How the FHLBank Chicago Dividend Reduces Your Borrowing Costs: Q4 2019
The Dividend EffectOn January 23, 2020, the Federal Home Loan Bank of Chicago (FHLBank Chicago) declared a dividend on B1 activity stock at an annualized rate of 5.00% and on B2 membership stock at an annualized rate of 2.25%. The Bank pays a higher dividend per share on activity stock to reward members for using the Bank’s advances and, thereby, supporting the entire cooperative. The higher dividend received on Class B1 activity stock has the effect of lowering your borrowing costs.
- The FHLBank Chicago dividend reduces the "all-in" cost of borrowing an advance
- The FHLBank Chicago dividend represents a return on a member's investments
How Your Institution Gets More Savings from Advance Activity at the FHLBank Chicago
There are two types of capital stock— membership stock and activity stock. Members purchase membership stock to join and maintain membership in the FHLBank Chicago and receive the B2 dividend rate (which was 2.25% annualized for period ending Q4 2019) on that membership stock. As a member borrows in the form of advances, all but $10,000 of the B2 membership stock converts into B1 activity stock, which is required to support the advance borrowing. This B1 activity stock receives a higher dividend rate (which was 5.00% annualized for period ending Q4 2019). The dividend can be viewed as a discount on the advance rate— approximately 15.2 basis points (bps) based on dividends paid on February 13, 2020 by crediting your DID account. Based on current projections and assumptions about our financial condition and the economic outlook, we expect to maintain a 5.00% (annualized) level of dividend for Class B1 activity stock for the next two quarters.
In Figure 2 below, the calculation behind the 15.2 bps savings is shown. As of January 23, 2020, the interest cost on a $5 million one-year advance with a fixed-rate of 1.77% is $89,729. The advance requires the purchase of activity stock equal to 4.5% of the advance, and the earnings on which are $11,250 when you take into account the 5.00% B1 activity stock dividend. Assuming a U.S. Federal Funds Effective Rate of 1.55% as an alternative investment purchase, the net benefit from the activity stock is reduced from $11,250 to $3,536. Overall, this reduces the interest cost of the advance from $89,729 to $82,015. Consequently, the “all-in” interest rate on a $5 million one-year, fixed- rate, fixed-term advance is reduced from 1.77% to 1.62%. This equates to the 15.2 bps “discount” based on dividends payable in Q1 2020.
Members who can earn significant alternate investment yields should consider our Reduced Capitalization Advance Program (RCAP), which requires a 2% activity stock investment instead of 4.5%, based on terms and conditions.
In summary, an FHLBank Chicago member receives savings on advance rates after taking the B1 dividend into consideration.
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Managing Director, Member Strategy and Solutions
Director, Member Strategy and Solutions
The scenarios in this paper were prepared without any consideration of your institution’s balance sheet composition,hedging strategies, or financial assumptions and plans, any of which may affect the relevance of these scenarios to your own analysis. The Federal Home Loan Bank of Chicago makes no representations or warranties about the accuracy or suitability of any information in this paper. This paper is not intended to constitute legal, accounting, investment, or financial advice or the rendering of legal, accounting, consulting, or other professional services of any kind. You should consult with your accountants, counsel, financial representatives, consultants, and/or other advisors regarding the extent these scenarios may be useful to you and with respect to any legal, tax, business, and/or financial matters or questions. Historical dividend rates provided for informational purposes only; future dividends at the Board’s discretion and subject to change.
Federal Home Loan Bank of Chicago | Member owned. Member focused. | July 2019