UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2009
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 000-51999
FEDERAL HOME LOAN BANK OF DES MOINES
(Exact name of registrant as specified in its charter)
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Federally chartered corporation
(State or other jurisdiction of incorporation or organization)
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42-6000149
(I.R.S. employer identification number) |
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Skywalk Level
801 Walnut Street, Suite 200
Des Moines, IA
(Address of principal executive offices)
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50309
(Zip code) |
Registrants telephone number, including area code: (515) 281-1000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such files).
o Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer þ
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
o Yes þ No
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
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Shares outstanding |
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as of October 31, 2009 |
Class B Stock, par value $100
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29,849,187 |
PART IFINANCIAL INFORMATION
Item 1. Financial Statements
FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CONDITION
(In thousands, except shares)
(Unaudited)
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September 30, |
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December 31, |
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2009 |
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2008 |
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ASSETS |
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Cash and due from banks |
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$ |
26,897 |
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$ |
44,368 |
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Interest-bearing deposits |
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20,685 |
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|
152 |
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Federal funds sold |
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4,485,000 |
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3,425,000 |
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Investments |
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Trading securities (Note 3) |
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5,363,215 |
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2,151,485 |
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Available-for-sale securities include $0 pledged as collateral
at September 30, 2009 and December 31, 2008 that may be repledged (Note 4) |
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5,521,251 |
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3,839,980 |
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Held-to-maturity securities include $0 pledged as collateral at September 30, 2009 and
December 31, 2008 that may be repledged (estimated fair value of $5,812,549 and
$5,917,288 at September 30, 2009 and December 31, 2008) (Note 5) |
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5,743,500 |
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5,952,008 |
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Advances (Note 6) |
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36,303,074 |
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41,897,479 |
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Mortgage loans held for portfolio, net of allowance for credit losses on mortgage
loans of $775 at September 30, 2009 and $500 at December 31, 2008 (Note 7) |
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7,838,035 |
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10,684,910 |
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Accrued interest receivable |
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84,305 |
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92,620 |
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Premises and equipment, net |
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9,082 |
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8,550 |
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Derivative assets (Note 8) |
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5,266 |
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2,840 |
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Other assets |
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25,669 |
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29,915 |
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Total assets |
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$ |
65,425,979 |
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$ |
68,129,307 |
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LIABILITIES AND CAPITAL |
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LIABILITIES |
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Deposits |
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Interest-bearing |
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$ |
1,171,415 |
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$ |
1,389,642 |
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Noninterest-bearing demand |
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45,510 |
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106,828 |
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Total deposits |
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1,216,925 |
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1,496,470 |
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Consolidated obligations, net (Note 9) |
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Discount notes |
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12,874,240 |
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20,061,271 |
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Bonds (includes $4,308,501 at fair value under the fair value option at
September 30, 2009) |
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46,918,100 |
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42,722,473 |
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Total consolidated obligations, net |
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59,792,340 |
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62,783,744 |
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Mandatorily redeemable capital stock |
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17,504 |
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10,907 |
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Accrued interest payable |
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289,468 |
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320,271 |
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Affordable Housing Program (AHP) |
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40,421 |
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39,715 |
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Payable to REFCORP |
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9,026 |
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|
557 |
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Derivative liabilities (Note 8) |
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379,501 |
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435,015 |
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Other liabilities |
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294,630 |
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25,261 |
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Total liabilities |
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62,039,815 |
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65,111,940 |
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Commitments and contingencies (Note 13) |
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CAPITAL (Note 10) |
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Capital stock Class B putable ($100 par value) authorized, issued, and outstanding
29,518,733 and 27,809,271 shares at September 30, 2009 and December 31, 2008 |
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2,951,873 |
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2,780,927 |
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Retained earnings |
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458,386 |
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381,973 |
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Accumulated other comprehensive loss |
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Net unrealized loss on available-for-sale securities |
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(22,971 |
) |
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(144,271 |
) |
Employee retirement plans |
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(1,124 |
) |
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(1,262 |
) |
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Total capital |
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3,386,164 |
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3,017,367 |
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Total liabilities and capital |
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$ |
65,425,979 |
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$ |
68,129,307 |
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The accompanying notes are an integral part of these financial statements.
2
FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF INCOME
(In thousands)
(Unaudited)
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Three Months Ended
September 30, |
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Nine Months Ended
September 30, |
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2009 |
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2008 |
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2009 |
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2008 |
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INTEREST INCOME |
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Advances |
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$ |
148,880 |
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$ |
371,974 |
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$ |
535,131 |
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$ |
1,090,671 |
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Advance prepayment fees, net |
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|
3,471 |
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|
68 |
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6,719 |
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|
717 |
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Interest-bearing deposits |
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|
108 |
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4 |
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339 |
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63 |
|
Securities purchased under
agreements to resell |
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|
466 |
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1,625 |
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Federal funds sold |
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2,449 |
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|
18,294 |
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|
15,645 |
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|
64,726 |
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Investments |
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|
|
|
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|
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|
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|
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Trading securities |
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14,667 |
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49,936 |
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Available-for-sale securities |
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17,960 |
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|
31,695 |
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|
40,119 |
|
|
|
101,839 |
|
Held-to-maturity securities |
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|
42,541 |
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|
|
57,379 |
|
|
|
133,868 |
|
|
|
149,243 |
|
Mortgage loans |
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|
95,057 |
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|
132,980 |
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|
|
348,972 |
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|
399,789 |
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Loans to other FHLBanks |
|
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|
78 |
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|
|
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|
|
92 |
|
|
|
|
|
|
|
|
|
|
|
|
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Total interest income |
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325,599 |
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|
|
612,472 |
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|
1,132,354 |
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1,807,140 |
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INTEREST EXPENSE |
|
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|
|
|
|
|
|
|
|
|
|
|
|
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Consolidated obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Discount notes |
|
|
18,829 |
|
|
|
173,247 |
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|
|
126,539 |
|
|
|
490,812 |
|
Bonds |
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|
247,929 |
|
|
|
353,631 |
|
|
|
873,024 |
|
|
|
1,075,355 |
|
Deposits |
|
|
582 |
|
|
|
5,662 |
|
|
|
2,050 |
|
|
|
20,559 |
|
Borrowings from other FHLBanks |
|
|
|
|
|
|
|
|
|
|
21 |
|
|
|
7 |
|
Securities sold under agreements to
repurchase |
|
|
|
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|
1 |
|
|
|
|
|
|
|
1,961 |
|
Mandatorily redeemable capital stock |
|
|
117 |
|
|
|
265 |
|
|
|
199 |
|
|
|
1,081 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
267,457 |
|
|
|
532,806 |
|
|
|
1,001,833 |
|
|
|
1,589,775 |
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
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|
NET INTEREST INCOME |
|
|
58,142 |
|
|
|
79,666 |
|
|
|
130,521 |
|
|
|
217,365 |
|
Provision for credit losses on
mortgage loans |
|
|
91 |
|
|
|
|
|
|
|
341 |
|
|
|
|
|
|
|
|
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|
|
|
|
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|
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NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES |
|
|
58,051 |
|
|
|
79,666 |
|
|
|
130,180 |
|
|
|
217,365 |
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
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|
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|
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|
OTHER INCOME (LOSS) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service fees |
|
|
416 |
|
|
|
573 |
|
|
|
1,647 |
|
|
|
1,734 |
|
Net realized and unrealized (loss)
gain on trading securities |
|
|
(1,697 |
) |
|
|
|
|
|
|
52,056 |
|
|
|
|
|
Net gain (loss) on sale of
available-for-sale securities |
|
|
31,059 |
|
|
|
|
|
|
|
(11,710 |
) |
|
|
|
|
Net loss on bonds held at fair value |
|
|
(3,165 |
) |
|
|
|
|
|
|
(15,392 |
) |
|
|
|
|
Net gain on loans held for sale |
|
|
|
|
|
|
|
|
|
|
1,342 |
|
|
|
|
|
Net gain (loss) on derivatives and
hedging activities |
|
|
1,881 |
|
|
|
(2,143 |
) |
|
|
98,297 |
|
|
|
(12,516 |
) |
(Loss) gain on extinguishment of debt |
|
|
(28,567 |
) |
|
|
|
|
|
|
(80,925 |
) |
|
|
239 |
|
Other, net |
|
|
1,551 |
|
|
|
(4,994 |
) |
|
|
3,896 |
|
|
|
(3,743 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (loss) |
|
|
1,478 |
|
|
|
(6,564 |
) |
|
|
49,211 |
|
|
|
(14,286 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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OTHER EXPENSE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
6,874 |
|
|
|
6,432 |
|
|
|
21,053 |
|
|
|
19,409 |
|
Operating |
|
|
3,410 |
|
|
|
3,437 |
|
|
|
11,512 |
|
|
|
10,615 |
|
Federal Housing Finance Agency |
|
|
551 |
|
|
|
421 |
|
|
|
1,694 |
|
|
|
1,261 |
|
Office of Finance |
|
|
468 |
|
|
|
444 |
|
|
|
1,576 |
|
|
|
1,464 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense |
|
|
11,303 |
|
|
|
10,734 |
|
|
|
35,835 |
|
|
|
32,749 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE ASSESSMENTS |
|
|
48,226 |
|
|
|
62,368 |
|
|
|
143,556 |
|
|
|
170,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AHP |
|
|
3,948 |
|
|
|
5,099 |
|
|
|
11,739 |
|
|
|
13,939 |
|
REFCORP |
|
|
8,856 |
|
|
|
11,450 |
|
|
|
26,364 |
|
|
|
31,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assessments |
|
|
12,804 |
|
|
|
16,549 |
|
|
|
38,103 |
|
|
|
45,202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
|
$ |
35,422 |
|
|
$ |
45,819 |
|
|
$ |
105,453 |
|
|
$ |
125,128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
3
FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENT OF CHANGES IN CAPITAL
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Capital Stock |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Class B (putable) |
|
|
Retained |
|
|
Comprehensive |
|
|
Total |
|
|
|
Shares |
|
|
Par Value |
|
|
Earnings |
|
|
Loss |
|
|
Capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE DECEMBER 31, 2008 |
|
|
27,809 |
|
|
$ |
2,780,927 |
|
|
$ |
381,973 |
|
|
$ |
(145,533 |
) |
|
$ |
3,017,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of capital stock |
|
|
1,898 |
|
|
|
189,804 |
|
|
|
|
|
|
|
|
|
|
|
189,804 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase/redemption of capital stock |
|
|
(23 |
) |
|
|
(2,285 |
) |
|
|
|
|
|
|
|
|
|
|
(2,285 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net shares reclassified to mandatorily redeemable
capital stock |
|
|
(165 |
) |
|
|
(16,573 |
) |
|
|
|
|
|
|
|
|
|
|
(16,573 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
105,453 |
|
|
|
|
|
|
|
105,453 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain on
available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
185,824 |
|
|
|
185,824 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for gains
included in net income relating to sale of
available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(64,524 |
) |
|
|
(64,524 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee retirement plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
138 |
|
|
|
138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
226,891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends on capital stock (1.34% annualized) |
|
|
|
|
|
|
|
|
|
|
(29,040 |
) |
|
|
|
|
|
|
(29,040 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE SEPTEMBER 30, 2009 |
|
|
29,519 |
|
|
$ |
2,951,873 |
|
|
$ |
458,386 |
|
|
$ |
(24,095 |
) |
|
$ |
3,386,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
4
FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENT OF CHANGES IN CAPITAL
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Capital Stock |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Class B (putable) |
|
|
Retained |
|
|
Comprehensive |
|
|
Total |
|
|
|
Shares |
|
|
Par Value |
|
|
Earnings |
|
|
Loss |
|
|
Capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE DECEMBER 31, 2007 |
|
|
27,173 |
|
|
$ |
2,717,247 |
|
|
$ |
361,347 |
|
|
$ |
(26,371 |
) |
|
$ |
3,052,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of capital stock |
|
|
49,030 |
|
|
|
4,903,067 |
|
|
|
|
|
|
|
|
|
|
|
4,903,067 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase/redemption of capital stock |
|
|
(38,102 |
) |
|
|
(3,810,236 |
) |
|
|
|
|
|
|
|
|
|
|
(3,810,236 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net shares reclassified to mandatorily redeemable
capital stock |
|
|
(29 |
) |
|
|
(2,861 |
) |
|
|
|
|
|
|
|
|
|
|
(2,861 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
125,128 |
|
|
|
|
|
|
|
125,128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized loss on
available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(80,436 |
) |
|
|
(80,436 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee retirement plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
127 |
|
|
|
127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,819 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends on capital stock (4.17% annualized) |
|
|
|
|
|
|
|
|
|
|
(82,398 |
) |
|
|
|
|
|
|
(82,398 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE SEPTEMBER 30, 2008 |
|
|
38,072 |
|
|
$ |
3,807,217 |
|
|
$ |
404,077 |
|
|
$ |
(106,680 |
) |
|
$ |
4,104,614 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
5
FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30, |
|
|
|
2009 |
|
|
2008 |
|
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
Net income |
|
$ |
105,453 |
|
|
$ |
125,128 |
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
Net premiums, discounts, and basis adjustments on investments,
advances, mortgage loans, and consolidated obligations |
|
|
(33,799 |
) |
|
|
9,526 |
|
Concessions on consolidated obligation bonds |
|
|
3,395 |
|
|
|
6,082 |
|
Premises and equipment |
|
|
996 |
|
|
|
756 |
|
Other |
|
|
279 |
|
|
|
(128 |
) |
Provision for credit losses on mortgage loans |
|
|
341 |
|
|
|
|
|
Loss (gain) on extinguishment of debt |
|
|
80,925 |
|
|
|
(239 |
) |
Net change in fair value on trading securities |
|
|
(52,056 |
) |
|
|
|
|
Net loss on sale of available-for-sale securities |
|
|
11,710 |
|
|
|
|
|
Net change in fair value on bonds held at fair value |
|
|
15,392 |
|
|
|
|
|
Net gain on loans held for sale |
|
|
(1,342 |
) |
|
|
|
|
Net change in fair value on derivatives and hedging activities |
|
|
(84,618 |
) |
|
|
16,812 |
|
Net realized loss on disposal of premises and equipment |
|
|
4 |
|
|
|
12 |
|
Net change in: |
|
|
|
|
|
|
|
|
Accrued interest receivable |
|
|
8,398 |
|
|
|
7,904 |
|
Accrued interest on derivatives |
|
|
16,033 |
|
|
|
37,104 |
|
Other assets |
|
|
10,244 |
|
|
|
(2,160 |
) |
Accrued interest payable |
|
|
(27,694 |
) |
|
|
66,317 |
|
AHP liability and discount on AHP advances |
|
|
692 |
|
|
|
(203 |
) |
Payable to REFCORP |
|
|
8,878 |
|
|
|
5,170 |
|
Other liabilities |
|
|
(1,346 |
) |
|
|
(414 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments |
|
|
(43,568 |
) |
|
|
146,539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
61,885 |
|
|
|
271,667 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
6
FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CASH FLOWS (continued from previous page)
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30, |
|
|
|
2009 |
|
|
2008 |
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Net change in: |
|
|
|
|
|
|
|
|
Interest-bearing deposits |
|
|
171,967 |
|
|
|
(47 |
) |
Federal funds sold |
|
|
(1,060,000 |
) |
|
|
(251,000 |
) |
Trading securities: |
|
|
|
|
|
|
|
|
Proceeds from sales |
|
|
754,626 |
|
|
|
|
|
Purchases |
|
|
(3,844,300 |
) |
|
|
|
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
Proceeds from sales and maturities |
|
|
3,270,871 |
|
|
|
2,706,719 |
|
Purchases |
|
|
(4,638,468 |
) |
|
|
(3,405,971 |
) |
Held-to-maturity securities: |
|
|
|
|
|
|
|
|
Net decrease in short-term |
|
|
384,933 |
|
|
|
300,097 |
|
Proceeds from maturities |
|
|
1,082,735 |
|
|
|
493,070 |
|
Purchases |
|
|
(1,249,913 |
) |
|
|
(2,544,821 |
) |
Advances to members: |
|
|
|
|
|
|
|
|
Principal collected |
|
|
35,776,149 |
|
|
|
256,009,755 |
|
Originated |
|
|
(30,551,036 |
) |
|
|
(279,449,831 |
) |
Mortgage loans held for portfolio: |
|
|
|
|
|
|
|
|
Principal collected |
|
|
1,943,767 |
|
|
|
1,033,010 |
|
Originated or purchased |
|
|
(1,368,885 |
) |
|
|
(813,233 |
) |
Mortgage loans held for sale: |
|
|
|
|
|
|
|
|
Principal collected |
|
|
128,045 |
|
|
|
|
|
Proceeds from sales |
|
|
2,123,595 |
|
|
|
|
|
Additions to premises and equipment |
|
|
(1,717 |
) |
|
|
(937 |
) |
Proceeds from sale of premises and equipment |
|
|
185 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by investing activities |
|
|
2,922,554 |
|
|
|
(25,923,179 |
) |
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Net change in: |
|
|
|
|
|
|
|
|
Deposits |
|
|
(276,045 |
) |
|
|
494,003 |
|
Net decrease in securities sold under agreement to repurchase |
|
|
|
|
|
|
(200,000 |
) |
Net payments on derivative contracts with financing elements |
|
|
(7,787 |
) |
|
|
|
|
Net proceeds from issuance of consolidated obligations: |
|
|
|
|
|
|
|
|
Discount notes |
|
|
607,196,488 |
|
|
|
1,057,476,138 |
|
Bonds |
|
|
20,766,716 |
|
|
|
16,628,956 |
|
Payments for maturing, transferring and retiring consolidated obligations: |
|
|
|
|
|
|
|
|
Discount notes |
|
|
(614,333,936 |
) |
|
|
(1,037,228,631 |
) |
Bonds |
|
|
(16,495,849 |
) |
|
|
(11,993,496 |
) |
Proceeds from issuance of capital stock |
|
|
189,804 |
|
|
|
4,903,067 |
|
Net payments for repurchase/issuance of mandatorily redeemable capital stock |
|
|
(9,976 |
) |
|
|
(37,938 |
) |
Payments for repurchase/redemption of capital stock |
|
|
(2,285 |
) |
|
|
(3,810,236 |
) |
Cash dividends paid |
|
|
(29,040 |
) |
|
|
(82,398 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used) provided by financing activities |
|
|
(3,001,910 |
) |
|
|
26,149,465 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and due from banks |
|
|
(17,471 |
) |
|
|
497,953 |
|
Cash and due from banks at beginning of the period |
|
|
44,368 |
|
|
|
58,675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks at end of the period |
|
$ |
26,897 |
|
|
$ |
556,628 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures |
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
Interest |
|
$ |
1,552,789 |
|
|
$ |
1,529,511 |
|
AHP |
|
$ |
11,135 |
|
|
$ |
14,105 |
|
REFCORP |
|
$ |
17,486 |
|
|
$ |
26,093 |
|
Mortgage loans held for portfolio transferred to mortgage loans held for sale |
|
$ |
2,413,843 |
|
|
$ |
|
|
Mortgage loans held for sale transferred to mortgage loans held for portfolio |
|
$ |
162,800 |
|
|
$ |
|
|
Unpaid principal balance transferred from mortgage loans held for
portfolio to
real estate owned |
|
$ |
11,896 |
|
|
$ |
9,460 |
|
The accompanying notes are an integral part of these financial statements.
7
FEDERAL HOME LOAN BANK OF DES MOINES
CONDENSED NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED)
Background Information
The Federal Home Loan Bank of Des Moines (the Bank) is a federally chartered
corporation that is exempt from all federal, state, and local taxation except real property taxes
and is one of 12 district Federal Home Loan Banks (FHLBanks). The FHLBanks were created under the
authority of the Federal Home Loan Bank Act of 1932 (FHLBank Act), which was amended by the Housing
and Economic Recovery Act of 2008 (Housing Act). The Federal Housing Finance Agency (Finance
Agency) supervises and regulates the FHLBanks and the FHLBanks Office of Finance (Office of
Finance), as well as Federal National Mortgage Association (Fannie Mae) and Federal Home Loan
Mortgage Corporation (Freddie Mac). The Finance Agencys principal purpose is to ensure the
FHLBanks operate in a safe and sound manner. In addition, the Finance Agency ensures the FHLBanks
carry out their housing finance mission and remain adequately capitalized. The Finance Agency
establishes policies and regulations governing the operations of the FHLBanks. Each FHLBank
operates as a separate entity with its own management, employees, and board of directors.
The FHLBanks serve the public by enhancing the availability of funds (advances and mortgage
loans) for residential mortgages and targeted community development. The Bank provides a readily
available, low cost source of funds to its member institutions and eligible housing associates in
Iowa, Minnesota, Missouri, North Dakota, and South Dakota. Commercial banks, savings institutions,
credit unions, and insurance companies may apply for membership. State and local housing associates
that meet certain statutory criteria may also borrow from the Bank; while eligible to borrow,
housing associates are not members of the Bank and, as such, are not permitted to hold capital
stock.
The Bank is a cooperative. This means the Bank is owned by its customers, whom the Bank calls
members. As a condition of membership in the Bank, all members must purchase and maintain
membership capital stock based on a percentage of their total assets as of the preceding December
31st. Each member is also required to purchase and maintain activity-based capital stock
to support certain business activities with the Bank. The Bank conducts business with its
stockholders in the normal course of business.
8
Note 1Basis of Presentation
The accompanying unaudited financial statements of the Bank for the three and nine months
ended September 30, 2009, have been prepared in accordance with accounting principles generally
accepted in the United States of America (GAAP) for interim financial information. Accordingly, it
does not include all of the information required by GAAP for full year information and should be
read in conjunction with the audited financial statements for the year ended December 31, 2008,
which are contained in the Banks annual report on Form 10-K filed with the Securities and Exchange
Commission (SEC) under the Securities Exchange Act of 1934 on March 13, 2009 (Form 10-K). In the
opinion of management, the unaudited financial information is complete and reflects all
adjustments, consisting of normal recurring adjustments, for a fair statement of results for the
interim periods. The presentation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those estimates. The results of
operations for interim periods are not necessarily indicative of the results to be expected for the
full year ending December 31, 2009.
Descriptions of the Banks significant accounting policies are included in Note 1 Summary
of Significant Accounting Policies of the Banks 2008 audited financial statements in the Form
10-K, with the exception of one change noted below.
Mortgage Loans Held for Sale. During the second quarter of 2009 the Bank classified certain
mortgage loans as held for sale and reported them at the lower of cost basis or fair value. Cost
basis included principal amount outstanding and unamortized premiums, discounts, and basis
adjustments. At the time of sale, all unamortized premiums, discounts, and basis adjustments were
recognized in the gain/loss calculation. For more information related to the sale of the mortgage
loans held for sale see Note 7 Mortgage Loans Held for Portfolio.
Reclassifications. During the first quarter of 2009 the Bank enhanced its calculation of
adjusted net interest income by segment. Prior period amounts were reclassified to be consistent
with the enhanced calculation presented at September 30, 2009. Refer to Note 11 Segment
Information for further information.
Subsequent Events. The Bank has evaluated events and transactions for potential recognition or
disclosure in the financial statements through the time of filing its third quarter 2009 Form 10-Q
with the SEC on November 12, 2009.
9
Note 2Recently Issued and Adopted Accounting Guidance
Measuring Liabilities at Fair Value. On August 28, 2009, the Financial Accounting Standards
Board (FASB) issued amended guidance for the fair value measurement of liabilities. The update
provides clarification in circumstances in which a quoted price in an active market for the
identical liability is not available, a reporting entity is required to measure fair value using
one or more of the following techniques: (i) a valuation technique that uses: (a) the quoted price
of the identical liability when traded as an asset; (b) quoted prices for similar liabilities or
similar liabilities when traded as assets; (ii) another valuation technique that is consistent with
the principles of this topic. This guidance is effective for the first reporting period beginning
after issuance (October 1, 2009 for the Bank). The Bank does not believe the adoption of this
guidance will have a material effect on the Banks financial condition, results of operations, or
cash flows.
Codification of Accounting Standards. On June 29, 2009, the FASB established FASBs Accounting
Standards Codification (Codification) as the single source of authoritative GAAP recognized by the
FASB to be applied by non-governmental entities. SEC rules and interpretative releases are also
sources of authoritative GAAP for SEC registrants. This guidance modifies the GAAP hierarchy to
include only two levels of GAAP: authoritative and non-authoritative. In addition, the FASB no
longer considers new accounting standard updates as authoritative in their own right. Instead, new
accounting standard updates will serve only to update the Codification, provide background
information about the guidance, and provide the basis for conclusions regarding changes in the
Codification. The Codification is effective for interim and annual periods ending after September
15, 2009. The Bank adopted the Codification for the interim period ended September 30, 2009. As the
Codification is not intended to change or alter previous GAAP, its adoption did not affect the
Banks financial condition, results of operations, or cash flows.
Accounting for the Consolidation of Variable Interest Entities. On June 12, 2009, the FASB
issued guidance to improve financial reporting by enterprises involved with variable interest
entities (VIEs) and to provide more relevant and reliable information to users of financial
statements. This guidance amends the manner in which entities evaluate whether consolidation is
required for VIEs. An entity must first perform a qualitative analysis in determining whether it
must consolidate a VIE, and if the qualitative analysis is not determinative, the entity must
perform a quantitative analysis. The guidance also requires an entity continually evaluate VIEs for
consolidation, rather than making such an assessment based upon the occurrence of triggering
events. Additionally, the guidance requires enhanced disclosures about how an entitys involvement
with a VIE affects its financial statements and its exposure to risks. This guidance is effective
as of the beginning of each reporting entitys first annual reporting period that begins after
November 15, 2009 (January 1, 2010 for the Bank), for interim periods within that first annual
reporting period and for interim and annual reporting periods thereafter. Earlier application is
prohibited. The Bank has not yet determined the effect that the adoption of this guidance will have
on its financial condition, results of operations, or cash flows.
10
Accounting for Transfers of Financial Assets. On June 12, 2009, the FASB issued guidance
intended to improve the relevance, representational faithfulness, and comparability of the
information a reporting entity provides in its financial reports about a transfer of financial
assets; the effects of a transfer on its financial position, financial performance, and cash flows;
and a transferors continuing involvement in transferred financial assets. Key provisions of the
guidance include: (i) the removal of the concept of qualifying special purpose entities; (ii) the
introduction of the concept of a participating interest, in circumstances in which a portion of a
financial asset has been transferred; and (iii) the requirement that in order to qualify for sale
accounting, the transferor must evaluate whether it maintains effective control over transferred
financial assets either directly or indirectly. The guidance also requires enhanced disclosures
about transfers of financial assets and a transferors continuing involvement. This guidance is
effective as of the beginning of each reporting entitys first annual reporting period that begins
after November 15, 2009 (January 1, 2010 for the Bank), for interim periods within that first
annual reporting period and for interim and annual reporting periods thereafter. Earlier
application is prohibited. The Bank has not yet determined the effect that the adoption of this
guidance will have on its financial condition, results of operations, or cash flows.
Subsequent Events. On May 28, 2009, the FASB issued guidance establishing general standards of
accounting for and disclosure of events occurring after the balance sheet date but before financial
statements are issued or available to be issued. This guidance sets forth: (i) the period after the
balance sheet date during which management of a reporting entity should evaluate events or
transactions that may occur for potential recognition or disclosure in the financial statements;
(ii) the circumstances under which an entity should recognize events or transactions occurring
after the balance sheet date in its financial statements; and (iii) the disclosures an entity
should make about events or transactions occurring after the balance sheet date, including
disclosure of the date through which an entity has evaluated subsequent events and whether that
represents the date the financial statements were issued or available to be issued. This guidance
does not apply to subsequent events or transactions within the scope of other applicable GAAP that
provide different guidance on the accounting treatment for subsequent events or transactions. This
guidance is effective for interim and annual financial periods ending after June 15, 2009. The Bank
adopted this guidance effective June 30, 2009.
Recognition and Presentation of Other-Than-Temporary Impairments. On April 9, 2009, the FASB
issued guidance amending the other-than-temporary impairment (OTTI) guidance for debt securities to
make the guidance more operational and to improve the presentation and disclosure of OTTI on debt
securities in the financial statements. This OTTI guidance clarifies the interaction of the factors
to be considered when determining whether a debt security is other-than-temporarily impaired and
changes the presentation and calculation of the OTTI on debt securities recognized in earnings in
the financial statements. This guidance does not amend existing recognition and measurement
guidance related to OTTI of equity securities. This guidance expands and increases the frequency of
existing disclosures about OTTI for debt and equity securities and requires new disclosures to help
users of financial statements understand the significant inputs used in determining a credit loss,
as well as a rollforward of that amount each period.
11
If the fair value of a debt security is less than its amortized cost basis at the measurement
date an entity is required to assess whether (i) it has the intent to sell the debt security or
(ii) it is more likely than not that it will be required to sell the debt security before its
anticipated recovery. If either of these conditions is met, an OTTI on the security must be
recognized.
In instances in which a determination is made that a credit loss (the difference between the
present value of the cash flows expected to be collected and the amortized cost basis) exists but
the entity does not intend to sell the debt security and it is not more likely than not that the
entity will be required to sell the debt security before the anticipated recovery of its remaining
amortized cost basis (i.e., the amortized cost basis less any current-period credit loss), the OTTI
guidance changes the presentation and amount of the OTTI recognized in the Statements of Income. In
these instances, the OTTI is separated into (i) the amount of the total OTTI related to the credit
loss, and (ii) the amount of the total OTTI related to all other factors. The amount of the total
OTTI related to the credit loss is recognized in earnings. The amount of the total OTTI related to
all other factors is recognized in accumulated other comprehensive loss. Subsequent
non-OTTI-related increases and decreases in the fair value of available-for-sale securities will be
included in accumulated other comprehensive loss. The OTTI recognized in accumulated other
comprehensive loss for debt securities classified as held-to-maturity will be amortized over the
remaining life of the debt security as an increase in the carrying value of the security (with no
effect on earnings unless the security is subsequently sold or there is additional OTTI
recognized). The total OTTI is presented in the Statements of Income with an offset for the amount
of the total OTTI recognized in accumulated other comprehensive loss. Previously, if an impairment
was determined to be other-than-temporary, an impairment loss was recognized in earnings in an
amount equal to the entire difference between the securitys amortized cost basis and its fair
value at the balance sheet date of the reporting period for which the assessment was made. The new
presentation provides additional information about the amounts the entity does not expect to
collect related to a debt security. The Bank adopted this OTTI guidance effective January 1, 2009
and recognized no cumulative-effect adjustment because it had not previously recognized OTTI.
Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly. On April 9, 2009, the
FASB issued guidance which clarifies the approach to, and provides additional factors to consider
in estimating fair value when the volume and level of activity for the asset or liability have
significantly decreased. It also includes guidance on identifying circumstances indicating a
transaction is not orderly. The guidance is effective and should be applied prospectively for
financial statements issued for interim and annual reporting periods ending after June 15, 2009,
with early adoption permitted for reporting periods ending after March 15, 2009. If an entity
elected to early adopt this guidance, it must also have concurrently adopted the OTTI guidance
discussed in the previous paragraphs. The Bank elected to early adopt this guidance effective
January 1, 2009. Its adoption did not have a material effect on the Banks financial condition,
results of operations, or cash flows.
12
Interim Disclosures about Fair Value of Financial Instruments. On April 9, 2009, the FASB
issued guidance to require disclosures about the fair value of financial instruments, including
disclosure of the method(s) and significant assumptions used to estimate the fair value of
financial instruments, in interim financial statements as well as in annual financial statements.
Previously, these disclosures were required only in annual financial statements. The guidance is
effective and should be applied prospectively for financial statements issued for interim and
annual reporting periods ending after June 15, 2009, with early adoption permitted for reporting
periods ending after March 15, 2009. An entity may early adopt this guidance only if it also
concurrently adopted guidance discussed in the previous paragraphs regarding fair value and the
OTTI guidance. The Bank elected to early adopt this guidance effective January 1, 2009. Its
adoption resulted in increased interim financial statement disclosures, but did not affect the
Banks financial condition, results of operations, or cash flows.
Enhanced Disclosures about Derivative Instruments and Hedging Activities. On March 19, 2008,
the FASB issued guidance which is intended to improve financial reporting about derivative
instruments and hedging activities by requiring enhanced disclosures to enable investors to better
understand their effects on an entitys financial position, financial performance, and cash flows.
This guidance is effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early adoption allowed. The Bank adopted this guidance
effective January 1, 2009. Its adoption resulted in increased financial statement disclosures.
Note 3Trading Securities
Major Security Types. Trading securities were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Non-mortgage-backed securities |
|
|
|
|
|
|
|
|
TLGP1 |
|
$ |
5,111,348 |
|
|
$ |
2,151,485 |
|
Taxable municipal bonds2 |
|
|
251,867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,363,215 |
|
|
$ |
2,151,485 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Temporary Liquidity Guarantee Program (TLGP) securities represented corporate
debentures of the issuing party that are backed by the full faith and credit of the U.S. Government. |
|
2 |
|
Taxable municipal bonds represented investments in Build America Bonds. |
13
The following table summarizes net realized and unrealized (loss) gain on trading
securities (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gain on
sale of trading
securities |
|
$ |
3,038 |
|
|
$ |
|
|
|
$ |
3,626 |
|
|
$ |
|
|
Unrealized holding
(loss) gain on
trading securities |
|
|
(4,735 |
) |
|
|
|
|
|
|
48,430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized and
unrealized (loss)
gain on trading
securities |
|
$ |
(1,697 |
) |
|
$ |
|
|
|
$ |
52,056 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 4Available-for-Sale Securities
Major Security Types. Available-for-sale securities at September 30, 2009 were as follows
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Recorded in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Hedging |
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated |
|
|
|
Cost |
|
|
Adjustments |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
Non-mortgage-backed
securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TLGP1 |
|
$ |
563,688 |
|
|
$ |
44 |
|
|
$ |
3,477 |
|
|
$ |
|
|
|
$ |
567,209 |
|
Government-sponsored
enterprise
obligations2 |
|
|
456,093 |
|
|
|
2,655 |
|
|
|
7,299 |
|
|
|
|
|
|
|
466,047 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-mortgage-backed
securities |
|
|
1,019,781 |
|
|
|
2,699 |
|
|
|
10,776 |
|
|
|
|
|
|
|
1,033,256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored
enterprise3 |
|
|
4,521,743 |
|
|
|
|
|
|
|
28,081 |
|
|
|
61,829 |
|
|
|
4,487,995 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,541,524 |
|
|
$ |
2,699 |
|
|
$ |
38,857 |
|
|
$ |
61,829 |
|
|
$ |
5,521,251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
Available-for-sale securities at December 31, 2008 were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State or local housing
agency
obligations4 |
|
$ |
580 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored
enterprise3 |
|
|
3,983,671 |
|
|
|
|
|
|
|
144,271 |
|
|
|
3,839,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,984,251 |
|
|
$ |
|
|
|
$ |
144,271 |
|
|
$ |
3,839,980 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
TLGP securities represented corporate debentures of the issuing party that are
backed by the full faith and credit of the U.S. Government. |
|
2 |
|
GSE obligations represented Tennessee Valley Authority (TVA) and Federal Farm Credit
Bank (FFCB) bonds. |
|
3 |
|
GSE mortgage-backed securities (MBS) represented Fannie Mae and Freddie Mac securities. |
|
4 |
|
State or local housing agency obligations represented Housing Finance Agency (HFA)
bonds that were purchased by the Bank from housing associates in the Banks district. |
The following table summarizes the available-for-sale securities with unrealized losses
at September 30, 2009. The unrealized losses are aggregated by major security type and the length
of time that individual securities have been in a continuous unrealized loss position (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months |
|
|
12 Months or More |
|
|
Total |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored
enterprise |
|
$ |
723,071 |
|
|
$ |
4,189 |
|
|
$ |
3,043,954 |
|
|
$ |
57,640 |
|
|
$ |
3,767,025 |
|
|
$ |
61,829 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
The following table summarizes the available-for-sale securities with unrealized losses at
December 31, 2008. The unrealized losses are aggregated by major security type and the length of
time that individual securities have been in a continuous unrealized loss position (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months |
|
|
12 Months or More |
|
|
Total |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored
enterprise |
|
$ |
1,487,246 |
|
|
$ |
45,639 |
|
|
$ |
2,352,154 |
|
|
$ |
98,632 |
|
|
$ |
3,839,400 |
|
|
$ |
144,271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemption Terms. The following table summarizes the amortized cost and estimated fair value
of available-for-sale securities categorized by contractual maturity (dollars in thousands).
Expected maturities of some securities and MBS may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call or prepayment fees.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
|
December 31, 2008 |
|
|
|
Amortized |
|
|
Estimated |
|
|
Amortized |
|
|
Estimated |
|
Year of Maturity |
|
Cost |
|
|
Fair Value |
|
|
Cost |
|
|
Fair Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due after one year
through five years |
|
$ |
573,411 |
|
|
$ |
577,246 |
|
|
$ |
|
|
|
$ |
|
|
Due after five years
through ten years |
|
|
390,967 |
|
|
|
399,387 |
|
|
|
|
|
|
|
|
|
Due after ten years |
|
|
55,403 |
|
|
|
56,623 |
|
|
|
580 |
|
|
|
580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,019,781 |
|
|
|
1,033,256 |
|
|
|
580 |
|
|
|
580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
|
4,521,743 |
|
|
|
4,487,995 |
|
|
|
3,983,671 |
|
|
|
3,839,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,541,524 |
|
|
$ |
5,521,251 |
|
|
$ |
3,984,251 |
|
|
$ |
3,839,980 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortized cost of the Banks MBS classified as available-for-sale includes net discounts
of $1.8 million and $7.3 million at September 30, 2009 and December 31, 2008.
Gains and Losses on Sales. The Bank sold U.S. Treasury obligations with a total par value of
$1.9 billion and $2.7 billion out of its available-for-sale portfolio and recognized a gain of
$31.1 million and a loss of $11.7 million in other income (loss) during the three and nine months
ended September 30, 2009. There were no sales of available-for-sale securities during the three and
nine months ended September 30, 2008.
16
Other-than-Temporary Impairment Analysis on Available-for-Sale Securities. The Bank evaluates
its individual available-for-sale securities in an unrealized loss position for OTTI on at least a
quarterly basis. At September 30, 2009 the Banks available-for-sale securities portfolio consisted
of TLGP securities, GSE debt obligations, and GSE MBS that were all guaranteed by either the U.S.
Government or a GSE. This portfolio has experienced unrealized losses due to interest rate
volatility, illiquidity in the marketplace, and credit deterioration in the U.S. mortgage markets.
However, the decline is considered temporary as the Bank expects to recover the entire amortized
cost basis on its available-for-sale securities due to the U.S. Government or GSE guarantees. The
Bank does not intend to sell these securities, and it is not more likely than not that the Bank
will be required to sell these securities, before its anticipated recovery of each securitys
remaining amortized cost basis.
Note 5Held-to-Maturity Securities
Major Security Types. Held-to-maturity securities at September 30, 2009 were as follows
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Negotiable certificates of deposit |
|
$ |
450,000 |
|
|
$ |
900 |
|
|
$ |
|
|
|
$ |
450,900 |
|
Government-sponsored enterprise
obligations1 |
|
|
313,302 |
|
|
|
13,241 |
|
|
|
|
|
|
|
326,543 |
|
State or local housing agency
obligations2 |
|
|
124,878 |
|
|
|
4,052 |
|
|
|
|
|
|
|
128,930 |
|
TLGP3 |
|
|
1,250 |
|
|
|
31 |
|
|
|
|
|
|
|
1,281 |
|
Other4 |
|
|
6,627 |
|
|
|
138 |
|
|
|
|
|
|
|
6,765 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-mortgage-backed securities |
|
|
896,057 |
|
|
|
18,362 |
|
|
|
|
|
|
|
914,419 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored enterprise5 |
|
|
4,731,670 |
|
|
|
97,312 |
|
|
|
38,192 |
|
|
|
4,790,790 |
|
U.S. government
agency-guaranteed6 |
|
|
45,048 |
|
|
|
28 |
|
|
|
465 |
|
|
|
44,611 |
|
MPF shared funding |
|
|
34,813 |
|
|
|
|
|
|
|
1,157 |
|
|
|
33,656 |
|
Other7 |
|
|
35,912 |
|
|
|
|
|
|
|
6,839 |
|
|
|
29,073 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities |
|
|
4,847,443 |
|
|
|
97,340 |
|
|
|
46,653 |
|
|
|
4,898,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,743,500 |
|
|
$ |
115,702 |
|
|
$ |
46,653 |
|
|
$ |
5,812,549 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
Held-to-maturity securities at December 31, 2008 were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper |
|
$ |
384,757 |
|
|
$ |
146 |
|
|
$ |
1 |
|
|
$ |
384,902 |
|
State or local housing agency
obligations2 |
|
|
92,765 |
|
|
|
1,878 |
|
|
|
80 |
|
|
|
94,563 |
|
Other4 |
|
|
6,906 |
|
|
|
166 |
|
|
|
|
|
|
|
7,072 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-mortgage-backed securities |
|
|
484,428 |
|
|
|
2,190 |
|
|
|
81 |
|
|
|
486,537 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored enterprise5 |
|
|
5,329,884 |
|
|
|
64,310 |
|
|
|
87,540 |
|
|
|
5,306,654 |
|
U.S. government
agency-guaranteed6 |
|
|
52,006 |
|
|
|
|
|
|
|
981 |
|
|
|
51,025 |
|
MPF shared funding |
|
|
47,156 |
|
|
|
|
|
|
|
2,573 |
|
|
|
44,583 |
|
Other7 |
|
|
38,534 |
|
|
|
|
|
|
|
10,045 |
|
|
|
28,489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities |
|
|
5,467,580 |
|
|
|
64,310 |
|
|
|
101,139 |
|
|
|
5,430,751 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,952,008 |
|
|
$ |
66,500 |
|
|
$ |
101,220 |
|
|
$ |
5,917,288 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
GSE obligations represented TVA and FFCB bonds. |
|
2 |
|
State or local housing agency obligations represented HFA bonds that were purchased by the Bank from housing
associates in the Banks district. |
|
3 |
|
TLGP securities represented corporate debentures issued by the Banks members that are backed by the full faith
and credit of the U.S. Government. |
|
4 |
|
Other non-MBS investments represented investments in municipal bonds and Small Business Investment Company. |
|
5 |
|
GSE MBS represented Fannie Mae and Freddie Mac securities. |
|
6 |
|
U.S. government agency-guaranteed MBS represented Government National Mortgage Association securities and Small
Business Administration (SBA) Pool Certificates. SBA Pool Certificates represent undivided interests in pools of the
guaranteed portions of SBA loans. The SBAs guarantee of the Pool Certificates is backed by the full faith and credit of the
U.S. Government. |
|
7 |
|
Other MBS investments represented private-label MBS, which are backed by prime loans. |
18
The following table summarizes the held-to-maturity securities with unrealized losses at
September 30, 2009. The unrealized losses are aggregated by major security type and the length of
time that individual securities have been in a continuous unrealized loss position (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months |
|
|
12 Months or More |
|
|
Total |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored
enterprise |
|
$ |
530,840 |
|
|
$ |
4,872 |
|
|
$ |
1,890,805 |
|
|
$ |
33,320 |
|
|
$ |
2,421,645 |
|
|
$ |
38,192 |
|
U.S. government
agency-guaranteed |
|
|
11,589 |
|
|
|
67 |
|
|
|
31,682 |
|
|
|
398 |
|
|
|
43,271 |
|
|
|
465 |
|
MPF shared funding |
|
|
|
|
|
|
|
|
|
|
33,656 |
|
|
|
1,157 |
|
|
|
33,656 |
|
|
|
1,157 |
|
Other |
|
|
|
|
|
|
|
|
|
|
29,073 |
|
|
|
6,839 |
|
|
|
29,073 |
|
|
|
6,839 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
542,429 |
|
|
$ |
4,939 |
|
|
$ |
1,985,216 |
|
|
$ |
41,714 |
|
|
$ |
2,527,645 |
|
|
$ |
46,653 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
The following table summarizes the held-to-maturity securities with unrealized losses at
December 31, 2008. The unrealized losses are aggregated by major security type and the length of
time that individual securities have been in a continuous unrealized loss position (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months |
|
|
12 Months or More |
|
|
Total |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-mortgage-backed
securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper |
|
$ |
99,903 |
|
|
$ |
1 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
99,903 |
|
|
$ |
1 |
|
State or local
housing agency
obligations |
|
|
19,920 |
|
|
|
80 |
|
|
|
|
|
|
|
|
|
|
|
19,920 |
|
|
|
80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
119,823 |
|
|
|
81 |
|
|
|
|
|
|
|
|
|
|
|
119,823 |
|
|
|
81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored
enterprise |
|
|
1,933,043 |
|
|
|
61,049 |
|
|
|
653,825 |
|
|
|
26,491 |
|
|
|
2,586,868 |
|
|
|
87,540 |
|
U.S. government
agency-guaranteed |
|
|
47,939 |
|
|
|
901 |
|
|
|
3,085 |
|
|
|
80 |
|
|
|
51,024 |
|
|
|
981 |
|
MPF shared funding |
|
|
|
|
|
|
|
|
|
|
44,583 |
|
|
|
2,573 |
|
|
|
44,583 |
|
|
|
2,573 |
|
Other |
|
|
321 |
|
|
|
2 |
|
|
|
28,168 |
|
|
|
10,043 |
|
|
|
28,489 |
|
|
|
10,045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,981,303 |
|
|
|
61,952 |
|
|
|
729,661 |
|
|
|
39,187 |
|
|
|
2,710,964 |
|
|
|
101,139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,101,126 |
|
|
$ |
62,033 |
|
|
$ |
729,661 |
|
|
$ |
39,187 |
|
|
$ |
2,830,787 |
|
|
$ |
101,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
Redemption Terms. The following table summarizes the amortized cost and estimated fair value
of held-to-maturity securities by contractual maturity (dollars in thousands). Expected maturities
of some securities and MBS may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment fees.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
|
December 31, 2008 |
|
|
|
Amortized |
|
|
|
|
|
|
Amortized |
|
|
|
|
Year of Maturity |
|
Cost |
|
|
Fair Value |
|
|
Cost |
|
|
Fair Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less |
|
$ |
452,989 |
|
|
$ |
454,026 |
|
|
$ |
384,757 |
|
|
$ |
384,902 |
|
Due after one year through five years |
|
|
1,250 |
|
|
|
1,281 |
|
|
|
2,989 |
|
|
|
3,154 |
|
Due after five years through ten years |
|
|
2,600 |
|
|
|
2,646 |
|
|
|
3,205 |
|
|
|
3,261 |
|
Due after ten years |
|
|
439,218 |
|
|
|
456,466 |
|
|
|
93,477 |
|
|
|
95,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
896,057 |
|
|
|
914,419 |
|
|
|
484,428 |
|
|
|
486,537 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
|
4,847,443 |
|
|
|
4,898,130 |
|
|
|
5,467,580 |
|
|
|
5,430,751 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,743,500 |
|
|
$ |
5,812,549 |
|
|
$ |
5,952,008 |
|
|
$ |
5,917,288 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortized cost of the Banks MBS classified as held-to-maturity included net discounts of
$18.5 million and $22.6 million at September 30, 2009 and December 31, 2008.
Other-than-Temporary Impairment Analysis on Held-to-Maturity Securities. The Bank evaluates
its individual held-to-maturity securities in an unrealized loss position for OTTI on at least a
quarterly basis. As part of its securities evaluation for OTTI, the Bank considers its intent to
sell each debt security and whether it is more likely than not that it will be required to sell the
debt security before its anticipated recovery. If either of these conditions is met, the Bank
recognizes an OTTI in earnings equal to the entire difference between the securitys amortized cost
basis and its fair value at the balance sheet date. For securities in an unrealized loss position
meeting neither of these conditions, the Bank performs analyses to determine if any of these
securities are other-than-temporarily impaired.
To support consistency among the FHLBanks, the FHLBanks formed an OTTI Governance Committee
with the responsibility for reviewing and approving the key modeling assumptions, inputs, and
methodologies to be used by the FHLBanks to generate cash flow projections used in analyzing credit
losses and determining OTTI for private-label MBS. In accordance with this methodology, the Bank
may engage another designated FHLBank to perform the cash flow analysis underlying its OTTI
determination. In order to promote consistency in the application of the assumptions, inputs, and
implementation of the OTTI methodology, the FHLBanks established control procedures whereby the
FHLBanks performing the cash flow analysis select a sample group of private-label MBS and each
perform cash flow analyses on all such test MBS, using the assumptions approved by the OTTI
Governance Committee. These FHLBanks exchange and discuss the results and make any adjustments
necessary to achieve consistency among their respective cash flow models.
21
Utilizing this methodology, the Bank is responsible for making its own determination of
impairment, which includes determining the reasonableness of assumptions, inputs, and methodologies
used. At September 30, 2009 the Bank obtained its cash flow analysis from its designated FHLBanks
on all five of its private-label MBS. The cash flow analysis uses two third-party models. The first
model considers borrower characteristics and the particular attributes of the loans underlying the
Banks private-label MBS, in conjunction with assumptions about future changes in home prices and
interest rates, to project prepayments, defaults, and loss severities. A significant input to the
first model is the forecast of future housing price changes for the relevant states and core based
statistical areas (CBSAs), which are based upon an assessment of the individual housing markets.
CBSA refers collectively to metropolitan and micropolitan statistical areas as defined by the U.S.
Office of Management and Budget; as currently defined, a CBSA must contain at least one urban area
with a population of 10,000 or more. The Banks housing price forecast assumed CBSA level
current-to-trough home price declines ranging from zero percent to 20 percent over the next 9 to 15
months. Thereafter, home prices are projected to increase zero percent in the first six months, 0.5
percent in the next six months, three percent in the second year, and four percent in each
subsequent year.
The month-by-month projections of future loan performance derived from the first model, which
reflect projected prepayments, defaults, and loss severities, are then input into a second model
that allocates the projected loan level cash flows and losses to the various security classes in
the securitization structure in accordance with its prescribed cash flow and loss allocation rules.
If this estimate results in a present value of expected cash flows that is less than the amortized
cost basis of the security (that is, a credit loss exists), an OTTI is considered to have occurred.
If there is no credit loss and the Bank does not intend to sell or it is not more likely than not
it will be required to sell, any impairment is considered temporary.
At September 30, 2009 the Banks private-label MBS cash flow analysis did not project any
credit losses and therefore, no OTTI was considered to have occurred. The remainder of the Banks
held-to-maturity securities portfolio has experienced unrealized losses due to interest rate
volatility, illiquidity in the marketplace, and credit deterioration in the U.S. mortgage markets.
However, the decline is considered temporary as the Bank expects to recover the entire amortized
cost basis on its held-to-maturity securities in an unrealized loss position. The Bank does not
intend to sell these securities, and it is not more likely than not that the Bank will be required
to sell these securities, before its anticipated recovery of the remaining amortized cost basis. As
a result of the Banks analysis on the held-to-maturity securities portfolio, no OTTI was required
to be taken.
22
Note 6Advances
Members and eligible housing associates use the Banks various advance programs as sources of
funding for mortgage lending, affordable housing and other community lending (including economic
development), and general asset-liability management.
Redemption Terms. The following table shows the Banks advances outstanding (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
|
December 31, 2008 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Interest |
|
|
|
|
|
|
Interest |
|
Year of Maturity |
|
Amount |
|
|
Rate % |
|
|
Amount |
|
|
Rate % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overdrawn demand deposit accounts |
|
$ |
424 |
|
|
|
|
|
|
$ |
623 |
|
|
|
|
|
Due in one year or less |
|
|
8,053,840 |
|
|
|
2.69 |
|
|
|
9,332,574 |
|
|
|
2.70 |
|
Due after one year through two years |
|
|
5,255,178 |
|
|
|
3.11 |
|
|
|
5,212,502 |
|
|
|
3.97 |
|
Due after two years through three years |
|
|
4,561,309 |
|
|
|
2.27 |
|
|
|
3,656,941 |
|
|
|
3.45 |
|
Due after three years through four
years |
|
|
5,871,447 |
|
|
|
1.66 |
|
|
|
5,014,300 |
|
|
|
2.25 |
|
Due after four years through five years |
|
|
1,269,647 |
|
|
|
3.17 |
|
|
|
4,893,217 |
|
|
|
2.37 |
|
Thereafter |
|
|
10,425,989 |
|
|
|
3.51 |
|
|
|
12,552,790 |
|
|
|
3.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total par value |
|
|
35,437,834 |
|
|
|
2.78 |
|
|
|
40,662,947 |
|
|
|
3.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitment fees |
|
|
|
|
|
|
|
|
|
|
* |
|
|
|
|
|
Discounts on AHP advances |
|
|
(20 |
) |
|
|
|
|
|
|
(34 |
) |
|
|
|
|
Premiums |
|
|
325 |
|
|
|
|
|
|
|
380 |
|
|
|
|
|
Discounts |
|
|
(4 |
) |
|
|
|
|
|
|
(9 |
) |
|
|
|
|
Hedging fair value adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative fair value gain |
|
|
756,657 |
|
|
|
|
|
|
|
1,082,129 |
|
|
|
|
|
Basis adjustments from terminated
and ineffective hedges |
|
|
108,282 |
|
|
|
|
|
|
|
152,066 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
36,303,074 |
|
|
|
|
|
|
$ |
41,897,479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Amount is less than one thousand. |
The Bank offers advances to members that may be prepaid on pertinent dates (call dates)
without incurring prepayment or termination fees (callable advances). Other advances may only be
prepaid by paying a fee to the Bank (prepayment fee) that makes the Bank financially indifferent to
the prepayment of the advance. At September 30, 2009 and December 31, 2008, the Bank had callable
advances outstanding totaling $6.0 billion and $7.9 billion.
23
The Bank also offers putable advances. With a putable advance, the Bank has the right to
terminate the advance at predetermined exercise dates, which the Bank typically would exercise when
interest rates increase, and the borrower may then apply for a new advance at the prevailing market
rate. At September 30, 2009 and December 31, 2008, the Bank had putable advances outstanding
totaling $7.8 billion and $8.5 billion.
Interest Rate Payment Terms. The following table shows the Banks advances by interest rate
payment type (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Par amount of advances |
|
|
|
|
|
|
|
|
Fixed rate |
|
$ |
25,607,370 |
|
|
$ |
28,050,033 |
|
Variable rate |
|
|
9,830,464 |
|
|
|
12,612,914 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
35,437,834 |
|
|
$ |
40,662,947 |
|
|
|
|
|
|
|
|
Note 7Mortgage Loans Held for Portfolio
The Mortgage Partnership Finance (MPF) program (Mortgage Partnership Finance and MPF are
registered trademarks of the FHLBank of Chicago) involves investment by the Bank in mortgage loans
that are held for portfolio which are either funded by the Bank through, or purchased from, member
participating financial institutions (PFIs). The Banks members originate, service, and credit
enhance home mortgage loans that are sold to the Bank. Members participating in the servicing
released program do not service the loans owned by the Bank. The servicing on these loans is sold
concurrently by the member to a designated mortgage servicer.
Mortgage loans with an original contractual maturity of 15 years or less are classified as
medium-term, and all other mortgage loans are classified as long-term. The following table presents
information on the Banks mortgage loans held for portfolio (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Real Estate: |
|
|
|
|
|
|
|
|
Fixed rate medium-term single family mortgages |
|
$ |
1,973,785 |
|
|
$ |
2,409,977 |
|
Fixed rate long-term single family mortgages |
|
|
5,860,958 |
|
|
|
8,266,134 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total par value |
|
|
7,834,743 |
|
|
|
10,676,111 |
|
|
|
|
|
|
|
|
|
|
Premiums |
|
|
54,460 |
|
|
|
86,355 |
|
Discounts |
|
|
(54,754 |
) |
|
|
(81,547 |
) |
Basis adjustments from mortgage loan commitments |
|
|
4,361 |
|
|
|
4,491 |
|
Allowance for credit losses |
|
|
(775 |
) |
|
|
(500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans held for portfolio, net |
|
$ |
7,838,035 |
|
|
$ |
10,684,910 |
|
|
|
|
|
|
|
|
24
The par value of mortgage loans held for portfolio outstanding at September 30, 2009 and
December 31, 2008 consisted of government-insured loans totaling $383.0 million and $423.4 million
and conventional loans totaling $7.4 billion and $10.3 billion, respectively. During the second
quarter of 2009 the Bank sold $2.1 billion of mortgage loans held for sale to the FHLBank of
Chicago, who immediately resold these loans to Fannie Mae.
The Banks management of credit risk in the MPF program involves several layers of contractual
loss protection defined in agreements among the Bank and its participating members. Though the
nature of these layers of loss protection differs slightly among the MPF products the Bank offers,
each product contains similar credit risk structures. For conventional loans, the credit risk
structure contains the following layers of loss protection in order of priority:
|
|
|
Primary Mortgage Insurance for all loans with home owner equity of less than 20 percent
of the original purchase price or appraised value. |
|
|
|
First Loss Account (FLA) established by the Bank. FLA is a memorandum account for
tracking losses. Such losses are either recoverable from future payments of performance
based credit enhancement fees to the member or absorbed by the Bank. The Bank records
credit enhancement fees paid to participating members as a reduction of mortgage loan
interest income. Credit enhancement fees totaled $3.2 million and $4.7 million for the
three months ended September 30, 2009 and 2008 and $12.5 million and $14.4 million for the
nine months ended September 30, 2009 and 2008. |
|
|
|
Credit enhancements (including supplemental mortgage insurance (SMI)) provided by
participating members. The size of the participating members credit enhancement is
calculated so that any losses in excess of the FLA are limited to those of an investor in a
mortgage-backed security that is rated the equivalent of AA by a nationally recognized
statistical rating organization. To cover losses equal to all or a portion of the credit
enhancement obligations, participating members are required to either collateralize their
credit enhancement obligations or to purchase SMI from a highly rated mortgage insurer for
the benefit of the Bank. Currently, all of the Banks SMI providers have had their external
ratings for claims-paying ability or insurer financial strength downgraded below AA-.
Rating downgrades imply an increased risk that these SMI providers will be unable to
fulfill their obligations to reimburse the Bank for claims under insurance policies. On
August 7, 2009, the Finance Agency granted a waiver for one year on the AA- rating
requirement of SMI providers for existing loans and commitments in the program and granted
the same waiver for six months on new commitments. |
|
|
|
Losses greater than credit enhancements provided by members are the responsibility of
the Bank. The Bank utilizes an allowance for any estimated losses beyond the above layers. |
25
The following table presents the Banks allowance for credit losses activity (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
$ |
697 |
|
|
$ |
232 |
|
|
$ |
500 |
|
|
$ |
300 |
|
Provision for credit losses |
|
|
91 |
|
|
|
|
|
|
|
341 |
|
|
|
|
|
Charge-offs |
|
|
(13 |
) |
|
|
(24 |
) |
|
|
(66 |
) |
|
|
(92 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
775 |
|
|
$ |
208 |
|
|
$ |
775 |
|
|
$ |
208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In accordance with the Banks allowance for credit losses methodology, the allowance estimate
is based on historical loss experience, current delinquency levels, economic data, the ability to
recapture losses through member credit enhancements, and other relevant factors using a pooled loan
approach. On a regular basis, we monitor delinquency levels, loss rates, and portfolio
characteristics such as geographic concentration, loan-to-value ratios, property types, and loan
age. Other relevant factors evaluated in our methodology include changes in national/local economic
conditions, changes in the nature of the portfolio, changes in the portfolio performance, and the
existence and effect of geographic concentrations. The Bank monitors and reports portfolio
performance regarding delinquency, nonperforming loans, and net charge-offs monthly. Adjustments to
the allowance for credit losses are considered at least quarterly based upon charge-offs, the
amount of nonperforming loans, as well as other relevant factors discussed above.
During the three and nine months ended September 30, 2009, the Bank increased its allowance
for credit losses through a provision of $0.1 million and $0.3 million due to increased loss
severity on its mortgage loan portfolio and higher levels of nonperforming loans.
At September 30, 2009 and December 31, 2008, the Bank had $82.2 million and $48.4 million of
nonaccrual loans. Interest income that was contractually owed to the Bank but not received on
nonaccrual loans was $0.8 million and $0.5 million at September 30, 2009 and December 31, 2008. At
September 30, 2009 and December 31, 2008, the Bank had $9.2 million and $7.6 million of real estate
owned recorded as a component of other assets in the Statements of Condition.
26
Effective February 26, 2009, the MPF program was expanded to include a new off-balance sheet
product called MPF Xtra (MPF Xtra is a registered trademark of the FHLBank of Chicago). Under this
product, the Bank assigns 100 percent of its interests in PFI master commitments to the FHLBank of
Chicago. The FHLBank of Chicago then purchases mortgage loans from the Banks PFIs under the master
commitments and sells those loans to Fannie Mae. Currently, only PFIs that retain servicing of
their MPF loans are eligible for the MPF Xtra product. As of September 30, 2009, the FHLBank of
Chicago had funded $96.0 million of MPF Xtra mortgage loans under the master commitments of the
Banks PFIs. The Bank recorded approximately $21,000 and $44,000 in MPF Xtra fee income from the
FHLBank of Chicago during the three and nine months ended September 30, 2009.
Note 8Derivatives and Hedging Activities
Nature of Business Activity
Consistent with Finance Agency regulation, the Bank enters into derivatives to manage the
interest rate risk exposures inherent in otherwise unhedged assets and funding positions and to
achieve its risk management objectives. The Banks Enterprise Risk Management Policy prohibits
trading in or the speculative use of these derivative instruments and limits credit risk arising
from these instruments. Derivatives are an integral part of the Banks financial management
strategy.
The most common ways in which the Bank uses derivatives are to:
|
|
|
reduce the interest rate sensitivity and repricing gaps of assets and liabilities; |
|
|
|
reduce funding costs by combining a derivative with a consolidated obligation, as the
cost of a combined funding structure can be lower than the cost of a comparable
consolidated obligation; |
|
|
|
preserve a favorable interest rate spread between the yield of an asset (i.e., an
advance) and the cost of the related liability (i.e., the consolidated obligation used to
fund the advance). Without the use of derivatives, this interest rate spread could be
reduced or eliminated when a change in the interest rate on the advance does not match a
change in the interest rate on the consolidated obligation; |
|
|
|
mitigate the adverse earnings effects of the shortening or extension of certain assets
(i.e., advances or mortgage assets) and liabilities; and |
|
|
|
manage embedded options in assets and liabilities. |
27
Types of Derivatives
The Bank can enter into the following instruments to manage its exposure to interest rate
risks inherent in its normal course of business:
|
|
|
interest rate caps or floors; and |
|
|
|
future/forward contracts. |
The goal of the Banks interest rate risk management strategy is not to eliminate interest
rate risk, but to manage it within appropriate limits. To mitigate the risk of loss, the Bank has
established policies and procedures, which include guidelines on the amount of exposure to interest
rate changes it is willing to accept.
Interest Rate Swaps. An interest rate swap is an agreement between two entities to exchange
cash flows in the future. The agreement sets the dates on which the cash flows will be paid and the
manner in which the cash flows will be calculated. One of the simplest forms of an interest rate
swap involves the promise by one party to pay cash flows equivalent to the interest on a notional
principal amount at a predetermined fixed rate for a given period of time. In return for this
promise, this party receives cash flows equivalent to the interest on the same notional principal
amount at a variable interest rate index for the same period of time. The variable interest rate
received or paid by the Bank in most derivative agreements is the London Interbank Offered Rate
(LIBOR).
Options. An option is an agreement between two entities that conveys the right, but not the
obligation, to engage in a future transaction on some underlying security or other financial asset
at an agreed upon price during a certain period of time or on a specific date. Premiums or swap
fees paid to acquire options in a fair value hedge relationship are considered the fair value of
the option at inception of the hedge and are reported in
derivative assets or derivative
liabilities in the Statements of Condition.
Swaptions. A swaption is an option on a swap that gives the buyer the right to enter into a
specified interest rate swap at a certain time in the future. When used as a hedge, a swaption can
protect the Bank against future interest rate changes. The Bank purchases both payer swaptions and
receiver swaptions to decrease its interest rate risk exposure related to the prepayment of certain
assets. A payer swaption is the option to enter into a pay-fixed swap at a later date and a
receiver swaption is the option to enter into a receive-fixed swap at a later date.
Interest Rate Caps and Floors. In an interest rate cap agreement, a cash flow is generated if
the price or interest rate of an underlying variable rises above a certain threshold (or cap)
price. In an interest rate floor agreement, a cash flow is generated if the price or interest rate
of an underlying variable falls below a certain threshold (or floor) price. Interest rate caps
and floors are designed as protection against the interest rate on a variable interest rate asset
or liability rising above or falling below a certain level.
28
Futures/Forwards Contracts. Certain mortgage purchase commitments entered into by the Bank are
considered derivatives. The Bank hedges these commitments by selling to-be-announced (TBA) MBS
for forward settlement. A TBA represents a forward contract for the sale of MBS at a future agreed
upon date for an established price.
Application of Derivatives
Derivative financial instruments are used by the Bank in two ways:
|
|
|
as a hedge of the fair value of a recognized asset or liability or an unrecognized
firm commitment (a fair value hedge); or |
|
|
|
as a non-qualifying hedge of an asset, liability, or firm commitment (an economic
hedge) for asset/liability management purposes. |
Bank management uses derivatives when they are considered to be a cost-effective alternative
to achieve the Banks financial and risk management objectives. The Bank reevaluates its hedging
strategies from time to time and may change the hedging techniques it uses or adopt new strategies.
Types of Assets and Liabilities Hedged
The Bank documents at inception all relationships between derivatives designated as hedging
instruments and hedged items, its risk management objectives and strategies for undertaking various
hedge transactions, and its method of assessing effectiveness. This process includes linking all
derivatives that are designated as fair value hedges to (i) assets and liabilities in the
Statements of Condition, or (ii) firm commitments. The Bank also formally assesses (both at the
hedges inception and at least monthly) whether the derivatives it uses in hedging transactions
have been effective in offsetting changes in the fair value of hedged items and whether those
derivatives may be expected to remain effective in future periods. The Bank uses regression
analysis to assess hedge effectiveness prospectively and retrospectively.
Consolidated ObligationsWhile consolidated obligations are the joint and several obligations
of the 12 FHLBanks, the Bank is the primary obligor for the consolidated obligations recorded on
the Banks Statements of Condition. To date, the Bank has never had to assume or pay the
consolidated obligations of another FHLBank. The Bank may enter into derivatives to hedge the
interest rate risk associated with its consolidated obligations. The Bank manages the risk arising
from changing market prices and volatility of a consolidated obligation by matching the cash inflow
on the derivative with the cash outflow on the consolidated obligation.
29
For instance, in a typical transaction, fixed rate consolidated obligations are issued and the
Bank simultaneously enters into a matching interest rate swap in which the counterparty pays fixed
cash flows to the Bank designed to mirror in timing and amount the cash outflows the Bank pays on
the consolidated obligation. The Bank in turn pays a variable cash flow on the interest rate swap
that closely matches the interest payments it receives on short-term or variable interest rate
advances (typically one- or three-month LIBOR). These transactions are treated as fair value
hedges. The Bank may also issue variable interest rate consolidated obligations indexed to LIBOR or
the Federal funds rate and simultaneously execute interest rate swaps to hedge the basis risk of
the variable interest rate debt. Interest rate swaps used to hedge the basis risk of variable
interest rate debt indexed to the Federal funds rate do not qualify for hedge accounting. As a
result, this type of hedge is treated as an economic hedge.
AdvancesThe Bank offers a wide array of advance structures to meet members funding needs.
These advances may have maturities up to 30 years with variable or fixed interest rates and may
include early termination features or options. The Bank may use derivatives to adjust the repricing
and/or options characteristics of advances in order to more closely match the characteristics of
its funding liabilities. In general, whenever a member executes a fixed interest rate advance or a
variable interest rate advance with embedded options, the Bank will simultaneously execute a
derivative with terms that offset the terms and embedded options, if any, in the advance. For
example, the Bank may hedge a fixed interest rate advance with an interest rate swap where the Bank
pays a fixed interest rate coupon and receives a variable interest rate coupon, effectively
converting the fixed interest rate advance to a variable interest rate advance. This type of hedge
is treated as a fair value hedge.
When issuing putable advances, the Bank effectively purchases a put option from the member
that allows the Bank to put or extinguish the fixed interest rate advance, which the Bank normally
would exercise when interest rates increase, and the borrower may elect to enter into a new
advance. The Bank may hedge these advances by entering into a cancelable interest rate swap.
Mortgage LoansThe Bank invests in fixed interest rate mortgage loans. The prepayment options
embedded in mortgage loans can result in extensions or contractions in the expected repayment of
these investments, depending on changes in estimated prepayment speeds. The Bank manages the
interest rate and prepayment risks associated with mortgages through a combination of debt issuance
and derivatives. The Bank may issue both callable and noncallable debt and prepayment linked
consolidated obligations to achieve cash flow patterns and liability durations similar to those
expected on the mortgage loans.
30
The Bank may purchase interest rate caps and floors, swaptions, calls, and puts to minimize
sensitivity to changes in interest rates due to mortgage loan prepayments. Although these
derivatives are valid economic hedges, they are not specifically linked to individual loans and,
therefore, do not receive fair-value hedge accounting. The derivatives are marked-to-market through
earnings with no offsetting hedged item marked-to-market.
Certain mortgage purchase commitments are considered derivatives. The Bank normally hedges
these commitments by selling TBA MBS for forward settlement. A TBA represents a forward contract
for the sale of MBS at a future agreed upon date for an established price. The mortgage purchase
commitment and the TBA used in the firm commitment hedging strategy (economic hedge) are recorded
as a derivative asset or derivative liability at fair value, with changes in fair value recognized
in current period earnings. When the mortgage purchase commitment derivative settles, the current
market value of the commitment is included with the basis of the mortgage loan and amortized using
the level-yield method.
InvestmentsThe Banks investments include but are not necessarily limited to certificates of
deposit, commercial paper, U.S. Treasury obligations, municipal bonds, TVA and FFCB bonds, MBS,
TLGP securities, and the taxable portion of state or local HFA obligations, which may be classified
as held-to-maturity, available-for-sale, or trading securities. The interest rate and prepayment
risk associated with these investment securities is managed through a combination of debt issuance
and derivatives. The Bank may also manage the prepayment and interest rate risk by funding
investment securities with either callable or non-callable consolidated obligations or by hedging
the prepayment risk with interest rate caps or floors, interest rate swaps, or swaptions.
Managing Credit Risk on Derivatives
The Bank is subject to credit risk due to nonperformance by counterparties to the derivative
agreements. The degree of counterparty credit risk depends on the extent to which master netting
arrangements are included in such contracts to mitigate the risk. The Bank manages counterparty
credit risk through credit analysis, collateral requirements and adherence to the requirements set
forth in Bank policies and regulations.
The contractual or notional amount of derivatives reflects the involvement of the Bank in the
various classes of financial instruments. The notional amount of derivatives does not measure the
credit risk exposure of the Bank, and the maximum credit exposure of the Bank is substantially less
than the notional amount. The maximum credit risk is the estimated cost of replacing interest rate
swaps, forward interest rate agreements, mandatory delivery contracts for mortgage loans, and
purchased caps and floors that have a net positive market value, assuming the counterparty defaults
and the related collateral, if any, is of no value to the Bank.
31
At September 30, 2009 and December 31, 2008, the Banks maximum credit risk, as defined above,
was approximately $8.8 million and $2.8 million. These totals include $6.5 million and $0.6 million
of net accrued interest receivable. In determining maximum credit risk, the Bank considers accrued
interest receivables and payables, and the legal right to offset derivative assets and liabilities
by counterparty. The Bank held $3.5 million of cash as collateral at September 30, 2009. The Bank
did not hold any cash as collateral at December 31, 2008. Based on credit analysis and collateral
requirements, the Bank does not anticipate any credit losses on its derivative agreements.
The valuation of derivative assets and liabilities must reflect the value of the instrument
including the values associated with counterparty risk and the Banks own credit standing. The Bank
has collateral agreements with all its derivative counterparties that take into account both the
Banks and the counterpartys credit ratings. As a result of these practices and agreements, the
Bank has concluded that the impact of the credit differential between the Bank and its derivative
counterparties was sufficiently mitigated to an immaterial level and no further adjustments for
credit were deemed necessary to the recorded fair values of
derivative assets and derivative liabilities in
the Statements of Condition at September 30, 2009.
Some of the Banks derivative instruments contain provisions that require the Bank to post
additional collateral with its counterparties if there is deterioration in the Banks credit
rating. If the Banks credit rating is lowered by a major credit rating agency, the Bank may be
required to deliver additional collateral on derivative instruments in net liability positions. The
aggregate fair value of all derivative instruments with credit-risk related contingent features
that were in a net liability position at September 30, 2009 was $454.9 million. This amount
includes $64.1 million of net accrued interest payable. The Bank has posted collateral of $75.4
million in the normal course of business. If the Banks credit rating had been lowered one notch
(i.e., from its current rating to the next lower rating), the Bank would have been required to
deliver up to an additional $206.3 million of collateral to its derivative counterparties at
September 30, 2009. However, the Banks credit rating has not changed during the previous 12
months.
Financial Statement Effect and Additional Financial Information
The notional amount of derivatives reflects the volume of the Banks hedges, but it does not
measure the credit exposure of the Bank because there is no principal at risk.
32
The following table summarizes the Banks fair value of derivative instruments, without the
effect of netting arrangements or collateral at September 30, 2009 (dollars in thousands). For
purposes of this disclosure, the derivative values include fair value of derivatives and related
accrued interest.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional |
|
|
Derivative |
|
|
Derivative |
|
Fair Value of Derivative Instruments |
|
Amount |
|
|
Assets |
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
$ |
36,075,393 |
|
|
$ |
352,124 |
|
|
$ |
816,421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments
(economic hedges) |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
|
6,586,399 |
|
|
|
21,601 |
|
|
|
16,783 |
|
Interest rate caps |
|
|
2,340,000 |
|
|
|
13,412 |
|
|
|
|
|
Forward settlement agreements (TBAs) |
|
|
61,000 |
|
|
|
3 |
|
|
|
385 |
|
Mortgage delivery commitments |
|
|
60,980 |
|
|
|
315 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
Total derivatives not designated as hedging instruments |
|
|
9,048,379 |
|
|
|
35,331 |
|
|
|
17,177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives and related accrued interest before
netting and collateral adjustments |
|
$ |
45,123,772 |
|
|
|
387,455 |
|
|
|
833,598 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Netting adjustments1 |
|
|
|
|
|
|
(378,689 |
) |
|
|
(378,689 |
) |
Cash collateral and related accrued interest |
|
|
|
|
|
|
(3,500 |
) |
|
|
(75,408 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total netting adjustments and cash collateral |
|
|
|
|
|
|
(382,189 |
) |
|
|
(454,097 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets and liabilities |
|
|
|
|
|
$ |
5,266 |
|
|
$ |
379,501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Amounts represent the effect of legally enforceable master netting agreements
that allow the Bank to settle positive and negative positions by counterparty. |
The following table presents the components of Net gain (loss) on derivatives and
hedging activities as presented in the Statements of Income (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, 2009 |
|
|
September 30, 2009 |
|
Derivatives and hedged items in fair value
hedging relationships |
|
|
|
|
|
|
|
|
Interest rate swaps |
|
$ |
8,935 |
|
|
$ |
95,403 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging
instruments (economic hedges) |
|
|
|
|
|
|
|
|
Interest rate swaps |
|
|
(8,697 |
) |
|
|
(5,864 |
) |
Interest rate caps |
|
|
1,804 |
|
|
|
10,930 |
|
Forward settlement agreements (TBAs) |
|
|
(1,037 |
) |
|
|
1,721 |
|
Mortgage delivery commitments |
|
|
876 |
|
|
|
(3,893 |
) |
|
|
|
|
|
|
|
Total net (loss) gain related to derivatives
not designated as hedging instruments |
|
|
(7,054 |
) |
|
|
2,894 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain on derivatives and hedging activities |
|
$ |
1,881 |
|
|
$ |
98,297 |
|
|
|
|
|
|
|
|
33
During the three and nine months ended September 30, 2009 the Bank purchased and sold 30-year
U.S. Treasury obligations on three separate occasions. On each occasion, the Bank entered into
interest rate swaps to convert the fixed rate investments to floating rate. The relationships were
accounted for as a fair value hedge relationship with changes in LIBOR (benchmark interest rate)
reported as hedge ineffectiveness through net gain (loss) on
derivative and hedging activities. The Bank
sold these securities and terminated the related interest rate swaps. The impact of the sale of the
securities was accounted for through net gain (loss) on sale of available-for-sale securities and the
impact of the termination of the swaps was accounted for through
net gain (loss) on derivatives and
hedging activities. The impact of each of the sales of U.S. Treasury obligations and termination of
the related interest rate swaps are summarized as follows:
|
|
|
In June 2009 the Bank sold $800.0 million of U.S. Treasury obligations and
terminated the related interest rate swaps resulting in a $90.1 million gain on the
termination of the related interest rate swaps and a $42.8 million loss on the sale of
the available-for-sale securities. In addition, the Bank realized $14.3 million in
hedge ineffectiveness losses. The overall impact of this transaction was a net gain of
$33.0 million. |
|
|
|
In July 2009 the Bank sold $900.0 million of U.S. Treasury obligations and
terminated the related interest rate swaps resulting in a $11.8 million loss on the
termination of the related interest rate swaps and a $26.1 million gain on the sale of
the available-for-sale securities. In addition, the Bank realized $1.3 million in
hedge ineffectiveness losses. The overall impact of this transaction was a net gain of
$13.0 million. |
|
|
|
In September 2009 the Bank sold $1.0 billion of U.S. Treasury obligations and
terminated the related interest rate swaps resulting in a $18.4 million gain on the
termination of the related interest rate swaps and a $5.0 million gain on the sale of
the available-for-securities. In addition, the Bank realized $1.5 million in hedge
ineffectiveness gains. The overall impact of this transaction was a net gain of $24.9
million. |
Based on the above details the Bank recorded a net gain on the sale
of available-for-sale securities of $31.1 million during the
three months ended September 30, 2009 and a net loss of
$11.7 million during the nine months ended September
30, 2009. In addition, the termination of related interest rate
swaps and the ineffectivenes resulted in a total net gain on
derivatives and hedging activities of $6.8 million and
$82.6 million for the three and nine months ended September
30, 2009.
34
The following table presents, by type of hedged item, the gain (loss) on derivatives and
the related hedged items in fair value hedging relationships and the impact of those derivatives on
the Banks net interest income (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
Net Fair Value |
|
|
Effect on |
|
|
|
(Loss) Gain on |
|
|
Gain (Loss) on |
|
|
Hedge |
|
|
Net Interest |
|
Hedged Item Type |
|
Derivative |
|
|
Hedged Item |
|
|
Ineffectiveness |
|
|
Income1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances |
|
$ |
(107,096 |
) |
|
$ |
107,986 |
|
|
$ |
890 |
|
|
$ |
(102,274 |
) |
Investments |
|
|
22,063 |
|
|
|
(14,210 |
) |
|
|
7,853 |
|
|
|
(7,654 |
) |
Bonds |
|
|
28,077 |
|
|
|
(27,885 |
) |
|
|
192 |
|
|
|
71,266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(56,956 |
) |
|
$ |
65,891 |
|
|
$ |
8,935 |
|
|
$ |
(38,662 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
Net Fair Value |
|
|
Effect on |
|
|
|
Gain (Loss) on |
|
|
(Loss) Gain on |
|
|
Hedge |
|
|
Net Interest |
|
Hedged Item Type |
|
Derivative |
|
|
Hedged Item |
|
|
Ineffectiveness |
|
|
Income1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances |
|
$ |
328,517 |
|
|
$ |
(325,470 |
) |
|
$ |
3,047 |
|
|
$ |
(254,880 |
) |
Investments |
|
|
79,720 |
|
|
|
2,699 |
|
|
|
82,419 |
|
|
|
(10,030 |
) |
Bonds |
|
|
(137,653 |
) |
|
|
147,590 |
|
|
|
9,937 |
|
|
|
181,062 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
270,584 |
|
|
$ |
(175,181 |
) |
|
$ |
95,403 |
|
|
$ |
(83,848 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
The net interest on derivatives in fair value hedge relationships is presented
in the interest income/expense line item of the respective
hedged item. |
Note 9Consolidated Obligations
Consolidated obligations are the joint and several obligations of the FHLBanks and consist of
bonds and discount notes. The FHLBanks issue consolidated obligations through the Office of Finance
as their agent. Bonds are typically issued to raise intermediate- and long-term funds for the
FHLBanks and are not subject to any statutory or regulatory limits on maturity. Discount notes are
typically issued to raise short-term funds of one year or less. These discount notes sell at less
than their face amount and are redeemed at par value when they mature. See the Banks Form 10-K for
additional information regarding consolidated obligations.
The par amounts of the outstanding consolidated obligations of the 12 FHLBanks were
approximately $973.6 billion and $1,251.5 billion at September 30, 2009 and December 31, 2008.
35
The FHLBank Act authorizes the U.S. Treasury to purchase consolidated obligations directly
from the FHLBanks up to an aggregate principal amount of $4.0 billion. As a result of the passage
of the Housing Act in 2008, this authorization was supplemented with a temporary authorization for
the U.S. Treasury to directly purchase consolidated obligations from the FHLBanks in any amount
deemed appropriate under certain conditions. This temporary authorization expires December 31,
2009. At September 30, 2009, no such purchases had been made by the U.S. Treasury.
Bonds. The following table shows the Banks bonds outstanding by year of maturity (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
|
December 31, 2008 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Interest |
|
|
|
|
|
|
Interest |
|
Year of Maturity |
|
Amount |
|
|
Rate % |
|
|
Amount |
|
|
Rate % |
|
|
Due in one year or less |
|
$ |
22,109,400 |
|
|
|
1.73 |
|
|
$ |
15,962,600 |
|
|
|
3.10 |
|
Due after one year through two years |
|
|
8,566,250 |
|
|
|
2.65 |
|
|
|
6,159,050 |
|
|
|
4.01 |
|
Due after two years through three years |
|
|
3,813,150 |
|
|
|
3.32 |
|
|
|
4,670,100 |
|
|
|
4.34 |
|
Due after three years through four years |
|
|
2,329,900 |
|
|
|
4.23 |
|
|
|
2,231,050 |
|
|
|
4.54 |
|
Due after four years through five years |
|
|
805,700 |
|
|
|
4.45 |
|
|
|
2,417,500 |
|
|
|
4.35 |
|
Thereafter |
|
|
6,959,510 |
|
|
|
5.07 |
|
|
|
8,408,700 |
|
|
|
5.13 |
|
Index amortizing notes |
|
|
2,033,215 |
|
|
|
5.12 |
|
|
|
2,420,099 |
|
|
|
5.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total par value |
|
|
46,617,125 |
|
|
|
2.85 |
|
|
|
42,269,099 |
|
|
|
4.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums |
|
|
44,862 |
|
|
|
|
|
|
|
50,742 |
|
|
|
|
|
Discounts |
|
|
(34,324 |
) |
|
|
|
|
|
|
(40,699 |
) |
|
|
|
|
Hedging fair value adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative fair value loss |
|
|
254,262 |
|
|
|
|
|
|
|
348,214 |
|
|
|
|
|
Basis adjustments from terminated
and ineffective hedges |
|
|
17,674 |
|
|
|
|
|
|
|
95,117 |
|
|
|
|
|
Fair value option loss |
|
|
18,501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
46,918,100 |
|
|
|
|
|
|
$ |
42,722,473 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows the Banks total bonds outstanding (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Par amount of bonds |
|
|
|
|
|
|
|
|
Noncallable or nonputable |
|
$ |
42,605,125 |
|
|
$ |
39,214,099 |
|
Callable |
|
|
4,012,000 |
|
|
|
3,055,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total par value |
|
$ |
46,617,125 |
|
|
$ |
42,269,099 |
|
|
|
|
|
|
|
|
36
Interest Rate Payment Terms. The following table shows the Banks bonds by interest rate
payment type (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Par amount of bonds |
|
|
|
|
|
|
|
|
Fixed rate |
|
$ |
40,055,125 |
|
|
$ |
37,954,099 |
|
Simple variable rate |
|
|
6,015,000 |
|
|
|
4,315,000 |
|
Step-up |
|
|
547,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total par value |
|
$ |
46,617,125 |
|
|
$ |
42,269,099 |
|
|
|
|
|
|
|
|
Extinguishment of Debt. Losses on extinguishment of debt totaled $28.5 million and $80.9
million for the three and nine months ended September 30, 2009 due to the Bank extinguishing bonds
with a total par value of $266.8 million and $853.3 million. Losses on extinguishment of debt
exclude basis adjustment amortization of $1.2 million for the three months ended September 30, 2009
and basis adjustment accretion of $4.5 million for the nine months ended September 30, 2009
recorded in net interest income. As a result, for the three and nine months ended September 30,
2009, net losses on extinguishment of debt totaled $29.7 million and $76.4 million. For the three
months ended September 30, 2008, the Bank did not extinguish any debt. For the nine months ended
September 30, 2008, the Bank extinguished debt with a total par value of $500.0 million and
recorded a gain of $0.2 million.
Discount Notes. Discount notes are typically issued to raise short-term funds that have
original maturities up to 365/366 days. These notes are issued at less than their face amount and
redeemed at par value when they mature.
The Banks discount notes were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
|
December 31, 2008 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Interest |
|
|
|
|
|
|
Interest |
|
|
|
Amount |
|
|
Rate % |
|
|
Amount |
|
|
Rate % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Par value |
|
$ |
12,879,255 |
|
|
|
0.04 |
|
|
$ |
20,153,370 |
|
|
|
1.83 |
|
Discounts |
|
|
(5,015 |
) |
|
|
|
|
|
|
(92,099 |
) |
|
|
|
|
Hedging fair value adjustments |
|
|
|
|
|
|
|
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
12,874,240 |
|
|
|
|
|
|
$ |
20,061,271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Amount is less than one thousand. |
37
Note 10Capital
The Bank is subject to three regulatory capital requirements. The Bank must maintain at all
times permanent capital in an amount at least equal to the sum of its credit, market, and
operations risk capital requirements, calculated in accordance with Bank policy and rules and
regulations of the Finance Agency. Only permanent capital, defined as Class B stock and retained
earnings, satisfies this risk based capital requirement. Regulatory capital, as defined by the
Finance Agency, includes mandatorily redeemable capital stock and excludes accumulated other
comprehensive loss. For reasons of safety and soundness, the Finance Agency may require the Bank to
maintain a greater amount of permanent capital than is required by the risk based capital
requirements. Additionally, the Bank is required to maintain at least a four percent total
capital-to-asset ratio and at least a five percent leverage ratio at all times. The leverage ratio
is defined as the sum of permanent capital weighted 1.5 times and nonpermanent capital weighted 1.0
time divided by total assets. For reasons of safety and soundness, the Finance Agency may require
the Bank to maintain a higher total capital-to-asset ratio.
The following table shows the Banks compliance with the Finance Agencys capital requirements
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
|
December 31, 2008 |
|
|
|
Required |
|
|
Actual |
|
|
Required |
|
|
Actual |
|
Regulatory capital requirements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk based capital |
|
$ |
893,215 |
|
|
$ |
3,427,763 |
|
|
$ |
1,967,981 |
|
|
$ |
3,173,807 |
|
Total capital-to-asset ratio |
|
|
4.00 |
% |
|
|
5.24 |
% |
|
|
4.00 |
% |
|
|
4.66 |
% |
Total regulatory capital |
|
$ |
2,617,039 |
|
|
$ |
3,427,763 |
|
|
$ |
2,725,172 |
|
|
$ |
3,173,807 |
|
Leverage ratio |
|
|
5.00 |
% |
|
|
7.86 |
% |
|
|
5.00 |
% |
|
|
6.99 |
% |
Leverage capital |
|
$ |
3,271,299 |
|
|
$ |
5,141,644 |
|
|
$ |
3,406,465 |
|
|
$ |
4,760,711 |
|
The Bank issues a single class of capital stock (Class B stock). The Banks Class B stock has
a par value of $100 per share, and all shares are purchased, repurchased, redeemed, or transferred
only at par value. The Bank has two subclasses of Class B stock: membership stock and
activity-based stock.
Our members are required to maintain a certain minimum capital stock investment in the Bank.
The minimum investment requirements are designed so that we remain adequately capitalized as member
activity changes. To ensure we remain adequately capitalized within ranges established in the
Capital Plan, these requirements may be adjusted upward or downward by the Banks Board of
Directors.
Capital stock owned by members in excess of their minimum investment requirements is known as
excess capital stock. At September 30, 2009 and December 31, 2008 the Bank had excess capital stock
of $540.1 million and $61.1 million.
38
Under the Banks Capital Plan, the Bank, at its discretion and upon 15 days written notice,
may repurchase excess membership and activity-based capital stock. If a members stock balance
exceeds an operational threshold set forth in the Capital Plan as a result of a merger or
consolidation, the Bank may repurchase the amount of excess stock necessary to make the members
stock balance equal to the operational threshold.
In late 2008, as a result of market conditions, the Bank temporarily discontinued its practice
of voluntarily repurchasing excess membership and activity-based capital stock. Members are able to
continue using excess activity-based capital stock to satisfy their activity-based capital stock
requirements. The Banks Board of Directors will continue to monitor market conditions and assess
the need for this temporary action. Certain exceptions to this temporarily discontinued practice
have been approved by the Banks Board of Directors, such as when a member is taken over by the
Federal Deposit Insurance Corporation and when a member is in financial distress. During the nine
months ended September 30, 2009 the Bank repurchased $12.3 million of excess capital stock
(including mandatorily redeemable capital stock) under these exceptions. In these circumstances,
the Bank reviews each members required collateral on advances, standby letters of credit, and MPF
credit enhancements prior to the repurchase to ensure the Bank will remain adequately secured
subsequent to the repurchase.
As a condition of membership in the Bank, all members must purchase and maintain membership
capital stock based on a percentage of their total assets as of the preceding December
31st. For 2009, the Bank allowed members to use their excess activity-based capital
stock to satisfy updated membership capital stock requirements. During the second quarter of 2009
the Bank transferred $21.0 million of excess activity-based capital stock from certain members to
membership capital stock in order to meet the members updated membership capital stock
requirement. In addition, members with insufficient excess activity-based capital stock to cover
their updated membership capital stock requirement were required to purchase $13.4 million of
additional membership capital stock.
Mandatorily Redeemable Capital Stock. At September 30, 2009 and December 31, 2008, the Bank
had $17.5 million and $10.9 million in capital stock subject to mandatory redemption. These amounts
have been classified as mandatorily redeemable capital stock in the Statements of Condition.
39
The following table summarizes the Banks activity related to mandatorily redeemable capital
stock (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year |
|
$ |
10,907 |
|
|
$ |
46,039 |
|
|
|
|
|
|
|
|
|
|
Mandatorily redeemable stock issued |
|
|
7 |
|
|
|
49 |
|
Capital stock subject to mandatory redemption
reclassified from capital stock |
|
|
16,573 |
|
|
|
2,861 |
|
Repurchase of mandatorily redeemable capital stock |
|
|
(9,983 |
) |
|
|
(38,042 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
17,504 |
|
|
$ |
10,907 |
|
|
|
|
|
|
|
|
Note 11Segment Information
The Bank has identified two primary operating segments based on its method of internal
reporting: Member Finance and Mortgage Finance. A summary of each segments products and services
can be found below.
The Member Finance segment includes advances, investments (excluding MBS, HFA, and SBA
investments), and the related funding and hedging of those assets. Member deposits are also
included in this segment. Income from the Member Finance segment is derived primarily from the
spread between the yield on advances and investments and the borrowing and hedging costs related to
those assets. Additionally, expenses associated with member deposits impact income from the Member
Finance segment.
The Mortgage Finance segment includes mortgage loans acquired through the MPF program, MBS,
HFA, and SBA investments, and the related funding and hedging of those assets. Income from the
Mortgage Finance segment is derived primarily from the spread between the yield on mortgage loans,
MBS, HFA, and SBA investments and the borrowing and hedging costs related to those assets.
Capital is allocated to the Member Finance and Mortgage Finance segments based on each
segments amount of capital stock, retained earnings, and accumulated other comprehensive loss.
The Bank evaluates performance of the segments based on adjusted net interest income after
providing for a mortgage loan credit loss provision. Previously, adjusted net interest income was
net interest income adjusted for economic hedging costs included in other income (loss). During the
first quarter of 2009, the Bank enhanced its calculation of adjusted net interest income and
concluded that adjusted net interest income should be net interest income adjusted for basis
adjustment amortization on called and extinguished debt included in interest expense, economic
hedging costs included in other income (loss), and concession expense on fair value option bonds
included in other expense.
40
The following table shows the Banks financial performance by operating segment for the three
months ended September 30, 2009 and 2008 (dollars in thousands). Prior period amounts have been
adjusted to reflect the Banks enhanced calculation of adjusted net interest income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Member |
|
|
Mortgage |
|
|
|
|
|
|
Finance |
|
|
Finance |
|
|
Total |
|
Three months ended September 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net interest income |
|
$ |
45,636 |
|
|
$ |
15,178 |
|
|
$ |
60,814 |
|
Provision for credit losses on
mortgage loans |
|
|
|
|
|
|
91 |
|
|
|
91 |
|
|
|
|
|
|
|
|
|
|
|
Adjusted net interest income after
mortgage
loan credit loss provision |
|
$ |
45,636 |
|
|
$ |
15,087 |
|
|
$ |
60,723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average assets for the period |
|
$ |
50,834,791 |
|
|
$ |
17,047,675 |
|
|
$ |
67,882,466 |
|
Total assets at period end |
|
$ |
48,155,207 |
|
|
$ |
17,270,772 |
|
|
$ |
65,425,979 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net interest income |
|
$ |
43,456 |
|
|
$ |
36,794 |
|
|
$ |
80,250 |
|
Provision for credit losses on
mortgage loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net interest income after
mortgage loan credit loss provision |
|
$ |
43,456 |
|
|
$ |
36,794 |
|
|
$ |
80,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average assets for the period |
|
$ |
55,233,574 |
|
|
$ |
19,808,500 |
|
|
$ |
75,042,074 |
|
Total assets at period end |
|
$ |
66,687,877 |
|
|
$ |
20,380,681 |
|
|
$ |
87,068,558 |
|
The following table shows the Banks financial performance by operating segment for the nine
months ended September 30, 2009 and 2008 (dollars in thousands). Prior period amounts have been
adjusted to reflect the Banks enhanced calculation of adjusted net interest income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Member |
|
|
Mortgage |
|
|
|
|
|
|
Finance |
|
|
Finance |
|
|
Total |
|
Nine months ended September 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net interest income |
|
$ |
92,387 |
|
|
$ |
57,644 |
|
|
$ |
150,031 |
|
Provision for credit losses on
mortgage loans |
|
|
|
|
|
|
341 |
|
|
|
341 |
|
|
|
|
|
|
|
|
|
|
|
Adjusted net interest income after
mortgage
loan credit loss provision |
|
$ |
92,387 |
|
|
$ |
57,303 |
|
|
$ |
149,690 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average assets for the period |
|
$ |
52,508,125 |
|
|
$ |
18,941,228 |
|
|
$ |
71,449,353 |
|
Total assets at period end |
|
$ |
48,155,207 |
|
|
$ |
17,270,772 |
|
|
$ |
65,425,979 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net interest income |
|
$ |
137,423 |
|
|
$ |
88,437 |
|
|
$ |
225,860 |
|
Provision for credit losses on
mortgage loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net interest income after
mortgage loan credit loss provision |
|
$ |
137,423 |
|
|
$ |
88,437 |
|
|
$ |
225,860 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average assets for the period |
|
$ |
50,015,549 |
|
|
$ |
18,664,887 |
|
|
$ |
68,680,436 |
|
Total assets at period end |
|
$ |
66,687,877 |
|
|
$ |
20,380,681 |
|
|
$ |
87,068,558 |
|
41
For adjusted net interest income, the Bank includes interest income and interest expense
associated with economic hedges as well as concession expense associated with fair value option
bonds in its evaluation of financial performance for its two operating segments and excludes
interest expense associated with basis adjustment amortization/accretion on called and extinguished
debt. Interest income and interest expense associated with economic hedges are recorded as a
component of Net gain (loss) on derivatives and hedging activities in other income (loss) in the
Statements of Income. Concession expense associated with fair value option bonds is recorded in
other expense in the Statements of Income. Interest expense associated with basis adjustment
amortization/accretion on called and extinguished debt is recorded as a component of Bonds in
interest expense in the Statements of Income. The following table reconciles the Banks financial
performance by operating segment to total income before assessments (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net interest
income after mortgage
loan credit loss
provision |
|
$ |
60,723 |
|
|
$ |
80,250 |
|
|
$ |
149,690 |
|
|
$ |
225,860 |
|
Interest expense on
basis adjustment
accretion (amortization)
of called debt |
|
|
89 |
|
|
|
(356 |
) |
|
|
(17,836 |
) |
|
|
(10,792 |
) |
Interest expense on
basis adjustment
(amortization) accretion
of extinguished debt |
|
|
(1,229 |
) |
|
|
|
|
|
|
4,462 |
|
|
|
|
|
Concession expense on
fair value option bonds |
|
|
|
|
|
|
|
|
|
|
37 |
|
|
|
|
|
Net interest (income)
expense on economic
hedges |
|
|
(1,532 |
) |
|
|
(228 |
) |
|
|
(6,173 |
) |
|
|
2,297 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
after mortgage loan
credit loss provision |
|
|
58,051 |
|
|
|
79,666 |
|
|
|
130,180 |
|
|
|
217,365 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (loss) |
|
|
1,478 |
|
|
|
(6,564 |
) |
|
|
49,211 |
|
|
|
(14,286 |
) |
Other expense |
|
|
11,303 |
|
|
|
10,734 |
|
|
|
35,835 |
|
|
|
32,749 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before assessments |
|
$ |
48,226 |
|
|
$ |
62,368 |
|
|
$ |
143,556 |
|
|
$ |
170,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
Note 12Estimated Fair Values
The Bank records trading investments, available-for-sale investments, derivative assets,
derivative liabilities, and certain bonds, for which the fair value option was elected, at fair
value in the Statements of Condition. Fair value is a market-based measurement and is defined as
the price received to sell an asset, or paid to transfer a liability, in an orderly transaction
between market participants at the measurement date. The transaction to sell the asset or transfer
the liability is a hypothetical transaction at the measurement date, considered from the
perspective of a market participant holding the asset or owing the liability. In general, the
transaction price will equal the exit price and, therefore, represent the fair value of the asset
or liability at initial recognition. In determining whether a transaction price represents the fair
value of the asset or liability at initial recognition, each reporting entity is required to
consider factors specific to the asset or liability, the principal or most advantageous market for
the assets or liability, and market participants with whom the entity would transact in that
market.
Fair Value Option. The fair value option permits entities to elect fair value as an
alternative measurement for selected financial assets, financial liabilities, unrecognized firm
commitments, and written loan commitments not previously carried at fair value in the financial
statements. It requires entities to display the fair value of those assets and liabilities for
which the company has chosen to use fair value on the face of the balance sheet. Fair value is used
for both the initial and subsequent measurement of the designated assets, liabilities, and
commitments, with the changes in fair value recognized in net income.
During the first quarter of 2009, the Bank elected to record bonds indexed to the Federal
funds rate at fair value under the fair value option. The Bank entered into a derivative to swap
the Federal funds rate to LIBOR. The hedge relationship does not qualify for fair value hedge
accounting; therefore the Bank accounts for the derivative as an economic hedge. To offset the
derivative mark-to-market the Bank elected the fair value option on the bonds and records the
offsetting mark-to-market in the Banks Statements of Income.
Fair Value Hierarchy. The fair value hierarchy is used to prioritize the inputs of valuation
techniques used to measure fair value. The inputs are evaluated and an overall level for the
measurement is determined. This overall level is an indication of how market observable the fair
value measurement is and defines the level of disclosure. Fair value is the price in an orderly
transaction between market participants to sell an asset or transfer a liability in the principal
(or most advantageous) market for the asset or liability at the measurement date (an exit price).
In order to determine the fair value or the exit price, the Bank must determine the unit of
account, highest and best use, principal market, and market participants. These determinations
allow the Bank to define the inputs for fair value and level of hierarchy.
43
The following describes the application of the fair value hierarchy to the Banks financial
assets and financial liabilities that are carried at fair value in the Statements of Condition.
Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical
assets or liabilities in active markets. An active market for the asset or liability is a market in
which the transactions for the asset or liability occur with sufficient frequency and volume to
provide pricing information on an ongoing basis. The types of assets and liabilities carried at
Level 1 fair value include certain derivative contracts such as forward settlement agreements that
are highly liquid and actively traded in over-the-counter markets.
Level 2 inputs to the valuation methodology include quoted prices for similar assets and
liabilities in active markets, and inputs that are observable for the asset or liability, either
directly or indirectly, for substantially the full term of the financial instrument. The types of
assets and liabilities carried at Level 2 fair value include the Banks investment securities such
as municipal bonds, GSE obligations, TLGP debt, and MBS, including U.S. government agency, as well
as certain derivative contracts and bonds the Bank elected to record at fair value under the fair
value option.
Level 3 inputs to the valuation methodology are unobservable and significant to the fair
value measurement. Unobservable inputs supported by little or no market activity or by the entitys
own assumptions. The Bank does not currently have any assets and liabilities carried at Level 3
fair value.
The Bank utilizes valuation techniques that maximize the use of observable inputs and minimize
the use of unobservable inputs. Fair value is first determined based on quoted market prices or
market-based prices, where available. If quoted market prices or market-based prices are not
available, fair value is determined based on valuation models that use market-based information
available to the Bank as inputs to the models.
44
Fair Value on a Recurring Basis. The following table presents, for each hierarchy level, the
Banks assets and liabilities that are measured at fair value in the Statements of Condition at
September 30, 2009 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at September 30, 2009 Using: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Netting |
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Adjustment1 |
|
|
Total |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TLGP |
|
$ |
|
|
|
$ |
5,111,348 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
5,111,348 |
|
Taxable municipal bonds |
|
|
|
|
|
|
251,867 |
|
|
|
|
|
|
|
|
|
|
|
251,867 |
|
Available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TLGP |
|
|
|
|
|
|
567,209 |
|
|
|
|
|
|
|
|
|
|
|
567,209 |
|
Government-sponsored enterprise |
|
|
|
|
|
|
4,954,042 |
|
|
|
|
|
|
|
|
|
|
|
4,954,042 |
|
Derivative assets |
|
|
3 |
|
|
|
387,452 |
|
|
|
|
|
|
|
(382,189 |
) |
|
|
5,266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value |
|
$ |
3 |
|
|
$ |
11,271,918 |
|
|
$ |
|
|
|
$ |
(382,189 |
) |
|
$ |
10,889,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds2 |
|
$ |
|
|
|
$ |
(4,308,501 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
(4,308,501 |
) |
Derivative liabilities |
|
|
(385 |
) |
|
|
(833,213 |
) |
|
|
|
|
|
|
454,097 |
|
|
|
(379,501 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value |
|
$ |
(385 |
) |
|
$ |
(5,141,714 |
) |
|
$ |
|
|
|
$ |
454,097 |
|
|
$ |
(4,688,002 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Amounts represent the effect of legally enforceable master netting
agreements that allow the Bank to settle positive and negative
positions and also cash collateral held or placed with the same
counterparties. Net
cash collateral plus accrued interest totaled $71.9 million at September 30, 2009. |
|
2 |
|
Represents bonds recorded under the fair value option. |
45
The following table presents, for each hierarchy level, the Banks assets and liabilities that
are measured at fair value in the Statements of Condition at December 31, 2008 (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2008 Using: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Netting |
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Adjustment1 |
|
|
Total |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities |
|
$ |
|
|
|
$ |
2,151,485 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,151,485 |
|
Available-for-sale securities |
|
|
|
|
|
|
3,839,980 |
|
|
|
|
|
|
|
|
|
|
|
3,839,980 |
|
Derivative assets |
|
|
248 |
|
|
|
403,728 |
|
|
|
|
|
|
|
(401,136 |
) |
|
|
2,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value |
|
$ |
248 |
|
|
$ |
6,395,193 |
|
|
$ |
|
|
|
$ |
(401,136 |
) |
|
$ |
5,994,305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities |
|
$ |
(2,571 |
) |
|
$ |
(1,101,501 |
) |
|
$ |
|
|
|
$ |
669,057 |
|
|
$ |
(435,015 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value |
|
$ |
(2,571 |
) |
|
$ |
(1,101,501 |
) |
|
$ |
|
|
|
$ |
669,057 |
|
|
$ |
(435,015 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Amounts represent the effect of legally enforceable master netting
agreements that allow the Bank to settle positive and negative
positions and also cash collateral held or placed with the same
counterparties. Net
cash collateral plus accrued interest totaled $267.9 million at December 31, 2008. |
For instruments carried at fair value in the Statements of Condition, the Bank reviews the
fair value hierarchy classifications on a quarterly basis. Changes in the observability of the
valuation attributes may result in a reclassification to the hierarchy level for certain financial
assets or liabilities. At September 30, 2009 the Bank had made no reclassifications to its fair
value hierarchy.
The following table presents the changes in fair value included in the Statements of Income
for bonds in which the fair value option has been elected (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, 2009 |
|
|
September 30, 2009 |
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
$ |
6,710 |
|
|
$ |
13,780 |
|
Net loss on bonds held at fair value |
|
|
3,165 |
|
|
|
15,392 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total change in fair value |
|
$ |
9,875 |
|
|
$ |
29,172 |
|
|
|
|
|
|
|
|
46
For bonds recorded under the fair value option, the related contractual interest expense is
recorded as part of net interest income in the Statements of Income. The remaining changes are
recorded as Net loss on bonds held at fair value in the Statements of Income. The changes in fair
value, as shown in the previous table, do not include changes in instrument-specific credit risk.
The Bank has determined that no adjustments to the fair values of bonds recorded under the fair
value option were necessary for instrument-specific credit risk. Concessions paid on bonds under
the fair value option are expensed as incurred and recorded in
other expense in the Statements of
Income. The Bank recorded $0 and $37,000 in concession expense associated with fair value option
bonds during the three and nine months ended September 30, 2009.
The following table reflects the difference between the aggregate fair value and the aggregate
remaining contractual principal balance outstanding of bonds for which the fair value option has
been elected (dollars in thousands):
|
|
|
|
|
|
|
September 30, |
|
|
|
2009 |
|
|
|
|
|
|
Principal balance |
|
$ |
4,290,000 |
|
Fair value |
|
|
4,308,501 |
|
|
|
|
|
|
|
|
|
|
Fair value over principal balance |
|
$ |
18,501 |
|
|
|
|
|
Estimated Fair Values. The following estimated fair value amounts have been determined by the
Bank using available market information and managements best judgment of appropriate valuation
methods. These estimates are based on pertinent information available to the Bank at September 30,
2009 and December 31, 2008. Although management uses its best judgment in estimating the fair value
of these financial instruments, there are inherent limitations in any estimation technique or
valuation methodology. For example, because an active secondary market does not exist for a portion
of the Banks financial instruments, in certain cases fair values are not subject to precise
quantification or verification and may change as economic and market factors and evaluation of
those factors change. Therefore, these estimated fair values are not necessarily indicative of the
amounts that would be realized in current market transactions.
Cash and Due from Banks and Securities Purchased under Agreements to Resell. The estimated
fair value approximates the recorded book balance.
Interest-bearing Deposits. For instruments with less than three months to maturity the
estimated fair value approximates the recorded book balance. For instruments with more than three
months to maturity the estimated fair value is determined by calculating the present value of the
expected future cash flows.
Federal Funds Sold. The estimated fair value approximates the recorded book balance of
overnight and term Federal funds sold with three months or less to maturity. The estimated fair
value is determined by calculating the present value of the expected future cash flows for term
Federal funds sold with more than three months to maturity. Term Federal funds sold are discounted
at comparable current market rates.
47
Investment Securities. The estimated fair value of the Banks investment securities is
determined by using information from specialized pricing services that use pricing models and/or
quoted prices of securities with similar characteristics. Inputs into the pricing models are market
based and observable. The estimated fair value is determined based on each securitys quoted price
excluding accrued interest as of the last business day of the reporting period. The Bank performs
several validation steps in order to verify the accuracy and reasonableness of the investment fair
values provided by the pricing services. These steps may include, but are not limited to, a
detailed review of instruments with significant price changes and a comparison of fair values to
those derived by an alternative pricing service. Certain investments for which quoted prices are
not readily available are valued by third parties or internal pricing models. The Banks trading
and available-for-sale securities are recorded in the Banks Statements of Condition at fair value.
During the quarter ended September 30, 2009 the Bank changed the methodology used to estimate
the fair value of its private-label MBS. Under the new methodology, the Bank requests prices for
all of its private-label MBS from four specific third-party pricing services and, depending on the
number of prices received for each security, selects a median or average price as defined by the
methodology. The methodology also incorporates variance thresholds to assist in identifying median
or average prices that may require further review. In certain limited circumstances (i.e., prices
are outside of variance thresholds or the third-party pricing services do not provide a price), the
Bank will obtain a price from securities dealers or internally model a price that is deemed
appropriate after consideration of all relevant facts and circumstances that would be considered by
market participants. Since the Banks private-label MBS are all classified as held-to-maturity
securities, this change in pricing methodology had no impact on the Banks financial condition or
results of operations at September 30, 2009.
Advances and Other Loans. The Bank determines the estimated fair value of advances by
calculating the present value of expected future cash flows from the advances and excluding accrued
interest receivable. The Banks primary inputs for measuring the fair value of advances are the
consolidated obligation yield curve (CO Curve) published by the Office of Finance and available to
the public, LIBOR swap curves, and volatilities. The Bank considers these inputs to be market based
and observable as they can be directly corroborated by market participants.
Under Bank policy and Finance Agency regulations, advances with a maturity and repricing
period greater than six months generally require a prepayment fee sufficient to make the Bank
financially indifferent to the borrowers decision to prepay the advances. Therefore, the estimated
fair value of advances does not assume prepayment risk.
Mortgage Loans. The estimated fair values for mortgage loans are determined based on
contractual cash flows adjusted for prepayment assumptions and credit risk factors, discounted
using the quoted market prices of similar mortgage loans, and reduced by the amount of accrued
interest receivable. These prices, however, can change rapidly based on market conditions and are
highly dependent on the underlying prepayment assumptions.
Accrued Interest Receivable and Payable. The estimated fair value approximates the recorded
book balance.
48
Derivative Assets and Liabilities. The Bank bases the estimated fair values of derivatives
with similar terms on available market prices including accrued interest receivable and payable.
The estimated fair value is based on the LIBOR swap curve and forward rates at period end and, for
agreements containing options, the markets expectations of future interest rate volatility implied
from current market prices of similar options. The estimated fair values use standard valuation
techniques for derivatives, such as discounted cash-flow analysis and comparisons to similar
instruments. The fair values are netted with cash collateral by counterparty where such legal right
of offset exists. If these amounts are positive, they are classified as an asset and if negative a
liability.
Deposits. The Bank determines estimated fair values of deposits by calculating the present
value of expected future cash flows from the deposits and reducing this amount by accrued interest
payable. The discount rates used in these calculations are LIBOR rates with similar terms. The
estimated fair value approximates the recorded book balance for deposits with three months or less
to maturity.
Consolidated Obligations. The Bank estimates fair values based on the cost of issuing debt
with comparable terms. We determine the fair value of our consolidated obligations by calculating
the present value of expected future cash flows discounted by the CO Curve published by the Office
of Finance, excluding the amount of accrued interest. The discount rates used are the consolidated
obligation rates for instruments with similar terms.
Consolidated Obligations Elected Under the Fair Value Option. The Bank estimates fair values
using models that use primarily market observable inputs. The Banks primary inputs for measuring
the fair value of bonds are market-based CO Curve inputs obtained from the Office of Finance. The
Bank has determined that the CO Curve is based on market observable data.
Adjustments may be necessary to reflect the Banks credit quality or the credit quality of the
FHLBank System when valuing bonds measured at fair value. The Bank monitors its own
creditworthiness, the creditworthiness of the other 11 FHLBanks, and the FHLBank System to
determine whether any adjustments are necessary for creditworthiness in its fair value measurement
of bonds. The credit ratings of the FHLBank System and any changes to the credit ratings are the
basis for the Bank to determine whether the fair values of bonds have been significantly affected
during the reported period by changes in the instrument-specific credit risk.
49
Borrowings. The Bank determines the estimated fair value of borrowings by calculating the
present value of expected future cash flows from the borrowings and reducing this amount by accrued
interest payable. The discount rates used in these calculations are the estimated cost of
borrowings with similar terms. For borrowings with three months or less to maturity, the estimated
fair value approximates the recorded book balance.
Mandatorily Redeemable Capital Stock. The fair value of capital subject to mandatory
redemption is generally reported at par value. Fair value also includes estimated dividends earned
at the time of the reclassification from equity to liabilities, until such amount is paid. Stock
can only be acquired by members at par value and redeemed at par value. Stock is not traded and no
market mechanism exists for the exchange of stock outside the cooperative structure.
Commitments to Extend Credit for Mortgage Loans. The estimated fair value of the Banks
commitments to table fund mortgage loans is estimated using the fees currently charged to enter
into similar agreements, taking into account the remaining terms of the agreements and the present
creditworthiness of the counterparties. The estimated fair value of these fixed rate loan
commitments also takes into account the difference between current and committed interest rates.
Standby Letters of Credit. The estimated fair value of standby letters of credit is based on
fees currently charged for similar agreements or on the estimated cost to terminate them or
otherwise settle the obligations with the counterparties.
Standby Bond Purchase Agreements. The estimated fair value of standby bond purchase agreements
is calculated using the present value of expected future fees related to the agreements. The
discount rates used in the calculations are based on municipal spreads over the Treasury curve,
which are comparable to discount rates used to value the underlying bonds. Upon purchase of any
bonds under these agreements, the Bank estimates fair value based upon the Investment Securities
fair value methodology.
50
The carrying values and estimated fair values of the Banks financial instruments were as
follows (dollars in thousands):
FAIR VALUE SUMMARY TABLE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
|
December 31, 2008 |
|
|
|
Carrying |
|
|
Estimated |
|
|
Carrying |
|
|
Estimated |
|
Financial Instruments |
|
Value |
|
|
Fair Value |
|
|
Value |
|
|
Fair Value |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
26,897 |
|
|
$ |
26,897 |
|
|
$ |
44,368 |
|
|
$ |
44,368 |
|
Interest-bearing deposits |
|
|
20,685 |
|
|
|
20,594 |
|
|
|
152 |
|
|
|
152 |
|
Federal funds sold |
|
|
4,485,000 |
|
|
|
4,485,000 |
|
|
|
3,425,000 |
|
|
|
3,425,000 |
|
Trading securities |
|
|
5,363,215 |
|
|
|
5,363,215 |
|
|
|
2,151,485 |
|
|
|
2,151,485 |
|
Available-for-sale securities |
|
|
5,521,251 |
|
|
|
5,521,251 |
|
|
|
3,839,980 |
|
|
|
3,839,980 |
|
Held-to-maturity securities |
|
|
5,743,500 |
|
|
|
5,812,549 |
|
|
|
5,952,008 |
|
|
|
5,917,288 |
|
Advances |
|
|
36,303,074 |
|
|
|
36,614,890 |
|
|
|
41,897,479 |
|
|
|
41,864,640 |
|
Mortgage loans, net |
|
|
7,838,035 |
|
|
|
8,169,608 |
|
|
|
10,684,910 |
|
|
|
10,984,668 |
|
Accrued interest receivable |
|
|
84,305 |
|
|
|
84,305 |
|
|
|
92,620 |
|
|
|
92,620 |
|
Derivative assets |
|
|
5,266 |
|
|
|
5,266 |
|
|
|
2,840 |
|
|
|
2,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
(1,216,925 |
) |
|
|
(1,216,922 |
) |
|
|
(1,496,470 |
) |
|
|
(1,495,865 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount notes |
|
|
(12,874,240 |
) |
|
|
(12,877,298 |
) |
|
|
(20,061,271 |
) |
|
|
(20,141,287 |
) |
Bonds (includes $4,308,501 at
fair value under the fair
value option at September 30,
2009) |
|
|
(46,918,100 |
) |
|
|
(48,186,139 |
) |
|
|
(42,722,473 |
) |
|
|
(44,239,835 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated obligations, net |
|
|
(59,792,340 |
) |
|
|
(61,063,437 |
) |
|
|
(62,783,744 |
) |
|
|
(64,381,122 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mandatorily redeemable capital stock |
|
|
(17,504 |
) |
|
|
(17,504 |
) |
|
|
(10,907 |
) |
|
|
(10,907 |
) |
Accrued interest payable |
|
|
(289,468 |
) |
|
|
(289,468 |
) |
|
|
(320,271 |
) |
|
|
(320,271 |
) |
Derivative liabilities |
|
|
(379,501 |
) |
|
|
(379,501 |
) |
|
|
(435,015 |
) |
|
|
(435,015 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standby letters of credit |
|
|
(1,523 |
) |
|
|
(1,523 |
) |
|
|
(1,945 |
) |
|
|
(1,945 |
) |
Commitments to extend credit for
mortgage loans |
|
|
|
|
|
|
|
|
|
|
(1,406 |
) |
|
|
(1,426 |
) |
Standby bond purchase agreements |
|
|
|
|
|
|
4,401 |
|
|
|
482 |
|
|
|
263 |
|
51
Note 13Commitments and Contingencies
As described in Note 9, the 12 FHLBanks have joint and several liability for all consolidated
obligations issued. Accordingly, if one or more of the FHLBanks is unable to repay its
participation in the consolidated obligations, each of the other FHLBanks could be called upon by
the Finance Agency to repay all or part of such obligations, as determined or approved by the
Finance Agency. No FHLBank has ever had to assume or pay the consolidated obligation of another
FHLBank. The par amounts of the outstanding consolidated obligations issued on behalf of other
FHLBanks for which the Bank is jointly and severally liable were approximately $914.1 billion and
$1,189.1 billion at September 30, 2009 and December 31, 2008.
In 2008 the Bank entered into a Lending Agreement with the U.S. Treasury in connection with
the U.S. Treasurys establishment of the Government Sponsored Enterprise Credit Facility (GSECF),
as authorized by the Housing Act. The GSECF is designed to serve as a contingent source of
liquidity for the housing government-sponsored enterprises, including the 12 FHLBanks, and expires
on December 31, 2009. Any borrowings by one or more of the FHLBanks under the GSECF are considered
consolidated obligations with the same joint and several liability as all other consolidated
obligations. The terms of any borrowings are agreed to at the time of issuance. Loans under the
Lending Agreement are to be secured by collateral acceptable to the U.S. Treasury, which consists
of FHLBank advances to members that have been collateralized in accordance with regulatory
standards and MBS issued by Fannie Mae or Freddie Mac. The Bank is required to submit to the
Federal Reserve Bank of New York, acting as fiscal agent of the U.S. Treasury, a list of eligible
collateral, updated on a weekly basis. At September 30, 2009 the Bank had provided the U.S.
Treasury with a listing of advance collateral amounting to $10.6 billion, which provides for
maximum borrowings of $9.2 billion. The amount of collateral can be increased or decreased (subject
to the approval of the U.S. Treasury) at any time through the delivery of an updated listing of
collateral. As of September 30, 2009 the Bank has not drawn on this available source of liquidity.
Standby letters of credit are executed with members for a fee. A standby letter of credit is a
short-term financing arrangement between the Bank and a member. If the Bank is required to make
payment for a beneficiarys draw, these amounts are withdrawn from the members demand account. Any
resulting overdraft is converted into a collateralized advance to the member. Outstanding standby
letters of credit were approximately $3.5 billion at September 30, 2009, and had original terms
between 6 days and 13 years with a final expiration in 2020. Outstanding standby letters of credit
were approximately $3.4 billion at December 31, 2008, and had original terms between 4 days and 13
years with a final expiration in 2020. Unearned fees are recorded in other liabilities and amounted
to $1.5 million and $1.9 million at September 30, 2009 and December 31, 2008. Based on managements
credit analyses and collateral requirements, the Bank does not deem it necessary to have any
provision for credit losses on these commitments. The estimated fair value of standby letters of
credit at September 30, 2009 and December 31, 2008 is reported in Note 12.
52
Commitments that unconditionally obligate the Bank to fund/purchase mortgage loans from
members in the MPF program totaled $61.0 million and $289.6 million at September 30, 2009 and
December 31, 2008. Commitments are generally for periods not to exceed 45 business days.
Commitments obligating the Bank to purchase closed mortgage loans from its members are considered
derivatives, and their estimated fair value at September 30, 2009 and December 31, 2008 is reported
in Note 8 as mortgage delivery commitments. Commitments obligating the Bank to table fund mortgage
loans are not considered derivatives, and the estimated fair value at September 30, 2009 and
December 31, 2008 is reported in Note 12 as commitments to extend credit for mortgage loans.
As described in Note 7, for managing the inherent credit risk in the MPF program,
participating members receive base and performance based credit enhancement fees from the Bank.
When the Bank incurs losses for certain MPF products, it reduces performance based credit
enhancement fee payments to applicable members until the amount of the loss is recovered up to the
limit of the FLA. The FLA is an indicator of the potential losses for which the Bank is liable
(before the members credit enhancement is used to cover losses). The FLA amounted to $115.5
million and $105.9 million at September 30, 2009 and December 31, 2008.
The Bank entered into $1.0 billion par value traded but not settled bonds at September 30,
2009 and December 31, 2008. The Bank had derivatives with a notional value of $1.1 billion and $1.0
billion that had traded but not settled at September 30, 2009 and December 31, 2008. The Bank had
$75.4 million and $267.9 million of cash pledged as collateral to broker-dealers at September 30,
2009 and December 31, 2008. The Bank generally executes derivatives with large highly rated banks
and broker-dealers and enters into bilateral collateral agreements.
At September 30, 2009, the Bank had 20 standby bond purchase agreements with housing
associates within its district whereby the Bank would be required to purchase bonds under
circumstances defined in each agreement. The Bank would hold investments in the bonds until the
designated remarketing agent could find a suitable investor or the housing associate repurchases
the bonds according to a schedule established by the standby bond purchase agreement. The 20
outstanding standby bond purchase agreements total $567.6 million and expire seven years after
execution, with a final expiration in 2016. The Bank received fees for the guarantees that amounted
to $0.3 million and $0.7 million for the three and nine months ended September 30, 2009. The Bank
executed 2 and 11 standby bond purchase agreements during the three and nine months ended September
30, 2009. At September 30, 2009, the Bank had not been required to purchase any HFA bonds under the
executed standby bond purchase agreements. The estimated fair value of standby bond purchase
agreements at September 30, 2009 and December 31, 2008 is reported in Note 12.
53
On March 31, 2009, the Bank entered into an agreement with the Missouri Housing Development
Commission to purchase up to $75 million of taxable single family mortgage revenue bonds. The
agreement was set to expire October 8, 2009 however, was extended 30 days through November 6, 2009.
As of September 30, 2009, the Bank had purchased $15.0 million in mortgage revenue bonds under this
agreement.
On September 25, 2009, the Bank entered into an agreement with the Iowa Finance Authority to
purchase up to $100 million of taxable single family mortgage revenue bonds. The agreement expires
on September 24, 2010. As of September 30, 2009, the Bank had not purchased any mortgage revenue
bonds under this agreement.
In conjunction with its sale of certain mortgage loans to the FHLBank of Chicago, whereby the
mortgage loans were immediately resold by the FHLBank of Chicago to Fannie Mae, the Bank entered
into an agreement with the FHLBank of Chicago on June 11, 2009 to indemnify the FHLBank of Chicago
for potential losses on mortgage loans remaining in four master commitments from which the mortgage
loans were sold. The Bank and the FHLBank of Chicago each hold certain participation interests in
the four master commitments and therefore share, on a proportionate basis, any losses incurred
after considering PFI credit enhancement provisions. The sale of mortgage loans under these master
commitments reduced the amount of future credit enhancement fees available for recapture by the
FHLBank of Chicago and the Bank. Therefore, under the agreement, the Bank agreed to indemnify the
FHLBank of Chicago for any losses not otherwise recovered through credit enhancement fees, subject
to an indemnification cap of $2.1 million by December 31, 2010, $1.2 million by December 31, 2012,
$0.8 million by December 31, 2015, and $0.3 million by December 31, 2020. At September 30, 2009 the
Bank was not aware of any losses incurred by the FHLBank of Chicago that would not otherwise be
recovered through credit enhancement fees.
The Bank is not currently aware of any material pending legal proceedings other than ordinary
routine litigation incidental to the business, to which the Bank is a party or of which any of its
property is the subject.
54
Note 14Activities with Stockholders and Housing Associates
Under the Banks Capital Plan, voting rights conferred upon the Banks members are for the
election of member directors and independent directors. Member directorships are designated to one
of the five states in the Banks district and a member is entitled to nominate and vote for
candidates for the state in which the members principal place of business is located. A member is
entitled to cast, for each applicable member directorship, one vote for each share of capital stock
that the member is required to hold, subject to a statutory limitation. Under this limitation, the
total number of votes that a member may cast is limited to the average number of shares of the
Banks capital stock that were required to be held by all members in that state as of the record
date for voting. The independent directors are nominated by the Banks Board of Directors after
consultation with the FHLBanks Affordable Housing Advisory Council, and then voted upon by all
members within the Banks five-state district. Non-member stockholders are not entitled to cast
votes for the election of directors. At September 30, 2009 and December 31, 2008, no member owned
more than ten percent of the voting interests of the Bank due to statutory limits on members
voting rights as mentioned above.
Transactions with Stockholders. The Bank is a cooperative, which means that current members
own nearly all of the outstanding capital stock of the Bank and may receive dividends on their
investment. Former members own the remaining capital stock to support business transactions still
carried in the Banks Statements of Condition. All advances are issued to members and all mortgage
loans held for portfolio are purchased from members. The Bank also maintains demand deposit
accounts for members primarily to facilitate settlement activities that are directly related to
advances and mortgage loan purchases. The Bank may not invest in any equity securities issued by
its stockholders. The Bank extends credit to members in the ordinary course of business on
substantially the same terms, including interest rates and collateral that must be pledged to us,
as those prevailing at the time for comparable transactions with other members unless otherwise
discussed. These extensions of credit do not involve more than the normal risk of collectibility
and do not present other unfavorable features.
55
The following table shows transactions with members and their affiliates, former members and
their affiliates, and eligible housing associates (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
Cash |
|
$ |
3,588 |
|
|
$ |
18,839 |
|
Interest-bearing deposits1 |
|
|
19,818 |
|
|
|
|
|
Federal funds sold |
|
|
505,000 |
|
|
|
1,110,000 |
|
Trading securities2 |
|
|
130,803 |
|
|
|
|
|
Available-for-sale securities2 |
|
|
|
|
|
|
580 |
|
Held-to-maturity securities2 |
|
|
126,129 |
|
|
|
377,619 |
|
Advances |
|
|
36,303,074 |
|
|
|
41,897,479 |
|
Accrued interest receivable |
|
|
9,281 |
|
|
|
21,555 |
|
Derivative assets |
|
|
315 |
|
|
|
2,655 |
|
Other assets |
|
|
509 |
|
|
|
615 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
37,098,517 |
|
|
$ |
43,429,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Deposits |
|
$ |
1,179,282 |
|
|
$ |
1,394,198 |
|
Mandatorily redeemable capital stock |
|
|
17,504 |
|
|
|
10,907 |
|
Accrued interest payable |
|
|
229 |
|
|
|
853 |
|
Derivative liabilities |
|
|
46,079 |
|
|
|
57,519 |
|
Other liabilities |
|
|
1,523 |
|
|
|
1,945 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,244,617 |
|
|
$ |
1,465,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital: |
|
|
|
|
|
|
|
|
Capital stock Class B putable |
|
$ |
2,951,873 |
|
|
$ |
2,780,927 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount of derivatives |
|
$ |
4,051,670 |
|
|
$ |
939,650 |
|
Notional amount of standby letters of credit |
|
$ |
3,524,229 |
|
|
$ |
3,400,001 |
|
Notional amount of standby bond purchase
agreements |
|
$ |
567,619 |
|
|
$ |
259,677 |
|
|
|
|
1 |
|
Interest-bearing deposits consist of non-negotiable certificates of deposit
purchased by the Bank from its members. |
|
2 |
|
Trading securities, available-for-sale securities and held-to-maturity securities
consist of state or local housing agency obligations, commercial paper, and TLGP debt
purchased by the Bank from its members or eligible housing associates. |
56
Transactions with Directors Financial Institutions. In the normal course of business, the
Bank extends credit to its members whose directors and officers serve as its directors (Directors
Financial Institutions). Finance Agency regulations require that transactions with Directors
Financial Institutions be subject to the same eligibility and credit criteria, as well as the same
terms and conditions, as all other transactions. At September 30, 2009 and December 31, 2008,
advances outstanding to the Bank Directors Financial Institutions aggregated $676.8 million and
$561.6 million, representing 1.9 percent and 1.4 percent of the Banks total outstanding advances.
There were $13.8 million and $1.3 million in mortgage loans originated by the Bank Directors
Financial Institutions during the three months ended September 30, 2009 and 2008. There were $38.8
million and $3.0 million in mortgage loans originated by the Bank Directors Financial Institutions
during the nine months ended September 30, 2009 and 2008. At September 30, 2009 and December 31,
2008, capital stock outstanding to the Bank Directors Financial Institutions aggregated $47.1
million and $33.0 million, representing 1.6 percent and 1.2 percent of the Banks total outstanding
capital stock. The Bank did not have any investment or derivative transactions with Directors
Financial Institutions during the three and nine months ended September 30, 2009 and 2008.
Business Concentrations. The Bank has business concentrations with stockholders whose capital
stock outstanding was in excess of ten percent of the Banks total capital stock outstanding.
Capital Stock The following tables present members and their affiliates holding ten
percent or more of outstanding capital stock (including stock classified as mandatorily redeemable)
(shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares at |
|
|
Percent of |
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
Total Capital |
|
Name |
|
City |
|
|
State |
|
|
2009 |
|
|
Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Superior Guaranty Insurance Company1 |
|
Minneapolis |
|
MN |
|
|
4,054 |
|
|
|
13.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares at |
|
|
Percent of |
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
Total Capital |
|
Name |
|
City |
|
|
State |
|
|
2008 |
|
|
Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Superior Guaranty Insurance Company1 |
|
Minneapolis |
|
MN |
|
|
4,499 |
|
|
|
16.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Superior Guaranty Insurance Company (Superior) is an affiliate of Wells Fargo
Bank, N.A. (Wells Fargo). |
In the normal course of business, the Bank invested in overnight Federal funds from Wells
Fargo during the three and nine months ended September 30, 2009 and 2008.
57
Advances The Bank had advances with Wells Fargo of $0.7 billion and $0.2 billion at
September 30, 2009 and December 31, 2008 and advances with Superior, an affiliate of Wells Fargo,
of $1.3 billion and $2.3 billion at September 30, 2009 and December 31, 2008. The Bank made $0.5
billion of new advances to Wells Fargo during the three and nine months ended September 30, 2009.
The Bank made $67.2 billion and $159.9 billion of new advances with Wells Fargo during the three
and nine months ended September 30, 2008. The Bank made no new advances with Superior during the
three and nine months ended September 30, 2009. The Bank made $0.5 billion of new advances with
Superior during the three and nine months ended September 30, 2008. During the third quarter of
2009, Superior transferred a $500.0 million advance to Wells Fargo. This advance matured on
September 30, 2009.
Total interest income from Wells Fargo amounted to $4.1 million and $97.5 million for the
three months ended September 30, 2009 and 2008 and $9.3 million and $246.3 million for the nine
months ended September 30, 2009 and 2008. Total interest income from Superior amounted to $2.8
million and $8.3 million for the three months ended September 30, 2009 and 2008 and $11.0 million
and $26.8 million for the nine months ended September 30, 2009 and 2008. The Bank held sufficient
collateral to cover the members advances and expected to incur no credit losses as a result of
them.
Mortgage Loans At September 30, 2009 and December 31, 2008, 59 percent and 74
percent of the Banks mortgage loans outstanding were purchased from Superior. The decrease in
percent of mortgage loans outstanding with Superior at September 30, 2009 when compared to December
31, 2008 was due to the mortgage loans sale transaction as discussed in Note 7 Mortgage Loans
Held for Portfolio at page 24.
Other The Bank has a 20 year lease with an affiliate of Wells Fargo for space in a
building for the Banks headquarters that commenced on January 2, 2007. Future minimum rentals to
the Wells Fargo affiliate are as follows (dollars in thousands):
|
|
|
|
|
Year |
|
Amount |
|
|
|
|
|
|
Due in one year or less |
|
$ |
869 |
|
Due after one year through two years |
|
|
869 |
|
Due after two years through three years |
|
|
869 |
|
Due after three years through four years |
|
|
869 |
|
Due after four years through five years |
|
|
869 |
|
Thereafter |
|
|
11,516 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
15,861 |
|
|
|
|
|
58
Note 15Activities with Other FHLBanks
The Bank may invest in other FHLBank consolidated obligations, for which the other FHLBanks
are the primary obligor, for liquidity purposes. If made, these investments in other FHLBank
consolidated obligations would be purchased in the secondary market from third parties and would be
accounted for as available-for-sale securities. The Bank did not have any investments in other
FHLBank consolidated obligations at September 30, 2009 and December 31, 2008.
The Bank purchased MPF shared funding certificates from the FHLBank of Chicago. See Note 5
Held to Maturity Securities at page 17 for balances at September 30, 2009 and December 31, 2008.
The Bank recorded service fee expense as an offset to other income (loss) due to its
relationship with the FHLBank of Chicago in the MPF program. The Bank recorded $0.3 million in
service fee expense to the FHLBank of Chicago for the three months ended September 30, 2009 and
2008 and $1.0 million and $0.7 million for the nine months ended September 30, 2009 and 2008.
On June 24, 2009, the Bank sold $2.1 billion of mortgage loans held for sale to the FHLBank of
Chicago, who immediately resold these loans to Fannie Mae. As a result of the mortgage loan sale,
the Bank entered into an agreement with the FHLBank of Chicago to indemnify the FHLBank of Chicago
for potential losses on mortgage loans remaining in four master commitments from which the mortgage
loans were sold. For additional information on the indemnification agreement, refer to Note 13
Commitments and Contingencies at page 52.
Effective February 26, 2009 the Bank signed agreements with the FHLBank of Chicago to
participate in a MPF loan product called MPF Xtra. For additional information on the MPF Xtra
agreement with the FHLBank of Chicago, refer to Note 7 Mortgage Loans Held for Portfolio at
page 24.
The Bank may sell or purchase unsecured overnight and term Federal funds to and from other
FHLBanks at market interest rates.
59
The Bank did not make any loans to other FHLBanks during the nine months ended September 30,
2009. The following table shows loan activity to other FHLBanks during the nine months ended
September 30, 2008 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal |
|
|
|
|
|
|
Beginning |
|
|
|
|
|
|
Payment |
|
|
Ending |
|
Other FHLBank |
|
Balance |
|
|
Advance |
|
|
Received |
|
|
Balance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Atlanta |
|
$ |
|
|
|
$ |
113,000 |
|
|
$ |
(113,000 |
) |
|
$ |
|
|
Boston |
|
|
|
|
|
|
524,000 |
|
|
|
(524,000 |
) |
|
|
|
|
Chicago |
|
|
|
|
|
|
250,000 |
|
|
|
(250,000 |
) |
|
|
|
|
San Francisco |
|
|
|
|
|
|
1,100,000 |
|
|
|
(1,100,000 |
) |
|
|
|
|
Topeka |
|
|
|
|
|
|
201,000 |
|
|
|
(201,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
2,188,000 |
|
|
$ |
(2,188,000 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows loan activity from other FHLBanks during the nine months ended
September 30, 2009 and 2008 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning |
|
|
|
|
|
|
Principal |
|
|
Ending |
|
Other FHLBank |
|
Balance |
|
|
Borrowings |
|
|
Payment |
|
|
Balance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
San Francisco |
|
$ |
|
|
|
$ |
6,104,000 |
|
|
$ |
(6,104,000 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cincinnati |
|
$ |
|
|
|
$ |
63,000 |
|
|
$ |
(63,000 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
ITEM 2MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Managements Discussion and Analysis of Financial Condition and Results of Operations should
be read in conjunction with our financial statements and condensed notes at the beginning of this
Form 10-Q and in conjunction with our Managements Discussion and Analysis and annual report on
Form 10-K filed with the Securities and Exchange Commission (SEC) on March 13, 2009 (Form 10-K).
The Banks Managements Discussion and Analysis is designed to provide information that will help
the reader develop a better understanding of the Banks financial statements, key financial
statement changes from quarter to quarter, and the primary factors driving those changes. The
Banks Managements Discussion and Analysis is organized as follows:
Contents
|
|
|
|
|
|
|
|
62 |
|
|
|
|
|
63 |
|
|
|
|
|
66 |
|
|
|
|
|
67 |
|
|
|
|
|
69 |
|
|
|
|
|
69 |
|
|
|
|
|
70 |
|
|
|
|
|
74 |
|
|
|
|
|
75 |
|
|
|
|
|
76 |
|
|
|
|
|
78 |
|
|
|
|
|
83 |
|
|
|
|
|
86 |
|
|
|
|
|
86 |
|
|
|
|
|
86 |
|
|
|
|
|
89 |
|
|
|
|
|
91 |
|
|
|
|
|
93 |
|
|
|
|
|
95 |
|
|
|
|
|
96 |
|
|
|
|
|
98 |
|
|
|
|
|
106 |
|
|
|
|
|
108 |
|
|
|
|
|
113 |
|
|
61
Forward-Looking Information
Statements contained in this report, including statements describing the objectives,
projections, estimates, or future predictions in our operations, may be forward-looking statements.
These statements may be identified by the use of forward-looking terminology, such as believes,
projects, expects, anticipates, estimates, intends, strategy, plan, may, and will or their
negatives or other variations on these terms. By their nature, forward-looking statements involve
risk or uncertainty, and actual results could differ materially from those expressed or implied or
could affect the extent to which a particular objective, projection, estimate, or prediction is
realized.
These forward-looking statements involve risks and uncertainties including, but not limited
to, the following:
|
|
|
Economic and market conditions; |
|
|
|
Demand for Bank advances resulting from changes in Bank members deposit flows and/or
credit demands; |
|
|
|
Volume of eligible mortgage loans originated and sold by participating members to the
Bank through the Mortgage Partnership Finance (MPF) Program; |
|
|
|
Pricing of various mortgage loans under the MPF Program by the MPF Provider since the
Bank has only limited input on pricing through its participation on the MPF Governance
Committee; |
|
|
|
Volatility of market prices, rates and indices that could affect the value of
investments or the Banks ability to liquidate collateral expediently in the event of a
default by an obligor; |
|
|
|
Political events, including legislative, regulatory, judicial, or other developments
that affect the Bank, its members, counterparties and/or investors in the consolidated
obligations of the FHLBanks; |
|
|
|
Competitive forces including, without limitation, other sources of funding available
to Bank members including existing and newly created debt programs explicitly guaranteed
by the U.S. Government, other entities borrowing funds in the capital markets and the
ability of the Bank to attract and retain skilled individuals; |
|
|
|
Changes in domestic and foreign investor demand for consolidated obligations of the
FHLBanks and/or the terms of derivatives and similar instruments including, without
limitation, changes in the relative attractiveness of consolidated obligations as
compared to other investment opportunities including existing and newly created debt
programs explicitly guaranteed by the U.S. Government; |
|
|
|
Timing and volume of market activity; |
|
|
|
Risks related to the operations of the other 11 FHLBanks that could trigger our joint
and several liability for debt issued by the other 11 FHLBanks; and |
|
|
|
Risk of loss arising from litigation filed against the Bank. |
|
|
|
Member failures may adversely impact the Banks business. |
62
There can be no assurance that unanticipated risks will not materially and adversely affect
our results of operations. For additional information regarding these and other risks and
uncertainties that could cause our actual results to differ materially from the expectations
reflected in our forward-looking statements see Risk Factors in our Form 10-K incorporated herein
by reference. You are cautioned not to place undue reliance on any forward-looking statements made
by us or on our behalf. Forward-looking statements are made as of the date of this report. We
undertake no obligation to update or revise any forward-looking statement.
Executive Overview
The Federal Home Loan Bank of Des Moines (the Bank, we, us, or our) is a federally chartered
corporation that is exempt from all federal, state, and local taxation except real property taxes
and is one of 12 district Federal Home Loan Banks (FHLBanks). The FHLBanks were created under the
authority of the Federal Home Loan Bank Act of 1932 (FHLBank Act), which was recently amended by
the Housing and Economic Recovery Act of 2008 (Housing Act). The Federal Housing Finance Agency
(Finance Agency) supervises and regulates the FHLBanks and the FHLBanks Office of Finance (Office
of Finance), as well as Federal National Mortgage Association (Fannie Mae) and Federal Home Loan
Mortgage Corporation (Freddie Mac). The Finance Agencys principal purpose is to ensure that the
FHLBanks operate in a safe and sound manner. In addition, the Finance Agency ensures that the
FHLBanks carry out their housing finance mission and remain adequately capitalized. The Finance
Agency establishes policies and regulations governing the operations of the FHLBanks. Each FHLBank
operates as a separate entity with its own management, employees, and board of directors.
The Bank is a cooperatively owned government-sponsored enterprise (GSE) serving shareholder
members and housing associates in a five-state region (Iowa, Minnesota, Missouri, North Dakota, and
South Dakota). The Banks mission is to provide funding and liquidity for its members and housing
associates. The Bank fulfills its mission by being a stable resource that can make short- and
long-term funding available to members and housing associates through advances, standby letters of
credit, investment purchases, mortgage purchases, and targeted housing and economic development
activities. Our member institutions include commercial banks, savings institutions, credit unions,
and insurance companies.
During the three and nine months ended September 30, 2009 the Bank reported net income of
$35.5 million and $105.5 million compared to net income of $45.8 million and $125.1 million for the
same periods in 2008. Net income during the three and nine months ended September 30, 2009 was
primarily impacted by decreased net interest income, net gains on the sale of U.S. Treasury
obligations and termination of the related interest rate swaps, and losses on the extinguishment of
debt.
63
During the three and nine months ended September 30, 2009 the Banks net interest income
declined 27 percent and 40 percent, respectively, when compared to the same periods in 2008
primarily due to decreased average advances and mortgage loans. Average advances declined due to
the availability of alternative wholesale funding options for member banks as well as increased
deposit growth realized by many members. Average mortgage loans declined primarily due to the sale
of a portion of our MPF portfolio during the second quarter of 2009. The declining volumes were
partially offset by the impact of market conditions and interest rates.
During the latter half of 2008, the Banks longer-term funding was expensive due to
illiquidity in the market place and discount note spreads relative to London Interbank Offered Rate
(LIBOR) were at historically wide levels. As a result, the Bank funded longer-term assets with
short-term debt. This funding methodology decreased the Banks debt costs and therefore increased
net interest income during the nine months ended September 30, 2009 when compared with the same
period in 2008. With this funding methodology the Bank accepted the risk associated with the
maturity mismatches. Therefore, to compensate for the risk associated with this funding mismatch as
well as the challenging market place that was presenting diminishing liquidity and increasing
volatility, the Bank added a risk/liquidity adjustment to its advance pricing beginning in
September 2008. As the financial markets have shown signs of stabilization during the three months
ended September 30, 2009, the Bank has decreased this risk/liquidity adjustment in its advance
pricing.
Improved market conditions during the three months ended September 30, 2009 compared to the
same period in 2008 also provided the Bank with the opportunity to better match fund its
longer-term assets with longer-term debt (bonds). The Bank was also able to extinguish higher
costing debt and replace that debt with lower costing debt. Both the opportunity to better match
fund and extinguish debt allowed the Bank to increase our bond issuances at more attractive
interest rates, thereby, lowering debt costs and increasing net interest income during the three
and nine months ended September 30, 2009 when compared to the same periods in 2008.
Also impacting net interest income is the availability of attractive investment options.
Short-term investment rates are low, primarily due to increased deposit levels and the availability
of various government funding programs for financial institutions serving as the Banks
counterparties for short-term investments. The low growth market environment and the relative
improvement in funding resulted in decreased interest spreads on investments. Although the Bank
continues to explore new investment opportunities that provide favorable returns and has increased
average investments through purchases, the compressed spreads decreased net interest income during
the nine months ended September 30, 2009 relative to the same period in 2008.
64
Additionally, the Bank began purchasing investments in U.S. Treasury obligations during the
second quarter of 2009. These investments were made possible due to unique opportunities in the
financial markets as interest rates on 30-year U.S. Treasury obligations yielded returns above
equivalent maturity LIBOR swap rates, therefore allowing the Bank to earn a positive spread on the
investment. Management believes that the investment opportunities available in U.S. Treasury
obligations are a short-term market anomaly caused by continued uncertainty in the financial
markets (i.e. AAA rated U.S. Treasury obligations with interest rates yielding returns in excess of
AA rated U.S. LIBOR swap rates). The Bank also entered into interest rate swaps to convert the
fixed rate investments to three-month LIBOR plus a spread. At the time of execution, management
determined that if and when the market showed signs of correcting this imbalance, prudent action to
recognize large short-term gains, combined with any reduction in associated risk of the net
investment (the Banks risk in this investment results from any possible change between the Banks
cost of funds and LIBOR), was warranted through the subsequent sale and termination of the related
interest rate swaps. Therefore, during the three and nine months ended September 30, 2009, the Bank
sold $1.9 billion and $2.7 billion of U.S. Treasury obligations and terminated the related interest
rate swaps. The overall impact of these transactions was a net gain of $37.9 million and $70.9
million during the three and nine months ended September 30, 2009.
The Bank utilized, in part, the proceeds from the U.S. Treasury transactions described above
to extinguish approximately $266.8 million and $853.3 million of higher costing par value debt
during the three and nine months ended September 30, 2009 and, as a result, recorded losses of
approximately $28.5 million and $80.9 million. The Bank expects such losses will be offset in
future periods by improved earnings as a result of lower debt costs.
65
Conditions in the Financial Markets
Three and Nine Months Ended September 30, 2009 and December 31, 2008
Financial Market Conditions
During the three and nine months ended September 30, 2009, average market interest rates were
significantly lower when compared with the same periods in 2008. The following table shows
information on key average market interest rates for the three and nine months ended September 30,
2009 and 2008 and key market interest rates at December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-to-date |
|
|
Year-to-date |
|
|
|
|
|
|
Third Quarter |
|
|
Third Quarter |
|
|
September 30, |
|
|
September 30, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
December 31, |
|
|
|
3-Month |
|
|
3-Month |
|
|
9-Month |
|
|
9-Month |
|
|
2008 |
|
|
|
Average |
|
|
Average |
|
|
Average |
|
|
Average |
|
|
Ending Rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fed effective1 |
|
|
0.15 |
% |
|
|
1.96 |
% |
|
|
0.17 |
% |
|
|
2.41 |
% |
|
|
0.14 |
% |
Three-month LIBOR1 |
|
|
0.41 |
|
|
|
2.91 |
|
|
|
0.83 |
|
|
|
2.98 |
|
|
|
1.43 |
|
2-year U.S. Treasury1 |
|
|
1.01 |
|
|
|
2.35 |
|
|
|
0.97 |
|
|
|
2.26 |
|
|
|
0.77 |
|
10-year U.S. Treasury1 |
|
|
3.50 |
|
|
|
3.85 |
|
|
|
3.17 |
|
|
|
3.79 |
|
|
|
2.21 |
|
30-year residential mortgage note2 |
|
|
5.17 |
|
|
|
6.33 |
|
|
|
5.08 |
|
|
|
6.09 |
|
|
|
5.14 |
|
|
|
|
1 |
|
Source is Bloomberg. |
|
2 |
|
Average calculated using The Mortgage Bankers Association Weekly Application Survey;
December 31, 2008 ending rates are from the last week in 2008. |
The third quarter of 2009 reflected mixed economic conditions. While there have been some
signs of economic improvement (i.e., rising consumer confidence and retail sales, increasing
durable goods orders, and record issuance from some asset classes), there have also been signs of
uncertainty in the market regarding the timing of the recovery.
The U.S. Government, the Federal Reserve, and a number of foreign governments and foreign
central banks continued to take actions to stabilize the credit and liquidity markets. At the
conclusion of its September policy meeting, the Federal Reserve acknowledged that economic
activity has picked up. Although the central bank reiterated its position that an exceptionally
low level of interest rates would likely be warranted for an extended period, the Federal Reserve
also sent clear signals it is preparing to exit from parts of its credit easing.
66
Agency Spreads
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-to-date |
|
|
Year-to-date |
|
|
|
|
|
|
Third Quarter |
|
|
Third Quarter |
|
|
September 30, |
|
|
September 30, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
December 31, |
|
|
|
3-Month |
|
|
3-Month |
|
|
9-Month |
|
|
9-Month |
|
|
2008 |
|
|
|
Average |
|
|
Average |
|
|
Average |
|
|
Average |
|
|
Ending Rate |
|
FHLB spreads to LIBOR |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(basis points)1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3-month |
|
|
(0.2 |
) |
|
|
(37.9 |
) |
|
|
(56.7 |
) |
|
|
(45.7 |
) |
|
|
(131.5 |
) |
2-year |
|
|
(13.3 |
) |
|
|
(15.5 |
) |
|
|
6.2 |
|
|
|
(17.6 |
) |
|
|
19.4 |
|
5-year |
|
|
9.2 |
|
|
|
(0.8 |
) |
|
|
32.9 |
|
|
|
(4.1 |
) |
|
|
73.1 |
|
10-year |
|
|
56.7 |
|
|
|
21.8 |
|
|
|
90.5 |
|
|
|
13.3 |
|
|
|
109.1 |
|
|
|
|
1 |
|
Source is Office of Finance. |
Agency spreads to LIBOR have worsened in the three months ended September 30, 2009 in
each sector when compared to the same period in 2008, resulting in higher funding costs for the
Bank. The worsening of spreads to LIBOR is in part due to the significant decrease in 3-month LIBOR
since December 31, 2008.
Historically, the FHLBanks credit quality and efficiency led to ready access to funding at
competitive rates. However, since the fourth quarter of 2008, government intervention and weakening
investor confidence has adversely impacted the Banks long-term cost of funds. As demonstrated in
the table above, average agency spreads on the Banks longer dated maturities during the first nine
months of 2009 were wider to LIBOR compared with the same period in 2008 resulting in more
expensive debt costs to the Bank on its longer-term bonds. As a result, the Bank continued to rely
on the issuance of shorter-term discount notes and bonds to fund longer-term assets. Although the
Bank relied on the issuance of shorter-term discount notes and bonds to fund both its short- and
long-term assets during the nine months ended September 30, 2009, improved market conditions during
the third quarter of 2009 allowed the Bank to better match fund its longer-term assets with
longer-term debt.
Selected Financial Data
The following selected financial data should be read in conjunction with the financial
statements and condensed notes thereto, Managements Discussion and Analysis of Financial
Condition and Results of Operations included in this report, and our Form 10-K. The financial
position data at September 30, 2009 and results of operations data for the three and nine months
ended September 30, 2009 were derived from the unaudited financial statements and condensed notes
thereto included in this report. The financial position data at December 31, 2008 was derived from
the audited financial statements and notes not included in this report.
67
In the opinion of management, the unaudited financial information is complete and reflects all
adjustments, consisting of normal recurring adjustments, for a fair statement of results for the
interim periods and is in conformity with accounting principles generally accepted in the United
States of America (GAAP). The results of operations for the three and nine months ended September
30, 2009 are not necessarily indicative of the results that may be achieved for the full year.
|
|
|
|
|
|
|
|
|
Statements of Condition (Dollars in millions)
|
|
September 30,
2009 |
|
|
December 31,
2008 |
|
Short-term investments1 |
|
$ |
4,953 |
|
|
$ |
3,810 |
|
Mortgage-backed securities |
|
|
9,335 |
|
|
|
9,307 |
|
Other investments2 |
|
|
6,846 |
|
|
|
2,252 |
|
Advances |
|
|
36,303 |
|
|
|
41,897 |
|
Mortgage loans, net |
|
|
7,838 |
|
|
|
10,685 |
|
Total assets |
|
|
65,426 |
|
|
|
68,129 |
|
Consolidated obligations3 |
|
|
59,792 |
|
|
|
62,784 |
|
Mandatorily redeemable capital stock |
|
|
18 |
|
|
|
11 |
|
Affordable Housing Program |
|
|
40 |
|
|
|
40 |
|
Payable to REFCORP |
|
|
9 |
|
|
|
1 |
|
Total liabilities |
|
|
62,040 |
|
|
|
65,112 |
|
Capital stock Class B putable |
|
|
2,952 |
|
|
|
2,781 |
|
Retained earnings |
|
|
458 |
|
|
|
382 |
|
Capital-to-asset ratio4 |
|
|
5.18 |
% |
|
|
4.43 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
Operating Results and Performance Ratios |
|
September 30, |
|
|
September 30, |
|
(Dollars in millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Interest income |
|
$ |
325.5 |
|
|
$ |
612.5 |
|
|
$ |
1,132.3 |
|
|
$ |
1,807.2 |
|
Interest expense |
|
|
267.4 |
|
|
|
532.8 |
|
|
|
1,001.8 |
|
|
|
1,589.8 |
|
Net interest income |
|
|
58.1 |
|
|
|
79.7 |
|
|
|
130.5 |
|
|
|
217.4 |
|
Provision for credit losses on mortgage loans |
|
|
* |
|
|
|
|
|
|
|
0.3 |
|
|
|
|
|
Net interest income after mortgage loan credit
loss provision |
|
|
58.1 |
|
|
|
79.7 |
|
|
|
130.2 |
|
|
|
217.4 |
|
|
Other income (loss) |
|
|
1.5 |
|
|
|
(6.6 |
) |
|
|
49.2 |
|
|
|
(14.3 |
) |
Other expense |
|
|
11.3 |
|
|
|
10.8 |
|
|
|
35.8 |
|
|
|
32.8 |
|
Total assessments5 |
|
|
12.8 |
|
|
|
16.5 |
|
|
|
38.1 |
|
|
|
45.2 |
|
Net income |
|
|
35.5 |
|
|
|
45.8 |
|
|
|
105.5 |
|
|
|
125.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets |
|
|
0.21 |
% |
|
|
0.24 |
% |
|
|
0.20 |
% |
|
|
0.24 |
% |
Return on average capital stock |
|
|
4.78 |
|
|
|
5.63 |
|
|
|
4.87 |
|
|
|
5.61 |
|
Return on average total capital |
|
|
4.17 |
|
|
|
5.15 |
|
|
|
4.34 |
|
|
|
5.08 |
|
Net interest spread |
|
|
0.24 |
|
|
|
0.26 |
|
|
|
0.13 |
|
|
|
0.25 |
|
Net interest margin |
|
|
0.34 |
|
|
|
0.42 |
|
|
|
0.25 |
|
|
|
0.42 |
|
Operating expenses to average assets6 |
|
|
0.06 |
|
|
|
0.05 |
|
|
|
0.06 |
|
|
|
0.06 |
|
Annualized dividend rate |
|
|
2.00 |
|
|
|
4.00 |
|
|
|
1.34 |
|
|
|
4.17 |
|
Cash dividends declared and paid |
|
$ |
14.4 |
|
|
$ |
30.1 |
|
|
$ |
29.0 |
|
|
$ |
82.4 |
|
|
|
|
1 |
|
Short-term investments include: interest-bearing deposits, negotiable certificates of
deposit, Federal funds sold and commercial paper. Short-term investments have terms less than
one year. |
|
2 |
|
Other investments include: long-term interest-bearing deposits, Temporary Liquidity
Guarantee Program (TLGP) securities, Tennessee Valley Authority (TVA) and Federal Farm Credit
Bank (FFCB) bonds, state or local housing agency obligations, Small Business Investment
Company, and municipal bonds. |
|
3 |
|
The par amount of the outstanding consolidated obligations for all 12
FHLBanks was $973.6 billion and $1,251.5 billion at September 30, 2009 and December 31, 2008. |
|
4 |
|
Capital-to-asset ratio is capital stock plus retained earnings and accumulated other
comprehensive loss as a percentage of total assets at the end of the period. |
|
5 |
|
Total assessments include: Affordable Housing Program (AHP) and Resolution Funding
Corporation (REFCORP). |
|
6 |
|
Operating expenses to average assets ratio is salaries and benefits plus operating
expenses as a percentage of average assets. |
|
* |
|
Represents an amount less than $0.1 million. |
68
Results of Operations
Three and Nine Months Ended September 30, 2009 and 2008
Net Income
The Bank reported net income of $35.5 million and $105.5 million for the three and nine months
ended September 30, 2009 compared with net income of $45.8 million and $125.1 million for the three
and nine months ended September 30, 2008. The decrease in net income during the three and nine
months ended September 30, 2009 when compared to the same periods in 2008 was primarily
attributable to decreased net interest income and activity reported in other income (loss). These
items are described further in the sections that follow.
69
Net Interest Income
The following table presents average balances and rates of major interest rate sensitive asset
and liability categories for the three months ended September 30, 2009 and 2008. The table also
presents the net interest spread between yield on total interest-earning assets and cost of total
interest-bearing liabilities and the net interest margin between yield on total assets and the cost
of total liabilities and capital (dollars in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
For the Three Months Ended
|
|
|
|
September 30, 2009 |
|
|
September 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
|
|
|
|
|
|
|
|
|
Interest |
|
|
|
Average |
|
|
|
|
|
|
Income/ |
|
|
Average |
|
|
|
|
|
|
Income/ |
|
|
|
Balance 1 |
|
|
Yield/Cost |
|
|
Expense |
|
|
Balance 1 |
|
|
Yield/Cost |
|
|
Expense |
|
Interest-earning assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits |
|
$ |
76 |
|
|
|
0.57 |
% |
|
$ |
0.1 |
|
|
$ |
1 |
|
|
|
2.03 |
% |
|
$ |
* |
|
Securities purchased under
agreements to resell |
|
|
1,223 |
|
|
|
0.15 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold |
|
|
4,787 |
|
|
|
0.20 |
|
|
|
2.4 |
|
|
|
3,609 |
|
|
|
2.02 |
|
|
|
18.3 |
|
Short-term investments2 |
|
|
511 |
|
|
|
0.47 |
|
|
|
0.7 |
|
|
|
376 |
|
|
|
2.15 |
|
|
|
2.0 |
|
Mortgage-backed securities2 |
|
|
9,027 |
|
|
|
2.12 |
|
|
|
48.3 |
|
|
|
9,257 |
|
|
|
3.69 |
|
|
|
85.8 |
|
Other investments2 |
|
|
7,557 |
|
|
|
1.39 |
|
|
|
26.1 |
|
|
|
85 |
|
|
|
5.92 |
|
|
|
1.3 |
|
Advances3 |
|
|
36,578 |
|
|
|
1.65 |
|
|
|
152.4 |
|
|
|
50,931 |
|
|
|
2.91 |
|
|
|
372.0 |
|
Mortgage loans4 |
|
|
7,954 |
|
|
|
4.74 |
|
|
|
95.1 |
|
|
|
10,566 |
|
|
|
5.01 |
|
|
|
133.0 |
|
Loans to other FHLBanks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50 |
|
|
|
0.61 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
67,713 |
|
|
|
1.91 |
|
|
|
325.5 |
|
|
|
74,875 |
|
|
|
3.25 |
|
|
|
612.5 |
|
Noninterest-earning assets |
|
|
169 |
|
|
|
|
|
|
|
|
|
|
|
167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
67,882 |
|
|
|
1.90 |
% |
|
$ |
325.5 |
|
|
$ |
75,042 |
|
|
|
3.25 |
% |
|
$ |
612.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
1,320 |
|
|
|
0.17 |
% |
|
$ |
0.6 |
|
|
$ |
1,308 |
|
|
|
1.72 |
% |
|
$ |
5.7 |
|
Consolidated obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount notes |
|
|
18,265 |
|
|
|
0.41 |
|
|
|
18.8 |
|
|
|
30,881 |
|
|
|
2.23 |
|
|
|
173.2 |
|
Bonds |
|
|
44,009 |
|
|
|
2.24 |
|
|
|
247.9 |
|
|
|
38,724 |
|
|
|
3.63 |
|
|
|
353.6 |
|
Other interest-bearing liabilities |
|
|
17 |
|
|
|
2.68 |
|
|
|
0.1 |
|
|
|
21 |
|
|
|
5.09 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
63,611 |
|
|
|
1.67 |
|
|
|
267.4 |
|
|
|
70,934 |
|
|
|
2.99 |
|
|
|
532.8 |
|
Noninterest-bearing liabilities |
|
|
903 |
|
|
|
|
|
|
|
|
|
|
|
569 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
64,514 |
|
|
|
1.64 |
|
|
|
267.4 |
|
|
|
71,503 |
|
|
|
2.96 |
|
|
|
532.8 |
|
Capital |
|
|
3,368 |
|
|
|
|
|
|
|
|
|
|
|
3,539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and capital |
|
$ |
67,882 |
|
|
|
1.56 |
% |
|
$ |
267.4 |
|
|
$ |
75,042 |
|
|
|
2.83 |
% |
|
$ |
532.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income and spread |
|
|
|
|
|
|
0.24 |
% |
|
$ |
58.1 |
|
|
|
|
|
|
|
0.26 |
% |
|
$ |
79.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin |
|
|
|
|
|
|
0.34 |
% |
|
|
|
|
|
|
|
|
|
|
0.42 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest-earning assets
to interest-bearing liabilities |
|
|
|
|
|
|
106.45 |
% |
|
|
|
|
|
|
|
|
|
|
105.55 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Composition of net interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-liability spread |
|
|
|
|
|
|
0.26 |
% |
|
$ |
44.2 |
|
|
|
|
|
|
|
0.28 |
% |
|
$ |
53.3 |
|
Earnings on capital |
|
|
|
|
|
|
1.64 |
% |
|
|
13.9 |
|
|
|
|
|
|
|
2.96 |
% |
|
|
26.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
|
|
|
|
$ |
58.1 |
|
|
|
|
|
|
|
|
|
|
$ |
79.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Average balances do not reflect the effect of derivative master netting arrangements
with counterparties. |
|
2 |
|
The average balance of available-for-sale securities is reflected at amortized cost;
therefore the resulting yields do not give effect to changes in fair value. |
|
3 |
|
Advance interest income includes advance prepayment fee income of $3.5
million and $0.1 million for the three months ended September 30, 2009 and 2008. |
|
4 |
|
Nonperforming loans are included in average balances used to determine average rate. |
|
* |
|
Represents an amount less than $0.1 million. |
70
The following table presents average balances and rates of major interest rate sensitive asset
and liability categories for the nine months ended September 30, 2009 and 2008. The table also
presents the net interest spread between yield on total interest-earning assets and cost of total
interest-bearing liabilities and the net interest margin between yield on total assets and the cost
of total liabilities and capital (dollars in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended |
|
|
For the Nine Months Ended |
|
|
|
September 30, 2009 |
|
|
September 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
|
|
|
|
|
|
|
|
|
Interest |
|
|
|
Average |
|
|
|
|
|
|
Income/ |
|
|
Average |
|
|
|
|
|
|
Income/ |
|
|
|
Balance 1 |
|
|
Yield/Cost |
|
|
Expense |
|
|
Balance 1 |
|
|
Yield/Cost |
|
|
Expense |
|
Interest-earning assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits |
|
$ |
121 |
|
|
|
0.37 |
% |
|
$ |
0.3 |
|
|
$ |
3 |
|
|
|
2.45 |
% |
|
$ |
0.1 |
|
Securities purchased under
agreements to resell |
|
|
1,239 |
|
|
|
0.18 |
|
|
|
1.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold |
|
|
6,262 |
|
|
|
0.33 |
|
|
|
15.6 |
|
|
|
3,557 |
|
|
|
2.43 |
|
|
|
64.7 |
|
Short-term investments2 |
|
|
713 |
|
|
|
0.51 |
|
|
|
2.7 |
|
|
|
558 |
|
|
|
2.61 |
|
|
|
10.9 |
|
Mortgage-backed securities2 |
|
|
9,239 |
|
|
|
2.20 |
|
|
|
152.2 |
|
|
|
7,996 |
|
|
|
3.95 |
|
|
|
236.5 |
|
Other investments2 |
|
|
5,809 |
|
|
|
1.59 |
|
|
|
69.0 |
|
|
|
82 |
|
|
|
5.99 |
|
|
|
3.7 |
|
Advances3 |
|
|
38,258 |
|
|
|
1.89 |
|
|
|
541.9 |
|
|
|
45,595 |
|
|
|
3.20 |
|
|
|
1,091.4 |
|
Mortgage loans4 |
|
|
9,662 |
|
|
|
4.83 |
|
|
|
349.0 |
|
|
|
10,660 |
|
|
|
5.01 |
|
|
|
399.8 |
|
Loans to other FHLBanks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18 |
|
|
|
0.69 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
71,303 |
|
|
|
2.12 |
|
|
|
1,132.3 |
|
|
|
68,469 |
|
|
|
3.53 |
|
|
|
1,807.2 |
|
Noninterest-earning assets |
|
|
146 |
|
|
|
|
|
|
|
|
|
|
|
211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
71,449 |
|
|
|
2.12 |
% |
|
$ |
1,132.3 |
|
|
$ |
68,680 |
|
|
|
3.51 |
% |
|
$ |
1,807.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
1,291 |
|
|
|
0.21 |
% |
|
$ |
2.1 |
|
|
$ |
1,302 |
|
|
|
2.11 |
% |
|
$ |
20.6 |
|
Consolidated obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount notes |
|
|
23,527 |
|
|
|
0.72 |
|
|
|
126.5 |
|
|
|
27,177 |
|
|
|
2.41 |
|
|
|
490.8 |
|
Bonds |
|
|
42,303 |
|
|
|
2.76 |
|
|
|
873.0 |
|
|
|
36,218 |
|
|
|
3.97 |
|
|
|
1,075.4 |
|
Other interest-bearing liabilities |
|
|
45 |
|
|
|
0.65 |
|
|
|
0.2 |
|
|
|
82 |
|
|
|
4.95 |
|
|
|
3.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
67,166 |
|
|
|
1.99 |
|
|
|
1,001.8 |
|
|
|
64,779 |
|
|
|
3.28 |
|
|
|
1,589.8 |
|
Noninterest-bearing liabilities |
|
|
1,038 |
|
|
|
|
|
|
|
|
|
|
|
608 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
68,204 |
|
|
|
1.96 |
|
|
|
1,001.8 |
|
|
|
65,387 |
|
|
|
3.25 |
|
|
|
1,589.8 |
|
Capital |
|
|
3,245 |
|
|
|
|
|
|
|
|
|
|
|
3,293 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and capital |
|
$ |
71,449 |
|
|
|
1.87 |
% |
|
$ |
1,001.8 |
|
|
$ |
68,680 |
|
|
|
3.09 |
% |
|
$ |
1,589.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income and spread |
|
|
|
|
|
|
0.13 |
% |
|
$ |
130.5 |
|
|
|
|
|
|
|
0.25 |
% |
|
$ |
217.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin |
|
|
|
|
|
|
0.25 |
% |
|
|
|
|
|
|
|
|
|
|
0.42 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest-earning assets
to interest-bearing liabilities |
|
|
|
|
|
|
106.16 |
% |
|
|
|
|
|
|
|
|
|
|
105.70 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Composition of net interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-liability spread |
|
|
|
|
|
|
0.16 |
% |
|
$ |
82.8 |
|
|
|
|
|
|
|
0.26 |
% |
|
$ |
137.3 |
|
Earnings on capital |
|
|
|
|
|
|
1.96 |
% |
|
|
47.7 |
|
|
|
|
|
|
|
3.25 |
% |
|
|
80.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
|
|
|
|
$ |
130.5 |
|
|
|
|
|
|
|
|
|
|
$ |
217.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Average balances do not reflect the effect of derivative master netting arrangements
with counterparties. |
|
2 |
|
The average balance of available-for-sale securities is reflected at amortized cost;
therefore the resulting yields do not give effect to changes in fair value. |
|
3 |
|
Advance interest income includes advance prepayment fee income of $6.7 million and
$0.7 million for the nine months ended September 30, 2009 and 2008. |
|
4 |
|
Nonperforming loans and loans held for sale are included in average balances used to
determine average rate. |
71
Average assets decreased $7.2 billion to $67.9 billion during the three months ended September
30, 2009 when compared to the same period in 2008. The decrease was primarily attributable to
decreased average advances resulting from decreased member demand as well as decreased average
mortgage loans resulting from the mortgage loan sale transaction. The decrease was partially offset
by increased average investments. Average assets increased $2.8 billion to $71.4 billion during the
nine months ended September 30, 2009 when compared to the same period in 2008. The increase was
primarily attributable to increased average investments resulting from the Banks efforts to
replace mortgage assets sold and improve investment income, partially offset by decreased average
advances and mortgage loans. See Asset-Liability Spread at page 74 for further discussion.
Average liabilities decreased $7.0 billion to $64.5 billion and increased $2.8 billion to
$68.2 billion during the three and nine months ended September 30, 2009 when compared to the same
periods in 2008. The decrease during the three months ended September 30, 2009 was primarily
attributable to decreased average discount notes as a result of decreased average short-term
advances. The increase during the nine months ended September 30, 2009 was primarily attributable
to increased average bonds as a result of increased average investments. Due to improved market
conditions during the third quarter of 2009, the Bank began issuing bonds rather than discount
notes to fund its longer-term assets.
Average capital decreased $171 million and $48 million during the three and nine months ended
September 30, 2009 compared to the same periods in 2008. Average capital levels were higher during
the three and nine months ended September 30, 2008 due to higher advance balances and therefore
higher levels of activity-based capital stock supporting those balances. The decrease was partially
offset by decreased average unrealized losses on available-for-sale securities recorded in
accumulated other comprehensive loss and increased average retained earnings during the three and
nine months ended September 30, 2009.
72
Our net interest income is affected by changes in the dollar volumes of our interest-earning
assets and interest-bearing liabilities and changes in the average rates of those assets and
liabilities. The following table presents the changes in interest income and interest expense.
Changes that cannot be attributed to either rate or volume have been allocated to the rate and
volume variances based on relative size (dollars in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance For the Three Months Ended |
|
|
Variance For the Nine Months Ended |
|
|
|
September 30, 2009 vs. September 30, 2008 |
|
|
September 30, 2009 vs. September 30, 2008 |
|
|
|
Total Increase |
|
|
Total |
|
|
Total Increase |
|
|
Total |
|
|
|
(Decrease) Due to |
|
|
Increase |
|
|
(Decrease) Due to |
|
|
Increase |
|
|
|
Volume |
|
|
Rate |
|
|
(Decrease) |
|
|
Volume |
|
|
Rate |
|
|
(Decrease) |
|
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits |
|
$ |
0.1 |
|
|
$ |
|
|
|
$ |
0.1 |
|
|
$ |
0.3 |
|
|
$ |
(0.1 |
) |
|
$ |
0.2 |
|
Securities purchased under agreements
to resell |
|
|
0.4 |
|
|
|
|
|
|
|
0.4 |
|
|
|
1.6 |
|
|
|
|
|
|
|
1.6 |
|
Federal funds sold |
|
|
4.6 |
|
|
|
(20.5 |
) |
|
|
(15.9 |
) |
|
|
29.3 |
|
|
|
(78.4 |
) |
|
|
(49.1 |
) |
Short-term investments |
|
|
0.6 |
|
|
|
(1.9 |
) |
|
|
(1.3 |
) |
|
|
2.4 |
|
|
|
(10.6 |
) |
|
|
(8.2 |
) |
Mortgage-backed securities |
|
|
(2.1 |
) |
|
|
(35.4 |
) |
|
|
(37.5 |
) |
|
|
32.5 |
|
|
|
(116.8 |
) |
|
|
(84.3 |
) |
Other investments |
|
|
26.5 |
|
|
|
(1.7 |
) |
|
|
24.8 |
|
|
|
70.0 |
|
|
|
(4.7 |
) |
|
|
65.3 |
|
Advances |
|
|
(86.7 |
) |
|
|
(132.9 |
) |
|
|
(219.6 |
) |
|
|
(155.1 |
) |
|
|
(394.4 |
) |
|
|
(549.5 |
) |
Mortgage loans |
|
|
(31.2 |
) |
|
|
(6.7 |
) |
|
|
(37.9 |
) |
|
|
(36.7 |
) |
|
|
(14.1 |
) |
|
|
(50.8 |
) |
Loans to other FHLBanks |
|
|
(0.1 |
) |
|
|
|
|
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
|
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
(87.9 |
) |
|
|
(199.1 |
) |
|
|
(287.0 |
) |
|
|
(55.8 |
) |
|
|
(619.1 |
) |
|
|
(674.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
0.1 |
|
|
|
(5.2 |
) |
|
|
(5.1 |
) |
|
|
(0.2 |
) |
|
|
(18.3 |
) |
|
|
(18.5 |
) |
Consolidated obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount notes |
|
|
(51.5 |
) |
|
|
(102.9 |
) |
|
|
(154.4 |
) |
|
|
(58.5 |
) |
|
|
(305.8 |
) |
|
|
(364.3 |
) |
Bonds |
|
|
43.6 |
|
|
|
(149.3 |
) |
|
|
(105.7 |
) |
|
|
161.0 |
|
|
|
(363.4 |
) |
|
|
(202.4 |
) |
Other interest-bearing liabilities |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
(0.2 |
) |
|
|
(0.9 |
) |
|
|
(1.9 |
) |
|
|
(2.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
(7.9 |
) |
|
|
(257.5 |
) |
|
|
(265.4 |
) |
|
|
101.4 |
|
|
|
(689.4 |
) |
|
|
(588.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
(80.0 |
) |
|
$ |
58.4 |
|
|
$ |
(21.6 |
) |
|
$ |
(157.2 |
) |
|
$ |
70.3 |
|
|
$ |
(86.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The two components of the Banks net interest income are earnings from our asset-liability
spread and earnings on capital. See further discussion in Asset-Liability Spread and Earnings on
Capital at pages 74 and 75.
The yield on total interest-earning assets and cost of interest-bearing liabilities are
impacted by our use of derivatives to adjust the interest rate sensitivity of assets and
liabilities. For the net effect of the Banks hedging activities by product on net income see
Hedging Activities at page 78.
73
Asset-Liability Spread
Asset-liability spread income decreased $9.1 million and $54.5 million during the three and
nine months ended September 30, 2009 compared with the same periods in 2008. The Banks
asset-liability spread income was impacted by the following:
|
|
|
Interest income on the Banks advance portfolio (including advance prepayment fees,
net) decreased $219.6 million or 59 percent and $549.5 million or 50 percent during the
three and nine months ended September 30, 2009 compared to the same periods in 2008
primarily due to lower interest rates. In addition, average advance volumes decreased
$14.4 billion or 28 percent and $7.3 billion or 16 percent during the three and nine
months ended September 30, 2009 compared to the same periods in 2008 due to the
availability of alternative wholesale funding options for member banks as well as
increased deposit growth realized by many members. |
|
|
|
Interest expense on the Banks discount notes decreased $154.4 million or 89 percent
and $364.3 million or 74 percent during the three and nine months ended September 30,
2009 compared to the same periods in 2008 primarily due to lower interest rates. In
addition, average discount note volumes decreased $12.6 billion or 41 percent and $3.7
billion or 13 percent during the three and nine months ended September 30, 2009 compared
to the same periods in 2008. Discount note volumes declined as a result of the Bank not
replacing maturing discount notes due to decreased short-term funding needs as well as
the ability to fund longer-term during the three months ended September 30, 2009. |
|
|
|
Interest expense on the Banks bonds decreased $105.7 million or 30 percent and
$202.4 million or 19 percent during the three and nine months ended September 30, 2009
compared to the same periods in 2008 primarily due to lower interest rates, partially
offset by increased average bond volumes. Capitalizing on the lower interest rates, the
Bank also extinguished debt during the three and nine months ended September 30, 2009. A
portion of the extinguished debt was replaced with lower costing debt thereby lowering
interest costs. Average bond volumes increased during the three and nine months ended
September 30, 2009 compared to the same periods in 2008 as a result of increased funding
needs due to increased average investments. Additionally, due to improved market
conditions during the third quarter of 2009, the Bank was able to issue longer-term
bonds rather than discount notes to fund its longer-term assets. |
|
|
|
Interest income on the Banks mortgage-backed securities (MBS) decreased $37.5
million or 44 percent and $84.3 million or 36 percent during the three and nine months
ended September 30, 2009 compared to the same periods in 2008 primarily due to lower
interest rates. At September 30, 2009, $6.6 billion or 71 percent of the Banks MBS
portfolio was variable rate. As interest rates decline, so will the associated interest
income on the variable rate MBS. |
74
|
|
|
Interest income on the Banks other investments increased $24.8 million and $65.3 million
during the three and nine months ended September 30, 2009 when compared to the same
periods in 2008 primarily due to the Bank purchasing additional investments during the
nine months ended September 30, 2009 in an effort to improve investment income and
replace mortgage assets. During the nine months ended September 30, 2009 the Bank
purchased $2.7 billion of U.S. Treasury obligations, $4.2 billion of TLGP securities,
$0.7 billion of TVA and FFCB bonds, and $0.2 billion of taxable municipal bonds. |
|
|
|
Interest income on the Banks mortgage loans decreased $37.9 million or 28 percent
and $50.8 million or 13 percent during the three and nine months ended September 30,
2009 compared to the same periods in 2008 primarily due to lower volumes resulting from
the sale of mortgage loans during the second quarter of 2009 as well as payoffs
exceeding originations. |
|
|
|
Interest income on the Banks Federal funds sold decreased $15.9 million or 87
percent and $49.1 million or 76 percent during the three and nine months ended September
30, 2009 compared to the same periods in 2008 primarily due to lower interest rates,
partially offset by increased average Federal funds sold volumes. |
Earnings on Capital
We invest our capital to generate earnings, generally for the same repricing maturity as the
assets being supported. Earnings on capital decreased $12.5 million and $32.4 million during the
three and nine months ended September 30, 2009 compared with the same periods in 2008 primarily due
to the lower interest rate environment as well as the availability of attractive investment
opportunities. As short-term interest rates have declined and
investment opportunities were limited,
the earnings contribution from capital decreased. In addition, average capital balances decreased
$171 million and $48 million during the three and nine months ended September 30, 2009 when
compared to the same periods in 2008.
75
Other Income (Loss)
The following table presents the components of other income (loss) (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service fees |
|
$ |
0.4 |
|
|
$ |
0.5 |
|
|
$ |
1.6 |
|
|
$ |
1.7 |
|
Net realized and unrealized
(loss) gain on trading
securities |
|
|
(1.7 |
) |
|
|
|
|
|
|
52.1 |
|
|
|
|
|
Net gain (loss) on sale of
available-for-sale securities |
|
|
31.1 |
|
|
|
|
|
|
|
(11.7 |
) |
|
|
|
|
Net loss on bonds held at fair
value |
|
|
(3.2 |
) |
|
|
|
|
|
|
(15.4 |
) |
|
|
|
|
Net gain on loans held for sale |
|
|
|
|
|
|
|
|
|
|
1.3 |
|
|
|
|
|
Net gain (loss) on derivatives
and hedging activities |
|
|
1.9 |
|
|
|
(2.1 |
) |
|
|
98.3 |
|
|
|
(12.5 |
) |
(Loss) gain on extinguishment
of debt |
|
|
(28.5 |
) |
|
|
|
|
|
|
(80.9 |
) |
|
|
0.2 |
|
Other, net |
|
|
1.5 |
|
|
|
(5.0 |
) |
|
|
3.9 |
|
|
|
(3.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (loss) |
|
$ |
1.5 |
|
|
$ |
(6.6 |
) |
|
$ |
49.2 |
|
|
$ |
(14.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (loss) can be volatile from period to period depending on the type of financial
activity recorded. During the three and nine months ending September 30, 2009 other income (loss)
was impacted by the sale of U.S. Treasury obligations and the termination of the related interest
rate swaps, debt extinguishments, net realized and unrealized (loss) gain on trading securities,
and net losses on bonds held at fair value.
76
During the three and nine months ended September 30, 2009 the Bank purchased and sold 30-year
U.S. Treasury obligations on three separate occasions. On each occasion, the Bank entered into
interest rate swaps to convert the fixed rate investments to floating rate. The relationships were
accounted for as a fair value hedge relationship with changes in LIBOR (benchmark interest rate)
reported as hedge ineffectiveness through net gain (loss) on
derivative and hedging activities. The Bank
sold these securities and terminated the related interest rate swaps. The impact of the sale of the
securities was accounted for through net gain (loss) on
sale of available-for-sale securities and the
impact of the termination of the swaps was accounted for through net gain (loss) on derivatives and
hedging activities. The impact of each of the sales of U.S. Treasury obligations and termination of
the related interest rate swaps are summarized as follows:
|
|
|
In June 2009 the Bank sold $800.0 million of U.S. Treasury obligations and terminated
the related interest rate swaps resulting in a $90.1 million gain on the termination of
the related interest rate swaps and a $42.8 million loss on the sale of the
available-for-sale securities. In addition, the Bank realized $14.3 million in hedge
ineffectiveness losses. The overall impact of this transaction was a net gain of $33.0
million. |
|
|
|
|
In July 2009 the Bank sold $900.0 million of U.S. Treasury obligations and
terminated the related interest rate swaps resulting in a $11.8 million loss on the
termination of the related interest rate swaps and a $26.1 million gain on the sale of
the available-for-sale securities. In addition, the Bank realized $1.3 million in
hedge ineffectiveness losses. The overall impact of this transaction was a net gain of
$13.0 million. |
|
|
|
|
In September 2009 the Bank sold $1.0 billion of U.S. Treasury obligations and
terminated the related interest rate swaps resulting in a $18.4 million gain on the
termination of the related interest rate swaps and a $5.0 million gain on the sale of
the available-for-securities. In addition, the Bank realized $1.5 million in hedge
ineffectiveness gains. The overall impact of this transaction was a net gain of $24.9
million. |
Based on the above details the Bank recorded a net gain on the sale of available-for-sale
securities of $31.1 million during the three months ended September 30, 2009 and a net loss of
$11.7 million during the nine months ended September 30, 2009. In addition, the termination of the
related interest rate swaps and the ineffectiveness resulted in a total net gain on derivatives and
hedging activities of $6.8 million and $82.6 million for the three and nine months ended September
30, 2009.
The Bank extinguished bonds with a total par value of $266.8 million and $853.3 million during
the three and nine months ended September 30, 2009 as a result of its desire to reduce future
interest costs, the mortgage loan sale transaction during the second quarter of 2009, and mortgage
prepayments. This resulted in losses of $28.5 million and $80.9 million during the three and nine
months ended September 30, 2009. These losses exclude net losses on basis adjustment amortization
of $1.2 million and net gains on basis adjustment accretion of $4.5 million recorded in net
interest income for the three and nine months ended September 30, 2009. As a result, total net
losses on extinguishment of debt totaled $29.7 million and $76.4 million during the three and nine
months ended September 30, 2009.
77
The trading securities consist of TLGP and taxable municipal bonds. During the third quarter
of 2009, the Bank recorded unrealized losses on TLGP due to a decline in investor demand as the
programs issuance deadline of October 31, 2009 approached. These losses were partially offset by
unrealized gains in taxable municipal bonds. During the nine months ended September 30, 2009 the
Bank recorded gains of $52.1 million primarily due to gains on TLGP driven by favorable spreads.
Finally, net losses on bonds held at fair value were primarily attributable to an increase in
the Federal funds interest rate during the three and nine months ended September 30, 2009. These
losses were offset by gains on interest rate swaps being used to hedge the bonds recorded as a
component of net gains (losses) on derivative and hedging activities in other income (loss).
Hedging Activities
If a hedging activity qualifies for hedge accounting treatment, the Bank includes the periodic
cash flow components of the hedging instrument related to interest income or expense in the
relevant income statement caption consistent with the hedged asset or liability. In addition, the
Bank reports as a component of other income (loss) in Net gain (loss) on derivatives and hedging
activities, the fair value changes of both the hedging instrument and the hedged item. The Bank
records the amortization of certain upfront fees received on interest rate swaps and cumulative
fair value adjustments from terminated hedges in interest income or expense.
If a hedging activity does not qualify for hedge accounting treatment, the Bank reports the
hedging instruments components of interest income and expense, together with the effect of changes
in fair value in other income (loss); however, there is no corresponding fair value adjustment for
the hedged asset or liability.
As a result, accounting for derivatives and hedging activities affects the timing of income
recognition and the effect of certain hedging transactions are spread throughout the income
statement in net interest income and other income (loss).
78
The following tables categorize the net effect of hedging activities on net income by product
(dollars in millions). The table excludes the interest component on derivatives that qualify for
hedge accounting as this amount will be offset by the interest component on the hedged item within
net interest income. Because the purpose of the hedging activity is to protect net interest income
against changes in interest rates, the absolute increase or decrease of interest income from
interest-earning assets or interest expense from interest-bearing liabilities is not as important
as the relationship of the hedging activities to overall net income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2009 |
|
Net effect of |
|
|
|
|
|
|
|
|
|
Mortgage |
|
|
Consolidated |
|
|
Balance |
|
|
|
|
Hedging Activities |
|
Advances |
|
|
Investments |
|
|
Assets |
|
|
Obligations |
|
|
Sheet |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (amortization)\
accretion |
|
$ |
(12.3 |
) |
|
$ |
|
|
|
$ |
(0.4 |
) |
|
$ |
9.3 |
|
|
$ |
|
|
|
$ |
(3.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized and
unrealized gains on
derivatives and
hedging activities |
|
|
0.8 |
|
|
|
7.8 |
|
|
|
|
|
|
|
0.3 |
|
|
|
|
|
|
|
8.9 |
|
(Losses) Gains
Economic Hedges |
|
|
(0.4 |
) |
|
|
(15.2 |
) |
|
|
(0.2 |
) |
|
|
7.0 |
|
|
|
1.8 |
|
|
|
(7.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported in Other
Income (Loss) |
|
|
0.4 |
|
|
|
(7.4 |
) |
|
|
(0.2 |
) |
|
|
7.3 |
|
|
|
1.8 |
|
|
|
1.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(11.9 |
) |
|
$ |
(7.4 |
) |
|
$ |
(0.6 |
) |
|
$ |
16.6 |
|
|
$ |
1.8 |
|
|
$ |
(1.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2008 |
|
Net effect of |
|
|
|
|
|
|
|
|
|
Mortgage |
|
|
Consolidated |
|
|
Balance |
|
|
|
|
Hedging Activities |
|
Advances |
|
|
Investments |
|
|
Assets |
|
|
Obligations |
|
|
Sheet |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (amortization)\
accretion |
|
$ |
(17.8 |
) |
|
$ |
|
|
|
$ |
(0.4 |
) |
|
$ |
14.6 |
|
|
$ |
|
|
|
$ |
(3.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized and
unrealized (losses)
gains on derivatives
and hedging
activities |
|
|
(0.6 |
) |
|
|
|
|
|
|
|
|
|
|
1.2 |
|
|
|
|
|
|
|
0.6 |
|
Gains (Losses)
Economic Hedges |
|
|
5.6 |
|
|
|
|
|
|
|
1.0 |
|
|
|
(4.3 |
) |
|
|
(5.0 |
) |
|
|
(2.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported in Other
Income (Loss) |
|
|
5.0 |
|
|
|
|
|
|
|
1.0 |
|
|
|
(3.1 |
) |
|
|
(5.0 |
) |
|
|
(2.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(12.8 |
) |
|
$ |
|
|
|
$ |
0.6 |
|
|
$ |
11.5 |
|
|
$ |
(5.0 |
) |
|
$ |
(5.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2009 |
|
Net effect of |
|
|
|
|
|
|
|
|
|
Mortgage |
|
|
Consolidated |
|
|
Balance |
|
|
|
|
Hedging Activities |
|
Advances |
|
|
Investments |
|
|
Assets |
|
|
Obligations |
|
|
Sheet |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (amortization)\
accretion |
|
$ |
(43.8 |
) |
|
$ |
|
|
|
$ |
(1.3 |
) |
|
$ |
23.8 |
|
|
$ |
|
|
|
$ |
(21.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized and
unrealized gains on
derivatives and
hedging activities |
|
|
3.0 |
|
|
|
82.4 |
|
|
|
|
|
|
|
10.0 |
|
|
|
|
|
|
|
95.4 |
|
(Losses) Gains
Economic Hedges |
|
|
(0.7 |
) |
|
|
(15.2 |
) |
|
|
(2.2 |
) |
|
|
10.1 |
|
|
|
10.9 |
|
|
|
2.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported in Other
Income (Loss) |
|
|
2.3 |
|
|
|
67.2 |
|
|
|
(2.2 |
) |
|
|
20.1 |
|
|
|
10.9 |
|
|
|
98.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(41.5 |
) |
|
$ |
67.2 |
|
|
$ |
(3.5 |
) |
|
$ |
43.9 |
|
|
$ |
10.9 |
|
|
$ |
77.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2008 |
|
Net effect of |
|
|
|
|
|
|
|
|
|
Mortgage |
|
|
Consolidated |
|
|
Balance |
|
|
|
|
Hedging Activities |
|
Advances |
|
|
Investments |
|
|
Assets |
|
|
Obligations |
|
|
Sheet |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (amortization)\
accretion |
|
$ |
(25.8 |
) |
|
$ |
|
|
|
$ |
(1.4 |
) |
|
$ |
14.8 |
|
|
$ |
|
|
|
$ |
(12.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized and
unrealized losses on
derivatives and
hedging activities |
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
(0.6 |
) |
|
|
|
|
|
|
(0.8 |
) |
Gains (Losses)
Economic Hedges |
|
|
3.0 |
|
|
|
|
|
|
|
(0.5 |
) |
|
|
(5.7 |
) |
|
|
(8.5 |
) |
|
|
(11.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported in Other
Income (Loss) |
|
|
2.8 |
|
|
|
|
|
|
|
(0.5 |
) |
|
|
(6.3 |
) |
|
|
(8.5 |
) |
|
|
(12.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(23.0 |
) |
|
$ |
|
|
|
$ |
(1.9 |
) |
|
$ |
8.5 |
|
|
$ |
(8.5 |
) |
|
$ |
(24.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
Net amortization/accretion. The effect of hedging on net amortization/accretion varies from
period to period depending on the Banks activities, including terminating hedge relationships to
manage our risk profile and the amount of upfront fees received or paid on derivative transactions.
During the three months ended September 30, 2008, the Bank voluntarily terminated certain interest
rate swaps that were being used to hedge both advances and consolidated obligations in an effort to
reduce the Banks counterparty risk profile. This termination activity resulted in basis
adjustments that are amortized/accreted level-yield over the remaining life of the advance or
consolidated obligation. As a result, basis adjustment amortization/accretion was higher for both
advances and consolidated obligations for the three months ended September 30, 2008 when compared
to the same period in 2009. During the nine months ended September 30, 2009 advance basis
adjustment amortization increased compared with the same period in 2008 primarily due to normal
amortization of advance basis adjustments created during the latter half of 2008. Consolidated
obligation basis adjustment accretion increased as a result of the Bank extinguishing debt during
the nine months ended September 30, 2009.
Net realized and unrealized gains (losses) on derivatives and hedging activities. Hedge
ineffectiveness occurs when changes in fair value of the derivative and the related hedged item do
not perfectly offset each other. Hedge ineffectiveness is driven by changes in the benchmark
interest rate and volatility. As the benchmark interest rate changes and the magnitude of that
change intensifies, so will the impact on the Banks net realized and unrealized gains (losses) on
derivatives and hedging activities. Additionally, volatility in the marketplace may intensify this
impact. Hedge ineffectiveness gains (losses) during the three and nine months ended September 30,
2009 was primarily due to investment hedge relationships. During the three and nine months ended
September 30, 2009 the Bank sold $1.9 billion and $2.7 billion of U.S. Treasury obligations and
terminated the related interest rate swaps recognizing gains on the derivative termination of $6.6
million and $96.7 million. In addition, the Bank recognized ineffectiveness gains of $0.2 million
during the three months ended September 30, 2009 and ineffectiveness losses of $14.1 during the
nine months ended September 30, 2009. For additional information about the Banks sale of U.S.
Treasury obligations and termination of the related interest rate swaps, see Other Income (Loss)
at page 76.
81
(Losses) Gains Economic Hedges. During the three and nine months ended September 30, 2009,
economic hedges were primarily used to manage interest rate and prepayment risks in our balance
sheet. Changes in (losses) gains on economic hedges are primarily driven by the Banks use of
economic hedges due to changes in our balance sheet profile, changes in interest rates and
volatility, and the loss of hedge accounting for certain hedge relationships failing retrospective
hedge effectiveness testing. Economic hedges do not qualify for hedge accounting and as a result
the Bank records a fair market value gain or loss on the derivative instrument without recording
the corresponding loss or gain on the hedged item. In addition, the interest accruals on the hedges
are recorded as a component of other income (loss) instead of a component of net interest income.
(Losses) gains on economic hedges were impacted by the following events during the three and nine
months ended September 30, 2009 when compared with the same periods in 2008:
|
|
|
Consolidated obligation economic hedge gains/losses was primarily impacted by economic
hedges on fair value option bonds as well as the effect of failed retrospective hedge
effectiveness tests. The Bank had economic hedges protecting against changes in the fair
value of variable interest rate bonds indexed to the Federal funds interest rate. During
the three and nine months ended September 30, 2009 the Bank recorded $2.6 million and $15.9
million in gains related to these economic hedges. These gains were partially offset by
losses on the variable interest rate bonds, as the Bank elected the fair value option, of
$3.2 million and $15.4 million reported in Net loss on bonds held at fair value in other
income (loss) in the Statements of Income. Additionally, the Bank performs a retrospective
hedge effectiveness test at least quarterly. If a hedge relationship fails this test, the
Bank can no longer receive hedge accounting and the derivative is accounted for as an
economic hedge. Due to volatility in the market, the Bank experienced increased losses
related to consolidated obligation hedging relationships failing the retrospective hedge
effectiveness tests. |
|
|
|
The Bank held interest rate swaps on its balance sheet as economic hedges against
adverse changes in the fair value for a portion of its trading securities indexed to LIBOR.
During the three and nine months ended September 30, 2009 the Bank experienced $12.7
million and $11.2 million in losses related to these economic hedges. These losses were
partially offset by unrealized gains on the trading securities of $9.3 million and $17.2
million. |
|
|
|
The Bank held interest rate caps on its balance sheet as economic hedges to protect
against increases in interest rates. Due to volatility in the market, the Bank recorded
$1.8 million and $10.9 million in gains on these derivatives during the three and nine
months ended September 30, 2009. |
82
Net Interest Income by Segment
The Banks segment results are analyzed on an adjusted net interest income basis. Adjusted net
interest income is net interest income adjusted for basis adjustment amortization/accretion on
called and extinguished debt included in interest expense, economic hedging costs included in other
income (loss), and concession expense on fair value option bonds included in other expense.
The following shows the Banks financial performance by operating segment and a reconciliation
of financial performance to net interest income for the three months ended September 30, 2009 and
2008 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, |
|
|
|
2009 |
|
|
2008 |
|
Adjusted net interest income after mortgage
loan credit loss provision |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Member Finance |
|
$ |
45.6 |
|
|
$ |
43.4 |
|
Mortgage Finance |
|
|
15.1 |
|
|
|
36.9 |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
60.7 |
|
|
$ |
80.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of the Banks operating segment
results to net interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net interest income after mortgage
loan credit loss provision |
|
$ |
60.7 |
|
|
$ |
80.3 |
|
Interest expense on basis adjustment accretion
(amortization) of called debt |
|
|
0.1 |
|
|
|
(0.4 |
) |
Interest expense on basis adjustment
amortization of extinguished debt |
|
|
(1.2 |
) |
|
|
|
|
Net interest income on economic hedges |
|
|
(1.5 |
) |
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after mortgage loan credit
loss provision |
|
$ |
58.1 |
|
|
$ |
79.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (loss) |
|
|
1.5 |
|
|
|
(6.6 |
) |
Other expense |
|
|
11.3 |
|
|
|
10.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before assessments |
|
$ |
48.3 |
|
|
$ |
62.3 |
|
|
|
|
|
|
|
|
83
The following shows the Banks financial performance by operating segment and a reconciliation
of financial performance to net interest income for the nine months ended September 30, 2009 and
2008 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30, |
|
|
|
2009 |
|
|
2008 |
|
Adjusted net interest income after mortgage
loan credit loss provision |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Member Finance |
|
$ |
92.4 |
|
|
$ |
137.4 |
|
Mortgage Finance |
|
|
57.3 |
|
|
|
88.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
149.7 |
|
|
$ |
225.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of the Banks operating segment
results to net interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net interest income after mortgage
loan credit loss provision |
|
$ |
149.7 |
|
|
$ |
225.9 |
|
Interest expense on basis adjustment
amortization of called debt |
|
|
(17.8 |
) |
|
|
(10.8 |
) |
Interest expense on basis adjustment accretion
of extinguished debt |
|
|
4.5 |
|
|
|
|
|
Concession expense on fair value option bonds |
|
|
* |
|
|
|
|
|
Net interest (income) expense on economic hedges |
|
|
(6.2 |
) |
|
|
2.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after mortgage loan credit
loss provision |
|
$ |
130.2 |
|
|
$ |
217.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (loss) |
|
|
49.2 |
|
|
|
(14.3 |
) |
Other expense |
|
|
35.8 |
|
|
|
32.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before assessments |
|
$ |
143.6 |
|
|
$ |
170.3 |
|
|
|
|
|
|
|
|
|
|
|
* |
|
Amount is less than $0.1 million. |
The Banks adjusted net interest income was approximately $60.7 million and $149.7 million for
the three and nine months ended September 30, 2009 compared to unadjusted net interest income of
$58.1 million and $130.2 million for the same periods. The difference between the adjusted net
interest income and the Banks reported net interest income is due to the adjustments reflected
above. These adjustments primarily impacted the Mortgage Finance segment as described in the
following paragraphs.
84
Member Finance. Member Finance adjusted net interest income increased $2.2 million and
decreased $45.0 million during the three and nine months ended September 30, 2009 when compared
with the same periods in 2008. The increase during the three months ended September 30, 2009 was
primarily attributable to an increase in non-MBS investments. The decrease during the nine months
ended September 30, 2009 was primarily attributable to the decreased interest rate environment,
partially offset by increased average assets. The segments average assets increased $2.5 billion
to $52.5 billion during the nine months ended September 30, 2009 when compared to the same period
in 2008 primarily due to the purchase of non-MBS investments, including TLGP debt, Federal funds
sold, U.S. Treasury obligations, taxable municipal bonds, and resale agreements. The Bank increased
its investment purchases in an effort to improve investment income and replace mortgage assets. In
addition, during the nine months ended September 30, 2009, the Bank used a portion of the proceeds
from the mortgage loan sale to purchase TVA and FFCB bonds. The purchase of these investments
resulted in the Bank transferring a portion of its assets from the Mortgage Finance segment to the
Member Finance segment in order to be consistent with its segment methodology. The Bank expects
increased future investment income in the Member Finance segment as a result of this asset
transfer.
Mortgage Finance. Mortgage Finance adjusted net interest income decreased $21.8 million and
$31.2 million during the three and nine months ended September 30, 2009 when compared with the same
periods in 2008. The decrease was primarily attributable to the decreased interest rate environment
as well as the sale of mortgage loans during the second quarter of 2009. During the nine months
ended September 30, 2009, the Bank used a portion of the proceeds from the mortgage loan sale to
purchase multi-family agency MBS classified as available-for-sale.
As reflected in the Member Finance segment above, the Bank used a portion of the proceeds from
the mortgage loan sale to purchase TVA and FFCB bonds. Since these bonds were recorded under the
Member Finance segment, the Bank experienced lower Mortgage Finance income during the third quarter
of 2009 as a result of both decreased asset balances and decreased yield.
During the nine months ended September 30, 2009, the Mortgage Finance segment was materially
impacted by basis adjustments on called debt. The Bank called $1.2 billion of higher cost par value
bonds and consequently amortized $17.2 million of basis adjustment expense related to the
outstanding bonds during the nine months ended September 30, 2009. A portion of these bonds was
called and not replaced due to mortgage prepayments experienced during the nine months ended
September 30, 2009 and the sale of mortgage loans during the second quarter of 2009. A portion was
replaced with lower cost debt and will therefore provide future cost savings that will offset the
current expense recognized.
Additionally, adjusted net interest income eliminates the impact of basis adjustments on
extinguished debt as it is offset by losses recorded in other income (loss). The Bank recognized
net losses of approximately $29.7 million and $76.4 million on these extinguishments during the
three and nine months ended September 30, 2009. The Bank expects such losses to be offset in future
periods by improved earnings as a result of lower debt costs.
85
Statements of Condition at September 30, 2009 and December 31, 2008
Financial Highlights
The Banks total assets decreased four percent to $65.4 billion at September 30, 2009 from
$68.1 billion at December 31, 2008. Total liabilities decreased five percent to $62.0 billion at
September 30, 2009 from $65.1 billion at December 31, 2008. Total capital increased twelve percent
to $3.4 billion at September 30, 2009 from $3.0 billion at December 31, 2008. The overall financial
condition for the periods presented has been influenced by changes in investment purchases, changes
in member advances, the sale of mortgage loans, funding activities, and the temporary
discontinuation of voluntarily repurchasing excess capital stock. See further discussion of changes
in the Banks financial condition in the appropriate sections that follow.
Advances
At September 30, 2009, advances totaled $36.3 billion, which is a 13 percent decrease from
$41.9 billion at December 31, 2008. The decrease is primarily due to the availability of
alternative wholesale funding options for member banks as well as increased deposit growth realized
by many members. This has driven demand for the Banks advances down and allowed members to prepay
their advances. During the three and nine months ended September 30, 2009 members prepaid
approximately $1.4 billion and $4.0 billion of advances. A portion of the decrease in advances was
offset by the Bank offering unique funding opportunities to its members during the three and nine
months ended September 30, 2009. These unique funding opportunities increase advance demand for the
Bank and allow members to borrow from the Bank at a discounted rate for a particular advance
product.
The FHLBank Act requires the Bank to obtain sufficient collateral on advances to protect
against losses. The Bank has never experienced a credit loss on an advance to a member or eligible
housing associate. Bank management has policies and procedures in place to appropriately manage
this credit risk. Accordingly, the Bank has not provided any allowance for losses on advances. See
additional discussion regarding our collateral requirements in the Advances section within Risk
Management at page 119.
86
The composition of our advances based on remaining term to scheduled maturity was as follows
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
|
December 31, 2008 |
|
|
|
|
|
|
|
Percent of |
|
|
|
|
|
|
Percent of |
|
|
|
Amount |
|
|
Total |
|
|
Amount |
|
|
Total |
|
Simple fixed rate advances |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overdrawn demand deposit accounts |
|
$ |
* |
|
|
|
* |
% |
|
$ |
1 |
|
|
|
* |
% |
One month or less |
|
|
710 |
|
|
|
2.0 |
|
|
|
2,852 |
|
|
|
7.0 |
|
Over one month through one year |
|
|
5,603 |
|
|
|
15.8 |
|
|
|
5,220 |
|
|
|
12.8 |
|
Greater than one year |
|
|
10,186 |
|
|
|
28.8 |
|
|
|
10,108 |
|
|
|
24.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,499 |
|
|
|
46.6 |
|
|
|
18,181 |
|
|
|
44.7 |
|
Simple variable rate advances |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One month or less |
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
* |
|
Over one month through one year |
|
|
552 |
|
|
|
1.6 |
|
|
|
418 |
|
|
|
1.1 |
|
Greater than one year |
|
|
3,510 |
|
|
|
9.9 |
|
|
|
4,560 |
|
|
|
11.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,062 |
|
|
|
11.5 |
|
|
|
4,982 |
|
|
|
12.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Callable advances |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate |
|
|
272 |
|
|
|
0.7 |
|
|
|
262 |
|
|
|
0.6 |
|
Variable rate |
|
|
5,672 |
|
|
|
16.0 |
|
|
|
7,527 |
|
|
|
18.5 |
|
Putable advances |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate |
|
|
7,371 |
|
|
|
20.8 |
|
|
|
8,122 |
|
|
|
20.0 |
|
Community investment advances |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate |
|
|
982 |
|
|
|
2.7 |
|
|
|
1,000 |
|
|
|
2.5 |
|
Variable rate |
|
|
97 |
|
|
|
0.3 |
|
|
|
104 |
|
|
|
0.3 |
|
Callable fixed rate |
|
|
60 |
|
|
|
0.2 |
|
|
|
62 |
|
|
|
0.1 |
|
Putable fixed rate |
|
|
423 |
|
|
|
1.2 |
|
|
|
423 |
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total par value |
|
|
35,438 |
|
|
|
100.0 |
% |
|
|
40,663 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedging fair value adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative fair value gain |
|
|
757 |
|
|
|
|
|
|
|
1,082 |
|
|
|
|
|
Basis adjustments from terminated
and ineffective hedges |
|
|
108 |
|
|
|
|
|
|
|
152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total advances |
|
$ |
36,303 |
|
|
|
|
|
|
$ |
41,897 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Amount is less than one million or 0.1 percent. |
Cumulative fair value gains decreased $325 million at September 30, 2009 when compared to
December 31, 2008. Substantially all of the cumulative fair value gains on advances are offset by
the net estimated fair value losses on the related derivative contracts. Basis adjustments
decreased $44 million at September 30, 2009 when compared to December 31, 2008 due to normal
amortization of basis adjustments created during the latter half of 2008. For additional details
see the Derivatives section at page 96.
87
The following tables show advance balances for our five largest member borrowers (dollars in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
Percent of |
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
Total |
|
Name |
|
City |
|
State |
|
|
Advances1 |
|
|
Advances |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transamerica Life Insurance Company2 |
|
Cedar Rapids |
|
IA |
|
$ |
5,450 |
|
|
|
15.4 |
% |
Aviva Life and Annuity Company2 |
|
Des Moines |
|
IA |
|
|
2,955 |
|
|
|
8.3 |
|
TCF National Bank |
|
Sioux Falls |
|
SD |
|
|
2,450 |
|
|
|
6.9 |
|
ING USA Annuity and Life Insurance Company |
|
Des Moines |
|
IA |
|
|
1,304 |
|
|
|
3.7 |
|
Superior Guaranty Insurance Company3 |
|
Minneapolis |
|
MN |
|
|
1,250 |
|
|
|
3.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,409 |
|
|
|
37.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Housing associates |
|
|
|
|
|
|
|
|
|
|
461 |
|
|
|
1.3 |
|
All others |
|
|
|
|
|
|
|
|
|
|
21,568 |
|
|
|
60.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total advances (at par value) |
|
|
|
|
|
|
|
|
|
$ |
35,438 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
Percent of |
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
Total |
|
Name |
|
City |
|
State |
|
|
Advances1 |
|
|
Advances |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transamerica Life Insurance Company2 |
|
Cedar Rapids |
|
IA |
|
$ |
5,450 |
|
|
|
13.4 |
% |
Aviva Life and Annuity Company2 |
|
Des Moines |
|
IA |
|
|
3,131 |
|
|
|
7.7 |
|
ING USA Annuity and Life Insurance Company |
|
Des Moines |
|
IA |
|
|
2,994 |
|
|
|
7.4 |
|
TCF National Bank |
|
Wayzata |
|
MN |
|
|
2,475 |
|
|
|
6.1 |
|
Superior Guaranty Insurance Company3 |
|
Minneapolis |
|
MN |
|
|
2,250 |
|
|
|
5.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,300 |
|
|
|
40.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Housing associates |
|
|
|
|
|
|
|
|
|
|
302 |
|
|
|
0.7 |
|
All others |
|
|
|
|
|
|
|
|
|
|
24,061 |
|
|
|
59.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total advances (at par value) |
|
|
|
|
|
|
|
|
|
$ |
40,663 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Amounts represent par value before considering unamortized commitment fees, premiums
and discounts, and hedging fair value adjustments. |
|
2 |
|
Transamerica Life Insurance Company and Aviva Life and Annuity Company have not signed
new collateral maintenance agreements and therefore can not initiate new advances. At
September 30, 2009 the remaining weighted average life of advances held by Transamerica Life
Insurance Company and Aviva Life and Annuity Company was 5.25 years and 4.71 years. See
additional discussion regarding our collateral agreements in the Advances section within
Risk Management at page 119. |
|
3 |
|
Superior Guaranty Insurance Company (Superior) is an affiliate of Wells Fargo Bank,
N.A (Wells Fargo). |
88
Mortgage Loans
The following table shows information on mortgage loans held for portfolio (dollars in
millions):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Single family mortgages |
|
|
|
|
|
|
|
|
Fixed rate conventional loans |
|
|
|
|
|
|
|
|
Contractual maturity less than or equal
to 15 years |
|
$ |
1,972 |
|
|
$ |
2,408 |
|
Contractual maturity greater than 15 years |
|
|
5,480 |
|
|
|
7,845 |
|
|
|
|
|
|
|
|
Subtotal |
|
|
7,452 |
|
|
|
10,253 |
|
|
|
|
|
|
|
|
|
|
Fixed rate government-insured loans |
|
|
|
|
|
|
|
|
Contractual maturity less than or equal
to 15 years |
|
|
2 |
|
|
|
2 |
|
Contractual maturity greater than 15 years |
|
|
381 |
|
|
|
421 |
|
|
|
|
|
|
|
|
Subtotal |
|
|
383 |
|
|
|
423 |
|
|
|
|
|
|
|
|
|
|
Total par value |
|
|
7,835 |
|
|
|
10,676 |
|
|
|
|
|
|
|
|
|
|
Premiums |
|
|
55 |
|
|
|
86 |
|
Discounts |
|
|
(55 |
) |
|
|
(81 |
) |
Basis adjustments from mortgage loan
commitments |
|
|
4 |
|
|
|
4 |
|
Allowance for credit losses |
|
|
(1 |
) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans held for portfolio, net |
|
$ |
7,838 |
|
|
$ |
10,685 |
|
|
|
|
|
|
|
|
|
|
|
* |
|
Amount is less than one million. |
Mortgage loans decreased approximately $2.8 billion at September 30, 2009 when compared to
December 31, 2008. The decrease was primarily due to the Bank selling $2.1 billion of mortgage
loans to the FHLBank of Chicago, who immediately resold these loans to Fannie Mae during the second
quarter of 2009.
89
Excluding the mortgage loan sale transaction, mortgage loans decreased approximately $0.7
billion at September 30, 2009 when compared to December 31, 2008. This decrease in mortgage loans
was driven by an increase in principal repayments, partially offset by an increase in originations.
Total principal repayments amounted to $2.1 billion during the nine months ended September 30, 2009
as compared to $1.0 billion for the same period in 2008. Total originations amounted to $1.4
billion for the nine months ended September 30, 2009 compared to $0.8 billion for the same period
in 2008. The increase in principal repayments and originations was a result of the decreased
interest rate environment throughout the first half of 2009. During the third quarter of 2009, as
interest rates increased and underwriting standards remained stringent, borrowers had less
incentive to refinance, and as a result, the Bank experienced fewer principal repayments. The
annualized weighted average pay-down rate for mortgage loans for the nine months ended September
30, 2009 was approximately 25 percent compared with 12 percent at September 30, 2008.
Mortgage loans acquired from members are concentrated primarily with Superior, an affiliate of
Wells Fargo. At September 30, 2009 and December 31, 2008, mortgage loans acquired from Superior
amounted to $4.6 billion and $7.9 billion, respectively. The decrease in mortgage loans held from
Superior at September 30, 2009 when compared to December 31, 2008 was due to the mortgage loan sale
transaction during the second quarter of 2009.
Effective February 26, 2009, the MPF program was expanded to include a new off-balance sheet
product called MPF Xtra (MPF Xtra is a registered trademark of the FHLBank of Chicago). Under this
product, the Bank assigns 100 percent of its interests in participating financial institution (PFI)
master commitments to the FHLBank of Chicago. The FHLBank of Chicago then purchases mortgage loans
from the Banks PFIs under the master commitments and sells those loans to Fannie Mae. Currently,
only PFIs that retain servicing of their MPF loans are eligible for the MPF Xtra product. As of
September 30, 2009, the FHLBank of Chicago had funded $96.0 million of MPF Xtra mortgage loans
under the master commitments of the Banks PFIs. The Bank recorded approximately $21,000 and
$44,000 in MPF Xtra fee income from the FHLBank of Chicago during the three and nine months ended
September 30, 2009.
For additional discussion regarding the MPF credit risk sharing arrangements, see Mortgage
Assets at page 121.
90
Investments
The following table shows the book value of investments (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
|
December 31, 2008 |
|
|
|
|
|
|
|
Percent of |
|
|
|
|
|
|
Percent of |
|
|
|
Amount |
|
|
Total |
|
|
Amount |
|
|
Total |
|
Short-term investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits |
|
$ |
18 |
|
|
|
* |
% |
|
$ |
|
|
|
|
|
% |
Negotiable certificates of
deposit |
|
|
450 |
|
|
|
2.2 |
|
|
|
|
|
|
|
|
|
Federal funds sold |
|
|
4,485 |
|
|
|
21.2 |
|
|
|
3,425 |
|
|
|
22.3 |
|
Commercial paper |
|
|
|
|
|
|
|
|
|
|
385 |
|
|
|
2.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,953 |
|
|
|
23.4 |
|
|
|
3,810 |
|
|
|
24.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored
enterprise |
|
|
9,219 |
|
|
|
43.6 |
|
|
|
9,169 |
|
|
|
59.7 |
|
U.S.
government agency-guaranteed |
|
|
45 |
|
|
|
0.2 |
|
|
|
52 |
|
|
|
0.3 |
|
MPF shared funding |
|
|
35 |
|
|
|
0.2 |
|
|
|
47 |
|
|
|
0.3 |
|
Other |
|
|
36 |
|
|
|
0.2 |
|
|
|
39 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,335 |
|
|
|
44.2 |
|
|
|
9,307 |
|
|
|
60.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits |
|
|
2 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
Government-sponsored
enterprise obligations |
|
|
779 |
|
|
|
3.7 |
|
|
|
|
|
|
|
|
|
State or local housing agency
obligations |
|
|
125 |
|
|
|
0.6 |
|
|
|
93 |
|
|
|
0.6 |
|
TLGP |
|
|
5,680 |
|
|
|
26.9 |
|
|
|
2,152 |
|
|
|
14.0 |
|
Taxable municipal bonds |
|
|
252 |
|
|
|
1.2 |
|
|
|
|
|
|
|
|
|
Other |
|
|
8 |
|
|
|
* |
|
|
|
7 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,846 |
|
|
|
32.4 |
|
|
|
2,252 |
|
|
|
14.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments |
|
$ |
21,134 |
|
|
|
100.0 |
% |
|
$ |
15,369 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments as a percent of total
assets |
|
|
|
|
|
|
32.3 |
% |
|
|
|
|
|
|
22.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Amount is less than 0.1 percent. |
Investment balances increased $5.8 billion or 38 percent at September 30, 2009 compared with
December 31, 2008. The increase was primarily due to an increase in investments in TLGP debt,
Federal funds sold, GSE obligations, taxable municipal bonds, and negotiable certificates of
deposit. The Bank purchased these additional investments during the nine months ended September 30,
2009 in an effort to improve investment income and replace mortgage assets.
91
Despite the Banks increase in investments at September 30, 2009, short-term investment rates
are low, primarily due to increased deposit levels and the availability of various government
funding programs for financial institutions serving as the Banks counterparties for short-term
investments. The limited access to investment counterparties has made it more challenging for the
Bank to find favorable investment opportunities meeting the Banks risk profile. As a result, the
Banks short-term investments declined during the third quarter of 2009.
The Bank evaluates its individual available-for-sale and held-to-maturity securities for
other-than-temporary impairment (OTTI) on at least a quarterly basis. As part of this process, the
Bank considers its intent to sell each debt security and whether it is more likely than not that it
will be required to sell the debt security before its anticipated recovery. If either of these
conditions is met, the Bank recognizes an OTTI in earnings equal to the entire difference between
the securitys amortized cost basis and its fair value at the balance sheet date. For securities in
an unrealized loss position meeting neither of these conditions, the Bank performs analyses to
determine if any of these securities are other-than-temporarily impaired.
To support consistency among the FHLBanks, the FHLBanks formed an OTTI Governance Committee
with the responsibility for reviewing and approving the key modeling assumptions, inputs, and
methodologies to be used by the FHLBanks to generate cash flow projections used in analyzing credit
losses and determining OTTI for private-label MBS. In accordance with this methodology, the Bank
may engage another designated FHLBank to perform the cash flow analysis underlying its OTTI
determination. In order to promote consistency in the application of the assumptions, inputs, and
implementation of the OTTI methodology, the FHLBanks established control procedures whereby the
FHLBanks performing the cash flow analysis select a sample group of private-label MBS and each
perform cash flow analyses on all such test MBS, using the assumptions approved by the OTTI
Governance Committee. These FHLBanks exchange and discuss the results and make any adjustments
necessary to achieve consistency among their respective cash flow models.
Utilizing this methodology, the Bank is responsible for making its own determination of
impairment, which includes determining the reasonableness of assumptions, inputs, and methodologies
used. At September 30, 2009 the Bank obtained its cash flow analysis from its designated FHLBanks
on all five of its private-label MBS. The cash flow analysis uses two third-party models. The first
model considers borrower characteristics and the particular attributes of the loans underlying the
Banks private-label MBS, in conjunction with assumptions about future changes in home prices and
interest rates, to project prepayments, defaults, and loss severities. A significant input to the
first model is the forecast of future housing price changes for the relevant states and core based
statistical areas (CBSAs), which are based upon an assessment of the individual housing markets.
CBSA refers collectively to metropolitan and micropolitan statistical areas as defined by the U.S.
Office of Management and Budget; as currently defined, a CBSA must contain at least one urban area
with a population of 10,000 or more. The Banks housing price forecast assumed CBSA level
current-to-trough home price declines ranging from zero percent to 20 percent over the next 9 to 15
months. Thereafter, home prices are projected to increase zero percent in the first six months, 0.5
percent in the next six months, three percent in the second year, and four percent in each
subsequent year.
92
The month-by-month projections of future loan performance derived from the first model, which
reflect projected prepayments, defaults, and loss severities, are then input into a second model
that allocates the projected loan level cash flows and losses to the various security classes in
the securitization structure in accordance with its prescribed cash flow and loss allocation rules.
If this estimate results in a present value of expected cash flows that is less than the amortized
cost basis of the security (that is, a credit loss exists), an OTTI is considered to have occurred.
If there is no credit loss, any impairment is considered temporary.
At September 30, 2009 the Banks private-label MBS cash flow analysis did not project any
credit losses and therefore, no OTTI was considered to have occurred. Even under an adverse
scenario that delays recovery of the housing price index, no OTTI was considered to have occurred.
The remainder of the Banks available-for-sale and held-to-maturity securities portfolio has
experienced unrealized losses due to interest rate volatility, illiquidity in the marketplace, and
credit deterioration in the U.S. mortgage markets. However, the decline is considered temporary as
the Bank expects to recover the entire amortized cost basis on its available-for-sale and
held-to-maturity securities in an unrealized loss position. The Bank does not intend to sell these
securities, and it is unlikely the Bank will be required to sell these securities, before its
anticipated recovery of the remaining amortized cost basis. As a result of the Banks analysis on
the available-for-sale and held-to-maturity securities portfolio, no OTTI was required to be taken.
Approximately 93 percent of the unrealized losses in our investment portfolio are related to
agency securities guaranteed by a GSE. The remaining seven percent of unrealized losses are related
to our private-label MBS. Our private-label MBS were all rated AA or higher by a nationally
recognized statistical rating organization (NRSRO) at September 30, 2009 and December 31, 2008 with
the exception of one private-label MBS that was downgraded to an A rating on May 29, 2009. All of
these private-label MBS are backed by prime loans. For further discussion of our credit risks
associated with private-label MBS see Mortgage Assets at page 121.
Consolidated Obligations
Consolidated obligations, which include discount notes and bonds, are the primary source of
funds to support our investments, advances, and mortgage loans. We make significant use of
derivatives to restructure interest rates on consolidated obligations to better match our funding
needs and reduce funding costs. This generally means converting fixed rates to variable rates. At
September 30, 2009 the book value of the consolidated obligations issued on the Banks behalf
totaled $59.8 billion compared with $62.8 billion at December 31, 2008.
93
Discount
NotesThe following table shows our discount notes, all of which are due within one
year (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Par value |
|
$ |
12,879 |
|
|
$ |
20,153 |
|
Discounts |
|
|
(5 |
) |
|
|
(92 |
) |
|
|
|
|
|
|
|
Total discount notes |
|
$ |
12,874 |
|
|
$ |
20,061 |
|
|
|
|
|
|
|
|
The decrease in discount notes was primarily due to decreased short-term funding needs during
the nine months ended September 30, 2009. In addition, during the third quarter of 2009, spreads to
LIBOR on the Banks discount notes decreased primarily due to decreases in 3-month LIBOR. This
resulted in lower amounts of discount note issuances and higher amounts of bond issuances during
the three months ended September 30, 2009.
BondsThe following table shows our bonds based on remaining term to maturity (dollars in
millions):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
Year of Maturity |
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Due in one year or less |
|
$ |
22,109 |
|
|
$ |
15,963 |
|
Due after one year through two years |
|
|
8,566 |
|
|
|
6,159 |
|
Due after two years through three years |
|
|
3,813 |
|
|
|
4,670 |
|
Due after three years through four years |
|
|
2,330 |
|
|
|
2,231 |
|
Due after four years through five years |
|
|
806 |
|
|
|
2,417 |
|
Thereafter |
|
|
6,960 |
|
|
|
8,409 |
|
Index amortizing notes |
|
|
2,033 |
|
|
|
2,420 |
|
|
|
|
|
|
|
|
Total par value |
|
|
46,617 |
|
|
|
42,269 |
|
|
|
|
|
|
|
|
|
|
Premiums |
|
|
45 |
|
|
|
51 |
|
Discounts |
|
|
(34 |
) |
|
|
(41 |
) |
Hedging fair value adjustments |
|
|
|
|
|
|
|
|
Cumulative fair value loss |
|
|
254 |
|
|
|
348 |
|
Basis adjustments from terminated
and ineffective hedges |
|
|
18 |
|
|
|
95 |
|
Fair value option loss |
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total bonds |
|
$ |
46,918 |
|
|
$ |
42,722 |
|
|
|
|
|
|
|
|
94
The increase in bonds was primarily due to improved market conditions during the third quarter
of 2009 that allowed the Bank to better match fund its longer-term assets with longer-term debt.
The increase was partially offset by the Bank extinguishing $266.8 million and $853.3 million of
higher costing par value debt during the three and nine months ended September 30, 2009. Cumulative
fair value losses decreased $94 million at September 30, 2009 when compared to December 31, 2008.
Substantially all of the cumulative fair value losses on bonds are offset by the net estimated fair
value gains on the related derivative contracts. Basis adjustments decreased $77 million at
September 30, 2009 when compared to December 31, 2008, as a result of the Bank unwinding certain
interest rate swaps. For additional details see the Derivatives section at page 96.
In addition, the Bank elected the fair value option on approximately $4.3 billion of its
bonds. The bonds are variable interest rate bonds indexed to the Federal funds interest rate.
Because the Federal funds interest rate is not a benchmark rate, the associated hedge does not
qualify for hedge accounting, therefore the Bank elected to record bonds indexed to the Federal
funds rate at fair value. The Bank entered into a derivative to swap the Federal funds rate to
LIBOR. The Bank recorded $9.9 million and $29.2 million in fair value adjustments to the bonds held
at fair value for the three and nine months ended September 30, 2009.
Capital
At September 30, 2009 and December 31, 2008, total capital (including capital stock, retained
earnings, and accumulated other comprehensive loss) was $3.4 billion and $3.0 billion,
respectively. The increase was primarily due to an increase in excess capital stock as a result of
the Bank temporarily discontinuing its practice of voluntarily repurchasing excess capital stock in
late 2008. In addition, unrealized losses on available-for-sale securities recorded in accumulated
other comprehensive loss decreased as a result of current market conditions and retained earnings
increased.
95
Derivatives
The notional amount of derivatives reflects the volume of our hedges, but it does not measure
the credit exposure of the Bank because there is no principal at risk. The following table
categorizes the notional amount of our derivatives (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Notional amount of derivatives |
|
|
|
|
|
|
|
|
Interest rate swaps |
|
|
|
|
|
|
|
|
Noncallable |
|
$ |
31,104 |
|
|
$ |
17,773 |
|
Callable by counterparty |
|
|
11,498 |
|
|
|
9,261 |
|
Callable by the Bank |
|
|
60 |
|
|
|
77 |
|
|
|
|
|
|
|
|
|
|
|
42,662 |
|
|
|
27,111 |
|
|
|
|
|
|
|
|
|
|
Interest rate caps |
|
|
2,340 |
|
|
|
2,340 |
|
Forward settlement agreements |
|
|
61 |
|
|
|
289 |
|
Mortgage delivery commitments |
|
|
61 |
|
|
|
288 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total notional amount |
|
$ |
45,124 |
|
|
$ |
30,028 |
|
|
|
|
|
|
|
|
The notional amount of our derivative contracts increased approximately $15.1 billion at
September 30, 2009 when compared to December 31, 2008 primarily due to derivatives utilized to
hedge consolidated obligations funding investments as well as to convert fixed rate debt to
floating rate debt for portfolio rebalancing needs.
96
The following table categorizes the notional amount and the estimated fair value of derivative
instruments, excluding accrued interest, by product and type of accounting treatment (dollars in
millions). The category titled fair value represents hedges that qualify for fair value hedge
accounting. The category titled economic represents hedges that do not qualify for hedge
accounting.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
|
December 31, 2008 |
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
Estimated |
|
|
|
Notional |
|
|
Fair Value |
|
|
Notional |
|
|
Fair Value |
|
Advances |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
13,404 |
|
|
$ |
(781 |
) |
|
$ |
11,501 |
|
|
$ |
(1,109 |
) |
Economic |
|
|
500 |
|
|
|
(3 |
) |
|
|
527 |
|
|
|
(5 |
) |
Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
|
173 |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
Economic |
|
|
1,005 |
|
|
|
(10 |
) |
|
|
|
|
|
|
|
|
Mortgage assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward settlement agreements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Economic |
|
|
61 |
|
|
|
* |
|
|
|
289 |
|
|
|
(2 |
) |
Mortgage delivery commitments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Economic |
|
|
61 |
|
|
|
* |
|
|
|
288 |
|
|
|
2 |
|
Consolidated obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
|
22,498 |
|
|
|
250 |
|
|
|
11,969 |
|
|
|
330 |
|
Economic |
|
|
4,775 |
|
|
|
16 |
|
|
|
3,030 |
|
|
|
2 |
|
Discount notes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Economic |
|
|
307 |
|
|
|
1 |
|
|
|
84 |
|
|
|
1 |
|
Balance Sheet |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Economic |
|
|
2,340 |
|
|
|
13 |
|
|
|
2,340 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total notional and fair value |
|
$ |
45,124 |
|
|
$ |
(517 |
) |
|
$ |
30,028 |
|
|
$ |
(779 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives, excluding
accrued interest |
|
|
|
|
|
|
(517 |
) |
|
|
|
|
|
|
(779 |
) |
Accrued interest |
|
|
|
|
|
|
71 |
|
|
|
|
|
|
|
79 |
|
Net cash collateral |
|
|
|
|
|
|
72 |
|
|
|
|
|
|
|
268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net derivative balance |
|
|
|
|
|
$ |
(374 |
) |
|
|
|
|
|
$ |
(432 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net derivative assets |
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
3 |
|
Net derivative liabilities |
|
|
|
|
|
|
(379 |
) |
|
|
|
|
|
|
(435 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net derivative balance |
|
|
|
|
|
$ |
(374 |
) |
|
|
|
|
|
$ |
(432 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Represents an amount less than one million. |
Estimated fair values of derivative instruments will fluctuate based upon changes in the
interest rate environment, volatility in the marketplace, as well as the volume of derivative
activities. Changes in the estimated fair values are recorded as gains and losses in the Banks
Statements of Income. For fair value hedge relationships, substantially all of the net estimated
fair value gains and losses on our derivative contracts are offset by net hedging fair value
adjustment losses and gains or other book value adjustments on the related hedged items. Economic
derivatives do not have an offsetting fair value adjustment as they are not associated with a
hedged item.
97
Liquidity and Capital Resources
Our liquidity and capital positions are actively managed in an effort to preserve stable,
reliable, and cost-effective sources of cash to meet current and projected future operating
financial commitments, as well as regulatory and internal liquidity and capital requirements.
Liquidity
Sources of Liquidity
The Banks primary source of liquidity is proceeds from the issuance of consolidated
obligations (bonds and discount notes) in the capital markets. In addition, during the nine months
ended September 30, 2009, proceeds from the sale of U.S. Treasury obligations and mortgage loans
served as an additional source of liquidity for the Bank.
Consolidated obligations of the FHLBanks are rated Aaa/P-1 by Moodys and AAA/A-1+ by S&P.
These are the highest ratings available for such debt from an NRSRO. These ratings measure the
likelihood of timely payment of principal and interest on the consolidated obligations. Our ability
to raise funds in the capital markets as well as our cost of borrowing can be affected by these
credit ratings.
During the latter half of 2008, the credit and liquidity crisis made it difficult for the
FHLBanks to issue long-term debt at competitive interest rates. As a result, the Bank placed more
reliance on the issuance of discount notes to fund both its short- and long-term assets. This was
evidenced by the Bank receiving $1,057.5 billion and $16.6 billion in proceeds from the issuance of
discount notes and bonds during the nine months ended September 30, 2008 compared to $607.2 billion
and $20.8 billion during the same period in 2009.
As the credit and liquidity crisis worsened in the beginning of 2009, numerous government
initiatives were created to stimulate the economy, including the purchase of agency debt securities
by the Federal Reserve and the creation of the Government Sponsored Enterprise Credit Facility
(GSECF). These government initiatives, in combination with other positive developments, increased
investor demand for FHLBank debt during the first nine months of 2009. In addition, during the
third quarter of 2009, spreads to LIBOR on the Banks discount notes decreased primarily due to
decreases in 3-month LIBOR. This resulted in lower amounts of discount note issuances and higher
amounts of bond issuances during the three months ended
September 30, 2009 as the Bank was able to better match fund its
longer-term assets with longer-term debt.
For a summary of the Banks average debt spreads to LIBOR during the three and nine months
ended September 30, 2009 and 2008 see the Conditions in the Financial Markets section at page 66.
98
Other sources of liquidity include cash, interbank loan activity, payments collected on
advances and mortgage loans, proceeds from the issuance of capital stock, member deposits,
securities sold under agreements to repurchase, and current period earnings.
In the event of significant market disruptions or local disasters, the Bank President or his
designee is authorized to establish interim borrowing relationships with other FHLBanks and the
Federal Reserve. To provide further access to funding, the FHLBank Act authorizes the U.S. Treasury
to purchase directly from the FHLBanks consolidated obligations up to an aggregate principal amount
of $4.0 billion. As a result of the Housing Act in 2008, this authorization was supplemented with a
temporary authorization for the U.S. Treasury to directly purchase from the FHLBanks consolidated
obligations in any amount deemed appropriate under certain conditions. This temporary authorization
expires December 31, 2009. As of October 31, 2009, no purchases had been made by the U.S. Treasury
under this authorization.
In 2008, the Bank entered into a Lending Agreement with the U.S. Treasury in connection with
the U.S. Treasurys establishment of the GSECF, as authorized by the Housing Act. The GSECF is
designed to serve as a contingent source of liquidity for the housing government-sponsored
enterprises, including the 12 FHLBanks, and expires on December 31, 2009. At September 30, 2009 the
Bank had provided the U.S. Treasury with a listing of eligible advance collateral, which provided
for maximum borrowings of $9.2 billion. As of October 31, 2009 the Bank has not drawn on this
available source of liquidity.
Uses of Liquidity
The Bank used proceeds from the issuance of consolidated obligations primarily to fund
advances as well as investment purchases. The Bank funded approximately $30.6 billion of advances
during the nine months ended September 30, 2009 compared to $279.4 billion for the same period in
2008.
During the nine months ended September 30, 2009, the Bank also used proceeds from the issuance
of consolidated obligations and the sale of U.S. Treasury obligations and mortgage loans to
purchase investments and extinguish certain consolidated obligations. As the Bank desires to
increase net interest income through investment income, the Bank purchased $22.0 billion par value
of investments, excluding overnight investments, during the nine months ended September 30, 2009
compared to $14.3 billion for the same period in 2008. The investment purchases included
multi-family agency MBS, TVA and FFCB bonds, and taxable municipal bonds.
The Bank extinguished $266.8 million and $853.3 million of higher costing debt during the
three and nine months ended September 30, 2009 in an effort to lower the relative cost of its debt
in future years. The Bank recorded losses of $28.5 million and $80.9 million for the three and nine
months ended September 30, 2009 related to the extinguishment of debt.
99
In an effort to provide additional liquidity sources to its members, the Bank began purchasing
non-negotiable certificates of deposit and TLGP debt from its eligible members during the nine
months ended September 30, 2009. Both of these programs allow eligible members to increase their
liquidity without pledging additional collateral or impacting their advance capacity at the Bank.
At September 30, 2009 the Banks non-negotiable certificates of deposit and TLGP debt purchased
from members amounted to $19.8 million and $1.3 million. Effective October 30, 2009 the Bank is no
longer purchasing TLGP debt from its members.
Other uses of liquidity include purchase of mortgage loans, member deposits and interbank loan
activity, payment of dividends, and redemption or repurchase of capital stock.
Liquidity Requirements
Statutory
RequirementsThe FHLBank Act mandates three liquidity requirements. First,
contingent liquidity sufficient to meet our liquidity needs which shall, at a minimum, cover five
calendar days of inability to access the consolidated obligation debt markets. The following table
shows our sources of contingent liquidity to support operations for five calendar days compared to
our liquidity needs (dollars in billions):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Unencumbered marketable assets
maturing within one year |
|
$ |
5.6 |
|
|
$ |
4.8 |
|
Advances maturing in seven days or less |
|
|
0.2 |
|
|
|
1.3 |
|
Unencumbered assets available for
repurchase agreement borrowings |
|
|
14.7 |
|
|
|
10.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liquidity |
|
$ |
20.5 |
|
|
$ |
16.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity needs for five calendar days |
|
$ |
4.1 |
|
|
$ |
3.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liquidity as a percent of five day requirement |
|
|
500 |
% |
|
|
437 |
% |
|
|
|
|
|
|
|
100
Second, we are required to have available at all times an amount greater than or equal to
members current deposits invested in advances with maturities not to exceed five years, deposits
in banks or trust companies, and obligations of the U.S. Treasury. The following table shows our
compliance with this requirement (dollars in billions):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Advances with maturities not exceeding
five years |
|
$ |
25.0 |
|
|
$ |
28.1 |
|
Deposits in banks or trust companies |
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
25.5 |
|
|
$ |
28.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits1 |
|
$ |
1.2 |
|
|
$ |
1.5 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Amount does not reflect the effect of derivative master netting arrangements with
counterparties. |
Third, we are required to maintain, in the aggregate, unpledged qualifying assets in an amount
at least equal to the amount of our participation in the total consolidated obligations
outstanding. The following table shows our compliance with this requirement (dollars in billions):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Total qualifying assets |
|
$ |
65.4 |
|
|
$ |
68.1 |
|
Less: pledged assets |
|
|
0.1 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total qualifying assets free of lien or pledge |
|
$ |
65.3 |
|
|
$ |
67.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated obligations outstanding |
|
$ |
59.8 |
|
|
$ |
62.8 |
|
|
|
|
|
|
|
|
The Bank was in compliance with all three of its liquidity requirements at September 30, 2009.
101
In addition to the liquidity measures discussed above, the Finance Agency has provided the
Bank with guidance to maintain sufficient liquidity, through short-term investments, in an amount
at least equal to our anticipated cash outflows under two different scenarios. One scenario
(roll-off scenario) assumes that we can not access the capital markets for the issuance of debt for
a period of between 10 to 20 days with initial guidance set at 15 days and that during that time
members do not renew any maturing, prepaid, and called advances. The second scenario (renew
scenario) assumes that we can not access the capital markets for the issuance of debt for a period
of between three to seven days with initial guidance set at five days and that during that period
we will automatically renew maturing and called advances for all members except very large, highly
rated members. This guidance is designed to protect against temporary disruptions in the debt
markets that could lead to a reduction in market liquidity and thus the inability for the Bank to
provide advances to its members. Finance Agency guidance allows for trading investments to be
included in the liquidity calculation. At September 30, 2009 the Bank held $5.4 billion in trading
investments.
The following table shows the Banks number of days of liquidity under both liquidity
scenarios previously described:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
Guidance |
|
|
|
2009 |
|
|
Requirement |
|
|
|
|
|
|
|
|
|
|
Roll-off scenario |
|
|
30 |
|
|
|
15 |
|
Renew scenario |
|
|
28 |
|
|
|
5 |
|
Operational
and Contingent LiquidityBank policy requires that we maintain additional
liquidity for day-to-day operational and contingency needs. Contingent liquidity should not be
greater than available assets which include cash, money market, agency, and MBS securities. The
Bank will maintain contingent liquidity to meet average overnight and one-week advances, meet the
largest projected net cash outflow on any day over a projected 90-day period, and maintain
repurchase agreement eligible assets of at least twice the largest projected net cash outflow on
any day over a projected 90 day period.
The following table shows our contingent liquidity requirement (dollars in billions):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Required contingent liquidity |
|
$ |
(1.9 |
) |
|
$ |
(3.9 |
) |
Available assets |
|
|
14.2 |
|
|
|
11.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess contingent liquidity |
|
$ |
12.3 |
|
|
$ |
7.2 |
|
|
|
|
|
|
|
|
The Bank was in compliance with its contingent liquidity policy at September 30, 2009.
102
Capital
Capital Requirements
The FHLBank Act requires that the Bank maintain at all times permanent capital greater than or
equal to the sum of its credit, market, and operations risk capital requirements, all calculated in
accordance with the Finance Agencys regulations. Only permanent capital, defined as Class B stock
and retained earnings, can satisfy this risk based capital requirement. The FHLBank Act requires
the Bank to maintain a minimum four percent capital-to-asset ratio, which is defined as total
regulatory capital (which excludes other comprehensive income) divided by total assets. The FHLBank
Act also imposes a five percent minimum leverage ratio based on total capital, which is defined as
the sum of permanent capital weighted 1.5 times and nonpermanent capital weighted 1.0 times divided
by total assets.
For purposes of compliance with the regulatory minimum capital-to-asset and leverage ratios,
capital includes all capital stock, including mandatorily redeemable capital stock, plus retained
earnings. If the Banks capital falls below the above requirements, the Finance Agency has
authority to take actions necessary to return the Bank to safe and sound business operations.
The following table shows the Banks compliance with the Finance Agencys capital requirements
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
|
December 31, 2008 |
|
|
|
Required |
|
|
Actual |
|
|
Required |
|
|
Actual |
|
Regulatory capital requirements: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk based capital |
|
$ |
893 |
|
|
$ |
3,428 |
|
|
$ |
1,968 |
|
|
$ |
3,174 |
|
Total capital-to-asset ratio |
|
|
4.00 |
% |
|
|
5.24 |
% |
|
|
4.00 |
% |
|
|
4.66 |
% |
Total regulatory capital |
|
$ |
2,617 |
|
|
$ |
3,428 |
|
|
$ |
2,725 |
|
|
$ |
3,174 |
|
Leverage ratio |
|
|
5.00 |
% |
|
|
7.86 |
% |
|
|
5.00 |
% |
|
|
6.99 |
% |
Leverage capital |
|
$ |
3,271 |
|
|
$ |
5,142 |
|
|
$ |
3,406 |
|
|
$ |
4,761 |
|
Our members are required to maintain a certain minimum capital stock investment in the Bank.
The minimum investment requirements are designed so that we remain adequately capitalized as member
activity changes. To ensure we remain adequately capitalized within ranges established in the
Banks Capital Plan, these requirements may be adjusted upward or downward by the Banks Board of
Directors.
The Banks regulatory capital-to-asset ratio increased from 4.66 percent at December 31, 2008
to 5.24 percent at September 30, 2009 as a result of an increase in excess capital stock. See the
Capital Stock section at page 104 for further details on the Banks excess capital stock. The Banks
regulatory capital-to-asset ratio at September 30, 2009 and December 31, 2008 would have been 4.41
percent and 4.58 percent if all excess capital stock had been repurchased. The Banks regulatory
leverage ratio at September 30, 2009 and December 31, 2008 would have been 7.03 percent and 6.90
percent if all excess capital stock had been repurchased.
103
Capital Stock
We had 29.5 million shares of capital stock outstanding at September 30, 2009 compared with
27.8 million shares outstanding at December 31, 2008. We issued 1.9 million shares to members and
repurchased 23,000 shares from members during the nine months ended September 30, 2009. At
September 30, 2009 and December 31, 2008 approximately 82 percent and 83 percent of our capital
stock outstanding was activity-based capital stock. At September 30, 2009 and December 31, 2008
approximately 87 percent and 92 percent of our total capital was capital stock.
The Banks capital stock balances categorized by type of financial services company are noted
in the following table (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
Institutional Entity |
|
2009 |
|
|
2008 |
|
|
Commercial Banks |
|
$ |
1,474 |
|
|
$ |
1,314 |
|
Insurance Companies |
|
|
1,192 |
|
|
|
1,203 |
|
Savings and Loan Associations |
|
|
177 |
|
|
|
170 |
|
Credit Unions |
|
|
108 |
|
|
|
94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital stock |
|
$ |
2,951 |
|
|
$ |
2,781 |
|
|
|
|
|
|
|
|
The increase in capital stock was primarily attributable to an increase in excess capital
stock as a result of the Bank temporarily discontinuing its practice of voluntarily repurchasing
excess capital stock in late 2008. Additionally, during the second quarter of 2009, the Banks
excess activity-based capital stock increased $93.7 million due to the mortgage loan sale
transaction. Excess capital stock represents stock owned by members in excess of their minimum
investment requirements. At September 30, 2009 and December 31, 2008 the Bank had excess capital
stock of $540.1 million and $61.1 million. Members are able to continue using excess activity-based
capital stock to satisfy their activity-based capital stock requirements. The Banks Board of
Directors will continue to monitor market conditions and assess the need for this temporary action.
Certain exceptions to this temporarily discontinued practice have been approved by the Banks Board
of Directors, such as when a member is taken over by the Federal Deposit Insurance Corporation
(FDIC) and when a member is in financial distress. During the nine months ended September 30, 2009
the Bank repurchased $12.3 million of excess capital stock (including mandatorily redeemable
capital stock) under these exceptions. In these circumstances, the Bank reviews each members
required collateral on advances, standby letters of credit, and MPF credit enhancements prior to
the repurchase to ensure the Bank will remain adequately secured subsequent to the repurchase.
Mandatorily Redeemable Capital Stock
Although mandatorily redeemable capital stock is not included in capital for financial
reporting purposes, the Finance Agency requires that such outstanding stock be considered capital
for determining compliance with regulatory requirements.
104
At September 30, 2009, we had $17.5 million in capital stock subject to mandatory
redemption from one member and 14 former members. At December 31, 2008, we had $10.9 million in
capital stock subject to mandatory redemption from 10 former members. This amount has been
classified as mandatorily redeemable capital stock in the Statements of Condition.
The following table shows the amount of capital stock subject to mandatory redemption by the
time period in which we anticipate redeeming the capital stock (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
Year of Redemption |
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Due in one year or less |
|
$ |
11 |
|
|
$ |
3 |
|
Due after one year through two years |
|
|
4 |
|
|
|
6 |
|
Due after two years through three years |
|
|
* |
|
|
|
1 |
|
Due after three years through four years |
|
|
* |
|
|
|
1 |
|
Due after four years through five years |
|
|
2 |
|
|
|
* |
|
Thereafter |
|
|
1 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
18 |
|
|
$ |
11 |
|
|
|
|
|
|
|
|
|
|
|
* |
|
Amount is less than one million. |
A majority of the capital stock subject to mandatory redemption at September 30, 2009 and
December 31, 2008 was due to voluntary termination of membership as a result of a merger or
consolidation into a nonmember or into a member of another FHLBank. The redemption of this capital
stock will not be impacted by the Banks temporary discontinuance of voluntarily repurchasing
excess capital stock assuming the Bank is in compliance with its capital requirements after the
redemption.
Dividends
The Banks dividend philosophy is to pay out a consistent dividend close to average
three-month LIBOR for the covered period. The factors used to support the Board of Directors
dividend decision include the adequacy of the Banks capital and retained earnings position in
accordance with the Banks retained earnings policy and current and projected future earnings.
The Bank paid cash dividends of $29.0 million during the nine months ended September 30, 2009
compared to $82.4 million during the same period of 2008. The annualized dividend rate paid was
1.34 percent and 4.17 percent during the nine months ended September 30, 2009 and 2008. The
dividend rate is driven by the Banks current and projected financial performance and capital
position, including the targeted level of retained earnings and the current interest rate
environment.
105
Critical Accounting Policies and Estimates
Other-Than-Temporary Impairment for Investment Securities
The Bank closely monitors the performance of its investment securities classified as
available-for-sale or held-to-maturity on a quarterly basis to evaluate its
exposure to the risk of loss on these investments in order to determine whether a loss is
other-than-temporary.
If the fair value of a debt security is less than its amortized cost basis at the measurement
date, the Bank is required to assess whether it (i) has the intent to sell the debt security, or
(ii) more likely than not will be required to sell the debt security before its anticipated
recovery. If either of these conditions is met, the Bank recognizes an OTTI in earnings equal to
the entire difference between the securitys amortized cost basis and its fair value at the balance
sheet date. For securities in an unrealized loss position meeting neither of these conditions, the
Bank performs analysis to determine if any of these securities are other-than-temporarily impaired.
To support consistency among the FHLBanks, the FHLBanks formed an OTTI Governance Committee
with the responsibility for reviewing and approving the key modeling assumptions, inputs, and
methodologies to be used by the FHLBanks to generate cash flow projections used in analyzing credit
losses and determining OTTI for private-label MBS. In accordance with this methodology, the Bank
may engage another designated FHLBank to perform the cash flow analysis underlying its OTTI
determination. In order to promote consistency in the application of the assumptions, inputs, and
implementation of the OTTI methodology, the FHLBanks established control procedures whereby the
FHLBanks performing the cash flow analysis select a sample group of private-label MBS and each
perform cash flow analyses on all such test MBS, using the assumptions approved by the OTTI
Governance Committee. These FHLBanks exchange and discuss the results and make any adjustments
necessary to achieve consistency among their respective cash flow models.
Utilizing this methodology, the Bank is responsible for making its own determination of
impairment, which includes determining the reasonableness of assumptions, inputs, and methodologies
used. The Bank obtains cash flow analysis from its designated FHLBanks on all of its private-label
MBS. The cash flow analysis uses two third-party models. The first model considers borrower
characteristics and the particular attributes of the loans underlying the Banks securities, in
conjunction with assumptions about future changes in home prices and interest rates, to project
prepayments, defaults, and loss severities. A significant input to the first model is the forecast
of future housing price changes for the relevant states and CBSAs, which are based upon an
assessment of the individual housing markets. CBSA refers collectively to metropolitan and
micropolitan statistical areas as defined by the U.S. Office of Management and Budget; as currently
defined, a CBSA must contain at least one urban area with a population of 10,000 or more. The
Banks housing price forecast assumed CBSA level current-to-trough home price declines ranging from
zero percent to 20 percent over the next 9 to 15 months. Thereafter, home prices are projected to
increase zero percent in the first six months, 0.5 percent in the next six months, three percent in
the second year, and four percent in each subsequent year.
106
The month-by-month projections of future loan performance derived from the first model, which
reflect projected prepayments, defaults, and loss severities, are then input into a second model
that allocates the projected loan level cash flows and losses to the various security classes in
the securitization structure in accordance with its prescribed cash flow and loss allocation rules.
If this estimate results in a present value of expected cash flows that is less than the amortized
cost basis of the security (that is, a credit loss exists), an OTTI is considered to have occurred.
If there is no credit loss and the Bank does not intend to sell or it is unlikely it will be
required to sell, any impairment is considered temporary.
In instances in which a determination is made that a credit loss exists but the entity does
not intend to sell the debt security and it is unlikely the entity will be required to sell the
debt security before the anticipated recovery of its remaining amortized cost basis (i.e., the
amortized cost basis less any current-period credit loss), the presentation and amount of the OTTI
recognized changes in the Statements of Income. In those instances, the OTTI is separated into (i)
the amount of the total OTTI related to the credit loss, and (ii) the amount of the total OTTI
related to all other factors. The amount of the total OTTI related to the credit loss is recognized
in earnings. The amount of the total OTTI related to all other factors is recognized in accumulated
other comprehensive loss. Subsequent non-OTTI related increases and decreases in the fair value of
available-for-sale securities will be included in accumulated other comprehensive loss. The OTTI
recognized in accumulated other comprehensive loss for debt securities classified as
held-to-maturity will be amortized over the remaining life of the debt security as an increase in
the carrying value of the security (with no effect on earnings unless the security is subsequently
sold or there is additional OTTI recognized). As a result of this analysis, the Bank did not record
any OTTI on its investment securities.
Fair Value Methodology Used to Estimate the Fair Value of Private-Label MBS
In an effort to achieve consistency among all of the FHLBanks, the FHLBanks formed the MBS
Pricing Governance Committee which was responsible for developing a fair value methodology for MBS
that all FHLBanks could adopt. In this regard, the Bank changed the methodology used to estimate
the fair value of its private-label MBS during the quarter ended September 30, 2009. Under the new
methodology approved by the MBS Pricing Governance Committee, the Bank requests prices for all
private-label MBS from four specific third-party pricing services and, depending on the number of
prices received for each security, selects a median or average price as defined by the methodology.
The methodology also incorporates variance thresholds to assist in identifying median or average
prices that may require further review. In certain limited instances (i.e., prices are outside of
variance thresholds or the third-party pricing services do not provide a price), the Bank will
obtain a price from securities dealers or internally model a price that is deemed most appropriate
after consideration of all relevant facts and circumstances that would be considered by market
participants. Prices for private-label MBS held in common with other FHLBanks are reviewed for
consistency. In adopting this common methodology, each FHLBank remains responsible for the
selection and application of its fair value methodology and the reasonableness of assumptions and
inputs used. Since the Banks private-label MBS are all classified as held-to-maturity securities,
this change in pricing methodology had no impact on the Banks financial condition or results of
operations at September 30, 2009.
For additional discussion of our critical accounting policies and estimates, see Critical
Accounting Policies and Estimates in the Banks Form 10-K.
107
Legislative and Regulatory Developments
Finance Agency Examination Guidance Examination for Accounting Practices
On October 27, 2009, the Finance Agency issued examination guidance and standards, which are
effective immediately, relating to the accounting practices of Fannie Mae, Freddie Mac and the
FHLBanks (collectively, the Housing GSEs), consistent with the safety and soundness
responsibilities of the Finance Agency. The areas addressed by the examination guidance include: 1)
accounting policies and procedures; 2) Audit Committee; 3) independent internal audit function; 4)
accounting staff; 5) financial statements; 6) external auditor; and 7) review of audit and
accounting functions. This examination guidance is not intended to be in conflict with statutes,
regulations, and/or GAAP. Additionally, this examination guidance is not intended to relieve or
minimize the decision-making responsibilities, or regulated duties and responsibilities of a
Housing GSEs management, Board of Directors or Committees thereof.
Executive Compensation
On June 5, 2009, the Finance Agency published a proposed rule with a request for comment to
set forth requirements and processes with respect to compensation provided to executive officers by
Fannie Mae, Freddie Mac, FHLBanks (regulated entities), and the Office of Finance. The Executive
Compensation rule addresses the authority of the Finance Agency Director to approve, disapprove,
modify, prohibit, or withhold compensation of executive officers of the regulated entities. The
proposed rule also addresses the Finance Agency Directors authority to approve, in advance,
agreements or contracts of executive officers that provide compensation in connection with
termination of employment. The proposed rule prohibits a regulated entity or the Office of Finance
to pay compensation to an executive officer that is not reasonable and comparable with compensation
paid by such similar businesses involving similar duties and responsibilities. Failure by a
regulated entity or the Office of Finance to comply with the requirements of this part may result
in supervisory action by the Finance Agency, including an enforcement action to require an
individual to make restitution to or reimbursement of excessive compensation or inappropriately
paid termination benefits. Comments on the proposed rule were due August 4, 2009.
On October 27, 2009, the Finance Agency issued an advisory bulletin establishing certain
principles for executive compensation at the FHLBanks and the Office of Finance. These principles
include that: 1) such compensation must be reasonable and comparable to that offered to executives
in similar positions at comparable financial institutions; 2) such compensation should be
consistent with sound risk management and preservation of the par value of FHLBank capital stock;
3) executive incentive-based compensation should be tied to longer-term performance and
outcome-indicators and be deferred and made contingent upon performance over several years; and 4)
the board of directors should promote accountability and transparency in the process of setting
compensation.
108
Director Compensation
On October 23, 2009, the Finance Agency issued a proposed rule on FHLBank directors
compensation and expenses with a comment deadline of December 7, 2009. The proposed rule would
allow each FHLBank to pay its directors reasonable compensation and expenses, subject to the
authority of the Finance Agency Director (Director) to object to, and to prohibit prospectively,
compensation and/or expenses that the Director determines are not reasonable.
Finance Agency Publishes Final Rule Concerning the Nomination and Election of Directors
On September 26, 2008, the Finance Agency published an interim final rule to implement the
provisions of the Housing Act concerning the nominations, balloting, voting and reporting of
results for director elections. On October 7, 2009, the Finance Agency published a final rule
concerning the nomination and election of directors. The final rule is similar to the interim final
rule, but makes the following substantive changes:
|
|
|
Requires the board of directors of each Bank annually to determine how many of its
independent directorships should be designated as public interest directorships, but
mandates that at least two independent directors be public interest directors; |
|
|
|
Sets forth new provisions for filling a vacancy on the board of directors; |
|
|
|
Amends the election requirement for independent directors. The interim final rule
provided that an independent director nominee must receive at least 20 percent of the
number of votes eligible to be cast in the election to be elected. The final rule provides
that if a Banks board of directors nominates only one person for each directorship,
receipt of 20 percent of the eligible votes by that nominee is required for that nominee to
be elected. If, however, a Banks board of directors nominates more persons for the type of
independent directorship to be filled than there are directorships of that type to be
filled in the election, then the person with the highest number of votes will be declared
elected; and |
|
|
|
Clarifies the requirements for subsequent elections in the event an independent director
cannot be elected based on the failure to meet the 20 percent requirement of eligible
votes. |
The final rule became effective on November 6, 2009.
109
Collateral for Advances and Interagency Guidance on Nontraditional Mortgage Products
On August 4, 2009, the Finance Agency published a notice for comment on a study to review the
extent to which loans and securities used as collateral to support FHLBank advances are consistent
with the federal banking agencies guidance on nontraditional mortgage products. The Finance Agency
requested comments on whether it should take any additional regulatory actions to ensure that
FHLBanks are not supporting predatory practices. The Finance Agency also noted its intent to revise
previously published guidelines for subprime and nontraditional loans pledged as collateral. This
proposed revision would require members pledging private-label residential MBS and residential
loans acquired after July 10, 2007 to comply with the federal interagency guidance regardless of
the origination date of the loans in the security or of the loans pledged. At this time, we are
uncertain whether the Finance Agency will implement this revision or impose other restrictions on
FHLBank collateral practices as a result of this notice for comment.
Board of Directors of FHLBank Systems Office of Finance
On August 4, 2009, the Finance Agency published a notice of proposed rulemaking, with comments
due by November 4, 2009, related to the reconstitution of the Office of Finance Board of Directors.
The proposed rule would increase the size of the Office of Finance Board of Directors, create a
fully independent audit committee, provide for the creation of other committees, and set a method
for electing independent directors, along with setting qualification standards for these directors.
Currently, the Office of Finance is governed by a board of directors, the composition and functions
of which are determined by the Finance Agencys regulations. Under existing Finance Agency
regulation, the Office of Finance Board of Directors is made up of two FHLBank Presidents and one
independent director. The Finance Agency has proposed that all twelve FHLBank Presidents be members
of the Office of Finance Board of Directors, along with three to five independent directors. The
independent directors would comprise the audit committee of the Office of Finance Board of
Directors with oversight responsibility for the combined financial reports. Under the proposed
rule, the audit committee of the Office of Finance would be responsible for ensuring that the
FHLBanks adopt consistent accounting policies and procedures so that the combined financial reports
will continue to be accurate and meaningful.
Proposed Rule Regarding Golden Parachute and Indemnification Payments
On June 29, 2009, the Finance Agency published a proposed rule setting forth the standards
that the Finance Agency shall take into consideration when limiting or prohibiting golden parachute
and indemnification payments if adopted as proposed. The primary impact of this proposed rule is to
better conform existing Finance Agency regulations on golden parachutes with FDIC rules and to
further refine limitations on golden parachute payments to further limit such payments made by
Fannie Mae, Freddie Mac, or an FHLBank that are assigned certain less than satisfactory composite
Finance Agency examination ratings. It is unclear what impact this proposed rule may have on the
Bank. Comments on the proposed rule were due July 29, 2009.
110
Helping Families Save Their Homes Act of 2009
On May 20, 2009, the Helping Families Save Their Homes Act of 2009 was enacted to encourage
loan modifications in order to prevent mortgage foreclosures and to buttress the federal deposit
insurance system. One provision in this Act provides a safe harbor from liability for mortgage
servicers who modify the terms of a mortgage consistent with certain qualified loan modification
plans. Another provision extends the temporary increase in federal deposit insurance coverage to
$250,000 for banks, thrifts, and credit unions through 2013. At this time it is uncertain what
effect the provisions regarding loan modifications will have on the value of the Banks mortgage
asset portfolio. The extension of federal deposit insurance coverage could potentially decrease
demand for the Banks advances.
Finance Agency Issues Guidance on Other-Than-Temporary Impairment
On April 28, 2009 and May 7, 2009, the Finance Agency provided the FHLBanks with guidance on
the process for determining OTTI with respect to private-label MBS. The goal of the guidance is to
promote consistency in the determination of OTTI for private-label MBS among all FHLBanks. We
adopted the Finance Agency guidance as further described below, effective January 1, 2009.
Beginning with the second quarter of 2009, the FHLBanks formed an OTTI Governance Committee
with the responsibility for reviewing and approving the key modeling assumptions, inputs, and
methodologies used by the FHLBanks to generate cash flow projections used in analyzing credit
losses and determining OTTI for private-label MBS. The OTTI Governance Committee charter was
approved on June 11, 2009 and provides a formal process by which the other FHLBanks can provide
input on and approve the assumptions.
An FHLBank may engage one of four designated FHLBanks to perform the cash flow analysis
underlying its OTTI determination. Each FHLBank is responsible for making its own determination of
OTTI and the reasonableness of assumptions, inputs, and methodologies used. Additionally, each
FHLBank performs the required present value calculations using appropriate historical cost bases
and yields. FHLBanks that hold commonly owned private-label MBS are required to consult with one
another to ensure that any decision on a commonly held private-label MBS that is
other-than-temporarily impaired, including the determination of fair value and the credit loss
component of the unrealized loss, is consistent among those FHLBanks.
In order to promote consistency in the application of the assumptions and implementation of
the OTTI methodology, the FHLBanks have established control procedures whereby the FHLBanks
performing cash flow analysis select a sample group of private-label MBS and each perform cash flow
analyses on all such test MBS, using the assumptions approved by the OTTI Governance Committee.
These FHLBanks exchange and discuss the results and make any adjustments necessary to achieve
consistency among their respective cash flow models.
111
U.S. Treasury Departments Financial Stability Plan
On February 10, 2009 the U.S. Treasury Department announced a Financial Stability Plan to
address the global capital markets crisis and U.S. economic recession that continues into 2009.
This Financial Stability Plan has evolved to include a number of initiatives, including the
encouragement of lower mortgage rates, foreclosure relief programs, a bank capital injection
program, major lending programs with the Federal Reserve directed at the securitization markets for
consumer and small business lending, and a purchase program for certain illiquid assets. As part of
this stability plan, in October 2009, the U.S. Treasury Department announced a new bond purchase
program to support lending by Housing Finance Agencies (HFAs) and a temporary credit and liquidity
program to improve their access to liquidity for outstanding HFA bonds. It is uncertain at this
time how successful the plan will be in stabilizing the mortgage market and the financial condition
of the Banks members and how the plans initiatives will be phased out. The initiative to lower
mortgage rates, if successful, may cause faster prepayment of the mortgages being held by the Bank.
In June 2009, the U.S. Treasury Department announced a broad ranging plan for financial
regulatory reform that would change how financial firms, markets, and products are regulated.
Included in this reform plan are proposals to create a systemic risk regulator and a consumer
financial protection agency and to provide more regulation of certain over-the-counter derivatives.
Congress is currently considering legislation to implement these proposals. In addition, under the
plan, the U.S. Treasury Department and the Housing and Urban Development Department are charged
with developing recommendations regarding the future of the housing GSEs, including the FHLBanks.
At this time, it is uncertain what parts, if any, of the reform plan will be enacted or
implemented, whether any legislation enacted will result in more regulation of the FHLBanks and
their use of derivatives, and what recommendations will be made with regard to the future of the
GSEs.
FDIC Modifies & Extends Temporary Liquidity Guarantee Program for Bank Debt Liabilities
The FDIC has taken a number of actions with regard to the extension of the TLGP. The TLGP
comprises two components: the Debt Guarantee Program (DGP), which provides FDIC guarantees of
certain senior unsecured bank debt, and the Transaction Account Guarantee (TAG) program, which
provides FDIC guarantees for all funds held at participating banks in qualifying non-interest
bearing transaction accounts. On August 26, 2009, the FDIC adopted a final rule providing for a
six-month extension of the TAG program, through June 30, 2010. On October 30, 2009, the FDIC
adopted a final rule that allows for the DGP to terminate on October 31, 2009, for most DGP
participants, but also establishes a limited emergency guarantee facility for those DGP
participants that are unable to issue non-guaranteed debt to replace maturing senior unsecured debt
because of market disruptions or other circumstances beyond their control. Under this limited
emergency facility, the FDIC will guarantee senior unsecured debt issued on or before April 30,
2010. The TAG and DGP provide alternative sources of funds for many of the Banks members that
could compete with the Banks advance business.
112
FDIC Changes Risk-Based Assessments and imposes special Assessment
On February 27, 2009 the FDIC approved a final regulation that would increase the deposit
insurance assessment for those FDIC-insured institutions that have outstanding FHLBank advances and
other secured liabilities to the extent that the institutions ratio of secured liabilities to
domestic deposits exceeds 25 percent. On May 29, 2009, the FDIC published a final rule to impose a
five basis point special assessment on an FDIC-insured institutions assets minus Tier 1 capital as
of June 30, 2009, subject to certain caps. Past FDIC assessments have been based on the amount of
deposits held by an institution. On October 2, 2009, the FDIC published for comment a proposed rule
to require FDIC-insured institutions to prepay, on December 30, 2009, their risk-based assessments
for the fourth quarter of 2009, and for all of 2010, 2011, and 2012. The FDICs risk-based
assessment and special assessment on assets may provide an incentive for some of the Banks members
to hold more deposits vis-à-vis other liabilities, such as advances, than they would if non-deposit
liabilities were not a factor in determining an institutions deposit insurance assessments. It is
not certain at this time whether the FDIC will adopt or change its proposal to require the
prepayment of assessments and how the proposal, if adopted, will impact the Banks FDIC-insured
members.
Risk Management
We have risk management policies, established by the Banks Board of Directors, that monitor
and control our exposure to market, liquidity, credit, operational, and business risk. Our primary
objective is to manage assets, liabilities, and derivative exposures in ways that protect the par
redemption value of capital stock from risks, including fluctuations in market interest rates and
spreads. The Banks risk management strategies and limits protect the Bank from significant
earnings volatility. We periodically evaluate these strategies and limits in order to respond to
changes in the Banks financial position and general market conditions. This periodic evaluation
may result in changes to the Banks risk management policies and/or risk measures.
The Banks Enterprise Risk Management Policy (ERMP) provides the Bank with the ability to
conduct a robust risk management practice allowing for flexibility to make rational decisions in
stressed interest rate environments.
113
The Banks Board of Directors determined that the Bank should operate under a risk management
philosophy of maintaining an AAA rating. An AAA rating provides the Bank with ready access to funds
in the capital markets. In line with this objective, the ERMP establishes risk measures, with
policy limits or management action triggers (MATs), consistent with the maintenance of an AAA
rating, to monitor the Banks market risk, liquidity risk, and capital adequacy. MATs require the
Bank to more closely monitor and measure the risks inherent in the Banks Statements of Condition
but provide more flexibility to react prudently when those trigger levels occur. The following is a
list of the risk measures in place at September 30, 2009 and whether they are monitored by a policy
limit and/or MAT:
|
|
|
Market Risk:
|
|
Mortgage Portfolio Market Value Sensitivity (policy limit and MAT)
Market Value of Capital Stock Sensitivity (policy limit and MAT)
Projected 12-month GAAP Earnings per Share Sensitivity (MAT) |
|
Liquidity Risk:
|
|
Contingent Liquidity (policy limit and MAT) |
|
Capital Adequacy:
|
|
Economic Capital Ratio (MAT)
Economic Value of Capital Stock (MAT) |
Management identified Economic Value of Capital Stock (EVCS) and Market Value of Capital Stock
(MVCS) Sensitivity as the Banks key risk measures.
Market Risk/Capital Adequacy
We define market risk as the risk that net interest income or MVCS will change as a result of
changes in market conditions such as interest rates, spreads, and volatilities. Interest rate risk
was the predominant type of market risk exposure during the nine months ended September 30, 2009
and throughout 2008. Our ERMP is designed to provide an asset and liability management framework to
respond to changes in market conditions while minimizing balance sheet stress and income
volatility. Bank management and the Board of Directors routinely review both the policy thresholds
and the actual exposures to verify the interest rate risk in our balance sheet remains at prudent
and reasonable levels.
The goal of the Banks interest rate risk management strategy is to manage interest rate risk
by setting and operating within an appropriate framework and limits. The Banks general approach
toward managing interest rate risk is to acquire and maintain a portfolio of assets, liabilities
and hedges, which, taken together, limit the Banks expected exposure to market/interest rate risk.
Management regularly monitors the Banks sensitivity to interest rate changes by monitoring its
market risk measures in parallel and non-parallel interest rate shifts. Interest rate exposure is
managed by the use of appropriate funding instruments and by employing hedging strategies. Hedging
may occur for a single transaction or group of transactions as well as for the overall portfolio.
The Banks hedge positions are evaluated regularly and adjusted as deemed necessary by management.
114
During the second quarter of 2009, management concluded that the Banks prepayment model,
which was calibrated to historical observations, was projecting faster mortgage prepayments than
currently warranted. As a result, on June 29, 2009 the Bank adjusted its prepayment model to more
closely match the recent prepayment experiences of its MPF portfolio. For additional details on the
adjusted prepayment model, refer to the Banks second quarter 2009 Form 10-Q filed with the SEC on
August 12, 2009.
Management continues to review its prepayment model to ensure that it closely matches the
prepayment experiences of its MPF portfolio. The Banks key market risk measures are quantified in
the following discussion.
Economic Value of Capital Stock
EVCS is defined by the Bank as the net present value of expected future cash flows of the
Banks assets, liabilities, and derivatives, discounted at the Banks cost of funds, divided by the
total shares of capital stock outstanding. This method eliminates the day-to-day price changes
(i.e. mortgage option-adjusted spread) which cannot be attributed to any of the standard market
factors, such as movements in interest rates or volatilities. EVCS thus approximates the long-term
value of one share of Bank stock.
The Banks ERMP sets the MAT for EVCS at $100 per share. Under this policy, if EVCS drops
below $100 per share, the ERMP requires that the Bank increase its required retained earnings
minimum target to account for the shortfall. If actual retained earnings falls below the retained
earnings minimum, the Bank, as determined by the Board of Directors, will establish an action plan,
which may include a dividend cap at less than the current earned dividend, to enable the Bank to
return to its targeted levels of retained earnings within a practicable period of time.
Effective May 14, 2009, the Banks Board of Directors amended the ERMP to reflect the Boards
adoption of an action plan that enables the Bank to address any retained earnings shortfall within
twelve months. At September 30, 2009 the Banks actual retained earnings was above the retained
earnings minimum, and therefore no action plan was necessary.
The following table shows EVCS in dollars per share based on outstanding shares including
shares classified as mandatorily redeemable, at each quarter-end during 2009 and 2008.
|
|
|
|
|
Economic Value of Capital Stock (Dollars Per Share) |
|
2009 |
|
|
|
|
September |
|
$ |
106.9 |
|
June |
|
$ |
102.1 |
|
March |
|
$ |
86.3 |
|
2008 |
|
|
|
|
December |
|
$ |
80.0 |
|
September |
|
$ |
96.1 |
|
June |
|
$ |
105.1 |
|
March |
|
$ |
105.3 |
|
115
The Banks EVCS has recovered significantly at September 30, 2009 when compared to December
31, 2008. The improvement was primarily attributable to an increase in the level of interest rates
at September 30, 2009 when compared to December 31, 2008, elimination of the negative spread
carried on our liquidity portfolio at December 31, 2008, a decrease in longer-term funding costs
relative to LIBOR, adjustments to the Banks prepayment model, and a decrease in interest rate
volatility.
During the nine months ended September 30, 2009, increased interest rates improved the Banks
EVCS. As interest rates increase, the value of the shorter-term assets stays constant while the
value of the longer-term debt used to fund those assets decreases. During the fourth quarter of
2008, the Bank funded a portion of its liquidity portfolio with fixed rate longer-dated discount
notes. Subsequent to the issuance of these discount notes, interest rates fell significantly
resulting in a negative spread as the cost of the discount notes was greater than the earnings on
the liquidity portfolio. This negative spread significantly decreased EVCS at December 31, 2008. As
those discount notes have matured throughout 2009, the impact of the negative spread declined and
was gone by September 30, 2009.
Additionally, the Banks longer-term funding costs relative to LIBOR decreased during the nine
months ended September 30, 2009 when compared to December 31, 2008. Decreased longer-term funding
costs have a positive impact on the value of EVCS through their impact on the value of
mortgage-related assets and their associated funding. The Bank also adjusted its prepayment model
during the second quarter of 2009 to more accurately reflect the recent prepayment experiences of
its MPF portfolio. This adjustment decreased the prepayment speed on the Banks MPF portfolio,
resulting in higher future cash flows. Finally, interest rate volatility decreased during the nine
months ended September 30, 2009 when compared to December 31, 2008. Decreased interest rate
volatility has a positive impact on all of the Banks value measurements (including EVCS) through
its impact on the value of mortgage-related assets. Lower interest rate volatility increases the
certainty of the timing of future cash flows.
During the second and third quarter of 2009, the Bank purchased 30-year fixed rate U.S.
Treasury obligations, swapped these securities to LIBOR, and funded them with short-term discount
notes. This funding strategy resulted in increased basis risk for the Bank and resulted in a lower
EVCS. The Bank sold its remaining 30-year fixed rate U.S. Treasury obligations during the third
quarter of 2009, which eliminated the associated basis risk and as a result, increased EVCS at
September 30, 2009.
116
Market Value of Capital Stock Sensitivity
MVCS is defined by the Bank as the present value of assets minus the present value of
liabilities adjusted for the net present value of derivatives divided by the total shares of
capital stock outstanding. It represents the liquidation value of one share of Bank stock if all
assets and liabilities were liquidated at current market prices. MVCS does not represent the
long-term value of the Bank, as it takes into account the short-term market price fluctuations
which are unrelated to movements in interest rates or volatilities.
The MVCS calculation uses market prices, as well as implied forward rates, and assumes a
static balance sheet. The timing and variability of balance sheet cash flows are calculated by an
internal model. To ensure the accuracy of the market value calculation, we reconcile the computed
market prices of complex instruments, such as financial derivatives and mortgage assets, to market
observed prices or dealers quotes.
Interest rate risk stress test of MVCS involves instantaneous parallel shifts in interest
rates. The resulting percentage change in MVCS from the base case value is an indication of
longer-term repricing risk and option risk embedded in the balance sheet.
To protect the MVCS from large interest rate swings, we use hedging transactions, such as
entering into or canceling interest rate swaps on existing debt, altering the funding structure
supporting MBS purchases, and purchasing interest rate swaptions and caps.
The ERMP limits for MVCS are five percent and ten percent declines from base case in the up
and down 100 and 200 basis point parallel interest rate shift scenarios, respectively. Any breach
of ERMP limits requires an immediate action, as well as a report to the Board of Directors.
117
The following tables show our base case and change from base case MVCS in dollars per share
and percent change respectively, based on outstanding shares including shares classified as
mandatorily redeemable, assuming instantaneous shifts in interest rates at each quarter-end during
2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market Value of Capital Stock (Dollars per Share) |
|
|
|
Down 200 |
|
|
Down 100 |
|
|
Base Case |
|
|
Up 100 |
|
|
Up 200 |
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September |
|
$ |
78.4 |
|
|
$ |
91.7 |
|
|
$ |
95.5 |
|
|
$ |
93.5 |
|
|
$ |
89.0 |
|
June |
|
$ |
72.1 |
|
|
$ |
86.9 |
|
|
$ |
91.2 |
|
|
$ |
90.4 |
|
|
$ |
87.4 |
|
March |
|
$ |
42.7 |
|
|
$ |
59.2 |
|
|
$ |
76.3 |
|
|
$ |
86.9 |
|
|
$ |
85.7 |
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December |
|
$ |
20.6 |
|
|
$ |
41.0 |
|
|
$ |
58.4 |
|
|
$ |
66.2 |
|
|
$ |
64.3 |
|
September |
|
$ |
84.3 |
|
|
$ |
89.3 |
|
|
$ |
91.8 |
|
|
$ |
89.6 |
|
|
$ |
87.0 |
|
June |
|
$ |
81.7 |
|
|
$ |
93.5 |
|
|
$ |
97.0 |
|
|
$ |
94.0 |
|
|
$ |
89.1 |
|
March |
|
$ |
77.8 |
|
|
$ |
85.7 |
|
|
$ |
90.0 |
|
|
$ |
87.6 |
|
|
$ |
84.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent Change from Base Case |
|
|
|
Down 200 |
|
|
Down 100 |
|
|
Base Case |
|
|
Up 100 |
|
|
Up 200 |
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September |
|
|
(17.9 |
)% |
|
|
(4.0 |
)% |
|
|
0.0 |
% |
|
|
(2.1 |
)% |
|
|
(6.8 |
)% |
June |
|
|
(20.9 |
)% |
|
|
(4.7 |
)% |
|
|
0.0 |
% |
|
|
(0.9 |
)% |
|
|
(4.2 |
)% |
March |
|
|
(44.0 |
)% |
|
|
(22.3 |
)% |
|
|
0.0 |
% |
|
|
14.0 |
% |
|
|
12.3 |
% |
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December |
|
|
(64.8 |
)% |
|
|
(29.7 |
)% |
|
|
0.0 |
% |
|
|
13.5 |
% |
|
|
10.1 |
% |
September |
|
|
(8.2 |
)% |
|
|
(2.7 |
)% |
|
|
0.0 |
% |
|
|
(2.5 |
)% |
|
|
(5.3 |
)% |
June |
|
|
(15.7 |
)% |
|
|
(3.6 |
)% |
|
|
0.0 |
% |
|
|
(3.1 |
)% |
|
|
(8.1 |
)% |
March |
|
|
(13.5 |
)% |
|
|
(4.7 |
)% |
|
|
0.0 |
% |
|
|
(2.7 |
)% |
|
|
(6.6 |
)% |
The increase in base case MVCS at September 30, 2009 compared with December 31, 2008 was
primarily attributable to a decrease in the option-adjusted spread on our mortgage assets, an
increase in interest rates, a decrease in volatility and an increase in capital stock and retained
earnings.
At September 30, 2009, the Banks MVCS risk profile improved when compared to December 31,
2008 due to a combination of the mortgage loan sale transaction and associated debt extinguishments
during the second quarter of 2009, the replacement of assets, and adjustments to the Banks
prepayment model. The Bank sold $2.1 billion of its mortgage loan portfolio during the second
quarter of 2009 in an effort to improve the Banks market value sensitivity to changes in interest
rates. The Bank is exposed to interest rate risk on its mortgage assets due to the embedded
prepayment option available to homeowners creating a potential cash flow mismatch between its
mortgage investments and the liabilities funding them. Therefore, selling a portion of the Banks
mortgage loans reduced this cash flow mismatch and improved the Banks market value risk profile.
Additionally, as a result of the mortgage loan sale transaction, the Bank used a portion of the
proceeds to purchase investments to replace the mortgage loans. The investments purchased do not
expose the Bank to the same prepayment risk associated with mortgage assets and therefore, also
improved the Banks market value risk profile.
118
During the first nine months of 2009 and a majority of 2008, the Banks projected MVCS in the
down 200 basis point rate shift scenario fell below the ten percent policy threshold loss due to an
increase in prepayment sensitivity as a result of a lower interest rates and higher market
volatility. However, management received a temporary suspension of all policy limits pertaining to
the down 200 basis point rate shift scenario from the Board of Directors in early 2008. During the
second quarter of 2009, as a result of the mortgage loan sale and the Banks adjusted prepayment
model, the Banks projected MVCS in the down rate shift scenarios improved when compared to
December 31, 2008. The Bank utilized interest rate swaps on the mortgage portfolio throughout the
third quarter of 2009 to protect MVCS from large interest rate swings and improve the Banks
overall risk profile.
Liquidity Risk
See Liquidity beginning on page 98 for additional detail of our liquidity management.
Credit Risk
We define credit risk as the potential that our borrowers or counterparties will fail to meet
their obligations in accordance with agreed upon terms. The Banks primary credit risks arise from
our ongoing lending, investing, and hedging activities. Our overall objective in managing credit
risk is to operate a sound credit granting process and to maintain appropriate credit
administration, measurement, and monitoring practices.
Advances
We are required by regulation to obtain and maintain a security interest in eligible
collateral at the time we originate or renew an advance and throughout the life of the advance.
Eligible collateral includes whole first mortgages on improved residential property or securities
representing a whole interest in such mortgages; securities issued, insured, or guaranteed by the
U.S. Government or any of the GSEs, including without limitation MBS issued or guaranteed by Fannie
Mae, Freddie Mac, or Government National Mortgage Association; cash deposited in the Bank; and
other real estate-related collateral acceptable to the Bank provided such collateral has a readily
ascertainable value and the Bank can perfect a security interest in such property. Additionally,
Community Financial Institutions may pledge collateral consisting of secured small business, small
farm, or small agribusiness loans, including secured business and agri-business lines of credit.
Credit risk arises from the possibility that the collateral pledged to us is insufficient to
cover the obligations of a borrower in default. We manage credit risk by securing borrowings with
sufficient collateral acceptable to us, monitoring borrower creditworthiness through internal and
independent third-party analysis, and performing collateral review and valuation procedures to
verify the sufficiency of pledged collateral. We are required by law to make advances solely on a
secured basis and have never experienced a credit loss on an advance since our inception. The Bank
maintains policies and practices to monitor our exposure and take action where appropriate. In
addition, the Bank has the ability to call for additional or substitute collateral, or require
delivery of collateral, during the life of a loan to protect its security interest.
119
Although management has policies and procedures in place to manage credit risk, the Bank may
be exposed because the outstanding advance value may exceed the liquidation value of the Banks
collateral. The Bank mitigates this risk through applying collateral discounts, requiring most
borrowers to execute a blanket lien, taking delivery of collateral, and limiting extensions of
credit. The Banks potential credit risk from advances is concentrated in commercial banks and
insurance companies.
Collateral discounts, or haircuts, are applied to the unpaid principal balance or market
value, if available, of the collateral to determine the advance equivalent value of the collateral
securing each borrowers obligations. The amount of these discounts will vary based on the type of
collateral and security agreement. The Bank determines these discounts or haircuts using data based
upon historical price changes, discounted cash flow analysis, and loan level modeling.
At September 30, 2009 and December 31, 2008, borrowers pledged $90 billion and $87 billion of
collateral (net of applicable discounts) to support $39 billion and $44 billion of advances and
other activities with the Bank. Borrowers pledge collateral in excess of their collateral
requirement mainly to demonstrate liquidity availability and to borrow in the future.
At September 30, 2009 and December 31, 2008, six and seven borrowers had outstanding advances
greater than $1.0 billion. These advance holdings represented approximately 41 percent and 45
percent of the total par value of advances outstanding at September 30, 2009 and December 31, 2008.
For further discussion on our largest borrowers of advances, see Advances at page 86.
The following table shows our composition of collateral pledged to the Bank (dollars in
billions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
|
December 31, 2008 |
|
|
|
|
|
|
|
Advance |
|
|
|
|
|
|
|
|
|
|
Advance |
|
|
|
|
Collateral Type |
|
Dollars |
|
|
Equivalent |
|
|
Discount |
|
|
Dollars |
|
|
Equivalent |
|
|
Discount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family |
|
$ |
62.2 |
|
|
$ |
39.7 |
|
|
|
36.2 |
% |
|
$ |
51.5 |
|
|
$ |
36.0 |
|
|
|
30.1 |
% |
Multi-family |
|
|
2.7 |
|
|
|
1.3 |
|
|
|
51.9 |
|
|
|
1.9 |
|
|
|
1.1 |
|
|
|
42.1 |
|
Other real estate |
|
|
44.1 |
|
|
|
23.0 |
|
|
|
47.8 |
|
|
|
42.2 |
|
|
|
23.8 |
|
|
|
43.6 |
|
Securities/insured
loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, agency
and RMBS |
|
|
19.1 |
|
|
|
18.0 |
|
|
|
5.8 |
|
|
|
23.8 |
|
|
|
19.0 |
|
|
|
20.2 |
|
CMBS |
|
|
6.6 |
|
|
|
5.0 |
|
|
|
24.2 |
|
|
|
7.3 |
|
|
|
4.6 |
|
|
|
37.0 |
|
Government insured
loans |
|
|
1.1 |
|
|
|
1.0 |
|
|
|
9.1 |
|
|
|
1.1 |
|
|
|
0.9 |
|
|
|
18.2 |
|
Secured small
business loans and
agribusiness loans |
|
|
5.0 |
|
|
|
1.7 |
|
|
|
66.0 |
|
|
|
5.2 |
|
|
|
1.8 |
|
|
|
65.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total collateral |
|
$ |
140.8 |
|
|
$ |
89.7 |
|
|
|
36.3 |
% |
|
$ |
133.0 |
|
|
$ |
87.2 |
|
|
|
34.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120
Effective April 6, 2009, management updated discounts on advance collateral. The Bank
made these changes to ensure that it can continue to extend credit to members safely and soundly
and to protect the integrity of its capital stock. These changes apply to all members and housing
associates. Certain insurance company members were required to sign new collateral agreements with
the Bank. At October 31, 2009 five of those insurance company members had not signed a new
collateral agreement. Two of the five insurance companies were included in our top five advance
borrower listing at September 30, 2009. The Bank will not extend new advances or rollover any
existing advances to those insurance companies until they sign a new collateral agreement. To
ensure that it is fully collateralized on its existing business with those insurance companies, the
Bank establishes market values against which the discounts are applied and may limit the return of
delivered collateral on maturing advances.
Mortgage Assets
Mortgage asset credit risk is the risk that we will not receive timely payments of principal
and interest due from mortgage borrowers because of borrower defaults. Credit risk on mortgage
assets is affected by numerous characteristics, including loan type, down payment amount,
borrowers credit history, and other factors such as unemployment and home price depreciation. We
are exposed to mortgage asset credit risk through our participation in the MPF program and certain
investment activities.
We offer a variety of MPF products to meet the differing needs of our members. The Bank allows
participating members to select the products they want to use. These products include Original MPF,
MPF 100, MPF 125, MPF Plus, Original MPF Government, and MPF Xtra.
For additional discussion of our mortgage assets and MPF products, see Mortgage Assets in
the Banks Form 10-K.
The following table presents our MPF portfolio by product type at par value (dollars in
billions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
|
December 31, 2008 |
|
Product Type |
|
Dollars |
|
|
Percent |
|
|
Dollars |
|
|
Percent |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Original MPF |
|
$ |
0.4 |
|
|
|
5.1 |
% |
|
$ |
0.3 |
|
|
|
2.8 |
% |
MPF 100 |
|
|
0.1 |
|
|
|
1.3 |
|
|
|
0.2 |
|
|
|
1.9 |
|
MPF 125 |
|
|
2.4 |
|
|
|
30.8 |
|
|
|
2.0 |
|
|
|
18.7 |
|
MPF Plus |
|
|
4.5 |
|
|
|
57.7 |
|
|
|
7.8 |
|
|
|
72.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total conventional loans |
|
|
7.4 |
|
|
|
94.9 |
|
|
|
10.3 |
|
|
|
96.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government-insured loans |
|
|
0.4 |
|
|
|
5.1 |
|
|
|
0.4 |
|
|
|
3.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans |
|
$ |
7.8 |
|
|
|
100.0 |
% |
|
$ |
10.7 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
121
MPF shared funding certificates are mortgage-backed certificates created from conventional
conforming mortgages using a senior/subordinated tranche structure. The Banks investment is
recorded in held-to-maturity securities. The Bank does not consolidate its investments in MPF
shared funding since it is not the sponsor or primary beneficiary of these variable interest
entities. The following table shows our shared funding certificates and credit ratings (dollars in
millions):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
Credit Rating |
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
AAA |
|
$ |
33 |
|
|
$ |
45 |
|
AA |
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total MPF shared funding certificates |
|
$ |
35 |
|
|
$ |
47 |
|
|
|
|
|
|
|
|
We also manage the credit risk on our mortgage loan portfolio by monitoring portfolio
performance and the creditworthiness of our participating members. All loans purchased by the Bank
must comply with underwriting guidelines which follow standards generally required in the secondary
mortgage market.
We monitor the delinquency levels of our mortgage loan portfolio on a monthly basis. A summary
of our delinquencies at September 30, 2009 follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid Principal Balance |
|
|
|
|
|
|
|
Government- |
|
|
|
|
|
|
Conventional |
|
|
Insured |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30 days |
|
$ |
92 |
|
|
$ |
17 |
|
|
$ |
109 |
|
60 days |
|
|
38 |
|
|
|
7 |
|
|
|
45 |
|
90 days |
|
|
14 |
|
|
|
3 |
|
|
|
17 |
|
Greater than 90 days |
|
|
14 |
|
|
|
1 |
|
|
|
15 |
|
Foreclosures and bankruptcies |
|
|
82 |
|
|
|
4 |
|
|
|
86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total delinquencies |
|
$ |
240 |
|
|
$ |
32 |
|
|
$ |
272 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans outstanding |
|
$ |
7,452 |
|
|
$ |
383 |
|
|
$ |
7,835 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquencies as a percent of
total mortgage loans |
|
|
3.2 |
% |
|
|
8.4 |
% |
|
|
3.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquencies 90 days and
greater plus foreclosures and
bankruptcies as a
percent of total mortgage loans |
|
|
1.5 |
% |
|
|
2.1 |
% |
|
|
1.5 |
% |
|
|
|
|
|
|
|
|
|
|
122
A summary of our delinquencies at December 31, 2008 follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid Principal Balance |
|
|
|
|
|
|
|
Government- |
|
|
|
|
|
|
Conventional |
|
|
Insured |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30 days |
|
$ |
101 |
|
|
$ |
23 |
|
|
$ |
124 |
|
60 days |
|
|
27 |
|
|
|
7 |
|
|
|
34 |
|
90 days |
|
|
11 |
|
|
|
3 |
|
|
|
14 |
|
Greater than 90 days |
|
|
12 |
|
|
|
3 |
|
|
|
15 |
|
Foreclosures and bankruptcies |
|
|
47 |
|
|
|
5 |
|
|
|
52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total delinquencies |
|
$ |
198 |
|
|
$ |
41 |
|
|
$ |
239 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans outstanding |
|
$ |
10,253 |
|
|
$ |
423 |
|
|
$ |
10,676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquencies as a percent of
total mortgage loans |
|
|
1.9 |
% |
|
|
9.7 |
% |
|
|
2.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquencies 90 days and
greater plus foreclosures and
bankruptcies as a
percent of total mortgage loans |
|
|
0.7 |
% |
|
|
2.6 |
% |
|
|
0.8 |
% |
|
|
|
|
|
|
|
|
|
|
For additional information related to delinquent mortgage loans, see Mortgage Assets in the
Banks Form 10-K.
The Banks management of credit risk in the MPF program involves several layers of contractual
loss protection defined in agreements among the Bank and its participating members. One of these
layers consists of credit enhancements (including supplemental mortgage insurance (SMI) provided by
participating members). The Banks MPF Program uses four mortgage insurance companies to provide
SMI under its MPF Plus program (other MPF programs do not use SMI for credit enhancement). By
regulation, all providers are required to maintain a credit rating of AA- or better and are
reviewed by the Banks Credit Risk Committee annually or more frequently as circumstances warrant.
Currently, all of the Banks SMI providers have had their external ratings for claims-paying
ability or insurer financial strength downgraded below AA-. Rating downgrades imply an increased
risk that these SMI providers will be unable to fulfill their obligations to reimburse the Bank for
claims under insurance policies. On August 7, 2009, the Finance Agency granted a waiver for one
year on the AA- rating requirement of SMI providers for existing loans and commitments in the
program and granted the same waiver for six months on new commitments. At September 30, 2009 the
Bank had approximately $48.5 million in SMI insurance protection.
For additional information on the Banks layers of contractual loss protection, see
Mortgage Assets in the Banks Form 10-K. The Bank utilizes an allowance for any estimated losses
beyond such contractual protections.
123
The following table presents the Banks allowance for credit losses activity (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
$ |
697 |
|
|
$ |
232 |
|
|
$ |
500 |
|
|
$ |
300 |
|
Provision for credit losses |
|
|
91 |
|
|
|
|
|
|
|
341 |
|
|
|
|
|
Charge-offs |
|
|
(13 |
) |
|
|
(24 |
) |
|
|
(66 |
) |
|
|
(92 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
775 |
|
|
$ |
208 |
|
|
$ |
775 |
|
|
$ |
208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In accordance with the Banks allowance for credit losses methodology, the allowance estimate
is based on historical loss experience, current delinquency levels, economic data, the ability to
recapture losses through member credit enhancements, and other relevant factors using a pooled loan
approach. On a regular basis, we monitor delinquency levels, loss rates, and portfolio
characteristics such as geographic concentration, loan-to-value ratios, property types, and loan
age. Other relevant factors evaluated in our methodology include changes in national/local economic
conditions, changes in the nature of the portfolio, changes in the portfolio performance, and the
existence and effect of geographic concentrations. The Bank monitors and reports portfolio
performance regarding delinquency, nonperforming loans, and net charge-offs monthly. Adjustments to
the allowance for credit losses are considered at least quarterly based upon charge-offs, the
amount of nonperforming loans, as well as other relevant factors discussed above.
During the three and nine months ended September 30, 2009, the Bank increased its allowance
for credit losses through a provision of $0.1 million and $0.3 million due to increased loss
severity on its mortgage loan portfolio and higher levels of nonperforming loans.
At September 30, 2009 and December 31, 2008, the Bank had $82.2 million and $48.4 million of
nonaccrual loans. Interest income that was contractually owed to the Bank but not received on
nonaccrual loans was $0.8 million and $0.5 million at September 30, 2009 and December 31, 2008. At
September 30, 2009 and December 31, 2008, the Bank had $9.2 million and $7.6 million of real estate
owned recorded as a component of other assets in the Statements of Condition.
Effective August 1, 2009 the Bank introduced a temporary loan payment modification plan for
participating PFIs, which will be available until December 31, 2011 unless further extended by the
MPF Program. Borrowers with conventional loans secured by their primary residence that originated
prior to January 1, 2009 are eligible for the modification plan. This modification plan pertains to
borrowers currently in default or imminent danger of default. In addition, there are specific
eligibility requirements that must be met and procedures that the PFIs must follow to participate
in the modification plan. As of September 30, 2009, there has been no activity under this
modification plan.
124
As part of the mortgage portfolio, we also invest in MBS. Finance Agency regulations allow us
to invest in securities guaranteed by the U.S. Government, GSEs, and other MBS that are rated Aaa
by Moodys, AAA by S&P, or AAA by Fitch on the purchase date. We are exposed to credit risk to the
extent that these investments fail to perform adequately. We do ongoing analysis to evaluate the
investments and creditworthiness of the issuers, trustees, and servicers for potential credit
issues. See Investments at page 91 for additional discussion of the Banks ongoing analysis of
MBS.
At September 30, 2009, we owned $9.3 billion of MBS, of which $9.2 billion or 99 percent was
guaranteed by a GSE and $0.1 billion or one percent was private-label MBS. At December 31, 2008, we
owned $9.3 billion of MBS, of which $9.2 billion or 99 percent was guaranteed by a GSE and $0.1
billion or one percent was private-label MBS. At September 30, 2009, 49 percent of our
private-label MBS were MPF shared funding certificates and 51 percent were other private-label MBS.
Our MPF shared funding certificates were all fixed rate securities rated AA or higher by an NRSRO
at September 30, 2009 and December 31, 2008. Our other private-label MBS were all variable rate
securities rated AA or better by an NRSRO at September 30, 2009 and December 31, 2008 with the
exception of one private-label MBS that was downgraded to an A rating on May 29, 2009. As of
October 31, 2009 there have been no subsequent rating agency actions on our MPF shared funding
certificates or other private-label MBS. All of these MPF shared funding certificates and other
private-label MBS are backed by prime loans.
The following table summarizes the characteristics of our other private-label MBS by year of
securitization at September 30, 2009 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal |
|
|
Unrealized |
|
|
|
|
|
|
Investment |
|
|
|
|
|
|
Balance |
|
|
Losses |
|
|
Fair Value |
|
|
Grade % |
|
|
Watchlist % |
|
2003 and
earlier |
|
$ |
36 |
|
|
$ |
7 |
|
|
$ |
29 |
|
|
|
100 |
% |
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the fair value of our other private-label MBS as a percentage
of unpaid principal balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
June 30, |
|
|
March 31, |
|
|
December 31, |
|
|
September 30, |
|
|
|
2009 |
|
|
2009 |
|
|
2009 |
|
|
2008 |
|
|
2008 |
|
2003 and
earlier |
|
|
81 |
% |
|
|
80 |
% |
|
|
77 |
% |
|
|
74 |
% |
|
|
87 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125
The following table shows portfolio characteristics of the underlying collateral of our other
private-label MBS at September 30, 2009:
|
|
|
|
|
Portfolio Characteristics |
|
|
|
|
|
|
|
|
|
Weighted average FICO® score at origination1 |
|
|
725 |
|
Weighted average loan-to-value at origination |
|
|
65 |
% |
Weighted average market price |
|
$ |
80.96 |
|
Weighted average original credit enhancement |
|
|
4 |
% |
Weighted average credit enhancement |
|
|
9 |
% |
Weighted average delinquency rate2 |
|
|
4 |
% |
|
|
|
1 |
|
FICO® is a widely used credit industry model developed by Fair,
Isaac, and Company, Inc. to assess borrower credit quality with scores ranging from a low
of 300 to a high of 850. |
|
2 |
|
Represents the percentage of underlying loans that are 60 days or more past due. |
The following table shows the state concentrations of our other private-label MBS at
September 30, 2009. State concentrations are calculated based on unpaid principal balances.
|
|
|
|
|
State Concentrations |
|
|
|
|
|
|
|
|
|
Florida |
|
|
13.9 |
% |
California |
|
|
12.9 |
|
Georgia |
|
|
11.9 |
|
New York |
|
|
9.8 |
|
New Jersey |
|
|
5.0 |
|
All other1 |
|
|
46.5 |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
|
|
|
|
|
1 |
|
There are no individual states with a concentration greater than 4.3
percent. |
We perform ongoing analysis to evaluate the investments and creditworthiness of the
issuers, trustees, and servicers for potential credit issues. Due to the high level of credit
protection associated with these investments, the Bank does not expect any future material credit
losses on its MBS.
The Bank also invests in state housing finance agency bonds. At September 30, 2009 and
December 31, 2008, we had $124.9 million and $93.3 million of state agency bonds rated AA or
better.
Investments
We maintain an investment portfolio to provide liquidity, additional earnings, and promote
asset diversification. Finance Agency regulations and policies adopted by the Board of Directors
limit the type of investments we may purchase.
126
We invest in short-term instruments as well as obligations of the U.S. Government, GSEs and
other FHLBanks for liquidity purposes. The primary credit risk of these investments is the
counterparties ability to meet repayment terms. We establish unsecured credit limits to
counterparties based on the credit quality and capital levels of the counterparty as well as the
capital level of the Bank. Because the investments are transacted with highly rated counterparties,
the credit risk is low; accordingly, we have not set aside specific reserves for our investment
portfolio. We do, however, maintain a level of retained earnings to absorb any unexpected losses
from our investments that may arise from stress conditions.
The largest unsecured exposure to any single counterparty excluding GSE was $1.6 billion and
$0.8 billion of TLGP debt obligations at September 30, 2009 and December 31, 2008. The following
tables show our unsecured credit exposure to investment counterparties (including accrued interest
receivable) (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
|
|
|
|
|
|
Commercial |
|
|
Overnight |
|
|
Term |
|
|
Other |
|
|
|
|
Credit Rating1 |
|
Deposits2 |
|
|
Paper |
|
|
Federal Funds |
|
|
Federal Funds |
|
|
Obligations3 |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA |
|
$ |
3 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
5,684 |
|
|
$ |
5,687 |
|
A |
|
|
468 |
|
|
|
|
|
|
|
3,075 |
|
|
|
1,410 |
|
|
|
|
|
|
|
4,953 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
471 |
|
|
$ |
|
|
|
$ |
3,075 |
|
|
$ |
1,410 |
|
|
$ |
5,684 |
|
|
$ |
10,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
|
|
|
|
Commercial |
|
|
Overnight |
|
|
Term |
|
|
Other |
|
|
|
|
Credit Rating1 |
|
Deposits2 |
|
|
Paper |
|
|
Federal Funds |
|
|
Federal Funds |
|
|
Obligations3 |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA |
|
$ |
|
|
|
$ |
385 |
|
|
$ |
|
|
|
$ |
315 |
|
|
$ |
2,151 |
|
|
$ |
2,851 |
|
AA |
|
|
|
|
|
|
|
|
|
|
930 |
|
|
|
1,251 |
|
|
|
|
|
|
|
2,181 |
|
A |
|
|
|
|
|
|
|
|
|
|
780 |
|
|
|
150 |
|
|
|
|
|
|
|
930 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
385 |
|
|
$ |
1,710 |
|
|
$ |
1,716 |
|
|
$ |
2,151 |
|
|
$ |
5,962 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Credit rating is the lowest of S&P, Moodys, and Fitch ratings stated in terms of the
S&P equivalent. |
|
2 |
|
Deposits include interest and non-interest bearing deposits as well as
certificates of deposit. Certificates of deposit held from members are guaranteed by the
FDIC. |
|
3 |
|
Other obligations represent obligations in TLGP investments that are backed by
the full faith and credit of the U.S. Government. Because of the U.S. Government guarantee of
TLGP investments, the Bank categorizes these investments as AAA. |
127
We had cash and short-term investments with a book value of $5.0 billion at September 30,
2009 compared to $3.9 billion at December 31, 2008. We manage the level of cash and short-term
investments according to changes in other asset classes and levels of capital. Additionally, we
adjust cash and short-term investments to maintain our target leverage ratio, maintain sufficient
liquidity, and manage excess funds.
Derivatives
Most of our hedging strategies use over-the-counter derivative instruments that expose us to
counterparty credit risk because the transactions are executed and settled between two parties.
When an over-the-counter derivative has a market value above zero, the counterparty owes that value
to the Bank over the remaining life of the derivative. Credit risk arises from the possibility the
counterparty will not be able to fulfill its commitment to pay the amount owed to us.
The Bank manages this credit risk by spreading its transactions among many highly rated
counterparties, by entering into collateral exchange agreements with counterparties that include
minimum collateral thresholds, and by monitoring its exposure to each counterparty at least
monthly. In addition, all of the Banks collateral exchange agreements include master netting
arrangements whereby the fair values of all interest rate derivatives (including accrued interest
receivables and payables) with each counterparty are offset for purposes of measuring credit
exposure. The collateral exchange agreements require the delivery of collateral consisting of cash
or very liquid, highly rated securities if credit risk exposures rise above the minimum thresholds.
128
The following tables show our derivative counterparty credit exposure, excluding mortgage
delivery commitments and after applying netting agreements and collateral (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Value |
|
|
Exposure |
|
|
|
Active |
|
|
Notional |
|
|
Exposure at |
|
|
of Collateral |
|
|
Net of |
|
Credit Rating1 |
|
Counterparties |
|
|
Amount2 |
|
|
Fair Value3 |
|
|
Pledged |
|
|
Collateral4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA |
|
|
1 |
|
|
$ |
299 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
AA |
|
|
7 |
|
|
|
16,752 |
|
|
|
|
|
|
|
|
|
|
|
|
|
A |
|
|
14 |
|
|
|
28,012 |
|
|
|
8 |
|
|
|
3 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
22 |
|
|
$ |
45,063 |
|
|
$ |
8 |
|
|
$ |
3 |
|
|
$ |
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Value |
|
|
Exposure |
|
|
|
Active |
|
|
Notional |
|
|
Exposure at |
|
|
of Collateral |
|
|
Net of |
|
Credit Rating1 |
|
Counterparties |
|
|
Amount2 |
|
|
Fair Value3 |
|
|
Pledged |
|
|
Collateral4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA |
|
|
1 |
|
|
$ |
309 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
AA |
|
|
10 |
|
|
|
17,338 |
|
|
|
* |
|
|
|
|
|
|
|
* |
|
A |
|
|
12 |
|
|
|
12,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
23 |
|
|
$ |
29,740 |
|
|
$ |
* |
|
|
$ |
|
|
|
$ |
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Credit rating is the lower of the S&P, Moodys, and Fitch ratings stated in terms
of the S&P equivalent. |
|
2 |
|
Notional amounts serve as a factor in determining periodic interest amounts to be
received and paid and generally do not represent actual amounts to be exchanged or directly
reflect our exposure to counterparty credit risk. |
|
3 |
|
For each counterparty, this amount includes derivatives with a net positive market
value including the related accrued interest receivable/payable (net). |
|
4 |
|
Amount equals total exposure at fair value less value of collateral pledged as
determined at the counterparty level. |
|
* |
|
Amount is less than one million. |
Operational Risk
We define operational risk as the risk of loss resulting from inadequate or failed internal
processes, people, systems, or external events. Operational risk is inherent in all of our business
activities and processes. Management has established policies and procedures to reduce the
likelihood of operational risk and designed our annual risk assessment process to provide ongoing
identification, measurement, and monitoring of operational risk. For additional information related
to operational risk, see Operational Risk in the Banks Form 10-K.
129
Business Risk
We define business risk as the risk of an adverse impact on the Banks profitability resulting
from external factors that may occur in both the short- and long-term. Business risk includes
political, strategic, reputation, regulatory, and/or environmental factors, many of which are
beyond our control. We control business risk through strategic and annual business planning and
monitoring the Banks external environment.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See Market Risk/Capital Adequacy beginning on page 114 and the sections referenced therein
for Quantitative and Qualitative Disclosures about Market Risk.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
The Banks executive management is responsible for establishing and maintaining a system of
disclosure controls and procedures designed to ensure that information required to be disclosed by
the Bank in the reports filed or submitted within the time periods specified in the Securities
Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods
specified in the rules and forms of the SEC. The Banks disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information required to be
disclosed by the Bank in the reports that it files or submits under the Securities Exchange Act of
1934 is accumulated and communicated to the Banks management, including its principal executive
officer and principal financial officer, or persons performing similar functions, as appropriate to
allow timely decisions regarding required disclosure. In designing and evaluating the Banks
disclosure controls and procedures, the Banks management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and the Banks management necessarily is required to
apply its judgment in evaluating the cost-benefit relationship of controls and procedures.
The Banks management has evaluated the effectiveness of the design and operation of its
disclosure controls and procedures with the participation of the President and Chief Executive
Officer and Chief Financial Officer as of the end of the quarterly period covered by this report.
Based on that evaluation, the Banks President and Chief Executive Officer and Chief Financial
Officer have concluded that the Banks disclosure controls and procedures were effective at a
reasonable assurance level as of the end of the fiscal quarter covered by this report.
Internal Control Over Financial Reporting
For the third quarter of 2009, there were no changes in the Banks internal control over
financial reporting that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
130
PART IIOTHER INFORMATION
Item 1. Legal Proceedings
We are not currently aware of any material pending legal proceedings other than ordinary
routine litigation incidental to the business, to which the Bank is a party or of which any of its
property is the subject.
Item 1A. Risk Factors
Our 2008 Form 10-K includes a detailed discussion of our risk factors. The information below
should be read in conjunction with the risk factors included in our 2008 Form 10-K filed with the
SEC on March 13, 2009.
Member Failures and Consolidations May Adversely Affect our Business
Over the last two years, the financial services industry has experienced increasing defaults
on, among other things, home mortgage, commercial real estate, and credit card loans, which caused
increased regulatory scrutiny and required capital to cover non-performing loans. These factors
have led to an increase in both the number of financial institution failures and the number of
mergers and consolidations. During 2009, ten the Banks member institutions failed and four of the
Banks member institutions merged out-of-district. If the number of member institution failures and
mergers or consolidations out-of-district continues to increase, these activities may reduce the
number of current and potential members in our district. The resulting loss of business could
negatively impact our financial condition and results of operations, as well as our operations
generally.
Further, member failures may cause the Bank to liquidate pledged collateral if the outstanding
advances are not prepaid. The ability to liquidate the pledged collateral as well as the value of
the collateral may cause financial statement losses. Additionally, as members become financially
distressed, in accordance with established policies the Bank may decrease lending limits or, in certain circumstances, cease lending
activities. If member banks are unable to obtain sufficient liquidity from the Bank it may cause
further deterioration of that member institution. This may negatively impact the Banks reputation
and, therefore, negatively impact our financial condition and results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
131
Item 6. Exhibits
|
|
|
|
|
|
3.1 |
|
|
Organization Certificate of the Federal Home Loan Bank of Des Moines dated October 13,
1932. * |
|
|
|
|
|
|
3.2 |
|
|
Bylaws of the Federal Home Loan Bank of Des Moines as amended and restated effective
February 26, 2009. ** |
|
|
|
|
|
|
4.1 |
|
|
Federal Home Loan Bank of Des Moines Capital Plan as amended and revised effective March
24, 2009. *** |
|
|
|
|
|
|
31.1 |
|
|
Certification of the president and chief executive officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
31.2 |
|
|
Certification of the executive vice president and chief financial officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
32.1 |
|
|
Certification of the president and chief executive officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
32.2 |
|
|
Certification of the executive vice president and chief financial officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
* |
|
Incorporated by reference to the correspondingly numbered exhibit to our Registration
Statement on Form 10 filed with the SEC on May 12, 2006. |
|
** |
|
Incorporated by reference to the correspondingly numbered exhibit to our Form 10-K filed
with the SEC on March 13, 2009. |
|
*** |
|
Incorporated by reference to the correspondingly numbered exhibit to our Form 8-K/A filed
with the SEC on March 31, 2009. |
132
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
|
FEDERAL HOME LOAN BANK OF DES MOINES |
|
|
(Registrant) |
|
|
|
|
|
|
|
Date:
|
|
November 12, 2009 |
|
|
|
|
|
|
|
By:
|
|
/s/ Richard S. Swanson
Richard S. Swanson
|
|
|
|
|
President and Chief Executive Officer |
|
|
133