FEDERAL

Figure 17. FHLBanks’ Net Income for the Six
Months Ended June 30, 2013 and 2012 ($ millions)
2013 2012
Net Interest Income $1,682 $2,048
Reversal of (Provision for)
Credit Losses
10 (13)
Other-than-Temporary
Impairment Losses a (6) (86)
Other Income (Loss) 189 (31)
Total Non-interest Expense (421) (485)
Total Assessments (144) (148)
Net Income $1,310 $1,285
a
Of the other-than-temporary impairment losses, private-label
MBS comprised $6 million and $84 million for the six months
ended June 30, 2013 and 2012, respectively.
derive from decreases in interest income on advances,
held-to-maturity securities, prepayment fees,
and mortgage loans. Interest income on advances
decreased from $1.6 billion to $1.3 billion—i.e.,
21%—and interest income on held-to-maturity
securities decreased from $1.3 billion to
$1.1 billion—a 19% decline—for the six months
ended June 30, 2013, compared with the same period
in 2012. Also during this period, interest income
on prepayment fees was reduced from $158 million
to $64 million—or 59%—and interest income
on mortgage loans decreased from $1.1 billion to
$969 million—a 15% decline, compared with the
same period in 2012. 65
On the other hand, a decrease in interest expense from
$3.2 billion to $2.6 billion—i.e., 20%—prevented
additional declines in net interest income. The decrease
was driven by lower funding costs and reductions in the
balances of interest-bearing liabilities. The refinancing
of consolidated obligations, which resulted in lower
interest payments, was a key contributor to this decline.
Due to these lower payments, consolidated obligation
expenses decreased from $3.1 billion to $2.4 billion,
or 22%, for the six months ended June 30, 2013,
compared with the same period in 2012. 66
The FHLBanks are exposed to interest rate risk
primarily from the effect of interest rate changes on
their interest-earning assets, as well as the funding
sources for these assets. The goal of the FHLBanks
is not to eliminate interest rate risk entirely but to
manage it within appropriate limits. To achieve this
goal, the FHLBanks use derivatives (e.g., interest
rate swaps, options, and swaptions), which help
reduce funding costs, maintain favorable interest rates,
and manage overall assets and liabilities. 67
Changes in mark-to-market items prevented further
declines in overall profitability, adding gains on
derivatives and hedging activities. Specifically, the
gains accounted for additional non-interest income
of $293 million for the six months ended June 30,
2013, compared with a loss of $1 million for the same
period in 2012—a substantial increase. 68
As shown in Figure 18 (see below), the FHLBanks’
combined retained earnings have increased every year
for the last six years and now approach $12 billion
as of June 30, 2013. 69 As long as the FHLBanks
are profitable, retained earnings should continue to
increase because of the joint capital enhancement plan
provisions adopted by the FHLBanks last year. The
plan calls for the FHLBanks to set aside 20% of their
net income into a separate, restricted retained earnings
account. 70 The joint capital enhancements ensure
Figure 18. FHLBanks’ Retained Earnings 2007
Through Second Quarter 2013 ($ billions)
$12
$10
$8
$6
$4
$2
$0
3.69
2007
2.94
2008
6.03
2009
7.55
2010
8.58
2011
10.52
2012
11.45
Q2 2013
Semiannual Report to the Congress • April 1, 2013–September 30, 2013 47