Solutions

The Dividend Effect

On July 25, 2019, 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%. To reward members supporting
the cooperative by borrowing from us, the FHLBank Chicago increased the B1 activity stock dividend in order to reduce a member’s advance costs.

Key takeaways:

•    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

The figure below shows the recent history of our dividend rates and the corresponding “all-in” rate. 

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 in Q3 2019 was 2.25% annualized) 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 in Q3 2019 was 5.00% annualized). The dividend can be viewed as a discount on the advance rate— approximately 12.5 basis points (bps) based on dividends paid in Q2 2019— which substantially lowers member’s “all-in” advance cost.

In Figure 2 below, the calculation behind the 12.5 bps savings is shown. As of July 25, 2019, the interest cost on a $5 million one-year advance with a fixed-rate of 2.22% is $112,542. 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. Estimating the Q3 2019 average U.S. Federal Funds Effective Rate of 2.15% as an alternative investmentpurchase, the net benefit from the activity stock is reduced from $11,250 to $4,905. Overall, this reduces the interest cost ofthe advance from $112,542 to $106,196. Consequently, the “all-in” interest rate on a $5 million one-year, fixed- rate, fixed-term advance is reduced from 2.22% to 2.09%. This equates to the 12.5 bps “discount” based on dividends paid in Q3 2019.

Other Considerations

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.

Summary

In summary, an FHLBank Chicago member receives savings on advance rates after taking the B1 dividend into consideration.

To Learn More

Visit the Solutions section of eBanking to read How the FHLBank Chicago Dividend Reduces Your Borrowing Costs white paper.

For further information, contact your Sales Director at membership@fhlbc.com to find out more about the FHLBank Chicago dividend rate and opportunities to lower your borrowing costs.