FHLB Cin 2014 Q2 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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x | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2014
or
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o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to __________.
Commission File No. 000-51399
FEDERAL HOME LOAN BANK OF CINCINNATI
(Exact name of registrant as specified in its charter)
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Federally chartered corporation | | 31-6000228 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
600 Atrium Two, P.O. Box 598, | | |
Cincinnati, Ohio | | 45201-0598 |
(Address of principal executive offices) | | (Zip Code) |
(513) 852-7500
(Registrant's telephone number, including area code)
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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o | Accelerated filer o | Non-accelerated filer x | Smaller reporting company o |
| | (Do not check if a smaller reporting company) | |
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 July 31, 2014, the registrant had 43,322,446 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.
Table of Contents
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| PART I - FINANCIAL INFORMATION | |
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Item 1. | Financial Statements (Unaudited): | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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| PART II - OTHER INFORMATION | |
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Item 1A. | | |
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Item 6. | | |
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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF CONDITION
(In thousands, except par value)
(Unaudited)
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| | | | | | | |
| June 30, 2014 | | December 31, 2013 |
ASSETS | | | |
Cash and due from banks | $ | 219,048 |
| | $ | 8,598,933 |
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Interest-bearing deposits | 218 |
| | 166 |
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Securities purchased under agreements to resell | 5,950,000 |
| | 2,350,000 |
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Federal funds sold | 1,105,000 |
| | 1,740,000 |
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Investment securities: | | | |
Trading securities | 1,469 |
| | 1,578 |
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Available-for-sale securities | 2,004,981 |
| | 2,184,879 |
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Held-to-maturity securities (includes $0 and $0 pledged as collateral at June 30, 2014 and December 31, 2013, respectively, that may be repledged) (a) | 15,672,940 |
| | 16,087,162 |
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Total investment securities | 17,679,390 |
| | 18,273,619 |
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Advances | 69,485,413 |
| | 65,270,390 |
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Mortgage loans held for portfolio: | | | |
Mortgage loans held for portfolio | 6,701,699 |
| | 6,825,523 |
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Less: allowance for credit losses on mortgage loans | 5,441 |
| | 7,233 |
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Mortgage loans held for portfolio, net | 6,696,258 |
| | 6,818,290 |
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Accrued interest receivable | 82,057 |
| | 85,151 |
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Premises, software, and equipment, net | 12,488 |
| | 13,811 |
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Derivative assets | 5,389 |
| | 3,241 |
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Other assets | 23,225 |
| | 27,101 |
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TOTAL ASSETS | $ | 101,258,486 |
| | $ | 103,180,702 |
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LIABILITIES | | | |
Deposits | $ | 803,778 |
| | $ | 913,895 |
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Consolidated Obligations, net: | | | |
Discount Notes | 35,389,600 |
| | 38,209,946 |
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Bonds (includes $2,780,023 and $4,018,370 at fair value under fair value option at June 30, 2014 and December 31, 2013, respectively) | 59,653,311 |
| | 58,162,739 |
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Total Consolidated Obligations, net | 95,042,911 |
| | 96,372,685 |
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Mandatorily redeemable capital stock | 112,272 |
| | 115,853 |
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Accrued interest payable | 118,032 |
| | 116,381 |
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Affordable Housing Program payable | 96,543 |
| | 93,789 |
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Derivative liabilities | 72,323 |
| | 97,766 |
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Other liabilities | 159,285 |
| | 160,226 |
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Total liabilities | 96,405,144 |
| | 97,870,595 |
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Commitments and contingencies |
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CAPITAL | | | |
Capital stock Class B putable ($100 par value); issued and outstanding shares: 42,145 shares at June 30, 2014 and 46,980 shares at December 31, 2013 | 4,214,480 |
| | 4,697,985 |
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Retained earnings: | | | |
Unrestricted | 512,772 |
| | 510,321 |
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Restricted | 134,404 |
| | 110,843 |
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Total retained earnings | 647,176 |
| | 621,164 |
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Accumulated other comprehensive loss | (8,314 | ) | | (9,042 | ) |
Total capital | 4,853,342 |
| | 5,310,107 |
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TOTAL LIABILITIES AND CAPITAL | $ | 101,258,486 |
| | $ | 103,180,702 |
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(a) | Fair values: $15,642,823 and $15,808,397 at June 30, 2014 and December 31, 2013, respectively. |
The accompanying notes are an integral part of these financial statements.
FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF INCOME
(In thousands)
(Unaudited)
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| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
INTEREST INCOME: | | | | | | | |
Advances | $ | 77,046 |
| | $ | 77,694 |
| | $ | 153,197 |
| | $ | 148,646 |
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Prepayment fees on Advances, net | 1,075 |
| | 774 |
| | 2,071 |
| | 1,226 |
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Interest-bearing deposits | 24 |
| | 55 |
| | 43 |
| | 129 |
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Securities purchased under agreements to resell | 325 |
| | 464 |
| | 621 |
| | 1,323 |
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Federal funds sold | 1,230 |
| | 1,570 |
| | 2,359 |
| | 3,571 |
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Trading securities | 6 |
| | 9 |
| | 13 |
| | 17 |
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Available-for-sale securities | 988 |
| | 516 |
| | 1,748 |
| | 546 |
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Held-to-maturity securities | 88,100 |
| | 74,871 |
| | 177,353 |
| | 144,497 |
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Mortgage loans held for portfolio | 57,444 |
| | 67,695 |
| | 117,709 |
| | 140,903 |
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Loans to other FHLBanks | — |
| | 1 |
| | — |
| | 4 |
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Total interest income | 226,238 |
| | 223,649 |
| | 455,114 |
| | 440,862 |
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INTEREST EXPENSE: | | | | | | | |
Consolidated Obligations - Discount Notes | 6,247 |
| | 10,382 |
| | 14,696 |
| | 20,508 |
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Consolidated Obligations - Bonds | 141,835 |
| | 132,649 |
| | 283,992 |
| | 262,465 |
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Deposits | 64 |
| | 88 |
| | 127 |
| | 174 |
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Loans from other FHLBanks | — |
| | — |
| | — |
| | 5 |
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Mandatorily redeemable capital stock | 1,158 |
| | 1,417 |
| | 2,351 |
| | 3,040 |
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Total interest expense | 149,304 |
| | 144,536 |
| | 301,166 |
| | 286,192 |
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NET INTEREST INCOME | 76,934 |
| | 79,113 |
| | 153,948 |
| | 154,670 |
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Reversal for credit losses | (900 | ) | | (4,000 | ) | | (900 | ) | | (6,500 | ) |
NET INTEREST INCOME AFTER REVERSAL FOR CREDIT LOSSES | 77,834 |
| | 83,113 |
| | 154,848 |
| | 161,170 |
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OTHER NON-INTEREST INCOME: | | | | | | | |
Net losses on trading securities | (2 | ) | | (5 | ) | | (4 | ) | | (4 | ) |
Net (losses) gains on Consolidated Obligation Bonds held under fair value option | (80 | ) | | 355 |
| | 1,280 |
| | 887 |
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Net gains (losses) on derivatives and hedging activities | 3,332 |
| | (1,457 | ) | | 2,249 |
| | 2,888 |
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Standby Letters of Credit fees | 2,625 |
| | 2,000 |
| | 4,969 |
| | 3,699 |
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Other, net | 449 |
| | 575 |
| | 1,574 |
| | 1,703 |
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Total other non-interest income | 6,324 |
| | 1,468 |
| | 10,068 |
| | 9,173 |
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OTHER EXPENSE: | | | | | | | |
Compensation and benefits | 8,448 |
| | 7,826 |
| | 17,734 |
| | 16,193 |
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Other operating | 4,174 |
| | 4,216 |
| | 8,576 |
| | 8,200 |
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Finance Agency | 1,626 |
| | 1,088 |
| | 3,565 |
| | 2,176 |
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Office of Finance | 1,164 |
| | 1,122 |
| | 2,211 |
| | 2,211 |
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Other | 1,273 |
| | 1,416 |
| | 1,675 |
| | 1,903 |
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Total other expense | 16,685 |
| | 15,668 |
| | 33,761 |
| | 30,683 |
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INCOME BEFORE ASSESSMENTS | 67,473 |
| | 68,913 |
| | 131,155 |
| | 139,660 |
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Affordable Housing Program assessments | 6,863 |
| | 7,033 |
| | 13,351 |
| | 14,270 |
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NET INCOME | $ | 60,610 |
| | $ | 61,880 |
| | $ | 117,804 |
| | $ | 125,390 |
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The accompanying notes are an integral part of these financial statements.
FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
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| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
Net income | $ | 60,610 |
| | $ | 61,880 |
| | $ | 117,804 |
| | $ | 125,390 |
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Other comprehensive income adjustments: | | | | | | | |
Net unrealized gains (losses) on available-for-sale securities | 141 |
| | (39 | ) | | 102 |
| | 5 |
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Pension and postretirement benefits | 313 |
| | 482 |
| | 626 |
| | 932 |
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Total other comprehensive income adjustments | 454 |
| | 443 |
| | 728 |
| | 937 |
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Total comprehensive income | $ | 61,064 |
| | $ | 62,323 |
| | $ | 118,532 |
| | $ | 126,327 |
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The accompanying notes are an integral part of these financial statements.
FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF CAPITAL
(In thousands)
(Unaudited)
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| Capital Stock Class B - Putable | | Retained Earnings | | Accumulated Other Comprehensive | | Total |
| 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 |
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Proceeds from sale of capital stock | 6,984 |
| | 698,395 |
| | | | | | | | | | 698,395 |
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Net shares reclassified to mandatorily redeemable capital stock | (186 | ) | | (18,592 | ) | | | | | | | | | | (18,592 | ) |
Comprehensive income | | | | | 100,312 |
| | 25,078 |
| | 125,390 |
| | 937 |
| | 126,327 |
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Cash dividends on capital stock | | | | | (81,756 | ) | | | | (81,756 | ) | | | | (81,756 | ) |
BALANCE, JUNE 30, 2013 | 46,904 |
| | $ | 4,690,425 |
| | $ | 497,809 |
| | $ | 83,706 |
| | $ | 581,515 |
| | $ | (10,797 | ) | | $ | 5,261,143 |
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BALANCE, DECEMBER 31, 2013 | 46,980 |
| | $ | 4,697,985 |
| | $ | 510,321 |
| | $ | 110,843 |
| | $ | 621,164 |
| | $ | (9,042 | ) | | $ | 5,310,107 |
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Proceeds from sale of capital stock | 310 |
| | 30,970 |
| | | | | | | | | | 30,970 |
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Repurchase of capital stock | (4,979 | ) | | (497,875 | ) | | | | | | | | | | (497,875 | ) |
Net shares reclassified to mandatorily redeemable capital stock | (166 | ) | | (16,600 | ) | | | | | | | | | | (16,600 | ) |
Comprehensive income | | | | | 94,243 |
| | 23,561 |
| | 117,804 |
| | 728 |
| | 118,532 |
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Cash dividends on capital stock | | | | | (91,792 | ) | | | | (91,792 | ) | | | | (91,792 | ) |
BALANCE, JUNE 30, 2014 | 42,145 |
| | $ | 4,214,480 |
| | $ | 512,772 |
| | $ | 134,404 |
| | $ | 647,176 |
| | $ | (8,314 | ) | | $ | 4,853,342 |
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The accompanying notes are an integral part of these financial statements.
FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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| Six Months Ended June 30, |
| 2014 | | 2013 |
OPERATING ACTIVITIES: | | | |
Net income | $ | 117,804 |
| | $ | 125,390 |
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Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 2,879 |
| | 3,567 |
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Net change in fair value adjustment on derivative and hedging activities | 11,972 |
| | 21,069 |
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Net change in fair value adjustments on trading securities | 4 |
| | 4 |
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Net change in fair value adjustments on Consolidated Obligation Bonds held at fair value | (1,280 | ) | | (887 | ) |
Other adjustments | (791 | ) | | (6,503 | ) |
Net change in: | | | |
Accrued interest receivable | 3,095 |
| | (786 | ) |
Other assets | 3,359 |
| | 1,352 |
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Accrued interest payable | (417 | ) | | (1,869 | ) |
Other liabilities | 2,302 |
| | 11,400 |
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Total adjustments | 21,123 |
| | 27,347 |
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Net cash provided by operating activities | 138,927 |
| | 152,737 |
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INVESTING ACTIVITIES: | | | |
Net change in: | | | |
Interest-bearing deposits | 10,546 |
| | 80,227 |
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Securities purchased under agreements to resell | (3,600,000 | ) | | 2,350,000 |
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Federal funds sold | 635,000 |
| | (2,300,000 | ) |
Premises, software, and equipment | (447 | ) | | (1,743 | ) |
Trading securities: | | | |
Proceeds from maturities of long-term | 106 |
| | 173 |
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Available-for-sale securities: | | | |
Net decrease (increase) in short-term | 180,000 |
| | (1,025,000 | ) |
Held-to-maturity securities: | | | |
Net decrease in short-term | 1,436 |
| | 652 |
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Proceeds from maturities of long-term | 975,121 |
| | 1,510,639 |
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Purchases of long-term | (561,789 | ) | | (3,689,311 | ) |
Advances: | | | |
Proceeds | 471,592,155 |
| | 389,673,082 |
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Made | (475,835,179 | ) | | (400,923,970 | ) |
Mortgage loans held for portfolio: | | | |
Principal collected | 490,081 |
| | 1,204,634 |
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Purchases | (383,148 | ) | | (669,177 | ) |
Net cash used in by investing activities | (6,496,118 | ) | | (13,789,794 | ) |
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The accompanying notes are an integral part of these financial statements. | | |
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(continued from previous page) | | | |
FEDERAL HOME LOAN BANK OF CINCINNATI |
STATEMENTS OF CASH FLOWS |
(In thousands) |
(Unaudited) |
| Six Months Ended June 30, |
| 2014 | | 2013 |
FINANCING ACTIVITIES: | | | |
Net decrease in deposits and pass-through reserves | $ | (125,183 | ) | | $ | (138,723 | ) |
Net payments on derivative contracts with financing elements | (15,269 | ) | | (20,664 | ) |
Net proceeds from issuance of Consolidated Obligations: | | | |
Discount Notes | 113,292,004 |
| | 91,030,553 |
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Bonds | 31,755,220 |
| | 15,352,722 |
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Payments for maturing and retiring Consolidated Obligations: | | | |
Discount Notes | (116,111,544 | ) | | (82,948,438 | ) |
Bonds | (30,239,044 | ) | | (10,144,419 | ) |
Proceeds from issuance of capital stock | 30,970 |
| | 698,395 |
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Payments for repurchase/redemption of mandatorily redeemable capital stock | (20,181 | ) | | (104,420 | ) |
Payments for repurchase of capital stock | (497,875 | ) | | — |
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Cash dividends paid | (91,792 | ) | | (81,756 | ) |
Net cash (used in) provided by financing activities | (2,022,694 | ) | | 13,643,250 |
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Net (decrease) increase in cash and cash equivalents | (8,379,885 | ) | | 6,193 |
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Cash and cash equivalents at beginning of the period | 8,598,933 |
| | 16,423 |
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Cash and cash equivalents at end of the period | $ | 219,048 |
| | $ | 22,616 |
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Supplemental Disclosures: | | | |
Interest paid | $ | 315,558 |
| | $ | 293,986 |
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Affordable Housing Program payments, net | $ | 10,597 |
| | $ | 7,299 |
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The accompanying notes are an integral part of these financial statements.
FEDERAL HOME LOAN BANK OF CINCINNATI
NOTES TO UNAUDITED FINANCIAL STATEMENTS
Background Information
The Federal Home Loan Bank of Cincinnati (the FHLBank), a federally chartered corporation, is one of 12 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 FHLBank is regulated by the Federal Housing Finance Agency (Finance Agency).
Note 1 - Basis of Presentation
The accompanying interim financial statements of the FHLBank have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of financial statements in accordance with GAAP requires management to make assumptions and estimates. These assumptions and estimates affect the reported amount 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. The interim financial statements presented are unaudited, but they include all adjustments (consisting of only normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of the financial condition, results of operations, and cash flows for such periods. These financial statements do not include all disclosures associated with annual financial statements and accordingly should be read in conjunction with the audited financial statements and notes included in the FHLBank's annual report on Form 10-K for the year ended December 31, 2013 filed with the Securities and Exchange Commission (SEC). Results for the three and six months ended June 30, 2014 are not necessarily indicative of operating results for the full year.
The FHLBank presents certain financial instruments, including derivative instruments and securities purchased under agreements to resell, on a net basis when it has a legal right of offset and all other requirements for netting are met (collectively referred to as the netting requirements). For these instruments, the FHLBank has elected to offset its asset and liability positions, as well as cash collateral received or pledged, when it has met the netting requirements. The FHLBank did not have any offsetting liabilities related to its securities purchased under agreements to resell for the periods presented.
The net exposure for these financial instruments can change on a daily basis; therefore, there may be a delay between the time this exposure change is identified and additional collateral is requested, and the time this collateral is received or pledged. Likewise, there may be a delay for excess collateral to be returned. For derivative instruments that meet the requirements for netting, any excess cash collateral received or pledged is recognized as a derivative liability or derivative asset. Additional information regarding these agreements is provided in Note 10. Based on the fair value of the related collateral held, the securities purchased under agreements to resell were fully collateralized for the periods presented. For more information about the FHLBank's investments in securities purchased under agreements to resell, see “Item 8. Financial Statements and Supplementary Data - Note 1 - Summary of Significant Accounting Policies” in the FHLBank's 2013 Form 10-K.
The FHLBank 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.
Note 2 - Recently Issued Accounting Standards and Interpretations
Repurchase-to Maturity Transactions, Repurchase Financings, and Disclosures. On June 12, 2014, the Financial Accounting Standards Board (FASB) issued amended guidance for repurchase-to-maturity transactions and repurchase agreements executed as repurchase financings. Specifically, this guidance requires entities to account for (1) repurchase-to-maturity transactions as secured borrowings rather than as sales with forward repurchase agreements; and (2) repurchase agreements executed contemporaneously with the initial transfer of the underlying financial asset with the same counterparty as separate transactions only. In addition, this guidance requires a transferor to disclose additional information about certain transactions, including those in which it retains substantially all of the exposure to the economic returns of the underlying transferred asset over the transaction’s term. This guidance becomes effective for the FHLBank for the first interim or annual period beginning after December 15, 2014. The changes in accounting for transactions outstanding on the effective date are required to be presented
on a cumulative-effect approach. The FHLBank is in the process of evaluating this guidance, but its effect on the FHLBank's financial condition, results of operations, or cash flows is not expected to be material.
Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. On January 17, 2014, the FASB issued guidance clarifying when consumer mortgage loans collateralized by real estate should be reclassified to real estate owned. Specifically, such collateralized mortgage loans should be reclassified to real estate owned when either the creditor obtains legal title to the residential real estate property upon completion of a foreclosure, or the borrower conveys all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed-in-lieu of foreclosure or through a similar legal agreement. This guidance is effective for interim and annual periods beginning on or after December 15, 2014. The FHLBank is in the process of evaluating the effects this guidance may have on its financial condition, results of operations, or cash flows, but it is not expected to be material.
Joint and Several Liability Arrangements. On February 28, 2013, the FASB issued guidance for recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date. This guidance requires an entity to measure these obligations as the sum of (1) the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and (2) any additional amount the reporting entity expects to pay on behalf of its co-obligors. This guidance became effective for the FHLBank beginning on January 1, 2014. The adoption of this guidance did not effect the FHLBank's financial condition, results of operations, or cash flows.
Framework for Adversely Classifying Loans, Other Real Estate Owned, and Other Assets and Listing Assets for Special Mention. On April 9, 2012, the Finance Agency issued an advisory bulletin that establishes a standard and uniform methodology for adverse classification and identification of special mention assets and off-balance sheet credit exposures at the FHLBanks, excluding investment securities. The adverse classification requirements were implemented as of January 1, 2014; this implementation did not have a material effect on the FHLBank's financial condition, results of operations, or cash flows. The charge-off requirements should be implemented no later than January 1, 2015. The FHLBank is currently assessing the charge-off provisions of this advisory bulletin and has not yet determined the effect, if any, that this guidance will have on the FHLBank's financial condition, results of operations, or cash flows.
Note 3 - Trading Securities
Table 3.1 - Trading Securities by Major Security Types (in thousands) |
| | | | | | | |
Fair Value | June 30, 2014 | | December 31, 2013 |
Mortgage-backed securities: | | | |
Other U.S. obligation residential mortgage-backed securities (1) | $ | 1,469 |
| | $ | 1,578 |
|
Total | $ | 1,469 |
| | $ | 1,578 |
|
| |
(1) | Consists of Government National Mortgage Association (Ginnie Mae) mortgage-backed securities. |
Table 3.2 - Net Losses on Trading Securities (in thousands)
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| Six Months Ended June 30, |
| 2014 | | 2013 |
Net losses on trading securities held at period end | $ | (4 | ) | | $ | (4 | ) |
Net losses on trading securities | $ | (4 | ) | | $ | (4 | ) |
Note 4 - Available-for-Sale Securities
Table 4.1 - Available-for-Sale Securities by Major Security Types (in thousands)
|
| | | | | | | | | | | | | | | |
| June 30, 2014 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized (Losses) | | Fair Value |
Certificates of deposit | $ | 2,005,000 |
| | $ | 18 |
| | $ | (37 | ) | | $ | 2,004,981 |
|
Total | $ | 2,005,000 |
| | $ | 18 |
| | $ | (37 | ) | | $ | 2,004,981 |
|
| | | | | | | |
| December 31, 2013 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized (Losses) | | Fair Value |
Certificates of deposit | $ | 2,185,000 |
| | $ | 1 |
| | $ | (122 | ) | | $ | 2,184,879 |
|
Total | $ | 2,185,000 |
| | $ | 1 |
| | $ | (122 | ) | | $ | 2,184,879 |
|
All securities outstanding with gross unrealized losses at June 30, 2014 have been in a continuous unrealized loss position for less than 12 months.
Table 4.2 - Available-for-Sale Securities by Contractual Maturity (in thousands)
|
| | | | | | | | | | | | | | | |
| June 30, 2014 | | December 31, 2013 |
Year of Maturity | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
Due in one year or less | $ | 2,005,000 |
| | $ | 2,004,981 |
| | $ | 2,185,000 |
| | $ | 2,184,879 |
|
Table 4.3 - Interest Rate Payment Terms of Available-for-Sale Securities (in thousands)
|
| | | | | | | |
| June 30, 2014 | | December 31, 2013 |
Amortized cost of available-for-sale securities: | | | |
Fixed-rate | $ | 2,005,000 |
| | $ | 2,185,000 |
|
Realized Gains and Losses. The FHLBank had no sales of securities out of its available-for-sale portfolio during the six months ended June 30, 2014 or 2013.
Note 5 - Held-to-Maturity Securities
Table 5.1 - Held-to-Maturity Securities by Major Security Types (in thousands)
|
| | | | | | | | | | | | | | | |
| June 30, 2014 |
| Amortized Cost (1) | | Gross Unrecognized Holding Gains | | Gross Unrecognized Holding (Losses) | | Fair Value |
Non-mortgage-backed securities: | | | | | | | |
U.S. Treasury obligations | $ | 26,049 |
| | $ | 1 |
| | $ | — |
| | $ | 26,050 |
|
Total non-mortgage-backed securities | 26,049 |
| | 1 |
| | — |
| | 26,050 |
|
Mortgage-backed securities: | | | | | | | |
Other U.S. obligation residential mortgage-backed securities (2) | 2,184,883 |
| | 4,558 |
| | (11,958 | ) | | 2,177,483 |
|
Government-sponsored enterprises (GSE) residential mortgage-backed securities (3) | 13,462,008 |
| | 192,935 |
| | (215,653 | ) | | 13,439,290 |
|
Total mortgage-backed securities | 15,646,891 |
| | 197,493 |
| | (227,611 | ) | | 15,616,773 |
|
Total | $ | 15,672,940 |
| | $ | 197,494 |
| | $ | (227,611 | ) | | $ | 15,642,823 |
|
| | | | | | | |
| December 31, 2013 |
| Amortized Cost (1) | | Gross Unrecognized Holding Gains | | Gross Unrecognized Holding (Losses) | | Fair Value |
Non-mortgage-backed securities: | | | | | | | |
GSE (4) | $ | 27,485 |
| | $ | 1 |
| | $ | — |
| | $ | 27,486 |
|
Total non-mortgage-backed securities | 27,485 |
| | 1 |
| | — |
| | 27,486 |
|
Mortgage-backed securities: | | | | | | | |
Other U.S. obligation residential mortgage-backed securities (2) | 1,909,099 |
| | 4,545 |
| | (26,396 | ) | | 1,887,248 |
|
GSE residential mortgage-backed securities (3) | 14,150,578 |
| | 141,962 |
| | (398,877 | ) | | 13,893,663 |
|
Total mortgage-backed securities | 16,059,677 |
| | 146,507 |
| | (425,273 | ) | | 15,780,911 |
|
Total | $ | 16,087,162 |
| | $ | 146,508 |
| | $ | (425,273 | ) | | $ | 15,808,397 |
|
| |
(1) | Carrying value equals amortized cost. |
| |
(2) | 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. |
| |
(3) | 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. |
| |
(4) | 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. |
Table 5.2 - Net Purchased Discounts Included in the Amortized Cost of Mortgage-backed Securities Classified as Held-to-Maturity (in thousands)
|
| | | | | | | |
| June 30, 2014 | | December 31, 2013 |
Premiums | $ | 26,697 |
| | $ | 32,458 |
|
Discounts | (57,014 | ) | | (58,658 | ) |
Net purchased discounts | $ | (30,317 | ) | | $ | (26,200 | ) |
Table 5.3 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 5.3 - Held-to-Maturity Securities in a Continuous Unrealized Loss Position (in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 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 residential mortgage-backed securities (1) | $ | 871,376 |
| | $ | (11,958 | ) | | $ | — |
| | $ | — |
| | $ | 871,376 |
| | $ | (11,958 | ) |
GSE residential mortgage-backed securities (2) | 1,062,578 |
| | (20,668 | ) | | 5,549,321 |
| | (194,985 | ) | | 6,611,899 |
| | (215,653 | ) |
Total | $ | 1,933,954 |
| | $ | (32,626 | ) | | $ | 5,549,321 |
| | $ | (194,985 | ) | | $ | 7,483,275 |
| | $ | (227,611 | ) |
| | | | | | | | | | | |
| December 31, 2013 |
| 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 residential mortgage-backed securities (1) | $ | 663,278 |
| | $ | (26,396 | ) | | $ | — |
| | $ | — |
| | $ | 663,278 |
| | $ | (26,396 | ) |
GSE residential mortgage-backed securities (2) | 8,817,132 |
| | (397,252 | ) | | 48,902 |
| | (1,625 | ) | | 8,866,034 |
| | (398,877 | ) |
Total | $ | 9,480,410 |
| | $ | (423,648 | ) | | $ | 48,902 |
| | $ | (1,625 | ) | | $ | 9,529,312 |
| | $ | (425,273 | ) |
| |
(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 5.4 - Held-to-Maturity Securities by Contractual Maturity (in thousands)
|
| | | | | | | | | | | | | | | |
| June 30, 2014 | | December 31, 2013 |
Year of Maturity | Amortized Cost (1) | | Fair Value | | Amortized Cost (1) | | Fair Value |
Non-mortgage-backed securities: | | | | | | | |
Due in 1 year or less | $ | 26,049 |
| | $ | 26,050 |
| | $ | 27,485 |
| | $ | 27,486 |
|
Due after 1 year through 5 years | — |
| | — |
| | — |
| | — |
|
Due after 5 years through 10 years | — |
| | — |
| | — |
| | — |
|
Due after 10 years | — |
| | — |
| | — |
| | — |
|
Total non-mortgage-backed securities | 26,049 |
| | 26,050 |
| | 27,485 |
| | 27,486 |
|
Mortgage-backed securities (2) | 15,646,891 |
| | 15,616,773 |
| | 16,059,677 |
| | 15,780,911 |
|
Total | $ | 15,672,940 |
| | $ | 15,642,823 |
| | $ | 16,087,162 |
| | $ | 15,808,397 |
|
| |
(1) | Carrying value equals amortized cost. |
| |
(2) | Mortgage-backed securities are not presented by contractual maturity because their expected maturities will likely differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees. |
Table 5.5 - Interest Rate Payment Terms of Held-to-Maturity Securities (in thousands)
|
| | | | | | | |
| June 30, 2014 | | December 31, 2013 |
Amortized cost of non-mortgage-backed securities: | | | |
Fixed-rate | $ | 26,049 |
| | $ | 27,485 |
|
Total amortized cost of non-mortgage-backed securities | 26,049 |
| | 27,485 |
|
Amortized cost of mortgage-backed securities: | | | |
Fixed-rate | 12,831,121 |
| | 13,048,808 |
|
Variable-rate | 2,815,770 |
| | 3,010,869 |
|
Total amortized cost of mortgage-backed securities | 15,646,891 |
| | 16,059,677 |
|
Total | $ | 15,672,940 |
| | $ | 16,087,162 |
|
Realized Gains and Losses. From time to time the FHLBank may sell securities out of its held-to-maturity portfolio. These securities, generally, have less than 15 percent of the acquired principal outstanding at the time of the sale. These sales are considered maturities for the purposes of security classification. For the six months ended June 30, 2014 or 2013, the FHLBank did not sell any held-to-maturity securities.
Note 6 - Other-Than-Temporary Impairment Analysis
The FHLBank evaluates its individual available-for-sale and held-to-maturity investment securities holdings in an unrealized loss position for other-than-temporary impairment on a quarterly basis. As part of its evaluation for other-than-temporary impairment, the FHLBank considers its intent to sell each debt security and whether it is more likely than not that the FHLBank will be required to sell the security before its anticipated recovery. If either of these conditions is met, the FHLBank recognizes an other-than-temporary impairment in earnings equal to the entire difference between the security's amortized cost basis and its fair value at the balance sheet date. For securities in unrealized loss positions that meet neither of these conditions, the FHLBank performs analyses to determine if any of these securities are other-than-temporarily impaired.
For its other U.S. obligations and GSE investments (mortgage-backed securities and non-mortgage-backed securities), the FHLBank determined that the strength of the issuers' guarantees through direct obligations or support from the U.S. government is sufficient to protect the FHLBank from losses based on current expectations. As a result, the FHLBank determined that, as of June 30, 2014, 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 FHLBank does not intend to sell the investments, and it is not more likely than not that the FHLBank will be required to sell the investments before recovery of their amortized cost bases. As a result, the FHLBank did not consider any of these investments to be other-than-temporarily impaired at June 30, 2014.
The FHLBank also reviewed its available-for-sale securities that have experienced unrealized losses at June 30, 2014 and determined that the unrealized losses were temporary, based on the creditworthiness of the issuers and the related collateral characteristics, and that the FHLBank will recover its entire amortized cost basis. Additionally, because the FHLBank does not intend to sell these securities, nor is it more likely than not that the FHLBank will be required to sell the securities before recovery, it did not consider the investments to be other-than-temporarily impaired at June 30, 2014.
The FHLBank did not consider any of its investments to be other-than-temporarily impaired at December 31, 2013.
Note 7 - Advances
The FHLBank offers a wide range of fixed- and variable-rate Advance products with different maturities, interest rates, payment characteristics and optionality. At June 30, 2014 and December 31, 2013, the FHLBank had Advances outstanding, including Affordable Housing Program (AHP) Advances (see Note 13), at interest rates ranging from 0.00 percent to 9.20 percent. Advances with interest rates of 0.00 percent are AHP Advances. The following table presents Advance redemptions by contractual maturity, including index-amortizing Advances, which are presented according to their predetermined amortization schedules.
Table 7.1 - Advance Redemption Terms (dollars in thousands)
|
| | | | | | | | | | | | | | |
| | June 30, 2014 | | December 31, 2013 |
Redemption Term | | Amount | | Weighted Average Interest Rate | | Amount | | Weighted Average Interest Rate |
Overdrawn demand deposit accounts | | $ | 175 |
| | 0.21 | % | | $ | 150 |
| | 0.20 | % |
Due in 1 year or less | | 23,131,369 |
| | 0.36 |
| | 17,729,350 |
| | 0.42 |
|
Due after 1 year through 2 years | | 9,245,861 |
| | 0.48 |
| | 6,614,470 |
| | 0.63 |
|
Due after 2 years through 3 years | | 9,738,077 |
| | 0.82 |
| | 9,485,558 |
| | 0.64 |
|
Due after 3 years through 4 years | | 10,593,228 |
| | 0.72 |
| | 9,444,110 |
| | 0.81 |
|
Due after 4 years through 5 years | | 10,738,666 |
| | 0.58 |
| | 11,831,887 |
| | 0.61 |
|
Thereafter | | 5,888,419 |
| | 1.02 |
| | 9,987,245 |
| | 0.78 |
|
Total par value | | 69,335,795 |
| | 0.58 |
| | 65,092,770 |
| | 0.62 |
|
Commitment fees | | (722 | ) | | | | (750 | ) | | |
Discount on AHP Advances | | (13,549 | ) | | | | (14,953 | ) | | |
Premiums | | 3,228 |
| | | | 3,413 |
| | |
Discounts | | (11,893 | ) | | | | (14,104 | ) | | |
Hedging adjustments | | 172,554 |
| | | | 204,014 |
| | |
Total | | $ | 69,485,413 |
| | | | $ | 65,270,390 |
| | |
The FHLBank offers Advances to members that may be prepaid on specified dates (call dates) without incurring prepayment or termination fees (callable Advances). In exchange for receiving the right to call the Advance on a predetermined call schedule, the member typically pays a higher rate for the Advance relative to an equivalent maturity, non-callable Advance. If the call option is exercised, replacement funding may be available. Other Advances may only be prepaid subject to a prepayment fee paid to the FHLBank that makes the FHLBank financially indifferent to the prepayment of the Advance. At June 30, 2014 and December 31, 2013, the FHLBank had callable Advances (in thousands) of $11,921,489 and $10,072,203.
Table 7.2 - Advances by Year of Contractual Maturity or Next Call Date for Callable Advances (in thousands)
|
| | | | | | | |
Year of Contractual Maturity or Next Call Date | June 30, 2014 | | December 31, 2013 |
Overdrawn demand deposit accounts | $ | 175 |
| | $ | 150 |
|
Due in 1 year or less | 29,725,047 |
| | 25,109,451 |
|
Due after 1 year through 2 years | 7,571,181 |
| | 5,300,184 |
|
Due after 2 years through 3 years | 6,897,422 |
| | 7,149,237 |
|
Due after 3 years through 4 years | 9,769,904 |
| | 7,050,325 |
|
Due after 4 years through 5 years | 9,845,547 |
| | 10,877,078 |
|
Thereafter | 5,526,519 |
| | 9,606,345 |
|
Total par value | $ | 69,335,795 |
| | $ | 65,092,770 |
|
The FHLBank also offers putable Advances. With a putable Advance, the FHLBank effectively purchases put options from the member that allows the FHLBank to terminate the Advance at predetermined dates. The FHLBank normally would exercise its option when interest rates increase relative to contractual rates. At June 30, 2014 and December 31, 2013, the FHLBank had putable Advances, excluding those where the related put options have expired, totaling (in thousands) $2,090,900 and $2,146,400.
Table 7.3 - Advances by Year of Contractual Maturity or Next Put/Convert Date for Putable/Convertible Advances (in thousands)
|
| | | | | | | |
Year of Contractual Maturity or Next Put/Convert Date | June 30, 2014 | | December 31, 2013 |
Overdrawn demand deposit accounts | $ | 175 |
| | $ | 150 |
|
Due in 1 year or less | 24,882,269 |
| | 19,681,750 |
|
Due after 1 year through 2 years | 9,226,861 |
| | 6,424,970 |
|
Due after 2 years through 3 years | 9,224,777 |
| | 9,338,558 |
|
Due after 3 years through 4 years | 9,720,128 |
| | 8,582,710 |
|
Due after 4 years through 5 years | 10,563,166 |
| | 11,256,887 |
|
Thereafter | 5,718,419 |
| | 9,807,745 |
|
Total par value | $ | 69,335,795 |
| | $ | 65,092,770 |
|
Table 7.4 - Advances by Interest Rate Payment Terms (in thousands)
|
| | | | | | | |
Par value of Advances | June 30, 2014 | | December 31, 2013 |
Total fixed-rate (1) | $ | 19,871,531 |
| | $ | 15,480,817 |
|
Total variable-rate (1) | 49,464,264 |
| | 49,611,953 |
|
Total par value | $ | 69,335,795 |
| | $ | 65,092,770 |
|
| |
(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. |
Table 7.5 - Borrowers Holding Five Percent or more of Total Advances, Including Any Known Affiliates that are Members of the FHLBank (dollars in millions)
|
| | | | | | | | | | | | | | |
June 30, 2014 | | December 31, 2013 |
| Principal | | % of Total | | | Principal | | % of Total |
JPMorgan Chase Bank, N.A. | $ | 39,700 |
| | 57 | % | | JPMorgan Chase Bank, N.A. | $ | 41,700 |
| | 64 | % |
U.S. Bank, N.A. | 5,467 |
| | 8 |
| | U.S. Bank, N.A. | 4,584 |
| | 7 |
|
Total | $ | 45,167 |
| | 65 | % | | Total | $ | 46,284 |
| | 71 | % |
Note 8 - Mortgage Loans Held for Portfolio
Table 8.1 - Mortgage Loans Held for Portfolio (in thousands) |
| | | | | | | |
| June 30, 2014 | | December 31, 2013 |
Unpaid principal balance: | | | |
Fixed rate medium-term single-family mortgage loans (1) | $ | 1,393,005 |
| | $ | 1,482,345 |
|
Fixed rate long-term single-family mortgage loans | 5,130,859 |
| | 5,160,854 |
|
Total unpaid principal balance | 6,523,864 |
| | 6,643,199 |
|
Premiums | 171,573 |
| | 177,180 |
|
Discounts | (3,022 | ) | | (3,631 | ) |
Hedging basis adjustments (2) | 9,284 |
| | 8,775 |
|
Total mortgage loans held for portfolio | $ | 6,701,699 |
| | $ | 6,825,523 |
|
| |
(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 8.2 - Mortgage Loans Held for Portfolio by Collateral/Guarantee Type (in thousands) |
| | | | | | | |
| June 30, 2014 | | December 31, 2013 |
Unpaid principal balance: | | | |
Conventional mortgage loans | $ | 5,854,414 |
| | $ | 5,897,804 |
|
Federal Housing Administration (FHA) mortgage loans | 669,450 |
| | 745,395 |
|
Total unpaid principal balance | $ | 6,523,864 |
| | $ | 6,643,199 |
|
For information related to the FHLBank's credit risk on mortgage loans and allowance for credit losses, see Note 9.
Table 8.3 - Members, Including Any Known Affiliates that are Members of the FHLBank, and Former Members Selling Five Percent or more of Total Unpaid Principal (dollars in millions)
|
| | | | | | | | | | | | | | |
| June 30, 2014 | | | December 31, 2013 |
| Principal | | % of Total | | | Principal | | % of Total |
Union Savings Bank | $ | 1,408 |
| | 22 | % | | Union Savings Bank | $ | 1,433 |
| | 22 | % |
PNC Bank, N.A.(1) | 1,215 |
| | 19 |
| | PNC Bank, N.A. (1) | 1,356 |
| | 20 |
|
The Huntington National Bank | 328 |
| | 5 |
| | Total | $ | 2,789 |
| | 42 | % |
Total | $ | 2,951 |
| | 46 | % | | | | | |
Note 9 - Allowance for Credit Losses
The FHLBank has established an allowance methodology for each of the FHLBank's portfolio segments: credit products; FHA mortgage loans held for portfolio; and conventional mortgage loans held for portfolio.
Credit products
The FHLBank manages its credit exposure to credit products through an integrated approach that includes establishing a credit limit for each borrower, includes an ongoing review of each borrower's financial condition and is coupled with detailed collateral and lending policies to limit risk of loss while balancing borrowers' needs for a reliable source of funding. In addition, the FHLBank lends to eligible borrowers in accordance with federal statutes, including the Federal Home Loan Bank Act (FHLBank Act), and Finance Agency Regulations, which require the FHLBank 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 FHLBank accepts certain investment securities, residential mortgage loans, deposits, and other real estate related assets as collateral. In addition, community financial institutions (CFIs) are eligible to utilize expanded statutory collateral provisions for small business and agriculture loans. The FHLBank's capital stock owned by its member borrower 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 FHLBank can also require additional or substitute collateral to protect its security interest. Management of the FHLBank believes that these policies effectively manage the FHLBank's credit risk from credit products.
Members experiencing financial difficulties are subject to FHLBank-performed “stress tests” of the impact of poorly performing assets on the member’s capital and loss reserve positions. Depending on the results of these tests and the level of overcollateralization, a member may be allowed to maintain pledged loan assets in its custody, may be required to deliver those loans into the custody of the FHLBank or its agent, and/or may be required to provide details on these loans to facilitate an estimate of their fair value. The FHLBank perfects its security interest in all pledged collateral. The FHLBank Act affords any security interest granted to the FHLBank 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 FHLBank considers the payment status, collateralization levels, and borrower's financial condition to be indicators of credit quality for its credit products. At June 30, 2014 and December 31, 2013, the FHLBank had rights to collateral on a member-by-member basis with an estimated value in excess of its outstanding extensions of credit.
The FHLBank evaluates and makes changes to its collateral guidelines, as necessary, based on current market conditions. At June 30, 2014 and December 31, 2013, the FHLBank 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 FHLBank during the six months ended June 30, 2014 or 2013.
The FHLBank has not experienced any credit losses on Advances since it was founded in 1932. Based upon the collateral held as security, its credit extension and collateral policies, management's credit analysis and the repayment history on credit products, the FHLBank did not record any credit losses on credit products as of June 30, 2014 or December 31, 2013. Accordingly, the FHLBank did not record any allowance for credit losses on Advances.
At June 30, 2014 and December 31, 2013, no liability to reflect an allowance for credit losses for off-balance sheet credit exposures was recorded. See Note 19 for additional information on the FHLBank's off-balance sheet credit exposure.
Mortgage Loans Held for Portfolio - FHA
The FHLBank invests in fixed-rate mortgage loans secured by one-to-four family residential properties insured by the FHA. Any losses from such loans are expected to be recovered from the FHA. Any losses from these loans that are not recovered from the FHA would be due to a claim rejection by the FHA and, as such, would be recoverable from the selling participating financial institutions (PFIs). Therefore, the FHLBank only has credit risk for these loans if the seller or servicer fails to pay for losses not covered by insurance. As a result, the FHLBank 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 allowance for conventional loans is determined by analyses that include consideration of various data observations such as past performance, current performance, loan portfolio characteristics, collateral-related characteristics, industry data, and prevailing economic conditions. The measurement of the allowance for credit losses consists of: (1) collectively evaluating homogeneous pools of residential mortgage loans; (2) reviewing specifically identified loans for impairment; and (3) considering other relevant qualitative factors.
Collectively Evaluated Mortgage Loans. The credit risk analysis of conventional loans evaluated collectively for impairment considers historical delinquency migration, applies estimated loss severities, and incorporates the associated credit enhancements in order to determine the FHLBank's best estimate of probable incurred losses at the reporting date. The credit risk analysis of all conventional mortgage loans is performed at the individual Master Commitment Contract level to properly determine the credit enhancements available to recover losses on loans under each individual Master Commitment Contract. The Master Commitment Contract is an agreement with a member in which the member agrees to make every attempt to sell a specific dollar amount of loans to the FHLBank over a one-year period. Migration analysis is a methodology for determining, through the FHLBank's experience over a historical period, the rate of default on loans. The FHLBank applies migration analysis to loans based on payment status categories such as current, 30, 60, and 90 days past due. The FHLBank 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 credit enhancements available. 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 FHLBank 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. Specifically identified loans evaluated for impairment are removed from the collectively evaluated mortgage loan population.
Qualitative Factors. The FHLBank also assesses other qualitative factors in its estimation of loan losses for the collectively evaluated population. This amount represents a subjective management judgment, based on facts and circumstances that exist as of the reporting date, that is intended to cover other incurred losses that may not otherwise be captured in the methodology described above.
Rollforward of Allowance for Credit Losses on Mortgage Loans. The following tables present a rollforward of the allowance for credit losses on conventional mortgage loans as well as the recorded investment in mortgage loans by impairment methodology. The recorded investment in a loan is the unpaid principal balance of the loan adjusted for accrued interest,
unamortized premiums or discounts, hedging basis adjustments and direct write-downs. The recorded investment is not net of any allowance.
Table 9.1 - Rollforward of Allowance for Credit Losses on Conventional Mortgage Loans (in thousands)
|
| | | | | | | |
| Three Months Ended June 30, |
Allowance for credit losses: | 2014 | | 2013 |
Balance, beginning of period | $ | 6,655 |
| | $ | 14,832 |
|
Charge-offs | (314 | ) | | (1,656 | ) |
Reversal for credit losses | (900 | ) | | (4,000 | ) |
Balance, end of period | $ | 5,441 |
| | $ | 9,176 |
|
| | | |
| Six Months Ended June 30, |
Allowance for credit losses: | 2014 | | 2013 |
Balance, beginning of period | $ | 7,233 |
| | $ | 17,907 |
|
Charge-offs | (892 | ) | | (2,231 | ) |
Reversal for credit losses | (900 | ) | | (6,500 | ) |
Balance, end of period | $ | 5,441 |
| | $ | 9,176 |
|
Table 9.2 - Allowance for Credit Losses and Recorded Investment on Conventional Mortgage Loans by Impairment Methodology (in thousands)
|
| | | | | | | |
Allowance for credit losses, end of period: | June 30, 2014 | | December 31, 2013 |
Collectively evaluated for impairment | $ | 5,315 |
| | $ | 7,159 |
|
Individually evaluated for impairment | $ | 126 |
| | $ | 74 |
|
Recorded investment, end of period: | | | |
Collectively evaluated for impairment | $ | 6,035,908 |
| | $ | 6,082,636 |
|
Individually evaluated for impairment | 8,055 |
| | 7,799 |
|
Total recorded investment | $ | 6,043,963 |
| | $ | 6,090,435 |
|
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 FHLBank 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 FHLBank 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 FHLBank as a portion of the purchase proceeds to cover expected losses. 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 9.3 - Changes in the LRA (in thousands) |
| | | |
| Six Months Ended |
| June 30, 2014 |
LRA at beginning of year | $ | 115,236 |
|
Additions | 5,777 |
|
Claims | (1,185 | ) |
Scheduled distributions | (1,745 | ) |
LRA at end of period | $ | 118,083 |
|
Credit Quality Indicators. Key credit quality indicators for mortgage loans include the migration of past due loans, non-accrual loans, and loans in process of foreclosure. The table below summarizes the FHLBank's key credit quality indicators for mortgage loans.
Table 9.4 - Recorded Investment in Delinquent Mortgage Loans (dollars in thousands)
|
| | | | | | | | | | | |
| June 30, 2014 |
| Conventional MPP Loans | | FHA Loans | | Total |
Past due 30-59 days delinquent | $ | 36,995 |
| | $ | 39,237 |
| | $ | 76,232 |
|
Past due 60-89 days delinquent | 10,427 |
| | 12,217 |
| | 22,644 |
|
Past due 90 days or more delinquent | 48,550 |
| | 28,259 |
| | 76,809 |
|
Total past due | 95,972 |
| | 79,713 |
| | 175,685 |
|
Total current mortgage loans | 5,947,991 |
| | 602,025 |
| | 6,550,016 |
|
Total mortgage loans | $ | 6,043,963 |
| | $ | 681,738 |
| | $ | 6,725,701 |
|
Other delinquency statistics: | | | | | |
In process of foreclosure, included above (1) | $ | 40,528 |
| | $ | 16,894 |
| | $ | 57,422 |
|
Serious delinquency rate (2) | 0.82 | % | | 4.19 | % | | 1.17 | % |
Past due 90 days or more still accruing interest (3) | $ | 47,869 |
| | $ | 28,259 |
| | $ | 76,128 |
|
Loans on non-accrual status, included above | $ | 2,778 |
| | $ | — |
| | $ | 2,778 |
|
| | | | | |
| December 31, 2013 |
| Conventional MPP Loans | | FHA Loans | | Total |
Past due 30-59 days delinquent | $ | 48,619 |
| | $ | 53,305 |
| | $ | 101,924 |
|
Past due 60-89 days delinquent | 11,971 |
| | 18,963 |
| | 30,934 |
|
Past due 90 days or more delinquent | 57,934 |
| | 32,942 |
| | 90,876 |
|
Total past due | 118,524 |
| | 105,210 |
| | 223,734 |
|
Total current mortgage loans | 5,971,911 |
| | 654,399 |
| | 6,626,310 |
|
Total mortgage loans | $ | 6,090,435 |
| | $ | 759,609 |
| | $ | 6,850,044 |
|
Other delinquency statistics: | | | | | |
In process of foreclosure, included above (1) | $ | 46,285 |
| | $ | 18,595 |
| | $ | 64,880 |
|
Serious delinquency rate (2) | 0.96 | % | | 4.41 | % | | 1.34 | % |
Past due 90 days or more still accruing interest (3) | $ | 57,543 |
| | $ | 32,942 |
| | $ | 90,485 |
|
Loans on non-accrual status, included above | $ | 3,077 |
| | $ | — |
| | $ | 3,077 |
|
| |
(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 FHLBank did not have any real estate owned at June 30, 2014 or December 31, 2013.
Troubled Debt Restructurings. A troubled debt restructuring is considered to have occurred when a concession is granted to a borrower for economic or legal reasons related to the borrower's financial difficulties and that concession would not have been considered otherwise. The FHLBank's troubled debt restructurings primarily involve loans where an agreement permits the recapitalization of past due amounts up to the original loan amount and certain loans discharged in Chapter 7 bankruptcy. The FHLBank had 46 and 42 modified loans considered troubled debt restructurings at June 30, 2014 and December 31, 2013, respectively.
A loan considered a troubled debt restructuring is individually evaluated for impairment when determining its related allowance for credit losses. Credit loss is measured by factoring in expected cash shortfalls (i.e., loss severity rate) incurred as of the reporting date.
Table 9.5 - Recorded Investment in Troubled Debt Restructurings (in thousands)
|
| | | | | | | |
Troubled debt restructurings: | June 30, 2014 | | December 31, 2013 |
Conventional MPP Loans | $ | 8,055 |
| | $ | 7,799 |
|
Due to the minimal change in terms of modified loans (i.e., no principal forgiven), the FHLBank's pre-modification recorded investment was not materially different than the post-modification recorded investment in troubled debt restructurings.
Certain conventional MPP loans that were modified within the previous 12 months and considered troubled debt restructurings experienced a payment default as noted in the table below. A borrower is considered to have defaulted on a troubled debt restructuring if the borrower's contractually due principal or interest is 60 days or more past due at any time during the periods presented.
Table 9.6 - Recorded Investment of Financing Receivables Modified within the Previous 12 Months and Considered Troubled Debt Restructurings that Subsequently Defaulted (in thousands)
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
Defaulted troubled debt restructurings: | | | | | | | |
Conventional MPP Loans | $ | 554 |
| | $ | — |
| | $ | 554 |
| | $ | — |
|
Modified loans that subsequently default may recognize a higher probability of loss when calculating the allowance for credit losses.
Individually Evaluated Impaired Loans. At June 30, 2014 and December 31, 2013, only certain conventional MPP loans individually evaluated for impairment required an allowance for credit losses. Table 9.7 presents the recorded investment, unpaid principal balance, and related allowance associated with these loans.
Table 9.7 - Individually Evaluated Impaired Loan Statistics by Product Class Level (in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2014 | | December 31, 2013 |
Conventional MPP loans: | Recorded Investment | | Unpaid Principal Balance | | Related Allowance | | Recorded Investment | | Unpaid Principal Balance | | Related Allowance |
With no related allowance | $ | 5,277 |
| | $ | 5,159 |
| | $ | — |
| | $ | 4,959 |
| | $ | 4,828 |
| | $ | — |
|
With an allowance | 2,778 |
| | 2,744 |
| | 126 |
| | 2,840 |
| | 2,801 |
| | 74 |
|
Total | $ | 8,055 |
| | $ | 7,903 |
| | $ | 126 |
| | $ | 7,799 |
| | $ | 7,629 |
| | $ | 74 |
|
Table 9.8 - Average Recorded Investment of Individually Evaluated Impaired Loans and Related Interest Income Recognized (in thousands)
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, |
| 2014 | | 2013 |
Individually impaired loans: | Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized |
Conventional MPP Loans | $ | 7,969 |
| | $ | 104 |
| | $ | 6,709 |
| | $ | 90 |
|
| | | | | | | |
| Six Months Ended June 30, |
| 2014 | | 2013 |
Individually impaired loans: | Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized |
Conventional MPP Loans | $ | 7,839 |
| | $ | 204 |
| | $ | 6,281 |
| | $ | 168 |
|
Note 10 - Derivatives and Hedging Activities
Nature of Business Activity
The FHLBank is exposed to interest rate risk primarily from the effect of interest rate changes on its interest-earning assets and on the funding sources that finance these assets. The goal of the FHLBank'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 FHLBank 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 FHLBank monitors the risk to its interest income, net interest margin and average maturity of interest-earning assets and funding sources.
The FHLBank transacts most of its derivatives with large banks and major broker-dealers. Some of these banks and broker-dealers or their affiliates buy, sell, and distribute Consolidated Obligations. Derivative transactions may be either executed with a counterparty (bilateral 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 Clearinghouse notifies the clearing agent of the required initial and variation margin and the clearing agent notifies the FHLBank of the required initial and variation margin.
Consistent with Finance Agency Regulations, the FHLBank enters into derivatives to manage the interest rate risk exposures inherent in otherwise unhedged assets and funding positions, to achieve the FHLBank's risk management objectives and to act as an intermediary between its members and counterparties. The use of derivatives is an integral part of the FHLBank's financial management strategy. However, Finance Agency Regulations and the FHLBank'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 FHLBank uses derivatives are to:
| |
▪ | reduce the interest rate sensitivity and repricing gaps of assets and liabilities; |
| |
▪ | manage embedded options in assets and liabilities; |
| |
▪ | reduce funding costs by combining a derivative with a Consolidated Obligation Bond, as the cost of a combined funding structure can be lower than the cost of a comparable Consolidated Obligation Bond; |
| |
▪ | preserve a favorable interest rate spread between the yield of an asset (e.g., an Advance) and the cost of the related liability (e.g., the Consolidated Obligation Bond used to fund the Advance); without the use of derivatives, this interest rate spread could be reduced or eliminated when a change in the interest rate on the Advance does not match a change in the interest rate on the Bond; and |
| |
▪ | protect the value of existing asset or liability positions. |
Types of Derivatives
The FHLBank may enter into interest rate swaps (including callable and putable swaps), swaptions, interest rate cap and floor agreements, calls, puts, futures, and forward contracts to manage its exposure to changes in interest rates.
An interest rate swap is an agreement between two entities to exchange cash flows in the future. The agreement sets the dates on which the cash flows will be paid and the manner in which the cash flows will be calculated. One of the simplest forms of an interest rate swap involves the promise by one party to pay cash flows equivalent to the interest on a notional principal amount at a predetermined fixed rate for a given period of time. In return for this promise, this party receives cash flows equivalent to the interest on the same notional principal amount at a variable-rate index for the same period of time. The variable-rate transacted by the FHLBank in its derivatives is the London Interbank Offered Rate (LIBOR).
Application of Interest Rate Swaps
The FHLBank generally uses derivatives as fair value hedges of underlying financial instruments. However, because the FHLBank uses interest rate swaps when they are considered to be the most cost-effective alternative to achieve the FHLBank's financial and risk management objectives, it may enter into interest rate swaps that do not necessarily qualify for hedge accounting (economic hedges). The FHLBank re-evaluates its hedging strategies from time to time and may change the hedging techniques it uses or adopt new strategies.
Types of Hedged Items
The FHLBank documents at inception all relationships between derivatives designated as hedging instruments and the hedged items, its risk management objectives and strategies for undertaking various hedge transactions, and its method of assessing effectiveness. This process includes linking all derivatives that are designated as fair value hedges to assets and liabilities on the Statements of Condition. The FHLBank also formally assesses (both 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 FHLBank currently uses regression analyses to assess the effectiveness of its hedges. The types of assets and liabilities currently hedged with derivatives are:
| |
▪ | Consolidated Obligations |
Financial Statement Effect and Additional Financial Information
The notional amount of derivatives serves as a factor in determining periodic interest payments or cash flows received and paid. The notional amount reflects the FHLBanks' involvement in the various classes of financial instruments and represents neither the actual amounts exchanged nor the overall exposure of the FHLBank 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 derivatives, the items being hedged and any offsets between the derivatives and the items being hedged.
Table 10.1 summarizes the fair value of derivative instruments, including the effect of netting adjustments and cash collateral. For purposes of this disclosure, the derivative values include the fair value of derivatives and the related accrued interest.
Table 10.1 - Fair Value of Derivative Instruments (in thousands)
|
| | | | | | | | | | | |
| June 30, 2014 |
| Notional Amount of Derivatives | | Derivative Assets | | Derivative Liabilities |
Derivatives designated as fair value hedging instruments: | | | | | |
Interest rate swaps | $ | 3,987,415 |
| | $ | 27,066 |
| | $ | 183,504 |
|
Derivatives not designated as hedging instruments: | | | | | |
Interest rate swaps | 2,908,000 |
| | 1,224 |
| | 6,854 |
|
Forward rate agreements | 321,000 |
| | 20 |
| | 2,986 |
|
Mortgage delivery commitments | 429,399 |
| | 3,813 |
| | 47 |
|
Total derivatives not designated as hedging instruments | 3,658,399 |
| | 5,057 |
| | 9,887 |
|
Total derivatives before netting and collateral adjustments | $ | 7,645,814 |
| | 32,123 |
| | 193,391 |
|
Netting adjustments | | | (28,323 | ) | | (28,323 | ) |
Cash collateral and related accrued interest | | | 1,589 |
| | (92,745 | ) |
Total collateral and netting adjustments (1) | | | (26,734 | ) | | (121,068 | ) |
Total derivative assets and total derivative liabilities | | | $ | 5,389 |
| | $ | 72,323 |
|
| | | | | |
| December 31, 2013 |
| Notional Amount of Derivatives | | Derivative Assets | | Derivative Liabilities |
Derivatives designated as fair value hedging instruments: | | | | | |
Interest rate swaps | $ | 4,517,340 |
| | $ | 36,061 |
| | $ | 215,691 |
|
Derivatives not designated as hedging instruments: | | | | | |
Interest rate swaps | 4,143,000 |
| | 2,928 |
| | 7,732 |
|
Forward rate agreements | 31,000 |
| | 454 |
| | — |
|
Mortgage delivery commitments | 36,620 |
| | 2 |
| | 412 |
|
Total derivatives not designated as hedging instruments | 4,210,620 |
| | 3,384 |
| | 8,144 |
|
Total derivatives before netting and collateral adjustments | $ | 8,727,960 |
| | 39,445 |
| | 223,835 |
|
Netting adjustments | | | (36,204 | ) | | (36,204 | ) |
Cash collateral and related accrued interest | | | — |
| | (89,865 | ) |
Total collateral and netting adjustments (1) | | | (36,204 | ) | | (126,069 | ) |
Total derivative assets and total derivative liabilities | | | $ | 3,241 |
| | $ | 97,766 |
|
| |
(1) | Amounts represent the application of the netting requirements that allow the FHLBank to settle positive and negative positions and also cash collateral and related accrued interest held or placed by the FHLBank with the same counterparty. |
Table 10.2 presents the components of net gains (losses) on derivatives and hedging activities as presented in the Statements of Income.
Table 10.2 - Net Gains (Losses) on Derivatives and Hedging Activities (in thousands)
|
| | | | | | | |
| Three Months Ended June 30, |
| 2014 | | 2013 |
Derivatives and hedged items in fair value hedging relationships: | | | |
Interest rate swaps | $ | 869 |
| | $ | 2,015 |
|
Derivatives not designated as hedging instruments: | | | |
Economic hedges: | | | |
Interest rate swaps | 851 |
| | 1,815 |
|
Forward rate agreements | (5,585 | ) | | — |
|
Net interest settlements | (319 | ) | | (243 | ) |
Mortgage delivery commitments | 7,516 |
| | (5,044 | ) |
Total net gains (losses) related to derivatives not designated as hedging instruments | 2,463 |
| | (3,472 | ) |
Net gains (losses) on derivatives and hedging activities | $ | 3,332 |
| | $ | (1,457 | ) |
| | | |
| Six Months Ended June 30, |
| 2014 | | 2013 |
Derivatives and hedged items in fair value hedging relationships: | | | |
Interest rate swaps | $ | 1,153 |
| | $ | 4,937 |
|
Derivatives not designated as hedging instruments: | | | |
Economic hedges: | | | |
Interest rate swaps | 1,008 |
| | 6,046 |
|
Forward rate agreements | (6,081 | ) | | — |
|
Net interest settlements | (70 | ) | | 170 |
|
Mortgage delivery commitments | 6,239 |
| | (8,265 | ) |
Total net gains (losses) related to derivatives not designated as hedging instruments | 1,096 |
| | (2,049 | ) |
Net gains on derivatives and hedging activities | $ | 2,249 |
| | $ | 2,888 |
|
Table 10.3 presents by type of hedged item, the gains (losses) on derivatives and the related hedged items in fair value hedging relationships and the impact of those derivatives on the FHLBank's net interest income.
Table 10.3 - Effect of Fair Value Hedge Related Derivative Instruments (in thousands)
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, |
2014 | 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 | $ | 11,611 |
| | $ | (11,108 | ) | | $ | 503 |
| | $ | (23,902 | ) |
Consolidated Bonds | (3,278 | ) | | 3,644 |
| | 366 |
| | 4,629 |
|
Total | $ | 8,333 |
| | $ | (7,464 | ) | | $ | 869 |
| | $ | (19,273 | ) |
2013 | | | | | | | |
Hedged Item Type: | | | | | | | |
Advances | $ | 68,359 |
| | $ | (66,374 | ) | | $ | 1,985 |
| | $ | (28,336 | ) |
Consolidated Bonds | (9,407 | ) | | 9,437 |
| | 30 |
| | 7,522 |
|
Total | $ | 58,952 |
| | $ | (56,937 | ) | | $ | 2,015 |
| | $ | (20,814 | ) |
| | | | | | | |
| | | | | | | |
| Six Months Ended June 30, |
2014 | 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 | $ | 30,327 |
| | $ | (29,572 | ) | | $ | 755 |
| | $ | (48,270 | ) |
Consolidated Bonds | (7,387 | ) | | 7,785 |
| | 398 |
| | 9,481 |
|
Total | $ | 22,940 |
| | $ | (21,787 | ) | | $ | 1,153 |
| | $ | (38,789 | ) |
2013 | | | | | | | |
Hedged Item Type: | | | | | | | |
Advances | $ | 108,779 |
| | $ | (104,157 | ) | | $ | 4,622 |
| | $ | (57,088 | ) |
Consolidated Bonds | (18,054 | ) | | 18,369 |
| | 315 |
| | 16,010 |
|
Total | $ | 90,725 |
| | $ | (85,788 | ) | | $ | 4,937 |
| | $ | (41,078 | ) |
| |
(1) | The net interest on derivatives in fair value hedge relationships is included in the interest income/expense line item of the respective hedged item. |
Offsetting of Derivative Assets and Derivative Liabilities
The FHLBank presents derivative instruments, related cash collateral, including initial and variation margin, received or pledged, and associated accrued interest, on a net basis by clearing agent and/or by counterparty when it has met the netting requirements.
Table 10.4 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 June 30, 2014 and December 31, 2013, the FHLBank did not receive or pledge any non-cash collateral. Any overcollateralization under an individual clearing agent and/or counterparty level is not included in the determination of the net unsecured amount.
Table 10.4 - Offsetting of Derivative Assets and Derivative Liabilities (in thousands) |
| | | | | | | |
| June 30, 2014 |
| Derivative Assets | | Derivative Liabilities |
Derivative instruments meeting netting requirements: | | | |
Gross recognized amount: | | | |
Bilateral derivatives | $ | 28,064 |
| | $ | 189,860 |
|
Cleared derivatives | 226 |
| | 498 |
|
Total gross recognized amount | 28,290 |
| | 190,358 |
|
Gross amounts of netting adjustments and cash collateral: | | | |
Bilateral derivatives | (27,826 | ) | | (120,570 | ) |
Cleared derivatives | 1,092 |
| | (498 | ) |
Total gross amounts of netting adjustments and cash collateral | (26,734 | ) | | (121,068 | ) |
Net amounts after netting adjustments and cash collateral: | | | |
Bilateral derivatives | 238 |
| | 69,290 |
|
Cleared derivatives | 1,318 |
| | — |
|
Total net amounts after netting adjustments and cash collateral | 1,556 |
| | 69,290 |
|
Derivative instruments not meeting netting requirements(1): | | | |
Bilateral derivatives | 3,833 |
| | 3,033 |
|
Total derivative instruments not meeting netting requirements(1) | 3,833 |
| | 3,033 |
|
Total derivative assets and total derivative liabilities: | | | |
Bilateral derivatives | 4,071 |
| | 72,323 |
|
Cleared derivatives | 1,318 |
| | — |
|
Total derivative assets and total derivative liabilities | $ | 5,389 |
| | $ | 72,323 |
|
| | | |
| December 31, 2013 |
| Derivative Assets | | Derivative Liabilities |
Derivative instruments meeting netting requirements: | | | |
Gross recognized amount | $ | 38,989 |
| | $ | 223,423 |
|
Gross amounts of netting adjustments and cash collateral | (36,204 | ) | | (126,069 | ) |
Net amounts after netting adjustments and cash collateral | 2,785 |
| | 97,354 |
|
Derivative instruments not meeting netting requirements(1) | 456 |
| | 412 |
|
Total derivative assets and total derivative liabilities | $ | 3,241 |
| | $ | 97,766 |
|
| |
(1) | Represents mortgage delivery commitments and forward rate agreements that are not subject to an enforceable netting agreement. |
Managing Credit Risk on Derivatives
The FHLBank is subject to credit risk due to the risk of nonperformance 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 bilateral 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 FHLBank requires collateral agreements with collateral delivery thresholds on the majority of its bilateral derivatives.
For cleared derivatives, the Clearinghouse is the FHLBank's counterparty. The requirement that the FHLBank post initial and variation margin through the clearing agent, to the Clearinghouse, exposes the FHLBank to credit risk if the clearing agent or the Clearinghouse fails to meet its obligations. The use of cleared derivatives is intended to mitigate credit risk exposure because a central counterparty is substituted for individual counterparties and collateral is posted daily through a clearing agent, for changes in the value of cleared derivatives.
The FHLBank has analyzed the enforceability of offsetting rights incorporated in its cleared derivative transactions and determined that the exercise of those offsetting rights by a non-defaulting party under these transactions should be upheld under applicable law upon an event of default including bankruptcy, insolvency, or similar proceeding involving the Clearinghouse or the FHLBank's clearing agent, or both. Based on this analysis, the FHLBank presents a net derivative receivable or payable for all of its transactions through a particular clearing agent with a particular Clearinghouse.
Certain of the FHLBank's bilateral interest rate swap contracts contain provisions that require the FHLBank to post additional collateral with its counterparties if there is deterioration in the FHLBank's credit ratings. The aggregate fair value of all bilateral interest rate swaps with credit-risk-related contingent features that were in a liability position at June 30, 2014 was (in thousands) $162,035, for which the FHLBank had posted collateral with a fair value of (in thousands) $92,745 in the normal course of business.
If one of the FHLBank's credit ratings had been lowered to the next lower rating that would have triggered additional collateral to be delivered, the FHLBank would have been required to deliver up to an additional (in thousands) $13,157 of collateral at fair value to its derivatives counterparties at June 30, 2014.
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. The FHLBank was not required to post additional initial margin by its clearing agents at June 30, 2014.
Note 11 - Deposits
Table 11.1- Deposits (in thousands)
|
| | | | | | | |
| June 30, 2014 | | December 31, 2013 |
Interest bearing: | | | |
Demand and overnight | $ | 711,524 |
| | $ | 796,039 |
|
Term | 86,050 |
| | 96,100 |
|
Other | 5,954 |
| | 5,872 |
|
Total interest bearing | 803,528 |
| | 898,011 |
|
| | | |
Non-interest bearing: | | | |
Other | 250 |
| | 15,884 |
|
Total non-interest bearing | 250 |
| | 15,884 |
|
Total deposits | $ | 803,778 |
| | $ | 913,895 |
|
The average interest rate paid on interest bearing deposits was 0.03 percent in each of the three- and six-month periods ended June 30, 2014 and 2013.
The aggregate amount of time deposits with a denomination of $100 thousand or more was (in thousands) $86,000 and $96,000 as of June 30, 2014 and December 31, 2013, respectively.
Note 12 - Consolidated Obligations
Table 12.1 - Consolidated Bonds Outstanding by Contractual Maturity (dollars in thousands)
|
| | | | | | | | | | | | | | |
| | June 30, 2014 | | December 31, 2013 |
Year of Contractual Maturity | | Amount | | Weighted Average Interest Rate | | Amount | | Weighted Average Interest Rate |
Due in 1 year or less | | $ | 25,741,500 |
| | 0.36 | % | | $ | 35,691,500 |
| | 0.34 | % |
Due after 1 year through 2 years | | 13,674,000 |
| | 0.46 |
| | 2,802,000 |
| | 1.66 |
|
Due after 2 years through 3 years | | 3,518,000 |
| | 1.90 |
| | 3,295,000 |
| | 2.12 |
|
Due after 3 years through 4 years | | 4,392,000 |
| | 1.56 |
| | 3,689,000 |
| | 1.67 |
|
Due after 4 years through 5 years | | 3,000,000 |
| | 1.95 |
| | 3,415,000 |
| | 1.86 |
|
Thereafter | | 9,187,000 |
| | 2.68 |
| | 9,102,000 |
| | 2.66 |
|
Index amortizing notes | | 28,702 |
| | 5.07 |
| | 32,746 |
| | 5.07 |
|
Total par value | | 59,541,202 |
| | 1.00 |
| | 58,027,246 |
| | 1.04 |
|
Premiums | | 113,714 |
| | | | 123,820 |
| | |
Discounts | | (24,926 | ) | | | | (22,781 | ) | | |
Hedging adjustments | | 23,298 |
| | | | 31,084 |
| | |
Fair value option valuation adjustment and accrued interest | | 23 |
| | | | 3,370 |
| | |
Total | | $ | 59,653,311 |
| | | | $ | 58,162,739 |
| | |
Table 12.2 - Consolidated Discount Notes Outstanding (dollars in thousands)
|
| | | | | | | | | | |
| Book Value | | Par Value | | Weighted Average Interest Rate (1) |
June 30, 2014 | $ | 35,389,600 |
| | $ | 35,391,576 |
| | 0.06 | % |
December 31, 2013 | $ | 38,209,946 |
| | $ | 38,216,860 |
| | 0.09 | % |
| |
(1) | Represents an implied rate without consideration of concessions. |
Table 12.3 - Consolidated Bonds Outstanding by Features (in thousands)
|
| | | | | | | |
| June 30, 2014 | | December 31, 2013 |
Par value of Consolidated Bonds: | | | |
Non-callable | $ | 49,669,202 |
| | $ | 46,670,246 |
|
Callable | 9,872,000 |
| | 11,357,000 |
|
Total par value | $ | 59,541,202 |
| | $ | 58,027,246 |
|
Table 12.4 - Consolidated Bonds Outstanding by Contractual Maturity or Next Call Date (in thousands)
|
| | | | | | | | |
Year of Contractual Maturity or Next Call Date | | June 30, 2014 | | December 31, 2013 |
Due in 1 year or less | | $ | 32,013,500 |
| | $ | 41,493,500 |
|
Due after 1 year through 2 years | | 14,284,000 |
| | 3,827,000 |
|
Due after 2 years through 3 years | | 2,968,000 |
| | 2,915,000 |
|
Due after 3 years through 4 years | | 2,840,000 |
| | 2,427,000 |
|
Due after 4 years through 5 years | | 2,035,000 |
| | 2,095,000 |
|
Thereafter | | 5,372,000 |
| | 5,237,000 |
|
Index amortizing notes | | 28,702 |
| | 32,746 |
|
Total par value | | $ | 59,541,202 |
| | $ | 58,027,246 |
|
Table 12.5 - Consolidated Bonds by Interest-rate Payment Type (in thousands)
|
| | | | | | | |
| June 30, 2014 | | December 31, 2013 |
Par value of Consolidated Bonds: | | | |
Fixed-rate | $ | 28,601,202 |
| | $ | 29,362,246 |
|
Variable-rate | 30,910,000 |
| | 28,650,000 |
|
Step-up | 30,000 |
| | 15,000 |
|
Total par value | $ | 59,541,202 |
| | $ | 58,027,246 |
|
Concessions on Consolidated Obligations. Unamortized concessions included in other assets were (in thousands) $15,431 and $15,947 at June 30, 2014 and December 31, 2013. The amortization of these concessions is included in Consolidated Obligation interest expense and totaled (in thousands) $2,015 and $1,894 during the three months ended June 30, 2014 and 2013, respectively, and (in thousands) $3,804 and $3,627 during the six months ended June 30, 2014 and 2013, respectively.
Note 13 - Affordable Housing Program (AHP)
Table 13.1 - Analysis of the FHLBank's AHP Liability (in thousands)
|
| | | |
Balance at December 31, 2013 | $ | 93,789 |
|
Assessments (current year additions) | 13,351 |
|
Subsidy uses, net | (10,597 | ) |
Balance at June 30, 2014 | $ | 96,543 |
|
Note 14 - Capital
Table 14.1 - Capital Requirements (dollars in thousands)
|
| | | | | | | | | | | | | | | |
| June 30, 2014 | | December 31, 2013 |
| Minimum Requirement | | Actual | | Minimum Requirement | | Actual |
| | | | | | | |
Risk-based capital | $ | 491,095 |
| | $ | 4,973,928 |
| | $ | 547,455 |
| | $ | 5,435,002 |
|
Capital-to-assets ratio (regulatory) | 4.00 | % | | 4.91 | % | | 4.00 | % | | 5.27 | % |
Regulatory capital | $ | 4,050,339 |
| | $ | 4,973,928 |
| | $ | 4,127,228 |
| | $ | 5,435,002 |
|
Leverage capital-to-assets ratio (regulatory) | 5.00 | % | | 7.37 | % | | 5.00 | % | | 7.90 | % |
Leverage capital | $ | 5,062,924 |
| | $ | 7,460,892 |
| | $ | 5,159,035 |
| | $ | 8,152,503 |
|
Restricted Retained Earnings. At June 30, 2014 and December 31, 2013 the FHLBank had (in thousands) $134,404 and $110,843 in restricted retained earnings. These restricted retained earnings are not available to pay dividends but are available to absorb unexpected losses, if any, that the FHLBank may experience.
Table 14.2 - Mandatorily Redeemable Capital Stock Roll Forward (in thousands)
|
| | | |
Balance, December 31, 2013 | $ | 115,853 |
|
Capital stock subject to mandatory redemption reclassified from equity | 16,600 |
|
Redemption (or other reduction) of mandatorily redeemable capital stock | (20,181 | ) |
Balance, June 30, 2014 | $ | 112,272 |
|
Table 14.3 - Mandatorily Redeemable Capital Stock by Contractual Year of Redemption (in thousands)
|
| | | | | | | | |
Contractual Year of Redemption | | June 30, 2014 | | December 31, 2013 |
Due in 1 year or less | | $ | 107,530 |
| | $ | 114,531 |
|
Due after 1 year through 2 years | | — |
| | 130 |
|
Due after 2 years through 3 years | | — |
| | — |
|
Due after 3 years through 4 years | | — |
| | — |
|
Due after 4 years through 5 years | | 2,371 |
| | 71 |
|
Past contractual redemption date due to remaining activity(1) | | 2,371 |
| | 1,121 |
|
Total par value | | $ | 112,272 |
| | $ | 115,853 |
|
| |
(1) | Represents mandatorily redeemable capital stock that is past the end of the contractual redemption period because there is activity outstanding to which the mandatorily redeemable capital stock relates. |
Note 15 - Accumulated Other Comprehensive (Loss) Income
The following tables summarize the changes in accumulated other comprehensive (loss) income for the three and six months ended June 30, 2014 and 2013.
Table 15.1 - Accumulated Other Comprehensive (Loss) Income (in thousands)
|
| | | | | | | | | | | |
| Net unrealized gains (losses) on available-for-sale securities | | Pension and postretirement benefits | | Total accumulated other comprehensive (loss) income |
BALANCE, MARCH 31, 2013 | $ | 44 |
| | $ | (11,284 | ) | | $ | (11,240 | ) |
Other comprehensive income before reclassification: | | | | | |
Net unrealized losses | (39 | ) | | — |
| | (39 | ) |
Reclassifications from other comprehensive income to net income: | | | | | |
Amortization - pension and postretirement benefits | — |
| | 482 |
| | 482 |
|
Net current period other comprehensive income | (39 | ) | | 482 |
| | 443 |
|
BALANCE, JUNE 30, 2013 | $ | 5 |
| | $ | (10,802 | ) | | $ | (10,797 | ) |
| | | | | |
| | | | | |
BALANCE, MARCH 31, 2014 | $ | (160 | ) | | $ | (8,608 | ) | | $ | (8,768 | ) |
Other comprehensive income before reclassification: | | | | | |
Net unrealized gains | 141 |
| | — |
| | 141 |
|
Reclassifications from other comprehensive income to net income: | | | | | |
Amortization - pension and postretirement benefits | — |
| | 313 |
| | 313 |
|
Net current period other comprehensive income | 141 |
| | 313 |
| | 454 |
|
BALANCE, JUNE 30, 2014 | $ | (19 | ) | | $ | (8,295 | ) | | $ | (8,314 | ) |
|
| | | | | | | | | | | |
| Net unrealized gains (losses) 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 gains | 5 |
| | — |
| | 5 |
|
Reclassifications from other comprehensive income to net income: | | | | | |
Amortization - pension and postretirement benefits | — |
| | 932 |
| | 932 |
|
Net current period other comprehensive income | 5 |
| | 932 |
| | 937 |
|
BALANCE, JUNE 30, 2013 | $ | 5 |
| | $ | (10,802 | ) | | $ | (10,797 | ) |
| | | | | |
| | | | | |
BALANCE, DECEMBER 31, 2013 | $ | (121 | ) | | $ | (8,921 | ) | | $ | (9,042 | ) |
Other comprehensive income before reclassification: | | | | | |
Net unrealized gains | 102 |
| | — |
| | 102 |
|
Reclassifications from other comprehensive income to net income: | | | | | |
Amortization - pension and postretirement benefits | — |
| | 626 |
| | 626 |
|
Net current period other comprehensive income | 102 |
| | 626 |
| | 728 |
|
BALANCE, JUNE 30, 2014 | $ | (19 | ) | | $ | (8,295 | ) | | $ | (8,314 | ) |
Note 16 - Pension and Postretirement Benefit Plans
Qualified Defined Benefit Multi-employer Plan. The FHLBank participates in the Pentegra Defined Benefit Plan for Financial Institutions (Pentegra Defined Benefit Plan), a tax-qualified defined benefit pension 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 FHLBank who meet certain eligibility requirements. Contributions to the Pentegra Defined Benefit Plan charged to compensation and benefit expense were $1,529,000 and $1,229,000 in the three months ended June 30, 2014 and 2013, respectively and $3,058,000 and $2,458,000 in the six months ended June 30, 2014 and 2013.
Qualified Defined Contribution Plan. The FHLBank also participates in the Pentegra Defined Contribution Plan for Financial Institutions, a tax-qualified, defined contribution pension plan. The FHLBank 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 FHLBank contributed $184,000 and $172,000 in the three months ended June 30, 2014 and 2013, respectively, and $557,000, and $524,000 in the six months ended June 30, 2014 and 2013, respectively.
Nonqualified Supplemental Defined Benefit Retirement Plan. The FHLBank 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 FHLBank 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 FHLBank also sponsors a postretirement benefits plan that includes health care and life insurance benefits for eligible retirees. Future retirees are eligible for the postretirement benefits plan if they were hired prior to August 1, 1990, are age 55 or older, and their age plus years of continuous service at retirement are greater than or equal to 80. Spouses are covered subject to required contributions. There are no funded plan assets that have been designated to provide postretirement benefits.
Table 16.1 - Net Periodic Benefit Cost (in thousands)
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, |
| Defined Benefit Retirement Plan | | Postretirement Benefits Plan |
| 2014 | | 2013 | | 2014 | | 2013 |
Net Periodic Benefit Cost | | | | | | | |
Service cost | $ | 107 |
| | $ | 113 |
| | $ | 8 |
| | $ | 9 |
|
Interest cost | 273 |
| | 250 |
| | 30 |
| | 34 |
|
Amortization of net loss | 313 |
| | 450 |
| | — |
| | 32 |
|
Net periodic benefit cost | $ | 693 |
| | $ | 813 |
| | $ | 38 |
| | $ | 75 |
|
| | | | | | | |
| Six Months Ended June 30, |
| Defined Benefit Retirement Plan | | Postretirement Benefits Plan |
| 2014 | | 2013 | | 2014 | | 2013 |
Net Periodic Benefit Cost | | | | | | | |
Service cost | $ | 215 |
| | $ | 225 |
| | $ | 16 |
| | $ | 28 |
|
Interest cost | 546 |
| | 500 |
| | 57 |
| | 99 |
|
Amortization of net loss | 626 |
| | 900 |
| | — |
| | 32 |
|
Net periodic benefit cost | $ | 1,387 |
| | $ | 1,625 |
| | $ | 73 |
| | $ | 159 |
|
Note 17 - Segment Information
The FHLBank has identified two primary operating segments based on its method of internal reporting: Traditional Member Finance and the MPP. These segments reflect the FHLBank'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 FHLBank provides services to member stockholders.
Table 17.1 - Financial Performance by Operating Segment (in thousands)
|
| | | | | | | | | | | |
| Three Months Ended June 30, |
| Traditional Member Finance | | MPP | | Total |
2014 | | | | | |
Net interest income | $ | 58,884 |
| | $ | 18,050 |
| | $ | 76,934 |
|
Reversal for credit losses | — |
| | (900 | ) | | (900 | ) |
Net interest income after reversal for credit losses | 58,884 |
| | 18,950 |
| | 77,834 |
|
Other income | 4,391 |
| | 1,933 |
| | 6,324 |
|
Other expenses | 14,598 |
| | 2,087 |
| | 16,685 |
|
Income before assessments | 48,677 |
| | 18,796 |
| | 67,473 |
|
Affordable Housing Program assessments | 4,983 |
| | 1,880 |
| | 6,863 |
|
Net income | $ | 43,694 |
| | $ | 16,916 |
| | $ | 60,610 |
|
Average assets | $ | 94,796,053 |
| | $ | 6,696,021 |
| | $ | 101,492,074 |
|
Total assets | $ | 94,537,107 |
| | $ | 6,721,379 |
| | $ | 101,258,486 |
|
| | | | | |
2013 | | | | | |
Net interest income | $ | 55,766 |
| | $ | 23,347 |
| | $ | 79,113 |
|
Reversal for credit losses | — |
| | (4,000 | ) | | (4,000 | ) |
Net interest income after reversal for credit losses | 55,766 |
| | 27,347 |
| | 83,113 |
|
Other income (loss) | 6,511 |
| | (5,043 | ) | | 1,468 |
|
Other expenses | 13,588 |
| | 2,080 |
| | 15,668 |
|
Income before assessments | 48,689 |
| | 20,224 |
| | 68,913 |
|
Affordable Housing Program assessments | 5,011 |
| | 2,022 |
| | 7,033 |
|
Net income | $ | 43,678 |
| | $ | 18,202 |
| | $ | 61,880 |
|
Average assets | $ | 86,698,404 |
| | $ | 7,129,429 |
| | $ | 93,827,833 |
|
Total assets | $ | 88,309,400 |
| | $ | 7,010,196 |
| | $ | 95,319,596 |
|
|
| | | | | | | | | | | |
| Six Months Ended June 30, |
| Traditional Member Finance | | MPP | | Total |
2014 | | | | | |
Net interest income | $ | 116,065 |
| | $ | 37,883 |
| | $ | 153,948 |
|
Reversal for credit losses | — |
| | (900 | ) | | (900 | ) |
Net interest income after reversal for credit losses | 116,065 |
| | 38,783 |
| | 154,848 |
|
Other income | 9,908 |
| | 160 |
| | 10,068 |
|
Other expenses | 29,337 |
| | 4,424 |
| | 33,761 |
|
Income before assessments | 96,636 |
| | 34,519 |
| | 131,155 |
|
Affordable Housing Program assessments | 9,899 |
| | 3,452 |
| | 13,351 |
|
Net income | $ | 86,737 |
| | $ | 31,067 |
| | $ | 117,804 |
|
Average assets | $ | 95,103,409 |
| | $ | 6,738,740 |
| | $ | 101,842,149 |
|
Total assets | $ | 94,537,107 |
| | $ | 6,721,379 |
| | $ | 101,258,486 |
|
| | | | | |
2013 | | | | | |
Net interest income | $ | 104,371 |
| | $ | 50,299 |
| | $ | 154,670 |
|
Reversal for credit losses | — |
| | (6,500 | ) | | (6,500 | ) |
Net interest income after reversal for credit losses | 104,371 |
| | 56,799 |
| | 161,170 |
|
Other income (loss) | 17,436 |
| | (8,263 | ) | | 9,173 |
|
Other expenses | 26,499 |
| | 4,184 |
| | 30,683 |
|
Income before assessments | 95,308 |
| | 44,352 |
| | 139,660 |
|
Affordable Housing Program assessments | 9,835 |
| | 4,435 |
| | 14,270 |
|
Net income | $ | 85,473 |
| | $ | 39,917 |
| | $ | 125,390 |
|
Average assets | $ | 81,884,300 |
| | $ | 7,265,792 |
| | $ | 89,150,092 |
|
Total assets | $ | 88,309,400 |
| | $ | 7,010,196 |
| | $ | 95,319,596 |
|
Note 18 - 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 FHLBank using available market information and the FHLBank's best judgment of appropriate valuation methods. The fair values reflect the FHLBank's judgment of how a market participant would estimate the fair values.
Fair Value Hierarchy. The FHLBank records trading securities, available-for-sale securities, derivative assets, derivative liabilities and certain Consolidated Obligation Bonds at fair value on a recurring 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 FHLBank reviews the fair value hierarchy classifications on a quarterly basis. Changes in the observability of the valuation inputs may result in a reclassification of certain financial assets or liabilities. Such reclassifications are reported as transfers in/out at fair value as of the beginning of the quarter in which the changes occur. The FHLBank did not have any transfers of assets or liabilities recorded at fair value on a recurring basis during the six months ended June 30, 2014 or 2013.
Table 18.1 presents the carrying value, fair value, and fair value hierarchy of financial assets and liabilities of the FHLBank. These values do not represent an estimate of the overall market value of the FHLBank as a going concern, which would take into account future business opportunities and the net profitability of assets versus liabilities.
Table 18.1 - Fair Value Summary (in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2014 |
| | | Fair Value |
Financial Instruments | Carrying Value | | Total | | Level 1 | | Level 2 | | Level 3 | | Netting Adjustments and Cash Collateral (1) |
Assets: | | | | | | | | | | | |
Cash and due from banks | $ | 219,048 |
| | $ | 219,048 |
| | $ | 219,048 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Interest-bearing deposits | 218 |
| | 218 |
| | — |
| | 218 |
| | — |
| | — |
|
Securities purchased under resale agreements | 5,950,000 |
| | 5,950,000 |
| | — |
| | 5,950,000 |
| | — |
| | — |
|
Federal funds sold | 1,105,000 |
| | 1,105,000 |
| | — |
| | 1,105,000 |
| | — |
| | — |
|
Trading securities | 1,469 |
| | 1,469 |
| | — |
| | 1,469 |
| | — |
| | — |
|
Available-for-sale securities | 2,004,981 |
| | 2,004,981 |
| | — |
| | 2,004,981 |
| | — |
| | — |
|
Held-to-maturity securities | 15,672,940 |
| | 15,642,823 |
| | — |
| | 15,642,823 |
| | — |
| | — |
|
Advances | 69,485,413 |
| | 69,411,038 |
| | — |
| | 69,411,038 |
| | — |
| | — |
|
Mortgage loans held for portfolio, net | 6,696,258 |
| | 6,898,519 |
| | — |
| | 6,852,000 |
| | 46,519 |
| | — |
|
Accrued interest receivable | 82,057 |
| | 82,057 |
| | — |
| | 82,057 |
| | — |
| | — |
|
Derivative assets | 5,389 |
| | 5,389 |
| | — |
| | 32,123 |
| | — |
| | (26,734 | ) |
Liabilities: | | | | | | | | | | | |
Deposits | 803,778 |
| | 803,678 |
| | — |
| | 803,678 |
| | — |
| | — |
|
Consolidated Obligations: | | | | | | | | | | | |
Discount Notes | 35,389,600 |
| | 35,386,153 |
| | — |
| | 35,386,153 |
| | — |
| | — |
|
Bonds (2) | 59,653,311 |
| | 59,845,107 |
| | — |
| | 59,845,107 |
| | — |
| | — |
|
Mandatorily redeemable capital stock | 112,272 |
| | 112,272 |
| | 112,272 |
| | — |
| | — |
| | — |
|
Accrued interest payable | 118,032 |
| | 118,032 |
| | — |
| | 118,032 |
| | — |
| | — |
|
Derivative liabilities | 72,323 |
| | 72,323 |
| | — |
| | 193,391 |
| | — |
| | (121,068 | ) |
Other: | | | | | | | | | | | |
Commitments to extend credit for Advances | — |
| | 1 |
| | — |
| | 1 |
| | — |
| | — |
|
Standby bond purchase agreements | — |
| | 2,517 |
| | — |
| | 2,517 |
| | — |
| | — |
|
| |
(1) | Amounts represent the application of the netting requirements that allow the FHLBank to settle positive and negative positions and also cash collateral and related accrued interest held or placed by the FHLBank with the same counterparty. |
| |
(2) | Includes (in thousands) $2,780,023 of Consolidated Bonds recorded under the fair value option at June 30, 2014. |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2013 |
| | | Fair Value |
Financial Instruments | Carrying Value | | Total | | Level 1 | | Level 2 | | Level 3 | | Netting Adjustments and Cash Collateral (1) |
Assets: | | | | | | | | | | | |
Cash and due from banks | $ | 8,598,933 |
| | $ | 8,598,933 |
| | $ | 8,598,933 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Interest-bearing deposits | 166 |
| | 166 |
| | — |
| | 166 |
| | — |
| | — |
|
Securities purchased under resale agreements | 2,350,000 |
|
| 2,350,000 |
| | — |
| | 2,350,000 |
| | — |
| | — |
|
Federal funds sold | 1,740,000 |
| | 1,740,000 |
| | — |
| | 1,740,000 |
| | — |
| | — |
|
Trading securities | 1,578 |
| | 1,578 |
| | — |
| | 1,578 |
| | — |
| | — |
|
Available-for-sale securities | 2,184,879 |
| | 2,184,879 |
| | — |
| | 2,184,879 |
| | — |
| | — |
|
Held-to-maturity securities | 16,087,162 |
| | 15,808,397 |
| | — |
| | 15,808,397 |
| | — |
| | — |
|
Advances | 65,270,390 |
| | 65,065,523 |
| | — |
| | 65,065,523 |
| | — |
| | — |
|
Mortgage loans held for portfolio, net | 6,818,290 |
| | 6,827,406 |
| | — |
| | 6,774,514 |
| | 52,892 |
| | — |
|
Accrued interest receivable | 85,151 |
| | 85,151 |
| | — |
| | 85,151 |
| | — |
| | — |
|
Derivative assets | 3,241 |
| | 3,241 |
| | — |
| | 39,445 |
| | — |
| | (36,204 | ) |
Liabilities: | | | | | | | | | | | |
Deposits | 913,895 |
| | 913,799 |
| | — |
| | 913,799 |
| | — |
| | — |
|
Consolidated Obligations: | | | | | | | | | | | |
Discount Notes | 38,209,946 |
| | 38,200,971 |
| | — |
| | 38,200,971 |
| | — |
| | — |
|
Bonds (2) | 58,162,739 |
| | 58,075,025 |
| | — |
| | 58,075,025 |
| | — |
| | — |
|
Mandatorily redeemable capital stock | 115,853 |
| | 115,853 |
| | 115,853 |
| | — |
| | — |
| | — |
|
Accrued interest payable | 116,381 |
| | 116,381 |
| | — |
| | 116,381 |
| | — |
| | — |
|
Derivative liabilities | 97,766 |
| | 97,766 |
| | — |
| | 223,835 |
| | — |
| | (126,069 | ) |
Other: | | | | | | | | | | | |
Standby bond purchase agreements | — |
| | 3,715 |
| | — |
| | 3,715 |
| | — |
| | — |
|
| |
(1) | Amounts represent the application of the netting requirements that allow the FHLBank to settle positive and negative positions and also cash collateral and related accrued interest held or placed by the FHLBank with the same counterparty. |
| |
(2) | Includes (in thousands) $4,018,370 of Consolidated Bonds recorded under the fair value option at December 31, 2013. |
Summary of Valuation Methodologies and Primary Inputs.
A description of the valuation methodologies and primary inputs is disclosed in Note 19 - Fair Value Disclosures in the FHLBank's 2013 Form 10-K. Below is the valuation methodology that has been enhanced during 2014.
Consolidated Obligation Bonds:
The FHLBank determines the fair values of certain Consolidated Obligation Bonds by calculating the present value of scheduled future cash flows from the bonds excluding accrued interest. Inputs used to determine fair value of these Consolidated Obligation Bonds are the discount rates, which are estimated current market yields, as indicated by the Office of Finance, for bonds with similar current terms.
The FHLBank determines the fair values of other Consolidated Obligation Bonds based on pricing received from designated third-party pricing vendors. The pricing vendors used apply various proprietary models to price Consolidated Obligation Bonds. The inputs to those models are derived from various sources including, but not limited to, benchmark yields, reported trades, dealer estimates, issuer spreads, benchmark securities, bids, offers, and other market-related data. Since many Consolidated Obligation Bonds do not trade on a daily basis, the pricing vendors use available information, as applicable, such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing to determine the prices for
individual Consolidated Obligation Bonds. Each pricing vendor has an established challenge process in place for all valuations, which facilitates resolution of potentially erroneous prices identified by the FHLBank.
When pricing vendors are used, the FHLBank'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.
Four vendor prices were received for the FHLBank's Consolidated Obligation Bonds and the final prices for those bonds were computed by averaging the prices received. Based on the FHLBank'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 FHLBank 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 FHLBank 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.
Fair Value Measurements.
Table 18.2 presents the fair value of financial assets and liabilities, which are recorded on a recurring basis at June 30, 2014 or December 31, 2013, by level within the fair value hierarchy.
Table 18.2 - Fair Value Measurements (in thousands)
|
| | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements at June 30, 2014 |
| Total | | Level 1 | | Level 2 | | Level 3 | | Netting Adjustment and Cash Collateral (1) |
Recurring fair value measurements - Assets | | | | | | | | | |
Trading securities: | | | | | | | | | |
Other U.S. obligation residential mortgage-backed securities | $ | 1,469 |
| | $ | — |
| | $ | 1,469 |
| | $ | — |
| | $ | — |
|
Available-for-sale securities: | | | | | | | | | |
Certificates of deposit | 2,004,981 |
| | — |
| | 2,004,981 |
| | — |
| | — |
|
Derivative assets: | | | | | | | | | |
Interest rate swaps | 1,556 |
| | — |
| | 28,290 |
| | — |
| | (26,734 | ) |
Forward rate agreements | 20 |
| | — |
| | 20 |
| | — |
| | — |
|
Mortgage delivery commitments | 3,813 |
| | — |
| | 3,813 |
| | — |
| | — |
|
Total derivative assets | 5,389 |
| | — |
| | 32,123 |
| | — |
| | (26,734 | ) |
Total assets at fair value | $ | 2,011,839 |
| | $ | — |
| | $ | 2,038,573 |
| | $ | — |
| | $ | (26,734 | ) |
| | | | | | | | | |
Recurring fair value measurements - Liabilities | | | | | | | | | |
Consolidated Obligation Bonds (2) | $ | 2,780,023 |
| | $ | — |
| | $ | 2,780,023 |
| | $ | — |
| | $ | — |
|
Derivative liabilities: | | | | | | | | | |
Interest rate swaps | 69,290 |
| | — |
| | 190,358 |
| | — |
| | (121,068 | ) |
Forward rate agreement | 2,986 |
| | — |
| | 2,986 |
| | — |
| | — |
|
Mortgage delivery commitments | 47 |
| | — |
| | 47 |
| | — |
| | — |
|
Total derivative liabilities | 72,323 |
| | — |
| | 193,391 |
| | — |
| | (121,068 | ) |
Total liabilities at fair value | $ | 2,852,346 |
| | $ | — |
| | $ | 2,973,414 |
| | $ | — |
| | $ | (121,068 | ) |
| |
(1) | Amounts represent the application of the netting requirements that allow the FHLBank to settle positive and negative positions and also cash collateral and related accrued interest held or placed by the FHLBank with the same counterparty. |
| |
(2) | Represents Consolidated Obligation Bonds recorded under the fair value option. |
|
| | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements at December 31, 2013 |
| Total | | Level 1 | | Level 2 | | Level 3 | | Netting Adjustment and Cash Collateral (1) |
Recurring fair value measurements - Assets | | | | | | | | | |
Trading securities: | | | | | | | | | |
Other U.S. obligation residential mortgage-backed securities | $ | 1,578 |
| | $ | — |
| | $ | 1,578 |
| | $ | — |
| | $ | — |
|
Available-for-sale securities: | | | | | | | | | |
Certificates of deposit | 2,184,879 |
| | — |
| | 2,184,879 |
| | — |
| | — |
|
Derivative assets: | | | | | | | | | |
Interest rate swaps | 2,785 |
| | — |
| | 38,989 |
| | — |
| | (36,204 | ) |
Forward rate agreements | 454 |
| | — |
| | 454 |
| | — |
| | — |
|
Mortgage delivery commitments | 2 |
| | — |
| | 2 |
| | — |
| | — |
|
Total derivative assets | 3,241 |
| | — |
| | 39,445 |
| | — |
| | (36,204 | ) |
Total assets at fair value | $ | 2,189,698 |
| | $ | — |
| | $ | 2,225,902 |
| | $ | — |
| | $ | (36,204 | ) |
| | | | | | | | | |
Recurring fair value measurements - Liabilities | | | | | | | | | |
Consolidated Obligation Bonds (2) | $ | 4,018,370 |
| | $ | — |
| | $ | 4,018,370 |
| | $ | — |
| | $ | — |
|
Derivative liabilities: | | | | | | | | | |
Interest rate swaps | 97,354 |
| | — |
| | 223,423 |
| | — |
| | (126,069 | ) |
Mortgage delivery commitments | 412 |
| | — |
| | 412 |
| | — |
| | — |
|
Total derivative liabilities | 97,766 |
| | — |
| | 223,835 |
| | — |
| | (126,069 | ) |
Total liabilities at fair value | $ | 4,116,136 |
| | $ | — |
| | $ | 4,242,205 |
| | $ | — |
| | $ | (126,069 | ) |
| |
(1) | Amounts represent the application of the netting requirements that allow the FHLBank to settle positive and negative positions and also cash collateral and related accrued interest held or placed by the FHLBank with the same counterparty. |
| |
(2) | Represents Consolidated Obligation Bonds recorded under the fair value option. |
Fair Value Option. The fair value option provides an irrevocable option to elect fair value as an alternative measurement for selected financial assets, financial liabilities, unrecognized firm commitments, and written loan commitments not previously carried at fair value. It requires a company to display the fair value of those assets and liabilities for which it has chosen to use fair value on the face of the Statements of Condition. Fair value is used for both the initial and subsequent measurement of the designated assets, liabilities and commitments, with the changes in fair value recognized in net income. If elected, interest income and interest expense on Advances and Consolidated Bonds carried at fair value are recognized based solely on the contractual amount of interest due or unpaid and any transaction fees or costs are immediately recognized into other non-interest income or other non-interest expense. Additionally, concessions paid on Consolidated Obligations designated under the fair value option are expensed as incurred in other non-interest expense.
The FHLBank has elected the fair value option for certain Consolidated Obligation Bond transactions. The FHLBank elected the fair value option for these transactions so as to mitigate the income statement volatility that can arise when only the corresponding derivatives are marked at fair value in transactions that do not, or may not, meet hedge effectiveness requirements or otherwise qualify for hedge accounting (i.e., economic hedging transactions).
Table 18.3 – Fair Value Option Financial Liabilities (in thousands)
|
| | | | | | | |
| Three Months Ended June 30, |
| 2014 | | 2013 |
| Consolidated Bonds | | Consolidated Bonds |
Balance at beginning of period | $ | (2,265,459 | ) | | $ | (2,002,068 | ) |
New transactions elected for fair value option | (1,515,000 | ) | | — |
|
Maturities and terminations | 1,000,000 |
| | 1,900,000 |
|
Net (losses) gains on instruments held under fair value option | (80 | ) | | 355 |
|
Change in accrued interest | 516 |
| | 1,604 |
|
Balance at end of period | $ | (2,780,023 | ) | | $ | (100,109 | ) |
| | | |
| Six Months Ended June 30, |
| 2014 | | 2013 |
| Consolidated Bonds | | Consolidated Bonds |
Balance at beginning of period | $ | (4,018,370 | ) | | $ | (3,402,366 | ) |
New transactions elected for fair value option | (2,765,000 | ) | | — |
|
Maturities and terminations | 4,000,000 |
| | 3,300,000 |
|
Net gains on instruments held under fair value option | 1,280 |
| | 887 |
|
Change in accrued interest | 2,067 |
| | 1,370 |
|
Balance at end of period | $ | (2,780,023 | ) | | $ | (100,109 | ) |
Table 18.4 – Changes in Fair Values for Items Measured at Fair Value Pursuant to the Election of the Fair Value Option (in thousands)
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
| Consolidated Bonds | | Consolidated Bonds | | Consolidated Bonds | | Consolidated Bonds |
Interest expense | $ | (841 | ) | | $ | (701 | ) | | $ | (2,439 | ) | | $ | (2,060 | ) |
Net (losses) gains on changes in fair value under fair value option | (80 | ) | | 355 |
| | 1,280 |
| | 887 |
|
Total changes in fair value included in current period earnings | $ | (921 | ) | | $ | (346 | ) | | $ | (1,159 | ) | | $ | (1,173 | ) |
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 Consolidated Obligation Bonds held under fair value option” in the Statements of Income. The FHLBank has determined that no adjustments to the fair values of its instruments recorded under the fair value option for instrument-specific credit risk were necessary as of June 30, 2014 or December 31, 2013.
The following table reflects the difference between the aggregate unpaid principal balance outstanding and the aggregate fair value for Consolidated Bonds for which the fair value option has been elected.
Table 18.5 – Aggregate Unpaid Balance and Aggregate Fair Value (in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2014 | | December 31, 2013 |
| 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 |
Consolidated Bonds | $ | 2,780,000 |
| | $ | 2,780,023 |
| | $ | 23 |
| | $ | 4,015,000 |
| | $ | 4,018,370 |
| | $ | 3,370 |
|
Note 19 - Commitments and Contingencies
Table 19.1 - Off-Balance Sheet Commitments (in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2014 | | December 31, 2013 |
Notional Amount | Expire within one year | | Expire after one year | | Total | | Expire within one year | | Expire after one year | | Total |
Standby Letters of Credit outstanding | $ | 14,981,000 |
| | $ | 581,569 |
| | $ | 15,562,569 |
| | $ | 13,317,887 |
| | $ | 154,086 |
| | $ | 13,471,973 |
|
Commitments for standby bond purchases | 38,480 |
| | 215,265 |
| | 253,745 |
| | 10,960 |
| | 273,025 |
| | 283,985 |
|
Commitments to fund additional Advances | 3,000 |
| | — |
| | 3,000 |
| | — |
| | — |
| | — |
|
Commitments to purchase mortgage loans | 429,399 |
| | — |
| | 429,399 |
| | 36,620 |
| | — |
| | 36,620 |
|
Unsettled Consolidated Bonds, at par (1) | — |
| | — |
| | — |
| | 240,000 |
| | — |
| | 240,000 |
|
Unsettled Consolidated Discount Notes, at par (1) | 5,000 |
| | — |
| | 5,000 |
| | 1,122,298 |
| | — |
| | 1,122,298 |
|
| |
(1) | Expiration is based on settlement period rather than underlying contractual maturity of Consolidated Obligations. |
Legal Proceedings. From time to time, the FHLBank is subject to legal proceedings arising in the normal course of business. In March 2010, the FHLBank was advised by representatives of the Lehman Brothers Holdings, Inc. bankruptcy estate that they believed that the FHLBank had been unjustly enriched in connection with the close out of its interest rate swap transactions with Lehman at the time of the Lehman bankruptcy in 2008 and that the bankruptcy estate was entitled to the $43 million difference between the settlement amount the FHLBank paid Lehman in connection with the close-out transactions and the market value payment the FHLBank received when replacing the swaps with other counterparties. In May 2010, the FHLBank received a Derivatives Alternative Dispute Resolution notice from the Lehman bankruptcy estate with a settlement demand of $65.8 million, plus interest accruing primarily at LIBOR plus 14.5 percent since the bankruptcy filing, based on their view of how the settlement amount should have been calculated. In accordance with the Alternative Dispute Resolution Order of the Bankruptcy Court administering the Lehman estate, senior management of the FHLBank participated in a non-binding mediation in New York in August 2010, and counsel for the FHLBank continued discussions with the court-appointed mediator for several weeks thereafter. The mediation concluded in October 2010 without a settlement of the claims asserted by the Lehman bankruptcy estate. In April 2013 Lehman Brothers Special Financing Inc., through Lehman Brothers Holdings Inc. and the Plan Administrator under the Modified Third Amended Joint Chapter 11 Plan of Lehman Brothers Holdings Inc. and Its Affiliated Debtors, filed an adversary complaint in the United States Bankruptcy Court for the Southern District of New York against the FHLBank seeking (a) a declaratory judgment on the interpretation of certain provisions and the calculation of amounts due under the agreement governing the 2008 swap transactions described above, and (b) additional amounts alleged as due as part of the termination of such transactions. The FHLBank believes that it correctly calculated, and fully satisfied its obligation to Lehman in September 2008, and the FHLBank intends to vigorously defend itself.
The FHLBank also is subject to other legal proceedings arising in the normal course of business. After consultation with legal counsel, management does not anticipate that the ultimate liability, if any, arising out of these matters will have a material effect on the FHLBank's financial condition or results of operations.
Note 20 - Transactions with Other FHLBanks
The FHLBank notes all transactions with other FHLBanks on the face of its financial statements. Occasionally, the FHLBank 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 June 30, 2014 or December 31, 2013. The following table details the average daily balance of lending and borrowing between the FHLBank and other FHLBanks for the six months ended June 30, 2014 and 2013.
Table 20.1 - Lending and Borrowing Between the FHLBank and Other FHLBanks (in thousands)
|
| | | | | | | |
| Average Daily Balances for the Six Months Ended June 30, |
| 2014 | | 2013 |
Loans to other FHLBanks | $ | 166 |
| | $ | 4,779 |
|
Borrowings from other FHLBanks | — |
| | 8,287 |
|
The FHLBank 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 FHLBank is the primary obligor. The FHLBank then becomes the primary obligor on the transferred debt. There were no Consolidated Obligations transferred to the FHLBank during the six months ended June 30, 2014 or 2013. The FHLBank had no Consolidated Obligations transferred to other FHLBanks during these periods.
Note 21 - Transactions with Stockholders
Transactions with Directors' Financial Institutions. In the ordinary course of its business, the FHLBank may provide products and services to members whose officers or directors serve as directors of the FHLBank (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.
Table 21.1 - Transactions with Directors' Financial Institutions (dollars in millions)
|
| | | | | | | | | | | | | |
| June 30, 2014 | | December 31, 2013 |
| Balance | | % of Total (1) | | Balance | | % of Total (1) |
Advances | $ | 2,531 |
| | 3.7 | % | | $ | 1,611 |
| | 2.5 | % |
MPP | 136 |
| | 2.1 |
| | 57 |
| | 0.9 |
|
Mortgage-backed securities | — |
| | — |
| | — |
| | — |
|
Regulatory capital stock | 208 |
| | 4.8 |
| | 246 |
| | 5.1 |
|
Derivatives | — |
| | — |
| | — |
| | — |
|
| |
(1) | Percentage of total principal (Advances), unpaid principal balance (MPP), principal balance (mortgage-backed securities), regulatory capital stock, and notional balances (derivatives). |
Concentrations. The following table shows regulatory capital stock balances, outstanding Advance principal balances, and unpaid principal balances of mortgage loans held for portfolio at the dates indicated to stockholders holding five percent or more of regulatory capital stock and include any known affiliates that are members of the FHLBank.
Table 21.2 - Stockholders Holding Five Percent or more of Regulatory Capital Stock (dollars in millions)
|
| | | | | | | | | | | | | | |
| Regulatory Capital Stock | | Advance | | MPP Unpaid |
June 30, 2014 | Balance | | % of Total | | Principal | | Principal Balance |
JPMorgan Chase Bank, N.A. | $ | 1,533 |
| | 35 | % | | $ | 39,700 |
| | $ | — |
|
U.S. Bank, N.A. | 475 |
| | 11 |
| | 5,467 |
| | 42 |
|
Fifth Third Bank | 248 |
| | 6 |
| | 1,775 |
| | 4 |
|
Total | $ | 2,256 |
| | 52 | % | | $ | 46,942 |
| | $ | 46 |
|
|
| | | | | | | | | | | | | | |
| Regulatory Capital Stock | | Advance | | MPP Unpaid |
December 31, 2013 | Balance | | % of Total | | Principal | | Principal Balance |
JPMorgan Chase Bank, N.A. | $ | 1,533 |
| | 32 | % | | $ | 41,700 |
| | $ | — |
|
U.S. Bank, N.A. | 592 |
| | 12 |
| | 4,584 |
| | 45 |
|
Fifth Third Bank | 401 |
| | 8 |
| | 26 |
| | 4 |
|
Total | $ | 2,526 |
| | 52 | % | | $ | 46,310 |
| | $ | 49 |
|
Nonmember Affiliates. The FHLBank has relationships with three nonmember affiliates, the Kentucky Housing Corporation, the Ohio Housing Finance Agency and the Tennessee Housing Development Agency. The FHLBank had no investments in or borrowings to any of these nonmember affiliates at June 30, 2014 or December 31, 2013. The FHLBank has executed standby bond purchase agreements with one state housing authority whereby the FHLBank, 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. During the first six months of 2014 and 2013, the FHLBank was not required to purchase any bonds under these agreements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
This document contains forward-looking statements that describe the objectives, expectations, estimates, and assessments of the Federal Home Loan Bank of Cincinnati (FHLBank). 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 FHLBanks and other government-sponsored enterprises (GSEs), and/or investors in the Federal Home Loan Bank System's (FHLBank System) debt securities, which are called Consolidated Obligations or Obligations; |
| |
▪ | 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 ratings assigned to FHLBank System Obligations or our FHLBank that could raise our funding cost; |
| |
▪ | changes in investor demand for 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 and support technology and information systems that effectively manage the risks we face; |
| |
▪ | the risk of loss arising from failures or interruptions in our ongoing business operations, internal controls, information systems or other operating technologies; |
| |
▪ | 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.
EXECUTIVE OVERVIEW
The following table presents selected Statement of Condition data, Statement of Income data and financial ratios for the periods indicated.
|
| | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | June 30, 2014 | | March 31, 2014 | | December 31, 2013 | | September 30, 2013 | | June 30, 2013 |
STATEMENT OF CONDITION DATA AT QUARTER END: | | | | | | | | | |
Total assets | $ | 101,258 |
| | $ | 100,902 |
| | $ | 103,181 |
| | $ | 96,586 |
| | $ | 95,320 |
|
Advances | 69,485 |
| | 65,545 |
| | 65,270 |
| | 65,857 |
| | 65,093 |
|
Mortgage loans held for portfolio | 6,702 |
| | 6,698 |
| | 6,826 |
| | 6,835 |
| | 6,993 |
|
Allowance for credit losses on mortgage loans | 6 |
| | 7 |
| | 7 |
| | 7 |
| | 9 |
|
Investments (1) | 24,735 |
| | 28,418 |
| | 22,364 |
| | 22,642 |
| | 23,101 |
|
Consolidated Obligations, net: | | | | | | | | | |
Discount Notes | 35,390 |
| | 33,225 |
| | 38,210 |
| | 33,542 |
| | 38,926 |
|
Bonds | 59,653 |
| | 61,413 |
| | 58,163 |
| | 56,251 |
| | 49,521 |
|
Total Consolidated Obligations, net | 95,043 |
| | 94,638 |
| | 96,373 |
| | 89,793 |
| | 88,447 |
|
Mandatorily redeemable capital stock | 112 |
| | 115 |
| | 116 |
| | 121 |
| | 125 |
|
Capital: | | | | | | | | | |
Capital stock - putable | 4,215 |
| | 4,199 |
| | 4,698 |
| | 4,701 |
| | 4,690 |
|
Retained earnings | 647 |
| | 631 |
| | 621 |
| | 604 |
| | 582 |
|
Accumulated other comprehensive loss | (9 | ) | | (8 | ) | | (9 | ) | | (10 | ) | | (11 | ) |
Total capital | 4,853 |
| | 4,822 |
| | 5,310 |
| | 5,295 |
| | 5,261 |
|
| | | | | | | | | |
STATEMENT OF INCOME DATA FOR THE QUARTER: | | | | | | | | | |
Net interest income | $ | 77 |
| | $ | 77 |
| | $ | 82 |
| | $ | 91 |
| | $ | 79 |
|
Reversal for credit losses | (1 | ) | | — |
| | — |
| | (1 | ) | | (4 | ) |
Other income | 7 |
| | 4 |
| | 7 |
| | 4 |
| | 2 |
|
Other expenses | 17 |
| | 17 |
| | 18 |
| | 16 |
| | 16 |
|
Assessments | 7 |
| | 7 |
| | 7 |
| | 8 |
| | 7 |
|
Net income | $ | 61 |
| | $ | 57 |
| | $ | 64 |
| | $ | 72 |
| | $ | 62 |
|
FINANCIAL RATIOS: | | | | | | | | | |
Dividend payout ratio (2) | 73.37 | % | | 82.74 | % | | 73.94 | % | | 67.96 | % | | 69.98 | % |
Weighted average dividend rate (3) | 4.00 |
| | 4.00 |
| | 4.00 |
| | 4.25 |
| | 4.25 |
|
Return on average equity | 5.00 |
| | 4.51 |
| | 4.78 |
| | 5.37 |
| | 4.80 |
|
Return on average assets | 0.24 |
| | 0.23 |
| | 0.25 |
| | 0.30 |
| | 0.26 |
|
Net interest margin (4) | 0.30 |
| | 0.31 |
| | 0.33 |
| | 0.38 |
| | 0.34 |
|
Average equity to average assets | 4.79 |
| | 5.03 |
| | 5.29 |
| | 5.53 |
| | 5.51 |
|
Regulatory capital ratio (5) | 4.91 |
| | 4.90 |
| | 5.27 |
| | 5.62 |
| | 5.66 |
|
Operating expense to average assets | 0.050 |
| | 0.054 |
| | 0.055 |
| | 0.054 |
| | 0.051 |
|
| |
(1) | Investments include interest bearing deposits in banks, securities purchased under agreements to resell, Federal funds sold, trading securities, available-for-sale securities, and held-to-maturity securities. |
| |
(2) | Dividend payout ratio is dividends declared in the period as a percentage of net income. |
| |
(3) | Weighted average dividend rates are dividends paid in stock and cash divided by the average number of shares of capital stock eligible for dividends. |
| |
(4) | Net interest margin is net interest income before (reversal)/provision for credit losses as a percentage of average earning assets. |
| |
(5) | Regulatory capital ratio is period-end regulatory capital (capital stock, mandatorily redeemable capital stock and retained earnings) as a percentage of period-end total assets. |
Financial Condition
Mission Asset Activity
The following table summarizes our financial condition.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Ending Balances | | Average Balances |
| June 30, | | December 31, | | Six Months Ended June 30, | | Year Ended December 31, |
(In millions) | 2014 | | 2013 | | 2013 | | 2014 | | 2013 | | 2013 |
| | | | | | | | | | | |
Total Assets | $ | 101,258 |
| | $ | 95,320 |
| | $ | 103,181 |
| | $ | 101,842 |
| | $ | 89,150 |
| | $ | 93,691 |
|
Mission Asset Activity: | | | | | | | | | | | |
Advances (principal) | 69,336 |
| | 64,876 |
| | 65,093 |
| | 65,871 |
| | 58,572 |
| | 61,327 |
|
Mortgage Purchase Program (MPP): | | | | | | | | | | | |
Mortgage loans held for portfolio (principal) | 6,524 |
| | 6,806 |
| | 6,643 |
| | 6,541 |
| | 7,069 |
| | 6,881 |
|
Mandatory Delivery Contracts (notional) | 429 |
| | 102 |
| | 37 |
| | 187 |
| | 116 |
| | 254 |
|
Total MPP | 6,953 |
| | 6,908 |
| | 6,680 |
| | 6,728 |
| | 7,185 |
| | 7,135 |
|
Letters of Credit (notional) | 15,563 |
| | 13,839 |
| | 13,472 |
| | 14,070 |
| | 11,836 |
| | 12,560 |
|
Total Mission Asset Activity | $ | 91,852 |
| | $ | 85,623 |
| | $ | 85,245 |
| | $ | 86,669 |
| | $ | 77,593 |
| | $ | 81,022 |
|
In the first six months of 2014, the FHLBank fulfilled its mission by providing readily available and competitively priced wholesale funding to its member financial institutions, supporting its commitment to affordable housing, and paying stockholders a competitive dividend return on their capital investment. The vast majority of our members continued to have modest demand for new Advance borrowings due to measured economic growth and significant amounts of liquidity available to members as a result of the actions of the Federal Reserve System.
Total assets at June 30, 2014 decreased $1.9 billion (two percent) from year-end 2013. Average asset balances were $12.7 billion (14 percent) higher in the first six months of 2014 than the same period of 2013. The balance of Mission Asset Activity – comprising Advances, Letters of Credit, and total MPP – was $91.9 billion at June 30, 2014, an increase of $6.6 billion (eight percent) from year-end 2013. Mission Asset Activity on this date constituted 83 percent of adjusted Consolidated Obligations (which equal Obligations plus Letters of Credit and Mandatory Delivery Contracts), above the 80 percent internal benchmark we have established.
The growth in Mission Asset Activity from year-end 2013 to June 30, 2014 was led by a $4.2 billion (seven percent) increase in the principal balance of Advances primarily from several larger members. There was also a moderate broad-based increase in the number of members that grew their Advance balances in the first six months of 2014. Average Advance principal balances in the first six months of 2014 increased $7.3 billion (12 percent) from the first six months of 2013, primarily from expansion of lending to one larger member. As of June 30, 2014, members funded on average 3.3 percent of their assets with Advances, and the penetration rate was relatively stable over the last year with 65-70 percent of members holding Mission Asset Activity.
The principal balance of mortgage loans held for portfolio at June 30, 2014 fell $0.1 billion (two percent) from year-end 2013. The decline reflected principal paydowns and lack of purchase activity, especially from larger sellers, due to the stagnation in the refinancing market. During the first six months of 2014, we purchased $0.4 billion of mortgage loans, while principal paydowns totaled $0.5 billion. Residual credit risk exposure in the mortgage loan portfolio continued to be moderate and manageable. The allowance for credit losses in the MPP decreased to $6 million at June 30, 2014.
Based on earnings in the first two quarters of 2014, we contributed $13 million to the Affordable Housing Program pool of funds to be awarded to members in 2015. In addition, we continued our voluntary sponsorship of two other housing programs which provide resources to pay for accessibility rehabilitation and emergency repairs for special needs and elderly homeowners and to help members aid their communities following natural disasters.
Investments
The balance of investments at June 30, 2014 was $24.7 billion, an increase of $2.4 billion (11 percent) from year-end 2013.
At June 30, 2014, investments included $15.6 billion of mortgage-backed securities and $9.1 billion of other investments, which are mostly short-term instruments we hold for liquidity. Most of the increase in balances came from liquidity
investments as we re-invested a large balance of deposits ($8.6 billion) that we had held at the Federal Reserve (and reflected in cash and due from banks) on December 31, 2013.
Investment balances averaged $28.9 billion in the first six months of 2014, an increase of $6.0 billion (26 percent) from the same period in 2013. This growth occurred from both liquidity investments and mortgage-backed securities. All of our mortgage-backed securities held at June 30, 2014 were issued and guaranteed by Fannie Mae, Freddie Mac or a U.S. agency.
We maintained an adequate amount of asset liquidity throughout the year under a variety of liquidity measures as discussed in the "Liquidity Risk" section of "Quantitative and Qualitative Disclosures About Risk Management."
Capital
Capital adequacy remained strong in the first six months of 2014, exceeding all minimum regulatory capital requirements. The GAAP capital-to-assets ratio at June 30, 2014 was 4.79 percent, while the regulatory capital-to-assets ratio was 4.91 percent. Both ratios were above the regulatory required minimum of four percent. Regulatory capital includes mandatorily redeemable capital stock accounted for as a liability under GAAP.
The amounts of GAAP and regulatory capital decreased $457 million and $461 million, respectively, in the first six months of 2014, primarily resulting from redemption and repurchase of $500 million in excess stock from members as part of our capital management strategy.
Total retained earnings were $647 million at June 30, 2014, an increase of $26 million (four percent) from year-end 2013. Retained earnings were comprised of $513 million unrestricted and $134 million restricted. We believe the amount of retained earnings is sufficient to protect against impairment risk of capital stock and to provide opportunity to stabilize dividends. Our Capital Plan also has safeguards to prevent financial leverage ratios from falling below regulatory minimum levels.
We regularly conduct capital adequacy assessments as part of our risk management practices. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act rules, all FHLBanks are required to annually perform stress tests for capital adequacy. Our first test was completed and published in July 2014 based on our financial condition as of September 30, 2013 and the methodology prescribed by the Finance Agency. Capital adequacy was maintained under all established scenarios to absorb losses under adverse economic conditions.
Results of Operations
The table below summarizes our results of operations.
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, | | Year Ended December 31, |
(Dollars in millions) | 2014 | | 2013 | | 2014 | | 2013 | | 2013 |
| | | | | | | | | |
Net income | $ | 61 |
| | $ | 62 |
| | $ | 118 |
| | $ | 125 |
| | $ | 261 |
|
Affordable Housing Program accrual | 7 |
| | 7 |
| | 13 |
| | 14 |
| | 30 |
|
Return on average equity (ROE) | 5.00 | % | | 4.80 | % | | 4.75 | % | | 5.13 | % | | 5.10 | % |
Return on average assets | 0.24 |
| | 0.26 |
| | 0.23 |
| | 0.28 |
| | 0.28 |
|
Weighted average dividend rate | 4.00 |
| | 4.25 |
| | 4.00 |
| | 4.25 |
| | 4.18 |
|
Average 3-month LIBOR | 0.23 |
| | 0.28 |
| | 0.23 |
| | 0.28 |
| | 0.27 |
|
Average overnight Federal funds effective rate | 0.09 |
| | 0.12 |
| | 0.08 |
| | 0.13 |
| | 0.11 |
|
ROE spread to 3-month LIBOR | 4.77 |
| | 4.52 |
| | 4.52 |
| | 4.85 |
| | 4.83 |
|
Dividend rate spread to 3-month LIBOR | 3.77 |
| | 3.97 |
| | 3.77 |
| | 3.97 |
| | 3.91 |
|
ROE spread to Federal funds effective rate | 4.91 |
| | 4.68 |
| | 4.67 |
| | 5.00 |
| | 4.99 |
|
Dividend rate spread to Federal funds effective rate | 3.91 |
| | 4.13 |
| | 3.92 |
| | 4.12 |
| | 4.07 |
|
The spreads between ROE and short-term interest rates, for which we use 3-month LIBOR and Federal funds as a proxy, are market benchmarks we believe member stockholders use to assess the competitiveness of the return on their capital investment in our company. Earnings continued to be sufficient to provide competitive returns to stockholders' capital investment. Consistent with experience over the last five years, ROE was significantly above short-term rates, resulting in the ROE spreads being wider than the long-term historical average spreads.
The lower net income and ROE in the first six months of 2014 compared to the same period of 2013 resulted primarily from the following factors:
| |
▪ | a decline in mortgage asset spreads due to the run-off of higher yielding mortgages in excess of debt called and replaced at lower rates; |
| |
▪ | a larger reversal in 2013 for credit losses on mortgage loans held for portfolio; |
| |
▪ | an increase in net amortization related to mortgage assets; and |
| |
▪ | an increase in other expense. |
Several factors increased income, offsetting much of the impact of the unfavorable factors:
| |
▪ | an increase in the amount of short-term liabilities funding long-term assets; and |
| |
▪ | an increase in the balance of mortgage-backed securities. |
ROE improved in the second quarter comparison primarily due to the approximate $500 million stock repurchase in February, the effect of which was not fully realized until the second quarter.
Business Outlook and Risk Management
Our major business strategies, outlook for our business, and risk profiles and management have not changed substantially since our 2013 Form 10-K filing. "Conditions in the Economy and Financial Markets" discusses our business outlook in the context of external influences. “Quantitative and Qualitative Disclosures About Risk Management” provides details on current risk exposures. We have no material updates to provide for the regulatory or legislative environment since the 2013 Form 10-K filing.
CONDITIONS IN THE ECONOMY AND FINANCIAL MARKETS
Effect of Economy and Financial Markets on Mission Asset Activity and Debt Issuance
The primary external factors that affect our Mission Asset Activity and earnings are the general state and trends of the economy and financial institutions, especially in our Fifth District; conditions in the financial, credit, mortgage, and housing markets; interest rates; competitive alternatives to our products, such as retail deposits and other sources of wholesale funding; actions of the Federal Reserve to affect liquidity reserves of financial institutions and the money supply; the willingness and ability of financial institutions to expand lending; and regulatory initiatives, all of which are difficult to predict and affect in terms of their impact on demand for our products and services. Because of these external factors, we cannot reliably project future trends in Advance demand for individual members or the broad membership base. Our business is cyclical and Mission Asset Activity normally grows slowly, stabilizes, or declines in periods of difficult macro-economic conditions, when financial institutions have ample liquidity, or when there is significant growth in the money supply.
In the last several years, measured economic growth has resulted in relatively slow growth in consumer, mortgage and commercial loans across the broad membership both in absolute terms and relative to deposit growth. Other important factors continuing to negatively impact broad-based demand for our credit services are the extremely low levels of interest rates and the Federal Reserve's ongoing actions to provide an extraordinary amount of deposit-based liquidity to attempt to stimulate economic growth. We believe these trends continue to temper many members' demand for Advances. However, as the first two quarters of 2014 progressed, there was a noticeable increase in the number of members that increased their Advance balances. We could see an acceleration of the recent broad-based increase in Advance demand if the economy continues to improve or if notable changes in Federal Reserve policy reduce other sources of liquidity available to our members.
The relative balance between loan and deposit growth provides an indication of potential member Advance demand. From March 31, 2013 to March 31, 2014 (the most recent period for which data are available), aggregate loan portfolios of Fifth District depository institutions grew $43.7 billion (3.7 percent) while their aggregate deposit balances rose $94.7 billion (4.8 percent). The data include the effect of large mergers and acquisitions only when they are available for both comparison dates. Most of the loan and deposit growth in this period occurred from our largest members, which is consistent with the concentration of financial activity among large financial institutions. Excluding the five members with over $50 billion of
assets and recent acquisitions, aggregate loans increased $10.9 billion (6.0 percent) in the 12-month period while aggregate deposits grew $11.2 billion (4.9 percent).
This faster loan growth than deposit growth in members with assets below $50 billion may help explain the moderate broad-based growth in Advance demand in 2014. We do not know if this recent trend will continue, as much of it involves overnight and short-term Advances.
Financial markets were relatively stable in the first six months of 2014, and the FHLBank System maintained ample access to funding at relatively attractive levels.
Interest Rates
Trends in market interest rates affect members' demand for Mission Asset Activity, earnings, spreads on assets, funding costs and decisions in managing the tradeoffs in our market risk/return profile. The following table presents key market interest rates (obtained from Bloomberg L.P.).
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Six Months Ended June 30, | | | |
| Quarter 2 2014 | | Quarter 1 2014 | | 2014 | | 2013 | | Year 2013 |
| Ending | | Average | | Ending | | Average | | Average | | Average | | Ending | | Average |
Federal funds target | 0-0.25% |
| | 0-0.25% |
| | 0-0.25% |
| | 0-0.25% |
| | 0-0.25% |
| | 0-0.25% |
| | 0-0.25% |
| | 0-0.25% |
|
Federal funds effective | 0.09 |
| | 0.09 |
| | 0.06 |
| | 0.07 |
| | 0.08 |
| | 0.13 |
| | 0.07 |
| | 0.11 |
|
| | | | | | | | | | | | | | | |
3-month LIBOR | 0.23 |
| | 0.23 |
| | 0.23 |
| | 0.24 |
| | 0.23 |
| | 0.28 |
| | 0.25 |
| | 0.27 |
|
2-year LIBOR | 0.58 |
| | 0.54 |
| | 0.55 |
| | 0.49 |
| | 0.52 |
| | 0.41 |
| | 0.49 |
| | 0.44 |
|
5-year LIBOR | 1.70 |
| | 1.73 |
| | 1.80 |
| | 1.69 |
| | 1.71 |
| | 1.03 |
| | 1.79 |
| | 1.32 |
|
10-year LIBOR | 2.63 |
| | 2.72 |
| | 2.84 |
| | 2.87 |
| | 2.79 |
| | 2.08 |
| | 3.09 |
| | 2.47 |
|
| | | | | | | | | | | | | | | |
2-year U.S. Treasury | 0.46 |
| | 0.41 |
| | 0.42 |
| | 0.36 |
| | 0.38 |
| | 0.26 |
| | 0.38 |
| | 0.30 |
|
5-year U.S. Treasury | 1.63 |
| | 1.65 |
| | 1.72 |
| | 1.59 |
| | 1.62 |
| | 0.86 |
| | 1.74 |
| | 1.17 |
|
10-year U.S. Treasury | 2.53 |
| | 2.61 |
| | 2.72 |
| | 2.76 |
| | 2.68 |
| | 1.95 |
| | 3.03 |
| | 2.34 |
|
| | | | | | | | | | | | | | | |
15-year mortgage current coupon (1) | 2.24 |
| | 2.35 |
| | 2.52 |
| | 2.51 |
| | 2.43 |
| | 1.85 |
| | 2.68 |
| | 2.21 |
|
30-year mortgage current coupon (1) | 3.19 |
| | 3.29 |
| | 3.45 |
| | 3.45 |
| | 3.37 |
| | 2.67 |
| | 3.63 |
| | 3.07 |
|
| | | | | | | | | | | | | | | |
15-year mortgage note rate (2) | 3.47 |
| | 3.49 |
| | 3.62 |
| | 3.59 |
| | 3.54 |
| | 3.01 |
| | 3.74 |
| | 3.33 |
|
30-year mortgage note rate (2) | 4.33 |
| | 4.40 |
| | 4.56 |
| | 4.54 |
| | 4.47 |
| | 3.79 |
| | 4.64 |
| | 4.19 |
|
| |
(1) | Simple average of current coupon rates of Fannie Mae and Freddie Mac par mortgage-backed security indications. |
| |
(2) | Simple weekly average of 125 national lenders' mortgage rates for prime borrowers having a 20 percent down payment as surveyed and published by Freddie Mac. |
Short-term interest rates remained at historic lows in the first six months of 2014. The Federal Reserve maintained the overnight Federal funds target and effective rates between zero and 0.25 percent, with other short-term interest rates generally consistent with their historical relationships to Federal funds. The Federal Reserve has indicated that it currently plans to hold certain short-term interest rates at or near zero until at least mid-2015. This projection could change if indicators of economic growth or inflation, or its forecast thereof, changes.
Expectations for future changes in intermediate- and long-term interest rates are more difficult to form in part because the Federal Reserve has less control over these rates. In the first two quarters of 2014, intermediate-term rates (up to five years) were relatively stable, while longer-term rates declined moderately.
The low interest rate environment remained favorable for our results of operations in terms of the spread between our level of profitability (ROE) and the levels of interest rates. The rate environment has been a net benefit to our profitability over the last several years relative to levels of interest rates, for several reasons:
| |
▪ | Reductions in, and low, market interest rates raise ROE compared to market rates to the extent we fund a portion of long-term assets with shorter-term debt. |
| |
▪ | The low intermediate- and long-term interest rates have provided us the opportunity to retire many Bonds and replace them with lower cost Obligations, at a pace exceeding mortgage asset paydowns which were relatively muted in the last several years due to the difficulties in the housing and mortgage markets. |
| |
▪ | Earnings generated from funding assets with interest-free capital have not decreased as much as the reduction in overall interest rates because long-term assets do not reprice immediately to the lower rates. |
ANALYSIS OF FINANCIAL CONDITION
Mission Asset Activity
We regularly monitor the dollar and percentage amount of our balance sheet that is Mission Asset Activity, which we define as Advances, Letters of Credit, and total MPP. These are the primary means by which we fulfill our mission with direct connections to members. We measure Mission Asset Activity against Consolidated Obligations because the latter reflect the major source of our franchise value as a GSE. At June 30, 2014, the principal balance of Mission Asset Activity was $91.9 billion, an increase of $6.6 billion (eight percent) from year-end 2013, which constituted 83 percent of adjusted Consolidated Obligations (which equal Obligations plus Letters of Credit and Mandatory Delivery Contracts). The daily average percentage in the first six months of 2014 was 79 percent. These percentage levels were above or close to the 80 percent internal benchmark we have established.
Credit Services
Credit Activity and Advance Composition
The table below shows trends in Advance balances by major programs and in the notional amount of Letters of Credit. The growth in Advances was comprised primarily of short-term REPO Advances.
|
| | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | June 30, 2014 | | March 31, 2014 | | December 31, 2013 |
| Balance | | Percent(1) | | Balance | | Percent(1) | | Balance | | Percent(1) |
Adjustable/Variable Rate Indexed: | | | | | | | | | | | |
LIBOR | $ | 48,973 |
| | 71 | % | | $ | 49,269 |
| | 75 | % | | $ | 49,199 |
| | 75 | % |
Other | 491 |
| | 1 |
| | 389 |
| | 1 |
| | 413 |
| | 1 |
|
Total | 49,464 |
| | 72 |
| | 49,658 |
| | 76 |
| | 49,612 |
| | 76 |
|
Fixed-Rate: | | | | | | | | | | | |
REPO | 7,817 |
| | 11 |
| | 4,465 |
| | 7 |
| | 4,143 |
| | 7 |
|
Regular Fixed Rate | 6,507 |
| | 9 |
| | 5,903 |
| | 9 |
| | 5,751 |
| | 9 |
|
Putable (2) | 2,091 |
| | 3 |
| | 2,138 |
| | 3 |
| | 2,146 |
| | 3 |
|
Convertible (2) | 5 |
| | — |
| | 10 |
| | — |
| | 10 |
| | — |
|
Amortizing/Mortgage Matched | 2,627 |
| | 4 |
| | 2,618 |
| | 4 |
| | 2,593 |
| | 4 |
|
Other | 825 |
| | 1 |
| | 593 |
| | 1 |
| | 838 |
| | 1 |
|
Total | 19,872 |
| | 28 |
| | 15,727 |
| | 24 |
| | 15,481 |
| | 24 |
|
Total Advances Principal | $ | 69,336 |
| | 100 | % | | $ | 65,385 |
| | 100 | % | | $ | 65,093 |
| | 100 | % |
| | | | | | | | | | | |
Letters of Credit (notional) | $ | 15,563 |
| | | | $ | 13,603 |
| | | | $ | 13,472 |
| | |
| |
(1) | As a percentage of total Advances principal. |
| |
(2) | Excludes Putable/Convertible Advances where the related put/conversion options have expired. Such Advances are classified based on their current terms. |
The bulk of the increase in total Advance balances occurred from several larger members. However, as noted in the "Conditions in the Economy and Financial Markets" there was a moderate amount of broad-based growth in Advance usage with a discernible increase in the number of members with higher Advance balances.
Former members hold $1.7 billion in Advances (two percent), of which approximately $1.1 billion are scheduled to mature by the end of 2014. When these are repaid, the former members will not be able to replace them with new Advances.
Members increased their available lines in the Letters of Credit program by $2.1 billion in the first six months of 2014. We generally earn fees on Letters of Credit based on the actual notional amount of the Letters utilized, which normally is less than the available lines.
Advance Usage
The following table shows the unweighted average ratio of each member's Advance balance to its most-recently available figures for total assets.
|
| | | | | | | | |
| June 30, 2014 | | March 31, 2014 | | December 31, 2013 |
Average Advances-to-Assets for Members | | | | | |
Assets less than $1.0 billion (653 members) | 3.24 | % | | 3.13 | % | | 3.27 | % |
Assets over $1.0 billion (64 members) | 3.42 | % | | 3.17 | % | | 3.33 | % |
All members | 3.26 | % | | 3.13 | % | | 3.28 | % |
Overall Advance usage ratios were relatively stable in the first six months of 2014. Although Advance usage ratios have risen modestly in the last few years, we believe that the measured economic expansion, significant levels of financial institution liquidity as a result of Federal Reserve actions, and robust member deposit levels continue to limit overall member demand for our funding.
The following tables present principal balances for our top five Advance borrowers.
|
| | | | | | | | | | | | | | | | |
(Dollars in millions) | | | | | | | | | | |
June 30, 2014 | | December 31, 2013 |
Name | | Par Value of Advances | | Percent of Total Par Value of Advances | | Name | | Par Value of Advances | | Percent of Total Par Value of Advances |
| | | | | | | | | | |
JPMorgan Chase Bank, N.A. | | $ | 39,700 |
| | 57 | % | | JPMorgan Chase Bank, N.A. | | $ | 41,700 |
| | 64 | % |
U.S. Bank, N.A. | | 5,467 |
| | 8 |
| | U.S. Bank, N.A. | | 4,584 |
| | 7 |
|
The Huntington National Bank | | 2,884 |
| | 4 |
| | The Huntington National Bank | | 1,809 |
| | 3 |
|
Fifth Third Bank | | 1,775 |
| | 3 |
| | Western-Southern Life Assurance Co | | 1,342 |
| | 2 |
|
Western-Southern Life Assurance Co | | 1,447 |
| | 2 |
| | Protective Life Insurance Company | | 1,171 |
| | 2 |
|
Total of Top 5 | | $ | 51,273 |
| | 74 | % | | Total of Top 5 | | $ | 50,606 |
| | 78 | % |
As reflected in the table on Advances-to-member assets, large members currently as well as historically utilize Advances to fund a similar amount of their assets as smaller members. Therefore, our Advance concentration ratios are influenced by, and generally are similar to, concentration ratios of financial activity among our Fifth District financial institutions. We believe that having large financial institutions who actively use our Mission Asset Activity augments the value of membership to all members because it improves our operating efficiency, increases our earnings and thereby contributions to housing and community investment programs, may enable us over time to obtain more favorable funding costs, and helps us maintain competitively priced Mission Asset Activity.
Mortgage Loans Held for Portfolio (Mortgage Purchase Program, or "MPP")
For the MPP we emphasize recruiting community-based members to sell us mortgage loans, increasing the number of regular sellers and maintaining balances at a prudent level relative to capital. This strategy is guided by our principle of having a moderate amount of market and low amount of credit risk. The number of regular sellers remains at a high level compared to historical trends. Balances are driven primarily by activity from large sellers and a Finance Agency regulation requiring that if purchases in a calendar year exceed $2.5 billion, we must enact additional housing goals. Given the uncertainty of the goal requirements and possible operational and economic impacts, we continue to limit our calendar year purchases to less than $2.5 billion until further guidance is provided by the Finance Agency.
The table below shows principal paydowns and purchases of loans in the MPP for the first six months of 2014.
|
| | | |
(In millions) | MPP Principal |
Balance at December 31, 2013 | $ | 6,643 |
|
Principal purchases | 372 |
|
Principal paydowns | (491 | ) |
Balance at June 30, 2014 | $ | 6,524 |
|
The decline in principal loan balance in 2014 resulted from a stagnant refinancing market. However, commitments from members to sell loans increased modestly in the second quarter. Purchases resulted from sales by 84 participating financial institutions (PFIs) during the first six months of the year, with the number of monthly sellers averaging 55. Almost all loans acquired in the first two quarters of 2014 were conventional, with less than one percent of purchases being comprised of Federal Housing Administration (FHA) loans.
We closely track the refinancing incentives of our mortgage assets (including those in the MPP and mortgage-backed securities) because the option for homeowners to change their principal payments normally represents a large portion of our market risk exposure. MPP principal paydowns in the first six months of 2014 equated to an 11 percent annual constant prepayment rate, down from the 21 percent rate for all of 2013, as the refinancing incentives for many of our mortgage assets declined.
The MPP's composition of balances by loan type, original final maturity, and weighted-average mortgage note rate did not change materially in the first six months of 2014. The weighted average mortgage note rate fell from 4.53 percent at the end of 2013 to 4.46 percent at June 30, 2014. This decline reflected a continuing trend of prepayments of higher rate mortgages and purchases of lower rate mortgages. MPP yields earned during the first six months of 2014, relative to funding costs, continued to offer favorable returns relative to their market risk exposure.
Investments
We hold investments in order to provide liquidity, enhance earnings, and help manage market risk. We hold both shorter-term investments, which we refer to as "liquidity investments" because most of them serve to augment asset liquidity, and longer-term mortgage-backed securities. The table below presents the ending and average balances of our investments.
|
| | | | | | | | | | | | | | | |
(In millions) | Six Months Ended | | Year Ended |
| June 30, 2014 | | December 31, 2013 |
| Ending Balance | | Average Balance | | Ending Balance | | Average Balance |
Liquidity investments | $ | 9,086 |
| | $ | 12,747 |
| | $ | 6,303 |
| | $ | 10,389 |
|
Mortgage-backed securities | 15,649 |
| | 16,049 |
| | 16,061 |
| | 14,320 |
|
Other investments (1) | — |
| | 107 |
| | — |
| | 161 |
|
Total investments | $ | 24,735 |
| | $ | 28,903 |
| | $ | 22,364 |
| | $ | 24,870 |
|
| |
(1) | The average balance includes the rights or obligations to cash collateral, which are included in the fair value of derivative assets or derivative liabilities on the Statements of Condition at period end. |
We continued to maintain a sufficient amount of asset liquidity. Liquidity investment levels can vary significantly based on liquidity needs, the availability of acceptable net spreads, the number of eligible counterparties that meet our unsecured credit
risk criteria, and changes in the amount of Mission Assets. It is normal for liquidity investments to vary several billion dollars on a daily basis.
The increase in investments at June 30, 2014 compared to year-end 2013 was due mostly to holding a large amount of funds ($8.6 billion) in deposits at the Federal Reserve (reflected in cash and due from banks on the Statements of Condition) at year-end 2013, which we re-invested in liquidity investments thereafter.
Our overarching strategy for mortgage-backed securities is to keep holdings as close as possible to the regulatory maximum of three times regulatory capital, subject to the availability of securities that we believe provide acceptable risk/return tradeoffs. The balance of mortgage-backed securities at June 30, 2014 represented a 3.15 multiple of regulatory capital, which exceeded the maximum leverage limit of 3.00 due to our repurchase of excess capital stock that occurred in the first quarter of 2014. Per regulation, we suspended the purchase of new mortgage-backed securities until the leverage ratio falls below three multiples of capital. We purchased no mortgage-backed securities in the second quarter.
At June 30, 2014, the mortgage-backed securities composition consisted of $13.5 billion of securities issued by Fannie Mae or Freddie Mac (of which $1.7 billion were floating-rate securities), $1.1 billion of floating-rate securities issued by the National Credit Union Administration (NCUA), and $1.1 billion of securities issued by Ginnie Mae. We held no private-label mortgage-backed securities.
The table below shows principal purchases and paydowns of our mortgage-backed securities for the first six months of 2014.
|
| | | |
(In millions) | Mortgage-backed Securities Principal |
Balance at December 31, 2013 | $ | 16,087 |
|
Principal purchases | 567 |
|
Principal paydowns | (975 | ) |
Balance at June 30, 2014 | $ | 15,679 |
|
Principal paydowns in the first six months of 2014 equated to an 11 percent annual constant prepayment rate, down from the 17 percent rate in all of 2013.
Consolidated Obligations
The table below presents the ending and average balances of our participations in Consolidated Obligations.
|
| | | | | | | | | | | | | | | |
| Six Months Ended | | Year Ended |
(In millions) | June 30, 2014 | | December 31, 2013 |
| Ending Balance | | Average Balance | | Ending Balance | | Average Balance |
Discount Notes: | | | | | | | |
Par | $ | 35,392 |
| | $ | 35,425 |
| | $ | 38,217 |
| | $ | 34,581 |
|
Discount | (2 | ) | | (4 | ) | | (7 | ) | | (7 | ) |
Total Discount Notes | 35,390 |
| | 35,421 |
| | 38,210 |
| | 34,574 |
|
Bonds: | | | | | | | |
Unswapped fixed-rate | 25,131 |
| | 25,287 |
| | 24,222 |
| | 23,037 |
|
Unswapped adjustable-rate | 30,910 |
| | 31,312 |
| | 28,650 |
| | 24,319 |
|
Swapped fixed-rate | 3,500 |
| | 3,118 |
| | 5,155 |
| | 4,628 |
|
Total par Bonds | 59,541 |
| | 59,717 |
| | 58,027 |
| | 51,984 |
|
Other items (1) | 112 |
| | 127 |
| | 136 |
| | 125 |
|
Total Bonds | 59,653 |
| | 59,844 |
| | 58,163 |
| | 52,109 |
|
Total Consolidated Obligations (2) | $ | 95,043 |
| | $ | 95,265 |
| | $ | 96,373 |
| | $ | 86,683 |
|
| |
(1) | Includes unamortized premiums/discounts, fair value option valuation adjustments, hedging and other basis adjustments. |
| |
(2) | The 12 FHLBanks have joint and several liability for the par amount of all of the Consolidated Obligations issued on their behalves. The par amount of the outstanding Consolidated Obligations of all 12 FHLBanks was (in millions) $799,979 and $766,837 at June 30, 2014 and December 31, 2013, respectively. |
The increases in the ending and average balances of unswapped adjustable-rate Bonds reflect a shift away from discount note funding, which is part of a repositioning strategy to more efficiently manage the risks within our LIBOR-indexed portfolios. Our preference continues to be participation in unswapped adjustable-rate Bonds and discount notes as funding options instead of new interest rate swaps (i.e., swapped fixed-rate Bonds).
Deposits
Members' deposits with us are normally a relatively minor source of low-cost funding. Total interest bearing deposits at June 30, 2014 were $0.8 billion, a decrease of 11 percent from year-end 2013. The average balance of total interest bearing deposits in the first six months of 2014 was $0.9 billion, a decrease of 26 percent from the average balance during the same period of 2013.
Derivatives Hedging Activity and Liquidity
Our use of and accounting for derivatives is discussed in the "Effect of the Use of Derivatives on Net Interest Income" section in "Results of Operations." Liquidity is discussed in the "Liquidity Risk" section in “Quantitative and Qualitative Disclosures About Risk Management.” We did not change our strategy of using derivatives solely to manage market risk exposure in the first six months of 2014.
Capital Resources
The following tables present capital amounts and capital-to-assets ratios, on both a GAAP and regulatory basis.
|
| | | | | | | | | | | | | | | |
| Six Months Ended | | Year Ended |
GAAP and Regulatory Capital | June 30, 2014 | | December 31, 2013 |
(In millions) | Period End | | Average | | Period End | | Average |
GAAP Capital Stock | $ | 4,215 |
| | $ | 4,357 |
| | $ | 4,698 |
| | $ | 4,534 |
|
Mandatorily Redeemable Capital Stock | 112 |
| | 118 |
| | 116 |
| | 139 |
|
Regulatory Capital Stock | 4,327 |
| | 4,475 |
| | 4,814 |
| | 4,673 |
|
Retained Earnings | 647 |
| | 649 |
| | 621 |
| | 598 |
|
Regulatory Capital | $ | 4,974 |
| | $ | 5,124 |
| | $ | 5,435 |
| | $ | 5,271 |
|
|
| | | | | | | | | | | |
| Six Months Ended | | Year Ended |
GAAP and Regulatory Capital-to-Assets Ratio | June 30, 2014 | | December 31, 2013 |
| Period End | | Average | | Period End | | Average |
GAAP | 4.79 | % | | 4.91 | % | | 5.15 | % | | 5.47 | % |
Regulatory | 4.91 |
| | 5.03 |
| | 5.27 |
| | 5.63 |
|
In the first six months of 2014, our capital base decreased due mostly to a $500 million redemption and repurchase of excess capital stock in February as part of our ongoing philosophy to effectively manage capital and financial performance. Both GAAP and regulatory capital-to-assets ratios, post repurchase, remained above the regulatory required minimum of four percent. We consider the regulatory ratio to be a better representation of financial leverage than the GAAP ratio. Although the GAAP ratio treats mandatorily redeemable capital stock as a liability, it protects investors in our debt in the same way that GAAP capital stock and retained earnings do.
The amount of excess capital stock, as defined by our capital plan, was $554 million at June 30, 2014, a decrease of $675 million from year-end 2013, which was primarily due to the stock repurchase noted above and, secondarily, growth in Advances.
At June 30, 2014, the total amount of retained earnings were comprised of $513 million unrestricted (an increase of $3 million from year-end 2013) and $134 million restricted (an increase of $23 million), which are not permitted to be distributed as dividends. We believe that the amount of retained earnings is sufficient to protect against impairment risk of capital stock and to provide the opportunity to stabilize dividends. Further discussion is in the "Capital Adequacy" section of "Quantitative and Qualitative Disclosures About Risk Management."
Membership and Stockholders
In the first six months of 2014, we lost 10 members, ending the quarter at 717. The 10 lost members included seven that merged with other Fifth District members and three that merged out of the District. The impact on our earnings and Mission Asset Activity from the members lost was negligible. We will continue to recruit the remaining institutions eligible for membership in order to maintain and expand our customer base.
RESULTS OF OPERATIONS
Components of Earnings and Return on Equity
The following table is a summary income statement for the three and six months ended June 30, 2014 and 2013. Each ROE percentage is computed by dividing income or expense for the category by the average amount of stockholders' equity for the period. Factors determining the level of, and changes in, net income and ROE are explained in the remainder of this section.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(Dollars in millions) | 2014 | | 2013 | | 2014 | | 2013 |
| Amount | | ROE (1) | | Amount | | ROE (1) | | Amount | | ROE (1) | | Amount | | ROE (1) |
Net interest income | $ | 77 |
| | 6.35 | % | | $ | 79 |
| | 6.14 | % | | $ | 154 |
| | 6.21 | % | | $ | 155 |
| | 6.32 | % |
Reversal for credit losses | (1 | ) | | (0.07 | ) | | (4 | ) | | (0.31 | ) | | (1 | ) | | (0.04 | ) | | (6 | ) | | (0.27 | ) |
Net interest income after reversal for credit losses | 78 |
| | 6.42 |
| | 83 |
| | 6.45 |
| | 155 |
| | 6.25 |
| | 161 |
| | 6.59 |
|
Net gains (losses) on derivatives and hedging activities | 4 |
| | 0.28 |
| | (1 | ) | | (0.11 | ) | | 2 |
| | 0.09 |
| | 3 |
| | 0.12 |
|
Other non-interest income | 3 |
| | 0.25 |
| | 3 |
| | 0.22 |
| | 8 |
| | 0.31 |
| | 6 |
| | 0.25 |
|
Total non-interest income | 7 |
| | 0.53 |
| | 2 |
| | 0.11 |
| | 10 |
| | 0.40 |
| | 9 |
| | 0.37 |
|
Total revenue | 85 |
| | 6.95 |
| | 85 |
| | 6.56 |
| | 165 |
| | 6.65 |
| | 170 |
| | 6.96 |
|
Total other expense | 17 |
| | 1.38 |
| | 16 |
| | 1.21 |
| | 34 |
| | 1.36 |
| | 31 |
| | 1.25 |
|
Assessments | 7 |
| | 0.57 |
| | 7 |
| | 0.55 |
| | 13 |
| | 0.54 |
| | 14 |
| | 0.58 |
|
Net income | $ | 61 |
| | 5.00 | % | | $ | 62 |
| | 4.80 | % | | $ | 118 |
| | 4.75 | % | | $ | 125 |
| | 5.13 | % |
| |
(1) | The ROE amounts have been computed using dollars in thousands. Accordingly, recalculations based upon the disclosed amounts (millions) in this table may produce nominally different results. |
The most significant individual contributors to the decrease in net income and ROE in the first six months of 2014 compared to the same period of 2013 were:
| |
▪ | a decline in mortgage asset spreads due to the run-off of higher yielding mortgages in excess of debt called and replaced at lower rates; |
| |
▪ | a larger reversal in 2013 for credit losses on mortgage loans held for portfolio; |
| |
▪ | an increase in net amortization related to mortgage assets; and |
| |
▪ | an increase in total other expense. |
Several factors increased income, offsetting much of the impact of the unfavorable factors:
| |
▪ | an increase in the amount of short-term liabilities funding long-term assets; and |
| |
▪ | an increase in the balance of mortgage-backed securities. |
ROE improved in the second quarter comparison primarily due to the approximate $500 million stock repurchase in February, the effect of which was not fully realized until the second quarter.
Net Interest Income
Components of Net Interest Income
The following table shows the major components of net interest income. Reasons for the variance in net interest income between the periods are discussed below.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(Dollars in millions) | 2014 | | 2013 | | 2014 | | 2013 |
| Amount | | Pct of Earning Assets | | Amount | | Pct of Earning Assets | | Amount | | Pct of Earning Assets | | Amount | | Pct of Earning Assets |
Components of net interest rate spread: | | | | | | | | | | | | | | | |
Net (amortization)/accretion (1) (2) | $ | (3 | ) | | (0.01 | )% | | $ | (1 | ) | | — | % | | $ | (5 | ) | | (0.01 | )% | | $ | (1 | ) | | — | % |
Prepayment fees on Advances, net (2) | 1 |
| | — |
| | 1 |
| | — |
| | 2 |
| | — |
| | 1 |
| | — |
|
Other components of net interest rate spread | 71 |
| | 0.28 |
| | 70 |
| | 0.30 |
| | 140 |
| | 0.28 |
| | 136 |
| | 0.31 |
|
Total net interest rate spread | 69 |
| | 0.27 |
| | 70 |
| | 0.30 |
| | 137 |
| | 0.27 |
| | 136 |
| | 0.31 |
|
Earnings from funding assets with interest-free capital | 8 |
| | 0.03 |
| | 9 |
| | 0.04 |
| | 17 |
| | 0.04 |
| | 19 |
| | 0.04 |
|
Total net interest income/net interest margin (3) | $ | 77 |
| | 0.30 | % | | $ | 79 |
| | 0.34 | % | | $ | 154 |
| | 0.31 | % | | $ | 155 |
| | 0.35 | % |
| |
(1) | Includes (amortization)/accretion of premiums/discounts on mortgage assets and Consolidated Obligations and deferred transaction costs (concession fees) for Consolidated Obligations. |
| |
(2) | These components of net interest rate spread have been segregated here to display their relative impact. |
| |
(3) | Net interest margin is net interest income before (reversal)/provision for credit losses as a percentage of average total interest earning assets. |
Net Amortization/Accretion. Net amortization/accretion (generally referred to as "amortization") includes monthly recognition of premiums and discounts paid on purchases of mortgage assets, as well as premiums, discounts and concessions paid on Consolidated Obligations. Periodic amortization adjustments do not necessarily indicate a trend in economic return over the entire life of mortgage assets, although amortization over the entire life is one component of lifetime economic returns.
While net amortization has been large and volatile in several periods over the last four years, it was modest in the first six months of 2014 and 2013. Net amortization was higher in both the three and six months of 2014 due primarily to the lower than normal amortization in the first six months of 2013, which resulted from a decline in actual and projected prepayment speeds due to higher mortgage rates.
At June 30, 2014, the net premium balance of mortgage assets totaled $148 million compared to $156 million at the end of 2013. The decline was the result mostly of paydowns of premium-priced mortgage assets, which were replaced with MPP assets with lower purchase premiums and mortgage-backed securities purchased at near-par or discounted prices.
Prepayment Fees on Advances. Fees for members' early repayment of certain Advances are designed to make us economically indifferent to whether members hold Advances to maturity or repay them before maturity. Although Advance prepayment fees can be, and in the past have been significant, they were small in the first six months of both 2014 and 2013 reflecting a low amount of member prepayments of Advances.
Other Components of Net Interest Rate Spread. Excluding net amortization and prepayment fees, the total other components of net interest rate spread increased $4 million in the first six months of 2014 compared to the same period of 2013. The following factors, discussed below in estimated approximate order of impact from largest to smallest, accounted for the changes in net interest rate spread due to other components.
Six-Months Comparison
| |
▪ | Advance growth-Favorable: The growth in average Advance balances and new capital stock purchased to support the growth improved net interest income by an estimated $16 million. Leveraging the additional capital with mortgage-backed securities contributed to the increase in net interest income. |
| |
▪ | Asset-liability management-Unfavorable: Management strategies and actions, along with changes in the market rate environment, related to reducing our market risk exposure lowered earnings on a net basis for the following reasons: |
| |
1) | Net interest income deceased $19 million due to a decline in mortgage asset spreads resulting from the run-off of higher yielding mortgages in excess of debt called and replaced at lower rates. |
| |
2) | We had a higher amount of short-term debt funding fixed-rate mortgages in the first six months of 2014 compared to the same period of 2013, which increased net interest income by an estimated $13 million. |
| |
3) | Actions to manage risks associated with funding LIBOR assets and a slight decrease in spreads between LIBOR assets and Discount Notes lowered net interest income by an estimated $8 million. |
| |
▪ | Higher balances on mortgage-backed securities-Favorable: The average balance of the mortgage-backed security portfolio increased $3 billion compared to the first six months of 2013. Approximately $1 billion of this growth can be attributed to an increase in authority to purchase new mortgage-backed securities caused by the growth in capital to fund Advance growth. The income impact of the growth in the mortgage-backed security portfolio attributed to Advance growth is included in the factor above. The additional $2 billion of mortgage-backed security growth increased net interest income by an estimated $5 million. |
| |
▪ | Lower balances on MPP loans-Unfavorable: The average balance of MPP loans declined $0.5 billion, which reduced net interest income by an estimated $3 million. |
Three-Months Comparison
For the three-months comparison, the same factors generally affected the other components of net interest rate spread as in the six-months comparison and in approximately the same relative magnitude.
Earnings From Capital. The earnings from funding assets with interest-free capital remained relatively constant compared to the first six months of 2013.
Average Balance Sheet and Rates
The following tables provide average rates and average balances for major balance sheet accounts, which determine the changes in the net interest rate spread. All data include the impact of interest rate swaps, which we allocate to each asset and liability category according to their designated hedging relationship. The changes in the net interest rate spread and net interest margin between the periods shown occurred mostly from the net impact of the factors discussed above in “Components of Net Interest Income.”
|
| | | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | Three Months Ended | | Three Months Ended |
| June 30, 2014 | | June 30, 2013 |
| Average Balance | | Interest | | Average Rate (1) | | Average Balance | | Interest | | Average Rate (1) |
Assets | | | | | | | | | | | |
Advances | $ | 66,732 |
| | $ | 78 |
| | 0.47 | % | | $ | 62,713 |
| | $ | 78 |
| | 0.50 | % |
Mortgage loans held for portfolio (2) | 6,676 |
| | 57 |
| | 3.45 |
| | 7,115 |
| | 68 |
| | 3.82 |
|
Federal funds sold and securities purchased under resale agreements | 9,176 |
| | 2 |
| | 0.07 |
| | 8,559 |
| | 2 |
| | 0.10 |
|
Interest-bearing deposits in banks (3) (4) (5) | 2,777 |
| | 1 |
| | 0.14 |
| | 1,505 |
| | 1 |
| | 0.15 |
|
Mortgage-backed securities | 15,936 |
| | 88 |
| | 2.22 |
| | 13,769 |
| | 75 |
| | 2.18 |
|
Other investments | 69 |
| | — |
| | 0.08 |
| | 26 |
| | — |
| | 0.13 |
|
Loans to other FHLBanks | — |
| | — |
| |
| | 2 |
| | — |
| | 0.16 |
|
Total earning assets | 101,366 |
| | 226 |
| | 0.89 |
| | 93,689 |
| | 224 |
| | 0.96 |
|
Less: allowance for credit losses on mortgage loans | 7 |
| | | | | | 14 |
| | | | |
Other assets | 133 |
| | | | | | 153 |
| | | | |
Total assets | $ | 101,492 |
| | | | | | $ | 93,828 |
| | | | |
Liabilities and Capital | | | | | | | | | | | |
Term deposits | $ | 87 |
| | — |
| | 0.19 |
| | $ | 136 |
| | — |
| | 0.17 |
|
Other interest bearing deposits (5) | 757 |
| | — |
| | 0.01 |
| | 1,003 |
| | — |
| | 0.01 |
|
Short-term borrowings | 33,467 |
| | 6 |
| | 0.07 |
| | 36,381 |
| | 10 |
| | 0.11 |
|
Unswapped fixed-rate Bonds | 25,547 |
| | 132 |
| | 2.06 |
| | 23,622 |
| | 123 |
| | 2.08 |
|
Unswapped adjustable-rate Bonds | 33,664 |
| | 9 |
| | 0.11 |
| | 22,698 |
| | 9 |
| | 0.16 |
|
Swapped Bonds | 2,423 |
| | 1 |
| | 0.18 |
| | 3,993 |
| | 1 |
| | 0.11 |
|
Mandatorily redeemable capital stock | 116 |
| | 1 |
| | 4.00 |
| | 131 |
| | 2 |
| | 4.35 |
|
Other borrowings | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total interest-bearing liabilities | 96,061 |
| | 149 |
| | 0.62 |
| | 87,964 |
| | 145 |
| | 0.66 |
|
Non-interest bearing deposits | 1 |
| | | | | | 19 |
| | | | |
Other liabilities | 572 |
| | | | | | 674 |
| | | | |
Total capital | 4,858 |
| | | | | | 5,171 |
| | | | |
Total liabilities and capital | $ | 101,492 |
| | | | | | $ | 93,828 |
| | | | |
| | | | | | | | | | | |
Net interest rate spread | | | | | 0.27 | % | | | | | | 0.30 | % |
Net interest income and net interest margin (6) | | | $ | 77 |
| | 0.30 | % | | | | $ | 79 |
| | 0.34 | % |
Average interest-earning assets to interest-bearing liabilities | | | | | 105.52 | % | | | | | | 106.51 | % |
| |
(1) | Amounts used to calculate average rates are based on dollars in thousands. Accordingly, recalculations based upon the disclosed amounts (millions) may not produce the same results. |
| |
(2) | Non-accrual loans are included in average balances used to determine average rate. |
| |
(3) | Includes certificates of deposit and bank notes that are classified as available-for-sale securities. |
| |
(4) | Includes available-for-sale securities based on their amortized costs. The yield information does not give effect to changes in fair value that are reflected as a component of stockholders' equity for available-for-sale securities. |
| |
(5) | The average balance amounts include the rights or obligations to cash collateral, which are included in the fair value of derivative assets or derivative liabilities on the Statements of Condition at period end. |
| |
(6) | Net interest margin is net interest income before (reversal)/provision for credit losses as a percentage of average total interest earning assets. |
|
| | | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | Six Months Ended | | Six Months Ended |
| June 30, 2014 | | June 30, 2013 |
| Average Balance | | Interest | | Average Rate (1) | | Average Balance | | Interest | | Average Rate (1) |
Assets | | | | | | | | | | | |
Advances | $ | 66,040 |
| | $ | 155 |
| | 0.47 | % | | $ | 58,858 |
| | $ | 150 |
| | 0.51 | % |
Mortgage loans held for portfolio (2) | 6,719 |
| | 118 |
| | 3.53 |
| | 7,253 |
| | 141 |
| | 3.92 |
|
Federal funds sold and securities purchased under resale agreements | 10,252 |
| | 3 |
| | 0.06 |
| | 8,808 |
| | 5 |
| | 0.11 |
|
Interest-bearing deposits in banks (3) (4) (5) | 2,554 |
| | 2 |
| | 0.14 |
| | 891 |
| | 1 |
| | 0.15 |
|
Mortgage-backed securities | 16,049 |
| | 177 |
| | 2.23 |
| | 13,169 |
| | 144 |
| | 2.21 |
|
Other investments | 48 |
| | — |
| | 0.08 |
| | 26 |
| | — |
| | 0.13 |
|
Loans to other FHLBanks | — |
| | — |
| | — |
| | 5 |
| | — |
| | 0.17 |
|
Total earning assets | 101,662 |
| | 455 |
| | 0.90 |
| | 89,010 |
| | 441 |
| | 1.00 |
|
Less: allowance for credit losses on mortgage loans | 7 |
| | | | | | 16 |
| | | | |
Other assets | 187 |
| | | | | | 156 |
| | | | |
Total assets | $ | 101,842 |
| | | | | | $ | 89,150 |
| | | | |
Liabilities and Capital | | | | | | | | | | | |
Term deposits | $ | 87 |
| | — |
| | 0.18 |
| | $ | 125 |
| | — |
| | 0.18 |
|
Other interest bearing deposits (5) | 782 |
| | — |
| | 0.01 |
| | 1,045 |
| | — |
| | 0.01 |
|
Short-term borrowings | 35,421 |
| | 15 |
| | 0.08 |
| | 34,806 |
| | 21 |
| | 0.12 |
|
Unswapped fixed-rate Bonds | 25,386 |
| | 264 |
| | 2.09 |
| | 22,997 |
| | 243 |
| | 2.13 |
|
Unswapped adjustable-rate Bonds | 31,312 |
| | 17 |
| | 0.11 |
| | 19,353 |
| | 16 |
| | 0.16 |
|
Swapped Bonds | 3,146 |
| | 3 |
| | 0.19 |
| | 5,026 |
| | 3 |
| | 0.13 |
|
Mandatorily redeemable capital stock | 118 |
| | 2 |
| | 4.00 |
| | 157 |
| | 3 |
| | 3.91 |
|
Other borrowings | — |
| | — |
| | — |
| | 8 |
| | — |
| | 0.12 |
|
Total interest-bearing liabilities | 96,252 |
| | 301 |
| | 0.63 |
| | 83,517 |
| | 286 |
| | 0.69 |
|
Non-interest bearing deposits | 8 |
| | | | | | 19 |
| | | | |
Other liabilities | 585 |
| | | | | | 681 |
| | | | |
Total capital | 4,997 |
| | | | | | 4,933 |
| | | | |
Total liabilities and capital | $ | 101,842 |
| | | | | | $ | 89,150 |
| | | | |
| | | | | | | | | | | |
Net interest rate spread | | | | | 0.27 | % | | | | | | 0.31 | % |
Net interest income and net interest margin (6) | | | $ | 154 |
| | 0.31 | % | | | | $ | 155 |
| | 0.35 | % |
Average interest-earning assets to interest-bearing liabilities | | | | | 105.62 | % | | | | | | 106.58 | % |
| |
(1) | Amounts used to calculate average rates are based on dollars in thousands. Accordingly, recalculations based upon the disclosed amounts (millions) may not produce the same results. |
| |
(2) | Non-accrual loans are included in average balances used to determine average rate. |
| |
(3) | Includes certificates of deposit and bank notes that are classified as available-for-sale securities. |
| |
(4) | Includes available-for-sale securities based on their amortized costs. The yield information does not give effect to changes in fair value that are reflected as a component of stockholders' equity for available-for-sale securities. |
| |
(5) | The average balance amounts include the rights or obligations to cash collateral, which are included in the fair value of derivative assets or derivative liabilities on the Statements of Condition at period end. |
| |
(6) | Net interest margin is net interest income before (reversal)/provision for credit losses as a percentage of average total interest earning assets. |
The net interest spread and net interest margin decreased due to an increase in Advances balances and, secondarily, to the unfavorable earnings factors net of the favorable factors as discussed in the previous section. Although the Advance growth resulted in an overall benefit to net interest income because of a larger asset base, the growth lowered the spread and margin because Advances tend to have narrower spreads to funding costs compared to mortgage assets.
The decline in the average rate on total earning assets and total interest-bearing liabilities resulted from the continued low rate environment and, due to the Advance growth, an increase in the balance sheet composition of instruments that tend to carry lower rates relative to the total balance sheet. The low rate environment particularly resulted in a decline in the average rate of long-term assets (such as certain Advances, mortgage loans held for portfolio and mortgage-backed securities) 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, were replaced with new assets and liabilities at lower rates.
Yields 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 compared to the first six months of 2013 due to elevated short-term yields in the first half of 2013 that were the result of the continued effects of the Federal Reserve quantitative easing program. The yield on the swapped Bond portfolio increased compared to the first six months of 2013 due to a tightening in basis between Bonds and LIBOR swaps.
Volume/Rate Analysis
Changes in both average balances (volume) and interest rates influence changes in net interest income. The following table summarizes these changes and trends in interest income and interest expense.
|
| | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | Three Months Ended June 30, 2014 over 2013 | | Six Months Ended June 30, 2014 over 2013 |
| Volume (1)(3) | | Rate (2)(3) | | Total | | Volume (1)(3) | | Rate (2)(3) | | Total |
Increase (decrease) in interest income | | | | | | | | | | | |
Advances | $ | 5 |
| | $ | (5 | ) | | $ | — |
| | $ | 17 |
| | $ | (12 | ) | | $ | 5 |
|
Mortgage loans held for portfolio | (4 | ) | | (7 | ) | | (11 | ) | | (10 | ) | | (13 | ) | | (23 | ) |
Federal funds sold and securities purchased under resale agreements | — |
| | — |
| | — |
| | 1 |
| | (3 | ) | | (2 | ) |
Interest-bearing deposits in banks | — |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
|
Mortgage-backed securities | 12 |
| | 1 |
| | 13 |
| | 32 |
| | 1 |
| | 33 |
|
Other investments | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Loans to other FHLBanks | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total | 13 |
| | (11 | ) | | 2 |
| | 41 |
| | (27 | ) | | 14 |
|
Increase (decrease) in interest expense | | | | | | | | | | | |
Term deposits | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Other interest-bearing deposits | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Short-term borrowings | (1 | ) | | (3 | ) | | (4 | ) | | — |
| | (6 | ) | | (6 | ) |
Unswapped fixed-rate Bonds | 10 |
| | (1 | ) | | 9 |
| | 25 |
| | (4 | ) | | 21 |
|
Unswapped adjustable-rate Bonds | 3 |
| | (3 | ) | | — |
| | 8 |
| | (7 | ) | | 1 |
|
Swapped Bonds | — |
| | — |
| | — |
| | (1 | ) | | 1 |
| | — |
|
Mandatorily redeemable capital stock | (1 | ) | | — |
| | (1 | ) | | (1 | ) | | — |
| | (1 | ) |
Other borrowings | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total | 11 |
| | (7 | ) | | 4 |
| | 31 |
| | (16 | ) | | 15 |
|
Increase (decrease) in net interest income | $ | 2 |
| | $ | (4 | ) | | $ | (2 | ) | | $ | 10 |
| | $ | (11 | ) | | $ | (1 | ) |
| |
(1) | Volume changes are calculated as the change in volume multiplied by the prior year rate. |
| |
(2) | Rate changes are calculated as the change in rate multiplied by the prior year average balance. |
| |
(3) | Changes that are not identifiable as either volume-related or rate-related, but rather are equally attributable to both volume and rate changes, have been allocated to the volume and rate categories based upon the proportion of the absolute value of the volume and rate changes. |
Effect of the Use of Derivatives on Net Interest Income
The following table shows the effect of using derivatives on net interest income. The table does not show the effect on earnings from the non-interest components of derivatives related to market value adjustments. This is provided in the next section “Non-Interest Income and Non-Interest Expense.”
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(In millions) | 2014 | | 2013 | | 2014 | | 2013 |
Advances: | | | | | | | |
Amortization/accretion of hedging activities in net interest income | $ | (1 | ) | | $ | (1 | ) | | $ | (2 | ) | | $ | (2 | ) |
Net interest settlements included in net interest income | (23 | ) | | (27 | ) | | (46 | ) | | (55 | ) |
Mortgage loans: | | | | | | | |
Amortization of derivative fair value adjustments in net interest income | (1 | ) | | (1 | ) | | (1 | ) | | (1 | ) |
Consolidated Obligation Bonds: | | | | | | | |
Net interest settlements included in net interest income | 5 |
| | 7 |
| | 9 |
| | 16 |
|
Decrease to net interest income | $ | (20 | ) | | $ | (22 | ) | | $ | (40 | ) | | $ | (42 | ) |
Most of our derivatives synthetically convert the intermediate- and long-term fixed interest rates on certain Advances and Bonds to adjustable-coupon rates tied to short-term LIBOR (mostly one- and three-month repricing resets). These adjustable-rate coupons normally carry lower interest rates than the fixed rates. The use of derivatives lowered net interest income in each period primarily because the Advances that were swapped to short-term LIBOR had higher fixed interest rates than the Bonds that were swapped to short-term LIBOR. This reduction in earnings was acceptable because it enabled us, as we designed, to significantly lower market risk exposure by creating a much closer match of actual cash flows between assets and liabilities than would occur otherwise. The reduction was similar in the first six months of 2014 compared to the same period of 2013.
Provision for Credit Losses
In the first six months of 2013, we recorded a $6.5 million reversal for estimated incurred credit losses in the MPP driven by sharp increases in home prices combined with improved delinquency trends during that period. In the first six months of 2014, delinquency trends continued to decrease while home prices remained relatively steady, resulting in a $0.9 million reversal for estimated incurred credit losses. Further information is in the "Credit Risk - MPP" section in "Quantitative and Qualitative Disclosures About Risk Management" and Note 9 of the Notes to Unaudited Financial Statements.
Non-Interest Income and Non-Interest Expense
The following table presents non-interest income and non-interest expense for each of the three and six months ended June 30, 2014 and 2013.
|
| | | | | | | | | | | | | | | |
(Dollars in millions) | Three Months Ended June 30, | | Six Months Ended June 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
Other Non-Interest Income | | | | | | | |
Net gains (losses) on derivatives and hedging activities | $ | 4 |
| | $ | (1 | ) | | $ | 2 |
| | $ | 3 |
|
Other non-interest income, net | 3 |
| | 3 |
| | 8 |
| | 6 |
|
Total other non-interest income | $ | 7 |
| | $ | 2 |
| | $ | 10 |
| | $ | 9 |
|
| | | | | | | |
Other Expense | | | | | | | |
Compensation and benefits | $ | 9 |
| | $ | 8 |
| | $ | 18 |
| | $ | 16 |
|
Other operating expense | 4 |
| | 4 |
| | 9 |
| | 8 |
|
Finance Agency | 2 |
| | 1 |
| | 3 |
| | 2 |
|
Office of Finance | 1 |
| | 1 |
| | 2 |
| | 3 |
|
Other | 1 |
| | 2 |
| | 2 |
| | 2 |
|
Total other expense | $ | 17 |
| | $ | 16 |
| | $ | 34 |
| | $ | 31 |
|
Average total assets | $ | 101,492 |
| | $ | 93,828 |
| | $ | 101,842 |
| | $ | 89,150 |
|
Average regulatory capital | 4,983 |
| | 5,313 |
| | 5,124 |
| | 5,101 |
|
Total other expense to average total assets (1) | 0.07 | % | | 0.07 | % | | 0.07 | % | | 0.07 | % |
Total other expense to average regulatory capital (1) | 1.34 |
| | 1.18 |
| | 1.33 |
| | 1.21 |
|
| |
(1) | Amounts used to calculate percentages are based on dollars in thousands. Accordingly, recalculations based upon the disclosed amounts (millions) may not produce the same results. |
Other non-interest income increased in the first six months of 2014 compared to the same period of 2013 primarily due to an increase in Standby Letters of Credit fees.
Other expenses rose modestly in the 2014 periods, which reflected increases in compensation and benefits and increases in Finance Agency fees.
Effect of Derivatives and Hedging Activities
|
| | | | | | | | | | | | | | | |
(In millions) | Three Months Ended June 30, | | Six Months Ended June 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
Net gains (losses) on derivatives and hedging activities | | | | | | | |
Advances: | | | | | | | |
Gains on fair value hedges | $ | 1 |
| | $ | 2 |
| | $ | 1 |
| | $ | 4 |
|
Gains (losses) on derivatives not receiving hedge accounting | — |
| | 2 |
| | (1 | ) | | 6 |
|
Mortgage loans: | | | | | | | |
Gains (losses) on derivatives not receiving hedge accounting | 2 |
| | (5 | ) | | — |
| | (8 | ) |
Consolidated Obligation Bonds: | | | | | | | |
Gains on derivatives not receiving hedge accounting | 1 |
| | — |
| | 2 |
| | 1 |
|
Total net gains (losses) on derivatives and hedging activities | 4 |
| | (1 | ) | | 2 |
| | 3 |
|
Net gains on financial instruments held at fair value (1) | — |
| | — |
| | 2 |
| | 1 |
|
Total net effect of derivatives and hedging activities | $ | 4 |
| | $ | (1 | ) | | $ | 4 |
| | $ | 4 |
|
| |
(1) | Includes only those gains or losses on financial instruments held at fair value that have an economic derivative "assigned." |
The amounts of income volatility in overall derivatives and hedging activities were modest compared to the notional principal amounts, well within the range of normal historical fluctuation, and consistent with the close hedging relationships of our derivative transactions.
Affordable Housing Program Assessments
In the first six months of 2014, assessments totaled $13 million and lowered ROE by 0.54 percentage points. In the first six months of 2013, assessments totaled $14 million and lowered ROE by 0.58 percentage points.
Segment Information
Note 17 of the Notes to Unaudited 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 table below summarizes each segment's operating results for the periods shown.
|
| | | | | | | | | | | |
(Dollars in millions) | Traditional Member Finance | | MPP | | Total |
Three Months Ended June 30, 2014 | | | | | |
Net interest income after reversal for credit losses | $ | 59 |
| | $ | 19 |
| | $ | 78 |
|
Net income | $ | 44 |
| | $ | 17 |
| | $ | 61 |
|
Average assets | $ | 94,796 |
| | $ | 6,696 |
| | $ | 101,492 |
|
Assumed average capital allocation | $ | 4,537 |
| | $ | 321 |
| | $ | 4,858 |
|
Return on average assets (1) | 0.18 | % | | 1.01 | % | | 0.24 | % |
Return on average equity (1) | 3.86 | % | | 21.16 | % | | 5.00 | % |
| | | | | |
Three Months Ended June 30, 2013 | | | | | |
Net interest income after reversal for credit losses | $ | 56 |
| | $ | 27 |
| | $ | 83 |
|
Net income | $ | 44 |
| | $ | 18 |
| | $ | 62 |
|
Average assets | $ | 86,698 |
| | $ | 7,130 |
| | $ | 93,828 |
|
Assumed average capital allocation | $ | 4,779 |
| | $ | 392 |
| | $ | 5,171 |
|
Return on average assets (1) | 0.20 | % | | 1.02 | % | | 0.26 | % |
Return on average equity (1) | 3.67 | % | | 18.62 | % | | 4.80 | % |
|
| | | | | | | | | | | |
| | | | | |
(Dollars in millions) | Traditional Member Finance | | MPP | | Total |
Six Months Ended June 30, 2014 | | | | | |
Net interest income after reversal for credit losses | $ | 116 |
| | $ | 39 |
| | $ | 155 |
|
Net income | $ | 87 |
| | $ | 31 |
| | $ | 118 |
|
Average assets | $ | 95,103 |
| | $ | 6,739 |
| | $ | 101,842 |
|
Assumed average capital allocation | $ | 4,666 |
| | $ | 331 |
| | $ | 4,997 |
|
Return on Average Assets (1) | 0.18 | % | | 0.93 | % | | 0.23 | % |
Return on Average Equity (1) | 3.75 | % | | 18.93 | % | | 4.75 | % |
| | | | | |
Six Months Ended June 30, 2013 | | | | | |
Net interest income after reversal for credit losses | $ | 104 |
| | $ | 57 |
| | $ | 161 |
|
Net income | $ | 85 |
| | $ | 40 |
| | $ | 125 |
|
Average assets | $ | 81,884 |
| | $ | 7,266 |
| | $ | 89,150 |
|
Assumed average capital allocation | $ | 4,531 |
| | $ | 402 |
| | $ | 4,933 |
|
Return on Average Assets (1) | 0.21 | % | | 1.11 | % | | 0.28 | % |
Return on Average Equity (1) | 3.80 | % | | 20.03 | % | | 5.13 | % |
| |
(1) | Amounts used to calculate returns are based on numbers in thousands. Accordingly, recalculations based upon the disclosed amounts (millions) may not produce the same results. |
Traditional Member Finance Segment
The increases in net interest income in both comparison periods were due primarily to Advance growth, an increase in mortgage-backed securities leverage, and a decrease in net amortization. Net income remained relatively constant as these factors were mostly offset by a decrease in market values on swaps and related hedged items and an increase in operating expenses.
ROE decreased in the first six months of 2014 even though net income increased slightly because the proportional increase in average total capital to support Advance growth exceeded the net income generated. The growth in capital diluted ROE because earnings were spread over a larger capital base. ROE improved in the three-month comparison primarily due to an approximate $500 million stock repurchase in February 2014, the effect of which was not fully realized until the second quarter.
MPP Segment
The MPP continued to earn a substantial level of profitability compared with market interest rates, with a moderate amount of market risk and credit risk. In the first six months of 2014, the MPP averaged seven percent of total average assets while accounting for 26 percent of earnings.
Net interest income decreased in both comparison periods due to higher net amortization, lower reversals of MPP credit losses, the run-off of higher yielding MPP loans in excess of debt called and replaced at lower rates, and lower MPP balances. Net income decreased by smaller amounts since the factors above were partially offset by net gains on derivatives and hedging activities in the three and six months of 2014 compared to losses in the same periods of 2013.
Net amortization of MPP assets was $8 million higher in the first six months of 2014 due to a low amount of amortization in the same period of 2013 as a result of increases in mortgage rates.
ROE decreased in the first six months of 2014 due to the factors above, which were partially offset by a lower amount of capital allocated as a result of the lower MPP balances and Advance growth. As with the Traditional Member Finance segment, ROE increased in the second quarter comparison due to the repurchase of stock in February.
Compared to the Traditional Member Finance segment, the MPP segment can exhibit more earnings volatility relative to short-term interest rates and more credit risk exposure, but also provides the opportunity for enhancing risk-adjusted returns which
normally augments earnings. 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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT RISK MANAGEMENT
Market Risk
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. Average results are compiled using data for each month end. Given the current very low level of rates, the down rate shocks are nonparallel scenarios, with short-term rates decreasing less than long-term rates so that no rate falls below zero.
Market Value of Equity
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | Down 300 | | Down 200 | | Down 100 | | Flat Rates | | Up 100 | | Up 200 | | Up 300 |
Average Results | | | | | | | | | | | | | |
2014 Year-to-Date | | | | | | | | | | | | | |
Market Value of Equity | $ | 4,764 |
| | $ | 4,914 |
| | $ | 4,950 |
| | $ | 4,856 |
| | $ | 4,738 |
| | $ | 4,608 |
| | $ | 4,484 |
|
% Change from Flat Case | (1.9 | )% | | 1.2 | % | | 1.9 | % | | — |
| | (2.4 | )% | | (5.1 | )% | | (7.7 | )% |
2013 Full Year | | | | | | | | | | | | | |
Market Value of Equity | $ | 5,288 |
| | $ | 5,319 |
| | $ | 5,268 |
| | $ | 5,127 |
| | $ | 4,962 |
| | $ | 4,788 |
| | $ | 4,620 |
|
% Change from Flat Case | 3.1 | % | | 3.7 | % | | 2.8 | % | | — |
| | (3.2 | )% | | (6.6 | )% | | (9.9 | )% |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Month-End Results | | | | | | | | | | | | | |
June 30, 2014 | | | | | | | | | | | | | |
Market Value of Equity | $ | 4,684 |
| | $ | 4,849 |
| | $ | 4,938 |
| | $ | 4,893 |
| | $ | 4,779 |
| | $ | 4,641 |
| | $ | 4,504 |
|
% Change from Flat Case | (4.3 | )% | | (0.9 | )% | | 0.9 | % | | — |
| | (2.3 | )% | | (5.1 | )% | | (8.0 | )% |
December 31, 2013 | | | | | | | | | | | | | |
Market Value of Equity | $ | 5,205 |
| | $ | 5,271 |
| | $ | 5,187 |
| | $ | 5,044 |
| | $ | 4,925 |
| | $ | 4,814 |
| | $ | 4,711 |
|
% Change from Flat Case | 3.2 | % | | 4.5 | % | | 2.8 | % | | — |
| | (2.4 | )% | | (4.6 | )% | | (6.6 | )% |
Duration of Equity
|
| | | | | | | | | | | | | | | | | | | | |
(In years) | Down 300 | | Down 200 | | Down 100 | | Flat Rates | | Up 100 | | Up 200 | | Up 300 |
Average Results | | | | | | | | | | | | | |
2014 Year-to-Date | (4.1 | ) | | (1.8 | ) | | 1.5 |
| | 2.2 |
| | 2.8 |
| | 2.9 |
| | 2.8 |
|
2013 Full Year | 0.1 |
| | 1.2 |
| | 2.9 |
| | 3.4 |
| | 3.5 |
| | 3.7 |
| | 3.6 |
|
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Month-End Results | | | | | | | | | | | | | |
June 30, 2014 | (3.7 | ) | | (2.7 | ) | | (0.1 | ) | | 1.8 |
| | 2.8 |
| | 3.1 |
| | 3.1 |
|
December 31, 2013 | (2.3 | ) | | 1.0 |
| | 2.9 |
| | 2.5 |
| | 2.4 |
| | 2.3 |
| | 2.1 |
|
During the first six months of 2014, as in 2013, consistent with our historical practice, we positioned the market risk exposure to changing interest rates to be moderate overall to higher rates. Exposure to lower rates continued to benefit from slower mortgage prepayment speeds (given the level of rates and composition of mortgage assets) over the last several years, than the speeds that would be expected under a more normal housing environment.
Based on the totality of our market risk analysis, we expect that profitability, defined as the level of ROE compared with short-term market rates, will remain competitive unless interest rates change by extremely large amounts in a short period of time.
Decreases in long-term interest rates even up to two percentage points (which would put fixed-rate mortgages at almost two percent) would still result in ROE being above market interest rates. We believe that profitability would not become uncompetitive in a rising rate environment unless long-term rates were to permanently increase in a short period of time by as much as five percentage points or more combined with short-term rates increasing to at least eight percent.
Market Capitalization Ratio
The following table presents the market capitalization ratios for the interest rate environments for which we have policy limits.
|
| | | | | |
| June 30, 2014 | | December 31, 2013 |
Market Value of Equity to Par Value of Regulatory Capital Stock - Base Case (Flat Rates) Scenario | 113 | % | | 105 | % |
Market Value of Equity to Par Value of Regulatory Capital Stock - Down Shock of 200 bps | 114 |
| | 108 |
|
Market Value of Capital to Par Value of Regulatory Capital Stock - Up Shock of 200 bps | 107 |
| | 100 |
|
In the first six months of 2014, the market capitalization ratios in the scenarios presented continued to be above minimum policy limits. The ratios increased in 2014 due to the combined effect of several smaller factors, which included the repurchase of excess stock, modest decreases in long-term market rates, modestly higher market prices on mortgage assets relative to funding, and enhancements made to the methodology used to price some mortgage assets and Consolidated Bonds. The ratios remain at favorable levels because retained earnings are currently 15 percent of regulatory capital stock and we have maintained market risk exposure at moderate levels.
Market Risk Exposure of the Mortgage Assets Portfolio
The mortgage assets portfolio normally accounts for almost all of our market risk exposure because of prepayment volatility that we cannot completely hedge while maintaining positive 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 June 30, 2014, the mortgage assets portfolio had an assumed par-value equity (capital) allocation of $1.1 billion based on the entire balance sheet's regulatory capital-to-assets ratio. Average results are compiled using data for each month-end. The market value sensitivities are one measure we use to analyze the portfolio's estimated market risk exposure.
% Change in Market Value of Equity-Mortgage Assets Portfolio
|
| | | | | | | | | | | | | | | | | | | |
| Down 300 | | Down 200 | | Down 100 | | Flat Rates | | Up 100 | | Up 200 | | Up 300 |
Average Results | | | | | | | | | | | | | |
2014 Year-to-Date | (16.7 | )% | | (0.7 | )% | | 5.4 | % | | — | | (10.1 | )% | | (21.4 | )% | | (32.6 | )% |
2013 Full Year | 6.3 | % | | 10.6 | % | | 8.9 | % | | — | | (14.0 | )% | | (29.0 | )% | | (43.7 | )% |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Month-End Results | | | | | | | | | | | | | |
June 30, 2014 | (26.1 | )% | | (9.2 | )% | | 1.2 | % | | — | | (8.4 | )% | | (19.2 | )% | | (30.3 | )% |
December 31, 2013 | 7.7 | % | | 16.3 | % | | 11.3 | % | | — | | (12.6 | )% | | (24.6 | )% | | (36.1 | )% |
The sensitivities indicate that the market risk exposure of the mortgage assets portfolio had similar trends in the last two years across interest rate shocks as those of the entire balance sheet. The dollar amount of exposure for any individual rate shock can be obtained by multiplying the percentage change by the assumed equity allocation. We believe the mortgage assets portfolio continues to have an acceptable amount of market risk exposure relative to the inherent market risks of owning mortgages and relative to their actual and expected profitability. We believe this exposure is consistent with our risk appetite philosophy and cooperative business model.
The measured risk exposure of our mortgage assets portfolio, on average, declined in the first six months of 2014 relative to 2013. The decrease was a result of the market risk strategy we implemented to maintain exposure to higher rates at reduced levels.
Capital Adequacy
Capital Leverage
Prudent risk management dictates that we maintain effective financial leverage to minimize risk to our capital stock while preserving profitability and that we hold an adequate amount of retained earnings. Pursuant to these objectives, Finance Agency Regulations stipulate that we must comply with three limits on capital leverage and risk-based capital. We have always complied with each capital requirement. The regulatory capital ratio averaged 5.03 percent in the first six months of 2014 and at June 30, 2014 was 4.91 percent. The latter metric means that, given the amount of regulatory capital, total assets could increase by approximately $23 billion with no new stock purchases before the capital-to-assets ratio would fall to four percent. This amount of growth in assets is unlikely to occur and, if it did, our Capital Plan would require us to obtain additional amounts of capital well before the four percent policy limit on capitalization would be reached.
See the “Capital Resources” section of “Analysis of Financial Condition” and Note 14 of the Notes to Unaudited Financial Statements for more information on our capital adequacy.
Retained Earnings
Our Board-approved Retained Earnings and Dividend Policy sets forth a range for the amount of retained earnings we believe is needed to mitigate impairment risk and facilitate dividend stability in light of the risks we face. The current minimum retained earnings requirement is $375 million, based on mitigating quantifiable risks under very stressed business and market scenarios to at least a 99 percent confidence level. Given the regulatory environment, we have been carrying a greater amount of retained earnings ($647 million at June 30, 2014) than required by the Policy. We will continue to bolster capital adequacy over time by allocating a portion of earnings to a separate restricted retained earnings account in accordance with the FHLBank System's Capital Agreement.
Credit Risk
Overview
We assume a significant amount of inherent credit risk exposure in our business. We believe we continue to have a minimal overall amount of residual credit risk exposure related to our Credit Services, purchases of investments, and transactions in derivatives and a moderate amount of legacy credit risk exposure related to the MPP. We believe policies and practices related to credit underwriting, Advance collateral management, and transactions with investment and derivative counterparties continue to fully mitigate these risks, and as such we have no loan loss reserves or impairment recorded for these instruments.
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 June 30, 2014, our policy of over-collateralization resulted in total collateral pledged of $240.4 billion to serve members' total borrowing capacity of $197.6 billion. 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 Collateralized Maintenance Requirements).
|
| | | | | | | | | | | | | |
| June 30, 2014 | | December 31, 2013 |
(Dollars in billions) | | | Percent of Total | | | | Percent of Total |
| Collateral Amount | | Pledged Collateral | | Collateral Amount | | Pledged Collateral |
Single-family loans | $ | 131.8 |
| | 55 | % | | $ | 125.0 |
| | 56 | % |
Multi-family loans | 36.3 |
| | 15 |
| | 33.2 |
| | 15 |
|
Commercial real estate | 31.5 |
| | 13 |
| | 26.5 |
| | 12 |
|
Home equity loans/lines of credit | 20.7 |
| | 9 |
| | 20.4 |
| | 9 |
|
Bond securities | 19.6 |
| | 8 |
| | 17.0 |
| | 8 |
|
Farm real estate | 0.5 |
| | (a) |
| | 0.6 |
| | (a) |
|
Total | $ | 240.4 |
| | 100 | % | | $ | 222.7 |
| | 100 | % |
| |
(a) | Less than one percent of total pledged collateral. |
At June 30, 2014, 64 percent of collateral was related to residential mortgage lending in single-family loans and home equity loans/lines of credit. The collateral composition remained relatively constant compared to the end of 2013.
Borrowing Capacity/Lendable Value. We determine borrowing capacity against pledged collateral by establishing minimum levels of over-collateralization ("Collateralized Maintenance Requirements" or "CMRs"). CMRs are determined by statistical analysis and certain management assumptions applied to the estimated value of pledged collateral. All securities collateral and loan collateral pledged by certain members is subject to an ongoing market valuation process.
CMRs result in a lendable value, or borrowing capacity, that is less than the amount of pledged collateral. CMRs vary based on the financial strength of the member institution, the issuer of bond collateral or the quality of securitized assets, the marketability of the pledged assets, the payment performance of pledged loan collateral, and the quality of loan collateral as reflected in the manner in which it was underwritten and is administered.
The table below indicates the range of lendable values remaining after the application of CMRs for each major collateral type pledged at June 30, 2014. We periodically evaluate the CMRs applied by completing internal evaluations or engaging third-party specialists. In the second quarter of 2014, we updated our CMRs based on these evaluations. The resulting impact on secured borrowing capacity was low for most members.
|
| |
| Lending Values Applied to Collateral |
Blanket Status | |
Prime 1-4 family loans | 67-87% |
Multi-family loans | 53-77% |
Prime home equity loans/lines of credit | 57-77% |
Commercial real estate loans | 61-80% |
Farm real estate loans | 65-83% |
Listing Status/Physical Delivery | |
Cash/U.S. Government/U.S. Treasury/U.S. agency securities | 79-100% |
U.S. agency mortgage-backed securities/CMOs | 79-98% |
Private-label residential mortgage-backed securities | 43-87% |
Private-label commercial mortgage-backed securities | 33-86% |
Municipal securities | 25-93% |
Small Business Administration certificates | 88-93% |
1-4 family loans | 67-94% |
Multi-family loans | 57-87% |
Home equity loans/lines of credit | 63-87% |
Commercial real estate loans | 65-91% |
Farm real estate loans | 67-91% |
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.
Subprime and Nontraditional Mortgage Loan Collateral. We have policies and processes to identify subprime loans pledged by members to which we have high credit risk exposure or have extended significant credit. We perform on-site collateral reviews, sometimes engaging third parties, of members we deem to have high credit risk exposure. The reviews include identification of loans that meet our definitions of subprime and nontraditional. During the review process, we estimate overall subprime and nontraditional mortgage exposure levels by performing random statistical sampling of residential loans in the members' pledged portfolios.
Collateralization of Former Members. Underwriting criteria, including the forms of collateral that may be pledged, are generally the same for members and former members. One exception is that former members with outstanding Advances must either deliver sufficient collateral into our custody to cover their Advances (regardless of whether they would qualify for Blanket or Listing status as a member) or have their Advances covered by a subordination or other acceptable form of intercreditor agreement from/by another FHLBank to continue our credit risk exposure to former members. On June 30, 2014, we had $1.7 billion of Advances outstanding to former members. This amount continued to be overcollateralized through a combination of subordination or other intercreditor security agreements with other FHLBanks and marketable securities and loan collateral held in our custody.
Internal Credit Ratings. We perform credit underwriting of our members and nonborrower members 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. The credit ratings are based on internal credit analysis and consideration of available credit ratings from independent credit rating organizations. The credit ratings are used in conjunction with other measures of the credit risk and pledged collateral, as described above, in managing credit risk exposure to member and nonmember borrowers.
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) | | | | | | |
June 30, 2014 | | December 31, 2013 |
| | Borrowers | | | | Borrowers |
| | | | Collateral-Based | | | | | | Collateral-Based |
Credit | | | | Borrowing | | Credit | | | | Borrowing |
Rating | | Number | | Capacity | | Rating | | Number | | Capacity |
1-3 | | 520 |
| | $ | 122.5 |
| | 1-3 | | 505 |
| | $ | 108.4 |
|
4 | | 121 |
| | 70.1 |
| | 4 | | 125 |
| | 58.7 |
|
5 | | 55 |
| | 4.4 |
| | 5 | | 59 |
| | 4.0 |
|
6 | | 17 |
| | 0.3 |
| | 6 | | 26 |
| | 0.9 |
|
7 | | 15 |
| | 0.3 |
| | 7 | | 22 |
| | 0.4 |
|
Total | | 728 |
| | $ | 197.6 |
| | Total | | 737 |
| | $ | 172.4 |
|
A “4” rating is our assessment of the lowest level of satisfactory performance. At June 30, 2014, 87 borrowers (12 percent of the total) had credit ratings of "5" through "7," a net decrease of 20 from the end of 2013. These members had $5 billion of borrowing capacity at June 30, 2014. There was a net decrease of four members who had a "4" credit rating and a net increase of 15 member with credit ratings of "1," "2," or "3." We believe these trends indicate a general stabilization and improvement in the overall financial condition of our members during the recovery cycle for the overall economy and housing market.
Member Failures, Closures, and Receiverships. There was one member failure in 2014 through the date of this filing. All Advance exposure to this member was fully collateralized by assets held in our custody at the time of failure. This member had $6 million of Advances outstanding, all of which were repaid. We had no other outstanding exposure to this member.
MPP
Overview. We believe that the residual amount of credit risk exposure to loans in the MPP is modest and on a downward trend, based on the same factors described in the 2013 Form 10-K. Charge-offs totaled $0.9 million in the first six months of 2014 and $13.8 million program-to-date through June 30, 2014 in relation to $5.9 billion of unpaid principal balance on conventional loans at June 30, 2014. In addition to the low program-to-date charge-offs, our financial analysis suggests 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 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 |
Loan-to-Value | | June 30, 2014 | | December 31, 2013 | | Loan-to-Value | | June 30, 2014 | | December 31, 2013 |
<= 60% | | 18 | % | | 19 | % | | <= 60% | | 37 | % | | 33 | % |
> 60% to 70% | | 17 |
| | 17 |
| | > 60% to 70% | | 27 |
| | 26 |
|
> 70% to 80% | | 54 |
| | 53 |
| | > 70% to 80% | | 25 |
| | 25 |
|
> 80% to 90% | | 7 |
| | 7 |
| | > 80% to 90% | | 8 |
| | 11 |
|
> 90% | | 4 |
| | 4 |
| | > 90% to 100% | | 2 |
| | 3 |
|
| | | | | | > 100% | | 1 |
| | 2 |
|
Weighted Average | | 71 | % | | 71 | % | | Weighted Average | | 63 | % | | 65 | % |
Overall loan-to-value ratios have shown positive trends over the past few years as the overall housing market has undergone a sustained recovery. At June 30, 2014, we estimated that 11 percent of loans have current loan-to-value ratios above 80 percent, down from 16 percent at the end of 2013. We estimate the aggregate portfolio has a weighted average current loan-to-value ratio of 63 percent, eight percent lower than what was estimated at origination and two percent lower from the end of 2013. We believe the overall trend is consistent with an acceptable credit quality of the portfolio.
Based on the available data, we believe we have little 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.
Lender Risk Account. Conventional mortgage loans are supported against credit losses by various combinations of primary mortgage insurance (PMI), supplemental mortgage insurance (SMI) and the Lender Risk Account. The Lender Risk Account 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. The Lender Risk Account is funded by the FHLBank from a portion of the purchase proceeds to cover expected credit losses for a specific pool of loans. As a result, some pools of loans may have sufficient credit enhancements to recapture all losses while other pools of loans may not have enough credit enhancements to recapture all losses. The amount of loss claims against the Lender Risk Account in the first six months of 2014 was approximately $1 million. The Account had balances of $118 million and $115 million at June 30, 2014 and December 31, 2013, respectively. For more information, see Note 9 of the Notes to Unaudited Financial Statements.
Credit Performance. The table below provides an analysis of conventional loans delinquent or in foreclosure, along with the national average serious delinquency rate.
|
| | | | | | | |
| Conventional Loan Delinquencies |
(Dollars in millions) | June 30, 2014 | | December 31, 2013 |
Early stage delinquencies - unpaid principal balance (1) | $ | 45 |
| | $ | 59 |
|
Serious delinquencies - unpaid principal balance (2) | 49 |
| | 58 |
|
Early stage delinquency rate (3) | 0.8 | % | | 1.0 | % |
Serious delinquency rate (4) | 0.8 |
| | 1.0 |
|
National average serious delinquency rate (5) | 2.6 |
| | 2.9 |
|
| |
(1) | Includes conventional loans 30 to 89 days delinquent and not in foreclosure. |
| |
(2) | Includes conventional loans that are 90 days or more past due or where the decision of foreclosure or a similar alternative such as pursuit of deed-in-lieu has been reported. |
| |
(3) | Early stage delinquencies expressed as a percentage of the total conventional loan portfolio. |
| |
(4) | Serious delinquencies expressed as a percentage of the total conventional loan portfolio. |
| |
(5) | National average number of fixed-rate prime conventional loans that are 90 days or more past due or in the process of foreclosure is based on the most recent national delinquency data available. The June 30, 2014 rate is based on March 31, 2014 data. |
The MPP has experienced a moderate amount of delinquencies and foreclosures, with rates 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 June 30, 2014, high risk loans had experienced relatively moderate serious delinquencies (i.e., delinquencies that are 90 days or more past due or in the process of foreclosure). For example, of the $69 million of conventional principal balances with current estimated loan-to-values above 100 percent, $5 million (seven percent) were seriously delinquent. We believe these data further support our view that the overall portfolio is comprised of high quality loans.
Credit Losses. The following table shows the effects of credit enhancements on the determination of the allowance for credit losses at the noted periods.
|
| | | | | | | |
(In millions) | June 30, 2014 | | December 31, 2013 |
Estimated incurred credit losses, before credit enhancements | $ | (24 | ) | | $ | (31 | ) |
Estimated amounts deemed recoverable by: | | | |
Primary mortgage insurance | 2 |
| | 3 |
|
Supplemental mortgage insurance | 13 |
| | 17 |
|
Lender Risk Account | 3 |
| | 4 |
|
Allowance for credit losses, after credit enhancements | $ | (6 | ) | | $ | (7 | ) |
The data presented above are aggregated information on the health of the overall portfolio. Credit risk exposure depends on the actual and potential credit performance of the loans in each pool compared to the pool's equity (on individual loans) and credit enhancements, including PMI (for individual loans), the Lender Risk Account, and SMI.
The allowance for credit losses at June 30, 2014 did not change materially compared to the end of 2013. Delinquency trends continued to decrease while housing prices remained relatively stable.
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 scenarios for either home prices or unemployment rates, we do not expect further credit losses to significantly decrease our overall annual profitability or dividends payable to members, or to materially affect our capital adequacy. For example, assuming a 20 percent decline in all home prices over the next two years, we estimate that our lifetime credit losses, net of the effect of credit enhancements, could increase by approximately $16 million, which would decrease annual ROE by approximately only 0.05 percentage points over the next five years (most of the losses are estimated to occur in the next five years).
Credit Risk Exposure to Insurance Providers.
PMI
Some of our conventional loans carry PMI as a credit enhancement feature. Based on the guidelines of the MPP, we have assessed that we do not have any credit risk exposure to the PMI providers.
SMI
Another credit enhancement feature on some conventional loans is SMI purchased from Genworth and Mortgage Guaranty Insurance Corporation (MGIC). Beginning February 1, 2011, we discontinued use of SMI as a credit enhancement for new loan purchases; instead, we now augment credit enhancements with a greater amount of the purchase proceeds added to the Lender Risk Account. At June 30, 2014, we had $2.1 billion of conventional loans purchased prior to February 2011 with outstanding SMI coverage through Genworth and MGIC that are paying down over time.
In a scenario in which home prices do not change and both providers fail to pay their insurance coverage on defaulting loans (with an assumption that we would obtain a 50 percent recovery rate), we estimated at June 30, 2014 our exposure to the providers over the life of the MPP loans was $7 million. In an adverse scenario in which home prices decline 20 percent over the next two years and both providers fail to pay claims (with the same recovery assumption), we estimate exposure to be approximately $13 million.
Based on our most-recent analysis including consulting with a third-party rating agency, we believe it is likely each provider will fulfill its contractual insurance obligations. However, because of the uncertainty of this assessment we concluded, as of June 30, 2014, that payments on a portion of our SMI coverage may not be probable and have incorporated an estimate of such in our loan loss reserve. We estimate that $0.4 million of payments are not probable at June 30, 2014. The estimation of SMI exposure, similar to overall trends of our loan losses, has declined in the last year.
Investments
Liquidity Investments.
Liquidity investments are either unsecured, guaranteed by the U.S. government, or secured (i.e., collateralized). For unsecured liquidity investments, we invest in the debt securities of highly rated, investment-grade institutions, have appropriate and conservative limits on dollar and maturity exposure to each institution, and have strong credit underwriting practices, including active monitoring of credit quality of our counterparties and of the environment in which they operate. We believe we purchased all liquidity investments from counterparties that have a strong ability to repay principal and interest.
Our unsecured liquidity investments to a counterparty or group of affiliated counterparties are limited by regulation to maturities of no more than nine months and limited to a dollar amount based on a percentage of eligible regulatory capital (defined as the lessor of our regulatory capital or the eligible amount of a counterparty's Tier 1 capital). The permissible percentage ranges from one percent to 15 percent based on the counterparty's lowest long-term credit rating of its debt from a nationally recognized statistical rating organization (NRSRO). In 2014, pursuant to a Finance Agency Regulation, we have reduced reliance on NRSRO ratings for unsecured investment activity by enhancing 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 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) | June 30, 2014 |
| Long-Term Rating |
| AAA | | AA | | A | | Total |
Unsecured Liquidity Investments | | | | | | | |
Federal funds sold | $ | — |
| | $ | 350 |
| | $ | 755 |
| | $ | 1,105 |
|
Certificates of deposit | — |
| | 605 |
| | 1,400 |
| | 2,005 |
|
Total unsecured liquidity investments | — |
| | 955 |
| | 2,155 |
| | 3,110 |
|
Guaranteed/Secured Liquidity Investments | | | | | | | |
Securities purchased under agreements to resell | — |
| | 5,950 |
| | — |
| | 5,950 |
|
U.S. Treasury obligations | — |
| | 26 |
| | — |
| | 26 |
|
Total guaranteed/secured liquidity investments | — |
| | 5,976 |
| | — |
| | 5,976 |
|
Total liquidity investments | $ | — |
| | $ | 6,931 |
| | $ | 2,155 |
| | $ | 9,086 |
|
|
| | | | | | | | | | | | | | | |
| December 31, 2013 |
| Long-Term Rating |
| AAA | | AA | | A | | Total |
Unsecured Liquidity Investments | | | | | | | |
Federal funds sold | $ | — |
| | $ | 760 |
| | $ | 980 |
| | $ | 1,740 |
|
Certificates of deposit | — |
| | 1,800 |
| | 385 |
| | 2,185 |
|
Total unsecured liquidity investments | — |
| | 2,560 |
| | 1,365 |
| | 3,925 |
|
Guaranteed/Secured Liquidity Investments | | | | | | | |
Securities purchased under agreements to resell | — |
| | 2,350 |
| | — |
| | 2,350 |
|
Government-sponsored enterprises (1) | — |
| | 28 |
| | — |
| | 28 |
|
Total guaranteed/secured liquidity investments | — |
| | 2,378 |
| | — |
| | 2,378 |
|
Total liquidity investments | $ | — |
| | $ | 4,938 |
| | $ | 1,365 |
| | $ | 6,303 |
|
| |
(1) | Consists of securities that are issued and effectively guaranteed by Fannie Mae and/or Freddie Mac, which have the support of the U.S. government, although they are not obligations of the U.S. government. |
At June 30, 2014 and December 31, 2013, as well as many business days between these two dates, 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.
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| | | | | | | | | | | | | | |
(In millions) | | June 30, 2014 |
| | | | Counterparty Rating (1) | | |
Domicile of Counterparty | | Sovereign Rating (1) | | AA | | A | | Total |
Domestic | | AA+ | | $ | 255 |
| | $ | 805 |
| | $ | 1,060 |
|
U.S. branches and agency offices of foreign commercial banks: | | | | | | | | |
Canada | | AAA | | — |
| | 900 |
| | 900 |
|
Australia | | AAA | | 700 |
| | — |
| | 700 |
|
Switzerland | | AAA | | — |
| | 350 |
| | 350 |
|
Germany | | AAA | | — |
| | 100 |
| | 100 |
|
Total U.S. branches and agency offices of foreign commercial banks | |
| | 700 |
| | 1,350 |
| | 2,050 |
|
Total unsecured investment credit exposure | |
| | $ | 955 |
| | $ | 2,155 |
| | $ | 3,110 |
|
| |
(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.
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| | | | | | | | | | | | | | | | | | | | |
(In millions) | | June 30, 2014 |
Domicile of Counterparty | | Overnight | | Due 2 days through 30 days | | Due 31 days through 90 days | | Due 91 days through 180 days | | Total |
Domestic | | $ | 100 |
| | $ | 860 |
| | $ | 100 |
| | $ | — |
| | $ | 1,060 |
|
U.S. branches and agency offices of foreign commercial banks: | | | | | | | | | | |
Canada | | 555 |
| | — |
| | 345 |
| | — |
| | 900 |
|
Australia | | 350 |
| | — |
| | 350 |
| | — |
| | 700 |
|
Switzerland | | — |
| | — |
| | 350 |
| | — |
| | 350 |
|
Germany | | 100 |
| | — |
| | — |
| | — |
| | 100 |
|
Total U.S. branches and agency offices of foreign commercial banks | | 1,005 |
| | — |
| | 1,045 |
| | — |
| | 2,050 |
|
Total unsecured investment credit exposure | | $ | 1,105 |
| | $ | 860 |
| | $ | 1,145 |
| | $ | — |
| | $ | 3,110 |
|
At June 30, 2014, all of the $3.1 billion of unsecured liquidity exposure was to counterparties with holding companies domiciled in countries receiving either AAA or AA long-term sovereign ratings. Furthermore, we restrict a significant portion of unsecured lending to overnight maturities, which further limits risk exposure to these counterparties. By Finance Agency Regulation, all counterparties exposed to non-U.S. countries are required to be domestic U.S. branches of foreign counterparties. We also limit exposure to counterparties and countries that could have significant direct or indirect exposure to European sovereign debt.
Mortgage-Backed Securities.
GSE Mortgage-Backed Securities
Most of our mortgage-backed securities are residential 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; we believe the securities issued by these two GSEs are effectively government guaranteed. In addition, based on the data available to us and on our purchase practices, we believe that most of the mortgage loans backing our GSE mortgage-backed securities are of high quality with acceptable credit performance.
Mortgage-Backed Securities Issued by Other Government Agencies
We also invest in mortgage-backed securities issued by Ginnie Mae and mortgage-backed securities issued and guaranteed by the NCUA. These investments totaled $2.2 billion at June 30, 2014. The majority of the Ginnie Mae securities are fixed rate. The NCUA securities have floating rate coupons tied to one-month LIBOR with interest rate caps ranging from seven to eight percent. We believe that the strength of the issuers' guarantees and backing by the full faith and credit of the U.S. government is sufficient to protect us against credit losses on these securities.
Private Label Mortgage-Backed Securities
The FHLBank held no private-label mortgage-backed securities at June 30, 2014.
Derivatives
Credit Risk Exposure. We mitigate most of the credit risk exposure resulting from interest rate swap transactions through collateralization. The table below presents the derivative positions to which the FHLBank had credit risk exposure at June 30, 2014.
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| | | | | | | | | | | | | | | | |
(In millions) | | | | | | | | |
Credit Rating (1) | | Total Notional | | Gross Credit Exposure | | Cash Collateral Pledged To (From) Counterparty | | Net Credit Exposure to Counterparties |
Non-member counterparties: | | | | | | | | |
Asset positions with credit exposure: | | | | | | | | |
Bilateral derivatives | | | | | | | | |
Aa/AA | | $ | 170 |
| | $ | — |
| | $ | — |
| | $ | — |
|
A | | 16 |
| | — |
| | — |
| | — |
|
Liability positions with credit exposure: | | | | | | | | |
Cleared derivatives (2) | | 425 |
| | — |
| | 1 |
| | 1 |
|
Total derivative positions with credit exposure to non-member counterparties | | 611 |
| | — |
| | 1 |
| | 1 |
|
Member institutions (3) | | 333 |
| | 4 |
| | — |
| | 4 |
|
Total | | $ | 944 |
| | $ | 4 |
| | $ | 1 |
| | $ | 5 |
|
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(1) | Each category includes the related plus (+) and minus (-) ratings (i.e., “A” includes “A+” and “A-” ratings). |
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(2) | Represents derivative transactions cleared with Clearinghouses, which are not rated. |
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(3) | Represents Mandatory Delivery Contracts. |
Based on both the gross and net exposures, we had a minimal amount of residual credit risk exposure throughout the first six months of 2014, totaling $5 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 limit our exposure to acceptable levels.
The following table presents counterparties that provided 10 percent or more of the total notional amount of bilateral interest rate swap derivatives outstanding.
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| | | | | | | | | | | | | | | | | | | | | | |
(In millions) | | | | | | | | | | | | | | |
June 30, 2014 | | | | | | | | December 31, 2013 | | | | | | |
Counterparty | | Credit Rating Category | | Notional Principal | | Net Unsecured Exposure | | Counterparty | | Credit Rating Category | | Notional Principal | | Net Unsecured Exposure |
Deutsche Bank AG | | A | | $ | 1,689 |
| | $ | — |
| | Morgan Stanley Capital Services | | Baa/BBB | | $ | 3,421 |
| | $ | — |
|
JPMorgan Chase Bank, N.A. | | A | | 1,401 |
| | — |
| | Deutsche Bank AG | | A | | 1,458 |
| | — |
|
Wells Fargo Bank, N.A. | | Aa/AA | | 1,286 |
| | — |
| | Royal Bank of Scotland PLC | | A | | 1,142 |
| | — |
|
Although we cannot predict if we will realize credit risk losses from any of our derivatives counterparties, we believe that all of them 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 June 30, 2014, we had $1.4 billion of notional principal of interest rate swaps outstanding to one member, JPMorgan Chase Bank, N.A. (JPMorgan), which also had outstanding credit services with us totaling $39.7 billion. Due to the amount of market value collateralization, we had no outstanding credit exposure to this counterparty related to interest rate swaps outstanding.
Lehman Brothers Derivatives. See Note 19 of the Notes to Unaudited Financial Statements for information on derivatives we had with Lehman Brothers at the time of their bankruptcy in September 2008.
Exposure to Member Concentration
We regularly assess concentration risks from business activity. The large increase over the last two years in Advance borrowings from one member, JPMorgan, raised borrower concentration ratios. We believe that the current concentration of Advance activity is consistent with our risk management philosophy.
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 our 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 minor effect on market risk exposure because Advances are largely match funded. Finally, the increase in Advance concentration has not affected capital adequacy because Advance growth from the member is supported by new purchases of capital stock as required by the Capital Plan.
Liquidity Risk
Liquidity Overview
Our principal long-term source of funding and liquidity is from access to the capital markets through participation in the issuance of cost-effective FHLBank System debt securities (Consolidated Obligations) and through execution of derivative
transactions. We also raise liquidity via our liquidity investment portfolio and the ability to sell certain investments without significant accounting consequences. As shown on the Statements of Cash Flows, in the first six months of 2014, our participations in the System's debt issuances totaled $113.3 billion for Discount Notes and $31.8 billion for Bonds. The System's favorable debt ratings, the implicit U.S. government backing of our debt, and our effective funding management were, and continue to be, instrumental in ensuring satisfactory access to the capital markets.
Our liquidity position remained strong during the first six months of 2014 and our overall ability to fund our operations through debt issuances at acceptable interest costs remained sufficient. Although we can make no assurances, we expect this to continue to be the case, and we believe the possibility of a liquidity or funding crisis in the FHLBank System that would impair our FHLBank's ability to participate in issuances of new debt, service outstanding debt, maintain adequate capitalization, or pay competitive dividends is remote.
We must meet both operational and contingency liquidity requirements. We satisfied the operational liquidity requirement both by meeting a contingency liquidity requirement discussed below and because we were able to adequately access the capital markets to issue debt. 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. The amount of overnight liquidity per the Finance Agency guidance and our internal operational liquidity measures was in the range of $5 billion to $12 billion during the first six months of 2014.
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.
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| | | | | | | |
Contingency Liquidity Requirement (in millions) | June 30, 2014 | | December 31, 2013 |
Total Contingency Liquidity Reserves (1) | $ | 26,811 |
| | $ | 30,699 |
|
Total Requirement (2) | (17,623 | ) | | (11,752 | ) |
Excess Contingency Liquidity Available | $ | 9,188 |
| | $ | 18,947 |
|
| |
(1) | Includes, among others, cash, overnight Federal funds, overnight deposits, self-liquidating term Federal funds, 95 percent of the market value of available-for-sale negotiable securities, and 75 percent of the market value of certain held-to-maturity obligations, including obligations of the United States, U.S. government agency obligations and mortgage-backed securities. |
| |
(2) | Includes net liabilities maturing in the next seven business days, assets traded not yet settled, Advance commitments outstanding, Advances maturing in the next seven business days, and a three percent hypothetical increase in Advances. |
Deposit Reserve Requirement
To support our member deposits, we also must meet a statutory deposit reserve requirement. The sum of our investments in obligations of the United States, deposits in eligible banks or trust companies, and Advances with a final maturity not exceeding five years must equal or exceed the current amount of member deposits. The following table presents the components of this liquidity requirement.
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| | | | | | | |
Deposit Reserve Requirement (in millions) | June 30, 2014 | | December 31, 2013 |
Total Eligible Deposit Reserves | $ | 68,873 |
| | $ | 73,531 |
|
Total Member Deposits | (804 | ) | | (898 | ) |
Excess Deposit Reserves | $ | 68,069 |
| | $ | 72,633 |
|
Contractual Obligations
The following table summarizes our contractual obligations at June 30, 2014. The allocations according to the expiration terms and payment due dates of these obligations were not materially different from those at the end of 2013. Changes reflected normal business variations. We believe that, as in the past, we will continue to have sufficient liquidity, including from access to the debt markets to issue Consolidated Obligations, to satisfy these obligations timely.
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| | | | | | | | | | | | | | | | | | | |
(In millions) | < 1 year | | 1<3 years | | 3<5 years | | > 5 years | | Total |
Contractual Obligations | | | | | | | | | |
Long-term debt (Bonds) - par (1) | $ | 25,754 |
| | $ | 17,208 |
| | $ | 7,392 |
| | $ | 9,187 |
| | $ | 59,541 |
|
Operating leases (include premises and equipment) | 1 |
| | 2 |
| | 2 |
| | 6 |
| | 11 |
|
Mandatorily redeemable capital stock | 110 |
| | — |
| | 2 |
| | — |
| | 112 |
|
Commitments to fund mortgage loans | 429 |
| | — |
| | — |
| | — |
| | 429 |
|
Pension and other postretirement benefit obligations | 3 |
| | 6 |
| | 4 |
| | 16 |
| | 29 |
|
Total Contractual Obligations | $ | 26,297 |
| | $ | 17,216 |
| | $ | 7,400 |
| | $ | 9,209 |
| | $ | 60,122 |
|
| |
(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 June 30, 2014. The allocations according to the expiration terms and payment due dates of these items were not materially different from those at the end of 2013, and changes reflected normal business variations.
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| | | | | | | | | | | | | | | | | | | |
(In millions) | < 1 year | | 1<3 years | | 3<5 years | | > 5 years | | Total |
Off-balance sheet items (1) | | | | | | | | | |
Commitments to fund additional Advances | $ | 3 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 3 |
|
Standby Letters of Credit | 14,981 |
| | 506 |
| | 22 |
| | 54 |
| | 15,563 |
|
Standby bond purchase agreements | 39 |
| | 215 |
| | — |
| | — |
| | 254 |
|
Consolidated Obligations traded, not yet settled | 5 |
| | — |
| | — |
| | — |
| | 5 |
|
Total off-balance sheet items | $ | 15,028 |
| | $ | 721 |
| | $ | 22 |
| | $ | 54 |
| | $ | 15,825 |
|
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(1) | Represents notional amount of off-balance sheet obligations. |
Operational Risk
There were no material developments regarding our operational risk exposure during the first six months of 2014.
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
Information required by this Item is set forth under the caption “Quantitative and Qualitative Disclosures About Risk Management” in Part I, Item 2, of this filing.
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Item 4. | Controls and Procedures. |
DISCLOSURE CONTROLS AND PROCEDURES
As of June 30, 2014, the FHLBank'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 June 30, 2014, the FHLBank 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.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
As of June 30, 2014, the FHLBank's management, including its principal executive officer and principal financial officer, evaluated the FHLBank's internal control over financial reporting. Based upon that evaluation, these two officers each concluded that there were no changes in the FHLBank's internal control over financial reporting that occurred during the quarter ended June 30, 2014 that materially affected, or are reasonably likely to materially affect, the FHLBank's internal control over financial reporting.
PART II - OTHER INFORMATION
For a discussion of risk factors, see Part I, Item 1A. "Risk Factors" in the FHLBank's 2013 Form 10-K. There have been no material changes from the risk factors disclosed in the FHLBank's 2013 Form 10-K.
See Index of Exhibits
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, as of the 7th day of August 2014.
FEDERAL HOME LOAN BANK OF CINCINNATI
(Registrant)
|
| |
By: | /s/ Andrew S. Howell |
| Andrew S. Howell |
| President and Chief Executive Officer |
| (principal executive officer) |
| |
By: | /s/ Donald R. Able |
| Donald R. Able |
| Executive Vice President - Chief Operating Officer and Interim Chief Financial Officer |
| (principal financial officer) |
INDEX OF EXHIBITS
|
| | | | |
Exhibit Number (1) | | Description of exhibit | | Document filed or furnished, as indicated below |
| | | | |
31.1 | | Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer | | Filed Herewith |
| | | | |
31.2 | | Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer | | Filed Herewith |
| | | | |
32 | | Section 1350 Certifications | | 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 |
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(1) | Numbers coincide with Item 601 of Regulation S-K. |