UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
FORM 10-Q
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[√] QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the quarterly
period ended March 31, 2010
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or
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[ ] TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the transition period
from
to
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Commission File Number:
000-51395
FEDERAL HOME LOAN BANK OF
PITTSBURGH
(Exact name of registrant as specified in its charter)
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Federally Chartered Corporation
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25-6001324
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(State or other jurisdiction of
incorporation or organization)
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(IRS Employer Identification No.)
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601 Grant Street
Pittsburgh, PA 15219
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15219
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(Address of principal executive offices)
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(Zip Code)
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(412) 288-3400
(Registrants telephone number, including area code)
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. xYes 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 whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer
or a smaller reporting company. See definition of large
accelerated filer, accelerated filer and
smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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o Large
accelerated filer
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o Accelerated
filer
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x Non-accelerated
filer
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oSmaller
reporting company
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). o Yes x
No
There were 40,076,009 shares of common stock with a par
value of $100 per share outstanding at April 30, 2010.
FEDERAL
HOME LOAN BANK OF PITTSBURGH
TABLE OF
CONTENTS
i.
PART I
FINANCIAL INFORMATION
Item 2: Managements
Discussion and Analysis of Financial Condition and Results of
Operations
This Overview should be read in conjunction with the Banks
unaudited financial statements and footnotes to financial
statements in the quarterly report filed on this
Form 10-Q
as well as the Banks 2009 Annual Report filed on
Form 10-K.
Overview
The Federal Home Loan Bank of Pittsburghs (the Bank)
mission is to provide a readily available, low-cost source of
funds for housing and community lenders. The Bank strives to
enhance the availability of credit for residential mortgages and
targeted community development. The Bank manages its own
liquidity so that funds are available to meet members
demand. By providing needed liquidity and enhancing competition
in the mortgage market, the Banks lending programs benefit
homebuyers and communities.
Financial and housing markets have been in turmoil for the last
two years, both here in the U.S. and worldwide, as failure
to adhere to sound underwriting standards, an increase in
mortgage delinquencies and higher foreclosures impacted the
economy. As a result of the extensive efforts of the
U.S. government and other governments around the world to
stimulate economic activity and provide liquidity to the capital
markets, the economic environment remains uncertain.
Unemployment and underemployment remain at higher levels. In
addition, many government programs that support the financial
and housing markets are beginning to wind down in 2010. There
may be risks to the economy as these programs wind down and the
government withdraws its support.
Housing prices are still low and falling in some areas.
Delinquency and foreclosure rates continue to run at high
levels. While the agency mortgage-backed securities (MBS) market
is active in funding new mortgage originations, the private
label MBS market has not yet recovered. In addition, the
commercial real estate market continues to trend downward.
The conditions noted above continued to affect the Banks
business, results of operations and financial condition, as well
as that of the Banks members, in the first quarter of
2010, and are expected to continue to exert a significant
negative effect in the future.
General
The Bank is one of twelve Federal Home Loan Banks (FHLBanks).
The FHLBanks operate as separate entities with their own
managements, employees and boards of directors. The twelve
FHLBanks, along with the Office of Finance (OF - the
FHLBanks fiscal agent) and the Federal Housing Finance
Agency (Finance Agency - the FHLBanks regulator) make
up the Federal Home Loan Bank System (FHLBank System). The
FHLBanks were organized under the authority of the Federal Home
Loan Bank Act of 1932, as amended (Act). The FHLBanks are
commonly referred to as government-sponsored enterprises (GSEs),
which generally means they are a combination of private capital
and public sponsorship. The public sponsorship attributes
include: (1) being exempt from federal, state and local
taxation, except real estate taxes; (2) being exempt from
registration under the Securities Act of 1933 (1933 Act)
(although the FHLBanks are required by Finance Agency regulation
and the Housing and Economic Recovery Act of 2008 (the Housing
Act) to register a class of their equity securities under the
Securities Exchange Act of 1934 (1934 Act)) and
(3) having a line of credit with the U.S. Treasury.
The Bank is a cooperative institution, owned by financial
institutions that are also its primary customers. Any building
and loan association, savings and loan association, commercial
bank, homestead association, insurance company, savings bank,
credit union or insured depository institution that maintains
its principal place of business in Delaware, Pennsylvania or
West Virginia and that meets varying requirements can apply for
membership in the
1
Bank. The Housing Act expanded membership to include Community
Development Financial Institutions (CDFIs). Pursuant to the
Housing Act, the Finance Agency has amended its membership
regulations to authorize non-federally insured CDFIs to become
members of an FHLBank. The newly eligible CDFIs would include
community development loan funds, venture capital funds and
state-chartered credit unions without federal insurance. The
regulation was effective February 4, 2010 and sets out the
eligibility and procedural requirements for CDFIs that wish to
become members of an FHLBank. All members are required to
purchase capital stock in the Bank as a condition of membership.
The capital stock of the Bank can be purchased only by members.
The Banks primary mission is to intermediate between the
capital markets and the housing market through member financial
institutions. The Bank provides credit for housing and community
development through two primary programs. First, it provides
members with loans against the security of residential mortgages
and other types of high-quality collateral. Second, the Bank
purchases residential mortgage loans originated by or through
member institutions. The Bank also offers other types of credit
and noncredit products and services to member institutions.
These include letters of credit, interest rate exchange
agreements (interest rate swaps, caps, collars, floors,
swaptions and similar transactions), affordable housing grants,
securities safekeeping, and deposit products and services. The
Bank issues debt to the public (consolidated obligation bonds
and discount notes) in the capital markets through the OF and
uses these funds to provide its member financial institutions
with a reliable source of credit for these programs. The
U.S. government does not guarantee the debt securities or
other obligations of the Bank or the FHLBank System.
The Bank is a GSE, chartered by Congress to assure the flow of
liquidity through its member financial institutions into the
American housing market. As a GSE, the Banks principal
strategic position has historically been derived from its
ability to raise funds in the capital markets at narrow spreads
to the U.S. Treasury yield curve. Typically, this
fundamental competitive advantage, coupled with the joint and
several cross-guarantee on FHLBank System debt, has
distinguished the Bank in the capital markets and has enabled it
to provide attractively priced funding to members. However, as
the financial crisis worsened in 2008, the spread between
FHLBank System debt and U.S. Treasury debt widened, making
it more difficult for the Bank to provide term funding to
members at attractive rates in the beginning of 2009. However,
during the last part of the first quarter of 2009 spreads
narrowed, allowing the Bank to offer more attractive pricing.
Though chartered by Congress, the Bank is privately capitalized
by its member institutions, which are voluntary participants in
its cooperative structure. The characterization of the Bank as a
voluntary cooperative with the status of a federal
instrumentality differentiates the Bank from a traditional
banking institution in three principal ways.
First, members voluntarily commit capital required for
membership principally in order to gain access to the funding
and other services provided by the Bank. The value in membership
may be derived from the access to liquidity and the availability
of favorably priced liquidity, as well as the potential for a
dividend on the capital investment.
Second, because the Banks customers and shareholders are
predominantly the same group of 318, normally there is a need to
balance the pricing expectations of customers with the dividend
expectations of shareholders, although both are the same
institutions. This is a challenge in the current economic
environment. By charging wider spreads on loans to customers,
the Bank could potentially generate higher earnings and
potentially dividends for shareholders. Yet these same
shareholders viewed as customers would generally prefer narrower
loan spreads. In normal market conditions, the Bank strives to
achieve a balance between the goals of providing liquidity and
other services to members at advantageous prices and potentially
generating a market-based dividend. The Bank typically does not
strive to maximize the dividend yield on the stock, but to
produce an earned dividend that compares favorably to short-term
interest rates, compensating members for the cost of the capital
they have invested in the Bank. As previously announced on
December 23, 2008, in an effort to build retained earnings
the Bank, on a voluntary basis, temporarily has suspended its
dividend payments until the Bank believes it is prudent to
restore them.
2
Third, the Bank is different from a traditional banking
institution because its GSE charter is based on a public policy
purpose to assure liquidity for housing and community
development and to enhance the availability of affordable
housing for lower-income households. In upholding its public
policy mission, the Bank offers a number of programs that
consume a portion of earnings that might otherwise become
available to its shareholders. The cooperative GSE character of
this voluntary membership organization leads management to
strive to optimize the primary purpose of membership, access to
funding, as well as the overall value of Bank membership.
In November 2008, the Bank experienced a significant increase in
its risk-based capital (RBC) requirements due to deterioration
in the market values of the Banks private label MBS. The
Bank was narrowly in compliance with its RBC requirement. As a
result, the Bank submitted an initial Capital Stabilization Plan
(CSP) to the Finance Agency on February 27, 2009. During
2009, there were numerous changes in the economic environment
affecting the Bank, including a change in Financial Accounting
Standards Board (FASB) guidance regarding
other-than-temporary
impairment (OTTI), significant downgrades of the Banks
private label MBS securities, and a larger than expected
decrease in advances. Collectively, these developments merited
an update of the CSP in late 2009. The CSP submitted to the
Finance Agency requests that the Bank not be required to
increase member capital requirements unless it becomes
significantly undercapitalized, which by definition would mean
the Bank meets less than 75% of its risk-based, total or
leverage capital requirements. As part of that effort, the Bank
has reviewed its risk governance structure, risk management
practices and expertise and has begun to make certain
enhancements. The most recent CSP was accepted by the Finance
Agency.
On August 4, 2009, the Finance Agency issued its final
Prompt Corrective Action Regulation (PCA Regulation)
incorporating the terms of the Interim Final Regulation issued
on January 30, 2009. On March 31, 2010, the Bank
received final notification from the Finance Agency that it was
considered adequately capitalized for the quarter ended
December 31, 2009. In its determination, the Finance Agency
expressed concerns regarding the Banks capital position
and earnings prospects. Retained earnings levels and poor
quality of the Banks private label MBS portfolio have
created uncertainties about the Banks ability to maintain
permanent capital above RBC requirements. As of the date of this
filing, the Bank has not received notice from the Finance Agency
regarding its capital classification for the quarter ended
March 31, 2010. The Bank was in compliance with its
risk-based, total and leverage capital requirements at
March 31, 2010, as discussed in detail in the Capital
Resources section of this Item 2. Managements
Discussion and Analysis of Financial Condition and Results of
Operations (Managements Discussion and Analysis) in the
quarterly report filed on this
Form 10-Q.
Advances
and Collateral
The Bank makes advances (loans to members and eligible nonmember
housing associates) on the security of pledged mortgage loans
and other eligible types of collateral. The Act requires the
Bank to obtain and maintain a security interest in eligible
collateral at the time it originates or renews a loan.
Advance Products. The Bank offers a number of
various loan products to its members. These products are
discussed in detail in the Advances discussion in
Item 1. Business in the Banks 2009 Annual Report
filed on
Form 10-K.
Collateral. The Bank provides members with
two options regarding collateral agreements: a blanket
collateral pledge agreement or a specific collateral pledge
agreement. Under a blanket agreement, the Bank obtains a lien
against all of the members unencumbered eligible
collateral assets and most ineligible collateral assets, to
secure the members obligations with the Bank. Under a
specific agreement, the Bank obtains a lien against the specific
eligible collateral assets of a member, to secure the
members obligations with the Bank. These agreements
require one of three types of collateral status: undelivered,
detailed listing or delivered status. Partial listing or
delivery requirements may also be assigned at the Banks
discretion. A member is assigned a collateral status based on
the Banks determination of the members current
financial condition and credit product usage, as well as other
information that may have been obtained. All collateral securing
advances is discounted to help protect the Bank from losses
resulting from a decline in the values of the collateral in
adverse market conditions and if the Bank had to take title to
the collateral and liquidate in a worst case scenario. Eligible
collateral value represents either book
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value or fair value of pledged collateral multiplied by the
applicable discounts. These discounts, also referred to as
collateral weightings, vary by collateral type and whether the
calculation is based on book value or fair value of the
collateral. They also typically include consideration for
estimated costs to sell or liquidate collateral and the risk of
a decline in the collateral value due to market or credit
volatility. The Bank reviews the collateral weightings
periodically and may adjust them for individual borrowers on a
case-by-case
basis. The Bank may also require different levels of collateral
reporting depending on the members current financial
condition, types of collateral pledged and credit product usage.
The reporting may take the form of detailed loan level listings
and/or a
Qualifying Collateral Report (QCR) filed on a quarterly or
monthly basis. A summary of the collateral weightings is
presented in detail in the tables entitled Lending Value
Assigned to the Collateral as a Percentage of Value in
Item 1. Business in the Banks 2009 Annual Report
filed on
Form 10-K.
As additional security for each members indebtedness, the
Bank has a statutory lien on the members capital stock in
the Bank.
The least restrictive collateral status, and the most widely
used by the Banks members, is the undelivered collateral
status. This status is generally assigned to lower risk
institutions pledging collateral. Under undelivered collateral
status, the Bank calculates and monitors the eligible collateral
using regulatory financial reports or QCRs, which are typically
submitted quarterly along with collateral certifications. At
March 31, 2010, nine of the Banks top ten borrowers
were in an undelivered collateral status and one was in a
delivery collateral status. The Bank also obtains detailed
listings on some of the pledged loan collateral on five of the
top ten borrowers.
Under the Banks policy, the Bank may require members to
provide a detailed listing of eligible advance collateral being
pledged to the Bank due to their high usage of Bank credit
products, the type of assets being pledged or the credit
condition of the member. This is referred to as detailed listing
collateral status. In this case, the member typically retains
physical possession of collateral pledged to the Bank but
provides a loan level listing of assets pledged. The loan level
listing includes the reporting characteristics on the individual
loan. Examples include loan amount, zip code, appraised amount
and FICO score. In some cases, the member may benefit by listing
collateral, in lieu of undelivered status, since it may result
in a higher collateral weighting being applied to the
collateral. The Bank benefits from listing collateral status
because it provides more loan information to calculate a more
precise valuation on the collateral. Typically, those members
with large, frequent borrowings are covered under listing status
with a blanket agreement.
The third collateral status used by the Banks members is
delivered, or in possession collateral status. In this case, the
Bank requires the member to physically deliver, or grant control
of, eligible collateral to the Bank, including through a third
party custodian for the Bank to sufficiently secure all
outstanding member obligations. Typically, the Bank would take
physical possession/control of collateral if the financial
condition of the member was deteriorating or if the member
exceeded certain credit product usage triggers. Delivery of
collateral may also be required if there is a regulatory action
taken against the member by its regulator that would indicate
inadequate controls or other conditions that would be of concern
to the Bank. Delivery collateral status may apply to both
blanket lien and specific agreements. The Bank requires delivery
to a restricted account of all securities pledged as collateral.
The Bank also requires delivery of collateral from de novo
institution members at least during their first two years of
operation.
With respect to specific collateral agreement borrowers
(typically housing finance agencies (HFAs) and insurance
companies), the Bank takes control of all collateral pledged at
the time the loan is made through the delivery of securities or
mortgage loans to the Bank or its custodian.
The Bank determines the type and amount of collateral each
member has available to pledge as security for Bank advances by
reviewing, on a quarterly basis, call reports the members file
with their primary banking regulators. Depending on a
members credit product usage and current financial
condition, that member may also be required to file a QCR on a
quarterly or monthly basis. The resulting total value of
collateral available to be pledged to the Bank after any
collateral weighting is referred to as a members maximum
borrowing capacity (MBC).
At March 31, 2010, the principal form of eligible
collateral to secure loans made by the Bank was single-family
residential mortgage loans, which included a very low amount of
manufactured housing loans. High-quality
4
securities, including U.S. Treasuries, U.S. agency
securities, GSE MBS, and select private label MBS, were also
accepted as collateral. FHLBank deposits and multi-family
residential mortgages, as well as other real estate related
collateral (ORERC), comprised the remaining portion of
qualifying collateral. See the Credit and Counterparty
Risk discussion in the Risk Management section of this
Item 2. Managements Discussion and Analysis in the
quarterly report filed on this
Form 10-Q
for further information on collateral policies and practices and
details regarding eligible collateral, including amounts and
percentages of eligible collateral securing member advances as
of March 31, 2010.
At March 31, 2010 and December 31, 2009, respectively,
on a
borrower-by-borrower
basis, the Bank had a perfected interest in eligible collateral
with an eligible collateral value (after collateral weightings)
in excess of the book value of all advances. Management believes
that adequate policies and procedures are in place to
effectively manage the Banks credit risk associated with
lending to members and nonmember housing associates.
Although subprime mortgages are no longer considered an eligible
collateral asset class by the Bank, it is possible that the Bank
may have subprime mortgages pledged as collateral through the
blanket-lien pledge.
Nationally, during the first three months of 2010, 41 Federal
Deposit Insurance Corporation (FDIC)−insured institutions
have failed. None of the FHLBanks have incurred any losses on
advances outstanding to these institutions. Although many of
these institutions were members of the System, none was a member
of the Bank.
Investments
The Bank maintains a portfolio of investments for three main
purposes: liquidity, collateral for derivative counterparties
and additional earnings. For liquidity purposes, the Bank
invests in shorter-term instruments, including overnight Federal
funds, to ensure the availability of funds to meet member
requests. In addition, the Bank invests in other short-term
instruments, including term Federal funds, interest-bearing
certificates of deposit and commercial paper. The Bank also
maintains a secondary liquidity portfolio, which includes
FDIC-guaranteed Temporary Liquidity Guarantee Program (TLGP)
investments, U.S. Treasury and agency securities that can
be financed under normal market conditions in securities
repurchase agreement transactions to raise additional funds.
U.S. Treasury securities are the primary source for
derivative counterparty collateral.
The Bank further enhances interest income by maintaining a
long-term investment portfolio, including securities issued by
GSEs and state and local government agencies as well as agency
and private label MBS. All private label MBS currently in the
portfolio, excluding the Shared Funding securities, were
required to carry the top rating from Moodys Investors
Service, Inc. (Moodys), Standard & Poors
(S&P) or Fitch Ratings (Fitch) at the time of purchase. The
long-term investment portfolio is intended to provide the Bank
with higher returns than those available in the short-term money
markets. Investment income also bolsters the Banks
capacity to meet its commitment to affordable housing and
community investment, to cover operating expenses, and to
satisfy its statutory Resolution Funding Corporation (REFCORP)
assessment.
See the Credit and Counterparty Risk
Investments discussion in Risk Management in this
Item 2. Managements Discussion and Analysis in the
quarterly report filed on this
Form 10-Q
for discussion of the credit risk of the investment portfolio,
including OTTI charges, and further information on these
securities current ratings.
The Bank does not consolidate any off-balance sheet
special-purpose entities or other conduits.
Mortgage
Partnership Finance (MPF) Program
The Bank participates in the Mortgage Partnership Finance
(MPF®)
Program under which the Bank invests in qualifying 5- to
30-year
conventional conforming and government-insured fixed-rate
mortgage loans secured by
one-to-four
family residential properties.
5
The Bank currently offers three products under the MPF Program
to Participating Financial Institutions (PFIs): Original MPF,
MPF Government and MPF Xtra. Further details regarding the
credit risk structure for each of the products, as well as
additional information regarding the MPF Program and the
products offered by the Bank is provided in the Mortgage
Partnership Finance Program section in Item 7.
Managements Discussion and Analysis in the Banks
2009 Annual Report filed on
Form 10-K.
The Bank held approximately $5.0 billion and
$5.1 billion in mortgage loans at par under the MPF Program
at March 31, 2010 and December 31, 2009, respectively.
These balances represented approximately 8.4% and 7.8% of total
assets at March 31, 2010 and December 31, 2009,
respectively. Mortgage loans contributed approximately 25.9% and
16.1% of total interest income for first quarter 2010 and 2009,
respectively. While interest income on mortgage loans dropped
17.1% in the
quarter-over-quarter
comparison, the Banks total interest income decreased
48.5%. Total interest income decreased more rapidly than
interest income on mortgage loans as the Bank had significant
funds invested in short-term assets, which experienced sharp
rate declines in the
quarter-over-quarter
comparison.
As of March 31, 2010, 35 PFIs were eligible to participate
in the MPF Xtra program. Of these, 10 have sold
$12.4 million of mortgage loans through the MPF Xtra
program
year-to-date.
Effective July 15, 2009, the Bank introduced a temporary
loan payment modification plan (loan modification plan) for
participating PFIs, which will be available until
December 31, 2011 unless further extended by the MPF
Program. Borrowers with conventional loans secured by their
primary residence, which were closed prior to January 1,
2009 are eligible for the loan modification plan. This plan
pertains to borrowers currently in default or in imminent danger
of default. In addition, there are specific eligibility
requirements that must be met and procedures that the PFIs must
follow to participate in the loan modification plan. Applicants
are initially under a
90-day trial
period prior to final approval of the loan modification. As of
March 31, 2010, there have been minimal requests for loan
modifications under this loan modification plan; these
modifications are still in the
90-day trial
period.
The FHLBank of Chicago, in its role as MPF Provider, provides
the programmatic and operational support for the MPF Program and
is responsible for the development and maintenance of the
origination, underwriting and servicing guides.
Mortgage Partnership Finance, MPF and
MPF Extra are registered trademarks of the FHLBank
of Chicago.
Debt
Financing Consolidated Obligations
The primary source of funds for the Bank is the sale of debt
securities, known as consolidated obligations. These
consolidated obligations are issued as both bonds and discount
notes, depending on maturity. Consolidated obligations are the
joint and several obligations of the FHLBanks, backed by the
financial resources of the twelve FHLBanks. Consolidated
obligations are not obligations of the U.S. government, and
the U.S. government does not guarantee them. The OF has
responsibility for issuing and servicing consolidated
obligations on behalf of the FHLBanks. On behalf of the Bank,
the OF issues bonds that the Bank uses primarily to provide
advances. The Bank also uses bonds to fund the MPF Program and
its investment portfolio. Typically, the maturity of these bonds
ranges from one year to ten years, but the maturity is not
subject to any statutory or regulatory limit. The OF also sells
discount notes to provide short-term funds to the FHLBanks. The
Bank uses these funds to provide loans to members for seasonal
and cyclical fluctuations in savings flows and mortgage
financing, short-term investments, and other funding needs.
Discount notes are sold at a discount and mature at par. These
securities have maturities of up to 365 days.
See the Liquidity and Funding Risk discussion in the
Risk Management section of Managements Discussion and
Analysis in the quarterly report filed on this
Form 10-Q
and the Current Financial and Mortgage Market Events and
Trends discussion below for further information regarding
consolidated obligations and related liquidity risk.
6
Current
Financial and Mortgage Market Events and Trends
Conditions in the Financial
Markets. Government programs put in place in 2008
worked throughout 2009 to create more confidence in the credit
markets and helped to get capital flowing once again. As
financial conditions have shown some improvement and as further
evidence of the stabilization of the credit markets, the Federal
Reserve has substantially phased out the lending programs
activated during the crisis without significant effect on the
markets. Some were closed over the course of 2009, and most
others expired on February 1, 2010. Total credit
outstanding under all programs, including the regular discount
window, has fallen sharply from a peak of approximately $1.5
trillion at year-end 2008 to approximately $71 billion at
mid-March 2010. The Term Auction Facility, under which fixed
amounts of discount window credit were auctioned to depository
institutions, was discontinued in March 2010. Reflecting notably
better conditions in many markets for ABS, the Term Asset-Backed
Securities Loan Facility (TALF) closed on March 31, 2010
for securities backed by all types of collateral except newly
issued commercial MBS (CMBS) and will close on June 30,
2010 for securities backed by newly issued CMBS. The later
scheduled closing of the CMBS portion of the facility reflects
the Federal Reserve Boards (Federal Reserves)
assessment that conditions in that sector remain highly
stressed, as well as the fact that CMBS securitizations are more
complex and take longer to complete than other types of
arrangements.
Renewed economic growth, particularly employment growth, remains
uncertain. The unemployment rate remained at 9.7% in March 2010,
but the nation added 162,000 nonfarm jobs, the largest one-month
gain in three years. The job growth was below what economists
were predicting, but the government hired fewer census workers
than expected and the economic recovery continues to be slow.
Given the current economic environment, the financial
performance of the Bank has been significantly affected, mainly
due to OTTI charges on the private label MBS portfolio. The Bank
recognizes this will be an ongoing challenge throughout the
remainder of 2010. Additional material credit-related OTTI
charges have occurred in the first quarter and could be expected
throughout the year. The specific amount of credit-related OTTI
charges will depend on several factors, including economic,
financial market and housing market conditions and the actual
and projected performance of the loan collateral underlying the
Banks MBS. If delinquency
and/or loss
rates on mortgages
and/or home
equity loans continue to increase,
and/or there
is a further decline in residential real estate values, the Bank
could experience further material credit-related OTTI losses or
reduced yields on these investment securities.
First Quarter 2010. Credit markets continued
to trend toward stability through first quarter 2010. In
addition, the FHLBanks continued to have access to the capital
markets. While GDP showed promising growth towards the end of
2009, first quarter 2010 may see a slowing of GDP growth.
Specific
Program Activity
Federal Reserve Bank of New York (FRBNY). In
early February 2010, the Federal Reserve Bank of New York
(FRBNY) announced the scheduled expiration of several lending
programs. These programs included the Commercial Paper Funding
Facility (CPFF), the Primary Dealer Credit Facility (PDCF), and
the Term Securities Lending Facility (TSLF), each of which
expired on February 1, 2010. The expiration of these
programs does not appear to have had a major effect on the
agency debt markets.
Furthermore, the Federal Reserves purchasing of agency
debt and agency mortgage-backed securities ended during the
first quarter of 2010. During the quarter, the Federal Reserve
purchased $12.2 billion in debt issued by the housing GSEs,
including $3.2 billion in FHLBank mandated Global bullet
bonds. The Federal Reserve purchased a total of
$172.1 billion in agency debt securities while the program
was in effect; this was just shy of the $175 billion
committed to the purchase of agency debt under the program. The
Federal Reserve also purchased $207 billion in gross agency
MBS during the first quarter of 2010. From the programs
inception to its expiration, the Federal Reserves total
net purchases of agency MBS equaled $1.25 trillion, the amount
originally committed to the purchase of MBS under the program.
7
Fannie Mae and Freddie Mac. On
December 24, 2009, the U.S. Treasury had announced
modifications to the Preferred Stock Purchase Agreements with
Fannie Mae and Freddie Mac, including an increased capacity to
absorb losses from the housing GSEs beyond the original
$200 billion per agency and a portfolio cap of
$900 billion for each institution which will shrink by
10 percent each year. These modifications replaced the
requirement to reduce the actual portfolio amounts by
10 percent each year starting in 2010. These modifications
were fully implemented in first quarter 2010.
Also during the first quarter of 2010, Fannie Mae and Freddie
Mac announced plans to purchase loans that are at least
120 days delinquent out of mortgage pools. The initial
purchases are slated to occur from February 2010 through May
2010, with additional delinquency purchases as needed
thereafter. As Fannie Mae and Freddie Mac may need to raise
additional funds to complete these loan purchases, funding costs
in the short-end of the agency debt market may continue to be
affected.
Consolidated Obligations of the
FHLBanks. During the first quarter of 2010, the
FHLBanks issued $154 billion of consolidated bonds, just
$2.4 billion more than during the fourth quarter of 2009.
However, weighted-average bond funding costs decreased
significantly during the first quarter of 2010, with March 2010
witnessing the lowest weighted-average monthly spreads to London
Interbank Offered Rate (LIBOR) since February 2009. Swapped
funding levels have been driven lower by a variety of factors,
including recent spread compression of the swap curve. During
the first quarter of 2010, the FHLBanks relied heavily on
swapped negotiated callable bonds, floating-rate bonds and
step-up
callable bonds. In 2010, the FHLBanks continued to use an
issuance calendar for FHLBank mandated Global bullet bond
pricing; as such, the FHLBanks issued a $1 billion
reopening of the most recent two-year mandated Global bullet
bond in January 2010, issued $3 billion of a new,
three-year mandated Global bullet bond in February 2010, and
issued $3 billion of a new, two-year mandated Global bond
in March 2010.
The FHLBanks consolidated obligations outstanding
continued to shrink during the first quarter of 2010. Although
consolidated obligations outstanding increased slightly in early
January 2010, they soon reversed course, and through the first
quarter of 2010, have decreased approximately $60 billion
since year-end 2009, to $871 billion at March 31,
2010. Contrary to the fourth quarter of 2009, this decline was
caused primarily by a decline in consolidated bonds outstanding,
which fell $49 billion, while consolidated discount notes
dropped $10 billion. The drop in consolidated bonds
outstanding may be attributed in part to increased consolidated
bond redemptions during the first quarter of 2010. During this
period, consolidated bond maturities were $127 billion and
consolidated bond calls were $70.5 billion.
Primary dealer inventories of agency discount notes and bonds
increased during the first quarter of 2010, compared to year-end
2009. During the first quarter of 2010, agency discount note
inventories increased $4 billion, to $16 billion, and
agency bond inventories increased $6 billion, to
$62 billion. However, similar to the previous two calendar
quarters, dealer inventories increased during the quarter and
then decreased toward the end of the quarter. During the first
quarter of 2010, dealer inventories of agency discount notes
were as high as $38 billion in early March 2010 and dealer
inventories of agency bonds were as high as $83 billion in
mid-February 2010.
On a stand-alone basis, the Banks total consolidated
obligations declined $6.8 billion or 11.5% since year end
2009. Discount notes accounted for 19.0% and 17.2% of the
Banks total consolidated obligations at March 31,
2010 and December 31, 2009, respectively. Total bonds
decreased 13.4% in the same comparison, but comprised a smaller
percentage of the total debt portfolio, decreasing from 82.8% at
December 31, 2009 to 81.0% at March 31, 2010.
Foreign Official Holdings and Money
Fund Assets. Overall, foreign investor
holdings of agencies (both debt and MBS), as reported by the
Federal Reserve System, were flat to lower for much of the first
quarter of 2010, but started to increase in late February 2010,
closing the quarter up $10 billion compared to year-end
2009.
On March 4, 2010, in the Federal Register, the SEC
published its final rule on money market fund reform. The rule
became effective on May 5, 2010, with certain aspects of
the rule phased in over the remainder of 2010. In its
8
final rule, the SEC included FHLBank consolidated discount notes
with remaining maturities of 60 days or less in its
definition of weekly liquid assets, which should help maintain
investor demand for shorter-term FHLBank consolidated discount
notes. However, this new rule, combined with shrinking yields in
the money market sector, have driven investors to seek riskier
investment categories that offer a higher rate of return. As
such, taxable money market fund assets declined
$276 billion during the first quarter of 2010. As a subset
of those assets, taxable money market fund investments allocated
to the U.S. Other Agency category have also declined,
dropping an additional $68 billion since year-end 2009.
Interest Rate Trends. The Banks net
interest income is affected by several external factors,
including market interest rate levels and volatility, credit
spreads and the general state of the economy. Interest rates
prevailing during any reporting period affect the Banks
profitability for that reporting period. A portion of the
Banks advances have been hedged with interest-rate
exchange agreements in which a short-term, variable rate is
received. Interest rates also directly affect the Bank through
earnings on invested capital. Generally, due to the Banks
cooperative structure, the Bank earns relatively narrow net
spreads between the yield on assets and the cost of
corresponding liabilities.
The following table presents key market interest rates for the
periods indicated (obtained from Bloomberg L.P.).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st
Quarter
|
|
|
4th
Quarter
|
|
|
1st
Quarter
|
|
|
1st
Quarter
|
|
|
4th
Quarter
|
|
|
1st
Quarter
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
Target overnight Federal funds rate
|
|
|
|
0.25
|
%
|
|
|
|
0.25
|
%
|
|
|
|
0.25
|
%
|
|
|
|
0.25
|
%
|
|
|
|
0.25
|
%
|
|
|
|
0.25
|
%
|
3-month
LIBOR(1)
|
|
|
|
0.26
|
%
|
|
|
|
0.27
|
%
|
|
|
|
1.24
|
%
|
|
|
|
0.29
|
%
|
|
|
|
0.25
|
%
|
|
|
|
1.19
|
%
|
2-yr U.S. Treasury
|
|
|
|
0.91
|
%
|
|
|
|
0.87
|
%
|
|
|
|
0.89
|
%
|
|
|
|
1.02
|
%
|
|
|
|
1.14
|
%
|
|
|
|
0.80
|
%
|
5-yr. U.S. Treasury
|
|
|
|
2.41
|
%
|
|
|
|
2.29
|
%
|
|
|
|
1.75
|
%
|
|
|
|
2.55
|
%
|
|
|
|
2.68
|
%
|
|
|
|
1.66
|
%
|
10-yr. U.S. Treasury
|
|
|
|
3.70
|
%
|
|
|
|
3.45
|
%
|
|
|
|
2.70
|
%
|
|
|
|
3.83
|
%
|
|
|
|
3.84
|
%
|
|
|
|
2.67
|
%
|
15-yr. mortgage current
coupon(2)
|
|
|
|
3.54
|
%
|
|
|
|
3.52
|
%
|
|
|
|
3.74
|
%
|
|
|
|
3.62
|
%
|
|
|
|
3.78
|
%
|
|
|
|
3.59
|
%
|
30-yr. mortgage current
coupon(2)
|
|
|
|
4.40
|
%
|
|
|
|
4.28
|
%
|
|
|
|
4.13
|
%
|
|
|
|
4.52
|
%
|
|
|
|
4.57
|
%
|
|
|
|
3.89
|
%
|
Note:
(1)LIBOR -
London Interbank Offered Rate
(2)Simple
average of Fannie Mae and Freddie Mac mortgage-backed securities
current coupon rates.
Lehman Brothers Holding, Inc. (Lehman) and Lehman Brothers
Special Financing, Inc. On September 15, 2008,
Lehman filed for bankruptcy. At that time, Lehmans
subsidiary, Lehman Brothers Special Financing, Inc. (LBSF) was
the Banks largest derivatives counterparty, with a total
of 595 outstanding derivative trades having a total notional
value of $16.3 billion. Lehman was a guarantor under the
Banks agreement with LBSF such that Lehmans
bankruptcy filing triggered an event of default. The Bank posted
cash collateral to secure its exposure to Lehman on its
derivative transactions. As a result of the bankruptcy filing,
the Bank evaluated the outstanding trades it had with LBSF to
assess which individual derivatives were most important to the
Banks overall risk position. Of the 595 trades, 63
represented approximately half of the total LBSF notional value
and almost 100% of the base case duration impact of the LBSF
portfolio. Therefore, the Bank elected to enter into
63 identical new trades with different counterparties on
September 18, 2008.
Management determined that it was in the Banks best
interest to declare an event of default and designate
September 19, 2008 as the early termination date of the
Banks agreement with LBSF, as provided for in the
agreement. Accordingly, all LBSF derivatives were legally
terminated at that time and the Bank began the process of
obtaining third party quotes for all of the derivatives in order
to settle its position with LBSF in accordance with the
International Swaps Dealers Association, Inc. (ISDA) Master
Agreement (Master Agreement). The Bank sent a final settlement
notice to LBSF and demanded return of the balance of posted Bank
collateral, which, including
9
dealer quotes for all trades, the collateral position, and the
applicable accrued interest netted to an approximate
$41.5 million receivable from LBSF.
The Bank filed an adversary proceeding against LBSF to return
the cash collateral posted by the Bank associated with the
derivative contracts. In its 2008 Annual Report filed on
Form 10-K,
the Bank disclosed that it was probable that a loss has been
incurred with respect to this receivable. However, the Bank had
not recorded a reserve with respect to the receivable from LBSF
because the Bank was unable to reasonably estimate the amount of
loss that had been incurred. Continuing developments in the
adversary proceeding occurred during 2009. The discovery phase
of the adversary proceeding began, which has provided management
information related to its claim. Based on this information,
managements most probable estimated loss was
$35.3 million and a reserve was recorded in the first
quarter of 2009. As of March 31, 2010, the Bank maintained
a $35.3 million reserve on this receivable as this remains
the most probable estimated loss.
During discovery in the Banks adversary proceeding against
LBSF, the Bank learned that the Banks posted collateral
was held in a general operating account of LBSF the balances of
which were routinely swept to other Lehman Brother entities,
including Lehman Brothers Holdings, Inc. among others.
The Bank filed a complaint against Lehman Brothers Holding Inc.,
Lehman Brothers, Inc., Lehman Brothers Commercial Corporation,
Woodlands Commercial Bank, formerly known as Lehman Brothers
Commercial Bank, and Aurora Bank FSB (Aurora), formerly known as
Lehman Brothers Bank FSB, alleging unjust enrichment,
constructive trust, and conversion claims. Aurora is a member of
the Bank. Aurora did not hold more than five percent of the
Banks capital stock as of March 31, 2010.
See Item 3. Legal Proceedings in the Banks 2009
Annual Report filed on
Form 10-K
for additional information concerning the adversary proceedings
discussed above.
Mortgage-Based Assets and Related Trends. The
Bank is also heavily affected by the residential mortgage market
through the collateral securing member loans and holdings of
mortgage-related assets. As of March 31, 2010, 55.7% of the
Banks eligible collateral value, after collateral
weightings, was concentrated in 1-4 single family residential
mortgage loans or multi-family residential mortgage loans,
compared with 56.1% at December 31, 2009. The remaining
44.3% at March 31, 2010 was concentrated in other real
estate-related collateral and high quality investment
securities, compared to 43.9% at December 31, 2009. For the
top ten borrowers, 1-4 single family residential mortgage loans
or multi-family residential mortgage loans accounted for 59.2%
of total eligible collateral, after collateral weightings, at
March 31, 2010, compared to 59.3% at December 31,
2009. The remaining 40.8% at March 31, 2010 was
concentrated in other real estate-related collateral and high
quality investment securities, compared to 40.7% at
December 31, 2009. Due to collateral policy changes
implemented in third quarter 2009, the mix of collateral types
within the total portfolio shifted. The requirement to deliver
all securities pledged as collateral, as well as refinements in
collateral reporting and tracking made through the Qualifying
Collateral Report (QCR) process, impacted the concentration of
collateral types by category.
With respect to the investment portfolio, as of March 31,
2010 the Banks private label MBS portfolio represented
9.6% of total assets, while net mortgage loans held for
portfolio represented 8.5% of total assets. At December 31,
2009, the comparable percentages were 9.1% and 7.9%,
respectively.
The Bank continues to have high concentrations of its advance
portfolio outstanding to its top ten borrowers. The Banks
advance portfolio declined $4.4 billion, or 10.6%, from
December 31, 2009 to March 31, 2010, as members
de-levered, increased deposits and utilized government programs
aimed at improving liquidity. Also, many of the Banks
members may have reacted to the Banks temporary actions of
not paying dividends and not repurchasing excess capital stock
by limiting their use of the Banks advance products.
See the Credit and Counterparty Risk and
Market Risk discussions in the Risk Management
section of this Item 2. Managements Discussion and
Analysis in the quarterly report filed on this
Form 10-Q
for information related to derivative counterparty risk and
overall market risk of the Bank.
10
Financial
Highlights
The Statement of Operations data for the three months ended
March 31, 2010 and the Condensed Statement of Condition
data as of March 31, 2010 are unaudited and were derived
from the financial statements included in the quarterly report
filed on this
Form 10-Q
. The Condensed Statement of Condition data as of
December 31, 2009 was derived from the audited financial
statements in the Banks 2009 Annual Report filed on
Form 10-K.
The Statement of Operations data for the three months ended
December 31, 2009 is unaudited and was derived from the
Banks 2009 Annual Report filed on
Form 10-K.
The Statement of Operations and Statement of Condition data for
all other interim quarterly periods is unaudited and was derived
from the applicable quarterly reports filed on
Form 10-Q.
Statement
of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
(in millions, except per share data)
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
Net interest income before provision (benefit)
for credit losses
|
|
|
$
|
59.0
|
|
|
|
$
|
64.2
|
|
|
|
$
|
67.5
|
|
|
|
$
|
75.9
|
|
|
|
$
|
56.4
|
|
Provision (benefit) for credit losses
|
|
|
|
(0.1
|
)
|
|
|
|
(5.5
|
)
|
|
|
|
1.4
|
|
|
|
|
1.1
|
|
|
|
|
0.4
|
|
Other income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net OTTI losses
|
|
|
|
(27.6
|
)
|
|
|
|
(65.4
|
)
|
|
|
|
(93.3
|
)
|
|
|
|
(39.3
|
)
|
|
|
|
(30.5
|
)
|
Net gains (losses) on derivatives and hedging activities
|
|
|
|
(4.6
|
)
|
|
|
|
5.3
|
|
|
|
|
(4.5
|
)
|
|
|
|
12.4
|
|
|
|
|
(1.2
|
)
|
Net realized losses on
available-
for-sale
securities
|
|
|
|
-
|
|
|
|
|
(2.2
|
)
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
Net realized gains on
held-to-maturity
securities
|
|
|
|
-
|
|
|
|
|
1.8
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
Contingency reserve
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
(35.3
|
)
|
All other income
|
|
|
|
2.7
|
|
|
|
|
2.9
|
|
|
|
|
4.5
|
|
|
|
|
2.5
|
|
|
|
|
2.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other loss
|
|
|
|
(29.5
|
)
|
|
|
|
(57.6
|
)
|
|
|
|
(93.3
|
)
|
|
|
|
(24.4
|
)
|
|
|
|
(64.4
|
)
|
Other expense
|
|
|
|
16.2
|
|
|
|
|
17.6
|
|
|
|
|
16.2
|
|
|
|
|
15.3
|
|
|
|
|
15.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before assessments
|
|
|
|
13.4
|
|
|
|
|
(5.5
|
)
|
|
|
|
(43.4
|
)
|
|
|
|
35.1
|
|
|
|
|
(23.6
|
)
|
Assessments
|
|
|
|
3.5
|
|
|
|
|
-
|
|
|
|
|
(3.0
|
)
|
|
|
|
3.0
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
$
|
9.9
|
|
|
|
$
|
(5.5
|
)
|
|
|
$
|
(40.4
|
)
|
|
|
$
|
32.1
|
|
|
|
$
|
(23.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share
(1)
|
|
|
$
|
0.25
|
|
|
|
$
|
(0.14
|
)
|
|
|
$
|
(1.01
|
)
|
|
|
$
|
0.80
|
|
|
|
$
|
(0.59
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
Weighted average dividend rate
(2)
|
|
|
|
n/a
|
|
|
|
|
n/a
|
|
|
|
|
n/a
|
|
|
|
|
n/a
|
|
|
|
|
n/a
|
|
Dividend payout ratio
(3)
|
|
|
|
n/a
|
|
|
|
|
n/a
|
|
|
|
|
n/a
|
|
|
|
|
n/a
|
|
|
|
|
n/a
|
|
Return on average equity
|
|
|
|
1.07
|
%
|
|
|
|
(0.61
|
)%
|
|
|
|
(4.39
|
)%
|
|
|
|
3.31
|
%
|
|
|
|
(2.30
|
)%
|
Return on average assets
|
|
|
|
0.06
|
%
|
|
|
|
(0.03
|
)%
|
|
|
|
(0.23
|
)%
|
|
|
|
0.16
|
%
|
|
|
|
(0.11
|
)%
|
Net interest margin
(4)
|
|
|
|
0.37
|
%
|
|
|
|
0.38
|
%
|
|
|
|
0.38
|
%
|
|
|
|
0.38
|
%
|
|
|
|
0.26
|
%
|
Regulatory capital ratio
(5)
|
|
|
|
7.57
|
%
|
|
|
|
6.76
|
%
|
|
|
|
6.64
|
%
|
|
|
|
5.83
|
%
|
|
|
|
5.29
|
%
|
Total capital ratio (at period-end)
(6)
|
|
|
|
6.54
|
%
|
|
|
|
5.69
|
%
|
|
|
|
5.36
|
%
|
|
|
|
4.59
|
%
|
|
|
|
4.61
|
%
|
Total average equity to average assets
|
|
|
|
5.88
|
%
|
|
|
|
5.45
|
%
|
|
|
|
5.17
|
%
|
|
|
|
4.88
|
%
|
|
|
|
4.74
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes:
|
|
|
(1) |
|
Earnings (loss) per share
calculated based on net income (loss).
|
|
|
(2) |
|
Weighted average dividend rates are
calculated as annualized dividends paid in the period divided by
the average capital stock balance outstanding during the period
on which the dividend is based.
|
|
|
(3) |
|
Dividend payout ratio is dividends
declared in the period as a percentage of net income (loss) in
the period.
|
|
|
(4) |
|
Net interest margin is net interest
income before provision (benefit) for credit losses as a
percentage of average interest-earning assets.
|
|
|
(5) |
|
Regulatory capital ratio is the
total of period-end capital stock, mandatorily redeemable
capital stock, retained earnings and allowance for loan losses
as a percentage of total assets at period-end.
|
|
|
(6) |
|
Total capital ratio is capital
stock plus retained earnings and accumulated other comprehensive
income (loss), in total at period-end, as a percentage of total
assets at period-end.
|
11
Condensed
Statement of Condition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
(in millions)
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
Cash and due from banks
|
|
|
$
|
251.6
|
|
|
|
$
|
1,418.8
|
|
|
|
$
|
373.3
|
|
|
|
$
|
69.6
|
|
|
|
$
|
68.7
|
|
Investments
(1)
|
|
|
|
16,241.0
|
|
|
|
|
17,173.5
|
|
|
|
|
19,039.9
|
|
|
|
|
24,444.3
|
|
|
|
|
24,525.4
|
|
Advances
|
|
|
|
36,823.8
|
|
|
|
|
41,177.3
|
|
|
|
|
41,363.4
|
|
|
|
|
45,799.6
|
|
|
|
|
52,260.3
|
|
Mortgage loans held for portfolio, net
(2)
|
|
|
|
4,991.2
|
|
|
|
|
5,162.8
|
|
|
|
|
5,339.1
|
|
|
|
|
5,607.5
|
|
|
|
|
5,922.4
|
|
Prepaid REFCORP assessment
|
|
|
|
37.2
|
|
|
|
|
39.6
|
|
|
|
|
39.6
|
|
|
|
|
37.5
|
|
|
|
|
39.6
|
|
Total assets
|
|
|
|
58,656.0
|
|
|
|
|
65,290.9
|
|
|
|
|
66,510.5
|
|
|
|
|
76,401.6
|
|
|
|
|
83,294.8
|
|
Consolidated obligations, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount notes
|
|
|
|
9,990.4
|
|
|
|
|
10,208.9
|
|
|
|
|
11,462.5
|
|
|
|
|
15,538.1
|
|
|
|
|
14,381.9
|
|
Bonds
|
|
|
|
42,477.1
|
|
|
|
|
49,103.9
|
|
|
|
|
49,022.3
|
|
|
|
|
54,090.5
|
|
|
|
|
61,831.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated obligations, net
(3)
|
|
|
|
52,467.5
|
|
|
|
|
59,312.8
|
|
|
|
|
60,484.8
|
|
|
|
|
69,628.6
|
|
|
|
|
76,213.1
|
|
Deposits and other borrowings
|
|
|
|
1,418.4
|
|
|
|
|
1,284.3
|
|
|
|
|
1,023.8
|
|
|
|
|
2,097.2
|
|
|
|
|
1,899.0
|
|
Mandatorily redeemable capital stock
|
|
|
|
8.3
|
|
|
|
|
8.3
|
|
|
|
|
8.2
|
|
|
|
|
8.2
|
|
|
|
|
8.0
|
|
AHP payable
|
|
|
|
22.1
|
|
|
|
|
24.5
|
|
|
|
|
28.0
|
|
|
|
|
32.7
|
|
|
|
|
36.1
|
|
REFCORP payable
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
Capital stock putable
|
|
|
|
4,035.1
|
|
|
|
|
4,018.0
|
|
|
|
|
4,013.1
|
|
|
|
|
4,007.1
|
|
|
|
|
3,999.2
|
|
Retained earnings
|
|
|
|
398.9
|
|
|
|
|
389.0
|
|
|
|
|
394.5
|
|
|
|
|
434.9
|
|
|
|
|
402.8
|
|
AOCI
|
|
|
|
(596.0
|
)
|
|
|
|
(693.9
|
)
|
|
|
|
(845.2
|
)
|
|
|
|
(938.1
|
)
|
|
|
|
(560.2
|
)
|
Total capital
|
|
|
|
3,838.0
|
|
|
|
|
3,713.1
|
|
|
|
|
3,562.4
|
|
|
|
|
3,503.9
|
|
|
|
|
3,841.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes:
|
|
|
(1) |
|
Includes trading,
available-for-sale
and
held-to-maturity
investment securities, Federal funds sold, and interest-bearing
deposits. None of these securities were purchased under
agreements to resell.
|
|
(2) |
|
Includes allowance for loan losses
of $2.9 million, $2.7 million, $7.5 million,
$6.3 million and $5.5 million at March 31, 2010,
December 31, 2009, September 30, 2009, June 30,
2009 and March 31, 2009, respectively.
|
|
(3) |
|
Aggregate FHLBank System-wide
consolidated obligations (at par) were $870.9 billion,
$930.6 billion, $1.0 trillion, $1.1 trillion and $1.1
trillion at March 31, 2010, December 31, 2009,
September 30, 2009, June 30, 2009 and March 31,
2009, respectively.
|
12
Because of the nature of (1) the contingency reserve
resulting from the Lehman-related transactions and (2) the
OTTI charges recorded during the three months ended
March 31, 2010 and 2009, the Bank believes that the
presentation of adjusted non-GAAP financial measures below
provides a greater understanding of ongoing operations and
enhances comparability of results with prior periods.
Statement
of Operations
Reconciliation of GAAP Earnings to Adjusted Earnings to
Exclude Impact of
Lehman-Related Transactions, Net OTTI Charges and Related
Assessments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Three Months Ended March 31, 2010
|
|
|
|
GAAP
|
|
Lehman
|
|
OTTI
|
|
Adjusted
|
(in millions)
|
|
|
Earnings
|
|
Impact
|
|
Charges
|
|
Earnings
|
Net interest income before provision (benefit)
for credit losses
|
|
|
$
|
59.0
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
59.0
|
|
Benefit for credit losses
|
|
|
|
(0.1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(0.1
|
)
|
Other income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net OTTI losses
|
|
|
|
(27.6
|
)
|
|
|
-
|
|
|
|
27.6
|
|
|
|
-
|
|
Net losses on derivatives and
hedging activities
|
|
|
|
(4.6
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(4.6
|
)
|
All other income
|
|
|
|
2.7
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (loss)
|
|
|
|
(29.5
|
)
|
|
|
|
|
|
|
27.6
|
|
|
|
(1.9
|
)
|
Other expense
|
|
|
|
16.2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before assessments
|
|
|
|
13.4
|
|
|
|
-
|
|
|
|
27.6
|
|
|
|
41.0
|
|
Assessments
|
|
|
|
3.5
|
|
|
|
-
|
|
|
|
7.4
|
|
|
|
10.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
$
|
9.9
|
|
|
$
|
-
|
|
|
$
|
20.2
|
|
|
$
|
30.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
$
|
0.25
|
|
|
$
|
-
|
|
|
$
|
0.50
|
|
|
$
|
0.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average equity
|
|
|
|
1.07
|
%
|
|
|
-
|
|
|
|
2.18
|
%
|
|
|
3.25
|
%
|
Return on average assets
|
|
|
|
0.06
|
%
|
|
|
-
|
|
|
|
0.13
|
%
|
|
|
0.19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Three Months Ended March 31, 2009
|
|
|
|
GAAP
|
|
Lehman
|
|
OTTI
|
|
Adjusted
|
(in millions)
|
|
|
Earnings
|
|
Impact
|
|
Charges
|
|
Earnings
|
Net interest income before provision for credit losses
|
|
|
$
|
56.4
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
56.4
|
|
Provision for credit losses
|
|
|
|
0.4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0.4
|
|
Other income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net OTTI losses
|
|
|
|
(30.5
|
)
|
|
|
-
|
|
|
|
30.5
|
|
|
|
-
|
|
Net losses on derivatives and
hedging activities
|
|
|
|
(1.2
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1.2
|
)
|
Contingency reserve
|
|
|
|
(35.3
|
)
|
|
|
35.3
|
|
|
|
-
|
|
|
|
-
|
|
All other income
|
|
|
|
2.6
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (loss)
|
|
|
|
(64.4
|
)
|
|
|
35.3
|
|
|
|
30.5
|
|
|
|
1.4
|
|
Other expense
|
|
|
|
15.2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before assessments
|
|
|
|
(23.6
|
)
|
|
|
35.3
|
|
|
|
30.5
|
|
|
|
42.2
|
|
Assessments
(1)
|
|
|
|
-
|
|
|
|
6.0
|
|
|
|
5.2
|
|
|
|
11.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
$
|
(23.6
|
)
|
|
$
|
29.3
|
|
|
$
|
25.3
|
|
|
$
|
31.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share
|
|
|
$
|
(0.59
|
)
|
|
$
|
0.73
|
|
|
$
|
0.64
|
|
|
$
|
0.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average equity
|
|
|
|
(2.30
|
)%
|
|
|
2.86
|
%
|
|
|
2.46
|
%
|
|
|
3.02
|
%
|
Return on average assets
|
|
|
|
(0.11
|
)%
|
|
|
0.14
|
%
|
|
|
0.11
|
%
|
|
|
0.14
|
%
|
Notes:
|
|
|
(1) |
|
Assessments on the Lehman impact
and OTTI charges were prorated based on the required adjusted
earnings assessment expense to take into account the impact of
the first quarter 2009 GAAP net loss.
|
13
For further information regarding the Lehman-related
transactions, see the Current Financial and Mortgage
Market Events and Trends discussion in Earnings
Performance in Item 7. Managements Discussion and
Analysis in the Banks 2009 Annual Report filed on
Form 10-K.
For additional information on OTTI, see Critical Accounting
Policies and Risk Management, both in Item 7.
Managements Discussion and Analysis, and Note 8 to
the audited financial statements in Item 8. Financial
Statements and Supplementary Financial Data, all in the
Banks 2009 Annual Report filed on
Form 10-K.
Forward-Looking
Information
Statements contained in the quarterly report on this
Form 10-Q,
including statements describing the objectives, projections,
estimates, or predictions of the future of the Bank, may be
forward-looking statements. These statements may use
forward-looking terms, such as anticipates,
believes, could, estimates,
may, should, will, or their
negatives or other variations on these terms. The Bank cautions
that by their nature, forward-looking statements involve risk or
uncertainty and that actual results could differ materially from
those expressed or implied in these forward-looking statements
or could affect the extent to which a particular objective,
projection, estimate, or prediction is realized. These
forward-looking statements involve risks and uncertainties
including, but not limited to, the following: economic and
market conditions, including, but not limited to, real estate,
credit and mortgage markets; volatility of market prices, rates,
and indices; political, legislative, regulatory, litigation, or
judicial events or actions; changes in the Banks capital
structure; changes in the Banks capital requirements;
membership changes; changes in the demand by Bank members for
Bank advances; an increase in advances prepayments;
competitive forces, including the availability of other sources
of funding for Bank members; changes in investor demand for
consolidated obligations
and/or the
terms of interest rate exchange agreements and similar
agreements; the ability of the Bank to introduce new products
and services to meet market demand and to manage successfully
the risks associated with new products and services; the ability
of each of the other FHLBanks to repay the principal and
interest on consolidated obligations for which it is the primary
obligor and with respect to which the Bank has joint and several
liability; and timing and volume of market activity. This
Managements Discussion and Analysis of Financial Condition
and Results of Operations should be read in conjunction with the
Banks unaudited interim financial statements and notes and
Risk Factors included in Part II, Item 1A of the
quarterly report filed on this
Form 10-Q,
as well as Risk Factors in Item 1A of the Banks 2009
Annual Report filed on
Form 10-K.
Earnings
Performance
The following is Managements Discussion and Analysis of
the Banks earnings performance for the three months ended
March 31, 2010 compared to the three months ended
March 31, 2009. This discussion should be read in
conjunction with the unaudited interim financial statements and
notes included in the quarterly report filed on this
Form 10-Q
as well as the audited financial statements and analysis for the
year ended December 31, 2009, included in the Banks
2009 Annual Report filed on
Form 10-K.
Summary
of Financial Results
Net Income and Return on Equity. For the
first quarter of 2010, the Banks net income totaled
$9.9 million, an increase of $33.5 million from the
first quarter 2009 loss of $23.6 million. This increase was
primarily due to a $35.3 million reserve recorded in the
first quarter of 2009 related to the collectibility of the LBSF
receivable, as well as higher net interest income and slightly
lower net OTTI losses. First quarter 2010 results also reflect
slightly higher operating expenses from the prior year. Net OTTI
losses for the three months ended March 31, 2010 and 2009
were $27.6 million and $30.5 million, respectively.
Details of the Statement of Operations are presented more fully
below. The Banks return on average equity was 1.07% in the
first quarter of 2010, compared to (2.30)% in the same year-ago
period.
14
Adjusted Earnings. As presented above,
adjusted earnings for first quarter 2010 and 2009 exclude the
impact of the LBSF contingency reserve, net OTTI losses and
related assessments. For the first quarter of 2010, the
Banks adjusted earnings totaled $30.1 million, a
decrease of $0.9 million over the first quarter 2009
adjusted earnings. An increase in net interest income as well as
a benefit for credit losses in the current year quarter were
offset by losses on derivatives and hedging activities and
higher other expense. The Banks adjusted return on average
equity was 3.25% in first quarter 2010, compared to 3.02% in
first quarter 2009. The decrease in average capital, due to
higher noncredit OTTI losses in AOCI, more than offset the
decrease in adjusted earnings in the
quarter-over-quarter
comparison, resulting in an increase in the overall return.
Dividend. On December 23, 2008, the Bank
announced its voluntary decision to temporarily suspend payment
of dividends until further notice. Therefore, there were no
dividends declared or paid in the first quarters of 2010 and
2009. Retained earnings were $398.9 million as of
March 31, 2010, compared to $389.0 million at
December 31, 2009. See additional discussion regarding
dividends and retained earnings levels in the Financial
Condition section of this Item 2. Managements
Discussion and Analysis in the quarterly report filed on this
Form 10-Q.
15
Net
Interest Income
The following table summarizes the rate of interest income or
interest expense, the average balance for each of the primary
balance sheet classifications and the net interest margin for
the three months ended March 31, 2010 and 2009.
Average
Balances and Interest Yields/Rates Paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
Avg.
|
|
|
|
|
|
Avg.
|
|
|
|
|
|
Interest
|
|
Yield/
|
|
|
|
Interest
|
|
Yield/
|
|
|
|
Average
|
|
Income/
|
|
Rate
|
|
Average
|
|
Income/
|
|
Rate
|
(dollars in millions)
|
|
|
Balance(1)
|
|
Expense
|
|
(%)
|
|
Balance(1)
|
|
Expense
|
|
(%)
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold
(2)
|
|
|
$
|
4,722.1
|
|
|
$
|
1.3
|
|
|
|
0.11
|
|
|
$
|
13.9
|
|
|
$
|
-
|
|
|
|
0.12
|
|
Interest-bearing deposits
|
|
|
|
514.8
|
|
|
|
0.2
|
|
|
|
0.13
|
|
|
|
9,637.9
|
|
|
|
5.8
|
|
|
|
0.24
|
|
Investment securities
(3)
|
|
|
|
13,661.8
|
|
|
|
106.5
|
|
|
|
3.16
|
|
|
|
15,050.2
|
|
|
|
153.4
|
|
|
|
4.13
|
|
Advances(4)
|
|
|
|
40,143.2
|
|
|
|
74.3
|
|
|
|
0.75
|
|
|
|
56,450.5
|
|
|
|
241.7
|
|
|
|
1.74
|
|
Mortgage loans held for
portfolio(5)
|
|
|
|
5,070.4
|
|
|
|
63.7
|
|
|
|
5.10
|
|
|
|
6,084.9
|
|
|
|
76.9
|
|
|
|
5.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
|
64,112.3
|
|
|
|
246.0
|
|
|
|
1.55
|
|
|
|
87,237.4
|
|
|
|
477.8
|
|
|
|
2.22
|
|
Allowance for credit losses
|
|
|
|
(12.0
|
)
|
|
|
|
|
|
|
|
|
|
|
(14.0
|
)
|
|
|
|
|
|
|
|
|
Other
assets(5)(6)
|
|
|
|
(131.4
|
)
|
|
|
|
|
|
|
|
|
|
|
558.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
$
|
63,968.9
|
|
|
|
|
|
|
|
|
|
|
$
|
87,782.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
$
|
1,363.5
|
|
|
$
|
0.2
|
|
|
|
0.06
|
|
|
$
|
1,745.0
|
|
|
$
|
0.4
|
|
|
|
0.10
|
|
Consolidated obligation discount notes
|
|
|
|
9,921.5
|
|
|
|
2.6
|
|
|
|
0.11
|
|
|
|
17,867.4
|
|
|
|
24.8
|
|
|
|
0.56
|
|
Consolidated obligation
bonds(7)
|
|
|
|
47,326.6
|
|
|
|
184.2
|
|
|
|
1.58
|
|
|
|
61,659.5
|
|
|
|
396.2
|
|
|
|
2.61
|
|
Other borrowings
|
|
|
|
11.0
|
|
|
|
-
|
|
|
|
0.55
|
|
|
|
6.2
|
|
|
|
-
|
|
|
|
1.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
|
58,622.6
|
|
|
|
187.0
|
|
|
|
1.29
|
|
|
|
81,278.1
|
|
|
|
421.4
|
|
|
|
2.10
|
|
Other liabilities
|
|
|
|
1,583.5
|
|
|
|
|
|
|
|
|
|
|
|
2,342.0
|
|
|
|
|
|
|
|
|
|
Total capital
|
|
|
|
3,762.8
|
|
|
|
|
|
|
|
|
|
|
|
4,162.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and capital
|
|
|
$
|
63,968.9
|
|
|
|
|
|
|
|
|
|
|
$
|
87,782.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
|
|
|
0.26
|
|
|
|
|
|
|
|
|
|
|
|
0.12
|
|
Impact of noninterest-bearing funds
|
|
|
|
|
|
|
|
|
|
|
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
0.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/net interest margin
|
|
|
|
|
|
|
$
|
59.0
|
|
|
|
0.37
|
|
|
|
|
|
|
$
|
56.4
|
|
|
|
0.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes:
|
|
|
(1) |
|
Average balances of deposits
(assets and liabilities) include cash collateral received
from/paid to counterparties which are reflected in the Statement
of Condition as derivative assets/liabilities.
|
(2) |
|
The average balance of Federal
funds sold, related interest income and average yield
calculations may include loans to other FHLBanks.
|
(3) |
|
Investment securities include
trading,
held-to-maturity
and
available-for-sale
securities. The average balances of
held-to-maturity
and
available-for-sale
securities are reflected at amortized cost; therefore, the
resulting yields do not give effect to changes in fair value or
the noncredit component of a previously recognized OTTI
reflected in AOCI.
|
(4) |
|
Average balances reflect
noninterest-earning hedge accounting adjustments of
$1.5 billion and $2.2 billion in 2010 and 2009,
respectively.
|
(5) |
|
Nonaccrual mortgage loans are
included in average balances in determining the average rate.
BOB loans are reflected in other assets.
|
(6) |
|
The noncredit portion of OTTI
losses on investment securities is reflected in other assets for
purposes of the average balance sheet presentation.
|
(7) |
|
Average balances reflect
noninterest-bearing hedge accounting adjustments of
$310 million and $508 million in 2010 and 2009,
respectively
|
16
Net interest income increased $2.6 million, or 4.6%, to
$59.0 million for first quarter 2010, compared with the
same year-ago period. The improvement in net interest income was
driven by favorable funding costs. Rates paid on
interest-bearing liabilities fell 81 basis points while
yields on interest-earning assets fell 67 basis points in
the
year-over-year
comparison. Total average interest-earning assets for first
quarter 2010 were $64.1 billion, a decrease of
$23.1 billion, or 26.5%, from the same year-ago period. The
majority of the decline in interest-earning assets was
attributed to lower demand for advances, which declined
$16.3 billion, or 28.9%, as members de-levered, increased
deposits and utilized government programs aimed at improving
liquidity. In addition, in response to the Banks temporary
suspension of dividends and repurchase of excess capital stock,
many of the Banks members may have reacted by limiting the
use of the Banks advance products. The current economic
conditions also decreased the Banks members need for
funding from the Bank. For first quarter 2010, interest-bearing
deposits decreased $9.1 billion from first quarter 2009,
primarily due to a shift to investments in Federal funds sold.
The first quarter 2009 interest bearing deposit balance was
higher than normal because the Bank had shifted balances from
Federal funds sold into higher-yielding interest-bearing Federal
Reserve Bank (FRB) accounts. However, beginning in July 2009,
the FRBs stopped paying interest on the excess balances it holds
on the Banks behalf; consequently, the Bank shifted its
investments back to Federal funds sold. During the second half
of 2009 the Bank reduced its concentration in Federal funds sold
due to the unattractive yields. This portfolio subsequently
declined to $4.7 billion for the three months ended
March 31, 2010. The Bank also experienced a reduction in
its level of MBS and mortgage loans due primarily to paydowns.
Additional details and analysis regarding the shift in the mix
of these categories is included in the Rate/Volume
Analysis discussion below.
The net interest margin improved 11 basis points to
37 basis points, compared to 26 basis points a year
ago. Favorable funding costs, partially offset by lower yields
on the investment of interest-free funds (capital), contributed
to the improvement. The impact of favorable funding was evident
within both the advance and investment securities portfolios, as
the improvement in cost of funds, combined with the use of some
short-term debt greatly improved spreads. Partially offsetting
this improvement was a lower yield on interest-free funds
(capital) typically invested in short-term assets.
Rate/Volume Analysis. Changes in both volume
and interest rates influence changes in net interest income and
net interest margin. The following table summarizes changes in
interest income and interest expense between first quarter 2010
and first quarter 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 Compared to 2009
|
|
|
|
Increase (Decrease) in Interest
|
|
|
|
Income/Expense Due to Changes in:
|
(in millions)
|
|
|
Volume
|
|
Rate
|
|
Total
|
Federal funds sold
|
|
|
$
|
1.3
|
|
|
$
|
-
|
|
|
$
|
1.3
|
|
Interest-bearing deposits
|
|
|
|
(3.8
|
)
|
|
|
(1.8
|
)
|
|
|
(5.6
|
)
|
Investment securities
|
|
|
|
(13.2
|
)
|
|
|
(33.7
|
)
|
|
|
(46.9
|
)
|
Advances
|
|
|
|
(56.4
|
)
|
|
|
(111.0
|
)
|
|
|
(167.4
|
)
|
Mortgage loans held for portfolio
|
|
|
|
(12.8
|
)
|
|
|
(0.4
|
)
|
|
|
(13.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
$
|
(84.9
|
)
|
|
$
|
(146.9
|
)
|
|
$
|
(231.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits
|
|
|
$
|
(0.1
|
)
|
|
$
|
(0.1
|
)
|
|
$
|
(0.2
|
)
|
Consolidated obligation discount notes
|
|
|
|
(7.9
|
)
|
|
|
(14.3
|
)
|
|
|
(22.2
|
)
|
Consolidated obligation bonds
|
|
|
|
(78.6
|
)
|
|
|
(133.4
|
)
|
|
|
(212.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
$
|
(86.6
|
)
|
|
$
|
(147.8
|
)
|
|
$
|
(234.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total increase (decrease) in net interest income
|
|
|
$
|
1.7
|
|
|
$
|
0.9
|
|
|
$
|
2.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income increased $2.6 million from first
quarter 2009 to first quarter 2010. Total interest income
decreased $231.8 million
year-over-year.
This decline included a decrease of $146.9 million due to
rate and $84.9 million due to volume, driven primarily by
the advances portfolio and, to a lesser extent, the investment
securities portfolio, as discussed below. Total interest expense
decreased $234.4 million in the same comparison,
17
including a rate impact of $147.8 million and a volume
impact of $86.6 million, both due to the consolidated
obligation bonds and discount notes portfolios, discussed in
more detail below.
For first quarter 2010, average Federal funds sold increased
$4.7 billion from $13.9 million in first quarter 2009.
In the first quarter 2009, the Bank utilized an interest-bearing
deposit account with the FRBs due to favorable rates paid on
these balances. These balances were reinvested in Federal funds
sold once the FRBs stopped paying interest on these deposits.
Related interest income increased $1.3 million, nearly
entirely due to the higher balances. For first quarter 2010,
average interest-bearing deposits decreased $9.1 billion,
partially due to the shift to Federal funds sold noted above.
Related interest income decreased $5.6 million due to the
lower balances and the relatively low yields on short-term
investments.
The decrease in yields on both Federal funds sold and
interest-bearing deposits
quarter-over-quarter
reflects the significant downward change in overall short-term
rates. These decreases are evidenced in the interest rate trend
presentation in the Current Financial and Mortgage Market
Events and Trends discussion earlier in this Item 2.
Managements Discussion and Analysis.
The average investment securities portfolio balance for first
quarter 2010 decreased $1.4 billion, or 9.2%, from first
quarter 2009. Correspondingly, the interest income on this
portfolio decreased $46.9 million, driven primarily by a
97 basis point decline in the yield, and secondarily by the
volume decrease.
The investment securities portfolio includes trading,
available-for-sale
and
held-to-maturity
securities. The decrease in investments from first quarter 2009
to first quarter 2010 was due to declining certificates of
deposit balances and run-off of the MBS portfolio as well as
credit-related OTTI recorded on certain private label MBS. The
Bank has been cautious toward investments linked to the
U.S. housing market, including MBS, and has not purchased
any MBS in the first three months of 2010, and only purchased
U.S. agency and GSE MBS in 2009.
The average advances portfolio decreased $16.3 billion, or
28.9%, from first quarter 2009 to first quarter 2010. This
decline in volume, coupled with a 99 basis point decrease
in the yield, resulted in a $167.4 million decline in
interest income
year-over-year.
Advance demand began to decline in the fourth quarter of 2008
and continued through 2009 and into the first quarter of 2010,
as members grew core deposits and gained access to additional
liquidity from the Federal Reserve and other government programs
that became available in the second half of 2008. The interest
income on this portfolio was significantly impacted by the
decline in short-term rates, as presented in the interest rate
trend presentation in the Current Financial and Mortgage
Market Events and Trends discussion earlier in this
Item 2. Managements Discussion and Analysis. Average
3-month
LIBOR declined 98 basis points in the
quarter-over-quarter
comparison. Specific mix changes within the portfolio are
discussed more fully below under Average Advances
Portfolio Detail.
The mortgage loans held for portfolio balance declined
$1.0 billion, or 16.7%, from first quarter 2009 to first
quarter 2010. The related interest income on this portfolio
declined $13.2 million in the same period. The
quarter-over-quarter
decrease was due to the continued runoff of the existing
portfolio, which more than offset the new portfolio activity.
The decrease in interest income was due primarily to lower
average portfolio balances as the yields on the portfolio only
declined 2 basis points.
Interest-bearing deposits decreased $381.5 million, or
21.9%, from first quarter 2009 to first quarter 2010. Interest
expense on interest-bearing deposits decreased $0.2 million
quarter-over-quarter,
driven by a 4 basis point decline in rates paid. Average
interest-bearing deposit balances fluctuate periodically and are
driven by member activity.
The consolidated obligations portfolio balance decreased
$22.3 billion from first quarter 2009 to first quarter
2010. Discount notes accounted for $8.0 billion of the
decline, while average bonds fell by $14.3 billion quarter
over quarter. The decline in discount notes was consistent with
the decline in short-term advance demand from members as noted
above. Interest expense on discount notes decreased
$22.2 million from the prior year quarter. The decrease was
partially attributable to the volume decline and partially due
to the 45 basis point declines in rates paid
18
quarter-over-quarter.
The decline in rates paid was consistent with the general
decline in short-term rates as previously mentioned. Interest
expense on bonds decreased $212.0 million from first
quarter 2009 to first quarter 2010. This was due in part to the
103 basis points decrease in rates paid on bonds, as well
as the volume decline.
A portion of the bond portfolio is swapped to
3-month
LIBOR; therefore, as the LIBOR rate (decreases) increases,
interest expense on swapped bonds, including the impact of
swaps, (decreases) increases. Market conditions continued to
impact spreads on the Banks consolidated obligations. Bond
spreads were volatile in the beginning of 2009 and the Bank
experienced some obstacles in attempting to issue longer-term
debt as investors had been reluctant to buy longer-term GSE
obligations. However, investor demand for shorter-term GSE debt
grew stronger during 2009 and the Bank continued to be able to
issue discount notes and term bonds at attractive rates as
needed into 2010. See details regarding the impact of swaps on
the quarterly rates paid in the Net Interest Income
Derivatives Effects discussion below.
For additional information, see the Liquidity and Funding
Risk discussion in Risk Management in this Item 2.
Managements Discussion and Analysis in the quarterly
report filed on this
Form 10-Q.
Average
Advances Portfolio Detail
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Balances
|
|
|
|
Three Months Ended March 31,
|
(in millions)
|
|
|
|
Product
|
|
|
2010
|
|
2009
|
Repo
|
|
|
$
|
19,112.2
|
|
|
$
|
28,556.4
|
|
Term Loans
|
|
|
|
12,847.2
|
|
|
|
14,541.8
|
|
Convertible Select
|
|
|
|
6,596.3
|
|
|
|
7,385.8
|
|
Hedge Select
|
|
|
|
50.0
|
|
|
|
150.0
|
|
Returnable
|
|
|
|
25.8
|
|
|
|
3,551.7
|
|
|
|
|
|
|
|
|
|
|
|
Total par value
|
|
|
$
|
38,631.5
|
|
|
$
|
54,185.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The par value of the Banks average advance portfolio
decreased 28.7% from first quarter 2009 to first quarter 2010.
The most significant percentage decrease in the comparison was
in the Returnable product, which declined $3.5 billion, or
99.3%. The most significant dollar decrease was in the Repo
product, which declined $9.4 billion, or 33.1%
year-over-year.
The decrease in average balances for the Repo product reflected
the impact of members access to additional liquidity from
government programs as well as members reactions to the
Banks pricing of short-term advance products. Members have
also taken other actions during the credit crisis, such as
raising core deposits and reducing the size of their balance
sheets. In addition, many of the Banks members may have
reacted to the Banks temporary actions of not paying
dividends and not repurchasing excess capital stock by limiting
their use of the Banks advance products. The current
economic recession has reduced the Banks members
need for funding from the Bank as well. The majority of the
decline was driven by decreases in average advances of the
Banks larger borrowers, with five banks reducing their
total average advances outstanding by $10.0 billion. The
decline in Returnable product balances was due to one of the
Banks largest borrowers exercising their option to return
their advances. To a much lesser extent, the decrease in
interest rates also contributed to the decline in the Returnable
product balances.
As of March 31, 2010, 48.4% of the par value of loans in
the portfolio had a remaining maturity of one year or less,
compared to 47.7% at December 31, 2009. Details of the
portfolio components are included in Note 7 to the
unaudited financial statements in the quarterly report filed on
this
Form 10-Q.
The ability to grow the advance portfolio may be affected by,
among other things, the following: (1) the liquidity
demands of the Banks borrowers; (2) the composition
of the Banks membership itself; (3) the Banks
liquidity position and how management chooses to fund the Bank;
(4) current, as well as future, credit market conditions;
(5) member reaction to the Banks voluntary decision
to temporarily suspend dividend payments and
19
excess capital stock repurchases until further notice;
(6) actions of the U.S. government; (7) housing
market trends; and (8) the shape of the yield curve.
Beginning in 2008 and continuing through 2009, the Federal
Reserve took a series of unprecedented actions that made it more
attractive for eligible financial institutions to borrow
directly from the FRBs, creating increased competition for the
Bank. See the Legislative and Regulatory Actions
discussion in Item 7. Managements Discussion and
Analysis in the Banks 2009 Annual Report filed on
Form 10-K
for additional information regarding these government actions.
The Bank accepts various forms of collateral including, but not
limited to, AAA-rated investment securities and residential
mortgage loans. In light of recent market conditions, the Bank
recognizes that there is the potential for an increase in the
credit risk of the advance portfolio. However, the Bank
continues to monitor its collateral position and the related
policies and procedures, to help ensure adequate collateral
coverage. The Bank believes it was fully secured as of
March 31, 2010. For more information on collateral, see the
Loan Products discussion in Overview and
the Credit and Counterparty Risk discussion in Risk
Management in this Item 2. Managements
Discussion and Analysis, both in the quarterly report filed on
this
Form 10-Q.
20
Net Interest Income Derivative Effects. The
following tables separately quantify the effects of the
Banks derivative activities on its interest income and
interest expense for the three months ended March 31, 2010
and 2009. Derivative and hedging activities are discussed below
in the Other Income (Loss) section.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Avg.
|
|
|
|
Avg.
|
|
|
|
|
Three Months Ended
|
|
|
|
|
Interest Inc./
|
|
Yield/
|
|
Interest Inc./
|
|
Yield/
|
|
|
|
Incr./
|
March 31, 2010
|
|
|
Average
|
|
Exp. with
|
|
Rate
|
|
Exp. without
|
|
Rate
|
|
Impact of
|
|
(Decr.)
|
(dollars in millions)
|
|
|
Balance
|
|
Derivatives
|
|
(%)
|
|
Derivatives
|
|
(%)
|
|
Derivatives(1)
|
|
(%)
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances
|
|
|
$
|
40,143.2
|
|
|
$
|
74.3
|
|
|
|
0.75
|
|
|
$
|
323.0
|
|
|
|
3.26
|
|
|
$
|
(248.7
|
)
|
|
|
(2.51
|
)
|
Mortgage loans held for portfolio
|
|
|
|
5,070.4
|
|
|
|
63.7
|
|
|
|
5.10
|
|
|
|
64.4
|
|
|
|
5.15
|
|
|
|
(0.7
|
)
|
|
|
(0.05
|
)
|
All other interest-earning assets
|
|
|
|
18,898.7
|
|
|
|
108.0
|
|
|
|
2.32
|
|
|
|
108.0
|
|
|
|
2.32
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning
assets
|
|
|
$
|
64,112.3
|
|
|
$
|
246.0
|
|
|
|
1.55
|
|
|
$
|
495.4
|
|
|
|
3.12
|
|
|
$
|
(249.4
|
)
|
|
|
(1.57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated obligation
bonds
|
|
|
$
|
47,326.6
|
|
|
$
|
184.2
|
|
|
|
1.58
|
|
|
$
|
305.7
|
|
|
|
2.62
|
|
|
$
|
(121.5
|
)
|
|
|
(1.04
|
)
|
All other interest-bearing liabilities
|
|
|
|
11,296.0
|
|
|
|
2.8
|
|
|
|
0.10
|
|
|
|
2.8
|
|
|
|
0.10
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing
liabilities
|
|
|
$
|
58,622.6
|
|
|
$
|
187.0
|
|
|
|
1.29
|
|
|
$
|
308.5
|
|
|
|
2.13
|
|
|
$
|
(121.5
|
)
|
|
|
(0.84
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/net
interest spread
|
|
|
|
|
|
|
$
|
59.0
|
|
|
|
0.26
|
|
|
$
|
186.9
|
|
|
|
0.99
|
|
|
$
|
(127.9
|
)
|
|
|
(0.73
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Avg.
|
|
|
|
Avg.
|
|
|
|
|
Three Months Ended
|
|
|
|
|
Interest Inc./
|
|
Yield/
|
|
Interest Inc./
|
|
Yield/
|
|
|
|
Incr./
|
March 31, 2009
|
|
|
Average
|
|
Exp. with
|
|
Rate
|
|
Exp. without
|
|
Rate
|
|
Impact of
|
|
(Decr.)
|
(dollars in millions)
|
|
|
Balance
|
|
Derivatives
|
|
(%)
|
|
Derivatives
|
|
(%)
|
|
Derivatives(1)
|
|
(%)
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances
|
|
|
$
|
56,450.5
|
|
|
$
|
241.7
|
|
|
|
1.74
|
|
|
$
|
499.1
|
|
|
|
3.59
|
|
|
$
|
(257.4
|
)
|
|
|
(1.85
|
)
|
Mortgage loans held for portfolio
|
|
|
|
6,084.9
|
|
|
|
76.9
|
|
|
|
5.12
|
|
|
|
77.7
|
|
|
|
5.18
|
|
|
|
(0.8
|
)
|
|
|
(0.06
|
)
|
All other interest-earning
assets
|
|
|
|
24,702.0
|
|
|
|
159.2
|
|
|
|
2.61
|
|
|
|
159.2
|
|
|
|
2.61
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning
assets
|
|
|
$
|
87,237.4
|
|
|
$
|
477.8
|
|
|
|
2.22
|
|
|
$
|
736.0
|
|
|
|
3.42
|
|
|
$
|
(258.2
|
)
|
|
|
(1.20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated obligation
bonds
|
|
|
$
|
61,659.5
|
|
|
$
|
396.2
|
|
|
|
2.61
|
|
|
$
|
500.7
|
|
|
|
3.29
|
|
|
$
|
(104.5
|
)
|
|
|
(0.68
|
)
|
All other interest-bearing liabilities
|
|
|
|
19,618.6
|
|
|
|
25.2
|
|
|
|
0.52
|
|
|
|
25.2
|
|
|
|
0.52
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing
liabilities
|
|
|
$
|
81,278.1
|
|
|
$
|
421.4
|
|
|
|
2.10
|
|
|
$
|
525.9
|
|
|
|
2.62
|
|
|
$
|
(104.5
|
)
|
|
|
(0.52
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/net
interest spread
|
|
|
|
|
|
|
$
|
56.4
|
|
|
|
0.12
|
|
|
$
|
210.1
|
|
|
|
0.80
|
|
|
$
|
(153.7
|
)
|
|
|
(0.68
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note:
|
|
|
(1) |
|
Impact of Derivatives includes net
interest settlements and amortization of basis adjustments
resulting from previously terminated hedging relationships.
|
21
The Bank uses derivatives to hedge the fair market value changes
attributable to the change in the LIBOR benchmark interest rate.
The Bank generally uses interest rate swaps to hedge a portion
of advances and consolidated obligations which convert the
interest rates on those instruments from a fixed rate to a
LIBOR-based
variable rate. The purpose of this strategy is to protect the
interest rate spread. Using derivatives to convert interest
rates from fixed to variable can increase or decrease net
interest income. The variances in the advances and consolidated
obligation derivative impacts from period to period are driven
by the change in the average
LIBOR-based
variable rate, the timing of interest rate resets and the
average hedged portfolio balances outstanding during any given
period.
For first quarter 2010, the impact of derivatives decreased net
interest income by $127.9 million and reduced the net
interest spread 73 basis points. Average
3-month
LIBOR for first quarter 2010 fell 98 basis points
year-over-year
and the impact of declining rates on existing derivative
contracts continued to negatively impact net interest income.
For first quarter 2009, the impact of derivatives decreased net
interest income by $153.7 million and reduced net interest
spread 68 basis points.
The mortgage loans held for portfolio derivative impact for the
periods presented was affected by the amortization of basis
adjustments resulting from hedges of commitments to purchase
mortgage loans through the MPF program.
Other
Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
(in millions)
|
|
|
2010
|
|
2009
|
|
% Change
|
Services fees
|
|
|
$
|
0.6
|
|
|
$
|
0.6
|
|
|
|
-
|
|
Net gains (losses) on trading securities
|
|
|
|
(0.3
|
)
|
|
|
-
|
|
|
|
n/m
|
|
Net gains (losses) on derivatives and hedging
activities
|
|
|
|
(4.6
|
)
|
|
|
(1.2
|
)
|
|
|
283.3
|
|
Net OTTI losses
|
|
|
|
(27.6
|
)
|
|
|
(30.5
|
)
|
|
|
9.5
|
|
Contingency reserve
|
|
|
|
-
|
|
|
|
(35.3
|
)
|
|
|
n/m
|
|
Other income, net
|
|
|
|
2.4
|
|
|
|
2.0
|
|
|
|
20.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (loss)
|
|
|
$
|
(29.5
|
)
|
|
$
|
(64.4
|
)
|
|
|
54.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
n/m = not meaningful
The Bank recorded total other losses of $29.5 million for
first quarter 2010 compared to total other losses of
$64.4 million for first quarter 2009. Losses on derivative
and hedging activities were $4.6 million for first quarter
2010 compared to losses of $1.2 million for first quarter
2009. Net OTTI losses reflect the credit loss portion of OTTI
charges taken on the private label MBS portfolio. The
$35.3 million contingency reserve represents the
establishment of a contingency reserve for the Banks LBSF
receivable in first quarter 2009. There has been no change in
the reserve in 2010.
See additional discussion on OTTI charges in the Credit
and Counterparty Risk Investments discussion
in Risk Management, both in this Item 2. Managements
Discussion and Analysis in the quarterly report filed on this
Form 10-Q.
The activity related to net gains on derivatives and hedging
activities is discussed in more detail below.
22
Derivatives and Hedging Activities. The
following table details the net gains and losses on derivatives
and hedging activities, including hedge ineffectiveness.
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
March 31, 2010
|
|
March 31, 2009
|
(in millions)
|
|
|
Gain (Loss)
|
|
Gain (Loss)
|
Derivatives and hedged items in hedge
accounting relationships
|
|
|
|
|
|
|
|
|
|
Advances
|
|
|
$
|
(1.7
|
)
|
|
$
|
(19.2
|
)
|
Consolidated obligations
|
|
|
|
0.9
|
|
|
|
17.4
|
|
|
|
|
|
|
|
|
|
|
|
Total net loss related to fair value
hedge ineffectiveness
|
|
|
|
(0.8
|
)
|
|
|
(1.8
|
)
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging
instruments under hedge accounting
|
|
|
|
|
|
|
|
|
|
Economic hedges
|
|
|
|
(4.5
|
)
|
|
|
(1.4
|
)
|
Mortgage delivery commitments
|
|
|
|
0.4
|
|
|
|
1.9
|
|
Other
|
|
|
|
0.3
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
Total net gain (loss) related to derivatives not
designated as hedging instruments under
hedge accounting
|
|
|
|
(3.8
|
)
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
Net losses on derivatives and hedging
activities
|
|
|
$
|
(4.6
|
)
|
|
$
|
(1.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Hedges. The Bank uses fair
value hedge accounting treatment for certain of its advances and
consolidated obligation bonds using interest rate swaps. The
interest rate swaps convert fixed-rate instruments to a
variable-rate (i.e., LIBOR) or provide offset to options
embedded within variable-rate instruments. For the first quarter
of 2010, total ineffectiveness related to these fair value
hedges resulted in a loss of $0.8 million compared to a
loss of $1.8 million in the first quarter of 2009. During
the same period, the overall notional amount decreased from
$57.6 billion at March 31, 2009 to $42.8 billion
at March 31, 2010. Fair value hedge ineffectiveness
represents the difference between the change in the fair value
of the derivative compared to the change in the fair value of
the underlying asset/liability hedged. Fair value hedge
ineffectiveness is generated by movement in the benchmark
interest rate being hedged and by other structural
characteristics of the transaction involved. For example, the
presence of an upfront fee associated with a structured debt
hedge will introduce valuation differences between the hedge and
hedged item that will fluctuate through time.
Economic Hedges. For economic hedges,
the Bank includes the net interest income and the changes in the
fair value of the hedges in net gain (loss) on derivatives and
hedging activities. Total amounts recorded for economic hedges
were a loss of $4.5 million in first quarter 2010 compared
to a loss of $1.4 million in first quarter 2009. The
majority of the first quarter 2010 loss was comprised of losses
on the Banks interest rate caps. The overall notional
amount of economic hedges increased from $0.8 billion at
March 31, 2009 to $1.5 billion at March 31, 2010.
The notional amount of the Banks interest rate caps was
$1.4 billion at March 31, 2010. The Bank did not have
any interest rate caps at March 31, 2009.
Mortgage Delivery Commitments. Certain
mortgage purchase commitments are considered derivatives. 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 accordingly. Total gains relating to
mortgage delivery commitments for the first quarter of 2010 were
$0.4 million compared to total gains of $1.9 million
for the first quarter of 2009. Total notional of the Banks
mortgage delivery commitments decreased from $31.7 million
at March 31, 2009 to $16.7 million at March 31,
2010.
23
Other
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
March 31,
|
|
|
(in millions)
|
|
|
2010
|
|
2009
|
|
% Change
|
Operating - salaries and benefits
|
|
|
$
|
8.9
|
|
|
$
|
8.2
|
|
|
|
8.5
|
|
Operating - occupancy
|
|
|
|
0.7
|
|
|
|
0.6
|
|
|
|
16.7
|
|
Operating - other
|
|
|
|
4.9
|
|
|
|
4.9
|
|
|
|
-
|
|
Finance Agency
|
|
|
|
1.0
|
|
|
|
0.8
|
|
|
|
25.0
|
|
Office of Finance
|
|
|
|
0.7
|
|
|
|
0.7
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses
|
|
|
$
|
16.2
|
|
|
$
|
15.2
|
|
|
|
6.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For first quarter 2010, other expense totaled $16.2 million
compared to $15.2 million for the same prior year period,
an increase of $1.0 million, or 6.6%, driven by higher
salaries and benefits expense. The combined operating expenses
of the Finance Agency and the OF increased 13.3%
quarter-over-quarter,
driven by an increase in Finance Agency expenses. The Bank
expects this trend to continue through 2010. The increase in
salaries and benefits expense was primarily driven by severance
costs in first quarter 2010.
Collectively, the twelve FHLBanks are responsible for the
operating expenses of the Finance Agency and the OF. These
payments, allocated among the FHLBanks according to a
cost-sharing formula, are reported as other expense on the
Banks Statement of Operations.
Affordable
Housing Program (AHP) and Resolution Funding Corp. (REFCORP)
Assessments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
(in millions)
|
|
|
2010
|
|
2009
|
|
|
% Change
|
Affordable Housing Program (AHP)
|
|
|
$
|
1.1
|
|
|
$
|
-
|
|
|
|
|
n/m
|
|
REFCORP
|
|
|
|
2.4
|
|
|
|
-
|
|
|
|
|
n/m
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assessments
|
|
|
$
|
3.5
|
|
|
$
|
-
|
|
|
|
|
n/m
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
n/m = not meaningful
Assessment Calculations. Although the
FHLBanks are not subject to federal or state income taxes, the
combined financial obligations of making payments to REFCORP
(20%) and AHP contributions (10%) equate to a proportion of the
Banks net income comparable to that paid in income tax by
fully taxable entities. Inasmuch as both the REFCORP and AHP
payments are each separately subtracted from earnings prior to
the assessment of each, the combined effective rate is less than
the simple sum of both (i.e., less than 30%). In passing the
Financial Services Modernization Act of 1999, Congress
established a fixed 20% annual REFCORP payment rate beginning in
2000 for each FHLBank. The fixed percentage replaced a
fixed-dollar annual payment of $300 million which had
previously been divided among the twelve FHLBanks through a
complex allocation formula. The law also calls for an adjustment
to be made to the total number of REFCORP payments due in future
years so that, on a present value basis, the combined REFCORP
payments of all twelve FHLBanks are equal in amount to what had
been required under the previous calculation method. The
FHLBanks aggregate payments through the first quarter of
2010 exceeded the scheduled payments, effectively accelerating
payment of the REFCORP obligation and shortening its remaining
term to a final payment during the second quarter of 2012. This
date assumes that the FHLBanks pay exactly $300 million
annually until 2012. The cumulative amount to be paid to REFCORP
by the FHLBank is not determinable at this time due to the
interrelationships of the future earnings of all FHLBanks and
interest rates. In addition, the FHLBanks must set aside for the
AHP annually on a combined basis, the greater of an aggregate of
$100 million or 10 percent of current years net
earnings (income before interest expense related to mandatorily
redeemable capital stock but after the assessment for REFCORP).
The AHP, mandated by statute, is the largest and primary public
policy program among the FHLBanks. The AHP funds, which are
offered on a competitive basis,
24
provide grants and below-market loans for both rental and
owner-occupied housing for households at 80% or less of the area
median income.
Application of the REFCORP percentage rate as applied to
earnings during first quarter 2010 resulted in expenses for the
Bank of $2.4 million. Due to the pre-assessment loss
incurred in the first quarter 2009, the Bank did not incur
REFCORP or AHP expense for the period.
The Bank currently has a prepaid REFCORP assessment balance of
$37.2 million as of March 31, 2010. This prepaid
REFCORP assessment balance was the result of the Bank overpaying
its 2008 REFCORP assessment as a result of the loss recognized
in fourth quarter 2008. As instructed by the U.S. Treasury,
the Bank is using its overpayment as a credit against future
REFCORP assessments (to the extent the Bank has positive net
income in the future) over an indefinite period of time. This
overpayment is recorded as a prepaid asset by the Bank and
reported as prepaid REFCORP assessment on the
Statement of Condition. Over time, as the Bank uses this credit
against its future REFCORP assessments, the prepaid asset will
be reduced until it has been exhausted. If any amount of the
prepaid asset still remains at the time that the REFCORP
obligation for the FHLBank System as a whole is fully satisfied,
REFCORP, in consultation with the U.S. Treasury, will
implement a procedure so that the Bank would be able to collect
on its remaining prepaid asset.
Financial
Condition
The following is Managements Discussion and Analysis of
the Banks financial condition at March 31, 2010
compared to December 31, 2009. This should be read in
conjunction with the Banks unaudited interim financial
statements and notes in this report and the audited financial
statements in the Banks 2009 Annual Report filed on
Form 10-K.
Asset Composition. As a result of
declining loan demand by members, the Banks total assets
decreased $6.6 billion, or 10.1%, to $58.7 billion at
March 31, 2010, down from $65.3 billion at
December 31, 2009. Advances decreased $4.4 billion
while total investment securities decline $2.0 billion.
These decreases were partially offset by a $1.1 billion
increase in Federal funds sold.
Total housing finance-related assets, which include MPF Program
loans, advances, MBS and other mission-related investments,
decreased $5.0 billion, or 8.9%, to $50.9 billion at
March 31, 2010, down from $55.9 billion at
December 31, 2009. Total housing finance-related assets
accounted for 86.8% of assets as of March 31, 2010 and
85.7% of assets as of December 31, 2009.
Advances. At March 31, 2010, total
advances reflected balances of $36.8 billion to 218
borrowing members, compared to $41.2 billion at year-end
2009 to 222 borrowing members, representing a 10.6% decrease in
the portfolio balance. A significant concentration of the loans
continued to be generated from the Banks five largest
borrowers, generally reflecting the asset concentration mix of
the Banks membership base. Total loans outstanding to the
Banks five largest members were $21.9 billion and
$25.4 billion at March 31, 2010 and December 31,
2009, respectively. The decrease in advance balances reflected
the impact of members access to additional liquidity from
government programs and members reactions to the
Banks pricing of short-term advance products. Members have
also taken other actions during the credit crisis, such as
raising core deposits and reducing the size of their balance
sheets. In addition, many of the Banks members may have
reacted to the Banks temporary actions of not paying
dividends and not repurchasing excess capital stock by limiting
their use of the Banks advance products.
25
The following table provides a distribution of the number of
members, categorized by individual member asset size, that had
an outstanding average balance during the three months ended
March 31, 2010 and the year ended December 31, 2009.
|
|
|
|
|
|
|
|
|
|
Member Asset Size
|
|
|
2010
|
|
2009
|
Less than $100 million
|
|
|
|
35
|
|
|
|
40
|
|
Between $100 million and $500 million
|
|
|
|
120
|
|
|
|
135
|
|
Between $500 million and $1 billion
|
|
|
|
40
|
|
|
|
39
|
|
Between $1 billion and $5 billion
|
|
|
|
30
|
|
|
|
30
|
|
Greater than $5 billion
|
|
|
|
15
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowing members during the year
|
|
|
|
240
|
|
|
|
260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total membership
|
|
|
|
318
|
|
|
|
316
|
|
Percent of members borrowing during the period
|
|
|
|
75.5
|
%
|
|
|
82.3
|
%
|
Total borrowing members with outstanding loan balances at
period-end
|
|
|
|
218
|
|
|
|
222
|
|
Percent of member borrowing at period-end
|
|
|
|
68.6
|
%
|
|
|
70.3
|
%
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2010, the par value of the RepoPlus
products decreased $4.0 billion, or 20.0%, to
$16.1 billion, compared to $20.1 billion at
December 31, 2009. These products represented 45.4% and
50.6% of the par value of the Banks total advances
portfolio at March 31, 2010 and December 31, 2009,
respectively. The Banks shorter-term advances decreased as
a result of members having less need for liquidity from the Bank
as they have taken other actions during the credit crisis, such
as raising core deposits, reducing their balance sheets, and
identifying alternative sources of funds. The short-term portion
of the advances portfolio is volatile; as market conditions
change rapidly, the short-term nature of these lending products
could materially impact the Banks outstanding loan
balance. See Item 1. Business in the Banks 2009
Annual Report filed on
Form 10-K
for details regarding the Banks various loan products.
The Banks longer-term advances, referred to as Term
Advances, remained flat at $12.8 billion at both
March 31, 2010, and December 31, 2009. These balances
represented 36.3% and 32.2% of the Banks advance portfolio
at March 31, 2010 and December 31, 2009, respectively.
A number of the Banks members have a high percentage of
long-term mortgage assets on their balance sheets and these
members generally fund these assets through these longer-term
borrowings with the Bank to mitigate interest rate risk. Certain
members also prefer Term Advances given the current interest
rate environment. Meeting the needs of such members has been,
and will continue to be, an important part of the Banks
advances business.
As of March 31, 2010, the Banks longer-term option
embedded advances decreased $338.7 million to
$6.5 billion, down from $6.8 billion as of
December 31, 2009. These products represented 18.3% and
17.2% of the Banks advances portfolio on March 31,
2010 and December 31, 2009, respectively.
Mortgage Loans Held for Portfolio. Net
mortgage loans held for portfolio decreased 3.3% to
$5.0 billion as of March 31, 2010 compared to
$5.2 billion at December 31, 2009. This decrease was
primarily due to the continued runoff of the existing portfolio,
which more than offset the new portfolio purchase activity.
26
Loan Portfolio Analysis. The
Banks outstanding loans, nonaccrual loans and loans
90 days or more past due and accruing interest are
presented in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
(in millions)
|
|
|
2010
|
|
2009
|
Advances(1)
|
|
|
$
|
36,823.8
|
|
|
$
|
41,177.3
|
|
Mortgage loans held for portfolio,
net(2)
|
|
|
|
4,991.2
|
|
|
|
5,162.8
|
|
Nonaccrual mortgage loans,
net(3)
|
|
|
|
77.6
|
|
|
|
71.2
|
|
Mortgage loans past due 90 days or
more and still accruing
interest(4)
|
|
|
|
14.3
|
|
|
|
16.5
|
|
Banking on Business (BOB) loans,
net(5)
|
|
|
|
11.5
|
|
|
|
11.8
|
|
|
|
|
|
|
|
|
|
|
|
Notes:
|
|
|
(1) |
|
There are no advances which are
past due or on nonaccrual status.
|
(2) |
|
All of the real estate mortgages
held in portfolio by the Bank are fixed-rate. Balances are
reflected net of allowance for credit losses.
|
(3) |
|
All nonaccrual mortgage loans are
reported net of interest applied to principal.
|
(4) |
|
Government-insured or -guaranteed
loans (e.g., FHA, VA, HUD or RHS) continue to accrue
interest after becoming 90 days or more delinquent.
|
(5) |
|
Due to the nature of the program,
all BOB loans are considered nonaccrual loans. Balances are
reflected net of allowance for credit losses.
|
The Bank has experienced an increase in its nonaccrual mortgage
loans held for portfolio. Nonaccrual mortgage loans increased
approximately $6.4 million, or 9.0%, from December 31,
2009 to March 31, 2010. This increase was driven by the
general economic conditions. The decrease in mortgage loans past
due 90 days or more and still accruing from
December 31, 2009 to March 31, 2010 occurred as a
result of the Bank permitting PFIs to repurchase loans
that met certain pre-established criteria (i.e.,
government-guaranteed loans) at the time of the sale of the
loans to the Bank. The Bank increased its allowance for loan
losses, from $2.7 million at December 31, 2009 to
$2.9 million at March 31, 2010, an increase of 7.1%.
Interest-Bearing Deposits and Federal Funds
Sold. At March 31, 2010, these
short-term investments totaled $4.1 billion, a net increase
of $1.1 billion, or 36.7%, from December 31, 2009.
These combined balances have continued to grow over the last two
years, reflecting the Banks strategy to maintain its
short-term liquidity position in part to be able to meet
members loan demand and regulatory liquidity requirements.
Investment Securities. The
$2.0 billion, or 14.3%, decrease in investment securities
from December 31, 2009 to March 31, 2010, was
primarily due to a decrease in the certificates of deposit in
the
held-to-maturity
portfolio as well as MBS paydowns. The decrease in certificates
of deposit was driven by narrowing spreads. The Bank has not
invested in any private label MBS since late 2007.
Available-for-sale
MBS paydowns were offset by an increase in the fair value of the
investments during first quarter 2010. In addition, during 2009
the Bank did offset some of the MBS portfolio run-off with the
purchase of U.S. agency MBS.
27
The following tables summarize key investment securities
portfolio statistics.
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
(in millions)
|
|
2010
|
|
2009
|
Trading securities:
|
|
|
|
|
|
|
|
|
Mutual funds offsetting deferred compensation
|
|
$
|
6.6
|
|
|
$
|
6.7
|
|
U.S. Treasury bills
|
|
|
1,029.7
|
|
|
|
1,029.5
|
|
TLGP investments
|
|
|
250.0
|
|
|
|
250.0
|
|
|
|
|
|
|
|
|
|
|
Total trading securities
|
|
$
|
1,286.3
|
|
|
$
|
1,286.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities:
|
|
|
|
|
|
|
|
|
Mutual funds offsetting supplemental retirement plan
|
|
$
|
2.0
|
|
|
$
|
2.0
|
|
MBS
|
|
|
2,367.0
|
|
|
|
2,395.3
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale
securities
|
|
$
|
2,369.0
|
|
|
$
|
2,397.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity
securities:
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
1,650.0
|
|
|
|
3,100.0
|
|
State or local agency obligations
|
|
|
608.7
|
|
|
|
608.4
|
|
U.S. government-sponsored enterprises
|
|
|
71.4
|
|
|
|
176.7
|
|
MBS
|
|
|
6,149.4
|
|
|
|
6,597.3
|
|
|
|
|
|
|
|
|
|
|
Total
held-to-maturity
securities
|
|
|
8,479.5
|
|
|
|
10,482.4
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
$
|
12,134.8
|
|
|
$
|
14,165.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the maturity and yield
characteristics for the investment securities portfolio as of
March 31, 2010.
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
Book Value
|
|
Yield
|
Trading securities:
|
|
|
|
|
|
|
|
|
Mutual funds offsetting deferred compensation
|
|
$
|
6.6
|
|
|
|
n/a
|
|
U.S. Treasury bills
|
|
|
1,029.7
|
|
|
|
0.34
|
%
|
TLGP investments
|
|
|
250.0
|
|
|
|
0.22
|
|
|
|
|
|
|
|
|
|
|
Total trading securities
|
|
$
|
1,286.3
|
|
|
|
0.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities:
|
|
|
|
|
|
|
|
|
Mutual funds offsetting supplemental retirement plan
|
|
$
|
2.0
|
|
|
|
n/a
|
|
MBS
|
|
|
2,367.0
|
|
|
|
5.38
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale
securities
|
|
$
|
2,369.0
|
|
|
|
5.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity
securities:
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
1,650.0
|
|
|
|
0.26
|
|
State or local agency obligations:
|
|
|
|
|
|
|
|
|
Within one year
|
|
|
55.7
|
|
|
|
5.85
|
|
After one but within five years
|
|
|
78.0
|
|
|
|
5.75
|
|
After five years but within ten years
|
|
|
11.8
|
|
|
|
0.38
|
|
After ten years
|
|
|
463.2
|
|
|
|
2.73
|
|
|
|
|
|
|
|
|
|
|
Total state or local agency obligations
|
|
|
608.7
|
|
|
|
3.36
|
|
|
|
|
|
|
|
|
|
|
U.S. government-sponsored enterprises:
|
|
|
|
|
|
|
|
|
After five years but within ten years
|
|
|
71.4
|
|
|
|
4.05
|
|
|
|
|
|
|
|
|
|
|
Total U.S. government-sponsored enterprises
|
|
|
71.4
|
|
|
|
4.05
|
|
|
|
|
|
|
|
|
|
|
MBS
|
|
|
6,149.4
|
|
|
|
3.26
|
|
|
|
|
|
|
|
|
|
|
Total
held-to-maturity
securities
|
|
$
|
8,479.5
|
|
|
|
2.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
n/a not applicable
28
As of March 31, 2010, the Bank held securities from the
following issuers with a book value greater than 10% of Bank
total capital.
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Total
|
(in millions)
|
|
Book Value
|
|
Fair Value
|
Government National Mortgage Association
|
|
$
|
1,670.4
|
|
|
$
|
1,674.3
|
|
J.P. Morgan Mortgage Trust
|
|
|
1,248.8
|
|
|
|
1,217.4
|
|
U.S. Treasury
|
|
|
1,029.7
|
|
|
|
1,029.7
|
|
Federal Home Loan Mortgage Corp.
|
|
|
900.9
|
|
|
|
939.5
|
|
Wells Fargo Mortgage Backed Securities Trust
|
|
|
748.4
|
|
|
|
712.4
|
|
Structured Adjustable Rate Mortgage Loan Trust
|
|
|
442.0
|
|
|
|
424.6
|
|
Pennsylvania Housing Finance Agency
|
|
|
401.0
|
|
|
|
391.7
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,441.2
|
|
|
$
|
6,389.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the third quarter of 2009, Taylor, Bean &
Whitaker (TBW), a servicer on one of the Banks private
label MBS filed for bankruptcy. There is now a replacement
servicer on this security. The replacement servicer has provided
monthly remittances related to 2010 activity. However, certain
months in 2009 are continuing to be reconciled by the
replacement servicer.
For additional information on the credit risk of the investment
portfolio, see Credit and Counterparty
Risk-Investments discussion in the Risk Management section
of this Item 2. Managements Discussion and Analysis
in the quarterly report filed on this
Form 10-Q.
Deposits. At March 31, 2010, time
deposits in denominations of $100 thousand or more totaled
$5.0 million. The table below presents the maturities for
time deposits in denominations of $100 thousand or more:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Over 3
|
|
|
Over 6
|
|
|
|
|
|
|
|
|
|
|
|
|
Months but
|
|
|
Months but
|
|
|
|
|
|
|
(in millions)
|
|
|
3 Months
|
|
|
Within
|
|
|
Within
|
|
|
|
|
|
|
By Remaining Maturity at March 31, 2010
|
|
|
or Less
|
|
|
6 Months
|
|
|
12 Months
|
|
|
Thereafter
|
|
|
Total
|
Time certificates of deposit ($100,000 or more)
|
|
|
$
|
4.5
|
|
|
|
$
|
-
|
|
|
|
$
|
0.5
|
|
|
|
$
|
-
|
|
|
|
$
|
5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitment and Off-balance Sheet
Items. At March 31, 2010, the Bank was
obligated to fund approximately $158.0 million in
additional advances, $16.7 million of mortgage loans and
$8.0 billion in outstanding standby letters of credit, and
to issue $995.0 million in consolidated obligations. The
Bank does not consolidate any off-balance sheet special purpose
entities or other off-balance sheet conduits.
Retained Earnings. The Finance Agency
has issued regulatory guidance to the FHLBanks relating to
capital management and retained earnings. The guidance directs
each FHLBank to assess, at least annually, the adequacy of its
retained earnings with consideration given to future possible
financial and economic scenarios. The guidance also outlines the
considerations that each FHLBank should undertake in assessing
the adequacy of its retained earnings. In accordance with the
Finance Agencys RBC regulations, when the Banks
market value of equity to book value of equity falls below 85%,
the Bank is required to provide for additional market RBC. In
response to recent regulatory guidance, management has revised
its Asset Classification Policy. This change may result in
certain MBS being assigned a higher level of credit risk for
reasons beyond a credit rating below investment grade.
Managements assessment as of March 31, 2010 indicated
that this new guidance did not have a material impact with
respect to required retained earnings levels. This assessment
will be performed on an ongoing basis, so the impact on future
periods could prove to be material.
29
On December 23, 2008, in an effort to build retained
earnings, the Bank announced its voluntary decision to
temporarily suspend dividend payments until further notice.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(in millions)
|
|
2010
|
|
2009
|
Balance, beginning of the period
|
|
$
|
389.0
|
|
|
$
|
170.5
|
|
Cumulative effect of adoption of the amended OTTI guidance
|
|
|
-
|
|
|
|
255.9
|
|
Net income (loss)
|
|
|
9.9
|
|
|
|
(23.6
|
)
|
|
|
|
|
|
|
|
|
|
Balance, end of the period
|
|
$
|
398.9
|
|
|
$
|
402.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2010, retained earnings were
$398.9 million, an increase of $9.9 million, or 2.5%,
from December 31, 2009. This increase reflects the
Banks first quarter 2010 net income. At
March 31, 2009, retained earnings were $402.8 million,
representing an increase of $232.3 million, or 136.2%, from
December 31, 2008. The Bank adopted the amended OTTI
guidance effective January 1, 2009. This adoption resulted
in a $255.9 million increase in retained earnings due to
the cumulative effect adjustment recorded as of January 1,
2009. This cumulative effect adjustment did not impact the
Banks REFCORP or AHP assessment expenses or liabilities,
as these assessments are based on GAAP net income. Excluding the
cumulative effect adjustment, retained earnings fell
$23.6 million from prior year-end driven by the Banks
first quarter 2009 net loss. Additional information
regarding the amended OTTI guidance is available in the Critical
Accounting Policies and Note 3 to the audited financial
statements, both in the Banks 2009 Annual Report filed on
Form 10-K.
Further details of the components of required RBC are presented
in the Capital Resources discussion in
Managements Discussion and Analysis in the quarterly
report filed on this
Form 10-Q.
See Note 19 to the audited financial statements in the
Banks 2009 Annual Report filed on
Form 10-K
for further discussion of risk-based capital and the Banks
policy on capital stock requirements.
Capital
Resources
The following is Managements Discussion and Analysis of
the Banks capital resources as of March 31, 2010,
which should be read in conjunction with the unaudited interim
financial conditions and notes included in the quarterly report
filed on this
Form 10-Q
and the audited financial statements in the Banks 2009
Annual Report filed on
Form 10-K.
Risk-Based
Capital (RBC)
The Finance Agencys RBC regulations require the Bank to
maintain sufficient permanent capital, defined as retained
earnings plus capital stock, to meet its combined credit risk,
market risk and operational risk. Each of these components is
computed as specified in regulations and directives issued by
the Finance Agency.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
December 31,
|
(in millions)
|
|
2010
|
|
2009
|
|
2008
|
Permanent capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
stock(1)
|
|
$
|
4,043.4
|
|
|
$
|
4,026.3
|
|
|
$
|
3,986.4
|
|
Retained earnings
|
|
|
398.9
|
|
|
|
389.0
|
|
|
|
170.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total permanent capital
|
|
$
|
4,442.3
|
|
|
$
|
4,415.3
|
|
|
$
|
4,156.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RBC requirement:
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit risk capital
|
|
$
|
909.2
|
|
|
$
|
943.7
|
|
|
$
|
278.7
|
|
Market risk capital
|
|
|
1,042.7
|
|
|
|
1,230.8
|
|
|
|
2,739.1
|
|
Operations risk capital
|
|
|
585.5
|
|
|
|
652.4
|
|
|
|
905.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total RBC requirement
|
|
$
|
2,537.4
|
|
|
$
|
2,826.9
|
|
|
$
|
3,923.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note:
(1) Capital
stock includes mandatorily redeemable capital stock
30
The Bank held excess permanent capital over RBC requirements of
$1.9 billion, $1.6 billion and $233.8 million at
March 31, 2010, December 31, 2009 and
December 31, 2008, respectively.
Capital
and Leverage Ratios
In addition to the requirements for RBC, the Finance Agency has
mandated maintenance of certain capital and leverage ratios. The
Bank must maintain total regulatory capital and leverage ratios
of at least 4.0% and 5.0% of total assets, respectively.
Management has an ongoing program to measure and monitor
compliance with the ratio requirements. As a matter of policy,
the Board has established an operating range for capitalization
that calls for the capital ratio to be maintained between 4.08%
and 5.0%. To enhance overall returns, it has been the
Banks practice to utilize leverage within this operating
range when market conditions permit, while maintaining
compliance with statutory, regulatory and Bank policy limits.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
December 31,
|
(dollars in millions)
|
|
2010
|
|
2009
|
|
2008
|
Capital Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum capital (4.0% of total assets)
|
|
$
|
2,346.2
|
|
|
$
|
2,611.6
|
|
|
$
|
3,632.2
|
|
Actual capital (permanent capital plus loan loss reserves)
|
|
|
4,442.3
|
|
|
|
4,415.4
|
|
|
|
4,170.9
|
|
Total assets
|
|
|
58,656.0
|
|
|
|
65,290.9
|
|
|
|
90,805.9
|
|
Capital ratio (actual capital as a percent of total assets)
|
|
|
7.6
|
%
|
|
|
6.8
|
%
|
|
|
4.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum leverage capital (5.0% of total assets)
|
|
$
|
2,932.8
|
|
|
$
|
3,264.5
|
|
|
$
|
4,540.3
|
|
Leverage capital (permanent capital multiplied by a 1.5
weighting factor plus loan loss reserves)
|
|
|
6,663.4
|
|
|
|
6,623.1
|
|
|
|
6,249.3
|
|
Leverage ratio (leverage capital as a percent of total assets)
|
|
|
11.4
|
%
|
|
|
10.1
|
%
|
|
|
6.9
|
%
|
Management reviews, on a routine basis, projections of capital
leverage that incorporate anticipated changes in assets,
liabilities, and capital stock levels as a tool to manage
overall balance sheet leverage within the Boards operating
ranges. In connection with this review, when management believes
that adjustments to the current member stock purchase
requirements within the ranges established in the capital plan
are warranted, a recommendation is presented for Board
consideration. The member stock purchase requirements have been
adjusted several times since the implementation of the capital
plan in December 2002. The current percentages are 4.75%, 0.75%
and 4.0% of member loans outstanding, unused borrowing capacity
and AMA activity, respectively.
The Bank has initiated the process of amending its capital plan.
The goal of this capital plan amendment is to provide members
with a more stable membership capital stock calculation that
would replace the Unused Borrowing Capacity calculation.
Additionally, the proposed amendment would expand the AMA stock
purchase requirement range and prospectively establish a capital
stock purchase requirement for letters of credit. As required by
Finance Agency regulation and the terms of the capital plan, any
amendment must be approved by the Finance Agency prior to
becoming effective.
On November 10, 2008, the Bank first changed its excess
capital stock repurchase practice, stating that the Bank would
no longer make excess capital stock repurchases at a
members request and noting that the previous practice of
repurchasing excess capital stock from all members on a periodic
basis was revised. Subsequently, as announced on
December 23, 2008, the Bank temporarily suspended excess
capital stock repurchases on a voluntary basis until further
notice. At March 31, 2010 and December 31, 2009,
excess capital stock totaled $1.3 billion and
$1.2 billion, respectively. The Banks prior practice
was to promptly repurchase the excess capital stock of its
members upon their request (except with respect to
directors institutions during standard blackout periods).
As long as it is not repurchasing excess capital stock, the
Banks capital and leverage ratios may continue to increase
outside of normal ranges as evidenced by the increases from
December 31, 2008 through March 31, 2010. This may
continue to result in lower earnings per share and return on
capital.
31
Critical
Accounting Policies
The Banks financial statements are prepared in accordance
with U.S. Generally Accepted Accounting Principles (GAAP).
Application of these principles requires management to make
estimates, assumptions or judgments that affect the amounts
reported in the financial statements and accompanying notes. The
use of estimates, assumptions and judgments is necessary when
financial assets and liabilities are required to be recorded at,
or adjusted to reflect, fair value. Assets and liabilities
carried at fair value inherently result in more financial
statement volatility. The fair values and the information used
to record valuation adjustments for certain assets and
liabilities are based on quoted market prices when available.
When quoted market prices are not available, fair values may be
obtained from third-party sources or are estimated in good faith
by management, primarily through the use of internal cash flow
and other financial modeling techniques.
The most significant accounting policies followed by the Bank
are presented in Note 2 to the audited financial statements
in the Banks 2009 Annual Report filed on
Form 10-K.
These policies, along with the disclosures presented in the
other notes to the financial statements and in this
Form 10-Q,
provide information on how significant assets and liabilities
are valued in the financial statements and how those values are
determined. Management views critical accounting policies to be
those which are highly dependent on subjective or complex
judgments, estimates or assumptions, and those for which changes
in those estimates or assumptions could have a significant
impact on the financial statements.
The following critical accounting policies are discussed in more
detail under this same heading in the Banks 2009 Annual
Report filed on
Form 10-K:
|
|
|
|
|
Other-Than-Temporary
Impairment Assessments for Investment Securities*
|
|
|
Fair Value Calculations and Methodologies
|
|
|
Accounting for Derivatives
|
|
|
Advances and Related Allowance for Credit Losses
|
|
|
Guarantees and Consolidated Obligations
|
|
|
Accounting for Premiums and Discounts on Mortgage Loans and MBS
|
|
|
Allowance for Credit Losses on Banking on Business Loans
|
|
|
Allowance for Credit Losses on Mortgage Loans Held for Portfolio
|
|
|
Future REFCORP Payments
|
*The critical accounting policies in the Banks 2009 Annual
Report filed on
Form 10-K
includes discussion regarding the impact of the amended OTTI
guidance issued by the FASB during April 2009 and adopted by the
Bank effective January 1, 2009. The Banks adoption of
the amended OTTI guidance required a cumulative effect
adjustment as of January 1, 2009 which increased the
Banks retained earnings by $255.9 million, with an
offsetting decrease in AOCI.
The Bank did not implement any material changes to its
accounting policies or estimates, nor did the Bank implement any
new accounting policies that had a material impact on the
Banks Statement of Operations and Statement of Condition
for the three months ended March 31, 2010.
Recently Issued Accounting Standards and
Interpretations. See Note 2 to the unaudited
financial statements in Item 1. Financial Statements and
Supplementary Financial Data in the quarterly report filed on
this
Form 10-Q
for a discussion of recent accounting pronouncements that are
relevant to the Banks businesses.
Legislative
and Regulatory Developments
Final Rule Regarding Restructuring the Office of
Finance (OF). On August 4, 2009, the Finance
Agency issued a proposed rule regarding the restructuring of the
board of directors of the OF. On May 3, 2010 the Finance
Agency issued a final regulation restructuring the board of
directors of the OF. The regulation will become effective on
June 2, 2010. Among other things, the final regulation:
(1) increases the size of the board such that it will be
comprised of the twelve FHLBank presidents and five independent
directors; (2) creates an audit committee;
(3) provides for the creation of other committees;
(4) sets a method for electing independent directors along
with setting qualifications for these directors; and
(5) provides that the method of funding the OF and
allocating its expenses among the FHLBanks shall be as
determined by policies adopted by the board of directors. The
newly-
32
created audit committee will be comprised solely of the five
independent directors and will be charged with oversight of
greater consistency in accounting policies and procedures among
the FHLBanks related to the combined financial reports published
by the OF.
Final Regulation on FHLBank Directors Eligibility,
Elections, Compensation and Expenses. On
April 5, 2010, the Finance Agency issued a final regulation
on FHLBank director elections, compensation and expenses.
Regarding elections, the final regulation changes the process by
which FHLBank directors are chosen after a directorship is
re-designated to a new state prior to the end of the term as a
result of the annual designation of FHLBank directorships.
Specifically, the re-designation causes the original
directorship to terminate at the end of the next calendar year
and creates a new directorship that will be filled by an
election of the applicable members. Regarding compensation, the
final regulation, among other things: (1) allows FHLBanks
to pay directors reasonable compensation and reimburse necessary
expenses; (2) requires FHLBanks to adopt a written
compensation and reimbursement of expenses plan;
(3) prescribes certain related reporting requirements; and
(4) prohibits payments to FHLBank directors who regularly
fail to attend board or committee meetings.
Final Regulation on the Reporting of Fraudulent Financial
Instruments and Loans. On January 26, 2010 the
Finance Agency issued a final regulation regarding reporting of
fraudulent financial instruments and loans. The final regulation
largely incorporates the terms of the proposed regulation issued
June 17, 2009, requiring Fannie Mae, Freddie Mac, and the
FHLBanks to report to the Finance Agency any such entitys
sale or purchase of fraudulent financial assets and loans. The
final regulation imposes requirements on the timeframe, format,
document retention, and nondisclosure obligations for the Bank
reporting fraud or possible fraud to the Finance Agency. Under
the final regulation, fraud and potential fraud are defined
broadly, potentially creating significant reporting obligations.
The final regulation states that the Finance Agency will issue
additional guidance establishing the specific reporting
requirements for the FHLBanks. It is expected that this guidance
will be issued by the end of April 2010. The Bank will be in a
position to assess the significance of the reporting obligations
once the Finance Agency has promulgated the additional guidance
and specific requirements.
Finance Agency Examiner GuidanceFramework for
Adversely Classifying Investment Securities and Supplemental
Framework for Identifying Special Mention and Adversely
Classifying Private-Label
Mortgage-Backed
Securities. On January 7, 2010 the Finance Agency
issued guidance adopting the federal banking regulators
Uniform Agreement on Classification of Assets and Appraisal of
Securities Held by Banks and Thrifts (Interagency Agreement).
The Interagency Agreement establishes standards for adversely
classifying investment securities. In addition, the Examiner
Guidance bulletin states that the Finance Agency is
supplementing the Interagency Agreement with additional factors
for adversely classifying private label MBS. The level and
severity of adversely classified private label MBS is to be
considered by the FHLBanks when establishing retained earnings
targets and considered as an element of performance-based
compensation for executive management. This change may result in
certain MBS being assigned a higher level of credit risk for
reasons beyond a credit rating below investment grade.
Managements assessment as of March 31, 2010 indicated
that this new guidance did not have a material impact with
respect to required retained earnings levels. This assessment
will be performed on an ongoing basis, so the impact on future
periods could prove to be significant.
Finance Agency Advisory Bulletin on Application of
Guidance on Nontraditional and Subprime Residential Mortgage
Loans. On April 6, 2010, the Finance Agency
issued an advisory bulletin to provide clarification to the
FHLBanks on whether certain nontraditional and subprime loans
pledged to the FHLBanks by their members or private label MBS
backed by such loans may be considered eligible collateral or
whether such assets are required to be treated as ineligible
collateral for advances. This Advisory Bulletin may have
significant implications on the Banks acceptance of
private label MBS and nontraditional residential mortgages as
advance collateral. The Bank is completing a preliminary impact
analysis on its members.
Finance Agency Proposed Rule Regarding FHLBank
Investments. On May 4, 2010, the Finance
Agency issued a notice of proposed rule regarding FHLBank
investments. Among other things the proposed rule would
(1) move the existing Finance Board investment regulations
from 12 C.F.R. Part 956 to 12 C.F.R.
Part 1267 and (2) incorporate the regulation the
current limitations on the level of an FHLBanks MBS
investments that are applicable as a matter of Finance Agency
financial management policy and order (including without
limitation the provision limiting the level of an FHLBanks
MBS investments to no more than 300% of an FHLBanks
capital).
33
The proposal also requests comment on whether additional
limitations on an FHLBanks MBS investments, including its
private label MBS investments, should be adopted as part of a
final regulation and whether with respect to private label MBS
investments limitations should be based on an FHLBanks
level of retained earnings. Comments on the proposed rule are
due on July 6, 2010.
Money Market Fund Reform. On
March 4, 2010, the SEC published a final rule, amending the
rules governing money market funds under the Investment Company
Act. These amendments will result in tightened liquidity
requirements, such as: maintaining certain financial instruments
for short-term liquidity; reducing the maximum weighted-average
maturity of portfolio holdings and improving the quality of
portfolio holdings. The final rule includes overnight FHLBank
consolidated discount notes in the definition of daily
liquid assets and weekly liquid assets and
will encompass FHLBank consolidated discount notes with
remaining maturities of up to 60 days in the definition of
weekly liquid assets. These provisions reflect
changes to the SECs proposed rule that would have excluded
certain FHLBank consolidated discount notes, other than
overnight FHLBank consolidated discount notes, from the
definition of both daily liquid assets and
weekly liquid assets. The final rules
requirements become effective on May 5, 2010 unless another
compliance date is specified for a requirement (e.g., daily and
weekly liquidity requirements become effective on May 28,
2010). The Bank expects this final rule will increase demand for
discount notes with maturities of up to 60 days, which may
benefit the Bank in terms of an increase in the market for
discount notes.
Federal Reserve Board GSE Debt and MBS Purchase
Initiatives. On November 25, 2008, the Federal
Reserve announced an initiative for the FRBNY to purchase up to
$100 billion of the debt of Freddie Mac, Fannie Mae, and
the FHLBanks. On March 18, 2009, the Federal Reserve
committed to purchase up to an additional $100 billion of
such debt. On November 4, 2009, the Federal Reserve
announced that it will cease purchasing such debt when the
aggregated purchases reach $175 billion. The Federal
Reserve completed these purchases in March 2010; however the
Banks funding costs were not materially impacted.
Federal Reserve Board Term Deposit
Program. On December 28, 2009, the Federal
Reserve announced a proposal to offer a term deposit program for
certain eligible Federal Reserve member institutions. On
May 3, 2010 the Federal Reserve announced that it had
approved a final regulation establishing the Federal Reserve
term deposit program. The FHLBanks are not eligible to
participate in this program. The program will enable eligible
institutions to deposit funds with the Federal Reserve outside
of the Federal Reserve program, earn interest on the funds, and
pledge such deposits as collateral for loans from the Federal
Reserve.
FDIC Regulation on Deposit Insurance
Assessments. On April 13, 2010 the FDIC
approved a proposed rule to revise the deposit insurance
assessment system for large institutions which pose unique and
concentrated risks to the deposit insurance fund. An ability to
withstand funding-related stress score would be calculated with
the ratio of secured liabilities to total domestic deposits
receiving a 50% risk weight when calculating an
institutions loss severity score. The FDIC would continue
to allow for adjustments as a result of secured liabilities and
the proposal would extend the adjustment for brokered deposits
to all large institutions. On February 27, 2009, the FDIC
issued a final regulation on increases in deposit insurance
premium assessments to restore the Deposit Insurance Fund. The
final regulation is effective April 1, 2009. The
assessments adopted by the FDIC are higher for institutions that
use secured liabilities in excess of 25 percent of
deposits. Secured liabilities are defined to include FHLBank
advances. These rules may tend to decrease demand for advances
from Bank members affected due to the increase in the effective
all-in cost from the increased premium assessments.
FDIC Transaction Account Guarantee
Program. On August 26, 2009, the FDIC approved
the extension of its guarantee for noninterest bearing
transaction accounts through June 30, 2010 for those
participating institutions that do not opt-out of the program.
On April 13, 2010 the FDIC extended the transaction account
guarantee program through December 31, 2010. Under the
FDICs interim final rule the FDIC has the authority to
further extend the program through December 31, 2011.
Federal Banking Regulators Interagency Guidance on
Correspondent Concentration Risks. On
April 30, 2010, the FDIC, Federal Reserve, Office of the
Comptroller of the Currency, and Office of Thrift Supervision
(the Agencies) issued final guidance on correspondent
concentration risks, which is effective upon issuance. The
guidance provides that the stated levels of credit and funding
exposures are not firm limits but that relationships within the
levels set forth in the guidance warrant robust risk management.
The guidance provides that the Agencies
34
generally consider credit exposures arising from direct and
indirect obligations in an amount equal to or greater than
25 percent of total capital as concentrations. Depending on
its size and characteristics, a concentration of credit for a
financial institution may represent a funding exposure to the
correspondent. However, the guidance does not establish a
funding concentration threshold. The guidance provides that the
percentage of liabilities or other measurements that may
constitute a concentration of funding is likely to vary
depending on the type and maturity of the funding, and the
structure of the recipients sources of funds. Since it is
unclear whether member advances from an FHLBank may constitute a
concentration subject to the guidance and, if so, what the
implication for such a member would be, the Bank cannot predict
what impact the guidance may have.
Helping Families Save Their Homes Act of 2009 and Other
Mortgage Modification Legislation. On May 20,
2009, the Helping Families Save Their Home Act of 2009 was
enacted to encourage loan modifications in order to prevent
mortgage foreclosures and to support the federal deposit
insurance system. One provision in the act provides a safe
harbor from liability for mortgage servicers who modify the
terms of a mortgage consistent with certain qualified loan
modification plans. At this time it is uncertain what effect the
provisions regarding loan modifications will have on the value
of the Banks mortgage asset portfolio, the mortgage loan
collateral pledged by members to secure their loans to members
from the Bank or the value of the Banks MBS. As mortgage
servicers modify mortgages under the various government
incentive programs and otherwise, the value of the Banks
MBS and mortgage loans held for investment and mortgage assets
pledged as collateral for member advances may be reduced. At
this point, legislation to allow bankruptcy cramdowns on
mortgages secured by owner-occupied homes has been defeated in
the U.S. Senate; however, similar legislation could be
re-introduced. With this potential change in the law, the risk
of losses on mortgages due to borrower bankruptcy filings could
become material. The previously proposed legislation permitted a
bankruptcy judge, in specified circumstances, to reduce the
mortgage amount to todays market value of the property,
reduce the interest rate paid by the debtor,
and/or
extend the repayment period. In the event that this legislation
would again be proposed, passed and applied to existing mortgage
debt (including residential MBS), the Bank could face increased
risk of credit losses on its private label MBS that include
bankruptcy carve-out provisions and allocate bankruptcy losses
over a specified dollar amount on a pro-rata basis across all
classes of a security. As of March 31, 2010, the Bank had
69 private label MBS with a par value of $3.6 billion that
include bankruptcy carve-out language that could be affected by
cramdown legislation. The effect on the Bank will depend on the
actual version of the legislation that would be passed (if any)
and whether mortgages held by the Bank, either within the MPF
Program or as collateral for MBS held by the Bank, would be
subject to bankruptcy proceedings under the new legislation.
Other Bankruptcy Reform Act Amendments also continue to be
discussed.
House and Senate Financial Reform
Legislation. On December 11, 2009, 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: (1) create a consumer financial
protection agency; (2) create an inter-agency oversight
council that will identify and regulate systemically-important
financial institutions; (3) regulate the
over-the-counter
derivatives market; (4) reform the credit rating agencies;
(5) provide shareholders with an advisory vote on the
compensation practices of the entity in which they invest
including for executive compensation and golden parachutes; and
(6) create a federal insurance office that will monitor the
insurance industry.
The Senate version of financial regulatory reform legislation,
the Restoring American Financial Stability Act (Financial
Stability Act), passed the Senate banking committee on
March 22, 2010 and is undergoing Senate floor action. The
Financial Stability Act, would, among other things:
(1) create a consumer financial protection bureau, housed
within the Federal Reserve; (2) create an inter-agency
oversight council that will identify and regulate
systemically-important financial institutions; (3) attempt
to end too big to fail by creating a new way to
liquidate failed financial firms, imposing new capital and
leverage requirements, updating the Federal Reserves
authority to allow system-wide support and establishing rigorous
standards and supervision to protect the economy;
(4) establish a new system of regulation for over the
counter derivatives; (5) streamline bank supervision;
(6) provide shareholders with a say on pay and corporate
affairs with a nonbinding vote on executive compensation;
(7) require the largest financial firms to separate their
investment banking and proprietary trading from their commercial
banking activities; (8) provide for rules for transparency
and accountability for credit rating agencies; and
(9) strengthen regulatory oversight and empower regulators
to aggressively pursue financial fraud, conflicts of interest
and manipulation of the financial system. Depending on whether
the House or
35
Senate version, or similar legislation, is signed into law and
the final content of any such legislation, the Banks
business, operations, funding costs, rights, obligations,
and/or the
manner in which the Bank carries out its mission may be
impacted. For example, regulations on the
over-the-counter
derivatives market that may be issued under final legislation
could impact the Banks ability to and increase the costs
to hedge its interest-rate risk exposure from advances, achieve
the Banks risk management objectives, and act as an
intermediary between its members and counterparties. Limitations
on the level of lending an FHLBank could engage in with its
members could have a significant impact on the FHLBanks. Any
proprietary trading limits that do not treat FHLBank System debt
in the same manner as Fannie Mae and Freddie Mac debt would also
have an impact on the FHLBanks.
Depending on whether the House or Senate version, or similar
legislation is signed into law and on the final content of any
such legislation, the Banks business, operations, funding
costs, rights, obligations,
and/or the
manner in which the Bank carries out its mission may be
impacted. For example, regulations on the
over-the-counter
derivatives market that may be issued under the Reform Act could
impact the Banks ability to hedge its interest-rate risk
exposure from advances, achieve the Banks risk management
objectives, and act as an intermediary between its members and
counterparties. Limitations on the level of lending an FHLBank
could engage in with its members could have a significant impact
on the FHLBanks. However, the Bank cannot predict whether any
such legislation will be enacted and what the content of any
such legislation or regulations issued under any such
legislation would be and so cannot predict what impact the
Reform Act or similar legislation may have on the Bank.
GSE Reform and Additional Financial Regulatory
Reform. On April 14, 2010, the
U.S. Treasury released for a
60-day
public comment period questions regarding how the future
U.S. housing finance system should be structured and the
role of the GSEs in housing. The GSE and housing finance system
reform process are in their initial stages. In January 2010, the
U.S. Treasury announced a proposal to impose a
15 basis point financial responsibility fee that financial
firms with assets of greater than $50 billion would pay on
their covered liabilities. In the event that covered liabilities
are defined to include FHLBank advances to members, the fee
could impact member borrowing by affected firms.
U.S. Treasury Departments Financial Stability
Plan. On March 23, 2009, in accordance with
the U.S. Treasurys announced Financial Stability
Plans initiative to purchase illiquid assets, the
U.S. Treasury announced the Public-Private Investment
Program (PPIP), which is a program designed to attract private
investors to purchase certain real estate loans and illiquid MBS
(originally AAA-rated) owned by financial institutions using up
to $100 billion in TARP capital funds. These funds could be
levered with debt funding also provided by the
U.S. Treasury to expand the capacity of the program. On
July 8, 2009, the U.S. Treasury announced that it had
selected the initial nine PPIP fund managers to purchase legacy
securities including commercial and residential MBS originally
issued prior to 2009 that were originally rated AAA by two or
more NRSROs. On September 30, 2009, the Treasury Department
announced the initial closings of two Public Private Investment
Funds established under PPIP to purchase legacy securities.
Through March 31, 2010 the market value of the PPIP
residential MBS transactions executed was $8.8 billion. The
PPIPs activities in purchasing such residential MBS could
affect the values of residential MBS. On September 18,
2009, the Treasury Department ended its temporary program to
sustain money market funds at stable net asset values.
Risk
Management
Ongoing concerns over the impact of residential mortgage lending
practices, including failure to adhere to sound underwriting
standards, precipitated a sharp deterioration in the subprime-
and
Alt-A-related
mortgage markets, as well as the broader mortgage and credit
markets, beginning in 2008 and continuing through the first
quarter of 2010. In particular, the market for MBS experienced
high levels of volatility and uncertainty, reduced demand and
lack of liquidity, resulting in credit spreads widening
significantly. This deterioration in the housing market was
evidenced by growing delinquency and foreclosure rates on
subprime, Alt-A and prime mortgages. Given the uncertainty in
the mortgage markets, MBS continue to be subject to various
rating agency downgrades. Central banks, including the Federal
Reserve and the European Central Bank, have sought to prevent a
serious and extended economic downturn resulting from these and
other market difficulties by making significant interest rate
reductions and taking other actions to free up credit.
36
The Bank is heavily dependent on the residential mortgage market
through the collateral securing member loans and holdings of
mortgage-related assets. The Banks member collateral
policies, practices and secured status are discussed in more
detail below as well as in Item 1. Business in the
Banks 2009 Annual Report filed on
Form 10-K.
Additionally, the Bank has outstanding credit exposures related
to the MPF Program and investments in private label MBS, which
are affected by the mortgage market deterioration. All of these
risk exposures are continually monitored and are discussed in
more detail in the following sections.
For further information regarding the financial and residential
markets in first quarter 2010, see the Current Financial
and Mortgage Markets and Trends discussion in the Overview
section of this Item 2. Managements Discussion and
Analysis in the quarterly report filed on this
Form 10-Q.
Risk
Governance
The Banks lending, investment and funding activities and
use of derivative hedging instruments expose the Bank to a
number of risks that include market and interest rate risk,
credit and counterparty risk, liquidity and funding risk, and
operating and business risk, among others, including those
described in Item 1A. Risk Factors in the Banks 2009
Annual Report filed on
Form 10-K.
During first quarter 2010, the Board, with the support of
management, conducted an evaluation of the Banks risk
appetite. This included updates/changes to the Board level risk
metrics being used to monitor the Banks risk position.
Information regarding the new
and/or
revised metrics is included in each relevant discussion in more
detail below.
Capital Adequacy Measures. During 2008 and
2009, the Banks overarching capital adequacy metric was
the Projected Capital Stock Price (PCSP). The PCSP was
calculated using risk components for interest rates, spread,
credit, operating and accounting risk. The sum of these
components represented an estimate of projected capital stock
price variability and was used in evaluating the adequacy of
retained earnings and developing dividend payout recommendations
to the Board. The Board had established a PCSP floor of 85% and
a target of 95%. The difference between the actual PCSP and the
floor or target, if any, represented a range of additional
retained earnings that, in the absence of a reduction in the
aforementioned risk components, would need to be accumulated
over time to restore the PCSP and retained earnings to an
adequate level.
Mortgage spreads, particularly spreads on private label MBS,
expanded to historically wide levels over the last two years,
reflecting increased credit risk and an illiquid market
environment. In response to these unprecedented market
developments, management developed an Alternative Risk Profile
to exclude the effects of further increases in certain
mortgage-related asset credit spreads to better reflect the
underlying interest rate risk and accommodate prudent management
of the Banks balance sheet.
The following table presents the Banks PCSP calculation
under the provisions of the Risk Governance Policy through
December 31, 2009. Under both the Actual and Alternative
Risk Profile calculations, the Bank was out of compliance with
the PCSP limits for all periods presented.
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Projected Capital Stock Price (PCSP)
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Actual
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|
Alternative Risk Profile
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Floor
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|
|
Target
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December 31, 2009
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34.1
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%
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68.4
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%
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85
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%
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95
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%
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September 30, 2009
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25.5
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%
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|
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67.8
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%
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85
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%
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95
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%
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June 30, 2009
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21.2
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%
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71.6
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%
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85
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%
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95
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%
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March 31, 2009
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11.6
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%
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73.2
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%
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85
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%
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95
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%
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December 31, 2008
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9.9
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%
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74.2
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%
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85
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%
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95
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%
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As a part of the risk appetite evaluation previously mentioned,
the Board and management reviewed the PCSP calculation. Given
the uncertainty in the credit markets, reflected in current
market values, the PCSP calculation became less meaningful in
terms of assessing Bank risk. As a result, the Bank transitioned
from using the PCSP metric and replaced it with a new key risk
indicator Market Value of Equity to Par Value of
Capital Stock
37
(MV/CS)
for first quarter 2010. This risk metric provides a current
assessment of the liquidation value of the balance sheet and
measures the Banks current ability to honor the par put
redemption feature of its capital stock.
An initial floor of 85% was established for MV/CS. The floor
represents the estimated level from which the MV/CS would
recover to par, through the retention of retained earnings, over
the five-year par put redemption period of the Banks
capital stock. MV/CS will be measured against the floor monthly.
When MV/CS is below the established floor, excess capital stock
repurchases and dividend payouts will be restricted. When MV/CS
is above the established floor, additional analysis of the
adequacy of retained earnings will be performed, taking into
consideration the impact of excess capital stock repurchases
and/or
dividend payouts.
The following table presents the MV/CS calculations for
March 31, 2010, as well as the four quarters of 2009, which
were calculated for comparison purposes.
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MV/CS
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March 31, 2010
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80.7
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%
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December 31, 2009
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74.4
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%
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September 30, 2009
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66.6
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%
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June 30, 2009
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48.5
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%
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March 31, 2009
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29.3
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%
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|
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|
|
During first quarter 2010, the change in the MV/CS was primarily
due to narrower mortgage spreads, principal paydowns on private
label MBS and lower longer term interest rates and volatility.
Qualitative
Disclosures Regarding Market Risk
Managing Market and Interest Rate Risk. The
Banks market and interest rate risk management objective
is to protect member/shareholder and bondholder value consistent
with the Banks housing mission and safe and sound
operations in all interest-rate environments. Management
believes that a disciplined approach to market and interest rate
risk management is essential to maintaining a strong and durable
capital base and uninterrupted access to the capital markets.
Market risk is defined as the risk of loss arising from adverse
changes in market rates and prices and other relevant market
rate or price changes, such as basis changes. Generally, the
Bank manages basis risk through asset selection and pricing. The
unprecedented private label mortgage credit spreads have
significantly reduced the Banks net market value.
Interest rate risk is the risk that relative and absolute
changes in prevailing market interest rates may adversely affect
an institutions financial performance or condition.
Interest rate risk arises from a variety of sources, including
repricing risk, yield curve risk and options risk. The Bank
invests in mortgage assets, such as MPF Program mortgage loans
and MBS, which together represent the primary source of option
risk. As of March 31, 2010, mortgage assets totaled 23.0%
of the Banks balance sheet. Management reviews the
estimated market risk of the entire portfolio of mortgage assets
and related funding and hedges on a monthly basis to assess the
need for rebalancing strategies. These rebalancing strategies
may include entering into new funding and hedging transactions,
forgoing or modifying certain funding or hedging transactions
normally executed with new mortgage purchases, or terminating
certain funding and hedging transactions for the mortgage asset
portfolio.
Earnings-at-Risk. The
Bank employs an
Earnings-at-Risk
framework for certain
mark-to-market
positions, including economic hedges. This framework establishes
a forward-looking, scenario-based exposure limit based on
parallel rate shocks that would apply to any existing or
proposed transaction that is marked to market through the income
statement without an offsetting mark arising from a qualifying
hedge relationship. Beginning in the fourth quarter of 2009, the
rate shocks used to measure the
Earnings-at-Risk
Board-level metric were expanded to include flattening and
steepening scenarios.
In February 2010, the Board updated the daily exposure limit to
$2.4 million, compared to the previous limit of
$2.5 million. The Banks Asset and Liability Committee
(ALCO) has a more restrictive daily exposure operating guideline
of $2.0 million. Throughout the first quarter of 2010, the
daily forward-looking exposure was below the
38
operating guidelines of $2.0 million and at March 31,
2010 measured $472 thousand. The Banks Capital Markets and
Corporate Risk Management departments also monitor actual
profit/loss change on a daily, monthly cumulative, and quarterly
cumulative basis.
Quantitative
Disclosures Regarding Market Risk
The Banks Market Risk
Model. Significant resources, both in analytical
computer models and staff, are devoted to assuring that the
level of interest rate risk in the balance sheet is accurately
measured, thus allowing management to monitor the risk against
policy and regulatory limits. The Bank uses an externally
developed market risk model to evaluate its financial position.
Management regularly reviews the major assumptions and
methodologies used in the model, as well as available upgrades
to the model. One of the most critical market-based model
assumptions relates to the prepayment of principal on
mortgage-related instruments, which was upgraded in 2009 and the
first quarter of 2010 to more accurately reflect expected
prepayment behavior.
In recognition of the importance of the accuracy and reliability
of the valuation of financial instruments, management engages in
an ongoing internal review of model valuations for various
instruments. These valuations are evaluated on a quarterly basis
to confirm the reasonableness of the valuations. The Bank
regularly validates the models used to generate fair values. The
verification and validation procedures depend on the nature of
the instrument and valuation methodology being reviewed and may
include comparisons with observed trades or other sources and
independent verification of key model inputs. Results of the
quarterly verification process, as well as any changes in
valuation methodologies, are reported to ALCO, which is
responsible for reviewing and approving the approaches used in
the valuation to ensure that they are well controlled and
effective, and result in reasonable fair values.
The duration of equity, return volatility and market value of
equity volatility metrics were historically the direct primary
metrics used by the Bank to manage its interest rate risk
exposure. As discussed above, in first quarter 2010 the Bank
re-evaluated its risk appetite, which included review and, when
necessary, revisions
and/or
replacements of the primary market risk metrics. As a result,
the return volatility metric was renamed as the Earned Dividend
Spread (EDS) Floor and a new key risk indicator, EDS Volatility,
was established. The Banks asset/liability management
policies specify acceptable ranges for duration of equity, EDS
Floor and EDS Volatility, and the Banks exposures are
measured and managed against these limits. These metrics are
described in more detail below.
Duration of Equity. One key risk metric used
by the Bank, and which is commonly used throughout the financial
services industry, is duration. Duration is a measure of the
sensitivity of a financial instruments value, or the value
of a portfolio of instruments, to a parallel shift in interest
rates. Duration (typically measured in months or years) is
commonly used by investors throughout the fixed income
securities market as a measure of financial instrument price
sensitivity. Longer duration instruments generally exhibit
greater price sensitivity to changes in market interest rates
than shorter duration instruments. For example, the value of an
instrument with a duration of five years is expected to change
by approximately 5% in response to a one percentage point change
in interest rates. Duration of equity, an extension of this
conceptual framework, is a measure designed to capture the
potential for the market value of the Banks equity base to
change with movements in market interest rates. Higher duration
numbers, whether positive or negative, indicate a greater
potential exposure of market value of equity in response to
changing interest rates.
The Banks asset/liability management policy approved by
the Board calls for duration of equity to be maintained within a
+ 4.5 year range in the base case. In addition, the
duration of equity exposure limit in an instantaneous parallel
interest rate shock of + 200 basis points is
+ 7 years. Management analyzes the duration of
equity exposure against this policy limit on a daily basis and
continually evaluates its market risk management strategies. In
connection with the Alternative Risk Profile discussed above,
management requested and was initially approved to use the
alternate calculation of duration of equity for monitoring
against established limits in 2008. This approval was extended
for 2009 through December 31, 2010.
39
The following table presents the Banks duration of equity
exposure in accordance with the actual and Alternative Risk
Profile duration of equity calculation by quarter.
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Base
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Up 100
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Up 200
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(in years)
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Case
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basis points
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|
basis points
|
Alternative duration of equity
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March 31, 2010
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|
|
1.8
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3.8
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4.5
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|
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|
December 31, 2009
|
|
|
|
1.1
|
|
|
|
|
2.4
|
|
|
|
|
2.9
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
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|
September 30, 2009
|
|
|
|
0.2
|
|
|
|
|
2.2
|
|
|
|
|
2.8
|
|
|
|
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|
|
|
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|
June 30, 2009
|
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|
2.3
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|
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|
3.2
|
|
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|
3.3
|
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|
March 31, 2009
|
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|
(2.7
|
)
|
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|
0.2
|
|
|
|
|
1.1
|
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|
Actual duration of equity
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|
March 31, 2010
|
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|
7.7
|
|
|
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|
7.0
|
|
|
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|
6.0
|
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|
|
|
|
|
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|
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|
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|
|
|
December 31, 2009
|
|
|
|
11.6
|
|
|
|
|
7.5
|
|
|
|
|
4.7
|
|
|
|
|
|
|
|
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|
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|
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|
September 30, 2009
|
|
|
|
15.3
|
|
|
|
|
10.5
|
|
|
|
|
6.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
|
22.1
|
|
|
|
|
11.7
|
|
|
|
|
6.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009
|
|
|
|
13.9
|
|
|
|
|
2.2
|
|
|
|
|
(2.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note: Given the low level of interest rates, an
instantaneous parallel interest rate shock of down
200 basis points and down 100 basis
points cannot be meaningfully measured for these periods
and therefore is not presented.
Private label MBS spreads widened significantly throughout 2008,
causing a substantial decline in the market value of equity. The
Banks low market value of equity has the effect of
amplifying the actual reported duration of equity metric, As a
result, the Bank was substantially out of compliance with the
actual reported duration of equity throughout 2009 and the first
quarter of 2010. However, under the Alternative Risk Profile,
the Bank was in compliance with the duration of equity policy
metric for all periods presented.
During first quarter 2010, increases in the Alternative duration
of equity were primarily a result of prepayment model changes
made during the quarter, which more accurately reflect actual
prepayment levels and the impact of fixed rate debt calls. The
resulting extension in duration was partially offset by the
impact of lower longer term interest rates as well as fixed rate
debt issued during the quarter.
The Bank continues to monitor the mortgage and related fixed
income markets and the impact that changes in the market may
have on duration of equity and other market risk measures and
may take actions to reduce market risk exposures as needed.
Management believes that the Banks current market risk
profile is reasonable given these market conditions.
Earned Dividend Spread (EDS). The Banks
asset/liability management policy previously specified a Return
Volatility metric, which is based on an earned dividend spread
(EDS). EDS is defined as the Banks return on average
capital stock in excess of the average return of an established
benchmark market index, the
3-month
LIBOR in the Banks case, for the period measured. EDS
measures the Banks forecasted level of earned dividend
spread in response to shifts in interest rates and reflects the
Banks ability to provide a minimum return on investment to
its members in the short term compared to the benchmark.
Consistent with the Return Volatility metric, EDS is measured
over both a rolling forward one to 12 month time period
(Year 1) and a 13 to 24 month time period
(Year 2), for selected interest rate scenarios.
As previously discussed, during first quarter 2010 the Board and
management re-evaluated the Banks risk appetite and the
related risk metrics used to manage the Banks risk,
including the Return Volatility metric. As a result, the Return
Volatility metric was renamed the EDS Floor. In addition, a new
key risk indicator, EDS Volatility, was established. The EDS
Floor represents the minimum acceptable return under the
selected interest rate scenarios, for both Year 1 and Year 2.
For both Years 1 and 2, the EDS Floor is
3-month
LIBOR plus 15 basis points. EDS Volatility is a measure of
the variability of the Banks EDS in response to shifts in
interest rates, specifically the change in EDS for a given time
period and interest rate scenario compared to the current base
forecasted EDS. EDS Volatility is also measured for both Year 1
and Year 2 and reflects the Banks ability to provide
40
a somewhat stable EDS in the short-term. As a new measure, a
limit on EDS Volatility has been established initially for Year
1; a limit for Year 2 will be evaluated in the future. Both the
EDS Floor and EDS Volatility will be assessed on a monthly basis.
The following table presents the Banks EDS and EDS
Volatility for the first quarter of 2010 as well as the four
quarters of 2009. These metrics are presented as spreads over
3-month
LIBOR. The steeper and flatter yield curve shift scenarios shown
below are represented by appropriate increases and decreases in
short-term and long-term interest rates using the three-year
point on the yield curve as the pivot point. Given the current
low rate environment, management replaced the down
200 basis points parallel rate scenario during the
fourth quarter of 2009 with an additional non-parallel rate
scenario that reflects a decline in longer term rates. The Bank
was in compliance with the EDS Floor and EDS Volatility limit
across all selected interest rate shock scenarios as of
March 31, 2010.
|
|
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|
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|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
Earned Dividend Spread
|
|
|
|
Yield Curve Shifts
(1)
|
|
|
|
(expressed in basis points)
|
|
|
|
Down 100 bps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Longer Term Rate
|
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|
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|
|
Forward
|
|
|
|
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|
|
|
|
Up 200 bps Parallel
|
|
|
|
Shock
|
|
|
100 bps Steeper
|
|
|
Rates
|
|
|
100 bps Flatter
|
|
|
Shock
|
|
|
|
EDS
|
|
|
Volatility
|
|
|
EDS
|
|
|
Volatility
|
|
|
EDS
|
|
|
EDS
|
|
|
Volatility
|
|
|
EDS
|
|
|
Volatility
|
Year 1 Return Volatility
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
|
199
|
|
|
|
|
(37
|
)
|
|
|
|
254
|
|
|
|
|
18
|
|
|
|
|
236
|
|
|
|
|
221
|
|
|
|
|
(15
|
)
|
|
|
|
223
|
|
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
187
|
|
|
|
|
(61
|
)
|
|
|
|
256
|
|
|
|
|
8
|
|
|
|
|
248
|
|
|
|
|
208
|
|
|
|
|
(40
|
)
|
|
|
|
211
|
|
|
|
|
(37
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
|
(2
|
)
|
|
|
|
(2
|
)
|
|
|
|
235
|
|
|
|
|
11
|
|
|
|
|
224
|
|
|
|
|
160
|
|
|
|
|
(64
|
)
|
|
|
|
146
|
|
|
|
|
(78
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
|
(2
|
)
|
|
|
|
(2
|
)
|
|
|
|
284
|
|
|
|
|
81
|
|
|
|
|
203
|
|
|
|
|
128
|
|
|
|
|
(75
|
)
|
|
|
|
87
|
|
|
|
|
(116
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009
|
|
|
|
(2
|
)
|
|
|
|
(2
|
)
|
|
|
|
235
|
|
|
|
|
87
|
|
|
|
|
148
|
|
|
|
|
63
|
|
|
|
|
(85
|
)
|
|
|
|
79
|
|
|
|
|
(69
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year 2 Return Volatility
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
|
134
|
|
|
|
|
(71
|
)
|
|
|
|
227
|
|
|
|
|
22
|
|
|
|
|
205
|
|
|
|
|
186
|
|
|
|
|
(19
|
)
|
|
|
|
169
|
|
|
|
|
(36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
137
|
|
|
|
|
(76
|
)
|
|
|
|
220
|
|
|
|
|
7
|
|
|
|
|
213
|
|
|
|
|
179
|
|
|
|
|
(34
|
)
|
|
|
|
160
|
|
|
|
|
(53
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
|
(2
|
)
|
|
|
|
(2
|
)
|
|
|
|
192
|
|
|
|
|
9
|
|
|
|
|
183
|
|
|
|
|
139
|
|
|
|
|
(44
|
)
|
|
|
|
135
|
|
|
|
|
(48
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
|
(2
|
)
|
|
|
|
(2
|
)
|
|
|
|
216
|
|
|
|
|
37
|
|
|
|
|
179
|
|
|
|
|
121
|
|
|
|
|
(58
|
)
|
|
|
|
103
|
|
|
|
|
(76
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009
|
|
|
|
(2
|
)
|
|
|
|
(2
|
)
|
|
|
|
235
|
|
|
|
|
74
|
|
|
|
|
161
|
|
|
|
|
104
|
|
|
|
|
(57
|
)
|
|
|
|
99
|
|
|
|
|
(62
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes:
|
|
|
(1) |
|
Based on forecasted adjusted
earnings, which exclude future potential OTTI charges which
could be material, so that earnings movement related
to interest rate changes can be isolated.
|
(2) |
|
As noted above, previously the Bank
utilized the down 200 basis points scenario for
measuring compliance; however, due to the low level
of interest rates, an instantaneous parallel interest rate shock
of that magnitude could not be meaningfully measured
for those periods presented above. Beginning in fourth quarter
2009, the Bank replaced that scenario with
a down 100 basis points longer term rate
shock scenario, as presented above. This new scenario was
not applicable for periods prior to December 31,
2009, and therefore, those periods are not presented in the
table.
|
During the first quarter of 2010, the primary cause for the
decline in base case EDS (forward rates) was lower projected
advance borrowings, down approximately $6 billion and
$11 billion, respectively, for Year 1 and Year 2 relative
to the forecasted levels during the fourth quarter of 2009.
Lower forward rates and significantly slower mortgage prepayment
projections from the prepayment model change noted above
tempered this effect. The reduction in EDS volatility across the
rate scenarios was primarily the result of less projected
sensitivity of mortgage prepayments to rate changes and issuance
of fixed-rate debt during the current quarter to reduce exposure
to rising interest rates.
Credit
and Counterparty Risk
Credit risk is the risk that the market value of an obligation
will decline as a result of deterioration in the obligors
creditworthiness. Credit risk arises when Bank funds are
extended, committed, invested or otherwise exposed through
actual or implied contractual agreements. The Bank faces credit
risk on member and housing associate loans, letters of credit,
and other credit product exposure; investments; mortgage loans;
Banking On Business loans; and derivatives. The financial
condition of Bank members and all investment, mortgage loan and
41
derivative counterparties is monitored to ensure that the
Banks financial exposure to each member/counterparty is in
compliance with the Banks credit policies and Finance
Agency regulations. Unsecured credit exposure to any
counterparty is generally limited by the credit quality and
capital level of the counterparty and by the capital level of
the Bank. Financial monitoring reports evaluating each
member/counterpartys financial condition are produced and
reviewed by the Banks Credit Risk Management department on
an annual basis or more often if circumstances warrant. In
general, credit risk is measured through consideration of the
probability of default, the exposure at the time of default and
the loss-given default. The expected loss for a given credit is
determined by the product of these three components. The Board
has established appropriate policies and limits regarding
counterparty and investment credit risk, asset classification
and the allowance for credit losses.
Credit
and Counterparty Risk Total Credit Products and
Collateral
Total Credit Products. The Bank manages the
credit risk on a members exposure on Total Credit Products
(TCP), which includes advances, letters of credit, advance
commitments, MPF credit enhancement obligations and other credit
product exposure by monitoring the financial condition of
borrowers and by requiring all borrowers (and, where applicable
in connection with member affiliate pledge arrangements approved
by the Bank, their affiliates) to pledge sufficient eligible
collateral for all member indebtedness. The Bank establishes a
maximum borrowing capacity for each member based on collateral
weightings applied to qualifying collateral as described in the
Banks Member Products Policy. Details regarding this
Policy are available in the Loan Products discussion
in Item 1. Business in the Banks 2009 Annual Report
filed on
Form 10-K.
Management believes that it has adequate policies and procedures
in place to effectively manage credit risk related to member
loans and letters of credit. These credit and collateral
policies balance the Banks dual goals of meeting
members needs as a reliable source of liquidity and
limiting credit loss by adjusting the credit and collateral
terms in response to deterioration in creditworthiness. The Bank
has never experienced a credit loss on an advance or letter of
credit.
Advance Concentration Risk. The Banks
advance portfolio is concentrated in commercial banks and thrift
institutions. At March 31, 2010, the Bank had a
concentration of advances to its ten largest borrowers totaling
$25.4 billion, or 71.6%, of total advances outstanding.
Average par balances to these borrowers for the three months
ended March 31, 2010 were $28.0 billion, or 72.5%, of
total average advances outstanding. During the first quarter of
2010, the maximum outstanding balance to any one borrower was
$12.4 billion. The advances made by the Bank to these
borrowers are secured by collateral with an estimated value,
after collateral weightings, in excess of the book value of the
advances. Therefore, the Bank does not presently expect to incur
any losses on these advances. Because of the Banks advance
concentrations, the Bank has implemented specific credit and
collateral review procedures for these members. In addition, the
Bank analyzes the implication for its financial management and
profitability if it were to lose one or more of these members.
42
The following table lists the Banks top ten borrowers as
of March 31, 2010, and their respective December 31,
2009 advance balances and percentage of the total advance
portfolio.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
December 31, 2009
|
|
|
|
Loan
|
|
Percent
|
|
Loan
|
|
Percent
|
(balances at par; dollars in
millions)
|
|
|
Balance
|
|
of total
|
|
Balance
|
|
of total
|
Sovereign Bank, PA
|
|
|
$
|
10,345.0
|
|
|
|
29.2
|
|
|
$
|
11,595.0
|
|
|
|
29.2
|
|
Ally Bank,
UT(1)
|
|
|
|
4,816.0
|
|
|
|
13.6
|
|
|
|
5,133.0
|
|
|
|
12.9
|
|
PNC Bank, National Association, PA
|
|
|
|
4,000.4
|
|
|
|
11.3
|
|
|
|
4,500.4
|
|
|
|
11.3
|
|
ING Bank, FSB,
DE(2)
|
|
|
|
1,563.0
|
|
|
|
4.4
|
|
|
|
2,563.0
|
|
|
|
6.4
|
|
Citizens Bank of Pennsylvania, PA
|
|
|
|
1,130.0
|
|
|
|
3.2
|
|
|
|
1,605.0
|
|
|
|
4.1
|
|
Northwest Savings Bank, PA
|
|
|
|
780.7
|
|
|
|
2.2
|
|
|
|
782.2
|
|
|
|
2.0
|
|
National Penn Bank, PA
|
|
|
|
740.1
|
|
|
|
2.1
|
|
|
|
752.8
|
|
|
|
1.9
|
|
First Commonwealth Bank
|
|
|
|
738.1
|
|
|
|
2.1
|
|
|
|
286.9
|
|
|
|
0.7
|
|
Susquehanna Bank, PA
|
|
|
|
644.3
|
|
|
|
1.8
|
|
|
|
769.3
|
|
|
|
1.9
|
|
Wilmington Savings Fund Society FSB, DE
|
|
|
|
615.5
|
|
|
|
1.7
|
|
|
|
613.1
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,373.1
|
|
|
|
71.6
|
|
|
|
28,600.7
|
|
|
|
71.9
|
|
Other borrowers
|
|
|
|
10,049.8
|
|
|
|
28.4
|
|
|
|
11,155.3
|
|
|
|
28.1
|
|
|
Total advances
|
|
|
$
|
35,422.9
|
|
|
|
100.0
|
|
|
$
|
39,756.0
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes:
|
|
|
(1)
|
|
Formerly known as GMAC Bank. For
Bank membership purposes, principal place of business is
Horsham, PA.
|
(2) |
|
This borrower had an officer or
director who served on the Banks Board as of
March 31, 2010.
|
Over the last 18 months, there were several actions taken
by the U.S. Treasury, the Federal Reserve and the FDIC that
were intended to stimulate the economy and reverse the
illiquidity in the credit and housing markets. Additionally, the
Federal Reserve took a series of unprecedented actions that made
it more attractive for eligible financial institutions to borrow
directly from the FRBs. The Federal Reserve also created the
Commercial Paper Funding Facility to provide a liquidity
backstop for U.S. issuers of commercial paper and the FDIC
created its TLGP supporting unsecured debt. Lastly, the FDIC
recently approved a regulation increasing the FDIC assessment on
FDIC-insured financial institutions with outstanding FHLBank
loans and other secured liabilities above a specified level. The
Bank experienced an impact from these actions in the form of
reduced borrowings
and/or
paydowns by some of its members, including several of its top
ten borrowers, during 2009 and into 2010.
Letters of Credit. The following table
presents the Banks total outstanding letters of credit as
of March 31, 2010 and December 31, 2009. As noted
below, the majority of the balance was due to public unit
deposit letters of credit, which collateralize public unit
deposits. The letter of credit product is collateralized under
the same procedures and guidelines that apply to advances. There
has never been a draw on these letters of credit.
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
(dollars in millions)
|
|
2010
|
|
December 31, 2009
|
Letters of credit:
|
|
|
|
|
|
|
|
|
Public unit deposit
|
|
$
|
7,490.5
|
|
|
$
|
8,220.0
|
|
Tax exempt bonds
|
|
|
392.6
|
|
|
|
392.6
|
|
Other
|
|
|
115.1
|
|
|
|
114.8
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,998.2
|
|
|
$
|
8,727.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
The following table presents letters of credit based on
expiration terms.
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
(dollars in millions)
|
|
2010
|
|
December 31, 2009
|
Expiration terms:
|
|
|
|
|
|
|
|
|
One year or less
|
|
$
|
6,885.1
|
|
|
$
|
7,478.8
|
|
After one year through five years
|
|
|
1,113.1
|
|
|
|
1,248.6
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,998.2
|
|
|
$
|
8,727.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateral Policies and Practices. All
members are required to maintain collateral to secure their TCP.
TCP outstanding includes advances, letters of credit, advance
commitments, MPF credit enhancement obligations and other
obligations to the Bank. Collateral eligible to secure TCP
includes:
(1) one-to-four
family and multifamily mortgage loans and securities
representing an interest in such mortgages; (2) securities
issued, insured or guaranteed by the U.S. government or any
Federal agency; (3) cash or deposits held by the Bank; and
(4) certain other collateral that is real estate-related,
provided that the collateral has a readily ascertainable value
and that the Bank can perfect a security interest in it.
Residential mortgage loans are a significant form of collateral
for TCP. The Bank perfects its security interest in loan
collateral by completing a UCC-1 filing for each member and
affiliate (where applicable) pledging loans and also depending
on circumstances by taking possession directly or through a
third party custodian. The Bank also requires each borrower and
affiliate pledgor, where applicable, to execute an agreement
that establishes the Banks security interest in all
collateral pledged by the borrower or affiliate pledgor.
Finally, as additional security for a members
indebtedness, the Bank has a statutory and contractual lien on
the members capital stock in the Bank.
The Bank provides members with two options regarding collateral
agreements: a blanket collateral pledge agreement or a specific
collateral pledge agreement. Under a blanket agreement, the Bank
obtains a lien against all of the members unencumbered
eligible collateral assets and most ineligible collateral
assets, to secure the members obligations with the Bank.
Under a specific agreement, the Bank obtains a lien against the
specific eligible collateral assets of a member, to secure the
members obligations with the Bank.
The Bank periodically reviews the collateral pledged by members
or affiliates. This review process occurs quarterly, monthly or
daily depending on the form of pledge and type of collateral.
Additionally, the Bank conducts periodic collateral verification
reviews to ensure the eligibility, adequacy and sufficiency of
the collateral pledged. The Bank may, in its discretion, require
the delivery of loan collateral at any time. The Bank reviews
and assigns borrowing capacities to this collateral, taking into
account the known credit attributes in assigning the appropriate
secondary market discounts, and has determined that all member
loans are fully collateralized. Other factors that the Bank may
consider in assigning borrowing capacities to a members
collateral include the pledging method for loans, data reporting
frequency, collateral field review results, the members
financial strength and condition, and the concentration of
collateral type by member.
In 2009, the Bank revised its collateral policies, no longer
accepting subprime mortgage loans as qualifying collateral. The
Bank also revised the policy definition of subprime to be
consistent with the definition specified by the Federal
Financial Institutions Examination Council (FFIEC). The FFIEC
definition was more stringent than the Banks original
definition and resulted in more loans pledged/delivered as
collateral being classified as subprime and, therefore, deemed
ineligible. These changes did not cause any member to become
collateral deficient. Under limited circumstances, the Bank
still accepts nontraditional mortgage loans to be pledged as
collateral. As of March 31, 2010, the Bank held security
interests in both subprime and nontraditional residential
mortgage loans pledged as collateral included under blanket-lien
agreements. However, the amount of pledged subprime mortgage
loan collateral was immaterial with respect to total pledged
collateral at quarter-end. At March 31, 2010, less than
8.0% of the Banks total pledged collateral was
nontraditional mortgage loans and was primarily attributed to a
few larger borrowers. Given the higher inherent risk related to
nontraditional mortgage loans, the Bank takes additional steps
regarding the review and acceptance of these loans as
collateral. Members are required to identify nontraditional
mortgage loans; these loans are typically excluded as eligible
collateral. However, members may request that nontraditional
mortgage loan collateral be included as eligible collateral,
subject to an
on-site
review of the loans, the members processes and procedures
for originating and servicing the loans, the quality of loan
data
44
and a review of the members loan underwriting. The Bank
requires specific loan level characteristic reporting on the
loans and assigns more conservative collateral weightings to
nontraditional mortgage loan collateral on a
case-by-case
basis. In addition, in October 2009, the Board implemented
Bank-wide limits on subprime and nontraditional mortgage loan
exposure, including collateral, as detailed in the Risk
Governance discussion in the Risk Management section of
Item 7. Managements Discussion and Analysis in the
Banks 2009 Annual Report filed on
Form 10-K.
The Bank made several other changes to collateral practices and
policies during 2009, including the following:
(1) requiring securities to be delivered in order to be
counted in the maximum borrowing capacity (MBC) calculation;
(2) removing the ORERC cap on collateral weightings;
(3) adjusting the total borrowing limit to be equal to the
lower of MBC or 50% of a members total assets; and
(4) making other collateral weighting changes. Details of
the Banks current collateral weightings are presented in
the Advance Products Collateral discussion in
Item 1. Business in the Banks 2009 Annual Report
filed on
Form 10-K.
Under implementation of the GLB Act, the Bank is allowed to
expand eligible collateral for many of its members. Members that
qualify as CFIs can pledge small-business, small-farm, and
small-agribusiness loans as collateral for advances from the
Bank. At March 31, 2010, advances to CFIs secured with both
eligible standard and expanded collateral represented
approximately $4.4 billion, or 12.3% of total par value of
advances outstanding. Eligible expanded collateral represented
7.3% of total eligible collateral for these advances. However,
these advances were collateralized by sufficient levels of
non-CFI collateral. Beginning in July 2009, the Bank implemented
the new CFI definition, as defined in the Housing Act.
As noted in Legislative and Regulatory Developments in this
Item 2. Managements Discussion and Analysis, the
Finance Agency has issued an Advisory Bulletin providing
guidance on nontraditional and subprime mortgage loans with
respect to collateral. This Advisory Bulletin may have
significant implications on the Banks acceptance of
private label MBS and nontraditional residential mortgages as
advance collateral. The Bank is completing a preliminary impact
analysis on its members.
Collateral Agreements and Valuation. As
discussed earlier, the Bank provides members with two options
regarding collateral agreements: a blanket lien collateral
pledge agreement and a specific collateral pledge agreement.
Under a blanket lien agreement, the Bank obtains a lien against
all of the members unencumbered eligible collateral assets
and most ineligible collateral assets to secure the
members obligations with the Bank. Under a specific
collateral agreement, the Bank obtains a lien against a specific
set of a members eligible collateral assets, to secure the
members obligations with the Bank. The member provides a
detailed listing, as an addendum to the agreement, identifying
those assets pledged as collateral.
45
The following tables summarize total eligible collateral values,
after collateral weighting, by type under both blanket lien and
specific collateral pledge agreements as of March 31, 2010
and December 31, 2009. The Bank held collateral with an
eligible collateral value in excess of the book value of the
advances on a
borrower-by-borrower
basis at both March 31, 2010 and December 31, 2009.
The amount of excess collateral by individual borrowers,
however, varies significantly.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
December 31, 2009
|
(dollars in millions)
|
|
|
|
|
|
All member borrowers
|
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
One-to-four
single family residential mortgage loans
|
|
|
$
|
62,259.1
|
|
|
|
50.3
|
|
|
$
|
60,778.7
|
|
|
|
49.1
|
|
High quality investment
securities(1)
|
|
|
|
4,631.3
|
|
|
|
3.7
|
|
|
|
3,574.4
|
|
|
|
2.9
|
|
Other real-estate related collateral/community financial
institution eligible collateral
|
|
|
|
50,185.7
|
|
|
|
40.6
|
|
|
|
50,824.6
|
|
|
|
41.0
|
|
Multi-family residential mortgage loans
|
|
|
|
6,669.0
|
|
|
|
5.4
|
|
|
|
8,689.9
|
|
|
|
7.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total eligible collateral value
|
|
|
$
|
123,745.1
|
|
|
|
100.0
|
|
|
$
|
123,867.6
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total TCP outstanding
|
|
|
$
|
43,579.1
|
|
|
|
|
|
|
$
|
48,497.9
|
|
|
|
|
|
Collateralization ratio (eligible collateral value to TCP
outstanding)
|
|
|
|
284.0
|
%
|
|
|
|
|
|
|
255.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
December 31, 2009
|
(dollars in millions)
|
|
|
|
|
|
Ten largest member borrowers
|
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
One-to-four
single family residential mortgage loans
|
|
|
$
|
36,439.2
|
|
|
|
51.7
|
|
|
$
|
34,410.8
|
|
|
|
48.9
|
|
High quality investment
securities(1)
|
|
|
|
1,625.6
|
|
|
|
2.3
|
|
|
|
1,238.9
|
|
|
|
1.7
|
|
Other real-estate related collateral
|
|
|
|
27,114.6
|
|
|
|
38.5
|
|
|
|
27,417.5
|
|
|
|
39.0
|
|
Multi-family residential mortgage loans
|
|
|
|
5,281.6
|
|
|
|
7.5
|
|
|
|
7,288.8
|
|
|
|
10.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total eligible collateral value
|
|
|
$
|
70,461.0
|
|
|
|
100.0
|
|
|
$
|
70,356.0
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total TCP outstanding
|
|
|
$
|
32,197.4
|
|
|
|
|
|
|
$
|
36,356.4
|
|
|
|
|
|
Collateralization ratio (eligible collateral value to TCP
outstanding)
|
|
|
|
218.8
|
%
|
|
|
|
|
|
|
193.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note:
(1)High
quality investment securities are defined as U.S. Treasury and
U.S. agency securities, TLGP investments, GSE MBS and private
label MBS with a credit rating of AA or higher. Effective
July 20, 2009, the Bank required delivery of these
securities. Upon delivery, these securities are valued daily and
are subject to weekly ratings reviews.
The increases in the collateralization ratios during the first
quarter of 2010, as shown above, were due primarily to the
overall reductions in total TCP outstanding.
The following table provides information regarding TCP extended
to member and nonmember borrowers with either a blanket lien or
specific collateral pledge agreement, in listing-specific or
full collateral delivery status as of March 31, 2010 and
December 31, 2009, along with corresponding eligible
collateral values.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
December 31, 2009
|
|
|
|
Number of
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
Eligible
|
|
|
|
Collateral
|
|
Eligible
|
|
|
|
Collateral
|
(dollars in millions)
|
|
|
Borrowers
|
|
TCP
|
|
Held
|
|
Borrowers
|
|
TCP
|
|
Held
|
Listing-specific pledge-collateral
|
|
|
|
9
|
|
|
$
|
39.3
|
|
|
$
|
46.8
|
|
|
|
8
|
|
|
$
|
40.8
|
|
|
$
|
63.7
|
|
Full collateral delivery status
|
|
|
|
65
|
|
|
$
|
7,040.7
|
|
|
$
|
9,480.3
|
|
|
|
56
|
|
|
$
|
6,926.3
|
|
|
$
|
9,077.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of the nine eligible borrowers with listing-specific
pledge-collateral agreements noted in the table above, two
borrowers (one of which was a former member merged out of
district with TCP still outstanding) had outstanding TCP at
March 31, 2010. The TCP for these two borrowers, as noted
above, totaled $39.3 million, less than 0.1% of the
Banks total TCP, with related collateral of
$46.8 million. Of the 65 eligible borrowers in full
collateral delivery status noted in the table above, 45 had
outstanding TCP at March 31, 2010. The TCP for these 45
borrowers, as noted above, totaled $7.0 billion, or 16.2%
of the Banks total TCP, with $9.5 billion of related
collateral. The Banks remaining 245 eligible borrowers
were all in undelivered collateral status under a blanket lien
agreement at
46
March 31, 2010. Of these 245 borrowers, 177 had outstanding
TCP at March 31, 2010 totaling $36.5 billion, or 83.8%
of the Banks total TCP. The increase in the number of
eligible borrowers in full collateral delivery status from
December 31, 2009 to March 31, 2010 was due to was due
to the Banks increasingly stringent credit and lending
practices, as well as deterioration in certain members
creditworthiness.
Additional detailed information on the Banks collateral
policies and practices is provided in the Advance
Products discussion in the Overview section of this
Item 2. Managements Discussion and Analysis Business
in the quarterly report filed on this
Form 10-Q.
Credit
and Counterparty Risk Investments
The Bank is also subject to credit risk on investments
consisting of money market investments and investment
securities. As of March 31, 2010, the Banks credit
exposure to investments issued by entities other than the
U.S. Government, Federal agencies or GSEs was
$8.2 billion. This amount declined by $1.7 billion
from the December 31, 2009 balance of $9.9 billion of
credit exposure to such counterparties.
Investment External Credit Ratings. The
following tables present the Banks investment carrying
values, plus accrued interest, as of March 31, 2010 and
December 31, 2009 based on the lowest rating from the
credit rating agencies. Carrying values for
held-to-maturity
investment securities represent amortized cost after adjustment
for noncredit-related OTTI recognized in AOCI. Carrying values
for
available-for-sale
and trading securities represent fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
(1) (2)
|
(in millions)
|
|
|
AAA
|
|
AA
|
|
A
|
|
BBB
|
|
BB
|
|
B
|
|
Other
|
|
Total
|
Money market investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold
|
|
|
$
|
-
|
|
|
$
|
2,250.0
|
|
|
$
|
1,850.0
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,100.0
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
|
|
-
|
|
|
|
350.2
|
|
|
|
1,300.6
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,650.8
|
|
Treasury bills
|
|
|
|
1,029.7
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,029.7
|
|
TLGP investments
|
|
|
|
250.0
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
250.0
|
|
GSE securities
|
|
|
|
71.5
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
71.5
|
|
State and local agency obligations
|
|
|
|
7.3
|
|
|
|
477.9
|
|
|
|
-
|
|
|
|
129.9
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
615.1
|
|
MBS issued by Federal agencies
|
|
|
|
1,671.0
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,671.0
|
|
MBS issued by GSEs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fannie Mae
|
|
|
|
297.2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
297.2
|
|
Freddie Mac
|
|
|
|
905.6
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
905.6
|
|
MBS issued by private label issuers
|
|
|
|
1,518.2
|
|
|
|
491.8
|
|
|
|
542.2
|
|
|
|
388.0
|
|
|
|
179.5
|
|
|
|
361.2
|
|
|
|
2,179.3
|
|
|
|
5,660.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
$
|
5,750.5
|
|
|
$
|
3,569.9
|
|
|
$
|
3,692.8
|
|
|
$
|
517.9
|
|
|
$
|
179.5
|
|
|
$
|
361.2
|
|
|
$
|
2,179.3
|
|
|
$
|
16,251.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2009 (1)
(2)
|
(in millions)
|
|
|
AAA
|
|
AA
|
|
A
|
|
BBB
|
|
BB
|
|
B
|
|
Other
|
|
Total
|
Money market investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold
|
|
|
$
|
-
|
|
|
$
|
1,150.0
|
|
|
$
|
1,850.0
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,000.0
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
|
|
-
|
|
|
|
1,401.1
|
|
|
|
1,700.8
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,101.9
|
|
Treasury bills
|
|
|
|
1,029.5
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,029.5
|
|
TLGP investments
|
|
|
|
250.0
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
250.0
|
|
GSE securities
|
|
|
|
176.8
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
176.8
|
|
State and local agency obligations
|
|
|
|
7.3
|
|
|
|
477.4
|
|
|
|
-
|
|
|
|
127.7
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
612.4
|
|
MBS issued by Federal agencies
|
|
|
|
1,756.3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,756.3
|
|
MBS issued by GSEs:
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Fannie Mae
|
|
|
|
316.3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
316.3
|
|
Freddie Mac
|
|
|
|
1,001.7
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,001.7
|
|
MBS issued by private label issuers
|
|
|
|
1,684.1
|
|
|
|
591.1
|
|
|
|
587.5
|
|
|
|
358.6
|
|
|
|
218.2
|
|
|
|
346.3
|
|
|
|
2,152.8
|
|
|
|
5,938.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
$
|
6,222.0
|
|
|
$
|
3,619.6
|
|
|
$
|
4,138.3
|
|
|
$
|
486.3
|
|
|
$
|
218.2
|
|
|
$
|
346.3
|
|
|
$
|
2,152.8
|
|
|
$
|
17,183.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes:
|
|
|
(1)
|
|
Short-term credit ratings are used
when long-term credit ratings are not available. Credit rating
agency changes subsequent to March 31, 2010 are
described in detail below.
|
(2) |
|
Various deposits not held as
investments as well as mutual fund equity investments held by
the Bank through Rabbi trusts which are not generally
assigned a credit rating are excluded from the tables above.
|
As of March 31, 2010, there were credit rating agency
actions affecting a total of 12 private label MBS in the
investment portfolio resulting in downgrades of at least one
credit rating level since December 31, 2009. These
securities had a total par value of $449.3 million and
$477.7 million as of March 31, 2010 and
December 31, 2009, respectively, reflected in the tables
above. Included in these balances were downgrades to below
investment grade with a total par balance of
$78.2 million and $84.3 million at March 31, 2010
and December 31, 2009, respectively.
The Bank also manages credit risk based on an internal credit
rating system. For purposes of determining the internal credit
rating, the Bank measures credit exposure through a process
which includes internal credit review and various external
factors, including the placement on negative watch by one or
more NRSROs. In all cases, the Banks assigned internal
credit rating will never be higher than the lowest external
credit rating. The incorporation of negative credit watch into
the credit rating analysis of an investment may translate into a
downgrade of one credit rating level from the external rating.
Between April 1, 2010 and April 30, 2010, there were
eight subsequent credit rating agency actions taken with respect
to $367.2 million of the Banks private label MBS
portfolio. These actions are summarized in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Downgraded and Stable
|
(dollars in millions)
|
|
|
To BBB
|
|
|
To BB
|
|
|
To B
|
|
|
To CCC
|
|
|
To CC
|
|
|
Total
|
Private label residential MBS
|
|
|
$
|
102.8
|
|
|
|
$
|
32.3
|
|
|
|
$
|
179.7
|
|
|
|
$
|
50.6
|
|
|
|
$
|
-
|
|
|
|
$
|
365.4
|
|
HELOCs
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
1.8
|
|
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total carrying value
|
|
|
$
|
102.8
|
|
|
|
$
|
32.3
|
|
|
|
$
|
179.7
|
|
|
|
$
|
50.6
|
|
|
|
$
|
1.8
|
|
|
|
$
|
367.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Investments, Commercial Paper and
Certificates of Deposit. Under its Risk
Governance Policy, the Bank can place money market investments,
commercial paper and certificates of deposit on an unsecured
basis with large, financial institutions with long-term credit
ratings no lower than A for terms up to 90 days and with
long-term credit ratings no lower than BBB for terms up to
30 days. In April 2010, the Board approved a revision to
48
the policy whereby the credit ratings on these investments can
be no lower than A, as opposed to BBB. Management actively
monitors the credit quality of these counterparties. As of
March 31, 2010, the Bank had exposure to 15 counterparties
totaling $5.8 billion, or an average of $383.4 million
per counterparty, compared to exposure to 20 counterparties
totaling $6.1 billion, or an average of $305.1 million
per counterparty, as of December 31, 2009. As of
March 31, 2010, the Bank had exposure to two counterparties
exceeding 10 percent of the total exposure.
Specifically, total money market investment exposure was
$4.1 billion as of March 31, 2010, comprised primarily
of Federal funds sold with an overnight maturity. The Bank had
certificate of deposit exposure of $1.7 billion as of
March 31, 2010, with exposure to U.S. branches of
foreign banks amounting to 87.9% of this total. The Bank limits
foreign exposure to those countries rated AA or higher and had
exposure to Canada, France, Germany, Spain, Sweden and the
United Kingdom as of March 31, 2010. The Bank held no
commercial paper as of March 31, 2010.
Treasury Bills, TLGP Investments, GSE Securities and State
and Local Agency Obligations. In addition to
U.S. Treasury bills and the TLGP investments, which are
part of the FDIC program guaranteeing unsecured bank debt, the
Bank invests in and is subject to credit risk related to GSE
securities and state and local agency obligations. The Bank
maintains a portfolio of U.S. Treasury, U.S. agency
and GSE securities as a secondary liquidity portfolio. Further,
the Bank maintains a portfolio of state and local agency
obligations to invest in mission-related assets and enhance net
interest income. These portfolios totaled $2.0 billion and
$2.1 billion as of March 31, 2010 and
December 31, 2009, respectively.
Mortgage-Backed Securities (MBS). The Bank
invests in and is subject to credit risk related to MBS issued
by Federal agencies, GSEs and private label issuers that are
directly supported by underlying mortgage loans. The Banks
total MBS portfolio decreased $478.9 million from
December 31, 2009 to March 31, 2010. This decline was
due to repayments, sales and total OTTI losses (including both
credit and noncredit).
Private Label MBS. Investments in private
label MBS are permitted as long as they are rated AAA at the
time of purchase. In April 2007, the Finance Agency directed the
Bank to adopt practices consistent with the risk management,
underwriting and consumer protection principles of various
regulatory pronouncements regarding Alt-A and subprime mortgages
that the Bank purchases or which back private label MBS
investments. In response, the Board has adopted and implemented
stricter policies and risk management practices that set
appropriate risk sublimits for credit exposure on Alt-A and
subprime MBS.
Although the Bank discontinued the purchase of private label MBS
in late 2007, approximately 66% of the Banks current MBS
portfolio was issued by private label issuers. The Bank
generally focused its private label MBS purchases on
credit-enhanced, senior tranches of securities in which the
subordinate classes of the securities provide credit support for
the senior class of securities. Losses in the underlying loan
pool would generally have to exceed the credit support provided
by the subordinate classes of securities before the senior class
of securities would experience any credit losses.
The prospectuses and offering memoranda for the private labeled
MBS in the Banks portfolio contain representations and
warranties that the mortgage loans in the collateral pools were
underwritten to certain standards. Based on the performance of
the mortgages in some of the collateral pools, among other
information, it appears that the failure to adhere to the stated
underwriting standards was so routine that the underwriting
standards were all but completely abandoned. The issuers,
underwriters and rating agencies all failed to disclose that the
underwriting standards that were represented in the offering
documents were routinely not followed or had been abandoned
altogether. This failure resulted in the Bank owning certain
private label MBS on which it has recognized losses as more
fully explained in the discussion on OTTI later on in this Risk
Management section. The Bank has filed lawsuits against certain
issuers, underwriters and rating agencies as more fully
discussed in Part II, Item I. Legal Proceedings.
Participants in the mortgage market often characterize single
family loans based upon their overall credit quality at the time
of origination, generally considering them to be prime, Alt-A or
subprime. There is no universally
49
accepted definition of these segments or classifications. The
subprime segment of the mortgage market primarily serves
borrowers with poorer credit payment histories and such loans
typically have a mix of credit characteristics that indicate a
higher likelihood of default and higher loss severities than
prime loans. Further, many mortgage participants classify single
family loans with credit characteristics that range between
prime and subprime categories as Alt-A because these loans have
a combination of characteristics of each category or may be
underwritten with low or no documentation compared to a full
documentation mortgage loan. Industry participants often use
this classification principally to describe loans for which the
underwriting process has been streamlined in order to reduce the
documentation requirements of the borrower.
The following table presents the par value of the private label
MBS portfolio by various categories of underlying collateral and
by interest rate payment terms. In reporting the Banks
various MBS exposures below and throughout this report, the Bank
classifies private label MBS in accordance with the most
conservative classification provided by the credit rating
agencies at the time of issuance.
Characteristics
of Private Label MBS by Type of Collateral
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
|
Variable
|
|
|
|
|
|
Fixed
|
|
|
Variable
|
|
|
|
(dollars in millions)
|
|
|
Fixed Rate
|
|
|
Rate
|
|
|
Total
|
|
|
Rate
|
|
|
Rate
|
|
|
Total
|
Private label residential MBS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime
|
|
|
$
|
1,231.8
|
|
|
|
$
|
3,122.1
|
|
|
|
$
|
4,353.9
|
|
|
|
$
|
1,327.2
|
|
|
|
$
|
3,294.8
|
|
|
|
$
|
4,622.0
|
|
Alt-A
|
|
|
|
917.0
|
|
|
|
|
1,164.4
|
|
|
|
|
2,081.4
|
|
|
|
|
953.1
|
|
|
|
|
1,204.1
|
|
|
|
|
2,157.2
|
|
Subprime
|
|
|
|
-
|
|
|
|
|
9.2
|
|
|
|
|
9.2
|
|
|
|
|
-
|
|
|
|
|
9.8
|
|
|
|
|
9.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
2,148.8
|
|
|
|
|
4,295.7
|
|
|
|
|
6,444.5
|
|
|
|
|
2,280.3
|
|
|
|
|
4,508.7
|
|
|
|
|
6,789.0
|
|
HELOC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alt-A
|
|
|
|
-
|
|
|
|
|
60.0
|
|
|
|
|
60.0
|
|
|
|
|
-
|
|
|
|
|
62.1
|
|
|
|
|
62.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
-
|
|
|
|
|
60.0
|
|
|
|
|
60.0
|
|
|
|
|
-
|
|
|
|
|
62.1
|
|
|
|
|
62.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total private label MBS
|
|
|
$
|
2,148.8
|
|
|
|
$
|
4,355.7
|
|
|
|
$
|
6,504.5
|
|
|
|
$
|
2,280.3
|
|
|
|
$
|
4,570.8
|
|
|
|
$
|
6,851.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes: The table presented above excludes par
balances of $30.9 million and $32.5 million related to
the restricted certificates pertaining to the Shared Funding
Program at March 31, 2010 and December 31, 2009,
respectively. These securities were fixed rate prime private
label residential MBS for both periods presented.
Certain MBS securities have a fixed-rate component for a
specified period of time, then have a rate reset on a given
date. When the rate is reset, the security is then considered to
be a variable-rate security. Examples of these types of
instruments would include securities supported by underlying
5/1, 7/1 and 10/1 hybrid adjustable-rate mortgages (ARMs). For
purposes of the table above, these securities are all reported
as variable-rate, regardless of whether the rate reset date has
been hit.
Credit scores are a useful measure for assessing the credit
quality of a borrower. Credit scores are numbers reported by
credit repositories, based on statistical models that summarize
an individuals credit record and predict the likelihood
that a borrower will repay future obligations as expected.
FICO®
scores, developed by Fair, Isaac and Co., Inc. are the most
commonly used credit scores. FICO scores are ranked on a scale
of approximately 300 to 850 points. Based on historic
statistics, borrowers with higher credit scores are more likely
to repay their debts as expected than those with lower scores.
Original credit score data for the underlying borrowers was
available for approximately 87% of the mortgage loans comprising
the private label MBS portfolio as of March 31, 2010 and
December 31, 2009. Credit score ranges are based on
available loan level data applied to the ending par balances of
the loans. The averages for the private label MBS portfolio are
calculated from the average score for each security weighted by
the ending par balance of the loans.
50
Credit score characteristics of the Banks total private
label MBS portfolio are presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
Original FICO
®
score range:
|
|
|
|
|
|
|
|
|
|
|
740 and greater
|
|
|
|
43
|
%
|
|
|
|
44
|
%
|
700 to 739
|
|
|
|
55
|
%
|
|
|
|
54
|
%
|
660 to 699
|
|
|
|
1
|
%
|
|
|
|
1
|
%
|
Less than 660
|
|
|
|
1
|
%
|
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average original FICO
®
score
|
|
|
|
733
|
|
|
|
|
734
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides the fair value of the private label
MBS portfolio as a percentage of the par balance by collateral
type as well as year of securitization (vintage). The Bank
purchased no private label MBS during 2008, 2009 or the first
quarter of 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private label residential MBS
by
|
|
|
March 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
Vintage
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
Prime:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
76.5
|
%
|
|
|
|
74.9
|
%
|
|
|
|
72.5
|
%
|
|
|
|
62.9
|
%
|
|
|
|
66.5
|
%
|
2006
|
|
|
|
85.6
|
|
|
|
|
82.7
|
|
|
|
|
80.3
|
|
|
|
|
70.5
|
|
|
|
|
68.9
|
|
2005
|
|
|
|
87.7
|
|
|
|
|
86.6
|
|
|
|
|
86.4
|
|
|
|
|
80.8
|
|
|
|
|
75.9
|
|
2004 and earlier
|
|
|
|
92.4
|
|
|
|
|
90.2
|
|
|
|
|
90.3
|
|
|
|
|
86.7
|
|
|
|
|
84.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average of all Prime
|
|
|
|
85.5
|
|
|
|
|
83.6
|
|
|
|
|
82.6
|
|
|
|
|
76.0
|
|
|
|
|
75.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alt-A:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
63.1
|
|
|
|
|
63.5
|
|
|
|
|
59.8
|
|
|
|
|
54.5
|
|
|
|
|
56.4
|
|
2006
|
|
|
|
68.7
|
|
|
|
|
67.7
|
|
|
|
|
63.3
|
|
|
|
|
60.0
|
|
|
|
|
58.4
|
|
2005
|
|
|
|
82.1
|
|
|
|
|
80.0
|
|
|
|
|
78.9
|
|
|
|
|
70.4
|
|
|
|
|
68.0
|
|
2004 and earlier
|
|
|
|
87.0
|
|
|
|
|
85.6
|
|
|
|
|
84.2
|
|
|
|
|
80.3
|
|
|
|
|
78.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average of all Alt-A
|
|
|
|
74.5
|
|
|
|
|
73.5
|
|
|
|
|
70.8
|
|
|
|
|
66.2
|
|
|
|
|
65.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subprime:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 and earlier
|
|
|
|
65.0
|
|
|
|
|
62.7
|
|
|
|
|
64.3
|
|
|
|
|
57.8
|
|
|
|
|
63.3
|
|
Weighted average of all Subprime
|
|
|
|
65.0
|
|
|
|
|
62.7
|
|
|
|
|
64.3
|
|
|
|
|
57.8
|
|
|
|
|
63.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HELOC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
63.7
|
|
|
|
|
44.3
|
|
|
|
|
43.5
|
|
|
|
|
36.2
|
|
|
|
|
42.3
|
|
2005
|
|
|
|
43.5
|
|
|
|
|
43.2
|
|
|
|
|
43.2
|
|
|
|
|
56.4
|
|
|
|
|
56.8
|
|
2004 and earlier
|
|
|
|
48.6
|
|
|
|
|
42.8
|
|
|
|
|
38.5
|
|
|
|
|
36.3
|
|
|
|
|
38.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average of all HELOC
|
|
|
|
53.9
|
|
|
|
|
43.4
|
|
|
|
|
40.7
|
|
|
|
|
37.9
|
|
|
|
|
41.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average of total private label MBS
|
|
|
|
81.6
|
%
|
|
|
|
80.0
|
%
|
|
|
|
78.5
|
%
|
|
|
|
72.7
|
%
|
|
|
|
72.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note: The 2004 and earlier prime percentages
presented in the table above exclude the impact of the
restricted certificates pertaining to the Shared Funding Program.
Prices on private label MBS that include bankruptcy carve-out
language could be affected by legislation that impacts the
underlying collateral including any cramdown legislation or
mortgage loan modification programs. For further information,
see the discussion on Legislative and Regulatory Developments in
Item 7. Managements Discussion and Analysis in the
Banks 2009 Annual Report filed on
Form 10-K.
51
Private Label MBS Collateral Statistics. The
following tables provide various detailed collateral performance
and credit enhancement information for the Banks private
label MBS portfolio by collateral type as of March 31,
2010. The Bank purchased no private label MBS in 2008, 2009 or
the first quarter of 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Label MBS by Vintage
Prime(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 and
|
|
|
|
(dollars in millions)
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
earlier
|
|
|
Total
|
Par by lowest external long-
term rating:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA
|
|
|
$
|
-
|
|
|
|
$
|
102.2
|
|
|
|
$
|
47.8
|
|
|
|
$
|
915.7
|
|
|
|
$
|
1,065.7
|
|
AA
|
|
|
|
-
|
|
|
|
|
163.1
|
|
|
|
|
61.7
|
|
|
|
|
144.3
|
|
|
|
|
369.1
|
|
A
|
|
|
|
60.8
|
|
|
|
|
-
|
|
|
|
|
32.1
|
|
|
|
|
333.9
|
|
|
|
|
426.8
|
|
BBB
|
|
|
|
-
|
|
|
|
|
18.9
|
|
|
|
|
199.1
|
|
|
|
|
47.6
|
|
|
|
|
265.6
|
|
BB
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
140.9
|
|
|
|
|
23.7
|
|
|
|
|
164.6
|
|
B
|
|
|
|
68.2
|
|
|
|
|
145.3
|
|
|
|
|
172.7
|
|
|
|
|
-
|
|
|
|
|
386.2
|
|
CCC
|
|
|
|
816.8
|
|
|
|
|
304.7
|
|
|
|
|
148.6
|
|
|
|
|
-
|
|
|
|
|
1,270.1
|
|
CC
|
|
|
|
400.9
|
|
|
|
|
-
|
|
|
|
|
4.9
|
|
|
|
|
-
|
|
|
|
|
405.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
1,346.7
|
|
|
|
$
|
734.2
|
|
|
|
$
|
807.8
|
|
|
|
$
|
1,465.2
|
|
|
|
$
|
4,353.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average price
|
|
|
|
76.5
|
%
|
|
|
|
85.6
|
%
|
|
|
|
87.7
|
%
|
|
|
|
92.4
|
%
|
|
|
|
85.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value
|
|
|
$
|
1,030.0
|
|
|
|
$
|
628.4
|
|
|
|
$
|
708.8
|
|
|
|
|
1,353.1
|
|
|
|
$
|
3,720.3
|
|
Amortized cost
|
|
|
|
1,249.7
|
|
|
|
|
722.7
|
|
|
|
|
798.1
|
|
|
|
|
1,451.7
|
|
|
|
|
4,222.2
|
|
Gross unrealized losses
|
|
|
|
(219.7
|
)
|
|
|
|
(94.3
|
)
|
|
|
|
(89.3
|
)
|
|
|
|
(99.6
|
)
|
|
|
|
(502.9
|
)
|
Total 1Q 2010 OTTI charge taken
(2)
|
|
|
|
-
|
|
|
|
|
(2.2
|
)
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
(2.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Original credit enhancement
|
|
|
|
5.9
|
%
|
|
|
|
5.2
|
%
|
|
|
|
3.8
|
%
|
|
|
|
4.6
|
%
|
|
|
|
4.9
|
%
|
Weighted-average credit enhancement current
|
|
|
|
6.4
|
|
|
|
|
7.0
|
|
|
|
|
5.9
|
|
|
|
|
8.7
|
|
|
|
|
7.2
|
|
Collateral delinquency 60 or more days
(3)
|
|
|
|
13.3
|
|
|
|
|
9.9
|
|
|
|
|
9.2
|
|
|
|
|
6.5
|
|
|
|
|
9.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Monoline financial guarantee
|
|
|
$
|
-
|
|
|
|
$
|
-
|
|
|
|
$
|
-
|
|
|
|
$
|
-
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note:
|
|
(1)
|
The table presented above excludes
the impact related to the restricted certificates pertaining to
the Shared Funding Program, including 2003 vintage par balances
of $29.0 million rated AAA and $1.9 million rated AA.
|
(2)
|
Represents both the credit and
noncredit components of OTTI recorded in the first quarter of
2010.
|
(3)
|
Delinquency information is
presented at the cross-collateralization level.
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Label MBS by Vintage Alt-A
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 and
|
|
|
|
(dollars in millions)
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
earlier
|
|
|
Total
|
Par by lowest external long-
term rating:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA
|
|
|
$
|
-
|
|
|
|
$
|
26.6
|
|
|
|
$
|
-
|
|
|
|
$
|
400.4
|
|
|
|
$
|
427.0
|
|
AA
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
102.1
|
|
|
|
|
-
|
|
|
|
|
102.1
|
|
A
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
29.9
|
|
|
|
|
81.5
|
|
|
|
|
111.4
|
|
BBB
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
92.6
|
|
|
|
|
40.9
|
|
|
|
|
133.5
|
|
BB
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
14.3
|
|
|
|
|
-
|
|
|
|
|
14.3
|
|
CCC
|
|
|
|
-
|
|
|
|
|
493.2
|
|
|
|
|
42.0
|
|
|
|
|
-
|
|
|
|
|
535.2
|
|
CC
|
|
|
|
228.1
|
|
|
|
|
251.4
|
|
|
|
|
28.6
|
|
|
|
|
-
|
|
|
|
|
508.1
|
|
C
|
|
|
|
159.0
|
|
|
|
|
-
|
|
|
|
|
43.9
|
|
|
|
|
-
|
|
|
|
|
202.9
|
|
D
|
|
|
|
-
|
|
|
|
|
46.9
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
46.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
387.1
|
|
|
|
$
|
818.1
|
|
|
|
$
|
353.4
|
|
|
|
$
|
522.8
|
|
|
|
$
|
2,081.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average price
|
|
|
|
63.1
|
%
|
|
|
|
68.7
|
%
|
|
|
|
82.1
|
%
|
|
|
|
87.0
|
%
|
|
|
|
74.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value
|
|
|
$
|
244.3
|
|
|
|
$
|
561.6
|
|
|
|
|
290.1
|
|
|
|
|
455.0
|
|
|
|
$
|
1,551.0
|
|
Amortized cost
|
|
|
|
330.2
|
|
|
|
|
729.5
|
|
|
|
|
344.6
|
|
|
|
|
523.0
|
|
|
|
|
1,927.3
|
|
Gross unrealized losses
|
|
|
|
(86.0
|
)
|
|
|
|
(167.8
|
)
|
|
|
|
(54.5
|
)
|
|
|
|
(68.1
|
)
|
|
|
|
(376.4
|
)
|
Total 1Q 2010 OTTI charge
taken (2)
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Original credit enhancement
|
|
|
|
8.6
|
%
|
|
|
|
6.6
|
%
|
|
|
|
5.7
|
%
|
|
|
|
5.3
|
%
|
|
|
|
6.5
|
%
|
Weighted-average credit enhancement current
|
|
|
|
8.7
|
|
|
|
|
7.3
|
|
|
|
|
8.2
|
|
|
|
|
10.8
|
|
|
|
|
8.6
|
|
Collateral delinquency 60 or more
days(3)
|
|
|
|
35.3
|
|
|
|
|
23.6
|
|
|
|
|
11.6
|
|
|
|
|
7.2
|
|
|
|
|
19.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Monoline financial guarantee
|
|
|
$
|
-
|
|
|
|
$
|
-
|
|
|
|
$
|
-
|
|
|
|
$
|
-
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note:
|
|
(2)
|
Represents both the credit and
noncredit components of OTTI recorded in the first quarter of
2010.
|
(3)
|
Delinquency information is
presented at the cross-collateralization level.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Label MBS by Vintage -
|
|
|
|
Subprime
|
(dollars in millions)
|
|
|
2004 and earlier
|
|
|
Total
|
Par by lowest external long-
term rating:
|
|
|
|
|
|
|
|
|
|
|
AAA
|
|
|
$
|
6.3
|
|
|
|
$
|
6.3
|
|
CC
|
|
|
|
2.9
|
|
|
|
|
2.9
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
9.2
|
|
|
|
$
|
9.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average price
|
|
|
|
65.0
|
%
|
|
|
|
65.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Fair value
|
|
|
$
|
6.0
|
|
|
|
$
|
6.0
|
|
Amortized cost
|
|
|
|
8.8
|
|
|
|
|
8.8
|
|
Gross unrealized losses
|
|
|
|
(2.8
|
)
|
|
|
|
(2.8
|
)
|
Total 1Q 2010 OTTI charge
taken(2)
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Original credit enhancement
|
|
|
|
10.3
|
%
|
|
|
|
10.3
|
%
|
Weighted-average credit
enhancement - current
|
|
|
|
39.7
|
|
|
|
|
39.7
|
|
Collateral delinquency 60 or more
days(3)
|
|
|
|
32.9
|
|
|
|
|
32.9
|
|
|
|
|
|
|
|
|
|
|
|
|
Monoline financial guarantee
|
|
|
$
|
-
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Note:
|
|
(2)
|
Represents both the credit and
noncredit components of OTTI recorded in the first quarter of
2010.
|
(3)
|
Delinquency information is
presented at the cross-collateralization level.
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Label MBS by Vintage - HELOC
|
|
|
|
|
|
|
|
|
|
2004 and
|
|
|
|
(dollars in millions)
|
|
|
2006
|
|
|
2005
|
|
|
earlier
|
|
|
Total
|
Par by lowest external long-
term rating:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AA
|
|
|
$
|
22.7
|
|
|
|
$
|
-
|
|
|
|
$
|
-
|
|
|
|
$
|
22.7
|
|
A
|
|
|
|
-
|
|
|
|
|
5.2
|
|
|
|
|
-
|
|
|
|
|
5.2
|
|
B
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
16.9
|
|
|
|
|
16.9
|
|
CCC
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
15.2
|
|
|
|
|
15.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
22.7
|
|
|
|
$
|
5.2
|
|
|
|
$
|
32.1
|
|
|
|
$
|
60.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average price
|
|
|
|
63.7
|
%
|
|
|
|
43.5
|
%
|
|
|
|
48.6
|
%
|
|
|
|
53.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value
|
|
|
$
|
14.4
|
|
|
|
$
|
2.3
|
|
|
|
$
|
15.6
|
|
|
|
$
|
32.3
|
|
Amortized cost
|
|
|
|
22.7
|
|
|
|
|
5.2
|
|
|
|
|
26.3
|
|
|
|
|
54.2
|
|
Gross unrealized losses
|
|
|
|
(8.3
|
)
|
|
|
|
(2.9
|
)
|
|
|
|
(10.7
|
)
|
|
|
|
(21.9
|
)
|
Total 1Q 2010 OTTI charge
taken(2)
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Original credit enhancement
|
|
|
|
-
|
%
|
|
|
|
3.1
|
%
|
|
|
|
(0.2
|
)%
|
|
|
|
0.2
|
%
|
Weighted-average credit
enhancement - current
|
|
|
|
-
|
|
|
|
|
10.7
|
|
|
|
|
2.7
|
|
|
|
|
2.4
|
|
Collateral delinquency 60 or
more
days(3)
|
|
|
|
3.3
|
|
|
|
|
0.5
|
|
|
|
|
11.8
|
|
|
|
|
7.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Monoline financial guarantee
|
|
|
$
|
22.7
|
|
|
|
$
|
5.2
|
|
|
|
$
|
32.1
|
|
|
|
$
|
60.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note:
|
|
(2)
|
Represents both the credit and
noncredit components of OTTI recorded in the first quarter of
2010.
|
(3)
|
Delinquency information is
presented at the cross-collateralization level.
|
54
Private Label MBS Issuers and Servicers. The
following tables provide further detailed information regarding
the issuers and servicers of the Banks private label MBS
portfolio that exceeded 5% of the total as of March 31,
2010. Management actively monitors the credit quality of the
portfolios master servicers. For further information on
the Banks MBS master servicer risks, see additional
discussion in the Item 1A. Risk Factors entitled
The Banks financial condition or results of
operations may be adversely affected if MBS servicers fail to
perform their obligations to service mortgage loans as
collateral for MBS. in the Banks 2009 Annual
Report filed on
Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
Original Issuers
|
|
|
Total Carrying Value
|
|
|
|
(in millions, including accrued interest)
|
|
|
Plus Accrued Interest
|
|
|
Total Fair Value
|
J.P. Morgan Chase & Co.
|
|
|
$
|
1,481.2
|
|
|
|
$
|
1,442.8
|
|
Lehman Brothers Holdings
Inc.(1)
|
|
|
|
1,011.3
|
|
|
|
|
931.0
|
|
Wells Fargo & Co.
|
|
|
|
750.7
|
|
|
|
|
712.4
|
|
Countrywide Financial
Corp.(2)
|
|
|
|
622.2
|
|
|
|
|
598.8
|
|
Citigroup Inc.
|
|
|
|
399.5
|
|
|
|
|
375.1
|
|
Other
|
|
|
|
1,395.3
|
|
|
|
|
1,281.2
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
5,660.2
|
|
|
|
$
|
5,341.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Master Servicers
|
|
|
Total Carrying Value
|
|
|
|
(in millions)
|
|
|
Plus Accrued Interest
|
|
|
Total Fair Value
|
Wells Fargo Bank, NA
|
|
|
$
|
2,097.1
|
|
|
|
$
|
1,969.0
|
|
Aurora Loan Services Inc.
|
|
|
|
1,005.5
|
|
|
|
|
926.0
|
|
US Bank
|
|
|
|
695.2
|
|
|
|
|
690.3
|
|
Bank of America Corp.(2)
|
|
|
|
636.5
|
|
|
|
|
612.1
|
|
Citimortgage Inc.
|
|
|
|
343.5
|
|
|
|
|
319.0
|
|
Other
|
|
|
|
882.4
|
|
|
|
|
824.9
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
5,660.2
|
|
|
|
$
|
5,341.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note:
|
|
(1)
|
Lehman Brothers Holdings Inc. filed
for bankruptcy in 2008. Aurora Loan Services Inc. is now
servicing all but one of the bonds and six different
trustees have assumed responsibility for these 22 bonds.
However, the Bank believes the original issuer is
more relevant with respect to understanding the bond
underwriting criteria.
|
(2)
|
Bank of America acquired
Countrywide Financial Corp and Countrywide Home Loan Servicing
LP following issuance of certain private label MBS.
The Bank believes the original issuer is more relevant with
respect to understanding the bond underwriting
criteria. However, Bank of America is currently servicing the
private label MBS.
|
55
Private Label MBS Credit Ratings. The
following table provides the credit ratings by collateral type
as of March 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Wtd-Avg
|
(dollars in millions)
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Collateral
|
Credit Rating as of March 31, 2010
|
|
|
Par
|
|
|
Cost(1)
|
|
|
Losses
|
|
|
Delinquency(2)
|
Private label residential MBS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA
|
|
|
$
|
1,065.7
|
|
|
|
$
|
1,052.3
|
|
|
|
$
|
(36.3
|
)
|
|
|
|
2.9
|
%
|
AA
|
|
|
|
369.1
|
|
|
|
|
364.4
|
|
|
|
|
(30.4
|
)
|
|
|
|
6.1
|
|
A
|
|
|
|
426.8
|
|
|
|
|
424.3
|
|
|
|
|
(44.0
|
)
|
|
|
|
9.9
|
|
BBB
|
|
|
|
265.6
|
|
|
|
|
264.7
|
|
|
|
|
(27.9
|
)
|
|
|
|
10.3
|
|
BB
|
|
|
|
164.6
|
|
|
|
|
164.5
|
|
|
|
|
(26.3
|
)
|
|
|
|
12.8
|
|
B
|
|
|
|
386.2
|
|
|
|
|
384.4
|
|
|
|
|
(54.7
|
)
|
|
|
|
11.3
|
|
CCC
|
|
|
|
1,270.1
|
|
|
|
|
1,218.9
|
|
|
|
|
(216.7
|
)
|
|
|
|
13.0
|
|
CC
|
|
|
|
405.8
|
|
|
|
|
348.7
|
|
|
|
|
(66.6
|
)
|
|
|
|
16.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Prime
|
|
|
$
|
4,353.9
|
|
|
|
$
|
4,222.2
|
|
|
|
$
|
(502.9
|
)
|
|
|
|
9.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alt-A:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA
|
|
|
$
|
427.0
|
|
|
|
$
|
427.2
|
|
|
|
$
|
(47.3
|
)
|
|
|
|
5.8
|
%
|
AA
|
|
|
|
102.1
|
|
|
|
|
101.0
|
|
|
|
|
(8.4
|
)
|
|
|
|
6.5
|
|
A
|
|
|
|
111.4
|
|
|
|
|
111.2
|
|
|
|
|
(24.3
|
)
|
|
|
|
11.6
|
|
BBB
|
|
|
|
133.5
|
|
|
|
|
132.3
|
|
|
|
|
(20.9
|
)
|
|
|
|
11.5
|
|
BB
|
|
|
|
14.3
|
|
|
|
|
14.4
|
|
|
|
|
(7.6
|
)
|
|
|
|
10.2
|
|
CCC
|
|
|
|
535.2
|
|
|
|
|
492.4
|
|
|
|
|
(115.7
|
)
|
|
|
|
20.4
|
|
CC
|
|
|
|
508.1
|
|
|
|
|
442.1
|
|
|
|
|
(103.8
|
)
|
|
|
|
30.4
|
|
C
|
|
|
|
202.9
|
|
|
|
|
166.3
|
|
|
|
|
(44.7
|
)
|
|
|
|
35.5
|
|
D
|
|
|
|
46.9
|
|
|
|
|
40.4
|
|
|
|
|
(3.7
|
)
|
|
|
|
25.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Alt-A
|
|
|
$
|
2,081.4
|
|
|
|
$
|
1,927.3
|
|
|
|
$
|
(376.4
|
)
|
|
|
|
19.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subprime:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA
|
|
|
$
|
6.3
|
|
|
|
$
|
6.3
|
|
|
|
$
|
(1.9
|
)
|
|
|
|
31.1
|
%
|
CC
|
|
|
|
2.9
|
|
|
|
|
2.5
|
|
|
|
|
(0.9
|
)
|
|
|
|
36.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Subprime
|
|
|
$
|
9.2
|
|
|
|
$
|
8.8
|
|
|
|
$
|
(2.8
|
)
|
|
|
|
32.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HELOC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AA
|
|
|
$
|
22.7
|
|
|
|
$
|
22.7
|
|
|
|
$
|
(8.3
|
)
|
|
|
|
3.3
|
%
|
A
|
|
|
|
5.2
|
|
|
|
|
5.2
|
|
|
|
|
(2.9
|
)
|
|
|
|
0.5
|
|
B
|
|
|
|
16.9
|
|
|
|
|
14.4
|
|
|
|
|
(6.4
|
)
|
|
|
|
11.0
|
|
CCC
|
|
|
|
15.2
|
|
|
|
|
11.9
|
|
|
|
|
(4.3
|
)
|
|
|
|
12.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total HELOC
|
|
|
$
|
60.0
|
|
|
|
$
|
54.2
|
|
|
|
$
|
(21.9
|
)
|
|
|
|
7.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note: The table presented above excludes par
of $30.9 million, amortized cost of $31.6 million, and
gross unrealized gains of $0.1 million related to the
restricted certificates pertaining to the Shared Funding Program.
|
|
(1)
|
Amortized cost includes adjustments
made to the cost basis of an investment for accretion and/or
amortization, collection of cash, and/or previous
OTTI recognized in earnings (less any cumulative effect
adjustments recognized in accordance with the
transition provisions of the amended OTTI guidance).
|
|
(2)
|
Delinquency information is
presented at the cross-collateralization level.
|
56
The following table provides changes in credit ratings by
collateral type updated through April 30, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Ratings
|
|
|
Balances as of March 31, 2010
|
|
|
|
March 31,
|
|
|
April 30,
|
|
|
Carrying
|
|
|
Fair
|
(dollars in millions)
|
|
|
2010
|
|
|
2010
|
|
|
Value
|
|
|
Value
|
Private label residential MBS
|
|
|
AAA
|
|
|
B
|
|
|
$
|
94.9
|
|
|
|
$
|
91.9
|
|
|
|
|
AA
|
|
|
BBB
|
|
|
|
102.8
|
|
|
|
|
97.7
|
|
|
|
|
A
|
|
|
BB
|
|
|
|
32.3
|
|
|
|
|
27.1
|
|
|
|
|
BBB
|
|
|
B
|
|
|
|
84.8
|
|
|
|
|
78.5
|
|
|
|
|
B
|
|
|
CCC
|
|
|
|
50.6
|
|
|
|
|
50.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total private label residential MBS
|
|
|
|
|
|
|
|
|
|
365.4
|
|
|
|
|
345.8
|
|
HELOCs
|
|
|
CCC
|
|
|
CC
|
|
|
|
1.8
|
|
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total private label MBS
|
|
|
|
|
|
|
|
|
$
|
367.2
|
|
|
|
$
|
347.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Label MBS in Unrealized Loss
Positions. The following table provides select
financial and other statistical information on the portion of
the private label MBS portfolio in an unrealized loss position
at March 31, 2010.
Private
Label MBS in Unrealized Loss
Positions(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30,
2010(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% All
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Wtd-Avg
|
|
|
March 31,
|
|
|
|
|
|
Other
|
|
|
% Total
|
|
|
% Below
|
|
|
|
|
|
|
|
|
|
Amort
|
|
|
Unrealized
|
|
|
Collateral
|
|
|
2010
|
|
|
%
|
|
|
Inv
|
|
|
Inv
|
|
|
Inv
|
|
|
Current %
|
(dollars in millions)
|
|
|
Par
|
|
|
Cost
|
|
|
Losses
|
|
|
Del
Rate%(3)
|
|
|
% AAA
|
|
|
AAA
|
|
|
Grade(4)
|
|
|
Grade
|
|
|
Grade
|
|
|
Watchlist
|
Residential MBS
backed by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
|
$
|
4,156.5
|
|
|
|
$
|
4,030.3
|
|
|
|
$
|
(502.9
|
)
|
|
|
|
10.1
|
%
|
|
|
|
20.9
|
%
|
|
|
|
18.6
|
%
|
|
|
|
22.6
|
%
|
|
|
|
41.2
|
%
|
|
|
|
58.8
|
%
|
|
|
|
17.1
|
%
|
Alt-A and other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alt-A other
|
|
|
$
|
2,054.6
|
|
|
|
$
|
1,901.3
|
|
|
|
$
|
(376.4
|
)
|
|
|
|
19.7
|
%
|
|
|
|
19.5
|
%
|
|
|
|
19.0
|
%
|
|
|
|
17.0
|
%
|
|
|
|
36.0
|
%
|
|
|
|
64.0
|
%
|
|
|
|
31.8
|
%
|
Subprime loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
|
|
$
|
9.2
|
|
|
|
$
|
8.8
|
|
|
|
$
|
(2.8
|
)
|
|
|
|
32.9
|
%
|
|
|
|
68.2
|
%
|
|
|
|
68.2
|
%
|
|
|
|
-
|
%
|
|
|
|
68.2
|
%
|
|
|
|
31.8
|
%
|
|
|
|
68.2
|
%
|
HELOC backed by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alt-A and other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alt-A other
|
|
|
$
|
60.0
|
|
|
|
$
|
54.2
|
|
|
|
$
|
(21.9
|
)
|
|
|
|
7.3
|
%
|
|
|
|
-
|
%
|
|
|
|
-
|
%
|
|
|
|
46.5
|
%
|
|
|
|
46.5
|
%
|
|
|
|
53.5
|
%
|
|
|
|
85.7
|
%
|
Notes:
|
|
(1)
|
The table presented above excludes
the impact related to the restricted certificates pertaining to
the Shared Funding Program in the residential
MBS-Prime category, including par balance of $30.9 million,
amortized cost of $31.6 million, and
gross unrealized gains of $0.1 million.
|
(2)
|
Reflects impact of paydowns to zero
or sales of securities during April 2010.
|
(3)
|
Delinquency information is
presented at the cross-collateralization level.
|
(4)
|
Excludes AAA-rated investments.
|
Monoline Bond Insurers. The Banks
investment securities portfolio includes a limited number of
investments which are insured by five monoline bond
insurers/guarantors. The bond insurance on these investments
generally guarantees the timely payments of principal and
interest if these payments cannot be satisfied from the cash
flows of the underlying collateral. The Bank closely monitors
the financial condition of these bond insurers.
57
There are nine insured investment securities, including seven
securities backed by HELOC mortgage loans and two state and
local agency obligations. The credit rating of each of the MBS
is closely related to the credit rating of the applicable bond
insurer and most of these securities did not have stand-alone
credit ratings and carry limited or no additional credit
enhancement (CE). The Bank analyzes the creditworthiness of the
bond insurer and typically assigns to the individual security
the higher of the bond insurers rating or the stand-alone
investment rating, if available.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
Private
|
|
|
State and Local
|
|
|
Private
|
|
|
State and Local
|
|
|
|
Label
|
|
|
Agency
|
|
|
Label
|
|
|
Agency
|
(in millions)
|
|
|
MBS
|
|
|
Obligations
|
|
|
MBS
|
|
|
Obligations
|
AMBAC Assurance Corporation (AMBAC)
|
|
|
$
|
16.9
|
|
|
$
|
-
|
|
|
|
$
|
17.5
|
|
|
|
$
|
-
|
|
Financial Guaranty Insurance Co. (FGIC)
|
|
|
|
3.5
|
|
|
|
-
|
|
|
|
|
3.6
|
|
|
|
|
-
|
|
Assured Guaranty Municipal Corp (AGMC)
|
|
|
|
22.7
|
|
|
|
-
|
|
|
|
|
23.3
|
|
|
|
|
-
|
|
MBIA Insurance Corporation (MBIA)
|
|
|
|
16.9
|
|
|
|
-
|
|
|
|
|
17.7
|
|
|
|
|
-
|
|
National Public Finance Guarantee Corp. (NPFG)
|
|
|
|
-
|
|
|
|
127.3
|
|
|
|
|
-
|
|
|
|
|
127.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
60.0
|
|
|
$
|
127.3
|
|
|
|
$
|
62.1
|
|
|
|
$
|
127.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2009, Financial Security Assurance Inc. (FSA) was acquired by
Assured Guaranty Ltd and subsequently renamed Assured Guaranty
Municipal Corp (AGMC). AGMC continues to guarantee legacy
private label MBS; however, going forward, it is only
underwriting securities in the municipal market.
The following table further details the par value of the
Banks insured private label MBS by collateral type and
vintage as of March 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AMBAC
|
|
|
AGMC
|
|
|
MBIA
|
|
|
FGIC
|
|
|
|
Monoline
|
|
|
|
|
|
Monoline
|
|
|
|
|
|
Monoline
|
|
|
|
|
|
Monoline
|
|
|
|
|
|
|
Insurance
|
|
|
Unrealized
|
|
|
Insurance
|
|
|
Unrealized
|
|
|
Insurance
|
|
|
Unrealized
|
|
|
Insurance
|
|
|
Unrealized
|
(in millions)
|
|
|
Coverage
|
|
|
Losses
|
|
|
Coverage
|
|
|
Losses
|
|
|
Coverage
|
|
|
Losses
|
|
|
Coverage
|
|
|
Losses
|
HELOC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
$
|
-
|
|
|
|
$
|
-
|
|
|
|
$
|
22.7
|
|
|
|
$
|
(8.3
|
)
|
|
|
$
|
-
|
|
|
|
$
|
-
|
|
|
|
$
|
-
|
|
|
|
$
|
-
|
|
2005
|
|
|
|
5.2
|
|
|
|
|
(2.9
|
)
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
2004 and earlier
|
|
|
|
11.7
|
|
|
|
|
(3.2
|
)
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
16.9
|
|
|
|
|
(6.4
|
)
|
|
|
|
3.5
|
|
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
16.9
|
|
|
|
$
|
(6.1
|
)
|
|
|
$
|
22.7
|
|
|
|
$
|
(8.3
|
)
|
|
|
$
|
16.9
|
|
|
|
$
|
(6.4
|
)
|
|
|
$
|
3.5
|
|
|
|
$
|
(1.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the rating of the Banks
monoline insurers as of March 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Moodys
|
|
|
S&P
|
|
|
Fitch
|
|
|
|
Credit
|
|
|
|
|
|
Credit
|
|
|
|
|
|
Credit
|
|
|
|
|
|
|
Rating
|
|
|
Watch
|
|
|
Rating
|
|
|
Watch
|
|
|
Rating
|
|
|
Watch
|
AMBAC
|
|
|
Caa2
|
|
|
Positive
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
AGMC
|
|
|
Aa3
|
|
|
Negative
|
|
|
AAA
|
|
|
-
|
|
|
-
|
|
|
-
|
MBIA
|
|
|
B3
|
|
|
-
|
|
|
BB+
|
|
|
-
|
|
|
-
|
|
|
-
|
NPFG
|
|
|
Baa1
|
|
|
-
|
|
|
A
|
|
|
-
|
|
|
-
|
|
|
-
|
FGIC(1)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Note:
|
|
(1) |
FGIC is no longer being rated.
|
In late March 2010, Ambac was required by one of its regulators
to establish specific segregated accounts for certain of its
insurance policies. Ambacs regulator has stated that
payments under the insurance policies will be suspended until
September 2010. The Bank has three HELOC securities with a total
par value of $16.9 million at March 31, 2010 that are
insured by Ambac. One of the bonds was receiving insurance
payments in the first quarter of 2010.
In addition, the Bank had three prime reperforming MBS, the
underlying mortgage loans of which are government-guaranteed
which generally provides for the substantial repayment of
principal. These securities have a
58
total par balance of $40.2 million and total fair value of
$28.2 million at March 31, 2010. These three
securities were all rated below investment grade at
March 31, 2010.
Other-Than-Temporary
Impairment. In the first quarter of 2010, the Bank
recognized $27.6 million of credit-related OTTI charges in
earnings (the credit loss) related to private label MBS, after
the Bank determined that it was likely that it would not recover
the entire amortized cost of each of these securities. The Bank
does not intend to sell and it is not more likely than not that
the Bank will be required to sell any OTTI securities before
anticipated recovery of their amortized cost basis. The Bank has
not recorded OTTI on any other type of security (i.e.,
U.S. agency MBS or non-MBS securities). If delinquency
and/or loss
rates on mortgages
and/or home
equity loans continue to increase,
and/or a
decline in residential real estate values continues, the Bank
could experience additional material credit-related OTTI losses
on its investment securities.
The credit loss realized on the Banks private label MBS is
equal to the difference between the amortized cost basis
(pre-OTTI charge) and the present value of the estimated cash
flows the Bank expects to realize on the private label MBS over
their life. The Banks estimate of cash flows has a
significant impact on the Banks determination of credit
losses. Cash flows expected to be collected represent the cash
flows that the Bank is likely to collect based on the
performance and type of private label MBS and the Banks
expectations of the economic environment. To ensure consistency
in determination of the OTTI for private label MBS among all
FHLBanks, the FHLBanks used the same key modeling assumptions
for purposes of their cash flow analysis under the guidance of
an FHLBank System OTTI Governance Committee (OTTI Governance
Committee).
In performing the cash flow analysis on the majority of the
Banks private label MBS, the Bank used two third party
models. The first model considered borrower characteristics and
the particular attributes of the loans underlying the majority
of 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 was the forecast of future housing
price changes for the relevant states and core-based statistical
areas (CBSAs), and were based upon an assessment of the
individual housing markets. The term 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 of ten
thousand or more people. The Banks housing price forecast
assumed
current-to-trough
home price declines ranging from 0 percent to
15 percent over the next six to twelve months. Thereafter,
home prices are projected to remain flat for the first six
months, then 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 the projected prepayments, defaults and
loss severities, were then input into a second model that
allocated 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. A table of the significant assumptions (including default
rates, prepayment rates and loss severities) used on those
securities on which an OTTI was determined to have occurred
during the three months ended March 31, 2010 is included in
Note 6 to the unaudited financial statements in
Item 1. Financial Statements and Supplementary Financial
Data included in the quarterly report filed on this
Form 10-Q.
The classification is initially determined by the original
classification of the bond. However, the cash flow model will
override (i.e,. lower) this classification if certain criteria
are met. Additionally, the Bank will adjust to a lower
classification (i.e., Prime to Alt-A) any securities that have
certain poor performance criteria. These adjustments will result
in higher losses recorded.
The Bank was unable to perform a cash flow analysis for the
Banks HELOCs using the two models above because loan-level
data is not available. Therefore, the Bank performed a
security-level cash flow test based on the following
assumptions: (1) the six month actual constant default
rate; (2) prepayment speeds from the Banks market
risk modeling; and (3) 100% loss given default. The result
was the Banks best estimate of cash flows for these bonds.
Certain of these HELOCs are insured by third-party bond insurers
(referred to as monoline insurers). The monoline insurers
guarantee the timely payments of principal and interest. For
these HELOCs, the Bank determined if there was a credit loss
without any insurance proceeds from the monoline insurers. If
there were, the Bank considered the capacity of the monoline
insurer to cover the shortfalls. Certain of the monoline
insurers have been subject to adverse ratings, rating
downgrades, and weakening financial performance measures.
Accordingly,
59
the OTTI Governance Committee performed analyses to assess the
financial strength of these monoline insurers and established a
burnout period by monoline insurer. The burnout period
represents the date at which the OTTI Governance Committee
estimates that the monoline insurer would be unable to meet its
obligation of timely principal and interest. Shortfalls that
occur before the burnout period expires are not considered a
loss. The OTTI Governance Committee monitors the insurers and as
facts and circumstances change, the burnout period could
significantly change. During the first quarter of 2010, the Bank
was receiving payments on two HELOCs from monoline bond insurers
in accordance with contractual terms.
The following table presents the burnout period by monoline
insurer used by the Bank.
|
|
|
|
Monoline Insurer
|
|
|
Burnout Period
|
AGMC
|
|
|
No expiration
|
AMBAC
|
|
|
May 31, 2010
|
MBIA
|
|
|
June 30, 2011
|
FGIC
|
|
|
n/a
|
n/a not applicable; the New York Insurance
Department recently ordered FGIC to suspend all claim
payments.
As previously mentioned, in late March 2010, Ambac was required
to establish specific segregated accounts for certain of its
insurance policies. Payments under the insurance policies will
be suspended until September 2010. The Bank has three HELOC
securities with a total par value of $16.9 million at
March 31, 2010 that are insured by Ambac. One of the bonds
was receiving insurance payments in the first quarter of 2010.
In addition, the Bank was unable to perform a cash flow analysis
for a limited number of bonds because loan level data was not
available. For these bonds, the Bank identified a similar bond
(referred to as a proxy bond), based on collateral type,
vintage, and current performance. The Bank used the proxy
bonds
month-by-month
projections from the first model (referred to above) and entered
them into the second model for our bond. The result is the
Banks best estimate of cash flows. This proxy bond
approach is the default approach approved by the OTTI Governance
Committee for securities without loan level data.
These models and assumptions have a significant effect on
determining whether any of the investment securities are OTTI.
The use of different assumptions, as well as changes in market
conditions, could result in materially different net income,
retained earnings and total capital for the Bank. Based on the
structure of the Banks private label MBS and the
interaction of assumptions to estimate cash flows, the Bank is
unable to isolate the impact of the assumption changes or
performance deterioration on estimated credit losses recorded by
the Bank. However, the Bank believes that the most significant
driver of the credit loss during the first quarter of 2010 was
deterioration of the collateral supporting the Banks
securities and not changes to the assumptions, which remained
relatively stable. Assumption changes in future periods could
materially impact the amount of OTTI credit-related losses which
could be recorded.
Based on the Banks OTTI evaluation, the Bank has
determined that 45 of its private label MBS, including five
HELOCs, were
other-than-temporarily
impaired at March 31, 2010 (i.e., they are projected to
incur a credit loss during their life). These securities
included the 44 CUSIPs that had previously been identified as
other-than-temporarily
impaired at December 31, 2009, for which an additional
$27.6 million of credit loss was recorded during first
quarter 2010. The Bank had recognized $266.1 million of
credit losses on these securities
life-to-date
as of March 31, 2010. There was one additional CUSIP
identified as
other-than-temporarily
impaired in first quarter 2010, on which the Bank recorded an
insignificant credit loss. By comparison, at March 31,
2009, the Bank had determined that 17 of its private label MBS,
one of which was a HELOC, were
other-than-temporarily
impaired. The Bank recognized $40.5 million of credit
losses on these securities
life-to-date
as of March 31, 2009.
As noted previously, OTTI is based on estimates concerning
private label MBS performance and assumptions regarding the
economy. When the Bank updates its estimated cash flow
projections, the Bank may determine that there is an increase in
the estimated cash flows the Bank will receive. This increase in
cash flows is recorded as an increase in the yield on the
Banks investment and is recognized over the life of the
investment. During first quarter
60
2010, the Bank recognized an increase in yield on certain
private label MBS; this incremental increase in yield resulted
in $0.5 million of additional interest income. The Bank had
not recognized any additional interest income during the first
quarter of 2009.
Beginning in second quarter 2009 and continuing through first
quarter 2010, the Bank transferred private label MBS from
held-to-maturity
to
available-for-sale
when an OTTI credit loss had been recorded on the security. The
Bank believes that the occurrence of a credit loss constitutes
evidence of a significant decline in the issuers
creditworthiness and permits transfers from
held-to-maturity
to
available-for-sale
without calling into question the classification of the
remaining
held-to-maturity
securities. The Bank also believes that the transfer increases
its flexibility to potentially sell private label MBS on which a
credit loss has been recorded when market conditions improve
without tainting the Banks entire
held-to-maturity
portfolio. During first quarter 2010, the Bank transferred a
private label MBS from
held-to-maturity
to
available-for-sale
with a total amortized cost of $23.3 million, OTTI
recognized in AOCI of $2.2 million and fair value of
$21.1 million as of the date of the transfer.
The following tables present the entire private label and HELOC
MBS portfolios and any related OTTI at and for the three months
ended March 31, 2010.
Other-Than-Temporary
Impairment of
Private Label and HELOC MBS
by Vintage
At and for the Three Months Ended March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime(1)
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
OTTI related
|
|
|
OTTI Related
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
|
|
|
to Credit
|
|
|
to Noncredit
|
|
|
Total OTTI
|
Vintage (in millions)
|
|
|
Cost(3)
|
|
|
Losses(2)
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Losses
|
|
|
Losses
|
Private label residential MBS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
$
|
1,249.7
|
|
|
|
$
|
(219.7
|
)
|
|
|
$
|
1,030.0
|
|
|
|
$
|
(10.5
|
)
|
|
|
$
|
10.5
|
|
|
|
$
|
-
|
|
2006
|
|
|
|
722.7
|
|
|
|
|
(94.3
|
)
|
|
|
|
628.4
|
|
|
|
|
(1.2
|
)
|
|
|
|
(1.0
|
)
|
|
|
|
(2.2
|
)
|
2005
|
|
|
|
798.1
|
|
|
|
|
(89.3
|
)
|
|
|
|
708.8
|
|
|
|
|
(1.5
|
)
|
|
|
|
1.5
|
|
|
|
|
-
|
|
2004 and earlier
|
|
|
|
1,451.7
|
|
|
|
|
(99.6
|
)
|
|
|
|
1,353.1
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
Total
|
|
|
$
|
4,222.2
|
|
|
|
$
|
(502.9
|
)
|
|
|
$
|
3,720.3
|
|
|
|
$
|
(13.2
|
)
|
|
|
$
|
11.0
|
|
|
|
$
|
(2.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total private label residential MBS
|
|
|
$
|
4,222.2
|
|
|
|
$
|
(502.9
|
)
|
|
|
$
|
3,720.3
|
|
|
|
$
|
(13.2
|
)
|
|
|
$
|
11.0
|
|
|
|
$
|
(2.2
|
)
|
|
|
Note: The Bank had no Prime HELOCs
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alt-A(1)
|
|
|
|
|
|
Gross
|
|
|
|
OTTI related
|
|
OTTI Related
|
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
|
|
to Credit
|
|
to Noncredit
|
|
Total OTTI
|
Vintage (in millions)
|
|
|
Cost(3)
|
|
Losses(2)
|
|
Fair Value
|
|
Losses
|
|
Losses
|
|
Losses
|
Private label residential MBS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
$
|
330.2
|
|
|
$
|
(86.0
|
)
|
|
$
|
244.3
|
|
|
$
|
(3.9
|
)
|
|
$
|
3.9
|
|
|
$
|
-
|
|
2006
|
|
|
|
729.5
|
|
|
|
(167.8
|
)
|
|
|
561.6
|
|
|
|
(7.8
|
)
|
|
|
7.8
|
|
|
|
-
|
|
2005
|
|
|
|
344.6
|
|
|
|
(54.5
|
)
|
|
|
290.1
|
|
|
|
(2.4
|
)
|
|
|
2.4
|
|
|
|
-
|
|
2004 and earlier
|
|
|
|
523.0
|
|
|
|
(68.1
|
)
|
|
|
455.0
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Total
|
|
|
$
|
1,927.3
|
|
|
$
|
(376.4
|
)
|
|
$
|
1,551.0
|
|
|
$
|
(14.1
|
)
|
|
$
|
14.1
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HELOCs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
$
|
22.7
|
|
|
$
|
(8.3
|
)
|
|
$
|
14.4
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
2005
|
|
|
|
5.2
|
|
|
|
(2.9
|
)
|
|
|
2.3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
2004 and earlier
|
|
|
|
26.3
|
|
|
|
(10.7
|
)
|
|
|
15.6
|
|
|
|
(0.3
|
)
|
|
|
0.3
|
|
|
|
-
|
|
|
Total
|
|
|
$
|
54.2
|
|
|
$
|
(21.9
|
)
|
|
$
|
32.3
|
|
|
$
|
(0.3
|
)
|
|
$
|
0.3
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total private label residential MBS and HELOCs
|
|
|
$
|
1,981.5
|
|
|
$
|
(398.3
|
)
|
|
$
|
1,583.3
|
|
|
$
|
(14.4
|
)
|
|
$
|
14.4
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subprime(1)
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
OTTI related
|
|
|
OTTI Related
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
|
|
|
to Credit
|
|
|
to Noncredit
|
|
|
Total OTTI
|
Vintage (in millions)
|
|
|
Cost(3)
|
|
|
Losses(2)
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Losses
|
|
|
Losses
|
Private label residential MBS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 and earlier
|
|
|
$
|
8.8
|
|
|
|
$
|
(2.8
|
)
|
|
|
$
|
6.0
|
|
|
|
$
|
-
|
|
|
|
$
|
-
|
|
|
|
$
|
-
|
|
|
Total
|
|
|
$
|
8.8
|
|
|
|
$
|
(2.8
|
)
|
|
|
$
|
6.0
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
Total private label residential MBS
|
|
|
$
|
8.8
|
|
|
|
$
|
(2.8
|
)
|
|
|
$
|
6.0
|
|
|
|
$
|
-
|
|
|
|
$
|
-
|
|
|
|
$
|
-
|
|
|
|
Notes:
|
|
(1)
|
The FHLBanks classify private label
MBS as Prime, Alt-A and subprime based on the originators
classification at the time of origination or based on
classification by an NRSRO upon issuance of the MBS.
|
(2)
|
Represents total gross unrealized
losses including noncredit related impairment recognized in AOCI.
|
(3)
|
Amortized cost includes adjustments
made to the cost basis of an investment for accretion and/or
amortization, collection of cash, and/or previous
OTTI recognized in earnings (less any cumulative effect
adjustments recognized in accordance with the
transition provisions of the amended OTTI guidance).
|
62
Summary
of
Other-Than-Temporary
Impairments Recorded by Security Type and
Duration of Unrealized Losses Prior to
Impairment(1)
For the Three Months Ended March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncredit-Related Gross Unrealized
Losses(2)
|
|
|
Credit-Related Gross Unrealized
Losses(3)
|
|
|
|
Less than 12
|
|
|
12 Months or
|
|
|
|
|
|
Less than 12
|
|
|
12 Months or
|
|
|
|
(in millions)
|
|
|
Months
|
|
|
Greater
|
|
|
Total
|
|
|
Months
|
|
|
Greater
|
|
|
Total
|
Available-for-sale
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private label residential MBS
|
|
|
$
|
-
|
|
|
|
$
|
11.0
|
|
|
|
$
|
11.0
|
|
|
|
$
|
-
|
|
|
|
$
|
(13.2
|
)
|
|
|
$
|
(13.2
|
)
|
Alt-A:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private label residential MBS
|
|
|
|
-
|
|
|
|
|
14.1
|
|
|
|
|
14.1
|
|
|
|
|
-
|
|
|
|
|
(14.1
|
)
|
|
|
|
(14.1
|
)
|
HELOCs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private label residential MBS
|
|
|
|
-
|
|
|
|
|
0.3
|
|
|
|
|
0.3
|
|
|
|
|
-
|
|
|
|
|
(0.3
|
)
|
|
|
|
(0.3
|
)
|
Subprime:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private label residential MBS
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale
securities
|
|
|
$
|
-
|
|
|
|
$
|
25.4
|
|
|
|
$
|
25.4
|
|
|
|
$
|
-
|
|
|
|
$
|
(27.6
|
)
|
|
|
$
|
(27.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private label MBS total
|
|
|
$
|
-
|
|
|
|
$
|
25.4
|
|
|
|
$
|
25.4
|
|
|
|
$
|
-
|
|
|
|
$
|
(27.6
|
)
|
|
|
$
|
(27.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes:
|
|
(1)
|
The FHLBanks classify private label
MBS as Prime, Alt-A and subprime based on the originators
classification at the time of origination or based on
classification by an NRSRO upon issuance of the MBS.
|
(2)
|
Noncredit losses were recognized in
AOCI upon OTTI determination at March 31, 2010.
|
(3)
|
Credit losses were recognized in
earnings upon OTTI determination at March 31, 2010.
|
In its ongoing review, management will continue to evaluate all
impaired securities, including those on which charges for OTTI
have been recorded. It is not possible for the Bank to predict
the magnitude of future additional OTTI charges because that
depends on many factors, including economic, conditions in the
financial and housing markets and the actual and projected
performance of the loan collateral underlying the Banks
private label MBS portfolio. If either the assumptions become
more severe or the performance of the Banks private label
MBS portfolio continues to deteriorate, additional securities in
the Banks
held-to-maturity
portfolio could become OTTI, which could lead to additional
material OTTI charges. Furthermore, there could be additional
OTTI credit charges due to more severe assumptions or
deterioration in the performance on
available-for-sale
securities for which an OTTI charge has been previously
recorded. At the present time, the Bank cannot estimate the
future amount of any additional OTTI charges.
As discussed above, the projection of cash flows expected to be
collected on private label MBS involves significant judgment
with respect to key modeling assumptions. Therefore, for all
private label MBS and HELOC investments evaluated under a base
case (or best estimate) scenario, the Bank also performed a cash
flow analysis for each of these securities under one additional
scenario that represented a meaningful and plausible more
adverse external assumption. This more adverse scenario showed a
larger home price decline and a slower rate of housing price
recovery. Specifically, the
current-to-trough
forecast showed a decline of 5 percentage points more than
the base case
current-to-trough
housing price decline, and the housing price recovery path has
housing prices reflecting no increase from the trough level the
first year after the trough is reached, a 1 percent
increase in the second year, a 2 percent increase in the
third and fourth years, and a 3 percent per year increase
thereafter.
As shown in the table below, based on the estimated cash flows
of the Banks private label MBS and home equity loan
investments under the adverse case scenario, the Banks
first quarter 2010 credit losses would have increased
$86.2 million. The increase in the credit loss under the
adverse case scenario is the result of the credit loss
increasing on securities currently identified by the Bank as
OTTI and three additional securities with an unpaid
63
principal balance of $123.9 million. The adverse scenario
estimated cash flows were generated using the same model (Prime,
Alt-A or subprime) as the base scenario. Using a model with more
severe assumptions could significantly increase the estimated
credit loss recorded by the Bank. The adverse case housing price
forecast is not managements best estimate forecast and
should not be used as a basis for determining OTTI. The table
below classifies results based on the classification at the time
of issuance and not the model used to estimate the cash flows.
OTTI
Credit Loss Base vs. Stress Scenario
For the Three Months Ended March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
Base Case Scenario
|
|
Stress Scenario
|
(in millions)
|
|
(In Net Loss)
|
|
(Disclosure Only)
|
Prime
|
|
$
|
13.2
|
|
|
$
|
52.5
|
|
Alt-A
|
|
|
14.1
|
|
|
|
59.1
|
|
Subprime
|
|
|
-
|
|
|
|
0.1
|
|
HELOCs
|
|
|
0.3
|
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
Total OTTI credit loss
|
|
$
|
27.6
|
|
|
$
|
113.8
|
|
|
|
|
|
|
|
|
|
|
Credit
and Counterparty Risk Mortgage Loans, BOB Loans and
Derivatives
Mortgage Loans. The Bank offers a mortgage
loan purchase program as a service to members. The Finance
Agency has authorized the Bank to hold mortgage loans under the
MPF Program whereby the Bank acquires mortgage loans from
participating members in a shared credit risk structure,
including the necessary CE. These assets carry CEs, which give
them the approximate equivalent of a AA credit rating, although
the CE is not actually rated. The Bank had net mortgage loan
balances of $5.0 billion and $5.2 billion as of
March 31, 2010 and December 31, 2009, respectively,
after allowance for credit losses of $2.9 million and
$2.7 million, respectively. The increase in the allowance
for credit losses related to the MPF portfolio was driven by
several factors, including updated default and loss assumptions.
Delinquencies in the Banks portfolio remain markedly below
national delinquency rates for prime mortgage loans.
Mortgage Insurers. The Banks MPF
Program currently has credit exposure to nine mortgage insurance
companies to provide both primary mortgage insurance and
supplemental mortgage insurance under its various programs. The
Bank closely monitors the financial condition of these mortgage
insurers. All providers are required to maintain a rating of AA-
or better by at least one credit rating agency and are reviewed
at least annually by the Banks Credit Risk Committee or
more frequently as circumstances warrant. The MPF Provider and
the various FHLBanks offering the MPF Program have established a
set of financial criteria for further monitoring the financial
condition of the mortgage insurance companies.
Under the provisions of the Program, when an insurer is no
longer considered a qualified SMI provider for the MPF Program
due to a ratings downgrade, the Bank is required to notify
affected PFIs that they will be required to take one of the
following actions within six months: (1) obtain replacement
SMI coverage with a different provider; or (2) provide
their own undertaking equivalent to SMI coverage, including
assumption of CE and adequate collateralization of the CE
obligation. To date, the Banks affected PFIs have pledged
sufficient collateral to secure their CE obligations. In the
event the PFIs had not taken one of these actions, the Bank
would have withheld the PFIs performance-based CE fees.
Very few of the Banks mortgage insurers currently maintain
a rating of A+ or better by at least one credit rating agency.
As required by the Program, for ongoing primary mortgage
insurance, the ratings model currently requires additional CE
from the PFI to compensate for the lower mortgage insurer
rating. The MPF Plus product currently requires supplemental
mortgage insurance under the Program. The Bank had no open MPF
Plus Master Commitments at March 31, 2010 and has not
purchased loans under MPF Plus Commitments since July 2006.
64
The following tables present mortgage insurance provider credit
exposure and concentrations with coverage greater than 10% of
total coverage as of March 31, 2010 and December 31,
2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
Credit Rating (Fitch/
|
|
Primary
|
|
Supplemental
|
|
Total
|
|
|
|
|
Moodys/Standard &
|
|
Mortgage
|
|
Mortgage
|
|
Credit
|
|
Percent of
|
(dollars in millions)
|
|
Poors)
|
|
Insurance
|
|
Insurance
|
|
Exposure
|
|
Total
|
Genworth Mortgage Insurance Corp. (Genworth)
|
|
- / Baa2 / BBB-
|
|
$
|
6.5
|
|
|
$
|
51.4
|
|
|
$
|
57.9
|
|
|
|
41.5
|
|
Mortgage Guaranty Insurance Corp. (MGIC)
|
|
- / Ba3 / B+
|
|
|
23.5
|
|
|
|
3.7
|
|
|
|
27.2
|
|
|
|
19.5
|
|
Republic Mortgage Insurance Company (RMIC)
|
|
BBB- / Ba1 / BBB-
|
|
|
14.5
|
|
|
|
5.1
|
|
|
|
19.6
|
|
|
|
14.0
|
|
PMI Mortgage Insurance Co. (PMI)
|
|
- / B2 / B+
|
|
|
12.9
|
|
|
|
0.7
|
|
|
|
13.6
|
|
|
|
9.7
|
|
Other insurance providers
|
|
-
|
|
|
20.9
|
|
|
|
0.4
|
|
|
|
21.3
|
|
|
|
15.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
78.3
|
|
|
$
|
61.3
|
|
|
$
|
139.6
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
Credit Rating (Fitch/
|
|
Primary
|
|
Supplemental
|
|
Total
|
|
|
|
|
Moodys/Standard &
|
|
Mortgage
|
|
Mortgage
|
|
Credit
|
|
Percent of
|
(dollars in millions)
|
|
Poors)
|
|
Insurance
|
|
Insurance
|
|
Exposure
|
|
Total
|
Genworth Mortgage Insurance Corp. (Genworth)
|
|
- / Baa2 / BBB-
|
|
$
|
6.9
|
|
|
$
|
51.4
|
|
|
$
|
58.3
|
|
|
|
40.7
|
|
Mortgage Guaranty Insurance Corp. (MGIC)
|
|
BB- / Ba2 / B+
|
|
|
24.2
|
|
|
|
3.6
|
|
|
|
27.8
|
|
|
|
19.4
|
|
Republic Mortgage Insurance Company (RMIC)
|
|
BBB- / Baa2 / BBB-
|
|
|
15.4
|
|
|
|
5.1
|
|
|
|
20.5
|
|
|
|
14.3
|
|
PMI Mortgage Insurance Co. (PMI)
|
|
- / Ba3 / B+
|
|
|
13.6
|
|
|
|
0.8
|
|
|
|
14.4
|
|
|
|
10.0
|
|
Other insurance providers
|
|
-
|
|
|
22.0
|
|
|
|
0.4
|
|
|
|
22.4
|
|
|
|
15.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
82.1
|
|
|
$
|
61.3
|
|
|
$
|
143.4
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking On Business (BOB) Loans. The Bank has
offered the BOB loan program to members since 2000, which is
targeted to small businesses in the Banks district of
Delaware, Pennsylvania and West Virginia. The programs
objective is to assist in the growth and development of small
businesses, including both the
start-up and
expansion of these businesses. The Bank makes funds available to
members to extend credit to an approved small business borrower,
thereby enabling small businesses to qualify for credit that
would otherwise not be available. The original intent of the BOB
program is as a grant program to members to help facilitate
community economic development; however, repayment provisions
within the program require that the BOB program be accounted for
as an unsecured loan program. As the members collect directly
from the borrowers, the members remit to the Bank repayment of
the loans. If the business is unable to repay the loan, it may
be forgiven at the members request, subject to the
Banks approval. The entire BOB program is classified as a
nonaccrual loan portfolio due to the fact that the Bank has
doubt about the ultimate collection of the contractual principal
and interest of the loans. Therefore, interest income is not
accrued on these loans; income is recognized on a cash-basis
when received.
Derivative Counterparties. The Bank is
subject to credit risk arising from the potential
non-performance by derivative counterparties with respect to the
agreements entered into with the Bank, as well as certain
operational risks relating to the management of the derivative
portfolio. In management of this credit risk, the Bank follows
the policies established by the Board regarding unsecured
extensions of credit. For all derivative counterparties, the
Bank selects only highly-rated derivatives dealers and major
banks that meet the Banks eligibility criteria. The Bank
manages derivative counterparty credit risk through the combined
use of credit analysis, collateral management and other risk
mitigation techniques. For example, the Bank requires collateral
agreements on all nonmember derivative financial instrument
contracts under which collateral must be posted against exposure
over an unsecured threshold amount. Additionally, the extent to
which the Bank is exposed to derivative counterparty risk
65
is partially mitigated through the use of master netting
agreements and bilateral security agreements with all active
derivative counterparties that provide for delivery of
collateral at specified levels tied to individual counterparty
credit ratings as reported by the credit rating agencies. In
determining maximum credit exposure, the Bank considers accrued
interest receivables and payables, and the legal right to offset
assets and liabilities on an individual counterparty basis. As a
result of these risk mitigation actions, management does not
anticipate any credit losses on its current derivative
agreements outstanding.
The Bank regularly monitors the credit exposure of derivative
transactions by determining the market value of positions using
an internal pricing model. The market values generated by this
model are compared to other internal models and dealer prices on
a monthly basis. Collateral transfers required due to changes in
market values are conducted on a daily basis, when necessary.
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
recent deterioration in the credit/financial markets has
heightened the Banks awareness of derivative default risk.
In response, the Bank has worked toward lessening this risk by
(1) attempting to negotiate revised International Swaps
Dealers Association, Inc. (ISDA) standards, when necessary, that
should help to mitigate losses in the event of a counterparty
default and (2) verifying that the derivative
counterparties are in full compliance with existing ISDA
requirements through enhanced monitoring efforts. The
Banks ISDAs typically require segregation of the
Banks collateral posted with the counterparty and do not
permit rehypothecation.
The table below reflects only those counterparties which have
net credit exposure at March 31, 2010 and December 31,
2009. In addition, the maximum credit exposure represents the
estimated fair value of the derivative contracts that have a net
positive market value to the Bank and the net credit exposure
represents maximum credit exposure less the protection afforded
by contractually required collateral held by the Bank.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
|
|
|
|
Notional
|
|
|
Maximum
|
|
|
Cash
|
|
|
|
(dollars in millions)
|
|
|
Number of
|
|
|
Principal
|
|
|
Credit
|
|
|
Collateral
|
|
|
Net Credit
|
Credit
Rating(1)
|
|
|
Counterparties
|
|
|
Outstanding
|
|
|
Exposure
|
|
|
Held
|
|
|
Exposure
|
AA
|
|
|
3
|
|
|
$
|
3,243.0
|
|
|
|
$
|
10.9
|
|
|
|
$
|
-
|
|
|
|
$
|
10.9
|
|
A
|
|
|
1
|
|
|
|
100.0
|
|
|
|
|
3.3
|
|
|
|
|
-
|
|
|
|
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4
|
|
|
$
|
3,343.0
|
|
|
|
$
|
14.2
|
|
|
|
$
|
-
|
|
|
|
$
|
14.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
Notional
|
|
Maximum
|
|
Cash
|
|
|
(dollars in millions)
|
|
|
Number of
|
|
Principal
|
|
Credit
|
|
Collateral
|
|
Net Credit
|
Credit
Rating(1)
|
|
|
Counterparties
|
|
Outstanding
|
|
Exposure
|
|
Held
|
|
Exposure
|
AA
|
|
|
|
2
|
|
|
$
|
440.0
|
|
|
$
|
3.4
|
|
|
$
|
-
|
|
|
$
|
3.4
|
|
A
|
|
|
|
2
|
|
|
|
125.0
|
|
|
|
4.2
|
|
|
|
-
|
|
|
|
4.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
4
|
|
|
$
|
565.0
|
|
|
$
|
7.6
|
|
|
$
|
-
|
|
|
$
|
7.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note:
|
|
(1) |
Credit ratings reflect the lowest rating from the credit rating
agency. These tables do not reflect changes in any rating,
outlook or watch status after March 31, 2010 and
December 31, 2009. The Bank measures credit exposure
through a process which includes internal credit review and
various external factors.
|
At the time of its bankruptcy, Lehman Brothers along with its
subsidiary LBSF, was the Banks largest derivative
counterparty. As a result of the bankruptcy filing in September
2008, the Bank terminated 595 derivative trades. A portion of
these trades were replaced. For further information, see the
detailed discussion regarding the Lehman-related transactions in
Current Financial and Mortgage Market Events and
Trends in this Item 2. Managements Discussion
and Analysis in the quarterly report filed on this
Form 10-Q.
66
Liquidity
and Funding Risk
As a wholesale bank, the Banks financial strategies are
designed to enable it to expand and contract its assets,
liabilities and capital in response to changes in member credit
demand, membership composition and other market factors. The
Banks liquidity resources are designed to support these
financial strategies. The Bank actively manages its liquidity
position to maintain stable, reliable, and cost-effective
sources of funds, while taking into account market conditions,
member credit demand for short-and long-term loans, investment
opportunities and the maturity profile of the Banks assets
and liabilities. The Bank recognizes that managing liquidity is
critical to achieving its statutory mission of providing
low-cost funding to its members. In managing liquidity risk, the
Bank is required to maintain a level of liquidity in accordance
with certain Finance Agency guidance and policies established by
management and the Board. Effective March 6, 2009, the
Finance Agency provided final guidance revising and formalizing
prior guidance regarding additional increases in liquidity
originally provided to the FHLBanks in fourth quarter 2008. This
final guidance requires the Bank to maintain sufficient
liquidity in an amount at least equal to its anticipated cash
outflows under two different scenarios. One scenario assumes
that the Bank can not access the capital markets for a period of
15 days and that, during that time, members do not renew
any maturing, prepaid and called advances. The second scenario
assumes that the Bank cannot access the capital markets for five
days and that during that period it will automatically renew
maturing and called advances for all members except very large,
highly rated members. These additional requirements are more
stringent than the original five calendar day contingency
liquidity requirement discussed below. The requirement is
designed to enhance the Banks protection against temporary
disruptions in access to the FHLBank System debt markets in
response to a rise in capital markets volatility. Longer term
contingency liquidity is discussed in the contingency liquidity
section which follows.
Consolidated obligation bonds and discount notes, along with
member deposits and capital, represent the primary funding
sources used by the Bank to support its asset base. Consolidated
obligations enjoy GSE status; however, they are not obligations
of the United States, and the United States does not guarantee
them. Consolidated obligation bonds and discount notes are rated
Aaa/P-1 by
Moodys Investor Service, Inc. and
AAA/A-1+ by
Standard & Poors. These ratings measure the
likelihood of timely payment of principal and interest. At
March 31, 2010, the Banks consolidated obligation
bonds outstanding totaled $42.5 billion compared to
$49.1 billion as of December 31, 2009, a decrease of
$6.6 billion, or 13.4%. The Bank also issues discount
notes, which are shorter-term consolidated obligations, to
support its short-term member loan portfolio and other
short-term asset funding needs. Total discount notes outstanding
at March 31, 2010 were $10.0 billion compared to
$10.2 billion at December 31, 2009, a decrease of
$218.5 million, or 2.1%, largely due to a decrease in
short-term member borrowings. The Bank may combine consolidated
obligations with derivatives in order to lower its effective
all-in cost of funds and simultaneously reduce interest rate
risk. The funding strategy of issuing bonds while simultaneously
entering into swap agreements is referred to as the issuance of
structured debt. Discount notes have not generally been combined
with derivatives by the Bank, although this approach may be used
by the Bank in the future.
The Banks ability to operate its business, meet its
obligations and generate net interest income depends primarily
on the ability to issue large amounts of various debt structures
at attractive rates. From July 2008 through August 2009, market
concerns regarding the outlook for the net supply of GSE debt
over the short-term, as well as any investments linked to the
U.S. housing market, adversely affected access to the
unsecured debt markets, particularly for long-term and callable
debt. As a result, the Bank experienced an increase in long-term
debt funding costs relative to the U.S. Treasury and LIBOR
yield curves which reflected both investor reluctance to
purchase longer-term obligations and investor demand for
high-quality, short-term assets. As these long-term debt spreads
widened, the Bank experienced difficulty providing term funding
to its members at attractive levels consistent with historical
practice. Since August 2009, these conditions have improved. In
addition, the Banks ability to access the longer-term debt
market has also improved, although the Banks funding costs
relative to LIBOR have increased.
The Banks investments also represent a key source of
liquidity. Total investments available for liquidation may
include trading securities,
available-for-sale
securities, Federal funds sold and certificates of deposit.
These amounts were $9.4 billion at March 31, 2010,
compared to $9.8 billion at December 31, 2009. The
Bank also maintains a secondary liquidity portfolio which may
include U.S. Treasuries, TLGP investments, U.S. agency
securities and other GSE securities that can be financed under
normal market conditions in securities repurchase
67
agreement transactions to raise additional funds. In addition,
U.S. Treasuries may be used as collateral for derivative
counterparty obligations in lieu of cash.
For further information on the Banks liquidity risks, see
additional discussion in Item 1A. Risk Factors entitled
The Bank may be limited in its ability to access the
capital markets, which could adversely affect the Banks
liquidity. In addition, if the Banks ability to access the
long-term debt markets would be limited, this may have a
material adverse effect on its liquidity, results of operations
and financial condition, as well as its ability to fund
operations, including advances. in the Banks
2009 Annual Report filed on
Form 10-K.
Contingency Liquidity. In their
asset/liability management planning, members may look to the
Bank to provide standby liquidity. The Bank seeks to be in a
position to meet its customers credit and liquidity needs
without maintaining excessive holdings of low-yielding liquid
investments or being forced to incur unnecessarily high
borrowing costs. To satisfy these requirements and objectives,
the Banks primary sources of liquidity are short-term
investments, such as Federal funds sold, and the issuance of new
consolidated obligation bonds and discount notes. Member loan
growth may initially be funded by maturing on-balance sheet
liquid investments, but within a short time the growth is
usually funded by new issuances of consolidated obligations. The
capital to support the loan growth is provided by the borrowing
members, through their capital requirements, which are based in
part on outstanding loans.
The Bank maintains contingency liquidity plans designed to
enable it to meet its obligations and the liquidity needs of
members in the event of short-term capital market disruptions;
operational disruptions at other FHLBanks or the OF; or
short-term disruptions of the consolidated obligations markets.
Specifically, the Board has adopted a Liquidity and Funds
Management Policy which requires the Bank to maintain at least
90 days of liquidity to enable the Bank to meet its
obligations in the event of a longer-term consolidated
obligations market disruption. If a market or operational
disruption occurred that prevented the issuance of new
consolidated obligation bonds or discount notes through the
capital markets, the Bank could meet its obligations by:
(1) allowing short-term liquid investments to mature;
(2) purchasing Federal funds; (3) using eligible
securities as collateral for repurchase agreement borrowings;
and (4) if necessary, allowing loans to mature without
renewal. The Banks GSE status and the FHLB System
consolidated obligation credit rating, which reflects the fact
that all twelve FHLBanks share a joint and several liability on
the consolidated obligations, have historically provided
excellent capital market access. Due in part to capital markets
disruptions in the fourth quarter of 2008, the Bank was in
violation of this
90-day
liquidity requirement at times in the first six months of 2009
but was in compliance at each quarter-end in 2009 and at
March 31, 2010.
Additionally, consistent with regulatory requirements, the
Banks liquidity and funds management policy has
historically required the Bank to hold contingency liquidity
sufficient to meet the Banks estimated needs for a minimum
of five business days without access to the consolidated
obligation debt markets. The Banks liquidity measures are
estimates which are dependent upon certain assumptions which may
or may not prove valid in the event of an actual complete
capital market disruption. Management believes that under normal
operating conditions, routine member borrowing needs and
consolidated obligation maturities could be met under these
requirements; however, under extremely adverse market
conditions, the Banks ability to meet a significant
increase in member loan demand could be impaired without
immediate access to the consolidated obligation debt markets.
The Banks access to the capital markets has never been
interrupted to the extent the Banks ability to meet its
obligations was compromised and the Bank currently has no reason
to believe that its ability to issue consolidated obligations
will be impeded to that extent. Specifically, the Banks
sources of contingency liquidity include maturing overnight and
short-term investments, maturing advances, securities available
for repurchase agreements,
available-for-sale
securities and MBS repayments. Uses of contingency liquidity
include net settlements of consolidated obligations, member loan
commitments, mortgage loan purchase commitments, deposit
outflows and maturing other borrowed funds. Excess contingency
liquidity is calculated as the difference between sources and
uses of contingency liquidity. At March 31, 2010 and
December 31, 2009, excess contingency liquidity was
approximately $12.3 billion and $12.9 billion,
respectively.
Repurchases of Excess Capital Stock. In
the past, the Bank also retained liquidity to repurchase a
members capital stock, upon request and at the Banks
sole discretion, at par value as long as the repurchase would
not cause the Bank to fail to meet any of its regulatory capital
requirements or violate any other regulatory prohibitions.
Throughout
68
2008, it had been the Banks practice to routinely
(monthly) repurchase capital stock in excess of a members
minimum investment requirement. As a result, increases and
decreases in capital stock remained generally in line with
changes in the borrowing patterns of members. On
December 23, 2008, the Bank announced its voluntary
decision to temporarily suspend the repurchase of excess capital
stock until further notification in an effort to preserve
capital. Additionally, as of both March 31, 2010 and
December 31, 2009, the Bank had outstanding capital
redemption requests of $8.3 million. See Note 11 of
the unaudited financial statements in Item 1. Financial
Statements and Supplementary Financial Data in the quarterly
report filed on this
Form 10-Q
for additional information.
Operating
and Business Risks
Operating Risk. Operating risk is
defined as the risk of unexpected loss resulting from human
error, systems malfunctions, man-made or natural disasters,
fraud, or circumvention or failure of internal controls. The
Bank has established operating policies and procedures to manage
each of the specific operating risks, which are categorized as
compliance, fraud, legal, information and personnel. The
Banks Internal Audit department, which reports directly to
the Audit Committee of the Banks Board, regularly monitors
compliance with established policies and procedures. Management
continually monitors the effectiveness of the internal control
environment and takes action as appropriate to enhance the
environment. Some operating risk may also result from external
factors which are beyond the Banks control, such as the
failure of other parties with which the Bank conducts business
to adequately address their own operating risks. Governance over
the management of operating risks takes place through the
Banks Operating Risk Management Committee. Business areas
retain primary responsibility for identifying, assessing and
reporting their operational risks. To assist them in discharging
this responsibility and to ensure that operational risk is
managed consistently throughout the organization, the Bank has
developed an operating risk management framework, which includes
key risk indicators.
In addition to the particular risks and challenges that the Bank
faces, the Bank also experiences ongoing operating risks that
are similar to those of other large financial institutions. For
example, the Bank is exposed to the risk that a catastrophic
event, such as a terrorist event or a natural disaster, could
result in significant business disruption and an inability to
process transactions through normal business processes. To
mitigate this risk, the Bank maintains and tests business
continuity plans and has established backup facilities for
critical business processes and systems away from, although in
the same metropolitan area as, the main office. The Bank also
has a reciprocal backup agreement in place with the FHLBank Des
Moines to provide short-term loans and debt servicing in the
event that both of the Pittsburgh facilities are inoperable. The
results of the Banks periodic business continuity tests
are presented annually to the Board. Management can make no
assurances that these measures will be sufficient to respond to
the full range of catastrophic events that might occur.
The Bank maintains insurance coverage for employee
misappropriation, as well as director and officer liability
protection. Additionally, comprehensive insurance coverage is
currently in place for electronic data-processing equipment and
software, personal property, leasehold improvements, property
damage and personal injury. The Bank maintains additional
insurance protection as deemed appropriate, such as cyber
security and travel accident coverages. The Bank regularly
reviews its insurance coverages for adequacy as well as the
financial claims paying ability of its insurance carrier.
Business Risk. Business risk is the
risk of an adverse impact on the Banks profitability or
financial or business strategies resulting from external factors
that may occur in the short-term
and/or
long-term. This risk includes the potential for strategic
business constraints to be imposed through regulatory,
legislative or political changes. Examples of external factors
may include, but are not limited to continued financial services
industry consolidation, a declining membership base,
concentration of borrowing among members, an increase in
non-borrowing members, the introduction of new competing
products and services, increased non-Bank competition, weakening
of the FHLBank Systems GSE status, changes in the deposit
and mortgage markets for the Banks members, and other
factors that may have a significant direct or indirect impact on
the ability of the Bank to achieve its mission and strategic
objectives. The Banks Risk Management Committee monitors
economic indicators and the external environment in which the
Bank operates and attempts to mitigate this risk through
long-term strategic planning.
69
Item 1: Financial
Statements (unaudited)
Federal
Home Loan Bank of Pittsburgh
Statement of Operations
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
March 31,
|
(in thousands, except per share
amounts)
|
|
|
2010
|
|
|
2009
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances
|
|
|
$
|
73,550
|
|
|
|
$
|
240,628
|
|
|
|
|
|
Prepayment fees on advances, net
|
|
|
|
721
|
|
|
|
|
1,070
|
|
|
|
|
|
Interest-bearing deposits
|
|
|
|
170
|
|
|
|
|
5,814
|
|
|
|
|
|
Federal funds sold
|
|
|
|
1,275
|
|
|
|
|
4
|
|
|
|
|
|
Trading securities (Note 3)
|
|
|
|
993
|
|
|
|
|
5,915
|
|
|
|
|
|
Available-for-sale
securities (Note 4)
|
|
|
|
42,702
|
|
|
|
|
92
|
|
|
|
|
|
Held-to-maturity
securities (Note 5)
|
|
|
|
62,838
|
|
|
|
|
147,386
|
|
|
|
|
|
Mortgage loans held for portfolio
|
|
|
|
63,722
|
|
|
|
|
76,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
|
245,971
|
|
|
|
|
477,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated obligation discount notes
|
|
|
|
2,612
|
|
|
|
|
24,783
|
|
|
|
|
|
Consolidated obligation bonds
|
|
|
|
184,174
|
|
|
|
|
396,164
|
|
|
|
|
|
Deposits
|
|
|
|
200
|
|
|
|
|
412
|
|
|
|
|
|
Other borrowings
|
|
|
|
15
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
|
187,001
|
|
|
|
|
421,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income before provision (benefit) for credit
losses
|
|
|
|
58,970
|
|
|
|
|
56,391
|
|
|
|
|
|
Provision (benefit) for credit losses
|
|
|
|
(168
|
)
|
|
|
|
443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision (benefit) for credit
losses
|
|
|
|
59,138
|
|
|
|
|
55,948
|
|
|
|
|
|
Other income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total OTTI losses (Note 6)
|
|
|
|
(2,154
|
)
|
|
|
|
(324,808
|
)
|
|
|
|
|
Portion of OTTI losses recognized in other comprehensive loss
(Note 6)
|
|
|
|
(25,415
|
)
|
|
|
|
294,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net OTTI losses (Note 6)
|
|
|
|
(27,569
|
)
|
|
|
|
(30,460
|
)
|
|
|
|
|
Net gains (losses) on trading securities (Note 3)
|
|
|
|
(326
|
)
|
|
|
|
56
|
|
|
|
|
|
Net loss on derivatives and hedging activities (Note 9)
|
|
|
|
(4,565
|
)
|
|
|
|
(1,202
|
)
|
|
|
|
|
Contingency reserve (Note 14)
|
|
|
|
|
|
|
|
|
(35,314
|
)
|
|
|
|
|
Services fees
|
|
|
|
625
|
|
|
|
|
630
|
|
|
|
|
|
Other, net
|
|
|
|
2,331
|
|
|
|
|
1,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other loss
|
|
|
|
(29,504
|
)
|
|
|
|
(64,333
|
)
|
|
|
|
|
Other expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits expense
|
|
|
|
8,928
|
|
|
|
|
8,239
|
|
|
|
|
|
Other operating expense
|
|
|
|
5,548
|
|
|
|
|
5,534
|
|
|
|
|
|
Finance Agency expense
|
|
|
|
979
|
|
|
|
|
776
|
|
|
|
|
|
Office of Finance expense
|
|
|
|
702
|
|
|
|
|
664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
|
16,157
|
|
|
|
|
15,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before assessments
|
|
|
|
13,477
|
|
|
|
|
(23,598
|
)
|
|
|
|
|
Affordable Housing Program
|
|
|
|
1,100
|
|
|
|
|
|
|
|
|
|
|
REFCORP
|
|
|
|
2,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assessments
|
|
|
|
3,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
$
|
9,901
|
|
|
|
$
|
(23,598
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding (excludes mandatorily
redeemable stock)
|
|
|
|
40,239
|
|
|
|
|
39,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings (loss) per share
|
|
|
$
|
0.25
|
|
|
|
$
|
(0.59
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part
of these financial statements.
70
Federal
Home Loan Bank of Pittsburgh
Statement of Condition
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
(in thousands, except par
value)
|
|
|
2010
|
|
|
2009
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
$
|
251,566
|
|
|
|
$
|
1,418,743
|
|
Interest-bearing deposits
|
|
|
|
6,198
|
|
|
|
|
7,571
|
|
Federal funds sold
|
|
|
|
4,100,000
|
|
|
|
|
3,000,000
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
Trading securities (Note 3)
|
|
|
|
1,286,274
|
|
|
|
|
1,286,205
|
|
Available-for-sale
securities, at fair value (Note 4)
|
|
|
|
2,368,992
|
|
|
|
|
2,397,303
|
|
Held-to-maturity
securities; fair value of $8,216,405 and
$10,106,225, respectively (Note 5)
|
|
|
|
8,479,542
|
|
|
|
|
10,482,387
|
|
Advances (Note 7)
|
|
|
|
36,823,771
|
|
|
|
|
41,177,310
|
|
Mortgage loans held for portfolio (Note 8), net of
allowance for credit losses of $2,870 and $2,680, respectively
|
|
|
|
4,991,274
|
|
|
|
|
5,162,837
|
|
Banking on Business loans, net of allowance for credit losses of
$9,220 and $9,481, respectively
|
|
|
|
11,549
|
|
|
|
|
11,819
|
|
Accrued interest receivable
|
|
|
|
205,853
|
|
|
|
|
229,005
|
|
Prepaid REFCORP assessment
|
|
|
|
37,165
|
|
|
|
|
39,641
|
|
Premises, software and equipment, net
|
|
|
|
21,065
|
|
|
|
|
21,707
|
|
Derivative assets (Note 9)
|
|
|
|
14,223
|
|
|
|
|
7,662
|
|
Other assets
|
|
|
|
58,522
|
|
|
|
|
48,672
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
$
|
58,655,994
|
|
|
|
$
|
65,290,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
Federal
Home Loan Bank of Pittsburgh
Statement of Condition (continued)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
(in thousands, except par
value)
|
|
|
2010
|
|
|
2009
|
LIABILITIES AND CAPITAL
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
|
|
|
$
|
1,394,142
|
|
|
|
$
|
1,257,717
|
|
Noninterest-bearing
|
|
|
|
24,229
|
|
|
|
|
26,613
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
|
1,418,371
|
|
|
|
|
1,284,330
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated obligations, net: (Note 10)
|
|
|
|
|
|
|
|
|
|
|
Discount notes
|
|
|
|
9,990,414
|
|
|
|
|
10,208,891
|
|
Bonds
|
|
|
|
42,477,099
|
|
|
|
|
49,103,868
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated obligations, net
|
|
|
|
52,467,513
|
|
|
|
|
59,312,759
|
|
|
|
|
|
|
|
|
|
|
|
|
Mandatorily redeemable capital stock (Note 11)
|
|
|
|
8,256
|
|
|
|
|
8,256
|
|
Accrued interest payable
|
|
|
|
230,922
|
|
|
|
|
301,495
|
|
Affordable Housing Program
|
|
|
|
22,139
|
|
|
|
|
24,541
|
|
Derivative liabilities (Note 9)
|
|
|
|
649,714
|
|
|
|
|
623,524
|
|
Other liabilities
|
|
|
|
21,113
|
|
|
|
|
22,844
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
|
54,818,028
|
|
|
|
|
61,577,749
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 14)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital (Note 11)
|
|
|
|
|
|
|
|
|
|
|
Capital stock-putable ($100 par value) issued and
outstanding shares:
|
|
|
|
|
|
|
|
|
|
|
40,351 and 40,181 shares in 2010 and 2009, respectively
|
|
|
|
4,035,130
|
|
|
|
|
4,018,065
|
|
Retained earnings
|
|
|
|
398,889
|
|
|
|
|
388,988
|
|
Accumulated other comprehensive income (loss) (AOCI)
(Note 11):
|
|
|
|
|
|
|
|
|
|
|
Net unrealized loss on
available-for-securities
(Note 4)
|
|
|
|
(1,871
|
)
|
|
|
|
(2,020
|
)
|
Net noncredit portion of OTTI losses on
available-for-sale
securities (Note 4)
|
|
|
|
(593,778
|
)
|
|
|
|
(691,503
|
)
|
Net unrealized gain relating to hedging activities
|
|
|
|
263
|
|
|
|
|
264
|
|
Pension and post-retirement benefits
|
|
|
|
(667
|
)
|
|
|
|
(681
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive income (loss)
|
|
|
|
(596,053
|
)
|
|
|
|
(693,940
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total capital
|
|
|
|
3,837,966
|
|
|
|
|
3,713,113
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and capital
|
|
|
$
|
58,655,994
|
|
|
|
$
|
65,290,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part
of these financial statements.
72
Federal
Home Loan Bank of Pittsburgh
Statement of Cash Flows
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
(in thousands)
|
|
|
2010
|
|
|
2009
|
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
$
|
9,901
|
|
|
|
$
|
(23,598
|
)
|
|
|
|
|
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
5,819
|
|
|
|
|
(124,418
|
)
|
|
|
|
|
Change in net fair value adjustment on derivative
and hedging activities
|
|
|
|
54,606
|
|
|
|
|
190,802
|
|
|
|
|
|
OTTI credit losses
|
|
|
|
27,569
|
|
|
|
|
30,460
|
|
|
|
|
|
Other adjustments
|
|
|
|
(168
|
)
|
|
|
|
443
|
|
|
|
|
|
Net change in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities
|
|
|
|
(69
|
)
|
|
|
|
(3,134,112
|
)
|
|
|
|
|
Accrued interest receivable
|
|
|
|
23,143
|
|
|
|
|
73,149
|
|
|
|
|
|
Other assets
|
|
|
|
869
|
|
|
|
|
39,595
|
|
|
|
|
|
Accrued interest payable
|
|
|
|
(70,573
|
)
|
|
|
|
(81,581
|
)
|
|
|
|
|
Other
liabilities(1)
|
|
|
|
(1,605
|
)
|
|
|
|
(8,668
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
|
39,591
|
|
|
|
|
(3,014,330
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
$
|
49,492
|
|
|
|
$
|
(3,037,928
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits (including $1,373 and $253 from other
FHLBanks for mortgage loan programs)
|
|
|
$
|
20,721
|
|
|
|
$
|
(3,523,614
|
)
|
|
|
|
|
Federal funds sold
|
|
|
|
(1,100,000
|
)
|
|
|
|
1,250,000
|
|
|
|
|
|
Premises, software and equipment
|
|
|
|
(767
|
)
|
|
|
|
(1,544
|
)
|
|
|
|
|
Available-for-sale
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in short-term
|
|
|
|
|
|
|
|
|
(500,000
|
)
|
|
|
|
|
Proceeds
|
|
|
|
121,600
|
|
|
|
|
2,097
|
|
|
|
|
|
Held-to-maturity
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in short-term
|
|
|
|
1,450,000
|
|
|
|
|
2,700,000
|
|
|
|
|
|
Proceeds from long-term
|
|
|
|
520,594
|
|
|
|
|
1,028,791
|
|
|
|
|
|
Purchases of long-term
|
|
|
|
|
|
|
|
|
(275,000
|
)
|
|
|
|
|
Advances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
|
|
|
|
24,379,186
|
|
|
|
|
58,740,733
|
|
|
|
|
|
Made
|
|
|
|
(20,045,570
|
)
|
|
|
|
(49,196,833
|
)
|
|
|
|
|
Mortgage loans held for portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
|
|
|
|
212,754
|
|
|
|
|
352,245
|
|
|
|
|
|
Purchases
|
|
|
|
(44,226
|
)
|
|
|
|
(113,458
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
$
|
5,514,292
|
|
|
|
$
|
10,463,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73
Federal
Home Loan Bank of Pittsburgh
Statement of Cash Flows (continued)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
(in thousands)
|
|
|
2010
|
|
|
2009
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits and pass-through reserves
|
|
|
$
|
134,679
|
|
|
|
$
|
434,681
|
|
|
|
|
|
Net (payments) for derivative contracts with financing elements
|
|
|
|
(31,814
|
)
|
|
|
|
(56,741
|
)
|
|
|
|
|
Net proceeds from issuance of consolidated obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount notes
|
|
|
|
14,648,905
|
|
|
|
|
25,596,937
|
|
|
|
|
|
Bonds (including none from other FHLBanks)
|
|
|
|
6,147,075
|
|
|
|
|
11,257,611
|
|
|
|
|
|
Payments for maturing and retiring consolidated
obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount notes
|
|
|
|
(14,867,674
|
)
|
|
|
|
(34,049,220
|
)
|
|
|
|
|
Bonds (including none from other FHLBanks)
|
|
|
|
(12,779,197
|
)
|
|
|
|
(10,628,441
|
)
|
|
|
|
|
Proceeds from issuance of capital stock
|
|
|
|
17,065
|
|
|
|
|
20,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) by financing activities
|
|
|
$
|
(6,730,961
|
)
|
|
|
$
|
(7,424,357
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
|
(1,167,177
|
)
|
|
|
|
1,132
|
|
|
|
|
|
Cash and cash equivalents at beginning of the period
|
|
|
|
1,418,743
|
|
|
|
|
67,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of the period
|
|
|
$
|
251,566
|
|
|
|
$
|
68,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid during the period
|
|
|
$
|
254,710
|
|
|
|
$
|
583,195
|
|
|
|
|
|
AHP payments, net
|
|
|
|
3,502
|
|
|
|
|
7,279
|
|
|
|
|
|
Transfers of mortgage loans to real estate owned
|
|
|
|
5,253
|
|
|
|
|
3,140
|
|
|
|
|
|
Non-cash transfer of OTTI
held-to-maturity
security to
available-for-sale
|
|
|
|
21,124
|
|
|
|
|
|
|
|
|
|
|
Note:
|
|
|
(1) |
|
Other liabilities includes the net
change in the REFCORP asset/liability where applicable.
|
The accompanying notes are an integral part of these
financial statements.
74
Federal
Home Loan Bank of Pittsburgh
Statement of Changes in Capital
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Stock - Putable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
Shares
|
|
|
Par Value
|
|
|
Earnings
|
|
|
AOCI
|
|
|
Total Capital
|
|
|
Balance December 31, 2008
|
|
|
|
39,817
|
|
|
|
$
|
3,981,688
|
|
|
|
$
|
170,484
|
|
|
|
$
|
(17,305
|
)
|
|
|
$
|
4,134,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of adjustments to opening
balance relating to amended OTTI guidance
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
255,961
|
|
|
|
$
|
(255,961
|
)
|
|
|
$
|
|
|
|
|
|
|
Proceeds from sale of capital stock
|
|
|
|
208
|
|
|
|
$
|
20,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,816
|
|
|
|
|
|
Net shares reclassified to mandatorily
redeemable capital stock
|
|
|
|
(33
|
)
|
|
|
|
(3,331
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,331
|
)
|
|
|
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,598
|
)
|
|
|
|
|
|
|
|
|
(23,598
|
)
|
|
|
|
|
Net unrealized losses on
available-
for-sale
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(342
|
)
|
|
|
|
(342
|
)
|
|
|
|
|
Noncredit component of
other-than-
temporarily impaired securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
477
|
|
|
|
|
477
|
|
|
|
|
|
Held-to-maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(294,348
|
)
|
|
|
|
(294,348
|
)
|
|
|
|
|
Accretion of noncredit portion of
impairment losses on
held-to-
maturity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,162
|
|
|
|
|
7,162
|
|
|
|
|
|
Reclassification adjustment for losses (gains)
included in net income relating to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedging activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106
|
|
|
|
|
106
|
|
|
|
|
|
Pension and postretirement benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
|
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,598
|
)
|
|
|
|
(286,909
|
)
|
|
|
|
(310,507
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance March 31, 2009
|
|
|
|
39,992
|
|
|
|
$
|
3,999,173
|
|
|
|
$
|
402,847
|
|
|
|
$
|
(560,175
|
)
|
|
|
$
|
3,841,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
|
40,181
|
|
|
|
$
|
4,018,065
|
|
|
|
$
|
388,988
|
|
|
|
$
|
(693,940
|
)
|
|
|
$
|
3,713,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of capital stock
|
|
|
|
170
|
|
|
|
|
17,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,065
|
|
|
|
|
|
Net shares reclassified to mandatorily redeemable
capital stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,901
|
|
|
|
|
|
|
|
|
|
9,901
|
|
|
|
|
|
Net unrealized gains on
available-
for-sale
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
149
|
|
|
|
|
149
|
|
|
|
|
|
Net noncredit portion of OTTI losses on
available-
for-sale
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncredit portion of OTTI losses including noncredit OTTI losses
transferred from
held-
to-maturity
securities and subsequent fair value adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70,166
|
|
|
|
|
70,166
|
|
|
|
|
|
Reclassification of noncredit portion of
impairment losses included in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,559
|
|
|
|
|
27,559
|
|
|
|
|
|
Net noncredit portion of OTTI losses on
held-to-maturity
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncredit portion of OTTI losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,144
|
)
|
|
|
|
(2,144
|
)
|
|
|
|
|
Reclassification of noncredit portion of OTTI losses included in
net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of noncredit portion of OTTI losses to
available-for-sale
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,144
|
|
|
|
|
2,144
|
|
|
|
|
|
Reclassification adjustment for losses (gains)
included in net income relating to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedging activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
(1
|
)
|
|
|
|
|
Pension and postretirement benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,901
|
|
|
|
|
97,887
|
|
|
|
|
107,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2010
|
|
|
|
40,351
|
|
|
|
$
|
4,035,130
|
|
|
|
$
|
398,889
|
|
|
|
$
|
(596,053
|
)
|
|
|
$
|
3,837,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part
of these financial statements.
75
Note 1
Background Information
The Bank, a federally chartered corporation, is one of 12
district FHLBanks. The FHLBanks serve the public by enhancing
the availability of credit for residential mortgages and
community development. The Bank provides a readily available,
low-cost source of funds to its member institutions. The Bank is
a cooperative, which means that current members own nearly all
of the outstanding capital stock of the Bank. All holders of the
Banks capital stock may, to the extent declared by the
Board, receive dividends on their capital stock. Regulated
financial depositories and insurance companies engaged in
residential housing finance that maintain their principal place
of business in Delaware, Pennsylvania or West Virginia may apply
for membership. According to final Finance Agency regulation
effective February 4, 2010, Community Development Financial
Institutions (CDFIs) which meet certain standards are also
eligible to become Bank members. State and local housing
associates that meet certain statutory and regulatory criteria
may also borrow from the Bank. While eligible to borrow, state
and local housing associates are not members of the Bank and, as
such, are not required to hold capital stock.
All members must purchase stock in the Bank. The amount of
capital stock members own is based on their outstanding loans,
their unused borrowing capacity and the principal balance of
residential mortgage loans previously sold to the Bank. See
Note 11 for additional information. The Bank considers
those members with capital stock outstanding in excess of ten
percent of total capital stock outstanding to be related
parties. See Note 12 for additional information.
The Finance Agencys principal purpose with respect to the
FHLBanks is to promote a safe and sound manner of FHLBank
operations including maintenance of adequate capital and
internal controls. In addition, the Finance Agency promotes; the
fostering of operations and activities of each FHLBank that are
liquid, efficient, competitive, and resilient national housing
finance markets; compliance by each FHLBank with the title and
the rules, regulations, guidelines, and orders issued under the
Housing Act and the authorizing statute; each FHLBank carries
out its statutory mission only through activities that are
authorized under and consistent with the Act and the Housing
Act; and consistency with the public interest of the activities
of each FHLBank and the manner in which such regulated entity is
operated. Each FHLBank operates as a separate entity with its
own management, employees and board of directors. The Bank does
not consolidate any off-balance sheet special-purpose entities
(SPEs) or other conduits.
As provided by the Act, as amended, or Finance Agency
regulation, the Banks debt instruments, referred to as
consolidated obligations, are the joint and several obligations
of all the FHLBanks and are the primary source of funds for the
FHLBanks. See Note 10 for additional information. The OF is
a joint office of the FHLBanks established to facilitate the
issuance and servicing of the consolidated obligations of the
FHLBanks and to prepare the combined quarterly and annual
financial reports of all 12 FHLBanks. Deposits, other
borrowings, and capital stock issued to members provide other
funds. The Bank primarily uses these funds to provide advances
and to purchase mortgages from members through the MPF Program.
See Notes 7 and 8 for additional information. The Bank also
provides member institutions with correspondent services, such
as wire transfer, safekeeping and settlement.
The accounting and financial reporting policies of the Bank
conform to GAAP. Preparation of the unaudited financial
statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities, as well as the disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of income and expenses. Actual results
could differ from those estimates. In addition, from time to
time certain amounts in the prior period may be reclassified to
conform to the current presentation. In the opinion of
management, all normal recurring adjustments have been included
for a fair statement of this interim financial information.
These unaudited financial statements should be read in
conjunction with the audited financial statements for the year
ended December 31, 2009 included in the Banks 2009
Annual Report filed on
Form 10-K.
76
Notes to
Financial Statements (continued)
Note 2
Accounting Adjustments, Changes in Accounting Principle and
Recently Issued Accounting Standards and
Interpretations
Accounting for Transfers of Financial
Assets. During June 2009, the FASB issued guidance
which is intended to improve the relevance, representational
faithfulness, and comparability of information about a transfer
of financial assets. This guidance amends sale accounting by
eliminating the concept of a qualifying special-purpose entity
(QSPE), establishes the requirements for sale accounting for
transfers of portions of a financial instrument, clarifies and
amends de-recognition provisions, amends the gain/loss
recognition provisions related to sales of beneficial interests,
and requires enhanced disclosures. The Bank adopted this
guidance on January 1, 2010 and applied it prospectively.
The Banks adoption of this guidance had no impact on its
Statement of Operations and Statement of Condition.
Accounting for the Consolidation of Variable-Interest
Entities (VIEs). During June 2009, the FASB issued
guidance intended to amend the consolidation guidance for VIEs.
This updated guidance eliminates the scope exception for QSPEs,
establishes a more qualitative evaluation to determine the
primary beneficiary based on power and obligation to absorb
losses or right to receive benefits, and requires the Bank to
constantly reassess who is the primary beneficiary of a VIE. The
Bank adopted this guidance on January 1, 2010 which was
applied to all current VIEs (including QSPEs). The adoption of
this guidance had no impact on the Banks Statement of
Operations and Statement of Condition.
Improving Disclosures about Fair Value
Measurements. During January 2010, the FASB issued
amended guidance specific to fair value disclosures. The amended
guidance requires that the Bank disclose: (1) the amounts
of significant transfers in and out of Levels 1 and 2 of
the fair value hierarchy and the reasons for such transfers and
(2) separately, the amount of purchases, sales, issuance
and settlement activity in the reconciliation for fair value
measurements using significant unobservable inputs
(Level 3). The amended guidance clarifies that fair value
disclosures should be provided for each class of assets and
liabilities, which would normally be a subset of a line item in
the Statement of Condition. The amended guidance also requires
additional disclosure regarding inputs and valuation techniques
used to measure fair values classified under Levels 2 or 3
of the fair value hierarchy. With the exception of the required
changes noted above related to the reconciliation of
Level 3 fair values, which are effective for the Bank
January 1, 2011, the Bank adopted the amended guidance on
January 1, 2010, which resulted in increased financial
statement disclosures, but had no impact on the Banks
Statement of Operations and Statement of Condition. See
Note 13 to the unaudited financial statements in the
quarterly report filed on this
Form 10-Q
for the enhanced disclosures.
Recognition and Presentation of
Other-Than-Temporary
Impairments (OTTI). During April 2009, the FASB
issued guidance amending previous OTTI guidance for debt
securities (amended OTTI guidance), please refer to the
Banks 2009 Financial Statements issued on
Form 10-K
for more information regarding the amended OTTI guidance. The
Bank adopted the amended OTTI guidance as of January 1,
2009, and recognized the effects of applying this guidance as a
change in accounting principle. The Bank recognized
$255.9 million cumulative effect as an adjustment to
retained earnings at January 1, 2009, with a corresponding
offset to AOCI as a result of adopting the amended OTTI guidance.
Scope Exception Related to Embedded Credit
Derivatives. During March 2010, the FASB issued
amended guidance to clarify that the only type of embedded
credit derivative feature related to the transfer of credit risk
that is exempt from derivative bifurcation requirements is one
that is in the form of subordination of one financial instrument
to another. As a result, contracts containing an embedded
derivative feature in a form other than such subordination will
need to be assessed to determine if bifurcation and separate
accounting as a derivative is required. This guidance will be
effective for the Bank beginning July 1, 2010. The Bank is
currently evaluating the effect of adopting this guidance on its
Statement of Operations and Statement of Condition.
77
Notes to
Financial Statements (continued)
Note 3
Trading Securities
The following table presents trading securities as of
March 31, 2010 and December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
(in thousands)
|
|
2010
|
|
2009
|
TLGP investments
|
|
$
|
249,992
|
|
|
$
|
250,008
|
|
U.S. Treasury bills
|
|
|
1,029,722
|
|
|
|
1,029,499
|
|
Mutual funds offsetting deferred compensation
|
|
|
6,560
|
|
|
|
6,698
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,286,274
|
|
|
$
|
1,286,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The mutual funds are held in a Rabbi trust to generate returns
that seek to offset changes in liabilities related to market
risk of certain deferred compensation agreements. These deferred
compensation liabilities were $6.6 million and
$6.7 million at March 31, 2010 and December 31,
2009, respectively.
The Bank recorded net losses on trading securities of $326
thousand for the first quarter of 2010 and net gains on trading
securities of $56 thousand for the first quarter of 2009.
Interest income on trading securities was $1.0 million and
$5.9 million for the quarters ended March 31, 2010 and
2009, respectively.
Note 4
Available-for-Sale
Securities
The following table presents
available-for-sale
securities as of March 31, 2010 and December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
OTTI
|
|
|
Unrecognized
|
|
|
Unrecognized
|
|
|
|
|
|
|
Amortized
|
|
|
Recognized
|
|
|
Holding
|
|
|
Holding
|
|
|
|
(in thousands)
|
|
|
Cost(1)
|
|
|
in
OCI(2)
|
|
|
Gains(3)
|
|
|
Losses(3)
|
|
|
Fair Value
|
Mutual funds offsetting
supplemental retirement plan
|
|
|
$
|
1,993
|
|
|
|
$
|
|
|
|
|
$
|
3
|
|
|
|
$
|
|
|
|
|
$
|
1,996
|
|
Private label MBS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private label residential MBS
|
|
|
|
2,936,336
|
|
|
|
|
(1,000,559
|
)
|
|
|
|
417,496
|
|
|
|
|
(1,874
|
)
|
|
|
|
2,351,399
|
|
HELOCs
|
|
|
|
26,312
|
|
|
|
|
(13,985
|
)
|
|
|
|
3,270
|
|
|
|
|
|
|
|
|
|
15,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total private label MBS
|
|
|
|
2,962,648
|
|
|
|
|
(1,014,544
|
)
|
|
|
|
420,766
|
|
|
|
|
(1,874
|
)
|
|
|
|
2,366,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale
securities
|
|
|
$
|
2,964,641
|
|
|
|
$
|
(1,014,544
|
)
|
|
|
$
|
420,769
|
|
|
|
$
|
(1,874
|
)
|
|
|
$
|
2,368,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78
Notes to
Financial Statements (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
OTTI
|
|
|
Unrecognized
|
|
|
Unrecognized
|
|
|
|
|
|
|
Amortized
|
|
|
Recognized
|
|
|
Holding
|
|
|
Holding
|
|
|
|
(in thousands)
|
|
|
Cost(1)
|
|
|
in
OCI(2)
|
|
|
Gains(3)
|
|
|
Losses(3)
|
|
|
Fair Value
|
Mutual funds offsetting
supplemental retirement plan
|
|
|
$
|
1,993
|
|
|
|
$
|
-
|
|
|
|
$
|
2
|
|
|
|
$
|
-
|
|
|
|
$
|
1,995
|
|
Private label MBS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private label residential MBS
|
|
|
|
3,061,870
|
|
|
|
|
(1,026,734
|
)
|
|
|
|
347,859
|
|
|
|
|
(2,022
|
)
|
|
|
|
2,380,973
|
|
HELOCs
|
|
|
|
26,963
|
|
|
|
|
(13,225
|
)
|
|
|
|
597
|
|
|
|
|
-
|
|
|
|
|
14,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total private label MBS
|
|
|
|
3,088,833
|
|
|
|
|
(1,039,959
|
)
|
|
|
|
348,456
|
|
|
|
|
(2,022
|
)
|
|
|
|
2,395,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale
securities
|
|
|
$
|
3,090,826
|
|
|
|
$
|
(1,039,959
|
)
|
|
|
$
|
348,458
|
|
|
|
$
|
(2,022
|
)
|
|
|
$
|
2,397,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes:
|
|
|
(1) |
|
Amortized cost includes adjustments
made to the cost basis of an investment for accretion
and/or
amortization, collection of cash,
and/or
previous OTTI recognized in earnings (less any cumulative effect
adjustments recognized in accordance with the transition
provisions of the amended OTTI guidance).
|
|
(2) |
|
Represents the noncredit portion of
an OTTI recognized during the life of the security.
|
|
(3) |
|
Unrecognized holding gains/(losses)
represent the difference between estimated fair value and
amortized cost less OTTI recognized in other
comprehensive loss.
|
The mutual funds are held in a Rabbi trust to secure a portion
of the Banks supplemental retirement obligation to
participants. These obligations were $4.0 million at both
March 31, 2010 and December 31, 2009.
The following table presents a reconciliation of the
available-for-sale
OTTI loss recognized through AOCI to the total net noncredit
portion of OTTI losses on
available-for-sale
securities in AOCI as of March 31, 2010.
|
|
|
|
|
(in thousands)
|
|
March 31,
2010
|
Total OTTI loss recognized in OCI
|
|
$
|
(1,014,544
|
)
|
Subsequent unrecognized changes in fair value
|
|
|
420,766
|
|
|
|
|
|
|
Net noncredit portion of OTTI losses on
available-for-sale
securities in AOCI
|
|
$
|
(593,778
|
)
|
|
|
|
|
|
|
|
|
|
|
The following tables summarize the
available-for-sale
securities with unrealized losses as of March 31, 2010 and
December 31, 2009. The unrealized losses are aggregated by
major security type and length of time that individual
securities have been in a continuous unrealized loss position.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
Less than 12 Months
|
|
Greater than 12 Months
|
|
Total
|
|
|
|
|
Unrealized
|
|
|
|
Unrealized
|
|
|
|
Unrealized
|
(in thousands)
|
|
Fair Value
|
|
Losses
|
|
Fair Value
|
|
Losses
|
|
Fair Value
|
|
Losses(1)
|
Private label:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private label residential MBS
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,351,399
|
|
|
$
|
(584,937
|
)
|
|
$
|
2,351,399
|
|
|
$
|
(584,937
|
)
|
HELOCs
|
|
|
-
|
|
|
|
-
|
|
|
|
15,597
|
|
|
|
(10,715
|
)
|
|
|
15,597
|
|
|
|
(10,715
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total private label MBS
|
|
|
-
|
|
|
|
-
|
|
|
|
2,366,996
|
|
|
|
(595,652
|
)
|
|
|
2,366,996
|
|
|
|
(595,652
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale
securities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,366,996
|
|
|
$
|
(595,652
|
)
|
|
$
|
2,366,996
|
|
|
$
|
(595,652
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79
Notes to
Financial Statements (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
Less than 12 Months
|
|
Greater than 12 Months
|
|
Total
|
|
|
|
|
Unrealized
|
|
|
|
Unrealized
|
|
|
|
Unrealized
|
(in thousands)
|
|
Fair Value
|
|
Losses
|
|
Fair Value
|
|
Losses
|
|
Fair Value
|
|
Losses(1)
|
Private label:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private label residential MBS
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,380,973
|
|
|
$
|
(680,897
|
)
|
|
$
|
2,380,973
|
|
|
$
|
(680,897
|
)
|
HELOCs
|
|
|
-
|
|
|
|
-
|
|
|
|
14,335
|
|
|
|
(12,628
|
)
|
|
|
14,335
|
|
|
|
(12,628
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total private label MBS
|
|
|
-
|
|
|
|
-
|
|
|
|
2,395,308
|
|
|
|
(693,525
|
)
|
|
|
2,395,308
|
|
|
|
(693,525
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale
securities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,395,308
|
|
|
$
|
(693,525
|
)
|
|
$
|
2,395,308
|
|
|
$
|
(693,525
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note:
|
|
|
(1) |
|
As a result of differences in the
definitions of unrealized losses and unrecognized holding
losses, total unrealized losses in the table above will not
agree with total gross unrecognized holding losses in the
previous tables. Unrealized losses include OTTI recognized in
OCI and gross unrecognized holding gains and losses.
|
Securities Transferred. Beginning in second
quarter 2009 and continuing through first quarter 2010, the Bank
transferred investment securities from
held-to-maturity
to
available-for-sale
when an OTTI credit loss had been recorded on the security. The
Bank believes that a credit loss constitutes evidence of a
significant decline in the issuers creditworthiness. The
Bank transfers these securities to increase its financial
flexibility to sell the securities if management determines it
is prudent to do so. The Bank has no current plans to sell
securities that are transferred, nor is it under any requirement
to do so. At March 31, 2010, the Bank transferred one
private label MBS from
held-to-maturity
to
available-for-sale,
as an OTTI credit loss was recorded on this security during the
first quarter of 2010. The following table presents the
information on the private label MBS transferred at
March 31, 2010. There were no securities transferred at
March 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
|
OTTI
|
|
Unrecognized
|
|
Unrecognized
|
|
|
|
|
Amortized
|
|
Recognized
|
|
Holding
|
|
Holding
|
|
Fair
|
(in thousands)
|
|
Cost
|
|
in OCI
|
|
Gains
|
|
Losses
|
|
Value
|
March 31, 2010 transfers
|
|
$
|
23,268
|
|
|
$
|
(2,144
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
21,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total 2010 transfers
|
|
$
|
23,268
|
|
|
$
|
(2,144
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
21,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemption Terms. Expected maturities
will differ from contractual maturities because borrowers have
the right to prepay obligations with or without call or
prepayment fees.
As of March 31, 2010, the amortized cost of the Banks
private label MBS classified as
available-for-sale
included net purchased discounts of $18.6 million and
credit losses of $266.1 million, partially offset by
OTTI-related accretion adjustments of $15.9 million. As of
December 31, 2009, the amortized cost of the Banks
private label MBS classified as
available-for-sale
included net purchased discounts of $18.5 million and
credit losses of $238.6 million, partially offset by
OTTI-related accretion adjustments of $16.2 million.
80
Notes to
Financial Statements (continued)
Interest Rate Payment Terms. The following
table details interest payment terms for
available-for-sale
MBS at March 31, 2010 and December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
(in thousands)
|
|
2010
|
|
2009
|
Amortized cost of
available-for-sale
MBS:
|
|
|
|
|
|
|
|
|
Pass through securities:
|
|
|
|
|
|
|
|
|
Fixed-rate
|
|
$
|
1,393,117
|
|
|
$
|
1,464,702
|
|
Variable-rate
|
|
|
50,898
|
|
|
|
53,370
|
|
Collateralized mortgage obligations:
|
|
|
|
|
|
|
|
|
Fixed-rate
|
|
|
1,442,571
|
|
|
|
1,492,169
|
|
Variable-rate
|
|
|
76,062
|
|
|
|
78,592
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale
MBS
|
|
$
|
2,962,648
|
|
|
$
|
3,088,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note: Certain
MBS securities have a fixed-rate component for a specified
period of time, then have a rate reset on a given date. Examples
of this type of instrument would include securities supported by
underlying 5/1, 7/1 and 10/1 hybrid adjustable-rate mortgages
(ARMs). For purposes of the table above, these securities are
reported as fixed-rate until the rate reset date is hit. At that
point, the security is then considered to be variable-rate.
Realized Gains and Losses. There were no
sales of
available-for-sale
securities and, therefore, no realized gains or losses on sales
for the three months ended March 31, 2010 and 2009.
Note 5
Held-to-Maturity
Securities
The following table presents
held-to-maturity
securities as of March 31, 2010 and December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
|
|
|
|
Gross
|
|
|
|
|
Amortized
|
|
Gross
|
|
Unrecognized
|
|
|
|
|
Cost/Carrying
|
|
Unrecognized
|
|
Holding
|
|
|
(in thousands)
|
|
Value
|
|
Holding Gains
|
|
Losses
|
|
Fair Value
|
Certificates of
deposit(1)
|
|
$
|
1,650,000
|
|
|
$
|
6
|
|
|
$
|
(1
|
)
|
|
$
|
1,650,005
|
|
Government-sponsored enterprises
|
|
|
71,414
|
|
|
|
1,177
|
|
|
|
-
|
|
|
|
72,591
|
|
State or local agency obligations
|
|
|
608,680
|
|
|
|
16,324
|
|
|
|
(25,964
|
)
|
|
|
599,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
2,330,094
|
|
|
|
17,507
|
|
|
|
(25,965
|
)
|
|
|
2,321,636
|
|
MBS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. agency
|
|
|
1,670,438
|
|
|
|
4,505
|
|
|
|
(639
|
)
|
|
|
1,674,304
|
|
Government- sponsored enterprises
|
|
|
1,197,528
|
|
|
|
49,196
|
|
|
|
(538
|
)
|
|
|
1,246,186
|
|
Private label MBS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private label residential MBS
|
|
|
3,253,589
|
|
|
|
1,469
|
|
|
|
(297,503
|
)
|
|
|
2,957,555
|
|
HELOCs
|
|
|
27,893
|
|
|
|
-
|
|
|
|
(11,169
|
)
|
|
|
16,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total private label MBS
|
|
|
3,281,482
|
|
|
|
1,469
|
|
|
|
(308,672
|
)
|
|
|
2,974,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total MBS
|
|
|
6,149,448
|
|
|
|
55,170
|
|
|
|
(309,849
|
)
|
|
|
5,894,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
held-to-maturity
securities
|
|
$
|
8,479,542
|
|
|
$
|
72,677
|
|
|
$
|
(335,814
|
)
|
|
$
|
8,216,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81
Notes to
Financial Statements (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
Gross
|
|
|
|
|
Amortized
|
|
Gross
|
|
Unrecognized
|
|
|
|
|
Cost/Carrying
|
|
Unrecognized
|
|
Holding
|
|
|
(in thousands)
|
|
Value
|
|
Holding Gains
|
|
Losses
|
|
Fair Value
|
Certificates of deposit(1)
|
|
$
|
3,100,000
|
|
|
$
|
143
|
|
|
$
|
(4
|
)
|
|
$
|
3,100,139
|
|
Government-sponsored enterprises
|
|
|
176,741
|
|
|
|
1,853
|
|
|
|
-
|
|
|
|
178,594
|
|
State or local agency obligations
|
|
|
608,363
|
|
|
|
17,009
|
|
|
|
(30,837
|
)
|
|
|
594,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,885,104
|
|
|
|
19,005
|
|
|
|
(30,841
|
)
|
|
|
3,873,268
|
|
MBS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. agency
|
|
|
1,755,686
|
|
|
|
2,019
|
|
|
|
(4,551
|
)
|
|
|
1,753,154
|
|
Government-sponsored enterprises
|
|
|
1,312,228
|
|
|
|
47,999
|
|
|
|
(2,337
|
)
|
|
|
1,357,890
|
|
Private label MBS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private label residential MBS
|
|
|
3,500,813
|
|
|
|
373
|
|
|
|
(391,869
|
)
|
|
|
3,109,317
|
|
HELOCs
|
|
|
28,556
|
|
|
|
-
|
|
|
|
(15,960
|
)
|
|
|
12,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total private label MBS
|
|
|
3,529,369
|
|
|
|
373
|
|
|
|
(407,829
|
)
|
|
|
3,121,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total MBS
|
|
|
6,597,283
|
|
|
|
50,391
|
|
|
|
(414,717
|
)
|
|
|
6,232,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
held-to-maturity
securities
|
|
$
|
10,482,387
|
|
|
$
|
69,396
|
|
|
$
|
(445,558
|
)
|
|
$
|
10,106,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note:
(1)Represents
certificates of deposit that meet the definition of a security.
Restricted securities related to the Shared Funding Program are
classified as
held-to-maturity
and are included in private label residential MBS as of
March 31, 2010 and December 31, 2009. The restricted
securities had a total amortized cost of $31.6 million and
$33.2 million as of March 31, 2010 and
December 31, 2009, respectively.
The following tables summarize the
held-to-maturity
securities with unrealized losses as of March 31, 2010 and
December 31, 2009. The unrealized losses are aggregated by
major security type and length of time that individual
securities have been in a continuous unrealized loss position.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
Less than 12 Months
|
|
Greater than 12 Months
|
|
Total
|
|
|
|
|
Unrealized
|
|
|
|
Unrealized
|
|
|
|
Unrealized
|
(in thousands)
|
|
Fair Value
|
|
Losses
|
|
Fair Value
|
|
Losses
|
|
Fair Value
|
|
Losses
|
Certificates of deposit
|
|
$
|
349,999
|
|
|
$
|
(1
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
349,999
|
|
|
$
|
(1
|
)
|
State or local agency obligations
|
|
|
-
|
|
|
|
-
|
|
|
|
263,068
|
|
|
|
(25,964
|
)
|
|
|
263,068
|
|
|
|
(25,964
|
)
|
MBS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. agency
|
|
|
692,851
|
|
|
|
(639
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
692,851
|
|
|
|
(639
|
)
|
Government-sponsored enterprises
|
|
|
47,170
|
|
|
|
(12
|
)
|
|
|
202,523
|
|
|
|
(526
|
)
|
|
|
249,693
|
|
|
|
(538
|
)
|
Private label:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private label residential MBS
|
|
|
1,540
|
|
|
|
(385
|
)
|
|
|
2,706,848
|
|
|
|
(297,118
|
)
|
|
|
2,708,388
|
|
|
|
(297,503
|
)
|
HELOCs
|
|
|
-
|
|
|
|
-
|
|
|
|
16,724
|
|
|
|
(11,169
|
)
|
|
|
16,724
|
|
|
|
(11,169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total private label MBS
|
|
|
1,540
|
|
|
|
(385
|
)
|
|
|
2,723,572
|
|
|
|
(308,287
|
)
|
|
|
2,725,112
|
|
|
|
(308,672
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total MBS
|
|
|
741,561
|
|
|
|
(1,036
|
)
|
|
|
2,926,095
|
|
|
|
(308,813
|
)
|
|
|
3,667,656
|
|
|
|
(309,849
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,091,560
|
|
|
$
|
(1,037
|
)
|
|
$
|
3,189,163
|
|
|
$
|
(334,777
|
)
|
|
$
|
4,280,723
|
|
|
$
|
(335,814
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82
Notes to
Financial Statements (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
Less than 12 Months
|
|
Greater than 12 Months
|
|
Total
|
|
|
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
(in thousands)
|
|
Fair Value
|
|
Losses
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
Certificates of deposit
|
|
$
|
399,996
|
|
|
$
|
(4
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
399,996
|
|
|
$
|
(4
|
)
|
State or local agency obligations
|
|
|
2,771
|
|
|
|
(37
|
)
|
|
|
258,233
|
|
|
|
(30,800
|
)
|
|
|
261,004
|
|
|
|
(30,837
|
)
|
MBS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. agency
|
|
|
1,126,928
|
|
|
|
(4,551
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
1,126,928
|
|
|
|
(4,551
|
)
|
Government-sponsored enterprises
|
|
|
-
|
|
|
|
-
|
|
|
|
207,951
|
|
|
|
(2,337
|
)
|
|
|
207,951
|
|
|
|
(2,337
|
)
|
Private label:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private label residential MBS
|
|
|
-
|
|
|
|
-
|
|
|
|
3,075,741
|
|
|
|
(391,869
|
)
|
|
|
3,075,741
|
|
|
|
(391,869
|
)
|
HELOCs
|
|
|
-
|
|
|
|
-
|
|
|
|
12,596
|
|
|
|
(15,960
|
)
|
|
|
12,596
|
|
|
|
(15,960
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total private label MBS
|
|
|
-
|
|
|
|
-
|
|
|
|
3,088,337
|
|
|
|
(407,829
|
)
|
|
|
3,088,337
|
|
|
|
(407,829
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total MBS
|
|
|
1,126,928
|
|
|
|
(4,551
|
)
|
|
|
3,296,288
|
|
|
|
(410,166
|
)
|
|
|
4,423,216
|
|
|
|
(414,717
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,529,695
|
|
|
$
|
(4,592
|
)
|
|
$
|
3,554,521
|
|
|
$
|
(440,966
|
)
|
|
$
|
5,084,216
|
|
|
$
|
(445,558
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Transferred. Beginning in second
quarter 2009 and continuing through first quarter 2010, the Bank
transferred investment securities from
held-to-maturity
to
available-for-sale
when an OTTI credit loss had been recorded on the security. The
Bank believes that a credit loss constitutes evidence of a
significant decline in the issuers creditworthiness. The
Bank transfers these securities to increase its financial
flexibility to sell the securities if management determines it
is prudent to do so. The Bank has no current plans to sell
securities that are transferred, nor is it under any requirement
to do so. At March 31, 2010, the Bank transferred one
private label MBS from
held-to-maturity
to
available-for-sale.
See Note 4 for additional information.
Redemption Terms. The amortized cost and
fair value of
held-to-maturity
securities by contractual maturity as of March 31, 2010 and
December 31, 2009 are presented below. Expected maturities
of some securities will differ from contractual maturities
because borrowers may have the right to call or prepay
obligations with or without call or prepayment fees.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
December 31, 2009
|
|
|
Amortized
|
|
|
|
Amortized
|
|
|
(in thousands)
|
|
Cost/Carrying
|
|
|
|
Cost/Carrying
|
|
|
Year of Maturity
|
|
Value
|
|
Fair Value
|
|
Value
|
|
Fair Value
|
Due in one year or less
|
|
$
|
1,705,681
|
|
|
$
|
1,705,833
|
|
|
$
|
3,255,517
|
|
|
$
|
3,256,500
|
|
Due after one year through five years
|
|
|
78,027
|
|
|
|
82,149
|
|
|
|
77,852
|
|
|
|
82,252
|
|
Due after five years through ten years
|
|
|
83,199
|
|
|
|
84,027
|
|
|
|
88,545
|
|
|
|
90,142
|
|
Due after ten years
|
|
|
463,187
|
|
|
|
449,627
|
|
|
|
463,190
|
|
|
|
444,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,330,094
|
|
|
|
2,321,636
|
|
|
|
3,885,104
|
|
|
|
3,873,268
|
|
MBS
|
|
|
6,149,448
|
|
|
|
5,894,769
|
|
|
|
6,597,283
|
|
|
|
6,232,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,479,542
|
|
|
$
|
8,216,405
|
|
|
$
|
10,482,387
|
|
|
$
|
10,106,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83
Notes to
Financial Statements (continued)
At March 31, 2010, the amortized cost of the Banks
private label MBS classified as
held-to-maturity
included net purchased discounts of $36.3 million, with no
OTTI-related discounts. At December 31, 2009, the amortized
cost of the Banks private label MBS classified as
held-to-maturity
included net purchased discounts of $39.8 million, with no
OTTI-related discounts.
Interest Rate Payment Terms. The following
table details interest rate payment terms for
held-to-maturity
securities at March 31, 2010 and December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
(in thousands)
|
|
2010
|
|
2009
|
Amortized cost of
held-to-maturity
securities other than MBS:
|
|
|
|
|
|
|
|
|
Fixed-rate
|
|
$
|
1,973,524
|
|
|
$
|
3,428,553
|
|
Variable-rate
|
|
|
356,570
|
|
|
|
456,551
|
|
|
|
|
|
|
|
|
|
|
Total non-MBS
|
|
|
2,330,094
|
|
|
|
3,885,104
|
|
Amortized cost of
held-to-maturity
MBS:
|
|
|
|
|
|
|
|
|
Pass through securities:
|
|
|
|
|
|
|
|
|
Fixed-rate
|
|
|
1,228,228
|
|
|
|
1,382,318
|
|
Variable-rate
|
|
|
1,153,154
|
|
|
|
1,181,345
|
|
Collateralized mortgage obligations:
|
|
|
|
|
|
|
|
|
Fixed-rate
|
|
|
2,034,962
|
|
|
|
2,227,045
|
|
Variable-rate
|
|
|
1,733,104
|
|
|
|
1,806,575
|
|
|
|
|
|
|
|
|
|
|
Total MBS
|
|
|
6,149,448
|
|
|
|
6,597,283
|
|
|
|
|
|
|
|
|
|
|
Total
held-to-maturity
securities
|
|
$
|
8,479,542
|
|
|
$
|
10,482,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note: Certain MBS securities have a fixed-rate
component for a specified period of time, then have a rate reset
on a given date. Examples of this type of instrument would
include securities supported by underlying 5/1, 7/1 and 10/1
hybrid adjustable-rate mortgages (ARMs). For purposes of the
table above, these securities are reported as fixed-rate until
the rate reset date is hit. At that point, the security is then
considered to be variable-rate.
Realized Gains and Losses. There were no
sales of
held-to-maturity
securities and, therefore, no realized gains or losses on sales,
for the three months ended March 31, 2010 and 2009.
However, the Bank may sell certain
held-to-maturity
securities with less than 15 percent of the acquired
principal outstanding remaining at the time of sale. Such sales
are considered maturities for the purposes of security
classification. Changes in circumstances may cause the Bank to
change its intent to hold a certain security to maturity without
calling into question its intent to hold other debt securities
to maturity in the future, as noted above in the Securities
Transferred and Realized Gains and Losses discussions. 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.
Note 6
Other-Than-Temporary
Impairment
The Bank evaluates its individual
available-for-sale
and
held-to-maturity
investment securities holdings in an unrealized loss position
for OTTI on a quarterly basis. As part of this process, the Bank
considers its intent to sell each debt security and whether it
is more likely than not the Bank will be required to sell the
security before its anticipated recovery. If either of these
conditions is met, the Bank recognizes an OTTI loss in earnings
equal to the entire difference between the securitys
amortized cost basis and its fair value at the Statement of
Condition date. For
84
Notes to
Financial Statements (continued)
securities in an unrealized loss position that meet neither of
these conditions, the Bank performs analysis to determine if any
of these securities will incur a credit loss and, therefore, are
other-than-temporarily
impaired.
For state or local housing finance agency obligations, the Bank
has determined that all unrealized losses reflected above are
temporary given the creditworthiness of the issuers and the
underlying collateral.
The Bank invests in MBS, which are rated AAA at the time of
purchase with the exception of one of the restricted securities
related to the Shared Funding Program. This security was rated
AA at the time of purchase. Each MBS may contain one or more
forms of credit protection/enhancements, including but not
limited to guarantee of principal and interest, subordination,
over-collateralization, and excess interest and insurance wrap.
For agency MBS, the Bank has 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. As a result, the Bank
has determined that, as of March 31, 2010, all of the gross
unrealized losses on its agency MBS are temporary.
To support consistency among the FHLBanks, the Bank completes
its OTTI analysis of private label MBS based on the
methodologies and key modeling assumptions provided by the
FHLBanks OTTI Governance Committee. The OTTI analysis is a
cash flow analysis that is run on a common platform. The Bank
performs the cash flow analysis on all of its private label MBS
portfolio that have available data. Certain private label MBS
backed by multi-family and commercial real estate loans, HELOCs,
manufactured housing loans and other securities are not able to
be cash flow tested using the FHLBanks common platform.
For these types of private label MBS and certain securities
where underlying collateral data is not available, alternate
procedures, as prescribed by the OTTI Governance Committee, are
used by the Bank to assess these securities for OTTI. These
alternative procedures include using a proxy bonds loan
level results to allocate loan level cash flows, extrapolate
historical data (such as HELOCs), or a qualitative analysis of
government agency loan-level guarantees. Securities evaluated
using alternative procedures were not significant to the Bank,
as they represented approximately 3 percent of the par
balance of MBS at March 31, 2010.
As discussed above, to assess whether the entire amortized cost
basis of its private label residential MBS will be recovered,
the Bank, where possible, performed a cash flow analysis. In
performing the cash flow analysis for each of these securities
classified as prime, Alt-A and subprime, in accordance with the
FHLBanks OTTI Governance Committee, the Bank used two
third-party models. The first model considered 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 was the forecast of future
housing price changes which were forecasted for the relevant
states and core-based statistical areas (CBSAs), based upon an
assessment of the individual housing markets. The term 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 of 10,000 or more people. The Banks housing
price forecast assumed
current-to-trough
home price declines ranging from 0 percent to
12 percent over the next six to twelve months. Thereafter,
home prices are projected to remain flat for the first six
months, then 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 the projected prepayments, defaults and
loss severities, were then input into a second model that
allocated 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. In a securitization in which the
credit enhancement for the senior securities is derived from the
presence of subordinate securities, losses are generally
allocated first to the subordinate securities until their
principal balance is reduced to zero. The projected cash flows
are based on a number of assumptions and expectations, and the
results of these models can vary significantly with changes in
assumptions and expectations. The
85
Notes to
Financial Statements (continued)
scenario of cash flows determined based on the modeling 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.
To assess whether the entire amortized cost basis of HELOCs will
be recovered, the Bank performs a security-level cash flow test
on different third-party models because loan-level data is not
available. The security-level cash flow test is based on
published assumptions concerning prepayments, actual six-month
average constant default rate, and loss severities of
100 percent. Certain private-label MBS owned by the Bank
are insured by third-party bond insurers (monoline insurers).
The bond insurance on these investments guarantees the timely
payments of principal and interest if these payments cannot be
satisfied from the cash flows of the underlying mortgage pool.
The cash flow analysis of the HELOCs protected by such
third-party insurance looks first to the performance of the
underlying security, considering its embedded credit
enhancements in the form of excess spread,
over-collateralization,
and credit subordination, to determine the collectability of all
amounts due. If these protections are deemed insufficient to
make timely payment of all amounts due, then the Bank considers
the capacity of the third-party bond insurer to cover any
shortfalls. Certain of the monoline insurers have been subject
to adverse ratings, rating downgrades, and weakening financial
performance measures. Accordingly, the FHLBanks OTTI
Governance Committee has performed analyses to assess the
financial strength of these monoline insurers to establish an
expected case regarding the time horizon of the bond
insurers ability to fulfill their financial obligations
and provide credit support. The projected time horizon of credit
protection provided by an insurer is a function of claim paying
resources and anticipated claims in the future. This assumption
is referred to as the burnout period and is expressed in months.
The results of the insurer financial analysis were then
incorporated in the third-party cash flow model, as a key input.
Any cash flow shortfalls that occurred beyond the burnout period
were considered not recoverable and the insured security was
then deemed to be other-than-temporarily impaired.
There are four insurers wrapping the Banks HELOC
investments. Of these four, the financial guarantee from Assured
Guaranty Municipal Corp. (AGMC) is considered sufficient to
cover all future claims and is, therefore, excluded from the
burnout analysis discussed above. Another insurer, Financial
Guarantee Insurance Corp. (FGIC), was recently ordered by the
New York Insurance Department to suspend all claim payments. In
effect, FGIC then has no burnout period and no analysis was
performed. The Bank has analyzed the burnout period for the two
remaining insurers, Ambac Assurance Corp. (Ambac), which has a
burnout period ending May 31, 2010, and MBIA Insurance
Corp. (MBIA), which has a burnout period ending June 30,
2011. The Bank factored in these assumptions when relying on
credit protection from Ambac and MBIA. The Bank monitors these
insurers and as facts and circumstances change, the burnout
period could significantly change.
For those securities for which an OTTI was determined to have
occurred during the three months ended March 31, 2010 (that
is, a determination was made that the entire amortized cost
bases will not likely be recovered), the following table
presents a summary of the significant inputs used to measure the
amount of the credit loss recognized in earnings during the
three months ended March 31, 2010 as well as related
current credit enhancement. Credit enhancement is defined as the
percentage of subordinated tranches and over-collateralization,
if any, in a security structure that will generally absorb
losses before the Bank will experience a loss on the security.
The calculated averages represent the dollar weighted averages
of the significant inputs used to measure the credit loss
recognized in earnings during the first quarter of 2010. The
CUSIP classification (Prime, Alt-A and subprime) is based on the
classification used to run the estimated cash flows for the
CUSIP and not the classification at the time of issuance.
Securities classified as Prime at issuance, but experiencing
poor performance based on delinquency
86
Notes to
Financial Statements (continued)
rates of the underlying collateral pool, may result in the
security being modeled as Alt-A. Estimating cash flows of Prime
securities with Alt-A assumptions increased the projected losses
on certain CUSIPs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant Inputs for OTTI Residential MBS
|
|
|
|
|
|
|
Prepayment Rates
|
|
Default Rates
|
|
Loss Severities
|
|
Current Credit Enhancement
|
Year of
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
Securitization
|
|
Avg %
|
|
Range %
|
|
Avg %
|
|
Range %
|
|
Avg %
|
|
Range %
|
|
Avg %
|
|
Range %
|
Prime:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
9.5
|
|
|
|
5.5-11.6
|
|
|
|
29.2
|
|
|
|
14.3-36.3
|
|
|
|
42.3
|
|
|
|
37.8-47.0
|
|
|
|
6.5
|
|
|
|
4.0-7.8
|
|
2006
|
|
|
9.8
|
|
|
|
n/a
|
|
|
|
27.8
|
|
|
|
n/a
|
|
|
|
43.6
|
|
|
|
n/a
|
|
|
|
14.3
|
|
|
|
n/a
|
|
2005
|
|
|
6.1
|
|
|
|
6.0-6.3
|
|
|
|
12.2
|
|
|
|
7.9-14.4
|
|
|
|
57.3
|
|
|
|
56.5-58.9
|
|
|
|
4.2
|
|
|
|
4.1-4.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.3
|
|
|
|
5.5-11.6
|
|
|
|
27.5
|
|
|
|
7.9-36.3
|
|
|
|
43.8
|
|
|
|
37.8-58.9
|
|
|
|
7.5
|
|
|
|
4.0-14.3
|
|
Alt-A:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
10.4
|
|
|
|
8.8-11.4
|
|
|
|
50.7
|
|
|
|
35.3-55.9
|
|
|
|
46.7
|
|
|
|
42.6-51.3
|
|
|
|
7.2
|
|
|
|
3.4-15.1
|
|
2006
|
|
|
11.5
|
|
|
|
7.4-13.0
|
|
|
|
40.2
|
|
|
|
15.9-72.6
|
|
|
|
43.3
|
|
|
|
31.9-52.0
|
|
|
|
7.5
|
|
|
|
3.3-10.5
|
|
2005
|
|
|
8.9
|
|
|
|
7.9-10.4
|
|
|
|
21.4
|
|
|
|
20.6-34.4
|
|
|
|
36.3
|
|
|
|
34.9-46.0
|
|
|
|
5.2
|
|
|
|
4.8-6.2
|
|
2004 and prior
|
|
|
12.3
|
|
|
|
n/a
|
|
|
|
6.2
|
|
|
|
n/a
|
|
|
|
10.0
|
|
|
|
n/a
|
|
|
|
4.8
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.9
|
|
|
|
7.4-13.0
|
|
|
|
43.3
|
|
|
|
6.2-72.6
|
|
|
|
44.1
|
|
|
|
10.0-52.0
|
|
|
|
7.2
|
|
|
|
3.3-15.1
|
|
Subprime:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 and prior
|
|
|
13.3
|
|
|
|
n/a
|
|
|
|
36.3
|
|
|
|
n/a
|
|
|
|
90.8
|
|
|
|
n/a
|
|
|
|
16.2
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
10.4
|
|
|
|
5.5-13.3
|
|
|
|
38.1
|
|
|
|
6.2-72.6
|
|
|
|
44.0
|
|
|
|
10.0-90.8
|
|
|
|
7.3
|
|
|
|
3.3-16.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
n/a
not applicable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant Inputs for OTTI
HELOCs(1)
|
|
|
Prepayment Rates
|
|
Default Rates
|
|
Loss Severities
|
Year of
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
Securitization
|
|
Avg %
|
|
Range %
|
|
Avg %
|
|
Range %
|
|
Avg %
|
|
Range %
|
Alt-A:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 and prior
|
|
|
8.5
|
|
|
|
n/a
|
|
|
|
12.7
|
|
|
|
n/a
|
|
|
|
100.0
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
n/a not
applicable
Note:
|
|
|
(1)
|
|
Current credit enhancement weighted
average and range percentages are not considered meaningful for
home equity loan investments, as the majority of these
investments are third-party insured.
|
To determine the amount of the credit loss, the Bank compares
the present value of the cash flows expected to be collected
from its private label residential MBS to its amortized cost
basis. For the Banks private label residential MBS, the
Bank uses a forward interest rate curve to project the future
estimated cash flows. To calculate the present value of the
estimated cash flows for fixed rate bonds the Bank uses the
effective interest rate for the security prior to impairment. To
calculate the present value of the estimated cash flows for
variable rate and hybrid private label MBS, the Bank uses the
contractual interest rate plus a fixed spread that sets the
present value of cash flows equal to amortized cost before
impairment. For securities previously identified as
other-than-temporarily
impaired, the Bank updates its estimate of future estimated cash
flows on a quarterly basis and uses the previous effective rate
or spread until there is an increase in cash flows. When there
is an increase in cash flows, the effective rate or spread
adjustment to coupon interest rate is recalculated.
During the fourth quarter of 2009, the Bank changed its
estimation technique used to determine the present value of
estimated cash flows expected to be collected for its variable
rate and hybrid private label residential MBS.
87
Notes to
Financial Statements (continued)
Specifically, prior to the fourth quarter of 2009, the Bank used
the effective interest rate for the security prior to impairment
for fixed, variable, and hybrid private label MBS. The new
estimation technique requires the Bank to update the effective
interest rate used in its present value calculation, which
isolated movements in the underlying interest rate indices from
its measurement of credit loss. This change in present value
estimation technique did not have a significant impact on the
Banks estimated credit losses for its variable rate and
hybrid private label residential MBS at December 31, 2009.
The table below summarizes the Banks
available-for-sale
investment securities as of March 31, 2010 for which an
OTTI has been recognized during the three months ended
March 31, 2010 and during the life of the security.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale Investment Securities
|
|
|
|
OTTI Recognized During
|
|
|
OTTI Recognized During
|
|
|
|
the Three Months Ended March 31, 2010
|
|
|
the Life of the Security
|
|
|
|
Unpaid
|
|
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
|
|
|
Principal
|
|
|
Amortized
|
|
|
Fair
|
|
|
Principal
|
|
|
Amortized
|
|
Fair
|
(in thousands)
|
|
|
Balance
|
|
|
Cost(1)
|
|
|
Value
|
|
|
Balance
|
|
|
Cost(1)
|
|
Value
|
Private label residential MBS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime
|
|
|
$
|
1,705,756
|
|
|
|
$
|
1,597,270
|
|
|
|
$
|
1,311,631
|
|
|
|
$
|
1,844,279
|
|
|
|
$
|
1,733,571
|
|
|
$
|
1,427,861
|
|
Alt-A
|
|
|
|
1,187,243
|
|
|
|
|
1,051,627
|
|
|
|
|
803,420
|
|
|
|
|
1,345,879
|
|
|
|
|
1,194,013
|
|
|
|
917,573
|
|
Subprime
|
|
|
|
2,920
|
|
|
|
|
2,499
|
|
|
|
|
1,586
|
|
|
|
|
2,920
|
|
|
|
|
2,499
|
|
|
|
1,586
|
|
HELOCs
|
|
|
|
4,481
|
|
|
|
|
3,011
|
|
|
|
|
1,758
|
|
|
|
|
32,082
|
|
|
|
|
26,312
|
|
|
|
15,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total OTTI securities
|
|
|
|
2,900,400
|
|
|
|
|
2,654,407
|
|
|
|
|
2,118,395
|
|
|
|
|
3,225,160
|
|
|
|
|
2,956,395
|
|
|
|
2,362,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private label MBS not OTTI
|
|
|
|
331,013
|
|
|
|
|
308,241
|
|
|
|
|
248,601
|
|
|
|
|
6,253
|
|
|
|
|
6,253
|
|
|
|
4,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total private label MBS
|
|
|
$
|
3,231,413
|
|
|
|
$
|
2,962,648
|
|
|
|
$
|
2,366,996
|
|
|
|
$
|
3,231,413
|
|
|
|
$
|
2,962,648
|
|
|
$
|
2,366,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes:
(1) Amortized
cost includes adjustments made to the cost basis of an
investment for accretion and/or amortization, collection of
cash, and/or previous OTTI recognized in earnings (less any
cumulative effect adjustments recognized in accordance with the
transition provisions of the amended OTTI guidance).
Substantially all of the remainder of the private label MBS
investment securities portfolio, including those investments
classified as
held-to-maturity,
have experienced unrealized losses and a decrease in fair value
due to interest rate volatility, illiquidity in the marketplace,
and credit deterioration in the U.S. mortgage markets.
However, the decline is considered temporary as the Bank expects
to recover the entire amortized cost basis on the remaining
investment securities in an unrealized loss position and neither
intends to sell these securities nor considers it more likely
than not that the Bank would be required to sell the security
before its anticipated recovery.
88
Notes to
Financial Statements (continued)
The tables below summarize the impact of OTTI credit and
noncredit losses recorded on
available-for-sale
investment securities for the three months ended March 31,
2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
March 31, 2010
|
|
|
|
|
OTTI Related to
|
|
|
|
|
OTTI Related to
|
|
Net Noncredit
|
|
Total OTTI
|
(in thousands)
|
|
Credit Loss
|
|
Loss
|
|
Losses
|
Private label residential MBS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime
|
|
$
|
(13,243
|
)
|
|
$
|
11,089
|
|
|
$
|
(2,154
|
)
|
Alt-A
|
|
|
(14,015
|
)
|
|
|
14,015
|
|
|
|
-
|
|
Subprime
|
|
|
(21
|
)
|
|
|
21
|
|
|
|
-
|
|
HELOCs
|
|
|
(290
|
)
|
|
|
290
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total OTTI on private label
MBS
|
|
$
|
(27,569
|
)
|
|
$
|
25,415
|
|
|
$
|
(2,154
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As noted in the table above, of the $27.6 million of OTTI
related to credit loss, $25.4 million of it was the result
of OTTI previously recorded as noncredit losses being
reclassified and recognized as credit losses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
March 31, 2009
|
|
|
|
|
OTTI Related to
|
|
|
|
|
OTTI Related to
|
|
Net Noncredit
|
|
Total OTTI
|
(in thousands)
|
|
Credit Loss
|
|
Loss
|
|
Losses
|
Private label residential MBS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime
|
|
$
|
(1,291
|
)
|
|
$
|
(32,849
|
)
|
|
$
|
(34,140
|
)
|
Alt-A
|
|
|
(29,169
|
)
|
|
|
(261,499
|
)
|
|
|
(290,668
|
)
|
Subprime
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total OTTI on private label
MBS
|
|
$
|
(30,460
|
)
|
|
$
|
(294,348
|
)
|
|
$
|
(324,808
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89
Notes to
Financial Statements (continued)
The following tables present the rollforward of the amounts
related to credit losses recognized during the life of the
security for which a portion of the OTTI charges was recognized
in AOCI for the three months ended March 31, 2010 and 2009.
|
|
|
|
|
|
|
For the Three Months
|
|
|
Ended March 31,
|
(in thousands)
|
|
2010
|
Beginning balance
|
|
$
|
238,130
|
|
Additions:
|
|
|
|
|
Credit losses for which OTTI was not previously recognized
|
|
|
10
|
|
Additional OTTI credit losses for which an OTTI charge was
previously
recognized(1)
|
|
|
27,559
|
|
Reductions:
|
|
|
|
|
Increases in cash flows expected to be collected, recognized
over the remaining life of the
securities(2)
|
|
|
(505
|
)
|
|
|
|
|
|
Ending balance
|
|
$
|
265,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
Ended March 31,
|
(in thousands)
|
|
2009
|
Beginning balance
|
|
$
|
10,039
|
(3)
|
Additions:
|
|
|
|
|
Credit losses for which OTTI was not previously recognized
|
|
|
15,733
|
|
Additional OTTI credit losses for which an OTTI charge was
previously
recognized(1)
|
|
|
14,727
|
|
|
|
|
|
|
Ending balance
|
|
$
|
40,499
|
|
|
|
|
|
|
|
|
|
|
|
Notes:
|
|
(1)
|
For the three months ended
March 31, 2010 and 2009, OTTI previously
recognized represents securities that were impaired prior
to January 1, 2010 and 2009, respectively.
|
|
(2)
|
This represents the increase in
cash flows recognized in interest income during the period.
|
|
(3)
|
The Bank adopted the amended OTTI
guidance as of January 1, 2009 and recognized the
cumulative effect of initially applying this guidance, totaling
$255.9 million, as an adjustment to retained earnings at
January 1, 2009, with a corresponding offsetting adjustment
to AOCI.
|
90
Notes to
Financial Statements (continued)
Note 7
Advances
Redemption Terms. At March 31, 2010
and December 31, 2009, the Bank had advances outstanding
including AHP loans at interest rates ranging from 0% to 7.8% as
summarized below. AHP subsidized loans have interest rates
ranging between 0% and 6.5%.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
December 31, 2009
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
(dollars in thousands)
|
|
|
|
Average
|
|
|
|
Average
|
Year of Contractual Maturity
|
|
Amount
|
|
Interest Rate
|
|
Amount
|
|
Interest Rate
|
Due in 1 year or less
|
|
$
|
17,136,580
|
|
|
|
2.47
|
%
|
|
$
|
18,967,798
|
|
|
|
2.55
|
%
|
Due after 1 year through 2 years
|
|
|
2,764,479
|
|
|
|
3.45
|
|
|
|
4,478,412
|
|
|
|
3.07
|
|
Due after 2 years through 3 years
|
|
|
5,232,463
|
|
|
|
3.56
|
|
|
|
4,735,971
|
|
|
|
3.51
|
|
Due after 3 years through 4 years
|
|
|
1,569,409
|
|
|
|
3.85
|
|
|
|
2,835,357
|
|
|
|
3.41
|
|
Due after 4 years through 5 years
|
|
|
1,737,885
|
|
|
|
4.50
|
|
|
|
1,474,737
|
|
|
|
4.61
|
|
Thereafter
|
|
|
6,982,083
|
|
|
|
5.20
|
|
|
|
7,263,708
|
|
|
|
5.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total par value
|
|
|
35,422,899
|
|
|
|
3.40
|
%
|
|
|
39,755,983
|
|
|
|
3.34
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount on AHP advances
|
|
|
(809
|
)
|
|
|
|
|
|
|
(854
|
)
|
|
|
|
|
Deferred prepayment fees
|
|
|
(141
|
)
|
|
|
|
|
|
|
(154
|
)
|
|
|
|
|
Hedging adjustments
|
|
|
1,401,822
|
|
|
|
|
|
|
|
1,422,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total book value
|
|
$
|
36,823,771
|
|
|
|
|
|
|
$
|
41,177,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Index amortizing loans require repayment according to
predetermined amortization schedules linked to the level of
various indices. Usually, as market interest rates rise (fall),
the maturity of an index amortizing loan to member extends
(contracts).
The Bank offers advances that may be prepaid on pertinent dates
(call dates) without incurring prepayment or termination fees
(returnable advances). Other advances may only be prepaid by
paying a fee (prepayment fee) to the Bank that makes the Bank
financially indifferent to the prepayment of the loan. At
March 31, 2010 and December 31, 2009, the Bank had
returnable advances of $32.0 million and
$12.0 million, respectively. The following table summarizes
advances by year of contractual maturity or next call date for
returnable advances as of March 31, 2010 and
December 31, 2009.
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
March 31,
|
|
December 31,
|
Year of Contractual Maturity or
Next Call Date
|
|
2010
|
|
2009
|
Due in 1 year or less
|
|
$
|
17,168,580
|
|
|
$
|
18,979,798
|
|
Due after 1 year through 2 years
|
|
|
2,764,479
|
|
|
|
4,478,412
|
|
Due after 2 years through 3 years
|
|
|
5,230,463
|
|
|
|
4,733,971
|
|
Due after 3 years through 4 years
|
|
|
1,549,409
|
|
|
|
2,835,357
|
|
Due after 4 years through 5 years
|
|
|
1,737,885
|
|
|
|
1,474,737
|
|
Thereafter
|
|
|
6,972,083
|
|
|
|
7,253,708
|
|
|
|
|
|
|
|
|
|
|
Total par value
|
|
$
|
35,422,899
|
|
|
$
|
39,755,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Bank also offers convertible advances. With a convertible
advance, the Bank purchases an option from the member that
allows the Bank to convert the interest rate from fixed to
floating by terminating the fixed advance, which the Bank
normally would exercise when interest rates increase, and
offering a floating-rate advance. At
91
Notes to
Financial Statements (continued)
March 31, 2010 and December 31, 2009, the Bank had
convertible advances outstanding of $6.4 billion and
$6.8 billion, respectively. The following table summarizes
advances by year of contractual maturity or next convertible
date for convertible advances as of March 31, 2010 and
December 31, 2009.
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
March 31,
|
|
December 31,
|
Year of Contractual Maturity or
Next Convertible Date
|
|
2010
|
|
2009
|
Due in 1 year or less
|
|
$
|
21,906,430
|
|
|
$
|
23,975,498
|
|
Due after 1 year through 2 years
|
|
|
2,463,379
|
|
|
|
4,089,962
|
|
Due after 2 years through 3 years
|
|
|
4,208,963
|
|
|
|
4,104,971
|
|
Due after 3 years through 4 years
|
|
|
1,422,409
|
|
|
|
2,160,357
|
|
Due after 4 years through 5 years
|
|
|
1,381,135
|
|
|
|
1,223,987
|
|
Thereafter
|
|
|
4,040,583
|
|
|
|
4,201,208
|
|
|
|
|
|
|
|
|
|
|
Total par value
|
|
$
|
35,422,899
|
|
|
$
|
39,755,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security Terms. The Bank lends to financial
institutions involved in housing finance within its district
according to Federal statutes, including the Act. The Act
requires the Bank to obtain sufficient collateral for advances
to protect against losses and to accept only certain
U.S. government or government agency securities,
residential mortgage loans, cash or deposits in the Bank, and
other eligible real estate-related assets as collateral for such
advances.
CFIs are eligible under expanded statutory collateral rules to
use secured small business, small farm and small agriculture
loans and securities representing a whole interest in such
secured loans. Secured loans for community development
activities is a permitted purpose for funding use and as
eligible collateral for advances to CFIs; however, the Finance
Agency has not implemented final regulations defining
community development activities.
Effective February 4, 2010, CDFIs were also considered
eligible members of the FHLBank. Because none of the
newly-eligible CDFIs are insured by the FDIC, they cannot be
CFIs and thus cannot either pledge community development loans
as collateral or obtain long-term advances to support community
development purposes. To the extent that the collateral and
advances regulations may need to be revised to better
accommodate CDFI members, the Finance Agency would undertake
those changes as part of a separate rulemaking.
At March 31, 2010 and December 31, 2009, on a
borrower-by-borrower
basis, the Bank had secured a perfected interest in collateral
with an eligible collateral value in excess of the book value of
all advances. The estimated value of the collateral required to
secure each members obligation is calculated by applying
collateral discounts or weightings. On the basis of the
financial condition of the member, the type of security
agreement, and other factors, the Bank requires the member and
any affiliate pledgor to execute a written security agreement
and imposes one of two requirements to protect the collateral
secured:
|
|
|
|
|
Allows a member or affiliate pledgor to retain possession of the
collateral pledged to the Bank, under a written security
agreement that requires the member or affiliate pledgor to hold
such collateral for the benefit of the Bank; or
|
|
|
Requires the member or affiliate pledgor to deliver physical
custody to the Bank or custodian or grant control of the pledged
collateral to the Bank through its third-party custodian.
|
Beyond these provisions, the Act affords any security interest
granted by a member or any affiliate of the member to the Bank
priority over the claims or rights of any other party. The
exceptions are those claims that would be entitled to priority
under otherwise applicable law and are held by bona fide
purchasers for value or by secured parties with perfected
security interests ahead in priority to the Banks. As
additional security, the Bank has a statutory lien on each
borrowers capital in the Bank.
92
Notes to
Financial Statements (continued)
Credit Risk. While the Bank has never
experienced a loan loss on an advance, the expansion of
collateral for CFIs and lending to nonmember housing associates
and CDFIs provides the potential for additional credit risk for
the Bank. Deterioration in real estate values in various
markets, with a resulting decline in the value of certain
mortgage loans and mortgage securities pledged as collateral,
also pose the potential for additional risk. The management of
the Bank has policies and procedures in place to manage this
credit risk. Accordingly, the Bank has not provided any
allowance for credit losses on advances.
The Banks potential credit risk from advances is
concentrated in commercial banks and savings institutions. As of
March 31, 2010, the Bank had advances of $21.9 billion
outstanding to the five largest borrowers, which represented
61.7% of total advances outstanding. Of these five, three each
had outstanding loan balances in excess of 10 percent of
the total portfolio at March 31, 2010. As of
December 31, 2009, the Bank had advances of
$25.4 billion outstanding to the five largest borrowers,
which represented 63.9% of total advances outstanding. Of these
five, three each had outstanding loan balances in excess of
10 percent of the total portfolio at December 31,
2009. The Bank held sufficient collateral to secure advances and
the Bank does not expect to incur any losses on advances. See
Note 12 for further information on transactions with
related parties.
Interest Rate Payment Terms. The following
table details interest rate payment terms for advances as of
March 31, 2010 and December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
(in thousands)
|
|
2010
|
|
2009
|
Fixed rate overnight
|
|
$
|
169,000
|
|
|
$
|
147,577
|
|
Fixed rate term:
|
|
|
|
|
|
|
|
|
Due in 1 year or less
|
|
|
15,663,120
|
|
|
|
18,476,686
|
|
Thereafter
|
|
|
16,279,790
|
|
|
|
17,569,424
|
|
Variable-rate:
|
|
|
|
|
|
|
|
|
Due in 1 year or less
|
|
|
1,304,460
|
|
|
|
343,535
|
|
Thereafter
|
|
|
2,006,529
|
|
|
|
3,218,761
|
|
|
|
|
|
|
|
|
|
|
Total par value
|
|
$
|
35,422,899
|
|
|
$
|
39,755,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 8
Mortgage Loans Held for Portfolio
Under the MPF Program, the Bank invests in mortgage loans which
it purchases from its participating members and housing
associates. The total loans represent
held-for-portfolio
loans under the MPF Program whereby the Banks members
originate, service, and credit enhance residential mortgage
loans that are then sold to the Bank. In the past, the Bank has
sold participation interests in some of its MPF Program loans to
other FHLBanks and purchased participation interests from other
FHLBanks. See Note 12 for further information regarding
transactions with related parties.
93
Notes to
Financial Statements (continued)
The following table presents information as of March 31,
2010 and December 31, 2009 on mortgage loans held for
portfolio.
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
(in thousands)
|
|
2010
|
|
December 31, 2009
|
Fixed medium-term single-family
mortgages(1)
|
|
$
|
834,582
|
|
|
$
|
878,332
|
|
Fixed long-term single-family
mortgages(1)
|
|
|
4,116,799
|
|
|
|
4,243,117
|
|
|
|
|
|
|
|
|
|
|
Total par value
|
|
|
4,951,381
|
|
|
|
5,121,449
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
|
45,925
|
|
|
|
47,703
|
|
Discounts
|
|
|
(18,038
|
)
|
|
|
(18,798
|
)
|
Hedging adjustments
|
|
|
14,876
|
|
|
|
15,163
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans held for portfolio
|
|
$
|
4,994,144
|
|
|
$
|
5,165,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note:
|
|
|
(1) |
|
Medium-term is defined as a term
of 15 years or less. Long-term is defined as greater than
15 years.
|
The following tables detail the par value of mortgage loans held
for portfolio outstanding categorized by type and by maturity as
of March 31, 2010 and December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
(in thousands)
|
|
2010
|
|
December 31, 2009
|
Government-guaranteed/insured loans
|
|
$
|
388,059
|
|
|
$
|
398,039
|
|
Conventional loans
|
|
|
4,563,322
|
|
|
|
4,723,410
|
|
|
|
|
|
|
|
|
|
|
Total par value
|
|
$
|
4,951,381
|
|
|
$
|
5,121,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year of maturity
|
|
|
|
|
|
|
|
|
Due within one year
|
|
$
|
12
|
|
|
$
|
19
|
|
Due after one year through five years
|
|
|
4,680
|
|
|
|
4,665
|
|
Due after five years
|
|
|
4,946,689
|
|
|
|
5,116,765
|
|
|
|
|
|
|
|
|
|
|
Total par value
|
|
$
|
4,951,381
|
|
|
$
|
5,121,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 9
Derivatives and Hedging Activities
Nature of Business Activity. The Bank is
exposed to interest rate risk primarily from the effect of
interest rate changes on its interest-earning assets and
liabilities.
Consistent with Finance Agency policy, the Bank enters into
derivatives to manage the interest-rate risk exposures inherent
in otherwise unhedged assets and funding positions, to achieve
the Banks risk management objectives, and to act as an
intermediary between its members and counterparties. Finance
Agency regulation and the Banks risk management policy
prohibit trading in or the speculative use of these derivative
instruments and limit credit risk arising from these
instruments. The Bank may only use derivatives to reduce funding
costs for consolidated obligations and to manage interest rate
risk, mortgage prepayment risk and foreign currency risk
positions. Interest-rate exchange agreements (also referred to
as derivatives) are an integral part of the Banks
financial management strategy.
The most common ways, in no particular order, in which the Bank
uses derivatives are to:
|
|
|
|
|
reduce interest-rate sensitivity and repricing gaps of assets
and liabilities;
|
|
|
reduce funding costs by combining a derivative with a
consolidated obligation as the cost of a combined funding
structure can be lower than the cost of a comparable
consolidated obligation bond;
|
94
Notes to
Financial Statements (continued)
|
|
|
|
|
preserve a favorable interest-rate spread between the yield of
an asset (e.g., an advance) and the cost of the related
liability (e.g., the consolidated obligation bond 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 bond;
|
|
|
mitigate the adverse earnings effects of the shortening or
extension of certain assets (e.g., advances or mortgage assets)
and liabilities;
|
|
|
protect the value of existing asset or liability positions or of
anticipated transactions;
|
|
|
manage embedded options in assets and liabilities; and
|
|
|
as part of its overall asset/liability management.
|
Types of Interest-Rate Exchange
Agreements. The Banks risk governance policy
establishes guidelines for its use of interest-rate exchange
agreements. The Bank can use the following instruments, in no
particular order of importance, to reduce funding costs and to
manage exposure to interest rate risks inherent in the normal
course of the Banks business lending, investment, and
funding activities:
|
|
|
|
|
interest-rate swaps;
|
|
|
interest-rate swaptions; and
|
|
|
interest-rate caps or floors.
|
The goal of the Banks interest rate risk management
strategy is not to eliminate interest rate risk, but to manage
it within appropriate limits. One strategy the Bank may use to
manage interest rate risk is to acquire and maintain a portfolio
of assets and liabilities which, together with their associated
interest rate derivatives, limit the Banks risk exposure.
The Bank may use interest rate derivatives to adjust the
effective maturity, repricing frequency, or option
characteristics of financial instruments (such as advances, MPF
loans, MBS, and consolidated obligations) to achieve risk
management objectives.
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-rate for the same period of time. The variable rate
paid or received by the Bank in most interest-rate exchange
agreements is LIBOR.
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 when it is planning to
lend or borrow funds in the future against future interest rate
changes. From time to time, the Bank purchases both payer
swaptions and receiver swaptions. A payer swaption is the option
to make fixed interest payments at a later date and a receiver
swaption is the option to receive fixed interest payments at a
later date.
Interest-Rate Caps and Floors. In a cap agreement, a
cash flow is generated if the price or rate of an underlying
variable rises above a certain threshold (or cap)
price. In a floor agreement, a cash flow is generated if the
price or rate of an underlying variable falls below a certain
threshold (or floor) price. Caps and floors are
designed as protection against the interest rate on a
variable-rate asset or liability rising above or falling below a
certain level.
Application of Interest-Rate Exchange
Agreements. The Bank uses these derivatives to
adjust the effective maturity, repricing frequency or option
characteristics of financial instruments in order to achieve
risk management and funding objectives. Derivative financial
instruments are used by the Bank in three ways:
|
|
|
|
|
by designating them as a fair-value or cash-flow hedge of an
associated financial instrument, a firm commitment or an
anticipated transaction;
|
95
Notes to
Financial Statements (continued)
|
|
|
|
|
in asset/liability management (i.e.,economic hedges
that do not qualify for hedge accounting); or
|
|
|
by acting as an intermediary.
|
The Bank reevaluates its hedging strategies from time to time
and may change the hedging techniques it uses or adopt new
strategies.
Bank management uses derivatives when they are considered to be
a cost-effective alternative to achieve the Banks
financial and risk management objectives. Accordingly, the Bank
may enter into derivatives that do not necessarily qualify for
hedge accounting (economic hedges).
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 or cash flow hedges to
(1) assets and liabilities on the Statement of Condition,
(2) firm commitments, or (3) forecasted transactions.
The Bank also formally assesses (both at the hedges
inception and on a monthly basis) whether the derivatives that
it uses in hedging transactions have been effective in
offsetting changes in the fair value or cash flows of hedged
items and whether those derivatives may be expected to remain
effective in future periods. The Bank uses regression analyses
to assess the effectiveness of its hedges.
Consolidated Obligations. While consolidated
obligations are the joint and several obligations of the
FHLBanks, each FHLBank has consolidated obligations for which it
is the primary obligor. To date, no FHLBank has ever 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 specific debt issuances. The Bank
manages the risk arising from changing market prices and
volatility of a consolidated obligation by matching the cash
inflow on the interest-rate exchange agreement with the cash
outflow on the consolidated obligation.
For example, fixed-rate consolidated obligations are issued by
the Bank, and the Bank may simultaneously enter into a matching
derivative in which the counterparty pays fixed cash flows
designed to mirror, in timing and amount, the cash outflows that
the Bank pays on the consolidated obligation. The Bank pays a
variable cash flow that closely matches the interest payments it
receives on short-term or variable-rate advances (typically 1-
or 3-month
LIBOR). The fixed-rate consolidated obligation and matching
derivative are treated as fair-value hedges. The Bank may issue
variable-rate consolidated obligation - bonds indexed to
LIBOR, the U.S. Prime rate, or Federal funds rate and
simultaneously execute interest-rate swaps to hedge the basis
risk of the variable-rate debt. Basis risk represents the risk
that changes to one interest rate index will not perfectly
offset changes to another interest rate index.
This strategy of issuing bonds while simultaneously entering
into interest rate exchange agreements enables the Bank to offer
a wider range of attractively priced advances and may allow the
Bank to reduce its funding costs. The continued attractiveness
of such debt depends on yield relationships between the bond and
interest rate exchange markets. If conditions in these markets
change, the Bank may alter the types or terms of the bonds that
it issues. By acting in both the capital and the swap markets,
the Bank may be able to raise funds at lower costs than through
the issuance of simple fixed- or variable-rate consolidated
obligations in the capital markets alone.
Advances. The Bank offers a wide array of advances
structured to meet members funding needs. These advances
may have maturities up to 30 years with variable or fixed
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 the funding liabilities. Whenever a
member executes a fixed-rate advance or a variable-rate advance
with embedded options, the Bank may simultaneously execute a
derivative with terms that offset the terms and embedded options
in the advance. For example, the Bank may hedge a fixed-rate
96
Notes to
Financial Statements (continued)
advance with an interest-rate swap where the Bank pays a
fixed-rate coupon and receives a variable-rate coupon,
effectively converting the fixed-rate advances to variable-rate.
This type of hedge is treated as a fair-value hedge.
When issuing convertible advances, the Bank may purchase put
options from a member that allow the Bank to convert the loan
from a fixed rate to a variable rate if interest rates increase.
A convertible advance carries an interest rate lower than a
comparable-maturity fixed-rate advance that does not have the
conversion feature. With a putable advance, the Bank effectively
purchases a put option from the member that allows the Bank to
put or extinguish the fixed-rate advance, which the Bank
normally would exercise when interest rates increase, and the
borrower may elect to enter into a new loan. The Bank may hedge
these advances by entering into a cancelable interest-rate swap.
Mortgage Loans. The Bank invests in fixed-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, at times, derivatives, such as
interest-rate caps and floors, swaptions and callable swaps.
Although these derivatives are valid economic hedges against the
prepayment risk of the loans, they are not specifically linked
to individual loans and, therefore, do not receive either
fair-value or cash-flow hedge accounting. The derivatives are
marked-to-market
through earnings.
Firm Commitment Strategies. Certain mortgage
purchase commitments are considered derivatives. 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 accordingly.
The Bank may also hedge a firm commitment for a forward starting
advance through the use of an interest-rate swap. In this case,
the swap will function as the hedging instrument for both the
firm commitment and the subsequent advance. Because the firm
commitment ends at the same exact time that the advance is
settled, the basis movement associated with the firm commitment
is effectively rolled into the basis of the advance.
Investments. The Bank primarily invests in
certificates of deposit, U.S. Treasuries, U.S. agency
obligations, MBS, and the taxable portion of state or local
housing finance agency obligations, which may be classified as
held-to-maturity,
available-for-sale
or trading securities. The interest-rate and prepayment risks
associated with these investment securities is managed through a
combination of debt issuance and from time to time, derivatives.
The Bank may manage the prepayment and interest rate risks by
funding investment securities with consolidated obligations that
have call features or by hedging the prepayment risk with caps
or floors, callable swaps or swaptions. The Bank may manage
duration risk by funding investment securities with consolidated
obligations that contain call features. The derivatives held by
the Bank that may be associated with trading and
available-for-sale
securities, carried at fair value, and
held-to-maturity
securities, carried at amortized cost, are designated as
economic hedges. The changes in fair values of these derivatives
are recorded in current-period earnings.
Anticipated Debt Issuance. The Bank may enter into
interest-rate swaps for the anticipated issuance of fixed-rate
consolidated obligationsbonds to lock in the cost of
funding. The interest-rate swap is terminated upon issuance of
the fixed-rate consolidated obligationsbond, with the
realized gain or loss on the interest-rate swap recorded in
AOCI. Realized gains and losses reported in AOCI are recognized
as earnings in the periods in which earnings are affected by the
cash flows of the fixed-rate consolidated obligationsbonds.
Intermediation. To meet the asset/liability
management needs of members, the Bank may enter into
interest-rate exchange agreements with members and offsetting
interest-rate exchange agreements with other counterparties.
Under these agreements, the Bank acts as an intermediary between
members and other counterparties. This intermediation grants
smaller members indirect access to the derivatives market. The
derivatives used in intermediary activities do not receive hedge
accounting treatment and are separately
97
Notes to
Financial Statements (continued)
marked-to-market
through earnings. The net result of the accounting for these
derivatives does not significantly affect the operating results
of the Bank.
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 its policies and regulations. The
recent deterioration in the credit/financial markets has
heightened the Banks awareness of derivative default risk.
In response, the Bank has worked toward lessening this risk by
(1) verifying that the derivative counterparties are in
full compliance with existing ISDA requirements through enhanced
monitoring efforts; (2) substituting securities for cash
collateral, which would allow a more detailed identification of
the Banks particular collateral; and (3) attempting
to negotiate revised ISDA Master Agreement terms, when
necessary, that should help to mitigate losses in the event of a
counterparty default. These agreement negotiations include
establishing tri-party collateral agreements where possible to
further protect the Banks collateral. The Banks ISDA
Master Agreements typically require segregation of the
Banks collateral posted with the counterparty and do not
permit rehypothecation.
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 defined as 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 March 31, 2010 and December 31, 2009, the
Banks maximum credit risk, as defined above, was
approximately $14.9 million and $7.6 million,
respectively. These totals include $8.7 million and
$4.9 million of net accrued interest receivable,
respectively. In determining maximum credit risk, the Bank
considers accrued interest receivables and payables, and the
legal right to offset derivative assets and liabilities by
counterparty. The Bank held $0.6 million in cash collateral
at March 31, 2010 and no cash collateral at
December 31, 2009. Additionally, collateral related to
derivatives with member institutions includes collateral
assigned to the Bank, as evidenced by a written security
agreement and held by the member institution for the benefit of
the Bank.
Certain of the Banks derivative instruments contain
provisions that require the Bank to post additional collateral
with its counterparties if there is deterioration in its credit
rating. If the Banks credit rating is lowered by a major
credit rating agency, the Bank would 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 March 31, 2010 was
$1.1 billion for which the Bank has posted cash and
securities collateral with a fair value of approximately
$749.0 million in the normal course of business. If the
Banks credit ratings 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
$306.5 million of collateral to its derivative
counterparties at March 31, 2010. However, the Banks
credit ratings have not changed during the previous twelve
months.
The Bank transacts most of its derivatives with large banks and
major broker-dealers. Some of these banks and broker-dealers or
their affiliates buy, sell, and distribute consolidated
obligations. Note 14 discusses assets pledged by the Bank
to these counterparties. The Bank is not a derivative dealer and
thus does not trade derivatives for short-term profit.
98
Notes to
Financial Statements (continued)
Financial Statement Effect and Additional Financial
Information. Derivative Notional
Amounts. The notional amount of derivatives
serves as a factor in determining periodic interest payments or
cash flows received and paid. The notional amount of derivatives
represents neither the actual amounts exchanged nor the overall
exposure of the Bank to credit and market risk. The overall
amount that could potentially be subject to credit loss is much
smaller. Notional values are not meaningful measures of the
risks associated with derivatives.
The following tables summarize the notional and fair value of
derivative instruments as of March 31, 2010 and
December 31, 2009. For purposes of this disclosure, the
derivative values include fair value of derivatives and related
accrued interest.
Fair
Values of Derivative Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
Notional
|
|
|
|
|
|
|
Amount of
|
|
Derivative
|
|
Derivative
|
(in thousands)
|
|
Derivatives
|
|
Assets
|
|
Liabilities
|
Derivatives in hedge accounting relationships:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
42,779,247
|
|
|
$
|
381,895
|
|
|
$
|
1,494,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives in hedge accounting relationships
|
|
$
|
42,779,247
|
|
|
$
|
381,895
|
|
|
$
|
1,494,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not in hedge accounting relationships:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
34,000
|
|
|
$
|
-
|
|
|
$
|
1,131
|
|
Interest rate caps or floors
|
|
|
1,428,750
|
|
|
|
4,376
|
|
|
|
406
|
|
Mortgage delivery commitments
|
|
|
16,741
|
|
|
|
39
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives not in hedge accounting relationships
|
|
$
|
1,479,491
|
|
|
$
|
4,415
|
|
|
$
|
1,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives before netting and collateral adjustments
|
|
$
|
44,258,738
|
|
|
$
|
386,310
|
|
|
$
|
1,496,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Netting adjustments
|
|
|
|
|
|
|
(371,450
|
)
|
|
|
(371,450
|
)
|
Cash collateral and related accrued interest
|
|
|
|
|
|
|
(637
|
)
|
|
|
(475,383
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total collateral and netting
adjustments(1)
|
|
|
|
|
|
|
(372,087
|
)
|
|
|
(846,833
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets and derivative liabilities as reported on the
Statement of Condition
|
|
|
|
|
|
$
|
14,223
|
|
|
$
|
649,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99
Notes to
Financial Statements (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
Notional
|
|
|
|
|
|
|
Amount of
|
|
Derivative
|
|
Derivative
|
(in thousands)
|
|
Derivatives
|
|
Assets
|
|
Liabilities
|
Derivatives in hedge accounting relationships:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
51,335,964
|
|
|
$
|
451,215
|
|
|
$
|
1,568,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives in hedge accounting relationships
|
|
$
|
51,335,964
|
|
|
$
|
451,215
|
|
|
$
|
1,568,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not in hedge accounting relationships:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
34,000
|
|
|
$
|
-
|
|
|
$
|
1,580
|
|
Interest rate caps or floors
|
|
|
1,653,750
|
|
|
|
9,617
|
|
|
|
1,096
|
|
Mortgage delivery commitments
|
|
|
3,406
|
|
|
|
20
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives not in hedge accounting relationships
|
|
$
|
1,691,156
|
|
|
$
|
9,637
|
|
|
$
|
2,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives before netting and collateral adjustments
|
|
$
|
53,027,120
|
|
|
$
|
460,852
|
|
|
$
|
1,571,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Netting adjustments
|
|
|
|
|
|
|
(453,190
|
)
|
|
|
(453,190
|
)
|
Cash collateral and related accrued interest
|
|
|
|
|
|
|
-
|
|
|
|
(494,721
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total collateral and netting
adjustments(1)
|
|
|
|
|
|
|
(453,190
|
)
|
|
|
(947,911
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets and derivative liabilities as reported on the
Statement of Condition
|
|
|
|
|
|
$
|
7,662
|
|
|
$
|
623,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note:
|
|
(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.
|
100
Notes to
Financial Statements (continued)
The following table presents the components of net gains
(losses) on derivatives and hedging activities as presented in
the Statement of Operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
2009
|
(in thousands)
|
|
|
Gain (Loss)
|
|
Gain (Loss)
|
Derivatives and hedged items in fair value hedging relationships:
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
|
$
|
(753
|
)
|
|
$
|
(1,796
|
)
|
|
|
|
|
|
|
|
|
|
|
Total net loss related to fair value hedge ineffectiveness
|
|
|
|
(753
|
)
|
|
$
|
(1,796
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
Economic hedges:
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
|
$
|
448
|
|
|
$
|
1,445
|
|
Interest rate caps or floors
|
|
|
|
(4,534
|
)
|
|
|
(1,341
|
)
|
Net interest settlements
|
|
|
|
(398
|
)
|
|
|
(1,497
|
)
|
Mortgage delivery commitments
|
|
|
|
390
|
|
|
|
1,852
|
|
Intermediary transactions:
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
|
282
|
|
|
|
135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net gain (loss) related to derivatives not designated as
hedging instruments
|
|
|
$
|
(3,812
|
)
|
|
$
|
594
|
|
|
|
|
|
|
|
|
|
|
|
Net losses on derivatives and hedging activities
|
|
|
$
|
(4,565
|
)
|
|
$
|
(1,202
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents, by type of hedged item, the gains
(losses) 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 three months
ended March 31, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of
|
|
|
|
|
|
|
Net Fair
|
|
Derivatives on
|
|
|
Gain/(Loss) on
|
|
Gain/(Loss) on
|
|
Value Hedge
|
|
Net Interest
|
(in thousands)
|
|
Derivative
|
|
Hedged Item
|
|
Ineffectiveness
|
|
Income(1)
|
Three months ended March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedged item type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances
|
|
$
|
14,417
|
|
|
$
|
(16,114
|
)
|
|
$
|
(1,697
|
)
|
|
$
|
(244,368
|
)
|
Consolidated obligations bonds
|
|
|
8,907
|
|
|
|
(7,963
|
)
|
|
|
944
|
|
|
|
120,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
23,324
|
|
|
$
|
(24,077
|
)
|
|
$
|
(753
|
)
|
|
$
|
(123,551
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedged item type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances
|
|
$
|
323,901
|
|
|
$
|
(343,084
|
)
|
|
$
|
(19,183
|
)
|
|
$
|
(251,567
|
)
|
Consolidated obligations bonds
|
|
|
(70,374
|
)
|
|
|
87,761
|
|
|
|
17,387
|
|
|
|
107,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
253,527
|
|
|
$
|
(255,323
|
)
|
|
$
|
(1,796
|
)
|
|
$
|
(143,749
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note:
|
|
(1)
|
Represents the net interest
settlements on derivatives in fair value hedge relationships
presented in the interest income/expense line item of the
respective hedged item.
|
101
Notes to
Financial Statements (continued)
The Bank had no active cash flow hedging relationships during
the quarters ended March 31, 2010 and 2009. The losses
reclassified from AOCI into income for the effective portion of
the previously terminated cash flow hedges are presented in the
tables below for the three months ended March 31, 2010 and
2009. This activity was reported in interest expense
consolidated obligation-bonds in the Banks Statement of
Operations.
|
|
|
|
|
|
|
Losses Reclassified from AOCI
|
(in thousands)
|
|
into Income
|
For the three months ended March 31, 2010
|
|
$
|
(6
|
)
|
|
|
|
|
|
For the three months ended March 31, 2009
|
|
$
|
(114
|
)
|
As of March 31, 2010, the deferred net gains (losses) on
derivative instruments in AOCI expected to be reclassified to
earnings during the next twelve months were not material.
Note 10
Consolidated Obligations
Detailed information regarding consolidated obligations
including general terms and interest rate payment terms can be
found in Note 16 to the audited financial statements in the
Banks 2009 Annual Report filed on
Form 10-K.
The following table details interest rate payment terms for
consolidated obligation bonds as of March 31, 2010 and
December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
(in thousands)
|
|
2010
|
|
2009
|
Par value of consolidated bonds:
|
|
|
|
|
|
|
|
|
Fixed-rate
|
|
$
|
35,632,037
|
|
|
$
|
42,153,784
|
|
Step-up
|
|
|
480,000
|
|
|
|
210,000
|
|
Floating-rate
|
|
|
6,040,000
|
|
|
|
6,430,000
|
|
Conversion bonds:
|
|
|
|
|
|
|
|
|
Floating to fixed
|
|
|
-
|
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
|
Total par value
|
|
$
|
42,152,037
|
|
|
$
|
48,808,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bond premiums
|
|
|
65,512
|
|
|
|
42,114
|
|
Bond discounts
|
|
|
(28,349
|
)
|
|
|
(27,645
|
)
|
Hedging adjustments
|
|
|
287,899
|
|
|
|
280,615
|
|
|
|
|
|
|
|
|
|
|
Total book value
|
|
$
|
42,477,099
|
|
|
$
|
49,103,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102
Notes to
Financial Statements (continued)
Maturity Terms. The following table presents
a summary of the Banks consolidated obligation bonds
outstanding by year of contractual maturity as of March 31,
2010 and December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
December 31, 2009
|
(dollars in thousands)
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
Weighted Average
|
Year
of Contractual Maturity
|
|
|
Amount
|
|
|
Interest Rate
|
|
|
Amount
|
|
|
Interest Rate
|
Due in 1 year or less
|
|
|
$
|
13,078,500
|
|
|
|
|
1.62
|
%
|
|
|
$
|
21,165,000
|
|
|
|
|
1.42
|
%
|
Due after 1 year through 2 years
|
|
|
|
7,912,900
|
|
|
|
|
1.54
|
|
|
|
|
8,170,700
|
|
|
|
|
1.89
|
|
Due after 2 years through 3 years
|
|
|
|
7,158,600
|
|
|
|
|
2.93
|
|
|
|
|
5,665,000
|
|
|
|
|
3.25
|
|
Due after 3 years through 4 years
|
|
|
|
2,817,900
|
|
|
|
|
3.87
|
|
|
|
|
3,402,500
|
|
|
|
|
3.80
|
|
Due after 4 years through 5 years
|
|
|
|
3,014,650
|
|
|
|
|
3.57
|
|
|
|
|
1,977,900
|
|
|
|
|
4.37
|
|
Thereafter
|
|
|
|
4,625,500
|
|
|
|
|
4.55
|
|
|
|
|
4,610,500
|
|
|
|
|
4.83
|
|
Index amortizing notes
|
|
|
|
3,543,987
|
|
|
|
|
5.07
|
|
|
|
|
3,817,184
|
|
|
|
|
5.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total par value
|
|
|
$
|
42,152,037
|
|
|
|
|
2.73
|
%
|
|
|
$
|
48,808,784
|
|
|
|
|
2.60
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the Banks consolidated
obligation bonds outstanding between noncallable and callable as
of March 31, 2010 and December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
(in thousands)
|
|
2010
|
|
2009
|
Par value of consolidated bonds:
|
|
|
|
|
|
|
|
|
Noncallable
|
|
$
|
37,330,537
|
|
|
$
|
42,660,284
|
|
Callable
|
|
|
4,821,500
|
|
|
|
6,148,500
|
|
|
|
|
|
|
|
|
|
|
Total par value
|
|
$
|
42,152,037
|
|
|
$
|
48,808,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes consolidated obligation bonds
outstanding by year of contractual maturity or next call date as
of March 31, 2010 and December 31, 2009.
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
March 31,
|
|
December 31,
|
Year of Contractual
Maturity or Next Call Date
|
|
2010
|
|
2009
|
Due in 1 year or less
|
|
$
|
16,843,500
|
|
|
$
|
25,917,000
|
|
Due after 1 year through 2 years
|
|
|
8,470,900
|
|
|
|
9,015,700
|
|
Due after 2 years through 3 years
|
|
|
5,784,600
|
|
|
|
4,339,000
|
|
Due after 3 years through 4 years
|
|
|
2,329,900
|
|
|
|
2,599,500
|
|
Due after 4 years through 5 years
|
|
|
2,369,150
|
|
|
|
1,245,400
|
|
Thereafter
|
|
|
2,810,000
|
|
|
|
1,875,000
|
|
Index amortizing notes
|
|
|
3,543,987
|
|
|
|
3,817,184
|
|
|
|
|
|
|
|
|
|
|
Total par value
|
|
$
|
42,152,037
|
|
|
$
|
48,808,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103
Notes to
Financial Statements (continued)
Consolidated Obligation Discount
Notes. Consolidated obligation discount notes are
issued to raise short-term funds. Discount notes are
consolidated obligations with original maturities up to
365 days. These notes are issued at less than their face
amount and redeemed at par value when they mature. The following
table details the Banks consolidated obligation discount
notes, all of which are due within one year, as of
March 31, 2010 and December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
(dollars in thousands)
|
|
2010
|
|
2009
|
Book value
|
|
$
|
9,990,414
|
|
|
|
$
|
10,208,891
|
|
|
Par value
|
|
|
9,992,234
|
|
|
|
|
10,210,000
|
|
|
Weighted average interest rate
|
|
|
0.13
|
|
%
|
|
|
0.08
|
|
%
|
Note 11
Capital
The Bank is subject to three capital requirements under its
current capital plan structure and the Finance Agency rules and
regulations: (1) risk-based capital, (2) total capital
and (3) leverage capital. See details regarding these
requirements and the Banks capital plan in Note 19 to
the audited financial statements in the Banks 2009 Annual
Report filed on
Form 10-K.
The following table demonstrates the Banks compliance with
these capital requirements at March 31, 2010 and
December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
December 31, 2009
|
(dollars in thousands)
|
|
|
Required
|
|
|
Actual
|
|
|
Required
|
|
|
Actual
|
Regulatory capital requirements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-based capital
|
|
|
$
|
2,537,446
|
|
|
|
$
|
4,442,275
|
|
|
|
$
|
2,826,882
|
|
|
|
$
|
4,415,308
|
|
Total
capital-to-asset
ratio
|
|
|
|
4.0
|
%
|
|
|
|
7.6
|
%
|
|
|
|
4.0
|
%
|
|
|
|
6.8
|
%
|
Total regulatory capital
|
|
|
$
|
2,346,240
|
|
|
|
$
|
4,442,293
|
|
|
|
$
|
2,611,634
|
|
|
|
$
|
4,415,422
|
|
Leverage ratio
|
|
|
|
5.0
|
%
|
|
|
|
11.4
|
%
|
|
|
|
5.0
|
%
|
|
|
|
10.1
|
%
|
Leverage capital
|
|
|
$
|
2,932,800
|
|
|
|
$
|
6,663,431
|
|
|
|
$
|
3,264,543
|
|
|
|
$
|
6,623,076
|
|
On August 4, 2009, the Finance Agency issued its final
Prompt Corrective Action Regulation (PCA Regulation)
incorporating the terms of the Interim Final Regulation issued
on January 30, 2009. See the Legislative and
Regulatory Developments discussion in Item 7.
Managements Discussion and Analysis in the Banks
2009 Annual Report filed on
Form 10-K
for additional information regarding the terms of the Interim
Final Regulation. On March 31, 2010, the Bank received
final notification from the Finance Agency that it was
considered to be adequately capitalized for the quarter ended
December 31, 2009. Similar to prior quarters, the Finance
Agency expressed concerns regarding the Banks capital
position and earnings prospects. Retained earnings levels and
poor quality of the Banks private label MBS portfolio have
created uncertainties about the Banks ability to maintain
permanent capital above RBC requirements. As of the date of this
filing, the Bank has not received notice from the Finance Agency
regarding its capital classification for the quarter ended
March 31, 2010.
104
Notes to
Financial Statements (continued)
Capital Concentrations. The following
table presents member holdings of 10 percent or more of the
Banks total capital stock including mandatorily redeemable
capital stock outstanding as of March 31, 2010 and
December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
December 31, 2009
|
(dollars in thousands)
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
Percent of
|
Member
|
|
|
Capital
Stock(1)
|
|
|
Total
|
|
|
Capital
Stock(1)
|
|
|
Total
|
Sovereign Bank, Reading PA
|
|
|
$
|
644,438
|
|
|
|
|
15.9
|
|
|
|
$
|
644,438
|
|
|
|
|
16.0
|
|
Ally Bank, Midvale
UT(2)
|
|
|
|
496,090
|
|
|
|
|
12.3
|
|
|
|
|
496,090
|
|
|
|
|
12.3
|
|
ING Bank, FSB, Wilmington, DE
|
|
|
|
478,637
|
|
|
|
|
11.8
|
|
|
|
|
478,637
|
|
|
|
|
11.9
|
|
PNC Bank, N.A., Pittsburgh, PA
|
|
|
|
442,436
|
|
|
|
|
10.9
|
|
|
|
|
442,436
|
|
|
|
|
11.0
|
|
Notes:
|
|
(1)
|
Total capital stock includes
mandatorily redeemable capital stock.
|
|
(2)
|
Formerly known as GMAC Bank. For
Bank membership purposes, principal place of business is
Horsham, PA.
|
The Bank temporarily suspended excess capital stock repurchases
in December 2008 on a voluntary basis; therefore, the capital
stock balances for the members presented above did not decline
from December 31, 2009 to March 31, 2010. In addition,
the members borrowing activity did not require additional
stock purchases during the first quarter of 2010. Members are
currently required to purchase Bank stock at a rate of 4.75% of
member advances outstanding, 4.0% on AMA activity (Master
Commitments executed on or after May 1, 2009) and
0.75% of unused borrowing capacity.
Mandatorily Redeemable Capital Stock. At both
March 31, 2010 and December 31, 2009, the Bank had
$8.3 million in capital stock subject to mandatory
redemption with payment subject to a five-year waiting period
and the Bank meeting its minimum regulatory capital
requirements. No dividends were paid on mandatorily redeemable
stock for the three months ended March 31, 2010 and 2009.
The following table provides the related dollar amounts for
activities recorded in mandatorily redeemable stock during the
three months ended March 31, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March, 31
|
(in thousands)
|
|
|
2010
|
|
2009
|
Balance, beginning of the period
|
|
|
$
|
8,256
|
|
|
$
|
4,684
|
|
Capital stock subject to mandatory redemption reclassified from
capital stock:
|
|
|
|
|
|
|
|
|
|
Due to withdrawals
|
|
|
|
-
|
|
|
|
3,331
|
|
Redemption of mandatorily redeemable capital stock due to
withdrawals
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of the period
|
|
|
$
|
8,256
|
|
|
$
|
8,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105
Notes to
Financial Statements (continued)
As of March 31, 2010, the total mandatorily redeemable
capital stock reflected balances for seven institutions. One
institution was in receivership and one had notified the Bank to
voluntarily redeem their capital stock and withdraw from
membership. In addition, two other institutions were taken over
by the FDIC and their charters were dissolved. One institution
voluntarily dissolved its charter with the OTS. One institution
was merged out of district and is considered a nonmember. The
remaining institution was merged into a nonmember; subsequently,
as of November 6, 2009, the nonmember was fully integrated
into a member. The stock remains classified as mandatorily
redeemable capital stock. These redemptions were not complete as
of March 31, 2010. The following table shows the amount of
mandatorily redeemable capital stock by contractual year of
redemption at March 31, 2010 and December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
(in thousands)
|
|
2010
|
|
2009
|
Due in 1 year or less
|
|
$
|
3,249
|
|
|
$
|
3,249
|
|
Due after 1 year through 2 years
|
|
|
30
|
|
|
|
30
|
|
Due after 2 years through 3 years
|
|
|
-
|
|
|
|
-
|
|
Due after 3 years through 4 years
|
|
|
4,074
|
|
|
|
93
|
|
Due after 4 years through 5 years
|
|
|
903
|
|
|
|
4,884
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,256
|
|
|
$
|
8,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The year of redemption in the table above is the later of the
end of the five-year redemption period or the maturity date of
the activity the stock is related to, if the capital stock
represents the activity-based stock purchase requirement of a
nonmember (former member that withdrew from membership, merged
into a nonmember or was otherwise acquired by a nonmember).
Dividends, Retained Earnings and AOCI. At
March 31, 2010, retained earnings stood at
$398.9 million, representing an increase of
$9.9 million, or 2.5%, from December 31, 2009. This
increase was due to the Banks first quarter 2010 net
income.
The Finance Agency has issued regulatory guidance to the
FHLBanks relating to capital management and retained earnings.
The guidance directs each FHLBank to assess, at least annually,
the adequacy of its retained earnings with consideration given
to future possible financial and economic scenarios. The
guidance also outlines the considerations that each FHLBank
should undertake in assessing the adequacy of the Banks
retained earnings. The Banks retained earnings policy and
capital adequacy metric utilize this guidance.
Dividends paid by the Bank are subject to Board approval and may
be paid in either capital stock or cash; historically, the Bank
has paid cash dividends only. As announced on December 23,
2008, the Bank has temporarily suspended dividend payments on a
voluntary basis until further notice.
106
Notes to
Financial Statements (continued)
The following table summarizes the changes in AOCI for the three
months ended March 31, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
Noncredit
|
|
Net
|
|
|
|
|
|
|
Unrealized
|
|
Noncredit
|
|
OTTI
|
|
Unrealized
|
|
Pension and
|
|
|
|
|
Losses on
|
|
OTTI Losses
|
|
Losses on
|
|
Losses on
|
|
Post
|
|
|
|
|
Available-
|
|
on Available-
|
|
Held-to-
|
|
Hedging
|
|
Retirement
|
|
|
(in thousands)
|
|
for-Sale
|
|
for-Sale
|
|
Maturity
|
|
Activities
|
|
Plans
|
|
Total
|
Balances as of December 31, 2008
|
|
$
|
(14,543
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(885
|
)
|
|
$
|
(1,877
|
)
|
|
$
|
(17,305
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect adjustments relating to the amended OTTI
guidance
|
|
|
-
|
|
|
|
(2,842
|
)
|
|
|
(253,119
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(255,961
|
)
|
Net unrealized gain (loss)
|
|
|
(342
|
)
|
|
|
477
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
135
|
|
Noncredit component of OTTI losses
|
|
|
-
|
|
|
|
-
|
|
|
|
(294,348
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(294,348
|
)
|
Accretion of noncredit OTTI losses
|
|
|
-
|
|
|
|
-
|
|
|
|
7,162
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,162
|
|
Reclassification adjustment for losses included in net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
106
|
|
|
|
-
|
|
|
|
106
|
|
Pension and postretirement benefits
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
36
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of March 31, 2009
|
|
$
|
(14,885
|
)
|
|
$
|
(2,365
|
)
|
|
$
|
(540,305
|
)
|
|
$
|
(779
|
)
|
|
$
|
(1,841
|
)
|
|
$
|
(560,175
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2009
|
|
$
|
(2,020
|
)
|
|
$
|
(691,503
|
)
|
|
$
|
-
|
|
|
$
|
264
|
|
|
$
|
(681
|
)
|
|
$
|
(693,940
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains
|
|
|
149
|
|
|
|
72,310
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
72,459
|
|
Noncredit component of OTTI losses
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,144
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,144
|
)
|
Reclassification adjustment of noncredit OTTI losses included in
net income
|
|
|
-
|
|
|
|
27,559
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
27,559
|
|
Noncredit OTTI losses and unrecognized gain transferred from
held-to-
maturity to
available-for-sale
|
|
|
-
|
|
|
|
(2,144
|
)
|
|
|
2,144
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Reclassification adjustment for losses included in net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
(1
|
)
|
Pension and postretirement benefits
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of March 31, 2010
|
|
$
|
(1,871
|
)
|
|
$
|
(593,778
|
)
|
|
$
|
-
|
|
|
$
|
263
|
|
|
$
|
(667
|
)
|
|
$
|
(596,053
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107
Notes to
Financial Statements (continued)
Note 12
Transactions with Related Parties
The following table includes significant outstanding related
party member balances.
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
(in thousands)
|
|
2010
|
|
2009
|
Investments
|
|
$
|
400,945
|
|
$
|
400,945
|
Advances
|
|
|
22,029,303
|
|
|
24,635,662
|
Deposits
|
|
|
50,799
|
|
|
29,617
|
Capital stock
|
|
|
2,177,554
|
|
|
2,139,936
|
MPF loans
|
|
|
4,048,045
|
|
|
3,864,494
|
The following table summarizes the Statement of Operations
effects corresponding to the above related party member balances.
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
(in thousands)
|
|
|
2010
|
|
2009
|
Interest income on investments
|
|
|
$
|
2,146
|
|
$
|
3,016
|
Interest income on
advances(1)
|
|
|
|
48,553
|
|
|
181,652
|
Interest income on MPF loans
|
|
|
|
57,018
|
|
|
2,236
|
Interest expense on deposits
|
|
|
|
5
|
|
|
5
|
|
|
(1) |
Interest income on advances for the
three months ended March 31, 2010 included contractual
interest income of $221.4 million, net interest settlements
on derivatives in fair value hedge relationships of
$(170.9) million and total amortization of basis
adjustments of $(1.9) million. For the three months ended
March 31, 2009, interest income on advances included
contractual interest income of $362.5 million, net interest
settlements on derivatives in fair value hedge relationships of
$(179.8) million and total amortization of basis
adjustments of $(1.0) million.
|
The following table includes the MPF activity of the related
party members.
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
(in thousands)
|
|
|
2010
|
|
2009
|
Total MPF loan volume purchased
|
|
|
$
|
14,093
|
|
$
|
5,765
|
The following table summarizes the effect of the MPF activities
with FHLBank of Chicago.
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
(in thousands)
|
|
2010
|
|
2009
|
Servicing fee expense
|
|
$
|
139
|
|
$
|
130
|
Interest income on MPF deposits
|
|
|
1
|
|
|
1
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
(in thousands)
|
|
2010
|
|
2009
|
Interest-bearing deposits maintained with FHLBank of Chicago
|
|
$
|
6,198
|
|
$
|
7,571
|
From time to time, the Bank may borrow from or lend to other
FHLBanks on a short-term uncollateralized basis. For the three
months ended March 31, 2010 and 2009, there was no
borrowing or lending activity between the Bank and other
FHLBanks.
108
Notes to
Financial Statements (continued)
Subject to mutually agreed upon terms, on occasion, an FHLBank
may transfer its primary debt obligations to another FHLBank,
which becomes the primary obligor on the transferred debt upon
completion of the transfer. During the three months ended
March 31, 2010 and 2009, there were no transfers of debt
between the Bank and another FHLBank.
From time to time, a member of one FHLBank may be acquired by a
member of another FHLBank. When such an acquisition occurs, the
two FHLBanks may agree to transfer at fair value the loans of
the acquired member to the FHLBank of the surviving member. The
FHLBanks may also agree to the purchase and sale of any related
hedging instrument. The Bank had no such activity during the
three months ended March 31, 2010 and 2009.
Additional discussions regarding related party transactions
including the definition of related parties can be found in
Note 21 of the footnotes to the audited financial
statements in the Banks 2009 Annual Report filed on
Form 10-K.
Note 13
Estimated Fair Values
The Bank carries trading securities,
available-for-sale
securities and derivatives at fair value. Fair value is defined
as the price that would be received to sell an asset, or paid to
transfer a liability, (i.e., an exit price) 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 that holds the
asset or owes the liability. In general, the transaction price
will equal the exit price and, therefore, represents 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, the Bank
is required to consider factors specific to the asset or
liability, the principal or most advantageous market for the
asset or liability, and market participants with whom the Bank
would transact in that market.
The Bank has the option to elect fair value as an alternative
measurement method for selected financial assets, financial
liabilities, unrecognized firm commitments, and written loan
commitments not previously carried at fair value. If elected,
the Bank uses fair value for both the initial and subsequent
measurement with changes in fair value recognized in net income.
If the fair value option is elected, the Bank displays the fair
value of those assets and liabilities on the face of the balance
sheet. The Bank has not elected the fair value option on any
financial assets or liabilities.
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 fair value measurement is
determined. This overall level is an indication of the market
observability of the fair value measurement. Fair value is
defined as 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 (i.e., item being measured for
financial statement purposes), highest and best use, principal
market, and market participants. These determinations allow the
Bank to define the inputs for fair value and level within the
fair value hierarchy.
Outlined below is the application of the fair value hierarchy to
the Banks financial assets and financial liabilities that
are carried at fair value.
Level 1 defined as those instruments for
which 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. Certain of the Banks trading and
available-for-sale securities, which consist of publicly traded
mutual funds, are considered Level 1 instruments.
109
Notes to
Financial Statements (continued)
Level 2 defined as those instruments for
which 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 Banks derivative instruments, TLGP
investments and U.S. Treasury bills are generally
considered Level 2 instruments based on the inputs utilized
to derive fair value.
Level 3 defined as those instruments for
which inputs to the valuation methodology are unobservable and
significant to the fair value measurement. Unobservable inputs
are those supported by little or no market activity or by the
entitys own assumptions. As a result of the current market
conditions and the use of significant unobservable inputs, the
private label MBS in the Banks
available-for-sale
portfolio are considered Level 3 instruments.
The Bank utilizes valuation techniques that maximize the use of
observable inputs and minimize the use of unobservable inputs.
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.
110
Notes to
Financial Statements (continued)
Fair Value on a Recurring Basis. The
following tables present, for each hierarchy level, the
Banks assets and liabilities that are measured at fair
value on a recurring basis on its Statement of Condition at
March 31, 2010 and December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
|
|
|
|
|
|
Netting
|
|
|
(in thousands)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Adjustment(1)
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury bills
|
|
$
|
-
|
|
|
$
|
1,029,722
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,029,722
|
|
TLGP investments
|
|
|
-
|
|
|
|
249,992
|
|
|
|
-
|
|
|
|
-
|
|
|
|
249,992
|
|
Mutual funds offsetting deferred compensation
|
|
|
6,560
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading securities
|
|
$
|
6,560
|
|
|
$
|
1,279,714
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,286,274
|
|
Available-for-sale
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds offsetting employee benefit
plan obligations
|
|
$
|
1,996
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,996
|
|
Private label MBS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private label residential
|
|
|
-
|
|
|
|
-
|
|
|
|
2,351,399
|
|
|
|
-
|
|
|
|
2,351,399
|
|
HELOCs
|
|
|
-
|
|
|
|
-
|
|
|
|
15,597
|
|
|
|
-
|
|
|
|
15,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale
securities
|
|
$
|
1,996
|
|
|
$
|
-
|
|
|
$
|
2,366,996
|
|
|
$
|
-
|
|
|
$
|
2,368,992
|
|
Derivative assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate related
|
|
$
|
-
|
|
|
$
|
386,271
|
|
|
$
|
-
|
|
|
$
|
(372,087
|
)
|
|
$
|
14,184
|
|
Mortgage delivery commitments
|
|
|
-
|
|
|
|
39
|
|
|
|
-
|
|
|
|
-
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative assets
|
|
$
|
-
|
|
|
$
|
386,310
|
|
|
$
|
-
|
|
|
$
|
(372,087
|
)
|
|
$
|
14,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
8,556
|
|
|
$
|
1,666,024
|
|
|
$
|
2,366,996
|
|
|
$
|
(372,087
|
)
|
|
$
|
3,669,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate related
|
|
$
|
-
|
|
|
$
|
1,496,478
|
|
|
$
|
-
|
|
|
$
|
(846,833
|
)
|
|
$
|
649,645
|
|
Mortgage delivery commitments
|
|
|
-
|
|
|
|
69
|
|
|
|
-
|
|
|
|
-
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value
|
|
$
|
-
|
|
|
$
|
1,496,547
|
|
|
$
|
-
|
|
|
$
|
(846,833
|
)
|
|
$
|
649,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
111
Notes to
Financial Statements (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
Netting
|
|
|
(in thousands)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Adjustment(1)
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury bills
|
|
$
|
-
|
|
|
$
|
1,029,499
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,029,499
|
|
TLGP investments
|
|
|
-
|
|
|
|
250,008
|
|
|
|
-
|
|
|
|
-
|
|
|
|
250,008
|
|
Mutual funds offsetting deferred compensation
|
|
|
6,698
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading securities
|
|
$
|
6,698
|
|
|
$
|
1,279,507
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,286,205
|
|
Available-for-sale
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds offsetting employee benefit plan obligations
|
|
$
|
1,995
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,995
|
|
Private label MBS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private label residential
|
|
|
-
|
|
|
|
-
|
|
|
|
2,380,973
|
|
|
|
-
|
|
|
|
2,380,973
|
|
HELOCs
|
|
|
-
|
|
|
|
-
|
|
|
|
14,335
|
|
|
|
-
|
|
|
|
14,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale
securities
|
|
$
|
1,995
|
|
|
$
|
-
|
|
|
$
|
2,395,308
|
|
|
$
|
-
|
|
|
$
|
2,397,303
|
|
Derivative assets
|
|
$
|
-
|
|
|
$
|
460,852
|
|
|
$
|
-
|
|
|
$
|
(453,190
|
)
|
|
$
|
7,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
8,693
|
|
|
$
|
1,740,359
|
|
|
$
|
2,395,308
|
|
|
$
|
(453,190
|
)
|
|
$
|
3,691,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
-
|
|
|
$
|
1,571,435
|
|
|
$
|
-
|
|
|
$
|
(947,911
|
)
|
|
$
|
623,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value
|
|
$
|
-
|
|
|
$
|
1,571,435
|
|
|
$
|
-
|
|
|
$
|
(947,911
|
)
|
|
$
|
623,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note:
|
|
|
(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.
|
For instruments carried at fair value, 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 of certain financial assets or liabilities.
Such reclassifications are reported as transfers in/out at fair
value in the quarter in which the changes occur. Transfers are
reported as of the beginning of the period. There were no
transfers for the three months ended March 31, 2010.
112
Notes to
Financial Statements (continued)
The following table presents a reconciliation of all assets and
liabilities that are measured at fair value on the Statement of
Condition using significant unobservable inputs
(Level 3) for the three months ended March 31,
2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for
|
|
Available for
|
|
Available for
|
|
Available for
|
|
|
Sale Private
|
|
Sale Private
|
|
Sale Private
|
|
Sale Private
|
|
|
Label MBS
|
|
Label MBS
|
|
Label MBS
|
|
Label MBS
|
|
|
Residential
|
|
HELOCs
|
|
Residential
|
|
HELOCs
|
|
|
Three Months
|
|
Three Months
|
|
Three Months
|
|
Three Months
|
|
|
Ended March 31,
|
|
Ended March 31,
|
|
Ended
|
|
Ended March 31,
|
|
|
2010
|
|
2010
|
|
March 31, 2009
|
|
2009
|
Balance at January 1
|
|
$
|
2,380,973
|
|
|
$
|
14,335
|
|
|
$
|
12,909
|
|
|
$
|
6,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gains losses (realized/unrealized):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in net OTTI losses
|
|
|
(27,270
|
)
|
|
|
(289
|
)
|
|
|
-
|
|
|
|
-
|
|
Included in OCI
|
|
|
96,763
|
|
|
|
2,961
|
|
|
|
(689
|
)
|
|
|
784
|
|
Purchases, issuances, settlements
|
|
|
(120,191
|
)
|
|
|
(1,410
|
)
|
|
|
(1,105
|
)
|
|
|
(992
|
)
|
Transfer in/out Level 3
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Transfer of OTTI securities, HTM to AFS
|
|
|
21,124
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31
|
|
$
|
2,351,399
|
|
|
$
|
15,597
|
|
|
$
|
11,115
|
|
|
$
|
6,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amount of gains (losses) for the three month period
included in earnings attributable to the change in unrealized
gains or losses relating to assets and liabilities still held at
March 31, 2010
|
|
$
|
(27,270
|
)
|
|
$
|
(289
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the first quarter of 2010, the Bank transferred one
private label MBS from its
held-to-maturity
portfolio to its
available-for-sale
portfolio. Because transfers of OTTI securities are separately
reported in the quarter in which they occur, the net OTTI losses
and noncredit losses recognized on this security are not
separately reflected in the tables above. Further details,
including the OTTI charges relating to this transfer and the
rationale for the transfer, are presented in Note 4.
Significant Inputs of Recurring Fair Value
Measurements. The following represents the
significant inputs used to determine fair value of those
instruments carried on the Statement of Condition at fair value
which are classified as Level 2 or Level 3 within the
fair value hierarchy. A description of the valuation
methodologies and techniques are disclosed below for all
financial instruments under the section entitled Fair
Value Methodologies and Techniques.
113
Notes to
Financial Statements (continued)
Investment securities non-MBS. The
significant inputs associated with all classes of non-MBS
investment securities include a market-observable interest rate
curve and a discount spread, if applicable. The following table
presents the inputs used for each non-MBS investment security
class at March 31, 2010.
|
|
|
|
|
|
|
|
|
|
Interest Rate Curve
|
|
|
Spread Adjustment
|
U.S. Treasury bills
|
|
|
U.S. Treasury
|
|
|
None
|
TLGP investments
|
|
|
LIBOR Swap
|
|
|
(3) basis points
|
|
|
|
|
|
|
|
Investment securities MBS. For MBS, the
Banks valuation technique incorporates prices from up to
four designated third-party pricing vendors, when available.
These pricing vendors use methods that generally employ, but are
not limited to, benchmark yields, recent trades, dealer
estimates, valuation models, benchmarking of like securities,
sector groupings,
and/or
matrix pricing. The Bank establishes a price for each of its MBS
using a formula that is based upon the number of prices
received. If four prices are received, the average of the middle
two prices is used; if three prices are received, the middle
price is used; if two prices are received, the average of the
two prices is used; and if one price is received, it is used
subject to additional validation as described below. The
computed prices are tested for reasonableness using specified
tolerance thresholds. Prices within the established thresholds
are generally accepted unless strong evidence suggests that
using the formula-driven price would not be appropriate.
Preliminary estimated fair values that are outside the tolerance
thresholds, or that management believes may not be appropriate
based on all available information (including those limited
instances in which only one price is received), are subject to
further analysis. Such analysis may include a comparison to the
prices of similar securities
and/or to
non-binding dealer estimates or use of an internal model that is
deemed most appropriate after consideration of all relevant
facts and circumstances that a market participant would
consider. As of March 31, 2010, prices were received for
substantially all of the Banks MBS holdings. The relative
proximity of the prices received supports the Banks
conclusion that the final computed prices are reasonable
estimates of fair value. However, based on the current lack of
significant market activity for private-label RMBS, the fair
value measurements for such securities as of March 31, 2010
fell within Level 3 of the fair value hierarchy.
Derivative assets/liabilities. The fair value of
derivatives is determined using discounted cash-flow analysis
(the income approach) and comparisons to similar instruments
(the market approach). The discounted cash flow model uses
market-observable inputs (inputs that are actively quoted and
can be validated to external sources). Inputs by class of
derivative are as follows:
Interest rate-related derivatives:
|
|
|
|
|
LIBOR swap curve, and
|
|
|
Volatility assumption. Market-based expectations of future
interest rate volatility implied from current market prices for
similar options.
|
Mortgage delivery commitments:
|
|
|
|
|
TBA securities prices. Market-based prices of TBAs by coupon
class and expected term until settlement.
|
Fair Value Methodologies and Techniques. The
following fair value amounts have been determined by the Bank
using available market information and the Banks best
judgment of appropriate valuation methods. These estimates are
based on pertinent information available to the Bank as of
March 31, 2010 and December 31, 2009. Although the
Bank 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 majority
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 fair values are not
necessarily indicative of the amounts that would be realized in
current market transactions, although they do reflect the
Banks judgment of how a market participant would estimate
the fair values. In addition to these fair value limitations on
specific assets and liabilities,
114
Notes to
Financial Statements (continued)
no value has been ascribed to the future business opportunities
of the Bank which would be included in an overall valuation of
the Bank as a going concern.
Subjectivity of Estimates. Estimates of the
fair value of advances with options, mortgage instruments,
derivatives with embedded options and consolidated obligation
bonds with options using the methods described below and other
methods are highly subjective and require judgments regarding
significant matters such as the amount and timing of future cash
flows, prepayment speed assumptions, expected interest rate
volatility, methods to determine possible distributions of
future interest rates used to value options, and the selection
of discount rates that appropriately reflect market and credit
risks. Changes in these judgments often have a material effect
on the fair value estimates. Since these estimates are made as
of a specific point in time, they are susceptible to material
near term changes.
Cash and Due from Banks. The fair value
approximates the recorded book balance.
Interest-Bearing Deposits and Investment
Securities. The fair value of non-mortgage-related
securities and interest earning deposits is determined based on
quoted market prices, when available. When quoted market prices
are not available, the Bank estimates the fair value of these
instruments by calculating the present value of the expected
future cash flows and reducing the amount for accrued interest
receivable.
The Bank changed the methodology used to estimate the fair value
of MBS during the third quarter of 2009. Under the new
methodology, the Bank requests prices for all MBS from four
specific third-party vendors, and calculates a median price. The
methodology also incorporates variance thresholds to assist in
identifying median prices that may require further review. In
certain limited instances (i.e., prices are outside of variance
thresholds or the third-party services do not provide a price),
the Bank will obtain a price from securities dealers or
internally model a price that is deemed most appropriate after
consideration of all relevant facts and circumstances that would
be considered by market participants. Prior to the adoption of
the new pricing methodology, the Bank used a similar process
that utilized three third-party vendors and similar variance
thresholds. This change in pricing methodology did not have a
significant impact on the Banks fair values of its MBS.
Federal Funds Sold and Loans to Other
FHLBanks. The fair value is determined by
calculating the present value of the expected future cash flows.
The discount rates used in these calculations are the rates for
instruments with similar terms.
Mutual Funds Offsetting Deferred Compensation and Employee
Benefit Plan Obligations. Fair values for publicly
traded mutual funds are based on quoted market prices.
Advances. The Bank determines the fair value
of advances by calculating the present value of expected future
cash flows from the loans and excluding the amount for accrued
interest receivable. The discount rates used in these
calculations are the replacement loan rates for advances with
similar terms. Under Finance Agency regulations, advances with a
maturity or repricing period greater than six months require a
prepayment fee sufficient to make the Bank financially
indifferent to the borrowers decision to prepay the loans.
Therefore, the fair value of advances does not assign a value to
the ability of the member to prepay the advance.
Mortgage Loans Held For Portfolio. The fair
values for mortgage loans are determined based on quoted market
prices of similar mortgage instruments. These prices, however,
can change rapidly based upon market conditions.
Accrued Interest Receivable and Payable. The
fair value approximates the recorded book value. Derivative
accrued interest receivable and payable are excluded and are
valued as described below.
115
Notes to
Financial Statements (continued)
Derivative Assets/Liabilities. The Bank bases
the fair values of derivatives on market prices, when available,
including derivative accrued interest receivable and payable.
However, market prices do not exist for many types of derivative
instruments. Consequently, fair values for these instruments
must be estimated using standard valuation techniques such as
discounted cash flow analysis and comparisons to similar
instruments. Estimates developed using these methods are highly
subjective and require judgment regarding significant matters
such as the amount and timing of future cash flows, volatility
of interest rates and the selection of discount rates that
appropriately reflect market and credit risks. Changes in these
judgments often have a material effect on the fair value
estimates. Because these estimates are made as of a specific
point in time, they are susceptible to material near-term
changes. If these netted amounts are positive, they are
classified as an asset and if negative, a liability.
The Bank is subject to credit risk in derivatives transactions
due to potential nonperformance by the derivatives
counterparties. To mitigate this risk, the Bank enters into
master-netting
agreements for interest-rate-exchange agreements with
highly-rated institutions. In addition, the Bank has entered
into bilateral security agreements with all active derivatives
dealer counterparties that provide for delivery of collateral at
specified levels tied to counterparty credit ratings to limit
the Banks net unsecured credit exposure to these
counterparties. The Bank has evaluated the potential for the
fair value of the instruments to be impacted by counterparty
credit risk and has determined that no adjustments were
significant or necessary to the overall fair value measurements.
BOB Loans. The fair value approximates the
carrying value.
Deposits. The Bank determines fair values of
Bank deposits by calculating the present value of expected
future cash flows from the deposits and reducing this amount for
accrued interest payable. The discount rates used in these
calculations are the cost of deposits with similar terms.
Consolidated Obligations. The Banks
internal valuation model determines fair values of consolidated
obligations bonds and discount notes by calculating the present
value of expected cash flows using market-based yield curves.
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 consolidated obligations. 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 consolidated
obligations have been significantly affected during the
reporting period by changes in the instrument-specific credit
risk. Either no adjustment or an immaterial adjustment was made
during the three months ended March 31, 2010 and 2009, as
deemed appropriate by the Bank.
Mandatorily Redeemable Capital Stock. The
fair value of capital stock subject to mandatory redemption is
equal to par value. Capital stock can be acquired by members
only at par value and may be redeemed or repurchased at par
value. Capital stock is not traded and no market mechanism
exists for the exchange of stock outside the cooperative
structure of the Bank.
Commitments. The fair value of the
Banks unrecognized commitments to extend credit, including
standby letters of credit, was immaterial at March 31, 2010
and December 31, 2009. For fixed-rate loan commitments,
fair value also considers the difference between current levels
of interest rates and the committed rates. The fair value of
standby letters of credit is based on the present value of fees
currently charged for similar agreements or on the estimated
cost to terminate them or otherwise settle the obligations with
the counterparties.
Commitments to Extend Credit for Mortgage
Loans. Certain mortgage loan purchase commitments
are recorded as derivatives at their fair value.
116
Notes to
Financial Statements (continued)
The carrying value and fair value of the Banks financial
instruments at March 31, 2010 and December 31, 2009
are presented in the table below.
Fair
Value Summary Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
December 31, 2009
|
|
|
|
|
|
Carrying
|
|
Estimated
|
|
Carrying
|
|
Estimated Fair
|
(In thousands)
|
|
Value
|
|
Fair Value
|
|
Value
|
|
Value
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
251,566
|
|
|
$
|
251,566
|
|
|
$
|
1,418,743
|
|
|
$
|
1,418,743
|
|
Interest-bearing deposits
|
|
|
6,198
|
|
|
|
6,198
|
|
|
|
7,571
|
|
|
|
7,571
|
|
Federal funds sold
|
|
|
4,100,000
|
|
|
|
4,099,978
|
|
|
|
3,000,000
|
|
|
|
2,999,939
|
|
Trading securities
|
|
|
1,286,274
|
|
|
|
1,286,274
|
|
|
|
1,286,205
|
|
|
|
1,286,205
|
|
Available-for-sale
securities
|
|
|
2,368,992
|
|
|
|
2,368,992
|
|
|
|
2,397,303
|
|
|
|
2,397,303
|
|
Held-to-maturity
securities
|
|
|
8,479,542
|
|
|
|
8,216,405
|
|
|
|
10,482,387
|
|
|
|
10,106,225
|
|
Advances
|
|
|
36,823,771
|
|
|
|
36,898,116
|
|
|
|
41,177,310
|
|
|
|
41,299,566
|
|
Mortgage loans held for portfolio, net
|
|
|
4,991,274
|
|
|
|
5,243,616
|
|
|
|
5,162,837
|
|
|
|
5,373,977
|
|
BOB loans
|
|
|
11,549
|
|
|
|
11,549
|
|
|
|
11,819
|
|
|
|
11,819
|
|
Accrued interest receivable
|
|
|
205,853
|
|
|
|
205,853
|
|
|
|
229,005
|
|
|
|
229,005
|
|
Derivative assets
|
|
|
14,223
|
|
|
|
14,223
|
|
|
|
7,662
|
|
|
|
7,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
1,418,371
|
|
|
$
|
1,418,408
|
|
|
$
|
1,284,330
|
|
|
$
|
1,284,393
|
|
Consolidated obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount notes
|
|
|
9,990,414
|
|
|
|
9,990,367
|
|
|
|
10,208,891
|
|
|
|
10,209,195
|
|
Bonds
|
|
|
42,477,099
|
|
|
|
43,131,759
|
|
|
|
49,103,868
|
|
|
|
49,776,909
|
|
Mandatorily redeemable capital stock
|
|
|
8,256
|
|
|
|
8,256
|
|
|
|
8,256
|
|
|
|
8,256
|
|
Accrued interest payable
|
|
|
230,922
|
|
|
|
230,922
|
|
|
|
301,495
|
|
|
|
301,495
|
|
Derivative liabilities
|
|
|
649,714
|
|
|
|
649,714
|
|
|
|
623,524
|
|
|
|
623,524
|
|
Note 14
Commitments and Contingencies
As described in Note 16 to the audited financial statements
in the Banks 2009 Annual Report filed on
Form 10-K,
the twelve FHLBanks have joint and several liability for all the
consolidated obligations issued on their behalf. 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 to repay all or part of such
obligations, as determined or approved by the Finance Agency.
The Finance Agency, in its discretion and notwithstanding any
other provision, may at any time order any FHLBank to make
principal or interest payments due on any consolidated
obligation, even in the absence of default by the primary
obligor. No FHLBank has ever been asked or required to repay the
principal or interest on any consolidated obligation on behalf
of another FHLBank, and as of March 31, 2010 and through
the filing date of this report, the Bank does not believe that
it is probable that they will be asked to do so.
The FHLBanks determined it was not necessary to recognize a
liability for the fair value of the FHLBanks joint and
several liability for all of the consolidated obligations
because 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 obligation related to other FHLBanks
consolidated obligations at March 31, 2010 and
December 31, 2009.
117
Notes to
Financial Statements (continued)
The par amounts of the FHLBanks consolidated obligations
for which the Bank is jointly and severally liable were
approximately $870.9 billion and $930.6 billion at
March 31, 2010 and December 31, 2009, respectively.
Commitments that legally bind and unconditionally obligate the
Bank for additional advances, including BOB loans, totaled
approximately $158.0 million and $14.7 million at
March 31, 2010 and December 31, 2009, respectively.
Commitments can be for periods of up to twelve months. Standby
letters of credit are issued on behalf of members for a fee. A
standby letter of credit is generally a short-term financing
arrangement between the Bank and its member. If the Bank is
required to make payment for a beneficiarys draw, these
amounts are withdrawn from the members DDA account. Any
remaining amounts not covered by the withdrawal from the
members DDA account are converted into a collateralized
advance. The following table presents outstanding standby
letters of credit as of March 31, 2010 and
December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
(in millions)
|
|
2010
|
|
2009
|
|
|
Outstanding notional
|
|
$
|
7,998.2
|
|
|
$
|
8,727.4
|
|
Final expiration year
|
|
|
2015
|
|
|
|
2014
|
|
Original terms
|
|
less than 1 month to 5 years
|
Unearned fees related to standby letters of credit are recorded
in other liabilities and had a balance of $1.1 million and
$1.4 million as of March 31, 2010 and
December 31, 2009, respectively. The Bank monitors the
creditworthiness of its standby letters of credit based on an
evaluation of the member. The Bank has established parameters
for the review, assessment, monitoring and measurement of credit
risk related to these standby letters of credit.
Except as described below regarding BOB commitments, based on
managements credit analyses, collateral requirements, and
adherence to the requirements set forth in Bank policy and
Finance Agency regulations, the Bank has not recorded any
additional liability on these commitments and standby letters of
credit. Excluding BOB, commitments and standby letters of credit
are collateralized at the time of issuance. The Bank records a
liability with respect to BOB commitments, which is reflected in
other liabilities on the Statement of Condition.
Commitments that unconditionally obligate the Bank to purchase
mortgage loans under the MPF program totaled $16.7 million
and $3.4 million at March 31, 2010 and
December 31, 2009, respectively. Delivery commitments are
generally for periods not to exceed 45 days. Such
commitments are recorded as derivatives at their fair value.
The Bank generally executes derivatives with major banks and
broker-dealers and generally enters into bilateral collateral
agreements. As of March 31, 2010, the Bank has pledged
total collateral of $749.0 million, including cash of
$475.3 million and securities that cannot be sold or
repledged with a fair value of $273.7 million, to certain
of its derivative counterparties. As of December 31, 2009,
the Bank has pledged total collateral of $725.3 million,
including cash of $494.7 million and securities that cannot
be sold or repledged with a fair value of $230.6 million,
to certain of its derivative counterparties. As previously
noted, the Banks ISDA Master Agreements typically require
segregation of the Banks collateral posted with the
counterparty. The Bank reported $273.7 million and
$230.6 million of the collateral as trading securities as
of March 31, 2010 and December 31, 2009, respectively.
The Bank had committed to issue consolidated obligations
totaling $995.0 million and $400.0 million at
March 31, 2010 and December 31, 2009, respectively.
The Bank charged to operating expense net rental costs of
approximately $523 thousand and $515 thousand for the three
months ended March 31, 2010 and 2009, respectively. Lease
agreements for Bank premises generally
118
Notes to
Financial Statements (continued)
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.
In September 2008, the Bank terminated all of its derivative
contracts with Lehman Brothers Special Financing, Inc. (LBSF).
Related to the termination of these contracts, the Bank had a
receivable due from LBSF in the amount of $41.5 million as
of December 31, 2009. The Bank filed an adversary
proceeding against LBSF to return the cash collateral posted by
the Bank associated with the derivative contracts. See
discussion within Item 3. Legal Proceedings in the
Banks 2009 Annual Report filed on
Form 10-K
for more information with respect to the proceeding. The
discovery phase of the adversary proceeding is now underway,
which has provided management information related to its claim.
Based on this information, managements most probable
estimated loss is $35.3 million, which was recorded in
first quarter 2009.
The Bank has discontinued its LBSF adversary proceeding and
pursued its claim in the LBSF bankruptcy through the proof of
claim process, which made continuing the adversary proceeding
against LBSF unnecessary. The Bank has filed proofs of claim
against Lehman Brothers Holdings, Inc. and Lehman Brothers
Commercial Corp. as well.
The Bank has filed a new complaint against Lehman Brothers
Holding Inc., Lehman Brothers, Inc., Lehman Brothers Commercial
Corporation, Woodlands Commercial Bank, formerly known as Lehman
Brothers Commercial Bank, and Aurora Bank FSB (Aurora), formerly
known as Lehman Brothers Bank FSB, alleging unjust enrichment,
constructive trust, and conversion claims. Aurora is a member of
the Bank. Aurora did not hold more than 5% of the Banks
capital stock as of March 31, 2010.
As of March 31, 2010, the Bank continues to maintain a
reserve of $35.3 million on this $41.5 million
receivable as this remains the most probable estimated loss.
119
Item 3: Quantitative
and Qualitative Disclosures about Market Risk
See the Risk Management section of Managements
Discussion and Analysis of Results of Operations and Financial
Condition in Part I. Item 2 of this
Form 10-Q.
Item 4: Controls
and Procedures
Disclosure
Controls and Procedures
Under the supervision and with the participation of the
Banks management, including the chief executive officer
and chief financial officer, the Bank conducted an evaluation of
its disclosure controls and procedures, as such term is defined
under
Rule 13a-15(e)
promulgated under the Securities Exchange Act of 1934, as
amended. Based on this evaluation, the Banks chief
executive officer and chief financial officer concluded that the
Banks disclosure controls and procedures were effective as
of March 31, 2010.
Internal
Control Over Financial Reporting
There have been no changes in internal control over financial
reporting that occurred during the first quarter of 2010 that
have materially affected, or are reasonably likely to materially
affect, the Banks internal control over financial
reporting.
120
PART II
OTHER INFORMATION
Item 1: Legal
Proceedings
As discussed in Current Financial and Mortgage Market
Events and Trends in Item 7. Managements
Discussion and Analysis section of the Banks 2009 Annual
Report filed on
Form 10-K,
the Bank terminated multiple interest rate swap transactions
with Lehman Brothers Special Financing, Inc. (LBSF) effective
September 19, 2008. On October 7, 2008, the Bank filed
an adversary proceeding against LBSF in the United States
Bankruptcy Court in the Southern District of New York alleging
constructive trust, conversion, breach of contract, unjust
enrichment and injunction claims (Complaint) relating to the
right of the Bank to the return of the $41.5 million in
Bank posted cash collateral held.
The Bank has discontinued its LBSF adversary proceeding and
pursued that claim in the LBSF bankruptcy through the proof of
claim process, which made pursuing the adversary proceeding
against LBSF unnecessary. The Bank has filed proofs of claim
against Lehman Brothers Holdings, Inc. and Lehman Brothers
Commercial Corp. as well.
The Bank has filed a new complaint against Lehman Brothers
Holding Inc., Lehman Brothers, Inc., Lehman Brothers Commercial
Corporation, Woodlands Commercial Bank, formerly known as Lehman
Brothers Commercial Bank, and Aurora Bank FSB (Aurora), formerly
known as Lehman Brothers Bank FSB, alleging unjust enrichment,
constructive trust, and conversion claims. Aurora is a member of
the Bank. Aurora did not hold more than 5% of the Banks
capital stock as of March 31, 2010. The Bank filed this
complaint on July 29, 2009 in the United States Bankruptcy
Court for the Southern District of New York.
On September 23, 2009, the Bank filed two complaints in
state court, the Court of Common Pleas of Allegheny County,
Pennsylvania relating to nine private label MBS bonds purchased
from J.P. Morgan Securities, Inc. (J.P. Morgan) in an
aggregate original principal amount of approximately
$1.68 billion. In addition to J.P. Morgan, the parties
include: J.P. Morgan Mortgage Acquisition Corp.;
J.P. Morgan Mortgage Acceptance Corporation I; Chase Home
Finance L.L.C.; Chase Mortgage Finance Corporation;
J.P. Morgan Chase & Co.; Moodys
Corporation; Moodys Investors Service Inc.; The
McGraw-Hill Companies, Inc.; and Fitch, Inc. The Banks
complaints assert claims for fraud, negligent misrepresentation
and violations of state and Federal securities laws. Chase Bank
USA, N.A. (Chase Bank), which is affiliated with
J.P. Morgan Chase & Co., is a member of the Bank
but is not a defendant in these actions. Chase Bank held 6.0% of
the Banks capital stock as of December 31, 2009 and
March 31, 2010.
On October 2, 2009, the Bank also filed a complaint in the
Court of Common Pleas of Allegheny County, Pennsylvania against:
The McGraw-Hill Companies, Inc.; Fitch Inc., Moodys
Corporation; and Moodys Investors Service, Inc., the
rating agencies for certain private label MBS bonds purchased by
the Bank in the aggregate original principal amount of
approximately $640.0 million. The Banks complaint
asserts claims for fraud, negligent misrepresentation and
violations of Federal securities laws.
On October 13, 2009, the Bank filed an additional complaint
in the Court of Common Pleas of Allegheny County, Pennsylvania
against: Countrywide Securities Corporation, Countrywide Home
Loans, Inc., various other Countrywide related entities;
Moodys Corporation; Moodys Investors Service, Inc.;
The McGraw-Hill Companies, Inc.; and Fitch, Inc. in regard to
five Countrywide private label MBS bonds in the aggregate
original principal amount of approximately $366.0 million
purchased by the Bank. The Banks complaint asserts claims
for fraud, negligent misrepresentation and violations of state
and Federal securities laws.
The defendants in each of the private label MBS lawsuits have
filed motions to dismiss with the court. The Bank has filed its
responses to these motions and the defendants have until
May 19, 2010 to file their responses.
In addition, the Bank has filed a proof of claim against Lehman
Brothers Holdings, Inc. and Structured Asset Securities Corp. in
regard to certain private label MBS purchased by the Bank in the
aggregate original principal amount of approximately
$910 million.
121
Item 6: Exhibits
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Exhibit 31
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.1
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Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 for the Chief Executive Officer
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Exhibit 31
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.2
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Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 for the Chief Financial Officer
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Exhibit 32
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.1
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Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 for the Chief Executive Officer
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Exhibit 32
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.2
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Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 for the Chief Financial Officer
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123
SIGNATURE
Pursuant to the requirements 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 Pittsburgh
(Registrant)
Date:
May 10, 2010
By: /s/ Kristina K. Williams
Kristina K. Williams
Chief Financial Officer
124