Attached files
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EX-32 - EXHIBIT 32 - Federal Home Loan Bank of Cincinnati | ex322015q210-q.htm |
EX-31.1 - EXHIBIT 31.1 - Federal Home Loan Bank of Cincinnati | ex3112015q210-q.htm |
EX-31.2 - EXHIBIT 31.2 - Federal Home Loan Bank of Cincinnati | ex3122015q210-q.htm |
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2015
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to __________.
Commission File No. 000-51399
FEDERAL HOME LOAN BANK OF CINCINNATI
(Exact name of registrant as specified in its charter)
Federally chartered corporation | 31-6000228 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
600 Atrium Two, P.O. Box 598, | ||
Cincinnati, Ohio | 45201-0598 | |
(Address of principal executive offices) | (Zip Code) |
(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.
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, 2015, the registrant had 43,967,812 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.
Page 1 of |
Table of Contents
PART I - FINANCIAL INFORMATION | ||
Item 1. | Financial Statements (Unaudited): | |
Statements of Condition - June 30, 2015 and December 31, 2014 | ||
Statements of Income - Three and six months ended June 30, 2015 and 2014 | ||
Statements of Comprehensive Income - Three and six months ended June 30, 2015 and 2014 | ||
Statements of Capital - Six months ended June 30, 2015 and 2014 | ||
Statements of Cash Flows - Six months ended June 30, 2015 and 2014 | ||
Notes to Unaudited Financial Statements | ||
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | |
Item 4. | Controls and Procedures | |
PART II - OTHER INFORMATION | ||
Item 1A. | Risk Factors | |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | |
Item 6. | Exhibits | |
Signatures |
2
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF CONDITION
(In thousands, except par value)
(Unaudited)
June 30, 2015 | December 31, 2014 | ||||||
ASSETS | |||||||
Cash and due from banks | $ | 11,368 | $ | 3,109,970 | |||
Interest-bearing deposits | 180 | 119 | |||||
Securities purchased under agreements to resell | 1,465,000 | 3,343,000 | |||||
Federal funds sold | 4,250,000 | 6,600,000 | |||||
Investment securities: | |||||||
Trading securities | 1,255 | 1,341 | |||||
Available-for-sale securities | 550,013 | 1,349,977 | |||||
Held-to-maturity securities (includes $0 and $0 pledged as collateral at June 30, 2015 and December 31, 2014, respectively, that may be repledged) (a) | 14,544,782 | 14,712,271 | |||||
Total investment securities | 15,096,050 | 16,063,589 | |||||
Advances (includes $15,129 and $15,042 at fair value under fair value option at June 30, 2015 and December 31, 2014, respectively) | 71,107,890 | 70,405,616 | |||||
Mortgage loans held for portfolio: | |||||||
Mortgage loans held for portfolio | 7,731,941 | 6,989,602 | |||||
Less: allowance for credit losses on mortgage loans | 1,701 | 4,919 | |||||
Mortgage loans held for portfolio, net | 7,730,240 | 6,984,683 | |||||
Accrued interest receivable | 83,571 | 81,384 | |||||
Premises, software, and equipment, net | 10,675 | 11,282 | |||||
Derivative assets | 22,501 | 14,699 | |||||
Other assets | 24,709 | 26,077 | |||||
TOTAL ASSETS | $ | 99,802,184 | $ | 106,640,419 | |||
LIABILITIES | |||||||
Deposits | $ | 725,362 | $ | 729,936 | |||
Consolidated Obligations, net: | |||||||
Discount Notes | 48,262,505 | 41,232,127 | |||||
Bonds (includes $5,623,179 and $4,209,640 at fair value under fair value option at June 30, 2015 and December 31, 2014, respectively) | 45,230,501 | 59,216,557 | |||||
Total Consolidated Obligations, net | 93,493,006 | 100,448,684 | |||||
Mandatorily redeemable capital stock | 65,162 | 62,963 | |||||
Accrued interest payable | 114,843 | 114,781 | |||||
Affordable Housing Program payable | 102,023 | 98,103 | |||||
Derivative liabilities | 54,308 | 63,767 | |||||
Other liabilities | 199,460 | 183,177 | |||||
Total liabilities | 94,754,164 | 101,701,411 | |||||
Commitments and contingencies | |||||||
CAPITAL | |||||||
Capital stock Class B putable ($100 par value); issued and outstanding shares: 43,343 shares at June 30, 2015 and 42,665 shares at December 31, 2014 | 4,334,264 | 4,266,543 | |||||
Retained earnings: | |||||||
Unrestricted | 544,360 | 529,367 | |||||
Restricted | 184,719 | 159,694 | |||||
Total retained earnings | 729,079 | 689,061 | |||||
Accumulated other comprehensive loss | (15,323 | ) | (16,596 | ) | |||
Total capital | 5,048,020 | 4,939,008 | |||||
TOTAL LIABILITIES AND CAPITAL | $ | 99,802,184 | $ | 106,640,419 |
(a) | Fair values: $14,532,213 and $14,794,326 at June 30, 2015 and December 31, 2014, respectively. |
The accompanying notes are an integral part of these financial statements.
3
FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF INCOME
(In thousands)
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
INTEREST INCOME: | |||||||||||||||
Advances | $ | 86,470 | $ | 77,046 | $ | 171,267 | $ | 153,197 | |||||||
Prepayment fees on Advances, net | 262 | 1,075 | 1,292 | 2,071 | |||||||||||
Interest-bearing deposits | 20 | 24 | 41 | 43 | |||||||||||
Securities purchased under agreements to resell | 307 | 325 | 776 | 621 | |||||||||||
Federal funds sold | 1,905 | 1,230 | 3,770 | 2,359 | |||||||||||
Trading securities | 5 | 6 | 11 | 13 | |||||||||||
Available-for-sale securities | 389 | 988 | 876 | 1,748 | |||||||||||
Held-to-maturity securities | 79,330 | 88,100 | 159,765 | 177,353 | |||||||||||
Mortgage loans held for portfolio | 65,294 | 57,444 | 121,493 | 117,709 | |||||||||||
Total interest income | 233,982 | 226,238 | 459,291 | 455,114 | |||||||||||
INTEREST EXPENSE: | |||||||||||||||
Consolidated Obligations - Discount Notes | 10,329 | 6,247 | 20,269 | 14,696 | |||||||||||
Consolidated Obligations - Bonds | 138,095 | 141,835 | 275,378 | 283,992 | |||||||||||
Deposits | 84 | 64 | 177 | 127 | |||||||||||
Mandatorily redeemable capital stock | 617 | 1,158 | 1,249 | 2,351 | |||||||||||
Total interest expense | 149,125 | 149,304 | 297,073 | 301,166 | |||||||||||
NET INTEREST INCOME | 84,857 | 76,934 | 162,218 | 153,948 | |||||||||||
Reversal for credit losses | — | (900 | ) | — | (900 | ) | |||||||||
NET INTEREST INCOME AFTER REVERSAL FOR CREDIT LOSSES | 84,857 | 77,834 | 162,218 | 154,848 | |||||||||||
NON-INTEREST INCOME: | |||||||||||||||
Net losses on trading securities | (2 | ) | (2 | ) | (7 | ) | (4 | ) | |||||||
Net (losses) gains on financial instruments held under fair value option | (441 | ) | (80 | ) | (1,610 | ) | 1,280 | ||||||||
Net gains on derivatives and hedging activities | 2,281 | 3,332 | 7,583 | 2,249 | |||||||||||
Standby Letters of Credit fees | 3,266 | 2,625 | 6,309 | 4,969 | |||||||||||
Other, net | 430 | 449 | 1,391 | 1,574 | |||||||||||
Total non-interest income | 5,534 | 6,324 | 13,666 | 10,068 | |||||||||||
NON-INTEREST EXPENSE: | |||||||||||||||
Compensation and benefits | 9,706 | 8,448 | 19,813 | 17,734 | |||||||||||
Other operating expenses | 4,742 | 4,174 | 9,451 | 8,576 | |||||||||||
Finance Agency | 1,677 | 1,626 | 3,353 | 3,565 | |||||||||||
Office of Finance | 1,316 | 1,164 | 2,242 | 2,211 | |||||||||||
Other | 1,574 | 1,273 | 1,859 | 1,675 | |||||||||||
Total non-interest expense | 19,015 | 16,685 | 36,718 | 33,761 | |||||||||||
INCOME BEFORE ASSESSMENTS | 71,376 | 67,473 | 139,166 | 131,155 | |||||||||||
Affordable Housing Program assessments | 7,200 | 6,863 | 14,042 | 13,351 | |||||||||||
NET INCOME | $ | 64,176 | $ | 60,610 | $ | 125,124 | $ | 117,804 |
The accompanying notes are an integral part of these financial statements.
4
FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
Net income | $ | 64,176 | $ | 60,610 | $ | 125,124 | $ | 117,804 | |||||||
Other comprehensive income adjustments: | |||||||||||||||
Net unrealized gains on available-for-sale securities | 45 | 141 | 37 | 102 | |||||||||||
Pension and postretirement benefits | 619 | 313 | 1,236 | 626 | |||||||||||
Total other comprehensive income adjustments | 664 | 454 | 1,273 | 728 | |||||||||||
Comprehensive income | $ | 64,840 | $ | 61,064 | $ | 126,397 | $ | 118,532 |
The accompanying notes are an integral part of these financial statements.
5
FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF CAPITAL
(In thousands)
(Unaudited)
Capital Stock Class B - Putable | Retained Earnings | Accumulated Other Comprehensive | Total | |||||||||||||||||||||||
Shares | Par Value | Unrestricted | Restricted | Total | Loss | Capital | ||||||||||||||||||||
BALANCE, DECEMBER 31, 2013 | 46,980 | $ | 4,697,985 | $ | 510,321 | $ | 110,843 | $ | 621,164 | $ | (9,042 | ) | $ | 5,310,107 | ||||||||||||
Proceeds from sale of capital stock | 310 | 30,970 | 30,970 | |||||||||||||||||||||||
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 | |||||||||||||||||||||
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 | ||||||||||||
BALANCE, DECEMBER 31, 2014 | 42,665 | $ | 4,266,543 | $ | 529,367 | $ | 159,694 | $ | 689,061 | $ | (16,596 | ) | $ | 4,939,008 | ||||||||||||
Proceeds from sale of capital stock | 787 | 78,652 | 78,652 | |||||||||||||||||||||||
Net shares reclassified to mandatorily redeemable capital stock | (109 | ) | (10,931 | ) | (10,931 | ) | ||||||||||||||||||||
Comprehensive income | 100,099 | 25,025 | 125,124 | 1,273 | 126,397 | |||||||||||||||||||||
Cash dividends on capital stock | (85,106 | ) | (85,106 | ) | (85,106 | ) | ||||||||||||||||||||
BALANCE, JUNE 30, 2015 | 43,343 | $ | 4,334,264 | $ | 544,360 | $ | 184,719 | $ | 729,079 | $ | (15,323 | ) | $ | 5,048,020 |
The accompanying notes are an integral part of these financial statements.
6
FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended June 30, | |||||||
2015 | 2014 | ||||||
OPERATING ACTIVITIES: | |||||||
Net income | $ | 125,124 | $ | 117,804 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Depreciation and amortization | 8,342 | 2,879 | |||||
Net change in derivative and hedging activities | 2,415 | 11,972 | |||||
Net change in fair value adjustments on trading securities | 7 | 4 | |||||
Net change in fair value adjustments on financial instruments held under fair value option | 1,610 | (1,280 | ) | ||||
Other adjustments | (3 | ) | (791 | ) | |||
Net change in: | |||||||
Accrued interest receivable | (2,184 | ) | 3,095 | ||||
Other assets | 671 | 3,359 | |||||
Accrued interest payable | 1,903 | (417 | ) | ||||
Other liabilities | 20,454 | 2,302 | |||||
Total adjustments | 33,215 | 21,123 | |||||
Net cash provided by operating activities | 158,339 | 138,927 | |||||
INVESTING ACTIVITIES: | |||||||
Net change in: | |||||||
Interest-bearing deposits | 5,571 | 10,546 | |||||
Securities purchased under agreements to resell | 1,878,000 | (3,600,000 | ) | ||||
Federal funds sold | 2,350,000 | 635,000 | |||||
Premises, software, and equipment | (706 | ) | (447 | ) | |||
Trading securities: | |||||||
Proceeds from maturities of long-term | 79 | 106 | |||||
Available-for-sale securities: | |||||||
Net decrease in short-term | 800,000 | 180,000 | |||||
Held-to-maturity securities: | |||||||
Net (increase) decrease in short-term | (5,650 | ) | 1,436 | ||||
Proceeds from maturities of long-term | 1,239,443 | 975,121 | |||||
Purchases of long-term | (1,065,952 | ) | (561,789 | ) | |||
Advances: | |||||||
Proceeds | 520,583,099 | 471,592,155 | |||||
Made | (521,302,623 | ) | (475,835,179 | ) | |||
Mortgage loans held for portfolio: | |||||||
Principal collected | 759,202 | 490,081 | |||||
Purchases | (1,518,074 | ) | (383,148 | ) | |||
Net cash provided by (used in) investing activities | 3,722,389 | (6,496,118 | ) | ||||
The accompanying notes are an integral part of these financial statements. | |||||||
7
(continued from previous page) | |||||||
FEDERAL HOME LOAN BANK OF CINCINNATI | |||||||
STATEMENTS OF CASH FLOWS | |||||||
(In thousands) | |||||||
(Unaudited) | |||||||
Six Months Ended June 30, | |||||||
2015 | 2014 | ||||||
FINANCING ACTIVITIES: | |||||||
Net decrease in deposits and pass-through reserves | $ | (5,674 | ) | $ | (125,183 | ) | |
Net payments on derivative contracts with financing elements | (13,071 | ) | (15,269 | ) | |||
Net proceeds from issuance of Consolidated Obligations: | |||||||
Discount Notes | 125,046,626 | 113,292,004 | |||||
Bonds | 9,137,176 | 31,755,220 | |||||
Payments for maturing and retiring Consolidated Obligations: | |||||||
Discount Notes | (118,019,259 | ) | (116,111,544 | ) | |||
Bonds | (23,109,942 | ) | (30,239,044 | ) | |||
Proceeds from issuance of capital stock | 78,652 | 30,970 | |||||
Payments for repurchase/redemption of mandatorily redeemable capital stock | (8,732 | ) | (20,181 | ) | |||
Payments for repurchase of capital stock | — | (497,875 | ) | ||||
Cash dividends paid | (85,106 | ) | (91,792 | ) | |||
Net cash used in financing activities | (6,979,330 | ) | (2,022,694 | ) | |||
Net decrease in cash and cash equivalents | (3,098,602 | ) | (8,379,885 | ) | |||
Cash and cash equivalents at beginning of the period | 3,109,970 | 8,598,933 | |||||
Cash and cash equivalents at end of the period | $ | 11,368 | $ | 219,048 | |||
Supplemental Disclosures: | |||||||
Interest paid | $ | 309,598 | $ | 315,558 | |||
Affordable Housing Program payments, net | $ | 10,122 | $ | 10,597 |
The accompanying notes are an integral part of these financial statements.
8
FEDERAL HOME LOAN BANK OF CINCINNATI
NOTES TO UNAUDITED FINANCIAL STATEMENTS
Background Information
The Federal Home Loan Bank of Cincinnati (the FHLB), a federally chartered corporation, is one of 11 District Federal Home Loan Banks (FHLBanks). The FHLBanks serve the public by enhancing the availability of credit for residential mortgages and targeted community development. The FHLB is regulated by the Federal Housing Finance Agency (Finance Agency).
Note 1 - Basis of Presentation
The accompanying interim financial statements of the FHLB 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 FHLB's Annual Report on Form 10-K for the year ended December 31, 2014 filed with the Securities and Exchange Commission (SEC). Results for the three and six months ended June 30, 2015 are not necessarily indicative of operating results for the full year.
The FHLB 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 FHLB 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 FHLB 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 FHLB'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 FHLB's 2014 Annual Report on Form 10-K.
The FHLB has evaluated subsequent events for potential recognition or disclosure through the issuance of these financial statements and believes there have been no material subsequent events requiring additional disclosure or recognition in these financial statements.
Note 2 - Recently Issued Accounting Standards and Interpretations
Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. On April 15, 2015, the Financial Accounting Standards Board (FASB) issued amendments to clarify the accounting for cloud computing arrangements. The amendments provide guidance to customers on determining whether a cloud computing arrangement includes a software license. If the arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If the arrangement does not contain a software license, the customer should account for the arrangement as a service contract. This guidance becomes effective for the FHLB for the interim and annual periods beginning after December 15, 2015. The FHLB is in the process of evaluating this guidance and its effect on the FHLB's financial condition, results of operations, and cash flows.
9
Simplifying the Presentation of Debt Issuance Costs. On April 7, 2015, the FASB issued guidance to simplify the presentation of debt issuance costs. This guidance requires that debt issuance costs related to a recognized debt liability be presented in the Statement of Condition as a direct deduction from the carrying amount of the liability, consistent with the presentation of debt discounts. The adoption of this guidance will result in a reclassification of debt issuance costs from other assets to Consolidated Obligations on the FHLB's Statement of Condition. This guidance becomes effective for the FHLB for the interim and annual periods beginning after December 15, 2015. The guidance is required to be applied on a retrospective basis to each individual period presented on the Statement of Condition. The FHLB is in the process of evaluating this guidance and its effect on the FHLB's financial condition and cash flows.
Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure. On August 8, 2014, the FASB issued amended guidance relating to the classification and measurement of certain government-guaranteed mortgage loans upon foreclosure. The amendments in this guidance require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if certain conditions are met. This guidance became effective for the FHLB for the interim and annual periods beginning on January 1, 2015, and was adopted prospectively. The adoption of this guidance had no material effect on the FHLB's financial condition, results of operations, or cash flows.
Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. On June 12, 2014, the FASB issued amended guidance for repurchase-to-maturity transactions and repurchase agreements executed as repurchase financings. This amendment requires secured borrowing accounting treatment for repurchase-to-maturity transactions and provides guidance on accounting for repurchase financing arrangements. In addition, this guidance requires additional disclosures, particularly on transfers accounted for as sales that are economically similar to repurchase agreements and on the nature of collateral pledged in repurchase agreements accounted for as secured borrowings. This guidance became effective for the FHLB for interim and annual periods beginning on January 1, 2015. The adoption of this guidance had no material effect on the FHLB's financial condition, results of operations, or cash flows.
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 became effective for the FHLB for interim and annual periods beginning on January 1, 2015, and was adopted prospectively. The adoption of this guidance had no material effect on the FHLB'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 had no material effect on the FHLB's financial condition, results of operations, or cash flows. The charge-off requirements were implemented on January 1, 2015. The adoption of these requirements had no material effect on the FHLB's financial condition, results of operations, or cash flows.
10
Note 3 - Trading Securities
Table 3.1 - Trading Securities by Major Security Types (in thousands)
Fair Value | June 30, 2015 | December 31, 2014 | |||||
Mortgage-backed securities: | |||||||
Other U.S. obligation single-family mortgage-backed securities (1) | $ | 1,255 | $ | 1,341 | |||
Total | $ | 1,255 | $ | 1,341 |
(1) | Consists of Government National Mortgage Association (Ginnie Mae) mortgage-backed securities. |
Table 3.2 - Net Losses on Trading Securities (in thousands)
Six Months Ended June 30, | |||||||
2015 | 2014 | ||||||
Net losses on trading securities held at period end | $ | (7 | ) | $ | (4 | ) | |
Net losses on trading securities | $ | (7 | ) | $ | (4 | ) |
Note 4 - Available-for-Sale Securities
Table 4.1 - Available-for-Sale Securities by Major Security Types (in thousands)
June 30, 2015 | |||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
Certificates of deposit | $ | 550,000 | $ | 13 | $ | — | $ | 550,013 | |||||||
Total | $ | 550,000 | $ | 13 | $ | — | $ | 550,013 | |||||||
December 31, 2014 | |||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
Certificates of deposit | $ | 1,350,001 | $ | 3 | $ | (27 | ) | $ | 1,349,977 | ||||||
Total | $ | 1,350,001 | $ | 3 | $ | (27 | ) | $ | 1,349,977 |
All securities outstanding with gross unrealized losses at December 31, 2014 were 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, 2015 | December 31, 2014 | ||||||||||||||
Year of Maturity | Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||
Due in one year or less | $ | 550,000 | $ | 550,013 | $ | 1,350,001 | $ | 1,349,977 |
Table 4.3 - Interest Rate Payment Terms of Available-for-Sale Securities (in thousands)
June 30, 2015 | December 31, 2014 | ||||||
Amortized cost of available-for-sale securities: | |||||||
Fixed-rate | $ | 550,000 | $ | 1,350,001 |
Realized Gains and Losses. The FHLB had no sales of securities out of its available-for-sale portfolio for the six months ended June 30, 2015 or 2014.
11
Note 5 - Held-to-Maturity Securities
Table 5.1 - Held-to-Maturity Securities by Major Security Types (in thousands)
June 30, 2015 | |||||||||||||||
Amortized Cost (1) | Gross Unrecognized Holding Gains | Gross Unrecognized Holding Losses | Fair Value | ||||||||||||
Non-mortgage-backed securities: | |||||||||||||||
Government-sponsored enterprises (GSE) (2) | $ | 31,748 | $ | 1 | $ | — | $ | 31,749 | |||||||
Total non-mortgage-backed securities | 31,748 | 1 | — | 31,749 | |||||||||||
Mortgage-backed securities: | |||||||||||||||
Other U.S. obligation single-family mortgage-backed securities (3) | 2,927,484 | 4,036 | (18,009 | ) | 2,913,511 | ||||||||||
GSE single-family mortgage-backed securities (4) | 11,585,550 | 149,261 | (147,858 | ) | 11,586,953 | ||||||||||
Total mortgage-backed securities | 14,513,034 | 153,297 | (165,867 | ) | 14,500,464 | ||||||||||
Total | $ | 14,544,782 | $ | 153,298 | $ | (165,867 | ) | $ | 14,532,213 | ||||||
December 31, 2014 | |||||||||||||||
Amortized Cost (1) | Gross Unrecognized Holding Gains | Gross Unrecognized Holding Losses | Fair Value | ||||||||||||
Non-mortgage-backed securities: | |||||||||||||||
GSE (2) | $ | 26,099 | $ | — | $ | — | $ | 26,099 | |||||||
Total non-mortgage-backed securities | 26,099 | — | — | 26,099 | |||||||||||
Mortgage-backed securities: | |||||||||||||||
Other U.S. obligation single-family mortgage-backed securities (3) | 2,038,960 | 10,021 | (1,017 | ) | 2,047,964 | ||||||||||
GSE single-family mortgage-backed securities (4) | 12,647,212 | 191,870 | (118,819 | ) | 12,720,263 | ||||||||||
Total mortgage-backed securities | 14,686,172 | 201,891 | (119,836 | ) | 14,768,227 | ||||||||||
Total | $ | 14,712,271 | $ | 201,891 | $ | (119,836 | ) | $ | 14,794,326 |
(1) | Carrying value equals amortized cost. |
(2) | Consists of debt securities issued and effectively guaranteed by Freddie Mac and/or Fannie Mae, which have the support of the U.S. government, although they are not obligations of the U.S. government. |
(3) | Consists of Ginnie Mae mortgage-backed securities and/or mortgage-backed securities issued or guaranteed by the National Credit Union Administration (NCUA) and the U.S. government. |
(4) | Consists of mortgage-backed securities issued and effectively guaranteed by Freddie Mac and/or Fannie Mae, which have the support of the U.S. government, although they are not obligations of the U.S. government. |
Table 5.2 - Net Purchased Premiums (Discounts) Included in the Amortized Cost of Mortgage-backed Securities Classified as Held-to-Maturity (in thousands)
June 30, 2015 | December 31, 2014 | ||||||
Premiums | $ | 51,861 | $ | 24,473 | |||
Discounts | (46,156 | ) | (51,357 | ) | |||
Net purchased premiums (discounts) | $ | 5,705 | $ | (26,884 | ) |
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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, 2015 | |||||||||||||||||||||||
Less than 12 Months | 12 Months or more | Total | |||||||||||||||||||||
Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | ||||||||||||||||||
Mortgage-backed securities: | |||||||||||||||||||||||
Other U.S. obligation single-family mortgage-backed securities (1) | $ | 1,497,452 | $ | (18,009 | ) | $ | — | $ | — | $ | 1,497,452 | $ | (18,009 | ) | |||||||||
GSE single-family mortgage-backed securities (2) | 3,854,304 | (70,443 | ) | 2,216,962 | (77,415 | ) | 6,071,266 | (147,858 | ) | ||||||||||||||
Total | $ | 5,351,756 | $ | (88,452 | ) | $ | 2,216,962 | $ | (77,415 | ) | $ | 7,568,718 | $ | (165,867 | ) | ||||||||
December 31, 2014 | |||||||||||||||||||||||
Less than 12 Months | 12 Months or more | Total | |||||||||||||||||||||
Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | ||||||||||||||||||
Mortgage-backed securities: | |||||||||||||||||||||||
Other U.S. obligation single-family mortgage-backed securities (1) | $ | — | $ | — | $ | 197,625 | $ | (1,017 | ) | $ | 197,625 | $ | (1,017 | ) | |||||||||
GSE single-family mortgage-backed securities (2) | 631,907 | (1,348 | ) | 5,555,049 | (117,471 | ) | 6,186,956 | (118,819 | ) | ||||||||||||||
Total | $ | 631,907 | $ | (1,348 | ) | $ | 5,752,674 | $ | (118,488 | ) | $ | 6,384,581 | $ | (119,836 | ) |
(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, 2015 | December 31, 2014 | ||||||||||||||
Year of Maturity | Amortized Cost (1) | Fair Value | Amortized Cost (1) | Fair Value | |||||||||||
Non-mortgage-backed securities: | |||||||||||||||
Due in 1 year or less | $ | 31,748 | $ | 31,749 | $ | 26,099 | $ | 26,099 | |||||||
Due after 1 year through 5 years | — | — | — | — | |||||||||||
Due after 5 years through 10 years | — | — | — | — | |||||||||||
Due after 10 years | — | — | — | — | |||||||||||
Total non-mortgage-backed securities | 31,748 | 31,749 | 26,099 | 26,099 | |||||||||||
Mortgage-backed securities (2) | 14,513,034 | 14,500,464 | 14,686,172 | 14,768,227 | |||||||||||
Total | $ | 14,544,782 | $ | 14,532,213 | $ | 14,712,271 | $ | 14,794,326 |
(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. |
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Table 5.5 - Interest Rate Payment Terms of Held-to-Maturity Securities (in thousands)
June 30, 2015 | December 31, 2014 | ||||||
Amortized cost of non-mortgage-backed securities: | |||||||
Fixed-rate | $ | 31,748 | $ | 26,099 | |||
Total amortized cost of non-mortgage-backed securities | 31,748 | 26,099 | |||||
Amortized cost of mortgage-backed securities: | |||||||
Fixed-rate | 12,155,126 | 12,091,591 | |||||
Variable-rate | 2,357,908 | 2,594,581 | |||||
Total amortized cost of mortgage-backed securities | 14,513,034 | 14,686,172 | |||||
Total | $ | 14,544,782 | $ | 14,712,271 |
Realized Gains and Losses. From time to time the FHLB 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, 2015 and 2014, the FHLB did not sell any held-to-maturity securities.
Note 6 - Other-Than-Temporary Impairment Analysis
The FHLB evaluates any of its individual available-for-sale and held-to-maturity investment securities holdings in an unrealized loss position for other-than-temporary impairment on a quarterly basis.
For its Other U.S. obligations and GSE investments (mortgage-backed securities and non-mortgage-backed securities), the FHLB has determined that the strength of the issuers' guarantees through direct obligations or support from the U.S. government is sufficient to protect the FHLB from losses based on current expectations. As a result, the FHLB determined that, as of June 30, 2015, all of the gross unrealized losses on these investments were temporary as the declines in market value of these securities were not attributable to credit quality. Furthermore, the FHLB does not intend to sell the investments, and it is not more likely than not that the FHLB will be required to sell the investments before recovery of their amortized cost bases. As a result, the FHLB did not consider any of these investments to be other-than-temporarily impaired at June 30, 2015.
The FHLB did not consider any of its investments to be other-than-temporarily impaired at December 31, 2014.
Note 7 - Advances
The FHLB offers a wide range of fixed- and variable-rate Advance products with different maturities, interest rates, payment characteristics and optionality. At June 30, 2015 and December 31, 2014, the FHLB had Advances outstanding, including Affordable Housing Program (AHP) Advances (see Note 13), at interest rates ranging from 0.00 percent to 8.85 percent and from 0.00 percent to 9.20 percent, respectively. 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.
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Table 7.1 - Advance Redemption Terms (dollars in thousands)
June 30, 2015 | December 31, 2014 | |||||||||||||
Redemption Term | Amount | Weighted Average Interest Rate | Amount | Weighted Average Interest Rate | ||||||||||
Due in 1 year or less | $ | 20,282,144 | 0.33 | % | $ | 14,139,630 | 0.40 | % | ||||||
Due after 1 year through 2 years | 14,889,748 | 0.66 | 14,810,847 | 0.54 | ||||||||||
Due after 2 years through 3 years | 13,116,148 | 0.70 | 12,829,760 | 0.69 | ||||||||||
Due after 3 years through 4 years | 13,079,778 | 0.61 | 14,222,722 | 0.60 | ||||||||||
Due after 4 years through 5 years | 7,699,260 | 0.66 | 10,724,619 | 0.54 | ||||||||||
Thereafter | 1,951,025 | 2.34 | 3,570,929 | 1.51 | ||||||||||
Total par value | 71,018,103 | 0.61 | 70,298,507 | 0.60 | ||||||||||
Commitment fees | (685 | ) | (699 | ) | ||||||||||
Discount on AHP Advances | (10,636 | ) | (12,110 | ) | ||||||||||
Premiums | 2,902 | 3,058 | ||||||||||||
Discounts | (10,076 | ) | (12,572 | ) | ||||||||||
Hedging adjustments | 108,153 | 129,390 | ||||||||||||
Fair value option valuation adjustments and accrued interest | 129 | 42 | ||||||||||||
Total | $ | 71,107,890 | $ | 70,405,616 |
The FHLB offers Advances to members that may be prepaid on specified dates (call dates) without incurring prepayment or termination fees (callable Advances). If the call option is exercised, replacement funding may be available. Other Advances may only be prepaid subject to a prepayment fee paid to the FHLB that makes the FHLB financially indifferent to the prepayment of the Advance. At June 30, 2015 and December 31, 2014, the FHLB had callable Advances (in thousands) of $13,675,333 and $15,098,357.
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, 2015 | December 31, 2014 | |||||
Due in 1 year or less | $ | 26,633,174 | $ | 23,003,946 | |||
Due after 1 year through 2 years | 11,673,072 | 12,159,384 | |||||
Due after 2 years through 3 years | 13,220,823 | 9,659,975 | |||||
Due after 3 years through 4 years | 11,220,811 | 12,295,893 | |||||
Due after 4 years through 5 years | 6,680,198 | 9,970,280 | |||||
Thereafter | 1,590,025 | 3,209,029 | |||||
Total par value | $ | 71,018,103 | $ | 70,298,507 |
The FHLB also offers putable Advances. With a putable Advance, the FHLB effectively purchases put options from the member that allows the FHLB to terminate the Advance at predetermined dates. The FHLB normally would exercise its put option when interest rates increase relative to contractual rates. At June 30, 2015 and December 31, 2014, the FHLB had putable Advances, excluding those where the related put options have expired, totaling (in thousands) $1,569,900 and $1,617,400.
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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, 2015 | December 31, 2014 | |||||
Due in 1 year or less | $ | 21,833,044 | $ | 15,753,030 | |||
Due after 1 year through 2 years | 14,476,948 | 14,663,847 | |||||
Due after 2 years through 3 years | 12,323,548 | 12,115,860 | |||||
Due after 3 years through 4 years | 12,904,278 | 13,649,722 | |||||
Due after 4 years through 5 years | 7,699,260 | 10,715,119 | |||||
Thereafter | 1,781,025 | 3,400,929 | |||||
Total par value | $ | 71,018,103 | $ | 70,298,507 |
Table 7.4 - Advances by Interest Rate Payment Terms (in thousands)
June 30, 2015 | December 31, 2014 | ||||||
Total fixed-rate (1) | $ | 22,178,670 | $ | 17,945,050 | |||
Total variable-rate (1) | 48,839,433 | 52,353,457 | |||||
Total par value | $ | 71,018,103 | $ | 70,298,507 |
(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 FHLB (dollars in millions)
June 30, 2015 | December 31, 2014 | |||||||||||||
Principal | % of Total | Principal | % of Total | |||||||||||
JPMorgan Chase Bank, N.A. | $ | 37,300 | 53 | % | JPMorgan Chase Bank, N.A. | $ | 41,300 | 59 | % | |||||
U.S. Bank, N.A. | 8,121 | 11 | U.S. Bank, N.A. | 8,338 | 12 | |||||||||
Total | $ | 45,421 | 64 | % | Total | $ | 49,638 | 71 | % |
Note 8 - Mortgage Loans Held for Portfolio
Table 8.1 - Mortgage Loans Held for Portfolio (in thousands)
June 30, 2015 | December 31, 2014 | ||||||
Unpaid principal balance: | |||||||
Fixed rate medium-term single-family mortgage loans (1) | $ | 1,447,549 | $ | 1,393,525 | |||
Fixed rate long-term single-family mortgage loans | 6,062,984 | 5,402,479 | |||||
Total unpaid principal balance | 7,510,533 | 6,796,004 | |||||
Premiums | 204,067 | 179,540 | |||||
Discounts | (2,299 | ) | (2,460 | ) | |||
Hedging basis adjustments (2) | 19,640 | 16,518 | |||||
Total mortgage loans held for portfolio | $ | 7,731,941 | $ | 6,989,602 |
(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. |
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Table 8.2 - Mortgage Loans Held for Portfolio by Collateral/Guarantee Type (in thousands)
June 30, 2015 | December 31, 2014 | ||||||
Unpaid principal balance: | |||||||
Conventional mortgage loans | $ | 6,976,296 | $ | 6,203,318 | |||
Federal Housing Administration (FHA) mortgage loans | 534,237 | 592,686 | |||||
Total unpaid principal balance | $ | 7,510,533 | $ | 6,796,004 |
For information related to the FHLB'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 FHLB, and Former Members Selling Five Percent or more of Total Unpaid Principal (dollars in millions)
June 30, 2015 | December 31, 2014 | |||||||||||||
Principal | % of Total | Principal | % of Total | |||||||||||
Union Savings Bank | $ | 2,080 | 28 | % | Union Savings Bank | $ | 1,593 | 23 | % | |||||
PNC Bank, N.A. (1) | 954 | 13 | PNC Bank, N.A. (1) | 1,074 | 16 | |||||||||
Guardian Savings Bank FSB | 557 | 7 | Guardian Savings Bank FSB | 406 | 6 |
(1) | Former member. |
Note 9 - Allowance for Credit Losses
The FHLB has established an allowance methodology for each of the FHLB's portfolio segments: credit products (Advances, Letters of Credit and other extensions of credit to members); FHA mortgage loans held for portfolio; and conventional mortgage loans held for portfolio.
Credit products
The FHLB manages its credit exposure to credit products through an integrated approach that includes establishing a credit limit for each borrower, includes an ongoing review of each borrower's financial condition and is coupled with detailed collateral and lending policies to limit risk of loss while balancing borrowers' needs for a reliable source of funding. In addition, the FHLB lends to eligible borrowers in accordance with federal statutes, including the FHLBank Act, and Finance Agency regulations, which require the FHLB to obtain sufficient collateral to fully secure credit products. The estimated value of the collateral required to secure each member's credit products is calculated by applying collateral discounts, or haircuts, to the value of the collateral. The FHLB accepts certain investment securities, residential mortgage loans, deposits, and other real estate related assets as collateral. In addition, community financial institutions are eligible to utilize expanded statutory collateral provisions for small business and agriculture loans. The FHLB's capital stock owned by its member borrowers is also pledged as collateral. Collateral arrangements and a member’s borrowing capacity vary based on the financial condition and performance of the institution, the types of collateral pledged and the overall quality of those assets. The FHLB can also require additional or substitute collateral to protect its security interest. Management of the FHLB believes that these policies effectively manage the FHLB's credit risk from credit products.
Members experiencing financial difficulties are subject to FHLB-performed “stress tests” of the impact of poorly performing assets on the member’s capital and loss reserve positions. Depending on the results of these tests and the level of overcollateralization, a member may be allowed to maintain pledged loan assets in its custody, may be required to deliver those loans into the custody of the FHLB or its agent, and/or may be required to provide details on these loans to facilitate an estimate of their fair value. The FHLB perfects its security interest in all pledged collateral. The FHLBank Act affords any security interest granted to the FHLB by a member priority over the claims or rights of any other party except for claims or rights of a third party that would be entitled to priority under otherwise applicable law and that are held by a bona fide purchaser for value or by a secured party holding a prior perfected security interest.
Using a risk-based approach, the FHLB considers the payment status, collateralization levels, and borrower's financial condition to be indicators of credit quality for its credit products. At June 30, 2015 and December 31, 2014, the FHLB had rights to collateral on a member-by-member basis with an estimated value in excess of its outstanding extensions of credit.
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The FHLB evaluates and makes changes to its collateral guidelines, as necessary, based on current market conditions. At June 30, 2015 and December 31, 2014, the FHLB did not have any Advances that were past due, in non-accrual status or impaired. In addition, there were no troubled debt restructurings related to credit products of the FHLB during the six months ended June 30, 2015 or 2014.
The FHLB has not experienced any credit losses on Advances since it was founded in 1932. Based upon the collateral held as security, its credit extension and collateral policies, management's credit analysis and the repayment history on credit products, the FHLB did not record any credit losses on credit products as of June 30, 2015 or December 31, 2014. Accordingly, the FHLB did not record any allowance for credit losses on Advances.
At June 30, 2015 and December 31, 2014, the FHLB did not record any liability to reflect an allowance for credit losses for off-balance sheet credit exposures. See Note 19 for additional information on the FHLB's off-balance sheet credit exposure.
Mortgage Loans Held for Portfolio - FHA
The FHLB invests in fixed-rate mortgage loans secured by one-to-four family residential properties insured by the FHA. The FHLB expects to recover any losses from such loans from the FHA. Any losses from these loans that are not recovered from the FHA would be due to a claim rejection by the FHA and, as such, would be recoverable from the selling participating financial institutions. Therefore, the FHLB only has credit risk for these loans if the seller or servicer fails to pay for losses not covered by the FHA insurance. As a result, the FHLB did not establish an allowance for credit losses on its FHA insured mortgage loans. Furthermore, due to the insurance, none of these mortgage loans have been placed on non-accrual status.
Mortgage Loans Held for Portfolio - Conventional Mortgage Purchase Program (MPP)
The FHLB determines the allowance for conventional loans through analyses that include consideration of various data observations such as past performance, current performance, loan portfolio characteristics, collateral-related characteristics, industry data, and prevailing economic conditions. The measurement of the allowance for credit losses consists of: (1) collectively evaluating homogeneous pools of residential mortgage loans; (2) reviewing specifically identified loans for impairment; and (3) considering other relevant qualitative factors.
Collectively Evaluated Mortgage Loans. The credit risk analysis of conventional loans evaluated collectively for impairment considers historical delinquency migration, applies estimated loss severities, and incorporates the associated credit enhancements in order to determine the FHLB's best estimate of probable incurred losses at the reporting date. The FHLB performs the credit risk analysis of all conventional mortgage loans at the individual Master Commitment Contract level to properly determine the credit enhancements available to recover losses on loans under each individual Master Commitment Contract. The Master Commitment Contract is an agreement with a member in which the member agrees to make every attempt to sell a specific dollar amount of loans to the FHLB over a one-year period. Migration analysis is a methodology for determining, through the FHLB's experience over a historical period, the rate of default on loans. The FHLB applies migration analysis to loans based on payment status categories such as current, 30, 60, and 90 days past due. The FHLB then estimates, based on historical experience, how many loans in these categories may migrate to a loss realization event and applies a current loss severity to estimate losses. The estimated losses are then reduced by the probable cash flows resulting from available credit enhancements. Any credit enhancement cash flows that are projected and assessed as not probable of receipt do not reduce estimated losses.
Individually Evaluated Mortgage Loans. Conventional mortgage loans that are considered troubled debt restructurings are specifically identified for purposes of calculating the allowance for credit losses. The FHLB measures impairment of these specifically identified loans by either estimating the present value of expected cash flows, estimating the loan's observable market price, or estimating the fair value of the collateral if the loan is collateral dependent. The FHLB removes specifically identified loans evaluated for impairment from the collectively evaluated mortgage loan population.
Qualitative Factors. The FHLB also assesses other qualitative factors in its estimation of loan losses for the collectively evaluated population. This amount represents a subjective management judgment, based on facts and circumstances that exist as of the reporting date, 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,
18
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, | |||||||
2015 | 2014 | ||||||
Balance, beginning of period | $ | 2,162 | $ | 6,655 | |||
Charge-offs, net of recoveries (1) | (461 | ) | (314 | ) | |||
Reversal for credit losses | — | (900 | ) | ||||
Balance, end of period | $ | 1,701 | $ | 5,441 | |||
Six Months Ended June 30, | |||||||
2015 | 2014 | ||||||
Balance, beginning of period | $ | 4,919 | $ | 7,233 | |||
Charge-offs, net of recoveries (1) | (3,218 | ) | (892 | ) | |||
Reversal for credit losses | — | (900 | ) | ||||
Balance, end of period | $ | 1,701 | $ | 5,441 |
(1) | On January 1, 2015, the FHLB adopted the charge off provisions of the Finance Agency's Advisory Bulletin 2012-02, which require the FHLB to charge off the estimated loss portion of loans 180 days or more past due and certain loans in which the borrower has filed for bankruptcy. |
Table 9.2 - Allowance for Credit Losses and Recorded Investment on Conventional Mortgage Loans by Impairment Methodology (in thousands)
June 30, 2015 | December 31, 2014 | ||||||
Allowance for credit losses, end of period: | |||||||
Collectively evaluated for impairment | $ | 1,701 | $ | 4,766 | |||
Individually evaluated for impairment | — | 153 | |||||
Total | $ | 1,701 | $ | 4,919 | |||
Recorded investment, end of period: | |||||||
Collectively evaluated for impairment | $ | 7,206,042 | $ | 6,402,994 | |||
Individually evaluated for impairment | 8,779 | 8,639 | |||||
Total recorded investment | $ | 7,214,821 | $ | 6,411,633 |
Credit Enhancements. The conventional mortgage loans under the MPP are supported by some combination of credit enhancements (primary mortgage insurance (PMI), supplemental mortgage insurance (SMI) and the Lender Risk Account (LRA), including pooled LRA for those members participating in an aggregated MPP pool). The amount of credit enhancements needed to protect the FHLB against credit losses is determined through use of a third-party default model. These credit enhancements apply after a homeowner's equity is exhausted. Beginning in February 2011, the FHLB discontinued the use of SMI for all new loan purchases and replaced it with expanded use of the LRA. The LRA is funded by the FHLB as a portion of the purchase proceeds to cover expected losses. 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.
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Table 9.3 - Changes in the LRA (in thousands)
Six Months Ended | |||
June 30, 2015 | |||
LRA at beginning of year | $ | 129,213 | |
Additions | 21,754 | ||
Claims | (757 | ) | |
Scheduled distributions | (1,115 | ) | |
LRA at end of period | $ | 149,095 |
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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 FHLB's key credit quality indicators for mortgage loans.
Table 9.4 - Recorded Investment in Delinquent Mortgage Loans (dollars in thousands)
June 30, 2015 | |||||||||||
Conventional MPP Loans | FHA Loans | Total | |||||||||
Past due 30-59 days delinquent | $ | 43,922 | $ | 33,985 | $ | 77,907 | |||||
Past due 60-89 days delinquent | 9,006 | 8,609 | 17,615 | ||||||||
Past due 90 days or more delinquent | 35,360 | 17,518 | 52,878 | ||||||||
Total past due | 88,288 | 60,112 | 148,400 | ||||||||
Total current mortgage loans | 7,126,533 | 483,138 | 7,609,671 | ||||||||
Total mortgage loans | $ | 7,214,821 | $ | 543,250 | $ | 7,758,071 | |||||
Other delinquency statistics: | |||||||||||
In process of foreclosure, included above (1) | $ | 27,841 | $ | 9,272 | $ | 37,113 | |||||
Serious delinquency rate (2) | 0.50 | % | 3.28 | % | 0.69 | % | |||||
Past due 90 days or more still accruing interest (3) | $ | 29,328 | $ | 17,518 | $ | 46,846 | |||||
Loans on non-accrual status, included above | $ | 6,925 | $ | — | $ | 6,925 | |||||
December 31, 2014 | |||||||||||
Conventional MPP Loans | FHA Loans | Total | |||||||||
Past due 30-59 days delinquent | $ | 49,053 | $ | 42,744 | $ | 91,797 | |||||
Past due 60-89 days delinquent | 13,597 | 12,881 | 26,478 | ||||||||
Past due 90 days or more delinquent | 42,991 | 25,045 | 68,036 | ||||||||
Total past due | 105,641 | 80,670 | 186,311 | ||||||||
Total current mortgage loans | 6,305,992 | 522,042 | 6,828,034 | ||||||||
Total mortgage loans | $ | 6,411,633 | $ | 602,712 | $ | 7,014,345 | |||||
Other delinquency statistics: | |||||||||||
In process of foreclosure, included above (1) | $ | 34,854 | $ | 11,687 | $ | 46,541 | |||||
Serious delinquency rate (2) | 0.68 | % | 4.27 | % | 0.99 | % | |||||
Past due 90 days or more still accruing interest (3) | $ | 41,857 | $ | 25,045 | $ | 66,902 | |||||
Loans on non-accrual status, included above | $ | 3,574 | $ | — | $ | 3,574 |
(1) | Includes loans where the decision of foreclosure or a similar alternative such as pursuit of deed-in-lieu has been reported. Loans in process of foreclosure are included in past due or current loans dependent on their delinquency status. |
(2) | Loans that are 90 days or more past due or in the process of foreclosure (including past due or current loans in the process of foreclosure) expressed as a percentage of the total loan portfolio class recorded investment amount. |
(3) | Each conventional loan past due 90 days or more still accruing interest is on a schedule/scheduled monthly settlement basis and contains one or more credit enhancements. Loans that are well secured and in the process of collection as a result of remaining credit enhancements and schedule/scheduled settlement are not placed on non-accrual status. |
The FHLB did not have any real estate owned at June 30, 2015 or December 31, 2014.
21
Individually Evaluated Impaired Loans. Table 9.5 presents the recorded investment, unpaid principal balance, and related allowance associated with loans individually evaluated for investment.
Table 9.5 - Individually Evaluated Impaired Loan Statistics by Product Class Level (in thousands)
June 30, 2015 | December 31, 2014 | ||||||||||||||||||||||
Conventional MPP loans | Recorded Investment | Unpaid Principal Balance | Related Allowance | Recorded Investment | Unpaid Principal Balance | Related Allowance | |||||||||||||||||
With no related allowance | $ | 8,779 | $ | 8,588 | $ | — | $ | 5,297 | $ | 5,165 | $ | — | |||||||||||
With an allowance | — | — | — | 3,342 | 3,293 | 153 | |||||||||||||||||
Total | $ | 8,779 | $ | 8,588 | $ | — | $ | 8,639 | $ | 8,458 | $ | 153 |
Table 9.6 - Average Recorded Investment of Individually Evaluated Impaired Loans and Related Interest Income Recognized (in thousands)
Three Months Ended June 30, | |||||||||||||||
2015 | 2014 | ||||||||||||||
Individually impaired loans | Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | |||||||||||
Conventional MPP Loans | $ | 8,651 | $ | 111 | $ | 7,969 | $ | 104 | |||||||
Six Months Ended June 30, | |||||||||||||||
2015 | 2014 | ||||||||||||||
Individually impaired loans | Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | |||||||||||
Conventional MPP Loans | $ | 8,415 | $ | 219 | $ | 7,839 | $ | 204 |
Troubled Debt Restructurings. A troubled debt restructuring is considered to have occurred when a concession is granted to a borrower for economic or legal reasons related to the borrower's financial difficulties and that concession would not have been considered otherwise. The FHLB's troubled debt restructurings primarily involve loans where an agreement permits the recapitalization of past due amounts up to the original loan amount and certain loans discharged in Chapter 7 bankruptcy. 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 as of the reporting date.
The FHLB's recorded investment in modified loans considered troubled debt restructurings was (in thousands) $8,779 and $8,639 at June 30, 2015 and December 31, 2014, respectively. The amount of troubled debt restructurings is not considered material to the FHLB's financial condition, results of operations, or cash flows.
Note 10 - Derivatives and Hedging Activities
Nature of Business Activity
The FHLB is exposed to interest rate risk primarily from the effect of interest rate changes on its interest-earning assets and on the funding sources that finance these assets. The goal of the FHLB's interest-rate risk management strategy is not to eliminate interest-rate risk, but to manage it within appropriate limits. To mitigate the risk of loss, the FHLB has established policies and procedures, which include guidelines on the amount of exposure to interest rate changes it is willing to accept. In addition, the FHLB monitors the risk to its interest income, net interest margin and average maturity of interest-earning assets and funding sources.
The FHLB transacts its derivatives with large banks and major broker-dealers. Some of these banks and broker-dealers or their affiliates buy, sell, and distribute Consolidated Obligations. Derivative transactions may be either executed with a counterparty
22
(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.
Consistent with Finance Agency regulations, the FHLB enters into derivatives to manage the interest rate risk exposures inherent in otherwise unhedged assets and funding positions, to achieve the FHLB's risk management objectives and to act as an intermediary between its members and counterparties. The use of derivatives is an integral part of the FHLB's financial management strategy. However, Finance Agency regulations and the FHLB's financial management policy prohibit trading in, or the speculative use of, derivative instruments and limit credit risk arising from them.
The most common ways in which the FHLB uses derivatives are to:
▪ | reduce the interest rate sensitivity and repricing gaps of assets and liabilities; |
▪ | manage embedded options in assets and liabilities; |
▪ | reduce funding costs by combining a derivative with a Consolidated Obligation Bond, as the cost of a combined funding structure can be lower than the cost of a comparable Consolidated Obligation Bond; |
▪ | preserve a favorable interest rate spread between the yield of an asset (e.g., an Advance) and the cost of the related liability (e.g., the Consolidated Obligation Bond used to fund the Advance); without the use of derivatives, this interest rate spread could be reduced or eliminated when a change in the interest rate on the Advance does not match a change in the interest rate on the Bond; and |
▪ | protect the value of existing asset or liability positions. |
Types of Derivatives
The FHLB may enter into interest rate swaps (including callable and putable swaps), swaptions, interest rate cap and floor agreements, calls, puts, futures, and forward contracts to manage its exposure to changes in interest rates.
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 FHLB in its derivatives is LIBOR.
Application of Interest Rate Swaps
The FHLB may use derivatives as fair value hedges of associated financial instruments. However, because the FHLB uses interest rate swaps when they are considered to be the most cost-effective alternative to achieve the FHLB's financial and risk management objectives, it may enter into interest rate swaps that do not necessarily qualify for hedge accounting (economic hedges). The FHLB re-evaluates its hedging strategies from time to time and may change the hedging techniques it uses or adopt new strategies.
Types of Hedged Items
The FHLB documents at inception all relationships between derivatives designated as hedging instruments and the hedged items, its risk management objectives and strategies for undertaking various hedge transactions, and its method of assessing effectiveness. This process includes linking all derivatives that are designated as fair value hedges to assets and liabilities on the Statements of Condition. The FHLB also formally assesses (both at the hedge's inception and at least quarterly) whether the derivatives that are used in hedging transactions have been effective in offsetting changes in the fair value of the hedged items and whether those derivatives may be expected to remain effective in future periods. The FHLB currently uses regression analyses to assess the effectiveness of its hedges. The types of assets and liabilities currently hedged with derivatives are:
▪ | Consolidated Obligations; |
▪ | Advances; and |
▪ | Firm Commitments. |
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Financial Statement Effect and Additional Financial Information
The notional amount of derivatives serves as a factor in determining periodic interest payments or cash flows received and paid. The notional amount reflects the FHLB's involvement in the various classes of financial instruments and represents neither the actual amounts exchanged nor the overall exposure of the FHLB to credit and market risk; the overall risk is much smaller. The risks of derivatives only can be measured meaningfully on a portfolio basis that takes into account the 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, 2015 | |||||||||||
Notional Amount of Derivatives | Derivative Assets | Derivative Liabilities | |||||||||
Derivatives designated as fair value hedging instruments: | |||||||||||
Interest rate swaps | $ | 5,227,101 | $ | 17,904 | $ | 117,599 | |||||
Derivatives not designated as hedging instruments: | |||||||||||
Interest rate swaps | 6,028,000 | 3,589 | 5,542 | ||||||||
Forward rate agreements | 485,000 | 2,906 | 216 | ||||||||
Mortgage delivery commitments | 495,054 | 102 | 4,451 | ||||||||
Total derivatives not designated as hedging instruments | 7,008,054 | 6,597 | 10,209 | ||||||||
Total derivatives before netting and collateral adjustments | $ | 12,235,155 | 24,501 | 127,808 | |||||||
Netting adjustments and cash collateral (1) | (2,000 | ) | (73,500 | ) | |||||||
Total derivative assets and total derivative liabilities | $ | 22,501 | $ | 54,308 | |||||||
December 31, 2014 | |||||||||||
Notional Amount of Derivatives | Derivative Assets | Derivative Liabilities | |||||||||
Derivatives designated as fair value hedging instruments: | |||||||||||
Interest rate swaps | $ | 4,301,547 | $ | 19,826 | $ | 138,150 | |||||
Derivatives not designated as hedging instruments: | |||||||||||
Interest rate swaps | 4,635,000 | 900 | 6,559 | ||||||||
Forward rate agreements | 439,000 | 6 | 4,924 | ||||||||
Mortgage delivery commitments | 451,292 | 3,799 | 1 | ||||||||
Total derivatives not designated as hedging instruments | 5,525,292 | 4,705 | 11,484 | ||||||||
Total derivatives before netting and collateral adjustments | $ | 9,826,839 | 24,531 | 149,634 | |||||||
Netting adjustments and cash collateral (1) | (9,832 | ) | (85,867 | ) | |||||||
Total derivative assets and total derivative liabilities | $ | 14,699 | $ | 63,767 |
(1) | Amounts represent the application of the netting requirements that allow the FHLB to settle positive and negative positions and also cash collateral and related accrued interest held or placed by the FHLB with the same clearing agent and/or counterparty. Cash collateral posted and related accrued interest was (in thousands) $73,120 and $78,755 at June 30, 2015 and December 31, 2014. Cash collateral received and related accrued interest was (in thousands) $1,620 and $2,720 at June 30, 2015 and December 31, 2014. |
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Table 10.2 presents the components of net gains on derivatives and hedging activities as presented in the Statements of Income.
Table 10.2 - Net Gains on Derivatives and Hedging Activities (in thousands)
Three Months Ended June 30, | |||||||
2015 | 2014 | ||||||
Derivatives and hedged items in fair value hedging relationships: | |||||||
Interest rate swaps | $ | 1,110 | $ | 869 | |||
Derivatives not designated as hedging instruments: | |||||||
Economic hedges: | |||||||
Interest rate swaps | 214 | 851 | |||||
Forward rate agreements | 9,322 | (5,585 | ) | ||||
Net interest settlements | 2,376 | (319 | ) | ||||
Mortgage delivery commitments | (10,741 | ) | 7,516 | ||||
Total net gains related to derivatives not designated as hedging instruments | 1,171 | 2,463 | |||||
Net gains on derivatives and hedging activities | $ | 2,281 | $ | 3,332 | |||
Six Months Ended June 30, | |||||||
2015 | 2014 | ||||||
Derivatives and hedged items in fair value hedging relationships: | |||||||
Interest rate swaps | $ | 1,962 | $ | 1,153 | |||
Derivatives not designated as hedging instruments: | |||||||
Economic hedges: | |||||||
Interest rate swaps | 2,406 | 1,008 | |||||
Forward rate agreements | 1,741 | (6,081 | ) | ||||
Net interest settlements | 4,365 | (70 | ) | ||||
Mortgage delivery commitments | (2,891 | ) | 6,239 | ||||
Total net gains related to derivatives not designated as hedging instruments | 5,621 | 1,096 | |||||
Net gains on derivatives and hedging activities | $ | 7,583 | $ | 2,249 |
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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 FHLB's net interest income.
Table 10.3 - Effect of Fair Value Hedge-Related Derivative Instruments (in thousands)
Three Months Ended June 30, | |||||||||||||||
2015 | 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 | $ | 28,905 | $ | (27,452 | ) | $ | 1,453 | $ | (20,645 | ) | |||||
Consolidated Bonds | (3,868 | ) | 3,525 | (343 | ) | 5,100 | |||||||||
Total | $ | 25,037 | $ | (23,927 | ) | $ | 1,110 | $ | (15,545 | ) | |||||
2014 | |||||||||||||||
Hedged Item Type: | |||||||||||||||
Advances | $ | 11,611 | $ | (11,108 | ) | $ | 503 | $ | (22,894 | ) | |||||
Consolidated Bonds | (3,278 | ) | 3,644 | 366 | 4,629 | ||||||||||
Total | $ | 8,333 | $ | (7,464 | ) | $ | 869 | $ | (18,265 | ) | |||||
Six Months Ended June 30, | |||||||||||||||
2015 | 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 | $ | 21,434 | $ | (19,529 | ) | $ | 1,905 | $ | (41,261 | ) | |||||
Consolidated Bonds | (3,166 | ) | 3,223 | 57 | 9,616 | ||||||||||
Total | $ | 18,268 | $ | (16,306 | ) | $ | 1,962 | $ | (31,645 | ) | |||||
2014 | |||||||||||||||
Hedged Item Type: | |||||||||||||||
Advances | $ | 30,327 | $ | (29,572 | ) | $ | 755 | $ | (46,383 | ) | |||||
Consolidated Bonds | (7,387 | ) | 7,785 | 398 | 9,481 | ||||||||||
Total | $ | 22,940 | $ | (21,787 | ) | $ | 1,153 | $ | (36,902 | ) |
(1) | The net effect of derivatives, in fair value hedge relationships, on net interest income is included in the interest income or interest expense line item of the respective hedged item type. These amounts include the effect of net interest settlements attributable to designated fair value hedges but do not include (in thousands) $(797) and $(1,008) of (amortization)/accretion related to fair value hedging activities for the three months ended June 30, 2015 and 2014 and (in thousands) $(1,708) and $(1,887) for the six months ended June 30, 2015 and 2014. |
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Offsetting of Derivative Assets and Derivative Liabilities
The FHLB presents derivative instruments, related cash collateral, including initial and variation margin, received or pledged, and associated accrued interest, on a net basis by clearing agent and/or by counterparty when it has met the netting requirements.
Table 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, 2015 and December 31, 2014, the FHLB 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, 2015 | December 31, 2014 | ||||||||||||||
Derivative Assets | Derivative Liabilities | Derivative Assets | Derivative Liabilities | ||||||||||||
Derivative instruments meeting netting requirements: | |||||||||||||||
Gross recognized amount: | |||||||||||||||
Bilateral derivatives | $ | 16,288 | $ | 116,158 | $ | 19,585 | $ | 141,352 | |||||||
Cleared derivatives | 5,205 | 6,983 | 1,141 | 3,357 | |||||||||||
Total gross recognized amount | 21,493 | 123,141 | 20,726 | 144,709 | |||||||||||
Gross amounts of netting adjustments and cash collateral: | |||||||||||||||
Bilateral derivatives | (16,203 | ) | (66,517 | ) | (19,544 | ) | (82,510 | ) | |||||||
Cleared derivatives | 14,203 | (6,983 | ) | 9,712 | (3,357 | ) | |||||||||
Total gross amounts of netting adjustments and cash collateral | (2,000 | ) | (73,500 | ) | (9,832 | ) | (85,867 | ) | |||||||
Net amounts after netting adjustments and cash collateral: | |||||||||||||||
Bilateral derivatives | 85 | 49,641 | 41 | 58,842 | |||||||||||
Cleared derivatives | 19,408 | — | 10,853 | — | |||||||||||
Total net amounts after netting adjustments and cash collateral | 19,493 | 49,641 | 10,894 | 58,842 | |||||||||||
Derivative instruments not meeting netting requirements (1): | |||||||||||||||
Bilateral derivatives | 3,008 | 4,667 | 3,805 | 4,925 | |||||||||||
Total derivative instruments not meeting netting requirements (1) | 3,008 | 4,667 | 3,805 | 4,925 | |||||||||||
Total derivative assets and total derivative liabilities: | |||||||||||||||
Bilateral derivatives | 3,093 | 54,308 | 3,846 | 63,767 | |||||||||||
Cleared derivatives | 19,408 | — | 10,853 | — | |||||||||||
Total derivative assets and total derivative liabilities | $ | 22,501 | $ | 54,308 | $ | 14,699 | $ | 63,767 |
(1) | Represents mortgage delivery commitments and forward rate agreements that are not subject to an enforceable netting agreement. |
Credit Risk on Derivatives
The FHLB is subject to credit risk due to the risk of non-performance by counterparties to its derivative transactions and manages credit risk through credit analysis, collateral requirements and adherence to the requirements set forth in its policies, U.S. Commodity Futures Trading Commission regulations, and Finance Agency regulations. For 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 FHLB requires collateral agreements with collateral delivery thresholds on the majority of its bilateral derivatives.
For cleared derivatives, the Clearinghouse is the FHLB's counterparty. The Clearinghouse notifies the clearing agent of the required initial and variation margin and the clearing agent in turn notifies the FHLB. The requirement that the FHLB post initial and variation margin through the clearing agent, to the Clearinghouse, exposes the FHLB to credit risk if the clearing agent or the Clearinghouse fails to meet its obligations. The use of cleared derivatives is intended to mitigate credit risk exposure because a central counterparty is substituted for individual counterparties and collateral for changes in the value of cleared derivatives is posted daily through a clearing agent.
27
The FHLB has analyzed the enforceability of offsetting rights incorporated in its cleared derivative transactions and determined that the exercise of those offsetting rights by a non-defaulting party under these transactions should be upheld under applicable law upon an event of default including bankruptcy, insolvency, or similar proceeding involving the Clearinghouse or the FHLB's clearing agent, or both. Based on this analysis, the FHLB presents a net derivative receivable or payable for all of its transactions through a particular clearing agent with a particular Clearinghouse.
Certain of the FHLB's bilateral interest rate swap contracts contain provisions that require the FHLB to post additional collateral with its counterparties if there is deterioration in the FHLB's credit ratings. The aggregate fair value of all bilateral interest rate swaps with credit-risk-related contingent features that were in a liability position at June 30, 2015 was (in thousands) $99,956, for which the FHLB had posted collateral with a fair value of (in thousands) $50,315 in the normal course of business.
If one of the FHLB's credit ratings had been lowered to the next lower rating that would have triggered additional collateral to be delivered, the FHLB would have been required to deliver up to an additional (in thousands) $12,500 of collateral at fair value to its derivatives counterparties at June 30, 2015.
For cleared derivatives, the Clearinghouse determines initial margin requirements and generally credit ratings are not factored into the initial margin. However, clearing agents may require additional initial margin to be posted based on credit considerations, including, but not limited to, credit rating downgrades. At June 30, 2015, the FHLB was not required to post additional initial margin by its clearing agents based on credit considerations.
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Note 11 - Deposits
Table 11.1- Deposits (in thousands)
June 30, 2015 | December 31, 2014 | ||||||
Interest bearing: | |||||||
Demand and overnight | $ | 573,587 | $ | 624,446 | |||
Term | 141,825 | 99,600 | |||||
Other | 9,351 | 5,592 | |||||
Total interest bearing | 724,763 | 729,638 | |||||
Non-interest bearing: | |||||||
Other | 599 | 298 | |||||
Total non-interest bearing | 599 | 298 | |||||
Total deposits | $ | 725,362 | $ | 729,936 |
The average interest rates paid on interest bearing deposits were 0.04 percent and 0.03 percent in the three- and six-month periods ended June 30, 2015 and 2014, respectively.
Note 12 - Consolidated Obligations
Table 12.1 - Consolidated Discount Notes Outstanding (dollars in thousands)
Book Value | Par Value | Weighted Average Interest Rate (1) | ||||||||
June 30, 2015 | $ | 48,262,505 | $ | 48,266,772 | 0.07 | % | ||||
December 31, 2014 | $ | 41,232,127 | $ | 41,238,122 | 0.09 | % |
(1) | Represents an implied rate without consideration of concessions. |
Table 12.2 - Consolidated Bonds Outstanding by Contractual Maturity (dollars in thousands)
June 30, 2015 | December 31, 2014 | |||||||||||||
Year of Contractual Maturity | Amount | Weighted Average Interest Rate | Amount | Weighted Average Interest Rate | ||||||||||
Due in 1 year or less | $ | 18,564,000 | 0.41 | % | $ | 32,477,000 | 0.24 | % | ||||||
Due after 1 year through 2 years | 5,879,000 | 1.33 | 6,918,000 | 1.19 | ||||||||||
Due after 2 years through 3 years | 5,242,750 | 1.51 | 4,594,000 | 1.56 | ||||||||||
Due after 3 years through 4 years | 3,807,000 | 1.87 | 4,245,000 | 1.79 | ||||||||||
Due after 4 years through 5 years | 3,584,000 | 2.06 | 2,647,000 | 2.08 | ||||||||||
Thereafter | 8,051,000 | 2.84 | 8,217,000 | 2.79 | ||||||||||
Index amortizing notes | 12,354 | 5.19 | 25,297 | 5.07 | ||||||||||
Total par value | 45,140,104 | 1.35 | 59,123,297 | 1.00 | ||||||||||
Premiums | 100,786 | 103,477 | ||||||||||||
Discounts | (25,650 | ) | (25,161 | ) | ||||||||||
Hedging adjustments | 12,082 | 15,304 | ||||||||||||
Fair value option valuation adjustment and accrued interest | 3,179 | (360 | ) | |||||||||||
Total | $ | 45,230,501 | $ | 59,216,557 |
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Table 12.3 - Consolidated Bonds Outstanding by Call Features (in thousands)
June 30, 2015 | December 31, 2014 | ||||||
Par value of Consolidated Bonds: | |||||||
Non-callable | $ | 36,348,104 | $ | 49,976,297 | |||
Callable | 8,792,000 | 9,147,000 | |||||
Total par value | $ | 45,140,104 | $ | 59,123,297 |
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, 2015 | December 31, 2014 | ||||||
Due in 1 year or less | $ | 26,031,000 | $ | 40,774,000 | ||||
Due after 1 year through 2 years | 5,334,000 | 5,413,000 | ||||||
Due after 2 years through 3 years | 3,510,750 | 3,317,000 | ||||||
Due after 3 years through 4 years | 2,792,000 | 2,685,000 | ||||||
Due after 4 years through 5 years | 2,624,000 | 1,992,000 | ||||||
Thereafter | 4,836,000 | 4,917,000 | ||||||
Index amortizing notes | 12,354 | 25,297 | ||||||
Total par value | $ | 45,140,104 | $ | 59,123,297 |
Table 12.5 - Consolidated Bonds by Interest-rate Payment Type (in thousands)
June 30, 2015 | December 31, 2014 | ||||||
Par value of Consolidated Bonds: | |||||||
Fixed-rate | $ | 33,440,104 | $ | 31,363,297 | |||
Variable-rate | 11,550,000 | 27,610,000 | |||||
Step-up | 150,000 | 150,000 | |||||
Total par value | $ | 45,140,104 | $ | 59,123,297 |
Concessions on Consolidated Obligations. Unamortized concessions included in other assets were (in thousands) $13,487 and $14,184 at June 30, 2015 and December 31, 2014. The amortization of these concessions is included in Consolidated Obligation interest expense and totaled (in thousands) $2,059 and $2,015 during the three months ended June 30, 2015 and 2014, respectively, and (in thousands) $4,189 and $3,804 during the six months ended June 30, 2015 and 2014, respectively.
Note 13 - Affordable Housing Program (AHP)
Table 13.1 - Analysis of AHP Liability (in thousands)
Balance at December 31, 2014 | $ | 98,103 | |
Assessments (current year additions) | 14,042 | ||
Subsidy uses, net | (10,122 | ) | |
Balance at June 30, 2015 | $ | 102,023 |
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Note 14 - Capital
Table 14.1 - Capital Requirements (dollars in thousands)
June 30, 2015 | December 31, 2014 | ||||||||||||||
Minimum Requirement | Actual | Minimum Requirement | Actual | ||||||||||||
Risk-based capital | $ | 521,168 | $ | 5,128,505 | $ | 481,835 | $ | 5,018,567 | |||||||
Capital-to-assets ratio (regulatory) | 4.00 | % | 5.14 | % | 4.00 | % | 4.71 | % | |||||||
Regulatory capital | $ | 3,992,087 | $ | 5,128,505 | $ | 4,265,617 | $ | 5,018,567 | |||||||
Leverage capital-to-assets ratio (regulatory) | 5.00 | % | 7.71 | % | 5.00 | % | 7.06 | % | |||||||
Leverage capital | $ | 4,990,109 | $ | 7,692,758 | $ | 5,332,021 | $ | 7,527,851 |
Restricted Retained Earnings. At June 30, 2015 and December 31, 2014 the FHLB had (in thousands) $184,719 and $159,694 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 FHLB may experience.
Table 14.2 - Mandatorily Redeemable Capital Stock Roll Forward (in thousands)
Balance, December 31, 2014 | $ | 62,963 | |
Capital stock subject to mandatory redemption reclassified from equity | 10,931 | ||
Redemption (or other reduction) of mandatorily redeemable capital stock | (8,732 | ) | |
Balance, June 30, 2015 | $ | 65,162 |
Table 14.3 - Mandatorily Redeemable Capital Stock by Contractual Year of Redemption (in thousands)
Contractual Year of Redemption | June 30, 2015 | December 31, 2014 | ||||||
Year 1 | $ | — | $ | 130 | ||||
Year 2 | — | — | ||||||
Year 3 | — | — | ||||||
Year 4 | 2,314 | 55 | ||||||
Year 5 | 6,139 | 2,278 | ||||||
Past contractual redemption date due to remaining activity (1) | 56,709 | 60,500 | ||||||
Total | $ | 65,162 | $ | 62,963 |
(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. |
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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, 2015 and 2014.
Table 15.1 - Accumulated Other Comprehensive (Loss) Income (in thousands)
Net unrealized (losses) gains on available-for-sale securities | Pension and postretirement benefits | Total accumulated other comprehensive (loss) income | |||||||||
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 | ) | ||
BALANCE, MARCH 31, 2015 | $ | (32 | ) | $ | (15,955 | ) | $ | (15,987 | ) | ||
Other comprehensive income before reclassification: | |||||||||||
Net unrealized gains | 45 | — | 45 | ||||||||
Reclassifications from other comprehensive income to net income: | |||||||||||
Amortization - pension and postretirement benefits | — | 619 | 619 | ||||||||
Net current period other comprehensive income | 45 | 619 | 664 | ||||||||
BALANCE, JUNE 30, 2015 | $ | 13 | $ | (15,336 | ) | $ | (15,323 | ) |
Net unrealized (losses) gains on available-for-sale securities | Pension and postretirement benefits | Total accumulated other comprehensive (loss) income | |||||||||
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 | ) | ||
BALANCE, DECEMBER 31, 2014 | $ | (24 | ) | $ | (16,572 | ) | $ | (16,596 | ) | ||
Other comprehensive income before reclassification: | |||||||||||
Net unrealized gains | 37 | — | 37 | ||||||||
Reclassifications from other comprehensive income to net income: | |||||||||||
Amortization - pension and postretirement benefits | — | 1,236 | 1,236 | ||||||||
Net current period other comprehensive income | 37 | 1,236 | 1,273 | ||||||||
BALANCE, JUNE 30, 2015 | $ | 13 | $ | (15,336 | ) | $ | (15,323 | ) |
32
Note 16 - Pension and Postretirement Benefit Plans
Qualified Defined Benefit Multi-employer Plan. The FHLB participates in the Pentegra Defined Benefit Plan for Financial Institutions (Pentegra Defined Benefit Plan), a tax-qualified defined benefit pension plan. Under the Pentegra Defined Benefit Plan, contributions made by one participating employer may be used to provide benefits to employees of other participating employers because assets contributed by an employer are not segregated in a separate account or restricted to provide benefits only to employees of that employer. Also, in the event a participating employer is unable to meet its contribution requirements, the required contributions for the other participating employers could increase proportionately. The Pentegra Defined Benefit Plan covers substantially all officers and employees of the FHLB who meet certain eligibility requirements. Contributions to the Pentegra Defined Benefit Plan charged to compensation and benefit expense were $1,478,000 and $1,529,000 in the three months ended June 30, 2015 and 2014, respectively, and $2,978,000 and $3,058,000 in the six months ended June 30, 2015 and 2014, respectively.
Qualified Defined Contribution Plan. The FHLB also participates in the Pentegra Defined Contribution Plan for Financial Institutions, a tax-qualified, defined contribution pension plan. The FHLB contributes a percentage of the participants' compensation by making a matching contribution equal to a percentage of voluntary employee contributions, subject to certain limitations. The FHLB contributed $195,000 and $184,000 in the three months ended June 30, 2015 and 2014, respectively, and $569,000 and $557,000 in the six months ended June 30, 2015 and 2014, respectively.
Nonqualified Supplemental Defined Benefit Retirement Plan. The FHLB maintains a nonqualified, unfunded defined benefit plan. The plan ensures that participants receive the full amount of benefits to which they would have been entitled under the qualified defined benefit plan in the absence of limits on benefit levels imposed by the IRS. There are no funded plan assets. The FHLB has established a grantor trust, which is included in held-to-maturity securities on the Statements of Condition, to meet future benefit obligations and current payments to beneficiaries.
Postretirement Benefits Plan. The FHLB also sponsors a postretirement benefits 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 | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
Net Periodic Benefit Cost | |||||||||||||||
Service cost | $ | 157 | $ | 107 | $ | 18 | $ | 8 | |||||||
Interest cost | 298 | 273 | 50 | 30 | |||||||||||
Amortization of net loss | 601 | 313 | 18 | — | |||||||||||
Net periodic benefit cost | $ | 1,056 | $ | 693 | $ | 86 | $ | 38 | |||||||
Six Months Ended June 30, | |||||||||||||||
Defined Benefit Retirement Plan | Postretirement Benefits Plan | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
Net Periodic Benefit Cost | |||||||||||||||
Service cost | $ | 315 | $ | 215 | $ | 37 | $ | 16 | |||||||
Interest cost | 596 | 546 | 101 | 57 | |||||||||||
Amortization of net loss | 1,202 | 626 | 34 | — | |||||||||||
Net periodic benefit cost | $ | 2,113 | $ | 1,387 | $ | 172 | $ | 73 |
33
Note 17 - Segment Information
The FHLB has identified two primary operating segments based on its method of internal reporting: Traditional Member Finance and the MPP. These segments reflect the FHLB's two primary Mission Asset Activities and the manner in which they are managed from the perspective of development, resource allocation, product delivery, pricing, credit risk and operational administration. The segments identify the principal ways the FHLB provides services to member stockholders.
Table 17.1 - Financial Performance by Operating Segment (in thousands)
Three Months Ended June 30, | |||||||||||
Traditional Member Finance | MPP | Total | |||||||||
2015 | |||||||||||
Net interest income | $ | 61,377 | $ | 23,480 | $ | 84,857 | |||||
Non-interest income (loss) | 6,953 | (1,419 | ) | 5,534 | |||||||
Non-interest expense | 16,498 | 2,517 | 19,015 | ||||||||
Income before assessments | 51,832 | 19,544 | 71,376 | ||||||||
Affordable Housing Program assessments | 5,246 | 1,954 | 7,200 | ||||||||
Net income | $ | 46,586 | $ | 17,590 | $ | 64,176 | |||||
Average assets | $ | 93,436,035 | $ | 7,456,349 | $ | 100,892,384 | |||||
Total assets | $ | 92,044,861 | $ | 7,757,323 | $ | 99,802,184 | |||||
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 | ||||||||
Non-interest income | 4,391 | 1,933 | 6,324 | ||||||||
Non-interest expense | 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 |
34
Six Months Ended June 30, | |||||||||||
Traditional Member Finance | MPP | Total | |||||||||
2015 | |||||||||||
Net interest income | $ | 122,506 | $ | 39,712 | $ | 162,218 | |||||
Non-interest income (loss) | 14,815 | (1,149 | ) | 13,666 | |||||||
Non-interest expense | 31,713 | 5,005 | 36,718 | ||||||||
Income before assessments | 105,608 | 33,558 | 139,166 | ||||||||
Affordable Housing Program assessments | 10,687 | 3,355 | 14,042 | ||||||||
Net income | $ | 94,921 | $ | 30,203 | $ | 125,124 | |||||
Average assets | $ | 94,552,486 | $ | 7,316,045 | $ | 101,868,531 | |||||
Total assets | $ | 92,044,861 | $ | 7,757,323 | $ | 99,802,184 | |||||
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 | ||||||||
Non-interest income | 9,908 | 160 | 10,068 | ||||||||
Non-interest expense | 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 |
35
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 FHLB using available market information and the FHLB's best judgment of appropriate valuation methods. The fair values reflect the FHLB's judgment of how a market participant would estimate the fair values.
Fair Value Hierarchy. The FHLB records trading securities, available-for-sale securities, derivative assets, derivative liabilities, certain Advances and certain Consolidated Obligation Bonds at fair value on a recurring basis, and on occasion, certain mortgage loans on a nonrecurring basis. GAAP establishes a fair value hierarchy and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The inputs are evaluated and an overall level for the measurement is determined. This overall level is an indication of how market observable the fair value measurement is. An entity must disclose the level within the fair value hierarchy in which the measurements are classified.
The fair value hierarchy prioritizes the inputs used to measure fair value into three broad levels:
Level 1 Inputs - Quoted prices (unadjusted) for identical assets or liabilities in an active market that the reporting entity can access on the measurement date.
Level 2 Inputs - Inputs other than quoted prices within Level 1 that are observable inputs for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 2 inputs include the following: (1) quoted prices for similar assets or liabilities in active markets; (2) quoted prices for identical or similar assets or liabilities in markets that are not active; (3) inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates and yield curves that are observable at commonly quoted intervals, and implied volatilities); and (4) inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 Inputs - Unobservable inputs for the asset or liability.
The FHLB reviews the fair value hierarchy classifications on a quarterly basis. Changes in the observability of the valuation inputs may result in a reclassification of certain financial assets or liabilities. Such reclassifications are reported as transfers in/out at fair value as of the beginning of the quarter in which the changes occur. The FHLB did not have any transfers of assets or liabilities recorded at fair value on a recurring basis during the six months ended June 30, 2015 or 2014.
36
Table 18.1 presents the carrying value, fair value, and fair value hierarchy of financial assets and liabilities of the FHLB. These values do not represent an estimate of the overall market value of the FHLB 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, 2015 | |||||||||||||||||||||||
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 | $ | 11,368 | $ | 11,368 | $ | 11,368 | $ | — | $ | — | $ | — | |||||||||||
Interest-bearing deposits | 180 | 180 | — | 180 | — | — | |||||||||||||||||
Securities purchased under agreements to resell | 1,465,000 | 1,465,000 | — | 1,465,000 | — | — | |||||||||||||||||
Federal funds sold | 4,250,000 | 4,250,000 | — | 4,250,000 | — | — | |||||||||||||||||
Trading securities | 1,255 | 1,255 | — | 1,255 | — | — | |||||||||||||||||
Available-for-sale securities | 550,013 | 550,013 | — | 550,013 | — | — | |||||||||||||||||
Held-to-maturity securities | 14,544,782 | 14,532,213 | — | 14,532,213 | — | — | |||||||||||||||||
Advances (2) | 71,107,890 | 71,031,491 | — | 71,031,491 | — | — | |||||||||||||||||
Mortgage loans held for portfolio, net | 7,730,240 | 7,864,419 | — | 7,829,748 | 34,671 | — | |||||||||||||||||
Accrued interest receivable | 83,571 | 83,571 | — | 83,571 | — | — | |||||||||||||||||
Derivative assets | 22,501 | 22,501 | — | 24,501 | — | (2,000 | ) | ||||||||||||||||
Liabilities: | |||||||||||||||||||||||
Deposits | 725,362 | 725,291 | — | 725,291 | — | — | |||||||||||||||||
Consolidated Obligations: | |||||||||||||||||||||||
Discount Notes | 48,262,505 | 48,255,427 | — | 48,255,427 | — | — | |||||||||||||||||
Bonds (3) | 45,230,501 | 45,496,465 | — | 45,496,465 | — | — | |||||||||||||||||
Mandatorily redeemable capital stock | 65,162 | 65,162 | 65,162 | — | — | — | |||||||||||||||||
Accrued interest payable | 114,843 | 114,843 | — | 114,843 | — | — | |||||||||||||||||
Derivative liabilities | 54,308 | 54,308 | — | 127,808 | — | (73,500 | ) | ||||||||||||||||
Other: | |||||||||||||||||||||||
Standby bond purchase agreements | — | 1,104 | — | 1,104 | — | — |
(1) | Amounts represent the application of the netting requirements that allow the FHLB to settle positive and negative positions and also cash collateral and related accrued interest held or placed by the FHLB with the same counterparty. |
(2) | Includes (in thousands) $15,129 of Advances recorded under the fair value option at June 30, 2015. |
(3) | Includes (in thousands) $5,623,179 of Consolidated Obligation Bonds recorded under the fair value option at June 30, 2015. |
37
December 31, 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 | $ | 3,109,970 | $ | 3,109,970 | $ | 3,109,970 | $ | — | $ | — | $ | — | |||||||||||
Interest-bearing deposits | 119 | 119 | — | 119 | — | — | |||||||||||||||||
Securities purchased under agreements to resell | 3,343,000 | 3,343,002 | — | 3,343,002 | — | — | |||||||||||||||||
Federal funds sold | 6,600,000 | 6,600,000 | — | 6,600,000 | — | — | |||||||||||||||||
Trading securities | 1,341 | 1,341 | — | 1,341 | — | — | |||||||||||||||||
Available-for-sale securities | 1,349,977 | 1,349,977 | — | 1,349,977 | — | — | |||||||||||||||||
Held-to-maturity securities | 14,712,271 | 14,794,326 | — | 14,794,326 | — | — | |||||||||||||||||
Advances (2) | 70,405,616 | 70,279,438 | — | 70,279,438 | — | — | |||||||||||||||||
Mortgage loans held for portfolio, net | 6,984,683 | 7,219,198 | — | 7,178,047 | 41,151 | — | |||||||||||||||||
Accrued interest receivable | 81,384 | 81,384 | — | 81,384 | — | — | |||||||||||||||||
Derivative assets | 14,699 | 14,699 | — | 24,531 | — | (9,832 | ) | ||||||||||||||||
Liabilities: | |||||||||||||||||||||||
Deposits | 729,936 | 729,782 | — | 729,782 | — | — | |||||||||||||||||
Consolidated Obligations: | |||||||||||||||||||||||
Discount Notes | 41,232,127 | 41,224,739 | — | 41,224,739 | — | — | |||||||||||||||||
Bonds (3) | 59,216,557 | 59,496,247 | — | 59,496,247 | — | — | |||||||||||||||||
Mandatorily redeemable capital stock | 62,963 | 62,963 | 62,963 | — | — | — | |||||||||||||||||
Accrued interest payable | 114,781 | 114,781 | — | 114,781 | — | — | |||||||||||||||||
Derivative liabilities | 63,767 | 63,767 | — | 149,634 | — | (85,867 | ) | ||||||||||||||||
Other: | |||||||||||||||||||||||
Standby bond purchase agreements | — | 1,381 | — | 1,381 | — | — |
(1) | Amounts represent the application of the netting requirements that allow the FHLB to settle positive and negative positions and also cash collateral and related accrued interest held or placed by the FHLB with the same counterparty. |
(2) | Includes (in thousands) $15,042 of Advances recorded under the fair value option at December 31, 2014. |
(3) | Includes (in thousands) $4,209,640 of Consolidated Obligation Bonds recorded under the fair value option at December 31, 2014. |
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 FHLB's 2014 Annual Report on Form 10-K. There have been no changes in the valuation methodologies during 2015.
38
Fair Value Measurements.
Table 18.2 presents the fair value of financial assets and liabilities that are recorded on a recurring or nonrecurring basis at June 30, 2015 or December 31, 2014, by level within the fair value hierarchy. The FHLB records nonrecurring fair value adjustments to reflect partial write-downs on certain mortgage loans. The FHLB estimates the fair value of these assets based primarily on property values obtained from a third-party pricing vendor.
Table 18.2 - Fair Value Measurements (in thousands)
Fair Value Measurements at June 30, 2015 | |||||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | Netting Adjustment and Cash Collateral (1) | |||||||||||||||
Recurring fair value measurements - Assets | |||||||||||||||||||
Trading securities: | |||||||||||||||||||
Other U.S. obligation single-family mortgage-backed securities | $ | 1,255 | $ | — | $ | 1,255 | $ | — | $ | — | |||||||||
Available-for-sale securities: | |||||||||||||||||||
Certificates of deposit | 550,013 | — | 550,013 | — | — | ||||||||||||||
Advances | 15,129 | — | 15,129 | — | — | ||||||||||||||
Derivative assets: | |||||||||||||||||||
Interest rate swaps | 19,493 | — | 21,493 | — | (2,000 | ) | |||||||||||||
Forward rate agreements | 2,906 | — | 2,906 | — | — | ||||||||||||||
Mortgage delivery commitments | 102 | — | 102 | — | — | ||||||||||||||
Total derivative assets | 22,501 | — | 24,501 | — | (2,000 | ) | |||||||||||||
Total assets at fair value | $ | 588,898 | $ | — | $ | 590,898 | $ | — | $ | (2,000 | ) | ||||||||
Recurring fair value measurements - Liabilities | |||||||||||||||||||
Consolidated Obligation Bonds | $ | 5,623,179 | $ | — | $ | 5,623,179 | $ | — | $ | — | |||||||||
Derivative liabilities: | |||||||||||||||||||
Interest rate swaps | 49,641 | — | 123,141 | — | (73,500 | ) | |||||||||||||
Forward rate agreement | 216 | — | 216 | — | — | ||||||||||||||
Mortgage delivery commitments | 4,451 | — | 4,451 | — | — | ||||||||||||||
Total derivative liabilities | 54,308 | — | 127,808 | — | (73,500 | ) | |||||||||||||
Total liabilities at fair value | $ | 5,677,487 | $ | — | $ | 5,750,987 | $ | — | $ | (73,500 | ) | ||||||||
Nonrecurring fair value measurements - Assets (2) | |||||||||||||||||||
Mortgage loans held for portfolio | $ | 6,302 | $ | — | $ | — | $ | 6,302 |
(1) | Amounts represent the application of the netting requirements that allow the FHLB to settle positive and negative positions and also cash collateral and related accrued interest held or placed by the FHLB with the same counterparty. |
(2) | The fair value information presented is as of the date the fair value adjustment was recorded during the six months ended June 30, 2015. |
39
Fair Value Measurements at December 31, 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 single-family mortgage-backed securities | $ | 1,341 | $ | — | $ | 1,341 | $ | — | $ | — | |||||||||
Available-for-sale securities: | |||||||||||||||||||
Certificates of deposit | 1,349,977 | — | 1,349,977 | — | — | ||||||||||||||
Advances | 15,042 | — | 15,042 | — | — | ||||||||||||||
Derivative assets: | |||||||||||||||||||
Interest rate swaps | 10,894 | — | 20,726 | — | (9,832 | ) | |||||||||||||
Forward rate agreements | 6 | — | 6 | — | — | ||||||||||||||
Mortgage delivery commitments | 3,799 | — | 3,799 | — | — | ||||||||||||||
Total derivative assets | 14,699 | — | 24,531 | — | (9,832 | ) | |||||||||||||
Total assets at fair value | $ | 1,381,059 | $ | — | $ | 1,390,891 | $ | — | $ | (9,832 | ) | ||||||||
Recurring fair value measurements - Liabilities | |||||||||||||||||||
Consolidated Obligation Bonds | $ | 4,209,640 | $ | — | $ | 4,209,640 | $ | — | $ | — | |||||||||
Derivative liabilities: | |||||||||||||||||||
Interest rate swaps | 58,842 | — | 144,709 | — | (85,867 | ) | |||||||||||||
Forward rate agreements | 4,924 | — | 4,924 | — | — | ||||||||||||||
Mortgage delivery commitments | 1 | — | 1 | — | — | ||||||||||||||
Total derivative liabilities | 63,767 | — | 149,634 | — | (85,867 | ) | |||||||||||||
Total liabilities at fair value | $ | 4,273,407 | $ | — | $ | 4,359,274 | $ | — | $ | (85,867 | ) |
(1) | Amounts represent the application of the netting requirements that allow the FHLB to settle positive and negative positions and also cash collateral and related accrued interest held or placed by the FHLB with the same counterparty. |
Fair Value Option. The fair value option provides an irrevocable option to elect fair value as an alternative measurement for selected financial assets, financial liabilities, unrecognized firm commitments, and written loan commitments not previously carried at fair value. It requires a company to display the fair value of those assets and liabilities for which it has chosen to use fair value on the face of the Statements of Condition. Fair value is used for both the initial and subsequent measurement of the designated assets, liabilities and commitments, with the changes in fair value recognized in net income. If elected, interest income and interest expense on Advances and Consolidated Bonds carried at fair value are recognized based solely on the contractual amount of interest due or unpaid. Any transaction fees or costs are immediately recognized into other non-interest income or other non-interest expense.
The FHLB has elected the fair value option for certain Advances and Consolidated Obligation Bonds that either do not qualify for hedge accounting or may be at risk for not meeting hedge effectiveness requirements. These fair value elections were made primarily in an effort to mitigate the potential income statement volatility that can arise from economic hedging relationships in which the carrying value of the hedged item is not adjusted for changes in fair value.
40
Table 18.3 – Fair Value Option - Financial Assets and Liabilities (in thousands)
Three Months Ended June 30, | |||||||||||||||
2015 | 2014 | ||||||||||||||
Advances | Consolidated Bonds | Advances | Consolidated Bonds | ||||||||||||
Balance at beginning of period | $ | 15,182 | $ | (3,449,764 | ) | $ | — | $ | (2,265,459 | ) | |||||
New transactions elected for fair value option | — | (4,030,000 | ) | — | (1,515,000 | ) | |||||||||
Maturities and terminations | — | 1,857,000 | — | 1,000,000 | |||||||||||
Net losses on financial instruments held under fair value option | (52 | ) | (389 | ) | — | (80 | ) | ||||||||
Change in accrued interest | (1 | ) | (26 | ) | — | 516 | |||||||||
Balance at end of period | $ | 15,129 | $ | (5,623,179 | ) | $ | — | $ | (2,780,023 | ) | |||||
Six Months Ended June 30, | |||||||||||||||
2015 | 2014 | ||||||||||||||
Advances | Consolidated Bonds | Advances | Consolidated Bonds | ||||||||||||
Balance at beginning of period | $ | 15,042 | $ | (4,209,640 | ) | $ | — | $ | (4,018,370 | ) | |||||
New transactions elected for fair value option | — | (5,762,000 | ) | — | (2,765,000 | ) | |||||||||
Maturities and terminations | — | 4,352,000 | — | 4,000,000 | |||||||||||
Net gains (losses) on financial instruments held under fair value option | 88 | (1,698 | ) | — | 1,280 | ||||||||||
Change in accrued interest | (1 | ) | (1,841 | ) | — | 2,067 | |||||||||
Balance at end of period | $ | 15,129 | $ | (5,623,179 | ) | $ | — | $ | (2,780,023 | ) |
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, | |||||||||||||||
2015 | 2014 | ||||||||||||||
Advances | Consolidated Bonds | Advances | Consolidated Bonds | ||||||||||||
Interest income (expense) | $ | 63 | $ | (4,028 | ) | $ | — | $ | (841 | ) | |||||
Net losses on changes in fair value under fair value option | (52 | ) | (389 | ) | — | (80 | ) | ||||||||
Total changes in fair value included in current period earnings | $ | 11 | $ | (4,417 | ) | $ | — | $ | (921 | ) |
Six Months Ended June 30, | |||||||||||||||
2015 | 2014 | ||||||||||||||
Advances | Consolidated Bonds | Advances | Consolidated Bonds | ||||||||||||
Interest income (expense) | $ | 126 | $ | (7,721 | ) | $ | — | $ | (2,439 | ) | |||||
Net gains (losses) on changes in fair value under fair value option | 88 | (1,698 | ) | — | 1,280 | ||||||||||
Total changes in fair value included in current period earnings | $ | 214 | $ | (9,419 | ) | $ | — | $ | (1,159 | ) |
For instruments recorded under the fair value option, the related contractual interest income and contractual interest expense are recorded as part of net interest income on the Statements of Income. The remaining changes in fair value for instruments in which the fair value option has been elected are recorded as “Net (losses) gains on financial instruments held under fair value option” in the Statements of Income. The FHLB has determined that no adjustments to the fair values of its instruments
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recorded under the fair value option for instrument-specific credit risk were necessary as of June 30, 2015 or December 31, 2014.
The following table reflects the difference between the aggregate unpaid principal balance outstanding and the aggregate fair value for Advances and Consolidated Bonds for which the fair value option has been elected.
Table 18.5 – Aggregate Unpaid Balance and Aggregate Fair Value (in thousands)
June 30, 2015 | December 31, 2014 | ||||||||||||||||||||||
Aggregate Unpaid Principal Balance | Aggregate Fair Value | Aggregate Fair Value Over/(Under) Aggregate Unpaid Principal Balance | Aggregate Unpaid Principal Balance | Aggregate Fair Value | Aggregate Fair Value Over/(Under) Aggregate Unpaid Principal Balance | ||||||||||||||||||
Advances (1) | $ | 15,000 | $ | 15,129 | $ | 129 | $ | 15,000 | $ | 15,042 | $ | 42 | |||||||||||
Consolidated Bonds | 5,620,000 | 5,623,179 | 3,179 | 4,210,000 | 4,209,640 | (360 | ) |
(1) | At June 30, 2015 and December 31, 2014, none of the Advances were 90 days or more past due or had been placed on non-accrual status. |
Note 19 - Commitments and Contingencies
Table 19.1 - Off-Balance Sheet Commitments (in thousands)
June 30, 2015 | December 31, 2014 | ||||||||||||||||||||||
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 | $ | 18,869,084 | $ | 136,521 | $ | 19,005,605 | $ | 17,233,206 | $ | 546,385 | $ | 17,779,591 | |||||||||||
Commitments for standby bond purchases | 68,380 | 70,365 | 138,745 | 37,490 | 149,705 | 187,195 | |||||||||||||||||
Commitments to purchase mortgage loans | 495,054 | — | 495,054 | 451,292 | — | 451,292 | |||||||||||||||||
Unsettled Consolidated Bonds, at par (1)(2) | 38,000 | — | 38,000 | 17,000 | — | 17,000 | |||||||||||||||||
Unsettled Consolidated Discount Notes, at par (1) | 17,707 | — | 17,707 | 5,000 | — | 5,000 |
(1) | Expiration is based on settlement period rather than underlying contractual maturity of Consolidated Obligations. |
(2) | Of the total unsettled Consolidated Bonds, $15,000 and $17,000 (in thousands) were hedged with associated interest rate swaps at June 30, 2015 and December 31, 2014, respectively. |
Legal Proceedings. From time to time, the FHLB is subject to legal proceedings arising in the normal course of business. In March 2010, the FHLB was advised by representatives of the Lehman Brothers Holdings, Inc. bankruptcy estate that they believed that the FHLB had been unjustly enriched in connection with the close out of its interest rate swap transactions with Lehman at the time of the Lehman bankruptcy in 2008 and that the bankruptcy estate was entitled to the $43 million difference between the settlement amount the FHLB paid Lehman in connection with the close-out transactions and the market value payment the FHLB received when replacing the swaps with other counterparties. In May 2010, the FHLB received a Derivatives Alternative Dispute Resolution notice from the Lehman bankruptcy estate with a settlement demand of $65.8 million, plus interest accruing primarily at LIBOR plus 14.5 percent since the bankruptcy filing, based on their view of how the settlement amount should have been calculated. In accordance with the Alternative Dispute Resolution Order of the Bankruptcy Court administering the Lehman estate, senior management of the FHLB participated in a non-binding mediation in New York in August 2010, and counsel for the FHLB continued discussions with the court-appointed mediator for several weeks thereafter. The mediation concluded in October 2010 without a settlement of the claims asserted by the Lehman bankruptcy estate. In April 2013, Lehman Brothers Special Financing Inc., through Lehman Brothers Holdings Inc. and the Plan Administrator under the Modified Third Amended Joint Chapter 11 Plan of Lehman Brothers Holdings Inc. and its Affiliated Debtors, filed an adversary complaint in the United States Bankruptcy Court for the Southern District of New York against the FHLB seeking (a) a declaratory judgment on the interpretation of certain provisions and the calculation of amounts due under the agreement governing the 2008 swap transactions described above, and (b) additional amounts alleged as due as part of the termination of such transactions. The FHLB believes that it correctly calculated, and fully satisfied its obligation to Lehman in September 2008, and the FHLB intends to vigorously defend itself.
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The FHLB also is subject to other legal proceedings arising in the normal course of business. The FHLB would record an accrual for a loss contingency when it is probable that a loss has been incurred and the amount can be reasonably estimated. 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 FHLB's financial condition or results of operations.
Note 20 - Transactions with Other FHLBanks
The FHLB notes all transactions with other FHLBanks on the face of its financial statements. Occasionally, the FHLB loans short-term funds to and borrows short-term funds from other FHLBanks. These loans and borrowings are transacted at then current market rates when traded. There were no such loans or borrowings outstanding at June 30, 2015 or December 31, 2014. The following table details the average daily balance of lending and borrowing between the FHLB and other FHLBanks for the six months ended June 30, 2015 and 2014.
Table 20.1 - Lending and Borrowing Between the FHLB and Other FHLBanks (in thousands)
Average Daily Balances for the Six Months Ended June 30, | |||||||
2015 | 2014 | ||||||
Loans to other FHLBanks | $ | — | $ | 166 | |||
Borrowings from other FHLBanks | — | — |
In addition, the FHLB may, from time to time, assume the outstanding primary liability for Consolidated Obligations of another FHLBank (at then current market rates on the day when the transfer is traded) rather than issuing new debt for which the FHLB is the primary obligor. The FHLB then becomes the primary obligor on the transferred debt. There were no Consolidated Obligations transferred to the FHLB during the six months ended June 30, 2015 or 2014. The FHLB 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 FHLB may provide products and services to members whose officers or directors serve as directors of the FHLB (Directors' Financial Institutions). Finance Agency regulations require that transactions with Directors' Financial Institutions be made on the same terms as those with any other member. The following table reflects balances with Directors' Financial Institutions for the items indicated below. The FHLB had no mortgage-backed securities or derivatives transactions with Directors' Financial Institutions at June 30, 2015 or December 31, 2014.
Table 21.1 - Transactions with Directors' Financial Institutions (dollars in millions)
June 30, 2015 | December 31, 2014 | ||||||||||||
Balance | % of Total (1) | Balance | % of Total (1) | ||||||||||
Advances | $ | 3,133 | 4.4 | % | $ | 2,929 | 4.2 | % | |||||
MPP | 171 | 2.3 | 154 | 2.3 | |||||||||
Regulatory capital stock | 231 | 5.3 | 225 | 5.2 |
(1) | Percentage of total principal (Advances), unpaid principal balance (MPP), and regulatory capital stock. |
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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 FHLB.
Table 21.2 - Stockholders Holding Five Percent or more of Regulatory Capital Stock (dollars in millions)
Regulatory Capital Stock | Advance | MPP Unpaid | ||||||||||||
June 30, 2015 | Balance | % of Total | Principal | Principal Balance | ||||||||||
JPMorgan Chase Bank, N.A. | $ | 1,533 | 35 | % | $ | 37,300 | $ | — | ||||||
U.S. Bank, N.A. | 475 | 11 | 8,121 | 36 | ||||||||||
Fifth Third Bank | 248 | 6 | 2,871 | 3 |
Regulatory Capital Stock | Advance | MPP Unpaid | ||||||||||||
December 31, 2014 | Balance | % of Total | Principal | Principal Balance | ||||||||||
JPMorgan Chase Bank, N.A. | $ | 1,533 | 35 | % | $ | 41,300 | $ | — | ||||||
U.S. Bank, N.A. | 475 | 11 | 8,338 | 38 | ||||||||||
Fifth Third Bank | 248 | 6 | 24 | 3 |
Nonmember Affiliates. The FHLB has relationships with three nonmember affiliates, the Kentucky Housing Corporation, the Ohio Housing Finance Agency and the Tennessee Housing Development Agency. The FHLB had no investments in or borrowings to any of these nonmember affiliates at June 30, 2015 or December 31, 2014. The FHLB has executed standby bond purchase agreements with one state housing authority whereby the FHLB, for a fee, agrees as a liquidity provider if required, to purchase and hold the authority's bonds until the designated marketing agent can find a suitable investor or the housing authority repurchases the bond according to a schedule established by the standby agreement. During the first six months of 2015 and 2014, the FHLB was not required to purchase any bonds under these agreements.
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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 (the FHLB). These statements use words such as “anticipates,” “expects,” “believes,” “could,” “estimates,” “may,” and “should.” By their nature, forward-looking statements relate to matters involving risks or uncertainties, some of which we may not be able to know, control, or completely manage. Actual future results could differ materially from those expressed or implied in forward-looking statements or could affect the extent to which we are able to realize an objective, expectation, estimate, or assessment. Some of the risks and uncertainties that could affect our forward-looking statements include the following:
▪ | the effects of economic, financial, credit, market, and member conditions on our financial condition and results of operations, including changes in economic growth, general liquidity conditions, inflation and deflation, interest rates, interest rate spreads, interest rate volatility, mortgage originations, prepayment activity, housing prices, asset delinquencies, and members' mergers and consolidations, deposit flows, liquidity needs, and loan demand; |
▪ | political events, including legislative, regulatory, federal government, judicial or other developments that could affect us, our members, our counterparties, other Federal Home Loan Banks (FHLBanks) and other government-sponsored enterprises (GSEs), and/or investors in the Federal Home Loan Bank System's (FHLBank System) 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 the FHLB 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 (including cybersecurity risks); |
▪ | 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.
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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, 2015 | March 31, 2015 | December 31, 2014 | September 30, 2014 | June 30, 2014 | ||||||||||||||
STATEMENT OF CONDITION DATA AT PERIOD END: | |||||||||||||||||||
Total assets | $ | 99,802 | $ | 98,909 | $ | 106,640 | $ | 99,967 | $ | 101,258 | |||||||||
Advances | 71,108 | 66,731 | 70,406 | 71,442 | 69,485 | ||||||||||||||
Mortgage loans held for portfolio | 7,732 | 7,265 | 6,989 | 6,909 | 6,702 | ||||||||||||||
Allowance for credit losses on mortgage loans | 2 | 2 | 5 | 5 | 6 | ||||||||||||||
Investments (1) | 20,811 | 24,665 | 26,007 | 20,641 | 24,735 | ||||||||||||||
Consolidated Obligations, net: | |||||||||||||||||||
Discount Notes | 48,263 | 45,628 | 41,232 | 36,880 | 35,390 | ||||||||||||||
Bonds | 45,230 | 46,927 | 59,217 | 56,881 | 59,653 | ||||||||||||||
Total Consolidated Obligations, net | 93,493 | 92,555 | 100,449 | 93,761 | 95,043 | ||||||||||||||
Mandatorily redeemable capital stock | 65 | 62 | 63 | 110 | 112 | ||||||||||||||
Capital: | |||||||||||||||||||
Capital stock - putable | 4,335 | 4,302 | 4,267 | 4,231 | 4,215 | ||||||||||||||
Retained earnings | 729 | 707 | 689 | 667 | 647 | ||||||||||||||
Accumulated other comprehensive loss | (16 | ) | (16 | ) | (17 | ) | (7 | ) | (9 | ) | |||||||||
Total capital | 5,048 | 4,993 | 4,939 | 4,891 | 4,853 | ||||||||||||||
STATEMENT OF INCOME DATA FOR THE QUARTER: | |||||||||||||||||||
Net interest income | $ | 85 | $ | 78 | $ | 80 | $ | 83 | $ | 77 | |||||||||
Provision (reversal) for credit losses | — | — | 1 | — | (1 | ) | |||||||||||||
Non-interest income | 5 | 8 | 9 | 4 | 7 | ||||||||||||||
Non-interest expenses | 19 | 18 | 17 | 18 | 17 | ||||||||||||||
Assessments | 7 | 7 | 7 | 7 | 7 | ||||||||||||||
Net income | $ | 64 | $ | 61 | $ | 64 | $ | 62 | $ | 61 | |||||||||
FINANCIAL RATIOS: | |||||||||||||||||||
Dividend payout ratio (2) | 65.7 | % | 70.4 | % | 66.5 | % | 67.3 | % | 73.4 | % | |||||||||
Weighted average dividend rate (3) | 4.00 | 4.00 | 4.00 | 4.00 | 4.00 | ||||||||||||||
Return on average equity | 5.10 | 4.97 | 5.14 | 5.07 | 5.00 | ||||||||||||||
Return on average assets | 0.26 | 0.24 | 0.25 | 0.25 | 0.24 | ||||||||||||||
Net interest margin (4) | 0.34 | 0.31 | 0.31 | 0.33 | 0.30 | ||||||||||||||
Average equity to average assets | 5.00 | 4.83 | 4.86 | 4.93 | 4.79 | ||||||||||||||
Regulatory capital ratio (5) | 5.14 | 5.13 | 4.71 | 5.01 | 4.91 | ||||||||||||||
Operating expense to average assets | 0.057 | 0.058 | 0.054 | 0.056 | 0.050 |
(1) | Investments include interest bearing deposits in banks, securities purchased under agreements to resell, Federal funds sold, trading securities, available-for-sale securities, and held-to-maturity securities. |
(2) | Dividend payout ratio is dividends declared in the period as a percentage of net income. |
(3) | Weighted average dividend rates are dividends paid divided by the average number of shares of capital stock eligible for dividends. |
(4) | Net interest margin is net interest income before (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. |
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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) | 2015 | 2014 | 2014 | 2015 | 2014 | 2014 | |||||||||||||||||
Total Assets | $ | 99,802 | $ | 101,258 | $ | 106,640 | $ | 101,869 | $ | 101,842 | $ | 101,157 | |||||||||||
Mission Asset Activity: | |||||||||||||||||||||||
Advances (principal) | 71,018 | 69,336 | 70,299 | 69,168 | 65,871 | 66,492 | |||||||||||||||||
Mortgage Purchase Program (MPP): | |||||||||||||||||||||||
Mortgage loans held for portfolio (principal) | 7,511 | 6,524 | 6,796 | 7,084 | 6,541 | 6,620 | |||||||||||||||||
Mandatory Delivery Contracts (notional) | 495 | 429 | 451 | 585 | 187 | 273 | |||||||||||||||||
Total MPP | 8,006 | 6,953 | 7,247 | 7,669 | 6,728 | 6,893 | |||||||||||||||||
Letters of Credit (notional) | 19,006 | 15,563 | 17,780 | 17,328 | 14,070 | 15,154 | |||||||||||||||||
Total Mission Asset Activity | $ | 98,030 | $ | 91,852 | $ | 95,326 | $ | 94,165 | $ | 86,669 | $ | 88,539 |
In the first six months of 2015, the FHLB 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 majority of our members continued to have modest demand for new Advance borrowings due to measured economic growth and significant amounts of liquidity made available as a result of the actions of the Federal Reserve System.
The balance of Mission Asset Activity – which we define as Advances, Letters of Credit, and total MPP (including purchase commitments) – was $98.0 billion at June 30, 2015, an increase of $2.7 billion (three percent) from year-end 2014. The growth in ending balances of Mission Asset Activity from year-end 2014 to June 30, 2015 was driven by an increase in the principal balance of Advances, mortgage loans and in the notional balance of Letters of Credit. As of June 30, 2015, members funded on average 3.2 percent of their assets with Advances, and the penetration rate was relatively stable with 70-75 percent of members holding Mission Asset Activity.
The principal balance of mortgage loans held for portfolio at June 30, 2015 rose $0.7 billion (11 percent) from year-end 2014. During the first six months of 2015, we purchased $1.5 billion of mortgage loans, while principal reductions totaled $0.8 billion. Residual credit risk exposure in the mortgage loan portfolio continued to be minimal.
Based on earnings in the first six months of 2015, we contributed $14 million to the Affordable Housing Program (AHP) pool of funds to be awarded to members in 2016. 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 and Other Assets
The balance of investments at June 30, 2015 was $20.8 billion, a decrease of $5.2 billion (20 percent) from year-end 2014. Most of the decline was because we held fewer short-term liquidity investments. At June 30, 2015, investments included $14.5 billion of mortgage-backed securities and $6.3 billion of other investments, which were mostly short-term instruments held for liquidity.
Investment balances averaged $25.1 billion in the first six months of 2015, a decrease of $3.8 billion (13 percent) from the average during the same period in 2014. This reflected declines in both liquidity investments and mortgage-backed securities. All of our mortgage-backed securities held at June 30, 2015 were issued and guaranteed by Fannie Mae, Freddie Mac or a U.S. agency.
The balance of cash and due from banks at June 30, 2015 was $11 million, compared to $3.1 billion at December 31, 2014, a larger than normal amount due to holding $3.1 billion in deposits at the Federal Reserve.
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We maintained an adequate amount of asset liquidity throughout the first six months of 2015 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 2015, exceeding all minimum regulatory capital requirements. The GAAP capital-to-assets ratio at June 30, 2015 was 5.06 percent, while the regulatory capital-to-assets ratio was 5.14 percent. Both ratios exceeded the regulatory required minimum of four percent. Regulatory capital includes mandatorily redeemable capital stock accounted for as a liability under GAAP.
The amounts of GAAP and regulatory capital increased $109 million and $110 million, respectively, in the first six months of 2015, due primarily to purchases of capital stock by members.
Total retained earnings were $729 million at June 30, 2015, an increase of $40 million (six percent) from year-end 2014. We believe the amount of retained earnings is sufficient to protect against members' impairment risk of their capital stock investment in the FHLB and to provide the opportunity to stabilize future dividends. Our Capital Plan also has safeguards to prevent financial leverage ratios from falling below regulatory minimum levels.
Results of Operations
Overall Results
The table below summarizes our results of operations.
Three Months Ended June 30, | Six Months Ended June 30, | Year Ended December 31, | |||||||||||||||||
(Dollars in millions) | 2015 | 2014 | 2015 | 2014 | 2014 | ||||||||||||||
Net income | $ | 64 | $ | 61 | $ | 125 | $ | 118 | $ | 244 | |||||||||
Affordable Housing Program accrual | 7 | 7 | 14 | 13 | 28 | ||||||||||||||
Return on average equity (ROE) | 5.10 | % | 5.00 | % | 5.04 | % | 4.75 | % | 4.93 | % | |||||||||
Return on average assets | 0.26 | 0.24 | 0.25 | 0.23 | 0.24 | ||||||||||||||
Weighted average dividend rate | 4.00 | 4.00 | 4.00 | 4.00 | 4.00 | ||||||||||||||
Average 3-month LIBOR | 0.28 | 0.23 | 0.27 | 0.23 | 0.23 | ||||||||||||||
Average overnight Federal funds effective rate | 0.13 | 0.09 | 0.12 | 0.08 | 0.09 | ||||||||||||||
ROE spread to 3-month LIBOR | 4.82 | 4.77 | 4.77 | 4.52 | 4.70 | ||||||||||||||
Dividend rate spread to 3-month LIBOR | 3.72 | 3.77 | 3.73 | 3.77 | 3.77 | ||||||||||||||
ROE spread to Federal funds effective rate | 4.97 | 4.91 | 4.92 | 4.67 | 4.84 | ||||||||||||||
Dividend rate spread to Federal funds effective rate | 3.87 | 3.91 | 3.88 | 3.92 | 3.91 |
The spreads between ROE and short-term interest rates, for which we use 3-month LIBOR and Federal funds as proxies, 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 on stockholders' capital investment. Consistent with experience over the last several years, ROE was significantly above short-term rates, resulting in the ROE spreads being wider than the long-term historical average spread.
The higher net income and ROE in the 2015 periods compared to the same periods of 2014 resulted primarily from the following factors:
▪ | an increase in the spread between LIBOR and Discount Notes combined with more funding using Discount Notes; and |
▪ | higher average balances of Advances and mortgage loans held for portfolio. |
A decrease in the average balance of mortgage-backed securities partially offset a portion of the impact from the favorable factors in the two comparison periods.
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Effect of Interest Rate Environment
Trends in market interest rates strongly influence the results of operations via how they affect members' demand for Mission Asset Activity, spreads on assets, funding costs and decisions in managing the tradeoffs in our market risk/return profile. The following table presents key market interest rates (obtained from Bloomberg L.P.).
Six Months Ended June 30, | |||||||||||||||||||||||
Quarter 2 2015 | Quarter 1 2015 | 2015 | 2014 | Year 2014 | |||||||||||||||||||
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 | 0.08 | 0.13 | 0.06 | 0.11 | 0.12 | 0.08 | 0.06 | 0.09 | |||||||||||||||
3-month LIBOR | 0.28 | 0.28 | 0.27 | 0.26 | 0.27 | 0.23 | 0.26 | 0.23 | |||||||||||||||
2-year LIBOR | 0.90 | 0.86 | 0.81 | 0.84 | 0.85 | 0.52 | 0.90 | 0.62 | |||||||||||||||
10-year LIBOR | 2.46 | 2.24 | 2.02 | 2.09 | 2.16 | 2.79 | 2.28 | 2.65 | |||||||||||||||
2-year U.S. Treasury | 0.65 | 0.60 | 0.56 | 0.59 | 0.60 | 0.38 | 0.67 | 0.45 | |||||||||||||||
10-year U.S. Treasury | 2.35 | 2.15 | 1.92 | 1.97 | 2.06 | 2.68 | 2.17 | 2.53 | |||||||||||||||
15-year mortgage current coupon (1) | 2.30 | 2.09 | 1.97 | 1.96 | 2.03 | 2.43 | 2.10 | 2.34 | |||||||||||||||
30-year mortgage current coupon (1) | 3.12 | 2.88 | 2.68 | 2.71 | 2.80 | 3.37 | 2.85 | 3.23 |
(1) | Simple average of current coupon rates of Fannie Mae and Freddie Mac par mortgage-backed security indications. |
The persistence of the low interest rate environment in the first six months of 2015 continued to favorably affect our results of operations relative to the level of interest rates. Short-term interest rates remained close to zero as the Federal Reserve maintained the overnight Federal funds target and effective rates between zero and 0.25 percent, and other short-term interest rates remained consistent with their historical relationships to Federal funds. Average long-term rates were lower in the first six months of 2015 compared to the same period of 2014.
Effect of Economy and Financial Markets on Mission Asset Activity
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 constrain widespread demand for Advances are the extremely low levels of interest rates resulting in favorable broad-based funding levels and the Federal Reserve's ongoing actions to provide an extraordinary amount of deposit-based liquidity to attempt to stimulate economic growth. We would expect to see a broad-based increase in Advance demand when the economy experiences a sustained improvement or if changes in Federal Reserve policy reduce other sources of liquidity available to our members.
The relative balance between loan and deposit growth provides an indication of potential member Advance demand. From March 31, 2014 to March 31, 2015 (the most recent period for which data are available), aggregate loan portfolios of Fifth District depository institutions grew $71.6 billion (5.8 percent) while their aggregate deposit balances rose $143.9 billion (7.0 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.
Excluding the five members with over $50 billion of assets and recent acquisitions, aggregate loans increased $15.2 billion (7.9 percent) in the 12-month period while aggregate deposits grew $10.4 billion (4.3 percent). These members' faster loan growth than deposit growth could produce increased demand for Advances over time.
Business Conditions and Outlook and Risk Management
Our major business strategies, outlook for our business, and risk profiles and management have not changed substantially since our 2014 Annual Report on Form 10-K. “Quantitative and Qualitative Disclosures About Risk Management” provides details on current risk exposures.
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Regarding the proposed rulemaking related to membership requirements discussed in our Annual Report on Form 10-K, the Finance Agency continues to deliberate on the proposal, and we continue to monitor it closely. As of the date of this Report, the Finance Agency has not issued a final rule.
In July 2015, the Finance Agency issued an Advisory Bulletin codifying its expectations for one way to measure achievement of an FHLBank's mission of utilizing its GSE status to provide funding and liquidity to support the housing markets. Over the years, we have adopted numerous indicators of assessing achievement of our mission, which include metrics related to Mission Asset Activity, profitability, capital adequacy and safety and soundness. The Advisory Bulletin established a goal for the sum of average Advances and purchased mortgage loans (collectively called Primary Mission Assets) to equal or exceed 70 percent of average Consolidated Obligations (i.e., the Primary Mission Assets ratio). Consolidated Obligations is used as a comparison because it reflects the major source of our franchise value as a GSE. If the metric falls below the 70 percent preferred ratio, an FHLBank would be expected to include in its strategic plan actions aimed at increasing the ratio, which could include consideration of Supplemental Mission Assets and Activities, such as Letters of Credit issued to members. During the first six months of 2015, our Primary Mission Assets metric was well above the Finance Agency's preferred ratio.
ANALYSIS OF FINANCIAL CONDITION
Mission Asset Activity
We regularly monitor the dollar and percentage amount of our balance sheet that is comprised of Mission Asset Activity, which are the primary means by which we fulfill our mission with direct connections to members. In the first six months of 2015, our Primary Mission Asset ratio, as defined above, was 80 percent. In assessing mission achievement, we also consider supplemental sources of Mission Asset Activity, the most significant of which is Letters of Credit issued to members, which at June 30, 2015 totaled $19.0 billion or 19 percent of total Mission Asset Activity.
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.
(Dollars in millions) | June 30, 2015 | March 31, 2015 | December 31, 2014 | |||||||||||||||||
Balance | Percent(1) | Balance | Percent(1) | Balance | Percent(1) | |||||||||||||||
Adjustable/Variable-Rate Indexed: | ||||||||||||||||||||
LIBOR | $ | 48,242 | 68 | % | $ | 49,103 | 73 | % | $ | 51,839 | 74 | % | ||||||||
Other | 597 | 1 | 407 | 1 | 515 | 1 | ||||||||||||||
Total | 48,839 | 69 | 49,510 | 74 | 52,354 | 75 | ||||||||||||||
Fixed-Rate: | ||||||||||||||||||||
REPO | 8,499 | 12 | 4,061 | 6 | 5,201 | 7 | ||||||||||||||
Regular Fixed-Rate | 8,184 | 11 | 7,977 | 12 | 7,398 | 11 | ||||||||||||||
Putable (2) | 1,570 | 2 | 1,580 | 3 | 1,617 | 2 | ||||||||||||||
Amortizing/Mortgage Matched | 2,703 | 4 | 2,662 | 4 | 2,734 | 4 | ||||||||||||||
Other | 1,223 | 2 | 825 | 1 | 995 | 1 | ||||||||||||||
Total | 22,179 | 31 | 17,105 | 26 | 17,945 | 25 | ||||||||||||||
Total Advances Principal | $ | 71,018 | 100 | % | $ | 66,615 | 100 | % | $ | 70,299 | 100 | % | ||||||||
Letters of Credit (notional) | $ | 19,006 | $ | 16,905 | $ | 17,780 |
(1) | As a percentage of total Advances principal. |
(2) | Excludes Putable Advances where the related put options have expired. Such Advances are classified based on their current terms. |
The variability in Advance balances in the first six months of 2015 is driven by the activity from a few larger members and was comprised primarily of variable-rate and short-term repurchase (REPO) Advances.
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Members increased their available lines in the Letters of Credit program by $1.2 billion (seven percent) in the first six months of 2015. We normally earn fees on Letters of Credit based on the actual average amount of the Letters utilized, which generally is less than the notional amount issued.
Advance Usage
In addition to analyzing Advance balances by dollar trends and the number of members utilizing them, we monitor the degree to which members use Advances to fund their balance sheets. The following table shows the unweighted, average ratio of each member's Advance balance to its most-recently available figures for total assets.
June 30, 2015 | March 31, 2015 | December 31, 2014 | ||||||
Average Advances-to-Assets for Members | ||||||||
Assets less than $1.0 billion (624 members) | 3.14 | % | 3.06 | % | 3.24 | % | ||
Assets over $1.0 billion (69 members) | 3.90 | 3.08 | 3.75 | |||||
All members | 3.22 | 3.06 | 3.29 |
Advance usage ratios were higher at June 30, 2015 compared with March 31, 2015, due to more usage by a few large members and over 100 members with assets less than $1.0 billion borrowing a modestly greater amount of Advances. However, these usage ratios were relatively stable compared with year-end 2014.
The following tables present principal balances for our top five Advance borrowers.
(Dollars in millions) | ||||||||||||||||
June 30, 2015 | December 31, 2014 | |||||||||||||||
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. | $ | 37,300 | 53 | % | JPMorgan Chase Bank, N.A. | $ | 41,300 | 59 | % | |||||||
U.S. Bank, N.A. | 8,121 | 11 | U.S. Bank, N.A. | 8,338 | 12 | |||||||||||
Fifth Third Bank | 2,871 | 4 | The Huntington National Bank | 2,083 | 3 | |||||||||||
Nationwide Life Insurance Company | 2,053 | 3 | Nationwide Life Insurance Company | 1,761 | 3 | |||||||||||
Third Federal Savings and Loan Association | 1,898 | 3 | Western-Southern Life Assurance Co | 1,623 | 2 | |||||||||||
Total of Top 5 | $ | 52,243 | 74 | % | Total of Top 5 | $ | 55,105 | 79 | % |
Advance concentration ratios are influenced by, and generally similar to, concentration ratios of financial activity among our Fifth District financial institutions. We believe that having large financial institutions that actively use our Mission Asset Activity augments the value of membership to all members. For example, such activity improves our operating efficiency, increases our earnings and thereby contributions to housing and community investment programs, may enable us over time to obtain more favorable funding costs, and helps us maintain competitively priced Mission Asset Activity.
Mortgage Loans Held for Portfolio (Mortgage Purchase Program, or "MPP")
MPP balances continue to be driven primarily by activity from our two largest sellers and a Finance Agency regulation requiring that if purchases in a calendar year exceed $2.5 billion, we will be subject to Finance Agency established housing goals. Given the uncertainty of the housing goal requirements and possible operational and financial impacts, we anticipate continuing to limit our calendar year purchases to less than $2.5 billion until we receive further guidance from the Finance Agency.
The table below shows principal purchases and reductions of loans in the MPP for the first six months of 2015.
(In millions) | MPP Principal | ||
Balance at December 31, 2014 | $ | 6,796 | |
Principal purchases | 1,477 | ||
Principal reductions | (762 | ) | |
Balance at June 30, 2015 | $ | 7,511 |
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The increase in principal loan balances in 2015 resulted from higher amounts of loan purchases, particularly from our two largest sellers, reflecting the continued strengthening of the housing market. In the first six months of 2015, 90 members sold us mortgage loans, with the number of monthly sellers averaging 65. All loans acquired in the first two quarters of 2015 were conventional loans.
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 2015. The weighted average mortgage note rate fell from 4.36 percent at the end of 2014 to 4.20 percent at June 30, 2015. This decline reflected a continuing trend of prepayments of higher rate mortgages and purchases of lower rate mortgages. MPP yields earned in 2015, after consideration of funding costs, continued to offer favorable returns relative to their market risk exposure.
Investments
The table below presents the ending and average balances of the investment portfolio.
(In millions) | Six Months Ended | Year Ended | |||||||||||||
June 30, 2015 | December 31, 2014 | ||||||||||||||
Ending Balance | Average Balance | Ending Balance | Average Balance | ||||||||||||
Liquidity investments | $ | 6,297 | $ | 10,531 | $ | 11,319 | $ | 11,856 | |||||||
Mortgage-backed securities | 14,514 | 14,516 | 14,688 | 15,594 | |||||||||||
Other investments (1) | — | 86 | — | 98 | |||||||||||
Total investments | $ | 20,811 | $ | 25,133 | $ | 26,007 | $ | 27,548 |
(1) | The average balance includes the rights or obligations to cash collateral, which are included in the fair value of derivative assets or derivative liabilities on the Statements of Condition at period end. |
We continued to maintain an ample amount of asset liquidity. Liquidity investment levels can vary significantly based on liquidity needs, the availability of acceptable net spreads, the number of eligible counterparties that meet our unsecured credit risk criteria, and changes in the amount of Mission Assets. It is normal for liquidity investments to vary by up to several billion dollars on a daily basis.
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, 2015 represented a 2.83 multiple of regulatory capital and consisted of $11.6 billion of securities issued by Fannie Mae or Freddie Mac (of which $1.4 billion were floating-rate securities), $1.0 billion of floating-rate securities issued by the National Credit Union Administration (NCUA), and $1.9 billion of securities issued by Ginnie Mae (a majority of which are fixed rate). The NCUA securities have coupons tied to one-month LIBOR with interest rate caps ranging from seven to eight percent. We held no private-label mortgage-backed securities.
The table below shows principal purchases and paydowns of our mortgage-backed securities for the first six months of 2015.
(In millions) | Mortgage-backed Securities Principal | ||
Balance at December 31, 2014 | $ | 14,715 | |
Principal purchases | 1,033 | ||
Principal paydowns | (1,240 | ) | |
Balance at June 30, 2015 | $ | 14,508 |
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Principal paydowns in the first six months of 2015 equated to a 16 percent annual constant prepayment rate, up from a 13 percent rate in 2014. Purchases fell short of paydowns due to market constraints on the availability of securities that fit our parameters for risks and return.
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, 2015 | December 31, 2014 | |||||||||||||
Ending Balance | Average Balance | Ending Balance | Average Balance | ||||||||||||
Discount Notes: | |||||||||||||||
Par | $ | 48,267 | $ | 45,838 | $ | 41,238 | $ | 35,996 | |||||||
Discount | (4 | ) | (5 | ) | (6 | ) | (4 | ) | |||||||
Total Discount Notes | 48,263 | 45,833 | 41,232 | 35,992 | |||||||||||
Bonds: | |||||||||||||||
Unswapped fixed-rate | 26,226 | 25,390 | 26,124 | 25,513 | |||||||||||
Unswapped adjustable-rate | 11,550 | 18,106 | 27,610 | 29,355 | |||||||||||
Swapped fixed-rate | 7,364 | 5,912 | 5,390 | 3,697 | |||||||||||
Total par Bonds | 45,140 | 49,408 | 59,124 | 58,565 | |||||||||||
Other items (1) | 90 | 96 | 93 | 116 | |||||||||||
Total Bonds | 45,230 | 49,504 | 59,217 | 58,681 | |||||||||||
Total Consolidated Obligations (2) | $ | 93,493 | $ | 95,337 | $ | 100,449 | $ | 94,673 |
(1) | Includes unamortized premiums/discounts, fair value option valuation adjustments, hedging and other basis adjustments. |
(2) | The 11 FHLBanks have joint and several liability for the par amount of all of the Consolidated Obligations issued on their behalves. The par amount of the outstanding Consolidated Obligations for all of the FHLBanks was (in millions) $852,783 and $847,175 at June 30, 2015 and December 31, 2014, respectively. |
The composition of unswapped fixed-rate Bonds, which typically have initial maturities greater than one year, was relatively stable in the first six months of 2015 compared to 2014. During this same time period, we shifted the composition of funding of LIBOR-indexed assets from unswapped adjustable-rate Bonds (LIBOR-indexed) to Discount Notes. This change provided lower funding costs, which improved earnings as discussed in the "Net Interest Income" section of "Results of Operations."
This change in funding composition increases the risk of reduced basis spreads given the interest rate on LIBOR-indexed assets is different from the interest rate on Discount Notes. We believe the increased usage of Discount Note funding did not materially raise this risk because of the historically favorable relationship between the two rate indices. In addition, we do not rely on this basis spread for a significant portion of earnings.
Deposits
Total deposits with us are normally a relatively minor source of low-cost funding. Total interest bearing deposits at June 30, 2015 were $0.7 billion, a decrease of one percent from year-end 2014. The average balance of total interest bearing deposits in the first six months of 2015 was $0.9 billion, an increase of two percent from the average balance during the same period of 2014.
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 to manage market risk exposure in the first six months of 2015.
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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 | ||||||||||||||
(In millions) | June 30, 2015 | December 31, 2014 | |||||||||||||
Period End | Average | Period End | Average | ||||||||||||
GAAP and Regulatory Capital | |||||||||||||||
GAAP Capital Stock | $ | 4,335 | $ | 4,302 | $ | 4,267 | $ | 4,298 | |||||||
Mandatorily Redeemable Capital Stock | 65 | 63 | 63 | 105 | |||||||||||
Regulatory Capital Stock | 4,400 | 4,365 | 4,330 | 4,403 | |||||||||||
Retained Earnings | 729 | 721 | 689 | 666 | |||||||||||
Regulatory Capital | $ | 5,129 | $ | 5,086 | $ | 5,019 | $ | 5,069 |
Six Months Ended | Year Ended | ||||||||||
June 30, 2015 | December 31, 2014 | ||||||||||
Period End | Average | Period End | Average | ||||||||
GAAP and Regulatory Capital-to-Assets Ratio | |||||||||||
GAAP | 5.06 | % | 4.92 | % | 4.63 | % | 4.90 | % | |||
Regulatory | 5.14 | 4.99 | 4.71 | 5.01 |
Both GAAP and regulatory capital-to-assets ratios remained above the regulatory required minimum of four percent. We consider the regulatory ratio to be a better representation of financial leverage than the GAAP ratio because, although the GAAP ratio treats mandatorily redeemable capital stock as a liability, it protects investors in our debt in the same way that GAAP capital stock and retained earnings do.
A portion of capital stock is excess, meaning it is not required as a condition to being a member and not required to capitalize Mission Asset Activity. Excess capital stock provides a base of capital to manage financial leverage at prudent levels, augments loss protections for bondholders, and capitalizes a portion of growth in Mission Assets. The amount of excess capital stock, as defined by our Capital Plan, was $575 million at June 30, 2015, an increase of $71 million from year-end 2014.
Membership and Stockholders
In the first six months of 2015, we added four new member stockholders and lost 16 members, ending the quarter at 693. Most members lost merged with other Fifth District members and therefore the impact on our earnings and Mission Asset Activity was small. Of the members lost, 12 merged with other members, three merged out of the District, and one merged with a District non-member.
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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, 2015 and 2014. 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) | 2015 | 2014 | 2015 | 2014 | |||||||||||||||||||||||
Amount | ROE (1) | Amount | ROE (1) | Amount | ROE (1) | Amount | ROE (1) | ||||||||||||||||||||
Net interest income | $ | 85 | 6.75 | % | $ | 77 | 6.35 | % | $ | 162 | 6.53 | % | $ | 154 | 6.21 | % | |||||||||||
Reversal for credit losses | — | — | (1 | ) | (0.07 | ) | — | — | (1 | ) | (0.04 | ) | |||||||||||||||
Net interest income after reversal for credit losses | 85 | 6.75 | 78 | 6.42 | 162 | 6.53 | 155 | 6.25 | |||||||||||||||||||
Net gains on derivatives and hedging activities | 2 | 0.18 | 4 | 0.28 | 8 | 0.31 | 2 | 0.09 | |||||||||||||||||||
Other non-interest income | 3 | 0.26 | 3 | 0.25 | 6 | 0.25 | 8 | 0.31 | |||||||||||||||||||
Total non-interest income | 5 | 0.44 | 7 | 0.53 | 14 | 0.56 | 10 | 0.40 | |||||||||||||||||||
Total revenue | 90 | 7.19 | 85 | 6.95 | 176 | 7.09 | 165 | 6.65 | |||||||||||||||||||
Total non-interest expense | 19 | 1.51 | 17 | 1.38 | 37 | 1.48 | 34 | 1.36 | |||||||||||||||||||
Assessments | 7 | 0.58 | 7 | 0.57 | 14 | 0.57 | 13 | 0.54 | |||||||||||||||||||
Net income | $ | 64 | 5.10 | % | $ | 61 | 5.00 | % | $ | 125 | 5.04 | % | $ | 118 | 4.75 | % |
(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. |
Net income and ROE increased in both the three- and six-month comparison periods. Profitability remained competitive as ROE continued to significantly exceed our benchmarks relative to short-term interest rates. Details on the individual factors contributing to the increase in profitability are in the sections below.
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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) | 2015 | 2014 | 2015 | 2014 | |||||||||||||||||||||||
Amount | % of Earning Assets | Amount | % of Earning Assets | Amount | % of Earning Assets | Amount | % of Earning Assets | ||||||||||||||||||||
Components of net interest rate spread: | |||||||||||||||||||||||||||
Net (amortization)/accretion (1) (2) | $ | (1 | ) | — | % | $ | (3 | ) | (0.01 | )% | $ | (8 | ) | (0.01 | )% | $ | (5 | ) | (0.01 | )% | |||||||
Prepayment fees on Advances, net (2) | — | — | 1 | — | 1 | — | 2 | — | |||||||||||||||||||
Other components of net interest rate spread | 77 | 0.30 | 71 | 0.28 | 152 | 0.30 | 140 | 0.28 | |||||||||||||||||||
Total net interest rate spread | 76 | 0.30 | 69 | 0.27 | 145 | 0.29 | 137 | 0.27 | |||||||||||||||||||
Earnings from funding assets with interest-free capital | 9 | 0.04 | 8 | 0.03 | 17 | 0.03 | 17 | 0.04 | |||||||||||||||||||
Total net interest income/net interest margin (3) | $ | 85 | 0.34 | % | $ | 77 | 0.30 | % | $ | 162 | 0.32 | % | $ | 154 | 0.31 | % |
(1) | Includes (amortization)/accretion of premiums/discounts on mortgage assets and Consolidated Obligations and deferred transaction costs (concession fees) for Consolidated Obligations. |
(2) | These components of net interest rate spread have been segregated 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 five years, it was moderate in the three and six months ended June 30, 2015 and 2014.
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 have been significant in the past, they were minimal in the three and six months ended June 30, 2015 and 2014, 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 $6 million and $12 million in the three- and six-months comparison periods, respectively. The following factors are presented in approximate order of impact from largest to smallest.
Six-Months Comparison
▪ | LIBOR Advance funding-Favorable: Net interest income increased by an estimated $9 million primarily because of a transition from adjustable-rate bonds to lower-cost Discount Note funding and favorable changes in market spreads between LIBOR and Discount Notes. |
▪ | Lower balances on mortgage-backed securities-Unfavorable: The average balance of the mortgage-backed securities portfolio decreased $1.5 billion, which decreased net interest income by an estimated $4 million. |
▪ | Advance growth-Favorable: The $3.2 billion growth in average Advance balances at higher spreads improved net interest income by an estimated $3 million. |
▪ | Mortgage Purchase Program growth-Favorable: The average balance of mortgage loans held for portfolio increased $0.6 billion, which increased net interest income by an estimated $3 million. |
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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 did not change significantly in the three and six months ended June 30, 2015 compared to the same periods of 2014.
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Average Balance Sheet and Rates
The following tables provide average balances and rates 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.
(Dollars in millions) | Three Months Ended | Three Months Ended | |||||||||||||||||||
June 30, 2015 | June 30, 2014 | ||||||||||||||||||||
Average Balance | Interest | Average Rate (1) | Average Balance | Interest | Average Rate (1) | ||||||||||||||||
Assets: | |||||||||||||||||||||
Advances | $ | 69,396 | $ | 87 | 0.50 | % | $ | 66,732 | $ | 78 | 0.47 | % | |||||||||
Mortgage loans held for portfolio (2) | 7,430 | 65 | 3.52 | 6,676 | 57 | 3.45 | |||||||||||||||
Federal funds sold and securities purchased under resale agreements | 8,502 | 2 | 0.10 | 9,176 | 2 | 0.07 | |||||||||||||||
Interest-bearing deposits in banks (3) (4) (5) | 911 | 1 | 0.18 | 2,777 | 1 | 0.14 | |||||||||||||||
Mortgage-backed securities | 14,460 | 79 | 2.20 | 15,936 | 88 | 2.22 | |||||||||||||||
Other investments | 45 | — | 0.09 | 69 | — | 0.08 | |||||||||||||||
Loans to other FHLBanks | — | — | — | — | — | — | |||||||||||||||
Total interest-earning assets | 100,744 | 234 | 0.93 | 101,366 | 226 | 0.89 | |||||||||||||||
Less: allowance for credit losses on mortgage loans | 2 | 7 | |||||||||||||||||||
Other assets | 150 | 133 | |||||||||||||||||||
Total assets | $ | 100,892 | $ | 101,492 | |||||||||||||||||
Liabilities and Capital: | |||||||||||||||||||||
Term deposits | $ | 133 | — | 0.19 | $ | 87 | — | 0.19 | |||||||||||||
Other interest bearing deposits (5) | 741 | — | 0.01 | 757 | — | 0.01 | |||||||||||||||
Short-term borrowings | 49,187 | 10 | 0.08 | 33,467 | 6 | 0.07 | |||||||||||||||
Unswapped fixed-rate Bonds | 25,531 | 128 | 2.01 | 25,547 | 132 | 2.06 | |||||||||||||||
Unswapped adjustable-rate Bonds | 13,904 | 5 | 0.15 | 33,664 | 9 | 0.11 | |||||||||||||||
Swapped Bonds | 5,722 | 5 | 0.36 | 2,423 | 1 | 0.18 | |||||||||||||||
Mandatorily redeemable capital stock | 62 | 1 | 4.00 | 116 | 1 | 4.00 | |||||||||||||||
Other borrowings | — | — | — | — | — | — | |||||||||||||||
Total interest-bearing liabilities | 95,280 | 149 | 0.63 | 96,061 | 149 | 0.62 | |||||||||||||||
Non-interest bearing deposits | 1 | 1 | |||||||||||||||||||
Other liabilities | 569 | 572 | |||||||||||||||||||
Total capital | 5,042 | 4,858 | |||||||||||||||||||
Total liabilities and capital | $ | 100,892 | $ | 101,492 | |||||||||||||||||
Net interest rate spread | 0.30 | % | 0.27 | % | |||||||||||||||||
Net interest income and net interest margin (6) | $ | 85 | 0.34 | % | $ | 77 | 0.30 | % | |||||||||||||
Average interest-earning assets to interest-bearing liabilities | 105.73 | % | 105.52 | % |
(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. |
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(Dollars in millions) | Six Months Ended | Six Months Ended | |||||||||||||||||||
June 30, 2015 | June 30, 2014 | ||||||||||||||||||||
Average Balance | Interest | Average Rate (1) | Average Balance | Interest | Average Rate (1) | ||||||||||||||||
Assets: | |||||||||||||||||||||
Advances | $ | 69,281 | $ | 173 | 0.50 | % | $ | 66,040 | $ | 155 | 0.47 | % | |||||||||
Mortgage loans held for portfolio (2) | 7,291 | 121 | 3.36 | 6,719 | 118 | 3.53 | |||||||||||||||
Federal funds sold and securities purchased under resale agreements | 9,460 | 4 | 0.10 | 10,252 | 3 | 0.06 | |||||||||||||||
Interest-bearing deposits in banks (3) (4) (5) | 1,112 | 1 | 0.17 | 2,554 | 2 | 0.14 | |||||||||||||||
Mortgage-backed securities | 14,516 | 160 | 2.22 | 16,049 | 177 | 2.23 | |||||||||||||||
Other investments | 45 | — | 0.09 | 48 | — | 0.08 | |||||||||||||||
Loans to other FHLBanks | — | — | — | — | — | — | |||||||||||||||
Total interest-earning assets | 101,705 | 459 | 0.91 | 101,662 | 455 | 0.90 | |||||||||||||||
Less: allowance for credit losses on mortgage loans | 2 | 7 | |||||||||||||||||||
Other assets | 166 | 187 | |||||||||||||||||||
Total assets | $ | 101,869 | $ | 101,842 | |||||||||||||||||
Liabilities and Capital: | |||||||||||||||||||||
Term deposits | $ | 150 | — | 0.18 | $ | 87 | — | 0.18 | |||||||||||||
Other interest bearing deposits (5) | 738 | — | 0.01 | 782 | — | 0.01 | |||||||||||||||
Short-term borrowings | 45,833 | 20 | 0.09 | 35,421 | 15 | 0.08 | |||||||||||||||
Unswapped fixed-rate Bonds | 25,469 | 253 | 2.00 | 25,386 | 264 | 2.09 | |||||||||||||||
Unswapped adjustable-rate Bonds | 18,106 | 13 | 0.14 | 31,312 | 17 | 0.11 | |||||||||||||||
Swapped Bonds | 5,929 | 10 | 0.33 | 3,146 | 3 | 0.19 | |||||||||||||||
Mandatorily redeemable capital stock | 63 | 1 | 4.00 | 118 | 2 | 4.00 | |||||||||||||||
Other borrowings | — | — | — | — | — | — | |||||||||||||||
Total interest-bearing liabilities | 96,288 | 297 | 0.62 | 96,252 | 301 | 0.63 | |||||||||||||||
Non-interest bearing deposits | 1 | 8 | |||||||||||||||||||
Other liabilities | 573 | 585 | |||||||||||||||||||
Total capital | 5,007 | 4,997 | |||||||||||||||||||
Total liabilities and capital | $ | 101,869 | $ | 101,842 | |||||||||||||||||
Net interest rate spread | 0.29 | % | 0.27 | % | |||||||||||||||||
Net interest income and net interest margin (6) | $ | 162 | 0.32 | % | $ | 154 | 0.31 | % | |||||||||||||
Average interest-earning assets to interest-bearing liabilities | 105.63 | % | 105.62 | % |
(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 increased, in both comparison periods, due to the factors discussed in the previous section.
The increase in the average rates on total interest-earning assets resulted from an increase in yields on short-term assets (short-term Advances, Federal funds sold and securities purchased under resale agreements, and interest-bearing deposits in banks) as they repriced to marginally higher short-term rates.
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However, the continued low interest rate environment resulted in a decline in the average rate of certain long-term assets (such as mortgage loans held for portfolio and mortgage-backed securities) and long-term liabilities (unswapped fixed-rate Bonds) in the first six months of 2015 compared to the same period of 2014. This is because a substantial portion of the principal paid down on these assets and liabilities, which had higher rates, and was replaced with new assets and liabilities at lower rates.
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, 2015 over 2014 | Six Months Ended June 30, 2015 over 2014 | |||||||||||||||||||||
Volume (1)(3) | Rate (2)(3) | Total | Volume (1)(3) | Rate (2)(3) | Total | ||||||||||||||||||
Increase (decrease) in interest income | |||||||||||||||||||||||
Advances | $ | 3 | $ | 6 | $ | 9 | $ | 8 | $ | 10 | $ | 18 | |||||||||||
Mortgage loans held for portfolio | 7 | 1 | 8 | 9 | (6 | ) | 3 | ||||||||||||||||
Federal funds sold and securities purchased under resale agreements | (1 | ) | 1 | — | (1 | ) | 2 | 1 | |||||||||||||||
Interest-bearing deposits in banks | — | — | — | (1 | ) | — | (1 | ) | |||||||||||||||
Mortgage-backed securities | (8 | ) | (1 | ) | (9 | ) | (16 | ) | (1 | ) | (17 | ) | |||||||||||
Other investments | — | — | — | — | — | — | |||||||||||||||||
Loans to other FHLBanks | — | — | — | — | — | — | |||||||||||||||||
Total | 1 | 7 | 8 | (1 | ) | 5 | 4 | ||||||||||||||||
Increase (decrease) in interest expense | |||||||||||||||||||||||
Term deposits | — | — | — | — | — | — | |||||||||||||||||
Other interest-bearing deposits | — | — | — | — | — | — | |||||||||||||||||
Short-term borrowings | 3 | 1 | 4 | 4 | 1 | 5 | |||||||||||||||||
Unswapped fixed-rate Bonds | — | (4 | ) | (4 | ) | — | (11 | ) | (11 | ) | |||||||||||||
Unswapped adjustable-rate Bonds | (7 | ) | 3 | (4 | ) | (8 | ) | 4 | (4 | ) | |||||||||||||
Swapped Bonds | 2 | 2 | 4 | 4 | 3 | 7 | |||||||||||||||||
Mandatorily redeemable capital stock | — | — | — | (1 | ) | — | (1 | ) | |||||||||||||||
Other borrowings | — | — | — | — | — | — | |||||||||||||||||
Total | (2 | ) | 2 | — | (1 | ) | (3 | ) | (4 | ) | |||||||||||||
Increase (decrease) in net interest income | $ | 3 | $ | 5 | $ | 8 | $ | — | $ | 8 | $ | 8 |
(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. |
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Effect of the Use of Derivatives on Net Interest Income
The following table shows the effect of using derivatives on net interest income. The effect on earnings from the non-interest components of derivatives related to market value adjustments is provided in “Non-Interest Income and Non-Interest Expense.”
(In millions) | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
Advances: | |||||||||||||||
Amortization of hedging activities in net interest income | $ | (1 | ) | $ | (1 | ) | $ | (2 | ) | $ | (2 | ) | |||
Net interest settlements included in net interest income | (20 | ) | (23 | ) | (41 | ) | (46 | ) | |||||||
Mortgage loans: | |||||||||||||||
Amortization of derivative fair value adjustments in net interest income | (1 | ) | (1 | ) | (2 | ) | (1 | ) | |||||||
Consolidated Obligation Bonds: | |||||||||||||||
Net interest settlements included in net interest income | 5 | 5 | 10 | 9 | |||||||||||
Decrease to net interest income | $ | (17 | ) | $ | (20 | ) | $ | (35 | ) | $ | (40 | ) |
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. We accepted this reduction in earnings 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 in earnings was similar in the three and six months ended June 30, 2015 and 2014.
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, 2015 and 2014.
(Dollars in millions) | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
Non-interest income | |||||||||||||||
Net gains on derivatives and hedging activities | $ | 2 | $ | 4 | $ | 8 | $ | 2 | |||||||
Other non-interest income, net | 3 | 3 | 6 | 8 | |||||||||||
Total non-interest income | $ | 5 | $ | 7 | $ | 14 | $ | 10 | |||||||
Non-interest expense | |||||||||||||||
Compensation and benefits | $ | 10 | $ | 9 | $ | 20 | $ | 18 | |||||||
Other operating expense | 5 | 4 | 10 | 9 | |||||||||||
Finance Agency | 2 | 2 | 3 | 3 | |||||||||||
Office of Finance | 1 | 1 | 2 | 2 | |||||||||||
Other | 1 | 1 | 2 | 2 | |||||||||||
Total non-interest expense | $ | 19 | $ | 17 | $ | 37 | $ | 34 | |||||||
Average total assets | $ | 100,892 | $ | 101,492 | $ | 101,869 | $ | 101,842 | |||||||
Average regulatory capital | 5,120 | 4,983 | 5,086 | 5,124 | |||||||||||
Total other expense to average total assets (1) | 0.08 | % | 0.07 | % | 0.07 | % | 0.07 | % | |||||||
Total other expense to average regulatory capital (1) | 1.49 | 1.34 | 1.46 | 1.33 |
(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. |
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Non-interest income increased in the first six months of 2015 compared to the same period of 2014 primarily from larger gains on derivatives and hedging activities in 2015 compared to 2014, as presented in the table below. The increase in non-interest expense in 2015 resulted primarily from compensation and benefits.
Effect of Derivatives and Hedging Activities
(In millions) | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
Net gains (losses) on derivatives and hedging activities | |||||||||||||||
Advances: | |||||||||||||||
Gains on fair value hedges | $ | 1 | $ | 1 | $ | 2 | $ | 1 | |||||||
Losses on derivatives not receiving hedge accounting | — | — | (1 | ) | (1 | ) | |||||||||
Mortgage loans: | |||||||||||||||
(Losses) gains on derivatives not receiving hedge accounting | (2 | ) | 2 | (1 | ) | — | |||||||||
Consolidated Obligation Bonds: | |||||||||||||||
Gains on derivatives not receiving hedge accounting | 3 | 1 | 8 | 2 | |||||||||||
Total net gains on derivatives and hedging activities | 2 | 4 | 8 | 2 | |||||||||||
Net (losses) gains on financial instruments held at fair value (1) | — | — | (2 | ) | 2 | ||||||||||
Total net effect of derivatives and hedging activities | $ | 2 | $ | 4 | $ | 6 | $ | 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.
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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 tables below summarize each segment's operating results for the periods shown.
(Dollars in millions) | Traditional Member Finance | MPP | Total | ||||||||
Three Months Ended June 30, 2015 | |||||||||||
Net interest income | $ | 61 | $ | 24 | $ | 85 | |||||
Net income | $ | 46 | $ | 18 | $ | 64 | |||||
Average assets | $ | 93,436 | $ | 7,456 | $ | 100,892 | |||||
Assumed average capital allocation | $ | 4,669 | $ | 373 | $ | 5,042 | |||||
Return on average assets (1) | 0.20 | % | 0.95 | % | 0.26 | % | |||||
Return on average equity (1) | 4.00 | % | 18.90 | % | 5.10 | % | |||||
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 | % |
(Dollars in millions) | Traditional Member Finance | MPP | Total | ||||||||
Six Months Ended June 30, 2015 | |||||||||||
Net interest income | $ | 122 | $ | 40 | $ | 162 | |||||
Net income | $ | 95 | $ | 30 | $ | 125 | |||||
Average assets | $ | 94,553 | $ | 7,316 | $ | 101,869 | |||||
Assumed average capital allocation | $ | 4,647 | $ | 360 | $ | 5,007 | |||||
Return on average assets (1) | 0.20 | % | 0.83 | % | 0.25 | % | |||||
Return on average equity (1) | 4.12 | % | 16.92 | % | 5.04 | % | |||||
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 | % |
(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. |
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Traditional Member Finance Segment
The $8 million increase in net income in the first six months of 2015, compared to the same period of 2014, was due primarily to higher spreads earned on Advances, growth in the average Advance balance, and larger unrealized net gains on derivatives and hedging activities. These items were partially offset by lower balances on mortgage-backed securities.
MPP Segment
The MPP continued to earn a substantial level of profitability compared to market interest rates, with a moderate amount of market risk and small amount of credit risk. In the first six months of 2015, the MPP averaged seven percent of total average assets while accounting for 24 percent of earnings.
Net interest income increased slightly in the first six months of 2015, compared to the same period of 2014, as a result of growth in average MPP balances, partially offset by higher net amortization expense.
Net interest income increased in the three months ended June 30, 2015, compared to the same period of 2014, as a result of growth in average MPP balances and by lower net amortization expense. Net income increased by a smaller amount because the factors above were partially offset by losses on MPP-related derivatives and hedging activities in the three-month comparison period compared to gains in the same period of 2014 and a reversal of credit losses in 2014 that did not reoccur in 2015.
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. We compiled average results 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 | |||||||||||||||||||||||||||
2015 Year-to-Date | |||||||||||||||||||||||||||
Market Value of Equity | $ | 4,742 | $ | 4,832 | $ | 4,972 | $ | 4,949 | $ | 4,848 | $ | 4,697 | $ | 4,530 | |||||||||||||
% Change from Flat Case | (4.2 | )% | (2.4 | )% | 0.5 | % | — | (2.0 | )% | (5.1 | )% | (8.5 | )% | ||||||||||||||
2014 Full Year | |||||||||||||||||||||||||||
Market Value of Equity | $ | 4,763 | $ | 4,908 | $ | 4,961 | $ | 4,889 | $ | 4,771 | $ | 4,626 | $ | 4,479 | |||||||||||||
% Change from Flat Case | (2.6 | )% | 0.4 | % | 1.5 | % | — | (2.4 | )% | (5.4 | )% | (8.4 | )% | ||||||||||||||
Month-End Results | |||||||||||||||||||||||||||
June 30, 2015 | |||||||||||||||||||||||||||
Market Value of Equity | $ | 4,710 | $ | 4,873 | $ | 4,980 | $ | 4,893 | $ | 4,749 | $ | 4,584 | $ | 4,419 | |||||||||||||
% Change from Flat Case | (3.7 | )% | (0.4 | )% | 1.8 | % | — | (2.9 | )% | (6.3 | )% | (9.7 | )% | ||||||||||||||
December 31, 2014 | |||||||||||||||||||||||||||
Market Value of Equity | $ | 4,714 | $ | 4,824 | $ | 4,938 | $ | 4,920 | $ | 4,835 | $ | 4,688 | $ | 4,524 | |||||||||||||
% Change from Flat Case | (4.2 | )% | (2.0 | )% | 0.4 | % | — | (1.7 | )% | (4.7 | )% | (8.1 | )% |
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Duration of Equity
(In years) | Down 300 | Down 200 | Down 100 | Flat Rates | Up 100 | Up 200 | Up 300 | |||||||||||||
Average Results | ||||||||||||||||||||
2015 Year-to-Date | (4.4 | ) | (3.6 | ) | (0.6 | ) | 1.4 | 2.9 | 3.6 | 3.7 | ||||||||||
2014 Full Year | (3.7 | ) | (2.1 | ) | 1.0 | 2.0 | 3.0 | 3.3 | 3.3 | |||||||||||
Month-End Results | ||||||||||||||||||||
June 30, 2015 | (4.7 | ) | (3.5 | ) | 0.7 | 2.7 | 3.4 | 3.7 | 3.7 | |||||||||||
December 31, 2014 | (3.8 | ) | (3.4 | ) | (0.2 | ) | 1.0 | 2.6 | 3.5 | 3.7 |
During the first six months of 2015, as in 2014, consistent with our historical practice and risk appetite, we positioned market risk exposure to higher interest rates at a moderate level. Market risk exposure to lower rates continued to be at a favorable level because of our expectation of continued relatively subdued mortgage prepayment speeds compared to historical experiences (given the level of rates and composition of mortgage assets).
Based on the totality of our risk analysis, we expect that profitability, defined as the level of ROE compared with short-term market rates, will remain competitive unless interest rates change by extremely large amounts in a short period of time. Decreases in long-term interest rates even up to two percentage points (which would put fixed-rate mortgages below two percent) would still result in profitability being well above market interest rates. Similarly, we believe that profitability would not become uncompetitive in a rising rate environment unless long-term rates were to permanently increase in a short period of time by more than five percentage points or more, combined with short-term rates increasing to at least eight percent.
Market Risk Exposure of the Mortgage Assets Portfolio
The mortgage assets portfolio normally accounts for almost all market risk exposure because of prepayment volatility that we cannot completely hedge while maintaining 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, 2015, the mortgage assets portfolio had an assumed capital allocation of $1.2 billion based on the entire balance sheet's regulatory capital-to-assets ratio. Average results are compiled using data for each month-end. The market value sensitivities are one measure we use to analyze the portfolio's estimated market risk exposure.
% Change in Market Value of Equity-Mortgage Assets Portfolio
Down 300 | Down 200 | Down 100 | Flat Rates | Up 100 | Up 200 | Up 300 | |||||||||||||
Average Results | |||||||||||||||||||
2015 Year-to-Date | (26.5 | )% | (16.9 | )% | (1.0 | )% | — | (8.3 | )% | (21.4 | )% | (36.4 | )% | ||||||
2014 Full Year | (19.1 | )% | (3.9 | )% | 3.6 | % | — | (9.7 | )% | (22.1 | )% | (35.0 | )% | ||||||
Month-End Results | |||||||||||||||||||
June 30, 2015 | (26.3 | )% | (8.3 | )% | 5.1 | % | — | (12.0 | )% | (26.5 | )% | (41.4 | )% | ||||||
December 31, 2014 | (25.0 | )% | (13.7 | )% | (1.0 | )% | — | (7.9 | )% | (21.4 | )% | (36.6 | )% |
The risk exposure of the mortgage assets portfolio to higher interest rates was similar in the first six months of 2015 compared to 2014. 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.
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Capital Adequacy
Retained Earnings
We must hold sufficient capital to protect against exposure to various risks, including market, credit, and operational. We regularly conduct a variety of measurements and assessments for capital adequacy. At June 30, 2015, the $729 million of retained earnings substantially exceeded our policy minimum of $450 million and was comprised of $544 million unrestricted (an increase of $15 million from year-end 2014) and $185 million restricted (an increase of $25 million), which by regulation we are not permitted to distribute as dividends.
Given the regulatory environment and in an abundance of caution, we carry a greater amount of retained earnings than required by the policy. We will continue to bolster capital adequacy over time by allocating a portion of earnings to a separate restricted retained earnings account in accordance with the FHLBank System's Joint Capital Enhancement Agreement. We believe that the amount of retained earnings is sufficient to protect against members' impairment risk of their capital stock investment and to provide the opportunity to stabilize dividends.
Market Capitalization Ratios
We measure two sets of market capitalization ratios. One measures the market value of capital (i.e., stockholder equity) relative to the par value of regulatory capital stock (capital stock and mandatorily redeemable capital stock). The other measures the market value of capital relative to the book value of total capital, which includes retained earnings and mandatorily redeemable capital stock. The measures provide a point-in-time indication of the FHLB's liquidation or franchise value and also serve as a measure of realized or potential market risk exposure.
The following table presents the market value of equity to regulatory capital stock (excluding retained earnings) for the interest rate environments for which we have policy limits. A base case value below par could indicate that, in the event of an immediate liquidation scenario, capital stock may be impaired and returned at some value less than par.
June 30, 2015 | December 31, 2014 | ||||
Market Value of Equity to Par Value of Regulatory Capital Stock - Base Case (Flat Rates) Scenario | 111 | % | 114 | % | |
Market Value of Equity to Par Value of Regulatory Capital Stock - Down Shock (1) | 113 | 114 | |||
Market Value of Equity to Par Value of Regulatory Capital Stock - Up Shock (2) | 104 | 108 |
(1) | Represents a down shock of 100 basis points. |
(2) | Represents an up shock of 200 basis points. |
In the first six months of 2015, the market capitalization ratios in the scenarios presented continued to be above minimum policy limits. Although the ratios declined modestly at June 30, 2015, they remained acceptable because retained earnings were 17 percent of regulatory capital stock at June 30, 2015 and we maintained market risk exposure at moderate levels.
The following table presents the market value of equity to the book value of total capital and mandatorily redeemable capital stock for the same interest rate environments. A base case value below par could indicate that interest rate risk has been or could be incurred in the future or that, in the event of an immediate liquidation scenario, a portion of retained earnings would need to be utilized in order to return regulatory capital stock at par. The base case ratio of 96 percent at June 30, 2015 indicates that approximately $236 million of retained earnings would be required in order to return all regulatory capital stock to stockholders at par value.
June 30, 2015 | December 31, 2014 | ||||
Market Value of Equity to Book Value of Capital - Base Case (Flat Rates) Scenario (1) | 96 | % | 98 | % | |
Market Value of Equity to Book Value of Capital - Down Shock (1)(2) | 97 | 99 | |||
Market Value of Equity to Book Value of Capital - Up Shock (1)(3) | 90 | 94 |
(1) | Capital includes total capital and mandatorily redeemable capital stock. |
(2) | Represents a down shock of 100 basis points. |
(3) | Represents an up shock of 200 basis points. |
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Credit Risk
Overview
Our business entails a significant amount of inherent credit risk exposure. We believe our risk management practices, discussed below, bring the amount of residual credit risk to a minimal level. We have no loan loss reserves or impairment recorded for Credit Services, investments, and derivatives and a minimal amount of legacy credit risk exposure to the MPP.
Credit Services
Overview: We have policies and practices to manage credit risk exposure from our secured lending activities, which include Advances and Letters of Credit. The objective of our credit risk management is to equalize risk exposure across members and counterparties to a zero level of expected losses, consistent with our conservative risk management principles and desire to have virtually no residual credit risk related to member borrowings.
Collateral: We require each member to provide us a security interest in eligible collateral before it can undertake any secured borrowing. Eligible collateral includes single-family loans, multi-family loans, home equity loans and lines of credit, commercial real estate, bond securities and farm real estate. 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 if it must be liquidated. Over-collateralization by one member is not applied to another member. At June 30, 2015, our policy of over-collateralization resulted in total collateral pledged of $259.5 billion to serve total borrowing capacity of $216.2 billion. The collateral composition remained relatively constant compared to the end of 2014.
Borrowing Capacity/Lendable Value: We determine borrowing capacity against pledged collateral by establishing minimum levels of over-collateralization (Collateralized Maintenance Requirements or CMRs). CMRs result in a lendable value, or borrowing capacity, that is less than the amount of pledged collateral.
We determine CMRs by statistical analysis and management assumptions relating to historical price volatility, inherent credit risks, liquidation costs, and the current credit and economic environment. We apply CMR results to the estimated values of pledged assets. CMRs vary among pledged assets and members 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 range of lendable values applied to each major collateral type did not change in the first six months of 2015.
Internal Credit Ratings: We perform credit underwriting of our members and nonborrower members and assign them an internal credit rating. The credit ratings are based on internal credit analysis and consideration of available credit ratings from independent credit rating organizations. We use the credit ratings 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. Current trends of our members' credit ratings indicate a general improvement in the overall financial condition of our members during the recovery of the economy and housing market.
Member Failures, Closures, and Receiverships: There were no member failures in 2015 through the date of this filing.
MPP
Overview: We believe that the residual amount of credit risk exposure to loans in the MPP is minimal, based on the same factors described in the 2014 Annual Report on Form 10-K. We believe based on our analysis that future credit losses will not harm capital adequacy and will not significantly affect profitability except under the most extreme and unlikely credit conditions.
Conventional Loan Portfolio Characteristics: The levels of loan-to-value ratios have improved over the last several years, consistent with the portfolio's excellent credit quality. The positive trends reflect the sustained recovery and improvement in the overall housing market. At June 30, 2015, the weighted average loan-to-value ratios for conventional loans based on origination values and estimated current values were 73 percent and 64 percent, respectively. These ratios were similar at December 31, 2014.
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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, 2015 | December 31, 2014 | |||||
Early stage delinquencies - unpaid principal balance (1) | $ | 51 | $ | 61 | |||
Serious delinquencies - unpaid principal balance (2) | $ | 36 | $ | 43 | |||
Early stage delinquency rate (3) | 0.7 | % | 1.0 | % | |||
Serious delinquency rate (4) | 0.5 | % | 0.7 | % | |||
National average serious delinquency rate (5) | 2.2 | % | 2.4 | % |
(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, 2015 rate is based on March 31, 2015 data. |
The MPP has experienced a relatively small amount of delinquencies and foreclosures, with rates continuing to be well below national averages, which further supports our view that the overall portfolio is comprised of high-quality, well-performing loans.
Credit Enhancements: Conventional mortgage loans are supported against credit losses by various combinations of primary mortgage insurance (PMI), supplemental mortgage insurance (SMI) (for loans purchased before February 2011), and the Lender Risk Account (LRA). The LRA is a holdback of a portion of the initial purchase price to cover expected credit losses for a specific pool of loans. Starting after five years from the loan purchase date, we may return the holdback to PFIs if they manage credit risk to predefined acceptable levels of exposure on the loan pools they sell to us. The LRA had balances of $149 million and $129 million at June 30, 2015 and December 31, 2014, respectively. For more information, see Note 9 of the Notes to Unaudited Financial Statements.
Credit Losses: The following table shows the effects of credit enhancements on our estimation of credit losses at the noted periods. Estimated incurred credit losses, after credit enhancements are accounted for in the allowance for credit losses or as a charge off (i.e., a reduction to the principal of mortgage loans held for portfolio).
(In millions) | June 30, 2015 | December 31, 2014 | |||||
Estimated incurred credit losses, before credit enhancements | $ | (16 | ) | $ | (23 | ) | |
Estimated amounts deemed recoverable by: | |||||||
Primary mortgage insurance | 2 | 2 | |||||
Supplemental mortgage insurance | 9 | 13 | |||||
Lender Risk Account | 2 | 3 | |||||
Estimated incurred credit losses, after credit enhancements | $ | (3 | ) | $ | (5 | ) |
The data presented above provide further information on the aggregate health of the portfolio. Credit risk exposure depends on the actual and potential credit performance of the loans in each pool compared to the pool's equity (on individual loans) and credit enhancements, including PMI (for individual loans), SMI and the LRA.
The estimate of credit losses at June 30, 2015 decreased from the end of 2014 due to realized credit losses as problem loans continued to liquidate and as delinquency trends and housing prices improved.
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 expect that further credit losses would not significantly decrease profitability. For example, assuming a 20 percent decline in all home prices in each of the next two years, we estimate that our lifetime credit losses, net of the effect of credit enhancements, could increase by approximately $9 million, which would decrease annual ROE by 0.03 percentage points over the next five years (we estimate most of the losses to occur in the next five years).
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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 have no credit risk exposure to our PMI providers.
SMI
Another credit enhancement feature on some conventional loans is SMI purchased from Genworth and Mortgage Guaranty Insurance Corporation (MGIC). Beginning February 1, 2011, we discontinued use of SMI as a credit enhancement for new loan purchases; instead, we now augment credit enhancements with a greater amount of the purchase proceeds added to the LRA. At June 30, 2015, we had $1.6 billion of conventional loans purchased prior to February 2011 with outstanding SMI coverage through Genworth and MGIC that are paying down over time. Due to the possibility that MGIC and Genworth may not pay all of the future insurance claims we make, we have estimated that $0.3 million of such payments are not probable, which is reflected in our allowance for credit losses at June 30, 2015. The estimation of SMI exposure, similar to overall trends of our loan losses, has declined over the last several years.
Investments
Liquidity Investments: Liquidity investments may be 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 purchased liquidity investments from counterparties that have a strong ability to repay principal and interest.
Finance Agency regulations limit our unsecured liquidity investments to a counterparty or group of affiliated counterparties to maturities of no more than nine months and a dollar amount based on a percentage of eligible regulatory capital. The permissible percentage ranges from one percent to 15 percent of regulatory capital based on the counterparty's lowest long-term credit rating of its debt from a nationally recognized statistical rating organization (NRSRO). The lowest long-term credit rating for a counterparty to which we are permitted to extend credit is double-B. We complement reliance on NRSRO ratings for unsecured investment activity by also considering internal credit risk analytics on unsecured counterparties.
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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, 2015 | ||||||||||
Long-Term Rating | |||||||||||
AA | A | Total | |||||||||
Unsecured Liquidity Investments | |||||||||||
Federal funds sold | $ | 2,005 | $ | 2,245 | $ | 4,250 | |||||
Certificates of deposit | 250 | 300 | 550 | ||||||||
Total unsecured liquidity investments | 2,255 | 2,545 | 4,800 | ||||||||
Guaranteed/Secured Liquidity Investments | |||||||||||
Securities purchased under agreements to resell | 1,465 | — | 1,465 | ||||||||
Government-sponsored enterprises (1) | 32 | — | 32 | ||||||||
Total guaranteed/secured liquidity investments | 1,497 | — | 1,497 | ||||||||
Total liquidity investments | $ | 3,752 | $ | 2,545 | $ | 6,297 |
December 31, 2014 | |||||||||||
Long-Term Rating | |||||||||||
AA | A | Total | |||||||||
Unsecured Liquidity Investments | |||||||||||
Federal funds sold | $ | 2,100 | $ | 4,500 | $ | 6,600 | |||||
Certificates of deposit | 950 | 400 | 1,350 | ||||||||
Total unsecured liquidity investments | 3,050 | 4,900 | 7,950 | ||||||||
Guaranteed/Secured Liquidity Investments | |||||||||||
Securities purchased under agreements to resell | 3,343 | — | 3,343 | ||||||||
Government-sponsored enterprises (1) | 26 | — | 26 | ||||||||
Total guaranteed/secured liquidity investments | 3,369 | — | 3,369 | ||||||||
Total liquidity investments | $ | 6,419 | $ | 4,900 | $ | 11,319 |
(1) | Consists of securities that are issued and effectively guaranteed by Fannie Mae and/or Freddie Mac, which have the support of the U.S. government, although they are not obligations of the U.S. government. |
During the first six months of 2015, 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.
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The following table presents credit ratings of our unsecured investment credit exposure by the domicile of the counterparty or the domicile of the counterparty's parent for U.S. branches and agency offices of foreign commercial banks.
(In millions) | June 30, 2015 | |||||||||||||
Counterparty Rating (1) | ||||||||||||||
Domicile of Counterparty | Sovereign Rating (1) | AA | A | Total | ||||||||||
Domestic | AA+ | $ | — | $ | 100 | $ | 100 | |||||||
U.S. branches and agency offices of foreign commercial banks: | ||||||||||||||
Canada | AAA | 365 | 830 | 1,195 | ||||||||||
Australia | AAA | 970 | — | 970 | ||||||||||
Netherlands | AAA | — | 920 | 920 | ||||||||||
Germany | AAA | 200 | 595 | 795 | ||||||||||
Finland | AAA | 720 | — | 720 | ||||||||||
Switzerland | AAA | — | 100 | 100 | ||||||||||
Total U.S. branches and agency offices of foreign commercial banks | 2,255 | 2,445 | 4,700 | |||||||||||
Total unsecured investment credit exposure | $ | 2,255 | $ | 2,545 | $ | 4,800 |
(1) | Represents the lowest long-term credit rating provided by Standard & Poor's, Moody's, and/or Fitch Advisory Services. |
The following table presents the remaining contractual maturity of our unsecured investment credit exposure by the domicile of the counterparty or the domicile of the counterparty's parent for U.S. branches and agency offices of foreign commercial banks.
(In millions) | June 30, 2015 | |||||||||||||||
Domicile of Counterparty | Overnight | Due 2 days through 30 days | Due 31 days through 90 days | Total | ||||||||||||
Domestic | $ | — | $ | 100 | $ | — | $ | 100 | ||||||||
U.S. branches and agency offices of foreign commercial banks: | ||||||||||||||||
Canada | 1,095 | — | 100 | 1,195 | ||||||||||||
Australia | 970 | — | — | 970 | ||||||||||||
Netherlands | 920 | — | — | 920 | ||||||||||||
Germany | 795 | — | — | 795 | ||||||||||||
Finland | 720 | — | — | 720 | ||||||||||||
Switzerland | — | — | 100 | 100 | ||||||||||||
Total U.S. branches and agency offices of foreign commercial banks | 4,500 | — | 200 | 4,700 | ||||||||||||
Total unsecured investment credit exposure | $ | 4,500 | $ | 100 | $ | 200 | $ | 4,800 |
At June 30, 2015, all of the $4.8 billion of unsecured investment 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. Finance Agency regulations require all counterparties exposed to non-U.S. countries 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.
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Mortgage-Backed Securities.
GSE Mortgage-Backed Securities
At June 30, 2015, $11.6 billion of mortgage-backed securities held were single-family GSE securities issued by Fannie Mae and Freddie Mac, which provide credit safeguards by guaranteeing either timely or ultimate payments of principal and interest. We believe that the conservatorships of Fannie Mae and Freddie Mac lower the chance that they would not be able to fulfill their credit guarantees and that the securities issued by these two GSEs are effectively government guaranteed. In addition, based on the data available to us and our purchase practices, we believe that most of the mortgage loans backing our GSE mortgage-backed securities are of high quality with acceptable credit performance.
Mortgage-Backed Securities Issued by Other Government Agencies
We also invest in mortgage-backed securities issued and guaranteed by Ginnie Mae and the NCUA. These investments totaled $2.9 billion at June 30, 2015. We believe that the strength of the issuers' guarantees and backing by the full faith and credit of the U.S. government is sufficient to protect us against credit losses on these securities.
Private-Label Mortgage-Backed Securities
We held no private-label mortgage-backed securities at June 30, 2015.
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 we had credit risk exposure at June 30, 2015.
(In millions) | ||||||||||||||||
Credit Rating (1) | Total Notional | Net Derivatives Fair Value Before Collateral | Cash Collateral Pledged To (From) Counterparty | Net Credit Exposure to Counterparties | ||||||||||||
Non-member counterparties: | ||||||||||||||||
Asset positions with credit exposure: | ||||||||||||||||
Bilateral derivatives: | ||||||||||||||||
AA | $ | 20 | $ | — | $ | — | $ | — | ||||||||
A | 190 | 2 | — | 2 | ||||||||||||
BBB | 188 | 2 | — | 2 | ||||||||||||
Liability positions with credit exposure: | ||||||||||||||||
Cleared derivatives (2) | 6,967 | (2 | ) | 21 | 19 | |||||||||||
Total derivative positions with credit exposure to non-member counterparties | 7,365 | 2 | 21 | 23 | ||||||||||||
Member institutions (3) | 46 | — | — | — | ||||||||||||
Total | $ | 7,411 | $ | 2 | $ | 21 | $ | 23 |
(1) | Each category includes the related plus (+) and minus (-) ratings (i.e., “A” includes “A+” and “A-” ratings). |
(2) | Represents derivative transactions cleared with clearinghouses, which are not rated. |
(3) | Represents Mandatory Delivery Contracts. |
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Based on both the gross and net exposures, we had a minimal amount of residual credit risk exposure on bilateral derivatives throughout the first six months of 2015. Gross exposure would likely increase if interest rates rise and could increase if the composition of our derivatives change. However, contractual collateral provisions in these derivatives would limit net exposure to acceptable levels.
The following tables present counterparties that provided 10 percent or more of the total notional amount of bilateral interest rate swap derivatives outstanding.
(In millions) | ||||||||||||||||||||||
June 30, 2015 | December 31, 2014 | |||||||||||||||||||||
Counterparty | Credit Rating Category | Notional Principal | Net Unsecured Exposure | Counterparty | Credit Rating Category | Notional Principal | Net Unsecured Exposure | |||||||||||||||
Deutsche Bank AG | BBB | $ | 1,584 | $ | — | Wells Fargo Bank, N.A. | AA | $ | 1,104 | $ | — | |||||||||||
Wells Fargo Bank, N.A. | AA | 1,230 | — | Deutsche Bank AG | A | 1,049 | — | |||||||||||||||
HSBC Bank USA, N.A. | A | 1,000 | — |
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, 2015, we had $0.2 billion of notional principal of interest rate swaps outstanding to one member, JPMorgan Chase Bank, N.A., which also had outstanding credit services with us. Due to the amount of market value collateralization, we had no outstanding credit exposure to this counterparty related to interest rate swaps outstanding.
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 its bankruptcy in September 2008.
Exposure to Member Concentration
We regularly assess concentration risks from business activity. We believe that the current concentration of Advance activity is consistent with our risk management philosophy, and the impact of borrower concentration on market risk, credit risk, and operational risk, after considering mitigating controls, is small.
Liquidity Risk
Liquidity Overview
As shown on the Statements of Cash Flows, in the first six months of 2015, our portion of the System's debt issuances totaled $125.0 billion for Discount Notes and $9.1 billion for Bonds. The System's favorable debt ratings, the implicit U.S. government backing of our debt, and our effective risk management have been instrumental in ensuring satisfactory access to the capital markets.
Our liquidity position remained strong during the first six months of 2015, 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. Additionally, in July 2015, the Office of Finance modified its Discount Note Auction program to enhance its short-term debt issuance programs and to strengthen the FHLBank System's ability to meet the funding needs of members. The bi-weekly discount note auction was modified to use a single-price (Dutch) award method to determine the winning bids and the 9-week maturity was replaced with an 8-week maturity. The Discount Note Auction program is one of many short- and long-term debt issuance programs and products offered by the FHLBank System. We believe the possibility of a liquidity or funding crisis in the FHLBank System that would impair our ability to participate, on a cost-effective basis, in issuances of new debt, service outstanding debt, maintain adequate capitalization, or pay competitive dividends is remote.
We must meet both operational and contingency liquidity requirements. We satisfied the operational liquidity requirement by both meeting a contingency liquidity requirement, discussed below, and because we were able to adequately access the capital markets to issue debt. The amount of overnight liquidity was generally in the range of $5 billion to $15 billion during the first six months of 2015. In addition, Finance Agency guidance requires us to target at least 5 to 15 consecutive days of positive
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liquidity based on specific assumptions under two scenarios. We target holding at least three extra days of positive liquidity under each scenario, although as market conditions warrant we may hold, and often do hold, additional amounts.
Contingency Liquidity Requirement
Contingency liquidity risk is the potential inability to meet liquidity needs because our access to the capital markets to issue Consolidated Obligations is restricted or suspended for a period of time due to a market disruption, operational failure, or real or perceived credit quality problems. We continued to hold an ample amount of liquidity reserves to protect against contingency liquidity risk.
(In millions) | June 30, 2015 | December 31, 2014 | |||||
Contingency Liquidity Requirement | |||||||
Total Contingency Liquidity Reserves (1) | $ | 24,749 | $ | 30,594 | |||
Total Requirement (2) | (16,363 | ) | (12,155 | ) | |||
Excess Contingency Liquidity Available | $ | 8,386 | $ | 18,439 |
(1) | Includes, among others, cash, overnight Federal funds, overnight deposits, self-liquidating term Federal funds, 95 percent of the market value of available-for-sale negotiable securities, and 75 percent of the market value of certain held-to-maturity obligations, including obligations of the United States, U.S. government agency obligations and mortgage-backed securities. |
(2) | Includes net liabilities maturing in the next seven business days, assets traded not yet settled, Advance commitments outstanding, Advances maturing in the next seven business days, and a three percent hypothetical increase in Advances. |
Deposit Reserve Requirement
To support our member deposits, we also must meet a statutory deposit reserve requirement. The sum of our investments in obligations of the United States, deposits in eligible banks or trust companies, and Advances with a final maturity not exceeding five years must equal or exceed the current amount of member deposits. The following table presents the components of this liquidity requirement.
(In millions) | June 30, 2015 | December 31, 2014 | |||||
Deposit Reserve Requirement | |||||||
Total Eligible Deposit Reserves | $ | 73,222 | $ | 77,920 | |||
Total Member Deposits | (725 | ) | (730 | ) | |||
Excess Deposit Reserves | $ | 72,497 | $ | 77,190 |
Contractual Obligations
The following table summarizes our contractual obligations at June 30, 2015. The allocations according to the expiration terms and payment due dates of these obligations were not materially different from those at the end of 2014. Changes reflected normal business variations. We believe that, as in the past, we will continue to have sufficient liquidity, including from access to the debt markets to issue Consolidated Obligations, to satisfy these obligations on a timely basis.
(In millions) | < 1 year | 1 < 3 years | 3 < 5 years | > 5 years | Total | ||||||||||||||
Contractual Obligations | |||||||||||||||||||
Long-term debt (Bonds) - par (1) | $ | 18,576 | $ | 11,122 | $ | 7,391 | $ | 8,051 | $ | 45,140 | |||||||||
Operating leases (include premises and equipment) | 1 | 2 | 2 | 5 | 10 | ||||||||||||||
Mandatorily redeemable capital stock | 57 | — | 8 | — | 65 | ||||||||||||||
Commitments to fund mortgage loans | 495 | — | — | — | 495 | ||||||||||||||
Pension and other postretirement benefit obligations | 3 | 5 | 5 | 25 | 38 | ||||||||||||||
Total Contractual Obligations | $ | 19,132 | $ | 11,129 | $ | 7,406 | $ | 8,081 | $ | 45,748 |
(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. |
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Off-Balance Sheet Arrangements
The following table summarizes our off-balance sheet items at June 30, 2015. The allocations according to the expiration terms and payment due dates of these items were not materially different from those at the end of 2014, and changes reflected normal business variations.
(In millions) | < 1 year | 1 < 3 years | 3 < 5 years | > 5 years | Total | ||||||||||||||
Off-balance sheet items (1) | |||||||||||||||||||
Standby Letters of Credit | $ | 18,869 | $ | 58 | $ | 24 | $ | 55 | $ | 19,006 | |||||||||
Standby bond purchase agreements | 69 | 58 | 12 | — | 139 | ||||||||||||||
Consolidated Obligations traded, not yet settled | 18 | — | 15 | 23 | 56 | ||||||||||||||
Total off-balance sheet items | $ | 18,956 | $ | 116 | $ | 51 | $ | 78 | $ | 19,201 |
(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 2015.
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 Report.
Item 4. | Controls and Procedures. |
DISCLOSURE CONTROLS AND PROCEDURES
As of June 30, 2015, the FHLB's management, including its principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, these two officers each concluded that, as of June 30, 2015, the FHLB maintained effective disclosure controls and procedures designed to ensure that information required to be disclosed in the reports that it files under the Exchange Act is (1) accumulated and communicated to management as appropriate to allow timely decisions regarding disclosure and (2) recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
As of June 30, 2015, the FHLB's management, including its principal executive officer and principal financial officer, evaluated the FHLB's internal control over financial reporting. Based upon that evaluation, these two officers each concluded that there were no changes in the FHLB's internal control over financial reporting that occurred during the quarter ended June 30, 2015 that materially affected, or are reasonably likely to materially affect, the FHLB's internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1A. | Risk Factors. |
For a discussion of the FHLB's risk factors, see Part I, Item 1A. "Risk Factors" in the FHLB's 2014 Annual Report on Form 10-K. There have been no material changes from the risk factors in the FHLB's 2014 Annual Report on Form 10-K.
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
From time to time the FHLB provides Letters of Credit in the ordinary course of business to support members' obligations issued in support of unaffiliated, third-party offerings of notes, bonds or other securities. The FHLB provided $11.1 million of such credit support during the three months ended June 30, 2015. To the extent that these Letters of Credit are securities for purposes of the Securities Act of 1933, their issuance is exempt from registration pursuant to Section 3(a)(2) thereof.
Item 6. | Exhibits. |
(a) | Exhibits. |
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 6th day of August 2015.
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 Chief Financial Officer | |
(principal financial officer) |
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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 |
(1) | Numbers coincide with Item 601 of Regulation S-K. |
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