UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2009
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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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Class B Stock, par value $100
Name of Each Exchange on Which Registered: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. o Yes þ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. o Yes þ No
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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (s
229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment of this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer 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 |
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
Registrants stock is not publicly traded and is only issued to members of the registrant. Such
stock is issued and redeemed at par value, $100 per share, subject to certain regulatory and
statutory limits. At June 30, 2009, the aggregate par value of the stock held by members of the
registrant was approximately $2,923,406,000. At February 28, 2010, 23,883,944 shares of stock were
outstanding.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements contained in this annual report on Form 10-K, including statements describing
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 risks and uncertainties include, but are not limited to, the
following:
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Economic and market conditions; |
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Demand for our advances; |
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Timing and volume of market activity; |
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The volume of eligible mortgage loans originated and sold to us by participating
members through the Mortgage Partnership Finance (MPF) program (Mortgage Partnership
Finance and MPF are registered trademarks of the FHLBank of Chicago); |
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Volatility of market prices, rates, and indices that could affect the value of
financial instruments or our ability to liquidate collateral expediently in the event
of a default by an obligor; |
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Political events, including legislative, regulatory, judicial, or other developments
that affect us, our members, our counterparties, and/or our investors in the
consolidated obligations of the 12 Federal Home Loan Banks (FHLBanks); |
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Changes in the terms and investor demand for derivatives and similar instruments; |
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Changes in the relative attractiveness of consolidated obligations as compared to
other investment opportunities such as existing and newly created debt programs
explicitly guaranteed by the U.S. Government; |
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Risks related to the other 11 FHLBanks that could trigger our joint and several
liability for debt issued by the other 11 FHLBanks; and |
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Member failures. |
We undertake no obligation to update or revise publicly any forward-looking statements,
whether as a result of new information, future events, or otherwise. A detailed discussion of the
risks and uncertainties that could cause actual results and events to differ from such
forward-looking statements is included under Item 1A. Risk Factors.
2
PART I
ITEM 1 BUSINESS
Overview
The Federal Home Loan Bank of Des Moines (the Bank, we, us, or our) is a federally chartered
corporation organized on October 31, 1932, that is exempt from all federal, state, and local
taxation except real property taxes and is one of 12 district 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 FHLBanks are regulated by the
Federal Housing Finance Agency (Finance Agency), whose mission is to provide effective supervision,
regulation, and housing mission oversight of the FHLBanks to promote their safety and soundness,
support housing and finance and affordable housing, and support a stable and liquid mortgage
market. 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.
We are a cooperative. This means we are owned by our customers, whom we call members. Our
members may include commercial banks, savings institutions, credit unions, insurance companies, and
community development financial institutions (CDFIs) in Iowa, Minnesota, Missouri, North Dakota,
and South Dakota. While not considered members, we also do business with state and local housing
associates meeting certain statutory criteria.
Business Model
Our mission is to provide funding and liquidity for our members and eligible housing
associates by providing a stable source of short- and long-term funding through advances, standby
letters of credit, mortgage purchases, and targeted housing and economic development activities.
Our vision is to be the preferred financial provider of our members in meeting the housing and
economic development needs of the communities we serve together. We strive to achieve our vision
within an operating principle that balances the trade-off between attractively priced products,
reasonable returns on capital investments (dividends), and maintaining adequate capital and
retained earnings based on the Banks risk profile as well as to support safe and sound business
operations.
As a condition of membership, all of our 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 us. While eligible to borrow, housing associates are not members
and, as such are not permitted to purchase capital stock. Our capital stock is not publicly traded
and does not change in value. It is purchased by members at a par value of $100 per share and is
redeemed by members at $100 per share. All stockholders are eligible to receive dividends on their
capital investment when declared.
3
Our primary source of funding and liquidity is the issuance of the FHLBank Systems unsecured
debt securities, referred to as consolidated obligations, in the capital markets. Consolidated
obligations are the joint and several obligations of all 12 FHLBanks, backed only by the financial
resources of the 12 FHLBanks. A critical component to the success of our operations is the ability
to issue debt securities regularly and frequently in the capital markets under a wide range of
maturities, structures, and amounts, and at relatively favorable spreads to market interest rates,
represented by U.S. Treasury securities and the London Interbank Offered Rate (LIBOR), compared to
many other financial institutions.
Liquidity is also provided through our investment portfolio. Among other permissible
investments, we invest in highly rated debt securities of financial institutions and the U.S.
Government and in mortgage-related securities. In addition to liquidity, our investments provide
income, support the business needs of our members, and support the housing market through the
purchase of mortgage-related securities.
We manage our credit risk and establish collateral requirements to support safe and sound
business operations. We manage this risk for our advance products by obtaining and maintaining
security interests in eligible collateral, setting restrictions on borrowings, and performing
continuous monitoring of borrowings and members financial condition. We also manage the credit
risk on our mortgage loan portfolio by monitoring portfolio performance and the creditworthiness of
our participating members. All loans we purchase must comply with underwriting guidelines which
follow standards generally required in the conventional conforming mortgage market. Our MPF program
involves several layers of legal loss protection including homeowner equity, credit risk sharing
responsibilities between the Bank and our participating members, and mortgage insurance
requirements. We manage counterparty credit risk related to derivatives and investments by
transacting with highly rated counterparties, using master netting and bilateral collateral
agreements for derivative counterparties, establishing collateral delivery requirements, and
monitoring counterparty creditworthiness through internal and external analysis.
Our net income is attributable to the difference between the interest income we earn on our
advances, mortgage loans, and investments and the interest expense we pay on our consolidated
obligations and member deposits, as well as components of other income (loss) (i.e., gains and
losses on derivative and hedging activities, investments, and debt extinguishments). We operate
with narrow margins and expect to be profitable over the long-term based on our prudent lending
standards, conservative investment strategies, and diligent risk management practices. Because we
operate with narrow margins, our net income is sensitive to changes in market conditions that
impact the interest we earn and pay.
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A portion of our annual earnings is used to make interest payments on debt issued by the
Resolution Funding Corporation (REFCORP). REFCORP debt was issued by the U.S. Treasury to resolve
troubled savings and loan institutions in the late 1980s and early 1990s. Additionally, by
regulation, we are required to contribute ten percent of net earnings
(net earnings represents income before assessments,
and before interest expense on mandatorily redeemable capital stock, but after the assessment for
REFCORP) each year to the Affordable Housing Program (AHP). Through the AHP, we provide grants and
subsidized advances to members to support housing for households with incomes at or below 80
percent of the area median.
Our business model supports our mission and vision and is designed to be flexible in differing
market conditions. For example, the recent financial crisis and continued market instability and
volatility in 2009 presented both challenges and opportunities to our business model. Demand for
our advance business declined in 2009 due to the availability of alternative funding options to our
members as well as their increased deposit bases. Attractive short-term investment opportunities
were limited due to the low interest rate environment and liquidity demand in the marketplace. We
experienced a higher cost of long-term debt due to investors desires to primarily invest in
shorter terms. Despite the challenges discussed above, longer-term investment opportunities were
available as a result of government initiatives created to stimulate the economy, increasing the
availability of higher-yielding, low risk investments. In addition, the low interest rate
environment provided us with an opportunity to extinguish certain higher-cost debt and replace most
of the debt with lower-cost debt.
The credit and liquidity crisis during 2009 also presented many challenges from a credit risk
perspective. Due to our conservative collateral practices, counterparty monitoring, and risk
mitigation tools, we did not experience any credit losses in 2009 on our advance portfolio, and
only minimal credit related losses on our MPF portfolio.
The Bank concluded 2009 with net income totaling $145.9 million compared with $127.4 million
for the same period in 2008. For additional discussion, refer to Item 7. Managements Discussion
and Analysis of Financial Condition and Results of Operation.
Membership
Our membership is diverse and includes both small and large commercial banks, savings and loan
associations, credit unions, and insurance companies. CDFIs were approved by the Finance Agency to
apply for membership on February 4, 2010. The majority of institutions in our five-state district
eligible for membership are currently members.
Our membership level declined as the number of members who consolidated or failed exceeded new
membership. During 2009, while 18 financial institutions became members, we lost 27 members due to
mergers and acquisitions out of district and ten members due to bank failures.
5
The following table summarizes our membership, by type of institution, at December 31, 2009,
2008, and 2007:
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Institutional Entity |
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2009 |
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2008 |
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2007 |
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Commercial Banks |
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1,049 |
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1,072 |
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1,077 |
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Savings and Loan Associations |
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73 |
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77 |
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77 |
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Credit Unions |
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64 |
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60 |
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58 |
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Insurance Companies |
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40 |
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36 |
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31 |
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Total members |
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1,226 |
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1,245 |
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1,243 |
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The following table summarizes our membership, by type of institution and asset size, for
2009, 2008, and 2007:
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Membership Asset Size |
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2009 |
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2008 |
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2007 |
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Depository Institutions1 |
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Less than $100 million |
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44.5 |
% |
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47.4 |
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50.7 |
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$100 million to $500 million |
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41.8 |
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40.2 |
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38.5 |
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Greater than $500 million |
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10.5 |
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9.5 |
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8.3 |
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Insurance Companies |
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Less than $100 million |
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0.2 |
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0.3 |
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0.3 |
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$100 million to $500 million |
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0.7 |
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0.7 |
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0.7 |
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Greater than $500 million |
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2.3 |
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1.9 |
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1.5 |
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Total |
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100.0 |
% |
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100.0 |
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100.0 |
% |
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1 |
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Depository institutions consist of commercial banks, savings and loan
associations, and credit unions. |
At December 31, 2009, 2008, and 2007, approximately 88 percent, 90 percent, and 91 percent of
our members were Community Financial Institutions (CFIs). CFIs are defined under the Housing Act to
include all Federal Deposit Insurance Corporation (FDIC) insured institutions with average total
assets over the three prior years equal to or less than $1.0 billion. Beginning January 1, 2010,
the Finance Agency adjusted the average total asset cap to $1.029 billion. Institutions designated
as CFIs may pledge certain collateral types other members are not permitted to pledge, such as
small business, small agri-business, and small farm loans.
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Business Segments
We have identified two primary operating segments based on our products and services as well
as our method of internal reporting: Member Finance and Mortgage Finance.
The Member Finance segment includes advances, investments (excluding mortgage-backed
securities (MBS), Housing Finance Authority (HFA) investments, and Small Business Administration
(SBA) investments), and the funding and hedging instruments related to those assets. Member
deposits are also included in this segment. Net interest income for the Member Finance Segment is
derived primarily from the difference, or spread, between the yield on the assets in this segment
and the cost of the member deposit and funding related to those assets.
The Mortgage Finance segment includes mortgage loans purchased through the MPF program, MBS,
HFA investments, and SBA investments and the funding and hedging instruments related to those
assets. Net interest income for the Mortgage Finance segment is derived primarily from the
difference, or spread between the yield on these assets and the cost of the funding 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.
We evaluate performance of our segments based on adjusted net interest income after providing
for a mortgage loan credit loss provision. Adjusted net interest income includes the interest
income and expense on economic hedge relationships included in other income (loss) and concession
expense on fair value option bonds included in other expense and excludes basis adjustment
amortization/accretion on called and extinguished debt included in interest expense.
For further discussion of these business segments, see Item 8. Financial Statements and
Supplementary Data Note 17 Segment Information and Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operation Results of Operations Net Interest
Income by Segment.
Products and Services Member Finance
Advances
We carry out our mission primarily through lending funds which we call advances to our members
and eligible housing associates (collectively, borrowers). These advances are secured by eligible
collateral.
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Borrowers use our various advance products as sources of funding for mortgage lending,
affordable housing and other community lending (including economic development), and general
asset-liability management. Advances are also used by CFIs for loans to small businesses, small
farms, and small agribusinesses. Additionally, advances can provide competitively priced wholesale
funding to borrowers who may lack diverse funding sources. Our primary advance products include the
following:
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Overnight advances are used primarily to fund the short-term liquidity needs of
our borrowers. These advances are automatically renewed until the borrower pays off the
advances. Interest rates are set daily. |
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Fixed rate advances are available over a variety of terms to meet borrower needs.
Short-term fixed rate advances are used primarily to fund the short-term liquidity needs of
our borrowers. Long-term fixed rate advances are an effective tool to help manage long-term
lending and investment risks of our borrowers. |
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Variable rate advances provide a source of short- and long-term financing where
the interest rate changes in relation to a specified interest rate index such as LIBOR. |
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Callable advances may be prepaid by the borrower on pertinent dates (call dates).
Mortgage matched advances are a type of callable advance with fixed rates and amortizing
balances. Using a mortgage matched advance, a borrower may make predetermined principal
payments at scheduled intervals throughout the term of the loan to manage the interest rate
risk associated with long-term fixed rate assets. Also included in callable advances are
fixed and variable rate member owned option advances that are non-amortizing. Member owned
option advances provide borrowers a source of long-term financing with prepayment
flexibility. |
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Putable advances may, at our discretion, be terminated at predetermined dates
prior to the stated maturity dates of the advances and the borrower is required to repay
the advance. Should an advance be terminated, replacement funding at then current market
rates and terms is offered, based on our available advance products and subject to our
normal credit and collateral requirements. A putable advance carries an interest rate lower
than a comparable maturity advance that does not have the putable feature. |
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Community investment advances are below-market rate funds used by borrowers in
both affordable housing projects and community development. These advances are provided at
interest rates that represent our cost of funds plus a markup to cover our administrative
expenses. This markup is determined by our Asset-Liability Committee. Our Board of
Directors annually establishes limits on the total amount of funds available for community
investment advances and the total amount of community investment advances that may be
outstanding at any point in time. |
For additional information on advances, including our largest borrowers, see Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operation Statements
of Condition Advances.
8
Housing Associates
The FHLBank Act permits us to make advances to eligible housing associates. Housing associates
are approved mortgagees under Title II of the National Housing Act that meet certain criteria,
including: chartered under law and have succession; subject to inspection and supervision by some
governmental agency; and lending their own funds as their principal activity in the mortgage field.
Because housing associates are not members, they are not subject to certain provisions of the
FHLBank Act applicable to members and cannot own our capital stock. The same regulatory lending
requirements that apply to our members generally apply to housing associates. Because housing
associates are not members, eligible collateral is limited to Federal Housing Administration (FHA)
mortgages or Government National Mortgage Association (Ginnie Mae) securities backed by FHA
mortgages for pledged collateral. State housing associates may pledge additional collateral such as
cash deposited in the Bank, or certain residential mortgage loans, including securities backed by
such mortgages, for advances facilitating residential or commercial mortgage lending to benefit
low- and moderate-income individuals or families.
Prepayment Fees
We price advances at a spread over our cost of funds. We may charge a prepayment fee for
advances that terminate prior to their stated maturity or outside a predetermined call or put date.
The fees charged are priced to make us economically indifferent to the prepayment of the advance.
Collateral
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 government-sponsored housing enterprises (GSE), including without
limitation MBS issued or guaranteed by Federal National Mortgage Association (Fannie Mae), Federal
Home Loan Mortgage Corporation (Freddie Mac), or Ginnie Mae; cash deposited with us; guaranteed
student loans made under the Department of Educations Federal Family Education Loan Program
(FFELP); and other real estate-related collateral, acceptable by us provided such collateral has a
readily ascertainable value and we can perfect a security interest in such property. Additionally,
CFIs may pledge collateral consisting of secured small business, small farm, or small agribusiness
loans, including secured business and agri-business lines of credit. As additional security, the
FHLBank Act provides that we have a lien on each borrowers capital stock in the Bank; however,
capital stock cannot be pledged as collateral to secure credit exposures.
9
Under the FHLBank Act, any security interest granted to us by any of our members, or any
affiliate of any such member, has priority over the claims and rights of any party (including any
receiver, conservator, trustee, or similar party having the rights of a lien creditor), other than
claims and rights that (i) would be entitled to priority under otherwise applicable law and (ii)
are held by actual bona fide purchasers for value or by parties secured by actual perfected
security interests. We perfect our security interest in accordance with applicable state laws by
filing Uniform Commercial Code financing statements or taking possession of collateral.
We generally make advances to borrowers under a blanket lien, which grants us a security
interest in all eligible assets of the member to fully secure the members indebtedness to us. We
generally perfect our security interest in the collateral pledged. Other than securities collateral
and cash deposits, we do not initially take delivery of collateral pledged by blanket lien
borrowers. In the event of deterioration in the financial condition of a blanket lien borrower, we
have the ability to require delivery of pledged collateral sufficient to secure the borrowers
indebtedness to us.
With respect to nonblanket lien borrowers (typically insurance companies and housing
associates), we generally take control of collateral through the delivery of cash, securities or
mortgages to us or our custodian. For additional information on our collateral requirements, refer
to Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operation
Risk Management Credit Risk Advances.
Standby Letters of Credit
We issue letters of credit on behalf of our members and housing associates to facilitate
business transactions with third parties. Letters of credit may be used to facilitate residential
housing finance or other housing activity, facilitate community lending, assist with
asset-liability management, and support tax-exempt state and local bond issuances. Members and
housing associates must fully collateralize letters of credit with eligible collateral.
Investments
The Member Finance investment portfolio is comprised of both short- and long-term investments.
Our short-term portfolio includes, but is not limited to, interest bearing deposits, Federal funds,
commercial paper, obligations of GSEs, and securities purchased under agreements to resell. Our
long-term portfolio includes, but is not limited to, obligations of GSEs and state and local
housing associates as well as Temporary Liquidity Guarantee Program (TLGP) debt and bonds issued by
municipalities or agencies under the Build America Bond program. The longer-term investment
portfolio generally provides higher returns than those available in the short-term money markets.
10
Under Finance Agency regulations, we are prohibited from investing in certain types of
securities, including:
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Instruments such as common stock that represent an ownership interest in an
entity other than stock in small business investment companies and certain investments
targeted to low income persons or communities. |
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Instruments issued by non-U.S. entities other than those issued by U.S. branches
and agency offices of foreign commercial banks. |
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Noninvestment-grade debt instruments other than certain investments targeted to
low income persons or communities and instruments downgraded after we purchased them. |
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Non-U.S. dollar securities. |
We do not have any subsidiaries. With the exception of a limited partnership interest in Small
Business Investment Company (SBIC), we have no equity position in any partnerships, corporations,
or off-balance sheet special purpose entities. Our investment in SBIC was $3.8 million at December
31, 2009.
Deposits
We accept deposits from our members and housing associates. We offer several types of deposit
programs, including demand, overnight, and term deposits. Deposit programs provide us funding while
providing members a low-risk interest earning asset.
Products and Services Mortgage Finance
Mortgage Loans
We invest in mortgage loans through the MPF program, which is a secondary mortgage market
structure under which we purchase eligible mortgage loans from participating financial institution
members (PFIs) (MPF loans). The FHLBank of Chicago (MPF Provider) developed the MPF program in
order to help fulfill the housing mission of the FHLBanks.
MPF loans are conforming conventional and government-insured (i.e., insured or guaranteed by
the FHA, Veterans Administration, and U.S. Department of Agriculture) fixed rate mortgage loans
secured by one-to-four family residential properties with maturities ranging from five to 30 years.
We may also purchase MPF loans through participations with other FHLBanks.
11
Participating Financial Institution Agreement
Our members (or eligible housing associates) must apply to become a PFI. We review the general
eligibility of the members servicing qualifications and ability to supply documents, data, and
reports required to be delivered by PFIs under the MPF program. We also review the members
financial condition as it relates to their ability to meet the obligations of a PFI. The member and
the Bank sign an MPF program PFI Agreement creating a relationship framework for the PFI to do
business with us. The PFI Agreement provides the terms and conditions for the origination of the
MPF loans to be purchased by us and establishes the terms and conditions for servicing the MPF
loans.
Typically, a PFI will sign a master commitment to cover all the conventional MPF loans it
intends to deliver to us in a year or other time period specified in the master commitment
agreement. However, a PFI may also sign a master commitment for original MPF government loans and
choose to deliver MPF loans under more than one conventional product, or it may choose to use
different servicing options and have several master commitments opened at any one time. Master
commitments may be for shorter periods than one year and may be extended or increased by agreement
of us and the PFI up to a maximum of two years.
Under the Finance Agencys Acquired Member Asset regulation, the PFI must bear the economic
consequences of certain losses with respect to a master commitment based upon the MPF product and
other criteria. To comply with these regulations, MPF purchases and fundings are structured so the
credit risk associated with MPF loans is shared with PFIs. The master commitment defines the pool
of MPF loans for which the credit enhancement obligation is set so the risk associated with
investing in such pool of MPF loans is equivalent to investing in an AA rated asset. See
discussion in Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operation Risk Management Credit Risk Mortgage Assets.
MPF Loan Types
There are currently six MPF loan products from which PFIs may choose. Four of these products
(Original MPF, MPF 125, MPF Plus, and Original MPF Government) are closed loan products in which we
purchase loans acquired or closed by the PFI. MPF 100 is a loan product in which we table fund
MPF loans; that is, we provide the funds through the PFI as our agent to make the MPF loan to the
borrower. Additionally, effective February 26, 2009, the MPF program was expanded to include an
off-balance sheet product called MPF Xtra (MPF Xtra is a trademark of the FHLBank of Chicago).
Under this product, we assign 100 percent of our interest in PFI master commitments to the FHLBank
of Chicago. The FHLBank of Chicago then purchases mortgage loans from our PFIs and sells those
loans to Fannie Mae. Only PFIs retaining servicing for their MPF loans are eligible for the MPF
Xtra product.
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Under all of the above MPF loan products, the PFI performs all traditional retail loan
origination functions. With respect to the MPF 100 product, we are considered the originator of the
MPF loan for accounting purposes since the PFI is acting as our agent when originating the MPF
loan; however, we do not collect any origination fees.
The MPF program is designed to allocate the risks of MPF loans among the MPF Banks and PFIs
and to take advantage of the PFIs strengths. PFIs have direct knowledge of their mortgage markets
and have developed expertise in underwriting and servicing residential mortgage loans. By allowing
PFIs to originate MPF loans, whether through retail or wholesale operations, the MPF program gives
the PFIs control of these functions that most impact credit quality.
The Finance Agency requires all pools of MPF loans to have a credit
risk sharing arrangement with our PFIs limiting our credit risk
exposure to an AA or higher investment grade instrument from a
nationally recognized statistical rating organization (NRSRO). The MPF Banks are responsible
for managing the interest rate risk, prepayment risk, and liquidity risk associated with owning MPF
loans.
For conventional MPF loan products, PFIs retain a portion of the credit risk on the MPF loans
they fund and sell to an MPF Bank by providing credit enhancement either through a direct liability
to pay credit losses up to a specified amount or through a contractual obligation to provide
supplemental mortgage insurance (SMI). The PFIs maximum credit enhancement obligation for MPF loan
losses is specified in the master commitment. PFIs are paid a credit enhancement fee for managing
credit risk, and in some instances all or a portion of the credit enhancement fee may be
performance based. We utilize an allowance for credit losses to absorb any credit related losses we
may incur.
For a detailed discussion and analysis of our mortgage portfolio, see Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operation Statements of Condition
Mortgage Loans. A detailed discussion of the different MPF loan products we offer and their
related credit risk is provided in Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operation Risk Management Credit Risk Mortgage Assets.
MPF Provider
The MPF Provider maintains the structure of MPF loan products and the eligibility rules for
MPF loans as established by the FHLBanks participating in the MPF program. In addition, the MPF
Provider manages the pricing and delivery mechanism for MPF loans and the back-office processing of
MPF loans in its role as master servicer and master custodian. The MPF Provider has engaged Wells
Fargo Bank N.A. (Wells Fargo) as the vendor for master servicing and as the primary custodian for
the MPF program. The MPF Provider has also contracted with other custodians meeting MPF program
eligibility standards at the request of certain PFIs.
The MPF Provider publishes and maintains the MPF Origination Guide, MPF Underwriting Guide,
and MPF Servicing Guide, which detail the requirements PFIs must follow in originating,
underwriting, or selling and servicing MPF loans. The MPF Provider maintains the infrastructure
through which MPF Banks may fund or purchase MPF loans through their PFIs. In exchange for
providing these services, the MPF Provider receives a fee from each of the MPF Banks.
13
The FHLBanks established an MPF program Governance Committee comprised of representatives from
each of the six participating MPF Banks. The Governance Committee provides guidance for the
strategic decisions of the MPF program, including but not limited to,
changes in pricing methodology. All day-to-day policy and operating decisions remain the
responsibility of the MPF Provider.
MPF Servicing
PFIs selling MPF loans may either retain the servicing or transfer the servicing (excluding
MPF Xtra). If a PFI chooses to retain the servicing, they receive a servicing fee to manage the
servicing activities. If the PFI chooses to transfer servicing rights to an approved third-party
provider, the servicing is transferred concurrently with the sale of the MPF loan to us and the
servicing fee is paid to the third-party provider.
Throughout the servicing process, the master servicer monitors the PFIs compliance with MPF
program requirements and makes periodic reports to the MPF Provider.
Loan Modifications
Effective August 1, 2009, we introduced a temporary loan payment modification plan for
participating PFIs, which will be available until December 31, 2011. Homeowners with conventional
loans secured by their primary residence originated prior to January 1, 2009 are eligible for the
modification plan. This modification plan is available to homeowners currently in default or
imminent danger of default. The modification plan states specific eligibility requirements that
must be met and procedures the PFIs must follow to participate in the modification plan.
Investments
The Mortgage Finance investment portfolio includes investments in MBS, HFA securities, and SBA
securities. By regulation, we are permitted to invest in the following asset types, among others:
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Obligations, participations, or other instruments of or issued by Fannie Mae or
Ginnie Mae. |
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Mortgages, obligations, or other securities that are, or ever have been, sold by
Freddie Mac pursuant to 12 U.S.C. 1454 or 1455. |
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Instruments we determined are permissible investments for fiduciary or trust
funds under the laws of the state of Iowa. |
We limit our investments in MBS to those guaranteed by the U.S. Government, issued by a GSE,
or that carry the highest investment grade rating by any NRSRO at the time of purchase.
14
We participated in the MPF shared funding program, which provides a means to distribute both
the benefits and the risks of the mortgage loans among a number of parties. Under the MPF shared
funding program, a participating member of the FHLBank of Chicago sponsored a trust (trust sponsor)
and transferred into the trust loans eligible to be MPF loans that the participating member of the
FHLBank of Chicago originated or acquired. Upon transfer of the assets into the
trust, the trust issued certificates with tranches that have credit risk characteristics
consistent with the MPF program policy and are compliant with the applicable regulations. The
tranches are backed by the underlying mortgage loans and all or nearly all of the tranches receive
public credit ratings determined by an NRSRO.
The senior tranches (A Certificates) have a credit rating of AA or AAA and may have different
interest rate risk profiles and durations. The A Certificates, which may be structured to present
risk and investment characteristics attractive to different types of investors, were sold to the
FHLBank of Chicago, either directly by the trust or by the trust sponsor. The lower-rated tranches
(B Certificates) provide the credit enhancement for the A Certificates and are sold to the trust
sponsor. The FHLBank of Chicago may subsequently sell some or all of its A Certificates to its
members and other FHLBanks and their members. We purchased A Certificates of the MPF shared funding
program and hold approximately $33.2 million at December 31, 2009. No residuals are created or
retained on the Statements of Condition of the FHLBank of Chicago or any other FHLBank.
Under Finance Agency regulations, we are prohibited from investing in whole mortgages or other
whole loans other than:
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those acquired under our MPF program described above. |
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certain investments targeted to low income persons or communities. |
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certain marketable direct obligations of state, local, or tribal government units
or agencies having at least the second highest credit rating from an NRSRO. |
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MBS or asset-backed securities backed by manufactured housing loans or home
equity loans. |
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certain foreign housing loans authorized under section 12(b) of the FHLBank Act. |
15
The Finance Agencys Financial Management Policy (FMP) further limits our investment in MBS
and asset-backed securities. This policy requires the total book value of our MBS owned to not
exceed 300 percent of our capital at the time of purchase. The Finance Agency has excluded MPF
shared funding certificates from this FMP limit. The Finance Agency passed a resolution on March
24, 2008, authorizing the FHLBanks to increase their purchases of agency MBS from 300 percent of
regulatory capital to 600 percent of regulatory capital, effective until March 31, 2010. In 2008,
our Board approved a strategy to increase our investments in additional agency MBS in accordance
with the Finance Agency resolution up to 450 percent of regulatory capital. At December 31, 2009
and 2008 the book value of our MBS owned, excluding MPF shared funding certificates, represented
approximately 380 percent and 292 percent of regulatory capital.
We are prohibited from purchasing the following types of securities:
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Interest-only or principal-only stripped MBS. |
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Residual interest or interest accrual classes of collateralized mortgage
obligations and real estate mortgage investment conduits. |
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Fixed rate or variable rate MBS, collateralized mortgage obligations, and real
estate mortgage investment conduits that on the trade date are at rates equal to their
contractual caps and have average lives varying by more than six years under an assumed
instantaneous interest rate change of plus or minus 300 basis points. |
Standby Bond Purchase Agreements
We enter into standby bond purchase agreements with housing associates within our district
whereby we agree to purchase HFA bonds under circumstances defined in each agreement. We may be
requested to hold investments in the HFA bonds until the designated remarketing agent can find a
suitable investor or the housing associate repurchases the bonds according to a schedule
established by the standby agreement. When purchased, these HFA bonds are classified as
available-for-sale investments in the Statements of Condition. The bond purchase commitments
entered into by us expire after seven years, currently no later than 2016. For additional details
on our standby bond purchase agreements, refer to Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operation Off-Balance Sheet Arrangements.
Products and Services Member Finance and Mortgage Finance
We use consolidated obligations and derivatives in the same manner for both Member Finance and
Mortgage Finance as part of our funding and interest rate risk management strategies.
16
Consolidated Obligations
Our primary source of funds to support our business is the sale of consolidated obligations in
the capital markets. Consolidated obligations are the joint and several obligations of, and are
backed only by the financial resources of the FHLBanks. Consolidated obligations are not
obligations of the U.S. Government, and the U.S. Government does not guarantee them. At February
28, 2010, Moodys Investors Service, Inc. (Moodys) rated the consolidated obligations Aaa/P-1 and
Standard & Poors Ratings Services, a division of McGraw-Hill Companies, Inc. (S&P) rated them
AAA/A-1+.
Although we are primarily liable for the portion of consolidated obligations issued on our
behalf, we are also jointly and severally liable with the other 11 FHLBanks for the payment of
principal and interest on all consolidated obligations of each of the FHLBanks. The Finance Agency,
at its discretion, may require any FHLBank to make principal or interest payments due on any
consolidated obligation whether or not the consolidated obligation represents a primary liability
of such FHLBank. Although it has never happened, to the extent an FHLBank makes any payment on a
consolidated obligation on behalf of another FHLBank that is primarily liable for such consolidated
obligation, Finance Agency regulations provide that the paying FHLBank is entitled to reimbursement
from the noncomplying FHLBank for any payments made on behalf of the noncomplying FHLBank and other
associated costs (including interest to be determined by the Finance Agency). If, however, the
Finance Agency determines the noncomplying FHLBank is unable to satisfy its repayment obligations,
the Finance Agency may allocate the outstanding liabilities of the noncomplying FHLBank among the
remaining FHLBanks on a pro rata basis in proportion to each FHLBanks participation in all
consolidated obligations outstanding. The Finance Agency reserves the right to allocate the
outstanding liabilities for the consolidated obligations between the FHLBanks in any other manner
it may determine to ensure the FHLBanks operate in a safe and sound manner.
Finance Agency regulations govern the issuance and servicing of consolidated obligations.
Those regulations established the Office of Finance to facilitate the issuance and servicing of
consolidated obligations on behalf of the FHLBanks. The FHLBanks, through the Office of Finance as
their agent, are the issuers of consolidated obligations for which they are jointly and severally
liable. No FHLBank is permitted to issue individual debt without Finance Agency approval.
17
Pursuant to Finance Agency regulations, the Office of Finance has adopted policies and
procedures for consolidated obligations issued by the FHLBanks. The policies and procedures relate
to the frequency and timing of issuance of consolidated obligations, issue size, minimum
denomination, selling concessions, underwriter qualifications and selection, currency of issuance,
interest rate change or conversion features, call or put features, principal amortization features,
and selection of clearing organizations and outside counsel. The Office of Finance has
responsibility for facilitating and approving the issuance of the consolidated obligations in
accordance with these policies and procedures. In addition, the Office of Finance has the authority
to restrict or deny the FHLBanks requests to issue consolidated obligations otherwise allowed by
its policies and procedures if the Office of Finance determines such action would be inconsistent
with the Finance Agency requirement that consolidated obligations be issued efficiently and at the
lowest all-in cost over time. The Office of Finances authority to restrict or prohibit our
requests for issuance of consolidated obligations has not adversely impacted our ability to finance
our operations.
Consolidated obligations are generally issued with either fixed or variable rate payment terms
using a variety of indices for interest rate resets including LIBOR, Constant Maturity Treasury,
and the Federal funds rate. To meet the specific needs of certain investors in consolidated
obligations, both fixed and variable rate obligations may also contain certain embedded features
resulting in complex coupon payment terms and call features. When such consolidated obligations are
issued on our behalf, we may concurrently enter into derivative agreements containing offsetting
features effectively altering the terms of the bond to a simple variable rate tied to an index. The
Office of Finance may coordinate communication between underwriters, the Bank, and financial
institutions entering into interest rate exchange agreements to facilitate issuance.
The Office of Finance may also coordinate transfers of FHLBank consolidated obligations among
other FHLBanks. We may, from time to time, assume the outstanding primary liability of another
FHLBank rather than issue new consolidated obligations for which we are the primary obligor. If an
FHLBank has acquired excess funding, that FHLBank may offer its debt to the other 11 FHLBanks at
the current market rate of interest consistent with what may be expected in the auction process. We
may choose to assume the outstanding primary liability of another FHLBank as it would have a known
price compared with issuing debt through the auction process where actual pricing is unknown prior
to issuance.
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Finance Agency regulations require each FHLBank to maintain the following types of assets,
free from any lien or pledge, subject to such regulations, restrictions, and limitations as may be
prescribed by the Finance Agency, in an amount at least equal to the amount of that FHLBanks
participation in the total consolidated obligations outstanding:
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Cash, |
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Obligations of or fully guaranteed by the U.S., |
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Secured advances, |
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Mortgages having any guarantee, insurance, or commitment from the U.S. or any
agency of the U.S., |
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Investments described in section 16(a) of the FHLBank Act, which, among other
items, include investments a fiduciary or trust fund may purchase under the laws of the
state of Iowa, and |
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Other securities rated Aaa by Moodys, AAA by S&P, or AAA by Fitch, Inc. (Fitch). |
We were in compliance with this requirement at December 31, 2009 and 2008. See discussion in
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operation -
Liquidity and Capital Resources Liquidity Requirements Statutory Requirements.
In addition to being responsible for facilitating and executing the issuance of consolidated
obligations, the Office of Finance services all outstanding debt. It also collects information on
the FHLBank Systems unsecured credit exposure to individual counterparties, serves as a source of
information for the FHLBanks on capital market developments, manages the FHLBank Systems
relationship with the rating agencies for consolidated obligations, and prepares the FHLBank
Systems Combined Financial Reports.
The consolidated obligations the FHLBanks may issue consist of bonds and discount notes.
Bonds
Bonds satisfy our intermediate- and long-term funding requirements. Typically, the maturity of
these securities ranges from one to 30 years, but the maturity is not subject to any statutory or
regulatory limit.
We work with a variety of authorized securities dealers and the Office of Finance to meet our
debt issuance needs. Depending on the amount and type of funding needed, bonds may be issued
through a competitive bid auction process (TAP program and callable auction), on a negotiated
basis, or through a debt transfer between FHLBanks.
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Bonds issued through the TAP program are generally fixed rate, noncallable structures issued
with standard maturities of 18 months or two, three, five, seven, or ten years. The goal of the TAP
program is to aggregate frequent smaller issues into a larger bond issue for greater market
liquidity. We may participate in the TAP program to provide funding for our portfolio.
We may request specific amounts of certain bonds to be offered by the Office of Finance for
sale via competitive auction conducted with underwriters of a bond selling group. One or more
FHLBanks may also request amounts of those same bonds to be offered for sale for their benefit via
the same auction. Auction structures are determined by the FHLBanks in consultation with the Office
of Finance and the securities dealer community. We may receive zero to 100 percent of the proceeds
of the bonds issued via competitive auction depending on (i) the amounts and costs for the bonds
bid by underwriters; (ii) the maximum costs we or other FHLBanks participating in the same issue,
if any, are willing to pay for the obligations; and (iii) the guidelines for allocation of bond
proceeds among multiple participating FHLBanks administered by the Office of Finance.
We may participate in the Global Debt Program coordinated by the Office of Finance. The Global
Debt Program allows the FHLBanks to diversify their funding sources to include overseas investors.
Global Debt Program bonds may be issued in maturities ranging from one to 30 years and can be
customized with different terms and currencies. FHLBanks participating in the program approve the
terms of the individual issues.
We may issue Amortizing Prepayment Linked Securities (APLS). APLS principal balances pay down
consistent with a specified reference pool of mortgages determined at issuance and have a final
stated maturity of four to 15 years. APLS can be issued in a wide variety of sizes and maturities
to meet numerous portfolio objectives. Like all consolidated obligations, APLS carry the highest
ratings from both Moodys and S&P (Aaa/AAA) and are not obligations of the U.S. Government, and the
U.S. Government does not guarantee them.
For further analysis of our bonds, see Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operation Statements of Condition Consolidated Obligations
and Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operation -
Liquidity and Capital Resources Sources of Liquidity.
Discount Notes
Discount notes satisfy our short-term funding needs. These securities have maturities of up to
365/366 days and are offered daily through a discount note selling group and through other
authorized underwriters. Discount notes are sold at a discount and mature at par.
20
On a daily basis, we may request specific amounts of certain discount notes with specific
maturity dates to be offered by the Office of Finance at a specific cost for sale to underwriters
in the discount note selling group. One or more FHLBanks may also request amounts of those same
discount notes to be offered for sale for their benefit the same day. The Office of Finance commits
to issue discount notes on behalf of the participating FHLBanks when underwriters in the selling
group submit orders for the specific discount notes offered for sale. We may receive zero to 100
percent of the proceeds of the discount notes issued via this sales process depending on (i) the
maximum costs we or other FHLBanks participating in the same issue, if any, are willing to pay for
the discount notes; (ii) the order amounts for the discount notes submitted by underwriters; and
(iii) the guidelines for allocation of discount note proceeds among multiple participating FHLBanks
administered by the Office of Finance.
Twice weekly, we may request specific amounts of discount notes with fixed terms to maturity
ranging from four weeks to 26 weeks to be offered by the Office of Finance for sale via competitive
auction conducted with underwriters in the discount note selling group. One or more FHLBanks may
also request amounts of those same discount notes to be offered for sale for their benefit via the
same auction. The discount notes offered for sale via competitive auction are not subject to a
limit on the maximum costs the FHLBanks are willing to pay. We may receive zero to 100 percent of
the proceeds of the discount notes issued via competitive auction depending on (i) the amounts of
the discount notes bid by underwriters and (ii) the guidelines for allocation of discount note
proceeds among multiple participating FHLBanks administered by the Office of Finance.
For further analysis of our discount notes see Item 7. Managements Discussion and Analysis
of Financial Condition and Results of Operation Statements of Condition Consolidated
Obligations and Item 7. Managements Discussion and Analysis of Financial Condition and Results
of Operation Liquidity and Capital Resources Sources of Liquidity.
Derivatives
We use derivatives to manage our exposure to interest rate and prepayment risks. The Finance
Agencys regulations and our Enterprise Risk Management Policy (ERMP) establish guidelines for
derivatives. We can use interest rate swaps, swaptions, interest rate cap and floor agreements,
calls, puts, and futures and forward contracts as part of our interest rate and prepayment risk
management and funding strategies for both business segments. The Finance Agencys regulations and
our policies prohibit trading in or the speculative use of these instruments and limit exposure to
credit risk arising from the instruments.
We primarily use derivatives to manage our exposure to changes in interest rates. The goal of
our interest rate risk management strategy is not to eliminate interest rate risk, but to manage it
within appropriate limits. One key way we manage interest rate risk is to acquire and maintain a
portfolio of assets and liabilities which, together with their associated derivatives, are
conservatively matched with respect to the expected repricings of the assets and liabilities.
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We use derivatives as a fair value hedge of an underlying financial instrument and/or as an
economic hedge, which does not qualify for hedge accounting treatment but serves as an
asset-liability management tool. We also use derivatives to manage embedded options in assets and
liabilities to hedge the market value of existing assets, liabilities, and anticipated
transactions.
A more detailed discussion regarding our use of derivatives is located in Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operation Statements
of Condition Derivatives and in Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operation Risk Management Credit Risk Derivatives.
Capital and Dividends
Capital
Our Capital Plan requires each member to own capital stock in an amount equal to the aggregate
of a membership stock requirement and an activity-based stock requirement. Our Board of Directors
may adjust these requirements within ranges established in the Capital Plan. All stock issued is
subject to a five year notice of redemption.
Our capital stock has a par value of $100 per share, and all shares are issued, exchanged,
redeemed, and repurchased only by us at its stated par. We have two subclasses of capital stock;
membership capital stock and activity-based capital stock. Each member must purchase and hold
membership capital stock equal to a percentage of its total assets as of the preceding December
31st. Each member is also required to purchase activity-based capital stock equal to a
percentage of its outstanding transactions and commitments and to hold that activity-based capital
stock as long as the transactions and commitments remain outstanding.
Although we do not redeem activity-based capital stock prior to the expiration of the five
year notice period prescribed under our Capital Plan, we, in accordance with our Capital Plan,
automatically, but at our option, repurchase excess activity-based capital stock that exceeds an
operational threshold on at least a monthly basis, subject to the limitations set forth in our
Capital Plan. To review our Capital Plan, see Exhibit 4.1 to our Form 8-K/A, filed on March 31,
2009.
On December 22, 2008, we suspended our practice of voluntarily repurchasing excess
activity-based capital stock to preserve capital during an uncertain economic environment. As a
result of improved market conditions during 2009, we resumed our normal practice of voluntarily
repurchasing excess activity-based capital stock on December 18, 2009.
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Dividends
Our Board of Directors may declare and pay dividends in either cash or capital stock or a
combination thereof; however, historically, we have only paid cash dividends. Under Finance Agency
regulations, we are prohibited from paying a dividend in the form of additional shares of capital
stock if, after the issuance, the outstanding excess capital stock would be greater than one
percent of our total assets. By regulation, we may pay dividends from current earnings or retained
earnings, but we may not declare a dividend based on projected or anticipated earnings. Our Board
of Directors may not declare or pay dividends if it would result in our non-compliance with capital
requirements. Per regulation, we may not declare or pay a dividend if the par value of the stock is
impaired or is projected to become impaired after paying such dividend.
Our ERMP requires a minimum retained earnings level. If actual retained earnings fall below
the retained earnings minimum, we are required to establish an action plan, approved by our Board
of Directors, which may include a dividend cap at less than the current earned dividend, to enable
us to return to our targeted level of retained earnings within twelve months. At December 31, 2009,
our actual retained earnings were above the retained earnings minimum, and therefore no action plan
was necessary. Further discussion on our risk management metrics are discussed in Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operation Risk
Management.
Our dividend philosophy is to pay out a sustainable dividend equal to or above the average
three-month LIBOR rate for the covered period. While three-month LIBOR is the Banks dividend
benchmark, the actual dividend payout is impacted by Board of Director policies, regulatory
requirements, financial projections, and actual performance. Therefore, the actual dividend rate
may be higher or lower than three-month LIBOR.
Dividend payments are discussed in further detail in Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operation Liquidity and Capital Resources
Capital Dividends.
Competition
In general, the current competitive environment presents a challenge to achieving our
financial goals. We continuously reassess the potential for success in attracting and retaining
customers for our products and services.
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Demand for our advances is affected by, among other things, the cost of other available
sources of funds for our borrowers. We compete with other suppliers of secured and unsecured
wholesale funding including investment banks and dealers, commercial banks, other GSEs or
government agencies such as the Farm Credit System, FDIC, Federal Reserve, and, in certain
circumstances, other FHLBanks. Certain holding companies have subsidiary institutions located in
various states that may be members of different FHLBanks. To the extent a holding company has
access through multiple subsidiaries to more than one FHLBank, the holding company can choose the
most cost effective advance product available from among the FHLBanks to which it has access. Under
this scenario, FHLBanks may compete with each other to fund advances to members in different
FHLBank districts. The availability of alternative funding sources to our members and their deposit
levels, can significantly influence the demand for our advances and can vary as a result of a
number of factors including market conditions, member creditworthiness and size, and availability
of collateral.
Recent legislative and regulatory actions have provided members with additional funding
alternatives. For instance, the FDIC announced its TLGP, through which the FDIC provides a
guarantee on certain newly issued senior unsecured debt, including promissory notes, commercial
paper, interbank funding, and unsecured portions of secured debt in the event the issuing
institution subsequently fails or its holding company files for bankruptcy. These additional
funding alternatives increased competition with our advance products as well as contributed to our
increased long-term cost of funds.
Our primary source of funding is through the issuance of consolidated obligations. We compete
with the U.S. Government, Fannie Mae, Freddie Mac, Farm Credit System, and other GSEs as well as
corporate, sovereign, and supranational entities for funds raised through the issuance of unsecured
debt in the national and global debt markets. In the absence of increased demand, increased supply
of competing debt products may result in higher debt costs or lesser amounts of debt issued at the
same cost. In addition, the availability and cost of funds raised through the issuance of certain
types of unsecured debt may be adversely affected by regulatory initiatives or other government
actions. Although our debt issuances have kept pace with the funding needs of our members, there
can be no assurance that this will continue to be the case.
In addition, the sale of callable debt and the simultaneous execution of callable derivative
agreements that mirror the debt have been an important source of competitive funding for us. The
availability of markets for callable debt and derivative agreements may be an important determinant
of our relative cost of funds. There can be no assurance the current breadth and depth of these
markets will be sustained.
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Our cost of funds was also adversely affected by changes in investor perception of the
systemic risks associated with the housing GSEs. Issues relating to Fannie Mae, Freddie Mac, and
the FHLBanks have, at times, created pressure on debt pricing, as investors have perceived such
obligations as bearing greater risk than some other debt products. In response to investor and
financial concerns, in September 2008, the Finance Agency placed Fannie Mae and Freddie Mac in
conservatorship. Additionally, the U.S. Treasury put in place a set of financing agreements, which
expired on December 31, 2009, to ensure that Fannie Mae, Freddie Mac, and the FHLBanks continue to
meet their obligations to holders of bonds that they have issued or guaranteed.
The purchase of mortgage loans through the MPF program is subject to competition on the basis
of prices paid for mortgage loans, customer service, and ancillary services such as automated
underwriting. We compete primarily with other GSEs, such as Fannie Mae, Freddie Mac, and other
financial institutions and private investors for acquisition of conventional fixed rate mortgage
loans.
Taxation
We are exempt from all federal, state and local taxation except for real estate property
taxes, which is a component of our lease payments for office space or on real estate we own.
Assessments
Affordable Housing Program
To fund their respective AHPs, the FHLBanks each must set aside the greater of 10 percent of
the FHLBanks current year net earnings to fund next years AHP obligation, or the FHLBanks pro
rata share of an aggregate of $100 million to be contributed in total by the FHLBanks. Such
proration is made on the basis of current year net earnings. The required annual AHP contribution
for an FHLBank shall not exceed its current year net earnings. The exclusion of interest expense
related to mandatorily redeemable capital stock is a regulatory interpretation of the Finance
Agency. The AHP and REFCORP assessments are calculated simultaneously because of their
interdependence on each other. We accrue our AHP assessment on a monthly basis and reduce the AHP
liability as program funds are distributed.
Resolution Funding Corporation
Congress requires each FHLBank annually pay to the REFCORP 20 percent of net income calculated
in accordance with GAAP after the assessment for AHP, but before the assessment for the REFCORP. We
accrue our REFCORP assessment on a monthly basis.
The FHLBanks obligation to the REFCORP will terminate when the aggregate actual quarterly
payments made by all of the FHLBanks exactly equal the present value of a $300 million annual
annuity commencing on the date on which the first obligation of the REFCORP was issued and ends on
April 15, 2030. The Finance Agency determines the discounting factors to use in this calculation in
consultation with the Department of Treasury.
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The Finance Agency is required to shorten the term of the FHLBanks obligation to the REFCORP
for each calendar quarter in which there is an excess quarterly payment. An excess
quarterly payment is the amount by which the actual quarterly payment exceeds $75 million. The
Finance Agency is required to extend the term of the FHLBanks obligation to the REFCORP for each
calendar quarter in which there is a deficit quarterly payment. A deficit quarterly payment is the
amount by which the actual quarterly payment falls short of $75 million.
Because the FHLBanks cumulative REFCORP payments have generally exceeded $300 million per
year, those extra payments have defeased $2.3 million of the $75 million benchmark payment due on
April 15, 2012 and all payments due thereafter. The defeased benchmark payment (or portion thereof)
can be reinstated if future actual REFCORP payments fall short of the $75 million benchmark in any
quarter. Cumulative amounts to be paid by the FHLBanks to the REFCORP cannot be determined at this
time because the amount is dependent upon future net income of each FHLBank and interest rates.
Liquidity Requirements
We utilize liquidity to satisfy member demand for short- and long-term funds, to repay
maturing consolidated obligations, and to meet other business obligations. We are required to
maintain liquidity in accordance with certain Finance Agency regulations and with policies
established by the Board of Directors. See additional discussion in Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operation Liquidity and Capital
Resources Liquidity Requirements.
Regulatory Oversight, Audits, and Examinations
The Finance Agency is an independent agency in the U.S. Government responsible for supervising
and regulating the FHLBanks, Fannie Mae, and Freddie Mac. The Housing Act establishes the position
of Director of the Finance Agency as the head of such agency. The Finance Agency Director is
appointed by the President for a five year term. The Finance Agency Director is authorized to issue
rules, regulations, guidance, and orders affecting the FHLBanks.
To assess our safety and soundness, the Finance Agency conducts annual, on-site examinations
as well as periodic off-site reviews. Additionally, we are required to submit monthly financial
information including the statements of condition, results of operations, and various other
reports.
The Finance Agency requires we satisfy certain minimum liquidity and capital requirements.
Liquidity requirements are discussed in Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operation Liquidity and Capital Resources Liquidity Requirements
Statutory Requirements. Capital requirements are discussed in Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operation Liquidity and Capital Resources
Capital Capital Requirements.
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The Finance Agency has broad authority to bring administrative and supervisory actions against
an FHLBank and/or its directors and/or executive officers. The Finance Agency may initiate
proceedings to suspend or remove FHLBank directors and/or executive officers for cause. The Finance
Agency may issue a notice of charges seeking the issuance of a temporary or permanent cease and
desist order to an FHLBank or any director or executive officer if the Finance Agency determines
any such party is engaging in, has engaged in, or the Finance Agency has cause to believe the party
is about to engage in:
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any unsafe or unsound practices in conducting the business of the FHLBank. |
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any conduct that violates any provision of the FHLBank Act or any applicable law,
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any conduct that violates conditions imposed in writing by the Finance Agency in
connection with the granting of any application or other request by the FHLBank or any
written agreement between the FHLBank and the Finance Agency. |
The Finance Agency may issue a notice seeking the assessment of civil monetary penalties
against an FHLBank or, in some cases, any director or executive officer that:
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violates any provision of the FHLBank Act or any order, rule, or regulation
issued under the FHLBank Act. |
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violates any final or temporary cease and desist order issued by the Finance
Agency pursuant to the FHLBank Act. |
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violates any written agreement between an FHLBank and the Finance Agency. |
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engages in any conduct that causes or is likely to cause a loss to an FHLBank. |
The Finance Agency is funded through assessments levied against the FHLBanks and other
regulated entities. No tax dollars or other appropriations from the U.S. Government support the
operations of the Finance Agency. The Finance Agency allocates its applicable operating and capital
expenditures to the FHLBanks based on each FHLBanks percentage of total FHLBank capital. Unless
otherwise instructed in writing by the Finance Agency, each FHLBank pays the Finance Agency its pro
rata share of an assessment in semiannual installments during the annual period covered by the
assessment.
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The Comptroller General of the U.S. Government has authority under the FHLBank Act to audit or
examine the Finance Agency and the FHLBanks and to decide the extent to which they fairly and
effectively fulfill the purposes of the FHLBank Act. Further, the Government Corporation Control
Act provides the Comptroller General may review any audit of the financial statements conducted by
an independent public accounting firm. If the Comptroller General conducts such a review, he/she
must report the results and provide his/her recommendations to the Congress, the Office of
Management and Budget, and the FHLBank in question. The Comptroller General may also conduct
his/her own audit of any financial statements of the FHLBanks.
We submit annual management reports to the Congress, the President of the U.S., the Office of
Management and Budget, and the Comptroller General. These reports include statements of condition,
statements of income, statements of changes in capital, statements of cash flows, a statement of
internal accounting and administrative control systems, and the report of the independent auditors
on the financial statements.
We are required to file with the Securities and Exchange Commission (SEC) an Annual Report on
Form 10-K, Quarterly Reports on Form 10-Q, and current reports on Form 8-K. The SEC maintains a
website containing these reports and other information regarding our electronic filings located at
www.sec.gov. These reports may also be read and copied at the SECs Public Reference Room at 100 F
Street, NE, Washington, DC 20549. Further information about the operation of the Public Reference
Room may be obtained by calling 1-800-SEC-0330.
We also make our quarterly reports, annual financial reports, current reports, and amendments
to all such reports filed with or furnished to the SEC available on our Internet Website at
www.fhlbdm.com as soon as reasonably practicable after such reports are available. Quarterly and
annual reports for the FHLBanks on a combined basis are also available at the Website of the Office
of Finance as soon as reasonably practicable after such reports are available. The Internet Website
address to obtain these filings is www.fhlb-of.com.
Information contained in the above mentioned website, or that can be accessed through that
website, is not incorporated by reference into this annual report on Form 10-K and does not
constitute a part of this or any report filed with the SEC.
Personnel
As of February 28, 2010, we had 223 full-time equivalent employees. Our employees are not
covered by a collective bargaining agreement.
ITEM 1A RISK FACTORS
The following discussion summarizes the most significant risks we face. This discussion is not
exhaustive of all risks, and there may be other risks we face which are not described below. The
risks described below, if realized, could negatively affect our business operations, financial
condition, and future results of operations and, among other things, could result in our inability
to pay dividends on our capital stock.
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The FHLBanks are Subject to Complex Laws and Regulations Such That Legislative and Regulatory
Changes Could Negatively Affect our Business
The FHLBanks are GSEs, organized under the authority of the FHLBank Act, and, as such are
governed by federal laws and regulations promulgated, adopted, and applied by the Finance Agency.
Congress may amend the FHLBank Act or other statutes in ways that significantly affect (i) the
rights and obligations of the FHLBanks, and (ii) the manner in which the FHLBanks carry out their
housing-finance mission and business operations. New or modified legislation enacted by Congress or
regulations adopted by the Finance Agency or other financial services regulators could adversely
impact our ability to conduct business or the cost of doing business.
As an example of the foregoing, the enactment of the Housing Act on July 31, 2008, and
subsequent actions by the Finance Agency to adopt or modify regulations, orders or policies, could
adversely impact our business operations, and/or financial condition. We cannot predict how any
such action may adversely impact our business operations, and/or financial condition.
Additionally, the U.S. House of Representatives passed the Wall Street Reform and Consumer
Protection Act (the Reform Act), which, if passed by the U.S. Senate and signed into law by the
President, would, among other things: (i) create a Consumer Financial Protection Agency; (ii)
create an inter-agency oversight council that will identify and regulate systemically-important
financial institutions; (iii) regulate the over-the-counter derivatives market; (iv) reform the
credit rating agencies; (v) provide shareholders with an advisory vote on the compensation
practices of the entity in which they invest including for executive compensation and golden
parachutes; (vi) revise the assessment base for FDIC deposit insurance assessments; (vii) require
lenders to retain a portion of the credit risk of the mortgages that they originate and sell; and
(viii) create a federal insurance office that will monitor the insurance industry. Depending on
whether the Reform Act, or similar legislation, is signed into law and on the final content of any
such legislation, our business operations, funding costs, rights, obligations, and/or the manner in
which we carry out our housing-finance mission may be impacted.
We cannot predict whether additional regulations will be issued or whether additional
legislation will be enacted, and we cannot predict the effect of any such additional regulations or
legislation on our business operations and/or financial condition.
We Face Competition for Advances, Loan Purchases, and Access to Funding
Our primary business is making advances to our members. Demand for advances is impacted by,
among other things, alternative sources of liquidity and loan funding for our members. We compete
with other suppliers of secured and unsecured wholesale funding including investment banks and
dealers, commercial banks, other GSEs, and, in certain circumstances, other FHLBanks. The
availability of alternative funding sources to members can significantly influence the demand for
our advances.
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Our funding costs also impact the pricing of our advances. We compete with the U.S.
Government, Fannie Mae, Freddie Mac, and other GSEs, including other FHLBanks, as well as corporate
entities, for funds raised through the issuance of debt in the national and global markets.
Increases in supply of competing debt products may result in higher debt costs or lower amounts of
debt issued at the same cost by the FHLBanks. Although the FHLBank Systems debt issuances have
kept pace with the funding requirements of our members, there can be no assurance that this will
continue.
Additionally, many of our competitors are not subject to the same body of regulation that we
are, which enables those competitors to offer products and terms that we may not be able to offer.
Efforts to effectively compete with other suppliers of wholesale funding by changing the pricing of
our advances may result in a decrease in the profitability of our advance business. A decrease in
the demand for advances, or a decrease in the profitability on advances would negatively affect our
financial condition, results of operations, and value of the Bank to our membership.
Impact of Temporary Government Programs in Response to the Disruptions in the Financial Markets
Have and may Continue to Have an Adverse Impact on our Business
In response to the economic downturn and the continuing recession, the U.S. Government enacted
certain governmental programs. There have been adverse impacts to our business from these programs,
including increased funding costs, decreased investment liquidity, and increased competition for
advances. To the extent the U.S. Government extends these programs or creates new programs, they
may have a material adverse impact on our financial condition, results of operations, and value of
the Bank to our membership.
Changes in the FHLBank Systems Actual or Perceived Credit Rating May Adversely Affect our
Ability to Issue Consolidated Obligations on Acceptable Terms
Our primary source of funds is the sale of consolidated obligations in the capital markets,
including the short-term discount note market. Our access to funds in the capital markets may be
affected by the actual or perceived credit rating of the FHLBank system or the U.S. Government.
Negative perception or a downgrade in our credit rating may result in reduced investor confidence,
which could adversely affect our cost of funds and the ability to issue consolidated obligations on
acceptable terms. A higher cost of funds or an impaired ability to issue consolidated obligations
on acceptable terms could also adversely affect the FHLBanks financial condition, results of
operations, and value to our membership. While we do not believe the FHLBanks have suffered a
material adverse impact on their ability to issue consolidated obligations, we cannot predict the
effect of further changes in, or developments in regard to, these risks on our ability to raise
funds in the marketplace or on other aspects of our operations.
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We Are Jointly and Severally Liable for Payment of Principal and Interest on the Consolidated
Obligations Issued by the Other FHLBanks
Each of the FHLBanks relies upon the issuance of consolidated obligations as a primary source
of funds. Consolidated obligations are the joint and several obligations of all FHLBanks, backed
only by the financial resources of the FHLBanks. We are jointly and severally liable with the other
FHLBanks for the consolidated obligations issued by the FHLBanks through the Office of Finance,
regardless of whether we receive all or any portion of the proceeds from any particular issuance of
consolidated obligations. The Finance Agency, at its discretion, may require any FHLBank to make
principal or interest payments due on any consolidated obligation at any time, whether or not the
FHLBank who was the primary obligor has defaulted on the payment of that obligation. Furthermore,
the Finance Agency may allocate the liability for outstanding consolidated obligations among one or
more FHLBanks on a pro rata basis or on any other basis the Finance Agency may determine.
Accordingly, we could incur significant liability beyond our primary obligation under consolidated
obligations. Moreover, we may not pay dividends to, or redeem or repurchase capital stock from, any
of our members if timely payment of principal and interest on the consolidated obligations of the
entire FHLBank System has not been made. As a result, our ability to pay dividends to our members
or to redeem or repurchase shares of our capital stock may be affected not only by our own
financial condition, but also by the financial condition of the other FHLBanks.
Additionally, due to our relationship with other FHLBanks, we could be impacted by events
other than the default of a consolidated obligation. Events that impact other FHLBanks such as
member failures, capital deficiencies, and other-than-temporary impairment charges may cause the
Finance Agency, at its discretion, or the FHLBanks jointly, at their discretion, to require another
FHLBank to either provide capital or buy assets of another FHLBank. If we were called upon by the
Finance Agency to do either of these items, it may impact our financial condition.
We Could be Adversely Affected by Our Exposure to Credit Risk
We are exposed to credit risk if the market value of an obligation declines as a result of
deterioration in the creditworthiness of the obligor or if the market perceives a decline in the
credit quality of a security instrument. We assume secured and unsecured credit risk exposure in
that a borrower or counterparty could default and we may suffer a loss if we are not able to fully
recover amounts owed to us in a timely manner.
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We attempt to mitigate credit risk through collateral requirements and credit analysis of our
counterparties. We require collateral on advances, mortgage loan credit enhancements which may
include SMI, letters of credit, certain investments, and derivatives. Specifically, we require that
all outstanding advances and member provided mortgage loan credit enhancements be fully
collateralized. We evaluate the types of collateral pledged by our borrowers and assign a borrowing
capacity to the collateral, generally based on a percentage of its estimated market value. If a
member or counterparty fails, we would take ownership of the collateral covering our advances and
mortgage loan credit enhancements. However, if the market price of the collateral is less than the
obligation or there is not a market into which we can sell the collateral, we may incur losses that
could adversely affect our financial condition, results of operations, and value to our membership.
Although management has policies and procedures in place to manage credit risk, we may be
exposed because the outstanding advance value may exceed the liquidation value of our collateral.
We mitigate this risk through applying collateral discounts, requiring most borrowers to execute a
blanket lien, taking delivery of collateral, and limiting extensions of credit. We may incur losses
that could adversely affect our financial condition, results of operations, and value to our
membership.
Changes in Economic Conditions or Federal Monetary Policy Could Affect our Business and our
Ability to Pay Dividends
We operate with narrow margins and expect to be profitable based on our prudent lending
standards, conservative investment strategies, and diligent risk management practices. Because we
operate with narrow margins, our net income is sensitive to general business and economic
conditions that impact the interest we earn and pay. These conditions include, without limitation,
short- and long-term interest rates, inflation, money supply, fluctuations in both debt and equity
capital markets, and the strength of the U.S. economy and the local economies in which we conduct
our business. Additionally, we may be affected by the fiscal and monetary policies of the federal
government and its agencies, including the Federal Reserve Board. Significant changes in any one or
more of these conditions could impact our ability to maintain our past or current level of net
income, which could limit our ability to pay dividends or change the future level of dividends
that, in our Boards discretion, we may be willing to pay.
We Could be Adversely Affected by Our Exposure to Interest Rate Risk
We realize income primarily from the spread between interest earned on our outstanding
advances, mortgage assets (including MPF, MBS, HFA and SBA investments), non-mortgage investments,
and interest paid on our consolidated obligations, member deposits, and other liabilities as well
as components of other income. We may experience instances when either our interest bearing
liabilities will be more sensitive to changes in interest rates than our interest earning assets,
or vice versa. In either case, interest rate movements contrary to our position could negatively
affect our financial condition, results of operations, and value of the Bank to our membership.
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We Use Derivative Instruments to Reduce Our Interest-Rate Risk, And We May Not Be Able to Enter
into Effective Derivative Instruments on Acceptable Terms
We use derivative instruments to reduce our interest rate and mortgage prepayment risk, but no
hedging strategy can completely protect us from such risk. Our effective use of derivative
instruments depends upon our ability to enter into these instruments with acceptable counterparties
and terms, and upon our ability to determine the appropriate hedging positions by weighing our
assets, liabilities, and prevailing and changing market conditions. The cost of entering into
derivative instruments has increased dramatically as a result of (i) consolidations, mergers, and
failures which have led to fewer counterparties, resulting in less liquidity in the derivatives
market; (ii) increased volatility in the marketplace due to uncertain economic conditions; and
(iii) increased uncertainty related to the potential change in regulations regarding
over-the-counter derivatives. If we are unable to manage our hedging positions effectively, we may
be unable to manage our interest rate and other risks, which may result in earnings volatility, and
could adversely impact our financial condition, results of operations, and value of the Bank to our
membership.
Some of our derivative instruments contain provisions that require us to post additional
collateral with our counterparties if there is deterioration in our credit rating. If our credit
rating is lowered by a major credit rating agency, we may be required to deliver additional
collateral on derivative instruments in net liability positions.
Compliance with Regulatory Contingency Liquidity Guidance Could Adversely Impact our
Earnings
We are required to maintain five calendar days of contingent liquidity per Finance Agency
regulations. The guidance provided to the FHLBanks is designed to protect against temporary
disruptions in access to the FHLBank debt markets in response to a rise in capital markets
volatility. To satisfy this additional requirement, we have established a contingency liquidity
plan in which we maintain balances in shorter-term investments, which may earn lower interest rates
than alternate investment options and may, in turn, negatively impact net interest income. In
addition, these investments are primarily recorded as trading securities and recorded at fair value
with changes in fair value recorded in other income and therefore, this accounting treatment may
cause income statement volatility. We manage our liquidity position in a prudent manner to ensure
our ability to meet the needs of our members in a timely manner. However, our efforts to manage our
liquidity position, including our contingency liquidity plan, may impact our ability to meet our
obligations and the credit and liquidity needs of our members, which could adversely affect our
interest income, financial condition, and results of operations.
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Changes in Economic Conditions Impacting the Value of Collateral Held by the Bank Could
Negatively Impact Our Business
Advances to our members and eligible housing associates are secured by mortgages and other
eligible collateral. 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 Ginnie Mae; cash deposited in the Bank; guaranteed
student loans made under the Department of Educations FFELP; and other real estate-related
collateral acceptable to us provided such collateral has a readily ascertainable value and we can
perfect a security interest in such property. Additionally, CFIs may pledge collateral consisting
of secured small business, small farm, or small agribusiness loans, including secured business and
agri-business lines of credit. We estimate the value of collateral securing each borrowers
obligations by using collateral discounts, or haircuts. Additionally, members can provide a blanket
security agreement, pledging other assets as additional collateral.
Continued deterioration of economic conditions led to a significant decrease in real-estate
property values in some parts of the country. As a result, real-estate collateral we hold from our
members may have decreased in value. In order to remain fully collateralized, we required members
to pledge additional collateral, when deemed necessary. This requirement may impact those members
that lack additional assets to pledge as collateral. If members are unable to secure their
obligations with us, our advance levels could decrease, negatively impacting our financial
condition, results of operations, and value of the Bank to our membership.
Adverse Economic Conditions Impacting the Banks Financial Position Could Impact the Banks
Ability to Redeem Capital Stock at Par
Our capital stock is not publicly traded. All members must purchase and maintain capital stock
as a condition of membership. It can be issued, exchanged, redeemed, and repurchased only by us at
par value of $100 per share. Generally, capital stock may be redeemed upon five years notice and
excess capital stock may be voluntarily repurchased.
Continued deterioration of economic conditions may adversely impact our operations and,
consequently, our ability to redeem capital stock at its stated par value of $100 per share.
Additionally, our ability to meet regulatory capital requirements could be negatively impacted due
to poor financial performance. If deemed necessary, we may be required to call upon our members to
purchase additional capital stock to meet those regulatory capital requirements.
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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 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 of our member institutions failed and 27 of our member
institutions merged out-of-district. If this trend continues the number of current and potential
members in our district will decrease. The resulting loss of business could negatively impact our
business operations, financial condition, and results of operations.
Further, member failures may force us to liquidate pledged collateral if the outstanding
advances are not repaid. The inability to liquidate collateral on terms acceptable to us may cause
financial statement losses. Additionally, as members become financially distressed, in accordance
with established policies, we may decrease lending limits or, in certain circumstances, cease
lending activities. If member banks are unable to obtain sufficient liquidity from us it may cause
further deterioration of those member institutions. This may negatively impact our reputation and,
therefore, negatively impact our financial condition and results of operations.
Exposure to Option Risk in our Financial Assets and Liabilities Could Have an Adverse Effect on
Our Business
Our mortgage assets provide homeowners the option to prepay their mortgages prior to maturity.
The effect of changes in interest rates can exacerbate prepayment and extension risk, which is the
risk that mortgage assets will be refinanced by the mortgagor in low interest rate environments or
will remain outstanding longer than expected at below-market yields when interest rates increase.
Our advances, consolidated obligations, and derivatives may provide us, the borrower, issuer, or
counterparty with the option to call or put the asset or liability. These options leave us
susceptible to unpredictable cash flows associated with our financial assets and liabilities. The
exercise of the option and the prepayment or extension risk is dependent on general market
conditions and if not managed appropriately could have a material effect on our financial
condition, results of operations, and value of the Bank to our membership.
Reliance on Models to Value Financial Instruments and the Assumptions used may Have an Adverse
Impact on our Financial Position and Results of Operations
We make use of business and financial models for managing risk. We also use models in
determining the fair value of financial instruments for which independent price quotations are not
available or reliable. Pricing models and their underlying assumptions are based on managements
best estimates for discount rates, prepayments, market volatility, and other assumptions. These
assumptions may have a significant effect on the reported fair values of assets and liabilities,
including derivatives, and the related income and expense.
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The information provided by these models is also used in making business decisions relating to
strategies, initiatives, transactions and products, and in financial statement reporting. We have
adopted many controls, procedures, and policies to monitor and manage assumptions used in these
models. However, models are inherently imperfect predictors of actual results because they are
based on assumptions about future performance. Changes in any models or in any of the assumptions,
judgments or estimates used in the models may cause the results generated by the model to be
materially different. If the models are not reliable due to inaccurate assumptions, we could make
poor business decisions, including asset and liability management, or other decisions, which could
result in an adverse financial impact.
Reliance on the FHLBank of Chicago, as MPF Provider, and Fannie Mae, as the Ultimate Investor
in the MPF Xtra Product, Could have a Negative Effect on Our Business
As part of our business, we participate in the MPF program with the FHLBank of Chicago. As MPF
Provider, the FHLBank of Chicago establishes the structure of MPF loan products and the eligibility
rules for MPF loans. In addition, the MPF Provider administers the pricing and delivery mechanism
for MPF loans and the back-office processing of MPF loans in its role as master servicer and master
custodian. If the FHLBank of Chicago changes its MPF provider role or ceases to operate the
program, this may have a negative impact on our mortgage finance business, financial condition, and
results of operations. Additionally, if the FHLBank of Chicago, or its third party vendors,
experience operational difficulties, such difficulties could have a negative impact on our
financial condition, results of operations, and value of the Bank to our membership.
Effective February 26, 2009, we signed agreements to participate in a MPF loan product called
MPF Xtra. Under this product, we assign 100 percent of our interests in PFI master commitments to
the FHLBank of Chicago. The FHLBank of Chicago then purchases mortgage loans from our PFIs and
sells those loans to Fannie Mae. Should the FHLBank of Chicago or Fannie Mae experience any
operational difficulties, those difficulties could have a negative impact on the value of the Bank
to our membership.
The Terms of Any Liquidation, Merger, Or Consolidation Involving the Bank May Have an Adverse
Impact on Members Investment in the Bank
Under the FHLBank Act, holders of Class B stock own our retained earnings, paid-in surplus,
undivided profits, and equity reserves, if any. With respect to liquidation, our Capital Plan
provides that, after payment of creditors, holders of Class B stock shall receive the par value of
their Class B stock as well as any retained earnings in an amount proportional to the holders
share of total shares of Class B stock.
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Our Capital Plan also provides that our Board of Directors shall determine the rights and
preferences of our stockholders in connection with any merger or consolidation, subject to any
terms and conditions imposed by the Finance Agency. We cannot predict how the Finance Agency might
exercise its statutory authority with respect to liquidations, reorganizations, mergers, or
consolidations or whether any actions taken by the Finance Agency in this regard would be
inconsistent with the provisions of our Capital Plan or the rights of the holders of our Class B
stock. Consequently, there can be no assurance that if any liquidation, merger, or consolidation
were to occur involving us, that it would be consummated on terms that do not adversely affect our
members investment in us.
Our Reliance on Information Systems and Other Technology Could have a Negative Effect on our
Business
We rely heavily upon information systems and other technology to conduct and manage our
business. If we were to experience a failure or interruption in any of our information systems or
other technology, we may be unable to conduct and manage our business effectively. Although we have
implemented processes, procedures, and a business resumption plan, they may not be able to prevent,
timely and adequately address, or mitigate the negative effects of any failure or interruption. Any
failure or interruption could significantly harm our customer relations, risk management, and
profitability, which could have a negative effect on our financial condition, results of
operations, and value of the Bank to our membership.
ITEM 1B UNRESOLVED STAFF COMMENTS
None.
ITEM 2 PROPERTIES
We executed a 20 year lease with an affiliate of our member, Wells Fargo, for approximately
43,000 square feet of office space commencing on January 2, 2007. The office space is located in a
building at 801 Walnut Street, Suite 200, Des Moines, Iowa and is used for all our primary business
functions.
We also maintain a leased, off-site back-up facility with approximately 4,100 square feet in
Urbandale, Iowa.
ITEM 3 LEGAL PROCEEDINGS
We are not currently aware of any pending or threatened legal proceedings against us that
could have a material adverse effect on our financial condition, results of operations, or cash
flows.
ITEM 4 (REMOVED AND RESERVED)
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PART II
ITEM 5 MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES
Current members own the majority of our capital stock. Former members own the remaining
capital stock to support business transactions still carried on our Statement of Condition. There
is no established market for our capital stock and it is not publicly traded. Our capital stock may
be redeemed with a five year notice from the member or voluntarily repurchased at par value,
subject to certain limits. Par value of each share of capital stock is $100 per share. At February
28, 2010, we had 1,224 current members that held 23.8 million shares of capital stock. At February
28, 2010, we had 13 former members and one member who withdrew membership that held $8.1 million or
0.1 million shares of capital stock, which were classified as mandatorily redeemable capital stock.
The Board of Directors declared the following cash dividends in 2009 and 2008 (dollars in
millions):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter |
|
$ |
7.6 |
|
|
|
1.00 |
% |
|
$ |
25.7 |
|
|
|
4.50 |
% |
Second quarter |
|
|
7.0 |
|
|
|
1.00 |
|
|
|
26.6 |
|
|
|
4.00 |
|
Third quarter |
|
|
14.4 |
|
|
|
2.00 |
|
|
|
30.1 |
|
|
|
4.00 |
|
Fourth quarter |
|
|
14.9 |
|
|
|
2.00 |
|
|
|
24.3 |
|
|
|
3.00 |
|
|
|
|
1 |
|
This table is based on the period of declaration and payment. The
dividend applies to the financial performance for the quarter prior to the quarter declared
and paid. |
For additional information regarding our dividends, see Item 1. Business Capital and
Dividends and Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operation Liquidity and Capital Resources Capital Dividends.
38
ITEM
6 SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the financial
statements and notes, and Managements Discussion and Analysis of Financial Condition and Results
of Operation included in this report. The financial position data at December 31, 2009 and 2008
and results of operations data for the three years ended December 31, 2009, 2008, and 2007 are
derived from the financial statements and notes for those years included in this report. The
financial position data at December 31, 2007, 2006, and 2005 and the results of operations data for
the two years ended December 31, 2006 and 2005 are derived from financial statements and notes not
included in this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
Statements of Condition |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
(Dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments1 |
|
$ |
20,790 |
|
|
$ |
15,369 |
|
|
$ |
9,244 |
|
|
$ |
8,219 |
|
|
$ |
10,227 |
|
Advances |
|
|
35,720 |
|
|
|
41,897 |
|
|
|
40,412 |
|
|
|
21,855 |
|
|
|
22,283 |
|
Mortgage loans2 |
|
|
7,719 |
|
|
|
10,685 |
|
|
|
10,802 |
|
|
|
11,775 |
|
|
|
13,019 |
|
Total assets |
|
|
64,657 |
|
|
|
68,129 |
|
|
|
60,736 |
|
|
|
42,028 |
|
|
|
45,657 |
|
Consolidated obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount notes |
|
|
9,417 |
|
|
|
20,061 |
|
|
|
21,501 |
|
|
|
4,685 |
|
|
|
4,067 |
|
Bonds |
|
|
50,495 |
|
|
|
42,723 |
|
|
|
34,564 |
|
|
|
33,066 |
|
|
|
37,130 |
|
Total consolidated obligations3 |
|
|
59,912 |
|
|
|
62,784 |
|
|
|
56,065 |
|
|
|
37,751 |
|
|
|
41,197 |
|
Mandatorily redeemable capital stock |
|
|
8 |
|
|
|
11 |
|
|
|
46 |
|
|
|
65 |
|
|
|
85 |
|
Capital stock Class B putable |
|
|
2,461 |
|
|
|
2,781 |
|
|
|
2,717 |
|
|
|
1,906 |
|
|
|
1,932 |
|
Retained earnings |
|
|
484 |
|
|
|
382 |
|
|
|
361 |
|
|
|
344 |
|
|
|
329 |
|
Accumulated other comprehensive loss |
|
|
(34 |
) |
|
|
(146 |
) |
|
|
(26 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
Total capital |
|
|
2,911 |
|
|
|
3,017 |
|
|
|
3,052 |
|
|
|
2,249 |
|
|
|
2,260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
Statements of Income |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
(Dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income4 |
|
$ |
197.4 |
|
|
$ |
245.6 |
|
|
$ |
171.1 |
|
|
$ |
154.3 |
|
|
$ |
293.6 |
|
Provision for (reversal of) credit losses
on mortgage loans |
|
|
1.5 |
|
|
|
0.3 |
|
|
|
|
|
|
|
(0.5 |
) |
|
|
|
|
Other income (loss)5 |
|
|
55.8 |
|
|
|
(27.8 |
) |
|
|
10.3 |
|
|
|
8.7 |
|
|
|
46.8 |
|
Other expense |
|
|
53.1 |
|
|
|
44.1 |
|
|
|
42.4 |
|
|
|
41.5 |
|
|
|
39.0 |
|
Net income before change in accounting
principle |
|
|
145.9 |
|
|
|
127.4 |
|
|
|
101.4 |
|
|
|
89.4 |
|
|
|
221.2 |
|
Change in accounting
principle6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.5 |
|
Net income |
|
|
145.9 |
|
|
|
127.4 |
|
|
|
101.4 |
|
|
|
89.4 |
|
|
|
227.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
Selected Financial Ratios |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Net interest margin7 |
|
|
0.28 |
% |
|
|
0.35 |
% |
|
|
0.37 |
% |
|
|
0.35 |
% |
|
|
0.62 |
% |
Return on average equity |
|
|
4.46 |
|
|
|
3.88 |
|
|
|
4.25 |
|
|
|
3.91 |
|
|
|
9.57 |
|
Return on average assets |
|
|
0.21 |
|
|
|
0.18 |
|
|
|
0.21 |
|
|
|
0.20 |
|
|
|
0.48 |
|
Average equity to average assets |
|
|
4.63 |
|
|
|
4.71 |
|
|
|
5.04 |
|
|
|
5.21 |
|
|
|
5.04 |
|
Regulatory capital ratio8 |
|
|
4.57 |
|
|
|
4.66 |
|
|
|
5.14 |
|
|
|
5.50 |
|
|
|
5.13 |
|
Dividend payout ratio9 |
|
|
30.05 |
|
|
|
83.81 |
|
|
|
83.13 |
|
|
|
83.21 |
|
|
|
26.88 |
|
39
|
|
|
1 |
|
Investments include: interest-bearing deposits, securities purchased under
agreements to resell, Federal funds sold, trading securities, available-for-sale securities,
and held-to-maturity securities. |
|
2 |
|
Represents the gross amount of mortgage loans prior to the allowance for credit
losses. The allowance for credit losses was $1.9 million, $0.5 million, $0.3 million, $0.3
million, and $0.8 million at December 31, 2009, 2008, 2007, 2006, and 2005. |
|
3 |
|
The par amount of the outstanding consolidated obligations for all 12
FHLBanks was $930.5 billion, $1,251.5 billion, $1,189.6 billion, $951.7 billion, and $937.4
billion at December 31, 2009, 2008, 2007, 2006, and 2005, respectively. |
|
4 |
|
Net interest income is before provision for (reversal of) credit losses on mortgage
loans. |
|
5 |
|
Other income (loss) includes, among other things, net gain (loss) on derivatives and
hedging activities, net (loss) gain on extinguishment of debt, net gain on trading securities,
and net loss on bonds held at fair value. |
|
6 |
|
Effective January 1, 2005, we changed our method of accounting for premiums and
discounts related to and received on mortgage loans and MBS. We recorded a $6.5 million gain
after assessments to change the amortization period from estimated lives to contractual
maturities. |
|
7 |
|
Net interest margin is net interest income expressed as a percentage of average
interest-earning assets. |
|
8 |
|
Regulatory capital ratio is period-end regulatory capital expressed as a percentage of
period-end total assets. |
|
9 |
|
Dividend payout ratio is dividends declared in the stated period expressed as a
percentage of net income in the stated period. |
40
ITEM
7 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
Our Managements Discussion and Analysis (MD&A) is designed to provide information that will help
the reader develop a better understanding of our financial statements, key financial statement
changes from year to year, and the primary factors driving those changes, as well as how recently
issued accounting principles affect our financial statements. The MD&A is organized as follows:
Contents
|
|
|
|
|
|
|
|
42 |
|
|
|
|
|
|
|
|
|
42 |
|
|
|
|
|
|
|
|
|
44 |
|
|
|
|
|
|
|
|
|
46 |
|
|
|
|
|
|
|
|
|
46 |
|
|
|
|
|
|
|
|
|
46 |
|
|
|
|
|
|
|
|
|
51 |
|
|
|
|
|
|
|
|
|
53 |
|
|
|
|
|
|
|
|
|
53 |
|
|
|
|
|
|
|
|
|
55 |
|
|
|
|
|
|
|
|
|
59 |
|
|
|
|
|
|
|
|
|
59 |
|
|
|
|
|
|
|
|
|
59 |
|
|
|
|
|
|
|
|
|
60 |
|
|
|
|
|
|
|
|
|
63 |
|
|
|
|
|
|
|
|
|
65 |
|
|
|
|
|
|
|
|
|
68 |
|
|
|
|
|
|
|
|
|
71 |
|
|
|
|
|
|
|
|
|
71 |
|
|
|
|
|
|
|
|
|
72 |
|
|
|
|
|
|
|
|
|
74 |
|
|
|
|
|
|
|
|
|
85 |
|
|
|
|
|
|
|
|
|
91 |
|
|
|
|
|
|
|
|
|
98 |
|
|
|
|
|
|
|
|
|
101 |
|
|
|
|
|
|
|
|
|
102 |
|
|
|
|
|
|
41
Forward Looking Information
Statements contained in this annual report on Form 10-K, including statements describing
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. Refer to Special Note Regarding Forward-Looking Statements for a listing
of these risks and uncertainties.
We undertake no obligation to update or revise publicly any forward-looking statements,
whether as a result of new information, future events, or otherwise. A detailed discussion of these
risks and uncertainties is included under Item 1A. Risk Factors.
Executive Overview
Our Bank is a member owned cooperative serving shareholder members in a five-state region
(Iowa, Minnesota, Missouri, North Dakota, and South Dakota). Our mission is to provide funding and
liquidity for our members and eligible housing associates by providing a stable source of short-
and long-term funding through advances, standby letters of credit, mortgage purchases, and targeted
housing and economic development activities. Our member institutions may include commercial banks,
savings institutions, credit unions, insurance companies, and CDFIs.
We concluded 2009 with net income totaling $145.9 million compared with $127.4 million for the
same period in 2008, an increase of 15 percent. The year ended December 31, 2009 presented both
opportunities and challenges as a result of the recent financial crisis and continued market
instability and volatility in 2009. Net income was primarily impacted by several events as
described below.
During 2009 unique market conditions resulting from the financial crisis provided us with the
opportunity to purchase investments in 30-year U.S. Treasury obligations that yielded returns above
equivalent maturity LIBOR swap rates. We simultaneously 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 was warranted through the subsequent sale and termination of the
related interest rate swaps. For that reason, in 2009 we sold all $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 $70.9 million recorded as other income during the year ended
December 31, 2009.
During 2009, in an effort to improve our risk position, we also sold $2.1 billion of mortgage
loans to the FHLBank of Chicago, who immediately resold these loans to Fannie Mae. As a result of
the sale, we recorded a net gain of approximately $1.8 million as other income.
42
We utilized, in part, the proceeds from the U.S. Treasury and mortgage loan sale transactions
described above to extinguish higher costing debt during 2009 and, as a result, recorded losses of
approximately $89.9 million in other loss. Most of the extinguished debt was replaced with lower
costing debt and we expect such losses will be offset in future periods through lower interest
costs.
During the latter half of 2008, longer-term funding was expensive due to illiquidity in the
market place and investors desire to invest short-term. While longer-term funding was expensive,
discount note spreads relative to LIBOR were at historically wide levels. As a result, we funded
longer-term assets with short-term debt. This funding methodology decreased our debt costs but
introduced risks as a result of the maturity mismatch between our liabilities and assets.
Therefore, to compensate for increased risks associated with this funding mismatch and the
challenging market conditions creating unfavorable liquidity conditions and higher interest rate
volatility, we added a risk/liquidity premium to our advance pricing beginning in September 2008.
Improved market conditions during the second half of 2009 provided us with the opportunity to
better match fund our longer-term assets with longer-term debt. Therefore, we were able to reduce
the risk/liquidity premium on our advance pricing.
Net interest income decreased $48.2 million in 2009 when compared to 2008. The low interest
rate environment driving a lower return on invested capital was the primary contributor for our
decreased net interest income. In addition, decreased average advance volumes, limited short-term
investment opportunities, and a negative spread on investments during the first quarter of 2009 as
a result of us carrying additional liquidity during the fourth quarter of 2008 to comply with
liquidity guidance provided by the Finance Agency contributed to our decreased net interest income.
Average advance volumes decreased due to the availability of alternative wholesale funding options
for member banks as well as increased deposit growth realized by many members. Short-term
investment opportunities were limited in 2009 due to increased deposit levels and the availability
of various government funding programs for financial institutions serving as our counterparties for
short-term investments. The low growth market environment and the relative improvement in available
funding sources resulted in decreased interest spreads on investments. Although we continue to
explore new investment opportunities that provide more favorable returns, the compressed spreads
added to the decreased net interest income during 2009 when compared to 2008.
43
Conditions in the Financial Markets
Financial Market Conditions
During the year ended December 31, 2009, average market interest rates were lower when
compared with 2008. The following table shows information on key average market interest rates for
the years ended December 31, 2009 and 2008 and key market interest rates at December 31, 2009 and
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
December 31, |
|
|
December 31, |
|
|
|
12-Month |
|
|
12-Month |
|
|
2009 |
|
|
2008 |
|
|
|
Average |
|
|
Average |
|
|
Ending Rate |
|
|
Ending Rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds target1 |
|
|
0.16 |
% |
|
|
1.93 |
% |
|
|
0.05 |
% |
|
|
0.14 |
% |
Three-month LIBOR1 |
|
|
0.69 |
|
|
|
2.93 |
|
|
|
0.25 |
|
|
|
1.43 |
|
2-year U.S. Treasury1 |
|
|
0.94 |
|
|
|
1.99 |
|
|
|
1.14 |
|
|
|
0.77 |
|
10-year U.S. Treasury1 |
|
|
3.24 |
|
|
|
3.64 |
|
|
|
3.84 |
|
|
|
2.21 |
|
30-year residential mortgage note
1 |
|
|
5.05 |
|
|
|
6.05 |
|
|
|
5.14 |
|
|
|
5.14 |
|
The Federal Reserve lowered its key interest rate, the Federal funds target, to a range
of 0 to 0.25 percent on December 16, 2008. This target range was unchanged throughout 2009. The
Federal Reserve has maintained this accommodative stance to stimulate economic growth. Three-month
LIBOR declined in early 2009 (following the movement of the Federal funds target) and remained low
throughout 2009. While U.S. Treasury rates were stable for the first quarter of 2009, intermediate
and longer term U.S. Treasury rates increased rapidly during the second quarter of 2009 following
an increase in economic activity. The result was a significantly higher spread between 2-year and
10-year U.S. Treasury rates. Mortgage rates were relatively stable during the year as the Federal
Reserve continued their Agency MBS Purchase Program, purchasing approximately $1.1 trillion of
agency MBS.
As a result of the recent financial crisis, the U.S. Government, the Federal Reserve, and a
number of foreign governments and foreign central banks took significant actions to stabilize the
global financial markets. At its January 27, 2010 Open Market Committee meeting, the Federal
Reserve noted that inflation is expected to remain subdued for some time and that the Open Market
Committee intends to maintain the target range for the Federal funds rate at 0 to 0.25 percent for
an extended period. Significant debate continues regarding how the Federal Reserve and foreign
central banks will remove excess liquidity from the financial system. On February 19, 2010, the
Federal Reserve increased the discount rate, the rate at which banks may borrow directly from the
Federal Reserve, from 0.50 percent to 0.75 percent. In addition, the market is closely monitoring
the impact the conclusion of the Federal Reserves Agency MBS Purchase Program may have, currently
set to expire on March 31, 2010.
44
Agency Spreads
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth |
|
|
Fourth |
|
|
Year-to-date |
|
|
Year-to-date |
|
|
|
|
|
|
|
|
|
Quarter |
|
|
Quarter |
|
|
December 31, |
|
|
December 31, |
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
December 31, |
|
|
December 31, |
|
|
|
3-Month |
|
|
3-Month |
|
|
12-Month |
|
|
12-Month |
|
|
2009 |
|
|
2008 |
|
|
|
Average |
|
|
Average |
|
|
Average |
|
|
Average |
|
|
Ending Spread |
|
|
Ending Spread |
|
FHLB spreads to LIBOR
(basis points)1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3-month |
|
|
(14.8 |
) |
|
|
(154.5 |
) |
|
|
(46.4 |
) |
|
|
(73.0 |
) |
|
|
(12.1 |
) |
|
|
(131.5 |
) |
2-year |
|
|
(11.5 |
) |
|
|
60.7 |
|
|
|
1.8 |
|
|
|
7.9 |
|
|
|
(10.2 |
) |
|
|
19.4 |
|
5-year |
|
|
3.9 |
|
|
|
80.6 |
|
|
|
25.8 |
|
|
|
23.9 |
|
|
|
(1.7 |
) |
|
|
73.1 |
|
10-year |
|
|
53.2 |
|
|
|
124.2 |
|
|
|
81.3 |
|
|
|
47.4 |
|
|
|
41.9 |
|
|
|
109.1 |
|
|
|
|
1 |
|
Source is Office of Finance. |
Given that rates will not be set below zero, the relative performance of our funding
using three-month discount notes was less favorable in 2009 when compared to 2008. This is
primarily due to the compression of rates toward zero. As shown in the table above, spreads on
longer-term funding (2-years and greater) improved substantially during the fourth quarter of 2009
when compared to the same period in 2008. This was primarily due to the Federal Reserve purchasing
agency securities and a more stable economic environment. The improvement in FHLBank longer-term
spreads allowed us to extend the duration of our liabilities, which we have done by issuing bullets
(primarily three years and shorter), callable, and structured debt. This funding mix allowed us to
better match fund our longer-term assets with longer-term debt, thereby eliminating a majority of
the basis risk we were exposed to through the funding mismatch.
45
Results of Operations for the Years Ended December 31, 2009, 2008, and 2007
The following discussion highlights significant factors influencing our results of operations.
Average balances are calculated on a daily weighted average basis. Amounts used to calculate
percentage variances are based on numbers in thousands. Accordingly, recalculations may not produce
the same results when the amounts are disclosed in millions.
Net Income
Net income was $145.9 million for the year ended December 31, 2009 compared with $127.4
million in 2008. The increase of $18.5 million was primarily due to activity reported in other
income (loss), partially offset by decreased net interest income. These items are described in the
sections that follow.
Net income increased $26.0 million for the year ended December 31, 2008 when compared to the
same period in 2007. The increase was primarily due to increased net interest income, partially
offset by activity reported in other income (loss).
Net Interest Income
Net interest income was $197.4 million for the year ended December 31, 2009, compared with
$245.6 million in 2008, and $171.1 million in 2007. Our net interest income is impacted by changes
in average asset and liability balances, and the related yields and costs, as well as returns on
invested capital. Net interest income is managed within the context of tradeoff between market risk
and return. Due to our cooperative business model and low risk profile, our net interest margin
tends to be relatively low compared to other financial institutions.
46
The following table presents average balances and rates of major interest rate sensitive asset
and liability categories for the years ended December 31, 2009, 2008, and 2007. The table also
presents the net interest spread between yield on total interest-earning assets and cost of total
interest-bearing liabilities as well as net interest margin (dollars in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
|
|
|
|
|
|
|
|
|
Interest |
|
|
|
|
|
|
|
|
|
|
Interest |
|
|
|
Average |
|
|
Yield/ |
|
|
Income/ |
|
|
Average |
|
|
Yield/ |
|
|
Income/ |
|
|
Average |
|
|
Yield/ |
|
|
Income/ |
|
|
|
Balance1 |
|
|
Cost |
|
|
Expense |
|
|
Balance1 |
|
|
Cost |
|
|
Expense |
|
|
Balance1 |
|
|
Cost |
|
|
Expense |
|
Interest-earning assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits |
|
$ |
113 |
|
|
|
0.37 |
% |
|
$ |
0.4 |
|
|
$ |
24 |
|
|
|
0.45 |
% |
|
$ |
0.1 |
|
|
$ |
8 |
|
|
|
5.28 |
% |
|
$ |
0.4 |
|
Securities purchased under
agreements to resell |
|
|
1,165 |
|
|
|
0.16 |
|
|
|
1.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
222 |
|
|
|
5.36 |
|
|
|
11.9 |
|
Federal funds sold |
|
|
6,007 |
|
|
|
0.29 |
|
|
|
17.4 |
|
|
|
4,119 |
|
|
|
1.75 |
|
|
|
72.0 |
|
|
|
3,625 |
|
|
|
5.20 |
|
|
|
188.7 |
|
Short-term investments2 |
|
|
683 |
|
|
|
0.53 |
|
|
|
3.6 |
|
|
|
467 |
|
|
|
2.41 |
|
|
|
11.2 |
|
|
|
2,255 |
|
|
|
5.27 |
|
|
|
118.8 |
|
Mortgage-backed
securities2 |
|
|
9,584 |
|
|
|
2.12 |
|
|
|
203.0 |
|
|
|
8,403 |
|
|
|
3.88 |
|
|
|
326.5 |
|
|
|
4,974 |
|
|
|
5.30 |
|
|
|
263.6 |
|
Other investments2 |
|
|
6,028 |
|
|
|
1.59 |
|
|
|
95.6 |
|
|
|
145 |
|
|
|
4.28 |
|
|
|
6.2 |
|
|
|
39 |
|
|
|
5.58 |
|
|
|
2.2 |
|
Advances3, 4 |
|
|
37,766 |
|
|
|
1.77 |
|
|
|
668.2 |
|
|
|
45,653 |
|
|
|
3.11 |
|
|
|
1,418.6 |
|
|
|
24,720 |
|
|
|
5.31 |
|
|
|
1,313.6 |
|
Mortgage loans5 |
|
|
9,190 |
|
|
|
4.83 |
|
|
|
443.6 |
|
|
|
10,647 |
|
|
|
5.01 |
|
|
|
533.7 |
|
|
|
11,248 |
|
|
|
4.99 |
|
|
|
561.6 |
|
Loans to other FHLBanks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14 |
|
|
|
0.68 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
70,536 |
|
|
|
2.03 |
% |
|
$ |
1,433.6 |
|
|
|
69,472 |
|
|
|
3.41 |
% |
|
$ |
2,368.4 |
|
|
|
47,091 |
|
|
|
5.23 |
% |
|
$ |
2,460.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earning assets |
|
|
165 |
|
|
|
|
|
|
|
|
|
|
|
182 |
|
|
|
|
|
|
|
|
|
|
|
270 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
70,701 |
|
|
|
|
|
|
|
|
|
|
$ |
69,654 |
|
|
|
|
|
|
|
|
|
|
$ |
47,361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
1,296 |
|
|
|
0.18 |
% |
|
$ |
2.4 |
|
|
$ |
1,354 |
|
|
|
1.64 |
% |
|
$ |
22.2 |
|
|
$ |
1,072 |
|
|
|
4.79 |
% |
|
$ |
51.4 |
|
Consolidated obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount notes4 |
|
|
20,736 |
|
|
|
0.64 |
|
|
|
132.2 |
|
|
|
26,543 |
|
|
|
2.32 |
|
|
|
616.4 |
|
|
|
8,597 |
|
|
|
4.93 |
|
|
|
424.0 |
|
Bonds4 |
|
|
44,218 |
|
|
|
2.49 |
|
|
|
1,101.3 |
|
|
|
37,752 |
|
|
|
3.92 |
|
|
|
1,481.2 |
|
|
|
34,233 |
|
|
|
5.22 |
|
|
|
1,786.2 |
|
Other interest-bearing
liabilities |
|
|
38 |
|
|
|
0.80 |
|
|
|
0.3 |
|
|
|
68 |
|
|
|
4.43 |
|
|
|
3.0 |
|
|
|
478 |
|
|
|
5.87 |
|
|
|
28.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing
liabilities |
|
|
66,288 |
|
|
|
1.86 |
% |
|
$ |
1,236.2 |
|
|
|
65,717 |
|
|
|
3.23 |
% |
|
$ |
2,122.8 |
|
|
|
44,380 |
|
|
|
5.16 |
% |
|
$ |
2,289.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
liabilities |
|
|
1,142 |
|
|
|
|
|
|
|
|
|
|
|
656 |
|
|
|
|
|
|
|
|
|
|
|
595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
67,430 |
|
|
|
|
|
|
|
|
|
|
|
66,373 |
|
|
|
|
|
|
|
|
|
|
|
44,975 |
|
|
|
|
|
|
|
|
|
Capital |
|
|
3,271 |
|
|
|
|
|
|
|
|
|
|
|
3,281 |
|
|
|
|
|
|
|
|
|
|
|
2,386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and capital |
|
$ |
70,701 |
|
|
|
|
|
|
|
|
|
|
$ |
69,654 |
|
|
|
|
|
|
|
|
|
|
$ |
47,361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
and spread |
|
|
|
|
|
|
0.17 |
% |
|
$ |
197.4 |
|
|
|
|
|
|
|
0.18 |
% |
|
$ |
245.6 |
|
|
|
|
|
|
|
0.07 |
% |
|
$ |
171.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin6 |
|
|
|
|
|
|
0.28 |
% |
|
|
|
|
|
|
|
|
|
|
0.35 |
% |
|
|
|
|
|
|
|
|
|
|
0.37 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest-earning
assets to interest-bearing
liabilities |
|
|
|
|
|
|
106.41 |
% |
|
|
|
|
|
|
|
|
|
|
105.71 |
% |
|
|
|
|
|
|
|
|
|
|
106.11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Composition of net interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-liability spread |
|
|
|
|
|
|
0.20 |
% |
|
$ |
137.4 |
|
|
|
|
|
|
|
0.20 |
% |
|
$ |
140.7 |
|
|
|
|
|
|
|
0.11 |
% |
|
$ |
49.7 |
|
Earnings on capital |
|
|
|
|
|
|
1.83 |
% |
|
|
60.0 |
|
|
|
|
|
|
|
3.20 |
% |
|
|
104.9 |
|
|
|
|
|
|
|
5.09 |
% |
|
|
121.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
|
|
|
|
$ |
197.4 |
|
|
|
|
|
|
|
|
|
|
$ |
245.6 |
|
|
|
|
|
|
|
|
|
|
$ |
171.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $10.3 million, $0.9
million, and $1.5 million for the years ended December 31, 2009, 2008, and 2007. |
|
4 |
|
Average balances reflect the impact of hedging fair value and fair value option adjustments. |
|
5 |
|
Nonperforming loans and loans held for sale are included in average balance used to determine average rate. |
|
6 |
|
Net interest margin is net interest income expressed as a percentage of average interest-earning assets. |
47
The following table presents the changes in interest income and interest expense between
2009 and 2008 as well as between 2008 and 2007. Changes in interest income and interest expense
that are not identifiable as either volume-related or rate-related, but rather equally attributable
to both volume and rate changes, are allocated to the volume and rate categories based on the
proportion of the absolute value of the volume and rate changes (dollars in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance 2009 vs. 2008 |
|
|
Variance 2008 vs. 2007 |
|
|
|
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 |
|
$ |
0.3 |
|
|
$ |
|
|
|
$ |
0.3 |
|
|
$ |
0.3 |
|
|
$ |
(0.6 |
) |
|
$ |
(0.3 |
) |
Securities purchased under agreements
to resell |
|
|
1.8 |
|
|
|
|
|
|
|
1.8 |
|
|
|
(11.9 |
) |
|
|
|
|
|
|
(11.9 |
) |
Federal funds sold |
|
|
23.3 |
|
|
|
(77.9 |
) |
|
|
(54.6 |
) |
|
|
22.7 |
|
|
|
(139.4 |
) |
|
|
(116.7 |
) |
Short-term investments |
|
|
3.7 |
|
|
|
(11.3 |
) |
|
|
(7.6 |
) |
|
|
(63.9 |
) |
|
|
(43.7 |
) |
|
|
(107.6 |
) |
Mortgage-backed securities |
|
|
40.8 |
|
|
|
(164.3 |
) |
|
|
(123.5 |
) |
|
|
147.0 |
|
|
|
(84.1 |
) |
|
|
62.9 |
|
Other investments |
|
|
95.7 |
|
|
|
(6.3 |
) |
|
|
89.4 |
|
|
|
4.6 |
|
|
|
(0.6 |
) |
|
|
4.0 |
|
Advances |
|
|
(214.8 |
) |
|
|
(535.6 |
) |
|
|
(750.4 |
) |
|
|
800.9 |
|
|
|
(695.9 |
) |
|
|
105.0 |
|
Mortgage loans |
|
|
(71.3 |
) |
|
|
(18.8 |
) |
|
|
(90.1 |
) |
|
|
(30.1 |
) |
|
|
2.2 |
|
|
|
(27.9 |
) |
Loans to other FHLBanks |
|
|
(0.1 |
) |
|
|
|
|
|
|
(0.1 |
) |
|
|
0.1 |
|
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
(120.6 |
) |
|
|
(814.2 |
) |
|
|
(934.8 |
) |
|
|
869.7 |
|
|
|
(962.1 |
) |
|
|
(92.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
(0.9 |
) |
|
|
(18.9 |
) |
|
|
(19.8 |
) |
|
|
11.0 |
|
|
|
(40.2 |
) |
|
|
(29.2 |
) |
Consolidated obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount notes |
|
|
(112.3 |
) |
|
|
(371.9 |
) |
|
|
(484.2 |
) |
|
|
511.4 |
|
|
|
(319.0 |
) |
|
|
192.4 |
|
Bonds |
|
|
223.6 |
|
|
|
(603.5 |
) |
|
|
(379.9 |
) |
|
|
170.9 |
|
|
|
(475.9 |
) |
|
|
(305.0 |
) |
Other interest-bearing liabilities |
|
|
(1.0 |
) |
|
|
(1.7 |
) |
|
|
(2.7 |
) |
|
|
(19.5 |
) |
|
|
(5.6 |
) |
|
|
(25.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
109.4 |
|
|
|
(996.0 |
) |
|
|
(886.6 |
) |
|
|
673.8 |
|
|
|
(840.7 |
) |
|
|
(166.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
(230.0 |
) |
|
$ |
181.8 |
|
|
$ |
(48.2 |
) |
|
$ |
195.9 |
|
|
$ |
(121.4 |
) |
|
$ |
74.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our net interest income is made up of two components: asset-liability spread and earnings
on capital. Our asset-liability spread equals the yield on total assets minus the cost of total
liabilities. For the years ended December 31, 2009 and 2008, our asset-liability spread was 20
basis points compared to 11 basis points in 2007. The majority of our asset-liability spread is
driven by our net interest spread. For the year ended December 31, 2009, our net interest spread
was 17 basis points, compared to 18 basis points in 2008, and 7 basis points in 2007.
Although our asset-liability spread and net interest spread remained fairly constant for the
years ended December 31, 2009 and 2008, our earnings on capital decreased significantly. We invest
our capital to generate earnings, generally for the same repricing maturity as the assets being
supported. For the years ended December 31, 2009 and 2008, our earnings on capital were 183 basis
points and 320 basis points. The significant decrease in earnings on capital in 2009 when compared
to 2008 was primarily due to the lower interest rate environment as well as the lack of attractive
short-term investment opportunities. As short-term interest rates declined and short-term
investment opportunities were limited, the earnings contribution from capital decreased, thereby
decreasing net interest income. Our net interest income decreased $48.2 million in 2009 when
compared to 2008.
48
Our asset-liability spread and net interest spread increased for the year ended December 31,
2008 when compared to the same period in 2007, although our earnings on capital decreased. The
increase in asset-liability spread was primarily due to lower debt costs and increased asset
volumes, coupled with favorable interest rates. As a result, our net interest income increased
$74.5 million in 2008 when compared to 2007.
Our net interest income was impacted by the following:
Advances
Interest income on our advance portfolio (including advance prepayment fees, net) decreased
$750.4 million or 53 percent in 2009 when compared to 2008 primarily due to lower interest rates.
For 2009, the average yield on our advances was 1.77 percent compared to 3.11 percent in 2008. In
addition, average advance volumes decreased $7.9 billion or 17 percent in 2009 when compared to
2008 due to the availability of alternative wholesale funding options for member banks as well as
increased deposit growth realized by many members.
Interest income on our advance portfolio (including advance prepayment fees, net) increased
$105.0 million or eight percent in 2008 when compared to 2007 primarily due to increased average
advance volumes, partially offset by declining interest rates.
Discount Notes
Interest expense on our discount notes decreased $484.2 million or 79 percent in 2009 when
compared to 2008 primarily due to lower interest rates. For 2009, the average cost of our discount
notes was 0.64 percent compared to 2.32 percent in 2008. In addition, average discount note volumes
decreased $5.8 billion or 22 percent in 2009 when compared to 2008 as a result of us not replacing
maturing discount notes due to decreased short-term funding needs as well as the ability to fund
longer-term during the second half of 2009.
Interest expense on our discount notes increased $192.4 million or 45 percent in 2008 when
compared to 2007. The increase was primarily due to increased average discount note volume in
response to increased member advance activity. Additionally, during the last quarter of 2008,
government interventions and weakening investor confidence adversely impacted our long-term cost of
funds. As a result, we relied more heavily on the issuance of discount notes to fund both our
short- and long-term assets.
49
Bonds
Interest expense on our bonds decreased $379.9 million or 26 percent in 2009 when compared to
2008 due to lower interest rates, partially offset by increased average bond volumes. Capitalizing
on the lower interest rates, we extinguished bonds with a total par value of $0.9 billion in 2009.
Most of the extinguished debt was replaced with lower costing debt thereby lowering interest costs.
Average bond volumes increased in 2009 when compared to 2008 as a result of increased average
investments which were funded with bonds. Additionally, as spreads on our bonds became more
favorable during the second half of 2009, we were able to issue longer-term bonds rather than
discount notes to fund our longer-term assets.
Interest expense on our bonds decreased $305.0 million or 17 percent in 2008 when compared to
2007 primarily due to the lower interest rate environment.
Mortgage Loans
Interest income on our mortgage loans decreased $90.1 million or 17 percent in 2009 when
compared to 2008 primarily due to lower volume resulting from the sale of mortgage loans during the
second quarter of 2009. In addition, principal payments on mortgage loans exceeded originations
throughout 2009.
Interest income on our mortgage loans decreased $27.9 million or five percent in 2008 when
compared to 2007 primarily due to principal payments exceeding originations.
Federal Funds Sold
Interest income on our Federal funds sold decreased $54.6 million or 76 percent in 2009 when
compared to 2008 and $116.7 million or 62 percent in 2008 when compared to 2007 primarily due to
lower interest rates, partially offset by increased average Federal funds sold volumes.
Investments
Interest income on our investments decreased $41.7 million or 12 percent in 2009 when compared
to 2008 primarily due to lower interest rates on our MBS. At December 31, 2009, $8.7 billion or 77
percent of our MBS portfolio was variable rate. Therefore, as interest rates decline, so does the
associated interest income on the variable rate MBS. The decrease in interest income was partially
offset by increased volume on our other investments. In 2009, we purchased other investments in an
effort to improve investment income and replace mortgage assets sold.
Interest income on our investments decreased $40.7 million or 11 percent in 2008 when compared
to 2007 primarily due to decreased volumes on our short-term investments coupled with lower
interest rates. The decrease in interest income was partially offset by increased MBS purchases.
50
Net Interest Income by Segment
We evaluate performance of our segments based on adjusted net interest income after providing
for a mortgage loan credit loss provision. Adjusted net interest income includes the interest
income and expense on economic hedge relationships included in other income (loss) and concession
expense on fair value option bonds included in other expense and excludes basis adjustment
amortization/accretion on called and extinguished debt included in interest expense. A description
of these segments is included in Item 1. Business Business Segments.
The following table shows our financial performance by operating segment and a reconciliation
of financial performance to net interest income for the years ended December 31, 2009, 2008, and
2007 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Adjusted net interest
income after mortgage
loan credit loss
provision |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Member Finance |
|
$ |
133.8 |
|
|
$ |
122.2 |
|
|
$ |
139.0 |
|
Mortgage Finance |
|
|
81.8 |
|
|
|
133.0 |
|
|
|
30.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
215.6 |
|
|
$ |
255.2 |
|
|
$ |
169.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of
operating segment
results to net interest
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net interest
income after mortgage
loan credit loss
provision |
|
$ |
215.6 |
|
|
$ |
255.2 |
|
|
$ |
169.2 |
|
Net interest (income)
expense on economic
hedges |
|
|
(5.2 |
) |
|
|
2.2 |
|
|
|
1.7 |
|
Concession expense on
fair value option bonds |
|
|
0.5 |
|
|
|
|
|
|
|
|
|
Interest (expense)
income on basis
adjustment
amortization/accretion
of called debt |
|
|
(17.8 |
) |
|
|
(12.1 |
) |
|
|
0.2 |
|
Interest income on basis
adjustment accretion of
extinguished debt |
|
|
2.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
after mortgage loan
credit loss provision |
|
$ |
195.9 |
|
|
$ |
245.3 |
|
|
$ |
171.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (loss) |
|
|
55.8 |
|
|
|
(27.8 |
) |
|
|
10.3 |
|
Other expense |
|
|
53.1 |
|
|
|
44.1 |
|
|
|
42.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before assessments |
|
$ |
198.6 |
|
|
$ |
173.4 |
|
|
$ |
139.0 |
|
|
|
|
|
|
|
|
|
|
|
51
Member Finance
Member Finance adjusted net interest income increased $11.6 million in 2009 when compared to
2008. The increase was primarily attributable to higher asset-liability spread income, partially
offset by lower returns on invested capital. Asset-liability spread income increased due to the
segments average assets increasing $1.3 billion to $51.9 billion in 2009 when compared to 2008.
The increase in average assets was primarily attributable to the purchase of non-MBS investments,
including TLGP debt, Federal funds sold, U.S. Treasury obligations, taxable municipal bonds, and
resale agreements. We increased our non-MBS investment purchases in an effort to improve investment
income and replace mortgage assets sold in 2009. The increase was partially offset by lower returns
on invested capital as a result of the low interest rate environment and lack of attractive
short-term investment options.
Member Finance adjusted net interest income decreased $16.8 million in 2008 when compared to
2007. The decrease was primarily attributable to lower returns on invested capital as a result of
the low interest rate environment, partially offset by higher asset-liability spread income.
Asset-liability spread income increased due to the segments average assets increasing $19.5
billion to $50.6 in 2008 when compared to 2007 as a result of increased advance activities during
2008.
Mortgage Finance
Mortgage Finance adjusted net interest income decreased $51.2 million in 2009 when compared to
2008. The decrease was primarily attributable to lower asset-liability spread income, coupled with
lower returns on invested capital as a result of the low interest rate environment. Asset-liability
spread income decreased due to the segments average assets decreasing $0.2 billion to $18.8
billion in 2009 when compared to 2008. The segments average assets decreased primarily due to the
sale of mortgage loans during the second quarter of 2009. The decrease was partially offset by the
purchase of multi-family agency MBS with a portion of the proceeds from the mortgage loan sale. In
addition, we purchased additional agency MBS during the fourth quarter of 2009.
As reflected in the Member Finance segment above, we used a portion of the proceeds from the
mortgage loan sale to purchase TVA and FFCB bonds. These bonds were recorded under the Member
Finance segment. As a result, the Mortgage Finance segment experienced lower adjusted net interest
income in 2009 due to decreased average assets.
Mortgage Finance adjusted net interest income excludes basis adjustment expense related to
called bonds. In 2009, we called $1.6 billion of higher cost par value bonds and consequently
amortized $17.2 million of basis adjustment expense. A portion of these bonds was replaced with
lower cost debt, therefore, we expect lower future interest costs will offset the basis adjustment
amortization recorded in 2009.
52
Mortgage Finance adjusted net interest income increased $102.8 million in 2008 when compared
to 2007. The increase was primarily attributable to higher asset-liability spread income.
Asset-liability spread income increased due to the segments average assets increasing $2.8 billion
to $19.0 billion in 2008 when compared to 2007. The segments average assets increased primarily
due to an increase in average MBS of $3.4 billion to $8.4 billion in 2008 when compared to 2007.
Additionally, we purchased MBS at attractive spreads to LIBOR and funded the MBS with long-term
debt issued at favorable rates, thereby enhancing the segments net interest income. Interest
income from MBS increased $62.9 million in 2008 when compared to 2007.
Provision for Credit Losses on Mortgage Loans
We recorded a provision for credit losses of $1.5 million and $0.3 million in 2009 and 2008.
The increased provision in 2009 was primarily due to increased delinquency and loss severity rates
throughout 2009. In addition, credit enhancement fees available to recapture losses decreased in
2009 as a result of the mortgage loan sale and increased principal repayments.
Other Income (Loss)
The following table presents the components of other income (loss) for the years ended
December 31, 2009, 2008, and 2007 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service fees |
|
$ |
2.1 |
|
|
$ |
2.4 |
|
|
$ |
2.2 |
|
Net gain on trading securities |
|
|
19.1 |
|
|
|
1.5 |
|
|
|
|
|
Net realized loss on sale of available-for-sale
securities |
|
|
(10.9 |
) |
|
|
|
|
|
|
|
|
Net realized gain on sale of held-to-maturity
securities |
|
|
|
|
|
|
1.8 |
|
|
|
0.5 |
|
Net loss on bonds held at fair value |
|
|
(4.4 |
) |
|
|
|
|
|
|
|
|
Net gains on loans held for sale |
|
|
1.3 |
|
|
|
|
|
|
|
|
|
Net gain (loss) on derivatives and hedging activities |
|
|
133.8 |
|
|
|
(33.2 |
) |
|
|
4.5 |
|
Net (loss) gain on extinguishment of debt |
|
|
(89.9 |
) |
|
|
0.7 |
|
|
|
|
|
Other, net |
|
|
4.7 |
|
|
|
(1.0 |
) |
|
|
3.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (loss) |
|
$ |
55.8 |
|
|
$ |
(27.8 |
) |
|
$ |
10.3 |
|
|
|
|
|
|
|
|
|
|
|
Other income (loss) can be volatile from period to period depending on the type of financial
activity recorded. In 2009, other income (loss) was primarily impacted by the following events.
53
In 2009, we purchased and sold 30-year U.S. Treasury obligations on three separate occasions.
On each occasion, we entered into interest rate swaps to convert these 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. We subsequently sold these securities and terminated the
related interest rate swaps. As a result, we recorded an $11.7 million net loss on the sale of the
securities through net realized loss on sale of available-for-sale securities and an $82.6
million net gain on the termination of the interest rate swaps and normal ineffectiveness through
net gain (loss) on derivatives and hedging activities. The overall impact of these transactions
was a net gain of $70.9 million for the year ended December 31, 2009.
In 2009, we extinguished bonds with a total par value of $0.9 billion and recorded losses of
$89.9 million through other loss. Most of these bonds were replaced with lower costing debt and we
expect such losses will be offset in future periods through lower interest costs. These losses
exclude basis adjustment accretion of $2.8 million recorded in net interest income. As a result,
net losses recorded in the Statements of Income on the extinguishment of debt totaled $87.1 million
in 2009.
We use economic hedges to manage interest rate and prepayment risks in our balance sheet. In
2009, we recorded net gains of $34.2 million on economic hedges through net gain (loss) on
derivatives and hedging activities. Refer to Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operation Results of Operations Hedging Activities for
additional information on the impact of hedging activities to other income (loss).
At December 31, 2009, our trading securities portfolio consisted of $3.7 billion of par value
TLGP debt and $0.8 billion of par value taxable municipal bonds. For the year ended December 31,
2009, we recorded net unrealized gains of $4.6 million on our trading securities. As trading
securities are marked-to-market, changes in unrealized gains and losses are reflected in other
income (loss). For the year ended December 31, 2009, we sold $2.2 billion of par value TLGP debt
and realized a net gain of $14.5 million in other income (loss).
We also entered into derivatives to economically hedge against adverse changes in the fair
value of a portion of our trading securities portfolio. For the year ended December 31, 2009, we
recorded net gains on these economic derivatives of $12.0 million in net gain (loss) on
derivatives and hedging activities.
54
Hedging Activities
If a hedging activity qualifies for hedge accounting treatment, we include 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, we report 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. We report 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, we report the hedging
instruments components of interest income and expense, together with the effect of changes in fair
value as a component of other income (loss) in Net gain (loss) on derivatives and hedging
activities; 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 Statements of
Income in net interest income and other income (loss).
55
The following table categorizes the net effect of hedging activities on net income by product
for the years ended December 31, 2009, 2008, and 2007 (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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
Net Effect of |
|
|
|
|
|
|
|
|
|
Mortgage |
|
|
Consolidated |
|
|
Balance |
|
|
|
|
Hedging Activities |
|
Advances |
|
|
Investments |
|
|
Assets |
|
|
Obligations |
|
|
Sheet |
|
|
Total |
|
Net (amortization)
accretion |
|
$ |
(55.2 |
) |
|
$ |
|
|
|
$ |
(1.7 |
) |
|
$ |
30.5 |
|
|
$ |
|
|
|
$ |
(26.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized and
unrealized gains on
derivatives and
hedging activities |
|
|
2.6 |
|
|
|
82.8 |
|
|
|
|
|
|
|
14.2 |
|
|
|
|
|
|
|
99.6 |
|
(Losses) Gains
Economic Hedges |
|
|
(0.5 |
) |
|
|
12.0 |
|
|
|
(2.3 |
) |
|
|
5.7 |
|
|
|
19.3 |
|
|
|
34.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported in Other
Income (Loss) |
|
|
2.1 |
|
|
|
94.8 |
|
|
|
(2.3 |
) |
|
|
19.9 |
|
|
|
19.3 |
|
|
|
133.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(53.1 |
) |
|
$ |
94.8 |
|
|
$ |
(4.0 |
) |
|
$ |
50.4 |
|
|
$ |
19.3 |
|
|
$ |
107.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
Net Effect of |
|
|
|
|
|
|
|
|
|
Mortgage |
|
|
Consolidated |
|
|
Balance |
|
|
|
|
Hedging Activities |
|
Advances |
|
|
Investments |
|
|
Assets |
|
|
Obligations |
|
|
Sheet |
|
|
Total |
|
Net (amortization)
accretion |
|
$ |
(44.6 |
) |
|
$ |
|
|
|
$ |
(1.7 |
) |
|
$ |
27.5 |
|
|
$ |
|
|
|
$ |
(18.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized and
unrealized gains
(losses) on
derivatives and
hedging
activities |
|
|
2.5 |
|
|
|
|
|
|
|
|
|
|
|
(6.5 |
) |
|
|
|
|
|
|
(4.0 |
) |
Losses Economic
Hedges |
|
|
(3.5 |
) |
|
|
|
|
|
|
(1.2 |
) |
|
|
(1.4 |
) |
|
|
(23.1 |
) |
|
|
(29.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported in Other Loss |
|
|
(1.0 |
) |
|
|
|
|
|
|
(1.2 |
) |
|
|
(7.9 |
) |
|
|
(23.1 |
) |
|
|
(33.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(45.6 |
) |
|
$ |
|
|
|
$ |
(2.9 |
) |
|
$ |
19.6 |
|
|
$ |
(23.1 |
) |
|
$ |
(52.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
Net Effect of |
|
|
|
|
|
|
|
|
|
Mortgage |
|
|
Consolidated |
|
|
Balance |
|
|
|
|
Hedging Activities |
|
Advances |
|
|
Investments |
|
|
Assets |
|
|
Obligations |
|
|
Sheet |
|
|
Total |
|
Net amortization |
|
$ |
(1.0 |
) |
|
$ |
|
|
|
$ |
(2.0 |
) |
|
$ |
(34.1 |
) |
|
$ |
|
|
|
$ |
(37.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized and
unrealized gains on
derivatives and
hedging activities |
|
|
2.6 |
|
|
|
|
|
|
|
|
|
|
|
0.5 |
|
|
|
|
|
|
|
3.1 |
|
(Losses) Gains
Economic Hedges |
|
|
(0.6 |
) |
|
|
|
|
|
|
|
|
|
|
4.2 |
|
|
|
(2.2 |
) |
|
|
1.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported in Other
Income (Loss) |
|
|
2.0 |
|
|
|
|
|
|
|
|
|
|
|
4.7 |
|
|
|
(2.2 |
) |
|
|
4.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1.0 |
|
|
$ |
|
|
|
$ |
(2.0 |
) |
|
$ |
(29.4 |
) |
|
$ |
(2.2 |
) |
|
$ |
(32.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
Net amortization/accretion. The effect of hedging on net amortization/accretion varies
from period to period depending on our activities, including terminating hedge relationships and
the amount of upfront fees received or paid on derivative transactions. In late 2008, we
voluntarily terminated certain interest rate swaps that were being used to hedge both advances and
consolidated obligations in an effort to reduce our counterparty risk profile. Additionally, during
the latter half of 2008, as a result of Lehman Brothers Holdings Inc. filing bankruptcy, we chose
to terminate all consolidated obligation and advance hedge relationships with counterparties that
were an affiliate of Lehman Brothers Holdings Inc. This termination activity resulted in basis
adjustments that are amortized/accreted level-yield over the remaining life of the advance or
consolidated obligation. Advance basis adjustment amortization increased in 2009 when compared to
2008 due to amortization of these advance basis adjustments created during the latter half of 2008.
Consolidated obligation basis adjustment accretion increased in 2009 when compared to 2008
primarily due to the extinguishment of debt. Consolidated obligation amortization decreased while
advance amortization increased in 2008 when compared to 2007 primarily due to increased
consolidated obligation and advance hedge relationship terminations.
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 our net realized and unrealized gains (losses) on
derivatives and hedging activities. Additionally, volatility in the marketplace may intensify this
impact. Net realized and unrealized gains on derivatives and hedging activities in 2009 were
primarily due to investment hedge relationships. In 2009, we sold $2.7 billion of U.S. Treasury
obligations and terminated the related interest rate swaps recognizing gains on the derivative
termination of $96.7 million and normal hedge ineffectiveness losses of $14.1 million. For
additional information on the sale of U.S. Treasury obligations, refer to Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operation Results of Operations
Other Income (Loss). Hedge ineffectiveness gains on consolidated obligation hedge relationships
increased $20.7 million in 2009 when compared to 2008 due primarily to increased hedge
relationships and changes in interest rates. Hedge ineffectiveness losses on consolidated
obligation hedge relationships increased $7.0 million in 2008 when compared to 2007 due primarily
to decreased hedge relationships and changes in interest rates.
57
Gains (Losses) Economic Hedges. Economic hedges were used to manage interest rate and
prepayment risks in our balance sheet in 2009, 2008 and 2007. Changes in gains (losses) on economic
hedges are primarily driven by 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 we
record 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. Gains
(losses) on economic hedges were impacted by the following activity:
|
|
|
In 2009, we held interest rate caps on our balance sheet as economic hedges to protect
against increases in interest rates on our variable rate assets with caps. Due to changes
in interest rates, we recorded $19.3 million in gains on these interest rate caps in 2009
compared to $11.6 million in losses in 2008 and $1.5 million in gains in 2007. In 2008, we
also held interest rate swaptions on our balance sheet as economic hedges and recorded
losses of $11.5 million compared to $3.7 million in losses in 2007. |
|
|
|
|
We held interest rate swaps on our balance sheet as economic hedges against adverse
changes in the fair value of a portion of our trading securities indexed to LIBOR. In 2009,
we recorded $23.6 million in economic gains on these derivatives, partially offset by
interest expense accruals on the hedges of $11.6 million. The net gain was offset by $17.2
million of unrealized losses on the trading securities recorded in net gain on trading
securities in other income (loss). |
|
|
|
|
In 2009, gains on consolidated obligation economic hedges were impacted by economic
hedges on fair value option bonds. During 2009, we had economic hedges protecting against
changes in the fair value of both variable and fixed interest rate bonds elected under the
fair value option. We recorded $6.5 million in economic gains on these derivatives, coupled
with $7.8 million of interest income accruals on the hedges. These net gains were offset by
$4.4 million of fair value losses on the variable and fixed interest rate bonds recorded in
net loss on bonds held at fair value in other income (loss). |
|
|
|
|
In 2009, gains on consolidated obligation economic hedges were also impacted by the
effect of failed retrospective hedge effectiveness tests. We perform retrospective hedge
effectiveness testing at least quarterly on all hedge relationships. If a hedge
relationship fails this test, we can no longer receive hedge accounting and the derivative
is accounted for as an economic hedge. In 2009, we experienced losses of $20.9 million on
consolidated obligation hedging relationships failing the retrospective hedge effectiveness
tests compared to losses of $2.4 million in 2008 and gains of $5.6 million in 2007. The
majority of losses in 2009 were due to consolidated obligation hedge relationships nearing
maturity or having a short-duration. These losses and gains were partially offset by
interest accruals on the hedges of $12.3 million, $1.0 million, and $1.4 million in 2009,
2008, and 2007. |
58
Other Expenses
The following table shows the components of other expenses for the three years ended December
31, 2009, 2008, and 2007 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits |
|
$ |
31.9 |
|
|
$ |
26.3 |
|
|
$ |
24.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Occupancy cost |
|
|
1.6 |
|
|
|
1.3 |
|
|
|
1.6 |
|
Other operating expenses |
|
|
15.0 |
|
|
|
12.8 |
|
|
|
13.0 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
16.6 |
|
|
|
14.1 |
|
|
|
14.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance Agency |
|
|
2.4 |
|
|
|
1.9 |
|
|
|
1.5 |
|
Office of Finance |
|
|
2.2 |
|
|
|
1.8 |
|
|
|
1.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense |
|
$ |
53.1 |
|
|
$ |
44.1 |
|
|
$ |
42.4 |
|
|
|
|
|
|
|
|
|
|
|
Other expenses increased $9.0 million in 2009 when compared to 2008 and $1.7 million in 2008
when compared to 2007. The increase in both 2009 and 2008 was primarily due to increased
compensation and benefits. Compensation and benefits increased due primarily to us funding our
portion of the Pentegra Defined Benefit Plan for Financial Institutions (DB Plan) as well as making
staff additions. Funding and administrative costs of the DB Plan were $5.7 million in 2009, $3.2
million in 2008, and $3.3 million in 2007. In 2009, funding and administrative costs included a
one-time discretionary contribution of $3.3 million. In addition to increased compensation and
benefits, other expense was impacted by increased assessments from the Finance Agency and Office of
Finance in 2009 as a result of increased net income and increased fees for professional services.
Statements of Condition at December 31, 2009 and 2008
Financial Highlights
Our members are both stockholders and customers. Our primary business objective is to be
a reliable source of low-cost liquidity to our members while safeguarding their capital investment.
Due to our cooperative business model, our assets, liabilities, capital, and financial strategies
reflect changes in member business activities with the Bank.
Our total assets decreased five percent to $64.7 billion at December 31, 2009 from $68.1
billion at December 31, 2008. Total liabilities decreased five percent to $61.7 billion at December
31, 2009 from $65.1 billion at December 31, 2008. Total capital decreased four percent to $2.9
billion at December 31, 2009 from $3.0 billion at December 31, 2008. The overall financial
condition for the periods presented has been influenced by changes in member advances, investment
purchases, mortgage loans, and funding activities. See further discussion of changes in our
financial condition in the appropriate sections that follow.
59
Advances
Our advance portfolio decreased $6.2 billion or 15 percent to $35.7 billion at December
31, 2009 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 our advances down and provided incentive to
our members to prepay their advances. In 2009, members prepaid approximately $4.9 billion of
advances. A portion of the decrease in advances was offset by unique funding opportunities offered
to our members in 2009. These unique funding opportunities increased advance demand and allowed
members to borrow from us at discounted rates for particular advance products.
The FHLBank Act requires that we obtain sufficient collateral on advances to protect against
losses. We have 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, we have not provided any allowance for credit losses on advances. See additional
discussion regarding our collateral requirements in Item 7. Managements Discussion and Analysis
of Financial Condition and Results of Operation Risk Management Credit Risk Advances.
60
The composition of our advances based on remaining term to scheduled maturity at December 31,
2009 and 2008 was as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
Percent of |
|
|
|
|
|
|
Percent of |
|
|
|
Amount |
|
|
Total |
|
|
Amount |
|
|
Total |
|
Simple fixed rate advances |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overdrawn demand deposit accounts |
|
$ |
* |
|
|
|
* |
% |
|
$ |
1 |
|
|
|
* |
% |
One month or less |
|
|
1,022 |
|
|
|
2.9 |
|
|
|
2,852 |
|
|
|
7.0 |
|
Over one month through one year |
|
|
4,877 |
|
|
|
13.9 |
|
|
|
5,220 |
|
|
|
12.8 |
|
Greater than one year |
|
|
10,330 |
|
|
|
29.5 |
|
|
|
10,108 |
|
|
|
24.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,229 |
|
|
|
46.3 |
|
|
|
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 |
|
|
|
10.0 |
|
|
|
4,560 |
|
|
|
11.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,062 |
|
|
|
11.6 |
|
|
|
4,982 |
|
|
|
12.3 |
|
Callable advances |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate |
|
|
274 |
|
|
|
0.8 |
|
|
|
262 |
|
|
|
0.6 |
|
Variable rate |
|
|
6,297 |
|
|
|
18.0 |
|
|
|
7,527 |
|
|
|
18.5 |
|
Putable advances |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate |
|
|
6,675 |
|
|
|
19.1 |
|
|
|
8,122 |
|
|
|
20.0 |
|
Community investment advances |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate |
|
|
963 |
|
|
|
2.7 |
|
|
|
1,000 |
|
|
|
2.5 |
|
Variable rate |
|
|
72 |
|
|
|
0.2 |
|
|
|
104 |
|
|
|
0.3 |
|
Callable fixed rate |
|
|
64 |
|
|
|
0.2 |
|
|
|
62 |
|
|
|
0.1 |
|
Putable fixed rate |
|
|
396 |
|
|
|
1.1 |
|
|
|
423 |
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total par value |
|
|
35,032 |
|
|
|
100.0 |
% |
|
|
40,663 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedging fair value adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative fair value gain |
|
|
590 |
|
|
|
|
|
|
|
1,082 |
|
|
|
|
|
Basis adjustments from terminated
and ineffective hedges |
|
|
98 |
|
|
|
|
|
|
|
152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total advances |
|
$ |
35,720 |
|
|
|
|
|
|
$ |
41,897 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Amount is less than one million or 0.1 percent. |
Cumulative fair value gains decreased $492 million at December 31, 2009 when compared to
December 31, 2008 due primarily to changes in interest rates. All of the cumulative fair value
gains on advances were offset by the net estimated fair value losses on the related derivative
contracts during 2009. Basis adjustments decreased $54 million at December 31, 2009 when compared
to December 31, 2008 due primarily to the normal amortization of basis adjustments created during
the latter half of 2008. Refer to Item 7. Managements Discussion and Analysis
of Financial Condition and Results of Operation Results of Operations Hedging Activities
for additional information.
61
The following tables show advance balances for our five largest member borrowers at December
31, 2009 and 2008 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of |
|
|
|
|
|
|
|
|
|
2009 |
|
|
Total |
|
Name |
|
City |
|
State |
|
|
Advances1 |
|
|
Advances |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transamerica Life Insurance Company2 |
|
Cedar Rapids |
|
IA |
|
$ |
5,450 |
|
|
|
15.6 |
% |
Aviva Life and Annuity Company2 |
|
Des Moines |
|
IA |
|
|
2,955 |
|
|
|
8.4 |
|
TCF National Bank3 |
|
Sioux Falls |
|
SD |
|
|
2,650 |
|
|
|
7.6 |
|
Superior Guaranty Insurance Company4 |
|
Minneapolis |
|
MN |
|
|
1,625 |
|
|
|
4.6 |
|
ING USA Annuity and Life Insurance Company |
|
Des Moines |
|
IA |
|
|
1,304 |
|
|
|
3.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,984 |
|
|
|
39.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Housing associates |
|
|
|
|
|
|
|
|
455 |
|
|
|
1.3 |
|
All others |
|
|
|
|
|
|
|
|
20,593 |
|
|
|
58.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total advances (at par value) |
|
|
|
|
|
|
|
$ |
35,032 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Bank3 |
|
Wayzata |
|
MN |
|
|
2,475 |
|
|
|
6.1 |
|
Superior Guaranty Insurance Company4 |
|
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 premiums, discounts, and hedging
fair value adjustments. |
|
2 |
|
Transamerica Life Insurance Company and Aviva Life and Annuity Company have not signed
a new Advances, Pledge, and Security Agreement and therefore cannot initiate new advances. At
December 31, 2009, the remaining weighted average life of advances held by Transamerica Life
Insurance Company and Aviva Life and Annuity Company was 5.00 and 4.46 years. |
|
3 |
|
Effective April 6, 2009, TCF National Bank relocated their charter from Wayzata, MN
to Sioux Falls, SD. |
|
4 |
|
Superior Guaranty Insurance Company (Superior) is an affiliate of Wells Fargo Bank,
N.A. |
62
Mortgage Loans
The following table shows information at December 31, 2009 and 2008 on mortgage loans held
for portfolio (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Single family mortgages |
|
|
|
|
|
|
|
|
Fixed rate conventional loans |
|
|
|
|
|
|
|
|
Contractual maturity less than or equal to 15
years |
|
$ |
1,906 |
|
|
$ |
2,408 |
|
Contractual maturity greater than 15 years |
|
|
5,427 |
|
|
|
7,845 |
|
|
|
|
|
|
|
|
Subtotal |
|
|
7,333 |
|
|
|
10,253 |
|
|
|
|
|
|
|
|
|
|
Fixed rate government-insured loans |
|
|
|
|
|
|
|
|
Contractual maturity less than or equal to
15 years |
|
|
2 |
|
|
|
2 |
|
Contractual maturity greater than 15 years |
|
|
378 |
|
|
|
421 |
|
|
|
|
|
|
|
|
Subtotal |
|
|
380 |
|
|
|
423 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total par value |
|
|
7,713 |
|
|
|
10,676 |
|
|
|
|
|
|
|
|
|
|
Premiums |
|
|
53 |
|
|
|
86 |
|
Discounts |
|
|
(52 |
) |
|
|
(81 |
) |
Basis adjustments from mortgage loan commitments |
|
|
5 |
|
|
|
4 |
|
Allowance for credit losses |
|
|
(2 |
) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans held for portfolio, net |
|
$ |
7,717 |
|
|
$ |
10,685 |
|
|
|
|
|
|
|
|
|
|
|
* |
|
Amount is less than one million. |
Mortgage loans decreased approximately $3.0 billion at December 31, 2009 when compared to
December 31, 2008. The decrease was primarily due to us 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.
63
Excluding the mortgage loan sale transaction, mortgage loans decreased approximately $0.9
billion at December 31, 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 $2.4 billion in 2009 compared to $1.3 billion in 2008. Total
originations amounted to $1.5 billion in 2009 compared to $1.2 billion in 2008. The increase in
principal repayments and originations were each a result of the decreased interest rate environment
throughout 2009. During the second half of 2009, as interest rates increased and underwriting
standards remained stringent, borrowers had less incentive to refinance, and as a result, we
experienced fewer principal prepayments. The annualized weighted average pay-down rate for mortgage
loans in 2009 was approximately 23 percent compared to 11 percent in 2008.
At December 31, 2009 and 2008, $4.4 billion and $7.9 billion of our mortgage loans outstanding
were from Superior, an affiliate of Wells Fargo. The decrease in mortgage loans outstanding with
Superior at December 31, 2009 when compared to December 31, 2008 was due to the mortgage loans sale
transaction that took place 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, we assign 100 percent of our interests in PFI master commitments to the FHLBank of
Chicago. The FHLBank of Chicago then purchases mortgage loans from our 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. In 2009, the FHLBank of Chicago funded
$150.1 million of MPF Xtra mortgage loans under the master commitments of our PFIs. We recorded
approximately $0.1 million in MPF Xtra fee income from the FHLBank of Chicago in 2009. The fee is
compensation to us for our continued management of the PFI relationship under MPF Xtra, including
initial and ongoing training as well as enforcement of the PFIs representations and warranties as
necessary under the PFI Agreement and MPF Guides.
For additional discussion regarding the MPF credit risk sharing arrangements, see Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operation Risk
Management Credit Risk Mortgage Assets.
64
Investments
The following table shows the book value of investments at December 31, 2009 and 2008
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
Percent of |
|
|
|
|
|
|
Percent of |
|
|
|
Amount |
|
|
Total |
|
|
Amount |
|
|
Total |
|
Short-term investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits |
|
$ |
5 |
|
|
|
* |
% |
|
$ |
|
|
|
|
|
% |
Federal funds sold |
|
|
3,133 |
|
|
|
15.1 |
|
|
|
3,425 |
|
|
|
22.3 |
|
Negotiable certificates of deposit |
|
|
450 |
|
|
|
2.2 |
|
|
|
|
|
|
|
|
|
Commercial paper |
|
|
|
|
|
|
|
|
|
|
385 |
|
|
|
2.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,588 |
|
|
|
17.3 |
|
|
|
3,810 |
|
|
|
24.8 |
|
Long-term investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored enterprises |
|
|
11,147 |
|
|
|
53.6 |
|
|
|
9,169 |
|
|
|
59.7 |
|
U.S. government agency-guaranteed |
|
|
43 |
|
|
|
0.2 |
|
|
|
52 |
|
|
|
0.3 |
|
MPF shared funding |
|
|
33 |
|
|
|
0.1 |
|
|
|
47 |
|
|
|
0.3 |
|
Other |
|
|
35 |
|
|
|
0.2 |
|
|
|
39 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,258 |
|
|
|
54.1 |
|
|
|
9,307 |
|
|
|
60.6 |
|
Non-mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits |
|
|
6 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
Government-sponsored enterprise
obligations |
|
|
806 |
|
|
|
3.9 |
|
|
|
|
|
|
|
|
|
State or local housing agency obligations |
|
|
124 |
|
|
|
0.6 |
|
|
|
93 |
|
|
|
0.6 |
|
TLGP |
|
|
4,260 |
|
|
|
20.5 |
|
|
|
2,151 |
|
|
|
14.0 |
|
Taxable municipal bonds |
|
|
742 |
|
|
|
3.6 |
|
|
|
|
|
|
|
|
|
Other |
|
|
6 |
|
|
|
* |
|
|
|
8 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,944 |
|
|
|
28.6 |
|
|
|
2,252 |
|
|
|
14.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments |
|
$ |
20,790 |
|
|
|
100.0 |
% |
|
$ |
15,369 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments as a percentage of total assets |
|
|
|
|
|
|
32.2 |
% |
|
|
|
|
|
|
22.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Amount is less than 0.1 percent. |
Investment balances increased $5.4 billion or 35 percent at December 31, 2009 when
compared with December 31, 2008. The increase was primarily due to an increase in both non-MBS and
MBS investments, including purchases of TLGP debt, GSE obligations, taxable municipal bonds, and
GSE MBS. We purchased these investments throughout 2009 in an effort to improve investment income
and replace mortgage assets sold.
65
Despite our increase in total investments, short-term investments decreased at December 31,
2009 when compared with December 31, 2008. The decrease was primarily due to a lack of attractive
interest spreads on investments. Short-term rates were low in 2009, primarily due to increased
deposit levels and the availability of various government funding programs for financial
institutions serving as our counterparties for short-term investments. As a result, it was more
challenging for us to find favorable investment opportunities.
We evaluate our individual available-for-sale and held-to-maturity securities in an unrealized
loss position for OTTI on at least a quarterly basis. As part of our evaluation of securities for
OTTI, we consider our intent to sell each debt security and whether it is more likely than not that
we will be required to sell the security before its anticipated recovery. If either of these
conditions is met, we will recognize an OTTI charge to earnings equal to the entire difference
between the securitys amortized cost basis and its fair value at the balance sheet date. For
securities in unrealized loss position that meet neither of these conditions, we perform analysis
to determine if any of these securities are other-than-temporarily impaired.
For our agency MBS, GSE obligations, and TLGP debt in an unrealized loss position, we
determined that the strength of the issuers guarantees through direct obligations or support from
the U.S. Government is sufficient to protect us from losses based on current expectations. For our
state or local housing agency obligations in an unrealized loss position, we determined that all of
these securities are currently performing as expected. For our MPF shared funding in an unrealized
loss position, we determined that the underlying mortgage loans are eligible under the MPF program
and the tranches owned are senior level tranches. As a result, we have determined that, as of
December 31, 2009, all gross unrealized losses on our agency MBS, GSE obligations, TLGP debt, state
or local housing agency obligations, and MPF shared funding are temporary.
Furthermore, the declines in market value of these securities are not attributable to credit
quality. We do not intend to sell these securities, and it is not more likely than not that we will
be required to sell these securities before recovery of their amortized cost bases. As a result, we
do not consider any of these securities to be other-than-temporarily impaired at December 31, 2009.
66
For our private-label MBS, we perform cash flow analyses to determine whether the entire
amortized cost bases of these securities are expected to be recovered. During the second quarter of
2009, the FHLBanks formed an OTTI Governance Committee, which is comprised of representation from
all 12 FHLBanks and is responsible 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, we may engage another designated FHLBank to perform the cash flow analysis underlying
our 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, we are responsible for making our own determination of impairment,
which includes determining the reasonableness of assumptions, inputs, and methodologies used. At
December 31, 2009, we obtained our cash flow analysis from our designated FHLBanks on all five of
our private-label MBS. The cash flow analysis uses two third-party models.
The first third-party model considers borrower characteristics and the particular attributes
of the loans underlying our 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 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 people. Our housing price forecast assumed
CBSA level current-to-trough home price declines ranging from 0 percent to 15 percent over the next
9 to 15 months. Thereafter, home prices are projected to remain flat in the first six months, and
to increase 0.5 percent in the next six months, 3 percent in the second year and 4 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.
The scenario of cash flows determined based on the model approach described above reflects a best
estimate scenario and includes a base case current to trough housing price forecast and a base case
housing price recovery path described in the prior paragraph. 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 we do
not intend to sell or it is not more likely than not we will be required to sell, any impairment is
considered temporary.
67
At December 31, 2009, our private-label MBS cash flow analysis did not project any credit
losses. Even under an adverse scenario that delays recovery of the housing price index, no credit
losses were projected. We do not intend to sell these securities and it is not more likely than not
that we will be required to sell these securities before recovery of their amortized cost bases. As
a result, we do not consider any of these securities to be other-than-temporarily impaired at
December 31, 2009.
Consolidated Obligations
Consolidated obligations, which include discount notes and bonds, are the primary source
of funds to support our advances, mortgage loans, and investments. We use derivatives to
restructure interest rates on consolidated obligations to better manage our interest rate risk and
reduce funding costs. This generally means converting fixed rates to variable rates. At December
31, 2009, the book value of the consolidated obligations issued on our behalf totaled $59.9 billion
compared to $62.8 billion at December 31, 2008.
Discount Notes
The following table shows our discount notes, all of which are due within one year, at
December 31, 2009 and 2008 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Par value |
|
$ |
9,419 |
|
|
$ |
20,153 |
|
Discounts |
|
|
(2 |
) |
|
|
(92 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total discount notes |
|
$ |
9,417 |
|
|
$ |
20,061 |
|
|
|
|
|
|
|
|
The decrease in discount notes was primarily due to decreased short-term funding needs in 2009
as a result of reduced demand for short-term advances and limited short-term investment
opportunities. In addition, during the second half of 2009, spreads to LIBOR on our discount notes
increased, thereby increasing the cost of discount notes. This resulted in lower amounts of
discount note issuances and higher amounts of bond issuances during the second half of 2009.
68
Bonds
The following table shows our bonds based on remaining term to maturity at December 31, 2009
and 2008 (dollars in millions):
|
|
|
|
|
|
|
|
|
Year of Maturity |
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
2009 |
|
$ |
|
|
|
$ |
15,963 |
|
2010 |
|
|
23,040 |
|
|
|
6,159 |
|
2011 |
|
|
9,089 |
|
|
|
4,670 |
|
2012 |
|
|
5,337 |
|
|
|
2,231 |
|
2013 |
|
|
2,523 |
|
|
|
2,417 |
|
2014 |
|
|
1,422 |
|
|
|
501 |
|
Thereafter |
|
|
6,962 |
|
|
|
7,908 |
|
Index amortizing notes |
|
|
1,950 |
|
|
|
2,420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total par value |
|
|
50,323 |
|
|
|
42,269 |
|
|
|
|
|
|
|
|
|
|
Premiums |
|
|
50 |
|
|
|
51 |
|
Discounts |
|
|
(35 |
) |
|
|
(41 |
) |
Hedging fair value adjustments |
|
|
|
|
|
|
|
|
Cumulative fair value loss |
|
|
149 |
|
|
|
348 |
|
Basis adjustments from terminated
and ineffective hedges |
|
|
* |
|
|
|
95 |
|
Fair value option adjustments |
|
|
|
|
|
|
|
|
Net loss on bonds held at fair value |
|
|
4 |
|
|
|
|
|
Change in accrued interest |
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total bonds |
|
$ |
50,495 |
|
|
$ |
42,722 |
|
|
|
|
|
|
|
|
|
|
|
* |
|
Amount is less than one million. |
Bonds outstanding included the following at December 31, 2009 and 2008 (dollars in
millions):
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Par amount of bonds |
|
|
|
|
|
|
|
|
Noncallable or nonputable |
|
$ |
44,381 |
|
|
$ |
39,214 |
|
Callable |
|
|
5,942 |
|
|
|
3,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total par value |
|
$ |
50,323 |
|
|
$ |
42,269 |
|
|
|
|
|
|
|
|
69
The increase in bonds was primarily due to improved spreads to LIBOR on our bonds during the
second half of 2009. Improved spread to LIBOR decreased the cost of bonds and allowed us to better
match fund our longer-term assets with longer-term debt. Cumulative fair value losses decreased
$199 million at December 31, 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 $95 million at December 31, 2009 when
compared to December 31, 2008 as a result of us unwinding certain interest rate swaps.
The increase in bonds was partially offset by us calling and extinguishing debt in 2009. We
called and extinguished higher-costing debt primarily to lower our relative cost of funds in the
future. The following table summarizes the par value and weighted average interest rate of bonds
called and extinguished for the years ended December 31, 2009, 2008, and 2007 (dollars in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Bonds Called |
|
|
|
|
|
|
|
|
|
|
|
|
Par value |
|
$ |
5,095 |
|
|
$ |
7,302 |
|
|
$ |
1,228 |
|
Weighted average interest rate |
|
|
2.83 |
% |
|
|
4.32 |
% |
|
|
5.19 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds Extinguished |
|
|
|
|
|
|
|
|
|
|
|
|
Par value |
|
$ |
943 |
|
|
$ |
510 |
|
|
$ |
|
|
Weighted average interest rate |
|
|
5.33 |
% |
|
|
2.55 |
% |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total par value |
|
$ |
6,038 |
|
|
$ |
7,812 |
|
|
$ |
1,228 |
|
|
|
|
|
|
|
|
|
|
|
In addition, we elected the fair value option on approximately $6.0 billion of bonds that did
not qualify for hedge accounting in 2009. These bonds, coupled with related derivatives, were
unable to achieve hedge effectiveness. Therefore, in order to achieve some offset to the
mark-to-market on the fair value option bonds, we executed economic derivatives. During 2009, we
recorded $25.0 million of fair value adjustment losses on these fair value option bonds. These
losses were partially offset by gains on the economic derivatives. Refer to Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operation Results of Operations
Hedging Activities for additional information on the impact of these economic derivatives.
70
Deposits
The following table shows our deposits by product type at December 31, 2009 and 2008 (dollars
in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
Percent of |
|
|
|
|
|
|
Percent of |
|
|
|
Amount |
|
|
Total |
|
|
Amount |
|
|
Total |
|
Interest-bearing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overnight |
|
$ |
367 |
|
|
|
30.0 |
% |
|
$ |
694 |
|
|
|
46.4 |
% |
Demand |
|
|
293 |
|
|
|
23.9 |
|
|
|
230 |
|
|
|
15.3 |
|
Term |
|
|
484 |
|
|
|
39.5 |
|
|
|
465 |
|
|
|
31.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing |
|
|
1,144 |
|
|
|
93.4 |
|
|
|
1,389 |
|
|
|
92.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing |
|
|
81 |
|
|
|
6.6 |
|
|
|
107 |
|
|
|
7.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
1,225 |
|
|
|
100.0 |
% |
|
$ |
1,496 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Our deposits decreased $0.3 billion at December 31, 2009 when compared to December 31, 2008.
The level of deposits will vary based on member alternatives for short-term investments.
The table below presents time deposits in denominations of $100,000 or more by remaining
maturity at December 31, 2009 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Over three |
|
|
Over six |
|
|
|
|
|
|
Three |
|
|
months but |
|
|
months but |
|
|
|
|
|
|
months |
|
|
within six |
|
|
within 12 |
|
|
|
|
|
|
or less |
|
|
months |
|
|
months |
|
|
Total |
|
Time deposits |
|
$ |
62 |
|
|
$ |
299 |
|
|
$ |
123 |
|
|
$ |
484 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
At December 31, 2009, total capital (including capital stock, retained earnings, and
accumulated other comprehensive loss) was $2.9 billion compared with $3.0 billion at December 31,
2008. The decrease was primarily due to a decrease in activity-based capital stock as a result of
lower advance and mortgage loan volumes. This decrease was partially offset by unrealized gains on
available-for-sale securities recorded in accumulated other comprehensive loss, and increased
retained earnings. Beginning on December 22, 2008 we suspended our normal practice of voluntarily
repurchasing excess activity-based capital stock. This action was
taken after careful consideration of the unstable market conditions
and stressed economic environment at that time. Our Board of
Directors and management felt this action was necessary to preserve
capital that supports our service to members. As a result of improved market conditions during 2009, we resumed our normal practice
of voluntarily repurchasing excess activity-based capital stock on December 18, 2009 and
repurchased $569.6 million of excess activity-based capital stock from our members.
71
Derivatives
The notional amount of derivatives reflects the volume of our hedges, but it does not
measure our credit exposure because there is no principal at risk. The following table categorizes
the notional amount of our derivatives at December 31, 2009 and 2008 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Notional amount of derivatives |
|
|
|
|
|
|
|
|
Interest rate swaps |
|
|
|
|
|
|
|
|
Noncallable |
|
$ |
34,158 |
|
|
$ |
17,773 |
|
Callable by counterparty |
|
|
9,386 |
|
|
|
9,261 |
|
Callable by the Bank |
|
|
60 |
|
|
|
77 |
|
|
|
|
|
|
|
|
|
|
|
43,604 |
|
|
|
27,111 |
|
|
|
|
|
|
|
|
|
|
Interest rate caps |
|
|
3,240 |
|
|
|
2,340 |
|
Forward settlement agreements |
|
|
27 |
|
|
|
289 |
|
Mortgage delivery commitments |
|
|
27 |
|
|
|
288 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total notional amount |
|
$ |
46,898 |
|
|
$ |
30,028 |
|
|
|
|
|
|
|
|
The notional amount of our derivative contracts increased approximately $16.9 billion at
December 31, 2009 when compared to December 31, 2008. The increase was primarily due to the
utilization of interest rate swaps to hedge consolidated obligations for interest rate management,
thereby converting fixed rate debt to floating rate debt. In addition, in 2009 we swapped more
fixed rate advances as a result of market conditions and the low interest rate environment. We also
entered into interest rate swaps, treated as economic hedges, to hedge certain investments, including
TLGP debt and taxable municipal bonds.
72
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. 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. Amounts at December 31,
2009 and 2008 were as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
Estimated |
|
|
|
Notional |
|
|
Fair Value |
|
|
Notional |
|
|
Fair Value |
|
Advances |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
13,204 |
|
|
$ |
(613 |
) |
|
$ |
11,501 |
|
|
$ |
(1,109 |
) |
Economic |
|
|
746 |
|
|
|
(1 |
) |
|
|
527 |
|
|
|
(5 |
) |
Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
|
239 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
Economic |
|
|
1,525 |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
Mortgage assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward settlement agreements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Economic |
|
|
27 |
|
|
|
* |
|
|
|
289 |
|
|
|
(2 |
) |
Mortgage delivery commitments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Economic |
|
|
27 |
|
|
|
* |
|
|
|
288 |
|
|
|
2 |
|
Consolidated obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
|
20,753 |
|
|
|
147 |
|
|
|
11,969 |
|
|
|
330 |
|
Economic |
|
|
6,830 |
|
|
|
4 |
|
|
|
3,030 |
|
|
|
2 |
|
Discount notes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Economic |
|
|
307 |
|
|
|
* |
|
|
|
84 |
|
|
|
1 |
|
Balance Sheet |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Economic |
|
|
3,240 |
|
|
|
51 |
|
|
|
2,340 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total notional and fair value |
|
$ |
46,898 |
|
|
$ |
(385 |
) |
|
$ |
30,028 |
|
|
$ |
(779 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives, excluding accrued interest |
|
|
|
|
|
|
(385 |
) |
|
|
|
|
|
|
(779 |
) |
Accrued interest |
|
|
|
|
|
|
63 |
|
|
|
|
|
|
|
79 |
|
Net cash collateral |
|
|
|
|
|
|
53 |
|
|
|
|
|
|
|
268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net derivative balance |
|
|
|
|
|
$ |
(269 |
) |
|
|
|
|
|
$ |
(432 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net derivative assets |
|
|
|
|
|
|
11 |
|
|
|
|
|
|
|
3 |
|
Net derivative liabilities |
|
|
|
|
|
|
(280 |
) |
|
|
|
|
|
|
(435 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net derivative balance |
|
|
|
|
|
$ |
(269 |
) |
|
|
|
|
|
$ |
(432 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Amount is 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 our 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 losses and
gains on the related hedged items. Economic derivatives do not have an offsetting fair value
adjustment as they are not associated with a hedged item, however, they do offset the
mark-to-market on certain assets and liabilities (i.e., trading investments and fair value option
bonds).
73
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.
Sources of Liquidity
Our primary source of liquidity was proceeds from the issuance of consolidated obligations
(bonds and discount notes) in the capital markets. Although we are primarily liable for our portion
of consolidated obligations (i.e. those issued on our behalf), we are also jointly and severally
liable with the other 11 FHLBanks for the payment of principal and interest on all consolidated
obligations issued by the FHLBank System. The par amounts of outstanding consolidated obligations
issued on behalf of other FHLBanks for which the Bank is jointly and severally liable were
approximately $870.8 billion and $1,189.1 billion at December 31, 2009 and 2008.
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 2008, the credit and liquidity crisis put a strain on available liquidity in the
capital markets creating increased demand by our members for advances. As a result of our credit
quality and standing in the capital markets, we had ready access to funding at relatively
competitive interest rates. Additionally during 2008, several events increased longer-term funding
costs relative to shorter-term funding costs. Therefore, in order to meet the demands of our
members as well as support our liquidity requirements, we primarily issued discount notes to fund
both our short- and long-term assets during 2008. This was evidenced by the receipt of $1,143.3
billion in proceeds from the issuance of discount notes and $21.1 billion in proceeds from the
issuance of bonds during 2008.
As the credit and liquidity crisis continued in 2009, numerous government initiatives were
created to provide liquidity and stimulate the economy, including the U.S. Treasurys Financial
Stability Plan, the FDICs TLGP, and the purchase of agency debt securities by the Federal Reserve.
These government initiatives ultimately had a negative impact on the demand by our members for
advances in 2009 thereby reducing our funding needs. In addition, spreads to LIBOR on our discount
notes increased as a result of decreases in three-month LIBOR. Due to changes in market conditions
and our debt spreads relative to LIBOR, discount notes became more expensive and bonds became less
expensive, which resulted in lower amounts of discount note issuances and higher amounts of bond
issuances during the last six months of 2009. As a result, we were able to better match fund our
longer-term assets with longer-term debt. During 2009, proceeds on bonds were $32.4 billion and
proceeds on discount notes were $719.3 billion.
74
Other Sources of Liquidity
We utilize several other sources of liquidity to carry out our business activities. These
include cash, interbank loans, payments collected on advances and mortgage loans, proceeds from the
issuance of capital stock, member deposits, and current period earnings. During the year ended
December 31, 2009, proceeds from the sale of mortgage loans and gains on the sale of U.S. Treasury
obligations and related derivatives also served as additional sources of liquidity.
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 consolidated obligations issued by the GSEs, including FHLBanks, up to an aggregate
principal amount of $4.0 billion. As a result of the Housing Act, this authorization was
supplemented with a temporary authorization for the U.S. Treasury to purchase consolidated
obligations issued by the FHLBanks in any amount deemed appropriate under certain conditions. This
temporary authorization expired December 31, 2009 and no purchases were made under the temporary
authority.
In addition, a Lending Agreement with the U.S. Treasurys Government Sponsored Enterprise
Credit Facility (GSECF) was established as a contingent source of liquidity for the GSEs if needed.
We did not draw on this during 2009 and this credit facility expired as of December 31, 2009.
Uses of Liquidity
We use proceeds from the issuance of consolidated obligations primarily to fund advances as
well as investment purchases. In addition, during the year ended December 31, 2009, we used
proceeds from the sale of U.S. Treasury obligations and termination of the related derivatives and
the sale of mortgage loans to purchase investments as well as early extinguish higher costing debt.
Advances
We use proceeds from the issuance of consolidated obligations to fund advances. During 2008,
advance disbursements totaled $330.4 billion. As more funding options were available to our members
and their deposit bases grew, their need for our advances declined significantly. Disbursements to
members for the origination of advances declined to $38.0 billion in 2009.
75
Investments
We use proceeds from the issuance of consolidated obligations and capital to fund the purchase
of additional investments to both provide liquidity and increase our investment income. During
2009, we used a portion of the proceeds from the sale of mortgage loans to purchase additional
investments that replaced the mortgage loans we sold. Short-term investment opportunities were
limited in 2009 due to increased deposit levels and the availability of various government funding
programs for financial institutions serving as our counterparties. The low growth market
environment and the relative improvement in available funding sources resulted in decreased
interest spreads on short-term investments. Although we continue to explore new investment
opportunities that provide more favorable returns, the compressed spreads reduced our earnings
potential on these investments. Excluding overnight investments, we purchased $27.1 billion of par
value investments during the year ended December 31, 2009 compared to $24.2 billion during the same
period in 2008.
Other Uses of Liquidity
During 2009, we also used proceeds from the sale of U.S. Treasury obligations and termination
of the related derivatives and the sale of mortgage loans to extinguish approximately $0.9 billion
par value debt and, as a result, recorded losses of approximately $89.9 million in other income
(loss). Most of the extinguished debt was replaced with lower costing debt and we expect such
losses will be offset in future periods through lower interest costs.
Other uses of liquidity include purchases of mortgage loans, repayment of member deposits,
consolidated obligations, other borrowings, and interbank loans, redemption or repurchase of
capital stock, and payment of dividends.
76
Liquidity Requirements
Statutory Requirements
Finance Agency regulations mandate 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 at December 31, 2009 and 2008 (dollars in billions):
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Unencumbered marketable assets
maturing within one year |
|
$ |
4.0 |
|
|
$ |
4.8 |
|
Advances maturing in seven days or
less |
|
|
0.5 |
|
|
|
1.3 |
|
Unencumbered assets available for
repurchase agreement borrowings |
|
|
15.5 |
|
|
|
10.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liquidity |
|
$ |
20.0 |
|
|
$ |
16.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity needs for five calendar days |
|
$ |
1.9 |
|
|
$ |
3.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liquidity as a percent of
five day requirement |
|
|
1,053 |
% |
|
|
437 |
% |
|
|
|
|
|
|
|
Second, Finance Agency regulations require us 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 regulation at December 31, 2009 and 2008 (dollars in
billions):
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Advances with maturities not exceeding five years |
|
$ |
24.6 |
|
|
$ |
28.1 |
|
Deposits in banks or trust companies |
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
25.1 |
|
|
$ |
28.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits1 |
|
$ |
1.2 |
|
|
$ |
1.5 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Amount does not reflect the effect of derivative master netting arrangements with
counterparties. |
77
Third, Finance Agency regulations require us 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 regulation
at December 31, 2009 and 2008 (dollars in billions):
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Total qualifying assets |
|
$ |
64.6 |
|
|
$ |
68.1 |
|
Less: pledged assets |
|
|
0.1 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total qualifying assets free of lien or pledge |
|
$ |
64.5 |
|
|
$ |
67.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated obligations outstanding |
|
$ |
59.9 |
|
|
$ |
62.8 |
|
|
|
|
|
|
|
|
We were in compliance with all three of our liquidity requirements at December 31, 2009 and
2008.
In addition to the liquidity measures discussed above, the Finance Agency has provided us 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 cannot access the capital markets for the issuance of debt for a period
of 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 cannot access the capital markets for the issuance of debt for a period of 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 us to provide advances to our members.
The following table shows our number of days of liquidity under both liquidity scenarios
previously described:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
Guidance |
|
|
|
2009 |
|
|
Requirement |
|
|
|
|
|
|
|
|
|
|
Roll-off scenario |
|
|
36 |
|
|
|
15 |
|
Renew scenario |
|
|
22 |
|
|
|
5 |
|
At December 31, 2009, the actual days of liquidity under both scenarios exceeded the guidance
requirements. We maintained a high level of liquidity at December 31, 2009 due to an expected
slowdown of market funding opportunities and investment activity near year end.
78
Operational and Contingent Liquidity-Bank 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. We
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 at December 31, 2009 and 2008
(dollars in billions):
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Required liquidity |
|
$ |
(1.9 |
) |
|
$ |
(3.9 |
) |
Available assets |
|
|
15.8 |
|
|
|
11.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess contingent liquidity |
|
$ |
13.9 |
|
|
$ |
7.2 |
|
|
|
|
|
|
|
|
We were in compliance with our contingent liquidity policy at December 31, 2009 and 2008.
Capital
Capital Requirements
The FHLBank Act requires that we maintain at all times permanent capital greater than or equal
to the sum of our 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 a
minimum four percent capital-to-asset ratio, which is defined as total capital divided by total
assets. The FHLBank Act also imposes a five percent minimum leverage ratio, which is defined as the
sum of permanent capital weighted 1.5 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 our capital falls below the above requirements, the Finance Agency has authority to
take actions necessary to return us to safe and sound business operations within the regulatory
minimum ratios. The Finance Agency promulgated a final rule on capital classifications and critical
capital levels for the FHLBanks. Under this rule, it has been determined that we meet the
adequately capitalized classification, which is the highest rating. For details on this rule,
refer to Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operation Legislative and Regulatory Developments.
79
The following table shows our compliance with the Finance Agencys capital requirements at
December 31, 2009 and 2008 (dollars in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
Required |
|
|
Actual |
|
|
Required |
|
|
Actual |
|
Regulatory capital requirements: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk based capital |
|
$ |
827 |
|
|
$ |
2,953 |
|
|
$ |
1,968 |
|
|
$ |
3,174 |
|
Total capital-to-asset ratio |
|
|
4.00 |
% |
|
|
4.57 |
% |
|
|
4.00 |
% |
|
|
4.66 |
% |
Total regulatory capital |
|
$ |
2,586 |
|
|
$ |
2,953 |
|
|
$ |
2,725 |
|
|
$ |
3,174 |
|
Leverage ratio |
|
|
5.00 |
% |
|
|
6.85 |
% |
|
|
5.00 |
% |
|
|
6.99 |
% |
Leverage capital |
|
$ |
3,233 |
|
|
$ |
4,429 |
|
|
$ |
3,406 |
|
|
$ |
4,761 |
|
The decrease in the regulatory capital-to-asset ratio from 4.66 percent at December 31, 2008
to 4.57 percent at December 31, 2009, was primarily due to the increase in our investments.
Although the ratio declined, it exceeds the regulatory requirement and we do not expect it to
decline below that requirement. Our regulatory capital-to-asset ratio at December 31, 2009 and 2008
would have been 4.47 percent and 4.58 percent if all excess capital stock had been repurchased.
We issue a single class of capital stock (Class B stock). Our Class B capital stock has a par
value of $100 per share, and all shares are purchased, repurchased, redeemed, or transferred only
at par value. We have two subclasses of Class B stock: membership stock and activity-based stock.
We cannot redeem or repurchase any membership or activity-based stock if the repurchase or
redemption would cause a member to be out of compliance with its required investment. The
membership stock and activity-based stock percentages may be adjusted by our Board of Directors
within ranges established in the Capital Plan. Our Board of Directors has a right and an obligation
to call for additional capital stock purchases by our members if certain conditions exist.
Holders of Class B stock own a proportionate share of our retained earnings, paid-in surplus,
undivided profits, and equity reserves. Holders of Class B stock have no right to receive any
portion of these values except through the declaration of dividends or capital distributions upon
our liquidation. Our Board of Directors may declare and pay a dividend only from current earnings
or retained earnings. The Board of Directors may not declare or pay any dividends if we are not in
compliance with our capital requirements or, if after paying the dividend, we would not be in
compliance with our capital requirements.
Stock owned in excess of a members minimum investment requirement is known as excess stock. A
member may request redemption of any or all of its excess stock by providing us with written notice
five years in advance of the redemption. A stockholder may not have more than one redemption
request pending at the same time for any share of stock.
Under our Capital Plan, we may repurchase excess membership stock at our discretion and upon
15 days written notice. If a members membership stock balance exceeds the $10.0 million cap as a
result of a merger or consolidation, we may repurchase the amount of excess stock necessary to make
the members membership stock balance equal to the $10.0 million cap.
80
In accordance with our Capital Plan, we may repurchase excess activity-based capital stock
that exceeds an operational threshold on a scheduled monthly basis, subject to certain limitations
set forth in the Capital Plan. The current operational threshold is $50,000 and may be changed by
the Board of Directors within a range specified in the Capital Plan with at least 15 days prior
written notice. We may also change the scheduled date for repurchasing excess activity-based stock
with at least 15 days prior written notice.
During the fourth quarter of 2008, we suspended our regular practice of voluntarily
repurchasing excess activity-based capital stock. This action was taken after careful consideration
of the unstable market conditions and stressed economic environment at that time. Our Board of
Directors and management felt this action was necessary to preserve capital that supports our
service to members. Due to improved market conditions during 2009, we resumed our normal practice
of voluntarily repurchasing excess activity-based capital stock on December 18, 2009 and
repurchased $569.6 million of activity-based capital stock.
Because membership is voluntary for all members, a member can provide a notice of withdrawal
from membership at any time. If a member provides notice of withdrawal from membership, we will not
repurchase or redeem any membership stock until five years from the date of receipt of a notice of
withdrawal. If a member that withdraws from membership owns any activity-based capital stock, we
will not redeem any required activity-based capital stock until the activity no longer remains
outstanding.
A member may cancel any pending notice of redemption before the completion of the five-year
redemption period by providing written notice of cancellation. We charge a cancellation fee, which
is currently set at a range of one to five percent of the par value of the shares of capital stock
subject to redemption. Our Board of Directors retains the right to change the cancellation fee at
any time. We will provide at least 15 days advance written notice to each member of any adjustment
or amendment to our cancellation fee.
In accordance with the FHLBank Act, each class of our stock is considered putable by the
member. There are significant statutory and regulatory restrictions on the obligation or right to
redeem outstanding capital stock.
In no case may we redeem any capital stock if, following such redemption, we would fail to
satisfy our minimum capital requirements (i.e., a statutory capital-to-asset ratio requirement and
leverage requirement established by the FHLBank Act and a regulatory risk based capital-to-asset
ratio requirement established by the Finance Agency). By law, all member holdings of our stock
immediately become nonredeemable if we become undercapitalized.
In no case may we redeem any capital stock without the prior approval of the Finance Agency if
either our Board of Directors or the Finance Agency determines that we incurred or are likely to
incur losses resulting or likely to result in a charge against capital.
81
Additionally, we cannot redeem shares of capital stock from any member if the principal or
interest on any consolidated obligation of the FHLBank System is not paid in full when due, or
under certain circumstances if (i) we project, at any time, that we will fail to comply with
statutory or regulatory liquidity requirements, or will be unable to timely and fully meet all of
our current obligations; (ii) we actually fail to comply with statutory or regulatory liquidity
requirements or to timely and fully meet all of our current obligations, or enter or negotiate to
enter into an agreement with one or more other FHLBanks to obtain financial assistance to meet our
current obligations; or (iii) the Finance Agency determines that we will cease to be in compliance
with statutory or regulatory liquidity requirements, or will lack the capacity to timely or fully
meet all of our current obligations.
If we are liquidated, after payment in full to our creditors, our stockholders will be
entitled to receive the par value of their capital stock as well as any retained earnings, paid-in
surplus, undivided profits, and equity reserves, if any, in an amount proportional to the
stockholders share of the total shares of capital stock. In the event of a merger or
consolidation, our Board of Directors shall determine the rights and preferences of our
stockholders, subject to any terms and conditions imposed by the Finance Agency.
Capital Stock
We had 24.6 million shares of capital stock outstanding at December 31, 2009 compared with
27.8 million shares outstanding at December 31, 2008. We issued 2.7 million shares to members and
repurchased 5.7 million shares from members during 2009. We issued 55.8 million shares to members
and repurchased 55.1 million shares from members during 2008. Approximately 78 percent and 83
percent of our capital stock outstanding at December 31, 2009 and 2008 was activity-based stock
that fluctuates primarily with the outstanding balances of advances made to members and mortgage
loans purchased from members.
Our capital stock balance categorized by type of financial services company, including
mandatorily redeemable capital stock owned by former members, are noted in the following table at
December 31, 2009 and 2008 (dollars in millions):
|
|
|
|
|
|
|
|
|
Institutional Entity |
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Commercial Banks |
|
$ |
1,243 |
|
|
$ |
1,314 |
|
Insurance Companies |
|
|
982 |
|
|
|
1,203 |
|
Savings and Loan Associations |
|
|
141 |
|
|
|
170 |
|
Credit Unions |
|
|
95 |
|
|
|
94 |
|
Former Members |
|
|
8 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total regulatory capital stock |
|
$ |
2,469 |
|
|
$ |
2,792 |
|
|
|
|
|
|
|
|
82
Our members are required to maintain a certain minimum capital stock investment. Each member
must maintain Class B membership stock in an amount equal to 0.12 percent of the members total
assets as of the preceding December 31st subject to a cap of $10.0 million and a floor
of $10,000. Each member must also maintain Class B activity-based stock in an amount equal to the
total of:
|
(1) |
|
A specified percentage of its outstanding advances. As of December 31, 2009 the
percentage was 4.45 percent. |
|
(2) |
|
A specified percentage of its acquired member assets. As of December 31, 2009, the
percentage was 4.45 percent. |
|
(3) |
|
A specified percentage of its standby letters of credit. As of December 31, 2009, the
percentage was 0.00 percent. |
|
(4) |
|
A specified percentage of its advance commitments. As of December 31, 2009, the
percentage was 0.00 percent. |
|
(5) |
|
A specified percentage of its acquired member assets commitments. As of December 31,
2009, the percentage was 0.00 percent. |
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 our Board of Directors.
At December 31, 2009 and 2008, approximately 85 percent and 92 percent of our total capital was
capital stock.
Capital stock owned by members in excess of their minimum investment requirements is known as
excess capital stock. Our excess capital stock including amounts classified as mandatorily
redeemable capital stock was $61.8 million and $61.1 million at December 31, 2009 and 2008.
Mandatorily Redeemable Capital Stock
We reclassify stock subject to redemption from equity to a liability when a member engages in
any of the following activities:
|
(1) |
|
Submits a written notice to redeem all or part of the members capital stock. |
|
(2) |
|
Submits a written notice of the members intent to withdraw from membership, which
automatically commences a five-year redemption period. |
|
(3) |
|
Terminates its membership voluntarily as a result of a merger or consolidation into a
nonmember or into a member of another FHLBank, or involuntarily as a result of action by
our Board of Directors. |
83
When any of the above events occur, we will reclassify capital stock from equity to a
liability at fair value. The fair value of capital stock subject to mandatory redemption is
generally reported at par value as stock can only be acquired by members at par value and redeemed
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. Dividends related to
capital stock classified as a liability are accrued at the expected dividend rate and reported as
interest expense in the Statements of Income. The repayment of these mandatorily redeemable
financial instruments is reflected as a cash outflow in the financing activities section of the
Statements of Cash Flows.
If a member cancels its written notice of redemption or notice of withdrawal, we will
reclassify mandatorily redeemable capital stock from a liability to equity. After the
reclassification, dividends on the capital stock will no longer be classified as interest expense.
Although the mandatorily redeemable capital stock is not included in capital for financial
reporting purposes, Finance Agency interpretation requires that such outstanding capital stock be
considered capital for determining compliance with our regulatory capital requirements.
At December 31, 2009, we had $8.3 million in capital stock subject to mandatory redemption
from 14 former members. At December 31, 2008, we had $10.9 million in capital stock subject to
mandatory redemption from 10 former members. The decrease in mandatorily redeemable capital stock
at December 31, 2009 was primarily due to the decrease in advance balances with former members
whose stock was classified as mandatorily redeemable and therefore repurchased as activity paid
down.
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 based on our practices at December
31, 2009 and 2008 (dollars in millions):
|
|
|
|
|
|
|
|
|
Year of Redemption |
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
2009 |
|
$ |
|
|
|
$ |
3 |
|
2010 |
|
|
7 |
|
|
|
6 |
|
2011 |
|
|
1 |
|
|
|
1 |
|
2012 |
|
|
* |
|
|
|
1 |
|
2013 |
|
|
* |
|
|
|
* |
|
2014 |
|
|
* |
|
|
|
* |
|
Thereafter |
|
|
* |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
8 |
|
|
$ |
11 |
|
|
|
|
|
|
|
|
|
|
|
* |
|
Amount is less than one million. |
A majority of the capital stock subject to mandatory redemption at December 31, 2009 and
December 31, 2008 was due to voluntary termination of membership as a result of out of district
mergers or consolidations.
84
Dividends
Our Board of Directors may declare and pay dividends in either cash or capital stock or a
combination thereof; however, historically, we have only paid cash dividends. Under Finance Agency
regulations, we are prohibited from paying a dividend in the form of additional shares of capital
stock if, after the issuance, the outstanding excess capital stock would be greater than one
percent of our total assets. By regulation, we may pay dividends from current earnings or retained
earnings, but we may not declare a dividend based on projected or anticipated earnings. Our Board
of Directors may not declare or pay dividends if it would result in our non-compliance with capital
requirements. Per regulation, we may not declare or pay a dividend if the par value of the stock is
impaired or is projected to become impaired after paying such dividend.
Our ERMP requires a minimum retained earnings level. If actual retained earnings fall below
the retained earnings requirement, we, as determined by our Board of Directors, are required to
establish an action plan, which may include a dividend cap at less than the current earned
dividend, to enable us to return to our required level of retained earnings within twelve months.
At December 31, 2009 our actual retained earnings were above the retained earnings requirement, and
therefore no action plan was necessary. Further discussion on our risk management metrics are
discussed in Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operation Risk Management.
Our dividend philosophy is to pay out a sustainable dividend equal to or above the average
three-month LIBOR rate for the covered period. While three-month LIBOR is the Banks dividend
benchmark, the actual dividend payout is impacted by Board of Director polices, regulatory
requirements, financial projections, and actual performance. Therefore, the actual dividend rate
may be higher or lower than three-month LIBOR.
On February 18, 2010, the Board of Directors declared and approved a fourth quarter 2009
dividend at an annualized rate of 2.00 percent of average capital stock for the quarter. The
dividend was paid on February 25, 2010. The dividend for the fourth quarter 2009 totaled
$14.6 million, which was 36.1 percent of net income during the fourth quarter. Dividends declared
that related to the calendar year 2009 were at an annual rate of 1.75 percent compared to average
three-month LIBOR for the year of 0.69 percent. Dividends declared that related to calendar year
2008 were at an annual rate of 3.00 percent compared to average three-month LIBOR for the year of
2.93 percent.
Critical Accounting Policies and Estimates
Our accounting policies are fundamental to understanding Managements Discussion and Analysis
of Financial Condition and Results of Operation. We identified certain policies as critical
because they require management to make particularly difficult, subjective, and/or complex
judgments about matters that are inherently uncertain and because of the likelihood that materially
different amounts would be reported under different conditions or using different assumptions.
85
Several of these accounting policies involve the use of estimates that we consider critical
because
|
|
|
they are likely to change from period to period due to significant management
judgments and assumptions about highly complex and uncertain matters. |
|
|
|
they use a different estimate or a change in estimate that could have a material
impact on our reported results of operations or financial condition. |
Estimates and assumptions that are significant to the results of operations and financial
condition include those used in conjunction with
|
|
|
fair value estimates. |
|
|
|
|
allowance for credit losses on advances and mortgage loans. |
|
|
|
|
derivative and hedge accounting. |
|
|
|
|
other-than-temporary impairment. |
We evaluate our critical accounting policies and estimates on an ongoing basis. While
management believes our estimates and assumptions are reasonable based on historical experience and
other factors, actual results could differ from those estimates and differences could be material
to the financial statements.
Fair Value Estimates
We carry certain assets and liabilities on the Statements of Condition at fair value,
including investments classified as trading and available-for-sale, derivatives, and certain bonds
for which the fair value option was elected. 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 values play an important role in the valuation of certain of our assets, liabilities, and
hedging transactions. 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
values are determined based on valuation models that use either:
|
|
|
discounted cash flows, using market estimates of interest rates and volatility; |
|
|
|
prices of similar instruments. |
86
Pricing models and their underlying assumptions are based on our best estimates with respect
to:
These assumptions may have a significant effect on the reported fair values of assets and
liabilities, including derivatives, and the income and expense related thereto. The use of
different assumptions, as well as changes in market conditions, may result in materially different
fair values.
The valuation of derivative assets and liabilities must reflect the value of the instrument
including the values associated with counterparty risk and must also take into account the
companys own credit standing. We have collateral agreements with all our derivative counterparties
and enforce collateral exchanges. Each derivative counterparty has bilateral collateral thresholds
with us that take into account both our and the counterpartys credit rating. As a result of these
practices and agreements, we concluded that the impact of the credit differential between us and
our 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
liabilities in the Statements of Condition at December 31, 2009 and 2008.
We categorize our financial instruments carried at fair value into a three-level
classification. The valuation hierarchy is based upon the transparency (observable or unobservable)
of inputs to the valuation of an asset or liability as of the measurement date. Observable inputs
reflect market data obtained from independent sources, while unobservable inputs reflect our market
assumptions. We utilize valuation techniques that maximize the use of observable inputs and
minimize the use of unobservable inputs. We do not have any assets and liabilities carried at level
3 fair value on the Statements of Condition at December 31, 2009 and 2008.
For further discussion regarding how we measure financial assets and liabilities at fair
value, see Item 8. Financial Statements and Supplementary Data Note 18 Estimated Fair Values.
87
Allowance for Credit Losses
Advances
We are required by Finance Agency regulation to obtain sufficient collateral on advances to
protect against losses and to accept only certain collateral on advances such as 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 Ginnie Mae;
cash deposited with us; guaranteed student loans; and other real estate-related collateral
acceptable to us provided such collateral has a readily ascertainable value and we can perfect a
security interest in such property. Additionally, CFIs may pledge secured small business loans,
small farm loans, and agribusiness loans as collateral. At December 31, 2009 and 2008, we had
rights to collateral (either loans or securities) on a member-by-member basis, with a discounted
value in excess of outstanding advances. As additional security, the FHLBank Act provides that we
have a lien on each borrowers capital stock in the Bank; however, capital stock cannot be pledged
as collateral to secure credit exposures. We have not incurred any credit losses on advances since
our inception and, based on our credit extension and collateral policies, we do not anticipate any
credit losses on our advances. Accordingly, we have not provided any allowance for credit losses on
advances at December 31, 2009. For additional discussion regarding our advance collateral, see
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operation
Risk Management Credit Risk Advances.
Mortgage Loans
We established an allowance for credit losses on our conventional mortgage loan portfolio. The
allowance is an estimate of probable losses contained in the portfolio. We do not maintain an
allowance for loan losses on our government-insured mortgage loan portfolio because of the (i) U.S.
Government guarantee of the loans and (ii) contractual obligation of the loan servicer to
repurchase the loan when certain criteria are met.
During the fourth quarter of 2009, we revised our allowance for credit losses methodology for
conventional MPF loans. Under the prior methodology, we estimated our allowance for credit losses
based primarily upon (i) the current level of nonperforming loans (i.e., those loans 90 days or
more past due), (ii) historical losses experienced over several years, and (iii) credit enhancement
fees available to recapture expected losses assuming a constant portfolio balance.
Under the revised methodology, we estimate our allowance for credit losses based primarily
upon a rolling twelve-month average of (i) loan delinquencies, (ii) loans migrating to real estate
owned, and (iii) actual historical losses, as well as credit enhancement fees available to
recapture expected losses assuming a declining portfolio balance adjusted for prepayments.
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We implemented this revised methodology in order to better incorporate current market
conditions. For the year ended December 31, 2009, we increased our allowance for credit losses
through a provision of $1.5 million, of which $0.1 million related to the change in allowance
methodology. The remaining provision of $1.4 million was due to
increased delinquencies and loss severities throughout 2009. For additional discussion on our allowance for credit losses, see Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operation Risk
Management Credit Risk Mortgage Assets.
Derivative and Hedge Accounting
All derivatives are recognized in the Statements of Condition at their fair values and are
reported as either derivative assets or derivative liabilities net of cash collateral and
accrued interest from counterparties.
By regulation, we are only allowed to use derivative instruments to mitigate identifiable
risks. We formally document all relationships between derivative instruments and hedged items, as
well as our risk management objectives and strategies for undertaking various hedge transactions
and our method of assessing hedge effectiveness. Our current hedging strategies relate to hedges of
existing assets and liabilities that qualify for fair value hedge accounting treatment and economic
hedges that are used to reduce market risk at the balance sheet or portfolio level. As economic
hedges do not qualify for hedge accounting treatment, only the derivative instrument is marked to
market.
Each derivative is designated as one of the following:
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(1) |
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A hedge of the fair value of a recognized asset or liability or an unrecognized firm
commitment (a fair value hedge). |
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(2) |
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A nonqualifying hedge of an asset, liability, or firm commitment (an economic hedge)
for asset-liability management purposes. |
We recognize changes in the fair value of a derivative that is designated and qualifies as a
fair value hedge and changes in the fair value of the hedged asset, liability, or unrecognized firm
commitment that are attributable to the hedged risk in other income (loss) as Net gain (loss) on
derivatives and hedging activities. Hedge ineffectiveness (the amount by which the change in the
fair value of the derivative differs from the change in fair value of the hedged item) is recorded
in other income (loss) as Net gain (loss) on derivatives and hedging activities.
Changes in the fair value of a derivative not qualifying for hedge accounting (an economic
hedge) are recorded in current period earnings with no fair value adjustment to an asset or
liability. The fair value adjustments are recorded in other income (loss) as Net gain (loss) on
derivatives and hedging activities.
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The differences between accrued interest receivable and accrued interest payable on
derivatives designated as fair value hedges are recognized as adjustments to the income or expense
of the designated underlying financial instrument. The differences between accrued interest
receivable and accrued interest payable on derivatives designated as economic hedges are recognized
in other income (loss).
Certain derivatives might qualify for the short cut method of assessing effectiveness. The
short cut method allows us to make the assumption of no ineffectiveness, which means that the
change in fair value of the hedged item is assumed to equal the change in the fair value of the
derivative. No further evaluation of effectiveness is performed for these hedging relationships
unless a critical term changes.
For a hedging relationship that does not qualify for the short cut method, we measure our
effectiveness using the long haul method, in which the change in fair value of the hedged item
must be measured separately from the change in fair value of the derivative. We design
effectiveness testing criteria based on our knowledge of the hedged item and hedging instrument
that was employed to create the hedging relationship. We use regression analyses to assess hedge
effectiveness prospectively and retrospectively.
We may issue debt, make advances, or purchase financial instruments in which a derivative
instrument is embedded. Upon execution of these transactions, we assess whether the economic
characteristics of the embedded derivative are clearly and closely related to the economic
characteristics of the remaining component of the debt, advance, or purchased financial instrument
(the host contract) and whether a separate, non-embedded instrument with the same terms as the
embedded instrument would meet the definition of a derivative. If we determine that (i) the
embedded derivative has economic characteristics not clearly and closely related to the economic
characteristics of the host contract and (ii) a separate, stand-alone instrument with the same
terms would qualify as a derivative instrument, the embedded derivative is separated from the host
contract, carried at fair value, and designated as a stand-alone derivative instrument used as an
economic hedge. However, if the entire contract (the host contract and the embedded derivative) is
to be measured at fair value, with changes in fair value reported in current period earnings, or if
we cannot reliably identify and measure the embedded derivative for purposes of separating that
derivative from its host contract, the entire contract is carried at fair value and no portion of
the contract is designated as a hedging instrument.
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Other-Than-Temporary Impairment
We evaluate our individual available-for-sale and held-to-maturity securities in an unrealized
loss position for OTTI on a quarterly basis. As part of this process, we consider our intent to
sell each debt security before its anticipated recovery and whether it is likely we will be
required to sell the debt security before its anticipated recovery. If either of these conditions
is met, we recognize an OTTI charge in earnings equal to the entire unrealized loss amount. For
securities in unrealized loss position that do not meet these conditions, we perform an analysis to
determine if any of these securities are other-than-temporarily impaired. For our private-label
MBS, we perform a cash flow analysis to determine if we would recover the entire amortized cost
basis of the debt security. The present value of the cash flows expected to be collected is
compared to the amortized cost basis of the debt security to determine whether a credit loss
exists. If there is a credit loss (the difference between the present value of the cash flows
expected to be collected and the amortized cost basis of the debt security), the carrying value of
the debt security is adjusted to its fair value. However, rather than recognizing the entire
difference between the amortized cost basis and the fair value in earnings, only the amount of the
impairment representing the credit loss (i.e., the credit component) is recognized in earnings,
while the amount related to all other factors (i.e., the non-credit component) is recognized in
accumulated other comprehensive loss. The total OTTI is presented in the Statements of Income with
an offset for the amount of the total OTTI that is recognized in accumulated other comprehensive
loss. To date, we have never experienced an OTTI loss.
Legislative and Regulatory Developments
Proposed Regulation on Community Development Loans by Community Financial Institutions and Secured
Lending by FHLBanks to Members and Their Affiliates
On February 23, 2010, the Finance Agency issued a proposed regulation with a comment
deadline of April 26, 2010 that would (i) implement the Housing Act provision allowing CFIs to
secure advances from FHLBanks with community development loans, and (ii) deem all secured
extensions of credit by an FHLBank to a member of any FHLBank to be an advance subject to
applicable Finance Agency regulations on advances.
We are unable to predict what impact the proposed regulation may have on us if adopted.
However, the proposed regulations provision concerning secured extensions of credit may have the
potential to limit the parties with whom we enter into repurchase agreements, since such agreements
would be subject to applicable Finance Agency regulations, including capitalization requirements,
and non-members may not purchase our stock, thereby reducing our available lines of liquidity.
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Proposed Regulation on Temporary Increases in Minimum Capital Levels
On February 8, 2010, the Finance Agency issued a proposed regulation with a comment deadline
of April 9, 2010 that, if adopted as proposed, would set forth certain standards and procedures
that the Director of the Finance Agency would employ in determining whether to require or rescind a
temporary increase in the minimum capital levels for any of the FHLBanks, Fannie Mae and Freddie
Mac. To the extent that the final rule results in an increase in our capital requirements, our
ability to pay dividends and repurchase or redeem capital stock may be adversely impacted.
Reporting of Fraudulent Financial Instruments
On January 27, 2010, the Finance Agency issued a final regulation, which became effective
February 26, 2010, requiring Fannie Mae, Freddie Mac, and the FHLBanks to report to the Finance
Agency any such entitys purchase or sale of fraudulent financial instruments or loans, or
financial instruments or loans such entity suspects is possibly fraudulent. The regulation imposes
requirements on the timeframe, format, document retention, and nondisclosure obligations for
reporting fraud or possible fraud to the Finance Agency. We are also required to establish and
maintain adequate internal controls, policies and procedures, and an operational training program
to discover and report fraud or possible fraud. The adopting release provides that the regulation
will apply to all of our programs and products. The adopting release for the regulation provides
that the Finance Agency will issue certain guidance specifying the investigatory and reporting
obligations under the regulation. We will be in a better position to assess the significance of the
reporting obligations once the Finance Agency has promulgated additional guidance with respect to
specific requirements of the regulation.
Minority and Women Inclusion
The Housing Act requires the FHLBanks to establish or designate an Office of Minority and
Women Inclusion that is responsible for carrying out all matters relating to diversity in
management, employment, and business practices. On January 11, 2010, the Finance Agency issued a
proposed rule to effect this provision of the Housing Act. Comments on the proposed rule are due by
April 26, 2010.
Membership for Community Development Financial Institutions
On January 5, 2010, the Finance Agency issued a final rule establishing the eligibility
requirements and procedural requirements for non-depository CDFIs that wish to become FHLBank
members. The newly eligible non-depository CDFIs include community development loan funds, venture
capital funds and state-chartered credit unions without federal insurance. At February 28, 2010,
while eligible to become members, no non-depository CDFIs are included in our membership.
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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 our members that compete
with our advance business.
Finance Agency Examination Guidance Examination for Accounting Practices
On October 27, 2009, the Finance Agency issued examination guidance and standards, which were
effective immediately, relating to the accounting practices of Fannie Mae, Freddie Mac and the
FHLBanks, consistent with the safety and soundness responsibilities of the Finance Agency. The
areas addressed by the examination guidance include: (i) accounting policies and procedures; (ii)
Audit Committee responsibilities; (iii) independent internal audit function responsibilities; (iv)
accounting staff; (v) financial statements; (vi) external auditor; and (vii) 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 the
entitys management, Board of Directors, or Committees thereof.
Principles for Executive Compensation at the FHLBanks and the Office of Finance
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: (i) such compensation must be reasonable and comparable to that offered to executives
in similar positions at comparable financial institutions; (ii) such compensation should be
consistent with sound risk management and preservation of the par value of FHLBank capital stock;
(iii) 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
(iv) the board of directors should promote accountability and transparency in the process of
setting compensation.
93
Directors Compensation and Expenses
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. To assist the
Director in reviewing the compensation and expenses of FHLBank directors, each FHLBank would be
required to submit to the Director by specified deadlines: (i) the compensation anticipated to be
paid to its directors for the following calendar year; (ii) the amount of compensation and expenses
paid to each director for the immediately preceding calendar year; and (iii) a copy of the
FHLBanks written compensation policy, along with all studies or other supporting materials upon
which the board of directors relied in determining the level of compensation and expenses to pay to
its directors.
FHLBank Boards of Directors Eligibility and Elections
On October 7, 2009, the Finance Agency published a final rule concerning the nomination and
election of directors. The final rule provides for the following:
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Requires the board of directors of each FHLBank to determine annually 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; |
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Sets forth new provisions for filling a vacancy on the board of directors; |
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Amends the election requirement for independent directors. The final rule provides that
if an FHLBanks 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, an FHLBanks 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 |
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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.
94
Collateral for Advances and Interagency Guidance on Nontraditional Mortgage Products
On August 10, 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 System Office of Finance
On August 4, 2009, the Finance Agency published a notice of proposed rulemaking, with comments
due 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.
Golden Parachute and Indemnification Payments
On June 29, 2009, the Finance Agency published a proposed rule setting forth the standards
that the Finance Agency would take into consideration when limiting or prohibiting golden parachute
and indemnification payments. The proposed rule, if adopted, would better conform existing Finance
Agency regulations on golden parachutes to FDIC rules and further detail what golden parachute and
indemnification payments made by Fannie Mae, Freddie Mac, the FHLBanks, and the Office of Finance
are limited under regulations. Comments on the proposed rule were due July 29, 2009.
95
Executive Compensation
On June 5, 2009, the Finance Agency published a proposed rule to set forth requirements and
processes with respect to executive compensation provided by the regulated entities (Fannie Mae,
Freddie Mac, and the FHLBanks) and the Office of Finance. The Executive Compensation rule would
address the statutory authority of the Director to approve, disapprove, modify, prohibit, or
withhold compensation of executive officers of these regulated entities. The proposed rule would
also address 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 would prohibit 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 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.
U.S. Treasury Departments Financial Regulatory Reform
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.
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 our mortgage asset
portfolio. The extension of federal deposit insurance coverage could potentially decrease demand
for our advances.
96
Other-Than-Temporary Impairment Guidance
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.
FDIC Deposit Insurance Assessments
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. In addition, Congress is considering legislation to require the
FDIC to base future assessments on the amount of assets held by an institution instead of on the
amount of deposits it holds. The FDICs risk-based assessment and an assessment framework based on
assets may provide an incentive for some of our members to hold more deposits than they would if
non-deposit liabilities were not a factor in determining an institutions deposit insurance
assessments.
97
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 continued into 2009.
This Financial Stability Plan 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, a new bond purchase program to support lending by Housing Finance Agencies and
a temporary credit and liquidity program to improve their access to liquidity for outstanding
Housing Finance Agency bonds were created. To pay for a portion of the assistance provided by the
stability plan, the Obama Administration has proposed legislation that would assess a Financial
Responsibility Fee on large financial institutions liabilities (excluding deposits and insurance
policy reserves). If such a fee were to be imposed, advances to our large members may become more
costly.
Off-balance Sheet Arrangements
Our primary source of funds is the sale of consolidated obligations. Although we are primarily
liable for the portion of consolidated obligations issued on our behalf, we also are jointly and
severally liable with the other FHLBanks for the payment of principal and interest on all
consolidated obligations of each of the FHLBanks. If the principal or interest on any consolidated
obligation issued on behalf of any FHLBank is not paid in full when due, the FHLBanks may not pay
dividends or redeem or repurchase shares of stock from any member of that FHLBank. The Finance
Agency, at its discretion, may require any FHLBank to make principal or interest payments due on
any consolidated obligation whether or not the consolidated obligation represents a primary
liability of such FHLBank. Because of the high credit quality of each FHLBank, management has
concluded that the probability that an FHLBank would be unable to repay its participation is
remote. Furthermore, the Finance Agency regulations require that all FHLBanks maintain at least an
AA rating. Therefore, no liability is recorded for the joint and several obligation related to the
other FHLBanks share of consolidated obligations.
The par amount of the outstanding consolidated obligations of all 12 FHLBanks was
approximately $930.5 billion and $1,251.5 billion at December 31, 2009 and 2008. The par value of
consolidated obligations for which we are the primary obligor was approximately $59.7 billion and
$62.4 billion at December 31, 2009 and 2008.
During the third quarter of 2008, we 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 was designed to serve as a contingent source of liquidity for the GSEs, including
the 12 FHLBanks. The GSECF expired on December 31, 2009. The Bank did not draw on this available
source of liquidity during 2009.
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In the ordinary course of business, we issue letters of credit on behalf of our members and
housing associates to facilitate business transactions with third parties. Letters of credit may be
used to facilitate residential housing finance or other housing activities, facilitate community
lending, assist with asset-liability management, and provide liquidity or other funding. Members
and housing associates must fully collateralize letters of credit with eligible collateral. At
December 31, 2009 and 2008 we had $3.5 billion and $3.4 billion in letters of credit outstanding.
If we are required to make payment for a beneficiarys draw, rather than obtaining repayment of
these amounts from the member, these amounts may be converted into a collateralized advance to the
member.
At December 31, 2009, we had approximately $26.7 million in outstanding commitments to
purchase mortgage loans compared with $289.6 million at December 31, 2008. We did not have any
outstanding commitments for additional advances at December 31, 2009 or 2008. We entered into $0.2
billion and $1.0 billion par value traded but not settled bonds at December 31, 2009 and 2008. We
had $56.0 million and $267.9 million of cash pledged as collateral to broker-dealers at December
31, 2009 and 2008. We execute derivatives with large highly rated banks and broker-dealers and
enter into bilateral collateral agreements.
In conjunction with our 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, we 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. We 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 us and
the FHLBank of Chicago. Therefore, under the agreement, we 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 December 31, 2009, we were
not aware of any losses incurred by the FHLBank of Chicago that would not otherwise be recovered
through credit enhancement fees.
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At December 31, 2009 and 2008, we had executed 24 and 9 standby bond purchase agreements with
state housing associates within our district whereby we would be required to purchase bonds under
circumstances defined in each agreement. We 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 24
outstanding standby bond purchase agreements at December 31, 2009 totaled $711.1 million and expire
seven years after execution, with a final expiration in 2016. The 9 outstanding standby bond
purchase agreements at December 31, 2008 totaled $259.7 million and expire seven years after
execution, with a final expiration in 2015. We received fees for the guarantees that amounted to
$1.1 million and $0.2 million for the years ended December 31, 2009 and 2008. At December 31, 2009,
we were not required to purchase any bonds under the executed standby bond purchase agreements.
Should we be required to purchase these bonds, we would fund those purchases through the use of our
normal funding operations. For further details on our funding operations and strategies, see Item
7. Managements Discussion and Analysis of Financial Condition and Results of Operation Liquidity
and Capital Resources.
On March 31, 2009, we 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 November 6, 2009, however, it was extended 60 days through January 6,
2010. At December 31, 2009, we purchased $15 million in mortgage revenue bonds under this
agreement. These bonds are recorded as held-to-maturity investments at December 31, 2009. As of
January 6, 2010, the agreement expired and we made no subsequent bond purchases.
On September 25, 2009, we 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. At December 31, 2009, we had not purchased any mortgage revenue bonds under
this agreement. If required, we will fund the purchase of these bonds through the use of our normal
funding procedures. For further details on our funding strategies, see Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operation Liquidity and Capital
Resources.
Our financial statements do not include a liability for future statutorily mandated payments
from the FHLBanks to REFCORP. No liability is recorded because each FHLBank must pay 20 percent of
net earnings (after its AHP obligation) to REFCORP to support the payment of part of the interest
and principal on the bonds issued by REFCORP, and the FHLBanks are unable to estimate their future
required payments because the payments are based on future earnings and are not estimable.
Accordingly, the REFCORP payments are disclosed as a long-term statutory payment requirement and,
for accounting purposes, are treated, accrued, and recognized like an income tax.
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Contractual Obligations
The following table shows payments due by period under specified contractual obligations at
December 31, 2009 and 2008 (dollars in millions):
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2009 |
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Payments Due by Period |
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Over one |
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Over three |
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|
|
|
|
|
One year |
|
|
through |
|
|
through |
|
|
Over |
|
Contractual Obligations |
|
Total |
|
|
or less |
|
|
three years |
|
|
five years |
|
|
five years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt1 |
|
$ |
50,323 |
|
|
$ |
23,040 |
|
|
$ |
15,501 |
|
|
$ |
3,945 |
|
|
$ |
7,837 |
|
Operating lease obligations |
|
|
16 |
|
|
|
1 |
|
|
|
2 |
|
|
|
2 |
|
|
|
11 |
|
Purchase obligations2 |
|
|
4,587 |
|
|
|
374 |
|
|
|
3,386 |
|
|
|
107 |
|
|
|
720 |
|
Mandatorily redeemable capital
stock3 |
|
|
8 |
|
|
|
7 |
|
|
|
1 |
|
|
|
* |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
54,934 |
|
|
$ |
23,422 |
|
|
$ |
18,890 |
|
|
$ |
4,054 |
|
|
$ |
8,568 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
|
|
|
|
Over one |
|
|
Over three |
|
|
|
|
|
|
|
|
|
|
One year |
|
|
through |
|
|
through |
|
|
Over |
|
Contractual Obligations |
|
Total |
|
|
or less |
|
|
three years |
|
|
five years |
|
|
five years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt1 |
|
$ |
42,269 |
|
|
$ |
15,963 |
|
|
$ |
10,829 |
|
|
$ |
6,029 |
|
|
$ |
9,448 |
|
Operating lease obligations |
|
|
17 |
|
|
|
1 |
|
|
|
2 |
|
|
|
2 |
|
|
|
12 |
|
Purchase obligations2 |
|
|
4,955 |
|
|
|
2,826 |
|
|
|
1,832 |
|
|
|
30 |
|
|
|
267 |
|
Mandatorily redeemable capital
stock3 |
|
|
11 |
|
|
|
3 |
|
|
|
6 |
|
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
47,252 |
|
|
$ |
18,793 |
|
|
$ |
12,669 |
|
|
$ |
6,062 |
|
|
$ |
9,728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Long-term debt includes bonds (at par value). Long-term debt does not include
discount notes and is based on contractual maturities. Actual distributions could be impacted
by factors affecting early redemptions. Index amortizing notes are included in the table based
on contractual maturities. The amortizing feature of these notes based on underlying indices
could cause redemption at different times than contractual maturities. |
|
2 |
|
Purchase obligations include the notional amount of standby letters of
credit, commitments to fund mortgage loans, standby bond purchase agreements, commitments to
purchase housing bonds, and advances and bonds traded but not settled (see additional
discussion of these items in Item 8. Financial Statements and Supplementary Data Note 19
Commitments and Contingencies). |
|
3 |
|
Mandatorily redeemable capital stock payment periods are based on how we
anticipate redeeming the capital stock based on our practices. |
|
* |
|
Represents an amount less than one million. |
101
Risk Management
We have risk management policies, established by our 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. Our risk management strategies and limits protect us from significant earnings volatility.
We periodically evaluate these strategies and limits in order to respond to changes in our
financial position and general market conditions. This periodic evaluation may result in changes to
our risk management policies and/or risk measures.
Our ERMP provides the ability to conduct a robust risk management practice allowing for
flexibility to make rational decisions in stressed interest rate environments.
Our Board of Directors determined we should operate under a risk management philosophy of
maintaining an AAA rating. An AAA rating provides us 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 our
market risk, liquidity risk, and capital adequacy. Our MATs require close monitoring and measuring
of the risks inherent in our 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
December 31, 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 our 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 throughout 2009 and 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. 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.
102
The goal of our interest rate risk management strategy is to manage interest rate risk by
setting and operating within an appropriate framework and limits. Our general approach toward
managing interest rate risk is to acquire and maintain a portfolio of assets, liabilities, and
hedges, which, taken together, limit our expected exposure to market/interest rate risk. Management
regularly monitors our sensitivity to interest rate changes by monitoring our market risk measures
in parallel and non-parallel interest rate shifts. Our key market risk and capital adequacy
measures are quantified in the Economic Value of Capital Stock and Market Value of Capital
Stock sections that follow.
Valuation Models
We use sophisticated risk management systems to evaluate our financial position. These systems
employ various mathematical models and valuation techniques to measure interest rate risk. For
example, we use valuation techniques designed to model embedded options and other cash flow
uncertainties across a number of hypothetical interest rate environments. The techniques used to
model embedded options rely on
|
|
|
understanding the contractual and behavioral features of each instrument. |
|
|
|
|
using appropriate market data, such as yield curves and implied volatilities. |
|
|
|
using appropriate option valuation models and prepayment functions to describe
the evolution of interest rates over time and the expected cash flows of financial
instruments in response. |
The method for calculating fair value is dependent on the instrument type. We rely on these
approaches:
|
|
|
Option-free instruments, such as plain vanilla interest rate swaps, bonds, and advances
require an assessment of the future course of interest rates. Once the course of interest
rates has been specified and the expected cash flows determined, the appropriate forward
rates are used to discount the future cash flows to a fair value. |
|
|
|
Option-embedded instruments, such as cancelable interest rate swaps, swaptions, caps,
and floors, callable bonds, and mortgage-related instruments, are typically evaluated using
interest rate tree (lattice) or Monte Carlo simulations that generate a large number of
possible interest rate scenarios. |
103
Models are inherently imperfect predictors of actual results because they are based on
assumptions about future performance. Changes in any models or in any of the assumptions,
judgments, or estimates used in the models may cause the results generated by the model to be
materially different. Our risk computations require the use of instantaneous shifts in assumptions
such as interest rates, spreads, interest rate volatilities, and prepayment speeds. These
assumptions are based on managements best estimates at the time the model is run. Ultimately these
computations may differ from our interest rate risk exposure because they do not take into account
any portfolio rebalancing and hedging actions that are required to maintain risk exposures within
our policies and guidelines. Management has adopted controls, procedures, and policies to monitor
and manage assumptions used in these models.
Economic Value of Capital Stock
We define EVCS as the net present value of expected future cash flows of our assets,
liabilities, and derivatives, discounted at our cost of funds, divided by the total shares of
capital stock outstanding. This method reduces the impact of day-to-day price changes (e.g.
mortgage option-adjusted spread) which cannot be attributed to any of the standard market factors,
such as movements in interest rates or volatilities. Thus, EVCS approximates the long-term value of
one share of our capital stock.
Our ERMP sets the MAT for EVCS at $100 per share. Under the policy, if EVCS drops below $100
per share, the ERMP requires that we increase our required retained earnings to account for the
shortfall. If actual retained earnings fall below the retained earnings requirement we, as
determined by the Board of Directors, are required to establish an action plan to enable us to
return to our required retained earnings within twelve months. At December 31, 2009, our actual
retained earnings were 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 |
|
|
|
|
December |
|
$ |
108.7 |
|
September |
|
$ |
106.9 |
|
June |
|
$ |
102.1 |
|
March |
|
$ |
86.3 |
|
2008 |
|
|
|
|
December |
|
$ |
80.0 |
|
September |
|
$ |
96.1 |
|
June |
|
$ |
105.1 |
|
March |
|
$ |
105.3 |
|
104
Our EVCS has recovered significantly since December 31, 2008 increasing to $108.7 at December
31, 2009. The improvement was primarily attributable to the following:
|
|
|
Improvement in our funding costs relative to LIBOR. Because the EVCS methodology focuses
on the long-term value of one share of capital stock, we discount future cash flows of our
assets, liabilities, and derivatives using our cost of funds. During 2009, our cost of
funds relative to LIBOR improved, and therefore EVCS was positively impacted as the
long-term net earnings potential of our balance sheet increased. |
|
|
|
Decreased interest rate volatility. Decreased interest rate volatility during 2009 had a
positive impact on all value measurements (including EVCS) through its impact on the value
of mortgage-related assets. As interest rate volatility decreased, the value of the
prepayment option to homeowners embedded in the mortgage-related assets decreased, thereby
increasing the value of the assets. |
|
|
|
Adjustments to our prepayment model. During the second quarter of 2009 we adjusted our
prepayment model to more accurately reflect the recent prepayment experiences of our MPF
portfolio. This adjustment decreased the projected prepayment speeds on those assets,
resulting in higher future cash flows and thus higher EVCS. |
|
|
|
Increased retained earnings. Retained earnings increased during 2009 due primarily to
the Banks increased net income. As we retain net income, our equity position increases
thereby increasing EVCS. |
|
|
|
Elimination of the negative spread carried on our liquidity portfolio. During the fourth
quarter of 2008, we funded a portion of our 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 the discount notes matured throughout
2009, the impact of the negative spread was eliminated thereby increasing EVCS. |
105
Market Value of Capital Stock
We define MVCS 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 our stock if all assets and liabilities were
liquidated at current market prices. MVCS does not represent our long-term value, as it takes into
account only the short-term market price fluctuations. These fluctuations are generally unrelated
to the long-term value of the cash flows from our assets and liabilities.
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 tests of MVCS involve 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 and MPF purchases, and purchasing interest rate swaptions and caps.
The policy 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 policy limits requires an immediate action to bring the exposure back within policy limits, as
well as a report to the Board of Directors.
106
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December |
|
$ |
85.1 |
|
|
$ |
100.2 |
|
|
$ |
100.2 |
|
|
$ |
97.2 |
|
|
$ |
92.0 |
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December |
|
|
(15.1 |
)% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
(3.0 |
)% |
|
|
(8.2 |
)% |
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 |
)% |
107
The increase in base case MVCS at December 31, 2009 compared with December 31, 2008 was
primarily attributable to the following:
|
|
|
Decreased option-adjusted spread on our mortgage assets. During 2009, the spread between
mortgage interest rates and LIBOR decreased which increased the value of our mortgage
assets. |
|
|
|
Increased longer-term interest rates. As longer-term interest rates increased during
2009, the prepayments on fixed-rate mortgage assets were reinvested at higher interest
rates, while the cost of the associated debt remained constant/fixed. As a result, the
value of the mortgage assets decreased less than the value of the corresponding debt,
thereby increasing MVCS. |
|
|
|
Decreased interest rate volatility. Decreased interest rate volatility during 2009 had a
positive impact on all value measurements (including MVCS) through its impact on the value
of mortgage-related assets. As interest rate volatility decreased, the value of the
prepayment option to homeowners embedded in the mortgage-related assets decreased, thereby
increasing the value of the assets. |
|
|
|
Increased retained earnings. Retained earnings increased during 2009 due primarily to
the Banks increased net income. As we retain net income, our equity position increases
thereby increasing MVCS. |
|
|
|
Elimination of the negative spread carried on our liquidity portfolio. During the fourth
quarter of 2008, we funded a portion of our 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 MVCS at December 31, 2008. As the discount notes matured throughout
2009, the impact of the negative spread was eliminated thereby increasing MVCS. |
During 2009 and a majority of 2008, our projected MVCS in the down 200 basis point rate shift
scenario fell below the ten percent policy threshold loss. However, in February 2008, our Board of
Directors suspended all policy limits pertaining to the down 200 basis point rate shift scenario
due to the already low interest rate environment. In addition, our projected MVCS in the down 100
basis point rate shift scenario was below the five percent threshold during the last quarter of
2008 and the first quarter of 2009. While this was a policy breach, management determined that the
cost of employing hedging strategies to rebalance the profile and eliminate the breach outweighed
the protection it would provide.
108
Mortgage Finance Market Risk
Our Mortgage Finance business segment is exposed to market risk as a result of the interest
rate risk associated with fixed rate mortgage assets. Mortgage assets include mortgage loans, MBS,
HFA, and SBA investments. Interest rate risk exists on our mortgage assets due to the embedded
prepayment option available to homeowners creating a potential cash flow mismatch between our
mortgage assets and the liabilities funding them. Generally, as interest rates decrease, homeowners
are more likely to refinance fixed rate mortgages, resulting in increased prepayments that are
received earlier than if interest rates remain stable. Replacing higher rate loans that prepay with
lower rate loans has the potential of reducing our net interest income. Conversely, an increase in
interest rates may result in slower than expected prepayments and an extension in the
weighted-average life of the mortgage assets. In this case, we have the risk that our liabilities
may mature faster than our mortgage assets requiring us to issue additional funding at a higher
cost, which would also reduce net interest income.
We generally attempt to match the duration of our mortgage assets with the duration of our
liabilities within a reasonable range. We issue a mix of debt securities across a broad spectrum of
final maturities to achieve the desired liability durations. Because the cash flows of mortgage
assets fluctuate as interest rates change, we frequently issue callable and noncallable debt to
alter the cash flows of our liabilities to match partially the expected change in cash flows of our
mortgage assets. The duration of callable debt, like that of a mortgage, shortens when interest
rates decrease and lengthens when interest rates increase. If interest rates decrease, we are
likely to call debt that carries an interest rate higher than the current market.
We fund certain mortgage loans with a combination of callable, noncallable, and APLS debt
securities. APLS principal balances pay down consistent with a specified reference pool of
mortgages determined at issuance and have a final stated maturity of four to 15 years. These
consolidated obligations pay a fixed coupon with the redemption schedule dependent on the
amortization of the underlying reference pool of mortgages identified earlier. These consolidated
obligations are redeemed at the final maturity date, regardless of the then-outstanding amount of
the reference pool.
The noncallable and callable consolidated obligations have varying costs with the shorter-term
noncallable bonds generally having a lower cost than the longer-term callable bonds. As a result of
these differing bond costs, the cost of funds supporting our mortgage assets will change over time
and under varying interest rate scenarios. The related mortgage assets maintain a relatively
constant yield, resulting in changes in the portfolios interest spread relationship over time. In
a stable to rising interest rate environment, the lower-rate short-term bonds mature while the
higher-rate callable bonds remain outstanding, resulting in an increasing cost of funds and a lower
income spread as time passes. Conversely, in a falling interest rate environment, many of the
higher-rate callable bonds are called away reducing the cost of funds and improving spreads.
109
We improved our overall risk profile during 2009 due to a combination of the mortgage loan
sale transaction and associated debt extinguishments and the replacement of the mortgage loans
sold. We sold $2.1 billion of our mortgage loan portfolio during the second quarter of 2009 in an
effort to improve our market value sensitivity to changes in interest rates. We are exposed to
interest rate risk on our mortgage assets due to the embedded prepayment option available to
homeowners creating a potential cash flow mismatch between our mortgage investments and the
liabilities funding them. Therefore, selling a portion of our mortgage loans reduced this cash flow
mismatch and improved our market value risk profile. Additionally, as a result of the mortgage loan
sale transaction, we used a portion of the proceeds to purchase investments to replace the mortgage
loans. The investments purchased do not expose us to the same prepayment risk associated with
mortgage assets and therefore, also improved our market value risk profile.
Derivatives
We enter into derivative agreements to manage our exposure to changes in interest rates. We
use derivatives to adjust the effective maturity, repricing frequency, or option characteristics of
financial instruments to achieve risk management objectives. We do not use derivatives for
speculative purposes.
Our current hedging strategies encompass hedges of specific assets and liabilities that
qualify for fair value hedge accounting treatment and economic hedges that are used to reduce
overall market risk of the balance sheet. All hedging strategies are approved by our
Asset-Liability Committee.
The following table describes our approved derivative hedging strategies at December 31, 2009:
|
|
|
|
|
|
|
|
|
Hedging |
|
Derivative Hedging |
|
Purpose of Hedge |
Hedged Item |
|
Classification |
|
Instrument |
|
Transaction |
Advances |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate advances
|
|
Fair value
|
|
Payment of fixed,
receipt of variable
interest rate swap
|
|
To protect against
changes in interest
rates by converting
the assets fixed
rate to the same
variable rate index
as the funding
source. |
|
|
|
|
|
|
|
Putable fixed rate advances
|
|
Fair value
|
|
Payment of fixed,
receipt of variable
interest rate swap
with put option
|
|
To protect against
changes in interest
rates including
option risk by
converting the
assets fixed rate
to the same
variable rate index
as the funding
source. |
|
|
|
|
|
|
|
Callable fixed rate advances
|
|
Fair Value
|
|
Payment of fixed,
receipt of variable
interest rate swap
with call option
|
|
To protect against
changes in interest
rates including
option risk by
converting the
assets fixed rate
to the same
variable rate index
as the funding
source. |
110
|
|
|
|
|
|
|
|
|
Hedging |
|
Derivative Hedging |
|
Purpose of Hedge |
Hedged Item |
|
Classification |
|
Instrument |
|
Transaction |
Variable rate advances
|
|
Economic
|
|
Payment of variable
(i.e. six-month
LIBOR), receipt of
variable (i.e.
three-month LIBOR)
interest rate swap
|
|
To protect against
repricing risk by
converting the assets
variable rate to the same
index variable rate as
the funding source. |
|
|
|
|
|
|
|
Mortgage Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage delivery commitments
|
|
Economic
|
|
Forward settlement
agreements
|
|
To protect against
changes in market value
resulting from
changes in interest rates. |
|
|
|
|
|
|
|
Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate investments
|
|
Fair value or
economic
|
|
Payment of fixed,
receipt of variable
interest rate swap
|
|
To protect against
changes in interest rates
by converting the assets
fixed rate to the same
variable rate index as
the funding source. |
|
|
|
|
|
|
|
Consolidated Obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate consolidated obligations
|
|
Fair value or
Economic
|
|
Payment of
variable, receipt
of fixed interest
rate swap
|
|
To protect against
changes in interest rates
by converting the debts
fixed rate to the same
variable rate index as
the asset being funded. |
|
|
|
|
|
|
|
Callable fixed rate consolidated obligations
|
|
Fair value or
Economic2
|
|
Payment of
variable, receipt
of fixed interest
rate swap with call
option
|
|
To protect against
changes in interest rates
including option risk by
converting the debts
fixed rate to the same
variable rate index as
the asset being funded. |
|
|
|
|
|
|
|
Callable variable rate consolidated obligations1
|
|
Fair value or
Economic2
|
|
Payment of
variable, receipt
of variable
interest rate swap
with call option
|
|
To protect against
changes in interest rates
including option risk by
converting the debts
variable rate to the same
variable rate index as
the asset being funded. |
|
|
|
|
|
|
|
Variable rate consolidated obligations
|
|
Economic
|
|
Payment of variable
(i.e. one-month
LIBOR or another
index), receipt of
variable (i.e.
three-month LIBOR)
interest rate swap
|
|
To protect against
repricing risk by
converting the variable
rate funding source to
the same variable rate
index as the asset being
funded. |
|
|
|
|
|
|
|
Balance Sheet |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate caps
|
|
Economic
|
|
N/A
|
|
To protect against
changes in income of
mortgage assets due to
changes in interest
rates. |
111
|
|
|
|
|
|
|
|
|
Hedging |
|
Derivative Hedging |
|
Purpose of Hedge |
Hedged Item |
|
Classification |
|
Instrument |
|
Transaction |
Interest rate floors1
|
|
Economic
|
|
N/A
|
|
To protect against
changes in income of
mortgage assets due to
changes in interest
rates. |
|
|
|
|
|
|
|
Interest rate swaps and
swaptions1
|
|
Economic
|
|
N/A
|
|
To protect against
changes in income and
market value of capital
stock due to changes in
interest rates. |
|
|
|
1 |
|
This derivative hedging strategy was not outstanding as of December 31, 2009. |
|
|
2 |
|
When the hedged item is a hybrid instrument with an embedded derivative we may (i)
bifurcate the derivative or (ii) elect the fair value option on the entire hedged item; in
both cases the resulting instrument is classified as an economic hedge. |
Advances
We make advances to our members and eligible housing associates on the security of eligible
collateral. We issue fixed and variable rate advances, callable advances, and putable advances.
The optionality embedded in certain financial instruments can create additional interest rate
risk. When a borrower prepays an advance, we could suffer lower future income if the principal
portion of the prepaid advance were reinvested in lower yielding assets that continue to be funded
by higher cost debt. To protect against this risk, we may charge a prepayment fee that makes us
financially indifferent to a borrowers decision to prepay an advance. When we offer advances
(other than overnight advances) that a borrower may prepay without a prepayment fee, we generally
finance such advances with callable debt or otherwise hedge the embedded option.
Mortgage Assets
We manage the interest rate and prepayment risk associated with mortgage loans, securities,
and certificates using a combination of debt issuance and derivatives. We may use derivative
agreements to transform the characteristics of MBS to more closely match the characteristics of the
supporting funding.
The prepayment options embedded in mortgage assets can result in extensions or contractions in
the expected maturities of these investments, depending on levels of interest rates. The Finance
Agency limits this source of interest rate risk by restricting the types of MBS we may own to those
with limited average life changes under certain interest rate shock scenarios.
We enter into commitments to purchase mortgages from our participating members. We may
establish an economic hedge of these commitments by selling MBS to-be-announced (TBA) for forward
settlement. A TBA represents a forward contract for the sale of MBS at a future agreed upon date.
Upon expiration of the mortgage purchase commitment, the Bank purchases the TBA to close the hedged
position.
112
Non-Mortgage Investments
We manage the risk arising from changing market prices and volatility of certain fixed rate
non-mortgage assets by using derivative agreements to transform the fixed rate characteristics to
more closely match the characteristics of the supporting funding.
Consolidated Obligations
We manage the risk arising from changing market prices and volatility of a consolidated
obligation by matching the cash inflow on the derivative agreement with the cash outflow on the
consolidated obligation. While consolidated obligations are the joint and several obligations of
the FHLBanks, each FHLBank serves as sole counterparty to derivative agreements associated with
specific debt issues for which it is the primary obligor.
In a typical transaction, fixed rate consolidated obligations are issued for us by the Office
of Finance and we simultaneously enter into a matching derivative agreement in which the
counterparty pays us fixed cash flows designed to mirror in timing, optionality, and amount the
cash outflows paid by us on the consolidated obligation. In this typical transaction, we pay a
variable cash flow that closely matches the interest payments we receive on short-term or variable
rate assets. This intermediation between the capital and derivative markets permits us to raise
funds at lower costs than would otherwise be available through the issuance of variable rate
consolidated obligations in the capital markets.
We also enter into derivative agreements on variable rate consolidated obligations. For
example, we enter into a derivative agreement where the counterparty pays us variable rate cash
flows and we pay a different variable rate linked to LIBOR. This type of hedge allows us to manage
our repricing risk between assets and liabilities.
We may also enter into interest rate swaps with an upfront payment in a comparable amount to
the discount on the hedged consolidated obligation. This cash payment equates to the initial fair
value of the interest rate swap and is amortized over the estimated life of the interest rate swap
to net interest income as the discount on the bond is expensed. The interest rate swap is marked to
market through Net gain (loss) on derivatives and hedging activities in the Statements of Income.
Balance Sheet
We enter into certain economic derivatives as macro balance sheet hedges to protect against
changes in interest rates. These economic derivatives include interest rate caps, floors, swaps,
and swaptions.
See additional discussion regarding our derivative contracts in Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operation Statements of Condition
Derivatives.
113
Liquidity Risk
Liquidity risk is the risk that we will be unable to meet our obligations as they come due or
meet the credit needs of our members and housing associates in a timely and cost efficient manner.
Day-to-day and contingency liquidity objectives are designed to protect our financial strength and
to allow us to withstand market disruption. To achieve this objective, we establish liquidity
management requirements and maintain liquidity in accordance with Finance Agency regulations and
our own liquidity policy. Our Board of Directors approves the liquidity policy. Our liquidity risk
management process is based on ongoing calculations of net funding requirements, which are
determined by analyzing future cash flows based on assumptions of the expected behavior of members
and our assets, liabilities, capital stock, and derivatives. See Item 7. Managements Discussion
and Analysis of Financial Condition and Results of Operation Liquidity and Capital Resources for
additional details on 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. Our 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 Ginnie Mae; cash deposited with us; guaranteed student loans; and other real
estate-related collateral acceptable to the Bank provided such collateral has a readily
ascertainable value and we can perfect a security interest in such property. Additionally, CFIs 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 a borrower is unable to repay their obligation
and the collateral pledged to us is insufficient to cover the amount of exposure 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. We maintain policies and practices to monitor our exposure and
take action where appropriate. In addition, we have 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.
114
Although management has policies and procedures in place to manage credit risk, we may be
exposed because the outstanding advance value may exceed the liquidation value of our collateral.
We mitigate this risk through applying collateral discounts, requiring most borrowers to execute a
blanket lien, taking delivery of collateral, and limiting extensions of credit.
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. We determine these discounts or haircuts using data based upon
historical price changes, discounted cash flow analysis, and loan level modeling.
At December 31, 2009 and 2008, borrowers pledged $86 billion and $87 billion of collateral
(net of applicable discounts) to support $39 billion and $44 billion of advances and other
activities. Borrowers pledge collateral in excess of their collateral requirement to demonstrate
liquidity availability and to borrow additional amounts in the future.
The following table shows our composition of collateral pledged to the Bank (dollars in
billions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
December 31, 2008 |
|
|
|
|
|
|
|
Discounted |
|
|
|
|
|
|
|
|
|
|
Discounted |
|
|
|
|
|
|
|
|
|
|
Value of |
|
|
Percent of |
|
|
|
|
|
|
Value of |
|
|
Percent of |
|
|
|
Discount |
|
|
Collateral |
|
|
Total Pledged |
|
|
Discount |
|
|
Collateral |
|
|
Total Pledged |
|
Collateral Type |
|
Range |
|
|
Pledged |
|
|
Collateral |
|
|
Range |
|
|
Pledged |
|
|
Collateral |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family |
|
|
13-62 |
% |
|
$ |
38.7 |
|
|
|
45 |
% |
|
|
9-46 |
% |
|
$ |
36.0 |
|
|
|
41 |
% |
Multi-family |
|
|
50-62 |
|
|
|
1.3 |
|
|
|
2 |
|
|
|
33-50 |
|
|
|
1.1 |
|
|
|
1 |
|
Other real estate |
|
|
20-65 |
|
|
|
22.4 |
|
|
|
26 |
|
|
|
11-60 |
|
|
|
23.8 |
|
|
|
28 |
|
Securities/insured
loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, agency
and RMBS |
|
|
0-45 |
|
|
|
16.8 |
|
|
|
19 |
|
|
|
0-46 |
|
|
|
19.0 |
|
|
|
22 |
|
CMBS |
|
|
11-36 |
|
|
|
4.3 |
|
|
|
5 |
|
|
|
5-29 |
|
|
|
4.6 |
|
|
|
5 |
|
Government insured
loans |
|
|
9-38 |
|
|
|
1.0 |
|
|
|
1 |
|
|
|
17-23 |
|
|
|
0.9 |
|
|
|
1 |
|
Secured small
business loans and
agribusiness loans |
|
|
50-76 |
|
|
|
1.8 |
|
|
|
2 |
|
|
|
50-75 |
|
|
|
1.8 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
86.3 |
|
|
|
100 |
% |
|
|
|
|
|
$ |
87.2 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115
Mortgage Assets
We are exposed to mortgage asset credit risk through our participation in the MPF program and
MBS activities. 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, borrowers credit
history, and other factors such as home price fluctuations, unemployment levels, and other economic
factors in the local market or nationwide.
MPF Loans
Through our participation in the MPF program, we invest in conventional and government-insured
residential mortgage loans that are acquired through or purchased from a PFI. We currently offer
six MPF loan products to our PFIs: Original MPF, MPF 100, MPF 125, MPF Plus, Original MPF
Government, and MPF Xtra. For a description of these MPF products, refer to Item 1. Business
Products and Services Mortgage Finance MPF Loan Types.
The following table presents our MPF portfolio by product type at December 31, 2009 and 2008
at par value (dollars in billions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Product Type |
|
Dollars |
|
|
Percent |
|
|
Dollars |
|
|
Percent |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Original MPF |
|
$ |
0.5 |
|
|
|
6.5 |
% |
|
$ |
0 |
|
|
|
.3 2.8 |
% |
MPF 100 |
|
|
0.1 |
|
|
|
1.3 |
|
|
|
0 |
|
|
|
.2 1.9 |
|
MPF 125 |
|
|
2.4 |
|
|
|
31.2 |
|
|
|
2 |
|
|
|
.0 18.7 |
|
MPF Plus1 |
|
|
4.3 |
|
|
|
55.8 |
|
|
|
7.8 |
|
|
|
72.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total conventional loans |
|
|
7.3 |
|
|
|
94.8 |
|
|
|
10 |
|
|
|
.3 96.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government-insured loans |
|
|
0.4 |
|
|
|
5.2 |
|
|
|
0.4 |
|
|
|
3.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans |
|
$ |
7.7 |
|
|
|
100.0 |
% |
|
$ |
10.7 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
During the second quarter of 2009, we sold $2.1 billion of MPF Plus mortgage
loans to the FHLBank of Chicago, who immediately resold these loans to Fannie Mae. |
We manage the credit risk on mortgage loans acquired in the MPF program by (i) using
agreements to establish credit risk sharing responsibilities with our PFIs, (ii) monitoring the
performance of the mortgage loan portfolio and creditworthiness of PFIs, and (iii) establishing
prudent credit loss reserves to reflect managements estimate of probable credit losses inherent in
the portfolio. Our management of credit risk in the MPF program involves several layers of legal
loss protection that are defined in agreements among us and our PFIs.
116
For our government-insured MPF loans, our loss protection consists of the loan guarantee and
contractual obligation of the loan servicer to repurchase the loan when certain criteria are met.
For our conventional MPF loans, PFIs retain a portion of the credit risk on the MPF loans they
sell to us by providing credit enhancement. The required PFI credit enhancement may vary depending
on the MPF product alternatives selected.
PFIs are paid a credit enhancement fee for managing the credit risk, and in some instances all
or a portion of the credit enhancement fee may be performance based. Credit enhancement fees are
paid monthly and are determined based on the remaining unpaid principal balance of the MPF loans in
the master commitment. To the extent we experience losses in a master commitment, we may be able to
recapture credit enhancement fees paid to the PFI to offset these losses. For the years ended
December 31, 2009, 2008, and 2007, credit enhancement fees paid to PFIs amounted to $15.6 million,
$18.8 million, and $20.8 million.
For our conventional MPF loans, the availability of loss protection may differ slightly among
MPF products. Our loss protection consists of the following loss layers, in order of priority:
|
|
|
Primary Mortgage Insurance. PMI is on all loans with homeowner equity of less than 20
percent of the original purchase price or appraised value. |
|
|
|
First Loss Account. The first loss account specifies our loss exposure under each master
commitment prior to the PFIs credit enhancement obligation. If we experience losses in a
master commitment, these losses will either be (i) recovered through the recapture of
performance based credit enhancement fees from the PFI or (ii) absorbed by us. The first
loss account balance for all master commitments is a memorandum account and was $116.4
million and $105.9 million at December 31, 2009 and 2008. |
|
|
|
Credit Enhancement Obligation of PFI. PFIs have a credit enhancement obligation to
absorb losses in excess of the first loss account in order to limit our loss exposure to
that of an investor in an MBS that is rated the equivalent of AA by an NRSRO. PFIs are
required to either collateralize their credit enhancement obligation with us or to purchase
SMI from a highly rated mortgage insurer. All of our SMI providers have had their external
ratings for claims-paying ability or insurer financial strength downgraded below AA.
Ratings downgrades imply an increased risk that these SMI providers will be unable to
fulfill their obligations to reimburse us 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 MPF program. Currently, we are
evaluating the claims-paying ability of our SMI providers. |
117
We utilize an
allowance for credit losses to reserve for estimated losses after
considering the recapture of performance based credit enhancement
fees from the PFI. The allowance for credit losses
on mortgage loans was as follows for the years ended December 31, 2009, 2008, and 2007 (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year |
|
$ |
500 |
|
|
$ |
300 |
|
|
$ |
250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs |
|
|
(88 |
) |
|
|
(95 |
) |
|
|
(19 |
) |
Provision for credit losses |
|
|
1,475 |
|
|
|
295 |
|
|
|
69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year |
|
$ |
1,887 |
|
|
$ |
500 |
|
|
$ |
300 |
|
|
|
|
|
|
|
|
|
|
|
In accordance with our allowance for credit losses methodology, the allowance estimate is
based on both quantitative and qualitative factors. Quantitative factors include but are not
limited to portfolio composition and characteristics, delinquency levels, historical loss
experience, changes in members credit enhancements, including the recovery of performance based
credit enhancement fees, and other relevant factors using a pooled loan approach. Qualitative
factors include but are not limited to changes in national and local economic trends. During the
fourth quarter of 2009, we revised our allowance for credit loss methodology in order to better
incorporate current market conditions. Refer to Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operation Critical Accounting Policies and Estimates
Allowance for Credit Losses Mortgage Loans for details on the allowance revision.
We monitor and report our loan portfolio performance monthly. Adjustments to the allowance for
credit losses are considered at least quarterly based upon the factors discussed above. For the
year ended December 31, 2009, we increased our allowance for credit losses through a provision of
$1.5 million. This was primarily due to increased delinquency and loss severity rates throughout
2009. In addition, credit enhancement fees available to recapture losses decreased in 2009 as a
result of the mortgage loan sale and increased principal repayments. For the years ended December
31, 2008 and 2007, we increased our allowance for credit losses through a provision of $0.3 million
and $0.1 million.
118
The following table summarizes our loan delinquencies at December 31, 2009 (dollars in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid Principal Balance |
|
|
|
|
|
|
|
Government- |
|
|
|
|
|
|
Conventional |
|
|
Insured |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30 days |
|
$ |
89 |
|
|
$ |
17 |
|
|
$ |
106 |
|
60 days |
|
|
34 |
|
|
|
6 |
|
|
|
40 |
|
90 days |
|
|
21 |
|
|
|
3 |
|
|
|
24 |
|
Greater than 90 days |
|
|
22 |
|
|
|
2 |
|
|
|
24 |
|
Foreclosures and bankruptcies |
|
|
64 |
|
|
|
1 |
|
|
|
65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total delinquencies |
|
$ |
230 |
|
|
$ |
29 |
|
|
$ |
259 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans outstanding |
|
$ |
7,333 |
|
|
$ |
380 |
|
|
$ |
7,713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquencies as a percent of
total mortgage loans |
|
|
3.1 |
% |
|
|
7.6 |
% |
|
|
3.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquencies 90 days and
greater plus foreclosures and
bankruptcies as a
percent of total mortgage loans |
|
|
1.5 |
% |
|
|
1.6 |
% |
|
|
1.5 |
% |
|
|
|
|
|
|
|
|
|
|
The following table summarizes our loan delinquencies at December 31, 2008 (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 |
% |
|
|
|
|
|
|
|
|
|
|
119
We place any conventional mortgage loan that is 90 days or more past due on nonaccrual status,
meaning interest income on the loan is not accrued and any cash payments received are applied as a
reduction of principal. A government-insured loan that is 90 days or more past due is not placed on
nonaccrual status because of the (i) U.S. government guarantee of the loan and (ii) contractual
obligation of the loan servicer to repurchase the loan when certain criteria are met.
As shown in the tables above, delinquencies and nonaccrual loans for our conventional
portfolio increased in 2009 when compared to 2008, which is consistent with the overall trend of
increased delinquencies in the mortgage market. Delinquencies for our government-insured portfolio
decreased in 2009 when compared to 2008 primarily due to fewer delinquent loans and the contractual
obligation of the loan servicer to repurchase the loans when certain criteria are met.
The following table shows the state concentrations of our MPF portfolio at December 31, 2009.
State concentrations are calculated based on unpaid principal balances.
|
|
|
|
|
State Concentrations |
|
|
|
|
|
|
|
|
|
Minnesota |
|
|
18.5 |
% |
Iowa |
|
|
16.8 |
% |
Missouri |
|
|
9.4 |
% |
California |
|
|
6.8 |
% |
Illinois |
|
|
4.7 |
% |
All others1 |
|
|
43.8 |
% |
|
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
|
|
|
|
|
1 |
|
There are no individual states with a concentration greater than 2.9 percent. |
Effective August 1, 2009, we introduced a temporary loan payment modification plan for
participating PFIs, which will be available until December 31, 2011. Homeowners with conventional
loans secured by their primary residence originated prior to January 1, 2009 are eligible for the
modification plan. This modification plan is available to homeowners currently in default or
imminent danger of default. The modification plan states specific eligibility requirements that
must be met and procedures the PFIs must follow to participate in the modification plan.
Mortgage-Backed Securities
Finance Agency regulations allow us to invest in MBS guaranteed by the U.S. Government, GSEs,
and other MBS that are rated AAA by S&P, Aaa by Moodys, or AAA by Fitch on the purchase date. We
are exposed to credit risk to the extent these MBS fail to perform adequately. We do ongoing
analysis to evaluate the investments and creditworthiness of the issuers, trustees, and servicers
for potential credit issues.
120
At December 31, 2009, we owned $11.3 billion of MBS, of which $11.2 billion or 99 percent were
guaranteed by the U.S. Government or issued by GSEs and $0.1 billion or one percent were MPF shared
funding certificates or private-label MBS. At December 31, 2008, we owned $9.3 billion of MBS, of
which $9.2 billion or 99 percent were guaranteed by the U.S. Government or issued by GSEs and $0.1
billion or one percent were MPF shared funding certificates or private-label MBS.
Our MPF shared funding certificates are mortgage-backed certificates created from conventional
conforming mortgages using a senior/subordinated tranche structure. We record these investments as
held-to-maturity. We do not consolidate our investment in MPF shared funding certificates since we
are not the sponsor or primary beneficiary of these variable interest entities. The following table
shows our MPF shared funding certificates and credit ratings at December 31, 2009 and 2008 (dollars
in millions):
|
|
|
|
|
|
|
|
|
Credit Rating |
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
AAA |
|
$ |
31 |
|
|
$ |
45 |
|
AA |
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
33 |
|
|
$ |
47 |
|
|
|
|
|
|
|
|
Our private-label MBS were all variable rate securities rated AA or higher by an NRSRO at
December 31, 2009 and 2008 with the exception of one private-label MBS that was downgraded to an A
rating on May 29, 2009. As of February 28, 2010, there have been no subsequent rating agency
actions on our private-label MBS. All of these private-label MBS are backed by prime loans. For
more information on our evaluation of OTTI, see Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operation Critical Accounting Policies and Estimates
Other-Than-Temporary Impairment and Item 8. Financial Statements and Supplementary Date Note 7
Other-Than-Temporary Impairment.
The following table summarizes the characteristics of our private-label MBS by year of
securitization at December 31, 2009 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal |
|
|
Unrealized |
|
|
|
|
|
|
Investment |
|
|
|
|
Year of Securitization |
|
Balance |
|
|
Losses |
|
|
Fair Value |
|
|
Grade %1 |
|
|
Watchlist %2 |
|
2003 and earlier |
|
$ |
35 |
|
|
$ |
7 |
|
|
$ |
28 |
|
|
|
100 |
% |
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Investment grade includes securities that are rated BBB or higher by any NRSRO. |
|
2 |
|
Includes any securities placed on negative watch by any NRSRO. |
121
The following table summarizes the fair value of our private-label MBS as a percentage of
unpaid principal balance by quarter:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
September 30, |
|
|
June 30, |
|
|
March 31, |
|
|
December 31, |
|
Year of Securitization |
|
2009 |
|
|
2009 |
|
|
2009 |
|
|
2009 |
|
|
2008 |
|
2003 and
earlier |
|
|
80 |
% |
|
|
81 |
% |
|
|
80 |
% |
|
|
77 |
% |
|
|
74 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows portfolio characteristics of the underlying collateral of our
private-label MBS at December 31, 2009:
|
|
|
|
|
Portfolio Characteristics |
|
2009 |
|
|
|
|
|
|
Weighted average FICO score at origination1 |
|
|
725 |
|
Weighted average loan-to-value at origination |
|
|
65 |
% |
Weighted average original credit enhancement |
|
|
4 |
% |
Weighted average credit enhancement |
|
|
9 |
% |
Weighted average delinquency rate2 |
|
|
5 |
% |
|
|
|
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 delinquency rate on underlying loans that are 60 days or more
past due. |
The following table shows the state concentrations of our private-label MBS at December
31, 2009. State concentrations are calculated based on unpaid principal balances.
|
|
|
|
|
State Concentrations |
|
|
|
|
|
|
|
|
|
Florida |
|
|
14.1 |
% |
California |
|
|
13.1 |
% |
Georgia |
|
|
11.9 |
% |
New York |
|
|
9.4 |
% |
New Jersey |
|
|
5.1 |
% |
All other1 |
|
|
46.4 |
% |
|
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
|
|
|
|
|
1 |
|
There are no individual states with a concentration greater than 4.4
percent. |
Investments
We maintain an investment portfolio to provide investment income, provide liquidity, support
the business needs of our members, and support the housing market through the purchase of
mortgage-related assets. Finance Agency regulations and policies adopted by our Board of Directors
limit the type of investments we may purchase.
122
We invest in both short- and long-term investments. Our short-term portfolio includes, but is
not limited to, interest-bearing deposits, Federal funds sold, commercial paper, and securities
purchased under agreements to resell. Our long-term portfolio includes, but is not limited to, GSE
obligations, MBS, municipal bonds, state and local HFA obligations, and TLGP debt. The primary
credit risk of these investments is the counterparties ability to meet repayment terms.
We mitigate credit risk on investment securities by investing in highly-rated investment
securities as well as establishing unsecured credit limits to counterparties based on the credit
quality and capital levels of the counterparty as well as our capital level. 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 following table shows our total investment securities by investment rating (excluding
accrued interest receivable) (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
December 31, 2008 |
|
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
|
of Total |
|
|
|
|
|
|
of Total |
|
Credit Rating1 |
|
Amount |
|
|
Investments |
|
|
Amount |
|
|
Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA2 |
|
$ |
16,687 |
|
|
|
80.3 |
% |
|
$ |
11,477 |
|
|
|
74.7 |
% |
AA |
|
|
503 |
|
|
|
2.4 |
|
|
|
75 |
|
|
|
0.5 |
|
A |
|
|
5 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
BBB |
|
|
3 |
|
|
|
* |
|
|
|
3 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term |
|
|
17,198 |
|
|
|
82.7 |
|
|
|
11,555 |
|
|
|
75.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A-1 or higher/P-1 |
|
|
3,310 |
|
|
|
15.9 |
|
|
|
3,480 |
|
|
|
22.6 |
|
A-2/P-2 |
|
|
278 |
|
|
|
1.4 |
|
|
|
330 |
|
|
|
2.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term |
|
|
3,588 |
|
|
|
17.3 |
|
|
|
3,810 |
|
|
|
24.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrated3 |
|
|
4 |
|
|
|
* |
|
|
|
4 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
20,790 |
|
|
|
100.0 |
% |
|
$ |
15,369 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Credit rating is the lowest of S&P, Moodys, and Fitch ratings stated in terms of
the S&P equivalent. |
|
2 |
|
AAA rated investments include TLGP investments. We categorize these investments as AAA
because of the U.S. Government guarantee. |
|
3 |
|
Unrated securities represent an equity investment in Small Business Investment
Company. |
|
* |
|
Amount is less than 0.1 percent. |
123
The increase in AAA and AA investments from 2008 to 2009 was due to increased investment
purchases in an effort to improve investment income and replace mortgage assets sold in 2009. The
increase was primarily due to purchases of TLGP investments and AA rated taxable municipal
investments. For more details relating to our investment purchases, see Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operation Results of Operations -
Net Interest Income by Segment.
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 us that
value 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.
We manage this credit risk by spreading our transactions among many highly rated
counterparties, by entering into collateral exchange agreements with counterparties that include
minimum collateral thresholds, and by monitoring our exposure to each counterparty on a daily
basis. In addition, all of our collateral exchange agreements include master netting arrangements
whereby the fair values of all interest rate derivatives (including accrued interest receivable 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.
124
The following tables show our derivative counterparty credit exposure at December 31, 2009 and
2008 excluding mortgage delivery commitments and after applying netting agreements and collateral
(dollars in millions). We were in a net liability position at December 31, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Value |
|
|
Exposure |
|
|
|
Active |
|
|
Notional |
|
|
Exposure at |
|
|
of Collateral |
|
|
Net of |
|
Credit Rating1 |
|
Counterparties |
|
|
Amount2 |
|
|
Fair Value3 |
|
|
Pledged |
|
|
Collateral4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA |
|
|
1 |
|
|
$ |
276 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
AA |
|
|
7 |
|
|
|
17,419 |
|
|
|
5 |
|
|
|
|
|
|
|
5 |
|
A |
|
|
14 |
|
|
|
29,176 |
|
|
|
9 |
|
|
|
3 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
22 |
|
|
$ |
46,871 |
|
|
$ |
14 |
|
|
$ |
3 |
|
|
$ |
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. Our Enterprise Risk Committee
reviews risk assessment results and business unit recommendations regarding operational risk.
125
Management reduces the risk of process and system failures by implementing internal controls
designed to provide reasonable assurance that transactions are recorded in accordance with source
documentation and by maintaining certain back-up facilities. In addition, management has developed
and tested a comprehensive business continuity plan to restore mission critical processes and
systems in a timely manner. Our Internal Audit Department also conducts independent operational and
information system audits on a regular basis to ensure that adequate internal controls exist.
We use various financial models and model output to quantify financial risks and analyze
potential strategies. Management mitigates the risk of incorrect model output leading to
inappropriate business decisions by benchmarking model results to independent sources and having
third parties periodically validate critical models.
We are prepared to deliver services to customers in normal operating environments as well as
in the presence of significant internal or external stresses.
Despite the above policies and oversight, some operational risks are beyond our control, and
the failure of other parties to adequately address their operational risk could adversely affect
us.
Business Risk
We define business risk as the risk of an adverse impact on our 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. From time to time, proposals are made, or legislative and regulatory changes are
considered, which could affect our cost of doing business. Our risk management committees regularly
discuss business risk issues. We control business risk through strategic and annual business
planning and monitoring of our external environment.
126
ITEM
7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operation Risk Management Market Risk/Capital Adequacy and the sections referenced therein for
Quantitative and Qualitative Disclosures about Market Risk.
ITEM
8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements and accompanying notes, including the report of independent
registered public accounting firm, are set forth beginning at page S-1.
|
|
|
|
|
Audited Financial Statements |
|
|
|
|
Report of Independent Auditors dated March 18, 2010 PricewaterhouseCoopers LLP |
|
|
|
|
Statements of Condition at December 31, 2009 and 2008 |
|
|
|
|
Statements of Income for the Years Ended December 31, 2009, 2008, and 2007 |
|
|
|
|
Statements of Changes in Capital for the Years Ended December 31, 2009, 2008, and 2007 |
|
|
|
|
Statements of Cash Flows for the Years Ended December 31, 2009, 2008, and 2007 |
|
|
|
|
Notes to Financial Statements |
|
|
|
|
127
Supplementary Data
Selected Quarterly Financial Information
The following tables present selected financial data from the Statements of Condition at the
end of each quarter of 2009 and 2008. They also present selected quarterly operating results for
the same periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
December 31, |
|
|
September 30, |
|
|
June 30, |
|
|
March 31, |
|
Statements of Condition
(Dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments1 |
|
$ |
20,790 |
|
|
$ |
21,134 |
|
|
$ |
21,576 |
|
|
$ |
27,199 |
|
Advances |
|
|
35,720 |
|
|
|
36,303 |
|
|
|
37,165 |
|
|
|
37,783 |
|
Mortgage loans2 |
|
|
7,719 |
|
|
|
7,839 |
|
|
|
8,120 |
|
|
|
10,588 |
|
Total assets |
|
|
64,657 |
|
|
|
65,426 |
|
|
|
67,032 |
|
|
|
75,931 |
|
Consolidated obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount notes |
|
|
9,417 |
|
|
|
12,874 |
|
|
|
19,967 |
|
|
|
29,095 |
|
Bonds |
|
|
50,495 |
|
|
|
46,918 |
|
|
|
41,599 |
|
|
|
41,633 |
|
Total consolidated obligations3 |
|
|
59,912 |
|
|
|
59,792 |
|
|
|
61,566 |
|
|
|
70,728 |
|
Mandatorily redeemable capital stock |
|
|
8 |
|
|
|
18 |
|
|
|
12 |
|
|
|
11 |
|
Capital stock Class B putable |
|
|
2,461 |
|
|
|
2,952 |
|
|
|
2,923 |
|
|
|
2,871 |
|
Retained earnings |
|
|
484 |
|
|
|
458 |
|
|
|
437 |
|
|
|
368 |
|
Accumulated other comprehensive loss |
|
|
(34 |
) |
|
|
(24 |
) |
|
|
(22 |
) |
|
|
(78 |
) |
Total capital |
|
|
2,911 |
|
|
|
3,386 |
|
|
|
3,338 |
|
|
|
3,161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
2009 |
|
|
|
December 31, |
|
|
September 30, |
|
|
June 30, |
|
|
March 31, |
|
Statements of Income
(Dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income4 |
|
$ |
66.9 |
|
|
$ |
58.1 |
|
|
$ |
63.1 |
|
|
$ |
9.3 |
|
Provision for credit losses on mortgage loans |
|
|
1.2 |
|
|
|
* |
|
|
|
0.3 |
|
|
|
|
|
Other income (loss)5 |
|
|
6.6 |
|
|
|
1.5 |
|
|
|
51.2 |
|
|
|
(3.5 |
) |
Other expense |
|
|
17.3 |
|
|
|
11.3 |
|
|
|
12.8 |
|
|
|
11.7 |
|
Net income |
|
|
40.4 |
|
|
|
35.5 |
|
|
|
75.9 |
|
|
|
(5.9 |
) |
|
|
|
1 |
|
Investments include: interest-bearing deposits, securities purchased under
agreements to resell, Federal funds sold, trading securities, available-for-sale securities,
and held-to-maturity securities. |
|
2 |
|
Represents the gross amount of mortgage loans prior to the allowance for credit
losses. The allowance for credit losses was $1.9 million, $0.8 million, $0.7 million, and $0.5
million at December 31, 2009, September 30, 2009, June 30, 2009, and March 31, 2009. |
|
3 |
|
The par amount of the outstanding consolidated obligations for all 12
FHLBanks was $930.5 billion, $973.6 billion, $1,055.8 billion, and $1,135.4 billion at
December 31, 2009, September 30, 2009, June 30, 2009, and March 31, 2009, respectively. |
|
4 |
|
Net interest income is before provision for credit losses on mortgage loans. |
|
5 |
|
Other income (loss) includes, among other things, net gain (loss) on derivatives and
hedging activities, net (loss) gain on extinguishment of debt, net gain on trading securities,
and net loss on bonds held at fair value. |
|
* |
|
Represents an amount less than $0.1 million. |
128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
December 31, |
|
|
September 30, |
|
|
June 30, |
|
|
March 31, |
|
Statements of Condition
(Dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments1 |
|
$ |
15,369 |
|
|
$ |
11,868 |
|
|
$ |
14,047 |
|
|
$ |
12,077 |
|
Advances |
|
|
41,897 |
|
|
|
63,897 |
|
|
|
46,022 |
|
|
|
47,092 |
|
Mortgage loans2 |
|
|
10,685 |
|
|
|
10,576 |
|
|
|
10,583 |
|
|
|
10,707 |
|
Total assets |
|
|
68,129 |
|
|
|
87,069 |
|
|
|
70,838 |
|
|
|
70,082 |
|
Consolidated obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount notes |
|
|
20,061 |
|
|
|
41,753 |
|
|
|
27,714 |
|
|
|
32,365 |
|
Bonds |
|
|
42,723 |
|
|
|
39,217 |
|
|
|
37,588 |
|
|
|
32,166 |
|
Total consolidated obligations3 |
|
|
62,784 |
|
|
|
80,970 |
|
|
|
65,302 |
|
|
|
64,531 |
|
Mandatorily redeemable capital stock |
|
|
11 |
|
|
|
11 |
|
|
|
43 |
|
|
|
43 |
|
Capital stock Class B putable |
|
|
2,781 |
|
|
|
3,807 |
|
|
|
3,016 |
|
|
|
3,012 |
|
Retained earnings |
|
|
382 |
|
|
|
404 |
|
|
|
388 |
|
|
|
367 |
|
Accumulated other comprehensive loss |
|
|
(146 |
) |
|
|
(106 |
) |
|
|
(58 |
) |
|
|
(122 |
) |
Total capital |
|
|
3,017 |
|
|
|
4,105 |
|
|
|
3,346 |
|
|
|
3,257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
2008 |
|
|
|
December 31, |
|
|
September 30, |
|
|
June 30, |
|
|
March 31, |
|
Statements of Income
(Dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income4 |
|
$ |
28.2 |
|
|
$ |
79.7 |
|
|
$ |
73.0 |
|
|
$ |
64.7 |
|
Provision for credit losses on mortgage loans |
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (loss) income5 |
|
|
(13.5 |
) |
|
|
(6.6 |
) |
|
|
3.9 |
|
|
|
(11.6 |
) |
Other expense |
|
|
11.3 |
|
|
|
10.8 |
|
|
|
11.6 |
|
|
|
10.4 |
|
Net income |
|
|
2.3 |
|
|
|
45.8 |
|
|
|
47.9 |
|
|
|
31.4 |
|
|
|
|
|
|
|
|
1 |
|
Investments include: interest-bearing deposits, Federal funds sold, trading
securities, available-for-sale securities, and held-to-maturity securities.
|
|
2 |
|
Represents the gross amount of mortgage loans prior to the allowance for credit
losses. The allowance for credit losses was $0.5 million at December 31, 2008 and $0.2 million
at September 30, 2008, June 30, 2008, and March 31, 2008.
|
|
3 |
|
The par amount of the outstanding consolidated obligations for all 12
FHLBanks was $1,251.5 billion, $1,327.9 billion, $1,255.5 billion, and $1,220.4 billion at
December 31, 2008, September 30, 2008, June 30, 2008, and March 31, 2008, respectively.
|
|
4 |
|
Net interest income is before provision for credit losses on mortgage loans. |
|
5 |
|
Other (loss) income includes net (loss) gain on derivatives and hedging activities. |
129
Investment Portfolio Analysis
Supplementary financial data on our investment securities for the years ended December 31,
2009, 2008, and 2007 are included in the tables below.
At December 31, 2009, we had investments with a book value greater than 10 percent of our
total capital with the following issuers (excluding GSEs and U.S. government agencies) (dollars in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
Total |
|
|
Market |
|
|
|
Book Value |
|
|
Value |
|
Bank of America Corporation |
|
$ |
758 |
|
|
$ |
758 |
|
Bank of the West |
|
|
304 |
|
|
|
304 |
|
Bank of Nova Scotia |
|
|
545 |
|
|
|
545 |
|
BBVA |
|
|
461 |
|
|
|
461 |
|
BNP Paribas |
|
|
395 |
|
|
|
395 |
|
Citibank, N.A. |
|
|
340 |
|
|
|
340 |
|
Credit Industriel |
|
|
300 |
|
|
|
300 |
|
GE Capital Corporation |
|
|
1,105 |
|
|
|
1,105 |
|
JP Morgan |
|
|
656 |
|
|
|
656 |
|
Morgan Stanley |
|
|
327 |
|
|
|
327 |
|
National Bank of Canada |
|
|
425 |
|
|
|
425 |
|
Nordea Bank |
|
|
300 |
|
|
|
300 |
|
Northern Trust Company |
|
|
550 |
|
|
|
550 |
|
Westpac Banking Corporation |
|
|
450 |
|
|
|
451 |
|
|
|
|
|
|
|
|
|
|
$ |
6,916 |
|
|
$ |
6,917 |
|
|
|
|
|
|
|
|
Trading Securities
Our trading portfolio totals at December 31, 2009 and 2008 were as follows (dollars in
millions). We did not have any trading securities in 2007.
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
TLGP1 |
|
$ |
3,693 |
|
|
$ |
2,151 |
|
Taxable municipal bonds2 |
|
|
741 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,434 |
|
|
$ |
2,151 |
|
|
|
|
|
|
|
|
|
|
|
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 |
|
Taxable municipal bonds represented investments in U.S. Government subsidized Build
America Bonds that provide the bondholder with a higher yield than traditional tax-exempt
municipal bonds. |
130
The table below presents book value and yield characteristics on the basis of remaining
terms to contractual maturity for our trading securities at December 31, 2009 (dollars in
millions):
|
|
|
|
|
|
|
|
|
|
|
Book Value |
|
|
Yield |
|
TLGP |
|
|
|
|
|
|
|
|
After one but within five years |
|
$ |
3,693 |
|
|
|
0.90 |
% |
Taxable municipal bonds |
|
|
|
|
|
|
|
|
After five but within ten years |
|
|
12 |
|
|
|
4.15 |
|
After ten years |
|
|
729 |
|
|
|
4.98 |
|
|
|
|
|
|
|
|
Total available-for-sale securities |
|
$ |
4,434 |
|
|
|
1.60 |
% |
|
|
|
|
|
|
|
Available-for-Sale Securities
Our available-for-sale portfolio totals at December 31, 2009, 2008, and 2007 were as follows
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State or local housing agency
obligations1 |
|
$ |
|
|
|
$ |
1 |
|
|
$ |
|
|
TLGP2 |
|
|
566 |
|
|
|
|
|
|
|
|
|
Government-sponsored enterprises3 |
|
|
7,171 |
|
|
|
3,839 |
|
|
|
3,434 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
7,737 |
|
|
$ |
3,840 |
|
|
$ |
3,434 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
State or local housing agency obligations represented HFA bonds that were
purchased by us from housing associates in our district. |
|
2 |
|
TLGP securities represented corporate debentures of the issuing party that are backed
by the full faith and credit of the U.S. Government. |
|
3 |
|
GSE represented Fannie Mae and Freddie Mac MBS and TVA and FFCB bonds. |
The table below presents book value and yield characteristics on the basis of remaining
terms to contractual maturity for our available-for-sale securities at December 31, 2009 (dollars
in millions):
|
|
|
|
|
|
|
|
|
|
|
Book Value |
|
|
Yield |
|
TLGP |
|
|
|
|
|
|
|
|
After one but within five years |
|
$ |
566 |
|
|
|
0.62 |
% |
Government-sponsored enterprises |
|
|
|
|
|
|
|
|
After one but within five years |
|
|
10 |
|
|
|
3.29 |
|
After five but within ten years |
|
|
950 |
|
|
|
4.43 |
|
After ten years |
|
|
6,211 |
|
|
|
0.96 |
|
|
|
|
|
|
|
|
Total available-for-sale securities |
|
$ |
7,737 |
|
|
|
1.36 |
% |
|
|
|
|
|
|
|
131
Held-to-Maturity Securities
Our held-to-maturity portfolio at December 31, 2009, 2008, and 2007 includes (dollars in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Negotiable certificates of deposit |
|
$ |
450 |
|
|
$ |
|
|
|
$ |
100 |
|
Government-sponsored enterprises1 |
|
|
4,782 |
|
|
|
5,330 |
|
|
|
3,458 |
|
U.S. government agency-guaranteed2 |
|
|
43 |
|
|
|
52 |
|
|
|
64 |
|
State or local housing agency
obligations3 |
|
|
124 |
|
|
|
93 |
|
|
|
74 |
|
TLGP4 |
|
|
1 |
|
|
|
|
|
|
|
|
|
Other 5 |
|
|
75 |
|
|
|
477 |
|
|
|
309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held-to-maturity securities |
|
$ |
5,475 |
|
|
$ |
5,952 |
|
|
$ |
4,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
GSE represented Fannie Mae and Freddie Mac MBS and TVA and FFCB bonds. |
|
2 |
|
U.S. government agency-guaranteed represented Ginnie Mae securities and SBA Pool
Certificates. SBA Pool Certificates represented 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. |
|
3 |
|
State or local housing agency obligations represented HFA bonds that were purchased
by us from housing associates in our district. |
|
4 |
|
TLGP securities represented corporate debentures issued by our members that are
backed by the full faith and credit of the U.S. Government. |
|
5 |
|
Other represented investments in municipal bonds, Small Business Investment Company,
MPF shared funding and private-label MBS. |
132
The table below presents book value and yield characteristics on the basis of remaining
terms to contractual maturity for our held-to-maturity securities at December 31, 2009 (dollars in
millions):
|
|
|
|
|
|
|
|
|
|
|
Book Value |
|
|
Yield |
|
Certificates of deposit |
|
|
|
|
|
|
|
|
Within one year |
|
$ |
450 |
|
|
|
0.70 |
% |
Government-sponsored enterprises |
|
|
|
|
|
|
|
|
After five but within 10 years |
|
|
9 |
|
|
|
5.27 |
|
After 10 years |
|
|
4,773 |
|
|
|
2.93 |
|
U.S. government agency-guaranteed |
|
|
|
|
|
|
|
|
After five but within 10 years |
|
|
4 |
|
|
|
1.04 |
|
After 10 years |
|
|
39 |
|
|
|
0.79 |
|
State or local housing agency obligations |
|
|
|
|
|
|
|
|
After five but within 10 years |
|
|
3 |
|
|
|
5.40 |
|
After 10 years |
|
|
121 |
|
|
|
5.72 |
|
TLGP |
|
|
|
|
|
|
|
|
After one but within five years |
|
|
1 |
|
|
|
3.08 |
|
Other |
|
|
|
|
|
|
|
|
Within one year |
|
|
3 |
|
|
|
6.58 |
|
After five but within 10 years |
|
|
* |
|
|
|
0.73 |
|
After 10 years |
|
|
72 |
|
|
|
2.99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held-to-maturity securities |
|
$ |
5,475 |
|
|
|
2.80 |
% |
|
|
|
|
|
|
|
|
|
|
* |
|
Amount is less than one million. |
133
Loan Portfolio Analysis
Our outstanding advances, real estate mortgages, nonperforming real estate mortgages, and real
estate mortgages 90 days or more past due and accruing interest for the years ended December 31,
2009, 2008, 2007, 2006, and 2005 are as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances |
|
$ |
35,720 |
|
|
$ |
41,897 |
|
|
$ |
40,412 |
|
|
$ |
21,855 |
|
|
$ |
22,283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate mortgages |
|
$ |
7,717 |
|
|
$ |
10,685 |
|
|
$ |
10,802 |
|
|
$ |
11,775 |
|
|
$ |
13,018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming real
estate mortgages1 |
|
$ |
102 |
|
|
$ |
48 |
|
|
$ |
27 |
|
|
$ |
24 |
|
|
$ |
33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate mortgages past
due 90 days or
more and still accruing
interest2 |
|
$ |
5 |
|
|
$ |
7 |
|
|
$ |
5 |
|
|
$ |
6 |
|
|
$ |
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming real estate mortgages |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest contractually due
during the period |
|
$ |
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest actually received
during the
period |
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shortfall |
|
$ |
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Nonperforming real estate mortgages represent conventional mortgage loans that are 90
days or more past due and have been placed on nonaccrual status. |
|
2 |
|
Only government-insured loans continue to accrue after 90 days or more delinquent,
because of the i) U.S. government guarantee of the loans and ii) contractual obligation of the
loan servicer to repurchase the loan when certain criteria are met. |
134
Summary of Loan Loss Experience
The allowance for credit losses on real estate mortgage loans for the years ended December 31,
2009, 2008, 2007, 2006, and 2005 are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning
of year |
|
$ |
500 |
|
|
$ |
300 |
|
|
$ |
250 |
|
|
$ |
763 |
|
|
$ |
760 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs |
|
|
(88 |
) |
|
|
(95 |
) |
|
|
(19 |
) |
|
|
|
|
|
|
|
|
|
Recoveries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (charge-offs)
recoveries |
|
|
(88 |
) |
|
|
(95 |
) |
|
|
(19 |
) |
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for
(reversal of)
credit
losses |
|
|
1,475 |
|
|
|
295 |
|
|
|
69 |
|
|
|
(513 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of
period |
|
$ |
1,887 |
|
|
$ |
500 |
|
|
$ |
300 |
|
|
$ |
250 |
|
|
$ |
763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The ratio of net (charge-offs) recoveries to average loans outstanding was less than one
basis point for the years ended December 31, 2009, 2008, 2007, 2006, and 2005.
Advances
The following table shows our outstanding advances at December 31, 2009 (dollars in millions):
|
|
|
|
|
Maturity |
|
|
|
|
Overdrawn demand deposit accounts |
|
$ |
* |
|
Within one year |
|
|
7,810 |
|
After one but within five years |
|
|
16,812 |
|
After five years |
|
|
10,410 |
|
|
|
|
|
|
|
|
|
|
Total par value |
|
|
35,032 |
|
|
|
|
|
|
Hedging fair value adjustments |
|
|
|
|
Cumulative fair value gain |
|
|
590 |
|
Basis adjustments from terminated
and ineffective hedges |
|
|
98 |
|
|
|
|
|
|
|
|
|
|
Total advances |
|
$ |
35,720 |
|
|
|
|
|
|
|
|
* |
|
Amount is less than one million. |
135
The following table details additional interest rate payment terms for advances at
December 31, 2009 (dollars in millions):
|
|
|
|
|
Par amount of advances |
|
|
|
|
Fixed rate maturity |
|
|
|
|
Overdrawn demand deposit accounts |
|
$ |
* |
|
Within one year |
|
|
7,203 |
|
After one year |
|
|
17,398 |
|
|
|
|
|
|
Variable rate maturity |
|
|
|
|
Within one year |
|
|
607 |
|
After one year |
|
|
9,824 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
35,032 |
|
|
|
|
|
|
|
|
* |
|
Amount is less than one million. |
Short-term Borrowings
Borrowings with original maturities of one year or less are classified as short-term. The
following is a summary of short-term borrowings for the years ended December 31, 2009, 2008, and
2007 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Discount notes |
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at period-end |
|
$ |
9,417 |
|
|
$ |
20,061 |
|
|
$ |
21,501 |
|
Weighted average rate at period-end |
|
|
0.13 |
% |
|
|
1.83 |
% |
|
|
4.10 |
% |
Daily average outstanding for the
period |
|
$ |
20,736 |
|
|
$ |
26,543 |
|
|
$ |
8,597 |
|
Weighted average rate for the period |
|
|
0.64 |
% |
|
|
2.32 |
% |
|
|
4.93 |
% |
Highest outstanding at any month-end |
|
$ |
29,094 |
|
|
$ |
41,753 |
|
|
$ |
21,501 |
|
Ratios
Financial ratios for the years ended December 31, 2009, 2008, and 2007 are provided in the
following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets |
|
|
0.21 |
% |
|
|
0.18 |
% |
|
|
0.21 |
% |
Return on average equity |
|
|
4.46 |
% |
|
|
3.88 |
% |
|
|
4.25 |
% |
Average equity to average assets |
|
|
4.63 |
% |
|
|
4.71 |
% |
|
|
5.04 |
% |
Dividends declared per share in
stated period as a percentage
of net income per share in
stated period |
|
|
29.81 |
% |
|
|
90.77 |
% |
|
|
86.82 |
% |
136
ITEM
9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures at December 31, 2009
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934 (Exchange Act)) designed to provide reasonable assurance
that information required to be disclosed in reports we file or submit under the Exchange Act is
(i) recorded, processed, summarized, and reported within the time periods specified in SEC rules
and forms; and (ii) accumulated and communicated to our management, including our principal
executive officer and principal financial officer, as appropriate to allow timely decisions
regarding required disclosure.
In connection with the filing of this Form 10-K, under the supervision and with the
participation of our management, including our Chief Executive Officer (CEO) and Chief Financial
Officer (CFO), we evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act). Based upon that evaluation, the CEO and CFO concluded that our disclosure controls
and procedures were effective at December 31, 2009.
Report of Management on Internal Control over Financial Reporting at December 31, 2009
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our
internal control system is designed to provide reasonable assurance to our management and Board of
Directors regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with GAAP. Our internal control over financial
reporting includes those policies and procedures that (i) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our
assets; (ii) provide reasonable assurance transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP, and our receipts and expenditures are
made only in accordance with authorizations of our management and directors; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or the
degree of compliance with the policies or procedures may deteriorate.
137
Management assessed the effectiveness of our internal control over financial reporting at
December 31, 2009. In making this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission in Internal Control Integrated
Framework. Based on our assessment and those criteria, management believes, at December 31, 2009,
we maintained effective internal control over financial reporting.
PricewaterhouseCoopers, LLP (PwC), the independent registered public accounting firm that
audited our financial statements, issued an audit report on our internal control over financial
reporting. PwCs audit report appears in Item 8. Financial Statements and Supplementary Data
Audited Financial Statements.
ITEM
9B OTHER INFORMATION
In accordance with the FHLBank Act and Finance Agency regulations, members now elect all
directors that will serve on the Banks Board of Directors for terms beginning January 1, 2010. For
details relating to the director election process see Item 10 Directors, Executive Officers and
Corporate Governance Directors.
Our Board of Directors does not solicit proxies, nor were member institutions permitted to
solicit or use proxies to cast their votes in the election.
For 2010, the Finance Agency has designated seven independent directorships and nine member
directorships for a 16-member board beginning January 1, 2010. See the 2009 Director Election
Results below.
2009 Director Election Results
Elections were held during the third and fourth quarters of 2009 for those industry directors
elected by our member institutions (Member Directors) on a state-by-state basis and independent
directors elected by a plurality of our members (Independent Directors) with terms ending December
31, 2009. On November 11, 2009, five individuals were elected to our Board of Directors. The
following information summarizes the results of the elections:
Dale E. Oberkfell, president and chief operating officer of Reliance Bank in Frontenac,
Missouri. Mr. Oberkfell, who serves as our vice chairman, was re-elected to a four-year Member
Directorship term for the state of Missouri. Mr. Oberkfell has served on the Board of Directors
since January 1, 2007.
Clair J. Lensing, president and chief executive officer of Security State Bank in Waverly,
Iowa. Mr. Lensing was re-elected to a four-year Member Directorship term for the state of Iowa. Mr.
Lensing has served on the Board of Directors since January 1, 2004.
Chris D. Grimm, president of Iowa State Bank in Wapello, Iowa. Mr. Grimm was newly elected to
a two-year Member Directorship term for the state of Iowa.
138
Labh S. Hira, Ph.D., Dean of the College of Business at Iowa State University in Ames, Iowa,
was elected to a four-year Independent Directorship term. Dr. Hira has served on the Board of
Directors since May 14, 2007.
John H. Robinson, chairman of Hamilton Ventures, LLC in Kansas City, Missouri, was elected to
a two-year Independent Directorship term. Mr. Robinson has served on the Board of Directors since
May 14, 2007.
For further details of the results of the director elections, including the number of votes
cast for, against or withheld, as well as the number of abstentions, see Item 5.02 of our current
reports on Form 8-K filed with the SEC on November 12, 2009. See Item 10. Directors, Executive
Officers and Corporate Governance Directors for a list of directors at December 31, 2009, and
for those whose terms will continue in 2010.
PART III
ITEM
10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors
The Board of Directors is responsible for monitoring our compliance with Finance Agency
regulations and establishing policies and programs that carry out our housing finance mission. The
Board of Directors adopts, reviews, and oversees the implementation of policies governing our
advance, mortgage loan, investment, and funding activities. Additionally, the Board of Directors
adopts, reviews, and oversees the implementation of policies that manage our exposure to market,
liquidity, credit, operational, and business risks.
Our Board is comprised of Member Directors elected by our member institutions on a
state-by-state basis and Independent Directors elected by a plurality of our members. Prior to
enactment of the Housing Act, our Independent Directors were appointed by the Finance Agency. Our
Board currently includes nine Member Directors and seven Independent Directors, two of which serve
as public interest directors. Under the FHLBank Act, the only matter submitted to shareholders for
votes is the annual election of our Directors. The Housing Act required all of our Directors to be
elected by our members. No member of our management may serve as a director of an FHLBank.
139
For terms beginning January 1, 2010, with the exception of terms shortened by the Finance
Agency for staggering purposes, both Member and Independent Directors serve four-year terms. If any
person has been elected to three consecutive full terms as a Member or Independent Director of our
Board of Directors, the individual is not eligible for election to a Member or Independent
Directorship for a term which begins earlier than two years after the expiration of the last
expiring four-year term.
Member Directorships are allocated by the Finance Agency to the five states in our district
and a member institution is eligible to participate in the election for the state in which it is
located. Candidates for Member Directorships are not nominated by the Board. As provided for in the
FHLBank Act, Member Directors are nominated by the members eligible to participate in the election
in the relevant state. 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 as of the record date for
voting, subject to a statutory limitation. Under this limitation, the total number of votes that
each member may cast is limited to the average number of shares of our capital stock that were
required to be held by all members in that state as of the record date for voting. Under Finance
Agency regulations no director, officer, employee, attorney or agent of the Bank (except in his/her
personal capacity) may, directly or indirectly, support the nomination or election of a particular
individual for a Member Directorship.
Member Directors are required, by statute and regulation, to meet certain eligibility
requirements to serve as a director. To qualify as a Member Director an individual must: (i) be an
officer or director of a member institution in compliance with the minimum capital requirements
established by its regulator and located in the state in which there is an open Directorship and
(ii) be a U.S. citizen. We are not permitted to establish additional qualifications to define
eligibility criteria for Member Directors or nominees. Because of the structure of FHLBank Member
Director nominations and elections, we may not know what factors our member institutions considered
in selecting Member Director nominees or electing Member Directors.
140
Independent Directors are nominated by our Board of Directors after consultation with our
Affordable Housing Advisory Council, and then voted upon by all members within our five-state
district. For each Independent Directorship, a member is entitled to cast the same number of votes
as it would for a Member Directorship.
In order to be eligible to serve as an Independent Director on our Board, an individual must
be a U.S. citizen and maintain a principal residence in a state in our district (or own or lease a
residence in the district and be employed in the district). In addition, the individual may not be
an officer of any FHLBank or a director, officer, or employee of any member institution or of any
recipient of our advances. By Regulation, each public interest director must have more than four
years of personal experience in representing consumer or community interests in banking services,
credit needs, housing, or financial consumer protection. Each Independent Director, other than a
public interest director, must have knowledge of, or experience in, financial management, auditing
or accounting, risk management practices, derivatives, project development, organizational
management, or the law.
On an annual basis, our Board of Directors performs a Board assessment that includes
consideration of the directors backgrounds, expertise, qualifications, and other factors. Based in
part on that assessment, the Board of Directors also annually reviews its Corporate Governance
Principles, which include a statement of the skills and qualifications it desires on the Board.
Furthermore, each director annually provides us a certification that the director continues to meet
all applicable statutory and regulatory eligibility and qualification requirements. In connection
with the election or appointment of an Independent Director, the Independent Director completes an
application to serve on the Board of Directors. As a result of the annual Board assessment and as
of the filing date of this Form 10-K, nothing has come to the attention of the Board or management
to indicate that any of the current Board members do not continue to possess the necessary
experience, qualifications, attributes, or skills expected of the directors that serve on our Board
of Directors, as described in each directors biography below.
Information regarding our current directors and executive officers is provided in the
following sections. There are no family relationships among our directors or executive officers.
141
The table below shows membership information for the Banks Board of Directors at February 28,
2010:
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Expiration of |
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Current Term As |
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Member or |
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Director as of |
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Board |
Director |
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Age |
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Independent |
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Director Since |
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December 31 |
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Committees |
Michael K. Guttau (chair)
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63 |
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Member
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January 1, 2003
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2012 |
|
|
a, c, e, f |
Dale E. Oberkfell (vice
chair)
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54 |
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Member
|
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January 1, 2007
|
|
|
2013 |
|
|
a, b, e, g |
Johnny A. Danos
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70 |
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Independent
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May 14, 2007
|
|
|
2010 |
|
|
a, b, d, f |
Gerald D. Eid
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69 |
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Independent
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January 23, 2004
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2010 |
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b, d, f |
Michael J. Finley
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54 |
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Member
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January 1, 2005
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2010 |
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c, d, g |
Van D. Fishback
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63 |
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Member
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January 1, 2009
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2012 |
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c, e, f |
David R. Frauenshuh
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66 |
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Independent
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January 23, 2004
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2010 |
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b, e, g |
Chris D. Grimm
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51 |
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Member
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January 1, 2010
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2013 |
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c, d, g |
Eric A. Hardmeyer
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50 |
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Member
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January 1, 2008
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2010 |
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a, b, d, g |
Labh S. Hira
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61 |
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Independent
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May 14, 2007
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2013 |
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a, c, e, f |
John F. Kennedy, Sr.
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54 |
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Independent
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May 14, 2007
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2012 |
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b, d, g |
Clair J. Lensing
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75 |
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Member
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January 1, 2004
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2013 |
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b, d, g |
Dennis A. Lind
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59 |
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Member
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January 1, 2006
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2011 |
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a, c, e, f |
Paula R. Meyer
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55 |
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Independent
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May 14, 2007
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2012 |
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a, c, e, g |
John H. Robinson
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59 |
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Independent
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May 14, 2007
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2013 |
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b, d, f |
Joseph C. Stewart III
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40 |
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Member
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January 1, 2008
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2010 |
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c, e, f |
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a) |
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Executive and Governance Committee |
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b) |
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Audit Committee |
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c) |
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Risk Management Committee |
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d) |
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Mission, Member, and Housing Committee |
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e) |
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Finance and Planning Committee |
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f) |
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Human Resource and Compensation Committee (Compensation Committee) |
|
g) |
|
Business Operations and Technology Committee |
142
The following describes the principal occupation, business experience, qualifications, and
skills, among other matters of the 16 Directors who currently serve on our Board of Directors.
Except as otherwise indicated, each Director has been engaged in the principal occupation indicated
for at least the past five years.
Michael K. Guttau, the Boards chair, has been with Treynor State Bank in Treynor, Iowa, since
1978 where he has served as president, chairman, and CEO. He has been actively involved with the
American Bankers Association, Iowa Bankers Association, Community Bankers of Iowa, and served as
the Iowa Superintendent of Banking from 1995 through 1999. He is co-chair of fundraising for
Southwest Iowa Hospice and serves on the Good News Jail and Prison Ministry, and chair of Deaf
Missions. He is also a board member and chair of the audit committee for the Southwest Iowa
Renewable Energy ethanol plant. He served as the 2008-2009 chairman of the Council of FHLBanks,
which is a non-profit trade association for the 12 FHLBanks located in Washington, D.C. He received
the Allegiant Southwest Iowa Heritage Award for 2008. Mr. Guttaus position as an officer of a
member institution and his involvement in and knowledge of banking regulation and financial
management, as indicated by his background, support his qualifications to serve on our Board of
Directors. Mr. Guttau also serves as chair of the Executive and Governance Committee.
Dale E. Oberkfell, the Boards vice chair, has served in a variety of banking positions during
his nearly 30 years in the financial services industry. Since May 2005, Mr. Oberkfell has served as
the president and chief operating officer of Reliance Bank in Des Peres, Missouri. He also
currently serves as executive vice president and CFO of Reliance Bancshares, Inc. in Des Peres,
Missouri, and as an executive officer of Reliance Bank, FSB in Fort Myers, Florida. Prior to
joining Reliance Bank, Mr. Oberkfell was a partner at the Certified Public Accounting firm of
Cummings, Oberkfell & Ristau, P.C. in St. Louis, Missouri. He is a licensed Certified Public
Accountant and is active in the American Institute of Certified Public Accountants. He has held
board positions for several organizations, including the West County YMCA, St. Louis Childrens
Choir, and Young Audiences. Mr. Oberkfells position as an officer of a member institution and his
involvement in and knowledge of finance, accounting, internal controls, and financial management,
as indicated by his background, support his qualifications to serve on our Board of Directors. Mr.
Oberkfell also serves as vice chair of the Executive and Governance Committee and chair of the
Business Operations and Technology Committee.
Johnny A. Danos is Director of Strategic Development for LWBJ Financial in West Des Moines,
Iowa. Previously, Mr. Danos was president of the Greater Des Moines Community Foundation in Des
Moines, Iowa. He is the retired managing partner of the accounting firm of KPMG located in Des
Moines, Iowa and has 31 years of public accounting experience serving commercial, retail, and
financial institutions. He serves on the board of directors of Caseys General Stores and Wright
Tree Service. Mr. Danos involvement and experience in auditing, accounting, and organizational
management, as indicated by his background, support his qualifications to serve as an Independent
Director on our Board of Directors. Mr. Danos also serves as chair of the Mission, Member, and
Housing Committee.
143
Gerald D. Eid has served as CEO of Eid-Co Buildings, Inc. in Fargo, North Dakota, since 1973.
A second-generation builder, Mr. Eid has been in the building business and licensed as a realtor
for more than 30 years. Founded in 1951, Eid-Co Buildings, Inc. is one of the largest single-family
home builders in North Dakota. Mr. Eid has served as a member of the North Dakota Housing Finance
Agency Advisory Board since 1998 and is currently its chair. He also represented North Dakota on
the executive committee of the National Association of Homebuilders. Mr. Eids involvement and
experience in representing community interests in housing as well as housing finance, as indicated
by his background, support Mr. Eids qualifications to serve as a public interest director on our
Board of Directors.
Michael J. Finley has served since 1992 as president of Janesville State Bank in Janesville,
Minnesota. Mr. Finley serves on the Political Action Committee Board of the Minnesota Bankers
Association. He is a founding member of the Minnesota Financial Group, a peer group of 15 bankers
founded in 1988. He is currently the vice chairman of the Janesville Economic Development Authority
and president-elect of the Janesville Rotary Club. Mr. Finleys position as an officer of a member
institution and his involvement in and knowledge of financial management, audit, internal controls,
and economic development, as indicated by his background, support Mr. Finleys qualifications to
serve on our Board of Directors. Mr. Finley also serves as the vice chair of the Risk Management
Committee.
Van D. Fishback is vice chairman of First Bank & Trust in Brookings, South Dakota. Mr.
Fishback joined First Bank & Trust in 1972 and has previously served as its president and CEO. Mr.
Fishback currently serves as president and CEO of Fishback Financial Corporation, South Dakotas
largest privately held bank holding company. Mr. Fishback also serves as executive vice president
of Van Tol Surety Company, Inc. Mr. Fishback is a licensed attorney and has been a member of the
South Dakota bar since 1972. Mr. Fishbacks position as an officer of a member institution and his
involvement in and knowledge of finance, community development, and the law, as indicated by his
background, support Mr. Fishbacks qualifications to serve on our Board of Directors. Mr. Fishback
also serves as vice chair of the Finance and Planning Committee.
David R. Frauenshuh has served since 1983 as CEO and owner of Frauenshuh Inc. headquartered in
Bloomington, Minnesota. He also is chairman of Cornerstone Capital Investments, Frauenshuh/Sweeney,
VeriSpace, and Fourteen Foods. Mr. Frauenshuh has more than 30 years of experience in commercial
real estate with ownership interest in approximately 3.5 million square feet of real estate. He
currently serves as treasurer of the Economic Club of Minnesota, and has been chair of the
Childrens House based in Hawaii. He also serves on the Salvation Army National Advisory Board,
Concordia University Presidents Advisory Board, and the Minnesota Military Foundation. Mr.
Frauenshuh served as chair of the 2001 Minnesota Prayer Breakfast and is a CEO committee member of
The National Prayer Breakfast. Mr. Frauenshuhs involvement and experience in finance, real estate,
project development, and financial management, as indicated by his background, support Mr.
Frauenshuhs qualifications to serve as an Independent Director on our Board of Directors. Mr.
Frauenshuh also serves as vice chair of the Audit Committee.
144
Chris D. Grimm joined Iowa State Bank as its President and CEO in 2001. Prior to accepting his
current role at Iowa State Bank, Mr. Grimm held a number of positions unrelated to the financial
services industry. Mr. Grimms position as an officer of a member institution and his involvement
in and knowledge of financial management, as indicated by his background, support Mr. Grimms
qualifications to serve on our Board of Directors.
Eric A. Hardmeyer joined the Bank of North Dakota in 1985 as a loan officer and served as
senior vice president of lending before becoming president and CEO in 2001, a position he currently
maintains. Mr. Hardmeyer is the past chairman of the North Dakota Bankers Association and also
serves on the board of directors of the Bismarck-Mandan Chamber of Commerce, Bismarck YMCA, and the
North Dakota Rural Development Council. Mr. Hardmeyers position as an officer of a member
institution and his involvement in and knowledge of economic development and financial management,
as indicated by his background, support Mr. Hardmeyers qualifications to serve on our Board of
Directors. Mr. Hardmeyer also serves as the chair of the Audit Committee.
Labh S. Hira, Ph.D., is Dean of the College of Business at Iowa State University in Ames,
Iowa. Dr. Hira has held a variety of positions at Iowa State University since 1982. He was an
accounting professor, department chair, and associate dean before being named Dean of the College
of Business in 2001. Dr. Hiras involvement and experience in finance and accounting, as indicated
by his background, support Dr. Hiras qualifications to serve as an Independent Director on our
Board of Directors. Dr. Hira also serves as chair of the Finance and Planning Committee.
John F. Kennedy, Sr. is senior vice president and CFO for the St. Louis Equity Fund, Inc. in
St. Louis, Missouri which invests in decent affordable housing developments financed through
corporate investment and in cooperation with local, state, and federal governments. Mr. Kennedy has
been with the St. Louis Equity Fund since 1998 and has more than 30 years of experience in
affordable housing development and financial/banking services. He is a CPA and managed the
development of Tax Credit Manager, an internet database and reporting software. Mr. Kennedys
involvement and experience in accounting, finance, and representing community interests in housing,
as indicated by his background, support Mr. Kennedys qualifications to serve as a public interest
director on our Board of Directors. Mr. Kennedy also serves as vice chair of the Business
Operations and Technology Committee.
145
Clair J. Lensing has served as the president, CEO, and owner of Security State Bank in
Waverly, Iowa, since 1999. He also owns the Citizens Savings Bank in Hawkeye, Iowa, and the Maynard
Savings Bank in Maynard, Iowa. Previously he served as president and CEO of Farmers State Bank in
Marion, Iowa and as a bank examiner with the Iowa Division of Banking. Mr. Lensing has served as
president of the Iowa Bankers Association, chairman of the Board of Shazam Network, and board
member of the Iowa Independent Bankers. He also has been active in numerous other professional,
educational, and community organizations. Mr. Lensings position as an officer of a member
institution and his involvement in and knowledge of economic development and financial management,
as indicated by his background, support Mr. Lensings qualifications to serve on our Board of
Directors. Mr. Lensing also serves as vice chair of the Mission, Member and Housing Committee.
Dennis A. Lind is the president of Midwest Bank Group, Incorporated, a bank holding company,
and chairman of its subsidiary member bank, Midwest Bank, in Detroit Lakes, Minnesota. Mr. Lind has
over 30 years of experience in banking, capital markets and investments. He previously served as
senior vice president of The Marshall Group, Inc. in Minneapolis, Minnesota, and worked for 13
years at Norwest Bank (now Wells Fargo Bank) where he most recently held the position of executive
vice president at Norwest Investment Services, Inc. Mr. Lind began his career in the Bond
Department at First National Bank of Minneapolis, Minnesota (now US Bank). Mr. Linds position as
an officer of a member institution and his involvement in and knowledge of investments, capital
markets, and financial management, as indicated by his background, support Mr. Linds
qualifications to serve on our Board of Directors. Mr. Lind also serves as chair of the
Compensation Committee.
Paula R. Meyer has 30 years of experience in the financial services industry as a senior
manager encompassing marketing, operations, and management of mutual funds, investments and
insurance companies. She recently retired in 2006 as president of the mutual fund and certificate
businesses at Ameriprise Financial and has focused on board service since 2007. Prior to that, Ms.
Meyer was president of Piper Capital Management. Ms. Meyer also serves on the board of directors of
Mutual of Omaha in Omaha, NE, First Command Financial Services in Fort Worth, Texas, and is board
chair of Luther College in Decorah, Iowa. She is co-founder and director of Women Corporate
Directors of Minneapolis/St. Paul, a professional association of women who serve on corporate
boards. She founded and serves on the board of directors of Friends of Ngong Road, a non-profit
organization dedicated to helping children in Nairobi, Kenya who have been affected by HIV/AIDS.
Ms. Meyers involvement and experience in risk management, investments, marketing, and financial
management, as indicated by her background, support Ms. Meyers qualifications to serve as an
Independent Director on our Board of Directors. Ms. Meyer also serves as chair of the Risk
Management Committee.
146
John H. Robinson is chairman of Hamilton Ventures, LLC, a consulting and investment company in
Kansas City, Missouri. Mr. Robinson is an engineer with international experience as chairman of
EPCglobal Ltd in Sheffield, England from 2003 to 2004 and executive director of Amey Plc in London,
England from 2000 to 2002. He was managing partner and vice chairman of Black & Veatch, Inc. from
1989 to 2000. He serves on the board of directors of COMARK Building Systems, Olsson Associates,
Alliance Resources MLP, and Coeur Precious Metals. Mr. Robinsons involvement and experience in
financial management, project development, and organizational management, as indicated by his
background, support Mr. Robinsons qualifications to serve as an Independent Director on our Board
of Directors. Mr. Robinson also serves as vice chair of the Compensation Committee.
Joseph C. Stewart III has served since 2004 as chairman of the board of BancStar, Inc., a four
bank holding company in Festus, Missouri, and as CEO and director of Bank Star in Pacific,
Missouri, where he has worked in various capacities since 1994. In addition, Mr. Stewart also
serves as CEO and director for Bank Star of the LeadBelt in Park Hills, Missouri, Bank Star One in
Fulton, Missouri, and Bank Star of the BootHeel in Steele, Missouri. Mr. Stewart currently serves
on the board of directors for the Missouri Independent Bankers Association as well as the
government relations committee of the Missouri Bankers Association. Mr. Stewarts position as an
officer of a member institution and his involvement in and knowledge of finance, accounting,
financial reporting, risk management, and financial management, as indicated by his background,
support Mr. Stewarts qualifications to serve on our Board of Directors.
Executive Officers
The following persons currently serve as executive officers of the Bank:
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|
|
|
|
|
|
Employee of the |
Executive Officer |
|
Age |
|
Position Held |
|
Bank Since |
Richard S. Swanson
|
|
|
60 |
|
|
President and CEO
|
|
June 1, 2006 |
Edward J. McGreen
|
|
|
42 |
|
|
Executive Vice President and Chief Capital Markets Officer (CCMO)
|
|
November 8, 2004 |
Steven T. Schuler
|
|
|
58 |
|
|
Executive Vice President and CFO
|
|
September 18, 2006 |
Dusan Stojanovic
|
|
|
50 |
|
|
Executive Vice President and Chief Risk Officer (CRO)
|
|
August 17, 2008 |
Michael L. Wilson
|
|
|
53 |
|
|
Executive Vice President and Chief Business Officer (CBO)
|
|
August 21, 2006 |
Richard S. Swanson has been president and CEO since June 2006. Prior to joining the Bank, Mr.
Swanson was a principal of the Seattle law firm of Hillis, Clark, Martin & Peterson for two years
where he provided counsel in the areas of finance, banking law, and SEC regulation. Previously Mr.
Swanson served as chairman and CEO of HomeStreet Bank in Seattle, Washington, and had served as its
CEO since 1990. As a member director from HomeStreet Bank, Mr. Swanson served on the board of
directors of the FHLBank of Seattle from 1998 to 2003, and served as the boards vice chair from
2002 to 2003.
147
Edward J. McGreen has been with the Bank since November 2004 and is currently serving as the
Banks Executive Vice President and CCMO, a position he has held since July 2005. Mr. McGreens
management responsibilities include treasury and portfolio strategy. Mr. McGreen joined the Bank as
director of mortgage portfolio management. Prior to joining the Bank, Mr. McGreen held various
finance and portfolio management positions at Fannie Mae from 1996 to 2001 and 2002 to 2004. From
2001 to 2002, Mr. McGreen was senior interest rate risk manager for GE Asset Management.
Steven T. Schuler has been with the Bank since September 2006 and is currently serving as the
Banks Executive Vice President and CFO. Mr. Schuler has management responsibility for general
accounting, external reporting, financial analysis and internal reporting, asset-liability and
derivative accounting, accounting policy, accounting systems, business process management, and
information technology. Mr. Schuler was CFO, treasurer, and secretary for Iowa Wireless Services
from 2001 to 2006. In 1977 Mr. Schuler began a long career at Brenton Banks where he held a variety
of positions eventually serving as the corporate senior vice president, CFO, secretary and
treasurer until 2001 when Brenton Banks were acquired by Wells Fargo.
Dusan Stojanovic has been with the Bank since March 2008 and is currently serving as our
Executive Vice President and CRO. Mr. Stojanovic has management responsibility for enterprise risk
management, including credit risk, market risk, operational risk, and model validation. Mr.
Stojanovic held a variety of positions of increasing responsibility with the Federal Reserve Bank
of Chicago from 2006 to 2008, Federal Reserve Bank of Richmond from 2005 to 2006, and the Federal
Reserve Bank of St. Louis from 1995 to 2003. From 2003 to 2004, Mr. Stojanovic served as the vice
governor for banking supervision at the National Bank of Serbia.
Michael L. Wilson has been with the Bank since August 2006 and currently serves as the Banks
Executive Vice President and CBO. Mr. Wilsons management responsibilities include member-facing
functions (including credit and mortgage sales, member financial services, and community
investment), human resources, project management, and administration. Mr. Wilson currently serves
as chair of the FHLBank MPF Governance Committee. Prior to joining the Bank, Mr. Wilson had served
as senior executive vice president and COO of the FHLBank of Boston since August 1999, and had
served in other senior leadership roles with the FHLBank of Boston since 1994.
148
Code of Ethics
We have adopted a Code of Ethics that sets forth the guiding principles and rules of conduct
by which we operate and conduct our daily business with our customers, vendors, shareholders, and
fellow employees. The Code of Ethics applies to all of our directors, officers, and employees. The
purpose of the Code of Ethics is to promote honest and ethical conduct and compliance with the law,
particularly as it relates to the maintenance of our financial books and records and the
preparation of our financial statements. The Code of Ethics can be found on our website at
www.fhlbdm.com. We disclose on our website any amendments to, or waivers of, the Code of Ethics.
The information contained in or connected to our website is not incorporated by reference into this
annual report on Form 10-K and should not be considered part of this or any report filed with the
SEC.
Audit Committee
The Audit Committee of the Board of Directors (i) directs senior management to maintain the
reliability and integrity of the accounting policies and financial reporting and disclosure
practices; (ii) reviews the basis for our financial statements and the external auditors opinion
with respect to such statements; (iii) ensures that policies are in place that are reasonably
designed to achieve disclosure and transparency regarding our financial performance and governance
practices; and (iv) oversees the internal and external audit functions. The Audit Committee has
adopted a charter outlining its roles and responsibilities, which is available on our website at
www.fhlbdm.com. The information contained in or connected to our website is not incorporated by
reference into this annual report on Form 10-K and should not be considered part of this or any
report filed with the SEC. The members of our Audit Committee for 2010 are Eric Hardmeyer (chair),
David Frauenshuh (vice chair), Johnny Danos, Gerald Eid, Clair Lensing, Dale Oberkfell, John
Robinson, and John Kennedy. The Audit Committee held a total of six in-person meetings and two
telephonic meetings in 2009. As of February 28, 2010, the Audit Committee has held one in-person
meeting and is scheduled to hold five additional in-person meetings and three telephonic meetings
throughout the remainder of 2010.
Audit Committee Financial Expert
Our Board of Directors determined that the following members of its Audit Committee qualify as
audit committee financial experts under Item 407(d)(5) of Regulation S-K: Eric Hardmeyer, Johnny
Danos, and Dale Oberkfell. Refer to Item 13. Certain Relationships and Related Transactions, and
Director Independence for details on our director independence.
149
ITEM
11 EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
This Compensation Discussion and Analysis provides information on our executive compensation
and benefit programs for our named executive officers (Executives), who are listed in the Summary
Compensation Table under this Item 11. Specifically, this CD&A describes our executive
compensation philosophy and policies in 2009, and the elements of compensation that were paid to
our Executives in 2009. It also describes the analysis undertaken by the Compensation Committee and
the Board of Directors in recommending and approving compensation of the President in 2009, and the
analysis of the President in determining and approving the compensation of our other Executives in
2009.
Compensation Philosophy
Our executive compensation philosophy is to provide a competitive total compensation package
and to reward performance based on each Executives achievement of applicable objective Bank-wide
goals, as well as individual goals that are aligned with our strategic business plan. We believe
that in order to attract, retain, and motivate our Executives, we must provide a total compensation
package that is appropriate within a competitive range of the market data of executive positions
that the Compensation Committee has determined are similar to those of our Executives with
reference to a benchmark group consisting of certain commercial and regional banks, mortgage banks,
and the other 11 FHLBanks (Financial Services Industry Group). The Committee has determined that
more emphasis should be placed on the FHLBank System and the regression analysis of asset and
member sizes when reviewing the market data. In implementing this philosophy, we have structured
the total compensation of our Executives to appropriately reward them based on their performance
and contributions to the success of our business as primarily reflected by the achievement of
Bank-wide goals and initiatives under our strategic business plan.
150
Human Resources and Compensation Committee
The primary responsibility of the Compensation Committee of the Board of Directors is to
ensure that we meet our objectives of attracting, rewarding, and retaining a well-qualified
executive workforce through structuring and evaluating appropriate total compensation opportunities
and payouts for our Executives. In carrying out this responsibility, the Compensation Committee
carefully considers, recommends, and approves all executive compensation plan designs, policies,
and programs, including incentive opportunities, to ensure they are consistent with our strategic
business plan and that support our compensation philosophy and objectives. The President, CBO, and
the Director of Human Resources provide the Compensation Committee with a draft framework of the
Bank-wide goals for their input and suggestions. The President, CBO, and Director of Human
Resources then finalize the goals based on the Compensation Committees input and present them to
the Compensation Committee for final approval. The Bank-wide goals are designed to align reward
opportunities for the Executives with achievement of objectives under our strategic business plan.
The Compensation Committee is also responsible for reviewing and recommending to the Board of
Directors the employment and severance agreement for the President and for hiring and terminating
outside advisors that assist the Compensation Committee with performing its duties. The
Compensation Committee is also responsible for advising and making recommendations to the Board of
Directors on the following:
|
|
|
The Presidents total compensation based on Bank-wide performance, individual
performance, and the Committees recommendations for his base salary and incentive
compensation. |
|
|
|
Payouts of incentive awards for all eligible employees upon the Compensation Committees
review of Bank-wide performance relative to performance goals and targets established under
the incentive plans. |
|
|
|
Approval of recommendations for base salary and incentive compensation submitted by the
President for the other Executives (effective February 2010). |
|
|
|
Director compensation, including the annual director fee policy. |
|
|
|
Employee compensation and policy issues including the Annual Incentive Plan (AIP), the
Long-Term Incentive Plan (LTIP), and other benefits including our retirement plans and
non-qualified plans. |
Our vision is to be the preferred financial provider of our members in meeting housing and
economic development needs of the communities we serve together. We strive to achieve our vision
within an operating principle that balances the trade-off between attractively priced products,
dividends, and maintaining adequate capital and retained earnings based on the Banks risk profile
as well as to support safe and sound business operations. We attempt to accomplish this while
requiring accountability for actual performance. Therefore, the Compensation Committee and the
President have the discretion to adjust the total compensation of our Executives to above or below
the competitive range of the market data when our performance and/or Executive performance warrants
such an adjustment.
151
Overview of Executive Compensation
In 2009, we compensated our Executives through base salary, annual cash incentive awards, the
opportunity for long-term incentive awards, and other benefits, including retirement benefits and
perquisites.
Components of Executive Compensation Package
Base Salary
Base salary is a key component of our Executives total compensation package. The overall goal
of this component is to achieve success in attracting and retaining the executive talent needed to
execute our short- and long-term business strategies.
Until April 2009, the base salaries for the President, the CBO, and the former General
Counsel/CRO (former General Counsel) were established primarily by their respective Employment
Agreements, entered into when they joined the Bank in 2006 and 2007, that provided for guaranteed
minimum base salary increases. The base salaries for the CFO and CCMO were determined by the
President based on their performance and on market data for similar positions in the Financial
Services Industry Group.
Effective April 2009, we entered into new Employment Agreements with the President, CBO, CFO,
and CCMO. These new employment agreements establish a base salary for each Executive but do not
include the minimum base salary increases provided in the Presidents and CBOs previous employment
agreements with us. We did not enter into a new employment agreement with our former General
Counsel due to the expiration of his employment agreement at the end of its initial term
on June 30, 2009.
In July 2009, subsequent to the expiration of our employment agreement with the former General
Counsel, the base salary for our new CRO was determined by the President based on market data for
similar positions in the Financial Services Industry Group.
The President, CBO, CFO, CCMO and former General Counsel did not receive increases in base
salary in 2009 from 2008 levels as a result of their own recommendations to maintain their 2008
base salary levels, as discussed in more detail under Analysis Related to 2009 Compensation
Decisions in this Item 11.
152
Annual Incentive Plan
The AIP is a cash-based incentive plan designed to promote higher levels of performance
through the involvement and participation of the Executives and other personnel in goals developed
to implement and achieve the objectives of our strategic business plan. The AIP includes two
components:
|
1. |
|
Part I goals for 2009 were weighted in aggregate at 60 percent of the total AIP award
opportunity for each Executive and were based on Bank-wide goals of a net income trigger,
profitability measures, business with our members measures, and a risk management measure. |
|
2. |
|
Part II goals for 2009 were weighted in aggregate at 40 percent of the total AIP award
opportunity for each Executive. For the President, Part II goals are established annually
by the President and the Board of Directors. For each other Executive, Part II goals are
established annually by the Executive and the President. In each case, Part II goals are
based upon the strategic imperatives for which a particular Executive is responsible under
our strategic business plan. Part II goals are qualitative in nature and their achievement
is subjectively determined by the Board of Directors for the President and by the President
for the other Executives in determining the payment of awards under the AIP. |
Incentive award opportunities for each of the Executives under the AIP are established based
upon the comparative data of the Financial Services Industry Group. The award opportunities range
from 0 to 50 percent of base salary for the President; 0 to 40 percent of base salary for the CBO,
CFO, and CCMO; and 0 to 30 percent of base salary for the CRO.
Long-Term Incentive Plan
The LTIP is a cash-based incentive plan that provides incentive awards for an Executives
achievement over three-year rolling performance periods. Awards are determined based on (i) the AIP
Part I and Part II goals and (ii) the demonstration of leadership competencies and of our shared
values of positive engagement, collaboration, trust, excellence, agility, and pride. The first
performance period began in 2008 and will end December 31, 2010, with payouts scheduled for March
2011. The second performance period of the plan is based on 2009 performance and is scheduled to be
paid in 2012.
Award levels for each of the Executives under the LTIP are established based upon the
comparative data of the Financial Services Industry Group as a part of an Executives opportunity
for competitive total compensation. The award opportunities for the LTIP range from 0 to 37.5
percent of base salary for the President, 0 to 30 percent of base salary for the CBO, CFO, and
CCMO, and 0 to 22.5 percent of base salary for the CRO.
153
Retirement Benefits
We maintain a comprehensive retirement program for our Executives comprised of the Defined
Benefit Plan (DB Plan) and the Pentegra Defined Contribution Plan for Financial Institutions (DC
Plan).
In 1994, in response to federal legislation which imposed restrictions on the pension benefits
payable to its Executives, we established a third retirement plan entitled the Benefit Equalization
Plan (BEP), which was amended and restated in November 2008 in order to bring the BEP into
compliance with IRS Code Section 409A. The BEP is a non-qualified plan available to the Executives
that restores the pension benefits an Executive is restricted from receiving (due to the
limitations imposed by the Internal Revenue Service (IRS)) on the benefits received from or
contributions made to our two qualified pension plans.
Executive Perquisites
Perquisites are a de minimis element of total compensation and as such are provided to
Executives as a convenience associated with their overall duties and responsibilities. In 2009, we
provided the President with a monthly automobile allowance, the CRO with relocation assistance, and
certain of the Executives with financial planning assistance.
Finance Agency Oversight Executive Compensation
Section 1113 of the Housing Act amended the Federal Housing Enterprises Financial Safety and
Soundness Act of 1992 (the Housing Enterprises Act) and requires the Director of the Finance Agency
to prohibit any FHLBank from paying compensation to its executive officers that is not reasonable
and comparable to that paid for employment in similar businesses involving similar duties and
responsibilities. On June 5, 2009, the Finance Agency published a proposed regulation designed to
implement these statutory requirements. The proposed regulation covers compensation payable to
members of an FHLBanks senior executive team and defines reasonable and comparable compensation.
Reasonable compensation, taken in total or in part, would be customary and appropriate for the
position based on a review of the relevant factors. These factors include the unique duties and
responsibilities of the executives position. Comparable compensation, taken in total or in part,
does not materially exceed benefits paid at similar institutions for similar duties and
responsibilities. Comparable benefit levels are considered to be at or below the median
compensation for a given position at similar institutions (i.e., those institutions that are
similar in size, complexity and function). In addition, under the proposed regulation, the Director
would have authority to approve certain compensation and termination benefits.
154
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: (i) such compensation must be reasonable and comparable to that offered to executives
in similar positions at comparable financial institutions; (ii) such compensation should be
consistent with sound risk management and preservation of the par value of FHLBank capital stock;
(iii) a significant percentage of an executives 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 (iv) the Board of Directors should promote accountability and transparency
in the process of setting compensation.
As part of its January 2010 telephonic meeting and the February 2010 meeting, the Compensation
Committee reviewed base salary and incentive compensation information, focusing on the other 11
FHLBanks. Based on that review, the Compensation Committee believes the compensation payable to our
Executives is reasonable and comparable to that paid within the FHLBank System.
Beginning in November of 2008, the FHLBanks were directed to provide all compensation actions
affecting their five most highly compensated officers to the Finance Agency for prior review.
Accordingly, following our Board of Directors February 2010 meeting, we submitted the amounts of
annual incentive awards and long-term incentive awards to the Finance Agency for its review, along
with 2010 merit increases to base salaries for the Executives. The Finance Agency review period
expires on March 22, 2010 and we have not received an objection to the amounts of annual incentive
awards, long-term incentive awards, and merit increases at the time of this filing.
Analysis Related to 2009 Compensation Decisions
The President would approve annual base salary increases for the other Executives
based on a number of factors including: (i) each Executives individual performance and
contribution to the achievement of our strategic business plan and other leadership
responsibilities; (ii) our achievement of overall Bank-wide goals for the calendar year; and (iii)
an assessment of whether the current base salary remains competitive. However, in February 2009 the
President, CBO, CFO, CCMO, and former General Counsel recommended to the Compensation Committee
that they not receive any increases in base salary in 2009. This recommendation was made as a
result of the uncertain economic conditions that faced the banking industry at the beginning of
2009.
Therefore, despite the Compensation Committee and Board approvals in October 2008 of a budget
for the provision of merit increases Bank-wide averaging four percent for 2009, the Executives
suggested that their base salaries remain unchanged for 2009. Consequently, the Board approved the
Compensation Committees recommendation of no merit increase for the President and the President
approved the other Executives requests of no merit increase in 2009. In 2009, each Executive
received the same respective base salaries paid in 2008.
155
In November 2009, the Compensation Committee requested its independent compensation
consultant, Towers Perrin (now Towers Watson, and further referenced in this Item 11 as Towers
Watson), to provide a review of our compensation programs (primarily our AIP and LTIP) from a risk
perspective. This risk assessment included a review of the oversight of our pay programs, the
incorporation of risk measures into our pay philosophy, the balance in the mix of pay between base,
annual and long-term incentives, and the Bank-wide and individual performance goals. The risk
assessment also considered the design of our AIP and LTIP, the metrics used to measure performance,
and our overall governance processes involving executive compensation. Based on this risk
assessment, the Compensation Committee believes we took a conservative approach to executive
compensation and do not have high risk factors in our executive compensation design that would
encourage excessive risk taking. We will consider future enhancements to our executive compensation
plan designs based on this review by Towers Watson.
Use of Benchmarks
In striving to meet our objective to attract and retain executive talent, total compensation
in 2009 for each Executive was analyzed as to its competitive position within a range of total
compensation paid to executives determined to be in similar positions in the identified benchmark
group, the Financial Services Industry Group. However, as appropriate and at the discretion of the
Compensation Committee and/or the President, we may pay above or below the competitive range of the
compensation data based on the experience and performance of the Executives and our overall
performance during the year.
As part of their consultation services to the Compensation Committee, Towers Watson analyzed
the comparative position of the total compensation of the Executives, utilizing data from McLagan
Partners, a nationally recognized compensation consulting firm within the financial services
industry. In addition, Towers Watson completed an in-depth regression analysis of the Executives
compensation based on our asset size and member size compared to the FHLBank System.
The compensation data analyzed represented a composite of resources from McLagan Partners for
executive positions determined to be comparable to, and representative of realistic employment
opportunities for our Executives. This benchmark data considered, specifically, the Executives
management role, decision making capacity, and the scope of the functions for which the Executive
is responsible. For example, our Executives are required to have the depth of knowledge and
experience that is required of those serving organizations within the Financial Services Industry
Group, however, our focus is narrower due to our smaller size than many of the organizations in
this group. Therefore, total compensation for our President was compared to that of a subsidiary or
division President at larger financial services organizations. In analyzing the compensation data
and the regression analysis, the Compensation Committee determined that targeting total
compensation for our Executives within a competitive range of the Financial Services Industry
Group, with an emphasis on the FHLBank System, would facilitate our objectives to fairly compensate
and retain our Executives.
156
The Compensation Committee used this comparable data as a guideline for evaluating the
Presidents salary and incentive pay in 2009. The President also used this comparable data for
determining the salary and incentive pay recommendations for the other Executives in 2009. Although
the Compensation Committee and President undertook this benchmarking analysis in 2009 in order to
determine the competitive pay position for total compensation of the Executives, the ultimate
decision for appropriate base salaries of the Executives in 2009 was not affected by this analysis
due to the decision to make no changes in 2009 base salaries for the Executives as discussed above.
A representative list of peer companies, other than the other FHLBanks, that were used in the
Financial Services Industry Group from the McLagan Market Survey data is set forth below.
|
|
|
American Home Mortgage
|
|
Aviva Investors |
Aegon USA Realty Advisors
|
|
AIG |
Allstate Investments, LLC
|
|
Allstate Investments, LLC |
American Capital
|
|
Ameriprise Financial, Inc. |
AXA Investment Managers
|
|
B.F. Saul Mortgage |
Bank of America
|
|
BMO Financial Group |
Babson Capital Management LLC
|
|
Bloomberg |
CIBC World Markets
|
|
The CIT Group |
Citigroup
|
|
Carval Investors |
Discover Financial Group
|
|
Fannie Mae |
Fidelity Investments
|
|
Fortis Financial Services LLC |
Freddie Mac
|
|
Fiserv |
The Hartford
|
|
HSBC Global Banking and Markets |
Harvard Management Company, Inc.
|
|
ING Mortgage |
ING
|
|
Invesco Ltd. |
ING Investment Management
|
|
JP Morgan |
Johnson Financial Group, Inc.
|
|
JP Morgan Chase |
Legg Mason & Co., LLC
|
|
LPL Financial Services |
McGladrey Capital Markets
|
|
Metropolitan Life Insurance Company |
Marshall & Ilsley Corporation
|
|
The Northern Trust Corporation |
Northwestern Mutual Life Insurance
|
|
Piper Jaffray |
Prudential Financial
|
|
Saxon Mortgage |
Schroder Investment Management
|
|
Charles Schwab & Co., Inc. |
SVB Financial Group
|
|
State Street Bank & Trust Company |
TD Securities
|
|
TIAA-CREF |
TD Ameritrade
|
|
Universal American Mortgage Co, LLC |
The Vanguard Group, Inc
|
|
Wachovia Corporation |
Wells Fargo Bank
|
|
Western Asset Management Company |
157
Establishment of Pay Targets and Ranges
AIP and LTIP pay targets established for each Executive take into consideration total
compensation practices (base salary, annual incentives, long-term incentives, and benefits) of the
Financial Services Industry Group with emphasis placed on the FHLBank System regression analysis.
Each Executive is assigned target award opportunities, stated as percentages of base salary, under
the AIP and the LTIP. The target award opportunities correspond to determinations made by the
Compensation Committee and the President on each Executives level of responsibility and ability to
contribute to and influence our overall performance. Awards are paid to the Executives based upon
the achievement level of Bank-wide Part I goals and upon a subjective determination by the
Compensation Committee for the President and by the President for the other Executives regarding
individual performance, achievement of Part II individual and/or departmental team goals and other
leadership competencies.
The incentive compensation award opportunities under the AIP and LTIP for each Executive for
2009 were a percent of base salary as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Threshold |
|
|
Target |
|
|
Maximum |
|
|
|
Incentive |
|
percent of |
|
|
percent of |
|
|
percent of |
|
Executive |
|
Plan |
|
base salary |
|
|
base salary |
|
|
base salary |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
President |
|
AIP |
|
|
25 |
% |
|
|
37.5 |
% |
|
|
50 |
% |
|
|
LTIP |
|
|
12.5 |
% |
|
|
25 |
% |
|
|
37.5 |
% |
CBO, CFO, CCMO |
|
AIP |
|
|
20 |
% |
|
|
30 |
% |
|
|
40 |
% |
|
|
LTIP |
|
|
10 |
% |
|
|
20 |
% |
|
|
30 |
% |
CRO |
|
AIP |
|
|
20 |
% |
|
|
25 |
% |
|
|
30 |
% |
|
|
LTIP |
|
|
7.5 |
% |
|
|
15 |
% |
|
|
22.5 |
% |
LTIP awards earned and granted for 2009 will be payable in the first quarter of 2012 in
accordance with the terms of the LTIP.
Establishment of Performance Measures
In April 2009, the Compensation Committee and the Board of Directors approved the following
Part I Bank-wide goals:
|
|
|
Profitability measured by the spread between adjusted return on capital stock and
average 3-month LIBOR for 2009; |
|
|
|
Business with our Members measured by member borrowing penetration, member product usage
index, business with relatively inactive core members, and customer satisfaction; and |
|
|
|
Risk Management measured by (i) a finding of no material weaknesses or significant
deficiencies for 2009 upon analysis of our internal control over financial reporting and
(ii) a determination by our Board concerning the overall quality of our risk management. |
158
The Part I goals and measurements for profitability, business with our members, and risk
management were established in alignment with our 2009 strategic business plan and strategic
imperatives, current and anticipated market conditions, and 2008 performance results. Each goal was
assigned a weighting factor and included a threshold, target, and maximum level of performance.
Due to the economic uncertainties at the time, a net income trigger of $30 million was added
for 2009, based on a level of income that would ensure stable retained earnings, a sustainable
dividend equal to or above the average three-month LIBOR rate for the covered period, and a
contribution to our affordable housing program.
Achievement of the Net Income Trigger goal was a prerequisite for a payout under the
Profitability goal in Part I for the Executives. If the Net Income Trigger was not achieved, the
Executives would not receive payouts for the Profitability goal or for Part II goals, but the
Executives would remain eligible for payouts under the Business with Members and Risk Management
goals.
On a regular basis, in 2009 management provided an update to the Compensation Committee on the
status of performance relative to Bank-wide goals. In August 2009, the President, CBO, and Human
Resources Director recommended and the Compensation Committee approved changes to the Bank-wide
goals as a result of changing conditions in the marketplace and our year-to-date performance on
established goals. The changes, which increased the profitability target and placed greater weight
on risk management, included:
|
|
|
Modifying the definition Adjusted return on Capital Stock for the Profitability goal
so that it better approximates our core earnings. |
|
|
|
Increasing the Threshold/Target/Maximum achievement levels for the Profitability goal
from zero/50/100 basis points to 50/250/400 basis points. |
|
|
|
Reducing the overall weight on the Business with Members goal from 50 percent to 40
percent. |
|
|
|
Increasing the overall weight on the Risk Management goal from 20 percent to 30
percent. |
|
|
|
Simplifying the measurement of the Risk Management goal related to internal controls so
that it is determined solely by whether or not we had a significant deficiency or material
weakness for fiscal year 2009. The weight on this goal increased from 5 percent to 15
percent. |
When establishing the Part I AIP performance goals, the Compensation Committee and the Board
of Directors anticipates that we will successfully achieve the target level of performance. The
target level is aligned with the overall strategic business plan and is expected to be reasonably
achievable. The maximum level provides a goal that is anticipated to be more challenging to reach,
based on the previous years performance results and current market conditions. The Part I
incentive awards are paid based on the actual results achieved by the Bank. For calendar year 2009,
we achieved an overall level of performance on Part I performance goals at 114 percent of the
target achievement level.
159
The following table provides the revised 2009 AIP and LTIP Bank-wide goals approved by the
Board of Directors in August 2009 and our performance results for 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results |
|
|
|
|
|
|
|
|
|
|
And |
|
|
|
|
|
|
|
|
|
|
Achievement |
Bankwide Goals |
|
Weight |
|
Threshold |
|
Target |
|
Maximum |
|
Level |
|
|
|
|
|
|
|
|
|
|
|
Net Income Trigger |
|
|
|
|
|
|
|
|
|
|
GAAP Net Income in Millions of
Dollars |
|
NA |
|
$30.0 |
|
NA |
|
NA |
|
$145.9 (Trigger met) |
|
|
|
|
|
|
|
|
|
|
|
Profitability
(30% Total Weight) |
|
|
|
|
|
|
|
|
|
|
Spread Between Adjusted Return
on Capital Stock and Average
3-month LIBOR for the year |
|
30% |
|
0.50% |
|
2.50% |
|
4.00% |
|
5.38% (Maximum) |
|
|
|
|
|
|
|
|
|
|
|
Business with Members
(40% Total Weight) |
|
|
|
|
|
|
|
|
|
|
Member Borrowing Penetration |
|
10% |
|
73.0% |
|
76.5% |
|
80% |
|
75.4% (Threshold) |
Member Product Usage Index
(Touch Points) |
|
10% |
|
1.50 |
|
1.60 |
|
1.70 |
|
1.66 (Target) |
Business with Relatively Inactive
Core Members |
|
10% |
|
2.3% |
|
2.4% |
|
2.6% |
|
2.73% (Maximum) |
Customer Satisfaction |
|
10% |
|
At least 85%
|
|
At lease 88%
|
|
92% or more
|
|
93% or more
|
|
|
|
|
satisfied |
|
satisfied |
|
satisfied
|
|
satisfied with |
|
|
|
|
|
|
|
|
with 71% or more |
|
68% or more |
|
|
|
|
|
|
|
|
very satisfied |
|
very satisfied |
|
|
|
|
|
|
|
|
|
|
(Target) |
|
|
|
|
|
|
|
|
|
|
|
Risk Management
(30% Total Weight) |
|
|
|
|
|
|
|
|
|
|
SOX 404 Status: No Material
Weaknesses or Significant
Deficiencies for fiscal year 2009 |
|
15% |
|
If there is no material weakness or
significant deficiency, payout on this goal
will be at target, otherwise there will be no payout on this goal. |
|
Target |
Overall
Quality of Risk Management |
|
15% |
|
As Determined by the Board of Directors |
|
Target |
|
|
|
|
Risk Management Committee |
|
|
AIP and LTIP Part II Performance Goals
Part II AIP performance goals for each Executive are established by the Executive and the
President based on the strategic imperatives and action steps outlined in the strategic business
plan for which each Executive is responsible. Each Executive has primary responsibility for
setting, implementing, executing, and achieving the action items associated with one or more
strategic imperatives as outlined in the strategic business plan. Performance ratings for the
Executives are based on their contribution and accomplishment of the strategic imperatives, the
Bank-wide goals, additional leadership responsibilities and their overall job performance.
160
The 2009 to 2011 strategic business plan was approved by the Board of Directors in December
2008 and included the following strategic imperatives for which strategies and actions steps were
developed that formed the basis for Part II goals:
|
1. |
|
Deliver Member Value |
|
|
2. |
|
Seek and Sustain Operational Excellence |
|
|
3. |
|
Manage Risk Prudently in a Dynamic, Volatile Market |
|
|
4. |
|
Ensure a Sustainable Business Model |
|
|
5. |
|
Lead Effectively and Communicate Strategically Within the Bank and the FHLBank System |
The Part II AIP performance goals for the President are established by the President and the
Board of Directors in a similar manner as outlined above for the other four Executives. As stated
above for each Executive, the President also has responsibility for setting, implementing,
executing, and achieving the action items associated with one or more strategic imperatives as well
as the overall strategic business plan. Performance ratings for the President are based on his
contribution and accomplishment of the strategic imperatives, the Bank-wide goals, leadership
responsibilities, and his overall job performance.
2009 AIP and LTIP Performance Results
In February 2010, the Compensation Committee reviewed results of the annual performance
evaluation of the President conducted by the Board of Directors. Based on this review, the
Compensation Committee determined the President had exceeded expectations on the strategic
imperatives and overall job performance goals established for Part II of the AIP. In conjunction
with the Banks achievement of Part I performance goals under the AIP at 114 percent of target, the
Compensation Committee awarded the President the amounts identified in the chart below.
In February 2010, the President reviewed the performance of each of the other four Executives
with the Compensation Committee. The President determined that each of the other Executives had
exceeded expectations on their respective strategic imperatives and job performance goals
established for Part II of the AIP. In conjunction with the Banks achievement of Part I
performance goals under the AIP at 114 percent of target, the Compensation Committee awarded each
Executive the amounts identified in the chart below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Base |
|
Title |
|
AIP Award |
|
|
Salary |
|
President |
|
$ |
255,348 |
|
|
|
43.7 |
% |
CBO |
|
$ |
133,275 |
|
|
|
34.2 |
% |
CRO |
|
$ |
65,488 |
|
|
|
27.3 |
% |
CFO |
|
$ |
99,327 |
|
|
|
33.8 |
% |
CCMO |
|
$ |
154,512 |
1 |
|
|
52.6 |
% |
|
|
|
1 |
|
Includes an additional $50,000 discretionary award described as follows. |
161
An additional one-time discretionary award was granted to the CCMO for his significant
contribution prior to 2009 to the quality of our investment portfolio by consistently recommending
that we not purchase private label MBS. Private label MBS have resulted in OTTI at most FHLBanks,
in some cases with significant adverse financial impact. During this period when other FHLBanks
were investing in these securities, the CCMO was a consistent voice of caution advocating that we
not purchase these investments. The Committee had initially approved a discretionary bonus award
for the CCMO in early 2009. However, since economic conditions were uncertain at that time and no
salary increases were taken by the Executives, this discretionary bonus award was deferred until
the end of the 2009 performance year when the success of the Bank in dealing with the difficult
economic environment could be fully assessed. This additional discretionary award was approved at
the February 2010 Board of Directors meeting in the amount of $100 thousand and payable as follows:
|
|
|
$50 thousand payable as an addition to the regular AIP award for 2009; and |
|
|
|
$50 thousand deferred for three years and payable in March 2012 in accordance with the
2009 LTIP Plan Document. |
We submitted information concerning this one-time discretionary award to the Finance Agency
for its review. We have not yet received a response from the Finance Agency.
Under the Banks LTIP, the Executives, including the President, were awarded incentives for
2009 based on our Bank-wide performance and each Executives individual performance against their
individual goals. The following LTIP awards were approved for the President and the other
Executives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Base |
|
Title |
|
LTIP Award |
|
|
Salary |
|
President |
|
$ |
185,256 |
|
|
|
31.7 |
% |
CBO |
|
$ |
92,195 |
|
|
|
23.6 |
% |
CRO |
|
$ |
35,059 |
|
|
|
14.6 |
% |
CFO |
|
$ |
68,740 |
|
|
|
23.4 |
% |
CCMO |
|
$ |
122,220 |
1 |
|
|
41.6 |
% |
|
|
|
1 |
|
Includes the additional $50,000 discretionary award deferred for three years as previously discussed. |
162
The first LTIP award was granted in February 2009 for the 2008 to 2010 performance period and
will be paid in March 2011 subject to satisfaction of the conditions under the Plan as described at
Grants of Plan Based Awards Table in this Item 11. In February 2010, the Compensation Committee
approved the LTIP awards for the 2009 to 2011 performance period for the President and the other
Executives. These awards are payable to the Executives in March 2012 subject to the terms of the
LTIP.
Compensation Committee Report
The Compensation Committee of the Board of Directors furnished the following report for
inclusion in this annual report on Form 10-K:
The Compensation Committee has reviewed and discussed the 2009 Compensation Discussion and
Analysis set forth above with the Banks management. Based on such review and discussions, the
Compensation Committee recommended to the Board of Directors that the Compensation Discussion and
Analysis be included in this annual report on Form 10-K. The Compensation Committee includes the
following individuals:
2010 Human Resources and Compensation Committee
Dennis A. Lind, Chair
John H. Robinson, Vice Chair
Johnny A. Danos
Gerald D. Eid
Van D. Fishback
Michael K. Guttau
Labh S. Hira, Ph.D.
Joseph C. Stewart III
163
Summary Compensation Table
The following table provides compensation information for the year ended December 31, 2009,
2008, and 2007 for our 2009 named executive officers, as that term is defined in Item 402(a)(3)
of Regulation S-K, comprised of our President, CFO, CCMO, CBO, CRO, and former General Counsel.
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Summary Compensation Table |
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Changes in |
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Pension Value |
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and |
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Nonqualified |
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Non-Equity |
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Deferred |
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Name and Principal |
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Incentive Plan |
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Compensation |
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All Other |
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Position |
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Year |
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|
Salary |
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Bonus |
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|
Compensation 1 |
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Earnings2 |
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Compensation1 |
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Total |
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Richard S. Swanson, |
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|
2009 |
|
|
$ |
584,100 |
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|
|
|
|
|
$ |
440,604 |
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|
$ |
234,000 |
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|
$ |
46,624 |
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|
$ |
1,305,328 |
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President and Chief |
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2008 |
|
|
$ |
584,100 |
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|
|
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$ |
416,172 |
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$ |
182,000 |
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|
$ |
41,627 |
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$ |
1,223,899 |
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Executive Officer |
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2007 |
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$ |
561,600 |
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$ |
278,460 |
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$ |
69,000 |
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|
$ |
227,638 |
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|
$ |
1,136,698 |
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Steven T. Schuler, |
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2009 |
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|
$ |
294,100 |
4 |
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|
|
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$ |
168,067 |
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|
$ |
102,000 |
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|
$ |
14,763 |
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|
$ |
578,930 |
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Chief Financial |
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2008 |
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|
$ |
285,933 |
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|
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$ |
167,049 |
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$ |
68,000 |
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|
$ |
11,825 |
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|
$ |
532,807 |
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Officer |
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2007 |
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|
$ |
244,250 |
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|
|
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$ |
97,223 |
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$ |
10,000 |
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|
$ |
3,913 |
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|
$ |
355,386 |
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Edward J. McGreen, |
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2009 |
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|
$ |
293,900 |
4 |
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$ |
276,732 |
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$ |
64,000 |
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|
$ |
23,231 |
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|
$ |
657,863 |
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Chief Capital |
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2008 |
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|
$ |
292,017 |
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|
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|
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$ |
166,935 |
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|
$ |
38,000 |
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|
$ |
18,008 |
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|
$ |
514,960 |
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Markets Officer |
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2007 |
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$ |
281,467 |
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$ |
3,978 |
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$ |
100,794 |
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$ |
18,000 |
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|
$ |
9,151 |
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|
$ |
413,390 |
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Dusan Stojanovic, |
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2009 |
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$ |
220,667 |
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$ |
100,547 |
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$ |
26,000 |
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$ |
35,587 |
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$ |
382,801 |
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Chief Risk
Officer3 |
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Michael L. Wilson, |
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2009 |
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$ |
390,000 |
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$ |
225,470 |
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$ |
213,000 |
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|
$ |
31,397 |
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$ |
859,867 |
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Chief Business |
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2008 |
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|
$ |
390,000 |
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|
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|
|
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$ |
223,080 |
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|
$ |
126,000 |
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|
$ |
32,105 |
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|
$ |
771,185 |
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Officer |
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2007 |
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$ |
375,000 |
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$ |
148,750 |
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$ |
72,000 |
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|
$ |
93,870 |
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|
$ |
689,620 |
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Nicholas J. Spaeth, |
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2009 |
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$ |
171,600 |
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$ |
14,000 |
|
|
$ |
269,298 |
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|
$ |
454,898 |
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Former General |
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2008 |
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|
$ |
343,200 |
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|
|
|
|
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$ |
192,878 |
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|
$ |
53,000 |
|
|
$ |
12,591 |
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|
$ |
601,669 |
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Counsel and Chief |
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2007 |
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|
$ |
220,000 |
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$ |
66,000 |
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$ |
12,467 |
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|
|
|
|
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$ |
12,793 |
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|
$ |
311,260 |
|
Risk Officer |
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1 |
|
The components of these columns for 2009 are provided in the tables that follow. |
|
2 |
|
Represents change in value of pension benefits only. All returns on non-qualified deferred compensation are at the market rate. |
|
3 |
|
Mr. Stojanovic was promoted to the position of Chief Risk Officer on July 1, 2009 with
an annual salary of $240,000 as of that date. Previously he served as the Banks Financial Risk Officer. |
|
4 |
|
While the Executives received no salary increases in 2009, the increase shown in
salary from 2008 to 2009 reflects the 2008 merit increase which was effective March 1, 2008 through March 1, 2009. |
164
Components of 2009 Non-Equity Incentive Plan Compensation
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Annual Incentive |
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|
Long Term |
|
Name |
|
Plan |
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|
Incentive Plan |
|
Richard Swanson |
|
$ |
255,348 |
|
|
$ |
185,256 |
|
Steven Schuler |
|
$ |
99,327 |
|
|
$ |
68,740 |
|
Edward McGreen |
|
$ |
154,512 |
1 |
|
$ |
122,220 |
2 |
Dusan Stojanovic |
|
$ |
65,488 |
|
|
$ |
35,059 |
|
Michael Wilson |
|
$ |
133,275 |
|
|
$ |
92,195 |
|
|
|
|
1 |
|
Includes the additional $50,000 discretionary award under the AIP as previously discussed. |
|
2 |
|
Includes the additional $50,000 discretionary award deferred for three years as previously discussed. |
Components of 2009 All Other Compensation
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Bank Contributions |
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to Vested |
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|
|
|
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Defined Contribution Plans |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Non-qualified |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
401(k)/Thrift |
|
|
Compensation |
|
|
Car |
|
|
Financial |
|
|
Relocation |
|
|
Release |
|
Name |
|
Plan |
|
|
Plan (BEP) |
|
|
Allowance |
|
|
Planning |
|
|
Assistance |
|
|
Consideration |
|
Richard Swanson |
|
$ |
7,593 |
|
|
$ |
26,531 |
|
|
$ |
9,000 |
|
|
$ |
3,500 |
|
|
$ |
|
|
|
$ |
|
|
Steven Schuler |
|
$ |
8,346 |
|
|
$ |
6,417 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Edward McGreen |
|
$ |
11,247 |
|
|
$ |
11,984 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Dusan Stojanovic |
|
$ |
|
|
|
$ |
982 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
34,605 |
|
|
$ |
|
|
Michael Wilson |
|
$ |
14,309 |
|
|
$ |
17,088 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Nicholas Spaeth |
|
$ |
4,839 |
|
|
$ |
309 |
|
|
$ |
|
|
|
$ |
1,750 |
|
|
$ |
|
|
|
$ |
262,400 |
1 |
|
|
|
1 |
|
Includes $257,400 in cash and $5,000 in out-placement services. |
The following table provides estimated potential payouts under the Banks AIP and LTIP of
non-equity incentive plan awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 Grants of Plan-Based Awards |
|
|
|
|
|
Estimated Potential Payouts Under |
|
|
|
|
|
Non-Equity Incentive Plan |
|
Name |
|
Plan |
|
Threshold |
|
|
Target |
|
|
Maximum |
|
Richard S. Swanson |
|
AIP |
|
$ |
146,025 |
|
|
$ |
219,038 |
|
|
$ |
292,050 |
|
|
|
LTIP |
|
$ |
73,013 |
|
|
$ |
146,025 |
|
|
$ |
219,038 |
|
Steven T. Schuler |
|
AIP |
|
$ |
58,820 |
|
|
$ |
88,230 |
|
|
$ |
117,640 |
|
|
|
LTIP |
|
$ |
29,410 |
|
|
$ |
58,820 |
|
|
$ |
88,230 |
|
Edward J. McGreen |
|
AIP |
|
$ |
58,780 |
|
|
$ |
88,170 |
|
|
$ |
117,560 |
|
|
|
LTIP |
|
$ |
29,390 |
|
|
$ |
58,780 |
|
|
$ |
88,170 |
|
Dusan Stojanovic |
|
AIP |
|
$ |
48,000 |
|
|
$ |
60,000 |
|
|
$ |
72,000 |
|
|
|
LTIP |
|
$ |
15,000 |
|
|
$ |
30,000 |
|
|
$ |
45,000 |
|
Michael L. Wilson |
|
AIP |
|
$ |
78,000 |
|
|
$ |
117,000 |
|
|
$ |
156,000 |
|
|
|
LTIP |
|
$ |
39,000 |
|
|
$ |
78,000 |
|
|
$ |
117,000 |
|
165
Refer to the discussion of AIP and LTIP under 2009 AIP and LTIP Performance Results in this
Item 11 for additional information on the levels of awards under each plan. Actual award amounts
granted for the year ended December 31, 2009 are included in the non-equity incentive plan
compensation column under the Summary Compensation Table in this Item 11.
The payouts of AIP awards are subject to the Executives achieving a performance level of
meets expectations or higher evaluation subjectively determined by the Compensation Committee or
President, as applicable, and must not be subject to any disciplinary action or probationary status
at the time of payout. Furthermore, if an Executive fails to comply with regulatory requirements or
standards, internal control standards, the standards of his profession, any internal Bank standard,
or fails to perform responsibilities assigned under the Banks strategic business plan, the
Compensation Committee may determine the Executive is not eligible to receive part or all of any
payout depending on the severity of the failure, as determined by the Compensation Committee.
Under the LTIP, the Compensation Committee may determine an Executive is not eligible to
receive part or all of any payout depending on the severity of the following: if an Executive (i)
for any Plan Year during a Performance Period has not achieved a performance level of meets
expectations or higher evaluation of overall performance; (ii) has not achieved a meets
expectations or higher evaluation of overall performance at the time of payout; (iii) is subject
to any disciplinary action or probationary status at the time of payout; or (iv) fails to comply
with regulatory requirements or standards, internal control standards, the standards of his
profession, any internal standard, or fails to perform responsibilities assigned under our
strategic business plan.
Employment Agreements
Until April 2009, the terms of employment for the President, CBO, and former General Counsel
were set forth in Employment Agreements entered into when they were recruited to the Bank. These
Employment Agreements included an annual guaranteed minimum increase of four percent of base
salary for each of the President, CBO, and former General Counsel. The Employment Agreements with
the President and CBO were superseded and replaced by new Employment Agreements on April 17, 2009.
The former General Counsels Employment Agreement expired at the end of its initial term on June
30, 2009, and we did not enter into a new agreement with him.
In addition to entering into new Employment Agreements with the President and CBO, we also
entered into Employment Agreements with the CFO and the CCMO. These agreements became effective on
April 17, 2009. The CFO and CCMO did not have Employment Agreements prior to April 2009, however
they were subject to separate management agreements.
Each respective Employment Agreement provides that either we or the Executive may terminate
the agreement for any reason other than for good reason or cause on 90 days written notice to the
other party.
166
Each of the Employment Agreements provides that we shall initially pay each Executive an
annualized base salary of not less than the amount set forth in the respective agreement and that
each Executives salary is subject to annual review. However, each Executives salary may only be
adjusted upward from the 2009 salary as a result of such review and may not be adjusted downward
unless as part of a nondiscriminatory cost reduction plan applicable to our total compensation
budget.
Additionally, the respective agreements provide that each Executive is entitled to participate
in the AIP and the LTIP. Each agreement provides that the incentive targets for the AIP and LTIP
are to be established by the Banks Board of Directors and that the target for the AIP shall not be
set lower than the designated percentage of base salary set forth in the Agreement unless such
reduced target is part of a nondiscriminatory cost reduction plan applicable to our total
compensation budget. The agreements further provide that each Executive is entitled to participate
in the BEP, and in all pension, 401(k), and similar benefit plans that we offer.
The following sets out the material terms of each Employment Agreement with our Executives
that are in addition to those terms previously discussed:
Richard S. Swanson Employment Agreement. Mr. Swansons Employment Agreement provides that we
shall pay an annualized base salary of not less than $584,100 in 2009 and also establishes a BEP
that provides, beginning June 1, 2009, comparable benefits to Mr. Swanson as if he were fully
vested under our pension plan.
Mr. Swansons Employment Agreement also provides that incentive targets and maximums under the
AIP and LTIP are set by the Board and may increase or decrease based upon market data and/or other
studies we and the Board conduct, but in no event shall Mr. Swansons target under our AIP be set
lower than 37.5 percent of base salary unless as part of a nondiscriminatory cost reduction plan
applicable to our total compensation budget.
Michael L. Wilson Employment Agreement. Mr. Wilsons Employment Agreement provides that we
shall pay an annualized base salary of not less than $390,000 in 2009.
Mr. Wilsons Employment Agreement also provides that incentive targets and maximums are set by
the Board and may increase or decrease based upon market data and/or other studies we and the Board
conduct, but in no event shall Mr. Wilsons target under our AIP be set lower than 30 percent of
base salary unless as part of a nondiscriminatory cost reduction plan applicable to our total
compensation budget.
Steven T. Schuler Employment Agreement. Mr. Schulers Employment Agreement provides that we
shall pay an annualized base salary of not less than $294,100 in 2009.
167
Mr. Schulers Employment Agreement also provides that incentive targets and maximums are set
by the Board and may increase or decrease based upon market data and/or other studies we and the
Board conduct, but in no event shall Mr. Schulers target under our AIP be set lower than 30
percent of base salary unless as part of a nondiscriminatory cost reduction plan applicable to our
total compensation budget.
Edward J. McGreen Employment Agreement. Mr. McGreens Employment Agreement provides that we
shall pay an annualized base salary of not less than $293,900 in 2009.
Mr. McGreens Employment Agreement also provides that incentive targets and maximums are set
by the Board and may increase or decrease based upon market data and/or other studies we and the
Board conduct, but in no event shall Mr. McGreens target under our AIP be set lower than 30
percent of base salary unless as part of a nondiscriminatory cost reduction plan applicable to our
total compensation budget.
Nicholas J. Spaeth Employment Agreement and Agreement and General Release. On May 1, 2007, we
entered into an Employment Agreement with Mr. Spaeth with an initial term beginning May 1, 2007 and
extending through June 30, 2009. Under the terms of his Employment Agreement, the initial term
would be automatically extended on July 1st of each year unless either we or Mr. Spaeth
terminate such automatic extension by giving no less than 30 days written notice to the other prior
to the end of the initial Period of Employment or any extension. We provided notice to Mr. Spaeth
on May 1, 2009 that his Employment Agreement would expire at the end of its initial term on June
30, 2009.
Until the expiration of Mr. Spaeths Employment Agreement, he was entitled to participate in
the AIP and in all pension, 401(k), and similar benefit plans we offer at terms generally
applicable to our other Executives. In addition, Mr. Spaeth was entitled to participate in our BEP
that provided retirement benefits comparable to the benefits he would have received under our
defined benefit pension plan had its vesting schedule been as follows: on or after two years from
the effective date, 50 percent vested; on or after three years from the effective date, 60 percent
vested; on or after four years from the effective date, 80 percent vested. Therefore, Mr. Spaeth
was 50 percent vested in his BEP retirement benefit as of June 30, 2009. The amounts included in
the Summary Compensation Table for Mr. Spaeth in this Item 11, include $171,600 in base salary,
$257,400 in Agreement and General Release provisions, $5,148 in Bank matching contribution to his
401(k), and $5,000 in outplacement services.
168
Retirement Benefits and Pension Plan Tables
We provide the following retirement benefits to our Executives.
Qualified Defined Benefit Plan
All employees who have met the eligibility requirements participate in our DB Plan,
administered by Pentegra, which is a tax-qualified multiple-employer defined-benefit plan. The plan
requires no employee contributions. All of our Executives participate in the DB Plan.
The pension benefits payable under the DB Plan are determined under a pre-established formula
that provides a retirement benefit payable at age 65 or normal retirement under the DB Plan. The
benefit formula is 2.25 percent per each year of the benefit service multiplied by the highest
three consecutive years average compensation. Average compensation is defined as the total taxable
compensation as reported on the IRS Form W-2. In the event of retirement prior to attainment of age
65, a reduced pension benefit is payable under the plan. Upon termination of employment prior to
age 65, participants meeting the five year vesting and age 55 early retirement eligibility criteria
are entitled to an early retirement benefit. The regular form of retirement benefits provides a
single life annuity, with a guaranteed 12-year payment, or additional payment options are also
available. The benefits are not subject to offset for Social Security or any other retirement
benefits received.
In November, 2008, the Compensation Committee approved an amendment to the salary definition
under the DB Plan. This amendment excludes the LTIP from the existing definition of salary under
the plan and became effective January 1, 2009.
Non-Qualified Defined Benefit Plan
The Executives are eligible to participate in the defined benefit component of our BEP (BEP DB
Plan), an unfunded, non-qualified pension plan that mirrors the DB Plan.
In determining whether a restoration of retirement benefits is due an Executive, the BEP DB
Plan utilizes the identical benefit formulas applicable to our DB Plan; however, the BEP DB Plan
does not limit the annual earnings or benefits of the Executives. Rather, if the benefits payable
from the DB Plan have been reduced or otherwise limited, the Executives lost benefits are payable
under the terms of the BEP DB Plan. As a non-qualified plan, the benefits received from the BEP DB
Plan do not receive the same tax treatment and funding protection as with our qualified plans.
Payment options under the BEP DB Plan include a lump-sum distribution, annuity payments, or
installment payment options.
169
The following table provides the present value of the current accrued benefits payable to the
Executives upon retirement at age 65 from the DB Plan and the BEP DB Plan, and is calculated in
accordance with the formula currently in effect for specified years-of-service and remuneration for
participating in both plans. For pension plan purposes, prior membership in the Pentegra DB Plan is
included in the Number of Years of Credited Service. Assets under the prior membership are
transferred to the current plan. Prior service credit is not included in the Number of Years of
Credited Service under the BEP DB plan. Prior service does allow for immediate enrollment in the
plan. Our pension benefits do not include any reduction for a participants Social Security
benefits. The vesting period for the pension plans are five years, however Mr. Swanson and Mr.
Spaeth negotiated an accelerated vesting schedule of the BEP DB Plan. See Note 17 of the Notes to
Financial Statements for details regarding valuation method and assumptions.
|
|
|
|
|
|
|
|
|
|
|
2009 Pension Table |
|
|
|
|
|
|
|
|
|
Present Value of |
|
|
|
|
|
Number of Years |
|
|
Accumulated |
|
Name |
|
Plan Name |
|
of Credited Service |
|
|
Benefit1 |
|
Richard S. Swanson |
|
Pentegra DB Plan |
|
2.58 yrs |
|
|
$ |
136,000 |
|
|
|
BEP DB Plan |
|
2.58 yrs |
|
|
$ |
349,000 |
|
Steven T. Schuler |
|
Pentegra DB |
|
2.25 yrs |
|
|
$ |
111,000 |
|
|
|
BEP DB Plan |
|
2.25 yrs |
|
|
$ |
69,000 |
|
Edward J. McGreen |
|
Pentegra DB |
|
4.08 yrs |
|
|
$ |
82,000 |
|
|
|
BEP DB Plan |
|
4.08 yrs |
|
|
$ |
57,000 |
|
Michael L. Wilson |
|
Pentegra DB |
|
14.92 yrs |
1 |
|
$ |
468,000 |
|
|
|
BEP DB Plan |
|
3.33 yrs |
|
|
$ |
150,000 |
|
Dusan Stojanovic |
|
Pentegra DB |
|
0.75 yrs |
|
|
$ |
24,000 |
|
|
|
BEP DB Plan |
|
0.75 yrs |
|
|
$ |
2,000 |
|
Nicholas Spaeth |
|
Pentegra DB |
|
1.20 yrs |
|
|
$ |
|
|
|
|
BEP DB Plan |
|
1.20 yrs |
|
|
$ |
67,000 |
|
|
|
|
1 |
|
Mr. Wilson has 3.33 years of credited service with the Bank and 11.59 years of prior
service credit with the FHLBank of Boston under the Pentegra DB Plan. |
Qualified Defined Contribution Plan
All employees who have met the eligibility requirements may elect to participate in our DC
Plan, a retirement savings plan qualified under the Internal Revenue Code. We match employee
contributions based on the length of service and the amount of employee contributions to the DC
Plan. The matching contribution begins at three percent of eligible compensation upon completion of
one year of employment and increases to four and a half percent of eligible compensation upon
completion of three years of employment with a maximum of six percent of eligible compensation upon
completion of five years of employment. Eligible compensation is defined as base salary.
170
In November 2008, the Compensation Committee approved an amendment to the DC Plan. The
amendment authorizes employees to contribute up to 100 percent of their salary into the DC Plan.
Non-Qualified Defined Contribution Plan
The Executives are eligible to participate in the defined contribution component of the BEP
(BEP DC Plan), a non-qualified defined contribution plan that mirrors the DC Plan. The BEP DC Plan
ensures, among other things, that participants whose benefits under the DC Plan would otherwise be
restricted by certain provisions of the Internal Revenue Code are able to make elective pretax
deferrals and to receive a matching contribution relating to such deferrals. The investment returns
credited to a participating Executives account are at the market rate for the selected investment.
Aggregate earnings are calculated by subtracting the 2008 year end balance from the 2009 year end
balance less the Executives and our contributions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 Non-Qualified Deferred Compensation Table |
|
|
|
Executive |
|
|
Registrant |
|
|
Aggregate |
|
|
Aggregate |
|
|
|
Contributions |
|
|
Contributions |
|
|
Earnings |
|
|
Balance |
|
Name |
|
In Last FY1 |
|
|
In Last FY2 |
|
|
In Last FY |
|
|
At Last FY |
|
Richard S. Swanson |
|
$ |
170,119 |
|
|
$ |
23,145 |
|
|
$ |
783 |
|
|
$ |
358,743 |
|
Steven T. Schuler |
|
$ |
40,233 |
|
|
$ |
5,194 |
|
|
$ |
20,955 |
|
|
$ |
99,269 |
|
Edward J. McGreen |
|
$ |
71,712 |
|
|
$ |
7,580 |
|
|
$ |
93,222 |
|
|
$ |
392,934 |
|
Dusan Stojanovic |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Michael L. Wilson |
|
$ |
36,005 |
|
|
$ |
17,797 |
|
|
$ |
25,800 |
|
|
$ |
137,913 |
|
Nicholas Spaeth |
|
$ |
72,415 |
|
|
$ |
4,036 |
|
|
$ |
57,318 |
|
|
$ |
247,469 |
|
|
|
|
1 |
|
These amounts are included in the Salary column of the Summary Compensation Table
in this Item 11. |
|
2 |
|
These amounts are included in the All Other Compensation column of the Summary
Compensation Table in this Item 11. |
Potential payments upon termination and change of control
Until April 2009, the President, CBO, and former General Counsel were operating under
Employment Agreements that provided terms for termination of these Executives employment. The CFO
and CCMO had Management Agreements that provided similar terms for termination.
Effective April 17, 2009, we entered into new Employment Agreements with the President, CBO,
CFO, and CCMO. The former General Counsels Employment Agreement expired on June 30, 2009 and was
not renewed or replaced. The following paragraphs set out the material terms relating to
termination of each Executive and the compensation due to each upon termination under the current
Employment Agreements.
171
For purposes of the discussion below regarding potential payments upon termination or change
in control, the following are the definitions of Cause, Disability, and Good Reason. These
definitions are summaries and each respective Employment Agreement between us and each Executive
sets forth the relevant definition in full. Each Employment Agreement is available as an exhibit to
the report on Form 8-K we filed on April 20, 2009. Cause generally means a felony conviction, a
willful act committed in bad faith that materially impairs our business or goodwill, a willful act
committed in bad faith that constitutes a continued failure to perform duties, or a willful
violation of our Code of Ethics. Disability means the Executives inability, as the result of
illness or incapacity, to substantially perform his duties with reasonable accommodation. Good
Reason generally means an assignment of duties to an Executive that are inconsistent with his
position, a material diminution in his duties or responsibilities, a reduction in his base salary,
or annual and long-term bonus compensation, a material change in our geographic location, or a
material breach of the employment agreement.
Each of the Employment Agreements provide for payments to a terminated Executive in two
different scenarios. If an Executives employment is terminated by us for Cause, the Executives
death or Disability, or by the Executive without Good Reason, the Executive is entitled to the
following:
|
|
|
Base Salary through the date of termination |
|
|
|
Accrued but unpaid AIP for any year prior to the year of termination |
|
|
|
Accrued vacation through the date of termination |
|
|
|
All other vested benefits under the terms of our employee benefit plans, subject to the
terms of such plans. |
If, however, the Executives employment is terminated by us without Cause, by the Executive
for Good Reason, or as a result of a merger or change in control, the Executive is entitled to
severance payments equal to a certain number times the Executives base salary as described for
each Executive as follows:
|
|
|
One times the Executives target AIP award in effect for the calendar year in which the
date of termination occurs. |
|
|
|
The AIP award for the calendar year in which the date of termination occurs and prorated
for the portion of the calendar year in which the Executive was employed. |
|
|
|
The unpaid LTIP award for any Performance Period (as such term is defined under our
LTIP) ending prior to the year in which the date of termination occurs. |
|
|
|
A pro-rated LTIP award for any LTIP awards for which the Performance Period has not
ended as of the date of termination. |
|
|
|
COBRA-like benefits, provided that we will continue paying our portion of the medical
and/or dental insurance premiums for the Executive for the one year period following the
date of termination. |
172
The AIP and LTIP awards would be paid at target for individual/team goals and based on the
calendar year actual results for Bank-wide goals, and would be paid at the regular time that such
payments are made to all employees enrolled in the plans. The base salary amount and the pro-rated
amounts of the AIP and LTIP awards would be paid in lump sum within ten days following the
Executive executing a release of claims against us, which would entitle him to the payments
described.
The following sets forth the material terms of each Employment Agreement with our Executives
that differ from the terms previously discussed.
Richard S. Swanson Employment Agreement. If Mr. Swansons employment is terminated by us
without Cause, by Mr. Swanson for Good Reason, or as a result of a merger or change in control, Mr.
Swanson is entitled to severance payments equal to two times his base salary, one year of AIP at
target, earned but unpaid AIP, prorated share of LTIP if termination occurred from death,
disability, normal retirement, or agreed upon retirement date, and medical and dental insurance
premiums.
Assuming one or more of these triggering events for the receipt of severance payments occurred
as of December 31, 2009, the total value of severance payable to Mr. Swanson would have been $1.8
million.
Michael L. Wilson Employment Agreement. If Mr. Wilsons employment is terminated by us without
Cause, by Mr. Wilson for Good Reason, or as a result of a merger or change in control, Mr. Wilson
is entitled to severance payments equal to one times his base salary, one year of AIP at target,
earned but unpaid AIP, prorated share of LTIP if termination occurred from death, disability,
normal retirement, or agreed upon retirement date, and medical and dental insurance premiums.
Assuming one or more of the triggering events for the receipt of severance payments occurred
as of December 31, 2009, the total value of severance payable to Mr. Wilson would have been $0.7
million.
Steven T. Schuler Employment Agreement. If Mr. Schulers employment is terminated by us
without Cause, by Mr. Schuler for Good Reason, or as a result of a merger or change in control, Mr.
Schuler is entitled to severance payments equal to one times his base salary, one year of AIP at
target, earned but unpaid AIP, prorated share of LTIP if termination occurred from death,
disability, normal retirement, or agreed upon retirement date, and medical and dental insurance
premiums.
Assuming one or more of the triggering events for the receipt of severance payments occurred
as of December 31, 2009, the total value of severance payable to Mr. Schuler would have been $0.6
million.
173
Edward J. McGreen Employment Agreement. If Mr. McGreens employment is terminated by us
without Cause, by Mr. McGreen for Good Reason, or as a result of a merger or change in control,
Mr. McGreen is entitled to severance payments equal to one times his base salary, one year of AIP
at target, earned but unpaid AIP, prorated share of LTIP if termination occurred from death,
disability, normal retirement, or agreed upon retirement date, and medical and dental insurance
premiums.
Assuming one or more of the triggering events for the receipt of severance payments occurred
as of December 31, 2009, the total value of severance payable to Mr. McGreen would have been $0.6
million.
Nicholas J. Spaeth Agreement and General Release. Subsequent to the expiration of his
Employment Agreement with us on June 30, 2009, Mr. Spaeth entered into an Agreement and General
Release, dated January 7, 2010 pursuant to which he received consideration in the amount of
$257,400 and $5,000 in outplacement counseling services in exchange for his irrevocable and
unconditional release of any and all actions of any nature whatsoever arising from or otherwise
related to his employment relationship with us or termination thereof.
In addition to the amounts previously indicated, our Executives would be entitled to receive
benefits under the BEP in accordance with the terms of that plan. See the 2009 Non-Qualified
Deferred Compensation Table and the 2009 Pension Table as well as the accompanying narratives in
this Item 11 for a discussion of the retirement benefits available under the BEP. The present value of accumulated benefits under the BEP
DB Plan may be subject to vesting, early retirement, or acceleration conditions for payout of these
benefits, which may adjust the amounts that would be available to each Executive as of December 31,
2009.
Compensation of Directors
Prior to the passage of the Housing Act, we established statutory limits on director
compensation that were adjusted annually by the Finance Agency based on the Consumer Price Index
for urban consumers as published by the U.S. Department of Labor. The Housing Act removed the
statutory caps on FHLBank Director Compensation. In 2008, the FHLBank of Indianapolis engaged
McLagan Partners to conduct an analysis and evaluation of Director Compensation for similar
financial institutions. That report was shared at the Council of FHLBanks and each FHLBank agreed
to consistent compensation limits. We adopted this recommended director compensation structure,
which is consistent with the compensation policy to directors in 2009.
During 2009, the Board of Directors held eight in-person Board meetings and 24 in-person
committee meetings. In addition, there were four telephonic Board meetings and nine telephonic
committee meetings held throughout the year. Pursuant to our 2009 Director Fee Policy, Directors
are paid one quarter of the compensation limit following the end of each quarter if they attended
at least 75 percent of the meetings they were required to attend during such year.
174
The total expenses paid on behalf of the Board of Directors for travel and other reimbursed
expenses for 2009 was $76,781 and annual compensation paid to the Board of Directors by position
for 2009 was as follows:
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
Chair |
|
$ |
60,000 |
|
Vice Chair |
|
$ |
55,000 |
|
Audit Committee Chair |
|
$ |
55,000 |
|
Committee Chairs |
|
$ |
50,000 |
|
Other Directors |
|
$ |
45,000 |
|
Under the BEP DC Plan the directors may defer and contribute a portion of their directors fees
to the plan and self-direct investment elections into one or more investment funds. The investment
returns credited to a participating Directors account are at the market rate for the selected
investment. We do not contribute to the plan on behalf of the Directors. During 2009, none of the
Directors opted to participate in the BEP DC Plan.
In January 2010, the Compensation Committee approved the Director Fee Policy for 2010. Under
the policy, a Director shall receive one quarter of the total compensation fee following the end of
each calendar quarter. If it is determined at the end of the calendar year that a Director has
attended less than 75 percent of the meetings the Director was required to attend during such year,
the Director will not receive one quarter of the annual compensation they would have received.
Furthermore, the Board of Directors reserves the right to make appropriate adjustments in the
payments to any Director who regularly fails to attend Board meetings or meetings of Committees on
which the Director serves, or who consistently demonstrates a lack of participation in or
preparation for such meetings. The 2010 Director compensation fees are unchanged from 2009 and the
annual aggregate fees by position are as follows:
|
|
|
|
|
|
|
2010 |
|
|
|
|
|
|
Chairperson |
|
$ |
60,000 |
|
Vice Chairperson |
|
$ |
55,000 |
|
Audit Committee Chair |
|
$ |
55,000 |
|
Committee Chairs |
|
$ |
50,000 |
|
Other Directors |
|
$ |
45,000 |
|
175
The following table sets forth each Directors compensation for the year ended December 31,
2009:
|
|
|
|
|
2009 Director Compensation |
|
|
|
Fees earned or |
|
Name |
|
paid in cash |
|
Michael J. Guttau, Chair |
|
$ |
60,000 |
|
Dale E. Oberkfell, Vice Chair |
|
$ |
55,000 |
|
Johnny A. Danos |
|
$ |
45,000 |
|
Gerald D. Eid |
|
$ |
45,000 |
|
Michael J. Finley |
|
$ |
45,000 |
|
Van Dusen Fishback |
|
$ |
45,000 |
|
David R. Frauenshuh |
|
$ |
45,000 |
|
Eric Hardmeyer |
|
$ |
55,000 |
|
Labh S. Hira |
|
$ |
45,000 |
|
John F. Kennedy Sr. |
|
$ |
45,000 |
|
D.R. Landwehr |
|
$ |
45,000 |
|
Clair J. Lensing |
|
$ |
45,000 |
|
Dennis A. Lind |
|
$ |
50,000 |
|
Paula R. Meyer |
|
$ |
50,000 |
|
John H. Robinson |
|
$ |
45,000 |
|
Lynn V. Schneider |
|
$ |
50,000 |
|
Joseph C. Stewart III |
|
$ |
45,000 |
|
176
ITEM
12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Membership
The following tables present members (or combination of members within the same holding
company) holding five percent or more of our outstanding capital stock (including mandatorily
redeemable capital stock) at February 28, 2010 (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of |
|
|
|
|
|
|
|
|
|
|
|
|
Capital |
|
|
|
|
|
|
|
|
|
|
|
|
Stock |
|
|
Percent of |
|
|
|
|
|
|
|
|
|
Owned at |
|
|
Total |
|
|
|
|
|
|
|
|
|
February |
|
|
Capital |
|
Name |
|
Address |
|
City |
|
State |
|
28, 2010 |
|
|
Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transamerica Life Insurance Company1 |
|
4333 Edgewood Rd NE |
|
Cedar Rapids |
|
IA |
|
|
2,525 |
|
|
|
10.6 |
% |
Superior Guaranty Insurance Company2 |
|
90 S 7th St. |
|
Minneapolis |
|
MN |
|
|
2,357 |
|
|
|
9.9 |
|
Aviva Life and Annuity Company |
|
699 Walnut St. Ste 1700 |
|
Des Moines |
|
IA |
|
|
1,404 |
|
|
|
5.9 |
|
TCF National Bank |
|
2508 S Louise Ave |
|
Sioux Falls |
|
SD |
|
|
1,258 |
|
|
|
5.3 |
|
Wells Fargo Bank, N.A.2 |
|
101 N Phillips Ave |
|
Sioux Falls |
|
SD |
|
|
412 |
|
|
|
1.7 |
|
Monumental Life Insurance Company1 |
|
4333 Edgewood Rd NE |
|
Cedar Rapids |
|
IA |
|
|
278 |
|
|
|
1.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,234 |
|
|
|
34.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All others |
|
|
|
|
|
|
|
|
15,650 |
|
|
|
65.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital stock |
|
|
|
|
|
|
|
|
23,884 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Monumental Life Insurance Company is an affiliate of Transamerica Life Insurance Company. |
|
2 |
|
Superior Guaranty Insurance Company is an affiliate of Wells Fargo Bank, N.A. |
177
All of the Board of Directors, including both member and independent directors, are elected by
our membership. Member directors are required by regulation to serve as a director or officer of a
member institution and may have voting or investment power over the shares owned by the member with
which such director is affiliated. These directors may be deemed beneficial owners of the shares
owned by their respective institutions. Each such director disclaims beneficial ownership of our
capital stock held by the respective member institution. The following tables list the number of
shares of our capital stock (including mandatorily redeemable capital stock) owned by those members
who had an officer or director serving on our Board of Directors at February 28, 2010 (shares in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of |
|
|
|
|
|
|
|
|
|
|
|
|
Capital |
|
|
|
|
|
|
|
|
|
|
|
|
Stock |
|
|
Percent of |
|
|
|
|
|
|
|
|
|
Owned at |
|
|
Total |
|
|
|
|
|
|
|
|
|
February |
|
|
Capital |
|
Name |
|
Address |
|
City |
|
State |
|
28, 2010 |
|
|
Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank of North Dakota |
|
1200 Memorial Hwy |
|
Bismarck |
|
ND |
|
|
222 |
|
|
|
0.93 |
% |
Reliance Bank |
|
11781 Manchester Rd |
|
Des Peres |
|
MO |
|
|
62 |
|
|
|
0.26 |
|
First Bank & Trust |
|
520 6th St. |
|
Brookings |
|
SD |
|
|
49 |
|
|
|
0.21 |
|
Treynor State Bank |
|
15 E Main St. |
|
Treynor |
|
IA |
|
|
18 |
|
|
|
0.08 |
|
First Bank & Trust, N.A. |
|
101 2nd St. NW |
|
Pipestone |
|
MN |
|
|
12 |
|
|
|
0.06 |
|
Iowa State Bank |
|
409 Hwy 615 |
|
Wapello |
|
IA |
|
|
12 |
|
|
|
0.06 |
|
Midwest Bank |
|
613 Hwy 10 E |
|
Detroit Lakes |
|
MN |
|
|
11 |
|
|
|
0.05 |
|
First Bank & Trust |
|
110 N Minnesota Ave |
|
Sioux Falls |
|
SD |
|
|
9 |
|
|
|
0.05 |
|
Security State Bank |
|
933 16th St. SW |
|
Waverly |
|
IA |
|
|
5 |
|
|
|
0.02 |
|
First Bank & Trust of Milbank |
|
215 W 4th Ave |
|
Milbank |
|
SD |
|
|
5 |
|
|
|
0.02 |
|
Janesville State Bank |
|
210 N Main St. |
|
Janesville |
|
MN |
|
|
3 |
|
|
|
0.01 |
|
Maynard Savings Bank |
|
310 Main St. W |
|
Maynard |
|
IA |
|
|
2 |
|
|
|
0.01 |
|
Bank Star of the LeadBelt |
|
365 W Main St. |
|
Park Hills |
|
MO |
|
|
2 |
|
|
|
0.01 |
|
Bank Star One |
|
118 W 5th St. |
|
Fulton |
|
MO |
|
|
2 |
|
|
|
0.01 |
|
Citizens Savings Bank |
|
133 E Main St. |
|
Hawkeye |
|
IA |
|
|
2 |
|
|
|
0.01 |
|
First Bank of White |
|
301 W Main St. |
|
White |
|
SD |
|
|
2 |
|
|
|
0.01 |
|
Bank Star of the BootHeel |
|
100 S Walnut St. |
|
Steele |
|
MO |
|
|
1 |
|
|
|
* |
|
Bank Star |
|
1999 W Osage |
|
Pacific |
|
MO |
|
|
1 |
|
|
|
* |
|
Van Tol Surety Company, Inc. |
|
520 6th St. |
|
Brookings |
|
SD |
|
|
1 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
421 |
|
|
|
1.80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All others |
|
|
|
|
|
|
|
|
23,463 |
|
|
|
98.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital stock |
|
|
|
|
|
|
|
|
23,884 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Amount is less than 0.01 percent. |
178
ITEM
13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
We are a cooperative, and ownership of our capital stock is a statutory requirement for our
members to transact business with us. In recognition of this organizational structure, the SEC
granted us an accommodation pursuant to a no action letter, dated May 23, 2006, which relieves us
from the requirement to make disclosures under Item 404(a) of Regulation S-K for transactions with
related persons in the ordinary course of business. Further, the Housing Act codified this
accommodation.
Members with beneficial ownership of more than five percent of our total outstanding capital
stock, our directors and executive officers, and their immediate family members are classified as
related persons under SEC regulations. In the ordinary course of business we transact business
with members deemed related persons and with members whose officers or directors serve as our
Directors, including extensions of credit and transactions in Federal funds, interest bearing
deposits, member CDs, TLGP debt, commercial paper, and MBS. These transactions are on market terms
that are no more favorable to those members than the terms of comparable transactions with other
members. Additionally, we may also use members deemed related persons and members whose officers or
directors serve as our directors as securities custodians and derivatives dealer counterparties in
the ordinary course of business on terms and conditions similar to those that would be available
for comparable services if provided by unaffiliated entities.
Information with respect to our directors who are officers or directors of our members is set
forth under Item 10. Directors and Executive Officers of the FHLBank and Corporate Governance
Directors. Additional information regarding members that are beneficial owners of more than five
percent of our total outstanding capital stock is provided in Item 12. Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder Matters.
We do not have a written policy to have the Board review, approve, or ratify transactions with
related persons outside the ordinary course of business. However, the Board is empowered to review,
approve, and ratify such transactions between us and our related persons when circumstances warrant
such consideration. The Board would consider such transactions in the context of the materiality of
the transaction to us and to the related person and whether the transaction is likely to affect the
judgments made by the affected officer or director on our behalf. Furthermore, our code of ethics
requires Directors to disclose all actual or apparent conflicts of interest to the Board and, as
appropriate or required, furnish any necessary reports.
179
Director Independence
General
As of the date of this annual report on Form 10-K, we have 16 directors, all of whom were
elected by our member institutions. Pursuant to the passage of the Housing Act, the Finance Agency
implemented regulations whereby all new or re-elected directors will be elected by our member
institutions. All directors are independent of management from the standpoint they are not our
employees, officers, or stockholders. Only member institutions can own our capital stock. Thus, our
directors do not personally own our stock. In addition, we are required to determine whether our
directors are independent under three distinct director independence standards. Finance Agency
regulations and the Housing Act, which applied Section 10A(m) of the Exchange Act to the FHLBanks,
provide independence criteria for directors who serve as members of our Audit Committee.
Additionally, SEC rules require our Board of Directors to apply the independence criteria of a
national securities exchange or automated quotation system in assessing the independence of our
directors.
Finance Agency Regulations
The Finance Agency director independence standards prohibit individuals from serving as
members of our Audit Committee if they have one or more disqualifying relationships with us or
our management that would interfere with the exercise of that individuals independent judgment.
Disqualifying relationships considered by our Board are: (i) employment with us at any time during
the last five years; (ii) acceptance of compensation from us other than for service as a director;
(iii) being a consultant, advisor, promoter, underwriter, or legal counsel for us at any time
within the last five years; and (iv) being an immediate family member of an individual who is or
who has been, within the past five years, one of our executive officers. The Board assesses the
independence of all directors under the Finance Agencys independence standards, regardless of
whether they serve on our Audit Committee. As of February 28, 2010, all of our directors, including
all members of our Audit Committee, were independent under these criteria.
Exchange Act
Section 10A(m) of the Exchange Act sets forth the independence requirements of directors
serving on the Audit Committee of a reporting company. Under Section 10A(m), in order to be
considered independent, a member of the Audit Committee may not, other than in his or her capacity
as a member of the Board or any other Board Committee (i) accept any consulting, advisory, or other
compensation from us or (ii) be an affiliated person of the Bank. As of February 28, 2010, all of
our directors, including all members of our Audit Committee, were independent under these criteria.
180
SEC Rules
In addition, pursuant to SEC rules, we adopted the independence standards of the New York
Stock Exchange (NYSE) to determine which of our directors are independent for SEC disclosure
purposes. In making an affirmative determination of the independence of each director, the Board
first applied the objective measures of the NYSE independence standards to assist the Board in
determining whether a particular director has a material relationship with us.
Based upon the fact that each of our member directors are officers or directors of member
institutions, and that each such member routinely engages in transactions with us, the Board
affirmatively determined none of the member directors on the Board meet the NYSE independence
standards. In making this determination, the Board recognized a member director could meet the NYSE
objective standards on any particular day. However, because the volume of business between a member
directors institution and us can change frequently, and because we generally encourage increased
business with all members, the Board determined to avoid distinguishing among the member directors
based upon the amount of business conducted with us and our respective members at a specific time,
resulting in the Boards categorical finding that no member director is independent under an
analysis using the NYSE standards.
With regard to our independent directors, the Board affirmatively determined, at February 28,
2010, Johnny Danos, Gerald Eid, David Frauenshuh, Labh Hira, John Kennedy, Paula Meyer, and John
Robinson are each independent in accordance with NYSE standards. In concluding our seven
independent directors are independent under the NYSE rules, the Board first determined all
independent directors met the objective NYSE independence standards. In further determining none of
its independent directors had a material relationship with us, the Board noted the independent
directors are specifically prohibited from being an officer of the Bank or an officer or director
of a member.
Our Board has a standing Audit Committee. All Audit Committee members are independent under
the Finance Agencys independence standards and the independence standards under Section 10A(m) of
the Exchange Act in accordance with the Housing Act. For the reasons described above, our Board
determined none of the current member directors serving on the Audit Committee are independent
using the Exchange Act standards for audit committee member independence. These member directors
serving on the Audit Committee are Eric Hardmeyer, Clair Lensing, and Dale Oberkfell. Our Board
determined, however, the independent directors serving on the Audit Committee are independent under
the Exchange Act standards for audit committee member independence. These independent directors
serving on the Audit Committee are Johnny Danos, Gerald Eid, David Frauenshuh, John Kennedy, and
John Robinson.
181
Compensation Committee
The Board has a standing Compensation Committee. Our Board determined all members of the
Compensation Committee are independent under the Finance Agencys independence standards. For the
reasons described above, our Board determined none of the current member directors serving on the
Compensation Committee are independent using the NYSE standards for compensation committee member
independence. These member directors serving on the Compensation Committee are Van Fishback,
Michael Guttau, Joseph Stewart, and Dennis Lind. Our Board determined, however, the independent directors serving
on the Compensation Committee are independent under the NYSE standards for compensation committee
member independence. These independent directors serving on the Compensation Committee are Johnny
Danos, Gerald Eid, Labh Hira, and John Robinson.
ITEM
14 PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the aggregate fees billed by PwC for professional services
rendered in connection with the audit of our financial statements for 2009 and 2008, as well as the
fees billed by PwC for audit-related and other services to us during 2009 and 2008 (dollars in
millions).
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Audit fees1 |
|
$ |
0.6 |
|
|
$ |
0.9 |
|
Audit-related fees2 |
|
|
0.1 |
|
|
|
0.1 |
|
All other fees |
|
|
|
|
|
|
|
|
Tax fees3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
0.7 |
|
|
$ |
1.0 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Audit fees consist of fees incurred in connection with the integrated audit of our
financial statements, review of quarterly or annual managements discussion and
analysis, and participation and review of financial information filed with the SEC. We paid
assessments to the Office of Finance of $60,000 and $29,000 for audit fees on the OF Combined
Financial report for the years ended December 31, 2009 and 2008. |
|
2 |
|
Audit-related fees consist of fees related to other audit and attest services and
technical accounting consultation. |
|
3 |
|
The Bank is exempt from all federal, state, and local taxation except for real
property taxes. Therefore, no fees were paid to PwC during 2009 or 2008. |
Audit Committee Pre-Approval Policy
The Board of Directors prohibits management from using our external audit firm for services
not related to the external audit of our financial statements without prior approval of the Audit
Committee. Non-audit services permitted by the Board of Directors for fees payable by us of $5,000
or less may be pre-approved by the Audit Committee Chair with subsequent ratification by the Audit
Committee at its next, regularly scheduled meeting. We did not have any non-audit services provided
by PwC in 2009 and 2008.
182
PART IV
ITEM
15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements
The financial statements included as part of this report are identified in Item 8. Financial
Statements and Supplementary Data and are incorporated by reference into Item 15. Exhibits and
Financial Statement Schedules.
(b) 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 incorporated by reference to the exhibit to our Form 8-K filed with the SEC
on March 2, 2009. |
|
|
|
|
|
|
4.1 |
|
|
Federal Home Loan Bank of Des Moines Capital Plan, as amended, dated March 21, 2009, approved
by the Federal Housing Finance Agency on March 6, 2009, incorporated by reference to the
exhibit to our Form 8-K/A filed with the SEC on March 31, 2009. |
|
|
|
|
|
|
10.1 |
|
|
Federal Home Loan Bank of Des Moines Third Amended and Restated Benefit Equalization Plan
effective January 1, 2009.** |
|
|
|
|
|
|
10.2 |
|
|
Federal Home Loan Bank of Des Moines Pentegra Defined Benefit Plan for Financial Institutions
effective January 1, 2009.** |
|
|
|
|
|
|
10.3 |
|
|
Federal Home Loan Bank of Des Moines Pentegra Defined Contribution Plan for Financial
Institutions effective January 1, 2009.** |
|
|
|
|
|
|
10.4 |
|
|
U.S. Department of Treasury Lending Agreement incorporated by reference to the exhibit to our
Form 8-K filed with the SEC on September 9, 2008. |
|
|
|
|
|
|
10.5 |
|
|
Director Fee Policy approved by the Board of Directors on February 18, 2010. |
|
|
|
|
|
|
10.6 |
|
|
Federal Home Loan Bank of Des Moines Long-Term Incentive Plan Document effective January 1,
2008, incorporated by reference to the correspondingly numbered exhibit to our Form 10-Q/A
filed with the SEC on January 12, 2009. |
|
|
|
|
|
|
10.7 |
|
|
Federal Home Loan Bank Annual Incentive Plan Document effective October 8, 2009. |
|
|
|
|
|
|
12.1 |
|
|
Computation of Ratio of Earnings to Fixed Charges. |
183
|
|
|
|
|
|
|
|
|
|
|
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 exhibits to our annual report on Form 10-K filed with the
SEC on March 13, 2009 |
184
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) 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)
|
|
|
By: |
/s/ Richard S. Swanson
|
|
|
|
Richard S. Swanson |
|
|
|
President and Chief Executive Officer |
|
March 18, 2010
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
date indicated.
March 18, 2010
|
|
|
Signature |
|
Title |
|
|
|
Chief Executive Officer: |
|
|
|
|
|
/s/ Richard S. Swanson
|
|
President & Chief Executive Officer |
|
|
|
|
|
|
Chief Financial Officer: |
|
|
|
|
|
/s/ Steven T. Schuler
|
|
Executive Vice President & Chief Financial Officer |
|
|
|
|
|
|
Directors: |
|
|
|
|
|
/s/ Michael K. Guttau
|
|
Chairman of the Board of Directors |
|
|
|
|
|
|
/s/ Dale E. Oberkfell
|
|
Vice Chairman of the Board of Directors |
|
|
|
|
|
|
/s/ Johnny A. Danos
|
|
Director |
|
|
|
|
|
|
/s/ Gerald D. Eid
|
|
Director |
|
|
|
|
|
|
/s/ Michael J. Finley
|
|
Director |
|
|
|
185
|
|
|
Signature |
|
Title |
|
|
|
/s/ Van D. Fishback
|
|
Director |
|
|
|
|
|
|
/s/ David R. Frauenshuh
|
|
Director |
|
|
|
|
|
|
/s/ Chris D. Grimm
|
|
Director |
|
|
|
|
|
|
/s/ Eric A. Hardmeyer
|
|
Director |
|
|
|
|
|
|
/s/ Labh S. Hira
|
|
Director |
|
|
|
|
|
|
/s/ John F. Kennedy, Sr.
|
|
Director |
|
|
|
|
|
|
/s/ Clair J. Lensing
|
|
Director |
|
|
|
|
|
|
/s/ Dennis A. Lind
|
|
Director |
|
|
|
|
|
|
/s/ Paula R. Meyer
|
|
Director |
|
|
|
|
|
|
/s/ John H. Robinson
|
|
Director |
|
|
|
|
|
|
/s/ Joseph C. Stewart III
|
|
Director |
|
|
|
186
Table of Contents to Financial Statements
Audited Financial Statements
S-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of the
Federal Home Loan Bank of Des Moines:
In our opinion, the accompanying statements of condition and the related statements of income,
capital, and cash flows present fairly, in all material respects, the financial position of the
Federal Home Loan Bank of Des Moines (the Bank) at December 31, 2009 and 2008, and the results of
its operations and its cash flows for each of the three years in the period ended December 31, 2009
in conformity with accounting principles generally accepted in the United States of America. Also
in our opinion, the Bank maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2009, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). The Banks management is responsible for these financial statements, for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying Managements Report on
Internal Control over Financial Reporting. Our responsibility is to express opinions on these
financial statements and on the Banks internal control over financial reporting based on our
integrated audits. We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial reporting was maintained in all
material respects. Our audits of the financial statements included examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audits provide a
reasonable basis for our opinions.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Chicago, Illinois
March 18, 2010
S-2
FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CONDITION
(In thousands, except shares)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
Cash and due from banks (Note 3) |
|
$ |
298,841 |
|
|
$ |
44,368 |
|
Interest-bearing deposits |
|
|
10,570 |
|
|
|
152 |
|
Federal funds sold |
|
|
3,133,000 |
|
|
|
3,425,000 |
|
Investments |
|
|
|
|
|
|
|
|
Trading securities (Note 4) |
|
|
4,434,522 |
|
|
|
2,151,485 |
|
Available-for-sale securities (Note 5) |
|
|
7,737,413 |
|
|
|
3,839,980 |
|
Held-to-maturity securities (estimated fair value of $5,535,975 and
$5,917,288 at December 31, 2009 and 2008) (Note 6) |
|
|
5,474,664 |
|
|
|
5,952,008 |
|
Advances (Note 8) |
|
|
35,720,398 |
|
|
|
41,897,479 |
|
Mortgage loans held for portfolio, net of allowance for credit losses on
mortgage loans of $1,887 and $500 at December 31, 2009 and 2008 (Note 9) |
|
|
7,716,549 |
|
|
|
10,684,910 |
|
Accrued interest receivable |
|
|
81,703 |
|
|
|
92,620 |
|
Premises, software, and equipment, net |
|
|
9,062 |
|
|
|
8,550 |
|
Derivative assets (Note 10) |
|
|
11,012 |
|
|
|
2,840 |
|
Other assets |
|
|
28,939 |
|
|
|
29,915 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
64,656,673 |
|
|
$ |
68,129,307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND CAPITAL |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
Deposits (Note 11) |
|
|
|
|
|
|
|
|
Interest-bearing |
|
$ |
1,144,225 |
|
|
$ |
1,389,642 |
|
Non-interest-bearing demand |
|
|
80,966 |
|
|
|
106,828 |
|
|
|
|
|
|
|
|
Total deposits |
|
|
1,225,191 |
|
|
|
1,496,470 |
|
|
|
|
|
|
|
|
Consolidated obligations (Note 12) |
|
|
|
|
|
|
|
|
Discount notes |
|
|
9,417,182 |
|
|
|
20,061,271 |
|
Bonds (includes $5,997,867 at fair value under the fair value option
at December 31, 2009) |
|
|
50,494,474 |
|
|
|
42,722,473 |
|
|
|
|
|
|
|
|
Total consolidated obligations |
|
|
59,911,656 |
|
|
|
62,783,744 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mandatorily redeemable capital stock (Note 15) |
|
|
8,346 |
|
|
|
10,907 |
|
Accrued interest payable |
|
|
243,693 |
|
|
|
320,271 |
|
Affordable Housing Program (AHP) Payable (Note 13) |
|
|
40,479 |
|
|
|
39,715 |
|
Payable to REFCORP (Note 14) |
|
|
10,124 |
|
|
|
557 |
|
Derivative liabilities (Note 10) |
|
|
280,384 |
|
|
|
435,015 |
|
Other liabilities |
|
|
26,245 |
|
|
|
25,261 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
61,746,118 |
|
|
|
65,111,940 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 19) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAPITAL (Note 15) |
|
|
|
|
|
|
|
|
Capital
stock Class B putable ($100 par value) authorized, issued, and outstanding
24,604,186 and 27,809,271 shares at December 31, 2009 and 2008 |
|
|
2,460,419 |
|
|
|
2,780,927 |
|
Retained earnings |
|
|
484,071 |
|
|
|
381,973 |
|
Accumulated other comprehensive loss |
|
|
|
|
|
|
|
|
Net unrealized loss on available-for-sale securities (Note 5) |
|
|
(32,533 |
) |
|
|
(144,271 |
) |
Pension and postretirement benefits (Note 16) |
|
|
(1,402 |
) |
|
|
(1,262 |
) |
|
|
|
|
|
|
|
Total capital |
|
|
2,910,555 |
|
|
|
3,017,367 |
|
|
|
|
|
|
|
|
Total liabilities and capital |
|
$ |
64,656,673 |
|
|
$ |
68,129,307 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
S-3
FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF INCOME
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
INTEREST INCOME |
|
|
|
|
|
|
|
|
|
|
|
|
Advances |
|
$ |
657,913 |
|
|
$ |
1,417,661 |
|
|
$ |
1,312,133 |
|
Prepayment fees on advances, net |
|
|
10,270 |
|
|
|
943 |
|
|
|
1,527 |
|
Interest-bearing deposits |
|
|
422 |
|
|
|
107 |
|
|
|
401 |
|
Securities purchased under agreements to resell |
|
|
1,855 |
|
|
|
|
|
|
|
11,904 |
|
Federal funds sold |
|
|
17,369 |
|
|
|
72,044 |
|
|
|
188,668 |
|
Investments |
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities |
|
|
66,350 |
|
|
|
1,052 |
|
|
|
|
|
Available-for-sale securities |
|
|
61,943 |
|
|
|
133,443 |
|
|
|
111,548 |
|
Held-to-maturity securities |
|
|
173,954 |
|
|
|
209,407 |
|
|
|
272,996 |
|
Mortgage loans |
|
|
443,581 |
|
|
|
533,648 |
|
|
|
561,660 |
|
Loans to other FHLBanks |
|
|
|
|
|
|
93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
1,433,657 |
|
|
|
2,368,398 |
|
|
|
2,460,837 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE |
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated obligations |
|
|
|
|
|
|
|
|
|
|
|
|
Discount notes |
|
|
132,171 |
|
|
|
616,394 |
|
|
|
424,052 |
|
Bonds |
|
|
1,101,358 |
|
|
|
1,481,232 |
|
|
|
1,786,215 |
|
Deposits |
|
|
2,389 |
|
|
|
22,181 |
|
|
|
51,363 |
|
Borrowings from other FHLBanks |
|
|
21 |
|
|
|
26 |
|
|
|
119 |
|
Securities sold under agreements to repurchase |
|
|
|
|
|
|
1,961 |
|
|
|
25,045 |
|
Mandatorily redeemable capital stock |
|
|
283 |
|
|
|
1,029 |
|
|
|
2,902 |
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
1,236,222 |
|
|
|
2,122,823 |
|
|
|
2,289,696 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INTEREST INCOME |
|
|
197,435 |
|
|
|
245,575 |
|
|
|
171,141 |
|
Provision for credit losses on mortgage loans |
|
|
1,475 |
|
|
|
295 |
|
|
|
69 |
|
|
|
|
|
|
|
|
|
|
|
NET INTEREST INCOME AFTER PROVISION FOR
CREDIT LOSSES |
|
|
195,960 |
|
|
|
245,280 |
|
|
|
171,072 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (LOSS) |
|
|
|
|
|
|
|
|
|
|
|
|
Service fees |
|
|
2,081 |
|
|
|
2,341 |
|
|
|
2,217 |
|
Net gain on trading securities |
|
|
19,040 |
|
|
|
1,485 |
|
|
|
|
|
Net realized loss on sale of available-for-sale securities |
|
|
(10,912 |
) |
|
|
|
|
|
|
|
|
Net realized gain on sale of held-to-maturity securities |
|
|
|
|
|
|
1,787 |
|
|
|
545 |
|
Net loss on bonds held at fair value |
|
|
(4,394 |
) |
|
|
|
|
|
|
|
|
Net gain on loans held for sale |
|
|
1,342 |
|
|
|
|
|
|
|
|
|
Net gain (loss) on derivatives and hedging activities |
|
|
133,779 |
|
|
|
(33,175 |
) |
|
|
4,491 |
|
Net (loss) gain on extinguishment of debt |
|
|
(89,859 |
) |
|
|
698 |
|
|
|
|
|
Other, net |
|
|
4,708 |
|
|
|
(975 |
) |
|
|
3,080 |
|
|
|
|
|
|
|
|
|
|
|
Total other income (loss) |
|
|
55,785 |
|
|
|
(27,839 |
) |
|
|
10,333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER EXPENSE |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits |
|
|
31,857 |
|
|
|
26,274 |
|
|
|
24,828 |
|
Operating |
|
|
16,586 |
|
|
|
14,118 |
|
|
|
14,589 |
|
Federal Housing Finance Agency |
|
|
2,414 |
|
|
|
1,852 |
|
|
|
1,561 |
|
Office of Finance |
|
|
2,203 |
|
|
|
1,843 |
|
|
|
1,476 |
|
|
|
|
|
|
|
|
|
|
|
Total other expense |
|
|
53,060 |
|
|
|
44,087 |
|
|
|
42,454 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE ASSESSMENTS |
|
|
198,685 |
|
|
|
173,354 |
|
|
|
138,951 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AHP |
|
|
16,248 |
|
|
|
14,168 |
|
|
|
12,094 |
|
REFCORP |
|
|
36,488 |
|
|
|
31,820 |
|
|
|
25,462 |
|
|
|
|
|
|
|
|
|
|
|
Total assessments |
|
|
52,736 |
|
|
|
45,988 |
|
|
|
37,556 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
|
$ |
145,949 |
|
|
$ |
127,366 |
|
|
$ |
101,395 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
S-4
FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENT OF CHANGES IN CAPITAL
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
2,687 |
|
|
|
268,708 |
|
|
|
|
|
|
|
|
|
|
|
268,708 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase/redemption of capital
stock |
|
|
(5,700 |
) |
|
|
(570,046 |
) |
|
|
|
|
|
|
|
|
|
|
(570,046 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net shares reclassified to mandatorily
redeemable capital stock |
|
|
(192 |
) |
|
|
(19,170 |
) |
|
|
|
|
|
|
|
|
|
|
(19,170 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
145,949 |
|
|
|
|
|
|
|
145,949 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain on
available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
176,698 |
|
|
|
176,698 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment
for gains included in net
income relating to sale of
available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(64,960 |
) |
|
|
(64,960 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and postretirement benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(140 |
) |
|
|
(140 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
257,547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends on capital
stock (1.50% annualized) |
|
|
|
|
|
|
|
|
|
|
(43,851 |
) |
|
|
|
|
|
|
(43,851 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE DECEMBER 31, 2009 |
|
|
24,604 |
|
|
$ |
2,460,419 |
|
|
$ |
484,071 |
|
|
$ |
(33,935 |
) |
|
$ |
2,910,555 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
S-5
FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENT OF CHANGES IN CAPITAL
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
55,797 |
|
|
|
5,579,766 |
|
|
|
|
|
|
|
|
|
|
|
5,579,766 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase/redemption of capital
stock |
|
|
(55,132 |
) |
|
|
(5,513,225 |
) |
|
|
|
|
|
|
|
|
|
|
(5,513,225 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net shares reclassified to
mandatorily
redeemable capital stock |
|
|
(29 |
) |
|
|
(2,861 |
) |
|
|
|
|
|
|
|
|
|
|
(2,861 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
127,366 |
|
|
|
|
|
|
|
127,366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized loss on
available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(118,804 |
) |
|
|
(118,804 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and postretirement benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(358 |
) |
|
|
(358 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends on capital
stock (3.87% annualized) |
|
|
|
|
|
|
|
|
|
|
(106,740 |
) |
|
|
|
|
|
|
(106,740 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE DECEMBER 31, 2008 |
|
|
27,809 |
|
|
$ |
2,780,927 |
|
|
$ |
381,973 |
|
|
$ |
(145,533 |
) |
|
$ |
3,017,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
S-6
FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENT OF CHANGES IN CAPITAL
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Capital Stock |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Class B (putable) |
|
|
Retained |
|
|
Comprehensive |
|
|
Total |
|
|
|
Shares |
|
|
Par Value |
|
|
Earnings |
|
|
Loss |
|
|
Capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE DECEMBER 31, 2006 |
|
|
19,059 |
|
|
$ |
1,905,878 |
|
|
$ |
344,246 |
|
|
$ |
(1,153 |
) |
|
$ |
2,248,971 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of capital
stock |
|
|
20,047 |
|
|
|
2,004,664 |
|
|
|
|
|
|
|
|
|
|
|
2,004,664 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase/redemption of capital
stock |
|
|
(12,111 |
) |
|
|
(1,211,081 |
) |
|
|
|
|
|
|
|
|
|
|
(1,211,081 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net shares reclassified from
mandatorily
redeemable capital stock |
|
|
178 |
|
|
|
17,786 |
|
|
|
|
|
|
|
|
|
|
|
17,786 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
101,395 |
|
|
|
|
|
|
|
101,395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized loss on
available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,655 |
) |
|
|
(25,655 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and postretirement
benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
437 |
|
|
|
437 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76,177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends on capital
stock (4.31% annualized) |
|
|
|
|
|
|
|
|
|
|
(84,294 |
) |
|
|
|
|
|
|
(84,294 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE DECEMBER 31, 2007 |
|
|
27,173 |
|
|
$ |
2,717,247 |
|
|
$ |
361,347 |
|
|
$ |
(26,371 |
) |
|
$ |
3,052,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
S-7
FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
145,949 |
|
|
$ |
127,366 |
|
|
$ |
101,395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net income to net cash (used) provided by
operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums, discounts, and basis adjustments on investments,
advances, mortgage loans, and consolidated obligations |
|
|
(58,636 |
) |
|
|
39,905 |
|
|
|
64,147 |
|
Concessions on consolidated obligations |
|
|
4,990 |
|
|
|
7,559 |
|
|
|
6,079 |
|
Premises, software and equipment |
|
|
1,562 |
|
|
|
1,026 |
|
|
|
992 |
|
Other |
|
|
165 |
|
|
|
(103 |
) |
|
|
(161 |
) |
Provision for credit losses on mortgage loans |
|
|
1,475 |
|
|
|
295 |
|
|
|
69 |
|
Net loss (gain) on extinguishment of debt |
|
|
89,859 |
|
|
|
(698 |
) |
|
|
|
|
Net change in fair value on trading securities |
|
|
(19,040 |
) |
|
|
(1,485 |
) |
|
|
|
|
Net realized loss on sale of available-for-sale securities |
|
|
10,912 |
|
|
|
|
|
|
|
|
|
Net realized gain on sale of held-to-maturity securities |
|
|
|
|
|
|
(1,787 |
) |
|
|
(545 |
) |
Net gain on loans held for sale |
|
|
(1,342 |
) |
|
|
|
|
|
|
|
|
Net change in fair value on bonds held at fair value |
|
|
4,394 |
|
|
|
|
|
|
|
|
|
Net change in fair value on derivatives and hedging activities |
|
|
(161,679 |
) |
|
|
20,773 |
|
|
|
(10,788 |
) |
Net realized loss on disposal of premises and equipment |
|
|
4 |
|
|
|
12 |
|
|
|
77 |
|
Net change in: |
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest receivable |
|
|
10,930 |
|
|
|
37,117 |
|
|
|
(36,826 |
) |
Accrued interest on derivatives |
|
|
27,011 |
|
|
|
59,498 |
|
|
|
(36,046 |
) |
Other assets |
|
|
1,360 |
|
|
|
(10,945 |
) |
|
|
(8,794 |
) |
Accrued interest payable |
|
|
(73,104 |
) |
|
|
19,231 |
|
|
|
900 |
|
AHP Payable and discount on AHP advances |
|
|
744 |
|
|
|
(2,963 |
) |
|
|
(2,124 |
) |
Payable to REFCORP |
|
|
9,977 |
|
|
|
(6,132 |
) |
|
|
335 |
|
Other liabilities |
|
|
(1,662 |
) |
|
|
1,457 |
|
|
|
255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments |
|
|
(152,080 |
) |
|
|
162,760 |
|
|
|
(22,430 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used) provided by operating activities |
|
|
(6,131 |
) |
|
|
290,126 |
|
|
|
78,965 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
S-8
FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CASH FLOWS (continued from previous page)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Net change in: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits |
|
|
201,481 |
|
|
|
(267,916 |
) |
|
|
11,256 |
|
Securities purchased under agreements to resell |
|
|
|
|
|
|
|
|
|
|
305,000 |
|
Federal funds sold |
|
|
292,000 |
|
|
|
(1,620,000 |
) |
|
|
(180,000 |
) |
Trading securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales |
|
|
2,170,339 |
|
|
|
|
|
|
|
|
|
Purchases |
|
|
(4,434,336 |
) |
|
|
(2,150,000 |
) |
|
|
|
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease (increase) in short-term |
|
|
|
|
|
|
218,296 |
|
|
|
(69,217 |
) |
Proceeds from sales and maturities |
|
|
3,568,739 |
|
|
|
520,755 |
|
|
|
1,038,742 |
|
Purchases |
|
|
(7,367,055 |
) |
|
|
(1,263,991 |
) |
|
|
(3,864,765 |
) |
Held-to-maturity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease (increase) in short-term |
|
|
384,935 |
|
|
|
(84,461 |
) |
|
|
1,019,679 |
|
Proceeds from maturities |
|
|
1,352,466 |
|
|
|
703,616 |
|
|
|
762,400 |
|
Purchases |
|
|
(1,249,912 |
) |
|
|
(2,564,821 |
) |
|
|
(70,000 |
) |
Advances to members: |
|
|
|
|
|
|
|
|
|
|
|
|
Principal collected |
|
|
43,592,197 |
|
|
|
329,770,015 |
|
|
|
93,835,701 |
|
Originated |
|
|
(37,961,679 |
) |
|
|
(330,411,026 |
) |
|
|
(112,007,019 |
) |
Mortgage loans held for portfolio: |
|
|
|
|
|
|
|
|
|
|
|
|
Principal collected |
|
|
2,265,782 |
|
|
|
1,294,677 |
|
|
|
1,339,811 |
|
Originated or purchased |
|
|
(1,578,444 |
) |
|
|
(1,184,389 |
) |
|
|
(370,977 |
) |
Mortgage loans held for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
Principal collected |
|
|
128,045 |
|
|
|
|
|
|
|
|
|
Proceeds from sales |
|
|
2,123,595 |
|
|
|
|
|
|
|
|
|
Proceeds from sale of foreclosed assets |
|
|
16,004 |
|
|
|
11,452 |
|
|
|
9,962 |
|
Additions to premises, software, and equipment |
|
|
(2,263 |
) |
|
|
(2,632 |
) |
|
|
(1,922 |
) |
Proceeds from sale of premises, software, and equipment |
|
|
185 |
|
|
|
10 |
|
|
|
131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by investing activities |
|
|
3,502,079 |
|
|
|
(7,030,415 |
) |
|
|
(18,241,218 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Net change in: |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
(268,529 |
) |
|
|
602,657 |
|
|
|
(47,635 |
) |
Net decrease in securities sold under agreement to repurchase |
|
|
|
|
|
|
(200,000 |
) |
|
|
(300,000 |
) |
Net proceeds on derivative contracts with financing elements |
|
|
(11,050 |
) |
|
|
24,919 |
|
|
|
|
|
Net proceeds from issuance of consolidated obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
Discount notes |
|
|
719,301,475 |
|
|
|
1,143,298,513 |
|
|
|
619,804,146 |
|
Bonds |
|
|
32,407,277 |
|
|
|
21,122,613 |
|
|
|
8,681,550 |
|
Payments for maturing, transferring and retiring consolidated obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
Discount notes |
|
|
(729,868,518 |
) |
|
|
(1,144,771,902 |
) |
|
|
(603,019,683 |
) |
Bonds |
|
|
(24,435,210 |
) |
|
|
(13,272,626 |
) |
|
|
(7,635,893 |
) |
Proceeds from issuance of capital stock |
|
|
268,708 |
|
|
|
5,579,766 |
|
|
|
2,004,664 |
|
Net payments for repurchase/issuance of mandatorily
redeemable capital stock |
|
|
(21,731 |
) |
|
|
(37,993 |
) |
|
|
(1,027 |
) |
Payments for repurchase/redemption of capital stock |
|
|
(570,046 |
) |
|
|
(5,513,225 |
) |
|
|
(1,211,081 |
) |
Cash dividends paid |
|
|
(43,851 |
) |
|
|
(106,740 |
) |
|
|
(84,294 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used) provided by financing activities |
|
|
(3,241,475 |
) |
|
|
6,725,982 |
|
|
|
18,190,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and due from banks |
|
|
254,473 |
|
|
|
(14,307 |
) |
|
|
28,494 |
|
Cash and due from banks at beginning of the year |
|
|
44,368 |
|
|
|
58,675 |
|
|
|
30,181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks at end of the year |
|
$ |
298,841 |
|
|
$ |
44,368 |
|
|
$ |
58,675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
2,061,862 |
|
|
$ |
2,061,098 |
|
|
$ |
2,239,561 |
|
AHP |
|
|
15,586 |
|
|
|
17,075 |
|
|
|
14,186 |
|
REFCORP |
|
|
26,511 |
|
|
|
37,952 |
|
|
|
25,127 |
|
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 |
|
|
19,172 |
|
|
|
12,291 |
|
|
|
9,221 |
|
The accompanying notes are an integral part of these financial statements.
S-9
FEDERAL HOME LOAN BANK OF DES MOINES
NOTES TO FINANCIAL STATEMENTS
Background Information
The Federal Home Loan Bank of Des Moines (the Bank) is a federally chartered
corporation organized on October 31, 1932, 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
FHLBanks are regulated by the Federal Housing Finance Agency (Finance Agency), whose mission is to
provide effective supervision, regulation, and housing mission oversight of the FHLBanks to promote
their safety and soundness, support housing and finance and affordable housing, and support a
stable and liquid mortgage market. 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 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 Banks current members own nearly all of the outstanding capital stock of the Bank. Former
members own the remaining capital stock to support business transactions still carried on the
Banks Statements of Condition. All stockholders, including current members and former members, may
receive dividends on their investment to the extent declared by the Banks Board of Directors.
S-10
Note 1Summary of Significant Accounting Policies
The Bank prepares its financial statements in conformity with accounting principles generally
accepted in the U.S. (GAAP). The preparation of financial statements requires management to make
assumptions and estimates that may affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported amounts of income and expense.
Actual results could significantly differ from these estimates.
Interest-Bearing Deposits, Securities Purchased Under Agreements to Resell, and Federal Funds Sold
These investments provide short-term liquidity and are carried at cost. Interest-bearing
deposits include certificates of deposit purchased by the Bank from its members. Certificates of
deposit and bank notes purchased by the Bank that meet the definition of a security are recorded as
held-to-maturity securities. The Bank treats securities purchased under agreements to resell as
collateralized financings.
Investment Securities
The Bank classifies investments as trading, available-for-sale and held-to-maturity at the
date of acquisition. Purchases and sales of securities are recorded on a trade date basis.
Securities classified as trading are generally held for liquidity purposes and are carried at
fair value. The Bank records changes in the fair value of these investments through other income
(loss) as Net gain on trading securities.
Securities for which the Bank has the ability and intent to hold to maturity are classified as
held-to-maturity. Held-to-maturity investments are carried at amortized cost, adjusted for periodic
principal repayments, amortization of premiums and accretion of discounts.
Securities that are not trading or held-to-maturity are classified as available-for-sale and
are carried at fair value. The Bank records changes in the fair value of available-for-sale
securities not being hedged by derivative instruments through accumulated other comprehensive loss
as Net unrealized loss on available-for-sale securities. For available-for-sale securities that
have been hedged and qualify as a fair value hedge, the Bank first records the portion of the
change in fair value related to the risk being hedged together with the related change in fair
value of the derivative through other income (loss) as Net gain (loss) on derivatives and hedging
activities. The Bank records the remainder of the change in fair value through accumulated other
comprehensive loss as Net unrealized loss on available-for-sale securities.
S-11
Amortization. For mortgage-backed securities (MBS), the Bank amortizes premiums and accretes
discounts using the effective-yield method, adjusted for prepayment activity, over the contractual
life of the securities. For non-MBS, the Bank amortizes premiums and accretes discounts using the
effective-yield method over the contractual life of the securities. Amortization and accretion are
recorded as a component of investment interest income.
Sale or transfer of held-to-maturity securities. Certain changes in circumstances may cause
the Bank to change its intent to hold a security to maturity without calling into question its
intent to hold other debt securities to maturity in the future. Thus, the sale or transfer of a
held-to-maturity security due to certain changes in circumstances, such as evidence of significant
deterioration in the issuers creditworthiness or changes in regulatory requirements, is not
considered to be inconsistent with its original classification. Other events that are isolated,
nonrecurring, and unusual for the Bank that could not have been reasonably anticipated may cause
the Bank to sell or transfer a held-to-maturity security without necessarily calling into question
its intent to hold other debt securities to maturity. In addition, sales of debt securities that
meet either of the following two conditions may be considered maturities for purpose of the
classification of securities: (i) the sale occurs near enough to its maturity date (or call date if
exercise of the call is probable) that interest-rate risk is substantially eliminated as a pricing
factor and the changes in market interest rates would not have a significant effect on the
securitys fair value, or (ii) the sale of a security occurs after the Bank has already collected a
substantial portion (at least 85 percent) of the principal outstanding at acquisition due either to
prepayments on the debt security or to scheduled payments on a debt security payable in equal
installments (both principal and interest) over its term.
Sale of investment securities. The Bank computes gains and losses on sales of investment
securities using the specific identification method and includes these gains and losses in other
income (loss).
S-12
Impairment Analysis. The Bank evaluates its individual available-for-sale and held-to-maturity
securities in an unrealized loss position for other-than-temporary impairment (OTTI) on a quarterly
basis. As part of this process, the Bank considers its intent to sell each debt security before its
anticipated recovery 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 will
recognize an OTTI charge in earnings equal to the entire unrealized loss amount. If neither of
these conditions is met, the Bank will perform cash flow analysis to determine if it will recover
the entire amortized cost basis of the debt security. The present value of the cash flows expected
to be collected is compared to the amortized cost basis of the debt security to determine whether a
credit loss exists. If there is a credit loss (the difference between the present value of the cash
flows expected to be collected and the amortized cost basis of the debt security), the carrying
value of the debt security is adjusted to its fair value. However, rather than recognizing the
entire difference between the amortized cost basis and the fair value in earnings, only the amount
of the impairment representing the credit loss (i.e., the credit component) is recognized in
earnings, while the amount related to all other factors (i.e., the non-credit component) is
recognized in accumulated other comprehensive loss. The total OTTI is presented in the Statements
of Income with an offset for the amount of the total OTTI that 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
accreted 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 related to credit loss recognized).
Advances
The Bank reports advances (loans to members or eligible housing associates) at amortized cost,
net of premiums and discounts, discounts on AHP advances, and hedging fair value adjustments.
Following the requirements of the FHLBank Act, the Bank obtains sufficient collateral on
advances to protect it from losses. The FHLBank Act limits eligible collateral to residential
mortgage loans, certain investment securities, cash or deposits, and other eligible real
estate-related assets. As Note 8 Advances more fully describes, Community Financial
Institutions (CFIs) are eligible to utilize expanded statutory collateral rules. The Bank has not
incurred any credit losses on advances since its inception and, based on its credit extension and
collateral policies, Bank management does not anticipate any credit losses on its advances.
Accordingly, the Bank has not provided any allowance for losses on advances at December 31, 2009.
Amortization. The Bank amortizes premiums and accretes discounts on advances using the
effective-yield method over the contractual life of the advances. Amortization and accretion are
recorded as a component of advance interest income.
S-13
Prepayment Fees. The Bank may charge a prepayment fee when a borrower prepays certain advances
before the original maturity. In cases in which the Bank funds a new advance concurrent with or
within a short period of time after the prepayment of an existing advance, the Bank evaluates
whether the new advance meets the accounting criteria to qualify as a modification of an existing
advance or whether it constitutes a new advance. If the new advance qualifies as a modification of
the existing advance, the prepayment fee on the prepaid advance is deferred, recorded in the basis
of the modified advance and amortized over the life of the modified advance using the
effective-yield method. This amortization is recorded in advance interest income.
For prepaid advances that are hedged and meet the hedge accounting requirements, the Bank
terminates the hedging relationship upon prepayment and records the associated fair value gains and
losses, adjusted for the prepayment fees, in advance interest income. If the Bank funds a new
advance concurrent with or within a short period of time after the prepayment of an existing hedged
advance, the Bank evaluates whether the new advance qualifies as a modification of the original
hedged advance. If the new advance qualifies as a modification of the original hedged advance, the
fair value gains or losses of the original hedged advance and the prepayment fees are included in
the carrying amount of the modified advance, and gains or losses and prepayment fees are amortized
to advance interest income over the life of the modified advance using the effective-yield method.
If the modified advance is also hedged and the hedge meets the hedge accounting requirements, the
modified advance is marked to fair value and subsequent fair value changes are recorded in other
income (loss).
If the Bank determines that the transaction does not qualify as a modification of an existing
advance, it is treated as an advance termination with subsequent funding of a new advance and the
existing fees net of related hedging adjustments are recorded as Prepayment fees on advances, net
in the Statements of Income.
Mortgage Loans Held for Portfolio
The Bank participates in the Mortgage Partnership Finance (MPF) program (Mortgage Partnership
Finance and MPF are registered trademarks of the FHLBank of Chicago) under which the Bank invests
in conventional and government-insured (i.e., Federal Housing Administration, Veterans
Administration, and U.S. Department of Agriculture) residential mortgage loans that are acquired
through or purchased from a participating financial institution (PFI) member. MPF loans may also be
participations in pools of eligible mortgage loans purchased from other FHLBanks.
The Bank manages the liquidity, interest rate, and prepayment risk of the loans while the PFI
retains the customer relationship and loan servicing activities. If the PFI is participating in the
servicing released program, the PFI concurrently sells the servicing of the mortgage loans to a
designated mortgage service provider. The Bank and the PFI share the credit risk on the
conventional loans. The PFI assumes credit losses up to a contractually specified credit
enhancement obligation amount.
S-14
The Bank classifies mortgage loans as held for portfolio and reports them at their principal
amount outstanding, net of premiums and discounts, hedging fair value adjustments, basis
adjustments on loans initially classified as mortgage delivery commitments, and the allowance for
credit losses on mortgage loans. The Bank has the ability and intent to hold these mortgage loans
to maturity.
The Bank places a conventional mortgage loan on nonaccrual status when the collection of the
contractual principal or interest is 90 days or more past due. When a mortgage loan is placed on
nonaccrual status, accrued but uncollected interest is reversed against interest income. The Bank
records cash payments received on nonaccrual loans as a reduction of principal. A
government-insured loan is not placed on nonaccrual status when the collection of the contractual
principal or interest is 90 days or more past due because of the (i) U.S. Government guarantee of
the loan and (ii) contractual obligation of the loan servicer to repurchase the loan when certain
criteria are met.
Amortization. The Bank computes amortization and accretion of premiums, discounts, and other
nonrefundable fees on mortgage loans using the effective-yield method over the contractual life of
the mortgage loan. Amortization and accretion is recorded as a component of mortgage loan interest
income.
Credit Enhancement Fees. For conventional MPF loans, PFIs retain a portion of the credit risk
on the MPF loans they sell to the Bank by providing credit enhancement either through a directly
liability to pay credit losses up to a specified amount or through a contractual obligation to
provide supplemental mortgage insurance (SMI). The required PFI credit enhancement may vary
depending on the MPF product alternatives selected.
PFIs are paid a credit enhancement fee for managing credit risk, and in some instances all or
a portion of the credit enhancement fee may be performance based. Credit enhancement fees are paid
monthly and are determined based on the remaining unpaid principal balance of the MPF loans in the
master commitment. Credit enhancement fees, payable to a PFI as compensation for assuming credit
risk, are recorded as an offset to mortgage loan interest income. To the extent the Bank
experiences losses in a master commitment, the Bank may be able to recapture credit enhancement
fees paid to the PFI to offset these losses.
Other Fees. The Bank may receive other non-origination fees, such as delivery commitment
extension fees, pair-off fees and price adjustment fees. Delivery commitment extension fees are
received when the PFI requires an extension of the delivery commitment on an MPF loan beyond the
original stated maturity date. These fees compensate the Bank for interest lost as a result of the
late funding of the loan and are recorded in other income (loss). Pair-off fees represent a
make-whole provision and are received when the amount funded is less than a specific percentage of
the delivery commitment amount. Price adjustment fees are received when the amount funded is
greater than a specified percentage of the delivery commitment amount. Pair-off fees relating to
under-deliveries of loans are included in other income (loss). Price adjustment fees relating to
over-deliveries of loans are included as part of the loan basis.
S-15
Allowance for Credit Losses on Mortgage Loans
The Bank establishes an allowance for credit losses on its conventional mortgage loan
portfolio as of the balance sheet date. The allowance is an estimate of probable losses contained
in the portfolio. The Bank does not maintain an allowance for loan losses on the government-insured
mortgage loan portfolio because of the (i) U.S. Government guarantee of the loans and (ii)
contractual obligation of the loan servicer to repurchase the loan when certain criteria are met.
The Bank considers both quantitative and qualitative factors when determining the allowance
for credit losses. Quantitative factors include but are not limited to portfolio composition and
characteristics, delinquency levels, historical loss experience, changes in members credit
enhancements, including the recovery of performance based credit enhancement fees, and other
relevant factors using a pooled loan approach. Qualitative factors include but are not limited to
changes in national and local economic trends.
The Bank monitors and reports its loan portfolio performance monthly. Adjustments to the
allowance for credit losses are considered quarterly based upon the factors discussed above. For
the years ended December 31, 2009, 2008, and 2007, the Bank recorded an allowance for credit losses
in the amount of $1.9 million, $0.5 million, and $0.3 million. During the fourth quarter of 2009,
the Bank revised its allowance for credit losses methodology. Refer to Note 2 Recently Issued
and Adopted Accounting Guidance and Changes in Accounting Estimate for details on this change in
estimate. Refer to Note 9 Mortgage Loans Held for Portfolio for additional details on the
Banks allowance for credit losses.
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.
Real Estate Owned
Nonperforming loans that the Bank has obtained title to the property but not yet liquidated
are classified as real estate owned held for sale and recorded as a component of other assets in
the Statements of Condition.
S-16
At the time of transfer, real estate owned classified as held for sale is measured at the
lower of carrying amount or fair value less costs to sell. If the carrying amount exceeds the fair
value at the time of transfer, the Bank will record the difference as either a charge-off to the
allowance for credit losses or a credit enhancement fee receivable if it expects to recover the
difference through the recapture of performance based credit enhancement fees in the future.
Subsequent realized gains and losses on the sale of real estate owned are recorded in other income
(loss).
MPF Shared Funding Program
The Bank participated in the MPF shared funding program, which allows mortgage loans
originated through the MPF program to be sold to a third party-sponsored trust and pooled into
securities. The Bank currently holds MPF shared funding securities that were issued by special
purpose entities that were sponsored by One Mortgage Partners Corporation, a subsidiary of JPMorgan
Chase. The securities are classified as held-to-maturity and are reported at amortized cost in the
Banks Statements of Condition. The Bank does not consolidate any of its securitized interests
since it is not the sponsor, holds only senior interests, does not act as servicer, and does not
provide any liquidity or credit support to these investments. The Banks maximum loss exposure for
these investments is limited to the carrying value. See Note 6 Held-to-Maturity Securities for
more information.
Premises, Software, and Equipment
The Bank records premises, software, and equipment at cost less accumulated depreciation and
amortization. The Banks accumulated depreciation and amortization related to premises, software,
and equipment was $4.9 million and $3.4 million at December 31, 2009 and 2008. Depreciation and
amortization expense for premises, software, and equipment was $1.6 million, $1.0 million, and $1.0
million for the years ended December 31, 2009, 2008, and 2007. At December 31, 2009 and 2008, the
Bank had $1.7 million and $1.5 million in unamortized computer software costs. Amortization of
computer software costs charged to expense was $377,000, $90,000, and $49,000 for the years ended
December 31, 2009, 2008 and 2007.
The Bank computes depreciation using the straight-line method over the estimated useful lives
of relevant assets ranging from two to ten years. The Bank amortizes leasehold improvements using
the straight-line basis over the shorter of the estimated useful life of the improvement or the
remaining term of the lease. The Bank capitalizes improvements and major renewals but expenses
ordinary maintenance and repairs when incurred. The cost of computer software developed for
internal use is capitalized and amortized over future periods.
The Bank includes gains and losses on disposal of premises and equipment in other income
(loss). The total net realized loss on disposal of premises and equipment was $4,000, $12,000, and
$77,000 for the years ended December 31, 2009, 2008, and 2007.
S-17
Derivatives
All derivatives are recognized in the Statements of Condition at their fair values and are
reported as either derivative assets or derivative liabilities net of cash collateral and
accrued interest from counterparties. Each derivative is designated as one of the following:
|
(1) |
|
a hedge of the fair value of a recognized asset or liability or an unrecognized firm
commitment (a fair value hedge); |
|
(2) |
|
a non-qualifying hedge of an asset, liability, or firm commitment (an economic hedge)
for asset-liability management purposes. |
Changes in the fair value of a derivative that is designated and qualifies as a fair value
hedge, along with changes in the fair value of the hedged asset, liability, or unrecognized firm
commitment that are attributable to the hedged risk are recorded in other income (loss) as Net
gain (loss) on derivatives and hedging activities. Hedge ineffectiveness (which represents the
amount by which the change in the fair value of the derivative differs from the change in the fair
value of the hedged item) is recorded in other income (loss) as Net gain (loss) on derivatives and
hedging activities.
If hedging relationships meet certain criteria including, but not limited to, formal
documentation of the hedging relationship and an expectation to be highly effective, they are
eligible for hedge accounting and the offsetting changes in fair value of the hedged items may be
recorded in earnings. The application of hedge accounting requires the Bank to evaluate the
effectiveness of the hedging relationship at inception and on an ongoing basis and to calculate the
changes in fair value of the derivatives and related hedged items independently. This is known as
the long haul method of accounting. Transactions that meet more stringent criteria qualify for
the short cut method of hedge accounting in which an assumption can be made that the change in
fair value of a hedged item exactly offsets the change in fair value of the related derivative.
S-18
An economic hedge is defined as a derivative hedging specific or non-specific underlying
assets, liabilities, or firm commitments that does not qualify or was not designated for hedge
accounting, but is an acceptable hedging strategy under the Banks risk management program. These
economic hedging strategies also comply with Finance Agency regulatory requirements prohibiting
speculative hedge transactions. An economic hedge by definition introduces the potential for
earnings variability caused by the changes in fair value on the derivatives that are recorded in
the Banks income but not offset by corresponding changes in the value of the economically hedged
assets, liabilities, or firm commitments. As a result, the Bank recognizes only the net interest
and the change in fair value of these derivatives in other income (loss) as Net gain (loss) on
derivatives and hedging activities with no offsetting fair value adjustments for the related
assets, liabilities, or firm commitments. Cash flows associated with such stand-alone derivatives
(derivatives not qualifying as a hedge) are reflected as cash flows from operating activities in
the Statements of Cash Flows unless the derivative meets the criteria to be a financing derivative.
The differences between accrued interest receivable and accrued interest payable on
derivatives designated as fair value hedges are recognized as adjustments to the interest income or
expense of the designated underlying hedged asset, liability, or firm commitment. The differences
between accrued interest receivable and accrued interest payable on derivatives designated as
economic hedges are recognized in other income (loss) as Net gain (loss) on derivatives and
hedging activities.
The Bank may issue debt, make advances, or purchase financial instruments in which a
derivative instrument is embedded. Upon execution of these transactions, the Bank assesses
whether the economic characteristics of the embedded derivative are clearly and closely related to
the economic characteristics of the remaining component of the debt, advance or purchased financial
instrument (the host contract) and whether a separate, non-embedded instrument with the same terms
as the embedded instrument would meet the definition of a derivative. If the Bank determines that
(i) the embedded derivative has economic characteristics not clearly and closely related to the
economic characteristics of the host contract and (ii) a separate, stand-alone instrument with the
same terms would qualify as a derivative instrument, the embedded derivative is separated from the
host contract, carried at fair value, and designated as a stand-alone derivative instrument used as
an economic hedge. However, if the entire contract (the host contract and the embedded derivative)
is to be measured at fair value, with changes in fair value reported in current period earnings, or
if the Bank cannot reliably identify and measure the embedded derivative for purposes of separating
that derivative from its host contract, the entire contract is carried in the Statements of
Condition at fair value and no portion of the contract is designated as a hedging instrument.
S-19
Derivatives are typically executed at the same time as the hedged assets or liabilities and
the Bank designates the derivative and the hedged item in a qualifying hedging relationship as of
the trade date. In many hedging relationships, the Bank may designate the hedging relationship upon
its commitment to disburse an advance or trade a consolidated obligation in which settlement occurs
within the shortest period of time possible for the type of instrument based on market settlement
conventions. The Bank defines market settlement conventions for advances to be five business days
or less and for consolidated obligations to be thirty calendar days or less, using a next business
day convention. The Bank then records the changes in fair value of the derivative and the hedged
item beginning on the trade date. When the hedging relationship is designated on the trade date and
the fair value of the derivative is zero on that date, the hedge meets the conditions for applying
the shortcut method of hedge accounting, provided all the other conditions for applying the
shortcut method of hedge accounting are also met.
The Bank discontinues hedge accounting prospectively when: (i) it determines that the
derivative is no longer effective in offsetting changes in the fair value of a hedged item
(including hedged items such as firm commitments); (ii) the derivative and/or the hedged item
expires or is sold, terminated, or exercised; (iii) a hedged firm commitment no longer meets the
definition of a firm commitment; or (iv) management determines that designating the derivative as a
hedging instrument is no longer appropriate.
When hedge accounting is discontinued because the Bank determines that the derivative no
longer qualifies as an effective fair value hedge of an existing hedged item, the Bank continues to
carry the derivative in the Statements of Condition at its fair value, ceases to adjust the hedged
asset or liability for changes in fair value, and amortizes the cumulative basis adjustment on the
hedged item into earnings over the remaining life of the hedged item using the effective-yield
method.
When hedge accounting is discontinued because the hedged item no longer meets the definition
of a firm commitment, the Bank continues to carry the derivative in the Statements of Condition at
its fair value, removing from the Statements of Condition any asset or liability that was recorded
to recognize the firm commitment and recording the amount as a gain or loss in current period
earnings.
Securities Sold Under Agreements to Repurchase
The Bank periodically holds securities sold under agreements to repurchase those securities.
The amounts received under these agreements represent borrowings and are classified as liabilities
in the Statements of Condition.
S-20
Consolidated Obligations
Consolidated obligations consist of bonds and discount notes and are backed only by the
financial resources of the FHLBanks. The FHLBanks issue consolidated obligations through the Office
of Finance as their agent. In connection with each debt issuance, each FHLBank specifies the amount
of debt it wants issued on its behalf. The Office of Finance tracks the amount of debt issued on
behalf of each FHLBank. In addition, the Bank separately tracks and records as a liability its
specific portion of consolidated obligations for which it is the primary obligor. The Finance
Agency and the U.S. Secretary of the Treasury have oversight over the issuance of the FHLBank debt
through the Office of Finance. Bonds are issued primarily to raise intermediate and long-term funds
for the FHLBanks and are not subject to any statutory or regulatory limits on their maturity.
Discount notes are issued primarily to raise short-term funds. These notes sell at less than their
face amount and are redeemed at par value when they mature.
Although the Bank is primarily liable for its portion of consolidated obligations (i.e. those
issued on its behalf), the Bank is also jointly and severally liable with the other 11 FHLBanks for
the payment of principal and interest on all consolidated obligations of the FHLBanks. The Finance
Agency, at its discretion, may require any FHLBank to make principal or interest payments due on
any consolidated obligation whether or not the consolidated obligation represents a primary
liability of such FHLBank. Although it has never occurred, to the extent that a FHLBank makes any
payment on a consolidated obligation on behalf of another FHLBank that is primarily liable for such
consolidated obligation, Finance Agency regulations provide that the paying FHLBank is entitled to
reimbursement from the non-complying FHLBank for any payments made on its behalf and other
associated costs (including interest to be determined by the Finance Agency). If, however, the
Finance Agency determines that the non-complying FHLBank is unable to satisfy its repayment
obligations, the Finance Agency may allocate the outstanding liabilities of the non-complying
FHLBank among the remaining FHLBanks on a pro rata basis in proportion to each FHLBanks
participation in all consolidated obligations outstanding. The Finance Agency reserves the right to
allocate the outstanding liabilities for the consolidated obligations between the FHLBanks in any
other manner it may determine to ensure that the FHLBanks operate in a safe and sound manner.
Concessions on Consolidated Obligations. Concessions are paid to dealers in connection with
the issuance of certain consolidated obligations. The Office of Finance prorates the amount of the
concession to each FHLBank based upon the percentage of the debt issued that is assumed by the
FHLBank. Concessions paid on consolidated obligations designated under the fair value option are
expensed as incurred. Concessions paid on consolidated obligations not designated under the fair
value option are deferred and amortized using the effective-yield method over the terms to maturity
or the estimated lives of the consolidated obligations. Unamortized concessions were $8.1 million
and $10.0 million at December 31, 2009 and 2008 and are included in other assets in the
Statements of Condition. Amortization of such concessions is included in consolidated obligation
interest expense and totaled $10.3 million, $13.7 million, and $7.5 million for the years ended
December 31, 2009, 2008, and 2007.
S-21
Amortization. The Bank amortizes premiums and accretes discounts using the effective-yield
method over the contractual life of the consolidated obligations. Amortization and accretion are
recorded as a component of consolidated obligation interest expense.
Mandatorily Redeemable Capital Stock
The Bank reclassifies stock subject to redemption from equity to a liability after a member
provides written notice of redemption, gives notice of intention to withdraw from membership, or
attains non-member status by merger or acquisition, charter termination, or other involuntary
termination from membership, because the members shares will then meet the definition of a
mandatorily redeemable financial instrument. Shares meeting this definition are reclassified to a
liability at fair value. Dividends declared on shares classified as a liability are accrued at the
expected dividend rate and reflected as interest expense in the Statements of Income. The
repurchase or redemption of these mandatorily redeemable financial instruments is reflected as a
cash outflow in the financing activities section of the Statements of Cash Flows.
If a member cancels its written notice of redemption or notice of withdrawal, the Bank
reclassifies mandatorily redeemable capital stock from a liability to equity. After the
reclassification, dividends on the capital stock are no longer classified as interest expense.
Finance Agency and Office of Finance Expenses
The Bank is assessed for its proportionate share of the operating costs of the Finance Agency,
the Banks regulator, and the Office of Finance, which manages the sale and servicing of
consolidated obligations. The Finance Agencys expenses and working capital fund are allocated to
the Bank based on the Banks pro rata share of the annual assessments based on the ratio between
the Banks minimum required regulatory capital and the aggregate minimum required regulatory
capital of every FHLBank. Each Bank must pay an amount equal to one-half of its annual assessment
twice each year. The Office of Finance allocates its operating and capital expenditures based on
each FHLBanks percentage of capital stock, percentage of consolidated obligations issued, and
percentage of consolidated obligations outstanding.
S-22
Affordable Housing Program
The FHLBank Act requires each FHLBank to establish and fund an AHP. The Bank accrues this
expense monthly based on its earnings, excluding mandatorily redeemable capital stock interest
expense, and establishes a liability. The AHP grants provide subsidies to members to assist in the
purchase, construction, or rehabilitation of housing for very low, low, and moderate income
households. The Bank has the authority to make the AHP subsidy available to members as a grant. As
an alternative, the Bank also has the authority to make subsidized AHP advances, which are advances
at an interest rate below the Banks cost of funds. When the Bank makes an AHP advance, the present
value of the variation in the cash flow caused by the difference in the interest rate between the
AHP advance rate and the Banks related cost of funds for comparable maturity funding is charged
against the AHP liability and recorded as a discount on the AHP advance. The discount on AHP
advances is accreted to advance interest income using the effective-yield method over the life of
the advance.
Annually, each FHLBank is required
to set aside 10 percent of its net earnings (net earnings represents income before
assessments, and before interest expense related to mandatorily redeemable capital stock, but after
the assessment for Resolution Funding Corporation (REFCORP)) to fund next years AHP obligation.
The exclusion of interest expense related to mandatorily redeemable capital stock is a regulatory
interpretation of the Finance Agency. The AHP and REFCORP assessments are calculated simultaneously
because of their interdependence on each other.
If the Bank experienced a net loss during a quarter, but still had net earnings for the year,
the Banks obligation to the AHP would be calculated based on the Banks year-to-date net earnings.
If the Bank had net earnings in subsequent quarters, it would be required to contribute additional
amounts to meet its calculated annual obligation. If the Bank experienced a net loss for a full
year, the Bank would have no obligation to the AHP for the year unless the aggregate 10 percent
calculation described above was less than $100 million for all 12 FHLBanks. If it were, the FHLBank
Act requires that each FHLBank contribute such prorated sums as may be required to assure that the
aggregate contributions of the FHLBanks equals $100 million. The allocation is based on the ratio
of each FHLBanks net earnings before REFCORP assessments to the sum of net earnings before REFCORP
assessments of the 12 FHLBanks for the previous year. Each FHLBanks required annual AHP
contribution is limited to its annual net earnings. There was no shortfall in 2009, 2008, or 2007.
See Note 13 Affordable Housing Program for more information.
Resolution Funding Corporation
Although the FHLBanks are exempt from ordinary federal, state, and local taxation except for
local real estate tax, they are required to make quarterly payments to REFCORP to be used to pay a
portion of the interest on bonds that were issued by REFCORP. REFCORP is a corporation established
by Congress in 1989 to provide funding for the resolution and disposition of insolvent savings
institutions. Officers, employees, and agents of the Office of Finance are authorized to act for
and on behalf of REFCORP to carry out the functions of REFCORP.
S-23
Congress required that each FHLBank annually pay to REFCORP 20 percent of income calculated in
accordance with GAAP after the assessment for AHP, but before the assessment for REFCORP. Each
FHLBank notifies REFCORP of its GAAP income before AHP and REFCORP assessments. The AHP and REFCORP
assessments are then calculated simultaneously by REFCORP because of their interdependence on each
other. The Bank accrues its REFCORP assessment on a monthly basis.
The FHLBanks obligation to REFCORP will terminate when the aggregate actual quarterly
payments made by the FHLBanks exactly equal the present value of a $300 million annual annuity
whose final maturity date is April 15, 2030.
The Finance Agency is required to shorten the term of the FHLBanks obligation to REFCORP for
each calendar quarter in which there is an excess quarterly payment. An excess quarterly payment is
the amount by which the actual quarterly payment exceeds $75 million.
The Finance Agency is required to extend the term of the FHLBanks obligation to REFCORP for
each calendar quarter in which there is a deficit quarterly payment. A deficit quarterly payment is
the amount by which the actual quarterly payment falls short of $75 million.
If the Bank experienced a net loss during a quarter, but still had net income for the year,
the Banks obligation to REFCORP would be calculated based on the Banks year-to-date net income.
The Bank would be entitled to a refund of amounts paid for the full year that were in excess of its
calculated annual obligation. If the Bank had net income in subsequent quarters, it would be
required to contribute additional amounts to meet its calculated annual obligation. If the Bank
experienced a net loss for a full year, the Bank would have no obligation to REFCORP for the year.
See Note 14 Resolution Funding Corporation for more information.
Estimated Fair Values
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. See Note 18 Estimated Fair Values for more
information.
Cash Flows
In the Statements of Cash Flows, the Bank considers cash and due from banks as cash and cash
equivalents. Federal funds sold are not treated as cash equivalents for purposes of the Statements
of Cash Flows, but are instead treated as short-term investments and are reflected in the investing
activities section of the Statements of Cash Flows.
S-24
Reclassifications
Certain amounts in the 2008 financial statements and footnotes have been reclassified to
conform to the 2009 presentation.
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 December 31, 2009. Refer to Note 17 Segment Information for further
information.
During the fourth quarter of 2009 the Bank classified all proceeds from sale of foreclosed
assets as investing activities in the Statements of Cash Flows. Prior period amounts were
reclassified to be consistent with the presentation at December 31, 2009.
Note 2Recently Issued and Adopted Accounting Guidance and Changes in Accounting Estimate
Fair Value Measurements and Disclosures Improving Disclosures about Fair Value Measurements.
On January 21, 2010, the Financial Accounting Standards Board (FASB) issued amended guidance for
the fair value measurements and disclosures. The update requires a reporting entity to disclose
separately the amounts of significant transfers between Level 1 and Level 2 fair value measurements
and describe the reasons for the transfers. Furthermore, this update requires a reporting entity to
present separately information about purchases, sales, issuances, and settlements in the
reconciliation for fair value measurements using significant unobservable inputs; clarifies
existing fair value disclosures about the level of disaggregation and about inputs and valuation
techniques used to measure fair value; and amends guidance on employers disclosures about
postretirement benefit plan assets to require that disclosures be provided by classes of assets
instead of by major categories of assets. The new guidance is effective for interim and annual
reporting periods beginning after December 15, 2009 (January 1, 2010 for the Bank), except for the
disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in
Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after
December 15, 2010 (January 1, 2011 for the Bank), and for interim periods within those fiscal
years. In the period of initial adoption, entities will not be required to provide the amended
disclosures for any previous periods presented for comparative purposes. Early adoption is
permitted. The Banks adoption of this amended guidance will result in increased annual and interim
financial statement disclosures but will not affect the Banks financial condition, results of
operations, or cash flows.
S-25
Fair Value Measurements and Disclosures Measuring Liabilities at Fair Value. On August 28,
2009, 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. The Bank adopted this guidance effective October 1, 2009. The adoption of this
guidance did not affect 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 effective 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.
S-26
The Banks investments in VIEs may include, but are not limited to, senior interests in
private-label MBS and MPF shared funding. The Bank does not have the power to significantly affect
the economic performance of any of its investments in VIEs since it does not act as a key
decision-maker and does not have the unilateral ability to replace a key decision-maker.
Additionally, since the Bank holds a senior interest, rather than residual interest, in its
investments in VIEs, it does not have either the obligation to absorb losses of, or the right to
receive benefits from, any of its investments in VIEs that could potentially be significant to the
VIEs. Furthermore, the Bank does not design, sponsor, transfer, service, or provide credit or
liquidity support in any of its investments in VIEs.
This guidance is effective as of January 1, 2010 for the Bank. Earlier application is
prohibited. The Bank evaluated its investments in VIEs as of January 1, 2010 and determined that
consolidation accounting is not required under the new accounting guidance since the Bank is not
the primary beneficiary as described above. Therefore, the Banks adoption of this guidance did not
have a material effect on its financial condition, results of operations, or cash flows.
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 January 1, 2010 for the Bank. Earlier application is prohibited. The adoption of
this guidance did not affect the Banks 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 that occur after the balance sheet date, but before
financial statements are issued or available to be issued. On February 24, 2010, the FASB issued an
amendment to the earlier guidance to clarify (i) which entities are required to evaluate subsequent
events through the date the financial statements are issued, and (ii) the scope of the disclosure
requirements related to subsequent events.
S-27
The original guidance set 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 that an entity should make about events or
transactions that occurred 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 were available to be issued. This guidance does not apply to subsequent
events or transactions that are within the scope of other applicable GAAP that provide different
guidance on the accounting treatment for subsequent events or transactions. This guidance became
effective for interim and annual financial periods ending after June 15, 2009. The Bank adopted
this guidance as of June 30, 2009. Its adoption resulted in increased interim financial statement
disclosures, but did not affect the Banks financial condition, results of operations, or cash
flows.
The amended guidance requires SEC filers to evaluate subsequent events through the date the
financial statements are issued; however, it exempts SEC filers from disclosing the date through
which subsequent events have been evaluated. All entities other than SEC filers continue to be
required to evaluate subsequent events through the date the financial statements are available to
be issued and to disclose the date through which subsequent events have been evaluated.
Additionally, the amended guidance defines the term revised financial statements as financial
statements revised as a result of (i) correction of an error or (ii) retrospective application of
GAAP. Upon revising its financial statements, an entity is required to update its evaluation of
subsequent events through the date the revised financial statements are issued or are available to
be issued. The amended guidance also requires non-SEC filers to disclose both the date that the
financial statements were issued or available to be issued and the date the revised financial
statements were issued or available to be issued if the financial statements have been revised.
For all entities, except conduit debt obligors, this amended guidance is effective immediately
and should be applied prospectively. The Bank adopted this guidance upon its issuance. Its adoption
resulted in changes to financial statement disclosures, but did not affect the Banks financial
condition, results of operations, or cash flows.
S-28
Recognition and Presentation of Other-Than-Temporary Impairments. On April 9, 2009, the FASB
issued guidance amending the 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. The Bank adopted this OTTI guidance effective January
1, 2009 and recognized no cumulative-effect adjustment because it had no 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 that 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 paragraph. 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.
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.
S-29
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.
Change in Accounting Estimate. During the fourth quarter of 2009, the Bank revised its
allowance for credit losses methodology for conventional MPF loans. Under the prior methodology,
the Bank estimated its allowance for credit losses based primarily upon (i) the current level of
nonperforming loans (i.e., those loans 90 days or more past due), (ii) historical losses
experienced over several years, and (iii) credit enhancement fees available to recapture expected
losses assuming a constant portfolio balance.
Under the revised methodology, the Bank estimates its allowance for credit losses based
primarily upon a rolling twelve-month average of (i) loan delinquencies, (ii) loans migrating to
real estate owned, and (iii) actual historical losses, as well as credit enhancement fees available
to recapture expected losses assuming a declining portfolio balance adjusted for prepayments.
The Bank implemented this revised methodology in order to better incorporate current market
conditions. For the year ended December 31, 2009, the Bank increased its allowance for credit
losses through a provision of $1.5 million, of which $0.1 million related to the change in
accounting estimate. Refer to Note 9 Mortgage Loans Held for Portfolio for additional details
on the Banks allowance for credit losses.
Note 3Cash and Due from Banks
The Bank maintains collected cash balances with commercial banks in return for certain
services. These arrangements contain no legal restrictions on the withdrawal of funds. The average
collected cash balances for the years ended December 31, 2009 and 2008 were $3.6 million and $6.4
million.
In addition, the Bank maintained average required balances with various Federal Reserve Banks
of approximately $20.0 million and $20.5 million for the years ended December 31, 2009 and 2008.
There are no legal restrictions under these agreements on the withdrawal of funds. Earnings credits
on these balances may be used to pay for services received from the Federal Reserve Banks.
Pass-through Deposit Reserves. The Bank acts as a pass-through correspondent for member
institutions required to deposit reserves with the Federal Reserve Banks. Pass-through deposit
reserves amounted to $3.2 million and $4.1 million at December 31, 2009 and 2008. The Bank includes
member reserve balances as deposits in the Statements of Condition.
S-30
Note 4Trading Securities
Major Security Types. Trading securities at December 31, 2009 and 2008 were as follows
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
TLGP1 |
|
$ |
3,692,984 |
|
|
$ |
2,151,485 |
|
Taxable municipal bonds2 |
|
|
741,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,434,522 |
|
|
$ |
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 U.S. Government subsidized Build
America Bonds that provide the bondholder with a higher yield than traditional tax-exempt municipal bonds. |
The following table summarizes net realized and unrealized gains on trading securities
for the years ended December 31, 2009 and 2008 (dollars in thousands). The Bank did not have any
trading securities in 2007.
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Realized gain on sale of trading securities |
|
$ |
14,446 |
|
|
$ |
|
|
Unrealized holding gain on trading securities |
|
|
4,594 |
|
|
|
1,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain on trading securities |
|
$ |
19,040 |
|
|
$ |
1,485 |
|
|
|
|
|
|
|
|
S-31
Note 5Available-for-Sale Securities
Major Security Types. Available-for-sale securities at December 31, 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 |
|
|
$ |
41 |
|
|
$ |
2,028 |
|
|
$ |
|
|
|
$ |
565,757 |
|
Government-sponsored enterprise
obligations2 |
|
|
491,136 |
|
|
|
(1,847 |
) |
|
|
5,793 |
|
|
|
1,798 |
|
|
|
493,284 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-mortgage-backed securities |
|
|
1,054,824 |
|
|
|
(1,806 |
) |
|
|
7,821 |
|
|
|
1,798 |
|
|
|
1,059,041 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored enterprise3 |
|
|
6,716,928 |
|
|
|
|
|
|
|
10,514 |
|
|
|
49,070 |
|
|
|
6,678,372 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
7,771,752 |
|
|
$ |
(1,806 |
) |
|
$ |
18,335 |
|
|
$ |
50,868 |
|
|
$ |
7,737,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S-32
Available-for-sale securities at December 31, 2008 were as follows (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
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 |
|
Government-sponsored enterprise (GSE) obligations represented Tennessee Valley
Authority (TVA) and Federal Farm Credit Bank (FFCB) bonds. |
|
3 |
|
GSE 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 December 31, 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored enterprise obligations |
|
$ |
143,278 |
|
|
$ |
1,798 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
143,278 |
|
|
$ |
1,798 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored enterprise |
|
|
2,784,687 |
|
|
|
14,134 |
|
|
|
2,932,739 |
|
|
|
34,936 |
|
|
|
5,717,426 |
|
|
|
49,070 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,927,965 |
|
|
$ |
15,932 |
|
|
$ |
2,932,739 |
|
|
$ |
34,936 |
|
|
$ |
5,860,704 |
|
|
$ |
50,868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S-33
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 shows the amortized cost and estimated fair value
of available-for-sale securities at December 31, 2009 and 2008 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
Amortized |
|
|
Estimated |
|
|
Amortized |
|
|
Estimated |
|
Year of Maturity |
|
Cost |
|
|
Fair Value |
|
|
Cost |
|
|
Fair Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due after one year
through five years |
|
$ |
573,425 |
|
|
$ |
575,703 |
|
|
$ |
|
|
|
$ |
|
|
Due after five years
through ten years |
|
|
456,150 |
|
|
|
458,139 |
|
|
|
|
|
|
|
|
|
Due after ten years |
|
|
25,249 |
|
|
|
25,199 |
|
|
|
580 |
|
|
|
580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,054,824 |
|
|
|
1,059,041 |
|
|
|
580 |
|
|
|
580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
|
6,716,928 |
|
|
|
6,678,372 |
|
|
|
3,983,671 |
|
|
|
3,839,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
7,771,752 |
|
|
$ |
7,737,413 |
|
|
$ |
3,984,251 |
|
|
$ |
3,839,980 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortized cost of the Banks MBS classified as available-for-sale includes net discounts
of $1.6 million and $7.3 million at December 31, 2009 and 2008.
S-34
Interest Rate Payment Terms. The following table details interest rate payment terms for
available-for-sale securities at December 31, 2009 and 2008 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Amortized cost of non-mortgage-backed available-for-sale
securities |
|
|
|
|
|
|
|
|
Fixed rate |
|
$ |
554,824 |
|
|
$ |
|
|
Variable rate |
|
|
500,000 |
|
|
|
580 |
|
|
|
|
|
|
|
|
|
|
|
1,054,824 |
|
|
|
580 |
|
Amortized cost of mortgage-backed available-for-sale securities |
|
|
|
|
|
|
|
|
Pass-through securities |
|
|
|
|
|
|
|
|
Fixed rate |
|
|
595,365 |
|
|
|
|
|
Collateralized mortgage obligations |
|
|
|
|
|
|
|
|
Variable rate |
|
|
6,121,563 |
|
|
|
3,983,671 |
|
|
|
|
|
|
|
|
|
|
|
6,716,928 |
|
|
|
3,983,671 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
7,771,752 |
|
|
$ |
3,984,251 |
|
|
|
|
|
|
|
|
Gains and Losses on Sales. The Bank sold an MBS with a carrying value of $78.2 million
out if its available-for-sale portfolio and recognized a gain of $0.8 million in other income
(loss) during the year ended December 31, 2009. In addition, the Bank sold U.S. Treasury
obligations with a total par value of $2.7 billion out of its available-for-sale portfolio and
recognized a net loss of $11.7 million in other income (loss) during the year ended December 31,
2009. There were no sales of available-for-sale securities during the years ended December 31, 2008
or 2007. For details on the hedging activities associated with the sale of U.S. Treasury
obligations, refer to Note 10 Derivatives and Hedging Activities.
S-35
Note 6Held-to-Maturity Securities
Major Security Types. Held-to-maturity securities at December 31, 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 |
|
|
$ |
659 |
|
|
$ |
|
|
|
$ |
450,659 |
|
Government-sponsored enterprise obligations1 |
|
|
312,962 |
|
|
|
233 |
|
|
|
5,851 |
|
|
|
307,344 |
|
State or local housing agency obligations2 |
|
|
123,608 |
|
|
|
486 |
|
|
|
424 |
|
|
|
123,670 |
|
TLGP3 |
|
|
1,250 |
|
|
|
29 |
|
|
|
|
|
|
|
1,279 |
|
Other4 |
|
|
6,742 |
|
|
|
94 |
|
|
|
|
|
|
|
6,836 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-mortgage-backed securities |
|
|
894,562 |
|
|
|
1,501 |
|
|
|
6,275 |
|
|
|
889,788 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored enterprise5 |
|
|
4,468,928 |
|
|
|
88,482 |
|
|
|
14,942 |
|
|
|
4,542,468 |
|
U.S. government agency-guaranteed6 |
|
|
42,620 |
|
|
|
36 |
|
|
|
142 |
|
|
|
42,514 |
|
MPF shared funding |
|
|
33,202 |
|
|
|
247 |
|
|
|
405 |
|
|
|
33,044 |
|
Other7 |
|
|
35,352 |
|
|
|
|
|
|
|
7,191 |
|
|
|
28,161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities |
|
|
4,580,102 |
|
|
|
88,765 |
|
|
|
22,680 |
|
|
|
4,646,187 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,474,664 |
|
|
$ |
90,266 |
|
|
$ |
28,955 |
|
|
$ |
5,535,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S-36
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. |
S-37
The following table summarizes the held-to-maturity securities with unrealized losses at
December 31, 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored enterprise obligations |
|
$ |
280,715 |
|
|
$ |
5,851 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
280,715 |
|
|
$ |
5,851 |
|
State or local housing agency obligations |
|
|
33,171 |
|
|
|
424 |
|
|
|
|
|
|
|
|
|
|
|
33,171 |
|
|
|
424 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
313,886 |
|
|
|
6,275 |
|
|
|
|
|
|
|
|
|
|
|
313,886 |
|
|
|
6,275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored enterprise |
|
|
365,866 |
|
|
|
1,017 |
|
|
|
1,898,140 |
|
|
|
13,925 |
|
|
|
2,264,006 |
|
|
|
14,942 |
|
U.S. government agency-guaranteed |
|
|
|
|
|
|
|
|
|
|
37,246 |
|
|
|
142 |
|
|
|
37,246 |
|
|
|
142 |
|
MPF shared funding |
|
|
|
|
|
|
|
|
|
|
1,564 |
|
|
|
405 |
|
|
|
1,564 |
|
|
|
405 |
|
Other |
|
|
|
|
|
|
|
|
|
|
28,161 |
|
|
|
7,191 |
|
|
|
28,161 |
|
|
|
7,191 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
365,866 |
|
|
|
1,017 |
|
|
|
1,965,111 |
|
|
|
21,663 |
|
|
|
2,330,977 |
|
|
|
22,680 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
679,752 |
|
|
$ |
7,292 |
|
|
$ |
1,965,111 |
|
|
$ |
21,663 |
|
|
$ |
2,644,863 |
|
|
$ |
28,955 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S-38
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S-39
Redemption Terms. The amortized cost and estimated fair value of held-to-maturity
securities at December 31, 2009 and 2008 by contractual maturity are shown below (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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
Amortized |
|
|
Estimated |
|
|
Amortized |
|
|
Estimated |
|
Year of Maturity |
|
Cost |
|
|
Fair Value |
|
|
Cost |
|
|
Fair Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less |
|
$ |
452,989 |
|
|
$ |
453,742 |
|
|
$ |
384,757 |
|
|
$ |
384,902 |
|
Due after one year through five years |
|
|
1,250 |
|
|
|
1,279 |
|
|
|
2,989 |
|
|
|
3,154 |
|
Due after five years through ten years |
|
|
2,600 |
|
|
|
2,614 |
|
|
|
3,205 |
|
|
|
3,261 |
|
Due after ten years |
|
|
437,723 |
|
|
|
432,153 |
|
|
|
93,477 |
|
|
|
95,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
894,562 |
|
|
|
889,788 |
|
|
|
484,428 |
|
|
|
486,537 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
|
4,580,102 |
|
|
|
4,646,187 |
|
|
|
5,467,580 |
|
|
|
5,430,751 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,474,664 |
|
|
$ |
5,535,975 |
|
|
$ |
5,952,008 |
|
|
$ |
5,917,288 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortized cost of the Banks MBS classified as held-to-maturity includes net discounts of
$17.4 million and $22.6 million at December 31, 2009 and 2008.
Interest Rate Payment Terms. The following table details interest rate payment terms for
held-to-maturity securities at December 31, 2009 and 2008 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Amortized cost of non-mortgage-backed held-to-maturity securities |
|
|
|
|
|
|
|
|
Fixed rate |
|
$ |
894,562 |
|
|
$ |
484,428 |
|
|
|
|
|
|
|
|
|
|
Amortized cost of mortgage-backed held-to-maturity securities |
|
|
|
|
|
|
|
|
Pass-through securities |
|
|
|
|
|
|
|
|
Fixed rate |
|
|
330,981 |
|
|
|
404,078 |
|
Variable rate |
|
|
7,243 |
|
|
|
8,093 |
|
Collateralized mortgage obligations |
|
|
|
|
|
|
|
|
Fixed rate |
|
|
1,659,530 |
|
|
|
2,318,079 |
|
Variable rate |
|
|
2,582,348 |
|
|
|
2,737,330 |
|
|
|
|
|
|
|
|
|
|
|
4,580,102 |
|
|
|
5,467,580 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,474,664 |
|
|
$ |
5,952,008 |
|
|
|
|
|
|
|
|
S-40
Gains on Sales. There were no sales of held-to-maturity securities during the year ended
December 31, 2009. During the year ended December 31, 2008, the Bank sold MBS with a carrying value
of $47.4 million out of its held-to-maturity portfolio and recognized a gain of $1.8 million in
other income (loss). During the year ended December 31, 2007, the Bank sold MBS with a carrying
value of $32.5 million out of its held-to-maturity portfolio and recognized a gain of $0.5 million
in other income (loss). The MBS sold had less than 15 percent of the acquired principal
outstanding. As such, the sales were considered maturities for the purpose of the securities
classification and did not impact the Banks ability and intent to hold the remaining investments
classified as held-to-maturity through their stated maturities.
Note 7Other-Than-Temporary Impairment
The Bank evaluates its individual available-for-sale and held-to-maturity securities in an
unrealized loss position for OTTI on at least a quarterly basis. As part of its evaluation of
securities 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 security before its anticipated recovery.
If either of these conditions is met, the Bank will recognize an OTTI charge to earnings equal to
the entire difference between the securitys amortized cost basis and its fair value at the balance
sheet date. For securities in unrealized loss position that meet neither of these conditions, the
Bank performs analysis to determine if any of these securities are other-than-temporarily impaired.
For its agency MBS, GSE obligations, and TLGP debt in an unrealized loss position, the Bank
determined that the strength of the issuers guarantees through direct obligations or support from
the U.S. Government is sufficient to protect the Bank from losses based on current expectations.
For its state or local housing agency obligations in an unrealized loss position, the Bank
determined that all of these securities are currently performing as expected. For its MPF shared
funding in an unrealized loss position, the Bank determined that the underlying mortgage loans are
eligible under the MPF program and the tranches owned are senior level tranches. As a result, the
Bank has determined that, as of December 31, 2009, all gross unrealized losses on its agency MBS,
GSE obligations, TLGP debt, state or local housing agency obligations, and MPF shared funding are
temporary.
Furthermore, the declines in market value of these securities are not attributable to credit
quality. 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 recovery of their amortized cost bases.
As a result, the Bank does not consider any of these securities to be other-than-temporarily
impaired at December 31, 2009.
S-41
For its private-label MBS, the Bank performs cash flow analyses to determine whether the
entire amortized cost bases of these securities are expected to be recovered. During the second
quarter of 2009, the FHLBanks formed an OTTI Governance Committee, which is comprised of
representation from all 12 FHLBanks and is responsible 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 December 31, 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 third-party 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 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 people. The Banks housing
price forecast assumed CBSA level current-to-trough home price declines ranging from 0 percent to
15 percent over the next 9 to 15 months. Thereafter, home prices are projected to remain flat in
the first six months, and to increase 0.5 percent in the next six months, 3 percent in the second
year and 4 percent in each subsequent year.
S-42
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.
The scenario of cash flows determined based on the model approach described above reflects a best
estimate scenario and includes a base case current to trough housing price forecast and a base case
housing price recovery path described in the prior paragraph. 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 December 31, 2009 the Banks private-label MBS cash flow analysis did not project any
credit losses. 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 recovery of their amortized cost
bases. As a result, the Bank does not consider any of these securities to be other-than-temporarily
impaired at December 31, 2009.
S-43
Note 8Advances
Redemption Terms. For 2009 and 2008, average interest rates paid on the Banks advances,
including AHP advances, were 1.77 percent and 3.11 percent. The following table shows the Banks
advances outstanding at December 31, 2009 and 2008 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Interest |
|
|
|
|
|
|
Interest |
|
Year of Contractual Maturity |
|
Amount |
|
|
Rate % |
|
|
Amount |
|
|
Rate % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overdrawn demand deposit accounts |
|
$ |
90 |
|
|
|
|
|
|
$ |
623 |
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
9,332,574 |
|
|
|
2.70 |
|
2010 |
|
|
7,810,541 |
|
|
|
2.56 |
|
|
|
5,212,502 |
|
|
|
3.97 |
|
2011 |
|
|
4,802,348 |
|
|
|
2.71 |
|
|
|
3,656,941 |
|
|
|
3.45 |
|
2012 |
|
|
6,080,490 |
|
|
|
1.71 |
|
|
|
5,014,300 |
|
|
|
2.25 |
|
2013 |
|
|
4,938,047 |
|
|
|
1.86 |
|
|
|
4,893,217 |
|
|
|
2.37 |
|
2014 |
|
|
990,975 |
|
|
|
3.34 |
|
|
|
671,997 |
|
|
|
3.87 |
|
Thereafter |
|
|
10,409,938 |
|
|
|
3.45 |
|
|
|
11,880,793 |
|
|
|
3.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total par value |
|
|
35,032,429 |
|
|
|
2.62 |
|
|
|
40,662,947 |
|
|
|
3.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discounts on AHP advances |
|
|
(14 |
) |
|
|
|
|
|
|
(34 |
) |
|
|
|
|
Premiums |
|
|
308 |
|
|
|
|
|
|
|
380 |
|
|
|
|
|
Discounts |
|
|
(4 |
) |
|
|
|
|
|
|
(9 |
) |
|
|
|
|
Hedging fair value adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative fair value gain |
|
|
590,243 |
|
|
|
|
|
|
|
1,082,129 |
|
|
|
|
|
Basis adjustments from terminated
and ineffective hedges |
|
|
97,436 |
|
|
|
|
|
|
|
152,066 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
35,720,398 |
|
|
|
|
|
|
$ |
41,897,479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 December 31, 2009 and 2008, the Bank had callable advances of
$6.6 billion and $7.9 billion.
S-44
The following table summarizes advances at December 31, 2009 and 2008, by year of contractual
maturity or next call date for callable advances (dollars in thousands):
|
|
|
|
|
|
|
|
|
Year of Contractual Maturity or Next Call Date |
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Overdrawn demand deposit accounts |
|
$ |
90 |
|
|
$ |
623 |
|
2009 |
|
|
|
|
|
|
16,934,745 |
|
2010 |
|
|
14,153,813 |
|
|
|
5,279,406 |
|
2011 |
|
|
4,659,405 |
|
|
|
3,652,944 |
|
2012 |
|
|
3,197,057 |
|
|
|
2,290,764 |
|
2013 |
|
|
3,338,712 |
|
|
|
3,292,310 |
|
2014 |
|
|
1,097,691 |
|
|
|
671,997 |
|
Thereafter |
|
|
8,585,661 |
|
|
|
8,540,158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total par value |
|
$ |
35,032,429 |
|
|
$ |
40,662,947 |
|
|
|
|
|
|
|
|
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 December 31, 2009 and 2008, the Bank had putable advances outstanding totaling $7.1
billion and $8.5 billion.
The following table summarizes advances at December 31, 2009 and 2008, by year of contractual
maturity or next put date for putable advances (dollars in thousands):
|
|
|
|
|
|
|
|
|
Year of Contractual Maturity or Next Put Date |
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Overdrawn demand deposit accounts |
|
$ |
90 |
|
|
$ |
623 |
|
2009 |
|
|
|
|
|
|
14,353,624 |
|
2010 |
|
|
12,545,341 |
|
|
|
5,754,252 |
|
2011 |
|
|
5,126,148 |
|
|
|
3,973,741 |
|
2012 |
|
|
5,708,790 |
|
|
|
4,631,600 |
|
2013 |
|
|
4,611,147 |
|
|
|
4,566,317 |
|
2014 |
|
|
975,975 |
|
|
|
656,997 |
|
Thereafter |
|
|
6,064,938 |
|
|
|
6,725,793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total par value |
|
$ |
35,032,429 |
|
|
$ |
40,662,947 |
|
|
|
|
|
|
|
|
S-45
Security Terms. The Bank lends to financial institutions within its district according to
federal statutes, including the FHLBank Act. The FHLBank Act requires the Bank to obtain sufficient
collateral on advances to protect against losses and permits the Bank to accept the following as
eligible collateral on such advances: residential mortgage loans, certain U.S. Government or
government agency securities, cash or deposits, and other eligible real estate-related assets. As
additional security, the FHLBank Act provides that the Bank has a lien on each borrowers capital
stock in the Bank. CFIs are defined under applicable law as those institutions that have, as of the
date of the transaction at issue, less than $1.0 billion in average total assets over the three
years preceding that date. Beginning January 1, 2009, the Finance Agency adjusted the average total
assets cap to $1.011 billion. CFIs are eligible under expanded statutory collateral rules to pledge
as collateral for advances small-business, small-farm and small-agribusiness loans fully secured by
collateral other than real estate, or securities representing a whole interest in such secured
loans. Secured loans for community development activities also constitute eligible collateral for
advances to CFIs.
At December 31, 2009 and 2008, the Bank had rights to collateral with an estimated value
greater than the related outstanding advances. The estimated value of collateral required to secure
each borrowers obligation is calculated by applying collateral discounts or haircuts. The amount
of these discounts or haircuts will vary based on the type of collateral and security agreement.
Additionally, the Bank imposes the following requirements to protect the advances made:
|
(1) |
|
Requiring the borrower to execute a written security agreement whereby the borrower
retains possession of the collateral assigned to the Bank and agrees to hold such
collateral for the benefit of the Bank; or |
|
(2) |
|
Requiring the borrower specifically to assign or place physical possession of such
collateral with the Bank or a third-party custodian approved by the Bank. |
Beyond these provisions, the FHLBank Act affords any security interest granted by a member or
any affiliate of the member to the Bank priority over the claims and rights of any other party
except those claims that would be entitled to priority under otherwise applicable law and that are
held by bona fide purchasers for value or by secured parties with perfected security interests.
Credit Risk. While the Bank has never experienced a credit loss on an advance to a member, the
expanded statutory collateral rules for CFIs provide the potential for additional credit risk. Bank
management has policies and procedures in place to appropriately manage credit risk, including
requirements for physical possession or control of pledged collateral, restrictions on borrowings,
review of advance requests, verifications of collateral and continuous monitoring of borrowings and
the members financial condition. Accordingly, the Bank has not provided any allowance for credit
losses on advances.
S-46
At December 31, 2009 and 2008, the Bank had $15.0 billion and $18.3 billion of par value
advances outstanding that were greater than or equal to $1 billion per member. These advances were
made to six and seven borrowers, representing 43 percent and 45 percent of total advances
outstanding at December 31, 2009 and 2008, respectively. The Bank holds sufficient collateral to
cover the advances to these institutions, and does not expect to incur any credit losses on these
advances.
Interest Rate Payment Terms. The following table details interest-rate payment terms for
advances at December 31, 2009 and 2008 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Par amount of advances |
|
|
|
|
|
|
|
|
Fixed rate |
|
$ |
24,601,644 |
|
|
$ |
28,050,033 |
|
Variable rate |
|
|
10,430,785 |
|
|
|
12,612,914 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
35,032,429 |
|
|
$ |
40,662,947 |
|
|
|
|
|
|
|
|
Prepayment Fees. The Bank records prepayment fees received from members and former members on
prepaid advances net of any associated basis adjustments related to hedging activities on those
advances and net of any deferrals on advance modifications. The net amount of prepayment fees is
reflected as prepayment fees on advances, net in the Statements of Income. Gross prepayment fees
received from members and former members were $14.2 million, $3.2 million, and $3.6 million during
the years ended December 31, 2009, 2008, and 2007.
Note 9Mortgage Loans Held for Portfolio
The MPF program involves investment by the Bank in mortgage loans that are held-for-portfolio
which are either funded by the Bank through, or purchased from PFIs. MPF loans may also be
participations in pools of eligible mortgage loans purchased from other FHLBanks. The Banks PFIs
originate, service, and credit enhance mortgage loans that are then sold to the Bank. PFIs
participating in the servicing release program do not service the loans owned by the Bank. The
servicing on these loans is sold concurrently by the PFI to a designated mortgage service provider.
S-47
Mortgage loans with a 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
at December 31, 2009 and 2008 on mortgage loans held for portfolio (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Real Estate: |
|
|
|
|
|
|
|
|
Fixed rate, medium-term single family mortgages |
|
$ |
1,908,191 |
|
|
$ |
2,409,977 |
|
Fixed rate, long-term single family mortgages |
|
|
5,804,567 |
|
|
|
8,266,134 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total par value |
|
|
7,712,758 |
|
|
|
10,676,111 |
|
|
|
|
|
|
|
|
|
|
Premiums |
|
|
53,007 |
|
|
|
86,355 |
|
Discounts |
|
|
(52,165 |
) |
|
|
(81,547 |
) |
Basis adjustments from mortgage loan commitments |
|
|
4,836 |
|
|
|
4,491 |
|
Allowance for credit losses |
|
|
(1,887 |
) |
|
|
(500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans held for portfolio, net |
|
$ |
7,716,549 |
|
|
$ |
10,684,910 |
|
|
|
|
|
|
|
|
The par value of mortgage loans held for portfolio outstanding at December 31, 2009 and 2008
consisted of government-insured loans totaling $379.3 million and $423.4 million and conventional
loans totaling $7.3 billion and $10.3 billion, respectively.
During the second quarter of 2009, the Bank sold $2.1 billion of mortgage loans to the FHLBank
of Chicago, who immediately sold these loans to Fannie Mae.
The Banks management of credit risk in the MPF program involves several layers of legal loss
protection that are defined in agreements among the Bank and its participating PFIs. For the Banks
conventional MPF loans, the availability of loss protection may differ slightly among MPF products.
The Banks loss protection consists of the following loss layers, in order of priority:
|
|
|
Primary Mortgage Insurance (PMI). PMI is on all loans with homeowner equity of less than
20 percent of the original purchase price or appraised value. |
|
|
|
First Loss Account. The first loss account specifies the Banks loss exposure under each
master commitment prior to the PFIs credit enhancement obligation. If the Bank experiences
losses in a master commitment, these losses will either be (i) recovered through the
recapture of performance based credit enhancement fees from the PFI or (ii) absorbed by the
Bank. The first loss account balance for all master commitments is a memorandum account and
was $116.4 million and $105.9 million at December 31, 2009 and 2008. |
S-48
|
|
|
Credit Enhancement Obligation of PFI. PFIs have a credit enhancement obligation to absorb
losses in excess of the first loss account in order to limit the Banks loss exposure to
that of an investor in an MBS that is rated the equivalent of AA by a nationally recognized
statistical rating organization. PFIs are required to either collateralize their credit
enhancement obligation with the Bank or to purchase SMI from a highly rated mortgage
insurer. All of the Banks SMI providers have had their external ratings for claims-paying
ability or insurer financial strength downgraded below AA. Ratings 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 MPF program. |
The Bank
utilizes an allowance for credit losses to reserve for estimated losses after considering the
recapture of performance based credit enhancement fees from the PFI. The allowance for
credit losses on mortgage loans was as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year |
|
$ |
500 |
|
|
$ |
300 |
|
|
$ |
250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs |
|
|
(88 |
) |
|
|
(95 |
) |
|
|
(19 |
) |
Provision for credit losses |
|
|
1,475 |
|
|
|
295 |
|
|
|
69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year |
|
$ |
1,887 |
|
|
$ |
500 |
|
|
$ |
300 |
|
|
|
|
|
|
|
|
|
|
|
In accordance with the Banks allowance for credit losses methodology, the allowance estimate
is based on both quantitative and qualitative factors. Quantitative factors include but are not
limited to portfolio composition and characteristics, delinquency levels, historical loss
experience, changes in members credit enhancements, including the recovery of performance based
credit enhancement fees, and other relevant factors using a pooled loan approach. Qualitative
factors include but are not limited to changes in national and local economic trends.
The Bank monitors and reports its loan portfolio performance monthly. Adjustments to the
allowance for credit losses are considered at least quarterly based upon the factors discussed
above. For the year ended December 31, 2009, the Bank increased its allowance for credit losses
through a provision of $1.5 million. This was primarily due to increased delinquency and loss
severity rates throughout 2009. In addition, credit enhancement fees available to recapture losses
decreased in 2009 as a result of the mortgage loan sale and increased principal repayments. For the
years ended December 31, 2008 and 2007, the Bank increased its allowance for credit losses through
a provision of $0.3 million and $0.1 million.
S-49
At December 31, 2009 and 2008, the Bank had $102.0 million and $48.4 million of nonaccrual
loans. Interest income that was contractually owed to the Bank but not received on nonaccrual loans
was $1.1 million and $0.5 million at December 31, 2009 and 2008. At December 31, 2009 and 2008, the
Bank had $12.2 million and $7.6 million of real estate owned recorded as a component of other
assets in the Statements of Condition.
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. In 2009, the FHLBank of Chicago funded
$150.1 million of MPF Xtra mortgage loans under the master commitments of the Banks PFIs. The Bank
recorded approximately $0.1 million in MPF Xtra fee income from the FHLBank of Chicago in 2009. The
fee is compensation to the Bank for its continued management of the PFI relationship under MPF
Xtra, including initial and ongoing training as well as enforcement of the PFIs representations and
warranties as necessary under the PFI Agreement and MPF Guides.
Note 10Derivatives 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 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; |
|
|
|
reduce the interest rate sensitivity and repricing gaps of assets and liabilities; |
|
|
|
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. |
S-50
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. |
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 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.
S-51
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:
|
(1) |
|
as a hedge of the fair value of a recognized asset or liability or an unrecognized firm
commitment (a fair value hedge); or |
|
(2) |
|
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 in
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.
S-52
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. 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.
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.
S-53
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 effective-yield method.
InvestmentsThe Banks investments include, but are not 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.
For available-for-sale securities that have been hedged and qualify as a fair value hedge, the
Bank records the portion of the change in value related to the risk being hedged in other income
(loss) as Net gain (loss) on derivatives and hedging activities together with the related change
in the fair value of the derivative, and the remainder of the change in accumulated other
comprehensive loss as Net unrealized losses on available-for-sale securities.
The Bank may also manage the risk arising from changing market prices of investment securities
classified as trading by entering into derivatives (economic hedges) that offset the changes in
fair value of the securities. The market value changes of both the trading securities and the
associated derivatives are included in other income (loss) as Net gain on trading securities and
Net gain (loss) on derivatives and hedging activities.
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. Based on credit analysis and collateral requirements, the
Bank does not anticipate any credit losses on its derivative agreements.
S-54
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 Bank requires collateral agreements on all derivatives that establish
collateral delivery thresholds. 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.
At December 31, 2009 and 2008, the Banks maximum credit risk, as defined above, was
approximately $11.0 million and $2.8 million. At December 31, 2009, the Bank held cash collateral
of $2.8 million and therefore reduced its total credit risk exposure of $13.8 million by that
amount, resulting in a maximum credit risk of $11.0 million. At December 31, 2008, the Bank did not
hold any cash as collateral. 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 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 December 31, 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 December 31, 2009 was $336.1 million for which the Bank
has posted cash collateral of $56.0 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 $202.9 million of collateral to its
derivative counterparties at December 31, 2009. However, the Banks credit rating has not changed
during the previous 12 months.
S-55
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.
The following table summarizes the Banks fair value of derivative instruments, without the
effect of netting arrangements or collateral at December 31, 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 |
|
$ |
34,196,552 |
|
|
$ |
284,759 |
|
|
$ |
685,933 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments
(economic hedges) |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
|
9,407,539 |
|
|
|
41,976 |
|
|
|
14,783 |
|
Interest rate caps |
|
|
3,240,000 |
|
|
|
51,312 |
|
|
|
|
|
Forward settlement agreements (TBAs) |
|
|
27,500 |
|
|
|
322 |
|
|
|
1 |
|
Mortgage delivery commitments |
|
|
26,712 |
|
|
|
2 |
|
|
|
283 |
|
|
|
|
|
|
|
|
|
|
|
Total derivatives not designated as hedging instruments |
|
|
12,701,751 |
|
|
|
93,612 |
|
|
|
15,067 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives and related accrued interest before
netting and collateral adjustments |
|
$ |
46,898,303 |
|
|
|
378,371 |
|
|
|
701,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Netting adjustments1 |
|
|
|
|
|
|
(364,609 |
) |
|
|
(364,609 |
) |
Cash collateral and related accrued interest |
|
|
|
|
|
|
(2,750 |
) |
|
|
(56,007 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total netting adjustments and cash collateral |
|
|
|
|
|
|
(367,359 |
) |
|
|
(420,616 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets and liabilities |
|
|
|
|
|
$ |
11,012 |
|
|
$ |
280,384 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Amounts represent the effect of legally enforceable master netting agreements
that allow the Bank to settle positive and negative positions by counterparty. |
S-56
The following table summarizes the Banks fair value of derivative instruments, excluding
accrued interest and collateral by category at December 31, 2008 (dollars in thousands).
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
Estimated |
|
|
|
Notional |
|
|
Fair Value |
|
Interest rate swaps |
|
|
|
|
|
|
|
|
Fair value |
|
$ |
23,470,693 |
|
|
$ |
(779,200 |
) |
Economic |
|
|
3,640,595 |
|
|
|
(1,840 |
) |
Interest rate caps |
|
|
|
|
|
|
|
|
Economic |
|
|
2,340,000 |
|
|
|
2,481 |
|
Forward settlement agreements |
|
|
|
|
|
|
|
|
Economic |
|
|
289,000 |
|
|
|
(2,323 |
) |
Mortgage delivery commitments |
|
|
|
|
|
|
|
|
Economic |
|
|
288,175 |
|
|
|
2,017 |
|
|
|
|
|
|
|
|
Total notional and fair value |
|
$ |
30,028,463 |
|
|
$ |
(778,865 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives, excluding accrued interest |
|
|
|
|
|
|
(778,865 |
) |
Accrued interest |
|
|
|
|
|
|
78,769 |
|
Net cash collateral |
|
|
|
|
|
|
267,921 |
|
|
|
|
|
|
|
|
|
Net derivative balance |
|
|
|
|
|
$ |
(432,175 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net derivative assets |
|
|
|
|
|
|
2,840 |
|
Net derivative liabilities |
|
|
|
|
|
|
(435,015 |
) |
|
|
|
|
|
|
|
|
Net derivative balance |
|
|
|
|
|
$ |
(432,175 |
) |
|
|
|
|
|
|
|
|
The following table presents the components of Net gain (loss) on derivatives and hedging
activities for the year ended December 31, 2009 (dollars in thousands):
|
|
|
|
|
|
|
2009 |
|
Derivatives and hedged items in fair value hedging relationships |
|
|
|
|
Interest rate swaps |
|
$ |
99,587 |
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments (economic
hedges) |
|
|
|
|
Interest rate swaps |
|
|
17,203 |
|
Interest rate caps |
|
|
19,249 |
|
Forward settlement agreements (TBAs) |
|
|
1,305 |
|
Mortgage delivery commitments |
|
|
(3,565 |
) |
|
|
|
|
Total net gain related to derivatives not designated as hedging
instruments |
|
|
34,192 |
|
|
|
|
|
|
|
|
|
|
Net gain on derivatives and hedging activities |
|
$ |
133,779 |
|
|
|
|
|
S-57
During the year ended December 31, 2009, the Bank purchased and sold $2.7 billion of 30-year
U.S. Treasury obligations. At the time of purchase, 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. At the time of
sale, the Bank terminated the related interest rate swaps. The Bank recorded a net loss on the sale
of the available-for-sale securities of $11.7 million through net realized loss on sale of
available-for-sale securities for the year ended December 31, 2009. In addition, the termination
of the related interest rate swaps and normal ineffectiveness resulted in a net gain of $82.6
million recorded through net gain (loss) on derivatives and hedging activities for the year ended
December 31, 2009. The overall impact of these transactions was a net gain of $70.9 million for the
year ended December 31, 2009.
The following table presents the components of Net gain (loss) on derivatives and hedging
activities for the years ended December 31, 2008 and 2007 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
Net (loss) gain related to fair value hedge
ineffectiveness |
|
$ |
(4,021 |
) |
|
$ |
3,145 |
|
Net (loss) gain related to economic hedges |
|
|
(29,154 |
) |
|
|
1,346 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) gain on derivatives and hedging activities |
|
$ |
(33,175 |
) |
|
$ |
4,491 |
|
|
|
|
|
|
|
|
The following table presents, by type of hedged item, the (loss) gain on derivatives and the
related hedged items in fair value hedging relationships and the impact of those derivatives on the
Banks net interest income for the year ended December 31, 2009 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
Net Fair Value |
|
|
Effect on |
|
|
|
Gain (Loss) on |
|
|
(Loss) Gain on |
|
|
Hedge |
|
|
Net Interest |
|
Hedged Item Type |
|
Derivative |
|
|
Hedged Item |
|
|
Ineffectiveness |
|
|
Income1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances |
|
$ |
493,983 |
|
|
$ |
(491,376 |
) |
|
$ |
2,607 |
|
|
$ |
(365,664 |
) |
Investments |
|
|
84,655 |
|
|
|
(1,806 |
) |
|
|
82,849 |
|
|
|
(11,534 |
) |
Bonds |
|
|
(249,413 |
) |
|
|
263,544 |
|
|
|
14,131 |
|
|
|
276,998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
329,225 |
|
|
$ |
(229,638 |
) |
|
$ |
99,587 |
|
|
$ |
(100,200 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. |
S-58
Note 11Deposits
The Bank offers demand and overnight deposits to members and qualifying non-members. In
addition, the Bank offers short-term interest bearing deposit programs to members. During 2009 and
2008 average deposits amounted to $1.3 billion and $1.4 billion. The average interest rates paid on
average deposits during 2009 and 2008 were 0.18 percent and 1.64 percent. At December 31, 2009 and
2008, deposits had maturities of less than one year.
Certain financial institutions have agreed to maintain compensating balances in consideration
of correspondent and other noncredit services. These balances are classified as deposits in the
Statements of Condition. The compensating balances held by the Bank averaged $15.7 billion and $4.1
billion during 2009 and 2008. Effective October 31, 2009, the Bank no longer holds compensating
balances from financial institutions.
The following table details deposits with the Bank that are interest bearing and non-interest
bearing as of December 31, 2009 and 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Interest bearing: |
|
|
|
|
|
|
|
|
Demand and overnight |
|
$ |
660,263 |
|
|
$ |
924,956 |
|
Term |
|
|
483,962 |
|
|
|
464,686 |
|
Non-interest bearing: |
|
|
|
|
|
|
|
|
Demand |
|
|
80,966 |
|
|
|
106,828 |
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
1,225,191 |
|
|
$ |
1,496,470 |
|
|
|
|
|
|
|
|
The aggregate amount of term deposits with a denomination of $100,000 or more was $483.9
million and $464.7 million as of December 31, 2009 and 2008.
Note 12Consolidated Obligations
Consolidated obligations are issued with either fixed rate coupon payment terms or variable
rate coupon payment terms that use a variety of indices for interest rate resets including LIBOR,
Constant Maturity Treasury, Treasury Bills, the Prime rate, and others. To meet the expected
specific needs of certain investors in consolidated obligations, both fixed rate bonds and variable
rate bonds may contain features, which may result in complex coupon payment terms and options. When
such consolidated obligations are issued, the Bank enters into derivatives containing offsetting
features that effectively convert the terms to those of a simple variable rate or a fixed rate
bond.
S-59
These bonds, beyond having fixed rate or simple variable rate coupon payment terms, may also
have the following broad terms regarding either principal repayment or coupon payment terms:
Indexed Principal Redemption Bonds (index amortizing notes) repay principal according to
predetermined amortization schedules that are linked to the level of a certain index. These
notes have fixed rate coupon payment terms. Usually, as market interest rates rise (fall), the
average life of the index amortizing notes extends (contracts); and
Optional Principal Redemption Bonds (callable bonds) may be redeemed by the Bank in whole or in
part at its discretion on predetermined call dates according to the terms of the bond offerings.
Bonds also vary in relation to interest payments:
Step-up Bonds generally pay interest at increasing fixed rates for specified intervals over the
life of the bond. These bonds generally contain provisions enabling the Bank to call bonds
at its option on the step-up dates.
The par amounts of the outstanding consolidated obligations of the 12 FHLBanks were
approximately $930.5 billion and $1,251.5 billion at December 31, 2009 and 2008. The FHLBank Act
authorizes the U.S. Treasury to purchase consolidated obligations issued by the FHLBanks up to an
aggregate principal amount of $4.0 billion. At December 31, 2009, no such purchases had been made
by the U.S. Treasury.
Interest Rate Payment Terms. The following table shows bonds by interest rate payment type at
December 31, 2009 and 2008 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Par amount of bonds: |
|
|
|
|
|
|
|
|
Fixed rate |
|
$ |
41,360,598 |
|
|
$ |
37,954,099 |
|
Simple variable rate |
|
|
7,540,000 |
|
|
|
4,315,000 |
|
Step-up |
|
|
1,422,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total par value |
|
$ |
50,322,598 |
|
|
$ |
42,269,099 |
|
|
|
|
|
|
|
|
S-60
Redemption Terms. The following table shows the Banks bonds outstanding at December 31, 2009
and 2008 by year of contractual maturity (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Interest |
|
|
|
|
|
|
Interest |
|
Year of Contractual Maturity |
|
Amount |
|
|
Rate % |
|
|
Amount |
|
|
Rate % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
$ |
|
|
|
|
|
|
|
$ |
15,962,600 |
|
|
|
3.10 |
|
2010 |
|
|
23,040,050 |
|
|
|
1.43 |
|
|
|
6,159,050 |
|
|
|
4.01 |
|
2011 |
|
|
9,089,100 |
|
|
|
2.45 |
|
|
|
4,670,100 |
|
|
|
4.34 |
|
2012 |
|
|
5,337,250 |
|
|
|
2.79 |
|
|
|
2,231,050 |
|
|
|
4.54 |
|
2013 |
|
|
2,522,835 |
|
|
|
3.73 |
|
|
|
2,417,500 |
|
|
|
4.35 |
|
2014 |
|
|
1,421,710 |
|
|
|
3.66 |
|
|
|
500,500 |
|
|
|
5.00 |
|
Thereafter |
|
|
6,961,565 |
|
|
|
5.04 |
|
|
|
7,908,200 |
|
|
|
5.14 |
|
Index amortizing notes |
|
|
1,950,088 |
|
|
|
5.12 |
|
|
|
2,420,099 |
|
|
|
5.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total par value |
|
|
50,322,598 |
|
|
|
2.58 |
|
|
|
42,269,099 |
|
|
|
4.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums |
|
|
49,514 |
|
|
|
|
|
|
|
50,742 |
|
|
|
|
|
Discounts |
|
|
(34,785 |
) |
|
|
|
|
|
|
(40,699 |
) |
|
|
|
|
Hedging fair value adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative fair value loss |
|
|
148,954 |
|
|
|
|
|
|
|
348,214 |
|
|
|
|
|
Basis adjustments from
terminated
and ineffective hedges |
|
|
326 |
|
|
|
|
|
|
|
95,117 |
|
|
|
|
|
Fair value option adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss on bonds held at
fair value |
|
|
4,394 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in accrued interest |
|
|
3,473 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
50,494,474 |
|
|
|
|
|
|
$ |
42,722,473 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows the Banks bonds outstanding at December 31, 2009 and 2008 (dollars
in thousands):
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Par amount of bonds |
|
|
|
|
|
|
|
|
Noncallable or nonputable |
|
$ |
44,380,598 |
|
|
$ |
39,214,099 |
|
Callable |
|
|
5,942,000 |
|
|
|
3,055,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total par value |
|
$ |
50,322,598 |
|
|
$ |
42,269,099 |
|
|
|
|
|
|
|
|
S-61
The following table shows the Banks bonds outstanding by year of contractual maturity or next
call date at December 31, 2009 and 2008 (dollars in thousands):
|
|
|
|
|
|
|
|
|
Year of Contractual Maturity or Next Call Date |
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
2009 |
|
$ |
|
|
|
$ |
18,507,600 |
|
2010 |
|
|
27,757,050 |
|
|
|
6,229,050 |
|
2011 |
|
|
7,744,100 |
|
|
|
4,060,100 |
|
2012 |
|
|
3,430,250 |
|
|
|
1,801,050 |
|
2013 |
|
|
2,117,835 |
|
|
|
1,807,500 |
|
2014 |
|
|
626,710 |
|
|
|
435,500 |
|
Thereafter |
|
|
6,696,565 |
|
|
|
7,008,200 |
|
Index amortizing notes |
|
|
1,950,088 |
|
|
|
2,420,099 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total par value |
|
$ |
50,322,598 |
|
|
$ |
42,269,099 |
|
|
|
|
|
|
|
|
Extinguishment of Debt. For the year ended December 31, 2009, losses on the extinguishment of
debt totaled $89.9 million due to the Bank extinguishing bonds with a total par value of $0.9
billion. These losses exclude basis adjustment accretion of $2.8 million recorded in net interest
income. As a result, net losses recorded in the Statements of Income on the extinguishment of debt
totaled $87.1 million for the year ended December 31, 2009. For the year ended December 31, 2008,
net gains on the extinguishment of debt totaled $0.7 million due to the Bank extinguishing bonds
with a total par value of $0.5 billion. There were no gains or losses on the extinguishment of debt
for the year ended December 31, 2007. Losses and gains on the extinguishment of debt are recorded
as a component of other income (loss) in the Statements of Income.
Discount Notes. Discount notes are issued to raise short-term funds. Discount notes are
consolidated obligations with 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, all of which are due within one year, were as follows at December
31, 2009 and 2008 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Interest |
|
|
|
|
|
|
Interest |
|
|
|
Amount |
|
|
Rate % |
|
|
Amount |
|
|
Rate % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Par value |
|
$ |
9,418,870 |
|
|
|
0.13 |
|
|
$ |
20,153,370 |
|
|
|
1.83 |
|
Discounts |
|
|
(1,688 |
) |
|
|
|
|
|
|
(92,099 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
9,417,182 |
|
|
|
|
|
|
$ |
20,061,271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S-62
Note 13Affordable Housing Program
The Bank accrues its AHP assessment monthly based on its net earnings. The Bank reduces the
AHP liability as program funds are distributed. If the Bank finds that its required contributions
are contributing to its financial instability, it may apply to the Finance Agency for a temporary
suspension of its contributions. The Bank did not make such an application in 2009, 2008, or 2007.
The following table presents a roll forward of the Banks AHP liability for the years ended
December 31, 2009, 2008, and 2007 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year |
|
$ |
39,715 |
|
|
$ |
42,622 |
|
|
$ |
44,714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assessments |
|
|
16,248 |
|
|
|
14,168 |
|
|
|
12,094 |
|
Disbursements |
|
|
(15,484 |
) |
|
|
(17,075 |
) |
|
|
(14,186 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year |
|
$ |
40,479 |
|
|
$ |
39,715 |
|
|
$ |
42,622 |
|
|
|
|
|
|
|
|
|
|
|
In addition to the AHP grant program, the Bank also had AHP-related advances with a principal
balance outstanding of $0.9 million and $1.0 million at December 31, 2009 and 2008. Discounts
recorded by the Bank on these advances are treated as a reduction of the AHP liability at
origination. The Bank did not issue AHP advances in 2009, 2008, or 2007.
Note 14Resolution Funding Corporation
The FHLBanks aggregate payments through 2009 have exceeded the scheduled payments,
effectively accelerating payment of the REFCORP obligation and shortening its remaining term to
second quarter of 2012, effective December 31, 2009. The FHLBanks aggregate payments through 2009
have satisfied $2.3 million of the $75 million scheduled payment due on April 15, 2012 and all
scheduled payments thereafter. This date assumes that the FHLBanks will pay exactly $300 million
annually after December 31, 2009 until the annuity is satisfied.
The benchmark payments or portions of them could be reinstated if the actual REFCORP payments
of the FHLBanks fall short of $75 million in a quarter. The maturity date of the REFCORP obligation
may be extended beyond April 15, 2030 if such extension is necessary to ensure that the value of
the aggregate amounts paid by the FHLBanks exactly equals a $300 million annual annuity. Any
payment beyond April 15, 2030 will be paid to the U.S. Department of Treasury.
S-63
Note 15Capital
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 as defined 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 permanent capital weighted 1.5 times 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
at December 31, 2009 and 2008 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
Required |
|
|
Actual |
|
|
Required |
|
|
Actual |
|
Regulatory capital requirements: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk based capital |
|
$ |
826,709 |
|
|
$ |
2,952,836 |
|
|
$ |
1,967,981 |
|
|
$ |
3,173,807 |
|
Total capital-to-asset ratio |
|
|
4.00 |
% |
|
|
4.57 |
% |
|
|
4.00 |
% |
|
|
4.66 |
% |
Total regulatory capital |
|
$ |
2,586,267 |
|
|
$ |
2,952,836 |
|
|
$ |
2,725,172 |
|
|
$ |
3,173,807 |
|
Leverage ratio |
|
|
5.00 |
% |
|
|
6.85 |
% |
|
|
5.00 |
% |
|
|
6.99 |
% |
Leverage capital |
|
$ |
3,232,834 |
|
|
$ |
4,429,254 |
|
|
$ |
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.
Each member must maintain Class B membership stock in an amount equal to 0.12 percent of the
members total assets as of the preceding December 31st subject to a cap of $10.0
million and a floor of $10,000.
S-64
Excess Stock. The Bank had excess capital stock (including excess mandatorily redeemable
capital stock) of $61.8 million and $61.1 million at December 31, 2009 and 2008. In late 2008, as a
result of market conditions, the Bank temporarily discontinued its practice of voluntarily
repurchasing excess activity-based capital stock. Due to improved market conditions throughout the
second half of 2009, the Banks Board of Directors terminated this temporary action. On December
18, 2009, the Bank resumed its normal practice of voluntarily repurchasing excess activity-based
capital stock and repurchased $569.6 million of excess activity-based capital stock from its
members.
Mandatorily Redeemable Capital Stock. The Bank is a cooperative whose member financial
institutions and former members own all of its capital stock. Member shares cannot be purchased or
sold except between the Bank and its members at its $100 per share par value. If a member cancels
its written notice of redemption or notice of withdrawal, the Bank will reclassify mandatorily
redeemable capital stock from a liability to equity. After the reclassification, dividends on the
capital stock would no longer be classified as interest expense. For the years ended December 31,
2009, 2008 and 2007, dividends on mandatorily redeemable capital stock in the amount of $0.3
million, $1.0 million, and $2.9 million were recorded as interest expense.
The following table shows the Banks capital stock subject to mandatory redemption by reason
for redemption at December 31, 2009, 2008, and 2007 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
Number |
|
|
|
|
|
|
Number |
|
|
|
|
|
|
Number |
|
|
|
|
|
|
of |
|
|
|
|
|
|
of |
|
|
|
|
|
|
of |
|
|
|
|
|
|
Members |
|
|
Amount |
|
|
Members |
|
|
Amount |
|
|
Members |
|
|
Amount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voluntary termination of
membership as a result of a
merger or consolidation into a
member of another FHLBank |
|
|
13 |
|
|
$ |
8,262 |
|
|
|
10 |
|
|
$ |
10,907 |
|
|
|
32 |
|
|
$ |
45,616 |
|
Member withdrawal |
|
|
1 |
|
|
|
84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Member requests for partial
redemption of excess stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8 |
|
|
|
423 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
14 |
|
|
$ |
8,346 |
|
|
|
10 |
|
|
$ |
10,907 |
|
|
|
40 |
|
|
$ |
46,039 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S-65
The following table shows the amount of capital stock subject to redemption or repurchase by
year of redemption or repurchase at December 31, 2009 and 2008 (dollars in thousands). Membership
capital stock is shown by year of earliest mandatory redemption, which reflects the earliest time
at which the Bank is required to repurchase the members capital stock. Activity-based capital
stock is shown by year of anticipated repurchase assuming that the Bank will repurchase
activity-based capital stock as the associated activities are reduced or no longer outstanding and
that the underlying activities are no longer outstanding on their contractual maturity dates (which
may be before or after the expiration of the five-year notice of redemption or withdrawal).
|
|
|
|
|
|
|
|
|
Year of Redemption or Repurchase |
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
2009 |
|
$ |
|
|
|
$ |
3,487 |
|
2010 |
|
|
6,711 |
|
|
|
5,924 |
|
2011 |
|
|
733 |
|
|
|
492 |
|
2012 |
|
|
143 |
|
|
|
383 |
|
2013 |
|
|
61 |
|
|
|
305 |
|
2014 |
|
|
87 |
|
|
|
|
|
Thereafter |
|
|
611 |
|
|
|
316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
8,346 |
|
|
$ |
10,907 |
|
|
|
|
|
|
|
|
The Banks activity for mandatorily redeemable capital stock was as follows in 2009, 2008 and
2007 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year |
|
$ |
10,907 |
|
|
$ |
46,039 |
|
|
$ |
64,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mandatorily redeemable capital stock issued |
|
|
7 |
|
|
|
49 |
|
|
|
13,468 |
|
Capital stock subject to mandatory redemption
reclassified from capital stock |
|
|
19,170 |
|
|
|
2,861 |
|
|
|
6,326 |
|
Capital stock previously subject to mandatory
redemption reclassified to capital stock |
|
|
|
|
|
|
|
|
|
|
(24,112 |
) |
Repurchase of mandatorily redeemable capital stock |
|
|
(21,738 |
) |
|
|
(38,042 |
) |
|
|
(14,495 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year |
|
$ |
8,346 |
|
|
$ |
10,907 |
|
|
$ |
46,039 |
|
|
|
|
|
|
|
|
|
|
|
S-66
Note 16Pension and Postretirement Benefits
The Bank participates in the Pentegra Defined Benefit Plan for Financial Institutions
(Pentegra Defined Benefit Plan), a tax-qualified defined benefit pension plan. The plan covers all
officers and employees of the Bank that meet certain eligibility requirements. Funding and
administrative costs of the Pentegra Defined Benefit Plan charged to other operating expenses were
$5.7 million in 2009, $3.2 million in 2008, and $3.3 million in 2007. In 2009, funding and
administrative costs included a one-time discretionary contribution to the Pentegra Defined Benefit
Plan of $3.3 million. The Pentegra Defined Benefit Plan is a multi-employer plan in which assets
contributed by one participating employer may be used to provide benefits to employees of other
participating employers since assets contributed by an employer are not segregated in a separate
account or restricted to provide benefits only to employees of that employer. As a result,
disclosure of the accumulated benefit obligations, plan assets, and the components of annual
pension expense attributable to the Bank are not made.
The Bank also participates in the Pentegra Defined Contribution Plan for Financial
Institutions, a tax-qualified defined contribution pension plan. The plan covers all officers and
employees of the Bank that meet certain eligibility requirements. The Banks contributions are
equal to a percentage of participants compensation and a matching contribution equal to a
percentage of voluntary employee contributions, subject to certain limitations. The Bank
contributed $0.7 million, $0.6 million, and $0.6 million for each of the years ended December 31,
2009, 2008, and 2007.
In addition, the Bank offers the Benefit Equalization Plan (BEP). The BEP is a nonqualified
retirement plan restoring benefits offered under the qualified plans which have been limited by
laws governing such plans. The BEP covers selected officers of the Bank. There are no funded assets
that have been designated to provide benefits under this plan.
BEP. The Bank contributed $66,000, $69,000, and $66,000 in the years ended December 31, 2009,
2008, and 2007 for the defined contribution portion of the BEP.
S-67
The second portion of the BEP is a nonqualified defined benefit plan. The projected benefit
obligation of the Banks BEP at December 31, 2009 and 2008 was as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Change in benefit obligation |
|
|
|
|
|
|
|
|
Projected benefit obligation at beginning of year |
|
$ |
4,928 |
|
|
$ |
4,379 |
|
Service cost |
|
|
298 |
|
|
|
157 |
|
Interest cost |
|
|
297 |
|
|
|
280 |
|
Actuarial loss |
|
|
152 |
|
|
|
327 |
|
Benefits paid |
|
|
(256 |
) |
|
|
(358 |
) |
Change due to decrease in discount rate |
|
|
171 |
|
|
|
143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at end of year |
|
$ |
5,590 |
|
|
$ |
4,928 |
|
|
|
|
|
|
|
|
Amounts recognized in the Statements of Condition for the Banks BEP at December 31, 2009 and
2008 were (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Accrued benefit liability |
|
$ |
5,590 |
|
|
$ |
4,928 |
|
Accumulated other comprehensive loss |
|
|
(1,760 |
) |
|
|
(1,627 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized |
|
$ |
3,830 |
|
|
$ |
3,301 |
|
|
|
|
|
|
|
|
The accumulated benefit obligation for the Banks BEP was $5.3 million and $4.8 million at
December 31, 2009 and 2008.
Components of net periodic benefit cost for the Banks BEP for the years ended December 31,
2009, 2008, and 2007 were (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Net periodic benefit cost |
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
298 |
|
|
$ |
157 |
|
|
$ |
60 |
|
Interest cost |
|
|
297 |
|
|
|
280 |
|
|
|
265 |
|
Amortization of unrecognized prior service cost |
|
|
54 |
|
|
|
54 |
|
|
|
54 |
|
Amortization of unrecognized net loss |
|
|
136 |
|
|
|
93 |
|
|
|
101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
785 |
|
|
$ |
584 |
|
|
$ |
480 |
|
|
|
|
|
|
|
|
|
|
|
S-68
The following table details the change in the accumulated other comprehensive loss balance
related to the defined benefit portion of the Banks BEP for the year ended December 31, 2009
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior Service |
|
|
Net Loss |
|
|
|
|
|
|
Cost |
|
|
(Gain) |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
186 |
|
|
$ |
1,441 |
|
|
$ |
1,627 |
|
Net loss on defined benefit plan |
|
|
|
|
|
|
323 |
|
|
|
323 |
|
Amortization |
|
|
(54 |
) |
|
|
(136 |
) |
|
|
(190 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
132 |
|
|
$ |
1,628 |
|
|
$ |
1,760 |
|
|
|
|
|
|
|
|
|
|
|
Amounts in accumulated other comprehensive loss expected to be recognized as components of net
periodic benefit cost during 2010 are (dollars in thousands):
|
|
|
|
|
Projected amortization of unrecognized prior service cost |
|
$ |
41 |
|
Projected amortization of unrecognized net loss |
|
|
153 |
|
|
|
|
|
Total projected amortization of amounts in accumulated other comprehensive loss |
|
$ |
194 |
|
|
|
|
|
The measurement date used to determine the current years benefit obligation was December 31,
2009.
Key assumptions and other information for the actuarial calculations for the Banks BEP for
the years ended December 31, 2009, 2008, and 2007 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Discount rate benefit obligations |
|
|
5.75 |
% |
|
|
6.00 |
% |
|
|
6.25 |
% |
Discount rate net periodic benefit cost |
|
|
6.00 |
% |
|
|
6.25 |
% |
|
|
5.75 |
% |
Salary increases |
|
|
4.80 |
% |
|
|
4.80 |
% |
|
|
4.80 |
% |
Amortization period (years) |
|
|
8 |
|
|
|
9 |
|
|
|
11 |
|
The 2009 discount rate used to determine the benefit obligation of the Banks BEP was
determined using a discounted cash flow approach which incorporates the timing of each expected
future benefit payment. Future benefit payments were estimated based on census data, benefit
formula and provisions, and valuation assumptions reflecting the probability of decrement and
survival. The present value of the future benefit payments was calculated using duration-based
interest rate yields from the Citibank Pension Discount Curve as of December 31, 2009, and solving
for the single discount rate that produced the same present value.
The Bank estimates that its required contributions to the defined benefit portion of the BEP
for the year ended December 31, 2010 will be $261,000.
S-69
Estimated future benefit payments reflecting expected future services for the years ending
after December 31, 2009 were (dollars in thousands):
|
|
|
|
|
Year |
|
Amount |
|
2010 |
|
$ |
261 |
|
2011 |
|
|
265 |
|
2012 |
|
|
282 |
|
2013 |
|
|
298 |
|
2014 |
|
|
322 |
|
2015 through 2019 |
|
|
2,309 |
|
Note 17Segment Information
The Bank has identified two primary operating segments based on its products and services as
well as its method of internal reporting: Member Finance and Mortgage Finance.
The Member Finance segment includes advances, investments (excluding MBS, HFA investments, and
SBA investments), and the funding and hedging instruments related to those assets. Member deposits
are also included in this segment. Net interest income for the Member Finance segment is derived
primarily from the difference, or spread, between the yield on the assets in this segment and the
cost of the member deposit and funding related to those assets.
The Mortgage Finance segment includes mortgage loans purchased through the MPF program, MBS,
HFA investments, and SBA investments, and the funding and hedging instruments related to those
assets. Net interest income for the Mortgage Finance segment is derived primarily from the
difference, or spread, between the yield on the assets in this segment and the cost of the funding
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
included the interest income and expense on economic hedge relationships 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 also exclude basis
adjustment amortization/accretion on called and extinguished debt included in interest expense and
include concession expense on fair value option bonds included in other expense.
S-70
The following table shows the Banks financial performance by operating segment for the years
ended December 31, 2009, 2008, and 2007 (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 |
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net interest income |
|
$ |
133,768 |
|
|
$ |
83,330 |
|
|
$ |
217,098 |
|
Provision for credit losses
on mortgage loans |
|
|
|
|
|
|
1,475 |
|
|
|
1,475 |
|
|
|
|
|
|
|
|
|
|
|
Adjusted net interest income
after mortgage loan credit
loss provision |
|
$ |
133,768 |
|
|
$ |
81,855 |
|
|
$ |
215,623 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average assets for the year |
|
$ |
51,866,956 |
|
|
$ |
18,834,225 |
|
|
$ |
70,701,181 |
|
Total assets at year end |
|
$ |
45,558,042 |
|
|
$ |
19,098,631 |
|
|
$ |
64,656,673 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net interest income |
|
$ |
122,233 |
|
|
$ |
133,231 |
|
|
$ |
255,464 |
|
Provision for credit losses
on mortgage loans |
|
|
|
|
|
|
295 |
|
|
|
295 |
|
|
|
|
|
|
|
|
|
|
|
Adjusted net interest income
after mortgage loan credit
loss provision |
|
$ |
122,233 |
|
|
$ |
132,936 |
|
|
$ |
255,169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average assets for the year |
|
$ |
50,613,222 |
|
|
$ |
19,040,595 |
|
|
$ |
69,653,817 |
|
Total assets at year end |
|
$ |
48,064,653 |
|
|
$ |
20,064,654 |
|
|
$ |
68,129,307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net interest income |
|
$ |
139,032 |
|
|
$ |
30,246 |
|
|
$ |
169,278 |
|
Provision for credit losses
on mortgage loans |
|
|
|
|
|
|
69 |
|
|
|
69 |
|
|
|
|
|
|
|
|
|
|
|
Adjusted net interest income
after mortgage loan credit
loss provision |
|
$ |
139,032 |
|
|
$ |
30,177 |
|
|
$ |
169,209 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average assets for the year |
|
$ |
31,112,454 |
|
|
$ |
16,248,396 |
|
|
$ |
47,360,850 |
|
Total assets at year end |
|
$ |
43,022,745 |
|
|
$ |
17,712,861 |
|
|
$ |
60,735,606 |
|
S-71
For adjusted net interest income, the Bank includes the following:
|
|
|
Interest income and interest expense associated with economic hedges recorded as a
component of Net gain (loss) on derivatives and hedging activities in other income
(loss) in the Statements of Income; and |
|
|
|
Concession expense associated with fair value option bonds recorded in other
expense in the Statements of Income. |
For adjusted net interest income, the Bank excludes the following:
|
|
|
Interest income and interest expense associated with basis adjustment
amortization/accretion on called and extinguished debt recorded as a component of Bond
interest expense in the Statements of Income. |
The following table reconciles the Banks financial performance by operating segment to total
income before assessments for the years ended December 31, 2009, 2008, and 2007 (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net interest income after mortgage
loan credit loss provision |
|
$ |
215,623 |
|
|
$ |
255,169 |
|
|
$ |
169,209 |
|
Net interest (income) expense on economic hedges |
|
|
(5,141 |
) |
|
|
2,178 |
|
|
|
1,696 |
|
Concession expense on fair value option bonds |
|
|
488 |
|
|
|
|
|
|
|
|
|
Interest (expense) income on basis adjustment
amortization/accretion of called debt |
|
|
(17,777 |
) |
|
|
(12,067 |
) |
|
|
167 |
|
Interest income on basis adjustment accretion
of extinguished debt |
|
|
2,767 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after mortgage loan credit
loss provision |
|
|
195,960 |
|
|
|
245,280 |
|
|
|
171,072 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (loss) |
|
|
55,785 |
|
|
|
(27,839 |
) |
|
|
10,333 |
|
Other expenses |
|
|
53,060 |
|
|
|
44,087 |
|
|
|
42,454 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before assessments |
|
$ |
198,685 |
|
|
$ |
173,354 |
|
|
$ |
138,951 |
|
|
|
|
|
|
|
|
|
|
|
S-72
Note 18Estimated 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 provides an irrevocable option 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 2009 the Bank elected to record certain bonds that did not qualify for hedge accounting
at fair value under the fair value option. These bonds, coupled with related derivatives, were
unable to achieve hedge effectiveness. Therefore, in order to achieve some offset to the
mark-to-market on the fair value option bonds, the Bank executed economic derivatives.
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.
S-73
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.
S-74
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
December 31, 2009 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Netting |
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Adjustment1 |
|
|
Total |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TLGP |
|
$ |
|
|
|
$ |
3,692,984 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,692,984 |
|
Taxable municipal bonds |
|
|
|
|
|
|
741,538 |
|
|
|
|
|
|
|
|
|
|
|
741,538 |
|
Available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TLGP |
|
|
|
|
|
|
565,757 |
|
|
|
|
|
|
|
|
|
|
|
565,757 |
|
Government-sponsored enterprise |
|
|
|
|
|
|
7,171,656 |
|
|
|
|
|
|
|
|
|
|
|
7,171,656 |
|
Derivative assets |
|
|
322 |
|
|
|
378,049 |
|
|
|
|
|
|
|
(367,359 |
) |
|
|
11,012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value |
|
$ |
322 |
|
|
$ |
12,549,984 |
|
|
$ |
|
|
|
$ |
(367,359 |
) |
|
$ |
12,182,947 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds2 |
|
$ |
|
|
|
$ |
(5,997,867 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
(5,997,867 |
) |
Derivative liabilities |
|
|
(1 |
) |
|
|
(700,999 |
) |
|
|
|
|
|
|
420,616 |
|
|
|
(280,384 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value |
|
$ |
(1 |
) |
|
$ |
(6,698,866 |
) |
|
$ |
|
|
|
$ |
420,616 |
|
|
$ |
(6,278,251 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $53.2 million at December 31, 2009. |
|
2 |
|
Represents bonds recorded under the fair value option. |
S-75
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 December 31, 2009 the Bank had made no reclassifications to its fair
value hierarchy.
The following table summarizes the activity related to bonds in which the fair value option
has been elected during 2009 (dollars in thousands):
|
|
|
|
|
|
|
2009 |
|
Balance, beginning of the year |
|
$ |
|
|
New bonds elected for fair value option |
|
|
5,990,000 |
|
Net loss on bonds held at fair value |
|
|
4,394 |
|
Change in accrued interest |
|
|
3,473 |
|
|
|
|
|
|
|
|
|
|
Balance, end of the year |
|
$ |
5,997,867 |
|
|
|
|
|
S-76
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 during 2009 (dollars in thousands):
|
|
|
|
|
|
|
2009 |
|
Interest expense |
|
$ |
20,597 |
|
Net loss on bonds held at fair value |
|
|
4,394 |
|
|
|
|
|
|
|
|
|
|
Total change in fair value |
|
$ |
24,991 |
|
|
|
|
|
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 $0.5 million in concession expense associated with fair value option
bonds during the year ended December 31, 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 at December 31, 2009 (dollars in thousands):
|
|
|
|
|
|
|
2009 |
|
Principal balance |
|
$ |
5,990,000 |
|
Fair value |
|
|
5,997,867 |
|
|
|
|
|
|
|
|
|
|
Fair value over principal balance |
|
$ |
7,867 |
|
|
|
|
|
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 December 31,
2009 and 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.
S-77
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.
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 third quarter of 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. During the fourth quarter of 2009, the Bank adopted the above pricing methodology for
all of its investment securities.
S-78
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 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.
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.
S-79
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 FHLBanks credit quality when valuing bonds
measured at fair value. Due to the joint and several liability of consolidated obligations, the
Bank monitors its own creditworthiness and the creditworthiness of the other FHLBanks to determine
whether any credit adjustments are necessary in its fair value measurement of bonds. The credit
ratings of the FHLBanks and any changes to these credit ratings are the basis for the Bank to
determine whether the fair values of bonds have been significantly affected during the reporting
period by changes in the instrument-specific credit risk.
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.
S-80
The carrying values and estimated fair values of the Banks financial instruments at December
31, 2009 and 2008 were as follows (dollars in thousands):
FAIR VALUE SUMMARY TABLE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
Carrying |
|
|
Estimated |
|
|
Carrying |
|
|
Estimated |
|
Financial Instruments |
|
Value |
|
|
Fair Value |
|
|
Value |
|
|
Fair Value |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
298,841 |
|
|
$ |
298,841 |
|
|
$ |
44,368 |
|
|
$ |
44,368 |
|
Interest-bearing deposits |
|
|
10,570 |
|
|
|
10,346 |
|
|
|
152 |
|
|
|
152 |
|
Federal funds sold |
|
|
3,133,000 |
|
|
|
3,133,000 |
|
|
|
3,425,000 |
|
|
|
3,425,000 |
|
Trading securities |
|
|
4,434,522 |
|
|
|
4,434,522 |
|
|
|
2,151,485 |
|
|
|
2,151,485 |
|
Available-for-sale securities |
|
|
7,737,413 |
|
|
|
7,737,413 |
|
|
|
3,839,980 |
|
|
|
3,839,980 |
|
Held-to-maturity securities |
|
|
5,474,664 |
|
|
|
5,535,975 |
|
|
|
5,952,008 |
|
|
|
5,917,288 |
|
Advances |
|
|
35,720,398 |
|
|
|
35,978,355 |
|
|
|
41,897,479 |
|
|
|
41,864,640 |
|
Mortgage loans, net |
|
|
7,716,549 |
|
|
|
7,996,456 |
|
|
|
10,684,910 |
|
|
|
10,984,668 |
|
Accrued interest receivable |
|
|
81,703 |
|
|
|
81,703 |
|
|
|
92,620 |
|
|
|
92,620 |
|
Derivative assets |
|
|
11,012 |
|
|
|
11,012 |
|
|
|
2,840 |
|
|
|
2,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
(1,225,191 |
) |
|
|
(1,224,975 |
) |
|
|
(1,496,470 |
) |
|
|
(1,495,865 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount notes |
|
|
(9,417,182 |
) |
|
|
(9,417,818 |
) |
|
|
(20,061,271 |
) |
|
|
(20,141,287 |
) |
Bonds (includes $5,997,867 at
fair value under the fair
value option at December 31,
2009) |
|
|
(50,494,474 |
) |
|
|
(51,544,919 |
) |
|
|
(42,722,473 |
) |
|
|
(44,239,835 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated obligations, net |
|
|
(59,911,656 |
) |
|
|
(60,962,737 |
) |
|
|
(62,783,744 |
) |
|
|
(64,381,122 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mandatorily redeemable capital
stock |
|
|
(8,346 |
) |
|
|
(8,346 |
) |
|
|
(10,907 |
) |
|
|
(10,907 |
) |
Accrued interest payable |
|
|
(243,693 |
) |
|
|
(243,693 |
) |
|
|
(320,271 |
) |
|
|
(320,271 |
) |
Derivative liabilities |
|
|
(280,384 |
) |
|
|
(280,384 |
) |
|
|
(435,015 |
) |
|
|
(435,015 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standby letters of credit |
|
|
(1,443 |
) |
|
|
(1,443 |
) |
|
|
(1,945 |
) |
|
|
(1,945 |
) |
Commitments to extend credit for
mortgage loans |
|
|
|
|
|
|
|
|
|
|
(1,406 |
) |
|
|
(1,426 |
) |
Standby bond purchase agreements |
|
|
|
|
|
|
6,477 |
|
|
|
482 |
|
|
|
263 |
|
S-81
Note 19Commitments and Contingencies
As previously described in Note 12 Consolidated Obligations, the 12 FHLBanks have joint
and several liability for all consolidated obligations issued. Accordingly, should one or more of
the FHLBanks be 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.
No FHLBank has ever been asked or required to repay the principal or interest on any consolidated
obligation on behalf of another FHLBank.
The Bank determined it was not necessary to recognize a liability for the fair value of its
joint and several obligations. The joint and several obligations are mandated by Finance Agency
regulations and are not the result of arms-length transactions among the FHLBanks. The FHLBanks
have no control over the amount of the guaranty or the determination of how each FHLBank would
perform under the joint and several obligations. Accordingly, the Bank has not recognized a
liability for its joint and several obligations at December 31, 2009 and 2008. The par values of
the outstanding consolidated obligations for which the Bank is jointly and severally liable were
approximately $870.8 billion and $1,189.1 billion at December 31, 2009 and 2008.
During the third quarter of 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 was designed to
serve as a contingent source of liquidity for the housing government-sponsored enterprises,
including the 12 FHLBanks. Any borrowings by one or more of the FHLBanks under the GSECF would have
been considered consolidated obligations with the same joint and several liability as all other
consolidated obligations. The terms of any borrowings would have been agreed to at the time of
issuance. Loans under the Lending Agreement were to be secured by collateral acceptable to the U.S.
Treasury, which consisted 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 was
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. The amount of collateral was
subject to an increase or decrease (subject to the approval of the U.S. Treasury) at any time
through the delivery of an updated listing of collateral. The GSECF expired on December 31, 2009.
The Bank did not draw on this available source of liquidity prior to expiration.
S-82
There were no commitments that legally bind and unconditionally obligate the Bank for
additional advances at December 31, 2009 or 2008. Standby letters of credit are executed for
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, the payment is
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 December 31, 2009 and had original terms of 5 days to 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 of 4 days to 13 years with a final expiration in 2020. Unearned fees are
recorded in other liabilities in the Statements of Condition and amounted to $1.4 million and
$1.9 million at December 31, 2009 and 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
standby letters of credit. The estimated fair value of standby letters of credit at December 31,
2009 and 2008 is reported in Note 18 Estimated Fair Values.
Commitments that unconditionally obligate the Bank to fund or purchase mortgage loans from
members in the MPF program totaled $26.7 million and $289.6 million at December 31, 2009 and 2008.
Commitments are generally for periods not to exceed 45 business days. Commitments that obligate the
Bank to purchase closed mortgage loans from its members are considered derivatives, and their
estimated fair value at December 31, 2009 and 2008 is reported in Note 10 Derivatives and
Hedging Activities as mortgage delivery commitments. Commitments that obligate the Bank to table
fund mortgage loans are not considered derivatives, and their estimated fair value at December 31,
2009 and 2008 is reported in Note 18 Estimated Fair Values as commitments to extend credit for
mortgage loans.
As described in Note 9 Mortgage Loans Held for Portfolio, 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 $116.4 million and $105.9 million at December 31, 2009 and 2008.
S-83
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 December 31, 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.
At December 31, 2009 and 2008, the Bank had 24 and 9 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 24
outstanding standby bond purchase agreements at December 31, 2009 total $711.1 million and expire
seven years after execution, with a final expiration in 2016. The 9 outstanding standby bond
purchase agreements at December 31, 2008 totaled $259.7 million and expired seven years after
execution, with a final expiration in 2015. The Bank received fees for the guarantees that amounted
to $1.1 million and $0.2 million for the years ended December 31, 2009 and 2008. At December 31,
2009, the Bank had not been required to purchase any bonds under the executed standby bond purchase
agreements. The estimated fair value of standby bond purchase agreements at December 31, 2009 and
2008 is reported in Note 18 Estimated Fair Values.
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 November 6, 2009 however, was extended 60 days through January 6, 2010.
As of December 31, 2009, the Bank purchased $15 million in mortgage revenue bonds under this
agreement. These bonds are recorded as held-to-maturity investments at December 31, 2009.
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 December 31, 2009, the Bank had not purchased any mortgage revenue
bonds under this agreement.
S-84
The Bank entered into $0.2 billion and $1.0 billion par value traded but not settled bonds at
December 31, 2009 and 2008. The Bank did not enter into any traded but not settled discount notes
at December 31, 2009 and 2008.
The Bank generally executes derivatives with large banks and major broker-dealers and enters
into bilateral collateral agreements. At December 31, 2009 and 2008, the Bank had $56.0 million and
$267.9 million of cash pledged as collateral to broker-dealers.
The Bank charged to operating expenses net rental costs of approximately $1.3 million for the
years ended December 31, 2009, 2008, and 2007. Future minimum rentals for premises and equipment at
December 31, 2009 were as follows (dollars in thousands):
|
|
|
|
|
Year |
|
Amount |
|
|
|
|
|
|
2010 |
|
$ |
1,047 |
|
2011 |
|
|
936 |
|
2012 |
|
|
869 |
|
2013 |
|
|
869 |
|
2014 |
|
|
869 |
|
Thereafter |
|
|
11,298 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
15,888 |
|
|
|
|
|
Lease agreements for Bank premises generally provide for increases in the basic rentals
resulting from increases in property taxes and maintenance expenses. Such increases are not
expected to have a material effect on the Bank.
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.
S-85
Note 20Activities 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 December 31, 2009 and 2008, no member owned more than 10
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.
S-86
The following table shows transactions with members and their affiliates, former members and
their affiliates, and housing associates at December 31, 2009 and 2008 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
Cash |
|
$ |
1,470 |
|
|
$ |
18,839 |
|
Interest-bearing deposits1 |
|
|
10,406 |
|
|
|
|
|
Federal funds sold |
|
|
340,000 |
|
|
|
1,110,000 |
|
Trading securities2 |
|
|
130,819 |
|
|
|
|
|
Available-for-sale securities2 |
|
|
|
|
|
|
580 |
|
Held-to-maturity securities2 |
|
|
124,858 |
|
|
|
377,619 |
|
Advances |
|
|
35,720,398 |
|
|
|
41,897,479 |
|
Accrued interest receivable |
|
|
6,675 |
|
|
|
21,555 |
|
Derivative assets |
|
|
6,216 |
|
|
|
2,655 |
|
Other assets |
|
|
389 |
|
|
|
615 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
36,341,231 |
|
|
$ |
43,429,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Deposits |
|
$ |
1,147,469 |
|
|
$ |
1,394,198 |
|
Mandatorily redeemable capital stock |
|
|
8,346 |
|
|
|
10,907 |
|
Accrued interest payable |
|
|
118 |
|
|
|
853 |
|
Derivative liabilities |
|
|
27,631 |
|
|
|
57,519 |
|
Other liabilities |
|
|
1,894 |
|
|
|
1,945 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,185,458 |
|
|
$ |
1,465,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital: |
|
|
|
|
|
|
|
|
Capital stock Class B putable |
|
$ |
2,460,419 |
|
|
$ |
2,780,927 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount of derivatives |
|
$ |
5,255,246 |
|
|
$ |
939,650 |
|
Notional amount of standby letters of credit |
|
$ |
3,502,477 |
|
|
$ |
3,400,001 |
|
Notional amount of standby bond purchase agreements |
|
$ |
711,135 |
|
|
$ |
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. |
S-87
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 December 31, 2009 and 2008, advances
outstanding to the Bank Directors Financial Institutions aggregated $684.4 million and $561.6
million, representing 2.0 percent and 1.4 percent of the Banks total outstanding advances. During
the years ended December 31, 2009, 2008, and 2007, the Bank acquired approximately $45.5 million,
$3.8 million, and $1.3 million of mortgage loans that were originated by the Bank Directors
Financial Institutions. At December 31, 2009 and 2008, capital stock outstanding to the Bank
Directors Financial Institutions aggregated $44.4 million and $33.0 million, representing 1.8
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 years ended
December 31, 2009, 2008, and 2007.
Business Concentrations. The Bank has business concentrations with stockholders whose capital
stock outstanding is in excess of 10 percent of the Banks total capital stock outstanding.
Significant transactions, including but not limited to, advances and mortgage loans, may occur
between the Bank and these stockholders.
Capital Stock The following tables present members and their affiliates holding 10
percent or more of outstanding capital stock (including stock classified as mandatorily redeemable)
at December 31, 2009 and 2008 (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares at |
|
|
Percent of |
|
|
|
|
|
|
|
December 31, |
|
|
Total Capital |
|
Name |
|
City |
|
State |
|
2009 |
|
|
Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Superior Guaranty Insurance Company1 |
|
Minneapolis |
|
MN |
|
|
2,693 |
|
|
|
10.9 |
% |
Transamerica Life Insurance Company2 |
|
Cedar Rapids |
|
IA |
|
|
2,525 |
|
|
|
10.2 |
|
Wells Fargo Bank, N.A.1 |
|
Sioux Falls |
|
SD |
|
|
412 |
|
|
|
1.7 |
|
Monumental Life Insurance Company2 |
|
Cedar Rapids |
|
IA |
|
|
278 |
|
|
|
1.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,908 |
|
|
|
23.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares at |
|
|
Percent of |
|
|
|
|
|
|
|
December 31, |
|
|
Total Capital |
|
Name |
|
City |
|
State |
|
2008 |
|
|
Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Superior Guaranty Insurance Company1 |
|
Minneapolis |
|
MN |
|
|
4,499 |
|
|
|
16.2 |
% |
Wells Fargo Bank, N.A.1 |
|
Sioux Falls |
|
SD |
|
|
189 |
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,688 |
|
|
|
16.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Superior Guaranty Insurance Company (Superior) is an affiliate of Wells Fargo Bank, N.A. |
|
2 |
|
Monumental Life Insurance Company is an affiliate of Transamerica Life Insurance Company. |
S-88
Advances The following table presents advances outstanding with stockholders and
their affiliates whose capital stock outstanding is in excess of 10 percent of the Banks total
capital stock outstanding at December 31, 2009 and 2008 (dollars in thousands):
|
|
|
|
|
|
|
|
|
Stockholder |
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Superior Guaranty Insurance Company |
|
$ |
1,625,000 |
|
|
$ |
2,250,000 |
|
Transamerica Life Insurance Company |
|
|
5,450,000 |
|
|
|
* |
|
Wells Fargo Bank, N.A. |
|
|
700,000 |
|
|
|
200,000 |
|
Monumental Life Insurance Company |
|
|
400,000 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
$ |
8,175,000 |
|
|
$ |
2,450,000 |
|
|
|
|
|
|
|
|
|
|
|
* |
|
Transamerica Life Insurance Company and Monumental Life Insurance Company did not have
capital stock outstanding in excess of 10 percent of the Banks total
capital stock outstanding at December 31, 2008. |
The following tables presents advances originated to stockholders and their affiliates whose
capital stock outstanding is in excess of 10 percent of the Banks total capital stock outstanding
as well as interest income earned during the years ended December 31, 2009, 2008, and 2007 (dollars
in thousands):
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
Advances |
|
|
Interest |
|
Stockholder |
|
Originated |
|
|
Income |
|
|
|
|
|
|
|
|
|
|
Superior Guaranty Insurance Company |
|
$ |
625,000 |
|
|
$ |
8,443 |
|
Transamerica Life Insurance Company |
|
|
|
|
|
|
38,353 |
|
Wells Fargo Bank, N.A. |
|
|
500,000 |
|
|
|
17,758 |
|
Monumental Life Insurance Company |
|
|
|
|
|
|
3,039 |
|
|
|
|
|
|
|
|
|
|
$ |
1,125,000 |
|
|
$ |
67,593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
Advances |
|
|
Interest |
|
Stockholder |
|
Originated |
|
|
Income |
|
|
|
|
|
|
|
|
|
|
Superior Guaranty Insurance Company |
|
$ |
1,500,000 |
|
|
$ |
39,857 |
|
Wells Fargo Bank, N.A. |
|
|
179,146,000 |
|
|
|
275,793 |
|
|
|
|
|
|
|
|
|
|
$ |
180,646,000 |
|
|
$ |
315,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
Advances |
|
|
Interest |
|
Stockholder |
|
Originated |
|
|
Income |
|
|
|
|
|
|
|
|
|
|
Superior Guaranty Insurance Company |
|
$ |
1,000,000 |
|
|
$ |
35,784 |
|
Wells Fargo Bank, N.A. |
|
|
21,450,000 |
|
|
|
55,286 |
|
|
|
|
|
|
|
|
|
|
$ |
22,450,000 |
|
|
$ |
91,070 |
|
|
|
|
|
|
|
|
S-89
Mortgage Loans At December 31, 2009 and 2008, 57 percent and 74 percent,
respectively, of the Banks loans outstanding were from Superior. The decrease in percent of
mortgage loans outstanding with Superior at December 31, 2009 when compared to December 31, 2008
was due to the mortgage loans sale transaction that took place during the second quarter of 2009.
Note 21Activities 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 December 31, 2009 and 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 $1.4 million, $0.9
million, and $0.7 million in service fee expense to the FHLBank of Chicago for the years ended
December 31, 2009, 2008, and 2007.
During the first quarter of 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 9 Mortgage Loans Held for Portfolio.
During the second quarter of 2009, the Bank sold $2.1 billion of mortgage loans 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 19 Commitments and Contingencies.
S-90
The Bank did not make any loans to other FHLBanks during 2009. The following tables show loan
activity to other FHLBanks during 2008 (dollars in thousands). All of these loans were overnight
loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal |
|
|
|
|
|
|
Beginning |
|
|
|
|
|
|
Payment |
|
|
Ending |
|
Other FHLBank |
|
Balance |
|
|
Advance |
|
|
Received |
|
|
Balance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Atlanta |
|
$ |
|
|
|
$ |
176,000 |
|
|
$ |
(176,000 |
) |
|
$ |
|
|
Boston |
|
|
|
|
|
|
524,000 |
|
|
|
(524,000 |
) |
|
|
|
|
Chicago |
|
|
|
|
|
|
250,000 |
|
|
|
(250,000 |
) |
|
|
|
|
San Francisco |
|
|
|
|
|
|
1,150,000 |
|
|
|
(1,150,000 |
) |
|
|
|
|
Topeka |
|
|
|
|
|
|
201,000 |
|
|
|
(201,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
2,301,000 |
|
|
$ |
(2,301,000 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows loan activity from other FHLBanks during 2009 and 2008 (dollars in
thousands). All these loans were overnight loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning |
|
|
|
|
|
|
Principal |
|
|
Ending |
|
Other FHLBank |
|
Balance |
|
|
Borrowings |
|
|
Payment |
|
|
Balance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cincinnati |
|
$ |
|
|
|
$ |
75,000 |
|
|
$ |
(75,000 |
) |
|
$ |
|
|
San Francisco |
|
|
|
|
|
|
6,104,000 |
|
|
|
(6,104,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
6,179,000 |
|
|
$ |
(6,179,000 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chicago |
|
$ |
|
|
|
$ |
305,000 |
|
|
$ |
(305,000 |
) |
|
$ |
|
|
Cincinnati |
|
|
|
|
|
|
63,000 |
|
|
|
(63,000 |
) |
|
|
|
|
Topeka |
|
|
|
|
|
|
200,000 |
|
|
|
(200,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
568,000 |
|
|
$ |
(568,000 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S-91