Your FHLBank Atlanta Dividend: A Consistent Source of Value
October 2013 - FHLBank Atlanta offers many unique sources of value to its shareholders, ranging from structured advances and letters of credit to affordable housing products and educational programs. The Bank's dividend is another important source of value. It represents a return on shareholders' investments, and because shareholders must purchase stock as they borrow from the Bank, the dividend paid on those activity-based shares is, in effect, a reduction in the "all in" cost of borrowing the advance.
FHLBank Atlanta's activity-based stock requirement is equal to 4.5 percent of a shareholder's outstanding advances. Any dividends paid on a shareholder's activity-based stock lower the overall cost of an advance. This benefit is illustrated by the following example where a shareholder borrows a $5 million advance for one year at 0.31 percent. The required capital stock purchase for the advance is $225,000. Interest cost on the advance for 365 days would equal $15,715, while the dividend on the related activity-based stock at an average rate of 2.39 percent would equal $5,377. When factoring in a comparable alternative investment rate for the $225,000, the shareholder would achieve a net benefit from the additional capital stock of $4,680 and an "effective" total cost for the advance of $11,035.
The dividend's effect on total costs of an advance is more significant for shorter-term advances, but even for long-term advances, where the dividend will affect borrowing costs to a lesser extent, it still reduces the "all in" borrowing rate. The dividend payment and rate are not guaranteed and may fluctuate over the life of an advance.
The benefit of the dividend is particularly important because the Bank has a strong and consistent history of paying quarterly dividends to shareholders. In the last 10 years, the Bank has declared a dividend with respect to all but three quarters, during the height of the financial crisis.
The Bank generally determines a dividend rate based on a spread to three-month Libor and has established a target spread for the dividend of 50 to 150 basis points above average three-month Libor for a given quarter. Any dividend declaration is dependent on actual financial performance, the Bank's retained earnings balance, and approval by the board of directors. The Bank's ability to pay dividends also is subject to statutory and regulatory liquidity requirements.
Over time, the spread to three-month Libor for dividends has fluctuated. As shown in the graph below, in some years, such as 2003 and 2004, when interest rates were comparatively low, the Bank paid a spread that exceeded 150 basis points, the maximum of its target range. However, in rising-rate environments, such as in 2005, 2006, and 2007, while the absolute amount of the dividend rose with three-month Libor, the spread was more in line with the Bank's current target range of 50 to 150 basis points.
Past performance and dividends may not be indicative of future results, and shareholders should not assume that the Bank's future performance or dividends will be equal to past levels. While there are many financial and regulatory factors that influence the ability to pay dividends, FHLBank Atlanta's goal is to provide consistent financial returns to shareholders in all interest-rate environments.
For additional information on the Bank's dividend history or factors that may influence dividend payments, visit the Bank's website and filings with the Securities and Exchange Commission. To learn more about how dividends can potentially reduce your total borrowing costs with the Bank, contact your relationship manager.
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The Federal Home Loan Bank of Atlanta is not a registered investment advisor. Nothing herein is an offer to sell or a solicitation of an offer to buy any securities or derivative products. You should consult your own legal, financial and accounting advisors before entering into any transaction.