UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
|
| | |
x | | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20152018
or
|
| | |
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)
|
| | |
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.
|
| | | |
Large accelerated filer o | Accelerated filer o |
Non-accelerated filer x | Smaller reporting company o |
| | (Do not check if a smaller reporting company) | 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 29, 2016, the registrant had 43,340,502 shares of capital stock outstanding, which included stock classified as mandatorily redeemable. The capital stock of the registrant is not listed on any securities exchange or quoted on any automated quotation system, only may be owned by members and former members and is transferable only at its par value of $100 per share. At June 30, 2018, the aggregate par value of all Class B stock held by members and former members was $4,562,356,400. As of February 28, 2019, the registrant had 42,485,437 shares of capital stock outstanding, which included stock classified as mandatorily redeemable.
Documents Incorporated by Reference: None
Table of Contents
|
| | |
| PART I | |
| | |
Item 1. | Business | |
| | |
Item 1A. | Risk Factors | |
| | |
Item 1B. | Unresolved Staff Comments | |
| | |
Item 2. | Properties | |
| | |
Item 3. | Legal Proceedings | |
| | |
Item 4. | Mine Safety Disclosures | |
| | |
| PART II | |
| | |
Item 5. | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | |
| | |
Item 6. | Selected Financial Data | |
| | |
Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations | |
| | |
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | |
| | |
Item 8. | Financial Statements and Supplementary Data | |
| | |
| Financial Statements for the Years Ended 2015, 2014,2018, 2017, and 20132016 | |
| | |
| Notes to Financial Statements | |
| | |
| Supplemental Financial Data | |
| | |
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | |
| | |
Item 9A. | Controls and Procedures | |
| | |
Item 9B. | Other Information | |
| | |
| PART III | |
| | |
Item 10. | Directors, Executive Officers and Corporate Governance | |
| | |
Item 11. | Executive Compensation | |
| | |
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | |
| | |
Item 13. | Certain Relationships and Related Transactions, and Director Independence | |
| | |
Item 14. | Principal Accountant Fees and Services | |
| | |
| PART IV | |
| | |
Item 15. | Exhibits and Financial Statement Schedules | |
| | |
Item 16. | Form 10-K Summary | |
| | |
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 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:
| |
▪ | the effects of economic, financial, credit, market, and member conditions on our financial condition and results of operations, including changes in economic growth, general liquidity conditions, inflation and deflation, interest rates, interest rate spreads, interest rate volatility, mortgage originations, prepayment activity, housing prices, asset delinquencies, and members' mergers and consolidations, deposit flows, liquidity needs, and loan demand; |
| |
▪ | political events, including legislative, regulatory, federal government, judicial or other developments that could affect us, our members, our counterparties, other Federal 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); |
| |
▪ | competitive forces, including those related to other sources of funding available to members, to purchases of mortgage loans, and to our issuance of Consolidated Obligations; |
| |
▪ | 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; |
| |
▪ | changes in investor demand for Consolidated Obligations; |
| |
▪ | the volatility of market prices, interest rates, credit quality, and other indices that could affect the value of investments and collateral we hold as security for member obligations and/or for counterparty obligations; |
| |
▪ | the ability to attract and retain skilled management and other key employees; |
| |
▪ | the ability to develop, secure and support technology and information systems that effectively manage the risks we face; |
| |
▪ | the ability to successfully manage new products and services; and |
| |
▪ | 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 FHLB 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 ofcomprises 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. A GSE combines private sector ownership with public sector sponsorship. In additionU.S. government policy. The System has a critical 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 FHLB. 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, 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 members elect. Ten directors are officers and/or directors of our member institutions, while the remaining directors are independentIndependent directors who represent the public interest.
At December 31, 2015,2018, we had 699646 members, 203225 full-time employees, and nofour part-time employee.employees. Our employees are not represented by a collective bargaining unit. We consider our relationship with our employees to be good.
Our internet address is www.fhlbcin.com. Information on our website is not incorporated by reference into this report.
Mission and Corporate Objectives
The FHLB'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 member stockholders and issue low-cost high-quality debt securities in the global 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, and services (called Mission Asset Activity)low-cost sources of funding to support their business activities including affordable housing and community investment. Another
important member service is that we offer a program to purchase certain mortgage loans, which provides members liquidity and generatehelps them reduce market risk. Additionally, we provide a competitive return on theirmembers' capital investment in our company.
Our ability to best perform our 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 for 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, which we call Mission Assets, are readily available low-cost loans called Advances, purchases of certain whole mortgage loans sold by qualifying members through the Mortgage Purchase Program (MPP), and Letters of Credit. We also offer affordable housing programs and related activities to support members 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 members 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. 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 underwith a wide range of maturities, structures, and amounts, and at relatively favorable spreads to benchmark market interest rates (represented by(such as U.S. Treasury securities, and the London InterBank Offered Rate (LIBOR) and the Secured Overnight Financing Rate (SOFR)) compared with many other financial institutions.
Because we are a cooperative organization with some members using our products more heavily than others and members having different percentages of capital stock, we must achieve a balance in generating membership value from product prices and characteristics and paying a competitive dividend rate. We 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 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 intended to promote housing finance among members and ensure our operations and governance are effective and efficient. The first three objectives drive how members derive value from being in the cooperative.
| |
▪ | Mission Asset Activity:Activity: Implement strategies and tactics toand effectively manage ongoing operations andto promote members’ usage of our productsMission Assets and services.stand ready at all times to provide liquidity to members. |
| |
▪ | Stock ReturnReturn:: Earn adequate profitability so that members receive a competitive long-term dividend rate on their capital stock investment. |
| |
▪ | Housing and Community Investment ProgramsPrograms:: Maintain effective housing and community investment programs that maximize mandatory programs and offer additionaltargeted voluntary contributions.assistance programs. |
| |
▪ | Safe and Sound Operations:Operations: Optimize the FHLB’sour counterparty and deposit ratings, achieve an acceptable rating on annual regulatory examinations, and maintainhave an adequate amount and composition of capital. |
| |
▪ | Risk ManagementManagement:: Employ effective risk optimization management practices and maintain risk exposures at low to moderate levels. |
| |
▪ | 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).
|
Business Activities
Mission Asset Activity
The following are our principal business activities with members:
| |
▪ | We lend readily-available, competitively-priced, and fully-collateralized Advances. |
| |
▪ | We issue collateralized Letters of Credit. |
| |
▪ | 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 members 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 (MBS), 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:
| |
▪ | interest paid on Consolidated Obligations and deposits to fund assets; |
| |
▪ | 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' capital investment is comparable to investing in adjustable-rate preferred equity instruments. Therefore, we structure our balance sheet risk exposures so that earnings tend to move in the same direction as changes in short-term market rates, which can help provide a degree of predictability for dividend returns.
Capital
Due to our cooperative structure, we obtain capital from members. Each member must own capital stock as a condition of membership and normally must holdacquire additional stock above the membership stock amount in order to gain access to Advances and possibly to sell us MPP loans.Mission Assets. Acquiring capital in connection with growth in Mission Assets ensures that these assets are self-capitalizing. We issue, redeem, and repurchase capital stock only at its stated par value of $100 per share. By law, our stock is not publicly traded.
We strive to ensure that assets are self-capitalizing, meaning that we acquire capital primarily in connection with growth in Mission Asset Activity.
We also maintain an amount of capital to ensure we meet all of our regulatory and business requirements relating to capital adequacy and protection of creditors against losses. We hold retained earnings to protect members' stock investment against impairment risk.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 members and do not benefit from the corporate dividends received exclusion. Notes 1 and 14 of the Notes to Financial Statements provide additional details regarding the assessment for the Affordable Housing Program.
Ratings of Nationally Recognized Statistical Rating Organizations
The FHLBank System's comparative advantage in funding is acknowledged in its excellent credit ratings from nationally recognized statistical rating organizations (NRSROs). Moody's Investors Service (Moody's) currently assigns, and historically has assigned, the System's Consolidated Obligations the highest ratings available: long-term debt is rated Aaa and short-term debt is rated P-1. It also assigns a Prime-1 short-term bond rating on each FHLBank. It affirmed these ratings in 20152018 and maintained a stable outlook. In 2015,2018, Standard & Poor's affirmed its issuer credit ratings on each FHLBank and its AA+ ratings on the System's senior debt and also maintained a stable outlook.
The ratings closely follow the U.S. sovereign ratings from both agencies. The lower-than AAA debt ratings from Standard & Poor's has had no discernible impact on the System's debt issuance capabilities since the rating change occurred in 2011.
The agencies' rationales for their ratings of the System and our FHLB include the System's status as a GSE; the joint and several liability for Obligations; excellent overall asset quality; extremely strong capacity to meet commitments to pay timely principal and interest 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 of each FHLBank 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 FHLB. See the “Segment Information” section of “Results of Operations” in Item 77. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 members to help manage their asset/liability and liquidity needs. Advances can both complement and be alternatives to retail deposits, other wholesale funding sources, and corporate debt issuance. We strive to facilitate efficient, fast, and continualcontinuous member access to funds. In most cases, members 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. Having diverse programs gives members the flexibility to choose and customize their borrowings according to size, maturity, interest rate, interest rate index (for adjustable-rate coupons), interest rate options, and other features.
Repurchase based (REPO) Advances are short-term, fixed-rate instruments structured similarly to repurchase agreements from investment banks, with one principal difference. Members collateralize their REPO Advances through our normal collateralization process, instead of being required to pledge specific securities as would be required in a repurchase agreement. A majority of REPO Advances outstanding have overnight maturities.
LIBORAdjustable-rate Advances have adjustable interest rates typically priced off 1-benchmark rate indices such as LIBOR or 3-month LIBOR indices. LIBORSOFR. Adjustable-rate Advances may be structured at the member's option as either prepayable with a fee or prepayable without a fee if the prepayment is made on a repricing date.
Regular Fixed-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 members 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, provide members 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's behalf to guarantee its performance to third parties. A Letter of Credit may obligate us to make direct payments to a third party, in which case it is treated as an Advance to the member. The most popular use of Letters of Credit is as collateral supporting public unit deposits, which are deposits held by governmental units at financial institutions. We normally earn fees on Letters of Credit based on the actual notionalaverage amount of the Letters utilized.utilized, which generally is less than the notional amount issued.
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 similar 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 members 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 member prepays principal on an Advance that we have hedged with an interest rate swap, we may also assess the member a fee to compensate us for the cost we incur in terminating the swap before its stated final maturity. Some Advance programs are structured as non-prepayable and may have additional restrictions in order to terminate.
We manage credit risk on Advances by requiring each member 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, multi-family loans, commercial real estate 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"Quantitative and Qualitative Disclosures About Risk Management” in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Notes 8 and 10 of the Notes to Financial Statements have more detail on our credit risk management of member borrowings.
Housing and Community Investment
Our Housing and Community Investment Programs include the Affordable Housing Program and various housing and community economic development-related Advance 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 grants to members that apply and successfully compete in an annual offering. Under Welcome Home, we make funds available beginning in March until they have been fully committed. For both programs, the income of qualifying individuals or households must be 80 percent or less of the area median income. We set aside up to 35 percent of the Affordable Housing Program accrual for Welcome Home and allocate the remainder to the Competitive Program.
Our Board of Directors also may allocate funds to voluntary housing programs. In 2015,2018, the Board re-authorized an additional $1$1.5 million to the Carol M. Peterson Housing Fund for use during the year. In January 2019, the Board authorized an increase in this fund to $2.1 million for use in 2019. These funds are primarily used as grants to pay for accessibility rehabilitation and emergency repairs for special needs and elderly homeowners. In March 2016, the Board re-authorized this fund in the amount of $1.5 million for use in 2016. In 2012, the Board of Directors also established the Disaster Reconstruction Program, a $5 million voluntary housing program that provides grants for purchase or rehabilitation of a home 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. SinceIn December 2018, the program's inception, we have disbursed nearly $3Board approved an additional $3.6 million to assist 177 households.continue the Disaster Reconstruction Program. When combined with the existing $1.4 million available under the original authorization, the total disaster funds available were $5.0 million at December 31, 2018.
Two other housing programs that fall outside the auspices of the Affordable Housing Program are the Community Investment Program and the Economic Development Program. Advances under the former program have rates equal to our cost of funds, while Advances under the latter program have rates equal to our cost of funds plus three basis points. Members use the Community Investment Program to serve housing needs of low- and moderate-income households and, under certain
conditions, community economic development projects. The Economic Development Program is a discounted Advance program used to promote economic development and job creation and retention.
Investments
Types of Investments. OneA primary reason we hold investments is to carry sufficient asset liquidity. Permissible liquidity investments include Federal funds, certificates of deposit, bank notes, bankers' acceptances, commercial paper, securities purchased under agreements to resell, and debt securities issued by the U.S. government, its agencies, or its agencies.other GSE's. 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. MostMany 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:
| |
▪ | mortgage-backed securitiesMBS and collateralized mortgage obligations supported by mortgage securities (together, referred to as mortgage-backed securities) andMBS) issued by GSEs or private issuers; |
| |
▪ | asset-backed securities collateralized by manufactured housing loans or home equity loans and issued by GSEs or private issuers; and |
| |
▪ | marketable direct obligations of certain government units 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 do not own any privately-issued mortgage-backed securities. MBS. We have historically held small amounts of obligations of government units and agencies.
Per Finance Agency regulations, the total investment in mortgage-backed securitiesMBS and asset-backed securities may not exceed, on a book value basis, 300 percent of previous month-end regulatory capital on the day we purchase the securities. See the “Capital Resources” section below for the definition of regulatory capital.
Purposes of Having Investments. The investments portfolio helps us achieve corporate objectives in the following ways:
| |
▪ | Liquidity management. Liquidity investments help support the ability to fund assets on a timely basis, especially Advances.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. |
| |
▪ | Earnings enhancement. The investments portfolio, especially MBS, assists with earning a competitive return on capital, which also increasesand increasing funding for Housing and Community Investment programs. |
| |
▪ | 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.
|
| |
▪ | 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 member demand.
|
| |
▪ | Support of housing market. Investment in mortgage-backed securitiesMBS 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,MBS, 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 noncallablenon-callable 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 securitiesMBS and other investments we can hold. These restrictions prohibit, among others, the purchase of interest only or principal only stripped mortgage-backed securitiesMBS and mortgage-backed securitiesMBS whose average life varies more than six years under a 300 basis points interest rate shock.
Our internal policies specify guidelines for, and relatively tight constraints on, the types and amounts of short-term investments we are permitted to hold and the maximum amount of credit risk exposure we are permitted to have with eligible counterparties. We are permitted to invest only in the instruments of counterparties with high credit ratings, and because of our conservative investment policies and practices, we believe all of our investments have high credit quality. We have never had a credit loss or credit-related write down of any investment security.
Deposits
We provide a variety of deposit programs, including demand, overnight, term and Federal funds, which enable depositors to invest funds in short-term liquid assets. We accept deposits from members, other FHLBanks, any institution to which we offer correspondent services, and other government instrumentalities. The rates of interest we pay on deposits are subject to change daily based on comparable money market interest rates. The balances in deposit programs tend to vary positively with the amount of idle funds members have available to invest, as well as the level of short-term interest rates. Deposits have represented a small component of our funding in recent years, typically less than one percent of our funding sources.
Mortgage Purchase Program (MPP or Mortgage Loans Held for Portfolio)
Description of the MPP
Types of Loans and Benefits. Finance Agency regulations permit FHLBanks to purchase and hold specified whole mortgage loans from their members, which offers members a competitive alternative to the traditional secondary mortgage market and directly supports housing finance. We account for MPP loans as mortgage loans held for portfolio. By selling mortgage loans to us, members can increase their balance sheet liquidity and lower interest rate and mortgage prepayment risks. The MPP particularly enables small- and medium-sized community-based financial institutions to use their existing relationship with us to participate more effectively in the secondary mortgage market.
Under the MPP, 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 2016,2019, the Finance Agency re-establishedestablished the conforming limit at $417,000$484,350 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.MBS.
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 forSupplemental Mortgage Insurance. Supplemental Mortgage Insurance is applicable to loans acquired before February 2011 Supplemental Mortgage Insurance thatand was purchased by 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"Quantitative and Qualitative Disclosures About Risk Management” in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations provides more detail on how we manage market and credit risks for the MPP.
Earnings from the MPP
The MPP enhances long-term profitability on a risk-adjusted basis and augments the return on member stockholders' capital investment. We generate earnings in the MPP from monthly interest payments minus the cost of funding and the cost of hedging the MPP's interest rate risk. Interest income on each loan is computed as the mortgage note rate multiplied by the loan's principal balance:
| |
▪ | minus servicing costs (0.25 percent for conventional loans and 0.44 percent for FHA loans); |
| |
▪ | minus the cost of Supplemental Mortgage Insurance (for applicable loans); and |
| |
▪ | adjusted for the amortization of purchase premiums or the accretion of purchase discounts and for the amortization or accretion of fair value adjustments on loans initially classified as mortgage loan commitments. |
For new loan purchases, we consider the cost of the Lender Risk Account when we set conventional loan prices and evaluate the MPP's expected return.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:
| |
▪ | to finance and hedge intermediate- and long-term fixed-rate Advances and mortgage assets; |
| |
▪ | to finance and hedge short-term, LIBOR-indexed adjustable-rate Advances, and swapped Advances, typically by synthetically transforming fixed-rate Bonds to adjustable-rate LIBOR funding through the execution of interest rate swaps; and |
| |
▪ | to acquire liquidity.liquidity investments. |
Bonds may have fixed or adjustable rates of interest. Fixed-rate Bonds are either noncallablenon-callable 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 a benchmark market interest rate, typically LIBOR or SOFR, 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.Advances and certain longer-term fixed rate investments that have been swapped to an adjustable-rate.
We transact in interest rate swaps to synthetically convert some fixed-rate Bonds to adjustable-rate terms indexed to LIBOR.terms. 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)an adjustable-rate), liquidity investments, and a portion of longer-term fixed-rate assets. Discount Notes have maturities from one day to one year, with most of ours normally maturing within three months.
The mix of Obligations fluctuates in response to relative changes in short-term versus long-term assets, relative changes in fixed-rate versus adjustable-rate assets, decisions on market risk management (particularly the amount of funding of longer-term assets with short-term Obligations), and differences in relative costs of various Obligations.
Interest rates on Obligations including their relationship to other products such as U.S. Treasury securities and LIBOR, are affected by a multitude of factors such as: overall economic and credit conditions; credit ratings of the FHLBank System; investor demand and preferences for our debt securities; the level of interest rates and the shape of the U.S. Treasury curve and the LIBOR swap curve; and the supply, volume, timing, and characteristics of debt issuances by the FHLBanks, other GSEs, and other highly rated issuers.
Finance Agency regulations govern the issuance of Obligations. An FHLBank may not issue individual debt securities without Finance Agency approval, and we have never done so. The Office of Finance services Obligations, prepares the FHLBank System's quarterly and annual combined financial statements, and serves as a source of information for the FHLBanks on capital market developments.
We have the primary liability for our portion of Obligations, i.e., those issued on our behalf for which we received the proceeds. However, we also are jointly and severally liable with the other FHLBanks for the payment of principal and interest on all Obligations. If we do not pay the principal or interest in full when due on any Obligation issued on our FHLB's behalf, we are prohibited from paying dividends or redeeming or repurchasing shares of capital stock. If another FHLBank were unable to repay its participation in an Obligation for which it is the primary obligor, the Finance Agency could call on each of the other FHLBanks to repay all or part of the Obligation. The Finance Agency has never invoked this authority.
LIQUIDITY
Our business requires a continualsubstantial and substantialcontinual amount of liquidity to meetsatisfy financial obligations (primarily maturing Consolidated Obligations) in a timely and cost-efficient manner and to provide members access to timely Advance funding and mortgage loan sales in all financial environments. We obtain liquidity by issuing debt, holding short-term assets that mature before their associated funding, and having the ability to sell certain investments without significant accounting or economic consequences. Sources of asset liquidity include cash, maturing Advances, maturing investments, principal paydowns of mortgage assets, the ability to sell certain investments, and interest payments received. Uses of liquidity include repayments of Obligations, issuances of new Advances, purchases of loans under the MPP, purchases of investments, and payments of interest.
Liquidity requirements are significant because Advance balances can be volatile, many have short-term maturities, and we strive to allow members to borrow Advances on the same day they request them. We regularly monitor liquidity risks and the investment and cash resources available to meet liquidity needs, as well as statutory and regulatory liquidity requirements.
Because Obligations have favorable credit ratings and because the FHLBank System is one of the largest sellers of debt in the worldwide capital markets, the System historically has been able to satisfy its liquidity needs through debt issuance across a wide range of structures at relatively favorable spreads to benchmark market interest rates.rates, such as U.S. Treasury securities.
CAPITAL RESOURCES
Capital PlanRequirements
Basic CharacteristicsStatutory and Regulatory Requirements
Under Finance Agency regulations, regulatory capital is composed of all capital stock (including stock classified as mandatorily redeemable), retained earnings, general loss allowances, and other amounts from sources the Finance Agency determines are available to absorb losses. Currently, our regulatory capital consists of capital stock and retained earnings. Under the Gramm-Leach-Bliley Act of 1999 (GLB Act), permanent capital equals Class B stock plus retained earnings and is available to absorb financial losses.
Our Capital Plan has the following basic characteristics:
| |
▪ | We offer only one class of capital stock, Class B, which is redeemable upon a member's five-year advance written notice, with certain conditions described below. We may elect, at our discretion, to repurchase stock redemption requests sooner than five years. |
| |
▪ | We issue shares of capital stock as required for an institution to become a member or maintain membership, as required for members to capitalize Mission Asset Activity, and when we may pay dividends in the form of additional shares of stock. |
| |
▪ | The Capital Plan enables us to efficiently expand and contract capital stock needed to capitalize assets in response to changes in our membership base and demand for Mission Asset Activity. This enables us to maintain a prudent amount of financial leverage and also consistently generate a competitive dividend return. |
| |
▪ | We may, subject to the restrictions described below, repurchase certain capital stock (i.e., "excess" capital stock). |
| |
▪ | The concept of “cooperative capital,” explained below, better aligns the interests of heavy users of our products with light users by enhancing the dividend return. |
Prudent risk management requires us to maintain effective financial leverage to minimize risk to capital stock while preserving profitability and to hold an adequate amount of retained earnings. Pursuant to these objectives, Finance Agency regulations stipulate that we must comply with three limits on capital leverage and risk-based capital. These ensure a low amount of capital risk while providing for competitive profitability. We have always complied with thethese regulatory capital requirements.
| |
▪ | We must maintain at least a four percent minimum regulatory capital-to-assets ratio. This hasrequirement historically been the regulatory capital requirement that has been closest to affecting our operations. |
| |
▪ | We must maintain at least a five percent minimum leverage ratio of capital divided by total assets, which includes a 1.5 weighting factor applicable to permanent capital. Because all of our Class B stock is permanent capital, this requirement is met automatically if we satisfy the four percent unweighted capital requirement. |
| |
▪ | We are subject to a risk-based capital rule in which we must hold an amount of "permanent" capital that exceeds the amount of exposure to market risk, credit risk, and operational risk. How we determine the amount of these risk exposures is stipulated by Finance Agency regulation. Permanent capital includes retained earnings and the regulatory amount of Class B capital stock. |
In addition to the minimum capital requirements, the GLB Act and our Capital Plan promote the adequacy of our capital to absorb financial losses in three ways, whichways. These combine to give member stockholders a clear incentive to require us to minimize our risk profile:
| |
▪ | the five-year redemption period for Class B stock; |
| |
▪ | the option we have to call on members to purchase additional capital if required to preserve safety and soundness; and |
| |
▪ | the limitations, described below, on our ability to honor requested redemptions of capital if we are at risk of not maintaining safe and sound operations. |
GAAP capital excludes mandatorily redeemableIn accordance with the GLB Act, our stock is also putable by members. There are statutory and regulatory restrictions on our obligation or right to redeem or repurchase outstanding stock, including, but not limited to, the following:
| |
▪ | We may not redeem any capital stock if, following the redemption, we would fail to satisfy any regulatory capital requirements. By law, we may not redeem any stock if we become undercapitalized. |
| |
▪ | We may not redeem any capital stock without approval of the Finance Agency if either our Board of Directors or the Finance Agency determines that we have incurred or are likely to incur losses resulting or expected to result in a charge against capital. |
If we were to be liquidated, stockholders would be entitled to receive the par value of their capital stock while regulatoryafter 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 includes it. Mandatorily redeemable capital stock, which is stockstock. In the event of a merger or consolidation of the FHLB, the Board of Directors would determine the rights and preferences of the FHLB's stockholders, subject to pending redemption, is accounted for as a liability on our Statements of Conditionany terms 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 untilconditions imposed by the stock is redeemed or repurchased. See Note 15 of the Notes to Financial Statements for more discussion of mandatorily redeemable capital stock.Finance Agency.
Components of Capital Stock Purchases and Operations of the Capital Plan
Our Capital Plan ties the amount of each member's required capital stock to both the amount of the member's assets (membership stock) and the amount and type of its Mission Asset Activity with us. The Capital Plan has the following basic characteristics:
| |
▪ | We offer only one class of capital stock, Class B, which is generally redeemable upon a member's five-year advance written notice. We strive to manage capital risks to be able to safely and soundly satisfy redemption requests sooner than five years, although we may elect to wait up to five years (or longer under certain conditions). |
| |
▪ | We issue shares of capital stock as required for an institution to become a member or maintain membership (membership stock), as required for members to capitalize Mission Asset Activity (activity stock), and if we pay dividends in the form of additional shares of stock. |
| |
▪ | We may, subject to the restrictions described above, repurchase certain capital stock (i.e., "excess" capital stock). |
| |
▪ | The concept of “cooperative capital,” explained below, better aligns the interests of heavy users of our products with light users by enhancing the dividend return and providing a more stable base of capital. |
We believe the Capital Plan enables us (activity stock). Membershipto efficiently increase and decrease capital stock is requiredneeded to becomecapitalize assets in response to changes in the membership base and demand for Mission Asset Activity. This enables us to maintain a memberprudent amount of financial leverage and maintain membership. Theconsistently generate a competitive dividend return.
At December 31, 2018, the amount of membership stock required for each member currently rangesranged from a minimum of $1 thousand$1,000 to a maximum of $25 million, for each member, with the amount within that range determined as a percentage of member assets. Beginning in April 2019, the maximum amount of membership stock required for each member was increased to $30 million. Separate from its
In addition to its membership stock, aeach member may beis 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 FHLB must capitalize all Mission Asset Activity with capital stock at a rate of at least four percent. However, each member is permitted to maintain an amount of activity stock within the range of minimum and maximum percentages for each type of Mission Asset Activity. The current percentages are as follows:
|
| | | | |
Mission Asset Activity | | Minimum Activity Percentage | | Maximum Activity Percentage |
Advances | | 2% | | 4% |
Advance Commitments | | 2 | | 4 |
MPP | | 0 | | 4 |
If a member owns more stock than is needed to satisfy both its membership stock requirement and the maximum activity stock percentages for its Mission Asset Activity, we designate the remaining stock as the member's excess capital stock. The member may utilize its excess stock to capitalize additional Mission Asset Activity.
If an individual member's excess stock reaches zero, the Capital Plan normally permits us, withinwith certain limits, to capitalize additional Mission Asset Activity of that member with excess stock owned by other members at the maximum percentage rate. This feature, called “cooperative capital,” enables us to more effectively utilize our capital stock. The limit to how much cooperative capital a member may use is currently set at $100 million. A member's use of cooperative capital reduces the ratio of its activity stock to its Mission Asset Activity for each type of Mission Asset Activity. There is a limit to how much cooperative capital a member may use, which we currently set at $200 million.
When a member's ratio of activity stock to its Mission Asset Activity reaches the minimum activity stock percentage for all types of Mission Asset Activity, the member must capitalize additional Mission Asset Activity of a given type by purchasing capital stock at that asset type's minimum percentage rate, assuming availability of cooperative capital.
Statutory and Regulatory Restrictions on Capital Stock Redemption and Repurchases
In accordance with the GLB Act, our stock is putable by members. However, for us and the other FHLBanks, there are significant statutory and regulatory restrictions on our obligation or right to redeem or repurchase outstanding stock, including, but not limited to, the following:
| |
▪ | We may not redeem any capital stock if, following the redemption, we would fail to satisfy any Regulatory capital requirements. By law, we may not redeem any stock if we become undercapitalized. |
| |
▪ | We may not redeem any capital stock without approval of the Finance Agency if either our Board of Directors or the Finance Agency determines that we have incurred or are likely to incur losses resulting or expected to result in a charge against capital. |
If our FHLB is liquidated and after payment in full to our creditors, stockholders would be entitled to receive the par value of their capital stock. In addition, each stockholder would be entitled to any retained earnings in an amount proportional to the stockholder's share of the total shares of capital stock. In the event of a merger or consolidation of the FHLB, the Board of Directors shall determine the rights and preferences of the FHLB's stockholders, subject to any terms and conditions imposed by the Finance Agency.
Retained Earnings
Purposes and Amount of Retained Earnings
Retained earnings are important to protect members' capital stock investment against the risk of impairment and to enhance our ability to pay stable and competitive dividends when earnings may be volatile in light of the risks we face.volatile. Impairment risk is the risk that members would have to write down the par value of their capital stock investment in our FHLB as a result of their analysis of ultimate recoverability. An extreme situation of earnings instability, in which 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 determinationmembers determining that the value of ourtheir capital stock investment 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, 2018, the minimum retained earnings requirement ranges from $375$400 million to $600 million, based on mitigating quantifiable risks under very stressed business and market scenarios to a 99 percent confidence level. Given the regulatory environment, we carry a greater amount of retained earnings than required by the Policy. At the end of 2015,2018, our retained earnings totaled $765$1,023 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 is integral to hedging market risk created by offering Advances, purchasingcertain longer-term fixed-rate investments and mortgage assets, and transacting mortgageincluding commitments. Derivatives related to Advances most commonly hedge either:
| |
▪ | below-market rates and/or the market risk exposure on Putable Advances, and certain other Advances, for which members have sold us options embedded within the Advances; or |
| |
▪ | Regular Fixed-Rate Advances when it may not be as advantageous to issue Obligations or when it may improve our market risk management. |
DerivativesThe derivatives we transact related to investments hedge market risk exposure by effectively converting the fixed-rate investment to an adjustable-rate investment. The derivatives we transact related to mortgage assets are used to augment debt issuance in the hedgingprimarily hedge interest rate risk and prepayment risk. Such derivatives include options on interest rates swaps (swaptions) and sales of market risk. We also use derivatives to hedge the market risk associated with fixed-rate mortgage purchase commitments in the MPP.to-be-announced MBS for forward settlement.
Derivatives transactions related to Bonds also help us intermediate between the preference of capital market investors for intermediate- and long-term fixed-rate debt securities and the preference of our members for shorter-term or adjustable-rate Advances. We can satisfy the preferences of both groups by issuing long-term fixed-rate Bonds and entering into an interest rate swap that synthetically converts the Bonds to an adjustable-rate LIBOR funding basis that matches up with the short-term and adjustable-rate Advances, thereby preserving a favorable interest rate spread.
Use of derivatives can result in a substantial amount of volatility of accounting and economic earnings. Because we 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 higher 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' use of Mission Asset Activity. One of the most important factors that affect AdvanceAdvances
Members' demand is the amount of member deposits, which for most members are their primary source of funds. In addition, both small and, in particular, large members typically have access to wholesale funds besides FHLB Advances. Another important source of competition forour Advances is affected by, among other things, the ongoing fiscal and monetary stimuli initiated by the federal government to combat the continued difficulties in the housing market and broader economy. This is discussed in Item 1A's “Risk Factors” and in Item 7's “Executive Overview."
The holding companiescost of someother sources of funding available, including our large asset members have membership(s) in other FHLBanks through their affiliates. Others could initiate memberships in other Districts. The competition among FHLBanks for the business of multiple-membership institutions is similar to the FHLBanks' competition with other wholesale lenders and mortgage investors.members' customer deposits. We compete with other suppliers of wholesale funding, both secured and unsecured, including the federal government, commercial banks, investment banking divisions of commercial banks, brokered deposits and other FHLBanks when our members' affiliated institutions are members of other FHLBanks. In addition, competition is often more significant when originating Advances to larger members, which have greater access to the national and global capital markets.
Our ability to compete successfully with other suppliers of wholesale funding, including other FHLBanks, depends primarily on the offerings and pricingtotal cost of Mission Asset Activity,our products to members, which include the rates we charge, earnings and dividend performance, collateral policies, capital plans,stock requirements, product features and members' perceptions of our relative safety and soundness. Some members may also evaluate benefits of diversifying business relationships among FHLB memberships. We regularly monitor theseIn addition, our competitive forces amongenvironment continues to be impacted by the FHLBanks.Federal Reserve's low interest-rate environment. See Item 1A. Risk Factors below for further discussion.
Mortgage Purchase Program
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.other secondary mortgage market conduits. 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 securitiesMBS and affects market prices and the availability of supply.
Debt Issuance
16
For debt issuance, theThe FHLBank System primarily competes with issuersthe U.S. government and other GSEs for funds raised through the issuance of unsecured debt in the national and global debt markets, including most importantlymarkets. Increases in the U.S. government and other GSEs.supply of competing debt products may, in the absence of increases in demand, result in higher debt costs.
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:
| |
▪ | the general state and trends of the economy and financial institutions, especially in ourthe Fifth District; |
| |
▪ | conditions in the financial, credit, mortgage, and housing markets; |
| |
▪ | competitive alternatives to our products, such as retail deposits and other sources of wholesale funding; |
| |
▪ | actions of the Federal Reserve to affect liquidity reserves of financial institutions and the money supply; and |
| |
▪ | the willingness and ability of financial institutions to expand lending; and |
| |
▪ | regulatory initiatives.lending. |
Because our business tends to be cyclical, aA recessionary economy normally lowerscan lower 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 in this document as “request withdrawal of capital”). These unfavorable effects are more likely to occur and be more severe if a weak economy is accompanied by significant changes in interest rates, stresses in the housing market, elevated competitive forces, or actual or potential changes in the legislative and regulatory environment.
Since the last recession, which officially ended in 2009, theThe economy has grown at a measured pace contributing toin recent years, a major reason for tempered broad-based 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, 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 operateOur primary business is providing liquidity to our members by making Advances to, and purchasing mortgage loans from, our members. Members have access to alternative funding sources, including their customers' deposits and wholesale funding, which may offer more favorable terms than we offer, such as more flexible credit or collateral standards. Some of our competitors are not subject to the same body of regulations applicable to us, which enables those competitors to offer products and terms that we are not able to offer. In addition, state and federal regulators’ perception of the stability and reliability of our Advances can also directly impact the amount of Advances used by members.
In connection with purchasing mortgage loans from our members, we face competition in a highly competitive environmentthe areas of customer service, purchase prices for Mission Asset Activity. the MPP loans and ancillary services such as automated underwriting and loan servicing options. Our primary competitors are Fannie Mae, Freddie Mac, government agencies such as Ginnie Mae, and other secondary mortgage market conduits. In addition, our members face increased origination competition from originators that are not members of an FHLBank, which could reduce the amount of mortgage loans that members can make available to us to purchase.
Increased competition could decrease the amount of Mission Asset ActivityAdvances and mortgage loans and narrow profitability on that activity,those products, both of which could cause stockholders to request withdrawals of capital. Historically, our primary competition has been from other wholesale lenders and debt issuers, including other GSEs. A substantial source of competition in the last eight years has come from the federal government's actions to stimulate the economy, especially the actions of the Federal Reserve System through its policies of quantitative easing and maintaining extremely low interest rates. Among other effects, these actions have significantly expanded liquidity and excess reserves available to many members. We expect overall, broad-based growth in Advance demand will remain modest until the government reduces these initiatives by tightening monetary policy and winding down its holdings of U.S. Treasury and mortgage-backed securities. Even if these events take place, we cannot provide assurance regarding the pace or strength of the renewed Advance demand that we would anticipate.
In addition, the FHLBank System competes for funds through issuanceSystem's offerings of debt compete 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 conditionscondition and results of operations and the value of FHLB membership.
GSE Reform. Potential GSE reform could unfavorably affect our business model, financial condition, and results of operations.
The FHLBank System's regulator, the Finance Agency, also regulates Fannie Mae and Freddie Mac. While there appears to be consensus that a permanent financial and political solution to the current conservatorship status of Fannie Mae and Freddie Mac should be implemented, which could include maintaining the current structure, no consensus has evolved to date around any of the various legislative proposals. However, some policy proposals have included provisions applicable to the FHLBanks, such as limitations on Advances and portfolio investments, development of a covered bond market, and restrictions on GSE mortgage finance, that could threaten the FHLBank System's long-standing business model.
Because the FHLBanks shares a common regulator with Fannie Mae and Freddie Mac, the ultimate resolution to the conservatorship of Fannie Mae and Freddie Mac could affect the FHLBanks. There are significant differences between the FHLBank System and Fannie Mae and Freddie Mac, including the System's focus on lending as opposed to guaranteeing mortgages and its distinctive cooperative business model. Legislation could inadequately account for these differences, which could imperil the ability of the FHLBank System to continue operating effectively within its current business model or could change the System's business model. We cannot predict the effects on the System if GSE reform were to be enacted.
FHLB Regulatory Environment. We face a heightened regulatory and legislative environment, which could unfavorably affect our business model, financial condition, and results of operations.
In addition to potential GSE reform, the legislative and regulatory environment in which the FHLBank System operates continues to undergo rapid change driven principally by reforms emanating from the Housing and Economic Reform Act of 2008 (HERA) and the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Recently-promulgated and future legislative and regulatory actions could significantly affect our business model, financial condition, or results of operations.
In addition, in January 2016, the Finance Agency published a final rule regarding membership requirements, part of which will negatively affect our business. The rule prohibits captive insurance companies membership eligibility in the FHLBank System. The membership regulation is discussed further in Item 7's "Executive Overview."
We believe that, taken as a whole, legislative and regulatory actions have raised our operating costs and imparted added uncertainty regarding the business model under which the FHLBanks may operate in the future. We are unable at this time to predict the ultimate effects the heightened regulatory environment could have on the FHLBank System's business model or on our financial condition and results of operations.
Liquidity and Market Access. Impaired access to the capital markets for debt issuance could increase liquidity risk, decrease the amount of Mission Asset Activity, lower earnings by raising debt costs and, at the extreme, result in realization of liquidity risk preventing the System from meeting its financial obligations.
Our principal long-term source of funding, liquidity, and market risk management is through access to the capital markets for participation in the issuances of debt securities and execution of derivative transactions at prices and yields that are adequate to support our business model. Our ability to obtain funds through the sale of Consolidated Obligations depends in part on prevailing conditions in the capital markets, particularly the short-term capital markets, due to a large reliance on short-term funding. Access to the capital markets on favorable terms and strong investor demand for FHLBank System debt are the fundamental source of the FHLBank System's business franchise. The System's strong debt ratings, the implicit U.S. government backing of our debt, and effective funding management are instrumental in ensuring satisfactory access to the capital markets.
We are exposed to liquidity risk if there are significant disruptions in the capital markets. Although the last several years experienced ongoing issues with the federal government's fiscal condition and changes in the regulatory environment that affected the functioning of capital markets, the FHLBank System has been able to maintain access to the capital markets
for debt issuances on acceptable terms (including when the FHLBank System's debt was downgraded by Standard & Poor's). However, there is no assurance this will continue to be the case. Future ability to effectively access the capital markets could be adversely affected by external events (such as general economic and financial instabilities, political instability, wars, and natural disasters), continued evolution of capital markets in response to financial regulations, and by the System's joint and several liability for Consolidated Obligations, which exposes us to events at other FHLBanks. If access to capital markets were to be impaired for any extended period, the effect on our financial condition and results of operations could be material. At the extreme, the System's ability to achieve its mission and satisfy its financial obligations could be threatened.
Credit and Counterparty Risk. We are exposed to credit risk that, if realized, could materially affect our ability to pay members a competitive dividend.
We believe we have a de minimis overall amount of residual credit risk exposure related to Credit Services, purchases of investments, and transactions in derivatives, and a minimal amount of credit risk exposure related to the MPP. However, we can make no assurances that credit losses will not materially affect our financial condition or results of operations. An extremely severe and prolonged economic downturn, especially if combined with continued significant disruptions in housing or mortgage markets, could result in credit losses on assets that could impair our financial condition or results of operations.
The FHLB is an asset-based lender for Advances and Letters of Credit. Advances are over-collateralized and we have a perfected first lien position on collateral. However, we do not have full information on the characteristics of nor do we estimate current market values on a large portion of collateral. This results in a degree of uncertainty as to the precise amount of over-collateralization.
Although credit losses in the MPP have historically been small, they could increase under adverse economic scenarios involving significant and sustained reductions in home prices and sustained elevated levels of unemployment and other factors that influence delinquencies and defaults.
Some of our liquidity investments are unsecured, as are uncollateralized portions of interest rate swaps. We make unsecured liquidity investments in and transact derivatives with highly rated, investment-grade institutions, have conservative limits on dollar and maturity exposure to each institution, and have strong credit underwriting practices. Failure of an investment or derivative counterparty with which we have a large unsecured position could have a material adverse effect on our financial conditions and results of operations. To the extent we engage in derivative transactions required to be cleared under provisions of the Dodd-Frank Act, we may be exposed to nonperformance from central clearinghouses and Futures Commission Merchants.
Financial institutions are increasingly inter-related as a result of trading, clearing, counterparty, and other relationships. As a result, actual or potential defaults of one or more financial institutions could lead to market-wide disruptions making it difficult for us to find qualified counterparties for transactions.
Market Risk. Changes in interest rates and mortgage prepayment speeds (together referred to as market risk exposure or interest rate risk exposure) could significantly reduce our ability to pay members a competitive dividend from current earnings.
Exposure of earnings to unhedged changes in interest rates and mortgage prepayment speeds is one of our largest ongoing residual risks. We derive most of our income from the interest earned on assets less the interest paid on Consolidated Obligations and deposits used to fund the assets. We hedge mortgage assets with a combination of Consolidated Obligations, derivatives transactions, and capital. Interest rate movements can lower profitability in two ways: 1) directly due to their impact on earnings from cash flow mismatches between assets and liabilities; and 2) indirectly via their impact on prepayment speeds, which can unfavorably affect the cash flow mismatches. The effects on income can include acceleration in the amortization of purchased premiums on mortgage assets.
Because it is normally cost-prohibitive to completely mitigate market risk exposure, a residual amount of market risk normally remains after incorporating risk management activities. Sharp increases in interest rates, especially short-term rates, or sharp decreases in long-term interest rates could adversely affect us and our stockholders by making dividend rates less competitive relative to the returns available to members on alternative investments.
In some extremely stressful scenarios, changes in interest rates and prepayment speeds could result in dividends being below stockholders' expectations for an extended period of time. In such a situation, members could engage in less Mission Asset Activity and could request a withdrawal of capital. See Item 7's "Quantitative and Qualitative Disclosures About Risk Management" for additional information about market risk exposure.
Asset Profitability. Spreads on assets to funding costs may narrow because of changes in market conditions and competitive factors, resulting in lower profitability.
Spreads on our assets tend to be narrow compared to those of many other financial institutions due to our cooperative business model. Market conditions, competitive forces, and, as discussed above, market risk exposure could cause these already narrow asset spreads to decline, which could substantially reduce our profitability. A key spread relationship is that we tend to utilize Consolidated Discount Notes to fund a significant amount of assets that have adjustable-rates tied to LIBOR. Because rates on Discount Notes do not perfectly correlate with LIBOR, a narrowing of this spread, for example from investors changing perceptions about the quality of our debt, could lower income and reduce balances of Mission Asset Activity.
Capital Adequacy. Failure to meet capital adequacy requirements mandated by Finance Agency regulations and by our policies, or not being able to pay dividends or repurchase or redeem capital stock, may lower demand for Mission Asset Activity, affect results of operations, and lower membership value.
To ensure safe and sound operations, we must hold a minimum amount of capital relative to our asset levels. We must also hold a minimum amount of retained earnings to, among other things, help protect members' capital stock investment against impairment risk. If we were to violate any capital requirement, we may be unable to pay dividends or redeem and repurchase capital stock. This could adversely affect the value of membership including members' capital investment. Outcomes could be reduced demand for Mission Asset Activity, decreased profitability, requests from members to redeem a portion of their capital or to withdraw from membership, or increased investors' perception of the riskiness of our FHLB.
Business Concentration and Industry Consolidation and Composition.Composition of the Financial Industry. Sharp reductions in Mission Asset Activity resulting from lower usage by large members, consolidation of large members, or growthcontinued shift in mortgage lending activities bytowards 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 our large members. TheAdditionally, the financial industry continues to consolidate among a smaller number of institutions and the market share of mortgage financingin recent years there has shownbeen a systemic trend towardsof financial institutions whothat are currently ineligible for FHLB membership.membership gaining an increasing market share, especially related to mortgage finance. However, the legislative and regulatory environment faced by the FHLBanks has not changed in response to this trend. Our members could decrease their Mission Asset Activity and the amount of their capital stock as a result of merger and acquisition activity or continued loss of market share to ineligible FHLB members.entities. At December 31, 2015,2018, one member, JPMorgan Chase Bank, N.A., held nearly halfover 40 percent of our Advances and one member PFI, Union Savings Bank, accounted for over 2530 percent of the outstanding MPP principal balance. Our business model is structured to be able to absorb sharp changes in Mission Asset Activity because we can undertake commensurate reductions in liability balances and capital and because of our relatively modest operating expenses. However, an extremely large and sustained reduction in Mission Asset Activity could affect our profitability and ability to pay competitive dividends, as well as, at the FHLBank System level, raise policy questions about the relevance of the FHLBank System in its traditional mission of supporting housing finance.
GSE Reform. Potential GSE reform could unfavorably affect our business model, financial condition, and results of operations.
Due to our GSE status, the ultimate resolution to the conservatorship of Fannie Mae and Freddie Mac could affect the FHLBanks. While there appears to be consensus that a permanent financial and political solution to 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. Some 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. Other proposals have included broader changes in GSE mortgage finance, such as the FHLBank System being a greater participant in the secondary mortgage market, which could affect the FHLBank System's long-standing business model.
There are significant differences between the FHLBank System and Fannie Mae and Freddie Mac, including the System's focus on lending as opposed to guaranteeing mortgages and its distinctive cooperative business model. GSE legislation could inadequately account for these differences. This could jeopardize the ability of the FHLBank System to continue operating effectively within its current business model, including by adversely changing the perceptions of the capital markets about the risk associated with the debt of housing GSEs. We cannot predict the effects on the System if GSE reform were to be enacted.
FHLB Regulatory Environment. Changes in the regulatory and legislative environment 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 System operates continues to undergo change. Recently-promulgated and future legislative and regulatory actions could significantly affect 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 in the last few years combined with our growing role as a market liquidity provider for large financial institutions have resulted in heightened regulatory scrutiny.
We believe that, taken 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 the ultimate effects the regulatory environment could have on the FHLBank System's business model or on our financial condition and results of operations.
Liquidity and Market Access. Impaired access to the capital markets for debt issuance could decrease the amount of Mission Asset Activity, lower earnings by raising debt costs and, at the extreme, prevent 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. Our ability to obtain funds through the sale of Consolidated Obligations depends in part on prevailing conditions in the capital markets, particularly the short-term capital markets, because we and the System normally have a large reliance on 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.
We are exposed to liquidity risk if significant disruptions in the capital markets occur. Although the System was able to maintain access to the capital markets for debt issuances on acceptable terms during 2018, 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 joint and several liability for Consolidated Obligations, which exposes the System as a whole to events at individual FHLBanks. If access to capital markets were to be impaired for an 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 financial condition and results of operations.
We believe we have a de minimis overall amount of residual credit risk exposure related to Credit Services, purchases of investments, and transactions in derivatives, and a minimal amount of credit risk exposure related to the MPP. However, we can make no assurances that credit losses could not materially affect our financial condition or results of 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 FHLB 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 collateral. However, we do not have full information on the characteristics of nor do we estimate current market values on a large portion of collateral. This results in a degree of uncertainty as to the precise amount of over-collateralization.
Although credit losses in the MPP have historically been minimal, 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 certain derivatives. 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 Wall Street Reform and Consumer Protection Act (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 affect our financial condition and results of operations.
Exposure of earnings to unhedged changes in interest rates and mortgage prepayment speeds is one of our largest ongoing residual risks. We derive most of our income from the interest earned on assets less the interest paid on Consolidated Obligations and deposits used to fund the assets. We hedge mortgage assets with a combination of Consolidated Obligations and 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 acceleration in the amortization of purchased premiums on mortgage assets.
Because it is normally cost-prohibitive to completely mitigate market risk exposure, a residual amount of market risk normally remains after incorporating risk management activities. Sharp increases or decreases in interest rates could adversely affect us and our stockholders by making dividend rates less competitive relative to the returns available to members on alternative investments.
In some extremely stressful scenarios, changes in interest rates and prepayment speeds could result in dividends being below stockholders' expectations for an extended period of time and/or market capitalization ratios falling below par which could indicate potential impairment of member stock. In such a situation, members could engage in less Mission Asset Activity and could request a withdrawal of capital. See "Quantitative and Qualitative Disclosures About Risk Management" in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations for additional information about market risk exposure.
Asset Profitability. Spreads on assets to funding costs may narrow because of changes in other risk factors such as the economy, interest rates, and 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. Market conditions, yield curve shape, 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 a benchmark interest rate, such as LIBOR. Because rates on Discount Notes do not perfectly correlate with other adjustable benchmark interest rates, a narrowing of this spread, for example from investors changing perceptions about the quality of our debt, could lower income and reduce balances of Mission Asset Activity.
Capital Adequacy. Failure to meet capital adequacy requirements mandated by Finance Agency regulations and by our internal policies, or not being able to pay dividends or repurchase or redeem capital stock, may lower demand for Mission Asset Activity, harm 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 sufficient amount of retained earnings to help protect members' capital stock investment against impairment risk. If our capital levels fall significantly, we may be unable to pay dividends or redeem and repurchase capital stock in a timely manner (or at all). Such events could adversely affect the value of membership including causing impairment in the value of members' capital investment in our company. Outcomes could be reduced demand for Mission Asset Activity, decreased profitability, requests from members to redeem a portion of their capital or to withdraw from membership, or increased investors' perception of the riskiness of our FHLB.
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 no later than the end of 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 has settled on the establishment of the Secured Overnight Financing Rate (SOFR) as its recommended alternative to U.S. dollar LIBOR. SOFR is based on a broad segment of the overnight Treasuries repurchase market and is intended to be a measure of the cost of borrowing cash overnight collateralized by Treasury securities. The Federal Reserve Bank of New York began publishing SOFR in April
2018. During the third quarter of 2018, several market participants began utilizing SOFR through the issuance of variable-rate debt securities indexed to SOFR. In the fourth quarter of 2018, we participated in the FHLBank System's first issuance of SOFR-linked Consolidated Bonds and have continued to participate in subsequent issuances. However, many of our assets and liabilities still remain indexed to LIBOR. Therefore, we are planning for the eventual replacement of our LIBOR-indexed instruments away from the LIBOR benchmark interest rate, including the possibility of SOFR as the dominant replacement. We are not currently able to predict whether LIBOR will remain as an available rate index, whether and when an alternative rate such as SOFR will become a robust 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 FHLB to provide financial assistance to one or more other FHLBanks, for example, by making a payment on an Obligation on behalf of another FHLBank. Such assistance could adversely affect our financial condition, earnings, ability to pay dividends, or ability to redeem or repurchase capital stock.
Member Regulatory Environment.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. Additionally, the liquidity requirements being implemented could adversely impact Advance demand and investor demand for Consolidated Obligations because they would limit the ability of members to fully include Advances and Consolidated Obligations in required liquidity calculations. This could raise our debt costs and, in turn, raise the Advance rates we are able to offer members, thereby 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.
Control failures, including failures in our internal controls over financial reporting oras well as business interruptions with members 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 onbusiness, including the secure processing, storage and transmission of confidential and other information in computer systems and networks. For instance, due to our reliance on the book-entry system of the Federal Reserve Banks for debt issuance and servicing operations, we depend on them and their fiscal agent, the Federal Reserve Bank of New York, and one or more settlement agents to issue and make payments of principal and interest on Consolidated Obligations.
Computer systems, software and networks can be vulnerable to failures and interruptions including “cyberattacks,”cyberattacks, which aremay include breaches, unauthorized access, misuse, computer viruses or other malicious code and other events against information owned by our company and customers. These failures and interruptions could jeopardize the confidentiality or integrity of information, or otherwise cause interruptions or malfunctions in operations.
We can make no assurance that we will be able to prevent, timely and adequately address, or mitigate the negative effects of failures, interruptions, or "cyberattacks"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 members (and former members with a withdrawal notice pending) may own our stock. The par value of our capital stock is $100 per share. As of December 31, 2015,2018, we had 699646 stockholders and 44approximately 43 million shares of capital stock outstanding, all of which were Class B Stock.
We paid quarterly dividends in 20152018 and 20142017 as outlined in the table below.
| | (Dollars in millions) | (Dollars in millions) | | | | | | | | (Dollars in millions) | | | | | | | |
| | 2015 | | 2014 | | 2018 | | 2017 |
| | | | Annualized | | | | Annualized | | | | | Annualized | | | | Annualized | |
Quarter | | Amount | | Rate | | Form | | Quarter | | Amount | | Rate | | Form | | Amount | | Rate | | Form | | Quarter | | Amount | | Rate | | Form |
First | | $ | 43 |
| | 4.00 | % | | Cash | | First | | $ | 47 |
| | 4.00 | % | | Cash | | $ | 61 |
| | 5.75 | % | | Cash | | First | | $ | 47 |
| | 4.50 | % | | Cash |
Second | | 42 |
| | 4.00 |
| | Cash | | Second | | 44 |
| | 4.00 |
| | Cash | | 62 |
| | 5.75 |
| | Cash | | Second | | 49 |
| | 4.75 |
| | Cash |
Third | | 43 |
| | 4.00 |
| | Cash | | Third | | 42 |
| | 4.00 |
| | Cash | | 68 |
| | 6.00 |
| | Cash | | Third | | 54 |
| | 5.25 |
| | Cash |
Fourth | | 44 |
| | 4.00 |
| | Cash | | Fourth | | 43 |
| | 4.00 |
| | Cash | | 65 |
| | 6.00 |
| | Cash | | Fourth | | 58 |
| | 5.50 |
| | Cash |
Total | | $ | 172 |
| | 4.00 |
| | Total | | $ | 176 |
| | 4.00 |
| | | $ | 256 |
| | 5.88 |
| | Total | | $ | 208 |
| | 5.00 |
| |
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 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 us from issuing new excess capital stock to members, either by paying stock dividends or otherwise, if before or after the issuance the amount of member excess capital stock exceeds or would exceed one percent of the FHLB's assets. Excess capital stock for this regulatory purpose is calculated as the aggregate of capital stock owned that is in excess of all membership and Mission Asset Activity requirements (as defined in our Capital Plan). At December 31, 2018, we had excess capital stock outstanding totaling more 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 FHLB. See Note 15 of the Notes to the Financial Statements for additional information regarding our capital stock.
RECENT SALES OF UNREGISTERED SECURITIES
From time to time, we provide Letters of Credit in the ordinary course of business to support members' obligations issued in support of unaffiliated, third-party offerings of notes, bonds or other securities. We provided $17 million of such credit support during 2015. We did not provide such credit support during 20142018. We provided $12 million and 2013.$60 million of such credit support during 2017 and 2016. To the extent that these Letters of Credit are securities for purposes of the Securities Act of 1933, their issuance is exempt from registration pursuant to section 3(a)(2) thereof.
| |
Item 6. | Selected Financial Data. |
The following table presents selected Statement of Condition data, Statement of Income data and financial ratios for the five years ended December 31, 2015.2018.
| | | Year Ended December 31, | Year Ended December 31, |
(Dollars in millions) | 2015 | | 2014 | | 2013 | | 2012 | | 2011 | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
STATEMENT OF CONDITION DATA AT PERIOD END: | | | | | | | | | | | | | | | | | | |
Total assets | $ | 118,797 |
| | $ | 106,640 |
| | $ | 103,181 |
| | $ | 81,562 |
| | $ | 60,397 |
| $ | 99,203 |
| | $ | 106,895 |
| | $ | 104,635 |
| | $ | 118,756 |
| | $ | 106,607 |
|
Advances | 73,292 |
| | 70,406 |
| | 65,270 |
| | 53,944 |
| | 28,424 |
| 54,822 |
| | 69,918 |
| | 69,882 |
| | 73,292 |
| | 70,406 |
|
Mortgage loans held for portfolio | 7,982 |
| | 6,989 |
| | 6,826 |
| | 7,548 |
| | 7,871 |
| 10,502 |
| | 9,682 |
| | 9,150 |
| | 7,954 |
| | 6,956 |
|
Allowance for credit losses on mortgage loans | 2 |
| | 5 |
| | 7 |
| | 18 |
| | 21 |
| 1 |
| | 1 |
| | 1 |
| | 2 |
| | 5 |
|
Investments (1) | 37,356 |
| | 26,007 |
| | 22,364 |
| | 19,950 |
| | 21,941 |
| 33,614 |
| | 27,058 |
| | 25,334 |
| | 37,356 |
| | 26,007 |
|
Consolidated Obligations, net: | | | | | | | | | | | | | | | | | | |
Discount Notes | 77,199 |
| | 41,232 |
| | 38,210 |
| | 30,840 |
| | 26,136 |
| 46,944 |
| | 46,211 |
| | 44,690 |
| | 77,199 |
| | 41,232 |
|
Bonds | 35,105 |
| | 59,217 |
| | 58,163 |
| | 44,346 |
| | 28,855 |
| 45,659 |
| | 54,163 |
| | 53,191 |
| | 35,092 |
| | 59,217 |
|
Total Consolidated Obligations, net | 112,304 |
| | 100,449 |
| | 96,373 |
| | 75,186 |
| | 54,991 |
| 92,603 |
| | 100,374 |
| | 97,881 |
| | 112,291 |
| | 100,449 |
|
Mandatorily redeemable capital stock | 38 |
| | 63 |
| | 116 |
| | 211 |
| | 275 |
| 23 |
| | 30 |
| | 35 |
| | 38 |
| | 63 |
|
Capital: | | | | | | | | | | | | | | | | | | |
Capital stock - putable | 4,429 |
| | 4,267 |
| | 4,698 |
| | 4,010 |
| | 3,126 |
| 4,320 |
| | 4,241 |
| | 4,157 |
| | 4,429 |
| | 4,267 |
|
Retained earnings | 765 |
| | 689 |
| | 621 |
| | 538 |
| | 444 |
| 1,023 |
| | 940 |
| | 834 |
| | 737 |
| | 656 |
|
Accumulated other comprehensive loss | (13 | ) | | (17 | ) | | (9 | ) | | (11 | ) | | (11 | ) | (13 | ) | | (16 | ) | | (13 | ) | | (13 | ) | | (17 | ) |
Total capital | 5,181 |
| | 4,939 |
| | 5,310 |
| | 4,537 |
| | 3,559 |
| 5,330 |
| | 5,165 |
| | 4,978 |
| | 5,153 |
| | 4,906 |
|
STATEMENT OF INCOME DATA: | | | | | | | | | | | | | | | | | | |
Net interest income | $ | 322 |
| | $ | 317 |
| | $ | 328 |
| | $ | 308 |
| | $ | 249 |
| $ | 499 |
| | $ | 429 |
| | $ | 363 |
| | $ | 327 |
| | $ | 327 |
|
(Reversal) provision for credit losses | — |
| | — |
| | (7 | ) | | 1 |
| | 12 |
| |
Non-interest income (loss) | 30 |
| | 23 |
| | 20 |
| | 13 |
| | (5 | ) | (37 | ) | | (1 | ) | | 46 |
| | 30 |
| | 23 |
|
Non-interest expense | 75 |
| | 68 |
| | 64 |
| | 58 |
| | 57 |
| 85 |
| | 79 |
| | 111 |
| | 75 |
| | 68 |
|
Assessments | 28 |
| | 28 |
| | 30 |
| | 27 |
| | 37 |
| |
Affordable Housing Program assessments | | 38 |
| | 35 |
| | 30 |
| | 28 |
| | 28 |
|
Net income | $ | 249 |
| | $ | 244 |
| | $ | 261 |
| | $ | 235 |
| | $ | 138 |
| $ | 339 |
| | $ | 314 |
| | $ | 268 |
| | $ | 254 |
| | $ | 254 |
|
FINANCIAL RATIOS: | | | | | | | | | | | | | | | | | | |
Dividend payout ratio (2) | 69.2 | % | | 72.2 | % | | 68.1 | % | | 60.1 | % | | 95.4 | % | 75.6 | % | | 66.3 | % | | 63.9 | % | | 67.7 | % | | 69.5 | % |
Weighted average dividend rate (3) | 4.00 |
| | 4.00 |
| | 4.18 |
| | 4.44 |
| | 4.25 |
| 5.88 |
| | 5.00 |
| | 4.00 |
| | 4.00 |
| | 4.00 |
|
Return on average equity | 4.90 |
| | 4.93 |
| | 5.10 |
| | 6.20 |
| | 3.89 |
| 6.29 |
| | 6.15 |
| | 5.35 |
| | 5.04 |
| | 5.16 |
|
Return on average assets | 0.24 |
| | 0.24 |
| | 0.28 |
| | 0.35 |
| | 0.21 |
| 0.32 |
| | 0.31 |
| | 0.25 |
| | 0.24 |
| | 0.25 |
|
Net interest margin (4) | 0.31 |
| | 0.31 |
| | 0.35 |
| | 0.46 |
| | 0.37 |
| 0.47 |
| | 0.42 |
| | 0.35 |
| | 0.31 |
| | 0.32 |
|
Average equity to average assets | 4.81 |
| | 4.90 |
| | 5.47 |
| | 5.68 |
| | 5.29 |
| 5.11 |
| | 5.00 |
| | 4.76 |
| | 4.78 |
| | 4.86 |
|
Regulatory capital ratio (5) | 4.40 |
| | 4.71 |
| | 5.27 |
| | 5.84 |
| | 6.37 |
| 5.41 |
| | 4.88 |
| | 4.80 |
| | 4.38 |
| | 4.68 |
|
Operating expenses to average assets (6) | 0.058 |
| | 0.054 |
| | 0.055 |
| | 0.067 |
| | 0.068 |
| 0.063 |
| | 0.060 |
| | 0.061 |
| | 0.054 |
| | 0.050 |
|
| |
(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 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, |
| Ending Balances | | Average Balances |
(In millions) | 2015 | | 2014 | | 2015 | | 2014 |
Total Assets | $ | 118,797 |
| | $ | 106,640 |
| | $ | 105,569 |
| | $ | 101,157 |
|
Mission Asset Activity: | | | | | | | |
Advances (principal) | 73,242 |
| | 70,299 |
| | 70,355 |
| | 66,492 |
|
Mortgage Purchase Program (MPP): | | | | | | | |
Mortgage loans held for portfolio (principal) | 7,758 |
| | 6,796 |
| | 7,396 |
| | 6,620 |
|
Mandatory Delivery Contracts (notional) | 450 |
| | 451 |
| | 471 |
| | 273 |
|
Total MPP | 8,208 |
| | 7,247 |
| | 7,867 |
| | 6,893 |
|
Letters of Credit (notional) | 19,555 |
| | 17,780 |
| | 17,694 |
| | 15,154 |
|
Total Mission Asset Activity | $ | 101,005 |
| | $ | 95,326 |
| | $ | 95,916 |
| | $ | 88,539 |
|
In 20152018, the FHLB fulfilled its mission by providing a key source of readily available and competitively priced wholesale funding to its member financial institutions, supporting its commitment to affordable housing and community investment, and paying stockholders a competitive dividend return on their capital investment.
The balance of Mission Asset Activity –Assets, which we define as Advances, Letters of Credit, and total MPP (including purchase commitments) –, are the primary means by which we fulfill our mission with direct connections to members. We regularly monitor our balance sheet concentration of Mission Asset Activity. In 2018, our Primary Mission Asset ratio, which measures the sum of average Advances and mortgage loans as a percentage of average Consolidated Obligations, was $101.076 percent, exceeding the Federal Housing Finance Agency (Finance Agency) preferred ratio of 70 percent. In assessing overall mission achievement, we also consider supplemental sources of Mission Asset Activity, the most significant of which is Letters of Credit issued to members.
The following table summarizes our Mission Asset Activity.
|
| | | | | | | | | | | | | | | |
| Year Ended December 31, |
| Ending Balances | | Average Balances |
(In millions) | 2018 | | 2017 | | 2018 | | 2017 |
Mission Asset Activity: | | | | | | | |
Advances (principal) | $ | 54,872 |
| | $ | 69,978 |
| | $ | 65,593 |
| | $ | 67,683 |
|
Mortgage Purchase Program (MPP): | | | | | | | |
Mortgage loans held for portfolio (principal) | 10,272 |
| | 9,454 |
| | 9,743 |
| | 9,224 |
|
Mandatory Delivery Contracts (notional) | 146 |
| | 219 |
| | 287 |
| | 293 |
|
Total MPP | 10,418 |
| | 9,673 |
| | 10,030 |
| | 9,517 |
|
Letters of Credit (notional) | 14,847 |
| | 14,691 |
| | 14,619 |
| | 16,457 |
|
Total Mission Asset Activity | $ | 80,137 |
| | $ | 94,342 |
| | $ | 90,242 |
| | $ | 93,657 |
|
The balance of Mission Asset Activity was $80.1 billion at December 31, 2015, an increase2018, a decrease of $5.7$14.2 billion (six percent) (15 percent) from year-end 2014. This growth was primarily2017, driven by anlower Advance balances. Advance principal balances decreased $15.1 billion (22 percent) in 2018 primarily due to a reduction in borrowings from a few large-asset members. However, average Advance principal balances for 2018 declined only $2.1 billion compared to 2017. Advance balances are often volatile due to our members' ability to quickly, normally on the same day, increase in the principal balanceor decrease their amount of Advances. AsWe believe providing members flexibility in their funding levels helps support their asset-liability management needs and is a key benefit of membership. At December 31, 2015,2018, 70 percent of members held Mission Asset Activity, which was relatively stable compared to prior periods.
Based on the most-recently available figures, members funded onan average 3.4of 3.2 percent of their assets with Advances, and the market penetration rate was relatively stable with approximately 70 percent of members holding Mission Asset Activity. The majority ofAdvances. As in recent years, most members continued to have modest demand for new Advance borrowings due to measured economic growth, an abundanceborrowings. Demand for Advances is affected by the accessibility and cost of deposits and significant amountsother sources of liquidity madeand funding, such as deposits, available as a result of the actions of the Federal Reserve System.to members.
The MPP principal balance of mortgage loans held for portfolio at December 31, 2015rose$1.0 $0.8 billion (14 percent) (nine percent) from year-end 2014. The growth reflected ongoing improvements in the housing market and low mortgage rates.2017. During 2015,2018, we purchased $2.4$1.9 billion of mortgage loans, while principal reductions totaled $1.4$1.1 billion. Residual credit risk exposure in the mortgage loan portfolio continued to be minimal.
Based on earnings in 20152018 earnings,, we contributed $28accrued $38 million tofor the Affordable Housing Program (AHP) pool of funds to be awardedavailable to members in 2016.2019. 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 members aid their communities following natural disasters.
Investments and Other Assets
The balance of investments at December 31, 20152018 was $37.4$33.6 billion, an increase of $11.3$6.6 billion (44(24 percent) from year-end 2014. Most2017. Investments averaged $29.8 billion in 2018, an increase of $5.2 billion (21 percent) from the increase was because we held more short-termaverage balance during 2017. The increases in the ending and average balances of investments were primarily driven by higher liquidity investments, at the endwhich can vary significantly on a daily basis during times of 2015.volatility in Advance balances. At December 31, 2015,2018, investments included $15.3$15.7 billion of mortgage-backed securities (MBS) and $22.1$17.9 billion of other investments, which were mostly short-term instruments held for liquidity.
Investment balances averaged $27.3 billion in 2015, a decrease of $0.2 billion (one percent) from 2014's average. This reflected minimal changes in average liquidity investments and mortgage-backed securities. All of our mortgage-backed securitiesMBS held at December 31, 20152018 were issued and guaranteed by Fannie Mae, Freddie Mac or a U.S. agency.
The balance of cash and due from banks at December 31, 2015 was $10 million, compared to $3.1 billion at December 31, 2014. The 2014 balance was larger than normal due to holding $3.1 billion in deposits at the Federal Reserve on that date.
We maintained an adequatea robust amount of asset liquidity throughout the year under2018 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 2015, exceedingin 2018, surpassing all minimum regulatory capital requirements. The GAAP capital-to-assets ratio at December 31, 20152018 was 4.365.37 percent, while the regulatory capital-to-assets ratio was 4.405.41 percent. Both ratios exceeded the regulatory required minimum of four percent. Regulatory capital includes mandatorily redeemable capital stock accounted for as a liability under GAAP. The average GAAP and regulatory capital ratios in 2015 were 4.81 percent and 4.88 percent, respectively, higher than the year-end ratios. The year-end ratios reflected the higher amount of short-term liquidity balances we carried on that date.
The amounts of GAAP and regulatory capital increased $242$165 million and $213$155 million, respectively, in 2015,2018, due primarily to purchases of capital stock by members to supportassociated with Advance growth.
Totalactivity and the growth in retained earnings. Retained earnings were $765 milliontotaled $1.0 billion at December 31, 2015, 2018, an increase of $76 million (11nine percent) from year-end 20142017. We believe the amountThe increase in capital was partially offset by a repurchase of retained earnings is sufficient to protect against members' impairment risk$297 million in excess stock from members as part of theirour capital stock investment in the FHLB and to provide the opportunity to stabilize future dividends. Our Capital Plan also has safeguards to prevent financial leverage ratios from falling below regulatory minimum levels.management strategy.
Results of Operations
Overall Results
The table below summarizes our results of operations.
| | | Year Ended December 31, | Year Ended December 31, |
(Dollars in millions) | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 |
Net income | $ | 249 |
| | $ | 244 |
| | $ | 261 |
| $ | 339 |
| | $ | 314 |
| | $ | 268 |
|
Affordable Housing Program accrual | 28 |
| | 28 |
| | 30 |
| |
Affordable Housing Program assessments | | 38 |
| | 35 |
| | 30 |
|
Return on average equity (ROE) | 4.90 | % | | 4.93 | % | | 5.10 | % | 6.29 | % | | 6.15 | % | | 5.35 | % |
Return on average assets | 0.24 |
| | 0.24 |
| | 0.28 |
| 0.32 |
| | 0.31 |
| | 0.25 |
|
Weighted average dividend rate | 4.00 |
| | 4.00 |
| | 4.18 |
| 5.88 |
| | 5.00 |
| | 4.00 |
|
Average 3-month LIBOR | 0.32 |
| | 0.23 |
| | 0.27 |
| 2.31 |
| | 1.26 |
| | 0.74 |
|
Average overnight Federal funds effective rate | 0.13 |
| | 0.09 |
| | 0.11 |
| |
ROE spread to 3-month LIBOR | 4.58 |
| | 4.70 |
| | 4.83 |
| 3.98 |
| | 4.89 |
| | 4.61 |
|
Dividend rate spread to 3-month LIBOR | 3.68 |
| | 3.77 |
| | 3.91 |
| 3.57 |
| | 3.74 |
| | 3.26 |
|
ROE spread to Federal funds effective rate | 4.77 |
| | 4.84 |
| | 4.99 |
| |
Dividend rate spread to Federal funds effective rate | 3.87 |
| | 3.91 |
| | 4.07 |
| |
Net income in 20152018 increased $25 million (eight percent) compared to 2017. The increase in net income and ROE was $5 million (two percent)primarily the result of higher net interest income. Net interest income was higher in 2018 compared to 2017 primarily due to the rise in short-term interest rates, which improved earnings from funding assets with interest-free capital.
Earnings levels continued to represent competitive returns on stockholders' capital investment. ROE was significantly higher than in 2014. ROE was similarshort-term rates in the last two years andperiods presented above, while we paid the same dividend ratemaintained risk exposures in each of the last nine quarters. Although there were a number of factors that affected earnings, in the aggregate they nearly offset one another and no individual factor experienced a change that significantly affected operating results or indicated a concern about future profitability. This steady performance reflected the net impact of a stable business and interest rate environment, a modest increase in average assets, a relatively constant composition of assets, a consistent and conservative management of risk,line with our appetite for a moderate increase in operating expenses, and a prudent use of derivative transactions.
to low risk profile. The spreadsspread between ROE and short-term interest rates, such as 3-month LIBOR, and Federal funds, areis a market benchmarksbenchmark we believe member stockholders use to assess the competitiveness of the return on their capital investment.
In December 2018, we paid stockholders a quarterly 6.00 percent annualized dividend rate on their capital investment in our company. Earnings continuedThe higher dividend rates paid throughout 2018 compared to 2017 was driven in large part by the effects of higher short-term interest rates. In 2018, we paid an average dividend rate of 5.88 percent compared to 5.00 percent in 2017.
We believe that our operations and financial condition will continue to generate competitive profitability, reflecting the combination of a stable business model, 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 several years, ROE was significantly above short-term rates, resultingabsorb sharp changes in Mission Asset Activity because we can execute commensurate changes in liability balances and capital. Key factors that can cause significant periodic earnings volatility are changes in the ROElevel of interest rates, changes in spreads being wider thanbetween benchmark interest rates (such as LIBOR) and our short-term funding costs, recognition of net amortization, and fair value adjustments related to the long-term historical average spread.use of derivatives and the associated hedged items.
Effect of Interest Rate Environment
Trends in market interest rates and the resulting shapes of the market yield curves strongly influence the results of operations viaand profitability because of how they affect members' demand for Mission Asset Activity, spreads on assets, funding costs and decisions in managing the tradeoffs in our market risk/return profile. The following table presentstables present key market interest rates (obtained from Bloomberg L.P.).
| | | Year 2015 | | Year 2014 | | Year 2013 | Year 2018 | | Year 2017 | | Year 2016 |
| Ending | | Average | | Ending | | Average | | Ending | | Average | Ending | | Average | | Ending | | Average | | Ending | | Average |
Federal funds effective | 0.20 | % | | 0.13 | % | | 0.06 | % | | 0.09 | % | | 0.07 | % | | 0.11 | % | 2.40 | % | | 1.83 | % | | 1.33 | % | | 1.00 | % | | 0.55 | % | | 0.39 | % |
3-month LIBOR | 0.61 |
| | 0.32 |
| | 0.26 |
| | 0.23 |
| | 0.25 |
| | 0.27 |
| 2.81 |
| | 2.31 |
| | 1.69 |
| | 1.26 |
| | 1.00 |
| | 0.74 |
|
2-year LIBOR | 1.18 |
| | 0.88 |
| | 0.90 |
| | 0.62 |
| | 0.49 |
| | 0.44 |
| 2.66 |
| | 2.75 |
| | 2.08 |
| | 1.65 |
| | 1.45 |
| | 1.00 |
|
10-year LIBOR | 2.19 |
| | 2.18 |
| | 2.28 |
| | 2.65 |
| | 3.09 |
| | 2.47 |
| 2.71 |
| | 2.95 |
| | 2.40 |
| | 2.29 |
| | 2.34 |
| | 1.70 |
|
2-year U.S. Treasury | 1.05 |
| | 0.67 |
| | 0.67 |
| | 0.45 |
| | 0.38 |
| | 0.30 |
| 2.49 |
| | 2.52 |
| | 1.89 |
| | 1.39 |
| | 1.19 |
| | 0.83 |
|
10-year U.S. Treasury | 2.27 |
| | 2.13 |
| | 2.17 |
| | 2.53 |
| | 3.03 |
| | 2.34 |
| 2.69 |
| | 2.91 |
| | 2.41 |
| | 2.33 |
| | 2.45 |
| | 1.84 |
|
15-year mortgage current coupon (1) | 2.32 |
| | 2.13 |
| | 2.10 |
| | 2.34 |
| | 2.68 |
| | 2.21 |
| 3.06 |
| | 3.20 |
| | 2.52 |
| | 2.40 |
| | 2.49 |
| | 1.94 |
|
30-year mortgage current coupon (1) | 3.02 |
| | 2.88 |
| | 2.85 |
| | 3.23 |
| | 3.63 |
| | 3.07 |
| 3.51 |
| | 3.65 |
| | 3.00 |
| | 3.03 |
| | 3.14 |
| | 2.63 |
|
| | | Year 2015 by Quarter - Average | Year 2018 by Quarter - Average |
| Quarter 1 | | Quarter 2 | | Quarter 3 | | Quarter 4 | Quarter 1 | | Quarter 2 | | Quarter 3 | | Quarter 4 |
Federal funds effective | 0.11 | % | | 0.13 | % | | 0.13 | % | | 0.16 | % | 1.45 | % | | 1.74 | % | | 1.93 | % | | 2.22 | % |
3-month LIBOR | 0.26 |
| | 0.28 |
| | 0.31 |
| | 0.41 |
| 1.93 |
| | 2.34 |
| | 2.34 |
| | 2.63 |
|
2-year LIBOR | 0.84 |
| | 0.86 |
| | 0.88 |
| | 0.93 |
| 2.40 |
| | 2.74 |
| | 2.86 |
| | 2.98 |
|
10-year LIBOR | 2.09 |
| | 2.24 |
| | 2.28 |
| | 2.10 |
| 2.77 |
| | 2.96 |
| | 2.99 |
| | 3.09 |
|
2-year U.S. Treasury | 0.59 |
| | 0.60 |
| | 0.68 |
| | 0.82 |
| 2.15 |
| | 2.47 |
| | 2.66 |
| | 2.80 |
|
10-year U.S. Treasury | 1.97 |
| | 2.15 |
| | 2.22 |
| | 2.18 |
| 2.76 |
| | 2.92 |
| | 2.92 |
| | 3.04 |
|
15-year mortgage current coupon (1) | 1.96 |
| | 2.09 |
| | 2.25 |
| | 2.20 |
| 2.93 |
| | 3.20 |
| | 3.24 |
| | 3.42 |
|
30-year mortgage current coupon (1) | 2.71 |
| | 2.88 |
| | 2.98 |
| | 2.94 |
| 3.40 |
| | 3.64 |
| | 3.67 |
| | 3.89 |
|
| |
(1) | Simple average of current coupon rates of Fannie Mae and Freddie Mac par mortgage-backed securityMBS indications. |
Short-term interest rates remained low in 2015. In December 2015,2018, the Federal Reserve increased its target overnight Federal funds rate increased from a zero2.00 to 0.252.25 percent range to a 0.252.25 to 0.502.50 percent range. OtherAverage short-term interest rates remained consistent with their historical relationshipswere approximately 0.80 to Federal funds during 2015. Average1.10 percentage points higher in 2018 compared to 2017, while average long-term rates were modestly lower in 2015 comparedincreased approximately 0.60 to 2014.
0.80 percentage points during that same period. The persistence in 2015 of the lowgradually rising interest rate environment continued to favorably affect our resultsbenefit income during 2018 primarily because of operations relative toearnings generated by funding assets with interest-free capital. However, the leveltrends of rising short-term interest rates and flatter market yield curves could lower profitability if they were to continue for a prolonged period or if market yield curves were inverted between certain maturity points. For example, earnings may decrease as a consequence of a flat to inverted yield curve due to narrower spreads between yields earned on new mortgage assets and the following reasons:costs of new Consolidated Obligations used to fund them.
| |
▪ | Reductions in, and low, market interest rates raise ROE compared to market rates to the extent we fund a portion of long-term assets with shorter-term debt. |
| |
▪ | The long-standing low rate environment has provided us the opportunity to retire many Consolidated Bonds and replace them with lower cost Obligations, at a pace exceeding paydowns of high-yielding mortgage assets, which have been slower than would be expected in more normal housing and mortgage environments. |
| |
▪ | Earnings generated from funding assets with interest-free capital have not decreased as much as the reduction in overall interest rates because long-term assets do not reprice immediately to the lower rates. |
The current trend level of ROE spread to market interest rates is above the long-term average trend because of the factors referenced above. However, these factors have improved our net income by a smaller amount more recently because they have been present for many years. For example, over time paydowns of high-yielding mortgage assets cumulatively have increased, which has offset much of the benefit from previously retiring high-cost Bonds.
Business Outlook and Risk Management
This section summarizes the business outlook and what we believe are our current major risk exposures. See Item 1A's “Risk Factors” has1A. Risk Factors for a detailed discussion of riskcertain 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. Since the end of the recession in 2009, measured economic growth has resulted in relatively slow growth in consumer, mortgage and commercial loans across the broad membership both in absolute terms and relative to deposit growth. Other factors continuing tothat constrain widespread demand for Advances are the extremelyrelatively low levels of interest rates and little deviation in Advance rates versus deposit rates, and the Federal Reserve's ongoing actions to provide an extraordinary amountother competitive sources of deposit-based liquidity to attempt to stimulate economic growth.wholesale funding.
In the last several years, the percentage of assets that members funded with Advances showedhas shown little variation, in the range of three to four percent. We would expect tomay see a broad-based increase in Advance demand whenif one or more of the following occur: aggregate loan portfolios of our members grow quicker than aggregate deposits, the economy experiences an improved anda sustained growth trend, interest rates continue to increase over time, or if changes in Federal Reserve policy reduce other sources of liquidity available to members.
The relative balance between loan and deposit fluctuations can provide an indication of potential member Advance demand. From September 30, 2014 to September 30, 2015 (the most recent period for which data are available), aggregate loan portfolios of Fifth District depository institutions grew $106.8 billion (8.4 percent) while their aggregate deposit balances fell $29.9 billion (1.4 percent). The data include the effect of large mergers and acquisitions only when they are available for both comparison dates. Most of the loan growth and deposit decline in this period occurred from our largest members, which is consistent with the concentration of financial activity.
Excluding the five members with over $50 billion of assets and recent acquisitions, aggregate loans increased $13.1 billion (6.6 percent) in the 12-month period while aggregate deposits grew $12.1 billion (5.1 percent). This more recent trend of loan growth exceeding deposit growth could produce increased demand for Advances over time.
MPP.MPP: MPP balances are influenced by conditions in the housing and mortgage markets, the competitiveness of prices we offer to purchase loans as well as program features, and activity from our largest sellers.
Our ongoing strategy for the MPP has two components: 1) increase the number of regular sellers and participants in the program; and 2) increase purchases while maintaining balances at a prudent level relative to capital and total assets to effectively manage market and credit risks consistent with our risk appetite.
Regulatory and Legislative Risk
General. The FHLBank System currently faces heightened legislative and regulatory risks and uncertainties, which we believe has affected, and could continue to affect, our Mission Asset Activity, capitalization, and results of operations. Legislative and regulatory actions applicable to the FHLBank System in the last eight years have raised our operating costs and increased uncertainty regarding the business model under which the FHLBanks may operate in the future. This is due primarily to the uncertainty around potential future GSE reform, which shows no signs of resolution. See Item 1A's "Risk Factors" for more discussion.
Core Mission Achievement. Over the years, we have adopted numerous indicators to assess achievement of our mission. These include metrics related to Mission Asset Activity, profitability, capital adequacy and safety and soundness. In July 2015, the Finance Agency issued an Advisory Bulletin to formalize a measure of FHLBank mission achievement across the System. The Advisory Bulletin established a goal for the sum of average Advances and purchased mortgage loans (collectively called Primary Mission Assets) to equal or exceed 70 percent of average Consolidated Obligations (i.e., the Primary Mission Assets ratio). Consolidated Obligations is used as a comparison because it reflects the major source of our franchise value as a GSE. If the metric falls below the 70 percent preferred ratio, an FHLBank would be expected to include in its strategic plan actions aimed at increasing the ratio, which could include consideration of Supplemental Mission Assets and Activities, such as Letters of Credit issued to members. During 2015, our Primary Mission Assets metric exceeded the Finance Agency's preferred ratio.
Membership Requirements.In January 2016, the Finance Agency issued a final rule on membership requirements. The primary changes to membership requirements are to:
| |
▪ | ban currently-eligible captive insurance companies as eligible members in an FHLBank, and |
| |
▪ | clarify matters related to defining the principal place of business for eligible financial institution members for purposes of determining their appropriate FHLBank district. |
As a result, our current captive insurance company members must terminate their memberships one year after the rule's effective date. In addition, the rule allows these members until the end of the one-year period to repay their existing Advances, but prohibits them from taking new Advances or renewing existing Advances that expire after the rule’s effective date.
We believe that the final rule will not materially affect our financial condition or results of operations despite the loss of current and potential captive insurance members. However, we are concerned that the rule could constrain the ability of the FHLBanks to fulfill their mission of promoting housing finance through providing liquidity and funding to financial institutions engaged in housing finance activities. We believe captive insurance companies are important institutions in helping to deepen and diversify the flow of funds in the mortgage markets.
Privately Insured Credit Unions. In December 2015, the U.S. Congress passed into law a provision permitting privately-insured state-chartered credit unions to apply for membership in the FHLBank System. Based on the number and size of such institutions in our district, we believe that this change in eligible members will have only a small effect on Mission Asset Activity.
Dodd-Frank Act and Related Regulations.Regulatory agencies continue to promulgate rules covering derivatives activities as required by the Dodd-Frank Act. A joint rule of several agencies issued in 2015 that will affect the FHLBanks mandates the exchange of initial and variation margin for interest rate swaps not cleared through a central clearinghouse. Margins are based on swaps' market value and their relative risk. The rule is effective April 1, 2016 and has a staggered implementation schedule of up to four years. We already post and collect margin on uncleared swaps. Therefore, we believe the largest impact of the rule will be the elimination of thresholds permitted on daily variation margin for new swaps transacted after the implementation date. This will eliminate the amount of uncollateralized exposure between derivative counterparties and reduce counterparty risk. We believe the impact of the rule will not be material to our company.
Market Risk
During 2015,2018, as in 2014,2017, 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 permanently increase over the next 12 months by five percentage points or more combined with short-term rates increasing to at least seven percent. We believe such a stress scenario is extremely unlikely to occur in the foreseeable future. Our market risk exposure to lower long-term interest rates, even up to two percentage points, would result in ROE remaining well above market interest rates.change quickly and significantly.
Capital Adequacy
We believe members place a high value on their capital investment in our company. We maintained compliance with regulatory capital requirements. Capital ratios at December 31, 20152018, 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 increase 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.and prudential capital requirements.
Credit Risk
In 2015,2018, we continued to experience a de minimis level of overall residual credit risk exposure from our Credit Services, making investments, and executing derivative transactions. We believe policies and procedures related to credit underwriting, Advance collateral management, and transactions with investment and derivative counterparties continue to fully mitigate these risks. Therefore, weWe have never experienced any credit losses, and we continue to have no loan loss reserves or impairment recorded for these instruments.
Residual credit risk exposure in the mortgage loan portfolio was minimal. The allowance for credit losses in the MPP continued to declinewas stable during the year and was $2$1 million at December 31, 2015.2018.
Liquidity Risk
Our liquidity position remained strong during 2015,2018, as did our overall ability to fund operations through the issuance of Consolidated Obligations at acceptable interest costs. Investor demand for FHLBank System debt continued to be robust. There were no substantive stresses on market access or liquidity from external market and political events. Although we can make no assurances, we expect this to continue to be the case and believe there is only a remote possibility of a liquidity or funding crisis in the FHLBank System that could impair our ability to participate, on a cost-effective basis, in issuances of new debt, service outstanding debt, maintain adequate capitalization,capital levels, or pay competitive dividends.
Regulatory and Legislative Risk and Significant Developments
General: The FHLBank System is subject to legislative and regulatory oversight. Legislative and regulatory actions applicable, directly or indirectly, to the FHLBank System in the last decade have 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, and the evolution of mortgage financing moving towards financial institutions currently not eligible for FHLBank membership. See Item 1A. 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.
LIBOR Replacement:We are planning for the replacement of LIBOR given the announcement that the LIBOR index is expected to be phased out no later than the end of 2021 and the Federal Reserve Bank of New York's establishment of the Secured Overnight Financing Rate (SOFR) as its recommended alternative to U.S. dollar LIBOR. In the fourth quarter of 2018, we participated in the FHLBank System's first issuance of SOFR-linked Consolidated Bonds and have continued to participate in subsequent issuances. We also began offering SOFR-linked Advances in the fourth quarter of 2018. However, many of our assets and liabilities still remain indexed to LIBOR. Therefore, we are continuing to plan for the eventual replacement of our LIBOR-indexed instruments away from the LIBOR benchmark interest rate. The market transition away from LIBOR towards SOFR is expected to be gradual and complicated, including the development of term and credit adjustments to accommodate differences between LIBOR and SOFR. As such, we are not currently able to predict the ultimate impact of such a transition on our business, financial condition, and results of operations. See Item 1A. Risk Factors for more discussion.
Liquidity Advisory Bulletin:Advisory Bulletin 2018-07 Federal Home Loan Bank Liquidity Guidance (Liquidity AB). In August 2018, the Finance Agency issued a final Advisory Bulletin on expectations with respect to the maintenance of sufficient liquidity to enable the FHLBanks to provide Advances and Letters of Credit for members for a specified number of days without access to the capital markets or other unsecured funding sources. The Liquidity AB rescinds the 2009 liquidity guidance previously issued by the Finance Agency. In addition, the Liquidity AB provides guidance related to asset/liability maturity funding gap limits. Funding gap metrics measure the difference between assets and liabilities that are scheduled to mature during a specified period of time and are expressed as a percentage of total assets. The Liquidity AB provides for the funding gap limits to reduce the liquidity risks associated with a mismatch in asset and liability maturities, including an undue reliance on short-term debt funding, which may increase debt rollover risk. The Liquidity AB also addresses liquidity stress testing, contingent funding plans and an adjustment to the calculation of the Primary Mission Asset ratio. Portions of the Liquidity AB were implemented on December 31, 2018, with further implementation to take place on March 31, 2019 and full implementation on December 31, 2019.
The Liquidity AB will require us to hold an additional amount of liquid assets to meet the new guidance related to the base case liquidity expectations, which may raise our cost of funding. We currently do not believe these changes will have a material effect on our results of operations, but they will make managing liquidity and the balance sheet more operationally challenging. Refer to the "Liquidity Risk" section of "Quantitative and Qualitative Disclosures About Risk Management" for further discussion of the requirements set forth in the Liquidity AB.
Final Rule on FHLBank Capital Requirements: On February 20, 2019, the Finance Agency published a final rule, effective January 1, 2020, pertaining to the capital requirements for the FHLBanks. The final rule revises the credit risk component of the risk-based capital requirement, as well as the limitations on extensions of unsecured credit. The main revisions remove requirements that we calculate credit risk capital charges and unsecured credit limits based on ratings issued by a Nationally Recognized Statistical Rating Organization (NRSRO), and instead require that we establish and use our own internal rating methodology. With respect to derivatives, the rule imposes a new capital charge for cleared derivatives to align with the Dodd-Frank Act’s clearing mandate. The final rule also revises the percentages used to calculate credit risk capital charges for Advances and for non-mortgage assets. We do not expect this rule to materially affect our financial condition or results of operations.
Final Rule Amending AHP Regulations: On November 28, 2018, the Finance Agency published a final rule that amends the operating requirements of the FHLBanks’ AHP. The final rule amendments:
| |
▪ | revise the scoring criteria to create different and new scoring priorities; |
| |
▪ | remove the retention agreement requirement on owner-occupied units using the subsidy solely for rehabilitation; |
| |
▪ | increase the per-household set-aside grant amount to $22,000 with an annual housing price inflation adjustment (up from the current fixed limit of $15,000); |
| |
▪ | clarify the requirements for remediating AHP noncompliance; |
| |
▪ | prohibit our Board of Directors from delegating approval of AHP strategic policy decisions to a committee; and |
| |
▪ | further align AHP monitoring with certain federal government funding programs. |
The majority of the rule’s provisions take effect January 1, 2021, while the owner-occupied retention agreement requirements take effect January 1, 2020. We do not expect this rule to materially affect our financial condition or results of operations.
Proposed Rule on Housing Goals: On November 2, 2018, the Finance Agency published a proposed rule that would amend its existing Federal Home Loan Bank Housing Goals regulation. If adopted as proposed, the proposed amendments would:
| |
▪ | eliminate the $2.5 billion mortgage loan purchase volume threshold that triggers the application of housing goals; |
| |
▪ | establish the target level for the new prospective mortgage loan purchase housing goal at 20 percent of total mortgage loan purchases that are for very low-income families, low-income families, or families in low-income areas, and require that at least 75 percent of all mortgage purchases that count toward the goal be for borrowers with incomes at or below 80 percent of the area median income; |
| |
▪ | establish a goal that 50 percent of mortgage program users meet the definition of “small members” whose assets do not exceed the "community financial institution" asset cap, which is currently set at $1.199 billion; and |
| |
▪ | allow the FHLBanks to request FHFA approval of alternative target percentages for mortgage loan purchase housing goals and small member participation goals. |
We continue to evaluate this proposed rule and its effect on our financial condition and results of operation.
ANALYSIS OF FINANCIAL CONDITION
Mission Asset Activity
Mission Assets are the primary means by which we fulfill our mission with direct connections to members. We regularly monitor the balance sheet concentration of Mission Asset Activity. In 2015, our Primary Mission Asset ratio, as defined in "Regulatory and Legislative Risk" of the Executive Overview, was 79 percent. In assessing mission achievement, we also consider supplemental sources of Mission Asset Activity, the most significant of which is Letters of Credit issued to members.
Credit Services
Credit Activity and Advance Composition
The tables below show trends in Advance balances by major programs and in the notional amount of Letters of Credit.
| | (Dollars in millions) | December 31, 2015 | | December 31, 2014 | December 31, 2018 | | December 31, 2017 |
| Balance | | Percent(1) | | Balance | | Percent(1) | Balance | | Percent(1) | | Balance | | Percent(1) |
Adjustable/Variable Rate Indexed: | | | | | | | | |
Adjustable/Variable Rate-Indexed: | | | | | | | | |
LIBOR | $ | 47,312 |
| | 65 | % | | $ | 51,839 |
| | 74 | % | $ | 28,740 |
| | 52 | % | | $ | 32,420 |
| | 47 | % |
Other | 617 |
| | 1 |
| | 515 |
| | 1 |
| 2,144 |
| | 4 |
| | 941 |
| | 1 |
|
Total | 47,929 |
| | 66 |
| | 52,354 |
| | 75 |
| 30,884 |
| | 56 |
| | 33,361 |
| | 48 |
|
Fixed-Rate: | | | | | | | | | | | | | | |
REPO | 10,568 |
| | 14 |
| | 5,201 |
| | 7 |
| |
Repurchase based (REPO) | | 7,003 |
| | 13 |
| | 19,890 |
| | 28 |
|
Regular Fixed-Rate | 9,248 |
| | 13 |
| | 7,398 |
| | 11 |
| 10,972 |
| | 20 |
| | 11,191 |
| | 16 |
|
Putable (2) | 1,046 |
| | 1 |
| | 1,617 |
| | 2 |
| 460 |
| | 1 |
| | 280 |
| | — |
|
Amortizing/Mortgage Matched | 2,706 |
| | 4 |
| | 2,734 |
| | 4 |
| 2,702 |
| | 5 |
| | 2,776 |
| | 4 |
|
Other | 1,745 |
| | 2 |
| | 995 |
| | 1 |
| 2,851 |
| | 5 |
| | 2,479 |
| | 4 |
|
Total | 25,313 |
| | 34 |
| | 17,945 |
| | 25 |
| 23,988 |
| | 44 |
| | 36,616 |
| | 52 |
|
Other Advances | | — |
| | — |
| | 1 |
| | — |
|
Total Advances Principal | $ | 73,242 |
| | 100 | % | | $ | 70,299 |
| | 100 | % | $ | 54,872 |
| | 100 | % | | $ | 69,978 |
| | 100 | % |
| | | | | | | | | | | | | | |
Letters of Credit (notional) | $ | 19,555 |
| | | | $ | 17,780 |
| | | $ | 14,847 |
| | | | $ | 14,691 |
| | |
| | (Dollars in millions) | December 31, 2015 | | September 30, 2015 | | June 30, 2015 | | March 31, 2015 | December 31, 2018 | | September 30, 2018 | | June 30, 2018 | | March 31, 2018 |
| 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: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
LIBOR | $ | 47,312 |
| | 65 | % | | $ | 49,313 |
| | 64 | % | | $ | 48,242 |
| | 68 | % | | $ | 49,103 |
| | 73 | % | $ | 28,740 |
| | 52 | % | | $ | 20,940 |
| | 36 | % | | $ | 26,659 |
| | 44 | % | | $ | 31,646 |
| | 50 | % |
Other | 617 |
| | 1 |
| | 565 |
| | 1 |
| | 597 |
| | 1 |
| | 407 |
| | 1 |
| 2,144 |
| | 4 |
| | 637 |
| | 1 |
| | 1,130 |
| | 2 |
| | 781 |
| | 1 |
|
Total | 47,929 |
| | 66 |
| | 49,878 |
| | 65 |
| | 48,839 |
| | 69 |
| | 49,510 |
| | 74 |
| 30,884 |
| | 56 |
| | 21,577 |
| | 37 |
| | 27,789 |
| | 46 |
| | 32,427 |
| | 51 |
|
Fixed-Rate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
REPO | 10,568 |
| | 14 |
| | 12,023 |
| | 16 |
| | 8,499 |
| | 12 |
| | 4,061 |
| | 6 |
| 7,003 |
| | 13 |
| | 18,446 |
| | 32 |
| | 15,355 |
| | 25 |
| | 14,540 |
| | 23 |
|
Regular Fixed-Rate | 9,248 |
| | 13 |
| | 9,385 |
| | 12 |
| | 8,184 |
| | 11 |
| | 7,977 |
| | 12 |
| 10,972 |
| | 20 |
| | 11,929 |
| | 21 |
| | 12,059 |
| | 20 |
| | 11,677 |
| | 18 |
|
Putable (2) | 1,046 |
| | 1 |
| | 1,557 |
| | 2 |
| | 1,570 |
| | 2 |
| | 1,580 |
| | 3 |
| 460 |
| | 1 |
| | 235 |
| | — |
| | 110 |
| | — |
| | 175 |
| | — |
|
Amortizing/Mortgage Matched | 2,706 |
| | 4 |
| | 2,723 |
| | 3 |
| | 2,703 |
| | 4 |
| | 2,662 |
| | 4 |
| 2,702 |
| | 5 |
| | 2,800 |
| | 5 |
| | 2,821 |
| | 5 |
| | 2,810 |
| | 4 |
|
Other | 1,745 |
| | 2 |
| | 1,637 |
| | 2 |
| | 1,223 |
| | 2 |
| | 825 |
| | 1 |
| 2,851 |
| | 5 |
| | 2,894 |
| | 5 |
| | 2,532 |
| | 4 |
| | 2,355 |
| | 4 |
|
Total | 25,313 |
| | 34 |
| | 27,325 |
| | 35 |
| | 22,179 |
| | 31 |
| | 17,105 |
| | 26 |
| 23,988 |
| | 44 |
| | 36,304 |
| | 63 |
| | 32,877 |
| | 54 |
| | 31,557 |
| | 49 |
|
Other Advances | | — |
| | — |
| | 5 |
| | — |
| | — |
| | — |
| | 1 |
| | — |
|
Total Advances Principal | $ | 73,242 |
| | 100 | % | | $ | 77,203 |
| | 100 | % | | $ | 71,018 |
| | 100 | % | | $ | 66,615 |
| | 100 | % | $ | 54,872 |
| | 100 | % | | $ | 57,886 |
| | 100 | % | | $ | 60,666 |
| | 100 | % | | $ | 63,985 |
| | 100 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Letters of Credit (notional) | $ | 19,555 |
| | | | $ | 17,594 |
| | | | $ | 19,006 |
| | | | $ | 16,905 |
| | | $ | 14,847 |
| | | | $ | 13,952 |
| | | | $ | 14,482 |
| | | | $ | 15,606 |
| | |
| |
(1) | As a percentage of total Advances principal. |
| |
(2) | Excludes Putable Advances where the related put options have expired. SuchThese Advances are classified based on their current terms. |
The modest growth and variability in Advance balances in 2015 was driven primarilyat December 31, 2018 decreased 22 percent compared to year-end 2017, as a result of lower REPO and variable-rate borrowings by changes in variable-rate and short-term repurchase (REPO) Advances as the reduction in the need for variable-rate funding from our largest member was more than offset by REPO Advance borrowings. The increase in REPO Advance borrowings was primarily from new insurance companya few large-asset members. However, the borrowings from these new members are required to be paid off overaverage Advance principal balance of $65.6 billion during 2018 was significantly higher than the next year due toending balance at December 31, 2018. REPOs, which traditionally have the Finance Agency's 2016 final rule on membership requirements, which is discussed further in the "Executive Overview."most
Members increasedvolatile balances because a majority of them have overnight maturities, allow our members the most flexibility as their available lines in the Letters of Credit program by $1.8 billion (10 percent) in 2015. Letters of Credit balances averaged $17.7 billion during 2015, an increase of $2.5 billion (17 percent) from the average balance during 2014. We
normally earn fees on Letters of Credit based on the actual average amount of the Letters utilized, which generally is less than the notional amount issued.liquidity needs may change daily.
Advance Usage
In addition to analyzing Advance balances by dollar trends, and the number of members utilizing them, we monitor the degree to which members use Advances to fund their balance sheets. The following table shows the unweighted, average ratio of each member's Advance balance to its most-recently available figures for total assets.
|
| | | | | | | | | | | | | | |
| December 31, 2015 | | September 30, 2015 | | June 30, 2015 | | March 31, 2015 | | December 31, 2014 |
Average Advances-to-Assets for Members | | | | | | | | | |
Assets less than $1.0 billion (623 members) | 3.26 | % | | 3.20 | % | | 3.14 | % | | 3.06 | % | | 3.24 | % |
Assets over $1.0 billion (76 members) | 4.35 |
| | 4.75 |
| | 3.90 |
| | 3.08 |
| | 3.75 |
|
All members | 3.37 |
| | 3.35 |
| | 3.22 |
| | 3.06 |
| | 3.29 |
|
|
| | | | | | | | | | | | | | |
| December 31, 2018 | | September 30, 2018 | | June 30, 2018 | | March 31, 2018 | | December 31, 2017 |
Average Advances-to-assets for members | | | | | | | | | |
Assets less than $1.0 billion (557 members) | 3.05 | % | | 3.16 | % | | 3.18 | % | | 2.86 | % | | 3.04 | % |
Assets over $1.0 billion (89 members) | 4.26 |
| | 4.61 |
| | 4.85 |
| | 4.10 |
| | 4.95 |
|
All members | 3.22 |
| | 3.36 |
| | 3.41 |
| | 3.03 |
| | 3.28 |
|
Advance usage ratios were slightly higher at year-end 2015 compared to year-end 2014, driven primarily by an increase in short-term borrowings and the inclusion of borrowings from several new insurance company members. Usage ratio trends for members with assets less than $1.0 billion were stable within a narrow range during the same time periods.
The following table shows Advance usage of members by charter type.
| | (Dollars in millions) | December 31, 2015 | | December 31, 2014 | December 31, 2018 | | December 31, 2017 |
| Par Value of Advances | | Percent of Total Par Value of Advances | | Par Value of Advances | | Percent of Total Par Value of Advances | Principal Amount of Advances | | Percent of Total Principal Amount of Advances | | Principal Amount of Advances | | Percent of Total Principal Amount of Advances |
Commercial Banks | $ | 53,479 |
| | 73 | % | | $ | 59,119 |
| | 84 | % | $ | 39,195 |
| | 71 | % | | $ | 52,899 |
| | 76 | % |
Thrifts and Savings Banks | 5,220 |
| | 7 |
| | 4,067 |
| | 6 |
| |
Savings Institutions | | 5,424 |
| | 10 |
| | 7,369 |
| | 10 |
|
Credit Unions | 957 |
| | 1 |
| | 1,110 |
| | 1 |
| 1,564 |
| | 3 |
| | 1,293 |
| | 2 |
|
Insurance Companies | 13,428 |
| | 19 |
| | 5,408 |
| | 8 |
| 8,676 |
| | 16 |
| | 8,357 |
| | 12 |
|
Community Development Financial Institutions | 2 |
| | — |
| | 1 |
| | — |
| 1 |
| | — |
| | 1 |
| | — |
|
Total member Advances | 73,086 |
| | 100 |
| | 69,705 |
| | 99 |
| 54,860 |
| | 100 |
| | 69,919 |
| | 100 |
|
Former member borrowings | 156 |
| | — |
| | 594 |
| | 1 |
| 12 |
| | — |
| | 59 |
| | — |
|
Total par value of Advances | $ | 73,242 |
| | 100 | % | | $ | 70,299 |
| | 100 | % | |
Total principal amount of Advances | | $ | 54,872 |
| | 100 | % | | $ | 69,978 |
| | 100 | % |
The following tables present principal balances for the five members with the largest Advance borrowings.
| | (Dollars in millions) | | | | | | | | | | | | | | | | |
December 31, 2015 | | December 31, 2014 | |
December 31, 2018 | | December 31, 2018 | | December 31, 2017 |
Name | | Par Value of Advances | | Percent of Total Par Value of Advances | | Name | | Par Value of Advances | | Percent of Total Par Value of Advances | | Principal Amount of Advances | | Percent of Total Principal Amount of Advances | | Name | | Principal Amount of Advances | | Percent of Total Principal Amount of Advances |
JPMorgan Chase Bank, N.A. | | $ | 35,350 |
| | 48 | % | | JPMorgan Chase Bank, N.A. | | $ | 41,300 |
| | 59 | % | | $ | 23,400 |
| | 43 | % | | JPMorgan Chase Bank, N.A. | | $ | 23,950 |
| | 34 | % |
U.S. Bank, N.A. | | 10,086 |
| | 14 |
| | U.S. Bank, N.A. | | 8,338 |
| | 12 |
| | 4,574 |
| | 8 |
| | U.S. Bank, N.A. | | 8,975 |
| | 13 |
|
Capstead Insurance, LLC | | 2,875 |
| | 4 |
| | The Huntington National Bank | | 2,083 |
| | 3 |
| |
Third Federal Savings and Loan Association | | | 3,727 |
| | 7 |
| | Third Federal Savings and Loan Association | | 3,756 |
| | 5 |
|
Nationwide Life Insurance Company | | 2,279 |
| | 3 |
| | Nationwide Life Insurance Company | | 1,761 |
| | 3 |
| | 2,510 |
| | 5 |
| | The Huntington National Bank | | 3,732 |
| | 5 |
|
Third Federal Savings and Loan Association | | 2,162 |
| | 3 |
| | Western-Southern Life Assurance Co | | 1,623 |
| | 2 |
| |
Pinnacle Bank | | | 1,444 |
| | 3 |
| | Fifth Third Bank | | 3,140 |
| | 4 |
|
Total of Top 5 | | $ | 52,752 |
| | 72 | % | | Total of Top 5 | | $ | 55,105 |
| | 79 | % | | $ | 35,655 |
| | 66 | % | | Total of Top 5 | | $ | 43,553 |
| | 61 | % |
Advance concentration ratios are influenced by, and generally similar to, concentration ratios of financial activity among our Fifth District financial institutions. We believe that having large financial institutions that actively use our Mission Asset ActivityAssets augments the value of membership to all members. For example, such activity improves our operating efficiency, increases our earnings and thereby contributions to housing and community investment programs,programs. This activity may enable us over time to obtain more favorable funding costs, and helps us maintain competitively priced Mission Asset Activity.Assets.
Mortgage Loans Held for Portfolio (Mortgage Purchase Program, or "MPP")MPP)
The table below shows principal purchases and reductions of loans in the MPP for each of the last two years.
| | (In millions) | 2015 | | 2014 | 2018 | | 2017 |
Balance, beginning of year | $ | 6,796 |
| | $ | 6,643 |
| $ | 9,454 |
| | $ | 8,926 |
|
Principal purchases | 2,348 |
| | 1,226 |
| 1,936 |
| | 1,747 |
|
Principal reductions | (1,386 | ) | | (1,073 | ) | (1,118 | ) | | (1,219 | ) |
Balance, end of year | $ | 7,758 |
| | $ | 6,796 |
| $ | 10,272 |
| | $ | 9,454 |
|
The increaseAlthough there were 102 active members participating in the MPP at December 31, 2018, over 50 percent of the principal loan balancespurchases in 20152018 resulted from higher amountsactivity of loan purchases, particularly from our twothree largest sellers who drive program balances. In 2015, 99 members sold us mortgage loans, with the number of monthly sellers averaging 65.sellers. All loans acquired in 20152018 were conventional loans.
The following tables show the percentage of principal balances from PFIsParticipating Financial Institutions (PFIs) supplying five percent or more of total principal and the percentage of principal balances from all other PFIs. As shown in the table below, MPP activity is concentrated amongst a few members.
| | (Dollars in millions) | December 31, 2015 | | | December 31, 2014 | December 31, 2018 | | | December 31, 2017 |
| Principal | | % of Total | | | Principal | | % of Total | Principal | | % of Total | | | Principal | | % of Total |
Union Savings Bank | $ | 2,242 |
| | 29 | % | | Union Savings Bank | $ | 1,593 |
| | 23 | % | $ | 3,449 |
| | 34 | % | | Union Savings Bank | $ | 3,247 |
| | 34 | % |
PNC Bank, N.A. (1) | 839 |
| | 11 |
| | PNC Bank, N.A. (1) | 1,074 |
| | 16 |
| |
Guardian Savings Bank FSB | 633 |
| | 8 |
| | Guardian Savings Bank FSB | 406 |
| | 6 |
| 987 |
| | 10 |
| | Guardian Savings Bank FSB | 933 |
| | 10 |
|
All others | 4,044 |
| | 52 |
| | All others | 3,723 |
| | 55 |
| 5,836 |
| | 56 |
| | PNC Bank, N.A. (1) | 516 |
| | 5 |
|
Total | $ | 7,758 |
| | 100 | % | | Total | $ | 6,796 |
| | 100 | % | $ | 10,272 |
| | 100 | % | | All others | 4,758 |
| | 51 |
|
| | | | | | Total | $ | 9,454 |
| | 100 | % |
(1)Former member.
We closely track the refinancing incentives of our mortgage assets (including loans in the MPP and mortgage-backed securities)MBS) 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 2015 equated2018 and 2017 were low, equating to a 14eight and nine percent annual constant prepayment rate, up from the 12 percent rate for all of 2014, as the refinancing incentives for many of ourrates, respectively, due to a sustained increase in mortgage assets increased.rates.
The MPP's composition of balances by loan type, original final maturity, and weighted-average mortgage note rate did not change materially in 2015.2018. The weighted average mortgage note rate fell from 4.36 percentincreased by 0.09 percentage points in 2018 to end the year at the end of 2014 to 4.14 percent at the end of 2015. This decline reflected a continuing trend of prepayments of higher rate mortgages and purchases of lower rate mortgages.4.00 percent. MPP yields earned in 2015,2018, 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 2015,2018, we accrued $28$38 million of earnings for the Affordable Housing Program, which will be awarded to members in 2016.2019. This amount represents no changean increase of $3 million from 20142017 due to the similar amount ofhigher earnings in each year.2018.
Including funds available in 20152018 from previous years, we had $27$29 million available for the competitive Affordable Housing Program in 2015,2018, which we awarded to 7067 projects through a single competitive offering. In addition, we disbursed $9$13 million to 171188 members on behalf of 1,8692,553 homebuyers through the Welcome Home Program, which assists homebuyers with down payments and closing costs. In total, just over one-quartermore than one-third of members received approvalapplied for funding under the two Affordable Housing Programs.
Additionally, in 20152018, our Board committed $1$1.5 million to the Carol M. Peterson Housing Fund, (CMP Fund), which helped 151262 homeowners, and continued its commitment toreplenished the $5 million Disaster Reconstruction Program.Program (DRP) with an added $3.6 million, bringing the DRP fund to $5 million. 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 2015,2018, Advance balances under these programs totaled $449$444 million. AHP Advance balances have declined in recent years, reflecting our preference to distribute AHP subsidy in the form of grants.
Investments
The table below presents the ending and average balances of the investment portfolio.
| | (In millions) | 2015 | | 2014 | 2018 | | 2017 |
| Ending Balance | | Average Balance | | Ending Balance | | Average Balance | Ending Balance | | Average Balance | | Ending Balance | | Average Balance |
Liquidity investments | $ | 22,110 |
| | $ | 12,590 |
| | $ | 11,319 |
| | $ | 11,856 |
| $ | 17,858 |
| | $ | 13,989 |
| | $ | 12,286 |
| | $ | 9,757 |
|
Mortgage-backed securities | 15,246 |
| | 14,664 |
| | 14,688 |
| | 15,594 |
| |
MBS | | 15,756 |
| | 15,741 |
| | 14,772 |
| | 14,710 |
|
Other investments (1) | — |
| | 85 |
| | — |
| | 98 |
| — |
| | 64 |
| | — |
| | 84 |
|
Total investments | $ | 37,356 |
| | $ | 27,339 |
| | $ | 26,007 |
| | $ | 27,548 |
| $ | 33,614 |
| | $ | 29,794 |
| | $ | 27,058 |
| | $ | 24,551 |
|
| |
(1) | The average balance includes the rights or obligations to cash collateral, which are included in the fair value of derivative assets or derivative liabilities on the Statements of Condition at period end. |
We continued to maintain an amplea robust amount of asset liquidity. Liquidity investment levels can vary significantly based on changes in the amount of Advances, liquidity needs, the availability of acceptable net spreads, and the number of eligible counterparties that meet our unsecured credit risk criteria, and changes in the amount of Mission Assets.criteria. It is normal for liquidity investments to vary by up to several billion dollars on a daily basis.
Certain dealers, who play a large role in facilitating the distribution of our debt to investors, are being more reluctant to expand the The higher amount of our debt on their balance sheets over quarter- and year-endsliquidity investments at December 31, 2018 was primarily due to the perceived growing burden of their regulatory capital environment associated with Basel. Because of this, we conservatively carried a larger amount of liquidity leading up to year-end 2015 to satisfy any potential member borrowing needs during a period where accessing additional liquidity may be more challenging.volatility in Advance activity, especially short-term and variable-rate Advance borrowings.
Our overarching strategy for mortgage-backed securitiesbalances of MBS 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 balanceratio of mortgage-backed securitiesMBS to regulatory capital was 2.94 at December 31, 20152018 represented a 2.91 multiple. The balance of regulatory capital andMBS at December 31, 2018 consisted of $11.3$13.7 billion of securities issued by Fannie Mae or Freddie Mac (of which $1.78.7 billion were floating-rate securities), $0.9$0.3 billion of floating-rate securities issued by the National Credit Union Administration (NCUA), and $3.0$1.7 billion of securities issued by Ginnie Mae (a majority of which(which are primarily fixed rate). The NCUA securities have coupons tied to one-month LIBOR with interest rate caps ranging from seven to eight percent. We held no private-label mortgage-backed securities.MBS.
The table below shows principal purchases and paydowns of our mortgage-backed securitiesMBS for each of the last two years.
| | (In millions) | Mortgage-backed Securities Principal | MBS Principal |
| 2015 | | 2014 | 2018 | | 2017 |
Balance, beginning of year | $ | 14,715 |
| | $ | 16,087 |
| $ | 14,746 |
| | $ | 14,487 |
|
Principal purchases | 3,099 |
| | 722 |
| 3,839 |
| | 2,679 |
|
Principal paydowns | (2,611 | ) | | (2,094 | ) | (2,851 | ) | | (2,420 | ) |
Balance, end of year | $ | 15,203 |
| | $ | 14,715 |
| $ | 15,734 |
| | $ | 14,746 |
|
Principal paydowns in 20152018 equated to a 16 percent annual constant prepayment rate, up fromcompared to a 1315 percent rate in 2014. Purchases have outpaced paydowns this year due to the availability of mortgage securities offering attractive risk/return trade-offs.2017.
Consolidated Obligations
The table below presents the ending and average balances of our participations in Consolidated Obligations.
| | (In millions) | 2015 | | 2014 | 2018 | | 2017 |
| Ending Balance | | Average Balance | | Ending Balance | | Average Balance | Ending Balance | | Average Balance | | Ending Balance | | Average Balance |
Discount Notes: | | | | | | | | | | | | | | |
Par | $ | 77,225 |
| | $ | 52,714 |
| | $ | 41,238 |
| | $ | 35,996 |
| $ | 47,071 |
| | $ | 49,273 |
| | $ | 46,259 |
| | $ | 43,166 |
|
Discount | (26 | ) | | (8 | ) | | (6 | ) | | (4 | ) | (127 | ) | | (88 | ) | | (48 | ) | | (42 | ) |
Total Discount Notes | 77,199 |
| | 52,706 |
| | 41,232 |
| | 35,992 |
| 46,944 |
| | 49,185 |
| | 46,211 |
| | 43,124 |
|
Bonds: | | | | | | | | | | | | | | |
Unswapped fixed-rate | 26,962 |
| | 26,350 |
| | 26,124 |
| | 25,513 |
| 25,982 |
| | 26,566 |
| | 26,710 |
| | 26,707 |
|
Unswapped adjustable-rate | 4,065 |
| | 13,385 |
| | 27,610 |
| | 29,355 |
| 15,470 |
| | 16,967 |
| | 20,895 |
| | 18,500 |
|
Swapped fixed-rate | 4,010 |
| | 6,489 |
| | 5,390 |
| | 3,697 |
| 4,195 |
| | 5,982 |
| | 6,552 |
| | 7,131 |
|
Total par Bonds | 35,037 |
| | 46,224 |
| | 59,124 |
| | 58,565 |
| 45,647 |
| | 49,515 |
| | 54,157 |
| | 52,338 |
|
Other items (1) | 68 |
| | 90 |
| | 93 |
| | 116 |
| 12 |
| | (13 | ) | | 6 |
| | 29 |
|
Total Bonds | 35,105 |
| | 46,314 |
| | 59,217 |
| | 58,681 |
| 45,659 |
| | 49,502 |
| | 54,163 |
| | 52,367 |
|
Total Consolidated Obligations (2) | $ | 112,304 |
| | $ | 99,020 |
| | $ | 100,449 |
| | $ | 94,673 |
| $ | 92,603 |
| | $ | 98,687 |
| | $ | 100,374 |
| | $ | 95,491 |
|
| |
(1) | Includes unamortized premiums/discounts, fair value option valuation adjustments, hedging and other basis adjustments. |
| |
(2) | The 11 FHLBanks have joint and several liability for the par amount of all of the Consolidated Obligations issued on their behalves. The par amount of the outstanding Consolidated Obligations for all of the FHLBanks was (in millions) $905,2021,031,617 and $847,1751,034,260 at December 31, 20152018 and 2014,2017, respectively. |
Our preferred sourcesThe balances of funding for LIBOR-indexedConsolidated Obligations fluctuate with changes in the balances of our assets. For example, the volatility in certain Advances and liquidity investments contributed to the higher average balance of Discount Notes in 2018. Additionally, the decline in unswapped adjustable-rate Bonds at December 31, 2018 was primarily due to lower variable-rate Advance balances. We fund variable-rate assets arewith Discount Notes, adjustable-rate Bonds, and swapped fixed-rate Bonds because they give us the ability to effectively match the LIBORunderlying rate reset periods embedded in these assets. During 2015, we shifted the composition of this funding more towards Discount Notes. This change provided lower funding costs in the current market environment and therefore improved earnings as discussed in the "Net Interest Income" section of "Results of Operations." Discount Note balances also increased due to growth in Advance balances, most of which was in the short-term REPO program, as well as liquidity investments in order to ensure that member borrowing needs were met at year-end 2015.
This change in funding composition increases risk to changes in spreads between cashflows received on LIBOR-indexed assets and interest paid on Discount Notes. We believe the increased usage of Discount Note funding did not materially raise this risk because of the historically favorable relationship between the two rate indices.
The composition of unswapped fixed-rate Bonds, which typically have initial maturities greater than one year, was relatively stable in 20152018 compared to 2014.2017. The following table shows the allocation on December 31, 20152018 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 | Non-callable | Total | | Callable |
Due in 1 year or less | $ | 30 |
| $ | 3,343 |
| $ | 1 |
| $ | 3,374 |
| | $ | 6,229 |
| $ | 704 |
| $ | 4,738 |
| $ | 5,442 |
| | $ | 6,268 |
|
Due after 1 year through 2 years | 410 |
| 3,628 |
| — |
| 4,038 |
| | 240 |
| 1,036 |
| 4,179 |
| 5,215 |
| | 36 |
|
Due after 2 years through 3 years | 1,270 |
| 3,205 |
| — |
| 4,475 |
| | — |
| 1,629 |
| 3,121 |
| 4,750 |
| | — |
|
Due after 3 years through 4 years | 995 |
| 3,020 |
| — |
| 4,015 |
| | — |
| 394 |
| 2,471 |
| 2,865 |
| | — |
|
Due after 4 years through 5 years | 553 |
| 2,383 |
| — |
| 2,936 |
| | — |
| 952 |
| 2,232 |
| 3,184 |
| | — |
|
Thereafter | 3,211 |
| 4,913 |
| — |
| 8,124 |
| | — |
| 1,589 |
| 2,937 |
| 4,526 |
| | — |
|
Total | $ | 6,469 |
| $ | 20,492 |
| $ | 1 |
| $ | 26,962 |
| | $ | 6,469 |
| $ | 6,304 |
| $ | 19,678 |
| $ | 25,982 |
| | $ | 6,304 |
|
Deposits
Total deposits with us are normally a relatively minor source of low-cost funding. Total interest bearing deposits at December 31, 20152018 were $0.8$0.7 billion,, an increase of 10two percent from year-end 2014.2017. The average balance of total interest bearing deposits in 20152018 was $0.8 billion, a decrease of onean 18 percent increase from the average balance during 2014.2017.
Derivatives Hedging Activity and Liquidity
Our use of and accounting for derivatives is discussed in the "Effect of the Use of Derivatives on Net Interest Income" section in "Results of Operations." Liquidity is discussed in the "Liquidity Risk" section in “Quantitative and Qualitative Disclosures About Risk Management.”
Capital Resources
The GLB Act and Finance Agency regulations specify limits on how much we can leverage capital by requiring that we maintain, at all times, at least a four percent regulatory capital-to-assets ratio. A lower ratio indicates more leverage. If financial leverage increases too much, or becomes too close to the regulatory limit, we have discretionary ability within our Capital Plan to enact changes to ensure capitalization remains strong and in compliance with regulatory limits.
We have always complied with our regulatory capital requirements. The following tables present capital amounts and capital-to-assets ratios, on both a GAAP and regulatory basis.
|
| | | | | | | | | | | | | | | |
| Year Ended December 31, |
(In millions) | 2015 | | 2014 |
| Period End | | Average | | Period End | | Average |
GAAP and Regulatory Capital | | | | | | | |
GAAP Capital Stock | $ | 4,429 |
| | $ | 4,344 |
| | $ | 4,267 |
| | $ | 4,298 |
|
Mandatorily Redeemable Capital Stock | 38 |
| | 61 |
| | 63 |
| | 105 |
|
Regulatory Capital Stock | 4,467 |
| | 4,405 |
| | 4,330 |
| | 4,403 |
|
Retained Earnings | 765 |
| | 745 |
| | 689 |
| | 666 |
|
Regulatory Capital | $ | 5,232 |
| | $ | 5,150 |
| | $ | 5,019 |
| | $ | 5,069 |
|
|
| | | | | | | | | | | |
| 2015 | | 2014 |
| Period End | | Average | | Period End | | Average |
GAAP and Regulatory Capital-to-Assets Ratio | | | | | | | |
GAAP | 4.36 | % | | 4.81 | % | | 4.63 | % | | 4.90 | % |
Regulatory | 4.40 |
| | 4.88 |
| | 4.71 |
| | 5.01 |
|
We consider the regulatory ratio to be a better representation of financial leverage than the GAAP ratio because, although the GAAP ratio treats mandatorily redeemable capital stock as a liability, it protects investors in our debt in the same manner as GAAP capital stock and retained earnings. Both GAAP and regulatory capital-to-assets ratios remained above the regulatory required minimum of four percent. The reduction in these ratios at December 31, 2015 was a temporary result of the elevated liquidity we carried at that time due to the reasons discussed above.
|
| | | | | | | | | | | | | | | |
| Year Ended December 31, |
(In millions) | 2018 | | 2017 |
| Period End | | Average | | Period End | | Average |
GAAP and Regulatory Capital | | | | | | | |
GAAP Capital Stock | $ | 4,320 |
| | $ | 4,387 |
| | $ | 4,241 |
| | $ | 4,183 |
|
Mandatorily Redeemable Capital Stock | 23 |
| | 30 |
| | 30 |
| | 46 |
|
Regulatory Capital Stock | 4,343 |
| | 4,417 |
| | 4,271 |
| | 4,229 |
|
Retained Earnings | 1,023 |
| | 1,025 |
| | 940 |
| | 928 |
|
Regulatory Capital | $ | 5,366 |
| | $ | 5,442 |
| | $ | 5,211 |
| | $ | 5,157 |
|
|
| | | | | | | | | | | |
| 2018 | | 2017 |
| Period End | | Average | | Period End | | Average |
GAAP and Regulatory Capital-to-Assets Ratio | | | | | | | |
GAAP | 5.37 | % | | 5.11 | % | | 4.83 | % | | 5.00 | % |
Regulatory (1) | 5.41 |
| | 5.16 |
| | 4.88 |
| | 5.06 |
|
| |
(1) | At all times, the FHLBanks must maintain at least a four percent minimum regulatory capital-to-assets ratio. |
The following table presents the sources of change in regulatory capital stock balances in 20152018 and 2014.2017.
| | (In millions) | 2015 | | 2014 | 2018 | | 2017 |
Regulatory stock balance at beginning of year | $ | 4,330 |
| | $ | 4,814 |
| $ | 4,271 |
| | $ | 4,192 |
|
Stock purchases: | | | | | | |
Membership stock | 13 |
| | 11 |
| 25 |
| | 13 |
|
Activity stock | 178 |
| | 73 |
| 413 |
| | 341 |
|
Stock repurchases/redemptions: | | | | | | |
Redemption of member excess | (1 | ) | | (1 | ) | (40 | ) | | (259 | ) |
Repurchase of member excess | — |
| | (498 | ) | (297 | ) | | — |
|
Withdrawals | (53 | ) | | (69 | ) | (29 | ) | | (16 | ) |
Regulatory stock balance at the end of the year | $ | 4,467 |
| | $ | 4,330 |
| $ | 4,343 |
| | $ | 4,271 |
|
The table below shows the amount of excess capital stock.
| | (In millions) | December 31, 2015 | | December 31, 2014 | December 31, 2018 | | December 31, 2017 |
Excess capital stock (Capital Plan definition) | $ | 461 |
| | $ | 504 |
| $ | 1,015 |
| | $ | 391 |
|
Cooperative utilization of capital stock | $ | 521 |
| | $ | 441 |
| $ | 558 |
| | $ | 585 |
|
Mission Asset Activity capitalized with cooperative capital stock | $ | 13,034 |
| | $ | 11,020 |
| $ | 13,950 |
| | $ | 14,620 |
|
A portion of our capital stock is excess, meaning it is not required as a condition to being a member and is not required to capitalizecurrently capitalizing Mission Asset Activity. Excess capital stock provides a base of capital to manage financial leverage at prudent levels, augments loss protections for bondholders, and capitalizes a portion of growth in Mission Assets. The amount of excess
capital stock at December 31, 2018 increased $624 million compared to year-end 2017 due to lower Advance balances. In February 2019, we repurchased $294 million of excess capital stock as defined bypart of our Capital Plan, was $461 million at December 31, 2015,ongoing efforts to manage our capital and financial performance to levels that are efficient and effective. Although the balances of excess stock have been and may continue to be volatile due to changes in Advance demand, we have the ability to 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 $43 million from year-end 2014.our retained earnings.
Membership and Stockholders
In 2015,2018, we added 2110 new member stockholders and lost 27 members,24 member stockholders, ending the year at 699. Most members lost merged with other Fifth District members and, therefore, the impact on our earnings and Mission Asset Activity was small.646 member stockholders. Of the members lost, 17 merged with other Fifth District members, eightsix merged out of the District one merged with a District non-member, and one relocatedwas ineligible for membership due to a conversion of its charter out of District.charter.
In 2015,2018, there were no material changes in the allocation of membership by state, charter type, or asset size. At the end of 2015,2018, the composition of membership by state was Ohio with 304,298, Kentucky with 178, and Tennessee with 199, and Kentucky with 196.
The Finance Agency issued a final rule on FHLBank membership in January 2016. This rule imposes new membership requirements and eliminates all currently eligible captive insurance companies from FHLBank membership, as discussed in "Executive Overview." The ruling also requires that these entities, which represented 15 members totaling $6.6 billion in Advances at December 31, 2015, pay off existing Advances within one year and cease any new borrowings. The subsequent loss of this membership segment will not significantly affect our financial condition or results of operations.170.
The following table provides the number of member stockholders by charter type.
| | | December 31, | December 31, |
| 2015 | | 2014 | 2018 | | 2017 |
Commercial Banks | 418 |
| | 442 |
| 374 |
| | 385 |
|
Thrifts and Savings Banks | 99 |
| | 101 |
| |
Savings Institutions | | 83 |
| | 92 |
|
Credit Unions | 124 |
| | 120 |
| 134 |
| | 132 |
|
Insurance Companies | 54 |
| | 38 |
| 48 |
| | 46 |
|
Community Development Financial Institutions | 4 |
| | 4 |
| 7 |
| | 5 |
|
Total | 699 |
| | 705 |
| 646 |
| | 660 |
|
The following table provides the ownership of capital stock by charter type.
| | (In millions) | December 31, | December 31, |
| 2015 | | 2014 | 2018 | | 2017 |
Commercial Banks | $ | 3,425 |
| | $ | 3,441 |
| $ | 3,353 |
| | $ | 3,232 |
|
Thrifts and Savings Banks | 378 |
| | 376 |
| |
Savings Institutions | | 353 |
| | 416 |
|
Credit Unions | 128 |
| | 121 |
| 176 |
| | 169 |
|
Insurance Companies | 497 |
| | 328 |
| 437 |
| | 423 |
|
Community Development Financial Institutions | 1 |
| | 1 |
| 1 |
| | 1 |
|
Total GAAP Capital Stock | 4,429 |
| | 4,267 |
| 4,320 |
| | 4,241 |
|
Mandatorily Redeemable Capital Stock | 38 |
| | 63 |
| 23 |
| | 30 |
|
Total Regulatory Capital Stock | $ | 4,467 |
| | $ | 4,330 |
| $ | 4,343 |
| | $ | 4,271 |
|
Credit union members hold relatively less stock than their membership proportion because they tend to be smaller than the average member and borrow less. Insurance company members hold relatively more stock than their membership proportion because they tend to be larger than the average member and borrow more.
The following table provides a summary of member stockholders by asset size.
| | | December 31, | December 31, |
Member Asset Size (1) | 2015 | | 2014 | 2018 | | 2017 |
Up to $100 million | 177 |
| | 182 |
| 166 |
| | 171 |
|
> $100 up to $500 million | 370 |
| | 381 |
| 319 |
| | 338 |
|
> $500 million up to $1 billion | 76 |
| | 76 |
| 72 |
| | 66 |
|
> $1 billion | 76 |
| | 66 |
| 89 |
| | 85 |
|
Total Member Stockholders | 699 |
| | 705 |
| 646 |
| | 660 |
|
| |
(1) | The December 31 membership composition reflects members' assets as of the most-recently available figures for total assets. |
Most members are smaller community financial institutions, with 7875 percent having assets up to $500 million. As noted elsewhere, having larger members is important to help achieve our mission objectives, including providing valuable products and services to all members.
RESULTS OF OPERATIONS
Components of Earnings and Return on Equity
The following table is a summary income statement for the last three years. Each ROE percentage is computed by dividing income or expense for the category by the average amount of stockholders' equity for the period.
|
| | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | 2015 | | 2014 | | 2013 |
| Amount | | ROE (1) | | Amount | | ROE (1) | | Amount | | ROE (1) |
Net interest income | $ | 322 |
| | 6.35 | % | | $ | 317 |
| | 6.40 | % | | $ | 328 |
| | 6.40 | % |
Reversal for credit losses | — |
| | — |
| | — |
| | (0.01 | ) | | (7 | ) | | (0.15 | ) |
Net interest income after reversal for credit losses | 322 |
| | 6.35 |
| | 317 |
| | 6.41 |
| | 335 |
| | 6.55 |
|
Net gains on derivatives and hedging activities | 13 |
| | 0.26 |
| | 7 |
| | 0.13 |
| | 8 |
| | 0.16 |
|
Other non-interest income | 17 |
| | 0.33 |
| | 16 |
| | 0.32 |
| | 12 |
| | 0.23 |
|
Total non-interest income | 30 |
| | 0.59 |
| | 23 |
| | 0.45 |
| | 20 |
| | 0.39 |
|
Total revenue | 352 |
| | 6.94 |
| | 340 |
| | 6.86 |
| | 355 |
| | 6.94 |
|
Total non-interest expense | 75 |
| | 1.49 |
| | 68 |
| | 1.38 |
| | 64 |
| | 1.26 |
|
Assessments | 28 |
| | 0.55 |
| | 28 |
| | 0.55 |
| | 30 |
| | 0.58 |
|
Net income | $ | 249 |
| | 4.90 | % | | $ | 244 |
| | 4.93 | % | | $ | 261 |
| | 5.10 | % |
|
| | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | 2018 | | 2017 | | 2016 |
| Amount | | ROE (1) | | Amount | | ROE (1) | | Amount | | ROE (1) |
Net interest income | $ | 499 |
| | 9.24 | % | | $ | 429 |
| | 8.42 | % | | $ | 363 |
| | 7.24 | % |
Provision for credit losses | — |
| | — |
| | — |
| | 0.01 |
| | — |
| | — |
|
Net interest income after provision for credit losses | 499 |
| | 9.24 |
| | 429 |
| | 8.41 |
| | 363 |
| | 7.24 |
|
Non-interest income (loss): | | | | | | | | | | | |
Net realized gains from sale of held-to-maturity securities | — |
| | — |
| | — |
| | — |
| | 39 |
| | 0.77 |
|
Net losses on derivatives and hedging activities | (41 | ) | | (0.75 | ) | | (24 | ) | | (0.48 | ) | | (47 | ) | | (0.95 | ) |
Net (losses) gains on financial instruments held under fair value option | (14 | ) | | (0.26 | ) | | 10 |
| | 0.20 |
| | 40 |
| | 0.81 |
|
Other non-interest income, net | 18 |
| | 0.33 |
| | 13 |
| | 0.25 |
| | 14 |
| | 0.29 |
|
Total non-interest income (loss) | (37 | ) | | (0.68 | ) | | (1 | ) | | (0.03 | ) | | 46 |
| | 0.92 |
|
Total income | 462 |
| | 8.56 |
| | 428 |
| | 8.38 |
| | 409 |
| | 8.16 |
|
Non-interest expense | 85 |
| | 1.57 |
| | 79 |
| | 1.54 |
| | 111 |
| | 2.21 |
|
Affordable Housing Program assessments | 38 |
| | 0.70 |
| | 35 |
| | 0.69 |
| | 30 |
| | 0.60 |
|
Net income | $ | 339 |
| | 6.29 | % | | $ | 314 |
| | 6.15 | % | | $ | 268 |
| | 5.35 | % |
| |
(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 was steady in 2015 compared to 2014, although there was variation in individual factors that determine earnings. Profitability remained competitive as ROE continued to significantly exceed our benchmarks relative to short-term interest rates. Details on the individual factors contributing to the level and changes in profitability are explained in the sections below.
Net Interest Income
The largest component of net income is net interest income. Our principal goal in managing net interest income is to balance 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 costsearned 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 majorselected components of net interest income. Reasons for the variance in net interest income between the periods are discussed below.
| | (Dollars in millions) | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 |
| Amount | | % of Earning Assets | | Amount | | % of Earning Assets | | Amount | | % 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) | $ | (30 | ) | | (0.03 | )% | | $ | (11 | ) | | (0.01 | )% | | $ | (1 | ) | | — | % | $ | (17 | ) | | (0.02 | )% | | $ | (20 | ) | | (0.02 | )% | | $ | (54 | ) | | (0.05 | )% |
Prepayment fees on Advances, net (2) | 3 |
| | — |
| | 4 |
| | — |
| | 2 |
| | — |
| 1 |
| | — |
| | 1 |
| | — |
| | 10 |
| | 0.01 |
|
Other components of net interest rate spread | 314 |
| | 0.30 |
| | 291 |
| | 0.29 |
| | 290 |
| | 0.31 |
| 407 |
| | 0.39 |
| | 382 |
| | 0.38 |
| | 360 |
| | 0.34 |
|
Total net interest rate spread | 287 |
| | 0.27 |
| | 284 |
| | 0.28 |
| | 291 |
| | 0.31 |
| 391 |
| | 0.37 |
| | 363 |
| | 0.36 |
| | 316 |
| | 0.30 |
|
Earnings from funding assets with interest-free capital | 35 |
| | 0.04 |
| | 33 |
| | 0.03 |
| | 37 |
| | 0.04 |
| 108 |
| | 0.10 |
| | 66 |
| | 0.06 |
| | 47 |
| | 0.05 |
|
Total net interest income/net interest margin (3) | $ | 322 |
| | 0.31 | % | | $ | 317 |
| | 0.31 | % | | $ | 328 |
| | 0.35 | % | $ | 499 |
| | 0.47 | % | | $ | 429 |
| | 0.42 | % | | $ | 363 |
| | 0.35 | % |
| |
(1) | Includes (amortization)/accretionmonthly recognition of premiums/premiums and discounts paid on purchases of mortgage assets, premiums, discounts and concessions paid on Consolidated Obligations and deferred transaction costs (concession fees) for Consolidated Obligations.other hedging basis adjustments. |
| |
(2) | These components of net interest rate spread have been segregated to display their relative impact. |
| |
(3) | Net interest margin is net interest income before (reversal)/provision for credit losses as a percentage of average total interest earning assets. |
Net Amortization/Accretion: Net amortization/accretionAccretion (generally referred to as "amortization") includes monthly recognition: While net amortization has been substantial and volatile in the past, it was moderate in both 2018 and 2017. Amortization was higher in 2016 primarily because of premiums and discounts paid on purchases of mortgage assets,an acceleration in prepayment speeds as well as premiums, discounts and concessions paid on Consolidated Obligations.long-term interest rates generally declined in 2016. Periodic amortization adjustments do not necessarily indicate a trend in economic return over the entire life of mortgage assets, although it is one component of lifetime economic returns.
Amortization increased in 2015, compared to 2014, because net premium balances grew and long-term interest rates continue to fluctuate around very low levels. Amortization was lower than normal in 2013 due to a decline in actual and projected prepayment speeds in response to higher mortgage rates.
Prepayment Fees on Advances: Fees for members' early repayment of certain Advances, which are included in net interest income, are designed to make us economically indifferent to whether members hold Advances to maturity or repay them before maturity. Although Advance prepayment fees can be and have been significant in the past, they were minimal in 2015, 20142018 and 2013,2017, reflecting a low amount of member 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: Excluding net amortization and prepayment fees, the total other components of net interest rate spread increased $23$25 million in 20152018 compared to 2014, while it increased only $12017, compared to an increase of $22 million in 2014 compared2017 over 2016. The net increases were primarily due to 2013. The followingthe factors presented in approximate order of impact from largest to smallest, accounted for the changes in other components of net interest rate spread.below.
20152018 Versus 20142017
| |
▪ | LIBOR Asset funding-Higher spreads on mortgage assets-Favorable:Favorable: NetHigher spreads earned on mortgage assets increased net interest income increased by an estimated $18 million because we transitioned the funding of LIBOR-indexed assets from adjustable-rate LIBOR Bonds more towards lower-cost Discount Notes in response to a reduction in the cost of Discount Notes compared$13 million. Spreads improved primarily due to the cost of adjustable-rate LIBOR Bonds.rising interest rate environment.
|
| |
▪ | MPP growth-Growth in average mortgage asset balances-Favorable:Favorable: The $0.5 billion increase in the average balance of mortgage loans held for portfolio increased $0.8and the $1.0 billion whichincrease in the average balance of MBS improved net interest income by an estimated $10 million.
|
| |
▪ | Higher spreads on Advances-Favorable: Higher spreads earned on certain Advances increased net interest income by an estimated $11$5 million. However, the increase in Advance net interest income was more than offset by higher net interest payments on related derivatives not receiving hedge accounting, which are reflected in other non-interest income. The net interest payments relate to derivatives used to limit the market risk exposure of Advances to acceptable levels. |
| |
▪ | Growth in average liquidity investment balances-Favorable: The $4.2 billion increase in average liquidity investment balances improved net interest income by an estimated $3 million. |
| |
▪ | Advance growth-Other factors-Favorable:The $3.8 billion growth in average Advance balances improved Various other factors, individually less than $1 million, increased net interest income by an estimated $8 million.
|
| |
▪ | Fixed-rate asset funding-Unfavorable: A reduction in the amount of short-term debt funding longer-term fixed-rate mortgages lowered net interest income by an estimated $7$5 million.
|
| |
▪ | Lower MPP spread-average Advance balances-Unfavorable:Unfavorable: The continued paydown of higher-yielding mortgage assets and low-cost debt led to a$2.2 billion decline in the spread earned on mortgage loans, decreasingaverage Advance balances decreased net interest income by an estimated $6 million. |
| |
▪ | Lower balancesspreads on mortgage-backed securities-liquidity investments-Unfavorable:Unfavorable: The average balance of the mortgage-backed securities portfolio declined $0.9 billion, whichLower spreads earned on liquidity investments decreased net interest income by an estimated $5 million. |
| |
▪ | Other factors-Higher spreads on short-term and LIBOR-indexed Advances-Favorable: FavorableVarious: Wider spreads on outstanding short-term and LIBOR-indexed Advances relative to funding costs on Discount Notes and adjustable-rate Bonds increased net interest income by an estimated $44 million. This increase in net interest income was partially offset by earnings reductions in other factors, including, but not limitednon-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 raised investor demand for short-term government and GSE debt compared to prime institutional funds, which improved the pricing advantage for our funding. This factor was partially offset by a decrease in the amount of mandatorily redeemable capital stock andLIBOR-indexed assets funded by lower-cost Discount Notes.
|
| |
▪ | Growth in MPP balances-Favorable: A $0.9 billion higher average balance of MPP loans increased net interest income by an estimated $13 million. |
| |
▪ | Higher spreads on liquidity investments-Favorable: Higher spreads earned on mortgage-backed securities,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 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: Lower spreads earned on MPP loans and MBS 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. |
2014 Versus 2013
| |
▪ | Asset-liability management-Unfavorable: Management strategies and actions related to reducing our market risk exposure, along with changes in the market rate environment, lowered earnings on a net basis of $29 million for the following reasons:
|
| |
1) | Net interest income decreased $18 million due to a decline in mortgage asset spreads resulting from management actions to reduce market risk exposure by extending debt maturities and from continued run-off of higher yielding mortgages. |
| |
2) | Net interest income declined $11 million primarily because the cost of Discount Notes rose relative to LIBOR. Secondarily, we extended maturities of Discount Notes in order to reduce the burden of replacing Discount Notes as frequently. |
| |
▪ | Advance growth-Favorable: The $5.1 billion growth in average Advance balances at higher spreads improved net interest income by an estimated $26 million.
|
| |
▪ | Higher balances on mortgage-backed securities-Favorable: The average balance of the mortgage-backed security portfolio increased $1.3 billion compared to 2013's average, which increased net interest income by an estimated $5 million.
|
Earnings from Capital: The earningsEarnings from funding assets with interest-free capital did not change significantlyincreased $42 million in 20152018 compared to 20142017, and 2013increased $19 million in 2017 compared to 2016, primarily due to higher short-term interest rates. Average short-term rates were approximately 0.80 to 1.10 percentage points higher in 2018 compared to 2017, which drove the continued low interest rate environment.larger increase in 2018.
Average Balance Sheet and Rates
The following table provides average balances and rates for major balance sheet accounts, which determine the changes in net interest rate spreads. The average rates are affected by the inclusion or exclusion of net interest income or expense associated with our use of derivatives. For example, if derivatives qualify for fair value hedge accounting, the net interest settlements of interest receivables or payables associated with the derivatives is included in net interest income and interest rate spread. All data includeIf the impactderivatives do not qualify for fair value hedge accounting, the net interest settlements of interest rate swaps, which we allocate to each assetreceivables or payables associated with the derivatives is excluded from net interest income and liability category according to their designated hedging relationship. The changes infrom the netcalculation of interest rate spread and is recorded in “Non-interest income (loss)” as “Net losses on derivatives and hedging activities.” Amortization associated with some hedging-related basis adjustments is also reflected in net interest margin in 2015 versus 2014 and in 2014 versus 2013 occurred mostly from the net impact of the factors discussed above in “Components of Net Interest Income.”income, which affects interest rate spread.
| | (Dollars in millions) | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 |
| 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 | $ | 70,458 |
| | $ | 369 |
| | 0.52 | % | | $ | 66,642 |
| | $ | 318 |
| | 0.48 | % | | $ | 61,574 |
| | $ | 308 |
| | 0.50 | % | $ | 65,491 |
| | $ | 1,409 |
| | 2.15 | % | | $ | 67,656 |
| | $ | 905 |
| | 1.34 | % | | $ | 69,282 |
| | $ | 587 |
| | 0.85 | % |
Mortgage loans held for portfolio (2) | 7,611 |
| | 246 |
| | 3.23 |
| | 6,804 |
| | 237 |
| | 3.48 |
| | 7,065 |
| | 269 |
| | 3.80 |
| 9,967 |
| | 321 |
| | 3.22 |
| | 9,447 |
| | 297 |
| | 3.14 |
| | 8,541 |
| | 261 |
| | 3.06 |
|
Federal funds sold and securities purchased under resale agreements | 11,493 |
| | 14 |
| | 0.12 |
| | 9,673 |
| | 7 |
| | 0.07 |
| | 9,110 |
| | 8 |
| | 0.09 |
| 12,122 |
| | 228 |
| | 1.88 |
| | 9,184 |
| | 94 |
| | 1.02 |
| | 11,218 |
| | 44 |
| | 0.39 |
|
Interest-bearing deposits in banks (3) (4) (5) | 1,141 |
| | 2 |
| | 0.20 |
| | 2,244 |
| | 3 |
| | 0.15 |
| | 1,414 |
| | 2 |
| | 0.14 |
| 1,843 |
| | 41 |
| | 2.22 |
| | 624 |
| | 6 |
| | 1.03 |
| | 1,071 |
| | 6 |
| | 0.57 |
|
Mortgage-backed securities | 14,664 |
| | 326 |
| | 2.22 |
| | 15,594 |
| | 343 |
| | 2.20 |
| | 14,320 |
| | 313 |
| | 2.19 |
| |
MBS | | 15,741 |
| | 380 |
| | 2.41 |
| | 14,710 |
| | 306 |
| | 2.08 |
| | 15,061 |
| | 325 |
| | 2.16 |
|
Other investments (4) | 41 |
| | — |
| | 0.11 |
| | 37 |
| | — |
| | 0.08 |
| | 26 |
| | — |
| | 0.12 |
| 88 |
| | 2 |
| | 2.69 |
| | 33 |
| | — |
| | 0.83 |
| | 32 |
| | — |
| | 0.44 |
|
Loans to other FHLBanks | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4 |
| | — |
| | 0.13 |
| 1 |
| | — |
| | 1.46 |
| | — |
| | — |
| | — |
| | 3 |
| | — |
| | 0.41 |
|
Total interest-earning assets | 105,408 |
| | 957 |
| | 0.91 |
| | 100,994 |
| | 908 |
| | 0.90 |
| | 93,513 |
| | 900 |
| | 0.96 |
| 105,253 |
| | 2,381 |
| | 2.26 |
| | 101,654 |
| | 1,608 |
| | 1.58 |
| | 105,208 |
| | 1,223 |
| | 1.16 |
|
Less: allowance for credit losses on mortgage loans | 2 |
| | | | | | 6 |
| | | | | | 12 |
| | | | | 1 |
| | | | | | 1 |
| | | | | | 1 |
| | | | |
Other assets | 163 |
| | | | | | 169 |
| | | | | | 190 |
| | | | | 288 |
| | | | | | 264 |
| | | | | | 218 |
| | | | |
Total assets | $ | 105,569 |
| | | | | | $ | 101,157 |
| | | | | | $ | 93,691 |
| | | | | $ | 105,540 |
| | | | | | $ | 101,917 |
| | | | | | $ | 105,425 |
| | | | |
Liabilities and Capital | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Term deposits | $ | 132 |
| | — |
| | 0.20 |
| | $ | 93 |
| | — |
| | 0.19 |
| | $ | 120 |
| | — |
| | 0.17 |
| $ | 77 |
| | 1 |
| | 1.78 |
| | $ | 76 |
| | 1 |
| | 0.72 |
| | $ | 100 |
| | — |
| | 0.35 |
|
Other interest bearing deposits (5) | 704 |
| | — |
| | 0.01 |
| | 753 |
| | — |
| | 0.01 |
| | 955 |
| | — |
| | 0.01 |
| 747 |
| | 13 |
| | 1.69 |
| | 621 |
| | 4 |
| | 0.68 |
| | 734 |
| | 1 |
| | 0.13 |
|
Discount Notes | 52,706 |
| | 65 |
| | 0.12 |
| | 35,992 |
| | 28 |
| | 0.08 |
| | 34,574 |
| | 37 |
| | 0.11 |
| 49,185 |
| | 915 |
| | 1.86 |
| | 43,124 |
| | 385 |
| | 0.89 |
| | 49,835 |
| | 174 |
| | 0.35 |
|
Unswapped fixed-rate Bonds | 26,425 |
| | 528 |
| | 2.00 |
| | 25,605 |
| | 519 |
| | 2.03 |
| | 23,117 |
| | 488 |
| | 2.11 |
| 26,618 |
| | 554 |
| | 2.08 |
| | 26,768 |
| | 527 |
| | 1.97 |
| | 26,549 |
| | 532 |
| | 2.00 |
|
Unswapped adjustable-rate Bonds | 13,385 |
| | 21 |
| | 0.15 |
| | 29,355 |
| | 33 |
| | 0.11 |
| | 24,319 |
| | 35 |
| | 0.14 |
| 16,967 |
| | 317 |
| | 1.87 |
| | 18,500 |
| | 185 |
| | 1.00 |
| | 14,512 |
| | 84 |
| | 0.58 |
|
Swapped Bonds | 6,504 |
| | 19 |
| | 0.29 |
| | 3,721 |
| | 7 |
| | 0.20 |
| | 4,673 |
| | 7 |
| | 0.15 |
| 5,917 |
| | 80 |
| | 1.36 |
| | 7,099 |
| | 75 |
| | 1.05 |
| | 7,973 |
| | 66 |
| | 0.83 |
|
Mandatorily redeemable capital stock | 61 |
| | 2 |
| | 4.00 |
| | 105 |
| | 4 |
| | 4.01 |
| | 139 |
| | 5 |
| | 3.95 |
| 30 |
| | 2 |
| | 6.00 |
| | 46 |
| | 2 |
| | 5.42 |
| | 88 |
| | 3 |
| | 4.01 |
|
Other borrowings | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4 |
| | — |
| | 0.12 |
| — |
| | — |
| | 1.81 |
| | 1 |
| | — |
| | 1.17 |
| | — |
| | — |
| | 0.37 |
|
Total interest-bearing liabilities | 99,917 |
| | 635 |
| | 0.64 |
| | 95,624 |
| | 591 |
| | 0.62 |
| | 87,901 |
| | 572 |
| | 0.65 |
| 99,541 |
| | 1,882 |
| | 1.89 |
| | 96,235 |
| | 1,179 |
| | 1.22 |
| | 99,791 |
| | 860 |
| | 0.86 |
|
Non-interest bearing deposits | — |
| | | | | | 4 |
| | | | | | 18 |
| | | | | 4 |
| | | | | | 2 |
| | | | | | 1 |
| | | | |
Other liabilities | 578 |
| | | | | | 573 |
| | | | | | 651 |
| | | | | 599 |
| | | | | | 582 |
| | | | | | 618 |
| | | | |
Total capital | 5,074 |
| | | | | | 4,956 |
| | | | | | 5,121 |
| | | | | 5,396 |
| | | | | | 5,098 |
| | | | | | 5,015 |
| | | | |
Total liabilities and capital | $ | 105,569 |
| | | | | | $ | 101,157 |
| | | | | | $ | 93,691 |
| | | | | $ | 105,540 |
| | | | | | $ | 101,917 |
| | | | | | $ | 105,425 |
| | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest rate spread | | | | | 0.27 | % | | | | | | 0.28 | % | | | | | | 0.31 | % | | | | | 0.37 | % | | | | | | 0.36 | % | | | | | | 0.30 | % |
Net interest income and net interest margin (6) | | | $ | 322 |
| | 0.31 | % | | | | $ | 317 |
| | 0.31 | % | | | | $ | 328 |
| | 0.35 | % | | | $ | 499 |
| | 0.47 | % | | | | $ | 429 |
| | 0.42 | % | | | | $ | 363 |
| | 0.35 | % |
Average interest-earning assets to interest-bearing liabilities | | | | | 105.50 | % | | | | | | 105.62 | % | | | | | | 106.38 | % | | | | | 105.74 | % | | | | | | 105.63 | % | | | | | | 105.43 | % |
| |
(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 (reversal)/provision for credit losses as a percentage of average total interest earning assets. |
2015 Versus 2014.Rates on short-term interest-earningand adjustable-rate assets and liabilities rose because average short-term interestmore substantially than longer-term rates were slightly higher in 2015. The average rate on mortgage-backed securities also rose nominally2018 and 2017 due to a changethe increases in composition. However,short-term LIBOR and the Federal funds target rate. The result was increases in the average rate ofrates on total interest-earning assets increased only 0.01of 0.68 percentage pointpoints in 2015 because of the continued very low interest rate environment2018 compared to 2017 and higher net amortization.0.42 percentage points in 2017 over 2016.
The average rate on total interest-bearing liabilities increased marginally due to modest increases in short-term interest rates that were partially offset by lower average long-term rates, more favorable funding spreads to market rates, and the transition of a large amount of LIBOR-indexed funding into lower-cost Discount Notes funding.
The net interest spread and net interest margin remained stable asincrease in the higher recognition of mortgage premium amortization was offset by the net other components of net interest rate spread discussed in the previous section.
2014 Versus 2013. The net interest spreadboth 2018 and net interest margin decreased2017 was due to an increase in Advances balances and, secondarily, to the net effect of the otherfavorable earnings factors discussed in the previous section. Although the Advance growth increasedThe increase in net interest income because of a larger asset base, the growth lowered the spreadmargin in 2018 and margin because Advances tend to have narrower spreads to2017 was also driven by higher earnings from funding costs compared to mortgage assets.assets with interest-free capital.
The decline in the average rate on total earning assets and total interest-bearing liabilities resulted from the continued low rate environment and an increase in the balance sheet composition of instruments (due to the Advance growth) that tend to carry lower interest rates. The low rate environment particularly resulted in a decline in the average rate of long-term assets (such as certain Advances and mortgage loans held for portfolio) and long-term liabilities (unswapped fixed-rate Bonds). This is because a substantial portion of the principal paid down on these assets and liabilities, which had higher rates, was replaced with new assets and liabilities at lower rates.
Rates on short-term assets (Federal funds sold and securities sold under resale agreements) and liabilities (short-term borrowings and unswapped adjustable-rate Bonds) decreased slightly in 2014 as the low-rate rate environment continued.
Volume/Rate Analysis
Changes in both average balances (volume) and interest rates influence changes in net interest income. Theincome, as shown in the following table summarizes these changes and trends in interest income and interest expense.table.
| | (In millions) | 2015 over 2014 | | 2014 over 2013 | 2018 over 2017 | | 2017 over 2016 |
| 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 | $ | 19 |
| | $ | 32 |
| | $ | 51 |
| | $ | 25 |
| | $ | (15 | ) | | $ | 10 |
| $ | (30 | ) | | $ | 534 |
| | $ | 504 |
| | $ | (14 | ) | | $ | 332 |
| | $ | 318 |
|
Mortgage loans held for portfolio | 27 |
| | (18 | ) | | 9 |
| | (10 | ) | | (22 | ) | | (32 | ) | 16 |
| | 8 |
| | 24 |
| | 28 |
| | 8 |
| | 36 |
|
Federal funds sold and securities purchased under resale agreements | 1 |
| | 6 |
| | 7 |
| | 1 |
| | (2 | ) | | (1 | ) | 37 |
| | 97 |
| | 134 |
| | (9 | ) | | 59 |
| | 50 |
|
Interest-bearing deposits in banks | (2 | ) | | 1 |
| | (1 | ) | | 1 |
| | — |
| | 1 |
| 22 |
| | 13 |
| | 35 |
| | (4 | ) | | 4 |
| | — |
|
Mortgage-backed securities | (20 | ) | | 3 |
| | (17 | ) | | 28 |
| | 2 |
| | 30 |
| |
MBS | | 23 |
| | 51 |
| | 74 |
| | (7 | ) | | (12 | ) | | (19 | ) |
Other investments | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| 1 |
| | 1 |
| | 2 |
| | — |
| | — |
| | — |
|
Loans to other FHLBanks | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total | 25 |
| | 24 |
| | 49 |
| | 45 |
| | (37 | ) | | 8 |
| 69 |
| | 704 |
| | 773 |
| | (6 | ) | | 391 |
| | 385 |
|
Increase (decrease) in interest expense | | | | | | | | | | | | | | | | | | | | | | |
Term deposits | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | 1 |
| | 1 |
|
Other interest-bearing deposits | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| 1 |
| | 8 |
| | 9 |
| | — |
| | 3 |
| | 3 |
|
Discount Notes | 16 |
| | 21 |
| | 37 |
| | 1 |
| | (10 | ) | | (9 | ) | 61 |
| | 469 |
| | 530 |
| | (26 | ) | | 237 |
| | 211 |
|
Unswapped fixed-rate Bonds | 17 |
| | (8 | ) | | 9 |
| | 51 |
| | (20 | ) | | 31 |
| (3 | ) | | 30 |
| | 27 |
| | 4 |
| | (9 | ) | | (5 | ) |
Unswapped adjustable-rate Bonds | (22 | ) | | 10 |
| | (12 | ) | | 7 |
| | (9 | ) | | (2 | ) | (17 | ) | | 149 |
| | 132 |
| | 27 |
| | 74 |
| | 101 |
|
Swapped Bonds | 7 |
| | 5 |
| | 12 |
| | (2 | ) | | 2 |
| | — |
| (14 | ) | | 19 |
| | 5 |
| | (8 | ) | | 17 |
| | 9 |
|
Mandatorily redeemable capital stock | (2 | ) | | — |
| | (2 | ) | | (1 | ) | | — |
| | (1 | ) | — |
| | — |
| | — |
| | (2 | ) | | 1 |
| | (1 | ) |
Other borrowings | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total | 16 |
| | 28 |
| | 44 |
| | 56 |
| | (37 | ) | | 19 |
| 28 |
| | 675 |
| | 703 |
| | (5 | ) | | 324 |
| | 319 |
|
Increase (decrease) in net interest income | $ | 9 |
| | $ | (4 | ) | | $ | 5 |
| | $ | (11 | ) | | $ | — |
| | $ | (11 | ) | $ | 41 |
| | $ | 29 |
| | $ | 70 |
| | $ | (1 | ) | | $ | 67 |
| | $ | 66 |
|
| |
(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 derivativesimpact on net interest income.income from the effect of derivatives and hedging activities. For derivatives designated as a fair value hedge, the net interest settlements of interest receivables or payables related to such derivatives are recognized as adjustments to the interest income or expense of the designated hedged item. The effect on earnings from the non-interestother components of derivatives, related toincluding market value adjustments and net interest settlements on derivatives not receiving hedge accounting, is provided in “Non-Interest Income and Non-Interest Expense.”
| | (In millions)
| 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 |
Advances: | | | | | | | | | | |
Amortization of hedging activities in net interest income | $ | (3 | ) | | $ | (3 | ) | | $ | (3 | ) | $ | (1 | ) | | $ | (2 | ) | | $ | (3 | ) |
Net interest settlements included in net interest income | (84 | ) | | (91 | ) | | (107 | ) | 24 |
| | (18 | ) | | (60 | ) |
Mortgage loans: | | | | | | | | | | |
Amortization of derivative fair value adjustments in net interest income | (4 | ) | | (4 | ) | | (2 | ) | (1 | ) | | (3 | ) | | (7 | ) |
Consolidated Obligation Bonds: | | | | | | | | | | |
Net interest settlements included in net interest income | 20 |
| | 18 |
| | 27 |
| (3 | ) | | (1 | ) | | 8 |
|
Decrease to net interest income | $ | (71 | ) | | $ | (80 | ) | | $ | (85 | ) | |
Increase (decrease) to net interest income | | $ | 19 |
| | $ | (24 | ) | | $ | (62 | ) |
Most of our use of derivatives synthetically convert the intermediate- and long-term fixed interest rates on certain Advances and Bonds to adjustable-couponadjustable 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. The usepositive net effect of derivatives loweredon net interest income in each period2018 was primarily because the Advances that were swappeddue to increases in short-term LIBOR, hadwhich resulted in higher net interest settlements received on certain Advances where the fixed interest rates thanwere converted to adjustable-coupon rates. The fluctuation in earnings from the Bonds
that were swapped to short-term LIBOR. We accepted this reduction in earningsderivatives was acceptable because it enabled us as we designed, to significantly lower market risk exposure by creating a much closer match ofmatching actual cash flows between assets and liabilities more closely than would occur otherwise. The reduction in earnings was similar in 2015, 2014, and 2013.otherwise occur.
Provision for Credit Losses
In 2015 and 2014, delinquency trends in the MPP continued to decrease while home prices were relatively steady, resulting inThere was no provision for estimated incurred credit losses in 20152018 and 2016. In 2017, we recorded a $0.5 million reversal for estimated incurred credit losses in 2014. 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 is inthe third quarter of 2017. 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) | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 |
Non-interest income | | | | | | |
Net gains on derivatives and hedging activities | $ | 13 |
| | $ | 7 |
| | $ | 8 |
| |
Non-interest income (loss) | | | | | | |
Net realized gains from sale of held-to-maturity securities | | $ | — |
| | $ | — |
| | $ | 39 |
|
Net losses on derivatives and hedging activities | | (41 | ) | | (24 | ) | | (47 | ) |
Net (losses) gains on financial instruments held under fair value option | | (14 | ) | | 10 |
| | 40 |
|
Other non-interest income, net | 17 |
| | 16 |
| | 12 |
| 18 |
| | 13 |
| | 14 |
|
Total non-interest income | $ | 30 |
| | $ | 23 |
| | $ | 20 |
| |
Total non-interest income (loss) | | $ | (37 | ) | | $ | (1 | ) | | $ | 46 |
|
Non-interest expense | | | | | | | | | | |
Compensation and benefits | $ | 40 |
| | $ | 37 |
| | $ | 34 |
| $ | 46 |
| | $ | 42 |
| | $ | 38 |
|
Other operating expense | 22 |
| | 17 |
| | 17 |
| 20 |
| | 19 |
| | 26 |
|
Finance Agency | 7 |
| | 7 |
| | 5 |
| 7 |
| | 7 |
| | 6 |
|
Office of Finance | 4 |
| | 4 |
| | 5 |
| 5 |
| | 4 |
| | 4 |
|
Litigation settlement | | — |
| | — |
| | 25 |
|
Other | 2 |
| | 3 |
| | 3 |
| 7 |
| | 7 |
| | 12 |
|
Total non-interest expense | $ | 75 |
| | $ | 68 |
| | $ | 64 |
| $ | 85 |
| | $ | 79 |
| | $ | 111 |
|
Average total assets | $ | 105,569 |
| | $ | 101,157 |
| | $ | 93,691 |
| $ | 105,540 |
| | $ | 101,917 |
| | $ | 105,425 |
|
Average regulatory capital | 5,150 |
| | 5,069 |
| | 5,271 |
| 5,442 |
| | 5,157 |
| | 5,115 |
|
Total non-interest expense to average total assets (1) | 0.07 | % | | 0.07 | % | | 0.07 | % | 0.08 | % | | 0.08 | % | | 0.11 | % |
Total non-interest expense to average regulatory capital (1) | 1.47 |
| | 1.35 |
| | 1.22 |
| 1.56 |
| | 1.53 |
| | 2.17 |
|
| |
(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-interest income increased(loss) decreased $36 million in 20152018 compared to 20142017, primarily from larger gainsdue to derivatives and hedging activities. The table below presents further information on the net effect of derivatives and hedging activities in 2015 compared to 2014, as presented in the table below.on non-interest income. The changeincrease in non-interest expense in 2015 resulted primarily from2018 compared to 2017 was driven in part by higher legal fees and compensation and benefits.benefit expenses.
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) | 2018 |
| Advances | | Investment Securities | | Mortgage Loans | | Consolidated Obligation Bonds | | Balance Sheet (1) | | Total |
Net effect of derivatives and hedging activities | | | | | | | | | | | |
Gains (losses) on fair value hedges | $ | 2 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 2 |
|
Gains (losses) on derivatives not receiving hedge accounting | 1 |
| | (9 | ) | | (1 | ) | | 18 |
| | (6 | ) | | 3 |
|
Net interest settlements on derivatives not receiving hedge accounting | — |
| | — |
| | — |
| | (46 | ) | | — |
| | (46 | ) |
Net gains (losses) on derivatives and hedging activities | 3 |
| | (9 | ) | | (1 | ) | | (28 | ) | | (6 | ) | | (41 | ) |
Gains (losses) on trading securities (2) | — |
| | 7 |
| | — |
| | — |
| | — |
| | 7 |
|
Gains (losses) on financial instruments held under fair value option (3) | — |
| | — |
| | — |
| | (14 | ) | | — |
| | (14 | ) |
Total net effect on non-interest income | $ | 3 |
| | $ | (2 | ) | | $ | (1 | ) | | $ | (42 | ) | | $ | (6 | ) | | $ | (48 | ) |
|
| | | | | | | | | | | |
(In millions) | 2015 | | 2014 | | 2013 |
Net gains on derivatives and hedging activities | | | | | |
Advances: | | | | | |
Gains on fair value hedges | $ | 2 |
| | $ | 5 |
| | $ | 10 |
|
Gains on derivatives not receiving hedge accounting | 1 |
| | — |
| | 5 |
|
Mortgage loans: | | | | | |
Gains (losses) on derivatives not receiving hedge accounting | 1 |
| | — |
| | (11 | ) |
Consolidated Obligation Bonds: | | | | | |
Gains on fair value hedges | 1 |
| | — |
| | 1 |
|
Gains on derivatives not receiving hedge accounting | 8 |
| | 2 |
| | 3 |
|
Total net gains on derivatives and hedging activities | 13 |
| | 7 |
| | 8 |
|
Net gains on financial instruments held at fair value (1) | 1 |
| | 2 |
| | — |
|
Total net effect of derivatives and hedging activities | $ | 14 |
| | $ | 9 |
| | $ | 8 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | 2017 |
| Advances | | Mortgage Loans | | Consolidated Obligation Bonds | | Balance Sheet (1) | | Other (4) | | Total |
Net effect of derivatives and hedging activities | | | | | | | | | | | |
Gains (losses) on fair value hedges | $ | (1 | ) | | $ | — |
| | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Gains (losses) on derivatives not receiving hedge accounting | 2 |
| | 4 |
| | (6 | ) | | (17 | ) | | — |
| | (17 | ) |
Net interest settlements on derivatives not receiving hedge accounting | (1 | ) | | — |
| | (7 | ) | | — |
| | — |
| | (8 | ) |
Price alignment amount | — |
| | — |
| | — |
| | — |
| | 1 |
| | 1 |
|
Net gains (losses) on derivatives and hedging activities | — |
| | 4 |
| | (12 | ) | | (17 | ) | | 1 |
| | (24 | ) |
Gains (losses) 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 (losses) on fair value hedges | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1 |
|
Gains (losses) on derivatives not receiving hedge accounting | 1 |
| | 3 |
| | (70 | ) | | 6 |
| | (60 | ) |
Net interest settlements on derivatives not receiving hedge accounting | (1 | ) | | — |
| | 13 |
| | — |
| | 12 |
|
Net gains (losses) on derivatives and hedging activities | 1 |
| | 3 |
| | (57 | ) | | 6 |
| | (47 | ) |
Gains (losses) on financial instruments held under fair value option (3) | — |
| | — |
| | 40 |
| | — |
| | 40 |
|
Total net effect on non-interest income | $ | 1 |
| | $ | 3 |
| | $ | (17 | ) | | $ | 6 |
| | $ | (7 | ) |
| |
(1) | Balance sheet includes swaptions, which are not designated as hedging a specific financial instrument. |
| |
(2) | Includes only those gains (losses) on trading securities that have an assigned economic derivative; therefore, this line item may not agree to the Statement of Income. |
| |
(3) | Includes only those gains or losses on financial instruments held at fair value that have an economic derivative "assigned." |
| |
(4) | Other includes the price alignment amount on derivatives for which variation margin is characterized as a daily settled contract. |
The amountstotal amount of income volatility in derivatives and hedging activities were modest compared to the notional principal amounts, well within the range of normal historical fluctuation,during 2018, 2017, and 2016 was moderate and consistent with the close hedging relationships of our derivative transactions. The higher net losses in 2018 compared to 2017 and 2016 were primarily the result of increases in short-term LIBOR, which drove larger net interest settlement payments associated with certain Bonds where the fixed interest rates were converted to adjustable rates. The fluctuation in net interest settlements was acceptable because it enabled us to lower market risk exposure by matching actual cash flows between assets and liabilities more closely than would otherwise occur. The volatility in each of the periods was also a result of 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 2015's2018's quarterly ROE and provides quarterly ROE for 20142017 and 2013.2016.
|
| | | | | | | | | | |
| 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | Total |
Components of 2015 ROE: | | | | | |
Net interest income: | | | | | |
Other net interest income | 6.84 | % | 6.80 | % | 6.89 | % | 6.98 | % | 6.88 | % |
Net amortization | (0.61 | ) | (0.07 | ) | (0.93 | ) | (0.70 | ) | (0.58 | ) |
Prepayment fees | 0.08 |
| 0.02 |
| 0.03 |
| 0.08 |
| 0.05 |
|
Total net interest income | 6.31 |
| 6.75 |
| 5.99 |
| 6.36 |
| 6.35 |
|
Reversal for credit losses | — |
| — |
| — |
| — |
| — |
|
Net interest income after reversal for credit losses | 6.31 |
| 6.75 |
| 5.99 |
| 6.36 |
| 6.35 |
|
Net gains on derivatives and hedging activities | 0.43 |
| 0.18 |
| 0.42 |
| — |
| 0.26 |
|
Other non-interest income | 0.23 |
| 0.26 |
| 0.31 |
| 0.52 |
| 0.33 |
|
Total non-interest income | 0.66 |
| 0.44 |
| 0.73 |
| 0.52 |
| 0.59 |
|
Total revenue | 6.97 |
| 7.19 |
| 6.72 |
| 6.88 |
| 6.94 |
|
Total non-interest expense | 1.44 |
| 1.51 |
| 1.46 |
| 1.53 |
| 1.49 |
|
Assessments | 0.56 |
| 0.58 |
| 0.53 |
| 0.54 |
| 0.55 |
|
2015 ROE | 4.97 | % | 5.10 | % | 4.73 | % | 4.81 | % | 4.90 | % |
| | | | | |
2014 ROE | 4.51 | % | 5.00 | % | 5.07 | % | 5.14 | % | 4.93 | % |
| | | | | |
2013 ROE | 5.49 | % | 4.80 | % | 5.37 | % | 4.78 | % | 5.10 | % |
|
| | | | | | | | | | |
| 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | Total |
Components of 2018 ROE: | | | | | |
Net interest income: | | | | | |
Other net interest income | 9.19 | % | 9.65 | % | 10.09 | % | 9.24 | % | 9.54 | % |
Net amortization | (0.31 | ) | (0.31 | ) | (0.33 | ) | (0.31 | ) | (0.31 | ) |
Prepayment fees | — |
| 0.03 |
| — |
| 0.01 |
| 0.01 |
|
Total net interest income | 8.88 |
| 9.37 |
| 9.76 |
| 8.94 |
| 9.24 |
|
Net (losses) gains on derivatives and hedging activities | (1.98 | ) | (0.84 | ) | (0.66 | ) | 0.47 |
| (0.75 | ) |
Other non-interest income (loss) | 1.69 |
| (0.09 | ) | (0.01 | ) | (1.30 | ) | 0.07 |
|
Total non-interest (loss) income | (0.29 | ) | (0.93 | ) | (0.67 | ) | (0.83 | ) | (0.68 | ) |
Total income | 8.59 |
| 8.44 |
| 9.09 |
| 8.11 |
| 8.56 |
|
Total non-interest expense | 1.66 |
| 1.60 |
| 1.45 |
| 1.55 |
| 1.57 |
|
Affordable Housing Program assessments | 0.70 |
| 0.69 |
| 0.77 |
| 0.66 |
| 0.70 |
|
2018 ROE | 6.23 | % | 6.15 | % | 6.87 | % | 5.90 | % | 6.29 | % |
| | | | | |
2017 ROE | 5.25 | % | 6.94 | % | 5.97 | % | 6.42 | % | 6.15 | % |
| | | | | |
2016 ROE | 4.50 | % | 4.93 | % | 4.82 | % | 7.15 | % | 5.35 | % |
The moderate volatility in quarterly ROEsROE during 2018 and 2017 was primarily driven by unrealized gains and losses related to the net effect of derivatives and hedging activities. ROE in 2015the first three quarters of 2018 and 2017 was higher than the first three quarters of 2016 primarily due to lower net amortization of premiums and discounts related to mortgage assets and Consolidated Obligations, and higher earnings from capital. Additionally, ROE in 2017 was higher than the first three quarters of 2016 as a result of higher net spreads earned on short-term and LIBOR indexed assets. ROE in the fourth quarter of 2016 included gains on derivatives and hedging activities, and gains on financial instruments held at fair value, which are included in other non-interest income. Quarterly ROEs in 2014 and 2013 had similar levelsfrom the sale of volatility as experienced in 2015.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 |
2015 | | | | | |
Net interest income after reversal for credit losses | $ | 250 |
| | $ | 72 |
| | $ | 322 |
|
Net income | $ | 192 |
| | $ | 57 |
| | $ | 249 |
|
Average assets | $ | 97,932 |
| | $ | 7,637 |
| | $ | 105,569 |
|
Assumed average capital allocation | $ | 4,707 |
| | $ | 367 |
| | $ | 5,074 |
|
Return on average assets (1) | 0.20 | % | | 0.74 | % | | 0.24 | % |
Return on average equity (1) | 4.08 | % | | 15.41 | % | | 4.90 | % |
| | | | | |
2014 | | | | | |
Net interest income after reversal for credit losses | $ | 238 |
| | $ | 79 |
| | $ | 317 |
|
Net income | $ | 181 |
| | $ | 63 |
| | $ | 244 |
|
Average assets | $ | 94,333 |
| | $ | 6,824 |
| | $ | 101,157 |
|
Assumed average capital allocation | $ | 4,622 |
| | $ | 334 |
| | $ | 4,956 |
|
Return on average assets (1) | 0.19 | % | | 0.93 | % | | 0.24 | % |
Return on average equity (1) | 3.91 | % | | 18.96 | % | | 4.93 | % |
| | | | | |
2013 | | | | | |
Net interest income after reversal for credit losses | $ | 229 |
| | $ | 106 |
| | $ | 335 |
|
Net income | $ | 184 |
| | $ | 77 |
| | $ | 261 |
|
Average assets | $ | 86,609 |
| | $ | 7,082 |
| | $ | 93,691 |
|
Assumed average capital allocation | $ | 4,733 |
| | $ | 388 |
| | $ | 5,121 |
|
Return on average assets (1) | 0.21 | % | | 1.09 | % | | 0.28 | % |
Return on average equity (1) | 3.88 | % | | 20.00 | % | | 5.10 | % |
|
| | | | | | | | | | | |
| | | | | |
(Dollars in millions) | Traditional Member Finance | | MPP | | Total |
2018 | | | | | |
Net interest income after provision for credit losses | $ | 390 |
| | $ | 109 |
| | $ | 499 |
|
Net income | $ | 255 |
| | $ | 84 |
| | $ | 339 |
|
Average assets | $ | 93,531 |
| | $ | 12,009 |
| | $ | 105,540 |
|
Assumed average capital allocation | $ | 4,781 |
| | $ | 615 |
| | $ | 5,396 |
|
Return on average assets (1) | 0.27 | % | | 0.70 | % | | 0.32 | % |
Return on average equity (1) | 5.34 | % | | 13.65 | % | | 6.29 | % |
| | | | | |
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 | % |
| |
(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
20152018 Versus 2014.2017:The increase in net income in 2018 compared to 2017 was due primarily to higher earnings from funding assets with interest-free capital, the growth in investment balances and higher spreads earned on Advances primarily from lower funding costs as a result of using more Discount Notes, growth in average Advance balances, and larger unrealized net gains on derivatives and hedging activities. These itemsMBS. However, these positive factors were partially offset by lower spreads on liquidity investments and lower average balances on mortgage-backed securities.Advance balances.
20142017 Versus 2013.2016:The increase in net interest income in 2017 compared to 2016 was due primarily to Advance growth, an increase in mortgage-backed securities leverage, and a decrease inlower net amortization expenseand higher spreads earned on short-term and LIBOR-indexed Advances as discussed in the "Components of mortgage-backed securities. However, net income decreased as theseNet Interest Income" section above. These positive factors were more thanpartially offset by a decrease in unrealized net gainslower spreads on derivatives and hedging activities. Despite the decrease in net income, ROE increased slightly in 2014 primarily due to a lower amount of capital.MBS.
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.
2018 Versus 2017:The MPP continued to earn a substantial level of profitability compared to market interest rates, with a moderate amount of market risk and smalla minimal amount of credit risk. In 2015,2018, the MPP averaged seven11 percent of total average assets while accounting for 2325 percent of earnings.
2015 Versus 2014.Net income increased in 2018 compared to 2017 primarily due to the rising interest income decreased resulting from higher net amortization expenserate environment and the continued paydown of higher-yielding mortgage assets and low-cost debt, which were partially offset by growth in average MPP balances.
20142017 Versus 2013.2016: Net interest income decreased resulting from higher netincreased in 2017 compared to 2016 primarily due to lower amortization expense, smaller reversals of MPP credit losses, management actions to extend debt maturities, run-off of higher yielding MPPpurchased premiums on mortgage loans and lowerconcession fees on Consolidated Obligations and the positive impact from growth in average MPP balances. NetThe increase in net income decreased by a smaller amount because the factors above werewas partially offset by lower spreads earned on MPP, as a small gain in 2014, comparedresult of actions taken to reduce market risk exposure, and losses in 2013, on derivatives and hedging activities.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT RISK MANAGEMENT
Overview
We face various risks that could affect the ability to achieve our mission and corporate objectives. We generally categorize risks as: 1) business/strategic risk, 2) regulatory/legislativelegal risk, 3) market risk (also referred to as interest rate or prepayment risk), 4) credit risk, 5) capital adequacy (capital risk), 6) funding/liquidity risk, 7) accounting risk, and 8)7) operational risk. Our Board of Directors establishes objectives regarding risk philosophy, risk appetite, risk tolerances, and financial performance expectations. Market, capital, credit, liquidity, concentration, and operational risks are discussed below. Other risks are discussed throughout this filing.report.
We strive to maintain a risk profile that ensures we operate safely and soundly, promotes prudent growth in Mission Asset Activity, consistently generates competitive earnings, and protects the par value of members' capital stock investment. We believe our business is financially sound and adequately capitalized on a risk-adjusted basis.
We practice this conservative risk philosophy in many ways:
| |
▪ | We operate with moderate market risk and limited residual credit risk, liquidity risk, operational risk, and capital impairment risk. |
| |
▪ | We have a prioritybusiness objective to ensure competitive and relatively stable profitability. |
| |
▪ | We make conservative investment choices in terms of the types of investments we purchase and counterparties with which we engage. |
| |
▪ | We use derivatives to hedge individual assets and liabilities and to help hedgereduce market risk exposure. |
| |
▪ | We maintain a prudent amount of financial leverage. |
| |
▪ | We are judicious in instituting regular, large-scale, district-wide repurchases of excess stock. |
| |
▪ | We have significantly increased retained earnings in recent years and hold an amount of retained earnings that we believe is consistent with protectingwill protect the par value of capital stock and providingprovide for dividend stabilization. |
| |
▪ | We create a working and operating environment that emphasizes a stable employee base. |
We have numerous Board-adopted policies and processes that address risk management including risk appetite, tolerances, limits, guidelines, and regulatory compliance. Our cooperative business model, corporate objectives, capital structure, and regulatory oversight provide us clear incentives to minimize risk exposures. Our policies and operating practices are designed to limit risk exposures from ongoing operations in the following broad ways:
| |
▪ | by anticipating potential business risks and developing appropriate responses; |
| |
▪ | by defining permissible lines of business; |
| |
▪ | by limiting the kinds of assets we are permitted to hold in terms of their credit risk exposure and the kinds of hedging and financing arrangements we are permitted to use; |
| |
▪ | by limiting the amount of market risk and capital risk to which we are permitted to be exposed; |
| |
▪ | by specifying very conservative tolerances for credit risk posed by Advances; |
| |
▪ | by specifying capital adequacy minimums; and |
| |
▪ | by requiring strict adherence to internal controls and operating procedures, adequate insurance coverage, and comprehensive Human Resources policies, procedures, and strategies. |
Market Risk
Overview
Market risk exposure is the risk that profitability and the value of stockholders' capital investment may decrease and that profitability may bebecome uncompetitive as a result of changes and volatility in the market environment and economy. Along with business/strategic risk, market risk is normally our largest residual risk.
Our risk appetite is to maintain market risk exposure in a low to moderate range while earning a competitive return on members' capital stock investment. There is normally a tradeoff between long-term market risk exposure and shorter-term exposure. Effective management of both componentseach component is important in order to attract and retain members and capital and to support Mission Asset Activity.
The primary challenges in managing market risk exposure arise from 1) the tradeoff between earning a competitive return and correlating profitability with short-term interest rates and 2) the market risk exposure of owning mortgage assets. Mortgage assets grant homeowners prepayment options that could adversely affect our financial performance when interest rates increase or decrease. We mitigate the market risk of mortgage assets primarily by funding them principally with a portfolio of long-term fixed-rate callable and noncallablenon-callable 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. In 2015, we introduced the use of purchasing options on interest rate swaps (swaptions derivatives) as an additional hedging strategy. Use of these derivatives represent, and will continue to represent, a small component of overall hedging practices.
We analyze market risk using numerous analytical measures under a variety of interest rate and business scenarios, including stressed scenarios, and perform sensitivity analyses on the many variables that can affect market risk, using several market risk models from third-party software companies. These models employ rigorous valuation techniques for the optionality that exists in mortgage prepayments, call and put options, and caps/floors. We regularly assess the effects of different assumptions, techniques and methodologies on the measurements of market risk exposure, including comparisons to alternative models and information from brokers/dealers.
Policy Limits on Market Risk Exposure
We have five sets of policy limits regarding market risk exposure, which primarily measure long-term market risk exposure. We determine compliance with our policy limits at every month end or more frequently if market or business conditions change significantly or are volatile.
| |
▪ | Market Value of Equity Sensitivity. The market value of equity for the entire balance sheet in two hypothetical interest rate scenarios (up 200 basis points and down 200 basis points from the current interest rate environment) must be between positive and negative 10 percent of the current balance sheet's market value of equity. The interest rate |
movements are “shocks,” defined as instantaneous, permanent, and parallel changes in interest rates in which every point on the yield curve is changed by the same amount.
| |
▪ | Duration of Equity. The duration of equity for the entire balance sheet in the current (“flat rate” or “basebase 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 95100 percent in the current rate environment and must be above 9095 percent in each of the two interest rate shock scenarios. |
| |
▪ | Mortgage Assets as a Multiple of Regulatory Capital. The amount of mortgage assets must be less than six times the amount of regulatory capital. |
In addition, Finance Agency regulations and an internal policy provide controls on market risk exposure by restricting the types of mortgage loans, mortgage-backed securities and other investments we can hold. We also manage market risk exposure by charging members prepayment fees on many Advance programs where an early termination of an Advance would result in an economic loss to us.
In practice we carry a substantially smaller amount of market risk exposure by establishing a strategic management range that is well within policy limits.
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.shocks (in basis points). We compiled average results using data for each month end. Given the current very low level of rates, thesome down rate shocks are nonparallel scenarios, with short-term rates decreasing less than long-term rates such that no rate falls below zero.
Market Value of Equity
| | (Dollars in millions) | Down 300 | | Down 200 | | Down 100 | | Flat Rates | | Up 100 | | Up 200 | | Up 300 | Down 300 | | Down 200 | | Down 100 | | Flat Rates | | Up 100 | | Up 200 | | Up 300 |
Average Results | | | | | | | | | | | | | | | | | | | | | | | | | | |
2015 Full Year | | | | | | | | | | | | | | |
2018 Full Year | | | | | | | | | | | | | | |
Market Value of Equity | $ | 4,697 |
| | $ | 4,792 |
| | $ | 4,958 |
| | $ | 4,969 |
| | $ | 4,875 |
| | $ | 4,729 |
| | $ | 4,568 |
| $ | 4,936 |
| | $ | 5,154 |
| | $ | 5,306 |
| | $ | 5,264 |
| | $ | 5,176 |
| | $ | 5,105 |
| | $ | 5,045 |
|
% Change from Flat Case | (5.5 | )% | | (3.6 | )% | | (0.2 | )% | | — |
| | (1.9 | )% | | (4.8 | )% | | (8.1 | )% | (6.2 | )% | | (2.1 | )% | | 0.8 | % | | — |
| | (1.7 | )% | | (3.0 | )% | | (4.2 | )% |
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 | )% |
Month-End Results | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2015 | | | | | | | | | | | | | | |
December 31, 2018 | | | | | | | | | | | | | | |
Market Value of Equity | $ | 4,565 |
| | $ | 4,652 |
| | $ | 4,849 |
| | $ | 4,888 |
| | $ | 4,795 |
| | $ | 4,656 |
| | $ | 4,507 |
| $ | 4,736 |
| | $ | 4,911 |
| | $ | 5,130 |
| | $ | 5,149 |
| | $ | 5,043 |
| | $ | 4,951 |
| | $ | 4,906 |
|
% Change from Flat Case | (6.6 | )% | | (4.8 | )% | | (0.8 | )% | | — |
| | (1.9 | )% | | (4.7 | )% | | (7.8 | )% | (8.0 | )% | | (4.6 | )% | | (0.4 | )% | | — |
| | (2.1 | )% | | (3.8 | )% | | (4.7 | )% |
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 | )% |
Duration of Equity
|
| | | | | | | | | | | | | | | | | | | | |
(In years) | Down 300 | | Down 200 | | Down 100 | | Flat Rates | | Up 100 | | Up 200 | | Up 300 |
Average Results | | | | | | | | | | | | | |
2015 Full Year | (5.7 | ) | | (4.6 | ) | | (1.7 | ) | | 1.0 |
| | 2.8 |
| | 3.4 |
| | 3.5 |
|
2014 Full Year | (3.7 | ) | | (2.1 | ) | | 1.0 | | 2.0 | | 3.0 | | 3.3 | | 3.3 |
Month-End Results | | | | | | | | | | | | | |
December 31, 2015 | (6.9 | ) | | (5.7 | ) | | (2.8 | ) | | 0.6 |
| | 2.8 |
| | 3.3 |
| | 3.2 |
|
December 31, 2014 | (3.8 | ) | | (3.4 | ) | | (0.2 | ) | | 1.0 |
| | 2.6 |
| | 3.5 |
| | 3.7 |
|
|
| | | | | | | | | | | | | | | | | | | | |
(In years) | Down 300 | | Down 200 | | Down 100 | | Flat Rates | | Up 100 | | Up 200 | | Up 300 |
Average Results | | | | | | | | | | | | | |
2018 Full Year | (4.5 | ) | | (4.7 | ) | | (0.9 | ) | | 1.7 |
| | 1.4 |
| | 1.2 |
| | 1.1 |
|
2017 Full Year | (1.7 | ) | | (4.2 | ) | | (3.8 | ) | | 0.4 |
| | 1.6 |
| | 1.4 |
| | 1.4 |
|
Month-End Results | | | | | | | | | | | | | |
December 31, 2018 | (3.8 | ) | | (5.6 | ) | | (2.5 | ) | | 1.2 |
| | 2.0 |
| | 1.0 |
| | 0.6 |
|
December 31, 2017 | (2.0 | ) | | (5.3 | ) | | (4.4 | ) | | 0.5 |
| | 1.5 |
| | 1.4 |
| | 1.5 |
|
During 2015, as in 2014, consistent with our historical practice and risk appetite, we positionedThe overall market risk exposure to higherchanging interest rates was stable, at a moderate level. Market risk exposure to lower rates continued to be slightly favorablelevel, and well within policy limits. The duration of equity provides an estimate of the change in most scenarios unless allmarket value of equity for a 1.00 percentage point further change in interest rates decline to levels at (or near) zero.from the 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. DecreasesLarge decreases in long-term interest rates even upcould substantially decrease profitability in the near term before reverting over time to two percentage points (which would put fixed-rate mortgages below two percent) would still result in profitability being welllevels 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 over the next 12 monthsin a short period of time by fivefour percentage points or more combined with short-term rates increasing toand persist at least seven 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 sufficient net spreads. Sensitivities of the market value of equity allocated to the mortgage assets portfolio under interest rate shocks (in basis points) are shown below. At December 31, 2015, theThe average mortgage assets portfolio had an assumed capital allocation of $1.1$1.3 billion in 2018 based on the entire balance sheet's average 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 | | | | | | | | | | | | | |
2015 Full Year | (33.1 | )% | | (22.7 | )% | | (4.1 | )% | | — | | (8.0 | )% | | (21.3 | )% | | (36.3 | )% |
2014 Full Year | (19.1 | )% | | (3.9 | )% | | 3.6 | % | | — | | (9.7 | )% | | (22.1 | )% | | (35.0 | )% |
Month-End Results | | | | | | | | | | | | | |
December 31, 2015 | (41.7 | )% | | (30.8 | )% | | (6.4 | )% | | — | | (9.6 | )% | | (24.4 | )% | | (40.7 | )% |
December 31, 2014 | (25.0 | )% | | (13.7 | )% | | (1.0 | )% | | — | | (7.9 | )% | | (21.4 | )% | | (36.6 | )% |
|
| | | | | | | | | | | | | | | | | | | |
| Down 300 | | Down 200 | | Down 100 | | Flat Rates | | Up 100 | | Up 200 | | Up 300 |
Average Results | | | | | | | | | | | | | |
2018 Full Year | (35.9 | )% | | (15.2 | )% | | 0.3 | % | | — | | (4.3 | )% | | (7.4 | )% | | (10.0 | )% |
2017 Full Year | (36.1 | )% | | (29.1 | )% | | (6.8 | )% | | — | | (3.8 | )% | | (8.6 | )% | | (12.8 | )% |
Month-End Results | | | | | | | | | | | | | |
December 31, 2018 | (41.2 | )% | | (24.7 | )% | | (3.6 | )% | | — | | (7.0 | )% | | (13.2 | )% | | (15.9 | )% |
December 31, 2017 | (39.4 | )% | | (32.2 | )% | | (8.7 | )% | | — | | (2.4 | )% | | (4.9 | )% | | (7.8 | )% |
The average risk exposure of the mortgage assets portfolio in 2018 remained aligned with our preference to changingkeep our exposure to market risk at a low to moderate level. The variances between periods shown reflect normal changes in the balance sheet composition, and for the down 200 and down 300 shocks, the lower levels of interest rates was similar in 2015 compared to 2014 except in extreme falling rate scenarios where all interest rates are at or marginally above zero. The dollar amount of exposure for any individual rate shock can be obtained by multiplying the percentage change by the assumed equity allocation.2017. We believe the mortgage assetsasset portfolio continuedwill continue to haveprovide an acceptable amount of market risk exposure relative to its actual and expected profitability andadjusted return consistent with our risk appetite philosophy.
Use of Derivatives in Market Risk Management
A key component of hedging market risk exposure is the use of derivatives transactions, as discussed in Item 1 "Business."derivative transactions. The following table presents the notional principal amounts of the derivatives classified by how we designate the hedging relationship. The notional amount of derivatives at December 31, 20152018 decreased by $0.4$0.7 billion (four(five percent) from the end of 2014.2017, driven primarily by normal fluctuations in balance sheet composition.
| | (In millions) | | December 31, 2015 | | December 31, 2014 | | December 31, 2018 | | December 31, 2017 |
Hedged Item/Hedging Instrument | Hedging Objective | Fair Value Hedge | Economic Hedge | | Fair Value Hedge | Economic Hedge | Hedging Objective | Fair Value Hedge | Economic Hedge | | Fair Value Hedge | Economic Hedge |
Advances: | | | | | | | | |
Pay-fixed, receive-float interest rate swap (without options) | Converts the Advance's fixed rate to a variable-rate index. | $ | 3,007 |
| $ | 15 |
| | $ | 1,734 |
| $ | 15 |
| Converts the Advance's fixed rate to a variable-rate index. | $ | 5,408 |
| $ | 10 |
| | $ | 4,686 |
| $ | 15 |
|
Pay-fixed, receive-float interest rate swap (with options) | Converts the Advance's fixed rate to a variable-rate index and offsets option risk in the Advance. | 1,187 |
| 48 |
| | 1,653 |
| 128 |
| Converts the Advance's fixed rate to a variable-rate index and offsets option risk in the Advance. | 493 |
| 150 |
| | 379 |
| 150 |
|
Total Advances | | 4,194 |
| 63 |
| | 3,387 |
| 143 |
| | 5,901 |
| 160 |
| | 5,065 |
| 165 |
|
Investment securities: | | | | | |
Pay-fixed, receive-float interest rate swap (without options) | | Converts the investment security's fixed rate to a variable-rate index. | 52 |
| 222 |
| | — |
| — |
|
Mortgage Loans: | | | | | | | | |
Forward settlement agreement | Protects against changes in market value of fixed-rate Mandatory Delivery Contracts resulting from changes in interest rates. | — |
| 462 |
| | — |
| 439 |
| Protects against changes in market value of fixed-rate Mandatory Delivery Contracts resulting from changes in interest rates. | — |
| 131 |
| | — |
| 212 |
|
Consolidated Obligations Bonds: | | | | | | | | |
Receive-fixed, pay-float interest rate swap (without options) | Converts the Bond's fixed rate to a variable-rate index. | 1,184 |
| 2,494 |
| | 760 |
| 2,215 |
| Converts the Bond's fixed rate to a variable-rate index. | 15 |
| 3,376 |
| | 874 |
| 5,529 |
|
Receive-fixed, pay-float interest rate swap (with options) | Converts the Bond's fixed rate to a variable-rate index and offsets option risk in the Bond. | 170 |
| 162 |
| | 155 |
| 2,277 |
| Converts the Bond's fixed rate to a variable-rate index and offsets option risk in the Bond. | 239 |
| 565 |
| | 54 |
| 95 |
|
Total Consolidated Obligations Bonds | | 1,354 |
| 2,656 |
| | 915 |
| 4,492 |
| | 254 |
| 3,941 |
| | 928 |
| 5,624 |
|
Balance Sheet: | | | | | | | | |
Interest rate swaptions | Provides the option to enter into an interest rate swap to offset interest-rate or prepayment risk. | — |
| 281 |
| | — |
| — |
| Provides the option to enter into an interest rate swap to offset interest-rate or prepayment risk. | — |
| 3,000 |
| | — |
| 2,316 |
|
Stand-Alone Derivatives: | | | | | | | | |
Mandatory Delivery Contracts | Exposure to fair-value risk associated with fixed rate mortgage purchase commitments. | — |
| 450 |
| | — |
| 451 |
| Exposure to fair-value risk associated with fixed rate mortgage purchase commitments. | — |
| 146 |
| | — |
| 219 |
|
Total | | $ | 5,548 |
| $ | 3,912 |
| | $ | 4,302 |
| $ | 5,525 |
| | $ | 6,207 |
| $ | 7,600 |
| | $ | 5,993 |
| $ | 8,536 |
|
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. Our current retained earningsAt December 31, 2018, our capital management policy setsset forth a range of $375$400 million to $600 million as the minimum amount of retained earnings we believe is necessary to mitigate impairment risk and to provide for dividend stability. At stability from factors that could cause earnings to be volatile.
The following table presents retained earnings.December 31, 2015, |
| | | | | | | |
(In millions) | December 31, 2018 | | December 31, 2017 |
Unrestricted retained earnings | $ | 632 |
| | $ | 617 |
|
Restricted retained earnings (1) | 391 |
| | 323 |
|
Total retained earnings | $ | 1,023 |
| | $ | 940 |
|
| |
(1) | Pursuant to the FHLBank System's Joint Capital Enhancement Agreement we are not permitted to distribute as dividends. |
As noted in the $765 milliontable above, our current balance of retained earnings was comprised of $556 million unrestricted (an increase of $27 million from year-end 2014) and $209 million restricted (an increase of $49 million from year-end 2014),exceeds the policy range, which by the FHLBank System's Joint Capital Enhancement Agreement we are not permitted to distribute as dividends.
Due to the regulatory environment and employing abundance of caution, weexpect will continue to carry a greater amount of retained earnings than required bybe the policy and will continue tocase as we bolster capital adequacy over time by allocating a portion of earnings to a separatethe restricted retained earnings account in accordance with the FHLBank System's Joint Capital Enhancement Agreement. We believe that the current amount of retained earnings is sufficient to mitigate members' impairment risk of their capital stock investment and to provide the opportunity to stabilize dividends when profitability may be volatile.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, 2015 | | Monthly Average 2015 | | December 31, 2014 | December 31, 2018 | | Monthly Average 2018 | | December 31, 2017 |
Market risk-based capital | $ | 206 |
| | $ | 155 |
| | $ | 125 |
| $ | 327 |
| | $ | 374 |
| | $ | 421 |
|
Credit risk-based capital | 280 |
| | 253 |
| | 246 |
| 317 |
| | 327 |
| | 261 |
|
Operational risk-based capital | 145 |
| | 122 |
| | 111 |
| 194 |
| | 210 |
| | 204 |
|
Total risk-based capital requirement | 631 |
| | 530 |
| | 482 |
| 838 |
| | 911 |
| | 886 |
|
Total permanent capital | 5,232 |
| | 5,150 |
| | 5,019 |
| 5,366 |
| | 5,442 |
| | 5,211 |
|
Excess permanent capital | $ | 4,601 |
| | $ | 4,620 |
| | $ | 4,537 |
| $ | 4,528 |
| | $ | 4,531 |
| | $ | 4,325 |
|
Risk-based capital as a percent of permanent capital | 12 | % | | 10 | % | | 10 | % | 16 | % | | 17 | % | | 17 | % |
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 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. The amount of required risk-based capital increased at year-end 2015 versus year-end 2014 due to higher MPP balances and changes in interest rate volatility that affected the market risk component.
Dodd-Frank Stress Test
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, all FHLBanks are required to perform an annual stress test for capital adequacy. Our test wasWe completed and published the test in July 2015,November 2018, based on our financial condition as of September 30, 2014December 31, 2017 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.capital, and mandatorily redeemable capital stock. The measures provide a point-in-time indication of the FHLB's liquidation or franchise value and can also serve as a measure of realized or potential market risk exposure.
The following table presents the market value of equity to regulatory capital stock (excluding retained earnings) for several interest rate environments. | | | December 31, 2015 | | Monthly Average Year Ended December 31, 2015 | | December 31, 2014 | December 31, 2018 | | Monthly Average Year Ended December 31, 2018 | | December 31, 2017 |
Market Value of Equity to Par Value of Regulatory Capital Stock - Base Case (Flat Rates) Scenario | 109 | % | | 113 | % | | 114 | % | 119 | % | | 119 | % | | 121 | % |
Market Value of Equity to Par Value of Regulatory Capital Stock - Down Shock (1) | 109 |
| | 113 |
| | 114 |
| 118 |
| | 120 |
| | 119 |
|
Market Value of Equity to Par Value of Regulatory Capital Stock - Up Shock (2) | 104 |
| | 107 |
| | 108 |
| 114 |
| | 115 |
| | 118 |
|
| |
(1) | Represents a down shock of 100 basis points. |
| |
(2) | Represents an up shock of 200 basis points. |
A base case value below par100 percent could indicate that, in the remote event of an immediate liquidation scenario involving redemption of all capital stock, capital stock may be returned to stockholders at a value below par. This could be due to experiencing risks that lower the market value of capital and/or to having an insufficient amount of retained earnings. In 2015,2018, the market capitalization ratios in the scenarios presented continued to be above the minimumour policy limits identified above.requirements. Although the ratios declinedbase case ratio of 119 percent was slightly lower at December 31, 2015the end of 2018 compared to the end of 2014 and average for 2015, they remained acceptable2017, it was well above 100 percent because retained earnings were 1724 percent of regulatory capital stock at December 31, 20152018 and we maintained risk exposures at moderate levels.
The following table presents the market value of equity to the book value of total capital.capital and mandatorily redeemable capital stock.
| | | December 31, 2015 | | Monthly Average Year Ended December 31, 2015 | | December 31, 2014 | December 31, 2018 | | Monthly Average Year Ended December 31, 2018 | | December 31, 2017 |
Market Value of Equity to Book Value of Capital - Base Case (Flat Rates) Scenario (1) | 94 | % | | 97 | % | | 98 | % | 96 | % | | 97 | % | | 99 | % |
Market Value of Equity to Book Value of Capital - Down Shock (1)(2) | 93 |
| | 97 |
| | 99 |
| 96 |
| | 98 |
| | 98 |
|
Market Value of Equity to Book Value of Capital - Up Shock (1)(3) | 89 |
| | 92 |
| | 94 |
| 93 |
| | 94 |
| | 97 |
|
| |
(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 par100 percent 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 parthe book value (i.e., below 100 percent of the total book value).capital. The base-case ratio of 9496 percent at December 31, 20152018 indicates that the market value of total capital is $345$204 million below the parbook value of total capital. In a scenario in which interest rates increase 200 basis points, the market value of total capital would be $577$402 million below the parbook value of total capital, whichcapital. This indicates that capital stock would still be redeemable at par butin a liquidation scenario, stockholders would not receive the full sum of their total equity ownership claims in the FHLB which include both capital stockFHLB. We believe the likelihood of a liquidation scenario is extremely remote; and retained earnings.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 minimal amount of legacy credit risk exposure to the MPP.
Credit Services
Overview: We have policies and practices to manage credit risk exposure from our secured lending activities, which include Advances and Letters of Credit. The objective of our credit risk management is to equalize risk exposure across members and counterparties to a zero level of expected losses, consistent with our conservative risk management principles and desire to have virtually no residual credit risk related to member borrowings.
Collateral: We require each member to provide us a security interest in eligible collateral before it can undertake any secured borrowing. At December 31, 20152018, our policy of over-collateralization resulted in total collateral pledged of $306.5$348.0 billion to serve members' total borrowing capacity of $260.6$283.7 billion. of which $214.0 billion was unused. 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 member is not applied to another member.
The table below shows the total pledged collateral (unadjusted for Collateral Maintenance Requirements)Lendable Value Rates).
| | | December 31, 2015 | | December 31, 2014 | December 31, 2018 | | December 31, 2017 |
(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 | $ | 174.0 |
| | 57 | % | | $ | 140.4 |
| | 55 | % | |
Single family loans | | $ | 204.6 |
| | 59 | % | | $ | 192.3 |
| | 58 | % |
Multi-family loans | 44.9 |
| | 15 |
| | 38.2 |
| | 15 |
| 60.1 |
| | 17 |
| | 59.7 |
| | 18 |
|
Bond securities | 32.9 |
| | 11 |
| | 22.3 |
| | 9 |
| |
Commercial real estate | 31.0 |
| | 10 |
| | 29.5 |
| | 12 |
| 43.3 |
| | 13 |
| | 38.6 |
| | 12 |
|
Home equity loans/lines of credit | 23.1 |
| | 7 |
| | 22.0 |
| | 9 |
| 27.9 |
| | 8 |
| | 24.9 |
| | 8 |
|
Bond Securities | | 11.4 |
| | 3 |
| | 12.5 |
| | 4 |
|
Farm real estate | 0.6 |
| | — |
| | 0.6 |
| | — |
| 0.7 |
| | — |
| | 0.7 |
| | — |
|
Total | $ | 306.5 |
| | 100 | % | | $ | 253.0 |
| | 100 | % | $ | 348.0 |
| | 100 | % | | $ | 328.7 |
| | 100 | % |
At December 31, 2015, 642018, 67 percent of collateral was related to residential mortgage lending in single-family loans and home equity loans/lines of credit. The collateral composition remained consistent with the end of 2014.
We assign each member one of fourthree levels of collateral status: Blanket, Securities, Listing, and Physicalor Delivery. Assignment is based in part on an internala number of factors, including credit rating model that reflects our view of the member's current financial conditionratings, regulatory ratings, problem loan levels and performance.stressed capitalization. Blanket collateral status, which we assign to approximately 9089 percent of borrowers, is the least restrictive status and is available to lower-risk bank and credit union members. Approximately 5361 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. Securities collateral and loan collateral pledged by members in Listing status are subject to a periodic market valuation process.
Under Listing collateral status, a member 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 members 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, members 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: We determine borrowing capacity against pledged collateral by establishing minimum levelsapplying collateral discounts, or haircuts, to the value of over-collateralization (Collateral Maintenance Requirements or CMRs). CMRsthe collateral. These haircuts result in a lendable value, or borrowing capacityLendable 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 members based on the member institution type, the financial strength of the member institution, the levelform of collateral status,valuation, the issuer of bond collateral or the quality of securitized assets, the marketabilityquality 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.the marketability of the pledged assets.
The table below indicates the range of lendable values remaining after the application of CMRsLVRs for each major collateral type pledged at December 31, 2015. These ranges did not change from the end of 2014.2018.
|
| |
| Lending Values Applied to Collateral |
Blanket Status: | |
Prime 1-4 family loans | 67-87%71-83% |
Multi-family loans | 53-77%61-74% |
Prime home equity loans/lines of credit | 57-77%50-57% |
Commercial real estate loans | 61-80%67-83% |
Farm real estate loans | 65-83%61-74% |
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/MBS/collateralized mortgage obligations | 79-98%92-97% |
Private-label residential mortgage-backed securitiesMBS | 43-87%66-91% |
Private-label commercial mortgage-backed securitiesMBS | 33-86%60-90% |
Municipal securities | 25-93%78-94% |
Small Business Administration certificates | 88-93%93-95% |
Prime 1-4 family loans | 67-94%69-87% |
Multi-family loans | 57-87%67-83% |
HomePrime home equity loans/lines of credit | 63-87%65-80% |
Commercial real estate loans | 65-91%71-87% |
Farm real estate loans | 67-91%69-83% |
The ranges of lendable values exclude subprime and nontraditional mortgage loan collateral. Loans pledged by lower risk members 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: We have policies and processes to identify subprime and nontraditional residential mortgage loans pledged by 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.lower LVRs.
Internal Credit Ratings: We perform credit underwriting of our members and nonmember 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, 4) prompt us to more closely and/or frequently monitor the institution, using several established processes, and/or 5) limit the institution's exposure through borrowing restrictions (e.g., maturity restrictions on new Advances or requiring prepaymentsrestrictions on existing Advances)borrowing capacity from higher risk collateral sources).
The following tables show the distribution of internal credit ratings we assigned to member and nonmember borrowers, which we use to help manage credit risk exposure.
| | (Dollars in billions) | (Dollars in billions) | | | | | | | (Dollars in billions) | | | | | | |
December 31, 2015 | | December 31, 2014 | |
December 31, 2018 | | December 31, 2018 | | December 31, 2017 |
| | 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 | | 582 |
| | $ | 251.7 |
| | 1-3 | | 547 |
| | $ | 131.1 |
| | 486 |
| | $ | 272.2 |
| | 1-3 | | 532 |
| | $ | 262.4 |
|
4 | | 85 |
| | 5.2 |
| | 4 | | 107 |
| | 74.9 |
| | 131 |
| | 11.0 |
| | 4 | | 101 |
| | 9.2 |
|
5 | | 29 |
| | 3.6 |
| | 5 | | 37 |
| | 3.6 |
| | 26 |
| | 0.4 |
| | 5 | | 28 |
| | 0.5 |
|
6 | | 8 |
| | 0.1 |
| | 6 | | 14 |
| | 0.2 |
| | 5 |
| | 0.1 |
| | 6 | | 5 |
| | 0.1 |
|
7 | | 7 |
| | — |
| | 7 | | 12 |
| | 0.3 |
| | 7 |
| | — |
| | 7 | | 5 |
| | — |
|
Total | | 711 |
| | $ | 260.6 |
| | Total | | 717 |
| | $ | 210.1 |
| | 655 |
| | $ | 283.7 |
| | Total | | 671 |
| | $ | 272.2 |
|
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, 20152018, 4438 borrowers (six percent of the total) had credit ratings of "5" through "7," a net decrease of 19 fromthe same as the end of 2014.2017. These members had $3.70.5 billion of borrowing capacity at December 31, 20152018. There was a net Additionally, the decrease of 22 members who had a "4" credit rating and a net increase of 35 in members with credit ratings of "1," "2," or "3." These trends indicate"1" through "4" in 2018 was a general improvementresult of the decline in the overall financial conditionnumber of our members duringmembers. We believe the recovery cycle for the overall economy and housing market.credit rating distribution continues to show a financially sound membership base.
Member Failures, Closures, and Receiverships: There were no member failures in 2015.2018.
MPP
Overview.Overview: We believe that theThe residual amount of credit risk exposure to loans in the MPP is 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 small overall amount of delinquencies and defaults when compared to national averages; |
| |
▪ | credit losses totaling $1.9$0.4 million in 20152018 and $16.7$19.0 million oversince the lifeintroduction of the program in 2000, which represent an immaterial percentage of conventional loans' current unpaid principal balances at December 31, 20152018 and of total purchases-to-date for the entire MPP; and |
| |
▪ | in addition to the low program-to-date 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: The following table shows FICO® credit scores of homeowners at origination dates for the conventional loan portfolio.
| | FICO® Score (1) | | December 31, 2015 | | December 31, 2014 | | December 31, 2018 | | December 31, 2017 |
< 620 | | — | % | | — | % | | — | % | | — | % |
620 to < 660 | | 1 |
| | 2 |
| | — |
| | 1 |
|
660 to < 700 | | 7 |
| | 8 |
| | 6 |
| | 6 |
|
700 to < 740 | | 17 |
| | 18 |
| | 17 |
| | 16 |
|
>= 740 | | 75 |
| | 72 |
| | 77 |
| | 77 |
|
| | | | | | | | |
Weighted Average | | 762 |
| | 760 |
| | 765 |
| | 765 |
|
| |
(1) | Represents the FICO® score at origination. |
There was littleminimal change in the distribution of FICO® scores at origination in 20152018 compared to 2014.2017. The distribution of FICO® scores at origination is one indication of the portfolio's overall favorable credit quality. At December 31, 2015, 75 2018, 77
percent of the portfolio had scores at an excellent level of 740 or above and 9294 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, 2015 | | December 31, 2014 | | Loan-to-Value | | December 31, 2015 | | December 31, 2014 | | December 31, 2018 | | December 31, 2017 | | Loan-to-Value | | December 31, 2018 | | December 31, 2017 |
<= 60% | | 16 | % | | 17 | % | | <= 60% | | 33 | % | | 34 | % | | 13 | % | | 14 | % | | <= 60% | | 40 | % | | 41 | % |
> 60% to 70% | | 16 |
| | 16 |
| | > 60% to 70% | | 22 |
| | 25 |
| | 14 |
| | 15 |
| | > 60% to 70% | | 27 |
| | 29 |
|
> 70% to 80% | | 55 |
| | 55 |
| | > 70% to 80% | | 28 |
| | 25 |
| | 58 |
| | 56 |
| | > 70% to 80% | | 27 |
| | 24 |
|
> 80% to 90% | | 8 |
| | 7 |
| | > 80% to 90% | | 13 |
| | 12 |
| | 9 |
| | 9 |
| | > 80% to 90% | | 5 |
| | 5 |
|
> 90% | | 5 |
| | 5 |
| | > 90% to 100% | | 4 |
| | 3 |
| | 6 |
| | 6 |
| | > 90% to 100% | | 1 |
| | 1 |
|
| | | | | | > 100% | | — |
| | 1 |
| | | | | | > 100% | | — |
| | — |
|
Weighted Average | | 72 | % | | 72 | % | | Weighted Average | | 65 | % | | 65 | % | | 74 | % | | 73 | % | | Weighted Average | | 62 | % | | 61 | % |
The levels of loan-to-value ratios in the last several years are consistent with the portfolio's excellent credit quality. At December 31, 2015,2018, we estimated that 17six percent of loans have current loan-to-value ratios above 80 percent, relativelywhich was unchanged compared to the endfrom year-end of 2014.2017.
Based on the available data, we believe we have minimal 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 MPP is concentrated in Ohio, as shown in the following table based on unpaid principal balance.MPP.
| | | December 31, 2015 | | December 31, 2014 | December 31, 2018 | | December 31, 2017 |
Ohio | 63 | % | | Ohio | 61 | % | 61 | % | | Ohio | 65 | % |
Kentucky | 14 |
| | Kentucky | 13 |
| 13 |
| | Kentucky | 14 |
|
Indiana | 10 |
| | Indiana | 8 |
| 11 |
| | Indiana | 11 |
|
Tennessee | 3 |
| | Tennessee | 3 |
| 3 |
| | Tennessee | 2 |
|
Michigan | 1 |
| | Michigan | 2 |
| 1 |
| | Michigan | 1 |
|
All others | 9 |
| | All others | 13 |
| 11 |
| | All others | 7 |
|
Total | 100 | % | | Total | 100 | % | 100 | % | | Total | 100 | % |
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 (LRA). The LRA is a holdbackhold back of a portion of the initial purchase 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. As a result, some pools of loans may have sufficient credit enhancements to recapture all losses while other pools of loans may not. The LRA had balances of $158213 million and $129$201 million at December 31, 20152018 and 20142017, respectively. For more information, see Note 10 of the Notes to Financial Statements.
Credit 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, 2015 | | December 31, 2014 | December 31, 2018 | | December 31, 2017 |
Early stage delinquencies - unpaid principal balance (1) | $ | 51 |
| | $ | 61 |
| $ | 36 |
| | $ | 43 |
|
Serious delinquencies - unpaid principal balance (2) | $ | 32 |
| | $ | 43 |
| $ | 13 |
| | $ | 17 |
|
Early stage delinquency rate (3) | 0.7 | % | | 1.0 | % | 0.4 | % | | 0.5 | % |
Serious delinquency rate (4) | 0.4 | % | | 0.7 | % | 0.1 | % | | 0.2 | % |
National average serious delinquency rate (5) | 1.8 | % | | 2.4 | % | 1.6 | % | | 2.0 | % |
| |
(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, 20152018 rate is based on September 30, 20152018 data. |
The MPP has experienced a small amount of delinquencies, and foreclosures with the 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, 2015,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 $20$4 million of conventional principal balances with current estimated loan-to-values above 100 percent $1 million (six percent)at December 31, 2018, 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: The following table shows the effects of credit enhancements on the estimation of 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, 2015 | | December 31, 2014 | December 31, 2018 | | December 31, 2017 |
Estimated incurred credit losses, before credit enhancements | $ | (14 | ) | | $ | (23 | ) | $ | (4 | ) | | $ | (6 | ) |
Estimated amounts deemed recoverable by: | | | | | | |
Primary mortgage insurance | 1 |
| | 2 |
| 1 |
| | 1 |
|
Supplemental mortgage insurance | 8 |
| | 13 |
| 1 |
| | 3 |
|
Lender Risk Account | 2 |
| | 3 |
| 1 |
| | 1 |
|
Estimated incurred credit losses, after credit enhancements | $ | (3 | ) | | $ | (5 | ) | $ | (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, the LRA, and SMI.
The estimate We have assessed that we do not have any credit risk exposure to our PMI providers and our estimation of credit lossesexposure to SMI providers was not considered material at December 31, 2015 decreased from the end of 2014 due to realized credit losses as problem loans continued to liquidate and as delinquency trends and housing prices improved.2018.
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 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 our 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 LRA. At December 31, 2015, we had $1.4 billion of conventional loans purchased prior to February 2011 with outstanding SMI coverage through Genworth and MGIC that are paying down over time. Due to the possibility that MGIC and Genworth may not pay all of the future insurance claims we make, we estimate that $0.3 million of payments are not probable, which is reflected in our allowance for credit losses at December 31, 2015. The estimation of SMI exposure, similar to overall trends of our loan losses, has declined over the last several years.
Investments
Liquidity Investments: We purchase liquidity investments from counterparties that have a strong ability to repay principal and interest. Liquidity investments are either unsecured, guaranteed or supported by the U.S. government, or secured (i.e., collateralized). For unsecured liquidity investments, we invest in the debt securities of highly rated, investment-grade institutions, have appropriate and conservative limits on dollar and maturity exposure to each institution, and have strong credit underwriting practices, including active monitoring of credit quality of our counterparties and of the environment in which they operate. We purchase liquidity investments from counterparties that have a strong ability to repay principal and interest.
Our unsecured liquidity investments to a counterparty or group of affiliated counterparties are limited by Finance Agency regulations to maturities of no more than nine months and limited to a dollar amount based on a percentage of eligible regulatory capital (defined as the lessor of our regulatory capital or the eligible amount of a counterparty's Tier 1 capital). The permissible percentage ranges from one percent to 15 percent based on the counterparty's lowest long-term credit rating of its debt from a nationally recognized statistical rating organization (NRSRO).an NRSRO. In addition, pursuant to a Finance Agency regulation, we complement reliance on NRSRO ratings for unsecured investment activity by also 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 years,However, 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, 2015 | December 31, 2018 |
| Long-Term Rating | Long-Term Rating |
| AA | | A | | Total | AA | | A | | Total |
Unsecured Liquidity Investments | | | | | | | | | | |
Federal funds sold | $ | 4,305 |
| | $ | 6,540 |
| | $ | 10,845 |
| $ | 5,640 |
| | $ | 5,153 |
| | $ | 10,793 |
|
Certificates of deposit | 600 |
| | 100 |
| | 700 |
| 800 |
| | 1,550 |
| | 2,350 |
|
Total unsecured liquidity investments | 4,905 |
| | 6,640 |
| | 11,545 |
| 6,440 |
| | 6,703 |
| | 13,143 |
|
Guaranteed/Secured Liquidity Investments | | | | | | | | | | |
Securities purchased under agreements to resell | 10,532 |
| | — |
| | 10,532 |
| 4,402 |
| | — |
| | 4,402 |
|
Government-sponsored enterprises (1) | 33 |
| | — |
| | 33 |
| |
U.S. Treasury obligations | | 36 |
| | — |
| | 36 |
|
GSE obligations | | 277 |
| | — |
| | 277 |
|
Total guaranteed/secured liquidity investments | 10,565 |
| | — |
| | 10,565 |
| 4,715 |
| | — |
| | 4,715 |
|
Total liquidity investments | $ | 15,470 |
| | $ | 6,640 |
| | $ | 22,110 |
| $ | 11,155 |
| | $ | 6,703 |
| | $ | 17,858 |
|
| | | December 31, 2014 | December 31, 2017 |
| Long-Term Rating | Long-Term Rating |
| 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 |
|
| |
(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. |
During 2015,2018, 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 or 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, 2015 | | December 31, 2018 |
| | Counterparty Rating (1) | | | | Counterparty Rating (1) | | |
Domicile of Counterparty | | Sovereign Rating (1) | | AA | | A | | Total | | AA | | A | | Total |
Domestic | | AA+ | | $ | 840 |
| | $ | 2,190 |
| | $ | 3,030 |
| | $ | 2,890 |
| | $ | 1,200 |
| | $ | 4,090 |
|
U.S. branches and agency offices of foreign commercial banks: | | | | | | | | | | | | |
Canada | | AAA | | 1,765 |
| | 940 |
| | 2,705 |
| | 250 |
| | 1,286 |
| | 1,536 |
|
Sweden | | AAA | | 200 |
| | 940 |
| | 1,140 |
| |
Australia | | AAA | | 1,100 |
| | — |
| | 1,100 |
| | 1,500 |
| | — |
| | 1,500 |
|
Finland | | AAA | | 1,000 |
| | — |
| | 1,000 |
| | 1,400 |
| | — |
| | 1,400 |
|
Germany | | AAA | | — |
| | 940 |
| | 940 |
| | — |
| | 1,250 |
| | 1,250 |
|
United Kingdom | | | — |
| | 800 |
| | 800 |
|
France | | | — |
| | 700 |
| | 700 |
|
Netherlands | | | — |
| | 700 |
| | 700 |
|
Sweden | | | 400 |
| | 300 |
| | 700 |
|
Norway | | AAA | | — |
| | 940 |
| | 940 |
| | — |
| | 400 |
| | 400 |
|
Netherlands | | AAA | | — |
| | 440 |
| | 440 |
| |
United Kingdom | | AA+ | | — |
| | 250 |
| | 250 |
| |
Austria | | | — |
| | 67 |
| | 67 |
|
Total U.S. branches and agency offices of foreign commercial banks | |
| | 4,065 |
| | 4,450 |
| | 8,515 |
| | 3,550 |
| | 5,503 |
| | 9,053 |
|
Total unsecured investment credit exposure | |
| | $ | 4,905 |
| | $ | 6,640 |
| | $ | 11,545 |
| | $ | 6,440 |
| | $ | 6,703 |
| | $ | 13,143 |
|
| |
(1) | Represents the lowest long-term credit rating provided by Standard & Poor's, Moody's, and/or Fitch Advisory Services. |
The following table presents the remaining contractual maturity of our unsecured investment credit exposure by the domicile of the counterparty or the domicile of the counterparty's parent for U.S. branches and agency offices of foreign commercial banks.
| | (In millions) | | December 31, 2015 | | December 31, 2018 |
Domicile of Counterparty | | Overnight | | Due 2 days through 30 days | | Due 31 days through 90 days | | Total | | Overnight | | Due 2 days through 30 days | | Due 31 days through 90 days | | Total |
Domestic | | $ | 3,030 |
| | $ | — |
| | $ | — |
| | $ | 3,030 |
| | $ | 4,090 |
| | $ | — |
| | $ | — |
| | $ | 4,090 |
|
U.S. branches and agency offices of foreign commercial banks: | | | | | | | | | | | | | | | | |
Canada | | 2,405 |
| | 100 |
| | 200 |
| | 2,705 |
| | 1,436 |
| | — |
| | 100 |
| | 1,536 |
|
Sweden | | 940 |
| | 100 |
| | 100 |
| | 1,140 |
| |
Australia | | 1,000 |
| | — |
| | 100 |
| | 1,100 |
| | 1,500 |
| | — |
| | — |
| | 1,500 |
|
Finland | | 1,000 |
| | — |
| | — |
| | 1,000 |
| | 1,000 |
| | — |
| | 400 |
| | 1,400 |
|
Germany | | 940 |
| | — |
| | — |
| | 940 |
| | 500 |
| | 350 |
| | 400 |
| | 1,250 |
|
United Kingdom | | | 800 |
| | — |
| | — |
| | 800 |
|
France | | | 700 |
| | — |
| | — |
| | 700 |
|
Netherlands | | | 700 |
| | — |
| | — |
| | 700 |
|
Sweden | | | — |
| | 200 |
| | 500 |
| | 700 |
|
Norway | | 940 |
| | — |
| | — |
| | 940 |
| | — |
| | — |
| | 400 |
| | 400 |
|
Netherlands | | 440 |
| | — |
| | — |
| | 440 |
| |
United Kingdom | | 150 |
| | — |
| | 100 |
| | 250 |
| |
Austria | | | 67 |
| | — |
| | — |
| | 67 |
|
Total U.S. branches and agency offices of foreign commercial banks | | 7,815 |
| | 200 |
| | 500 |
| | 8,515 |
| | 6,703 |
| | 550 |
| | 1,800 |
| | 9,053 |
|
Total unsecured investment credit exposure | | $ | 10,845 |
| | $ | 200 |
| | $ | 500 |
| | $ | 11,545 |
| | $ | 10,793 |
| | $ | 550 |
| | $ | 1,800 |
| | $ | 13,143 |
|
At December 31, 20152018, all of the $11.5$13.1 billion of unsecured investment exposure was to counterparties with holding companies domiciled in countries receiving either AAA or AA+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.MBS:
GSE Mortgage-Backed SecuritiesMBS
At December 31, 20152018, $11.3$13.7 billion of mortgage-backed securitiesMBS held 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 securitiesMBS are of high quality with acceptable credit performance.
Mortgage-Backed SecuritiesMBS Issued by Other Government Agencies
We also invest in mortgage-backed securitiesMBS issued and guaranteed by Ginnie Mae and the NCUA. These investments totaled $3.9$2.0 billion at December 31, 20152018. 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.
Derivatives
Credit Risk Exposure: We mitigate most of the credit risk exposure resulting from derivative 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, 20152018.
|
| | | | | | | | | | | | | | | | |
(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: | | | | | | | | |
Asset positions with credit exposure: | | | | | | | | |
Uncleared derivatives: | | | | | | | | |
A | | $ | 385 |
| | $ | 2 |
| | $ | — |
| | $ | 2 |
|
Baa/BBB | | 536 |
| | 2 |
| | (2 | ) | | — |
|
Liability positions with credit exposure: | | | | | | | | |
Cleared derivatives (2) | | 5,952 |
| | (6 | ) | | 31 |
| | 25 |
|
Total derivative positions with credit exposure to non-member counterparties | | 6,873 |
| | (2 | ) | | 29 |
| | 27 |
|
Member institutions (3) | | 130 |
| | — |
| | — |
| | — |
|
Total | | $ | 7,003 |
| | $ | (2 | ) | | $ | 29 |
| | $ | 27 |
|
|
| | | | | | | | | | | | | | | | |
(In millions) | | | | | | | | |
| | Total Notional | | Net Derivatives Fair Value Before Collateral | | Cash Collateral Pledged to (from) Counterparties | | Net Credit Exposure to Counterparties |
Nonmember counterparties: | | | | | | | | |
Asset positions with credit exposure: | | | | | | | | |
Uncleared derivatives: | | | | | | | | |
AA-rated | | $ | 60 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Total uncleared derivatives | | 60 |
| | — |
| | — |
| | — |
|
Cleared derivatives (1) | | 3,662 |
| | 1 |
| | 16 |
| | 17 |
|
Liability positions with credit exposure: | | | | | | | | |
Uncleared derivatives: | | | | | | | | |
A-rated | | 15 |
| | — |
| | — |
| | — |
|
Total uncleared derivatives | | 15 |
| | — |
| | — |
| | — |
|
Cleared derivatives (1) | | 5,366 |
| | (5 | ) | | 52 |
| | 47 |
|
Total derivative positions with credit exposure to nonmember counterparties | | 9,103 |
| | (4 | ) | | 68 |
| | 64 |
|
Member institutions (2) | | 145 |
| | 2 |
| | — |
| | 2 |
|
Total | | $ | 9,248 |
| | $ | (2 | ) | | $ | 68 |
| | $ | 66 |
|
| |
(1) | Each category includesRepresents derivative transactions cleared with LCH Ltd. and CME Clearing, the related plus (+)FHLB's clearinghouses, which are not rated. LCH Ltd.'s ultimate parent, London Stock Exchange Group Plc is rated A3 by Moody's and minus (-) ratings (i.e., “A” includes “A+”A- by Standard & Poor's. CME Clearing's parent, CME Group Inc. is rated Aa3 by Moody's and “A-” ratings).AA- by Standard & Poor's. |
| |
(2) | Represents derivative transactions cleared with clearinghouses, which are not rated. |
| |
(3) | Represents Mandatory Delivery Contracts. |
Based on bothOur exposure to cleared derivatives is primarily associated with our requirement to post initial margin through the clearing agent to the Derivatives Clearing Organizations. The amount of cash collateral pledged as initial margin has increased from our use of cleared derivatives. However, the use of cleared derivatives mitigates credit risk exposure because a central counterparty is substituted for individual counterparties.
At December 31, 2018, the gross and net exposures, we had a minimal amountexposure of uncleared derivatives with residual credit risk exposure on uncleared derivatives throughout 2015.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.
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, 20152018, we had $0.3 billion$549 million of notional principal of interest rate swaps outstanding towith one member, JPMorgan Chase Bank, N.A., 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.
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 2018. Our overall ability to effectively fund our operations through debt issuances remained sufficient. Investor demand for System debt was robust in 2018. 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.
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 2018, our portion of the System's debt issuances totaled $552.6 billion for Discount Notes and $29.1 billion for Bonds. Access to short-term debt markets has been reliable because investors, driven by liquidity preferences and risk aversion, have sought the System’s short-term debt, which has resulted in strong demand for debt maturing in one year or less.
See the Notes to Financial Statements for more detailed information regarding maturities of certain financial assets and liabilities which are instrumental in determining the amount of 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.
Liquidity Management and Regulatory Requirements
We manage liquidity risk by ensuring compliance with our regulatory liquidity requirements and regularly monitoring other metrics. In particular, current 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 a scenario where no Advances are renewed and a scenario where certain Advances are renewed. 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.
As discussed in the "Regulatory and Legislative Risk" section of "Executive Overview," the Finance Agency issued the Liquidity AB in August 2018 increasing the expectations with respect to the maintenance of sufficient liquidity for a specified number of days. Under the new Liquidity AB, the calculation of liquidity is intended to provide additional assurance that we can continue to provide Advances to members over an extended period without access to the capital markets. As part of the base case liquidity expectations, the Liquidity AB requires the FHLBanks to maintain sufficient liquidity for an increased period of between 10 to 30 calendar days. Contemporaneously with the issuance of the Liquidity AB, the Finance Agency issued a supervisory letter that identifies initial thresholds for measures of liquidity. The supervisory letter sets forth a phase-in period for the maintenance of sufficient liquidity by requiring 10 calendar days or more of positive daily cash balances, net of cumulative cash flows, by March 31, 2019 and 20 calendar days or more of such balances by December 31, 2019. Under the new guidance, all Advance maturities are now assumed to renew, unless the Advances relate to former members who are ineligible to borrow new Advances.
The Liquidity AB also provided guidance related to asset/liability maturity funding gap limits, which was implemented beginning December 31, 2018. Funding gap metrics measure the difference between assets and liabilities that are scheduled to mature during a specified period of time and are expressed as a percentage of total assets. The Liquidity AB provides guidance on maintaining appropriate funding gaps for three-month (-10 percent to -20 percent) and one-year (-25 percent to -35 percent) maturity horizons. The Finance Agency's supervisory letter set forth initial funding gap percentage limits of -15 percent and -30 percent for the three-month and one-year maturity horizons, respectively. As of December 31, 2018, we were operating within those limits.
We also meet operational and contingency liquidity requirements. We satisfy the operational liquidity requirement by both meeting a contingency liquidity requirement, discussed below, and because we are able to adequately access the capital markets to issue debt. In addition, we focus on maintaining an adequate liquidity balance and a funding balance between our financial assets and financial liabilities.
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. The following table presents the components of the contingency liquidity requirement.
|
| | | | | | | |
(In millions) | December 31, 2018 | | December 31, 2017 |
Contingency Liquidity Requirement | | | |
Total Contingency Liquidity Reserves (1) | $ | 34,808 |
| | $ | 40,850 |
|
Total Requirement (2) | (18,745 | ) | | (32,349 | ) |
Excess Contingency Liquidity Available | $ | 16,063 |
| | $ | 8,501 |
|
| |
(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 MBS. |
| |
(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. |
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, 2018 | | December 31, 2017 |
Deposit Reserve Requirement | | | |
Total Eligible Deposit Reserves | $ | 66,643 |
| | $ | 73,728 |
|
Total Member Deposits | (664 | ) | | (649 | ) |
Excess Deposit Reserves | $ | 65,979 |
| | $ | 73,079 |
|
Contractual Obligations
Lehman Brothers Derivatives:The following table summarizes our contractual obligations at SeeDecember 31, 2018. 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) | $ | 21,086 |
| | $ | 13,828 |
| | $ | 6,207 |
| | $ | 4,526 |
| | $ | 45,647 |
|
Operating leases (include premises and equipment) | 1 |
| | 3 |
| | 2 |
| | 3 |
| | 9 |
|
Mandatorily redeemable capital stock | 17 |
| | 1 |
| | 5 |
| | — |
| | 23 |
|
Commitments to fund mortgage loans | 146 |
| | — |
| | — |
| | — |
| | 146 |
|
Pension and other postretirement benefit obligations | 3 |
| | 5 |
| | 5 |
| | 30 |
| | 43 |
|
Total Contractual Obligations | $ | 21,253 |
| | $ | 13,837 |
| | $ | 6,219 |
| | $ | 4,559 |
| | $ | 45,868 |
|
| |
(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, 2018. For more information, see Note 20 of the Notes to Financial Statements for information on derivatives we had with Lehman Brothers at the time of their bankruptcy in September 2008.Statements.
|
| | | | | | | | | | | | | | | | | | | |
(In millions) | < 1 year | | 1 < 3 years | | 3 < 5 years | | > 5 years | | Total |
Off-balance sheet items (1) | | | | | | | | | |
Standby Letters of Credit | $ | 14,579 |
| | $ | 60 |
| | $ | 192 |
| | $ | 16 |
| | $ | 14,847 |
|
Standby bond purchase agreements | 23 |
| | 55 |
| | — |
| | — |
| | 78 |
|
Consolidated Obligations traded, not yet settled | 525 |
| | 29 |
| | 51 |
| | 12 |
| | 617 |
|
Total off-balance sheet items | $ | 15,127 |
| | $ | 144 |
| | $ | 243 |
| | $ | 28 |
| | $ | 15,542 |
|
| |
(1) | Represents notional amount of off-balance sheet obligations. |
Exposure to Member Concentration Risk
We regularly assess concentration risks from business activity. 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 member to whom we lent a large amount of Advances, combined with the Federal Deposit Insurance Corporation's decision not to repay Advances, we would implement our member failure plan. Our member failure plan, which we test periodically, would liquidate collateral to recover losses from losing principal and interest on the Advance balances.
Advance concentration has a minimal effect on market risk exposure because Advances are largely match funded.funded by Consolidated Obligations and interest rate swaps that have similar interest rate characteristics. Furthermore, additional increases in Advance concentration would not materially affect capital adequacy because Advance growth is supported by new purchases of capital stock as required by the Capital Plan.
Liquidity Risk
Liquidity Overview
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 depends in part on prevailing conditions in the capital markets, particularly the short-term capital markets, due to a large reliance on short-term funding. As shown on the Statements of Cash Flows, in 2015, our portion of the System's debt issuances totaled $306.0 billion for Discount Notes and $19.0 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 2015, and our overall ability to fund our operations through debt issuances at acceptable interest costs remained sufficient. Investor demand of System debt remains robust and, we believe, increased in 2015. Although we can make no assurances, we expect this to continue to be the case. 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 new debt, service outstanding debt, maintain adequate capitalization, or pay competitive dividends is remote.
In 2015, the Office of Finance instituted several enhancements to its short-term debt issuance programs on behalf of the FHLBanks. The enhancements were responses to certain dealers, who ultimately distribute our debt to investors, being more reluctant to temporarily hold as much debt on their balance sheets at quarter- and year-ends. Such reluctance is a result of the perceived growing burden of their regulatory capital environment. Enhancements included modifying the Discount Notes auction to a single-price (Dutch) award method to determine winning bids, replacing the 9-week maturity with an 8-week maturity, extending the marketing period for debt issuance, and changes to the dealer compensation structure. We believe these enhancements will improve the ability of System debt to reach investors in a timely manner in the changing regulatory environment.
We must meet both operational and contingency liquidity requirements. We satisfied the operational liquidity requirement by both 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 the first nine months of 2015 before increasing above $20 billion in the fourth quarter. The increase was driven by the dealer balance sheet constraints and positioning to fulfill possible same-day member Advance demand. Liquidity balances decreased towards the $10 billion to $15 billion range in the first quarter of 2016. In addition, Finance Agency guidance requires us to target at least 5 to 15 consecutive days of positive liquidity based on specific assumptions 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. Similar to the increase in the amount of liquidity in the fourth quarter, we also increased the number of days of positive liquidity.
Contingency Liquidity Requirement
Contingency liquidity risk is the potential inability to meet liquidity needs because our access to the capital markets to issue Consolidated Obligations is restricted or suspended for a period of time due to a market disruption, operational failure, or real or perceived credit quality problems. We continued to hold an ample amount of liquidity reserves to protect against contingency liquidity risk.
|
| | | | | | | |
(In millions) | December 31, 2015 | | December 31, 2014 |
Contingency Liquidity Requirement | | | |
Total Contingency Liquidity Reserves (1) | $ | 41,932 |
| | $ | 30,594 |
|
Total Requirement (2) | (28,420 | ) | | (12,155 | ) |
Excess Contingency Liquidity Available | $ | 13,512 |
| | $ | 18,439 |
|
| |
(1) | Includes, among others, cash, overnight Federal funds, overnight deposits, self-liquidating term Federal funds, 95 percent of the market value of available-for-sale negotiable securities, and 75 percent of the market value of certain held-to-maturity obligations, including obligations of the United States, U.S. government agency obligations and mortgage-backed securities. |
| |
(2) | Includes net liabilities maturing in the next seven business days, assets traded not yet settled, Advance commitments outstanding, Advances maturing in the next seven business days, and a three percent hypothetical increase in Advances. |
Deposit Reserve Requirement
To support our member deposits, we also must meet a statutory deposit reserve requirement. The sum of our investments in obligations of the United States, deposits in eligible banks or trust companies, and Advances with a final maturity not exceeding five years must equal or exceed the current amount of member deposits. The following table presents the components of this liquidity requirement.
|
| | | | | | | |
(In millions) | December 31, 2015 | | December 31, 2014 |
Deposit Reserve Requirement | | | |
Total Eligible Deposit Reserves | $ | 82,036 |
| | $ | 77,920 |
|
Total Member Deposits | (804 | ) | | (730 | ) |
Excess Deposit Reserves | $ | 81,232 |
| | $ | 77,190 |
|
Contractual Obligations
The following table summarizes our contractual obligations at December 31, 2015. The allocations according to the expiration terms and payment due dates of these obligations were not materially different from those at the end of 2014. 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 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) | $ | 9,809 |
| | $ | 9,958 |
| | $ | 7,131 |
| | $ | 8,139 |
| | $ | 35,037 |
|
Operating leases (include premises and equipment) | 1 |
| | 2 |
| | 1 |
| | 5 |
| | 9 |
|
Mandatorily redeemable capital stock | 33 |
| | — |
| | 5 |
| | — |
| | 38 |
|
Commitments to fund mortgage loans | 450 |
| | — |
| | — |
| | — |
| | 450 |
|
Pension and other postretirement benefit obligations | 3 |
| | 5 |
| | 5 |
| | 25 |
| | 38 |
|
Total Contractual Obligations | $ | 10,296 |
| | $ | 9,965 |
| | $ | 7,142 |
| | $ | 8,169 |
| | $ | 35,572 |
|
| |
(1) | Does not include Discount Notes and contractual interest payments related to Bonds. Total is based on contractual maturities; the actual timing of payments could be affected by factors affecting redemptions. |
Off-Balance Sheet Arrangements
The following table summarizes our off-balance sheet items at December 31, 2015. The allocations according to the expiration terms and payment due dates of these items were not materially different from those at the end of 2014, and changes reflected normal business variations. For more information, see Note 20 of the Notes to Financial Statements.
|
| | | | | | | | | | | | | | | | | | | |
(In millions) | < 1 year | | 1 < 3 years | | 3 < 5 years | | > 5 years | | Total |
Off-balance sheet items (1) | | | | | | | | | |
Standby Letters of Credit | $ | 19,417 |
| | $ | 41 |
| | $ | 42 |
| | $ | 55 |
| | $ | 19,555 |
|
Standby bond purchase agreements | 86 |
| | 26 |
| | 10 |
| | — |
| | 122 |
|
Consolidated Obligations traded, not yet settled | — |
| | 10 |
| | 30 |
| | 20 |
| | 60 |
|
Total off-balance sheet items | $ | 19,503 |
| | $ | 77 |
| | $ | 82 |
| | $ | 75 |
| | $ | 19,737 |
|
| |
(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 member accounts, correspondent FHLB 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. 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 another FHLBank 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, and Directors' and Officers' liability. This coverage primarily 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. 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. ForAs of December 31, 2017, 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, thatwhich 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 2015, 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 2018 was in a range of zeropositive $9 million to negative $3$12 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).rate.
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, which could be higher or lower, compared to accounting under fair value hedge treatment.
Accounting for Premiums and Discounts on Mortgage Loans and Mortgage-Backed SecuritiesMBS
The accounting for amortization/accretion of premiums/discounts can result in earnings volatility, most of which relates to our MPP, mortgage-backed securities,MBS, 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 securitiesMBS outstanding at the end of 20152018 were purchased at net premium prices close to par. At the end of 2015,2018, the MPP had a net premium balance of $224$230 million and mortgage-backed securitiesMBS had a net premium balance of $44$23 million, resulting in a total mortgage net premium balance of $268$253 million.
When mortgagePremiums/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 MBS, 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 MBS with premium balances and an increase in book yields on MBS 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 2015, the estimated adjustments to the immediate recognition of premium amortization/discount accretion for various interest rate shocks (with interest rates not permitted to fall below zero percent). Although some of the changes shown below would result in a substantial change in ROE in the quarter in which the rate change occurred, it currently would not materially threaten our profitability.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | | -200 | | -100 | | -50 | | Base | | +50 | | +100 | | +200 |
| | $ | (76 | ) | | $ | (35 | ) | | $ | (12 | ) | | $ | (3 | ) | | $ | 1 |
| | $ | 3 |
| | $ | 7 |
|
Provision for Credit Losses
We evaluate Advances and the MPP to assure an adequate reserve is maintained to absorb probable losses inherent in these portfolios.
Advances
We evaluate probable credit losses inherent in Advances due to borrower default or delayed receipt of interest and principal, taking into consideration the amount recoverable from the collateral pledged by members to secure Advances. This analysis is performed for each member separately on at least a quarterly basis. We believe we have adequate policies and procedures in place to effectively manage credit risk exposure on Advances. These include monitoring the creditworthiness and financial condition of the institutions to which we lend funds, determining the quality and value of collateral pledged, estimating borrowing capacity based on collateral value and type for each member, and evaluating historical loss experience. At December 31, 2015,2018, we had rights to collateral (either loans or securities), on a member-by-member basis, with an estimated fair value that exceeds the amount of outstanding Advances. At the end of 2015,2018, the aggregate estimated value of this collateral was $306.5$348.0 billion. Although some of this overcollateralizationover-collateralization may reflect a desire to maintain excess borrowing capacity, all of a member's pledged collateral would be available as necessary to cover any of that member's credit obligations to the FHLB.
Based on the nature and quality of the collateral held as security for Advances, including overcollateralization,over-collateralization, our credit analyses of members and collateral, and members' prior repayment history (i.e., we have never recorded a loss from an Advance), we believe that no allowance for losses was necessary at December 31, 2015.2018. 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 acquirehold 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's available funds remaining in the Lender Risk Account, and 3) if applicable, Supplemental Mortgage Insurance coverage up to the policy limit, applied on a loan-by-loan basis. |
We assume any credit exposure if losses exceed the related real estate residual value and credit enhancements.
The key estimates and assumptions that affect our allowance for credit losses generally include:
| |
▪ | the characteristics of specific conventional loans outstanding under the MPP; |
| |
▪ | evaluations of the overall delinquent loan portfolio through the use of migration analysis; |
| |
▪ | loss severity estimates; |
| |
▪ | historical claims and default experience; |
| |
▪ | expected proceeds from credit enhancements; |
| |
▪ | evaluation of exposure to Supplemental Mortgage Insurance providers and their ability to pay claims; |
| |
▪ | comparisons to industry reported data; and |
| |
▪ | current economic trends and conditions. |
These estimates require significant judgments, especially considering the current national housing market, the inability to readily determine the fair value of all underlying properties, the application of pool level credit enhancements, and the uncertainty in other macroeconomic factors that make estimating defaults and severity imprecise.
Based on our analysis, as of December 31, 2015,2018, we determined that an allowance for credit losses of $2$1 million was required for our conventional mortgage loans in the MPP. Substantial 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, 2015 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, 20152018 and 2014,2017, 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, 2015 are provided in the tables below.
| | | 2015 | 2018 |
(In millions) | 1st Quarter | | 2nd Quarter | | 3rd Quarter | | 4th Quarter | | Total | 1st Quarter | | 2nd Quarter | | 3rd Quarter | | 4th Quarter | | Total |
Interest income | $ | 225 |
| | $ | 234 |
| | $ | 238 |
| | $ | 260 |
| | $ | 957 |
| $ | 524 |
| | $ | 594 |
| | $ | 598 |
| | $ | 665 |
| | $ | 2,381 |
|
Interest expense | 148 |
| | 149 |
| | 161 |
| | 177 |
| | 635 |
| 406 |
| | 465 |
| | 468 |
| | 543 |
| | 1,882 |
|
Net interest income | 77 |
| | 85 |
| | 77 |
| | 83 |
| | 322 |
| 118 |
| | 129 |
| | 130 |
| | 122 |
| | 499 |
|
Reversal for credit losses | — |
| | — |
| | — |
| | — |
| | — |
| |
Non-interest income | 8 |
| | 5 |
| | 10 |
| | 7 |
| | 30 |
| |
Non-interest income (loss) | | (4 | ) | | (13 | ) | | (9 | ) | | (11 | ) | | (37 | ) |
Non-interest expense | 24 |
| | 26 |
| | 26 |
| | 27 |
| | 103 |
| 31 |
| | 31 |
| | 30 |
| | 31 |
| | 123 |
|
Net income | $ | 61 |
| | $ | 64 |
| | $ | 61 |
| | $ | 63 |
| | $ | 249 |
| $ | 83 |
| | $ | 85 |
| | $ | 91 |
| | $ | 80 |
| | $ | 339 |
|
| | | 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 income (loss) | | (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 |
|
Investment Securities
Investments
Data on investments for the years ended December 31, 2015, 20142018, 2017 and 20132016 are provided in the tables below.
| | (In millions) | Carrying Value at December 31, | Carrying Value at December 31, |
| 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 |
Trading securities: | | | | | | | | | | |
Mortgage-backed securities: | | | | | | |
Other U.S. obligation single-family mortgage-backed securities | $ | 1 |
| | $ | 2 |
| | $ | 2 |
| |
GSE obligations | | $ | 224 |
| | $ | — |
| | $ | — |
|
MBS: | | | | | | |
U.S. obligation single-family MBS | | — |
| | 1 |
| | 1 |
|
Total trading securities | 1 |
| | 2 |
| | 2 |
| 224 |
| | 1 |
| | 1 |
|
Available-for-sale securities: | | | | | | | | | | |
Certificates of deposit | 700 |
| | 1,350 |
| | 2,185 |
| 2,350 |
| | 900 |
| | 1,300 |
|
GSE obligations | | 53 |
| | — |
| | — |
|
Total available-for-sale securities | 700 |
| | 1,350 |
| | 2,185 |
| 2,403 |
| | 900 |
| | 1,300 |
|
Held-to-maturity securities: | | | | | | | | | | |
Government-sponsored enterprises | 33 |
| | 26 |
| | 28 |
| |
Mortgage-backed securities: | | | | | | |
Other U.S. obligation single-family mortgage-backed securities | 3,894 |
| | 2,039 |
| | 1,909 |
| |
Government-sponsored enterprise single-family mortgage-backed securities | 10,891 |
| | 12,647 |
| | 14,150 |
| |
Government-sponsored enterprise multi-family mortgage-backed securities | 460 |
| | — |
| | — |
| |
U.S. Treasury obligations | | 36 |
| | 34 |
| | — |
|
GSE obligations | | — |
| | — |
| | 31 |
|
MBS: | | | | | | |
U.S. obligation single-family MBS | | 2,041 |
| | 2,484 |
| | 3,183 |
|
GSE single-family MBS | | 5,544 |
| | 6,703 |
| | 8,186 |
|
GSE multi-family MBS | | 8,171 |
| | 5,584 |
| | 3,146 |
|
Total held-to-maturity securities | 15,278 |
| | 14,712 |
| | 16,087 |
| 15,792 |
| | 14,805 |
| | 14,546 |
|
Total securities | 15,979 |
| | 16,064 |
| | 18,274 |
| 18,419 |
| | 15,706 |
| | 15,847 |
|
Securities purchased under agreements to resell | 10,532 |
| | 3,343 |
| | 2,350 |
| 4,402 |
| | 7,702 |
| | 5,230 |
|
Federal funds sold | 10,845 |
| | 6,600 |
| | 1,740 |
| 10,793 |
| | 3,650 |
| | 4,257 |
|
Total investments | $ | 37,356 |
| | $ | 26,007 |
| | $ | 22,364 |
| $ | 33,614 |
| | $ | 27,058 |
| | $ | 25,334 |
|
As of December 31, 2015,2018, 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 |
| |
GSE obligations | | $ | — |
| $ | — |
| $ | 168 |
| $ | 56 |
| $ | 224 |
|
MBS(1): | | |
U.S. obligation single-family MBS | | — |
| — |
| — |
| — |
| — |
|
Total trading securities | — |
| — |
| 1 |
| — |
| 1 |
| — |
| — |
| 168 |
| 56 |
| 224 |
|
Yield on trading securities | — | % | — | % | 2.25 | % | — | % | | — | % | — | % | 3.49 | % | 3.54 | % | |
Available-for-sale securities: | | |
Certificates of deposit | $ | 700 |
| $ | — |
| $ | — |
| $ | — |
| $ | 700 |
| $ | 2,350 |
| $ | — |
| $ | — |
| $ | — |
| $ | 2,350 |
|
GSE obligations | | — |
| — |
| 49 |
| 4 |
| 53 |
|
Total available-for-sale securities | 700 |
| — |
| — |
| — |
| 700 |
| 2,350 |
| — |
| 49 |
| 4 |
| 2,403 |
|
Yield on available-for sale securities | 0.31 | % | — | % | — | % | — | % | | 2.67 | % | — | % | 3.30 | % | 3.54 | % | |
Held-to-maturity securities: | | |
Government-sponsored enterprises | $ | 33 |
| $ | — |
| $ | — |
| $ | — |
| $ | 33 |
| |
Mortgage-backed securities(1): | | |
Other U.S. obligation single-family mortgage-backed securities | — |
| 884 |
| — |
| 3,010 |
| 3,894 |
| |
Government-sponsored enterprise single-family mortgage-backed securities | — |
| 174 |
| 647 |
| 10,070 |
| 10,891 |
| |
Government-sponsored enterprise multi-family mortgage-backed securities | — |
| — |
| — |
| 460 |
| 460 |
| |
U.S. Treasury obligations | | $ | 36 |
| $ | — |
| $ | — |
| $ | — |
| $ | 36 |
|
MBS(1): | | |
U.S. obligation single-family MBS | | — |
| 354 |
| — |
| 1,687 |
| 2,041 |
|
GSE single-family MBS | | — |
| — |
| 36 |
| 5,508 |
| 5,544 |
|
GSE multi-family MBS | | 43 |
| 50 |
| 7,883 |
| 195 |
| 8,171 |
|
Total held-to-maturity securities | 33 |
| 1,058 |
| 647 |
| 13,540 |
| 15,278 |
| 79 |
| 404 |
| 7,919 |
| 7,390 |
| 15,792 |
|
Yield on held-to-maturity securities | 0.14 | % | 1.37 | % | 3.38 | % | 2.26 | % | | 2.39 | % | 2.83 | % | 2.76 | % | 2.44 | % | |
Total securities | $ | 733 |
| $ | 1,058 |
| $ | 648 |
| $ | 13,540 |
| $ | 15,979 |
| $ | 2,429 |
| $ | 404 |
| $ | 8,136 |
| $ | 7,450 |
| $ | 18,419 |
|
Securities purchased under agreements to resell | 10,532 |
| — |
| — |
| — |
| 10,532 |
| 4,402 |
| — |
| — |
| — |
| 4,402 |
|
Federal funds sold | 10,845 |
| — |
| — |
| — |
| 10,845 |
| 10,793 |
| — |
| — |
| — |
| 10,793 |
|
Total investments | $ | 22,110 |
| $ | 1,058 |
| $ | 648 |
| $ | 13,540 |
| $ | 37,356 |
| $ | 17,624 |
| $ | 404 |
| $ | 8,136 |
| $ | 7,450 |
| $ | 33,614 |
|
| |
(1) | Mortgage-backed securitiesMBS allocated based on contractual principal maturities assuming no prepayments. |
As of December 31, 2015,2018, the FHLB held securities of the following issuers with a bookcarrying value greater than 10 percent of FHLB capital. The table includes government-sponsored enterprises,GSEs, 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 |
Fannie Mae | | | $ | 7,607 |
| | $ | 7,512 |
|
Freddie Mac | | $ | 4,160 |
| | $ | 4,152 |
| | 6,108 |
| | 6,034 |
|
Fannie Mae | | 7,224 |
| | 7,205 |
| |
National Credit Union Administration Trust | | 884 |
| | 886 |
| |
Government National Mortgage Association | | 3,011 |
| | 2,988 |
| | 1,688 |
| | 1,640 |
|
Certificates of deposit (4 issuers) | | 700 |
| | 700 |
| |
Other (1) | | | 3,016 |
| | 3,016 |
|
Total investment securities | | $ | 15,979 |
| | $ | 15,931 |
| | $ | 18,419 |
| | $ | 18,202 |
|
| |
(1) | Includes issuers of securities that have a carrying value that is less than 10 percent of FHLB capital. |
Loan Portfolio Analysis
The FHLB'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 FHLB'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) | 2015 | | 2014 | | 2013 | | 2012 | | 2011 | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
Domestic: | | | | | | | | | | | | | | | | | | |
Advances | $ | 73,292 |
| | $ | 70,406 |
| | $ | 65,270 |
| | $ | 53,944 |
| | $ | 28,424 |
| $ | 54,822 |
| | $ | 69,918 |
| | $ | 69,882 |
| | $ | 73,292 |
| | $ | 70,406 |
|
Real estate mortgages | $ | 7,982 |
| | $ | 6,989 |
| | $ | 6,826 |
| | $ | 7,548 |
| | $ | 7,871 |
| $ | 10,502 |
| | $ | 9,682 |
| | $ | 9,150 |
| | $ | 7,954 |
| | $ | 6,956 |
|
Real estate mortgages past due 90 days or more (including those in process of foreclosure) and still accruing interest | $ | 42 |
| | $ | 66 |
| | $ | 89 |
| | $ | 113 |
| | $ | 145 |
| |
Real estate mortgages past due 90 days or more (including those in process of foreclosure) and still accruing interest, unpaid principal balance | | $ | 19 |
| | $ | 26 |
| | $ | 33 |
| | $ | 42 |
| | $ | 66 |
|
Non-accrual loans, unpaid principal balance (1) | $ | 7 |
| | $ | 4 |
| | $ | 3 |
| | $ | 3 |
| | $ | 2 |
| $ | 3 |
| | $ | 3 |
| | $ | 4 |
| | $ | 7 |
| | $ | 4 |
|
Troubled debt restructurings (not included above) | $ | 8 |
| | $ | 5 |
| | $ | 4 |
| | $ | 3 |
| | $ | 1 |
| |
Troubled debt restructurings, unpaid principal balance (not included above) | | $ | 9 |
| | $ | 9 |
| | $ | 8 |
| | $ | 8 |
| | $ | 5 |
|
Allowance for credit losses on mortgage loans, beginning of year | $ | 5 |
| | $ | 7 |
| | $ | 18 |
| | $ | 21 |
| | $ | 12 |
| $ | 1 |
| | $ | 1 |
| | $ | 2 |
| | $ | 5 |
| | $ | 7 |
|
Charge-offs | (3 | ) | | (2 | ) | | (4 | ) | | (4 | ) | | (3 | ) | |
(Reversal) provision for credit losses | — |
| | — |
| | (7 | ) | | 1 |
| | 12 |
| |
Net charge-offs | | — |
| | — |
| | (1 | ) | | (3 | ) | | (2 | ) |
Provision (reversal) for credit losses | | — |
| | — |
| | — |
| | — |
| | — |
|
Allowance for credit losses on mortgage loans, end of year | $ | 2 |
| | $ | 5 |
| | $ | 7 |
| | $ | 18 |
| | $ | 21 |
| $ | 1 |
| | $ | 1 |
| | $ | 1 |
| | $ | 2 |
| | $ | 5 |
|
Ratio of net charge-offs during the period to average loans outstanding during the period | 0.04 | % | | 0.03 | % | | 0.05 | % | | 0.06 | % | | 0.05 | % | — | % | | — | % | | 0.01 | % | | 0.04 | % | | 0.03 | % |
| |
(1) | See Note 1 of the Notes to Financial Statements for an explanation of the FHLB'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) | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 |
Discount Notes | | | | | | | | | | |
Outstanding at year-end (book value) | $ | 77,199 |
| | $ | 41,232 |
| | $ | 38,210 |
| $ | 46,944 |
| | $ | 46,211 |
| | $ | 44,690 |
|
Weighted average rate at year-end (1) (2) | 0.24 | % | | 0.09 | % | | 0.09 | % | 2.35 | % | | 1.23 | % | | 0.46 | % |
Daily average outstanding for the year (book value) | $ | 52,706 |
| | $ | 35,992 |
| | $ | 34,574 |
| $ | 49,185 |
| | $ | 43,124 |
| | $ | 49,835 |
|
Weighted average rate for the year (2) | 0.12 | % | | 0.08 | % | | 0.11 | % | 1.86 | % | | 0.89 | % | | 0.35 | % |
Highest outstanding at any month-end (book value) | $ | 77,199 |
| | $ | 41,232 |
| | $ | 38,926 |
| $ | 64,045 |
| | $ | 51,762 |
| | $ | 63,137 |
|
Bonds (short-term) | | | | | | | | | | |
Outstanding at year-end (par value) | $ | 4,415 |
| | $ | 17,810 |
| | $ | 21,650 |
| |
Outstanding at year-end (principal amount) | | $ | 14,728 |
| | $ | 14,405 |
| | $ | 11,332 |
|
Weighted average rate at year-end (2) (3) | 0.23 | % | | 0.10 | % | | 0.11 | % | 2.38 | % | | 1.35 | % | | 0.66 | % |
Daily average outstanding for the year (par value) | $ | 6,974 |
| | $ | 18,810 |
| | $ | 16,583 |
| |
Daily average outstanding for the year (principal amount) | | $ | 14,937 |
| | $ | 10,359 |
| | $ | 11,996 |
|
Weighted average rate for the year (2) (3) | 0.13 | % | | 0.10 | % | | 0.13 | % | 1.87 | % | | 0.93 | % | | 0.51 | % |
Highest outstanding at any month-end (par value) | $ | 13,825 |
| | $ | 22,235 |
| | $ | 22,010 |
| |
Highest outstanding at any month-end (principal amount) | | $ | 19,438 |
| | $ | 14,405 |
| | $ | 14,591 |
|
| |
(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, 2015,2018, term deposits in denominations of $100,000 or more totaled $151,775,000.$51,550,000. The table below presents the maturities for term deposits in denominations of $100,000 or more:
| | (In millions) By remaining maturity at December 31, 2015 | 3 months or less | | Over 3 months but within 6 months | | Over 6 months but within 12 months | | Over 12 months but within 24 months | | Total | |
(In millions) By remaining maturity at December 31, 2018 | | 3 months or less | | Over 3 months but within 6 months | | Over 6 months but within 12 months | | Over 12 months but within 24 months | | Total |
Time certificates of deposit | $ | 79 |
| | $ | 48 |
| | $ | 16 |
| | $ | 9 |
| | $ | 152 |
| $ | 21 |
| | $ | 8 |
| | $ | 19 |
| | $ | 4 |
| | $ | 52 |
|
Ratios
| | | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 |
Return on average assets | 0.24 | % | | 0.24 | % | | 0.28 | % | 0.32 | % | | 0.31 | % | | 0.25 | % |
Return on average equity | 4.90 |
| | 4.93 |
| | 5.10 |
| 6.29 |
| | 6.15 |
| | 5.35 |
|
Average equity to average assets | 4.81 |
| | 4.90 |
| | 5.47 |
| 5.11 |
| | 5.00 |
| | 4.76 |
|
Dividend payout ratio | 69.24 | % | | 72.20 | % | | 68.10 | % | 75.60 | % | | 66.31 | % | | 63.92 | % |
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 7,7. Management's Discussion and Analysis of Financial Condition and Results of Operations, 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, 2018 and 2017, and the related statements of income, comprehensive income, capital and cash flows for each of the three years in the period ended December 31, 2018, 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, 2018, 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 "FHLB") at December 31, 20152018 and 2014,2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20152018 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the FHLB maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015,2018, 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 FHLB'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. Our responsibility is to express opinions on thesethe FHLB’s financial statements and on the FHLB'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’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’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’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 17, 201621, 2019
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, |
| 2015 | | 2014 | 2018 | | 2017 |
ASSETS | | | | | | |
Cash and due from banks (Note 3) | $ | 10,136 |
| | $ | 3,109,970 |
| $ | 10,037 |
| | $ | 26,550 |
|
Interest-bearing deposits | 99 |
| | 119 |
| 122 |
| | 140 |
|
Securities purchased under agreements to resell | 10,531,979 |
| | 3,343,000 |
| 4,402,208 |
| | 7,701,929 |
|
Federal funds sold | 10,845,000 |
| | 6,600,000 |
| 10,793,000 |
| | 3,650,000 |
|
Investment securities: | | | | | | |
Trading securities (Note 4) | 1,159 |
| | 1,341 |
| 223,980 |
| | 781 |
|
Available-for-sale securities (Note 5) | 700,081 |
| | 1,349,977 |
| 2,402,897 |
| | 899,876 |
|
Held-to-maturity securities (includes $0 and $0 pledged as collateral in 2015 and 2014, respectively, that may be repledged) (a) (Note 6) | 15,278,206 |
| | 14,712,271 |
| |
Held-to-maturity securities (includes $0 and $0 pledged as collateral in 2018 and 2017, respectively, that may be repledged) (a) (Note 6) | | 15,791,222 |
| | 14,804,970 |
|
Total investment securities | 15,979,446 |
| | 16,063,589 |
| 18,418,099 |
| | 15,705,627 |
|
Advances (includes $15,057 and $15,042 at fair value under fair value option in 2015 and 2014, respectively) (Note 8) | 73,292,172 |
| | 70,405,616 |
| |
Mortgage loans held for portfolio: | | | | |
Mortgage loans held for portfolio (Note 9) | 7,981,293 |
| | 6,989,602 |
| |
Less: allowance for credit losses on mortgage loans (Note 10) | 1,686 |
| | 4,919 |
| |
Mortgage loans held for portfolio, net | 7,979,607 |
| | 6,984,683 |
| |
Advances (includes $10,008 and $15,013 at fair value under fair value option in 2018 and 2017, respectively) (Note 8) | | 54,822,252 |
| | 69,918,224 |
|
Mortgage loans held for portfolio, net of allowance for credit losses of $840 and $1,190 in 2018 and 2017, respectively (Note 9 and Note 10) | | 10,500,917 |
| | 9,680,940 |
|
Accrued interest receivable | 94,855 |
| | 81,384 |
| 169,982 |
| | 128,561 |
|
Premises, software, and equipment, net | 10,436 |
| | 11,282 |
| |
Derivative assets (Note 11) | 26,996 |
| | 14,699 |
| 65,765 |
| | 60,695 |
|
Other assets | 26,055 |
| | 26,077 |
| 20,191 |
| | 22,548 |
|
TOTAL ASSETS | $ | 118,796,781 |
| | $ | 106,640,419 |
| $ | 99,202,573 |
| | $ | 106,895,214 |
|
LIABILITIES | | | | | | |
Deposits (Note 12) | $ | 804,342 |
| | $ | 729,936 |
| $ | 669,016 |
| | $ | 650,531 |
|
Consolidated Obligations, net (Note 13): | | | | |
Consolidated Obligations: (Note 13) | | | | |
Discount Notes | 77,199,208 |
| | 41,232,127 |
| 46,943,632 |
| | 46,210,458 |
|
Bonds (includes $2,214,590 and $4,209,640 at fair value under fair value option in 2015 and 2014, respectively) | 35,104,764 |
| | 59,216,557 |
| |
Total Consolidated Obligations, net | 112,303,972 |
| | 100,448,684 |
| |
Bonds (includes $3,906,610 and $5,577,315 at fair value under fair value option in 2018 and 2017, respectively) | | 45,659,138 |
| | 54,163,061 |
|
Total Consolidated Obligations | | 92,602,770 |
| | 100,373,519 |
|
Mandatorily redeemable capital stock (Note 15) | 37,895 |
| | 62,963 |
| 23,184 |
| | 30,031 |
|
Accrued interest payable | 118,823 |
| | 114,781 |
| 147,337 |
| | 128,652 |
|
Affordable Housing Program payable (Note 14) | 107,352 |
| | 98,103 |
| 117,336 |
| | 109,877 |
|
Derivative liabilities (Note 11) | 31,087 |
| | 63,767 |
| 4,586 |
| | 2,893 |
|
Other liabilities | 212,254 |
| | 183,177 |
| 308,128 |
| | 435,198 |
|
Total liabilities | 113,615,725 |
| | 101,701,411 |
| 93,872,357 |
| | 101,730,701 |
|
Commitments and contingencies (Note 20) |
| |
|
| |
|
CAPITAL (Note 15) | | | | | | |
Capital stock Class B putable ($100 par value); issued and outstanding shares: 44,288 shares in 2015 and 42,665 shares in 2014 | 4,428,756 |
| | 4,266,543 |
| |
Capital stock Class B putable ($100 par value); issued and outstanding shares: 43,205 shares in 2018 and 42,411 shares in 2017 | | 4,320,459 |
| | 4,241,140 |
|
Retained earnings: | | | | | | |
Unrestricted | 556,139 |
| | 529,367 |
| 631,971 |
| | 617,034 |
|
Restricted | 209,438 |
| | 159,694 |
| 390,829 |
| | 322,999 |
|
Total retained earnings | 765,577 |
| | 689,061 |
| 1,022,800 |
| | 940,033 |
|
Accumulated other comprehensive loss (Note 16) | (13,277 | ) | | (16,596 | ) | (13,043 | ) | | (16,660 | ) |
Total capital | 5,181,056 |
| | 4,939,008 |
| 5,330,216 |
| | 5,164,513 |
|
TOTAL LIABILITIES AND CAPITAL | $ | 118,796,781 |
| | $ | 106,640,419 |
| $ | 99,202,573 |
| | $ | 106,895,214 |
|
| |
(a) | Fair values: $15,229,965$15,575,368 and $14,794,32614,682,329 at December 31, 20152018 and 2014,2017, 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, |
| 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 |
INTEREST INCOME: | | | | | | | | | | |
Advances | $ | 366,651 |
| | $ | 314,800 |
| | $ | 305,658 |
| $ | 1,407,702 |
| | $ | 903,620 |
| | $ | 576,970 |
|
Prepayment fees on Advances, net | 2,723 |
| | 3,624 |
| | 2,473 |
| 679 |
| | 1,351 |
| | 9,874 |
|
Interest-bearing deposits | 88 |
| | 85 |
| | 185 |
| 704 |
| | 181 |
| | 320 |
|
Securities purchased under agreements to resell | 2,147 |
| | 1,261 |
| | 1,872 |
| 48,454 |
| | 23,340 |
| | 9,491 |
|
Federal funds sold | 12,106 |
| | 5,426 |
| | 6,232 |
| 179,552 |
| | 70,287 |
| | 34,313 |
|
Investment securities: | | | | | | | | | | |
Trading securities | 22 |
| | 25 |
| | 31 |
| 1,535 |
| | 19 |
| | 20 |
|
Available-for-sale securities | 2,198 |
| | 3,204 |
| | 1,827 |
| 40,444 |
| | 6,228 |
| | 5,822 |
|
Held-to-maturity securities | 325,449 |
| | 343,042 |
| | 313,181 |
| 380,304 |
| | 306,204 |
| | 325,500 |
|
Total investment securities | 327,669 |
| | 346,271 |
| | 315,039 |
| 422,283 |
| | 312,451 |
| | 331,342 |
|
Mortgage loans held for portfolio | 245,876 |
| | 236,882 |
| | 268,691 |
| 321,328 |
| | 297,075 |
| | 261,071 |
|
Loans to other FHLBanks | — |
| | — |
| | 5 |
| 20 |
| | — |
| | 13 |
|
Total interest income | 957,260 |
| | 908,349 |
| | 900,155 |
| 2,380,722 |
| | 1,608,305 |
| | 1,223,394 |
|
INTEREST EXPENSE: | | | | | | | | | | |
Consolidated Obligations: | | | | | | | | | | |
Discount Notes | 65,217 |
| | 27,439 |
| | 36,686 |
| 915,032 |
| | 384,976 |
| | 173,595 |
|
Bonds | 566,970 |
| | 559,480 |
| | 529,788 |
| 951,298 |
| | 786,922 |
| | 681,757 |
|
Total Consolidated Obligations | 632,187 |
| | 586,919 |
| | 566,474 |
| 1,866,330 |
| | 1,171,898 |
| | 855,352 |
|
Deposits | 360 |
| | 264 |
| | 326 |
| 14,009 |
| | 4,738 |
| | 1,320 |
|
Loans from other FHLBanks | — |
| | — |
| | 5 |
| 5 |
| | 10 |
| | 1 |
|
Mandatorily redeemable capital stock | 2,432 |
| | 4,190 |
| | 5,506 |
| 1,806 |
| | 2,514 |
| | 3,517 |
|
Other borrowings | | — |
| | 2 |
| | — |
|
Total interest expense | 634,979 |
| | 591,373 |
| | 572,311 |
| 1,882,150 |
| | 1,179,162 |
| | 860,190 |
|
NET INTEREST INCOME | 322,281 |
| | 316,976 |
| | 327,844 |
| 498,572 |
| | 429,143 |
| | 363,204 |
|
Reversal for credit losses | — |
| | (500 | ) | | (7,450 | ) | |
NET INTEREST INCOME AFTER REVERSAL FOR CREDIT LOSSES | 322,281 |
| | 317,476 |
| | 335,294 |
| |
NON-INTEREST INCOME: | | | | | | |
Net losses on trading securities | (18 | ) | | (9 | ) | | (19 | ) | |
Net gains on financial instruments held under fair value option | 1,057 |
| | 2,174 |
| | 330 |
| |
Net gains on derivatives and hedging activities | 13,037 |
| | 6,627 |
| | 7,903 |
| |
Standby Letters of Credit fees | 13,098 |
| | 10,767 |
| | 8,066 |
| |
Provision for credit losses | | — |
| | 500 |
| | — |
|
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES | | 498,572 |
| | 428,643 |
| | 363,204 |
|
NON-INTEREST INCOME (LOSS): | | | | | | |
Net gains (losses) on investment securities | | 7,086 |
| | (6 | ) | | 38,758 |
|
Net (losses) gains on financial instruments held under fair value option | | (14,184 | ) | | 10,409 |
| | 40,503 |
|
Net losses on derivatives and hedging activities | | (40,398 | ) | | (24,464 | ) | | (47,431 | ) |
Other, net | 2,720 |
| | 3,071 |
| | 3,511 |
| 10,678 |
| | 12,824 |
| | 14,401 |
|
Total non-interest income | 29,894 |
| | 22,630 |
| | 19,791 |
| |
Total non-interest income (loss) | | (36,818 | ) | | (1,237 | ) | | 46,231 |
|
NON-INTEREST EXPENSE: | | | | | | | | | | |
Compensation and benefits | 39,766 |
| | 36,777 |
| | 33,992 |
| 46,317 |
| | 42,272 |
| | 38,034 |
|
Other operating expenses | 21,728 |
| | 17,454 |
| | 17,493 |
| 20,019 |
| | 18,880 |
| | 25,935 |
|
Finance Agency | 6,793 |
| | 7,084 |
| | 5,203 |
| 6,389 |
| | 6,598 |
| | 6,325 |
|
Office of Finance | 4,698 |
| | 4,374 |
| | 4,535 |
| 4,984 |
| | 4,484 |
| | 4,284 |
|
Litigation settlement | | — |
| | — |
| | 25,250 |
|
Other | 2,566 |
| | 2,559 |
| | 3,164 |
| 7,010 |
| | 6,484 |
| | 11,235 |
|
Total non-interest expense | 75,551 |
| | 68,248 |
| | 64,387 |
| 84,719 |
| | 78,718 |
| | 111,063 |
|
INCOME BEFORE ASSESSMENTS | 276,624 |
| | 271,858 |
| | 290,698 |
| 377,035 |
| | 348,688 |
| | 298,372 |
|
Affordable Housing Program assessments | 27,906 |
| | 27,605 |
| | 29,620 |
| 37,884 |
| | 35,120 |
| | 30,189 |
|
NET INCOME | $ | 248,718 |
| | $ | 244,253 |
| | $ | 261,078 |
| $ | 339,151 |
| | $ | 313,568 |
| | $ | 268,183 |
|
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, |
| 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 |
Net income | $ | 248,718 |
| | $ | 244,253 |
| | $ | 261,078 |
| $ | 339,151 |
| | $ | 313,568 |
| | $ | 268,183 |
|
Other comprehensive income adjustments: | | | | | | | | | | |
Net unrealized gains (losses) on available-for-sale securities | 105 |
| | 97 |
| | (121 | ) | 14 |
| | (147 | ) | | (58 | ) |
Pension and postretirement benefits | 3,214 |
| | (7,651 | ) | | 2,813 |
| 3,603 |
| | (3,257 | ) | | 79 |
|
Total other comprehensive income adjustments | 3,319 |
| | (7,554 | ) | | 2,692 |
| 3,617 |
| | (3,404 | ) | | 21 |
|
Comprehensive income | $ | 252,037 |
| | $ | 236,699 |
| | $ | 263,770 |
| $ | 342,768 |
| | $ | 310,164 |
| | $ | 268,204 |
|
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, 2012 | 40,106 |
| | $ | 4,010,622 |
| | $ | 479,253 |
| | $ | 58,628 |
| | $ | 537,881 |
| | $ | (11,734 | ) | | $ | 4,536,769 |
| |
BALANCE, DECEMBER 31, 2015 | | 44,288 |
| | $ | 4,428,756 |
| | $ | 530,998 |
| | $ | 206,648 |
| | $ | 737,646 |
| | $ | (13,277 | ) | | $ | 5,153,125 |
|
Comprehensive income | | | | | | 214,546 |
| | 53,637 |
| | 268,183 |
| | 21 |
| | 268,204 |
|
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 |
| |
BALANCE, DECEMBER 31, 2017 | | 42,411 |
| | 4,241,140 |
| | 617,034 |
| | 322,999 |
| | 940,033 |
| | (16,660 | ) | | 5,164,513 |
|
Comprehensive income | | |
| | |
| | 271,321 |
| | 67,830 |
| | 339,151 |
| | 3,617 |
| | 342,768 |
|
Proceeds from sale of capital stock | 835 |
| | 83,543 |
| | | | | | | | | | 83,543 |
| 4,392 |
| | 439,157 |
| | | | | | | | | | 439,157 |
|
Repurchase of capital stock | (4,979 | ) | | (497,875 | ) | | | | | | | | | | (497,875 | ) | (2,972 | ) | | (297,252 | ) | | | | | | | | | | (297,252 | ) |
Net shares reclassified to mandatorily redeemable capital stock | (171 | ) | | (17,110 | ) | | | | | | | | | | (17,110 | ) | (626 | ) | | (62,586 | ) | | | | | | | | | | (62,586 | ) |
Comprehensive income | | | | | 195,402 |
| | 48,851 |
| | 244,253 |
| | (7,554 | ) | | 236,699 |
| |
Cash dividends on capital stock | | | | | (176,356 | ) | | | | (176,356 | ) | | | | (176,356 | ) | | | | | (256,384 | ) | | | | (256,384 | ) | | | | (256,384 | ) |
BALANCE, DECEMBER 31, 2014 | 42,665 |
| | 4,266,543 |
| | 529,367 |
| | 159,694 |
| | 689,061 |
| | (16,596 | ) | | 4,939,008 |
| |
Proceeds from sale of capital stock | 1,912 |
| | 191,132 |
| | | | | | | | | | 191,132 |
| |
Net shares reclassified to mandatorily redeemable capital stock | (289 | ) | | (28,919 | ) | | | | | | | | | | (28,919 | ) | |
Comprehensive income | | | | | 198,974 |
| | 49,744 |
| | 248,718 |
| | 3,319 |
| | 252,037 |
| |
Cash dividends on capital stock | | | | | (172,202 | ) | | | | (172,202 | ) | | | | (172,202 | ) | |
BALANCE, DECEMBER 31, 2015 | 44,288 |
| | $ | 4,428,756 |
| | $ | 556,139 |
| | $ | 209,438 |
| | $ | 765,577 |
| | $ | (13,277 | ) | | $ | 5,181,056 |
| |
BALANCE, DECEMBER 31, 2018 | | 43,205 |
| | $ | 4,320,459 |
| | $ | 631,971 |
| | $ | 390,829 |
| | $ | 1,022,800 |
| | $ | (13,043 | ) | | $ | 5,330,216 |
|
The accompanying notes are an integral part of these financial statements.
FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF CASH FLOWS
(In thousands)
|
| | | | | | | | | | | |
(In thousands) | For the Years Ended December 31, |
| 2018 | | 2017 | | 2016 |
OPERATING ACTIVITIES: | | | | | |
Net income | $ | 339,151 |
| | $ | 313,568 |
| | $ | 268,183 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Depreciation and amortization | 59,577 |
| | 57,973 |
| | 55,296 |
|
Net change in derivative and hedging activities | (4,706 | ) | | 6,927 |
| | 63,806 |
|
Net change in fair value adjustments on trading securities | (7,086 | ) | | 6 |
| | 5 |
|
Net change in fair value adjustments on financial instruments held under fair value option | 14,184 |
| | (10,409 | ) | | (40,503 | ) |
Other adjustments | (10 | ) | | 489 |
| | (38,774 | ) |
Net change in: | | | | | |
Accrued interest receivable | (41,482 | ) | | (18,701 | ) | | (15,028 | ) |
Other assets | 1,651 |
| | 23,686 |
| | (24,325 | ) |
Accrued interest payable | 18,077 |
| | 4,743 |
| | 21,273 |
|
Other liabilities | 25,792 |
| | 15,456 |
| | 32,560 |
|
Total adjustments | 65,997 |
| | 80,170 |
| | 54,310 |
|
Net cash provided by operating activities | 405,148 |
| | 393,738 |
| | 322,493 |
|
| | | | | |
INVESTING ACTIVITIES: | | | | | |
Net change in: | | | | | |
Interest-bearing deposits | (7,089 | ) | | 46,981 |
| | (113,516 | ) |
Securities purchased under agreements to resell | 3,299,721 |
| | (2,472,442 | ) | | 5,302,492 |
|
Federal funds sold | (7,143,000 | ) | | 607,000 |
| | 6,588,000 |
|
Premises, software, and equipment | (2,173 | ) | | (2,647 | ) | | (1,623 | ) |
Trading securities: | | | | | |
Proceeds from maturities of long-term | 164 |
| | 182 |
| | 184 |
|
Purchases of long-term | (216,277 | ) | | — |
| | — |
|
Available-for-sale securities: | | | | | |
Net (increase) decrease in short-term | (1,450,000 | ) | | 400,000 |
| | (600,000 | ) |
Purchases of long-term | (36,000 | ) | | — |
| | — |
|
Held-to-maturity securities: | | | | | |
Net (increase) decrease in short-term | (1,634 | ) | | (2,753 | ) | | 1,404 |
|
Proceeds from maturities of long-term | 2,851,296 |
| | 2,420,330 |
| | 2,924,469 |
|
Proceeds from sale of long-term | — |
| | — |
| | 852,199 |
|
Purchases of long-term | (3,996,773 | ) | | (2,992,069 | ) | | (2,529,144 | ) |
Advances: | | | | | |
Repaid | 2,889,037,056 |
| | 2,366,633,884 |
| | 1,364,290,711 |
|
Originated | (2,873,930,828 | ) | | (2,366,705,248 | ) | | (1,360,955,355 | ) |
Mortgage loans held for portfolio: | | | | | |
Principal collected | 1,117,727 |
| | 1,218,035 |
| | 1,661,697 |
|
Purchases | (1,978,111 | ) | | (1,788,156 | ) | | (2,899,907 | ) |
Net cash provided by (used in) investing activities | 7,544,079 |
| | (2,636,903 | ) | | 14,521,611 |
|
| | | | | |
| | | | | |
The accompanying notes are an integral part of these financial statements. | | | | |
| | | | | |
| | | | | |
| | | | | |
|
| | | | | | | | | | | |
| For the Years Ended December 31, |
| 2015 | | 2014 | | 2013 |
OPERATING ACTIVITIES: | | | | | |
Net income | $ | 248,718 |
| | $ | 244,253 |
| | $ | 261,078 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Depreciation and amortization | 41,511 |
| | 8,188 |
| | (512 | ) |
Net change in derivative and hedging activities | 12,651 |
| | 16,224 |
| | 35,607 |
|
Net change in fair value adjustments on trading securities | 18 |
| | 9 |
| | 19 |
|
Net change in fair value adjustments on financial instruments held under fair value option | (1,057 | ) | | (2,174 | ) | | (330 | ) |
Other adjustments | (11 | ) | | (393 | ) | | (7,464 | ) |
Net change in: | | | | | |
Accrued interest receivable | (13,473 | ) | | 3,746 |
| | (1,216 | ) |
Other assets | (1,120 | ) | | (739 | ) | | (3,244 | ) |
Accrued interest payable | 4,694 |
| | (3,177 | ) | | 10,829 |
|
Other liabilities | 41,036 |
| | 19,252 |
| | 25,470 |
|
Total adjustments | 84,249 |
| | 40,936 |
| | 59,159 |
|
Net cash provided by operating activities | 332,967 |
| | 285,189 |
| | 320,237 |
|
| | | | | |
INVESTING ACTIVITIES: | | | | | |
Net change in: | | | | | |
Interest-bearing deposits | 12,092 |
| | 30,579 |
| | 119,127 |
|
Securities purchased under agreements to resell | (7,188,979 | ) | | (993,000 | ) | | 1,450,000 |
|
Federal funds sold | (4,245,000 | ) | | (4,860,000 | ) | | 1,610,000 |
|
Premises, software, and equipment | (1,834 | ) | | (686 | ) | | (7,203 | ) |
Trading securities: | | | | | |
Proceeds from maturities of long-term | 164 |
| | 228 |
| | 325 |
|
Available-for-sale securities: | | | | | |
Net decrease (increase) in short-term | 650,000 |
| | 835,000 |
| | (2,185,000 | ) |
Held-to-maturity securities: | | | | | |
Net (increase) decrease in short-term | (6,585 | ) | | 1,386 |
| | (1,247 | ) |
Proceeds from maturities of long-term | 2,611,029 |
| | 2,093,933 |
| | 2,686,432 |
|
Purchases of long-term | (3,172,521 | ) | | (719,833 | ) | | (5,977,152 | ) |
Advances: | | | | | |
Proceeds | 930,146,812 |
| | 1,120,239,271 |
| | 697,384,820 |
|
Made | (933,090,216 | ) | | (1,125,441,755 | ) | | (708,852,213 | ) |
Mortgage loans held for portfolio: | | | | | |
Principal collected | 1,383,198 |
| | 1,070,820 |
| | 1,890,141 |
|
Purchases | (2,414,064 | ) | | (1,260,888 | ) | | (1,203,883 | ) |
Net cash used in investing activities | (15,315,904 | ) | | (9,004,945 | ) | | (13,085,853 | ) |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
The accompanying notes are an integral part of these financial statements. | | | | |
| | | | | |
| | | | | | | | | | | | | | | | | | |
(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, | 2018 | | 2017 | | 2016 |
| 2015 | | 2014 | | 2013 | |
FINANCING ACTIVITIES: | | | | | | | | | | |
Net increase (decrease) in deposits and pass-through reserves | $ | 74,725 |
| | $ | (200,660 | ) | | $ | (260,961 | ) | |
Net change in deposits and pass-through reserves | | $ | 28,225 |
| | $ | (99,633 | ) | | $ | 3,567 |
|
Net payments on derivative contracts with financing elements | (28,458 | ) | | (31,195 | ) | | (42,054 | ) | (1,107 | ) | | (4,210 | ) | | (23,185 | ) |
Net proceeds from issuance of Consolidated Obligations: | | | | | | | | | | |
Discount Notes | 305,975,240 |
| | 270,415,559 |
| | 165,083,112 |
| 552,603,900 |
| | 449,775,543 |
| | 325,535,819 |
|
Bonds | 19,042,816 |
| | 41,461,146 |
| | 34,035,263 |
| 29,071,856 |
| | 27,080,080 |
| | 50,922,924 |
|
Payments for maturing and retiring Consolidated Obligations: | | | | | | | | | | |
Discount Notes | (270,027,809 | ) | | (267,394,419 | ) | | (157,714,961 | ) | (551,919,437 | ) | | (448,296,555 | ) | | (358,051,273 | ) |
Bonds | (43,118,354 | ) | | (40,358,950 | ) | | (20,166,866 | ) | (37,565,265 | ) | | (26,065,750 | ) | | (32,787,008 | ) |
Proceeds from issuance of capital stock | 191,132 |
| | 83,543 |
| | 720,820 |
| 439,157 |
| | 354,654 |
| | 92,027 |
|
Payments for repurchase of capital stock | | (297,252 | ) | | — |
| | — |
|
Payments for repurchase/redemption of mandatorily redeemable capital stock | (53,987 | ) | | (70,000 | ) | | (128,432 | ) | (69,433 | ) | | (275,209 | ) | | (366,952 | ) |
Payments for repurchase of capital stock | — |
| | (497,875 | ) | | — |
| |
Cash dividends paid | (172,202 | ) | | (176,356 | ) | | (177,795 | ) | (256,384 | ) | | (207,942 | ) | | (171,422 | ) |
Net cash provided by financing activities | 11,883,103 |
| | 3,230,793 |
| | 21,348,126 |
| |
Net cash (used in) provided by financing activities | | (7,965,740 | ) | | 2,260,978 |
| | (14,845,503 | ) |
Net (decrease) increase in cash and cash equivalents | (3,099,834 | ) | | (5,488,963 | ) | | 8,582,510 |
| (16,513 | ) | | 17,813 |
| | (1,399 | ) |
Cash and cash equivalents at beginning of the period | 3,109,970 |
| | 8,598,933 |
| | 16,423 |
| 26,550 |
| | 8,737 |
| | 10,136 |
|
Cash and cash equivalents at end of the period | $ | 10,136 |
| | $ | 3,109,970 |
| | $ | 8,598,933 |
| $ | 10,037 |
| | $ | 26,550 |
| | $ | 8,737 |
|
Supplemental Disclosures: | | | | | | | | | | |
Interest paid | $ | 642,179 |
| | $ | 621,865 |
| | $ | 584,640 |
| $ | 1,851,838 |
| | $ | 1,157,662 |
| | $ | 858,401 |
|
Affordable Housing Program payments, net | $ | 18,657 |
| | $ | 23,291 |
| | $ | 18,503 |
| $ | 30,425 |
| | $ | 30,126 |
| | $ | 32,658 |
|
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 FHLB), a federally chartered corporation, is one of 11 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 FHLB provides a readily available, competitively-priced source of funds to its member institutions. The FHLB is a cooperative whose member institutions own nearly all of the capital stock of the FHLB and may receive dividends on their investment to the extent declared by the FHLB's Board of Directors. Former members own the remaining capital stock to support business transactions still carried on the FHLB'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 FHLB; while eligible to borrow, housing authorities are not members of the FHLB and, therefore, are not allowed to hold capital stock. A housing authority is eligible to utilize the Advance programs of the FHLB if it meets applicable statutory requirements. It must be a U.S. Department of Housing and Urban Development approved mortgagee and must also meet applicable mortgage lending, financial condition, as well as charter, inspection and supervision requirements.
All members must purchase stock in the FHLB. Members must own capital stock in the FHLB based on the amount of their total assets. Each member also may be required to purchase activity-based capital stock as it engages in certain business activities with the FHLB. As a result of these requirements, the FHLB conducts business with stockholders in the normal course of business. For financial statement purposes, the FHLB defines related parties as those members with more than 10 percent of the voting interests of the FHLB's outstanding capital stock. See Note 22 for more information relating to transactions with stockholders.
The Federal Housing Finance Agency (Finance Agency) is the independent Federal regulator of the FHLBanks, Federal Home Loan Mortgage Corporation (Freddie Mac) and Federal National Mortgage Association (Fannie Mae). The Finance Agency's stated mission is to ensure that the housing government-sponsored enterprises (GSEs) operate in a safe and sound manner so that they serve as a reliable source of liquidity and funding for housing finance and community investment.
Each FHLBank operates as a separate entity with its own management, employees, and board of directors. The FHLB 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 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 members provide other funds. The FHLB primarily uses its funds to provide Advances to members and to purchase loans from members through its Mortgage Purchase Program (MPP). The FHLB also provides member institutions with correspondent services, such as wire transfer, security safekeeping, and settlement services.
Note 1 - Summary of Significant Accounting Policies
Basis of Presentation.Presentation
The FHLB'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 FHLB considers non-interest bearing cash and due from banks as cash and cash equivalents. Federal funds sold are not treated as cash equivalents for purposes of the Statements of Cash Flows, but are instead treated as short-term investments and are reflected in the investing activities section of the Statements of Cash Flows.
Reclassifications. Certain amounts in the 2017 and 2016 financial statements and footnotes have been reclassified to conform to the 2018 presentation. Specifically, due to a change in presentation, variation margin on certain cleared derivatives has been reclassified from netting adjustments and cash collateral and allocated to the individual derivative instruments. Refer to Note 11 for additional information. Also, on January 1, 2018, the FHLB retrospectively adopted the guidance, Improving the Presentation of Net Periodic Pension and Postretirement Benefit Cost, issued by the Financial Accounting Standards Board (FASB) on March 10, 2017. As a result of the adoption, $3,271,000 and $3,898,000 of other components of net benefit costs were reclassified from "Compensation and benefits" to "Other" within the non-interest expense section of the Statements of Income for the years ended December 31, 2017 and December 31, 2016, respectively.
Subsequent Events. The FHLB 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 FHLB'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 FHLB 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 FHLB treats securities purchased under agreements to resell as short-term collateralized loans, which are classified as assets on the Statements of Condition. Securities purchased under agreements to resell are held in safekeeping in the name of the FHLB by third-party custodians approved by the 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 FHLB 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 FHLB to be of investment quality.
Investment Securities. The FHLB 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 FHLB records changes in the fair value of these securities through other income as a net gain or loss on trading securities. However, the FHLB 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 lossgains (losses) on available-for-sale securities. For available-for-sale securities that have been hedged and qualify as a fair value hedge, the FHLB records the portion of the change in the fair value of the investment related to the risk being hedged in non-interest income as net gains (losses) on derivatives and hedging activities together with the related change in the fair value of the derivative, and records the remainder of the change in the fair value of the investment in other comprehensive income as net unrealized gains (losses) on available-for-sale securities.
Held-to-Maturity. Securities that the FHLB 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 FHLB 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 FHLB that could not have been reasonably anticipated may cause the FHLB 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(for example, within three months of maturity), or call date if exercise of the call is probable)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 FHLB 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 FHLB amortizes purchased premiums and accretes purchased discounts on mortgage-backed securities and other investment categories with a term of greater than one year(MBS) using the retrospective level-yieldinterest method (retrospective method). The retrospective method requires that the FHLB estimate prepayments over the estimated life of the securities and make a retrospective adjustment of the effective yield each time that the FHLB changes the estimated life and/or prepayments as if the new estimate had been known since the original acquisition date of the securities. The FHLB uses nationally recognized third-party prepayment models to project estimated cash flows. Due to their short term nature, the FHLB 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 FHLB, 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 FHLB 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 FHLB 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 FHLB considers an other-than-temporary impairment to have occurred under any of the following circumstances:conditions:
| |
▪ | if the FHLB has an intent to sell the impaired debt security; |
| |
▪ | if, based on available evidence, the FHLB 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 FHLB 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 FHLB 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 FHLB reports Advances (loans to members, former members or housing associates) either at amortized cost or at fair value when the fair value option is elected. Advances carried at amortized cost are reported net of premiums, discounts (including discounts on Advances related to the Affordable Housing Program (AHP), as discussed below), unearned commitment fees and hedging adjustments. The FHLB 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. Refundable fees are deferred until the commitment expires or until the Advance is made. The FHLB 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 FHLB funds a new Advance concurrent with or within a short period of time before or after the prepayment of an existing Advance by the same 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 FHLB 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 FHLB 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 FHLB charges a borrower a prepayment fee when the borrower prepays certain Advances before the original maturity. The FHLB 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 FHLB 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 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 basis 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, the existingprepaid 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 FHLB 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 FHLB records commitment fees for Standby Letters of Credit as a deferred credit when it receives the fees and accretes them using a straight-line methodology over the term of the Standby Letter of Credit. Based upon past experience, the FHLB's management believes that the likelihood of Standby Letters of Credit being drawn upon is remote.
Mortgage Loans Held for Portfolio. The FHLB 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 FHLB has the intent and ability to hold these mortgage loans to maturity.
Premiums and Discounts. The FHLB defers and amortizes premiums and accretes discounts paid to and received by the FHLB's participating members (Participating Financial Institutions, or PFIs) and mark-to-markethedging basis adjustments, as interest income using the retrospective method. The FHLB 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 FHLB may receive non-origination fees, called pair-off fees. Pair-off fees represent a make-whole provision and are assessed when a member fails to deliver the quantity of loans committed to in a Mandatory Delivery Contract. Pair-off fees are recorded in other income. A Mandatory Delivery Contract is a legal commitment the FHLB 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 FHLB's portfolio as of the Statements of Condition date and the amount of loss can be reasonably estimated. A loan is considered impaired when, based on current information and events, it is probable that the FHLB will be unable to collect all amounts due according to the contractual terms of the loan agreement. 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 FHLB has developed and documented a systematic methodology for determining an allowance for credit losses, where applicable, for (1) Advances, letterscredit products (Advances, Letters of creditCredit and other extensions of credit to members, collectively referred to as “credit products”;members) (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 FHLB 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 FHLB at the portfolio segment level.
Impairment Methodology.Collateral-dependent Loans. AAn impaired loan is considered impaired when, based on current information and events, it is probable that the FHLB 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,property; that is, there is no other available and reliable source of repayment. Collateral-dependent loans are impaired ifA loan that is considered collateral-dependent is measured for impairment based on the fair value of the underlying collateral is insufficient to recover the unpaid principal balance on the loan.property less estimated selling costs, with any shortfall recognized as an allowance for loan loss or charged-off. Interest income on impaired loans is recognized in the same manner as non-accrual loans noted below.
Non-accrual Loans. The FHLB 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 settlementsremittances on a schedule/scheduled basis). Loans with settlementsremittances on a schedule/scheduled basis means the FHLB receives monthly principal and interest payments from the servicer regardless of whether the mortgagee is making payments to the servicer. Loans with monthly settlementremittances 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 FHLB 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 FHLB 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 FHLB 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. As a result of adopting the Finance Agency's Advisory Bulletin 2012-02, theThe FHLB also charges off the portion of outstanding conventional mortgage loan balances in excess of fair value of the 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. Premises, software and equipment are included in other assets on the Statements of Condition. The FHLB records premises, software and equipment at cost less accumulated depreciation and amortization. The FHLB's accumulated depreciation and amortization related to these items was $20,867,000 and $18,556,000 at December 31, 2015 and 2014. The FHLB computes depreciation on a straight-line methodology over the estimated useful lives of assets ranging from three to ten years. The FHLB amortizes leaseholdLeasehold improvements are amortized on a straight-line basis over the shorter of the estimated useful life of the improvement or the remaining term of the lease. The FHLB capitalizes improvements and major renewals but expenses ordinary maintenance and repairs when incurred. Depreciation and amortization expense for premises, software and equipment was $2,691,000, $3,108,000, and $2,549,000 for the years ended December 31, 2015, 2014, and 2013.
The FHLB includes gainscapitalizes and losses on disposal of premises, software and equipment in other income. The net realized gain (loss) on disposal of premises, software and equipment was $11,000, $(106,000), and $13,000 foramortizes the years ended December 31, 2015, 2014, and 2013.
The cost of computer software developed or obtained for internal use is capitalized and amortized over future periods. AsIn addition, the FHLB includes gains and losses on the disposal of premises, software and equipment in other non-interest income in the Statements of Income.
Premises, software and equipment were $8,190,000 and $8,896,000, which was net of accumulated depreciation and amortization of $29,007,000 and $26,167,000 as of December 31, 20152018 and 2014, the FHLB had $5,887,000 and $6,659,000 in unamortized computer software costs. Amortization of computer software costs charged to expense was $1,965,000, $2,433,000, and $1,814,000 for2017, respectively. For the years ended December 31, 2015, 2014,2018, 2017, and 2013.2016, the depreciation and amortization expense for premises, software and equipment was $2,889,000, $2,949,000, and $2,883,000, respectively.
Derivatives. All derivatives are recognized on the Statements of Condition at their fair values and are reported as either derivative assets or derivative liabilities, net of cash collateral, and accrued interest from counterparties. The fair values of derivatives are netted by counterparty when the netting requirements have been met. If these netted amounts are positive, they are classified as an asset and, if negative, they are classified as a liability. Cash flows associated with derivatives are reflected as cash flows from operating activities in the Statement of Cash Flows unless the derivative meets the criteria to be a financing derivative.
The FHLB utilizes two Derivative Clearing Organizations (Clearinghouses), for all cleared derivative transactions, LCH Ltd. and CME Clearing. Effective January 16, 2018, LCH Ltd. made certain amendments to its rulebook changing the legal characterization of variation margin payments to be daily settlement payments, rather than collateral. CME Clearing made the same changes to its rulebook on January 3, 2017. As a result, at both Clearinghouses, variation margin is characterized as daily settlement payments, rather than cash collateral. 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 FHLB 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 FHLB 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 FHLB designates the hedged item in a qualifying hedge relationship as of the trade date. In many hedging relationships, the FHLB 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 FHLB 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 gainslosses 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 FHLB'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 FHLB'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 FHLB recognizes onlythe net interest and the change in fair value of these derivatives in othernon-interest income as “Net gainslosses 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 gainslosses on derivatives and hedging activities.”
Embedded Derivatives. The FHLB may issue debt, make Advances, or purchase financial instruments in which a derivative instrument is “embedded.” Upon execution of these transactions, the FHLB 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 FHLB 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 FHLB cannot reliably identify and measure the embedded derivative for purposes of separating that derivative from its host contract.
Discontinuance of Hedge Accounting. The FHLB 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 FHLB determines that the derivative no longer qualifies as an effective fair value hedge of an existing hedged item, the FHLB 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 FHLB 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 FHLB based upon the percentage of the debt issued that is assumed by the 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 FHLB 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 FHLB, 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 FHLB 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, the 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 FHLB, and the FHLB 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 FHLB reclassifies stock subject to redemption from equity to liability upon expiration of the “grace period” after a member provides written notice of redemption, gives notice of intent to withdraw from membership, or attains nonmember status by merger or acquisition, charter termination, or involuntary termination from membership, because the 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 member cancels its written notice of redemption or notice of withdrawal, the FHLB 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 FHLB 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,Under the FHLBanks entered into a Joint Capital Enhancement Agreement, as amended (Capital Agreement). Under the Capital Agreement, beginning in the third quarter of 2011,, the FHLB 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 FHLB'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.
Standby Letters of Credit. The FHLB records commitment fees for Standby Letters of Credit as deferred income 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 FHLB's management believes that the likelihood of Standby Letters of Credit being drawn upon is remote.
Finance Agency Expenses. The FHLB 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 each 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 FHLB 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 FHLB classifies amounts awarded under its voluntary housing programs as other non-interest expenses.
Affordable Housing Program (AHP). The FHLBank Act requires each FHLBank to establish and fund an AHP. The FHLB charges the required funding for AHP to earnings and establishes a liability. The AHP funds provide subsidies to members to
assist in the purchase, construction, or rehabilitation of housing for very low-, low-, and moderate-income households. The FHLB also issues AHP Advances at interest rates below the customary interest rate for non-subsidized Advances. When the FHLB 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 FHLB'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 FHLB also has the authority to make the AHP subsidy available to members as a grant. The discount on AHP Advances is accreted to interest income on Advances using a level-yield methodology over the life of the Advance.
Note 2 - Recently Issued Accounting Standards and Interpretations
Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes. On October 25, 2018, the FASB issued guidance that permits the OIS rate based on SOFR as an eligible U.S. benchmark interest rate for hedge accounting purposes, to facilitate the LIBOR to SOFR transition. This guidance became effective for the FHLB for the interim and annual periods beginning on January 1, 2019 (concurrent with the adoption of the hedging standard mentioned below). This guidance was adopted prospectively for qualifying new or re-designated hedging relationships entered into on or after January 1, 2019; however, the FHLB did not implement any SOFR OIS hedge strategies upon adoption. The FHLB will continue to assess opportunities to expand its eligible hedge strategies in the future.
Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. On August 29, 2018, the FASB issued amended guidance that aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). This guidance becomes effective for the FHLB for the interim and annual periods beginning on January 1, 2020. Early adoption is permitted. The FHLB is in the process of evaluating the guidance, and its effect on the FHLB’s financial condition, results of operations, and cash flows has not yet been determined.
Changes to the Disclosure Requirements for Defined Benefit Plans. On August 28, 2018, the FASB issued amended guidance that modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans to improve disclosure effectiveness. This guidance becomes effective for annual periods ending after December 15, 2020 (December 31, 2020 for the FHLB) and will be applied retrospectively for all comparative periods presented. Early adoption is permitted. The FHLB does not intend to adopt this guidance early. The adoption of this guidance will affect the FHLB's disclosures, but will not have any effect on the FHLB's financial condition, results of operations, or cash flows.
Changes to the Disclosure Requirements for Fair Value Measurement. On August 28, 2018, the FASB issued amended guidance that modifies the disclosure requirements for fair value measurements to improve disclosure effectiveness. This guidance becomes effective for the FHLB for the interim and annual periods beginning on January 1, 2020. Early adoption is permitted. The FHLB does not intend to adopt this guidance early. The adoption of this guidance will affect the FHLB's disclosures, but will not have any effect on the FHLB's financial condition, results of operations, or cash flows.
Targeted Improvements to Accounting for Hedging Activities. On August 28, 2017, the FASB issued amended guidance to 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. In addition, the amendments include certain targeted improvements to the assessment of hedge effectiveness. This guidance became effective for the FHLB for the interim and annual periods beginning on January 1, 2019 and was applied to all existing hedging relationships as of that date. On January 1, 2019, the FHLB modified the presentation of fair value hedge results on its Statements of Income, as well as relevant disclosures, prospectively. However, the adoption of this guidance did not have a material effect on the FHLB's financial condition, results of operations, or cash flows.
Premium Amortization on Purchased Callable Debt Securities. On March 30, 2017, the FASB issued amended guidance to shorten the amortization period for certain purchased callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. This guidance was adopted on January 1, 2019, and is 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 guidance did not have an impact on the FHLB’s financial condition, results of operations, or 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 becomes effective for the FHLB for the interim and annual periods beginning on January 1, 2020. Early adoption is permitted. 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. Based on its preliminary assessments, the FHLB does not expect the guidance to result in an allowance for credit losses for certain financial instruments including Advances, U.S. obligations/GSE investments, securities purchased under agreement to resell and other short-term investments given the specific terms, issuer guarantees, and/or collateralized/secured nature of the instruments. For mortgage loans held for portfolio, the FHLB does not expect the guidance to have a material impact. However, the FHLB's expectation of the guidance's ultimate impact on its financial condition, results of operations, and cash flows may change depending 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 Financial Accounting Standards Board (FASB)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 monthmonths or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and lease liabilities.The guidance becomes effective for the FHLB for the interim and annual periods beginning after December 15, 2018, and early application is permitted. The guidance requires lessors and lessees to recognize and measure leases at the beginning of the earliest period presented in the financial statements using a modified retrospective approach. 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.
Recognition and Measurement of Financial Assets and Financial Liabilities. On January 5, 2016, the FASB issued amended guidance on certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This guidance includes, but is not limited to, the following:
| |
▪ | Requires equity investments (with certain exceptions) to be measured at fair value with changes in fair value recognized in net income. |
| |
▪ | Require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected the fair value option. |
| |
▪ | Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements. |
| |
▪ | Eliminates the requirement for public entities to disclose the method(s) and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost on the balance sheet. |
The guidance becomes effective for the FHLB for the interim and annual periods beginning after December 15, 2017, and early adoption is only permitted for certain provision. The amendments, in general, should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the period of adoption. 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.
Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. On April 15, 2015, the FASB issued amendments to clarify the accounting for cloud computing arrangements. The amendments provide guidance to customers on determining whether a cloud computing arrangement includes a software license. If the arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If the arrangement does not contain a software license, the customer should account for the arrangement as a service contract. This guidance became effective for the FHLB for the interim and annual periods beginning on January 1, 2016, and was adopted prospectively. The2019. However, the adoption of this guidance had nodid not have a material effectimpact on the FHLB's financial condition, results of operations, andor cash flows.
Simplifying the Presentation of Debt Issuance Costs. On April 7, 2015, the FASB issued guidance to simplify the presentation of debt issuance costs. This guidance requires that debt issuance costs related to a recognized debt liability be presented in the Statement of Condition as a direct deduction from the carrying amount of the liability, consistent with the presentation of debt discounts. This guidance became effective for the FHLB for the interim and annual periods beginning on January 1, 2016, and was adopted retrospectively. The adoption of this guidance resulted in a reclassification of debt issuance costs from other assets to Consolidated Obligations for each applicable prior period. The adoption of this guidance had no material effect on the FHLB's financial condition.
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 FHLB 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, 20152018 and 20142017 were approximately $63,000$118,000 and $77,000.$98,000.
Pass-through Deposit Reserves. The FHLB acts as a pass-through correspondent for member institutions required to deposit reserves with the Federal Reserve Banks. The amount shown as “Cash and due from banks” includes pass-through reserves deposited with Federal Reserve Banks of approximately $238,000$6,478,000 and $298,000$1,805,000 as of December 31, 20152018 and 2014.2017.
Note 4 - Trading Securities
Table 4.1 - Trading Securities by Major Security Types (in thousands) | | Fair Value | December 31, 2015 | | December 31, 2014 | December 31, 2018 | | December 31, 2017 |
Mortgage-backed securities: | | | | |
Other U.S. obligation single-family mortgage-backed securities (1) | $ | 1,159 |
| | $ | 1,341 |
| |
Non-MBS: | | | | |
GSE obligations | | $ | 223,368 |
| | $ | — |
|
MBS: | | | | |
U.S. obligation single-family MBS | | 612 |
| | 781 |
|
Total | $ | 1,159 |
| | $ | 1,341 |
| $ | 223,980 |
| | $ | 781 |
|
| |
(1) | Consists of Government National Mortgage Association (Ginnie Mae) mortgage-backed securities. |
Table 4.2 - Net LossesGains (Losses) on Trading Securities (in thousands)
|
| | | | | | | | | | | |
| For the Years Ended December 31, |
| 2015 | | 2014 | | 2013 |
Net losses on trading securities held at period end | $ | (18 | ) | | $ | (9 | ) | | $ | (19 | ) |
Net losses on trading securities | $ | (18 | ) | | $ | (9 | ) | | $ | (19 | ) |
|
| | | | | | | | | | | |
| For the Years Ended December 31, |
| 2018 | | 2017 | | 2016 |
Net gains (losses) on trading securities held at period end | $ | 7,086 |
| | $ | (6 | ) | | $ | (5 | ) |
Net gains (losses) on trading securities | $ | 7,086 |
| | $ | (6 | ) | | $ | (5 | ) |
Note 5 - Available-for-Sale Securities
Table 5.1 - Available-for-Sale Securities by Major Security Types (in thousands)
| | | December 31, 2015 | December 31, 2018 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | Amortized Cost (1) | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Certificates of deposit | $ | 700,000 |
| | $ | 81 |
| | $ | — |
| | $ | 700,081 |
| $ | 2,350,000 |
| | $ | 71 |
| | $ | (69 | ) | | $ | 2,350,002 |
|
GSE obligations | | 53,007 |
| | 16 |
| | (128 | ) | | 52,895 |
|
Total | $ | 700,000 |
| | $ | 81 |
| | $ | — |
| | $ | 700,081 |
| $ | 2,403,007 |
| | $ | 87 |
| | $ | (197 | ) | | $ | 2,402,897 |
|
| | | | | | | | | | | | | | |
| December 31, 2014 | December 31, 2017 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | Amortized Cost (1) | | 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 |
|
| |
(1) | Amortized cost of available-for-sale securities includes adjustments made to the cost basis of an investment for accretion, amortization, and/or fair value hedge accounting adjustments. |
All securities outstanding with gross unrealized losses at December 31, 20142018 and 2017 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, 2015 | | December 31, 2014 | December 31, 2018 | | December 31, 2017 |
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 | $ | 700,000 |
| | $ | 700,081 |
| | $ | 1,350,001 |
| | $ | 1,349,977 |
| |
Due in 1 year or less | | $ | 2,350,000 |
| | $ | 2,350,002 |
| | $ | 900,000 |
| | $ | 899,876 |
|
Due after 1 year through 5 years | | — |
| | — |
| | — |
| | — |
|
Due after 5 years through 10 years | | 48,999 |
| | 48,904 |
| | — |
| | — |
|
Due after 10 years | | 4,008 |
| | 3,991 |
| | — |
| | — |
|
Total | | $ | 2,403,007 |
| | $ | 2,402,897 |
| | $ | 900,000 |
| | $ | 899,876 |
|
Table 5.3 - Interest Rate Payment Terms of Available-for-Sale Securities (in thousands)
| | | December 31, 2015 | | December 31, 2014 | December 31, 2018 | | December 31, 2017 |
Amortized cost of available-for-sale securities: | | | | | | |
Fixed-rate | $ | 700,000 |
| | $ | 1,350,001 |
| $ | 2,403,007 |
| | $ | 900,000 |
|
Realized Gains and Losses. The FHLB had no sales of securities out of its available-for-sale portfolio for the years ended December 31, 20152018, 20142017, or 2013.2016.
Note 6 - Held-to-Maturity Securities
Table 6.1 - Held-to-Maturity Securities by Major Security Types (in thousands)
|
| | | | | | | | | | | | | | | |
| December 31, 2015 |
| Amortized Cost (1) | | Gross Unrecognized Holding Gains | | Gross Unrecognized Holding Losses | | Fair Value |
Non-mortgage-backed securities: | | | | | | | |
Government-sponsored enterprises (GSE) (2) | $ | 32,683 |
| | $ | — |
| | $ | — |
| | $ | 32,683 |
|
Total non-mortgage-backed securities | 32,683 |
| | — |
| | — |
| | 32,683 |
|
Mortgage-backed securities: | | | | | | | |
Other U.S. obligation single-family mortgage-backed securities (3) | 3,894,432 |
| | 3,629 |
| | (25,292 | ) | | 3,872,769 |
|
GSE single-family mortgage-backed securities (4) | 10,891,089 |
| | 122,044 |
| | (148,589 | ) | | 10,864,544 |
|
GSE multi-family mortgage-backed securities (4) | 460,002 |
| | — |
| | (33 | ) | | 459,969 |
|
Total mortgage-backed securities | 15,245,523 |
| | 125,673 |
| | (173,914 | ) | | 15,197,282 |
|
Total | $ | 15,278,206 |
| | $ | 125,673 |
| | $ | (173,914 | ) | | $ | 15,229,965 |
|
| | | | | | | |
| December 31, 2014 |
| Amortized Cost (1) | | Gross Unrecognized Holding Gains | | Gross Unrecognized Holding Losses | | Fair Value |
Non-mortgage-backed securities: | | | | | | | |
GSE (2) | $ | 26,099 |
| | $ | — |
| | $ | — |
| | $ | 26,099 |
|
Total non-mortgage-backed securities | 26,099 |
| | — |
| | — |
| | 26,099 |
|
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 |
|
Total mortgage-backed securities | 14,686,172 |
| | 201,891 |
| | (119,836 | ) | | 14,768,227 |
|
Total | $ | 14,712,271 |
| | $ | 201,891 |
| | $ | (119,836 | ) | | $ | 14,794,326 |
|
|
| | | | | | | | | | | | | | | |
| December 31, 2018 |
| Amortized Cost (1) | | Gross Unrecognized Holding Gains | | Gross Unrecognized Holding Losses | | Fair Value |
Non-MBS: | | | | | | | |
U.S. Treasury obligations | $ | 35,667 |
| | $ | — |
| | $ | (6 | ) | | $ | 35,661 |
|
Total non-MBS | 35,667 |
| | — |
| | (6 | ) | | 35,661 |
|
MBS: | | | | | | | |
U.S. obligation single-family MBS | 2,040,642 |
| | 540 |
| | (47,463 | ) | | 1,993,719 |
|
GSE single-family MBS | 5,543,524 |
| | 9,891 |
| | (162,097 | ) | | 5,391,318 |
|
GSE multi-family MBS | 8,171,389 |
| | 1,739 |
| | (18,458 | ) | | 8,154,670 |
|
Total MBS | 15,755,555 |
| | 12,170 |
| | (228,018 | ) | | 15,539,707 |
|
Total | $ | 15,791,222 |
| | $ | 12,170 |
| | $ | (228,024 | ) | | $ | 15,575,368 |
|
| | | | | | | |
| December 31, 2017 |
| Amortized Cost (1) | | Gross Unrecognized Holding Gains | | Gross Unrecognized Holding Losses | | Fair Value |
Non-MBS: | | | | | | | |
U.S. Treasury obligations | $ | 34,033 |
| | $ | — |
| | $ | (6 | ) | | $ | 34,027 |
|
Total non-MBS | 34,033 |
| | — |
| | (6 | ) | | 34,027 |
|
MBS: | | | | | | | |
U.S. obligation single-family MBS | 2,483,446 |
| | 1,974 |
| | (23,547 | ) | | 2,461,873 |
|
GSE single-family MBS | 6,703,367 |
| | 37,265 |
| | (138,960 | ) | | 6,601,672 |
|
GSE multi-family MBS | 5,584,124 |
| | 4,956 |
| | (4,323 | ) | | 5,584,757 |
|
Total MBS | 14,770,937 |
| | 44,195 |
| | (166,830 | ) | | 14,648,302 |
|
Total | $ | 14,804,970 |
| | $ | 44,195 |
| | $ | (166,836 | ) | | $ | 14,682,329 |
|
| |
(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 Premiums (Discounts) Included in the Amortized Cost of Mortgage-backed SecuritiesMBS Classified as Held-to-Maturity (in thousands)
| | | December 31, 2015 | | December 31, 2014 | December 31, 2018 | | December 31, 2017 |
Premiums | $ | 84,450 |
| | $ | 24,473 |
| $ | 42,299 |
| | $ | 49,713 |
|
Discounts | (40,667 | ) | | (51,357 | ) | (19,730 | ) | | (24,243 | ) |
Net purchased premiums (discounts) | $ | 43,783 |
| | $ | (26,884 | ) | |
Net purchased premiums | | $ | 22,569 |
| | $ | 25,470 |
|
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, 2015 |
| Less than 12 Months | | 12 Months or more | | Total |
| Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
Mortgage-backed securities: | | | | | | | | | | | |
Other U.S. obligation single-family mortgage-backed securities (1) | $ | 2,574,649 |
| | $ | (25,292 | ) | | $ | — |
| | $ | — |
| | $ | 2,574,649 |
| | $ | (25,292 | ) |
GSE single-family mortgage-backed securities (2) | 4,332,237 |
| | (74,068 | ) | | 2,065,926 |
| | (74,521 | ) | | 6,398,163 |
| | (148,589 | ) |
GSE multi-family mortgage-backed securities (2)
| 459,969 |
| | (33 | ) | | — |
| | — |
| | 459,969 |
| | (33 | ) |
Total | $ | 7,366,855 |
| | $ | (99,393 | ) | | $ | 2,065,926 |
| | $ | (74,521 | ) | | $ | 9,432,781 |
| | $ | (173,914 | ) |
| | | | | | | | | | | |
| December 31, 2014 |
| Less than 12 Months | | 12 Months or more | | Total |
| Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
Mortgage-backed securities: | | | | | | | | | | | |
Other U.S. obligation single-family mortgage-backed securities (1) | $ | — |
| | $ | — |
| | $ | 197,625 |
| | $ | (1,017 | ) | | $ | 197,625 |
| | $ | (1,017 | ) |
GSE single-family mortgage-backed securities (2) | 631,907 |
| | (1,348 | ) | | 5,555,049 |
| | (117,471 | ) | | 6,186,956 |
| | (118,819 | ) |
Total | $ | 631,907 |
| | $ | (1,348 | ) | | $ | 5,752,674 |
| | $ | (118,488 | ) | | $ | 6,384,581 |
| | $ | (119,836 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2018 |
| Less than 12 Months | | 12 Months or more | | Total |
| Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
Non-MBS: | | | | | | | | | | | |
U.S. Treasury obligations | $ | 35,661 |
| | $ | (6 | ) | | $ | — |
| | $ | — |
| | $ | 35,661 |
| | $ | (6 | ) |
Total non-MBS | 35,661 |
|
| (6 | ) |
| — |
|
| — |
|
| 35,661 |
|
| (6 | ) |
MBS: | | | | | | | | | | | |
U.S. obligation single-family MBS | 175,663 |
| | (1,571 | ) | | 1,526,835 |
| | (45,892 | ) | | 1,702,498 |
| | (47,463 | ) |
GSE single-family MBS | 401,509 |
| | (1,581 | ) | | 3,859,608 |
| | (160,516 | ) | | 4,261,117 |
| | (162,097 | ) |
GSE multi-family MBS | 5,976,323 |
| | (18,185 | ) | | 229,739 |
| | (273 | ) | | 6,206,062 |
| | (18,458 | ) |
Total MBS | 6,553,495 |
| | (21,337 | ) | | 5,616,182 |
| | (206,681 | ) | | 12,169,677 |
| | (228,018 | ) |
Total | $ | 6,589,156 |
| | $ | (21,343 | ) | | $ | 5,616,182 |
| | $ | (206,681 | ) | | $ | 12,205,338 |
| | $ | (228,024 | ) |
| | | | | | | | | | | |
| December 31, 2017 |
| Less than 12 Months | | 12 Months or more | | Total |
| Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
Non-MBS: | | | | | | | | | | | |
U.S. Treasury obligations | $ | 34,027 |
| | $ | (6 | ) | | $ | — |
| | $ | — |
| | $ | 34,027 |
| | $ | (6 | ) |
Total non-MBS | 34,027 |
| | (6 | ) | | — |
| | — |
| | 34,027 |
| | (6 | ) |
MBS: | | | | | | | | | | | |
U.S. obligation single-family MBS | 1,193,566 |
| | (10,455 | ) | | 657,209 |
| | (13,092 | ) | | 1,850,775 |
| | (23,547 | ) |
GSE single-family MBS | 1,169,590 |
| | (14,171 | ) | | 3,578,537 |
| | (124,789 | ) | | 4,748,127 |
| | (138,960 | ) |
GSE multi-family MBS | 1,133,452 |
| | (4,307 | ) | | 136,051 |
| | (16 | ) | | 1,269,503 |
| | (4,323 | ) |
Total MBS | 3,496,608 |
| | (28,933 | ) | | 4,371,797 |
| | (137,897 | ) | | 7,868,405 |
| | (166,830 | ) |
Total | $ | 3,530,635 |
| | $ | (28,939 | ) | | $ | 4,371,797 |
| | $ | (137,897 | ) | | $ | 7,902,432 |
| | $ | (166,836 | ) |
| |
(1) | Consists of Ginnie Mae mortgage-backed securities. |
| |
(2) | Consists of mortgage-backed securities issued and effectively guaranteed by Freddie Mac and/or Fannie Mae, which have the support of the U.S. government, although they are not obligations of the U.S. government. |
Table 6.4 - Held-to-Maturity Securities by Contractual Maturity (in thousands)
| | | December 31, 2015 | | December 31, 2014 | December 31, 2018 | | December 31, 2017 |
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: | | | | | | | | |
Non-MBS: | | | | | | | | |
Due in 1 year or less | $ | 32,683 |
| | $ | 32,683 |
| | $ | 26,099 |
| | $ | 26,099 |
| $ | 35,667 |
| | $ | 35,661 |
| | $ | 34,033 |
| | $ | 34,027 |
|
Due after 1 year through 5 years | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
|
Due after 5 years through 10 years | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
|
Due after 10 years | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
|
Total non-mortgage-backed securities | 32,683 |
| | 32,683 |
| | 26,099 |
| | 26,099 |
| |
Mortgage-backed securities (2) | 15,245,523 |
| | 15,197,282 |
| | 14,686,172 |
| | 14,768,227 |
| |
Total non-MBS | | 35,667 |
| | 35,661 |
| | 34,033 |
| | 34,027 |
|
MBS (2) | | 15,755,555 |
| | 15,539,707 |
| | 14,770,937 |
| | 14,648,302 |
|
Total | $ | 15,278,206 |
| | $ | 15,229,965 |
| | $ | 14,712,271 |
| | $ | 14,794,326 |
| $ | 15,791,222 |
| | $ | 15,575,368 |
| | $ | 14,804,970 |
| | $ | 14,682,329 |
|
| |
(1) | Carrying value equals amortized cost. |
| |
(2) | Mortgage-backed securitiesMBS 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, 2015 | | December 31, 2014 | December 31, 2018 | | December 31, 2017 |
Amortized cost of non-mortgage-backed securities: | | | | |
Amortized cost of non-MBS: | | | | |
Fixed-rate | $ | 32,683 |
| | $ | 26,099 |
| $ | 35,667 |
| | $ | 34,033 |
|
Total amortized cost of non-mortgage-backed securities | 32,683 |
| | 26,099 |
| |
Amortized cost of mortgage-backed securities: | | | | |
Total amortized cost of non-MBS | | 35,667 |
| | 34,033 |
|
Amortized cost of MBS: | | | | |
Fixed-rate | 12,664,603 |
| | 12,091,591 |
| 6,652,055 |
| | 8,003,906 |
|
Variable-rate | 2,580,920 |
| | 2,594,581 |
| 9,103,500 |
| | 6,767,031 |
|
Total amortized cost of mortgage-backed securities | 15,245,523 |
| | 14,686,172 |
| |
Total amortized cost of MBS | | 15,755,555 |
| | 14,770,937 |
|
Total | $ | 15,278,206 |
| | $ | 14,712,271 |
| $ | 15,791,222 |
| | $ | 14,804,970 |
|
Realized Gains and Losses.From time to time the The FHLB may sellsold securities out of its held-to-maturity portfolio. These securities, generally, haveportfolio during the period 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. For the years ended December 31, 2015, 2014, or 2013, the FHLB did not sell any held-to-maturity securities.
Table 6.6 - Proceeds from Sale and Gains on Held-to-Maturity Securities (in thousands)
|
| | | | | | | | | | | |
| For the Years Ended December 31, |
| 2018 | | 2017 | | 2016 |
Proceeds from sale of held-to-maturity securities | $ | — |
| | $ | — |
| | $ | 852,199 |
|
Gross gains from sale of held-to-maturity securities | — |
| | — |
| | 38,763 |
|
Note 7 - Other-Than-Temporary Impairment Analysis
The FHLB 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.
U.S. Obligations and GSE Investments
For its Other U.S. obligations and GSE investments (mortgage-backed securities(MBS and non-mortgage-backed securities)non-MBS), the FHLB has determined that the strength of the issuers' guarantees through direct obligations or support from the U.S. government is sufficient to protect the FHLB from losses based on current expectations. As a result, the FHLB determined that, as of December 31, 20152018, 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 FHLB does not intend to sell the investments, and it is not more likely than not that the FHLB will be required to sell the investments before recovery of their amortized cost bases. As a result, the FHLB did not consider any of these investments to be other-than-temporarily impaired at December 31, 20152018.
All Other Investment Securities
The FHLB also reviewed its other securities that have experienced unrealized losses at December 31, 2018 and determined that the unrealized losses are due primarily to interest rate volatility and/or illiquidity. These losses are considered temporary as the FHLB expects to recover its entire amortized cost basis. Additionally, because the FHLB does not intend to sell these securities, nor is it more likely than not that the FHLB will be required to sell the securities before recovery, it did not consider the investments to be other-than-temporarily impaired at December 31, 2018.
The FHLB did not consider any of its investments to be other-than-temporarily impaired at December 31, 20142017.
Note 8 - Advances
The FHLB 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 othera specified index. 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 - AdvanceAdvances by Redemption TermsTerm (dollars in thousands)
| | | | December 31, 2015 | | December 31, 2014 | December 31, 2018 | | December 31, 2017 |
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 | | $ | — |
| | — | % | | $ | 1,302 |
| | 1.55 | % |
Due in 1 year or less | | $ | 27,177,311 |
| | 0.57 | % | | $ | 14,139,630 |
| | 0.40 | % | 38,592,494 |
| | 2.56 |
| | 40,473,141 |
| | 1.55 |
|
Due after 1 year through 2 years | | 12,360,345 |
| | 0.79 |
| | 14,810,847 |
| | 0.54 |
| 6,461,276 |
| | 2.39 |
| | 15,655,118 |
| | 1.69 |
|
Due after 2 years through 3 years | | 15,839,007 |
| | 0.77 |
| | 12,829,760 |
| | 0.69 |
| 3,146,830 |
| | 2.30 |
| | 6,537,170 |
| | 1.74 |
|
Due after 3 years through 4 years | | 11,107,509 |
| | 0.78 |
| | 14,222,722 |
| | 0.60 |
| 1,145,118 |
| | 2.56 |
| | 1,980,655 |
| | 2.00 |
|
Due after 4 years through 5 years | | 3,391,892 |
| | 1.06 |
| | 10,724,619 |
| | 0.54 |
| 935,439 |
| | 2.76 |
| | 893,283 |
| | 2.07 |
|
Thereafter | | 3,366,205 |
| | 1.69 |
| | 3,570,929 |
| | 1.51 |
| 4,591,015 |
| | 2.98 |
| | 4,437,731 |
| | 2.17 |
|
Total par value | | 73,242,269 |
| | 0.75 |
| | 70,298,507 |
| | 0.60 |
| |
Total principal amount | | 54,872,172 |
| | 2.56 |
| | 69,978,400 |
| | 1.66 |
|
Commitment fees | | (629 | ) | | | | (699 | ) | | | (456 | ) | | | | (510 | ) | | |
Discount on AHP Advances | | (9,396 | ) | | | | (12,110 | ) | | | |
Discount on Affordable Housing Program (AHP) Advances | | (4,386 | ) | | | | (5,795 | ) | | |
Premiums | | 2,744 |
| | | | 3,058 |
| | | 1,510 |
| | | | 1,789 |
| | |
Discounts | | (8,386 | ) | | | | (12,572 | ) | | | (3,090 | ) | | | | (4,252 | ) | | |
Hedging adjustments | | 65,513 |
| | | | 129,390 |
| | | (43,506 | ) | | | | (51,421 | ) | | |
Fair value option valuation adjustments and accrued interest | | 57 |
| | | | 42 |
| | | 8 |
| | | | 13 |
| | |
Total | | $ | 73,292,172 |
| | | | $ | 70,405,616 |
| | | $ | 54,822,252 |
| | | | $ | 69,918,224 |
| | |
The FHLB offers certain fixed and variable-rate Advances to members that may be prepaid on specified dates (call dates) without incurring prepayment or termination fees (callable Advances). If the call option is exercised, replacement funding may be available. At December 31, 2015 and 2014, the FHLB had callable Advances (in thousands) of $14,095,712 and $15,098,357.available to members. Other Advances may only be prepaid subject to a prepayment fee paid to the FHLB that makes the FHLB financially indifferent to the prepayment of the Advance.
Table 8.2 - Advances by Year of Contractual MaturityRedemption Term or Next Call Date (in thousands)
| | Year of Contractual Maturity or Next Call Date | December 31, 2015 | | December 31, 2014 | |
Redemption Term or Next Call Date | | December 31, 2018 | | December 31, 2017 |
Overdrawn demand deposit accounts | | $ | — |
| | $ | 1,302 |
|
Due in 1 year or less | $ | 33,384,838 |
| | $ | 23,003,946 |
| 43,793,555 |
| | 46,390,733 |
|
Due after 1 year through 2 years | 11,289,035 |
| | 12,159,384 |
| 4,338,117 |
| | 15,054,889 |
|
Due after 2 years through 3 years | 13,959,002 |
| | 9,659,975 |
| 3,490,580 |
| | 3,768,534 |
|
Due after 3 years through 4 years | 10,356,770 |
| | 12,295,893 |
| 753,716 |
| | 2,903,655 |
|
Due after 4 years through 5 years | 2,747,419 |
| | 9,970,280 |
| 905,189 |
| | 506,557 |
|
Thereafter | 1,505,205 |
| | 3,209,029 |
| 1,591,015 |
| | 1,352,730 |
|
Total par value | $ | 73,242,269 |
| | $ | 70,298,507 |
| |
Total principal amount | | $ | 54,872,172 |
| | $ | 69,978,400 |
|
The FHLB also offers putable Advances. With a putable Advance, the FHLB effectively purchases put options from the member that allows the FHLB to terminate the Advance at predetermined dates. The FHLB normally would exercise its put option when interest rates increase relative to contractual rates. At December 31, 2015 and 2014, the FHLB had putable Advances, excluding those where the related put options have expired, totaling (in thousands) $1,046,400 and $1,617,400.
Table 8.3 - Advances by Year of Contractual MaturityRedemption Term or Next Put/ConvertPut Date for Putable/ConvertiblePutable Advances (in thousands)
| | Year of Contractual Maturity or Next Put/Convert Date | December 31, 2015 | | December 31, 2014 | |
Redemption Term or Next Put Date | | December 31, 2018 | | December 31, 2017 |
Overdrawn demand deposit accounts | | $ | — |
| | $ | 1,302 |
|
Due in 1 year or less | $ | 28,111,211 |
| | $ | 15,753,030 |
| 38,827,494 |
| | 40,588,641 |
|
Due after 1 year through 2 years | 11,895,945 |
| | 14,663,847 |
| 6,611,276 |
| | 15,649,618 |
|
Due after 2 years through 3 years | 15,549,007 |
| | 12,115,860 |
| 3,221,830 |
| | 6,537,170 |
|
Due after 3 years through 4 years | 11,098,009 |
| | 13,649,722 |
| 1,145,118 |
| | 1,980,655 |
|
Due after 4 years through 5 years | 3,391,892 |
| | 10,715,119 |
| 835,439 |
| | 893,283 |
|
Thereafter | 3,196,205 |
| | 3,400,929 |
| 4,231,015 |
| | 4,327,731 |
|
Total par value | $ | 73,242,269 |
| | $ | 70,298,507 |
| |
Total principal amount | | $ | 54,872,172 |
| | $ | 69,978,400 |
|
Table 8.4 - Advances by Interest Rate Payment Terms (in thousands)
| | | December 31, 2015 | | December 31, 2014 | December 31, 2018 | | December 31, 2017 |
Fixed-rate (1) | | | | | | |
Due in one year or less | $ | 15,599,101 |
| | $ | 8,638,946 |
| $ | 14,965,711 |
| | $ | 26,505,900 |
|
Due after one year | 9,713,857 |
| | 9,306,104 |
| 9,022,587 |
| | 10,109,877 |
|
Total fixed-rate (1) | 25,312,958 |
| | 17,945,050 |
| 23,988,298 |
| | 36,615,777 |
|
Variable-rate (1) | | | | | | |
Due in one year or less | 11,578,210 |
| | 5,500,684 |
| 23,626,783 |
| | 13,968,543 |
|
Due after one year | 36,351,101 |
| | 46,852,773 |
| 7,257,091 |
| | 19,394,080 |
|
Total variable-rate (1) | 47,929,311 |
| | 52,353,457 |
| 30,883,874 |
| | 33,362,623 |
|
Total par value | $ | 73,242,269 |
| | $ | 70,298,507 |
| |
Total principal amount | | $ | 54,872,172 |
| | $ | 69,978,400 |
|
| |
(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. The FHLB's potential credit risk from Advances is concentrated in commercial banks and insurance companies. The FHLB's Advances outstanding that were greater than or equal to $1.0 billion per borrower were $57.4$41.3 billion (78.4(75.3 percent) and $56.6$54.8 billion (80.5(78.3 percent) at December 31, 20152018 and 2014,2017, respectively. These Advances were made to 810 and 612 borrowers (members and former members) at December 31, 20152018 and 2014.2017, respectively. See Note 10 for information related to the FHLB'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 FHLB (dollars in millions)
| | December 31, 2015 | | December 31, 2014 | |
December 31, 2018 | | December 31, 2018 | | December 31, 2017 |
| Principal | | % of Total Par Value of Advances | | Principal | | % of Total Par Value of Advances | Principal | | % of Total Principal Amount of Advances | | Principal | | % of Total Principal Amount of Advances |
JPMorgan Chase Bank, N.A. | $ | 35,350 |
| | 48 | % | | JPMorgan Chase Bank, N.A. | $ | 41,300 |
| | 59 | % | $ | 23,400 |
| | 43 | % | | JPMorgan Chase Bank, N.A. | $ | 23,950 |
| | 34 | % |
U.S. Bank, N.A. | 10,086 |
| | 14 |
| | U.S. Bank, N.A. | 8,338 |
| | 12 |
| 4,574 |
| | 8 |
| | U.S. Bank, N.A. | 8,975 |
| | 13 |
|
Third Federal Savings and Loan Association | | 3,727 |
| | 7 |
| | Third Federal Savings and Loan Association | 3,756 |
| | 5 |
|
Total | $ | 45,436 |
| | 62 | % | | Total | $ | 49,638 |
| | 71 | % | $ | 31,701 |
| | 58 | % | | The Huntington National Bank | 3,732 |
| | 5 |
|
| |
|
| |
| | Total | $ | 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 FHLB's members originate, credit enhance, and then sell to the FHLB. The FHLB does not service any of these loans. The FHLB plans to retain its existing portfolio of mortgage loans.
Table 9.1 - Mortgage Loans Held for Portfolio (in thousands) | | | December 31, 2015 | | December 31, 2014 | December 31, 2018 | | December 31, 2017 |
Unpaid principal balance: | | | | | | |
Fixed rate medium-term single-family mortgage loans (1) | $ | 1,478,780 |
| | $ | 1,393,525 |
| $ | 933,340 |
| | $ | 1,128,749 |
|
Fixed rate long-term single-family mortgage loans | 6,278,904 |
| | 5,402,479 |
| 9,338,814 |
| | 8,325,465 |
|
Total unpaid principal balance | 7,757,684 |
| | 6,796,004 |
| 10,272,154 |
| | 9,454,214 |
|
Premiums | 205,600 |
| | 179,540 |
| 227,161 |
| | 217,716 |
|
Discounts | (1,989 | ) | | (2,460 | ) | (2,603 | ) | | (3,173 | ) |
Hedging basis adjustments (2) | 19,998 |
| | 16,518 |
| 5,045 |
| | 13,373 |
|
Total mortgage loans held for portfolio | $ | 7,981,293 |
| | $ | 6,989,602 |
| $ | 10,501,757 |
| | $ | 9,682,130 |
|
| |
(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, 2015 | | December 31, 2014 | December 31, 2018 | | December 31, 2017 |
Unpaid principal balance: | | | | | | |
Conventional mortgage loans | $ | 7,277,584 |
| | $ | 6,203,318 |
| $ | 9,999,307 |
| | $ | 9,129,003 |
|
FHA mortgage loans | 480,100 |
| | 592,686 |
| 272,847 |
| | 325,211 |
|
Total unpaid principal balance | $ | 7,757,684 |
| | $ | 6,796,004 |
| $ | 10,272,154 |
| | $ | 9,454,214 |
|
For information related to the FHLB's credit risk on mortgage loans and allowance for credit losses, see Note 10.
Table 9.3 - Members, Including Any Known Affiliates that are Members of the FHLB, and Former Members Selling Five Percent or more of Total Unpaid Principal (dollars in millions)
| | | December 31, 2015 | | | December 31, 2014 | December 31, 2018 | | | December 31, 2017 |
| Principal | | % of Total | | | Principal | | % of Total | Principal | | % of Total | | | Principal | | % of Total |
Union Savings Bank | $ | 2,242 |
| | 29 | % | | Union Savings Bank | $ | 1,593 |
| | 23 | % | $ | 3,449 |
| | 34 | % | | Union Savings Bank | $ | 3,247 |
| | 34 | % |
PNC Bank, N.A. (1) | 839 |
| | 11 |
| | PNC Bank, N.A. (1) | 1,074 |
| | 16 |
| |
Guardian Savings Bank FSB | 633 |
| | 8 |
| | Guardian Savings Bank FSB | 406 |
| | 6 |
| 987 |
| | 10 |
| | Guardian Savings Bank FSB | 933 |
| | 10 |
|
| |
|
| |
|
| | PNC Bank, N.A. (1) | 516 |
| | 5 |
|
Note 10 - Allowance for Credit Losses
The FHLB has established an allowance methodology for each of the FHLB's portfolio segments: credit products (Advances, Letters of Credit and other extensions of credit to members); FHA mortgage loans held for portfolio; and conventional mortgage loans held for portfolio.
Credit productsProducts
The FHLB 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 collateral and lending policies to limit risk of loss while balancing borrowers' needs for a reliable source of funding. In addition, the FHLB lends to eligible borrowers in accordance with federal statutes, including the FHLBank Actlaw and Finance Agency regulations,
which require the FHLB to obtain sufficient collateral to fully secure credit products. The estimated value of the collateral required to secure each member's credit products is calculated by applying collateral discounts, or haircuts, to the value of the collateral. The FHLB 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 community development loans. The FHLB's capital stock owned by its member borrowers is also pledged as collateral. Collateral arrangements and a member’s borrowing capacity vary based on the financial condition and performance of the institution, the
types of collateral pledged and the overall quality of those assets. The FHLB can also require additional or substitute collateral to protect its security interest. Management of the FHLB believes that these policies effectively manage the FHLB's credit risk from credit products.
Members experiencing financial difficulties are subject to FHLB-performed “stress tests” of the impact of poorly performing assets on the member’s capital and loss reserve positions. Depending on the results of these tests and the level of overcollateralization,over-collateralization, a member may be allowed to maintain pledged loan assets in its custody, may be required to deliver those loans into the custody of the FHLB or its agent, and/or may be required to provide details on these loans to facilitate an estimate of their fair value. The FHLB perfects its security interest in all pledged collateral. The FHLBank Act affords any security interest granted to the FHLB by a member priority over the claims or rights of any other party except for claims or rights of a third party that would be entitled to priority under otherwise applicable law and that are held by a bona fide purchaser for value or by a secured party holding a prior perfected security interest.
Using a risk-based approach, the FHLB considers the payment status, collateralization levels, and borrower's financial condition to be indicators of credit quality for its credit products. At December 31, 20152018 and 2014,2017, the FHLB had rights to collateral on a member-by-member basis with an estimated value in excess of its outstanding extensions of credit.
The FHLB evaluates and makes changes to its collateral guidelines, as necessary, based on current market conditions. At December 31, 20152018 and 2014,2017, the FHLB 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 FHLB during 20152018 or 20142017.
The FHLB 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 and the repayment history on credit products, the FHLB did not record any credit losses on credit products as of December 31, 20152018 or 2014.2017. Accordingly, the FHLB did not record any allowance for credit losses on Advances.
At December 31, 20152018 and 2014,2017, the FHLB did not record any liability to reflect an allowance for credit losses for off-balance sheet credit exposures. See Note 20 for additional information on the FHLB's off-balance sheet credit exposure.
Mortgage Loans Held for Portfolio - FHA
The FHLB invests in fixed-rate mortgage loans secured by one-to-four family residential properties insured by the FHA. The FHLB expects to recover any losses from such loans 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 FHLB 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 FHLB 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 through 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 FHLB's best estimate of probable incurred losses at the reporting date. The FHLB performs the credit risk analysis of all conventional mortgage loans at the individual Master Commitment Contract level to properly determine the credit enhancements available to recover losses on loans under each individual Master Commitment Contract. The Master Commitment Contract is an agreement with a member in which the member agrees to make a best efforts attempt to sell a specific dollar amount of loans to the FHLB generally over a one-year period. Migration analysis is a
methodology for determining, through the FHLB's experience over a historical period, the rate of default on loans. The FHLB applies migration analysis to loans based on payment status categories such as current, 30, 60, and 90 days past due. The FHLB 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. To properly determine the credit enhancements available to recover estimated losses, the FHLB performs the credit risk analysis of all conventional mortgage loans at the individual Master Commitment Contract level. The Master Commitment Contract is an agreement with a member in which the member agrees to make a best efforts attempt to sell a specific dollar amount of loans to the FHLB generally over a one-year period. 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 FHLB 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. The FHLB removes specifically identified loans evaluated for impairment from the collectively evaluated mortgage loan population.
Qualitative Factors. The FHLB 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, thatwhich 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, |
| 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 |
Balance, beginning of period | $ | 4,919 |
| | $ | 7,233 |
| | $ | 17,907 |
| $ | 1,190 |
| | $ | 1,142 |
| | $ | 1,686 |
|
Net charge offs | (3,233 | ) | | (1,814 | ) | | (3,224 | ) | (350 | ) | | (452 | ) | | (544 | ) |
Reversal for credit losses | — |
| | (500 | ) | | (7,450 | ) | |
Provision for credit losses | | — |
| | 500 |
| | — |
|
Balance, end of period | $ | 1,686 |
| | $ | 4,919 |
| | $ | 7,233 |
| $ | 840 |
| | $ | 1,190 |
| | $ | 1,142 |
|
Table 10.2 - Allowance for Credit Losses and Recorded Investment on Conventional Mortgage Loans by Impairment Methodology (in thousands)
| | | December 31, 2015 | | December 31, 2014 | December 31, 2018 | | December 31, 2017 |
Allowance for credit losses, end of period: | | | | |
Allowance for credit losses: | | | | |
Collectively evaluated for impairment | $ | 1,686 |
| | $ | 4,766 |
| $ | 840 |
| | $ | 1,190 |
|
Individually evaluated for impairment | — |
| | 153 |
| — |
| | — |
|
Total allowances for credit losses | $ | 1,686 |
| | $ | 4,919 |
| |
Recorded investment, end of period: | | | | |
Total allowance for credit losses | | $ | 840 |
| | $ | 1,190 |
|
Recorded investment: | | | | |
Collectively evaluated for impairment | $ | 7,510,089 |
| | $ | 6,402,994 |
| $ | 10,249,169 |
| | $ | 9,373,393 |
|
Individually evaluated for impairment | 9,385 |
| | 8,639 |
| 10,554 |
| | 10,109 |
|
Total recorded investment | $ | 7,519,474 |
| | $ | 6,411,633 |
| $ | 10,259,723 |
| | $ | 9,383,502 |
|
Credit Enhancements. The conventional mortgage loans under the MPP are supported by some combination of credit enhancements (primary mortgage insurance (PMI), supplemental mortgage insurance (SMI) and the Lender Risk Account (LRA), including pooled LRA for those members participating in an aggregated MPP pool). The amount of credit enhancements needed to protect the FHLB 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 FHLB 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 FHLB as a portion of the purchase proceeds to cover expected losses. The LRA is recorded in other liabilities in the Statements of Condition. Excess funds over required balances are distributed to the member in accordance with a step-down schedule that is established upon execution of a Master Commitment Contract, subject to performance of the related loan pool. The LRA established for a pool of loans is limited to only covering losses of that specific pool of loans.
Table 10.3 - Changes in the LRA (in thousands) | | | For the Years Ended December 31, | For the Years Ended December 31, |
| 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 |
LRA at beginning of year | $ | 129,213 |
| | $ | 115,236 |
| | $ | 102,680 |
| $ | 200,745 |
| | $ | 187,684 |
| | $ | 158,010 |
|
Additions | 33,100 |
| | 18,947 |
| | 18,331 |
| 24,784 |
| | 20,677 |
| | 34,338 |
|
Claims | (1,747 | ) | | (2,075 | ) | | (4,118 | ) | (492 | ) | | (506 | ) | | (885 | ) |
Scheduled distributions | (2,556 | ) | | (2,895 | ) | | (1,657 | ) | (11,777 | ) | | (7,110 | ) | | (3,779 | ) |
LRA at end of period | $ | 158,010 |
| | $ | 129,213 |
| | $ | 115,236 |
| $ | 213,260 |
| | $ | 200,745 |
| | $ | 187,684 |
|
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 FHLB's key credit quality indicators for mortgage loans.
Table 10.4 - Recorded Investment in Delinquent Mortgage Loans (dollars in thousands)
| | | December 31, 2015 | December 31, 2018 |
| Conventional MPP Loans | | FHA Loans | | Total | Conventional MPP Loans | | FHA Loans | | Total |
Past due 30-59 days delinquent | $ | 42,606 |
| | $ | 31,846 |
| | $ | 74,452 |
| $ | 29,596 |
| | $ | 14,845 |
| | $ | 44,441 |
|
Past due 60-89 days delinquent | 10,125 |
| | 9,887 |
| | 20,012 |
| 7,175 |
| | 4,238 |
| | 11,413 |
|
Past due 90 days or more delinquent | 30,575 |
| | 17,426 |
| | 48,001 |
| 12,807 |
| | 7,210 |
| | 20,017 |
|
Total past due | 83,306 |
| | 59,159 |
| | 142,465 |
| 49,578 |
| | 26,293 |
| | 75,871 |
|
Total current mortgage loans | 7,436,168 |
| | 429,551 |
| | 7,865,719 |
| 10,210,145 |
| | 250,308 |
| | 10,460,453 |
|
Total mortgage loans | $ | 7,519,474 |
| | $ | 488,710 |
| | $ | 8,008,184 |
| $ | 10,259,723 |
| | $ | 276,601 |
| | $ | 10,536,324 |
|
Other delinquency statistics: | | | | | | | | | | |
In process of foreclosure, included above (1) | $ | 23,171 |
| | $ | 7,043 |
| | $ | 30,214 |
| $ | 7,557 |
| | $ | 4,635 |
| | $ | 12,192 |
|
Serious delinquency rate (2) | 0.42 | % | | 3.63 | % | | 0.62 | % | 0.13 | % | | 2.65 | % | | 0.19 | % |
Past due 90 days or more still accruing interest (3) | $ | 25,016 |
| | $ | 17,426 |
| | $ | 42,442 |
| $ | 11,773 |
| | $ | 7,210 |
| | $ | 18,983 |
|
Loans on non-accrual status, included above | $ | 6,753 |
| | $ | — |
| | $ | 6,753 |
| $ | 2,535 |
| | $ | — |
| | $ | 2,535 |
|
| | | | | | | | | | |
| 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 |
|
| |
(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 FHLB did not have any real estate owned at December 31, 20152018 or 2014.2017.
Individually Evaluated Impaired Loans. Table 10.5 presents the recorded investment, unpaid principal balance, and related allowance associated with loans individually evaluated for investment.
Table 10.5 - Individually Evaluated Impaired Loan Statistics by Product Class Level (in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2015 | | December 31, 2014 |
Conventional MPP loans | Recorded Investment | | Unpaid Principal Balance | | Related Allowance | | Recorded Investment | | Unpaid Principal Balance | | Related Allowance |
With no related allowance | $ | 9,385 |
| | $ | 9,187 |
| | $ | — |
| | $ | 5,297 |
| | $ | 5,165 |
| | $ | — |
|
With an allowance | — |
| | — |
| | — |
| | 3,342 |
| | 3,293 |
| | 153 |
|
Total | $ | 9,385 |
| | $ | 9,187 |
| | $ | — |
| | $ | 8,639 |
| | $ | 8,458 |
| | $ | 153 |
|
Table 10.6 - Average Recorded Investment of Individually Evaluated Impaired Loans and Related Interest Income Recognized (in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| 2015 | | 2014 | | 2013 |
Individually impaired loans | Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized |
Conventional MPP Loans | $ | 8,433 |
| | $ | 438 |
| | $ | 8,029 |
| | $ | 417 |
| | $ | 6,615 |
| | $ | 348 |
|
Troubled Debt Restructurings. A troubled debt restructuring is considered to have occurred when a concession is granted to a borrower for economic or legal reasons related to the borrower's financial difficulties and that concession would not have been considered otherwise. The FHLB'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 FHLB had 60 and 53 modified loans considered troubled debt restructurings at December 31, 2015 and 2014, respectively. A loan considered a troubled debt restructuring is individually evaluated for impairment when determining its related allowance for credit losses. Credit loss is measured by factoring inestimating expected cash shortfalls incurred as of the reporting date.
The FHLB's recorded investment in modified loans considered troubled debt restructurings was (in thousands) $9,385$10,554 and $8,639$10,109 at December 31, 20152018 and 2014,2017, respectively. The amount of troubled debt restructurings is not considered material to the FHLB's financial condition, results of operations, or cash flows.
Note 11 - Derivatives and Hedging Activities
Nature of Business Activity
The FHLB is exposed to interest rate risk primarily from the effect of interest rate changes on its interest-earning assets and on the interest-bearing liabilities that finance these assets. The goal of the FHLB'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 FHLB 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 FHLB monitors the risk to its interest income, net interest margin and average maturity of interest-earning assets and interest-bearing liabilities. The FHLB uses derivatives when they are considered to be the most cost-effective alternative to achieve the FHLB's financial and risk management objectives.
The FHLB transacts its derivatives with large banks and major broker-dealers. Some of these banks and broker-dealers or their affiliates buy, sell, and distribute Consolidated Obligations. Derivative transactions may be either executed with a counterparty (uncleared derivatives) or cleared through a Futures Commission Merchant (i.e., clearing agent) with a Derivative Clearing Organization (cleared derivatives).
Once a derivative transaction has been accepted for clearing by a Derivative Clearing Organization (Clearinghouse), the derivative transaction is novated and the executing counterparty is replaced with the Clearinghouse. The FHLB is not a derivative dealer and does not trade derivatives for short-term profit.
Consistent with Finance Agency regulations, the FHLB enters into derivatives to manage the interest rate risk exposures inherent in otherwise unhedged assets and funding positions, to achieve the FHLB's risk management objectives and to act as an intermediary between its members and counterparties. The use of derivatives is an integral part of the FHLB's financial management strategy. However, Finance Agency regulations and the FHLB'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 FHLB uses derivatives are to:
| |
▪ | reduce the interest rate sensitivity and repricing gaps of assets and liabilities; |
| |
▪ | 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); |
| |
▪ | manage embedded options in assets and liabilities; |
| |
▪ | reduce funding costs by combining a derivative with a Consolidated Obligation Bond, as the cost of a combined funding structure can be lower than the cost of a comparable Consolidated Obligation Bond; |
| |
▪ | preserve a favorable interest rate spread between the yield of an asset (e.g., an Advance) and the cost of the related liability (e.g., the Consolidated Obligation Bond used to fund the Advance); without the use of derivatives, this interest rate spread could be reduced or eliminated when a change in the interest rate on the Advance does not match a change in the interest rate on the Bond; and |
| |
▪ | protect the value of existing asset or liability positions. |
Types of Derivatives
The FHLB 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.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. TheAs of December 31, 2018, the variable-rate transacted by the FHLB 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.
Forwards Contracts - The FHLB may use forwardForwards contracts in ordergives the buyer the right to hedge interest-rate risk.buy or sell a specific type of asset at a specific time at a given price. For example, certain mortgage purchase commitments entered into by the FHLB are considered derivatives. The
FHLB may hedge these commitments by selling to-be-announced (TBA) mortgage-backed securities for forward settlement. A TBA represents a forward contract for the sale of mortgage-backed securities at a future agreed upon date for an established price.
Application of Derivatives
The FHLB 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 FHLB may use certain derivatives as fair value hedges of associated financial instruments. However, because the FHLB uses derivatives when they are considered to be the most cost-effective alternative to achieve the FHLB's financial and risk management objectives, it may enter into derivatives that do not necessarily qualify for hedge accounting (economic hedges). The FHLB 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 FHLB 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 FHLB also formally assesses (both at the hedge's inception and at least quarterly) whether the derivatives that are used in hedging transactions have been effective in offsetting changes in the fair value of the hedged items and whether those derivatives may be expected to remain effective in future periods. The FHLB currently uses regression analyses to assess the effectiveness of its hedges.The types of assets and liabilities currently hedged with derivatives are:
Investments - The interest rate and prepayment risks associated with the FHLB's investment securities are managed through a combination of debt issuance and, possibly, derivatives. The FHLB may manage the prepayment and interest rate risksrisk by funding investment securities with Consolidated Obligations that have call features or by hedging the prepayment riskthese risks with interest rate swaps, caps or floors, callable swaps or swaptions. The FHLB may also purchasepurchases swaptions to minimize the prepayment risk embedded in certain investments. Although these derivatives are valid economic hedges against the prepayment risk of the investments, they are not specifically linked to individual investments and therefore do not receive fair value hedge accounting. These derivatives are marked-to-market through earnings.
Advances - The FHLB offers a wide 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 FHLB may use derivatives to manage the repricing and/or option characteristics of Advances in order to more closely match the characteristics of the FHLB's funding liabilities. In general, whenever a member executes a fixed-rate Advance or a variable-rate Advance with embedded options, the FHLB willmay simultaneously execute a derivative with terms that offset the terms and embedded options if any, in the Advance. For example, the FHLB may hedge a fixed-rate Advance with an interest rate swap where the FHLB pays a fixed-rate coupon and receives a floating-rate coupon,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 FHLB effectively purchases a put option from the member that allows the FHLB to put or extinguish the fixed-rate Advance, which the FHLB normally would exercise when interest rates increase. The FHLB may hedge these Advances by entering into a cancelable derivative.
Mortgage Loans - The FHLB invests in fixed-rate mortgage loans. The prepayment options embedded in these mortgage loans can result in extensions or contractions in the expected repayment of these investments, depending on changes in actual and estimated prepayment speeds. The FHLB may manage the interest rate and prepayment risks associated with mortgagesmortgage loans through a combination of debt issuance and derivatives. The FHLB issues both callable and noncallablenon-callable debt and prepayment linked Consolidated Obligations to achieve cash flow patterns and liability durations similar to those expected on the mortgage loans. The FHLB may purchase swaptions to minimize the prepayment risk embedded in mortgage loans. Although these derivatives are valid economic hedges against the prepayment risk of the loans, they are not specifically linked to individual loans and therefore do not receive fair value hedge accounting. These derivatives are marked-to-market through earnings.
Consolidated Obligations - The FHLB entersmay enter into derivatives to hedge the interest rate risk associated with its specific debt issuances. The FHLB 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 example, fixed-rate Consolidated Obligations are issued and the FHLB may simultaneously enter into a matching interest rate swap in which the counterparty pays fixed cash flows to the FHLB designed to mirror in timing and amount the cash outflows the FHLB pays on the Consolidated Obligation. The FHLB pays a variable cash flow that closely matches the interest payments it receives on short-term or variable-rate Advances, typically 3-month LIBOR.Advances. These transactions are treated as fair value hedges.
This strategy of issuing BondsConsolidated Obligations while simultaneously entering into derivatives enables the FHLB to offer a wider range of attractively priced Advances to its members and may allow the FHLB 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 FHLB may alter the types or terms of the Bonds that it issues. By acting in both the capital and the swap markets, the FHLB 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 FHLB may hedge these commitments by selling TBA mortgage-backed securities for forward settlement. 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 FHLB's involvement in the various classes of financial instruments and represents neither the actual amounts exchanged nor the overall exposure of the FHLB 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 and fair value of derivative instruments includingand total derivative assets and liabilities. Total derivative assets and liabilities include the effect of netting adjustments and cash collateral. For purposes of this disclosure, the derivative values include the fair value of derivatives and the related accrued interest.
Table 11.1 - Fair Value of Derivative Instruments (in thousands)
| | | December 31, 2015 | December 31, 2018 |
| 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 | $ | 5,548,351 |
| | $ | 12,205 |
| | $ | 77,950 |
| $ | 6,207,278 |
| | $ | 2,393 |
| | $ | 16,810 |
|
Derivatives not designated as hedging instruments: | | | | | | | | | | |
Interest rate swaps | 2,719,000 |
| | 1,051 |
| | 4,029 |
| 4,322,480 |
| | 3,311 |
| | 1,904 |
|
Interest rate swaptions | 281,000 |
| | 683 |
| | — |
| 3,000,000 |
| | 15,911 |
| | — |
|
Forward rate agreements | 462,000 |
| | 1,680 |
| | 69 |
| 131,000 |
| | — |
| | 2,664 |
|
Mortgage delivery commitments | 449,856 |
| | 342 |
| | 1,650 |
| 146,009 |
| | 1,726 |
| | 1 |
|
Total derivatives not designated as hedging instruments | 3,911,856 |
| | 3,756 |
| | 5,748 |
| 7,599,489 |
| | 20,948 |
| | 4,569 |
|
Total derivatives before netting and collateral adjustments | $ | 9,460,207 |
| | 15,961 |
| | 83,698 |
| |
Total derivatives before adjustments | | $ | 13,806,767 |
| | 23,341 |
| | 21,379 |
|
Netting adjustments and cash collateral (1) | | | 11,035 |
| | (52,611 | ) | | | 42,424 |
| | (16,793 | ) |
Total derivative assets and total derivative liabilities | | | $ | 26,996 |
| | $ | 31,087 |
| | | $ | 65,765 |
| | $ | 4,586 |
|
| | | | | | | | | | |
| December 31, 2014 | December 31, 2017 (2) |
| 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 |
| | $ | 58,027 |
| | $ | 9,190 |
|
Derivatives not designated as hedging instruments: | | | | | | | | | | |
Interest rate swaps | 4,635,000 |
| | 900 |
| | 6,559 |
| 5,789,265 |
| | 2,639 |
| | 363 |
|
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 |
| | 6,290 |
| | 610 |
|
Total derivatives before netting and collateral adjustments | $ | 9,826,839 |
| | 24,531 |
| | 149,634 |
| |
Total derivatives before adjustments | | $ | 14,528,678 |
| | 64,317 |
| | 9,800 |
|
Netting adjustments and cash collateral (1) | | | (9,832 | ) | | (85,867 | ) | | | (3,622 | ) | | (6,907 | ) |
Total derivative assets and total derivative liabilities | | | $ | 14,699 |
| | $ | 63,767 |
| | | $ | 60,695 |
| | $ | 2,893 |
|
| |
(1) | Amounts represent the application of the netting requirements that allow the FHLB to settle positive and negative positions, and also cash collateral and related accrued interest held or placed by the FHLB with the same clearing agent and/or counterparty. Cash collateral posted and related accrued interest was (in thousands) $66,685$71,246 and $78,755$64,079 at December 31, 20152018 and 2014.2017. Cash collateral received and related accrued interest was (in thousands) $3,039$12,029 and $2,720$60,794 at December 31, 20152018 and 2014.2017. |
| |
(2) | To conform with current presentation, (in thousands) $74,431 in variation margin has been allocated to the individual derivative instruments as of December 31, 2017. Previously, this amount was included with Netting adjustments and cash collateral. |
Table 11.2 presents the components of net gainslosses on derivatives and hedging activities as presented in the Statements of Income.
Table 11.2 - Net GainsLosses on Derivatives and Hedging Activities (in thousands)
| | | For the Years Ended December 31, | For the Years Ended December 31, |
| 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 |
Derivatives and hedged items in fair value hedging relationships: | | | | | | | | | | |
Interest rate swaps | $ | 2,762 |
| | $ | 5,127 |
| | $ | 10,837 |
| $ | 1,875 |
| | $ | (60 | ) | | $ | 697 |
|
Derivatives not designated as hedging instruments: | | | | | | | | | | |
Economic hedges: | | | | | | | | | | |
Interest rate swaps | 2,515 |
| | 628 |
| | 7,456 |
| 10,722 |
| | (4,067 | ) | | (69,266 | ) |
Interest rate swaptions | (274 | ) | | — |
| | — |
| (5,725 | ) | | (17,016 | ) | | 6,229 |
|
Forward rate agreements | (1,090 | ) | | (15,465 | ) | | (845 | ) | 4,446 |
| | (6,054 | ) | | 2,794 |
|
Net interest settlements | 6,623 |
| | 706 |
| | 328 |
| (46,093 | ) | | (8,298 | ) | | 12,009 |
|
Mortgage delivery commitments | 2,501 |
| | 15,631 |
| | (9,873 | ) | (5,349 | ) | | 10,424 |
| | 106 |
|
Total net gains (losses) related to derivatives not designated as hedging instruments | 10,275 |
| | 1,500 |
| | (2,934 | ) | |
Net gains on derivatives and hedging activities | $ | 13,037 |
| | $ | 6,627 |
| | $ | 7,903 |
| |
Total net losses related to derivatives not designated as hedging instruments | | (41,999 | ) | | (25,011 | ) | | (48,128 | ) |
Price alignment amount (1) | | (274 | ) | | 607 |
| | — |
|
Net losses on derivatives and hedging activities | | $ | (40,398 | ) | | $ | (24,464 | ) | | $ | (47,431 | ) |
| |
(1) | This amount is for 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 FHLB'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, |
2015 | Gain/(Loss) on Derivative | | Gain/(Loss) on Hedged Item | | Net Fair Value Hedge Ineffectiveness | | Effect of Derivatives on Net Interest Income(1) | |
2018 | | 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 | | $ | (6,443 | ) | | $ | 8,517 |
| | $ | 2,074 |
| | $ | 24,006 |
|
Consolidated Bonds | | 2,758 |
| | (2,950 | ) | | (192 | ) | | (3,215 | ) |
Available-for-sale securities | | (1,015 | ) | | 1,008 |
| | (7 | ) | | (44 | ) |
Total | | $ | (4,700 | ) | | $ | 6,575 |
| | $ | 1,875 |
| | $ | 20,747 |
|
2017 | | | | | | | | |
Hedged Item Type: | | | | | | | | | | | | | | |
Advances | $ | 62,657 |
| | $ | (60,453 | ) | | $ | 2,204 |
| | $ | (83,571 | ) | $ | 35,570 |
| | $ | (36,152 | ) | | $ | (582 | ) | | $ | (17,907 | ) |
Consolidated Bonds | (10,930 | ) | | 11,488 |
| | 558 |
| | 19,787 |
| 240 |
| | 282 |
| | 522 |
| | (1,101 | ) |
Total | $ | 51,727 |
| | $ | (48,965 | ) | | $ | 2,762 |
| | $ | (63,784 | ) | $ | 35,810 |
| | $ | (35,870 | ) | | $ | (60 | ) | | $ | (19,008 | ) |
2014 | | | | | | | | |
2016 | | | | | | | | |
Hedged Item Type: | | | | | | | | | | | | | | |
Advances | $ | 76,295 |
| | $ | (71,315 | ) | | $ | 4,980 |
| | $ | (91,232 | ) | $ | 76,401 |
| | $ | (75,744 | ) | | $ | 657 |
| | $ | (59,560 | ) |
Consolidated Bonds | (15,633 | ) | | 15,780 |
| | 147 |
| | 18,298 |
| (6,641 | ) | | 6,681 |
| | 40 |
| | 7,624 |
|
Total | $ | 60,662 |
| | $ | (55,535 | ) | | $ | 5,127 |
| | $ | (72,934 | ) | $ | 69,760 |
| | $ | (69,063 | ) | | $ | 697 |
| | $ | (51,936 | ) |
2013 | | | | | | | | |
Hedged Item Type: | | | | | | | | |
Advances | $ | 156,025 |
| | $ | (145,843 | ) | | $ | 10,182 |
| | $ | (106,452 | ) | |
Consolidated Bonds | (26,341 | ) | | 26,996 |
| | 655 |
| | 27,038 |
| |
Total | $ | 129,684 |
| | $ | (118,847 | ) | | $ | 10,837 |
| | $ | (79,414 | ) | |
| |
(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) $(3,424)$(602), $(3,310),$(2,131) and $(3,022)$(2,908) of (amortization)/accretion related to fair value hedging activities for the years ended December 31, 2015, 2014,2018, 2017 and 2013.2016. |
Credit Risk on Derivatives
The FHLB 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 uncleared derivatives, the degree of credit risk depends on the extent to which master netting arrangements are included in these contracts to mitigate the risk. The FHLB requires collateral agreements withon its uncleared derivatives where the collateral delivery thresholds on the majority of its uncleared derivatives.threshold is set to zero.
For cleared derivatives, the Clearinghouse is the FHLB's counterparty. The Clearinghouse notifies the clearing agent of the required initial and variation margin and the clearing agent in turn notifies the FHLB. The FHLB utilizes two Clearinghouses for all cleared derivative transactions, LCH Ltd. and CME Clearing. Effective January 16, 2018, LCH Ltd. made certain amendments to its rulebook changing the legal characterization of variation margin payments to be daily settlement payments, rather than collateral. CME Clearing made the same change to its rulebook on January 3, 2017. As a result, at both Clearinghouses, variation margin is characterized as daily settlement payments, rather than cash collateral. At both Clearinghouses, initial margin continues to be considered collateral. The requirement that the FHLB post initial and variation margin through the clearing agent, to the Clearinghouse, exposes the FHLB 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 collateralcollateral/payments for changes in the value of cleared derivatives is posted daily through a clearing agent.
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, 2018, the FHLB was not required to post additional initial margin by its clearing agents based on credit considerations.
Offsetting of Derivative Assets and Derivative Liabilities
The FHLB presents derivative instruments, related cash collateral 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 FHLB's clearing agent, or both. Based on this analysis, the FHLB presents a net derivative receivable or payable for all of its transactions through a particular clearing agent with a particular Clearinghouse.
Certain of the FHLB's uncleared derivative contracts contain provisions 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 all uncleared derivatives with credit-risk-related contingent features that were in a net liability position (before cash collateral and related accrued interest) at December 31, 2015 was (in thousands) $64,235, for which the FHLB had posted collateral with a fair value of (in thousands) $34,867 in the normal course of business.
If one of the FHLB's credit ratings had been lowered to the next lower rating that would have triggered additional collateral to be delivered, the FHLB would have been required to deliver up to an additional (in thousands) $5,588 of collateral at fair value to its derivatives counterparties at December 31, 2015.
For cleared derivatives, the Clearinghouse determines initial margin requirements and generally credit ratings are not factored into the initial margin. However, clearing agents may require additional initial margin to be posted based on credit considerations, including, but not limited to, credit rating downgrades. At December 31, 2015, the FHLB was not required to post additional initial margin by its clearing agents based on credit considerations.
Offsetting of Derivative Assets and Derivative Liabilities
The FHLB presents derivative instruments, related cash collateral, including initial and variation margin, received or pledged, and associated accrued interest, on a net basis by clearing agent and/or by counterparty when it has met the netting requirements.
Table 11.4 presents separately the fair value of derivative instruments meeting or not meeting netting requirements, including the related collateral received from or pledged to counterparties. At December 31, 20152018 and 2014,2017, the FHLB did not receive or pledge any non-cash collateral. Any overcollateralizationover-collateralization under an individual clearing agent and/or counterparty level is not included in the determination of the net unsecured amount.
Table 11.4 - Offsetting of Derivative Assets and Derivative Liabilities (in thousands) |
| | | | | | | | | | | | | | | |
| December 31, 2015 | | December 31, 2014 |
| Derivative Assets | | Derivative Liabilities | | Derivative Assets | | Derivative Liabilities |
Derivative instruments meeting netting requirements: | | | | | | | |
Gross recognized amount: | | | | | | | |
Uncleared derivatives | $ | 8,046 |
| | $ | 70,178 |
| | $ | 19,585 |
| | $ | 141,352 |
|
Cleared derivatives | 5,893 |
| | 11,801 |
| | 1,141 |
| | 3,357 |
|
Total gross recognized amount | 13,939 |
| | 81,979 |
| | 20,726 |
| | 144,709 |
|
Gross amounts of netting adjustments and cash collateral: | | | | | | | |
Uncleared derivatives | (7,844 | ) | | (40,810 | ) | | (19,544 | ) | | (82,510 | ) |
Cleared derivatives | 18,879 |
| | (11,801 | ) | | 9,712 |
| | (3,357 | ) |
Total gross amounts of netting adjustments and cash collateral | 11,035 |
| | (52,611 | ) | | (9,832 | ) | | (85,867 | ) |
Net amounts after netting adjustments and cash collateral: | | | | | | | |
Uncleared derivatives | 202 |
| | 29,368 |
| | 41 |
| | 58,842 |
|
Cleared derivatives | 24,772 |
| | — |
| | 10,853 |
| | — |
|
Total net amounts after netting adjustments and cash collateral | 24,974 |
| | 29,368 |
| | 10,894 |
| | 58,842 |
|
Derivative instruments not meeting netting requirements (1): | | | | | | | |
Uncleared derivatives | 2,022 |
| | 1,719 |
| | 3,805 |
| | 4,925 |
|
Total derivative instruments not meeting netting requirements (1) | 2,022 |
| | 1,719 |
| | 3,805 |
| | 4,925 |
|
Total derivative assets and total derivative liabilities: | | | | | | | |
Uncleared derivatives | 2,224 |
| | 31,087 |
| | 3,846 |
| | 63,767 |
|
Cleared derivatives | 24,772 |
| | — |
| | 10,853 |
| | — |
|
Total derivative assets and total derivative liabilities | $ | 26,996 |
| | $ | 31,087 |
| | $ | 14,699 |
| | $ | 63,767 |
|
|
| | | | | | | | | | | | | | | |
| December 31, 2018 |
| Derivative Instruments Meeting Netting Requirements | | | | |
| Amount Recognized | | Gross Amount of Netting Adjustments and Cash Collateral | | Derivative Instruments Not Meeting Netting Requirements(1) | | Total Derivative Assets and Total Derivative Liabilities |
Derivative Assets: | | | | | | | |
Uncleared | $ | 20,284 |
| | $ | (20,250 | ) | | $ | 1,726 |
| | $ | 1,760 |
|
Cleared | 1,331 |
| | 62,674 |
| | — |
| | 64,005 |
|
Total |
| |
|
| |
|
| | $ | 65,765 |
|
Derivative Liabilities: | | | | | | | |
Uncleared | $ | 13,745 |
| | $ | (11,824 | ) | | $ | 2,665 |
| | $ | 4,586 |
|
Cleared | 4,969 |
| | (4,969 | ) | | — |
| | — |
|
Total |
| |
|
| |
|
| | $ | 4,586 |
|
| | | | | | | |
| December 31, 2017 (2) |
| Derivative Instruments Meeting Netting Requirements | | | | |
| Amount Recognized | | Gross Amount of Netting Adjustments and Cash Collateral | | Derivative Instruments Not Meeting Netting Requirements(1) | | Total Derivative Assets and Total Derivative Liabilities |
Derivative Assets: | | | | | | | |
Uncleared | $ | 5,239 |
| | $ | (5,215 | ) | | $ | 480 |
| | $ | 504 |
|
Cleared | 58,598 |
| | 1,593 |
| | — |
| | 60,191 |
|
Total |
| |
| |
| | $ | 60,695 |
|
Derivative Liabilities: | | | | | | | |
Uncleared | $ | 8,773 |
| | $ | (6,127 | ) | | $ | 247 |
| | $ | 2,893 |
|
Cleared | 780 |
| | (780 | ) | | — |
| | — |
|
Total |
| |
| |
| | $ | 2,893 |
|
| |
(1) | Represents mortgage delivery commitments and forward rate agreements that are not subject to an enforceable netting agreement. |
| |
(2) | To conform with current presentation, (in thousands) $74,431 in variation margin has been allocated to the individual derivative instruments with the Amount Recognized as of December 31, 2017. Previously, this amount was included with Gross Amount of Netting Adjustments and Cash Collateral. |
Note 12 - Deposits
The FHLB offers demand and overnight deposits to members and to qualifying nonmembers. In addition, the FHLB offers short-term interest bearing deposit programs to members, and in certain cases, to qualifying nonmembers. A member that services mortgage loans may deposit funds collected in connection with the mortgage loans at the FHLB, pending disbursement of such funds to the owners of the mortgage loans. The FHLB classifies these itemsfunds as other interest bearing deposits. 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.
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 FHLB averaged (in thousands) $3,171,708$8,343 and $3,597,698$22,370 during 20152018 and 2014.
Deposits classified as demand, overnight, and other pay interest based on a daily interest rate. Term deposits pay interest based on a fixed rate determined at the issuance of the deposit. The average interest rates paid on interest bearing deposits was 0.04 percent, 0.03 percent, and 0.03 percent during 2015, 2014, and 2013.2017.
Non-interest bearing deposits represent funds for which the FHLB acts as a pass-through correspondent for member institutions required to deposit reserves with the Federal Reserve Banks.
Table 12.1-12.1 - Deposits (in thousands)
| | | December 31, 2015 | | December 31, 2014 | December 31, 2018 | | December 31, 2017 |
Interest bearing: | | | | | | |
Demand and overnight | $ | 646,902 |
| | $ | 624,446 |
| $ | 605,979 |
| | $ | 590,617 |
|
Term | 151,825 |
| | 99,600 |
| 51,600 |
| | 52,600 |
|
Other | 5,377 |
| | 5,592 |
| 4,959 |
| | 5,509 |
|
Total interest bearing | 804,104 |
| | 729,638 |
| 662,538 |
| | 648,726 |
|
| | | | |
Non-interest bearing: | | | | | | |
Other | 238 |
| | 298 |
| 6,478 |
| | 1,805 |
|
Total non-interest bearing | 238 |
| | 298 |
| 6,478 |
| | 1,805 |
|
Total deposits | $ | 804,342 |
| | $ | 729,936 |
| $ | 669,016 |
| | $ | 650,531 |
|
The aggregate amount of time deposits with a denomination of $250 thousand or more was (in thousands) $151,775 and $99,550 as of December 31, 2015 and 2014, respectively.
Note 13 - Consolidated Obligations
Consolidated Obligations consist of Consolidated Bonds and Discount Notes. The FHLBanks issue Consolidated Obligations through the Office of Finance as their agent. In connection with each debt issuance, each FHLBank specifies the amount of debt it wants issued on its behalf. The Office of Finance tracks the amount of debt issued on behalf of each FHLBank. In addition, the FHLBank 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 FHLB is primarily liable for its portion of Consolidated Obligations, the FHLB is also jointly and severally liable with the other 10 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 11 FHLBanks' outstanding Consolidated Obligations were approximately $905.2$1,031.6 billion and $847.2$1,034.3 billion at December 31, 20152018 and 2014. Regulations2017. Finance Agency regulations require the FHLB 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 FHLB 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, 2015 | $ | 77,199,208 |
| | $ | 77,225,334 |
| | 0.24 | % |
December 31, 2014 | $ | 41,232,127 |
| | $ | 41,238,122 |
| | 0.09 | % |
|
| | | | | | | | | | |
| Book Value | | Principal Amount | | Weighted Average Interest Rate (1) |
December 31, 2018 | $ | 46,943,632 |
| | $ | 47,071,113 |
| | 2.35 | % |
December 31, 2017 | $ | 46,210,458 |
| | $ | 46,258,644 |
| | 1.23 | % |
| |
(1) | Represents an implied rate without consideration of concessions. |
Table 13.2 - Consolidated Bonds Outstanding by Contractual Maturity (dollars in thousands)
| | | | December 31, 2015 | | December 31, 2014 | | December 31, 2018 | | December 31, 2017 |
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 | | $ | 9,808,000 |
| | 0.91 | % | | $ | 32,477,000 |
| | 0.24 | % | | $ | 21,085,800 |
| | 2.20 | % | | $ | 28,940,265 |
| | 1.34 | % |
Due after 1 year through 2 years | | 5,143,750 |
| | 1.42 |
| | 6,918,000 |
| | 1.19 |
| | 6,998,565 |
| | 2.13 |
| | 5,841,800 |
| | 1.74 |
|
Due after 2 years through 3 years | | 4,814,000 |
| | 1.64 |
| | 4,594,000 |
| | 1.56 |
| | 6,829,595 |
| | 2.05 |
| | 4,770,565 |
| | 1.89 |
|
Due after 3 years through 4 years | | 4,090,000 |
| | 1.89 |
| | 4,245,000 |
| | 1.79 |
| | 2,958,620 |
| | 2.39 |
| | 6,017,000 |
| | 1.92 |
|
Due after 4 years through 5 years | | 3,041,000 |
| | 2.09 |
| | 2,647,000 |
| | 2.08 |
| | 3,248,975 |
| | 2.63 |
| | 2,244,620 |
| | 2.24 |
|
Thereafter | | 8,139,000 |
| | 2.80 |
| | 8,217,000 |
| | 2.79 |
| | 4,525,635 |
| | 2.94 |
| | 6,343,055 |
| | 2.72 |
|
Index amortizing notes | | 943 |
| | 5.25 |
| | 25,297 |
| | 5.07 |
| |
Total par value | | 35,036,693 |
| | 1.74 |
| | 59,123,297 |
| | 1.00 |
| |
Total principal amount | | | 45,647,190 |
| | 2.29 |
| | 54,157,305 |
| | 1.69 |
|
Premiums | | 90,189 |
| | | | 103,477 |
| | | | 75,809 |
| | | | 86,521 |
| | |
Discounts | | (24,525 | ) | | | | (25,161 | ) | | | | (29,275 | ) | | | | (30,669 | ) | | |
Hedging adjustments | | 3,817 |
| | | | 15,304 |
| | | | (196 | ) | | | | (3,146 | ) | | |
Fair value option valuation adjustment and accrued interest | | (1,410 | ) | | | | (360 | ) | | | | (34,390 | ) | | | | (46,950 | ) | | |
Total | | $ | 35,104,764 |
| | | | $ | 59,216,557 |
| | | | $ | 45,659,138 |
| | | | $ | 54,163,061 |
| | |
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, including LIBOR.are indexed to either LIBOR or the Secured Overnight Financing Rate. 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 FHLB 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, 2015 | | December 31, 2014 | December 31, 2018 | | December 31, 2017 |
Par value of Consolidated Bonds: | | | | |
Principal Amount of Consolidated Bonds: | | | | |
Non-callable | $ | 28,235,693 |
| | $ | 49,976,297 |
| $ | 38,539,190 |
| | $ | 47,155,305 |
|
Callable | 6,801,000 |
| | 9,147,000 |
| 7,108,000 |
| | 7,002,000 |
|
Total par value | $ | 35,036,693 |
| | $ | 59,123,297 |
| |
Total principal amount | | $ | 45,647,190 |
| | $ | 54,157,305 |
|
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, 2015 | | December 31, 2014 | | December 31, 2018 | | December 31, 2017 |
Due in 1 year or less | | $ | 16,339,000 |
| | $ | 40,774,000 |
| | $ | 27,173,800 |
| | $ | 35,029,265 |
|
Due after 1 year through 2 years | | 4,881,750 |
| | 5,413,000 |
| | 5,773,565 |
| | 5,369,800 |
|
Due after 2 years through 3 years | | 3,499,000 |
| | 3,317,000 |
| | 5,060,595 |
| | 3,715,565 |
|
Due after 3 years through 4 years | | 3,020,000 |
| | 2,685,000 |
| | 2,470,620 |
| | 4,388,000 |
|
Due after 4 years through 5 years | | 2,383,000 |
| | 1,992,000 |
| | 2,231,975 |
| | 1,823,620 |
|
Thereafter | | 4,913,000 |
| | 4,917,000 |
| | 2,936,635 |
| | 3,831,055 |
|
Index amortizing notes | | 943 |
| | 25,297 |
| |
Total par value | | $ | 35,036,693 |
| | $ | 59,123,297 |
| |
Total principal amount | | | $ | 45,647,190 |
| | $ | 54,157,305 |
|
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 FHLB 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, 2015 | | December 31, 2014 | December 31, 2018 | | December 31, 2017 |
Par value of Consolidated Bonds: | | | | |
Principal Amount of Consolidated Bonds: | | | | |
Fixed-rate | $ | 30,806,693 |
| | $ | 31,363,297 |
| $ | 29,837,190 |
| | $ | 33,252,305 |
|
Variable-rate | 4,065,000 |
| | 27,610,000 |
| 15,470,000 |
| | 20,895,000 |
|
Step-up | 165,000 |
| | 150,000 |
| 340,000 |
| | 10,000 |
|
Total par value | $ | 35,036,693 |
| | $ | 59,123,297 |
| |
Total principal amount | | $ | 45,647,190 |
| | $ | 54,157,305 |
|
Concessions on Consolidated Obligations. Unamortized concessions included in other assets were (in thousands) $13,042 and $14,184 at December 31, 2015 and 2014. The amortization of these concessions is included in Consolidated Obligation interest expense and totaled (in thousands) $13,280, $7,380, and $7,026 for the years ended December 31, 2015, 2014, and 2013, respectively.
Note 14 - Affordable Housing Program (AHP)
The FHLBank Act requires each FHLBank to establish an AHP. Each FHLBank provides subsidies in the form of direct grants and below-market interest rate AHP Advances to members who use the funds to assist in the purchase, construction, or rehabilitation of housing for very low-, low-, and moderate-income households. Annually, the FHLBanks must set aside for theEach FHLBank is required to contribute to its AHP the greater of $100 million or 10 percent of net earnings.its previous year's income subject to assessment, or the prorated sum required to ensure the aggregate contribution by the FHLBanks in no less than $100 million for each year. For purposes of the AHP calculation, net earningsincome subject to assessment is defined as net income before assessments, plus interest expense related to mandatorily redeemable capital stock. The FHLB accrues AHP expense monthly based on its net earnings.income subject to assessment. The FHLB reduces the AHP liability as members use subsidies.
If the FHLB experienced a net loss during a quarter, but still had net earningsincome subject to assessment for the year, the FHLB's obligation to the AHP would be calculated based on the FHLB's year-to-date net earnings.income subject to assessment. If the FHLB had net earningsincome subject to assessment in subsequent quarters, it would be required to contribute additional amounts to meet its calculated annual obligation. If the FHLB experienced a net loss for a full year, the FHLB would have no obligation to the AHP for the year, because each FHLB'sFHLBank's required annual AHP contribution is limited to its annual net earnings.income subject to assessment. 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 sufficientprorated sum to assureensure that the aggregate contributions ofby the FHLBanks equaled $100 million. The pro rationproration 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 2015, 2014,2018, 2017, or 2013.2016. 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 FHLB has never made such an application. The FHLB had outstanding principal in AHP-related Advances (in thousands) of $85,145 and $102,465 at December 31, 2015 and 2014.
Table 14.1 - Analysis of AHP Liability (in thousands)
| | | 2015 | | 2014 | 2018 | | 2017 |
Balance at beginning of year | $ | 98,103 |
| | $ | 93,789 |
| $ | 109,877 |
| | $ | 104,883 |
|
Assessments (current year additions) | 27,906 |
| | 27,605 |
| 37,884 |
| | 35,120 |
|
Subsidy uses, net | (18,657 | ) | | (23,291 | ) | (30,425 | ) | | (30,126 | ) |
Balance at end of year | $ | 107,352 |
| | $ | 98,103 |
| $ | 117,336 |
| | $ | 109,877 |
|
Note 15 - Capital
The FHLB 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 FHLB 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 FHLB is required tomust 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 FHLB is required tomust 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 FHLB to maintain greater permanent capital than is required based on Finance Agency rules and regulations.
At December 31, 20152018 and 2014,2017, the FHLB was in compliance with each of these capital requirements.
Table 15.1 - Capital Requirements (dollars in thousands)
| | | December 31, 2015 | | December 31, 2014 | December 31, 2018 | | December 31, 2017 |
| Minimum Requirement | | Actual | | Minimum Requirement | | Actual | Minimum Requirement | | Actual | | Minimum Requirement | | Actual |
Risk-based capital | $ | 630,604 |
| | $ | 5,232,228 |
| | $ | 481,835 |
| | $ | 5,018,567 |
| $ | 837,666 |
| | $ | 5,366,443 |
| | $ | 886,033 |
| | $ | 5,211,204 |
|
Capital-to-assets ratio (regulatory) | 4.00 | % | | 4.40 | % | | 4.00 | % | | 4.71 | % | 4.00 | % | | 5.41 | % | | 4.00 | % | | 4.88 | % |
Regulatory capital | $ | 4,751,871 |
| | $ | 5,232,228 |
| | $ | 4,265,617 |
| | $ | 5,018,567 |
| $ | 3,968,103 |
| | $ | 5,366,443 |
| | $ | 4,275,809 |
| | $ | 5,211,204 |
|
Leverage capital-to-assets ratio (regulatory) | 5.00 | % | | 6.61 | % | | 5.00 | % | | 7.06 | % | 5.00 | % | | 8.11 | % | | 5.00 | % | | 7.31 | % |
Leverage capital | $ | 5,939,839 |
| | $ | 7,848,342 |
| | $ | 5,332,021 |
| | $ | 7,527,851 |
| $ | 4,960,129 |
| | $ | 8,049,665 |
| | $ | 5,344,761 |
| | $ | 7,816,806 |
|
The FHLB 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 member of and maintain membership in the FHLB. The membership stock requirement is based upon a percentage of the member's total assets, currentlyassets. At December 31, 2018, the membership stock requirement was determined within a declining range from 0.12 percent to 0.03 percent of each member's total assets, with a current minimum of $1 thousand and a current maximum of $25 million for each member. In addition to membership stock, a member may be required to hold activity stock to capitalize its Mission Asset Activity with the FHLB.
Mission Asset Activity includes Advances, certain funds and rate Advance commitments, and MPP activity that occurred after implementation of the Capital Plan on December 30, 2002. Members must maintain an activity stock balance at least equal to the minimum activity allocation percentage, which currently is zero percent for the MPP and two percent for all other Mission
Asset Activity. If a member owns more than the maximum activity allocation percentage, which currently is four percent of all Mission Asset Activity, the additional stock is that member's excess stock. The FHLB'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 FHLB's excess stock may normally be used by members to support a portion of their activity stock requirement as long as those members maintain at least their minimum activity stock allocation percentage.
A member may request redemption of all or part of its Class B stock or may withdraw from membership by giving five years' advance written notice. When the FHLB 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 FHLB has repurchased, at its discretion, all member 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 member that has withdrawn from membership may not be readmitted to membership in any FHLBank until five years from the divestiture date for all capital stock that was held as a condition of membership, unless the institution has canceled its notice of withdrawal prior to the divestiture date. This restriction does not apply if the member is transferring its membership from one FHLBank to another on an uninterrupted basis.
In accordance with the FHLBank Act, eachEach class of FHLB stock is considered putable by the member and the FHLB may repurchase, in its sole discretion, any member's stock investments that exceed the required minimum amount. However, there are significant statutory and regulatory restrictions on the obligation to redeem, or right to repurchase, the outstanding stock. As a result, whether or not a member may have its capital stock in the FHLB repurchased (at the FHLB's discretion at any time before the end of the redemption period) or redeemed (at a member's request, completed at the end of a redemption period) will depend on whether the FHLB is in compliance with those restrictions.
The FHLB'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 FHLB periodically declares dividends or at such time as the FHLB is liquidated. The FHLB's Board of Directors may declare and pay dividends in either cash or capital stock, assuming the FHLB 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 thean FHLBank may experience. At December 31, 20152018 and 20142017 the FHLB had (in thousands) $209,438390,829 and $159,694322,999 in restricted retained earnings.
Mandatorily Redeemable Capital Stock. The FHLB is a cooperative whose members and former members own allmost of the FHLB'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 FHLB and its members at its $100 per share par value, as mandated by the FHLB's Capital Plan. The FHLB reclassifies stock subject to redemption from equity to liability upon expiration of the “grace period” after a member submits a written redemption request or withdrawal notice, or when the member attains nonmember status by merger or acquisition, relocation, charter termination, or involuntary termination of membership. A member may cancel or revoke its written redemption request or its withdrawal notice prior to the end of the five-year redemption period. Under the FHLB's Capital Plan, there is a five calendar day “grace period” for revocation of a redemption request and a 30 calendar day “grace period” for revocation of a withdrawal notice during which the member may cancel the redemption request or withdrawal notice without a penalty or fee. The cancellation fee after the “grace period” is currently two percent of the requested amount in the first year and increases one percent a year until it reaches a maximum of six percent in the fifth year. The cancellation fee can be waived by the FHLB's Board of Directors for a bona fide business purpose.
Stock subject to a redemption or withdrawal notice that is within the “grace period” continues to be considered equity because there is no penalty or fee to retract these notices. Expiration of the “grace period” triggers the reclassification from equity to a liability (mandatorily redeemable capital stock) at fair value because after the “grace period” the penalty to retract these notices is considered substantive. If a member cancels its written notice of redemption or notice of withdrawal, the FHLB 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, 2015, 2014,2018, 2017, and 20132016 dividends on mandatorily redeemable capital stock in the amount (in thousands) of $2,432, $4,190$1,806, $2,514 and $5,506$3,517 were recorded as interest expense.
Table 15.2 - Mandatorily Redeemable Capital Stock Roll ForwardRollforward (in thousands)
| | | 2015 | 2014 | 2013 | 2018 | 2017 | 2016 |
Balance, beginning of year | $ | 62,963 |
| $ | 115,853 |
| $ | 210,828 |
| $ | 30,031 |
| $ | 34,782 |
| $ | 37,895 |
|
Capital stock subject to mandatory redemption reclassified from equity | 28,919 |
| 17,110 |
| 33,457 |
| 68,185 |
| 270,458 |
| 363,839 |
|
Redemption (or other reduction) of mandatorily redeemable capital stock | (53,987 | ) | (70,000 | ) | (128,432 | ) | |
Capital stock previously subject to mandatory redemption reclassified to capital | | (5,599 | ) | — |
| — |
|
Repurchase/redemption of mandatorily redeemable capital stock | | (69,433 | ) | (275,209 | ) | (366,952 | ) |
Balance, end of year | $ | 37,895 |
| $ | 62,963 |
| $ | 115,853 |
| $ | 23,184 |
| $ | 30,031 |
| $ | 34,782 |
|
The number of stockholders holding the mandatorily redeemable capital stock was 15, 1125, 26 and 1128 at December 31, 2015, 2014,2018, 2017, and 2013.2016.
As of December 31, 20152018 there was one memberwere no members or former members 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 FHLB is not required to redeem membership stock until five years after either (i) the membership is terminated or (ii) the FHLB receives notice of withdrawal. The FHLB 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 FHLB 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, 2015 | | December 31, 2014 | | December 31, 2018 | | December 31, 2017 |
Year 1 | | $ | — |
| | $ | 130 |
| | $ | 1,633 |
| | $ | 20 |
|
Year 2 | | — |
| | — |
| | 371 |
| | 1,811 |
|
Year 3 | | 41 |
| | — |
| | 357 |
| | 439 |
|
Year 4 | | 2,265 |
| | 55 |
| | 1,209 |
| | 2,912 |
|
Year 5 | | 2,876 |
| | 2,278 |
| | 3,553 |
| | 5,257 |
|
Past contractual redemption date due to remaining activity (1) | | 32,713 |
| | 60,500 |
| |
Thereafter (1) | | | 624 |
| | 610 |
|
Past contractual redemption date due to remaining activity (2) | | | 15,437 |
| | 18,982 |
|
Total | | $ | 37,895 |
| | $ | 62,963 |
| | $ | 23,184 |
| | $ | 30,031 |
|
| |
(1) | Represents mandatorily redeemable capital stock resulting from a Finance Agency rule effective February 19, 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 member excess stock under certain circumstances. The FHLB may not pay dividends in the form of capital stock or issue new excess stock to members if its excess stock exceeds one percent of its total assets or if the issuance of excess stock would cause the FHLB's excess stock to exceed one percent of its total assets. At December 31, 2015,2018, the FHLB had excess capital stock outstanding totaling lessmore than one percent of its total assets. At December 31, 2015,2018, the FHLB was in compliance with the Finance Agency's excess stock rules.
Note 16 - Accumulated Other Comprehensive Income (Loss) Income
The following tables summarize the changes in accumulated other comprehensive income (loss) income for the years ended December 31, 20152018, 20142017, and 2013.2016.
Table 16.1 - Accumulated Other Comprehensive Income (Loss) Income (in thousands)
|
| | | | | | | | | | | |
| | | | | |
| Net unrealized gains (losses) on available-for-sale securities | | Pension and postretirement benefits | | Total accumulated other comprehensive (loss) income |
BALANCE, DECEMBER 31, 2015 | $ | 81 |
| | $ | (13,358 | ) | | $ | (13,277 | ) |
Other comprehensive income before reclassification: | | | | | |
Net unrealized losses | (58 | ) | | — |
| | (58 | ) |
Net actuarial losses | — |
| | (2,283 | ) | | (2,283 | ) |
Reclassifications from other comprehensive income to net income: | | | | | |
Amortization - pension and postretirement benefits | — |
| | 2,362 |
| | 2,362 |
|
Net current period other comprehensive (loss) income | (58 | ) | | 79 |
| | 21 |
|
BALANCE, DECEMBER 31, 2016 | 23 |
| | (13,279 | ) | | (13,256 | ) |
Other comprehensive income before reclassification: | | | | | |
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 | — |
| | 1,707 |
| | 1,707 |
|
Net current period other comprehensive loss | (147 | ) | | (3,257 | ) | | (3,404 | ) |
BALANCE, DECEMBER 31, 2017 | (124 | ) | | (16,536 | ) | | (16,660 | ) |
Other comprehensive income before reclassification: | | | | | |
Net unrealized gains | 14 |
| | — |
| | 14 |
|
Net actuarial gains | — |
| | 1,403 |
| | 1,403 |
|
Reclassifications from other comprehensive income to net income: | | | | | |
Amortization - pension and postretirement benefits | — |
| | 2,200 |
| | 2,200 |
|
Net current period other comprehensive income | 14 |
| | 3,603 |
| | 3,617 |
|
BALANCE, DECEMBER 31, 2018 | $ | (110 | ) | | $ | (12,933 | ) | | $ | (13,043 | ) |
|
| | | | | | | | | | | |
| Net unrealized (losses) gains on available-for-sale securities | | Pension and postretirement benefits | | Total accumulated other comprehensive (loss) income |
BALANCE, DECEMBER 31, 2012 | $ | — |
| | $ | (11,734 | ) | | $ | (11,734 | ) |
Other comprehensive income before reclassification: | | | | | |
Net unrealized loss | (121 | ) | | — |
| | (121 | ) |
Net actuarial gains | — |
| | 803 |
| | 803 |
|
Reclassifications from other comprehensive income to net income: | | | | | |
Amortization - pension and postretirement benefits | — |
| | 2,010 |
| | 2,010 |
|
Net current period other comprehensive (loss) income | (121 | ) | | 2,813 |
| | 2,692 |
|
BALANCE, DECEMBER 31, 2013 | (121 | ) | | (8,921 | ) | | (9,042 | ) |
Other comprehensive income before reclassification: | | | | | |
Net unrealized gains | 97 |
| | — |
| | 97 |
|
Net actuarial loss | — |
| | (9,496 | ) | | (9,496 | ) |
Reclassifications from other comprehensive income to net income: | | | | | |
Amortization - pension and postretirement benefits | — |
| | 1,845 |
| | 1,845 |
|
Net current period other comprehensive income (loss) | 97 |
| | (7,651 | ) | | (7,554 | ) |
BALANCE, DECEMBER 31, 2014 | (24 | ) | | (16,572 | ) | | (16,596 | ) |
Other comprehensive income before reclassification: | | | | | |
Net unrealized gains | 105 |
| | — |
| | 105 |
|
Net actuarial gains | — |
| | 598 |
| | 598 |
|
Reclassifications from other comprehensive income to net income: | | | | | |
Amortization - pension and postretirement benefits | — |
| | 2,616 |
| | 2,616 |
|
Net current period other comprehensive income | 105 |
| | 3,214 |
| | 3,319 |
|
BALANCE, DECEMBER 31, 2015 | $ | 81 |
| | $ | (13,358 | ) | | $ | (13,277 | ) |
Note 17 - Pension and Postretirement Benefit Plans
Qualified Defined Benefit Multi-employer Plan. The FHLB 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 FHLB 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 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, 2014.2017. 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, 2017 and 2015. The FHLB contributed more than five percent of the total contributions to the Pentegra Defined Benefit Plan for the plan year ended June 30, 2014 and 2013.2016.
Table 17.1 - Pentegra Defined Benefit Plan Net Pension Cost and Funded Status (dollars in thousands)
| | | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 |
Net pension cost charged to compensation and benefit expense for the year ended December 31 | $ | 6,348 |
| | $ | 6,041 |
| | $ | 5,516 |
| $ | 8,988 |
| | $ | 8,340 |
| | $ | 6,659 |
|
Pentegra Defined Benefit Plan funded status as of July 1 | 106.89 | % | (a) | 111.44 | % | (b) | 101.31 | % | 109.86 | % | (a) | 111.75 | % | (b) | 104.72 | % |
FHLB's funded status as of July 1 | 124.97 | % | | 128.27 | % | | 107.36 | % | 124.65 | % | | 124.35 | % | | 118.53 | % |
| |
(a) | The Pentegra Defined Benefit Plan's funded status as of July 1, 20152018 is preliminary and may increase because the plan's participants were permitted to make contributions for the plan year ended June 30, 20152018 through March 15, 2016.2019. Contributions made on or before March 15, 2016,2019, and designated for the plan year ended June 30, 2015,2018, will be included in the final valuation as of July 1, 2015.2018. The final funded status as of July 1, 20152018 will not be available until the Form 5500 for the plan year July 1, 20152018 through June 30, 20162019 is filed (this Form 5500 is due to be filed no later than April 2017)2020). |
| |
(b) | 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). |
Qualified Defined Contribution Plan. The FHLB also participates in the Pentegra Defined Contribution Plan for Financial Institutions, a tax-qualified, defined contribution pension plan. The FHLB 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 FHLB contributed $992,000, $943,000,$1,249,000, $1,191,000, and $875,000$1,026,000 in the years ended December 31, 2015, 2014,2018, 2017, and 2013,2016, respectively. The FHLB's contributions are recorded as compensation and benefits expense in the Statements of Income.
Nonqualified Supplemental Defined Benefit Retirement Plan (Defined Benefit Retirement Plan). The FHLB 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 FHLB 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 FHLB 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 FHLB's nonqualified supplemental defined benefit retirement planDefined 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: | 2015 | 2014 | | 2015 | 2014 | 2018 | 2017 | | 2018 | 2017 |
Benefit obligation at beginning of year | $ | 33,860 |
| $ | 26,511 |
| | $ | 5,197 |
| $ | 3,957 |
| $ | 39,545 |
| $ | 34,303 |
| | $ | 4,795 |
| $ | 4,867 |
|
Service cost | 668 |
| 524 |
| | 74 |
| 53 |
| 1,129 |
| 882 |
| | 19 |
| 28 |
|
Interest cost | 1,222 |
| 1,234 |
| | 203 |
| 190 |
| 1,353 |
| 1,367 |
| | 166 |
| 197 |
|
Actuarial (gain) loss | (413 | ) | 8,335 |
| | (185 | ) | 1,161 |
| (1,127 | ) | 5,060 |
| | (276 | ) | (96 | ) |
Benefits paid | (2,797 | ) | (2,744 | ) | | (173 | ) | (164 | ) | (2,213 | ) | (2,067 | ) | | (223 | ) | (201 | ) |
Benefit obligation at end of year | 32,540 |
| 33,860 |
| | 5,116 |
| 5,197 |
| 38,687 |
| 39,545 |
| | 4,481 |
| 4,795 |
|
Change in plan assets: | | | | | | |
Fair value of plan assets at beginning of year | — |
| — |
| | — |
| — |
| — |
| — |
| | — |
| — |
|
Employer contribution | 2,797 |
| 2,744 |
| | 173 |
| 164 |
| 2,213 |
| 2,067 |
| | 223 |
| 201 |
|
Benefits paid | (2,797 | ) | (2,744 | ) | | (173 | ) | (164 | ) | (2,213 | ) | (2,067 | ) | | (223 | ) | (201 | ) |
Fair value of plan assets at end of year | — |
| — |
| | — |
| — |
| — |
| — |
| | — |
| — |
|
Funded status at end of year | $ | (32,540 | ) | $ | (33,860 | ) | | $ | (5,116 | ) | $ | (5,197 | ) | $ | (38,687 | ) | $ | (39,545 | ) | | $ | (4,481 | ) | $ | (4,795 | ) |
Amounts recognized in “Other liabilities” on the Statements of Condition for the FHLB's nonqualified supplemental defined benefit planDefined Benefit Retirement Plan and postretirement benefits planPostretirement Benefits Plan as of December 31, 20152018 and 20142017 were (in thousands) $37,656$43,168 and $39,057.$44,340.
Table 17.3 - Amounts Recognized in Accumulated Other Comprehensive Income (in thousands)
|
| | | | | | | | | | | | | | | |
| Defined Benefit Retirement Plan | | Postretirement Benefits Plan |
| 2015 | | 2014 | | 2015 | | 2014 |
Net actuarial loss | $ | 12,447 |
| | $ | 15,409 |
| | $ | 911 |
| | $ | 1,163 |
|
|
| | | | | | | | | | | | | | | |
| Defined Benefit Retirement Plan | | Postretirement Benefits Plan |
| 2018 | | 2017 | | 2018 | | 2017 |
Net actuarial loss | $ | 12,779 |
| | $ | 16,106 |
| | $ | 154 |
| | $ | 430 |
|
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 |
| 2015 | | 2014 | | 2013 | | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 | | 2018 | | 2017 | | 2016 |
Net Periodic Benefit Cost | | | | | | | | | | | | | | | | | | | | | | |
Service cost | $ | 668 |
| | $ | 524 |
| | $ | 494 |
| | $ | 74 |
| | $ | 53 |
| | $ | 58 |
| $ | 1,129 |
| | $ | 882 |
| | $ | 730 |
| | $ | 19 |
| | $ | 28 |
| | $ | 50 |
|
Interest cost | 1,222 |
| | 1,234 |
| | 986 |
| | 203 |
| | 190 |
| | 199 |
| 1,353 |
| | 1,367 |
| | 1,317 |
| | 166 |
| | 197 |
| | 219 |
|
Amortization of net loss | 2,549 |
| | 1,845 |
| | 1,948 |
| | 67 |
| | — |
| | 62 |
| 2,200 |
| | 1,702 |
| | 2,316 |
| | — |
| | 5 |
| | 46 |
|
Net periodic benefit cost | $ | 4,439 |
| | $ | 3,603 |
| | $ | 3,428 |
| | $ | 344 |
| | $ | 243 |
| | $ | 319 |
| $ | 4,682 |
| | $ | 3,951 |
| | $ | 4,363 |
| | $ | 185 |
| | $ | 230 |
| | $ | 315 |
|
Other Changes in Benefit Obligations Recognized in Other Comprehensive Income | | | | | | | | | | �� | | | | | | | | | | | | |
Net (gain) loss | (413 | ) | | 8,335 |
| | 215 |
| | (185 | ) | | 1,161 |
| | (1,018 | ) | $ | (1,127 | ) | | $ | 5,060 |
| | $ | 2,617 |
| | $ | (276 | ) | | $ | (96 | ) | | $ | (334 | ) |
Amortization of net loss | (2,549 | ) | | (1,845 | ) | | (1,948 | ) | | (67 | ) | | — |
| | (62 | ) | (2,200 | ) | | (1,702 | ) | | (2,316 | ) | | — |
| | (5 | ) | | (46 | ) |
Total recognized in other comprehensive income | (2,962 | ) | | 6,490 |
| | (1,733 | ) | | (252 | ) | | 1,161 |
| | (1,080 | ) | (3,327 | ) | | 3,358 |
| | 301 |
| | (276 | ) | | (101 | ) | | (380 | ) |
Total recognized in net periodic benefit cost and other comprehensive income | $ | 1,477 |
|
| $ | 10,093 |
|
| $ | 1,695 |
|
| $ | 92 |
|
| $ | 1,404 |
|
| $ | (761 | ) | $ | 1,355 |
|
| $ | 7,309 |
|
| $ | 4,664 |
|
| $ | (91 | ) |
| $ | 129 |
|
| $ | (65 | ) |
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 | $ | 1,839 |
| | $ | 46 |
|
|
| | | | | | | |
| | | |
| Defined Benefit Retirement Plan | | Postretirement Benefits Plan |
Net actuarial loss | $ | 1,605 |
| | $ | — |
|
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 |
| 2015 | | 2014 | | 2015 | | 2014 | 2018 | | 2017 | | 2018 | | 2017 |
Discount rate | 4.02 | % | | 3.67 | % | | 4.33 | % | | 3.96 | % | 4.10 | % | | 3.45 | % | | 4.15 | % | | 3.53 | % |
Salary increases | 4.50 | % | | 4.50 | % | | N/A |
| | N/A |
| 5.00 | % | | 5.00 | % | | N/A |
| | N/A |
|
Table 17.7 presents the key assumptions used for the actuarial calculations to determine net periodic benefit cost for the FHLB's defined benefit retirement plansDefined 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 |
| 2015 | | 2014 | | 2013 | | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 | | 2018 | | 2017 | | 2016 |
Discount rate | 3.67 | % | | 4.32 | % | | 3.26 | % | | 3.96 | % | | 4.88 | % | | 4.16 | % | 3.45 | % | | 3.91 | % | | 4.02 | % | | 3.53 | % | | 4.10 | % | | 4.33 | % |
Salary increases | 4.50 | % | | 4.50 | % | | 4.50 | % | | N/A |
| | N/A |
| | N/A |
| 5.00 | % | | 4.50 | % | | 4.50 | % | | N/A |
| | N/A |
| | N/A |
|
Table 17.8 - Postretirement Benefits Plan Assumed Health Care Cost Trend Rates
| | | 2015 | | 2014 | 2018 | | 2017 |
Assumed for next year | 8.00 | % | | 8.50 | % | 6.50 | % | | 7.00 | % |
Ultimate rate | 5.50 | % | | 5.25 | % | 5.00 | % | | 5.00 | % |
Year that ultimate rate is reached | 2020 |
| | 2024 |
| 2021 |
| | 2021 |
|
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 $63,000$35,000 and in accumulated postretirement benefit obligation (APBO) of $1,022,000.$725,000. 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 $49,000$28,000 and in APBO of $805,000.$589,000.
The discount rates for the disclosures as of December 31, 20152018 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, 2015,2018, 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, 2015.2018.
Table 17.9 - Estimated Future Benefit Payments (in thousands)
|
| | | | | | | | |
Years | | Defined Benefit Retirement Plan | | Postretirement Benefit Plan |
2016 | | $ | 3,006 |
| | $ | 161 |
|
2017 | | 2,227 |
| | 161 |
|
2018 | | 2,197 |
| | 176 |
|
2019 | | 2,278 |
| | 172 |
|
2020 | | 1,902 |
| | 184 |
|
2021 - 2025 | | 8,547 |
| | 1,179 |
|
|
| | | | | | | | |
Years | | Defined Benefit Retirement Plan | | Postretirement Benefit Plan |
2019 | | $ | 2,573 |
| | $ | 222 |
|
2020 | | 2,197 |
| | 230 |
|
2021 | | 2,313 |
| | 246 |
|
2022 | | 2,428 |
| | 248 |
|
2023 | | 1,894 |
| | 249 |
|
2024 - 2028 | | 10,756 |
| | 1,305 |
|
Note 18 - Segment Information
The FHLB has identified two primary operating segments based on its method of internal reporting: Traditional Member Finance and the MPP. These segments reflect the FHLB'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 FHLB provides services to member stockholders. The 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 FHLB 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 FHLB 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.
The following tables set forth the FHLB'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 |
2015 | | | | | |
Net interest income after reversal for credit losses | $ | 250,076 |
| | $ | 72,205 |
| | $ | 322,281 |
|
Non-interest income | 28,586 |
| | 1,308 |
| | 29,894 |
|
Non-interest expense | 64,925 |
| | 10,626 |
| | 75,551 |
|
Income before assessments | 213,737 |
| | 62,887 |
| | 276,624 |
|
Affordable Housing Program assessments | 21,618 |
| | 6,288 |
| | 27,906 |
|
Net income | $ | 192,119 |
| | $ | 56,599 |
| | $ | 248,718 |
|
Average assets | $ | 97,932,122 |
| | $ | 7,637,197 |
| | $ | 105,569,319 |
|
Total assets | $ | 110,789,438 |
| | $ | 8,007,343 |
| | $ | 118,796,781 |
|
2014 | | | | | |
Net interest income | $ | 237,828 |
| | $ | 79,148 |
| | $ | 316,976 |
|
Reversal for credit losses | — |
| | (500 | ) | | (500 | ) |
Net interest income after reversal for credit losses | 237,828 |
| | 79,648 |
| | 317,476 |
|
Non-interest income | 22,460 |
| | 170 |
| | 22,630 |
|
Non-interest expense | 58,876 |
| | 9,372 |
| | 68,248 |
|
Income before assessments | 201,412 |
| | 70,446 |
| | 271,858 |
|
Affordable Housing Program assessments | 20,560 |
| | 7,045 |
| | 27,605 |
|
Net income | $ | 180,852 |
| | $ | 63,401 |
| | $ | 244,253 |
|
Average assets | $ | 94,333,213 |
| | $ | 6,824,283 |
| | $ | 101,157,496 |
|
Total assets | $ | 99,629,924 |
| | $ | 7,010,495 |
| | $ | 106,640,419 |
|
2013 | | | | | |
Net interest income | $ | 229,559 |
| | $ | 98,285 |
| | $ | 327,844 |
|
Reversal for credit losses | — |
| | (7,450 | ) | | (7,450 | ) |
Net interest income after reversal for credit losses | 229,559 |
| | 105,735 |
| | 335,294 |
|
Non-interest income (loss) | 30,505 |
| | (10,714 | ) | | 19,791 |
|
Non-interest expense | 55,459 |
| | 8,928 |
| | 64,387 |
|
Income before assessments | 204,605 |
| | 86,093 |
| | 290,698 |
|
Affordable Housing Program assessments | 21,011 |
| | 8,609 |
| | 29,620 |
|
Net income | $ | 183,594 |
| | $ | 77,484 |
| | $ | 261,078 |
|
Average assets | $ | 86,609,248 |
| | $ | 7,081,377 |
| | $ | 93,690,625 |
|
Total assets | $ | 96,336,915 |
| | $ | 6,843,787 |
| | $ | 103,180,702 |
|
|
| | | | | | | | | | | |
| For the Years Ended December 31, |
| Traditional Member Finance | | MPP | | Total |
2018 | | | | | |
Net interest income after provision for credit losses | $ | 389,615 |
| | $ | 108,957 |
| | $ | 498,572 |
|
Non-interest income (loss) | (32,415 | ) | | (4,403 | ) | | (36,818 | ) |
Non-interest expense | 73,441 |
| | 11,278 |
| | 84,719 |
|
Income before assessments | 283,759 |
| | 93,276 |
| | 377,035 |
|
Affordable Housing Program assessments | 28,556 |
| | 9,328 |
| | 37,884 |
|
Net income | $ | 255,203 |
| | $ | 83,948 |
| | $ | 339,151 |
|
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 (loss) | 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 |
|
Table 18.2 - Asset Balances by Operating Segment (in thousands)
|
| | | | | | | | | | | |
| Assets |
| Traditional Member Finance | | MPP | | Total |
December 31, 2018 | $ | 86,042,150 |
| | $ | 13,160,423 |
| | $ | 99,202,573 |
|
December 31, 2017 | 95,525,754 |
| | 11,369,460 |
| | 106,895,214 |
|
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 FHLB using available market information and the FHLB's best judgment of appropriate valuation methods. GAAP defines fair value as the 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 (i.e., an exit price). The fair values reflect the FHLB's judgment of how a market participant would estimate the fair values.
Fair Value Hierarchy. The FHLB 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 FHLB 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 arewould be reported as transfers in/out at fair value as of the beginning of the quarter in which the changes occur. The FHLB did not have any transfers of assets or liabilities recorded atbetween fair value on a recurring basislevels during the years ended December 31, 20152018 or 20142017.
Table 19.1 presents the carrying value, fair value, and fair value hierarchy of financial assets and liabilities of the FHLB. These values do not represent an estimate ofThe FHLB 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. The FHLB records all other financial assets and liabilities at amortized cost. Refer to Table 19.2 for further details about the overall marketfinancial assets and liabilities held at fair value of the FHLB ason either a going concern, which would take into account future business opportunities and the net profitability of assets versus liabilities.recurring or nonrecurring basis.
Table 19.1 - Fair Value Summary (in thousands)
| | | December 31, 2015 | December 31, 2018 |
| | | Fair Value | | | Fair Value |
Financial Instruments | Carrying Value | | Total | | Level 1 | | Level 2 | | Level 3 | | Netting Adjustments and Cash Collateral (1) | Carrying Value | | Total | | Level 1 | | Level 2 | | Level 3 | | Netting Adjustments and Cash Collateral (1) |
Assets: | | | | | | | | | | | | | | | | | | | | | | |
Cash and due from banks | $ | 10,136 |
| | $ | 10,136 |
| | $ | 10,136 |
| | $ | — |
| | $ | — |
| | $ | — |
| $ | 10,037 |
| | $ | 10,037 |
| | $ | 10,037 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Interest-bearing deposits | 99 |
| | 99 |
| | — |
| | 99 |
| | — |
| | — |
| 122 |
| | 122 |
| | — |
| | 122 |
| | — |
| | — |
|
Securities purchased under agreements to resell | 10,531,979 |
| | 10,531,979 |
| | — |
| | 10,531,979 |
| | — |
| | — |
| 4,402,208 |
| | 4,402,237 |
| | — |
| | 4,402,237 |
| | — |
| | — |
|
Federal funds sold | 10,845,000 |
| | 10,845,000 |
| | — |
| | 10,845,000 |
| | — |
| | — |
| 10,793,000 |
| | 10,793,000 |
| | — |
| | 10,793,000 |
| | — |
| | — |
|
Trading securities | 1,159 |
| | 1,159 |
| | — |
| | 1,159 |
| | — |
| | — |
| 223,980 |
| | 223,980 |
| | — |
| | 223,980 |
| | — |
| | — |
|
Available-for-sale securities | 700,081 |
| | 700,081 |
| | — |
| | 700,081 |
| | — |
| | — |
| 2,402,897 |
| | 2,402,897 |
| | — |
| | 2,402,897 |
| | — |
| | — |
|
Held-to-maturity securities | 15,278,206 |
| | 15,229,965 |
| | — |
| | 15,229,965 |
| | — |
| | — |
| 15,791,222 |
| | 15,575,368 |
| | — |
| | 15,575,368 |
| | — |
| | — |
|
Advances (2) | 73,292,172 |
| | 73,089,912 |
| | — |
| | 73,089,912 |
| | — |
| | — |
| 54,822,252 |
| | 54,736,645 |
| | — |
| | 54,736,645 |
| | — |
| | — |
|
Mortgage loans held for portfolio, net | 7,979,607 |
| | 8,106,224 |
| | — |
| | 8,075,390 |
| | 30,834 |
| | — |
| 10,500,917 |
| | 10,329,982 |
| | — |
| | 10,317,010 |
| | 12,972 |
| | — |
|
Accrued interest receivable | 94,855 |
| | 94,855 |
| | — |
| | 94,855 |
| | — |
| | — |
| 169,982 |
| | 169,982 |
| | — |
| | 169,982 |
| | — |
| | — |
|
Derivative assets | 26,996 |
| | 26,996 |
| | — |
| | 15,961 |
| | — |
| | 11,035 |
| 65,765 |
| | 65,765 |
| | — |
| | 23,341 |
| | — |
| | 42,424 |
|
Liabilities: | | | | | | | | | | | | | | | | | | | | | | |
Deposits | 804,342 |
| | 804,140 |
| | — |
| | 804,140 |
| | — |
| | — |
| 669,016 |
| | 668,947 |
| | — |
| | 668,947 |
| | — |
| | — |
|
Consolidated Obligations: | | | | | | | | | | | | | | | | | | | | | | |
Discount Notes | 77,199,208 |
| | 77,183,854 |
| | — |
| | 77,183,854 |
| | — |
| | — |
| 46,943,632 |
| | 46,944,523 |
| | — |
| | 46,944,523 |
| | — |
| | — |
|
Bonds (3) | 35,104,764 |
| | 35,317,688 |
| | — |
| | 35,317,688 |
| | — |
| | — |
| 45,659,138 |
| | 45,385,615 |
| | — |
| | 45,385,615 |
| | — |
| | — |
|
Mandatorily redeemable capital stock | 37,895 |
| | 37,895 |
| | 37,895 |
| | — |
| | — |
| | — |
| 23,184 |
| | 23,184 |
| | 23,184 |
| | — |
| | — |
| | — |
|
Accrued interest payable | 118,823 |
| | 118,823 |
| | — |
| | 118,823 |
| | — |
| | — |
| 147,337 |
| | 147,337 |
| | — |
| | 147,337 |
| | — |
| | — |
|
Derivative liabilities | 31,087 |
| | 31,087 |
| | — |
| | 83,698 |
| | — |
| | (52,611 | ) | 4,586 |
| | 4,586 |
| | — |
| | 21,379 |
| | — |
| | (16,793 | ) |
Other: | | | | | | | | | | | | | | | | | | | | | | |
Standby bond purchase agreements | — |
| | 698 |
| | — |
| | 698 |
| | — |
| | — |
| — |
| | 443 |
| | — |
| | 443 |
| | — |
| | — |
|
| |
(1) | Amounts represent the application of the netting requirements that allow the FHLB to settle positive and negative positions and also cash collateral and related accrued interest held or placed by the FHLB with the same counterparty. |
| |
(2) | Includes (in thousands) $15,057$10,008 of Advances recorded under the fair value option at December 31, 20152018. |
| |
(3) | Includes (in thousands) $2,214,5903,906,610 of Consolidated Obligation Bonds recorded under the fair value option at December 31, 20152018. |
| | | 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 and Cash Collateral (1)(2) |
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)(3) | 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 |
| | — |
| | 64,317 |
| | — |
| | (3,622 | ) |
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)(4) | 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 |
| | — |
| | 9,800 |
| | — |
| | (6,907 | ) |
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 FHLB to settle positive and negative positions and also cash collateral and related accrued interest held or placed by the FHLB with the same counterparty. |
| |
(2) | IncludesTo conform with current presentation, (in thousands) $15,04274,431 in variation margin has been allocated to the individual derivative instrument as of Advances recorded under the fair value option at December 31, 2014.2017. Previously, this amount was included with Netting Adjustments and Cash Collateral.
|
| |
(3) | Includes (in thousands) $4,209,64015,013 of Advances recorded under the fair value option at December 31, 2017. |
| |
(4) | Includes (in thousands) $5,577,315 of Consolidated Obligation Bonds recorded under the fair value option at December 31, 20142017. |
Summary of Valuation Methodologies and Primary Inputs.
CashThe valuation methodologies and due from banks:primary inputs used to develop the measurement of fair value for assets and liabilities that are measured at fair value on a recurring or nonrecurring basis in the Statement of Condition are listed below. The fair values and level within the fair value equals the carrying value.hierarchy of these assets and liabilities are reported in Table 19.2.
Interest-bearing deposits:Investment securities – MBS: 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 FHLB'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 securityMBS holdings, the FHLB obtainsincorporates prices from fourmultiple designated third-party pricing vendors, when available. The pricing vendors use various proprietary models to price mortgage-backed securities.MBS. 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 securitiesMBS 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 securityMBS valuations, which facilitates resolution of potentially erroneous prices identified by the FHLB. The FHLB
The FHLB 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 FHLB's valuation technique for estimating the fair values of MBS 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 FHLB's mortgage-backed securityMBS holdings and the final prices for those securities were computed by averaging the prices received. Based on the FHLB's review of the pricing methods and controls employed by the third-party pricing vendors and the relative lack of dispersion among the vendor prices, the FHLB believes its final prices result in reasonable estimates of fair value and further that the fair value measurements are classified appropriately in the fair value hierarchy.
Available-for-sale securities:Investment securities – Non-MBS: To determine the estimated fair values of non-MBS investment securities, the FHLB 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. For its U.S. Treasury obligations, the FHLB determines the fair value using the income approach. The FHLB's available-for-sale portfolio generally consists ofincome approach uses indicative fair values derived from a discounted cash flow methodology. The FHLB uses the Treasury curve as the market-observable interest rate curve. For GSE obligations and certificates of deposit. Quoted marketdeposit, the fair value is determined using prices in active markets are not available for these securities. Therefore,received from third-party pricing vendors. For GSE obligations, the FHLB uses prices from multiple third-party pricing vendors. The pricing vendors' methodology and the FHLB's validation process is consistent with the MBS process described above. For certificates of deposit, the fair value is determined based on each security'ssecurity’s indicative fair value obtained from a third-party vendor. The FHLB performs several validation steps in order to verify the accuracy and reasonableness of thesethe fair values.values obtained for certificates of deposit. 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 FHLB's held-to-maturity portfolio generally consists of 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 determineAdvances recorded under the fair value of its non-mortgage backed securities, the FHLB 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 FHLB 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 discount notes issued by Freddie Mac, and/or Fannie Mae, the FHLB determines the fair value using the income approach. The market-observable interest rate curve used by the FHLB includes the U.S. Government Agency Fair Value Curve.
Advances:option: The FHLB determines the fair values of Advances recorded under the fair value option by calculating the present value of expected future cash flows from the Advances excluding accrued interest.these Advances. 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 FHLB's pricing methodologies for Advances with similar current terms. Advance pricing is determined based on the FHLB's rates on Consolidated Obligations. To determine the estimated fair value for Advances with optionality, market-based expectations of future interest rate volatility implied from current prices for similar options are also used. 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 FHLB financially indifferent to the borrower's decision to prepay the Advances. Therefore, the fair value of Advances does not assume prepayment risk.
For swapped option-based Advances, the fair value is determined (independently of the related derivative) by the discounted cash flow methodology based on the LIBOR Swap Curve and forward rates at period end adjusted for the estimated current spread on new swapped Advances to the swap curve. For swapped Advances with a conversion option, the conversion option is valued by taking into account the LIBOR Swap Curve and forward rates at period end and the market's expectations of future interest rate volatility implied from current market prices of similar options.
Mortgage loans held for portfolio, net: The fair values of performing mortgage loans are determined based on quoted market prices offered to approved members as indicated by the FHLB's MPP pricing methodologies for mortgage loans with similar current terms excluding accrued interest. The quoted prices offered to members are based on Fannie Mae price indications on to-be-announced (TBA) mortgage-backed securities and FHA price indications on government-guaranteed loans. The FHLB then adjusts these indicative prices to account for particular features of the FHLB'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 FHLB'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 FHLB'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 FHLB's derivative assets/liabilities generally consist of interest rate swaps, interest rate swaptions, TBA mortgage-backed securitiesMBS (forward rate agreements), and mortgage delivery commitments. The FHLB's interest rate related derivatives (swaps and swaptions) are traded in the over-the-counter market. Therefore, the FHLB determines the fair value of each individual instrument 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 FHLB 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, 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 FHLB 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 FHLB prepares a monthly reconciliation of the model's fair
values to estimates of fair values provided by the derivative counterparties. The FHLB 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 securitiesMBS is based on independent indicative and/or quoted prices generated by market transactions involving comparable instruments. The FHLB 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 FHLB's discounted cash flow analysis uses market-observable inputs. Inputs, by class of derivative, are as follows:
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:MBS:
| |
▪ | 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.commitments. The adjustments to the market prices are market observable, or can be corroborated with observable market data. |
The FHLB is subject to credit risk due to the risk of nonperformance by counterparties to its derivative transactions. For uncleared derivatives, the degree of credit risk depends on the extent to which master netting arrangements are included in these contracts to mitigate the risk. In addition, the FHLB requires collateral agreements with collateral delivery thresholds on its uncleared derivatives. The FHLB 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 FHLB'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 FHLB determinesConsolidated Obligations recorded under the fair values of FHLB 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:option: The FHLB 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 FHLB determines the fair values of non-option-based Consolidated Obligation Bonds recorded under the fair value option by calculating the present value of scheduled future cash flows from the bonds excluding accrued interest.bonds. Inputs used to determine the 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 FHLB determines the fair values of option-based Consolidated Obligation Bonds recorded under the fair value option based on pricing received from designated third-party pricing vendors. The pricing vendors used apply various proprietary models to price these 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 FHLB.
When pricing vendors are used, the FHLB's valuation technique first requires the establishment of a “median” price for each Consolidated Obligation Bond. If four prices are received, the average of the middle two prices is the median price; if three prices are received, the middle price is the median price; if two prices are received, the average of the two prices is the median price; and if one price is received, it is the median price (and also the final price) subject to validation of outliers. All prices that
are within a specified tolerance threshold of the median price are included in the “cluster” of prices that are averaged to compute a “default” price.
All prices that are outside the threshold (“outliers”) are subject to further analysis (including, but not limited to, comparison to prices provided by an additional third-party valuation service, prices for similar securities, non-binding dealer estimates, and/or use of an internal model that is deemed most appropriate) to determine if an outlier is a better estimate of fair value. If an outlier (or some other price identified in the analysis) is determined to be a better estimate of fair value, then the outlier (or the other price as appropriate) is used as the final price rather than the default price. Alternatively,
if the analysis confirms that an outlier is in fact not representative of fair value and the default price is the best estimate, then the default price is used as the final price. In all cases, the final price is used to determine the fair value of 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 FHLB's Consolidated Obligation Bonds and the final prices for those bonds were computed by averaging the prices received. Based on the FHLB's review of the pricing methods and controls employed by the third-party pricing vendors and the relative lack of dispersion among the vendor prices, the FHLB believes its final prices result in reasonable estimates of fair value and that the fair value measurements are classified appropriately in the fair value hierarchy.
The FHLB has conducted reviews of its pricing vendors to confirm and further augment its understanding of the vendors' pricing processes, methodologies and control procedures for Consolidated Obligation Bonds.
Adjustments may be necessary to reflect the 11 FHLBanks' credit quality when valuing Consolidated Obligation Bonds measured atrecorded under the fair value.value option. Due to the joint and several liability for Consolidated Obligations, the FHLB 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, 20152018 or 2014.
Mandatorily redeemable capital stock:The fair value of capital stock subject to mandatory redemption is par value for the dates presented, as indicated by member contemporaneous purchases and sales at par value. FHLB stock can only be acquired by members at par value and redeemed at par value. FHLB 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.2017.
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.
126
Fair Value Measurements.
Table 19.2 presents the fair value of financial assets and liabilities that are recorded on a recurring or nonrecurring basis at December 31, 20152018 or 2014,and 2017, 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, 2015 | Fair Value Measurements at December 31, 2018 |
| Total | | Level 1 | | Level 2 | | Level 3 | | Netting Adjustment and Cash Collateral (1) | Total | | Level 1 | | Level 2 | | Level 3 | | Netting Adjustments and Cash Collateral (1) |
Recurring fair value measurements - Assets | | | | | | | | | | | | | | | | | | |
Trading securities: | | | | | | | | | | | | | | | | | | |
Other U.S. obligation single-family mortgage-backed securities | $ | 1,159 |
| | $ | — |
| | $ | 1,159 |
| | $ | — |
| | $ | — |
| |
GSE obligations | | $ | 223,368 |
| | $ | — |
| | $ | 223,368 |
| | $ | — |
| | $ | — |
|
U.S. obligation single-family MBS | | 612 |
| | — |
| | 612 |
| | — |
| | — |
|
Total trading securities | | 223,980 |
| | — |
| | 223,980 |
| | — |
| | — |
|
Available-for-sale securities: | | | | | | | | | | | | | | | | | | |
Certificates of deposit | 700,081 |
| | — |
| | 700,081 |
| | — |
| | — |
| 2,350,002 |
| | — |
| | 2,350,002 |
| | — |
| | — |
|
GSE obligations | | 52,895 |
| | — |
| | 52,895 |
| | — |
| | — |
|
Total available-for-sale securities | | 2,402,897 |
| | — |
| | 2,402,897 |
| | — |
| | — |
|
Advances | 15,057 |
| | — |
| | 15,057 |
| | — |
| | — |
| 10,008 |
| | — |
| | 10,008 |
| | — |
| | — |
|
Derivative assets: | | | | | | | | | | | | | | | | | | |
Interest rate related | 24,974 |
| | — |
| | 13,939 |
| | — |
| | 11,035 |
| 64,039 |
| | — |
| | 21,615 |
| | — |
| | 42,424 |
|
Forward rate agreements | 1,680 |
| | — |
| | 1,680 |
| | — |
| | — |
| |
Mortgage delivery commitments | 342 |
| | — |
| | 342 |
| | — |
| | — |
| 1,726 |
| | — |
| | 1,726 |
| | — |
| | — |
|
Total derivative assets | 26,996 |
| | — |
| | 15,961 |
| | — |
| | 11,035 |
| 65,765 |
| | — |
| | 23,341 |
| | — |
| | 42,424 |
|
Total assets at fair value | $ | 743,293 |
| | $ | — |
| | $ | 732,258 |
| | $ | — |
| | $ | 11,035 |
| $ | 2,702,650 |
| | $ | — |
| | $ | 2,660,226 |
| | $ | — |
| | $ | 42,424 |
|
| | | | | | | | | | | | | | | | | | |
Recurring fair value measurements - Liabilities | | | | | | | | | | | | | | | | | | |
Consolidated Obligation Bonds | $ | 2,214,590 |
| | $ | — |
| | $ | 2,214,590 |
| | $ | — |
| | $ | — |
| $ | 3,906,610 |
| | $ | — |
| | $ | 3,906,610 |
| | $ | — |
| | $ | — |
|
Derivative liabilities: | | | | | | | | | | | | | | | | | | |
Interest rate related | 29,368 |
| | — |
| | 81,979 |
| | — |
| | (52,611 | ) | 1,921 |
| | — |
| | 18,714 |
| | — |
| | (16,793 | ) |
Forward rate agreement | 69 |
| | — |
| | 69 |
| | — |
| | — |
| |
Forward rate agreements | | 2,664 |
| | — |
| | 2,664 |
| | — |
| | — |
|
Mortgage delivery commitments | 1,650 |
| | — |
| | 1,650 |
| | — |
| | — |
| 1 |
| | — |
| | 1 |
| | — |
| | — |
|
Total derivative liabilities | 31,087 |
| | — |
| | 83,698 |
| | — |
| | (52,611 | ) | 4,586 |
| | — |
| | 21,379 |
| | — |
| | (16,793 | ) |
Total liabilities at fair value | $ | 2,245,677 |
| | $ | — |
| | $ | 2,298,288 |
| | $ | — |
| | $ | (52,611 | ) | $ | 3,911,196 |
| | $ | — |
| | $ | 3,927,989 |
| | $ | — |
| | $ | (16,793 | ) |
| | | | | | | | | | | | | | | | | | |
Nonrecurring fair value measurements - Assets (2) | | | | | | | | | | | | | | | | | | |
Mortgage loans held for portfolio | $ | 6,270 |
| | $ | — |
| | $ | — |
| | $ | 6,270 |
| | | $ | 311 |
| | $ | — |
| | $ | — |
| | $ | 311 |
| | |
| |
(1) | Amounts represent the application of the netting requirements that allow the FHLB to settle positive and negative positions and also cash collateral and related accrued interest held or placed by the FHLB with the same counterparty. |
| |
(2) | The fair value information presented is as of the date the fair value adjustment was recorded during the year ended December 31, 2015.2018. |
| | | 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 and Cash Collateral (1)(2) |
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 MBS | | $ | 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 related | 10,894 |
| | — |
| | 20,726 |
| | — |
| | (9,832 | ) | 60,215 |
| | — |
| | 63,837 |
| | — |
| | (3,622 | ) |
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 |
| | — |
| | 64,317 |
| | — |
| | (3,622 | ) |
Total assets at fair value | $ | 1,381,059 |
| | $ | — |
| | $ | 1,390,891 |
| | $ | — |
| | $ | (9,832 | ) | $ | 976,365 |
| | $ | — |
| | $ | 979,987 |
| | $ | — |
| | $ | (3,622 | ) |
| | | | | | | | | | | | | | | | | | |
Recurring fair value measurements - Liabilities | | | | | | | | | | | | | | | | | | |
Consolidated Obligation Bonds | $ | 4,209,640 |
| | $ | — |
| | $ | 4,209,640 |
| | $ | — |
| | $ | — |
| $ | 5,577,315 |
| | $ | — |
| | $ | 5,577,315 |
| | $ | — |
| | $ | — |
|
Derivative liabilities: | | | | | | | | | | | | | | | | | | |
Interest rate related | 58,842 |
| | — |
| | 144,709 |
| | — |
| | (85,867 | ) | 2,646 |
| | — |
| | 9,553 |
| | — |
| | (6,907 | ) |
Forward rate agreements | 4,924 |
| | — |
| | 4,924 |
| | — |
| | — |
| 230 |
| | — |
| | 230 |
| | — |
| | — |
|
Mortgage delivery commitments | 1 |
| | — |
| | 1 |
| | — |
| | — |
| 17 |
| | — |
| | 17 |
| | — |
| | — |
|
Total derivative liabilities | 63,767 |
| | — |
| | 149,634 |
| | — |
| | (85,867 | ) | 2,893 |
| | — |
| | 9,800 |
| | — |
| | (6,907 | ) |
Total liabilities at fair value | $ | 4,273,407 |
| | $ | — |
| | $ | 4,359,274 |
| | $ | — |
| | $ | (85,867 | ) | $ | 5,580,208 |
| | $ | — |
| | $ | 5,587,115 |
| | $ | — |
| | $ | (6,907 | ) |
| | | | | | | | | | |
Nonrecurring fair value measurements - Assets (3) | | | | | | | | | | |
Mortgage loans held for portfolio | | $ | 598 |
| | $ | — |
| | $ | — |
| | $ | 598 |
| | |
| |
(1) | Amounts represent the application of the netting requirements that allow the FHLB to settle positive and negative positions and also cash collateral and related accrued interest held or placed by the FHLB with the same counterparty. |
| |
(2) | To conform with current presentation, (in thousands) $74,431 in variation margin has been allocated to the individual derivative instrument as of December 31, 2017. Previously, this amount was included with Netting Adjustments and Cash Collateral. |
| |
(3) | 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 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. Any transaction fees or costs are immediately recognized into other non-interest income or other non-interest expense.
The FHLB has elected the fair value option for certain financial instruments that either do not qualify for hedge accounting or may be at risk for not meeting hedge effectiveness requirements. These fair value elections were made primarily in an effort to mitigate the potential income statement volatility that can arise from economic hedging relationships in which the carrying value of the hedged item is not adjusted for changes in fair value.
Table of Contents19.3 presents net (losses) gains recognized in earnings related to financial assets and liabilities in which the fair value option was elected during the years ended December 31, 2018, 2017 and 2016.
Table 19.3 – Changes in Fair Values for Items Measured at Fair Value Pursuant to the Election of the Fair Value Option - Financial Assets and Liabilities (in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| 2015 | | 2014 | | 2013 |
| Advances | | Consolidated Bonds | | Advances | | Consolidated Bonds | | Advances | | Consolidated Bonds |
Interest income (expense) | $ | 255 |
| | $ | (13,201 | ) | | $ | 82 |
| | $ | (5,899 | ) | | $ | — |
| | $ | (4,914 | ) |
Net gains on changes in fair value under fair value option | 15 |
| | 1,042 |
| | 20 |
| | 2,154 |
| | — |
| | 330 |
|
Total changes in fair value included in current period earnings | $ | 270 |
| | $ | (12,159 | ) | | $ | 102 |
| | $ | (3,745 | ) | | $ | — |
| | $ | (4,584 | ) |
|
| | | | | | | | | | | |
| For the Years Ended December 31, |
Net (Losses) Gains from Changes in Fair Value Recognized in Earnings | 2018 | | 2017 | | 2016 |
Advances | $ | (4 | ) | | $ | (81 | ) | | $ | 37 |
|
Consolidated Bonds | (14,180 | ) | | 10,490 |
| | 40,466 |
|
Total net (losses) gains | $ | (14,184 | ) | | $ | 10,409 |
| | $ | 40,503 |
|
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 (losses) gains on financial instruments held under fair value option” in the Statements of Income.Income, except for changes in fair value related to instrument specific credit risk, which are recorded in accumulated other comprehensive income in the Statement of Condition. The FHLB has determined that no adjustments tonone of the fair values of its instruments recorded under theremaining changes in fair value option forwere related to instrument-specific credit risk were necessary as offor the years ended December 31, 20152018 or 2014.2017. In determining that there has been no change in instrument-specific credit risk period to period, the FHLB primarily considered the following factors:
| |
▪ | The FHLB is a federally chartered GSE, and as a result of this status, the FHLB’s Consolidated Obligations have historically received the same credit ratings as the government bond credit rating of the United States, even though they are not Obligations of the United States and are not guaranteed by the United States. |
| |
▪ | The FHLB is jointly and severally liable with the other 10 FHLBanks for the payment of principal and interest on all Consolidated Obligations of each of the other FHLBanks. |
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 19.4 – Aggregate Unpaid Balance and Aggregate Fair Value (in thousands)
| | | December 31, 2015 | | December 31, 2014 | December 31, 2018 | | December 31, 2017 |
| 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 |
| | $ | 15,057 |
| | $ | 57 |
| | $ | 15,000 |
| | $ | 15,042 |
| | $ | 42 |
| $ | 10,000 |
| | $ | 10,008 |
| | $ | 8 |
| | $ | 15,000 |
| | $ | 15,013 |
| | $ | 13 |
|
Consolidated Bonds | 2,216,000 |
| | 2,214,590 |
| | (1,410 | ) | | 4,210,000 |
| | 4,209,640 |
| | (360 | ) | 3,941,000 |
| | 3,906,610 |
| | (34,390 | ) | | 5,624,265 |
| | 5,577,315 |
| | (46,950 | ) |
| |
(1) | At December 31, 20152018 and 2014,2017, none of the Advances were 90 days or more past due or had been placed on non-accrual status. |
Note 20 -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, 2015,2018, and through the filing date of this report, the FHLB does not believe that it is probable that it will be asked to do so.
The FHLB 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, 20152018 or 2014.2017. 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, 2015 | | December 31, 2014 | December 31, 2018 | | December 31, 2017 |
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 | $ | 19,417,093 |
| | $ | 137,995 |
| | $ | 19,555,088 |
| | $ | 17,233,206 |
| | $ | 546,385 |
| | $ | 17,779,591 |
| |
Standby Letters of Credit | | $ | 14,578,925 |
| | $ | 268,395 |
| | $ | 14,847,320 |
| | $ | 14,388,745 |
| | $ | 302,237 |
| | $ | 14,690,982 |
|
Commitments for standby bond purchases | 85,865 |
| | 36,510 |
| | 122,375 |
| | 37,490 |
| | 149,705 |
| | 187,195 |
| 23,215 |
| | 54,820 |
| | 78,035 |
| | 27,230 |
| | 44,645 |
| | 71,875 |
|
Commitments to fund additional Advances | | — |
| | — |
| | — |
| | 5,000 |
| | — |
| | 5,000 |
|
Commitments to purchase mortgage loans | 449,856 |
| | — |
| | 449,856 |
| | 451,292 |
| | — |
| | 451,292 |
| 146,009 |
| | — |
| | 146,009 |
| | 218,651 |
| | — |
| | 218,651 |
|
Unsettled Consolidated Bonds, at par (1)(2) | 60,000 |
| | — |
| | 60,000 |
| | 17,000 |
| | — |
| | 17,000 |
| |
Unsettled Consolidated Discount Notes, at par (1) | — |
| | — |
| | — |
| | 5,000 |
| | — |
| | 5,000 |
| |
Unsettled Consolidated Bonds, principal amount (1) | | 92,000 |
| | — |
| | 92,000 |
| | — |
| | — |
| | — |
|
Unsettled Consolidated Discount Notes, principal amount (1) | | 525,000 |
| | — |
| | 525,000 |
| | 309,662 |
| | — |
| | 309,662 |
|
| |
(1) | Expiration is based on settlement period rather than underlying contractual maturity of Consolidated Obligations. |
| |
(2) | Of the total unsettled Consolidated Bonds, $0 and $17,000 (in thousands) were hedged with associated interest rate swaps at December 31, 2015 and 2014, 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 FHLBmembers (or member's customer) 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 members for a fee. If the FHLB 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. These However, Standby Letters of Credit usually expire without being drawn upon.Standby Letters of Credit have original expiration periods of up to 1918 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) $4,666$3,331 and $4,441$3,889 at December 31, 20152018 and 2014.2017.
The FHLB monitors the creditworthiness of its members 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 FHLB has deemed it unnecessary to record any additional liability on these commitments.
Standby Bond Purchase Agreements. The FHLB has executed standby bond purchase agreements with one state housing authority whereby the FHLB, for a fee, agrees as a liquidity provider if required, to purchase and hold the authority's bonds until the designated marketing agent can find a suitable investor or the housing authority repurchases the bonds according to a schedule established by the standby agreement. Each standby agreement dictates the specific terms that would require the FHLB to purchase the bonds. The bond purchase commitments entered into by the FHLB have original expiration periods up to 53 years, currently no later than 2020,2021, although some are renewable at the option of the FHLB. During 20152018 and 2014,2017, the FHLB was not required to purchase any bonds under these agreements.
Commitments to Purchase Mortgage Loans. The FHLB enters into commitments that unconditionally obligate the FHLB 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 FHLB may pledge securities, as collateral, related to derivatives. See Note 11 - Derivatives and Hedging Activities for additional information about the FHLB's pledged collateral and other credit-risk-related contingent features.
Lease Commitments. The FHLB charged to operating expenses net rental and related costs of approximately $1,966,000,$1,998,000, $1,816,000,1,990,000, and $1,713,000$1,899,000 for the years ending December 31, 2015, 2014,2018, 2017, and 2013.
Table 20.2 - Future Minimum Rentals for Operating Leases (in thousands)
|
| | | | | | | | | | | | |
Year | | Premises | | Equipment | | Total |
2016 | | $ | 768 |
| | $ | 146 |
| | $ | 914 |
|
2017 | | 771 |
| | 143 |
| | 914 |
|
2018 | | 791 |
| | 72 |
| | 863 |
|
2019 | | 796 |
| | — |
| | 796 |
|
2020 | | 812 |
| | — |
| | 812 |
|
Thereafter | | 5,053 |
| | — |
| | 5,053 |
|
Total | | $ | 8,991 |
| | $ | 361 |
| | $ | 9,352 |
|
2016. Total future minimum operating lease payments were $8,590,000 at December 31, 2018. Lease agreements for FHLB 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 FHLB.FHLB's financial condition or results of operations.
Legal Proceedings. From time to time, the FHLB is subject to legal proceedings arising in the normal course of business. In March 2010, the FHLB was advised by representatives of the Lehman Brothers Holdings, Inc. bankruptcy estate that they believed that the FHLB 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 FHLB paid Lehman in connection with the close-out transactions and the market value payment the FHLB received when replacing the swaps with other counterparties. In May 2010, the FHLB 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 FHLB participated in a non-binding mediation in New York in August 2010, and counsel for the FHLB continued discussions with the court-appointed mediator for several weeks thereafter. The mediation concluded in October 2010 without a settlement of the claims asserted by the Lehman bankruptcy estate. In April 2013, Lehman Brothers Special Financing Inc., through Lehman Brothers Holdings Inc. and the Plan Administrator under the Modified Third Amended Joint Chapter 11 Plan of Lehman Brothers Holdings Inc. and its Affiliated Debtors, filed an adversary complaint in the United States Bankruptcy Court for the Southern District of New York against the FHLB seeking (a) a declaratory judgment on the interpretation of certain provisions and the calculation of amounts due under the agreement governing the 2008 swap transactions described above, and (b) additional amounts alleged as due as part of the termination of such transactions. The FHLB believes that it correctly calculated, and fully satisfied its obligation to Lehman in September 2008, and the FHLB intends to vigorously defend itself.
The FHLB also is subject to other legal proceedings arising in the normal course of business. The FHLB would record an accrual for a loss contingency when it is probable that a loss has been incurred and the amount 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 FHLB's financial condition or results of operations.
Note 21 - Transactions with Other FHLBanks
The FHLB notes all transactions with other FHLBanks on the face of its financial statements. Occasionally, the FHLB 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, 2015, 2014,2018, 2017, or 2013.2016. The following table details the average daily balance of lending and borrowing between the FHLB and other FHLBanks for the for the years ended December 31.
Table 21.1 - Lending and Borrowing Between the FHLB and Other FHLBanks (in thousands)
| | | Average Daily Balances for the Years Ended December 31, | Average Daily Balances for the Years Ended December 31, |
| 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 |
Loans to other FHLBanks | $ | — |
| | $ | 438 |
| | $ | 3,740 |
| $ | 1,370 |
| | $ | 14 |
| | $ | 3,142 |
|
Borrowings from other FHLBanks | 68 |
| | 68 |
| | 4,110 |
| 274 |
| | 959 |
| | 273 |
|
In 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 FHLB is the primary obligor. The FHLB 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 FHLB during the years ended December 31, 2015, 2014,2018, 2017, or 2013.2016. The FHLB had no Consolidated Obligations transferred to other FHLBanks during these periods.
Note 22 - Transactions with Stockholders
As a cooperative, the FHLB's capital stock is owned by its members, by former members that retain the stock as provided in the FHLB's Capital Plan and by nonmember institutions that have acquired members and must retain the stock to support Advances or other activities with the FHLB. All Advances are issued to members and all mortgage loans held for portfolio are purchased from members. The FHLB also maintains demand deposit accounts for members, primarily to facilitate settlement activities that are directly related to Advances and mortgage loan purchases. Additionally, the FHLB may enter into interest rate swaps with its stockholders. The FHLB may not invest in any equity securities issued by its stockholders and it has not purchased any mortgage-backed securitiesMBS securitized by, or other direct long-term investments in, its stockholders.
For financial statement purposes, the FHLB defines related parties as those members with more than 10 percent of the voting interests of the FHLB capital stock outstanding. Federal legislationstatute prescribes the voting rights of members in the election of both memberMember and independentIndependent directors. For memberMember directorships, the Finance Agency designates the number of memberMember directorships in a given year and an eligible voting member may vote only for candidates seeking election in its respective state. For independent directorships,Independent directors, the FHLB's Board of Directors nominates candidates to be placed on the ballot in an at-large election. For both memberMember and independent directorshipIndependent director elections, a member is entitled to vote one share of required capital stock, subject to a statutory limitation, for each applicable directorship. Under this limitation, the total number of votes that a member may cast is limited to the average number of shares of the FHLB's capital stock that were required to be held by all members in that state as of the record date for voting. Nonmember stockholders are not eligible to vote in director elections. Due to the abovementionedthese statutory limitation,limitations, no member owned more than 10 percent of the voting interests of the FHLB at December 31, 20152018 or 2014.2017.
All transactions with stockholders are entered into in the ordinary course of business. Finance Agency regulations require the FHLB to offer the same pricing for Advances and other services to all members regardless of asset or transaction size, charter type, or geographic location. However, the FHLB may, in pricing its Advances, distinguish among members based upon its assessment of the credit and other risks to the FHLB of lending to any particular member or upon other reasonable criteria that may be applied equally to all members. The FHLB's policies and procedures require that such standards and criteria be applied consistently and without discrimination to all members applying for Advances.
Transactions with Directors' Financial Institutions. In the ordinary course of its business, the FHLB may provide products and services to members whose officers or directors serve as directors of the FHLB (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. The following table reflects balances with Directors' Financial Institutions for the items indicated below. The FHLB had no mortgage-backed securitiesMBS or derivatives transactions with Directors' Financial Institutions at December 31, 20152018 or 2014.2017.
Table 22.1 - Transactions with Directors' Financial Institutions (dollars in millions)
| | | December 31, 2015 | | December 31, 2014 | December 31, 2018 | | December 31, 2017 |
| Balance | | % of Total (1) | | Balance | | % of Total (1) | Balance | | % of Total (1) | | Balance | | % of Total (1) |
Advances | $ | 3,867 |
| | 5.3 | % | | $ | 2,929 |
| | 4.2 | % | $ | 3,424 |
| | 6.2 | % | | $ | 3,558 |
| | 5.1 | % |
MPP | 186 |
| | 2.4 |
| | 154 |
| | 2.3 |
| 585 |
| | 5.7 |
| | 112 |
| | 1.2 |
|
Regulatory capital stock | 236 |
| | 5.3 |
| | 225 |
| | 5.2 |
| 419 |
| | 9.6 |
| | 187 |
| | 4.4 |
|
| |
(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 members of the 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, 2015 | Balance | | % of Total | | Principal | | Principal Balance | |
December 31, 2018 | | Balance | | % of Total | | Principal | | Principal Balance |
JPMorgan Chase Bank, N.A. | $ | 1,533 |
| | 34 | % | | $ | 35,350 |
| | $ | — |
| $ | 1,085 |
| | 25 | % | | $ | 23,400 |
| | $ | — |
|
U.S. Bank, N.A. | 475 |
| | 11 |
| | 10,086 |
| | 33 |
| 796 |
| | 18 |
| | 4,574 |
| | 19 |
|
Fifth Third Bank | 248 |
| | 6 |
| | 20 |
| | 3 |
| |
The Huntington National Bank | | 248 |
| | 6 |
| | 6 |
| | 486 |
|
| | | 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 |
|
Nonmember Affiliates. The FHLB has relationships with three nonmember affiliates, the Kentucky Housing Corporation, the Ohio Housing Finance Agency and the Tennessee Housing Development Agency. The FHLB had no investments in or borrowings to any of these nonmember affiliates at December 31, 20152018 or 2014.2017. The FHLB has executed standby bond purchase agreements with one state housing authority whereby the FHLB, for a fee, agrees as a liquidity provider if required, to purchase and hold the authority's bonds until the designated marketing agent can find a suitable investor or the housing authority repurchases the bond according to a schedule established by the standby agreement. For the years ended December 31, 20152018 and 2014,2017, the FHLB 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 77. Management's Discussion and Analysis of Financial Condition and Results of Operations 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, 2015,2018, the FHLB'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, 2015,2018, the FHLB 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 FHLB is responsible for establishing and maintaining adequate internal control over financial reporting. The FHLB's internal control over financial reporting is designed by, or under the supervision of, the FHLB'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 FHLB's management assessed the effectiveness of the FHLB's internal control over financial reporting as of December 31, 2015.2018. 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 FHLB determined that, as of December 31, 2015,2018, the FHLB's internal control over financial reporting was effective based on those criteria.
The effectiveness of the FHLB's internal control over financial reporting as of December 31, 20152018 has been audited by PricewaterhouseCoopers LLP (PwC), an independent registered public accounting firm, as stated in their report which is included in “ItemItem 8. Financial Statements and Supplementary Data."
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in the FHLB's internal control over financial reporting that occurred during the fourth quarter ended December 31, 20152018 that materially affected, or are reasonably likely to materially affect, the FHLB's internal control over financial reporting.
| |
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 team, personnel in the chain of command, 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.
TablePwC has advised the FHLB that as of ContentsDecember 31, 2018, 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:
| |
▪ | 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; |
| |
▪ | the debt balances outstanding are immaterial to PwC and to each lender; |
| |
▪ | PwC has borrowing relationships with a diverse group of lenders, therefore PwC is not dependent on any single lender or group of lenders; and |
| |
▪ | 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:
| |
▪ | although the lenders owned more than ten percent of the FHLB’s capital stock, the lenders' voting rights are each less than ten percent; |
| |
▪ | 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 |
| |
▪ | as of December 31, 2018, 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
| |
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 seven independenteight Independent directors. Two of our independentIndependent directors are designated as public interestPublic Interest directors and all 1718 directors are elected by our members.
For both memberMember and independentIndependent directorship elections, a member institution may cast one vote per seat or directorship up for election for each share of stock that the member was required to hold as of December 31 of the calendar year immediately preceding the election year. However, the number of votes that any member may cast for any one directorship cannot exceed the average number of shares of FHLB stock that were required to be held by all members located in its state. The election process is conducted by mail. Our Board of Directors does not solicit proxies nor is any member institution permitted to solicit proxies in an election.
Finance Agency regulations also provide for two separate selection processes for memberMember and independentIndependent director candidates.
Member director candidates are nominated by any officer or director of a member institution eligible to vote in the respective statewide election, including the candidate's own institution. After the FHLB 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 independentIndependent director application form to the FHLB and request to be considered for election. The FHLB reviews all application forms to determine that the individual satisfies the appropriate public interest or non-public interest independentIndependent 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 also considers diversity in nominating independentIndependent 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 independentIndependent director vacancy.
DIRECTORS
The following table sets forth certain information (ages as of March 1, 2016)2019) regarding each of our current directors.
| | Name | Age | Director Since | Expiration of Term as a Director | Independent or Member (State) | Age | Director Since | Expiration of Term as a Director | Independent or Member (State) |
J. Lynn Anderson | 52 | 2011 | 12/31/16 | Member (OH) | 55 | 2017 (1) | 12/31/20 | Independent (OH) |
Grady P. Appleton | 68 | 2007 | 12/31/17 | Independent (OH) | 71 | 2007 | 12/31/21 | Independent (OH) |
April Miller Boise | | 50 | 2019 | 12/31/22 | Independent (OH) |
Brady T. Burt | | 46 | 2017 | 12/31/20 | Member (OH) |
Greg W. Caudill | 57 | 2014 | 12/31/17 | Member (KY) | 60 | 2014 | 12/31/21 | Member (KY) |
James R. DeRoberts | 59 | 2008 | 12/31/18 | Member (OH) | |
Mark N. DuHamel | | 61 | (2009-2015) 2018 | 12/31/21 | Member (OH) |
Leslie D. Dunn | 70 | 2007 | 12/31/16 | Independent (OH) | 73 | 2007 | 12/31/20 | Independent (OH) |
James A. England | 64 | 2011 | 12/31/18 | Member (TN) | |
Charles J. Koch | 69 | 2008 (1) | 12/31/18 | Independent (OH) | |
James A. England, Vice Chair | | 67 | 2011 | 12/31/22 | Member (TN) |
Robert T. Lameier | 63 | 2016 | 12/31/19 | Member (OH) | 66 | 2016 | 12/31/19 | Member (OH) |
Michael R. Melvin | 71 | (1995-2001) 2006 | 12/31/19 | Member (OH) | 74 | (1995-2001) 2006 | 12/31/19 | Member (OH) |
Thomas L. Moore | 69 | 2013 | 12/31/16 | Member (OH) | |
Donald J. Mullineaux, Chair | 70 | 2010 | 12/31/19 | Independent (KY) | 73 | 2010 | 12/31/19 | Independent (KY) |
Alvin J. Nance | 58 | 2009 | 12/31/16 | Independent (TN) | 61 | 2009 | 12/31/20 | Independent (TN) |
Michael P. Pell | | 55 | 2019 | 12/31/22 | Member (OH) |
Charles J. Ruma | 74 | (2002-2004) 2007 | 12/31/19 | Independent (OH) | 77 | (2002-2004) 2007 | 12/31/19 | Independent (OH) |
David E. Sartore | 55 | 2014 | 12/31/17 | Member (KY) | 58 | 2014 | 12/31/21 | Member (KY) |
William J. Small, Vice Chair | 65 | 2007 | 12/31/17 | Member (OH) | |
William S. Stuard, Jr. | 61 | 2011 | 12/31/18 | Member (TN) | 64 | 2011 | 12/31/22 | Member (TN) |
Nancy E. Uridil | 64 | 2015 | 12/31/18 | Independent (OH) | 67 | 2015 | 12/31/22 | Independent (OH) |
James J. Vance | | 57 | 2017 | 12/31/20 | Member (OH) |
| |
(1) | Mr. Koch,Ms. Anderson, an independentIndependent director beginning in 2008,2017, also served as a memberMember director from 1990-1995 and 1998-2006.2011-2016. |
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 member that: is located in the voting state to be represented by the memberMember directorship, was a member of the FHLB 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 members through an annual voting process administered by us. Any member that is entitled to vote in the election may nominate an eligible individual to fill each available 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 FHLB 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 FHLB is not in a position to know which factors its member institutions considered in nominating candidates for memberMember directorships or in voting to elect memberMember directors.
Ms. AndersonMr. Burt becamehas been the Senior Vice President-Member Solutions Integration for Nationwide Mutual Insurance Company, Columbus,President and Chief Financial Officer of The Park National Bank, Newark, Ohio, in March 2016. Shea subsidiary of Park National Corporation, since December 2012. He also servedserves as Presidentthe Secretary, Treasurer, and Chief Financial Officer of Nationwide Bank from November 2009 to March 2016.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. DeRobertsDuHamel has been ChairmanExecutive Vice President and Corporate Treasurer of The ArlingtonHuntington National Bank, Upper Arlington, Ohio since 1999 and a partner at Gardiner Allen DeRoberts Insurance LLC, Columbus, Ohio since 2006. He also servesAugust 2016. Previously, he served as a directorthe Executive Vice President and Deputy Chief Financial Officer of Park National Corporation, Newark, Ohio.FirstMerit Bank, N.A. from May 2015 to August 2016. In addition, he served as the Executive Vice President of FirstMerit Bank, N.A. from February 2005 to May 2015 and Treasurer of FirstMerit Bank, N.A. from 1996 to May 2015.
Mr. England has 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. MoorePell 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 FederalState Bank, ofWinchester, Ohio from 1995 to January 2014.since March 2006.
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. Small has been Chairman of First Defiance Financial Corp. 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 Chairman of F&M Bank, Clarksville, Tennessee, since January 2016 and President and Chief Executive Officer of F&M Bank 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 independentIndependent directors. Each independentIndependent director, and each nominee to an independentIndependent directorship, must be a U.S. citizen and bona fide resident of our District. At least two of our independentIndependent directors must be designated by our Board as public interest directors. Public interest independentIndependent 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 independentIndependent 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 independentIndependent directorships. Directors, officers, employees, attorneys, or agents of the FHLB are permitted to support directly or indirectly the nomination or election of a particular individual for an independentIndependent 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 nine 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 FHLB's corporate objective of maximizing the effectiveness of contributions to Housing and Community Investment programs. Mr. Appleton also served as a member of the FHLB's Advisory Council from 1997 until 2006.
Ms. Boise has been Senior Vice President, Chief Legal Officer, and Corporate Secretary of Meritor Incorporated, Troy, Michigan, since August 2016. Previously, Ms. Boise served as Senior Vice President, General Counsel, Head of Global Mergers and Acquisitions and Corporate Secretary of Avintiv Incorporated from March 2015 to December 2015. She also served as Vice President, General Counsel, Corporate Secretary and Chief Privacy Officer of Veyance Technologies Incorporated from January 2011 to January 2015. Ms. Boise has 25 years of legal experience and expertise leading corporate development and implementing strategic growth plans, while mitigating related risks. Her knowledge and background offers the Board valuable insight on the FHLB’s governance and risk management corporate objectives.
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.,EssilorLuxottica, 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, Compensation, and Nominating and Corporate Governance Committees since September 2015.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 FHLB's status as an SEC registrant, corporate governance matters, and the Board's responsibility to oversee the FHLB'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. Mr. Koch's prior leadership positions within the banking industry and various board positions held contribute skills important to the Board's responsibility for approving a strategic business plan that supports the FHLB'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 theLHP Development LLC and PropertyLHP Management operating divisions of LHP Capital,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 from 2000 to 2015. The KCDC is the public housing and redevelopment authority for the City of Knoxville and Knox County, which strives to improve Knoxville's neighborhoods and communities, including through providing quality affordable housing. Mr. Nance also served as Chairman of the Legislative Committee for the Tennessee Association of Housing and Redevelopment Authorities, which provides assistance and support to the state's public and affordable housing agencies. In addition, Mr. Nance 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 FHLB'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 FHLB's mission and corporate objectives.
Ms. Uridil was 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, 2016)2019) regarding our executive officers.
| | Name | Age | Position | Employee of the FHLB Since | Age | Position | Employee of the FHLB Since |
Andrew S. Howell | 54 | President and Chief Executive Officer | 1989 | 57 | President and Chief Executive Officer | 1989 |
Donald R. Able | 55 | Executive Vice President-Chief Operating Officer and Chief Financial Officer | 1981 | |
Stephen J. Sponaugle | | 56 | Executive Vice President-Chief Financial Officer | 1992 |
R. Kyle Lawler | 58 | Executive Vice President-Chief Business Officer | 2000 | 61 | Executive Vice President-Chief Business Officer | 2000 |
J. Gregory Dooley, Sr. | | 65 | Executive Vice President-Chief Risk and Compliance Officer | 2006 |
Damon v. Allen | 45 | Senior Vice President-Community Investment Officer | 1999 | 48 | Senior Vice President-Housing and Community Investment Officer | 1999 |
J. Christopher Bates | 40 | Senior Vice President-Chief Accounting Officer | 2005 | 43 | Senior Vice President-Chief Accounting Officer | 2005 |
Roger B. Batsel | 44 | Senior Vice President-Chief Information Officer | 2014 | 47 | Senior Vice President-Chief Information and Operations Officer | 2014 |
James G. Dooley, Sr. | 62 | Senior Vice President-Internal Audit | 2006 | |
David C. Eastland | 58 | Senior Vice President-Chief Credit Officer | 1999 | 61 | Senior Vice President-Chief Credit Officer | 1999 |
Tami L. Hendrickson | 55 | Senior Vice President-Treasurer | 2006 | 58 | Senior Vice President-Treasurer | 2006 |
Stephen J. Sponaugle | 53 | Senior Vice President-Chief Risk and Compliance Officer | 1992 | |
Bridget C. Hoffman | | 42 | Senior Vice President-General Counsel | 2018 |
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. AbleSponaugle became the Executive Vice President-Chief Operating Officer and Chief Financial Officer in January 2015. Mr. Able2018. Previously, he served as the Executive Vice President-Chief Operating OfficerRisk and Interim Chief FinancialCompliance Officer since March 2014. He became Executive Vice President-Chief Operating Officer in August 2012 and hasJanuary 2017. Mr. Sponaugle also served as the Principal Financial Officer
since January 2007. Prior to that, he had served as theFHLB's Senior Vice President-Chief AccountingRisk and TechnologyCompliance Officer sincefrom November 2015 to December 2016, and as Senior Vice President-Chief Risk Officer from January 2011.2007 to October 2015.
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. Dooley became the Executive Vice President-Chief Risk and Compliance Officer in January 2018. Previously, he served as the FHLB's Senior Vice President-Internal Audit since January 2013.
Mr. Allen became Senior Vice President-CommunityPresident-Housing and Community Investment Officer in January 2012. Previously, he served as the FHLB'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 FHLB's Vice President-Controller since January 2013 and as Vice President-Assistant Controller from January 2011 to January 2013.
Mr. Batsel became Senior Vice President-Chief Information and Operations 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.July 2018. Previously, he served as the FHLB's Senior Vice President-Internal AuditPresident-Chief Information Officer since 2006.January 2014.
Mr. Eastland became the Senior Vice President-Chief Credit Officer in January 2015. Prior to that, he had served as the FHLB's Vice President-Credit Risk Management since January 2002.
Ms. Hendrickson became Senior Vice President-Treasurer in January 2015. Previously, she served as the FHLB's Vice President-Treasurer since January 2010.
Mr. SponaugleMs. Hoffman became the Senior Vice President-Chief Risk and Compliance OfficerPresident-General Counsel in November 2015. PriorMay 2018. Previously, she was a partner of the law firm Taft Stettinius & Hollister LLP from January 2011 to that, he had served as the FHLB's Senior Vice President-Chief Risk Officer since January 2007.May 2018.
All officers are appointed annually by our Board of Directors.
AUDIT COMMITTEE FINANCIAL EXPERT
The Board of Directors has determined (1) that Ms. J. Lynn Anderson, ChairmanChair of the Audit Committee, and Committee member Mr. 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'sAnderson has experience has principally been in the internal audit disciplines within the financial industry and is a Certified Public Accountant. Mr. Sartore's experience has principally been in the accounting and finance disciplines within the financial industry and is a Certified Public Accountant. For additional information regarding the independence of the directors of the FHLB, see “ItemItem 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 FHLB's reports to regulatory authorities and other public communications, and compliance with applicable laws, rules and regulations. The Code is posted on the FHLB's Web sitewebsite (www.fhlbcin.com). If a waiver of any provision of the Code is granted to a covered officer, or if any amendment is made to the Code, information concerning the waiver or amendment will be posted on our Web site.website.
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 FHLB against fraudulent activities and fosters an environment in which open communication is expected and protected.
| |
Item 11. | Executive Compensation. |
20152018 COMPENSATION DISCUSSION AND ANALYSIS
The following provides discussion and analysis regarding our compensation program for executive officers for 2015,2018, and in particular our Named Executive Officers. Our Named Executive Officers for 20152018 were: Andrew S. Howell, President and Chief Executive Officer; Donald R. Able,Officer (CEO); Stephen J. Sponaugle, Executive Vice President- Chief Operating Officer and Chief Financial Officer; R. Kyle Lawler, Executive Vice President- Chief Business Officer; Stephen J. Sponaugle, SeniorGregory Dooley, Sr., Executive Vice President- Chief Risk and Compliance Officer, and James G. Dooley, Sr.,Roger B. Batsel, Senior Vice President- Internal Audit.Chief Information and Operations Officer, and Donald R. Able, former Executive Vice President- Chief Operating Officer who retired effective June 30, 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 FHLB's mission through increasedincreasing business with member 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, shortshort-term and long-term variable (incentive-based)deferred 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 FHLB'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 shortshort-term and long-term incentives, which reward teamwork,deferred incentive pay creates a total compensation opportunity for executives who contribute to and influence strategic plans and who are primarily responsible for the FHLB's strategic business plan, execution, and performance.
Oversight of the compensation program is the responsibility of the PersonnelBoard's Human Resources, Compensation and CompensationInclusion 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 FHLB'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 FHLB'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 20152018 and January 20162019 meetings, we submitted the 20162019 base salaries as well as incentive payments earned for 20152018 for ourthe Named Executive Officers to the Finance Agency. At this time, we do not expect the regulatory 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 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 20162019 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 20152018 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, short-term incentive and short and long-term incentivedeferred pay with our compensation program. While ourThe annual (short-term) incentive compensation component rewards all officers and staff for the achievement of FHLB annual strategic business goals, ourgoals. The deferred (long-term) incentive compensation component is provided to executive and seniorcertain officers, including the Named Executive Officers, for achievementmaintaining the value of specific, strategic and mission-related goals for which FHLB performance is measuredour members' capital stock above a minimum threshold over a three-year period. The Committee has not established or assigned specific percentages to each element of the FHLB'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 a retirement plan), to
each executive officer that, when the FHLB 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 FHLB. RiskStrong 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 themeeting 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 FHLB to incur such a risk that could threaten the long-term value of the FHLB.
Elements of Total Compensation Program
The following table summarizes all compensation to the FHLB's Named Executive Officers for the years ended December 31, 2015, 20142018, 2017 and 2013.2016. Discussion of each component follows the table.
Summary Compensation Table
| | Name and Principal Position | Year | | Salary(1) | | Non-Equity Incentive Plan Compensation(2) | | Change in Pension Value & Non-Qualified Deferred Compensation Earnings(3) | | All Other Compensation(4) | | Total | 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 |
Current Named Executive Officers: | | | | | | | | | | | | | | |
Andrew S. Howell | 2015 | | $ | 728,482 |
| | $ | 544,843 |
| | $ | 889,000 |
| | $ | 29,536 |
| | $ | 2,191,861 |
| 2018 | | $ | 901,538 |
| | $ | — |
| | $ | 722,867 |
| | $ | 192,000 |
| | $ | 34,233 |
| | $ | 1,850,638 |
|
President and Chief Executive Officer | 2014 | | 692,016 |
| | 479,622 |
| | 2,431,000 |
| | 15,600 |
| | 3,618,238 |
| |
President and CEO | | 2017 | | 854,808 |
| | — |
| | 650,066 |
| | 2,149,000 |
| | 32,837 |
| | 3,686,711 |
|
| 2013 | | 617,775 |
| | 340,546 |
| | 189,000 |
| | 15,300 |
| | 1,162,621 |
| 2016 | | 800,625 |
| | — |
| | 648,357 |
| | 1,426,000 |
| | 27,215 |
| | 2,902,197 |
|
| | | | | | | | | | | | | | | | | | | | | | |
Donald R. Able | 2015 | | 383,125 |
| | 242,198 |
| | 465,000 |
| | 15,900 |
| | 1,106,223 |
| |
Stephen J. Sponaugle | | 2018 | | 405,231 |
| | — |
| | 245,058 |
| | 193,000 |
| | 16,500 |
| | 859,789 |
|
Executive Vice President- | 2014 | | 358,788 |
| | 207,972 |
| | 1,498,000 |
| | 15,600 |
| | 2,080,360 |
| 2017 | | 368,750 |
| | — |
| | 215,949 |
| | 777,000 |
| | 16,200 |
| | 1,377,899 |
|
Chief Operating Officer and Chief Financial Officer | 2013 | | 320,800 |
| | 160,354 |
| | — |
| | 15,300 |
| | 496,454 |
| |
Chief Financial Officer | | 2016 | | 337,692 |
| | — |
| | 191,269 |
| | 494,000 |
| | 15,900 |
| | 1,038,861 |
|
| | | | | | | | | | | | | | | | | | | | | | |
R. Kyle Lawler | 2015 | | 357,885 |
| | 229,316 |
| | 244,000 |
| | 15,900 |
| | 847,101 |
| 2018 | | 424,250 |
| | — |
| | 284,925 |
| | 170,000 |
| | 16,500 |
| | 895,675 |
|
Executive Vice President- | 2014 | | 331,154 |
| | 199,572 |
| | 646,000 |
| | 15,600 |
| | 1,192,326 |
| 2017 | | 404,654 |
| | — |
| | 255,349 |
| | 661,000 |
| | 16,200 |
| | 1,337,203 |
|
Chief Business Officer | 2013 | | 315,087 |
| | 157,180 |
| | 26,000 |
| | 15,300 |
| | 513,567 |
| 2016 | | 379,385 |
| | — |
| | 261,931 |
| | 438,000 |
| | 15,900 |
| | 1,095,216 |
|
| | | | | | | | | | | | | | | | | | | | | | |
Stephen J. Sponaugle | 2015 | | 306,752 |
| | 176,417 |
| | 181,000 |
| | 15,900 |
| | 680,069 |
| |
Senior Vice President- | 2014 | | 281,292 |
| | 138,781 |
| | 694,000 |
| | 15,600 |
| | 1,129,673 |
| |
J. Gregory Dooley, Sr. | | 2018 | | 307,518 |
| | — |
| | 194,570 |
| | 103,000 |
| | 16,382 |
| | 621,470 |
|
Executive Vice President- | | 2017 | | 262,014 |
| | — |
| | 176,729 |
| | 99,000 |
| | 16,200 |
| | 553,943 |
|
Chief Risk and Compliance Officer | 2013 | | 245,725 |
| | 117,640 |
| | — |
| | 11,922 |
| | 375,287 |
| 2016 | | 251,333 |
| | — |
| | 162,790 |
| | 68,000 |
| | 15,900 |
| | 498,023 |
|
| | | | | | | | | | | | | | | | | | | | | | |
James G. Dooley, Sr. (5) | 2015 | | 233,627 |
| | 118,814 |
| | 39,000 |
| | 15,900 |
| | 407,341 |
| |
Roger B. Batsel (5) | | 2018 | | 316,635 |
| | — |
| | 190,309 |
| | 26,000 |
| | 12,375 |
| | 545,319 |
|
Senior Vice President- | | | | | | | | | |
|
| 2017 | | 295,000 |
| | — |
| | 168,365 |
| | 38,000 |
| | 11,980 |
| | 513,345 |
|
Internal Audit | | | | | | | | | |
|
| |
Chief Information and Operations Officer | | |
|
| |
| |
|
| |
|
| |
|
| |
|
|
| | | | | | | | | | | | | |
Former Named Executive Officer: | | | | | | | | | | | | | |
Donald R. Able (6) | | 2018 | | 244,582 |
| | — |
| | 279,737 |
| | 2,409,683 |
| | 16,500 |
| | 2,950,502 |
|
Former Executive Vice President- | | 2017 | | 433,846 |
| | — |
| | 273,250 |
| | 1,559,000 |
| | 16,200 |
| | 2,282,296 |
|
Chief Operating Officer | | 2016 | | 418,952 |
| | 50,000 |
| | 278,474 |
| | 943,000 |
| | 15,900 |
| | 1,706,326 |
|
| |
(1) | Includes excess accrued vacation benefits automatically paid in accordance with established policy (applicable to all employees), which for 20152018 were as follows: Mr. Howell, $53,482;$61,538; Mr. Sponaugle $15,231; Mr. Lawler, $19,250; Mr. Dooley, $7,518 and Mr. Able $18,125; Mr. Lawler, $17,885; Mr. Sponaugle $6,752; and Mr. Dooley $2,527.$28,082. |
| |
(2) | Amounts shown for 20152018 reflect total payments pursuant to the current portion of the 20152018 Incentive Plan and the deferred portion of the 20122015 Incentive Plan (2013(2016 - 20152018 performance period), as follows:follows. In connection with Mr. Able's retirement, his 2018 Incentive Plan payment includes the deferred portion of the total incentive award earned in 2018. |
| | Name | | 2015 Incentive Plan (current incentive) | | 2012 Incentive Plan (three-year deferred incentive) | | Total | | 2018 Incentive Plan (current incentive) | | 2015 Incentive Plan (three-year deferred incentive) | | Total |
Andrew S. Howell | | $ | 324,084 |
| | $ | 220,759 |
| | $ | 544,843 |
| | $ | 368,999 |
| | $ | 353,868 |
| | $ | 722,867 |
|
Stephen J. Sponaugle | | | 137,058 |
| | 108,000 |
| | 245,058 |
|
R. Kyle Lawler | | | 142,329 |
| | 142,596 |
| | 284,925 |
|
J. Gregory Dooley, Sr. | | | 105,921 |
| | 88,649 |
| | 194,570 |
|
Roger B. Batsel | | | 95,460 |
| | 94,849 |
| | 190,309 |
|
Donald R. Able | | 140,196 |
| | 102,002 |
| | 242,198 |
| | 152,169 |
| | 127,568 |
| | 279,737 |
|
R. Kyle Lawler | | 130,594 |
| | 98,722 |
| | 229,316 |
| |
Stephen J. Sponaugle | | 98,910 |
| | 77,507 |
| | 176,417 |
| |
James G. Dooley, Sr. | | 76,841 |
| | 41,973 |
| | 118,814 |
| |
| |
(3) | Represents change in the actuarial present value of accumulated pension benefits only, which is primarily dependent on changes in interest rates, years of benefit service and salary. See "Retirement Benefits" and "2018 Pension Benefits" for additional information. |
| |
(4) | Amounts represent matching contributions to the qualified defined contribution pension plan in 2015.2018. For Mr. Howell, 20152018 also includes perquisites totaling $13,636,$17,733, which consisted of personal use of an FHLB-owned vehicle, premiums for an Executive long-term disability plan, spousalguest travel expenses and an airline program membership. The value of perquisites are based on the actual cash cost to the FHLB. |
| |
(5) | Mr. Dooley's 2014 and 2013Batsel's 2016 compensation amounts areamount is not included as he was not a Named Executive Officer in those years.that year. |
| |
(6) | Mr. Able's 2018 compensation was earned through June 30, 2018, the date of his retirement. |
Salary
Base salary is both a key component of the total compensation program and a key factor when attracting and retaining executive talent. While base salaries for the Named Executive Officers are influenced by a number of factors, the Board generally targets 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 current Named Executive Officers received a base salary increase at the beginning of 2015. Total salary increases, including merit and market adjustments, ranged from 5.53 percent to 13.21 percent.2018. For each of the current Named Executive Officers other than the President, the Committee's actionstotal salary increases, including merit, market, and promotional adjustments, ranged from 5.08 percent to 15.11 percent. These increases 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 9.22 percent for Mr. Howell.5.00 percent. In recommending and approving the 2015Mr. Howell's 2018 increase, the Committee and Board took into consideration competitive market analysis and the directors' appraisals of Mr. Howell'shis performance during the year.
With the retirement of the Chief Operating Officer in mid-2018, Mr. Batsel was promoted to Senior Vice President-Chief Information and Operations Officer, with a base salary increase to $325,000 effective July 23, 2018.
In October 2015,2018, the Committee recommended and the Board approved a 5.254.50 percent salary increase pool for 20162019 for all employees, comprised of 3.00 percent for merit increases and 2.251.50 percent for market and promotional adjustments. Using the same process as described above, in November 2018, the Committee recommended, and the Board approved, the following 20162019 base salaries and percent increases for the Named Executive Officers: Mr. Howell, $750,000 (11.11$875,000 (4.17 percent); Mr. Able, $400,000 (9.59Sponaugle, $409,500 (5.00 percent); Mr. Lawler, $365,000 (7.35$425,000 (4.94 percent); Mr. Sponaugle, $325,000 (8.33Dooley, $309,000 (3.00 percent); and Mr. Dooley, $250,000 (8.18Batsel, $341,000 (4.92 percent). On December 17, 2015,November 20, 2018, we were informed that the Finance Agency had completed its review ofand did not object to the Board-approved compensation actions affecting the Named Executive Officers in 2016.2019.
Non-Equity Incentive Compensation Plan (Incentive Plan)
The 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 shorter-termannual 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 performancesafety and soundness and serve as an employment retention tool for selected executive and senior officers, including the Named Executive Officers.
The Incentive Plan annual 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 and Compliance 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. Additionally, the Senior Vice President - Internal Audit's award opportunity is based entirely on Internal Audit specific goals, which are developed with the Audit Committee, to maintain independence for the internal audit function.
When establishing the Incentive Plan goals and corresponding performance levels, the Board anticipates that we will successfully achieve a threshold level of performance nearly every year. The target level is aligned with expected performance and is anticipated to be reasonably achievable in a majority of plan years. The maximum level of performance reflects a graduated level of difficulty from the target performance level and 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 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 20152018 plan year stated as a percentage of base salary were as follows:
| | | | Incentive Opportunity | | Incentive Opportunity |
Name | | Threshold | | Target | | Maximum | | Threshold | | Target | | Maximum |
Current Named Executive Officers: | | | | | | | |
Andrew S. Howell | | 50.0 | % | | 75.0 | % | | 100.0 | % | | 50.0 | % | | 75.0 | % | | 100.0 | % |
Stephen J. Sponaugle | | | 40.0 |
| | 60.0 |
| | 80.0 |
|
R. Kyle Lawler | | | 40.0 |
| | 60.0 |
| | 80.0 |
|
J. Gregory Dooley, Sr. | | | 40.0 |
| | 60.0 |
| | 80.0 |
|
Roger B. Batsel | | | 30.0 |
| | 50.0 |
| | 70.0 |
|
Former Named Executive Officer: | | | | | | | |
Donald R. Able | | 40.0 |
| | 60.0 |
| | 80.0 |
| | 40.0 |
| | 60.0 |
| | 80.0 |
|
R. Kyle Lawler | | 40.0 |
| | 60.0 |
| | 80.0 |
| |
Stephen J. Sponaugle | | 30.0 |
| | 50.0 |
| | 70.0 |
| |
James G. Dooley, Sr. | | 30.0 |
| | 50.0 |
| | 70.0 |
| |
If actual performance falls below the threshold level of performance, no payment is made for that goal. If actual performance exceeds the maximum level, only the value assigned as the performance maximum is paid. When actual performance falls between the assigned threshold, target and maximum performance levels, an interpolated achievement is calculated for that goal. The achievement for each goal is then multiplied by the corresponding incentive weight assigned to that goal and the results for each goal are summed to arrive at the final incentive award payable to the executive. No final awards (or payments) will be made to executives under the Incentive Plan if we receive the lowest "Composite Rating" during the most recent examination by the Finance Agency. Such a rating would indicate that we have been found to be operating in an unacceptable manner, that we exhibit serious deficiencies in corporate governance, risk management or financial condition and performance, or that we are in substantial noncompliance with laws, Finance Agency regulations or supervisory guidance.
Fifty percent of the total opportunity for the Incentive Plan is awarded in cash following the plan year (current incentive award) and 50 percent is mandatorily deferred for three years after the end of the Plan year (deferred incentive award). DeferredThe deferred incentive awards areearned from 2016 - 2018 were calculated based on the actual performance or achievement level for each deferred plan goal at the end of eachthe three-year performance period, with interpolations made for results between achievement levels. The achievement level for each goal then iswas multiplied by the corresponding incentive weight assigned to that goal. The final value of the deferred award can be increased, decreased or remain the samewas adjusted based on the goal achievement level determined using separate performance measures over the three-year2016 - 2018 deferral period. For all Named Executive Officers, the final value of the deferred award was 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 iswas below the threshold, no payment iswould be made for that deferred goal.
In November 2018, the Board established a new safety and soundness metric to determine if the deferred portion of the 2018 Incentive Plan and future plans will be awarded rather than using the calculation described above. The following table presentssafety and soundness metric is tied to the percentages, categorizedFHLB’s market capitalization ratio defined as the market value of total capital divided by achievement level,the par value of capital stock. The market capitalization ratio is measured as the simple average at 36 month ends in whichthe three-year performance period using the base-case interest rate and business environment used in reports to the Board at each month end. If the FHLB's market capitalization ratio is greater than 100 percent during the deferred performance period, the final value will be 100 percent of the deferred award will be adjusted:
|
| | | | | | | | | |
| | Achievement Levels |
Name | | Threshold | | Target | | Maximum |
Andrew S. Howell | | 75.0 | % | | 100.0 | % | | 125.0 | % |
Donald R. Able | | 75.0 |
| | 100.0 |
| | 125.0 |
|
R. Kyle Lawler | | 75.0 |
| | 100.0 |
| | 125.0 |
|
Stephen J. Sponaugle | | 75.0 |
| | 100.0 |
| | 125.0 |
|
James G. Dooley, Sr. | | 75.0 |
| | 100.0 |
| | 125.0 |
|
plus interest based on the annual interest rates applicable to the FHLB’s qualified defined benefit plan.
Except as noted above with respect to exam ratings, the Board has ultimate authority over the Incentive Plan described above and may modify or terminate the Plan at any time or for any reason. The Board also has sole discretion to increase or decrease any Incentive Plan awards. In addition, payments under the Plan are subject to certain claw back provisions whichthat allow the FHLB 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. OurThe Board believes these claw back requirements serve as deterrentsa deterrent to any manipulation of financial statements or performance metrics in a manner that would assure and/or increase an incentive payment.
Current 2018Incentive Award.Plan. For calendar year 2015,2018, 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 20162019 meeting, following certification of the 20152018 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 20152018 plan year, we cumulatively achieved approximately 9688 percent of the available maximum
incentive opportunity for FHLB goals. This was an increase inhigher than the 85 percent overall FHLB performance from the 91 percent achieved for 20142017 primarily due to improvedexceeding the target performance onlevel for five of the new Mandatory Delivery Commitments and Market Value of Equity goals.six goals in 2018.
The following table presents the incentive weights, threshold, target and maximum performance levels, and the actual results achieved for the 20152018 Incentive Plan performance measures for all Named Executive Officers other than the Senior Vice President - Internal Audit.Officers.
20152018 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 | % | | 80 |
| | 92 |
| | 110 |
| | 99 |
| 10.0 | % | | 86 |
| | 100 |
| | 115 |
| | 117 |
|
2) Mission Asset Participation | 10.0 |
| | 64 | % | | 69 | % | | 76 | % | | 78 | % | 10.0 |
| | 65 | % | | 72 | % | | 80 | % | | 82 | % |
Member Asset Activity | | | | | | | | | | |
3) Average Advance Balances for Members with Assets of $50 Billion or less | 15.0 |
| | $ | 14,500,000 |
| | $ | 15,500,000 |
| | $ | 16,900,000 |
| | $ | 19,955,968 |
| |
Mission Asset Activity | | | | | | | | | | |
3) Average Advance Balances for Members with Assets of $50 billion or Less | | 15.0 |
| | $ | 20,500,000 |
| | $ | 22,500,000 |
| | $ | 24,500,000 |
| | $ | 24,929,388 |
|
4) Mortgage Purchase Program New Mandatory Delivery Commitments | 15.0 |
| | 1,750,000 |
| | 1,900,000 |
| | 2,500,000 |
| | 2,408,500 |
| 15.0 |
| | 1,500,000 |
| | 1,800,000 |
| | 2,200,000 |
| | 1,938,115 |
|
Stockholder Risk/Return | | | | | | | | | | | | | | | | | | |
5) Decline in Market Value of Equity | 25.0 |
| | < 10% |
| | < 8% |
| | 4% or less |
| | 4.8 | % | 25.0 |
| | < 7% |
| | < 5% |
| | 3% or less |
| | 3.0 | % |
6) Profitability-Available Earnings vs. Average 3-month LIBOR rate | 25.0 |
| | 350 bps |
| | 390 bps |
| | 440 bps |
| | 435 bps |
| |
6) Profitability-Available Earnings vs. Average 3-month LIBOR Rate | | 25.0 |
| | 375 bps |
| | 435 bps |
| | 490 bps |
| | 402 bps |
|
During 2015,2018, the Board, the Committee and the President periodically reviewed the Incentive Plan goals presented above to determine progress toward the goals. Although the Board and the President discussed various external factors that were affecting achievement of the performance measures, the Board did not take any actions to revise or change the Incentive Plan goals.
The 2018 incentive program for the CRO isChief Risk and Compliance Officer was weighted 75 percent on bank-wide goals, shown above, and 25 percent on the ERM department goal, as follows:
Implement specific initiatives of the FHLB's ERM program within the ERM Department.
| |
Weight of Goal: | 100 percent |
| |
Threshold: | 43 initiatives satisfactorily completed* |
| |
Target: | 54 initiatives satisfactorily completed* |
| |
Maximum: | 75 initiatives satisfactorily completed* |
| |
20152018 Results Achieved: | 6.34.6 initiatives satisfactorily completed* |
| |
* | Specific initiatives include efforts in improvementin: 1) the comprehensive review of the FHLB's general ERM program,risk management programs; 2) continuing to improve the operational risk assessment process 3) implementing a company-wide framework to promote consistency for compliance related activities; 4) MPP credit modeling initiative; and compliance and market risk.5) enhancing Board reporting. |
The 2015 Incentive Plan measures for the Senior Vice President - Internal Audit were based entirely on achievement of specific internal audit function goals, including issuance of a certain number of audit reports, complete testing of identified internal controls, compliance with regulatory standards, and general effectiveness and leadership of the internal auditor. Based on these goals, 95 percent of the maximum performance was achieved during 2015.
2019Incentive Plan.At its November 20152018 meeting, the Board established the 20162019 Incentive Plan goals, the incentive weights and the performance measures corresponding to each Incentive Plan goal and award opportunity for the 20162019 Incentive Plan. In December 2015,After that meeting, the 20162019 Incentive Plan was sent to the Finance Agency and we received notification of the completion of their review and non-objection in January 2016.December 2018. The 20162019 Incentive Plan goals for our executives are set forth below.
20162019 Incentive Plan Goals
|
| |
Franchise Value Promotion | |
Mission Outreach | Weight: 10.0% |
Mission Asset Participation | Weight: 10.0% |
Mission 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 20162019 goals the same as those in 20152018 although the performance metrics have been adjusted. In setting the performance measures for the 20162019 Incentive Plan, the Board reviewed the results against target for 20152018 and considered relevant aspects of our financial outlook for 20162019 including the continued uncertaintyimpact of the economyanticipated interest rate environment, market volatility and changes in the government's liquidity programsmortgage market that continue to affect Mission Asset Activity and profitability. The Board also considered opportunities to increase mission asset participation by members.
The Board also approved a separate ERM department goal for the CRO,Chief Risk and Compliance Officer, whose annual incentive is weighted 75 percent on bank-wide goals and 25 percent on the ERM goal.
2016 CRO's2019 ERM Goal
Implement specific initiatives of the FHLB's ERM program within the ERM Department.
| |
Weight of Goal: | 100 percent |
| |
Threshold: | 43 initiatives satisfactorily completed* |
| |
Target: | 64 initiatives satisfactorily completed* |
| |
Maximum: | 75 initiatives satisfactorily completed* |
| |
* | Specific initiatives include efforts in improvementin: 1) implementing a data integrity project; 2) credit and collateral model migration; 3) leveraging technology to improve efficiency and effectiveness of the FHLB's general ERM program, operational risk management; 4) MPP credit modeling initiative; and compliance and market risk. 5) enhancing risk management practices. |
Finally, upon recommendation of the Audit Committee, the Board approved the separate 2016 Internal Audit department goals for the Senior Vice President - Internal Audit. The Board decided to keep all of the 2016 goals the same as those in 2015, although some of the performance metrics have been adjusted.
Three-Year Deferred Incentive Award.Awards. During 2015,2018, the Board, the Committee and the President periodically reviewed progress toward the deferred plan goals for each ongoing performance period. At its January 20162019 meeting, following certification of the performance results for the deferred portion of the 20122015 Incentive Plan (2013(2016 - 20152018 performance period) and in accordance with those results, the Board authorized the distribution of payments to eligible officers including the Named Executive Officers. Cumulatively, we achieved approximately 9187 percent of the available maximum incentive opportunity for FHLB goals. The deferred payments for the 20132016 - 20152018 performance period are shown in Note 2 to the Summary Compensation Table.
The following table presents, for all Named Executive Officers, except the Senior Vice President - Internal Audit, the incentive weights, threshold, target and maximum performance levels, and the actual results achieved for each of the goals in the deferred portion of the 20122015 Incentive Plan (2013(2016 - 20152018 performance period):
|
| | | | | | | | | |
| Incentive Weight | | Threshold Performance | | Target Performance | | Maximum Performance | | Results Achieved |
OPERATING EFFICIENCY: | | | | | | | | | |
Ranking of Operating Efficiency Ratio in comparison to other FHLBanks | 25% | | 8th of 12 | | 4th of 12 | | 1st of 12 | | 1st of 12 |
RISK ADJUSTED PROFITABILITY: | | | | | | | | | |
Ranking of Risk Adjusted Profitability in comparison to other FHLBanks | 25% | | 8th of 12 | | 4th of 12 | | 1st of 12 | | 1st of 12 |
MARKET CAPITALIZATION RATIO: | | | | | | | | | |
Ratio of Market Value of Equity to Par Value of Regulatory Capital Stock | 25% | | 95% | | 100% | | 110% | | 105% |
ADVANCE UTILIZATION RATIO: | | | | | | | | | |
Ranking of average of each member's Advances-to-Assets ratio multiplied by the average member borrower penetration ratio in comparison to other FHLBanks | 25% | | 8th of 12 | | 4th of 12 | | 1st of 12 | | 5th of 12 |
|
| | | | | | | | | |
| 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 | | 2nd |
Earnings Volatility Adjusted Profitability: | | | | | | | | | |
Ranking of monthly volatility adjusted return on average equity (ROE) spread to average 3-month LIBOR in comparison to other FHLBanks | 20% | | 8th | | 5th | | 1st | | 5th |
Market Capitalization Ratio: | | | | | | | | | |
Ratio of Market Value of Equity to Par Value of Regulatory Capital Stock | 20% | | 95% | | 100% | | 110% | | 113% |
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% | | 7th | | 4th | | 1st | | 5th |
Strategic Business Plan Achievement: | | | | | | | | | |
Percentage of Strategic Business Plan strategies achieved | 20% | | 70% | | 80% | | 100% | | 90% |
For the Senior Vice President - Internal Audit, the following table presents the incentive weights, threshold, target and maximum performance levels, and the actual results achieved for each of the Internal Audit goals inAs described above, the deferred portion of the 20122018 Incentive Plan (2013(2019 - 20152021 performance period):
|
| | | | | | | | | |
| Incentive Weight | | Threshold Performance | | Target Performance | | Maximum Performance | | Results Achieved |
AUDIT COMMITTEE CHARTER FULFILLMENT: | | | | | | | | | |
Average of the Audit Committee's annual performance review ratings | 50% | | 3 | | 4 | | 5 | | 4.72 |
FINDINGS TRACKING: | | | | | | | | | |
Results of Audit Committee's evaluation of monitoring, tracking and reporting on findings as a result of audits and examinations | 25% | | 3 | | 4 | | 5 | | 4.84 |
SUCCESSION PLANNING AND READINESS: | | | | | | | | | |
Level of readiness based on Audit Committee assessment | 25% | | Minimally Prepared (3) | | Prepared (4) | | Highly Prepared (5) | | 4.30 |
At its November 2015 meeting, is based on a safety and soundness metric tied to the Board establishedFHLB’s market capitalization ratio. If the goals, incentive weights and performance measures to determine the achievement level reachedFHLB's market capitalization ratio is greater than 100 percent during the 20162019 - 2018 deferral2021 performance period, the final value will be 100 percent of the 2015 Incentive Plan. The following table presentsdeferred award plus interest based on the goals and incentive weights for all Named Executive Officers, exceptannual interest rates applicable to the Senior Vice President - Internal Audit:
2015 Deferred Incentive Plan Goals (2016 - 2018 Performance Period)
|
| |
1) OPERATING EFFICIENCY: | |
Ranking of Operating Efficiency Ratio in comparison to other FHLBanks | Weight: 20% |
2) EARNINGS VOLATILITY ADJUSTED PROFITABILITY: | |
Ranking of Earnings Volatility Adjusted Profitability in comparison to other FHLBanks | Weight: 20% |
3) MARKET CAPITALIZATION RATIO: | |
Ratio of Market Value of Equity 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% |
FHLB’s qualified defined benefit plan.
The performance measures and incentive weights used to determine the achievement level reached during the three-year deferral period for the Senior Vice President - Internal Audit included: (1) fulfillment of the Audit Committee Charter (50 percent weighting) and (2) tracking of findings from internal audits, external audits and examination findings (50 percent weighting).
The goalsterms for the deferred component of the 20162019 Incentive Plan, which includeincludes the 20172020 - 20192022 performance period, areis expected to be setreviewed at the November 20162019 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 19, 2015 | | $ | 375,000 |
| | $ | 562,500 |
| | $ | 750,000 |
| | November 15, 2018 | | $ | 437,500 |
| | $ | 656,250 |
| | $ | 875,000 |
|
Donald R. Able | | November 19, 2015 | | 160,000 |
| | 240,000 |
| | 320,000 |
| |
Stephen J. Sponaugle | | | November 15, 2018 | | 163,800 |
| | 245,700 |
| | 327,600 |
|
R. Kyle Lawler | | November 19, 2015 | | 146,000 |
| | 219,000 |
| | 292,000 |
| | November 15, 2018 | | 170,000 |
| | 255,000 |
| | 340,000 |
|
Stephen J. Sponaugle | | November 19, 2015 | | 97,500 |
| | 162,500 |
| | 227,500 |
| |
James G. Dooley, Sr. | | November 19, 2015 | | 75,000 |
| | 125,000 |
| | 175,000 |
| |
J. Gregory Dooley, Sr. | | | November 15, 2018 | | 123,600 |
| | 185,400 |
| | 247,200 |
|
Roger B. Batsel | | | November 15, 2018 | | 119,350 |
| | 179,025 |
| | 238,700 |
|
| |
(1) | Awards granted on this date are for the 20162019 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. TheIf the FHLB operates in a safe and sound manner according to the market capitalization ratio metric during the deferred performance period, the final value will be 100 percent of the deferred award can be increased, decreased or remain the sameplus interest based on the achievement level ofannual interest rates applicable to the deferred goals during the three-year period.FHLB’s qualified defined benefit plan. 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 FHLB 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,Sponaugle, Lawler, and Sponaugle,Able, 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.Messrs. Dooley and 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 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 (other than Mr. Able) 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. For Mr. Able, the benefits reflect his retirement during 2018. Our pension benefits do not include any reduction for a participant's Social Security benefits.
20152018 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 | Payments During Year Ended December 31, 2018 |
Current Named Executive Officers: | | | | | |
Andrew S. Howell | | Pentegra DB | | 25.50 |
| | $ | 1,665,000 |
| | Pentegra DB | | 28.50 |
| | $ | 2,119,000 |
| $ | — |
|
| | DB/BEP | | 25.50 |
| | 4,648,000 |
| | DB/BEP | | 28.50 |
| | 7,961,000 |
| — |
|
| | | | | | | | |
Donald R. Able | | Pentegra DB | | 34.42 |
| | 1,800,000 |
| |
Stephen J. Sponaugle | | | Pentegra DB | | 25.33 |
| | 1,890,000 |
| — |
|
| | DB/BEP | | 34.42 |
| | 2,653,000 |
| | DB/BEP | | 25.33 |
| | 1,515,000 |
| — |
|
| | | | | | | | |
R. Kyle Lawler | | Pentegra DB | | 14.50 |
| | 1,112,000 |
| | Pentegra DB | | 17.50 |
| | 1,591,000 |
| — |
|
| | DB/BEP | | 14.50 |
| | 813,000 |
| | DB/BEP | | 17.50 |
| | 1,603,000 |
| — |
|
| | | | | | | | |
Stephen J. Sponaugle | | Pentegra DB | | 22.33 |
| | 1,393,000 |
| |
J. Gregory Dooley, Sr. | | | Pentegra DB | | 11.33 |
| | 486,000 |
| — |
|
| | DB/BEP | | 22.33 |
| | 548,000 |
| | DB/BEP | | 11.33 |
| | 49,000 |
| — |
|
| | | | | | | | |
James G. Dooley, Sr. | | Pentegra DB | | 8.33 |
| | 265,000 |
| |
Roger B. Batsel | | | Pentegra DB | | 3.92 |
| | 92,000 |
| — |
|
| | DB/BEP | | 8.33 |
| | — |
| | DB/BEP | | 3.92 |
| | 15,000 |
| — |
|
| | | | | |
Former Named Executive Officer: | | | | | |
Donald R. Able | | | Pentegra DB | | 37.00 |
| | 891,000 |
| 1,591,655 |
|
| | | DB/BEP | | 37.00 |
| | 6,659,614 |
| 222,414 |
|
| |
(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 (current incentive award) and excludes any deferred incentive 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 retirement 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.
During 2015,2018, the President was also provided with an FHLB-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 FHLB-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 FHLB 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 2015,2018, perquisites totaled $13,636$17,733 for Mr. Howell, as shown in the Summary Compensation Table. Perquisites did not individually or collectively exceed $10,000 for any other Named Executive Officers and are therefore excluded from the Summary Compensation Table.
Employment Arrangements and Severance Benefits
Pursuant to the FHLBank Act, all employees of the FHLB 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 arrangementsagreements with any Named Executive Officer. Other than normal pension benefits and eligibility to participate in our retiree supplemental benefits programmedical 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 change in control, 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 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.pay, 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.
Executive Change in Control Plan (Change in Control Plan).We have 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, 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 President 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 (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 been 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 days 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 Officers if their employment had terminated as of December 31, 2018.
Total Potential Payment Upon Termination (1)
|
| | | | | | | | | | | | | | | | | | | | |
Separation Event | | Andrew S. Howell | | Stephen J. Sponaugle | | R. Kyle Lawler | | J. Gregory Dooley, Sr. | | 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) | | 96,923 |
| | 24,750 |
| | 31,154 |
| | 18,462 |
| | 9,831 |
|
Involuntary termination without Cause not due to a Change in Control (3) | | 516,923 |
| | 219,750 |
| | 233,654 |
| | 168,462 |
| | 145,248 |
|
Involuntary termination without Cause due to a Change in Control or resignation for Good Reason due to a Change in Control (4) | | 4,432,423 |
| | 1,372,500 |
| | 1,429,904 |
| | 1,060,212 |
| | 913,665 |
|
| |
(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. Mr. Able is not included in this table because he was not an employee on December 31, 2018. |
| |
(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 | | Stephen J. Sponaugle | | R. Kyle Lawler | | J. Gregory Dooley, Sr. | | Roger B. Batsel |
Salary | | $ | 2,100,000 |
| | $ | 682,500 |
| | $ | 708,750 |
| | $ | 525,000 |
| | $ | 487,500 |
|
Incentive compensation | | 1,575,000 |
| | 409,500 |
| | 425,250 |
| | 315,000 |
| | 237,519 |
|
Other (a) | | 757,423 |
| | 280,500 |
| | 295,904 |
| | 220,212 |
| | 188,646 |
|
Total | | $ | 4,432,423 |
| | $ | 1,372,500 |
| | $ | 1,429,904 |
| | $ | 1,060,212 |
| | $ | 913,665 |
|
| |
(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 FHLB has furnished the following report for inclusion in this annual reportAnnual Report on Form 10-K:
The Committee has reviewed and discussed the 20152018 Compensation Discussion and Analysis set forth above with the FHLB'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. KochJames A. England |
Michael R. Melvin |
William J. Small (Vice Chair)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 FHLB.
2015 Compensation. Under our 2015 policy, compensation wasis comprised of per meeting fees, 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 per meeting fees and the annual caps for 2015:
|
| | | | | | | |
| 2015 |
| Per Meeting Fee | | Annual Meeting Fee Cap |
Chair | $ | 15,000 |
| | $ | 105,000 |
|
Vice Chair | 13,750 |
| | 95,000 |
|
Other Members | 10,500 |
| | 72,500 |
|
In addition, under the 2015 policy, annual fees were paid as follows for certain Board Committee assignments that involved significant time and responsibilities. These fees were subject to certain attendance requirements.
|
| | | |
| 2015 |
Audit Committee: | |
Chair | $ | 17,000 |
|
Other members | 9,500 |
|
Finance and Market Risk Management Committee: | |
Chair | 14,000 |
|
Other members | 7,000 |
|
All other committees: | |
Chair | 14,000 |
|
However, the Board Chair did not receive additional compensation for chairing any committee and no director received fees totaling more than the annual amount paid to the Board Chair.
2016 Compensation. At its November 2015 meeting, the Board approved a revision to the directors' fee structure, effective January 1, 2016. Under our revised policy, compensation is comprised of a maximum base fee that is divided into two equal parts: (1) a quarterly retainer fee, and (2) a per meeting fee, subject to an annual cap, and reimbursement for reasonable FHLB travel-related expenses. As in prior years, the fees are intended to compensate directors for time spent reviewing materials sent to them, preparing for meetings, participating in other FHLB activities and attending the meetings of the Board of Directors and its committees.
The following table sets forth the per meeting fees and the maximum base fees for 2018 and 2019:
| | | 2016 | | | | | | | |
| Quarterly Retainer Fee | | Per Meeting Fee | | Maximum Base Fees | Per Meeting Fee | | Maximum Base Fees |
Chair | $ | 16,875 |
| | $ | 9,650 |
| | $ | 135,000 |
| $ | 20,720 |
| | $ | 145,000 |
|
Vice Chair | 15,000 |
| | 8,580 |
| | 120,000 |
| 17,930 |
| | 125,500 |
|
Other Members | 12,500 |
| | 7,150 |
| | 100,000 |
| |
Other members | | 15,720 |
| | 110,000 |
|
In addition to the base fees, under the 2016 policy, annual fees are paid to the Audit Committee Chair and Other Committee Chairs of $17,000$15,500 and $14,000,$12,500, respectively. These fees are subject to certain attendance requirements.
During 2015,2018, total directors' fees and travel expenses incurred by the FHLB were $1,457,125$2,080,290 and $229,189,$304,858, 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 FHLB, subject to certain limitations, and reported as a taxable fringe benefit. During 2015,2018, there were 13 directors that received reimbursement for spousalguest travel expenses. These expenses did not individually or collectively exceed $10,000 for any director and, therefore, are therefore excluded from the Directors Compensation Table below.
The following table sets forth the fees earned by each director for the year ended December 31, 2015.2018.
20152018 Directors Compensation Table | | Name | | Fees Earned or Paid in Cash | | Total | | Fees Earned or Paid in Cash |
J. Lynn Anderson | | $ | 96,000 |
| | $ | 96,000 |
| | $ | 125,500 |
|
Grady P. Appleton | | 82,000 |
| | 82,000 |
| | 110,000 |
|
Brady T. Burt | | | 110,000 |
|
Greg W. Caudill | | 79,625 |
| | 79,625 |
| | 110,000 |
|
James R. DeRoberts | | 82,000 |
| | 82,000 |
| | 110,000 |
|
Mark N. DuHamel | | 87,000 |
| | 87,000 |
| | 110,000 |
|
Leslie D. Dunn | | 96,000 |
| | 96,000 |
| | 122,500 |
|
James A. England | | 82,000 |
| | 82,000 |
| |
James A. England, Vice Chair | | | 125,500 |
|
Charles J. Koch | | 79,500 |
| | 79,500 |
| | 94,290 |
|
Robert T. Lameier | | | 110,000 |
|
Michael R. Melvin | | 79,500 |
| | 79,500 |
| | 110,000 |
|
Thomas L. Moore | | 79,500 |
| | 79,500 |
| |
Donald J. Mullineaux, Chair | | 105,000 |
| | 105,000 |
| | 145,000 |
|
Alvin J. Nance | | 72,500 |
| | 72,500 |
| | 110,000 |
|
Charles J. Ruma | | 93,500 |
| | 93,500 |
| | 122,500 |
|
David E. Sartore | | 89,000 |
| | 89,000 |
| | 122,500 |
|
William J. Small, Vice Chair | | 95,000 |
| | 95,000 |
| |
William S. Stuard, Jr. | | 79,500 |
| | 79,500 |
| | 122,500 |
|
Nancy E. Uridil | | 79,500 |
| | 79,500 |
| | 110,000 |
|
James J. Vance | | | 110,000 |
|
Total | | $ | 1,457,125 |
| | $ | 1,457,125 |
| | $ | 2,080,290 |
|
The following table summarizes the total number of board meetings and meetings of its designated committees held in 20142017 and 2015.2018.
| | | | Number of Meetings Held | | Number of Meetings Held |
Meeting Type | | 2014 | | 2015 | | 2017 | | 2018 |
Board Meeting | | 9 | | 9 | | 10 | | 10 |
Audit Committee | | 11 | | 11 | | 10 | | 11 |
Finance and Risk Management Committee | | 7 | | 7 | |
Risk Committee | | | 7 | | 7 |
Business and Operations Committee | | | 5 | | 5 |
Governance | | 7 | | 6 | | 7 | | 7 |
Housing and Community Development Committee | | 5 | | 5 | | 6 | | 6 |
Personnel and Compensation Committee | | 8 | | 6 | |
Executive Committee | | 1 | | 1 | |
Human Resources, Compensation and Inclusion Committee (f.k.a. Personnel and Compensation Committee) | | | 6 | | 6 |
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Personnel and Compensation Committee of the Board of Directors is charged with responsibility for the FHLB's compensation policies and programs. None of the 20152018 or 2016 Personnel and Compensation2019 Committee members are or previously were officers or employees of the FHLB. Additionally, none of the FHLB's executive officers served or serve on the board of directors or the compensation committee of any entity whose executive officers served on the FHLB's Personnel and Compensation Committee or Board of Directors. This Committee was and is composed of the following members:
|
| | |
2018 | | 2019 |
Donald J. Mullineaux (Chair) | | Donald J. Mullineaux (Chair) |
Grady P. Appleton | | Grady P. Appleton |
Leslie D. Dunn | | Leslie D. Dunn |
James A. England | | James A. England |
Charles J. Koch | | Michael R. Melvin |
Michael R. Melvin | | Nancy E. Uridil |
Nancy E. Uridil | |
|
PAY RATIO
As required by the Dodd-Frank Act, information about the 2018 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 President) was $108,624; and |
| |
2015 and 2016▪ |
Donald J. Mullineaux (Chair) |
Grady P. Appleton |
Leslie D. Dunn |
Charles J. Koch |
Michael R. Melvin |
William J. Small (Vice Chair)the annual total compensation of the President, as reported in the Summary Compensation Table, was $1,850,638. |
Based on this information, for 2018, the ratio of the annual total compensation of the President to the median of the annual total compensation of all employees was 17 to 1.
We have updated the median employee's compensation for 2018, 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 President, we used the amount reported in the “Total” column of our 2018 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 member institutions. Individuals, including directors and officers of the 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 29, 201628, 2019 and includes any known affiliates that are members of the 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 | $ | 1,439,000 |
| 33 | % | 14,390,000 |
| 1111 Polaris Parkway Columbus, OH 43240 | $ | 1,281,000 |
| 30 | % | 12,810,000 |
|
U.S. Bank, N.A. | 425 Walnut Street Cincinnati, OH 45202 | 475,393 |
| 11 |
| 4,753,927 |
| 425 Walnut Street Cincinnati, OH 45202 | 650,253 |
| 15 |
| 6,502,525 |
|
Fifth Third Bank | 38 Fountain Square Plaza Cincinnati, OH 45263 | 247,687 |
| 6 |
| 2,476,870 |
| |
The following table lists capital stock outstanding as of February 29, 201628, 2019 held by member institutions that have an officer or director who serves as a director of the 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 | $ | 123,102 |
| 2.8 | % | |
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 | $ | 194,646 |
| 4.6 | % |
Western & Southern Financial Group (1) | | 400 Broadway Street Cincinnati, OH 45202 | 114,537 |
| 2.7 |
|
The Park National Bank | | 50 North Third Street Newark, OH 43058 | 40,265 |
| 0.9 |
|
F&M Bank | 50 Franklin Street Clarksville, TN 37040 | 3,378 |
| 0.1 |
| 50 Franklin Street Clarksville, TN 37040 | 4,998 |
| 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 | 1,818 |
| 0.0 |
|
Farmers National Bank | 304 West Main Street Danville, KY 40422 | 1,722 |
| 0.0 |
| 304 West Main Street Danville, KY 40422 | 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 |
| |
First State Bank | | 19230 State Route 136 Winchester, OH 45697 | 1,079 |
| 0.0 |
|
Miami Savings Bank | 8008 Ferry Street Miamitown, OH 45041 | 722 |
| 0.0 |
| 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 | 97 |
| 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 FHLB members. |
| |
(2) | Includes two subsidiaries (Plateau Casualty Insurance Company and Plateau Insurance Company), which are 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, would be deemed independent because all are directors and/or officers of members that do business with us. Messrs. Appleton, Koch, Mullineaux, Nance and Ruma and Mses. Anderson, Boise, Dunn and Uridil, our seveneight non-industry directors, have no material transactions, relationships or arrangements with the FHLB 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“Compensation Committee Interlocks and Insider Participation.”Participation” in Item 11. Executive Compensation.
Review and Approval of Related Persons Transactions. Ordinary course transactions with Directors' Financial Institutions and with members holding five percent or more of our capital stock are reviewed and approved by our management in the normal course of events so as to assure compliance with Finance Agency regulations.
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 FHLB 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 sitewebsite 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, 20152018 have been so reviewed and approved.
| |
Item 14. | Principal Accountant Fees and Services. |
The following table sets forth the aggregate fees billed to the FHLB for the years ended December 31, 20152018 and 20142017 by its independent registered public accounting firm, PricewaterhouseCoopers LLP:PwC:
| | | For the Years Ended | For the Years Ended |
(In thousands) | December 31, | December 31, |
| 2015 | | 2014 | 2018 | | 2017 |
Audit fees | $ | 695 |
| | $ | 661 |
| $ | 721 |
| | $ | 697 |
|
Audit-related fees | 53 |
| | 67 |
| 70 |
| | 38 |
|
Tax fees | — |
| | — |
| — |
| | — |
|
All other fees | 20 |
| | — |
| 3 |
| | 2 |
|
Total fees | $ | 768 |
| | $ | 728 |
| $ | 794 |
| | $ | 737 |
|
Audit fees were for professional services rendered for the audits of the FHLB'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 FHLB is exempt from all federal, state and local income taxation. Therefore, no fees were paid for tax services during the years presented.
All other fees represent non-audit services related to an FHLBank System project on certain employee benefits during 2015. There were no other fees during 2014.for the annual license of accounting research software and a disclosure compliance checklist.
The Audit Committee approves the annual engagement letter for the FHLB'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 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 FHLB'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 FHLB paid additional fees to PricewaterhouseCoopers LLPPwC in the form of assessments paid to the Office of Finance. The FHLB 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 FHLBanks. These assessments, which totaled $51,000$49,000 and $47,000 in 20152018 and 20142017, 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 88. Financial Statements and Supplementary Data above, are filed as a part of this registration statement. |
Report of Independent Registered Public Accounting Firm
Statements of Condition as of December 31, 20152018 and 20142017
Statements of Income for the years ended December 31, 2015, 20142018, 2017 and 20132016
Statements of Comprehensive Income for the years ended December 31, 2015, 20142018, 2017 and 20132016
Statements of Capital for the years ended December 31, 2015, 20142018, 2017 and 20132016
Statements of Cash Flows for the years ended December 31, 2015, 20142018, 2017 and 20132016
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 17th21st day of March 2016.2019.
FEDERAL HOME LOAN BANK OF CINCINNATI
(Registrant)
|
| |
By: | /s/ Andrew S. Howell |
| Andrew S. Howell |
| President and Chief Executive Officer |
SIGNATURES AND POWER OF ATTORNEY
We, the undersigned directors of the Federal Home Loan Bank of Cincinnati, hereby appoint Andrew S. Howell and Stephen J. Sponaugle, or either of them, our true and lawful attorneys and agents to do any and all acts and things in our names and on our behalves, in our capacities indicated below, which said attorneys and agents, or either of them, may deem necessary or advisable to enable said registrant to comply with the Securities Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2018, including, without limitation, power and authority to sign for us, or any of us, in our names in the capacities indicated below, the Report and any and all amendments to the Report, and we hereby ratify and confirm all that said attorneys and agents, or each of them, shall do or cause to be done by virtue hereof.
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 17th21st day of March 2016.2019.
|
| | | |
| 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 Chief Financial Officer |
| Donald R. AbleStephen J. Sponaugle | | (principal financial officer) |
| | | |
| /s/ J. Christopher Bates | | Senior Vice President-Chief Accounting Officer |
| J. Christopher Bates | | (principal accounting officer) |
| | | |
| /s/ J. Lynn Anderson*Anderson | | Director |
| J. Lynn Anderson | | |
| | | |
| /s/ Grady P. Appleton*Appleton | | Director |
| Grady P. Appleton | | |
| | | |
| /s/ April Miller Boise | | Director |
| April Miller Boise | | |
| | | |
| /s/ Brady T. Burt | | Director |
| Brady T. Burt | | |
| | | |
| /s/ Greg W. Caudill*Caudill | | Director |
| Greg W. Caudill | | |
| | | |
| /s/ James R. DeRoberts*Mark N. DuHamel | | Director |
| James R. DeRobertsMark N. DuHamel | | |
|
| | | |
| /s/ Leslie D. Dunn*Dunn | | Director |
| Leslie D. Dunn | | |
| | | |
| /s/ James A. England*England | | Director (Vice Chair) |
| James A. England | | |
| | | |
| /s/ Charles J. Koch* | | Director |
| Charles J. Koch | | |
| | | |
| /s/ Robert T. Lameier*Lameier | | Director |
| Robert T. Lameier | | |
| | | |
| /s/ Michael R. Melvin*Melvin | | Director |
| Michael R. Melvin | | |
| | | |
| /s/ Thomas L. Moore* | | Director |
| Thomas L. Moore | | |
|
| | | |
| /s/ Donald J. Mullineaux*Mullineaux | | Director (Chair) |
| Donald J. Mullineaux | | |
| | | |
| /s/ Alvin J. Nance*Nance | | Director |
| Alvin J. Nance | | |
| | | |
| /s/ Michael P. Pell | | Director |
| Michael P. Pell | | |
| | | |
| /s/ Charles J. Ruma*Ruma | | Director |
| Charles J. Ruma | | |
| | | |
| /s/ David E. Sartore*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*Uridil | | Director |
| Nancy E. Uridil | | |
| | | |
| * Pursuant to Power of Attorney /s/ James J. Vance | | Director |
| James J. Vance | | |
| | | |
| /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 | | | | Filed Herewith |
| | | | |
4 | | | | Form 10-Q, filed May 7, 2015August 9, 2018 |
| | | | |
10.1.A10.1 | | | | Form 10, filed
December 5, 2005
|
| | | | |
10.1.B | | Form of Blanket Security Agreement, for new signatories on and after November 21, 2005 | | Form 10, filed December 5, 2005 |
| | | | |
10.2 | | | | Form 10, filed December 5, 2005 |
| | | | |
10.3 | | | | Form 10, filed December 5, 2005 |
| | | | |
10.4 | | | | Form 8-K,10-K, filed June 28, 2006 March 16, 2017 |
| | | | |
10.410.5 | | | | Form 8-K, filed August 5, 2011 |
| | | | |
10.510.6 (2)
| | | | Form 10-Q, filed August 9, 2012 |
| | | | |
10.6 (2) as of January 1, 2018
| | Transitional Executive Long-Term Incentive Plan | | Form 10-Q,10-K, filed August 9, 2012 March 15, 2018 |
| | | | |
10.7 (2) | | Federal Home Loan Bank | | Form 10-K, filed
March 18, 2010 Filed Herewith |
| | | | |
10.8 (2) | | First Amendment to the | | Form 10-K, filed March 18, 2010 |
| | | | |
10.9 (2) | | | | Form 10-K, filed March 18, 2010 |
| | | | |
10.10 | | | | Form 8-K, filed July 30, 2009
|
| | | | |
1210.11 | | Statements | | Form 10-K, filed March 16, 2017 |
| | | | |
10.12 | | | | Filed Herewith |
| | | | |
10.13 | | | | Form 10-Q, filed November 9, 2017 |
| | | | |
24 | | Powers | | 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. |
| |
(2) | Indicates management compensation plan or arrangement. |