LENDING SOLUTIONS Products Designed to Assist Credit Unions in Serving Members. Dan Hess SVP, Chief Business Officer May 20, 2014

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1 LENDING SOLUTIONS Products Designed to Assist Credit Unions in Serving Members Dan Hess SVP, Chief Business Officer May 20,

2 TODAY S AGENDA FHLBank Topeka and FHLBank System overview Credit union balance sheet trends Strategies for generating on balance sheet loan growth Off balance sheet strategies for residential mortgages 2

3 FHLBANK OVERVIEW 3

4 FHLBANK SYSTEM COMPOSITION 12 Regional Banks Liquidity provider to more than 8,000 financial institution members Advances and Mortgage Programs Cooperative business models Strong access to credit markets Separate management teams and boards Varying lending and collateral policies 4

5 FHLBANK SYSTEM DISTRICTS 5

6 FHLBANK SYSTEM: SIMILAR TO CREDIT UNIONS Cooperative structure Defined membership base Member owned Profits to you, our members Tax-exempt 6

7 BALANCE SHEET CHANGES National Credit Union Trends 7

8 FUNDING GAP DISCUSSION 40,000,000,000 Credit Union Sources and Uses of Funding Dollar Change 35,000,000,000 30,000,000,000 25,000,000,000 20,000,000,000 15,000,000,000 10,000,000,000 5,000,000, ,000,000, Q1 2013Q2 2013Q3 2013Q4 Funding Uses Funding Sources Funding Gap Advance Change

9 GOOD SHARE GROWTH HELD IN CASH 2013Q1 VS. 2012Q4 Uses Cash increased $17.4 billion, 17.3% Loans up $2.3 billion, 0.4% Unsecured loans down $1.3 billion, 1.9% Auto loans up $3 billion Investments up $12.2 billion, 4.4% Agency Securities up $9 billion Sources Shares and Deposits up $32 billion, 3.6% Share drafts up $10 billion, regular shares up $18.2 billion Advances declined $2.8 billion

10 FUNDING REALLOCATION 2013Q2 VS. 2013Q1 Uses Cash declined $20.4 billion, 17.3% Loans up $13.8 billion, 2.3% Auto loans increased $3.6 billion 1 st mortgages increased $5.3 billion Investments increased $6.5 billion, 2.2% Agency securities up $4.3 billion Sources Shares and Deposits down negligibly, <$0.5 billion Share drafts declined $2.5 billion, regular shares increased $2.7 billion Advances up $1.5 billion

11 CONTINUED REALLOCATION LOANS 2013Q3 VS. 2013Q2 Uses Cash down $11.2 billion, 11.4% Loans increased $17.8 billion, 2.9% Auto loans up $6.4 billion 1 st mortgages up $8.4 billion Investments declined $5.6 billion, 1.9% Agency securities up $5.4 billion Sources Shares and Deposits down $3.5 billion, 0.4% Share drafts -$2.0 billion, regular shares -$0.6 billion Advances up $3.1 billion

12 CONTINUED LOAN GROWTH 2013Q4 VS. 2013Q3 Sources Cash down slightly Loans increased $13.7 billion, 2.2% Unsecured loans up $1.9 billion Auto loans up $4.7 billion 1 st mortgage loans up $5.5 billion Investments down $7.8 billion, 2.7% Agency securities declined $6.3 billion Uses Shares and Deposits up $4.2 billion, 0.5% Share drafts up $1.9 billion, regular shares up $1.8 billion Advances up negligibly

13 STRATEGIES FOR ON BALANCE SHEET LOAN GROWTH 13

14 PRODUCT FOCUS Products are designed to meet member needs Liquidity Liquidity access supported by broad range of collateral Operating and contingent liquidity Interest Rate Risk Management Balance sheet management Residential mortgage focus Interest rate risk management Mortgage banking solutions 14

15 ADVANCE RATES e Advances and Interest Rate Swap wk 1 Mo 2 Mo 3 Mo 6 Mo 1 yr 2 yr 3 yr 4 yr 5 yr 7 yr 10 yr Difference Advances Swaps Difference

16 MOVE IN RATES: ARE YOU PREPARED? 16

17 MOVE IN RATES: ARE YOU PREPARED? 17

18 FORWARD SETTLING ADVANCE COMMITMENT Features Lock in current low rates on a bullet advance, up to 30 years in maturity Delay funding up to 2 years Time the advance settlement with future interest rate risk management needs $2.5 million minimum advance 18

19 FSA COMMITMENT (continued) Pricing Cost is based on forward rate curve, eliminating speculation on future rate movements Benefits Lock low rates without adding immediate liquidity Protect against rising rates Fund loans with a delayed disbursement, such as construction projects No stock or collateral required until funding 19

20 FSA Commitment (continued) Current 4/10/2015 4/10/2017 4/10/2019 4/10/2024 4/10/2025 Projected 10 Yr 10/1Yr FSA Projected Rate (Like Maturity) 11 Yr Rate 20

21 CONSTRUCTION TO PERM 21

22 CONSTRUCTION TO PERM 22

23 CONSTRUCTION TO PERM RESULTS & COMPARISON 23

24 FSA: OPPORTUNITIES 1. Future maturities: Advances Brokered Deposits Certificate of Deposits 2. Projected loan growth 24

25 SYMMETRICAL FIXED RATE ADVANCE Features (SFA) Monetize gains on advances paid off early in a rising rate environment Available on bullet advances of $2.5 million or greater Gain limited to 10% of outstanding advance amount 25

26 SYMMETRICAL FIXED RATE ADVANCE (SFA) Prepayment Prepayment calculation captures the mark-tomarket gain or loss on the swap used to hedge the advance plus the value of FHLBank s spread Benefits Provides gains on advances as interest rates rise Offset losses in the bond portfolio 26

27 SYMMETRICAL FIXED RATE ADVANCE (continued) Strategy $150,000 In a rising rate environment, offset losses in $100,000 $50,000 securities portfolio with gain on advance Change in Market Value $200,000 $0 -$50,000 -$100,000 -$150,000 -$200,000 -$250,000 Shift in Interest Rates Advance $(184,772) $(122,915) $(61,312) $(802) $58,195 $115,613 $171,498 MBS $166,850 $149,100 $120,875 $72,275 $12,350 $(49,953) $(113,360) 27

28 PORTFOLIO LENDING SERVICE Subscribe to this free service at 28

29 PLS Approach Features Complimentary service helps members successfully fund and hedge fixed-rate residential mortgages FHLBank utilizes its sophisticated tools and expertise to develop the best funding strategies for various interest rate scenarios Analyzes and forecasts cash flows, yields, costs and income for loans and funding in a variety of interest rate scenarios Sophisticated prepayment forecasts 16 advance types run in 1,000 different combinations to find the best strategy 29

30 PLS Results Benefits Grow loan portfolio and build earnings Put excess capital to work Safely fund fixed-rate residential portfolio Ability to refinance debt Improved ROE Free service to FHLBank members Strategy Book mortgages at primary mortgage yields Historically wide primary/secondary spreads Wide funding margins 30

31 PLS Strategy (continued) 31

32 PLS Strategy (continued) 32

33 MPF PROGRAM Mortgage Partnership Finance 33

34 OFF-BALANCE-SHEET STRATEGY Sell Residential Mortgages Removed interest rate risk Removes much of the credit risk MPF Program Member does what it does best Underwrite, originate and maintain customer relationship FHLBank does what it does best Funding and hedging 34

35 MPF PRODUCTS Traditional Products Credit Sharing Original MPF MPF 125 Member is compensated for credit enhancement Off-balance-sheet MPF Xtra Eliminates credit sharing Eliminates contingent liability obligation 35

36 FHLBANK TOPEKA MPF FACTS 284 Participating Financial Institutions (PFIs) More than 1,000 master commitment pools 106,770 loans purchased to-date Gross fundings of $15.5 billion Only 300 loans (0.3%) have defaulted 36

37 MPF PRODUCT CREDIT QUALITY 37

38 MPF PRODUCT EXPLANATION Mainstay of the MPF Program FHLBanks and PFIs share in the risks and rewards of the loans originated Credit enhancement fee income Credit enhancement obligation First loss account 38

39 CREDIT ENHANCEMENT FEE INCOME Up to 10 bps annually, paid monthly, above and beyond transaction price proceeds, servicing fee income or Servicing Released Premium. Rule of Thumb: However many millions ($$$) you produce annually roughly translates into that many in thousands ($$$) paid to you. Over $41 million paid out to PFIs since

40 CREDIT ENHANCEMENT OBLIGATION A contingent liability; not a hard cash reserve Each loan sold into the MPF Program contributes a dollar amount to the overall obligation based on that loan s overall level of risk Risk is determined in the loan presentment phase by running the loan through empf for credit enhancement 40

41 CREDIT ENHANCEMENT OBLIGATION EXAMPLE $100,000 loan 5% CE obligation = $5,000 Principal is reported on NCUA 5300 as an offbalance sheet Contingent Liability CE obligation is subject to the Risk Based Net Worth requirement FHLBank Topeka is not providing accounting or legal advice with respect to the accounting treatment of MPF Program assets and liabilities. You should consult with your own accountants and attorneys for advice on this matter. 41

42 FIRST LOSS ACCOUNT (FLA) The funds accumulated in this account represent your layer of insulation against loss The FLA grows with every loan sold into the program FHLBank Topeka s FLA has protected PFIs against losses of approx. $6 million 42

43 HIERARCHY OF LOSS 1. Borrower equity 2. Primary mortgage insurance 3. FHLBank First Loss Account 4. PFI 5. FHLBank Topeka EQUITY PRIMARY MI FLA PFI CE OBLIGATION FHLBANK 43

44 HISTORIC LOSS 44

45 MPF OPTIONS Conventional loans Original MPF MPF 125 MPF Xtra Government loans FHA/VA USDA Section 502 HUD Section 184 Servicing released and/or Servicing retained Multiple remittance options 45

46 MPF FEATURES Rates and guidelines online Transact business online PFI Process Originates loan Processes loan Underwrites loans Schedules closing and prepares loan docs Funds the loan MPF purchases the closed loan 46

47 MPF PROGRAM BENEFITS Competitive agency pricing Ongoing fee income No loan-level price adjustments or Investor Price Adjustments Except for MFP Xtra No delivery fees 47

48 QUESTIONS? 48