Advances. The Bank’s primary function is to provide its members with
a reliable source of secured credit in the form of loans known as advances.
The Bank offers advances to its members with a wide variety of terms designed
to meet members’ business and risk management needs. Standard offerings
include the following types of advances:
Fixed-rate, fixed-term advances. The Bank offers fixed-rate, fixed-term advances
with maturities ranging from overnight to 20 years, and with maturities as long
as 40 years for Community Investment advances. Interest is generally paid monthly
and principal repaid at maturity for fixed-rate, fixed-term advances.
Fixed-rate, amortizing advances. The Bank offers fixed-rate advances with a
variety of final maturities and fixed amortization schedules. Standard advances
offerings include fully amortizing advances with final maturities of 5, 7, 10,
15 or 20 years, and advances with amortization schedules based on those maturities
but with shorter final maturities accompanied by balloon payments of the remaining
outstanding principal balance. Borrowers may also request alternative amortization
schedules and maturities. Interest is generally paid monthly and principal is
repaid in accordance with the specified amortization schedule. Although these
advances have fixed amortization schedules, borrowers may elect to pay a higher
interest rate and have an option to prepay the advance without a fee after a
specified lockout period (typically five years). Otherwise, early repayments
are subject to the Bank’s standard prepayment fees.
Variable-rate advances. The Bank offers term variable-rate advances with maturities
between one and ten years. Standard offerings include variable-rate advances
indexed to either one-month LIBOR or three-month LIBOR that are priced at a
constant spread to the relevant index. The Bank also offers variable-rate advances
(discount note floating rate advances) that reset every 4, 8, 13 or 26 weeks
based on the results of the FHLBank System's discount note auctions that typically
occur twice every week. In addition to longer term variable-rate advances, the
Bank offers short term variable-rate advances (maturities of 30 days or less)
indexed to the daily federal funds rate. Variable-rate advances may also include
embedded features such as caps, floors or provisions for the conversion of the
advances to a fixed rate.
Putable advances. The Bank also makes advances that include a put feature that
allows the Bank to terminate the advance at specified points in time. If the
Bank exercises its option to terminate the putable advance, the Bank offers
replacement funding to the member for a period selected by the member up to
the remaining term to maturity of the putable advance, provided the Bank determines
that the member is able to satisfy the normal credit and collateral requirements
of the Bank for the replacement funding requested.
Symmetrical prepayment advances. The Bank also offers fixed-rate, fixed-term
or amortizing advances that include a symmetrical prepayment feature which allows
a member to prepay an advance at the lower of par value or fair value plus a
make-whole amount, thus allowing the member to realize a portion of the decrease
in fair value that would arise if interest rates have increased since the advance
was originated.
Expander advances. The Bank also offers fixed-rate, fixed-term, non-amortizing
advances that provide the member with a one-time option to increase the principal
amount of the advance generally up to twice the amount of the original advance
at the original interest rate for the remaining term of the advance.
Fixed-rate, fixed-term advances, including Community Investment Program and
Economic Development Program advances, can be forward-starting, which allows
a member to lock in a rate for an advance that will settle at a future date.
Amortizing advances and certain advances containing the symmetrical prepayment
feature are also available on a forward-starting basis.
Finance Agency regulations require the Bank to establish a formula for and to
charge, if necessary, a prepayment fee on an advance that is repaid prior to
maturity in an amount sufficient to make the Bank financially indifferent to
the borrower’s decision to repay the advance prior to its scheduled maturity
date. Currently, these fees are generally calculated as the present value of
the difference (if positive) between the interest rate on the prepaid advance
and the rate derived from the FHLBank System consolidated obligations curve
for the remaining term to maturity of the repaid advance.
Members are required by statute and regulation to use the proceeds of advances
with an original term to maturity of greater than five years to purchase or
fund new or existing residential housing finance assets which, for CFIs, are
defined by statute and regulation to include small business, small farm and
small agribusiness loans, loans for community development activities (subject
to the Finance Agency’s requirements as described below) and securities
representing a whole interest in such loans. Community Investment Cash Advances
(described below) are exempt from these requirements.
The Bank prices its credit products with the objective of providing benefits
of membership that are greatest for those members that use the Bank’s
products most actively, while maintaining sufficient profitability to pay dividends
at a rate that makes members financially indifferent to holding the Bank’s
capital stock and that will allow the Bank to increase its retained earnings
over time. Generally, that set of objectives results in small mark-ups over
the Bank’s cost of funds for its advances and dividends on capital stock
at rates that have for the last several years been slightly above the upper
end of the Federal Reserve’s target for the federal funds rate. In keeping
with its cooperative philosophy, the Bank provides equal pricing for advances
to all members regardless of asset or transaction size, charter type, or geographic
location.
The Bank is required by the FHLB Act to obtain collateral that is sufficient,
in the judgment of the Bank, to fully secure advances and other extensions of
credit to members/borrowers. The Bank has not suffered any credit losses on
advances in its 83-year history. In accordance with the Bank’s Capital
Plan, members and former members must hold Class B-2 capital stock in proportion
to their outstanding advances. In addition, members must hold Class B-1 capital
stock to meet their membership investment requirement. Pursuant to the FHLB
Act, the Bank has a lien upon and holds the Bank’s Class B-1 and Class
B-2 capital stock owned by each of its shareholders as additional collateral
for all of the respective shareholder’s obligations to the Bank.
In order to comply with the requirement to fully secure advances and other extensions
of credit, the Bank and each of its members/borrowers execute a written security
agreement that establishes the Bank’s security interest in a variety of
the members’/borrowers’ assets. The Bank, pursuant to the FHLB Act
and Finance Agency regulations, originates, renews, or extends advances only
if it has obtained and is maintaining a security interest in sufficient eligible
collateral at the time such advance is made, renewed, or extended. Eligible
collateral includes whole first mortgages on improved residential real property
or securities representing an undivided interest in such mortgages; securities
issued, insured, or guaranteed by the U.S. government or any of its agencies,
including mortgage-backed and other debt securities issued or guaranteed by
the Federal National Mortgage Association (“Fannie Mae”), the Federal
Home Loan Mortgage Corporation (“Freddie Mac”), or the Government
National Mortgage Association; term deposits in the Bank; and other real estate-related
collateral acceptable to the Bank, provided that such collateral has a readily
ascertainable value and the Bank can perfect a security interest in such assets.
In the case of CFIs, the Bank may also accept as eligible collateral secured
small business, small farm, and small agribusiness loans, secured loans for
community development activities, and securities representing a whole interest
in such loans, provided the collateral has a readily ascertainable value and
the Bank can perfect a security interest in such collateral.
The HER Act added secured loans for community development activities as a new
type of eligible collateral for CFIs. To the extent secured loans for community
development activities represent a new class of collateral that the Bank has
not previously accepted, the Bank would be required to seek the Finance Agency’s
approval prior to accepting that collateral. To date, the Bank has not been
requested to accept secured loans for community development activities as collateral.
Except as set forth in the next sentence, the FHLB Act affords any security
interest granted to the Bank by any member/borrower of the Bank, or any affiliate
of any such member/borrower, priority over the claims and rights of any party,
including any receiver, conservator, trustee, or similar party having rights
of a lien creditor. The Bank’s security interest is not entitled to priority
over the claims and rights of a party that (i) would be entitled to priority
under otherwise applicable law and (ii) is an actual bona fide purchaser for
value or is a secured party who has a perfected security interest in such collateral
in accordance with applicable law (e.g., a prior perfected security interest
under the Uniform Commercial Code or other applicable law). For example, as
discussed further below, the Bank usually perfects its security interest in
collateral by filing a Uniform Commercial Code financing statement against the
borrower. If another secured party, without knowledge of the Bank's lien, perfected
its security interest in that same collateral by taking possession of the collateral,
rather than or in addition to filing a Uniform Commercial Code financing statement
against the borrower, then that secured party’s security interest that
was perfected by possession may be entitled to priority over the Bank’s
security interest that was perfected by filing a Uniform Commercial Code financing
statement.