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LENDING SOLUTIONS Products Designed to Assist Credit Unions in Serving Members

Dan Hess | SVP, Chief Business Officer

May 20, 2014

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

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FHLBANK OVERVIEW

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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

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FHLBANK SYSTEM DISTRICTS

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FHLBANK SYSTEM: SIMILAR TO CREDIT UNIONS

• Cooperative structure

• Defined membership base

• Member owned

• Profits to you, our members

• Tax-exempt

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BALANCE SHEET CHANGES National Credit Union Trends

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FUNDING GAP DISCUSSION

-5,000,000,000

0

5,000,000,000

10,000,000,000

15,000,000,000

20,000,000,000

25,000,000,000

30,000,000,000

35,000,000,000

40,000,000,000

2013Q1 2013Q2 2013Q3 2013Q4

Do

llar

Ch

ange

Credit Union Sources and Uses of Funding

Funding Uses Funding Sources Funding Gap Advance Change

“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

“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 • 1st 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

“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 • 1st 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

“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 • 1st 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

STRATEGIES FOR ON BALANCE SHEET LOAN GROWTH

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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

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ADVANCE RATES

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Difference

-0.60

-0.50

-0.40

-0.30

-0.20

-0.10

0.00

0.10

0.20

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

1 wk 1 Mo 2 Mo 3 Mo 6 Mo 1 yr 2 yr 3 yr 4 yr 5 yr 7 yr 10 yr

Advances and Interest Rate Swap

Difference Advances Swaps

-1.50

-1.00

-0.50

0.00

0.50

Difference

MOVE IN RATES: ARE YOU PREPARED?

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MOVE IN RATES: ARE YOU PREPARED?

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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

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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

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FSA Commitment (continued)

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3.35

3.77

4.44

4.77

4.91 4.89

3.71 3.71

3.00

3.25

3.50

3.75

4.00

4.25

4.50

4.75

5.00

5.25

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

CONSTRUCTION TO PERM

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CONSTRUCTION TO PERM

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CONSTRUCTION TO PERM RESULTS & COMPARISON

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FSA: OPPORTUNITIES

1. Future maturities:

Advances

Brokered Deposits

Certificate of Deposits

2. Projected loan growth

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SYMMETRICAL FIXED RATE ADVANCE (SFA)

• Features

– 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

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SYMMETRICAL FIXED RATE ADVANCE (SFA)

• Prepayment – Prepayment calculation captures the mark-to-

market 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

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SYMMETRICAL FIXED RATE ADVANCE (continued)

• Strategy

– In a rising rate environment, offset losses in securities portfolio with gain on advance

-150 -100 -50 0 50 100 150

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)

-$250,000

-$200,000

-$150,000

-$100,000

-$50,000

$0

$50,000

$100,000

$150,000

$200,000

Ch

ange

in M

arke

t V

alu

e

Shift in Interest Rates

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PORTFOLIO LENDING SERVICE

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Subscribe to this free service at www.fhlbtopeka.com/portfolio

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

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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

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PLS Strategy (continued)

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PLS Strategy (continued)

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MPF PROGRAM Mortgage Partnership Finance

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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

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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

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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

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MPF PRODUCT CREDIT QUALITY

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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

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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 2004.

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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

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CREDIT ENHANCEMENT OBLIGATION EXAMPLE

• $100,000 loan

• 5% CE obligation = $5,000

• Principal is reported on NCUA 5300 as an off-balance 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.

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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

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HIERARCHY OF LOSS

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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

HISTORIC LOSS

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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

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MPF FEATURES • Rates and guidelines online

– www.fhlbmpf.com

• 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

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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

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QUESTIONS?

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