UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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| x | | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20142017
or
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| o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to __________.
Commission File No. 000-51399
FEDERAL HOME LOAN BANK OF CINCINNATI
(Exact name of registrant as specified in its charter)
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Federally chartered corporation | | 31-6000228 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| 600 Atrium Two, P.O. Box 598, | | |
Cincinnati, Ohio | | 45201-0598 |
(Address of principal executive offices) | | (Zip Code) |
Registrant's telephone number, including area code
(513) 852-7500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class B Stock, par value $100 per share
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
o Yes x No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d).
o Yes x No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o | Accelerated filer o |
Non-accelerated filer x | Smaller reporting company o
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Smaller reporting company o | Emerging growth company o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes x No
As of February 28, 2015,2018, the registrant had 43,469,46645,215,145 shares of capital stock outstanding, which included stock classified as mandatorily redeemable. The capital stock of the registrant is not listed on any securities exchange or quoted on any automated quotation system, only may be owned by membersMembers and former membersMembers and is transferable only at its par value of $100 per share.
Documents Incorporated by Reference: None
Table of Contents
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| | PART I | |
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| Item 1. | Business | |
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| Item 1A. | Risk Factors | |
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| Item 1B. | Unresolved Staff Comments | |
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| Item 2. | Properties | |
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| Item 3. | Legal Proceedings | |
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| Item 4. | Mine Safety Disclosures | |
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| | PART II | |
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| Item 5. | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | |
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| Item 6. | Selected Financial Data | |
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| Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations | |
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| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | |
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| Item 8. | Financial Statements and Supplementary Data | |
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| | Financial Statements for the Years Ended 2014, 2013,2017, 2016, and 20122015 | |
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| | Notes to Financial Statements | |
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| | Supplemental Financial Data | |
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| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | |
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| Item 9A. | Controls and Procedures | |
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| Item 9B. | Other Information | |
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| | PART III | |
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| Item 10. | Directors, Executive Officers and Corporate Governance | |
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| Item 11. | Executive Compensation | |
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| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | |
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| Item 13. | Certain Relationships and Related Transactions, and Director Independence | |
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| Item 14. | Principal Accountant Fees and Services | |
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| | PART IV | |
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| Item 15. | Exhibits and Financial Statement Schedules | |
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| Item 16. | Form 10-K Summary | |
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| Signatures | | |
PART I
Special Cautionary Notice Regarding Forward Looking Information
This document contains forward-looking statements that describe the objectives, expectations, estimates, and assessments of the Federal Home Loan Bank of Cincinnati (the FHLBank)FHLB). These statements use words such as “anticipates,” “expects,” “believes,” “could,” “estimates,” “may,” and “should.” By their nature, forward-looking statements relate to matters involving risks or uncertainties, some of which we may not be able to know, control, or completely manage. Actual future results could differ materially from those expressed or implied in forward-looking statements or could affect the extent to which we are able to realize an objective, expectation, estimate, or assessment. Some of the risks and uncertainties that could affect our forward-looking statements include the following:
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| ▪ | the effects of economic, financial, credit, market, and memberMember conditions on our financial condition and results of operations, including changes in economic growth, general liquidity conditions, inflation and deflation, interest rates, interest rate spreads, interest rate volatility, mortgage originations, prepayment activity, housing prices, asset delinquencies, and members'Members' mergers and consolidations, deposit flows, liquidity needs, and loan demand; |
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| ▪ | political events, including legislative, regulatory, federal government, judicial or other developments that could affect us, our members,Members, our counterparties, other FHLBanksFederal Home Loan Banks (FHLBanks) and other government-sponsored enterprises (GSEs), and/or investors in the Federal Home Loan Bank System's (FHLBank System or System) unsecured debt securities, which are called Consolidated Obligations or Obligations;(or Obligations); |
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| ▪ | competitive forces, including those related to other sources of funding available to members,Members, to purchases of mortgage loans, and to our issuance of Consolidated Obligations; |
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| ▪ | the financial results and actions of other FHLBanks that could affect our ability, in relation to the FHLBank System's joint and several liability for Consolidated Obligations, to access the capital markets on favorable terms or preserve our profitability, or could alter the regulations and legislation to which we are subject; |
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| ▪ | changes in investor demand for Consolidated Obligations; |
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| ▪ | the volatility of market prices, interest rates, credit quality, and other indices that could affect the value of investments and collateral we hold as security for memberMember obligations and/or for counterparty obligations; |
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| ▪ | the ability to attract and retain skilled management and other key employees; |
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| ▪ | the ability to develop, secure and support technology and information systems that effectively manage the risks we face; |
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| ▪ | the ability to successfully manage new products and services; and |
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| ▪ | the risk of loss arising from litigation filed against us or one or more other FHLBanks. |
We do not undertake any obligation to update any forward-looking statements made in this document.
COMPANY INFORMATION
Organizational StructureCompany Background
The FHLBankFHLB is a regional wholesale bank that providesserves the public interest by providing financial products and services to our members.Members to fulfill a public-policy mission of supporting housing finance and community investment. We are part of the FHLBank System (or System).System. Each FHLBankof the 11 FHLBanks operates as a separate entity with its own stockholders, employees, Board of Directors, and business model. Our region, known as the Fifth District, is comprised of Kentucky, Ohio and Tennessee.
The U.S. Congress chartered the FHLBank System in the Federal Home Loan Bank Act of 1932 (the FHLBank Act) as a GSE to help provide liquidity inand credit to the U.S. housing market. FHLBanks are GSEsmarket and support home ownership. Promoting home ownership is a long-standing central theme of the United States of America;U.S. government policy. The System has a GSE combines private sector ownership with public sector sponsorship. In additioncritical public-policy role as important national liquidity providers to being GSEs, the FHLBanks are cooperative institutions, privately and wholly owned by their members, who purchase capital stock and who are the primary customers.mortgage lenders, particularly during stressful conditions when private-sector liquidity often proves unreliable.
The FHLBanks are not government agencies and the U.S. government does not guarantee, directly or indirectly, the debt securities or other obligations of the FHLBank System. Rather, the FHLBanks are GSEs, which combine private sector ownership with public sector sponsorship. In addition, the FHLBanks are cooperative institutions, privately and wholly owned by stockholders who are also the primary customers.
The FHLBank System also includes the Federal Housing Finance Agency (Finance Agency) and the Office of Finance. The Finance Agency is an independent agency in the executive branch of the U.S. government that regulates the FHLBanks, the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the Office of Finance. The Office of Finance is a joint office of the FHLBanks that facilitates the issuance and servicing of the FHLBank System's Consolidated Obligations (or Obligations).Obligations.
All federally insured depository institutions, certain insurance companies, and community development financial institutions chartered in the Fifth District may voluntarily apply for membership in our FHLBank. Such applicantsFHLB. Applicants must satisfy membership requirements in accordance with statutes and Finance Agency regulations. These requirements deal primarily with home financing activities, satisfactory financial condition such that Advances may be made safely, to the member, and matters related to the regulatory, supervisory and management oversight of the applicant. By law, an institution is permitted to be a member ofapply for membership in only one FHLBank, although a holding company may have memberships in more than one FHLBank through its subsidiaries.
The combination of public sponsorship and private ownership that drives our business model is reflected in the composition of our 17-member18-Member Board of Directors, all of whom membersMembers elect. Ten directors are officers and/or directors of our memberMember institutions, while the remaining directors are independent directors who represent the public interest.
At December 31, 2014,2017, we had 705 members, 203660 Members, 226 full-time employees, and 1no part-time employee.employees. Our employees are not represented by a collective bargaining unit. We consider our relationship with our employees to be good.
Mission and Corporate Objectives
The FHLBank'sOur mission is to provide Member-stockholders with financial intermediation between theservices and a competitive return on their capital markets and our member stockholders in orderinvestment to help them facilitate and expand the availability of financing for housing finance and community lendinginvestment and investment.achieve their objectives for liquidity and asset liability management.
How We Achieve Ourthe Mission
We achieve our mission through a cooperative business model. We raise private-sector capital from memberMember stockholders and issue low-cost high-quality debt securities in the world-wide capital markets (alongjointly with other FHLBanks) in orderFHLBanks. The capital and proceeds from debt issuance enable us to provide productsMembers services—primarily, access to liquidity via reliable, readily available, economical, and services (called Mission Asset Activity)low-cost sources of funding to memberssupport their business activities including affordable housing and generatecommunity investment. Another important Member service is that we offer a program to purchase certain mortgage loans, which provides Members liquidity and helps them reduce market risk. Additionally, we provide a competitive return on theirMembers' capital investment in our company.
Our ability to maximize the mission depends on having a membership base that is an essential component of the nation’s housing and mortgage finance systems. We focus closely on fulfilling our mission relative to Members who are community financial institutions, who we believe typically rely more on us for access to liquidity and mortgage markets compared with larger Members. At the same time, we value having large Members who are active borrowers because they provide the System the ability to consistently issue large amounts of debt, which helps ensure the debt has a relatively low cost, benefiting all Members.
The primary products we offer, or Mission Assets, are readily available low-cost loans called Advances, purchases of certain whole mortgage loans sold by qualifying members calledMembers through the Mortgage Purchase Program (MPP), and Letters of Credit. We also offer affordable housing programs and related activities to support membersMembers in their efforts to assist very low-, low- and moderate-income households and their local communities. To a more limited extent, we also have several correspondent services that assist membersMembers in operational administration.
The primary way we obtain funding is through participation in the issuance of the FHLBank System's unsecured debt securities, called Consolidated Obligations in the global capital markets. Secondary sources of funding are capital and deposits we accept from our members.Members. A critical component of the success of the FHLBank System is its ability to maintain a comparative
advantage in funding, which is due largely to its GSE status, andconfers an implied guarantee from the U.S. federal government, low risk operations.operations, and joint and several liability across the 11 FHLBanks. We regularly issue Obligations under a wide range of maturities, structures, and amounts, and at relatively favorable spreads to benchmark market interest rates (represented by U.S. Treasury securities and the London InterBank Offered Rate (LIBOR)) compared with many other financial institutions.
Because we are a cooperative organization with some membersMembers using our products more heavily than others and membersMembers having different percentages of capital stock, we must achieve a balance in generating membership value from product prices and characteristics and paying a competitive dividend rate. We attempt to achieve this balance by pricing Mission Asset Activity at relatively narrow spreads over funding costs, compared with other financial institutions, while still achieving acceptable profitability. Our cooperative ownership structure and deep access to debt markets allow our business to be scalable and self-capitalizing without jeopardizing profitability, taking undue risks, or diminishing capital adequacy.
Our franchise value is derived from the synergies brought by the various components of our business model, including the public-policy mandate, GSE status, cooperative ownership structure, consistent ability to issue large amounts of debt in the world-wide capital markets at favorable funding costs, and mechanisms of providing housing finance liquidity through products and services to financial institutions rather than directly to homeowners.
Corporate Objectives
Our corporate objectives, listed below, are to promote housing finance among membersMembers and ensure our operations and governance are effective and efficient. The first three objectives drive how members derive value from being in the cooperative.
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| ▪ | Mission Asset Activity:Activity: Implement strategies and practice effective ongoingtactics and effectively manage operations aimed at promoting members’to promote Members’ usage of our productsMission Asset Activity and services.stand ready at all times to provide liquidity to Members. |
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| ▪ | Stock ReturnReturn:: Earn adequate profitability so that membersMembers receive a competitive long-term dividend rate on their capital stock investment. |
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| ▪ | Housing and Community Investment ProgramsPrograms:: Maintain effective housing and community investment programs that maximize mandatory programs and provide funding for additionaloffer targeted voluntary contributions.assistance programs. |
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| ▪ | Safe and Sound Operations:Operations: Optimize the FHLBank’sour counterparty and deposit ratings, achieve an acceptable rating on annual regulatory examinations, and maintainhave an adequate amount and composition of capital. |
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| ▪ | Risk ManagementManagement:: Employ effective risk optimization management practices and maintain risk exposures at low to moderate levels. |
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| ▪ | GovernanceGovernance:: Operate in accordance with effective corporate governance processes.processes that emphasize compliance and consider the interest of all stakeholders (Members, stockholders, employees, creditors, housing partners, and regulators).
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Business Activities
Mission Asset Activity
The following are our principal business activities with members:Members:
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| ▪ | We lend readily-available, competitively-priced, and fully-collateralized Advances. |
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| ▪ | We issue collateralized Letters of Credit. |
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| ▪ | We purchase qualifying residential mortgage loans through the MPP and hold them on our balance sheet. |
Together, these product offerings constitute “Mission Asset Activity.” We refer to Advances and Letters of Credit as Credit Services.
Affordable Housing and Community Investment
In addition, through various Housing and Community Investment programs, we assist membersMembers in serving very low-, low-, and moderate-income households and community economic development. These programs provide Advances at below-market rates of interest, as well as direct grants.
Investments
To help us achieve our mission and corporate objectives, we invest in highly-rated debt instruments of financial institutions and the U.S. government and in mortgage-related securities. In practice, these investments normally include shorter-term liquidity instruments and longer-term mortgage-backed securities, as permitted by Finance Agency regulation. Investments provide liquidity, help us manage market risk exposure, enhance earnings, and through the purchase of mortgage-related securities, support the housing market.
Sources of Earnings
Our major source of revenue is interest income earned on Advances, MPP loans, and investments.
Major items of expense are:
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| ▪ | interest paid on Consolidated Obligations and deposits to fund assets; |
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| ▪ | costs of providing below-market-cost Advances and direct grants and subsidies under the Affordable Housing Program; and |
The largest component of earnings is net interest income, which equals interest income minus interest expense. We derive net interest income from the interest rate spread earned on assets versus funding costs and the use of financial leverage. Each of these can vary over time with changes in market conditions, including most importantly interest rates, business conditions and our risk management activities.
We believe members'Members' capital investment is comparable to investing in adjustable-rate preferred equity instruments. Therefore, we structure our balance sheet risk exposures so that earnings tend to move in the same direction as changes in short-term market rates, which can help provide a degree of predictability for dividend returns.
Capital
Due to our cooperative structure, we obtain capital from members.Members. Each memberMember must own capital stock as a condition of membership and normally must hold additional stock above the membership stock amount in order to gain access to Advances and possibly to sell us MPP loans. We issue, redeem, and repurchase capital stock only at its stated par value of $100 per share. By law, our stock is not publicly traded.
We strive to ensure that assets are self-capitalizing, meaning that we acquire capital primarily in connection with growth in Mission Asset Activity. We also maintain an amount of capital to ensure we meet all of our regulatory and business
requirements relating to capital adequacy and protection of creditors against losses. We hold retained earnings to protect members'Members' stock investment against impairment risk.risk and to help stabilize dividend payments when earnings may be volatile.
Tax Status
We are exempt from all federal, state, and local taxation other than real property taxes. Any cash dividends we issue are taxable to membersMembers and do not benefit from the corporate dividends received exclusion. Notes 1 and 14 of the Notes to Financial Statements provide additional details regarding the assessment for the Affordable Housing Program.
Ratings of Nationally Recognized Statistical Rating Organizations
The FHLBank System's comparative advantage in funding is acknowledged in its excellent credit ratings from nationally recognized statistical rating organizations (NRSROs). Moody's Investors Service (Moody's) currently assigns, and historically has assigned, the System's Consolidated Obligations the highest ratings available: long-term debt is rated Aaa and short-term debt is rated P-1. It also assigns a Prime-1 short-term bond rating on each FHLBank. It affirmed these ratings in 20142017 and maintained a stable outlook. In 2014,2017, Standard & Poor's affirmed its issuer credit ratings on each FHLBank and its AA+ ratings on the System's senior debt and also maintained a stable outlook.
The ratings closely follow the U.S. sovereign ratings from both agencies. The lower-than AAA debt ratings from Standard & Poor's, which first occurred in 2011, continue to have had no discernible impact on the System's debt issuance capabilities.
The agencies' rationales for their ratings of the System and our FHLBankFHLB include the System's status as a GSE; the joint and several liability for Obligations; excellent overall asset quality; extremely strong capacity to meet commitments to pay timely principal and interest on debt; strong liquidity; conservative use of derivatives; adequate capitalization relative to our risk
profile; a stable capital structure; and the fact that no FHLBank has ever defaulted on repayment of, or delayed return of principal or interest on, any Obligation.
A credit rating is not a recommendation to buy, sell or hold securities. A rating organization may revise or withdraw its ratings at any time, and each rating should be evaluated independently of any other rating. We cannot predict what future actions, if any, a rating organization may take regarding the System's or our ratings.
Regulatory Oversight
The Finance Agency is headed by a Director who has authority to promulgate regulations and to make other decisions. The Finance Agency is charged with ensuring that each FHLBank carries out its housing and community development finance mission, remains adequately capitalized, operates in a safe and sound manner, and complies with Finance Agency regulations.
To carry out these responsibilities, the Finance Agency conducts on-site examinations at least annually of each FHLBank, as well as periodic on- and off-site reviews, and receives monthly information on each FHLBank's financial condition and operating results. While an individual FHLBank has substantial discretion in governance and operational structure, the Finance Agency maintains broad supervisory and regulatory authority. In addition, the Comptroller General has authority to audit or examine the Finance Agency and the FHLBanks, to decide the extent to which the FHLBanks fairly and effectively fulfill the purposes of the FHLBank Act, and to review any audit, or conduct its own audit, of the financial statements of an FHLBank.
BUSINESS SEGMENTS
We manage the development, resource allocation, product delivery, pricing, credit risk management, and operational administration of our Mission Asset Activity in two business segments: Traditional Member Finance and the MPP. Traditional Member Finance includes Credit Services, Housing and Community Investment, Investments, some correspondent and deposit services, and other financial products of the FHLBank.FHLB. See the “Segment Information” section of “Results of Operations” in Item 7 and Note 18 of the Notes to Financial Statements for more information on our business segments, including their results of operations.
Traditional Member Finance
Credit Services
Advances. Advances are competitively priced sources of funds available for membersMembers to help manage their asset/liability and liquidity needs. Advances can both complement and be alternatives to retail deposits, other wholesale funding sources, and
corporate debt issuance. We strive to facilitate efficient, fast, and continual memberMember access to funds. In most cases membersMembers can access funds on a same-day basis.
We price a variety of standard Advance programs every business day and several other standard programs on demand. We also offer customized, non-standard Advances that fall under one of the standard programs.Advances. Having diverse programs gives membersMembers the flexibility to choose and customize their borrowings according to size, maturity, interest rate, interest rate index (for adjustable-rate coupons), interest rate options, and other features.
Repurchase based (REPO) Advances are short-term, fixed-rate instruments structured similarly to repurchase agreements from investment banks, with one principal difference. Members collateralize their REPO Advances through our normal collateralization process, instead of being required to pledge specific securities as would be required in a repurchase agreement. A majority of REPO Advances outstanding have overnight maturities.
LIBOR Advances have adjustable interest rates typically priced off 1- or 3-month LIBOR indices. LIBOR Advances may be structured at the member'sMember's option as either prepayable with a fee or prepayable without a fee if the prepayment is made on a repricing date.
Regular Fixed-Rate Advances have terms of 3 months to 30 years, with interest normally paid monthly and principal repayment normally at maturity. Members may choose to purchase call options on these Advances, although in the last fiveseveral years, balances with call options have been at or close to zero.
Putable Advances are fixed-rate Advances that provide us an option to terminate the Advance, usually after an initial “lockout” period. Most have long-term original maturities. Selling us these options enables membersMembers to secure lower rates on Putable Advances compared to Regular Fixed-Rate Advances with the same final maturity.
Mortgage-Related Advances are fixed-rate, amortizing Advances with final maturities of 5 to 30 years. Some of these Advances, at the choice of the member,Member, provide membersMembers with prepayment options without fees.
We also offer various other Advance programs that have smaller outstanding balances.
Letters of Credit. Letters of Credit are collateralized contractual commitments we issue on a member'sMember's behalf to guarantee its performance to third parties. A Letter of Credit may obligate us to make direct payments to a third party, in which case it is treated as an Advance to the member.Member. The most popular use of Letters of Credit is as collateral supporting public unit deposits, which are deposits held by governmental units at financial institutions. We earn fees on Letters of Credit based on the actual notional amount of the Letters utilized.
How We Manage Risks of Credit Services. We manage market risk from Advances by funding them with Consolidated Obligations and interest rate swaps that have a close similarity ofsimilar interest rate risk characteristics as the Advances. The net effect is that in practice we mitigate nearly all of Advances'the market risk exposures.exposure associated with Advances.
In addition, for many, but not all, Advance programs, Finance Agency regulations require us to charge membersMembers prepayment fees for early termination of principal when the early termination results in an economic loss to us. We determine prepayment fees using standard present-value calculations that make us economically indifferent to the prepayment. The prepayment fee equals the present value of the estimated profit that we would have earned over the remaining life of the prepaid Advance. If a memberMember prepays principal on an Advance that we have hedged with an interest rate swap, we may also assess the memberMember a fee to compensate us for the cost we incur in terminating the swap before its stated final maturity. Some Advance programs are structured as non-prepayable and may have additional restrictions in order to terminate.
We manage credit risk on Advances by requiring each memberMember to supply us with a security interest in eligible collateral that in the aggregate has estimated value in excess of the total Advances and Letters of Credit. Collateral is comprised mostly of single-family loans, home equity lines, multi-family loans and bond securities. The combination of conservative collateral policies and risk-based credit underwriting activities mitigates virtually all potential credit risk associated with Advances and Letters of Credit. We have never experienced a credit loss on Advances, nor have we ever determined it necessary to establish a loan loss reserve for Advances. Item 7's “Quantitative and Qualitative Disclosures About Risk Management” and Notes 8 and 10 of the Notes to Financial Statements have more detail on our credit risk management of memberMember borrowings.
Housing and Community Investment
Our Housing and Community Investment Programs include the Affordable Housing Program and various housing and community economic development-related Advance and grant programs. We fund the Affordable Housing Program with an accrual equal to 10 percent of our previous year's net earnings, mandated by the Financial Institutions Reform, Recovery and Enforcement Act of 1989. See Note 14 of the Notes to Financial Statements for a complete description of the Affordable Housing Program calculation.
The Affordable Housing Program provides funding for the development of affordable housing. The Program consists of a Competitive Program and a homeownership program called Welcome Home, which assists homebuyers with down payments and closing costs. Under the Competitive Program, we currently distribute funds in the form of either grants or below-market rate Advances to membersMembers that apply and successfully compete in an annual offering. Under Welcome Home, we make funds available beginning in March until they have been fully committed. For both programs, the income of qualifying individuals or households must be 80 percent or less of the area median income. We set aside up to 35 percent of the Affordable Housing Program accrual for Welcome Home and allocate the remainder to the Competitive Program.
Our Board of Directors also may allocate funds to voluntary housing programs. In 2014,2017, the Board re-authorized an additional $1$1.5 million to the Carol M. Peterson Housing Fund for use during the year. These funds are primarily used as grants to pay for accessibility rehabilitation and emergency repairs for special needs and elderly homeowners. In March 2015,2018, the Board re-authorized this fund in the same amount for use in 2015.2018. In 2012, the Board of Directors also established the Disaster Reconstruction Program, a $5 million voluntary housing program that provides grants for purchase or rehabilitation of a home towithin the Fifth District for residents that have suffered loss or damage to their primary residence as a result of a state or federally declared disaster. Since the program's inception, we have disbursed nearlyover $3 million to assist 172207 households.
Two other housing programs that fall outside the auspices of the Affordable Housing Program are the Community Investment Program and the Economic Development Program. Advances under the former program have rates equal to our cost of funds, while Advances under the latter program have rates equal to our cost of funds plus three basis points. Members use the Community Investment Program to serve housing needs of low- and moderate-income households and, under certain conditions, community economic development projects. The Economic Development Program is a discounted Advance program used to promote economic development and job creation and retention.
Investments
Types of Investment Assets.Investments. WeA primary reason we hold investments in orderis to havecarry sufficient asset liquidity. Permissible liquidity investments include Federal funds, certificates of deposit, bank notes, bankers' acceptances, commercial paper, securities purchased under agreements to resell, and debt securities issued by the U.S. government or its agencies. The first five categories represent unsecured lending to private counterparties. We also may place deposits with the Federal Reserve Bank. We are prohibited by Finance Agency regulations from investing (secured or unsecured) in financial investments issued by non-U.S. entities other than those issued by U.S. branches and agency offices of foreign commercial banks. Most liquidity investments have short-term maturities.
We are also permitted by regulation to purchase the following other investments, which have longer original maturities than liquidity investments and do not provide us with liquidity:investments:
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| ▪ | mortgage-backed securities and collateralized mortgage obligations supported by mortgage securities (together, referred to as mortgage-backed securities) and issued by GSEs or private issuers; |
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| ▪ | asset-backed securities collateralized by manufactured housing loans or home equity loans and issued by GSEs or private issuers; and |
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| ▪ | marketable direct obligations of certain government units orand agencies (such as state housing finance agencies) that supply needed funding for housing or community lending and that do not exceed 20 percent of our regulatory capital. |
We have never purchased asset-backed securities and currently do not own any privately-issued mortgage-backed securities. We have historically held small amounts of obligations of government units and agencies.
Per Finance Agency regulations, the total investment in mortgage-backed securities and asset-backed securities may not exceed, on a book value basis, 300 percent of previous month-end regulatory capital on the day we purchase the securities. See the “Capital Resources” section below for the definition of regulatory capital.
Purposes of Having Investments. The investments portfolio helps us achieve corporate objectives in the following ways:
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| ▪ | Liquidity management. Liquidity investments help support the ability to fund assets on a timely basis, especially Advances.Advances, and when it may be more difficult to issue new debt. These investments supply a source of liquidity because we normally ensure they have shorter maturitiesfund them with longer-term debt than the debt we issue to fund them.asset maturities. We also may be able to obtain liquidity by selling certain investments for cash without a significant loss of value. |
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| ▪ | Earnings enhancement. The investments portfolio, especially mortgage-backed securities, assists with earning a competitive return on capital, which also increasesand increasing funding for Housing and Community Investment programs. |
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▪ | Market risk management. Liquidity In addition, liquidity investments help stabilize earnings because they typically earn a relatively stable spread to the cost of debt issued to fund them, with less market risk than mortgage assets.them.
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| ▪ | DebtManagement of debt issuance management. Maintaining a short-term liquidity investment portfolio can help us participate in attractively priced debt issuances, on an opportunistic basis. We can temporarily invest proceeds from debt issuances in short-term liquid assets and quickly access them to fund demand for Mission Asset Activity, rather than having debt issuances dictated solely by the timing of memberMember demand.
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| ▪ | Support of housing market. Investment in mortgage-backed securities and state housing finance agency bonds directly supports the residential mortgage market by providing capital and financing for mortgages. |
How We Manage Risks of Investments. We strive to ensure our investment holdings have a moderate degree of market risk and limited credit risk, which tends to lower the returns we can expect to earn on these securities. We believe that a philosophy of purchasing investments with a high amount of market or credit risk would be inconsistent with our GSE status and corporate objectives.
Market risk associated with short-term investments tends to be minimal because of their short maturities and because we typically fund them with similar duration short-term Consolidated Obligations.Obligations having similar maturities. We mitigate much of the market risk of mortgage-backed securities, which exists primarily from changes in mortgage prepayment speeds, by limiting their balances to 300 percent of regulatory capital, by funding them with a portfolio of long-term fixed-rate callable and noncallable Obligations, and by managing the market risk exposure of the entire balance sheet within prudent policy limits.
Finance Agency regulations and internal policies also provide controls on market risk exposure by restricting the types of mortgage loans, mortgage-backed securities and other investments we can hold. These restrictions prohibit, among others, the purchase of interest only or principal only stripped mortgage-backed securities and mortgage-backed securities whose average life varies more than six years under a 300 basis points interest rate shock.
Our internal policies specify guidelines for, and relatively tight constraints on, the types and amounts of short-term investments we are permitted to hold and the maximum amount of credit risk exposure we are permitted to have with eligible counterparties. We are permitted to invest only in the instruments of counterparties with high credit ratings, and because of our conservative investment policies and practices, we believe all of our investments have high credit quality. We have never had a credit loss or credit-related write down of any investment security.
Deposits
We provide a variety of deposit programs, including demand, overnight, term and Federal funds, which enable depositors to invest funds in short-term liquid assets. We accept deposits from members,Members, other FHLBanks, any institution to which we offer correspondent services, and other government instrumentalities. The rates of interest we pay on deposits are subject to change daily based on comparable money market interest rates. The balances in deposit programs tend to vary positively with the amount of idle funds membersMembers have available to invest, as well as, the level of short-term interest rates. Deposits have represented a small component of our funding in recent years, typically betweenless than one and two percent of our funding sources.
Mortgage Purchase Program (MPP or Mortgage Loans Held for Portfolio)
Description of the MPP
Types of Loans and Benefits. Finance Agency regulations permit FHLBanks to purchase and hold specified whole mortgage loans from their members,Members, which offers membersMembers a competitive alternative to the traditional secondary mortgage market and directly supports housing finance. We account for MPP loans as mortgage loans held for portfolio. By selling mortgage loans to us, membersMembers can increase their balance sheet liquidity and lower interest rate and mortgage prepayment risks. The MPP
particularly enables small- and medium-sized community-based financial institutions to use their existing relationship with us to participate more effectively in the secondary mortgage market.
Under the MPP, weWe purchase two types of mortgage loans: qualifying conforming fixed-rate conventional 1-4 family residential mortgages and residential mortgages fully insured by the Federal Housing Administration (FHA). Members approved to sell us these loans are referred to as Participating Financial Institutions (PFIs). Although regulations permit us to purchase qualifying mortgage loans originated within any state or territory of the United States, beginning several years ago we no longer purchase loans originated in New York, Massachusetts, Maine, Rhode Island or New Jersey due to features of those states' Anti-Predatory Lending laws that are less restrictive than we prefer.
A “conventional” mortgage refers to a non-government-guaranteed mortgage. A “conforming” mortgage refers to the maximum amount permissible to be lent as a regular prime (i.e., non-jumbo, non-subprime) mortgage. For 2015,2018, the Finance Agency re-established thatestablished the conforming limit at $417,000$453,100 with loans originated in a limited number of high-cost cities and counties receiving higher conforming limits. We do not purchase mortgages subject to these higher amounts.
Loan Purchase Process. A Master Commitment Contract is negotiated with each PFI, in which the PFI agrees to make a best efforts attempt to sell us a specific dollar amount of mortgage loans generally over a period of up to 12 months. We purchase loans pursuant to a Mandatory Delivery Contract, which is a legal commitment we make to purchase, and a PFI makes to deliver, a specified dollar amount of mortgage loans, with a forward settlement date, at a specified range of note rates and prices.
Shortly before delivering the loans that will fill the Mandatory Delivery Contract, the PFI must submit loan level detail including underwriting information. We apply procedures through the automated Loan Acquisition System designed to screen loans that do not comply with our policies. Our underwriting guidelines generally mirror those of Fannie Mae and Freddie Mac for conforming conventional loans, although our guidelines and pool composition requirements are more conservative in a
number of ways in order to further limit credit risk exposure. PFIs are required to make certain representations and warranties against our underwriting guidelines on the loans they sell to us. If a PFI sells us a loan in breach of those representations and warranties, we have the contractual right to require the PFI to repurchase the loan.
How We Manage Risks of the MPP
Market Risk. We mitigate the MPP's market risk similarly to how we mitigate market risk from mortgage-backed securities.
Credit Risk - Conventional Mortgage Loans. A unique feature of the MPP is that it separates the various activities and risks associated with residential mortgage lending for conventional loans and allows these risks and activities to be taken on by different entities. We manage the funding of the loans, market risk (including interest rate risk and prepayment risk), and liquidity risk. PFIs manage marketing, originating and, in most cases, servicing the loans. PFIs may either retain servicing or sell it to a qualified and approved third-party servicer (also referred to as a PFI). Because PFIs manage and bear most of the credit risk, they do not pay us a guarantee fee to transfer credit risk.
We manage credit risk exposure for conventional loans primarily through underwriting and pool composition requirements and by applying layered credit enhancements. These enhancements, which apply after a homeowner's equity is exhausted, include (in order of priority)available primary mortgage insurance, (when applicable), the Lender Risk Account (discussed below), and for loans acquired before February 2011, Supplemental Mortgage Insurance that the PFI purchased from one of our approved third-party providers naming us as the beneficiary.
Beginning in February 2011, we discontinued use of Supplemental Mortgage Insurance for new loan purchases and replaced it with expanded use of the Lender Risk Account and aggregation of loan purchases into larger pools to provide diversification in credit risk exposure. These credit enhancements are designed to adequately protect us against credit losses in scenarios of severe downward movements in housing prices and unfavorable changes in other factors that can affect loan delinquencies and defaults.
The Lender Risk Account is a key component of how we manage residual credit risk. It is a holdback of a portion of the initial purchase price. Starting after five years from the loan purchase date, we may return the holdback to PFIs if they manage credit risk to pre-defined acceptable levels of exposure on the loan pools they sell to us. Actual loan losses are deducted from the amount of the purchase-price holdback we return to the PFI. The Lender Risk Account provides PFIs with a strong incentive to sell us high quality performing mortgage loans.
Credit Risk - FHA Mortgage Loans. Because the FHA makes an explicit guarantee on FHA loans, we do not require any credit enhancements on these loans beyond underwriting, homeowner's equity, and primary mortgage insurance.
Item 7's “Quantitative and Qualitative Disclosures About Risk Management” provides more detail on how we manage market and credit risks for the MPP.
Earnings from the MPP
The MPP enhances long-term profitability on a risk-adjusted basis and augments the return on memberMember stockholders' capital investment. We generate earnings in the MPP from monthly interest payments minus the cost of funding and the cost of hedging the MPP's interest rate risk. Interest income on each loan is computed as the mortgage note rate multiplied by the loan's principal balance:
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| ▪ | minus servicing costs (0.25 percent for conventional loans and 0.44 percent for FHA loans); |
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| ▪ | minus the cost of Supplemental Mortgage Insurance (for applicable loans); and |
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| ▪ | adjusted for the amortization of purchase premiums or the accretion of purchase discounts and for the amortization or accretion of fair value adjustments on loans initially classified as mortgage loan commitments. |
For new loan purchases, we consider the cost of the Lender Risk Account when we set conventional loan prices and evaluate the MPP's expected return.potential return on investment. The pricing of each structure depends on a number of factors and is specific to the PFI and to the loan pool. We do not receive fees or income for retaining the risk of losses in excess of any credit enhancements.
FUNDING - CONSOLIDATED OBLIGATIONS
Our primary source of funding and hedging market risk exposure is through participation in the sale of Consolidated Obligation debt securities (Consolidated Obligations).to global investors. Obligations are the joint and several obligations of all the FHLBanks, backed only by the financial resources of these institutions.
There are two types of Consolidated Obligations: Consolidated Bonds (Bonds) and Consolidated Discount Notes (Discount Notes). We participate in the issuance of Bonds for three purposes:
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| ▪ | to finance and hedge intermediate- and long-term fixed-rate Advances and mortgage assets; |
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| ▪ | to finance and hedge short-term, LIBOR-indexed adjustable-rate Advances, and swapped Advances, typically by synthetically transforming fixed-rate Bonds to adjustable-rate LIBOR funding through the execution of interest rate swaps; and |
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| ▪ | to acquire liquidity.liquidity investments. |
Bonds may have fixed or adjustable rates of interest. Fixed-rate Bonds are either noncallable or callable. A callable Bond is one that we are able to redeem in whole or in part at our discretion on one or more predetermined call dates according to the Bond's offering notice. The maturity of Bonds typically ranges from one year to 20 years. Our adjustable-rateAdjustable-rate Bonds use LIBOR for interest rate resets. In the last five years, we haveWe do not participatedparticipate in the issuance of range Bonds, zero coupon Bonds, or indexed principal redemption Bonds.
We use fixed-rate Bonds to fund longer-term fixed-rate Advances and longer-term fixed-rate mortgage assets, and use adjustable-rate Bonds to fund adjustable-rate LIBOR Advances.
We transact in interest rate swaps to synthetically convert some fixed-rate Bonds to adjustable-rate terms indexed to LIBOR. These are used to hedge adjustable-rate LIBOR Advances.
We participate in the issuance of Discount Notes to fund short-term Advances, adjustable-rate LIBOR Advances, putable Advances (which we normally swap to LIBOR), liquidity investments, and a portion of longer-term fixed-rate assets. Discount Notes have maturities from one day to one year, with most of ours normally maturing within three months.
The mix of Obligations fluctuates in response to relative changes in short-term versus long-term assets, relative changes in fixed-rate versus adjustable-rate assets, decisions on market risk management (particularly the amount of funding of longer-term assets with short-term Obligations), and differences in relative costs of various Obligations.
Interest rates on Obligations, including their relationship to other products such as U.S. Treasury securities and LIBOR, are affected by a multitude of factors such as: overall economic and credit conditions; credit ratings of the FHLBank System; investor demand and preferences for our debt securities; the level of interest rates and the shape of the U.S. Treasury curve and the LIBOR swap curve; and the supply, volume, timing, and characteristics of debt issuances by the FHLBanks, other GSEs, and other highly rated issuers.
Finance Agency regulations govern the issuance of Obligations. An FHLBank may not issue individual debt securities without Finance Agency approval, and we have never done so. The Office of Finance services Obligations, prepares the FHLBank System's quarterly and annual combined financial statements, and serves as a source of information for the FHLBanks on capital market developments.
We have the primary liability for our portion of Obligations, i.e., those issued on our behalf for which we received the proceeds. However, we also are jointly and severally liable with the other FHLBanks for the payment of principal and interest on all Obligations. If we do not pay the principal or interest in full when due on any Obligation issued on our FHLBank'sFHLB's behalf, we are prohibited from paying dividends or redeeming or repurchasing shares of capital stock. If another FHLBank were unable to repay its participation in an Obligation for which it is the primary obligor, the Finance Agency could call on each of the other FHLBanks to repay all or part of the Obligation. The Finance Agency has never invoked this authority.
An FHLBank may not issue individual debt securities without Finance Agency approval.
LIQUIDITY
Our business requires a continualsubstantial and substantialcontinual amount of liquidity to meetsatisfy financial obligations (primarily maturing Consolidated Obligations) in a timely and cost-efficient manner and to provide membersMembers access to timely Advance funding and mortgage loan sales in all financial environments. We obtain liquidity by issuing debt, holding short-term assets that mature before their associated funding, and having the ability to sell certain investments without significant accounting or economic consequences. Sources of asset liquidity include cash, maturing Advances, maturing investments, principal paydowns of mortgage assets, the ability to sell certain investments, and interest payments received. Uses of liquidity include repayments of Obligations, issuances of new Advances, purchases of loans under the MPP, purchases of investments, and payments of interest.
Liquidity requirements are significant because Advance balances can be volatile, many have short-term maturities, and we strive to allow membersMembers to borrow Advances on the same day they request them. We regularly monitor liquidity risks and the investment and cash resources available to meet liquidity needs, as well as statutory and regulatory liquidity requirements.
Because Obligations have favorable credit ratings and because the FHLBank System is one of the largest sellers of debt in the worldwide capital markets, the System historically has been able to satisfy its liquidity needs through debt issuance across a wide range of structures at relatively favorable spreads to benchmark market interest rates.rates, such as U.S. Treasury securities.
CAPITAL RESOURCES
Capital Plan
Basic Characteristics
Under Finance Agency regulations, regulatory capital is composed of all capital stock (including stock classified as mandatorily redeemable), retained earnings, general loss allowances, and other amounts from sources the Finance Agency determines are available to absorb losses. Currently, our regulatory capital consists of capital stock and retained earnings. Under the Gramm-Leach-Bliley Act of 1999 (GLB Act), permanent capital equals Class B stock plus retained earnings and is available to absorb financial losses.
Our Capital Plan has the following basic characteristics:
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| ▪ | We offer only one class of capital stock, Class B, which is generally redeemable upon a member'sMember's five-year advance written notice, withnotice. We strive to manage capital risks to be able to safely and soundly repurchase redemption requests sooner than five years, although we may elect to wait up to five years (or longer under certain conditions described below. |
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▪ | The Capital Plan enables us to efficiently expand and contract capital stock needed to capitalize assets in response to changes in our membership base and demand for Mission Asset Activity. This enables us to maintain a prudent amount of financial leverage and also consistently generate a competitive dividend return.conditions). |
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| ▪ | We issue shares of capital stock as required for an institution to become a memberMember or maintain membership, as required for membersMembers to capitalize Mission Asset Activity, and whenif we may pay dividends in the form of additional shares of stock. |
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| ▪ | The Capital Plan enables us to efficiently increase and decrease capital stock needed to capitalize assets in response to changes in the membership base and demand for Mission Asset Activity. This enables us to maintain a prudent amount of financial leverage and consistently generate a competitive dividend return. |
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| ▪ | We may, subject to the restrictions described below, repurchase certain capital stock (i.e., "excess" capital stock). |
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| ▪ | The concept of “cooperative capital,” explained below, better aligns the interests of heavy users of our products with light users by enhancing the dividend return. |
Prudent risk management requires usUnder Finance Agency regulations, regulatory capital is composed of all capital stock (including stock classified as mandatorily redeemable), retained earnings, general loss allowances, and other amounts from sources the Finance Agency determines are available to maintain effectiveabsorb losses. Under the Gramm-Leach-Bliley Act of 1999 (GLB Act), permanent capital equals Class B stock plus retained earnings and is available to absorb financial leverage to minimize risk tolosses.
GAAP capital excludes mandatorily redeemable capital stock, while preserving profitabilityregulatory capital includes it. Mandatorily redeemable capital stock, which is stock subject to pending redemption, is accounted for as a liability on our Statements of Condition and related dividend payments are accounted for as interest expense. The classification of some capital stock as a liability has no effect on our safety and soundness, liquidity position, market risk exposure, or ability to hold an adequate amountmeet interest payments on our participation in Obligations. Mandatorily redeemable capital stock is fully available to absorb losses until the stock is redeemed or repurchased. See Note 15 of retained earnings. Pursuantthe Notes to these objectives, Financial Statements for more information about our mandatorily redeemable capital stock.
Finance Agency regulations stipulate that we must comply with three limits on capital leverage and risk-based capital. These ensure a low amount of capital risk while providing for competitive profitability. We have always complied with thethese regulatory capital requirements.
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| ▪ | We must maintain at least a four percent minimum regulatory capital-to-assets ratio. This has historically been the regulatory capital requirement that has been closest to affecting our operations. |
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| ▪ | We must maintain at least a five percent minimum leverage ratio of capital divided by total assets, which includes a 1.5 weighting factor applicable to permanent capital. Because all of our Class B stock is permanent capital, this requirement is met automatically if we satisfy the four percent unweighted capital requirement. |
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| ▪ | We are subject to a risk-based capital rule in which we must hold an amount of "permanent" capital that exceeds the amount of exposure to market risk, credit risk, and operational risk. How we determine the amount of these risk exposures is stipulated by Finance Agency regulation. Permanent capital includes retained earnings and the regulatory amount of Class B capital stock. |
In addition to the minimum capital requirements, the GLB Act and our Capital Plan promote the adequacy of our capital to absorb financial losses in three ways, whichways. These combine to give memberMember stockholders a clear incentive to require us to minimize our risk profile:
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| ▪ | the five-year redemption period for Class B stock; |
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| ▪ | the option we have to call on membersMembers to purchase additional capital if required to preserve safety and soundness; and |
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| ▪ | the limitations, described below, on our ability to honor requested redemptions of capital if we are at risk of not maintaining safe and sound operations. |
GAAP capital excludes mandatorily redeemable capital stock, while regulatory capital includes it. Mandatorily redeemable capital stock, which is stock subject to pending redemption, is accounted for as a liability on our Statements of Condition and related dividend payments are accounted for as interest expense. The classification of some capital stock as a liability has no effect on our safety and soundness, liquidity position, market risk exposure, or ability to meet interest payments on our participation in Obligations. Mandatorily redeemable capital stock is fully available to absorb losses until the stock is redeemed or repurchased. See Note 15 of the Notes to Financial Statements for more discussion of mandatorily redeemable capital stock.
Components of Capital Stock Purchases and Operations of the Capital Plan
OurThe Capital Plan ties the amount of each member'sMember's required capital stock to both the amount of the member'sMember's assets (membership stock) and the amount and type of its Mission Asset Activity with us (activity stock).us. The former stock is called membership stock; the latter is called activity stock. Membership stock is required to become a memberMember and maintain membership. The amount required for each memberMember currently ranges from a minimum of $1 thousand to a maximum of $25 million, for each member, with the amount within that range determined as a percentage of memberMember assets.
In addition to its membership stock, a member may beMember is required to purchase and hold activity stock to capitalize its Mission Asset Activity. For purposes of the Capital Plan, Mission Asset Activity includes the principal balance of Advances, guaranteed funds and rate Advance commitments, and the principal balance of loans and commitments in the MPP that occurred after implementation of the Capital Plan.MPP.
The FHLBankFHLB must capitalize all Mission Asset Activity with capital stock at a rate of at least four percent. However, each memberMember is permitted to maintain an amount of activity stock within the range of minimum and maximum percentages for each type of Mission Asset Activity. The current percentages are as follows:
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| Mission Asset Activity | | Minimum Activity Percentage | | Maximum Activity Percentage |
| Advances | | 2% | | 4% |
| Advance Commitments | | 2 | | 4 |
| MPP | | 0 | | 4 |
If a memberMember owns more stock than is needed to satisfy both its membership stock requirement and the maximum activity stock percentages for its Mission Asset Activity, we designate the remaining stock as the member'sMember's excess capital stock. The member then utilizesMember may utilize its excess stock to capitalize additional Mission Asset Activity.
If an individual member'sMember's excess stock reaches zero, the Capital Plan normally permits us, withinwith certain limits, to capitalize additional Mission Asset Activity of that memberMember with excess stock owned by other membersMembers at the maximum percentage rate. This feature, called “cooperative capital,” enables us to more effectively utilize our capital stock. A member'sMember's use of cooperative capital reduces the ratio of its activity stock to its Mission Asset Activity for each type of Mission Asset Activity. There is a limit to how much cooperative capital a memberMember may use, which we currently set at $200$100 million.
When a member'sMember's ratio of activity stock to its Mission Asset Activity reaches the minimum activity stock percentage for all types of Mission Asset Activity, the memberMember must capitalize additional Mission Asset Activity of a given type by purchasing capital stock at that asset type's minimum percentage rate, assuming availability of cooperative capital.
Statutory and Regulatory Restrictions on Capital Stock Redemption and Repurchases
In accordance with the GLB Act, our stock is putable by members. However, for us and the other FHLBanks, thereMembers. There are significant statutory and regulatory restrictions on our obligation or right to redeem or repurchase outstanding stock, including, but not limited to, the following:
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| ▪ | We may not redeem any capital stock if, following the redemption, we would fail to satisfy any Regulatory capital requirements. By law, we may not redeem any stock if we become undercapitalized. |
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| ▪ | We may not redeem any capital stock without approval of the Finance Agency if either our Board of Directors or the Finance Agency determines that we have incurred or are likely to incur losses resulting or expected to result in a charge against capital. |
If our FHLBank iswe were to be liquidated, and after payment in full to our creditors, stockholders would be entitled to receive the par value of their capital stock.stock after payment in full to our creditors. In addition, each stockholder would be entitled to any retained earnings in an amount proportional to the stockholder's share of the total shares of capital stock. In the event of a merger or consolidation of the FHLBank,FHLB, the Board of Directors shallwould determine the rights and preferences of the FHLBank'sFHLB's stockholders, subject to any terms and conditions imposed by the Finance Agency.
Retained Earnings
Purposes and Amount of Retained Earnings
Retained earnings are important to protect members'Members' capital stock investment against the risk of impairment and to enhance our ability to pay stable and competitive dividends when earnings may be volatile in light of the risks we face.volatile. Impairment risk is the risk that membersMembers would have to write down the par value of their capital stock investment in our FHLBankFHLB as a result of their analysis of ultimate recoverability. An extreme situation of earnings instability, in which other-than-temporary losses exceeded the amount of our retained earningswere experienced and expected for a period of time, determined to be other-than-temporary, could result in a determination that the value of our capital stock was impaired.
We have a policy that sets forth a range for the amount of retained earnings we believe is needed to mitigate impairment risk and facilitate dividend stability in light of the risks we face. The currentAt December 31, 2017, the minimum retained earnings requirement is $450ranges from $225 million to $425 million, based on mitigating quantifiable risks under very stressed business and market scenarios to at least a 99 percent confidence level. Given the regulatory environment, we carry a greater amount of retained earnings than required by the Policy. At the end of 2014,2017, our retained earnings totaled $689$940 million. We believe the current amount of retained earnings is fully sufficient to protect our capital stock against impairment risk and to provide for dividend stability if needed.stability.
Joint Capital Agreement to Augment Retained Earnings
The FHLBanks entered into a Joint Capital Enhancement Agreement (the “Capital Agreement”) in February 2011. The Capital Agreement provides that each FHLBank will allocate quarterly at least 20 percent of its net income to a restricted retained earnings account (the “Account”). The 20 percent reserve allocation to the Account is similar to what had been required under the FHLBanks' REFCORP obligation, which was satisfied in 2011. The Account is not available to be distributed as dividends except under certain limited circumstances. The Capital Agreement does not limit our ability to use retained earnings held outside of the Account to pay dividends.
Although we have always maintained compliance with our capital requirements, we believe the Capital Agreement enhances risk mitigation by building a larger capital buffer over time to absorb unexpected losses, if any, that we may experience. Therefore, the Capital Agreement provides additional protection against impairment risk to stockholders' capital investment.
USE OF DERIVATIVES
Finance Agency regulations and our policies establish guidelines for the execution and use of derivative transactions. We are prohibited from trading in, or the speculative use of, derivatives and have limits on the amount of credit risk to which we may be exposed. Most of our derivatives activity involves interest rate swaps, some of which may include options. We account for all derivatives at their fair values.value.
Similar to our participation in debt issuances, use of derivatives help us hedgeis integral to hedging market risk created by offering Advances and mortgage assets, including commitments. Derivatives related to Advances most commonly hedge either:
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| ▪ | below-market rates and/or the market risk exposure on Putable Advances, and certain other Advances, for which membersMembers have sold us options embedded within the Advances; or |
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| ▪ | Regular Fixed-Rate Advances when it may not be as advantageous to issue Obligations or when it may improve our market risk management. |
We also useThe derivatives we transact related to mortgage assets primarily hedge the marketinterest rate risk created by commitment periodsand prepayment risk. Such derivatives include options on interest rates swaps (swaptions) and sales of Mandatory Delivery Contracts in the MPP.to-be-announced mortgage-backed securities for forward settlement.
Other derivativesDerivatives transactions related to Bonds help us intermediate between the preference of capital market investors for intermediate- and long-term fixed-rate debt securities and the preference of our membersMembers for shorter-term or adjustable-rate Advances. We can satisfy the preferences of both groups by issuing long-term fixed-rate Bonds and entering into an interest rate swap that synthetically converts the Bonds to an adjustable-rate LIBOR funding basis that matches up with the short-term and adjustable-rate Advances, thereby preserving a favorable interest rate spread.
Use of derivatives can result in a substantial amount of volatility of accounting and economic earnings. Because we haveWe strive to maintain a cooperative business model, our Boardlow amount of Directors has emphasizedearnings volatility from realized gains and losses on derivatives. We accept a moderate amount of earnings volatility from unrealized gains and losses on recording derivatives at fair values, to the importance of controlling earnings volatility. Accordingly, our strategy is to execute derivatives that we expect to be effective hedges of market risk exposure relative to their impacts on profitability. As a result, the volatility in the market value of equity and earnings fromextent our use of derivatives has historically tended to be moderate.effectively hedge market risk exposure.
COMPETITION
Numerous economic and financial factors influence members'Members' use of Mission Asset Activity. One of the most important factors that affect Advance demand is the amount of memberMember deposits, which for most membersMembers are their primary source of funds. In addition, both small and, in particular, large membersMembers typically have access to wholesale funds besides FHLBankFHLB Advances. Another important source of competition for Advances is the ongoing fiscal and monetary stimuli initiated by the federal government to combat the continued difficulties in the housing market and broader economy. This is discussed in Item 1A's “Risk Factors” and in Item 7's “Executive Overview" and "Conditions in the Economy and Financial Markets.Overview."
The holding companies of some of our large asset membersMembers have membership(s) in other FHLBanks through their affiliates. Others could initiate memberships in other Districts. The competition among FHLBanks for the business of multiple-membership institutions is similar to the FHLBanks' competition with other wholesale lenders and mortgage investors. We compete with other FHLBanks on the offerings and pricing of Mission Asset Activity, earnings and dividend performance, collateral policies, capital plans, and members'Members' perceptions of our relative safety and soundness. Some membersMembers may also evaluate benefits of diversifying business relationships among FHLBank memberships. We regularly monitor these competitive forces among the FHLBanks.
The primary competitors for mortgage loans we purchase in the MPP are Fannie Mae and Freddie Mac, government agencies such as the Government National Mortgage Association (Ginnie Mae), and private issuers. Fannie Mae and Freddie Mac, in particular, have long-established and efficient programs and are the dominant purchasers of fixed-rate conventional mortgages. In addition, a number of private financial institutions have well-established securitization programs, although they may not currently be as active as they were historically. The MPP also competes with the Federal Reserve to the extent it purchases mortgage-backed securities and affects market prices and the availability of supply.
For debt issuance, the FHLBank System competes with issuers in the national and global debt markets, including most importantly the U.S. government and other GSEs.
Item 1A. Risk Factors.
The following are the most important risks we currently face. The realization of one or more of the risks could negatively affect our results of operations, financial condition, safety and soundness, and, at the extreme, the viability of our business franchise. The effects could include reductions in Mission Asset Activity, lower earnings and dividends, and, at the extreme, impairment of our capital or an inability to participate in issuances of Consolidated Obligations. The risks identified below are not the only risks we face. Other risks not presently known or which we deem to be currently immaterial may also impact our business. Additionally, the risks identified may adversely affect our business in ways we do not expect or anticipate.
Economy. An economic downturn could lower Mission Asset Activity and profitability.
Member demand for Mission Asset Activity depends in large part on the general health of the economy and overall business conditions. Numerous external factors can affect our Mission Asset Activity and earnings including:
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| ▪ | the general state and trends of the economy and financial institutions, especially in ourthe Fifth District; |
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| ▪ | conditions in the financial, credit, mortgage, and housing markets; |
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| ▪ | competitive alternatives to our products, such as retail deposits and other sources of wholesale funding; |
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| ▪ | actions of the Federal Reserve to affect liquidity reserves of financial institutions and the money supply; and |
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| ▪ | the willingness and ability of financial institutions to expand lending; and |
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▪ | regulatory initiatives.lending. |
Because our business tends to be cyclical, a
A recessionary economy or an economy characterized by stagflation, normally lowers the amount ofdemand for Mission Asset Activity, can decrease profitability, and can cause stockholders to request redemption of a portion of their capital or request withdrawal from membership (both referred to herein this document as “request withdrawal of capital”). These unfavorable effects are more likely to occur and be more severe if a weak economy is accompanied by significant changes in interest rates, stresses in the housing market, elevated competitive forces, or actual or potential changes in the legislative and regulatory environment.
In the last five years theThe economy has grown at a measured pace contributing toin recent years, a major reason for tempered memberoverall demand for Mission Asset Activity. In addition, overall Advance demand has been and continues to be unfavorably affected by the substantial amount of deposit baseddeposit-based liquidity provided to financial institutions through the monetary actions of the Federal Reserve, and a more onerous regulatory environmentReserve. See the "Competition" risk factor for our members. Acceleration of these conditions or another recession could decrease Mission Asset Activity and increase MPP credit losses, both of which could reduce profitability.further discussion.
Competition. The competitive environment for our products could adversely affect business activities, including decreasing the level and utilization rates of Mission Asset Activity, earnings, and capitalization.
We operate in a highly competitive environment for Mission Asset Activity.environment. Increased competition could decrease the amount of Mission Asset Activity and narrow profitability on that activity, both of which could cause stockholders to request withdrawals of capital. Historically, our primary competition has been from other wholesale lenders and debt issuers, including other GSEs. A substantial source of competition in the last seven yearsdecade has come from the federal government's actions to stimulate the economy, especially the actions of the Federal Reserve System through its policies of quantitative easing and maintaining extremelyvery low interest rates. Among other effects, these actions have significantly expanded liquidity and excess reserves available to many members. WeMembers. If all other factors remain constant, we expect overall, broad-based growth in Advance demand will remain modesttempered until the government reduces these initiatives by tightening monetary policy and winding down its holdings of U.S. Treasury and mortgage-backed securities. Even if these events take place, we cannot provide assurance regarding the pace or strength of the renewedany acceleration in Advance demand that we would anticipate.demand.
In addition, the FHLBank System competes for funds through issuance of debt with the U.S. Treasury, Fannie Mae, Freddie Mac, other GSEs, and corporate, state, and sovereign entities, among others. Increases in the supply and types of competing debt products or other regulatory factors could adversely affect the System's ability to access funding or increase the cost of our debt issuance. Either of these effects could in turn adversely affect our financial conditions and results of operations and the value of FHLBankFHLB membership.
GSE Reform. Potential GSE reform could unfavorably affect our business model, financial condition, and results of operations.
The FHLBank System's regulator,Due to our GSE status, the Finance Agency, also regulatesultimate resolution to the conservatorship of Fannie Mae and Freddie Mac.Mac could affect the FHLBanks. While there appears to be consensus that a permanent financial and political solution for Fannie Mae and Freddie Macto the current conservatorship status should be implemented, which could include maintaining the current structure, no consensus has evolved to date around any of the various legislative proposals. However, someSome policy proposals directed towards Fannie Mae and Freddie Mac have included provisions applicable to the FHLBank System, such as limitations on Advances and portfolio investments, and development of a covered bond market, and restrictions onmarket. Other proposals have included broader changes in GSE mortgage finance, thatsuch as the FHLBank System being a greater participant in the secondary mortgage market, which could threatenaffect the FHLBank System's long-standing business model.
Because all the GSEs share a common regulator and general housing mission, the ultimate resolution to the conservatorship of Fannie Mae and Freddie Mac could threaten the FHLBanks. There are significant differences between the FHLBank System and Fannie Mae and Freddie Mac, including the System's focus on lending as opposed to guaranteeing mortgages and ourits distinctive cooperative business model. LegislationGSE legislation could inadequately account for these differences, whichdifferences. This could substantially change or imperil the ability of the FHLBank System to continue operating effectively within its current business model, or could changeincluding by adversely changing the System's business model.
At this time, it is unknownperceptions of the capital markets about the risk associated with the debt of housing GSEs. We cannot predict the effects on the System if and when GSE reform willwere to be enacted and, if it is, what the effects would be on the FHLBank System's business model or our financial condition and results of operations, including whether the effects would be positive or negative.enacted.
FHLBankFHLB Regulatory Environment. We face a heightenedChanges in the regulatory and legislative environment which could unfavorably affect our business model, financial condition, and results of operations.
In addition to potential GSE reform, the legislative and regulatory environment in which the FHLBank System operates continues to undergo rapid change driven principally by reforms emanating from the Housing and Economic Reform Act of 2008 (HERA) and the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). There have been numerous new regulations promulgated in the last several years and more are in the process of being promulgated for the FHLBank System, many of which are pursuant to HERA or the Dodd-Frank Act. CurrentRecently-promulgated and future legislative and regulatory actions, including possible changes in the Dodd-Frank Act, could significantly affect us.our business model, financial condition, or results of operations.
Furthermore, the overall increase in demand for short-term funding due to the effects of reform in the money markets combined with our growing role as a market liquidity provider for large financial institutions have resulted in heightened regulatory scrutiny.
We believe that, thetaken as a whole, legislative and regulatory actions have raised our operating costs and imparted added uncertainty regarding the business model and membership base under which the FHLBanks may operate in the future. We are unable at this time to predict whatthe ultimate effects the heightened regulatory environment willcould have on the FHLBank System's business model or on our financial condition and results of operations.
There is one proposed regulation regarding membership requirements about which we are particularly concerned. This is discussed in the "Executive Overview."
Liquidity and Market Access. Impaired access to the capital markets for debt issuance could increase liquidity risk, decrease the amount of Mission Asset Activity, lower earnings by raising debt costs and, at the extreme, result in realization of liquidity risk preventingprevent the System from meeting its financial obligations.
Our principal long-term source of funding, liquidity, and market risk management is through access on favorable terms to the capital markets for participation in the issuances of debt securities and execution of derivative transactions at prices and yields that are adequate to support our business model. AccessOur ability to obtain funds through the sale of Consolidated Obligations depends in part on prevailing conditions in the capital markets, particularly the short-term capital markets, because we and the System normally have a large reliance on favorable terms is the fundamental source of the FHLBank System's business franchise.short-term funding. The System's strong debt ratings, the implicit U.S. government backing of our debt, strong investor demand for FHLBank System debt, and effective funding management are instrumental in ensuring satisfactory access to the capital markets.
AlthoughWe are exposed to liquidity risk if significant disruptions in the last several years were characterized bycapital markets occur. Although ongoing issues with the federal government's fiscal condition we haveand changes in the regulatory environment that affected the functioning of capital markets existed during 2017, the System has been able to maintain access to the capital markets for debt issuances on acceptable terms (including when the FHLBank System's debt was downgraded by Standard & Poor's).terms. However, there is no assurance this will continue to be the case. Future ability to effectively access the capital markets could be adversely affected by external events (such as general economic and financial instabilities, political instability, wars, and natural disasters), deterioration in the perception of financial market participants about the financial strength of Consolidated Obligations, or downgrades to the System's credit ratings. The System could also be affected by the continued changes in the capital markets in response to financial regulations and by the System's joint and several liability for Consolidated Obligations, which exposes usthe System as a whole to events at otherindividual FHLBanks. If access to capital markets were to be impaired for anyan extended period, the effect on our financial condition and results of operations could be material. At the extreme, the System's ability to achieve its mission and satisfy its financial obligations could be threatened.
Credit and Counterparty Risk. We are exposed to credit risk that, if realized, could materially affect our ability to pay membersMembers a competitive dividend.
We believe we have a smallde minimis overall amount of residual credit risk exposure related to Credit Services, purchases of investments, and transactions in derivatives, and a moderateminimal amount of credit risk exposure related to the MPP. However, we can make no assurances that credit losses willcould not materially affect our financial condition or results of operations.operations in all scenarios. An extremely severe and prolonged economic downturn, especially if combined with continued significant disruptions in housing or mortgage markets, could result in credit losses on assets that could impair our financial condition or results of operations.
The FHLBankFHLB is an asset-based lender for Advances and Letters of Credit. Advances and Letters of Credit are over-collateralized and we have a perfected first lien position on such collateral. Under a "Blanket" lien collateral status, which we assign to 85 percent of members amounting to approximately two-thirds of pledged collateral,However, we do not have full information on the structure and risk characteristics of the loannor do we estimate current market values on a large portion of collateral. This results in a degree of uncertainty as to the ultimate value we might obtain if we were forced to liquidate the loan collateral pledged to us under a Blanket lien.precise amount of over-collateralization.
Although credit losses in the MPP have historically been minor to date,small, they could increase under adverse economic scenarios involving significant and sustained reductions in home prices and sustained elevated levels of unemployment and other factors that influence delinquencies and defaults.
Some of our liquidity investments are unsecured, as are uncollateralized portions of interest rate swaps.swaps and swaptions. We make unsecured liquidity investments in and transact derivatives with highly rated, investment-grade institutions, have conservative limits on dollar and maturity exposure to each institution, and have strong credit underwriting practices. Failure of an investment or derivative counterparty with which we have a large unsecured position could have a material
adverse effect on our financial conditions and results of operations. To the extent we engage in derivative transactions required to be cleared under provisions of the Dodd-Frank Act, we may be exposed to nonperformance from central clearinghouses and Futures Commission Merchants.
Financial institutions are increasingly inter-related as a result of trading, clearing, counterparty, and other relationships. As a result, actual or potential defaults of one or more financial institutions could lead to market-wide disruptions making it difficult for us to find qualified counterparties for transactions.
Market Risk. Changes in interest rates and mortgage prepayment speeds (together referred to as market risk exposure or interest rate risk exposure) could significantly reduce our ability to pay membersMembers a competitive dividend from current earnings.
Exposure of earnings to unhedged changes in interest rates and mortgage prepayment speeds is one of our largest ongoing residual risks. We derive most of our income from the interest earned on assets less the interest paid on Consolidated Obligations and deposits used to fund the assets. We fundhedge mortgage assets and hedge them with a combination of Consolidated Obligations and capital.derivatives transactions. Interest rate movements can lower profitability in two ways: 1) directly due to their impact on earnings from cash flow mismatches between assets and liabilities; and 2) indirectly via their impact on prepayment speeds, which can unfavorably affect the cash flow mismatches. The effects on income can also include changesacceleration in the amortization of purchasepurchased premiums on mortgage assets.
Because it is normally cost-prohibitive to completely mitigate market risk exposure, a residual amount of market risk normally remains after incorporating risk management activities. Sharp increases in interest rates, especially short-term rates, or sharp decreases in long-term interest rates could adversely affect us and our stockholders by making dividend rates less competitive relative to the returns available to membersMembers on alternative investments.
In some extremely stressful scenarios, changes in interest rates and prepayment speeds could result in dividends being below stockholders' expectations for an extended period of time.time and/or market capitalization ratios falling below par which could indicate potential impairment of Member stock. In such a situation, membersMembers could engage in less Mission Asset Activity and could request a withdrawal of capital. See Item 7's "Quantitative and Qualitative Disclosures About Risk Management" for additional information about market risk exposure.
Asset Profitability. Spreads on assets to funding costs may narrow because of changes in market conditionsother risk factors such as the economy, interest rates, and competitive factors,competition, resulting in lower profitability.
Spreads on our assets tend to be narrow compared to those of many other financial institutions due to our cooperative business model, resulting in relatively lower profitability.model. Market conditions, competitive forces, and, as discussed above, market risk exposure could cause these already narrow asset spreads to decline, which could substantially reduce our profitability. A key spread relationship is that we tend to utilize Consolidated Discount Notes to fund a significant amount of assets that have adjustable-rates tied to LIBOR. Because rates on Discount Notes do not perfectly correlate with LIBOR, a narrowing of this spread, for example from investors changing perceptions about the quality of our debt, is a key risk for us. Realizationcould lower income and reduce balances of narrower spreads could result in lower dividends and a reduction in Mission Asset Activity.
Capital Adequacy. Failure to meet capital adequacy requirements mandated by Finance Agency regulations and by our internal policies, or not being able to pay dividends or repurchase or redeem capital stock, may lower demand for Mission Asset Activity, affectharm results of operations, and lower membership value.
To ensure safe and sound operations, we must hold a minimum amount of capital relative to our asset levels. We must also hold a minimumsufficient amount of retained earnings to among other things, help protect members'Members' capital stock investment against impairment risk. If we were to violate anyour capital requirement,levels fall significantly, we may be unable to pay dividends or redeem and repurchase capital stock. Thisstock in a timely manner (or at all). Such events could adversely affect the value of membership including members'causing impairment in the value of Members' capital investment.investment in our company. Outcomes could be reduced demand for Mission Asset Activity, decreased profitability, requests from membersMembers to redeem a portion of their capital or to withdraw from membership, or increased investors' perception of the riskiness of our FHLBank.FHLB.
Business Concentration and Industry Consolidation.Consolidation and Composition of the Financial Industry. Sharp reductions in Mission Asset Activity resulting from lower usage by large members orMembers, consolidation of large membersMembers, or continued shift in mortgage lending activities towards entities not eligible for FHLB membership could adversely impact our net income and dividends.
The amount of Mission Asset Activity and capital is concentrated among a handfulsmall number of large members.Members. The financial industry continues to consolidate amongand the market share of mortgage financing has shown a smaller number ofsystemic trend towards financial institutions that are currently ineligible for FHLB membership. However, the legislative and regulatory environment faced by the FHLBanks has not kept pace in recent years with adapting to become more concentrated.this trend. Our large membersMembers could decrease their Mission Asset Activity and the amount of their capital stock as a result of merger and acquisition activity or their reduced demand for Mission Assets.continued loss of market share to ineligible Members. At December 31, 2014,2017, one member,Member, JPMorgan Chase Bank, N.A., held over half30 percent of our Advances and one memberMember PFI, Union Savings Bank, accounted for nearly 25over 30 percent of the outstanding MPP principal balance. Our business model is structured to be able to absorb sharp changes in Mission Asset Activity because we can undertake commensurate reductions in liability balances and capital and because of our relatively lowmodest operating expenses. However, an extremely large and sustained reduction in Mission Asset Activity could affect our profitability and possibly our ability to pay competitive dividends.dividends, as well as, at the FHLBank System level, raise policy questions about the relevance of the FHLBank System in its traditional mission of supporting housing finance.
LIBOR Replacement. Replacement of the LIBOR benchmark interest rate could adversely affect our business, financial condition, and results of operations.
The United Kingdom's Financial Conduct Authority (FCA), which has regulated LIBOR since April 2013, has made significant improvements to the index since LIBOR began to face scrutiny in 2009. However, the LIBOR index is now expected to be phased out after 2021. The Federal Reserve Bank of New York convened the Alternative Reference Rates Committee (ARRC) to 1) develop a robust alternative to U.S. dollar LIBOR and 2) develop a plan to encourage its use in derivatives and other transactions as appropriate. The ARRC settled on the establishment of the Secured Overnight Financing Rate (SOFR), which is based on a broad segment of the overnight Treasuries repurchase market. We are in the central stages of developing plans to transition away from the LIBOR index. Many of our assets and liabilities are indexed to LIBOR. We are not able to predict whether LIBOR will cease to be available after 2021, whether an alternative rate will become a market benchmark rate in place of LIBOR, or what the impact of such a transition may be on our business, financial condition, and results of operations.
Exposure to FHLBank System.Other FHLBanks. Financial difficulties at other FHLBanks could require us to provide financial assistance to another FHLBank, which could adversely affect our results of operations or our financial condition.
Each FHLBank has a joint and several liability for principal and interest payments on Consolidated Obligations, which are backed only by the financial resources of the FHLBanks. Although no FHLBank has ever defaulted on its principal or interest share of an Obligation, there can be no assurance that this will continue to be the case. Financial performance issues could require our FHLBankFHLB to provide financial assistance to one or more other FHLBanks, for example, by making a payment on an Obligation on behalf of another FHLBank. Such assistance could adversely affect our financial condition, earnings, ability to pay dividends, or ability to redeem or repurchase capital stock.
Member Regulatory Environment.Exposure to the Office of Finance. Members face increased regulatory scrutiny, which could further decrease Mission Asset Activity and lower profitability.
In the last number of years, regulation and scrutinyFailures of the financial industry has increased significantly. We believe these activities have decreased members' overall usageOffice of Advances.
The Basel Committee on Banking Supervision (the Basel Committee) has developed a proposed new capital regime for internationally active banks. Banks subject to the new regime are required, among other things, to have higher capital ratios. While it is uncertain how the new capital regime and other standards, such as those related to liquidity, developed by
the Basel Committee will ultimately be implemented by U.S. regulatory authorities, the new regimeFinance could require some of our members to divest assets in order to comply with the regime's more stringent capital and liquidity requirements, thereby possibly lowering Advance demand. The proposed liquidity requirements may adversely impact Advance demand and investor demand for Consolidated Obligations because they would limit the ability of members to fully include Advances and Consolidated Obligations in required liquidity calculations. This could raise our debt costs and, in turn, raise the Advance rates we are able to offer members, thereby harmingdisrupt the ability to fulfillconduct and manage our business model.
Personnel Risk. Our financial condition and results of operations could suffer if we are unable to hire and retain skilled key personnel.business.
The successOffice of Finance is a joint office of the FHLBanks established to facilitate the issuance and servicing of Consolidated Obligations, among other things. Pursuant to Finance Agency regulations, the Office of Finance, often in conjunction with the FHLBanks, has adopted policies and procedures for the purposes of facilitating and approving the issuance of Consolidation Obligations. A failure or interruption of the Office of Finance's services as a result of breaches, cyberattacks, or technological risks could disrupt each FHLBank's access to these funds, which could also harm the System's debt franchise. Although the Office of Finance has a business continuity plan in place, our business mission depends, in large part, onoperations could be constrained, disrupted or otherwise negatively affected if the abilityOffice of Finance was not able to attract and retain key personnel. Competitionperform its functions for qualified people or ineffective succession planning could affect the ability to hire or retain effective key personnel, thereby harming our financial condition and resultsa period of operations.time.
Operational and Compliance Risks. Failures or interruptions in our internal controls, compliance activities, information systems and other operating technologies, models, and third-party vendors could harm our financial condition, results of operations, reputation, and relations with members.Members.
Control failures, including failures in our controls over financial reporting oras well as business interruptions with membersMembers and counterparties, could occur from human error, fraud, breakdowns in information and computer systems, anderrors or misuse of financial and business models and services we use,employ (including third-party vendor services), lapses in operating processes, or natural or man-made disasters. If a significant control failure or business interruption were to occur, it could materially damage our financial condition and results of operations. We may not be able to foresee, prevent, mitigate, reverse or repair the negative effects of such failures or interruptions.
We rely heavily on internal and third-party information systems and other technology to conduct and manage our business. Our operations rely on the secure processing, storage and transmission of confidential and other information in computer systems and networks. Computer systems, software and networks can be vulnerable to failures and interruptions including “cyberattacks” (e.g.,cyberattacks, which may include breaches, unauthorized access, misuse, computer viruses or other malicious code and other events) thatevents against information owned by our company and customers. These failures and interruptions could jeopardize the confidentiality or integrity of information, or otherwise cause interruptions or malfunctions in operations.
We can make no assurance that we will be able to prevent, timely and adequately address, or mitigate the negative effects of failures, interruptions, or "cyberattacks"cyberattacks in information systems and other technology. If we experience a failure, interruption, or "cyberattack"cyberattack in any of these systems, we may be unable to effectively conduct or manage our business activities, operating processes, and risk management, which could significantly harm customer relations, our reputation, or profitability,and operating costs, potentially resulting in material adverse effects on our financial condition and results of operations.
Personnel Risk. Our financial condition and results of operations could suffer if we are unable to hire and retain skilled key personnel.
The success of our mission depends, in large part, on the ability to attract and retain key personnel. Competition for qualified people or ineffective succession planning could affect the ability to hire or retain effective key personnel, thereby harming our financial condition and results of operations.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our offices are located in approximately 79,000 square feet of leased space in downtown Cincinnati, Ohio. We also maintain a leased, fully functioning, back-up facility in suburban Cincinnati. Additionally, we lease a small office in Nashville, Tennessee for the area marketing representative. We believe that our facilities are in good condition, well maintained, and adequate for our current needs.
Item 3. Legal Proceedings.
From time to time, we are subject to various legal proceedings arising in the normal course of business. Management does not anticipate that the ultimate liability, if any, arising out of these matters will have a material adverse effect on our financial condition or results of operations.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
| |
| Item 5. | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
By law our stock is not publicly traded, and only our membersMembers (and former membersMembers with a withdrawal notice pending) may own our stock. The par value of our capital stock is $100 per share. As of December 31, 2014,2017, we had 705660 stockholders and 43approximately 42 million shares of capital stock outstanding, all of which were Class B Stock.
We paid quarterly dividends in 20142017 and 20132016 as outlined in the table below.
| | | (Dollars in millions) | (Dollars in millions) | | | | | | | | (Dollars in millions) | | | | | | | |
| | | 2014 | | 2013 | | 2017 | | 2016 |
| | | | | Annualized | | | | Annualized | | | | | Annualized | | | | Annualized | |
| Quarter | | Amount | | Rate | | Form | | Quarter | | Amount | | Rate | | Form | | Amount | | Rate | | Form | | Quarter | | Amount | | Rate | | Form |
| First | | $ | 47 |
| | 4.00 | % | | Cash | | First | | $ | 39 |
| | 4.25 | % | | Cash | | $ | 47 |
| | 4.50 | % | | Cash | | First | | $ | 44 |
| | 4.00 | % | | Cash |
| Second | | 44 |
| | 4.00 |
| | Cash | | Second | | 43 |
| | 4.25 |
| | Cash | | 49 |
| | 4.75 |
| | Cash | | Second | | 43 |
| | 4.00 |
| | Cash |
| Third | | 42 |
| | 4.00 |
| | Cash | | Third | | 49 |
| | 4.25 |
| | Cash | | 54 |
| | 5.25 |
| | Cash | | Third | | 42 |
| | 4.00 |
| | Cash |
| Fourth | | 43 |
| | 4.00 |
| | Cash | | Fourth | | 47 |
| | 4.00 |
| | Cash | | 58 |
| | 5.50 |
| | Cash | | Fourth | | 42 |
| | 4.00 |
| | Cash |
| Total | | $ | 176 |
| | 4.00 |
| | Total | | $ | 178 |
| | 4.18 |
| | | $ | 208 |
| | 5.00 |
| | Total | | $ | 171 |
| | 4.00 |
| |
Generally, ourthe Board of Directors has discretion to declare or not declare dividends and to determine the rate of any dividend declared. Our Retained Earnings and Dividend Policypolicy states that dividends for a quarter are declared and paid from retained earnings after the close of a calendar quarter and are based on average stock balances for the then closed quarter. OurThe Board of Directors' decision to declare dividends is influenced by the financial condition, overall financial performance and retained earnings of the FHLBank,FHLB, and actual and anticipated developments in the overall economic and financial environment including most importantly, interest rates and the mortgage and credit markets. The dividend rate is generally referenced as a spread to average short-term interest rates experienced during the quarter to help assess a competitive level for our stockholders.
A Finance Agency Capital Rulerule prohibits an FHLBankus from issuing new excess capital stock to members,Members, either by paying stock dividends or otherwise, if before or after the issuance the amount of memberMember excess capital stock exceeds or would exceed one percent of the FHLBank'sFHLB's assets. Excess capital stock for this regulatory purpose is calculated as the aggregate of capital stock owned that is in excess of all membership and Mission Asset Activity requirements (as defined in our Capital Plan). At December 31, 2017, we had excess capital stock outstanding totaling less than one percent of total assets.
We may not declare a dividend if, at the time, we are not in compliance with all of our capital requirements. We also may not declare or pay a dividend if, after distributing the dividend, we would fail to meet any of our capital requirements or if we determine that the dividend would create a safety and soundness issue for the FHLBank.FHLB. See Note 15 of the Notes to the Financial Statements for additional information regarding our capital stock.
RECENT SALES OF UNREGISTERED SECURITIES
From time to time, we provide Letters of Credit in the ordinary course of business to support members'Members' obligations issued in support of unaffiliated, third-party offerings of notes, bonds or other securities. We did not provide such credit support during 2014provided $12 million, $60 million, and 2013. We provided $8$17 million of such credit support during 2012.2017, 2016, and 2015. To the extent that these Letters of Credit are securities for purposes of the Securities Act of 1933, their issuance is exempt from registration pursuant to section 3(a)(2) thereof.
| |
| Item 6. | Selected Financial Data. |
The following table presents selected Statement of Condition data, Statement of Income data and financial ratios for the five years ended December 31, 2014.2017.
| | | | Year Ended December 31, | Year Ended December 31, |
| (Dollars in millions) | 2014 | | 2013 | | 2012 | | 2011 | | 2010 | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| STATEMENT OF CONDITION DATA AT PERIOD END: | | | | | | | | | | | | | | | | | | |
| Total assets | $ | 106,640 |
| | $ | 103,181 |
| | $ | 81,562 |
| | $ | 60,397 |
| | $ | 71,631 |
| $ | 106,895 |
| | $ | 104,635 |
| | $ | 118,756 |
| | $ | 106,607 |
| | $ | 103,137 |
|
| Advances | 70,406 |
| | 65,270 |
| | 53,944 |
| | 28,424 |
| | 30,181 |
| 69,918 |
| | 69,882 |
| | 73,292 |
| | 70,406 |
| | 65,270 |
|
| Mortgage loans held for portfolio | 6,989 |
| | 6,826 |
| | 7,548 |
| | 7,871 |
| | 7,782 |
| 9,682 |
| | 9,150 |
| | 7,954 |
| | 6,956 |
| | 6,782 |
|
| Allowance for credit losses on mortgage loans | 5 |
| | 7 |
| | 18 |
| | 21 |
| | 12 |
| 1 |
| | 1 |
| | 2 |
| | 5 |
| | 7 |
|
Investments (1) | 26,007 |
| | 22,364 |
| | 19,950 |
| | 21,941 |
| | 33,314 |
| 27,058 |
| | 25,334 |
| | 37,356 |
| | 26,007 |
| | 22,364 |
|
| Consolidated Obligations, net: | | | | | | | | | | | | | | | | | | |
| Discount Notes | 41,232 |
| | 38,210 |
| | 30,840 |
| | 26,136 |
| | 35,003 |
| 46,211 |
| | 44,690 |
| | 77,199 |
| | 41,232 |
| | 38,210 |
|
| Bonds | 59,217 |
| | 58,163 |
| | 44,346 |
| | 28,855 |
| | 30,697 |
| 54,163 |
| | 53,191 |
| | 35,092 |
| | 59,217 |
| | 58,163 |
|
| Total Consolidated Obligations, net | 100,449 |
| | 96,373 |
| | 75,186 |
| | 54,991 |
| | 65,700 |
| 100,374 |
| | 97,881 |
| | 112,291 |
| | 100,449 |
| | 96,373 |
|
| Mandatorily redeemable capital stock | 63 |
| | 116 |
| | 211 |
| | 275 |
| | 357 |
| 30 |
| | 35 |
| | 38 |
| | 63 |
| | 116 |
|
| Capital: | | | | | | | | | | | | | | | | | | |
| Capital stock - putable | 4,267 |
| | 4,698 |
| | 4,010 |
| | 3,126 |
| | 3,092 |
| 4,241 |
| | 4,157 |
| | 4,429 |
| | 4,267 |
| | 4,698 |
|
| Retained earnings | 689 |
| | 621 |
| | 538 |
| | 444 |
| | 438 |
| 940 |
| | 834 |
| | 737 |
| | 656 |
| | 578 |
|
| Accumulated other comprehensive loss | (17 | ) | | (9 | ) | | (11 | ) | | (11 | ) | | (7 | ) | (16 | ) | | (13 | ) | | (13 | ) | | (17 | ) | | (9 | ) |
| Total capital | 4,939 |
| | 5,310 |
| | 4,537 |
| | 3,559 |
| | 3,523 |
| 5,165 |
| | 4,978 |
| | 5,153 |
| | 4,906 |
| | 5,267 |
|
| STATEMENT OF INCOME DATA: | | | | | | | | | | | | | | | | | | |
| Net interest income | $ | 317 |
| | $ | 328 |
| | $ | 308 |
| | $ | 249 |
| | $ | 275 |
| $ | 429 |
| | $ | 363 |
| | $ | 327 |
| | $ | 327 |
| | $ | 307 |
|
| (Reversal) provision for credit losses | — |
| | (7 | ) | | 1 |
| | 12 |
| | 13 |
| |
| Non-interest income (loss) | 23 |
| | 20 |
| | 13 |
| | (5 | ) | | 20 |
| |
| Non-interest expenses | 68 |
| | 64 |
| | 58 |
| | 57 |
| | 56 |
| |
| Assessments | 28 |
| | 30 |
| | 27 |
| | 37 |
| | 62 |
| |
| Provision (reversal) for credit losses | | — |
| | — |
| | — |
| | — |
| | (7 | ) |
| Non-interest (loss) income | | (1 | ) | | 46 |
| | 30 |
| | 23 |
| | 20 |
|
| Non-interest expense | | 79 |
| | 111 |
| | 75 |
| | 68 |
| | 64 |
|
| Affordable Housing Program assessments | | 35 |
| | 30 |
| | 28 |
| | 28 |
| | 30 |
|
| Net income | $ | 244 |
| | $ | 261 |
| | $ | 235 |
| | $ | 138 |
| | $ | 164 |
| $ | 314 |
| | $ | 268 |
| | $ | 254 |
| | $ | 254 |
| | $ | 240 |
|
| FINANCIAL RATIOS: | | | | | | | | | | | | | | | | | | |
Dividend payout ratio (2) | 72.2 | % | | 68.1 | % | | 60.1 | % | | 95.4 | % | | 84.1 | % | 66.3 | % | | 63.9 | % | | 67.7 | % | | 69.5 | % | | 74.2 | % |
Weighted average dividend rate (3) | 4.00 |
| | 4.18 |
| | 4.44 |
| | 4.25 |
| | 4.38 |
| 5.00 |
| | 4.00 |
| | 4.00 |
| | 4.00 |
| | 4.18 |
|
| Return on average equity | 4.93 |
| | 5.10 |
| | 6.20 |
| | 3.89 |
| | 4.67 |
| 6.15 |
| | 5.35 |
| | 5.04 |
| | 5.16 |
| | 4.72 |
|
| Return on average assets | 0.24 |
| | 0.28 |
| | 0.35 |
| | 0.21 |
| | 0.24 |
| 0.31 |
| | 0.25 |
| | 0.24 |
| | 0.25 |
| | 0.26 |
|
Net interest margin (4) | 0.31 |
| | 0.35 |
| | 0.46 |
| | 0.37 |
| | 0.40 |
| 0.42 |
| | 0.35 |
| | 0.31 |
| | 0.32 |
| | 0.33 |
|
| Average equity to average assets | 4.90 |
| | 5.47 |
| | 5.68 |
| | 5.29 |
| | 5.08 |
| 5.00 |
| | 4.76 |
| | 4.78 |
| | 4.86 |
| | 5.43 |
|
Regulatory capital ratio (5) | 4.71 |
| | 5.27 |
| | 5.84 |
| | 6.37 |
| | 5.43 |
| 4.88 |
| | 4.80 |
| | 4.38 |
| | 4.68 |
| | 5.23 |
|
| Operating expense to average assets | 0.054 |
| | 0.055 |
| | 0.067 |
| | 0.068 |
| | 0.070 |
| |
Operating expenses to average assets (6) | | 0.063 |
| | 0.064 |
| | 0.058 |
| | 0.054 |
| | 0.055 |
|
| |
| (1) | Investments include interest bearing deposits in banks, securities purchased under agreements to resell, Federal funds sold, trading securities, available-for-sale securities, and held-to-maturity securities. |
| |
| (2) | Dividend payout ratio is dividends declared in the period as a percentage of net income. |
| |
| (3) | Weighted average dividend rates are dividends paid divided by the average number of shares of capital stock eligible for dividends. |
| |
| (4) | Net interest margin is net interest income before provision/(reversal)/provision for credit losses as a percentage of average earning assets. |
| |
| (5) | Regulatory capital ratio is period-end regulatory capital (capital stock, mandatorily redeemable capital stock and retained earnings) as a percentage of period-end total assets. |
| |
| (6) | Operating expenses comprise compensation and benefits and other operating expenses, which are included in non-interest expense. |
| |
| Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations. |
This discussion and analysis by management of the FHLB's financial condition and results of operations should be read in conjunction with the Financial Statements and related Notes to Financial Statements contained in this Form 10-K.
EXECUTIVE OVERVIEW
Financial Condition
Mission Asset Activity
The following table summarizes our financial condition.
| | | | Year Ended December 31, | Year Ended December 31, |
| | Ending Balances | | Average Balances | Ending Balances | | Average Balances |
| (In millions) | 2014 | | 2013 | | 2014 | | 2013 | 2017 | | 2016 | | 2017 | | 2016 |
| Total Assets | $ | 106,640 |
| | $ | 103,181 |
| | $ | 101,157 |
| | $ | 93,691 |
| $ | 106,895 |
| | $ | 104,635 |
| | $ | 101,917 |
| | $ | 105,425 |
|
| Mission Asset Activity: | | | | | | | | | | | | | | |
| Advances (principal) | 70,299 |
| | 65,093 |
| | 66,492 |
| | 61,327 |
| 69,978 |
| | 69,907 |
| | 67,683 |
| | 69,214 |
|
| Mortgage Purchase Program (MPP): | | | | | | | | | | | | | | |
| Mortgage loans held for portfolio (principal) | 6,796 |
| | 6,643 |
| | 6,620 |
| | 6,881 |
| 9,454 |
| | 8,926 |
| | 9,224 |
| | 8,323 |
|
| Mandatory Delivery Contracts (notional) | 451 |
| | 37 |
| | 273 |
| | 254 |
| 219 |
| | 441 |
| | 293 |
| | 555 |
|
| Total MPP | 7,247 |
| | 6,680 |
| | 6,893 |
| | 7,135 |
| 9,673 |
| | 9,367 |
| | 9,517 |
| | 8,878 |
|
| Letters of Credit (notional) | 17,780 |
| | 13,472 |
| | 15,154 |
| | 12,560 |
| 14,691 |
| | 17,508 |
| | 16,457 |
| | 17,035 |
|
| Total Mission Asset Activity | $ | 95,326 |
| | $ | 85,245 |
| | $ | 88,539 |
| | $ | 81,022 |
| $ | 94,342 |
| | $ | 96,782 |
| | $ | 93,657 |
| | $ | 95,127 |
|
In 20142017, the FHLBankFHLB fulfilled its mission by providing a key source of readily available and competitively priced wholesale funding to its memberMember financial institutions, supporting its commitment to affordable housing and community investment, and paying stockholders a competitive dividend return on their capital investment.
The majoritybalance of our membersMission Asset Activity – which we define as Advances, Letters of Credit, and total MPP (including purchase commitments) – was $94.3 billion at December 31, 2017, a decrease of $2.4 billion (three percent) from year-end 2016, primarily driven by lower Letters of Credit balances. At December 31, 2017, 72 percent of Members held Mission Asset Activity, which was relatively stable compared to prior years.
Based on the most-recently available figures, Members funded an average of 3.3 percent of their assets with Advances. As in recent years, most Members continued to have modest demand for new Advance borrowings due to measured economic growth and significant amounts of liquidity made available as a result of the actions of the Federal Reserve System.
Total assets at December 31, 2014increased$3.5 billion (three percent) from year-end 2013. Average asset balances were $7.5 billion (eight percent) higher in 2014 than 2013. The balance of Mission Asset Activity – comprising Advances, Letters of Credit, and total MPP – was $95.3 billion at December 31, 2014, an increase of $10.1 billion (12 percent) from year-end 2013. Mission Asset Activity on this date constituted 80 percent of adjusted Consolidated Obligations (which equal Obligations plus Letters of Credit and Mandatory Delivery Contracts), equal to our internal benchmark.borrowings.
The MPP principal balance rose $0.5 billion (six percent) from year-end 2016. The slower growth in ending and average balances of Mission Asset Activity in 2014 was ledthe MPP compared to 2016 reflected less refinancing activity by an increase in the principal balance of Advances, primarily from a few larger members. As of December 31, 2014, members funded on average 3.3 percent of their assets with Advances, and the penetration rate was relatively stable over the last year with 65-70 percent of members holding Mission Asset Activity.
The principal balance of mortgage loans held for portfolio at December 31, 2014rose$0.2 billion (two percent) from year-end 2013.homeowners. During 20142017, we purchased $1.2$1.7 billion of mortgage loans, while principal paydownsreductions totaled $1.0$1.2 billion. Residual credit risk exposure in the mortgage loan portfolio continued to be modest. The allowance for credit losses in the MPP decreased to $5 million at December 31, 2014.
Based on earnings in 20142017 earnings,, we contributed $28accrued $35 million tofor the Affordable Housing Program (AHP) pool of funds to be awardedavailable to membersMembers in 2015.2018. In addition to the required AHP assessment, we continued our voluntary sponsorship of two other housing programs, which provide resources to pay for accessibility rehabilitation and emergency repairs for special needs and elderly homeowners and to help membersMembers aid their communities following natural disasters.
Investments and Other Assets
The balance of investments at December 31, 20142017 was $26.0$27.1 billion, an increase of $3.6$1.7 billion (16(seven percent) from year-end 2013.2016. At the end of 2014,December 31, 2017, investments included $14.7$14.8 billion of mortgage-backed securities and $11.3$12.3 billion of other investments, which arewere mostly short-term instruments we holdheld for liquidity.
Investment balances averaged $27.5 billion in 2014, an increase of $2.7 billion (11 percent) from 2013's average. This growth occurred from both liquidity investments and mortgage-backed securities. All of our mortgage-backed securities held at December 31, 20142017 were issued and guaranteed by Fannie Mae, Freddie Mac or a U.S. agency.
The balance of cash and due from banks at December 31, 2014 was $3.1
Investments averaged $24.6 billion in 2017, a decrease of $5.5$2.8 billion (64 percent) from year-end 2013. The larger thancompared to 2016 primarily driven by lower liquidity investments. It is normal balance of cash and due from banks at the end of 2013 wasfor liquidity investments to vary by up to several billion dollars on a result of holding $8.6 billion in deposits at the Federal Reserve due to narrower spreads and fewer eligible counterparties at that time for certain types of liquidity investments.
daily basis. We maintained an adequatea robust amount of asset liquidity throughout the year under2017 across a variety of liquidity measures as discussed in the "Liquidity Risk" section of "Quantitative and Qualitative Disclosures About Risk Management."
Capital
Capital adequacy remained strong throughout 2014, exceeding2017, surpassing all minimum regulatory capital requirements. The GAAP capital-to-assets ratio at December 31, 20142017 was 4.634.83 percent,, while the regulatory capital-to-assets ratio was 4.71 percent.4.88 percent. Both ratios exceeded the regulatory required minimum of four percent. Regulatory capital includes mandatorily redeemable capital stock accounted for as a liability under GAAP.
The amounts of GAAP and regulatory capital decreased $371increased $187 million and $416$185 million,, respectively, in 2014, primarily resulting from redemption and repurchase of $500 million2017, due to growth in excess stock in February as part of our capital management strategy.
Total retained earnings wereand purchases of capital stock associated with Mission Asset Activity. Retained earnings totaled $689940 million at December 31, 20142017, an increase of $68106 million (1113 percent) from year-end 20132016. Retained earnings were comprised of $529 million unrestricted and $160 million restricted. We believe the amount of retained earnings is sufficient to protect against members' impairment risk of their capital stock investment in the FHLBank and to provide the opportunity to stabilize future dividends. Our Capital Plan also has safeguards to prevent financial leverage ratios from falling below regulatory minimum levels.
Results of Operations
Overall Results
The table below summarizes our results of operations.
| | | | For the Years Ended December 31, | Year Ended December 31, |
| (Dollars in millions) | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| Net income | $ | 244 |
| | $ | 261 |
| | $ | 235 |
| $ | 314 |
| | $ | 268 |
| | $ | 254 |
|
| Affordable Housing Program accrual | 28 |
| | 30 |
| | 27 |
| |
| Affordable Housing Program assessments | | 35 |
| | 30 |
| | 28 |
|
| Return on average equity (ROE) | 4.93 | % | | 5.10 | % | | 6.20 | % | 6.15 | % | | 5.35 | % | | 5.04 | % |
| Return on average assets | 0.24 |
| | 0.28 |
| | 0.35 |
| 0.31 |
| | 0.25 |
| | 0.24 |
|
| Weighted average dividend rate | 4.00 |
| | 4.18 |
| | 4.44 |
| 5.00 |
| | 4.00 |
| | 4.00 |
|
| Average 3-month LIBOR | 0.23 |
| | 0.27 |
| | 0.43 |
| 1.26 |
| | 0.74 |
| | 0.32 |
|
| Average overnight Federal funds effective rate | 0.09 |
| | 0.11 |
| | 0.14 |
| |
| ROE spread to 3-month LIBOR | 4.70 |
| | 4.83 |
| | 5.77 |
| 4.89 |
| | 4.61 |
| | 4.72 |
|
| Dividend rate spread to 3-month LIBOR | 3.77 |
| | 3.91 |
| | 4.01 |
| 3.74 |
| | 3.26 |
| | 3.68 |
|
| ROE spread to Federal funds effective rate | 4.84 |
| | 4.99 |
| | 6.06 |
| |
| Dividend rate spread to Federal funds effective rate | 3.91 |
| | 4.07 |
| | 4.30 |
| |
Net income in 2017 increased $46 million (17 percent) compared to 2016. The increase was the result of higher net interest income, which was driven primarily by lower net amortization of premiums and discounts related to mortgage assets and Consolidated Obligations, higher net spreads earned on short-term and LIBOR-indexed assets, and higher earnings from capital as short-term interest rates rose.
Earnings levels continued to represent competitive returns on stockholders' capital investment. ROE was significantly higher than short-term rates in the periods presented above, while we maintained risk exposures in line with our appetite for a moderate to low risk profile. The spread between ROE and short-term interest rates, for which we use 3-month LIBOR and Federal funds as proxies, areis a market benchmarksbenchmark we believe memberMember stockholders use to assess the competitiveness of the return on their capital investment.
In December 2017, we paid stockholders a quarterly 5.50 percent annualized dividend rate on their capital investment in our company. Earnings continuedOur dividend rate paid increased 25 to 50 basis points each quarter in 2017 driven in large part by the effects of higher shorter-term interest rates.
We believe that our operations and financial condition will continue to generate steady and competitive profitability, reflecting the combination of a stable business model and operating environment, and a consistent and conservative management of risk. Our business model is structured to be sufficientable to provide competitive returns on stockholders' capital investment. Consistent with experience over the last seven years, ROE was significantly aboveabsorb sharp changes in Mission Asset Activity because we can undertake commensurate changes in liability balances and capital. Factors that can cause significant periodic earnings volatility currently are changes in spreads between LIBOR and our short-term rates, resulting in the ROE spreads being wider than the long-term historical average spread.
The lower net income and ROE in 2014 compared to 2013 resulted primarily from the following factors:
| |
▪ | implementation of a strategy to reduce market risk exposure to the possibility of higher interest rates; |
| |
▪ | an increase in net amortization related to mortgage assets in 2014; |
| |
▪ | narrower spreads on LIBOR Advances funded by short-term debt; |
| |
▪ | a decline in mortgage asset spreads due to the run-off of higher yielding mortgages in excess of the retirement of high-cost debt; |
| |
▪ | a larger reversal for credit losses on mortgage loans held for portfolio in 2013; |
| |
▪ | a reduction in earnings from interest-free capital as interest rates continued to be low and trend lower; and |
| |
▪ | an increase in other expense. |
Three factors increased income, offsetting a portion of the impact from the unfavorable factors:
| |
▪ | an increase in the average balance of mortgage-backed securities; and |
| |
▪ | an increase in fees received from Letters of Credit due to the substantial growth in notional balances outstanding. |
The decline in ROE was less than thatfunding costs, recognition of net income dueamortization, and unrealized fair value adjustments related to our repurchasethe use of excess stock in February 2014.derivatives.
Effect of Interest Rate Environment
Trends in market interest rates strongly influence the results of operations and profitability via how they affect members'Members' demand for Mission Asset Activity, spreads on assets, funding costs and decisions in managing the tradeoffs in our market risk/return profile. The following tables presenttable presents key market interest rates (obtained from Bloomberg L.P.).
| | | | Year 2014 | | Year 2013 | | Year 2012 | Year 2017 | | Year 2016 | | Year 2015 |
| | Ending | | Average | | Ending | | Average | | Ending | | Average | Ending | | Average | | Ending | | Average | | Ending | | Average |
| Federal funds target | 0-0.25% |
| | 0-0.25% |
| | 0-0.25% |
| | 0-0.25% |
| | 0-0.25% |
| | 0-0.25% |
| |
| Federal funds effective | 0.06 |
| | 0.09 |
| | 0.07 |
| | 0.11 |
| | 0.09 |
| | 0.14 |
| 1.33 | % | | 1.00 | % | | 0.55 | % | | 0.39 | % | | 0.20 | % | | 0.13 | % |
| 3-month LIBOR | 0.26 |
| | 0.23 |
| | 0.25 |
| | 0.27 |
| | 0.31 |
| | 0.43 |
| 1.69 |
| | 1.26 |
| | 1.00 |
| | 0.74 |
| | 0.61 |
| | 0.32 |
|
| 2-year LIBOR | 0.90 |
| | 0.62 |
| | 0.49 |
| | 0.44 |
| | 0.39 |
| | 0.50 |
| 2.08 |
| | 1.65 |
| | 1.45 |
| | 1.00 |
| | 1.18 |
| | 0.88 |
|
| 10-year LIBOR | 2.28 |
| | 2.65 |
| | 3.09 |
| | 2.47 |
| | 1.84 |
| | 1.88 |
| 2.40 |
| | 2.29 |
| | 2.34 |
| | 1.70 |
| | 2.19 |
| | 2.18 |
|
| 2-year U.S. Treasury | 0.67 |
| | 0.45 |
| | 0.38 |
| | 0.30 |
| | 0.25 |
| | 0.27 |
| 1.89 |
| | 1.39 |
| | 1.19 |
| | 0.83 |
| | 1.05 |
| | 0.67 |
|
| 10-year U.S. Treasury | 2.17 |
| | 2.53 |
| | 3.03 |
| | 2.34 |
| | 1.76 |
| | 1.78 |
| 2.41 |
| | 2.33 |
| | 2.45 |
| | 1.84 |
| | 2.27 |
| | 2.13 |
|
15-year mortgage current coupon (1) | 2.10 |
| | 2.34 |
| | 2.68 |
| | 2.21 |
| | 1.71 |
| | 1.64 |
| 2.52 |
| | 2.40 |
| | 2.49 |
| | 1.94 |
| | 2.32 |
| | 2.13 |
|
30-year mortgage current coupon (1) | 2.85 |
| | 3.23 |
| | 3.63 |
| | 3.07 |
| | 2.22 |
| | 2.54 |
| 3.00 |
| | 3.03 |
| | 3.14 |
| | 2.63 |
| | 3.02 |
| | 2.88 |
|
| | | | Year 2014 by Quarter - Average | Year 2017 by Quarter - Average |
| | Quarter 1 | | Quarter 2 | | Quarter 3 | | Quarter 4 | Quarter 1 | | Quarter 2 | | Quarter 3 | | Quarter 4 |
| Federal funds target | 0-0.25% |
| | 0-0.25% |
| | 0-0.25% |
| | 0-0.25% |
| |
| Federal funds effective | 0.07 |
| | 0.09 |
| | 0.09 |
| | 0.10 |
| 0.70 | % | | 0.95 | % | | 1.15 | % | | 1.20 | % |
| 3-month LIBOR | 0.24 |
| | 0.23 |
| | 0.23 |
| | 0.24 |
| 1.07 |
| | 1.20 |
| | 1.31 |
| | 1.47 |
|
| 2-year LIBOR | 0.49 |
| | 0.54 |
| | 0.71 |
| | 0.75 |
| 1.56 |
| | 1.55 |
| | 1.60 |
| | 1.90 |
|
| 10-year LIBOR | 2.87 |
| | 2.72 |
| | 2.62 |
| | 2.40 |
| 2.38 |
| | 2.21 |
| | 2.20 |
| | 2.35 |
|
| 2-year U.S. Treasury | 0.36 |
| | 0.41 |
| | 0.50 |
| | 0.52 |
| 1.23 |
| | 1.29 |
| | 1.36 |
| | 1.69 |
|
| 10-year U.S. Treasury | 2.76 |
| | 2.61 |
| | 2.49 |
| | 2.27 |
| 2.44 |
| | 2.26 |
| | 2.24 |
| | 2.37 |
|
15-year mortgage current coupon (1) | 2.51 |
| | 2.35 |
| | 2.34 |
| | 2.16 |
| 2.50 |
| | 2.34 |
| | 2.30 |
| | 2.46 |
|
30-year mortgage current coupon (1) | 3.45 |
| | 3.29 |
| | 3.21 |
| | 2.95 |
| 3.18 |
| | 3.00 |
| | 2.94 |
| | 3.01 |
|
| |
| (1) | Simple average of current coupon rates of Fannie Mae and Freddie Mac par mortgage-backed security indications. |
Short-termResults of operations continued to benefit from a lack of sharp changes in interest rates, remained close to zero in 2014. The Federal Reserve maintainedespecially significant upward movements.
During 2017, the target overnight Federal funds target and effectiveincreased from a 0.50 to 0.75 percent range to a 1.25 to 1.50 percent range. In addition, increases in short-term rates between zero and 0.25 percent, with other short-termduring 2017 improved income because we have a substantial amount of assets that reprice to current interest rates generally consistent with their historical relationships to Federal funds. The Federal Reserve has communicated that it currently anticipates continuing actions to hold short-term interest rates at or near zero until at least mid-2015. Intermediate-term rates (up to five years) were relatively stable, while longer-term rates declined approximately 80 basis points and resulted in an overall flattening ofquicker than the yield curve.debt funding those assets.
The low interest rate environment remained favorableWe expect the recent movements in both short- and long-term rates will have only a modest overall for oureffect on results of operations in 2014. The rate environment since 2008 has benefited ourand profitability, (ROE) relative to interest rate levels, for several reasons:outside of temporary fluctuations from net amortization and unrealized fair value adjustments on derivatives.
| |
▪ | Reductions in, and low, market interest rates raise ROE compared to market rates to the extent we fund a portion of long-term assets with shorter-term debt. |
| |
▪ | The low rate environment has provided the opportunity for us to retire many Consolidated Bonds and replace them with lower cost Obligations, at a pace exceeding mortgage asset paydowns, which have been slower than would be expected in more normal housing and mortgage environments. |
| |
▪ | Earnings generated from funding assets with interest-free capital have not decreased as much as the reduction in overall interest rates because long-term assets do not reprice immediately to the lower rates. |
Business Conditions and Outlook and Risk Management
This section summarizes the business outlook and what we believe are our current major risk exposures. Item 1A's “Risk Factors” has a detailed discussion of risk factors that could affect our corporate objectives, financial condition, and results of operations. "Quantitative and Qualitative Disclosures About Risk Management" provides details on current risk exposures.
Strategic/Business Risk
Advances.Advances:Our business is cyclical and Mission Asset Activity normally grows slowly stabilizes, or declinesstabilizes in periods of difficultmoderate macro-economic conditions,growth, when financial institutions have ample liquidity, or when there is significant growth in the money supply. InSince the end of the last several years,recession in 2009, measured economic growth has resulted in relatively slow growth in consumer, mortgage and commercial loans across the broad membership both in absolute terms and relative to deposit growth.
Other important factors continuing to constrain widespread demand for Advances are the extremely low levels of interest rates resultingand little deviation in favorable broad-based funding levelsAdvance rates versus deposit rates, and the Federal Reserve's ongoing actions to provide an extraordinary amount of deposit-based liquidity to attempt to stimulate economic growth. We would expect to see a broad-based increase in Advance demand when the economy experiences a sustained improvement or if changes in Federal Reserve policy reduce other sources of liquidity available to our members.
In the last several years, the percentage of assets that Members funded with Advances showed little variation, in the range of three to four percent. The relative balance between loan and deposit growth providesfluctuations can provide an indication of potential memberMember Advance demand. From September 30, 20132016 to September 30, 20142017 (the most recent period for which data are available), aggregate loan portfolios of Fifth District depository institutions grew $52.7$76.0 billion (4.3 percent) (5.1 percent) while their aggregate deposit balances rose $74.6$111.6 billion (3.6 percent) (4.8 percent). The data include the effect of large mergers and acquisitions only when they are available for both comparison dates. Most of the loan and deposit growth in this period occurred from our largest members,Members, which is consistent with the concentration of nationwide financial activity. ExcludingWe may see a broad-based increase in Advance demand if one or more of the following occur: aggregate loan portfolios of our Members grow quicker than aggregate deposits, the economy experiences a sustained growth trend, interest rates continue to increase over time, or changes in Federal Reserve policy reduce other sources of liquidity available to Members.
fiveMPP: members with over $50 billion of assets and recent acquisitions, aggregate loans increased $12.0 billion (6.4 percent)MPP balances are influenced by conditions in the 12-month period while aggregate deposits grew $4.7 billion (2.0 percent).housing and mortgage markets, the competitiveness of prices we offer to purchase loans as well as program features, and activity from our largest sellers.
Members' faster loan growth than deposit growth could over time produce increased demand for Advances, although the impact in 2014 across the membership base was modest with most of the Advance growth coming from a few larger members.
MPP.Our current and ongoing strategy for the MPP has two components: 1) increase the number of regular sellers and participants in the programprogram; and 2) and grow balancesincrease purchases while maintaining thembalances at a prudent level relative to capital and total assets to helpeffectively manage market and credit risks consistent with our risk appetite.
Balances are influenced primarily by activity from large sellers and a Finance Agency regulation requiring that if purchases in a calendar year exceed $2.5 billion, we must enact additional housing goals. Given the uncertainty of the goal requirements and possible operational and economic impacts, we currently plan to limit our calendar year purchases to less than $2.5 billion until we receive further guidance from the Finance Agency and we confirm our ability to meet the goals.
Regulatory and Legislative Risk
General.General: The FHLBank System currently faces heightenedis subject to legislative and regulatory risks and uncertainties, which we believe has affected, and could continue to affect, our Mission Asset Activity, capitalization, and results of operations. Item 1A.'s "Risk Factors" provides details of some of the primary current and recent regulatory and legislative initiatives that could affect our business. The legislativeoversight. Legislative and regulatory actions relatedapplicable, directly or indirectly, to our companythe FHLBank System in the last decade have raised our operating costs and increased uncertainty regarding the business model and membership base under which the FHLBanks may operate in the future. This is due primarily to the uncertainty around potential future GSE reform, which shows no signs of resolution.resolution, and the evolution of mortgage financing moving towards financial institutions currently not eligible for FHLBank membership. See Item 1A's "Risk Factors" for more discussion. We cannot predict the ultimate outcome of GSE reform and whether our membership base will be legislatively and regulatorily permitted to evolve in concert with the housing finance market.
Membership Requirements.LIBOR Replacement:In September 2014,July 2017, the Finance Agency publishedUnited Kingdom’s Financial Conduct Authority, a notice of proposed rulemaking that would modify membership requirements. This is the primary current regulatory action in process that could significantly affect how we achieve our mission. The primary provisions of the proposed rule include the following:
| |
▪ | A new membership requirement for all members to hold, on an ongoing basis, at least one percent of their assets in first-lien mortgage loans (including mortgage-backed securities), with the option of the Finance Agency making the requirement two percent or up to five percent. |
| |
▪ | A requirement that all insured depository members with assets over $1.1 billion must hold, on an ongoing basis, at least 10 percent of their assets in a broader range of residential mortgage loans. |
| |
▪ | Narrowing the definition of eligible insurance companies by eliminating from FHLBank membership all currently-eligible captive insurance companies. |
| |
▪ | Clarification of how FHLBanks should determine the "principal place of business" for membership of insurance companies and community development financial institutions. Current rules define an institution's "principal place of business" as the state in which it maintains its home office. The proposed rule would also add a requirement that an institution should conduct business operations from the home office for that state to be considered its principal place of business. The change would be applied prospectively. |
The proposed rule would disallow a numberregulator of financial institutions from being membersservices firms and financial markets in the U.K., stated that they will plan for a phase out of regulatory oversight of LIBOR interest rate indices. The Financial Conduct Authority has indicated they will support the LIBOR indices through 2021 to allow for an FHLBank whoorderly transition to an alternative reference rate(s). Other financial services regulators and industry groups are currently eligible underevaluating the FHLBank Act established by the U.S. Congress. We are thereby concerned that the rule, if adopted in its current form, would constrain the abilityplanned phase-out of the FHLBanks to fulfill their mission of promoting housing finance through providing liquidity and funding to financial institutions engaged in housing finance activities.
The comment period ended on January 12, 2015. Along with other FHLBanks, many members,LIBOR and the U.S. Congress,development of alternate interest rate indices or reference rate(s). While it is unclear as to what the overall financial impact of these developments will be, many of our assets and liabilities are indexed to LIBOR, so we provided our comments on the proposed rule.will continue to monitor any alternative reference rate proposals as they are developed. See Item 1A's "Risk Factors" for more discussion.
Market Risk
During 2014,2017, as in 2013,2016, the market risk exposure to changing interest rates was moderate overall and well within policy limits. We believe that profitability would not become uncompetitive unless long-terminterest rates were to increase immediatelychange quickly and permanently by five percentage points or more combined with short-term rates increasing to at least eight percent.significantly. We believe such an extremea stress scenario although plausible, is very unlikely to occur in the foreseeable future. However, in anticipation of interest rates beginning to increase we adopted a strategy in late 2013, which we implemented in 2014, to lower market risk exposure to higher rates. Our market risk exposure to lower long-term interest rates, even up to two percentage points, would result in ROE still being well above market interest rates.
Capital Adequacy
We maintained compliance with regulatorybelieve Members place a high value on their capital requirements.investment in our company. Capital ratios at December 31, 20142017, and all throughout the year, exceeded the regulatory required minimum of four percent. We believe that the amount of our retained earnings is sufficient to protect against Members' impairment risk of their capital stock investment in the FHLB and to provide the opportunity to stabilize or augment future dividends. Our capital policies and Capital Plan hasalso have safeguards to prevent financial leverage from increasing beyondensure we meet regulatory minimums or below safe levels. We believe members place a high value on theirand prudential capital investment in our company.requirements.
Credit Risk
In 2014,2017, we continued to experience minimala de minimis level of overall residual credit risk exposure from our Credit Services, making investments, and executing derivative transactions. We believe policies and procedures related to credit underwriting, Advance collateral management, and transactions with investment and derivative counterparties continue to fully mitigate these risks,risks. We have never experienced any credit losses, and we continuedcontinue to have no loan loss reserves or impairment recorded for these instruments.
Residual credit risk exposure in the mortgage loan portfolio remained modest.was minimal. The allowance for credit losses in the MPP continued to declinewas stable during the year and was $5$1 million at December 31, 2014.
As in prior years, we did not evaluate any investments to be other-than-temporarily impaired in 2014. We held no private-label mortgage-backed securities. All of our mortgage-backed securities were issued and guaranteed by Fannie Mae or Freddie Mac, which we believe have the backing of the U.S. government, or by the National Credit Union Administration (NCUA) or Ginnie Mae, which issue guaranteed securities. Liquidity investments are either guaranteed by the U.S. government, secured (i.e., collateralized), or unsecured with our exposure limited to investment in the debt securities of highly rated, investment-grade institutions with appropriate limits on dollar and maturity exposure to each institution. We mitigate most of the credit risk exposure resulting from interest rate swap transactions through collateralization.2017.
Liquidity Risk
Our liquidity position remained strong during 2014,2017, as did our overall ability to fund operations through the issuance of Consolidated Obligations at acceptable interest costs. Investor demand for FHLBank System debt continued to be robust. There were minimalno substantive stresses on market access or liquidity from external market and political events. Additionally, the FHLBanks have expanded their role as a market liquidity provider in recent years driven in part by demand from large banks to help satisfy their Liquidity Coverage Ratio (LCR) regulatory requirement. The System's expanded role as a market liquidity provider may require us to hold more liquidity. A key component of the System's role is helping members liquefy mortgage assets by pledging them to FHLBanks as collateral for longer-term Advances and using the proceeds to purchase High Quality Liquid Assets, which benefits the LCR. Furthermore, demand for short-term funding has increased more recently due to the effects of the SEC's money market reforms, which have caused investors and fund managers to shift from prime money funds to government money funds. Although we can make no assurances, we expect this to continue to be the case and believe there is only a remote possibility of a liquidity or funding crisis in the FHLBank System that could impair the FHLBank'sour ability to participate, on a cost-effective basis, in issuances of new debt, service outstanding debt, maintain adequate capitalization,capital levels, or pay competitive dividends.
ANALYSIS OF FINANCIAL CONDITION
Mission Asset Activity
We regularly monitor the dollar and percentage amount of our balance sheet that is Mission Asset Activity, which we define as Advances, Letters of Credit, and total MPP. TheseAssets are the primary means by which we fulfill our mission with direct connections to members.Members. We measureregularly monitor our balance sheet concentration of Mission Asset Activity againstActivity. In 2017, our Primary Mission Asset ratio, which measures the sum of average Advances and mortgage loans as a percentage of average Consolidated Obligations, becausewas 81 percent, well above the latter reflect the major sourceFinance Agency preferred ratio of our franchise value as a GSE. At December 31, 2014, the principal balance70 percent. In assessing overall mission achievement, we also consider supplemental sources of Mission Asset Activity, the most significant of $95.3 billion constituted 80 percent of adjusted Obligations (which equal Obligations pluswhich is Letters of Credit and Mandatory Delivery Contracts). The daily average percentage in 2014 was also 80 percent. These percentage levels were equalissued to our internal benchmark.Members.
Credit Services
Credit Activity and Advance Composition
The tables below show trends in Advance balances by major programs and in the notional amount of Letters of Credit.
| | | (Dollars in millions) | December 31, 2014 | | December 31, 2013 | December 31, 2017 | | December 31, 2016 |
| | Balance | | Percent(1) | | Balance | | Percent(1) | Balance | | Percent(1) | | Balance | | Percent(1) |
| Adjustable/Variable Rate Indexed: | | | | | | | | |
| Adjustable/Variable Rate-Indexed: | | | | | | | | |
| LIBOR | $ | 51,839 |
| | 74 | % | | $ | 49,199 |
| | 75 | % | $ | 32,420 |
| | 47 | % | | $ | 44,289 |
| | 64 | % |
| Other | 515 |
| | 1 |
| | 413 |
| | 1 |
| 941 |
| | 1 |
| | 918 |
| | 1 |
|
| Total | 52,354 |
| | 75 |
| | 49,612 |
| | 76 |
| 33,361 |
| | 48 |
| | 45,207 |
| | 65 |
|
| Fixed-Rate: | | | | | | | | | | | | | | |
| REPO | 5,201 |
| | 7 |
| | 4,143 |
| | 7 |
| |
| Repurchase based (REPO) | | 19,890 |
| | 28 |
| | 10,786 |
| | 15 |
|
| Regular Fixed-Rate | 7,398 |
| | 11 |
| | 5,751 |
| | 9 |
| 11,191 |
| | 16 |
| | 9,618 |
| | 14 |
|
Putable (2) | 1,617 |
| | 2 |
| | 2,146 |
| | 3 |
| 280 |
| | — |
| | 565 |
| | 1 |
|
Convertible (2) | — |
| | — |
| | 10 |
| | — |
| |
| Amortizing/Mortgage Matched | 2,734 |
| | 4 |
| | 2,593 |
| | 4 |
| 2,776 |
| | 4 |
| | 2,596 |
| | 4 |
|
| Other | 995 |
| | 1 |
| | 838 |
| | 1 |
| 2,479 |
| | 4 |
| | 1,135 |
| | 1 |
|
| Total | 17,945 |
| | 25 |
| | 15,481 |
| | 24 |
| 36,616 |
| | 52 |
| | 24,700 |
| | 35 |
|
| Other Advances | — |
| | — |
| | — |
| | — |
| 1 |
| | — |
| | — |
| | — |
|
| Total Advances Principal | $ | 70,299 |
| | 100 | % | | $ | 65,093 |
| | 100 | % | $ | 69,978 |
| | 100 | % | | $ | 69,907 |
| | 100 | % |
| | | | | | | | | | | | | | | |
| Letters of Credit (notional) | $ | 17,780 |
| | | | $ | 13,472 |
| | | $ | 14,691 |
| | | | $ | 17,508 |
| | |
| | | (Dollars in millions) | December 31, 2014 | | September 30, 2014 | | June 30, 2014 | | March 31, 2014 | December 31, 2017 | | September 30, 2017 | | June 30, 2017 | | March 31, 2017 |
| | Balance | | Percent(1) | | Balance | | Percent(1) | | Balance | | Percent(1) | | Balance | | Percent(1) | Balance | | Percent(1) | | Balance | | Percent(1) | | Balance | | Percent(1) | | Balance | | Percent(1) |
| Adjustable/Variable Rate Indexed: | | | | | | | | | | | | | | | | |
| Adjustable/Variable-Rate Indexed: | | | | | | | | | | | | | | | | |
| LIBOR | $ | 51,839 |
| | 74 | % | | $ | 49,244 |
| | 69 | % | | $ | 48,973 |
| | 71 | % | | $ | 49,269 |
| | 75 | % | $ | 32,420 |
| | 47 | % | | $ | 35,567 |
| | 53 | % | | $ | 38,061 |
| | 53 | % | | $ | 40,319 |
| | 66 | % |
| Other | 515 |
| | 1 |
| | 531 |
| | 1 |
| | 491 |
| | 1 |
| | 389 |
| | 1 |
| 941 |
| | 1 |
| | 896 |
| | 1 |
| | 643 |
| | 1 |
| | 442 |
| | — |
|
| Total | 52,354 |
| | 75 |
| | 49,775 |
| | 70 |
| | 49,464 |
| | 72 |
| | 49,658 |
| | 76 |
| 33,361 |
| | 48 |
| | 36,463 |
| | 54 |
| | 38,704 |
| | 54 |
| | 40,761 |
| | 66 |
|
| Fixed-Rate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| REPO | 5,201 |
| | 7 |
| | 8,993 |
| | 12 |
| | 7,817 |
| | 11 |
| | 4,465 |
| | 7 |
| |
| Repurchase based (REPO) | | 19,890 |
| | 28 |
| | 13,753 |
| | 20 |
| | 16,857 |
| | 24 |
| | 6,982 |
| | 12 |
|
| Regular Fixed-Rate | 7,398 |
| | 11 |
| | 7,004 |
| | 10 |
| | 6,507 |
| | 9 |
| | 5,903 |
| | 9 |
| 11,191 |
| | 16 |
| | 11,246 |
| | 17 |
| | 10,610 |
| | 15 |
| | 9,587 |
| | 16 |
|
Putable (2) | 1,617 |
| | 2 |
| | 1,935 |
| | 3 |
| | 2,091 |
| | 3 |
| | 2,138 |
| | 3 |
| 280 |
| | — |
| | 358 |
| | — |
| | 429 |
| | 1 |
| | 493 |
| | 1 |
|
Convertible (2) | — |
| | — |
| | 5 |
| | — |
| | 5 |
| | — |
| | 10 |
| | — |
| |
| Amortizing/Mortgage Matched | 2,734 |
| | 4 |
| | 2,702 |
| | 4 |
| | 2,627 |
| | 4 |
| | 2,618 |
| | 4 |
| 2,776 |
| | 4 |
| | 2,716 |
| | 4 |
| | 2,698 |
| | 4 |
| | 2,656 |
| | 4 |
|
| Other | 995 |
| | 1 |
| | 910 |
| | 1 |
| | 825 |
| | 1 |
| | 593 |
| | 1 |
| 2,479 |
| | 4 |
| | 3,439 |
| | 5 |
| | 1,814 |
| | 2 |
| | 841 |
| | 1 |
|
| Total | 17,945 |
| | 25 |
| | 21,549 |
| | 30 |
| | 19,872 |
| | 28 |
| | 15,727 |
| | 24 |
| 36,616 |
| | 52 |
| | 31,512 |
| | 46 |
| | 32,408 |
| | 46 |
| | 20,559 |
| | 34 |
|
| Other Advances | — |
| | — |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | — |
| 1 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total Advances Principal | $ | 70,299 |
| | 100 | % | | $ | 71,325 |
| | 100 | % | | $ | 69,336 |
| | 100 | % | | $ | 65,385 |
| | 100 | % | $ | 69,978 |
| | 100 | % | | $ | 67,975 |
| | 100 | % | | $ | 71,112 |
| | 100 | % | | $ | 61,320 |
| | 100 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Letters of Credit (notional) | $ | 17,780 |
| | | | $ | 16,080 |
| | | | $ | 15,563 |
| | | | $ | 13,603 |
| | | $ | 14,691 |
| | | | $ | 16,796 |
| | | | $ | 17,175 |
| | | | $ | 17,411 |
| | |
| |
| (1) | As a percentage of total Advances principal. |
| |
| (2) | Excludes Putable/ConvertiblePutable Advances where the related put/conversionput options have expired. SuchThese Advances are classified based on their current terms. |
The growth2017 were similar to year-end 2016. As shown in Advances was comprised primarilythe tables above, REPOs tend to be our most volatile Advance product because a majority of fixed-rate, LIBOR based and short-term repurchase (REPO) Advances. Most of the Advance growth came from several larger members.them have overnight maturities.
Members increased their available lines in the Letters of Credit programbalances at December 31, 2017 decreased by $4.3 billion (32 percent)16 percent compared to the end of 2016. However, average Letters of Credit balances decreased only three percent in 2014. As with Advances, most of the growth was from a few large members.2017. We generallynormally earn fees on Letters of Credit based on the actual notionalaverage amount of the Letters utilized, which normallygenerally is less than the available lines.notional amount issued.
Advance Usage
In addition to analyzing Advance balances by dollar trends, and the number of members utilizing them, we monitor the degree to which membersMembers use Advances to fund their balance sheets. The following table shows the unweighted, average ratio of each member'sMember's Advance balance to its most-recently available figures for total assets.
|
| | | | | | | | | | | | | | |
| | December 31, 2014 | | September 30, 2014 | | June 30, 2014 | | March 31, 2014 | | December 31, 2013 |
| Average Advances-to-Assets for Members | | | | | | | | | |
| Assets less than $1.0 billion (639 members) | 3.24 | % | | 3.32 | % | | 3.24 | % | | 3.13 | % | | 3.27 | % |
| Assets over $1.0 billion (66 members) | 3.75 |
| | 3.77 |
| | 3.42 |
| | 3.17 |
| | 3.33 |
|
| All members | 3.29 |
| | 3.36 |
| | 3.26 |
| | 3.13 |
| | 3.28 |
|
|
| | | | | | | | | | | | | | |
| | December 31, 2017 | | September 30, 2017 | | June 30, 2017 | | March 31, 2017 | | December 31, 2016 |
| Average Advances-to-Assets for Members | | | | | | | | | |
| Assets less than $1.0 billion (575 Members) | 3.04 | % | | 3.11 | % | | 3.00 | % | | 2.87 | % | | 3.07 | % |
| Assets over $1.0 billion (85 Members) | 4.95 |
| | 4.73 |
| | 4.90 |
| | 4.03 |
| | 3.87 |
|
| All Members | 3.28 |
| | 3.31 |
| | 3.23 |
| | 3.01 |
| | 3.17 |
|
OverallThe Advance usage ratios were stableratio across all Members was slightly higher at the end of 2017 compared to year-end 2016, driven by increased demand in 2014. Large members currently utilize Advances to fundfrom a similar amount of their assets as smaller members.few large-asset Members.
The following table shows Advance usage of membersMembers by charter type.
| | | (Dollars in millions) | December 31, 2014 | | December 31, 2013 | December 31, 2017 | | December 31, 2016 |
| | Par Value of Advances | | Percent of Total Par Value of Advances | | Par Value of Advances | | Percent of Total Par Value of Advances | Par Value of Advances | | Percent of Total Par Value of Advances | | Par Value of Advances | | Percent of Total Par Value of Advances |
| Commercial Banks | $ | 59,119 |
| | 84 | % | | $ | 54,909 |
| | 84 | % | $ | 52,899 |
| | 76 | % | | $ | 53,743 |
| | 77 | % |
| Thrifts and Savings Banks | 4,067 |
| | 6 |
| | 3,106 |
| | 5 |
| |
| Savings Institutions | | 7,369 |
| | 10 |
| | 6,857 |
| | 10 |
|
| Credit Unions | 1,110 |
| | 1 |
| | 814 |
| | 1 |
| 1,293 |
| | 2 |
| | 1,191 |
| | 2 |
|
| Insurance Companies | 5,408 |
| | 8 |
| | 4,601 |
| | 7 |
| 8,357 |
| | 12 |
| | 8,043 |
| | 11 |
|
| Community Development Financial Institutions | 1 |
| | — |
| | 1 |
| | — |
| 1 |
| | — |
| | 3 |
| | — |
|
| Total member Advances | 69,705 |
| | 99 |
| | 63,431 |
| | 97 |
| |
| Former member borrowings | 594 |
| | 1 |
| | 1,662 |
| | 3 |
| |
| Total Member Advances | | 69,919 |
| | 100 |
| | 69,837 |
| | 100 |
|
| Former Member borrowings | | 59 |
| | — |
| | 70 |
| | — |
|
| Total par value of Advances | $ | 70,299 |
| | 100 | % | | $ | 65,093 |
| | 100 | % | $ | 69,978 |
| | 100 | % | | $ | 69,907 |
| | 100 | % |
The following tables present principal balances for our topthe five Members with the largest Advance borrowers.borrowings.
| | | (Dollars in millions) | | | | | | | | | | | | | | | | |
| December 31, 2014 | | December 31, 2013 | |
| December 31, 2017 | | December 31, 2017 | | December 31, 2016 |
| Name | | Par Value of Advances | | Percent of Total Par Value of Advances | | Name | | Par Value of Advances | | Percent of Total Par Value of Advances | | Par Value of Advances | | Percent of Total Par Value of Advances | | Name | | Par Value of Advances | | Percent of Total Par Value of Advances |
| JPMorgan Chase Bank, N.A. | | $ | 41,300 |
| | 59 | % | | JPMorgan Chase Bank, N.A. | | $ | 41,700 |
| | 64 | % | | $ | 23,950 |
| | 34 | % | | JPMorgan Chase Bank, N.A. | | $ | 32,300 |
| | 46 | % |
| U.S. Bank, N.A. | | 8,338 |
| | 12 |
| | U.S. Bank, N.A. | | 4,584 |
| | 7 |
| | 8,975 |
| | 13 |
| | U.S. Bank, N.A. | | 8,563 |
| | 12 |
|
| Third Federal Savings and Loan Association | | | 3,756 |
| | 5 |
| | Third Federal Savings and Loan Association | | 3,049 |
| | 4 |
|
| The Huntington National Bank | | 2,083 |
| | 3 |
| | The Huntington National Bank | | 1,809 |
| | 3 |
| | 3,732 |
| | 5 |
| | Fifth Third Bank | | 2,517 |
| | 4 |
|
| Nationwide Life Insurance Company | | 1,761 |
| | 3 |
| | Western-Southern Life Assurance Co | | 1,342 |
| | 2 |
| |
| Western-Southern Life Assurance Co | | 1,623 |
| | 2 |
| | Protective Life Insurance Company | | 1,171 |
| | 2 |
| |
| Fifth Third Bank | | | 3,140 |
| | 4 |
| | The Huntington National Bank | | 2,433 |
| | 3 |
|
| Total of Top 5 | | $ | 55,105 |
| | 79 | % | | Total of Top 5 | | $ | 50,606 |
| | 78 | % | | $ | 43,553 |
| | 61 | % | | Total of Top 5 | | $ | 48,862 |
| | 69 | % |
Advance concentration ratios are influenced by, and generally are similar to, concentration ratios of financial activity among our Fifth District financial institutions. We believe that having large financial institutions that actively use our Mission Asset Activity augments the value of membership to all members because itMembers. For example, such activity improves our operating efficiency, increases our earnings
and thereby contributions to housing and community investment programs,programs. Over time, this activity may enable us over time to obtain more favorable funding costs, and helps us maintain competitively priced Mission Asset Activity.
Mortgage Loans Held for Portfolio (Mortgage Purchase Program, or "MPP")
MPP balances continue to be driven primarily by activity from two large sellers and a Finance Agency regulation requiring that if purchases in a calendar year exceed $2.5 billion, we will be subject to Finance Agency established housing goals. Given the uncertainty of the housing goal requirements and possible operational and economic impacts, we continue to limit our calendar year purchases to less than $2.5 billion. The number of regular sellers remained at a high level in 2014 compared to historical trends.MPP)
The table below shows principal paydownspurchases and purchasesreductions of loans in the MPP for each of the last two years.
| | | (In millions) | 2014 | | 2013 | 2017 | | 2016 |
| Balance, beginning of year | $ | 6,643 |
| | $ | 7,366 |
| $ | 8,926 |
| | $ | 7,758 |
|
| Principal purchases | 1,226 |
| | 1,171 |
| 1,747 |
| | 2,830 |
|
| Principal paydowns | (1,073 | ) | | (1,894 | ) | |
| Principal reductions | | (1,219 | ) | | (1,662 | ) |
| Balance, end of year | $ | 6,796 |
| | $ | 6,643 |
| $ | 9,454 |
| | $ | 8,926 |
|
The small increase inMost of the principal loan balance in 2014 reflected purchase activity closely matching principal paydowns. Purchasespurchases resulted from sales by 95 participating financial institutions (PFIs) during the year,activity of our two largest sellers who drive program balances. In 2017, 92 Members sold us mortgage loans, with the number of monthly sellers averaging 60. Almost all59. All loans acquired in 20142017 were conventional with less than one percent of purchases comprised of Federal Housing Administration (FHA) loans.
In the fourth quarter of 2014, MPP activity increased. At the end of the year, MPP commitments outstanding totaled $451 million, compared to only $37 million at the end of 2013.
The following tables show the percentage of principal balances from PFIs supplying five percent or more of total principal and the percentage of principal balances from all other PFIs. Similar to Advances,As shown in the table below, MPP activity is concentrated amongst a few members.Members.
| | | (Dollars in millions) | December 31, 2014 | | | December 31, 2013 | December 31, 2017 | | | December 31, 2016 |
| | Principal | | % of Total | | | Principal | | % of Total | Principal | | % of Total | | | Principal | | % of Total |
| Union Savings Bank | $ | 1,593 |
| | 23 | % | | Union Savings Bank | $ | 1,433 |
| | 22 | % | $ | 3,247 |
| | 34 | % | | Union Savings Bank | $ | 2,886 |
| | 32 | % |
| Guardian Savings Bank FSB | | 933 |
| | 10 |
| | Guardian Savings Bank FSB | 855 |
| | 10 |
|
PNC Bank, N.A. (1) | 1,074 |
| | 16 |
| | PNC Bank, N.A. (1) | 1,356 |
| | 20 |
| 516 |
| | 5 |
| | PNC Bank, N.A. (1) | 660 |
| | 7 |
|
| Guardian Savings Bank FSB | 406 |
| | 6 |
| | All others | 3,854 |
| | 58 |
| |
| All others | 3,723 |
| | 55 |
| | Total | $ | 6,643 |
| | 100 | % | 4,758 |
| | 51 |
| | All others | 4,525 |
| | 51 |
|
| Total | $ | 6,796 |
| | 100 | % | | |
|
| |
|
| $ | 9,454 |
| | 100 | % | | Total | $ | 8,926 |
| | 100 | % |
(1)Former member.Member.
We closely track the refinancing incentives of our mortgage assets (including thoseloans in the MPP and mortgage-backed securities) because the option for homeowners to change their principal payments normally represents a largethe largest portion of our market risk exposure.exposure and can affect MPP balances. MPP principal paydowns in all of 20142017 equated to a 12nine percent annual constant prepayment rate, down from the 2115 percent rate for all of 2013. Refinancing incentives for many mortgage assets declined because although2016 due to an increase in mortgage rates trended lower in 2014, they still remained above the low levels experienced in the first half of 2013.late 2016 that persisted throughout 2017.
The MPP's composition of balances by loan type, original final maturity, and weighted-average mortgage note rate did not change materially in 2014.2017. The weighted average mortgage note rate fell from 4.53 percentonly 0.04 percentage points in 2017 to end the year at the end of 2013 to 4.36 percent at the end of 2014. This decline reflected a continuing trend of prepayments of higher rate mortgages and purchases of lower rate mortgages.3.91 percent. MPP yields earned during 2014, relative toin 2017, after consideration of funding and hedging costs, continued to offer favorable returns relative to their market and credit risk exposure.
Housing and Community Investment
In 2014,2017, we accrued $28$35 million of earnings for the Affordable Housing Program, which will be awarded to membersMembers in 2015.2018. This amount represents a $2an increase of $5 million (seven percent) decrease from 2013,2016 due to 2014's lower earnings.the higher earnings in 2017.
Including funds available in 20142017 from previous years, we had $28$29 million available for the competitive Affordable Housing Program in 2014,2017, which we awarded to 7865 projects through a single competitive offering. In addition, we awarded $12disbursed $10 million to 173 members172 Members on behalf of more than 2,3812,126 homebuyers through the Welcome Home Program, which assists homebuyers with down payments and closing costs. In total, just over one-quarternearly one-third of membersMembers received approval for funding under the totaltwo Affordable Housing Program. Programs.
Additionally, in 20142017 our Board authorized $1committed $1.5 million to renew the Carol M. Peterson Housing Fund, (CMP Fund)which helped 218 homeowners, and continued its commitment to the $5 million Disaster Reconstruction Program. Both are voluntary programs beyond the 10 percent of earnings that we are required by law to set aside for the Affordable Housing Program.
Our activities to support affordable housing and economic development also include offering Advances through the Affordable Housing Program, Community Investment Program and Economic Development Program with below-market interest rates at or near zero profit for us.funding costs. At the end of 2014,2017, Advance balances under these programs totaled $460$442 million. AHP Advance balances have declined in recent years, reflecting our preference to distribute AHP subsidy in the form of grants.
Investments
The table below presents the ending and average balances of the investment portfolio.
| | | (In millions) | 2014 | | 2013 | 2017 | | 2016 |
| | Ending Balance | | Average Balance | | Ending Balance | | Average Balance | Ending Balance | | Average Balance | | Ending Balance | | Average Balance |
| Liquidity investments | $ | 11,319 |
| | $ | 11,856 |
| | $ | 6,303 |
| | $ | 10,389 |
| $ | 12,286 |
| | $ | 9,757 |
| | $ | 10,818 |
| | $ | 12,177 |
|
| Mortgage-backed securities | 14,688 |
| | 15,594 |
| | 16,061 |
| | 14,320 |
| 14,772 |
| | 14,710 |
| | 14,516 |
| | 15,061 |
|
Other investments (1) | — |
| | 98 |
| | — |
| | 161 |
| — |
| | 84 |
| | — |
| | 144 |
|
| Total investments | $ | 26,007 |
| | $ | 27,548 |
| | $ | 22,364 |
| | $ | 24,870 |
| $ | 27,058 |
| | $ | 24,551 |
| | $ | 25,334 |
| | $ | 27,382 |
|
| |
| (1) | The average balance includes the rights or obligations to cash collateral, which are included in the fair value of derivative assets or derivative liabilities on the Statements of Condition at period end. |
We continued to maintain a sufficientrobust amount of asset liquidity. Liquidity investment levels can vary significantly based on liquidity needs, the availability of acceptable net spreads, the number of eligible counterparties that meet our unsecured credit risk criteria, and changes in the amount of Mission Assets. It is normal for liquidity investments to vary by up to several billion dollars on a daily basis. Ending balances were noticeably higher at year-end 2014 compared to year-end 2013, which was primarily due to our decision to hold a larger portion of funds in deposits at the Federal Reserve at year-end 2013 resulting from the lack of suitable counterparties at the time.
Our overarching strategy for balances of mortgage-backed securities is to keep holdings as close as possible to the regulatory maximum of three times regulatory capital, subject to the availability of securities that we believe provide acceptable risk/return tradeoffs. The ratio of mortgage-backed securities to regulatory capital was 2.83 at December 31, 2017. The balance of mortgage-backed securities at December 31, 2014 represented a 2.93 multiple of regulatory capital and2017 consisted of $12.6$12.3 billion of securities issued by Fannie Mae or Freddie Mac (of which $1.56.3 billion were floating-rate securities), $1.1$0.5 billion of floating-rate securities issued by the NCUA,National Credit Union Administration (NCUA), and $1.0$2.0 billion of securities issued by Ginnie Mae.Mae (which are primarily fixed rate). We held no private-label mortgage-backed securities.
Total outstanding mortgage-backed securities balances were modestly lower at year-end 2014 relative to 2013 due to the repurchase of excess stock that occurred in early 2014, which limited our authority to purchase mortgage-backed securities until the regulatory multiple fell below three.
The table below shows principal purchases, paydowns and paydownssales of our mortgage-backed securities for each of the last two years.
| | | (In millions) | Mortgage-backed Securities Principal | Mortgage-backed Securities Principal |
| | 2014 | | 2013 | 2017 | | 2016 |
| Balance, beginning of year | $ | 16,087 |
| | $ | 12,757 |
| $ | 14,487 |
| | $ | 15,203 |
|
| Principal purchases | 722 |
| | 6,017 |
| 2,679 |
| | 3,016 |
|
| Principal paydowns | (2,094 | ) | | (2,687 | ) | (2,420 | ) | | (2,925 | ) |
| Principal sales | | — |
| | (807 | ) |
| Balance, end of year | $ | 14,715 |
| | $ | 16,087 |
| $ | 14,746 |
| | $ | 14,487 |
|
Principal paydowns in 20142017 equated to a 1315 percent annual constant prepayment rate, down from the 17compared to an 18 percent rate in 2013.2016.
Only two percent of total pass-through mortgage-backed securities had 30-year fixed-rate mortgages as collateral. Because approximately 75 percent of MPP loans have 30-year original terms, purchasing pass-throughs with shorter than 30-year original terms is one way we diversify mortgage assets to help manage market risk exposure.
Consolidated Obligations
The table below presents the ending and average balances of our participations in Consolidated Obligations.
| | | (In millions) | 2014 | | 2013 | 2017 | | 2016 |
| | Ending Balance | | Average Balance | | Ending Balance | | Average Balance | Ending Balance | | Average Balance | | Ending Balance | | Average Balance |
| Discount Notes: | | | | | | | | | | | | | | |
| Par | $ | 41,238 |
| | $ | 35,996 |
| | $ | 38,217 |
| | $ | 34,581 |
| $ | 46,259 |
| | $ | 43,166 |
| | $ | 44,711 |
| | $ | 49,853 |
|
| Discount | (6 | ) | | (4 | ) | | (7 | ) | | (7 | ) | (48 | ) | | (42 | ) | | (21 | ) | | (18 | ) |
| Total Discount Notes | 41,232 |
| | 35,992 |
| | 38,210 |
| | 34,574 |
| 46,211 |
| | 43,124 |
| | 44,690 |
| | 49,835 |
|
| Bonds: | | | | | | | | | | | | | | |
| Unswapped fixed-rate | 26,124 |
| | 25,513 |
| | 24,222 |
| | 23,037 |
| 26,710 |
| | 26,707 |
| | 25,373 |
| | 26,495 |
|
| Unswapped adjustable-rate | 27,610 |
| | 29,355 |
| | 28,650 |
| | 24,319 |
| 20,895 |
| | 18,500 |
| | 18,290 |
| | 14,512 |
|
| Swapped fixed-rate | 5,390 |
| | 3,697 |
| | 5,155 |
| | 4,628 |
| 6,552 |
| | 7,131 |
| | 9,510 |
| | 7,959 |
|
| Total par Bonds | 59,124 |
| | 58,565 |
| | 58,027 |
| | 51,984 |
| 54,157 |
| | 52,338 |
| | 53,173 |
| | 48,966 |
|
Other items (1) | 93 |
| | 116 |
| | 136 |
| | 125 |
| 6 |
| | 29 |
| | 18 |
| | 68 |
|
| Total Bonds | 59,217 |
| | 58,681 |
| | 58,163 |
| | 52,109 |
| 54,163 |
| | 52,367 |
| | 53,191 |
| | 49,034 |
|
Total Consolidated Obligations (2) | $ | 100,449 |
| | $ | 94,673 |
| | $ | 96,373 |
| | $ | 86,683 |
| $ | 100,374 |
| | $ | 95,491 |
| | $ | 97,881 |
| | $ | 98,869 |
|
| |
| (1) | Includes unamortized premiums/discounts, fair value option valuation adjustments, hedging and other basis adjustments. |
| |
| (2) | The 1211 FHLBanks have joint and several liability for the par amount of all of the Consolidated Obligations issued on their behalves. The par amount of the outstanding Consolidated Obligations for all of all 12the FHLBanks was (in millions) $847,1751,034,260 and $766,837989,311 at December 31, 20142017 and 2013,2016, respectively. |
The compositionWe fund LIBOR-indexed assets with Discount Notes, adjustable-rate Bonds, and swapped fixed-rate Bonds because they give us the ability to effectively match the LIBOR reset periods embedded in these assets. At December 31, 2017, the balance of Consolidated Obligations remained relatively stable in 2014 compared to 2013, but can vary with balance sheet needs as well as the market and funding environment. The growth in total Consolidated Obligations in 2014 related mostlyDiscount Notes was higher than at year-end 2016 due to the increase in Advance balances.certain short-term Advances and liquidity investments at the end of the year. However, the average balance of Discount Notes was lower in 2017 primarily due to continuing to shift the composition of shorter-term funding away from Discount Notes towards unswapped adjustable-rate LIBOR Bonds, which normally have longer maturities than Discount Notes. The intent is to lower exposure to unforeseen liquidity risk and compression in spreads between LIBOR and Discount Notes. This change in funding composition also reduced the income benefits associated with the elevated spreads experienced in 2017 (compared to historical averages) between LIBOR-indexed assets and interest paid on Discount Notes.
In 2014, interest costsThe composition of Consolidated Obligations relativeunswapped fixed-rate Bonds, which typically have initial maturities greater than one year, was relatively stable in 2017 compared to market indices (U.S. Treasuries and LIBOR) were comparable to recent years' historical differences.
2016. The following table shows the allocation on December 31, 20142017 of unswapped fixed-rate Bonds according to their final remaining maturity and next call date (for callable Bonds). We believe that the allocations of Bonds among these classifications provide effective mitigation of market risk exposure to both higher and lower interest rates.
| | | (In millions) | Year of Maturity | | Year of Next Call | Year of Maturity | | Year of Next Call |
| | Callable | Noncallable | Amortizing | Total | | Callable | Callable | Noncallable | Total | | Callable |
| Due in 1 year or less | $ | — |
| $ | 3,637 |
| $ | 24 |
| $ | 3,661 |
| | $ | 6,277 |
| $ | 615 |
| $ | 3,546 |
| $ | 4,161 |
| | $ | 6,585 |
|
| Due after 1 year through 2 years | 390 |
| 3,093 |
| 2 |
| 3,485 |
| | 405 |
| 704 |
| 4,579 |
| 5,283 |
| | 232 |
|
| Due after 2 years through 3 years | 1,052 |
| 3,042 |
| — |
| 4,094 |
| | 50 |
| 1,036 |
| 3,489 |
| 4,525 |
| | 36 |
|
| Due after 3 years through 4 years | 1,485 |
| 2,685 |
| — |
| 4,170 |
| | — |
| 1,629 |
| 2,588 |
| 4,217 |
| | — |
|
| Due after 4 years through 5 years | 535 |
| 1,992 |
| — |
| 2,527 |
| | — |
| 357 |
| 1,824 |
| 2,181 |
| | — |
|
| Thereafter | 3,270 |
| 4,917 |
| — |
| 8,187 |
| | — |
| 2,512 |
| 3,831 |
| 6,343 |
| | — |
|
| Total | $ | 6,732 |
| $ | 19,366 |
| $ | 26 |
| $ | 26,124 |
| | $ | 6,732 |
| $ | 6,853 |
| $ | 19,857 |
| $ | 26,710 |
| | $ | 6,853 |
|
Deposits
Members'Total deposits with us are normally a relatively minor source of low-cost funding. Total interest bearing deposits at December 31, 20142017 were $0.70.6 billion, a decrease of 19 percent$0.1 billion from year-end 2013.2016. The average balance of total interest bearing deposits in 20142017 was $0.8$0.7 billion, a decrease of 21 percent$0.1 billion from the average balance during 20132016.
Derivatives Hedging Activity and Liquidity
Our use of and accounting for derivatives is discussed in the "Effect of the Use of Derivatives on Net Interest Income" section in "Results of Operations." Liquidity is discussed in the "Liquidity Risk" section in “Quantitative and Qualitative Disclosures About Risk Management.” We did not change our strategy of using derivatives solely to manage market risk exposure in 2014.
Capital Resources
The GLB Act and Finance Agency regulations specify limits on how much we can leverage capital by requiring that we maintain, at all times, at least a four percent regulatory capital-to-assets ratio. A lower ratio indicates more leverage. If financial leverage increases too much, or becomes too close to the regulatory limit, we have discretionary ability within our Capital Plan to enact changes to ensure capitalization remains strong and in compliance with regulatory limits.
We have always complied with our regulatory capital requirements. The following tables present capital amounts and capital-to-assets ratios, on both a GAAP and regulatory basis.
| | | | Year Ended December 31, | Year Ended December 31, |
| (In millions) | 2014 | | 2013 | 2017 | | 2016 |
| | Period End | | Average | | Period End | | Average | Period End | | Average | | Period End | | Average |
| GAAP and Regulatory Capital | | | | | | | | | | | | | | |
| GAAP Capital Stock | $ | 4,267 |
| | $ | 4,298 |
| | $ | 4,698 |
| | $ | 4,534 |
| $ | 4,241 |
| | $ | 4,183 |
| | $ | 4,157 |
| | $ | 4,214 |
|
| Mandatorily Redeemable Capital Stock | 63 |
| | 105 |
| | 116 |
| | 139 |
| 30 |
| | 46 |
| | 35 |
| | 88 |
|
| Regulatory Capital Stock | 4,330 |
| | 4,403 |
| | 4,814 |
| | 4,673 |
| 4,271 |
| | 4,229 |
| | 4,192 |
| | 4,302 |
|
| Retained Earnings | 689 |
| | 666 |
| | 621 |
| | 598 |
| 940 |
| | 928 |
| | 834 |
| | 813 |
|
| Regulatory Capital | $ | 5,019 |
| | $ | 5,069 |
| | $ | 5,435 |
| | $ | 5,271 |
| $ | 5,211 |
| | $ | 5,157 |
| | $ | 5,026 |
| | $ | 5,115 |
|
| | | | 2014 | | 2013 | 2017 | | 2016 |
| | Period End | | Average | | Period End | | Average | Period End | | Average | | Period End | | Average |
| GAAP and Regulatory Capital-to-Assets Ratio | | | | | | | | | | | | | | |
| GAAP | 4.63 | % | | 4.90 | % | | 5.15 | % | | 5.47 | % | 4.83 | % | | 5.00 | % | | 4.76 | % | | 4.76 | % |
Regulatory | 4.71 |
| | 5.01 |
| | 5.27 |
| | 5.63 |
| 4.88 |
| | 5.06 |
| | 4.80 |
| | 4.85 |
|
| |
| (1) | At all times, the FHLBanks must maintain at least a four percent minimum regulatory capital-to-assets ratio. |
Both GAAP and regulatory capital-to-assets ratios remained above the regulatory required minimum of four percent. We consider the regulatory ratio to be a better representation of financial leverage than the GAAP ratio because, although the GAAP ratio treats mandatorily redeemable capital stock as a liability, it protects investors in our debt in the same way thatmanner as GAAP capital stock and retained earnings do. The regulatory capital-to-assets ratio of 4.71 percent at the end of 2014 means that, given the amount of regulatory capital, total assets could increase by approximately $19 billion with no new stock purchases before the capital-to-assets ratio would fall to four percent. This amount of growth in assets is unlikely to occur and, if it did, our Capital Plan would require us to obtain additional amounts of capital well before the four percent policy limit on capitalization would be reached.earnings.
The following table presents the sources of change in regulatory capital stock balances in 20142017 and 2013.2016.
| | | (In millions) | 2014 | | 2013 | 2017 | | 2016 |
| Regulatory stock balance at beginning of year | $ | 4,814 |
| | $ | 4,221 |
| $ | 4,192 |
| | $ | 4,467 |
|
| Stock purchases: | | | | | | |
| Membership stock | 11 |
| | 16 |
| 13 |
| | 34 |
|
| Activity stock | 73 |
| | 705 |
| 341 |
| | 58 |
|
| Stock repurchases/redemptions: | | | | | | |
| Redemption of member excess | (1 | ) | | (3 | ) | |
| Repurchase of member excess | (498 | ) | | — |
| |
| Redemption of Member excess | | (259 | ) | | (285 | ) |
| Withdrawals | (69 | ) | | (125 | ) | (16 | ) | | (82 | ) |
| Regulatory stock balance at the end of the year | $ | 4,330 |
| | $ | 4,814 |
| $ | 4,271 |
| | $ | 4,192 |
|
In 2014, the amount of capital decreased principally due to the redemption and repurchase of excess capital stock in February. The table below shows the amount of excess capital stock.
| | | (In millions) | December 31, 2014 | | December 31, 2013 | December 31, 2017 | | December 31, 2016 |
| Excess capital stock (Capital Plan definition) | $ | 504 |
| | $ | 1,229 |
| $ | 391 |
| | $ | 347 |
|
| Cooperative utilization of capital stock | $ | 441 |
| | $ | 404 |
| $ | 585 |
| | $ | 525 |
|
| Mission Asset Activity capitalized with cooperative capital stock | $ | 11,020 |
| | $ | 10,100 |
| $ | 14,620 |
| | $ | 13,133 |
|
A portion of capital stock is excess, meaning it is not required as a condition to being a Member and not required to capitalize Mission Asset Activity. Excess capital stock provides a base of capital to manage financial leverage at prudent levels, augment augments
loss protections for bondholders, and capitalizecapitalizes a portion of growth in Mission Assets. The amount of excess capital stock, as defined by our Capital Plan, was $504$391 million at December 31, 2014,2017. We could repurchase all excess stock on a decreasetimely basis and continue to meet our regulatory and prudential capital requirements.
See the "Capital Adequacy" section in “Quantitative and Qualitative Disclosures About Risk Management” for discussion of $725 million from year-end 2013, primarily due to the stock repurchase noted above and, secondarily, our growth in Advances.retained earnings.
Membership and Stockholders
In 2014,2017, we added two10 new memberMember stockholders and lost 24 members,37 Members, ending the year at 705.660 Member stockholders. The 2437 Members lost members included 2119 Members that merged with other Fifth District members, twoMembers, six that merged out of the District, and one that failedwithdrew from membership, and was taken into Federal Deposit Insurance Corporation receivership. The impact on our earnings and Mission Asset Activity from the members lost was negligible. We will continue to recruit the remaining institutions11 captive insurance companies that were no longer eligible for membership in order to maintain and expandeffective February 2017 based on the Finance Agency’s 2016 final rule on membership requirements. The subsequent loss of the captive insurance company Members did not significantly affect our customer base.financial condition or results of operations.
In 2014,2017, there were no material changes in the allocation of membership by state, charter type, or asset size. At the end of 2014,2017, the composition of membership by state was Ohio with 307,302, Kentucky with 208,184, and Tennessee with 190.174.
The following table provides the number of memberMember stockholders by charter type.
| | | | December 31, | December 31, |
| | 2014 | | 2013 | 2017 | | 2016 |
| Commercial Banks | 442 |
| | 457 |
| 385 |
| | 402 |
|
| Thrifts and Savings Banks | 101 |
| | 109 |
| |
| Savings Institutions | | 92 |
| | 96 |
|
| Credit Unions | 120 |
| | 120 |
| 132 |
| | 130 |
|
| Insurance Companies | 38 |
| | 37 |
| 46 |
| | 55 |
|
| Community Development Financial Institutions | 4 |
| | 4 |
| 5 |
| | 4 |
|
| Total | 705 |
| | 727 |
| 660 |
| | 687 |
|
The following table provides the ownership of capital stock by charter type.
| | | (In millions) | December 31, | December 31, |
| | 2014 | | 2013 | 2017 | | 2016 |
| Commercial Banks | $ | 3,441 |
| | $ | 3,878 |
| $ | 3,232 |
| | $ | 3,224 |
|
| Thrifts and Savings Banks | 376 |
| | 399 |
| |
| Savings Institutions | | 416 |
| | 391 |
|
| Credit Unions | 121 |
| | 120 |
| 169 |
| | 141 |
|
| Insurance Companies | 328 |
| | 301 |
| 423 |
| | 400 |
|
| Community Development Financial Institutions | 1 |
| | — |
| 1 |
| | 1 |
|
| Total GAAP Capital Stock | 4,267 |
| | 4,698 |
| 4,241 |
| | 4,157 |
|
| Mandatorily Redeemable Capital Stock | 63 |
| | 116 |
| 30 |
| | 35 |
|
| Total Regulatory Capital Stock | $ | 4,330 |
| | $ | 4,814 |
| $ | 4,271 |
| | $ | 4,192 |
|
Credit union membersMembers hold relatively less stock than their membership proportion because they tend to be smaller than the average memberMember and borrow less. Insurance company membersMembers hold relatively more stock than their membership proportion because they tend to be larger than the average memberMember and borrow more.
The following table provides a summary of memberMember stockholders by asset size.
| | | | December 31, | December 31, |
Member Asset Size (1) | 2014 | | 2013 | 2017 | | 2016 |
| Up to $100 million | 182 |
| | 196 |
| 171 |
| | 172 |
|
| > $100 up to $500 million | 381 |
| | 394 |
| 338 |
| | 359 |
|
| > $500 million up to $1 billion | 76 |
| | 73 |
| 66 |
| | 71 |
|
| > $1 billion | 66 |
| | 64 |
| 85 |
| | 85 |
|
| Total Member Stockholders | 705 |
| | 727 |
| 660 |
| | 687 |
|
| |
| (1) | The December 31 membership composition reflects members'Members' assets as of September 30 (thethe most-recently available figures for total assets).assets. |
Most membersMembers are smaller community financial institutions, with 8077 percent having assets up to $500 million. As noted elsewhere, having larger membersMembers is important to help achieve our mission objectives, including providing valuable products and services to all members.Members.
RESULTS OF OPERATIONS
Components of Earnings and Return on Equity
The following table is a summary income statement for the last three years. Each ROE percentage is computed by dividing income or expense for the category by the average amount of stockholders' equity for the period. Factors determining the level of, and changes in, net income and ROE are explained in the remainder of this section.
|
| | | | | | | | | | | | | | | | | | | | |
| (Dollars in millions) | 2014 | | 2013 | | 2012 |
| | Amount | | ROE (1) | | Amount | | ROE (1) | | Amount | | ROE (1) |
| Net interest income | $ | 317 |
| | 6.40 | % | | $ | 328 |
| | 6.40 | % | | $ | 308 |
| | 8.14 | % |
| (Reversal) provision for credit losses | — |
| | (0.01 | ) | | (7 | ) | | (0.15 | ) | | 1 |
| | 0.04 |
|
| Net interest income after (reversal) provision for credit losses | 317 |
| | 6.41 |
| | 335 |
| | 6.55 |
| | 307 |
| | 8.10 |
|
| Net gains on derivatives and hedging activities | 7 |
| | 0.13 |
| | 8 |
| | 0.16 |
| | 9 |
| | 0.23 |
|
| Other non-interest income | 16 |
| | 0.32 |
| | 12 |
| | 0.23 |
| | 4 |
| | 0.12 |
|
| Total non-interest income | 23 |
| | 0.45 |
| | 20 |
| | 0.39 |
| | 13 |
| | 0.35 |
|
| Total revenue | 340 |
| | 6.86 |
| | 355 |
| | 6.94 |
| | 320 |
| | 8.45 |
|
| Total non-interest expense | 68 |
| | 1.38 |
| | 64 |
| | 1.26 |
| | 58 |
| | 1.53 |
|
| Assessments | 28 |
| | 0.55 |
| | 30 |
| | 0.58 |
| | 27 |
| | 0.72 |
|
| Net income | $ | 244 |
| | 4.93 | % | | $ | 261 |
| | 5.10 | % | | $ | 235 |
| | 6.20 | % |
|
| | | | | | | | | | | | | | | | | | | | |
| (Dollars in millions) | 2017 | | 2016 | | 2015 |
| | Amount | | ROE (1) | | Amount | | ROE (1) | | Amount | | ROE (1) |
| Net interest income | $ | 429 |
| | 8.42 | % | | $ | 363 |
| | 7.24 | % | | $ | 327 |
| | 6.50 | % |
| Provision for credit losses | — |
| | 0.01 |
| | — |
| | — |
| | — |
| | — |
|
| Net interest income after provision for credit losses | 429 |
| | 8.41 |
| | 363 |
| | 7.24 |
| | 327 |
| | 6.50 |
|
| Non-interest income: | | | | | | | | | | | |
| Net realized gains from sale of held-to-maturity securities | — |
| | — |
| | 39 |
| | 0.77 |
| | — |
| | — |
|
| Net (losses) gains on derivatives and hedging activities | (24 | ) | | (0.48 | ) | | (47 | ) | | (0.95 | ) | | 13 |
| | 0.26 |
|
| Net gains on financial instruments held under fair value option | 10 |
| | 0.20 |
| | 40 |
| | 0.81 |
| | 1 |
| | 0.02 |
|
| Other non-interest income, net | 13 |
| | 0.25 |
| | 14 |
| | 0.29 |
| | 16 |
| | 0.31 |
|
| Total non-interest (loss) income | (1 | ) | | (0.03 | ) | | 46 |
| | 0.92 |
| | 30 |
| | 0.59 |
|
| Total income | 428 |
| | 8.38 |
| | 409 |
| | 8.16 |
| | 357 |
| | 7.09 |
|
| Non-interest expense | 79 |
| | 1.54 |
| | 111 |
| | 2.21 |
| | 75 |
| | 1.50 |
|
| Affordable Housing Program assessments | 35 |
| | 0.69 |
| | 30 |
| | 0.60 |
| | 28 |
| | 0.55 |
|
| Net income | $ | 314 |
| | 6.15 | % | | $ | 268 |
| | 5.35 | % | | $ | 254 |
| | 5.04 | % |
| |
| (1) | The ROE amounts have been computed using dollars in thousands. Accordingly, recalculations based upon the disclosed amounts (millions) in this tablemillions may produce nominally different results. |
Net income declined $17 million (six percent) in 2014 over 2013. ROE declined less (three percent) due to our repurchase of excess stock in February 2014. Profitability remained competitive as ROE continued to significantly exceed our benchmarks relative to short-term interest rates. Details on the individual factors contributing to the decrease in profitability are in the sections below.
Net Interest Income
The largest component of net income is net interest income. Our principal goalsgoal in managing net interest income areis to balance the trade-offs between maintaining a moderate market risk profile and ensuring profitability remains competitive. Effective risk/return management requires us to focus principally on the relationships among assets and liabilities that affect net interest income, rather than individual balance sheet and income statement accounts in isolation.
Our ROE normally is lower than that of many other financial institutions because of the cooperative wholesale business model that results in narrow spreads to funding costs on our primary assets, (Advances), the moderate overall risk profile, and the strategic objective to have a positive correlation of dividendsearnings to short-term interest rates.
Components of Net Interest Income
We generate net interest income from the following two components:
| |
| ▪ | Net interest rate spread. This component equals the balance of total earning assets multiplied by the difference between the book yield on interest-earning assets and the book cost of interest-bearing liabilities. It is composed of net (amortization)/accretion, prepayment fees on Advances, and all other earnings from interest-earning assets net of funding costs. The latter is the largest component and represents the coupon yields of interest-earning assets net of the coupon costs of Consolidated Obligations and deposits. |
| |
| ▪ | Earnings from funding assets with capital (“earnings from capital”). Because of our relatively low net interest rate spread compared to other financial institutions, we have historically derived a substantial proportionportion of net interest income from deploying interest-free capital in interest-earning assets. We deploy much of the capital in short-term and adjustable-rate assets in order to help ensure that ROE moves in the same direction as short-term interest rates and to help control market risk exposure. |
The following table shows the major components of net interest income. Reasons for the variance in net interest income between the periods are discussed below.
| | | (Dollars in millions) | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| | Amount | | Pct of Earning Assets | | Amount | | Pct of Earning Assets | | Amount | | Pct of Earning Assets | Amount | | % of Earning Assets | | Amount | | % of Earning Assets | | Amount | | % of Earning Assets |
| Components of net interest rate spread: | | | | | | | | | | | | | | | | | | | | | | |
Net (amortization)/accretion (1) (2) | $ | (11 | ) | | (0.01 | )% | | $ | (1 | ) | | — | % | | $ | (49 | ) | | (0.07 | )% | $ | (20 | ) | | (0.02 | )% | | $ | (54 | ) | | (0.05 | )% | | $ | (24 | ) | | (0.02 | )% |
Prepayment fees on Advances, net (2) | 4 |
| | — |
| | 2 |
| | — |
| | 20 |
| | 0.03 |
| 1 |
| | — |
| | 10 |
| | 0.01 |
| | 3 |
| | — |
|
| Other components of net interest rate spread | 291 |
| | 0.29 |
| | 290 |
| | 0.31 |
| | 293 |
| | 0.44 |
| 382 |
| | 0.38 |
| | 360 |
| | 0.34 |
| | 314 |
| | 0.30 |
|
| Total net interest rate spread | 284 |
| | 0.28 |
| | 291 |
| | 0.31 |
| | 264 |
| | 0.40 |
| 363 |
| | 0.36 |
| | 316 |
| | 0.30 |
| | 293 |
| | 0.28 |
|
| Earnings from funding assets with interest-free capital | 33 |
| | 0.03 |
| | 37 |
| | 0.04 |
| | 44 |
| | 0.06 |
| 66 |
| | 0.06 |
| | 47 |
| | 0.05 |
| | 34 |
| | 0.03 |
|
Total net interest income/net interest margin (3) | $ | 317 |
| | 0.31 | % | | $ | 328 |
| | 0.35 | % | | $ | 308 |
| | 0.46 | % | $ | 429 |
| | 0.42 | % | | $ | 363 |
| | 0.35 | % | | $ | 327 |
| | 0.31 | % |
| |
| (1) | Includes (amortization)/accretion of premiums/discounts on mortgage assets and Consolidated Obligations and deferred transaction costs (concession fees) for Consolidated Obligations. |
| |
| (2) | These components of net interest rate spread have been segregated here to display their relative impact. |
| |
| (3) | Net interest margin is net interest income before provision/(reversal)/provision for credit losses as a percentage of average total interest earning assets. |
Net Amortization/Accretion.Accretion: Net amortization/accretion (generally referred to as "amortization") includes monthly recognition of premiums and discounts paid on purchases of mortgage assets, as well as premiums, discounts and concessions paid on Consolidated Obligations.Obligations and other hedging basis adjustments. Periodic amortization adjustments do not necessarily indicate a trend in economic return over the entire life of mortgage assets, although amortization over the entire lifeit is one component of lifetime economic returns.
While netAmortization decreased in 2017 compared to 2016 primarily due to lower amortization has been largeof issuance costs (concession fees) on Consolidated Obligations and volatile in several periods over the last five years, it was moderate in 2014 and 2013. Netlower amortization of purchased mortgage premiums. Concession fee amortization was higher in 20142016 because of the decision to call certain Bonds as rates fell in 2016. Amortization of purchased mortgage premiums was lower in 2017 as a result of slower prepayments (actual and projected, as applicable) given the higher mortgage rates in 2017. Amortization was higher in 2016 compared to 2013 due2015 primarily to the lower than normal amortizationbecause of an acceleration in 2013, which had resulted from a declineprepayments speeds as long-term interest rates generally declined in actual and projected prepayment speeds in response to higher mortgage rates. Net amortization in 2014 was at a relatively normal level reflecting less fluctuation in mortgage rates.2016.
Prepayment Fees on Advances.Advances: Fees for members'Members' early repayment of certain Advances are designed to make us economically indifferent to whether membersMembers hold Advances to maturity or repay them before maturity. Although Advance prepayment fees can be and have been significant in the past, they were smallminimal in 20142017 and 2013,2015, reflecting a low amount of memberMember prepayments of Advances. Advance prepayment fees were higher in 2016 due to the prepayment of Advances related to an in-district merger in the third quarter of 2016.
Other Components of Net Interest Rate Spread.Spread: Excluding net amortization and prepayment fees, the total other components of net interest rate spread increased only $1$22 million in 20142017 compared to 2013. However, there were several factors that on a net basis offset one another.2016, compared to an increase of $46 million in 2016 over 2015. The following factors are presented in estimated approximate order of impact from largest to smallest.primarily accounted for the net increase.
20142017 Versus 20132016
| |
| ▪ | Asset-liability management-Higher spreads on short-term and LIBOR-indexed Advances-Unfavorable:Favorable: Management strategiesWider spreads on outstanding short-term and actions relatedLIBOR-indexed Advances relative to reducing our market risk exposure, along with changes in the market rate environment, lowered earnings on a net basis of $29 million for the following reasons:
|
| |
1) | Net interest income decreased $18 million due to a decline in mortgage asset spreads resulting from management actions to reduce market risk exposure by extending debt maturities and from continued run-off of higher yielding mortgages. |
| |
2) | Net interest income declined $11 million primarily because of changes in market spreadsfunding costs on Discount Notes funding LIBOR Advances. Secondarily, we extended maturities of Discount Notes in order to reduce the burden of replacing Discount Notes as frequently. |
| |
▪ | Advance growth-Favorable: The $5.1 billion growth in average Advance balances at higher spreads improvedand adjustable-rate Bonds increased net interest income by an estimated $26$44 million. This increase in net interest income was partially offset by earnings reductions in other non-interest income related to derivatives and hedging activities. The wider spreads were due to Advances repricing quicker than the debt funding them and regulatory requirements for the money market industry, which became effective in October 2016. These requirements have raised investor demand for short-term government and GSE debt compared to prime institutional funds, improving the pricing advantage for our funding. This factor was partially offset by a decrease in the amount of LIBOR-indexed assets funded by lower-cost Discount Notes.
|
| |
| ▪ | Higher balances on mortgage-backed securities-Growth in MPP balances-Favorable: The average balance of the mortgage-backed security portfolio increased $1.3 billion compared to 2013's average, which increased net interest income by an estimated $5 million.
|
2013 Versus 2012
| |
▪ | Advance growth-Favorable: The $28.8 billion growth in average Advance balances and new capital stock purchased to support the growth improved net interest income by an estimated $77 million. Leveraging the additional capital with mortgage-backed securities contributed to the increase in net interest income.
|
| |
▪ | Asset-liability management-Unfavorable: Management strategies and actions, along with changes in the market rate environment, related to reducing our market risk exposure lowered earnings on a net basis, for the following reasons:
|
| |
1) | We carried a lower amount of short-term debt funding fixed-rate mortgages in 2013, which resulted in a year-over-year $19 million decrease in net interest income. |
| |
2) | We use short-term Discount Notes to fund a substantial amount of LIBOR-indexed assets. The average market spread between LIBOR and Discount Notes narrowed in 2013, lowering net interest income by an estimated $15 million. |
The overall impact of these items decreased interest income an estimated $34 million.
| |
▪ | Trading securities-Unfavorable: In 2012, we held a large amount of investments in short-term trading securities (including instruments of the U.S. Treasury and GSEs) in order to enhance asset liquidity and manage counterparty credit risk. No such securities were held in 2013. Many of the trading securities had been purchased with above-market coupon rates, which resulted in a $32 million increase in net interest income in 2012 compared to 2013. However, this was offset by earnings reductions in other non-interest income (specifically, net unrealized market value losses on trading securities), with the resulting combined earnings from the trading securities reflecting at-market rates.
|
| |
▪ | Lower balances on MPP loans-UnfavorableFavorable: TheA $0.9 billion higher average balance of MPP loans declined $0.9 billion, which reducedincreased net interest income by an estimated $13 million.
|
| |
| ▪ | Lower balances and narrowerHigher spreads on liquidity investments-Favorable: Higher spreads earned on liquidity investments increased net interest income by an estimated $7 million. These spreads widened primarily due to liquidity investments repricing to higher rates quicker than the short-term investment portfolio-debt funding them and due to the improved pricing advantage for our funding given the money market reform discussed above.
|
| |
| ▪ | Lower spreads on mortgage assets-Unfavorable: AverageLower spreads earned on MPP loans and mortgage-backed securities decreased net interest income by an estimated $38 million. The decline was driven by actions taken to reduce market risk exposure, and by continued paydowns of higher-yielding mortgage assets and low-cost debt. These negative factors were partially offset by an increase in spreads from additional utilization of hedging with derivatives (swaptions) and the decision to call and replace certain debt at lower rates throughout the first three quarters of 2016. |
| |
| ▪ | Lower Advance balances-Unfavorable: The $1.6 billion decline in average Advance balances decreased net interest income by an estimated $4 million. |
2016 Versus 2015
| |
| ▪ | Funding of LIBOR-indexed assets-Favorable: Net interest income on LIBOR-indexed assets increased by an estimated $25 million primarily for short-term investments decreased $3.5the same reasons discussed above. |
| |
| ▪ | Growth in MPP Balances-Favorable: A $1.0 billion while asset spreads tightened due to management actions to enhance liquidity. We estimate the earnings reduction from these changes in the short-term investment portfolio was approximately $8higher average balance of MPP loans increased net interest income by an estimated $12 million. |
| |
| ▪ | Lower interest expenseHigher spreads on Mandatorily Redeemable Stock-liquidity investments-Favorable:Interest expense Higher spreads earned on this liability fell $7 million dueliquidity investments increased net interest income by an estimated $4 million. The increase in spreads was primarily driven by the larger increase in rates earned on liquidity investments relative to a lower average balance.their associated funding.
|
| |
| ▪ | Additional factors-Higher spreads on MPP loans-Favorable:Favorable: OtherAn increase in the spread earned on mortgage loans improved net interest income by an estimated $3 million. The increase was driven by additional utilization of hedging with derivatives (swaptions) and the decision to call and replace debt at lower rates driven by declines in long-term interest rates. These factors included changes in Advancewere partially offset by continued paydowns of higher-yielding mortgage assets and low-cost debt.
|
| |
| ▪ | Higher spreads andon mortgage-backed security balances that were not causedsecurities-Favorable: Higher spreads earned on new mortgage-backed securities increased net interest income by Advance growth.an estimated $3 million. |
Earnings From Capital.from Capital: The earningsEarnings from funding assets with interest-free capital declinedincreased $19 million and $13 million in 2014, as in the prior several years,2017 and 2016, respectively, due to the continued lowhigher short-term interest rate environment.rates.
Average Balance Sheet and Rates
The following table providestables provide average ratesbalances and average balancesrates for major balance sheet accounts, which determine the changes in the net interest rate spread. All data include the impact of interest rate swaps, which we allocate to each asset and liability category according to their designated hedging relationship. The changes in the net interest rate spread and net interest margin in 2014 versus 2013 and in 2013 versus 2012 occurred mostly from the net impact of the factors discussed above in “Components of Net Interest Income.”
| | | (Dollars in millions) | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| | Average Balance | | Interest | | Average Rate (1) | | Average Balance | | Interest | | Average Rate (1) | | Average Balance | | Interest | | Average Rate (1) | Average Balance | | Interest | | Average Rate (1) | | Average Balance | | Interest | | Average Rate (1) | | Average Balance | | Interest | | Average Rate (1) |
| Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Advances | $ | 66,642 |
| | $ | 318 |
| | 0.48 | % | | $ | 61,574 |
| | $ | 308 |
| | 0.50 | % | | $ | 32,781 |
| | $ | 261 |
| | 0.80 | % | $ | 67,656 |
| | $ | 905 |
| | 1.34 | % | | $ | 69,282 |
| | $ | 587 |
| | 0.85 | % | | $ | 70,458 |
| | $ | 369 |
| | 0.52 | % |
Mortgage loans held for portfolio (2) | 6,804 |
| | 237 |
| | 3.48 |
| | 7,065 |
| | 269 |
| | 3.80 |
| | 7,981 |
| | 313 |
| | 3.92 |
| 9,447 |
| | 297 |
| | 3.14 |
| | 8,541 |
| | 261 |
| | 3.06 |
| | 7,581 |
| | 251 |
| | 3.32 |
|
Federal funds sold and securities purchased under resale agreements | 9,673 |
| | 7 |
| | 0.07 |
| | 9,110 |
| | 8 |
| | 0.09 |
| | 8,004 |
| | 11 |
| | 0.14 |
| 9,184 |
| | 94 |
| | 1.02 |
| | 11,218 |
| | 44 |
| | 0.39 |
| | 11,493 |
| | 14 |
| | 0.12 |
|
Interest-bearing deposits in banks (3) (4) (5) | 2,244 |
| | 3 |
| | 0.15 |
| | 1,414 |
| | 2 |
| | 0.14 |
| | 1,955 |
| | 3 |
| | 0.17 |
| 624 |
| | 6 |
| | 1.03 |
| | 1,071 |
| | 6 |
| | 0.57 |
| | 1,141 |
| | 2 |
| | 0.20 |
|
| Mortgage-backed securities | 15,594 |
| | 343 |
| | 2.20 |
| | 14,320 |
| | 313 |
| | 2.19 |
| | 11,375 |
| | 293 |
| | 2.58 |
| 14,710 |
| | 306 |
| | 2.08 |
| | 15,061 |
| | 325 |
| | 2.16 |
| | 14,664 |
| | 326 |
| | 2.22 |
|
Other investments (4) | 37 |
| | — |
| | 0.08 |
| | 26 |
| | — |
| | 0.12 |
| | 4,392 |
| | 40 |
| | 0.90 |
| 33 |
| | — |
| | 0.83 |
| | 32 |
| | — |
| | 0.44 |
| | 41 |
| | — |
| | 0.11 |
|
| Loans to other FHLBanks | — |
| | — |
| | — |
| | 4 |
| | — |
| | 0.13 |
| | 3 |
| | — |
| | 0.12 |
| — |
| | — |
| | — |
| | 3 |
| | — |
| | 0.41 |
| | — |
| | — |
| | — |
|
| Total earning assets | 100,994 |
| | 908 |
| | 0.90 |
| | 93,513 |
| | 900 |
| | 0.96 |
| | 66,491 |
| | 921 |
| | 1.39 |
| |
| Total interest-earning assets | | 101,654 |
| | 1,608 |
| | 1.58 |
| | 105,208 |
| | 1,223 |
| | 1.16 |
| | 105,378 |
| | 962 |
| | 0.92 |
|
Less: allowance for credit losses on mortgage loans | 6 |
| | | | | | 12 |
| | | | | | 20 |
| | | | | 1 |
| | | | | | 1 |
| | | | | | 2 |
| | | | |
| Other assets | 169 |
| | | | | | 190 |
| | | | | | 231 |
| | | | | 264 |
| | | | | | 218 |
| | | | | | 163 |
| | | | |
| Total assets | $ | 101,157 |
| | | | | | $ | 93,691 |
| | | | | | $ | 66,702 |
| | | | | $ | 101,917 |
| | | | | | $ | 105,425 |
| | | | | | $ | 105,539 |
| | | | |
| Liabilities and Capital | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Term deposits | $ | 93 |
| | — |
| | 0.19 |
| | $ | 120 |
| | — |
| | 0.17 |
| | $ | 114 |
| | — |
| | 0.22 |
| $ | 76 |
| | 1 |
| | 0.72 |
| | $ | 100 |
| | — |
| | 0.35 |
| | $ | 132 |
| | — |
| | 0.20 |
|
Other interest bearing deposits (5) | 753 |
| | — |
| | 0.01 |
| | 955 |
| | — |
| | 0.01 |
| | 1,050 |
| | — |
| | 0.01 |
| 621 |
| | 4 |
| | 0.68 |
| | 734 |
| | 1 |
| | 0.13 |
| | 704 |
| | — |
| | 0.01 |
|
| Short-term borrowings | 35,992 |
| | 28 |
| | 0.08 |
| | 34,574 |
| | 37 |
| | 0.11 |
| | 29,499 |
| | 31 |
| | 0.10 |
| |
| Discount Notes | | 43,124 |
| | 385 |
| | 0.89 |
| | 49,835 |
| | 174 |
| | 0.35 |
| | 52,706 |
| | 65 |
| | 0.12 |
|
| Unswapped fixed-rate Bonds | 25,605 |
| | 519 |
| | 2.03 |
| | 23,117 |
| | 488 |
| | 2.11 |
| | 18,738 |
| | 544 |
| | 2.90 |
| 26,768 |
| | 527 |
| | 1.97 |
| | 26,549 |
| | 532 |
| | 2.00 |
| | 26,425 |
| | 528 |
| | 2.00 |
|
| Unswapped adjustable-rate Bonds | 29,355 |
| | 33 |
| | 0.11 |
| | 24,319 |
| | 35 |
| | 0.14 |
| | 3,086 |
| | 7 |
| | 0.23 |
| 18,500 |
| | 185 |
| | 1.00 |
| | 14,512 |
| | 84 |
| | 0.58 |
| | 13,385 |
| | 21 |
| | 0.15 |
|
| Swapped Bonds | 3,721 |
| | 7 |
| | 0.20 |
| | 4,673 |
| | 7 |
| | 0.15 |
| | 9,267 |
| | 19 |
| | 0.21 |
| 7,099 |
| | 75 |
| | 1.05 |
| | 7,973 |
| | 66 |
| | 0.83 |
| | 6,504 |
| | 19 |
| | 0.29 |
|
| Mandatorily redeemable capital stock | 105 |
| | 4 |
| | 4.01 |
| | 139 |
| | 5 |
| | 3.95 |
| | 252 |
| | 12 |
| | 4.64 |
| 46 |
| | 2 |
| | 5.42 |
| | 88 |
| | 3 |
| | 4.01 |
| | 61 |
| | 2 |
| | 4.00 |
|
| Other borrowings | — |
| | — |
| | — |
| | 4 |
| | — |
| | 0.12 |
| | 1 |
| | — |
| | 0.29 |
| 1 |
| | — |
| | 1.17 |
| | — |
| | — |
| | 0.37 |
| | — |
| | — |
| | — |
|
| Total interest-bearing liabilities | 95,624 |
| | 591 |
| | 0.62 |
| | 87,901 |
| | 572 |
| | 0.65 |
| | 62,007 |
| | 613 |
| | 0.99 |
| 96,235 |
| | 1,179 |
| | 1.22 |
| | 99,791 |
| | 860 |
| | 0.86 |
| | 99,917 |
| | 635 |
| | 0.64 |
|
| Non-interest bearing deposits | 4 |
| | | | | | 18 |
| | | | | | 18 |
| | | | | 2 |
| | | | | | 1 |
| | | | | | — |
| | | | |
| Other liabilities | 573 |
| | | | | | 651 |
| | | | | | 888 |
| | | | | 582 |
| | | | | | 618 |
| | | | | | 578 |
| | | | |
| Total capital | 4,956 |
| | | | | | 5,121 |
| | | | | | 3,789 |
| | | | | 5,098 |
| | | | | | 5,015 |
| | | | | | 5,044 |
| | | | |
| Total liabilities and capital | $ | 101,157 |
| | | | | | $ | 93,691 |
| | | | | | $ | 66,702 |
| | | | | $ | 101,917 |
| | | | | | $ | 105,425 |
| | | | | | $ | 105,539 |
| | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest rate spread | | | | | 0.28 | % | | | | | | 0.31 | % | | | | | | 0.40 | % | | | | | 0.36 | % | | | | | | 0.30 | % | | | | | | 0.28 | % |
Net interest income and net interest margin (6) | | | $ | 317 |
| | 0.31 | % | | | | $ | 328 |
| | 0.35 | % | | | | $ | 308 |
| | 0.46 | % | | | $ | 429 |
| | 0.42 | % | | | | $ | 363 |
| | 0.35 | % | | | | $ | 327 |
| | 0.31 | % |
Average interest-earning assets to interest-bearing liabilities | | | | | 105.62 | % | | | | | | 106.38 | % | | | | | | 107.23 | % | | | | | 105.63 | % | | | | | | 105.43 | % | | | | | | 105.47 | % |
| |
| (1) | Amounts used to calculate average rates are based on dollars in thousands. Accordingly, recalculations based upon the disclosed amounts (millions)in millions may not produce the same results. |
| |
| (2) | Non-accrual loans are included in average balances used to determine average rate. |
| |
| (3) | Includes certificates of deposit and bank notes that are classified as available-for-sale securities. |
| |
| (4) | Includes available-for-sale securities based on their amortized costs. The yield information does not give effect to changes in fair value that are reflected as a component of stockholders' equity for available-for-sale securities. |
| |
| (5) | The average balance amounts include the rights or obligations to cash collateral, which are included in the fair value of derivative assets or derivative liabilities on the Statements of Condition at period end. |
| |
| (6) | Net interest margin is net interest income before provision/(reversal)/provision for credit losses as a percentage of average total interest earning assets. |
Rates on short-term and adjustable-rate assets and liabilities rose in 2017 and 2016 following the increases in short-term LIBOR and the Federal funds target rate. The result was increases in the net average rate on total interest-earning assets of 0.42 and 0.24 percentage points in 2017 and 2016, respectively.
2014 Versus 2013.The net impact was an overall increase in net interest spread and net interest margin decreased due to an in both 2016 and 2017. The larger increase in Advances balances and, secondarily,2017 was due to the net effect of the otherfavorable earnings factors discussed in the previous section. Althoughsection, with the Advance growth increased net interest income because of alargest contributing factor being the larger asset base, the growth lowered the spread and margin because Advances tend to have narrower spreads to funding costs compared to mortgage assets.
The decline in the average rate on total earning assets and total interest-bearing liabilities resulted from the continued low rate environment and an increase in the balance sheet composition of instruments (duerates earned on short-term and LIBOR-indexed Advances relative to the Advance growth) that tend to carry lower interest rates. The low rate environment particularly resulted in a decline in the average rate of long-term assets (such as certain Advances and mortgage loans held for portfolio) and long-term liabilities (unswapped fixed-rate Bonds). This is because a substantial portion of the principal paid down on these assets and liabilities, which had higher rates, was replaced with new assets and liabilities at lower rates.
Rates on short-term assets (Federal funds sold and securities sold under resale agreements) and liabilities (short-term borrowings and unswapped adjustable-rate Bonds) decreased slightly in 2014 as the low-rate rate environment continued.
2013 Versus 2012.The decline in net interest spread and net interest margin and in the average rate on total earning assets and total interest-bearing liabilities resulted from the same factors listed above in the 2014 versus 2013 comparison. The average rate on other investments decreased in 2013 since most of the instruments in this portfolio in 2012 were trading securities with above-market coupons purchased at premiums, with corresponding market value adjustments reflected in non-interest income as losses to the securities' fair values. All of these investments matured in late 2012.associated funding.
Volume/Rate Analysis
Changes in both average balances (volume) and interest rates influence changes in net interest income. Theincome, as shown in the following table summarizes these changes and trends in interest income and interest expense.table.
| | | (In millions) | 2014 over 2013 | | 2013 over 2012 | 2017 over 2016 | | 2016 over 2015 |
| | Volume (1)(3) | | Rate (2)(3) | | Total | | Volume (1)(3) | | Rate (2)(3) | | Total | Volume (1)(3) | | Rate (2)(3) | | Total | | Volume (1)(3) | | Rate (2)(3) | | Total |
| Increase (decrease) in interest income | | | | | | | | | | | | | | | | | | | | | | |
| Advances | $ | 25 |
| | $ | (15 | ) | | $ | 10 |
| | $ | 169 |
| | $ | (122 | ) | | $ | 47 |
| $ | (14 | ) | | $ | 332 |
| | $ | 318 |
| | $ | (6 | ) | | $ | 224 |
| | $ | 218 |
|
| Mortgage loans held for portfolio | (10 | ) | | (22 | ) | | (32 | ) | | (35 | ) | | (9 | ) | | (44 | ) | 28 |
| | 8 |
| | 36 |
| | 31 |
| | (21 | ) | | 10 |
|
| Federal funds sold and securities purchased under resale agreements | 1 |
| | (2 | ) | | (1 | ) | | 1 |
| | (4 | ) | | (3 | ) | (9 | ) | | 59 |
| | 50 |
| | — |
| | 30 |
| | 30 |
|
| Interest-bearing deposits in banks | 1 |
| | — |
| | 1 |
| | (1 | ) | | — |
| | (1 | ) | (4 | ) | | 4 |
| | — |
| | — |
| | 4 |
| | 4 |
|
| Mortgage-backed securities | 28 |
| | 2 |
| | 30 |
| | 69 |
| | (49 | ) | | 20 |
| (7 | ) | | (12 | ) | | (19 | ) | | 8 |
| | (9 | ) | | (1 | ) |
| Other investments | — |
| | — |
| | — |
| | (21 | ) | | (19 | ) | | (40 | ) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Loans to other FHLBanks | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total | 45 |
| | (37 | ) | | 8 |
| | 182 |
| | (203 | ) | | (21 | ) | (6 | ) | | 391 |
| | 385 |
| | 33 |
| | 228 |
| | 261 |
|
| Increase (decrease) in interest expense | | | | | | | | | | | | | | | | | | | | | | |
| Term deposits | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | 1 |
| | 1 |
| | — |
| | — |
| | — |
|
| Other interest-bearing deposits | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | 3 |
| | 3 |
| | — |
| | 1 |
| | 1 |
|
| Short-term borrowings | 1 |
| | (10 | ) | | (9 | ) | | 5 |
| | 1 |
| | 6 |
| |
| Discount Notes | | (26 | ) | | 237 |
| | 211 |
| | (3 | ) | | 112 |
| | 109 |
|
| Unswapped fixed-rate Bonds | 51 |
| | (20 | ) | | 31 |
| | 111 |
| | (167 | ) | | (56 | ) | 4 |
| | (9 | ) | | (5 | ) | | 2 |
| | 2 |
| | 4 |
|
| Unswapped adjustable-rate Bonds | 7 |
| | (9 | ) | | (2 | ) | | 32 |
| | (4 | ) | | 28 |
| 27 |
| | 74 |
| | 101 |
| | 2 |
| | 61 |
| | 63 |
|
| Swapped Bonds | (2 | ) | | 2 |
| | — |
| | (8 | ) | | (4 | ) | | (12 | ) | (8 | ) | | 17 |
| | 9 |
| | 5 |
| | 42 |
| | 47 |
|
| Mandatorily redeemable capital stock | (1 | ) | | — |
| | (1 | ) | | (5 | ) | | (2 | ) | | (7 | ) | (2 | ) | | 1 |
| | (1 | ) | | 1 |
| | — |
| | 1 |
|
| Other borrowings | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total | 56 |
| | (37 | ) | | 19 |
| | 135 |
| | (176 | ) | | (41 | ) | (5 | ) | | 324 |
| | 319 |
| | 7 |
| | 218 |
| | 225 |
|
| Increase (decrease) in net interest income | $ | (11 | ) | | $ | — |
| | $ | (11 | ) | | $ | 47 |
| | $ | (27 | ) | | $ | 20 |
| $ | (1 | ) | | $ | 67 |
| | $ | 66 |
| | $ | 26 |
| | $ | 10 |
| | $ | 36 |
|
| |
| (1) | Volume changes are calculated as the change in volume multiplied by the prior year rate. |
| |
| (2) | Rate changes are calculated as the change in rate multiplied by the prior year average balance. |
| |
| (3) | Changes that are not identifiable as either volume-related or rate-related, but rather are equally attributable to both volume and rate changes, have been allocated to the volume and rate categories based upon the proportion of the absolute value of the volume and rate changes. |
Effect of the Use of Derivatives on Net Interest Income
The following table shows the effect of using derivatives on net interest income. The effect on earnings from the non-interestother components of derivatives, related toincluding market value adjustments, is provided in the next section “Non-Interest Income and Non-Interest Expense.”
| | (In millions)
| 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| Advances: | | | | | | | | | | |
| Amortization/accretion of hedging activities in net interest income | $ | (3 | ) | | $ | (3 | ) | | $ | (4 | ) | |
| Amortization of hedging activities in net interest income | | $ | (2 | ) | | $ | (3 | ) | | $ | (3 | ) |
| Net interest settlements included in net interest income | (91 | ) | | (107 | ) | | (245 | ) | (18 | ) | | (60 | ) | | (84 | ) |
| Mortgage loans: | | | | | | | | | | |
| Amortization of derivative fair value adjustments in net interest income | (4 | ) | | (2 | ) | | (3 | ) | (3 | ) | | (7 | ) | | (5 | ) |
| Consolidated Obligation Bonds: | | | | | | | | | | |
| Net interest settlements included in net interest income | 18 |
| | 27 |
| | 37 |
| (1 | ) | | 8 |
| | 20 |
|
| Decrease to net interest income | $ | (80 | ) | | $ | (85 | ) | | $ | (215 | ) | $ | (24 | ) | | $ | (62 | ) | | $ | (72 | ) |
Most of our use of derivatives synthetically convert the intermediate- and long-term fixed interest rates on certain Advances and Bonds to adjustable-coupon rates tied to short-term LIBOR (mostly one-(one- and three-month repricing resets). These adjustable-rate coupons normally carry lower interest rates than the fixed rates.fixed-rates. The use of derivatives lowered net interest income in each
period primarily because the Advances that were swapped to short-term LIBOR had higher fixed interest rates than the Bonds
that were swapped to short-term LIBOR. ThisHowever, the reduction in earnings was acceptable because it enabled us, as we designed, to significantly lower market risk exposure by creating a much closer match of actual cash flows between assets and liabilities than would occur otherwise. The reductionless in earnings was significantly smaller in 2014 and 2013 compared to 2012 primarily2017 due to a decreasethe recent increases in the notional amount of swaps outstanding.short-term LIBOR.
Provision for Credit Losses
In 2014, delinquency trends in the MPP continued to decrease while home prices were relatively steady, resulting in2017, we recorded a $0.5 million reversal for estimated incurred credit losses. In 2013, we recorded a $7.5 million reversalprovision for estimated incurred credit losses in the MPP driven by higher home prices combined with improved delinquency trendsrelated to the hurricanes that impacted the United States in that year. Further information isthe third quarter of 2017 compared to no provision for estimated incurred credit losses in 2016 and 2015. See the "Credit Risk - MPP" section in "Quantitative and Qualitative Disclosures About Risk Management" and Note 10 of the Notes to Financial Statements.Statements for additional information on credit exposure in the MPP.
Non-Interest Income and Non-Interest Expense
The following table presents non-interest income and non-interest expense for each of the last three years.
| | | (Dollars in millions) | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| Non-interest income | | | | | | |
| Net gains on held-to-maturity securities | $ | — |
| | $ | — |
| | $ | 29 |
| |
| Net gains on derivatives and hedging activities | 7 |
| | 8 |
| | 9 |
| |
| Other non-interest income (loss), net | 16 |
| | 12 |
| | (25 | ) | |
| Total non-interest income | $ | 23 |
| | $ | 20 |
| | $ | 13 |
| |
| Non-interest (loss) income | | | | | | |
| Net realized gains from sale of held-to-maturity securities | | $ | — |
| | $ | 39 |
| | $ | — |
|
| Net (losses) gains on derivatives and hedging activities | | (24 | ) | | (47 | ) | | 13 |
|
| Net gains on financial instruments held under fair value option | | 10 |
| | 40 |
| | 1 |
|
| Other non-interest income, net | | 13 |
| | 14 |
| | 16 |
|
| Total non-interest (loss) income | | $ | (1 | ) | | $ | 46 |
| | $ | 30 |
|
| Non-interest expense | | | | | | | | | | |
| Compensation and benefits | $ | 37 |
| | $ | 34 |
| | $ | 31 |
| $ | 46 |
| | $ | 42 |
| | $ | 40 |
|
| Other operating expense | 17 |
| | 17 |
| | 14 |
| 19 |
| | 26 |
| | 22 |
|
| Finance Agency | 7 |
| | 5 |
| | 6 |
| 7 |
| | 6 |
| | 7 |
|
| Office of Finance | 4 |
| | 5 |
| | 3 |
| 4 |
| | 4 |
| | 4 |
|
| Litigation settlement | | — |
| | 25 |
| | — |
|
| Other | 3 |
| | 3 |
| | 4 |
| 3 |
| | 8 |
| | 2 |
|
| Total non-interest expense | $ | 68 |
| | $ | 64 |
| | $ | 58 |
| $ | 79 |
| | $ | 111 |
| | $ | 75 |
|
| Average total assets | $ | 101,157 |
| | $ | 93,691 |
| | $ | 66,702 |
| $ | 101,917 |
| | $ | 105,425 |
| | $ | 105,539 |
|
| Average regulatory capital | 5,069 |
| | 5,271 |
| | 4,050 |
| 5,157 |
| | 5,115 |
| | 5,120 |
|
Total other expense to average total assets (1) | 0.07 | % | | 0.07 | % | | 0.09 | % | |
Total other expense to average regulatory capital (1) | 1.35 |
| | 1.22 |
| | 1.43 |
| |
Total non-interest expense to average total assets (1) | | 0.08 | % | | 0.11 | % | | 0.07 | % |
Total non-interest expense to average regulatory capital (1) | | 1.53 |
| | 2.17 |
| | 1.48 |
|
| |
| (1) | Amounts used to calculate percentages are based on dollars in thousands. Accordingly, recalculations based upon the disclosed amounts (millions)in millions may not produce the same results. |
Non-interestThe $47 million decrease in non-interest (loss) income increased in 2014 compared2017 was primarily due to 2013 primarily from higher fees received on Lettersnon-interest income in 2016 as a result of Credit because notional balances of Letters increased.
The net gains on held-to-maturity securities in 2012 occurred from the salessale of mortgage-backed securities. Each of the securities sold had less than 15 percent of the original acquired principal remaining and were sold under our periodic clean-up process. Secondarily, the lower non-interest (loss) income was driven by larger losses from derivatives and hedging activities, net of gains on financial instruments held under the fair value option in 2017 than in 2016. The table below presents further information on the net effect of derivatives and hedging activities on non-interest income.
Non-interest expense decreased in the 2017 compared to 2016 primarily due to a settlement of approximately $25 million in December 2016 of all claims related to the 2008 Lehman bankruptcy. In addition, non-interest expense was lower in 2017 than in 2016 due to lower operating expenses driven by a decrease in legal fees.
The otherNon-interest income was higher in 2016 compared to 2015 primarily due to the gain on sale of securities as discussed in the 2017 to 2016 comparison. In addition, non-interest lossexpense was higher in 2012 was2016 compared to 2015 primarily due primarily to losses recorded on trading securities that were no longer held in 2013 or 2014. The losses on the trading securities occurred because these securities had above-market coupon rates and, therefore, were purchased at prices above par. The related premiums paid are recognized as mark-to-market losses as their fair values approach par at maturity.litigation settlement discussed above.
Effect of Derivatives and Hedging Activities on Non-Interest Income
The following tables present the net effect of derivatives and hedging activities on non-interest income.
|
| | | | | | | | | | | |
| (In millions) | 2014 | | 2013 | | 2012 |
| Net gains on derivatives and hedging activities | | | | | |
| Advances: | | | | | |
| Gains on fair value hedges | $ | 5 |
| | $ | 10 |
| | $ | 7 |
|
| Gains (losses) on derivatives not receiving hedge accounting | — |
| | 5 |
| | (5 | ) |
| Mortgage loans: | | | | | |
| (Losses) gains on derivatives not receiving hedge accounting | — |
| | (11 | ) | | 1 |
|
| Consolidated Obligation Bonds: | | | | | |
| Gains on fair value hedges | — |
| | 1 |
| | — |
|
| Gains on derivatives not receiving hedge accounting | 2 |
| | 3 |
| | 6 |
|
| Total net gains on derivatives and hedging activities | 7 |
| | 8 |
| | 9 |
|
Net gains on financial instruments held at fair value (1) | 2 |
| | — |
| | 2 |
|
| Total net effect of derivatives and hedging activities | $ | 9 |
| | $ | 8 |
| | $ | 11 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | 2017 |
| | Advances | | Mortgage Loans | | Consolidated Obligation Bonds | | Balance Sheet (1) | | Other (2) | | Total |
| Net effect of derivatives and hedging activities | | | | | | | | | | | |
| (Losses) gains on fair value hedges | $ | (1 | ) | | $ | — |
| | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Gains (losses) on derivatives not receiving hedge accounting | 1 |
| | 4 |
| | (13 | ) | | (17 | ) | | — |
| | (25 | ) |
Other (2) | — |
| | — |
| | — |
| | — |
| | 1 |
| | 1 |
|
| Total net gains (losses) on derivatives and hedging activities | — |
| | 4 |
| | (12 | ) | | (17 | ) | | 1 |
| | (24 | ) |
Net gains on financial instruments held under fair value option (3) | — |
| | — |
| | 10 |
| | — |
| | — |
| | 10 |
|
| Total net effect on non-interest income | $ | — |
|
| $ | 4 |
|
| $ | (2 | ) |
| $ | (17 | ) | | $ | 1 |
| | $ | (14 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| (In millions) | 2016 |
| | Advances | | Mortgage Loans | | Consolidated Obligation Bonds | | Balance Sheet (1) | | Total |
| Net effect of derivatives and hedging activities | | | | | | | | | |
| Gains on fair value hedges | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1 |
|
| Gains (losses) on derivatives not receiving hedge accounting | — |
| | 3 |
| | (57 | ) | | 6 |
| | (48 | ) |
| Total net gains (losses) on derivatives and hedging activities | 1 |
| | 3 |
| | (57 | ) | | 6 |
| | (47 | ) |
Net gains on financial instruments held under fair value option (3) | — |
| | — |
| | 40 |
| | — |
| | 40 |
|
| Total net effect on non-interest income | $ | 1 |
|
| $ | 3 |
|
| $ | (17 | ) |
| $ | 6 |
| | $ | (7 | ) |
|
| | | | | | | | | | | | | | | |
| (In millions) | 2015 |
| | Advances | | Mortgage Loans | | Consolidated Obligation Bonds | | Total |
| Net effect of derivatives and hedging activities | | | | | | | |
| Gains on fair value hedges | $ | 2 |
| | $ | — |
| | $ | 1 |
| | $ | 3 |
|
| Gains on derivatives not receiving hedge accounting | 1 |
| | 1 |
| | 8 |
| | 10 |
|
| Total net gains on derivatives and hedging activities | 3 |
| | 1 |
| | 9 |
| | 13 |
|
Net gains on financial instruments held under fair value option (3) | — |
| | — |
| | 1 |
| | 1 |
|
| Total net effect on non-interest income | $ | 3 |
|
| $ | 1 |
|
| $ | 10 |
|
| $ | 14 |
|
| |
| (1) | Balance sheet includes swaptions, which are not designated as hedging a specific financial instrument. |
| |
| (2) | Other includes the price alignment amount on derivatives for which variation margin is characterized as a daily settled contract. |
| |
| (3) | Includes only those gains or losses on financial instruments held at fair value that have an economic derivative "assigned." |
The amountstotal amount of income volatility in overall derivatives and hedging activities were modestduring 2017, 2016, and 2015 was moderate compared to the notional principal amounts well within the range of normal historical fluctuation, and consistent with the close hedging relationships of our derivative transactions. The volatility represents both unrealized fair value gains and losses on instruments we expect to hold to maturity and the realized costs of utilizing swaptions to hedge market risk exposure associated with mortgage assets.
Analysis of Quarterly ROE
The following table summarizes the components of 2014's2017's quarterly ROE and provides quarterly ROE for 20132016 and 2012.2015.
|
| | | | | | | | | | |
| | 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | Total |
| Components of 2014 ROE: | | | | | |
| Net interest income: | | | | | |
| Other net interest income | 6.13 | % | 6.54 | % | 6.65 | % | 6.84 | % | 6.54 | % |
| Net (amortization)/accretion | (0.13 | ) | (0.28 | ) | 0.07 |
| (0.52 | ) | (0.21 | ) |
| Prepayment fees | 0.08 |
| 0.09 |
| 0.03 |
| 0.09 |
| 0.07 |
|
| Total net interest income | 6.08 |
| 6.35 |
| 6.75 |
| 6.41 |
| 6.40 |
|
| (Reversal) Provision for credit losses | — |
| (0.07 | ) | — |
| 0.03 |
| (0.01 | ) |
| Net interest income after (reversal) provision for credit losses | 6.08 |
| 6.42 |
| 6.75 |
| 6.38 |
| 6.41 |
|
Net (losses) gains on derivatives and hedging activities | (0.09 | ) | 0.28 |
| 0.01 |
| 0.35 |
| 0.13 |
|
| Other non-interest income | 0.38 |
| 0.25 |
| 0.30 |
| 0.36 |
| 0.32 |
|
| Total non-interest income | 0.29 |
| 0.53 |
| 0.31 |
| 0.71 |
| 0.45 |
|
| Total revenue | 6.37 |
| 6.95 |
| 7.06 |
| 7.09 |
| 6.86 |
|
| Total non-interest expense | 1.35 |
| 1.38 |
| 1.42 |
| 1.37 |
| 1.38 |
|
| Assessments | 0.51 |
| 0.57 |
| 0.57 |
| 0.58 |
| 0.55 |
|
| 2014 ROE | 4.51 | % | 5.00 | % | 5.07 | % | 5.14 | % | 4.93 | % |
| | | | | | |
| 2013 ROE | 5.49 | % | 4.80 | % | 5.37 | % | 4.78 | % | 5.10 | % |
| | | | | | |
| 2012 ROE | 6.50 | % | 6.03 | % | 6.05 | % | 6.22 | % | 6.20 | % |
ROE in the first quarter of 2014 was lower than the last three quarters because the second quarter and beyond reflect the full impact of the repurchase of excess stock in February. The upward trend in other net interest income throughout 2014 is attributable to a moderately increasing amount of short-funding. |
| | | | | | | | | | |
| | 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | Total |
| Components of 2017 ROE: | | | | | |
| Net interest income: | | | | | |
| Other net interest income | 8.74 | % | 8.83 | % | 8.79 | % | 8.78 | % | 8.78 | % |
| Net amortization | (0.45 | ) | (0.36 | ) | (0.36 | ) | (0.41 | ) | (0.39 | ) |
| Prepayment fees | 0.03 |
| 0.01 |
| 0.06 |
| 0.01 |
| 0.03 |
|
| Total net interest income | 8.32 |
| 8.48 |
| 8.49 |
| 8.38 |
| 8.42 |
|
| Provision for credit losses | — |
| — |
| 0.04 |
| — |
| 0.01 |
|
| Net interest income after provision for credit losses | 8.32 |
| 8.48 |
| 8.45 |
| 8.38 |
| 8.41 |
|
Net (losses) gains on derivatives and hedging activities | (0.65 | ) | 1.06 |
| (0.52 | ) | (1.75 | ) | (0.48 | ) |
| Other non-interest (loss) income | (0.21 | ) | (0.25 | ) | 0.27 |
| 1.95 |
| 0.45 |
|
| Total non-interest (loss) income | (0.86 | ) | 0.81 |
| (0.25 | ) | 0.20 |
| (0.03 | ) |
| Total revenue | 7.46 |
| 9.29 |
| 8.20 |
| 8.58 |
| 8.38 |
|
| Total non-interest expense | 1.62 |
| 1.57 |
| 1.56 |
| 1.44 |
| 1.54 |
|
| Affordable Housing Program assessments | 0.59 |
| 0.78 |
| 0.67 |
| 0.72 |
| 0.69 |
|
| 2017 ROE | 5.25 | % | 6.94 | % | 5.97 | % | 6.42 | % | 6.15 | % |
| | | | | | |
| 2016 ROE | 4.50 | % | 4.93 | % | 4.82 | % | 7.15 | % | 5.35 | % |
| | | | | | |
| 2015 ROE | 5.32 | % | 4.70 | % | 5.23 | % | 4.93 | % | 5.04 | % |
The moderate volatility in quarterly ROEs in 2013ROE during 2017 was due primarily driven by unrealized gains and losses related to changes in asset-liability management strategies, the timingnet effect of Advance growth, reversal of credit losses, and net gains on derivatives and hedging activities.
Quarterly ROEs in 2012 were at levels above six percent2017 was higher than the first three quarters of 2016 primarily due to management's asset-liability and market risk strategies (which includes calling and replacing bonds at substantially lower rates in excess of high-yielding mortgage paydowns and maintaining a higher amount of short-funding), higher Advance prepayment fees, lower net amortization of premiums and discounts related to mortgage assets and Consolidated Obligations, higher net spreads earned on short-term and LIBOR-indexed assets, and higher earnings from capital. However, ROE in the reduction in provision for credit losses.fourth quarter of 2016 was higher than the fourth quarter of 2017 primarily due to the gains from the sale of securities.
Segment Information
Note 18 of the Notes to Financial Statements presents information on our two operating business segments. We manage financial operations and market risk exposure primarily at the macro level, and within the context of the entire balance sheet, rather than exclusively at the level of individual segments. Under this approach, the market risk/return profile of each segment may not match, or possibly even have the same trends as, what would occur if we managed each segment on a stand-alone basis. The tables below summarize each segment's operating results for the periods shown.
|
| | | | | | | | | | | |
| (Dollars in millions) | Traditional Member Finance | | MPP | | Total |
| 2014 | | | | | |
| Net interest income after reversal for credit losses | $ | 238 |
| | $ | 79 |
| | $ | 317 |
|
| Net income | $ | 181 |
| | $ | 63 |
| | $ | 244 |
|
| Average assets | $ | 94,333 |
| | $ | 6,824 |
| | $ | 101,157 |
|
| Assumed average capital allocation | $ | 4,622 |
| | $ | 334 |
| | $ | 4,956 |
|
Return on average assets (1) | 0.19 | % | | 0.93 | % | | 0.24 | % |
Return on average equity (1) | 3.91 | % | | 18.96 | % | | 4.93 | % |
| | | | | | |
| 2013 | | | | | |
| Net interest income after reversal for credit losses | $ | 229 |
| | $ | 106 |
| | $ | 335 |
|
| Net income | $ | 184 |
| | $ | 77 |
| | $ | 261 |
|
| Average assets | $ | 86,609 |
| | $ | 7,082 |
| | $ | 93,691 |
|
| Assumed average capital allocation | $ | 4,733 |
| | $ | 388 |
| | $ | 5,121 |
|
Return on average assets (1) | 0.21 | % | | 1.09 | % | | 0.28 | % |
Return on average equity (1) | 3.88 | % | | 20.00 | % | | 5.10 | % |
| | | | | | |
| 2012 | | | | | |
| Net interest income after provision for credit losses | $ | 210 |
| | $ | 97 |
| | $ | 307 |
|
| Net income | $ | 154 |
| | $ | 81 |
| | $ | 235 |
|
| Average assets | $ | 58,708 |
| | $ | 7,994 |
| | $ | 66,702 |
|
| Assumed average capital allocation | $ | 3,335 |
| | $ | 454 |
| | $ | 3,789 |
|
Return on average assets (1) | 0.26 | % | | 1.01 | % | | 0.35 | % |
Return on average equity (1) | 4.62 | % | | 17.76 | % | | 6.20 | % |
|
| | | | | | | | | | | |
| (Dollars in millions) | Traditional Member Finance | | MPP | | Total |
| 2017 | | | | | |
| Net interest income after provision for credit losses | $ | 335 |
| | $ | 94 |
| | $ | 429 |
|
| Net income | $ | 243 |
| | $ | 71 |
| | $ | 314 |
|
| Average assets | $ | 91,485 |
| | $ | 10,432 |
| | $ | 101,917 |
|
| Assumed average capital allocation | $ | 4,576 |
| | $ | 522 |
| | $ | 5,098 |
|
Return on average assets (1) | 0.27 | % | | 0.68 | % | | 0.31 | % |
Return on average equity (1) | 5.30 | % | | 13.60 | % | | 6.15 | % |
| | | | | | |
| 2016 | | | | | |
| Net interest income after provision for credit losses | $ | 288 |
| | $ | 75 |
| | $ | 363 |
|
| Net income | $ | 205 |
| | $ | 63 |
| | $ | 268 |
|
| Average assets | $ | 96,855 |
| | $ | 8,570 |
| | $ | 105,425 |
|
| Assumed average capital allocation | $ | 4,607 |
| | $ | 408 |
| | $ | 5,015 |
|
Return on average assets (1) | 0.21 | % | | 0.73 | % | | 0.25 | % |
Return on average equity (1) | 4.45 | % | | 15.44 | % | | 5.35 | % |
| | | | | | |
| 2015 | | | | | |
| Net interest income after provision for credit losses | $ | 250 |
| | $ | 77 |
| | $ | 327 |
|
| Net income | $ | 192 |
| | $ | 62 |
| | $ | 254 |
|
| Average assets | $ | 97,932 |
| | $ | 7,607 |
| | $ | 105,539 |
|
| Assumed average capital allocation | $ | 4,680 |
| | $ | 364 |
| | $ | 5,044 |
|
Return on average assets (1) | 0.20 | % | | 0.82 | % | | 0.24 | % |
Return on average equity (1) | 4.10 | % | | 17.14 | % | | 5.04 | % |
| |
| (1) | Amounts used to calculate returns are based on numbers in thousands. Accordingly, recalculations based upon the disclosed amounts (millions)in millions may not produce the same results. |
Traditional Member Finance Segment
2017 Versus 2016:The increase in net interest income in 20142017 compared to 20132016 was due primarily to Advance growth, anlower net amortization and higher spreads earned on short-term and LIBOR-indexed Advances as discussed in the "Components of Net Interest Income" section above. These positive factors were partially offset by lower spreads on mortgage-backed securities.
2016 Versus 2015:The increase in mortgage-backed securities leverage, and a decrease in net amortization expense of mortgage-backed securities. However, net income decreased as thesewas due primarily to gains from the sale of securities in the fourth quarter of 2016 and higher spreads earned on LIBOR-indexed assets. These positive factors were more thanpartially offset by a decreasesettlement in the fourth quarter of 2016 of all claims related to the 2008 Lehman bankruptcy and net unrealized net gainslosses on derivatives and hedging activities. Despite the decrease in net income, ROE increased slightly in 2014 primarily due to a lower amount of capital.
The increase in net income from 2012 to 2013 was due primarily to Advance growth and lower net amortization for mortgage-backed securities. These favorable factors were partially offset by net gains on securities sales recognized in 2012 that did not reoccur in 2013, decreased short-funding, and narrower spreads between LIBOR and Discount Notes.
ROE decreased in 2013 compared to 2012 even though net income increased because the total increase in net income was insufficient to offset the increase in average total capital to support Advance growth. The growth in capital diluted ROE because earnings were spread over a larger capital base.
MPP Segment
Compared to the Traditional Member Finance segment, the MPP segment can exhibit more earnings volatility relative to short-term interest rates and more credit risk exposure. However, the MPP segment also provides the opportunity for enhancing risk-adjustedto enhance risk-
adjusted returns, which normally augments earnings. Although mortgage assets are the largest source of our market risk, we believe that we have historically managed this risk prudently and consistently with our risk appetite and corporate objectives. We also believe that these assets do not excessively elevate the balance sheet's overall market risk exposure.
2017 Versus 2016:The MPP continued to earn a substantial level of profitability compared to market interest rates, with a moderate amount of market risk and a minimal amount of credit risk. In 2014,2017, the MPP averaged seven10 percent of total average assets while accounting for 2623 percent of earnings.
Net interest income decreased 25 percentincreased in 20142017 compared to 20132016 primarily due to lower amortization of purchased premiums on mortgage loans and concession fees on Consolidated Obligations and the positive impact from growth in average MPP balances. The increase in net income was partially offset by lower spreads earned on MPP, as a result of higher net amortization expense, smaller reversals of MPP creditactions taken to reduce market risk exposure, and losses management actions to extend debt maturities, run-off of higher yielding MPP loans, and lower average MPP balances. Net income decreased by a smaller amount (18 percent) because the factors above were partially offset by a small gain in 2014 compared to losses in 2013 on derivatives and hedging activities.
2016 Versus 2015:Net amortization of MPP assets was $13 million higherincome increased slightly in 2014 due to a lower than normal amount of amortization in 2013 as a result of increases in mortgage rates.
ROE decreased only modestly in 20142016 compared to 2013 because the net income decrease was partially offset by a lower amount of capital allocated reflecting the repurchase of excess stock.
Net income for 2013 decreased $4 million compared2015 due primarily to 2012 as a result of lowergrowth in MPP balances and a decreasehigher net spread, resulting from an increase in the amountuse of short-funding.swaptions to hedge interest rate risk and the decision to call and replace debt at lower rates. These favorable factors were mostly offset by lower netthe increased amortization as well as reversals for credit losses.of purchased mortgage premiums. Secondarily, profitability decreased due to the paydown of higher-yielding mortgage loans and low-cost debt.
Despite the reduction in net income, ROE increased in 2013 as a result of a lower amount of capital allocated due to lower MPP balances and Advance growth, which resulted in more capital being allocated to the Traditional Member Finance segment.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT RISK MANAGEMENT
Overview
We face various risks that could affect the ability to achieve our mission and corporate objectives. We generally categorize risks into:as: 1) business/strategic risk, 2) regulatory/legislative risk, 3) market risk (also referred to as interest rate or prepayment risk), 4) credit risk, 5) capital adequacy (capital risk), 6) funding/liquidity risk, 7) concentration risk, 8) accounting risk, and 8)9) operational risk. Our Board of Directors establishes objectives regarding risk philosophy, risk appetite, risk tolerances, and financial performance expectations. Market, capital, credit, capital, liquidity, concentration, and operational risks are discussed below. Other risks are discussed throughout this filing.
We strive to maintain a risk profile that ensures we operate safely and soundly, to promotepromotes prudent growth in Mission Asset Activity, to consistently generategenerates competitive earnings, and to protectprotects the par value of members'Members' capital stock investment. We believe our business is financially sound and adequately capitalized on a risk-adjusted basis.
We practice this conservative risk philosophy in many ways:
| |
| ▪ | We operate with moderate market risk and limited residual credit risk, liquidity risk, operational risk, and capital impairment risk. |
| |
| ▪ | We have a prioritybusiness objective to ensure competitive and relatively stable profitability. |
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| ▪ | We make conservative investment choices in terms of the types of investments we purchase and counterparties with which we engage. |
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| ▪ | We use derivatives primarily to hedge individual assets and liabilities.liabilities and to help reduce market risk exposure. |
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| ▪ | We normally operate with lessmaintain a prudent amount of financial leverage than Finance Agency regulations permit.leverage. |
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| ▪ | We are judicious in instituting regular, large-scale, district-wide repurchases of excess stock. |
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| ▪ | We have significantly increased retained earnings in recent years and hold an amount of retained earnings that we assess is consistent with achievingbelieve will protect the first corporate objective listed above.par value of capital stock and provide for dividend stabilization. |
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| ▪ | We create a working and operating environment that emphasizes a stable employee base. |
We have numerous Board-adopted policies and processes that address risk management including risk appetite, tolerances, limits, guidelines, and regulatory compliance. Our cooperative business model, corporate objectives, capital structure, and regulatory oversight provide us clear incentives to minimize risk exposures to the extent possible.exposures. Our policies and operating practices are designed to limit risk exposures from ongoing operations in the following broad ways:
| |
| ▪ | by anticipating potential business risks and developing appropriate responses; |
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| ▪ | by defining permissible lines of business; |
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| ▪ | by limiting the kinds of assets we are permitted to hold in terms of their credit risk exposure and the kinds of hedging and financing arrangements we are permitted to use; |
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| ▪ | by limiting the amount of market risk and capital risk to which we are permitted to be exposed; |
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| ▪ | by specifying very conservative tolerances for credit risk posed by Advances; |
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| ▪ | by specifying capital adequacy minimums; and |
| |
| ▪ | by requiring strict adherence to internal controls and operating procedures, adequate insurance coverage, and comprehensive Human Resources policies, procedures, and strategies. |
Market Risk
Overview
Market risk exposure is the risk that profitability and the value of stockholders' capital investment may decrease and that profitability may bebecome uncompetitive as a result of changes and volatility in the market environment and economy. Along with business/strategic risk, market risk is normally one of our largest residual risks.risk.
Our risk appetite is to maintain market risk exposure withinin a prudent moderate range while earning a competitive return on members'Members' capital stock investment. There is normally a tradeoff between long-term market risk exposure and shorter-term exposure. Effective management of both componentseach component is important in order to attract and retain membersMembers and capital and to support Mission Asset Activity.
The primary challenges in managing market risk exposure arise from 1) the tradeoff between earning a competitive return and correlating profitability with short-term interest rates and 2) the market risk exposure of owning mortgage assets. Mortgage assets grant homeowners prepayment options that tend tocould adversely affect usour financial performance when interest rates increase or decrease. We mitigate the market risk of mortgage assets primarily by funding them principally with a portfolio of long-term fixed-rate callable and noncallable Bonds that haveand, secondarily, with swaptions derivative transactions. The Bonds and swaptions provide expected cash flows that are similar to the aggregate cash flows expected from mortgage assets under a wide range of interest rate and prepayment environments. Because it is normally cost-prohibitive to completely mitigate mortgage prepayment risk, a residual amount of market risk normally remains after funding and hedging activities.
We analyze market risk using numerous analytical measures under a variety of interest rate and business scenarios, including stressed scenarios, and perform sensitivity analyses on the many variables that can affect market risk, using several market risk
models from third-party software companies. These models employ rigorous valuation techniques for the optionality that exists in mortgage prepayments, call and put options, and caps/floors. We regularly assess the effects of different assumptions, techniques and methodologies on the measurements of market risk exposure, including comparisons to alternative models and information from brokers/dealers.
We have historically emphasized strategies aimed at ensuring a moderate level of market risk, with the goal of generating competitive profitability over a wide variety of market and business environments and having a moderate amount of earnings volatility. These strategies include, among others: 1) conservative management of market risk exposure, 2) controlled growth in mortgage assets and 3) hedging practices that attempt to optimize earnings volatility from the use of derivatives.
Policy Limits on Market Risk Exposure
We have five sets of policy limits regarding market risk exposure, which primarily addressmeasure long-term market risk exposure. We determine compliance with our policy limits at every month end or more frequently if market or business conditions change significantly or are volatile.
| |
| ▪ | Market Value of Equity Sensitivity. The market value of equity for the entire balance sheet in two hypothetical interest rate scenarios (up 200 basis points and down 200 basis points from the current interest rate environment) must be between positive and negative 10 percent of the current balance sheet's market value of equity. The interest rate movements are “shocks,” defined as instantaneous, permanent, and parallel changes in interest rates in which every point on the yield curve is changed by the same amount. We reduced this limit from 12 percent to 10 percent in early 2015 to better align our market risk policy with our risk appetite. |
movements are “shocks,” defined as instantaneous, permanent, and parallel changes in interest rates in which every point on the yield curve is changed by the same amount.
| |
| ▪ | Duration of Equity. The duration of equity for the entire balance sheet in the current (“flat rate” or “base case”) interest rate environment must be between positive and negative five years and in the two interest rate shock scenarios (up 200 basis points and down 200 basis points from the current interest rate environment) must be between positive and negative six years. |
| |
| ▪ | Mortgage Assets Portfolio. The change in net market value of the mortgage assets portfolio as a percentage of the book value of portfolio assets must be between positive and negative three percent in each of the two interest rate shock scenarios. Net market value is defined as the market value of assets minus the market value of liabilities, with no assumed capital allocation. |
| |
| ▪ | Market Capitalization. The market capitalization ratio (defined as the ratio of the market value of equity to the par value of regulatory stock) must be above 95 percent in the current rate environment and must be above 8590 percent in each of the two interest rate shock scenarios. |
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| ▪ | Mortgage Assets as a Multiple of Regulatory Capital. The amount of mortgage assets must be less than six times the amount of regulatory capital. |
In addition, Finance Agency regulations and an internal policy provide controls on market risk exposure by restricting the types of mortgage loans, mortgage-backed securities and other investments we can hold. We also manage market risk exposure by charging membersMembers prepayment fees on many Advance programs where an early termination of an Advance would result in an economic loss to us.
Market Value of Equity and Duration of Equity - Entire Balance Sheet
Two key measures of long-term market risk exposure are the sensitivities of the market value of equity and the duration of equity to changes in interest rates and other variables, as presented in the following tables for various instantaneous and permanent interest rate shocks. Averageshocks (in basis points). We compiled average results are compiled using data for each month end. Given the current very low level of rates, the down rate shocks are nonparallel scenarios, with short-term rates decreasing less than long-term rates sosuch that no rate falls below zero.
Market Value of Equity
| | | (Dollars in millions) | Down 300 | | Down 200 | | Down 100 | | Flat Rates | | Up 100 | | Up 200 | | Up 300 | Down 300 | | Down 200 | | Down 100 | | Flat Rates | | Up 100 | | Up 200 | | Up 300 |
| Average Results | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2014 Full Year | | | | | | | | | | | | | | |
| 2017 Full Year | | | | | | | | | | | | | | |
| Market Value of Equity | $ | 4,763 |
| | $ | 4,908 |
| | $ | 4,961 |
| | $ | 4,889 |
| | $ | 4,771 |
| | $ | 4,626 |
| | $ | 4,479 |
| $ | 4,702 |
| | $ | 4,765 |
| | $ | 4,973 |
| | $ | 5,021 |
| | $ | 4,956 |
| | $ | 4,881 |
| | $ | 4,815 |
|
| % Change from Flat Case | (2.6 | )% | | 0.4 | % | | 1.5 | % | | — |
| | (2.4 | )% | | (5.4 | )% | | (8.4 | )% | (6.3 | )% | | (5.1 | )% | | (0.9 | )% | | — |
| | (1.3 | )% | | (2.8 | )% | | (4.1 | )% |
| 2013 Full Year | | | | | | | | | | | | | | |
| 2016 Full Year | | | | | | | | | | | | | | |
| Market Value of Equity | $ | 5,288 |
| | $ | 5,319 |
| | $ | 5,268 |
| | $ | 5,127 |
| | $ | 4,962 |
| | $ | 4,788 |
| | $ | 4,620 |
| $ | 4,571 |
| | $ | 4,595 |
| | $ | 4,720 |
| | $ | 4,843 |
| | $ | 4,791 |
| | $ | 4,655 |
| | $ | 4,509 |
|
| % Change from Flat Case | 3.1 | % | | 3.7 | % | | 2.8 | % | | — |
| | (3.2 | )% | | (6.6 | )% | | (9.9 | )% | (5.6 | )% | | (5.1 | )% | | (2.5 | )% | | — |
| | (1.1 | )% | | (3.9 | )% | | (6.9 | )% |
| Month-End Results | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2014 | | | | | | | | | | | | | | |
| December 31, 2017 | | | | | | | | | | | | | | |
| Market Value of Equity | $ | 4,714 |
| | $ | 4,824 |
| | $ | 4,938 |
| | $ | 4,920 |
| | $ | 4,835 |
| | $ | 4,688 |
| | $ | 4,524 |
| $ | 4,764 |
| | $ | 4,837 |
| | $ | 5,095 |
| | $ | 5,165 |
| | $ | 5,097 |
| | $ | 5,027 |
| | $ | 4,955 |
|
| % Change from Flat Case | (4.2 | )% | | (2.0 | )% | | 0.4 | % | | — |
| | (1.7 | )% | | (4.7 | )% | | (8.1 | )% | (7.8 | )% | | (6.3 | )% | | (1.3 | )% | | — |
| | (1.3 | )% | | (2.7 | )% | | (4.1 | )% |
| December 31, 2013 | | | | | | | | | | | | | | |
| December 31, 2016 | | | | | | | | | | | | | | |
| Market Value of Equity | $ | 5,205 |
| | $ | 5,271 |
| | $ | 5,187 |
| | $ | 5,044 |
| | $ | 4,925 |
| | $ | 4,814 |
| | $ | 4,711 |
| $ | 4,587 |
| | $ | 4,660 |
| | $ | 4,803 |
| | $ | 4,770 |
| | $ | 4,654 |
| | $ | 4,543 |
| | $ | 4,457 |
|
| % Change from Flat Case | 3.2 | % | | 4.5 | % | | 2.8 | % | | — |
| | (2.4 | )% | | (4.6 | )% | | (6.6 | )% | (3.8 | )% | | (2.3 | )% | | 0.7 | % | | — |
| | (2.4 | )% | | (4.8 | )% | | (6.6 | )% |
Duration of Equity
|
| | | | | | | | | | | | | | | | | | | | |
| (In years) | Down 300 | | Down 200 | | Down 100 | | Flat Rates | | Up 100 | | Up 200 | | Up 300 |
| Average Results | | | | | | | | | | | | | |
| 2014 Full Year | (3.7 | ) | | (2.1 | ) | | 1.0 |
| | 2.0 |
| | 3.0 |
| | 3.3 |
| | 3.3 |
|
| 2013 Full Year | 0.1 | | 1.2 | | 2.9 | | 3.4 | | 3.5 | | 3.7 | | 3.6 |
| Month-End Results | | | | | | | | | | | | | |
| December 31, 2014 | (3.8 | ) | | (3.4 | ) | | (0.2 | ) | | 1.0 |
| | 2.6 |
| | 3.5 |
| | 3.7 |
|
| December 31, 2013 | (2.3 | ) | | 1.0 |
| | 2.9 |
| | 2.5 |
| | 2.4 |
| | 2.3 |
| | 2.1 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| (In years) | Down 300 | | Down 200 | | Down 100 | | Flat Rates | | Up 100 | | Up 200 | | Up 300 |
| Average Results | | | | | | | | | | | | | |
| 2017 Full Year | (1.7 | ) | | (4.2 | ) | | (3.8 | ) | | 0.4 |
| | 1.6 |
| | 1.4 |
| | 1.4 |
|
| 2016 Full Year | (2.3 | ) | | (2.8 | ) | | (3.4 | ) | | (0.8 | ) | | 2.3 |
| | 3.1 |
| | 3.3 |
|
| Month-End Results | | | | | | | | | | | | | |
| December 31, 2017 | (2.0 | ) | | (5.3 | ) | | (4.4 | ) | | 0.5 |
| | 1.5 |
| | 1.4 |
| | 1.5 |
|
| December 31, 2016 | (2.0 | ) | | (3.7 | ) | | (1.7 | ) | | 1.8 |
| | 2.5 |
| | 2.0 |
| | 1.8 |
|
During 2014, as in 2013, consistent with our historical practice andWe took actions during 2017 to reduce market risk appetite, we positionedto rising interest rates. The overall market risk exposure to higherchanging interest rates was at a moderate level. In late 2013, we adoptedlevel and well within policy limits. The dollar amount of equity exposure for any individual rate shock can be obtained by multiplying the percentage change of the market value of equity by the amount of total capital. The durations of equity provide an estimate of the change in market value of equity for a strategy to lower risk exposure to higher1.00 percentage point further change in interest rates and to reducefrom the variability of risk positioning. We maintained the strategy throughout 2014. Market risk exposure continued to benefit from exposure to lower rates by way of relatively subdued mortgage prepayment speeds (given the level of rates and composition of mortgage assets) over the last several years.rate shock level.
Based on the totality of our risk analysis, we expect that profitability, defined as the level of ROE compared with short-term market rates, will remain competitive unless interest rates change by extremely large amounts in a short period of time. Decreases in long-term interest rates, even up toby two percentage points, (which would put fixed-rate mortgages below two percent) would still result in profitability being well above market interest rates. Similarly, we believe that profitability would not become uncompetitive in a rising rate environment unless long-terminterest rates were to permanently increase in a short period of time by more than five percentage points or more combined with short-term rates increasing toand persist at least eight percent.the higher levels for a long period of time.
Market Risk Exposure of the Mortgage Assets Portfolio
The mortgage assets portfolio normally accounts for almost all market risk exposure because of prepayment volatility that we cannot completely hedge while maintaining positivesufficient net spreads. Sensitivities of the market value of equity allocated to the mortgage assets portfolio under interest rate shocks (in basis points) are shown below. At December 31, 20142017, the average mortgage assets portfolio had an assumed capital allocation of $1.1$1.2 billion based on the entire balance sheet's regulatory capital-to-assets ratio. Average results are compiled using data for each month-end.month end. The market value sensitivities are one measure we use to analyze the portfolio's estimated market risk exposure.
% Change in Market Value of Equity-Mortgage Assets Portfolio
|
| | | | | | | | | | | | | | | | | | | |
| | Down 300 | | Down 200 | | Down 100 | | Flat Rates | | Up 100 | | Up 200 | | Up 300 |
| Average Results | | | | | | | | | | | | | |
| 2014 Full Year | (19.1 | )% | | (3.9 | )% | | 3.6 | % | | — | | (9.7 | )% | | (22.1 | )% | | (35.0 | )% |
| 2013 Full Year | 6.3 | % | | 10.6 | % | | 8.9 | % | | — | | (14.0 | )% | | (29.0 | )% | | (43.7 | )% |
| Month-End Results | | | | | | | | | | | | | |
| December 31, 2014 | (25.0 | )% | | (13.7 | )% | | (1.0 | )% | | — | | (7.9 | )% | | (21.4 | )% | | (36.6 | )% |
| December 31, 2013 | 7.7 | % | | 16.3 | % | | 11.3 | % | | — | | (12.6 | )% | | (24.6 | )% | | (36.1 | )% |
|
| | | | | | | | | | | | | | | | | | | |
| | Down 300 | | Down 200 | | Down 100 | | Flat Rates | | Up 100 | | Up 200 | | Up 300 |
| Average Results | | | | | | | | | | | | | |
| 2017 Full Year | (36.1 | )% | | (29.1 | )% | | (6.8 | )% | | — | | (3.8 | )% | | (8.6 | )% | | (12.8 | )% |
| 2016 Full Year | (31.7 | )% | | (29.4 | )% | | (15.5 | )% | | — | | (3.1 | )% | | (15.3 | )% | | (29.0 | )% |
| Month-End Results | | | | | | | | | | | | | |
| December 31, 2017 | (39.4 | )% | | (32.2 | )% | | (8.7 | )% | | — | | (2.4 | )% | | (4.9 | )% | | (7.8 | )% |
| December 31, 2016 | (28.4 | )% | | (18.5 | )% | | 0.7 | % | | — | | (10.4 | )% | | (20.3 | )% | | (27.7 | )% |
The risk exposure of the mortgage assets portfolio at year-end 2017 compared to higher interest ratesthe end of 2016 was slightly lower in 2014 comparedrising rate scenarios and higher in lower rate scenarios driven by our actions taken to 2013. The dollar amount of exposure for any individual rate shock can be obtained by multiplying the percentage change by the assumed equity allocation.reduce risk to rising rates along with normal changes in balance sheet composition. We believe the mortgage assetsasset portfolio continueswill continue to haveprovide an acceptable amount of market risk exposure relative to the inherent market risks of owning mortgages and relative to their actual and expected profitability. We believe this exposure isadjusted return consistent with our risk appetite philosophy and cooperative business model.philosophy.
Use of Derivatives in Market Risk Management
A key component of hedging market risk exposure is the use of derivative transactions. The following table presents the notional principal amounts of the derivatives used to hedge other financial instruments classified by how we designate the hedging relationship.
|
| | | | | | | | | | | | | | |
| (In millions) | | December 31, 2014 | | December 31, 2013 |
| Hedged Item/Hedging Instrument | Hedging Objective | Fair Value Hedge | Economic Hedge | | Fair Value Hedge | Economic Hedge |
| Advances: | | | | | | |
| Pay-fixed, receive floating interest rate swap (without options) | Converts the Advance's fixed rate to a variable rate index. | $ | 1,734 |
| $ | 15 |
| | $ | 1,284 |
| $ | — |
|
| Pay-fixed, receive floating interest rate swap (with options) | Converts the Advance's fixed rate to a variable rate index and offsets option risk in the Advance. | 1,653 |
| 128 |
| | 2,093 |
| 128 |
|
| Total Advances | | 3,387 |
| 143 |
| | 3,377 |
| 128 |
|
| Mortgage Loans: | | | | | | |
| Forward settlement agreement | Protects against changes in market value of fixed rate Mandatory Delivery Contracts resulting from changes in interest rates. | — |
| 439 |
| | — |
| 31 |
|
| Consolidated Obligations Bonds: | | | | | | |
| Receive-fixed, pay floating interest rate swap (without options) | Converts the Bond's fixed rate to a variable rate index. | 760 |
| 2,215 |
| | 855 |
| — |
|
| Receive-fixed, pay floating interest rate swap (with options) | Converts the Bond's fixed rate to a variable rate index and offsets option risk in the Bond. | 155 |
| 2,277 |
| | 285 |
| 4,015 |
|
Total Consolidated Obligations Bonds | | 915 |
| 4,492 |
| | 1,140 |
| 4,015 |
|
| Stand-Alone Derivatives: | | | | | | |
| Mandatory Delivery Contracts | Protects against fair value risk associated with fixed rate mortgage purchase commitments. | — |
| 451 |
| | — |
| 37 |
|
| Total | | $ | 4,302 |
| $ | 5,525 |
| | $ | 4,517 |
| $ | 4,211 |
|
In addition to issuing long-term Bonds, we may engage in derivative transactions, primarily interest rate swaps and forward settlement agreements of mortgage-backed securities, to manage the market risk exposure associated with our MPP delivery commitments and LIBOR-indexed assets. The notional amount of derivatives at December 31, 2014 increased2017 decreased by $1.1$2.6 billion (13(15 percent) from the end of 2013.2016, driven primarily by normal fluctuations in balance sheet composition.
|
| | | | | | | | | | | | | | |
| (In millions) | | December 31, 2017 | | December 31, 2016 |
| Hedged Item/Hedging Instrument | Hedging Objective | Fair Value Hedge | Economic Hedge | | Fair Value Hedge | Economic Hedge |
| Advances: | | | | | | |
| Pay-fixed, receive-float interest rate swap (without options) | Converts the Advance's fixed rate to a variable-rate index. | $ | 4,686 |
| $ | 15 |
| | $ | 3,605 |
| $ | 15 |
|
| Pay-fixed, receive-float interest rate swap (with options) | Converts the Advance's fixed rate to a variable-rate index and offsets option risk in the Advance. | 379 |
| 150 |
| | 696 |
| 33 |
|
| Total Advances | | 5,065 |
| 165 |
| | 4,301 |
| 48 |
|
| Mortgage Loans: | | | | | | |
| Forward settlement agreement | Protects against changes in market value of fixed-rate Mandatory Delivery Contracts resulting from changes in interest rates. | — |
| 212 |
| | — |
| 511 |
|
| Consolidated Obligations Bonds: | | | | | | |
| Receive-fixed, pay-float interest rate swap (without options) | Converts the Bond's fixed rate to a variable-rate index. | 874 |
| 5,529 |
| | 1,229 |
| 6,789 |
|
| Receive-fixed, pay-float interest rate swap (with options) | Converts the Bond's fixed rate to a variable-rate index and offsets option risk in the Bond. | 54 |
| 95 |
| | 130 |
| 1,362 |
|
Total Consolidated Obligations Bonds | | 928 |
| 5,624 |
| | 1,359 |
| 8,151 |
|
| Balance Sheet: | | | | | | |
| Interest rate swaptions | Provides the option to enter into an interest rate swap to offset interest-rate or prepayment risk. | — |
| 2,316 |
| | — |
| 2,346 |
|
| Stand-Alone Derivatives: | | | | | | |
| Mandatory Delivery Contracts | Exposure to fair-value risk associated with fixed rate mortgage purchase commitments. | — |
| 219 |
| | — |
| 441 |
|
| Total | | $ | 5,993 |
| $ | 8,536 |
| | $ | 5,660 |
| $ | 11,497 |
|
See Note 11 of the Notes to Financial Statements for additional information on how we use derivatives and the types of assets and liabilities hedged with derivatives.
Capital Adequacy
Retained Earnings
We must hold sufficient capital to protect against exposure to various risks, including market, credit, and operational. We regularly conduct a variety of measurements and assessments for capital adequacy. At December 31, 2017, our capital management policy set forth a range of $225 million to $425 million as the minimum amount of retained earnings we believe is necessary to mitigate impairment risk from market risk exposure and to provide for dividend stability from factors that could cause earnings to be volatile. At December 31, 2017, the $940 million of retained earnings was comprised of $617 million unrestricted (an increase of $43 million from year-end 2016) and $323 million restricted (an increase of $63 million from year-end 2016), which pursuant to the FHLBank System's Joint Capital Enhancement Agreement we are not permitted to distribute as dividends.
We believe that the current amount of retained earnings, which exceeds the policy range, is sufficient to mitigate Members' impairment risk of their capital stock investment and to provide for dividend stabilization. We will continue to carry a greater amount of retained earnings than required by the policy and will continue to bolster capital adequacy over time by allocating a portion of earnings to the required restricted retained earnings account.
Risk-Based Capital
The following table shows the amount of risk-based capital required based on Finance Agency prescribed measurements. By regulation, we are required to hold permanent capital at least equal to the amount of risk-based capital.
|
| | | | | | | | | | | |
| (Dollars in millions) | December 31, 2017 | | Monthly Average 2017 | | December 31, 2016 |
| Market risk-based capital | $ | 421 |
| | $ | 330 |
| | $ | 184 |
|
| Credit risk-based capital | 261 |
| | 272 |
| | 262 |
|
| Operational risk-based capital | 204 |
| | 180 |
| | 134 |
|
| Total risk-based capital requirement | 886 |
| | 782 |
| | 580 |
|
| Total permanent capital | 5,211 |
| | 5,157 |
| | 5,026 |
|
| Excess permanent capital | $ | 4,325 |
| | $ | 4,375 |
| | $ | 4,446 |
|
| Risk-based capital as a percent of permanent capital | 17 | % | | 15 | % | | 12 | % |
The increaserisk-based capital requirement has historically not been a constraint on operations, and we do not use it to actively manage any of our risks. It has normally ranged from 10 to 20 percent of permanent capital.
Dodd-Frank Stress Test
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, all FHLBanks are required to perform an annual stress test for capital adequacy. We completed and published the test in November 2017, based on our financial condition as of December 31, 2016 and the methodology prescribed by the Finance Agency. Capital adequacy was sufficient under all established scenarios to fully absorb losses under both adverse and severely adverse economic conditions.
Market Capitalization Ratios
We measure two sets of market capitalization ratios. One measures the market value of equity (i.e., total capital) relative to the par value of regulatory capital stock (which is GAAP capital stock and mandatorily redeemable capital stock). The other measures the market value of total capital relative to the book value of total capital, which includes all components of capital. The measures provide a point-in-time indication of the FHLB's liquidation or franchise value and can also serve as a measure of realized or potential market risk exposure.
The following table presents the market value of equity to regulatory capital stock (excluding retained earnings) for several interest rate environments. |
| | | | | | | | |
| | December 31, 2017 | | Monthly Average Year Ended December 31, 2017 | | December 31, 2016 |
| Market Value of Equity to Par Value of Regulatory Capital Stock - Base Case (Flat Rates) Scenario | 121 | % | | 119 | % | | 114 | % |
Market Value of Equity to Par Value of Regulatory Capital Stock - Down Shock (1) | 119 |
| | 117 |
| | 115 |
|
Market Value of Equity to Par Value of Regulatory Capital Stock - Up Shock (2) | 118 |
| | 115 |
| | 108 |
|
| |
| (1) | Represents a down shock of 100 basis points. |
| |
| (2) | Represents an up shock of 200 basis points. |
A base case value below 100 percent (par) could indicate that, in the notionalremote event of an immediate liquidation scenario involving redemption of all capital stock, capital stock may be returned to stockholders at a value below par. This could be due to experiencing risks that lower the market value of capital and/or to having an insufficient amount of retained earnings. In 2017, the market capitalization ratios in the scenarios presented continued to be above our policy requirements. The base case ratio of 121 percent was modestly higher at the end of 2017 compared to the end of 2016 driven mostly by changes in interest rate swaps was due primarily to our decision to enter into new transactions with the derivatives clearing house following the resolutionrates, market pricing and continued growth in retained earnings, which were 22 percent of prior uncertainties that had existed in 2013 surrounding costs, operating and regulatory processes, and the credit and legal risks associated with clearing requirements under the Dodd-Frank Act.capital stock at
December 31, 2017. The ratio remains acceptable and well above policy requirements, as we maintained risk exposures at moderate levels.
The following table presents the market value of equity to the book value of total capital.
|
| | | | | | | | |
| | December 31, 2017 | | Monthly Average Year Ended December 31, 2017 | | December 31, 2016 |
Market Value of Equity to Book Value of Capital - Base Case (Flat Rates) Scenario (1) | 99 | % | | 98 | % | | 95 | % |
Market Value of Equity to Book Value of Capital - Down Shock (1)(2) | 98 |
| | 97 |
| | 96 |
|
Market Value of Equity to Book Value of Capital - Up Shock (1)(3) | 97 |
| | 95 |
| | 91 |
|
| |
| (1) | Capital includes total capital and mandatorily redeemable capital stock. |
| |
| (2) | Represents a down shock of 100 basis points. |
| |
| (3) | Represents an up shock of 200 basis points. |
A base-case value below par indicates that we have realized or could realize risks (especially market risk) such that the market value of total capital owned by stockholders, which includes regulatory capital stock and retained earnings, is below par value (i.e., below 100 percent of the total book value). The base-case ratio of 99 percent at December 31, 2017 indicates that the market value of total capital is $46 million below the par value of total capital. In a scenario in which interest rates increase 200 basis points, the market value of total capital would be $184 million below the par value of total capital. This indicates that in a liquidation scenario, stockholders would not receive the full sum of their total equity ownership in the FHLB, which include both capital stock and retained earnings. We believe the likelihood of a liquidation scenario is extremely remote; and therefore, we accept the risk of diluting equity ownership in such a scenario.
Credit Risk
Overview
Our business entails a significant amount of inherent credit risk exposure. We believe our risk management practices, discussed below, bring the amount of residual credit risk to a minimal level. We have no loan loss reserves or impairment recorded for Credit Services, investments, and derivatives and a modestminimal amount of legacy credit risk exposure to the MPP.
Credit Services
Overview.Overview: Our goal isWe have policies and practices to manage credit risk exposure tofrom our secured lending activities, which include Advances and Letters of CreditCredit. The objective of our credit risk management is to equalize risk exposure across Members and counterparties to a zero level of expected losses. We continuedlosses, consistent with our conservative risk management principles and desire to achieve this objective in 2014 by employing the following practices:
| |
▪ | significant over-collateralization; |
| |
▪ | significant further discounts applied to subprime and nontraditional loan collateral; |
| |
▪ | close monitoring of financial condition, performance, and repayment capacities of members; and |
| |
▪ | review and verification of the quality, documentation, and administration of collateral. |
Because of these factors, we have never experienced avirtually no residual credit loss nor established a loan loss reserve for Advances. Prospectively, we expectrisk related to collect all amounts due in accordance with their contractual terms.Member borrowings.
Collateral.Collateral: We require each memberMember to provide us a security interest in eligible collateral before it can undertake any secured borrowing. At December 31, 20142017, our policy of over-collateralization resulted in total collateral pledged of $253.0$328.7 billion to serve members'Members' total borrowing capacity of $210.1$272.2 billion. of which $187.5 billion was available to support new credit services. The estimated value of pledged collateral is discounted in order to offset market, credit, and liquidity risks that may affect the collateral's realizable value in the event it must be liquidated. Over-collateralization by one memberMember is not applied to another member.Member.
The table below shows the total pledged collateral (unadjusted for Collateralized Maintenance Requirements)Lendable Value Rates). The collateral composition in 2014 was consistent with that in 2013.
| | | | December 31, 2014 | | December 31, 2013 | December 31, 2017 | | December 31, 2016 |
| (Dollars in billions) | | | Percent of Total | | | | Percent of Total | | | Percent of Total | | | | Percent of Total |
| | Collateral Amount | | Pledged Collateral | | Collateral Amount | | Pledged Collateral | Collateral Amount | | Pledged Collateral | | Collateral Amount | | Pledged Collateral |
| Single-family loans | $ | 140.4 |
| | 55 | % | | $ | 125.0 |
| | 56 | % | |
| Single family loans | | $ | 192.3 |
| | 58 | % | | $ | 188.7 |
| | 59 | % |
| Multi-family loans | 38.2 |
| | 15 |
| | 33.2 |
| | 15 |
| 59.7 |
| | 18 |
| | 56.7 |
| | 18 |
|
| Commercial real estate | 29.5 |
| | 12 |
| | 26.5 |
| | 12 |
| 38.6 |
| | 12 |
| | 33.8 |
| | 11 |
|
| Home equity loans/lines of credit | 22.0 |
| | 9 |
| | 20.4 |
| | 9 |
| 24.9 |
| | 8 |
| | 24.9 |
| | 8 |
|
| Bond securities | 22.3 |
| | 9 |
| | 17.0 |
| | 8 |
| |
| Bond Securities | | 12.5 |
| | 4 |
| | 13.8 |
| | 4 |
|
| Farm real estate | 0.6 |
| | — |
| | 0.6 |
| | — |
| 0.7 |
| | — |
| | 0.6 |
| | — |
|
| Total | $ | 253.0 |
| | 100 | % | | $ | 222.7 |
| | 100 | % | $ | 328.7 |
| | 100 | % | | $ | 318.5 |
| | 100 | % |
At December 31, 2017, 66 percent of collateral was related to residential mortgage lending in single-family loans and home equity loans/lines of credit.
We assign each memberMember one of fourthree levels of collateral status: Blanket, Securities, Listing, and Physicalor Delivery. Assignment is based in part on an internal credit rating model that reflects our view of the member'sMember's current financial condition and performance. Blanket collateral status, which we assign to approximately 8590 percent of borrowers, is the least restrictive status and is available to lower-risk bank and credit union members.Members. Approximately 6654 percent of pledged collateral is under Blanket status. We monitor the level of eligible collateral pledged under Blanket status using quarterly regulatory financial reports or periodic collateral “Certification” documents submitted by all significant borrowers.
Under Listing collateral status, a memberMember provides us detailed information on specifically identified individual loans that meet certain minimum qualifications. Physical Delivery is the most restrictive collateral status, which we assign to membersMembers experiencing significant financial difficulties, insurance companies, pledging loans,Community Development Financial Institutions and newly chartered institutions. We require borrowers in Physical Delivery status to deliver into our custody securities and/or original notes, mortgages or deeds of trust. Under any collateral status, membersMembers may elect to pledge bond securities, which we either hold in our custody or, less often, have third parties control on our behalf.
We use third-party services to regularly estimate market values of collateral under Listing and PhysicalDelivery status. Third-party services use various proprietary models to estimate market values. Assumptions may be made on factors that affect collateral value, such as market liquidity, discount rates, prepayments, liquidation and servicing costs in the event of a default and economic and market conditions. We have policies and procedures for evaluating the reasonableness of collateral valuations.
Borrowing Capacity/Lendable Value.Value: We determine borrowing capacity against pledged collateral by establishing minimum levelsapplying collateral discounts, or haircuts, to the value of over-collateralization (Collateralized Maintenance Requirements or CMRs). CMRsthe collateral. These haircuts result in a lendable value, or borrowing capacity,Lendable Value Rates (LVRs) that isare less than the amount of pledged collateral.
CMRsLVRs are determined by statistical analysis and management assumptions relating to historical price volatility, inherent credit risks, liquidation costs, and the current credit and economic environment. We apply CMRLVR results to the estimated values of pledged assets. CMRsLVRs vary among pledged assets and membersMembers based on the Member institution type, the financial strength of the memberMember institution, the form of valuation, the issuer of bond collateral or the quality of securitized assets, the marketability of the pledged assets, the payment performance of pledged loan collateral, and the quality of loan collateral as reflected in the manner in which it was underwritten and is administered.underwritten. Effective July 2017, we updated LVRs resulting in minor changes in borrowing capacity for most Members.
The table below indicates the range of lendable values remaining after the application of CMRsLVRs for each major collateral type pledged at December 31, 2014.2017.
|
| |
| | Lending Values Applied to Collateral |
| Blanket Status: | |
| Prime 1-4 family loans | 67-87%71-83% |
| Multi-family loans | 53-77%59-77% |
| Prime home equity loans/lines of credit | 57-77%53-63% |
| Commercial real estate loans | 61-80%67-87% |
| Farm real estate loans | 65-83%74-87% |
| Listing Status/Physical Delivery: | |
| Cash/U.S. Government/U.S. Treasury/U.S. agency securities | 79-100%92-100% |
| U.S. agency mortgage-backed securities/collateralized mortgage obligations | 79-98%91-98% |
| Private-label residential mortgage-backed securities | 43-87%62-90% |
| Private-label commercial mortgage-backed securities | 33-86%54-88% |
| Municipal securities | 25-93%78-93% |
| Small Business Administration certificates | 88-93%92-95% |
| Prime 1-4 family loans | 67-94%69-87% |
| Multi-family loans | 57-87%63-83% |
HomePrime home equity loans/lines of credit | 63-87%65-80% |
| Commercial real estate loans | 65-91%69-87% |
| Farm real estate loans | 67-91%71-83% |
The ranges of lendable values exclude subprime and nontraditional mortgage loan collateral. Loans pledged by lower risk membersMembers for which we require only high level, summary reporting of eligible balances are generally discounted more heavily than loans on which we have detailed loan structure and underwriting information. For any form of loan collateral, additional credit risk based adjustments may be made to an individual Member’s collateral that results in a lower lendable value than that indicated in the above table.
Subprime and Nontraditional Mortgage Loan Collateral.Collateral: We have policies and processes to identify subprime and nontraditional residential mortgage loans pledged by members.Members. We perform collateral reviews sometimes engaging third parties, to determine whetherestimate the pledged loans meet our definitionvolume of subprime and nontraditional or both.loans pledged. Depending on the quality of underwriting and administration, we may subject these loans to higher CMRs. We also limit the overall percentage of borrowing capacity that members can receive from subprime and nontraditional collateral.
Collateralization of Former Members. Former members may maintain existing Advances up to their maturity date as long as they meet certain requirements. Underwriting criteria, including the forms of collateral that may be pledged, are generally the same for members and former members. One exception is that former members with outstanding Advances must deliver sufficient collateral into our custody, regardless of whether they would qualify for Blanket or Listing status as a member. Alternatively, if a former member is acquired by a member of another FHLBank, we may allow its outstanding Advances to be covered by that FHLBank's collateral under the terms and conditions of an intercreditor agreement. On December 31, 2014, we had $0.6 billion of Advances outstanding to former members. This amount continued to be overcollateralized through a combination of subordination or other intercreditor security agreements with other FHLBanks and marketable securities and loan collateral held in our custody.lower LVRs.
Internal Credit Ratings.Ratings: We perform credit underwriting of our membersMembers and nonborrower membersnonmember borrowers and assign them an internal credit rating on a scale of one to seven, with a higher number representing a less favorable assessment of the institution's credit and overall financial condition. TheThese credit ratings are based on internal ratings models, credit analysisanalyses and consideration of available credit ratings from independent credit rating organizations. The creditCredit ratings are used in conjunction with other measures of the credit risk and pledged collateral, as described above, in managing secured credit risk exposure to member and nonmember borrowers.exposure.
A less favorable credit rating can cause us to 1) decrease the institution's borrowing capacity via higher CMRs,lower LVRs, 2) require the institution to provide an increased level of detail on pledged collateral, 3) require it to deliver collateral into our custody, and/or 4) prompt us to more closely and/or frequently monitor the institution using several established processes.processes, and/or 5) limit the institution's exposure through borrowing restrictions (e.g., maturity restrictions on new Advances or restrictions on borrowing capacity from higher risk collateral sources). In 2017, we updated our internal credit rating model scoring for certain Member types, generally resulting in more Members being rated slightly lower. The impact to these Members' borrowing capacity was minimal.
The following tables show the distribution of internal credit ratings we assigned to memberMember and nonmember borrowers, which we use to help manage credit risk exposure.
| | | (Dollars in billions) | (Dollars in billions) | | | | | | | (Dollars in billions) | | | | | | |
| December 31, 2014 | | December 31, 2013 | |
| December 31, 2017 | | December 31, 2017 | | December 31, 2016 |
| | | Borrowers | | | | Borrowers | | Borrowers | | | | Borrowers |
| | | | | Collateral-Based | | | | | Collateral-Based | | | | Collateral-Based | | | | | Collateral-Based |
| Credit | | | | Borrowing | | Credit | | | | Borrowing | | | | Borrowing | | Credit | | | | Borrowing |
| Rating | | Number | | Capacity | | Rating | | Number | | Capacity | | Number | | Capacity | | Rating | | Number | | Capacity |
| 1-3 | | 547 |
| | $ | 131.1 |
| | 1-3 | | 505 |
| | $ | 108.4 |
| | 532 |
| | $ | 262.4 |
| | 1-3 | | 599 |
| | $ | 265.8 |
|
| 4 | | 107 |
| | 74.9 |
| | 4 | | 125 |
| | 58.7 |
| | 101 |
| | 9.2 |
| | 4 | | 67 |
| | 6.7 |
|
| 5 | | 37 |
| | 3.6 |
| | 5 | | 59 |
| | 4.0 |
| | 28 |
| | 0.5 |
| | 5 | | 22 |
| | 1.2 |
|
| 6 | | 14 |
| | 0.2 |
| | 6 | | 26 |
| | 0.9 |
| | 5 |
| | 0.1 |
| | 6 | | 8 |
| | 0.1 |
|
| 7 | | 12 |
| | 0.3 |
| | 7 | | 22 |
| | 0.4 |
| | 5 |
| | — |
| | 7 | | 3 |
| | — |
|
| Total | | 717 |
| | $ | 210.1 |
| | Total | | 737 |
| | $ | 172.4 |
| | 671 |
| | $ | 272.2 |
| | Total | | 699 |
| | $ | 273.8 |
|
A “4” rating is our assessmentWe consider Members with credit ratings of the lowest level of satisfactory performance."1" through "4" to be financially sound institutions. At December 31, 20142017, 6338 borrowers (ninesix percent of the total) had credit ratings of "5" through "7," a net decreaseincrease of 44five Members from the end of 2013.2016. These membersMembers had $4.10.6 billion of borrowing capacity at December 31, 20142017. ThereAdditionally, the decrease in Members with a credit rating of "1" through "3" in 2017 was a net decreaseresult of 18 members who had a "4" credit rating and a net increase of 42 members with credit ratings of "1," "2," or "3." These trends indicate a general improvementthe decline in the overall financial conditionnumber of our members duringMembers and the recovery cycle forupdated credit rating model scoring noted above. We believe the overall economy and housing market.credit rating distribution continues to show a financially sound membership base.
Member Failures, Closures, and Receiverships.Receiverships: There was one member failurewere no Member failures in 2014. All Advance exposure to this member was fully collateralized by assets held in our custody at the time of failure and all Advances have been subsequently repaid by the acquiring institution.2017.
MPP
Overview.Overview: We believe that theThe residual amount of credit risk exposure to loans in the MPP is modest,minimal, based on the following factors:
| |
| ▪ | various credit enhancements for conventional loans, which are designed to protect us against credit losses; |
| |
| ▪ | conservative underwriting and loan characteristics consistent with favorable expected credit performance; |
| |
| ▪ | a relatively minorsmall overall amount of delinquencies and defaults when compared to national averages; |
| |
| ▪ | charge-offscredit losses totaling $1.8$0.8 million in 20142017 and $14.8$18.7 million over the life of the program, which represent an immaterial percentage of conventional loans' current unpaid principal balances at December 31, 20142017 and of total purchases-to-date for the entire MPP; and
|
| |
| ▪ | in addition to the low program-to-date charge-offs,credit losses, based on financial analysis, we believe that future credit losses will not harm capital adequacy and will not significantly affect profitability except under the most extreme and unlikely credit conditions. |
Portfolio Loan Characteristics.Characteristics:The following table shows FICO® credit scores of homeowners at origination dates for the conventional loan portfolio.
| | FICO® Score (1) | | December 31, 2014 | | December 31, 2013 | | December 31, 2017 | | December 31, 2016 |
| < 620 | | — | % | | — | % | | — | % | | — | % |
| 620 to < 660 | | 2 |
| | 2 |
| | 1 |
| | 1 |
|
| 660 to < 700 | | 8 |
| | 9 |
| | 6 |
| | 6 |
|
| 700 to < 740 | | 18 |
| | 18 |
| | 16 |
| | 16 |
|
| >= 740 | | 72 |
| | 71 |
| | 77 |
| | 77 |
|
| | | | | | | | | |
| Weighted Average | | 760 |
| | 758 |
| | 765 |
| | 764 |
|
| |
| (1) | Represents the FICO® score at origination. |
There was littleno change in the distribution of FICO® scores at origination in 20142017 compared to 2013.2016. The distribution of FICO® scores at origination is one indication of the portfolio's overall favorable credit quality. At December 31, 2014, 722017, 77 percent of the
portfolio had scores at an excellent level of 740 or above and 9093 percent had scores above 700, which is a threshold generally considered indicative of homeowners'homeowners with good credit quality.
The following tables show loan-to-value ratios for conventional loans based on values estimated at the origination dates and current values estimated at the noted periods. The estimated current ratios are based on original loan values, principal paydowns that have occurred since origination, and a third-party estimate of changes in historical home prices for the zip code in which each loan resides. Both measures are weighted by current unpaid principal.
| | | | | Based on Estimated Origination Value | | | Based On Estimated Current Value | | Based on Estimated Origination Value | | | Based On Estimated Current Value |
| Loan-to-Value | | December 31, 2014 | | December 31, 2013 | | Loan-to-Value | | December 31, 2014 | | December 31, 2013 | | December 31, 2017 | | December 31, 2016 | | Loan-to-Value | | December 31, 2017 | | December 31, 2016 |
| <= 60% | | 17 | % | | 19 | % | | <= 60% | | 34 | % | | 33 | % | | 14 | % | | 15 | % | | <= 60% | | 41 | % | | 38 | % |
| > 60% to 70% | | 16 |
| | 17 |
| | > 60% to 70% | | 25 |
| | 26 |
| | 15 |
| | 16 |
| | > 60% to 70% | | 29 |
| | 26 |
|
| > 70% to 80% | | 55 |
| | 53 |
| | > 70% to 80% | | 25 |
| | 25 |
| | 56 |
| | 55 |
| | > 70% to 80% | | 24 |
| | 28 |
|
| > 80% to 90% | | 7 |
| | 7 |
| | > 80% to 90% | | 12 |
| | 11 |
| | 9 |
| | 9 |
| | > 80% to 90% | | 5 |
| | 7 |
|
| > 90% | | 5 |
| | 4 |
| | > 90% to 100% | | 3 |
| | 3 |
| | 6 |
| | 5 |
| | > 90% to 100% | | 1 |
| | 1 |
|
| | | | | | | > 100% | | 1 |
| | 2 |
| | | | | | > 100% | | — |
| | — |
|
| Weighted Average | | 72 | % | | 71 | % | | Weighted Average | | 65 | % | | 65 | % | | 73 | % | | 73 | % | | Weighted Average | | 61 | % | | 63 | % |
The levels of loan-to-value ratios and overall positive trends in the last several years are consistent with the portfolio's excellent credit quality. The positive trends reflect the sustained recovery and improvement in the overall housing market. At December 31, 2014 and 2013,2017, we estimated that 16six percent of loans have current loan-to-value ratios above 80 percent.percent, compared to eight percent at the end of 2016. The improvement in the 2017 current loan-to-value ratios reflected the six percent average increase in housing prices nationwide during the year.
Based on the available data, we believe we have littleminimal exposure to loans in the MPP considered to have characteristics of “subprime” or “alternative/nontraditional” loans. Further, we do not knowingly purchase any loan that violates the terms of our Anti-Predatory Lending Policy.
The following table presents the geographical allocation based on the unpaid principal balance of conventional loans in the MPPMPP. The geographical allocation is concentrated in Ohio as shown inand was consistent with the following table based on unpaid principal balance.allocation at the end of 2016.
|
| | | | | | |
| | December 31, 2014 | | | December 31, 2013 |
| Ohio | 61 | % | | Ohio | 59 | % |
| Kentucky | 13 |
| | Kentucky | 13 |
|
| Indiana | 8 |
| | Indiana | 7 |
|
| Tennessee | 3 |
| | Tennessee | 3 |
|
| Michigan | 2 |
| | California | 2 |
|
| All others | 13 |
| | All others | 16 |
|
| Total | 100 | % | | Total | 100 | % |
|
| | |
| December 31, 2017 |
| Ohio | 65 | % |
| Kentucky | 14 |
|
| Indiana | 11 |
|
| Tennessee | 2 |
|
| Michigan | 1 |
|
| All others | 7 |
|
| Total | 100 | % |
Lender Risk Account.Credit Enhancements: Conventional mortgage loans are supported against credit losses by various combinations of primary mortgage insurance (PMI), supplemental mortgage insurance (SMI) (for loans purchased before February 2011), and the Lender Risk Account.Account (LRA). The Lender Risk AccountLRA is a holdbackhold back of a portion of the initial purchase price.price to cover expected credit losses for a specific pool of loans. Starting after five years from the loan purchase date, we may return the holdbackhold back to PFIs if they manage credit risk to predefined acceptable levels of exposure on the loan pools they sell to us. The Lender Risk Account is funded by the FHLBank from a portion of the purchase proceeds to cover expected credit losses for a specific pool of loans. As a result, some pools of loans may have sufficient credit enhancements to recapture all losses while other pools of loans may not have enough credit enhancements to recapture all losses.
not. The amount of loss claims against the Lender Risk Account in 2014 was approximately $2 million. The AccountLRA had balances of $129201 million and $115$188 million at December 31, 20142017 and 20132016, respectively. For more information, see Note 10 of the Notes to Financial Statements.
Credit Performance.Performance: The table below provides an analysis of conventional loans delinquent or in the process of foreclosure, along with the national average serious delinquency rate.
| | | | Conventional Loan Delinquencies | Conventional Loan Delinquencies |
| (Dollars in millions) | December 31, 2014 | | December 31, 2013 | December 31, 2017 | | December 31, 2016 |
Early stage delinquencies - unpaid principal balance (1) | $ | 61 |
| | $ | 59 |
| $ | 43 |
| | $ | 47 |
|
Serious delinquencies - unpaid principal balance (2) | $ | 43 |
| | $ | 58 |
| $ | 17 |
| | $ | 23 |
|
Early stage delinquency rate (3) | 1.0 | % | | 1.0 | % | 0.5 | % | | 0.5 | % |
Serious delinquency rate (4) | 0.7 | % | | 1.0 | % | 0.2 | % | | 0.3 | % |
National average serious delinquency rate (5) | 2.4 | % | | 2.9 | % | 2.0 | % | | 2.5 | % |
| |
| (1) | Includes conventional loans 30 to 89 days delinquent and not in foreclosure. |
| |
| (2) | Includes conventional loans that are 90 days or more past due or where the decision of foreclosure or a similar alternative such as pursuit of deed-in-lieu has been reported. |
| |
| (3) | Early stage delinquencies expressed as a percentage of the total conventional loan portfolio. |
| |
| (4) | Serious delinquencies expressed as a percentage of the total conventional loan portfolio. |
| |
| (5) | National average number of fixed-rate prime and subprime conventional loans that are 90 days or more past due or in the process of foreclosure is based on the most recent national delinquency data available. The December 31, 20142017 rate is based on September 30, 20142017 data. |
The MPP has experienced a relatively small amount of delinquencies, and foreclosures, with ratesthe serious delinquency rate continuing to be well below national averages.
We consider a high risk loan as having a current loan-to-value ratio above 100 percent. At December 31, 2014,Historically, high risk loans hadhave experienced a moderateminimal amount of serious delinquencies (i.e., delinquencies that are 90 days or more past due or in the process of foreclosure). For example, of the $51$9 million of conventional principal balances with current estimated loan-to-values above 100 percent $4 million (seven percent)at December 31, 2017, none of them were seriously delinquent. We believe these data further support our view that the overall portfolio is comprised of high-quality, well-performing loans.
Credit Losses.Losses: The following table shows the effects of credit enhancements on the determinationestimation of the allowance for credit losses at the noted periods. Estimated incurred credit losses, after credit enhancements, are accounted for in the allowance for credit loss or as a charge off (i.e., a reduction to the principal of mortgage loans held for portfolio).
| | | (In millions) | December 31, 2014 | | December 31, 2013 | December 31, 2017 | | December 31, 2016 |
| Estimated incurred credit losses, before credit enhancements | $ | (23 | ) | | $ | (31 | ) | $ | (6 | ) | | $ | (9 | ) |
| Estimated amounts deemed recoverable by: | | | | | | |
| Primary mortgage insurance | 2 |
| | 3 |
| 1 |
| | 1 |
|
| Supplemental mortgage insurance | 13 |
| | 17 |
| 3 |
| | 5 |
|
| Lender Risk Account | 3 |
| | 4 |
| 1 |
| | 2 |
|
| Allowance for credit losses, after credit enhancements | $ | (5 | ) | | $ | (7 | ) | |
| Estimated incurred credit losses, after credit enhancements | | $ | (1 | ) | | $ | (1 | ) |
The data presented above provideminimal amount of incurred credit losses provides further informationsupport on the aggregate health of the portfolio. Credit risk exposure depends on the actual and potential credit performance of the loans in each pool compared to the pool's equity (on individual loans) and credit enhancements, including PMI, (for individual loans), the Lender Risk Account,LRA, and SMI. We have assessed that we do not have any credit risk exposure to our PMI providers and our estimation of credit exposure to SMI providers was not considered material at December 31, 2017.
The allowance for creditDuring the third quarter of 2017, two significant hurricanes impacted areas in which we have mortgage loan borrowers, including the southeastern coast of Texas and areas of Florida, Georgia and certain other southeastern states. Based on internal analysis utilizing the information currently available, we do not expect that the potential losses at December 31, 2014 decreased $2 million compared toresulting from the endhurricanes will have a material effect on our financial condition or results of 2013 as problem loans continued to liquidate, new delinquency trends continued to stabilize and housing prices, which affect both delinquency rates and loss severities, remained relatively stable.operations.
In addition to the allowance for credit losses recorded, we regularly analyze potential ranges of additional lifetime credit risk exposure for the loans in the MPP. Even under adverse macroeconomic scenarios, for either home prices or unemployment rates, we expect that further credit losses would not significantly decrease our overall annual profitability or dividends payable to members. For example, assuming a 20 percent decline in all home prices in each of the next two years, we estimate that our lifetime credit losses, net of the effect of credit enhancements, could increase by approximately $13 million, which would decrease annual ROE by approximately only 0.05 percentage points over the next five years (most of the losses are estimated to occur in the next five years).profitability.
Credit Risk Exposure to Insurance Providers.
PMI
Some of our conventional loans carry PMI as a credit enhancement feature. Based on the guidelines of the MPP, we have assessed that we do not have any credit risk exposure to the PMI providers.
SMI
Another credit enhancement feature on some conventional loans is SMI purchased from Genworth and Mortgage Guaranty Insurance Corporation (MGIC). Beginning February 1, 2011, we discontinued use of SMI as a credit enhancement for new loan purchases; instead, we now augment credit enhancements with a greater amount of the purchase proceeds added to the Lender Risk Account. At December 31, 2014, we had $1.9 billion of conventional loans purchased prior to February 2011 with outstanding SMI coverage through Genworth and MGIC that are paying down over time. Both providers have experienced weak financial condition in recent years; although, the most recent available information indicates there has been improvements in their financial health. However, due to the uncertainty of MGIC and Genworth's financial condition, we estimate that $0.4 million of payments are not probable at December 31, 2014. The estimation of SMI exposure, similar to overall trends of our loan losses, has declined in the last year.
Investments
Liquidity Investments.Investments: We purchase liquidity investments from counterparties that have a strong ability to repay principal and interest. Liquidity investments are either unsecured, guaranteed by the U.S. government, or secured (i.e., collateralized). For unsecured liquidity investments, we invest in the debt securities of highly rated, investment-grade institutions, have appropriate and conservative limits on dollar and maturity exposure to each institution, and have strong credit underwriting practices, including active monitoring of credit quality of our counterparties and of the environment in which they operate. We believe we purchased all liquidity investments from counterparties that have a strong ability to repay principal and interest.
Our unsecured liquidity investments to a counterparty or group of affiliated counterparties are limited by Finance Agency regulations to maturities of no more than nine months and limited to a dollar amount based on a percentage of eligible regulatory capital (defined as the lessor of our regulatory capital or the eligible amount of a counterparty's Tier 1 capital). The permissible percentage ranges from one percent to 15 percent based on the counterparty's lowest long-term credit rating of its debt from a nationally recognized statistical rating organization (NRSRO). In 2014,addition, pursuant to a Finance Agency regulation, we reducedcomplement reliance on NRSRO ratings for unsecured investment activity by enhancingalso considering internal credit risk analytics on unsecured counterparties.
The lowest long-term credit rating for a counterparty to which we are permitted to extend credit is double-B. In practice, for many yearsHowever, we have generally invested funds only in those eligible institutions with long-term credit ratings of at least single-A. In addition, we restrict maturities, reduce dollar exposure, and avoid new investments with counterparties we deem to represent elevated credit risk.
The following table presents the carrying value of liquidity investments outstanding in relation to the counterparties' lowest long-term credit ratings provided by Standard & Poor's, Moody's, and/or Fitch Advisory Services. For resale agreements, the ratings shown are based on ratings of the associated collateral.
| | | (In millions) | December 31, 2014 | December 31, 2017 |
| | Long-Term Rating | Long-Term Rating |
| | AAA | | AA | | A | | Total | AA | | A | | Total |
| Unsecured Liquidity Investments | | | | | | | | | | | | |
| Federal funds sold | $ | — |
| | $ | 2,100 |
| | $ | 4,500 |
| | $ | 6,600 |
| $ | 1,465 |
| | $ | 2,185 |
| | $ | 3,650 |
|
| Certificates of deposit | — |
| | 950 |
| | 400 |
| | 1,350 |
| 800 |
| | 100 |
| | 900 |
|
| Total unsecured liquidity investments | — |
| | 3,050 |
| | 4,900 |
| | 7,950 |
| 2,265 |
| | 2,285 |
| | 4,550 |
|
| Guaranteed/Secured Liquidity Investments | | | | | | | | | | | | |
| Securities purchased under agreements to resell | — |
| | 3,343 |
| | — |
| | 3,343 |
| 7,702 |
| | — |
| | 7,702 |
|
Government-sponsored enterprises (1) | — |
| | 26 |
| | — |
| | 26 |
| |
| U.S. Treasury obligations | | 34 |
| | — |
| | 34 |
|
| Total guaranteed/secured liquidity investments | — |
| | 3,369 |
| | — |
| | 3,369 |
| 7,736 |
| | — |
| | 7,736 |
|
| Total liquidity investments | $ | — |
| | $ | 6,419 |
| | $ | 4,900 |
| | $ | 11,319 |
| $ | 10,001 |
| | $ | 2,285 |
| | $ | 12,286 |
|
| | | | December 31, 2013 | December 31, 2016 |
| | Long-Term Rating | Long-Term Rating |
| | AAA | | AA | | A | | Total | AA | | A | | Total |
| Unsecured Liquidity Investments | | | | | | | | | | | | |
| Federal funds sold | $ | — |
| | $ | 760 |
| | $ | 980 |
| | $ | 1,740 |
| $ | 1,280 |
| | $ | 2,977 |
| | $ | 4,257 |
|
| Certificates of deposit | — |
| | 1,800 |
| | 385 |
| | 2,185 |
| 1,300 |
| | — |
| | 1,300 |
|
| Total unsecured liquidity investments | — |
| | 2,560 |
| | 1,365 |
| | 3,925 |
| 2,580 |
| | 2,977 |
| | 5,557 |
|
| Guaranteed/Secured Liquidity Investments | | | | | | | | | | | | |
| Securities purchased under agreements to resell | — |
| | 2,350 |
| | — |
| | 2,350 |
| 5,230 |
| | — |
| | 5,230 |
|
Government-sponsored enterprises (1) | — |
| | 28 |
| | — |
| | 28 |
| 31 |
| | — |
| | 31 |
|
| Total guaranteed/secured liquidity investments | — |
| | 2,378 |
| | — |
| | 2,378 |
| 5,261 |
| | — |
| | 5,261 |
|
| Total liquidity investments | $ | — |
| | $ | 4,938 |
| | $ | 1,365 |
| | $ | 6,303 |
| $ | 7,841 |
| | $ | 2,977 |
| | $ | 10,818 |
|
| |
| (1) | Consists of securities that are issued and effectively guaranteed by Fannie Mae and/or Freddie Mac, which have the support of the U.S. government, although they are not obligations of the U.S. government. |
At December 31, 2014 and 2013, as well as many business days between these two dates,During 2017, we purchased a portion of our total liquidity investments from counterparties for which the investments are secured with collateral (secured resale agreements). We believe these investments present little orvirtually no credit risk exposure to us.
The following table presents credit ratings of our unsecured investment credit exposures by the domicile of the counterparty or the domicile of the counterparty's parent for U.S. branches and agency offices of foreign commercial banks.
| | | (In millions) | | December 31, 2014 | | December 31, 2017 |
| | | Counterparty Rating (1) | | | | Counterparty Rating (1) | | |
| Domicile of Counterparty | | Sovereign Rating (1) | | AA | | A | | Total | | AA | | A | | Total |
| Domestic | | AA+ | | $ | 550 |
| | $ | 200 |
| | $ | 750 |
| | $ | 565 |
| | $ | — |
| | $ | 565 |
|
| U.S. branches and agency offices of foreign commercial banks: | | | | | | | | | | | | |
| Canada | | AAA | | 400 |
| | 2,000 |
| | 2,400 |
| | 200 |
| | 1,200 |
| | 1,400 |
|
| Finland | | AAA | | 1,400 |
| | — |
| | 1,400 |
| |
| Australia | | | 1,000 |
| | — |
| | 1,000 |
|
| Netherlands | | AAA | | — |
| | 900 |
| | 900 |
| | — |
| | 510 |
| | 510 |
|
| United Kingdom | | AA+ | | — |
| | 900 |
| | 900 |
| |
| Norway | | | — |
| | 500 |
| | 500 |
|
| Germany | | AAA | | — |
| | 900 |
| | 900 |
| | 300 |
| | 75 |
| | 375 |
|
| Australia | | AAA | | 700 |
| | — |
| | 700 |
| |
| Sweden | | | 200 |
| | — |
| | 200 |
|
| Total U.S. branches and agency offices of foreign commercial banks | |
| | 2,500 |
| | 4,700 |
| | 7,200 |
| | 1,700 |
| | 2,285 |
| | 3,985 |
|
| Total unsecured investment credit exposure | |
| | $ | 3,050 |
| | $ | 4,900 |
| | $ | 7,950 |
| | $ | 2,265 |
| | $ | 2,285 |
| | $ | 4,550 |
|
| |
| (1) | Represents the lowest long-term credit rating provided by Standard & Poor's, Moody's, and/or Fitch Advisory Services. |
The following table presents the remaining contractual maturity of our unsecured investment credit exposure by the domicile of the counterparty or the domicile of the counterparty's parent for U.S. branches and agency offices of foreign commercial banks.
| | | (In millions) | | December 31, 2014 | | December 31, 2017 |
| Domicile of Counterparty | | Overnight | | Due 2 days through 30 days | | Due 31 days through 90 days | | Due 91 days through 180 days | | Total | | Overnight | | Due 2 days through 30 days | | Due 31 days through 90 days | | Total |
| Domestic | | $ | — |
| | $ | — |
| | $ | 750 |
| | $ | — |
| | $ | 750 |
| | $ | 265 |
| | $ | — |
| | $ | 300 |
| | $ | 565 |
|
| U.S. branches and agency offices of foreign commercial banks: | | | | | | | | | | | | | | | | | | |
| Canada | | 1,800 |
| | 600 |
| | — |
| | — |
| | 2,400 |
| | 1,100 |
| | 200 |
| | 100 |
| | 1,400 |
|
| Finland | | 1,400 |
| | — |
| | — |
| | — |
| | 1,400 |
| |
| Australia | | | 1,000 |
| | — |
| | — |
| | 1,000 |
|
| Netherlands | | 900 |
| | — |
| | — |
| | — |
| | 900 |
| | 510 |
| | — |
| | — |
| | 510 |
|
| United Kingdom | | 900 |
| | — |
| | — |
| | — |
| | 900 |
| |
| Norway | | | 500 |
| | — |
| | — |
| | 500 |
|
| Germany | | 900 |
| | — |
| | — |
| | — |
| | 900 |
| | 75 |
| | — |
| | 300 |
| | 375 |
|
| Australia | | 700 |
| | — |
| | — |
| | — |
| | 700 |
| |
| Sweden | | | 200 |
| | — |
| | — |
| | 200 |
|
| Total U.S. branches and agency offices of foreign commercial banks | | 6,600 |
| | 600 |
| | — |
| | — |
| | 7,200 |
| | 3,385 |
| | 200 |
| | 400 |
| | 3,985 |
|
| Total unsecured investment credit exposure | | $ | 6,600 |
| | $ | 600 |
| | $ | 750 |
| | $ | — |
| | $ | 7,950 |
| | $ | 3,650 |
| | $ | 200 |
| | $ | 700 |
| | $ | 4,550 |
|
At December 31, 20142017, all of the $8.04.6 billion of unsecured liquidityinvestment exposure was to counterparties with holding companies domiciled in countries receiving either AAA or AA long-term sovereign ratings. Furthermore, we restrict a significant portion of unsecured lending to overnight maturities, which further limits risk exposure to these counterparties. By Finance Agency regulation, all counterparties exposed to non-U.S. countries are required to be domestic U.S. branches of foreign counterparties. We also limit exposure to counterparties and countries that could have significant direct or indirect exposure to European sovereign debt.
Mortgage-Backed Securities.Securities:
GSE Mortgage-Backed Securities
Over 85 percentAt December 31, 2017, $12.3 billion of our mortgage-backed securities are single-familyheld were GSE securities issued by Fannie Mae and Freddie Mac, which provide credit safeguards by guaranteeing either timely or ultimate payments of principal and interest. We believe that the conservatorships of Fannie Mae and Freddie Mac lower the chance that they would not be able to fulfill their credit guarantees and that the securities issued by these two GSEs are effectively government guaranteed. In addition, based on the data available to us and our purchase practices, we believe that most of the mortgage loans backing our GSE mortgage-backed securities are of high quality with acceptable credit performance.
Mortgage-Backed Securities Issued by Other Government Agencies
We also invest in mortgage-backed securities issued and guaranteed by Ginnie Mae and the NCUA. These investments totaled $2.0$2.5 billion at December 31, 20142017. The majority of the Ginnie Mae securities are fixed rate. The NCUA securities have floating rate coupons tied to one-month LIBOR with interest rate caps ranging from seven to eight percent. We believe that the strength of the issuers' guarantees and backing by the full faith and credit of the U.S. government is sufficient to protect us against credit losses on these securities.
Private-Label Mortgage-Backed Securities
We held no private-label mortgage-backed securities at December 31, 2014.
Derivatives
Credit Risk Exposure.Exposure: We mitigate most of the credit risk exposure resulting from interest rate swapderivative transactions through collateralization.collateralization or use of daily settled contracts. The table below presents the credit rating for derivative positions to which we had credit risk exposure at December 31, 20142017.
| | | (In millions) | | | | | | | | | | | | | | | | |
Credit Rating (1) | | Total Notional | | Net Derivatives Fair Value Before Collateral | | Cash Collateral Pledged To (From) Counterparty | | Net Credit Exposure to Counterparties | |
| Non-member counterparties: | | | | | | | | | |
| | | | Total Notional | | Net Derivatives Fair Value Before Collateral and Variation Margin for Daily Settled Contracts | | Cash Collateral Pledged to (from) Counterparties and Variation Margin for Daily Settled Contracts (1) | | Net Credit Exposure to Counterparties |
| Nonmember counterparties: | | | | | | | | | |
| Asset positions with credit exposure: | | | | | | | | | | | | | | | | |
| Bilateral derivatives: | | | | | | | | | |
| AA | | $ | 170 |
| | $ | — |
| | $ | — |
| | $ | — |
| |
| A | | 19 |
| | — |
| | — |
| | — |
| |
| Uncleared derivatives: | | | | | | | | | |
| A-rated | | | $ | 89 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Total uncleared derivatives | | | 89 |
| | — |
| | — |
| | — |
|
Cleared derivatives (2) | | | 4,574 |
| | 56 |
| | (20 | ) | | 36 |
|
| Liability positions with credit exposure: | | | | | | | | | | | | | | | | |
Cleared derivatives (2) | | 3,607 |
| | (2 | ) | | 13 |
| | 11 |
| | 6,340 |
| | (73 | ) | | 97 |
| | 24 |
|
| Total derivative positions with credit exposure to non-member counterparties | | 3,796 |
| | (2 | ) | | 13 |
| | 11 |
| |
| Total derivative positions with credit exposure to nonmember counterparties | | | 11,003 |
| | (17 | ) | | 77 |
| | 60 |
|
Member institutions (3) | | 450 |
| | 4 |
| | — |
| | 4 |
| | 177 |
| | 1 |
| | — |
| | 1 |
|
| Total | | $ | 4,246 |
| | $ | 2 |
| | $ | 13 |
| | $ | 15 |
| | $ | 11,180 |
| | $ | (16 | ) | | $ | 77 |
| | $ | 61 |
|
| |
| (1) | Each category includes the related plus (+) and minus (-) ratings (i.e., “A” includes “A+” and “A-” ratings).Cleared derivatives include variation margin for daily settled contracts of $74 million at December 31, 2017. |
| |
| (2) | Represents derivative transactions cleared with LCH.Clearnet LLC and CME Clearing, the FHLB's clearinghouses, which are not rated. LCH.Clearnet LLC's parent company, LCH Group Holdings Ltd, was rated A+ by Standard & Poor's; however, on May 31, 2017, Standard & Poor's lowered the rating to A and withdrew the rating at LCH Group Holdings Ltd.'s request. LCH Group Holdings Ltd.'s ultimate parent, London Stock Exchange Group Plc is rated A3 by Moody's and A- by Standard & Poor's. CME Clearing's parent, CME Group Inc. is rated Aa3 by Moody's and AA- by Standard & Poor's. |
| |
| (3) | Represents Mandatory Delivery Contracts. |
Based on bothAt December 31, 2017, the gross and net exposures, we had a minimal amountexposure of uncleared derivatives with residual credit risk exposure on bilateral derivatives throughout 2014.was less than $1 million. Gross exposure would likely increase if interest rates rise and could increase if the composition of our derivatives change. However, contractual collateral provisions in these derivatives would limit net exposure to acceptable levels.
The following table presents counterparties that provided 10 percent or more of the total notional amount of bilateral interest rate swap derivatives outstanding.
|
| | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | | | | | | | | | | | | | | |
| December 31, 2014 | | | | | | | | December 31, 2013 | | | | | | |
| Counterparty | | Credit Rating Category | | Notional Principal | | Net Unsecured Exposure | | Counterparty | | Credit Rating Category | | Notional Principal | | Net Unsecured Exposure |
| Wells Fargo Bank, N.A. | | AA | | $ | 1,104 |
| | $ | — |
| | Morgan Stanley Capital Services | | BBB | | $ | 3,421 |
| | $ | — |
|
| Deutsche Bank AG | | A | | 1,049 |
| | — |
| | Deutsche Bank AG | | A | | 1,458 |
| | — |
|
| HSBC Bank USA, N.A. | | A | | 1,000 |
| | — |
| | Royal Bank of Scotland PLC | | A | | 1,142 |
| | — |
|
Although we cannot predict if we will realize credit risk losses from any of our derivatives counterparties, we believe that all of themthe counterparties will be able to continue making timely interest payments and, more generally, to continue to satisfy the terms and conditions of their derivative contracts with us. As of December 31, 20142017, we had $0.5 billion$20 million of notional principal of interest rate swaps outstanding towith one member,Member, JPMorgan Chase Bank, N.A. (JPMorgan), which also had outstanding credit services with us. Due to the amount of market value collateralization, we had no outstanding credit exposure to this counterparty related to interest rate swaps outstanding.
Lehman Brothers Derivatives.Liquidity Risk
Liquidity Overview
We strive to be in a liquidity position at all times to meet the borrowing needs of our Members and to meet all current and future financial commitments. This objective is achieved by managing liquidity positions to maintain stable, reliable, and cost-effective sources of funds while taking into account market conditions, Member demand, and the maturity profile of assets and liabilities. Our liquidity position complies with the FHLBank Act, Finance Agency regulations, and internal policies.
The FHLBank System's primary source of funds is the sale of Consolidated Obligations in the capital markets. Our ability to obtain funds through the sale of Consolidated Obligations at acceptable interest costs depends on the financial market's perceived riskiness of the Obligations and on prevailing conditions in the capital markets, particularly the short-term capital markets. The System's favorable debt ratings, the implicit U.S. government backing of our debt, and our effective risk management practices are instrumental in ensuring stable and satisfactory access to the capital markets.
We believe our liquidity position, as well as that of the System, continued to be strong during 2017. Our overall ability to effectively fund our operations through debt issuances remained sufficient. Investor demand for System debt was robust in 2017. Although we can make no assurances, we expect this to continue to be the case. We believe the possibility of a liquidity or funding crisis in the System that would impair our ability to participate, on a cost-effective basis, in issuances of debt, service outstanding debt, maintain adequate capitalization, or pay competitive dividends is remote. See Note 20the "Consolidated Obligations" section of "Analysis of Financial Condition" for further information about our funding actions throughout 2017 aimed at lowering exposure to unforeseen liquidity risks given the System's critical role as a liquidity provider in the financial services market.
The System works collectively to manage and monitor the System-wide liquidity and funding risks. Liquidity risk includes the risk the System could have difficulty rolling over short-term Obligations when market conditions change, also called refinancing risk. The System has a large reliance on short-term funding; therefore, it has a sharp focus on managing liquidity risk to very low levels. As shown on the Statements of Cash Flows, in 2017, our portion of the System's debt issuances totaled $449.8 billion for Discount Notes and $27.1 billion for Bonds. Access to short-term debt markets has been reliable because investors, driven by increased liquidity preferences and risk aversion, including the effects of money market fund reform, have sought the System’s short-term debt, which has led to increased utilization of debt maturing in one year or less. See the Notes to Financial Statements for more detailed information on derivatives we had with Lehman Brothers atregarding maturities of certain financial assets and liabilities which are instrumental in determining the timeamount of their bankruptcy in September 2008.liquidity risk. In addition to contractual maturities, other assumptions regarding cash flows such as estimated prepayments, embedded call optionality, and scheduled amortization are considered when managing liquidity risks.
ExposureA primary way that we manage liquidity risk is to meet operational and contingency liquidity requirements. We satisfied the operational liquidity requirement by both meeting a contingency liquidity requirement, discussed below, and because we were able to adequately access the capital markets to issue debt. Liquidity investments, most of which were overnight, were generally in the range of $5 billion to $15 billion during 2017. In addition, Finance Agency guidance requires us to target at least 5 to 15 consecutive days of a positive amount of liquidity based on specific assumptions under two scenarios. We target holding at least three extra days of positive liquidity under each scenario, although as market conditions warrant we may hold, and often do hold, additional amounts.
Contingency Liquidity Requirement
Contingency liquidity risk is the potential inability to meet liquidity needs because our access to the capital markets to issue Consolidated Obligations is restricted or suspended for a period of time due to a market disruption, operational failure, or real or perceived credit quality problems. We continued to hold an ample amount of liquidity reserves to protect against contingency liquidity risk.
|
| | | | | | | |
| (In millions) | December 31, 2017 | | December 31, 2016 |
| Contingency Liquidity Requirement | | | |
Total Contingency Liquidity Reserves (1) | $ | 40,850 |
| | $ | 32,127 |
|
Total Requirement (2) | (32,349 | ) | | (24,224 | ) |
| Excess Contingency Liquidity Available | $ | 8,501 |
| | $ | 7,903 |
|
| |
| (1) | Includes, among others, cash, overnight Federal funds, overnight deposits, self-liquidating term Federal funds, 95 percent of the market value of available-for-sale negotiable securities, and 75 percent of the market value of certain held-to-maturity obligations, including obligations of the United States, U.S. government agency obligations and mortgage-backed securities. |
| |
| (2) | Includes net liabilities maturing in the next seven business days, assets traded not yet settled, Advance commitments outstanding, Advances maturing in the next seven business days, and a three percent hypothetical increase in Advances. |
Deposit Reserve Requirement
To support our Member deposits, we also must meet a statutory deposit reserve requirement. The sum of our investments in obligations of the United States, deposits in eligible banks or trust companies, and Advances with a final maturity not exceeding five years must equal or exceed the current amount of Member deposits. The following table presents the components of this liquidity requirement.
|
| | | | | | | |
| (In millions) | December 31, 2017 | | December 31, 2016 |
| Deposit Reserve Requirement | | | |
| Total Eligible Deposit Reserves | $ | 73,728 |
| | $ | 72,114 |
|
| Total Member Deposits | (649 | ) | | (765 | ) |
| Excess Deposit Reserves | $ | 73,079 |
| | $ | 71,349 |
|
Contractual Obligations
The following table summarizes our contractual obligations at December 31, 2017. We believe that, as in the past, we will continue to have sufficient liquidity, including from access to the debt markets to issue Consolidated Obligations, to satisfy these obligations on a timely basis.
|
| | | | | | | | | | | | | | | | | | | |
| (In millions) | < 1 year | | 1 < 3 years | | 3 < 5 years | | > 5 years | | Total |
| Contractual Obligations | | | | | | | | | |
Long-term debt (Bonds) - par (1) | $ | 28,940 |
| | $ | 10,612 |
| | $ | 8,262 |
| | $ | 6,343 |
| | $ | 54,157 |
|
| Operating leases (include premises and equipment) | 1 |
| | 2 |
| | 2 |
| | 3 |
| | 8 |
|
| Mandatorily redeemable capital stock | 19 |
| | 2 |
| | 8 |
| | 1 |
| | 30 |
|
| Commitments to fund mortgage loans | 219 |
| | — |
| | — |
| | — |
| | 219 |
|
| Pension and other postretirement benefit obligations | 2 |
| | 5 |
| | 5 |
| | 32 |
| | 44 |
|
| Total Contractual Obligations | $ | 29,181 |
| | $ | 10,621 |
| | $ | 8,277 |
| | $ | 6,379 |
| | $ | 54,458 |
|
| |
| (1) | Does not include Discount Notes and contractual interest payments related to Bonds. Total is based on contractual maturities; the actual timing of payments could be affected by factors affecting redemptions. |
Off-Balance Sheet Arrangements
The following table summarizes our off-balance sheet items at December 31, 2017. For more information, see Note 20 of the Notes to Financial Statements.
|
| | | | | | | | | | | | | | | | | | | |
| (In millions) | < 1 year | | 1 < 3 years | | 3 < 5 years | | > 5 years | | Total |
Off-balance sheet items (1) | | | | | | | | | |
| Commitments to fund additional Advances | $ | 5 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 5 |
|
| Standby Letters of Credit | 14,389 |
| | 92 |
| | 186 |
| | 24 |
| | 14,691 |
|
| Standby bond purchase agreements | 27 |
| | 45 |
| | — |
| | — |
| | 72 |
|
| Consolidated Obligations traded, not yet settled | 310 |
| | — |
| | — |
| | — |
| | 310 |
|
| Total off-balance sheet items | $ | 14,731 |
| | $ | 137 |
| | $ | 186 |
| | $ | 24 |
| | $ | 15,078 |
|
| |
| (1) | Represents notional amount of off-balance sheet obligations. |
Member Concentration Risk
We regularly assess concentration risks from business activity. The increase over the last two years in Advance borrowings from one member, JPMorgan, raised borrower concentration ratios. We believe that the current concentration of Advance activity is consistent with our risk management philosophy, and the impact of borrower concentration on market risk, credit risk, and operational risk, after considering mitigating controls, is small.minimal.
Our business is designed to support significant changes in asset levels without having to undergo material changes in staffing, operations, risk practices, or general resource needs. A key reason for this scalability is that the Capital Plan provides for additional capital when Mission Assets grow and the opportunity for us to retire capital when Mission Assets decline, thereby acting, along with our efficient operating expenses, to preserve competitive profitability.
We believe the effect on credit risk exposure from borrower concentration is minimal because of our application of normal credit risk mitigations, the most important of which is over-collateralization of borrowings. In the remote possibility of failure of a memberMember to whom we lent a large amount of Advances, combined with the Federal Deposit Insurance Corporation's decision not to repay Advances, we would implement our memberMember failure plan. Our memberMember failure plan, which we test periodically, would liquidate collateral to recover losses from losing principal and interest on the Advance balances.
Advance concentration has a minorminimal effect on market risk exposure because Advances are largely match funded. Finally, the increasefunded by Consolidated Obligations and interest rate swaps that have similar interest rate characteristics. Furthermore, additional increases in Advance concentration haswould not affectedmaterially affect capital adequacy because Advance growth from the member is supported by new purchases of capital stock as required by the Capital Plan.
Capital Adequacy
Retained Earnings
We must hold sufficient capital to protect against exposure to various risks and we regularly conduct a variety of measurements and assessments for capital adequacy. The $689 million of retained earnings at December 31, 2014 substantially exceeded our policy minimum of $450 million. Given the regulatory environment, we carry a greater amount of retained earnings than required by the policy. We will continue to bolster capital adequacy over time by allocating a portion of earnings to a separate restricted retained earnings account in accordance with the FHLBank System's Capital Agreement. We believe that the amount of retained earnings is sufficient to protect against members' impairment risk of their capital stock investment and to provide the opportunity to stabilize dividends.
Risk-Based Capital
The following table shows the amount of risk-based capital required based on Finance Agency prescribed measurements, the amount of permanent capital, and the amount of excess permanent capital. |
| | | | | | | | | | | |
| (Dollars in millions) | December 31, 2014 | | Monthly Average 2014 | | December 31, 2013 |
| Market risk-based capital | $ | 125 |
| | $ | 165 |
| | $ | 199 |
|
| Credit risk-based capital | 246 |
| | 241 |
| | 222 |
|
| Operational risk-based capital | 111 |
| | 122 |
| | 126 |
|
| Total risk-based capital requirement | 482 |
| | 528 |
| | 547 |
|
| Total permanent capital | 5,019 |
| | 5,069 |
| | 5,435 |
|
| Excess permanent capital | $ | 4,537 |
| | $ | 4,541 |
| | $ | 4,888 |
|
| Risk-based capital as a percent of permanent capital | 10 | % | | 10 | % | | 10 | % |
The risk-based capital requirement has historically not been a constraint on operations and we do not use it to actively manage any of our risks. It has normally ranged from 10 to 20 percent, which is significantly less than the amount of permanent capital. This measure has been at the low end of the range for several years, primarily due to the low level of interest rates during this period limiting estimated exposure to extreme lower rate scenarios.
Dodd-Frank Stress Test
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, all FHLBanks are required to perform an annual stress test for capital adequacy. Our first test was completed and published in July 2014, based on our financial condition as of September 30, 2013 and the methodology prescribed by the Finance Agency. Capital adequacy was sufficient under all established scenarios to fully absorb losses under both adverse and severely adverse economic conditions.
Market Capitalization Ratios
We measure two sets of market capitalization ratios. One measures the market value of capital (i.e., stockholder equity) relative to the par value of regulatory capital stock (capital stock and mandatorily redeemable capital stock). The other measures the market value of capital relative to the book value of total capital, which includes retained earnings, and mandatorily redeemable capital stock. The measures provide a point-in-time indication of the FHLBank's liquidation or franchise value and also serve as a measure of realized or potential market risk exposure.
The following table presents the market value of equity to regulatory capital stock (excluding retained earnings) for the interest rate environments for which we have policy limits. A base case value below par could indicate that, in the event of an immediate liquidation scenario, capital stock may be impaired and returned at some value less than par.
|
| | | | | | | | |
| | December 31, 2014 | | Monthly Average Year Ended December 31, 2014 | | December 31, 2013 |
| Market Value of Equity to Par Value of Regulatory Capital Stock - Base Case (Flat Rates) Scenario | 114 | % | | 112 | % | | 105 | % |
Market Value of Equity to Par Value of Regulatory Capital Stock - Down Shock (1) | 114 |
| | 114 |
| | 108 |
|
Market Value of Equity to Par Value of Regulatory Capital Stock - Up Shock (2) | 108 |
| | 106 |
| | 100 |
|
| |
(1) | Represents a down shock of 100 basis points. |
| |
(2) | Represents an up shock of 200 basis points. |
In 2014, the market capitalization ratios in the scenarios presented continued to be above the minimum policy limits. The ratios increased in 2014 due to the combined effect of several factors, which included the repurchase of excess stock, modest declines in long-term market rates and modestly higher market prices on mortgage assets relative to funding. The ratios remained at favorable levels because retained earnings were 16 percent of regulatory capital stock at December 31, 2014 and we maintained market risk exposure at moderate levels.
The following table presents the market value of equity to the book value of total capital and mandatorily redeemable capital stock for the same interest rate environments. A base case value below par could indicate that interest rate risk has been or could be incurred in the future or that, in the event of an immediate liquidation scenario, a portion of retained earnings would need to be utilized in order to return regulatory capital stock at par. The base case ratio of 98 percent at December 31, 2014 indicates that approximately $90 million of retained earnings would be required in order to return regulatory capital stock at par. |
| | | | | | | | |
| | December 31, 2014 | | Monthly Average Year Ended December 31, 2014 | | December 31, 2013 |
Market Value of Equity to Book Value of Capital - Base Case (Flat Rates) Scenario (1) | 98 | % | | 97 | % | | 93 | % |
Market Value of Equity to Book Value of Capital - Down Shock (1)(2) | 99 |
| | 99 |
| | 96 |
|
Market Value of Equity to Book Value of Capital - Up Shock (1)(3) | 94 |
| | 92 |
| | 89 |
|
| |
(1) | Capital includes total capital and mandatorily redeemable capital stock. |
| |
(2) | Represents a down shock of 100 basis points. |
| |
(3) | Represents an up shock of 200 basis points. |
Liquidity Risk
Liquidity Overview
As shown on the Statements of Cash Flows, in 2014, our portion of the System's debt issuances totaled $270.4 billion for Discount Notes and $41.5 billion for Bonds. The System's favorable debt ratings, the implicit U.S. government backing of our debt, and our effective risk management have been instrumental in ensuring satisfactory access to the capital markets.
Our liquidity position remained strong during 2014 and our overall ability to fund our operations through debt issuances at acceptable interest costs remained sufficient. Although we can make no assurances, we expect this to continue to be the case,
and we believe the possibility of a liquidity or funding crisis in the FHLBank System that would impair the FHLBank's ability to participate, on a cost-effective basis, in issuances of new debt, service outstanding debt, maintain adequate capitalization, or pay competitive dividends is remote.
We must meet both operational and contingency liquidity requirements. We satisfied the operational liquidity requirement by both meeting a contingency liquidity requirement, discussed below, and because we were able to adequately access the capital markets to issue debt. The amount of overnight liquidity was generally in the range of $5 billion to $15 billion during 2014. In addition, Finance Agency guidance requires us to target at least 5 to 15 consecutive days of positive liquidity based on specific assumptions under two scenarios. We target holding at least three extra days of positive liquidity under each scenario, although as market conditions warrant we may hold additional amounts.
Contingency Liquidity Requirement
Contingency liquidity risk is the potential inability to meet liquidity needs because our access to the capital markets to issue Consolidated Obligations is restricted or suspended for a period of time due to a market disruption, operational failure, or real or perceived credit quality problems. We continued to hold an ample amount of liquidity reserves to protect against contingency liquidity risk.
|
| | | | | | | |
| (In millions) | December 31, 2014 | | December 31, 2013 |
| Contingency Liquidity Requirement | | | |
Total Contingency Liquidity Reserves (1) | $ | 30,594 |
| | $ | 30,699 |
|
Total Requirement (2) | (12,155 | ) | | (11,752 | ) |
| Excess Contingency Liquidity Available | $ | 18,439 |
| | $ | 18,947 |
|
| |
(1) | Includes, among others, cash, overnight Federal funds, overnight deposits, self-liquidating term Federal funds, 95 percent of the market value of available-for-sale negotiable securities, and 75 percent of the market value of certain held-to-maturity obligations, including obligations of the United States, U.S. government agency obligations and mortgage-backed securities. |
| |
(2) | Includes net liabilities maturing in the next seven business days, assets traded not yet settled, Advance commitments outstanding, Advances maturing in the next seven business days, and a three percent hypothetical increase in Advances. |
Deposit Reserve Requirement
To support our member deposits, we also must meet a statutory deposit reserve requirement. The sum of our investments in obligations of the United States, deposits in eligible banks or trust companies, and Advances with a final maturity not exceeding five years must equal or exceed the current amount of member deposits. The following table presents the components of this liquidity requirement.
|
| | | | | | | |
| (In millions) | December 31, 2014 | | December 31, 2013 |
| Deposit Reserve Requirement | | | |
| Total Eligible Deposit Reserves | $ | 77,920 |
| | $ | 73,531 |
|
| Total Member Deposits | (730 | ) | | (898 | ) |
| Excess Deposit Reserves | $ | 77,190 |
| | $ | 72,633 |
|
Contractual Obligations
The following table summarizes our contractual obligations at December 31, 2014. The allocations according to the expiration terms and payment due dates of these obligations were not materially different from those at the end of 2013. Changes reflected normal business variations. We believe that, as in the past, we will continue to have sufficient liquidity, including from access to the debt markets to issue Consolidated Obligations, to satisfy these obligations timely.
|
| | | | | | | | | | | | | | | | | | | |
| (In millions) | < 1 year | | 1<3 years | | 3<5 years | | > 5 years | | Total |
| Contractual Obligations | | | | | | | | | |
Long-term debt (Bonds) - par (1) | $ | 32,501 |
| | $ | 11,514 |
| | $ | 6,892 |
| | $ | 8,217 |
| | $ | 59,124 |
|
| Operating leases (include premises and equipment) | 1 |
| | 2 |
| | 1 |
| | 6 |
| | 10 |
|
| Mandatorily redeemable capital stock | 61 |
| | — |
| | 2 |
| | — |
| | 63 |
|
| Commitments to fund mortgage loans | 451 |
| | — |
| | — |
| | — |
| | 451 |
|
| Pension and other postretirement benefit obligations | 3 |
| | 5 |
| | 5 |
| | 26 |
| | 39 |
|
| Total Contractual Obligations | $ | 33,017 |
| | $ | 11,521 |
| | $ | 6,900 |
| | $ | 8,249 |
| | $ | 59,687 |
|
| |
(1) | Does not include Discount Notes and contractual interest payments related to Bonds. Total is based on contractual maturities; the actual timing of payments could be affected by factors affecting redemptions. |
Off-Balance Sheet Arrangements
The following table summarizes our off-balance sheet items at December 31, 2014. The allocations according to the expiration terms and payment due dates of these items were not materially different from those at the end of 2013, and changes reflected normal business variations.
|
| | | | | | | | | | | | | | | | | | | |
| (In millions) | < 1 year | | 1<3 years | | 3<5 years | | > 5 years | | Total |
Off-balance sheet items (1) | | | | | | | | | |
| Standby Letters of Credit | $ | 17,233 |
| | $ | 479 |
| | $ | 14 |
| | $ | 54 |
| | $ | 17,780 |
|
| Standby bond purchase agreements | 37 |
| | 150 |
| | — |
| | — |
| | 187 |
|
| Consolidated Obligations traded, not yet settled | 5 |
| | — |
| | 17 |
| | — |
| | 22 |
|
| Total off-balance sheet items | $ | 17,275 |
| | $ | 629 |
| | $ | 31 |
| | $ | 54 |
| | $ | 17,989 |
|
| |
(1) | Represents notional amount of off-balance sheet obligations. |
Operational RiskRisks
Operational risk is defined as the risk of an unexpected loss resulting from human error, fraud, inability to enforce legal contracts, or deficiencies in internal controls or information systems. We mitigate operational riskrisks through adherence to internal policies, conformance with entity level controls, department procedures and controls, usethrough an emphasis on the importance of tested information systems, disaster recovery provisions for those systems, acquisition of insurance coverage to help protect us from financial exposure relating to errors or fraud by our personnel, and comprehensive policies and procedures related to Human Resources.risk management, as further discussed below. In addition, the Internal Audit Department, which reports directly to the Audit Committee of the Board of Directors, regularly monitors and tests compliance with our policies, procedures, applicable regulatory requirements and best practices.
Internal Department Procedures and Controls
Each of our departments maintains and regularly reviews and enhances, as needed, a system of internal procedures and controls, including those that address proper segregation of duties. Each system is designed to prevent any one individual from processing the entirety of a transaction that affects memberMember accounts, correspondent FHLBankFHLB accounts or third-party servicers providing support to us. We review daily and periodic transaction activity reports in a timely manner to detect erroneous or fraudulent activity. Procedures and controls also are assessed on an enterprise-wide basis, independently from the business unit departments. We also are in compliance with Sarbanes-Oxley Sections 302 and 404, which focus on the control environment over financial reporting.
Information Systems
We rely heavily upon internal and third-party information systems and other technology to conduct and manage our business. Our operations rely on the secure processing, storage and transmission of confidential and other information in our computer systems and networks. Our computer systems, software and networks may be subjected to “cyberattacks”cyberattacks (e.g., breaches,
unauthorized access, misuse, computer viruses or other malicious code and other events) that could jeopardize the confidentiality or integrity of such information, or otherwise cause interruptions or malfunctions in our operations.
We mitigate the risk associated with cyberattacks through the implementation of multiple layers of security controls. Administrative, physical, and logical controls are in place for establishing, administering and actively monitoring system access, sensitive data, and system change. Additionally, separate groups within our organization and/or third parties validate the strength of our security and confirm that established policies and procedures are adequately followed.
Disaster Recovery Provisions
We have a Business Resumption Contingency Plan that provides us with the ability to maintain operations in various scenarios of business disruption. A committee of staff reviewsWe review and updatesupdate this plan periodically to ensure that it serves our changing operational needs and those of our members.Members. We have an off-site facility in a suburb of Cincinnati, Ohio, which is tested at least annually. We also have a back-up agreement in place with theanother FHLBank of Indianapolis in the event that both of our Cincinnati-based facilities are inoperable.
Insurance Coverage
We have insurance coverage for cyber risks, employee fraud, forgery and wrongdoing, as well asand Directors' and Officers' liabilityliability. This coverage thatprimarily provides protection for claims alleging breach of duty, misappropriation of funds, neglect, acts of omission, employment practices, and fiduciary liability. We also have property, casualty, computer equipment, automobile, and various types of other coverage as well.
Human Resources Policies and Procedures
The risks associated with our Human Resources function are categorized as either Employment Practices Risk or Human Capital Risk. Employment Practices Risk is the potential failure to properly administer our policies regarding employment practices and compensation and benefit programs for eligible staff and retirees, and the potential failure to observe and properly comply with federal, state and municipal laws and regulations. Human Capital Risk is the potential inability to attract and retain appropriate levels of qualified human resources to maintain efficient operations.
Comprehensive policies and procedures are in place to limit Employment Practices Risk. These are supported by an established internal control system that is routinely monitored and audited. With respect to Human Capital Risk, we strive to maintain a competitive salary and benefit structure, which is regularly reviewed and updated as appropriate to attract and retain qualified staff. In addition, we have a management succession plan that is reviewed and approved by our Board of Directors.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Introduction
The preparation of financial statements in accordance with GAAP requires management to make a number of significant judgments, estimates, and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities (if applicable), and the reported amounts of income and expenses during the reported periods. Although management believes its judgments, estimates, and assumptions are reasonable, actual results may differ and other parties could arrive at different conclusions.
We have identified the following critical accounting policies that require management to make subjective or complex judgments about inherently uncertain matters. Our financial condition and results of operations could be materially affected under different conditions or different assumptions related to these accounting policies.
Accounting for Derivatives and Hedging Activity
In accordance with Finance Agency regulations, we execute all derivatives to manage market risk exposure, not for speculation or solely for earnings enhancement. As in past years, in 2014 all outstanding derivatives hedged specific assets, liabilities, or Mandatory Delivery Contracts. We record derivative instruments at their fair values on the Statements of Condition, and we record changes in these fair values in current period earnings. We strive to ensure that our use of derivatives maximizes the probability that they are highly effective in offsetting changes in the market values of the designated balance sheet instruments.
Fair Value Hedges
As indicated in the "Use of Derivatives in Market Risk Management" section of "Quantitative and Qualitative Disclosures About Risk Management," we designate a portion of our derivatives as fair value hedges. Fair value hedge accounting permits
the changes in fair values of the hedged risk in the hedged instruments to be recorded in the current period, thus offsetting, partially or fully, the change in fair value of the derivatives. For derivatives accounted as fair value hedges, the hedged risk is
designated to be changes in LIBOR benchmark interest rates. The result is that there has been a relatively small amount of unrealized earnings volatility from hedging market risk with derivatives.
In order to determine if a derivative qualifies for fair value hedge accounting, we must assess how effective the derivative has been, and is expected to be, in hedging changes in the fair values of the risk being hedged. Each month we perform effectiveness testing using a consistently applied standard statistical methodology, regression analysis, that measures the degree of correlation and relationship between the fair values of the derivative and hedged instrument. The results of the statistical measures must pass predefined threshold values to enable us to conclude that the fair values of the derivative transaction have a close correlation with the fair values of the hedged instrument. If any measure is outside of its respective tolerance, the hedge would no longer qualify for fair value hedge accounting. This means we must then record the fair value change of the derivative in current earnings without any offset in the fair value change of the related hedged instrument. Due to the intentional matching of terms between the derivative and the hedged instrument, we expect that failing an effectiveness test will be infrequent, which has been the case historically.
If a derivative/hedged instrument transaction fails effectiveness testing, it does not mean that the hedge relationship is no longer successful in achieving its intended economic purpose. For example, a Consolidated Obligation hedged with an interest rate swap creates adjustable-rate LIBOR funding, which is used to match fund adjustable-rate LIBOR and other short-term Advances. The hedge achieves the desired result (matching the net funding with the asset) because, economically, the Advance is part of the overall hedging strategy and the reason for engaging in the derivative transaction.
Fair value differences that have actually occurred have historically resulted in a relatively small amount of earnings volatility. Each month, we compute fair values on all derivatives and related hedged instruments across a range of interest rate scenarios. As of year-end 2014, forFor derivatives receiving long-haul fair value hedge accounting, the total net difference between the fair valuesadditional amount of the derivatives and related hedged instrumentsearnings volatility under an assumption of stressed interest rate environments as of year-end 2017 was in a range of zeropositive $8 million to negative $2$9 million. This range is minimal compared to the notional principal amount.
Fair Value Option--Economic Hedge
We account for a portion of Advance and Bond-related derivatives using an accounting election called "fair value option," which is included in the economic hedge category. An economic hedge under the fair value option does not require passing effectiveness testing to permit the derivatives'derivative's fair market value to be offset with the market value of the hedged instrument, as is required under a fair value hedge. However, it records the fair market value of the hedged instrument at its full fair value instead of only the value of hedging the benchmark interest rate (LIBOR).
The effect of electing full fair value is that the hedged instruments'instrument's market value includes the impact of changes in spreads between LIBOR and the interest rate index related to the hedged instrument. This spread includes a creditinstrument, as well as other risk component.components, such as liquidity. Therefore, full fair value results in a different kind of unrealized earnings volatility, (whichwhich could be higher or lower, compared to accounting under fair value hedge treatment.
Accounting for Premiums and Discounts on Mortgage Loans and Mortgage-Backed Securities
The accounting for amortization/accretion of premiums/discounts can result in earnings volatility, most of which relates to our MPP, mortgage-backed securities, and Consolidated Obligations. Normally, earnings volatility associated with amortization/accretion of premiums/discounts for Obligations is less pronounced than that for mortgage assets.
When we purchase or invest in mortgages, we normally pay an amount that differs from the principal balance. A premium price is paid if the purchase price exceeds the principal amount. A discount price is paid if the purchase price is less than the principal amount. Premiums/discounts are required to be deferred and amortized/accreted to net interest income in a manner such that the yield recognized each month on the underlying asset is constant over the asset's historical life and estimated future life. This is called the constant effective (level) yield method.
We typically pay more than the principal balance when the interest rate on a purchased mortgage is greater than the prevailing market rate for similar mortgages. The net purchase premium is amortized as a reduction in the mortgage's book yield. Similarly,A discount price is paid if the purchase price is less than the principal amount. If we pay less than the principal balance, the net discount is accreted in the same manner as the premium, resulting in an increase in the mortgage's book yield.
We have historically purchased most MPP loans at premium prices. Mortgage-backed securities outstanding at the end of 20142017 were purchased at net discountpremium prices close to par. At the end of 2014,2017, the MPP had a net premium balance of $194$228 million and
mortgage-backed securities had a net discountpremium balance of $27$25 million, resulting in a total mortgage net premium balance of $167$253 million.
When mortgage
Premiums/discounts are required to be deferred and amortized/accreted to net interest income in a manner such that a constant yield is recognized each month on the underlying asset by using either the contractual interest method (contractual method) or the retrospective interest method (retrospective method).
Contractual Method
For MPP loans, we use the contractual method, which recognizes the income effects of premiums and discounts over the contractual life of the loan based on the actual behavior of the underlying loans, including adjustments for actual prepayment activities. The contractual method does not consider changes in estimated prepayments based on assumptions about future borrower behavior.
Retrospective Method
For mortgage-backed securities, we apply the retrospective method. The retrospective method requires that we estimate principal cash flows are volatile, there can be substantial fluctuation inover the accounting recognitionestimated life of premiumsthe securities and discounts. We updatemake a retrospective adjustment of the constant effective yield method monthly using actual historical and projected principal cash flows. Projectedeach time the estimated life changes as if the new estimate had been known since the original acquisition date of the asset. Projecting principal cash flows requires us to estimate mortgage prepayment speeds, which are driven primarily by changes in interest rates. Projected prepayment speeds are derived using a market-tested third-party prepayment model. We regularly test the reasonableness and accuracy of the prepayment model by comparing its projections to actual prepayment results experienced over time and to dealer prepayment indications.
When interest rates decline, actual and projected prepayment speeds are likely to increase. This accelerates the amortization/accretion, resulting in a reduction in the mortgages' book yields on mortgage-backed securities with premium balances and an increase in book yields on mortgage-backed securities with discount balances. The opposite effect tends to occur when interest rates rise. The immediate adjustment and the schedules for future amortization/accretion are based on applying the new constant effective yield as if it had been in effect since the purchase of the assets. See Note 1 of the Notes to Financial Statements for additional information.
Our mortgages under the MPP are stratified for amortization purposes into multiple portfolios according to common characteristics such as coupon interest rate, state of origination, final original maturity (mostly 15, 20, and 30 years), loan age, and type of mortgage (i.e., conventional and FHA). We compute amortization/accretion for each mortgage-backed security separately. Projected prepayment speeds are derived using a market-tested third-party prepayment model. We regularly test the reasonableness and accuracy of the prepayment model by comparing its projections to actual prepayment results experienced over time and to dealer prepayment indications.
It is difficult to calculate how much amortization/accretion is likely to change over time because prepayment projections are inherently subject to uncertainty. Exact trends depend on the relationship between market interest rates and coupon rates on outstanding mortgage assets, the historical evolution of mortgage interest rates, the age of the mortgage loans, demographic and population trends, and other market factors. Changes in amortization/accretion also depend on 1) the accuracy of prepayment projections compared to actual realized prepayments and 2) term structure models used to simulate possible future evolution of various interest rates. The term structure models depend heavily on theories and assumptions related to future interest rates and interest rate volatility. We strive to maintain consistency in our use of prepayment and term structure models, although we do enhance these models based on developments in theories, technologies, best practices, and market conditions.
We regularly perform analyses that test the sensitivity of premium/discount recognition for mortgage assets to changes in prepayment speeds. The following table shows, as of year-end 2014, the estimated adjustments to the immediate recognition of premium amortization/discount accretion for various interest rate shocks (with interest rates not permitted to fall below zero percent). Although some of the changes shown below would result in a substantial change in ROE in the quarter in which the rate change occurred, it currently would not materially threaten our profitability.
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | | -200 | | -100 | | -50 | | Base | | +50 | | +100 | | +200 |
| | | $ | (48 | ) | | $ | (23 | ) | | $ | (12 | ) | | $ | (3 | ) | | $ | 2 |
| | $ | 6 |
| | $ | 10 |
|
Provision for Credit Losses
We evaluate Advances and the MPP to assure an adequate reserve is maintained to absorb probable losses inherent in these portfolios.
Advances
We evaluate probable credit losses inherent in Advances due to borrower default or delayed receipt of interest and principal, taking into consideration the amount recoverable from the collateral pledged by membersMembers to secure Advances. This analysis is performed for each memberMember separately on at least a quarterly basis. We believe we have adequate policies and procedures in place to effectively manage credit risk exposure on Advances. These include monitoring the creditworthiness and financial condition of the institutions to which we lend funds, determining the quality and value of collateral pledged, estimating borrowing capacity based on collateral value and type for each member,Member, and evaluating historical loss experience. At December 31, 2014,2017, we had rights to collateral (either loans or securities), on a member-by-memberMember-by-Member basis, with an estimated fair value that exceeds the amount of outstanding Advances. At the end of 2014,2017, the aggregate estimated value of this collateral was $253.0$328.7 billion. Although some of this overcollateralizationover-collateralization may reflect a desire to maintain excess borrowing capacity, all of a member'sMember's pledged collateral would be available as necessary to cover any of that member'sMember's credit obligations to the FHLBank.FHLB.
Based on the nature and quality of the collateral held as security for Advances, including overcollateralization,over-collateralization, our credit analyses of membersMembers and collateral, and members'Members' prior repayment history (i.e., we have never recorded a loss from an
Advance), we believe that no allowance for losses was necessary at December 31, 2014.2017. See Notes 1 and 10 of the Notes to Financial Statements for additional information.
Mortgage Loans Acquired Under the MPP
We analyze loans in the MPP on at least a quarterly basis by 1) estimating the incurred credit losses inherent in the portfolio and comparing these to credit enhancements, including the recoverability of insurance, and 2) establishing reserves based on the results. We apply a consistent methodology to determine our estimates.
We acquire both FHA and conventional fixed-rate mortgage loans under the MPP. Because FHA mortgage loans are U.S. government insured, we have determined that they do not require a loan loss allowance. We are protected against credit losses on conventional mortgage loans from several sources, in order of priority:
| |
| ▪ | having the related real estate as collateral, which effectively includes the borrower's equity; and |
| |
| ▪ | by credit enhancements including 1) primary mortgage insurance, if applicable, 2) the member'sMember's available funds remaining in the Lender Risk Account, and 3) if applicable, Supplemental Mortgage Insurance coverage up to the policy limit, applied on a loan-by-loan basis. |
We assume any credit exposure if losses exceed the related real estate residual value and credit enhancements.
The key estimates and assumptions that affect our allowance for credit losses generally include:
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| ▪ | the characteristics of specific conventional loans outstanding under the MPP; |
| |
| ▪ | evaluations of the overall delinquent loan portfolio through the use of migration analysis; |
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| ▪ | loss severity estimates; |
| |
| ▪ | historical claims and default experience; |
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| ▪ | expected proceeds from credit enhancements; |
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| ▪ | evaluation of exposure to Supplemental Mortgage Insurance providers and their ability to pay claims; |
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| ▪ | comparisons to industry reported data; and |
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| ▪ | current economic trends and conditions. |
These estimates require significant judgments, especially considering the current national housing market, the inability to readily determine the fair value of all underlying properties, the application of pool level credit enhancements, and the uncertainty in other macroeconomic factors that make estimating defaults and severity imprecise.
Based on our analysis, as of December 31, 2014,2017, we determined that an allowance for credit losses of $5$1 million was required for our conventional mortgage loans in the MPP. Further substantialSubstantial reductions in home prices or other economic variables that affect mortgage defaults could increase credit losses experienced in the portfolio.
Other-Than-Temporary Impairment Analysis for Investment Securities
We closely monitor the performance of our investment securities to evaluate our exposure to the risk of loss of principal or interest on these investments and to determine on a quarterly basis whether this risk of loss represents an other-than-temporary impairment.
An investment security is deemed impaired if the fair value of the security is less than its amortized cost. To determine whether an impairment is other-than-temporary, we assess whether the amortized cost basis of the security will be recovered by considering numerous factors, as described in Notes 1 and 7 of the Notes to Financial Statements. We must recognize impairment losses if we intend to sell the security or if available evidence indicates it is more likely than not we will be required to sell the security before the recovery of its amortized cost basis. We also must recognize impairment losses when any credit losses are expected for the security. This includes consideration of market conditions and projections of future results, which requires significant judgments, estimates and assumptions, especially considering the uncertainty in the national housing market and other macroeconomic factors that make estimating future results imprecise.
If we were to determine that an other-than-temporary impairment existed, the security would initially be written down to current market value, with the loss recognized in non-interest income if we intend to sell the security or it is more likely than not we will be required to sell the security before recovery of the amortized cost basis. If we do not intend to sell the security
and it is not more likely than not we will be required to sell the security before recovery, the security would be written down to current market value with a separate display of losses related to credit deterioration and losses related to all other factors on the income statement. Any non-credit loss related amounts would then be reclassified and recorded in other comprehensive income, resulting in only net credit-related losses recorded on the income statement. As of December 31, 20142017 we did not consider any of our investment securities to be other-than-temporarily impaired.
Fair Values
We carry certain assets and liabilities on the Statement of Conditions at estimated fair value, including all derivatives, investments classified as available-for-sale and trading, and any financial instruments where we elected the fair value option. Fair value is defined as the price - the “exit price” - that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. Because our financial instruments generally do not have available quoted market prices, we determine fair values based on 1) our valuation models or 2) dealer indications, which may be based on the dealers' own valuation models and/or prices of similar instruments.
Valuation models and their underlying assumptions are based on the best estimates of management with respect to discount rates, prepayments, market volatility, and other factors. These assumptions may have a significant effect on the reported fair values of assets and liabilities, and the income and expense related thereto. The use of different assumptions or changes in the models and assumptions, as well as changes in market conditions, could result in materially different net income and retained earnings.
We have control processes designed to ensure that fair value measurements are appropriate and reliable, that they are based on observable inputs wherever possible and that our valuation approaches and assumptions are reasonable and consistently applied. Where applicable, valuations are also compared to alternative external market data (e.g., quoted market prices, broker or dealer indications, pricing services and comparative analyses to similar instruments). For further discussion regarding how we measure financial assets and financial liabilities at fair value, see Note 19 of the Notes to Financial Statements.
We categorize each of our financial instruments carried at fair value into one of three levels in accordance with the fair value hierarchy. The hierarchy is based upon the transparency (observable or unobservable) of inputs to the valuation of an asset or liability as of the measurement date. Observable inputs reflect market data obtained from independent sources (Levels 1 and 2), while unobservable inputs reflect our assumptions of market variables (Level 3). Management utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Because items classified as Level 3 are valued using significant unobservable inputs, the process for determining the fair value of these items is generally more subjective and involves a high degree of management judgment and use of assumptions. As of December 31, 20142017 and 2013,2016, all of our assets and liabilities measured at fair value on a recurring basis were classified as Level 2 within the fair value hierarchy.
RECENTLY ISSUED ACCOUNTING STANDARDS AND INTERPRETATIONS
See Note 2 of the Notes to Financial Statements for a discussion of recently issued accounting standards and interpretations.
OTHER FINANCIAL INFORMATION
Income Statements (Quarter amounts are unaudited)
Summary income statements for each quarter within the last two years ended December 31, 2014 are provided in the tables below.
| | | | 2014 | 2017 |
| (In millions) | 1st Quarter | | 2nd Quarter | | 3rd Quarter | | 4th Quarter | | Total | 1st Quarter | | 2nd Quarter | | 3rd Quarter | | 4th Quarter | | Total |
| Interest income | $ | 229 |
| | $ | 226 |
| | $ | 228 |
| | $ | 225 |
| | $ | 908 |
| $ | 344 |
| | $ | 385 |
| | $ | 437 |
| | $ | 442 |
| | $ | 1,608 |
|
| Interest expense | 152 |
| | 149 |
| | 145 |
| | 145 |
| | 591 |
| 241 |
| | 279 |
| | 327 |
| | 332 |
| | 1,179 |
|
| Net interest income | 77 |
| | 77 |
| | 83 |
| | 80 |
| | 317 |
| 103 |
| | 106 |
| | 110 |
| | 110 |
| | 429 |
|
| (Reversal) provision for credit losses | — |
| | (1 | ) | | — |
| | 1 |
| | — |
| |
| Non-interest income | 4 |
| | 6 |
| | 4 |
| | 9 |
| | 23 |
| |
| Non-interest (loss) income | | (11 | ) | | 10 |
| | (3 | ) | | 3 |
| | (1 | ) |
| Non-interest expense | 24 |
| | 23 |
| | 25 |
| | 24 |
| | 96 |
| 27 |
| | 29 |
| | 29 |
| | 29 |
| | 114 |
|
| Net income | $ | 57 |
| | $ | 61 |
| | $ | 62 |
| | $ | 64 |
| | $ | 244 |
| $ | 65 |
| | $ | 87 |
| | $ | 78 |
| | $ | 84 |
| | $ | 314 |
|
| | | | 2013 | 2016 |
| (In millions) | 1st Quarter | | 2nd Quarter | | 3rd Quarter | | 4th Quarter | | Total | 1st Quarter | | 2nd Quarter | | 3rd Quarter | | 4th Quarter | | Total |
| Interest income | $ | 217 |
| | $ | 224 |
| | $ | 230 |
| | $ | 229 |
| | $ | 900 |
| $ | 303 |
| | $ | 298 |
| | $ | 308 |
| | $ | 314 |
| | $ | 1,223 |
|
| Interest expense | 142 |
| | 145 |
| | 139 |
| | 146 |
| | 572 |
| 214 |
| | 215 |
| | 215 |
| | 216 |
| | 860 |
|
| Net interest income | 75 |
| | 79 |
| | 91 |
| | 83 |
| | 328 |
| 89 |
| | 83 |
| | 93 |
| | 98 |
| | 363 |
|
| Reversal for credit losses | (2 | ) | | (4 | ) | | (1 | ) | | — |
| | (7 | ) | |
| Non-interest income | 8 |
| | 2 |
| | 4 |
| | 6 |
| | 20 |
| |
| Non-interest (loss) income | | (4 | ) | | 6 |
| | (4 | ) | | 48 |
| | 46 |
|
| Non-interest expense | 22 |
| | 23 |
| | 24 |
| | 25 |
| | 94 |
| 28 |
| | 28 |
| | 28 |
| | 57 |
| | 141 |
|
| Net income | $ | 63 |
| | $ | 62 |
| | $ | 72 |
| | $ | 64 |
| | $ | 261 |
| $ | 57 |
| | $ | 61 |
| | $ | 61 |
| | $ | 89 |
| | $ | 268 |
|
Investment Securities
Data on investments for the years ended December 31, 2014, 20132017, 2016 and 20122015 are provided in the tables below.
| | | (In millions) | Carrying Value at December 31, | Carrying Value at December 31, |
| | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| Trading securities: | | | | | | | | | | |
| Mortgage-backed securities: | | | | | | | | | | |
| Other U.S. obligation single-family mortgage-backed securities | $ | 2 |
| | $ | 2 |
| | $ | 2 |
| |
| U.S. obligation single-family mortgage-backed securities | | $ | 1 |
| | $ | 1 |
| | $ | 1 |
|
| Total trading securities | 2 |
| | 2 |
| | 2 |
| 1 |
| | 1 |
| | 1 |
|
| Available-for-sale securities: | | | | | | | | | | |
| Certificates of deposit | 1,350 |
| | 2,185 |
| | — |
| 900 |
| | 1,300 |
| | 700 |
|
| Total available-for-sale securities | 1,350 |
| | 2,185 |
| | — |
| 900 |
| | 1,300 |
| | 700 |
|
| Held-to-maturity securities: | | | | | | | | | | |
| U.S. Treasury obligations | | 34 |
| | — |
| | — |
|
| Government-sponsored enterprises | 26 |
| | 28 |
| | 26 |
| — |
| | 31 |
| | 33 |
|
| Mortgage-backed securities: | | | | | | | | | | |
| Other U.S. obligation single-family mortgage-backed securities | 2,039 |
| | 1,909 |
| | 1,411 |
| |
| U.S. obligation single-family mortgage-backed securities | | 2,484 |
| | 3,183 |
| | 3,894 |
|
| Government-sponsored enterprise single-family mortgage-backed securities | 12,647 |
| | 14,150 |
| | 11,361 |
| 6,703 |
| | 8,186 |
| | 10,891 |
|
| Government-sponsored enterprise multi-family mortgage-backed securities | | 5,584 |
| | 3,146 |
| | 460 |
|
| Total held-to-maturity securities | 14,712 |
| | 16,087 |
| | 12,798 |
| 14,805 |
| | 14,546 |
| | 15,278 |
|
| Total securities | 16,064 |
| | 18,274 |
| | 12,800 |
| 15,706 |
| | 15,847 |
| | 15,979 |
|
| Securities purchased under agreements to resell | 3,343 |
| | 2,350 |
| | 3,800 |
| 7,702 |
| | 5,230 |
| | 10,532 |
|
| Federal funds sold | 6,600 |
| | 1,740 |
| | 3,350 |
| 3,650 |
| | 4,257 |
| | 10,845 |
|
| Total investments | $ | 26,007 |
| | $ | 22,364 |
| | $ | 19,950 |
| $ | 27,058 |
| | $ | 25,334 |
| | $ | 37,356 |
|
As of December 31, 2014,2017, investments had the following maturity and yield characteristics.
| | | (Dollars in millions) | Due in one year or less | Due after one year through five years | Due after five through 10 years | Due after 10 years | Carrying Value | Due in one year or less | Due after one year through five years | Due after five through 10 years | Due after 10 years | Carrying Value |
| Trading securities: | | |
Mortgage-backed securities(1): | | |
| Other U.S. obligation single-family mortgage-backed securities | $ | — |
| $ | — |
| $ | 1 |
| $ | 1 |
| $ | 2 |
| |
| U.S. obligation single-family mortgage-backed securities | | $ | — |
| $ | — |
| $ | 1 |
| $ | — |
| $ | 1 |
|
| Total trading securities | — |
| — |
| 1 |
| 1 |
| 2 |
| — |
| — |
| 1 |
| — |
| 1 |
|
| Yield on trading securities | — | % | — | % | 2.36 | % | 2.46 | % | | — | % | — | % | 3.20 | % | — | % | |
| Available-for-sale securities: | | |
| Certificates of deposit | $ | 1,350 |
| $ | — |
| $ | — |
| $ | — |
| $ | 1,350 |
| $ | 900 |
| $ | — |
| $ | — |
| $ | — |
| $ | 900 |
|
| Total available-for-sale securities | 1,350 |
| — |
| — |
| — |
| 1,350 |
| 900 |
| — |
| — |
| — |
| 900 |
|
| Yield on available-for sale securities | 0.15 | % | — | % | — | % | — | % | | 1.53 | % | — | % | — | % | — | % | |
| Held-to-maturity securities: | | |
| Government-sponsored enterprises | $ | 26 |
| $ | — |
| $ | — |
| $ | — |
| $ | 26 |
| |
| U.S. Treasury obligations | | $ | 34 |
| $ | — |
| $ | — |
| $ | — |
| $ | 34 |
|
Mortgage-backed securities(1): | | |
| Other U.S. obligation single-family mortgage-backed securities | — |
| 213 |
| 839 |
| 987 |
| 2,039 |
| |
| U.S. obligation single-family mortgage-backed securities | | — |
| 468 |
| — |
| 2,016 |
| 2,484 |
|
| Government-sponsored enterprise single-family mortgage-backed securities | — |
| 149 |
| 620 |
| 11,878 |
| 12,647 |
| — |
| — |
| 49 |
| 6,654 |
| 6,703 |
|
| Government-sponsored enterprise multi-family mortgage-backed securities | | — |
| — |
| 5,387 |
| 197 |
| 5,584 |
|
| Total held-to-maturity securities | 26 |
| 362 |
| 1,459 |
| 12,865 |
| 14,712 |
| 34 |
| 468 |
| 5,436 |
| 8,867 |
| 14,805 |
|
| Yield on held-to-maturity securities | 0.09 | % | 2.17 | % | 1.82 | % | 2.27 | % | | 1.09 | % | 1.86 | % | 1.92 | % | 2.33 | % | |
| Total securities | $ | 1,376 |
| $ | 362 |
| $ | 1,460 |
| $ | 12,866 |
| $ | 16,064 |
| $ | 934 |
| $ | 468 |
| $ | 5,437 |
| $ | 8,867 |
| $ | 15,706 |
|
| Securities purchased under agreements to resell | 3,343 |
| — |
| — |
| — |
| 3,343 |
| 7,702 |
| — |
| — |
| — |
| 7,702 |
|
| Federal funds sold | 6,600 |
| — |
| — |
| — |
| 6,600 |
| 3,650 |
| — |
| — |
| — |
| 3,650 |
|
| Total investments | $ | 11,319 |
| $ | 362 |
| $ | 1,460 |
| $ | 12,866 |
| $ | 26,007 |
| $ | 12,286 |
| $ | 468 |
| $ | 5,437 |
| $ | 8,867 |
| $ | 27,058 |
|
| |
(1) | Mortgage-backed securities allocated based on contractual principal maturities assuming no prepayments. |
As of December 31, 2014,2017, the FHLBankFHLB held securities of the following issuers with a bookcarrying value greater than 10 percent of FHLBankFHLB capital. The table includes government-sponsored enterprises, securities of the U.S. government, and government agencies and corporations.corporations, and privately issued certificates of deposit.
| | | (In millions) | | Total | | Total | | Total | | Total |
| Name of Issuer | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| Freddie Mac | | $ | 4,557 |
| | $ | 4,585 |
| | $ | 3,946 |
| | $ | 3,906 |
|
| Fannie Mae | | 8,116 |
| | 8,161 |
| | 8,341 |
| | 8,280 |
|
| National Credit Union Administration Trust | | 1,052 |
| | 1,056 |
| |
| Government National Mortgage Association | | 989 |
| | 994 |
| | 2,017 |
| | 1,994 |
|
| Certificates of deposit (4 issuers) | | 1,350 |
| | 1,350 |
| |
Other (1) | | | 1,402 |
| | 1,403 |
|
| Total investment securities | | $ | 16,064 |
| | $ | 16,146 |
| | $ | 15,706 |
| | $ | 15,583 |
|
| |
| (1) | Includes issuers of securities that have a carrying value that is less than 10 percent of FHLB capital. |
Loan Portfolio Analysis
The FHLBank'sFHLB's outstanding loans, loans 90 days or more past due and accruing interest, and allowance for credit loss information for the five years ended December 31 are shown below. The FHLBank'sFHLB's interest and related shortfall on non-accrual loans and loans modified in troubled debt restructurings was not material during the years presented below.
| | | (Dollars in millions) | 2014 | | 2013 | | 2012 | | 2011 | | 2010 | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Domestic: | | | | | | | | | | | | | | | | | | |
| Advances | $ | 70,406 |
| | $ | 65,270 |
| | $ | 53,944 |
| | $ | 28,424 |
| | $ | 30,181 |
| $ | 69,918 |
| | $ | 69,882 |
| | $ | 73,292 |
| | $ | 70,406 |
| | $ | 65,270 |
|
| Real estate mortgages | $ | 6,989 |
| | $ | 6,826 |
| | $ | 7,548 |
| | $ | 7,871 |
| | $ | 7,782 |
| $ | 9,682 |
| | $ | 9,150 |
| | $ | 7,954 |
| | $ | 6,956 |
| | $ | 6,782 |
|
Real estate mortgages past due 90 days or more (including those in process of foreclosure) and still accruing interest | $ | 66 |
| | $ | 89 |
| | $ | 113 |
| | $ | 145 |
| | $ | 133 |
| |
Real estate mortgages past due 90 days or more (including those in process of foreclosure) and still accruing interest, unpaid principal balance | | $ | 26 |
| | $ | 33 |
| | $ | 42 |
| | $ | 66 |
| | $ | 89 |
|
Non-accrual loans, unpaid principal balance (1) | $ | 4 |
| | $ | 3 |
| | $ | 3 |
| | $ | 2 |
| | $ | — |
| $ | 3 |
| | $ | 4 |
| | $ | 7 |
| | $ | 4 |
| | $ | 3 |
|
| Troubled debt restructurings (not included above) | $ | 5 |
| | $ | 4 |
| | $ | 3 |
| | $ | 1 |
| | $ | — |
| |
| Troubled debt restructurings, unpaid principal balance (not included above) | | $ | 9 |
| | $ | 8 |
| | $ | 8 |
| | $ | 5 |
| | $ | 4 |
|
Allowance for credit losses on mortgage loans, beginning of year | $ | 7 |
| | $ | 18 |
| | $ | 21 |
| | $ | 12 |
| | $ | — |
| $ | 1 |
| | $ | 2 |
| | $ | 5 |
| | $ | 7 |
| | $ | 18 |
|
| Charge-offs | (2 | ) | | (4 | ) | | (4 | ) | | (3 | ) | | (1 | ) | |
| (Reversal) provision for credit losses | — |
| | (7 | ) | | 1 |
| | 12 |
| | 13 |
| |
| Net charge-offs | | — |
| | (1 | ) | | (3 | ) | | (2 | ) | | (4 | ) |
| Provision (reversal) for credit losses | | — |
| | — |
| | — |
| | — |
| | (7 | ) |
Allowance for credit losses on mortgage loans, end of year | $ | 5 |
| | $ | 7 |
| | $ | 18 |
| | $ | 21 |
| | $ | 12 |
| $ | 1 |
| | $ | 1 |
| | $ | 2 |
| | $ | 5 |
| | $ | 7 |
|
Ratio of net charge-offs during the period to average loans outstanding during the period | 0.03 | % | | 0.05 | % | | 0.06 | % | | 0.05 | % | | 0.02 | % | — | % | | 0.01 | % | | 0.04 | % | | 0.03 | % | | 0.05 | % |
| |
(1) | See Note 1 of the Notes to Financial Statements for an explanation of the FHLBank'sFHLB's non-accrual policy. |
Other Borrowings
Borrowings with original maturities of one year or less are classified as short-term. The following is a summary of short-term borrowings exceeding 30 percent of total capital for the years ended December 31:
| | | (Dollars in millions) | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| Discount Notes | | | | | | | | | | |
| Outstanding at year-end (book value) | $ | 41,232 |
| | $ | 38,210 |
| | $ | 30,840 |
| $ | 46,211 |
| | $ | 44,690 |
| | $ | 77,199 |
|
Weighted average rate at year-end (1) (2) | 0.09 | % | | 0.09 | % | | 0.13 | % | 1.23 | % | | 0.46 | % | | 0.24 | % |
| Daily average outstanding for the year (book value) | $ | 35,992 |
| | $ | 34,574 |
| | $ | 29,499 |
| $ | 43,124 |
| | $ | 49,835 |
| | $ | 52,706 |
|
Weighted average rate for the year (2) | 0.08 | % | | 0.11 | % | | 0.10 | % | 0.89 | % | | 0.35 | % | | 0.12 | % |
| Highest outstanding at any month-end (book value) | $ | 41,232 |
| | $ | 38,926 |
| | $ | 32,556 |
| $ | 51,762 |
| | $ | 63,137 |
| | $ | 77,199 |
|
| Bonds (short-term) | | | | | | | | | | |
| Outstanding at year-end (par value) | $ | 17,810 |
| | $ | 21,650 |
| | $ | 9,140 |
| $ | 14,405 |
| | $ | 11,332 |
| | $ | 4,415 |
|
Weighted average rate at year-end (2) (3) | 0.10 | % | | 0.11 | % | | 0.17 | % | 1.35 | % | | 0.66 | % | | 0.23 | % |
| Daily average outstanding for the year (par value) | $ | 18,810 |
| | $ | 16,583 |
| | $ | 3,527 |
| $ | 10,359 |
| | $ | 11,996 |
| | $ | 6,974 |
|
Weighted average rate for the year (2) (3) | 0.10 | % | | 0.13 | % | | 0.19 | % | 0.93 | % | | 0.51 | % | | 0.13 | % |
| Highest outstanding at any month-end (par value) | $ | 22,235 |
| | $ | 22,010 |
| | $ | 9,140 |
| $ | 14,405 |
| | $ | 14,591 |
| | $ | 13,825 |
|
| |
| (1) | Represents an implied rate without consideration of concessions. |
| |
| (2) | Amounts used to calculate weighted average rates for the year are based on dollars in thousands. Accordingly, recalculations based upon amounts in millions may not produce the same results. |
| |
| (3) | Represents the effective coupon rate. |
Term Deposits
At December 31, 2014,2017, term deposits in denominations of $100,000 or more totaled $99,550,000.$52,550,000. The table below presents the maturities for term deposits in denominations of $100,000 or more:
| | (In millions) By remaining maturity at December 31, 2014 | 3 months or less | | Over 3 months but within 6 months | | Over 6 months but within 12 months | | Over 12 months but within 24 months | | Total | |
(In millions) By remaining maturity at December 31, 2017 | | 3 months or less | | Over 3 months but within 6 months | | Over 6 months but within 12 months | | Over 12 months but within 24 months | | Total |
| Time certificates of deposit | $ | 22 |
| | $ | 13 |
| | $ | 34 |
| | $ | 31 |
| | $ | 100 |
| $ | 30 |
| | $ | 7 |
| | $ | 13 |
| | $ | 3 |
| | $ | 53 |
|
Ratios
| | | | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| Return on average assets | 0.24 | % | | 0.28 | % | | 0.35 | % | 0.31 | % | | 0.25 | % | | 0.24 | % |
| Return on average equity | 4.93 |
| | 5.10 |
| | 6.20 |
| 6.15 |
| | 5.35 |
| | 5.04 |
|
| Average equity to average assets | 4.90 |
| | 5.47 |
| | 5.68 |
| 5.00 |
| | 4.76 |
| | 4.78 |
|
| Dividend payout ratio | 72.20 | % | | 68.10 | % | | 60.09 | % | 66.31 | % | | 63.92 | % | | 67.68 | % |
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Information required under this Item is set forth in the “Quantitative and Qualitative Disclosures About Risk Management” caption at Part II, Item 7, of this filing.
| |
| Item 8. | Financial Statements and Supplementary Data. |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To theBoard of Directors and Shareholders of the
Federal Home Loan Bank of Cincinnati
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying statements of condition of the Federal Home Loan Bank of Cincinnati:
In our opinion, the accompanying statementsCincinnati (the “FHLB”) as of conditionDecember 31, 2017 and 2016, and the related statements of income, comprehensive income, capital and cash flows for each of the three years in the period ended December 31, 2017, including the related notes (collectively referred to as the “financial statements”). We also have audited the FHLB’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Federal Home Loan BankFHLB as of Cincinnati (the "FHLBank") at December 31, 20142017 and 2013,2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20142017 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the FHLBankFHLB maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014,2017, based on criteria established in Internal Control - Integrated Framework(2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). COSO.
Basis for Opinions
The FHLBank'sFHLB’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included under Item 9A in the accompanying Management's Report on Internal Control over Financial Reporting.Reporting. Our responsibility is to express opinions on thesethe FHLB’s financial statements and on the FHLBank'sFHLB’s internal control over financial reporting based on our integrated audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the FHLB in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the financial statement presentation.statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company'scompany’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company'scompany’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company'scompany’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Cincinnati, Ohio
March 19, 201515, 2018
We have served as the FHLB’s auditor since 1990.
FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF CONDITION
(In thousands, except par value)
| | | | December 31, | |
| (In thousands, except par value) | | December 31, |
| | 2014 | | 2013 | 2017 | | 2016 |
| ASSETS | | | | | | |
| Cash and due from banks (Note 3) | $ | 3,109,970 |
| | $ | 8,598,933 |
| $ | 26,550 |
| | $ | 8,737 |
|
| Interest-bearing deposits | 119 |
| | 166 |
| 140 |
| | 129 |
|
| Securities purchased under agreements to resell | 3,343,000 |
| | 2,350,000 |
| 7,701,929 |
| | 5,229,487 |
|
| Federal funds sold | 6,600,000 |
| | 1,740,000 |
| 3,650,000 |
| | 4,257,000 |
|
| Investment securities: | | | | | | |
| Trading securities (Note 4) | 1,341 |
| | 1,578 |
| 781 |
| | 970 |
|
| Available-for-sale securities (Note 5) | 1,349,977 |
| | 2,184,879 |
| 899,876 |
| | 1,300,023 |
|
Held-to-maturity securities (includes $0 and $0 pledged as collateral in 2014 and 2013, respectively, that may be repledged) (a) (Note 6) | 14,712,271 |
| | 16,087,162 |
| |
Held-to-maturity securities (includes $0 and $0 pledged as collateral in 2017 and 2016, respectively, that may be repledged) (a) (Note 6) | | 14,804,970 |
| | 14,546,979 |
|
| Total investment securities | 16,063,589 |
| | 18,273,619 |
| 15,705,627 |
| | 15,847,972 |
|
| Advances (includes $15,042 and $0 at fair value under fair value option in 2014 and 2013, respectively) (Note 8) | 70,405,616 |
| | 65,270,390 |
| |
| Advances (includes $15,013 and $15,093 at fair value under fair value option in 2017 and 2016, respectively) (Note 8) | | 69,918,224 |
| | 69,882,074 |
|
| Mortgage loans held for portfolio: | | | | | | |
| Mortgage loans held for portfolio (Note 9) | 6,989,602 |
| | 6,825,523 |
| 9,682,130 |
| | 9,149,860 |
|
| Less: allowance for credit losses on mortgage loans (Note 10) | 4,919 |
| | 7,233 |
| 1,190 |
| | 1,142 |
|
| Mortgage loans held for portfolio, net | 6,984,683 |
| | 6,818,290 |
| 9,680,940 |
| | 9,148,718 |
|
| Accrued interest receivable | 81,384 |
| | 85,151 |
| 128,561 |
| | 109,886 |
|
| Premises, software, and equipment, net | 11,282 |
| | 13,811 |
| 8,896 |
| | 9,187 |
|
| Derivative assets (Note 11) | 14,699 |
| | 3,241 |
| 60,695 |
| | 104,753 |
|
| Other assets | 26,077 |
| | 27,101 |
| 13,652 |
| | 37,338 |
|
| TOTAL ASSETS | $ | 106,640,419 |
| | $ | 103,180,702 |
| $ | 106,895,214 |
| | $ | 104,635,281 |
|
| LIABILITIES | | | | | | |
| Deposits (Note 12) | $ | 729,936 |
| | $ | 913,895 |
| $ | 650,531 |
| | $ | 765,879 |
|
| Consolidated Obligations, net (Note 13): | | | | |
| Consolidated Obligations: (Note 13) | | | | |
| Discount Notes | 41,232,127 |
| | 38,209,946 |
| 46,210,458 |
| | 44,689,662 |
|
| Bonds (includes $4,209,640 and $4,018,370 at fair value under fair value option in 2014 and 2013, respectively) | 59,216,557 |
| | 58,162,739 |
| |
| Total Consolidated Obligations, net | 100,448,684 |
| | 96,372,685 |
| |
| Bonds (includes $5,577,315 and $7,895,510 at fair value under fair value option in 2017 and 2016, respectively) | | 54,163,061 |
| | 53,190,866 |
|
| Total Consolidated Obligations | | 100,373,519 |
| | 97,880,528 |
|
| Mandatorily redeemable capital stock (Note 15) | 62,963 |
| | 115,853 |
| 30,031 |
| | 34,782 |
|
| Accrued interest payable | 114,781 |
| | 116,381 |
| 128,652 |
| | 119,322 |
|
| Affordable Housing Program payable (Note 14) | 98,103 |
| | 93,789 |
| 109,877 |
| | 104,883 |
|
| Derivative liabilities (Note 11) | 63,767 |
| | 97,766 |
| 2,893 |
| | 17,874 |
|
| Other liabilities | 183,177 |
| | 160,226 |
| 435,198 |
| | 733,918 |
|
| Total liabilities | 101,701,411 |
| | 97,870,595 |
| 101,730,701 |
| | 99,657,186 |
|
| Commitments and contingencies (Note 20) |
| |
|
| |
|
| CAPITAL (Note 15) | | | | | | |
| Capital stock Class B putable ($100 par value); issued and outstanding shares: 42,665 shares in 2014 and 46,980 shares in 2013 | 4,266,543 |
| | 4,697,985 |
| |
| Capital stock Class B putable ($100 par value); issued and outstanding shares: 42,411 shares in 2017 and 41,569 shares in 2016 | | 4,241,140 |
| | 4,156,944 |
|
| Retained earnings: | | | | | | |
| Unrestricted | 529,367 |
| | 510,321 |
| 617,034 |
| | 574,122 |
|
| Restricted | 159,694 |
| | 110,843 |
| 322,999 |
| | 260,285 |
|
| Total retained earnings | 689,061 |
| | 621,164 |
| 940,033 |
| | 834,407 |
|
| Accumulated other comprehensive loss (Note 16) | (16,596 | ) | | (9,042 | ) | (16,660 | ) | | (13,256 | ) |
| Total capital | 4,939,008 |
| | 5,310,107 |
| 5,164,513 |
| | 4,978,095 |
|
| TOTAL LIABILITIES AND CAPITAL | $ | 106,640,419 |
| | $ | 103,180,702 |
| $ | 106,895,214 |
| | $ | 104,635,281 |
|
| |
| (a) | Fair values: $14,794,326$14,682,329 and $15,808,39714,413,231 at December 31, 20142017 and 2013,2016, respectively. |
The accompanying notes are an integral part of these financial statements.
FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF INCOME
(In thousands)
| | | | For the Years Ended December 31, | |
| (In thousands) | | For the Years Ended December 31, |
| | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| INTEREST INCOME: | | | | | | | | | | |
| Advances | $ | 314,800 |
| | $ | 305,658 |
| | $ | 240,637 |
| $ | 903,620 |
| | $ | 576,970 |
| | $ | 366,651 |
|
| Prepayment fees on Advances, net | 3,624 |
| | 2,473 |
| | 20,064 |
| 1,351 |
| | 9,874 |
| | 2,723 |
|
| Interest-bearing deposits | 85 |
| | 185 |
| | 571 |
| 181 |
| | 320 |
| | 88 |
|
| Securities purchased under agreements to resell | 1,261 |
| | 1,872 |
| | 4,527 |
| 23,340 |
| | 9,491 |
| | 2,147 |
|
| Federal funds sold | 5,426 |
| | 6,232 |
| | 6,844 |
| 70,287 |
| | 34,313 |
| | 12,106 |
|
| Investment securities: | | | | | | |
| Trading securities | 25 |
| | 31 |
| | 35,580 |
| 19 |
| | 20 |
| | 22 |
|
| Available-for-sale securities | 3,204 |
| | 1,827 |
| | 2,794 |
| 6,228 |
| | 5,822 |
| | 2,198 |
|
| Held-to-maturity securities | 343,042 |
| | 313,181 |
| | 297,127 |
| 306,204 |
| | 325,500 |
| | 325,449 |
|
| Total investment securities | | 312,451 |
| | 331,342 |
| | 327,669 |
|
| Mortgage loans held for portfolio | 236,882 |
| | 268,691 |
| | 312,696 |
| 297,075 |
| | 261,071 |
| | 251,594 |
|
| Loans to other FHLBanks | — |
| | 5 |
| | 3 |
| — |
| | 13 |
| | — |
|
| Total interest income | 908,349 |
| | 900,155 |
| | 920,843 |
| 1,608,305 |
| | 1,223,394 |
| | 962,978 |
|
| INTEREST EXPENSE: | | | | | | | | | | |
| Consolidated Obligations - Discount Notes | 27,439 |
| | 36,686 |
| | 30,699 |
| |
| Consolidated Obligations - Bonds | 559,480 |
| | 529,788 |
| | 569,949 |
| |
| Consolidated Obligations: | | | | | | |
| Discount Notes | | 384,976 |
| | 173,595 |
| | 65,217 |
|
| Bonds | | 786,922 |
| | 681,757 |
| | 566,970 |
|
| Total Consolidated Obligations | | 1,171,898 |
| | 855,352 |
| | 632,187 |
|
| Deposits | 264 |
| | 326 |
| | 383 |
| 4,738 |
| | 1,320 |
| | 360 |
|
| Loans from other FHLBanks | — |
| | 5 |
| | 1 |
| 10 |
| | 1 |
| | — |
|
| Mandatorily redeemable capital stock | 4,190 |
| | 5,506 |
| | 11,690 |
| 2,514 |
| | 3,517 |
| | 2,432 |
|
| Other borrowings | — |
| | — |
| | 1 |
| 2 |
| | — |
| | — |
|
| Total interest expense | 591,373 |
| | 572,311 |
| | 612,723 |
| 1,179,162 |
| | 860,190 |
| | 634,979 |
|
| NET INTEREST INCOME | 316,976 |
| | 327,844 |
| | 308,120 |
| 429,143 |
| | 363,204 |
| | 327,999 |
|
| (Reversal) provision for credit losses | (500 | ) | | (7,450 | ) | | 1,459 |
| |
| NET INTEREST INCOME AFTER (REVERSAL) PROVISION FOR CREDIT LOSSES | 317,476 |
| | 335,294 |
| | 306,661 |
| |
| NON-INTEREST INCOME: | | | | | | |
| Provision for credit losses | | 500 |
| | — |
| | — |
|
| NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES | | 428,643 |
| | 363,204 |
| | 327,999 |
|
| NON-INTEREST (LOSS) INCOME: | | | | | | |
| Net losses on trading securities | (9 | ) | | (19 | ) | | (32,770 | ) | (6 | ) | | (5 | ) | | (18 | ) |
| Net realized gains from sale of held-to-maturity securities | — |
| | — |
| | 29,292 |
| — |
| | 38,763 |
| | — |
|
| Net gains on financial instruments held under fair value option | 2,174 |
| | 330 |
| | 1,939 |
| 10,409 |
| | 40,503 |
| | 1,057 |
|
| Net gains on derivatives and hedging activities | 6,627 |
| | 7,903 |
| | 8,735 |
| |
| Net (losses) gains on derivatives and hedging activities | | (24,464 | ) | | (47,431 | ) | | 13,037 |
|
| Standby Letters of Credit fees | 10,767 |
| | 8,066 |
| | 3,144 |
| 10,895 |
| | 12,195 |
| | 13,098 |
|
| Other, net | 3,071 |
| | 3,511 |
| | 3,072 |
| 1,929 |
| | 2,206 |
| | 2,720 |
|
| Total non-interest income | 22,630 |
| | 19,791 |
| | 13,412 |
| |
| Total non-interest (loss) income | | (1,237 | ) | | 46,231 |
| | 29,894 |
|
| NON-INTEREST EXPENSE: | | | | | | | | | | |
| Compensation and benefits | 36,777 |
| | 33,992 |
| | 30,854 |
| 45,543 |
| | 41,932 |
| | 39,766 |
|
| Other operating expenses | 17,454 |
| | 17,493 |
| | 14,048 |
| 18,880 |
| | 25,935 |
| | 21,728 |
|
| Finance Agency | 7,084 |
| | 5,203 |
| | 6,002 |
| 6,598 |
| | 6,325 |
| | 6,793 |
|
| Office of Finance | 4,374 |
| | 4,535 |
| | 3,442 |
| 4,484 |
| | 4,284 |
| | 4,698 |
|
| Litigation settlement | | — |
| | 25,250 |
| | — |
|
| Other | 2,559 |
| | 3,164 |
| | 3,624 |
| 3,213 |
| | 7,337 |
| | 2,566 |
|
| Total non-interest expense | 68,248 |
| | 64,387 |
| | 57,970 |
| 78,718 |
| | 111,063 |
| | 75,551 |
|
| INCOME BEFORE ASSESSMENTS | 271,858 |
| | 290,698 |
| | 262,103 |
| 348,688 |
| | 298,372 |
| | 282,342 |
|
| Affordable Housing Program assessments | 27,605 |
| | 29,620 |
| | 27,379 |
| 35,120 |
| | 30,189 |
| | 27,906 |
|
| NET INCOME | $ | 244,253 |
| | $ | 261,078 |
| | $ | 234,724 |
| $ | 313,568 |
| | $ | 268,183 |
| | $ | 254,436 |
|
The accompanying notes are an integral part of these financial statements.
FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
| | | | For the Years Ended December 31, | |
| (In thousands) | | For the Years Ended December 31, |
| | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| Net income | $ | 244,253 |
| | $ | 261,078 |
| | $ | 234,724 |
| $ | 313,568 |
| | $ | 268,183 |
| | $ | 254,436 |
|
| Other comprehensive income adjustments: | | | | | | | | | | |
| Net unrealized gains (losses) on available-for-sale securities | 97 |
| | (121 | ) | | 1,014 |
| |
| Net unrealized (losses) gains on available-for-sale securities | | (147 | ) | | (58 | ) | | 105 |
|
| Pension and postretirement benefits | (7,651 | ) | | 2,813 |
| | (1,747 | ) | (3,257 | ) | | 79 |
| | 3,214 |
|
| Total other comprehensive income adjustments | (7,554 | ) | | 2,692 |
| | (733 | ) | (3,404 | ) | | 21 |
| | 3,319 |
|
| Comprehensive income | $ | 236,699 |
| | $ | 263,770 |
| | $ | 233,991 |
| $ | 310,164 |
| | $ | 268,204 |
| | $ | 257,755 |
|
The accompanying notes are an integral part of these financial statements.
FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF CAPITAL
(In thousands)
| | | (In thousands) | | Capital Stock Class B - Putable | | Retained Earnings | | Accumulated Other Comprehensive | | Total |
| | Capital Stock Class B - Putable | | Retained Earnings | | Accumulated Other Comprehensive | | Total | Shares | | Par Value | | Unrestricted | | Restricted | | Total | | Loss | | Capital |
| | Shares | | Par Value | | Unrestricted | | Restricted | | Total | | Loss | | Capital | |
| BALANCE, DECEMBER 31, 2011 | 31,259 |
| | $ | 3,125,895 |
| | $ | 432,530 |
| | $ | 11,683 |
| | $ | 444,213 |
| | $ | (11,001 | ) | | $ | 3,559,107 |
| |
| BALANCE, DECEMBER 31, 2014 | | 42,665 |
| | $ | 4,266,543 |
| | $ | 499,651 |
| | $ | 155,761 |
| | $ | 655,412 |
| | $ | (16,596 | ) | | $ | 4,905,359 |
|
| Comprehensive income | | | | | | 203,549 |
| | 50,887 |
| | 254,436 |
| | 3,319 |
| | 257,755 |
|
| Proceeds from sale of capital stock | 9,248 |
| | 924,853 |
| | | | | | | | | | 924,853 |
| 1,912 |
| | 191,132 |
| | | | | | | | | | 191,132 |
|
Net shares reclassified to mandatorily redeemable capital stock | (401 | ) | | (40,126 | ) | | | | | | | | | | (40,126 | ) | (289 | ) | | (28,919 | ) | | | | | | | | | | (28,919 | ) |
| Cash dividends on capital stock | | | | | | (172,202 | ) | | | | (172,202 | ) | | | | (172,202 | ) |
| BALANCE, DECEMBER 31, 2015 | | 44,288 |
| | 4,428,756 |
| | 530,998 |
| | 206,648 |
| | 737,646 |
| | (13,277 | ) | | 5,153,125 |
|
| Comprehensive income | | | | | 187,779 |
| | 46,945 |
| | 234,724 |
| | (733 | ) | | 233,991 |
| | | | | 214,546 |
| | 53,637 |
| | 268,183 |
| | 21 |
| | 268,204 |
|
| Cash dividends on capital stock | | | | | (141,056 | ) | | | | (141,056 | ) | | | | (141,056 | ) | |
| BALANCE, DECEMBER 31, 2012 | 40,106 |
| | 4,010,622 |
| | 479,253 |
| | 58,628 |
| | 537,881 |
| | (11,734 | ) | | 4,536,769 |
| |
| Proceeds from sale of capital stock | 7,208 |
| | 720,820 |
| | | | | | | | | | 720,820 |
| 920 |
| | 92,027 |
| | | | | | | | | | 92,027 |
|
Net shares reclassified to mandatorily redeemable capital stock | (334 | ) | | (33,457 | ) | | | | | | | | | | (33,457 | ) | (3,639 | ) | | (363,839 | ) | | | | | | | | | | (363,839 | ) |
| Cash dividends on capital stock | | | | | | (171,422 | ) | | | | (171,422 | ) | | | | (171,422 | ) |
| BALANCE, DECEMBER 31, 2016 | | 41,569 |
| | 4,156,944 |
| | 574,122 |
| | 260,285 |
| | 834,407 |
| | (13,256 | ) | | 4,978,095 |
|
| Comprehensive income | | | | | 208,863 |
| | 52,215 |
| | 261,078 |
| | 2,692 |
| | 263,770 |
| |
| | |
| | 250,854 |
| | 62,714 |
| | 313,568 |
| | (3,404 | ) | | 310,164 |
|
| Proceeds from sale of capital stock | | 3,547 |
| | 354,654 |
| | | | | | | | | | 354,654 |
|
Net shares reclassified to mandatorily redeemable capital stock | | (2,705 | ) | | (270,458 | ) | | | | | | | | | | (270,458 | ) |
| Cash dividends on capital stock | | | | | (177,795 | ) | | | | (177,795 | ) | | | | (177,795 | ) | | | | | (207,942 | ) | | | | (207,942 | ) | | | | (207,942 | ) |
| BALANCE, DECEMBER 31, 2013 | 46,980 |
| | 4,697,985 |
| | 510,321 |
| | 110,843 |
| | 621,164 |
| | (9,042 | ) | | 5,310,107 |
| |
| Proceeds from sale of capital stock | 835 |
| | 83,543 |
| | | | | | | | | | 83,543 |
| |
| Repurchase of capital stock | (4,979 | ) | | (497,875 | ) | | | | | | | | | | (497,875 | ) | |
Net shares reclassified to mandatorily redeemable capital stock | (171 | ) | | (17,110 | ) | | | | | | | | | | (17,110 | ) | |
| Comprehensive income | | | | | 195,402 |
| | 48,851 |
| | 244,253 |
| | (7,554 | ) | | 236,699 |
| |
| Cash dividends on capital stock | | | | | (176,356 | ) | | | | (176,356 | ) | | | | (176,356 | ) | |
| BALANCE, DECEMBER 31, 2014 | 42,665 |
| | $ | 4,266,543 |
| | $ | 529,367 |
| | $ | 159,694 |
| | $ | 689,061 |
| | $ | (16,596 | ) | | $ | 4,939,008 |
| |
| BALANCE, DECEMBER 31, 2017 | | 42,411 |
| | $ | 4,241,140 |
| | $ | 617,034 |
| | $ | 322,999 |
| | $ | 940,033 |
| | $ | (16,660 | ) | | $ | 5,164,513 |
|
The accompanying notes are an integral part of these financial statements.
FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF CASH FLOWS
(In thousands)
| | | | For the Years Ended December 31, | |
| (In thousands) | | For the Years Ended December 31, |
| | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| OPERATING ACTIVITIES: | | | | | | | | | | |
| Net income | $ | 244,253 |
| | $ | 261,078 |
| | $ | 234,724 |
| $ | 313,568 |
| | $ | 268,183 |
| | $ | 254,436 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | |
| Depreciation and amortization | 8,188 |
| | (512 | ) | | 59,389 |
| 57,973 |
| | 55,296 |
| | 35,793 |
|
| Net change in derivative and hedging activities | 16,224 |
| | 35,607 |
| | 69,279 |
| 6,927 |
| | 63,806 |
| | 12,651 |
|
| Net change in fair value adjustments on trading securities | 9 |
| | 19 |
| | 32,770 |
| 6 |
| | 5 |
| | 18 |
|
| Net change in fair value adjustments on financial instruments held under fair value option | (2,174 | ) | | (330 | ) | | (1,939 | ) | (10,409 | ) | | (40,503 | ) | | (1,057 | ) |
| Other adjustments | (393 | ) | | (7,464 | ) | | (27,830 | ) | 489 |
| | (38,774 | ) | | (11 | ) |
| Net change in: | | | | | | | | | | |
| Accrued interest receivable | 3,746 |
| | (1,216 | ) | | 30,354 |
| (18,701 | ) | | (15,028 | ) | | (13,473 | ) |
| Other assets | (739 | ) | | (3,244 | ) | | (726 | ) | 23,686 |
| | (24,325 | ) | | (1,120 | ) |
| Accrued interest payable | (3,177 | ) | | 10,829 |
| | (36,317 | ) | 4,743 |
| | 21,273 |
| | 4,694 |
|
| Other liabilities | 19,252 |
| | 25,470 |
| | 42,856 |
| 15,456 |
| | 32,560 |
| | 41,036 |
|
| Total adjustments | 40,936 |
| | 59,159 |
| | 167,836 |
| 80,170 |
| | 54,310 |
| | 78,531 |
|
| Net cash provided by operating activities | 285,189 |
| | 320,237 |
| | 402,560 |
| 393,738 |
| | 322,493 |
| | 332,967 |
|
| | | | | | | | | | | |
| INVESTING ACTIVITIES: | | | | | | | | | | |
| Net change in: | | | | | | | | | | |
| Interest-bearing deposits | 30,579 |
| | 119,127 |
| | 279,777 |
| 46,981 |
| | (113,516 | ) | | 12,092 |
|
| Securities purchased under agreements to resell | (993,000 | ) | | 1,450,000 |
| | (3,800,000 | ) | (2,472,442 | ) | | 5,302,492 |
| | (7,188,979 | ) |
| Federal funds sold | (4,860,000 | ) | | 1,610,000 |
| | (1,080,000 | ) | 607,000 |
| | 6,588,000 |
| | (4,245,000 | ) |
| Premises, software, and equipment | (686 | ) | | (7,203 | ) | | (2,129 | ) | (2,647 | ) | | (1,623 | ) | | (1,834 | ) |
| Trading securities: | | | | | | | | | | |
| Net decrease in short-term | — |
| | — |
| | 2,510,301 |
| |
| Proceeds from maturities of long-term | 228 |
| | 325 |
| | 317,746 |
| 182 |
| | 184 |
| | 164 |
|
| Available-for-sale securities: | | | | | | | | | | |
| Net decrease (increase) in short-term | 835,000 |
| | (2,185,000 | ) | | 4,172,157 |
| 400,000 |
| | (600,000 | ) | | 650,000 |
|
| Held-to-maturity securities: | | | | | | | | | | |
| Net decrease (increase) in short-term | 1,386 |
| | (1,247 | ) | | 835,392 |
| |
| Net (increase) decrease in short-term | | (2,753 | ) | | 1,404 |
| | (6,585 | ) |
| Proceeds from maturities of long-term | 2,093,933 |
| | 2,686,432 |
| | 3,771,382 |
| 2,420,330 |
| | 2,924,469 |
| | 2,611,029 |
|
| Proceeds from sale of long-term | — |
| | — |
| | 507,531 |
| — |
| | 852,199 |
| | — |
|
| Purchases of long-term | (719,833 | ) | | (5,977,152 | ) | | (5,323,500 | ) | (2,992,069 | ) | | (2,529,144 | ) | | (3,172,521 | ) |
| Advances: | | | | | | | | | | |
| Proceeds | 1,120,239,271 |
| | 697,384,820 |
| | 749,327,365 |
| |
| Made | (1,125,441,755 | ) | | (708,852,213 | ) | | (775,104,699 | ) | |
| Repaid | | 2,366,633,884 |
| | 1,364,290,711 |
| | 930,146,812 |
|
| Originated | | (2,366,705,248 | ) | | (1,360,955,355 | ) | | (933,090,216 | ) |
| Mortgage loans held for portfolio: | | | | | | | | | | |
| Principal collected | 1,070,820 |
| | 1,890,141 |
| | 2,666,537 |
| 1,218,035 |
| | 1,661,697 |
| | 1,383,198 |
|
| Purchases | (1,260,888 | ) | | (1,203,883 | ) | | (2,374,523 | ) | (1,788,156 | ) | | (2,899,907 | ) | | (2,414,064 | ) |
| Net cash used in investing activities | (9,004,945 | ) | | (13,085,853 | ) | | (23,296,663 | ) | |
| Net cash (used in) provided by investing activities | | (2,636,903 | ) | | 14,521,611 |
| | (15,315,904 | ) |
| | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| The accompanying notes are an integral part of these financial statements. | The accompanying notes are an integral part of these financial statements. | | | | | The accompanying notes are an integral part of these financial statements. | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | | | |
| (continued from previous page) | | | | | | | | | | |
FEDERAL HOME LOAN BANK OF CINCINNATI | STATEMENTS OF CASH FLOWS | | | | |
| (In thousands) | (In thousands) | For the Years Ended December 31, |
| | For the Years Ended December 31, | 2017 | | 2016 | | 2015 |
| | 2014 | | 2013 | | 2012 | |
| FINANCING ACTIVITIES: | | | | | | | | | | |
| Net (decrease) increase in deposits and pass-through reserves | $ | (200,660 | ) | | $ | (260,961 | ) | | $ | 108,546 |
| |
| Net change in deposits and pass-through reserves | | $ | (99,633 | ) | | $ | 3,567 |
| | $ | 74,725 |
|
| Net payments on derivative contracts with financing elements | (31,195 | ) | | (42,054 | ) | | (113,976 | ) | (4,210 | ) | | (23,185 | ) | | (28,458 | ) |
| Net proceeds from issuance of Consolidated Obligations: | | | | | | | | | | |
| Discount Notes | 270,415,559 |
| | 165,083,112 |
| | 250,629,492 |
| 449,775,543 |
| | 325,535,819 |
| | 305,975,240 |
|
| Bonds | 41,461,146 |
| | 34,035,263 |
| | 35,063,026 |
| 27,080,080 |
| | 50,922,924 |
| | 19,042,816 |
|
| Payments for maturing and retiring Consolidated Obligations: | | | | | | | | | | |
| Discount Notes | (267,394,419 | ) | | (157,714,961 | ) | | (245,932,389 | ) | (448,296,555 | ) | | (358,051,273 | ) | | (270,027,809 | ) |
| Bonds | (40,358,950 | ) | | (20,166,866 | ) | | (19,557,835 | ) | (26,065,750 | ) | | (32,787,008 | ) | | (43,118,354 | ) |
| Proceeds from issuance of capital stock | 83,543 |
| | 720,820 |
| | 924,853 |
| 354,654 |
| | 92,027 |
| | 191,132 |
|
| Payments for repurchase/redemption of mandatorily redeemable capital stock | (70,000 | ) | | (128,432 | ) | | (104,079 | ) | (275,209 | ) | | (366,952 | ) | | (53,987 | ) |
| Payments for repurchase of capital stock | (497,875 | ) | | — |
| | — |
| |
| Cash dividends paid | (176,356 | ) | | (177,795 | ) | | (141,056 | ) | (207,942 | ) | | (171,422 | ) | | (172,202 | ) |
| Net cash provided by financing activities | 3,230,793 |
| | 21,348,126 |
| | 20,876,582 |
| |
| Net (decrease) increase in cash and cash equivalents | (5,488,963 | ) | | 8,582,510 |
| | (2,017,521 | ) | |
| Net cash provided by (used in) financing activities | | 2,260,978 |
| | (14,845,503 | ) | | 11,883,103 |
|
| Net increase (decrease) in cash and cash equivalents | | 17,813 |
| | (1,399 | ) | | (3,099,834 | ) |
| Cash and cash equivalents at beginning of the period | 8,598,933 |
| | 16,423 |
| | 2,033,944 |
| 8,737 |
| | 10,136 |
| | 3,109,970 |
|
| Cash and cash equivalents at end of the period | $ | 3,109,970 |
| | $ | 8,598,933 |
| | $ | 16,423 |
| $ | 26,550 |
| | $ | 8,737 |
| | $ | 10,136 |
|
| Supplemental Disclosures: | | | | | | | | | | |
| Interest paid | $ | 621,865 |
| | $ | 584,640 |
| | $ | 649,609 |
| $ | 1,157,662 |
| | $ | 858,401 |
| | $ | 642,179 |
|
| Affordable Housing Program payments, net | $ | 23,291 |
| | $ | 18,503 |
| | $ | 18,902 |
| $ | 30,126 |
| | $ | 32,658 |
| | $ | 18,657 |
|
The accompanying notes are an integral part of these financial statements.
FEDERAL HOME LOAN BANK OF CINCINNATI
NOTES TO FINANCIAL STATEMENTS
Background Information
The Federal Home Loan Bank of Cincinnati (the FHLBank)FHLB), a federally chartered corporation, is one of 1211 District Federal Home Loan Banks (FHLBanks). The FHLBanks serve the public by enhancing the availability of credit for residential mortgages and targeted community development. The FHLBankFHLB provides a readily available, competitively-priced source of funds to its memberMember institutions. The FHLBankFHLB is a cooperative whose memberMember institutions own nearly all of the capital stock of the FHLBankFHLB and may receive dividends on their investment to the extent declared by the FHLBank'sFHLB's Board of Directors. Former membersMembers own the remaining capital stock to support business transactions still carried on the FHLBank'sFHLB's Statements of Condition. Regulated financial depositories and insurance companies engaged in residential housing finance may apply for membership. Housing associates, including state and local housing authorities, may also borrow from the FHLBank;FHLB; while eligible to borrow, housing authorities are not membersMembers of the FHLBankFHLB and, therefore, are not allowed to hold capital stock. A housing authority is eligible to utilize the Advance programs of the FHLBankFHLB if it meets applicable statutory requirements. It must be a U.S. Department of Housing and Urban Development approved mortgagee and must also meet applicable mortgage lending, financial condition, as well as charter, inspection and supervision requirements.
All membersMembers must purchase stock in the FHLBank.FHLB. Members must own capital stock in the FHLBankFHLB based on the amount of their total assets. Each memberMember also may be required to purchase activity-based capital stock as it engages in certain business activities with the FHLBank.FHLB. As a result of these requirements, the FHLBankFHLB conducts business with stockholders in the normal course of business. For financial statement purposes, the FHLBankFHLB defines related parties as those membersMembers with more than 10 percent of the voting interests of the FHLBank'sFHLB's outstanding capital stock. See Note 22 for more information relating to transactions with stockholders.
The Federal Housing Finance Agency (Finance Agency) was established and becameis the independent Federal regulator of the FHLBanks, Federal Home Loan Mortgage Corporation (Freddie Mac) and Federal National Mortgage Association (Fannie Mae), effective July 30, 2008 with the passage of the “Housing and Economic Recovery Act of 2008” (HERA). Pursuant to HERA, all regulations, orders, determinations, and resolutions that were issued, made, prescribed, or allowed to become effective by the former Federal Housing Finance Board will remain in effect until modified, terminated, set aside, or superseded by the Finance Agency Director, any court of competent jurisdiction, or operation of law. The Finance Agency's stated mission with respect to the FHLBanks is to provide effective supervision, regulationensure that the housing government-sponsored enterprises (GSEs) operate in a safe and housing mission oversightsound manner so that they serve as a reliable source of the FHLBanks to promote their safetyliquidity and soundness, supportfunding for housing finance and affordable housing, and support a stable and liquid mortgage market.community investment.
Each FHLBank operates as a separate entity with its own management, employees, and board of directors. The FHLBankFHLB does not have any special purpose entities or any other type of off-balance sheet conduits.
The Office of Finance is a joint office of the FHLBanks established to facilitate the issuance and servicing of the debt instruments of the FHLBanks, known as Consolidated Obligations, and to prepare combined quarterly and annual financial reports of all 12 FHLBanks. As provided by the Federal Home Loan Bank Act of 1932, as amended (the FHLBank Act), or by Finance Agency regulation, the FHLBanks' Consolidated Obligations are backed only by the financial resources of the FHLBanks and are the primary source of funds for the FHLBanks. Deposits, other borrowings, and capital stock issued to membersMembers provide other funds. The FHLBankFHLB primarily uses its funds to provide Advances to membersMembers and to purchase loans from membersMembers through its Mortgage Purchase Program (MPP). The FHLBankFHLB also provides memberMember institutions with correspondent services, such as wire transfer, security safekeeping, and settlement services.
Note 1 - Summary of Significant Accounting Policies
Basis of Presentation.Presentation
The FHLBank'sFHLB's accounting and financial reporting policies conform to accounting principles generally accepted in the United States of America (GAAP).
Significant Accounting Policies
Cash Flows. In the Statements of Cash Flows, the FHLBankFHLB considers non-interest bearing cash and due from banks as cash and cash equivalents. Federal funds sold are not treated as cash equivalents for purposes of the Statements of Cash Flows, but are instead treated as short-term investments and are reflected in the investing activities section of the Statements of Cash Flows.
Subsequent Events. The FHLBankFHLB has evaluated subsequent events for potential recognition or disclosure through the issuance of these financial statements and believes there have been no material subsequent events requiring additional disclosure or recognition in these financial statements.
Use of Estimates. The preparation of financial statements in accordance with GAAP requires management to make subjective assumptions and estimates. These assumptions and estimates affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. Actual results could differ from these estimates.
Fair Values. Some of the FHLBank'sFHLB's financial instruments lack an available trading market with prices characterized as those that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. Therefore, the FHLBankFHLB uses pricing services and/or internal models employing significant estimates and present value calculations when disclosing fair values. See Note 19 for more information.
Interest Bearing Deposits, Securities Purchased Under Agreements to Resell, and Federal Funds Sold. These investments provide short-term liquidity and are carried at cost. Interest bearing deposits include certificates of deposits (CDs) not meeting the definition of an investment security. The FHLBankFHLB treats securities purchased under agreements to resell as short-term collateralized loans, which are classified as assets inon the Statements of Condition. Securities purchased under agreements to resell are held in safekeeping in the name of the FHLBankFHLB by third-party custodians approved by the FHLBank.FHLB. If the market value of the underlying securities decrease below the market value required as collateral, the counterparty has the option to (1) place an equivalent amount of additional securities in safekeeping in the name of the FHLBankFHLB or (2) remit an equivalent amount of cash. Federal funds sold consist of short-term, unsecured loans generally transacted with counterparties that are considered by the FHLBankFHLB to be of investment quality.
Investment Securities. The FHLBankFHLB classifies investment securities as trading, available-for-sale and held-to-maturity at the date of acquisition. Purchases and sales of securities are recorded on a trade date basis.
Trading. Securities classified as trading are acquired for liquidity purposes and asset/liability management and carried at fair value. The FHLBankFHLB records changes in the fair value of these securities through other income as a net gain or loss on trading securities. However, the FHLBankFHLB does not participate in speculative trading practices and holds these investments indefinitely as management periodically evaluates its liquidity needs.
Available-for-Sale. Securities that are not classified as held-to-maturity or trading are classified as available-for-sale and are carried at fair value. The change in fair value of available-for-sale securities is recorded in other comprehensive income as a net unrealized gain or loss on available-for-sale securities.
Held-to-Maturity. Securities that the FHLBankFHLB has both the ability and intent to hold to maturity are classified as held-to-maturity and are carried at amortized cost, representing the amount at which an investment is acquired adjusted for periodic principal repayments, amortization of premiums and accretion of discounts.
Certain changes in circumstances may cause the FHLBankFHLB to change its intent to hold a security to maturity without calling into question its intent to hold other debt securities to maturity in the future. Thus, the sale or transfer of a held-to-maturity security due to certain changes in circumstances, such as evidence of significant deterioration in the issuer's creditworthiness or changes in regulatory requirements, is not considered to be inconsistent with its original classification. Other events that are isolated, nonrecurring, and unusual for the FHLBankFHLB that could not have been reasonably anticipated may cause the FHLBankFHLB to sell or transfer a held-to-maturity security without necessarily calling into question its intent to hold other debt securities to maturity.
In addition, sales of held-to-maturity debt securities that meet either of the following two conditions may be considered as maturities for purposes of the classification of securities: (1) the sale occurs near enough to the security's maturity date (or call date if exercise of the call is probable) that interest rate risk is substantially eliminated as a pricing factor and changes in market interest rates would not have a significant effect on the security's fair value, or (2) the sale of the security occurs after the FHLBankFHLB has already collected a substantial portion (at least 85 percent) of the principal outstanding at acquisition due either to prepayments on the security or to scheduled payments on the security payable in equal installments (both principal and interest) over its term.
Premiums and Discounts. The FHLBankFHLB amortizes purchased premiums and accretes purchased discounts on mortgage-backed securities and other investment categories with a term of greater than one year using the retrospective level-yieldinterest method
(retrospective (retrospective method). The retrospective method requires that the FHLBankFHLB estimate prepayments over the estimated life of the securities and make a retrospective adjustment of the effective yield each time that the FHLBankFHLB changes the estimated life and/or prepayments as if the new estimate had been known since the original acquisition date of the
securities. The FHLBankFHLB uses nationally recognized third-party prepayment models to project estimated cash flows. Due to their short term nature, the FHLBankFHLB amortizes premiums and accretes discounts on other investment categories with a term of one year or less using a straight-line methodology based on the contractual maturity of the securities. Analyses of the straight-line compared to the interest, or level-yield, methodology have been performed by the FHLBankFHLB and it has determined that the impact of the difference on the financial statements for each period reported, taken individually and as a whole, is not material.
Gains and Losses on Sales. The FHLBankFHLB computes gains and losses on sales of investment securities using the specific identification method and includes these gains and losses in other income.
Investment Securities - Other-than-Temporary Impairment. The FHLBankFHLB evaluates its individual available-for-sale and held-to-maturity securities in an unrealized loss position for other-than-temporary impairment on a quarterly basis. A security is considered impaired when its fair value is less than its amortized cost. The FHLBankFHLB considers an other-than-temporary impairment to have occurred under any of the following circumstances:conditions:
| |
| ▪ | if the FHLBankFHLB has an intent to sell the impaired debt security; |
| |
| ▪ | if, based on available evidence, the FHLBankFHLB believes it is more likely than not that it will be required to sell the impaired debt security before the recovery of its amortized cost basis; or |
| |
| ▪ | if the FHLBankFHLB does not expect to recover the entire amortized cost basis of the debt security. |
Recognition of Other-than-Temporary Impairment. If either of the first two conditions above is met, the FHLBankFHLB recognizes an other-than-temporary impairment charge in earnings equal to the entire difference between the security's amortized cost basis and its fair value as of the Statement of Condition date. For securities in an unrealized loss position that do not meet either of thesethe first two conditions, the entire loss position, or total other-than-temporary impairment, is evaluated to determine the extent and amount of credit loss.
Advances. The FHLBankFHLB reports Advances (loans to members,Members, former membersMembers or housing associates) either at amortized cost or at fair value when the fair value option is elected. Advances carried at amortized cost are reported net of premiums, discounts (including discounts on Advances related to the Affordable Housing Program (AHP), as discussed below), unearned commitment fees and hedging adjustments. The FHLBankFHLB amortizes theor accretes premiums and accretes the discounts, and recognizes unearned commitment fees and hedging adjustments on Advances to interest income using a level-yield methodology. The FHLBankFHLB records interest on Advances to income as earned. For Advances carried at fair value, interest income is recognized based on the contractual interest rate.
Advance Modifications. In cases in which the FHLBankFHLB funds a new Advance concurrent with or within a short period of time before or after the prepayment of an existing Advance by the FHLBanksame borrower, the FHLB evaluates whether the new Advance meets the accounting criteria to qualify as a modification of an existing Advance or whether it constitutes a new Advance. The FHLBankFHLB compares the present value of cash flows on the new Advance to the present value of cash flows remaining on the existing Advance. If there is at least a 10 percent difference in the cash flows, or if the FHLBankFHLB concludes the differences between the Advances are more than minor based on qualitative factors, the Advance is accounted for as a new Advance. In all other instances, the new Advance is accounted for as a modification.
Prepayment Fees. The FHLBankFHLB charges a borrower a prepayment fee when the borrower prepays certain Advances before the original maturity. The FHLBankFHLB records prepayment fees, net of basis adjustments related to hedging activities included in the carrying value of the Advances, as “Prepayment fees on Advances, net” in the interest income section of the Statements of Income.
If a new Advance qualifies as a modification of the existingoriginal Advance, the net prepayment fee on the prepaid Advance is deferred, recorded in the basis of the modified Advance, and amortized/accreted using a level-yield methodology over the life of the modified Advance to Advance interest income.
For prepaid Advances that are hedged and meet the hedge accounting requirements, the FHLBankFHLB terminates the hedging relationship upon prepayment and records the associated fair value gains and losses, adjusted for the prepayment fees, in interest income. If the FHLBank funds a new Advance to a member concurrent with or within a short period of time after the prepayment of a previous Advance to that member, the FHLBank evaluates whether the new Advance qualifies as a modification of the original hedged Advance. If the new Advance qualifies as a modification of the original hedged Advance,
the associated fair value gains or losses of the Advance and the prepayment fees are included in the carrying amountbasis of the modified Advance, andAdvance. Such gains or losses and prepayment fees are then amortized in interest income over the life of the modified Advance using a level-yield methodology. If the modified Advance also is hedged and the hedge meets the hedging criteria, the modified Advance is marked to fair value after the modification, and subsequent fair value changes are recorded in other income.
If a new Advance does not qualify as a modification of an existinga prepaid Advance, itthe prepaid Advance is treated as an Advance termination with subsequent funding of a new Advance and the existing fees on the prepaid Advance, net of related hedging adjustments, are recorded in interest income as “Prepayment fees on Advances, net.”
The FHLBankFHLB defers commitment fees for Advances and amortizes them to interest income using a level-yield methodology. Refundable fees are deferred until the commitment expires or until the Advance is made. The FHLBankFHLB records commitment fees for Standby Letters of Credit as a deferred creditincome when it receives the fees and accretes them using a straight-line methodology over the term of the Standby Letter of Credit. Based upon past experience, the FHLBank'sFHLB's management believes that the likelihood of Standby Letters of Credit being drawn upon is remote.
Mortgage Loans Held for Portfolio. The FHLBankFHLB classifies mortgage loans as held for portfolio and, accordingly, reports them at their principal amount outstanding net of unamortized premiums and discounts and mark-to-markethedging basis adjustments on loans initially classified as mortgage loan commitments. The FHLBankFHLB has the intent and ability to hold these mortgage loans to maturity.
Premiums and Discounts. The FHLBankFHLB defers and amortizes premiums and accretes discounts paid to and received by the FHLBank'sFHLB's participating membersMembers (Participating Financial Institutions, or PFIs) and mark-to-markethedging basis adjustments, as interest income using the retrospective method. The FHLBank aggregates the mortgage loans by similar characteristics (type, maturity, note rate and acquisition date) in determining prepayment estimates for the retrospective method.contractual interest method (contractual method).
Other Fees. The FHLBankFHLB may receive non-origination fees, called pair-off fees. Pair-off fees represent a make-whole provision and are assessed when a memberMember fails to deliver the quantity of loans committed to in a Mandatory Delivery Contract. Pair-off fees are recorded in other income. A Mandatory Delivery Contract is a legal commitment the FHLBankFHLB makes to purchase, and a PFI makes to deliver, a specified dollar amount of mortgage loans, with a forward settlement date, at a specified range of mortgage note rates and prices.
Allowance for Credit Losses. An allowance for credit losses is separately established for each identified portfolio segment, if it is probable that a loss triggering event has occurred in the FHLBank'sFHLB's portfolio as of the Statements of Condition date and the amount of loss can be reasonably estimated. To the extent necessary, an allowance for credit losses for off-balance sheet credit exposures is recorded as a liability. See Note 10 for details on each allowance methodology.
Portfolio Segments. A portfolio segment is defined as the level at which an entity develops and documents a systematic methodology for determining its allowance for credit losses. The FHLBankFHLB has developed and documented a systematic methodology for determining an allowance for credit losses, where applicable, for (1) Advances, letters of credit and other extensions of credit to members,Members, collectively referred to as “credit products”; (2) Federal Housing Administration (FHA) mortgage loans held for portfolio; and (3) conventional mortgage loans held for portfolio.
Classes of Financing Receivables. Classes of financing receivables generally are a disaggregation of a portfolio segment to the extent needed to understand the exposure to credit risk arising from these financing receivables. The FHLBankFHLB determined that no further disaggregation of the portfolio segments identified above is needed as the credit risk arising from these financing receivables is assessed and measured by the FHLBankFHLB at the portfolio segment level.
Impairment Methodology. A loan is considered impaired when, based on current information and events, it is probable that the FHLBankFHLB will be unable to collect all amounts due according to the contractual terms of the loan agreement.
Loans that are on non-accrual status and that are considered collateral-dependent are measured for impairment based on the fair value of the underlying property (net of estimated selling costs) and the amount of applicable credit enhancements. Loans are considered collateral-dependent if repayment is expected to be provided solely by the sale of the underlying property, that is, there is no other available and reliable source of repayment. Collateral-dependent loans are impaired if the fair value of the underlying collateral is insufficient to recover the unpaid principal balance on the loan. Interest income on impaired loans is recognized in the same manner as non-accrual loans noted below.
Non-accrual Loans. The FHLBankFHLB places a conventional mortgage loan on non-accrual status if it is determined that either (1) the collection of interest or principal is doubtful (e.g., when a related allowance for credit losses is recorded on a loan
considered to be a troubled debt restructuring as a result of the individual evaluation for impairment), or (2) interest or principal is past due for 90 days or more, except when the loan is well-secured and in the process of collection (e.g., through credit enhancements and with monthly settlements on a schedule/scheduled basis). Loans with settlements on a schedule/scheduled basis means the FHLBankFHLB receives monthly principal and interest payments from the servicer regardless of whether the mortgagee is making payments to the servicer. Loans with monthly settlement on an actual/actual basis are considered well-secured; however, servicers of actual/actual loan types contractually do not advance principal and interest regardless of borrower creditworthiness. As a result, these loans are placed on non-accrual status once they become 90 days delinquent.
For those mortgage loans placed on non-accrual status, accrued but uncollected interest is reversed against interest income. The FHLBankFHLB records cash payments received on non-accrual loans first as interest income and then as a reduction of principal as specified in the contractual agreement, unless the collection of the remaining principal amount due is considered doubtful. If the collection of the remaining principal amount due is considered doubtful, cash payments received are applied first solely to principal until the remaining principal amount due is expected to be collected and then as a recovery of any charge-off, if applicable, followed by recording interest income. A loan on non-accrual status may be restored to accrual status when (1) none of its contractual principal and interest is due and unpaid, and the FHLBankFHLB expects repayment of the remaining contractual interest and principal, or (2) it otherwise becomes well secured and in the process of collection.
Charge-off Policy. A charge-off is recorded if it is estimated that the recorded investment in a loan will not be recovered. The FHLBankFHLB evaluates whether to record a charge-off on a conventional mortgage loan upon the occurrence of a confirming event. Confirming events include, but are not limited to, the occurrence of foreclosure orevent, such as notification of a claim against any of the credit enhancements. A charge-off is recorded ifThe FHLB also charges off the recorded investmentportion of outstanding conventional mortgage loan balances in excess of fair value of the loan will not be recovered.underlying property, less cost to sell and adjusted for any available credit enhancements, for loans that are 180 days or more delinquent and/or certain loans that the borrower has filed for bankruptcy.
Premises, Software and Equipment, Net. The FHLBankFHLB records premises, software and equipment at cost less accumulated depreciation and amortization. The FHLBank'sFHLB's accumulated depreciation and amortization related to these items was $18,556,000$26,167,000 and $19,161,000$23,345,000 at December 31, 20142017 and 2013.2016. The FHLBankFHLB computes depreciation on a straight-line methodology over the estimated useful lives of assets ranging from three to ten years. The FHLBankFHLB amortizes leasehold improvements on a straight-line basis over the shorter of the estimated useful life of the improvement or the remaining term of the lease. The FHLBankFHLB capitalizes improvements and major renewals but expenses ordinary maintenance and repairs when incurred. Depreciation and amortization expense for premises, software and equipment was $3,108,000, $2,549,000,$2,949,000, $2,883,000, and $2,176,000$2,691,000 for the years ended December 31, 2014, 2013,2017, 2016, and 2012.2015.
The FHLBankFHLB includes gains and losses on disposal of premises, software and equipment in other income. The net realized (loss) gain on disposal of premises, software and equipment was $(106,000), $13,000, and $(3,000)$11,000 for each of the years ended December 31, 2014, 2013,2017, 2016, and 2012.2015.
The cost of computer software developed or obtained for internal use is capitalized and amortized over future periods. As of December 31, 20142017 and 2013,2016, the FHLBankFHLB had $6,659,000$4,725,000 and $8,677,000$4,902,000 in unamortized computer software costs. Amortization of computer software costs charged to expense was $2,433,000, $1,814,000,$2,157,000, $2,080,000, and $1,528,000$1,965,000 for the years ended December 31, 2014, 2013,2017, 2016, and 2012.2015.
Derivatives. All derivatives are recognized on the Statements of Condition at their fair values and are reported as either derivative assets or derivative liabilities, net of cash collateral, including initial and certain variation margin, and accrued interest from counterparties. The fair values of derivatives are netted by counterparty when the netting arrangementsrequirements have been met. If these netted amounts are positive, they are classified as an asset and, if negative, they are classified as a liability. Cash flows associated with derivatives are reflected as cash flows from operating activities in the Statement of Cash Flows unless the derivative meets the criteria to be a financing derivative.
The FHLB utilizes two Derivative Clearing Organizations (Clearinghouses), for all cleared derivative transactions, LCH.Clearnet LLC and CME Clearing. Effective January 3, 2017, CME Clearing made certain amendments to its rulebook changing the legal characterization of variation margin payments to be daily settlement payments, rather than collateral. Variation margin related to LCH.Clearnet LLC contracts continues to be characterized as cash collateral through December 31, 2017. At both Clearinghouses, initial margin is considered cash collateral.
Derivative Designations. Each derivative is designated as one of the following:
| |
| 1. | a qualifying hedge of the fair value of a recognized asset or liability or an unrecognized firm commitment (a "fair value" hedge); or |
| |
| 2. | a non-qualifying hedge (“economic hedge”) for asset/liability management purposes. |
Accounting for Fair Value Hedges. If hedging relationships meet certain criteria including, but not limited to, formal documentation of the hedging relationship and an expectation to be highly effective, they are eligible for fair value hedge accounting and the offsetting changes in fair value of the hedged items attributable to the hedged risk may be recorded in earnings. The application of hedge accounting generally requires the FHLBankFHLB to evaluate the effectiveness of the hedging relationships at inception and on an ongoing basis and to calculate the changes in fair value of the derivatives and related
hedged items independently. This is known as the “long-haul” method of accounting. Transactions that meet more stringent criteria qualify for the “shortcut” method of hedge accounting in which an assumption can be made that the change in fair value of a hedged item exactly offsets the change in value of the related derivative. The FHLBankFHLB discontinued use of the shortcut method effective July 1, 2009 for all new hedging relationships.
Derivatives are typically executed at the same time as the hedged Advances or Consolidated Obligations, and the FHLBankFHLB designates the hedged item in a qualifying hedge relationship as of the trade date. In many hedging relationships, the FHLBankFHLB may designate the hedging relationship upon its commitment to disburse an Advance or trade a Consolidated Obligation in which settlement occurs within the shortest period of time possible for the type of instrument based on market settlement conventions. The FHLBankFHLB records the changes in fair value of the derivative and the hedged item beginning on the trade date.
Changes in the fair value of a derivative that is designated and qualifies as a fair value hedge, along with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk, are recorded in other income as “Net (losses) gains on derivatives and hedging activities.”
Accounting for Economic Hedges. An economic hedge is defined as a derivative hedging specific or non-specific underlying assets, liabilities, or firm commitments that does not qualify, or was not designated, for hedge accounting, but is an acceptable hedging strategy under the FHLBank'sFHLB's risk management program. These economic hedging strategies also comply with Finance Agency regulatory requirements prohibiting speculative hedge transactions. An economic hedge by definition introduces the potential for earnings variability caused by the changes in fair value of the derivatives that are recorded in the FHLBank'sFHLB's income but that are not offset by corresponding changes in the value of the economically hedged assets, liabilities, or firm commitments. As a result, the FHLBankFHLB recognizes only the change in fair value of these derivatives in other income as “Net (losses) gains on derivatives and hedging activities” with no offsetting fair value adjustments for the assets, liabilities, or firm commitments.
The difference between accruals of interest receivables and payables on derivatives that are designated as fair value hedge relationships is recognized as adjustments to the interest income or expense of the designated hedged item. The differentialsdifference between accruals of interest receivables and payables on economic hedges are recognized in other income as “Net (losses) gains on derivatives and hedging activities.”
Embedded Derivatives. The FHLBankFHLB may issue debt, make Advances, or purchase financial instruments in which a derivative instrument is “embedded.” Upon execution of these transactions, the FHLBankFHLB assesses whether the economic characteristics of the embedded derivative are clearly and closely related to the economic characteristics of the remaining component of the Advance, debt, or purchased financial instrument (the host contract) and whether a separate, non-embedded instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument. When the FHLBankFHLB determines that (1) the embedded derivative has economic characteristics that are not clearly and closely related to the economic characteristics of the host contract and (2) a separate, stand-alone instrument with the same terms would qualify as a derivative instrument, the embedded derivative is separated from the host contract, carried at fair value, and designated as a stand-alone derivative instrument pursuant to an economic hedge. However, the entire contract is carried at fair value and no portion of the contract is designated as a hedging instrument if the entire contract (the host contract and the embedded derivative) is to be measured at fair value, with changes in fair value reported in current-period earnings (such as an investment security classified as “trading” as well as hybrid financial instruments that are selected for the fair value option), or if the FHLBankFHLB cannot reliably identify and measure the embedded derivative for purposes of separating that derivative from its host contract.
Discontinuance of Hedge Accounting. The FHLBankFHLB discontinues hedge accounting prospectively when: (1) it determines that the derivative is no longer effective in offsetting changes in the fair value of a hedged item attributable to the hedged risk; (2) the derivative and/or the hedged item expires or is sold, terminated, or exercised; or (3) management determines that designating the derivative as a hedging instrument is no longer appropriate.
When hedge accounting is discontinued because the FHLBankFHLB determines that the derivative no longer qualifies as an effective fair value hedge of an existing hedged item, the FHLBankFHLB continues to carry the derivative on the Statements of Condition at its fair value, ceases to adjust the hedged asset or liability for changes in fair value, and amortizes the cumulative basis adjustment on the hedged item into earnings over the remaining life of the hedged item using a level-yield methodology.
Consolidated Obligations. Consolidated Obligations are recorded at amortized cost unless the FHLBankFHLB has elected the fair value option, in which case the Consolidated Obligations are carried at fair value.
Concessions. Dealers receive concessions in connection with the issuance of certain Consolidated Obligations. The Office of Finance prorates the amount of the concession to the FHLBankFHLB based upon the percentage of the debt issued that is assumed by the
the FHLBank.FHLB. Concessions paid on Consolidated Obligations designated under the fair value option are expensed as incurred in other non-interest expense. ConcessionsThe FHLB records concessions paid on Consolidated Obligation Bonds not designated under the fair value option as a direct deduction from their carrying amounts, consistent with the presentation of discounts on Consolidated Obligations. The concessions are deferred and amortized, using a level-yield methodology, over the terms to maturity or the expected lives of the Consolidated Obligation Bonds. Unamortized concessions are included in “Other assets,” and theThe amortization of those concessions is included in Consolidated Obligation Bond interest expense.
The FHLBankFHLB charges to expense as incurred the concessions applicable to Consolidated Obligation Discount Notes because of the short maturities of these Notes. Analyses of expensing concessions as incurred compared to a level-yield methodology have been performed by the FHLBankFHLB, and it has determined that the impact of the difference on the financial statements for each period reported, taken individually and as a whole, is not material.
Discounts and Premiums. The FHLBankFHLB accretes the discounts and amortizes the premiums on Consolidated Obligation Bonds to interest expense using a level-yield methodology over the terms to maturity or estimated lives of the corresponding Consolidated Obligation Bonds. Due to their short-term nature, itthe FHLB expenses the discounts on Consolidated Obligation Discount Notes using a straight-line methodology over the term of the Notes. Analyses of a straight-line compared to a level-yield methodology have been performed by the FHLBank,FHLB, and the FHLBankFHLB has determined that the impact of the difference on the financial statements for each period reported, taken individually and as a whole, is not material.
Mandatorily Redeemable Capital Stock. The FHLBankFHLB reclassifies stock subject to redemption from equity to liability upon expiration of the “grace period” after a memberMember provides written notice of redemption, gives notice of intent to withdraw from membership, or attains nonmember status by merger or acquisition, charter termination, or involuntary termination from membership, because the memberMember's shares then meet the definition of a mandatorily redeemable financial instrument. Shares meeting this definition are reclassified to a liability at fair value. Dividends declared on shares classified as a liability are accrued at the expected dividend rate and reflected as interest expense in the Statements of Income. The repurchase or redemption of mandatorily redeemable capital stock is reflected as a cash outflow in the financing activities section of the Statements of Cash Flows.
If a memberMember cancels its written notice of redemption or notice of withdrawal, the FHLBankFHLB reclassifies the mandatorily redeemable capital stock from a liability to equity. After the reclassification, dividends on the capital stock are no longer classified as interest expense.
Employee Benefit Plans. The FHLBankFHLB records the periodic benefit cost associated with its employee retirement plans and its contributions associated with its defined contribution plans as compensation and benefits expense in the Statements of Income.
Restricted Retained Earnings. In 2011, the 12 FHLBanks entered into a Joint Capital Enhancement Agreement, as amended (Capital Agreement). Under the Capital Agreement, beginning in the third quarter of 2011, the FHLBankFHLB contributes 20 percent of its quarterly net income to a separate restricted retained earnings account until the account balance equals at least one percent of the FHLBank'sFHLB's average balance of outstanding Consolidated Obligations for the previous quarter. These restricted retained earnings are not available to pay dividends and are presented separately on the Statements of Condition.
Finance Agency Expenses. The FHLBankFHLB funds its proportionate share of the costs of operating the Finance Agency. The portion of the Finance Agency's expenses and working capital fund paid by each FHLBank has been allocated based on theeach FHLBank's pro rata share of total annual assessments (which are based on the ratio between each FHLBank's minimum required regulatory capital and the aggregate minimum required regulatory capital of every FHLBank).
Office of Finance Expenses. The FHLBankFHLB is assessed for its proportionate share of the costs of operating the Office of Finance. Each FHLBank's proportionate share of Office of Finance operating and capital expenditures is calculated using a formula that is based upon the following components: (1) two-thirds based upon each FHLBank's share of total Consolidated Obligations outstanding and (2) one-third based upon an equal pro rata allocation.
Voluntary Housing Programs. The FHLBankFHLB classifies amounts awarded under its voluntary housing programs as other expenses.
Affordable Housing Program (AHP). The FHLBank Act requires each FHLBank to establish and fund an AHP. The FHLBankFHLB charges the required funding for AHP to earnings and establishes a liability. The AHP funds provide subsidies to membersMembers to assist in the purchase, construction, or rehabilitation of housing for very low-, low-, and moderate-income households. The FHLBankFHLB issues AHP Advances at interest rates below the customary interest rate for non-subsidized Advances. When the FHLBankFHLB makes an AHP Advance, the present value of the variation in the cash flow caused by the difference in the interest rate between the AHP Advance rate and the FHLBank'sFHLB's related cost of funds for comparable maturity funding is charged
against the AHP
liability and recorded as a discount on the AHP Advance. As an alternative, the FHLBankFHLB also has the authority to make the AHP subsidy available to membersMembers as a grant. The discount on AHP Advances is accreted to interest income on Advances using a level-yield methodology over the life of the Advance.
Note 2 - Recently Issued Accounting Standards and Interpretations
Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure.Targeted Improvements to Accounting for Hedging Activities. On August 8, 2014,28, 2017, the Financial Accounting Standards Board (FASB) issued amended guidance relatingto improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. This guidance requires that, for fair value hedges, the entire change in the fair value of the hedging instrument included in the assessment of hedge effectiveness be presented in the same income statement line that is used to present the earnings effect of the hedged item. For cash flow hedges, the entire change in the fair value of the hedging instrument included in the assessment of hedge effectiveness must be recorded in other comprehensive income. In addition, the amendments include certain targeted improvements to the classificationassessment of hedge effectiveness. This guidance becomes effective for the FHLB for interim and measurementannual periods beginning on January 1, 2019, and early adoption is permitted. The amended presentation and disclosure guidance is required only prospectively. The FHLB does not intend to adopt the new guidance early. The FHLB is in the process of evaluating this guidance, and its effect on the FHLB’s financial condition, results of operations, and cash flows has not yet been determined.
Premium Amortization on Purchased Callable Debt Securities. On March 30, 2017, the FASB issued amended guidance to shorten the amortization period for certain government-guaranteed mortgage loans upon foreclosure.purchased callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments indo not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. This guidance is effective for the FHLB for interim and annual periods beginning on January 1, 2019, and early adoption is permitted. This guidance should be applied using a modified retrospective method through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The FHLB does not intend to adopt this guidance requireearly. The FHLB is in the process of evaluating this guidance, but its effect on the FHLB’s financial condition, results of operations, and cash flows is not expected to be material.
Improving the Presentation of Net Periodic Pension and Postretirement Benefit Cost. On March 10, 2017, the FASB issued amended guidance that a mortgage loanrequires an employer to disaggregate the service cost component from the other components of net periodic pension and postretirement benefit costs (net benefit costs). The amendments also provide explicit guidance on how to present the service cost component and the other components of net benefit costs in the income statement and allow only the service cost component of net benefit cost to be derecognized and that a separate other receivable be recognized upon foreclosure if certain conditions are met.eligible for capitalization. This guidance became effective for the FHLBankFHLB for interim and annual periods, and adopted retrospectively, beginning on January 1, 2018, for the presentation of the service cost component and the other components of net benefit costs in the income statement. For the capitalization of the service cost component of net benefit costs, this guidance was applied prospectively on and after the effective date. This guidance did not have a material effect on the FHLB's financial condition, results of operations, and cash flows.
Classification of Certain Cash Receipts and Cash Payments. On August 26, 2016, the FASB issued amendments to clarify guidance on the classification of certain cash receipts and payments in the Statement of Cash Flows. This guidance is intended to reduce existing diversity in practice in how certain cash receipts and cash payments are presented and classified on the Statement of Cash Flows. This guidance became effective for the FHLB for interim and annual periods beginning on January 1, 2018. However, adoption of this guidance did not have any effect on the FHLB's financial condition, results of operations, and cash flows.
Measurement of Credit Losses on Financial Instruments. On June 16, 2016, the FASB issued amended guidance for the accounting of credit losses on financial instruments. The amendments require entities to immediately record the full amount of expected credit losses in their loan portfolios. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The guidance also requires, among other things, credit losses relating to available-for-sale debt securities to be recorded through an allowance for credit losses and expanded disclosure requirements. The guidance is effective for the FHLB for interim and annual periods beginning on January 1, 2020. Early application is permitted as of the interim and annual reporting periods beginning after December 15, 2018. The guidance should be applied using a modified-retrospective approach, through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. In addition, entities are required to use a prospective transition approach for debt securities for which an other-than-temporary impairment had been recognized before the effective date. The FHLB does not intend to adopt the new guidance early. While the FHLB is still in the process of evaluating this guidance, the FHLB expects the guidance will result in an increase in the allowance for credit losses given the requirement to estimate losses for the entire estimated life of the financial asset. The extent of the impact on the FHLB’s financial condition, results of operations, and cash
flows will depend upon the composition of the FHLB’s financial assets at the adoption date and the economic conditions and forecasts at that time.
Leases. On February 25, 2016, the FASB issued guidance which requires recognition of lease assets and lease liabilities on the Statement of Condition and disclosure of key information about leasing arrangements. In particular, this guidance requires a lessee, of operating or finance leases, to recognize on the Statement of Condition a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. However, for leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and lease liabilities. The guidance becomes effective for the FHLB for the interim and annual periods beginning on January 1, 2015,2019, and was adopted prospectively.early application is permitted. The guidance requires lessors and lessees to recognize and measure leases at the beginning of the earliest period presented in the financial statements using a modified retrospective approach. The FHLB does not intend to adopt the new guidance early. Upon adoption, the FHLB expects to report higher assets and liabilities as a result of including right-of-use assets and lease liabilities on its Statement of Condition. While the FHLB is still in the process of evaluating this guidance, willthe FHLB does not expect the new guidance to have a material effectimpact on the FHLBank'sits financial condition, results of operations, orand cash flows.
Repurchase-to Maturity Transactions, Repurchase Financings,Recognition and Disclosures.Measurement of Financial Assets and Financial Liabilities. On June 12, 2014,January 5, 2016, the FASB issued amended guidance for repurchase-to-maturity transactionson certain aspects of recognition, measurement, presentation, and repurchase agreements executed as repurchase financings.disclosure of financial instruments. This amendment requires secured borrowing accounting treatment for repurchase-to-maturity transactions and provides guidance on accounting for repurchase financing arrangements. In addition, this guidance requires additional disclosures, particularly on transfers accounted for as sales that are economically similarincludes, but is not limited to, repurchase agreements and on the nature of collateral pledged in repurchase agreements accounted for as secured borrowings. Thisfollowing:
| |
| ▪ | Requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected the fair value option. |
| |
| ▪ | Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the Statement of Condition or the accompanying notes to the financial statements. |
| |
| ▪ | Eliminates the requirement for public entities to disclose the method(s) and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost on the Statement of Condition. |
The guidance became effective for the FHLBankFHLB for the interim and annual periods beginning on January 1, 2015. The changes in accounting for transactions outstanding on2018. While the effective date were presented as a cumulative-effect adjustment to retained earnings as of January 1, 2015. The adoption of this guidance willaffects the FHLB's disclosures, the requirement to present the instrument-specific credit risk in other comprehensive income did not have a materialany effect on the FHLBank'sFHLB's financial condition, results of operations, orand cash flows.
Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.Revenue from Contracts with Customers. On January 17,May 28, 2014, the FASB issued guidance clarifying when consumer mortgage loans collateralized by real estate should be reclassifiedon revenue from contracts with customers. This guidance applies to real estate owned. Specifically,all contracts with customers except those that are within the scope of certain other standards, such collateralized mortgage loans should be reclassified to real estate owned when either the creditor obtains legal title to the residential real estate property upon completion of a foreclosure, or the borrower conveys all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed-in-lieu of foreclosure or through a similar legal agreement.as financial instruments, certain guarantees, insurance contracts, and lease contracts. This guidance became effective for the FHLBankFHLB for the interim and annual periods beginning on January 1, 2015,2018. Given that the majority of the FHLB's financial instruments and was adopted prospectively. Theother contractual rights that generate revenue are covered by other GAAP, the adoption of this guidance willdid not have a materialany effect on the FHLBank'sFHLB's financial condition, results of operations, orand cash flows.
Framework for Adversely Classifying Loans, Other Real Estate Owned, and Other Assets and Listing Assets for Special Mention. On April 9, 2012, the Finance Agency issued an advisory bulletin that establishes a standard and uniform methodology for adverse classification and identification of special mention assets and off-balance sheet credit exposures at the FHLBanks, excluding investment securities. The adverse classification requirements were implemented as of January 1, 2014; this implementation did not have a material effect on the FHLBank's financial condition, results of operations, or cash flows. The charge-off requirements were implemented on January 1, 2015. The adoption of these requirements will not have a material effect on the FHLBank's financial condition, results of operations, or cash flows.
Note 3 - Cash and Due from Banks
Cash and due from banks on the Statement of Condition includes cash on hand, cash items in the process of collection, compensating balances, and amounts due from correspondent banks and the Federal Reserve Bank.
Compensating Balances. The FHLBankFHLB maintains collected cash balances with commercial banks in return for certain services. These agreements contain no legal restrictions on the withdrawal of funds. The average collected cash balances for the years ended December 31, 20142017 and 20132016 were approximately $77,000$98,000 and $68,000.$50,000.
Pass-through Deposit Reserves. The FHLBankFHLB acts as a pass-through correspondent for memberMember institutions required to deposit reserves with the Federal Reserve Banks. The amount shown as “Cash and due from banks” includes pass-through reserves deposited with Federal Reserve Banks of approximately $298,000$1,805,000 and $15,884,000$576,000 as of December 31, 20142017 and 2013.2016.
Note 4 - Trading Securities
Table 4.1 - Trading Securities by Major Security Types (in thousands) | | Fair Value | December 31, 2014 | | December 31, 2013 | December 31, 2017 | | December 31, 2016 |
| Mortgage-backed securities: | | | | | | |
Other U.S. obligation single-family mortgage-backed securities (1) | $ | 1,341 |
| | $ | 1,578 |
| |
| U.S. obligation single-family mortgage-backed securities | | $ | 781 |
| | $ | 970 |
|
| Total | $ | 1,341 |
| | $ | 1,578 |
| $ | 781 |
| | $ | 970 |
|
| |
(1) | Consists of Government National Mortgage Association (Ginnie Mae) mortgage-backed securities. |
Table 4.2 - Net Losses on Trading Securities (in thousands)
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2014 | | 2013 | | 2012 |
| Net (losses) gains on trading securities held at period end | $ | (9 | ) | | $ | (19 | ) | | $ | 8 |
|
| Net losses on securities matured during the period | — |
| | — |
| | (32,778 | ) |
| Net losses on trading securities | $ | (9 | ) | | $ | (19 | ) | | $ | (32,770 | ) |
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Net losses on trading securities held at period end | $ | (6 | ) | | $ | (5 | ) | | $ | (18 | ) |
| Net losses on trading securities | $ | (6 | ) | | $ | (5 | ) | | $ | (18 | ) |
Note 5 - Available-for-Sale Securities
Table 5.1 - Available-for-Sale Securities by Major Security Types (in thousands)
| | | | December 31, 2014 | December 31, 2017 |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized (Losses) | | Fair Value | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| Certificates of deposit | $ | 1,350,001 |
| | $ | 3 |
| | $ | (27 | ) | | $ | 1,349,977 |
| $ | 900,000 |
| | $ | — |
| | $ | (124 | ) | | $ | 899,876 |
|
| Total | $ | 1,350,001 |
| | $ | 3 |
| | $ | (27 | ) | | $ | 1,349,977 |
| $ | 900,000 |
| | $ | — |
| | $ | (124 | ) | | $ | 899,876 |
|
| | | | | | | | | | | | | | | |
| | December 31, 2013 | December 31, 2016 |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized (Losses) | | Fair Value | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| Certificates of deposit | $ | 2,185,000 |
| | $ | 1 |
| | $ | (122 | ) | | $ | 2,184,879 |
| $ | 1,300,000 |
| | $ | 38 |
| | $ | (15 | ) | | $ | 1,300,023 |
|
| Total | $ | 2,185,000 |
| | $ | 1 |
| | $ | (122 | ) | | $ | 2,184,879 |
| $ | 1,300,000 |
| | $ | 38 |
| | $ | (15 | ) | | $ | 1,300,023 |
|
All securities outstanding with gross unrealized losses at December 31, 2014 have been2017 and 2016 were in a continuous unrealized loss position for less than 12 months.
Table 5.2 - Available-for-Sale Securities by Contractual Maturity (in thousands)
| | | | December 31, 2014 | | December 31, 2013 | December 31, 2017 | | December 31, 2016 |
| Year of Maturity | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
| Due in one year or less | $ | 1,350,001 |
| | $ | 1,349,977 |
| | $ | 2,185,000 |
| | $ | 2,184,879 |
| $ | 900,000 |
| | $ | 899,876 |
| | $ | 1,300,000 |
| | $ | 1,300,023 |
|
Table 5.3 - Interest Rate Payment Terms of Available-for-Sale Securities (in thousands)
| | | | December 31, 2014 | | December 31, 2013 | December 31, 2017 | | December 31, 2016 |
| Amortized cost of available-for-sale securities: | | | | | | |
| Fixed-rate | $ | 1,350,001 |
| | $ | 2,185,000 |
| $ | 900,000 |
| | $ | 1,300,000 |
|
Realized Gains and Losses. The FHLBankFHLB had no sales of securities out of its available-for-sale portfolio for the years ended December 31, 20142017, 20132016, or 2012.2015.
Note 6 - Held-to-Maturity Securities
Table 6.1 - Held-to-Maturity Securities by Major Security Types (in thousands)
| | | | December 31, 2014 | December 31, 2017 |
| | Amortized Cost (1) | | Gross Unrecognized Holding Gains | | Gross Unrecognized Holding (Losses) | | Fair Value | Amortized Cost (1) | | Gross Unrecognized Holding Gains | | Gross Unrecognized Holding Losses | | Fair Value |
| Non-mortgage-backed securities: | | | | | | | | | | | | | | |
Government-sponsored enterprises (GSE) (2) | $ | 26,099 |
| | $ | — |
| | $ | — |
| | $ | 26,099 |
| |
| U.S. Treasury obligations | | $ | 34,033 |
| | $ | — |
| | $ | (6 | ) | | $ | 34,027 |
|
| Total non-mortgage-backed securities | 26,099 |
| | — |
| | — |
| | 26,099 |
| 34,033 |
| | — |
| | (6 | ) | | 34,027 |
|
| Mortgage-backed securities: | | | | | | | | | | | | | | |
Other U.S. obligation single-family mortgage-backed securities (3) | 2,038,960 |
| | 10,021 |
| | (1,017 | ) | | 2,047,964 |
| |
GSE single-family mortgage-backed securities (4) | 12,647,212 |
| | 191,870 |
| | (118,819 | ) | | 12,720,263 |
| |
U.S. obligation single-family mortgage-backed securities | | 2,483,446 |
| | 1,974 |
| | (23,547 | ) | | 2,461,873 |
|
Government-sponsored enterprises (GSE) single-family mortgage-backed securities | | 6,703,367 |
| | 37,265 |
| | (138,960 | ) | | 6,601,672 |
|
| GSE multi-family mortgage-backed securities | | 5,584,124 |
| | 4,956 |
| | (4,323 | ) | | 5,584,757 |
|
| Total mortgage-backed securities | 14,686,172 |
| | 201,891 |
| | (119,836 | ) | | 14,768,227 |
| 14,770,937 |
| | 44,195 |
| | (166,830 | ) | | 14,648,302 |
|
| Total | $ | 14,712,271 |
| | $ | 201,891 |
| | $ | (119,836 | ) | | $ | 14,794,326 |
| $ | 14,804,970 |
| | $ | 44,195 |
| | $ | (166,836 | ) | | $ | 14,682,329 |
|
| | | | | | | | | | | | | | | |
| | December 31, 2013 | December 31, 2016 |
| | Amortized Cost (1) | | Gross Unrecognized Holding Gains | | Gross Unrecognized Holding (Losses) | | Fair Value | Amortized Cost (1) | | Gross Unrecognized Holding Gains | | Gross Unrecognized Holding Losses | | Fair Value |
| Non-mortgage-backed securities: | | | | | | | | | | | | | | |
GSE (2) | $ | 27,485 |
| | $ | 1 |
| | $ | — |
| | $ | 27,486 |
| |
| GSE | | $ | 31,279 |
| | $ | 1 |
| | $ | — |
| | $ | 31,280 |
|
| Total non-mortgage-backed securities | 27,485 |
| | 1 |
| | — |
| | 27,486 |
| 31,279 |
| | 1 |
| | — |
| | 31,280 |
|
| Mortgage-backed securities: | | | | | | | | | | | | | | |
Other U.S. obligation single-family mortgage-backed securities (3) | 1,909,099 |
| | 4,545 |
| | (26,396 | ) | | 1,887,248 |
| |
GSE single-family mortgage-backed securities (4) | 14,150,578 |
| | 141,962 |
| | (398,877 | ) | | 13,893,663 |
| |
U.S. obligation single-family mortgage-backed securities | | 3,183,219 |
| | 3,653 |
| | (23,151 | ) | | 3,163,721 |
|
| GSE single-family mortgage-backed securities | | 8,186,733 |
| | 36,161 |
| | (147,494 | ) | | 8,075,400 |
|
| GSE multi-family mortgage-backed securities | | 3,145,748 |
| | 988 |
| | (3,906 | ) | | 3,142,830 |
|
| Total mortgage-backed securities | 16,059,677 |
| | 146,507 |
| | (425,273 | ) | | 15,780,911 |
| 14,515,700 |
| | 40,802 |
| | (174,551 | ) | | 14,381,951 |
|
| Total | $ | 16,087,162 |
| | $ | 146,508 |
| | $ | (425,273 | ) | | $ | 15,808,397 |
| $ | 14,546,979 |
| | $ | 40,803 |
| | $ | (174,551 | ) | | $ | 14,413,231 |
|
| |
| (1) | Carrying value equals amortized cost. |
| |
(2) | Consists of debt securities issued and effectively guaranteed by Freddie Mac and/or Fannie Mae, which have the support of the U.S. government, although they are not obligations of the U.S. government. |
| |
(3) | Consists of Ginnie Mae mortgage-backed securities and/or mortgage-backed securities issued or guaranteed by the National Credit Union Administration (NCUA) and the U.S. government. |
| |
(4) | Consists of mortgage-backed securities issued and effectively guaranteed by Freddie Mac and/or Fannie Mae, which have the support of the U.S. government, although they are not obligations of the U.S. government. |
Table 6.2 - Net Purchased DiscountsPremiums Included in the Amortized Cost of Mortgage-backed Securities Classified as Held-to-Maturity (in thousands)
| | | | December 31, 2014 | | December 31, 2013 | December 31, 2017 | | December 31, 2016 |
| Premiums | $ | 24,473 |
| | $ | 32,458 |
| $ | 49,713 |
| | $ | 60,519 |
|
| Discounts | (51,357 | ) | | (58,658 | ) | (24,243 | ) | | (31,474 | ) |
| Net purchased discounts | $ | (26,884 | ) | | $ | (26,200 | ) | |
| Net purchased premiums | | $ | 25,470 |
| | $ | 29,045 |
|
Table 6.3 summarizes the held-to-maturity securities with unrealized losses, which are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position.
Table 6.3 - Held-to-Maturity Securities in a Continuous Unrealized Loss Position (in thousands)
| | | | December 31, 2014 | December 31, 2017 |
| | Less than 12 Months | | 12 Months or more | | Total | Less than 12 Months | | 12 Months or more | | Total |
| | Fair Value | | Gross Unrealized (Losses) | | Fair Value | | Gross Unrealized (Losses) | | Fair Value | | Gross Unrealized (Losses) | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
| Non-mortgage-backed securities: | | | | | | | | | | | | |
| U.S. Treasury obligations | | $ | 34,027 |
| | $ | (6 | ) | | $ | — |
| | $ | — |
| | $ | 34,027 |
| | $ | (6 | ) |
| Total non-mortgage-backed securities | | 34,027 |
|
| (6 | ) |
| — |
|
| — |
|
| 34,027 |
|
| (6 | ) |
| Mortgage-backed securities: | | | | | | | | | | | | | | | | | | | | | | |
Other U.S. obligation single-family mortgage-backed securities (1) | $ | — |
| | $ | — |
| | $ | 197,625 |
| | $ | (1,017 | ) | | $ | 197,625 |
| | $ | (1,017 | ) | |
GSE single-family mortgage-backed securities (2) | 631,907 |
| | (1,348 | ) | | 5,555,049 |
| | (117,471 | ) | | 6,186,956 |
| | (118,819 | ) | |
U.S. obligation single-family mortgage-backed securities | | 1,193,566 |
| | (10,455 | ) | | 657,209 |
| | (13,092 | ) | | 1,850,775 |
| | (23,547 | ) |
| GSE single-family mortgage-backed securities | | 1,169,590 |
| | (14,171 | ) | | 3,578,537 |
| | (124,789 | ) | | 4,748,127 |
| | (138,960 | ) |
| GSE multi-family mortgage-backed securities | | 1,133,452 |
| | (4,307 | ) | | 136,051 |
| | (16 | ) | | 1,269,503 |
| | (4,323 | ) |
| Total mortgage-backed securities | | 3,496,608 |
| | (28,933 | ) | | 4,371,797 |
| | (137,897 | ) | | 7,868,405 |
| | (166,830 | ) |
| Total | $ | 631,907 |
| | $ | (1,348 | ) | | $ | 5,752,674 |
| | $ | (118,488 | ) | | $ | 6,384,581 |
| | $ | (119,836 | ) | $ | 3,530,635 |
| | $ | (28,939 | ) | | $ | 4,371,797 |
| | $ | (137,897 | ) | | $ | 7,902,432 |
| | $ | (166,836 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2013 | December 31, 2016 |
| | Less than 12 Months | | 12 Months or more | | Total | Less than 12 Months | | 12 Months or more | | Total |
| | Fair Value | | Gross Unrealized (Losses) | | Fair Value | | Gross Unrealized (Losses) | | Fair Value | | Gross Unrealized (Losses) | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
| Mortgage-backed securities: | | | | | | | | | | | | | | | | | | | | | | |
Other U.S. obligation single-family mortgage-backed securities (1) | $ | 663,278 |
| | $ | (26,396 | ) | | $ | — |
| | $ | — |
| | $ | 663,278 |
| | $ | (26,396 | ) | |
GSE single-family mortgage-backed securities (2) | 8,817,132 |
| | (397,252 | ) | | 48,902 |
| | (1,625 | ) | | 8,866,034 |
| | (398,877 | ) | |
U.S. obligation single-family mortgage-backed securities | | $ | 2,151,584 |
| | $ | (23,151 | ) | | $ | — |
| | $ | — |
| | $ | 2,151,584 |
| | $ | (23,151 | ) |
| GSE single-family mortgage-backed securities | | 4,548,897 |
| | (90,119 | ) | | 1,193,241 |
| | (57,375 | ) | | 5,742,138 |
| | (147,494 | ) |
| GSE multi-family mortgage-backed securities | | 1,897,043 |
| | (3,906 | ) | | — |
| | — |
| | 1,897,043 |
| | (3,906 | ) |
| Total | $ | 9,480,410 |
| | $ | (423,648 | ) | | $ | 48,902 |
| | $ | (1,625 | ) | | $ | 9,529,312 |
| | $ | (425,273 | ) | $ | 8,597,524 |
| | $ | (117,176 | ) | | $ | 1,193,241 |
| | $ | (57,375 | ) | | $ | 9,790,765 |
| | $ | (174,551 | ) |
| |
(1) | Consists of Ginnie Mae mortgage-backed securities. |
| |
(2) | Consists of mortgage-backed securities issued and effectively guaranteed by Freddie Mac and/or Fannie Mae, which have the support of the U.S. government, although they are not obligations of the U.S. government. |
Table 6.4 - Held-to-Maturity Securities by Contractual Maturity (in thousands)
| | | | December 31, 2014 | | December 31, 2013 | December 31, 2017 | | December 31, 2016 |
| Year of Maturity | Amortized Cost (1) | | Fair Value | | Amortized Cost (1) | | Fair Value | Amortized Cost (1) | | Fair Value | | Amortized Cost (1) | | Fair Value |
| Non-mortgage-backed securities: | | | | | | | | | | | | | | |
| Due in 1 year or less | $ | 26,099 |
| | $ | 26,099 |
| | $ | 27,485 |
| | $ | 27,486 |
| $ | 34,033 |
| | $ | 34,027 |
| | $ | 31,279 |
| | $ | 31,280 |
|
| Due after 1 year through 5 years | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
|
| Due after 5 years through 10 years | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
|
| Due after 10 years | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
|
| Total non-mortgage-backed securities | 26,099 |
| | 26,099 |
| | 27,485 |
| | 27,486 |
| 34,033 |
| | 34,027 |
| | 31,279 |
| | 31,280 |
|
Mortgage-backed securities (2) | 14,686,172 |
| | 14,768,227 |
| | 16,059,677 |
| | 15,780,911 |
| 14,770,937 |
| | 14,648,302 |
| | 14,515,700 |
| | 14,381,951 |
|
| Total | $ | 14,712,271 |
| | $ | 14,794,326 |
| | $ | 16,087,162 |
| | $ | 15,808,397 |
| $ | 14,804,970 |
| | $ | 14,682,329 |
| | $ | 14,546,979 |
| | $ | 14,413,231 |
|
| |
| (1) | Carrying value equals amortized cost. |
| |
| (2) | Mortgage-backed securities are not presented by contractual maturity because their expected maturities will likely differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees. |
Table 6.5 - Interest Rate Payment Terms of Held-to-Maturity Securities (in thousands)
| | | | December 31, 2014 | | December 31, 2013 | December 31, 2017 | | December 31, 2016 |
| Amortized cost of non-mortgage-backed securities: | | | | | | |
| Fixed-rate | $ | 26,099 |
| | $ | 27,485 |
| $ | 34,033 |
| | $ | 31,279 |
|
| Total amortized cost of non-mortgage-backed securities | 26,099 |
| | 27,485 |
| 34,033 |
| | 31,279 |
|
| Amortized cost of mortgage-backed securities: | | | | | | |
| Fixed-rate | 12,091,591 |
| | 13,048,808 |
| 8,003,906 |
| | 9,706,072 |
|
| Variable-rate | 2,594,581 |
| | 3,010,869 |
| 6,767,031 |
| | 4,809,628 |
|
| Total amortized cost of mortgage-backed securities | 14,686,172 |
| | 16,059,677 |
| 14,770,937 |
| | 14,515,700 |
|
| Total | $ | 14,712,271 |
| | $ | 16,087,162 |
| $ | 14,804,970 |
| | $ | 14,546,979 |
|
Realized Gains and Losses. The FHLBankFHLB sold securities out of its held-to-maturity portfolio during the periodsperiod noted below in Table 6.6, each of which had less than 15 percent of the acquired principal outstanding at the time of the sale. These sales arewere considered maturities for the purposes of security classification.
Table 6.6 - Proceeds from Sale and Gains on Held-to-Maturity Securities (in thousands)
| | | | For the Years Ended December 31, | For the Years Ended December 31, |
| | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| Proceeds from sale of held-to-maturity securities | $ | — |
| | $ | — |
| | $ | 507,531 |
| $ | — |
| | $ | 852,199 |
| | $ | — |
|
| Gross gains from sale of held-to-maturity securities | — |
| | — |
| | 29,292 |
| — |
| | 38,763 |
| | — |
|
Note 7 - Other-Than-Temporary Impairment Analysis
The FHLBankFHLB evaluates any of its individual available-for-sale and held-to-maturity investment securities holdings in an unrealized loss position for other-than-temporary impairment on a quarterly basis.
For its other U.S. obligations and GSE investments (mortgage-backed securities and non-mortgage-backed securities), the FHLBankFHLB has determined that the strength of the issuers' guarantees through direct obligations or support from the U.S. government is sufficient to protect the FHLBankFHLB from losses based on current expectations. As a result, the FHLBankFHLB determined that, as of December 31, 20142017, all of the gross unrealized losses on these investments were temporary as the declines in market value of these securities were not attributable to credit quality. Furthermore, the FHLBankFHLB does not intend to sell the investments, and it is not more likely than not that the FHLBankFHLB will be required to sell the investments before recovery of their amortized cost bases. As a result, the FHLBankFHLB did not consider any of these investments to be other-than-temporarily impaired at December 31, 20142017.
The FHLBankFHLB also reviewed its available-for-sale securities that have experienced unrealized losses at December 31, 20142017 and determined that the unrealized losses were temporary, based on the creditworthiness of the issuers and the related collateral characteristics, and that the FHLBankFHLB will recover its entire amortized cost basis. Additionally, because the FHLBankFHLB does not intend to sell these securities, nor is it more likely than not that the FHLBankFHLB will be required to sell the securities before recovery, it did not consider the investments to be other-than-temporarily impaired at December 31, 2014.2017.
The FHLBankFHLB did not consider any of its investments to be other-than-temporarily impaired at December 31, 20132016.
Note 8 - Advances
The FHLBankFHLB offers a wide range of fixed- and variable-rate Advance products with different maturities, interest rates, payment characteristics and optionality. Fixed-rate Advances generally have maturities ranging from one day to 30 years. Variable-rate advances generally have maturities ranging from less than 30 days to 10 years, where the interest rates reset periodically at a fixed spread to the London Interbank Offered Rate (LIBOR) or other specified index. At December 31, 2014 and 2013, the FHLBank had Advances outstanding, including AHP Advances (see Note 14), at interest rates ranging from 0.00 percent to 9.20 percent. Advances with interest rates of 0.00 percent are AHP Advances. The following table presents Advance
redemptions by contractual maturity, including index-amortizing Advances, which are presented according to their predetermined amortization schedules.
Table 8.1 - Advance Redemption Terms (dollars in thousands)
| | | | | December 31, 2014 | | December 31, 2013 | December 31, 2017 | | December 31, 2016 |
| Redemption Term | | Amount | | Weighted Average Interest Rate | | Amount | | Weighted Average Interest Rate | Amount | | Weighted Average Interest Rate | | Amount | | Weighted Average Interest Rate |
| Overdrawn demand deposit accounts | | $ | — |
| | — | % | | $ | 150 |
| | 0.20 | % | $ | 1,302 |
| | 1.55 | % | | $ | — |
| | — | % |
| Due in 1 year or less | | 14,139,630 |
| | 0.40 |
| | 17,729,350 |
| | 0.42 |
| 40,473,141 |
| | 1.55 |
| | 23,129,060 |
| | 0.85 |
|
| Due after 1 year through 2 years | | 14,810,847 |
| | 0.54 |
| | 6,614,470 |
| | 0.63 |
| 15,655,118 |
| | 1.69 |
| | 21,503,138 |
| | 1.06 |
|
| Due after 2 years through 3 years | | 12,829,760 |
| | 0.69 |
| | 9,485,558 |
| | 0.64 |
| 6,537,170 |
| | 1.74 |
| | 14,292,353 |
| | 1.12 |
|
| Due after 3 years through 4 years | | 14,222,722 |
| | 0.60 |
| | 9,444,110 |
| | 0.81 |
| 1,980,655 |
| | 2.00 |
| | 5,322,050 |
| | 1.26 |
|
| Due after 4 years through 5 years | | 10,724,619 |
| | 0.54 |
| | 11,831,887 |
| | 0.61 |
| 893,283 |
| | 2.07 |
| | 963,105 |
| | 1.78 |
|
| Thereafter | | 3,570,929 |
| | 1.51 |
| | 9,987,245 |
| | 0.78 |
| 4,437,731 |
| | 2.17 |
| | 4,697,315 |
| | 1.75 |
|
| Total par value | | 70,298,507 |
| | 0.60 |
| | 65,092,770 |
| | 0.62 |
| 69,978,400 |
| | 1.66 |
| | 69,907,021 |
| | 1.07 |
|
| Commitment fees | | (699 | ) | | | | (750 | ) | | | (510 | ) | | | | (534 | ) | | |
| Discount on AHP Advances | | (12,110 | ) | | | | (14,953 | ) | | | |
| Discount on Affordable Housing Program (AHP) Advances | | (5,795 | ) | | | | (7,435 | ) | | |
| Premiums | | 3,058 |
| | | | 3,413 |
| | | 1,789 |
| | | | 2,061 |
| | |
| Discounts | | (12,572 | ) | | | | (14,104 | ) | | | (4,252 | ) | | | | (5,994 | ) | | |
| Hedging adjustments | | 129,390 |
| | | | 204,014 |
| | | (51,421 | ) | | | | (13,138 | ) | | |
| Fair value option valuation adjustments and accrued interest | | 42 |
| | | | — |
| | | 13 |
| | | | 93 |
| | |
| Total | | $ | 70,405,616 |
| | | | $ | 65,270,390 |
| | | $ | 69,918,224 |
| | | | $ | 69,882,074 |
| | |
The FHLBankFHLB offers certain fixed and variable-rate Advances to membersMembers that may be prepaid on specified dates (call dates) without incurring prepayment or termination fees (callable Advances). If the call option is exercised, replacement funding may be available.available to Members. Other Advances may only be prepaid subject to a prepayment fee paid to the FHLBankFHLB that makes the FHLBankFHLB financially indifferent to the prepayment of the Advance. At December 31, 2014 and 2013, the FHLBank had callable Advances (in thousands) of $15,098,357 and $10,072,203.
Table 8.2 - Advances by Year of Contractual Maturity or Next Call Date for Callable Advances (in thousands)
| | | Year of Contractual Maturity or Next Call Date | December 31, 2014 | | December 31, 2013 | December 31, 2017 | | December 31, 2016 |
| Overdrawn demand deposit accounts | $ | — |
| | $ | 150 |
| $ | 1,302 |
| | $ | — |
|
| Due in 1 year or less | 23,003,946 |
| | 25,109,451 |
| 46,390,733 |
| | 33,831,156 |
|
| Due after 1 year through 2 years | 12,159,384 |
| | 5,300,184 |
| 15,054,889 |
| | 15,901,805 |
|
| Due after 2 years through 3 years | 9,659,975 |
| | 7,149,237 |
| 3,768,534 |
| | 13,608,214 |
|
| Due after 3 years through 4 years | 12,295,893 |
| | 7,050,325 |
| 2,903,655 |
| | 2,982,425 |
|
| Due after 4 years through 5 years | 9,970,280 |
| | 10,877,078 |
| 506,557 |
| | 2,243,105 |
|
| Thereafter | 3,209,029 |
| | 9,606,345 |
| 1,352,730 |
| | 1,340,316 |
|
| Total par value | $ | 70,298,507 |
| | $ | 65,092,770 |
| $ | 69,978,400 |
| | $ | 69,907,021 |
|
The FHLBankFHLB also offers putable Advances. With a putable Advance, the FHLBankFHLB effectively purchases put options from the memberMember that allows the FHLBankFHLB to terminate the Advance at predetermined dates. The FHLBankFHLB normally would exercise its put option when interest rates increase relative to contractual rates. At December 31, 2014 and 2013, the FHLBank had putable Advances, excluding those where the related put options have expired, totaling (in thousands) $1,617,400 and $2,146,400.
Table 8.3 - Advances by Year of Contractual Maturity or Next Put/ConvertPut Date for Putable/ConvertiblePutable Advances (in thousands)
| | | Year of Contractual Maturity or Next Put/Convert Date | December 31, 2014 | | December 31, 2013 | |
| Year of Contractual Maturity or Next Put Date | | December 31, 2017 | | December 31, 2016 |
| Overdrawn demand deposit accounts | $ | — |
| | $ | 150 |
| $ | 1,302 |
| | $ | — |
|
| Due in 1 year or less | 15,753,030 |
| | 19,681,750 |
| 40,588,641 |
| | 23,499,560 |
|
| Due after 1 year through 2 years | 14,663,847 |
| | 6,424,970 |
| 15,649,618 |
| | 21,248,138 |
|
| Due after 2 years through 3 years | 12,115,860 |
| | 9,338,558 |
| 6,537,170 |
| | 14,286,853 |
|
| Due after 3 years through 4 years | 13,649,722 |
| | 8,582,710 |
| 1,980,655 |
| | 5,322,050 |
|
| Due after 4 years through 5 years | 10,715,119 |
| | 11,256,887 |
| 893,283 |
| | 963,105 |
|
| Thereafter | 3,400,929 |
| | 9,807,745 |
| 4,327,731 |
| | 4,587,315 |
|
| Total par value | $ | 70,298,507 |
| | $ | 65,092,770 |
| $ | 69,978,400 |
| | $ | 69,907,021 |
|
Table 8.4 - Advances by Interest Rate Payment Terms (in thousands)
| | | | December 31, 2014 | | December 31, 2013 | December 31, 2017 | | December 31, 2016 |
Fixed-rate (1) | | | | | | |
| Due in one year or less | $ | 8,638,946 |
| | $ | 6,706,181 |
| $ | 26,505,900 |
| | $ | 16,330,685 |
|
| Due after one year | 9,306,104 |
| | 8,774,636 |
| 10,109,877 |
| | 8,369,765 |
|
Total fixed-rate (1) | 17,945,050 |
| | 15,480,817 |
| 36,615,777 |
| | 24,700,450 |
|
Variable-rate (1) | | | | | | |
| Due in one year or less | 5,500,684 |
| | 10,580,389 |
| 13,968,543 |
| | 6,798,375 |
|
| Due after one year | 46,852,773 |
| | 39,031,564 |
| 19,394,080 |
| | 38,408,196 |
|
Total variable-rate (1) | 52,353,457 |
| | 49,611,953 |
| 33,362,623 |
| | 45,206,571 |
|
| Total par value | $ | 70,298,507 |
| | $ | 65,092,770 |
| $ | 69,978,400 |
| | $ | 69,907,021 |
|
| |
| (1) | Payment terms based on current interest rate terms, which reflect any option exercises or rate conversions that have occurred subsequent to the related Advance issuance. |
Credit Risk Exposure and Security Terms.Exposure. The FHLBank'sFHLB's potential credit risk from Advances is concentrated in commercial banks and insurance companies. The FHLBank'sFHLB's Advances outstanding that were greater than or equal to $1.0 billion per borrower were $56.6$54.8 billion (80.5(78.3 percent) and $51.6$55.5 billion (79.3(79.4 percent) at December 31, 20142017 and 2013,2016, respectively. These Advances were made to 612 and 9 borrowers (members(Members and former members)Members) at December 31, 20142017 and 2013.2016. See Note 10 for information related to the FHLBank'sFHLB's credit risk on Advances and allowance methodology for credit losses.
Table 8.5 - Borrowers Holding Five Percent or more of Total Advances, Including Any Known Affiliates that are Members of the FHLBankFHLB (dollars in millions)
| | | December 31, 2014 | | December 31, 2013 | |
| December 31, 2017 | | December 31, 2017 | | December 31, 2016 |
| | Principal | | % of Total | | Principal | | % of Total | Principal | | % of Total Par Value of Advances | | Principal | | % of Total Par Value of Advances |
| JPMorgan Chase Bank, N.A. | $ | 41,300 |
| | 59 | % | | JPMorgan Chase Bank, N.A. | $ | 41,700 |
| | 64 | % | $ | 23,950 |
| | 34 | % | | JPMorgan Chase Bank, N.A. | $ | 32,300 |
| | 46 | % |
| U.S. Bank, N.A. | 8,338 |
| | 12 |
| | U.S. Bank, N.A. | 4,584 |
| | 7 |
| 8,975 |
| | 13 |
| | U.S. Bank, N.A. | 8,563 |
| | 12 |
|
| Third Federal Savings and Loan Association | | 3,756 |
| | 5 |
| | Total | $ | 40,863 |
| | 58 | % |
| The Huntington National Bank | | 3,732 |
| | 5 |
| | |
|
| |
|
|
| Total | $ | 49,638 |
| | 71 | % | | Total | $ | 46,284 |
| | 71 | % | $ | 40,413 |
| | 57 | % | | | | |
Note 9 - Mortgage Loans Held for Portfolio
Total mortgage loans held for portfolio represent residential mortgage loans under the MPP that the FHLBank's membersFHLB's Members originate, credit enhance, and then sell to the FHLBank.FHLB. The FHLBankFHLB does not service any of these loans. The FHLBankFHLB plans to retain its existing portfolio of mortgage loans.
Table 9.1 - Mortgage Loans Held for Portfolio (in thousands) | | | | December 31, 2014 | | December 31, 2013 | December 31, 2017 | | December 31, 2016 |
| Unpaid principal balance: | | | | | | |
Fixed rate medium-term single-family mortgage loans (1) | $ | 1,393,525 |
| | $ | 1,482,345 |
| $ | 1,128,749 |
| | $ | 1,320,585 |
|
| Fixed rate long-term single-family mortgage loans | 5,402,479 |
| | 5,160,854 |
| 8,325,465 |
| | 7,605,088 |
|
| Total unpaid principal balance | 6,796,004 |
| | 6,643,199 |
| 9,454,214 |
| | 8,925,673 |
|
| Premiums | 179,540 |
| | 177,180 |
| 217,716 |
| | 211,058 |
|
| Discounts | (2,460 | ) | | (3,631 | ) | (3,173 | ) | | (3,740 | ) |
Hedging basis adjustments (2) | 16,518 |
| | 8,775 |
| 13,373 |
| | 16,869 |
|
| Total mortgage loans held for portfolio | $ | 6,989,602 |
| | $ | 6,825,523 |
| $ | 9,682,130 |
| | $ | 9,149,860 |
|
| |
| (1) | Medium-term is defined as a term of 15 years or less. |
| |
| (2) | Represents the unamortized balance of the mortgage purchase commitments' market values at the time of settlement. The market value of the commitment is included in the basis of the mortgage loan and amortized accordingly. |
Table 9.2 - Mortgage Loans Held for Portfolio by Collateral/Guarantee Type (in thousands) | | | | December 31, 2014 | | December 31, 2013 | December 31, 2017 | | December 31, 2016 |
| Unpaid principal balance: | | | | | | |
| Conventional mortgage loans | $ | 6,203,318 |
| | $ | 5,897,804 |
| $ | 9,129,003 |
| | $ | 8,534,542 |
|
| Federal Housing Administration (FHA) mortgage loans | 592,686 |
| | 745,395 |
| |
| FHA mortgage loans | | 325,211 |
| | 391,131 |
|
| Total unpaid principal balance | $ | 6,796,004 |
| | $ | 6,643,199 |
| $ | 9,454,214 |
| | $ | 8,925,673 |
|
For information related to the FHLBank'sFHLB's credit risk on mortgage loans and allowance for credit losses, see Note 10.10.
Table 9.3 - Members, Including Any Known Affiliates that are Members of the FHLBank,FHLB, and Former Members Selling Five Percent or more of Total Unpaid Principal (dollars in millions)
| | | | December 31, 2014 | | | December 31, 2013 | December 31, 2017 | | | December 31, 2016 |
| | Principal | | % of Total | | | Principal | | % of Total | Principal | | % of Total | | | Principal | | % of Total |
| Union Savings Bank | $ | 1,593 |
| | 23 | % | | Union Savings Bank | $ | 1,433 |
| | 22 | % | $ | 3,247 |
| | 34 | % | | Union Savings Bank | $ | 2,886 |
| | 32 | % |
| Guardian Savings Bank FSB | | 933 |
| | 10 |
| | Guardian Savings Bank FSB | 855 |
| | 10 |
|
PNC Bank, N.A.(1) | 1,074 |
| | 16 |
| | PNC Bank, N.A. (1) | 1,356 |
| | 20 |
| 516 |
| | 5 |
| | PNC Bank, N.A. (1) | 660 |
| | 7 |
|
| Guardian Savings Bank FSB | 406 |
| | 6 |
| |
|
| |
|
| |
Note 10 - Allowance for Credit Losses
The FHLBankFHLB has established an allowance methodology for each of the FHLBank'sFHLB's portfolio segments: credit products (Advances, Letters of Credit and other extensions of credit to members)Members); FHA mortgage loans held for portfolio; and conventional mortgage loans held for portfolio.
Credit productsProducts
The FHLBankFHLB manages its credit exposure to credit products through an integrated approach that includes establishing a credit limit for each borrower, includes an ongoing review of each borrower's financial condition, and is coupled with detailed collateral and lending policies to limit risk of loss while balancing borrowers' needs for a reliable source of funding. In addition, the FHLBankFHLB lends to eligible borrowers in accordance with federal statutes,law, including the FHLBank Act and Finance Agency regulations, which require the FHLBankFHLB to obtain sufficient collateral to fully secure credit products. The estimated value of the collateral required to secure each member'sMember's credit products is calculated by applying collateral discounts, or haircuts, to the value of the collateral. The FHLBankFHLB accepts certain investment securities, residential mortgage loans, deposits and other real estate related assets as collateral. In addition, community financial institutions are eligible to utilize expanded statutory collateral provisions for small business, agriculture loans and agriculturecommunity development loans. The FHLBank'sFHLB's capital stock owned by its memberMember borrowers is also pledged as collateral. Collateral arrangements and a member’sMember’s borrowing capacity vary based on the financial condition and
performance of the institution, the types of collateral pledged and the overall quality of those assets. The FHLBankFHLB can also require additional or substitute collateral to protect its security interest. Management of the FHLBankFHLB believes that these policies effectively manage the FHLBank'sFHLB's credit risk from credit products.
Members experiencing financial difficulties are subject to FHLBank-performedFHLB-performed “stress tests” of the impact of poorly performing assets on the member’sMember’s capital and loss reserve positions. Depending on the results of these tests and the level of overcollateralization,over-collateralization, a memberMember may be allowed to maintain pledged loan assets in its custody, may be required to deliver those loans into the custody of the FHLBankFHLB or its agent, and/or may be required to provide details on these loans to facilitate an estimate of their fair value. The FHLBankFHLB perfects its security interest in all pledged collateral. The FHLBank Act affords any security interest granted to the FHLBankFHLB by a memberMember priority over the claims or rights of any other party except for claims or rights of a third party that would be entitled to priority under otherwise applicable law and that are held by a bona fide purchaser for value or by a secured party holding a prior perfected security interest.
Using a risk-based approach, the FHLBankFHLB considers the payment status, collateralization levels, and borrower's financial condition to be indicators of credit quality for its credit products. At December 31, 20142017 and 2013,2016, the FHLBankFHLB had rights to collateral on a member-by-memberMember-by-Member basis with an estimated value in excess of its outstanding extensions of credit.
The FHLBankFHLB evaluates and makes changes to its collateral guidelines, as necessary, based on current market conditions. At December 31, 20142017 and 2013,2016, the FHLBankFHLB did not have any Advances that were past due, in non-accrual status or impaired. In addition, there were no troubled debt restructurings related to credit products of the FHLBankFHLB during 20142017 or 20132016.
The FHLBankFHLB has not experienced any credit losses on Advances since it was founded in 1932. Based upon the collateral held as security, its credit extension and collateral policies management's credit analysis and the repayment history on credit products, the FHLBankFHLB did not record any credit losses on credit products as of December 31, 20142017 or 2013.2016. Accordingly, the FHLBankFHLB did not record any allowance for credit losses on Advances.
At December 31, 20142017 and 2013, no2016, the FHLB did not record any liability to reflect an allowance for credit losses for off-balance sheet credit exposures was recorded.exposures. See Note 20 for additional information on the FHLBank'sFHLB's off-balance sheet credit exposure.
Mortgage Loans Held for Portfolio - FHA
The FHLBankFHLB invests in fixed-rate mortgage loans secured by one-to-four family residential properties insured by the FHA. AnyThe FHLB expects to recover any losses from such loans are expected to be recovered from the FHA. Any losses from these loans that are not recovered from the FHA would be due to a claim rejection by the FHA and, as such, would be recoverable from the selling participating financial institutions. Therefore, the FHLBankFHLB only has credit risk for these loans if the seller or servicer fails to pay for losses not covered by the FHA insurance. As a result, the FHLBankFHLB did not establish an allowance for credit losses on its FHA insured mortgage loans. Furthermore, due to the insurance, none of these mortgage loans have been placed on non-accrual status.
Mortgage Loans Held for Portfolio - Conventional Mortgage Purchase Program (MPP)
The FHLB determines the allowance for conventional loans is determined bythrough analyses that include consideration of various data observations such as past performance, current performance, loan portfolio characteristics, collateral-related characteristics, industry data, and prevailing economic conditions. The measurement of the allowance for credit losses consists of: (1) collectively evaluating homogeneous pools of residential mortgage loans; (2) reviewing specifically identified loans for impairment; and (3) considering other relevant qualitative factors.
Collectively Evaluated Mortgage Loans. The credit risk analysis of conventional loans evaluated collectively for impairment considers historical delinquency migration, applies estimated loss severities, and incorporates the associated credit enhancements in order to determine the FHLBank'sFHLB's best estimate of probable incurred losses at the reporting date. The FHLB performs the credit risk analysis of all conventional mortgage loans is performed at the individual Master Commitment Contract level to properly determine the credit enhancements available to recover losses on loans under each individual Master Commitment Contract. The Master Commitment Contract is an agreement with a memberMember in which the memberMember agrees to make everya best efforts attempt to sell a specific dollar amount of loans to the FHLBankFHLB generally over a one-year period. Migration analysis is a methodology for determining, through the FHLBank'sFHLB's experience over a historical period, the rate of default on loans. The FHLBankFHLB applies migration analysis to loans based on payment status categories such as current, 30, 60, and 90 days past due. The FHLBankFHLB then estimates based on historical experience, how many loans in these categories may migrate to a loss realization event and applies a current loss severity to estimate losses. The estimated losses are then reduced by the probable cash flows resulting from available credit enhancements. Any credit enhancement cash flows that are projected and assessed as not probable of receipt do not reduce estimated losses.
Individually Evaluated Mortgage Loans. Conventional mortgage loans that are considered troubled debt restructurings are specifically identified for purposes of calculating the allowance for credit losses. The FHLBankFHLB measures impairment of these specifically identified loans by either estimating the present value of expected cash flows, estimating the loan's observable market price, or estimating the fair value of the collateral if the loan is collateral dependent. SpecificallyThe FHLB removes specifically identified loans evaluated for impairment are removed from the collectively evaluated mortgage loan population.
Qualitative Factors. The FHLBankFHLB also assesses other qualitative factors in its estimation of loan losses for the collectively evaluated population. This amount represents a subjective management judgment, based on facts and circumstances that exist as of the reporting date, that is intended to cover other incurred losses that may not otherwise be captured in the methodology described above.
Rollforward of Allowance for Credit Losses on Mortgage Loans. The following tables present a rollforward of the allowance for credit losses on conventional mortgage loans as well as the recorded investment in mortgage loans by impairment methodology. The recorded investment in a loan is the unpaid principal balance of the loan adjusted for accrued interest, unamortized premiums or discounts, hedging basis adjustments and direct write-downs. The recorded investment is not net of any allowance.
Table 10.1 - Rollforward of Allowance for Credit Losses on Conventional Mortgage Loans (in thousands)
| | | | For the Years Ended December 31, | For the Years Ended December 31, |
| | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| Balance, beginning of period | $ | 7,233 |
| | $ | 17,907 |
| | $ | 20,750 |
| $ | 1,142 |
| | $ | 1,686 |
| | $ | 4,919 |
|
| Charge-offs | (1,814 | ) | | (3,224 | ) | | (4,302 | ) | |
| (Reversal) provision for credit losses | (500 | ) | | (7,450 | ) | | 1,459 |
| |
| Net charge offs | | (452 | ) | | (544 | ) | | (3,233 | ) |
| Provision for credit losses | | 500 |
| | — |
| | — |
|
| Balance, end of period | $ | 4,919 |
| | $ | 7,233 |
| | $ | 17,907 |
| $ | 1,190 |
| | $ | 1,142 |
| | $ | 1,686 |
|
Table 10.2 - Allowance for Credit Losses and Recorded Investment on Conventional Mortgage Loans by Impairment Methodology (in thousands)
| | | | December 31, 2014 | | December 31, 2013 | December 31, 2017 | | December 31, 2016 |
| Allowance for credit losses, end of period: | | | | |
| Allowance for credit losses: | | | | |
| Collectively evaluated for impairment | $ | 4,766 |
| | $ | 7,159 |
| $ | 1,190 |
| | $ | 1,142 |
|
| Individually evaluated for impairment | 153 |
| | 74 |
| — |
| | — |
|
| Total | $ | 4,919 |
| | $ | 7,233 |
| |
| Recorded investment, end of period: | | | | |
| Total allowance for credit losses | | $ | 1,190 |
| | $ | 1,142 |
|
| Recorded investment: | | | | |
| Collectively evaluated for impairment | $ | 6,402,994 |
| | $ | 6,082,636 |
| $ | 9,373,393 |
| | $ | 8,772,681 |
|
| Individually evaluated for impairment | 8,639 |
| | 7,799 |
| 10,109 |
| | 9,889 |
|
| Total recorded investment | $ | 6,411,633 |
| | $ | 6,090,435 |
| $ | 9,383,502 |
| | $ | 8,782,570 |
|
Credit Enhancements. The conventional mortgage loans under the MPP are supported by some combination of credit enhancements (primary mortgage insurance (PMI), supplemental mortgage insurance (SMI) and the Lender Risk Account (LRA), including pooled LRA for those membersMembers participating in an aggregated MPP pool). The amount of credit enhancements needed to protect the FHLBankFHLB against credit losses is determined through use of a third-party default model. These credit enhancements apply after a homeowner's equity is exhausted. Beginning in February 2011, the FHLBankFHLB discontinued the use of SMI for all new loan purchases and replaced it with expanded use of the LRA. The LRA is funded by the FHLBankFHLB as a portion of the purchase proceeds to cover expected losses. The LRA is recorded in other liabilities in the Statements of Condition. Excess funds over required balances are distributed to the memberMember in accordance with a step-down schedule that is established upon execution of a Master Commitment Contract, subject to performance of the related loan pool. The LRA established for a pool of loans is limited to only covering losses of that specific pool of loans.
Table 10.3 - Changes in the LRA (in thousands) | | | | For the Years Ended December 31, | For the Years Ended December 31, |
| | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| LRA at beginning of year | $ | 115,236 |
| | $ | 102,680 |
| | $ | 68,684 |
| $ | 187,684 |
| | $ | 158,010 |
| | $ | 129,213 |
|
| Additions | 18,947 |
| | 18,331 |
| | 39,111 |
| 20,677 |
| | 34,338 |
| | 33,100 |
|
| Claims | (2,075 | ) | | (4,118 | ) | | (3,409 | ) | (506 | ) | | (885 | ) | | (1,747 | ) |
| Scheduled distributions | (2,895 | ) | | (1,657 | ) | | (1,706 | ) | (7,110 | ) | | (3,779 | ) | | (2,556 | ) |
| LRA at end of period | $ | 129,213 |
| | $ | 115,236 |
| | $ | 102,680 |
| $ | 200,745 |
| | $ | 187,684 |
| | $ | 158,010 |
|
Credit Quality Indicators. Key credit quality indicators for mortgage loans include the migration of past due loans, non-accrual loans, and loans in process of foreclosure.foreclosure, and non-accrual loans. The table below summarizes the FHLBank'sFHLB's key credit quality indicators for mortgage loans.
Table 10.4 - Recorded Investment in Delinquent Mortgage Loans (dollars in thousands)
| | | | December 31, 2014 | December 31, 2017 |
| | Conventional MPP Loans | | FHA Loans | | Total | Conventional MPP Loans | | FHA Loans | | Total |
| Past due 30-59 days delinquent | $ | 49,053 |
| | $ | 42,744 |
| | $ | 91,797 |
| $ | 36,662 |
| | $ | 20,992 |
| | $ | 57,654 |
|
| Past due 60-89 days delinquent | 13,597 |
| | 12,881 |
| | 26,478 |
| 8,040 |
| | 6,974 |
| | 15,014 |
|
| Past due 90 days or more delinquent | 42,991 |
| | 25,045 |
| | 68,036 |
| 16,702 |
| | 10,484 |
| | 27,186 |
|
| Total past due | 105,641 |
| | 80,670 |
| | 186,311 |
| 61,404 |
| | 38,450 |
| | 99,854 |
|
| Total current mortgage loans | 6,305,992 |
| | 522,042 |
| | 6,828,034 |
| 9,322,098 |
| | 291,371 |
| | 9,613,469 |
|
| Total mortgage loans | $ | 6,411,633 |
| | $ | 602,712 |
| | $ | 7,014,345 |
| $ | 9,383,502 |
| | $ | 329,821 |
| | $ | 9,713,323 |
|
| Other delinquency statistics: | | | | | | | | | | |
In process of foreclosure, included above (1) | $ | 34,854 |
| | $ | 11,687 |
| | $ | 46,541 |
| $ | 10,039 |
| | $ | 4,767 |
| | $ | 14,806 |
|
Serious delinquency rate (2) | 0.68 | % | | 4.27 | % | | 0.99 | % | 0.19 | % | | 3.19 | % | | 0.29 | % |
Past due 90 days or more still accruing interest (3) | $ | 41,857 |
| | $ | 25,045 |
| | $ | 66,902 |
| $ | 15,431 |
| | $ | 10,484 |
| | $ | 25,915 |
|
| Loans on non-accrual status, included above | $ | 3,574 |
| | $ | — |
| | $ | 3,574 |
| $ | 2,713 |
| | $ | — |
| | $ | 2,713 |
|
| | | | | | | | | | | |
| | December 31, 2013 | December 31, 2016 |
| | Conventional MPP Loans | | FHA Loans | | Total | Conventional MPP Loans | | FHA Loans | | Total |
| Past due 30-59 days delinquent | $ | 48,619 |
| | $ | 53,305 |
| | $ | 101,924 |
| $ | 39,409 |
| | $ | 23,206 |
| | $ | 62,615 |
|
| Past due 60-89 days delinquent | 11,971 |
| | 18,963 |
| | 30,934 |
| 9,350 |
| | 8,275 |
| | 17,625 |
|
| Past due 90 days or more delinquent | 57,934 |
| | 32,942 |
| | 90,876 |
| 21,773 |
| | 14,054 |
| | 35,827 |
|
| Total past due | 118,524 |
| | 105,210 |
| | 223,734 |
| 70,532 |
| | 45,535 |
| | 116,067 |
|
| Total current mortgage loans | 5,971,911 |
| | 654,399 |
| | 6,626,310 |
| 8,712,038 |
| | 351,299 |
| | 9,063,337 |
|
| Total mortgage loans | $ | 6,090,435 |
| | $ | 759,609 |
| | $ | 6,850,044 |
| $ | 8,782,570 |
| | $ | 396,834 |
| | $ | 9,179,404 |
|
| Other delinquency statistics: | | | | | | | | | | |
In process of foreclosure, included above (1) | $ | 46,285 |
| | $ | 18,595 |
| | $ | 64,880 |
| $ | 15,412 |
| | $ | 5,841 |
| | $ | 21,253 |
|
Serious delinquency rate (2) | 0.96 | % | | 4.41 | % | | 1.34 | % | 0.26 | % | | 3.59 | % | | 0.40 | % |
Past due 90 days or more still accruing interest (3) | $ | 57,543 |
| | $ | 32,942 |
| | $ | 90,485 |
| $ | 19,408 |
| | $ | 14,054 |
| | $ | 33,462 |
|
| Loans on non-accrual status, included above | $ | 3,077 |
| | $ | — |
| | $ | 3,077 |
| $ | 3,908 |
| | $ | — |
| | $ | 3,908 |
|
| |
| (1) | Includes loans where the decision of foreclosure or a similar alternative such as pursuit of deed-in-lieu has been reported. Loans in process of foreclosure are included in past due or current loans dependent on their delinquency status. |
| |
| (2) | Loans that are 90 days or more past due or in the process of foreclosure (including past due or current loans in the process of foreclosure) expressed as a percentage of the total loan portfolio class recorded investment amount. |
| |
| (3) | Each conventional loan past due 90 days or more still accruing interest is on a schedule/scheduled monthly settlement basis and contains one or more credit enhancements. Loans that are well secured and in the process of collection as a result of remaining credit enhancements and schedule/scheduled settlement are not placed on non-accrual status. |
The FHLBankFHLB did not have any real estate owned at December 31, 20142017 or 2016.
Individually Evaluated Impaired Loans.Table 10.52013 presents the recorded investment, unpaid principal balance, and related allowance associated with loans individually evaluated for investment..
Table 10.5 - Individually Evaluated Impaired Loan Statistics by Product Class Level (in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
| Conventional MPP loans | Recorded Investment | | Unpaid Principal Balance | | Related Allowance | | Recorded Investment | | Unpaid Principal Balance | | Related Allowance |
With no related allowance | $ | 10,109 |
| | $ | 9,912 |
| | $ | — |
| | $ | 9,889 |
| | $ | 9,708 |
| | $ | — |
|
| With an allowance | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total | $ | 10,109 |
| | $ | 9,912 |
| | $ | — |
| | $ | 9,889 |
| | $ | 9,708 |
| | $ | — |
|
Table 10.6 - Average Recorded Investment of Individually Evaluated Impaired Loans and Related Interest Income Recognized (in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Individually impaired loans | Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized |
| Conventional MPP Loans | $ | 8,950 |
| | $ | 418 |
| | $ | 9,440 |
| | $ | 466 |
| | $ | 8,433 |
| | $ | 438 |
|
Troubled Debt Restructurings. A troubled debt restructuring is considered to have occurred when a concession is granted to a borrower for economic or legal reasons related to the borrower's financial difficulties and that concession would not have been considered otherwise. The FHLBank'sFHLB's troubled debt restructurings primarily involve loans where an agreement permits the recapitalization of past due amounts up to the original loan amount and certain loans discharged in Chapter 7 bankruptcy. The FHLBank had 53 and 42 modified loans considered troubled debt restructurings at December 31, 2014 and 2013, respectively.
A loan considered a troubled debt restructuring is individually evaluated for impairment when determining its related allowance for credit losses. Credit loss is measured by factoring inestimating expected cash shortfalls (i.e., loss severity rate) incurred as of the reporting date.
Table 10.5 - Recorded Investment in Troubled Debt Restructurings (in thousands)
|
| | | | | | | |
| Troubled debt restructurings | December 31, 2014 | | December 31, 2013 |
| Conventional MPP Loans | $ | 8,639 |
| | $ | 7,799 |
|
Due to the minimal change in terms of modified loans (i.e., no principal forgiven), the FHLBank's pre-modification recorded investment was not materially different than the post-modificationThe FHLB's recorded investment in troubled debt restructurings.
Certain conventional MPPmodified loans that were modified within the previous 12 months and considered troubled debt restructurings experienced a payment default as noted in the table below. A borrower is considered to have defaulted on awas (in thousands) $10,109 and $9,889 at December 31, 2017 and 2016, respectively. The amount of troubled debt restructuring ifrestructurings is not considered material to the borrower's contractually due principalFHLB's financial condition, results of operations, or interest is 60 days or more past due at any time during the periods presented.
Table 10.6 - Recorded Investment of Financing Receivables Modified within the Previous 12 Months and Considered Troubled Debt Restructurings that Subsequently Defaulted (in thousands)cash flows.
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| Defaulted troubled debt restructurings | 2014 | | 2013 | | 2012 |
| Conventional MPP Loans | $ | 671 |
| | $ | 793 |
| | $ | — |
|
Modified loans that subsequently default may recognize a higher probability of loss when calculating the allowance for credit losses.
Individually Evaluated Impaired Loans. At December 31, 2014 and 2013, only certain conventional MPP loans individually evaluated for impairment required an allowance for credit losses. Table 10.7 presents the recorded investment, unpaid principal balance, and related allowance associated with these loans.
Table 10.7 - Individually Evaluated Impaired Loan Statistics by Product Class Level (in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2014 | | December 31, 2013 |
| Conventional MPP loans | Recorded Investment | | Unpaid Principal Balance | | Related Allowance | | Recorded Investment | | Unpaid Principal Balance | | Related Allowance |
With no related allowance | $ | 5,297 |
| | $ | 5,165 |
| | $ | — |
| | $ | 4,959 |
| | $ | 4,828 |
| | $ | — |
|
| With an allowance | 3,342 |
| | 3,293 |
| | 153 |
| | 2,840 |
| | 2,801 |
| | 74 |
|
| Total | $ | 8,639 |
| | $ | 8,458 |
| | $ | 153 |
| | $ | 7,799 |
| | $ | 7,629 |
| | $ | 74 |
|
Table 10.8 - Average Recorded Investment of Individually Evaluated Impaired Loans and Related Interest Income Recognized (in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2014 | | 2013 | | 2012 |
| Individually impaired loans | Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized |
| Conventional MPP Loans | $ | 8,029 |
| | $ | 417 |
| | $ | 6,615 |
| | $ | 348 |
| | $ | 4,331 |
| | $ | 228 |
|
Note 11 - Derivatives and Hedging Activities
Nature of Business Activity
The FHLBankFHLB is exposed to interest rate risk primarily from the effect of interest rate changes on its interest-earning assets and on the funding sourcesinterest-bearing liabilities that finance these assets. The goal of the FHLBank'sFHLB's interest-rate risk management strategy is not to eliminate interest-rate risk, but to manage it within appropriate limits. To mitigate the risk of loss, the FHLBankFHLB has established policies and procedures, which include guidelines on the amount of exposure to interest rate changes it is willing to accept. In addition, the FHLBankFHLB monitors the risk to its interest income, net interest margin and average maturity of interest-earning assets and funding sources.interest-bearing liabilities.
The FHLBankFHLB transacts its derivatives with large banks and major broker-dealers. Some of these banks and broker-dealers or their affiliates buy, sell, and distribute Consolidated Obligations. Derivative transactions may be either executed with a counterparty (bilateral(uncleared derivatives) or cleared through a Futures Commission Merchant (i.e., clearing agent), with a Derivative Clearing Organization (cleared derivatives).
Once a derivative transaction has been accepted for clearing by a Derivative Clearing Organization (Clearinghouse), the derivative transaction is novated and the executing counterparty is replaced with the Clearinghouse. The FHLB is not a derivative dealer and does not trade derivatives for short-term profit.
Consistent with Finance Agency regulations, the FHLBankFHLB enters into derivatives to manage the interest rate risk exposures inherent in otherwise unhedged assets and funding positions, to achieve the FHLBank'sFHLB's risk management objectives and to act as an intermediary between its membersMembers and counterparties. The use of derivatives is an integral part of the FHLBank'sFHLB's financial management strategy. However, Finance Agency regulations and the FHLBank'sFHLB's financial management policy prohibit trading in, or the speculative use of, derivative instruments and limit credit risk arising from them.
The most common ways in which the FHLBankFHLB uses derivatives are to:
| |
| ▪ | reduce the interest rate sensitivity and repricing gaps of assets and liabilities; |
| |
▪ | manage embedded options in assets and liabilities; |
| |
▪ | reduce funding costs by combining a derivative with a Consolidated Obligation Bond, as the cost of a combined funding structure can be lower than the cost of a comparable Consolidated Obligation Bond; |
| |
| ▪ | preserve a favorable interest rate spread between the yield of an asset (e.g., an Advance) and the cost of the related liability (e.g., the Consolidated Obligation Bond used to fund the Advance); without |
| |
| ▪ | manage embedded options in assets and liabilities; |
| |
| ▪ | reduce funding costs by combining a derivative with a Consolidated Obligation Bond, as the usecost of derivatives, this interest rate spread coulda combined funding structure can be reduced or eliminated whenlower than the cost of a change in the interest rate on the Advance does not match a change in the interest rate on thecomparable Consolidated Obligation Bond; and |
| |
| ▪ | protect the value of existing asset or liability positions. |
Types of Derivatives
The FHLBank may enter into interest rate swaps (including callable and putable swaps), swaptions, interest rate cap and floor agreements, calls, puts, futures, and forward contracts to manage its exposure to changes in interest rates.FHLB primarily uses the following derivative instruments:
Interest rate swaps - An interest rate swap is an agreement between two entities to exchange cash flows in the future. The agreement sets the dates on which the cash flows will be paidexchanged and the manner in which the cash flows will be calculated. One of the simplest forms of an interest rate swap involves the promise by one party to pay cash flows equivalent to the interest on a notional principal amount at a predetermined fixed rate for a given period of time. In return for this promise, this party receives cash flows equivalent to the interest on the same notional principal amount at a variable-rate index for the same period of time. The variable-rate transacted by the FHLBankFHLB in its derivatives is LIBOR.
Swaptions - A swaption is an option on a swap that gives the buyer the right to enter into a specified interest rate swap at a certain time in the future. The FHLB may enter into both payer swaptions and receiver swaptions. A payer swaption is the option to make fixed interest payments at a later date and a receiver swaption is the option to receive fixed interest payments at a later date.
Application of Interest Rate SwapsDerivatives
The FHLBank generally uses derivatives as fair value hedges of underlying financial instruments. However, because the FHLBank uses interest rate swaps when they are considered to be the most cost-effective alternative to achieve the FHLBank's financial and risk management objectives, it may enter into interest rate swaps that do not necessarily qualify for hedge accounting (economic hedges). The FHLBank re-evaluates its hedging strategies from time to time and may change the hedging techniques it uses or adopt new strategies.
Types of Hedged Items
The FHLBankFHLB documents at inception all relationships between derivatives designated as hedging instruments and the hedged items, its risk management objectives and strategies for undertaking various hedge transactions, and its method of assessing effectiveness. This process includes linking all derivatives that are designated as fair value hedges to assets and liabilities on the Statements of Condition.
The FHLBank also formally assesses (both atFHLB may use certain derivatives as fair value hedges of associated financial instruments. However, because the hedge's inceptionFHLB uses derivatives when they are considered to be the most cost-effective alternative to achieve the FHLB's financial and at least quarterly) whether therisk management objectives, it may enter into derivatives that are used indo not necessarily qualify for hedge accounting (economic hedges). The FHLB re-evaluates its hedging transactions have been effective in offsetting changes instrategies from time to time and may change the fair valuehedging techniques it uses or adopt new strategies.
Types of the hedged items and whether those derivatives may be expected to remain effective in future periods. The FHLBank currently uses regression analyses to assess the effectiveness of its hedges.Hedged Items
The types of assets and liabilities currently hedged with derivatives are:
Investments - The interest rate and prepayment risks associated with the FHLBank'sFHLB's investment securities are managed through a combination of debt issuance and, possibly, derivatives. The FHLBankFHLB may manage the prepayment and interest rate risksrisk by funding investment securities with Consolidated Obligations that have call features or by hedging the prepayment risk with caps or floors, callable swaps or swaptions. The FHLB may also purchase swaptions to minimize the prepayment risk embedded in certain investments. Although these derivatives are valid economic hedges against the prepayment risk of the investments, they are not specifically linked to individual investments and therefore do not receive fair value hedge accounting. These derivatives are marked-to-market through earnings.
Advances - The FHLBankFHLB offers a wide arrayrange of fixed- and variable-rate Advance structures to meet members' funding needs. These Advances may haveproducts with different maturities, up to 30 years with variable or fixedinterest rates, and may include early termination features or options. The repricingpayment characteristics, and optionality embedded in certain Advances may create interest-rate risk.optionality. The FHLBankFHLB may use derivatives to adjustmanage the repricing and/or option characteristics of Advances in order to more closely match the characteristics of the FHLBank'sFHLB's funding liabilities. In general, whenever a memberMember executes a fixed-rate Advance or a variable-rate Advance with embedded options, the FHLBank willFHLB may simultaneously execute a derivative with terms that offset the terms and embedded options if any, in the Advance. For example, the FHLBankFHLB may hedge a fixed-rate Advance with an interest rate swap where the FHLBankFHLB pays a fixed-rate coupon and receives a floating-rate coupon,variable-rate, effectively converting the fixed-rate Advance to a floating-ratevariable-rate Advance. These types of hedges are typically treated as fair value hedges.
When issuing a putable Advance, the FHLBankFHLB effectively purchases a put option from the memberMember that allows the FHLBankFHLB to put or extinguish the fixed-rate Advance, which the FHLBankFHLB normally would exercise when interest rates increase. The FHLBankFHLB may hedge these Advances by entering into a cancelable derivative.
Mortgage Loans - The FHLBankFHLB invests in fixed-rate mortgage loans. The prepayment options embedded in these mortgage loans can result in extensions or contractions in the expected repayment of these investments, depending on changes in actual and estimated prepayment speeds. The FHLBankFHLB may manage the interest rate and prepayment risks associated with mortgagesmortgage loans through a combination of debt issuance and derivatives. The FHLBankFHLB issues both callable and noncallable debt and prepayment linked Consolidated Obligations to achieve cash flow patterns and liability durations similar to those expected on the mortgage loans. The FHLBank is also permittedFHLB may purchase swaptions to useminimize the prepayment risk embedded in mortgage loans. Although these derivatives to matchare valid economic hedges against the expected prepayment characteristicsrisk of the mortgages, althoughloans, they are not specifically linked to date it hasindividual loans and therefore do not done so.receive fair value hedge accounting. These derivatives are marked-to-market through earnings.
Consolidated Obligations - The FHLBank entersFHLB may enter into derivatives to hedge the interest rate risk associated with its specific debt issuances. The FHLBankFHLB manages the risk arising from changing market prices and volatility of a Consolidated Obligation by matching the cash inflow on a derivative with the cash outflow on the Consolidated Obligation.
For instance, in a typical transaction,example, fixed-rate Consolidated Obligations are issued by one or more FHLBanks, and the FHLBankFHLB may simultaneously entersenter into a matching interest rate swap in which the counterparty pays fixed cash flows to the FHLBankFHLB designed to mirror in timing and amount the cash outflows the FHLBankFHLB pays on the Consolidated Obligation. The FHLBankFHLB pays a variable cash flow that closely matches the interest payments it receives on short-term or variable-rate Advances, typically 3-month LIBOR. These transactions are treated as fair value hedges.
This strategy of issuing BondsConsolidated Obligations while simultaneously entering into derivatives enables the FHLBankFHLB to offer a wider range of attractively priced Advances to its membersMembers and may allow the FHLBankFHLB to reduce its funding costs. The continued
attractiveness of such debt depends on yield relationships between the BondFHLB's Consolidated Obligations and the derivative markets. If conditions in these markets change, the FHLBankFHLB may alter the types or terms of the Bonds that it issues. By acting in both the capital and the
swap markets, the FHLBank may raise funds at lower costs than through the issuance of simple fixed- or variable-rate Consolidated Obligations in the capital markets alone.Obligations.
Firm Commitments - Certain mortgage loan purchase commitments, such as mortgage delivery commitments, are considered derivatives. The FHLBankFHLB may hedge these commitments by selling to-be-announced (TBA)TBA mortgage-backed securities for forward settlement. A TBA represents a forward contract for the sale of mortgage-backed securities at a future agreed upon date for an established price. The mortgage loan purchase commitment and the TBA used in the firm commitment hedging strategy (economic hedge) are recordedtreated as a derivative asset or derivative liability at fair value, with changes in fair value recognized in the current periodan economic hedge and are marked-to-market through earnings. When the mortgage loan purchase commitment derivative settles, the current market value of the commitment is included in the basis of the mortgage loan and amortized accordingly.
Financial Statement Effect and Additional Financial Information
The notional amount of derivatives serves as a factor in determining periodic interest payments or cash flows received and paid. The notional amount reflects the FHLBanks'FHLB's involvement in the various classes of financial instruments and represents neither the actual amounts exchanged nor the overall exposure of the FHLBankFHLB to credit and market risk; the overall risk is much smaller. The risks of derivatives only can be measured meaningfully on a portfolio basis that takes into account the counterparties, the types of derivatives, the items being hedged and any offsets between the derivatives and the items being hedged.
Table 11.1 summarizes the notional amount, fair value of derivative instruments including(excluding fair value adjustments related to variation margin on settled daily contracts), and total derivative assets and liabilities. Total derivative assets and liabilities include the effect of netting adjustments, cash collateral and cash collateral.variation margin for daily settled contracts. For purposes of this disclosure, the derivative values include the fair value of derivatives and the related accrued interest.
Table 11.1 - Fair Value of Derivative Instruments (in thousands)
| | | | December 31, 2014 | December 31, 2017 |
| | Notional Amount of Derivatives | | Derivative Assets | | Derivative Liabilities | Notional Amount of Derivatives | | Derivative Assets | | Derivative Liabilities |
| Derivatives designated as fair value hedging instruments: | | | | | | | | | | |
| Interest rate swaps | $ | 4,301,547 |
| | $ | 19,826 |
| | $ | 138,150 |
| $ | 5,992,762 |
| | $ | 59,389 |
| | $ | 10,771 |
|
| Derivatives not designated as hedging instruments: | | | | | | | | | | |
| Interest rate swaps | 4,635,000 |
| | 900 |
| | 6,559 |
| 5,789,265 |
| | 1,040 |
| | 72,976 |
|
| Interest rate swaptions | | 2,316,000 |
| | 3,171 |
| | — |
|
| Forward rate agreements | 439,000 |
| | 6 |
| | 4,924 |
| 212,000 |
| | 27 |
| | 230 |
|
| Mortgage delivery commitments | 451,292 |
| | 3,799 |
| | 1 |
| 218,651 |
| | 453 |
| | 17 |
|
| Total derivatives not designated as hedging instruments | 5,525,292 |
| | 4,705 |
| | 11,484 |
| 8,535,916 |
| | 4,691 |
| | 73,223 |
|
| Total derivatives before netting and collateral adjustments | $ | 9,826,839 |
| | 24,531 |
| | 149,634 |
| |
Netting adjustments and cash collateral (1) | | | (9,832 | ) | | (85,867 | ) | |
| Total derivatives before adjustments | | $ | 14,528,678 |
| | 64,080 |
| | 83,994 |
|
Netting adjustments, cash collateral and variation margin for daily settled contracts (1) | | | | (3,385 | ) | | (81,101 | ) |
| Total derivative assets and total derivative liabilities | | | $ | 14,699 |
| | $ | 63,767 |
| | | $ | 60,695 |
| | $ | 2,893 |
|
| | | | | | | | | | | |
| | December 31, 2013 | December 31, 2016 |
| | Notional Amount of Derivatives | | Derivative Assets | | Derivative Liabilities | Notional Amount of Derivatives | | Derivative Assets | | Derivative Liabilities |
| Derivatives designated as fair value hedging instruments: | | | | | | | | | | |
| Interest rate swaps | $ | 4,517,340 |
| | $ | 36,061 |
| | $ | 215,691 |
| $ | 5,660,420 |
| | $ | 37,379 |
| | $ | 26,610 |
|
| Derivatives not designated as hedging instruments: | | | | | | | | | | |
| Interest rate swaps | 4,143,000 |
| | 2,928 |
| | 7,732 |
| 8,199,000 |
| | 2,135 |
| | 64,661 |
|
| Interest rate swaptions | | 2,346,000 |
| | 13,335 |
| | — |
|
| Forward rate agreements | 31,000 |
| | 454 |
| | — |
| 511,000 |
| | 681 |
| | 166 |
|
| Mortgage delivery commitments | 36,620 |
| | 2 |
| | 412 |
| 440,849 |
| | 319 |
| | 10,628 |
|
| Total derivatives not designated as hedging instruments | 4,210,620 |
| | 3,384 |
| | 8,144 |
| 11,496,849 |
| | 16,470 |
| | 75,455 |
|
| Total derivatives before netting and collateral adjustments | $ | 8,727,960 |
| | 39,445 |
| | 223,835 |
| |
| Total derivatives before adjustments | | $ | 17,157,269 |
| | 53,849 |
| | 102,065 |
|
Netting adjustments and cash collateral (1) | | | (36,204 | ) | | (126,069 | ) | | | 50,904 |
| | (84,191 | ) |
| Total derivative assets and total derivative liabilities | | | $ | 3,241 |
| | $ | 97,766 |
| | | $ | 104,753 |
| | $ | 17,874 |
|
| |
| (1) | Amounts represent the application of the netting requirements that allow the FHLBankFHLB to settle positive and negative positions, and also cash collateral and related accrued interest held or placed by the FHLBankFHLB with the same clearing agent and/or counterparty.counterparty, and effective January 3, 2017, includes fair value adjustments on derivatives for which variation margin is characterized as a daily settled contract. Cash collateral posted and related accrued interest was (in thousands) $78,755$64,079 and $109,288$180,169 at December 31, 20142017 and 2013.2016. Cash collateral received and related accrued interest was (in thousands) $2,720$60,794 and $19,423$45,074 at December 31, 20142017 and 2013.2016. Variation margin for daily settled contracts was (in thousands) $74,431 at December 31, 2017 and $0 at December 31, 2016. |
Table 11.2 presents the components of net (losses) gains on derivatives and hedging activities as presented in the Statements of Income.
Table 11.2 - Net (Losses) Gains on Derivatives and Hedging Activities (in thousands)
| | | | For the Years Ended December 31, | For the Years Ended December 31, |
| | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| Derivatives and hedged items in fair value hedging relationships: | | | | | | | | | | |
| Interest rate swaps | $ | 5,127 |
| | $ | 10,837 |
| | $ | 6,864 |
| $ | (60 | ) | | $ | 697 |
| | $ | 2,762 |
|
| Derivatives not designated as hedging instruments: | | | | | | | | | | |
| Economic hedges: | | | | | | | | | | |
| Interest rate swaps | 628 |
| | 7,456 |
| | 3,771 |
| (4,067 | ) | | (69,266 | ) | | 2,515 |
|
| Interest rate swaptions | | (17,016 | ) | | 6,229 |
| | (274 | ) |
| Forward rate agreements | (15,465 | ) | | (845 | ) | | (8,645 | ) | (6,054 | ) | | 2,794 |
| | (1,090 | ) |
| Net interest settlements | 706 |
| | 328 |
| | (2,378 | ) | (8,298 | ) | | 12,009 |
| | 6,623 |
|
| Mortgage delivery commitments | 15,631 |
| | (9,873 | ) | | 9,123 |
| 10,424 |
| | 106 |
| | 2,501 |
|
| Total net gains (losses) related to derivatives not designated as hedging instruments | 1,500 |
| | (2,934 | ) | | 1,871 |
| |
| Net gains on derivatives and hedging activities | $ | 6,627 |
| | $ | 7,903 |
| | $ | 8,735 |
| |
| Total net (losses) gains related to derivatives not designated as hedging instruments | | (25,011 | ) | | (48,128 | ) | | 10,275 |
|
Other (1) | | 607 |
| | — |
| | — |
|
| Net (losses) gains on derivatives and hedging activities | | $ | (24,464 | ) | | $ | (47,431 | ) | | $ | 13,037 |
|
| |
| (1) | Consists of price alignment amount on derivatives for which variation margin is characterized as a daily settled contract. |
Table 11.3 presents by type of hedged item, the gains (losses) on derivatives and the related hedged items in fair value hedging relationships and the impact of those derivatives on the FHLBank'sFHLB's net interest income.
Table 11.3 - Effect of Fair Value Hedge-Related Derivative Instruments (in thousands)
| | | | For the Years Ended December 31, | For the Years Ended December 31, |
| 2014 | Gain/(Loss) on Derivative | | Gain/(Loss) on Hedged Item | | Net Fair Value Hedge Ineffectiveness | | Effect of Derivatives on Net Interest Income(1) | |
| 2017 | | Gain/(Loss) on Derivative | | Gain/(Loss) on Hedged Item | | Net Fair Value Hedge Ineffectiveness | | Effect of Derivatives on Net Interest Income(1) |
| Hedged Item Type: | | | | | | | | | | | | | | |
| Advances | $ | 76,295 |
| | $ | (71,315 | ) | | $ | 4,980 |
| | $ | (91,232 | ) | $ | 35,570 |
| | $ | (36,152 | ) | | $ | (582 | ) | | $ | (17,907 | ) |
| Consolidated Bonds | (15,633 | ) | | 15,780 |
| | 147 |
| | 18,298 |
| 240 |
| | 282 |
| | 522 |
| | (1,101 | ) |
| Total | $ | 60,662 |
| | $ | (55,535 | ) | | $ | 5,127 |
| | $ | (72,934 | ) | $ | 35,810 |
| | $ | (35,870 | ) | | $ | (60 | ) | | $ | (19,008 | ) |
| 2013 | | | | | | | | |
| 2016 | | | | | | | | |
| Hedged Item Type: | | | | | | | | | | | | | | |
| Advances | $ | 156,025 |
| | $ | (145,843 | ) | | $ | 10,182 |
| | $ | (106,452 | ) | $ | 76,401 |
| | $ | (75,744 | ) | | $ | 657 |
| | $ | (59,560 | ) |
| Consolidated Bonds | (26,341 | ) | | 26,996 |
| | 655 |
| | 27,038 |
| (6,641 | ) | | 6,681 |
| | 40 |
| | 7,624 |
|
| Total | $ | 129,684 |
| | $ | (118,847 | ) | | $ | 10,837 |
| | $ | (79,414 | ) | $ | 69,760 |
| | $ | (69,063 | ) | | $ | 697 |
| | $ | (51,936 | ) |
| 2012 | | | | | | | | |
| 2015 | | | | | | | | |
| Hedged Item Type: | | | | | | | | | | | | | | |
| Advances | $ | 268,944 |
| | $ | (261,817 | ) | | $ | 7,127 |
| | $ | (244,836 | ) | $ | 62,657 |
| | $ | (60,453 | ) | | $ | 2,204 |
| | $ | (83,571 | ) |
| Consolidated Bonds | (8,666 | ) | | 8,403 |
| | (263 | ) | | 36,763 |
| (10,930 | ) | | 11,488 |
| | 558 |
| | 19,787 |
|
| Total | $ | 260,278 |
| | $ | (253,414 | ) | | $ | 6,864 |
| | $ | (208,073 | ) | $ | 51,727 |
| | $ | (48,965 | ) | | $ | 2,762 |
| | $ | (63,784 | ) |
| |
| (1) | TheFor fair value hedge relationships, the net effect of derivatives in fair value hedge relationships, on net interest income is included in the interest income or interest expense line item of the respective hedged item type. These amounts include the effect of net interest settlements attributable to designated fair value hedges but do not include (in thousands) $(3,310)$(2,131), $(3,022)$(2,908), and $(3,566) $(3,424)of (amortization)/accretion related to fair value hedging activities for the years ended December 31, 2014, 2013,2017, 2016 and 2012, respectively.2015. |
Offsetting of Derivative Assets and Derivative Liabilities
The FHLBank presents derivative instruments, related cash collateral, including initial and variation margin, received or pledged, and associated accrued interest, on a net basis by clearing agent and/or by counterparty when it has met the netting requirements.
Table 11.4 presents separately the fair value of derivative instruments meeting or not meeting netting requirements, including the related collateral received from or pledged to counterparties. At December 31, 2014 and 2013, the FHLBank did not receive or pledge any non-cash collateral. Any overcollateralization under an individual clearing agent and/or counterparty level is not included in the determination of the net unsecured amount.
Table 11.4 - Offsetting of Derivative Assets and Derivative Liabilities (in thousands) |
| | | | | | | |
| | December 31, 2014 |
| | Derivative Assets | | Derivative Liabilities |
| Derivative instruments meeting netting requirements: | | | |
| Gross recognized amount: | | | |
| Bilateral derivatives | $ | 19,585 |
| | $ | 141,352 |
|
| Cleared derivatives | 1,141 |
| | 3,357 |
|
| Total gross recognized amount | 20,726 |
| | 144,709 |
|
| Gross amounts of netting adjustments and cash collateral: | | | |
| Bilateral derivatives | (19,544 | ) | | (82,510 | ) |
| Cleared derivatives | 9,712 |
| | (3,357 | ) |
| Total gross amounts of netting adjustments and cash collateral | (9,832 | ) | | (85,867 | ) |
| Net amounts after netting adjustments and cash collateral: | | | |
| Bilateral derivatives | 41 |
| | 58,842 |
|
| Cleared derivatives | 10,853 |
| | — |
|
| Total net amounts after netting adjustments and cash collateral | 10,894 |
| | 58,842 |
|
Derivative instruments not meeting netting requirements(1): | | | |
| Bilateral derivatives | 3,805 |
| | 4,925 |
|
Total derivative instruments not meeting netting requirements(1) | 3,805 |
| | 4,925 |
|
| Total derivative assets and total derivative liabilities: | | | |
| ��Bilateral derivatives | 3,846 |
| | 63,767 |
|
| Cleared derivatives | 10,853 |
| | — |
|
| Total derivative assets and total derivative liabilities | $ | 14,699 |
| | $ | 63,767 |
|
| | | | |
| | December 31, 2013 |
| | Derivative Assets | | Derivative Liabilities |
| Bilateral derivative instruments meeting netting requirements: | | | |
| Gross recognized amount | $ | 38,989 |
| | $ | 223,423 |
|
| Gross amounts of netting adjustments and cash collateral | (36,204 | ) | | (126,069 | ) |
| Net amounts after netting adjustments and cash collateral | 2,785 |
| | 97,354 |
|
Derivative instruments not meeting netting requirements(1) | 456 |
| | 412 |
|
| Total derivative assets and total derivative liabilities | $ | 3,241 |
| | $ | 97,766 |
|
| |
(1) | Represents mortgage delivery commitments and forward rate agreements that are not subject to an enforceable netting agreement. |
Credit Risk on Derivatives
The FHLBankFHLB is subject to credit risk due to the risk of non-performance by counterparties to its derivative transactions, and manages credit risk through credit analysis, collateral requirements and adherence to the requirements set forth in its policies, U.S. Commodity Futures Trading Commission regulations, and Finance Agency regulations.
For bilateraluncleared derivatives, the
degree of credit risk depends on the extent to which master netting arrangements are included in these contracts to mitigate the risk. The FHLBankFHLB requires collateral agreements with collateral delivery thresholds on the majority of its bilateraluncleared derivatives.
For cleared derivatives, the Clearinghouse is the FHLBank'sFHLB's counterparty. The Clearinghouse notifies the clearing agent of the required initial and variation margin and the clearing agent in turn notifies the FHLBankFHLB. The FHLB utilizes two Clearinghouses for all cleared derivative transactions, LCH.Clearnet LLC and CME Clearing. Effective January 3, 2017, CME Clearing made certain amendments to its rulebook changing the legal characterization of the requiredvariation margin payments to be daily settlement payments, rather than collateral. Variation margin related to LCH.Clearnet LLC contracts continues to be presented as cash collateral through December 31, 2017. At both Clearinghouses, initial and variation margin.margin continues to be considered collateral. The requirement that the FHLBankFHLB post initial and variation margin through the clearing agent, to the Clearinghouse, exposes the FHLBankFHLB to credit risk if the clearing agent or the Clearinghouse fails to meet its obligations. The use of cleared derivatives is intended to mitigate credit risk exposure because a central counterparty is substituted for individual counterparties and collateral is posted daily through a clearing agent,collateral/payments for changes in the value of cleared derivatives.derivatives is posted daily through a clearing agent.
Certain of the FHLB's uncleared derivative contracts contain credit-risk-related contingent features that require the FHLB to post additional collateral with its counterparties if there is deterioration in the FHLB's credit ratings. The aggregate fair value of such uncleared derivatives in a net liability position (before cash collateral and related accrued interest) at December 31, 2017 was (in thousands) $2,260, for which the FHLB was not required to post any collateral. If the FHLB's credit ratings had been lowered to the next lower rating, the FHLB would not have been required to deliver any additional collateral at December 31, 2017.
For cleared derivatives, the Clearinghouse determines initial margin requirements and generally credit ratings are not factored into the initial margin. However, clearing agents may require additional initial margin to be posted based on credit considerations, including, but not limited to, credit rating downgrades. At December 31, 2017, the FHLB was not required to post additional initial margin by its clearing agents based on credit considerations.
Offsetting of Derivative Assets and Derivative Liabilities
The FHLBankFHLB presents derivative instruments, related cash collateral, including any initial and certain variation margin, received or pledged, and associated accrued interest, on a net basis by clearing agent and/or by counterparty when it has met the netting requirements.
The FHLB has analyzed the enforceability of offsetting rights incorporated in its cleared derivative transactions and determined that the exercise of those offsetting rights by a non-defaulting party under these transactions should be upheld under applicable law upon an event of default including bankruptcy, insolvency, or similar proceeding involving the Clearinghouse or the FHLBank'sFHLB's clearing agent, or both. Based on this analysis, the FHLBankFHLB presents a net derivative receivable or payable for all of its transactions through a particular clearing agent with a particular Clearinghouse.
Certain ofTable 11.4 presents separately the FHLBank's bilateral interest rate swap contracts contain provisions that require the FHLBank to post additional collateral with its counterparties if there is deterioration in the FHLBank's credit ratings. The aggregate fair value of all bilateral interest rate swaps with credit-risk-related contingent features that were in a liability position atderivative instruments meeting or not meeting netting requirements, including the related collateral received from or pledged to counterparties and variation margin for daily settled contracts. At December 31, 20142017 was (in thousands) $121,808, for whichand 2016, the FHLBank had posted collateral with a fair value of (in thousands) $62,966FHLB did not receive or pledge any non-cash collateral. Any over-collateralization under an individual clearing agent and/or counterparty level is not included in the normal coursedetermination of business.the net unsecured amount.
If oneTable 11.4 - Offsetting of the FHLBank's credit ratings had been lowered to the next lower rating that would have triggered additional collateral to be delivered, the FHLBank would have been required to deliver up to an additionalDerivative Assets and Derivative Liabilities (in thousands)$12,353 of collateral at fair value to its derivatives counterparties at December 31, 2014. |
| | | | | | | | | | | | | | | |
| | December 31, 2017 |
| | Derivative Instruments Meeting Netting Requirements
| | | | |
| | Gross Recognized Amount | | Gross Amounts of Netting Adjustments, Cash Collateral and Variation Margin for Daily Settled Contracts(1) | | Derivative Instruments Not Meeting Netting Requirements(2) | | Total Derivative Assets and Total Derivative Liabilities |
| Derivative Assets: | | | | | | | |
| Uncleared | $ | 5,239 |
| | $ | (5,215 | ) | | $ | 480 |
| | $ | 504 |
|
| Cleared | 58,361 |
| | 1,830 |
| | — |
| | 60,191 |
|
| Total |
| |
|
| |
|
| | $ | 60,695 |
|
| Derivative Liabilities: | | | | | | | |
| Uncleared | $ | 8,773 |
| | $ | (6,127 | ) | | $ | 247 |
| | $ | 2,893 |
|
| Cleared | 74,974 |
| | (74,974 | ) | | — |
| | — |
|
| Total |
| |
|
| |
|
| | $ | 2,893 |
|
| | | | | | | | |
| | December 31, 2016 |
| | Derivative Instruments Meeting Netting Requirements | | | | |
| | Gross Recognized Amount | | Gross Amounts of Netting Adjustments, Cash Collateral | | Derivative Instruments Not Meeting Netting Requirements(2) | | Total Derivative Assets and Total Derivative Liabilities |
| Derivative Assets: | | | | | | | |
| Uncleared | $ | 15,506 |
| | $ | (14,737 | ) | | $ | 1,000 |
| | $ | 1,769 |
|
| Cleared | 37,343 |
| | 65,641 |
| | — |
| | 102,984 |
|
| Total |
| |
| |
| | $ | 104,753 |
|
| Derivative Liabilities: | | | | | | | |
| Uncleared | $ | 21,378 |
| | $ | (14,298 | ) | | $ | 10,794 |
| | $ | 17,874 |
|
| Cleared | 69,893 |
| | (69,893 | ) | | — |
| | — |
|
| Total |
| |
| |
| | $ | 17,874 |
|
| |
| (1) | Variation margin for daily settled contracts was (in thousands) $74,431 at December 31, 2017. |
| |
| (2) | Represents mortgage delivery commitments and forward rate agreements that are not subject to an enforceable netting agreement. |
For cleared derivatives, the Clearinghouse determines initial margin requirements and generally credit ratings are not factored into the initial margin. However, clearing agents may require additional initial margin to be posted based on credit considerations, including, but not limited to, credit rating downgrades. At December 31, 2014, the FHLBank was not required to post additional initial margin by its clearing agents, based on credit considerations.
Note 12 - Deposits
The FHLBankFHLB offers demand and overnight deposits to membersMembers and qualifying nonmembers. In addition, the FHLBankFHLB offers short-term interest bearing deposit programs to members.Members, and in certain cases, qualifying nonmembers. A memberMember that services mortgage loans may deposit funds collected in connection with the mortgage loans at the FHLBank,FHLB, pending disbursement of such funds to the owners of the mortgage loans. The FHLBankFHLB classifies these items as other interest bearing deposits.
Certain financial institutions have agreed to maintain compensating balances in consideration for correspondent and other non-credit services. These balances are included in interest bearing deposits on the accompanying financial statements. The compensating balances required to be held by the FHLBankFHLB averaged (in thousands) $3,597,698$22,370 and $3,982,567$108,008 during 20142017 and 2013.2016.
Deposits classified as demand, overnight, and other pay interest based on a daily interest rate. Term deposits pay interest based on a fixed rate determined at the issuance of the deposit. The average interest raterates paid on interest bearing deposits was 0.030.68 percent, 0.16 percent, and 0.04 percent during 2014, 2013,2017, 2016, and 2012.2015.
Non-interest bearing deposits represent funds for which the FHLBankFHLB acts as a pass-through correspondent for memberMember institutions required to deposit reserves with the Federal Reserve Banks.
Table 12.1-12.1 - Deposits (in thousands)
| | | | December 31, 2014 | | December 31, 2013 | December 31, 2017 | | December 31, 2016 |
| Interest bearing: | | | | | | |
| Demand and overnight | $ | 624,446 |
| | $ | 796,039 |
| $ | 590,617 |
| | $ | 611,432 |
|
| Term | 99,600 |
| | 96,100 |
| 52,600 |
| | 149,350 |
|
| Other | 5,592 |
| | 5,872 |
| 5,509 |
| | 4,521 |
|
| Total interest bearing | 729,638 |
| | 898,011 |
| 648,726 |
| | 765,303 |
|
| | | | | |
| Non-interest bearing: | | | | | | |
| Other | 298 |
| | 15,884 |
| 1,805 |
| | 576 |
|
| Total non-interest bearing | 298 |
| | 15,884 |
| 1,805 |
| | 576 |
|
| Total deposits | $ | 729,936 |
| | $ | 913,895 |
| $ | 650,531 |
| | $ | 765,879 |
|
The aggregate amount of time deposits with a denomination of $250 thousand or more was (in thousands) $99,550$52,550 and $96,000$149,300 as of December 31, 20142017 and 2013,2016, respectively.
Note 13 - Consolidated Obligations
Consolidated Obligations consist of Consolidated Bonds and Discount Notes. The FHLBanks issue Consolidated Obligations through the Office of Finance as their agent. In connection with each debt issuance, each FHLBank specifies the amount of debt it wants issued on its behalf. The Office of Finance tracks the amount of debt issued on behalf of each FHLBank. In addition, the FHLBank records as a liability its specific portion of Consolidated Obligations for which it is the primary obligor.
The Finance Agency and the U.S. Secretary of the Treasury oversee the issuance of FHLBank debt through the Office of Finance. Consolidated Bonds aremay be issued primarily to raise short-, intermediate-, and long-term funds for the FHLBanks and are not subject to any statutory or regulatory limits on maturity. Consolidated Discount Notes are issued primarily to raise short-term funds and have original maturities up to one year. These notes generally sell at less than their face amount and are redeemed at par value when they mature.
Although the FHLBankFHLB is primarily liable for its portion of Consolidated Obligations, the FHLBankFHLB is also jointly and severally liable with the other 1110 FHLBanks for the payment of principal and interest on all Consolidated Obligations of each of the other FHLBanks. The Finance Agency, at its discretion, may require any FHLBank to make principal or interest payments due on any Consolidated Obligation whether or not the Consolidated Obligation represents a primary liability of such FHLBank. Although an FHLBank has never paid the principal or interest payments due on a Consolidated Obligation on behalf
of another FHLBank, if that event should occur, Finance Agency regulations provide that the paying FHLBank is entitled to reimbursement from the non-complying FHLBank that is primarily liable for thosethat Consolidated Obligation for any payments and other associated costs, including interest to be determined by the Finance Agency. If, however, the Finance Agency determines that the non-complying FHLBank is unable to satisfy its repayment obligations, the Finance Agency may allocate the outstanding liabilities of the non-complyingthat FHLBank among the remaining FHLBanks on a pro rata basis in proportion to each FHLBank's participation in all Consolidated Obligations outstanding or in any other manner it may determine to ensure that the FHLBanks operate in a safe and sound manner.
The par values of the 1211 FHLBanks' outstanding Consolidated Obligations were approximately $847.2$1,034.3 billion and $766.8$989.3 billion at December 31, 20142017 and 2013. Regulations2016. Finance Agency regulations require the FHLBankFHLB to maintain unpledged qualifying assets equal to its participation in the Consolidated Obligations outstanding. Qualifying assets are defined as cash; secured Advances; obligations of or fully guaranteed by the United States; obligations, participations, or other instruments of or issued by Fannie Mae or Ginnie Mae; mortgages, obligations, or other securities which are or ever have been sold by Freddie Mac under the FHLBank Act; and such securities as fiduciary and trust funds may invest in under the laws of the state in which the FHLBankFHLB is located. Any assets subject to a lien or pledge for the benefit of holders of any issue of Consolidated Obligations are treated as if they were free from lien or pledge for purposes of compliance with these regulations.
Table 13.1 - Consolidated Discount Notes Outstanding (dollars in thousands)
|
| | | | | | | | | | |
| | Book Value | | Par Value | | Weighted Average Interest Rate (1) |
| December 31, 2014 | $ | 41,232,127 |
| | $ | 41,238,122 |
| | 0.09 | % |
| December 31, 2013 | $ | 38,209,946 |
| | $ | 38,216,860 |
| | 0.09 | % |
|
| | | | | | | | | | |
| | Book Value | | Par Value | | Weighted Average Interest Rate (1) |
| December 31, 2017 | $ | 46,210,458 |
| | $ | 46,258,644 |
| | 1.23 | % |
| December 31, 2016 | $ | 44,689,662 |
| | $ | 44,710,521 |
| | 0.46 | % |
| |
| (1) | Represents an implied rate without consideration of concessions. |
Table 13.2 - Consolidated Bonds Outstanding by Contractual Maturity (dollars in thousands)
| | | | | December 31, 2014 | | December 31, 2013 | | December 31, 2017 | | December 31, 2016 |
| Year of Contractual Maturity | | Amount | | Weighted Average Interest Rate | | Amount | | Weighted Average Interest Rate | | Amount | | Weighted Average Interest Rate | | Amount | | Weighted Average Interest Rate |
| Due in 1 year or less | | $ | 32,477,000 |
| | 0.24 | % | | $ | 35,691,500 |
| | 0.34 | % | | $ | 28,940,265 |
| | 1.34 | % | | $ | 20,970,750 |
| | 0.87 | % |
| Due after 1 year through 2 years | | 6,918,000 |
| | 1.19 |
| | 2,802,000 |
| | 1.66 |
| | 5,841,800 |
| | 1.74 |
| | 12,811,000 |
| | 1.12 |
|
| Due after 2 years through 3 years | | 4,594,000 |
| | 1.56 |
| | 3,295,000 |
| | 2.12 |
| | 4,770,565 |
| | 1.89 |
| | 4,359,000 |
| | 1.81 |
|
| Due after 3 years through 4 years | | 4,245,000 |
| | 1.79 |
| | 3,689,000 |
| | 1.67 |
| | 6,017,000 |
| | 1.92 |
| | 3,566,000 |
| | 1.95 |
|
| Due after 4 years through 5 years | | 2,647,000 |
| | 2.08 |
| | 3,415,000 |
| | 1.86 |
| | 2,244,620 |
| | 2.24 |
| | 4,970,000 |
| | 1.87 |
|
| Thereafter | | 8,217,000 |
| | 2.79 |
| | 9,102,000 |
| | 2.66 |
| | 6,343,055 |
| | 2.72 |
| | 6,496,000 |
| | 2.65 |
|
| Index amortizing notes | | 25,297 |
| | 5.07 |
| | 32,746 |
| | 5.07 |
| |
| Total par value | | 59,123,297 |
| | 1.00 |
| | 58,027,246 |
| | 1.04 |
| | 54,157,305 |
| | 1.69 |
| | 53,172,750 |
| | 1.39 |
|
| Premiums | | 103,477 |
| | | | 123,820 |
| | | | 86,521 |
| | | | 84,275 |
| | |
| Discounts | | (25,161 | ) | | | | (22,781 | ) | | | | (30,669 | ) | | | | (32,804 | ) | | |
| Hedging adjustments | | 15,304 |
| | | | 31,084 |
| | | | (3,146 | ) | | | | (2,865 | ) | | |
Fair value option valuation adjustment and accrued interest | | (360 | ) | | | | 3,370 |
| | | | (46,950 | ) | | | | (30,490 | ) | | |
| Total | | $ | 59,216,557 |
| | | | $ | 58,162,739 |
| | | | $ | 54,163,061 |
| | | | $ | 53,190,866 |
| | |
Consolidated ObligationsBonds outstanding were issued with either fixed-rate coupon payment terms or variable-rate coupon payment terms that may use a variety of indices for interest rate resets, includingare indexed primarily to LIBOR. To meet the expected specific needs of certain investors in Consolidated Obligations, both fixed-rate Bonds and variable-rate Bonds may contain features that result in complex coupon payment terms and call options. When these Consolidated ObligationsBonds are issued, the FHLBankFHLB may enter into derivatives containing features that offset the terms and embedded options, if any, of the Consolidated Obligations.Bonds.
Table 13.3 - Consolidated Bonds Outstanding by Call Features (in thousands)
| | | | December 31, 2014 | | December 31, 2013 | December 31, 2017 | | December 31, 2016 |
| Par value of Consolidated Bonds: | | | | | | |
| Non-callable | $ | 49,976,297 |
| | $ | 46,670,246 |
| $ | 47,155,305 |
| | $ | 46,007,750 |
|
| Callable | 9,147,000 |
| | 11,357,000 |
| 7,002,000 |
| | 7,165,000 |
|
| Total par value | $ | 59,123,297 |
| | $ | 58,027,246 |
| $ | 54,157,305 |
| | $ | 53,172,750 |
|
Table 13.4 - Consolidated Bonds Outstanding by Contractual Maturity or Next Call Date (in thousands)
| | | Year of Contractual Maturity or Next Call Date | | December 31, 2014 | | December 31, 2013 | | December 31, 2017 | | December 31, 2016 |
| Due in 1 year or less | | $ | 40,774,000 |
| | $ | 41,493,500 |
| | $ | 35,029,265 |
| | $ | 26,489,750 |
|
| Due after 1 year through 2 years | | 5,413,000 |
| | 3,827,000 |
| | 5,369,800 |
| | 12,006,000 |
|
| Due after 2 years through 3 years | | 3,317,000 |
| | 2,915,000 |
| | 3,715,565 |
| | 3,894,000 |
|
| Due after 3 years through 4 years | | 2,685,000 |
| | 2,427,000 |
| | 4,388,000 |
| | 2,805,000 |
|
| Due after 4 years through 5 years | | 1,992,000 |
| | 2,095,000 |
| | 1,823,620 |
| | 3,964,000 |
|
| Thereafter | | 4,917,000 |
| | 5,237,000 |
| | 3,831,055 |
| | 4,014,000 |
|
| Index amortizing notes | | 25,297 |
| | 32,746 |
| |
| Total par value | | $ | 59,123,297 |
| | $ | 58,027,246 |
| | $ | 54,157,305 |
| | $ | 53,172,750 |
|
Consolidated Bonds, beyond having fixed-rate or variable-rate interest-rate payment terms, may also have a step-up interest-rate payment type. Step-up bonds pay interest at increasing fixed rates for specified intervals over the life of the Consolidated Bond. These Consolidated Bonds generally contain provisions enabling the FHLBankFHLB to call the Consolidated Bonds at its option on the step-up dates.
Table 13.5 - Consolidated Bonds by Interest-rate Payment Type (in thousands)
| | | | December 31, 2014 | | December 31, 2013 | December 31, 2017 | | December 31, 2016 |
| Par value of Consolidated Bonds: | | | | | | |
| Fixed-rate | $ | 31,363,297 |
| | $ | 29,362,246 |
| $ | 33,252,305 |
| | $ | 34,682,750 |
|
| Variable-rate | 27,610,000 |
| | 28,650,000 |
| 20,895,000 |
| | 18,290,000 |
|
| Step-up | 150,000 |
| | 15,000 |
| 10,000 |
| | 200,000 |
|
| Total par value | $ | 59,123,297 |
| | $ | 58,027,246 |
| $ | 54,157,305 |
| | $ | 53,172,750 |
|
Concessions on Consolidated Obligations. Unamortized concessions included in other assets were (in thousands) $14,184 and $15,947 at December 31, 2014 and 2013. The amortization of these concessions is included in Consolidated Obligation interest expense and totaled (in thousands) $7,380, $7,026, and $21,704 for the years ended December 31, 2014, 2013, and 2012, respectively.
Note 14 - Affordable Housing Program (AHP)
The FHLBank Act requires each FHLBank to establish an AHP. Each FHLBank provides subsidies in the form of direct grants and below-market interest rate Advances to membersMembers who use the funds to assist in the purchase, construction, or rehabilitation of housing for very low-, low-, and moderate-income households. Annually, the FHLBanks must set aside for the AHP the greater of $100 million or 10 percent of net earnings. For purposes of the AHP calculation, net earnings is defined as net income before assessments, plus interest expense related to mandatorily redeemable capital stock. The FHLBankFHLB accrues AHP expense monthly based on its net earnings. The FHLBankFHLB reduces the AHP liability as membersMembers use subsidies.
If the FHLBankFHLB experienced a net loss during a quarter, but still had net earnings for the year, the FHLBank'sFHLB's obligation to the AHP would be calculated based on the FHLBank'sFHLB's year-to-date net earnings. If the FHLBankFHLB had net earnings in subsequent quarters, it would be required to contribute additional amounts to meet its calculated annual obligation. If the FHLBankFHLB experienced a net loss for a full year, the FHLBankFHLB would have no obligation to the AHP for the year, because each FHLBank's required annual AHP contribution is limited to its annual net earnings. If the aggregate 10 percent calculation described above was less than $100 million for the FHLBanks, each FHLBank would be required to contribute a pro rata amount sufficient to
assure that the aggregate contributions of the FHLBanks equaled $100 million. The pro ration would be made on the basis of an FHLBank's income in relation to the income of all FHLBanks for the previous year.
There was no shortfall, as described above, in 2014, 20132017, 2016, or 2012.2015. If an FHLBank finds that its required AHP obligations are contributing to its financial instability, it may apply to the Finance Agency for a temporary suspension of its contributions. The FHLBankFHLB has never made such an application. The FHLBankFHLB had outstanding principal in AHP-related Advances (in thousands) of $102,465$60,515 and $116,503$69,569 at December 31, 20142017 and 2013.2016.
Table 14.1 - Analysis of the FHLBank's AHP Liability (in thousands)
| | | | 2014 | | 2013 | 2017 | | 2016 |
| Balance at beginning of year | $ | 93,789 |
| | $ | 82,672 |
| $ | 104,883 |
| | $ | 107,352 |
|
| Assessments (current year additions) | 27,605 |
| | 29,620 |
| 35,120 |
| | 30,189 |
|
| Subsidy uses, net | (23,291 | ) | | (18,503 | ) | (30,126 | ) | | (32,658 | ) |
| Balance at end of year | $ | 98,103 |
| | $ | 93,789 |
| $ | 109,877 |
| | $ | 104,883 |
|
Note 15 - Capital
The FHLBankFHLB is subject to three capital requirements under its Capital Plan and the Finance Agency rules and regulations. Regulatory capital does not include accumulated other comprehensive income, but does include mandatorily redeemable capital stock.
| |
| 1. | Risk-based capital. The FHLBankFHLB must maintain at all times permanent capital, defined as Class B stock and retained earnings, in an amount at least equal to the sum of its credit risk, market risk, and operations risk capital requirements, all of which are calculated in accordance with the rules and regulations of the Finance Agency. |
| |
| 2. | Total regulatory capital. The FHLBank is required toFHLB must maintain at all times a total regulatory capital-to-assets ratio of at least four percent. Total regulatory capital is the sum of permanent capital, Class A stock, any general loss allowance, if consistent with GAAP and not established for specific assets, and other amounts from sources determined by the Finance Agency as available to absorb losses. |
| |
| 3. | Leverage capital. The FHLBank is required toFHLB must maintain at all times a leverage capital-to-assets ratio of at least five percent. Leverage capital is defined as the sum of permanent capital weighted 1.5 times and all other capital without a weighting factor. |
The Finance Agency may require the FHLBankFHLB to maintain greater permanent capital than is required based on Finance Agency rules and regulations.
At December 31, 20142017 and 2013,2016, the FHLBankFHLB was in compliance with each of these capital requirements.
Table 15.1 - Capital Requirements (dollars in thousands)
| | | | December 31, 2014 | | December 31, 2013 | December 31, 2017 | | December 31, 2016 |
| | Minimum Requirement | | Actual | | Minimum Requirement | | Actual | Minimum Requirement | | Actual | | Minimum Requirement | | Actual |
| Risk-based capital | $ | 481,835 |
| | $ | 5,018,567 |
| | $ | 547,455 |
| | $ | 5,435,002 |
| $ | 886,033 |
| | $ | 5,211,204 |
| | $ | 579,629 |
| | $ | 5,026,133 |
|
| Capital-to-assets ratio (regulatory) | 4.00 | % | | 4.71 | % | | 4.00 | % | | 5.27 | % | 4.00 | % | | 4.88 | % | | 4.00 | % | | 4.80 | % |
| Regulatory capital | $ | 4,265,617 |
| | $ | 5,018,567 |
| | $ | 4,127,228 |
| | $ | 5,435,002 |
| $ | 4,275,809 |
| | $ | 5,211,204 |
| | $ | 4,185,411 |
| | $ | 5,026,133 |
|
| Leverage capital-to-assets ratio (regulatory) | 5.00 | % | | 7.06 | % | | 5.00 | % | | 7.90 | % | 5.00 | % | | 7.31 | % | | 5.00 | % | | 7.21 | % |
| Leverage capital | $ | 5,332,021 |
| | $ | 7,527,851 |
| | $ | 5,159,035 |
| | $ | 8,152,503 |
| $ | 5,344,761 |
| | $ | 7,816,806 |
| | $ | 5,231,764 |
| | $ | 7,539,200 |
|
The FHLBankFHLB currently offers only Class B stock, which is issued and redeemed at a par value of $100 per share. Class B stock may be issued to meet membership and activity stock purchase requirements, to pay dividends, and to pay interest on mandatorily redeemable capital stock. Membership stock is required to become a memberMember of and maintain membership in the FHLBank.FHLB. The membership stock requirement is based upon a percentage of the member'sMember's total assets, currently determined
within a declining range from 0.150.12 percent to 0.03 percent of each member'sMember's total assets, with a current minimum of $1 thousand and a current maximum of $25 million for each member.Member. In addition to membership stock, a memberMember may be required to hold activity stock to capitalize its Mission Asset Activity with the FHLBank.FHLB.
Mission Asset Activity includes Advances, certain funds and rate Advance commitments, and MPP activity that occurred after implementation of the Capital Plan on December 30, 2002. Members must maintain an activity stock balance at least equal to the minimum activity allocation percentage, which currently is zero percent for the MPP and two percent for all other Mission
Asset Activity. If a memberMember owns more than the maximum activity allocation percentage, which currently is four percent of all Mission Asset Activity, the additional stock is that member'sMember's excess stock. The FHLBank'sFHLB's unrestricted excess stock is defined as total Class B stock minus membership stock, activity stock calculated at the maximum allocation percentage, shares reserved for exclusive use after a stock dividend, and shares subject to redemption and withdrawal notices. The FHLBank'sFHLB's excess stock may normally be used by membersMembers to support a portion of their activity stock requirement as long as those membersMembers maintain at least their minimum activity stock allocation percentage.
A memberMember may request redemption of all or part of its Class B stock or may withdraw from membership by giving five years' advance written notice. When the FHLBankFHLB repurchases capital stock, it must first repurchase shares for which a redemption or withdrawal notice's five-year redemption period or withdrawal period has expired. Since its Capital Plan was implemented, the FHLBankFHLB has repurchased, at its discretion, all memberMember shares subject to outstanding redemption notices prior to the expiration of the five-year redemption period.
The Gramm-Leach-Bliley Act of 1999 (GLB Act) made membership in the FHLBanks voluntary for all members. Any memberMember that has withdrawn from membership may not be readmitted to membership in any FHLBank until five years from the divestiture date for all capital stock that was held as a condition of membership, unless the institution has canceled its notice of withdrawal prior to the divestiture date. This restriction does not apply if the memberMember is transferring its membership from one FHLBank to another on an uninterrupted basis.
In accordance with the FHLBank Act, eachEach class of FHLBankFHLB stock is considered putable by the memberMember and the FHLBankFHLB may repurchase, in its sole discretion, any member'sMember's stock investments that exceed the required minimum amount. However, there are significant statutory and regulatory restrictions on the obligation to redeem, or right to repurchase, the outstanding stock. As a result, whether or not a memberMember may have its capital stock in the FHLBankFHLB repurchased (at the FHLBank'sFHLB's discretion at any time before the end of the redemption period) or redeemed (at a member'sMember's request, completed at the end of a redemption period) will depend on whether the FHLBankFHLB is in compliance with those restrictions.
The FHLBank'sFHLB's retained earnings are owned proportionately by the current holders of Class B stock. The holders' interest in the retained earnings is realized at the time the FHLBankFHLB periodically declares dividends or at such time as the FHLBankFHLB is liquidated. The FHLBank'sFHLB's Board of Directors may declare and pay dividends in either cash or capital stock, assuming the FHLBankFHLB is in compliance with Finance Agency rules and regulations.
Restricted Retained Earnings. The Joint Capital Enhancement Agreement (Capital Agreement) is intended to enhance the capital position of each FHLBank. The Capital Agreement provides that each FHLBank contributes 20 percent of its net income each quarter to a separate restricted retained earnings account until the balance of that account equals at least one percent of that FHLBank's average balance of outstanding Consolidated Obligations for the previous quarter. These restricted retained earnings are not available to pay dividends but are available to absorb unexpected losses, if any, that the FHLBank may experience. At December 31, 20142017 and 20132016 the FHLBankFHLB had (in thousands) $159,694322,999 and $110,843260,285 in restricted retained earnings.
Mandatorily Redeemable Capital Stock. The FHLBankFHLB is a cooperative whose members and former membersMembers own allmost of the FHLBank'sFHLB's capital stock. Former Members (including certain nonmembers that own the FHLB's capital stock as a result of a merger or acquisition, relocation, charter termination, or involuntary termination of an FHLB Member) own the remaining capital stock to support business transactions still carried on the FHLB's Statements of Condition. Member shares cannot be purchased or sold except between the FHLBankFHLB and its membersMembers at its $100 per share par value, as mandated by the FHLBank'sFHLB's Capital Plan. The FHLBankFHLB reclassifies stock subject to redemption from equity to liability upon expiration of the “grace period” after a memberMember submits a written redemption request or withdrawal notice, or when the memberMember attains nonmember status by merger or acquisition, relocation, charter termination, or involuntary termination of membership. A memberMember may cancel or revoke its written redemption request or its withdrawal notice prior to the end of the five-year redemption period. Under the FHLBank'sFHLB's Capital Plan, there is a five calendar day “grace period” for revocation of a redemption request and a 30 calendar day “grace period” for revocation of a withdrawal notice during which the memberMember may cancel the redemption request or withdrawal notice without a penalty or fee. The cancellation fee after the “grace period” is currently two percent of the requested amount in the first year and increases one percent a year until it reaches a maximum of six percent in the fifth year. The cancellation fee can be waived by the FHLBank'sFHLB's Board of Directors for a bona fide business purpose.
Stock subject to a redemption or withdrawal notice that is within the “grace period” continues to be considered equity because there is no penalty or fee to retract these notices. Expiration of the “grace period” triggers the reclassification from equity to a liability (mandatorily redeemable capital stock) at fair value because after the “grace period” the penalty to retract these notices is considered substantive. If a memberMember cancels its written notice of redemption or notice of withdrawal, the FHLBankFHLB will reclassify mandatorily redeemable capital stock from a liability to equity. Dividends related to capital stock classified as a liability are accrued at the expected dividend rate and reported as interest expense in the Statements of Income. For the years
ended December 31, 2014, 2013,2017, 2016, and 20122015 dividends on mandatorily redeemable capital stock in the amount (in thousands) of $4,190, $5,506$2,514, $3,517 and $11,690$2,432 were recorded as interest expense.
Table 15.2 - Mandatorily Redeemable Capital Stock Roll Forward (in thousands)
| | | | 2014 | 2013 | 2012 | 2017 | 2016 | 2015 |
| Balance, beginning of year | $ | 115,853 |
| $ | 210,828 |
| $ | 274,781 |
| $ | 34,782 |
| $ | 37,895 |
| $ | 62,963 |
|
Capital stock subject to mandatory redemption reclassified from equity | 17,110 |
| 33,457 |
| 40,126 |
| 270,458 |
| 363,839 |
| 28,919 |
|
Redemption (or other reduction) of mandatorily redeemable capital stock | (70,000 | ) | (128,432 | ) | (104,079 | ) | (275,209 | ) | (366,952 | ) | (53,987 | ) |
| Balance, end of year | $ | 62,963 |
| $ | 115,853 |
| $ | 210,828 |
| $ | 30,031 |
| $ | 34,782 |
| $ | 37,895 |
|
The number of stockholders holding the mandatorily redeemable capital stock was 1126, 28 and 15 at December 31, 2014, 2013,2017, 2016, and 2012.2015.
As of December 31, 20142017 there were no membersMembers or former membersMembers that had requested redemptions of capital stock whose stock had not been reclassified as mandatorily redeemable capital stock because the “grace periods” had not yet expired on these requests.
Table 15.3 shows the amount of mandatorily redeemable capital stock by contractual year of redemption. The year of redemption in the table is the end of the five-year redemption period. Consistent with the Capital Plan currently in effect, the FHLBankFHLB is not required to redeem membership stock until five years after either (i) the membership is terminated or (ii) the FHLBankFHLB receives notice of withdrawal. The FHLBankFHLB is not required to redeem activity-based stock until the later of the expiration of the notice of redemption or until the activity to which the capital stock relates no longer remains outstanding. If activity-based stock becomes excess stock as a result of an activity no longer remaining outstanding, the FHLBankFHLB may repurchase such shares, in its sole discretion, subject to the statutory and regulatory restrictions on capital stock redemption.
The GLB Act states that an FHLBank may repurchase, in its sole discretion, any member's stock investments that exceed the required minimum amount.
Table 15.3 - Mandatorily Redeemable Capital Stock by Contractual Year of Redemption (in thousands)
| | | Contractual Year of Redemption | | December 31, 2014 | | December 31, 2013 | | December 31, 2017 | | December 31, 2016 |
| Year 1 | | $ | 130 |
| | $ | 114,531 |
| | $ | 20 |
| | $ | — |
|
| Year 2 | | — |
| | 130 |
| | 1,811 |
| | 29 |
|
| Year 3 | | — |
| | — |
| | 439 |
| | 2,264 |
|
| Year 4 | | 55 |
| | — |
| | 2,912 |
| | 865 |
|
| Year 5 | | 2,278 |
| | 71 |
| | 5,257 |
| | 6,307 |
|
Past contractual redemption date due to remaining activity(1) | | 60,500 |
| | 1,121 |
| |
Thereafter (1) | | | 610 |
| | 623 |
|
Past contractual redemption date due to remaining activity (2) | | | 18,982 |
| | 24,694 |
|
| Total | | $ | 62,963 |
| | $ | 115,853 |
| | $ | 30,031 |
| | $ | 34,782 |
|
| |
| (1) | Represents mandatorily redeemable capital stock resulting from a Finance Agency rule effective February 2016, that made captive insurance companies ineligible for FHLB membership. Captive insurance companies that were admitted as FHLB Members prior to September 12, 2014, will have their membership terminated no later than February 19, 2021. Captive insurance companies that were admitted as FHLB Members on or after September 12, 2014, had their membership terminated no later than February 19, 2017. The related mandatorily redeemable capital stock is not required to be redeemed until five years after the Member's termination. |
| |
| (2) | Represents mandatorily redeemable capital stock that is past the end of the contractual redemption period because there is activity outstanding to which the mandatorily redeemable capital stock relates. |
Excess Capital Stock. Finance Agency regulations limit the ability of an FHLBank to create memberMember excess stock under certain circumstances. The FHLBankFHLB may not pay dividends in the form of capital stock or issue new excess stock to membersMembers if its excess stock exceeds one percent of its total assets or if the issuance of excess stock would cause the FHLBank'sFHLB's excess stock to exceed one percent of its total assets. At December 31, 2014,2017, the FHLBankFHLB had excess capital stock outstanding totaling less
than one percent of its total assets. At December 31, 2014,2017, the FHLBankFHLB was in compliance with the Finance Agency's excess stock rules.
Note 16 - Accumulated Other Comprehensive (Loss) Income
The following tables summarize the changes in accumulated other comprehensive (loss) income for the years endedDecember 31, 20142017, 20132016, and 2012.2015.
Table 16.1 - Accumulated Other Comprehensive (Loss) Income (in thousands)
| | | | Net unrealized gains (losses) on available-for-sale securities | | Pension and postretirement benefits | | Total accumulated other comprehensive (loss) income | Net unrealized (losses) gains on available-for-sale securities | | Pension and postretirement benefits | | Total accumulated other comprehensive (loss) income |
| BALANCE, DECEMBER 31, 2011 | $ | (1,014 | ) | | $ | (9,987 | ) | | $ | (11,001 | ) | |
| BALANCE, DECEMBER 31, 2014 | | $ | (24 | ) | | $ | (16,572 | ) | | $ | (16,596 | ) |
| Other comprehensive income before reclassification: | | | | | | | | | | |
| Net unrealized gains | 1,014 |
| | — |
| | 1,014 |
| 105 |
| | — |
| | 105 |
|
| Net actuarial loss | — |
| | (2,701 | ) | | (2,701 | ) | |
| Net actuarial gains | | — |
| | 598 |
| | 598 |
|
| Reclassifications from other comprehensive income to net income: | | | | | | | | | | |
| Amortization - pension and postretirement benefits | — |
| | 954 |
| | 954 |
| — |
| | 2,616 |
| | 2,616 |
|
| Net current period other comprehensive income (loss) | 1,014 |
| | (1,747 | ) | | (733 | ) | |
| BALANCE, DECEMBER 31, 2012 | — |
| | (11,734 | ) | | (11,734 | ) | |
| Net current period other comprehensive income | | 105 |
| | 3,214 |
| | 3,319 |
|
| BALANCE, DECEMBER 31, 2015 | | 81 |
| | (13,358 | ) | | (13,277 | ) |
| Other comprehensive income before reclassification: | | | | | | | | | | |
| Net unrealized losses | (121 | ) | | — |
| | (121 | ) | (58 | ) | | — |
| | (58 | ) |
| Net actuarial gain | — |
| | 803 |
| | 803 |
| |
| Net actuarial losses | | — |
| | (2,283 | ) | | (2,283 | ) |
| Reclassifications from other comprehensive income to net income: | | | | | | | | | | |
| Amortization - pension and postretirement benefits | — |
| | 2,010 |
| | 2,010 |
| — |
| | 2,362 |
| | 2,362 |
|
| Net current period other comprehensive (loss) income | (121 | ) | | 2,813 |
| | 2,692 |
| (58 | ) | | 79 |
| | 21 |
|
| BALANCE, DECEMBER 31, 2013 | (121 | ) | | (8,921 | ) | | (9,042 | ) | |
| BALANCE, DECEMBER 31, 2016 | | 23 |
| | (13,279 | ) | | (13,256 | ) |
| Other comprehensive income before reclassification: | | | | | | | | | | |
| Net unrealized gains | 97 |
| | — |
| | 97 |
| |
| Net actuarial loss | — |
| | (9,496 | ) | | (9,496 | ) | |
| Net unrealized losses | | (147 | ) | | — |
| | (147 | ) |
| Net actuarial losses | | — |
| | (4,964 | ) | | (4,964 | ) |
| Reclassifications from other comprehensive income to net income: | | | | | | | | | | |
| Amortization - pension and postretirement benefits | — |
| | 1,845 |
| | 1,845 |
| — |
| | 1,707 |
| | 1,707 |
|
| Net current period other comprehensive income (loss) | 97 |
| | (7,651 | ) | | (7,554 | ) | |
| BALANCE, DECEMBER 31, 2014 | $ | (24 | ) | | $ | (16,572 | ) | | $ | (16,596 | ) | |
| Net current period other comprehensive loss | | (147 | ) | | (3,257 | ) | | (3,404 | ) |
| BALANCE, DECEMBER 31, 2017 | | $ | (124 | ) | | $ | (16,536 | ) | | $ | (16,660 | ) |
Note 17 - Pension and Postretirement Benefit Plans
Qualified Defined Benefit Multi-employer Plan. The FHLBankFHLB participates in the Pentegra Defined Benefit Plan for Financial Institutions (Pentegra Defined Benefit Plan), a tax-qualified defined benefit pension plan. The Pentegra Defined Benefit Plan is treated as a multi-employer plan for accounting purposes, but operates as a multiple-employer plan under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code. As a result, certain multi-employer plan disclosures, including the certified zone status, are not applicable to the Pentegra Defined Benefit Plan. Under the Pentegra Defined Benefit Plan, contributions made by one participating employer may be used to provide benefits to employees of other participating employers because assets contributed by an employer are not segregated in a separate account or restricted to provide benefits only to employees of that employer. Also, in the event a participating employer is unable to meet its contribution requirements, the required contributions for the other participating employers could increase proportionately. The
Pentegra Defined Benefit Plan covers substantially all officers and employees of the FHLBankFHLB who meet certain eligibility requirements.
The Pentegra Defined Benefit Plan operates on a plan year from July 1 through June 30. The Pentegra Defined Benefit Plan files one Form 5500 on behalf of all employers who participate in the plan. The Employer Identification Number is 13-5645888 and the three-digit plan number is 333. There are no collective bargaining agreements in place at the FHLBank.FHLB.
The Pentegra Defined Benefit Plan's annual valuation process includes calculating the plan's funded status and separately calculating the funded status of each participating employer. The funded status is defined as the market value of assets divided by the funding target (100 percent of the present value of all benefit liabilities accrued at that date). As permitted by ERISA, the Pentegra Defined Benefit Plan accepts contributions for the prior plan year up to eight and a half months after the end of the prior plan year. As a result, the market value of assets at the valuation date (July 1) will increase by any subsequent contributions designated for the immediately preceding plan year ended June 30.
The most recent Form 5500 available for the Pentegra Defined Benefit Plan is for the year ended June 30, 2013.2016. The FHLBank did not contributeFHLB contributed more than five percent of the total contributions to the Pentegra Defined Benefit Plan for the plan year ended June 30, 20132016. The FHLB did not contribute more than five percent of the total contributions to the Pentegra Defined Benefit Plan for the plan years ended June 30, 2015 and 2012.2014.
Table 17.1 - Pentegra Defined Benefit Plan Net Pension Cost and Funded Status (dollars in thousands)
| | | | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
Net pension cost charged to compensation and benefit expense for the year ended December 31 | $ | 6,041 |
| | $ | 5,516 |
| | $ | 4,638 |
| $ | 8,340 |
| | $ | 6,659 |
| | $ | 6,348 |
|
| Pentegra Defined Benefit Plan funded status as of July 1 | 111.31 | % | (a) | 101.31 | % | (b) | 108.39 | % | 111.30 | % | (a) | 104.72 | % | (b) | 107.01 | % |
| FHLBank's funded status as of July 1 | 128.27 | % | | 107.36 | % | | 110.48 | % | |
| FHLB's funded status as of July 1 | | 124.35 | % | | 118.53 | % | | 124.97 | % |
| |
| (a) | The Pentegra Defined Benefit Plan's funded status as of July 1, 20142017 is preliminary and may increase because the plan's participants were permitted to make contributions for the plan year ended June 30, 20142017 through March 15, 2015.2018. Contributions made on or before March 15, 2015,2018, and designated for the plan year ended June 30, 2014,2017, will be included in the final valuation as of July 1, 2014.2017. The final funded status as of July 1, 20142017 will not be available until the Form 5500 for the plan year July 1, 20142017 through June 30, 20152018 is filed (this Form 5500 is due to be filed no later than April 2016)2019). |
| |
| (b) | The Pentegra Defined Benefit Plan's funded status as of July 1, 20132016 is preliminary and may increase because the plan's participants were permitted to make contributions for the plan year ended June 30, 20132016 through March 15, 2014.2017. Contributions made on or before March 15, 2014,2017, and designated for the plan year ended June 30, 2013,2016, will be included in the final valuation as of July 1, 2013.2016. The final funded status as of July 1, 20132016 will not be available until the Form 5500 for the plan year July 1, 20132016 through June 30, 20142017 is filed (this Form 5500 is due to be filed no later than April 2015)2018). |
Qualified Defined Contribution Plan. The FHLBankFHLB also participates in the Pentegra Defined Contribution Plan for Financial Institutions, a tax-qualified, defined contribution pension plan. The FHLBankFHLB contributes a percentage of the participants' compensation by making a matching contribution equal to a percentage of voluntary employee contributions, subject to certain limitations. The FHLBankFHLB contributed $943,000, $875,000,$1,191,000, $1,026,000, and $848,000$992,000 in the years ended December 31, 2014, 2013,2017, 2016, and 2012,2015, respectively.
Nonqualified Supplemental Defined Benefit Retirement Plan (Defined Benefit Retirement Plan). The FHLBankFHLB maintains a nonqualified, unfunded defined benefit plan. The plan ensures that participants receive the full amount of benefits to which they would have been entitled under the qualified defined benefit plan in the absence of limits on benefit levels imposed by the IRS. There are no funded plan assets. The FHLBankFHLB has established a grantor trust, which is included in held-to-maturity securities on the Statements of Condition, to meet future benefit obligations and current payments to beneficiaries.
Postretirement Benefits Plan. The FHLBankFHLB also sponsors a postretirement benefits planPostretirement Benefits Plan that includes health care and life insurance benefits for eligible retirees. Future retirees are eligible for the postretirement benefits plan if they were hired prior to August 1, 1990, are age 55 or older, and their age plus years of continuous service at retirement are greater than or equal to 80. Spouses are covered subject to required contributions. There are no funded plan assets that have been designated to provide postretirement benefits.
Table 17.2 presents the obligations and funding status of the FHLBank's nonqualified supplemental defined benefit retirement planFHLB's Defined Benefit Retirement Plan and postretirement benefits plan.Postretirement Benefits Plan. The benefit obligation represents projected benefit obligation for the nonqualified supplemental defined benefit retirement planDefined Benefit Retirement Plan and accumulated postretirement benefit obligation for the postretirement benefits plan.Postretirement Benefits Plan.
Table 17.2 - Benefit Obligation, Fair Value of Plan Assets and Funded Status (in thousands)
| | | | Defined Benefit Retirement Plan | | Postretirement Benefits Plan | Defined Benefit Retirement Plan | | Postretirement Benefits Plan |
| Change in benefit obligation: | 2014 | 2013 | | 2014 | 2013 | 2017 | 2016 | | 2017 | 2016 |
| Benefit obligation at beginning of year | $ | 26,511 |
| $ | 27,293 |
| | $ | 3,957 |
| $ | 4,859 |
| $ | 34,303 |
| $ | 32,540 |
| | $ | 4,867 |
| $ | 5,116 |
|
| Service cost | 524 |
| 494 |
| | 53 |
| 58 |
| 882 |
| 730 |
| | 28 |
| 50 |
|
| Interest cost | 1,234 |
| 986 |
| | 190 |
| 199 |
| 1,367 |
| 1,317 |
| | 197 |
| 219 |
|
| Actuarial loss (gain) | 8,335 |
| 215 |
| | 1,161 |
| (1,018 | ) | 5,060 |
| 2,617 |
| | (96 | ) | (334 | ) |
| Benefits paid | (2,744 | ) | (2,477 | ) | | (164 | ) | (141 | ) | (2,067 | ) | (2,901 | ) | | (201 | ) | (184 | ) |
| Benefit obligation at end of year | 33,860 |
| 26,511 |
| | 5,197 |
| 3,957 |
| 39,545 |
| 34,303 |
| | 4,795 |
| 4,867 |
|
| Change in plan assets: | | | | | | |
| Fair value of plan assets at beginning of year | — |
| — |
| | — |
| — |
| — |
| — |
| | — |
| — |
|
| Employer contribution | 2,744 |
| 2,477 |
| | 164 |
| 141 |
| 2,067 |
| 2,901 |
| | 201 |
| 184 |
|
| Benefits paid | (2,744 | ) | (2,477 | ) | | (164 | ) | (141 | ) | (2,067 | ) | (2,901 | ) | | (201 | ) | (184 | ) |
| Fair value of plan assets at end of year | — |
| — |
| | — |
| — |
| — |
| — |
| | — |
| — |
|
| Funded status at end of year | $ | (33,860 | ) | $ | (26,511 | ) | | $ | (5,197 | ) | $ | (3,957 | ) | $ | (39,545 | ) | $ | (34,303 | ) | | $ | (4,795 | ) | $ | (4,867 | ) |
Amounts recognized in “Other liabilities” on the Statements of Condition for the FHLBank'sFHLB's nonqualified supplemental defined benefit planDefined Benefit Retirement Plan and postretirement benefits planPostretirement Benefits Plan as of December 31, 20142017 and 20132016 were (in thousands) $39,057$44,340 and $30,468.$39,170.
Table 17.3 - Amounts Recognized in Accumulated Other Comprehensive Income (in thousands)
|
| | | | | | | | | | | | | | | |
| | Defined Benefit Retirement Plan | | Postretirement Benefits Plan |
| | 2014 | | 2013 | | 2014 | | 2013 |
| Net actuarial loss (gain) | $ | 15,409 |
| | $ | 8,919 |
| | $ | 1,163 |
| | $ | 2 |
|
|
| | | | | | | | | | | | | | | |
| | Defined Benefit Retirement Plan | | Postretirement Benefits Plan |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Net actuarial loss | $ | 16,106 |
| | $ | 12,748 |
| | $ | 430 |
| | $ | 531 |
|
Table 17.4 - Net Periodic Benefit Cost and Other Amounts Recognized in Accumulated Other Comprehensive Income (in thousands)
| | | | For the Years Ended December 31, | For the Years Ended December 31, |
| | Defined Benefit Retirement Plan | | Postretirement Benefits Plan | Defined Benefit Retirement Plan | | Postretirement Benefits Plan |
| | 2014 | | 2013 | | 2012 | | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 |
| Net Periodic Benefit Cost | | | | | | | | | | | | | | | | | | | | | | |
| Service cost | $ | 524 |
| | $ | 494 |
| | $ | 578 |
| | $ | 53 |
| | $ | 58 |
| | $ | 72 |
| $ | 882 |
| | $ | 730 |
| | $ | 668 |
| | $ | 28 |
| | $ | 50 |
| | $ | 74 |
|
| Interest cost | 1,234 |
| | 986 |
| | 963 |
| | 190 |
| | 199 |
| | 200 |
| 1,367 |
| | 1,317 |
| | 1,222 |
| | 197 |
| | 219 |
| | 203 |
|
| Amortization of net loss | 1,845 |
| | 1,948 |
| | 932 |
| | — |
| | 62 |
| | 22 |
| 1,702 |
| | 2,316 |
| | 2,549 |
| | 5 |
| | 46 |
| | 67 |
|
| Net periodic benefit cost | 3,603 |
| | 3,428 |
| | 2,473 |
| | 243 |
| | 319 |
| | 294 |
| $ | 3,951 |
| | $ | 4,363 |
| | $ | 4,439 |
| | $ | 230 |
| | $ | 315 |
| | $ | 344 |
|
| | | | | | | | | | | | | |
| Other Changes in Benefit Obligations Recognized in Other Comprehensive Income | | | | | | | | | | | | | | | | | | | | | | |
| Net loss (gain) | 8,335 |
| | 215 |
| | 2,261 |
| | 1,161 |
| | (1,018 | ) | | 440 |
| $ | 5,060 |
| | $ | 2,617 |
| | $ | (413 | ) | | $ | (96 | ) | | $ | (334 | ) | | $ | (185 | ) |
| Amortization of net loss | (1,845 | ) | | (1,948 | ) | | (932 | ) | | — |
| | (62 | ) | | (22 | ) | (1,702 | ) | | (2,316 | ) | | (2,549 | ) | | (5 | ) | | (46 | ) | | (67 | ) |
| Total recognized in other comprehensive income | 6,490 |
| | (1,733 | ) | | 1,329 |
| | 1,161 |
| | (1,080 | ) | | 418 |
| 3,358 |
| | 301 |
| | (2,962 | ) | | (101 | ) | | (380 | ) | | (252 | ) |
Total recognized in net periodic benefit cost and other comprehensive income | $ | 10,093 |
| | $ | 1,695 |
| | $ | 3,802 |
| | $ | 1,404 |
| | $ | (761 | ) | | $ | 712 |
| $ | 7,309 |
|
| $ | 4,664 |
|
| $ | 1,477 |
|
| $ | 129 |
|
| $ | (65 | ) |
| $ | 92 |
|
Table 17.5 presents the estimated net actuarial loss that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year.
Table 17.5 - Amortization for Next Fiscal Year (in thousands)
|
| | | | | | | |
| | Defined Benefit Retirement Plan | | Postretirement Benefits Plan |
| Net actuarial loss | $ | 2,405 |
| | $ | 67 |
|
|
| | | | | | | |
| | | | |
| | Defined Benefit Retirement Plan | | Postretirement Benefits Plan |
| Net actuarial loss | $ | 1,944 |
| | $ | — |
|
Table 17.6 presents the key assumptions used for the actuarial calculations to determine benefit obligations for the nonqualified supplemental defined benefit retirement planDefined Benefit Retirement Plan and postretirement benefits plan.Postretirement Benefits Plan.
Table 17.6 - Benefit Obligation Key Assumptions
| | | | Defined Benefit Retirement Plan | | Postretirement Benefits Plan | Defined Benefit Retirement Plan | | Postretirement Benefits Plan |
| | 2014 | | 2013 | | 2014 | | 2013 | 2017 | | 2016 | | 2017 | | 2016 |
| Discount rate | 3.67 | % | | 4.32 | % | | 3.96 | % | | 4.88 | % | 3.45 | % | | 3.91 | % | | 3.53 | % | | 4.10 | % |
| Salary increases | 4.50 | % | | 4.50 | % | | N/A |
| | N/A |
| 5.00 | % | | 4.50 | % | | N/A |
| | N/A |
|
Table 17.7 presents the key assumptions used for the actuarial calculations to determine net periodic benefit cost for the FHLBank's defined benefit retirement plansFHLB's Defined Benefit Retirement Plan and postretirement benefit plans.Postretirement Benefit Plan.
Table 17.7 - Net Periodic Benefit Cost Key Assumptions
| | | | Defined Benefit Retirement Plan | | Postretirement Benefits Plan | Defined Benefit Retirement Plan | | Postretirement Benefits Plan |
| | 2014 | | 2013 | | 2012 | | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 |
| Discount rate | 4.32 | % | | 3.26 | % | | 3.96 | % | | 4.88 | % | | 4.16 | % | | 4.73 | % | 3.91 | % | | 4.02 | % | | 3.67 | % | | 4.10 | % | | 4.33 | % | | 3.96 | % |
| Salary increases | 4.50 | % | | 4.50 | % | | 4.50 | % | | N/A |
| | N/A |
| | N/A |
| 4.50 | % | | 4.50 | % | | 4.50 | % | | N/A |
| | N/A |
| | N/A |
|
Table 17.8 - Postretirement Benefits Plan Assumed Health Care Cost Trend Rates
| | | | 2014 | | 2013 | 2017 | | 2016 |
| Assumed for next year | 8.50 | % | | 9.00 | % | 7.00 | % | | 7.50 | % |
| Ultimate rate | 5.25 | % | | 5.25 | % | 5.00 | % | | 5.50 | % |
| Year that ultimate rate is reached | 2024 |
| | 2024 |
| 2021 |
| | 2020 |
|
The effect of a percentage point increase in the assumed health care trend rates would be an increase in net periodic postretirement benefit expense of $44,000$45,000 and in accumulated postretirement benefit obligation (APBO) of $1,027,000.$844,000. The effect of a percentage point decrease in the assumed health care trend rates would be a decrease in net periodic postretirement benefit expense of $35,000 and in APBO of $806,000.$677,000.
The discount rates for the disclosures as of December 31, 20142017 were determined by using a discounted cash flow approach, which incorporates the timing of each expected future benefit payment. Estimated future benefit payments are based on each plan's census data, benefit formulas and provisions, and valuation assumptions reflecting the probability of decrement and survival. The present value of the future benefit payments is determined by using weighted average duration based interest rate yields from a variety of highly rated relevant corporate bond indices as of December 31, 2014,2017, and solving for the single discount rate that produces the same present value.
Table 17.9 presents the estimated future benefits payments reflecting expected future services for the years ended after December 31, 2014.2017.
Table 17.9 - Estimated Future Benefit Payments (in thousands)
|
| | | | | | | | |
| Years | | Defined Benefit Retirement Plan | | Postretirement Benefit Plan |
| 2015 | | $ | 2,874 |
| | $ | 158 |
|
| 2016 | | 2,987 |
| | 163 |
|
| 2017 | | 2,225 |
| | 178 |
|
| 2018 | | 2,192 |
| | 172 |
|
| 2019 | | 2,296 |
| | 181 |
|
| 2020 - 2024 | | 8,825 |
| | 1,165 |
|
|
| | | | | | | | |
| Years | | Defined Benefit Retirement Plan | | Postretirement Benefit Plan |
| 2018 | | $ | 2,182 |
| | $ | 203 |
|
| 2019 | | 2,311 |
| | 199 |
|
| 2020 | | 1,964 |
| | 207 |
|
| 2021 | | 2,111 |
| | 226 |
|
| 2022 | | 2,257 |
| | 230 |
|
| 2023 - 2027 | | 9,940 |
| | 1,262 |
|
Note 18 - Segment Information
The FHLBankFHLB has identified two primary operating segments based on its method of internal reporting: Traditional Member Finance and the MPP. These segments reflect the FHLBank'sFHLB's two primary Mission Asset Activities and the manner in which they are managed from the perspective of development, resource allocation, product delivery, pricing, credit risk and operational administration. The segments identify the principal ways the FHLBankFHLB provides services to memberMember stockholders. The FHLBank,FHLB, as an interest rate spread manager, considers a segment's net interest income, net interest rate spread and, ultimately, net income as the key factors in allocating resources. Resource allocation decisions are made by considering these profitability measures in the context of the historical, current and expected risk profile of each segment and the entire balance sheet, as well as current incremental profitability measures relative to the incremental market risk profile.
Overall financial performance and risk management are dynamically managed primarily at the level of, and within the context of, the entire balance sheet rather than at the level of individual business segments or product lines. Also, the FHLBankFHLB hedges specific asset purchases and specific subportfolios in the context of the entire mortgage asset portfolio and the entire balance sheet. Under this holistic approach, the market risk/return profile of each business segment does not correspond, in general, to the performance that each segment would generate if it were completely managed on a separate basis, and it is not possible to accurately determine what the performance would be if the two business segments were managed on a stand-alone basis. Further, because financial and risk management is a dynamic process, the performance of a segment over a single identified period may not reflect the long-term expected or actual future trends for the segment.
The Traditional Member Finance segment includes products such as Advances and investments and the borrowing costs related to those assets. The FHLBankFHLB assigns its investments to this segment primarily because they historically have been used to
provide liquidity for Advances and to support the level and volatility of earnings from Advances. All interest rate swaps and a portion of swaptions, including their market value adjustments, are allocated to the Traditional Member Finance segment. The FHLB executed all of its interest rate swaps in its management of market risk for the Traditional Member Finance segment. The FHLB enters into swaptions to minimize the prepayment risk in its overall mortgage asset portfolio.
Income from the MPP is derived primarily from the difference, or spread, between the yield on mortgage loans and the borrowing cost of Consolidated Obligations outstanding allocated to this segment at the time debt is issued. MPP income also includes the gains (losses) on derivatives associated with the MPP segment, comprising all mortgage delivery commitments and forward rate agreements and a portion of swaptions.
Both segments also earn income from investment of interest-free capital. Capital is allocated proportionate to each segment's average assets based on the total balance sheet's average capital-to-assets ratio. Expenses are allocated based on cost accounting techniques that include direct usage, time allocations and square footage of space used. AHP assessments are calculated using the current assessment rates based on the income before assessments for each segment. All interest rate swaps, including their market value adjustments, are allocated to the Traditional Member Finance segment because the FHLBank has not executed interest rate swaps in its management of the MPP's market risk. All derivatives classified as mandatory delivery commitments and forward rate agreements are allocated to the MPP segment.
The following tables set forth the FHLBank'sFHLB's financial performance by operating segment for the years ended December 31.
Table 18.1 - Financial Performance by Operating Segment (in thousands)
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| | Traditional Member Finance | | MPP | | Total |
| 2014 | | | | | |
| Net interest income | $ | 237,828 |
| | $ | 79,148 |
| | $ | 316,976 |
|
| Reversal for credit losses | — |
| | (500 | ) | | (500 | ) |
| Net interest income after reversal for credit losses | 237,828 |
| | 79,648 |
| | 317,476 |
|
| Non-interest income | 22,460 |
| | 170 |
| | 22,630 |
|
| Non-interest expense | 58,876 |
| | 9,372 |
| | 68,248 |
|
| Income before assessments | 201,412 |
| | 70,446 |
| | 271,858 |
|
| Affordable Housing Program assessments | 20,560 |
| | 7,045 |
| | 27,605 |
|
| Net income | $ | 180,852 |
| | $ | 63,401 |
| | $ | 244,253 |
|
| Average assets | $ | 94,333,213 |
| | $ | 6,824,283 |
| | $ | 101,157,496 |
|
| Total assets | $ | 99,629,924 |
| | $ | 7,010,495 |
| | $ | 106,640,419 |
|
| 2013 | | | | | |
| Net interest income | $ | 229,559 |
| | $ | 98,285 |
| | $ | 327,844 |
|
| Reversal for credit losses | — |
| | (7,450 | ) | | (7,450 | ) |
| Net interest income after reversal for credit losses | 229,559 |
| | 105,735 |
| | 335,294 |
|
| Non-interest income (loss) | 30,505 |
| | (10,714 | ) | | 19,791 |
|
| Non-interest expense | 55,459 |
| | 8,928 |
| | 64,387 |
|
| Income before assessments | 204,605 |
| | 86,093 |
| | 290,698 |
|
| Affordable Housing Program assessments | 21,011 |
| | 8,609 |
| | 29,620 |
|
| Net income | $ | 183,594 |
| | $ | 77,484 |
| | $ | 261,078 |
|
| Average assets | $ | 86,609,248 |
| | $ | 7,081,377 |
| | $ | 93,690,625 |
|
| Total assets | $ | 96,336,915 |
| | $ | 6,843,787 |
| | $ | 103,180,702 |
|
| 2012 | | | | | |
| Net interest income | $ | 209,636 |
| | $ | 98,484 |
| | $ | 308,120 |
|
| Provision for credit losses | — |
| | 1,459 |
| | 1,459 |
|
| Net interest income after provision for credit losses | 209,636 |
| | 97,025 |
| | 306,661 |
|
| Non-interest income | 12,930 |
| | 482 |
| | 13,412 |
|
| Non-interest expense | 50,082 |
| | 7,888 |
| | 57,970 |
|
| Income before assessments | 172,484 |
| | 89,619 |
| | 262,103 |
|
| Affordable Housing Program assessments | 18,417 |
| | 8,962 |
| | 27,379 |
|
| Net income | $ | 154,067 |
| | $ | 80,657 |
| | $ | 234,724 |
|
| Average assets | $ | 58,707,558 |
| | $ | 7,994,445 |
| | $ | 66,702,003 |
|
| Total assets | $ | 74,003,271 |
| | $ | 7,558,879 |
| | $ | 81,562,150 |
|
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| | Traditional Member Finance | | MPP | | Total |
| 2017 | | | | | |
| Net interest income | $ | 334,383 |
| | $ | 94,760 |
| | $ | 429,143 |
|
| Provision for credit losses | — |
| | 500 |
| | 500 |
|
| Net interest income after provision for credit losses | 334,383 |
| | 94,260 |
| | 428,643 |
|
| Non-interest income (loss) | 2,979 |
| | (4,216 | ) | | (1,237 | ) |
| Non-interest expense | 67,571 |
| | 11,147 |
| | 78,718 |
|
| Income before assessments | 269,791 |
| | 78,897 |
| | 348,688 |
|
| Affordable Housing Program assessments | 27,230 |
| | 7,890 |
| | 35,120 |
|
| Net income | $ | 242,561 |
| | $ | 71,007 |
| | $ | 313,568 |
|
| 2016 | | | | | |
| Net interest income after provision for credit losses | $ | 287,721 |
| | $ | 75,483 |
| | $ | 363,204 |
|
| Non-interest income | 40,423 |
| | 5,808 |
| | 46,231 |
|
| Non-interest expense | 99,758 |
| | 11,305 |
| | 111,063 |
|
| Income before assessments | 228,386 |
| | 69,986 |
| | 298,372 |
|
| Affordable Housing Program assessments | 23,190 |
| | 6,999 |
| | 30,189 |
|
| Net income | $ | 205,196 |
| | $ | 62,987 |
| | $ | 268,183 |
|
| 2015 | | | | | |
| Net interest income after provision for credit losses | $ | 250,076 |
| | $ | 77,923 |
| | $ | 327,999 |
|
| Non-interest income | 28,586 |
| | 1,308 |
| | 29,894 |
|
| Non-interest expense | 64,925 |
| | 10,626 |
| | 75,551 |
|
| Income before assessments | 213,737 |
| | 68,605 |
| | 282,342 |
|
| Affordable Housing Program assessments | 21,618 |
| | 6,288 |
| | 27,906 |
|
| Net income | $ | 192,119 |
| | $ | 62,317 |
| | $ | 254,436 |
|
Table 18.2 - Asset Balances by Operating Segment (in thousands)
|
| | | | | | | | | | | |
| | Assets |
| | Traditional Member
Finance | | MPP | | Total |
| December 31, 2017 | $ | 95,525,754 |
| | $ | 11,369,460 |
| | $ | 106,895,214 |
|
| December 31, 2016 | 95,456,372 |
| | 9,178,909 |
| | 104,635,281 |
|
Note 19 - Fair Value Disclosures
The fair value amounts recorded on the Statements of Condition and presented in the related note disclosures have been determined by the FHLBankFHLB using available market information and the FHLBank'sFHLB's best judgment of appropriate valuation methods. The fair values reflect the FHLBank'sFHLB's judgment of how a market participant would estimate the fair values.
Fair Value Hierarchy. The FHLBankFHLB records trading securities, available-for-sale securities, derivative assets, derivative liabilities, certain Advances and certain Consolidated Obligation Bonds at fair value on a recurring basis, and on occasion, certain mortgage loans held for portfolio on a nonrecurring basis. GAAP establishes a fair value hierarchy and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The inputs are evaluated and an overall level for the measurement is determined. This overall level is an indication of how market observable
the fair value measurement is. An entity must disclose the level within the fair value hierarchy in which the measurements are classified.
The fair value hierarchy prioritizes the inputs used to measure fair value into three broad levels:
Level 1 Inputs - Quoted prices (unadjusted) for identical assets or liabilities in an active market that the reporting entity can access on the measurement date.
Level 2 Inputs - Inputs other than quoted prices within Level 1 that are observable inputs for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 2 inputs include the following: (1) quoted prices for similar assets or liabilities in active markets; (2) quoted prices for identical or similar assets or liabilities in markets that are not active; (3) inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates and yield curves that are observable at commonly quoted intervals, and implied volatilities); and (4) inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 Inputs - Unobservable inputs for the asset or liability.
The FHLBankFHLB reviews the fair value hierarchy classifications on a quarterly basis. Changes in the observability of the valuation inputs may result in a reclassification of certain financial assets or liabilities. Such reclassifications are reported as transfers in/out at fair value as of the beginning of the quarter in which the changes occur. The FHLBankFHLB did not have any transfers of assets or liabilities recorded at fair value on a recurring basis during the years ended December 31, 20142017 or 20132016.
Table 19.1 presents the carrying value, fair value, and fair value hierarchy of financial assets and liabilities of the FHLBank. These values do not represent an estimate of the overall market value of the FHLBank as a going concern, which would take into account future business opportunities and the net profitability of assets versus liabilities.FHLB.
Table 19.1 - Fair Value Summary (in thousands)
| | | | December 31, 2014 | December 31, 2017 |
| | | | Fair Value | | | Fair Value |
| Financial Instruments | Carrying Value | | Total | | Level 1 | | Level 2 | | Level 3 | | Netting Adjustments and Cash Collateral (1) | Carrying Value | | Total | | Level 1 | | Level 2 | | Level 3 | | Netting Adjustments, Cash Collateral, and Variation Margin for Daily Settled Contracts(1) |
| Assets: | | | | | | | | | | | | | | | | | | | | | | |
| Cash and due from banks | $ | 3,109,970 |
| | $ | 3,109,970 |
| | $ | 3,109,970 |
| | $ | — |
| | $ | — |
| | $ | — |
| $ | 26,550 |
| | $ | 26,550 |
| | $ | 26,550 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Interest-bearing deposits | 119 |
| | 119 |
| | — |
| | 119 |
| | — |
| | — |
| 140 |
| | 140 |
| | — |
| | 140 |
| | — |
| | — |
|
| Securities purchased under agreements to resell | 3,343,000 |
| | 3,343,002 |
| | — |
| | 3,343,002 |
| | — |
| | — |
| 7,701,929 |
| | 7,701,934 |
| | — |
| | 7,701,934 |
| | — |
| | — |
|
| Federal funds sold | 6,600,000 |
| | 6,600,000 |
| | — |
| | 6,600,000 |
| | — |
| | — |
| 3,650,000 |
| | 3,650,000 |
| | — |
| | 3,650,000 |
| | — |
| | — |
|
| Trading securities | 1,341 |
| | 1,341 |
| | — |
| | 1,341 |
| | — |
| | — |
| 781 |
| | 781 |
| | — |
| | 781 |
| | — |
| | — |
|
| Available-for-sale securities | 1,349,977 |
| | 1,349,977 |
| | — |
| | 1,349,977 |
| | — |
| | — |
| 899,876 |
| | 899,876 |
| | — |
| | 899,876 |
| | — |
| | — |
|
| Held-to-maturity securities | 14,712,271 |
| | 14,794,326 |
| | — |
| | 14,794,326 |
| | — |
| | — |
| 14,804,970 |
| | 14,682,329 |
| | — |
| | 14,682,329 |
| | — |
| | — |
|
Advances (2) | 70,405,616 |
| | 70,279,438 |
| | — |
| | 70,279,438 |
| | — |
| | — |
| 69,918,224 |
| | 69,894,641 |
| | — |
| | 69,894,641 |
| | — |
| | — |
|
Mortgage loans held for portfolio, net | 6,984,683 |
| | 7,219,198 |
| | — |
| | 7,178,047 |
| | 41,151 |
| | — |
| 9,680,940 |
| | 9,731,947 |
| | — |
| | 9,714,802 |
| | 17,145 |
| | — |
|
| Accrued interest receivable | 81,384 |
| | 81,384 |
| | — |
| | 81,384 |
| | — |
| | — |
| 128,561 |
| | 128,561 |
| | — |
| | 128,561 |
| | — |
| | — |
|
| Derivative assets | 14,699 |
| | 14,699 |
| | — |
| | 24,531 |
| | — |
| | (9,832 | ) | 60,695 |
| | 60,695 |
| | — |
| | 64,080 |
| | — |
| | (3,385 | ) |
| Liabilities: | | | | | | | | | | | | | | | | | | | | | | |
| Deposits | 729,936 |
| | 729,782 |
| | — |
| | 729,782 |
| | — |
| | — |
| 650,531 |
| | 650,422 |
| | — |
| | 650,422 |
| | — |
| | — |
|
| Consolidated Obligations: | | | | | | | | | | | | | | | | | | | | | | |
| Discount Notes | 41,232,127 |
| | 41,224,739 |
| | — |
| | 41,224,739 |
| | — |
| | — |
| 46,210,458 |
| | 46,209,716 |
| | — |
| | 46,209,716 |
| | — |
| | — |
|
Bonds (3) | 59,216,557 |
| | 59,496,247 |
| | — |
| | 59,496,247 |
| | — |
| | — |
| 54,163,061 |
| | 54,095,627 |
| | — |
| | 54,095,627 |
| | — |
| | — |
|
Mandatorily redeemable capital stock | 62,963 |
| | 62,963 |
| | 62,963 |
| | — |
| | — |
| | — |
| 30,031 |
| | 30,031 |
| | 30,031 |
| | — |
| | — |
| | — |
|
| Accrued interest payable | 114,781 |
| | 114,781 |
| | — |
| | 114,781 |
| | — |
| | — |
| 128,652 |
| | 128,652 |
| | — |
| | 128,652 |
| | — |
| | — |
|
| Derivative liabilities | 63,767 |
| | 63,767 |
| | — |
| | 149,634 |
| | — |
| | (85,867 | ) | 2,893 |
| | 2,893 |
| | — |
| | 83,994 |
| | — |
| | (81,101 | ) |
| Other: | | | | | | | | | | | | | | | | | | | | | | |
| Commitments to extend credit for Advances | | — |
| | 4 |
| | — |
| | 4 |
| | — |
| | — |
|
| Standby bond purchase agreements | — |
| | 1,381 |
| | — |
| | 1,381 |
| | — |
| | — |
| — |
| | 354 |
| | — |
| | 354 |
| | — |
| | — |
|
| |
| (1) | Amounts represent the application of the netting requirements that allow the FHLBankFHLB to settle positive and negative positions, cash collateral and related accrued interest held or placed by the FHLB with the same counterparty, and effective January 3, 2017, includes fair value adjustments on derivatives for which variation margin is characterized as a daily settled contract. Variation margin for daily settled contracts was (in thousands) $74,431 at December 31, 2017. |
| |
| (2) | Includes (in thousands) $15,013 of Advances recorded under the fair value option at December 31, 2017. |
| |
| (3) | Includes (in thousands) $5,577,315 of Consolidated Obligation Bonds recorded under the fair value option at December 31, 2017. |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2016 |
| | | | Fair Value |
| Financial Instruments | Carrying Value | | Total | | Level 1 | | Level 2 | | Level 3 | | Netting Adjustments and Cash Collateral(1) |
| Assets: | | | | | | | | | | | |
| Cash and due from banks | $ | 8,737 |
| | $ | 8,737 |
| | $ | 8,737 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Interest-bearing deposits | 129 |
| | 129 |
| | — |
| | 129 |
| | — |
| | — |
|
| Securities purchased under agreements to resell | 5,229,487 |
|
| 5,229,487 |
| | — |
| | 5,229,487 |
| | — |
| | — |
|
| Federal funds sold | 4,257,000 |
| | 4,257,000 |
| | — |
| | 4,257,000 |
| | — |
| | — |
|
| Trading securities | 970 |
| | 970 |
| | — |
| | 970 |
| | — |
| | — |
|
| Available-for-sale securities | 1,300,023 |
| | 1,300,023 |
| | — |
| | 1,300,023 |
| | — |
| | — |
|
| Held-to-maturity securities | 14,546,979 |
| | 14,413,231 |
| | — |
| | 14,413,231 |
| | — |
| | — |
|
Advances (2) | 69,882,074 |
| | 69,842,730 |
| | — |
| | 69,842,730 |
| | — |
| | — |
|
| Mortgage loans held for portfolio, net | 9,148,718 |
| | 9,174,790 |
| | — |
| | 9,152,186 |
| | 22,604 |
| | — |
|
| Accrued interest receivable | 109,886 |
| | 109,886 |
| | — |
| | 109,886 |
| | — |
| | — |
|
| Derivative assets | 104,753 |
| | 104,753 |
| | — |
| | 53,849 |
| | — |
| | 50,904 |
|
| Liabilities: | | | | | | | | | | | |
| Deposits | 765,879 |
| | 765,628 |
| | — |
| | 765,628 |
| | — |
| | — |
|
| Consolidated Obligations: | | | | | | | | | | | |
| Discount Notes | 44,689,662 |
| | 44,689,594 |
| | — |
| | 44,689,594 |
| | — |
| | — |
|
Bonds (3) | 53,190,866 |
| | 53,278,571 |
| | — |
| | 53,278,571 |
| | — |
| | — |
|
| Mandatorily redeemable capital stock | 34,782 |
| | 34,782 |
| | 34,782 |
| | — |
| | — |
| | — |
|
| Accrued interest payable | 119,322 |
| | 119,322 |
| | — |
| | 119,322 |
| | — |
| | — |
|
| Derivative liabilities | 17,874 |
| | 17,874 |
| | — |
| | 102,065 |
| | — |
| | (84,191 | ) |
| Other: | | | | | | | | | | | |
| Standby bond purchase agreements | — |
| | 708 |
| | — |
| | 708 |
| | — |
| | — |
|
| |
| (1) | Amounts represent the application of the netting requirements that allow the FHLB to settle positive and negative positions and also cash collateral and related accrued interest held or placed by the FHLBank with the same counterparty. |
| |
(2) | Includes (in thousands) $15,042 of Advances recorded under the fair value option at December 31, 2014.
|
| |
(3) | Includes (in thousands) $4,209,640 of Consolidated Obligation Bonds recorded under the fair value option at December 31, 2014.
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2013 |
| | | | Fair Value |
| Financial Instruments | Carrying Value | | Total | | Level 1 | | Level 2 | | Level 3 | | Netting Adjustments and Cash Collateral (1) |
| Assets: | | | | | | | | | | | |
| Cash and due from banks | $ | 8,598,933 |
| | $ | 8,598,933 |
| | $ | 8,598,933 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Interest-bearing deposits | 166 |
| | 166 |
| | — |
| | 166 |
| | — |
| | — |
|
| Securities purchased under agreements to resell | 2,350,000 |
|
| 2,350,000 |
| | — |
| | 2,350,000 |
| | — |
| | — |
|
| Federal funds sold | 1,740,000 |
| | 1,740,000 |
| | — |
| | 1,740,000 |
| | — |
| | — |
|
| Trading securities | 1,578 |
| | 1,578 |
| | — |
| | 1,578 |
| | — |
| | — |
|
| Available-for-sale securities | 2,184,879 |
| | 2,184,879 |
| | — |
| | 2,184,879 |
| | — |
| | — |
|
| Held-to-maturity securities | 16,087,162 |
| | 15,808,397 |
| | — |
| | 15,808,397 |
| | — |
| | — |
|
| Advances | 65,270,390 |
| | 65,065,523 |
| | — |
| | 65,065,523 |
| | — |
| | — |
|
| Mortgage loans held for portfolio, net | 6,818,290 |
| | 6,827,406 |
| | — |
| | 6,774,514 |
| | 52,892 |
| | — |
|
| Accrued interest receivable | 85,151 |
| | 85,151 |
| | — |
| | 85,151 |
| | — |
| | — |
|
| Derivative assets | 3,241 |
| | 3,241 |
| | — |
| | 39,445 |
| | — |
| | (36,204 | ) |
| Liabilities: | | | | | | | | | | | |
| Deposits | 913,895 |
| | 913,799 |
| | — |
| | 913,799 |
| | — |
| | — |
|
| Consolidated Obligations: | | | | | | | | | | | |
| Discount Notes | 38,209,946 |
| | 38,200,971 |
| | — |
| | 38,200,971 |
| | — |
| | — |
|
Bonds (2) | 58,162,739 |
| | 58,075,025 |
| | — |
| | 58,075,025 |
| | — |
| | — |
|
| Mandatorily redeemable capital stock | 115,853 |
| | 115,853 |
| | 115,853 |
| | — |
| | — |
| | — |
|
| Accrued interest payable | 116,381 |
| | 116,381 |
| | — |
| | 116,381 |
| | — |
| | — |
|
| Derivative liabilities | 97,766 |
| | 97,766 |
| | — |
| | 223,835 |
| | — |
| | (126,069 | ) |
| Other: | | | | | | | | | | | |
| Standby bond purchase agreements | — |
| | 3,715 |
| | — |
| | 3,715 |
| | — |
| | — |
|
| |
(1) | Amounts represent the application of the netting requirements that allow the FHLBank to settle positive and negative positions and also cash collateral and related accrued interest held or placed by the FHLBankFHLB with the same counterparty. |
| |
| (2) | Includes (in thousands) $4,018,37015,093 of Advances recorded under the fair value option at December 31, 2016. |
| |
| (3) | Includes (in thousands) $7,895,510 of Consolidated Obligation Bonds recorded under the fair value option at December 31, 20132016. |
Summary of Valuation Methodologies and Primary Inputs.
Cash and due from banks: The fair value equals the carrying value.
Interest-bearing deposits: The fair value is determined based on each security's quoted prices, excluding accrued interest, as of the last business day of the period.
Securities purchased under agreements to resell: The fair value of overnight securities purchased under agreements to resell approximates the carrying value. The fair value of term securities purchased under agreements to resell is determined by calculating the present value of the future cash flows and reducing the amount for accrued interest receivable. The discount rates used in these calculations are the rates for securities with similar terms. Based on the fair value of the related collateral held, the securities purchased under agreements to resell were fully collateralized for the periods presented.
Federal funds sold: The fair value of overnight Federal funds sold approximates the carrying value. The fair value of term Federal funds sold is determined by calculating the present value of the expected future cash flows. The discount rates used in these calculations are the rates for Federal funds with similar terms, as approximated by adding an estimated current spread to the LIBOR Swap Curve for Federal funds with similar terms. The fair value excludes accrued interest.
Trading securities: The FHLBank'sFHLB's trading portfolio generally consists of mortgage-backed securities issued by Ginnie Mae. Quoted market prices in active markets are not available for these securities.
To value mortgage-backed security holdings, the FHLBank obtainsFHLB incorporates prices from fourmultiple designated third-party pricing vendors, when available. The pricing vendors use various proprietary models to price mortgage-backed securities. The inputs to those models are derived from various sources including, but not limited to: benchmark yields, reported trades, dealer estimates, issuer spreads, benchmark securities, bids, offers and other market-related data. BecauseAs many mortgage-backed securities do not trade on a daily basis, the pricing vendors use available information such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing to determine the prices for individual securities. Each pricing vendor has an established challenge process in place for all mortgage-backed security valuations, which facilitates resolution of potentially erroneous prices identified by the FHLBank.
FHLB. The FHLBankFHLB has conducted reviews of themultiple pricing methods employed by the third-party vendors to confirm and further augment its understanding of the vendors' pricing processes, methodologies and control procedures for specific instruments.
The FHLBank'sFHLB's valuation technique for estimating the fair values of mortgage-backed securities first requires the establishment of a “median” price for each security. If four prices are received, the average of the middle two prices is the median price; if three prices are received, the middle price is the median price; if two prices are received, the average of the two prices is the median price; and if one price is received, it is the median price (and also the final price) subject to validation of outliers. All prices that are within a specified tolerance threshold of the median price are included in the “cluster” of prices that are averaged to compute a “default” price.
All prices that are outside the threshold (“outliers”) are subject to further analysis (including, but not limited to, comparison to prices provided by an additional third-party valuation service, prices for similar securities, non-binding dealer estimates, and/or use of an internal model that is deemed most appropriate) to determine if an outlier is a better estimate of fair value. If an outlier (or some other price identified in the analysis) is determined to be a better estimate of fair value, then the outlier (or the other price as appropriate) is used as the final price rather than the default price. Alternatively, if the analysis confirms that an outlier is in fact not representative of fair value and the default price is the best estimate, then the default price is used as the final price. In all cases, the final price is used to determine the fair value of the security.
If all prices received for a security are outside the tolerance threshold level of the median price, then there is no default price, and the final price is determined by an evaluation of all outlier prices as described above.
Four vendorMultiple prices were received for mostsubstantially all of the FHLBank'sFHLB's mortgage-backed security holdings and the final prices for those securities were computed by averaging the prices received. Based on the FHLBank'sFHLB's review of the pricing methods and controls employed by the third-party pricing vendors and the relative lack of dispersion among the vendor prices, the FHLBankFHLB believes its final prices result in reasonable estimates of fair value and further that the fair value measurements are classified appropriately in the fair value hierarchy.
Available-for-sale securities: The FHLBank'sFHLB's available-for-sale portfolio generally consists of certificates of deposit. Quoted market prices in active markets are not available for these securities. Therefore, the fair value is determined based on each security's indicative fair value obtained from a third-party vendor. The FHLBankFHLB performs several validation steps in order to verify the accuracy and reasonableness of these fair values. These steps may include, but are not limited to, a detailed review of instruments with significant periodic price changes and a derived fair value from an option-adjusted discounted cash flow methodology using market-observed inputs for the interest rate environment and similar instruments.
Held-to-maturity securities: The FHLBank'sFHLB's held-to-maturity portfolio generally consists of U.S. Treasury obligations and discount notes issued by Freddie Mac and/or Fannie Mae (non-mortgage-backed securities), and mortgage-backed securities. Quoted market prices are not available for these securities. The fair value for each individual mortgage-backed security is determined by using the third-party vendor approach described above. In general, in order to determine the fair value of its non-mortgage backed securities, the FHLBankFHLB can use either (a) an income approach based on a market-observable interest rate curve that may be adjusted for a spread, or (b) prices received from third-party pricing vendors. The income approach uses indicative fair values derived from a discounted cash flow methodology. The FHLBankFHLB believes that both methodologies result in fair values that are reasonable and similar in all material respects based on the nature of the financial instruments being measured.
For its U.S. Treasury obligations and discount notes issued by Freddie Mac, and/or Fannie Mae, the FHLBankFHLB determines the fair value using the income approach. The market-observable interest rate curvecurves used by the FHLBank includesFHLB include the Treasury Curve and U.S. Government Agency Fair Value Curve.
Advances: The FHLBankFHLB determines the fair values of Advances by calculating the present value of expected future cash flows from the Advances excluding accrued interest. The discount rates used in these calculations are the replacement rates for Advances with similar terms, as approximated either by adding an estimated current spread to the LIBOR Swap Curve or by using current indicative market yields, as indicated by the FHLBank'sFHLB's pricing methodologies for Advances with similar current terms. Advance pricing is determined based on the FHLBank'sFHLB's rates on Consolidated Obligations. In accordance with Finance Agency regulations, Advances with a maturity and repricing period greater than six months require a prepayment fee sufficient to make the FHLBankFHLB financially indifferent to the borrower's decision to prepay the Advances. Therefore, the fair value of Advances does not assume prepayment risk.
For swapped option-based Advances, the fair value is determined (independently of the related derivative) by the discounted cash flow methodology based on the LIBOR Swap Curve and forward rates at period end adjusted for the estimated current spread on new swapped Advances to the swap curve. For swapped Advances with a conversion option, the conversion option is valued by taking into account the LIBOR Swap Curve and forward rates at period end and the market's expectations of future interest rate volatility implied from current market prices of similar options.
Mortgage loans held for portfolio, net: The fair values of performing mortgage loans are determined based on quoted market prices offered to approved membersMembers as indicated by the FHLBank'sFHLB's MPP pricing methodologies for mortgage loans with similar current terms excluding accrued interest. The quoted prices offered to membersMembers are based on Fannie Mae price indications on to-be-announced (TBA) mortgage-backed securities and FHA price indications on government-guaranteed loans. The FHLBankFHLB then adjusts these indicative prices to account for particular features of the FHLBank'sFHLB's MPP that differ from the Fannie Mae and FHA securities. These features include, but may not be limited to, the MPP's credit enhancements, and marketing adjustments that reflect the FHLBank'sFHLB's cooperative business model and preferences for particular kinds of loans and mortgage note rates. These quoted prices, however, can change rapidly based upon market conditions and are highly dependent upon the underlying prepayment assumptions. In order to determine the fair values, the loan amounts are also reduced for the FHLBank'sFHLB's estimate of expected net credit losses. The fair value of conventional mortgage loans 90 days or more delinquent are based on the estimated values of the underlying collateral or the present value of future cash flows and as such are classified as Level 3 in the fair value hierarchy.
Impaired mortgage loans held for portfolio: The estimated fair values of impaired mortgage loans held for portfolio on a non-recurring basis are based on property values obtained from a third-party pricing vendor.
Accrued interest receivable and payable: The fair value approximates the carrying value.
Derivative assets/liabilities: The FHLBank'sFHLB's derivative assets/liabilities generally consist of interest rate swaps, interest rate swaptions, TBA mortgage-backed securities (forward rate agreements), and mortgage delivery commitments. The FHLBank'sFHLB's interest rate swapsrelated derivatives (swaps and swaptions) are traded in the over-the-counter market. Therefore, the FHLBankFHLB determines the fair value of each individual interest rate swapinstrument using market value models that use readily observable market inputs as their basis (inputs that are actively quoted and can be validated to external sources). The FHLBankFHLB uses a mid-market pricing convention as a practical expedient for fair value measurements within a bid-ask spread. These models reflect the contractual terms, of the interest rate swaps, including the period to maturity, as well as the significant inputs noted below. The fair value determination uses the standard valuation technique of discounted cash flow analysis.
The FHLBankFHLB performs several validation steps to verify the reasonableness of the fair value output generated by the primary market value model. In addition to an annual model validation, the FHLBankFHLB prepares a monthly reconciliation of the model's fair values to estimates of fair values provided by the derivative counterparties. The FHLBankFHLB believes these processes provide a reasonable basis for it to place continued reliance on the derivative fair values generated by the model.
The fair value of TBA mortgage-backed securities is based on independent indicative and/or quoted prices generated by market transactions involving comparable instruments. The FHLBankFHLB determines the fair value of mortgage delivery commitments using market prices from the TBA/mortgage-backed security market or TBA/Ginnie Mae market and adjustments noted below.
The FHLBank'sFHLB's discounted cash flow analysis uses market-observable inputs. Inputs, by class of derivative, are as follows:
Interest-rate swaps:Interest rate swaps and interest rate swaptions:
| |
| ▪ | Discount rate assumption. Overnight Index Swap Curve; |
| |
| ▪ | Forward interest rate assumption. LIBOR Swap Curve; and |
| |
| ▪ | Volatility assumption. Market-based expectations of future interest rate volatility implied from current market prices for similar options. |
TBA mortgage-backed securities:
| |
| ▪ | Market-based prices by coupon class and expected term until settlement. |
Mortgage delivery commitments:
| |
| ▪ | TBA securities prices. Market-based prices by coupon class and expected term until settlement, adjusted to reflect the contractual terms of the mortgage delivery commitments, similar to the mortgage loans held for portfolio process. The adjustments to the market prices are market observable, or can be corroborated with observable market data. |
The FHLBankFHLB is subject to credit risk due to the risk of nonperformance by counterparties to its derivative transactions. For bilateraluncleared derivatives, the degree of credit risk depends on the extent to which master netting arrangements are included in these contracts to mitigate the risk. In addition, the FHLBankFHLB requires collateral agreements with collateral delivery thresholds on its bilateraluncleared derivatives. The FHLBankFHLB has evaluated the potential for the fair value of the instruments to be impacted by counterparty credit risk and has determined that no adjustments were significant or necessary to the overall fair value measurements.
The fair values of the FHLBank'sFHLB's derivatives include accrued interest receivable/payable and related cash collateral remitted to/received from counterparties. The estimated fair values of the accrued interest receivable/payable and cash collateral approximate their carrying values due to their short-term nature. Derivatives are presented on a net basis by counterparty when it has met the netting requirements. If these netted amounts are positive, they are classified as an asset and if negative, they are classified as a liability.
Deposits: The FHLBankFHLB determines the fair values of FHLBankFHLB deposits with fixed rates by calculating the present value of expected future cash flows from the deposits and reducing this amount for accrued interest payable. The discount rates used in these calculations are the cost of deposits with similar terms.
Consolidated Obligations: The FHLBankFHLB determines the fair values of Discount Notes by calculating the present value of expected future cash flows from the Discount Notes excluding accrued interest. The discount rates used in these calculations are current replacement rates for Discount Notes with similar current terms, as approximated by adding an estimated current spread to the LIBOR Swap Curve. Each month's cash flow is discounted at that month's replacement rate.
The FHLBankFHLB determines the fair values of non-option-based Consolidated Obligation Bonds by calculating the present value of scheduled future cash flows from the bonds excluding accrued interest. Inputs used to determine fair value of these Consolidated Obligation Bonds are the discount rates, which are estimated current market yields, as indicated by the Office of Finance, for bonds with similar current terms.
The FHLBankFHLB determines the fair values of option-based Consolidated Obligation Bonds based on pricing received from designated third-party pricing vendors. The pricing vendors used apply various proprietary models to price Consolidated Obligation Bonds. The inputs to those models are derived from various sources including, but not limited to, benchmark yields, reported trades, dealer estimates, issuer spreads, benchmark securities, bids, offers, and other market-related data. Since many Consolidated Obligation Bonds do not trade on a daily basis, the pricing vendors use available information, as applicable, such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing to determine the prices for individual Consolidated Obligation Bonds. Each pricing vendor has an established challenge process in place for all valuations, which facilitates resolution of potentially erroneous prices identified by the FHLBank.FHLB.
When pricing vendors are used, the FHLBank'sFHLB's valuation technique first requires the establishment of a “median” price for each Consolidated Obligation Bond. If four prices are received, the average of the middle two prices is the median price; if three prices are received, the middle price is the median price; if two prices are received, the average of the two prices is the median price; and if one price is received, it is the median price (and also the final price) subject to validation of outliers. All prices that are within a specified tolerance threshold of the median price are included in the “cluster” of prices that are averaged to compute a “default” price.
All prices that are outside the threshold (“outliers”) are subject to further analysis (including, but not limited to, comparison to prices provided by an additional third-party valuation service, prices for similar securities, non-binding dealer estimates, and/or use of an internal model that is deemed most appropriate) to determine if an outlier is a better estimate of fair value. If an outlier (or some other price identified in the analysis) is determined to be a better estimate of fair value, then the outlier (or the
other price as appropriate) is used as the final price rather than the default price. Alternatively, if the analysis confirms that an outlier is in fact not representative of fair value and the default price is the best estimate, then the default price is used as the final price. In all cases, the final price is used to determine the fair value of the security.
If all prices received for a Consolidated Obligation Bond are outside the tolerance threshold level of the median price, then there is no default price, and the final price is determined by an evaluation of all outlier prices as described above.
FourMultiple vendor prices were received for the FHLBank'sFHLB's Consolidated Obligation Bonds and the final prices for those bonds were computed by averaging the prices received. Based on the FHLBank'sFHLB's review of the pricing methods and controls employed by the third-party pricing vendors and the relative lack of dispersion among the vendor prices, the FHLBankFHLB believes its final prices result in reasonable estimates of fair value and that the fair value measurements are classified appropriately in the fair value hierarchy.
The FHLBankFHLB has conducted reviews of its pricing vendors to confirm and further augment its understanding of the vendors' pricing processes, methodologies and control procedures for Consolidated Obligation Bonds.
Adjustments may be necessary to reflect the 1211 FHLBanks' credit quality when valuing Consolidated Obligation Bonds measured at fair value. Due to the joint and several liability for Consolidated Obligations, the FHLBankFHLB monitors its own creditworthiness and the creditworthiness of the other FHLBanks to determine whether any credit adjustments are necessary in its fair value measurement of Consolidated Obligation Bonds. No adjustments were considered necessary at December 31, 20142017 or 2013.2016.
Mandatorily redeemable capital stock: The fair value of capital stock subject to mandatory redemption is par value for the dates presented, as indicated by memberMember contemporaneous purchases and sales at par value. FHLBankFHLB stock can only be acquired by membersMembers at par value and redeemed at par value. FHLBankFHLB stock is not traded and no market mechanism exists for the exchange of stock outside the cooperative structure.
Commitments: The fair values of standby bond purchase agreements are based on the present value of the estimated fees taking into account the remaining terms of the agreements.
Subjectivity of estimates. Estimates of the fair values of financial assets and liabilities using the methods described above and other methods are highly subjective and require judgments regarding significant matters such as the amount and timing of future cash flows, prepayment speeds, interest rate volatility, distributions of future interest rates used to value options, and discount rates that appropriately reflect market and credit risks. The judgments also include the parameters, methods, and assumptions used in models to value the options. The use of different assumptions could have a material effect on the fair value estimates. Since these estimates are made as of a specific point in time, they are susceptible to material near term changes.
Fair Value Measurements.
Table 19.2 presents the fair value of financial assets and liabilities whichthat are recorded on a recurring or nonrecurring basis at December 31, 20142017 or 2013,and 2016, by level within the fair value hierarchy. The FHLB records nonrecurring fair value adjustments to reflect partial write-downs on certain mortgage loans.
Table 19.2 - Fair Value Measurements (in thousands)
| | | | Fair Value Measurements at December 31, 2014 | Fair Value Measurements at December 31, 2017 |
| | Total | | Level 1 | | Level 2 | | Level 3 | | Netting Adjustment and Cash Collateral (1) | Total | | Level 1 | | Level 2 | | Level 3 | | Netting Adjustments, Cash Collateral, and Variation Margin for Daily Settled Contracts(1) |
| Recurring fair value measurements - Assets | | | | | | | | | | | | | | | | | | |
| Trading securities: | | | | | | | | | | | | | | | | | | |
| Other U.S. obligation single-family mortgage-backed securities | $ | 1,341 |
| | $ | — |
| | $ | 1,341 |
| | $ | — |
| | $ | — |
| |
| U.S. obligation single-family mortgage-backed securities | | $ | 781 |
| | $ | — |
| | $ | 781 |
| | $ | — |
| | $ | — |
|
| Available-for-sale securities: | | | | | | | | | | | | | | | | | | |
| Certificates of deposit | 1,349,977 |
| | — |
| | 1,349,977 |
| | — |
| | — |
| 899,876 |
| | — |
| | 899,876 |
| | — |
| | — |
|
| Advances | 15,042 |
| | — |
| | 15,042 |
| | — |
| | — |
| 15,013 |
| | — |
| | 15,013 |
| | — |
| | — |
|
| Derivative assets: | | | | | | | | | | | | | | | | | | |
| Interest rate swaps | 10,894 |
| | — |
| | 20,726 |
| | — |
| | (9,832 | ) | |
| Interest rate related | | 60,215 |
| | — |
| | 63,600 |
| | — |
| | (3,385 | ) |
| Forward rate agreements | 6 |
| | — |
| | 6 |
| | — |
| | — |
| 27 |
| | — |
| | 27 |
| | — |
| | — |
|
| Mortgage delivery commitments | 3,799 |
| | — |
| | 3,799 |
| | — |
| | — |
| 453 |
| | — |
| | 453 |
| | — |
| | — |
|
| Total derivative assets | 14,699 |
| | — |
| | 24,531 |
| | — |
| | (9,832 | ) | 60,695 |
| | — |
| | 64,080 |
| | — |
| | (3,385 | ) |
| Total assets at fair value | $ | 1,381,059 |
| | $ | — |
| | $ | 1,390,891 |
| | $ | — |
| | $ | (9,832 | ) | $ | 976,365 |
| | $ | — |
| | $ | 979,750 |
| | $ | — |
| | $ | (3,385 | ) |
| | | | | | | | | | | | | | | | | | | |
| Recurring fair value measurements - Liabilities | | | | | | | | | | | | | | | | | | |
| Consolidated Obligation Bonds | $ | 4,209,640 |
| | $ | — |
| | $ | 4,209,640 |
| | $ | — |
| | $ | — |
| $ | 5,577,315 |
| | $ | — |
| | $ | 5,577,315 |
| | $ | — |
| | $ | — |
|
| Derivative liabilities: | | | | | | | | | | | | | | | | | | |
| Interest rate swaps | 58,842 |
| | — |
| | 144,709 |
| | — |
| | (85,867 | ) | |
| Interest rate related | | 2,646 |
| | — |
| | 83,747 |
| | — |
| | (81,101 | ) |
| Forward rate agreement | 4,924 |
| | — |
| | 4,924 |
| | — |
| | — |
| 230 |
| | — |
| | 230 |
| | — |
| | — |
|
| Mortgage delivery commitments | 1 |
| | — |
| | 1 |
| | — |
| | — |
| 17 |
| | — |
| | 17 |
| | — |
| | — |
|
| Total derivative liabilities | 63,767 |
| | — |
| | 149,634 |
| | — |
| | (85,867 | ) | 2,893 |
| | — |
| | 83,994 |
| | — |
| | (81,101 | ) |
| Total liabilities at fair value | $ | 4,273,407 |
| | $ | — |
| | $ | 4,359,274 |
| | $ | — |
| | $ | (85,867 | ) | $ | 5,580,208 |
| | $ | — |
| | $ | 5,661,309 |
| | $ | — |
| | $ | (81,101 | ) |
| | | | | | | | | | | |
Nonrecurring fair value measurements - Assets (2) | | | | | | | | | | |
| Mortgage loans held for portfolio | | $ | 598 |
| | $ | — |
| | $ | — |
| | $ | 598 |
| | |
| |
| (1) | Amounts represent the application of the netting requirements that allow the FHLBankFHLB to settle positive and negative positions, cash collateral and related accrued interest held or placed by the FHLB with the same counterparty, and effective January 3, 2017, includes fair value adjustments on derivatives for which variation margin is characterized as a daily settled contract. Variation margin for daily settled contracts was (in thousands) $74,431 at December 31, 2017. |
| |
| (2) | The fair value information presented is as of the date the fair value adjustment was recorded during the year ended December 31, 2017. |
|
| | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements at December 31, 2016 |
| | Total | | Level 1 | | Level 2 | | Level 3 | | Netting Adjustment and Cash Collateral (1) |
| Recurring fair value measurements - Assets | | | | | | | | | |
| Trading securities: | | | | | | | | | |
| U.S. obligation single-family mortgage-backed securities | $ | 970 |
| | $ | — |
| | $ | 970 |
| | $ | — |
| | $ | — |
|
| Available-for-sale securities: | | | | | | | | | |
| Certificates of deposit | 1,300,023 |
| | — |
| | 1,300,023 |
| | — |
| | — |
|
| Advances | 15,093 |
| | — |
| | 15,093 |
| | — |
| | — |
|
| Derivative assets: | | | | | | | | | |
| Interest rate related | 103,753 |
| | — |
| | 52,849 |
| | — |
| | 50,904 |
|
| Forward rate agreements | 681 |
| | — |
| | 681 |
| | — |
| | — |
|
| Mortgage delivery commitments | 319 |
| | — |
| | 319 |
| | — |
| | — |
|
| Total derivative assets | 104,753 |
| | — |
| | 53,849 |
| | — |
| | 50,904 |
|
| Total assets at fair value | $ | 1,420,839 |
| | $ | — |
| | $ | 1,369,935 |
| | $ | — |
| | $ | 50,904 |
|
| | | | | | | | | | |
| Recurring fair value measurements - Liabilities | | | | | | | | | |
| Consolidated Obligation Bonds | $ | 7,895,510 |
| | $ | — |
| | $ | 7,895,510 |
| | $ | — |
| | $ | — |
|
| Derivative liabilities: | | | | | | | | | |
| Interest rate related | 7,080 |
| | — |
| | 91,271 |
| | — |
| | (84,191 | ) |
| Forward rate agreements | 166 |
| | — |
| | 166 |
| | — |
| | — |
|
| Mortgage delivery commitments | 10,628 |
| | — |
| | 10,628 |
| | — |
| | — |
|
| Total derivative liabilities | 17,874 |
| | — |
| | 102,065 |
| | — |
| | (84,191 | ) |
| Total liabilities at fair value | $ | 7,913,384 |
| | $ | — |
| | $ | 7,997,575 |
| | $ | — |
| | $ | (84,191 | ) |
| | | | | | | | | | |
Nonrecurring fair value measurements - Assets (2) | | | | | | | | | |
| Mortgage loans held for portfolio | $ | 1,388 |
| | $ | — |
| | $ | — |
| | $ | 1,388 |
| | |
| |
| (1) | Amounts represent the application of the netting requirements that allow the FHLB to settle positive and negative positions and also cash collateral and related accrued interest held or placed by the FHLBankFHLB with the same counterparty. |
|
| | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements at December 31, 2013 |
| | Total | | Level 1 | | Level 2 | | Level 3 | | Netting Adjustment and Cash Collateral (1) |
| Recurring fair value measurements - Assets | | | | | | | | | |
| Trading securities: | | | | | | | | | |
| Other U.S. obligation single-family mortgage-backed securities | $ | 1,578 |
| | $ | — |
| | $ | 1,578 |
| | $ | — |
| | $ | — |
|
| Available-for-sale securities: | | | | | | | | | |
| Certificates of deposit | 2,184,879 |
| | — |
| | 2,184,879 |
| | — |
| | — |
|
| Derivative assets: | | | | | | | | | |
| Interest rate swaps | 2,785 |
| | — |
| | 38,989 |
| | — |
| | (36,204 | ) |
| Forward rate agreements | 454 |
| | — |
| | 454 |
| | — |
| | — |
|
| Mortgage delivery commitments | 2 |
| | — |
| | 2 |
| | — |
| | — |
|
| Total derivative assets | 3,241 |
| | — |
| | 39,445 |
| | — |
| | (36,204 | ) |
| Total assets at fair value | $ | 2,189,698 |
| | $ | — |
| | $ | 2,225,902 |
| | $ | — |
| | $ | (36,204 | ) |
| | | | | | | | | | |
| Recurring fair value measurements - Liabilities | | | | | | | | | |
| Consolidated Obligation Bonds | $ | 4,018,370 |
| | $ | — |
| | $ | 4,018,370 |
| | $ | — |
| | $ | — |
|
| Derivative liabilities: | | | | | | | | | |
| Interest rate swaps | 97,354 |
| | — |
| | 223,423 |
| | — |
| | (126,069 | ) |
| Mortgage delivery commitments | 412 |
| | — |
| | 412 |
| | — |
| | — |
|
| Total derivative liabilities | 97,766 |
| | — |
| | 223,835 |
| | — |
| | (126,069 | ) |
| Total liabilities at fair value | $ | 4,116,136 |
| | $ | — |
| | $ | 4,242,205 |
| | $ | — |
| | $ | (126,069 | ) |
| |
(1)(2) | Amounts represent the applicationThe fair value information presented is as of the netting requirements that allowdate the FHLBank to settle positive and negative positions and also cash collateral and related accrued interest held or placed byfair value adjustment was recorded during the FHLBank with the same counterparty.year ended December 31, 2016. |
Fair Value Option. The fair value option provides an irrevocable option to elect fair value as an alternative measurement for selected financial assets, financial liabilities, unrecognized firm commitments, and written loan commitments not previously carried at fair value. It requires a company to display the fair value of those assets and liabilities for which it has chosen to use fair value on the face of the Statements of Condition. Fair value is used for both the initial and subsequent measurement of the designated assets, liabilities and commitments, with the changes in fair value recognized in net income. If elected, interest income and interest expense on Advances and Consolidated Bonds carried at fair value are recognized based solely on the contractual amount of interest due or unpaid and anyunpaid. Any transaction fees or costs are immediately recognized into other non-interest income or other non-interest expense. Additionally, concessions paid on Consolidated Obligations designated under the fair value option are expensed as incurred in other non-interest expense.
The FHLBankFHLB has elected the fair value option for certain Advances and Consolidated Obligation Bond transactions. The FHLBank elected thefinancial instruments that either do not qualify for hedge accounting or may be at risk for not meeting hedge effectiveness requirements. These fair value option for these transactions so aselections were made primarily in an effort to mitigate the potential income statement volatility that can arise when onlyfrom economic hedging relationships in which the corresponding derivatives are marked atcarrying value of the hedged item is not adjusted for changes in fair value.
Table 19.3 presents net gains related to financial assets and liabilities in which the fair value in transactions that do not, or may not, meet hedge effectiveness requirements or otherwise qualify for hedge accounting (i.e., economic hedging transactions).option was elected during the years ended December 31, 2017, 2016 and 2015.
Table 19.3 – Fair Value Option - Financial Assets and Liabilities (in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2014 | | 2013 | | 2012 |
| | Advances | | Consolidated Bonds | | Advances | | Consolidated Bonds | | Advances | | Consolidated Bonds |
| Balance at beginning of period | $ | — |
| | $ | (4,018,370 | ) | | $ | — |
| | $ | (3,402,366 | ) | | $ | — |
| | $ | (4,900,296 | ) |
| New transactions elected for fair value option | 15,000 |
| | (6,480,000 | ) | | — |
| | (4,015,000 | ) | | — |
| | (3,365,000 | ) |
| Maturities and terminations | — |
| | 6,285,000 |
| | — |
| | 3,400,000 |
| | — |
| | 4,860,000 |
|
| Net gains on financial instruments held under fair value option | 20 |
| | 2,154 |
| | — |
| | 330 |
| | — |
| | 1,939 |
|
| Change in accrued interest | 22 |
| | 1,576 |
| | — |
| | (1,334 | ) | | — |
| | 991 |
|
| Balance at end of period | $ | 15,042 |
| | $ | (4,209,640 | ) | | $ | — |
| | $ | (4,018,370 | ) | | $ | — |
| | $ | (3,402,366 | ) |
Table 19.4 – Changes in Fair Values for Items Measured at Fair Value Pursuant to the Election of the Fair Value Option (in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2014 | | 2013 | | 2012 |
| | Advances | | Consolidated Bonds | | Advances | | Consolidated Bonds | | Advances | | Consolidated Bonds |
| Interest income (expense) | $ | 82 |
| | $ | (5,899 | ) | | $ | — |
| | $ | (4,914 | ) | | $ | — |
| | $ | (8,934 | ) |
| Net gains on changes in fair value under fair value option | 20 |
| | 2,154 |
| | — |
| | 330 |
| | — |
| | 1,939 |
|
| Total changes in fair value included in current period earnings | $ | 102 |
| | $ | (3,745 | ) | | $ | — |
| | $ | (4,584 | ) | | $ | — |
| | $ | (6,995 | ) |
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| Net Gains on Financial Instruments Held under Fair Value Option | 2017 | | 2016 | | 2015 |
| Advances | $ | (81 | ) | | $ | 37 |
| | $ | 15 |
|
| Consolidated Bonds | 10,490 |
| | 40,466 |
| | 1,042 |
|
| Total net gains | $ | 10,409 |
| | $ | 40,503 |
| | $ | 1,057 |
|
For instruments recorded under the fair value option, the related contractual interest income and contractual interest expense are recorded as part of net interest income on the Statements of Income. The remaining changes in fair value for instruments in which the fair value option has been elected are recorded as “Net gains on financial instruments held under fair value option” in the Statements of Income. The FHLBankFHLB has determined that no adjustments to the fair values of its instruments recorded under the fair value option for instrument-specific credit risk were necessary as of December 31, 20142017 or 2013.2016.
The following table reflects the difference between the aggregate unpaid principal balance outstanding and the aggregate fair value for Advances and Consolidated Bonds for which the fair value option has been elected.
Table 19.519.4 – Aggregate Unpaid Balance and Aggregate Fair Value (in thousands)
| | | | December 31, 2014 | | December 31, 2013 | December 31, 2017 | | December 31, 2016 |
| | Aggregate Unpaid Principal Balance | | Aggregate Fair Value | | Aggregate Fair Value Over/(Under) Aggregate Unpaid Principal Balance | | Aggregate Unpaid Principal Balance | | Aggregate Fair Value | | Aggregate Fair Value Over/(Under) Aggregate Unpaid Principal Balance | Aggregate Unpaid Principal Balance | | Aggregate Fair Value | | Aggregate Fair Value Over/(Under) Aggregate Unpaid Principal Balance | | Aggregate Unpaid Principal Balance | | Aggregate Fair Value | | Aggregate Fair Value Over/(Under) Aggregate Unpaid Principal Balance |
Advances (1) | $ | 15,000 |
| | $ | 15,042 |
| | $ | 42 |
| | $ | — |
| | $ | — |
| | $ | — |
| $ | 15,000 |
| | $ | 15,013 |
| | $ | 13 |
| | $ | 15,000 |
| | $ | 15,093 |
| | $ | 93 |
|
| Consolidated Bonds | 4,210,000 |
| | 4,209,640 |
| | (360 | ) | | 4,015,000 |
| | 4,018,370 |
| | 3,370 |
| 5,624,265 |
| | 5,577,315 |
| | (46,950 | ) | | 7,926,000 |
| | 7,895,510 |
| | (30,490 | ) |
| |
| (1) | At December 31, 20142017 and 2013,2016, none of the Advances were 90 days or more past due or had been placed on non-accrual status. |
Note 20 - Commitments and Contingencies
As previously described, Consolidated Obligations are backed only by the financial resources of the FHLBanks. The joint and several liability Finance Agency regulation authorizes the Finance Agency to require any FHLBank to repay all or a portion of the principal and interest on Consolidated Obligations for which another FHLBank is the primary obligor. No FHLBank has ever been asked or required to repay the principal or interest on any Consolidated Obligation on behalf of another FHLBank, and as of December 31, 2014,2017, and through the filing date of this report, the FHLBankFHLB does not believe that it is probable that it will be asked to do so.
The FHLBankFHLB determined that it was not necessary to recognize a liability for the fair values of its joint and several obligation related to other FHLBanks' Consolidated Obligations at December 31, 20142017 or 2013.2016. The joint and several obligations are mandated by Finance Agency regulations and are not the result of arms-length transactions among the FHLBanks. The FHLBanks have no control over the amount of the guaranty or the determination of how each FHLBank would perform under the joint and several obligation.
Table 20.1 - Off-Balance Sheet Commitments (in thousands)
| | | | December 31, 2014 | | December 31, 2013 | December 31, 2017 | | December 31, 2016 |
| Notional Amount | Expire within one year | | Expire after one year | | Total | | Expire within one year | | Expire after one year | | Total | Expire within one year | | Expire after one year | | Total | | Expire within one year | | Expire after one year | | Total |
| Standby Letters of Credit outstanding | $ | 17,233,206 |
| | $ | 546,385 |
| | $ | 17,779,591 |
| | $ | 13,317,887 |
| | $ | 154,086 |
| | $ | 13,471,973 |
| $ | 14,388,745 |
| | $ | 302,237 |
| | $ | 14,690,982 |
| | $ | 17,029,024 |
| | $ | 479,119 |
| | $ | 17,508,143 |
|
| Commitments for standby bond purchases | 37,490 |
| | 149,705 |
| | 187,195 |
| | 10,960 |
| | 273,025 |
| | 283,985 |
| 27,230 |
| | 44,645 |
| | 71,875 |
| | 28,810 |
| | 77,240 |
| | 106,050 |
|
| Commitments to fund additional Advances | | 5,000 |
| | — |
| | 5,000 |
| | — |
| | — |
| | — |
|
| Commitments to purchase mortgage loans | 451,292 |
| | — |
| | 451,292 |
| | 36,620 |
| | — |
| | 36,620 |
| 218,651 |
| | — |
| | 218,651 |
| | 440,849 |
| | — |
| | 440,849 |
|
Unsettled Consolidated Bonds, at par (1)(2) | 17,000 |
| | — |
| | 17,000 |
| | 240,000 |
| | — |
| | 240,000 |
| |
Unsettled Consolidated Discount Notes, at par (1) | 5,000 |
| | — |
| | 5,000 |
| | 1,122,298 |
| | — |
| | 1,122,298 |
| 309,662 |
| | — |
| | 309,662 |
| | 5,500 |
| | — |
| | 5,500 |
|
| |
| (1) | Expiration is based on settlement period rather than underlying contractual maturity of Consolidated Obligations. |
| |
(2) | Of the total unsettled Consolidated Bonds, $17,000 and $0 (in thousands) were hedged with associated interest rate swaps at December 31, 2014 and 2013, respectively.
|
Standby Letters of Credit. AThe FHLB issues Standby LetterLetters of Credit is a financing arrangement betweenon behalf of its Members to support certain obligations of the FHLBankMembers to third-party beneficiaries. These Standby Letters of Credit are subject to the same collateralization and its member.borrowing limits that are applicable to Advances. Standby Letters of Credit may be offered to assist Members in facilitating residential housing finance, community lending, and asset-liability management, and to provide liquidity. In particular, Members often use Standby Letters of Credit as collateral for deposits from federal and state government agencies. Standby Letters of Credit are executed for membersMembers for a fee. If the FHLBankFHLB is required to make payment for a beneficiary's draw, the paymentMember either reimburses the FHLB for the amount isdrawn or, subject to the FHLB's discretion, the amount drawn may be converted into a collateralized Advance to the member. The original terms of theseMember. However, Standby Letters of Credit range from less than 1 monthusually expire without being drawn upon.Standby Letters of Credit have original expiration periods of up to 19 years.years, currently expiring no later than 2024. Unearned fees and the value of guarantees related to Standby Letters of Credit are recorded in other liabilities and amounted to (in thousands) $4,441$3,889 and $3,145$5,057 at December 31, 20142017 and 2013.2016.
The FHLBankFHLB monitors the creditworthiness of its membersMembers that have Standby Letters of Credit. In addition, Standby Letters of Credit are subject to the same collateralization and borrowing limits that apply to Advances and are fully collateralized at the time of issuance. As a result, the FHLBankFHLB has deemed it unnecessary to record any additional liability on these commitments.
Standby Bond Purchase Agreements. The FHLBankFHLB has executed standby bond purchase agreements with one state housing authority whereby the FHLBank,FHLB, for a fee, agrees as a liquidity provider if required, to purchase and hold the authority's bonds until the designated marketing agent can find a suitable investor or the housing authority repurchases the bonds according to a schedule established by the standby agreement. Each standby agreement dictates the specific terms that would require the FHLBankFHLB to purchase the bonds. The bond purchase commitments entered into by the FHLBankFHLB have original expiration periods up to 63 years, currently no later than 2017,2020, although some are renewable at the option of the FHLBank.FHLB. During 20142017 and 2013,2016, the FHLBankFHLB was not required to purchase any bonds under these agreements.
Commitments to Purchase Mortgage Loans. The FHLBankFHLB enters into commitments that unconditionally obligate the FHLBankFHLB to purchase mortgage loans. Commitments are generally for periods not to exceed 90 days. The delivery commitments are recorded as derivatives at their fair values.
Pledged Collateral. The FHLBankFHLB may pledge securities, as collateral, related to derivatives. See Note 11 - Derivatives and Hedging Activities for additional information about the FHLBank'sFHLB's pledged collateral and other credit-risk-related contingent features.
Lease Commitments. The FHLBankFHLB charged to operating expenses net rental and related costs of approximately $1,816,000,$1,990,000, $1,713,000,1,899,000, and $1,905,000$1,966,000 for the years ending December 31, 2014, 2013,2017, 2016, and 2012.
Table 20.2 - Future Minimum Rentals for Operating Leases (in thousands)
|
| | | | | | | | | | | | |
Year | | Premises | | Equipment | | Total |
| 2015 | | $ | 831 |
| | $ | 146 |
| | $ | 977 |
|
| 2016 | | 755 |
| | 143 |
| | 898 |
|
| 2017 | | 758 |
| | 143 |
| | 901 |
|
| 2018 | | 777 |
| | 72 |
| | 849 |
|
| 2019 | | 796 |
| | — |
| | 796 |
|
| Thereafter | | 5,865 |
| | — |
| | 5,865 |
|
| Total | | $ | 9,782 |
| | $ | 504 |
| | $ | 10,286 |
|
2015. Total future minimum operating lease payments were $7,815,000 at December 31, 2017. Lease agreements for FHLBankFHLB premises generally provide for increases in the basic rentals resulting from increases in property taxes and maintenance expenses. Such increases are not expected to have a material effect on the FHLBank.FHLB's financial condition or results of operations.
Legal Proceedings. From time to time, the FHLBankFHLB is subject to legal proceedings arising in the normal course of business. In March 2010, the FHLBank was advised by representatives of the Lehman Brothers Holdings, Inc. bankruptcy estate that they believed that the FHLBank had been unjustly enriched in connection with the close out of its interest rate swap transactions with Lehman at the time of the Lehman bankruptcy in 2008 and that the bankruptcy estate was entitled to the $43 million difference between the settlement amount the FHLBank paid Lehman in connection with the close-out transactions and the market value payment the FHLBank received when replacing the swaps with other counterparties. In May 2010, the FHLBank received a Derivatives Alternative Dispute Resolution notice from the Lehman bankruptcy estate with a settlement demand of $65.8 million, plus interest accruing primarily at LIBOR plus 14.5 percent since the bankruptcy filing, based on their view of how the settlement amount should have been calculated. In accordance with the Alternative Dispute Resolution Order of the Bankruptcy Court administering the Lehman estate, senior management of the FHLBank participated in a non-binding mediation in New York in August 2010, and counsel for the FHLBank continued discussions with the court-appointed mediator for several weeks thereafter. The mediation concluded in October 2010 without a settlement of the claims asserted by the Lehman bankruptcy estate. In April 2013, Lehman Brothers Special Financing Inc., through Lehman Brothers Holdings Inc. and the Plan Administrator under the Modified Third Amended Joint Chapter 11 Plan of Lehman Brothers Holdings Inc. and its Affiliated Debtors, filed an adversary complaint in the United States Bankruptcy Court for the Southern District of New York against the FHLBank seeking (a) a declaratory judgment on the interpretation of certain provisions and the calculation of amounts due under the agreement governing the 2008 swap transactions described above, and (b) additional amounts alleged as due as part of the termination of such transactions. The FHLBank believes that it correctly calculated, and fully satisfied its obligation to Lehman in September 2008, and the FHLBank intends to vigorously defend itself.
The FHLBank also is subject to other legal proceedings arising in the normal course of business. The FHLBankFHLB would record an accrual for a loss contingency when it is probable that a loss has been incurred and the amount cancould be reasonably estimated. After consultation with legal counsel, management does not anticipate that the ultimate liability, if any, arising out of theseany matters will have a material effect on the FHLBank'sFHLB's financial condition or results of operations.
Note 21 - Transactions with Other FHLBanks
The FHLBankFHLB notes all transactions with other FHLBanks on the face of its financial statements. Occasionally, the FHLBankFHLB loans short-term funds to and borrows short-term funds from other FHLBanks. These loans and borrowings are transacted at then current market rates when traded. There were no such loans or borrowings outstanding at December 31, 2014, 2013,2017, 2016, or 2012.2015. The following table details the average daily balance of lending and borrowing between the FHLBankFHLB and other FHLBanks for the years ended December 31.
Table 21.1 - Lending and Borrowing Between the FHLBankFHLB and Other FHLBanks (in thousands)
| | | | Average Daily Balances for the Years Ended December 31, | Average Daily Balances for the Years Ended December 31, |
| | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| Loans to other FHLBanks | $ | 438 |
| | $ | 3,740 |
| | $ | 2,514 |
| $ | 14 |
| | $ | 3,142 |
| | $ | — |
|
| Borrowings from other FHLBanks | 68 |
| | 4,110 |
| | 273 |
| 959 |
| | 273 |
| | 68 |
|
The FHLBankIn addition, the FHLB may, from time to time, assume the outstanding primary liability for Consolidated Obligations of another FHLBank (at then current market rates on the day when the transfer is traded) rather than issuing new debt for which the FHLBankFHLB is the primary obligor. The FHLBankFHLB then becomes the primary obligor on the transferred debt. There are no formal arrangements governing the transfer of Consolidated Obligations between the FHLBanks, and these transfers are not investments of one FHLBank in another FHLBank. Transferring debt at current market rates enables the FHLBank System to satisfy the debt issuance needs of individual FHLBanks without incurring the additional selling expenses (concession fees) associated with new debt. It also provides the transferring FHLBanks with outlets for extinguishing debt structures no longer required for their balance sheet management strategies.
There were no Consolidated Obligations transferred to the FHLBankFHLB during the years ended December 31, 20142017, 20132016, or 2012.2015. The FHLBankFHLB had no Consolidated Obligations transferred to other FHLBanks during these periods.
Note 22 - Transactions with Stockholders
As a cooperative, the FHLBank'sFHLB's capital stock is owned by its members,Members, by former membersMembers that retain the stock as provided in the FHLBank'sFHLB's Capital Plan and by nonmember institutions that have acquired membersMembers and must retain the stock to support Advances or other activities with the FHLBank.FHLB. All Advances are issued to membersMembers and all mortgage loans held for portfolio are purchased from members.Members. The FHLBankFHLB also maintains demand deposit accounts for members,Members, primarily to facilitate settlement activities that are directly related to Advances and mortgage loan purchases. Additionally, the FHLBankFHLB may enter into interest rate swaps with its stockholders. The FHLBankFHLB may not invest in any equity securities issued by its stockholders and it has not purchased any mortgage-backed securities securitized by, or other direct long-term investments in, its stockholders.
For financial statement purposes, the FHLBankFHLB defines related parties as those membersMembers with more than 10 percent of the voting interests of the FHLBankFHLB capital stock outstanding. Federal legislationstatute prescribes the voting rights of membersMembers in the election of both memberMember and independent directors. For memberMember directorships, the Finance Agency designates the number of memberMember directorships in a given year and an eligible voting memberMember may vote only for candidates seeking election in its respective state. For independent directorships,directors, the FHLBank'sFHLB's Board of Directors nominates candidates to be placed on the ballot in an at-large election. For both memberMember and independent directorshipdirector elections, a memberMember is entitled to vote one share of required capital stock, subject to a statutory limitation, for each applicable directorship. Under this limitation, the total number of votes that a memberMember may cast is limited to the average number of shares of the FHLBank'sFHLB's capital stock that were required to be held by all membersMembers in that state as of the record date for voting. Nonmember stockholders are not eligible to vote in director elections. Due to the abovementionedthese statutory limitation,limitations, no memberMember owned more than 10 percent of the voting interests of the FHLBankFHLB at December 31, 20142017 or 2013.2016.
All transactions with stockholders are entered into in the ordinary course of business. Finance Agency regulations require the FHLBankFHLB to offer the same pricing for Advances and other services to all membersMembers regardless of asset or transaction size, charter type, or geographic location. However, the FHLBankFHLB may, in pricing its Advances, distinguish among membersMembers based upon its assessment of the credit and other risks to the FHLBankFHLB of lending to any particular memberMember or upon other reasonable criteria that may be applied equally to all members.Members. The FHLBank'sFHLB's policies and procedures require that such standards and criteria be applied consistently and without discrimination to all membersMembers applying for Advances.
Transactions with Directors' Financial Institutions. In the ordinary course of its business, the FHLBankFHLB may provide products and services to membersMembers whose officers or directors serve as directors of the FHLBankFHLB (Directors' Financial Institutions). Finance Agency regulations require that transactions with Directors' Financial Institutions be made on the same terms as those with any other member.Member. The following table reflects balances with Directors' Financial Institutions for the items indicated below. The FHLBankFHLB had no mortgage-backed securities or derivatives transactions with Directors' Financial Institutions at December 31, 2014 and 2013.2017 or 2016.
Table 22.1 - Transactions with Directors' Financial Institutions (dollars in millions)
| | | | December 31, 2014 | | December 31, 2013 | December 31, 2017 | | December 31, 2016 |
| | Balance | | % of Total (1) | | Balance | | % of Total (1) | Balance | | % of Total (1) | | Balance | | % of Total (1) |
| Advances | $ | 2,929 |
| | 4.2 | % | | $ | 1,611 |
| | 2.5 | % | $ | 3,558 |
| | 5.1 | % | | $ | 3,947 |
| | 5.6 | % |
| MPP | 154 |
| | 2.3 |
| | 57 |
| | 0.9 |
| 112 |
| | 1.2 |
| | 234 |
| | 2.6 |
|
| Regulatory capital stock | 225 |
| | 5.2 |
| | 246 |
| | 5.1 |
| 187 |
| | 4.4 |
| | 166 |
| | 4.0 |
|
| |
| (1) | Percentage of total principal (Advances), unpaid principal balance (MPP), and regulatory capital stock. |
Concentrations. The following table shows regulatory capital stock balances, outstanding Advance principal balances, and unpaid principal balances of mortgage loans held for portfolio at the dates indicated toof stockholders holding five percent or more of regulatory capital stock and includeincludes any known affiliates that are membersMembers of the FHLBank.FHLB.
Table 22.2 - Stockholders Holding Five Percent or more of Regulatory Capital Stock (dollars in millions)
| | | | Regulatory Capital Stock | | Advance | | MPP Unpaid | Regulatory Capital Stock | | Advance | | MPP Unpaid |
| December 31, 2014 | Balance | | % of Total | | Principal | | Principal Balance | |
| December 31, 2017 | | Balance | | % of Total | | Principal | | Principal Balance |
| JPMorgan Chase Bank, N.A. | $ | 1,533 |
| | 35 | % | | $ | 41,300 |
| | $ | — |
| $ | 1,059 |
| | 25 | % | | $ | 23,950 |
| | $ | — |
|
| U.S. Bank, N.A. | 475 |
| | 11 |
| | 8,338 |
| | 38 |
| 593 |
| | 14 |
| | 8,975 |
| | 23 |
|
| The Huntington National Bank | | 282 |
| | 7 |
| | 3,732 |
| | 456 |
|
| Fifth Third Bank | 248 |
| | 6 |
| | 24 |
| | 3 |
| 248 |
| | 6 |
| | 3,140 |
| | 2 |
|
| | | | Regulatory Capital Stock | | Advance | | MPP Unpaid | Regulatory Capital Stock | | Advance | | MPP Unpaid |
| December 31, 2013 | Balance | | % of Total | | Principal | | Principal Balance | |
| December 31, 2016 | | Balance | | % of Total | | Principal | | Principal Balance |
| JPMorgan Chase Bank, N.A. | $ | 1,533 |
| | 32 | % | | $ | 41,700 |
| | $ | — |
| $ | 1,317 |
| | 31 | % | | $ | 32,300 |
| | $ | — |
|
| U.S. Bank, N.A. | 592 |
| | 12 |
| | 4,584 |
| | 45 |
| 475 |
| | 11 |
| | 8,563 |
| | 27 |
|
| Fifth Third Bank | 401 |
| | 8 |
| | 26 |
| | 4 |
| 248 |
| | 6 |
| | 2,517 |
| | 2 |
|
| The Huntington National Bank | | 244 |
| | 6 |
| | 2,433 |
| | 388 |
|
Nonmember Affiliates. The FHLBankFHLB has relationships with three nonmember affiliates, the Kentucky Housing Corporation, the Ohio Housing Finance Agency and the Tennessee Housing Development Agency. The FHLBankFHLB had no investments in or borrowings to any of these nonmember affiliates at December 31, 20142017 or 2013.2016. The FHLBankFHLB has executed standby bond purchase agreements with one state housing authority whereby the FHLBank,FHLB, for a fee, agrees as a liquidity provider if required, to purchase and hold the authority's bonds until the designated marketing agent can find a suitable investor or the housing authority repurchases the bond according to a schedule established by the standby agreement. For the years ended December 31, 20142017 and 2013,2016, the FHLBankFHLB was not required to purchase any bonds under these agreements.
SUPPLEMENTAL FINANCIAL DATA
Supplemental financial data required is set forth in the “Other Financial Information” caption at Part II, Item 7 of this report.
| |
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
There were no changes in or disagreements with our accountants on accounting and financial disclosure during the two most recent fiscal years.
| |
| Item 9A. | Controls and Procedures. |
DISCLOSURE CONTROLS AND PROCEDURES
As of December 31, 2014,2017, the FHLBank'sFHLB's management, including its principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, these two officers each concluded that, as of December 31, 2014,2017, the FHLBankFHLB maintained effective disclosure controls and procedures designed to ensure that information required to be disclosed in the reports that it files under the Exchange Act is (1) accumulated and communicated to management as appropriate to allow timely decisions regarding disclosure and (2) recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of the FHLBankFHLB is responsible for establishing and maintaining adequate internal control over financial reporting. The FHLBank'sFHLB's internal control over financial reporting is designed by, or under the supervision of, the FHLBank'sFHLB's management, including its principal executive officer and principal financial officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The FHLBank'sFHLB's management assessed the effectiveness of the FHLBank'sFHLB's internal control over financial reporting as of December 31, 2014.2017. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based on its assessment, management of the FHLBankFHLB determined that, as of December 31, 2014,2017, the FHLBank'sFHLB's internal control over financial reporting was effective based on those criteria.
The effectiveness of the FHLBank'sFHLB's internal control over financial reporting as of December 31, 20142017 has been audited by PricewaterhouseCoopers LLP (PwC), an independent registered public accounting firm, as stated in their report which is included in “Item 8. Financial Statements and Supplementary Data."
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in the FHLBank'sFHLB's internal control over financial reporting that occurred during the fourth quarter ended December 31, 20142017 that materially affected, or are reasonably likely to materially affect, the FHLBank'sFHLB's internal control over financial reporting. On May 14, 2013, the COSO published an updated Internal Control - Integrated Framework (2013) and related illustrative documents. The FHLBank adopted the new framework in 2014.
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| Item 9B. | Other Information. |
Not applicable.PwC serves as the independent registered public accounting firm for the FHLB. Rule 201(c)(1)(ii)(A) of SEC Regulation S-X (the Loan Rule) prohibits an accounting firm, such as PwC, from having certain financial relationships with its audit clients and affiliated entities. Specifically, the Loan Rule provides, in relevant part, that an accounting firm generally would not be independent if it or a covered person in the firm receives a loan from a lender that is a “record or beneficial owner of more than ten percent of the audit client’s equity securities.” A covered person in the firm includes personnel on the audit engagement
Tableteam, personnel in the chain of Contentscommand, partners and managers who provide ten or more hours of non-audit services to the audit client, and partners in the office where the lead engagement partner practices in connection with the client.
PwC has advised the FHLB that as of December 31, 2017 PwC and certain covered persons had borrowing relationships with two FHLB Members (referred below as the “lenders”) who own more than ten percent of the FHLB’s capital stock, which under the Loan Rule, may reasonably be thought to bear on PwC’s independence with respect to the FHLB. The FHLB is providing this disclosure to explain the facts and circumstances, as well as PwC’s and the Audit Committee’s conclusions, concerning PwC’s objectivity and impartiality with respect to the audit of the FHLB.
PwC advised the Audit Committee of the Board that it believes that, in light of the facts of these borrowing relationships, its ability to exercise objective and impartial judgment on all matters encompassed within PwC’s audit engagement has not been impaired and that a reasonable investor with knowledge of all relevant facts and circumstances would reach the same conclusion. PwC has advised the Audit Committee that this conclusion is based in part on the following considerations:
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| ▪ | the firm's borrowings are in good standing and neither lender has the right to take action against PwC, as borrower, in connection with the financings; |
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| ▪ | the debt balances outstanding are immaterial to PwC and to each lender; |
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| ▪ | PwC has borrowing relationships with a diverse group of lenders, therefore PwC is not dependent on any single lender or group of lenders; and |
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| ▪ | the PwC audit engagement team has no involvement in PwC’s treasury function and PwC’s treasury function has no oversight or ability to influence the PwC audit engagement team. |
Additionally, the Audit Committee assessed PwC’s ability to perform an objective and impartial audit, including consideration of the ownership structure of the FHLB, the limited voting rights of Members and the composition of the Board of Directors. In addition to the above listed considerations, the Audit Committee considered the following:
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| ▪ | although the lenders owned more than ten percent of the FHLB’s capital stock, the lenders' voting rights are each less than ten percent; |
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| ▪ | no individual officer or director that serves on the Board of Directors has the ability to significantly influence the FHLB based on the composition of the Board of Directors; and |
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| ▪ | as of December 31, 2017, and as of the date of the filing of this Form 10-K, no officer or director of either lender served on the Board of Directors of the FHLB. |
Based on this evaluation, the Audit Committee has concluded that PwC’s ability to exercise objective and impartial judgment on all issues encompassed within PwC’s audit engagement has not been impaired.
PART III
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| Item 10. | Directors, Executive Officers and Corporate Governance. |
NOMINATION AND ELECTION OF DIRECTORS
The Finance Agency has authorized us to have a total of 1718 directors: 10 memberMember directors and seveneight independent directors. Two of our independent directors are designated as public interest directors and all 1718 directors are elected by our members.Members.
For both memberMember and independent directorship elections, a memberMember institution may cast one vote per seat or directorship up for election for each share of stock that the memberMember was required to hold as of December 31 of the calendar year immediately preceding the election year. However, the number of votes that any memberMember may cast for any one directorship cannot exceed the average number of shares of FHLBankFHLB stock that were required to be held by all membersMembers located in its state. The election process is conducted by mail. Our Board of Directors does not solicit proxies nor is any memberMember institution permitted to solicit proxies in an election.
Finance Agency regulations also provide for two separate selection processes for memberMember and independent director candidates.
Member director candidates are nominated by any officer or director of a memberMember institution eligible to vote in the respective statewide election, including the candidate's own institution. After the FHLBankFHLB determines that the candidate meets all memberMember director eligibility requirements per Finance Agency regulations, the candidate may run for election and the candidate's name is placed on the ballot.
Independent director candidates are self-nominated. Any individual may submit an independent director application form to the FHLBankFHLB and request to be considered for election. The FHLBankFHLB reviews all application forms to determine that the individual satisfies the appropriate public interest or non-public interest independent director eligibility requirements per Finance Agency regulations before forwarding the application form to the Board for review of the candidate's qualifications and skills. The Board then nominates an individual whose name will appear on the ballot after consultation with the Affordable Housing Advisory Council and after the nominee information has been submitted to the Finance Agency for review. As part of the nomination process, the Board may consider several factors including the individual's contributions and service on the Board, if a former or incumbent director, and the specific experience and qualifications of the candidate. The Board will also considerconsiders diversity in nominating independent directors and how the attributes of the candidate may add to the overall strength and skill set of the Board. These same factors are considered when the Board fills a memberMember or independent director vacancy.
DIRECTORS
The following table sets forth certain information (ages as of March 1, 2015)2018) regarding each of our current directors.
| | | Name | Age | Director Since | Expiration of Term as a Director | Independent or Member (State) | Age | Director Since | Expiration of Term as a Director | Independent or Member (State) |
| J. Lynn Anderson | 51 | 2011 | 12/31/16 | Member (OH) | 54 | 2017 (1) | 12/31/20 | Independent (OH) |
| Grady P. Appleton | 67 | 2007 | 12/31/17 | Independent (OH) | 70 | 2007 | 12/31/21 | Independent (OH) |
| Brady T. Burt | | 45 | 2017 | 12/31/20 | Member (OH) |
| Greg W. Caudill | 56 | 2014 | 12/31/17 | Member (KY) | 59 | 2014 | 12/31/21 | Member (KY) |
| James R. DeRoberts | 58 | 2008 | 12/31/18 | Member (OH) | 61 | 2008 | 12/31/18 | Member (OH) |
| Mark N. DuHamel | 57 | 2009 | 12/31/15 | Member (OH) | 60 | (2009-2015) 2018 | 12/31/21 | Member (OH) |
| Leslie D. Dunn | 69 | 2007 | 12/31/16 | Independent (OH) | 72 | 2007 | 12/31/20 | Independent (OH) |
| James A. England | 63 | 2011 | 12/31/18 | Member (TN) | |
| James A. England, Vice Chair | | 66 | 2011 | 12/31/18 | Member (TN) |
| Charles J. Koch | 68 | 2008 (1) | 12/31/18 | Independent (OH) | 71 | 2008 (2) | 12/31/18 | Independent (OH) |
| Robert T. Lameier | | 65 | 2016 | 12/31/19 | Member (OH) |
| Michael R. Melvin | 70 | (1995-2001) 2006 | 12/31/15 | Member (OH) | 73 | (1995-2001) 2006 | 12/31/19 | Member (OH) |
| Thomas L. Moore | 68 | 2013 | 12/31/16 | Member (OH) | |
| Donald J. Mullineaux, Chair | 69 | 2010 | 12/31/15 | Independent (KY) | 72 | 2010 | 12/31/19 | Independent (KY) |
| Alvin J. Nance | 57 | 2009 | 12/31/16 | Independent (TN) | 60 | 2009 | 12/31/20 | Independent (TN) |
| Charles J. Ruma | 73 | (2002-2004) 2007 | 12/31/15 | Independent (OH) | 76 | (2002-2004) 2007 | 12/31/19 | Independent (OH) |
| David E. Sartore | 54 | 2014 | 12/31/17 | Member (KY) | 57 | 2014 | 12/31/21 | Member (KY) |
| William J. Small, Vice Chair | 64 | 2007 | 12/31/17 | Member (OH) | |
| William S. Stuard, Jr. | 60 | 2011 | 12/31/18 | Member (TN) | 63 | 2011 | 12/31/18 | Member (TN) |
| Nancy E. Uridil | 63 | 2015 | 12/31/18 | Independent (OH) | 66 | 2015 | 12/31/18 | Independent (OH) |
| James J. Vance | | 56 | 2017 | 12/31/20 | Member (OH) |
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| (1) | Ms. Anderson, an independent director beginning in 2017, also served as a Member director from 2011-2016. |
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| (2) | Mr. Koch, an independent director beginning in 2008, also served as a memberMember director from 1990-1995 and 1998-2006. |
Member Directors
Finance Agency regulations govern the eligibility requirements for our memberMember directors. Each memberMember director, and each nominee to a memberMember directorship, must be a U.S. citizen and an officer or director of a memberMember that: is located in the voting state to be represented by the memberMember directorship, was a memberMember of the FHLBankFHLB as of the record date, and meets all minimum capital requirements established by its appropriate Federal banking agency or state regulator.
Each memberMember director is nominated and elected by our membersMembers through an annual voting process administered by us. Any memberMember that is entitled to vote in the election may nominate an eligible individual to fill each available memberMember directorship for its voting state, and all eligible nominees must be presented to the membership in the voting state. In accordance with Finance Agency regulations, except when acting in a personal capacity, no director, officer, attorney, employee or agent of the FHLBankFHLB may communicate in any manner that he or she directly or indirectly, supports or opposes the nomination or election of a particular individual for a memberMember directorship or take any other action to influence the voting with respect to a particular individual. As a result, the FHLBankFHLB is not in a position to know which factors its memberMember institutions considered in nominating candidates for memberMember directorships or in voting to elect memberMember directors.
Ms. Anderson Mr. Burthas been the Senior Vice President and Chief Financial Officer of NationwideThe Park National Bank, Columbus,Newark, Ohio, a subsidiary of Park National Corporation, since November 2009. SheDecember 2012. He also servedserves as the Senior Vice President-PropertySecretary, Treasurer, and Casualty Product and Pricing for Nationwide Mutual Insurance Company from March 2003 until November 2009.Chief Financial Officer of Park National Corporation.
Mr. Caudill has been President and Chief Executive Officer of Farmers National Bank, Danville, Kentucky since December 2002. He also served as President of Farmers National Bank from December 2002 until April 2016.
Mr. DeRoberts has been Chairman of The Arlington Bank, Upper Arlington, Ohio since 1999 and a partner at Gardiner Allen DeRoberts Insurance LLC, Columbus, Ohio since 2006. He has also servesserved as a director of Park National Corporation and its subsidiary, The Park National Bank, Newark, Ohio.Ohio since February 2015. In addition, he served as Chairman of The Arlington Bank from 1999 to 2017.
Mr. DuHamel has been a directorExecutive Vice President and Corporate Treasurer of The Huntington National Bank, Columbus, Ohio since August 2016. Previously, he served as the Executive Vice President and Deputy Chief Financial Officer of FirstMerit Bank, N.A. from May 2015 to August 2016. In addition, he served as the Executive Vice President of FirstMerit Bank, N.A., Akron, Ohio, since from February 2005 to May 2015 and Treasurer of FirstMerit Bank, N.A. since March 1996.from 1996 to May 2015.
Mr. Englandhas been Chairman of Decatur County Bank, Decaturville, Tennessee since 1990. He also served as Chief Executive Officer of Decatur County Bank from 1990 to 2013.
Mr. Lameier has been President, Chief Executive Officer, and a director of Miami Savings Bank, Miamitown, Ohio since 1993.
Mr. Melvin has been President and a director of Perpetual Federal Savings Bank, Urbana, Ohio since 1980.
Mr. Moore has been a director at First Federal Bank of Ohio, Galion, Ohio, since 1995, serving as Chairman from November 2011 to November 2014. He also served as President and Chief Executive Officer of First Federal Bank of Ohio from 1995 to January 2014.
Mr. Sartore became Executive Vice President and Chief Financial Officer of Field & Main Bank, Henderson, Kentucky in January 2015 when Ohio Valley Financial Group and BankTrust Financial merged to form Field & Main Bank. Previously, Mr. Sartore was Senior Vice President and Chief Financial Officer of Ohio Valley Financial Group since 1992.
Mr. SmallStuard has been Chairman of First Defiance Financial Corp.F&M Bank, Clarksville, Tennessee, since January 2016 and its subsidiary bank, First Federal Bank of the Midwest, of Defiance, Ohio, since 1999. He also served as Chief Executive Officer of First Defiance Financial Corp. from 1999 to December 2013. In addition, he served as Chief Executive Officer of First Federal Bank of the Midwest from 1999 until 2008.
Mr. Stuard has been President and Chief Executive Officer of F&M Bank Clarksville, Tennessee, since January 1991.
Mr. Vance has been Senior Vice President and Treasurer of Western-Southern Life Assurance Company and related subsidiaries (Cincinnati, Ohio) since March 2016. Previously, he served as Vice President and Treasurer of Western-Southern Life Assurance Company and related subsidiaries from 1999 to March 2016.
Independent Directors
Finance Agency regulations also govern the eligibility requirements of our independent directors. Each independent director, and each nominee to an independent directorship, must be a U.S. citizen and bona fide resident of our District. At least two of our independent directors must be designated by our Board as public interest directors. Public interest independent directors must have more than four years experience representing consumer or community interest in banking services, credit needs, housing, or consumer financial protections. All other independent directors must have knowledge of or experience in one or more of the following areas: auditing and accounting; derivatives; financial management; organizational management; project development; risk management practices; and the law. Our Board of Directors nominates candidates for independent directorships. Directors, officers, employees, attorneys, or agents of the FHLBankFHLB are permitted to support directly or indirectly the nomination or election of a particular individual for an independent directorship.
Ms. Anderson was the Senior Vice President-Member Solutions Integration for Nationwide Mutual Insurance Company, Columbus, Ohio from March 2016 to December 2016. She also served as President of Nationwide Bank from November 2009 to March 2016. Ms. Anderson is a certified public accountant and has seven years of experience serving on the board of a non-profit entity which focuses on providing low- to moderate-income housing. Ms. Anderson's prior leadership positions within the banking and insurance industries contribute skills to the Board in the areas of auditing and accounting, operations and corporate governance.
Mr. Appleton has served aswas the President and Chief Executive Officer of East Akron Neighborhood Development Corporation (EANDC), Akron, Ohio, sincefrom January 2014.2014 to January 2018. He previouslyalso served as Executive Director of EANDC for more than 30 years. EANDC improves communities by providing quality and affordable housing, comprehensive homeownership services and economic development opportunities. Mr. Appleton's years of experience with EANDC bring insight to the Board that contributes to the FHLBank'sFHLB's corporate objective of maximizing the effectiveness of contributions to Housing and Community Investment programs. Mr. Appleton also served as a member of the FHLBank'sFHLB's Advisory Council from 1997 until 2006.
Ms. Dunn was Senior Vice President of Business Development, General Counsel and Secretary of Cole National Corporation, a New York Stock Exchange listed retailer now owned by Luxottica Group S.p.A., from September 1997 until October 2004. Prior to joining Cole, she had been a partner since 1985 in the Business Practice of the Jones Day law firm. She currently is engaged in various businesspublic and private company board activities and serves in leadership positions with a number of civic and philanthropic organizations. Ms. Dunn has served as a director of New York Community Bancorp, Inc. since September 2015 and serves on its Audit, Risk Assessment, Cyber, and Nominating and Corporate Governance Committees. Ms. Dunn's experience as a director and senior officer of a publicly held companycompanies and as a law firm partner representing numerous publicly held companies brings perspective to the Board regarding the FHLBank'sFHLB's status as an SEC registrant, corporate governance matters, and the Board's responsibility to oversee the FHLBank'sFHLB's operations.
Mr. Koch is the retired Chairman of the Board and Chief Executive Officer of Charter One Bank, N.A., Cleveland, Ohio. He served as Charter One's Chief Executive Officer from 1987 to 2004, and as its Chairman of the Board from 1995 to 2004, when the bank was sold to Royal Bank of Scotland. Mr. Koch was a director of the Royal Bank of Scotland from 2004 until February 2009. He is currently a director of Assurant Inc. and Citizens Financial Group. In addition, he is the Chair of the Risk and Compliance Committees of Citizens Financial Group. Mr. Koch's substantial experience in risk management and his prior leadership positions within the banking industry and various board positions held contribute skills important to the Board's responsibility for approving a strategic business plan that supports the FHLBank'sFHLB's mission and corporate objectives.
Dr. Mullineaux is the Emeritus duPont Endowed Chair in Banking and Financial Services in the Gatton College of Business and Economics at the University of Kentucky. He held the duPont Endowed Chair from 1984 until 2014. Previously, he was on the staff of the Federal Reserve Bank of Philadelphia, where he served as Senior Vice President and Director of Research from 1979 until 1984. He also served as a director of Farmers Capital Bank Corporation from 2005 until 2009. He has published numerous articles and lectured on a variety of banking topics, including risk management, financial markets and economics. He
has served as the Curriculum Director for the ABA's Stonier Graduate School of Banking since 2001.from 2001 to 2016. Dr. Mullineaux brings knowledge and experience to the Board in areas vital to the operation of financial institutions in today's economy.
Mr. Nance has been Chief Executive Officer of LHP Development LLC and LHP Management LLC, Knoxville, Tennessee, since April 2015. Previously, he was Executive Director and the Chief Executive Officer of Knoxville's Community Development Corporation (KCDC) Knoxville, Tennessee since 2000.from 2000 to 2015. The KCDC is the public housing and redevelopment authority for the City of Knoxville and Knox County, which strives to improve Knoxville's neighborhoods and communities, including through providing quality affordable housing. Mr. Nance will leave KCDC to become Chief Executive Officeralso served as Chairman of the DevelopmentLegislative Committee for the Tennessee Association of Housing and Property Management operating divisions of Lawler Wood Housing Partners, LLC, Knoxville, Tennessee, effective April 1, 2015.Redevelopment Authorities, which provides assistance and support to the state's public and affordable housing agencies. In addition, Mr. Nance also served an eight-year term where he held the office of Vice Chairman on the Tennessee Housing Development Agency, the state's housing finance agency, which promotes the production of affordable housing for very low, low, and moderate, income individuals and families in the state. Mr. Nance also serves on the Board of Knoxville Habitat for Humanity. Mr. Nance's depth of experience with these organizations brings insight to the Board that contributes to the FHLBank'sFHLB's corporate objective of maximizing the effectiveness of its contributions to Housing and Community Investment programs.
Mr. Ruma has been President and Chief Executive Officer of Virginia Homes Ltd., a Columbus, Ohio area homebuilder, since 1975. He served on the board of the Ohio Housing Finance Agency (OHFA), the state's housing agency, from 2004 to 2009. OHFA helps Ohio's first-time homebuyers, renters, senior citizens, and others find quality, affordable housing that meets their needs. OHFA's programs also support developers and property managers of affordable housing throughout the state. Mr. Ruma's years of experience in the home building industry and with the OHFA bring insight to the Board that contributes to the FHLBank'sFHLB's mission and corporate objectives.
Ms. Uridilwas the Senior Vice President of Global Operation for Moen Incorporated, North Olmsted, Ohio, from September 2005 until March 2014. Ms. Uridil is currently on the Board of Directors of Flexsteel Industries, Inc., where she serves on the Compensation Committee and chairs the Nominations and Governance Committee. Previously, Ms. Uridil served as a Senior Vice President of Estée Lauder Companies, from 2000 to 2005. Ms. Uridil also served as a Senior Vice President of Mary Kay, Incorporated, from 1996 to 2000. Serving on executive teams for global businesses for more than 18 years, Ms. Uridil has extensive experience in strategy, expense and capital management, merger and acquisition integration and sourcing. Ms. Uridil's qualifications and insight provide valuable skills to the Board in the important areas of personnel, compensation, information technology and operations.
EXECUTIVE OFFICERS
The following table sets forth certain information (ages as of March 1, 2015)2018) regarding our executive officers.
| | | Name | Age | Position | Employee of the FHLBank Since | Age | Position | Employee of the FHLB Since |
| Andrew S. Howell | 53 | President and Chief Executive Officer | 1989 | 56 | President and Chief Executive Officer | 1989 |
| Donald R. Able | 54 | Executive Vice President-Chief Operating Officer and Chief Financial Officer | 1981 | 57 | Executive Vice President-Chief Operating Officer | 1981 |
| James G. Dooley, Sr. | | 64 | Executive Vice President-Chief Risk and Compliance Officer | 2006 |
| R. Kyle Lawler | 57 | Executive Vice President-Chief Business Officer | 2000 | 60 | Executive Vice President-Chief Business Officer | 2000 |
| Stephen J. Sponaugle | | 55 | Executive Vice President-Chief Financial Officer | 1992 |
| Damon v. Allen | 44 | Senior Vice President-Community Investment Officer | 1999 | 47 | Senior Vice President-Community Investment Officer | 1999 |
| J. Christopher Bates | 39 | Senior Vice President-Chief Accounting Officer | 2005 | 42 | Senior Vice President-Chief Accounting Officer | 2005 |
| Roger B. Batsel | 43 | Senior Vice President-Chief Information Officer | 2014 | 46 | Senior Vice President-Chief Information Officer | 2014 |
| Thomas J. Ciresi | 61 | Senior Vice President-Member Services | 1981 | |
| James G. Dooley, Sr. | 61 | Senior Vice President-Internal Audit | 2006 | |
| David C. Eastland | 57 | Senior Vice President-Chief Credit Officer | 1999 | 60 | Senior Vice President-Chief Credit Officer | 1999 |
| Tami L. Hendrickson | 54 | Senior Vice President-Treasurer | 2006 | 57 | Senior Vice President-Treasurer | 2006 |
| Stephen J. Sponaugle | 52 | Senior Vice President-Chief Risk Officer | 1992 | |
Except as described below, all of the executive officers named above have held their current positions for at least the past five years.
Mr. Howell became President and Chief Executive Officer in June 2012. Previously, he served as the Executive Vice President-Chief Operating Officer since January 2008.
Mr. Able becamehas served as the Executive Vice President-Chief Operating Officer andsince August 2012. In addition, Mr. Able served as the Chief Financial Officer infrom January 2015. Mr. Able served2015 to December 2017, and as the Executive Vice President-Chief Operating Officer and Interim Chief Financial Officer sincefrom March 2014 to December 2014. He
Mr. Dooley became the Executive Vice President-Chief OperatingRisk and Compliance Officer in August 2012 and hasJanuary 2018. Previously, he served as the Principal Financial OfficerFHLB's Senior Vice President-Internal Audit since January 2007. Prior to that, he had served as the Senior Vice President-Chief Accounting and Technology Officer since January 2011 and as the Senior Vice President-Controller since March 2006.2013.
Mr. Lawler became Executive Vice President-Chief Business Officer in August 2012. Previously, he served as the Senior Vice President-Chief Credit Officer since May 2007.
Mr. Sponaugle became Executive Vice President-Chief Financial Officer in January 2018. Previously, he served as the Executive Vice President-Chief Risk and Compliance Officer since January 2017. Mr. Sponaugle also served as the FHLB's Senior Vice President-Chief Risk and Compliance Officer from November 2015 to December 2016, and as Senior Vice President-Chief Risk Officer from January 2007 to October 2015.
Mr. Allen became Senior Vice President-Community Investment Officer in January 2012. Previously, he served as the FHLBank'sFHLB's Vice President and Community Investment Officer since July 2011, and as Vice President-Housing and Community Investment from January 2009 to June 2011.
Mr. Bates became Senior Vice President-Chief Accounting Officer in January 2015. Previously, he served as the FHLBank'sFHLB's Vice President-Controller since January 2013 and as Vice President-Assistant Controller from January 2011 to January 2013. Prior to that, he was the Vice President-Financial Reporting from January 2009 to January 2011.
Mr. Batselbecame Senior Vice President-Chief Information Officer in January 2014. Previously, he was the Senior Vice President, Chief Information Officer at MidCountry Financial Corp. from September 2011 to January 2014. Prior to that, he was the Senior Vice President and Managing Director of Information Systems at Republic Bank from April 2006 to September 2011.
Mr. Dooley became Senior Vice President-Internal Audit in January 2013. Previously, he served as Vice President-Internal Audit since 2006.
Mr. Eastland became the Senior Vice President-Chief Credit Officer in January 2015. Prior to that, he had served as the FHLBank'sFHLB's Vice President-Credit Risk Management since January 2002.
Ms. Hendrickson became Senior Vice President-Treasurer in January 2015. Previously, she served as the FHLBank'sFHLB's Vice President-Treasurer since January 2010.
All officers are appointed annually by our Board of Directors.
AUDIT COMMITTEE FINANCIAL EXPERT
The Board of Directors has determined (1) that each of Mr. Mark N. DuHamel, ChairmanMs. J. Lynn Anderson, Chair of the Audit Committee, and Committee member Ms. J. Lynn AndersonMr. David E. Sartore, have the relevant accounting and related financial management expertise, and therefore are qualified, to serve as the Audit Committee financial experts within the meaning of the regulations of the SEC and (2) that each is independent under SEC Rule 10A-3(b)(1). Ms. Anderson has experience in the internal audit disciplines within the financial industry and is a Certified Public Accountant. Mr. DuHamel'sSartore's experience has principally been in the accounting finance and treasury disciplines within the financial industry, and has included managing various accounting functions. Ms. Anderson's experience has principally been in the internal auditfinance disciplines within the financial industry and is a Certified Public Accountant. For additional information regarding the independence of the directors of the FHLBank,FHLB, see “Item 13. Certain Relationships and Related Transactions, and Director Independence.”
CODES OF ETHICS
The Board of Directors has adopted a “Code of Ethics for Senior Financial Officers” that applies to the principal executive officer and the principal financial officer, as well as all other executive officers. This policy serves to promote honest and ethical conduct, full, fair and accurate disclosure in the FHLBank'sFHLB's reports to regulatory authorities and other public communications, and compliance with applicable laws, rules and regulations. The Code is posted on the FHLBank'sFHLB's Web site (www.fhlbcin.com). If a waiver of any provision of the Code is granted to a covered officer, information concerning the waiver will be posted on our Web site.
The Board of Directors has also adopted a “Standards of Conduct” policy that applies to all employees. The purpose of this policy is to promote a strong ethical climate that protects the FHLBankFHLB against fraudulent activities and fosters an environment in which open communication is expected and protected.
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Item 11. | Executive Compensation. |
20142017 COMPENSATION DISCUSSION AND ANALYSIS
The following provides discussion and analysis regarding our compensation program for executive officers for 2014, including2017, and in particular the executive officers named in the Summary Compensation Table below (theour Named Executive Officers).Officers. Named Executive Officers for 2017 were: Andrew S. Howell, President and Chief Executive Officer (CEO); Donald R. Able, Executive Vice President- Chief Operating Officer and Chief Financial Officer; R. Kyle Lawler, Executive Vice President- Chief Business Officer; Stephen J. Sponaugle, Executive Vice President- Chief Risk and Compliance Officer and Roger B. Batsel, Senior Vice President- Chief Information Officer. Effective January 1, 2018, Mr. Sponaugle became Executive Vice President- Chief Financial Officer in anticipation of Mr. Able’s retirement in June 2018.
Compensation Program Overview (Philosophy and Objectives)
Our Board of Directors (the Board) is responsible for determining the philosophy and objectives of the compensation program. The philosophy of the program is to provide a flexible and market-based approach to compensation that attracts, retains and motivates high performing, accomplished financial services executives who, by their individual and collective performance, achieve strategic business initiatives and thereby enhance stockholder value.to fulfill the FHLB's mission. The program is primarily designed to focus executives on achieving the FHLBank's mission through increasedincreasing business with memberMember institutions within established riskprofitability and profitabilityrisk tolerance levels, while also encouraging teamwork.
To achieve this, weWe compensate executive officers using a combination of base salary, short and long-term variable (incentive-based) cash compensation, retirement benefits and modest fringe benefits. We believe the compensation program communicates short and long-term goals and standards of performance for the FHLBank'sFHLB's mission and key business objectives and appropriately motivates and rewards executives commensurate with their contributions and achievements. The combination of base salary, which rewards individual performance, and short and long-term incentives, which reward teamwork, creates a total compensation opportunity for executives who contribute to and influence strategic plans and who are primarily responsible for the FHLBank'sFHLB's performance.
Oversight of the compensation program is the responsibility of the Board's Personnel and Compensation Committee of the Board (the Committee). The Committee annually reviews the components of the compensation program to ensure that it is consistent with and supports the FHLBank'sFHLB's mission, strategic business objectives, and annualshort and long-term goals. In carrying out its responsibilities, the Committee may engage executive compensation consultants to assist in evaluating the effectiveness of the compensation program and in
determining the appropriate mix of compensation provided to executive officers. Because individuals are not permitted to own the FHLBank'sFHLB's capital stock, all compensation is paid in cash and we have no equity compensation plans or arrangements.
The Committee recommends the President's annual compensation package to the Board, which is responsible for approving all compensation provided to the President. Additionally, the Committee is responsible for reviewing and approving the compensation programsprogram's budget for all officers, including the other Named Executive Officers, and submitting its recommendations to the Board for final approval.
Management Involvement - Executive Compensation
While the Board is ultimately responsible for determining the compensation of the President and all other executive officers, the President and the Human Resources department periodically advise the Committee regarding competitive and administrative issues affecting ourthe compensation program. The President and the Human Resources department also present recommendations to the Committee regarding the compensation of all other executive officers, and administer programs approved by the Committee and the Board.
Finance Agency Oversight - Executive Compensation
The Director of the Finance Agency is required by regulation to prohibit an FHLBank from paying compensation to its executive officers that is not reasonable and comparable to that paid for employment in similar businesses involving similar duties and responsibilities. Finance Agency rules direct the FHLBanks to provide all compensation actions affecting their Named Executive Officers to the Finance Agency for review. Accordingly, following our Board's November 20142017 and January 20152018 meetings, we submitted the 20152018 base salaries as well as short and long-term incentive payments earned for 20142017 for ourthe Named Executive Officers to the Finance Agency. At this time, we do not expect the statutoryregulatory requirements to have a material impact on our executive compensation plans.programs.
Use of Comparative Compensation Data
The compensation program is designedaims to provide a market competitive compensation package when recruiting and retaining highly talented executives seeking stable, long-term employment. To this end, we gather compensation data from a wide variety of sources, including broad-based national and regional surveys, presentationsinformation on compensation programs at FHLBank System meetings,other FHLBanks, and formal and informal interactions with our compensation consultant. Our consultant, McLagan, is a nationally recognized compensation consulting firm specializing in the financial services industry. When determining compensation for our executive officers, the Committee and the President use this information to inform themselves regarding trends in compensation practices and as a comparison check against general market data (market check) to evaluate the reasonableness and effectiveness of our total compensation program and its components.
We also participate in multiple surveys including the annual McLagan Federal Home Loan Bank Custom Survey and the annual Federal Home Loan Bank System Key Position Compensation Survey. Both surveys contain executive and non-executive compensation information for various key positions across all FHLBanks. When determining the 12 FHLBanks.compensation program, the Committee and the President use compensation data collected from these sources to inform themselves regarding trends in compensation practices and as a comparison check against general market data (market check).
In setting 20152018 compensation, we concentrated our attention onprimarily relied upon information from the McLagan Federal Home Loan Bank Custom Survey as it encompassedSurvey. It encompasses information relating to 20142017 compensation from mortgage banks, commercial financial institutions, and other FHLBanks. While McLagan's compensation analysis included those financial institutions that typically had assets of less than $20 billion, and other FHLBanks. However, we believe the positions at other FHLBanks generally are more directly comparable to ours given the unique nature of the FHLBank System. The FHLBanks share the same public policy mission, interact routinely with each other, and share a common regulator and regulatory constraints, including the need for Finance Agency review of all compensation actions affecting our executive officers. However, there are significant differences across the FHLBank System, including the sizes of the various FHLBanks, the complexity of their operations, their organizational and cost structures and the types of compensation packages offered. Thus, we do not and, as a practical matter could not, calculate compensation packages for our Named Executive Officers based solely on comparisons to the other FHLBanks.
Compensation Program Approach
The Committee utilizes a balanced approach for delivering base salary and short and long-term incentive pay with our compensation program. While ourthe annual (short-term) incentive compensation component rewards all officers and staff for the achievement of FHLBankFHLB annual strategic business goals, ourthe deferred (long-term) incentive compensation component is provided to executive and seniorcertain officers, including the Named Executive Officers, for achievement of specific, strategic and mission-related goals for which FHLBankFHLB performance is measured over a three-year period. The Committee has not established or assigned specific percentages to each element of the FHLBank's executive compensation program. Instead, the Committee strives to create a program that generally delivers a total compensation opportunity, i.e., base salary, annual and deferred incentive compensation and other benefits (including
(including a retirement plan), to each executive officer that, when the FHLBankFHLB meets its target performance goals, is at or near the median of the other FHLBanks and is generally consistent with ourthe market check. However, individual elements of compensation as well as total compensation for individual executives may vary from the median due to an executive's tenure, experience and responsibilities.
While the competitiveness of the compensation program is considered an important factor for attracting and retaining executives, the Committee also reviews all elements of compensationthe program to ensure the programit is well designed and fiscally responsible from both a regulatory and corporate governance perspective.
Impact of Risk-Taking on Compensation Program
The Committee reviews the overall program to ensure the compensation of executive officers does not encourage unnecessary or excessive risk-taking that could threaten the long-term value of the FHLBank. RiskFHLB. Strong risk management is an integral part of our culture. The Committee believes that base salary is a sufficient percentage of total compensation to discourage suchexcessive risk-taking by our executive officers. The Committee also believes the mix of incentive goals, which include risk-related metrics, does not encourage unnecessary or excessive risk-taking and achieves an appropriate balance of incentive for performance between the short and long-term organizational goals. Moreover, the Committee retainsand the Board retain the discretion to reduce or withhold incentive compensation payments if it determinesa determination is made that an executive has caused the FHLBankFHLB to incur such a risk that could threaten the long-term value of the FHLBank.FHLB.
Elements of Total Compensation Program
The following table summarizes all compensation to the FHLBank'sFHLB's Named Executive Officers for the years ended December 31, 2014, 20132017, 2016 and 2012.2015. Discussion of each component follows the table.
Summary Compensation Table
| | | Name and Principal Position | Year | | Salary(1) | | Bonus | | Non-Equity Incentive Plan Compensation(2) | | Change in Pension Value & Non-Qualified Deferred Compensation Earnings(3) | | All Other Compensation(4) | | Total | Year | | Salary(1) | | Bonus | | Non-Equity Incentive Plan Compensation(2) | | Change in Pension Value & Non-Qualified Deferred Compensation Earnings(3) | | All Other Compensation(4) | | Total |
| Andrew S. Howell | 2014 | | $ | 692,016 |
| | $ | — |
| | $ | 479,622 |
| | $ | 2,431,000 |
| | $ | 15,600 |
| | $ | 3,618,238 |
| 2017 | | $ | 854,808 |
| | $ | — |
| | $ | 650,066 |
| | $ | 2,149,000 |
| | $ | 32,837 |
| | $ | 3,686,711 |
|
| President and Chief Executive Officer | 2013 | | 617,775 |
| | — |
| | 340,546 |
| | 189,000 |
| | 15,300 |
| | 1,162,621 |
| |
| President and CEO | | 2016 | | 800,625 |
| | — |
| | 648,357 |
| | 1,426,000 |
| | 27,215 |
| | 2,902,197 |
|
| | 2012 | | 491,055 |
| | — |
| | 271,561 |
| | 810,000 |
| | 15,000 |
| | 1,587,616 |
| 2015 | | 728,482 |
| | — |
| | 544,843 |
| | 889,000 |
| | 29,536 |
| | 2,191,861 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Donald R. Able | 2014 | | 358,788 |
| | — |
| | 207,972 |
| | 1,498,000 |
| | 15,600 |
| | 2,080,360 |
| 2017 | | 433,846 |
| | — |
| | 273,250 |
| | 1,559,000 |
| | 16,200 |
| | 2,282,296 |
|
| Executive Vice President- | 2013 | | 320,800 |
| | — |
| | 160,354 |
| | — |
| | 15,300 |
| | 496,454 |
| 2016 | | 418,952 |
| | 50,000 |
| | 278,474 |
| | 943,000 |
| | 15,900 |
| | 1,706,326 |
|
| Chief Operating Officer and Chief Financial Officer | 2012 | | 291,989 |
| | — |
| | 135,824 |
| | 680,000 |
| | 15,000 |
| | 1,122,813 |
| |
| Chief Operating Officer | | 2015 | | 383,125 |
| | — |
| | 242,198 |
| | 465,000 |
| | 15,900 |
| | 1,106,223 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| R. Kyle Lawler | 2014 | | 331,154 |
| | — |
| | 199,572 |
| | 646,000 |
| | 15,600 |
| | 1,192,326 |
| 2017 | | 404,654 |
| | — |
| | 255,349 |
| | 661,000 |
| | 16,200 |
| | 1,337,203 |
|
| Executive Vice President- | 2013 | | 315,087 |
| | — |
| | 157,180 |
| | 26,000 |
| | 15,300 |
| | 513,567 |
| 2016 | | 379,385 |
| | — |
| | 261,931 |
| | 438,000 |
| | 15,900 |
| | 1,095,216 |
|
| Chief Business Officer | 2012 | | 277,020 |
| | — |
| | 133,056 |
| | 227,000 |
| | 15,000 |
| | 652,076 |
| 2015 | | 357,885 |
| | — |
| | 229,316 |
| | 244,000 |
| | 15,900 |
| | 847,101 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Stephen J. Sponaugle | 2014 | | 281,292 |
| | — |
| | 138,781 |
| | 694,000 |
| | 15,600 |
| | 1,129,673 |
| 2017 | | 368,750 |
| | — |
| | 215,949 |
| | 777,000 |
| | 16,200 |
| | 1,377,899 |
|
| Senior Vice President- | 2013 | | 245,725 |
| | — |
| | 117,640 |
| | — |
| | 11,922 |
| | 375,287 |
| |
| Chief Risk Officer | 2012 | | 224,339 |
| | — |
| | 107,451 |
| | 232,000 |
| | 15,000 |
| | 578,790 |
| |
| Executive Vice President- | | 2016 | | 337,692 |
| | — |
| | 191,269 |
| | 494,000 |
| | 15,900 |
| | 1,038,861 |
|
| Chief Financial Officer | | 2015 | | 306,752 |
| | — |
| | 176,417 |
| | 181,000 |
| | 15,900 |
| | 680,069 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Roger B. Batsel (5) | 2014 | | 235,577 |
| | 45,000 |
| | 73,442 |
| | — |
| | — |
| | 354,019 |
| 2017 | | 295,000 |
| | — |
| | 168,365 |
| | 38,000 |
| | 11,980 |
| | 513,345 |
|
| Senior Vice President- | | | | | | | | | | | |
|
| |
|
| |
| |
|
| |
|
| |
|
| |
|
|
| Chief Information Officer | | | | | | | | | | | |
|
| |
|
| |
| |
|
| |
|
| |
|
| |
|
|
| |
| (1) | Includes excess accrued vacation benefits automatically paid in accordance with established policy (applicable to all employees), which for 20142017 were as follows: Mr. Howell, $50,246;$54,808; Mr. Able, $21,288;$13,846; Mr. Lawler, $9,231;$19,654; and Mr. Sponaugle $6,100.$8,750. |
| |
| (2) | Amounts shown for 20142017 reflect total payments pursuant to the current portion of the 20142017 Incentive Plan and the 2012-2014 Transitional Long-Term Non-Equitydeferred portion of the 2014 Incentive Plan (Transition Plan)(2015 - 2017 performance period), as follows: |
| | | Name | | Annual Incentive Plan | | Transitional Long-Term Incentive Plan | | Total | | 2017 Incentive Plan (current incentive) | | 2014 Incentive Plan (three-year deferred incentive) | | Total |
| Andrew S. Howell | | $ | 282,370 |
| | $ | 197,252 |
| | $ | 479,622 |
| | $ | 338,752 |
| | $ | 311,314 |
| | $ | 650,066 |
|
| Donald R. Able | | 118,797 |
| | 89,175 |
| | 207,972 |
| | 142,275 |
| | 130,975 |
| | 273,250 |
|
| R. Kyle Lawler | | 113,314 |
| | 86,258 |
| | 199,572 |
| | 130,419 |
| | 124,930 |
| | 255,349 |
|
| Stephen J. Sponaugle | | 82,586 |
| | 56,195 |
| | 138,781 |
| | 124,898 |
| | 91,051 |
| | 215,949 |
|
| Roger B. Batsel | | 73,442 |
| | — |
| | 73,442 |
| | 87,394 |
| | 80,971 |
| | 168,365 |
|
| |
| (3) | Represents change in the actuarial present value of accumulated pension benefits only, which is primarily dependent on changes in interest rates, years of benefit service salary and mortality assumptions. In 2014, there was a decline in the discount rates assumed and new mortality tables projecting longer life expectancies were issued by the Society of Actuaries, both of which increased pension values.salary. |
| |
| (4) | Amounts represent matching contributions to the qualified defined contribution pension plan in 2014.2017. For Mr. Howell, 2017 also includes perquisites totaling $16,637, which consisted of personal use of an FHLB-owned vehicle, premiums for an Executive long-term disability plan, guest travel expenses and an airline program membership. The value of perquisites are based on the actual cash cost to the FHLB. |
| |
| (5) | Mr. Batsel joined the FHLBankBatsel's 2016 and 2015 compensation amounts are not included as he was not a Named Executive Officer in January 2014 as the Senior Vice President-Chief Information Officer. The amount set forth under Bonus represents a one-time signing/relocation bonus.those years. |
Salary
Base salary is both a key component of the total compensation program and a key factor when attracting and retaining executive talent. While base salaries for the Named Executive Officers are influenced by a number of factors, theythe Board generally targettargets the median of the competitive market. Other factors affecting an executive's base salary include length of time in position, relevant experience, individual achievement, and the size and scope of assigned responsibilities as compared to the responsibilities of other executives. Base salary increases traditionally take effect at the beginning of each calendar year and are granted after a review of the individual's performance and leadership contributions to the achievement of our annual business plan goals and strategic objectives.
Each of the Named Executive Officers received a base salary increase at the beginning of 2014.2017. Total salary increases, including merit and market adjustments, ranged from 3.335.00 percent to 8.8010.77 percent. For the Named Executive Officers other than the President, the Committee's actions were based on the President's recommendation for each executive, which took into consideration market data, and an evaluation of each executive's annual performance. Individually,For Mr. Howell, directors provided feedback to the Chair, and the Committee recommended, and the Board subsequently approved a salary increase of 8.80 percent for Mr. Howell.6.67 percent. In recommending and approving the 2014Mr. Howell's 2017 increase, the Committee and Board took into consideration competitive market analysis and the directors' appraisals of Mr. Howell'shis performance during the year and noted, in particular, the sound performance of the FHLBank under his leadership as President.year.
In October 2014,2017, the Committee recommended and the Board approved a 4.504.60 percent salary increase pool for 20152018 for all employees, comprised of 3.003.10 percent for merit increases and 1.50 percent for market and promotional adjustments. Using the same process as described above, in November 2017, the Committee recommended, and the Board approved, the following 20152018 base salaries and percent increases for the Named Executive Officers: Mr. Howell, $675,000 (9.22$840,000 (5.00 percent); Mr. Able, $365,000 (12.31$433,000 (3.10 percent); Mr. Lawler, $340,000 (9.68$405,000 (5.19 percent); Mr. Sponaugle, $300,000 (13.21$390,000 (8.33 percent); and Mr. Batsel, $260,000 (4.00$310,000 (5.08 percent). On January 8, 2015,December 18, 2017, we were informed that the Finance Agency had completed its review of the Board-approved compensation actions affecting the Named Executive Officers in 2015.2018.
Non-Equity Incentive Compensation Plan (Incentive Plan)
The 2014 Incentive Plan is a cash-based total incentive award that is divided into two equal parts: (1) a current incentive award, and (2) a three-year deferred incentive award. The current component of the Incentive Plan is awarded annually and designed to promote and reward higher levels of performance for accomplishing Board-approved annual goals. The long-term component of the Incentive Plan is a three-year deferred incentive award that is designed to promote higher levels of long-term performance and serve as an employment retention tool for executive officers, including the Named Executive Officers.
The Incentive Plan goals generally reflect desired financial, operational, risk and public mission objectives for the current and future fiscal years. Each goal is weighted reflecting its relative importance and potential impact on our strategic initiativesmission and annual strategic business plan, and eachplan. Each goal is assigned a quantitative threshold, target and maximum level of performance. Each Named Executive Officer's award opportunity is based entirely on bank-wide performance. However, the Chief Risk Officer's (CRO) award opportunity is weighted 75 percent on bank-wide goals and 25 percent on Enterprise Risk Management (ERM) specific goals, which are developed with the Risk Committee in order to provide incentive and maintain a certain level of independence for risk management initiatives.
When establishing the Incentive Plan goals and corresponding performance levels, the Board anticipates that we will successfully achieve a threshold level of performance nearly every year. The target level is aligned with expected performance and is anticipated to be reasonably achievable in a majority of plan years. The maximum level of performance reflects a graduated level of difficulty from the target performance level and requiresis designed to require superior performance to achieve.
Each executive officer, including the Named Executive Officers,Officer is assigned a total incentive award opportunity, stated as a percentage of base salary, which corresponds to the individual's level of organizational responsibility and ability to contribute to and influence overall performance. The total incentive award opportunity established for executives is designed to be comparable to incentive opportunities for executives with similar duties and responsibilities at other financial institutions, primarily other FHLBanks, and generally consistent with our market check. The Board believes the total incentive opportunity and plan design provide an appropriate, competitive reward to all officers, including the Named Executive Officers, commensurate with the achievement levels expected for the incentive goals.
The authorization for payment of current and/or deferred incentive plan awards, if any, is generally granted following certification of the period-end performance results by the Board at its January meeting. The total incentive award earned is determined based on the actual achievement level for each goal in comparison with the performance levels established for that goal.
The total incentive award opportunities for the 2017 plan year stated as a percentage of base salary were as follows:
|
| | | | | | | | | |
| | | Incentive Opportunity |
| Name | | Threshold | | Target | | Maximum |
| Andrew S. Howell | | 50.0 | % | | 75.0 | % | | 100.0 | % |
| Donald R. Able | | 40.0 |
| | 60.0 |
| | 80.0 |
|
| R. Kyle Lawler | | 40.0 |
| | 60.0 |
| | 80.0 |
|
| Stephen J. Sponaugle | | 40.0 |
| | 60.0 |
| | 80.0 |
|
| Roger B. Batsel | | 30.0 |
| | 50.0 |
| | 70.0 |
|
If actual performance falls below the threshold level of performance, no payment is made for that goal. If actual performance exceeds the maximum level, only the value assigned as the performance maximum is paid. When actual performance falls between the assigned threshold, target and maximum performance levels, an interpolated achievement is calculated for that goal. The achievement for each goal is then multiplied by the corresponding incentive weight assigned to that goal and the results for each goal are summed to arrive at the final incentive award payable to the executive. No final awards (or payments) will be made to executives under the Incentive Plan if we receive the lowest "Composite Rating" during the most recent examination by the Finance Agency. Such a rating would indicate that we have been found to be operating in an unacceptable manner, that we exhibit serious deficiencies in corporate governance, risk management or financial condition and performance, or that we are in substantial noncompliance with laws, Finance Agency regulations or supervisory guidance.
Fifty percent of the total opportunity for the Incentive Plan is awarded in cash following the plan year (current incentive award) and 50 percent is mandatorily deferred for three years after the end of the Plan year (deferred incentive award). Deferred incentive awards are calculated based on the actual performance or achievement level for each deferred plan goal at the end of each three-year performance period, with interpolations made for results between achievement levels. The achievement level for each goal then is multiplied by the corresponding incentive weight assigned to that goal. The final value of the deferred award can be increased, decreased or remain the same based on the goal achievement level determined using separate performance measures over the three-year deferral period. For all Named Executive Officers, the final value of the deferred award is 75 percent for a Threshold level of achievement, 100 percent for a Target level of achievement, or 125 percent for a Maximum level of achievement. If a goal achievement level over the three-year deferral period is below the threshold, no payment is made for that deferred goal.
Except as noted above with respect to exam ratings, the Board has ultimate authority over the Incentive Plan and may modify or terminate the Plan at any time or for any reason. The Board also has sole discretion to increase or decrease any Incentive Plan awards. In addition, payments under the Plan are subject to certain claw back provisions that allow the FHLB to recover any incentive plan awards.paid to a participant based on achievement of financial or operational goals that subsequently are deemed to be inaccurate, misstated or misleading. The Board believes these claw back requirements serve as a deterrent to any manipulation of financial statements or performance metrics in a manner that would assure and/or increase an incentive payment.
2017Incentive Award.For calendar year 2014,2017, the Board approved a total of six performance measures in the functional areas of Franchise Value Promotion, MemberMission Asset Activity and Stockholder Risk/Return. The mix of financial and non-financial goals measures performance across our mission and corporate objectives and is intended to discourage unnecessary or excessive risk-taking. Because we consider risk management to be an essential component in the achievement of our mission and corporate objectives, the goals below include a separate risk-related metric.
At its January 20152018 meeting, following certification of the 20142017 performance results and in accordance with those results, the Board authorized the distribution to the Named Executive Officers of the current awards shown in Note 2 to the Summary Compensation Table. For the 20142017 plan year, we cumulatively achieved approximately 9185 percent of the available maximum incentive opportunity.opportunity for FHLB goals. This was a slight decrease inlower than the 97 percent overall FHLBank performance from the 92 percent achieved for 2013 even though the FHLBank continued2016 primarily due to exceednot meeting the threshold performance level for one of performance for allthe six goals.
The following table presents the incentive weights, threshold, target and maximum performance levels, and the actual results achieved for the 20142017 Incentive Plan performance measures.measures for all Named Executive Officers.
20142017 Incentive Plan Performance Levels and Results
| | | (Dollars in thousands) | | | | | | | | | | | | | | | | | | |
| | Incentive Weight | | Threshold Performance | | Target Performance | | Maximum Performance | | Results Achieved | Incentive Weight | | Threshold Performance | | Target Performance | | Maximum Performance | | Results Achieved |
| Franchise Value Promotion | | | | | | | | | | | | | | | | | | |
| 1) Mission Outreach | 10.0 | % | | 75 |
| | 87 |
| | 105 |
| | 104 |
| 10.0 | % | | 86 |
| | 100 |
| | 115 |
| | 115 |
|
| 2) Mission Asset Participation | 10.0 |
| | 62 | % | | 67 | % | | 73 | % | | 76 | % | 10.0 |
| | 65 | % | | 72 | % | | 80 | % | | 79 | % |
| Member Asset Activity | | | | | | | | | | |
| 3) Average Advance Balances for Members with Assets of $50 Billion or less | 15.0 |
| | $ | 12,500,000 |
| | $ | 13,200,000 |
| | $ | 14,000,000 |
| | $ | 15,538,761 |
| |
| Mission Asset Activity | | | | | | | | | | |
| 3) Average Advance Balances for Members with Assets of $50 billion or Less | | 15.0 |
| | $ | 18,500,000 |
| | $ | 20,500,000 |
| | $ | 23,000,000 |
| | $ | 23,445,536 |
|
| 4) Mortgage Purchase Program New Mandatory Delivery Commitments | 15.0 |
| | 500,000 |
| | 850,000 |
| | 1,250,000 |
| | 694,448 |
| 15.0 |
| | 2,000,000 |
| | 2,300,000 |
| | 2,700,000 |
| | 1,592,912 |
|
| Stockholder Risk/Return | | | | | | | | | | | | | | | | | | |
| 5) Decline in Market Value of Equity | 25.0 |
| | < 10% |
| | < 8% |
| | 4% or less |
| | 5.4 | % | 25.0 |
| | < 7% |
| | < 5% |
| | 3% or less |
| | 2.8 | % |
| 6) Profitability-Available Earnings vs. Average 3-month LIBOR rate | 25.0 |
| | 350 bps |
| | 400 bps |
| | 450 bps |
| | 443 bps |
| |
| 6) Profitability-Available Earnings vs. Average 3-month LIBOR Rate | | 25.0 |
| | 330 bps |
| | 380 bps |
| | 440 bps |
| | 491 bps |
|
During 2014,2017, the Board, the Committee and the President periodically reviewed the Incentive Plan goals presented above to determine progress toward the goals. Although the Board and the President discussed various external factors that were affecting achievement of the performance measures, the Board did not take any actions to revise or change the Incentive Plan goals.
During 2017, Mr. Sponaugle served as the Senior Vice President- Chief Risk and Compliance Officer. The 2017 incentive program for the CRO iswas weighted 75 percent on bank-wide goals, shown above, and 25 percent on the ERM department goal.goal, as follows:
Implement specific initiatives of the FHLBank'sFHLB's ERM program within the ERM Department.
| |
Weight of Goal: | 100 percent |
| |
| Threshold: | 53 initiatives satisfactorily completed* |
| |
| Target: | 74 initiatives satisfactorily completed* |
| |
| Maximum: | 106 initiatives satisfactorily completed* |
| |
20142017 Results Achieved: | 8.55.4 initiatives satisfactorily completed* |
| |
| * | Specific initiatives include efforts inin: 1) the comprehensive review of the FHLB's risk management programs; 2) risk management integration; 3) enhancing key risk metrics; 4) improving the modeling of collateral maintenance requirements; 5) the company-wide implementation of new operational risk initiatives; and 6) enhancing market risk credit risk, model risk and improvement of the FHLBank's general ERM program. |
analytics.
The total incentive award opportunities for the 2014 plan year stated as a percentage of base salary were as follows:
|
| | | | | | | | | |
| | | Incentive Opportunity |
| Name | | Threshold | | Target | | Maximum |
| Andrew S. Howell | | 50.0 | % | | 75.0 | % | | 100.0 | % |
| Donald R. Able | | 40.0 |
| | 60.0 |
| | 80.0 |
|
| R. Kyle Lawler | | 40.0 |
| | 60.0 |
| | 80.0 |
|
| Stephen J. Sponaugle | | 30.0 |
| | 50.0 |
| | 70.0 |
|
| Roger B. Batsel | | 30.0 |
| | 50.0 |
| | 70.0 |
|
The current component of the Incentive Plan is awarded annually and designed to promote and reward higher levels of performance for accomplishing Board-approved goals. The long-term component of the Incentive Plan is a three-year deferred incentive award that is designed to promote higher levels of performance and long-term employment retention of selected executive and senior officers, including the Named Executive Officers.
Fifty percent of the total opportunity for the Incentive Plan is awarded in cash following the plan year and 50 percent is mandatorily deferred for three years after the end of the Plan year. The final value of the deferred award can be increased, decreased or remain the same based on the goal achievement level during the three-year period. If the goal achievement level over the three-year deferral period is below the threshold, no payment of the deferred award will be made. The following table presents the percentages, categorized by achievement level, in which the deferred award will be adjusted:
|
| | | | | | | | | |
| | | Achievement Levels (1) |
| Name | | Threshold | | Target | | Maximum |
| Andrew S. Howell | | 75.0 | % | | 100.0 | % | | 125.0 | % |
| Donald R. Able | | 75.0 |
| | 100.0 |
| | 125.0 |
|
| R. Kyle Lawler | | 75.0 |
| | 100.0 |
| | 125.0 |
|
| Stephen J. Sponaugle | | 75.0 |
| | 100.0 |
| | 125.0 |
|
| Roger B. Batsel | | 75.0 |
| | 100.0 |
| | 125.0 |
|
| |
(1) | Earned incentive awards that fall between any of the designated achievement levels (i.e. threshold, target, and maximum) will be interpolated. |
The achievement levels presented above are determined using separate performance measures over the three-year deferral period (2015-2017).
The following table presents the performance measures and incentive weights used to determine the achievement level reached during the three-year deferral period:
2014 Deferred Annual 2018Incentive Plan Goals (2015 - 2017 Performance Period)
|
| |
1) OPERATING EFFICIENCY: | |
Ranking of Operating Efficiency Ratio in comparison to other FHLBanks | Weight: 20% |
2) RISK ADJUSTED PROFITABILITY: | |
Ranking of Risk Adjusted Profitability in comparison to other FHLBanks | Weight: 20% |
3) MARKET CAPITALIZATION RATIO: | |
Ratio of Market Value of Equity (MVE) to Par Value of Regulatory Capital Stock | Weight: 20% |
4) ADVANCE UTILIZATION RATIO: | |
Ranking of average of each member's Advances-to-Assets ratio multiplied by the average member borrower penetration ratio in comparison to other FHLBanks | Weight: 20% |
5) STRATEGIC BUSINESS PLAN ACHIEVEMENT: | |
Percentage of Strategic Business Plan strategies achieved | Weight: 20% |
The Board has ultimate authority over the Incentive Plan described above and the Transition Plan (described below) and may modify or terminate the Plans at any time or for any reason. In addition, payments under the Plans are subject to certain claw back provisions which allow the FHLBank to recover any incentive paid to a participant based on achievement of financial or operational goals that subsequently are deemed to be inaccurate, misstated or misleading. Our Board believes these claw back
requirements serve as deterrents to any manipulation of financial statements or performance metrics in a manner that would assure and/or increase an incentive payment.
Award.At its November 20142017 meeting, the Board established the 20152018 Incentive Plan goals, the incentive weights and the performance levels (measures)measures corresponding to each Incentive Plan goal and award opportunity for the 20152018 Incentive Plan. In December 2014,After that meeting, the 20152018 Incentive Plan was sent to the Finance Agency.Agency and we received notification of the completion of their review in December 2017. The Finance Agency has not yet provided its non-objection, and therefore, the plan is subject to change. The 2015 incentive award opportunities2018 Incentive Plan goals for our executives are set forth below.
2015
2018 Incentive Plan Goals
|
| |
| Franchise Value Promotion | |
| Mission Outreach | Weight: 10.0% |
| Mission Asset Participation | Weight: 10.0% |
MemberMission Asset Activity | |
Average Advances Balances for Members with Assets of $50 billion or lessLess | Weight: 15.0% |
| Mortgage Purchase Program New Mandatory Delivery Commitments | Weight: 15.0% |
| Stockholder Risk/Return | |
| Decline in Market Value of Equity | Weight: 25.0% |
| Profitability-Available Earnings vs. Average 3-month LIBOR Rate | Weight: 25.0% |
As reflected above, the Board decided to keep all of the 20152018 goals the same as those in 20142017 although the performance metrics have been adjusted. In setting the performance measures for the 20152018 Incentive Plan, the Board reviewed the results against target for 20142017 and considered relevant aspects of our financial outlook for 20152018 including the continued uncertaintyimpact of anticipated rising interest rates and other changes in the economymortgage market and the government's liquidity programs that continue to affect Mission Asset Activity and profitability. The Board also considered opportunities to facilitate outreach to membership and increase mission asset participation by members. The goals for the deferred component of the 2015 Incentive Plan, which include the 2016 - 2018 performance period, are expected to be set at the November 2015 Board meeting.
The Board also approved a separate ERM department goal for the CRO, whose annual incentive is weighted 75 percent on bank-wide goals and 25 percent on the ERM goal.
2015 CRO's GoalMembers.
Implement specific initiatives of the FHLBank's ERM program within the ERM Department.
| |
Weight of Goal: | 100 percent |
| |
Threshold: | 4 initiatives satisfactorily completed* |
| |
Target: | 5 initiatives satisfactorily completed* |
| |
Maximum: | 7 initiatives satisfactorily completed* |
| |
* | Specific initiatives include efforts in improvement of the FHLBank's general ERM program, operational risk and compliance and market risk.
|
Residual/Transitional Long-Term Non-EquityThree-Year Deferred Incentive Plan Compensation
The former Executive Long-Term Incentive Plan (LTI Plan) was a cash-based, performance unit plan designed to promote higher levels of performance and long-term employment retention by selected executive and senior officers, including the Named Executive Officers, for accomplishing Board-approved long-term goals. Since the LTI Plan was initially created, the Board had established a new three-year performance period annually, commencing each January 1, so that three overlapping performance periods are in effect at one time. However, in May 2012, we received notification of the completion of the review by the Finance Agency of certain 2012 executive compensation actions, which effectively discontinued long-term plans for all FHLBanks. In order to assist in the transition of our executive incentive plans, the 2012 - 2014 Transition Plan was adopted to bridge the participants' cash compensation levels in 2015 to close what otherwise would be a gap in compensation until the deferred component of the 2012 Incentive Plan is fully implemented in 2016.
At the beginning of the 2012 - 2014 Transition Plan, the Board established a base award opportunity for each executive officer in the form of a grant of a fixed number of performance units, with an assigned value of $100 per unit, equal to a percentage of
the participant's base salary. The value of each performance unit then fluctuates as a function of the actual performance in comparison with the performance levels established for each goal with interpolations made for results between achievement levels. The achievement level for each goal then is multiplied by the corresponding incentive weight assigned to that goal. The results for each goal are summed and multiplied by the executive officer's respective number of performance units to arrive at the final award payable.
If actual performance falls below the threshold level of performance for any of the goals, no payment is made for that goal. If actual performance exceeds the performance maximum for a goal, only the maximum for that goal is paid. The Board has sole discretion to increase or decrease awards up to 10 percent to recognize performance not captured by the total achievement level of the goals. Award.During 2014,2017, the Board, the Committee and the President periodically reviewed progress toward the Transition Plan goals.deferred plan goals for each ongoing performance period. At its January 20152018 meeting, following certification of the performance results for the 2012deferred portion of the 2014 Incentive Plan (2015 - 20142017 performance periodperiod) and in accordance with those results, the Board authorized the distribution of Transition Plan payments to eligible officers including the Named Executive Officers. Cumulatively, we achieved approximately 8588 percent of the available maximum incentive opportunity for FHLBankFHLB goals. The 2012deferred payments for the 2015 - 2014 Transition Plan payments2017 performance period are shown in Note 2 to the Summary Compensation Table.
The following table presents, for all Named Executive Officers, the incentive weights, threshold, target and maximum performance levels, and the actual results achieved for each of the 2012goals in the deferred portion of the 2014 Incentive Plan (2015 - 2014 Transition Plan goals.2017 performance period):
|
| | | | | | | | | |
| | Incentive Weight | | Threshold Performance | | Target Performance | | Maximum Performance | | Results Achieved |
| OPERATING EFFICIENCY: | | | | | | | | | |
| Ranking of Operating Efficiency Ratio in comparison to other FHLBanks | 30% | | 8th of 12 | | 4th of 12 | | 1st of 12 | | 1st of 12 |
| RISK ADJUSTED PROFITABILITY: | | | | | | | | | |
| Ranking of Risk Adjusted Profitability in comparison to other FHLBanks | 30% | | 8th of 12 | | 4th of 12 | | 1st of 12 | | 2nd of 12 |
| MARKET CAPITALIZATION RATIO: | | | | | | | | | |
| Ratio of Market Value of Equity to Par Value of Regulatory Capital Stock | 30% | | 95% | | 100% | | 110% | | 108% |
| MARKET PENETRATION: | | | | | | | | | |
| Ratio of Member Advances to Member Assets | 10% | | 3.5% | | 3.7% | | 4.0% | | 3.2% |
|
| | | | | | | | | |
| | Incentive Weight | | Threshold Performance | | Target Performance | | Maximum Performance | | Results Achieved |
| Operating Efficiency: | | | | | | | | | |
| Ranking of Operating Efficiency Ratio in comparison to other FHLBanks | 20% | | 6th | | 4th | | 1st | | 1st |
| Risk Adjusted Profitability: | | | | | | | | | |
| Ranking of Risk Adjusted Profitability in comparison to other FHLBanks | 20% | | 8th | | 4th | | 1st | | 5th |
| Market Capitalization Ratio: | | | | | | | | | |
| Ratio of Market Value of Equity to Par Value of Regulatory Capital Stock | 20% | | 95% | | 100% | | 110% | | 110% |
| Advance Utilization Ratio: | | | | | | | | | |
| Ranking of average of each Member's Advances-to-Assets ratio multiplied by the average Member borrower penetration ratio in comparison to other FHLBanks | 20% | | 8th | | 4th | | 1st | | 5th |
| Strategic Business Plan Achievement: | | | | | | | | | |
| Percentage of Strategic Business Plan strategies achieved | 20% | | 70% | | 80% | | 100% | | 91% |
At its November 2017 meeting, the Board established the goals, incentive weights and performance measures to determine the achievement level reached during the 2018 - 2020 deferral period of the 2017 Incentive Plan. The following table presents the goals and incentive weights for all Named Executive Officers:
2017 Deferred Incentive Plan Goals (2018 - 2020 Performance Period)
|
| |
| Operating Efficiency: | |
| Ranking of Operating Efficiency Ratio in comparison to other FHLBanks | Weight: 25% |
| Market Capitalization Ratio: | |
| Ratio of Market Value of Equity to Par Value of Regulatory Capital Stock | Weight: 25% |
| Advance Utilization Ratio: | |
| Ranking of average of each Member's Advances-to-Assets ratio multiplied by the average Member borrower penetration ratio in comparison to other FHLBanks | Weight: 25% |
| Strategic Business Plan Achievement: | |
| Percentage of Strategic Business Plan strategies achieved | Weight: 25% |
The goals for the deferred component of the 2018 Incentive Plan, which include the 2019 - 2021 performance period, are expected to be set at the November 2018 Board meeting.
Non-Equity Incentive Plan Compensation Grants
The following table provides information on grants made under our Incentive Plans.
Grants of Plan-Based Awards
| | | | | Estimated Future Payouts Under Non-Equity Incentive Plan Awards | | Estimated Future Payouts Under Non-Equity Incentive Plan Awards |
| Name | | Grant Date (1) | | Threshold | | Target | | Maximum | | Grant Date (1) | | Threshold | | Target | | Maximum |
| Andrew S. Howell | | November 20, 2014 | | $ | 337,500 |
| | $ | 506,250 |
| | $ | 675,000 |
| | November 16, 2017 | | $ | 420,000 |
| | $ | 630,000 |
| | $ | 840,000 |
|
| Donald R. Able | | November 20, 2014 | | 146,000 |
| | 219,000 |
| | 292,000 |
| | November 16, 2017 | | 173,200 |
| | 259,800 |
| | 346,400 |
|
| R. Kyle Lawler | | November 20, 2014 | | 136,000 |
| | 204,000 |
| | 272,000 |
| | November 16, 2017 | | 162,000 |
| | 243,000 |
| | 324,000 |
|
| Stephen J. Sponaugle | | November 20, 2014 | | 90,000 |
| | 150,000 |
| | 210,000 |
| | November 16, 2017 | | 156,000 |
| | 234,000 |
| | 312,000 |
|
| Roger B. Batsel | | November 20, 2014 | | 78,000 |
| | 130,000 |
| | 182,000 |
| | November 16, 2017 | | 93,000 |
| | 155,000 |
| | 217,000 |
|
| |
| (1) | Awards granted on this date are for the 20152018 Incentive Plan. |
Under the awards shown above, 50 percent of the estimated future payout will be awarded in cash following the Plan year. The other 50 percent of the estimated future payout will be mandatorily deferred for three years after the end of the Plan year. The final value of the deferred award can be increased, decreased or remain the same based on the achievement level of the deferred goals during the three-year period. See the "Non-Equity Incentive Compensation Plan (Incentive Plan)" section above for further detail.
Retirement Benefits
We maintain a comprehensive retirement program for executive officers comprised of two qualified retirement plans (a defined benefit plan and a defined contribution plan) and a non-qualified pension plan. For our qualified plans, we participate in the Pentegra Defined Benefit Plan for Financial Institutions and the Pentegra Defined Contribution Plan for Financial Institutions. The non-qualified plan, the Benefit Equalization Plan (BEP), restores benefits that eligible highly compensated employees would have received were it not for Internal Revenue Service limitations on benefits from the defined benefit plan (DB/BEP).plan. Generally, benefits under the BEP vest and are payable according to the corresponding provisions of the qualified plans.
The plans provide benefits based on a combination of an employee's tenure and annual compensation. As such, the benefits provided by the plans are one component of the total compensation opportunity for executive officers and, the Board believes, serve as valuable retention tools since retirement benefits increase as executives' tenure and compensation with the FHLBankFHLB grow.
Qualified Defined Benefit Pension Plan. The Pentegra Defined Benefit Plan for Financial Institutions (Pentegra DB) is a funded tax-qualified plan that is maintained on a non-contributory basis, i.e.,meaning, employee contributions are not required. Participants' pension benefits vest upon completion of five years of service.
The pension benefits payable under the Pentegra
DB plan are determined using a pre-established formula that provides a single life annuity payable monthly at age 65 or normal retirement.
The benefit formula for employees hired prior to January 1, 2006, which includes Messrs. Howell, Able, Lawler, and Sponaugle, is 2.50 percent for each year of benefit service multiplied by the highest three-year average compensation. Compensation is defined as base salary, excess accrued vacation benefits and annual incentive compensation, and excludes any long-term or deferred incentive payments. In the event of retirement prior to attainment of age 65, a reduced pension benefit is payable under the plan, with payments commencing as early as age 45.
For employees who are hired after January 1, 2006, which includes Mr. Batsel, the Pentegra DB was amended. The current benefit formula is 1.25 percent for each year of benefit service multiplied by the highest five-year average compensation. Beginning in 2006 through the end of 2017, compensation wherewas defined as base salary only and excluded all other forms of compensation. Beginning January 1, 2018, compensation is defined as base salary, onlyexcess accrued vacation benefits and annual incentive compensation, and excludes all other forms of compensation.any long-term or deferred incentive payments. In addition, the current plan provides for a reduced pension benefit in the event of retirement prior to attainment of age 65 with payment commencing as early as age 55 if the participant has 10 years or more of service.
Lastly, the Pentegra DB plan provides certain actuarially equivalent forms of benefit payments other than a single life annuity, including a limited lump sum distribution option, which is available only to employees including Named Executive Officers, hired prior to February 1, 2006.
Non-Qualified Defined Benefit Pension Plan. Executive officers and other employees whose pay exceeds IRS pension limitations are eligible to participate in the Defined Benefit component of the Benefit Equalization Plan (DB/BEP), an unfunded, non-qualified pension plan that mirrors the Pentegra DB plan in all material respects. In determining whether a restoration of retirement benefits is due an eligible employee, the DB/BEP utilizes the identical benefit formula applicable to the Pentegra DB plan. In the event that the benefits payable from the Pentegra DB plan have been reduced or otherwise limited, the executive's lost benefits are payable under the terms of the DB/BEP. Because the DB/BEP is a non-qualified plan, the benefits received from this plan do not receive the same tax treatment and funding protection associated with the qualified plan.
The following table provides the present value of benefits payable to the Named Executive Officers upon retirement at age 65 from the Pentegra DB plan and the DB/BEP, and is calculated in accordance with the formula currently in effect for specified years-of-service and remuneration for participating in both plans. Our pension benefits do not include any reduction for a participant's Social Security benefits.
20142017 Pension Benefits
| | | Name | | Plan Name | | Number of Years Credited Service (1) | | Present Value (2) of Accumulated Benefits | | Plan Name | | Number of Years Credited Service (1) | | Present Value (2) of Accumulated Benefits |
| Andrew S. Howell | | Pentegra DB | | 24.50 |
| | $ | 1,650,000 |
| | Pentegra DB | | 27.50 |
| | $ | 2,198,000 |
|
| | | DB/BEP | | 24.50 |
| | 3,774,000 |
| | DB/BEP | | 27.50 |
| | 7,690,000 |
|
| | | | | | | | | |
| Donald R. Able | | Pentegra DB | | 33.42 |
| | 1,866,000 |
| | Pentegra DB | | 36.42 |
| | 2,294,000 |
|
| | | DB/BEP | | 33.42 |
| | 2,122,000 |
| | DB/BEP | | 36.42 |
| | 4,661,000 |
|
| | | | | | | | | |
| R. Kyle Lawler | | Pentegra DB | | 13.50 |
| | 1,055,000 |
| | Pentegra DB | | 16.50 |
| | 1,562,000 |
|
| | | DB/BEP | | 13.50 |
| | 626,000 |
| | DB/BEP | | 16.50 |
| | 1,462,000 |
|
| | | | | | | | | |
| Stephen J. Sponaugle | | Pentegra DB | | 21.33 |
| | 1,380,000 |
| | Pentegra DB | | 24.33 |
| | 1,943,000 |
|
| | | DB/BEP | | 21.33 |
| | 380,000 |
| | DB/BEP | | 24.33 |
| | 1,269,000 |
|
| | | | | | | | | |
| Roger B. Batsel | | Pentegra DB | | — |
| | — |
| | Pentegra DB | | 2.92 |
| | 77,000 |
|
| | | DB/BEP | | — |
| | — |
| | DB/BEP | | 2.92 |
| | 4,000 |
|
| |
| (1) | For pension plan purposes, the calculation of credited service begins upon completion of a required waiting period following the date of employment. Accordingly, the years shown are less than the executive's actual years of employment. Because IRS regulations generally prohibit the crediting of additional years of service under the qualified plan, such additional service also is precluded under the DB/BEP, which only restores those benefits lost under the qualified plan. |
| |
| (2) | See Note 17 of the Notes to Financial Statements for details regarding valuation assumptions. |
Qualified Defined Contribution Plan. The Pentegra Defined Contribution Plan for Financial Institutions (Pentegra DC) is a tax-qualified defined contribution plan to which we make tenure-based matching contributions. Matching contributions begin upon completion of one year of employmentimmediately and subsequently increase based on length of employment to a maximum of six percent of eligible compensation. Eligible compensation in the Pentegra DC plan is defined as base salary and annual bonus (STI compensation)(current incentive award) and excludes any deferred incentive payments or payments received from the LTI or Transition Plan.awards.
Under the Pentegra DC plan, a participant may elect to contribute up to 10075 percent of eligible compensation on either a before-tax or after-tax basis. The plan permits participants to self-direct investment elections into one or more investment funds. All returns are at the market rate of the related fund. Investment fund elections may be changed daily by the participants. A participant may withdraw vested account balances while employed, subject to certain plan limitations, which include those under IRS regulations. Participants also are permitted to revise their contribution/deferral election once each pay period. However, the revised election is only applicable to future earnings and may also be limited by IRS regulations.
Fringe Benefits and Perquisites
Executive officers are eligible to participate in the traditional fringe benefit plans made available to all other employees, including participation in the pensionretirement plans, medical, dental and vision insurance program and group term life and standard long term disability (LTD) insurance plans, as well as annual leave (i.e., vacation) and sick leave policies. Executives participate in our subsidized medical, dental and vision insurance and group term life and standard LTD insurance programs on the same basis and terms as all of our employees. However, executives are required to pay higher premiums for medical coverage. Executive officers also receive on-site parking at our expense. The perquisites provided by the FHLBank represent a small fraction of an executive officer's annual compensation.
During 2014,2017, the President was also provided with an FHLBank-ownedFHLB-owned vehicle for his business and personal use. Theuse, along with the operating expenses associated with the vehicle, including an automobile club membership for emergency roadside assistance, also were provided.vehicle. An executive officer's personal use of an FHLBank-ownedFHLB-owned vehicle, including use for the daily commute to and from work, is reported as a taxable fringe benefit. In addition to the standard LTD insurance plan provided to all FHLB employees, Named Executive Officers may elect to receive additional LTD coverage. The premiums the FHLB pays for the additional LTD coverage are considered a taxable fringe benefit. Additionally, with prior approval, our current Travel Policy permits a spouseguest to accompany an executive officer on authorized business trips. The transportation and other related expenses associated
with the spouse'sguest's travel are reimbursed by the FHLBankFHLB and reported as a taxable fringe benefit.
The perquisites provided by the FHLB represent a small fraction of an executive officer's annual compensation. During 2017, perquisites totaled $16,637 for Mr. Howell, as shown in the Summary Compensation Table. Perquisites did not individually or collectively exceed $10,000 for any of theother Named Executive Officers and are therefore excluded from the Summary Compensation Table.
Other than normal pension benefits and eligibility to participate in our retiree supplemental benefits program (if hired prior to August 1, 1990), no perquisites or other special benefits are provided to our executive officers in the event of a change in control, resignation, retirement or other termination of employment.
Employment Arrangements and Severance Benefits
Pursuant to the FHLBank Act, all employees of the FHLBankFHLB are “at will” employees. Accordingly, an employee may resign employment at any time and an employee's employment may be terminated at any time for any reason, with or without cause and with or without notice.
We have no employment agreements with any Named Executive Officer. Other than normal pension benefits and eligibility to participate in our retiree medical and life insurance programs (if hired prior to August 1, 1990), no perquisites, tax gross-ups or other special benefits are provided to our executive officers in the event of a resignation, retirement or other termination of employment. However, Named Executive Officers may receive certain benefits under our severance policy and Change in Control Plan, described below.
Severance Policy.We have a severance policy under which all employees including executive officers, may receive benefits in the event of termination of employment resulting from job elimination, substantial job modification, job relocation, or a planned reduction in staff that causes an involuntary termination of employment.staff. Under this policy, an executive officer is entitled to a lump sum payment of one month's pay for every fulleach year of continuous employment, pro-ratedrounded to the next whole year for partial years, of employment, with a minimum of one month and a maximum of six months' severance pay, if a general release of any claims against the FHLBank is signed.as well as payment for all unused, accrued vacation benefits. At our discretion, executive officers and employees receiving benefits under this policy may also receive outplacement assistance as well as continuation of health insurance coverage on a limited basis.
WeExecutive Change in Control Plan (Change in Control Plan).In 2017, the Board adopted a Change in Control Plan that provides certain payments and benefits in the event of a qualifying termination within 24 months following a change in control. The purpose of the Change in Control Plan is to facilitate the hiring and retention of senior executives by providing them with certain protection and benefits in the event of a qualifying termination following a defined change in control of the FHLB.
Change in control benefit payments are in lieu of, not in addition to, the severance benefit payments described above. The Change in Control Plan applies to officers as designated by the Board. Current designees are the President and CEO, all Executive Vice Presidents, and all Senior Vice Presidents.
Under the Change in Control Plan, a “qualifying termination” is defined as any separation, termination or other discontinuation of the employment relationship between the FHLB and a participant, (a) by the FHLB, other than for “cause” (as defined in the Change in Control Plan), death or disability; or (b) by the participant, for “good reason” (as defined in the Change in Control Plan).
“Change in Control” is defined under the Change in Control Plan as:
| |
| ▪ | the merger, reorganization, or consolidation of the FHLB with or into, or acquisition of the FHLB by, another Federal Home Loan Bank or other entity; |
| |
| ▪ | the sale or transfer of all or substantially all of the business or assets of the FHLB to another Federal Home Loan Bank or other entity; |
| |
| ▪ | a change in the composition of the FHLB’s board that causes the combined number of Member directors from the jurisdictions of Kentucky, Ohio and Tennessee to cease to constitute a majority of the Bank’s directors; or |
| |
| ▪ | the FHLB’s liquidation or dissolution. |
“Cause” is defined in the Change in Control Plan to include:
| |
| ▪ | the participant’s failure to perform substantially his/her duties; |
| |
| ▪ | the participant’s engagement in illegal conduct or willful misconduct injurious to the FHLB; |
| |
| ▪ | the participant’s material violation of law or regulation or of the FHLB’s written policies or guidelines; |
| |
| ▪ | a written request from the Finance Agency requesting that the FHLB terminate the participant’s employment; |
| |
| ▪ | crimes involving a felony, fraud or other dishonest acts; |
| |
| ▪ | certain other notices from or actions by the Finance Agency; |
| |
| ▪ | the participant’s breach of fiduciary duty or breach of certain covenants in the Change in Control Plan; or |
| |
| ▪ | the participant’s refusal to comply with a lawful directive from the CEO or the Board of Directors. |
“Good Reason” is defined in the Change in Control Plan to include:
| |
| ▪ | a material diminution in the participant’s base salary or in his/her duties or authority; |
| |
| ▪ | the FHLB requiring the participant to be based at any office or location more than 100 miles from Cincinnati, Ohio; or |
| |
| ▪ | a material breach of the Change in Control Plan by the FHLB. |
In the event of a qualifying termination, the participant will receive a severance payment equal to a compensation multiplier times the sum of the participant's base salary plus target annual incentive amount for the year in which the Change in Control occurs. The President and CEO (Tier 1) is subject to a compensation multiplier of 2.50, Executive Vice Presidents (Tier 2) are subject to a compensation multiplier of 1.75 and Senior Vice Presidents (Tier 3) are subject to a compensation multiplier of 1.50. Participants will also receive a lump sum cash payment equal to accrued vacation benefits and the amount that would have nobeen payable pursuant to the participant’s annual incentive compensation award for the year in which the date of a qualifying termination occurs based on actual FHLB performance, prorated based on the number of employment, severance or change-in-control arrangements with anydays the participant was employed that year. In addition, participants will receive a cash payment for outplacement assistance of $7,500 for Tier 1, $4,500 for Tier 2 and $2,500 for Tier 3, as well as the continuation of health care coverage for 24 months for Tier 1, 18 months for Tier 2 and 12 months for Tier 3.
The following table presents the total amounts that would be payable to our Named Executive Officer.Officers if their employment had terminated as of December 31, 2017.
Total Potential Payment Upon Termination (1)
|
| | | | | | | | | | | | | | | | | | | | |
| Separation Event | | Andrew S. Howell | | Donald R. Able | | R. Kyle Lawler | | Stephen J. Sponaugle | | Roger B. Batsel |
| Involuntary termination for Cause | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Voluntary resignation not due to a Change in Control or resignation without Good Reason due to a Change in Control (2) | | 85,577 |
| | 30,000 |
| | 34,462 |
| | 22,596 |
| | 6,655 |
|
Involuntary termination without Cause not due to a Change in Control (3) | | 485,577 |
| | 240,000 |
| | 226,962 |
| | 202,596 |
| | 104,988 |
|
Involuntary termination without Cause due to a Change in Control or resignation for Good Reason due to a Change in Control (4) | | 4,217,333 |
| | 1,480,692 |
| | 1,336,153 |
| | 1,269,288 |
| | 839,755 |
|
| |
| (1) | Due to the number of factors that affect the nature and amounts of compensation and benefits provided upon the potential termination events, the actual amounts paid may be different than the estimates presented. |
| |
| (2) | Named Executive Officers would only receive payment for unused, accrued vacation. |
| |
| (3) | Named Executive Officers would receive payment for one month's pay for each year of continuous employment, rounded to the next whole year for partial years, subject to a six months' pay maximum, plus unused, accrued vacation. |
| |
| (4) | Named Executive Officers would receive payment as follows: |
|
| | | | | | | | | | | | | | | | | | | | |
| Component | | Andrew S. Howell | | Donald R. Able | | R. Kyle Lawler | | Stephen J. Sponaugle | | Roger B. Batsel |
| Salary | | $ | 2,000,000 |
| | $ | 735,000 |
| | $ | 673,750 |
| | $ | 630,000 |
| | $ | 442,500 |
|
| Incentive compensation | | 1,500,000 |
| | 441,000 |
| | 404,250 |
| | 378,000 |
| | 221,250 |
|
Other (a) | | 717,333 |
| | 304,692 |
| | 288,153 |
| | 261,288 |
| | 176,005 |
|
| Total | | $ | 4,217,333 |
| | $ | 1,480,692 |
| | $ | 1,366,153 |
| | $ | 1,269,288 |
| | $ | 839,755 |
|
| |
| (a) | Includes accrued annual incentive compensation from the current year, accrued vacation benefits, outplacement assistance and health care coverage. |
COMPENSATION COMMITTEE REPORT
The Personnel and Compensation Committee of the Board of Directors (the Committee) of the FHLBankFHLB has furnished the following report for inclusion in this annual reportAnnual Report on Form 10-K:
The Committee has reviewed and discussed the 20142017 Compensation Discussion and Analysis set forth above with the FHLBank'sFHLB's management. Based on such review and discussions, the Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this annual reportAnnual Report on Form 10-K.
Donald J. Mullineaux (Chair)Grady P. Appleton
Leslie D. Dunn
Charles J. Koch
Michael R. Melvin
William J. Small |
|
| Donald J. Mullineaux (Chair) |
| Grady P. Appleton |
| Leslie D. Dunn |
| James A. England (Vice Chair) |
| Charles J. Koch |
| Michael R. Melvin |
| Nancy E. Uridil |
COMPENSATION OF DIRECTORS
As required by Finance Agency regulations and the FHLBank Act, we have established a formal policy governing the compensation and travel reimbursement provided to our directors. The goal of the policy is to compensate Board members for work performed on behalf of the FHLBank.FHLB.
2017 Compensation. Under our 2017 policy, compensation was comprised of a maximum base fee that was divided into two equal parts: (1) a quarterly retainer fee, and (2) a per meeting fee, subject to an annual cap, and reimbursement for reasonable FHLB travel-related expenses. The fees were intended to compensate directors for time spent reviewing materials sent to them, preparing for meetings, participating in other FHLB activities and attending the meetings of the Board of Directors and its committees.
The following table sets forth the quarterly retainer fees, per meeting fees, and the maximum base fees for 2017:
|
| | | | | | | | | | | |
| | 2017 |
| | Quarterly Retainer Fee | | Per Meeting Fee | | Maximum Base Fees |
| Chair | $ | 16,875 |
| | $ | 9,650 |
| | $ | 135,000 |
|
| Vice Chair | 15,000 |
| | 8,580 |
| | 120,000 |
|
| Other Directors | 12,500 |
| | 7,150 |
| | 100,000 |
|
In addition to the base fees, under the 2017 policy, annual fees were paid to the Audit Committee Chair and Other Committee Chairs of $17,000 and $14,000, respectively. These fees are subject to certain attendance requirements.
2018 Compensation. At its September 2017 meeting, the Board approved a revision to the directors' fee structure, effective January 1, 2018. Under our revised policy, compensation is comprised of per meeting fees, subject to an annual cap, and reimbursement for reasonable FHLBankFHLB travel-related expenses. The meetingAs in prior years, the fees are intended to compensate directors for time spent reviewing materials sent to them, preparing for meetings, participating in other FHLBankFHLB activities and attending the meetings of the Board of Directors and its committees.
The following table sets forth the per meeting fees and the annual capsmaximum base fees for 2014 and 2015:2018:
| | | | 2014 | | 2015 | 2018 |
| | Per Meeting Fee | | Annual Cap | | Per Meeting Fee | | Annual Cap | Per Meeting Fee | | Maximum Base Fees |
| Chair | $ | 14,000 |
| | $ | 98,000 |
| | $ | 15,000 |
| | $ | 105,000 |
| $ | 20,720 |
| | $ | 145,000 |
|
| Vice Chair | 12,200 |
| | 85,000 |
| | 13,750 |
| | 95,000 |
| 17,930 |
| | 125,500 |
|
| Other Members | 10,000 |
| | 70,000 |
| | 10,500 |
| | 72,500 |
| 15,720 |
| | 110,000 |
|
In addition to the base fees, under the 2018 policy, annual fees whichare paid to the Audit Committee Chair and Other Committee Chairs of $15,500 and $12,500, respectively. These fees are subject to certain attendance requirements, are paid as follows for certain Board Committee assignments that involve significant time and responsibilities.requirements.
|
| | | | | | | |
| | 2014 | | 2015 |
| Audit Committee: | | | |
| Chair | $ | 17,000 |
| | $ | 17,000 |
|
| Other members | 9,500 |
| | 9,500 |
|
| Finance and Risk Management Committee: | | | |
| Chair | 14,000 |
| | 14,000 |
|
| Other members | 7,000 |
| | 7,000 |
|
| All other committees: | | | |
| Chair | 14,000 |
| | 14,000 |
|
However, the Board Chair does not receive additional compensation for chairing any committee and no director may receive fees totaling more than the annual amount paid to the Board Chair.
During 2014,2017, total directors' fees and travel expenses incurred by the FHLBankFHLB were $1,414,000$1,920,900 and $264,036,$281,148, respectively.
With prior approval, our current Travel Policy permits a spouseguest to accompany a director on authorized business trips. The transportation and other related expenses associated with the spouse'sguest's travel are reimbursed by the FHLBankFHLB, subject to certain limitations, and reported as a taxable fringe benefit. During 2014,2017, there were 15 directors that received reimbursement for spousalguest travel expenses. These expenses did not exceed $10,000 for any director and, therefore, are excluded from the Directors Compensation Table below.
The following table sets forth the meeting fees earned by each director and expenses paid to each director for the year ended December 31, 2014.2017.
20142017 Directors Compensation Table | | | Name | | Fees Earned or Paid in Cash | | Total Expenses (1) | | Total | | Fees Earned or Paid in Cash |
| J. Lynn Anderson | | $ | 86,500 |
| | $ | — |
| | $ | 86,500 |
| | $ | 117,000 |
|
| Grady P. Appleton | | 79,500 |
| | 764 |
| | 80,264 |
| | 100,000 |
|
| Brady T. Burt | | | 100,000 |
|
| Greg W. Caudill | | 79,500 |
| | 540 |
| | 80,040 |
| | 100,000 |
|
| James R. DeRoberts | | 69,500 |
| | 1,090 |
| | 70,590 |
| | 114,000 |
|
| Mark N. DuHamel | | 94,000 |
| | 857 |
| | 94,857 |
| |
| Leslie D. Dunn | | 93,500 |
| | 1,088 |
| | 94,588 |
| | 114,000 |
|
| James A. England | | 79,500 |
| | 845 |
| | 80,345 |
| | 100,000 |
|
| Charles J. Koch | | 77,000 |
| | 1,332 |
| | 78,332 |
| | 92,900 |
|
| Robert T. Lameier | | | 100,000 |
|
| Michael R. Melvin | | 77,000 |
| | 753 |
| | 77,753 |
| | 100,000 |
|
| Thomas L. Moore | | 77,000 |
| | 658 |
| | 77,658 |
| |
| Donald J. Mullineaux | | 93,500 |
| | 1,627 |
| | 95,127 |
| |
| Donald J. Mullineaux, Chair | | | 135,000 |
|
| Alvin J. Nance | | 70,000 |
| | 961 |
| | 70,961 |
| | 100,000 |
|
| Charles J. Ruma | | 91,000 |
| | — |
| | 91,000 |
| | 114,000 |
|
| David E. Sartore | | 86,500 |
| | 1,005 |
| | 87,505 |
| | 100,000 |
|
| William J. Small, Vice Chair | | 85,000 |
| | 686 |
| | 85,686 |
| | 120,000 |
|
| William S. Stuard, Jr. | | 77,000 |
| | 744 |
| | 77,744 |
| | 114,000 |
|
| Carl F. Wick, Chair | | 98,000 |
| | 757 |
| | 98,757 |
| |
| Nancy E. Uridil | | | 100,000 |
|
| James J. Vance | | | 100,000 |
|
| Total | | $ | 1,414,000 |
| | $ | 13,707 |
| | $ | 1,427,707 |
| | $ | 1,920,900 |
|
| |
(1) | Total expenses are comprised of spousal travel expenses reimbursed to the director by the FHLBank; directors' travel expenses are not included. |
The following table summarizes the total number of board meetings and meetings of its designated committees held in 20132016 and 2014.2017.
| | | | | Number of Meetings Held | | Number of Meetings Held |
| Meeting Type | | 2013 | | 2014 | | 2016 | | 2017 |
| Board Meeting | | 10 | | 9 | | 9 | | 10 |
| Audit Committee | | 13 | | 11 | | 10 | | 10 |
| Finance and Risk Management Committee | | 7 | | 7 | |
| Risk Committee | | | 7 | | 7 |
| Business and Operations Committee | | | 6 | | 5 |
| Governance | | 6 | | 7 | | 6 | | 7 |
| Housing and Community Development Committee | | 5 | | 5 | | 5 | | 6 |
| Personnel and Compensation Committee | | 5 | | 8 | | 5 | | 6 |
| Executive Committee | | — | | 1 | |
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Personnel and Compensation Committee of the Board of Directors is charged with responsibility for the FHLBank'sFHLB's compensation policies and programs. None of the 20142017 or 20152018 Personnel and Compensation Committee members are or previously were officers or employees of the FHLBank.FHLB. Additionally, none of the FHLBank'sFHLB's executive officers served or serve on the board of directors or the compensation committee of any entity whose executive officers served on the FHLBank'sFHLB's Personnel and Compensation Committee or Board of Directors. This Committee was and is composed of the following members:
| | | 2014 | | 2015 | |
| Carl F. Wick (Chair) | | Donald J. Mullineaux (Chair) | |
| 2017 | | | 2018 |
| Donald J. Mullineaux (Chair) | | | Donald J. Mullineaux (Chair) |
| Grady P. Appleton | | Grady P. Appleton | | Grady P. Appleton |
| Leslie D. Dunn | | Leslie D. Dunn | | Leslie D. Dunn |
| Charles J. Koch | | Charles J. Koch | | James A. England (Vice Chair) |
| Michael R. Melvin | | Michael R. Melvin | | Charles J. Koch |
| William J. Small (Vice Chair) | | William J. Small (Vice Chair) | | Michael R. Melvin |
| Nancy E. Uridil | | | Nancy E. Uridil |
RATIO OF CEO PAY TO MEDIAN EMPLOYEE
156
As required by the Dodd-Frank Act, information about the 2017 total compensation for the FHLB's median employee and the President and CEO, Mr. Howell, is as follows:
| |
| ▪ | the median of the annual total compensation of all FHLB employees (other than the CEO) was $101,589; and |
| |
| ▪ | the annual total compensation of the CEO, as reported in the Summary Compensation Table, was $3,686,711. |
Based on this information, for 2017, the ratio of Contentsthe annual total compensation of the CEO to the median of the annual total compensation of all employees was 36 to 1.
To identify the median employee, we compared the compensation of all full-time and part-time employees who were employed at the FHLB as of November 3, 2017. We annualized the compensation of employees who were hired in 2017 but did not work for us the entire fiscal year. This compensation measure, which was consistently applied to all employees, includes base salary, overtime pay and incentive compensation that is all payable in cash.
After we identified our median employee, we combined all of the elements of such employee’s compensation in 2017, which includes base salary, excess accrued vacation benefits, incentive compensation, matching contributions to the qualified defined contribution pension plan, and the value of such employee’s pension benefits. The value of the median employee's pension benefits represents only the change in the actuarial present value of accumulated pension benefits, which is primarily dependent on changes in interest rates, years of benefit service and salary. With respect to the annual total compensation of the CEO, we used the amount reported in the “Total” column of our 2017 Summary Compensation Table.
| |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
We have one class of capital stock, Class B Stock, all of which is owned by our current and former memberMember institutions. Individuals, including directors and officers of the FHLBank,FHLB, are not permitted to own our capital stock. Therefore, we have no equity compensation plans.
The following table lists institutions holding five percent or more of outstanding capital stock at February 28, 20152018 and includes any known affiliates that are membersMembers of the FHLBank:FHLB:
| | | (Dollars in thousands) | | | | | | |
| | | Capital | Percent of Total | Number | | Capital | Percent of Total | Number |
| Name | Address | Stock | Capital Stock | of Shares | Address | Stock | Capital Stock | of Shares |
| JPMorgan Chase Bank, N.A. | 1111 Polaris Parkway
Columbus, OH 43240 | $ | 1,533,000 |
| 35 | % | 15,330,000 |
| 1111 Polaris Parkway
Columbus, OH 43240 | $ | 1,059,000 |
| 23 | % | 10,590,000 |
|
| U.S. Bank, N.A. | 425 Walnut Street Cincinnati, OH 45202 | 475,393 |
| 11 |
| 4,753,927 |
| 425 Walnut Street Cincinnati, OH 45202 | 836,457 |
| 18 |
| 8,364,571 |
|
| The Huntington National Bank | | 41 South High Street
Columbus, OH 43215 | 282,281 |
| 6 |
| 2,822,808 |
|
| Fifth Third Bank | 38 Fountain Square Plaza Cincinnati, OH 45263 | 247,687 |
| 6 |
| 2,476,870 |
| 38 Fountain Square Plaza Cincinnati, OH 45202 | 247,687 |
| 5 |
| 2,476,870 |
|
The following table lists capital stock outstanding as of February 28, 20152018 held by memberMember institutions that have an officer or director who serves as a director of the FHLBank:FHLB:
| | | (Dollars in thousands) | | | | | | |
| | | Capital | Percent of Total | | Capital | Percent of Total |
| Name | Address | Stock | Capital Stock | Address | Stock | Capital Stock |
Nationwide (1) | One Nationwide Plaza
Columbus, OH 43215 | $ | 113,557 |
| 2.6 | % | |
| FirstMerit Bank, N.A. | 111 Cascade Plaza, 7th Floor Akron, OH 44308 | 86,660 |
| 2.0 |
| |
| First Federal Bank of the Midwest | 601 Clinton Street
Defiance, OH 43512 | 13,792 |
| 0.3 |
| |
| The Huntington National Bank | | 41 South High Street
Columbus, OH 43215 | $ | 282,281 |
| 6.2 | % |
The Western & Southern Financial Group (1) | | 400 Broadway Street
Cincinnati, OH 45202 | 109,912 |
| 2.4 |
|
| The Park National Bank | | 50 North Third Street
Newark, OH 43058 | 50,086 |
| 1.1 |
|
| F&M Bank | 50 Franklin Street
Clarksville, TN 37040 | 3,378 |
| 0.1 |
| 50 Franklin Street
Clarksville, TN 37040 | 4,965 |
| 0.1 |
|
| Perpetual Federal Savings Bank | 120 North Main Street
Urbana, OH 43078 | 2,794 |
| 0.1 |
| 120 North Main Street
Urbana, OH 43078 | 2,794 |
| 0.1 |
|
| First Federal Bank of Ohio | 140 North Columbus Street
Galion, OH 44833 | 1,902 |
| 0.0 |
| |
| Field & Main Bank | | 140 North Main Street
Henderson, KY 42420 | 1,810 |
| 0.0 |
|
| Farmers National Bank | 304 West Main Street
Danville, KY 40422 | 1,722 |
| 0.0 |
| 304 West Main Street
Danville, KY 40423 | 1,782 |
| 0.0 |
|
| Field & Main Bank | 140 North Main Street
Henderson, KY 42420 | 1,628 |
| 0.0 |
| |
| The Arlington Bank | 2130 Tremont Center
Upper Arlington, OH 43221 | 1,055 |
| 0.0 |
| |
| Miami Savings Bank | | 8008 Ferry Street
Miamitown, OH 45041 | 737 |
| 0.0 |
|
| Decatur County Bank | 56 North Pleasant Street
Decaturville, TN 38329 | 646 |
| 0.0 |
| 56 North Pleasant Street
Decaturville, TN 38329 | 646 |
| 0.0 |
|
The Plateau Group (2) | 2701 North Main Street
Crossville, TN 38555 | 93 |
| 0.0 |
| 2701 North Main Street
Crossville, TN 38555 | 95 |
| 0.0 |
|
| |
| (1) | Includes Nationwide Bank, Nationwidefive subsidiaries (Western-Southern Life Assurance Co., Integrity Life Insurance Co.,Company, Lafayette Life Insurance Company, Columbus Life Insurance Company and Nationwide MutualNational Integrity Life Insurance Co.Company), which are FHLBank members.FHLB Members. |
| |
| (2) | Includes two subsidiaries (Plateau Casualty Insurance Company and Plateau Insurance Company), which are FHLBank members.FHLB Members. |
| |
| Item 13. | Certain Relationships and Related Transactions, and Director Independence. |
DIRECTOR INDEPENDENCE
Because we are a cooperative, capital stock ownership is a prerequisite to transacting any business with us. Transactions with our stockholders are part of the ordinary course of - and are essential to the purpose of - our business.
Our capital stock is not permitted to be publicly traded and is not listed on any stock exchange. Therefore, we are not governed by stock exchange rules relating to director independence. If we were so governed, arguably none of our industry directors, who are elected by our members,Members, would be deemed independent because all are directors and/or officers of membersMembers that do business with us. Messrs. Appleton, Koch, Mullineaux, Nance and Ruma and Mses. Anderson, Dunn and Uridil, our seveneight non-industry directors, have no material transactions, relationships or arrangements with the FHLBankFHLB other than in their capacity as directors. Therefore, our Board of Directors has determined that each of them is independent under the independence standards of the New York Stock Exchange.
The Finance Agency director independence standards specify independence criteria for members of our Audit Committee. Under these criteria, all of our directors serving on the Audit Committee are independent.
TRANSACTIONS WITH RELATED PERSONS
See Note 22 of the Notes to Financial Statements for information on transactions with stockholders, including information on transactions with Directors' Financial Institutions and concentrations of business, and transactions with nonmember affiliates, which information is incorporated herein by reference.
See also “Item 11. Executive Compensation - Compensation Committee Interlocks and Insider Participation.”
Review and Approval of Related Persons Transactions. Ordinary course transactions with Directors' Financial Institutions and with membersMembers holding five percent or more of our capital stock are reviewed and approved by our management in the normal course of events so as to assure compliance with Finance Agency regulations.
As required by Finance Agency regulations, we have a written conflict of interest policy. This policy requires directors (1) to disclose to the Board of Directors any known personal financial interests that they, their immediate family members or their business associates have in any matter to be considered by the Board and in any other matter in which another person or entity does or proposes to do business with the FHLBankFHLB and (2) to recuse themselves from considering or voting on any such matter. The scope of the Finance Agency's conflict of interest Regulationregulation (available at www.fhfa.gov) and our conflict of interest policy (posted on our Web site at www.fhlbcin.com) is similar, although not identical, to the scope of the SEC's requirements governing transactions with related persons. In March 2007, our Board of Directors adopted a written related person transaction policy that is intended to close any gaps between Finance Agency and SEC requirements. The policy includes procedures for identifying, approving and reporting related person transactions as defined by the SEC. One of the tools that we used to monitor non-ordinary course transactions and other relationships with our directors and executive officers is an annual questionnaire that uses the New York Stock Exchange criteria for independence. Finally, our Insider Trading Policy provides that any request for redemption of excess stock (except for de minimis amounts) held by a Director's Financial Institution must be approved by the Board of Directors or by the Executive Committee of the Board.
We believe these policies are effective in bringing to the attention of management and the Board any non-ordinary course transactions that require Board review and approval and that all such transactions since January 1, 20142017 have been so reviewed and approved.
| |
| Item 14. | Principal Accountant Fees and Services. |
The following table sets forth the aggregate fees billed to the FHLBankFHLB for the years ended December 31, 20142017 and 20132016 by its independent registered public accounting firm, PricewaterhouseCoopers LLP:PwC:
| | | | For the Years Ended | For the Years Ended |
| (In thousands) | December 31, | December 31, |
| | 2014 | | 2013 | 2017 | | 2016 |
| Audit fees | $ | 661 |
| | $ | 659 |
| $ | 697 |
| | $ | 689 |
|
| Audit-related fees | 67 |
| | 59 |
| 38 |
| | 125 |
|
| Tax fees | — |
| | — |
| — |
| | — |
|
| All other fees | — |
| | — |
| — |
| | 6 |
|
| Total fees | $ | 728 |
| | $ | 718 |
| $ | 735 |
| | $ | 820 |
|
Audit fees were for professional services rendered for the audits of the FHLBank'sFHLB's financial statements.
Audit-related fees were for assurance and related services primarily related to the performance of the audit and review of the FHLB's financial statements and primarily consisted of accounting consultations, control advisory services and fees related to participation in and presentations at conferences.
The FHLBankFHLB is exempt from all federal, state and local income taxation. Therefore, no fees were paid for tax services during the years presented.
All other fees represent non-audit services related to an FHLBank System project on certain employee benefits during 2016. There were no other fees paid during the years presented.2017.
The Audit Committee approves the annual engagement letter for the FHLBank'sFHLB's audit. In evaluating the performance of the independent registered public accounting firm, the Audit Committee considers a number of factors, such as:
| |
| ▪ | PwC's independence and process for maintaining independence; |
| |
| ▪ | PwC's historical and recent performance on the FHLB's audit, including the results of an internal survey of PwC service and quality with the FHLB and the FHLBank System; |
| |
| ▪ | external data related to audit quality and performance, including recent Public Company Accounting Oversight Board (PCAOB) audit quality inspection reports on PwC; and |
| |
| ▪ | the appropriateness of PwC's audit fees. |
The Audit Committee also establishes a fixed dollar limit for other recurring annual accounting related consultations, which include the FHLBank'sFHLB's share of FHLBank System-related accounting issues. The status of these services is periodically reviewed by the Audit Committee throughout the year with any increase in these services requiring pre-approval. All other services provided by the independent accounting firm are specifically approved by the Audit Committee in advance of commitment.
The FHLBankFHLB paid additional fees to PricewaterhouseCoopers LLP in the form of assessments paid to the Office of Finance. The FHLBankFHLB is assessed its proportionate share of the costs of operating the Office of Finance, which includes the expenses associated with the annual audits of the combined financial statements of the 12 FHLBanks. These assessments, which totaled $51,000$47,000 and $52,000$49,000 in 20142017 and 2013,2016, respectively, are not included in the table above.
PART IV
| |
| Item 15. | Exhibits and Financial Statement Schedules. |
| |
| (a) | Financial Statements. The following financial statements of the Federal Home Loan Bank of Cincinnati, set forth in Item 8 above, are filed as a part of this registration statement. |
Report of Independent Registered Public Accounting Firm
Statements of Condition as of December 31, 20142017 and 20132016
Statements of Income for the years ended December 31, 2014, 20132017, 2016 and 20122015
Statements of Comprehensive Income for the years ended December 31, 2014, 20132017, 2016 and 20122015
Statements of Capital for the years ended December 31, 2014, 20132017, 2016 and 20122015
Statements of Cash Flows for the years ended December 31, 2014, 20132017, 2016 and 20122015
Notes to Financial Statements
See Index of Exhibits
| |
| Item 16. | Form 10-K Summary. |
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, as of the 19th15th day of March 2015.2018.
FEDERAL HOME LOAN BANK OF CINCINNATI
(Registrant)
|
| |
| By: | /s/ Andrew S. Howell |
| | Andrew S. Howell |
| | President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated as of the 19th15th day of March 2015.2018.
|
| | | |
| | Signatures | | Title |
| | | | |
| | /s/ Andrew S. Howell | | President and Chief Executive Officer |
| | Andrew S. Howell | | (principal executive officer) |
| | | | |
| | /s/ Donald R. AbleStephen J. Sponaugle | | Executive Vice President - Chief Operating Officer and ChiefPresident-Chief Financial Officer |
| | Donald R. AbleStephen J. Sponaugle | | (principal financial officer) |
| | | | |
| | /s/ J. Christopher Bates | | Senior Vice President - ChiefPresident-Chief Accounting Officer |
| | J. Christopher Bates | | (principal accounting officer) |
| | | | |
| | /s/ J. Lynn Anderson* | | Director |
| | J. Lynn Anderson | | |
| | | | |
| | /s/ Grady P. Appleton* | | Director |
| | Grady P. Appleton | | |
| | | |
| /s/ Brady T. Burt* | | Director |
| Brady T. Burt | | |
| | | | |
| | /s/ Greg W. Caudill* | | Director |
| | Greg W. Caudill | | |
| | | | |
| | /s/ James R. DeRoberts* | | Director |
| | James R. DeRoberts | | |
| | | | |
| | /s/ Mark N. DuHamel* | | Director |
| | Mark N. DuHamel | | |
| | | | |
| | /s/ Leslie D. Dunn* | | Director |
| | Leslie D. Dunn | | |
| | | | |
| | /s/ James A. England* | | Director (Vice Chair) |
| | James A. England | | |
| | | | |
| | /s/ Charles J. Koch* | | Director |
| | Charles J. Koch | | |
| | | | |
| | /s/ Robert T. Lameier* | | Director |
| Robert T. Lameier | | |
|
| | | |
| /s/ Michael R. Melvin* | | Director |
| | Michael R. Melvin | | |
| | | | |
| /s/ Thomas L. Moore* | | Director |
| Thomas L. Moore | | |
|
| | | |
| | /s/ Donald J. Mullineaux* | | Director (Chair) |
| | Donald J. Mullineaux | | |
| | | | |
| | /s/ Alvin J. Nance* | | Director |
| | Alvin J. Nance | | |
| | | | |
| | /s/ Charles J. Ruma* | | Director |
| | Charles J. Ruma | | |
| | | | |
| | /s/ David E. Sartore* | | Director |
| | David E. Sartore | | |
| | | | |
| | /s/ William J. Small* | | Director (Vice Chair) |
| William J. Small | | |
| | | |
| /s/ William S. Stuard, Jr.* | | Director |
| | William S. Stuard, Jr. | | |
| | | | |
| | /s/ Nancy E. Uridil* | | Director |
| | Nancy E. Uridil | | |
| | | |
| /s/ James J. Vance* | | Director |
| James J. Vance | | |
| | | | |
| | * Pursuant to Power of Attorney | | |
| | | | |
| | /s/ Andrew S. Howell | | |
| | Andrew S. Howell | | |
| | Attorney-in-fact | | |
INDEX OF EXHIBITS
|
| | | | |
Exhibit Number (1) | | Description of exhibit | | Document filed or furnished, as indicated below |
| | | | | |
| 3.1 | | | | Form 10, filed December 5, 2005 |
| | | | | |
| 3.2 | | | | Form 10-K, filed March 18, 2010 17, 2016 |
| | | | | |
| 4 | | | | Form 8-K,10-Q, filed January 31, 2014November 10, 2016 |
| | | | | |
| 10.1.A | | | | Form 10, filed December 5, 2005 |
| | | | | |
| 10.1.B | | | | Form 10, filed December 5, 2005 |
| | | | | |
| 10.2 | | | | Form 10, filed December 5, 2005 |
| | | | | |
| 10.3 | | | | Form 8-K,10-K, filed June 28, 2006
March 16, 2017 |
| | | | | |
| 10.4 | | | | Form 8-K, filed August 5, 2011 |
| | | | | |
10.5 (2) | | | | Form 10-Q, filed August 9, 2012Filed Herewith |
| | | | | |
10.6 (2) | | Transitional Executive Long-Term Incentive Plan | | Form 10-Q, filed August 9, 2012 |
| | | | |
10.7 (2)
| | Federal Home Loan Bank of Cincinnati Benefit Equalization Plan (December 2008 Restatement) | | Form 10-K, filed March 18, 2010 |
| | | | | |
10.810.7 (2)
| | | | Form 10-K, filed March 18, 2010 |
| | | | | |
10.9 (2)
10.8 | | | | Form 8-K, filed
July 30, 2009 |
| | | | |
| 10.9 | | | | Form 10-K, filed March 16, 2017 |
| | | | |
| 10.10 | | July 30, 2009
| | Form 10-Q, filed November 9, 2017 |
| | | | | |
| 12 | | | | Filed Herewith |
| | | | | |
| 24 | | | | Filed Herewith |
| | | | | |
| 31.1 | | | | Filed Herewith |
| | | | | |
| 31.2 | | | | Filed Herewith |
| | | | | |
| 32 | | | | Furnished Herewith |
| | | | |
| | | | |
| | | | |
|
| | | | |
Exhibit Number (1) | | Description of exhibit | | Document filed or furnished, as indicated below |
| | | | | |
| 99.1 | | | | Furnished Herewith |
| | | | | |
| 99.2 | | | | Furnished Herewith |
| | | | | |
| 101.INS | | XBRL Instance Document | | Filed Herewith |
| | | | | |
| 101.SCH | | XBRL Taxonomy Extension Schema Document | | Filed Herewith |
| | | | | |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | Filed Herewith |
| | | | | |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | Filed Herewith |
| | | | | |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | Filed Herewith |
| | | | | |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | Filed Herewith |
| |
| (1) | Numbers coincide with Item 601 of Regulation S-K. |
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| (2) | Indicates management compensation plan or arrangement. |
