1 Welcome Summer Member Meetings [Date] Exhibit 99.1 |
2 Agenda • Welcome • State of the FHLB Chicago: From Remediation to Transformation • Recent Financial Results • Member Credit, Collateral, and Products • Market Update |
3 This presentation contains forward-looking statements which are based upon our current expectations and speak only as of the date hereof. These statements may use forward-looking terms, such as “anticipates,” “believes,” “expects,” “could,” “plans,” “estimates,” “may,” “should,” “will,” or their negatives or other variations on these terms. We caution that, by their nature, forward-looking statements involve risk or uncertainty, that actual results could differ materially from those expressed or implied in these forward-looking statements, and that actual events could affect the extent to which a particular objective, projection, estimate, or prediction is realized. These forward-looking statements involve risks and uncertainties including, but not limited to, instability in the credit and debt markets, economic conditions (including effects on, among other things, mortgage-backed securities), changes in mortgage interest rates and prepayment speeds on mortgage assets, our ability to |
4 successfully transition to a new business model and the risk factors set forth in our periodic filings with the Securities and Exchange Commission, which are available on our website at www.fhlbc.com. In addition, certain information included here speaks only as of the particular date or dates included in this presentation, and the information in the presentation may have become out of date. We do not undertake an obligation, and disclaim any duty, to update any of the information in this presentation. The data and valuations provided in this presentation are for information purposes only and are provided as an accommodation and without charge. This presentation is not intended to constitute legal, investment, or financial advice or the rendering of legal, consulting, or other professional services of any kind. “Mortgage Partnership Finance,” “MPF,” and “MPF Xtra” are registered trademarks of the Federal Home Loan Bank of Chicago. |
5 State of the FHLB Chicago: From Remediation to Transformation Matt Feldman President and CEO |
6 Today’s Topics • Remediation: Where we’ve been • Transformation: Where we’re going • External/Public Policy Considerations |
FHLBC Goals • Provide our funding advantage and other essential products and services to our members; • Generate consistent, profitable results; • Stabilize our capital base through a capital stock conversion; • Grow retained earnings; • Simplify our business model and operations; and • Restore an appropriate dividend and full liquidity to our stock. 7 |
8 Remediation: A simpler FHLBC • Where We’ve Been: Restructured the balance sheet Completed the asset replacement strategy Completed implementation of core operating systems to provide platform for process reengineering Submitted Capital Plan and Market Risk Framework to Federal Housing Finance Agency (FHFA) |
9 Remediation: The Results • A balance sheet that’s getting simpler • Improvement in net interest margin • Streamlined/re-engineered processes • Over time, positioning the Bank to achieve our goals of consistent profitability, reduced interest rate risk, lower/more consistent hedging costs, reduced operating expenses, resumption of a dividend, and full liquidity for our stock |
10 Transformation: Member Focus • Where We’re Going: We continue our transformation from a business model focused on the acquisition of individual mortgage loans to one focused on advances The challenge of becoming an advances bank when advance volumes are declining |
11 Transformation: Member Focus • We will be a reflection of member needs, market conditions, and economy • Focus on: – Maximizing utilization of FHLB Chicago by all members – Adding new members, including insurance companies and credit unions |
12 Transformation: Member Focus • Our scale will match your needs/your utilization of the Bank • We remain committed to operating the MPF ® Program and to expanding the suite of MPF Xtra ® products for our members • We plan to convert our capital stock as expeditiously as possible after approval from the FHFA |
13 Continuing Considerations • Economy • Financial services reform • Housing finance reform • Public policy issues |
14 Impact of Housing Reform Legislation • Grouping the FHLBanks with Fannie and Freddie in discussions of implied guarantee could impact: Cost of funds Availability of liquidity to members Ownership structure |
15 Public Policy Discussions • Redefinition of American dream • Home ownership vs. rental vs. hybrid/co-op • Mortgage structures • Housing affordability vs. accessibility |
16 Public Policy Discussions • In coming discussions, your support is important • The FHLBanks are working with your trade associations in developing discussion points for the coming debate • We will need your help and support |
17 Transformation • Goals are clear • Substantial progress • Significant challenges remain • We are in it with you and for you |
Recent Financial Results Roger Lundstrom Chief Financial Officer |
19 FHLB Chicago Historical Perspective |
20 Advance Balances, at Par |
21 MPF Loans Held in Portfolio |
Advances and MPF Loans 22 22 |
23 FHLBC Members Placed Into Receivership # Institutions 2009 19 YTD as of 5/14/2010 8 • Total credit outstanding $1.0 billion • All institutions were fully collateralized • No credit losses to date 23 |
24 First Quarter Performance Review |
25 Selected Balance Sheet Items – Assets Q1 2009 vs. Q1 2010 $ in millions 3/31/2010 3/31/2009 Difference ASSETS Advances $21,291 $31,197 ($9,906) MPF Loans Held in Portfolio, net 22,678 29,825 (7,147) Long-term Investments 24,696 16,017 8,679 Total Housing/Mission - Related Assets 68,665 77,039 (8,374) Other Investments 15,622 5,055 10,567 Other Assets 1,782 1,656 126 Total Assets 86,069 83,750 2,319 |
26 Selected Balance Sheet Items – Liabilities & Capital Q1 2009 vs. Q1 2010 $ in millions 3/31/2010 3/31/2009 Difference LIABILITIES Total Deposits $830 $1,352 ($522) CO's, DN's, Repos 78,813 77,362 1,451 Subordinated Notes 1,000 1,000 - Mandatorily Redeemable Capital Stock 470 409 61 Other Liabilities 2,413 2,175 238 Total Liabilities 83,526 82,298 1,228 CAPITAL Capital Stock 2,332 2,355 (23) Retained Earnings 709 734 (25) Accumulated OCI (498) (1,637) 1,139 Total Capital 2,543 1,452 1,091 Total Liabilities and Capital 86,069 83,750 2,319 |
27 Regulatory Capital Requirements The Bank continues to be in compliance with all required capital ratios. $3.802 billion in regulatory capital stock plus designated amount of subordinated notes at March 31, 2010; (required minimum of $3.600 billion). Actual at 3/31/2010 Minimum Regulatory Capital Ratio Required 5.24% 4.76% |
28 $ in millions Selected Income Statement Items *Includes gain/loss on OTTI, hedging, & debt transfers **Excludes MPF Program, FHFA, & Office of Finance expenses FY 2009 FY 2008 Difference Net Interest Income 570 $ 199 $ 371 OTTI Charges, net (437) (292) (145) NII Including Adjustments* 45 (28) 73 Operating Expenses** (114) (113) (1) REFCO Payments - - - AHP Assessment - - - Net Income (65) (119) 54 |
29 $ in millions Selected Income Statement Items *Includes gain/loss on OTTI, hedging, & debt transfers **Excludes MPF Program, FHFA, & Office of Finance expenses First Quarter 2010 First Quarter 2009 Difference Net Interest Income 136 $ 141 $ (5) $ OTTI Charges, net (44) (86) 42 NII Including Adjustments* 29 (22) 51 Operating Expenses** (24) (25) 1 REFCO Payments (1) - (1) AHP Assessment - - - Net Income 1 (39) 40 |
30 Other-Than-Temporary Impairment (OTTI) Impact on YTD Net Income $ in millions Net Income has improved significantly. 1Q 2010 FY 2009 FY 2008 Net Income (Loss) 1 $ (65) $ (119) $ OTTI Credit Loss 44 437 53 Impact on Assessments (13) (106) - Net Income (Loss) Excluding OTTI 32 266 (66) |
31 Quarterly Net Interest Income |
Net Spread -0.20% 0.00% 0.20% 0.40% 0.60% 0.80% 1.00% 1.20% 1.40% 1.60% 1.80% Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 32 |
33 Quarterly Net Income |
34 Number of Employees |
35 Other-Than-Temporary Impairment |
36 Other-than-Temporary Impairment As of March 31, 2010 $ in millions * Accumulated Other Comprehensive Income Credit Losses = losses due to cash shortfalls on the underlying securities Non-Credit Losses = losses that primarily result from current market conditions net of accretion FY 08 $53 $233 FY 09 437 745 1Q 10 44 (67) $534 $911 Credit Losses Non-Credit Losses Change in AOCI* |
Retained Earnings 37 |
38 Profitability – Spread to Index -12.55% -11.76% 1.17% -2.79% -5.65% 10.49% -17.07% 2.14% -0.13% -20.00% -16.00% -12.00% -8.00% -4.00% 0.00% 4.00% 8.00% 12.00% 16.00% 20.00% 1Q 2008 2Q 2008 3Q 2008 4Q 2008 1Q 2009 2Q 2009 3Q 2009 4Q 2009 1Q 2010 |
39 Ratio of Market to Book -40% -20% 0% 20% 40% 60% 80% 100% 1Q 2008 2Q 2008 3Q 2008 4Q 2008 1Q 2009 2Q 2009 3Q 2009 4Q 2009 1Q 2010 |
40 Conclusions • Both Advances and MPF loans are declining, but for very different reasons. • Net spread has increased strongly and is now consistently in desirable range. • Future OTTI credit loss levels are uncertain and are strongly linked to home sales, home price appreciation/depreciation, and employment. Levels over the last two quarters have shown declining credit charges and rising securities prices. |
Member Update Chad Brandt Executive Vice President Banking and Advances Product Group |
42 Member Update • Membership Credit • Commercial Real Estate • CFI Collateral • Mark-to-Market • Collateral Systems • Member Activity |
43 Member Credit Profile • The current credit cycle began in August 2007 • Credit quality within the membership seems to have stabilized at the end of Q1 2010 • For the first time since the start of the cycle, more members’ call report data indicated improving rather than declining condition To date, 27 members have been resolved, all in 2009-2010 In 2008 and 2009, 22 members Bank! joined the |
44 Member Profile: Risk Ratings |
45 Collateral in a Cooperative • Ongoing efforts to maximize collateral availability for members • Ongoing efforts to monitor collateral quality • We want to make it easier to use the Bank • We want to continue to support members in tough economy |
46 Commercial Real Estate Update • Commercial Real Estate (CRE) was approved in late 2009 • Several members have gone through the CRE process CRE-specific field review (at no charge to the member) Valuation of the collateral About 5 to 6 weeks end-to-end |
47 Commercial Real Estate Update • Initially, the Collateral Loan Value for CRE has been established at 33% of the unpaid principal balance (UPB) • Will be modified as market allows |
48 Commercial Real Estate Update • Not the best time in the market to roll out CRE as a collateral class • A number of restrictions prevented members from fully accessing CRE: Eligibility guidelines Listing requirement Trade-off time/eligibility/collateral loan value Risk rating (not available to risk-rated 5 members) • We learned a lot about CRE in the process of implementation…and something about CFI collateral, too |
49 CFI Collateral • In the CRE field review process, we discovered that Community Financial Institution (CFI) collateral was underutilized by members as a collateral class 10% asset cap Listing required • Less than $1 billion of CFI collateral is currently being pledged • Over $20 billion CFI collateral resides on member balance sheets |
50 CFI Collateral • CFIs are defined as institutions with less than $1.029 billion in average total assets for 2007 - 2009 • 93% of our members are CFIs • 60% of members have over 30% of their assets in CFI collateral |
51 CFI Collateral • CFI collateral includes Small farm loans Small business loans Small agribusiness loans |
52 CFI Collateral Goals • Make members aware of CFI collateral availability • Streamline the CFI pledging process • Increase the amount of eligible CFI collateral pledged by members |
53 Mark-to-Market (MTM) Update • Last year we reported that we would be marking collateral to market • Collateral loan value would be a function of MTM • Listed collateral would be submitted to outside valuation service |
54 Mark-to-Market Update • Broad implementation of MTM on member collateral has been challenging • Data requirements Quantity Quality |
55 Mark-to-Market Update • Assigning the proper value to members on blanket lien has been subject to ongoing discussion • Member impact a critical consideration • Must be fair • Notice of change in valuation must be sufficient for members to adjust |
56 Mark-to-Market Update • Full implementation of MTM late 2010/2011 • We are acting on portfolio valuations of some members submitting data that are required to list Reducing collateral loan value in cases where the valuations do not support the standard haircuts • As always, our credit actions are designed to protect collective member capital • No credit losses have been taken related to the member resolutions thus far |
57 Collateral Systems Update • Last year we informed you of our intention to move the QCR to an entirely web-based platform • Budget and resource constraints have postponed that enhancement until 2011 • However, we have made some changes to the QCR to make it easier for members to upload the data to the Bank • Also, we have provided additional personnel resources to assist members with their QCR and Collateral Listing • We are happy to come to your location to help! |
Member Activity - Advances • Member advance balances continue to decline • From a peak of $38.1 billion in Q4 of 2008, advances stand at $21.3 billion on 3/31/10 Members continue to receive customer deposits Members continue to reduce balance sheets Members are not adding assets quickly • Some members are beginning to fund longer term Long-term advance rates are attractive, approaching historic lows 58 |
59 Member Activity - Letters of Credit • Letters of Credit continue to be popular with the membership LOC volumes have stabilized at $1.1 billion (at 3/31/09) after rapidly increasing from their 2008 levels during the crisis The mix of LOCs has shifted from primarily public unit deposit (PUD) LOCs to standby LOCs Business insurance providers like the product |
60 Member Activity - MPF Xtra ® • MPF Xtra volumes have surpassed $3.7 billion • We recently improved our pricing to the membership and saw a commensurate increase in member activity • As expected, the credit performance of the loans has been excellent |
61 Member Activity – Community Investment • Applications available soon for 2010 Affordable Housing Program grants (deadline September 1, 2010) • FHLBanks celebrating 20 years of AHP • National Housing Conference will honor FHLBanks as “Housing Person of the Year” next month |
62 Post- July 24, 2008 Stock Redemptions • Recall that, since July 24, 2008, the Bank has been allowed to redeem activity-based capital stock purchased in excess of a member’s capital stock floor • This program is working nicely and was a welcome relief to the membership |
63 Post- July 24, 2008 Stock Redemptions • Through March 31, 2010, approximately: $225 million in activity-based capital stock has been purchased to support additional advances (more than 100 members) $112 million has been redeemed • The FHLB structure works |
64 Summary • We are focused on partnering with members, regardless of the state of the economy • We want to ensure members are maximizing their membership through credit availability and product usage • We are actively monitoring credit and collateral quality • We are striving to improve collateral availability and processes • Your access is our business |
Financial Market Update: Impact on FHLBC Members Patrick Quinn Vice President |
66 Market Update • Update On Economic Conditions • Impact On FHLBC Members • Balance Sheet Strategies For The Future • Where Do We Stand? • Summary • Questions |
67 67 Update On Economic Conditions • Historic times require historic actions, and the actions from Federal Reserve and U.S. Treasury helped stabilize the crisis and laid the groundwork for economic growth. • The U.S. economy is experiencing improving trends, and the consensus is that prospects for sustainable economic growth are increasing. • Many analysts believe that the U.S. economy seems well-prepared to deal with the global risk concerns developing in Europe. However, risks do remain. |
68 Update On Economic Conditions • Positives: GDP growth Worker productivity levels Rebounding manufacturing sector Improving corporate profits (especially financials) Consumer spending Employment Expiration of temporary Federal Reserve facilities 68 |
69 GDP: Moderate growth with major uncertainties 69 Source: Federal Reserve Database |
70 Productivity levels have reached historic highs 70 Source: Federal Reserve Database Employee productivity gains have help improve corporate profits |
71 Manufacturing sector is leading the economy out of the recession 71 Source: Federal Reserve Database Strong rebound in manufacturing |
72 Finance industry profits vs. other industries Source: Bureau of Economic Analysis Finance industry profits near all-time highs |
73 Corporate profits: largest year-over-year gain in 25 years 73 Source: Bureau of Economic Analysis |
74 Consumers finally increasing spending levels 74 Source: Federal Reserve Database Consumer spending levels are slowly increasing |
75 Job creation is returning slowly 75 Source: Federal Reserve Database 573k jobs created so far in 2010 |
• PDCF – Primary dealers obtain funds against collateral – Start: 03/08 End: 02/10 • ABCP – Banks borrow from the Fed to purchase ABCP – Start: 09/08 End: 02/10 • TSLF – Primary dealers obtain Treasurys against collateral – Start: 03/08 End: 02/10 • MMIFF – Fed buys CP and CDs – Start: 10/08 End:10/09 76 Expiration of Federal Reserve Liquidity Facilities • CPFF – Fed buys CP from Tier 1 issuers – Start: 10/08 End: 02/10 • TALF – Fed leveraged TARP money to provide loans against ABS – Start: 11/08 End: 03/10 • TAF – Loan facility for short term funding – Start: 12/08 End: 03/10 • TLGP – FDIC guarantees new issuance by financial companies. – Start: 10/08 End: 10/09 Source: Federal Reserve Board of Governors, U.S. Treasury, FDIC |
77 Discount window borrowings are falling 77 Source: Federal Reserve Bank of St. Louis 2/19/10- Federal Reserve hikes the discount rate .25% |
78 TARP’s Capital Purchase Program (CPP) Update 78 Source: U.S. Treasury |
79 CPP and Community Banks 79 Source: U.S. Treasury |
80 CPP warrants are slowly being repaid 80 Source: U.S. Treasury |
81 Problem banks: still well below S&L crisis levels Source: FDIC |
82 Bank Failures: Below S&L Crisis levels Source: FDIC |
83 Impact On FHLBC Members • The U.S. Treasury yield curve remains near its steepest level in history • The Federal Reserve has intentionally implemented this strategy by anchoring the Fed Funds rate at 0.00% - 0.25% and by committing to hold rates at low levels for an “extended period.” • Result = improved net interest margins 83 |
84 Yield curve remains steep 84 Source: Federal Reserve Bank of St. Louis Widest spread in history. |
85 NIMs have improved more significantly for larger institutions than smaller institutions 85 Source: Federal Reserve Bank of St. Louis |
86 Are CRE write-downs hampering net interest margins for small banks? 86 Source: Federal Reserve Bank of St. Louis |
87 Banks are managing capital positions 87 Source: Federal Reserve Database |
88 Impact On FHLBC Members • FHLBC is helping our members with advance restructurings. • Some members are taking advantage of the current environment by prepaying higher-cost advances and refinancing into lower-cost, term advances, helping increase net interest margins. • We work with our members on different structures, calculate the advance prepayment fee, apply the appropriate discount, and execute the new advances. 88 |
89 Impact On FHLBC Members • What about the accounting? In certain cases, members have worked with advisors to achieve favorable accounting treatment by amortizing the prepay fee over the life of the new advance. • Examples: Putables Fixed-rate Fixed-rate Floating-rate Putables & floating-rates Floating-rates with caps 89 |
90 Impact On FHLBC Members • We have the tools and resources available to help you manage your balance sheets in these difficult markets: Scenario analysis Product discussions Discussions regarding developments in the financial markets 90 |
91 Impact On FHLBC Members • FHLBC New Products: Symmetrical Prepay Delivery vs. Payment Enhanced capabilities of our current structures More to come 91 |
92 Where Do We Stand? • Sovereign debt concerns have increased risk concerns in the financial markets. • Will there be another credit crisis? • Federal Reserve rate hike expectations have been pushed back to next year. 92 |
93 Impact of the Sovereign debt crisis: Market expectations for rate hikes reduced 93 Source: Bloomberg |
94 Summary • U.S. economic conditions have improved and prospects for the future remain positive. • Employment is the key economic component. • Members are utilizing the steep yield curve to enhance their balance sheets using FHLBC products. • The sovereign debt crisis has increased risk concerns, helping to support the currently artificially low interest rates environment. 94 |
95 FHLBC Member Services • FHLBC Weekly Market Update – Conferenceplus.com – [Contact information] – Every Thursday afternoon at 3 p.m. – Discuss financial market developments as they relate to member balance sheets – Funding strategies • Member Transaction Desk (877) 230-1610 95 |
96 Contact Information Patrick Quinn, Vice President Member Group Product Manager Federal Home Loan Bank of Chicago [contact information] 96 |
97 Questions? |