Regulations or congressional legislation related to the FHLBank System could restrict our ability to compete for wholesale lending with Advances and for mortgage purchases with the Mortgage Purchase Program. | ||
§ | Interest Rate Movements. Extremely large, rapid, and lasting increases in interest rates and a flatter yield curve, or extremely large, rapid, and lasting decreases in long-term interest rates, could cause earnings to generate uncompetitive dividend returns to member stockholders for an extended period of time, especially if the interest rate changes are accompanied by reductions in Mission Asset Activity. This could reduce the value of membership sufficiently to cause some members to consider withdrawing their membership. |
68
Table of Contents
Year 2004 | Year 2003 | |||||||||||||||
Average | Ending | Average | Ending | |||||||||||||
Overnight Federal funds effective | 1.35 | % | 1.97 | % | 1.13 | % | 0.94 | % | ||||||||
3-month LIBOR | 1.62 | 2.56 | 1.21 | 1.15 | ||||||||||||
2-year U.S. Treasury | 2.36 | 3.07 | 1.63 | 1.82 | ||||||||||||
5-year U.S. Treasury | 3.41 | 3.61 | 2.93 | 3.25 | ||||||||||||
10-year U.S. Treasury | 4.26 | 4.22 | 3.99 | 4.25 | ||||||||||||
15-year mortgage current coupon(1) | 4.63 | 4.62 | 4.40 | 4.53 | ||||||||||||
30-year mortgage current coupon(1) | 5.30 | 5.25 | 5.16 | 5.31 |
Year 2004 by Quarterly Average | ||||||||||||||||
Quarter 1 | Quarter 2 | Quarter 3 | Quarter 4 | |||||||||||||
Overnight Federal funds effective | 1.00 | % | 1.01 | % | 1.43 | % | 1.95 | % | ||||||||
3-month LIBOR | 1.12 | 1.30 | 1.75 | 2.30 | ||||||||||||
2-year U.S. Treasury | 1.66 | 2.43 | 2.53 | 2.80 | ||||||||||||
5-year U.S. Treasury | 2.97 | 3.71 | 3.49 | 3.48 | ||||||||||||
10-year U.S. Treasury | 4.00 | 4.58 | 4.29 | 4.16 | ||||||||||||
15-year mortgage current coupon(1) | 4.28 | 4.96 | 4.70 | 4.56 | ||||||||||||
30-year mortgage current coupon(1) | 5.04 | 5.64 | 5.35 | 5.19 |
(1) | Simple average of Fannie Mae and Freddie Mac mortgage-backed securities current coupon rates. |
69
Table of Contents
§ | earnings from the investment of capital increased; | ||
§ | actual mortgage prepayment speeds (which are strongly affected by the historical evolution of interest rates) relative to retirement of Consolidated Obligations slowed, on average, compared to 2003; | ||
§ | the book yields on new mortgage assets compared to the cost of new Consolidated Obligations decreased; | ||
§ | the recognition of mortgage premiums in accordance with SFAS 91 (which is governed by actual and projected prepayment speeds) increased; and | ||
§ | the rising interest rate environment prompted us to reduce our market risk exposure to further increases in long-term interest rates, as the flatter yield curve reduced the opportunity cost of doing so (in terms of foregone earnings from mismatched funding). |
70
Table of Contents
2004 | 2003 | 2002 | ||||||||||||||||||||||||||||||||||||||||||||||
% of | Change From | % of | Change From | % of | Change From | |||||||||||||||||||||||||||||||||||||||||||
Total | Prior Year | Total | Prior Year | Total | Prior Year | |||||||||||||||||||||||||||||||||||||||||||
Balance | Assets | Amount | Pct | Balance | Assets | Amount | Pct | Balance | Assets | Amount | Pct | |||||||||||||||||||||||||||||||||||||
Advances | ||||||||||||||||||||||||||||||||||||||||||||||||
Principal | $ | 40,919 | 53.4 | % | $ | (852 | ) | (2.0 | )% | $ | 41,771 | 54.1 | % | $ | 3,533 | 9.2 | % | $ | 38,238 | 53.8 | % | $ | 3,941 | 11.5 | % | |||||||||||||||||||||||
Other items(1) | 382 | 0.6 | (976 | ) | (71.9 | ) | 1,358 | 1.8 | (467 | ) | (25.6 | ) | 1,825 | 2.6 | 899 | 97.1 | ||||||||||||||||||||||||||||||||
Total book value | 41,301 | 54.0 | (1,828 | ) | (4.2 | ) | 43,129 | 55.9 | 3,066 | 7.7 | 40,063 | 56.4 | 4,840 | 13.7 | ||||||||||||||||||||||||||||||||||
Mortgage loans held for portfolio | ||||||||||||||||||||||||||||||||||||||||||||||||
Principal | 8,272 | 10.8 | 286 | 3.6 | 7,986 | 10.4 | 4,268 | 114.8 | 3,718 | 5.2 | 3,157 | 562.7 | ||||||||||||||||||||||||||||||||||||
Other items | 99 | 0.1 | (16 | ) | (13.9 | ) | 115 | 0.1 | 66 | 134.7 | 49 | 0.1 | 44 | 880.0 | ||||||||||||||||||||||||||||||||||
Total book value | 8,371 | 10.9 | 270 | 3.3 | 8,101 | 10.5 | 4,334 | 115.1 | 3,767 | 5.3 | 3,201 | 565.5 | ||||||||||||||||||||||||||||||||||||
Investments | ||||||||||||||||||||||||||||||||||||||||||||||||
Mortgage-backed securities | ||||||||||||||||||||||||||||||||||||||||||||||||
Principal | 11,659 | 15.3 | 488 | 4.4 | 11,171 | 14.5 | 635 | 6.0 | 10,536 | 14.8 | 1,622 | 18.2 | ||||||||||||||||||||||||||||||||||||
Other items | 23 | — | (7 | ) | (23.3 | ) | 30 | — | 35 | 700.0 | (5 | ) | — | 1 | 16.7 | |||||||||||||||||||||||||||||||||
Total book value | 11,682 | 15.3 | 481 | 4.3 | 11,201 | 14.5 | 670 | 6.4 | 10,531 | 14.8 | 1,623 | 18.2 | ||||||||||||||||||||||||||||||||||||
Short-term money market | ||||||||||||||||||||||||||||||||||||||||||||||||
Principal | 14,939 | 19.5 | 580 | 4.0 | 14,359 | 18.6 | (1,826 | ) | (11.3 | ) | 16,185 | 22.8 | 127 | 0.8 | ||||||||||||||||||||||||||||||||||
Other items | (4 | ) | — | (3 | ) | 300.0 | (1 | ) | — | — | — | (1 | ) | — | — | — | ||||||||||||||||||||||||||||||||
Total book value | 14,935 | 19.5 | 577 | 4.0 | 14,358 | 18.6 | (1,826 | ) | (11.3 | ) | 16,184 | 22.8 | 127 | 0.8 | ||||||||||||||||||||||||||||||||||
Other long-term investments | 38 | — | (13 | ) | (25.5 | ) | 51 | 0.1 | (42 | ) | (45.2 | ) | 93 | 0.1 | (27 | ) | (22.5 | ) | ||||||||||||||||||||||||||||||
Total investments | 26,655 | 34.8 | 1,045 | 4.1 | 25,610 | 33.2 | (1,198 | ) | (4.5 | ) | 26,808 | 37.7 | 1,723 | 6.9 | ||||||||||||||||||||||||||||||||||
Loans to other | ||||||||||||||||||||||||||||||||||||||||||||||||
FHLBanks | — | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
Total earning assets | 76,327 | 99.7 | (513 | ) | (0.7 | ) | 76,840 | 99.6 | 6,202 | 8.8 | 70,638 | 99.4 | 9,764 | 16.0 | ||||||||||||||||||||||||||||||||||
Other assets | 250 | 0.3 | (54 | ) | (17.8 | ) | 304 | 0.4 | (129 | ) | (29.8 | ) | 433 | 0.6 | 5 | 1.2 | ||||||||||||||||||||||||||||||||
Total assets | $ | 76,577 | 100.0 | % | $ | (567 | ) | (0.7 | ) | $ | 77,144 | 100.0 | % | $ | 6,073 | 8.5 | $ | 71,071 | 100.0 | % | $ | 9,769 | 15.9 | |||||||||||||||||||||||||
Other Business Activity (Notional) | ||||||||||||||||||||||||||||||||||||||||||||||||
Letters of Credit | $ | 1,415 | $ | (484 | ) | (25.5 | ) | $ | 1,899 | $ | (112 | ) | (5.6 | ) | $ | 2,011 | $ | 291 | 16.9 | |||||||||||||||||||||||||||||
Mandatory Delivery Contracts | $ | 75 | $ | (255 | ) | (77.3 | ) | $ | 330 | $ | (1,911 | ) | (85.3 | ) | $ | 2,241 | $ | 1,888 | 534.8 | |||||||||||||||||||||||||||||
Total Mission Asset Activity(2) (Principal and Notional) | $ | 50,681 | 66.2 | % | $ | (1,305 | ) | (2.5 | ) | $ | 51,986 | 67.4 | % | $ | 5,778 | 12.5 | $ | 46,208 | 65.0 | % | $ | 9,277 | 25.1 | |||||||||||||||||||||||||
(1) | The majority of these balances are SFAS 133-related basis adjustments. | |
(2) | Includes Advances, mortgage loans held for portfolio, Letters of Credit and Mandatory Delivery Contracts. |
71
Table of Contents
2004 | 2003 | 2002 | ||||||||||||||||||||||||||||||||||||||||||||||
% of | Change From | % of | Change From | % of | Change From | |||||||||||||||||||||||||||||||||||||||||||
Total | Prior Year | Total | Prior Year | Total | Prior Year | |||||||||||||||||||||||||||||||||||||||||||
Balance | Assets | Amount | Pct | Balance | Assets | Amount | Pct | Balance | Assets | Amount | Pct | |||||||||||||||||||||||||||||||||||||
Advances | ||||||||||||||||||||||||||||||||||||||||||||||||
Principal | $ | 44,688 | 55.5 | % | $ | 2,103 | 4.9 | % | $ | 42,585 | 55.3 | % | $ | 6,951 | 19.5 | % | $ | 35,634 | 53.7 | % | $ | 3,086 | 9.5 | % | ||||||||||||||||||||||||
Other items(1) | 878 | 1.1 | (818 | ) | (48.2 | ) | 1,696 | 2.2 | 490 | 40.6 | 1,206 | 1.8 | 541 | 81.4 | ||||||||||||||||||||||||||||||||||
Total book value | 45,566 | 56.6 | 1,285 | 2.9 | 44,281 | 57.5 | 7,441 | 20.2 | 36,840 | 55.5 | 3,627 | 10.9 | ||||||||||||||||||||||||||||||||||||
Mortgage loans held for portfolio | ||||||||||||||||||||||||||||||||||||||||||||||||
Principal | 8,092 | 10.1 | 1,495 | 22.7 | 6,597 | 8.6 | 4,785 | 264.1 | 1,812 | 2.7 | 1,609 | 792.6 | ||||||||||||||||||||||||||||||||||||
Other items | 106 | 0.1 | 7 | 7.1 | 99 | 0.1 | 79 | 395.0 | 20 | — | 19 | 1,900.0 | ||||||||||||||||||||||||||||||||||||
Total book value | 8,198 | 10.2 | 1,502 | 22.4 | 6,696 | 8.7 | 4,864 | 265.5 | 1,832 | 2.7 | 1,628 | 798.0 | ||||||||||||||||||||||||||||||||||||
Investments | ||||||||||||||||||||||||||||||||||||||||||||||||
Mortgage-backed securities | ||||||||||||||||||||||||||||||||||||||||||||||||
Principal | 11,168 | 13.9 | 768 | 7.4 | 10,400 | 13.5 | 1,435 | 16.0 | 8,965 | 13.5 | 514 | 6.1 | ||||||||||||||||||||||||||||||||||||
Other items | 27 | — | 10 | 58.8 | 17 | — | 21 | (525.0 | ) | (4 | ) | — | 2 | (33.3 | ) | |||||||||||||||||||||||||||||||||
Total book value | 11,195 | 13.9 | 778 | 7.5 | 10,417 | 13.5 | 1,456 | 16.2 | 8,961 | 13.5 | 516 | 6.1 | ||||||||||||||||||||||||||||||||||||
Short-term money market | ||||||||||||||||||||||||||||||||||||||||||||||||
Principal | 15,189 | 18.9 | (21 | ) | (0.1 | ) | 15,210 | 19.7 | (3,030 | ) | (16.6 | ) | 18,240 | 27.5 | 2,508 | 15.9 | ||||||||||||||||||||||||||||||||
Other items | (1 | ) | — | — | — | (1 | ) | — | 1 | (50.0 | ) | (2 | ) | — | 2 | (50.0 | ) | |||||||||||||||||||||||||||||||
Total book value | 15,188 | 18.9 | (21 | ) | (0.1 | ) | 15,209 | 19.7 | (3,029 | ) | (16.6 | ) | 18,238 | 27.5 | 2,510 | 16.0 | ||||||||||||||||||||||||||||||||
Other long-term investments | 42 | 0.1 | (24 | ) | (36.4 | ) | 66 | 0.1 | (36 | ) | (35.3 | ) | 102 | 0.2 | (80 | ) | (44.0 | ) | ||||||||||||||||||||||||||||||
Total investments | 26,425 | 32.9 | 733 | 2.9 | 25,692 | 33.3 | (1,609 | ) | (5.9 | ) | 27,301 | 41.2 | 2,946 | 12.1 | ||||||||||||||||||||||||||||||||||
Loans to other | ||||||||||||||||||||||||||||||||||||||||||||||||
FHLBanks | 57 | 0.1 | 26 | 83.9 | 31 | — | 27 | 675.0 | 4 | — | (8 | ) | (66.7 | ) | ||||||||||||||||||||||||||||||||||
Total earning assets | 80,246 | 99.8 | 3,546 | 4.6 | 76,700 | 99.5 | 10,723 | 16.3 | 65,977 | 99.4 | 8,193 | 14.2 | ||||||||||||||||||||||||||||||||||||
Other assets | 249 | 0.2 | (113 | ) | (31.2 | ) | 362 | 0.5 | 1 | 0.3 | 361 | 0.6 | 58 | 19.1 | ||||||||||||||||||||||||||||||||||
Total assets | $ | 80,495 | 100.0 | % | $ | 3,433 | 4.5 | $ | 77,062 | 100.0 | % | $ | 10,724 | 16.2 | $ | 66,338 | 100.0 | % | $ | 8,251 | 14.2 | |||||||||||||||||||||||||||
Other Business Activity (Notional) | ||||||||||||||||||||||||||||||||||||||||||||||||
Letters of Credit | $ | 1,803 | $ | (56 | ) | (3.0 | ) | $ | 1,859 | $ | 90 | 5.1 | $ | 1,769 | $ | 854 | 93.3 | |||||||||||||||||||||||||||||||
Mandatory Delivery Contracts | $ | 210 | $ | (834 | ) | (79.9 | ) | $ | 1,044 | $ | 278 | 36.3 | $ | 766 | $ | 650 | 560.3 | |||||||||||||||||||||||||||||||
Total Mission Asset Activity(2) (Principal and Notional) | $ | 54,793 | 68.1 | % | $ | 2,708 | 5.2 | $ | 52,085 | 67.6 | % | $ | 12,104 | 30.3 | $ | 39,981 | 60.3 | % | $ | 6,199 | 18.4 | |||||||||||||||||||||||||||
(1) | The majority of these balances are SFAS 133-related basis adjustments. | |
(2) | Includes Advances, mortgage loans held for portfolio, Letters of Credit and Mandatory Delivery Contracts. |
72
Table of Contents
Total | ||||||||||||||||||||
Mortgage | Mandatory | Mission | ||||||||||||||||||
(Dollars in millions) | Letters of | Purchase | Delivery | Asset | ||||||||||||||||
Month-End | Advances(1) | Credit | Program(2) | Contracts | Activity | |||||||||||||||
December 2003 | $41,771 | $1,899 | $7,986 | $330 | $51,986 | |||||||||||||||
January 2004 | 42,054 | 1,878 | 8,133 | 193 | 52,258 | |||||||||||||||
February | 41,627 | 1,869 | 8,137 | 155 | 51,788 | |||||||||||||||
March | 36,959 | 1,885 | 8,060 | 519 | 47,423 | |||||||||||||||
April | 46,831 | 1,863 | 8,050 | 307 | 57,051 | |||||||||||||||
May | 48,163 | 1,831 | 7,941 | 385 | 58,320 | |||||||||||||||
June | 45,227 | 1,767 | 8,095 | 47 | 55,136 | |||||||||||||||
July | 46,866 | 1,611 | 8,133 | 89 | 56,699 | |||||||||||||||
August | 49,522 | 1,598 | 8,096 | 193 | 59,409 | |||||||||||||||
September | 44,997 | 1,945 | 8,127 | 115 | 55,184 | |||||||||||||||
October | 46,021 | 2,009 | 8,064 | 119 | 56,213 | |||||||||||||||
November | 45,143 | 1,600 | 8,116 | 92 | 54,951 | |||||||||||||||
December 2004 | 40,919 | 1,415 | 8,272 | 75 | 50,681 |
(1) | Principal balances outstanding to members (excludes book-value adjustments). | |
(2) | Unpaid principal balance outstanding (excludes book-value adjustments). |
73
Table of Contents
2004 | 2003 | 2002 | ||||||||||||||||||||||
(Dollars in millions) | Balance | Percent(1) | Balance | Percent(1) | Balance | Percent(1) | ||||||||||||||||||
Short-Term and Adjustable-Rate | ||||||||||||||||||||||||
REPO/Cash Management | $ | 8,524.9 | 20.8 | % | $ | 7,781.4 | 18.6 | % | $ | 5,238.4 | 13.7 | % | ||||||||||||
LIBOR | 18,123.9 | 44.3 | 13,449.0 | 32.2 | 11,468.5 | 30.0 | ||||||||||||||||||
Total | 26,648.8 | 65.1 | 21,230.4 | 50.8 | 16,706.9 | 43.7 | ||||||||||||||||||
Long-Term Fixed Rate | ||||||||||||||||||||||||
Regular Fixed-Rate | 4,431.5 | 10.9 | 3,262.9 | 7.8 | 3,725.5 | 9.7 | ||||||||||||||||||
Convertible Rate(2) | 7,395.2 | 18.1 | 14,817.8 | 35.5 | 15,546.8 | 40.7 | ||||||||||||||||||
Mortgage-Related | 2,146.8 | 5.2 | 2,115.2 | 5.0 | 1,915.8 | 5.0 | ||||||||||||||||||
Total | 13,973.5 | 34.2 | 20,195.9 | 48.3 | 21,188.1 | 55.4 | ||||||||||||||||||
Other Advances | 296.9 | 0.7 | 345.0 | 0.9 | 343.3 | 0.9 | ||||||||||||||||||
Total Advances Principal | 40,919.2 | 100.0 | % | 41,771.3 | 100.0 | % | 38,238.3 | 100.0 | % | |||||||||||||||
Other Items | 381.7 | 1,357.8 | 1,824.9 | |||||||||||||||||||||
Total Advances Book Value | $ | 41,300.9 | $ | 43,129.1 | $ | 40,063.2 | ||||||||||||||||||
(1) | As a percentage of total Advances principal. | |
(2) | Before related interest rate swaps executed to hedge these Advances. |
74
Table of Contents
December 31, 2004 | September 30, 2004 | June 30, 2004 | March 31, 2004 | December 31, 2003 | ||||||||||||||||||||||||||||||||||||
(Dollars in millions) | Balance | Pct(1) | Balance | Pct(1) | Balance | Pct(1) | Balance | Pct(1) | Balance | Pct(1) | ||||||||||||||||||||||||||||||
Short-Term and Adjustable-Rate | ||||||||||||||||||||||||||||||||||||||||
REPO/Cash Management | $ | 8,524.9 | 20.8 | % | $ | 10,620.5 | 23.6 | % | $ | 14,242.1 | 31.5 | % | $ | 7,670.4 | 20.8 | % | $ | 7,781.4 | 18.6 | % | ||||||||||||||||||||
LIBOR | 18,123.9 | 44.3 | 18,190.2 | 40.4 | 12,435.0 | 27.5 | 10,910.7 | 29.5 | 13,449.0 | 32.2 | ||||||||||||||||||||||||||||||
Total | 26,648.8 | 65.1 | 28,810.7 | 64.0 | 26,677.1 | 59.0 | 18,581.1 | 50.3 | 21,230.4 | 50.8 | ||||||||||||||||||||||||||||||
Long-Term Fixed-Rate | ||||||||||||||||||||||||||||||||||||||||
Regular Fixed-Rate | 4,431.5 | 10.9 | 3,869.9 | 8.6 | 3,658.9 | 8.1 | 3,488.3 | 9.4 | 3,262.9 | 7.8 | ||||||||||||||||||||||||||||||
Convertible Rate(2) | 7,395.2 | 18.1 | 9,855.3 | 21.9 | 12,405.8 | 27.4 | 12,456.8 | 33.7 | 14,817.8 | 35.5 | ||||||||||||||||||||||||||||||
Mortgage-Related | 2,146.8 | 5.2 | 2,151.0 | 4.8 | 2,148.2 | 4.8 | 2,134.6 | 5.8 | 2,115.2 | 5.0 | ||||||||||||||||||||||||||||||
Total | 13,973.5 | 34.2 | 15,876.2 | 35.3 | 18,212.9 | 40.3 | 18,079.7 | 48.9 | 20,195.9 | 48.3 | ||||||||||||||||||||||||||||||
Other Advances | 296.9 | 0.7 | 310.6 | 0.7 | 337.8 | 0.7 | 300.6 | 0.8 | 345.0 | 0.9 | ||||||||||||||||||||||||||||||
Total Advances Principal | 40,919.2 | 100.0 | % | 44,997.5 | 100.0 | % | 45,227.8 | 100.0 | % | 36,961.4 | 100.0 | % | 41,771.3 | 100.0 | % | |||||||||||||||||||||||||
Other Items | 381.7 | 651.7 | 667.5 | 1,353.2 | 1,357.8 | |||||||||||||||||||||||||||||||||||
Total Advances Book Value | $ | 41,300.9 | $ | 45,649.2 | $ | 45,895.3 | $ | 38,314.6 | $ | 43,129.1 | ||||||||||||||||||||||||||||||
(1) | As a percentage of total Advances principal. | |
(2) | Before related interest rate swaps executed to hedge these Advances. |
75
Table of Contents
December 31, 2004 | ||||||
Ending | Weighted Average | |||||
(Dollars in millions) | Balance | Interest Rate | ||||
Charter One Bank, N.A.(1) | $ | 8,527 | 2.17% | |||
Fifth Third Bank | 4,345 | 2.77 | ||||
Ohio Savings Bank | 3,912 | 3.02 | ||||
U.S. Bank, N.A. | 3,208 | 2.28 | ||||
National Bank of Commerce | 2,589 | 2.88 | ||||
Total of Top 5 | $ | 22,581 | 2.53 | |||
Total Advances (Principal) | $ | 40,919 | 3.00 | |||
Top 5 Percent of Total | 55 | % | ||||
(1) | Charles J. Koch, Chairman of the Board of Charter One Bank, is a director (elected Chair March 17, 2005) of the FHLBank. Advances made to Charter One Bank were on the same terms and rates available to other members with similar financial conditions. |
76
Table of Contents
77
Table of Contents
Conventional | FHA (Gov’t | |||||||||||||||||||||||
(Dollars in millions) | 30 Year | 20 Year | 15 Year | Total | Guaranteed) | Total | ||||||||||||||||||
4.00 - 4.50 Percent | $ | — | $ | — | $ | 0.8 | $ | 0.8 | $ | — | $ | 0.8 | ||||||||||||
> 4.50 - 5.00 Percent | 0.3 | 1.1 | 462.4 | 463.8 | 1.9 | 465.7 | ||||||||||||||||||
> 5.00 - 5.50 Percent | 176.1 | 154.9 | 948.2 | 1,279.2 | 173.8 | 1,453.0 | ||||||||||||||||||
> 5.50 - 6.00 Percent | 2,047.4 | 204.4 | 346.3 | 2,598.1 | 906.5 | 3,504.6 | ||||||||||||||||||
> 6.00 - 6.50 Percent | 1,186.8 | 44.0 | 52.1 | 1,282.9 | 992.6 | 2,275.5 | ||||||||||||||||||
> 6.50 Percent | 283.0 | 4.9 | 19.1 | 307.0 | 339.9 | 646.9 | ||||||||||||||||||
Total Unpaid Principal | $ | 3,693.6 | $ | 409.3 | $ | 1,828.9 | $ | 5,931.8 | $ | 2,414.7 | $ | 8,346.5 | ||||||||||||
Percent of Total | 44.3 | % | 4.9 | % | 21.9 | % | 71.1 | % | 28.9 | % | 100.0 | % | ||||||||||||
Weighted Average | ||||||||||||||||||||||||
Mortgage Note Rate | 5.92 | % | 5.58 | % | 5.21 | % | 5.68 | % | 5.99 | % | 5.77 | % | ||||||||||||
Weighted Average | ||||||||||||||||||||||||
Loan Age (in months) | 13 | 14 | 16 | 14 | 19 | 15 |
(Dollars in millions) | Unpaid Principal Balances | % of Total | ||||||
National City Bank | $ | 4,349 | 53 | % | ||||
Union Savings Bank | 2,257 | 27 | ||||||
Total | $ | 6,606 | 80 | % | ||||
78
Table of Contents
1. | The GLB Act mandates that the amount of regulatory capital must exceed a four percent capital-to-assets ratio. Currently, we are permitted to raise new capital only through payment of stock dividends and, under our Capital Plan, through required purchases to directly capitalize new Mission Asset Activity. This limit, in conjunction with our Board’s preference regarding the relative size of mortgage loans to Advances and capital, as discussed above in this section, effectively constrains the potential for substantial growth over a short period of time in loans under the Mortgage Purchase Program. | ||
2. | Currently, in almost all cases, members are not required to purchase additional stock to support their activity in the Mortgage Purchase Program due to the Capital Plan’s cooperative sharing of our excess stock among members and the continued payment of stock dividends. However, our excess capital may decrease significantly over time from substantial growth in Mission Asset Activity and/or from our repurchase of excess stock based on member requests to have their excess stock redeemed. If this occurs, it may become necessary for us to modify our Capital Plan to require members wishing to sell us mortgage loans to purchase capital stock to support these transactions. | ||
3. | There is a $200 million limit on how much of our excess stock any one member is permitted to utilize to provide capital for additional Mission Asset Activity. |
79
Table of Contents
80
Table of Contents
(Dollars in millions) | 2004 | 2003 | ||||||
Security Type | ||||||||
Collateralized mortgage obligations | $ | 6,641.4 | $ | 5,484.2 | ||||
Pass-throughs(1) | 5,018.0 | 5,687.2 | ||||||
Total | $ | 11,659.4 | $ | 11,171.4 | ||||
Collateral Type | ||||||||
15-year collateral | $ | 7,199.7 | $ | 8,552.1 | ||||
30-year collateral | 4,459.7 | 2,619.3 | ||||||
Total | $ | 11,659.4 | $ | 11,171.4 | ||||
Issuer | ||||||||
GSE residential mortgage-backed securities | $ | 10,957.7 | $ | 10,205.9 | ||||
Agency residential mortgage-backed securities | 101.6 | 203.7 | ||||||
Private-label residential mortgage-backed securities | 600.1 | 761.8 | ||||||
Total | $ | 11,659.4 | $ | 11,171.4 | ||||
(1) | All but $8.4 million and $11.8 million of the pass-throughs were 15-year fixed-rate pass-throughs at the end of 2004 and 2003, respectively. The other amounts were 30-year adjustable-rate mortgages. |
81
Table of Contents
(Dollars in millions) | 2004 | 2003 | 2002 | |||||||||||||||||||||
Ending | Average | Ending | Average | Ending | Average | |||||||||||||||||||
Balance | Balance | Balance | Balance | Balance | Balance | |||||||||||||||||||
Consolidated Discount Notes: | ||||||||||||||||||||||||
Par | $ | 18,660 | $ | 28,407 | $ | 29,460 | $ | 28,818 | $ | 25,649 | $ | 25,403 | ||||||||||||
Discount | (28 | ) | (30 | ) | (17 | ) | (28 | ) | (32 | ) | (45 | ) | ||||||||||||
Total Consolidated Discount Notes | 18,632 | 28,377 | 29,443 | 28,790 | 25,617 | 25,358 | ||||||||||||||||||
Consolidated Bonds: | ||||||||||||||||||||||||
Unswapped fixed-rate | 24,715 | 23,633 | 23,027 | 22,063 | 18,598 | 15,069 | ||||||||||||||||||
Unswapped adjustable-rate | 2,030 | 1,254 | 570 | 1,164 | 1,350 | 2,422 | ||||||||||||||||||
Swapped fixed-rate | 25,235 | 20,740 | 16,639 | 16,763 | 17,068 | 16,197 | ||||||||||||||||||
Total Principal Consolidated Bonds | 51,980 | 45,627 | 40,236 | 39,990 | 37,016 | 33,688 | ||||||||||||||||||
Other items(1) | (161 | ) | (17 | ) | 125 | 288 | 401 | 250 | ||||||||||||||||
Total Consolidated Bonds | 51,819 | 45,610 | 40,361 | 40,278 | 37,417 | 33,938 | ||||||||||||||||||
Total Consolidated Obligations (2) | $ | 70,451 | $ | 73,987 | $ | 69,804 | $ | 69,068 | $ | 63,034 | $ | 59,296 | ||||||||||||
(1) | Includes unamortized premiums/discounts, SFAS 133 and other basis adjustments. | |
(2) | The 12 FHLBanks have joint and several liability for the par amount of all of the Consolidated Obligations issued on their behalves. See Note 12 of the Notes to Financial Statements for additional detail and discussion related to Consolidated Obligations (page 199). The par amount of the outstanding Consolidated Obligations of all 12 FHLBanks was (in millions) $869,242, $759,529 and $680,695 at December 31, 2004, 2003 and 2002, respectively. |
82
Table of Contents
(Dollars in millions) | Year of Maturity | Year of Next Call | |||||||||||||||
Callable | Non-Callable | Total | Callable | ||||||||||||||
2005 | $ | 170 | $ | 3,464 | $ | 3,634 | $ | 6,664 | |||||||||
2006 | 450 | 3,475 | 3,925 | 465 | |||||||||||||
2007 | 1,314 | 2,937 | 4,251 | 85 | |||||||||||||
2008 | 990 | 1,933 | 2,923 | 40 | |||||||||||||
2009 | 750 | 1,715 | 2,465 | — | |||||||||||||
After 2009 | 3,605 | 3,912 | 7,517 | 25 | |||||||||||||
Total | $ | 7,279 | $ | 17,436 | $ | 24,715 | $ | 7,279 | |||||||||
(Dollars in millions) | 2004 | 2003 | ||||||
Total Par Value Eligible Assets | $ | 75,829 | $ | 75,339 | ||||
Total Par Value Consolidated Obligations | (70,640 | ) | (69,696 | ) | ||||
Excess Eligible Assets | $ | 5,189 | $ | 5,643 | ||||
83
Table of Contents
(Dollars in millions) | 2004 | 2003 | 2002 | |||||||||||||||||||||||||||||||||
Ending Balance | Average | Ending Balance | Average | Ending Balance | Average | |||||||||||||||||||||||||||||||
Amount | Percent | Balance | Amount | Percent | Balance | Amount | Percent | Balance | ||||||||||||||||||||||||||||
Term Deposits | $ | 115.5 | 11.2 | % | $ | 160.3 | $ | 261.6 | 18.5 | % | $ | 249.9 | $ | 164.6 | 7.1 | % | $ | 147.3 | ||||||||||||||||||
Overnight Deposits | 432.7 | 41.9 | 557.0 | 595.6 | 42.1 | 1,174.4 | 1,273.7 | 54.6 | 1,200.8 | |||||||||||||||||||||||||||
Demand Deposits | 465.9 | 45.2 | 471.5 | 494.3 | 35.0 | 667.1 | 695.0 | 29.8 | 566.1 | |||||||||||||||||||||||||||
Other Deposits | 17.5 | 1.7 | 36.5 | 61.6 | 4.4 | 151.6 | 199.0 | 8.5 | 138.7 | |||||||||||||||||||||||||||
Total Deposits | $ | 1,031.6 | 100.0 | % | $ | 1,225.3 | $ | 1,413.1 | 100.0 | % | $ | 2,243.0 | $ | 2,332.3 | 100.0 | % | $ | 2,052.9 | ||||||||||||||||||
84
Table of Contents
Year Ended | ||||||||
December 31, 2004 | ||||||||
(Dollars in millions) | Year End | Average | ||||||
GAAP Capital Stock | $ | 3,799.9 | $ | 3,675.3 | ||||
SFAS 150-Related Stock | 34.3 | 32.6 | ||||||
Regulatory Capital Stock | 3,834.2 | 3,707.9 | ||||||
Retained Earnings | 167.5 | 133.3 | ||||||
Regulatory Capital | $ | 4,001.7 | $ | 3,841.2 | ||||
2004 | 2003 | 2002 | ||||||||||||||
GAAP | Regulatory | |||||||||||||||
Average | 4.73 | % | 4.77 | % | 4.76 | % | 5.21 | % | ||||||||
Year End | 5.18 | 5.23 | 4.84 | 5.08 |
85
Table of Contents
(in millions) | At December 31, | |||||||||||
2004 | 2003 | 2002 | ||||||||||
FHLBank excess stock | $ | 1,010.6 | $ | 940.8 | $ | 1,201.0 | ||||||
Cooperative utilization of capital stock | $ | 323.6 | $ | 242.6 | $ | 20.2 | ||||||
Mission Asset Activity capitalized with cooperative stock | $ | 8,090.0 | $ | 6,065.0 | $ | 505.0 | ||||||
86
Table of Contents
§ | The actual and anticipated growth of the Mortgage Purchase Program has made short-term and long-term earnings more volatile due to its prepayment optionality and accounting for purchase premiums and discounts. | ||
§ | Application of SFAS 133 to the use of derivatives has increased potential earnings volatility. | ||
§ | The increased volatility of Advance balances, especially through merger activity, raises earnings volatility. | ||
§ | A formal retained earnings policy increases the clarity and transparency of the Board’s decision-making process regarding capital management. | ||
§ | Stable dividends enhance the market’s perception of the low risk of the FHLBank System’s Consolidated Obligations, which could improve debt costs and debt liquidity. |
87
Table of Contents
88
Table of Contents
89
Table of Contents
(In thousands) | 2004 | 2003 | 2002 | |||||||||
Net interest income | $ | 301,758 | $ | 227,668 | $ | 264,646 | ||||||
Securities gains (losses) | (36 | ) | 4,156 | (625 | ) | |||||||
Net realized and unrealized gains (losses) on derivatives and hedging activities | 39,555 | 26,234 | (836 | ) | ||||||||
Other non-interest income | 4,357 | 5,636 | 5,687 | |||||||||
Total non-interest income | 43,876 | 36,026 | 4,226 | |||||||||
Total revenue | 345,634 | 263,694 | 268,872 | |||||||||
Total other expenses | (36,448 | ) | (31,287 | ) | (25,942 | ) | ||||||
Assessments | (82,139 | ) | (61,659 | ) | (64,451 | ) | ||||||
Net income | $ | 227,047 | $ | 170,748 | $ | 178,479 | ||||||
2004 | 2003 | 2002 | ||||||||||
Net interest income | 5.83 | % | 4.57 | % | 5.63 | % | ||||||
Securities gains (losses) | — | 0.08 | (0.01 | ) | ||||||||
Net realized and unrealized gains (losses) on derivatives and hedging activities | 0.76 | 0.53 | (0.02 | ) | ||||||||
Other non-interest income | 0.08 | 0.11 | 0.12 | |||||||||
Total non-interest income | 0.84 | 0.72 | 0.09 | |||||||||
Total revenue | 6.67 | 5.29 | 5.72 | |||||||||
Total other expenses | (0.70 | ) | (0.63 | ) | (0.55 | ) | ||||||
Total ROE | 5.97 | % | 4.66 | % | 5.17 | % | ||||||
90
Table of Contents
For the Years Ended December 31 | ||||||||||||||||||||||||
2004 vs. 2003 | 2003 vs. 2002 | 2002 vs. 2001 | ||||||||||||||||||||||
(Dollars in thousands) | Amount | Percent | Amount | Percent | Amount | Percent | ||||||||||||||||||
Total interest income | $ | 224,134 | 13.0 | $ | (119,706 | ) | (6.5 | ) | $ | (874,824 | ) | (32.1 | ) | |||||||||||
Total interest expense | 150,044 | 10.0 | (82,728 | ) | (5.2 | ) | (866,208 | ) | (35.3 | ) | ||||||||||||||
Net interest income | 74,090 | 32.5 | (36,978 | ) | (14.0 | ) | (8,616 | ) | (3.2 | ) | ||||||||||||||
Service fees | 122 | 8.0 | 27 | 1.8 | 28 | 1.9 | ||||||||||||||||||
Net losses on trading securities | 382 | 92.0 | 210 | 33.6 | (1,363 | ) | (184.7 | ) | ||||||||||||||||
Net (losses) gains on other securities | (4,574 | ) | (100.1 | ) | 4,571 | 100.0 | — | — | ||||||||||||||||
Net realized and unrealized gains (losses) on derivatives and hedging activities | 13,321 | 50.8 | 27,070 | 3,238.0 | (1,819 | ) | (185.0 | ) | ||||||||||||||||
Other, net | (1,401 | ) | (34.1 | ) | (78 | ) | (1.9 | ) | 145 | 3.6 | ||||||||||||||
Total other income | 7,850 | 21.8 | 31,800 | 752.5 | (3,009 | ) | (41.6 | ) | ||||||||||||||||
Salaries and benefits | 2,203 | 13.8 | 2,493 | 18.6 | 1,101 | 8.9 | ||||||||||||||||||
Other operating expenses | 1,368 | 15.1 | 1,265 | 16.3 | 516 | 7.1 | ||||||||||||||||||
Finance Board | 190 | 8.3 | 121 | 5.6 | 355 | 19.7 | ||||||||||||||||||
Office of Finance | 241 | 12.1 | 75 | 3.9 | 499 | 35.4 | ||||||||||||||||||
Other expenses | 1,159 | 56.5 | 1,391 | 210.8 | 585 | 780.0 | ||||||||||||||||||
Total other expense | 5,161 | 16.5 | 5,345 | 20.6 | 3,056 | 13.4 | ||||||||||||||||||
Affordable Housing Program | 6,405 | 33.8 | (859 | ) | (4.3 | ) | (1,123 | ) | (5.4 | ) | ||||||||||||||
REFCORP | 14,075 | 33.0 | (1,933 | ) | (4.3 | ) | (2,526 | ) | (5.4 | ) | ||||||||||||||
Total assessments | 20,480 | 33.2 | (2,792 | ) | (4.3 | ) | (3,649 | ) | (5.4 | ) | ||||||||||||||
Net income before cumulative effect of change in accounting principle | 56,299 | 33.0 | (7,731 | ) | (4.3 | ) | (11,032 | ) | (5.8 | ) | ||||||||||||||
Cumulative effect of change in accounting principle | — | — | — | — | 926 | 100.0 | ||||||||||||||||||
Net income | $ | 56,299 | 33.0 | $ | (7,731 | ) | (4.3 | ) | $ | (10,106 | ) | (5.4 | ) | |||||||||||
§ | a $74.1 million increase in net interest income, which improved the contribution to ROE of this component by 1.26 percentage points (from 4.57 percent to 5.83 percent). Of this increase, $39.4 million represented an increase in Advance prepayment fees related to prepayment of $11.1 billion of Advances and $(12.8) million reflected the reclassification of the amortization of SFAS 133-related market value basis adjustments on modified hedging relationships. These two factors are discussed further below in this section, in the “Net Interest Income” section, and in Note 1 to the Notes to Financial Statements (page 182). Excluding these two components, net interest income increased $47.5 million; | ||
§ | a $13.3 million gain in the SFAS 133 market-value adjustment (referenced on the income statement as “Net realized and unrealized gains (losses) on derivatives and hedging activities”). Of this gain, $12.8 million reflects the amortization of basis adjustments on modified hedge relationships, which decreased “Net interest income” and increased the gain on SFAS 133 market adjustments in “Other Income” by this amount. Without this reclassification the SFAS 133 account would have risen by $0.5 million; | ||
§ | a $4.2 million decrease in gains on trading and other securities, reflecting sales of securities from 2003; and | ||
§ | a $5.2 million (16.5 percent) increase in total other expenses. |
91
Table of Contents
2004 | 2003 | 2002 | ||||||||||||||||||||||||||||||||||
Average | Average | Average | Average | Average | Average | |||||||||||||||||||||||||||||||
(Dollars in thousands) | Balance | Interest | Yield/Rate | Balance | Interest | Yield/Rate | Balance | Interest | Yield/Rate | |||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||
Advances | $ | 45,566,126 | $ | 839,664 | 1.84 | % | $ | 44,280,561 | $ | 726,505 | 1.64 | % | $36,840,305 | $ | 896,228 | 2.43 | % | |||||||||||||||||||
Mortgage loans held for portfolio(1) | 8,197,498 | 405,326 | 4.94 | 6,695,531 | 343,119 | 5.12 | 1,832,097 | 107,012 | 5.84 | |||||||||||||||||||||||||||
Federal funds sold and securities purchased under resale agreements | 7,488,109 | 105,315 | 1.41 | 9,081,781 | 107,340 | 1.18 | 12,348,832 | 216,298 | 1.75 | |||||||||||||||||||||||||||
Other short-term investments(2) | 1,077,486 | 15,153 | 1.41 | 879,804 | 10,289 | 1.17 | 1,504,527 | 27,105 | 1.80 | |||||||||||||||||||||||||||
Interest-bearing deposits in banks | 6,622,417 | 90,825 | 1.37 | 5,248,091 | 59,694 | 1.14 | 4,384,296 | 80,489 | 1.84 | |||||||||||||||||||||||||||
Mortgage-backed securities | 11,194,642 | 493,989 | 4.41 | 10,416,729 | 478,225 | 4.59 | 8,960,773 | 516,250 | 5.76 | |||||||||||||||||||||||||||
Other long-term investments | 41,684 | 2,286 | 5.48 | 66,461 | 3,678 | 5.53 | 102,200 | 5,441 | 5.32 | |||||||||||||||||||||||||||
Loans to other FHLBanks | 57,434 | 769 | 1.34 | 30,984 | 343 | 1.11 | 4,304 | 76 | 1.77 | |||||||||||||||||||||||||||
Total earning assets | 80,245,396 | 1,953,327 | 2.43 | 76,699,942 | 1,729,193 | 2.26 | 65,977,334 | 1,848,899 | 2.80 | |||||||||||||||||||||||||||
Allowance for credit losses on mortgage loans | — | — | — | |||||||||||||||||||||||||||||||||
Other assets | 249,283 | 362,068 | 360,837 | |||||||||||||||||||||||||||||||||
Total assets | $ | 80,494,679 | $ | 77,062,010 | $ | 66,338,171 | ||||||||||||||||||||||||||||||
Liabilities and Capital | ||||||||||||||||||||||||||||||||||||
Term deposits | $ | 160,257 | 2,117 | 1.32 | $ | 249,909 | 3,102 | 1.24 | $ | 147,297 | 2,983 | 2.03 | ||||||||||||||||||||||||
Other interest-bearing deposits | 1,065,059 | 10,702 | 1.00 | 1,993,080 | 17,889 | 0.90 | 1,905,606 | 27,174 | 1.43 | |||||||||||||||||||||||||||
Short-term borrowings | 28,376,787 | 371,855 | 1.31 | 28,790,300 | 325,103 | 1.13 | 25,358,436 | 439,647 | 1.73 | |||||||||||||||||||||||||||
Unswapped fixed-rate Consolidated Bonds | 23,639,976 | 961,016 | 4.07 | 22,081,858 | 960,902 | 4.35 | 15,071,216 | 799,404 | 5.30 | |||||||||||||||||||||||||||
Unswapped adjustable-rate Consolidated Bonds | 1,253,661 | 18,055 | 1.44 | 1,163,507 | 13,291 | 1.14 | 2,421,822 | 42,419 | 1.75 | |||||||||||||||||||||||||||
Swapped Consolidated Bonds | 20,716,731 | 286,347 | 1.38 | 17,032,451 | 181,191 | 1.06 | 16,444,804 | 272,571 | 1.66 | |||||||||||||||||||||||||||
Mandatory redeemable capital stock | 32,620 | 1,350 | 4.14 | — | — | — | — | — | — | |||||||||||||||||||||||||||
Other borrowings | 9,680 | 127 | 1.31 | 3,725 | 47 | 1.26 | 3,288 | 55 | 1.67 | |||||||||||||||||||||||||||
Total interest-bearing liabilities | 75,254,771 | 1,651,569 | 2.19 | 71,314,830 | 1,501,525 | 2.11 | 61,352,469 | 1,584,253 | 2.58 | |||||||||||||||||||||||||||
Non interest-bearing deposits | — | — | — | |||||||||||||||||||||||||||||||||
Other liabilities | 1,435,152 | 2,079,994 | 1,532,091 | |||||||||||||||||||||||||||||||||
Total capital | 3,804,756 | 3,667,186 | 3,453,611 | |||||||||||||||||||||||||||||||||
Total liabilities and capital | $ | 80,494,679 | $ | 77,062,010 | $ | 66,338,171 | ||||||||||||||||||||||||||||||
Net interest rate spread | 0.24 | % | 0.15 | % | 0.22 | % | ||||||||||||||||||||||||||||||
Net interest income and net interest margin | $ | 301,758 | 0.38 | % | $ | 227,668 | 0.30 | % | $ | 264,646 | 0.40 | % | ||||||||||||||||||||||||
Average interest-earnings assets to interest-bearing liabilities | 106.63 | % | 107.55 | % | 107.54 | % | ||||||||||||||||||||||||||||||
(1) | Nonperforming loans are included in average balances used to determine average rate. There were none for the years displayed. | |
(2) | The investment securities classified as available-for-sale are 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. |
92
Table of Contents
§ | Net interest rate spread. This component equals total earning assets multiplied by the difference between the book yield on interest-earning assets and the book cost of interest-bearing liabilities. | ||
§ | Earnings from investment of interest-free capital. We must invest our interest-free funds (primarily capital) to generate earnings. As interest rates change, asset yields also move but there is no corresponding change in the interest-free funds that finance a portion of interest-earning assets. We tend to invest a majority of our capital in short-term assets to help ensure that earnings correlate with short-term interest rates. |
2004 | 2003 | 2002 | ||||||||||||||||||||||
Pct of | Pct of | Pct of | ||||||||||||||||||||||
Earning | Earning | Earning | ||||||||||||||||||||||
(Dollars in thousands) | Amount | Assets | Amount | Assets | Amount | Assets | ||||||||||||||||||
Components of net interest rate spread | ||||||||||||||||||||||||
Other components of net interest rate spread | $ | 160,548 | 0.20 | % | $ | 109,186 | 0.14 | % | $ | 118,881 | 0.18 | % | ||||||||||||
Prepayment fees on Advances, net(1) | 69,244 | 0.09 | 29,817 | 0.04 | 26,341 | 0.04 | ||||||||||||||||||
Amortization of basis adjustments on modified Advance hedges(1) | (37,560 | ) | (0.05 | ) | (24,718 | ) | (0.03 | ) | — | — | ||||||||||||||
Total net interest rate spread(2) | 192,232 | 0.24 | 114,285 | 0.15 | 145,222 | 0.22 | ||||||||||||||||||
Earnings from investment of interest-free capital | 109,526 | 0.14 | 113,383 | 0.15 | 119,424 | 0.18 | ||||||||||||||||||
Total net interest income/net interest margin | $ | 301,758 | 0.38 | % | $ | 227,668 | 0.30 | % | $ | 264,646 | 0.40 | % | ||||||||||||
(1) | These components of net interest rate spread have been segregated here to display their relative impact. | |
(2) | Total earning assets times (book yield on interest-earning assets minus book cost of interest-bearing liabilities). |
93
Table of Contents
§ | Changes in the Market Risk/Return Profile. The management of the market risk/return profile can significantly affect the level and volatility of earnings over the short term and long term. There are two primary and complementary measures of our market risk/return profile as it affects our near-term/intermediate-term earnings: the long-term gap and the duration of equity. These are discussed in detail in the “Measurement of Market Risk Exposure” section of “Quantitative and Qualitative Disclosures About Risk Management” page 107. | ||
In a market environment of an upward sloping yield curve, a higher long-term gap and a higher duration of equity (for a base-case constant interest rate environment) correlate with higher earnings. The following table presents the average long-term gap (in dollars in millions) and the average duration of equity (in years for a base-case constant interest rate environment) for each quarter of 2004 and 2003. |
Average Gap | Average Duration | |||||||
First Quarter 2003 | $ | 704 | 0.00 | |||||
Second Quarter 2003 | 654 | -1.00 | ||||||
Third Quarter 2003 | (1,033 | ) | 2.52 | |||||
Fourth Quarter 2003 | 25 | 3.30 | ||||||
First Quarter 2004 | 1,397 | 1.70 | ||||||
Second Quarter 2004 | 1,552 | 5.01 | ||||||
Third Quarter 2004 | 631 | 2.19 | ||||||
Fourth Quarter 2004 | 556 | 1.05 |
94
Table of Contents
In 2003, particularly in the second quarter, earnings were reduced due to historically fast mortgage prepayment speeds that resulted in reductions in the duration of equity and the long-term gap. In some months, these two measures were less than zero. We gradually rebalanced the market risk/return profile beginning later in 2003 and into the first quarter of 2004 in order to continue issuing Consolidated Bonds to fund new long-term assets in the historically low interest rate environment of the second and third quarters of 2003. This helped protect the market risk/return profile from higher future interest rates. The rebalancing in the fourth quarter of 2003 and the first quarter of 2004 was accomplished primarily by funding a portion of new asset purchases with shorter-term debt and by not replacing all Consolidated Bonds that we called. | |||
In the second half of 2004, based on an expectation that interest rates would begin increasing from the cyclically low levels, we implemented a rebalancing strategy that was focused on mitigating the long-term exposure of earnings to substantial and sustained increases in interest rates. This strategy involved engaging in only a minimal amount of incremental short funding of new assets and replacing many of the Consolidated Bonds that matured or were called with new Consolidated Bonds. As prepayment speeds on mortgage assets continued to be relatively fast throughout 2004 (due to generally stagnant long-term interest rate trends), we allowed the long-term gap to trend downward after the second quarter of 2004 to implement this focus on long-term earnings exposure to higher interest rates. | |||
§ | Higher asset balances. The average principal balance of the Mortgage Purchase Program increased by $1.5 billion and that of Advances increased by $2.1 billion. Higher asset balances increase earnings in proportion to the spread to funding costs we earn on the assets. | ||
§ | Hedging of Commitment Periods of Mandatory Delivery Contracts. We increased the relative percentage amount of our use of a common derivative hedging strategy that mitigates the impact on net income from the timing of the recognition of earnings losses from having to settle Consolidated Bonds earlier than we are able to settle Mortgage Purchase Program loans. As discussed in detail in the “Use of Derivatives in Risk Management” section below (page 118), the hedging strategy is to short sell to-be-announced mortgage-backed securities for forward settlement. To-be-announced mortgage-backed securities are generic pass-through mortgage-backed securities with specific coupons, but not specific to a particular pool or pools. Transactions involving to-be-announced mortgage-backed securities obligate the seller to deliver, at settlement, a pool or pools of pass-through mortgage-backed securities that qualify under good delivery guidelines established by the Bond Market Association. | ||
One effect of this strategy is to defer recognition of the negative carry from the normal situation in which our Consolidated Bonds settle sooner than the loans under the Mortgage Purchase Program. Using this strategy, we hedged 49 percent of the Mandatory Delivery Contracts transacted in 2003 and 88 percent of those transacted in 2004. We estimate this strategy increased 2004’s net interest income, compared to 2003, by $4.0 million, and ROE by 0.08 percentage points. The savings realized from this hedging activity will be recognized over the lives of the mortgages delivered as additional premium amortization, which will reduce the future book yields earned on these hedged mortgages over their lives. | |||
§ | Rollover Rates on Consolidated Bonds. In 2004, the Consolidated Bonds that we retired (through maturities or calls) were replaced with new Consolidated Bonds at an average lower book cost compared to the lower book yields earned on new mortgage assets. | ||
§ | Funding Spreads. Spreads below LIBOR on the cost of interest rate swaps related to Consolidated Bonds moved lower (which decreased the cost of funds) by several basis points. In addition, these spreads became slightly more favorable to us compared to the spreads on Consolidated Discount Notes. We responded to this development by moving a portion of our funding from Discount Notes to swapped Consolidated Bonds. | ||
§ | Short-Term Asset Gap. The increases during the year in short-term interest rates enhanced earnings over and above the gain in earnings from the investment of capital at higher interest rate levels. This is because, on average during the year, there were more assets that were repriced every day compared to liabilities. This “short-term asset gap” contributes to earnings in a rising interest rate environment. |
95
Table of Contents
§ | There was $9.0 million more in total SFAS 91 amortization in 2004 than in 2003. This occurred for two reasons. First, the average book balance of mortgage assets increased by $2.3 billion. Second, the general trend in long-term interest rates was downward in 2004 (these rates decreased in three out of four quarters of 2004) compared to more of a whipsaw pattern of long-term interest rates in 2003 in which these rates decreased during the first two quarters, rose sharply in the third quarter, and were relatively stable in the fourth quarter. The nature of the relationship between mortgage prepayment speeds and SFAS 91 amortization is discussed in the “Critical Accounting Policies” section. | ||
§ | The spreads on new mortgage assets narrowed significantly, especially those in the Mortgage Purchase Program, which began in the second half of 2003 and deteriorated further throughout 2004. | ||
§ | There was a large shift in the composition of Advances toward REPO and LIBOR Advances that generally have lower spreads than our other Advance programs. Much of this shift occurred in conjunction with the large amount of Convertible Rate Advance prepayments. | ||
§ | Net interest income decreased due to losing Advances that were prepaid. Although some of these Advances were replaced with new Advances as part of member’s restructuring of their liabilities, the new Advances tended to have lower spreads to funding costs than the prepaid Advances. The annual lost income from prepaid Advances can be approximated by the prepayment fees’ amortization schedule based on the remaining maturity of the prepaid Advances subject to a fee. The following table presents, as of the end of 2004, the remaining amortization of the prepayment fees on Advances (subject to fees) that were prepaid prior to the first day of 2005. For 2004, this amortized amount was $18.1 million, which represents an estimate of the reduction in net interest income in 2004 from prepaid Advances. |
(In millions) | ||||
2004 | $ | 18.1 | ||
2005 | 17.9 | |||
2006 | 14.2 | |||
2007 | 12.9 | |||
2008 | 7.0 | |||
After 2008 | 2.6 | |||
Total | $ | 72.7 | ||
§ | There was a smaller benefit from the amount of funding of long-term assets with shorter-term debt, due to the higher average short-term interest rates in 2004 compared to 2003. Discussion of this point is expanded in the next section. |
96
Table of Contents
§ | Level of short-term market interest rates. The level of short-term interest rates has two effects. First, an increase in short-term interest rates raises the earnings from our investment of interest-free capital, as noted previously. For example, each 1.00 percent increase in the earnings from capital investment due to an increase in interest rates would raise net interest income by $40.0 million and the ROE by 0.74 percentage points. Second, increases in short-term interest rates reduce the gain from any funding of long-term assets with shorter-term debt. We normally carry an amount of this “short funding,” as evidenced by normally having a positive long-term gap and a positive duration of equity, as discussed in the “Measurement of Market Risk Exposure” section of “Quantitative and Qualitative Disclosures About Risk Management” (page 107). For example, assuming the long-term gap equals $1.0 billion, each 1.00 percent increase in short-term interest rates would decrease net interest income by $10.0 million and the ROE by 0.18 percentage points. The effect on earnings from changes in interest rates due to having short funding reverses over time as the long-term assets reprice into the new interest rate environment. The net effect in short-term interest rates normally is to slightly reduce earnings as rates rise and increase earnings as rates fall. | ||
§ | Shape of Consolidated Obligation market yield curve. The steepness of this yield curve has several effects, both direct and indirect. First, a steeper yield curve enhances earnings from any funding of long-term assets with shorter-term debt. A steeper yield curve achieved through reductions in short-term interest rates quickly enhances earnings; the computation is the same as described immediately above. A steeper yield curve achieved through increases in long-term interest rates takes longer to affect earnings, depending on how soon the long-term assets can be repriced into the higher interest-rate environment; however, the calculation of the impact is the same. | ||
§ | Capital leverage/asset growth. A greater amount of capital leverage may raise earnings. For example, assuming leverage increases through growth in assets that earn a 0.10 percent spread, each 0.25 percent reduction in the capital-to-assets ratio (a lower capital-to-assets ratio implies a greater capital leverage) would increase net interest income by $4.2 million and the ROE by 0.08 percent. Assuming leverage increases through a reduction in the amount of capital, earnings would decrease according to the book yields on the assets that the capital had supported. However, in this case normally the ROE would increase because the decrease in the amount of capital would result in a decrease in the amount of short-term investments (all else being equal), which normally have a lower book yield than the ROE. | ||
§ | Amount of capital.An increase in capital stock, which for example occurs when earnings are distributed to stockholders in the form of additional shares of stock, would normally increase net interest income but decrease the ROE, assuming the new stock is not levered but invested only in short-term money market assets. If the stock were levered with new assets such that the capital-to-assets ratio does not change, net interest income would also increase, but the ROE may either increase or decrease, depending on the level of the net asset spreads earned. | ||
§ | Asset spreads to funding costs/Substitution of assets at different net spreads to funding costs.A widening of asset spreads to funding costs, or substituting assets earnings lower spreads with assets earnings higher spreads, would directly enhance net interest income and the ROE. For example, each 2 basis points increase in the net spread to funding costs on $10 billion of assets would improve net interest income by $2.0 million and the ROE by 0.04 percentage points. | ||
§ | Mortgage prepayment speeds. Generally, an increase in mortgage prepayment speeds, compared to the rate of retirement of supporting Consolidated Bonds, would lower net interest income and the ROE under the following circumstances: |
- | if the assets prepaid were reinvested into new assets at lower yields (either with or without additional incremental funding); or | ||
- | if the assets prepaid were reinvested into new assets at the same yields and additional incremental debt were issued to fund these new assets, with no retirement of the debt that had funded the prepaid assets. |
97
Table of Contents
§ | Amount of short funding (level of long-term gap). Related to the analysis of mortgage prepayment speeds, an increase in the amount of long-term assets funded with shorter-term debt would raise the level of net interest income and the ROE assuming an upward sloping yield curve (but also would raise the market risk profile to increases in interest rates). For example, a $100 million increase in this long-term gap, assuming a 2 percent gain in the net spread from the short funding, would increase net interest income by $2.0 million and the ROE by 0.04 percentage points. The concept of the long-term gap is discussed in the “Measurement of Market Risk Exposure” section of “Quantitative and Qualitative Disclosures About Risk Management” (page 107). | ||
§ | Short-term repricing mismatches between assets and funding. Short-term and adjustable-rate assets and liabilities generally do not have the same repricing or maturity schedules. We typically tend to have more assets maturing daily than liabilities; this difference was magnified in 2004 with the increase in overnight REPO Advances. Given a short-term asset repricing gap, a higher short-term interest rate environment would temporarily raise the level of net interest income and the ROE. For example, for a $10.0 billion overnight asset gap funded on average with debt instruments having an average maturity of two weeks, a 1.00 percent increase in short-term interest rates during the year would increase net interest income in that year by $3.8 million and the ROE by 0.07 percentage points. |
(In thousands) | 2004 | 2003 | 2002 | |||||||||
Advances(1) | $ | (468,719 | ) | $ | (686,884 | ) | $ | (588,491 | ) | |||
Mortgage purchase commitments(2) | 2,420 | 396 | — | |||||||||
Consolidated Obligations(1) | 300,497 | 396,794 | 460,855 | |||||||||
Decrease in net interest income | $ | (165,802 | ) | $ | (289,694 | ) | $ | (127,636 | ) | |||
(1) | Relates to interest rate swap interest. | |
(2) | Relates to the amortization of derivative fair value adjustments. |
98
Table of Contents
(Dollars in thousands) | 2004 over 2003 | 2003 over 2002 | ||||||||||||||||||||||
Volume | Rate | Total | Volume | Rate | Total | |||||||||||||||||||
Increase (decrease) in interest income | ||||||||||||||||||||||||
Advances | $ | 21,092 | $ | 92,067 | $ | 113,159 | $ | 181,002 | $ | (350,725 | ) | $ | (169,723 | ) | ||||||||||
Mortgage loans held for portfolio | 76,970 | (14,763 | ) | 62,207 | 284,071 | (47,964 | ) | 236,107 | ||||||||||||||||
Federal funds sold and securities purchased under resale agreements | (18,836 | ) | 16,811 | (2,025 | ) | (57,225 | ) | (51,733 | ) | (108,958 | ) | |||||||||||||
Other short-term investments | 2,312 | 2,552 | 4,864 | (11,255 | ) | (5,561 | ) | (16,816 | ) | |||||||||||||||
Interest-bearing deposits in banks | 15,632 | 15,499 | 31,131 | 15,858 | (36,653 | ) | (20,795 | ) | ||||||||||||||||
Mortgage-backed securities | 35,713 | (19,949 | ) | 15,764 | 83,881 | (121,906 | ) | (38,025 | ) | |||||||||||||||
Other long-term investments | (1,371 | ) | (21 | ) | (1,392 | ) | (1,903 | ) | 140 | (1,763 | ) | |||||||||||||
Loans to other FHLBanks | 293 | 133 | 426 | 471 | (204 | ) | 267 | |||||||||||||||||
Total | 131,805 | 92,329 | 224,134 | 494,900 | (614,606 | ) | (119,706 | ) | ||||||||||||||||
Increase (decrease) in interest expense | ||||||||||||||||||||||||
Term deposits | (1,113 | ) | 128 | (985 | ) | 2,078 | (1,959 | ) | 119 | |||||||||||||||
Other interest-bearing deposits | (8,330 | ) | 1,143 | (7,187 | ) | 1,247 | (10,532 | ) | (9,285 | ) | ||||||||||||||
Short-term borrowings | (4,669 | ) | 51,421 | 46,752 | 59,499 | (174,043 | ) | (114,544 | ) | |||||||||||||||
Unswapped fixed-rate Consolidated Bonds | 67,802 | (67,688 | ) | 114 | 371,857 | (210,359 | ) | 161,498 | ||||||||||||||||
Unswapped adjustable-rate Consolidated Bonds | 1,030 | 3,734 | 4,764 | (22,040 | ) | (7,088 | ) | (29,128 | ) | |||||||||||||||
Swapped Consolidated Bonds | 39,193 | 65,963 | 105,156 | 9,740 | (101,120 | ) | (91,380 | ) | ||||||||||||||||
Mandatory redeemable capital stock | — | 1,350 | 1,350 | — | — | — | ||||||||||||||||||
Other borrowings | 75 | 5 | 80 | 7 | (15 | ) | (8 | ) | ||||||||||||||||
Total | 93,988 | 56,056 | 150,044 | 422,388 | (505,116 | ) | (82,728 | ) | ||||||||||||||||
Increase (decrease) in net interest income | $ | 37,817 | $ | 36,273 | $ | 74,090 | $ | 72,512 | $ | (109,490 | ) | $ | (36,978 | ) | ||||||||||
(Dollars in thousands) | 2004 | 2003 | 2002 | |||||||||
Other Income | ||||||||||||
Service fees | $ | 1,651 | $ | 1,529 | $ | 1,503 | ||||||
Net losses on trading securities | (33 | ) | (415 | ) | (625 | ) | ||||||
Net (losses) gains on other securities | (3 | ) | 4,571 | — | ||||||||
Net realized and unrealized gains (losses) on derivatives and hedging activities | 39,555 | 26,234 | (836 | ) | ||||||||
Other non-interest income, net | 2,706 | 4,107 | 4,184 | |||||||||
Total other income | $ | 43,876 | $ | 36,026 | $ | 4,226 | ||||||
Other Expense | ||||||||||||
Salaries and benefits | $ | 18,131 | $ | 15,928 | $ | 13,435 | ||||||
Other operating expense | 10,413 | 9,045 | 7,780 | |||||||||
Finance Board | 2,468 | 2,278 | 2,157 | |||||||||
Office of Finance | 2,226 | 1,985 | 1,910 | |||||||||
Other expenses | 3,210 | 2,051 | 660 | |||||||||
Total other expense | $ | 36,448 | $ | 31,287 | $ | 25,942 | ||||||
§ | Gains/Losses on Securities. The change in 2004 in the net gains on securities held to maturity was mostly due to the sale in 2003 of $81.6 million of mortgage-backed securities. Securities sales were minimal in 2004. |
99
Table of Contents
§ | Effect of SFAS 133 on Earnings. The following table is a summary of the net realized and unrealized gain (loss) on derivatives and hedging activities for the last three years: |
2004 | 2003 | 2002 | ||||||||||
Fair Value Hedge | ||||||||||||
Advances | $ | 37,964 | $ | 25,205 | $ | (181 | ) | |||||
Mortgage Purchase Program | — | (664 | ) | (326 | ) | |||||||
Consolidated Obligations | 1,790 | — | 4 | |||||||||
Total | 39,754 | 24,541 | (503 | ) | ||||||||
Economic Hedge | ||||||||||||
Mandatory Delivery Contracts | (6,750 | ) | 11,114 | — | ||||||||
To-be-announced mortgage-backed securities hedge | 6,299 | (9,418 | ) | — | ||||||||
Investments | (56 | ) | (3 | ) | (333 | ) | ||||||
Consolidated Obligations | 308 | — | — | |||||||||
Total | (199 | ) | 1,693 | (333 | ) | |||||||
Total net realized and unrealized gains (losses) on derivatives and hedging activities | $ | 39,555 | $ | 26,234 | $ | (836 | ) | |||||
The net increase in the gain on SFAS 133 for 2004 versus 2003 due to ineffectiveness was $0.5 million, excluding changes in amortization of the basis adjustments on modified Advance hedging relationships. Excluding the $37.6 million amortization of these adjustments in 2004, SFAS 133 increased 2004 earnings by $2.0 million. Excluding the $24.7 million of basis adjustments amortized in 2003, SFAS 133 raised 2003 earnings by $1.5 million. SFAS 133-related net fair value adjustments on derivatives are recorded in the category “Net realized and unrealized gain (loss) on derivatives and hedging activities” in non-interest income. | |||
§ | Total Other Expense. Total other expense increased $5.2 million in 2004 over 2003 (16.5 percent), compared to $5.3 million in 2003 over 2002 (20.6 percent). The level of total other expense as a percentage of average total assets was 0.045 percent in 2004 and 0.041 percent in 2003, while as a percentage of average capital it was 0.96 percent in 2004 and 0.85 percent in 2003. These ratios continued to be the lowest of any FHLBank. | ||
The bulk of other expense is salaries and benefits, which rose by $2.2 million (13.8 percent) in 2004 compared to $2.5 million (18.6 percent) in 2003. These and other operating expenses (which include consulting fees and general contractual services) increased mostly due to our efforts to enhance financial disclosures and controls. The change in other expenses was largely due to the full year’s amount of expense related to the American Dream program from $0.5 million in 2003 to $1.5 million in 2004. |
100
Table of Contents
§ | The quarterly contributions to ROE from other net interest income (excluding SFAS 91-related amortization, Advance prepayment fees, and SFAS 133-related amortization) were relatively stable in 2004. The net effect of the various favorable and unfavorable factors discussed in the “Net Interest Income” section (page 91) tended to balance one another during each quarter of 2004. However, as identified in the same section, the change in other net interest income between the whole of 2003 and the whole of 2004 was strongly positive. This component of earnings increased by $56.5 million, from $254.6 million in 2003 to $311.1 million in 2004. | ||
§ | SFAS 91-related net amortization decreased in the second quarter of 2004 over the first quarter of 2004 due to increases in mortgage interest rates in the second quarter that slowed actual and projected future mortgage prepayment speeds. Most of our mortgage assets were purchased at premiums, the amortization of which as a reduction in earnings is delayed as interest rates increase. Mortgage interest rates then tended to fall in the last half of the year, which again accelerated SFAS 91 recognition of mortgage premiums. | ||
§ | Advance prepayment fees were volatile across quarters. Seventy-five percent of 2004’s Advance prepayment fees were recorded in the second half of the year and 95 percent of 2003’s fees were recorded in the second half of that year. | ||
§ | There was minimal volatility in SFAS 133-related amortization of basis adjustments on modified Advance hedging relationships in 2004 compared to 2003. This amortization began in the second quarter of 2003. | ||
§ | The relative stability in ROE between the first and second quarters of 2003 was due to the net effect of several offsetting factors. On the unfavorable side, there was a $10.9 million increase in SFAS 91 amortization (which decreased earnings) in the second quarter due to large reductions in mortgage interest rates in the second quarter of 2003 that increased actual and future projected mortgage prepayment speeds. On the favorable side, there was a gain on the sale of securities and an increase in other net interest income that occurred primarily because we increased the amount of capital leverage and the amount of hedging of the market risk from the commitment period of Mandatory Delivery Contracts. | ||
§ | ROE improved by 0.80 percentage points in the third quarter of 2003 due to the large increase in Advance prepayment fees and reduction in SFAS 91-related amortization. However, the significantly lower amount of other net interest income in the third quarter of 2003 occurred because of dramatically faster mortgage prepayment speeds in response to historical lows reached in mortgage rates in the second quarter of 2003. These faster prepayment speeds resulted in an imbalanced asset/liability mix, as is discussed in the “Factors that Affected 2004’s Net Interest Income” section (page 93). | ||
§ | ROE was constant between the third and fourth quarters of 2003, despite a $10.3 million increase in SFAS 91-related amortization as mortgage rates decreased in the fourth quarter after increasing in the third quarter. The increase in other net interest income in the fourth quarter of 2003 occurred because of management’s action to rebalance our market risk/return profile, as discussed in the “Net Interest Income” section (page 91). |
101
Table of Contents
Dollars in Millions | Annualized ROE | |||||||||||||||||||||||||||||||||||||||
Quarter 1 | Quarter 2 | Quarter 3 | Quarter 4 | Total | Quarter 1 | Quarter 2 | Quarter 3 | Quarter 4 | Total | |||||||||||||||||||||||||||||||
Year 2004 | ||||||||||||||||||||||||||||||||||||||||
Net Interest Income: | ||||||||||||||||||||||||||||||||||||||||
Net (amortization)/accretion(1) | $ | (15.1 | ) | $ | (2.5 | ) | $ | (11.6 | ) | $ | (11.8 | ) | $ | (41.0 | ) | (1.20 | )% | (0.20 | )% | (0.89 | )% | (0.88 | )% | (0.79 | )% | |||||||||||||||
Prepayment fees | 10.8 | 6.4 | 32.4 | 19.6 | 69.2 | 0.86 | 0.50 | 2.48 | 1.47 | 1.34 | ||||||||||||||||||||||||||||||
Advance basis adjustment(2) | (9.4 | ) | (9.4 | ) | (9.5 | ) | (9.3 | ) | (37.6 | ) | (0.74 | ) | (0.73 | ) | (0.73 | ) | (0.70 | ) | (0.73 | ) | ||||||||||||||||||||
Other net interest income | 75.0 | 76.1 | 77.3 | 82.7 | 311.1 | 5.94 | 5.95 | 5.92 | 6.19 | 6.01 | ||||||||||||||||||||||||||||||
Total net-interest income | 61.3 | 70.6 | 88.6 | 81.2 | 301.7 | 4.86 | 5.52 | 6.78 | 6.08 | 5.83 | ||||||||||||||||||||||||||||||
Securities gains (losses) | 0.1 | (0.1 | ) | — | — | — | 0.01 | (0.01 | ) | — | — | — | ||||||||||||||||||||||||||||
Net realized and unrealized gains (losses) on derivatives (2) (3) | 9.0 | 12.4 | 8.2 | 10.0 | 39.6 | 0.71 | 0.97 | 0.63 | 0.75 | 0.76 | ||||||||||||||||||||||||||||||
Other non-interest income | 1.0 | 1.0 | 1.2 | 1.1 | 4.3 | 0.08 | 0.08 | 0.09 | 0.08 | 0.08 | ||||||||||||||||||||||||||||||
Total non-interest income | 10.1 | 13.3 | 9.4 | 11.1 | 43.9 | 0.80 | 1.04 | 0.72 | 0.83 | 0.84 | ||||||||||||||||||||||||||||||
Total revenue | 71.4 | 83.9 | 98.0 | 92.3 | 345.6 | 5.66 | 6.56 | 7.50 | 6.91 | 6.67 | ||||||||||||||||||||||||||||||
Total non-interest expense | 9.1 | 9.6 | 8.8 | 9.0 | 36.5 | 0.72 | 0.75 | 0.67 | 0.67 | 0.70 | ||||||||||||||||||||||||||||||
Total assessments | 16.5 | 19.7 | 23.7 | 22.2 | 82.1 | Assessments have been pro-rated to the other components. | ||||||||||||||||||||||||||||||||||
Total net income/ROE | $ | 45.8 | $ | 54.6 | $ | 65.5 | $ | 61.1 | $ | 227.0 | 4.94 | % | 5.81 | % | 6.83 | % | 6.24 | % | 5.97 | % | ||||||||||||||||||||
Average capital | $ | 3,718.5 | $ | 3,774.7 | $ | 3,816.9 | $ | 3,907.7 | $ | 3,804.8 | ||||||||||||||||||||||||||||||
Year 2003 | ||||||||||||||||||||||||||||||||||||||||
Net Interest Income: | ||||||||||||||||||||||||||||||||||||||||
Net (amortization)/accretion(1) | $ | (4.3 | ) | $ | (15.2 | ) | $ | (1.1 | ) | $ | (11.4 | ) | $ | (32.0 | ) | (0.36 | )% | (1.23 | )% | (0.09 | )% | (0.89 | )% | (0.64 | )% | |||||||||||||||
Prepayment fees | 0.4 | 1.2 | 14.5 | 13.7 | 29.8 | 0.03 | 0.10 | 1.15 | 1.07 | 0.60 | ||||||||||||||||||||||||||||||
Advance basis adjustment(2) | — | — | (15.4 | ) | (9.3 | ) | (24.7 | ) | — | — | (1.22 | ) | (0.73 | ) | (0.50 | ) | ||||||||||||||||||||||||
Other net interest income | 63.3 | 68.5 | 55.6 | 67.2 | 254.6 | 5.25 | 5.55 | 4.39 | 5.25 | 5.11 | ||||||||||||||||||||||||||||||
Total net-interest income | 59.4 | 54.5 | 53.6 | 60.2 | 227.7 | 4.92 | 4.42 | 4.23 | 4.70 | 4.57 | ||||||||||||||||||||||||||||||
Securities gains (losses) | — | 4.5 | (0.2 | ) | (0.1 | ) | 4.2 | — | 0.36 | (0.02 | ) | (0.01 | ) | 0.08 | ||||||||||||||||||||||||||
Net realized and unrealized gains (losses) on derivatives (2) (3) | (0.2 | ) | (0.5 | ) | 16.7 | 10.2 | 26.2 | (0.02 | ) | (0.04 | ) | 1.32 | 0.80 | 0.53 | ||||||||||||||||||||||||||
Other non-interest income | 1.0 | 1.4 | 0.9 | 2.3 | 5.6 | 0.08 | 0.11 | 0.07 | 0.18 | 0.11 | ||||||||||||||||||||||||||||||
Total non-interest income | 0.8 | 5.4 | 17.4 | 12.4 | 36.0 | 0.06 | 0.43 | 1.37 | 0.97 | 0.72 | ||||||||||||||||||||||||||||||
Total revenue | 60.2 | 59.9 | 71.0 | 72.6 | 263.7 | 4.98 | 4.85 | 5.60 | 5.67 | 5.29 | ||||||||||||||||||||||||||||||
Total non-interest expense | 7.4 | 7.9 | 7.5 | 8.5 | 31.3 | 0.61 | 0.64 | 0.59 | 0.66 | 0.63 | ||||||||||||||||||||||||||||||
Total assessments | 14.0 | 13.8 | 16.9 | 17.0 | 61.7 | Assessments have been pro-rated to the other components. | ||||||||||||||||||||||||||||||||||
Total net income/ROE | $ | 38.8 | $ | 38.2 | $ | 46.6 | $ | 47.1 | $ | 170.7 | 4.37 | % | 4.21 | % | 5.01 | % | 5.01 | % | 4.66 | % | ||||||||||||||||||||
Average capital | $ | 3,602.3 | $ | 3,642.5 | $ | 3,692.4 | $ | 3,729.8 | $ | 3,667.2 | ||||||||||||||||||||||||||||||
(1) | Per SFAS 91, net (amortization)/accretion of premiums/discounts on mortgage assets and Consolidated Obligations and deferred transaction costs (concession fees) for Consolidated Obligations. | |
(2) | Amortization of SFAS133 basis adjustments on modified hedge relationships decreased Advance interest income and increased the “Net realized and unrealized gain (loss) on derivatives” by these amounts. | |
(3) | Per SFAS 133. |
102
Table of Contents
Traditional | Mortgage | |||||||||||
Member | Purchase | |||||||||||
Finance | Program | Total | ||||||||||
2004 | ||||||||||||
Net interest income | $ | 216,330 | $ | 85,428 | $ | 301,758 | ||||||
Net income | $ | 169,429 | $ | 57,618 | $ | 227,047 | ||||||
Average assets | $ | 72,174,510 | $ | 8,320,169 | $ | 80,494,679 | ||||||
Assumed average capital allocation | $ | 3,407,884 | $ | 396,872 | $ | 3,804,756 | ||||||
Return on Average Assets | 0.24 | % | 0.69 | % | 0.28 | % | ||||||
Return on Average Equity | 4.97 | % | 14.52 | % | 5.97 | % | ||||||
2003 | ||||||||||||
Net interest income | $ | 152,296 | $ | 75,372 | $ | 227,668 | ||||||
Net income | $ | 119,660 | $ | 51,088 | $ | 170,748 | ||||||
Average assets | $ | 70,366,479 | $ | 6,695,531 | $ | 77,062,010 | ||||||
Assumed average capital allocation | $ | 3,348,479 | $ | 318,707 | $ | 3,667,186 | ||||||
Return on Average Assets | 0.17 | % | 0.76 | % | 0.22 | % | ||||||
Return on Average Equity | 3.57 | % | 16.03 | % | 4.66 | % | ||||||
103
Table of Contents
§ | rebalancing of the market risk/return profile (much of which involved mortgage-backed securities contained in this segment); | ||
§ | lower rollover rates on Consolidated Bonds; | ||
§ | improved funding spreads on interest rate swaps related to Consolidated Bonds; and | ||
§ | the short-term asset gap. |
§ | $5.6 million more SFAS 91-related amortization of purchased premiums related to the program’s assets; | ||
§ | the significantly narrower spreads on new mortgage assets in the program, which began in the second half of 2003 and deteriorated further throughout 2004; and | ||
§ | the smaller gain from short funding from the increases in 2004 in short-term interest rates. |
104
Table of Contents
105
Table of Contents
106
Table of Contents
§ | strict policies requiring over-collateralization of our Credit Services; | ||
§ | credit enhancements on the Mortgage Purchase Program that protect against losses down to approximately 50 percent of each loan’s value and that raise the credit rating on the loans to AA/Aa; | ||
§ | adherence to a Financial Management Policy that establishes conservative limits on market risk exposures, investment activities, unsecured counterparty exposures and the amount of capital leverage; | ||
§ | holding only long-term investments with AAA/Aaa credit ratings; | ||
§ | holding only high-quality short-term investments to highly-rated counterparties; | ||
§ | requiring sufficient collateral on interest rate swaps; | ||
§ | limiting our use of derivatives only to hedge market risk and credit risk and not for speculative purposes; and | ||
§ | the continued absence of any loss from credit or operations risk. |
107
Table of Contents
§ | differences in the timing of the expected repricings and expected maturities of cash flows of assets and liabilities and hedging instruments (referred to as net cash flows); | ||
§ | changes in the relationship between market benchmark rates, which are the foundation for the rates on our assets and liabilities (referred to as basis risk); and | ||
§ | changes in the values of the options associated with certain Advances, mortgage assets, Consolidated Obligations, and derivatives. |
§ | Interest rates (especially long-term interest rates) change, which result in changes in market risk exposure given differences in the timing of expected net cash flows. | ||
§ | Changes occur in the actual and projected prepayment speeds on our mortgage assets. We are unable to completely hedge the volatility of mortgage prepayments in a cost effective manner using callable debt or derivatives. Changes in mortgage prepayment speeds, net of offsetting changes in the cash flows of liabilities, affect the timing difference of actual and expected net cash flows. Prepayment speeds change primarily due to changes in actual and expected future mortgage interest rates as well as secondarily due to changes in other factors such as the type of mortgage assets we hold, their final maturities, the age of the mortgage loans, and the historical pattern of the evolution of interest rates. |
§ | they do not indicate the timing of risk exposure and earning patterns; | ||
§ | they do not incorporate active management responses in response to actual changes in the market environment; and |
108
Table of Contents
§ | they do not consider effects of changes in the level, composition and management of future business activity, the passage of time, or duration drift. |
§ | changes in market variables such as interest rates, mortgage prepayment speeds, and interest rate volatility; | ||
§ | differences in maturities, pay downs, and exercise of call and put options of assets and liabilities; | ||
§ | changes in the composition of long-term assets (e.g., between long-term Advances and mortgage assets) and long-term Consolidated Bonds (e.g., the percentage of noncallable versus callable Consolidated Bonds); and | ||
§ | management actions to control the market risk profile in response to the above three variables and to expectations of potential future market and business environments. |
109
Table of Contents
§ | We hedge specific asset purchases and specific subportfolios in the context of the market risk/return profile of the entire balance sheet and the entire mortgage asset portfolio. | ||
§ | We measure the market risk/return profile primarily at the level of the entire balance sheet and the entire mortgage asset portfolio, not primarily at the level of specific asset segments or specific subportfolios of mortgage assets. | ||
§ | After Consolidated Bonds are issued and allocated to the Credit Services portfolio or the Mortgage Purchase Program or mortgage-backed securities subportfolios, they are not reallocated. | ||
§ | Our overall market risk/return profile is continually “rebalanced” through time in response to actual and expected changes in interest rates, prepayment speeds, interest rate volatility, cash flow mismatches between amortizing mortgage assets and nonamortizing debt liabilities, the actual market risk profile, earnings considerations, and other factors. |
§ | as assets pay down or mature; | ||
§ | as liabilities mature or are called; | ||
§ | as the balance sheet’s market risk/return profile changes due to movements in interest rates, projected mortgage prepayment speeds, and interest rate volatility; | ||
§ | as new assets are purchased; and | ||
§ | as opportunities to issue debt on favorable terms arise. |
110
Table of Contents
§ | minimize, to the extent consistent with paying a competitive dividend, the earnings volatility resulting from economic considerations, for example, resulting from the inability to perfectly hedge, on a cost effective basis, all risk from varying prepayment speeds of mortgage assets; and | ||
§ | minimize, to the extent possible, earnings volatility from the application of GAAP (which is primarily an issue of the timing of recognition of economic earnings). |
111
Table of Contents
(Dollars in millions) | Down 200 | Down 100 | Down 50 | Flat Rates | Up 50 | Up 100 | Up 200 | |||||||||||||||||||||
2004 Year End | ||||||||||||||||||||||||||||
Market Value of Equity | $ | 3,786.9 | $ | 4,040.8 | $ | 4,110.1 | $ | 4,122.6 | $ | 4,082.2 | $ | 4,002.7 | $ | 3,796.1 | ||||||||||||||
% Change from Flat Case | (8.1 | )% | (2.0 | )% | (0.3 | )% | (1.0 | )% | (2.9 | )% | (7.9 | )% | ||||||||||||||||
2004 Quarter 3 | ||||||||||||||||||||||||||||
Market Value of Equity | $ | 3,535.7 | $ | 3,817.1 | $ | 3,893.4 | $ | 3,908.8 | $ | 3,870.5 | $ | 3,794.1 | $ | 3,598.1 | ||||||||||||||
% Change from Flat Case | (9.5 | )% | (2.3 | )% | (0.4 | )% | (1.0 | )% | (2.9 | )% | (8.0 | )% | ||||||||||||||||
2004 Quarter 2 | ||||||||||||||||||||||||||||
Market Value of Equity | $ | 3,717.5 | $ | 3,840.3 | $ | 3,815.3 | $ | 3,737.5 | $ | 3,626.0 | $ | 3,501.6 | $ | 3,263.0 | ||||||||||||||
% Change from Flat Case | (0.5 | )% | 2.8 | % | 2.1 | % | (3.0 | )% | (6.3 | )% | (12.7 | )% | ||||||||||||||||
2004 Quarter 1 | ||||||||||||||||||||||||||||
Market Value of Equity | $ | 3,592.6 | $ | 3,804.5 | $ | 3,865.5 | $ | 3,872.7 | $ | 3,857.3 | $ | 3,759.8 | $ | 3,475.6 | ||||||||||||||
% Change from Flat Case | (7.2 | )% | (1.8 | )% | (0.2 | )% | (0.4 | )% | (2.9 | )% | (10.3 | )% | ||||||||||||||||
2003 Year End | ||||||||||||||||||||||||||||
Market Value of Equity | $ | 3,698.6 | $ | 3,864.6 | $ | 3,877.3 | $ | 3,842.0 | $ | 3,785.0 | $ | 3,695.7 | $ | 3,445.1 | ||||||||||||||
% Change from Flat Case | (3.7 | )% | 0.6 | % | 0.9 | % | (1.5 | )% | (3.8 | )% | (10.3 | )% | ||||||||||||||||
2002 Year End | ||||||||||||||||||||||||||||
Market Value of Equity | $ | 3,362.3 | $ | 3,524.3 | $ | 3,604.4 | $ | 3,624.8 | $ | 3,617.0 | $ | 3,552.1 | $ | 3,365.6 | ||||||||||||||
% Change from Flat Case | (7.2 | )% | (2.8 | )% | (0.6 | )% | (0.2 | )% | (2.0 | )% | (7.2 | )% |
112
Table of Contents
113
Table of Contents
(In years) | Down 200 | Down 100 | Down 50 | Flat Rates | Up 50 | Up 100 | Up 200 | |||||||||||||||||||||
2004 Year End | (7.16 | ) | (4.49 | ) | (1.82 | ) | 0.85 | 3.13 | 4.67 | 5.60 | ||||||||||||||||||
2004 Quarter 3 | (8.58 | ) | (5.07 | ) | (2.23 | ) | 0.73 | 3.17 | 4.69 | 5.52 | ||||||||||||||||||
2004 Quarter 2 | (6.23 | ) | (0.30 | ) | 2.90 | 5.32 | 6.74 | 7.22 | 6.93 | |||||||||||||||||||
2004 Quarter 1 | (7.79 | ) | (5.26 | ) | (2.21 | ) | 0.85 | 3.60 | 7.23 | 7.86 | ||||||||||||||||||
2003 Year End | (5.56 | ) | (3.04 | ) | (0.59 | ) | 2.39 | 4.72 | 6.27 | 7.20 | ||||||||||||||||||
2002 Year End | (6.71 | ) | (4.66 | ) | (2.59 | ) | 0.26 | 2.51 | 4.59 | 6.20 |
114
Table of Contents
2004 Year End | 103.0 | % | ||
2003 Year End | 102.8 | |||
2002 Year End | 100.3 |
§ | the flatter yield curve during 2004, which caused market prices on outstanding mortgage assets to tend to decrease less than market prices on Consolidated Bonds; | ||
§ | narrower market spreads on new mortgage assets versus new Consolidated Bonds in 2004 (due to the flatter yield curve and supply and demand conditions of mortgage assets compared to Consolidated Bonds), which improved the value of existing mortgage assets; and | ||
§ | a reduction in 2004 in expected future interest rates, which lowered the market cost of the unfavorable prepayment option on mortgage assets. |
Down 200 | Down 100 | Down 50 | Flat Rates | Up 50 | Up 100 | Up 200 | ||||||||||||||||||||||
2004 Year End | (1.8 | )% | (0.5 | )% | (0.1 | )% | — | (0.2 | )% | (0.5 | )% | (1.4 | )% | |||||||||||||||
2003 Year End | (1.4 | )% | (0.2 | )% | 0.0 | % | — | (0.2 | )% | (0.7 | )% | (1.7 | )% |
115
Table of Contents
(In years) | Down 200 | Down 100 | Down 50 | Flat Rates | Up 50 | Up 100 | Up 200 | |||||||||||||||||||||
2004 Year End | 1.26 | 1.79 | 2.55 | 3.63 | 4.76 | 5.62 | 6.19 | |||||||||||||||||||||
2004 Quarter 3 | 1.27 | 1.82 | 3.12 | 3.64 | 4.78 | 5.68 | 6.30 | |||||||||||||||||||||
2004 Quarter 2 | 1.44 | 2.47 | 3.49 | 4.64 | 5.60 | 6.10 | 6.49 | |||||||||||||||||||||
2004 Quarter 1 | 1.24 | 1.58 | 2.08 | 3.00 | 4.05 | 5.09 | 6.26 | |||||||||||||||||||||
2003 Year End | 1.36 | 1.89 | 2.63 | 3.24 | 4.79 | 5.73 | 6.57 | |||||||||||||||||||||
2003 Quarter 3 | 1.32 | 1.68 | 2.21 | 3.14 | 4.24 | 5.30 | 6.48 | |||||||||||||||||||||
2003 Quarter 2 | 1.16 | 1.30 | 1.52 | 2.01 | 2.90 | 3.99 | 4.34 | |||||||||||||||||||||
2003 Quarter 1 | 1.10 | 1.15 | 1.33 | 2.01 | 3.18 | 4.51 | 6.00 |
§ | to pay a competitive dividend over time across a wide range of business environments; | ||
§ | to minimize the volatility of near-term and intermediate-term earnings, relative to yields on comparable investments; and | ||
§ | to minimize market risk exposures at various maturity points on the yield curve. |
§ | earnings-at-risk simulations of projected net income for the whole balance sheet, including projected incremental transactions, over a multi-year horizon under various interest rate scenarios, balance sheet projections, asset spreads, risk management strategies, and sensitivities of prepayment speeds; | ||
§ | projected cash flow and funding mismatches; and | ||
§ | key rate duration analysis. |
§ | characteristics (principal balances, maturities, options, coupon rates, repricing frequency, amortization schedules, accrual bases, expected prepayment speeds) of current and future assets and liabilities; | ||
§ | spreads of new assets to financing (which we are able to change through time); |
116
Table of Contents
§ | the ability to link new assets with specific new funding (which we are able to change through time); | ||
§ | the ability to model management of market risk exposure by short funding and/or long funding and by changing the size and composition of the investments portfolio; and | ||
§ | the ability to specify monthly future interest rates for all points on numerous yield curves (LIBOR, U.S. Treasury, Consolidated Obligations, and mortgage). |
117
Table of Contents
§ | to synthetically transform long-term fixed-rate callable Consolidated Obligations, which are one type of debt security the investor community prefers, to an adjustable-rate LIBOR funding basis (usually 3-month LIBOR) in order to offer and fund competitively-priced LIBOR Advances and other short-term Advances; | ||
§ | to hedge below-market fixed rates on, for example, Convertible Rate Advances that have a put option on interest-rates permitting, or requiring, us to convert them to adjustable-rate LIBOR Advances (usually after an initial lockout period); | ||
§ | to hedge Regular Fixed-Rate Advances when it may not be advantageous to issue Consolidated Obligations; | ||
§ | to hedge the interest rate and interest-rate options on certain Advances and investments that have caps and/or floors we have purchased; and | ||
§ | to hedge the market risk exposure during the commitment period of Mandatory Delivery Contracts. |
December 31, | ||||||||||||||||||
(Dollars in millions) | 2004 | 2003 | 2002 | |||||||||||||||
Hedged Item | Hedging Instrument | |||||||||||||||||
Consolidated Obligations | Interest rate swap | $ | 25,235 | $ | 16,639 | $ | 17,068 | |||||||||||
Convertible Advances | Interest rate swap | 7,395 | 14,818 | 15,547 | ||||||||||||||
Advances and Investments with purchased caps and/or floors | Interest rate swap | 14 | 1,022 | 1,029 | ||||||||||||||
Regular Fixed-Rate Advances | Interest rate swap | 240 | 200 | 200 | ||||||||||||||
Mandatory Delivery | Commitments to sell to-be-announced | |||||||||||||||||
Contracts | mortgage-backed securities | 53 | 303 | 404 | ||||||||||||||
Total based on hedged item(1) | $ | 32,937 | $ | 32,982 | $ | 34,248 | ||||||||||||
(1) | The FHLBank enters into Mandatory Delivery Contracts (commitments to purchase loans) in the normal course of business and economically hedges them with commitments to sell to-be-announced mortgage-backed securities. Therefore, the Mandatory Delivery Contracts (which are derivatives) are the objects of the hedge (the Hedged Item) and are not listed as a Hedging Instrument in this table. |
118
Table of Contents
(Dollars in millions) | 2004 | 2003 | 2002 | |||||||||
Shortcut (Fair Value) Treatment | ||||||||||||
Advances | $ | 7,408 | $ | 12,481 | $ | 15,575 | ||||||
Mortgage Purchase Program | — | — | — | |||||||||
Investments | — | — | — | |||||||||
Consolidated Obligations | 15,325 | 11,363 | 7,821 | |||||||||
Total | 22,733 | 23,844 | 23,396 | |||||||||
Long-haul (Fair Value) Treatment | ||||||||||||
Advances | 237 | 3,547 | 1,182 | |||||||||
Mandatory Delivery Contracts | — | — | 404 | |||||||||
Investments | — | — | — | |||||||||
Consolidated Obligations | 9,910 | 5,276 | 9,247 | |||||||||
Total | 10,147 | 8,823 | 10,833 | |||||||||
Economic Hedges | ||||||||||||
Advances | — | — | — | |||||||||
Mandatory Delivery Contracts | 75 | 330 | — | |||||||||
To-be-announced mortgage-backed securities hedges | 53 | 303 | — | |||||||||
Investments | 4 | 12 | 19 | |||||||||
Consolidated Obligations | — | — | — | |||||||||
Total | 132 | 645 | 19 | |||||||||
Total Derivatives | $ | 33,012 | $ | 33,312 | $ | 34,248 | ||||||
119
Table of Contents
120
Table of Contents
§ | whole first mortgages on residential property, or securities representing a whole interest in such mortgages; | ||
§ | securities issued, insured, or guaranteed by the United States government or any of its agencies; | ||
§ | cash or deposits in the FHLBank; | ||
§ | other real estate-related collateral acceptable to us provided that the collateral has a readily ascertainable value and we can perfect a security interest in the property; and | ||
§ | loans to small or agriculture businesses that may be pledged by Community Financial Institutions. |
Borrowing Capacity by Assigned Credit Rating (Dollars in millions) | |||||||||||||||||||||||||||||
All Secured Borrowers | Secured Borrowers with Borrowings | ||||||||||||||||||||||||||||
Member | Collateral Based | Credit | Collateral Based | ||||||||||||||||||||||||||
Credit | Borrowing | Services | Borrowing | Percent | |||||||||||||||||||||||||
Rating | Number | Capacity | Number | Outstanding | Capacity | Used | |||||||||||||||||||||||
1 | 272 | $ | 50,418 | 178 | $ | 13,283 | $ | 48,190 | 28 | % | |||||||||||||||||||
2 | 430 | 48,853 | 362 | 28,331 | 47,604 | 60 | |||||||||||||||||||||||
3 | 40 | 964 | 30 | 555 | 916 | 61 | |||||||||||||||||||||||
4 | 11 | 120 | 8 | 78 | 116 | 67 | |||||||||||||||||||||||
5 | 13 | 151 | 11 | 87 | 149 | 58 | |||||||||||||||||||||||
Total | 766 | $ | 100,506 | 589 | $ | 42,334 | $ | 96,975 | 44 | ||||||||||||||||||||
121
Table of Contents
122
Table of Contents
(In thousands) | 2004 | 2003 | ||||||
Lender Risk Account at beginning of year | $ | 30,265 | $ | 10,804 | ||||
Additions | 7,054 | 19,461 | ||||||
Claims | (55 | ) | — | |||||
Scheduled distributions | (21 | ) | — | |||||
Lender Risk Account at end of year | $ | 37,243 | $ | 30,265 | ||||
December 31 | ||||||||
2004 | 2003 | |||||||
Midwest | 51.0 | % | 51.4 | % | ||||
Northeast | 7.0 | 6.4 | ||||||
Southeast | 23.6 | 24.0 | ||||||
Southwest | 12.2 | 12.2 | ||||||
West | 6.2 | 6.0 | ||||||
Total | 100.0 | % | 100.0 | % | ||||
Northeast includes CT, DE, MA, ME, NH, NJ, NY, PA, PR, RI, VI, and VT.
Southeast includes AL, DC, FL, GA, KY, MD, MS, NC, SC, TN, VA, and WV.
Southwest includes AR, AZ, CO, KS, LA, MO, NM, OK, TX, and UT.
West includes AK, CA, GU, HI, ID, MT, NV, OR, WA, and WY.
123
Table of Contents
Percent | Percent | |||||||||||
Loan-to-Value | of Principal | FICO Score | of Principal | |||||||||
<= 60% | 24.9 | % | < 620 | 0 | % | |||||||
> 60% to 70% | 19.5 | 620 to < 660 | 5.4 | |||||||||
> 70% to 80% | 46.1 | 660 to < 700 | 13.0 | |||||||||
> 80% to 90% | 5.6 | 700 to < 740 | 20.7 | |||||||||
> 90% | 3.9 | >= 740 | 60.9 | |||||||||
Weighted Average | 69 | 744 |
124
Table of Contents
December 31 | ||||||||
(Dollars in millions) | 2004 | 2003 | ||||||
Aaa/AAA | $ | 500.0 | $ | 284.0 | ||||
Aa/AA | 8,254.8 | 8,397.5 | ||||||
A | 5,310.0 | 4,881.0 | ||||||
Baa/BBB | — | 45.0 | ||||||
Total | $ | 14,064.8 | $ | 13,607.5 | ||||
125
Table of Contents
(Dollars in thousands) | Mark-to- | Market Value | Market Value | Net Market- | |||||||||||||||||||||||
Credit Rating | Number of | Notional | Market | of Collateral | of Collateral | to-Market | |||||||||||||||||||||
Category | Counterparties | Principal | Valuation | Held | Delivered | Exposure | |||||||||||||||||||||
Aaa/AAA | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
Aa/AA | 5 | 6,214,500 | (43,057 | ) | — | — | (43,057 | ) | |||||||||||||||||||
A | 8 | 26,669,896 | (487,757 | ) | — | 278,906 | (208,851 | ) | |||||||||||||||||||
Total | 13 | $ | 32,884,396 | $ | (530,814 | ) | $ | — | $ | 278,906 | $ | (251,908 | ) | ||||||||||||||
§ | Operational liquidity risk is the potential inability to meet anticipated or unanticipated day-to-day liquidity needs through our normal sources of funding. | ||
§ | Contingency liquidity risk is the potential inability to meet liquidity needs because our access to the capital markets is restricted or suspended for a period of time due to a market disruption, operational failure, or real or perceived credit quality problems. |
126
Table of Contents
§ | 100 percent of liabilities maturing or called in the next seven business days (net of liabilities issued, not yet settled); | ||
§ | 100 percent of assets traded, not yet settled, and Advance commitments; | ||
§ | 100 percent of Advances maturing; and | ||
§ | a percentage increase in potential Advances, computed based on recent balance experience. |
§ | cash; | ||
§ | overnight Federal funds, overnight deposits, self-liquidating term Federal funds, 90 percent of the market value of negotiable securities, 75 percent of the market value of held-to-maturity obligations of the United States, U.S. government agencies and mortgage-backed securities, and certain other investments as detailed in our Financial Management Policy; | ||
§ | Advances maturing within the next seven business days; and | ||
§ | principal and interest payments to be received within the next seven business days on mortgage-backed securities. |
Contingency Liquidity Requirement (Dollars in millions) | 2004 | 2003 | ||||||
Total Contingency Liquidity Reserves | $ | 29,877 | $ | 27,191 | ||||
Total Requirement | (18,369 | ) | (24,975 | ) | ||||
Excess Contingency Liquidity Available | $ | 11,508 | $ | 2,216 | ||||
Deposit Reserve Requirement (Dollars in millions) | 2004 | 2003 | ||||||
Total Eligible Deposit Reserves | $ | 39,088 | $ | 38,682 | ||||
Total Member Deposits | (1,032 | ) | (1,374 | ) | ||||
Excess Deposit Reserves | $ | 38,056 | $ | 37,308 | ||||
§ | 20 percent of the sum of our daily average demand and overnight deposits and other overnight borrowings, plus | ||
§ | 10 percent of the sum of our daily average term deposits, Consolidated Obligations, and other borrowings that mature within one year. |
127
Table of Contents
Average Daily Liquidity Requirement (Dollars in millions) | 2004 | 2003 | ||||||
Total Eligible Investments | $ | 13,043 | $ | 13,322 | ||||
Total Reserve Requirement | (4,312 | ) | (5,157 | ) | ||||
Excess Daily Liquidity Reserves | $ | 8,731 | $ | 8,165 | ||||
(Dollars in millions) | < 1 year | 1<3 years | 3<5 years | > 5 years | Total | |||||||||||||||
Long-term debt (Consolidated Bonds) – par | $ | 13,827.1 | $ | 23,048.0 | $ | 6,398.0 | $ | 8,707.0 | $ | 51,980.1 | ||||||||||
Mandatorily redeemable capital stock | — | 21.0 | 13.3 | — | 34.3 | |||||||||||||||
Other long-term obligations (term deposits) – par | 102.5 | 8.1 | 1.6 | 3.3 | 115.5 | |||||||||||||||
Capital lease obligations | — | — | — | — | — | |||||||||||||||
Operating leases (include premises and equipment) | 0.7 | 1.5 | 1.3 | — | 3.5 | |||||||||||||||
Total Contractual Obligations before off-balance sheet items | 13,930.3 | 23,078.6 | 6,414.2 | 8,710.3 | 52,133.4 | |||||||||||||||
Off-balance sheet items(1) | ||||||||||||||||||||
Commitments for additional Advances | 18.6 | — | — | — | 18.6 | |||||||||||||||
Standby Letters of Credit | 1,201.5 | 135.2 | 49.7 | 29.0 | 1,415.4 | |||||||||||||||
Standby bond purchase agreements | — | 46.9 | 69.9 | — | 116.8 | |||||||||||||||
Commitments to fund mortgage loans | 74.8 | — | — | — | 74.8 | |||||||||||||||
Unused line of credits and other commitments | — | — | — | — | — | |||||||||||||||
Consolidated Bonds traded, not yet settled | — | 250.0 | 65.0 | 210.0 | 525.0 | |||||||||||||||
Total off-balance sheet items | 1,294.9 | 432.1 | 184.6 | 239.0 | 2,150.6 | |||||||||||||||
Total Contractual Obligations and off-balance sheet items | $ | 15,225.2 | $ | 23,510.7 | $ | 6,598.8 | $ | 8,949.3 | $ | 54,284.0 | ||||||||||
(1) | Represents notional amount of related off-balance sheet obligations. |
128
Table of Contents
§ | The market value of equity at risk, which is determined from simulations using movements in interest rates and interest rate volatility that could occur during times of market stress. Interest rate movements and volatility are defined as those that have occurred over each 6-month period starting in 1978 and are calibrated based on current interest rate levels. The applicable market risk number is defined as the 99th percentile loss from all the simulations, which means that one percent of simulations have market value losses that exceed the applicable market risk number. | ||
§ | The amount by which our current base-case market value of equity is less than 85 percent of the book value of total capital. |
(Dollars in millions) | Year End 2004 | Monthly Average 2004 | ||||||
Market risk-based capital | $ | 294.2 | $ | 308.1 | ||||
Credit risk-based capital | 197.0 | 201.2 | ||||||
Operational risk-based capital | 147.4 | 152.8 | ||||||
Total risk-based capital | 638.6 | 662.1 | ||||||
Total permanent capital | 4,001.7 | 3,841.2 | ||||||
Excess permanent capital | $ | 3,363.1 | $ | 3,179.1 | ||||
Risk-based capital as a percent of permanent capital | 16.0 | % | 17.2 | % | ||||
§ | we operate with a low risk profile; | ||
§ | we have historically offered valued products and services to our member stockholders; | ||
§ | we have historically been able to pay competitive dividends; | ||
§ | our stock is not traded on an open exchange; | ||
§ | our stock is always carried at par on members’ books (unless it is more than temporarily impaired); and | ||
§ | our stock is required as a condition of membership and as a condition to engage in mission asset activity. |
129
Table of Contents
130
Table of Contents
131
Table of Contents
132
Table of Contents
(Dollars in millions) | Mortgage Purchase Program | Mortgage-Backed Securities | ||||||||||||||
Dollars | CPR | Dollars | CPR | |||||||||||||
2004 Quarter 4 | $ | 468 | 19 | $ | 610 | 19 | ||||||||||
2004 Quarter 3 | 387 | 16 | 600 | 19 | ||||||||||||
2004 Quarter 2 | 773 | 31 | 1,080 | 33 | ||||||||||||
2004 Quarter 1 | 376 | 15 | 689 | 23 | ||||||||||||
2003 Quarter 4 | 540 | 23 | 997 | 31 | ||||||||||||
2003 Quarter 3 | 1,522 | 60 | 2,705 | 67 | ||||||||||||
2003 Quarter 2 | 811 | 41 | 2,526 | 63 | ||||||||||||
2003 Quarter 1 | 446 | 32 | 2,149 | 57 |
133
Table of Contents
134
Table of Contents
135
Table of Contents
136
Table of Contents
(In millions)
Commercial | Thrifts and | Credit | Insurance | ||||||||||||||||||||||
Banks | Savings Banks | Unions | Companies | Other(1) | Total | ||||||||||||||||||||
September 30, 2005 | $ | 2,725 | $ | 638 | $ | 74 | $ | 20 | $ | 410 | $ | 3,867 | |||||||||||||
December 31, 2004 | 3,082 | 629 | 70 | 19 | 34 | 3,834 | |||||||||||||||||||
December 31, 2003 | 2,907 | 648 | 60 | 2 | 28 | 3,645 | |||||||||||||||||||
December 31, 2002 | 2,824 | 648 | 55 | — | 21 | 3,548 | |||||||||||||||||||
December 31, 2001 | 1,968 | 1,152 | 39 | — | 38 | 3,197 | |||||||||||||||||||
December 31, 2000 | 1,653 | 1,074 | 29 | — | 33 | 2,789 |
(1) | “Other” includes capital stock of members involved in mergers with non-members where the resulting institution is not a member of the FHLBank. |
(Dollars in millions) | ||||||||||||||||
Capital | Percent of Total | Number | ||||||||||||||
Name | Address | Stock | Capital Stock | of Shares | ||||||||||||
Charter One Bank, N.A.(1) | Cleveland, OH | $ | 541 | 14.0 | % | 5,410,936 | ||||||||||
U.S. Bank, N.A. | Cincinnati, OH | 489 | 12.6 | 4,890,230 | ||||||||||||
Fifth Third Bank | Cincinnati, OH | 342 | 8.9 | 3,423,835 | ||||||||||||
Ohio Savings Bank | Cleveland, OH | 199 | 5.1 | 1,989,863 |
(1) | Charles J. Koch, Chairman of the Board of Charter One Bank, is a director of the FHLBank. As discussed above, the number of votes that any member may cast for any one directorship cannot exceed the average number of shares of FHLBank stock that were required to be held by all members located in the state. |
137
Table of Contents
Capital | Percent of Total | |||||||||
Name | Address | Stock | Capital Stock | |||||||
Charter One Bank, N.A. | Cleveland, OH | $ | 541 | 14.0 | % | |||||
Park National Corporation(1) | Newark, OH | 51 | 1.3 | |||||||
Liberty Savings Bank, F.S.B. | Wilmington, OH | 31 | 0.8 | |||||||
Advantage Bank | Cambridge, OH | 27 | 0.7 | |||||||
Greene County Bank | Greeneville, TN | 6 | 0.1 | |||||||
Citizens National Bank | Sevierville, TN | 5 | 0.1 | |||||||
First Federal S&LA of Lorain | Lorain, OH | 4 | 0.1 | |||||||
North Akron Savings Bank | Akron, OH | 2 | 0.1 | |||||||
Peoples Exchange Bank | Beattyville, KY | 1 | 0.0 | |||||||
Peoples Bank | Morehead, KY | 1 | 0.0 |
(1) | Parent corporation of eight institutions which are FHLBank members. |
138
Table of Contents
Expiration of | Appointed or | |||||||||||
Name | Age | Director Since | Term as Director | Elected (State) | ||||||||
Donald R. Ball | 69 | 2003 | 12/31/05 | Appointed (KY) | ||||||||
Richard C. Baylor | 50 | 2003 | 12/31/08 | Elected (OH) | ||||||||
Charles Beach, Jr. | 86 | 1998 | 12/31/06 | Elected (KY) | ||||||||
Robert E. Brosky | 62 | 2003 | 12/31/08 | Elected (OH) | ||||||||
William Y. Carroll | 66 | 2002 | 12/31/07 | Elected (TN) | ||||||||
B. Proctor Caudill, Jr. | 56 | 2004 | 12/31/06 | Elected (KY) | ||||||||
Janet Weir Creighton | 55 | 2003 | 12/31/05 | Appointed (OH) | ||||||||
Stephen D. Hailer | 55 | (1993-1998) 2002 | 12/31/08 | Elected (OH) | ||||||||
Charles J. Koch, Chair | 59 | (1990-1995) 1998 | 12/31/06 | Elected (OH) | ||||||||
John W. Kozak | 50 | 2003 | 12/31/05 | Elected (OH) | ||||||||
Michael R. Melvin | 61 | (1995-2001) 2006 | 12/31/08 | Elected (OH) | ||||||||
James R. Powell | 55 | 1999 | 12/31/07 | Elected (OH) | ||||||||
R. Stan Puckett | 49 | 2005 | 12/31/07 | Elected (TN) | ||||||||
Stephen B. Smith | 51 | 2002 | 12/31/06 | Appointed (TN) | ||||||||
Carl F. Wick, Vice Chair | 66 | 2003 | 12/31/06 | Appointed (OH) |
139
Table of Contents
Employee of | ||||||||||
Name | Age | Position | the FHLBank Since | |||||||
David H. Hehman | 56 | President and Chief Executive Officer | 1977 | |||||||
Sandra E. Bell | 48 | Executive Vice President and Chief Financial Officer | 2004 | |||||||
Nicholas L. Berning | 59 | Senior Vice President-Controller | 1980 | |||||||
Carole L. Cossé | 58 | Senior Vice President-Treasurer | 1979 | |||||||
Andrew S. Howell | 44 | Senior Vice President-Credit Services | 1989 | |||||||
Paul J. Imwalle | 57 | Senior Vice President-Member Services | 1974 | |||||||
R. Kyle Lawler | 47 | Senior Vice President-Mortgage Purchase Program | 2000 | |||||||
Carol M. Peterson | 66 | Senior Vice President-Housing & Community Investment | 1974 | |||||||
Thomas F. Schlager | 58 | Senior Vice President-Bank Operations | 1980 |
140
Table of Contents
141
Table of Contents
�� | ||||||||||||||||||
Annual Compensation | ||||||||||||||||||
Name and Principal | Other Annual | All Other | ||||||||||||||||
Position | Year | Salary | Bonus | Compensation(2) | Compensation(3) | |||||||||||||
David H. Hehman | 2004 | $ | 478,980 | $ | 283,226 | $ | — | $ | 45,959 | |||||||||
President | 2003 | 451,346 | 287,002 | — | 36,651 | |||||||||||||
2002 | 305,577 | 159,500 | — | 24,867 | ||||||||||||||
Sandra E. Bell(1) | 2004 | 238,673 | 134,459 | 333,321 | — | |||||||||||||
Executive Vice President and Chief Financial Officer | ||||||||||||||||||
Carole L. Cossé | 2004 | 194,442 | 74,927 | — | 16,341 | |||||||||||||
Senior Vice President-Treasurer | 2003 | 190,413 | 77,900 | — | 15,917 | |||||||||||||
2002 | 174,885 | 74,872 | — | 13,513 | ||||||||||||||
R. Kyle Lawler | 2004 | 183,577 | 71,939 | — | 11,659 | |||||||||||||
Senior Vice President-Mortgage | 2003 | 177,808 | 75,522 | — | 9,071 | |||||||||||||
Purchase Program | 2002 | 164,000 | 71,832 | — | 6,389 | |||||||||||||
Paul J. Imwalle | 2004 | 163,928 | 63,631 | — | 13,922 | |||||||||||||
Senior Vice President-Marketing | 2003 | 163,290 | 68,100 | — | 13,722 | |||||||||||||
and Communications | 2002 | 153,192 | 65,416 | — | 11,839 |
(1) | Ms. Bell joined the FHLBank in April 2004. |
(2) | Amount for Ms. Bell represents moving and relocation expenses of $182,572 and a gross up of $150,749 for related payroll taxes. For all other named executive officers, none, other than perquisites that did not exceed the lesser of $50,000 or 10 percent of salary and bonus. |
(3) | Represents contributions made by the FHLBank to qualified and non-qualified defined contribution plans. |
142
Table of Contents
Years of Service(2) | ||||||||||||||||||||||||||||
Remuneration(1) | 15 | 20 | 25 | 30 | 40 | 50 | ||||||||||||||||||||||
$ | 100,000 | $ | 37,500 | $ | 50,000 | $ | 62,500 | $ | 75,000 | $ | 100,000 | $ | 125,000 | |||||||||||||||
200,000 | 75,000 | 100,000 | 125,000 | 150,000 | 200,000 | 250,000 | ||||||||||||||||||||||
300,000 | 112,500 | 150,000 | 187,500 | 225,000 | 300,000 | 375,000 | ||||||||||||||||||||||
400,000 | 150,000 | 200,000 | 250,000 | 300,000 | 400,000 | 500,000 | ||||||||||||||||||||||
500,000 | 187,500 | 250,000 | 312,500 | 375,000 | 500,000 | 625,000 | ||||||||||||||||||||||
600,000 | 225,000 | 300,000 | 375,000 | 450,000 | 600,000 | 750,000 | ||||||||||||||||||||||
700,000 | 262,500 | 350,000 | 437,500 | 525,000 | 700,000 | 875,000 | ||||||||||||||||||||||
800,000 | 300,000 | 400,000 | 500,000 | 600,000 | 800,000 | 1,000,000 | ||||||||||||||||||||||
900,000 | 337,500 | 450,000 | 562,500 | 675,000 | 900,000 | 1,125,000 | ||||||||||||||||||||||
1,000,000 | 375,000 | 500,000 | 625,000 | 750,000 | 1,000,000 | 1,250,000 |
(1) | Includes Salary and Bonus as shown in the Summary Compensation Table. |
(2) | At December 31, 2004, the credited years of benefit service for the named executive officers were 26 years for Mr. Hehman; 0 years for Ms. Bell; 24 years for Ms. Cossé; 3 years for Mr. Lawler; and 30 years for Mr. Imwalle. |
143
Table of Contents
Per Meeting Fee | Annual Cap | |||||||
Chair | $ | 3,700 | $ | 28,364 | ||||
Vice Chair | 2,900 | 22,692 | ||||||
Other Members | 2,250 | 17,019 |
144
Table of Contents
Advances Par | Percent of | |||||||||||
Name | Location | (Dollars in millions) | Total Advances | |||||||||
September 30, 2005 | Charter One Bank, N.A. (1) | Cleveland, OH | $ | 9,652 | 22.3 | % | ||||||
U.S. Bank, N.A. | Cincinnati, OH | 4,509 | 10.4 | |||||||||
Ohio Savings Bank | Cleveland, OH | 3,923 | 9.1 | |||||||||
National City Bank | Cleveland, OH | 3,254 | 7.5 | |||||||||
Fifth Third Bank | Cincinnati, OH | 3,045 | 7.1 | |||||||||
Total | $ | 24,383 | 56.4 | % | ||||||||
December 31, 2004 | Charter One Bank, N.A. (1) | Cleveland, OH | $ | 8,527 | 20.8 | % | ||||||
Fifth Third Bank | Cincinnati, OH | 4,345 | 10.6 | |||||||||
Ohio Savings Bank | Cleveland, OH | 3,912 | 9.6 | |||||||||
U.S. Bank, N.A. | Cincinnati, OH | 3,208 | 7.9 | |||||||||
National Bank of Commerce | Memphis, TN | 2,629 | 6.4 | |||||||||
Total | $ | 22,621 | 55.3 | % | ||||||||
December 31, 2003 | Charter One Bank, N.A. (1) | Cleveland, OH | $ | 9,164 | 21.9 | % | ||||||
U.S. Bank, N.A. | Cincinnati, OH | 8,172 | 19.6 | |||||||||
Fifth Third Bank | Cincinnati, OH | 4,278 | 10.2 | |||||||||
National Bank of Commerce | Memphis, TN | 1,964 | 4.7 | |||||||||
Ohio Savings Bank | Cleveland, OH | 1,296 | 3.1 | |||||||||
Total | $ | 24,874 | 59.5 | % | ||||||||
December 31, 2002 | U.S. Bank, N.A. | Cincinnati, OH | $ | 8,498 | 22.2 | % | ||||||
Charter One Bank, N.A. (1) | Cleveland, OH | 8,422 | 22.0 | |||||||||
Ohio Savings Bank | Cleveland, OH | 2,655 | 7.0 | |||||||||
Fifth Third Bank | Cincinnati, OH | 2,358 | 6.2 | |||||||||
National Bank of Commerce | Memphis, TN | 1,506 | 3.9 | |||||||||
Total | $ | 23,439 | 61.3 | % | ||||||||
(1) | Charles J. Koch, Chairman of the Board of Charter One Bank, has been a director (elected Chair March 17, 2005) of the FHLBank during each period. Advances made to Charter One Bank during the periods presented were on the same terms and rates available to other members with similar financial conditions. |
145
Table of Contents
(Dollars in thousands) | 2005 | 2004 | 2003 | |||||||||||||||||||||
Percent Per | Percent Per | Percent Per | ||||||||||||||||||||||
Quarter | Amount | Annum | Amount | Annum | Amount | Annum | ||||||||||||||||||
First | $ | 42,077 | 4.50 | $ | 35,921 | 4.00 | $ | 34,790 | 4.00 | |||||||||||||||
Second | 45,328 | 4.88 | 36,387 | 4.00 | 35,527 | 4.00 | ||||||||||||||||||
Third | 41,948 | 4.88 | 39,297 | 4.25 | 36,299 | 4.00 | ||||||||||||||||||
Fourth | 40,052 | 4.25 | 36,690 | 4.00 |
146
Table of Contents
§ | Permanent capital is defined as the amount paid for the FHLBank’s Class B Stock plus the FHLBank’s retained earnings. Permanent capital must at least equal the FHLBank’s risk-based capital requirement, which is defined as the sum of credit risk, market risk and operations risk capital requirements. Each of these risks is measured by the FHLBank in accordance with guidelines in the Regulations. Generally, the FHLBank’s: |
1. | Credit risk capital is the sum of our credit risk charges for all assets, off-balance sheet items and derivative contracts, calculated using the methodology and risk weights assigned to each classification in the Regulations; | ||
2. | Market risk capital is the sum of the market value of our portfolio at risk from movements in interest rates, foreign exchange rates, commodity prices and equity prices that could occur during periods of market stress and the amount by which the market value of total capital is less than 85 percent of the book value of total capital; and | ||
3. | Operations risk capital is 30 percent of the sum of our credit risk and market risk capital requirements. |
§ | Total capital is defined as permanent capital plus a general allowance for losses plus any other amounts determined by the Finance Board to be available to absorb losses. Total capital must equal at least four percent of total assets. | ||
§ | Leverage capital is defined as 150 percent of permanent capital plus the sum of all other components of capital. Leverage capital must equal at least five percent of total assets. |
§ | Membership Stock Account. The number of shares of Class B Stock required to be held as a condition of membership in the FHLBank is a percentage of each member’s total assets, calculated on a sliding scale (established from time to time by our Board of Directors) through a range of percentages that decrease as a member’s total assets increase. The current range of percentages is from 0.03 percent to 0.15 percent. | ||
If a member’s membership stock requirement increases and the member has no available excess stock, the member must purchase additional shares. A member may not use the FHLBank’s excess stock or shares in its Activity Stock Account to satisfy its membership stock requirement. If the number of membership |
147
Table of Contents
shares required to be held by a member decreases, the excess shares are allocated to the member’s Activity Stock Account until the maximum number of shares allowed in that Account is reached. Any remaining shares then are allocated to the member’s Excess Stock Account. | |||
§ | Activity Stock Account. A member currently must hold shares of Class B Stock in its Activity Stock Account equal in value to at least the Minimum Allocation Percentage of the member’s Mission Asset Activity but not more than the Maximum Allocation Percentage. The Minimum Allocation Percentage is currently two percent for Advances and Guaranteed Funds and Rate Advance Commitments and zero percent for the Mortgage Purchase Program of the member’s Mission Asset Activity. The Maximum Allocation Percentage is currently four percent for all Mission Asset Activity. We may adjust the Minimum and Maximum Allocation Percentages. | ||
A member’s Mission Asset Activity is defined as (a) the outstanding principal balance of Advances, (b) Guaranteed Funds and rate Advance Commitments and (c) the unpaid principal balances of mortgages purchased and Mandatory Delivery Contracts initiated under the Mortgage Purchase Program after the effective date of the Capital Plan (December 30, 2002). | |||
Increased Mission Asset Activity always must be capitalized at the Maximum Allocation Percentage with some combination of shares in the member’s Activity Stock and Excess Stock Accounts and the FHLBank’s excess stock. Shares are allocated in the following manner: |
1. | the member’s Excess Stock Account is first used to the extent shares are available; | ||
2. | next, the member must use the FHLBank’s excess stock to the extent available and permissible under the Capital Plan; and | ||
3. | finally, once a member has exhausted its ability to utilize its own excess stock, as well as the FHLBank’s, the member is required to purchase additional shares of capital stock in accordance with the Capital Plan. |
When excess stock is used to capitalize increased Mission Asset Activity, shares in the member’s Excess Stock Account are re-allocated to the member’s Activity Stock Account, at the Maximum Allocation Percentage, to the extent available. If the member’s Mission Asset Activity decreases and, after the decrease, the value of the member’s Activity Stock Account is less than the Maximum Allocation Percentage, the number of shares in the member’s Activity Stock Account is not adjusted. On the other hand if, after the decrease, the value of the member’s Activity Stock Account exceeds the Maximum Allocation Percentage, the shares in excess of the Maximum Allocation Percentage are re-allocated to the member’s Excess Stock Account. | |||
§ | Member Excess Stock Account. A member’s Excess Stock Account is comprised of the total number of shares of Class B Stock owned by the member minus both: |
1. | the shares the member is required to hold in its Membership Stock Account; and | ||
2. | the number of shares which would be in the member’s Activity Stock Account if it held shares at the Maximum Allocation Percentage. |
If a member has a positive Excess Stock Account balance, all of the member’s excess shares that are not reserved for the member’s exclusive use or the subject of a redemption or withdrawal notice become part of the pool of the FHLBank’s excess stock and generally may be used by any member to capitalize increased Mission Asset Activity (see “FHLBank Excess Stock” below). A member has exclusive use of any shares received as a stock dividend, and that are allocated to its Excess Stock Account, for three months after the dividend is paid. If a member’s Excess Stock Account balance is negative, the member owns no excess stock and is using some of the FHLBank’s excess stock to capitalize its Mission Asset Activity. | |||
§ | FHLBank Excess Stock. Our excess stock consists of the total number of shares of Class B Stock owned by all members minus: |
1. | the shares of stock allocated to all members’ Membership Stock Accounts; |
148
Table of Contents
2. | the number of shares which would be in all members’ Activity Stock Accounts if all of those Accounts held shares at the Maximum Allocation Percentage; | ||
3. | excess shares that are reserved for members’ exclusive use; and | ||
4. | excess shares that are the subject of members’ redemption and withdrawal notices. |
Generally, all members are able to draw on the FHLBank’s excess stock to capitalize increased Mission Asset Activity, subject to the rules described under “Activity Stock Account” above. However, no member may use more than $200 million of the FHLBank’s excess stock at any time. If a member has reached the $200 million limitation and wishes to increase its Mission Asset Activity, it must purchase additional shares of Class B Stock at the Maximum Allocation Percentage. We may adjust the $200 million limitation from time to time. | |||
Furthermore, we have the discretion at any time to prohibit members’ use of either their own or the FHLBank’s excess stock for any purpose. We are required to do so if not in compliance with any of our capital requirements and may do so if we determine that there is insufficient excess stock available. In either case, regardless of whether a member has a positive balance in its Excess Stock Account, the member must purchase additional shares of Class B Stock to meet an increased membership stock requirement or to capitalize increased Mission Asset Activity. |
149
Table of Contents
150
Table of Contents
§ | Redemption of Members’ Excess Stock. A member may at any time file one or more redemption notices with the FHLBank requesting redemption of some or all of its shares of Class B Stock. Although any shares may be the subject of a redemption notice, only shares that are held in the member’s Excess Stock Account at the end of the redemption period may be redeemed. A member continues to receive dividends on shares that have been targeted for redemption and, if the dividends are paid in shares of stock, also may target those dividend shares for redemption. The member may not have more than one redemption notice outstanding at any time covering the same shares of Class B Stock. | ||
A redemption notice is cancelled automatically if and to the extent that, at the end of the redemption period, the FHLBank cannot redeem all of the shares covered by the notice because the member will not have sufficient Required Shares after the redemption. | |||
At the end of the five-year redemption period, assuming that the redemption notice has not been cancelled, that the targeted shares have not already been repurchased by us and that we are not then prohibited from redeeming shares, the FHLBank must redeem the excess shares covered by the notice and make payment to the member in immediately available funds. If at any time we are unable to redeem all shares of Class B Stock that are the subject of members’ redemption notices, we must honor the redemption requests in the order received. | |||
§ | Repurchase of Members’ Excess Stock. We may repurchase all or part of members’ excess stock on five days’ written notice to each affected member. If we decide to repurchase excess stock, we must first repurchase any shares covered by effective redemption notices that have not been fully honored. We then may repurchase shares for which members have filed redemption notices that are not yet effective. If we decide to repurchase more shares than members have tendered for redemption, the additional shares must be repurchased pro rata from members with positive balances in their Excess Stock Accounts. Any repurchases of Class B Stock are at the sole discretion of the FHLBank. |
§ | Voluntary Withdrawal. A member wishing to withdraw its membership in the FHLBank must submit a written withdrawal notice to us. We, in turn, are required to send a copy of the withdrawal notice to the Finance Board. | ||
During the five-year withdrawal period, the member is entitled to its regular membership rights, including the right to vote and to receive dividends. At the end of the withdrawal period, the member’s membership rights, other than the right to receive dividends on any unredeemed shares, terminate and we must redeem, at their par value and less any amounts owed to us, the shares of Class B Stock that were held by the member on the date of the withdrawal notice. |
151
Table of Contents
If a member purchases any shares or acquires additional shares as stock dividends after the date of its original withdrawal notice, five-year withdrawal periods begin automatically for those shares on the dates they are acquired. We have discretion to repurchase the newly acquired shares earlier to the extent that they are, or become, excess stock. | |||
We may not redeem or repurchase shares held by a withdrawing member to the extent that those shares are required to support continuing obligations of the withdrawing member to the FHLBank. See “Additional Withdrawal Conditions” below. In addition, the restrictions described under “Restrictions on Redemptions and Repurchases” could prevent us from redeeming shares at the end of a withdrawal period. If at any time we are unable to redeem all shares of Class B Stock that are the subject of members’ withdrawal notices, we must honor the notices in the order in which they became effective. | |||
§ | Involuntary Withdrawal. The Board of Directors may terminate membership of an institution that (a) has not complied with any provision of the Capital Plan, the Act or the Regulations, (b) has become insolvent or (c) would jeopardize the safety and soundness of the FHLBank if it were to remain a member. In such an event, membership terminates as of the date the Board of Directors acts, and the institution loses all its membership rights except the right to receive dividends until its Class B Stock is redeemed. | ||
A five-year redemption period for the shares of Class B Stock then held by the former member begins on the date its membership terminates. At the end of the period, we must redeem those shares at their par value, less any amounts owed the FHLBank. Five-year redemption periods automatically begin for any shares acquired as stock dividends after membership terminates. We have discretion to repurchase these additional shares earlier to the extent that they are not required to support any indebtedness of the former member to, or business transaction with, the FHLBank. | |||
The repurchase of a former member’s shares is subject to the requirements described below under “Additional Withdrawal Conditions” and “Restrictions on Redemptions and Repurchases.” | |||
§ | Additional Withdrawal Conditions. Any amounts owed to the FHLBank must be offset against payment for a member’s shares of Class B Stock when the member withdraws, either voluntarily or involuntarily, as a member. To the extent that shares of Class B Stock held by a withdrawing member are required to support (at up to the Maximum Allocation Percentage) any indebtedness of the member to, or business transaction of the member with, the FHLBank, we may not redeem or repurchase those shares until the indebtedness has been paid or the business transaction settled. For this purpose, all shares of Membership Stock held on the date of withdrawal and all shares subsequently received in the form of a capital stock dividend are first allocated to the former member’s Activity Stock Account until the Maximum Allocation Percentage is reached. Next, the shares are allocated to the Member’s Excess Stock Account and, thus, are subject to repurchase at our discretion. As the former member’s obligations to the FHLBank decrease, shares in excess of the Maximum Allocation Percentage may be repurchased assuming that, at the time, there are no restrictions on redemptions. Nonetheless, the member’s membership in, and rights as a member of, the FHLBank terminate on the applicable date, despite the fact that the institution continues to hold shares of Class B Stock. | ||
§ | Rejoining. With certain limited exceptions, a member that has divested, or been divested of, all shares of our or another FHLBank’s capital stock may not rejoin or acquire shares of our or any other FHLBank’s stock for five years after the divestiture is complete. |
§ | We may not redeem or repurchase shares of Class B Stock if we are not then in compliance with any of our minimum capital requirements or if, after the redemption or repurchase, we would not meet any of those capital requirements. |
152
Table of Contents
§ | Even if we are in compliance with our capital requirements, we may not redeem or repurchase shares of Class B Stock without prior Finance Board approval if we have incurred, or are likely to incur, losses that result in the value of total equity falling, other than temporarily, below our aggregate capital stock amount. | ||
§ | We may suspend redemptions of shares of Class B Stock if we believe that continued redemptions would cause us not to meet our minimum capital requirements, prevent us from maintaining adequate capital against potential risks or otherwise prevent us from operating in a safe and sound manner. We must notify the Finance Board if we suspend redemptions. During the time that redemptions are suspended, we may not repurchase any shares of Class B Stock without Finance Board permission. |
153
Table of Contents
154
Table of Contents
(In thousands, except par value)
(Unaudited)
September 30, | December 31, | |||||||
2005 | 2004 | |||||||
ASSETS | ||||||||
Cash and due from banks | $ | 4,963 | $ | 11,262 | ||||
Interest-bearing deposits | 4,042,414 | 5,781,266 | ||||||
Securities purchased under agreements to resell | — | 700,000 | ||||||
Federal funds sold | 6,249,000 | 7,542,800 | ||||||
Trading securities | 6,705 | 8,463 | ||||||
Available-for-sale securities (a) | 1,262,010 | 910,592 | ||||||
Held-to-maturity securities includes $0 and $100,562 pledged as collateral in 2005 and 2004 that may be repledged (b) | 11,917,705 | 11,711,842 | ||||||
Advances | 43,409,426 | 41,300,942 | ||||||
Mortgage loans held for portfolio, net | 8,674,290 | 8,370,495 | ||||||
Accrued interest receivable | 226,388 | 185,828 | ||||||
Equipment and leasehold improvements, net | 7,663 | 6,485 | ||||||
Derivative assets | 244 | 84 | ||||||
Other assets | 47,474 | 46,469 | ||||||
TOTAL ASSETS | $ | 75,848,282 | $ | 76,576,528 | ||||
LIABILITIES AND CAPITAL | ||||||||
Interest-bearing deposits: | ||||||||
Demand and overnight | $ | 853,716 | $ | 898,681 | ||||
Term | 81,350 | 115,500 | ||||||
Other | 15,916 | 17,460 | ||||||
Total interest-bearing deposits | 950,982 | 1,031,641 | ||||||
Consolidated Obligations, net: | ||||||||
Discount Notes | 17,452,039 | 18,632,320 | ||||||
Bonds | 52,320,127 | 51,818,345 | ||||||
Total Consolidated Obligations, net | 69,772,166 | 70,450,665 | ||||||
Mandatorily redeemable capital stock | 410,119 | 34,344 | ||||||
Accrued interest payable | 487,143 | 389,458 | ||||||
Affordable Housing Program | 87,218 | 88,919 | ||||||
Payable to REFCORP | 13,953 | 15,110 | ||||||
Derivative liabilities | 407,788 | 530,954 | ||||||
Other liabilities | 69,613 | 72,274 | ||||||
Total liabilities | 72,198,982 | 72,613,365 | ||||||
Commitments and contingencies (Note 13) | ||||||||
CAPITAL | ||||||||
Capital stock – Class B putable ($100 par value) issued and outstanding shares: | ||||||||
34,568 and 37,999 shares in 2005 and 2004 | 3,456,794 | 3,799,852 | ||||||
Retained earnings | 194,766 | 167,540 | ||||||
Accumulated other comprehensive income: | ||||||||
Net unrealized gain (loss) on available-for-sale securities | 1,879 | (90 | ) | |||||
Other | (4,139 | ) | (4,139 | ) | ||||
Total capital | 3,649,300 | 3,963,163 | ||||||
TOTAL LIABILITIES AND CAPITAL | $ | 75,848,282 | $ | 76,576,528 | ||||
(a) | Amortized cost: $1,260,131 and $910,682 at September 30, 2005 and December 31, 2004, respectively. | |
(b) | Fair values: $11,730,677 and $11,719,733 at September 30, 2005 and December 31, 2004, respectively. |
155
Table of Contents
(In thousands)
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
INTEREST INCOME: | ||||||||||||||||
Advances | $ | 402,398 | $ | 212,571 | $ | 1,072,410 | $ | 519,795 | ||||||||
Prepayment fees on Advances, net | 97 | 32,478 | 294 | 49,626 | ||||||||||||
Interest-bearing deposits | 31,093 | 25,421 | 102,978 | 62,170 | ||||||||||||
Securities purchased under agreements to resell | 2,825 | 32 | 15,011 | 49 | ||||||||||||
Federal funds sold | 59,438 | 23,141 | 152,400 | 62,286 | ||||||||||||
Trading securities | 70 | 96 | 217 | 329 | ||||||||||||
Available-for-sale securities | 9,853 | 3,764 | 30,190 | 9,411 | ||||||||||||
Held-to-maturity securities | 133,872 | 125,897 | 400,698 | 366,367 | ||||||||||||
Mortgage loans held for portfolio | 113,571 | 99,354 | 314,327 | 306,206 | ||||||||||||
Loans to other FHLBanks | 111 | 138 | 281 | 533 | ||||||||||||
Total interest income | 753,328 | 522,892 | 2,088,806 | 1,376,772 | ||||||||||||
INTEREST EXPENSE: | ||||||||||||||||
Consolidated Obligations | 653,055 | 430,703 | 1,816,551 | 1,146,887 | ||||||||||||
Deposits | 7,333 | 3,059 | 19,862 | 8,313 | ||||||||||||
Mandatorily redeemable capital stock | 4,976 | 419 | 7,365 | 991 | ||||||||||||
Other borrowings | — | 8 | 1 | 79 | ||||||||||||
Total interest expense | 665,364 | 434,189 | 1,843,779 | 1,156,270 | ||||||||||||
NET INTEREST INCOME | 87,964 | 88,703 | 245,027 | 220,502 | ||||||||||||
OTHER INCOME: | ||||||||||||||||
Service fees | 348 | 421 | 1,220 | 1,229 | ||||||||||||
Net (loss) gain on trading securities | (76 | ) | 20 | (111 | ) | (2 | ) | |||||||||
Net realized loss from sale of other securities | — | (3 | ) | — | (3 | ) | ||||||||||
Net realized and unrealized (loss) gain on derivatives and hedging activities | (2,264 | ) | 8,163 | (2,811 | ) | 29,563 | ||||||||||
Other, net | 828 | 748 | 2,141 | 2,004 | ||||||||||||
Total other income | (1,164 | ) | 9,349 | 439 | 32,791 | |||||||||||
OTHER EXPENSE: | ||||||||||||||||
Salaries and benefits | 5,578 | 4,498 | 16,192 | 13,466 | ||||||||||||
Other operating | 3,053 | 2,695 | 8,980 | 7,933 | ||||||||||||
Finance Board | 828 | 741 | 2,484 | 2,222 | ||||||||||||
Office of Finance | 385 | 459 | 1,600 | 1,606 | ||||||||||||
Other | 436 | 425 | 2,271 | 2,289 | ||||||||||||
Total other expense | 10,280 | 8,818 | 31,527 | 27,516 | ||||||||||||
INCOME BEFORE ASSESSMENTS | 76,520 | 89,234 | 213,939 | 225,777 | ||||||||||||
Affordable Housing Program | 6,754 | 7,327 | 18,216 | 18,532 | ||||||||||||
REFCORP | 13,953 | 16,381 | 39,144 | 41,449 | ||||||||||||
Total assessments | 20,707 | 23,708 | 57,360 | 59,981 | ||||||||||||
NET INCOME | $ | 55,813 | $ | 65,526 | $ | 156,579 | $ | 165,796 | ||||||||
156
Table of Contents
September 30, 2005 and 2004
(In thousands)
(Unaudited)
Accumulated | ||||||||||||||||||||
Capital Stock | Other | |||||||||||||||||||
Class B* | Retained | Comprehensive | Total | |||||||||||||||||
Shares | Par Value | Earnings | Income | Capital | ||||||||||||||||
BALANCE, DECEMBER 31, 2003 | 36,453 | $ | 3,645,253 | $ | 92,150 | $ | (3,730 | ) | $ | 3,733,673 | ||||||||||
Proceeds from sale of capital stock | 353 | 35,302 | 35,302 | |||||||||||||||||
Net reclassified to mandatorily redeemable capital stock | (867 | ) | (86,674 | ) | (86,674 | ) | ||||||||||||||
Comprehensive income: | ||||||||||||||||||||
Net income | 165,796 | 165,796 | ||||||||||||||||||
Other comprehensive income: | ||||||||||||||||||||
Net unrealized loss on available-for-sale securities | (128 | ) | (128 | ) | ||||||||||||||||
Reclassification adjustment for (gain) loss included in net income relating to available-for-sale securities | — | — | ||||||||||||||||||
Other | — | — | ||||||||||||||||||
Total other comprehensive income | (128 | ) | (128 | ) | ||||||||||||||||
Total comprehensive income | 165,668 | |||||||||||||||||||
Dividends on capital stock: | ||||||||||||||||||||
Cash | (205 | ) | (205 | ) | ||||||||||||||||
Stock | 1,114 | 111,466 | (111,400 | ) | 66 | |||||||||||||||
BALANCE, SEPTEMBER 30, 2004 | 37,053 | $ | 3,705,347 | $ | 146,341 | $ | (3,858 | ) | $ | 3,847,830 | ||||||||||
BALANCE, DECEMBER 31, 2004 | 37,999 | $ | 3,799,852 | $ | 167,540 | $ | (4,229 | ) | $ | 3,963,163 | ||||||||||
Proceeds from sale of capital stock | 229 | 22,932 | 22,932 | |||||||||||||||||
Net reclassified to mandatorily redeemable capital stock | (4,923 | ) | (492,276 | ) | (492,276 | ) | ||||||||||||||
Comprehensive income: | ||||||||||||||||||||
Net income | 156,579 | 156,579 | ||||||||||||||||||
Other comprehensive income: | ||||||||||||||||||||
Net unrealized gain on available-for-sale securities | 1,969 | 1,969 | ||||||||||||||||||
Reclassification adjustment for (gain) loss included in net income relating to available-for-sale securities | — | — | ||||||||||||||||||
Other | — | — | ||||||||||||||||||
Total other comprehensive income | 1,969 | 1,969 | ||||||||||||||||||
Total comprehensive income | 158,548 | |||||||||||||||||||
Dividends on capital stock: | ||||||||||||||||||||
Cash | (112 | ) | (112 | ) | ||||||||||||||||
Stock | 1,263 | 126,286 | (129,241 | ) | (2,955 | ) | ||||||||||||||
BALANCE, SEPTEMBER 30, 2005 | 34,568 | $ | 3,456,794 | $ | 194,766 | $ | (2,260 | ) | $ | 3,649,300 | ||||||||||
* Putable |
157
Table of Contents
(In thousands)
(Unaudited)
Nine Months Ended September 30, | ||||||||
2005 | 2004 | |||||||
OPERATING ACTIVITIES: | ||||||||
Net income | $ | 156,579 | $ | 165,796 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization: | ||||||||
Net premiums and discounts on Consolidated Obligations and investments | (28,887 | ) | (1,520 | ) | ||||
Concessions on Consolidated Obligation bonds | 7,813 | 14,359 | ||||||
Premiums and discounts on mortgage loans, net | 19,426 | 20,990 | ||||||
Premiums and discounts on Advances | (920 | ) | 3,522 | |||||
Net deferred (gain) loss on derivatives | (115 | ) | 26,460 | |||||
Equipment and leasehold improvements | 1,232 | 944 | ||||||
Other | (2,448 | ) | (1,684 | ) | ||||
Non-cash interest on mandatorily redeemable capital stock | 7,358 | 884 | ||||||
Decrease in trading securities | 1,758 | 2,627 | ||||||
Net realized loss on available-for-sale securities | — | 3 | ||||||
Gain due to change in net fair value adjustment on derivative and hedging activities | (134 | ) | (22,814 | ) | ||||
Net realized gain on disposal of equipment and leasehold improvements | (8 | ) | (5 | ) | ||||
(Increase) decrease in accrued interest receivable | (40,560 | ) | 17,924 | |||||
Increase in derivative asset-net accrued interest | (136 | ) | (1,841 | ) | ||||
Decrease in derivative liability-net accrued interest | (55,094 | ) | (75,831 | ) | ||||
Increase in other assets | (558 | ) | (405 | ) | ||||
Net increase in Affordable Housing Program (AHP) liability and discount on AHP Advances | 1,194 | 1,304 | ||||||
Increase in accrued interest payable | 97,685 | 52,139 | ||||||
(Decrease) increase in payable to REFCORP | (1,157 | ) | 2,792 | |||||
(Decrease) increase in other liabilities | (709 | ) | 10,346 | |||||
Total adjustments | 5,740 | 50,194 | ||||||
Net cash provided by operating activities | 162,319 | 215,990 | ||||||
INVESTING ACTIVITIES: | ||||||||
Net decrease in interest-bearing deposits | 1,738,852 | 1,027,574 | ||||||
Net decrease in securities purchased under agreements to resell | 700,000 | — | ||||||
Net decrease (increase) in Federal funds sold | 1,293,800 | (3,219,500 | ) | |||||
Proceeds from sale of available-for-sale securities | — | 199,510 | ||||||
Proceeds from maturities of available-for-sale securities | 60,075,645 | 46,213,000 | ||||||
Purchases of available-for-sale securities | (60,394,904 | ) | (46,818,119 | ) | ||||
Proceeds from maturities of long-term held-to-maturity securities | 2,085,784 | 2,380,365 | ||||||
Purchases of long-term held-to-maturity securities | (2,294,763 | ) | (3,068,768 | ) | ||||
Principal collected on Advances | 1,764,099,543 | 1,684,079,721 | ||||||
Advances made | (1,766,433,368 | ) | (1,687,304,890 | ) | ||||
Principal collected on mortgage loans held for portfolio | 1,305,183 | 1,537,296 | ||||||
Mortgage loans held for portfolio purchased | (1,626,950 | ) | (1,687,199 | ) | ||||
Net increase in equipment and leasehold improvements | (2,402 | ) | (2,258 | ) | ||||
Net cash provided by (used in) investing activities | $ | 546,420 | $ | (6,663,268 | ) | |||
158
Table of Contents
(In thousands)
(Unaudited)
Nine Months Ended September 30, | ||||||||
2005 | 2004 | |||||||
FINANCING ACTIVITIES: | ||||||||
Net decrease in deposits | $ | (80,659 | ) | $ | (346,725 | ) | ||
Net proceeds from issuance of Consolidated Obligations: | ||||||||
Discount notes | 714,595,718 | 612,363,926 | ||||||
Master notes | 77,793 | — | ||||||
Bonds | 12,082,861 | 24,525,019 | ||||||
Bonds transferred from other FHLBanks | 46,610 | 349,542 | ||||||
Payments for maturing and retiring Consolidated Obligations: | ||||||||
Discount notes | (715,777,249 | ) | (613,823,951 | ) | ||||
Master notes | (22,403 | ) | — | |||||
Bonds | (11,533,716 | ) | (16,606,175 | ) | ||||
Payments for redemption of mandatorily redeemable capital stock | (126,813 | ) | (53,862 | ) | ||||
Proceeds from issuance of capital stock | 22,932 | 35,302 | ||||||
Cash dividends paid | (112 | ) | (205 | ) | ||||
Net cash (used in) provided by financing activities | (715,038 | ) | 6,442,871 | |||||
Net decrease in cash and cash equivalents | (6,299 | ) | (4,407 | ) | ||||
Cash and cash equivalents at beginning of the year | 11,262 | 6,668 | ||||||
Cash and cash equivalents at end of the period | $ | 4,963 | $ | 2,261 | ||||
Supplemental Disclosures: | ||||||||
Interest paid | $ | 1,772,595 | $ | 1,118,138 | ||||
AHP payments | $ | 19,917 | $ | 19,607 | ||||
REFCORP payments | $ | 40,301 | $ | 38,657 | ||||
159
Table of Contents
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. | Basis of Presentation | |
The accompanying interim financial statements of the Federal Home Loan Bank of Cincinnati (FHLBank) have been prepared in accordance with accounting principles generally accepted in the United States of America. The interim financial statements presented are unaudited, but they include all adjustments (consisting of only normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of the financial condition, results of operations, and cash flows for such periods. These financial statements do not include all disclosures associated with annual financial statements and accordingly should be read in conjunction with our audited financial statements and notes thereto for the year ended December 31, 2004 included herein. Results for the three and nine months ended September 30, 2005 are not necessarily indicative of operating results for the remainder of the year. | ||
2. | Available-For-Sale Securities | |
Major Security Types. Available-for-sale securities as of September 30, 2005 were as follows (in thousands): |
Gross | Gross | Estimated | ||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | (Losses) | Value | |||||||||||||
Commercial paper | $ | 1,260,131 | $ | 1,896 | $ | (17 | ) | $ | 1,262,010 | |||||||
Available-for-sale securities as of December 31, 2004 were as follows (in thousands): |
Gross | Gross | Estimated | ||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | (Losses) | Value | |||||||||||||
Commercial paper | $ | 910,682 | $ | — | $ | (90 | ) | $ | 910,592 | |||||||
Redemption Terms.The amortized costs and estimated fair values of available-for-sale securities by contractual maturity at September 30, 2005 and December 31, 2004 are shown below (in thousands). Expected maturities of some securities and mortgage-backed securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees. |
September 30, 2005 | December 31, 2004 | |||||||||||||||
Estimated | Estimated | |||||||||||||||
Amortized | Fair | Amortized | Fair | |||||||||||||
Year of Maturity | Cost | Value | Cost | Value | ||||||||||||
Due in one year or less | $ | 1,260,131 | $ | 1,262,010 | $ | 910,682 | $ | 910,592 | ||||||||
3. | Held-To-Maturity Securities | |
Major Security Types. Held-to-maturity securities as of September 30, 2005 were as follows (in thousands): |
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Estimated | |||||||||||||
Cost | Gains | (Losses) | Fair Value | |||||||||||||
State or local housing agency obligations | $ | 31,105 | $ | 795 | $ | — | $ | 31,900 | ||||||||
Mortgage-backed securities: | ||||||||||||||||
Government-sponsored enterprises | 11,327,105 | 6,374 | (186,905 | ) | 11,146,574 | |||||||||||
Agency | 53,666 | — | (459 | ) | 53,207 | |||||||||||
Other | 505,829 | 3 | (6,836 | ) | 498,996 | |||||||||||
Total mortgage-backed securities | 11,886,600 | 6,377 | (194,200 | ) | 11,698,777 | |||||||||||
Total | $ | 11,917,705 | $ | 7,172 | $ | (194,200 | ) | $ | 11,730,677 | |||||||
160
Table of Contents
Held-to-maturity securities as of December 31, 2004 were as follows (in thousands): |
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Estimated | |||||||||||||
Cost | Gains | (Losses) | Fair Value | |||||||||||||
State or local housing agency obligations | $ | 37,585 | $ | 968 | $ | — | $ | 38,553 | ||||||||
Mortgage-backed securities: | ||||||||||||||||
Government-sponsored enterprises | 10,979,887 | 54,252 | (47,577 | ) | 10,986,562 | |||||||||||
Agency | 93,224 | 766 | — | 93,990 | ||||||||||||
Other | 601,146 | 154 | (672 | ) | 600,628 | |||||||||||
Total mortgage-backed securities | 11,674,257 | 55,172 | (48,249 | ) | 11,681,180 | |||||||||||
Total | $ | 11,711,842 | $ | 56,140 | $ | (48,249 | ) | $ | 11,719,733 | |||||||
Redemption Terms.The amortized costs and estimated fair values of held-to-maturity securities by contractual maturity at September 30, 2005 and December 31, 2004 are shown below (in thousands). Expected maturities of some securities and mortgage-backed securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees. |
September 30, 2005 | December 31, 2004 | |||||||||||||||
Amortized | Estimated | Amortized | Estimated | |||||||||||||
Year of Maturity | Cost | Fair Value | Cost | Fair Value | ||||||||||||
Due in one year or less | $ | 1,500 | $ | 1,508 | $ | — | $ | — | ||||||||
Due after one year through five years | — | — | 2,325 | 2,383 | ||||||||||||
Due after ten years | 29,605 | 30,392 | 35,260 | 36,170 | ||||||||||||
Total other | 31,105 | 31,900 | 37,585 | 38,553 | ||||||||||||
Mortgage-backed securities: | ||||||||||||||||
Government-sponsored enterprises | 11,327,105 | 11,146,574 | 10,979,887 | 10,986,562 | ||||||||||||
Agency | 53,666 | 53,207 | 93,224 | 93,990 | ||||||||||||
Other | 505,829 | 498,996 | 601,146 | 600,628 | ||||||||||||
Total mortgage-backed securities | 11,886,600 | 11,698,777 | 11,674,257 | 11,681,180 | ||||||||||||
Total | $ | 11,917,705 | $ | 11,730,677 | $ | 11,711,842 | $ | 11,719,733 | ||||||||
The amortized costs of the FHLBank’s mortgage-backed securities classified as held-to-maturity include net premiums (in thousands) of $15,823 and $23,227 at September 30, 2005 and December 31, 2004, respectively. | ||
The following tables summarize the held-to-maturity securities with unrealized losses as of September 30, 2005 and December 31, 2004. The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position (in thousands). |
Less than 12 Months | 12 Months or more | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
September 30, 2005 | Value | (Losses) | Value | (Losses) | Value | (Losses) | ||||||||||||||||||
Mortgage-backed securities: | ||||||||||||||||||||||||
Government-sponsored enterprises | $ | 8,155,724 | $ | (108,916 | ) | $ | 2,293,247 | $ | (77,989 | ) | $ | 10,448,971 | $ | (186,905 | ) | |||||||||
Agency | 53,207 | (459 | ) | — | — | 53,207 | (459 | ) | ||||||||||||||||
Other | 387,029 | (4,838 | ) | 110,905 | (1,998 | ) | 497,934 | (6,836 | ) | |||||||||||||||
Total temporarily impaired | $ | 8,595,960 | $ | (114,213 | ) | $ | 2,404,152 | $ | (79,987 | ) | $ | 11,000,112 | $ | (194,200 | ) | |||||||||
161
Table of Contents
Less than 12 Months | 12 Months or more | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
December 31, 2004 | Value | (Losses) | Value | (Losses) | Value | (Losses) | ||||||||||||||||||
Mortgage-backed securities: | ||||||||||||||||||||||||
Government-sponsored enterprises | $ | 3,695,792 | $ | (20,328 | ) | $ | 1,384,865 | $ | (27,249 | ) | $ | 5,080,657 | $ | (47,577 | ) | |||||||||
Agency | — | — | — | — | — | — | ||||||||||||||||||
Other | 456,234 | (672 | ) | — | — | 456,234 | (672 | ) | ||||||||||||||||
Total temporarily impaired | $ | 4,152,026 | $ | (21,000 | ) | $ | 1,384,865 | $ | (27,249 | ) | $ | 5,536,891 | $ | (48,249 | ) | |||||||||
The FHLBank reviewed its investment security holdings and has determined that all unrealized losses reflected above are temporary, based in part on the creditworthiness of the issuers and the underlying collateral. Additionally, the FHLBank has the ability and the intent to hold such securities through to recovery of the unrealized losses. | ||
4. | Advances | |
Redemption Terms.At September 30, 2005 and December 31, 2004, the FHLBank had Advances outstanding, including Affordable Housing Program (AHP) Advances, at interest rates ranging from 0.00 percent to 9.75 percent, as summarized below (dollars in thousands). Advances with interest rates of 0.00 percent are AHP subsidized Advances. |
September 30, 2005 | December 31, 2004 | |||||||||||||||
Weighted | Weighted | |||||||||||||||
Average | Average | |||||||||||||||
Interest | Interest | |||||||||||||||
Year of Maturity | Amount | Rate % | Amount | Rate % | ||||||||||||
Overdrawn demand deposit accounts | $ | — | — | $ | 627 | 2.67 | ||||||||||
Due in 1 year or less | 14,136,584 | 3.85 | 13,198,436 | 2.44 | ||||||||||||
Due after 1 year through 2 years | 6,895,339 | 3.79 | 4,336,969 | 2.75 | ||||||||||||
Due after 2 years through 3 years | 5,258,158 | 3.99 | 6,123,014 | 2.54 | ||||||||||||
Due after 3 years through 4 years | 4,689,808 | 3.91 | 2,876,750 | 3.40 | ||||||||||||
Due after 4 years through 5 years | 5,439,500 | 4.37 | 5,514,328 | 2.92 | ||||||||||||
Thereafter | 6,833,923 | 4.43 | 8,869,120 | 4.21 | ||||||||||||
Total par value | 43,253,312 | 4.02 | 40,919,244 | 3.00 | ||||||||||||
Commitment fees | (2,552 | ) | (2,906 | ) | ||||||||||||
Discount on AHP Advances | (30,325 | ) | (27,430 | ) | ||||||||||||
Discount on Advances | (2,107 | ) | (3,027 | ) | ||||||||||||
SFAS 133 hedging adjustments | 191,098 | 415,061 | ||||||||||||||
Total | $ | 43,409,426 | $ | 41,300,942 | ||||||||||||
The FHLBank offers Advances to members that may be prepaid at the members’ discretion on pertinent dates (call dates) without incurring prepayment or termination fees (callable Advances). Other Advances may only be prepaid by paying a fee to the FHLBank (prepayment fee) that makes the FHLBank financially indifferent to the prepayment of the Advance. At September 30, 2005 and December 31, 2004, the FHLBank had callable Advances (in thousands) of $17,894,051 and $14,193,557. |
162
Table of Contents
The following table summarizes Advances at September 30, 2005 and December 31, 2004 by year of maturity or next call date for callable Advances (in thousands): |
September 30, | December 31, | |||||||
Year of Maturity or Next Call/Repricing Date | 2005 | 2004 | ||||||
Overdrawn demand deposit accounts | $ | — | $ | 627 | ||||
Due in 1 year or less | 30,892,858 | 28,099,059 | ||||||
Due after 1 year through 2 years | 1,617,115 | 1,816,444 | ||||||
Due after 2 years through 3 years | 1,522,624 | 975,371 | ||||||
Due after 3 years through 4 years | 1,141,352 | 1,452,863 | ||||||
Due after 4 years through 5 years | 1,809,282 | 1,478,849 | ||||||
Thereafter | 6,270,081 | 7,096,031 | ||||||
Total par value | $ | 43,253,312 | $ | 40,919,244 | ||||
The FHLBank also offers convertible Advances. With a convertible Advance, the FHLBank effectively purchases a put option from the member that allows the FHLBank to terminate the fixed-rate Advance, which the FHLBank normally would exercise when interest rates increase, and offer a floating-rate Advance. At September 30, 2005 and December 31, 2004, the FHLBank had convertible Advances outstanding totaling (in thousands) $7,274,700 and $7,395,200. | ||
The following table summarizes Advances at September 30, 2005 and December 31, 2004 by year of maturity or next put date for convertible Advances (in thousands): |
September 30, | December 31, | |||||||
Year of Maturity or Next Put Date | 2005 | 2004 | ||||||
Overdrawn demand deposit accounts | $ | — | $ | 627 | ||||
Due in 1 year or less | 20,497,784 | 19,545,636 | ||||||
Due after 1 year through 2 years | 7,213,839 | 4,595,969 | ||||||
Due after 2 years through 3 years | 4,694,158 | 6,244,514 | ||||||
Due after 3 years through 4 years | 4,015,308 | 2,118,250 | ||||||
Due after 4 years through 5 years | 4,113,300 | 4,536,628 | ||||||
Thereafter | 2,718,923 | 3,877,620 | ||||||
Total par value | $ | 43,253,312 | $ | 40,919,244 | ||||
Interest Rate Payment Terms.The following table details additional interest rate payment terms for Advances at September 30, 2005 and December 31, 2004 (in thousands): |
September 30, | December 31, | |||||||
2005 | 2004 | |||||||
Par amount of Advances: | ||||||||
Fixed-rate | $ | 23,329,261 | $ | 21,995,687 | ||||
Variable-rate | 19,924,051 | 18,923,557 | ||||||
Total | $ | 43,253,312 | $ | 40,919,244 | ||||
163
Table of Contents
The following table shows Advance balances at September 30, 2005 and December 31, 2004 to members holding 10 percent or more of total Advances: |
September 30, 2005 | December 31, 2004 | |||||||||||||||||||
(Dollars in millions) | Principal | % of Total | Principal | % of Total | ||||||||||||||||
Charter One Bank, N.A. | $ | 9,652 | 22 | % | Charter One Bank, N.A. | $ | 8,527 | 21 | % | |||||||||||
U.S. Bank, N.A. | 4,509 | 11 | Fifth Third Bank | 4,345 | 11 | |||||||||||||||
Total | $ | 14,161 | 33 | % | Total | $ | 12,872 | 32 | % | |||||||||||
5. | Mortgage Loans Held for Portfolio | |
The following table presents information as of September 30, 2005 and December 31, 2004 on mortgage loans held for portfolio: |
September 30, | December 31, | |||||||
(In thousands) | 2005 | 2004 | ||||||
Real Estate: | ||||||||
Fixed medium-term single-family mortgages | $ | 1,669,580 | $ | 1,826,808 | ||||
Fixed long-term single-family mortgages | 6,912,051 | 6,444,878 | ||||||
Premiums | 113,002 | 121,048 | ||||||
Discounts | (6,835 | ) | (7,277 | ) | ||||
SFAS 133 unamortized market adjustments | (13,508 | ) | (14,962 | ) | ||||
Total mortgage loans held for portfolio | $ | 8,674,290 | $ | 8,370,495 | ||||
The following table presents changes in the Lender Risk Account for the nine months ended September 30, 2005: |
Nine Months Ended | ||||
(In thousands) | September 30, 2005 | |||
Lender Risk Account at December 31, 2004 | $ | 37,243 | ||
Additions | 4,810 | |||
Claims | (45 | ) | ||
Scheduled distributions | — | |||
Lender Risk Account at September 30, 2005 | $ | 42,008 | ||
The current mortgage loan portfolio consists of Federal Housing Administration and conventional mortgage loans. The conventional mortgage loans are supported by supplemental insurance and the member’s credit enhancement (Lender Risk Account) in addition to the associated property as collateral. The FHLBank has experienced no credit losses on mortgage loans to date and no event has occurred that causes the FHLBank to believe it will have to absorb any credit losses on these mortgage loans. Accordingly, the FHLBank has not provided any allowances for losses on these mortgage loans. |
164
Table of Contents
6. | Consolidated Obligations | |
Consolidated Obligations are the joint and several obligations of the FHLBanks and consist of Consolidated Bonds and Discount Notes. The FHLBanks issue Consolidated Obligations through the Office of Finance as their agent. 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 (original maturities up to 360 days). These notes sell at less than their face amount and are redeemed at par value when they mature. | ||
The Finance Board, at its discretion, may require any FHLBank to make principal or interest payments due on any Consolidated Obligations. Although it has never occurred, to the extent that an FHLBank would make a payment on a Consolidated Obligation on behalf of another FHLBank, the paying FHLBank would be entitled to reimbursement from the non-complying FHLBank. However, if the Finance Board determines that the non-complying FHLBank is unable to satisfy its obligations, then the Finance Board may allocate the outstanding liability among the remaining FHLBanks on apro ratabasis in proportion to each FHLBank’s participation in all Consolidated Obligations outstanding, or on any other basis the Finance Board may determine. | ||
Redemption Terms.The following is a summary of the FHLBank’s participation in Consolidated Bonds outstanding at September 30, 2005 and December 31, 2004 by year of maturity (dollars in thousands): |
September 30, 2005 | December 31, 2004 | |||||||||||||||
Weighted | Weighted | |||||||||||||||
Average | Average | |||||||||||||||
Interest | Interest | |||||||||||||||
Year of Maturity | Amount | Rate % | Amount | Rate % | ||||||||||||
Due in 1 year or less | $ | 12,628,390 | 2.93 | $ | 13,827,055 | 2.43 | ||||||||||
Due after 1 year through 2 years | 15,815,625 | 3.43 | 14,615,000 | 2.91 | ||||||||||||
Due after 2 years through 3 years | 8,781,000 | 3.64 | 8,433,000 | 3.43 | ||||||||||||
Due after 3 years through 4 years | 2,945,000 | 4.21 | 3,408,000 | 3.58 | ||||||||||||
Due after 4 years through 5 years | 3,869,000 | 4.32 | 2,990,000 | 4.14 | ||||||||||||
Thereafter | 8,605,339 | 4.81 | 8,707,000 | 4.72 | ||||||||||||
Total par value | 52,644,354 | 3.68 | 51,980,055 | 3.28 | ||||||||||||
Bond premiums | 42,540 | 54,775 | ||||||||||||||
Bond discounts | (57,044 | ) | (61,423 | ) | ||||||||||||
SFAS 133 hedging adjustments | (309,723 | ) | (155,062 | ) | ||||||||||||
Total | $ | 52,320,127 | $ | 51,818,345 | ||||||||||||
Consolidated Bonds outstanding at September 30, 2005 and December 31, 2004 include callable bonds totaling $19,413,390 and $22,124,000 (in thousands). The FHLBank uses fixed-rate callable debt to finance callable Advances (see Note 4) and mortgage-backed securities. Simultaneous with such a debt issue, the FHLBank may also enter into an interest rate swap (in which the FHLBank pays variable, and receives fixed, interest) with a call feature that mirrors the option embedded in the debt (a sold callable swap). The combined sold callable swap and callable debt allows the FHLBank to provide members attractively priced variable-rate Advances. | ||
The FHLBank’s Consolidated Bonds outstanding at September 30, 2005 and December 31, 2004 include (in thousands): |
September 30, 2005 | December 31, 2004 | |||||||
Par amount of Consolidated Bonds: | ||||||||
Non-callable or non-putable | $ | 33,230,964 | $ | 29,856,055 | ||||
Callable | 19,413,390 | 22,124,000 | ||||||
Total par value | $ | 52,644,354 | $ | 51,980,055 | ||||
165
Table of Contents
The following table summarizes Consolidated Bonds outstanding at September 30, 2005 and December 31, 2004 by year of maturity or next call date (in thousands): |
Year of Maturity or Next Call Date | September 30, 2005 | December 31, 2004 | ||||||
Due in 1 year or less | $ | 27,946,390 | $ | 28,956,055 | ||||
Due after 1 year through 2 years | 10,535,625 | 10,400,000 | ||||||
Due after 2 years through 3 years | 6,428,000 | 4,859,000 | ||||||
Due after 3 years through 4 years | 1,425,000 | 2,013,000 | ||||||
Due after 4 years through 5 years | 2,734,000 | 1,715,000 | ||||||
Thereafter | 3,575,339 | 4,037,000 | ||||||
Total par value | $ | 52,644,354 | $ | 51,980,055 | ||||
The FHLBank’s participation in Consolidated Discount Notes, all of which are due within one year, was as follows (dollars in thousands): |
Weighted | ||||||||||||
Average | ||||||||||||
Book Value | Par Value | Interest Rate | ||||||||||
September 30, 2005 | $ | 17,452,039 | $ | 17,504,459 | 3.60 | % | ||||||
December 31, 2004 | $ | 18,632,320 | $ | 18,659,549 | 2.12 | % | ||||||
7. | Affordable Housing Program | |
The following table presents changes in the AHP liability for the nine months ended September 30, 2005 (in thousands): |
AHP liability at December 31, 2004 | $ | 88,919 | ||
Accruals | 18,216 | |||
Subsidy used | (19,917 | ) | ||
AHP liability at September 30, 2005 | $ | 87,218 | ||
8. | Capital | |
The following table shows the FHLBank’s compliance with the Finance Board’s capital requirements at September 30, 2005 and December 31, 2004 (dollars in thousands): |
September 30, 2005 | December 31, 2004 | |||||||||||||||
Required | Actual | Required | Actual | |||||||||||||
Regulatory capital requirements: | ||||||||||||||||
Risk-based capital | $ | 564,796 | $ | 4,061,679 | $ | 638,620 | $ | 4,001,736 | ||||||||
Capital-to-assets ratio(1) | 4.00 | % | 5.36 | % | 4.00 | % | 5.23 | % | ||||||||
Regulatory capital | $ | 3,033,931 | $ | 4,061,679 | $ | 3,063,061 | $ | 4,001,736 | ||||||||
Leverage capital-to-assets ratio(1) | 5.00 | % | 8.03 | % | 5.00 | % | 7.84 | % | ||||||||
Leverage capital | $ | 3,792,414 | $ | 6,092,519 | $ | 3,828,826 | $ | 6,002,604 |
(1) | Required regulatory and leverage capital equal four percent and five percent of assets, respectively. Actual regulatory capital equals the sum of capital stock (including mandatorily redeemable capital stock) and retained earnings. Actual leverage capital equals actual regulatory capital weighted 1.5 times. |
166
Table of Contents
The FHLBank’s activity for mandatorily redeemable capital stock during the nine months ended September 30, 2005 was as follows (in thousands). |
Balance, December 31, 2004 | $ | 34,344 | ||
Capital stock subject to mandatory redemption reclassified from equity | 492,276 | |||
Redemption of mandatorily redeemable capital stock | (126,813 | ) | ||
Stock dividend classified as mandatorily redeemable | 10,312 | |||
Balance, September 30, 2005 | $ | 410,119 | ||
9. | Comprehensive Income | |
The following table shows the FHLBank’s comprehensive income for the noted periods (in thousands): |
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Net income | $ | 55,813 | $ | 65,526 | $ | 156,579 | $ | 165,796 | ||||||||
Other comprehensive income: | ||||||||||||||||
Net unrealized gain (loss) on available-for-sale securities | 1,451 | 23 | 1,969 | (128 | ) | |||||||||||
Reclassification adjustment for (gain) loss included in net income relating to available-for-sale securities | — | — | — | — | ||||||||||||
Total other comprehensive income | 1,451 | 23 | 1,969 | (128 | ) | |||||||||||
Total comprehensive income | $ | 57,264 | $ | 65,549 | $ | 158,548 | $ | 165,668 | ||||||||
10. | Employee Retirement Plans | |
The FHLBank participates in the Pentegra Defined Benefit Plan for Financial Institutions (formerly known as the Financial Institutions Retirement Fund), a defined benefit plan. The Pentegra Defined Benefit Plan for Financial Institutions is a multiemployer plan and does not segregate its assets, liabilities, or costs by participating employer. The FHLBank also participates in the Pentegra Defined Contribution Plan for Financial Institutions (formerly known as the Financial Institutions Thrift Plan), a defined contribution plan. Funding and administrative costs of the Pentegra Defined Benefit Plan for Financial Institutions charged to other operating expenses were $813,000 and $465,000, respectively, for the three months ended September 30, 2005 and 2004 and $2,215,000 and $1,395,000, respectively, for the nine months ended September 30, 2005 and 2004. The FHLBank contributed $87,000 and $97,000 to the Pentegra Defined Contribution Plan for Financial Institutions, respectively, for the three months ended September 30, 2005 and 2004 and $390,000 and $359,000, respectively, for the nine months ended September 30, 2005 and 2004. |
167
Table of Contents
The FHLBank offers the Benefit Equalization Plan (BEP). The BEP is a non-qualified supplemental retirement plan restoring those pension benefits offered under the qualified plans, which have been limited by laws governing such plans. The FHLBank also sponsors a fully insured retirement benefits program that includes health care and life insurance benefits for eligible retirees. Components of the net periodic pension cost for the FHLBank’s supplemental retirement plan and postretirement health plan for the three and nine months ended September 30, 2005 and 2004 were (in thousands): |
Three Months Ended September 30, | ||||||||||||||||
Postretirement | ||||||||||||||||
BEP | Benefits Plan | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Service cost | $ | 75 | $ | 49 | $ | 13 | $ | 11 | ||||||||
Interest cost | 200 | 187 | 48 | 47 | ||||||||||||
Amortization of unrecognized prior service benefit | (27 | ) | (25 | ) | — | — | ||||||||||
Amortization of unrecognized net loss | 326 | 227 | 1 | — | ||||||||||||
Net periodic benefit cost | $ | 574 | $ | 438 | $ | 62 | $ | 58 | ||||||||
Nine Months Ended September 30, | ||||||||||||||||
Postretirement | ||||||||||||||||
BEP | Benefits Plan | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Service cost | $ | 225 | $ | 147 | $ | 36 | $ | 29 | ||||||||
Interest cost | 600 | 560 | 130 | 128 | ||||||||||||
Amortization of unrecognized prior service benefit | (81 | ) | (75 | ) | — | — | ||||||||||
Amortization of unrecognized net loss | 976 | 681 | 2 | — | ||||||||||||
Net periodic benefit cost | $ | 1,720 | $ | 1,313 | $ | 168 | $ | 157 | ||||||||
11. | Segment Information | |
The FHLBank has identified two primary operating segments based on its method of internal reporting: Traditional Member Finance and the Mortgage Purchase Program. These segments reflect the FHLBank’s two Mission Asset Programs and the manner in which they are managed from the perspective of development, resource allocation, product delivery, pricing, credit risk management, and operational administration. The segments identify the primary ways we provide services to member stockholders. The FHLBank, 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, which includes funding, market risk exposure, earnings volatility and dividend return, is 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, we hedge 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. It also is not possible, given this approach, to accurately determine what the performance would be if the two business segments were managed on stand-alone bases. Further, because management of financial performance 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. We have assigned our investments to this segment primarily because they have historically been used to provide liquidity for Advances and to support the level and volatility of earnings from Advances. Mortgage Purchase Program income is derived primarily from the difference, or |
168
Table of Contents
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. Capital is allocated proportionate to each segment’s average assets based on the total balance sheet’s capital-to-assets ratio. Expenses are allocated based on cost accounting techniques that include direct usage, time allocations and square footage of space used. Affordable Housing Program and REFCORP 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 under Statement of Financial Accounting Standards (SFAS) No. 133,Accounting for Derivative Instruments and Hedging Activities, as amended (herein referred to as “SFAS 133”), are allocated to the Traditional Member Finance segment because the FHLBank has not executed interest rate swaps in our management of the Mortgage Purchase Program’s market risk. |
169
Table of Contents
The following tables set forth the FHLBank’s financial performance by operating segment for the three and nine months ended September 30, 2005 and 2004 (in thousands): |
Three Months Ended September 30, | ||||||||||||
Traditional | Mortgage | |||||||||||
Member | Purchase | |||||||||||
Finance | Program | Total | ||||||||||
2005 | ||||||||||||
Net interest income | $ | 65,561 | $ | 22,403 | $ | 87,964 | ||||||
Other income | (1,169 | ) | 5 | (1,164 | ) | |||||||
Other expenses | 8,392 | 1,888 | 10,280 | |||||||||
Income before assessments | 56,000 | 20,520 | 76,520 | |||||||||
Affordable Housing Program | 5,079 | 1,675 | 6,754 | |||||||||
REFCORP | 10,184 | 3,769 | 13,953 | |||||||||
Total assessments | 15,263 | 5,444 | 20,707 | |||||||||
Net income | $ | 40,737 | $ | 15,076 | $ | 55,813 | ||||||
Average assets | $ | 67,619,425 | $ | 9,627,378 | $ | 77,246,803 | ||||||
Total assets | $ | 65,999,027 | $ | 9,849,255 | $ | 75,848,282 | ||||||
2004 | ||||||||||||
Net interest income | $ | 72,338 | $ | 16,365 | $ | 88,703 | ||||||
Other income | 9,266 | 83 | 9,349 | |||||||||
Other expenses | 6,967 | 1,851 | 8,818 | |||||||||
Income before assessments | 74,637 | 14,597 | 89,234 | |||||||||
Affordable Housing Program | 6,135 | 1,192 | 7,327 | |||||||||
REFCORP | 13,700 | 2,681 | 16,381 | |||||||||
Total assessments | 19,835 | 3,873 | 23,708 | |||||||||
Net income | $ | 54,802 | $ | 10,724 | $ | 65,526 | ||||||
Average assets | $ | 74,905,766 | $ | 8,212,237 | $ | 83,118,003 | ||||||
Total assets | $ | 73,953,601 | $ | 8,843,852 | $ | 82,797,453 | ||||||
Nine Months Ended September 30, | ||||||||||||
2005 | ||||||||||||
Net interest income | $ | 191,386 | $ | 53,641 | $ | 245,027 | ||||||
Other income | 423 | 16 | 439 | |||||||||
Other expenses | 25,795 | 5,732 | 31,527 | |||||||||
Income before assessments | 166,014 | 47,925 | 213,939 | |||||||||
Affordable Housing Program | 14,304 | 3,912 | 18,216 | |||||||||
REFCORP | 30,341 | 8,803 | 39,144 | |||||||||
Total assessments | 44,645 | 12,715 | 57,360 | |||||||||
Net income | $ | 121,369 | $ | 35,210 | $ | 156,579 | ||||||
Average assets | $ | 70,240,897 | $ | 9,199,714 | $ | 79,440,611 | ||||||
Total assets | $ | 65,999,027 | $ | 9,849,255 | $ | 75,848,282 | ||||||
2004 | ||||||||||||
Net interest income | $ | 149,496 | $ | 71,006 | $ | 220,502 | ||||||
Other income | 32,598 | 193 | 32,791 | |||||||||
Other expenses | 21,929 | 5,587 | 27,516 | |||||||||
Income before assessments | 160,165 | 65,612 | 225,777 | |||||||||
Affordable Housing Program | 13,176 | 5,356 | 18,532 | |||||||||
REFCORP | 29,398 | 12,051 | 41,449 | |||||||||
Total assessments | 42,574 | 17,407 | 59,981 | |||||||||
Net income | $ | 117,591 | $ | 48,205 | $ | 165,796 | ||||||
Average assets | $ | 71,977,263 | $ | 8,195,396 | $ | 80,172,659 | ||||||
Total assets | $ | 73,953,601 | $ | 8,843,852 | $ | 82,797,453 | ||||||
170
Table of Contents
12. | Derivatives | |
The FHLBank uses interest rate swaps to hedge the fair value of certain fixed-rate Advances and Consolidated Obligations. We do this by issuing swaps where one side of the swap offsets the fixed rate in the hedged item and the other side is based on a short-term London InterBank Offered Rate (LIBOR) rate that normally resets within three months. These derivatives are reflected as fair-value hedges. In addition we have a relatively small amount of derivatives that are classified as stand-alone delivery commitments and economic hedges. Stand-alone delivery commitments are Mandatory Delivery Contracts made under our Mortgage Purchase Program and represent a future commitment to purchase mortgage loans from our customers. We hedge these commitments in part by committing to sell to-be-announced (TBA) mortgage-backed securities issued by other government-sponsored enterprises such as Fannie Mae and Freddie Mac and/or government agencies such as Ginnie Mae. The market value of the TBAs tends to move in the opposite direction of the market pricing of the hedged Mandatory Delivery Contracts. The TBAs are considered stand-alone derivatives and therefore achieve an economic hedge of the Mandatory Delivery Contracts. We also have one interest rate swap that was established to economically hedge an Advance and that is not accounted for under hedge accounting. This swap has the effect of removing the interest rate cap and floors embedded in the Advance. | ||
The following tables reflect the net fair value of derivatives on the balance sheet and the outstanding notional principal amounts. Since derivatives are executed with various counterparties and there is no right of offset among the counterparties, certain categories may be included as both derivative assets and derivative liabilities. |
(In thousands) | September 30, 2005 | December 31, 2004 | ||||||||||||||
Notional | Fair Value | Notional | Fair Value | |||||||||||||
Total derivatives excluding accrued interest | $ | (506,922 | ) | $ | (575,018 | ) | ||||||||||
Accrued interest | 99,378 | 44,148 | ||||||||||||||
Net derivative balances | $ | (407,544 | ) | $ | (530,870 | ) | ||||||||||
Net derivative asset balances | $ | 244 | $ | 84 | ||||||||||||
Net derivative liability balances | (407,788 | ) | (530,954 | ) | ||||||||||||
Net derivative balances | $ | (407,544 | ) | $ | (530,870 | ) | ||||||||||
Detail by Category: | ||||||||||||||||
Fair value swaps hedging Advances | $ | 7,514,700 | $ | (203,302 | ) | $ | 7,645,200 | $ | (445,201 | ) | ||||||
Fair value swaps hedging Consolidated Obligations | 23,785,625 | (203,751 | ) | 25,235,000 | (85,592 | ) | ||||||||||
Stand-alone delivery commitments | 65,792 | (309 | ) | 74,835 | 70 | |||||||||||
TBAs economically hedging Mandatory | ||||||||||||||||
Delivery Contracts | 41,000 | 141 | 52,500 | (126 | ) | |||||||||||
Economic swaps hedging Advances | 10,000 | (323 | ) | — | — | |||||||||||
Economic swaps hedging mortgage-backed securities | — | — | 4,196 | (21 | ) | |||||||||||
Total/Net | $ | 31,417,117 | $ | (407,544 | ) | $ | 33,011,731 | $ | (530,870 | ) | ||||||
13. | Commitments | |
The following table sets forth the FHLBank’s commitments at September 30, 2005 and December 31, 2004 (in thousands): |
September 30, 2005 | December 31, 2004 | |||||||
Commitments to fund additional Advances | $ | 8,323 | $ | 18,610 | ||||
Mandatory Delivery Contracts for mortgage loans | 65,792 | 74,835 | ||||||
Outstanding Standby Letters of Credit | 1,373,573 | 1,415,384 | ||||||
Consolidated Obligations – committed to, not settled (Par value) | 1,257,873 | 525,000 | ||||||
Standby bond purchase agreements (Principal) | 251,550 | 116,755 |
In addition, the 12 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 of all 12 FHLBanks was $920.4 billion and $869.2 billion at September 30, 2005 and December 31, 2004, respectively. |
171
Table of Contents
14. | Transactions with Other FHLBanks | |
Occasionally, the FHLBank loans short-term funds to and borrows short term from other FHLBanks. These loans and borrowings are transacted at then current market rates when traded. The FHLBank has noted such activity on the face of its financial statements. There were no such loans or borrowings outstanding at September 30, 2005 or 2004. The following table details the average daily balance of lending and borrowing between the FHLBank and other FHLBanks for nine months ended September 30, 2005 and 2004. |
(In millions) | Average Daily Balances | |||||||
2005 | 2004 | |||||||
Loans to Other FHLBanks | $ 13 | $ 62 | ||||||
Borrowings from Other FHLBanks | 0 | 1 |
The FHLBank may, from time to time, assume the outstanding primary liability of another FHLBank rather than issue new debt for which the FHLBank is the primary obligor. The FHLBank then becomes the primary obligor for such transfers. There are no formal arrangements governing the transfer of Consolidated Obligations between the FHLBanks. These transfers are not investments of one FHLBank in another FHLBank. They reflect, rather, the act of one FHLBank assuming the debt obligation (at then current market rates on the day when the transfer is traded) that was originally issued by 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 and provides the transferring FHLBanks with outlets for extinguishing debt structures no longer required for their balance sheet management strategies. | ||
During the nine months ended September 30, 2005 and 2004, the par amounts of the liability on such consolidated obligations transferred to the FHLBank totaled (in thousands) $47,000 and $360,000, respectively. All such transfers were from the FHLBank of Chicago. The net premiums (discounts) associated with these transactions were $(390) and $(10,458) in 2005 and 2004, respectively. The FHLBank accounts for these transfers in the same manner as it accounts for new debt issuances. | ||
15. | Transactions with Shareholders and Affiliates | |
Concentrations. The following table shows capital stock balances, outstanding Advance principal, and unpaid principal balances of Mortgage Loans Held for Portfolio at September 30, 2005 of members holding 10 percent or more of total capital stock: |
Mortgage Purchase | ||||||||||||||||
Capital Stock | Advances | Program Unpaid | ||||||||||||||
(Dollars in millions) | Balance | % of Total | Principal | Principal Balance | ||||||||||||
Charter One Bank, N.A. | $ | 541 | 14 | % | $ | 9,652 | $ | — | ||||||||
U. S. Bank, N.A. | 489 | 13 | 4,509 | 217 | ||||||||||||
Total | $ | 1,030 | 27 | % | $ | 14,161 | $ | 217 | ||||||||
The following table shows capital stock balances, outstanding Advance principal, and unpaid principal balances of Mortgage Loans Held for Portfolio at December 31, 2004 of members holding 10 percent or more of total capital stock: |
Mortgage Purchase | ||||||||||||||||
Capital Stock | Advances | Program Unpaid | ||||||||||||||
(Dollars in millions) | Balance | % of Total | Principal | Principal Balance | ||||||||||||
Charter One Bank, N.A. | $ | 645 | 17 | % | $ | 8,527 | $ | — | ||||||||
U. S. Bank, N.A. | 472 | 12 | 3,208 | 284 | ||||||||||||
Total | $ | 1,117 | 29 | % | $ | 11,735 | $ | 284 | ||||||||
172
Table of Contents
Non-member Affiliates.The FHLBank has a relationship with a non-member affiliate, the Kentucky Housing Corporation. The nature of this relationship is twofold: one as an approved borrower from the FHLBank and one in which the FHLBank invests in via the purchase of the Kentucky Housing Corporation Bonds. Kentucky Housing Corporation had no borrowings during the nine months ended September 30, 2005 or 2004. The FHLBank had investments in the bonds of the Kentucky Housing Corporation of $14,435,000 and $15,015,000 as of September 30, 2005 and 2004, respectively. | ||
16. | Subsequent Events | |
Effective October 1, 2005, the FHLBank corrected the manner in which it assesses effectiveness for its Convertible Rate Advance hedging relationships to the long-haul method. Under the FHLBank’s prior approach, the FHLBank inappropriately assumed no ineffectiveness for these hedging transactions since the Convertible Rate Advance and the designated interest rate swap had identical terms with the exception that a variable rate Advance is offered to the Member upon exercise of the conversion option. The FHLBank has analyzed the impact of this correction on all prior annual periods since the adoption of SFAS 133 on January 1, 2001, and all prior quarterly periods for 2003, 2004 and the first three quarters of 2005, and has determined that had the FHLBank applied the revised long-haul approach since January 1, 2001 it would not have had a material impact on the results of operations or financial condition of the FHLBank for any of these reporting periods. Effective October 1, 2005, the FHLBank recorded the cumulative effect adjustment, an increase of $1.7 million to net income. |
173
Table of Contents
174
Table of Contents
The Federal Home Loan Bank of Cincinnati:
Columbus, Ohio
175
Table of Contents
STATEMENTS OF CONDITION
(In thousands, except par value)
December 31, | ||||||||
2004 | 2003 | |||||||
ASSETS | ||||||||
Cash and due from banks (Note 3) | $ | 11,262 | $ | 6,668 | ||||
Interest-bearing deposits | 5,781,266 | 6,285,338 | ||||||
Securities purchased under agreements to resell (Note 4) | 700,000 | — | ||||||
Federal funds sold | 7,542,800 | 7,250,500 | ||||||
Trading securities (Note 5) | 8,463 | 11,919 | ||||||
Available-for-sale securities (a) (Note 6) | 910,592 | 822,513 | ||||||
Held-to-maturity securities includes $100,562 and $310,970 pledged as collateral in 2004 and 2003 that may be repledged (b) (Note 7) | 11,711,842 | 11,240,050 | ||||||
Advances (Note 8) | 41,300,942 | 43,129,143 | ||||||
Mortgage loans held for portfolio, net (Note 10) | 8,370,495 | 8,101,158 | ||||||
Accrued interest receivable | 185,828 | 201,028 | ||||||
Equipment and leasehold improvements, net | 6,485 | 4,980 | ||||||
Derivative assets (Note 16) | 84 | 51,309 | ||||||
Other assets | 46,469 | 38,968 | ||||||
TOTAL ASSETS | $ | 76,576,528 | $ | 77,143,574 | ||||
LIABILITIES AND CAPITAL | ||||||||
Interest-bearing deposits (Note 11): | ||||||||
Demand and overnight | $ | 898,681 | $ | 1,089,922 | ||||
Term | 115,500 | 261,600 | ||||||
Other | 17,460 | 61,535 | ||||||
Total interest-bearing deposits | 1,031,641 | 1,413,057 | ||||||
Consolidated Obligations, net (Note 12): | ||||||||
Discount Notes | 18,632,320 | 29,443,378 | ||||||
Bonds | 51,818,345 | 40,360,947 | ||||||
Total Consolidated Obligations, net | 70,450,665 | 69,804,325 | ||||||
Mandatorily redeemable capital stock (Notes 2, 13) | 34,344 | — | ||||||
Accrued interest payable | 389,458 | 349,635 | ||||||
Affordable Housing Program (Note 9) | 88,919 | 85,632 | ||||||
Payable to REFCORP (Note 1) | 15,110 | 11,770 | ||||||
Derivative liabilities (Note 16) | 530,954 | 1,311,488 | ||||||
Other liabilities | 72,274 | 433,994 | ||||||
Total liabilities | 72,613,365 | 73,409,901 | ||||||
Commitments and contingencies (Note 18) | ||||||||
CAPITAL (Note 13) | ||||||||
Capital stock – Class B putable ($100 par value) issued and outstanding shares: | ||||||||
37,999 and 36,453 shares in 2004 and 2003 | 3,799,852 | 3,645,253 | ||||||
Retained earnings | 167,540 | 92,150 | ||||||
Accumulated other comprehensive income: | ||||||||
Net unrealized loss on available-for-sale securities (Note 6) | (90 | ) | (8 | ) | ||||
Other (Note 14) | (4,139 | ) | (3,722 | ) | ||||
Total capital | 3,963,163 | 3,733,673 | ||||||
TOTAL LIABILITIES AND CAPITAL | $ | 76,576,528 | $ | 77,143,574 | ||||
(a) | Amortized cost: $910,682 and $822,521 at December 31, 2004 and 2003. | |
(b) | Fair values: $11,719,733 and $11,259,734 at December 31, 2004 and 2003. |
176
Table of Contents
For the Years Ended December 31, | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
INTEREST INCOME: | ||||||||||||
Advances | $ | 770,420 | $ | 696,688 | $ | 869,887 | ||||||
Prepayment fees on Advances, net | 69,244 | 29,817 | 26,341 | |||||||||
Interest-bearing deposits | 90,825 | 59,694 | 80,489 | |||||||||
Securities purchased under agreements to resell | 750 | 2,891 | 381 | |||||||||
Federal funds sold | 104,565 | 104,449 | 215,917 | |||||||||
Trading securities | 406 | 763 | 1,419 | |||||||||
Available-for-sale securities | 15,153 | 10,289 | 27,105 | |||||||||
Held-to-maturity securities | 495,869 | 481,140 | 520,272 | |||||||||
Mortgage loans held for portfolio | 405,326 | 343,119 | 107,012 | |||||||||
Loans to other FHLBanks | 769 | 343 | 76 | |||||||||
Total interest income | 1,953,327 | 1,729,193 | 1,848,899 | |||||||||
INTEREST EXPENSE: | ||||||||||||
Consolidated Obligations | 1,637,273 | 1,480,487 | 1,554,041 | |||||||||
Deposits | 12,640 | 19,548 | 28,213 | |||||||||
Borrowings from other FHLBanks | 19 | 34 | — | |||||||||
Mandatorily redeemable capital stock | 1,350 | — | — | |||||||||
Other borrowings | 287 | 1,456 | 1,999 | |||||||||
Total interest expense | 1,651,569 | 1,501,525 | 1,584,253 | |||||||||
NET INTEREST INCOME | 301,758 | 227,668 | 264,646 | |||||||||
OTHER INCOME: | ||||||||||||
Service fees | 1,651 | 1,529 | 1,503 | |||||||||
Net loss on trading securities | (33 | ) | (415 | ) | (625 | ) | ||||||
Net realized loss from sale of available-for-sale securities | (3 | ) | — | — | ||||||||
Net realized gain from sale of held-to-maturity securities (Note 7) | — | 4,571 | — | |||||||||
Net realized and unrealized gain (loss) on derivatives and hedging activities | 39,555 | 26,234 | (836 | ) | ||||||||
Other, net | 2,706 | 4,107 | 4,184 | |||||||||
Total other income | 43,876 | 36,026 | 4,226 | |||||||||
OTHER EXPENSE: | ||||||||||||
Salaries and benefits | 18,131 | 15,928 | 13,435 | |||||||||
Other operating | 10,413 | 9,045 | 7,780 | |||||||||
Finance Board | 2,468 | 2,278 | 2,157 | |||||||||
Office of Finance | 2,226 | 1,985 | 1,910 | |||||||||
Other | 3,210 | 2,051 | 660 | |||||||||
Total other expense | 36,448 | 31,287 | 25,942 | |||||||||
INCOME BEFORE ASSESSMENTS | 309,186 | 232,407 | 242,930 | |||||||||
Affordable Housing Program | 25,377 | 18,972 | 19,831 | |||||||||
REFCORP | 56,762 | 42,687 | 44,620 | |||||||||
Total assessments | 82,139 | 61,659 | 64,451 | |||||||||
NET INCOME | $ | 227,047 | $ | 170,748 | $ | 178,479 | ||||||
177
Table of Contents
Accumulated | ||||||||||||||||||||||||||||
Capital Stock | Other | |||||||||||||||||||||||||||
Class B* | Capital Stock* | Retained | Comprehensive | Total | ||||||||||||||||||||||||
Shares | Par Value | Shares | Par Value | Earnings | Income | Capital | ||||||||||||||||||||||
BALANCE, DECEMBER 31, 2001 | — | $ | — | 31,974 | $ | 3,197,393 | $ | 42,940 | $ | (522 | ) | $ | 3,239,811 | |||||||||||||||
Proceeds from sale of capital stock | 4 | 387 | 2,762 | 276,175 | 276,562 | |||||||||||||||||||||||
Repurchase/redemption of capital stock | — | — | (822 | ) | (82,222 | ) | (82,222 | ) | ||||||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||
Net income | 178,479 | 178,479 | ||||||||||||||||||||||||||
Other comprehensive income: | ||||||||||||||||||||||||||||
Net unrealized loss on available-for-sale securities | (20 | ) | (20 | ) | ||||||||||||||||||||||||
Reclassification adjustment for (gain) loss included in net income relating to available-for-sale securities | — | — | ||||||||||||||||||||||||||
Other | (923 | ) | (923 | ) | ||||||||||||||||||||||||
Total other comprehensive income | (943 | ) | (943 | ) | ||||||||||||||||||||||||
Total comprehensive income | 177,536 | |||||||||||||||||||||||||||
Conversion to Class B shares | 35,080 | 3,507,945 | (35,080 | ) | (3,507,945 | ) | — | |||||||||||||||||||||
Dividends on capital stock: | ||||||||||||||||||||||||||||
Cash | (443 | ) | (443 | ) | ||||||||||||||||||||||||
Stock | 396 | 39,669 | 1,166 | 116,599 | (156,268 | ) | — | |||||||||||||||||||||
BALANCE, DECEMBER 31, 2002 | 35,480 | 3,548,001 | — | — | 64,708 | (1,465 | ) | 3,611,244 | ||||||||||||||||||||
Proceeds from sale of capital stock | 122 | 12,222 | 12,222 | |||||||||||||||||||||||||
Repurchase/redemption of capital stock | (581 | ) | (58,123 | ) | (58,123 | ) | ||||||||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||
Net income | 170,748 | 170,748 | ||||||||||||||||||||||||||
Other comprehensive income: | ||||||||||||||||||||||||||||
Net unrealized loss on available-for-sale securities | (113 | ) | (113 | ) | ||||||||||||||||||||||||
Reclassification adjustment for (gain) loss included in net income relating to available-for-sale securities | — | — | ||||||||||||||||||||||||||
Other | (2,152 | ) | (2,152 | ) | ||||||||||||||||||||||||
Total other comprehensive income | (2,265 | ) | (2,265 | ) | ||||||||||||||||||||||||
Total comprehensive income | 168,483 | |||||||||||||||||||||||||||
Dividends on capital stock: | ||||||||||||||||||||||||||||
Cash | (153 | ) | (153 | ) | ||||||||||||||||||||||||
Stock | 1,432 | 143,153 | (143,153 | ) | — | |||||||||||||||||||||||
BALANCE, DECEMBER 31, 2003 | 36,453 | $ | 3,645,253 | — | $ | — | $ | 92,150 | $ | (3,730 | ) | $ | 3,733,673 |
178
Table of Contents
STATEMENTS OF CAPITAL
(In thousands)
Accumulated | ||||||||||||||||||||||||||||
Capital Stock | Other | |||||||||||||||||||||||||||
Class B* | Capital Stock* | Retained | Comprehensive | Total | ||||||||||||||||||||||||
Shares | Par Value | Shares | Par Value | Earnings | Income | Capital | ||||||||||||||||||||||
BALANCE, DECEMBER 31, 2003 | 36,453 | $ | 3,645,253 | — | $ | — | $ | 92,150 | $ | (3,730 | ) | $ | 3,733,673 | |||||||||||||||
Proceeds from sale of capital stock | 902 | 90,193 | 90,193 | |||||||||||||||||||||||||
Net reclassified to mandatorily redeemable capital stock | (871 | ) | (87,074 | ) | (87,074 | ) | ||||||||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||
Net income | 227,047 | 227,047 | ||||||||||||||||||||||||||
Other comprehensive income: | ||||||||||||||||||||||||||||
Net unrealized loss on available-for-sale securities | (82 | ) | (82 | ) | ||||||||||||||||||||||||
Reclassification adjustment for (gain) loss included in net income relating to available-for-sale securities | — | — | ||||||||||||||||||||||||||
Other | (417 | ) | (417 | ) | ||||||||||||||||||||||||
Total other comprehensive income | (499 | ) | (499 | ) | ||||||||||||||||||||||||
Total comprehensive income | 226,548 | |||||||||||||||||||||||||||
Dividends on capital stock: | ||||||||||||||||||||||||||||
Cash | (242 | ) | �� | (242 | ) | |||||||||||||||||||||||
Stock | 1,515 | 151,480 | (151,415 | ) | 65 | |||||||||||||||||||||||
BALANCE, DECEMBER 31, 2004 | 37,999 | $ | 3,799,852 | — | $ | — | $ | 167,540 | $ | (4,229 | ) | $ | 3,963,163 | |||||||||||||||
179
Table of Contents
STATEMENTS OF CASH FLOWS
(In thousands)
For the Years Ended December 31, | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
OPERATING ACTIVITIES: | ||||||||||||
Net income | $ | 227,047 | $ | 170,748 | $ | 178,479 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization: | ||||||||||||
Net premiums and discounts on Consolidated Obligations and investments | (4,661 | ) | (37,926 | ) | (72,149 | ) | ||||||
Concessions on Consolidated Obligation bonds | 17,736 | 19,546 | 13,233 | |||||||||
Premiums and discounts on mortgage loans, net | 31,032 | 23,427 | 7,027 | |||||||||
Premiums and discounts on Advances | 4,362 | 2,263 | — | |||||||||
Net deferred loss on derivatives | 34,726 | 24,323 | 19 | |||||||||
Equipment and leasehold improvements | 1,345 | 1,248 | 1,021 | |||||||||
Other | (2,772 | ) | (1,998 | ) | (1,667 | ) | ||||||
Non-cash interest on mandatorily redeemable capital stock | 1,243 | — | — | |||||||||
Decrease in trading securities | 3,456 | 7,661 | 10,737 | |||||||||
Net realized loss from available-for-sale securities | 3 | — | — | |||||||||
Net realized gain from sale of held-to-maturity securities (Note 7) | — | (4,571 | ) | — | ||||||||
Gain due to change in net fair value adjustment on derivative and hedging activities | (32,581 | ) | (13,035 | ) | (301 | ) | ||||||
Net realized (gain) loss on disposal of equipment and leasehold improvements | (4 | ) | 58 | (2 | ) | |||||||
Decrease in accrued interest receivable | 15,200 | 8,947 | 12,067 | |||||||||
Decrease (increase) in derivative asset-net accrued interest | 27,253 | 3,656 | (9,928 | ) | ||||||||
(Decrease) increase in derivative liability-net accrued interest | (83,055 | ) | 9,663 | 73,871 | ||||||||
Increase in other assets | (2,690 | ) | (4,107 | ) | (1,543 | ) | ||||||
Net increase in Affordable Housing Program (AHP) liability and discount on AHP Advances | 6,235 | 5,222 | 9,833 | |||||||||
Increase (decrease) in accrued interest payable | 39,823 | 3,973 | (33,448 | ) | ||||||||
Increase (decrease) in payable to REFCORP | 3,340 | (662 | ) | 520 | ||||||||
Increase in other liabilities | 15,198 | 29,728 | 13,666 | |||||||||
Total adjustments | 75,189 | 77,416 | 22,956 | |||||||||
Net cash provided by operating activities | 302,236 | 248,164 | 201,435 | |||||||||
INVESTING ACTIVITIES: | ||||||||||||
Net decrease (increase) in interest-bearing deposits | 504,072 | (2,532,753 | ) | (606,694 | ) | |||||||
Net (increase) decrease in securities purchased under agreements to resell | (700,000 | ) | 200,000 | (200,000 | ) | |||||||
Net (increase) decrease in Federal funds sold | (292,300 | ) | 4,195,500 | (136,000 | ) | |||||||
Proceeds from sales of available-for-sale securities | 199,510 | — | — | |||||||||
Proceeds from maturities of available-for-sale securities | 71,838,000 | 29,403,319 | 57,137,158 | |||||||||
Purchases of available-for-sale securities | (72,110,521 | ) | (29,429,974 | ) | (56,295,542 | ) | ||||||
Proceeds from sales of long-term held-to-maturity securities | — | 86,230 | — | |||||||||
Proceeds from maturities of long-term held-to-maturity securities | 2,989,295 | 8,329,972 | 5,306,946 | |||||||||
Purchases of long-term held-to-maturity securities | (3,841,780 | ) | (8,673,414 | ) | (6,908,160 | ) | ||||||
Principal collected on Advances | 2,325,820,033 | 1,090,072,608 | 495,269,490 | |||||||||
Advances made | (2,324,944,227 | ) | (1,093,629,726 | ) | (499,210,999 | ) | ||||||
Principal collected on mortgage loans held for portfolio | 2,004,810 | 3,317,379 | 526,120 | |||||||||
Mortgage loans held for portfolio purchased | (2,307,281 | ) | (7,687,850 | ) | (3,733,787 | ) | ||||||
Net decrease in loans to other FHLBanks | — | — | 100,000 | |||||||||
Net increase in equipment and leasehold improvements | (2,846 | ) | (888 | ) | (3,269 | ) | ||||||
Net cash used in investing activities | $ | (843,235 | ) | $ | (6,349,597 | ) | $ | (8,754,737 | ) | |||
180
Table of Contents
STATEMENTS OF CASH FLOWS
(In thousands)
For the Years Ended December 31, | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
FINANCING ACTIVITIES: | ||||||||||||
Net (decrease) increase in deposits | $ | (381,416 | ) | $ | (919,220 | ) | $ | 697,278 | ||||
Net proceeds from issuance of Consolidated Obligations: | ||||||||||||
Discount notes | 826,021,476 | 791,166,856 | 731,863,015 | |||||||||
Bonds | 32,856,513 | 27,854,760 | 31,693,372 | |||||||||
Bonds transferred from other FHLBanks | 349,542 | 1,024,233 | 99,450 | |||||||||
Payments for maturing and retiring Consolidated Obligations: | ||||||||||||
Discount notes | (836,841,046 | ) | (787,322,814 | ) | (730,997,249 | ) | ||||||
Bonds | (21,495,520 | ) | (25,662,945 | ) | (24,993,000 | ) | ||||||
Payments for redemption of mandatorily redeemable capital stock | (53,907 | ) | — | — | ||||||||
Proceeds from issuance of capital stock | 90,193 | 12,222 | 276,562 | |||||||||
Payments for repurchase/redemption of capital stock | — | (58,123 | ) | (82,222 | ) | |||||||
Cash dividends paid | (242 | ) | (153 | ) | (443 | ) | ||||||
Net cash provided by financing activities | 545,593 | 6,094,816 | 8,556,763 | |||||||||
Net increase (decrease) in cash and cash equivalents | 4,594 | (6,617 | ) | 3,461 | ||||||||
Cash and cash equivalents at beginning of the year | 6,668 | 13,285 | 9,824 | |||||||||
Cash and cash equivalents at end of the year | $ | 11,262 | $ | 6,668 | $ | 13,285 | ||||||
Supplemental Disclosures: | ||||||||||||
Interest paid | $ | 1,582,784 | $ | 1,521,711 | $ | 1,588,639 | ||||||
AHP payments | $ | 22,090 | $ | 15,553 | $ | 12,801 | ||||||
REFCORP payments | $ | 53,422 | $ | 43,349 | $ | 44,100 | ||||||
181
Table of Contents
182
Table of Contents
183
Table of Contents
184
Table of Contents
1. | hedging market risk exposure; and | ||
2. | providing intermediation between the preferences of the capital markets for the kinds of debt securities in which they want to invest and the preferences of member institutions for the kinds of Advances they want to hold and the kinds of mortgage loans they want to sell. |
1. | a hedge of the fair value of a recognized asset or liability or an unrecognized firm commitment (a “fair value” hedge); | ||
2. | a non-qualifying hedge of an asset or liability (“economic hedge”) for asset/liability management purposes; or |
185
Table of Contents
3. | a non-qualifying hedge of another derivative (an “intermediation” hedge) that is offered as a product to members or used to offset other derivatives with non-member counterparties. |
186
Table of Contents
187
Table of Contents
188
Table of Contents
189
Table of Contents
2004 | 2003 | |||||||
Mortgage-backed securities: | ||||||||
Agency | $ | 8,463 | $ | 11,919 | ||||
190
Table of Contents
Gross | Gross | Estimated | ||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | (Losses) | Value | |||||||||||||
Commercial paper | $ | 910,682 | $ | — | $ | (90 | ) | $ | 910,592 | |||||||
Gross | Gross | Estimated | ||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | (Losses) | Value | |||||||||||||
Bankers’ acceptances | $ | 2,999 | $ | — | $ | — | $ | 2,999 | ||||||||
Commercial paper | 819,522 | — | (8 | ) | 819,514 | |||||||||||
Total | $ | 822,521 | $ | — | $ | (8 | ) | $ | 822,513 | |||||||
2004 | 2003 | |||||||||||||||
Estimated | Estimated | |||||||||||||||
Amortized | Fair | Amortized | Fair | |||||||||||||
Year of Maturity | Cost | Value | Cost | Value | ||||||||||||
Due in one year or less | $ | 910,682 | $ | 910,592 | $ | 822,521 | $ | 822,513 | ||||||||
2004 | 2003 | |||||||
Amortized cost of available-for-sale securities other than mortgage-backed securities: | ||||||||
Fixed-rate | $ | 910,682 | $ | 822,521 | ||||
191
Table of Contents
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Estimated | |||||||||||||
Cost | Gains | (Losses) | Fair Value | |||||||||||||
State or local housing agency obligations | $ | 37,585 | $ | 968 | $ | — | $ | 38,553 | ||||||||
Mortgage-backed securities: | ||||||||||||||||
Government-sponsored enterprises | 10,979,887 | 54,252 | (47,577 | ) | 10,986,562 | |||||||||||
Agency | 93,224 | 766 | — | 93,990 | ||||||||||||
Other | 601,146 | 154 | (672 | ) | 600,628 | |||||||||||
Total mortgage-backed securities | 11,674,257 | 55,172 | (48,249 | ) | 11,681,180 | |||||||||||
Total | $ | 11,711,842 | $ | 56,140 | $ | (48,249 | ) | $ | 11,719,733 | |||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Estimated | |||||||||||||
Cost | Gains | (Losses) | Fair Value | |||||||||||||
State or local housing agency obligations | $ | 50,570 | $ | 777 | $ | (1,134 | ) | $ | 50,213 | |||||||
Mortgage-backed securities: | ||||||||||||||||
Government-sponsored enterprises | 10,234,175 | 68,011 | (50,753 | ) | 10,251,433 | |||||||||||
Agency | 191,927 | 1,481 | — | 193,408 | ||||||||||||
Other | 763,378 | 2,331 | (1,029 | ) | 764,680 | |||||||||||
Total mortgage-backed securities | 11,189,480 | 71,823 | (51,782 | ) | 11,209,521 | |||||||||||
Total | $ | 11,240,050 | $ | 72,600 | $ | (52,916 | ) | $ | 11,259,734 | |||||||
192
Table of Contents
Less than 12 Months | 12 Months or more | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Value | (Losses) | Value | (Losses) | Value | (Losses) | |||||||||||||||||||
Mortgage-backed securities: | ||||||||||||||||||||||||
Government-sponsored enterprises | $ | 3,695,792 | $ | (20,328 | ) | $ | 1,384,865 | $ | (27,249 | ) | $ | 5,080,657 | $ | (47,577 | ) | |||||||||
Agency | — | — | — | — | — | — | ||||||||||||||||||
Other | 456,234 | (672 | ) | — | — | 456,234 | (672 | ) | ||||||||||||||||
Total temporarily impaired | $ | 4,152,026 | $ | (21,000 | ) | $ | 1,384,865 | $ | (27,249 | ) | $ | 5,536,891 | $ | (48,249 | ) | |||||||||
Less than 12 Months | 12 Months or more | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Value | (Losses) | Value | (Losses) | Value | (Losses) | |||||||||||||||||||
State or local housing agency obligations | $ | 18,391 | $ | (1,134 | ) | $ | — | $ | — | $ | 18,391 | $ | (1,134 | ) | ||||||||||
Mortgage-backed securities: | ||||||||||||||||||||||||
Government-sponsored enterprises | 3,896,511 | (50,753 | ) | — | — | 3,896,511 | (50,753 | ) | ||||||||||||||||
Agency | — | — | — | — | — | — | ||||||||||||||||||
Other | 332,503 | (1,029 | ) | — | — | 332,503 | (1,029 | ) | ||||||||||||||||
Total mortgage-backed securities | 4,229,014 | (51,782 | ) | — | — | 4,229,014 | (51,782 | ) | ||||||||||||||||
Total temporarily impaired | $ | 4,247,405 | $ | (52,916 | ) | $ | — | $ | — | $ | 4,247,405 | $ | (52,916 | ) | ||||||||||
2004 | 2003 | |||||||||||||||
Amortized | Estimated | Amortized | Estimated | |||||||||||||
Year of Maturity | Cost | Fair Value | Cost | Fair Value | ||||||||||||
Due after one year through five years | $ | 2,325 | $ | 2,383 | $ | 3,135 | $ | 3,360 | ||||||||
Due after ten years | 35,260 | 36,170 | 47,435 | 46,853 | ||||||||||||
Total other | 37,585 | 38,553 | 50,570 | 50,213 | ||||||||||||
Mortgage-backed securities: | ||||||||||||||||
Government-sponsored enterprises | 10,979,887 | 10,986,562 | 10,234,175 | 10,251,433 | ||||||||||||
Agency | 93,224 | 93,990 | 191,927 | 193,408 | ||||||||||||
Other | 601,146 | 600,628 | 763,378 | 764,680 | ||||||||||||
Total mortgage-backed securities | 11,674,257 | 11,681,180 | 11,189,480 | 11,209,521 | ||||||||||||
Total | $ | 11,711,842 | $ | 11,719,733 | $ | 11,240,050 | $ | 11,259,734 | ||||||||
193
Table of Contents
2004 | 2003 | |||||||
Amortized cost of held-to-maturity securities other than mortgage-backed securities: | ||||||||
Fixed-rate | $ | 33,525 | $ | 45,515 | ||||
Variable-rate | 4,060 | 5,055 | ||||||
Total other | 37,585 | 50,570 | ||||||
Amortized cost of held-to-maturity mortgage-backed securities: | ||||||||
Pass-through securities: | ||||||||
Fixed-rate | 5,033,336 | 5,705,457 | ||||||
Collateralized mortgage obligations: | ||||||||
Fixed-rate | 6,632,141 | 5,468,083 | ||||||
Variable-rate | 8,780 | 15,940 | ||||||
Total mortgage-backed securities | 11,674,257 | 11,189,480 | ||||||
Total | $ | 11,711,842 | $ | 11,240,050 | ||||
2004 | 2003 | |||||||||||||||
Weighted | Weighted | |||||||||||||||
Average | Average | |||||||||||||||
Interest | Interest | |||||||||||||||
Year of Maturity | Amount | Rate % | Amount | Rate % | ||||||||||||
Overdrawn demand deposit accounts | $ | 627 | 2.67 | $ | — | |||||||||||
2004 | 11,637,946 | 1.25 | ||||||||||||||
2005 | 13,198,436 | 2.44 | 7,133,587 | 3.22 | ||||||||||||
2006 | 4,336,969 | 2.75 | 3,957,005 | 2.04 | ||||||||||||
2007 | 6,123,014 | 2.54 | 4,976,848 | 4.06 | ||||||||||||
2008 | 2,876,750 | 3.40 | 5,377,169 | 4.08 | ||||||||||||
2009 | 5,514,328 | 2.92 | 1,413,549 | 5.07 | ||||||||||||
Thereafter | 8,869,120 | 4.21 | 7,275,160 | 4.73 | ||||||||||||
Total par value | 40,919,244 | 3.00 | 41,771,264 | 3.10 | ||||||||||||
Commitment fees | (2,906 | ) | (879 | ) | ||||||||||||
Discount on Affordable Housing Program Advances | (27,430 | ) | (24,482 | ) | ||||||||||||
Premium on Advances | — | 22,722 | ||||||||||||||
Discount on Advances | (3,027 | ) | (305 | ) | ||||||||||||
SFAS 133 hedging adjustments | 415,061 | 1,360,823 | ||||||||||||||
Total | $ | 41,300,942 | $ | 43,129,143 | ||||||||||||
194
Table of Contents
Year of Maturity or Next Call/Repricing Date | 2004 | 2003 | ||||||
Overdrawn demand deposit accounts | $ | 627 | $ | — | ||||
2004 | 22,114,583 | |||||||
2005 | 28,099,059 | 3,338,912 | ||||||
2006 | 1,816,444 | 1,203,830 | ||||||
2007 | 975,371 | 2,490,215 | ||||||
2008 | 1,452,863 | 4,173,082 | ||||||
2009 | 1,478,849 | 1,280,070 | ||||||
Thereafter | 7,096,031 | 7,170,572 | ||||||
Total par value | $ | 40,919,244 | $ | 41,771,264 | ||||
Year of Maturity or Next Put Date | 2004 | 2003 | ||||||
Overdrawn demand deposit accounts | $ | 627 | $ | — | ||||
2004 | 25,468,646 | |||||||
2005 | 19,545,636 | 5,051,087 | ||||||
2006 | 4,595,969 | 3,902,905 | ||||||
2007 | 6,244,514 | 3,054,248 | ||||||
2008 | 2,118,250 | 1,747,469 | ||||||
2009 | 4,536,628 | 452,849 | ||||||
Thereafter | 3,877,620 | 2,094,060 | ||||||
Total par value | $ | 40,919,244 | $ | 41,771,264 | ||||
195
Table of Contents
1. | allows a member to retain possession of the collateral assigned to the FHLBank, if the member executes a written security agreement and agrees to hold such collateral for the benefit of the FHLBank; or | ||
2. | requires the member specifically to assign or place physical possession of such collateral with the FHLBank or its safekeeping agent. |
2004 | 2003 | |||||||
Par amount of Advances: | ||||||||
Fixed-rate | $ | 21,995,687 | $ | 27,602,682 | ||||
Variable-rate | 18,923,557 | 14,168,582 | ||||||
Total | $ | 40,919,244 | $ | 41,771,264 | ||||
(Dollars in millions) | Principal | % of Total | ||||||
Charter One Bank, N.A. | $ | 8,527 | 21 | % | ||||
Fifth Third Bank | 4,345 | 11 | ||||||
Total | $ | 12,872 | 32 | % | ||||
196
Table of Contents
2004 | 2003 | |||||||
AHP liability at beginning of year | $ | 85,632 | $ | 82,213 | ||||
Accruals | 25,377 | 18,972 | ||||||
Subsidy uses | (22,090 | ) | (15,553 | ) | ||||
AHP liability at end of year | $ | 88,919 | $ | 85,632 | ||||
2004 | 2003 | |||||||
Real Estate: | ||||||||
Fixed medium-term single-family mortgages | $ | 1,826,808 | $ | 1,899,828 | ||||
Fixed long-term single-family mortgages | 6,444,878 | 6,086,649 | ||||||
Premiums | 121,048 | 131,436 | ||||||
Discounts | (7,277 | ) | (3,895 | ) | ||||
SFAS 133 unamortized market adjustments | (14,962 | ) | (12,860 | ) | ||||
Total mortgage loans held for portfolio | $ | 8,370,495 | $ | 8,101,158 | ||||
197
Table of Contents
(Dollars in millions) | Unpaid Principal Balances | % of Total | ||||||
National City Bank | $ | 4,349 | 53 | % | ||||
Union Savings Bank | 2,257 | 27 | ||||||
Total | $ | 6,606 | 80 | % | ||||
198
Table of Contents
199
Table of Contents
2004 | 2003 | |||||||
Par value of Consolidated Bonds: | ||||||||
Fixed-rate | $ | 49,950,055 | $ | 39,655,575 | ||||
Variable-rate | 2,030,000 | 580,000 | ||||||
Total par value | $ | 51,980,055 | $ | 40,235,575 | ||||
2004 | 2003 | |||||||||||||||
Weighted | Weighted | |||||||||||||||
Average | Average | |||||||||||||||
Interest | Interest | |||||||||||||||
Year of Maturity | Amount | Rate % | Amount | Rate % | ||||||||||||
2004 | $ | 12,669,820 | 3.32 | |||||||||||||
2005 | $ | 13,827,055 | 2.43 | 5,814,055 | 3.52 | |||||||||||
2006 | 14,615,000 | 2.91 | 6,070,000 | 3.41 | ||||||||||||
2007 | 8,433,000 | 3.43 | 3,936,000 | 3.84 | ||||||||||||
2008 | 3,408,000 | 3.58 | 3,253,000 | 3.64 | ||||||||||||
2009 | 2,990,000 | 4.14 | 1,360,000 | 4.56 | ||||||||||||
Thereafter | 8,707,000 | 4.72 | 7,132,700 | 4.79 | ||||||||||||
Total par value | 51,980,055 | 3.28 | 40,235,575 | 3.74 | ||||||||||||
Bond premiums | 54,775 | 60,834 | ||||||||||||||
Bond discounts | (61,423 | ) | (52,612 | ) | ||||||||||||
SFAS 133 hedging adjustments | (155,062 | ) | 117,150 | |||||||||||||
Total | $ | 51,818,345 | $ | 40,360,947 | ||||||||||||
200
Table of Contents
2004 | 2003 | |||||||
Par amount of Consolidated Bonds: | ||||||||
Non-callable or non-putable | $ | 29,856,055 | $ | 26,378,680 | ||||
Callable | 22,124,000 | 13,856,895 | ||||||
Total par value | $ | 51,980,055 | $ | 40,235,575 | ||||
Year of Maturity or Next Call Date | 2004 | 2003 | ||||||
2004 | $ | 22,279,520 | ||||||
2005 | $ | 28,956,055 | 5,804,055 | |||||
2006 | 10,400,000 | 4,195,000 | ||||||
2007 | 4,859,000 | 2,237,000 | ||||||
2008 | 2,013,000 | 1,678,000 | ||||||
2009 | 1,715,000 | 1,040,000 | ||||||
Thereafter | 4,037,000 | 3,002,000 | ||||||
Total par value | $ | 51,980,055 | $ | 40,235,575 | ||||
Weighted | ||||||||||||
Average | ||||||||||||
Book Value | Par Value | Interest Rate | ||||||||||
December 31, 2004 | $ | 18,632,320 | $ | 18,659,549 | 2.12 | % | ||||||
December 31, 2003 | $ | 29,443,378 | $ | 29,460,023 | 1.03 | % | ||||||
201
Table of Contents
December 31, 2004 | December 31, 2003 | |||||||||||||||
Required | Actual | Required | Actual | |||||||||||||
Regulatory capital requirements(1): | ||||||||||||||||
Risk based capital | $ | 638,620 | $ | 4,001,736 | $ | 628,294 | $ | 3,737,403 | ||||||||
Total capital-to-assets ratio | 4.00 | % | 5.23 | % | 4.00 | % | 4.84 | % | ||||||||
Total regulatory capital | $ | 3,063,061 | $ | 4,001,736 | $ | 3,085,743 | $ | 3,737,403 | ||||||||
Leverage capital-to-assets ratio | 5.00 | % | 7.84 | % | 5.00 | % | 7.27 | % | ||||||||
Leverage capital | $ | 3,828,826 | $ | 6,002,604 | $ | 3,857,179 | $ | 5,606,105 |
(1) | Required regulatory and leverage capital equal four percent and five percent of assets, respectively. Actual regulatory capital equals the sum of capital stock (including mandatorily redeemable capital stock) and retained earnings. Actual leverage capital equals actual regulatory capital weighted 1.5 times. |
202
Table of Contents
Contractual Year of Repurchase | ||||
2005 | $ | — | ||
2006 | — | |||
2007 | 21,011 | |||
2008 | 1,819 | |||
2009 | 11,514 | |||
Thereafter | — | |||
Total par value | $ | 34,344 | ||
203
Table of Contents
Balance, December 31, 2003 | $ | — | ||
Capital stock subject to mandatory redemption reclassified from equity on adoption of SFAS 150 | 29,825 | |||
Capital stock subject to mandatory redemption reclassified from equity | 57,633 | |||
Capital stock previously subject to mandatory redemption reclassified to equity | (384 | ) | ||
Redemption of mandatorily redeemable capital stock | (53,907 | ) | ||
Stock dividend classified as mandatorily redeemable | 1,177 | |||
Balance, December 31, 2004 | $ | 34,344 | ||
§ | In no case may the FHLBank redeem any capital stock if, following such redemption, the FHLBank would fail to satisfy its minimum capital requirements (i.e., a statutory capital/assets ratio requirement, established by the GLB Act, and a regulatory risk-based capital/assets ratio requirement established by the Finance Board). By law, all member holdings of FHLBank stock immediately become non-redeemable if their FHLBank becomes undercapitalized and, at the macro-level, only a minimal portion of outstanding stock qualifies for redemption consideration. | ||
§ | In no case may the FHLBank redeem any capital stock if either its Board of Directors, or the Finance Board, determine that it has incurred, or is likely to incur, losses resulting, or expected to result, in a charge against capital. | ||
§ | In addition to possessing the authority to prohibit stock redemptions, the FHLBank’s Board of Directors has a right and an obligation to call for additional capital stock purchases by its members, as a condition of membership, as needed to satisfy statutory and regulatory capital requirements. These requirements include the maintenance of a stand-alone “double-A” credit rating from a nationally recognized statistical rating organization. | ||
§ | If, during the period between receipt of a stock redemption notification from a member and the actual redemption (which last indefinitely if the FHLBank is undercapitalized, does not have the required credit rating, etc.), an FHLBank becomes insolvent and is either liquidated or forced to merge with another FHLBank, the redemption value of the stock will be established either through the market liquidation process or through negotiation with a merger partner. In either case all senior claims must first be settled at par, and there are no claims which are subordinated to the rights of FHLBank stockholders. | ||
§ | The GLB Act states that the FHLBank may redeem, in its sole discretion, stock investments which exceed the required minimum amount. | ||
§ | In no case may the FHLBank redeem any capital stock if the principal or interest due on any Consolidated Obligation issued by the Office of Finance has not been paid in full. | ||
§ | In no case may the FHLBank redeem any capital stock if the FHLBank fails to provide the Finance Board quarterly certification required by section 966.9(b)(1) of the Finance Board’s rules prior to declaring or paying dividends for a quarter. |
204
Table of Contents
• | In no case may the FHLBank redeem any capital stock if the FHLBank is unable to provide the required certification, projects that it will fail to comply with statutory or regulatory liquidity requirements or will be unable to timely and fully meet all of its obligations, actually fails to satisfy these requirements or obligations, or negotiates to enter or enters into an agreement with another FHLBank to obtain financial assistance to meet its current obligations. |
(Dollars in millions) | Balance | % of Total | ||||||
Charter One Bank, N.A. | $ | 645 | 17 | % | ||||
U. S. Bank, N.A. | 472 | 12 | ||||||
Total | $ | 1,117 | 29 | % | ||||
205
Table of Contents
Postretirement | ||||||||||||||||
Health Benefit | ||||||||||||||||
BEP | Plan | |||||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
Change in benefit obligation: | ||||||||||||||||
Benefit obligation at beginning of year | $ | 12,685 | $ | 11,731 | $ | 2,696 | $ | 2,555 | ||||||||
Service cost | 210 | 175 | 38 | 38 | ||||||||||||
Interest cost | 798 | 785 | 171 | 174 | ||||||||||||
Change in assumptions | 819 | 524 | 305 | 174 | ||||||||||||
Actuarial loss (gain) | — | — | 16 | (95 | ) | |||||||||||
Benefits paid | (833 | ) | (1,046 | ) | (148 | ) | (150 | ) | ||||||||
Benefit obligation at end of year | 13,679 | 12,169 | 3,078 | 2,696 | ||||||||||||
Change in plan assets: | ||||||||||||||||
Fair value of plan assets at beginning of year | — | — | — | — | ||||||||||||
Employer contribution | 833 | 1,046 | 148 | 150 | ||||||||||||
Benefits paid | (833 | ) | (1,046 | ) | (148 | ) | (150 | ) | ||||||||
Fair value of plan assets at end of year | — | — | — | — | ||||||||||||
Funded status | (13,679 | ) | (12,169 | ) | (3,078 | ) | (2,696 | ) | ||||||||
Unrecognized net actuarial loss | 5,974 | 5,610 | 351 | 30 | ||||||||||||
Unrecognized prior service benefit | (214 | ) | (321 | ) | — | — | ||||||||||
Net amount recognized | $ | (7,919 | ) | $ | (6,880 | ) | $ | (2,727 | ) | $ | (2,666 | ) | ||||
2004 | 2003 | |||||||
Accrued benefit liability | $ | (12,058 | ) | $ | (10,602 | ) | ||
Net amount recognized | (7,919 | ) | (6,880 | ) | ||||
Accumulated other comprehensive loss | $ | (4,139 | ) | $ | (3,722 | ) | ||
Postretirement | ||||||||||||||||||||||||
Health Benefit | ||||||||||||||||||||||||
BEP | Plan | |||||||||||||||||||||||
2004 | 2003 | 2002 | 2004 | 2003 | 2002 | |||||||||||||||||||
Service cost | $ | 210 | $ | 175 | $ | 294 | $ | 38 | $ | 38 | $ | 35 | ||||||||||||
Interest cost | 798 | 785 | 520 | 171 | 174 | 168 | ||||||||||||||||||
Amortization of unrecognized prior service benefit | (107 | ) | (107 | ) | (107 | ) | — | — | — | |||||||||||||||
Amortization of unrecognized net loss | 971 | 979 | 448 | — | — | — | ||||||||||||||||||
Net periodic benefit cost | $ | 1,872 | $ | 1,832 | $ | 1,155 | $ | 209 | $ | 212 | $ | 203 | ||||||||||||
2004 | 2003 | |||||||
Discount rate | 5.75 | % | 6.50 | % | ||||
Salary increases | 4.50 | % | 4.50 | % | ||||
Amortization period | 5 years | 5 years | ||||||
Benefits paid during the year | $ | 833 | $ | 1,046 |
206
Table of Contents
2004 | 2003 | |||||||
Discount rate | 6.50 | % | 7.00 | % | ||||
Weighted average discount rate at the end of the year | 5.75 | % | 6.50 | % | ||||
Health care cost trend rates: | ||||||||
Assumed for next year | 8.50 | % | 9.00 | % | ||||
Ultimate rate | 5.25 | % | 5.25 | % | ||||
Year that ultimate rate is reached | 2014 | 2014 |
Years | Payments | |||
2005 | $ | 139 | ||
2006 | 145 | |||
2007 | 153 | |||
2008 | 158 | |||
2009 | 159 | |||
2010-2014 | 902 |
207
Table of Contents
208
Table of Contents
Traditional | Mortgage | |||||||||||
Member | Purchase | |||||||||||
Finance | Program | Total | ||||||||||
2004 | ||||||||||||
Net interest income | $ | 216,330 | $ | 85,428 | $ | 301,758 | ||||||
Other income | 43,586 | 290 | 43,876 | |||||||||
Other expenses | 29,155 | 7,293 | 36,448 | |||||||||
Income before assessments | 230,761 | 78,425 | 309,186 | |||||||||
Affordable Housing Program | 18,975 | 6,402 | 25,377 | |||||||||
REFCORP | 42,357 | 14,405 | 56,762 | |||||||||
Total assessments | 61,332 | 20,807 | 82,139 | |||||||||
Net income | $ | 169,429 | $ | 57,618 | $ | 227,047 | ||||||
2004 | ||||||||||||
Average assets | $ | 72,174,510 | $ | 8,320,169 | $ | 80,494,679 | ||||||
Total assets | $ | 67,842,007 | $ | 8,734,521 | $ | 76,576,528 | ||||||
2003 | ||||||||||||
Net interest income | $ | 152,296 | $ | 75,372 | $ | 227,668 | ||||||
Other income | 35,320 | 706 | 36,026 | |||||||||
Other expenses | 24,745 | 6,542 | 31,287 | |||||||||
Income before assessments | 162,871 | 69,536 | 232,407 | |||||||||
Affordable Housing Program | 13,296 | 5,676 | 18,972 | |||||||||
REFCORP | 29,915 | 12,772 | 42,687 | |||||||||
Total assessments | 43,211 | 18,448 | 61,659 | |||||||||
Net income | $ | 119,660 | $ | 51,088 | $ | 170,748 | ||||||
2003 | ||||||||||||
Average assets | $ | 70,366,479 | $ | 6,695,531 | $ | 77,062,010 | ||||||
Total assets | $ | 69,004,727 | $ | 8,138,847 | $ | 77,143,574 | ||||||
2002 | ||||||||||||
Net interest income | $ | 243,532 | $ | 21,114 | $ | 264,646 | ||||||
Other income | 4,107 | 119 | 4,226 | |||||||||
Other expenses | 21,898 | 4,044 | 25,942 | |||||||||
Income before assessments | 225,741 | 17,189 | 242,930 | |||||||||
Affordable Housing Program | 18,428 | 1,403 | 19,831 | |||||||||
REFCORP | 41,463 | 3,157 | 44,620 | |||||||||
Total assessments | 59,891 | 4,560 | 64,451 | |||||||||
Net income | $ | 165,850 | $ | 12,629 | $ | 178,479 | ||||||
2002 | ||||||||||||
Average assets | $ | 64,019,934 | $ | 2,318,237 | $ | 66,338,171 | ||||||
Total assets | $ | 66,735,596 | $ | 4,335,077 | $ | 71,070,673 | ||||||
209
Table of Contents
For the Year Ended | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
Amortization of basis adjustments on modified Advance hedging relationships | $ | 37,560 | $ | 24,718 | $ | — | ||||||
Gains (losses) related to fair value hedge ineffectiveness | 2,503 | 487 | (177 | ) | ||||||||
Gains (losses) on economic hedges | (508 | ) | 1,029 | (659 | ) | |||||||
Net gain (loss) on derivatives and hedging activities | $ | 39,555 | $ | 26,234 | $ | (836 | ) | |||||
210
Table of Contents
2004 | 2003 | |||||||||||||||
Estimated | Estimated | |||||||||||||||
Notional | Fair Value | Notional | Fair Value | |||||||||||||
Interest-rate Swaps: | ||||||||||||||||
Fair value | $ | 32,880,200 | $ | (574,943 | ) | $ | 32,666,695 | $ | (1,248,329 | ) | ||||||
Economic | 4,196 | (19 | ) | 11,795 | (176 | ) | ||||||||||
Interest-rate Forward Agreements: | ||||||||||||||||
Economic | 52,500 | (126 | ) | 303,400 | (2,319 | ) | ||||||||||
Mortgage Delivery Commitments: | ||||||||||||||||
Economic | 74,835 | 70 | 329,891 | 2,298 | ||||||||||||
Total | $ | 33,011,731 | $ | (575,018 | ) | $ | 33,311,781 | $ | (1,248,526 | ) | ||||||
Total derivatives excluding accrued interest | $ | (575,018 | ) | $ | (1,248,526 | ) | ||||||||||
Accrued interest | 44,148 | (11,653 | ) | |||||||||||||
Net derivative balances | $ | (530,870 | ) | $ | (1,260,179 | ) | ||||||||||
Net derivative asset balances | $ | 84 | $ | 51,309 | ||||||||||||
Net derivative liability balances | (530,954 | ) | (1,311,488 | ) | ||||||||||||
Net derivative balances | $ | (530,870 | ) | $ | (1,260,179 | ) | ||||||||||
211
Table of Contents
212
Table of Contents
213
Table of Contents
§ | the Mortgage Purchase Program’s credit enhancements; | ||
§ | marketing adjustments that reflect the FHLBank’s cooperative business model and the appetite for purchasing mortgage loans given the current net spreads to funding costs relative to their risks; and | ||
§ | incentives or disincentives the FHLBank has chosen to make regarding the purchase of particular kinds of loans, prices, and mortgage note rates. |
214
Table of Contents
215
Table of Contents
Net | ||||||||||||
Carrying | Unrealized | Estimated | ||||||||||
Financial Instruments | Value | Gains (Losses) | Fair Value | |||||||||
Assets: | ||||||||||||
Cash and due from banks | $ | 11,262 | $ | — | $ | 11,262 | ||||||
Interest-bearing deposits | 5,781,266 | (653 | ) | 5,780,613 | ||||||||
Securities purchased under agreements to resell | 700,000 | — | 700,000 | |||||||||
Federal funds sold | 7,542,800 | (38 | ) | 7,542,762 | ||||||||
Trading securities | 8,463 | — | 8,463 | |||||||||
Available-for-sale securities | 910,592 | — | 910,592 | |||||||||
Held-to-maturity securities | 11,711,842 | 7,891 | 11,719,733 | |||||||||
Advances | 41,300,942 | 16,714 | 41,317,656 | |||||||||
Mortgage loans held for portfolio, net | 8,370,495 | 35,658 | 8,406,153 | |||||||||
Accrued interest receivable | 185,828 | — | 185,828 | |||||||||
Derivative assets | 84 | — | 84 | |||||||||
Liabilities: | ||||||||||||
Deposits | (1,031,641 | ) | 88 | (1,031,553 | ) | |||||||
Consolidated Obligations: | ||||||||||||
Discount Notes | (18,632,320 | ) | 2,800 | (18,629,520 | ) | |||||||
Bonds | (51,818,345 | ) | (75,242 | ) | (51,893,587 | ) | ||||||
Mandatorily redeemable capital stock | (34,344 | ) | — | (34,344 | ) | |||||||
Accrued interest payable | (389,458 | ) | — | (389,458 | ) | |||||||
Derivative liabilities | (530,954 | ) | — | (530,954 | ) | |||||||
Other: | ||||||||||||
Commitments to extend credit for Advances | — | (42 | ) | (42 | ) | |||||||
Standby bond purchase agreements | — | 659 | 659 |
216
Table of Contents
Net | ||||||||||||
Carrying | Unrealized | Estimated | ||||||||||
Financial Instruments | Value | Gains (Losses) | Fair Value | |||||||||
Assets: | ||||||||||||
Cash and due from banks | $ | 6,668 | $ | — | $ | 6,668 | ||||||
Interest-bearing deposits | 6,285,338 | (89 | ) | 6,285,249 | ||||||||
Federal funds sold | 7,250,500 | — | 7,250,500 | |||||||||
Trading securities | 11,919 | — | 11,919 | |||||||||
Available-for-sale securities | 822,513 | — | 822,513 | |||||||||
Held-to-maturity securities | 11,240,050 | 19,684 | 11,259,734 | |||||||||
Advances | 43,129,143 | 135,488 | 43,264,631 | |||||||||
Mortgage loans held for portfolio, net | 8,101,158 | 27,673 | 8,128,831 | |||||||||
Accrued interest receivable | 201,028 | — | 201,028 | |||||||||
Derivative assets | 51,309 | — | 51,309 | |||||||||
Liabilities: | ||||||||||||
Deposits | (1,413,057 | ) | 18 | (1,413,039 | ) | |||||||
Consolidated Obligations: | ||||||||||||
Discount Notes | (29,443,378 | ) | 2,182 | (29,441,196 | ) | |||||||
Bonds | (40,360,947 | ) | (329,934 | ) | (40,690,881 | ) | ||||||
Accrued interest payable | (349,635 | ) | — | (349,635 | ) | |||||||
Derivative liabilities | (1,311,488 | ) | — | (1,311,488 | ) | |||||||
Other: | ||||||||||||
Commitments to extend credit for Advances | — | 971 | 971 | |||||||||
Standby bond purchase agreements | — | 365 | 365 |
217
Table of Contents
Year | Premises | Equipment | Total | |||||||||
2005 | $ | 623 | $ | 107 | $ | 730 | ||||||
2006 | 624 | 107 | 731 | |||||||||
2007 | 661 | 107 | 768 | |||||||||
2008 | 655 | 107 | 762 | |||||||||
2009 | 464 | 28 | 492 | |||||||||
Total | $ | 3,027 | $ | 456 | $ | 3,483 | ||||||
218
Table of Contents
(In millions) | Average Daily Balances | |||||||||||
2004 | 2003 | 2002 | ||||||||||
Loans to Other FHLBanks | $ | 57 | $ | 31 | $ | 4 | ||||||
Borrowings from Other FHLBanks | 2 | 3 | 0 |
219
Table of Contents
2004 | 2003 | |||||||||||||||
(Dollars in millions) | Balance | % of Total (1) | Balance | % of Total(1) | ||||||||||||
Advances | $ | 9,825 | 24.0 | % | $ | 10,429 | 25.0 | % | ||||||||
Mortgage Purchase Program | 63 | 0.8 | 58 | 0.7 | ||||||||||||
Capital Stock | 760 | 20.0 | 728 | 20.0 |
(1) | Percentage of total principal (Advances), unpaid principal balance (Mortgage Purchase Program) and Capital Stock (classified as capital) on the Statements of Condition. |
Capital Stock | Advance | Unpaid Principal | ||||||||||||||
(Dollars in millions) | Balance | % of Total | Principal | Balance | ||||||||||||
Charter One Bank, N.A. | $ | 645 | 17 | % | $ | 8,527 | $ | — | ||||||||
U. S. Bank, N.A. | 472 | 12 | 3,208 | 284 | ||||||||||||
Total | $ | 1,117 | 29 | % | $ | 11,735 | $ | 284 | ||||||||
220
Table of Contents
221
Table of Contents
2004 | ||||||||||||||||||||
(In thousands) | 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | Total | |||||||||||||||
Interest income | $ | 417,842 | $ | 436,038 | $ | 522,892 | $ | 576,555 | $ | 1,953,327 | ||||||||||
Interest expense | 356,552 | 365,529 | 434,189 | 495,299 | 1,651,569 | |||||||||||||||
Net interest income | 61,290 | 70,509 | 88,703 | 81,256 | 301,758 | |||||||||||||||
Provision for credit loss | — | — | — | — | — | |||||||||||||||
Non-interest income | 10,138 | 13,304 | 9,349 | 11,085 | 43,876 | |||||||||||||||
Non-interest expense | 25,711 | 29,260 | 32,526 | 31,090 | 118,587 | |||||||||||||||
Net income | $ | 45,717 | $ | 54,553 | $ | 65,526 | $ | 61,251 | $ | 227,047 | ||||||||||
2003 | ||||||||||||||||||||
(In thousands) | 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | Total | |||||||||||||||
Interest income | $ | 435,801 | $ | 440,247 | $ | 423,939 | $ | 429,206 | $ | 1,729,193 | ||||||||||
Interest expense | 376,432 | 385,790 | 370,337 | 368,966 | 1,501,525 | |||||||||||||||
Net interest income | 59,369 | 54,457 | 53,602 | 60,240 | 227,668 | |||||||||||||||
Provision for credit loss | — | — | — | — | — | |||||||||||||||
Non-interest income | 823 | 5,486 | 17,368 | 12,349 | 36,026 | |||||||||||||||
Non-interest expense | 21,379 | 21,731 | 24,327 | 25,509 | 92,946 | |||||||||||||||
Net income | $ | 38,813 | $ | 38,212 | $ | 46,643 | $ | 47,080 | $ | 170,748 | ||||||||||
Held-to-maturity securities (book value) | ||||||||||||
(In thousands) | 2004 | 2003 | 2002 | |||||||||
States and political subdivisions | $ | 37,585 | $ | 50,570 | $ | 92,690 | ||||||
Mortgage-backed securities: | ||||||||||||
Government-sponsored enterprises | 10,979,887 | 10,234,175 | 9,789,940 | |||||||||
Agency | 93,224 | 191,927 | 562,769 | |||||||||
Other | 601,146 | 763,378 | 159,000 | |||||||||
Total Mortgage-backed securities | 11,674,257 | 11,189,480 | 10,511,709 | |||||||||
Total held-to-maturity securities | $ | 11,711,842 | $ | 11,240,050 | $ | 10,604,399 | ||||||
(In thousands) | Book Value | Yield | ||||||
States and political subdivisions | ||||||||
After one but within five years | $ | 2,325 | 6.07 | % | ||||
After ten years | 35,260 | 5.49 | ||||||
$ | 37,585 | 5.53 | ||||||
222
Table of Contents
(In thousands) | Book Value | Yield | ||||||
Mortgage-backed securities* | ||||||||
After one but within five years | $ | 36,196 | 6.24 | % | ||||
After five but within ten years | 44,683 | 5.84 | ||||||
After ten years | 11,593,378 | 4.56 | ||||||
$ | 11,674,257 | 4.57 | ||||||
* | Mortgage-backed securities allocated based on contractual principal maturities assuming no prepayments. |
Available-for-sale securities (book value) | ||||||||||||
(In thousands) | 2004 | 2003 | 2002 | |||||||||
Other bonds, notes and debentures | $ | 910,592 | $ | 822,513 | $ | 785,682 | ||||||
Total available-for-sale securities | $ | 910,592 | $ | 822,513 | $ | 785,682 | ||||||
(In thousands) | Book Value | Yield | ||||||
Other bonds, notes and debentures | ||||||||
Within one year | $ | 910,592 | 2.44 | % | ||||
Trading securities (book value) | ||||||||||||
(In thousands) | 2004 | 2003 | 2002 | |||||||||
Mortgage-backed securities: | ||||||||||||
Agency | $ | 8,463 | $ | 11,919 | $ | 19,580 | ||||||
Total trading securities | $ | 8,463 | $ | 11,919 | $ | 19,580 | ||||||
(In thousands) | Book Value | Yield | ||||||
Mortgage-backed securities — Agency* | ||||||||
After ten years | $ | 8,463 | 3.58 | % | ||||
* | Mortgage-backed securities allocated based on contractual principal maturities assuming no prepayments. |
(In thousands) | Total | Total | ||||||
Name of Issuer | Book Value | Fair Value | ||||||
Fannie Mae | $ | 6,495,359 | $ | 6,490,832 | ||||
Freddie Mac | 4,484,528 | 4,495,730 | ||||||
Government National Mortgage Association | 101,687 | 102,453 | ||||||
General Electric Capital Services, Inc. | 497,539 | 497,539 | ||||||
All other investments (12 issuers) | 1,051,784 | 1,052,234 | ||||||
Total investments | $ | 12,630,897 | $ | 12,638,788 | ||||
223
Table of Contents
(In thousands) | 2004 | 2003 | 2002 | 2001 | 2000 | |||||||||||||||
Domestic: | ||||||||||||||||||||
Advances | $ | 41,300,942 | $ | 43,129,143 | $ | 40,063,195 | $ | 35,222,620 | $ | 31,934,509 | ||||||||||
Real estate mortgages | $ | 8,370,495 | $ | 8,101,158 | $ | 3,766,684 | $ | 566,334 | $ | 30,654 | ||||||||||
Nonperforming real estate mortgages | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
Real estate mortgages past due 90 days or more and still accruing interest(1) | $ | 35,866 | $ | 26,023 | $ | 15,450 | $ | 1,072 | $ | — | ||||||||||
Interest contractually due during the year | $ | 405,326 | $ | 343,119 | $ | 107,012 | $ | 13,524 | $ | 224 | ||||||||||
Interest actually received during the year | (405,326 | ) | (343,119 | ) | (107,012 | ) | (13,524 | ) | (224 | ) | ||||||||||
Shortfall | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
(1) | Government loans (e.g., FHA) continue to accrue after 90 days or more delinquent, as do all loans purchased, since our agreements with the PFIs include monthly settlement on a schedule/scheduled basis. Schedule/scheduled means that the PFI is obligated to remit the contractual mortgage payments on loans sold to the FHLBank, regardless of whether or not the PFI received payment from the mortgagee. There were no net (charge-offs) recoveries to average loans outstanding for the five years ended December 31, 2004. |
224
Table of Contents
(In thousands) | 2004 | 2003 | 2002 | |||||||||
Federal funds purchased | ||||||||||||
Outstanding at year end | $ | — | $ | — | $ | — | ||||||
Weighted average rate at year end | — | — | — | |||||||||
Daily average outstanding for the year | $ | 8,117 | $ | 673 | $ | 3,288 | ||||||
Weighted average rate for the year | 1.32 | % | 2.08 | % | 1.67 | % | ||||||
Highest outstanding at any month end | $ | — | $ | — | $ | — | ||||||
Other FHLBs | ||||||||||||
Outstanding at year end | $ | — | $ | — | $ | — | ||||||
Weighted average rate at year end | — | — | — | |||||||||
Daily average outstanding for the year | $ | 1,563 | $ | 3,052 | $ | — | ||||||
Weighted average rate for the year | 1.28 | % | 1.08 | % | — | |||||||
Highest outstanding at any month end | $ | — | $ | — | $ | — | ||||||
Consolidated Discount Notes | ||||||||||||
Outstanding at year end | $ | 18,632,320 | $ | 29,443,378 | $ | 25,617,034 | ||||||
Weighted average rate at year end | 2.12 | % | 1.03 | % | 1.35 | % | ||||||
Daily average outstanding for the year | $ | 28,376,787 | $ | 28,790,300 | $ | 25,358,436 | ||||||
Weighted average rate for the year | 1.31 | % | 1.13 | % | 1.73 | % | ||||||
Highest outstanding at any month end | $ | 32,846,956 | $ | 30,728,575 | $ | 30,420,206 |
Over 3 | Over 6 | Over 12 | ||||||||||||||||||
months but | months but | months but | ||||||||||||||||||
3 months | within 6 | within 12 | within 24 | |||||||||||||||||
By remaining maturity at December 31, 2004 | or less | months | months | months | Total | |||||||||||||||
(In thousands) | ||||||||||||||||||||
Time certificates of deposit | ||||||||||||||||||||
($100 or more) | $ | 102,500 | $ | 8,050 | $ | 1,600 | $ | 3,000 | $ | 115,150 | ||||||||||
2004 | 2003 | 2002 | ||||||||||
Net income to average assets | 0.28 | % | 0.22 | % | 0.27 | % | ||||||
Return on equity | 5.97 | 4.66 | 5.17 | |||||||||
Total average equity to average assets | 4.73 | 4.76 | 5.21 |
225
Table of Contents
Exhibit No. | Description | |
3.1 | Organization Certificate | |
3.2 | Bylaws | |
4 | Capital Plan | |
10.1.A | Form of Blanket Agreement for Advances and Security Agreement, as in effect for signatories prior to November 21, 2005 | |
10.1.B | Form of Blanket Security Agreement, for new signatories on and after November 21, 2005 | |
10.2 | Form of Mortgage Purchase Program Master Selling and Servicing Master Agreement | |
10.3 | Executive Incentive Compensation Plan | |
10.4 | Executive Long-Term Incentive Plan | |
10.5 | Federal Home Loan Bank of Cincinnati Benefit Equalization Plan | |
10.6 | Federal Home Loan Bank of Cincinnati Nonqualified Deferred Compensation Program For Directors | |
10.7 | Letter Agreement between the Federal Home Loan Bank of Cincinnati and Sandra E. Bell dated January 29, 2004 | |
10.8 | Deferred Compensation Agreement between the Federal Home Loan Bank of Cincinnati and Sandra E. Bell dated February 25, 2004 | |
12 | Statements of Computation of Ratio of Earnings to Fixed Charges |
226
Table of Contents
By: | /s/ David H. Hehman | |||
President |
227